Digital Creative Development Corp · 10KSB40 · For 6/30/99

Filed On 4/20/00 4:15pm ET   ·   SEC File 0-22315   ·   Accession Number 889812-0-1870

Annual Report -- Small Business -- [X] Reg. S-B Item 405   ·   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB40     Annual Report                                         58    168K 
 2: EX-10.19    Forbearance Agreement                                 13     47K 
 3: EX-10.20    Master Agreement                                      18     64K 
 4: EX-27       Financial Data Schedule                                1      4K 

10KSB40   ·   Annual Report
Document Table of Contents

10KSB40
1st Page of 58
TOC
Top
Previous
Next
Bottom
Just 1st
 
Sponsored Ads...


 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 FORM 10-KSB

 ANNUAL REPORT
 Under Section 13 or 15(d) of the Securities Act of 1934
 For the Fiscal Year Ended June 30, 1999

 ARTHUR TREACHER'S, INC.
--------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)

                       UTAH                                         34-1413104
--------------------------------------------------------------- ----------------
(State or Other Jurisdiction of Incorporation or Organization)  (I.R.S. Employer
                                                             Identification No.)

7400 Baymeadows Way, Suite 300, Jacksonville, Florida                    32256  
----------------------------------------------------------------   ------------ 
(Address of Principal Executive Offices)                             (Zip Code) 

(904) 739-1200                                                  
---------------------------                                                     
(Issuer's Telephone Number)                                                     

Securities registered under Section 12(b) of the Act:                 

Title of Each Class          Name of Each Exchange on Which 
  to be so Registered             Each Class is to be Registered
  -------------------          ---------------------------------

--------------------------------                --------------------------------

--------------------------------                --------------------------------

Securities registered under Section 12(g) of the Act:         

Common Stock, $.01 par value                
----------------------------------------------------------------                
(Title of Class)                    

        Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such  
shorter period that the registrant was required to file such reports), and (2)  
has been subject to such filing requirements for the past 90 days.              
Yes [_]   No [X]                                                                

10KSB40
2nd Page of 58
TOC
1st
Previous
Next
Bottom
Just 2nd

     Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or     
information statements incorporated by reference in Part III of this Form       
10-KSB. [X]                                                                     

       State issuer's revenues for its most recent fiscal year.  $21,531,829
                                                                ------------

Shares outstanding. 15,424,004                                
----------            

State the aggregate market value of the voting stock held by  
non-affiliates computed by reference to the price at which the stock was sold,  
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange    
Act.) $38,560,010                                                               
-----------                                                         
Note: if determining whether a person is an affiliate will involve an           
unreasonable effort and expense, the issuer may calculate the aggregate market  
value of the common equity held by non-affiliates on the basis of reasonable    
assumptions, if the assumptions are stated.                                     

10KSB40
3rd Page of 58
TOC
1st
Previous
Next
Bottom
Just 3rd

PART I

Item 1.  Description of Business.                                               

The Company is a fast service seafood restaurant chain based in Jacksonville,   
Florida. The Company's principal business is the operation, franchising,        
ownership and development of "Arthur Treacher's Fish & Chips" fast food         
restaurants. On December 31, 1999 the Arthur Treacher's system consist of 161   
restaurants, consisting of 29 Company owned restaurants and 71 independently    
owned and operated franchised locations and 61 franchise restaurants cobranded  
with Miami Subs, Corp. ("Miami Subs"), Nathan's Famous Hot Dogs and Pudgie's    
Famous Chicken. The restaurants are located in 13 states in the mid-western and 
eastern United States as well as in Washington D.C. and the province of Ontario,
Canada. The Company's main product is its "Original Fish & Chips" product       
consisting of fish fillets coated with a special batter prepared under a        
proprietary formula, deep-fried golden brown and served with English-style chips
and two corn meal "hush puppies". The Company's other products include chicken, 
shrimp, clams and an assortment of other seafood combination dishes.            

(A)  Background                                                                 

The Company was originally founded in 1969 as Arthur Treacher's Fish & Chips,   
Inc., a Delaware corporation. In 1979, Mrs. Paul's, Inc. ("Mrs. Paul's")        
purchased Arthur Treacher's Fish & Chips, Inc. In 1982, Lumara Foods of America,
Inc. ("Lumara") acquired the assets of Arthur Treacher's Fish & Chips, Inc. from
Mrs. Paul's. Lumara sought bankruptcy protection in 1983. In December 1983,     
Arthur Treacher's Inc., an Ohio corporation, entered into an agreement to       
purchase the assets of Lumara, during Chapter XI bankruptcy proceedings. In     
February 1984, Arthur Treacher's Inc., an Ohio corporation, merged into El      
Charro, Inc., a Utah corporation, which consummated the acquisition of the      
assets of Lumara and changed its name to Arthur Treacher's, Inc. On May 31,     
1996, an investor group organized by Mr. Bruce Galloway, the current Chief      
Executive Officer and Chairman of the Board, acquired control of the Company.   

In 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.                    

3 

10KSB40
4th Page of 58
TOC
1st
Previous
Next
Bottom
Just 4th

(B)  Corporate Restructuring Strategy                                           

The Company seeks to focus on four key areas  :                                 

o        Improve operating cash flow and profitability          

o        Franchise Expansion                                    

o        Co-Branding                                            

o        Retail Development                                     

Restructuring Strategy                                                          

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 same store operations, franchising and attracting capital or new debt.
Each facet of the strategy is geared to improving operations by selling certain 
company owned restaurants that incur losses, increasing franchise sales and     
cobranding and introducing a retail product line for major supermarkets chains. 
As of October 30, 1999, the restructuring of real estate obligations by         
franchising, selling and terminating selected leases was complete. The Company  
owned and operated restaurants are 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 restaurant chains will continue to provide an additional source of
franchise revenue.                                                              

4 

10KSB40
5th Page of 58
TOC
1st
Previous
Next
Bottom
Just 5th

The following chart describes the restructuring. The 29 remaining company owned 
and operated restaurants are the traditional Arthur Treacher's Fish & Chip      
restaurants.                                                                    

--------------------------------------------------------------------------------
Restructuring Activity
 for Company Owned Restaurants
                           Before          June 30, 1999    September 26, 1999
--------------------------------------------------------------------------------
                      Restructuring      Restructuring       Restructuring
--------------------------------------------------------------------------------
Company                                                                         
Restaurants Operated           63                42                    29       
Franchised restaurants                           15                    28       
Sell Leases                                       3                     3       
Terminate Leases                                  8                     8       
Closed restaurants              6                 1                     1       
                        --                --                    --

           Total        69                69                    69
--------------------------------------------------------------------------------

Franchise Expansion & Co-branding                                               

The Company intends to focus on franchising the Arthur Treacher's Fish & Chips  
brand restaurants and accelerate its cobrand expansion with Miami Subs, Nathans 
Famous Hot Dogs, Kenny Rogers Roasters and Pudgies. The targeted territories for
franchise and cobrand expansion will include New York, New Jersey, Delaware,    
Pennsylvania, Ohio, Michigan, Maryland, Washington D C, Florida and Ontario. The
Company will continue to capitalize on the strength of its brand equity building
franchise revenues by franchising and cobranding.                               

o        Expansion in Previously Exclusive Territory                            

The Company has acquired the exclusive development rights from its Canadian     
franchisee and has begun to market the Ontario territory. The company intends to
develop the Toronto market initially before expanding into other regions of     
Ontario. The growth plan will primarily be franchise expansion with additional  
emphasis on seeking cobrand partners with an established multi unit Canadian    
concept.                                                                        

o        Co-branding with other concepts.                                       

The Company seeks co-branding between two restaurant concepts when one concept  
provides a product or serves a demographic group that is underserved by the     
other. In addition, the Company will seek complementary concepts that offer     
different products to the same customers during different parts of the day. The 
Company intends to continue to pursue co-branding opportunities.                

5 

10KSB40
6th Page of 58
TOC
1st
Previous
Next
Bottom
Just 6th

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 December 31, 1999, 56 Miami Sub franchisees have        
co-branded with Arthur Treacher's.                                              

The Company is also cobranding with Nathan's Famous Hot Dogs and Pudgie's Famous
Chicken. As of December 31, 1999, four Nathan's restaurants and one Pudgie's    
were operating under a cobrand agreement with Arthur Treacher's.                

Arthur Treacher's receives royalties and initial franchise fees under each      
cobrand franchise agreement. The Company anticipates opening additional co-brand
locations during the current fiscal year with each of its cobrand partners.     

o        Corporate Franchisees                                                  

The Company intends to develop joint programs with new corporate franchisees for
regional expansion opportunities in certain selected markets. This program will 
entail a corporate sponsor for a particular region based upon metropolitan      
population densities. A region would typically be large enough to cover an area 
that could accommodate ten or more store locations. The Company anticipates that
a regional representative franchise agreement would be executed with the        
corporate franchisee providing it with rights to a specified region and to      
support from the Company in order to develop the area within certain guidelines 
established by the Company relating, among other things, to a minimum number of 
restaurants to be opened within particular time periods. The Company also       
intends to grant new franchises to operators of single restaurants. There can be
no assurance, however, that suitable franchisees can be located or that regional
representative franchise agreements will be reached at terms acceptable to the  
Company.                                                                        

The Company estimates the cost of opening a new Company owned restaurant at     
between $50,000 and $200,000 per restaurant (assuming the purchase, not lease,  
of new equipment), depending upon factors such as the size of the restaurant,   
the lease, remodeling cost and local construction costs.                        

Co-branding the Arthur Treacher's menu into another restaurant concept entails a
conversion cost of approximately $25,000 to $35,000 depending on the existing   
restaurant equipment being used by the co-brand partner.                        

By standardizing the construction and equipment procurement process of its      
restaurant network, the Company believes that it could develop the economies of 
scale in the design and site selection process. 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.               

6 

10KSB40
7th Page of 58
TOC
1st
Previous
Next
Bottom
Just 7th

There can be no assurance that such programs will be reached at terms acceptable
to the Company.                                                                 

The Company's proposed expansion and store renovations will be dependent on,    
among other things, attracting quality franchise candidates, the availability of
suitable restaurant sites, negotiation of acceptable lease terms, timely        
development of such sites, obtaining landlords' consents to renovations,        
constructing or renovating restaurants, hiring of skilled management and other  
personnel, the general ability to successfully manage growth (including         
monitoring restaurants, controlling costs and maintaining effective quality     
controls) and the availability of adequate financing. In the case of franchised 
restaurants, the Company will be substantially dependent on the management      
skills of its franchisees                                                       

Marketing, Promotion and Advertising                                            

Core  menu items                                                                

Batter-dipped fish, chicken and shrimp continue to account for more than 75% of 
the Company's annual sales during the fiscal year ended June 30, 1999. Arthur   
Treacher's has built a strong brand awareness over the past 30 years with its   
core menu and anticipates increasing the marketing and promotion of the         
batter-dipped products. The Company's restaurants are designed to produce the   
batter-dipped products easily. Increasing the sales of already high volume      
products will improve product rotation and help ensure hot, fresh food for      
customers.                                                                      

The Company believes that batter-dipped food is a strong focus for the menu     
because, in part, batter-dipped food cannot be prepared easily at home. Most    
households do not have a deep fryer and a recipe for batter.                    

Marketing  strategies                                                           

Mall based stores are critical to the Company's success. Seventy percent of the 
Arthur Treacher systemwide revenue for the fiscal year ended June 30, 1999 was  
mall based. Therefore, marketing strategies are tailored to generate business in
malls. If the tactics are feasible for freestanding stores, the marketing       
approach will expand to the freestanding markets. Certain promotions developed  
for freestanding stores will not necessarily be successful in the mall          
locations. Freestanding locations can benefit substantially from external media 
(print, radio, television, direct mail and out of home). Purchasing external    
media to drive customers to a mall food court and to an Arthur Treacher's       
restaurant in that food court becomes cost efficient when the concentration of  
stores can adequately support the marketing cost of the external media. The     
geographic distribution of the Company's mall based and free standing stores    
permits the Company to design marketing programs for each region. Most of the   
Company's freestanding and mall locations are in separate markets. Northeast    
Ohio and Central Pennsylvania have most of the freestanding stores while the    
mall based Arthur Treacher's are located primarily in the                       

7 

10KSB40
8th Page of 58
TOC
1st
Previous
Next
Bottom
Just 8th

New York to Philadelphia corridor and Florida.                                  

A local marketing training program for managers of Arthur Treacher's restaurants
located in food courts has been implemented. One day training classes have been 
held for the managers. The program is designed to enable and empower managers to
market their store within the confines of the mall by capturing new customers,  
use fewer discounts and improve frequency of visits. Promotional tools have been
provided to the managers. Managers are working with their supervisors and the   
marketing department to create marketing plans tailored to the needs of each    
store. Managers of freestanding locations are also being trained in local       
marketing techniques which are designed to reflect the different needs of       
freestanding stores.                                                            

(C)  Franchises                                                                 

As of December 31, 1999, the Company had 132 independently owned and operated   
franchised locations consisting of 71 traditional Arthur Treacher restaurants   
and 61 cobranded restaurants. The Company has three options for franchises:     
individual stores, cobranding and area development. Pursuant to its franchise   
agreement, the Company provides its franchisees with a method of operation,     
including trade secrets, technical knowledge, a supply distribution program and 
standards for customer service, quality control, decor, layout, signs and       
accounting systems. The Company also provides centralized advertising and       
cooperative advertising programs and an initial training program, which is      
required for franchisees. Each franchisee is required to spend a minimum of     
three percent of monthly gross sales on advertising. In addition, each          
franchisee must purchase certain private label, proprietary food, paper         
supplies, equipment and signage from Company approved suppliers and             
distributors.                                                                   

The Company does not select restaurant sites for franchisees, but all sites are 
subject to the Company's approval. The Company also requires that its           
franchisees name the Company as an additional insured party on their property   
and casualty insurance policies and that vendors provide subrogation to the     
Company with respect to their product liability insurance.                      

