SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 29, 1997
----------------------
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 No.)
439 East 82nd Street
New York, New York 10028
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 452-2359
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each
exchange on
Title of each class which registered
Common Stock, $.001 par value Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
NONE
(Title of class)
(Title of class)
[Cover Page 1 of 2 Pages]
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Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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
or any amendment to this Form 10-KSB. [X]
The Issuer's revenues for its most recent fiscal ended June 29, 1997 were
$8,265,474.
On September 17, 1997, the Company received a letter from NASDAQ indicating
that the Company would be removed from the NASDAQ small cap listing at the close
of business on September 17, 1997 due to its failure to comply with the minimum
capital and surplus requirement of $1,000,000 and the $1.00 minimum stock price.
On September 17, 1997 the Company was removed from the NASDAQ small cap listing.
The Company continues to trade on the OTC Bulletin Board and the Boston Stock
Exchange.
On October 13, 1997, the aggregate market value of the voting stock of The
Rattlesnake Holding Company, Inc. (consisting of Common Stock, $.001 par value)
held by non-affiliates of the Registrant was approximately $742,064 based on the
average closing bid and asked prices for such Common Stock on said date as
reported by NASDAQ.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On October 13, 1997, there were 2,650,227 shares of Common Stock, $.001 par
value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
INTRODUCTION
The Rattlesnake Holding Company, Inc. (the "Company") was organized in June
1993 to develop, own and operate a chain of casual dining restaurants featuring
a southwestern theme. The Company currently operates three restaurants under the
name "Rattlesnake Southwestern Grill." The Rattlesnake concept is designed to
appeal to the casual dining guest by creating a relaxed restaurant experience
for families and couples in an attractive southwestern setting. Each restaurant
features contemporary southwestern decor with desert pastel colors and native
American art and artifacts. The restaurants include a 40 to 60 foot full relief,
mosaic rattlesnake bar, sculpted and tiled by artisans. The varied "all day"
menu offers wide selection and customer value and includes traditional favorites
as well as spicy recipes inspired by the cuisine of Arizona, New Mexico and
Texas. Checks average $10.25 at lunch and $13.90 at dinner per person.
The first Rattlesnake Southwestern Grill was opened in June 1992 in
historic South Norwalk, Connecticut as a prototype and distinguished entry into
the "theme" restaurant market segment. The Company opened seven additional
restaurants in Hamden, Fairfield and Danbury, Connecticut and Lynbrook, White
Plains and Yorktown Heights, New York and Flemington, New Jersey. All existing
Rattlesnake Restaurants are located in renovated facilities where restaurants
were previously operated. In January 1997, as part of the Company's revised
business plan the Company evaluated it's restaurant operations on a location by
location basis. As a result of this evaluation, the Company closed three
operating locations during fiscal year 1997 which did not meet the Company's
performance standards. These locations included Fairfield, Connecticut, Yorktown
Heights and White Plains New York. The New York City location which was not
opened for operations was sold as part of the Company's revised business plan
and modified expansion strategy. On September 17, 1997 the Company closed its
facility located in Lynbrook, New York pursuant to fiscal 1997 board approval.
Management still believes this area is conducive to the Rattlesnake concept and
is investigating other potential opportunities in the area. In January 1996, the
Company closed it's Hamden, Connecticut location due to poor performance.
The Company was incorporated in the State of Delaware on June 8, 1993. The
executive offices of the Company are located at 439 East 82nd Street, New York,
New York 10028, and its telephone number is 212-452-2359.
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Due to a number of factors, including the Company's limited operating
history, small restaurant base and geographic concentration, as well as the
dependence of the Company's expansion strategy on certain external factors which
it cannot control, there can be no assurance that the Company's plan of
operation will prove profitable or commercially viable.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
The Company's Board of Directors voted in January of 1997 to revise the
current business plan, in view of continued losses and marginal performance at a
number of the restaurants. In addition, cost reductions would be sought through
reductions in overhead and staffing. A decision was made to sell marginal
restaurants, including the Fairfield, Connecticut and White Plains and Yorktown
Heights, New York restaurants, and to sell the lease for the New York City
facility which had not yet been developed. The Company also closed its facility
located in Lynbrook, New York.
During fiscal 1997 there have been several changes in the management of the
Corporation. On March 15, 1997, an agreement was signed between the Company and
Vice Chairman & Chief Administrative Officer which amended the December 1995
employment agreement. Under the new agreement, the former Vice Chairman & Chief
Administrative Officer accepted the position of acting Co-CEO. On March 15,
1997, an agreement was signed between the Company and Chairman & Chief Executive
Officer which terminated the previous December 1, 1994 employment agreement and
any and all oral agreements relating to his employment. On March 29, 1997, an
agreement was signed between the Company and a Director of the Corporation for
acceptance of the position of acting Co-CEO for up to 150 days. On June 2, 1997,
an agreement was signed between the Company & Executive Vice president which
terminated the December 1, 1994 employment agreement and any and all oral
agreements relating to his employment. On July 25, 1997, an agreement was signed
between the Company and President which terminated the previous December 1 1994
employment agreement and any and all oral agreements relating to the employment.
In July 1996, the Company sold to an outside investor through a separate
offering, an additional 2,000 shares of preferred stock under the same terms of
the preferred stock offering of June 1996.
In fiscal 1997 the Board of Directors authorized the closing of the
Rattlesnake Southwestern Grill Restaurant located in Fairfield, Connecticut. The
facility was closed on January 4, 1997. The fixed assets, leasehold improvements
and intangibles at
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the facility have been written off. The building is reflected at the lower of
cost or market and is currently accounted for in the financial statements as
"asset held for sale." A net loss of $394,941 relating to the closing of the
Fairfield location, was recorded in fiscal 1997.
In fiscal 1997 the Board of Directors authorized the closing of the
Rattlesnake Southwestern Grill Restaurant located in White Plans, New York. The
facility was closed on March 1, 1997 and sold on July 16, 1997. The Company sold
all of the assets of White Plains except for cash, accounts receivable and
certain items specified in the Asset Purchase Agreement in exchange for a
release from its note payable to the landlord of $276,499 and the receipt of a
$23,500 note receivable from the purchaser. The facility was sold to a group
which included the Company's Chairman of the Board. A net loss of $224,135,
relating to the closing of the White Plains location was recorded in fiscal
1997.
In fiscal 1997 the Board of Directors authorized the closing of the
Rattlesnake Southwestern Grill Restaurant located in Yorktown Heights, New York.
The facility was closed on June 9, 1997 and sold on June 27, 1997. The purchaser
assumed the remaining outstanding balance of the notes payable to the landlord
and the related lease obligation. A net loss of $362,091, relating to the
Yorktown Heights location, was recorded in fiscal 1997.
The Restaurant location on 86th Street in New York was never opened and the
Restaurant was sold on May 29, 1997 for total consideration aggregating
$289,387. Rattlesnake remains a guarantor of the lease. A net loss of $306,456,
relating to the selling of the 86th Street location, was recorded in fiscal
1997.
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.
On March 15, 1997, an agreement was signed between the Company and Chairman
& Chief Executive Officer which terminated the previous December 1, 1994
employment agreement and any and all oral agreements relating to his employment.
The agreement included payments for expense reimbursement, accrued and unused
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vacation, medical, dental, disability and life insurance and severance payments.
In connection with this agreement, the Chief Executive Officer's employee stock
options shall be immediately vested and shall be amended to constitute
non-qualified employee stock options and the strike price is reduced to an
exercise price of $2.00.
On March 15, 1997, an agreement was signed between the Company and Vice
Chairman & Chief Administrative Officer which amended the December 1995
employment agreement. Under the new agreement, the former Vice Chairman & Chief
Administrative Officer will accept the position of acting Co-Chief Executive
Officer. This agreement waives any base rate or annual rate increases per the
previous agreement and modified the term to March 1, 1997 through February 28,
1999. Services are provided on a part-time consulting basis as needed. The
compensation for the period March 1, 1997 through February 28, 1999 will be
$75,000 plus benefits. This agreement also included the grant of an option to
purchase 125,000 shares of stock at the closing price on the date of this
agreement ($1-1/16). The agreement also includes that in the event the stock
options previously granted under the current Rattlesnake stock option plans are
repriced for any employee, the existing stock option grants for the acting
Co-CEO will be repriced at the same time as any repricing and under the same
terms and conditions.
On May 29, 1997, an agreement was signed between the Company and a Director
of the Corporation for acceptance of the position of acting Co-CEO for up to 150
days. This agreement included five months of compensation at $5,000 a month plus
expense and 100,000 warrants at the current price.
On June 2, 1997, an agreement was signed between the Company & Executive
Vice president which terminated the December 1, 1994 employment agreement and
any and all oral agreements relating to his employment. The agreement included
payments for expense reimbursement, accrued and unused vacation, medical,
dental, disability and life insurance and severance payments. In connection with
this agreement, the Executive Vice President's stock options are hereby replaced
by a warrant to purchase up to 200,000 shares of common stock exercisable at the
closing bid on the date of this agreement ($.25).
On June 2, 1997, 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. The acting Co-CEO is affiliated with the investment
banking firm.
On July 25, 1997, an agreement was signed between the Company and President
which terminated the previous December 1 1994 agreement and any and all oral
agreements relating to the employment. The agreement included payments for
expense
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reimbursement, accrued and unused vacation, medical, dental, disability and life
insurance and severance payments. In connection with this agreement the
President's employee stock options are replaced by a warrant to purchase up to
150,000 shares of common stock exercisable at the closing bid price on July 18,
1997 ($7/16).
On August 21, 1997, the Company signed a Reorganization and Stock Exchange
Agreement (the Agreement) with the Ottomanelli Group, as defined as 34th Street
Cafe Associates, Inc., Garden State Cafe Corporation, Ottomanelli Brothers West,
Ltd. and Ottomanelli's Cafe Franchising Corporation. This agreement includes
Ottomanelli Group companies contributing one hundred percent of its stock in
exchange for thirty-seven and one-half percent of Rattlesnake common stock and
common stock purchase options, warrants and convertible dilutive securities
equal to thirty seven and one half percent of all outstanding options, warrants
and convertible dilutive securities of Rattlesnake. The agreement is subject to
cancellation by either party prior to closing under specified terms of the
Agreement.
In fiscal 1997, the Board of Directors authorized the disposition of the
Rattlesnake Southwestern Grill Restaurant located in Lynbrook, New York. On
September 17, 1997 the Company closed the restaurant and wrote-off the related
assets to the estimated realizable value. A net loss of $374,852 relating to the
closing of this location was recorded in fiscal 1997.
On October 1, 1997 the Vice President of Finance resigned as an officer and
employee of the Company. The former Vice President of Finance continued working
as a consultant for a period of approximately four weeks. A new Vice President
of Finance was hired on October 16, 1997. Louis R. Malikow is currently acting
Principal Accounting Officer.
BUSINESS ORGANIZATION
In March 1992, Rattlesnake Ventures, Inc. ("RVI") was organized for the
purpose of owning and operating the South Norwalk facility. In June 1993, the
Company was established to act as a holding company for the restaurants and in
August 1993, acquired all of the outstanding shares of RVI in exchange for
685,617 shares of common stock. In November 1993, the Company acquired all of
the outstanding shares of PEN-Z Corp. ("PEN-Z") from Penny Markatos, the mother
of Peter Markatos, the former Executive Vice President of the Company, for a
$300,000 note, 36,084 shares of Common Stock, and other consideration. See
"Certain Relationships and Related Transactions." At the time of the
acquisition, PEN-Z was not an operating entity and its principal asset was the
liquor license for the Yorktown Heights facility. The Company has established
new subsidiary corporations
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for each new restaurant operation and such subsidiaries are owned by the Holding
company.
THE CONCEPT - THE RATTLESNAKE SOUTHWESTERN GRILL
The Rattlesnake Southwestern Grill concept was designed and developed to
take advantage of the many available restaurants in choice locations whose
operations for any one of a number of reasons did not succeed. The Rattlesnake's
ability to adapt its design to existing "upfitted" facilities enables it to
completely renovate and outfit a facility for less than an average of $70.00 per
square feet, exclusive of facility acquisition costs. Moreover, the Company has
completed full conversions of existing restaurant facilities from take-over to
opening in six to eight weeks. The Company believes this formula gives the
Rattlesnake a significant advantage in rollout time and cost over industry
leaders in the same segment.
The Company believes that the relatively low costs of acquisition and the
speed of renovation increase the Company's ability to generate revenues rapidly.
Further, the trend toward two wage earner families will strongly influence
dining habits for the nineties and beyond as families prepare less meals at home
during the work week. The emphasis on quality meals in comfortable surroundings
will move families to consider alternatives to the fast food restaurants.
Tablecloth restaurants, while very popular, are not able to accommodate this
market due to their relatively high prices for the repeat customer (2 to 3 times
per week). The Company believes the expanding theme restaurant segment has
become the concept of choice for families whose working parents have moved away
from in-home dining and toward frequent outside dining. The Company also
believes that casual "theme" restaurants represent a strong segment of the
restaurant market and that southwestern concepts represent a highly appealing
but unsaturated portion of that segment.
However, due to a number of factors, including the Company's limited
operating history, historical operating losses, small restaurant base and
geographic concentration, as well as the dependence of the Company's expansion
strategy on certain external factors which it cannot control, there can be no
assurance that the Company's plan of operation will prove profitable or
commercially viable.
The Company's revised business plan allows for consideration of a multiple
theme concept approach for future restaurants. This revised approach will be
tested with the conversion of one or more Rattlesnake restaurants into a Steak
House concept. In addition, one or more of the currently operating Rattlesnake
restaurants may be converted to Ottomanelli Cafe restaurants.
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THE RATTLESNAKE MENU
The menu of the Rattlesnake is a varied offering which provides a wide
selection and customer value. It is a diverse "all day" menu which offers
traditional favorites and spicy recipes inspired by the cuisine of Arizona, New
Mexico and Texas. Dinner customers can choose from slow-cooked Texas style BBQ
ribs and "shredded" meats to grilled salmon. Light alternatives include salad,
sandwich or pasta selections. The Rattlesnake also offers a prime 1/2 pound,
"Buckaroo Burger" where customers can choose from a variety of toppings as
add-ons. Other selections include "Rattlesnake Prairie Pizza," a southwestern
variation of the Italian classic, with choices from BBQ chicken and smoked
chorizo sausage to Santa Fe garden vegetables, all atop a paper thin crust made
from lightly fried flour tortillas. The Rattlesnake also offers three varieties
of chili; the "Soon to be Famous, Three Bean, Beef and Chorizo Chili" made with
top round of beef, instead of ground meat; "Buzzards Breath Chicken Chili" a
white chili filled with grilled boneless breast of chicken, white beans, garlic
and green chilies; and savory "Navajo Vegetable Chili" which offers a fat-free
healthful alternative. Fajitas are among the strongest segment of the menu and
the Rattlesnake offers a variety including the standard chicken, beef and
shrimp, and the more unusual portabello mushroom, salmon, spicy chorizo sausage
and vegetarian. The Company also added Diamond Brand Angus steaks to the menu
which capitalizes on the renewed popularity of steakhouses and quality beef.
