<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
Commission File No. 1-13818
THE RATTLESNAKE HOLDING COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1369616
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3 Stamford Landing, Suite 130, Stamford, CT 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 975-9455
Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
2,650,227 Common Shares, par value $.001 per share were outstanding as of May
14, 1997.
<PAGE> 2
FORM 10-QSB
THE RATTLESNAKE HOLDING COMPANY, INC.
MARCH 30, 1997
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Consolidated Balance Sheet March 30, 3
1997 (Unaudited) and June 30, 1996
Consolidated Statements of Operations 4
for the three and nine months ended
March 30, 1997 and March 31,
1996 (Unaudited)
Consolidated Statements of Cash Flows for 5
the nine months ended March 30,1997
and March 31, 1996 (Unaudited)
Notes to Consolidated Financial Statements 6
(Unaudited)
Management's Discussion and Analysis 12
Liquidity 17
Part II - Other Information
Item 5: Other Information 21
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
2
<PAGE> 3
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 30, JUNE 30,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 418,239 $ 684,414
Cash in Escrow 0 1,237,625
Accounts receivable, net 11,992 63,659
Inventory 83,921 111,312
Pre-opening costs 15,767 107,289
Prepaid expenses and other current assets 91,339 140,490
------------ ------------
Total current assets 621,258 2,344,789
Property and equipment, net 2,368,549 2,374,848
Intangible assets, net 1,499,878 1,534,227
Other assets, net 252,387 246,288
------------ ------------
$ 4,742,072 $ 6,500,152
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ 1,230,838 $ 576,852
Accounts payable 572,429 574,889
Accrued expenses 379,653 488,204
Other current liabilities 514,977 283,234
------------ ------------
Total current liabilities 2,697,897 1,923,179
Notes payable, net of current maturities 1,265,724 1,255,723
------------ ------------
Stockholders' equity
Preferred stock, $.10 par value, 5,000,000 shares
authorized, 56,500 and 54,500 issued and outstanding,
at March 30, 1997 and June 30, 1996, respectively 5,650 5,450
Common Stock, $.001 par value - 20,000,000 shares authorized,
2,643,734 issued and outstanding at March 30, 1997 and
June 30, 1996 2,644 2,644
Additional paid-in capital 10,738,877 10,704,315
Accumulated deficit (9,968,720) (7,391,159)
------------ ------------
778,451 3,321,250
$ 4,742,072 $ 6,500,152
============ ============
</TABLE>
3
<PAGE> 4
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Restaurant sales $ 1,919,641 $ 2,372,121 $ 6,742,981 $ 6,431,995
Less: promotional sales 119,548 165,974 343,084 404,680
----------- ----------- ----------- -----------
Net restaurant sales 1,800,093 2,206,147 6,399,897 6,027,315
Costs and expenses:
Cost of food and beverage sales 544,790 670,590 2,021,991 1,893,917
Restaurant salaries and benefits 603,029 798,574 2,298,194 2,277,975
Occupancy and other 493,412 514,660 1,696,245 1,652,713
Depreciation and amortization expense 168,078 145,662 567,999 424,578
----------- ----------- ----------- -----------
Total restaurant costs and operating expenses 1,809,309 2,129,486 6,584,429 6,249,183
General and administration 476,644 679,132 1,849,031 2,190,500
Restaurant closing costs 149,547 0 392,765 143,948
Interest expense, net 42,564 20,308 110,653 78,445
Miscellaneous expenses 25,943 7,635 40,580 12,250
----------- ----------- ----------- -----------
Net loss before extraordinary item (703,914) (630,414) (2,577,561) (2,647,011)
Extraordinary item:
Gain on early extinguishment of debt -- -- -- 89,710
----------- ----------- ----------- -----------
Net loss $ (703,914) $ (630,414) (2,577,561) $(2,557,301)
=========== =========== =========== ===========
Per share:
Loss before extraordinary item $ (0.27) $ (0.24) (0.97) $ (1.02)
Extraordinary item -- -- -- 0.03
----------- ----------- ----------- -----------
Net loss $ (0.27) $ (0.24) (0.97) $ (0.99)
=========== =========== =========== ===========
Weighted average number of common
and common equivalent shares
outstanding 2,643,734 2,643,734 2,643,734 2,593,212
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS ENDED
------------------------------
MARCH 30, MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,577,561) $(2,557,301)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 616,767 453,615
Gain on early extinguishment of debt 0 (89,710)
Restaurant closing costs 392,765 143,948
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 48,178 (23,981)
Decrease (increase) in inventory 23,391 (882)
Decrease (increase) in prepaids and other assets 55,642 (174,177)
(Increase) in pre-opening costs 0 (44,794)
(Decrease) increase in accounts payable and accrued expenses (108,446) (113,615)
Increase (decrease) in other current liabilities 218,688 (110,071)
----------- -----------
Net cash used in operating activities (1,330,576) (2,289,738)
----------- -----------
Cash flows from investing activities:
Capital expenditures (240,458) (1,268,229)
Payments for acquisitions of leaseholds (206,515) (180,115)
----------- -----------
Net cash used in investing activities (446,973) (1,448,344)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible debt 500,000 0