Pursuant to the Company's standard franchise agreement, which is incorporated in
its Uniform Franchise Offering Circular, the initial franchise fee for a one    
unit franchise is $19,500. The fee for each additional franchise declines       
thereafter. The fee for an area development franchise is $69,500. These         
franchise fees do not include the costs associated with the operation of the    
restaurant, including food, supplies, labor, equipment, occupancy costs and     
taxes.                                                                          

Cobranding fee arrangements may vary depending on the growth potential,         
commitments and development schedules agreed upon with the cobrand partner.     

Each franchisee is subject to a royalty fee of a maximum of six percent of the  
franchisee's gross sales, net of sales taxes and certain other adjustments,     
based upon sales reports at the end of each calendar month. In the fiscal year  
ended June 30, 1999, the Company received a total of                            

8 

10KSB40
9th Page of 58
TOC
1st
Previous
Next
Bottom
Just 9th

$355,776 in franchise fees and royalty income. Most franchisees, pay royalties  
at a rate substantially lower than six percent of gross sales, with an average  
royalty of about three percent. Reduced royalty fees have been granted by the   
Company for certain older franchisees and for franchisees who operate multiple  
units.                                                                          

As of December 31, 1999, franchisees operating eight restaurants have either    
been notified of being in default for non-payment of royalties or are more than 
90 days in default on royalty payments. The inability of the Company's          
franchisees to make payments on a timely basis will adversely affect the        
Company's liquidity and its operations.                                         

(D)   Suppliers and Pricing                                                     

Seafood prices, particularly the price of pollack, are subject to supply        
problems due to environmental and economic factors. The Company is developing   
measures to minimize the effect on the Company.                                 

The Company's principal product, "Fish and Chips," includes pollack. Other      
species are being tested as alternatives due to supply, price and availability. 
The Company and franchisees utilize one supplier for pollack and one supplier   
for shrimp. For the fiscal year ended June 30, 1999, purchases of pollack and   
shrimp accounted for approximately 20% and 7% of the Company's operating        
expenses, excluding occupancy costs, respectively. Such supplies and prices are 
subject to volatility. Seafoods of the quality sought by the Company tend to    
trade on a negotiated basis depending upon supply and demand at the time of     
purchase. Supply and price can be affected by multiple factors, such as weather,
politics and economics in the producing countries. An increase in the prices of 
seafood, particularly pollack, could have an adverse effect on the Company.     

The Company maintains relationships with certain seafood vendors in an effort to
obtain seafood of the quality and in the quantity demanded by the Company's     
customers. These relationships enable the Company to maintain its supply of fish
as well as affording the Company some price stability. The Company has sought to
mitigate the effects of price volatility by entering into agreements with its   
principal fish suppliers to provide fixed prices for seafood products during the
six months to one year duration of the contracts. Such fixed price agreements   
also help ensure the Company's supply of fish and enable the Company to reduce  
its supply costs. Although the Company anticipates that the agreements will be  
renewed on substantially the same terms as the current agreements, there can be 
no assurance that the new terms will not be more costly. However the Company    
believes that alternate suppliers of pollack and other seafoods are available if
the prices of pollack or other seafoods 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."                                 

9 

10KSB40
10th Page of 58
TOC
1st
Previous
Next
Bottom
Just 10th

The Company uses many individual suppliers for many of its significant          
non-seafood items. For example: cups, potatoes, chicken, shortening and         
proprietary fish batter are each purchased from different individual suppliers  
under oral and written agreements which set the price for one year. All of the  
Company's supplies are delivered by such suppliers to one distributor who       
services the Company's restaurants from three distribution centers. Any         
disruption in supplies from such suppliers could temporarily have an adverse    
effect on the Company's operations, although the Company believes that the      
supplier could readily be replaced. Except with respect to the Company's        
proprietary products, franchisees can purchase such products from other         
suppliers or distributors, subject to the Company's prior approval.             

(E)  Competition                                                                

The restaurant business is highly competitive with respect to price, service,   
location and food quality and is generally considered to be a mature industry.  
Competition in the industry can be expected to increase. The industry is        
affected by changes in consumer eating habits and preferences, local, regional  
and national economic conditions, demographic trends, automobile traffic        
patterns, government regulation, employee availability and commodity and        
operating cost fluctuations, many of which are beyond the Company's control. Any
unplanned or unanticipated changes in these factors could adversely affect the  
Company.                                                                        

There are numerous well-established competitors in the operating areas of the   
Company. Restaurants operated or franchised by the Company compete directly not 
only with quick service restaurants ("QSRs"), but also with moderately priced   
family and specialty restaurants. Significant competitors include fast food     
seafood restaurants such as Long John Silvers and Captain D's, casual dining    
restaurants with a seafood emphasis such as Red Lobster and Landry's, and other 
chains that serve seafood or chicken, or both.                                  

The Company's primary competitors in the fast service seafood restaurant        
business are Long John Silvers and Captain D's. Both competitors have company   
owned and franchised restaurant operations in certain regions of the United     
States. Long John Silvers is the largest competitor and Captain D's, a wholly   
owned subsidiary of Shoney's, Inc. has a strong regional presence in the        
southeastern United States. The amount of competition varies among the Company's
principal regional markets. Both Captain D's and Long John Silvers compete      
directly with the Company in Ohio and Pennsylvania, although the level of       
competition is highest in several Pennsylvania markets. Long John Silvers       
competes directly with the Company in several of its markets in Florida.        

In Ontario, the Company has significant direct competition from independent fish
and chips restaurants, but less direct competition from other major fast service
seafood chains. Many of the Company's competitors possess substantially greater 
financial, marketing, personnel and other resources than those of the Company.  
Such competitive pressures limit the Company's ability to increase food and     
beverage prices and thus may limit the extent to which the Company              

10

10KSB40
11th Page of 58
TOC
1st
Previous
Next
Bottom
Just 11th

and its franchisees can offset certain costs of doing business. There can be no 
assurance that well-established competitors will not place additional           
restaurants in close proximity to those of the Company and its franchisees.     

The Company also faces vigorous competition from other QSR chains in attracting 
and retaining suitable franchises. The Company plans to increase its number of  
franchised restaurants but there can be no assurance that it will be able to    
attract and retain suitable franchisees.                                        

The Company has developed a concentration of restaurant locations in the food   
courts of regional shopping malls. The competition in the malls typically       
consists of the seven to thirteen different restaurant concepts in each food    
court. Each food concept generally serves a distinctive menu item which may     
compete, directly or indirectly, with the Company. There can be no assurance    
that the Company will continue to be able to compete effectively with such food 
concepts. Top competitors in food courts include Sbarros, Chik-fil-a, Philly    
Stations, a variety of small chains featuring Japanese, Chinese, Cajun and other
ethnic foods. Major QSR chains such as McDonald's, KFC, Burger King, Wendy's,   
and Taco Bell are opening in food courts. The major chains benefit from broad   
consumer awareness generated by broadcast media. These concepts can dominate a  
food court.                                                                     

(F) Seasonality                                                                 

The Company derives a significant portion of its sales during the               
November/December (Christmas) and March/April (Easter) seasons, which are       
reflected in the Company's operating results for the second and third quarter.  
These seasonal effects are dependent upon the general retailing environment and 
customers' preference to shopping malls. Weather can have a significant affect  
on shopping in Northern climates. During the Fiscal Years ended June 30, 1999   
and June 30, 1998, 86% of the Company's net sales came from Northern states.    
These areas can be significantly impacted by weather during December, January   
and February. Approximately 70% of the Company's net sales is derived from      
shopping malls. The Company derives approximately 15% of its total net sales    
from operations of the stores located in shopping malls during the holiday      
season.                                                                         

(G) Employees                                                                   

At January 31, 2000, the Company had approximately 350 employees. A total of    
approximately 285 employees are paid on an hourly basis and 65 employees receive
a salary. Six of the Company's employees perform executive functions. Most of   
the Company's employees are employed at the Company's restaurants. The Company  
believes that the number of persons employed is adequate to conduct the         
Company's current level of operations.                                          

11

10KSB40
12th Page of 58
TOC
1st
Previous
Next
Bottom
Just 12th

(H)  Government Regulation                                                      

The Company's business is subject to extensive federal, state and local         
government regulation, including regulations relating to franchising, public    
health and safety, zoning and fire codes. The failure to obtain or retain food  
or other licenses would adversely affect the operations of the Company's        
restaurants.                                                                    

The Company is subject to federal and state laws, rules and regulations that    
govern the offer and sale of franchises. The Company is also subject to a number
of state laws that regulate certain substantive aspects of the                  
franchisor-franchisee relationship. If the Company is unable to comply with the 
franchise laws, rules and regulations of a particular state, relating to offers 
and sales of franchises, the Company will be unable to engage in offering or    
selling franchises in such state. The Company believes it is in compliance with 
such laws, rules and regulations and has not been cited for non-compliance. The 
Company is not currently subject to any investigation by any federal or state   
regulatory authority.                                                           

On a national level, the FTC requires the Company to furnish prospective        
franchisees with a disclosure document which complies with the FTC's Trade      
Regulation Rule (the "FTC Rule"). The Company's current FTC disclosure document 
is effective for use in 37 states, and the District of Columbia, that do not    
require registration of disclosure documents. However, in the 13 remaining      
states, the Company is required to register a state-specific document and       
receive an effective registration notice prior to the commencement of sales of  
franchises in such states. The Company is qualified to sell franchises in       
selected states that requires a state specific document although the Company    
believes that it could register in all registration states if it chose to offer 
franchises in such states.                                                      

The Company will be required to update its FTC disclosure document to reflect   
the occurrence of material events. The occurrence of any such events may, from  
time to time, require the Company to modify its disclosure documents within 90  
days or stop offering and selling franchises until the document is so updated.  
There can be no assurance that the Company will be able to update its disclosure
document or become registered to offer or sell franchises in certain states     
consistent with its expansion plans or that the Company will be able to comply  
with existing or future franchise regulations in any particular state, any of   
which could have an adverse effect on the Company.                              

(I)  Trade and Service Marks and Trade Secrets                                  

The Company believes that the "Arthur Treacher's" and the "Arthur Treacher's    
Fish & Chips" trade and service marks, and other marks may have significant     
value and are important to the marketing of its restaurants and products. All   
are registered with the United States Patent Office. The Company registered     
"Arthur Treacher's Seafood Grille" as a trade and service mark in 1998. The     
Company's principal "Arthur Treacher's" and "Arthur Treacher's Fish and Chips"  
trade and                                                                       

12

10KSB40
13th Page of 58
TOC
1st
Previous
Next
Bottom
Just 13th

service marks are subject to renewal for 10 year periods upon application to the
United States Patent Office between 2007 - 2009. The other trade and service    
marks are subject to renewal for 10 year periods on various dates between 2000 -
2010. Upon expiration of each period, the marks may be renewed for successive 10
year periods. The Company also registered the trademark "Arthur Treacher's Fish 
& Chips" in Canada on July 23, 1999. This trademark is subject to renewal every 
15 years. There can be no assurance, however, that the Company's trade and      
service marks do not, or will not, violate the proprietary rights of others,    
that the Company's trade and service marks would be upheld if challenged or that
the Company would not be prevented from using its trade or service marks. Any of
the aforementioned instances could have a material adverse effect on the Company
and its franchisees. The Company's trade and service marks have not been and are
not subject to any material challenges and the Company has acted to vigorously  
defend the marks in several isolated instances where alleged infringement has   
occurred.                                                                       

The Company utilizes a proprietary batter mix in connection with the preparation
of its seafood products. There can be no assurance that such recipe will not be 
copied by a competitor and that the Company's business will not be adversely    
affected.                                                                       

13

10KSB40
14th Page of 58
TOC
1st
Previous
Next
Bottom
Just 14th

Item 2.  Description of Property.                                               

The Company's principal executive offices are located at 7400 Baymeadows Way,   
Jacksonville, Florida 32256 (904-739-1200). The Company rents its 5,100 square  
feet of headquarters space for an annual rent of approximately $96,000 pursuant 
to a lease which expires in 2001.                                               

The Company's 42 restaurants include 11 restaurants located in premises leased  
by the Company, 31 located in premises leased by MIE, a wholly-owned subsidiary 
of the Company. In addition, with respect to five leases, the Company either    
guarantees the obligations of franchisees or leases the properties and subleases
them to franchisees. The Company's free standing restaurants are each           
approximately 2,000 square feet and the Company's restaurants located in malls  
are each approximately 400 to 1,100 square feet.                                