Menu prices range from $1.95 to $23.95, with an average per person check of
$10.25 for lunch and $13.90 for dinner. The Company believes that many of these
menu items are popular in the take-out food market, and the Company has launched
an initiative called "Grub to Go," offering an alternative to the traditional
Chinese and pizza take-out options. The Company is also currently developing an
off-premises catering program offering corporate and private Southwestern
barbecues and buffets, delivered and served at client locations.
MARKETING STRATEGY
The Company believes that the upward trend in theme type restaurants will
continue as the public continues its desire for value and entertainment.
Restaurants are entertainment, and in this respect, the Rattlesnake appeals to a
broad spectrum of the market. The largest segment is the 25 to 35 year old
seeking diverse fare in an environment conducive to socializing. The menu,
energetic bar and live entertainment in a contemporary southwestern ambiance
provide the inducement for this market. Family business is encouraged as the
Rattlesnake is a "kid friendly" restaurant offering "Kid's Grub" menu, crayons,
balloons and games. The energy of the restaurant relieves parents
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of the fear that their children might disturb other diners. The unique nature of
the product is also a repeat business generator. The Company attempts to offer
many menu items which can only be obtained at The Rattlesnake Southwestern
Grill.
The Company believes that further opportunities exist in the areas of "Take
Out" and "Off Premises" Catering. Many families consist of multiple wage
earners, many of which regularly seek take out foods as alternatives to cooking
in or eating out. The food at the Rattlesnake is well suited for these meals.
Catering is also a potential growth component of the business. Many corporations
are currently seeking unique experiences as well as low cost alternatives for
company entertainment.
In addition to these concepts, the Company intends to explore additional
themes to complement the Rattlesnake concept. This will allow it to maximize the
potential of each restaurant, and allow for a possible conversion to a secondary
concept, should the current one experience a decline as the Restaurant matures.
In furtherance of this approach, Rattlesnake has agreed to merge with the
Ottomanelli Group, and may convert one or more Rattlesnake restaurants to
Ottomanelli Cafes. It should be noted that the proposed merger can be canceled
by either party prior to closing
RESTAURANT MANAGEMENT AND EMPLOYEES
The Company seeks to attract and retain high caliber restaurant managers by
providing them with an appropriate balance of autonomy, direction and attractive
financial incentives. The Company has developed a management incentive program
under which new general managers will work with senior management to prepare
quarterly budgets and performance plans for their restaurants. More experienced
general managers, who have demonstrated the ability to achieve planned
objectives, may be promoted to the district manager level. The Company believes
that by providing its general managers and district managers with short and
long-term financial incentives, it will continue to attract and retain high
caliber personnel. Company policy strongly favors promoting existing
non-management employees into management positions. Management trainees must
demonstrate their ability in every area of restaurant operations before being
considered for promotion.
To assure that its employees properly implement the Company's commitment to
consistently high quality food and attentive service, the Company has developed
manuals regarding its policies and procedures for all aspects of restaurant
operation, including food handling and preparation and dining room and beverage
service operations. New employees are trained by corporate personnel and by
experienced employees who have
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demonstrated their familiarity with and ability to consistently implement
Company policies. The Company believes that by requiring its employees to adhere
to these policies, giving them direct internal training by corporate personnel
and using experienced employees to train new ones, it will provide the
consistently high quality of food and service its customers desire.
In addition, Company policy is generally to assign each server tables with
seating for no more than twelve to fourteen guests to enable the server to
provide attentive service. The Company believes it provides a supportive work
environment which attracts experienced servers.
Each restaurant will be directly operated by a management team consisting
of:
General Manager: Has full operational responsibility including
profit and loss and in house promotions.
Assistant General Manager: Second in command and is directly responsible and
reporting issues as well as repairs and maintenance.
Reports to the General Manager.
Front of the House Manager: Directs Human Resources and front-of-house training
programs as well as scheduling and employee
reviews. Reports to General Manager.
Kitchen Manager: Responsible for all food operations including
production, purchasing, inventories, food cost
controls, sanitation and personnel. Reports to the
General Manager.
Assistant Kitchen Manager: Directly responsible for line production,
preparation schedules and daily sanitation.
Reports to the Kitchen Manager.
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The entire management team is directly supervised by and responsible to the
director of operations.
Cooks, service staff and support personnel will be recruited from local
areas surrounding each individual restaurant, and although there can be no
assurance, it is anticipated that a sufficient number of qualified personnel
will be available in each area. Restaurant sites will be selected giving full
consideration to the availability of lower level hourly personnel. All personnel
will follow a two-week training protocol and receive qualifying examinations
before completion of their probationary employment. All candidates for
employment must consent to random and periodic drug screening, if requested by
the Company.
RESTAURANT SYSTEMS & CONTROLS
The Company requires each restaurant unit to adhere to a strict program of
systems and controls which were designed to prevent theft and minimize losses
resulting from poor product handling and manpower utilization. Cash and credit
card transactions are controlled by electronic register systems which compute
all sales transactions by server, product and time of day. Sales and cash are
reconciled and monitored daily. All food items, beverages and supplies are
inventoried weekly and detailed computerized reports of are compiled from this
information. These reports along with other support materials are used to
generate weekly operating statements for units to summarize data for weekly
review. The control system allows for rapid and geographically diverse growth
while maintaining the integrity of the data received.
TRADEMARK RIGHTS
The Company uses or intends to use various trade names and marks in the
Company's business, including "Rattlesnake Southwestern Grill" and variations of
that name and mark. Another business has registered the name "The Rattlesnake
Club" as a federal trademark.
The Company has obtained a license for the use of the name "The Rattlesnake
Southwestern Grill" and variations of that name and mark from this trademark
holder. In April 1995, the Company entered into an agreement with RC Holdings
Inc. ("RC"), the owner of the Rattlesnake trademark, which grants the Company
the license to use the trademark in connection with its existing and future
facilities. The agreement limits the ability of the Company to open restaurants
under the Rattlesnake name within a 24-month period in the areas of Las Vegas,
Nevada, Phoenix, Arizona, Seattle, Washington, Dallas and Houston, Texas,
Chicago, Illinois and Southern Florida. After the expiration of the
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24-month period, the Company will not be able to open in locations if, within a
50-mile radius, there is an existing or proposed location of a facility
established or to be established by RC. Irrespective of the foregoing, neither
RC nor the Company may open a restaurant within five miles of each other in an
urban area, or 15 miles of each other in any other area. At no time may the
Company open up a Rattlesnake facility in the states of Colorado or Michigan
without the prior written consent of RC. RC is currently the operator of fine
dining establishments in Colorado and Michigan. The Company does not consider
its establishments to be in direct competition with those operated by RC.
The Company paid RC $5,000 in August 1995 for these licensing rights, and
is obligated to pay RC an annual fee of $5,000 for the existing facilities, and
an annual fee of $2,500 a year for each of the first ten additional facilities,
$1,500 per year for the next ten additional facilities, and $1,000 per year for
each additional facility in excess of 20.
There can be no assurance that any application by the Company to register
any tradenames and trademarks used by the Company will be approved and/or that
the right to the use of any such trademarks outside of their respective current
areas of usage will not be claimed by others. If trademarks are issued, there
can be no assurance as to the extent of the protection that will be granted to
the Company as a result of having such trademarks or that the Company will be
able to afford the expenses of any complex litigation which may be necessary to
enforce its trademark or license rights. The Company was successful in its
defense of the Rattlesnake trademark against an operating restaurant in the
vicinity of one of the Company's restaurants. Future failure of the Company to
successfully enforce license and trademark rights may have a material adverse
impact on the Company's business.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, type and quality of food, location and other factors. The Company has
many well established competitors with substantially greater financial resources
and a longer history of operations than the Company. In light of the Company's
recent establishment of its restaurant operations, small number of facilities
and geographical concentration, the Company has not had a significant impact on
the restaurant industry. The Company competes with locally-owned restaurants, as
well as national and regional restaurant chains, many of which are better
established in the Company's existing and future markets. Changes in customer
tastes, economic conditions, demographic trends, and the location and number of
competing restaurants, as well as the type of cuisine served by competitors,
could adversely affect the
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Company's business as well as the availability of experienced management and
hourly employees.
Although the Company competes generally with all other casual dining
restaurants, the Company believes there are few restaurant concepts that are
directly competitive in the Southwestern "theme" market. Most notable of these
competitors is Chili's which is currently a chain operated by Brinker
International. There are other concepts which exist in a "Southwestern" venue
such as the steakhouses Longhorn, Lonestar and Santa Fe, and the Mexican
restaurants On the Border, Chi-Chi's and EL Torito. There are also a large
number of Bar-B-Que restaurants such as Virgil's . Other casual theme restaurant
concepts such as Friday's and Bennigan's compete with the Company for the casual
diner, although their concept is distinct from Rattlesnake. The Company is not
aware of any other restaurant which is comparable in concept, menu variety or
decor; however, the Company believes that the current interest in the American
Southwest will stimulate the emergence of such competitors.
The Company believes that restaurants are entertainment, and in this
respect, intends to compete by designing the Rattlesnake to appeal to a broad
spectrum of the market. The menu, energetic bar and live entertainment in a
contemporary Southwestern ambiance appeal to this market. Family business is
encouraged as the Rattlesnake is a "kid friendly" restaurant offering "Kid's
Grub" menu, crayons, balloons and games. The energy of the restaurant relieves
parents of the fear that their children might disturb other diners. The unique
nature of the product is also a repeat business generator. The Company attempts
to offer menu items which will be identified with The Rattlesnake Southwestern
Grill.
Although management believes it will gain market acceptance, there can be
no assurance that the Company will be able to successfully compete in its
market.
FRANCHISING/LICENSING
The Company has no immediate plans to franchise or license. However, the
Company believes that one or both may be appropriate outside its near-term
expansion territory in the northeast United States and, if potential
franchisees/licensees with the necessary experience, stature and financing
express interest, the Company may pursue appropriate opportunities.
GOVERNMENT REGULATION
The Company is subject to a variety of federal, state and local laws. Each
of the Company's restaurants is subject to licensing and regulation by a number
of government authorities,
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including alcoholic beverage control, health, safety, sanitation, building and
fire agencies in the state or municipality in which the restaurant is located.
Difficulties in obtaining or failure to obtain required licenses or approvals
could delay or prevent the development of a new restaurant in a particular area.
A substantial portion of the Company's revenues is attributable to the sale
of alcoholic beverages. Approximately 30% of net restaurant sales were derived
from the sale of beverages, including alcohol. Alcoholic beverage control
regulations require each of the Company's restaurants to apply to a state
authority and, in certain locations, county or municipal authorities for a
license or permit to sell alcoholic beverages on the premises. Typically,
licenses must be renewed annually and may be revoked or suspended for cause at
any time. Alcoholic beverage control regulations relate to numerous aspects of
restaurant operations, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
storage and dispensing of alcoholic beverages.
The failure of a restaurant to obtain or retain liquor or food service
licenses would severely adversely affect the restaurant's operations. To reduce
this risk, each Company restaurant is operated in accordance with procedures
intended to assure compliance with applicable codes and regulations.
The Company is subject in certain states to "dram shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. The Company presently carries an average liquor liability
coverage as part of its existing $1,000,000 comprehensive general liability
insurance, as well as excess liability coverage of $2,000,000 per occurrence,
with no deductible. The Company has never been named as a defendant in a lawsuit
involving "dram shop" liability.
The Company's restaurant operations are also subject to federal and state
laws governing such matters as the minimum hourly wage, unemployment tax rates,
sales tax and similar matters, over which the Company has no control. A majority
of the Company's service, food preparation and other personnel are paid at rates
related to the federal minimum wage, and the October 1, 1997 minimum wage
increase could increase the Company's labor costs.
The development and construction of additional restaurants will be subject
to compliance with applicable zoning, land use and environmental laws and
regulations.
13
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
EXECUTIVE OFFICES
The Company's executive offices are located at 439 East 82nd Street, New
York, New York 10028, and its telephone number is 212/452-2359.
RESTAURANT FACILITIES
The Company's first location in South Norwalk, Connecticut occupies 2,600
square feet on the corner of Washington Avenue and South Main Street in the
historic restoration district of South Norwalk. The facility was opened in June
1992 and has a five-year lease with two five-year options. The current rent is
$58,900 annually with minimum escalation's over the course of the three
five-year periods. The space is comprised of two dining rooms and a large
dining/bar room where the mosaic rattlesnake is located. This facility was the
prototype facility and tested the feasibility of the Rattlesnake Concept.
The second facility in Hamden, Connecticut was closed in January 1996 due
to the inability of the facility to achieve the consistent level of revenues
required by the company.
The third facility located at 355 Kear Street in Yorktown Heights
(Westchester County), New York was closed on June 9, 1997 due to the inability
of the facility to meet the Company's performance standards. This facility was
sold on June 27, 1997.
The fourth Rattlesnake restaurant, located at 55 Miller Street in downtown
Fairfield, Connecticut, ceased operations on January 4, 1997. Management is
currently marketing the property for sale. The facility was unable to meet the
Company's performance standards.
The fifth restaurant located at 1241 Mamaroneck Avenue, White Plains, New
York, was closed on March 1, 1997, due to the inability of the facility to
achieve the consistent level of revenues required by the Company. This
restaurant was sold on July 16, 1997 to an investment group which includes the
Chairman of the Board of Directors.
The sixth restaurant was opened in Danbury, Connecticut in August 1995. The
Danbury restaurant is in the vicinity of major shopping facilities and across
from a multiplex movie theater. The five-year lease includes three five-year
renewal options and has an initial annual rent of $102,480 plus real estate
taxes. The Company has an option to purchase the facility for $1,365,000.
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<PAGE>
The seventh restaurant was opened in Flemington, New Jersey in November
1995. The Company purchased the lease for $100,000 and liquor license for
$150,000. The Company has a seven year lease on a net-net basis with a base rent
of $80,400 a year plus a percentage of sales over a stated sales volume.
The eighth restaurant was opened in Lynbrook, New York in June 1996, and as
part of the Strategic Plan as revised in fiscal 1997, was determined not to have
met the Company's performance standard and was closed on September 17, 1997. The
Company recorded a loss of $374,852 in fiscal 1997 as a result of this closing.