Proceeds from issuance of preferred stock 1,272,387 0
Proceeds from issuance of common stock 0 14,357
Proceeds from IPO 0 7,260,800
IPO costs 0 (721,020)
Principal repayment of borrowings (261,013) (1,271,255)
----------- -----------
Net cash provided by financing activities 1,511,374 5,282,882
----------- -----------
Net (decrease) increase in cash and cash equivalents (266,175) 1,544,800
Cash and cash equivalents, beginning of period 684,414 28,316
----------- -----------
Cash and cash equivalent , end of period $ 418,239 $ 1,573,116
=========== ===========
Cash paid during the period for:
Interest $ 62,359 $ 106,237
=========== ===========
Income taxes $ 31,963 $ 12,250
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 1997
(UNAUDITED)
1. Principles of consolidation
The consolidated financial statements include the accounts of The
Rattlesnake Holding Company, Inc. and subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. Consolidated financial statements
The accompanying unaudited consolidated financial statements as shown
in the index were prepared in accordance with generally accepted accounting
principles and include all adjustments which, in the opinion of management, are
necessary to present fairly the consolidated financial position of the Company
as of March 30, 1997 and June 30, 1996, and the results of operations and cash
flows for the periods ended March 30, 1997 and March 31, 1996. In the opinion of
management, all necessary adjustments that were made are of a normal recurring
nature.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed, reclassified or omitted. It is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for fiscal year end June 30, 1996. The results of
operations for the period ended March 30, 1997 are not necessarily indicative of
the operating results which may be achieved for the full year.
3. Basis of presentation
The accompanying consolidated financial statements have been prepared
on a going concern basis which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
However, due to the matters discussed below, its continuation as a going concern
cannot be reasonably assured.
The Company has incurred aggregate losses since inception of
$9,968,720, inclusive of a net loss for the quarter ended March 30, 1997 of
$703,914. Based upon interim financial information prepared by management, the
Company has continued to incur losses in the fourth quarter of fiscal 1997.
Additionally, $303,749 of series C Subordinated
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<PAGE> 7
notes payable mature in August 1997, a $425,000 short-term note payable
associated with the acquisition of restaurant matures in fiscal 1997 and
$500,000 of convertible debt due September 4, 1997.
Management of the Company is continuing its implementation of its cost
reduction plan, which addresses the restaurant operating losses. Such plan
includes the closing and sale of the facilities located in Fairfield CT and New
York City, the sale or concept conversion of the White Plains and Yorktown
Heights, New York locations, a reduction in the Company's work force and other
cost containment measures designed to reduce operating expenses and improve
restaurant operating performance. The Company anticipates recognizing the
financial results of these reductions primarily beginning in the fourth quarter
of fiscal year 1997 and in fiscal year 1998. The Company's plans to pay the
$425,000 short term note payable from the proceeds of the sale of the building
and assets at the Fairfield, Connecticut facility. Management anticipates that
the Series C subordinated notes will be refinanced and the $500,000 convertible
note will be converted to equity. To further the Company's expansion and
growth, management is actively investigating merger or acquisition
opportunities. The Company may need additional capital to further fund
operations and repay liabilities until the Company's plan is fully implemented.
There can be no assurance that the Company will be able to obtain sufficient
capital to pay existing liabilities and maintain operations.
Management believes that the implementation of its modified strategic
expansion and cost reduction plan will guide the Company to profitable
operations and restore liquidity. However, no assurance can be made regarding
the achievement of the goals outlined in the strategic plan, or if such plans
are achieved, that the Company's operations will be profitable.
4. Financing arrangements
On June 29, 1995, the Company completed an initial public offering
(IPO) of 1,300,000 shares of common stock and 195,000 additional shares pursuant
to the exercise of the over-allotment option by the underwriter at $5.50 per
share. The net proceeds of the offering, after deducting underwriter's
commissions and fees of $986,700 and offering costs of $700,705 were $6,535,095
and were received on July 7, 1995. The proceeds from this offering were used for
working capital, marketing and advertising, the implementation of the Company's
expansion strategy and to repay subordinated debt as described below.
In July 1995, the Company re-negotiated the terms of the $1,800,000 of
9% subordinated notes payable (the "Notes"), and redeemed $225,000 of the Notes.