The leases have remaining terms ranging from one to 18 years. Many of the leases
contain renewal options for periods of five to 10 years. The Company is         
reviewing whether to continue to operate any marginal restaurants acquired in   
the MIE Acquisition and to renegotiate the terms of each restaurant lease upon  
the expiration of each lease. The following chart sets forth the expiration     
dates of the terms of (i) the leases of Company owned restaurants, and (ii) the 
Company's leases which are subleased to franchisees and leases of franchisees   
which are guaranteed by the Company.                                            

Leases Subject
to Guarantees 
Number of Leases        or Subleases          Expiration Date 
----------------        ---------------       --------------- 

    2                   1                   2000
    5                   0                   2001
   10                   0                   2002
   12                   3                   2003
    7                   0                   2004
          7                   0                   Thereafter

14

10KSB40
15th Page of 58
TOC
1st
Previous
Next
Bottom
Just 15th

Item 3.  Legal Proceedings                                                      

ATAC Corporation and Patrick Cullen v. Arthur Treacher's, Inc. and James        
Cataland, Case No. 1:95CV 1032, In the U.S. District Court, Northern District,  
Ohio Eastern Division; filed May 9, 1995. On November 16, 1994, Arthur          
Treacher's terminated the agency agreement of a Regional Development            
Representative, ATAC Corporation, on the grounds that ATAC breached the         
agreement by assigning the agency agreement to a third party without the consent
of Arthur Treacher's. ATAC claims that the Company was aware of and consented to
the third-party assignment. The Company is unaware of any document signed by a  
properly-authorized representative of the Company formally authorizing or       
consenting to the assignment. On May 9, 1995, ATAC filed the action and alleged 
that the Company terminated the contract without cause, tortuously interfered   
with other business relationships, committed wrongful conversion of the         
territory and committed restraint of trade and price-fixing, breach of contract,
fraud, and violations of RICO. ATAC originally demanded a minimum of $2,750,000 
in compensatory damages and $6,000,000 in punitive damages. In response to the  
original complaint, the Company filed a motion to dismiss all of the claims. In 
addition, the Company filed a counterclaim against ATAC seeking a Declaratory   
Judgment that ATAC does not have a service contract with the Company in certain 
areas which the Company does business, that ATAC has committed breach of        
contract and that the Company is entitled to indemnification for previous       
lawsuits which have occurred because of the actions of ATAC on behalf of the    
Company. ATAC has twice amended the claims and allegation of the original       
complaint. In the Third Amended Complaint, ATAC asserts claims against the      
Company and the Company's former President, James Cataland, for fraud, breach of
contract, tortuous interference with contract, violations of the Ohio Business  
Opportunity Act, violations of the Ohio Consumer Sales Practices Act and breach 
of fiduciary duty. ATAC seeks in excess of $10,000,000 in compensatory,         
punitive, and statutory damages from the Company. In response to the Third      
Amended Complaint, the Company in 1997 filed a Motion to Dismiss ATAC's claims  
for breach of fiduciary duty and under the Consumer Sales Practices and Business
Opportunity Acts. The Company also requested that the district court dismiss the
claim against the Company's former President. The Company in 1998 filed Motions 
for Summary Judgment on behalf of itself and the Company's former President with
respect to all of ATAC's claims (except breach of contract) and requested that  
the court refer the remaining contract claim to binding arbitration. The Court  
granted the Company's Motion to Stay the lawsuit pending arbitration and the    
ruling is presently the subject of an appeal to the Sixth Circuit Court of      
Appeals. The parties submitted briefs to the Sixth Circuit between July and     
October of 1999. The Sixth Circuit should hand down the decision within the next
few months.                                                                     

The Company originally believed that the lawsuit was an attempt by plaintiffs to
regain the territory by forcing the Company to defend expensive litigation at   
significant expense and that the plaintiffs' claims are without merit. The      
Company now understands that ATAC solely seeks damages from the Company. The    
Company still believes that ATAC's claims are meritless. The                    

15

10KSB40
16th Page of 58
TOC
1st
Previous
Next
Bottom
Just 16th

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 of         
operations of financial position.                                               

Item 4.  Submission of Matters to a Vote of Security Holders.                   

Not Applicable.                                               

 PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.              

The following table sets forth the high and low prices for the periods indicated
as reported by the National Daily Quotation Service, Inc. between dealers and do
not include retail mark-ups, mark-downs, or commissions and do not necessarily  
represent actual transactions, as reported by the National Association of       
Securities Dealers Composite Feed or other qualified inter-dealer quotation     
medium. As of April 17, 2000, the closing bid price was $2.00 per share.        

                       Low                      High
                       ---                      ----
1998 Fiscal Year:                                                               

First Quarter                        3.000                    3.500             
Second Quarter                       3.000                    4.250             
Third Quarter                        3.125                    4.000             
Fourth Quarter                       2.000                    3.563             

1999 Fiscal Year:                                                               

First Quarter                        0.563                    2.625             
Second Quarter                       0.594                    1.125             
Third Quarter                        0.375                    0.969             
Fourth Quarter                       0.313                    0.813             

The Common Stock is recorded on the NASD Bulletin Board with the symbol ATCH. As
of June 30, 1999, the number of record holders of the Company's Common Stock was
551.                                                                            

Dividends                                                                       

In November and December 1997, the Company consummated a private placement with 
respect to equity units consisting of shares of its Series C Preferred Stock and
warrants to purchase shares of common stock for aggregate proceeds of $990,000. 
The Company sold 9,900 shares of Series C Preferred Stock with warrants to      
purchase 148,500 shares of common stock attached.                               

16

10KSB40
17th Page of 58
TOC
1st
Previous
Next
Bottom
Just 17th

The preferred stock is not convertible, but may be redeemed at the option of the
Company at a redemption price of $100 per share plus accrued and unpaid         
dividends, at any time. The holders of the preferred stock are entitled to a    
cumulative dividend of 10 percent per annum, payable semi annually, if and when 
the Board declares a dividend. On September 28, 1998, the Company sold 4,000    
shares of Series D preferred stock and Common Stock Purchase Warrants with gross
proceeds of an aggregate amount of $400,000. The preferred stock is convertible 
into 400,000 shares of common stock.. The holders of the preferred stock are    
entitled to a cumulative dividend of 15 percent per annum, payable semi         
annually, if and when the Board declares a dividend.                            

To date, the Company has not paid any dividends on its Common Stock or Preferred
Stock. The payment of dividends, if any, in the future is within the discretion 
of the Board of Directors and will depend upon the Company's earnings, its      
capital requirements and financial condition, and other relevant factors. The   
Company does not intend to declare any dividends in the foreseeable future, but 
instead intends to retain all earnings, if any, for use in the Company's        
business operations. No dividends may be distributed with respect to the Common 
Stock so long as there are accrued and unpaid dividends on the Series A and     
Series C Preferred Stock. The amount of accumulated and unpaid dividends on the 
Series A Preferred Stock, Series C Preferred stock and Series D Preferred Stock 
was approximately $212,970 as of June 30, 1999.                                 

Item 6.  Management's Discussion and Analysis or Plan of Operation.             

This Management's Discussion and Analysis of Financial Condition and Results of 
Operations of the Company should be read in conjunction with the Financial      
Statements and Notes thereto.                                                   

Safe Harbor Statement Under the Private Securities Litigation Reform Act of     
1995.                                                                           

Information set forth herein contains "forward-looking statements" which can be 
identified by the use of forward-looking terminology such as "believes,"        
"expects," "may," "should" or "anticipates" or the negative thereof or other    
variations thereon or comparable terminology, or by discussions of strategy. No 
assurance can be given that the future results covered by the forward-looking   
statements will be achieved. The Company cautions readers that important factors
may affect the Company's actual results and could cause such results to differ  
materially from forward-looking statements made by or on behalf of the Company. 
Such factors include, but are not limited to, changing market conditions, the   
impact of competitive products, pricing and acceptance of the Company's         
products.                                                                       

Overview                                                                        

The Company's principal sources of revenues are from the operations of the      
Company owned restaurants and the receipt of royalties from franchisees. The    
Company's cost of sales includes food, supplies and occupancy costs (rent and   
utilities at Company owned stores). Operating                                   

17

10KSB40
18th Page of 58
TOC
1st
Previous
Next
Bottom
Just 18th

expenses include labor costs at the Company owned stores and advertising,       
marketing and maintenance costs. Franchise services and selling expenses include
fees payable to regional representatives and their expenses and the salary of   
the Company's Director of Franchise Services. General and administrative        
expenses include costs incurred for corporate support and administration,       
including the salaries and related expenses of personnel at the Company's       
headquarters in Jacksonville, Florida (except the Director of Franchise         
Services), the costs of operating the headquarters offices (rent and utilities) 
and certain related costs (travel and entertainment).                           

Results of Operations                                                           

The following discussion includes the following periods: (i) the fiscal year    
ended June 30, 1999 ("Fiscal 1999") and (ii) the fiscal year ended June 30, 1998
("Fiscal 1998"). The financial results of the Company have been audited as of   
the full fiscal years ended June 30, 1999 and June 30, 1998.                    

Fiscal 1999 and Fiscal 1998                                                     

The Company's reported total revenues of $21,531,829 for Fiscal 1999, a decrease
of $1,454,933 or 6.3%, compared to Fiscal 1998. The decrease in total revenues  
was generally a result of the restructuring activity which reduced the company  
owned restaurants from 62 operating restaurants to 42 by June 30, 1999. Also    
contributing to the decrease in total revenues was a reduction in couponing and 
discounting of $1,133,356 when compared to the same period last year and a same 
store sales decline of 6.2% for restaurants operated a minimum of 12 months when
compared to the same period last year.                                          

Net restaurant sales (defined as gross restaurant sales less coupons, promotion 
cost and discounts) decreased 3.1% or $626,566 to $19,576,361 compared to the   
same period last year of $20,202,927 generally a result of the restructuring    
activity. Same store net restaurant sales for stores operated a minimum of 12   
months decreased $1,166,425 or 6.2% for Fiscal 1999 compared to Fiscal 1998.    

Franchise and royalty income increased $276,063 or 39.7% to $971,610 for Fiscal 
1999 primarily due to the co-brand expansion program with Miami Subs. The       
co-brand expansion program with Miami Subs produced $ 28,765 in royalty income  
and $ 57,500 in initial franchise fees for Fiscal 1999, compared to zero in the 
same period last year.                                                          

Cost of sales from restaurant operations for Fiscal 1999 increased by .2% to    
34.8% on net restaurant sales compared to 34.6% for Fiscal 1998. The increase in
cost of sales percentage is primarily a result of low sales volumes in many of  
the restaurants subsequently sold during the restructuring. The Company's total 
operating expenses increased $1,473,270 or 5.9% to $26,571,148 for Fiscal 1999, 
as compared to $25,097,878 for Fiscal 1998. Of the increase                     

18

10KSB40
19th Page of 58
TOC
1st
Previous
Next
Bottom
Just 19th

$2,036,955 or 138.3% of the increase is attributed to the recognition of an     
asset impairment charge as required by SFAS No. 121" Accounting for the         
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".   

Discontinued operations and other non-recurring cost increased by $576,217 or   
117.3% to $1,067,446 of which $878,785 was a result of losses and write-downs   
incurred from the new concept development of the seafood grilles and co-branded 
restaurants operated by the Company. These stores have been sold or the leases  
have been terminated during the restructuring.                                  

Interest expense decreased $16,959 or 8.8% to $175,728 for Fiscal 1999, as      
compared to $192,687 for Fiscal 1998. The decrease in interest expense was a    
function of paying down debt financing for past acquisitions and the natural    
expiration of various debt.                                                     

Depreciation and amortization decreased $11,035 or .9% to $1,204,321 for Fiscal 
1999, as compared to $1,215,356 for Fiscal 1998. Included in Fiscal 1998        
depreciation was an asset impairment write-down of $110,000 in accordance with  
FASB 121. With the $110,000 omitted from Fiscal 1998, depreciation and          
amortization actually increased $98,965 or 9.0% to $1,204,321 for Fiscal 1999,  
as compared to $1,105,356 for Fiscal 1998. The increase was primarily driven by 
new store construction.                                                         

The undeclared preferred stock dividends increased $42,283 or 70.3% to $102,390 
in Fiscal 1999 compared to $60,107 in Fiscal 1998. The increase is primarily    
attributable to the Series D Preferred Stock issued in September 1998.          

As a result of the "asset impairment write-down", discontinued operations of the
"Seafood Grilles" and co-branded restaurants and other non recurring cost, all  
combined for net losses of $3,104,401. The Company's net loss (before preferred 
dividends) increased $3,078,024 or 111.2% to $5,846,719 for Fiscal 1999, as     
compared to a net loss (before preferred dividends) of $2,768,695 for the Fiscal
1998.                                                                           

Fiscal 1998 and Fiscal 1997                                                     

The Company's reported total revenues of $22,986,762 for Fiscal 1998, ended June
30, 1998, an increase of $5,211,103 or 29.3%, compared to the year ended June   
30, 1997 (Fiscal 1997). The increase in sales include the operating results of  
the restaurants from the Company's M.I.E. division for all of Fiscal 1998,      
compared to the 31 weeks of operation for Fiscal 1997.                          

The most significant increase from revenues came from net restaurant sales      
(defined as gross restaurant sales less coupons, promotion cost and discounts)  
which increased 25.9% or $4,156,236 to $20,202,927 compared to the same period  
last year of $16,046,691. The increase was attributable to the net restaurant   
sales generated by the M.I.E. division for a full 52 week period ended Fiscal   
1998, compared to the post acquisition 31 week period of operation for the      

19

10KSB40
20th Page of 58
TOC
1st
Previous
Next
Bottom
Just 20th

period ended Fiscal 1997.                                                       

Franchise and royalty income decreased 31.8% or $154,316 to $330,569 for Fiscal 
1998 primarily due to the acquisition of M.I.E. Hospitality, Inc., the Company's
former 32 restaurant franchisee and several other franchise locations. Regional 
representative fees decreased in conjunction with the decline in royalty revenue
compared to the same period last year. Overall, comparable store sales for      
restaurants operated a minimum of 12 months decreased by 6.6% in Fiscal Year    
1998 compared to Fiscal Year 1997.                                              

Cost of sales from restaurant operations improved by 1.1% to 34.6% on net       
restaurant sales for Fiscal Year 1998, as compared to 35.7% for the same period 
last year. The Company's total costs and expenses increased 27.0% or $5,399,318 
to $25,097,878 for Fiscal Year 1998, as compared to the same period last year.  
Of the increase $4,945,806 or 91.6% of the increase was attributed to cost and  
expenses incurred by the M.I.E. division from July 1 through November 26, 1997. 
Additional costs incurred in Fiscal Year 1998 was a function of the acquisition 
of three additional restaurants during the fiscal year.                         

Other non-recurring cost increased by $512,204 of which $419,417 was attributed 
to the professional fees and due diligence expenses associated with the proposed
Seattle Crab Company and Miami Sub's Corporation acquisitions, which were       
subsequently terminated.                                                        

Interest expense increased 18.1% or $29,557 to $192,687 for Fiscal Year 1998, as
compared to $163,130 for the same period last year. The increase in interest    
expense was a function of increased debt financing for recent acquisitions, new 
store construction and renovations. Depreciation and amortization increased     
67.6% or $490,388 to $1,215,356 for Fiscal Year 1998, as compared to $724,968   
for the same period last year. This increase was primarily driven by            
acquisitions, new store construction and renovations and a write-down of        
$110,000 in accordance with FASB 121.                                           

The undeclared preferred stock dividends increased $51,387 in Fiscal Year 1998  
primarily due to the issuance of Series C Preferred Shares in November 1997.    