Management still believes this area is conducive to the Rattlesnake concept and
is investigating other potential opportunities in the area.
The Company has sold the lease for the restaurant located at 86th Street in
New York City. A lease for the facility was signed in November 1996, prior to
the implementation of the Company's revised business plan. The facility was
never developed and the lease was sold on May 29, 1997.
The following table sets forth certain information with respect to the
Company's restaurants currently operating:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Opening Date Location Approximate Seating Restaurant Size Lease
Capacity(2) (Approximate Square Expiration(1)
Feet)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 1992 2 South Main Street 120 3,270 May 2012
South Norwalk, CT
- -----------------------------------------------------------------------------------------------------------
August 1995 106 Federal Road 225 7,200 March 2015
Danbury, CT
- -----------------------------------------------------------------------------------------------------------
November 1995 Route 202 250 7,800 August 2010
Flemington, NJ
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Including all renewal options that may be exercised in the Company's sole
discretion.
(2) Excludes outside dining area and seating.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a lawsuit involving its South Norwalk facility.
The owner of an apartment above the facility has commenced an action against the
Company seeking damages for nuisance and has complained to local authorities for
excessive noise. The action is being defended by the Company's insurance carrier
and other than causing the elimination of live entertainment at the facility,
the Company does not believe the action will have a material adverse effect on
its financial position or results of operation. All of the Company's other
facilities, existing and proposed, are free-standing buildings which do not
adjoin residential apartments. The Company does not anticipate similar problems
with any of its other facilities.
The Company is a party to no other material legal proceedings.
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
Upon the effectiveness of the Company's public offering on June 29, 1995,
the Common Stock of the Company commenced trading in the over-the-counter market
and was listed on the small cap market of the NASDAQ Stock Market ("NASDAQ")
under the symbol RTTL and the Boston Stock Exchange under the symbol RTT.
The following is the range of high and low bid prices for the Company's
stock for the periods indicated below:
COMMON STOCK HIGH LOW
Fiscal Year 1997
1st Quarter 4-3/4 1-7/8
2nd Quarter 3-7/8 1-1/8
3rd Quarter 2-1/8 7/8
4th Quarter 1 1/4
Fiscal Year 1996
1st Quarter 6 5-1/2
2nd Quarter 6-1/8 5-1/2
3rd Quarter 5-1/2 2-5/8
4th Quarter 4-1/8 2-7/8
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<PAGE>
Fiscal Year 1995
4th Quarter (from June 29, 1995) 5-5/8 5-1/2
The above quotations represent prices between dealers, do not include
retail mark-ups, mark-downs, or commissions, and do not necessarily represent
actual transactions.
There are approximately 250 holders of record of all the Company's Common
Stock but the Company believes there are more than 700 beneficial holders of the
Company's Common Stock.
On September 17, 1997, the Company received a letter from NASDAQ indicating
that the Company would be removed from the NASDAQ small cap listing at the close
of business on September 17, 1997 due to its failure to comply with the minimum
capital and surplus requirement of $1,000,000 and the $1.00 minimum stock price.
On September 17, 1997 the Company was removed from the NASDAQ small cap listing.
The Company continues to trade on the OTC Bulletin Board on the Boston Stock
Exchange.
DIVIDEND POLICY
The Company has not paid any dividends upon its Common Stock since its
inception. The Company does not expect to pay any dividends upon its Common
Stock in the foreseeable future and plans to retain earnings, if any, to finance
the development and expansion of its business. In June and July 1996 the Company
issued 56,500 shares of preferred stock for $24.50 per share. Each share is
entitled to cumulative semi-annual dividends of $.9187 payable on May 15 and
November 15 of each year commencing November 15, 1996 and accruing from the date
of issuance. Unpaid dividends will accumulate and be payable prior to the
payment of any dividends on the Common Stock. No dividends will be payable
unless the Company has funds legally available therefor. To date, the Board of
Directors has not declared any dividends. The Company has recorded dividends not
declared and not paid for the preferred stock aggregating $103,818 as of June
29, 1997.
ITEM 6. MANAGEMENT'S 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.
INTRODUCTION
Rattlesnake Holding Company, Inc. is the parent corporation of three
subsidiary companies operating at individual
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<PAGE>
restaurant locations, utilizing the unique Rattlesnake Southwestern Grill
concept. The following table identifies the three operating locations and the
date operations commenced at each of those locations:
RESTAURANT LOCATIONS OPERATIONS COMMENCEMENT DATE
Flemington, New Jersey November 1995
Danbury, Connecticut August 1995
South Norwalk, Connecticut June 1992
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 it's actual implementation in
the third quarter of fiscal year 1997. The Company has closed four of it's
unprofitable locations and has sold three of these locations. On May 29, 1997
the Company sold it's facility located at 86th Street in New York City. The
Company had not opened this facility for operations.
The Company's strategy of aggressive growth, utilizing a low cost
restaurant concept adaptable to different leasehold configurations in a short
construction timetable, has met with some difficulty, particularly in the areas
of inconsistent operating performance of newer units. As a result, the Board of
Directors voted in January 1997 to adopt a revised business plan that focuses on
profitability of existing restaurants and the closing of marginal restaurants
including Fairfield, Connecticut, White Plains, Yorktown Heights and Lynbrook,
New York.
FISCAL YEAR ENDED JUNE 29, 1997 AS COMPARED WITH FISCAL YEAR
ENDED JUNE 30, 1996
GENERAL DISCUSSION
Net restaurant sales decreased 4.7% to $7,851,950 for the fiscal year ended
June 29, 1997 from $8,242,809 for the twelve months ended June 30, 1996. The
decrease in net restaurant sales resulted from the net effect of the closing of
the Fairfield, Connecticut, White Plains and Yorktown Heights, New York
restaurants in fiscal 1997 offset by an increase in the Danbury, Flemington and
Lynbrook restaurants operating for a full year as compared to the prior period.
For the fiscal year ended June 29,
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<PAGE>
1997, the Company generated a net loss of $4,797,857 as compared to a net loss
of $3,193,155 for the fiscal year ended June 30, 1996, an increase of
$1,604,702. The increased loss was principally attributed to losses incurred
from the closing of restaurant sites of $1,731,842.
Restaurant operating losses were $(136,256) for the fiscal year ended June
29, 1997 as compared with $(159,235) for the fiscal year ended June 30, 1996.
This decrease in operating losses was principally attributable to the
implementation of the Company's cost reduction plan. The benefits recognized by
these cost reductions were offset by the cost incurred relating to the
maintenance of closed restaurants prior to their sale.
RESTAURANT SALES
Gross restaurant sales decreased 5.6% to $8,265,474 for the fiscal year
ended June 29, 1997 from $8,755,565 for the fiscal year ended June 30, 1996. The
decrease in restaurant sales resulted from the decrease in the number of
operating restaurants during the fiscal 1997 period. The number of operating
restaurants decreased from seven to four in the period ended June 29, 1997. The
Company closed three of it's restaurants in fiscal year 1997 as follows:
Fairfield, Connecticut in January 1997; White Plains, New York in March 1997;
and Yorktown Heights, New York in June 1997. The restaurant located in Lynbrook,
New York was closed in September 1997. As a result of these restaurant closings
and the timing of restaurant openings, South Norwalk represents the only
restaurant for which same store sales can be analyzed. Same store sales for the
South Norwalk location increased $104,084 for the twelve month period ended June
29, 1997.
PROMOTIONAL SALES
Promotional sales decreased from $512,756 for fiscal year ended June 30,
1996 to $413,524 for fiscal year ended June 29, 1997. This decrease is
attributed to a reduction in couponing and direct mail advertisement incentives
which were distributed to counter extreme winter weather conditions during
fiscal year 1996. Promotional sales have decreased as a percentage of gross
sales in fiscal year 1997 to 5.0% from 5.9% in fiscal year 1996. This decrease
as a percentage of sales is the result of the beneficial effects of clustered
marketing efforts and shared costs among all of the Rattlesnake restaurants.
FOOD AND BEVERAGE COSTS
Food and beverage costs remained constant as a percentage of net restaurant
sales at 31.1% in fiscal year 1997
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<PAGE>
and 1996. The cost of food and beverage sales decreased to $2,443,860 for the
fiscal year ended June 29, 1997, as compared with $2,565,905 for the fiscal year
ended June 30, 1996. The Company was able to maintain it's food and beverage
cost level through the implementation of a new menu, revised recipes, improved
inventory utilization, increased purchasing efficiencies and improved training
methods. This was done despite increases in the cost of chicken, beef, and
produce. There can be no assurance that the Company will be able to maintain
these cost levels.
RESTAURANT SALARIES AND FRINGE BENEFITS
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
decreased to $2,792,622 for the fiscal year ended June 29, 1997 as compared to
$3,109,435 for the fiscal year ended June 30, 1996. This decrease is
attributable to the opening of additional restaurants during fiscal 1996 and no
restaurant openings in fiscal 1997. As a percentage of net sales, these costs
decreased to 35.6% in fiscal 1997 from 37.7% in fiscal 1996, principally due to
increased restaurant management and operating personnel in newly opened
restaurants in fiscal 1996. The decrease is also attributed to the
implementation of the Company's cost reduction plan under which it reduced
restaurant management and staff during the fourth quarter of fiscal year 1997.
OCCUPANCY AND RELATED EXPENSES
Occupancy and related expenses, which include linen, repairs, maintenance,
utilities, rent, insurance and other occupancy related expenses, decreased to
$2,025,198 for the fiscal year ended June 29, 1997 from $2,118,444 for the
fiscal year end June 30, 1996. As a percentage of net restaurant sales, these
costs increased to 25.8% in fiscal 1997 from 25.7% in fiscal 1996. The increase
as a percentage of sales can be attributed primarily to the costs associated
with the maintenance of the three restaurants closed in fiscal year 1997 prior
to their sale.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses, including the amortization of
pre-opening store expenses, increased as a percentage of gross restaurant sales
to 9.3% for the fiscal year ended June 29, 1997 from 7.4% for the fiscal year
end June 30, 1996. These expenses increased to $726,526 in fiscal year ended
June 29, 1997 from $608,260 for the fiscal year end June 30, 1996. This increase
is primarily attributable to the depreciation and amortization recorded on
restaurants which were closed during
20
<PAGE>
fiscal year 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $2,715,293 in
fiscal year ended June 29, 1997 from $2,810,433 for the fiscal year end June 30,
1996. As a percentage of net sales, selling, general and administrative expenses
increased from 34.1% in 1996 to 34.6% in 1997. These reductions in expense are a
direct result of the Company's implementation of it's cost reduction plan. The
increase as a percentage of sales reflect the impact of the decreased sales
resulting from the closing of related restaurant sites
AMORTIZATION OF DEBT ISSUANCE COSTS
Debt issuance costs are principally associated with the subordinated notes
component of the Company's $1,800,000 unit offering and were capitalized and
amortized ratably over the initial one year term of the debt. As a result of the
restructuring of this debt, the related unamortized debt issuance costs of
$72,114 were offset against the extraordinary gain recognized in this
transaction in fiscal year 1996.
LOSS ON CLOSURE OF RESTAURANT SITES
The Rattlesnake Southwestern Grill Restaurant located in Fairfield,
Connecticut was closed on January 4, 1997. The fixed assets, leasehold
improvements and intangibles at the facility have been written off and is
recorded at it's estimated fair value. The facility is currently being offered
for sale. A net loss of $394,941 relating to the closing of the Fairfield
location, was recorded during the 1997 fiscal year.
The Rattlesnake Southwestern Grill Restaurant located in White Plains, New
York was closed on March 1, 1997 and sold on July 16, 1997. The facility was
sold to individuals including the Company's Chairman of the Board. A net loss of
$224,135 relating to the closing of the White Plains location, was recorded in
fiscal 1997.
The Rattlesnake Southwestern Grill Restaurant located in Yorktown Heights,
New York was closed on June 9, 1997 and sold on June 27, 1997. A net loss of
$362,091 relating to the closing of the Yorktown Heights location, was recorded
in fiscal 1997.
The restaurant location on 86th Street in New York City was never opened
and the Company sold the fixed assets on May 29, 1997 and transferred it's
interest in the lease at that location. A net loss of $306,456, relating to the
selling of the 86th Street location was recorded in fiscal 1997.
21
<PAGE>
On September 17, 1997 the Company closed its facility located in Lynbrook,
New York pursuant to fiscal 1997 Board approval, as it was not meeting the
Company's performance standards as part of the Strategic Plan. The Company
recorded a net loss of $374,852 in fiscal 1997 as a result of this closing.
INTEREST EXPENSES
Interest expense increased to $172,886 for the fiscal year ended June 29,
1997 from $108,536 for the fiscal year end June 30, 1996. This increase resulted
from additional borrowing by the Company and the increased interest rate
relating to the extension of the Series C Notes Payable.
FISCAL YEAR ENDED JUNE 30, 1996 AS COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1995
RESTAURANT SALES
Gross restaurant sales increased 63.9% to $8,755,565 for the fiscal year
ended June 30, 1996 from $5,340,657 for the fiscal year ended June 30, 1995. The
increase in restaurant sales resulted from the increase in the number of
restaurants operating during the fiscal 1996 period. The number of operating
restaurants increased from five to eight for the period ended June 30, 1996,
prior to the closing of the Hamden, Connecticut facility in January 1996. The
three new restaurants are located in Danbury, Connecticut; Flemington, New
Jersey; and Lynbrook, New York. The White Plains location was open for only
three weeks in fiscal year 1995, thus also contributing to the increased sales
in fiscal year 1996. Danbury, Flemington and Lynbrook were opened in August
1995, November 1995 and June 1996 respectively.
For the three restaurants operating for a full twelve months in fiscal year
1995 and 1996, same store sales declined by $508,551. This decline is attributed
to decreased sales experienced by Yorktown and Fairfield. These comparative
sales declines are attributed to the typical higher sales levels experienced by
these new units during fiscal 1995. South Norwalk, which was not a new unit in
fiscal 1995 experienced an increase in sales. The severe weather conditions
experienced in the country's northeastern region had a dramatic affect on sales
specifically during the second and third quarters of fiscal year 1996.
22
<PAGE>
PROMOTIONAL SALES
Promotional sales increased from $362,589 for fiscal year ended June 30,
1995 to $512,756 for fiscal year ended June 30, 1996. This increase is
attributed to couponing and direct mail advertisement targeted as sales
incentives to counter extreme winter weather conditions during fiscal year 1996.