The remaining principal amount outstanding of $1,575,000 was restructured as
follows:
7
<PAGE> 8
Each $25,000 principal amount of Notes was exchanged for: (i) $8,334
paid in August and September 1995 (the "First Payment"); and (ii) a 9%
$8,333 Series A Note (the "Series A Notes") due August 6, 1996, and
(iii) a 9% $8,333 Series B Note (the "Series B Notes") due July 6,
2000. Each Series B Note is convertible into common stock 13 months
after issuance at a conversion price equal to 70% of the IPO price of
the common stock sold, with piggy-back registration rights for the
shares underlying each Series B Note. Each Series B Note is redeemable
with 30 days prior written notice at any time after the closing that
the bid price of the common stock is 150% of the conversion price for
the 10 consecutive trading days ending within 15 days of the date of
notice of redemption.
An extraordinary gain of $89,710, net of the write-off of the remaining
debt issuance cost of $72,114, has been recorded in the accompanying
consolidated statement of operations for the nine month period ended March 31,
1996 relating to the early extinguishment of debt associated with the above
mentioned restructuring.
In fiscal 1997, the Company offered to convert the Series A Notes to
Series C Notes, which provided for a one year extension of the maturity date, in
exchange for an increase in the interest rate from 9% to 15% and one warrant for
every dollar of indebtedness. The warrants provide for exercise prices ranging
between $2.50 - $3.00 and expire on August 6, 2001. Note holders aggregating
$303,749 accepted the terms of the conversion and the remaining $221,243 were
paid in cash.
In March 1996, the Company entered into an agreement with an investment
banking firm to sell 200,000 shares of Series A preferred stock and 800,000
common stock warrants in a private placement for a total consideration of
$5,000,000. The preferred stock was valued at $24.50 per share and each warrant
at $.125 per warrant. The warrants are exercisable at a price of $7.00 per share
and expire on August 31, 2001. On June 30, 1996, the Company closed on the sale
of 54,500 shares of the aforementioned Series A preferred stock and 218,000
common stock purchase warrants. The underwriter received warrants to purchase
24,760 shares of common stock at $3.75 per share which expire on June 30, 2001.
The net proceeds of the offering were $1,113,844, net of commissions and
expenses of $248,656. The offering period expired on June 30, 1996. In August
1996 an outside investor purchased 2,000 shares of preferred stock under the
same terms detailed above.
On October 10, 1996, the Company executed a letter of intent with an
investment banking firm to raise additional capital through
8
<PAGE> 9
a private placement to be sold on a "best efforts" basis. No funds were raised
though this placement.
On March 4, 1997, the Company entered into a private financing
arrangement with two individuals to provide a total of $500,000 of convertible
subordinated secured debt. The Notes are for a term of six months at an interest
rate of 18%. The principal amount of the Notes may be converted into the
Company's common stock at a conversion price of $0.75 per share anytime before
the repayment of principal. The Notes are fully subordinated to all "senior
indebtedness" of the Company and are secured by all the issued and outstanding
shares of the Company's wholly owned subsidiaries: Rattlesnake Ventures, Inc.,
Rattlesnake-Danbury, Inc., Rattlesnake-Flemington, Inc. and
Rattlesnake-Lynbrook, Inc.
5. Restaurant closing costs
On March 31, 1996, the Board of Directors authorized the closing of the
Rattlesnake Southwestern Grill restaurant located in Hamden, Connecticut. The
facility was closed January 7, 1996. A majority of the fixed assets at this
facility have been removed to be utilized at existing or new facilities. All
remaining fixed assets and leasehold improvements have been abandoned. A loss of
$143,948 was recorded at December 31, 1995. An additional loss of $5,485 was
recorded in January 1996 for inventory items which were spoiled or lost after
the actual closing. This additional loss was reflected in Cost of food and
beverage sales on the Consolidated Statements of Operations in January 1996.
On January 4, 1997, the Company ceased operations at the Rattlesnake
Southwestern Grill restaurant located in Fairfield, Connecticut. Contracts are
currently being drawn for the sale of this facility. Under the current terms of
the sale, the Company does not anticipate recovery of $162,662 in fixed assets
and $80,091 of intangible assets. These assets, along with other miscellaneous
assets totaling $465 were written off and recorded as Restaurant closing costs
as of December 29, 1996. An additional write off of $3,489 was taken at March
30, 1997 for receivables which were deemed uncollectible as a result of this
closing.
On March 1, 1997, the Rattlesnake restaurant at White Plains, New York,
was closed for operations. Management is discussing the conversion of this
restaurant to another concept and is gathering information regarding the
demographics and potential customer market in this area. The Company would
finance this conversion either through a separate financing or a joint venture.
In the event of a conversion, Management does not believe at this time there
would be an impairment of value of the existing assets. Management is also
considering the sale of this unit to a related party. Currently there are no
contracts in place and as a result no adjustments have been made relating to the
closing of this unit.