As a result of the foregoing, particularly the increase in depreciation and     
amortization and non recurring cost, the Company's net loss (before preferred   
dividends) increased 33.2% or $689,673 to $2,768,695 for Fiscal Year 1998, as   
compared to a net loss (before preferred dividends) of $2,079,022 for the Fiscal
Year 1997.                                                                      

20

10KSB40
21st Page of 58
TOC
1st
Previous
Next
Bottom
Just 21st

Liquidity and Capital Resources                                                 

The Company has financed its operations principally from revenues derived from  
Company owned restaurants, franchise income and private placements of equity and
debt. The Company has raised approximately $12,000,000 in equity and debt since 
May 1996, of which $3.3 million of equity and debt has been raised since        
December 1997.                                                                  

                                                        [Enlarge/Download Table]
                                                                                           
Preferred Stock "Series C"                                     December 1997  $     990,000
Warrants exercised                                     Dec 1997 - April 1998  $      60,400
Common Stock                                                       June 1998  $     438,315
Private Placement of Promissory Notes and Warrants            September 1998  $     200,000
Preferred Stock "Series D"                                    September 1998  $     400,000
Common Stock                                                      March 1999  $     110,000
Promissory Notes and Warrants                       May 1999 - February 2000  $   1,137,000
                                                                              -------------
                                                                              $   3,335,715

The management of the Company has reduced certain costs by renegotiating various
vendor contracts and continues to seek opportunities to reduce the Company's    
operating costs. The Company engages in contract negotiations with certain      
suppliers to reduce the Company's cost of goods sold and improve the Company's  
liquidity. The Company's most significant supplier contract was completed in    
December 1998 relative to the Company's soft drink product offerings. The       
Company received in excess of $625,000 in cash from its new soft drink supplier 
during the three months ended December 27, 1998. Such proceeds were used to     
defray the cost of switching vendors and promotional cost incurred to integrate 
the new product line into the Company's menu. Any excess proceeds will be       
amortized into income over a two year period. The new vendor is providing menu  
board design leadership, menu board financing and marketing support in various  
phases of core product promotions in addition to soft drink promotions.         

The Company's current liabilities exceeded its current assets by $3,733,044 at  
June 30, 1999 compared to $2,443,782 at June 30, 1998. The Company had cash and 
short-term investments of $165,459 at June 30, 1999 compared to $909,636 at June
30, 1998. During Fiscal 1999, the Company experienced negative cash flow which  
has adversely affected its liquidity. Such negative cash flow resulted primarily
from operating losses related to the "Seafood Grille" concept in the Detroit,   
Florida and New York metropolitan markets, expenses related to the construction 
of new restaurants in the New York City area, legal and lease obligation        
settlements and the professional fees and due diligence expenses associated with
the proposed Seattle Crab Company and Miami Subs Corporation acquisitions, which
were subsequently terminated. The Company became in arrears with respect to     
certain leases because of poor performance by stores in those locations. The    
Company had also incurred indebtedness in connection with (i) the conversion of 
past due amounts under certain leases to indebtedness and (ii) the repurchase of
certain franchises, but several of such restaurants were unable to generate     
sufficient revenues to repay the indebtedness.                                  

21

10KSB40
22nd Page of 58
TOC
1st
Previous
Next
Bottom
Just 22nd

The Nasdaq Stock Market, Inc. delisted the Company's Common Stock from the      
NASDAQ Small Cap Market on February 10, 1999 because the Company failed to      
comply with Nasdaq's compliance criteria regarding minimum net tangible assets  
and minimum bid price. The Company's common stock became listed on the OTC      
Bulletin Board effective February 11, 1999. The delisting from NASDAQ could     
adversely affect the Company's ability to raise additional capital.             

The Company has reduced administrative, personnel and certain occupancy costs   
during the fiscal year ended June 30, 1999 and seeks opportunities to reduce the
Company's operating costs.                                                      

The Company implemented a restructuring strategy in January 1999 which is       
focused on improving cash flow and profitability by franchising or selling      
certain company owned restaurants, franchise sales, cobranding and introducing a
retail product line for major supermarkets chains. As of October 1999, the      
restructuring of real estate obligations by franchising, selling and terminating
selected leases was completed. As a result of the spin-off of selected leases,  
losses typically incurred by certain locations have been eliminated, thus       
improving cashflow and profitability. financial improvement                     

The implementation of the strategy has improved the operating cash flow and     
profitability of the Company as illustrated in the financial summary below.     

                                                        [Enlarge/Download Table]

-------------------------------------------------------------------------------------------------------------------
                             Statement of Operations                                                               
                              For Six Months Ended                                                                 
                                  ( unaudited )                                                                    
                                   Dec 26, 1999       Dec  27, 1998        Dec  28, 1997                           
(in thousands)                    (unaudited)                                                                      
-------------------------------------------------------------------------------------------------------------------

                                                                                                                   
Total Revenue                        $ 7,486             $ 11,298             $ 12,185                             
Net Loss                              (  273)          (    1,289)               ( 602)                            
Adjustments                                                                                                        
Add: Depreciation & Amortization         391                  594                  546                             
     Interest                             83                   79                  178                             
                                     -------            ----------              -----------                        

EBITDA                               $   201          $(      616)               $ 122                             

-------------------------------------------------------------------------------------------------------------------

EBITDA         - Earnings before Interest, Taxes, Depreciation and Amortization 

On September 30, 1999, the Company secured 12% promissory notes which generated 
$289,000 from certain shareholders and board members. Interest accrues at a rate
of 12% per annum. In addition, the debt and interest is convertible into        
1,541,333 shares of common stock at $.21 per                                    

22

10KSB40
23rd Page of 58
TOC
1st
Previous
Next
Bottom
Just 23rd

share on September 30, 2000. Also 481,667 warrants are attached to this debt at 
an exercise price of $.30 per share, which warrants are exercisable through     
September 30, 2004.                                                             

On October 21, 1999, the Company secured 12% promissory notes which generated   
$221,000 from certain shareholders and board members. Interest accrues at a rate
of 12% per annum. In addition, the debt and interest is convertible into        
1,420,714 shares of common stock at $.21 per share on October 21, 2000. Also    
368,333 warrants are attached to this debt at an exercise price of $.30 per     
share, which warrants are exercisable through October 21, 2004.                 

On December 1, 1999, the Company secured 12% promissory notes which generated   
$50,000 from Bruce Galloway the Company's CEO and Chairman of the Board.        
Interest accrues at a rate of 12% per annum. In addition, the debt and interest 
is convertible into 200,000 shares of common stock at $.28 per share on December
1, 2000. Also 65,789 warrants are attached to this debt at an exercise price of 
$.38 per share, which warrants are exercisable through December 1, 2004.        

On January 5, 2000, the Company secured 12% promissory notes which generated    
$50,000 from Skuli Thorvaldsson, a Director of the Company. Interest accrues at 
a rate of 12% per annum. In addition, the debt and interest is convertible into 
200,000 shares of common stock at $.28 per share on January 5, 2001. Also 65,789
warrants are attached to this debt at an exercise price of $.38 per share, which
warrants are exercisable through January 5, 2005.                               

On February 5, 2000, the Company secured 12% promissory notes which generated   
$345,000 from certain shareholders and board members. Interest accrues at a rate
of 12% per annum. In addition, the debt and interest is convertible into        
1,983,334 shares of common stock at $.24 per share on February 5, 2001. Also    
566,667 warrants are attached to this debt at an exercise price of $.30 per     
share, which warrants are exercisable through February 5, 2005.                 

The Company believes that its current cash resources, cash flow from operations,
cost savings and its past ability to obtain additional financing will be        
sufficient to adequately fund its current working capital needs through the     
fiscal year commencing July 1, 1999. In the event that the Company needs        
additional working capital to finance its operations or capital expenditures,   
the Company believes it could meet its needs through either additional          
borrowings or the sale of additional equity, although there can be no assurance 
that the Company would be successful in obtaining any such financing or on what 
terms such transactions could be effected.                                      

Year 2000 Compliance                                                            

The Company has undertaken a comprehensive review of its computer-based systems 
and applications to identify modifications necessitated by the century change in
the year 2000 and has implemented a plan to make such modifications. The Company
has completed critical systems compliant with the century change prior to       
December 31, 1999. The Company has                                              

23

10KSB40
24th Page of 58
TOC
1st
Previous
Next
Bottom
Just 24th

completed the process of updating all accounting and computer programs. The     
Company's costs of compliance was not material relative to its financial        
condition. The Company has made inquiries with its' suppliers in regards to year
2000 compliance issues and no issues were derived from the year 2000 compliance.

Item 7.  Financial Statements.                                                  

     The financial statements are filed as part of this Annual Report on
Form 10-KSB.                                                                    

Item 8.  Changes in and Disagreements with Accountants.                         

       On April, 21 1999, KPMG LLP (the "Former Accountant") notified Arthur
      Treacher's Inc. (the Company") that the client -auditor relationship
had ceased. The Former Accountant had served as the Company's 
    independent public accountant prior to its resignation. The Former
        Accountant's report on the financial statements for the past two years
      did not contain an adverse opinion or a disclaimer of opinion. There
   were no disagreements with the Former Accountant on any matter of
        accounting principles or practices, financial statement disclosures or
auditing scope or procedure.                                  

        The Company than engaged Lytkowski & Company LLP to replace the Former
       Accountant as the Company's independent certifying public accountant.

         On February, 20 2000, Lytkowski & Company LLP (the "Former Accountant")
       was notified by Arthur Treacher's Inc. (the Company") that the client
       -auditor relationship had ceased. The Former Accountant had served as
       the Company's independent public accountant prior to its resignation.
         The Former Accountant's report on the financial statements for the past
  ten months did not contain an adverse opinion or a disclaimer of
        opinion. There were no disagreements with the Former Accountant on any
   matter of accounting principles or practices, financial statement
disclosures or auditing scope or procedure.                   

     The Company than engaged Davis Monk & Company to replace the Former
       Accountant as the Company's independent certifying public accountant.

24

10KSB40
25th Page of 58
TOC
1st
Previous
Next
Bottom
Just 25th

PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons.          

                                                                [Download Table]

          Name          Age           Position                  
          ----          ---           --------                  

                                                                
Bruce R. Galloway       42   Chairman of the Board and          
                             Chief Executive Officer            

Skuli Thorvaldsson      58   Vice Chairman of the Board         

William F. Saculla      48   President, Chief Financial Officer,
                             Secretary, Director                

Donald Perlyn           56   Director                           

Maurice Sonnenburg      63   Director                           

Evan Binn               60   Director                           

Sigurdur Jon Bjornsson  34   Director                           

Directors                                                                       

Bruce R. Galloway. Mr. Galloway has been Chief Executive Officer since May 1998 
and Chairman of the Board of Directors since May 1996. Mr. Galloway is currently
a managing director of Burnham Securities Inc., the placement agent in the      
November Private Placement, an NASD Broker/Dealer and investment bank based in  
New York. Prior to joining Burnham in 1993, Mr. Galloway was a senior vice      
president at Oppenheimer & Company, an investment bank and NASD Broker/Dealer   
based in New York, from 1991 through 1993. Mr. Galloway holds a B.A. degree in  
Economics from Hobart College and an M.B.A. in Finance from New York            
University's Stern Graduate School of Business.                                 

Skuli Thorvaldsson. Mr. Thorvaldsson has been Vice Chairman of the Board of     
Directors since May 1996. Mr. Thorvaldsson has been the Chief Executive Officer 
of the Hotel Holt in Iceland since 1980. . Mr. Thorvaldsson has various         
diversified interests in food court services, travel agency and pork processing.
He is also a master franchisee of Domino's Pizza in Scandinavia. Mr.            
Thorvaldsson is a director of Allied Resources Corp. Mr. Thorvaldsson graduated 
from the Commercial College of Iceland and the University of Barcelona. Mr.     
Thorvaldsson received his Degree in Law from the University of Iceland.         

25

10KSB40
26th Page of 58
TOC
1st
Previous
Next
Bottom
Just 26th

William F. Saculla. Mr. Saculla has served as Secretary of the Company and Chief
Financial Officer since 1984. In May 1998, Mr. Saculla was named President and  
was also nominated to the Board of Directors. Mr. Saculla earned a B.S. degree  
in Accounting from Youngstown State University in 1978.                         

Donald Perlyn. In November 1998, Mr. Perlyn was nominated to the Board of       
Directors. Mr. Perlyn Joined Miami Subs Corporation in May of 1989. In addition 
to being an attorney, he is a 32 year veteran of the of the restaurant industry 
with extensive experience in restaurant development, operations and franchising.
Since 1989, Mr. Perlyn has been responsible for the development and growth of   
the Miami Subs Grill concept. Mr. Perlyn was promoted to the position of        
President of Miami Subs Corporation in July of 1998. In October of 1999, Miami  
Subs Corp. was acquired by Nathan's Famous Inc. As a result of this acquisition,
Mr. Perlyn, in addition to his responsibilities at Miami Subs, assumed the      
position of Executive Vice President of Nathan's Famous, Inc. He is also a      
member of the Board of Directors of Nathan's.                                   

Maurice Sonnenberg In November 1998, Mr. Sonnenberg was nominated to the Board  
of Directors. Mr. Sonnenberg has served as an advisor to five United States     
Presidential Administrations on matters of finance, international trade, foreign
policy and intelligence matters. Among his vocational activities he presently   
serves as the Senior International Advisor to the investment banking firm of    
Bear Stearns & Co. Inc. and as the Senior International Advisor to the law firm 
of Manatt, Phelps and Philips, LLP (with offices in Washington DC and Los       
Angeles).                                                                       

Evan Binn. In November 1998, Mr. Binn was nominated to the Board of Directors.  
Mr. Binn received his bachelors degree from University of California at Los     
Angeles and is A Certified Public Accountant in California. He is a member of   
the California Society of Certified Public Accountants and has maintained a     
practice in Los Angeles, CA for thirty seven years.                             