Promotional sales have decreased as a percentage of gross sales in fiscal year
1996 to 5.9% from 6.8% in fiscal year 1995. This decrease as a percentage of
sales is the result of the beneficial effects of clustered marketing efforts and
shared costs among all of the Rattlesnake restaurants.
FOOD AND BEVERAGE COSTS
Food and beverage costs decreased as a percentage of net restaurant sales
to 31.1% in fiscal year ended June 30, 1996 as compared to 32.4% for the twelve
months ended June 30, 1995, despite the opening of three facilities in fiscal
year 1996 and the typically higher costs associated with new facilities. The
cost of food and beverage sales increased to $2,565,905 for the fiscal year
ended June 30, 1996, as compared with $1,610,680 for the fiscal year ended June
30, 1995. The decrease of the food and beverage cost rates as a percentage of
net restaurant sales was attributable to the new menu, revised recipes, improved
inventory utilization, increased purchasing efficiencies and improved training
methods. The company was able to maintain these lower cost levels despite
increases in the cost of chicken, beef, and produce in fiscal 1996. There can be
no assurance that the Company will be able to maintain these cost levels.
RESTAURANT SALARIES AND FRINGE BENEFITS
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
increased to $3,109,435 for the fiscal year ended June 30, 1996 as compared to
$1,804,129 for the fiscal year ended June 30, 1995. This increase is
attributable to the opening of additional restaurants during fiscal 1996. As a
percentage of net sales, these costs increased to 37.7% in fiscal 1996 from
36.2% in fiscal 1995, principally due to increased restaurant management and
operating personnel in newly opened restaurants. The Company believes that the
management component of restaurant salaries should be moderate in the future, as
existing restaurant supervisory personnel can manage the anticipated growth in
restaurants in fiscal 1997.
23
<PAGE>
OCCUPANCY AND RELATED EXPENSES
Occupancy and related expenses, which include linen, repairs, maintenance,
utilities, rent, insurance and other occupancy related expenses, increased to
$2,118,444 for the fiscal year ended June 30, 1996 from $1,306,469 for the
fiscal year ended June 30, 1995. As a percentage of net restaurant sales, these
costs decreased to 25.7% in fiscal 1996 from 26.2% in fiscal 1995. The decrease
can be attributed primarily to the enhanced controls and improved site
selection.
DEPRECIATION AND AMOTIZATION EXPENSE
Depreciation and amortization expenses, including the amortization of
pre-opening store expenses, decreased as a percentage of gross restaurant sales
to 7.4% for fiscal year ended June 30, 1996 from 7.8% for the fiscal year end
June 30, 1995. These expenses increased to $608,260 in fiscal year ended June
30, 1996 from $388,695 for the fiscal year end June 30, 1995. This increase is
primarily attributable to the opening of new restaurants, the expansion of the
corporate offices and other capital expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $2,810,433 in
fiscal year ended June 30, 1996 from $1,332,237 for the fiscal year end June 30,
1995. As a percentage of net sales, selling, general and administrative expenses
increased from 26.8% in 1995 to 34.1% in 1996. These expenditures include a
foundation for the implementation of its expansion strategy. These investments
included additional corporate level accounting, administrative and restaurant
management personnel. The Company also made expenditures necessary to establish
the Company as a public company including professional fees, directors and
officers insurance, printing costs, postage and professional service dues.
Additionally, increased advertising, marketing and the cost of promotional
programs contributed to the increases in selling, general and administrative
expenses as did the other expenses directly relating the opening of new
restaurants.
AMORTIZATION OF DEBT ISSUANCE COSTS
Debt issuance costs are principally associated with the subordinated notes
component of the Company's $1,800,000 unit offering and were capitalized and
amortized ratably over the initial one year term of the debt. As a result of the
restructuring of this debt, the related unamortized debt issuance costs of
$72,114 were offset against the extraordinary gain recognized in this
transaction in fiscal year 1996.
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<PAGE>
LOSS ON CLOSURE OF RESTAURANT
On December 31, 1995, the Board of Directors authorized the closing of the
Rattlesnake Southwestern Grill Restaurant located in Hamden, Connecticut. The
facility was closed on January 7, 1996. A majority of the fixed assets at the
facility have been removed to be utilized at other existing or new facilities.
All remaining fixed assets and leasehold improvements have been abandoned and
all intangible assets have been written off. A loss of $192,311 relating to the
closing of the Hamden location was recorded during the 1996 fiscal year.
INTEREST EXPENSES
Interest expense decreased to $108,536 for the fiscal year ended June 30,
1996 from $264,279 for the fiscal year end June 30, 1995. The decrease resulted
from the repayment of notes upon completion of the IPO.
LIQUIDITY
The Company's cash position decreased by $616,392 during the year ended
June 29, 1997, principally as a result of net cash used in operating activities
of $1,654,066.
Net cash used in operating activities consisting primarily of the
$4,797,857 net loss for the year, offset by a decrease in accounts payable of
$177,779, depreciation and amortization of $797,092, loss on closure of
restaurant sites of $1,850,043, valuation of warrants for services of $293,750,
decrease in prepaid of $119,016 and an increase in other current liabilities of
$157,016.
The Company utilized $477,864 for investing activities, principally for
capital expenditures and lease acquisition costs.
The Company generated $1,515,538 in cash from financing activities during
the year ended June 29, 1996, principally through the proceeds of the private
placement of preferred stock and the issuance of $500,000 convertible notes,
offset by $272,087 repayment of borrowings.
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
each dollar of indebtedness. The warrants provided for exercise prices ranging
between $2.50 and 3.00 and expire on August 6, 2001. These warrants were valued
and the related expense of $121,962 was recorded in the financial statements for
the fiscal year
25
<PAGE>
ended June 29, 1997. 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 service company for meal credits at the Company's restaurants.
At June 29, 1997, the Company has available a net operating loss
carryforward (NOL) for Federal and State income tax purposes of approximately
$10,870,000, which are available to offset future taxable income, if any, before
2012. In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended, a change in more than 50% in the beneficial ownership of the Company
within a three-year period (an "Ownership Change"), will place an annual limit
on the Company's ability to utilize its existing NOL carryforwards to offset
taxable income in current and future periods. The Company believes that an
ownership change has occurred and will cause the annual limitations to apply.
The Company has not determined what the maximum annual amount of taxable income
is that can be reduced by the NOL carryforwards.
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 a principal stockholder through a 15% short
term note due on January 2, 1997. In addition the investor received 50,000
warrants at an exercise price equal to the market price at the date of the
grant. The Fairfield facility was closed in January 1997 and is currently being
offered for sale. The Company anticipates that the proceeds of the sale will be
used to repay the short term note which was due January 2, 1997 and is currently
in default.
On August 7, 1996, the Company signed a purchase and sale agreement for
$388,000 for a restaurant location on 86th Street in New York city. Included in
the purchase price was the lease and certain furniture, fixtures and equipment.
This restaurant location was never opened and the Company sold the assets on May
29, 1997 and transferred it's interest in the lease at that location in exchange
for cash of $260,000 and reimbursement of prepaid rent of $29,387. Rattlesnake
remains a guarantor of the lease. A net loss of $306,456, relating to the
selling of the 86th Street location was recorded during the 1997 fiscal year
The Rattlesnake Southwestern Grill Restaurant located in
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<PAGE>
White Plains, New York was closed on March 1, 1997 and sold on July 16, 1997.
The Company sold all of the assets of White Plains except for cash, accounts
receivable and certain items specified in the Asset Purchase Agreement in
exchange for a release from its note payable to the landlord of $276,499 and
receipt of $23,500 note receivable from the purchaser. The facility was sold to
a group which includes the Company's Chairman of the Board. A net loss of
$224,135 relating to the closing of the White Plains location, was recorded in
fiscal 1997.
The Rattlesnake Southwestern Grill Restaurant located in Yorktown Heights,
New York was closed on June 9, 1997 and sold on June 27, 1997. A net loss of
$362,091 relating to the closing of the Yorktown Heights location, was recorded
during fiscal 1997.
On October 10, 1996, a letter of intent was executed with an investment
banking firm to raise $1,500,000-$3,000,000 through a private placement to be
sold on a "best effort" basis. No funds were raised through this arrangement.
On March 4, 1997 the Company entered into a private financing arrangement
to provide $500,000 of convertible subordinated secured debt. The notes are for
a term of 6 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 $.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. The Company has received a demand for
payment of notes due September 4, 1997. The Company is currently negotiating the
refinance of these notes with an outside investor.
On June 2, 1997, the Company executed a letter of intent with an investment
banking firm to raise $2,500,000 of additional capital through a private
placement to be sold on a "best efforts" basis. The acting CO-CEO is affiliated
with the investment banking firm.
On August 21, 1997 the Company signed a Reorganization and Stock Exchange
Agreement (the Agreement) with the Ottomanelli Group, defined as 34th Street
Cafe Associates, Inc., Garden Street Cafe Corporation, Ottomanelli Brothers
West, Ltd. and Ottomanelli's Cafe Franchising Corporation. This agreement
includes Ottomanelli Group contributing one hundred percent of it's stock in
exchange for thirty seven and one-half percent of all outstanding common stock
options warrants and convertible dilutive securities of Rattlesnake. The
agreement is subject to cancellation by either party prior to closing under
specified
27
<PAGE>
terms of the Agreement.
From September 11 through September 29, the Company entered into a private
financing arrangement with four individuals to provide $250,000 of bridge
financing at 10% interest per annum and with a due date of the earlier of the
closing of the proposed private placement or December 31, 1997.
On September 17, 1997 the Company closed it's facility located in Lynbrook,
New York pursuant to fiscal 1997 Board approval, as it was not meeting the
Company's performance standards as part of the Strategic Plan. The Company
recorded a net loss of $374,852 in fiscal 1997 as a result of this closure.
SEASONALITY AND EXTERNAL INFLUENCES ON QUARTERLY RESULTS
The Company's sales and earnings do not reflect a seasonality of the
business. Quarterly results have been and, in the future are likely to be,
substantially affected by the timing of new restaurant openings. Because of the
impact of new restaurant openings, results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year and cannot
be used to indicate financial performance for the entire year.
IMPACT OF ACCOUNTING STANDARDS
In the second quarter of fiscal 1998, the Company is required to adopt
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per share".
This statement establishes standards for computing and presenting earnings per
share (EPS), replacing the presentation of currently required Primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. When SFAS No. 128 is adopted, the
Company will be required to restate its EPS data for all prior periods
presented. The Corporation does not expect the impact of the adoption of this
statement to be material to previously reported EPS amounts.
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements annexed hereto.
28
<PAGE>
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS.
MANAGEMENT
The executive officers and directors of the Company are as follows:
NAME AGE OFFICE
William J. Opper 54 Chairman of the Board
Stephen A. Stein 45 Co-Acting Chief Executive Officer and Director
Louis R. Malikow 50 Co-Acting Chief Executive
Officer and Director
Roger Rankin 52 Director
William J. Opper, has served as Chairman of the Board of the Company since
its inception and he had served as Chief executive Officer from inception to
March 1997. He had also served as President of each of its subsidiaries from
June 1992 through March 1997. Mr Opper is a member of a group of investors that
has acquired the facility formerly known as Rattlesnake White Plains. From 1986
through 1991, Mr. Opper served as Senior Partner of Atlantic Professional
Resources, Inc., a management and marketing consulting firm serving the
restaurant, food service and hospitality industries. From 1981 to 1986, Mr.
Opper was Vice President of Marketing for NCI Foodservice, Inc., where he
developed marketing programs. Previously, Mr. Opper was the principal owner of
eight full service restaurants. Mr. Opper graduated St. Bonaventure University
with a Bachelor of Arts degree in History.
Stephen A. Stein, joined the Company as a Director in November 1994 and
served as Vice Chairman and Chief Administrative Officer from December 1995 to
March 1997. From March 1, 1997 to date Mr. Stein is serving as the Company's
Co-Acting Chief Executive Officer. From March 1997, to date Mr. Stein has been a
Managing Director of the Corporate Finance Department at Commonwealth
Associates, a New York City based investment bank. On June 2, 1997, the Company
executed a letter of intent with Commonwealth Associates to raise additional
29
<PAGE>
capital through a private placement to be sold on a "best efforts" basis. The
Company has signed a From 1983 to 1995, Mr. Stein was a principal and the
President of David's Cookies, Inc. (or its predecessors), a
manufacturer/distributor with a chain of retail specialty food stores and
franchise outlets with locations worldwide. From 1990 to the present, Mr. Stein
has owned and operated a food management consulting firm, SAS Ventures, Inc. Mr.
Stein is also a former practicing attorney and a graduate of Ohio State
University and Vermont Law School.
Louis R. Malikow, has served as Secretary and Director of the Company since
September 1993 and as Co-Acting Chief Executive Officer since May 29, 1997. Mr.
Malikow has served as Principal Accounting Officer since October 1, 1997. Mr.
Malikow is an attorney and the proprietor of Louis R. Malikow Associates, a tax
and financial consulting firm which he founded in 1990. From 1975 to 1990, Mr.
Malikow served as Vice President of The Ayco Corporation, Inc. a tax and
financial consulting firm. He is a graduate of Syracuse University School of
Management with a degree in Corporate Finance and is also a graduate of The
Albany Law School.
Roger Rankin, joined the Company as a Director in November 1994. From 1991
to present Mr. Rankin is active as a private investor. From 1986 to 1991, Mr.
Rankin served as Chairman and Chief Executive Officer of Top Source
Technologies, Inc., a publicly traded (American Stock Exchange) manufacturing
company in the automotive industry. From 1976 to 1984, Mr. Rankin was the
principal owner and operator of Rankin Distributing, a company with
wholesale/retail stores selling automotive stereo equipment.
A Vice President of Finance was hired on October 16,1997.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The number of directors comprising the entire Board of Directors is such
number as determined in accordance with the By-Laws of the Company. The
Company's By-Laws provide that the number of directors shall be not less than
three nor more than eleven. The Company's Certificate of Incorporation provides
for a classified or "staggered" Board of Directors. The classified or
"staggered" Board of Directors is comprised of three classes of directors
elected for initial terms expiring at the 1995, 1996 and 1997 Annual Meeting of
Stockholders. Thereafter, each class is elected for a term of three years. By
reason of the classified Board of Directors, one class of the Board comes up for
re-election each year. Any further amendment to the Company's Certificate of
Incorporation affecting the classified Board may only be adopted upon the
affirmative vote of not less than 75% of the issued and outstanding shares
entitled to vote thereon. Officers serve at the discretion of the Board of
Directors of the
30
<PAGE>
Company. There are no family relationships among any of the officers or
directors. The underwriting agreement in connection with the Public Offering
granted the underwriter, Auerbach, Pollak & Richardson, Inc., the right to
designate an observer to the Board of Directors for a period of five years.