9
<PAGE> 10
The Company has signed contracts for the sale of the restaurant located
at 86th Street in New York City. Based upon the terms of the contract, the
Company will incur a loss of $146,058, primarily for the write-off of assets and
the brokerage fees incurred. This loss was recorded at March 30, 1997 and is
included in the accompanying financial statements as restaurant closing costs.
6. Accounting for the impairment of long-lived assets and long- lived
assets to be disposed of
The Company is required to adopt in fiscal 1997 Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
requires, among other things, that Long-Lived assets held and used by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company's
management has assessed the impact of the implementation of SFAS No. 121 and has
determined that it has no material impact on the Company's financial statements.
7. Accounting for stock-based compensation
In October 1996, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation," which must be
adopted by the Company in fiscal year 1997. The Company has chosen not to
implement the fair value accounting method for employee stock options, but has
elected to disclose, commencing with the fiscal 1997 Annual report, the pro
forma net income and earnings per share as if such method had been used to
account for stock-based compensation costs as described in Statement No. 123.
8. Restaurant acquisition
On September 5, 1996, the Company acquired a restaurant location on
86th Street in New York City. Of the $388,000 purchase
10
<PAGE> 11
price, $308,000 was paid in cash for the acquisition of the lease and certain
furniture, fixtures and equipment. The remaining purchase price represents the
assumption of food credits. See footnote 5 above as it pertains to the
subsequent sale of this restaurant.
9. Dividends in arrears
The Company's preferred stock bears a dividend rate of 7-1/2% per
annum. These dividends are payable semi-annually in arrears on May 15 and
November 15 of each year, commencing November 15, 1996. At March 30, 1997 there
are $51,909 dividends in arrears.
11
<PAGE> 12
MANAGEMENT DISCUSSION AND ANALYSIS
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto.
The Company has modified its expansion and operating strategy to
facilitate a more rapid course to profitability and accelerate the reduction of
losses. This new strategy incorporates a sharpened focus on existing profitable
restaurants, the elimination or conversion of unprofitable restaurants and the
implementation of aggressive cost cutting measures designed to reduce operating
expenses and improve restaurant operating performance. Management formulated
this new strategy in the second quarter and began its actual implementation in
the third quarter of fiscal year 1997. In March 1997 the Company's Chairman of
the Board and Chief Executive Officer resigned his position as Chief Executive
Officer to pursue other endeavors, but remains as the Company's Chairman of the
Board. Also in March 1997, the Company's Vice-Chairman and Chief Administrative
Officer resigned from both of these positions and is now serving as a consultant
to the Company. The Company has closed two of its unprofitable locations and is
negotiating either the sale of these units or the possible conversion to another
concept. The implementation of this modified strategic expansion and cost
reduction plan in the third quarter of fiscal 1997 has resulted in an increase
in the operational profitability of the Company's existing restaurants.
Management is confident that as the modified strategic expansion and cost
reduction plan is more fully implemented the Company's profitability and
liquidity will be significantly improved. However, no assurance can be made
regarding the achievement of the goals outlined in the strategic plan, or if
such plans are achieved that the Company's operations will be profitable.
Prior to incurring the costs associated with the closing of the
unprofitable restaurants, the Company reduced its loss for the three and nine
months ended March 30, 1997 to $554,367 and $2,184,796, respectively, from
$630,414 and $2,413,353 for the three and nine months ended March 31, 1996. This
reduction was recognized despite the occupancy expenses the Company continues to
incur relating to the two closed facilities and the New York City location which
was not opened. To further the Company's financial and strategic position,
Management is investigating acquisition or merger prospects. However, no
assurance can be made
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<PAGE> 13
regarding the achievement of the goals outlined in the strategic plan, or if
such plans are achieved that the Company's operations will be profitable.
OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED MARCH 30, 1997 AS COMPARED
WITH MARCH 31, 1996
Gross restaurant sales increased 4.8% to $6,742,981 for the nine month
period ended March 30, 1997 from $6,431,995 for the nine month period ended
March 31, 1996 and decreased 19.1% to $1,919,641 from $2,372,121 for the three
months ended March 30, 1997 as compared to the three months ended March 31,
1996. Likewise net sales increased 6.2% to $6,399,897 for the nine month period
ended March 30, 1997 from $6,027,315 for the nine month period ended March 31,
1996 and decreased 18.4% to $1,800,093 from $2,206,147 for the three month ended
March 30, 1997 as compared to the three months ended March 31, 1996. The
increase in gross sales for the nine month period resulted from an increase in
the number of restaurants operating during the period. The Company operated
seven restaurants for the full nine months ended March 30, 1997 as compared to
five for the full nine months ended March 31, 1996. The decrease in sales for
the comparable three month period is attributed primarily to the closure of two
restaurants which were operating during the full three months ended March 31,
1996. Same store net sales for the nine month period ended March 31, 1997
declined 3.8% to $1,822,906 from $1,894,126 for the same three month period
ended March 31, 1996. Same store net sales decreased 21.6% to $1,263,843 from
$1,612,653 for the three month period ended March 30, 1997 and March 31, 1996,
respectively. The decrease in same store sales resulted primarily from the
maturity of the Danbury, Connecticut location which was opened August 30, 1995
and the Flemington, New Jersey location which opened November 16, 1995. These
restaurants, as with most newly opened restaurants experienced higher than
normal sales levels in the first 90 to 120 days of operations. As these new
units attained maturity, their sales volumes leveled off to a more sustainable
level.