Sigurdur Jon Bjornsson. Mr. Bjornsson has been a member of the Board of         
Directors since March 2000. Since 1997, he has been Vice President and Chief    
Financial Officer of EFA Venture Inc., a venture capital firm. From 1993 through
1997, he was the sales manager at Icelandic American Trading, a distributor of  
products in Iceland. Mr. Bjornsson received his bachelors degree in 1993 from   
the University of Iceland.                                                      

Each Director is elected to serve until the Company's next annual meeting of    
Shareholders and until his successor is duly elected and qualified. There are no
agreements with respect to the election of directors. Executive officers are    
appointed annually by the Board of Directors and each executive officer serves  
at the discretion of the Board of Directors.                                    

Other Key Employees                                                             

Thomas K. Hoffman, Executive Vice President, Corporate Development. Mr. Hoffman 
joined the Company when MIE was purchased in November of 1996. In his current   
capacity he is responsible for purchasing, new product development, store       
development and franchise relations. Prior to this he served as Vice President  
of Operations for MIE from 1986 until 1996. He continued supervising the MIE    
stores after the Company purchased the franchise until May 1998 when he was     
promoted to his current position. He received a BA degree in Business Management
from Bloomsburg University in 1975.                                             

26

10KSB40
27th Page of 58
TOC
1st
Previous
Next
Bottom
Just 27th

Robert J. Zelinski, Controller, Assistant Secretary. Mr. Zelinski has served as 
Controller of the Company since 1987. Mr. Zelinski is responsible for the       
Company's financial reporting activities and internal controls . Mr. Zelinski   
earned a B.S. degree in Accounting from Youngstown State University's Williamson
School of Business in 1987 and was also a franchisee of the Company from 1990   
through 1993.                                                                   

Committees                                                                      

The Company has the following committees:                                       
Executive, Compensation and Audit. The Board of Directors elected William F.    
Saculla, Bruce Galloway and Skuli Thorvaldsson to the Executive Committee. The  
Compensation Committee of the Board of Directors was formed to review the       
Company's executive compensation proposals, subject to the approval of the Board
of Directors. The Compensation Committee is composed of Skuli Thorvaldsson and  
Bruce Galloway. The Audit Committee was formed to advise the Board in matters   
relating to the audit of the Company's financial statements and the Company's   
financial reporting systems. Messrs. Bruce Galloway, R. Skuli Thorvaldsson,     
William Saculla, and George Koo, an independent advisor to the Company, serve as
members of the Audit Committee.                                                 

In addition, the International Advisory Committee was formed to advise the Board
of Directors regarding international operations and expansion opportunities,    
although without the power to obligate the Company. The Board selected Messers. 
Gudmundur Jonsson, David Baron, Valdimar Thomasson, Evan Binn, Gisly Martinsson,
Lorie Karnath and Hans Rutkowski to the International Advisory Committee.       

Item 10. Executive Compensation.                                                

         The following table provides certain summary information concerning the
compensation paid or accrued by the Company to or on behalf of its Chief        
Executive Officer and the other named executive officers of the Company for     
services rendered in all capacities to the Company and its subsidiaries for the 
fiscal years ended June 30, 1999, 1998 and 1997.                                

(a)  Summary Compensation Table                                                 

                                                        [Enlarge/Download Table]

                                                                                               Long-Term Compensation   
                                                                                              ------------------------  
                                         Annual Compensation                                  Awards Payouts   Payouts  
                                        ----------------------                                --------------   -------  
                                                                                Securities                              
Name and Principal                                Other Annual  Restricted      Underlying        LTIP        All Other 
Position            Year  Salary        Bonus     Compensation  Stock Award(s)  Options/SARs     Payouts    Compensation
--------            ----  ------        -----     ------------  --------------  ------------     -------    ------------
                                                                                                                        
Bruce Galloway      1999  $ 110,000.00  0.00      $0.00         0.00            10,000.            $0.00          0     
Chairman, CEO                                                                                                           

27

10KSB40
28th Page of 58
TOC
1st
Previous
Next
Bottom
Just 28th

                                                        [Enlarge/Download Table]
                                                                                       

                    1998  $  20,000.00  0.00  $0.00  0.00  255,000           $0.00  0  
                                                           shares of Common            
                                                           Stock                       

                    1997  $  00,000.00  0.00  $0.00  0.00  430,000           $0.00     
                                                           shares of Common            
                                                           Stock                       

William F. Saculla  1999  $  95,000.00  0.00  $0.00  0.00  10.000            $0.00  0  
President,                                                                             
Treasurer                                                                              

                    1998  $  78,000.00  0.00  $0.00  0.00  0.00              $0.00  0  
                                                           shares Common               
                                                           Stock                       

                    1997  $  75,000.00  0.00  $0.00  0.00  0.00              $0.00     
                                                           shares Common               
                                                           Stock                       

Mr. Galloway has agreed to forego salary of $190,000 for an aggregate of        
$880,812 warrants, with exorcise prices ranging from $.08 to $2.16 per share.   

(b)      Option/SAR Grants in Last Fiscal Year  - None                          

(c) Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End              
Option/SAR Values                                                       

                                                        [Enlarge/Download Table]


                Shares acquired on                  Number of Unexercised          Value of unexercised        
Name            exercise            Value Realized  options/SARs at June 30, 1999  in-the-money options/SARs at
                                                                                   June 30, 1999               

                                                                                                               
Bruce Galloway        0                  0            695,000 options                $0.00 Exercisable         

                                                      685,000 Exercisable                                      
                                                       10,000 Unexerciseable                                   

(1) 25% of the options for 20,000 vest each year over a period of four years    
commencing March 27, 1997 and are exercisable for five years after vesting.     
  20% of the options for 260,000 shares vest each year over a period of five
years commencing June 1, 1997 and are exercisable for five years after vesting. 

28

10KSB40
29th Page of 58
TOC
1st
Previous
Next
Bottom
Just 29th

Item 11. Security Ownership of Certain Beneficial Owners and Management         

The following table sets forth information as of February 28, 2000, with respect
to officers, directors and persons who are known by the Company to be beneficial
owners of more than 5% of the Company's Common Stock. Except as otherwise       
indicated, the Company believes that the beneficial owners of the Common Stock  
listed below, based on information furnished by such owners, have sole          
investment and voting power with respect to such shares, subject to community   
property laws where applicable.                                                 

Shareholder                                  Shares             Percentage      
--------------------------------------------------------------------------------
Bruce R. Galloway (1)                       2,591,694             15.3          
Fred Knoll (2)                              1,305,487              8.2          
Magee Industrial                                                                
Enterprises, Inc.(3)                       1,009,718              6.2         
Skuli Thorvaldsson (4)                        959,086              5.9          
Evan Binn and Ronna Binn(5)                   811,458              5.1          
NTS Financial Services Ltd. (6)               789,458              5.0          
Donald Perlyn (7)                              71,667               .5          
William Saculla(8)                             71,242               .5          
Maurice Sonnenberg (9)                         40,000               .3          

Officers and Directors as a Group(10)       5,850,634             26.0%         

Total Outstanding Shares                   15,424,004                           

Notes                                                                           

(1)      Mr. Bruce R. Galloway is the Chairman of the Board of the Company.     
   Includes warrants to purchase 380,000 shares of Common Stock at a
         purchase price of $1.00, 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 10,000 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 per share through November
        24, 2003; (v) a promissory note convertible to 89,080 shares of Common
        Stock at a conversion price of $.44 per share commencing May 10, 2000;
        (vi) warrants to purchase 72,000 shares of Common Stock at an exercise
 price of $.44 per share through May 10, 2004; (vii) warrants to
      purchase 175,000 shares of Common Stock at an exercise price of $.30
   per share through September 30, 2004; (viii) warrants to purchase
83,333 shares of Common                                       

29

10KSB40
30th Page of 58
TOC
1st
Previous
Next
Bottom
Just 30th

        Stock at an exercise price of $.30 per share through October 21, 2004;
        (ix) warrants to purchase 65,789 shares of Common Stock at an exercise
   price of $.38 per share through December 1, 2004; (x) warrants to
         purchase 83,333 shares of Common Stock at an exercise price of $.60 per
         share through February 5, 2005; (xi) warrants to purchase 66,211 shares
         of Common Stock at an exercise price of $.45 per share through July 10,
      2004; (xii) warrants to purchase 23,702 shares of Common Stock at an
  exercise price of $.42 per share through August 10, 2004; (xiii)
         warrants to purchase 27,824 shares of Common Stock at an exercise price
 of $.36 per share through September 10, 2004. (xiv) warrants to
         purchase 40,000 shares of Common Stock at an exercise price of $.25 per
         share through October 10, 2004; (xv) warrants to purchase 26,667 shares
 of Common Stock at an exercise price of $.375 per share through
       November 10, 2004; (xvi) warrants to purchase 26,667 shares of Common
    Stock at an exercise price of $.375 per share through December 10,
       2004; (xvii) warrants to purchase 29,087 shares of Common Stock at an
    exercise price of $.34 per share through January 10, 2005; (xviii)
         warrants to purchase 26,667 shares of Common Stock at an exercise price
         of $.38 per share through February 10, 2005; (xix) warrants to purchase
      20,000 shares of Common Stock at an exercise price of $.38 per share
       through March 15, 2004. Excludes (i) a promissory note convertible to
        560,000 shares of Common Stock at a conversion price of $.21 per share
        on September 30, 2000; (ii) a promissory note convertible into 266,666
   shares of Common Stock at a conversion price of $.21 per share on
         October 21, 2000; (iii) a promissory note convertible to 200,000 shares
        of Common Stock at a conversion price of $.28 per share on December 1,
      2000; (iv) a promissory note convertible to 233,333 shares of Common
    Stock at a conversion price of $.24 per share on February 5, 2001.

(2)      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 at an
   exercise price of $1.00 through April 30, 2003; (iii) warrants to
      purchase 10,000 shares of Common Stock at an exercise price of $1.00
       through November 24, 2003. 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) Includes a promissory note  
        convertible to 132,572 shares of Common Stock at a conversion price of
         $.44 per share on May 10, 2000; (ii) warrants to purchase 50,000 shares
        of Common Stock at an exercise price of $.44 per share through May 10,
       2004; (iii) warrants to purchase 83,333, shares of Common Stock at an
   exercise price of $.30 per share through September 30, 2004; (iv)
         warrants to purchase 83,333 shares of Common Stock at an exercise price
      of $.30 per share through October 21, 2004; (v) warrants to purchase
      83,333 shares of Common Stock at an exercise price of $.30 per share
      through February 5, 2005; (vi) warrants to purchase 20,000 shares of
       Common Stock at an exercise price of $.38 per share through March 15,
   2004. Excludes a promissory note convertible to 266,666 shares of
       Common Stock at a conversion price of $.21 per share on September 30,
      2000; (ii) a promissory note convertible to 266,666 shares of Common
Stock at a conversion price of $.21 per share                 

30

10KSB40
31st Page of 58
TOC
1st
Previous
Next
Bottom
Just 31st

     on October 21, 2000; (iii) a promissory note convertible to 233,333
   shares of Common Stock at a conversion price of $.24 per share on
    February 5, 2001. Includes 156,250 shares of Common Stock owned by
Europa International Inc.                                     

(3)      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. Excludes 236,269 shares of Common Stock that Magee will
receive on June 5, 2000 in lieu of note payment.              

(4)      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 10,000 shares of Common Stock which
       are exercisable at an exercise price of $1.00 per share through March
       27, 2002, and (iv) warrants to purchase 10,000 shares of Common Stock
at an exercise price of $1.00 through November 24, 2003; (v) a
    promissory note convertible to 159,086 shares of Common Stock at a
      conversion price of $.44 per share on May 10, 2000; (vi) warrants to
         purchase 60,000 shares of Common Stock at an exercise price of $.44 per
         share through May 10, 2004; (vii) warrants to purchase 20,000 shares of
       Common Stock at an exercise price of $.38 per share through March 15,
2004.                                                         

(5)      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 10,000 shares of Common
       Stock at an exercise price of $1.00 through November 24, 2003 ; (iii)
    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 February 5, 2005; warrants to purchase 20,000 shares of
       Common Stock at an exercise price of $.38 per share through March 15,
   2004. Excludes a promissory note convertible to 266,666 shares of
       Common Stock at a conversion price of $.21 per share on September 30,
      2000; (ii) a promissory note convertible to 233,333 shares of Common
    Stock at a conversion price of $.24 per share on February 5, 2001.

(6)      Includes warrants to purchase 140,000, shares of Common Stock at an    
   exercise price of $.60 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. Excludes a promissory note convertible to 448,000 shares of
       Common Stock at a conversion price of $.21 per share on September 30,
      2000; (ii) a promissory note convertible to 266,666 shares of Common
    Stock at a conversion price of $.21 per share on October 21, 2000;
       (iii) a promissory note convertible to 200,000 shares of Common Stock
    at a conversion price of $.28 per share on January 5, 2001; (iv) a
promissory note convertible to 233,333                        

31

10KSB40
32nd Page of 58
TOC
1st
Previous
Next
Bottom
Just 32nd

   shares of Common Stock at a conversion price of $.24 per share on
February 5, 2001;                                             

(7)      Includes warrants to purchase 10,000 shares of Common Stock at an      
    exercise price of $1.00 through November 24, 2003, and warrants to
         purchase 41,667 shares of Common Stock at an exercise price of $.30 per
        share through February 5, 2005, and warrants to purchase 20,000 shares
      of Common Stock at an exercise price of $.38 per share through March
       15, 2004. Excludes a promissory note convertible to 116,667 shares of
     Common Stock at a conversion price of $.24 per share on February 5,
2001,                                                         

(8)      Mr. William Saculla is the President, Treasurer, and Secretary of the  
         Company. Includes options to purchase 9,000 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 6,000
   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, and warrants to
         purchase 16,667 shares of Common Stock at an exercise price of $.30 per
        share through February 5, 2005, and warrants to purchase 20,000 shares
      of Common Stock at an exercise price of $.38 per share through March
      15, 2004. Excludes a promissory note convertible to 46,667 shares of
     Common Stock at a conversion price of $.24 per share on February 5,
2001.                                                         

(9)      Includes warrants to purchase 10,000 shares of Common Stock at an      
    exercise price of $1.00 through November 24, 2003, and warrants to
         purchase 30,000 shares of Common Stock at an exercise price of $.38 per
share through March 15, 2004.                                 