Mr. Opper was elected as Class 1 Directors to serve for a term of three
years until the 1997 Annual Meeting of Stockholders; Mr. Malikow was elected as
Class 2 Director to serve for a term of two years until the 1996 Annual Meeting
of Stockholders; and Messrs. Stein and Rankin were each elected as Class 3
Directors to serve for a term of one year until the Company's 1995 Annual
Meeting of Stockholders. During the Company's 1995 Annual Meeting of
Stockholders, Messrs. Stein and Rankin were re-elected for a three year term to
the Board of Directors. Thereafter, each class of directors standing for
re-election shall be elected for a term of three years. There has not been a
1996 Annual Shareholders Meeting.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has standing Audit, Compensation and Executive
Committees.
Audit Committee. The members of the Audit Committee are Roger Rankin, and
Louis R. Malikow. The Audit Committee reviews: (i) the Corporation's audit
functions; (ii) with management, the finances, financial condition and interim
financial statements of the Corporation; (iii) with the Corporation's
independent auditors, the year-end financial statements; and (iv) the
implementation of any action recommended by the independent auditors. The Audit
Committee of the Board of Directors met once during fiscal 1997.
Executive Committee. The Executive Committee has all of the powers of the
Board of Directors except it may not, among other things: (i) amend the
Certificate of Incorporation or Bylaws; (ii) enter into agreements to borrow
money in excess of $100,000; (iii) grant security interests to secure
obligations of more than $100,000; (iv) authorize private placements or public
offerings of the Company's securities; (v) authorize the acquisition of any
major assets or business or change the business of the Corporation; or (vi)
authorize the employment of any independent contractor for compensation in
excess of $50,000. The Executive Committee of the Board of Directors met several
times during fiscal 1997.
Compensation Committee. The only member of the Compensation Committee is
Roger Rankin. The Compensation Committee administers the Corporation's 1994
Stock Option Plan and Non-Employee Director Stock Option Plan and negotiates and
reviews of all employment agreements of executive officers of the
31
<PAGE>
Corporation.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended June 29, 1997, the Board of Directors of the
Company met on 9 occasions and voted by unanimous written consent on 9
occasions. No member of the Board of Directors attended less than 75% of the
aggregate number of (i) the total number of meetings of the Board of Directors
or (ii) the total number of meetings held by all Committees of the Board of
Directors.
CERTAIN REPORTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors and officers, and persons who own, directly or
indirectly, more than 10% of a registered class of the Corporation's equity
securities, to file with the Securities and Exchange Commission ("SEC") reports
of ownership and reports of changes in ownership of common stock and other
equity securities of the Company. Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms that they file. Based solely on review of the copies
of such reports received by the Company, the Company believes that all Section
16(a) filing requirements applicable to officers, directors and 10% shareholders
were complied with during the 1997 fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and Non-Plan
(as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded to,
earned by, paid by the Company during the periods ended June 29, 1997, June 30,
1996, and 1995 for each of the named executive officers of the Company.
32
<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Long Term Compensation Awards
- -----------------------------------------------------------------------------------------------------------------
Other No. of Securities
Name and Fiscal Annual Underlying
Principal Year Salary Bonus(2) Compensation Restricted Stock Options
Position (3) Awards Granted
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William J. 1997 $93,500 $0 $0 0(8)
Opper 1996 $90,000 $0 $20,000 (4) 150,000(5)
Chairman, 1995(1) $85,000 $0 $0 (4) 0
Former CEO
- -----------------------------------------------------------------------------------------------------------------
Stephan A. 1997 $86,250 $0 $0 (4) 125,000(7)
Stein 1996 $72,500 $0 $10,000 (4) 120,000(6)
Former Vice 1995 $0 $0 $0 (4) 0
Chairman and
Chief
Administrative
Officer
Acting Co-CEO
- -----------------------------------------------------------------------------------------------------------------
David C. 1997 $93,500 $0 $0 0(10)
Sederholt 1996 $90,000 $0 $20,000 (4) 150,000(5)
Former 1995(1) $85,000 $0 $0 (4) 0
President
- -----------------------------------------------------------------------------------------------------------------
Peter C. 1997 $88,000 $0 $0 0(9)
Markatos 1996 $84,600 $0 $20,000 (4) 200,000(5)
Former 1995(1) $80,000 $0 $0 (4) 0
Executive
Vice President
- -----------------------------------------------------------------------------------------------------------------
Louis R. 1997 $5,000 $0 $0 0 100,000(11)
Malikow
Acting Co-CEO
Acting
Principal
Accounting
Officer
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Commencing July 1, 1994, the salaries of Messrs. Opper, Sederholt and
Markatos were increased to $85,000, $85,000 and $80,000 per year,
respectively. In December 1994, these three executives entered into
employment agreements with the company which continued the salaries for the
next year. See "Employment Agreements" below. On March 15, 1997 Mr. Opper
signed an agreement with the Company resigning his position as Chief
Executive Officer terminating the previous December 1, 1994 employment
agreement including any and all oral agreements relating to his employment.
On June 2, 1997 Mr. Markatos signed an agreement with the Company resigning
his position as Executive Vice
33
<PAGE>
President terminating the previous December 1, 1994 employment agreement
including any and all oral agreements relating to his employment. On July
25, 1997 Mr. Sederholt signed an agreement with the Company resigning his
position as President and terminating the previous December 1, 1994
employment agreement including any and all oral agreements relating to his
employment.
(2) Pursuant to the terms of their employment agreements dated December 1, 1994
Messrs. Opper, Sederholt and Markatos are to receive a cash bonus each year
during the term of their agreements equal to 4%, 3% and 3%, respectively,
of the earnings before interest and taxes of the Company, as defined
("EBIT") up to $1,000,000, 3%, 2.25% and 2.25% of EBIT in excess of
$1,000,000 up to $2,000,000, and 2%, 1.5% and 1.5% of EBIT in excess of
$2,000,000, contingent on the Company achieving at least $500,000 in EBIT.
See "Employment Agreements."
(3) Pursuant to the terms of their employment agreements, Messrs. Opper, Stein,
Sederholt and Markatos may receive additional compensation as determined
from time to time by the Board of Directors. During fiscal year 1996, the
Board of Directors approved the above additional compensation to its
executive officers.
(4) No restricted stock awards were granted in fiscal 1997; however, Messrs.
Opper, Sederholt and Markatos owned 283,361, 144,158 and 0, respectively,
restricted shares of the Company's Common Stock as of June 29, 1997, the
market value of which was $252,303, $126,130 and 0, respectively.
(5) In December 1994, pursuant to the terms of their employment agreements,
Messrs. Opper, Sederholt and Markatos, respectively, were granted options
to purchase an aggregate of 150,000, 150,000 and 200,000 shares of the
Company's Common Stock, respectively exercisable at $4.50 per share,
vesting at one-third each year commencing December 1, 1995. See "Employment
Agreements." At the date of Messrs. Opper, Sederholt and Markatos'
separation these original options were terminated and equivalent options
were issued to Mr. Opper at an exercise price of $2.00 and equivalent
warrants were issued to Mr. Sederholt at a price of $ 7/16 and Mr. Markatos
at an exercise price of $ 1/4.
(6) In December 1995, pursuant to the terms of Mr. Stein's employment
agreement, 120,000 options were granted to purchase shares of common stock
at an exercise price of $5.25 per share, vesting one-third each year.
(7) On March 15, 1997 Mr. Stein amended his employment agreement and received
an option to purchase 125,000 shares of the Company's Common stock at an
exercise price of $1-1/16. The agreement also includes that in the event
the stock options are repriced for any employee, the existing stock option
grants for Mr. Stein will be repriced at the same time as any repricing and
under the same terms and conditions. No adjustments have been made to the
exercise price of Mr. Stein's
34
<PAGE>
outstanding options. See "Employment Agreements" below.
(8) On March 15, 1997 Mr. Opper signed an agreement with the Company resigning
his position as Chief Executive Officer terminating the previous December
1, 1994 employment agreement including any and all oral agreements relating
to his employment. In connection with this agreement, Mr. Opper's employee
stock options shall be immediately vested and shall be amended to
constitute non-qualified employee stock options and the strike price is
reduced to an exercise price of $2.00.
(9) On June 2, 1997 Mr. Markatos signed an agreement with the Company resigning
his position as Executive Vice President terminating the previous December
1, 1994 employment agreement including any and all oral agreements relating
to his employment.
(10) On July 25, 1997 Mr. Sederholt signed an agreement with the Company
resigning his position as President and terminating the previous December
1, 1994 employment agreement including any and all oral agreements relating
to his employment.
(11) On May 29, 1997, Mr. Malikow signed an agreement with the Company accepting
the position of acting Co-CEO for up to 150 days. This agreement included
five months compensation at $5,000 per month plus expenses, and the grant
of 100,000 warrants at the then current price $.3125.
STOCK OPTIONS
The following table sets forth certain information concerning the grant of
stock options made as of the last fiscal year under the Company's 1994 Employees
Stock Option Plan to each of the named executive officers of the Company and
non-executive employees as a group.
OPTION/SAR GRANTS
(Individual Grants)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
No. of Securities
Underlying Percentage of Total Exercise of
Name Options Granted Options/Fiscal Year Base Price Expiration Date
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephan A. Stein 125,000 43% $1-1/16 03/01/02
- -------------------------------------------------------------------------------------------------
Non-Executive 165,000 57% $0.38-$5.25 11/27/00-5/28/02
Employees
- -------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
The following table contains information with respect to the named
executive officers concerning options held as of the last fiscal year.
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND
FY-END OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Aggregated Option/SAR Exercises
In Last Fiscal Year and FY-End
Options/SAR Values
- -----------------------------------------------------------------------------------------------------------
Shares Value Realized Number of Unexercised Value of Unexercised
Acquired on Options as of June 29, In-the-Money Options
Name Exercise 1997 Exercisable/ at June 29, 1997(1)
Unexercisable Exercisable/
Unexercisable
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William J. Opper 0 -- 150,000/150,000 $0/0
- -----------------------------------------------------------------------------------------------------------
Stephan A. Stein 0 -- 205,000/285,000 $0/0
- -----------------------------------------------------------------------------------------------------------
David C. Sederholt 0 -- 100,000/150,000 $0/0
- -----------------------------------------------------------------------------------------------------------
Peter C. Markatos 0 -- 120,000/120,000 $0/0
- -----------------------------------------------------------------------------------------------------------
Louis R. Malikow 0 __ 55,000/55,000 $0/0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
1. Market value at June 29, 1997 was $ 7/8 per share.
EMPLOYMENT AGREEMENTS
The Company entered into three-year employment agreements with the
Company's Chairman of the Board and Chief Executive Officer, William J. Opper;
the Company's President and Chief Operating Officer, David C.
36
<PAGE>
Sederholt and the Executive Vice President, Peter Markatos, in December 1994.
The employment agreements provide for (i) annual compensation of $85,000,
$85,000 and $80,000, respectively for the first year of the agreements,
increasing by 10% in each of the second and third years; (ii) a bonus of 4%, 3%
and 3%, respectively, of the Company's earnings before interest and taxes
("EBIT") up to $1,000,000 (as defined in the agreement), 3%, 2.25% and 2.25%,
respectively of the amount of EBIT in excess of $1,000,000 up to $2,000,000 and
2%, 1.5% and 1.5%, respectively, of the EBIT in excess of $2,000,000, providing
the Company achieves at least $500,000 in EBIT, with such additional bonuses as
may be awarded in the discretion of the Board of Directors; (iii) the award of
non-qualified stock options to purchase 150,000, 150,000 and 200,000 shares of
Common Stock, respectively at an exercise price of $4.50 per share (iv) certain
insurance and severance benefits and (v) automobile expenses. Messrs. Opper,
Sederholt and Markatos signed separation agreements with the Company terminating
their rights under the December 1994 Employment Agreements. See "Severance
Agreements" below.
In December 1995, the Company entered into a three year employment
agreement with Stephen A. Stein, the Company's Vice-Chairman and Chief
Administrative Officer. The agreement provides for a base salary of $90,000 per
year increasing 10% per annum plus a bonus to be determined by the Board of
Directors. The agreement also granted Mr. Stein 120,000 five year employee stock
options exercisable at $5.25 per share as well as certain insurance and
severance benefits and automobile expense payment. On March 15, 1997 Mr. Stein
signed an agreement with the Company which amended the December 1995 employment
agreement. Under the new agreement, Mr. Stein resigned his position as Vice
Chairman & Chief Administrative Officer and accepted the position of Acting
Chief Executive Officer. This agreement waives any base rate or annual rate
increases per the previous agreement and modified the term to March 1, 1997
through February 28, 1999. Services are provided on a part-time consulting basis
as needed for New Business Development Services. The compensation for the period
March 1, 1997 through February 28, 1999 will be $75,000 plus benefits annually,
payable as an independent contractor. This agreement also included the grant of
an option to purchase 125,000 shares of stock at the closing price on the date
of this agreement ($1.0625). The agreement also includes that in the event the
stock options are repriced for any employee, the existing stock option grants
for Mr. Stein will be repriced at the same time as any repricing and under the
same terms and conditions.
On May 29, 1997, Mr. Malikow signed an agreement with the Company accepting
the position of acting Co-CEO for up to 150 days. This agreement included five
months compensation at $5,000 per month plus expenses, and the grant of 100,000
warrants at the then current price ($.3125).
The Non-Executive Directors will receive options under the Non- Executive
Director Stock Option Plan to purchase 25,000 shares of Common Stock upon
joining the Board and options to purchase 15,000 shares each year they serve on
the Board. The directors will be reimbursed for expenses incurred in order to
attend meetings of the Board of Directors and have waived receiving a meeting
fee.
37
<PAGE>
SEVERANCE AGREEMENTS
On March 15, 1997 Mr. Opper signed an agreement with the Company resigning
his position as Chief Executive Officer terminating the previous December 1,
1994 employment agreement including any and all oral agreements relating to his
employment. The agreement included payments for expense reimbursement, accrued
and unused vacation, medical, dental and life insurance and severance payments,
all unpaid amounts are accrued in the June 29, 1997 financials. In connection
with this agreement, Mr. Opper's employee stock options shall be immediately
vested and shall be amended to constitute non-qualified employee stock options
and the strike price is reduced to an exercise price of $2.00.
On June 2, 1997 Mr. Markatos signed an agreement with the Company resigning
his position as Executive Vice President terminating the previous December 1,
1994 employment agreement including any and all oral agreements relating to his
employment. The agreement included payments for expense reimbursement, accrued
and unused vacation, medical, dental and life insurance and severance payments,
all unpaid amounts are accrued in the June 29, 1997 financials. In connection
with this agreement, Mr. Markatos' stock options are hereby replaced by a
warrant to purchase up to 200,000 shares of common stock exercisable at the
closing bid price on the date of this agreement ($.25).