Promotional sales declined as a percentage of gross sales from 7.0% for
the quarter ended March 31, 1996 to 6.2% for the same quarter ended March 30,
1997. This decline is attributed to, the higher costs experienced in fiscal year
1996, resulting from the opening of the Danbury and Flemington locations. This
decrease is also evident in the comparable nine month periods ended March 30,
1997 and March
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31, 1996. Promotional sales decreased from 6.3% of gross sales for the nine
months ended March 31, 1996 to 5.1% for the same period ended March 30, 1997.
Food and beverage costs increased slightly as a percentage of net
restaurant sales to 31.6% for the nine months ended March 30, 1997 as compared
to 31.4% for the nine months ended March 31, 1996. For the three months ended
March 30, 1997, food and beverage costs decreased slightly as a percentage of
net restaurant sales to 30.3% from 30.4% for the same three months ended March
31, 1996. The increase in the nine months ended March 30, 1997 is the result of
higher food costs incurred primarily in the second quarter of fiscal year 1997,
offset by menu changes in January 1997 and specials to offset these higher food
costs. The new menu and specials contributed to the slight reduction in food
costs for the three month period ended March 30, 1997.
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
decreased as a percentage of net sales to 33.5% for the three months and 35.9%
for the nine months ended March 30, 1997 as compared to 36.2% and 37.8% for the
three and nine months ended March 31, 1996, respectively. This decrease reflects
more normal operating levels of mature stores and the implementation of the
Company's cost reduction plan. As is traditional with the opening of new
restaurant sites, the start up period of 90 to 120 days reflects salary ratios
at higher than normal operating levels. The Company believes that restaurant
salaries and fringe benefit costs will moderate further as a result of
management efforts to control costs.
Occupancy and other related expenses, which include linen, repairs,
maintenance, utilities, rent, insurance and other occupancy related expenses, as
a percentage of net sales increased to 27.4% for the three months ended March
30, 1997 from 23.3% for the three months ended March 31, 1996. These expenses
decreased to 26.5% for the nine months ended March 30, 1997 from 27.4% for the
nine months ended March 31, 1996. This increase in the three month comparison is
the result of the Company continuing to incur occupancy costs associated with
the two closed restaurants and the New York City location which was not been
opened. Management expects these costs to moderate when the sale or conversion
of these restaurants are completed. This decrease in the nine month comparison
reflects the reduction in these expenses as these restaurants achieve maturity
and
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management's continued effort to reduce these costs. Occupancy and related
expenses generally fluctuate as a result of needed maintenance which may occur
in any period.
Depreciation and amortization expenses, including the amortization of
pre-opening store expenses, increased as a percentage of net restaurant sales to
9.3% and 8.9% for the three and nine months ended March 30, 1997 from 6.6% and
7.0% for the three and nine months ended March 31, 1996. This increase as a
percentage of net restaurant sales is the direct result of decreased sales for
these periods resulting from the closure of two restaurants. These expenses
increased to $168,078 and $567,999 in the three and nine months ended March 30,
1997 from $145,662 and $424,578 for the three and nine months ended March 31,
1996. The increase in depreciation and amortization expense for the three and
nine months ended March 31, 1997 can be primarily attributed to the opening of
the Lynbrook, New York facility, the expansion of the point-of-sale computer
system and other capital expenditures.
General and administrative expenses decreased to $476,644 for the three
months ended March 30, 1997 from $679,132 for the three months ended March 31,
1996, this represents a 29.8% decrease in general and administrative expenses
for the comparable three month periods. As a percentage of net sales, general
and administrative expenses decreased to 26.5% for the three months ended March
30, 1997 from 30.8% for the three months ended March 31, 1996. For the nine
month period ended March 30, 1997, general and administrative expenses decreased
to $1,849,031 from $2,190,500 for the same period ended March 31, 1996. As a
percentage of net restaurant sales, general and administrative expenses
decreased for this nine month period to 28.9% in 1997, as compared to 36.3% in
1996. These reductions in general and administrative expenses reflect directly
the revised corporate strategy of cutting costs in an attempt to achieve
profitability. These decreases are offset by the costs incurred for the
maintenance of the newly acquired 86th Street location which was not opened and
other expenses incurred relating to the negotiations of the sale or conversion
the Company's unprofitable locations.