Item 12. Certain Relationships and Related Transactions.                        

On September 15, 1998, Skuli Thorvaldsson, a Director of the Company,           
participated in a private placement of the Company's secured 15% promissory     
notes and common stock purchase warrants, which private placement generated     
gross proceeds of $600,000. Mr. Thorvaldsson loaned the Company $400,000        
pursuant to the terms of a promissory note. Interest accrues at the rate of 15% 
per annum. In addition, Mr. Thorvaldsson received warrants to purchase 100,000  
shares of Common Stock at an exercise price of $1.78 per share, which warrants  
are exercisable through September 15, 2003.                                     

On September 28, 1999, the debt was converted to 4,000 shares of Series D       
Preferred Stock. The Preferred Stock is convertible by the holder to shares of  
Common Stock at a conversion price of $1.00 per share of Common Stock the 4,000 
shares of Preferred Stock issuable upon conversion of the Note in the principal 
amount of $400,000 is convertible into 400,000 shares of Common Stock.          

On May 10, 1999, the Company issued 16% promissory notes in the aggregate       
principal amount of $182,000, included notes in the principal amount of $72,000,
$60,000 and $50,000 from Mr. Bruce Galloway, Mr. Skuli Thorvaldsson, and Europa 
International Inc. Knoll Capital Management, Inc., is the investment manager for
Europa. Mr. Knoll is the sole shareholder of                                    

32

10KSB40
33rd Page of 58
TOC
1st
Previous
Next
Bottom
Just 33rd

Knoll Capital Management Inc. respectfully. Interest accrues at a rate of 16%   
per annum. In addition, the debt and interest is convertible into 380,737 shares
of common stock at $.44 per share on May 10, 2000. In conjunction with the      
promissory notes The Company issued 182,000 warrants at an exercise price of    
$.44 per share, which warrants are exercisable through May 10, 2004.            

On September 30, 1999, the Company issued 12% promissory notes in the aggregate 
principal amount of $239,000 included notes in the principal amount of $105,000,
$84,000, $50,000 and $50,000 from Mr. Bruce Galloway, NTS Financial Services    
Ltd., Mr. Evan Binn and Europa International Inc. Knoll Capital Management,     
Inc., is the investment manager for Europa. Mr. Knoll is the sole shareholder of
Knoll Capital Management Inc. respectfully. Interest accrues at a rate of 12%   
per annum. In addition, the debt and interest is convertible into 1,541,333     
shares of common stock at $.21 per share on September 30, 2000. In conjunction  
with the promissory notes The Company issued 481,667 warrants at an exercise    
price of $.30 per share, which warrants are exercisable through September 30,   
2004.                                                                           

On October 21, 1999, the Company issued 12% promissory notes in the aggregate   
principal amount of $221,000 included notes in the principal amount of $50,000, 
$50,000 and $50,000 from Mr. Bruce Galloway, NTS Financial Services Ltd., and   
Europa International Inc. Knoll Capital Management, Inc., is the investment     
manager for Europa. Mr. Knoll is the sole shareholder of Knoll Capital          
Management Inc. respectfully. Interest accrues at a rate of 12% per annum. In   
addition, the debt and interest is convertible into 1,420,714 shares of common  
stock at $.21 per share on October 21, 2000. In conjunction with the promissory 
notes The Company issued 368,333 warrants at an exercise price of $.30 per      
share, which warrants are exercisable through October 21, 2004.                 

On December 1, 1999, the Company issued 12% promissory notes in the aggregate   
principal amount of $50,000 from Mr. Bruce Galloway the Company's CEO and       
Chairman of the Board. Interest accrues at a rate of 12% per annum. In addition,
the debt and interest is convertible into 200,000 shares of common stock at $.28
per share on December 1, 2000. In conjunction with the promissory notes The     
Company issued 65,789 warrants at an exercise price of $.38 per share, which    
warrants are exercisable through December 1, 2004.                              

On January 5, 2000, the Company issued 12% promissory notes in the aggregate    
principal amount of $50,000 from NTS Financial Services Ltd., a Director of the 
Company. Interest accrues at a rate of 12% per annum. In addition, the debt and 
interest is convertible into 200,000 shares of common stock at $.28 per share on
January 5, 2001. In conjunction with the promissory notes The Company issued    
65,789 warrants at an exercise price of $.38 per share, which warrants are      
exercisable through January 5, 2005.                                            

On February 5, 2000, the Company issued 12% promissory notes in the aggregate   
principal amount of $345,000 included notes in the principal amount of $50,000, 
$50,000, $50,000 and                                                            

33

10KSB40
34th Page of 58
TOC
1st
Previous
Next
Bottom
Just 34th

$50,000 from Mr. Bruce Galloway, NTS Financial Services Ltd., Mr. Evan Binn     
and Europa International Inc. Knoll Capital Management, Inc., is the investment 
manager for Europa. Mr. Knoll is the sole shareholder of Knoll Capital          
Management Inc. respectfully. Interest accrues at a rate of 12% per annum. In   
addition, the debt and interest is convertible into 1,983,334 shares of common  
stock at $.24 per share on February 5, 2001. In conjunction with the promissory 
notes The Company issued 566,667 warrants at an exercise price of $.30 per      
share, which warrants are exercisable through February 5, 2005.                 

Item 13. Exhibits and Report                                                    

(a)      Exhibits                                             

       3.1.1    *Registrant's Certificate of Incorporation

            3.1.2    *Agreement and Plan of Reorganization and First
     Addendum dated December 5, 1983

          3.1.3    *Certificate of Merger dated January 23, 1984

       3.1.4    *Articles of Merger dated January 27, 1984

                3.1.5    *Articles of Amendment to Articles of Incorporation
dated January 27, 1984    

                  3.1.6    *Amendment to Articles of Incorporation dated January
27, 1986                  

                3.1.7    *Articles of Amendment to Articles of Incorporation
dated June 28, 1996       

3.2      *Registrant's Bylaws               

4.1      *Form of Common Stock Certificate  

              4.2      *Certificate of Designation of Series A Preferred
Stock                     

              4.3      *Certificate of Designation of Series B Preferred
Stock                     

              4.4      *Certificate of Designation of Series C Preferred
Stock                     

              4.5      *Certificate of Designation of Series D Preferred
Stock                     

                 10.1     *Purchase Agreement dated May 31, 1996 between James
Cataland and Registrant   

34

10KSB40
35th Page of 58
TOC
1st
Previous
Next
Bottom
Just 35th

Exhibits
--------
                     *Exhibit A - Option Agreement
                   (See Exhibit 10.16)
                         *Exhibit B - Consulting Agreement
                  (See Exhibit 10.14

 Schedules
 ---------
                                  **Schedule A - States of Incorporation and
                                   Qualification
                           **Schedule B - Financial Statements
            **Schedule C - Taxes
                **Schedule D - Contracts
                          **Schedule E - Accounts Receivable
                 **Schedule F - Litigation
                            **Schedule G - Conflicting Interests
             **Schedule H - Leases
                 **Schedule I - Franchises
                 **Schedule J - Trademarks
                       **Schedule K - Payroll Register
                           **Schedule L - Employment Contracts
                         **Schedule M - Insurance Policies

                 10.3     *Purchase Agreement dated November 27, 1996, between
       M.I.E. Hospitality and Registrant

                                                                [Download Table]

Schedules                                                                   
---------                                                                   
                                                                            
**Schedule 1              Notice of Target Inter-Company Debt               

**Schedule 1(b)           Seller's Distribution Schedule (See Exhibit 10.17)

**Schedule B              Qualifications  as Foreign  Corporations  in      
                          Delaware, New Jersey, New York                    

**Schedule 2(a)           Capital Stock Representations, Exceptions, etc.   

**Schedule 2(b)           Exceptions to GAAP and Ordinary Course of Business
                          since September                                   

35

10KSB40
36th Page of 58
TOC
1st
Previous
Next
Bottom
Just 36th

                                                                [Download Table]
                                                                             
                    30, 1996, etc.                                           

**Schedule 2(c)     Disclosure of Liabilities of M.I.E.  Hospitality  Not    
                    Disclosed in Financial  Statements  or Other             
                    Schedules                                                

**Schedule 2(d)     Exceptions to Tax Returns, Representations and Warranties

**Schedule 2(e)     List of assets owned or leased, etc.                     

**Schedule 2(f)     Exceptions to Usability and Salability of Inventories    

**Schedule 2(g)     Contracts, Notices, Defaults, etc.                       

**Schedule 2(g)(5)  Insurance policies and bonds                             

**Schedule 2(g)(6)  Banks                                                    

**Schedule 2(g)(7)  Interests in entities having been party to transaction   
                    with M.I.E. in past 12 months                            

**Schedule 2(g)(8)  Consents or approvals of third parties required          

**Schedule 2(g)(9)  Accounts receivable aging schedule                       

**Schedule 2(i)     Salary increases, contracts with employees, agents, etc.,
                    and M.I.E. benefit plans; M.I.E. payroll roster;         
                    Collective Bargaining Agreements                         

**Schedule 2(k)     Legal Actions                                            

**Schedule 2(l)     Patents and trademarks, licenses, etc.                   

**Schedule 2(m)     List of Indemnification Given for M.I.E. Hospitality for 
                    Patent,                                                  

36

10KSB40
37th Page of 58
TOC
1st
Previous
Next
Bottom
Just 37th

                                                                [Download Table]
                                                                            

                  Trademark or Copyright Infringement                       

**Schedule 2(o)   Insurance Policies, see Schedule 2(g)(5)                  

**Schedule 2(p)   Outstanding Loans or Advances or Obligations to Make Loans
                  or Advances                                               

**Schedule 2(r)   Environmental                                             

**Schedule 3(b)   Consents required for performance by Buyer                

**Schedule 3(d)   Preferred Stock Rights and Preferences                    

**Schedule 3(e)   Buyer Financials                                          

**Schedule 5      Consents and Release of Guarantees Received by M.I.E.     
                  Hospitality (Identified Leases)                           

**Schedule 5(i)   Consents to Lease, etc., not received                     

**Schedule 7(e)   Actual Knowledge (individuals)                            

**Schedule 12(i)  Target Working Capital Statement                          

Exhibits                                                                    
--------                                                                    
 *Exhibit A       M.I.E. Note (See Exhibit 10.8)                            

 *Exhibit B       Buyer Guaranty (See Exhibit 10.4)                         

 *Exhibit C       Buyer Note (See Exhibit 10.7)                             

**Exhibit 2(b)    Balance Sheets and statements of Income as of 12/31/95 and
                  9/30/96                                                   

37

10KSB40
38th Page of 58
TOC
1st
Previous
Next
Bottom
Just 38th

                                                                [Download Table]
                                                                     
**Exhibit D               Form of Questionnaire                      

**Exhibit D-1             Responses to Questionnaire                 

 *Exhibit E               Escrow Agreement (See Exhibit 10.5)        

 *Exhibit F               General Mutual Releases (See Exhibit  10.6)

                  10.4     *Guaranty Surety Agreement dated November 27, 1996 by
Arthur Treacher's, Inc.   

            10.5     *Escrow Agreement dated November 27, 1996 among
                       Arthur Treacher's, Inc. Seller and Brown Brothers
Harriman & Co.            

               10.6     *Mutual Release Agreement dated November 27, 1996,
                         among M.I.E. Hospitality, Inc. and Magee Industrial
Enterprises, Inc.         

                  10.7     *Promissory Note dated November 27, 1996 for $390,417
                     from M.I.E. Hospitality, Inc. in favor of Magee
 Industrial Enterprises Inc.

         10.8     *Promissory Note dated November 27, 1996 for
                         $1,139,563 from M.I.E. Hospitality, Inc in favor of
        Magee Industrial Enterprises, Inc.

                  10.9     *Uniform Franchise Offering Circular as of January 1,
1997                      

               10.10    *Form of Franchise Agreement as of January 1, 1997

            10.11    *Form of Warrant exercisable at $1.51 per share

         10.12    *Form of Warrant to Burnham Securities, Inc.

10.13    *Form of Stock Option to Employees 

                 10.16    *Option Agreement dated March 29, 1996 between James
     Cataland and Skuli Thorvaldsson

           10.17    *Schedule 1(b) to the Purchase Agreement dated
                      November 27, 1996 between M.I.E. Hospitality and
Registrant.               

        10.18    *Form of agreement with holders of Series A
Preferred Stock           

38

10KSB40
39th Page of 58
TOC
1st
Previous
Next
Bottom
Just 39th

                10.19    Forbearance Agreement between the Company and Magee
                         Industrial Enterprises, Inc. dated October 21, 1999

                10.20    Co-Branding Agreement between the Company and Miami
Subs dated August 13, 1998

            11.1     *Statement of Computation of Per Share Earnings

21.      *List of Subsidiaries              

27.       Financial Data Schedules          

* Previously Filed with Form 10-SB Declared Effective on August 12, 1997
** Not Included with previous filings.                                    
*** Previously Filed with Form 10-QSB filed on November 13, 1997            

39

10KSB40
40th Page of 58
TOC
1st
Previous
Next
Bottom
Just 40th

SIGNATURES

        In accordance with the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.                                                                     

             ARTHUR TREACHER'S, INC.
                                (Registrant)

Date:  April 17, 2000              By  /s/ Bruce Galloway                       
                                     -----------------------------------------
            Bruce Galloway
                     Chief Executive Officer

               By /s/ William F. Saculla
                                     -----------------------------------------
                William F. Saculla
                                President, Chief Financial Officer

                                                        [Enlarge/Download Table]

            Name                          Title                        Date          
            ----                          -----                        ----          
                                                                                     
 /s/ Bruce Galloway            Chief Executive Officer, Director,  April   17  , 2000
-----------------------------  Chairman of the Board                                 
Bruce Galloway                                                                       

/s/ William F. Saculla         President, Treasurer, Chief         April   17  , 2000
----------------------------   Financial Officer, Director                           
William F. Saculla                                                                   

                               Director                            April       , 2000
----------------------------                                                         
Skuli Thorvaldsson                                                                   

                               Director                            April       , 2000
----------------------------                                                         
Donald Perlyn                                                                        

/s/ Evan Binn                  Director                            April   17  , 2000
----------------------------                                                         
Evan Binn                                                                            

/s/ Maurice Sonnenburg         Director                            April   17  , 2000
----------------------------                                                         
Maurice Sonnenburg                                                                   

                               Director                            April       , 2000
----------------------------                                                         
Sigurdur Jon Bjornsson                                                               


40

10KSB40
41st Page of 58
TOC
1st
Previous
Next
Bottom
Just 41st

 ARTHUR TREACHER'S, INC.

 AUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

CONTENTS                      

                                                              PAGE

Independent Auditors' Report                                          F-2       

Consolidated Balance Sheets                                           F-3       

Consolidated Statements of Operations                                 F-4       

Consolidated Statements of Stockholders' Equity                   F-5-F-6       

Consolidated Statements of Cash Flows                                 F-7       

Notes to Consolidated Financial Statements                       F-8-F-17       

 F-1

10KSB40
42nd Page of 58
TOC
1st
Previous
Next
Bottom
Just 42nd

INDEPENDENT AUDITORS' REPORT

To the Board of Directors                                                       
Arthur Treacher's, Inc.                                                         

We have audited the consolidated balance sheet of Arthur Treacher's, Inc. as of 
June 30, 1999, and the related consolidated statements of operations,           
stockholders' equity, and cash flows for the year 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 audit. The consolidated financial statements of Arthur  
Treacher's Inc. as of June 30, 1998, were audited by other auditors whose report
dated September 4, 1998, expressed an unqualified opinion on those statements.  

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable 
assurance about whether the financial statements are free of material           
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.          

In our opinion, the June 30, 1999 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, 1999, and the results of its 
operations and its cash flows for the year then ended, in conformity with       
generally accepted accounting principles.                                       

The accompanying financial statements have been prepared assuming that the      
Company will continue as a going concern. As discussed in Note 10 to the        
consolidated financial statements, the Company has a negative working capital, a
stockholders' deficit of approximately $3,000,000 and continued net losses.     
These conditions raise substantial doubt 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.                                    

                                       DAVIS, MONK & COMPANY

February 1, 2000                                                                
Gainesville, Florida                                                            

 F-2

10KSB40
43rd Page of 58
TOC
1st
Previous
Next
Bottom
Just 43rd

 ARTHUR TREACHER'S, INC.
 CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998

ASSETS

                                                          1999          1998
                                                          ----          ----
CURRENT ASSETS                                                                  

Cash and Cash Equivalents                                 $165,459     $909,636 
Accounts Receivable, Net of Allowance of $49,700                                
 in 1999 and $19,900 in 1998                              149,468       90,618
Inventories                                                174,930      274,738 
Prepaid Expenses and Other                                  94,176      173,509 
                                                         --------     --------
TOTAL CURRENT ASSETS                                       584,033    1,448,501 

PROPERTY AND EQUIPMENT                                                          

Buildings                                                       --      156,300 
Leasehold Improvements                                    4,072,762   4,640,605 
Furniture, Fixtures, and Equipment                        2,943,477   3,450,160 
                                                        ----------  ----------
                                                         7,016,239   8,247,065
Less - Accumulated Depreciation                           5,450,502   3,173,746 
                                                        ----------  ----------
PROPERTY AND EQUIPMENT, NET                               1,565,737   5,073,319 

OTHER ASSETS                                                                    

Deposits                                                    134,213     198,574 
Goodwill, Net of Accumulated Amortization of $42,178                            
  in 1999 and $25,851 in 1998                              284,362     450,689
Other                                                        73,174     141,511 
                                                         ---------   ---------
TOTAL OTHER ASSETS                                          491,749     790,774 
                                                         ---------   ---------
TOTAL ASSETS                                             $2,641,519  $7,312,594 
                                                       ===========  ==========

 F-3

10KSB40
44th Page of 58
TOC
1st
Previous
Next
Bottom
Just 44th

LIABILITIES AND STOCKHOLDERS' EQUITY

                                                          1999          1998
                                                          ----          ----
CURRENT LIABILITIES                                                             
Accounts Payable                                        $2,968,623   $2,307,009 
Accrued Expenses and Other Liabilities                     410,025      501,545 
Current Maturities of Long-Term Debt                       570,579      393,312 
Dividend Payable                                                --      390,417 
Deferred Revenue                                           367,850           -- 
                                                       ----------   ----------
TOTAL CURRENT LIABILITIES                                4,317,077    3,592,283 

LONG-TERM DEBT, Net of Current Maturities                1,119,300    1,398,805 

OTHER LIABILITIES                                                               
Deferred Revenue                                           248,000           -- 
Other                                                           --       15,358 
                                                       ----------   ----------
TOTAL OTHER LIABILITIES                                    248,000       15,358 
                                                       ----------   ----------
TOTAL LIABILITIES                                        5,684,377    5,006,446 

STOCKHOLDERS' EQUITY                                                            
Preferred Stock 2,000,000 Shares Authorized:                                  
Series A Convertible, Par Value $1; 2,200                                   
Shares Issued and Outstanding at June 30,                                 
1999; 12,800 Shares Issued and Outstanding                                
at June 30, 1998; Involuntary Liquidation                                 
Preference of $1 Per Share Plus Accrued and                               
  Unpaid Dividends                                          2,200       12,800
Series B Convertible, Par Value $1; 490,000                                 
Shares Issued and Outstanding; Involuntary                                
  Liquidation Preference of $1 Per Share                  490,000      490,000
Series C, Par Value $100; 9,900 Shares Issued                               
and Outstanding; Involuntary Liquidation                                  
Preference of $100 Per Share Plus Accrued and                             
  Unpaid Dividends                                        852,705      852,705
Series D, Par Value $100; 4,000 Shares Issued                               
and Outstanding; Involuntary Liquidation                                  
Preference of $100 Per Share Plus Accrued and                             
  Unpaid Dividends                                        399,980           --
Common Stock $.01 Par Value; Authorized                                       
25,000,000 Shares Issued and Outstanding;                                   
15,149,181 Shares at June 30, 1999; 14,869,748                              
 Shares at June 30, 1998                                  151,651      148,539
Additional Paid-In Capital                              10,516,950   10,411,729 
Accumulated Deficit                                    (15,456,344)  (9,609,625)
                                                    ------------   -----------
TOTAL STOCKHOLDERS' EQUITY                              (3,042,858)   2,306,148 
                                                    ------------   -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              $2,641,519   $7,312,594 
                                                     ============  ===========

 See accompanying Notes.

F-4 

10KSB40
45th Page of 58
TOC
1st
Previous
Next
Bottom
Just 45th

 ARTHUR TREACHER'S, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998

                                                      1999          1998
                                                      ----          ----
REVENUES                                                                        
Restaurant Sales                                      $20,567,361   $22,329,369 
Franchise Fees and Royalties                              355,776       330,569 
Other Revenues                                            608,692       326,824 
                                                     -----------   -----------
TOTAL REVENUES                                         21,531,829    22,986,762 

OPERATING EXPENSES                                                              
Cost of Sales, Including Occupancy                                              
    Except Depreciation                               12,855,353    12,144,241
Operating Expenses                                      8,569,080     9,747,656 
Depreciation and Amortization                           1,204,321     1,215,356 
General and Administrative Expenses                     1,905,439     1,990,625 
Impairment of Assets                                    2,036,955            -- 
                                                     -----------   -----------
TOTAL OPERATING EXPENSES                               26,571,148    25,097,878 
                                                     -----------   -----------
LOSS FROM OPERATIONS                                   (5,039,319)   (2,111,116)

OTHER INCOME (EXPENSES)                                                         
Interest Expense, Net of Interest Income of                               
      $6,842 in 1999 and $38,154 in 1998                 (168,885)     (154,533)
Other, Net                                               (638,515)     (503,046)
                                                     -----------   -----------
TOTAL OTHER INCOME (EXPENSES)                            (807,400)     (657,579)
                                                     -----------   -----------
NET LOSS                                               (5,846,719)   (2,768,695)

UNDECLARED PREFERRED STOCK DIVIDENDS                     (102,390)      (60,107)
                                                     -----------  ------------
NET LOSS FOR COMMON SHAREHOLDERS                      $(5,949,109) $ (2,828,802)
                                                     ===========  ============
Basic Loss Per Common Share                                  (.40)         (.19)
                                                     ===========   ===========
Diluted Loss Per Common Share                                (.40)         (.19)
                                                     ===========   ===========
Weighted Average Number of Outstanding Shares for                               
  Basic and Diluted                                   14,966,624    14,537,153
                                                     ===========   ===========

 See accompanying Notes.

 F-5

10KSB40
46th Page of 58
TOC
1st
Previous
Next
Bottom
Just 46th

 ARTHUR TREACHER'S, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998

          Additional
      Preferred  Common   Paid in    Accumulated
                  Stock     Stock    Capital      Deficit        Total
Balance at                                                                      
June 30, 1997       $577,200  $143,992  $9,704,248  $(6,840,930)  $3,584,510  

Common Stock Issued        --     2,690     571,553           --      574,243   

Stock Issued for                                                                
Restaurant Purchases      --       341      99,659           --      100,000  

Preferred Stock                                                                 
Issued               990,000        --          --           --      990,000  

Preferred Stock                                                                 
Issuance Costs            --        --    (234,310)          --     (234,310) 

Warrants Issued                                                                 
Attached to                                                                   
Preferred Stock     (137,295)       --     137,295           --           --  

Preferred Stock                                                                 
Converted to                                                                  
Common               (74,400)    1,116      73,284           --           --  

Stock Issued for                                                                
Exercised Warrants        --       400      60,000           --       60,400  

Net Loss                   --        --          --   (2,768,695)  (2,768,695)  
                  --------  -------- ----------- ------------  -----------
Balance at June                                                                 
30, 1998           1,355,505   148,539  10,411,729   (9,609,625)   2,306,148  

Preferred Stock                                                                 
Issued               399,980        --     (44,681)          --      355,299  

Common Stock Issued        --     2,515     107,486           --      110,001   

Stock Issued to Settle                                                          
Accounts Payable          --       438      43,398           --       43,836  

Stock Issuance Costs       --        --     (11,423)          --      (11,423)  

Preferred Stock                                                                 
Converted to                                                                  
Common               (10,600)      159      10,441           --           --  
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) 
                ==========  ======== =========== ============  ===========
 See accompanying Notes.

F-6 

10KSB40
47th Page of 58
TOC
1st
Previous
Next
Bottom
Just 47th

 ARTHUR TREACHER'S, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998

                                               1999                 1998
OPERATING ACTIVITIES                                                            
Net Loss                                      $(5,846,719)         $(2,768,695) 
Adjustments to Reconcile Net Loss to                                            
Net Cash Used in Operating Activities:                                        
Depreciation and Impairment                    3,241,276            1,215,356 
Loss on Disposal of Assets                       932,590               36,641 
Changes in Assets and Liabilities:                                            
(Increase) Decrease in Accounts Receivable      (58,851)              46,980
Decrease (Increase) in Deposits and Other                                   
  Assets                                         132,698             (155,401)
Decrease in Prepaid Expenses and Other                                      
 Current Assets                                  79,332                8,035
Decrease in Inventories                          99,808               13,925
Increase in Accounts Payable                    617,758            1,256,053
Increase (Decrease) in Accrued                                              
Expenses, Other Liabilities                                               
  and Dividends Payable                          133,913             (139,912)
                                            ------------         -----------
NET CASH USED IN OPERATING ACTIVITIES            (668,195)            (487,018) 
                                            ------------         -----------
INVESTING ACTIVITIES                                                            
Purchase Acquisitions of Restaurants                   --              (62,500) 
Capital Expenditures                             (427,622)            (809,577) 
Proceeds from Disposition of Restaurants               --              246,102  
                                             ------------         ------------
NET CASH USED IN INVESTING ACTIVITIES            (427,622)            (625,975) 

FINANCING ACTIVITIES                                                            
Proceeds from the Issuance of Common Stock         98,577              634,643  
Proceeds from the Issuance of Preferred Stock     355,299              990,000  
Preferred Stock Issuance Costs                         --             (234,310) 
Proceeds from Long-Term Debt                      435,725              177,216  
Principal Payments on Long-Term Debt             (537,961)            (412,767) 
                                           ------------          -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES         351,640            1,154,782  
                                           ------------          -----------
NET INCREASE (DECREASE) IN CASH AND CASH                                        
EQUIVALENTS                                    (744,177)              41,789
CASH AND CASH EQUIVALENTS, Beginning of Year      909,636              867,847  
                                           ------------          -----------
CASH AND CASH EQUIVALENTS, End of Year           $165,459             $909,636  
                                           ============          ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW                                           
INFORMATION:                                                                
Cash Paid for Interest                         $175,727             $187,906
Noncash Investing and Financing Activities:                                 
Long-Term Debt Assumed in Restaurant                                    
    Purchases                                  $     --             $ 87,500
Common Stock Issued to Settle Accounts                                  
    Payable                                    $ 43,856             $100,000

 See accompanying Notes.

F-7 

10KSB40
48th Page of 58
TOC
1st
Previous
Next
Bottom
Just 48th

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

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 names "Arthur Treacher's Fish & Chips" and
"Arthur Treacher's Seafood Grille". At June 30, 1999, the Company owned and     
operated 42 restaurants and franchised an additional 57 restaurants, located in 
seven states and Canada, with the greatest concentrations in the northeast and  
midwest regions of the United States.                                           

Principles of Consolidation                                                     

The consolidated financial statements include the accounts of the Company and   
its wholly-owned subsidiaries, Arthur Treacher's Management Company and Arthur  
Treacher's Advertising Company. All material intercompany transactions have been
eliminated in consolidation.                                                    

Cash and Cash Equivalents                                                       

The Company considers all highly liquid investments with an original maturity of
ninety days or less to be cash equivalents.                                     

Inventories                                                                     

The Company values its inventories at the lower of cost (first-in, first-out    
method) or market.                                                              

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.                 