On July 25, 1997 Mr. Sederholt signed an agreement with the Company
resigning his position as President and terminating the previous December 1,
1994 employment agreement including any and all oral agreements relating to his
employment. The agreement included payments for expense reimbursement and the
continued use of a company leased vehicle, with the Company obligated to pay the
lease payment only, accrued and unused vacation, medical, dental and life
insurance and severance payments. In connection with this agreement, Mr.
Sederholt's stock options were replaced by a warrant to purchase up to 150,000
shares of common stock exercisable at the closing bid price on July 18, 1997
($.4375).
STOCK OPTION PLANS
In December 1994, the Company adopted the 1994 Employees Stock Option Plan
(the "Plan"). The Plan provides for the grant of options to purchase up to
1,000,000 shares of the Company's Common Stock. Under the terms of the Plan,
options granted thereunder may be designated as options which qualify for
incentive stock option treatment ("ISOs") under Section 422A of the Code, or
options which do not so qualify ("Non-ISOs").
The Plan is administered by the Board of Directors or by a Stock Option
Committee designated by the Board of Directors. The Board or the Stock Option
Committee has the discretion to determine the eligible employees to whom, and
the times and the price at which, options will be granted. Whether such options
shall be ISOs or Non-ISOs; the periods during which each option will be
exercisable; and the number of shares subject to each option, shall be
determined by the Board or Committee. The Board or
38
<PAGE>
Committee shall have full authority to interpret the Plan and to establish and
amend rules and regulations relating thereto.
Under the Plan, the exercise price of an option designated as an ISO shall
not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the Plan) such exercise
price shall be at least 110% of such fair market value. Exercise prices of
Non-ISOs options may be less than such fair market value. The aggregate fair
market value of shares subject to options granted to a participant which are
designated as ISOs which become exercisable in any calendar year shall not
exceed $100,000. The "fair market value" will be the closing NASDAQ bid price,
or if the Company's Common Stock is not quoted by NASDAQ, as reported by the
National Quotation Bureau, Inc., or a market maker of the Company's Common
Stock, or if the Common Stock is not quoted by any of the above, by the Board of
Directors acting in good faith.
The Board or the Stock Option Committee, as the case may be, may, in its
sole discretion, grant bonuses or authorize loans to or guarantee loans obtained
by an optionee to enable such optionee to pay any taxes that may arise in
connection with the exercise or cancellation of an option.
Unless sooner terminated, the Plan will expire in November, 2004.
The Plan is currently administered by the Board of Directors, although the
Board may designate a Stock Option Committee to administer the Plan, comprised
of three individuals at least two of whom shall be Directors.
In December 1994, the Company adopted the Non-Executive Director Stock
Option Plan (the "Director Plan"). The Director Plan provides for issuance of a
maximum of 500,000 shares of the Company's Common Stock upon the exercise of
stock options granted under the Director Plan. Options are granted under the
Director Plan until December 2004 to (i) non-executive directors as defined and
(ii) members of any advisory board established by the Company who are not full
time employees of the Company or any of its subsidiaries. The Director Plan
provides that each non-executive director will automatically be granted an
option to purchase 25,000 shares upon joining the Board of Directors, and on
each December 1st thereafter each non-executive director will automatically be
granted an option to purchase 15,000 shares, provided such person has served as
a director for the 12 months immediately prior to such December 1st.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the Common Stock on the date of grant. The
"fair market value" will be the closing NASDAQ bid price, or if the Company's
Common Stock is not quoted by NASDAQ, as reported by the National Quotation
Bureau, Inc., or a market maker of the Company's Common Stock, or if the Common
Stock is not quoted by any of the above by the Board of Directors acting in good
faith. Until otherwise provided in the Stock Option Plan the exercise price of
options granted under the Director Plan must be paid at the time of exercise,
either in cash, by delivery of
39
<PAGE>
shares of common Stock of the Company or by a combination of each. The term of
each option commences on the date it is granted and unless terminated sooner as
provided in the Director Plan, expires five years from the date of grant. The
Director Plan is administered by a committee of the Board of Directors composed
of not fewer than three persons who are officers of the Company (the
"Committee"). The Committee has no discretion to determine which non-executive
director or advisory board member will receive options or the number of shares
subject to the option, the term of the option or the exercisability of the
option. However, the Committee will make all determinations of the
interpretation of the Director Plan. Options granted under the Director Plan are
not qualified for incentive stock option treatment.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as October, 1997, with respect
to the Company's Common Stock owned by each person known to the Company to be
the beneficial owner of more than five percent (5%) of the Company's Common
Stock, each director and all officers and directors as a group.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Name Position with Company Amount and Nature Percentage of Class
of Beneficial
Ownership(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William J. Opper Chairman of the Board 433,361 (2) 15.5%
The Rattlesnake Holding
Company, Inc.
3 Stamford Landing
Suite 130
Stamford, CT 06902
- -----------------------------------------------------------------------------------------------------------
Stephan A. Stein Acting Co-Chief Executive 205,000 (3) 7.2%
The Rattlesnake Holding Officer and Director
Company, Inc.
3 Stamford Landing
Suite 130
Stamford, CT 06902
- -----------------------------------------------------------------------------------------------------------
David C. Sederholt Stockholder 294,158 (4) 10.5%
- -----------------------------------------------------------------------------------------------------------
Peter C. Markatos Stockholder 200,000 (5) 7.0%
- -----------------------------------------------------------------------------------------------------------
Donald M. Zuckert Stockholder 163,252 (6) 6.0%
- -----------------------------------------------------------------------------------------------------------
Louis R. Malikow Secretary, Director and 191,517 (7) 6.8%
Louis R. Malikow Associates Acting Co-Chief Executive
679 Plank Road Officer
- -----------------------------------------------------------------------------------------------------------
Clifton Park, New York 12065
- -----------------------------------------------------------------------------------------------------------
Roger Rankin Director 203,434 (8) 7.3%
17561 S.E. Conch Bar Ave.
Tequesta, FL 33463
- -----------------------------------------------------------------------------------------------------------
Guy B. Snowden Stockholder
4080 Ibis Point Circle 272,422 (9) 10.0%
Boca Raton, Fl 33431
- -----------------------------------------------------------------------------------------------------------
All Officers and Directors as a 1,690,722 49.8%
Group (7 persons)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
- ----------
(1) Each person listed has sole voting and investment power over the shares
listed as beneficially owned unless otherwise indicated.
(2) Includes 150,000 vested options to purchase shares of Common Stock.
(3) Includes options to purchase 40,000 shares of Common Stock. Does not
include non-vested options to purchase 80,000 shares of Common Stock.
(4) Includes warrants to purchase 150,000 shares of Common Stock.
(5) Does not include 36,084 shares held by the mother of Mr. Markatos. Does
include 200,000 warrants to purchase shares of Common Stock.
(6) Includes options to purchase 55,000 shares of Common Stock.
(7) Includes (i) options to purchase 55,000 shares; (ii) 100,000 shares
issuable upon exercise of a warrant.
(8) Includes (i) options to purchase 55,000 shares; (ii) 77,000 shares issuable
upon exercise of a warrant, and 15,151 shares issuable upon conversion of a
convertible Note, and 50,000 warrants issuable in conjunction with a bridge
financing in September 1997.
(9) Includes (i) 27,671 shares held in five trusts established for each of Mr.
Snowden's children, (ii) 36,500 shares issuable upon exercise of a warrant,
(iii) 50,000 warrants issued to Mr. Snowden's children July 1, 1996 and
(iv)50,000 warrants issuable in conjunction with a bridge financing in
September 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1992, William J. Opper, the Chairman of the Board and former CEO,
loaned the Company $100,000 on a five-year note at an interest rate of 9% per
annum. This note was subsequently paid in full in July
41
<PAGE>
1995. Mr. Opper's brother privately purchased an aggregate of $95,000 principal
amount of 12% convertible promissory notes which were converted to common stock
and warrants to purchase 34,675 shares from Donald M. Zuckert. On July 16, 1997
the Company sold all of the assets of the Rattlesnake Southwestern Grill
restaurant located in White Plains, New York to a group of individuals of which
William J. Opper , the Company's Chairman was a member. Mr. Opper disclaims any
beneficial interest from this transaction. Mr. Opper disclaims any beneficial
interest in this transaction.
In January 1994, David Sederholt, the Company's former President and Chief
Operating Officer, loaned the Company $22,300 on a note payable in two years at
an interest rate of 9% per annum. This note was subsequently paid in full in
August 1995. In June 1994, Mr. Sederholt's mother-in-law loaned the Company
$10,000 on a note payable on demand at an interest rate of 12% per annum. This
note was subsequently paid in full in August 1995.
In June 1994, in connection with the acquisition of the Yorktown Heights
facility, the Company purchased all of the shares of PEN-Z Corp. Inc. from Penny
Markatos, the mother of Peter Markatos, the Company's former Executive
Vice-President, for a $300,000 note payable monthly through May 2009 at an
interest rate of prime plus 1% and Mrs. Markatos received 36,084 shares of
Common Stock and a trust of which Mrs. Markatos is Trustee, sold the furniture
and equipment in the Yorktown Heights location to the Company for $100,000
payable on a note due monthly through April 2009 at an interest rate of prime
plus 1%. The Yorktown Heights facility was sold on June 27, 1997 and the Company
was relieved of these related notes. Peter Markatos disclaimed any beneficial
interest of any transaction involving his mother.
On May 29, 1997, Louis R. Malikow, Secretary and a Director of the Company
agreed to act as Co-CEO for a period not to exceed 150 days. Mr. Malikow will be
paid $5,000 per month plus expenses incurred while acting on the Company's
behalf in this capacity. In addition, Mr. Malikow has been granted warrants to
purchase 100,000 shares of the Company stock at $.3125, the mean price of the
stock on May 29, 1997. 50,000 of the warrants vested May 29, 1997 with the
remaining 50,000 vesting on November 29, 1997.
In September 1997 Roger Rankin, a Director of the Company, loaned the
Company $50,000 as part of a bridge financing at 10% interest per annum and with
a due date of the earlier of the closing of the proposed private placement or
December 31, 1997.
Guy Snowden, a principal stockholder of the Company, loaned the Company
$52,500 pursuant to a demand note at 15% interest per annum. This note was
subsequently paid in full August 1995. Mr. Snowden in December 1994 purchased
$100,000 principal amount of 12% convertible promissory notes, convertible at
$4.00 per share, and warrants to purchase 36,500 shares of the Company's common
stock at an exercise price of $4.50. The note was converted into 25,000 shares
of Rattlesnake Common stock. In
42
<PAGE>
August 1996, Mr. Snowden loaned the Company $425,000 to finance the purchase of
the Fairfield location. This First Mortgage note is at 15% and is due January
1997. As additional consideration Mr. Snowden received 50,000 warrants at the
market price at the date of grant. In September 1997, Mr. Snowden loaned the
Company $50,000 as part of a bridge financing at 10% interest per annum and with
a due date of the earlier of the closing of the proposed private placement or
December 31, 1997.
Stephen A. Stein, the Company's acting Co-CEO and director and former
Vice-Chairman, has provided, and expects to continue to provide, investment
banking services for Commonwealth Associates. The Company has engaged, and in
the future may continue to engage, Commonwealth Associates to provide advisory
and/or financing activities. Mr. Stein disclaims any beneficial interest in any
transaction or activity involving the Company and Commonwealth Associates.
Except as provided herein, the Company has not entered into any material
transactions or series of similar transactions with any director, executive
officer or any security holder owning 5% or more of the Company's Common Stock.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statement Schedules
None
(b) Reports on Form 8-K
During the quarter ended June 29, 1997 the Company filed no reports on Form
8-K.
(c) Exhibits
The following exhibits, designated by an asterisk (*), have been previously
filed with the Commission with the Company's registration on Form SB-2 (File No.
33-88486) and those designated with two asterisks have been filed with the
Company's 10KSB for the year ended June 30, 1995, and those with three asterisks
(***) have been filed with the Company's 10KSB for the year ended June 30, 1996,
and, pursuant to 17 C.F.R. Section 230.411, are incorporated by reference. Those
not so designated are filed herewith. The following exhibits, designated by a
dagger (+), will be filed by Amendment.
Exhibit No. Description
2.1* Merger Agreement dated August 31, 1993 by and between
Rattlesnake Ventures, Inc. and the Registrant
3.1* Form of Restated Certificate of Incorporation of the
Registrant
43
<PAGE>
3.1.1*** Designation of Preferred Stock
3.2* By-Laws
4.1* Form of Common Stock Certificate
4.2* Form of Warrant to be issued to the Underwriter
4.3* Form of Warrant issued to certain individuals in December
1994
10.1* Lease agreement dated May 12, 1992 between the Registrant
and South Norwalk Redevelopment Limited Partnership for
the South Norwalk facilities
10.1.1* Agreement between Breakaway Sono Inc. and the Registrant
for the purchase of certain equipment
10.1.2* Note dated June 11, 1992 from the Registrant to Breakaway
Sono, Inc.
10.2* Lease Agreement dated April 1, 1994 between Sivad Inc.
and the Registrant for the Fairfield facilities
10.2.1* Purchase Money Leasehold Mortgage between the Registrant
and Sivad Inc.
10.3* Common Stock Purchase Agreement between the Registrant
and Penny Markatos dated November 1, 1993
10.3.1* Lease Agreement between Penny Markatos and PEN-Z Corp.
dated April 1, 1994
10.4* Lease Agreement dated March 15, 1993 between the
Registrant and Elm City Manufacturing Jewelers Inc. for
the Hamden facilities
10.4.1* Sale Agreement dated August 31, 1993 between the
Registrant and Hamden Entertainment Inc.
10.4.2* Amendment of Promissory Note Agreement dated February 28,
1994
10.4.3* Amendment to Commitment Agreement dated October 31, 1994
between the Registrant and Hamden Entertainment Inc.
10.4.4* Amendment to Promissory Note dated April, 1995
10.5* Lease Agreement dated January 24, 1995 for Danbury
facility
44
<PAGE>
10.6* License Agreement with RC Holdings, Inc. dated April,
1995
10.7* Form of Employment agreement with William J. Opper dated
December 1994
10.8* Form of Employment agreement with David Sederholt dated
December 1994
10.9* Form of Employment Agreement with Peter Markatos dated
December 1994
10.10* 1994 Employee Stock Option Plan
10.11* 1994 Nonexecutive Directors Stock Option Plan
10.12* Form of 12% Convertible Note
10.12.1* Form of Extension Agreement between the Company and the
holders of the 12% Convertible Notes
10.13* Form of Warrant issued to holders of 12% Convertible Note
10.14* Note dated May 8, 1992 from the Registrant to William J.