Interest expense increased to $42,564 for the three months ended March
30, 1997 from $20,308 for the three months ended March 31, 1996 and to $110,653
from $78,445 for the nine months ended March 30, 1997 and March 31, 1996,
respectively. The increase in interest expense is attributable to the exchange
of Series A Notes which earned
15
<PAGE> 16
interest at a rate of 9% for Series C Notes which earned interest at 15%, the
interest expense recognized on the $425,000 short-term note recognized for the
purchase of the Fairfield building and on the $500,000 short term convertible
debt.
Restaurant closing costs of $149,547 and $392,765 were incurred for the
three and nine months ended March 30, 1997, respectively. These closing costs
relate to the write off of $146,058 of assets for the Company's New York City
location at March 30, 1997 for which contracts have been signed. At December
29, 1996, the Company recorded a loss of $243,218 for the write off of assets
relating to the closing of the Fairfield, Connecticut location. On March 30,
1997, an additional $3,489 was recorded representing receivables which were
deemed to be uncollectible as a result of the closure of the Fairfield location.
16
<PAGE> 17
LIQUIDITY
The Company's cash position decreased by $266,175 during the nine months
ended March 30, 1997, principally as a result of cash used in operating
activities of $1,330,576 and cash used in investing activities of $446,973,
offset by cash generated from financing activities of $1,511,374.
Net cash used in operating activities consisted primarily of the
$2,577,561 net loss for the nine months ended March 30, 1997 and a decrease in
accounts payable of $108,446, offset by depreciation and amortization of
$616,767, restaurant closing costs of $392,765 and an increase in other current
liabilities of $218,688.
The Company utilized $446,973 for investing activities, principally for
capital expenditures and lease acquisition costs for the purchase of the New
York City location.
The Company generated $1,511,374 in cash from financing activities during
the nine months ended March 30, 1997, principally through the proceeds from the
issuance of preferred stock and convertible debt, offset by the repayment of
borrowings.
On June 29, 1995, the Company completed an initial public offering of
1,300,000 shares of its common stock and 195,000 additional shares pursuant to
the exercise of the over-allotment option by the Underwriter at $5.50 per share.
The net proceeds of the offering, after deducting underwriters' commissions and
fees of $986,700 and offering costs of $700,705 was $6,535,095. The proceeds of
the offering were received on July 7, 1995.
The Company utilized the proceeds from its June 1995 initial public
offering of common stock to pay approximately $750,000 of the restricted 9%
subordinated notes, $650,000 other notes outstanding principally payable to
related parties, $200,000 relating to the acquisition of the White Plains, New
York facility, $600,000 relating to the acquisition of the Danbury, Connecticut
facility, $750,000 relating to the acquisition of the Flemington, New Jersey
facility, $150,000 relating to the liquor license acquired for the Flemington
location, $400,000 in other capital expenditures for existing facilities,
$2,000,000 in corporate overhead and $500,000 in operating losses.
17
<PAGE> 18
In July 1995, the Company redeemed $225,000 of the $1,800,000 subordinated
notes and restructured the remaining principle amount outstanding of $1,575,000.
This redemption was partially funded by a $50,000 note payable issued in June
1995 by the Company, with interest at 9%, and repaid in July 1995, together with
10,000 shares of common stock. Each $25,000 principal amount of Notes was
exchanged as follows: (i) $8,334 paid in August and September 1995 (the "First
Payment"); and (ii) a 9% $8,333 Series A Note (the Series A Notes) due 13 months
after the first payment, and (iii) a 9% $8,333 Series B Note (the Series B
Notes) due five years after the first payment were issued to each Noteholder
with the First Payment. Each Series B Note is convertible into common stock
thirteen months after issuance at a conversion price equal to $3.85 per share,
with piggy-back registration rights for the shares underlying the Series B
Notes. Each Series B Note is redeemable with 30 days prior written notice at any
time after the closing bid price of the common stock is 150% of the conversion
price for the ten consecutive trading days ending within 15 days of the date of
notice of redemption.
In fiscal 1997, the Company offered to convert the Series A Note to a
Series C Note, which provided for a one year extension of the maturity date, in
exchange for an increase in the interest rate from 9% to 15% and one warrant for
every dollar of indebtedness. The warrants provide for exercise prices ranging
between $2.50 - $3.00 and expire on August 6, 2001. Note holders aggregating
$303,749 accepted the terms of the extension and the remaining $221,243 of
$524,992 were paid in cash.
On June 24, 1996, the Company entered into an agreement to continue its
participation in a discounted meal program in exchange for $230,000 in temporary
financing, of which $115,000 was received in June 1996 and the remainder was
received in July 1996. On October 3, 1996 the Company received $150,000 from
another dining services company in exchange for meal credits at the Company's
restaurants.