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 to be recognized is measured by the amount by which the carrying     
amount of the assets exceed the fair value of the assets. During 1999 and 1998, 
the Company recognized an impairment loss of approximately $2,037,000 and       
$110,000, (which is included in depreciation and amortization in 1998) on the   
accompanying consolidated statement of operations, related to the assets at two 
store locations in 1998, and approximately 17 stores in two states in 1999.     

F-8 

10KSB40
49th Page of 58
TOC
1st
Previous
Next
Bottom
Just 49th

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)                 

Income Taxes                                                                    

The Company utilizes the asset and liability method of accounting for income    
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial   
statement carrying amounts of existing assets and liabilities and their         
respective tax bases. In addition, the method requires the recognition of future
tax benefits, such as net operating loss and business tax credit carryforwards, 
to the extent that realization of such benefits is more likely than not.        
Deferred tax assets and liabilities are measured using enacted tax rates        
expected to apply to taxable income in the years in which those temporary       
differences are expected to be recovered or settled. The effect on deferred tax 
assets and liabilities of a change in tax rates is recognized in income in the  
period that includes the enactment date.                                        

Franchise Operations                                                            

Franchise royalties, which are based upon a percentage of franchise restaurants'
sales, are recognized as income on the accrual basis. Initial franchise fees are
typically included in revenues when substantially all services and conditions   
relating to the sale of the franchise have been performed or satisfied, which   
occurs when the franchised restaurant commences operations. Initial franchise   
fees for area franchise agreements are recognized as income on a pro rata basis 
as the restaurants are opened.                                                  

Pre-Opening Costs                                                               

Costs associated with opening new restaurants are expensed during the period    
incurred.                                                                       

Per Share Data                                                                  

The Company adopted the provisions of Statement of Financial Accounting         
Standards (SFAS) No. 128, "Earnings Per Share," during fiscal 1998. This        
statement governs the computation, presentation, and disclosure requirements of 
earnings per share (EPS) for entities with publicly held common stock.          

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 1999 and 1998 
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.             

F-9 

10KSB40
50th Page of 58
TOC
1st
Previous
Next
Bottom
Just 50th

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)                 

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 made in 1996 and
future years as if the fair-value-based method defined in SFAS No. 123 had been 
applied. The Company has elected to continue to apply the provisions of APB     
Opinion 25 and provide the pro forma disclosure provisions of SFAS No. 123.     

Goodwill                                                                        

Goodwill, which has been recorded as a result of purchased acquisitions, is     
amortized over the period estimated to benefit from the acquired assets and     
rights, which is twenty years.                                                  

NOTE 2 - ACQUISITIONS                                                           

On June 4, 1998, the Company paid $250,000 in cash, stock, and assumed          
liabilities, for one store location. The transaction was accounted for as a     
purchase and its results of operations have been included in the consolidated   
statement of operations from the date of acquisition forward. As a result of    
this acquisition, goodwill of $150,000 has been recorded. This transaction was  
not significant to the Company's operations during 1998.                        

NOTE 3 - ACCRUED EXPENSES AND OTHER LIABILITIES                                 

Accrued expenses and other liabilities consisted of the following at June 30,   
1999 and 1998:                                                                  

                                                       1999             1998
                                                       ----             ----

Accrued Professional Fees                              $     --         $80,000 
Accrued Taxes                                           269,164         267,827 
Other                                                   140,861         153,718 
                                                      --------        --------
Total Accrued Expenses and Other Liabilities           $410,025        $501,545 
                                                      ========        ========

F-10

10KSB40
51st Page of 58
TOC
1st
Previous
Next
Bottom
Just 51st

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE 4 - LONG-TERM DEBT                                                         

Long-term debt consisted of the following at June 30, 1999 and 1998:            

                                                     1999           1998
Note payable due in semi-annual principal                                       
installments of $113,956, plus interest at 8%,                                  
beginning June 1, 1998, maturing December 2002,                                 
unsecured. At June 30, 1999, the Company was in                                 
default under the agreement and has subsequently                                
cured the default.                                     $907,228      $1,025,607 

Notes payable to banks, due in monthly installments                             
totaling $8,041, including interest at rates ranging                            
from 8% to 18%, maturing through June 2005,                                     
collateralized by property and equipment.               172,022         317,994 

Various notes payable related to the acquisition of                             
franchised restaurants, due in monthly installments                             
of principal and interest at rates ranging from 8% to                           
14%, maturing at dates through 2007, collateralized                             
by property and equipment.                              218,629         448,516 

Various notes payable to related parties,                                       
bearing fixed interest at 16%, payable in full                                  
on May 30, 2000.                                         392,000             -- 
                                                     ----------     ----------
                                                      1,689,879      1,792,117

Less Current Maturities                                  570,579        393,312 
                                                     ----------     ----------
Total Long-Term Debt                                  $1,119,300     $1,398,805 
                                                     ==========     ==========
Principal maturities of long-term debt for the next five years and thereafter at
June 30, 1999 are as follows:                                                   

Year ending June 30,                                      Amount                
2000                                              $570,579          
2001                                               353,178          
2002                                               337,140          
2003                                               350,116          
2004                                                18,129          
Thereafter                                             60,737             
                                      ----------
TOTAL                                              $1,689,879             
                                      ==========
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.             

F-11

10KSB40
52nd Page of 58
TOC
1st
Previous
Next
Bottom
Just 52nd

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE 4 - LONG-TERM DEBT (concluded)                                             

Interest paid for the years ended June 30, 1999 and 1998 approximated $175,000  
and $192,000 respectively.                                                      

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 1999 and 1998, respectively, was approximately $2,602,000
and $2,396,000 for the years ended June 30, 1999 and 1998, 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, 1999:                                

Year ending June 30,                        Amount          

2000                             $2,100,107   
2001                              2,013,974   
2002                              1,723,436   
2003                              1,291,512   
2004                                774,500   
Thereafter                           1,821,173      
                              ----------
TOTAL                               $9,724,702      
                              ==========
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.                                                                

F-12

10KSB40
53rd Page of 58
TOC
1st
Previous
Next
Bottom
Just 53rd

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE 6 - INCOME TAXES                                                           

Income tax benefit attributable to income from continuing operations for the    
years ended June 30, 1999 and 1998, differed from the amounts computed by       
applying the U.S. Federal income tax rate of 34% to income before taxes as      
follows:                                                                        

                                                        1999        1998
Computed "expected" tax benefits                      $(2,043,745)  $(941,356)  
Increase (decrease) in income taxes resulting from:                             
  Non-deductible meals and entertainment                51,434      17,000
  Goodwill amortization                                 16,327       5,551
  Change in valuation allowance                      1,850,202     818,341
  Other, net                                           125,782     100,464
                                                   -----------   ---------
                                                   $        --   $      --
                                                   ===========   =========
The tax effects of temporary differences that give rise to significant portions 
of deffered tax assets and liabilities as of June 30, 1998 and 1999 are as      
follows:                                                                        

                                                1999              1998
Deferred Tax Assets:                                                

     Net Operating Loss Carryforward           $3,649,684       $2,809,098
     Allowance for Doubtful Accounts               16,898            6,764
     Deferred Royalty                             209,389            5,222
     Property and Equipment                       185,466               --
                                               ----------       ----------
   Total Gross Deferred Tax Assets              4,061,437        2,821,084
   Less Valuation Allowance                     4,061,437        2,211,235
                                               ----------       ----------
     Net Deferred Tax Assets                           --          609,849
Deferred Tax Liabilities - Property                                 
     and Equipment                                     --          609,849
                                               ----------       ----------
     Net Deferred Tax Assets                    $      --       $       --
                                               ==========       ==========

At June 30, 1999, the Company had approximately $10.8 million of net operating  
loss carryforwards available for use, which expire through 2019. 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-13

10KSB40
54th Page of 58
TOC
1st
Previous
Next
Bottom
Just 54th

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS                                       

During 1999 and 1998, the Company has granted 90,000 and 55,000 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 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: 1998 - no expected dividend yield, risk-free      
interest rate of 5.6% weighted average expected volatility of 22% and an        
expected life of 5 years; 1999 - no expected dividend yield, risk-free interest 
rate of 4.9% weighted average expected volatility of 30% and an expected life of
5 years. In addition, for 1999 and 1998 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 was $0.10 and $0.26 for 1999 and 1998, respectively.                  

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 either 1999 or 1998.                             

In addition, during 1998 the Company granted 30,000 warrants (valued at $8,203) 
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 9.              

F-14

10KSB40
55th Page of 58
TOC
1st
Previous
Next
Bottom
Just 55th

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS (concluded)                           

Stock option and warrant activity during the period indicated is as follows:    

                                                              Weighted
                                     Number of                 Average
                                        Shares              Exercise Price

Balance at June 30, 1997 Granted        3,015,391                  $1.96    
- exercise price in excess of                                           
market price of stock                   233,500                   3.13  
Exercised                               (40,000)                  1.51  
Canceled                                (45,000)                  2.73  
                                   ----------                  -----
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    
                                  ==========                   =====
The following table presents information regarding all options and warrants     
outstanding at June 30, 1999.                                                   

    Weighted
     Number of         Average          Weighted
                   Warrants and      Remaining         Range of        Average
                      Options        Contractual        Exercise        Exercise
                   Outstanding         Life             Prices           Price

                     435,363         4.6 years       $0.49 - 1.00        $0.66
                   1,435,000         3.0 years        1.00 - 1.51         1.05
                     998,500         3.1 years        1.00 - 3.13         1.28
                     450,391         2.7 years        1.00 - 3.37         2.72
                   ---------         ---------       ------------        -----
                   3,319,254         2.9 years       $1.00 - 3.37        $1.30
                   =========         =========       ============        =====
The following table presents information regarding options and warrants         
currently exercisable at June 30, 1999.                                         

                   Number of                                      Weighted
                 Warrants and          Range of                    Average
                    Options             Exercise                    Exercise
                Exercisable            Prices                      Price

                 1,435,000         $1.00 - 1.51                    $1.05
                   721,000          1.00 - 3.13                     1.22
                   402,391          1.00 - 3.37                     2.87
                 ---------         ------------                    -----
                 2,558,391         $1.00 - 3.37                    $1.38
                 =========         ============                    =====

F-15

10KSB40
56th Page of 58
TOC
1st
Previous
Next
Bottom
Just 56th

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE 8 - COMMITMENTS AND CONTINGENCIES                                          

The Company is a defendant in one 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.                                               

NOTE 9 - 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, 1999 and 1998, the Company had accumulated and unpaid dividends of  
approximately $102,000 and $56,000 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.                                                      

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 87,200          
outstanding shares of Series A Preferred Stock are convertible into 96,889      
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 $23,720 at June 30, 1999 and $15,000 at June 
30, 1998.                                                                       

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 

F-16

10KSB40
57th Page of 58
TOC
1st
Previous
Next
Bottom
Just 57th

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE 9 - STOCKHOLDERS' EQUITY (concluded)                                       

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.      

In addition, the Company issued approximately 34,100 shares of its common stock 
during 1998 as part of acquiring restaurants.                                   

During 1999, 10,600 shares of Preferred Stock Series A were converted to common 
stock.                                                                          

NOTE 10 - GOING CONCERN                                                         

As shown in the accompanying financial statements, the Company incurred a net   
loss of approximately $5,800,000 during the year ended June 30, 1999, and as of 
that date, the Company's current liabilities exceeded its current assets by     
approximately $3,733,000 and its total liabilities exceeded its total assets by 
$3,043,000. Those factors create an uncertainty about the Company's ability to  
continue as a going concern.                                                    

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.                                                       

F-17

10KSB40
Last Page of 58
TOC
1st
Previous
Next
Bottom
Just 58th

 ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE 11 - SUBSEQUENT EVENTS                                                     

Subsequent to June 30, 1999, the Company has issued convertible promissory notes
to related parties in the amount of approximately $660,000. The notes bear      
interest at 12% and are payable in October, 2000. Proceeds from the loans were  
used for working capital and the notes are unsecured.                           

F-18

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10KSB40 Filing		Date		First		Last			Other Filings
		11/16/94		15
		5/9/95		15
		3/29/96		38
		5/31/96		3		34
		6/28/96		34
		11/27/96		35		38
		11/30/96		56		57
		1/1/97		38
		3/27/97		28
		6/1/97		28
		6/30/97		19		55			10KSB
		8/12/97		39
		11/13/97		39					10QSB
		11/25/97		56
		11/26/97		20
		12/23/97		56
		6/1/98		51
		6/4/98		50
		6/30/98		11		58			NT 10-K, 10KSB40
		8/13/98		3		39
		9/1/98		57
		9/4/98		42
		9/15/98		32
		9/28/98		17
		12/27/98		21					NT 10-Q, 10QSB
		2/10/99		22
		2/11/99		22					NT 10-Q
		5/10/99		32
For The Period Ended		6/30/99		1		58			NTN 10K
		7/1/99		23
		7/23/99		13
		9/1/99		32
		9/26/99		5					10QSB, 10QSB/A
		9/28/99		32
		9/30/99		22		33
		10/21/99		23		39
		10/30/99		4		57
		10/31/99		56
		12/1/99		23		33
		12/31/99		3		23
		1/5/00		23		33
		1/31/00		11
		2/1/00		42
		2/4/00		57
		2/5/00		23		33
		2/28/00		29
		4/17/00		16		40
Filed On / Filed As Of		4/20/00
		5/10/00		29		33			SC 13D
		5/30/00		51					10QSB
		6/5/00		31
		9/30/00		23		33
		10/21/00		23		33
		12/1/00		23		33
		1/5/01		23		33
		2/5/01		23		34
		5/31/01		29		31
		12/31/01		29
		1/9/02		31
		3/27/02		29		31
		8/31/02		32
		4/30/03		30
		9/15/03		32
		11/24/03		29		32
		3/15/04		30		32
		5/10/04		29		33
		7/10/04		30
		8/10/04		30
		9/10/04		30
		9/30/04		23		33			10QSB/A, 4/A, 4, 10QSB
		10/10/04		30
		10/21/04		23		33
		11/10/04		30					SC 13D/A
		12/1/04		23		33
		12/10/04		30
		1/5/05		23		33
		1/10/05		30		31
		2/5/05		23		34
		2/10/05		30
Top									List All Filings