Opper
10.15* Agreement with Berkeley Securities Corporation providing
for the cancellation of certain shares
10.16* Proposed Debt Restructure
10.16.1* Series A Note
10.16.2* Series B Note
10.17* Agreement with 1241 Mamaroneck Avenue Corp.
10.17.1* Form of Proposed Lease for 1241 Mamaroneck Avenue
10.17.2* Note Extension Agreement
10.18* Form of Consulting Agreement to be entered into with
Auerbach, Pollak & Richardson, Inc.
10.19* Letter of intent with Steve Kalafer for the Flemington
facility
10.20* Form of 12% Convertible Promissory Note
10.21** Lease Agreement dated September 12, 1995 with SBX
investments, Inc.
45
<PAGE>
10.21.1** Asset Purchase Agreement dated September 12, 1995 with
Twinlittle, Inc. and Twinlittle II, Inc.
10.21.2** $100,000 principal amount of promissory note to SBX
Investments, Inc.
10.22*** Employment Agreement with Stephen A. Stein
10.23*** Lease Agreement with Jack Cioffi Trust ULWT dated April
15, 1996 together with Exhibits
10.24*** Form of Series C Note
10.25*** Note Agreement with Guy B. Snowden
10.26*** Option and Escrow Agreement dated August 1996 between CFT
Restaurant, Land and Building Group, Rattlesnake of
Milford, Inc. et al., together with Asset Sale/Purchase
Agreement and related Exhibits thereto
10.27*** First Amendment and Restated Lease between Land and
Building Group and Rattlesnake of Milford, Inc.
10.28*** Form of Consulting Agreement among Frank Tummunello,
Charter Tummunello, Thomas Dunn and Rattlesnake of
Milford, Inc.
10.29*** Agreement of Sale dated August 6, 1996 between Kings
Castle Caterers Inc. and Rattlesnake of Bay Ridge, Inc.
and certain exhibits
10.30*** Assignment and Assumption Agreement dated August 23, 1994
between Holy Cow Restaurant Associates, Inc. and
Rattlesnake of 86th Street, Inc.
11.1+ Securities Purchase Agreement and Warrant between David
and Janet Coyle and Rattlesnake Holding Company, Inc.
11.2+ Commonwealth Underwriting Agreement
11.3+ Convertible Subordinated Secured 18% Promissory Note
dated March 4, 1997, in favor of J.L.B. of Nevada, Inc.
11.4+ Convertible Subordinated Secured 18% Promissory Note
dated March 4, 1997, in favor of Michael Lauer.
11.5+ Agreement of Sale dated July 16, 1997 between Cattleman
Associates LLC and Rattlesnake White Plains, Inc. and
certain exhibits.
46
<PAGE>
11.6+ Agreement of Sale dated May 29, 1997 between Cobra
Restaurants Inc. and Rattlesnake of 86th Street, Inc. and
certain exhibits
11.7+ Agreement of Sale dated June 27, 1997 between Anika
Restaurant, Inc. and Penn Z. Corp., a wholly owned
subsidiary of Rattlesnake Holding Company, and certain
exhibits
11.8+ Reorganization and Stock Exchange Agreement among The
Rattlesnake Holding Company, Inc. and Ottomanelli
Brothers west, Ltd., Ottomanelli's Cafe Franchising
Corp., 34th St. Cafe Associates Inc., Garden state Cafe
Corp.
11.9+ Revised Employment Agreement with Stephen A. Stein
11.10+ Employment Agreement with Louis R. Malikow
11.11+ William J. Opper Severance Agreement
11.12+ David C. Sederholt Severance Agreement
11.13+ Peter C. Markatos Severance Agreement
11.14+ Subscription Agreement, Warrant and Promissory Note
between JT Partners and Rattlesnake Holding Company, Inc.
11.15+ Subscription Agreement, Warrant and Promissory Note
between Don Winton and Rattlesnake Holding Company, Inc.
11.16+ Subscription Agreement, Warrant and Promissory Note
between Roger Rankin and Rattlesnake Holding Company,
Inc.
11.17+ Subscription Agreement between Guy B. Snowden and
Rattlesnake Holding Company, Inc.
11.18+ Series C Noteholder Extension Agreement between Joseph
Mandarino and Rattlesnake Holding Company, Inc.
11.19+ Series C Noteholder Extension Agreement between Dr.
George Jordan and Rattlesnake Holding Company, Inc.
11.20+ Series C Noteholder Extension Agreement between Fred
Meyers and Rattlesnake Holding Company, Inc.
11.21+ The Ottomanelli Group combined Financial Statements
December 31, 1996 and 1995 (With Independent Auditors'
Report Thereon)
22*** Subsidiary List
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:/S William J. Opper
-----------------------------
William J. Opper
Chairman of the Board
Dated: October 31, 1997
Pursuant to the requirements of the Securities Act of 1933, this Report has
been signed below by the following persons in the capacities and on the dates
indicated:
Signature Capacity Date
/S William J. Opper Chairman of the Board October 31, 1997
- --------------------
William J. Opper
/S Louis R. Malikow Secretary and Director October 31, 1997
- -------------------- Co-Chief Executive Officer
Louis R. Malikow (Acting) Principal
Accounting Officer (Acting)
/S Stephan A. Stein Director October 31, 1997
- -------------------- Co-Chief Executive Officer
Stephan A. Stein (Acting)
/S Roger Rankin Director October 31, 1997
- --------------------
Roger Rankin
48
<PAGE>
THE RATTLESNAKE HOLDING
COMPANY, INC. AND SUBSIDIARIES
Consolidated Financial Statements
June 29, 1997, June 30, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
The Rattlesnake Holding Company, Inc.
We have audited the accompanying consolidated balance sheets of The Rattlesnake
Holding Company, Inc. and subsidiaries as of June 29, 1997 and June 30, 1996 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years ended June 29, 1997, June 30, 1996 and 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Rattlesnake
Holding Company, Inc. and subsidiaries as of June 29, 1997 and June 30, 1996,
and the results of their operations and their cash flows for the years ended
June 29, 1997, June 30, 1996 and 1995 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Additionally, a $425,000 note payable associated with the
acquisition of a restaurant matured on January 2, 1997, $303,749 of Series C
subordinated notes payable matured on August 6, 1997 and $500,000 of convertible
subordinated notes payable matured on September 4, 1997, all of which were not
satisfied. Approximately $62,500 of Series C noteholders have extended the
repayment date to December 15, 1997. All of the remaining obligations are in
default. Management of the Company is continuing the implementation of its cost
reduction plan, which included the closing and/or sale of several restaurant
locations. On August 21, 1997, pursuant to a letter of intent dated May 30,
1997, the Company executed a Reorganization and Stock Exchange Agreement with
The Ottomanelli Group to merge the two restaurant companies as described in
<PAGE>
2
note 16. Additionally, on June 2, 1997, the Company executed a letter of intent
with an investment banking firm for a proposed $2,000,000 private placement of
convertible preferred stock on a "best efforts" basis. In September 1997, the
Company completed a $250,000 bridge financing of 10% notes payable which mature
on December 31, 1997. Management's plans in regard to these matters are also
described in note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
October 17, 1997
Jericho, New York
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 29, 1997 and June 30, 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash $ 68,022 684,414
Cash in escrow -- 1,237,625
Accounts receivable 13,287 63,659
Inventory 42,119 111,312
Pre-opening costs -- 107,289
Prepaid expenses and other current assets 23,272 140,490
Assets held for sale 679,544 --
------------ ------------
Total current assets 826,244 2,344,789
Property and equipment, net 1,007,092 2,374,848
Intangible assets, net 299,102 1,534,227
Other assets 129,457 246,288
------------ ------------
$ 2,261,895 6,500,152
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of notes payable 835,335 576,852
Accounts payable 280,528 574,889
Liabilities related to assets held for sale 1,133,257 --
Accrued expenses 357,407 488,204
Dividends payable 103,818 --
Other current liabilities 218,220 283,234
------------ ------------
Total current liabilities 2,928,565 1,923,179
Notes payable, net of current maturities 545,006 1,255,723
------------ ------------
Total liabilities 3,473,571 3,178,902
------------ ------------
Stockholders' equity:
Preferred stock, Series A, $.10 par value, 5,000,000 shares authorized,
56,500 and 54,500 issued and outstanding at
June 29, 1997 and June 30, 1996, respectively 5,650 5,450
Common stock, $.001 par value - 20,000,000 shares authorized,
2,650,227 and 2,643,734 issued and outstanding, at
June 29, 1997 and June 30, 1996, respectively 2,651 2,644
Additional paid-in capital 11,072,857 10,704,315
Accrued dividends (103,818) --
Accumulated deficit (12,189,016) (7,391,159)
------------ ------------
(1,211,676) 3,321,250
------------ ------------
$ 2,261,895 6,500,152
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 29, 1997, June 30, 1996 and 1995
<TABLE>
<CAPTION>
Year ended Year ended Year ended
June 29, June 30, June 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Restaurant sales $ 8,265,474 8,755,565 5,340,657
Less: promotional sales 413,524 512,756 362,589
------------ ------------ ------------
Net restaurant sales 7,851,950 8,242,809 4,978,068
Costs and expenses:
Cost of food and beverage sales 2,443,860 2,565,905 1,610,680
Restaurant salaries and fringe benefits 2,792,622 3,109,435 1,804,129
Occupancy and related expenses 2,025,198 2,118,444 1,306,469
Depreciation and amortization expense 726,526 608,260 388,695
------------ ------------ ------------
Total restaurant costs and expenses 7,988,206 8,402,044 5,109,973
Selling, general and administrative 2,715,293 2,810,433 1,332,237
Amortization of debt issuance costs -- -- 1,027,751
Loss on closure of restaurant sites 1,731,842 192,311 --
Interest expense 172,886 108,536 264,279
Miscellaneous expenses 41,580 12,350 2,199
------------ ------------ ------------
Total expenses 12,649,807 11,525,674 7,736,439
------------ ------------ ------------
Net loss before extraordinary
item (4,797,857) (3,282,865) (2,758,371)
Extraordinary item:
Gain on early extinguishment of debt -- 89,710 --
------------ ------------ ------------
Net loss $ (4,797,857) (3,193,155) (2,758,371)
============ ============ ============
Per share:
Loss before extraordinary item (1.81) (1.26) (2.46)
Extraordinary item -- .03 --
------------ ------------ ------------
Net loss $ (1.81) (1.23) (2.46)
============ ============ ============
Weighted average number of common
and common equivalent shares
outstanding 2,645,335 2,605,808 1,122,678
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 29, 1997, June 30, 1996 and 1995
<TABLE>
<CAPTION>
Addi-
tional
Common Preferred Common paid-in
shares stock stock capital
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, June 30, 1994 905,493 $ -- 905 1,866,246
Issuance of stock in connection
with refinancing of debt 10,000 -- 10 54,990
Net proceeds received from Initial
Public Offering 1,495,000 -- 1,495 6,576,839
Net proceeds received from issuance
of common stock in connection
with private placement 20,570 -- 21 253,452
Conversion of debt to equity 127,500 -- 128 509,872
Issuance of warrants in connection
with private placement of debt -- -- -- 18,250
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, June 30, 1995 2,558,563 -- 2,559 9,279,649
Additional costs from Initial Public
Offering -- -- -- (43,239)
Issuance of common stock for
services performed 2,671 -- 3 14,355
Net proceeds received from issuance
of preferred stock -- 5,450 -- 1,123,632
Conversion of debt to equity 82,500 -- 82 329,918
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, June 30, 1996 2,643,734 5,450 2,644 10,704,315
Net proceeds received from issuance
of preferred stock -- 200 -- 49,800
Conversion of debt to equity 6,493 -- 7 24,992
Accrued dividends -- -- -- --
Issuance of warrants for services
performed -- -- -- 293,750
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, June 29, 1997 2,650,227 $ 5,650 2,651 11,072,857
=========== =========== =========== ===========
<CAPTION>
Total
Accum- stock-
Accrued ulated holders'
dividends deficit equity
----------- ----------- -----------
<S> <C> <C> <C>
Balance, June 30, 1994 -- (1,439,633) 427,518
Issuance of stock in connection
with refinancing of debt -- -- 55,000
Net proceeds received from Initial
Public Offering -- -- 6,578,334
Net proceeds received from issuance
of common stock in connection
with private placement -- -- 253,473
Conversion of debt to equity -- -- 510,000
Issuance of warrants in connection
with private placement of debt -- -- 18,250
Net loss -- (2,758,371) (2,758,371)
----------- ----------- -----------
Balance, June 30, 1995 -- (4,198,004) 5,084,204
Additional costs from Initial Public
Offering -- -- (43,239)
Issuance of common stock for
services performed -- -- 14,358
Net proceeds received from issuance
of preferred stock -- -- 1,129,082
Conversion of debt to equity -- -- 330,000
Net loss -- (3,193,155) (3,193,155)
----------- ----------- -----------
Balance, June 30, 1996 -- (7,391,159) 3,321,250
Net proceeds received from issuance
of preferred stock -- -- 50,000
Conversion of debt to equity -- -- 24,999
Accrued dividends (103,818) -- (103,818)
Issuance of warrants for services
performed -- -- 293,750
Net loss (4,797,857) (4,797,857)
----------- ----------- -----------
Balance, June 29, 1997 (103,818) (12,189,016) (1,211,676)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 29, 1997, June 30, 1996 and 1995
<TABLE>
<CAPTION>
Year ended Year ended Year ended
June 29, June 30, June 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,797,857) (3,193,155) (2,758,371)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 797,092 651,597 1,420,314
Loss from fixed asset disposals 26,989 -- --
Gain on early extinguishment of debt -- (89,710) --
Loss on closure of restaurant sites 1,850,043 190,965 --
Valuation warrants issued for services 293,750 -- --
Issuance of stock in connection with debt restructuring -- 30,000 55,000
Stock issued for services provided -- 14,358 --
Changes in assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable 50,308 (36,521) (10,712)
Decrease (increase) in inventory 27,356 (25,013) (17,897)
Decrease (increase) in prepaid expenses and other assets 119,016 (206,384) (31,445)
Increase in pre-opening costs -- (169,138) (21,697)
(Decrease) increase in accounts payable and
accrued expenses (177,779) (334,691) 1,178,214
Increase (decrease) in other current liabilities 157,016 (34,609) 100,718
----------- ----------- -----------
Net cash used in operating activities (1,654,066) (3,202,301) (85,876)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (269,237) (1,769,272) (314,242)
Payments for acquisitions of leaseholds and lease costs (208,627) (155,924) (150,448)
Purchase of liquor license -- (150,000) --
----------- ----------- -----------
Net cash used in investing activities (477,864) (2,075,196) (464,690)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from IPO -- 7,260,800 --
Proceeds from issuance of convertible notes 500,000 -- 510,000
Net proceeds from private placement -- -- 383,263
Net proceeds from cost of issuance of preferred stock 1,287,625 (108,543) --
Proceeds from borrowings -- 100,000 484,250
Principal repayment of borrowings (272,087) (1,275,423) (141,567)
IPO costs -- (43,239) (682,466)
----------- ----------- -----------
Net cash provided by financing activities 1,515,538 5,933,595 553,480
----------- ----------- -----------
Net (decrease) increase in cash (616,392) 656,098 2,914
Cash, beginning of period 684,414 28,316 25,402
----------- ----------- -----------
Cash, end of period $ 8,022 684,414 28,316
=========== =========== ===========
Cash paid during the period for:
Interest $ 100,871 221,825 57,686
=========== =========== ===========
Income taxes $ 31,963 17,015 2,199
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 1997, June 30, 1996 and 1995
(1) Organization and Description of Business
(a) Description of Business
As of June 29, 1997, the Rattlesnake Holding Company, Inc. and
subsidiaries (collectively, the Company), operated four restaurants in
Lynbrook, New York; South Norwalk, and Danbury, Connecticut and
Flemington, New Jersey. The Company closed four of its restaurants as
follows: Hamden, Connecticut in January 1996, Fairfield, Connecticut
in January 1997, White Plains, New York in March 1997 and Yorktown
Heights, New York in June 1997 and had determined that it would close
the Lynbrook, New York site. On September 17, 1997, the Company closed
the Lynbrook, New York restaurant. The Company acquired a restaurant
facility in August 1996 which the Company did not open for operations.