In March 1996, the Company entered into an agreement with an investment
banking firm to sell 200,000 shares of Series A preferred stock and 800,000
common stock warrants in a private placement for total consideration of
$5,000,000. The preferred stock was valued at $24.50 per share and each warrant
at $0.125 per warrant. On June 30, 1996, the Company closed on the sale of
54,500 shares of the aforementioned Series A preferred stock and 218,000 common
stock purchase warrants. The net proceeds of the offering
18
<PAGE> 19
were $1,113,844, net of commissions and expenses of $248,656. The dividend rate
for the preferred shares is 7-1/2% per annum payable semi-annually in arrears on
May 15 and November 15 of each year commencing November 15, 1996. The shares are
convertible at any time, one year after issuance into common stock at a
conversion price equal to the lesser of (i) $3.95; or (ii) 85% of the average of
the last reported sales price of the common stock for the 10 trading days
immediately preceding the first anniversary of the first closing subject to
certain anti-dilution adjustments. The warrants are exercisable between
September 1, 1996 and August 31, 2001 at an exercise price of $7.00 per share,
with piggy-back and demand rights on the common stock underlying the preferred
stock and the warrants.
On March 31 1996, the Company exercised its option to purchase the
building housing the Fairfield facility for $425,000. This transaction was
closed on August 31, 1996 and was financed by an outside investor through a 15%
short term note agreement. In addition the investor received 50,000 warrants at
an exercise price equal to the market price at the date of the grant.
On September 5, 1996, the Company acquired a restaurant location on 86th
Street in New York City for a purchase price of $308,000 cash and $80,000 in
store food credits. Included in the purchase price was the lease and certain
furniture, fixtures and equipment. The Company has signed contracts for the sale
of this location and has recorded a loss of $146,058 relating to this sale.
On October 10, 1996, the Company executed a letter of intent with an
investment banking firm to raise additional capital through a private placement
to be sold on a "best efforts" basis. No funds were raised though this
arrangement.
On March 4, 1997 the Company entered into a private financing arrangement
with two individuals to provide $500,000 of convertible subordinated secured
debt. The Note is for a term of six months at an interest rate of 18%. The
principal amount of the Note may be converted into the Company's common stock at
a conversion price of $.75 per share any time before repayment of principal. The
Notes are secured by all of the issued and outstanding shares of the Company's
wholly owned subsidiaries Rattlesnake Ventures, Inc., Rattlesnake-Danbury, Inc.,
Rattlesnake-Lynbrook, Inc., and Rattlesnake-Flemington, Inc.
19
<PAGE> 20
The Company has incurred aggregate losses since inception of $9,968,720,
inclusive of a net loss for the quarter ended March 30, 1997 of $703,914. Based
upon interim financial information prepared by management, the Company continues
to incur losses in the fourth quarter of fiscal year 1997. Additionally,
$303,749 of the Series C Subordinated notes payable mature in August 1997,
$425,000 notes payable associated with the acquisition of Fairfield is due in
fiscal 1997 and $500,000 of convertible debt is due on September 4, 1997. The
Company plans to pay the $425,000 short term note payable with the proceeds from
the sale of the building and the assets of the Fairfield, Connecticut location.
Management anticipates that the Series C notes will be refinanced and the
$500,000 convertible note will be converted into common stock.
Management is continuing its implementation of its cost reduction plan,
which addresses the restaurant operating losses. The plan includes the closing
or concept conversion of unprofitable sites, a reduction in the Company's work
force and other cost containment measures designed to reduce operating expenses
and improve restaurant operating performance. The Company anticipates
recognizing the financial results of these reductions primarily beginning in the
fourth quarter of fiscal year 1997 and in fiscal year 1998. The Company may need
additional capital to further fund operations and repay short term indebtedness
until the Company's plan is fully implemented. There can be no assurance that
the Company will be able to obtain sufficient capital to pay existing
liabilities and maintain operations.
Management believes that upon the completion of the implementation of its
modified strategic and cost reduction plan, the Company's operating performance
will be improved. However, no assurance can be made regarding the achievement of
the goals outlined in the strategic plan, or if such plans are achieved, that
the company's operations will be profitable.
20
<PAGE> 21
PART II
OTHER INFORMATION
Item 5. Other Information
In connection with the implementation of the Company's modified expansion
and cost reduction plan, the Company closed two of its restaurant facilities.
The Fairfield, Connecticut facility was closed on January 4, 1997 and the White
Plains, New York facility was closed March 1, 1997. The Company is currently
negotiating the sale of the assets and ground lease of the Fairfield,
Connecticut facility. The Company is investigating the conversion of the White
Plains, New York location to another concept which would better fit the
demographics of the area. While considering offers for the sale of the existing
lease of the White Plains facility, the Company is exploring the feasibility of
financing the conversion through a joint venture. The Company also is
negotiating a sale of its Yorktown Heights location, but no contracts have been
signed to date. The Company may, in the alternative, implement a conversion of
the Yorktown facility into a new style of restaurant concept. On September 5,
1996, the Company acquired the assets and leasehold interest of a restaurant
facility located in New York City. The Company has signed contracts for the sale
of this facility and anticipates a closing within the next few weeks.
In March 1997, the Company sold $500,000 in principal amount of 18%
promissory notes convertible into shares of the Company's common stock at $0.75
per share. The notes are secured by all of the issued and outstanding shares of
the Company's wholly owned operating subsidiaries: Rattlesnake Ventures, Inc.,
Rattlesnake Danbury, Inc., Rattlesnake Lynbrook, Inc. and Rattlesnake
Flemington, Inc. In connection with the loan, the principal of one of the
purchasers of the notes, Jay Botchman, or a designee, is to became a member of
the Company's Board of Directors. The Company is obligated to nominate and use
its best efforts to cause to be elected to the company's Board of Directors for
a period of three years a designee of one of the purchasers of the notes.
The Company's Common Stock is presently listed on the Nasdaq SmallCap
Market. The National Association of Securities Dealers, Inc. (Nasdaq) has
established certain standards for the continued listing of a security on the
SmallCap Market. The maintenance standards require, among other things, that an
issuer have total assets of at least $2,000,000 and capital and surplus of at
least $1,000,000; that the minimum bid price for the listed securities be $1.00
per share; and that the minimum market value of the "public float" be at least
$1,000,000.
On April 15, 1997 the Company received a deficiency letter from Nasdaq
resulting from the failure of the Company's Common Stock to maintain a closing
bid price greater than or equal to $1.00. The Company has 90 days from the date
of this letter to cure this deficiency. If for any 10 day period during this 90
day cure period the Company's Common Stock trades above $1.00 the deficiency is
considered cured. As of May 14, 1997 the Company has not cured this deficiency.
If the Company fails to cure this deficiency within the given time period the
Company will be subject to delisting procedures from Nasdaq.
As of March 30, 1997 the Company failed to Maintain $1,000,000 in Capital
and surplus to meet the Nasdaq's maintenance requirements. The Company is
persuing merger/acquisition type transactions and negotiating the conversion of
$500,000 of convertible debt into equity which would cure this deficiency.
There can be no assurance that the Company will complete a transaction to cure
this deficiency nor that the Company will continue to satisfy the other
requirements for maintaining a NASDAQ listing. If the Company's securities were
excluded from NASDAQ, it would adversely affect the prices of such securities
and the ability of holders to sell them, and the Company would be required to
comply with the initial listing requirements to be relisted on NASDAQ.
In the event that the Company is unable to satisfy NASDAQ's maintenance
requirements, and the requirements of the Boston Stock Exchange, trading would
be conducted in the "pink sheets" or the NASD's Electronic Bulletin Board. In
the absence of the Common Stock being quoted on NASDAQ, or the Company having
$2,000,000 in net tangible assets, trading in the Common Stock would be covered
by Rule 15g-9 promulgated under the Securities Exchange Act of 1934 for
non-NASDAQ and non-exchange listed securities. Under such rule, broker/dealers
who recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if the market price is at
least $5.00 per share. The SEC has adopted regulations that generally define a
penny stock to be any equity security that has a market price of less than $5.00
per share, subject to certain exceptions. Such exceptions include an equity
security listed on NASDAQ and an equity security issued by an issuer that has
(i) net tangible assets of at least $2,000,000, if such issuer has been in
continuous operation for three years, (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average revenue of at least $6,000,000 for the preceding three
years. Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks associated therewith.
The SEC has adopted regulations that generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include an equity security listed
on NASDAQ and an equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three years, (ii) net tangible assets of at least $5,000,000, if such issuer
has been in continuous operation for less than three years, or (iii) average
revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
If the Company's Common Stock was subject to the regulations on penny
stocks, the market liquidity for the Common Stock would be severely affected by
limiting the ability of broker/dealers to sell the Common Stock in the public
market. There is no assurance that trading in the Company's securities will not
be subject to these or other regulations that would adversely affect the market
for such securities.
Item 6. Exhibits and Reports on Forms 8-K.
(b) Reports on Form 8-K
During the quarter ended March 31, 1996, the Company filed no reports on Form
8-K.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE RATTLESNAKE HOLDING COMPANY, INC.
(Registrant)
By: /s/ David Sederholt
-------------------
David Sederholt
President
By: /s/ Stacey A. Wetterstrom
-------------------------
Stacey A. Wetterstrom
Vice President of Finance
Date: May 13, 1997
22
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