This facility was sold in May 1997 (note 4). Company restaurants
feature casual dining utilizing a southwestern theme.
(b) Organization
In December 1994, an amendment to the Company's Certificate of
Incorporation was approved and adopted to (i) effect a 1:2.8077
reverse split of the Company's common stock (ii) change the par value
of the Company's common stock from $.01 to $.001 per share (iii)
increase the authorized capital stock of the Company to 20,000,000
shares of $.001 par value common stock and 5,000,000 shares of $0.10
par value preferred stock, and (iv) change the Company's fiscal year
end from December 31st to June 30th. In March 1995, an additional
reverse common stock split of 1:2 was approved by the Company's Board
of Directors. All references in the accompanying consolidated
financial statements and notes thereto relating to share and per share
data have been adjusted retroactively to reflect the stock splits.
On June 29, 1995, the Company completed an initial public offering (IPO)
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, were $6,535,095. The proceeds from this
offering were to be used for working capital, marketing and
advertising, the implementation of the Company's expansion strategy
and to repay subordinated debt. The underwriter received warrants to
purchase 130,000 shares of common stock at a price of 120% of the
offering price for a term of four years commencing from the date of
the offering. Upon the closing of the offering, the Company executed a
one year consulting agreement, as amended, under which the underwriter
received $30,000 for providing financial advisory and other consulting
services.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The consolidated financial
statements have been presented on a historical cost basis for the
consolidated statements of operations. All significant inter-company
balances and transactions have been eliminated in consolidation.
(Continued)
F-8
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 can not be reasonably assured.
The Company has incurred aggregate losses since inception of $12,189,016,
inclusive of a net loss in fiscal 1997 of $4,797,857. Based upon
interim financial information prepared by management, the Company has
continued to incur losses in fiscal 1998. Additionally, $303,749 of
Series C subordinated notes payable matured on August 6, 1997, of
which noteholders with principal balances aggregating $62,499 have
extended the repayment date to December 15, 1997, (note 9), $500,000
convertible subordinated notes payable matured September 4, 1997 (note
9) and a $425,000 note payable associated with the acquisition of a
restaurant matured on January 2, 1997 (note 8), all of which were not
satisfied by the Company and are in default.
Management of the Company is continuing the implementation of its cost
reduction plan, which addresses the restaurant operating losses. Such
plan included the closing and sale of the Yorktown Heights and White
Plains, New York locations, as well as the sale of its New York City
property. The Company has closed its Fairfield, Connecticut location
and is holding this property for sale. In September 1997, the Company
has closed its Lynbrook, New York location. The Company has reduced
its work force and is implementing other cost containment measures
designed to reduce operating expenses and improve restaurant operating
performance. The sales of the above mentioned locations were completed
in the fourth quarter of fiscal year 1997 and first quarter of fiscal
year 1998; therefore the Company anticipates recognizing the impact of
these reductions in the first and second quarters of fiscal 1998. On
August 21, 1997, pursuant to a letter of intent dated May 30, 1997,
the Company executed a Reorganization and Stock Exchange Agreement
with The Ottomanelli Group to merge the two restaurant companies as
described in note 16. Additionally, on June 2, 1997, the Company
executed a letter of intent with an investment banking firm for a
proposed $2,000,000 private placement of convertible preferred stock
on a "best efforts" basis. In September 1997, the Company completed a
$250,000 bridge financing of 10% notes payable which mature on
December 31, 1997. The Company is also negotiating with an investor to
refinance the $500,000 convertible notes payable. The Company plans to
satisfy the $425,000 short term note payable from the proceeds of the
sale of the building and assets at the Fairfield, Connecticut
facility. The Company may need additional capital to further fund
operations and repay liabilities until the Company's plan is fully
implemented.
Management believes that the implementation of its cost reduction plan,
finalization of the proposed merger with The Ottomanelli Group, and
proposed $2,000,000 private placement will enable the Company to
achieve profitable operations and restore liquidity. However, no
assurance can be made regarding the achievement of the goals outlined
in the strategic plan as outlined above, or if such plans are
achieved, that the Company's operations will be profitable.
(b) Reporting Periods
On April 2, 1996, the Board of Directors approved a change, effective
July 1, 1996, in the Company's accounting reporting period to a 52
week cycle ending on the last Sunday in June. This change was
implemented to establish consistency between the Company's operational
and accounting reporting periods.
(Continued)
F-9
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(c) Cash in Escrow
On June 30, 1996, the Company completed a private placement of a
$1,362,500 unit offering, consisting of 54,500 shares of 7-1/2%
preferred stock and 218,000 common stock purchase warrants (note 9).
The proceeds of the offering, net of underwriters commissions and fees
were $1,212,625. On June 30, 1996, these net proceeds and a $25,000
deposit previously paid by the Company were held in an escrow account
by the underwriter on behalf of the Company. The Company subsequently
received the proceeds in the first quarter of fiscal 1997.
(d) Accounts Receivable
Accounts receivable consist principally of bank credit card accounts
receivable.
(e) Inventories
Inventories consist primarily of restaurant food items and supplies and are
stated at the lower of cost or market value. Cost is determined using
the first-in, first-out method.
(f) Pre-Opening Costs
Certain costs relating to hiring and training of employees prior to the
opening of new restaurants are capitalized and amortized over a twelve
month period commencing upon restaurant opening. At June 30, 1996 such
costs amounted to $107,289.
(g) Net Assets Held for Sale
Pursuant to a restaurant lease agreement, the Company exercised its option
to purchase the facility for $425,000. This transaction was financed
by a shareholder through a 15% short-term note payable (note 8). In
addition, the investor received 50,000 warrants at an exercise price
equal to the market price at the date of the grant. The restaurant
facility at this location was closed on January 4, 1997. The building
is currently being held for sale and is classified on the financial
statements as net asset held for sale, net of an additional $100,000
writedown (note 4).
At June 29, 1997, the Company recorded $679,544 of net assets held for
sale. This balance represents $335,986 of assets which were sold on
July 16, 1997, $25,000 of assets from a restaurant facility which was
closed September 17, 1997 and $318,558 relating to a building as
discussed above.
(h) Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated
primarily on the straight-line basis over the estimated useful lives
of the assets. Leasehold improvements are amortized over the shorter
of the estimated useful life or the lease term of the related asset.
The estimated useful lives are as follows:
Artifacts 3 years
Original small wares 3 years
Furniture and fixtures 5 years
Restaurant and office equipment 7 years
Leasehold improvements 3-15 years
Building 40 years
(Continued)
F-10
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(i) Intangible Assets
Intangible assets consist principally of costs to acquire leased
facilities. These costs are amortized over the life of the related
lease, generally 3 to 15 years. Accumulated amortization at June 29,
1997 and June 30, 1996 was $107,950 and $401,114, respectively.
Amortization expense was $201,377, $227,847 and $150,480 for the years
ended June 29, 1997, June 30, 1996 and June 30, 1995, respectively. In
connection with the closing of the Fairfield, White Plains, Yorktown
Heights, Lynbrook and 86th Street locations, the Company wrote off
approximately $1,239,000 in leasehold costs, organization costs, and
lease costs, net of accumulated amortization of $494,541 in fiscal
1997. In connection with the closing of the Hamden location, the
Company wrote off approximately $65,000 in leasehold costs, net of
accumulated amortization of $21,672 in fiscal 1996.
(j) Other Assets
The Company utilizes an outside service to provide financing and
promotional activities. The costs relating to these activities are
capitalized and are being amortized over the repayment period. The
Company also capitalized deferred costs relating to potential
Rattlesnake locations under negotiation.
(k) Financial Instruments
Management of the Company believes that the book value of its monetary
assets and liabilities, exclusive of long-term debt, approximates fair
value as a result of the short-term nature of such assets and
liabilities. Management further believes that the fair market value of
long-term debt does not differ materially from carrying value.
(l) Reclassification
Certain reclassifications of prior period balances have been made to
conform with the fiscal 1997 presentation.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amount 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 may
differ from those estimates.
(n) Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of
Effective July 1, 1996, the Company adopted 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 adoption of SFAS No.121 on July 1, 1996
did not have a material impact on the Company's consolidated financial
position or results of operations (note 4).
(Continued)
F-11
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(o) Accounting for Stock-Based Compensation
Effective July 1, 1996, the Company adopted SFAS No.123 "Accounting for
Stock-Based Compensation", which encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation under the existing accounting
rules contained in Accounting Principles Board Opinion No.25,
"Accounting for Stock Issued to Employees", and related
interpretations, but has provided disclosures of stock-based
compensation expense determined under the fair value provisions of
SFAS No.123.
(3) Restaurant Acquisition
On August 7, 1996, the Company signed a purchase and sale agreement for
$388,000 for a restaurant location on 86th Street in New York City.
Included in the purchase price was the lease and certain furniture,
fixtures and equipment. The Company did not open this location and the
restaurant was sold in May 1997 for total consideration aggregating
$289,387. The Company remains a guarantor of the lease.
On August 6, 1996, the Company entered into two agreements for the option
to lease restaurant locations in Bayridge, New York and Milford,
Connecticut. The Company allowed both options to expire in fiscal
1997.
(4) Closure of Restaurant Sites
In fiscal year 1996, the Board of Directors authorized the closing of the
Rattlesnake Southwestern Grill Restaurant located in Hamden,
Connecticut. The facility was closed on January 7, 1996. A majority of
the fixed assets at the facility were removed to be utilized at other
existing or new facilities. All remaining fixed assets and leasehold
improvements have been abandoned and all intangible assets have been
written off. A loss of $192,311, relating to the closing of the Hamden
location, was recorded in fiscal 1996.
In fiscal 1997, the Board of Directors authorized the closing of the
Rattlesnake Southwestern Grill Restaurant located in Fairfield,
Connecticut. The facility was closed on January 4, 1997. The fixed
assets, leasehold improvements and intangibles at the facility have
been written off. The building is reflected at its estimated
realizable value and is currently accounted for in the financial
statements in "net assets held for sale." A net loss of $394,941
relating to the closing of the Fairfield location was recorded in
fiscal 1997.
In fiscal 1997, the Board of Directors authorized the closing of the
Rattlesnake Southwestern Grill Restaurant located in White Plains, New
York. The facility was closed on March 1, 1997 and sold on July 16,
1997. The Company recorded a loss of $224,135 related to the closing
of this location in 1997. The Company sold all of the assets of White
Plains except for cash, receivables and certain items specified in the
Asset Purchase Agreement in exchange for a release from its note
payable to the landlord of $276,499, the purchaser's assumption of
food credits and other miscellaneous liabilities totaling $39,017, and
the receipt of a $23,500 note receivable from the purchaser. The
facility was sold to a group which includes the Company's Chairman of
the Board.
(Continued)
F-12
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In fiscal 1997, the Board of Directors authorized the closing of the
Rattlesnake Southwestern Grill Restaurant located in Yorktown Heights,
New York. The facility was closed on June 9, 1997 and sold on June 27,
1997. The purchaser assumed the remaining outstanding balance of the
notes payable to the landlord and the related lease obligation. A net
loss of $362,091, relating to the closing of the Yorktown Heights
location, was recorded in fiscal 1997.
The Restaurant location on 86th Street in New York was never opened and on
May 29, 1997 the Company sold the fixed assets and transferred its
interest in the lease at that location for total consideration
aggregating $289,387. The Company continues to guarantee the lease
obligation. A net loss of $306,456, relating the sale of the 86th
Street location, was recorded in fiscal 1997.
In fiscal 1997, the Board of Directors authorized the disposition of the
Rattlesnake Southwestern Grill Restaurant located in Lynbrook, New
York. On September 17, 1997, the Company closed the restaurant and
wrote-off the related assets to its estimated realizable value. A net
loss of $374,852 relating to the closing of this location was recorded
in fiscal 1997.
At June 29, 1997, consistent with the Board's approval for the closure of
the above-mentioned locations, the assets held for sale and related
liabilities have been reclassified as "assets held for sale" and
"liabilities related to assets held for sale". The accompanying June
29, 1997 consolidated balance sheet includes the following components:
Fairfield restaurant facility $ 318,558
White Plains restaurant facility 335,986
Lynbrook equipment 25,000
-----------
Assets held for sale 679,544
-----------
Notes payable 702,914
Accounts payable 185,555
Accrued expenses 47,759
Other current liabilities 197,029
-----------
Liabilities related to assets
held for sale $1,133,257
==========
(Continued)
F-13
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Property and Equipment
Property and equipment consists of the following:
June 29,1997 June 30, 1996
------------ -------------
Leasehold improvements $ 783,415 1,410,404
Restaurant and office equipment 457,378 918,787
Furniture and fixtures 211,320 494,876
Original smallwares 66,144 73,562
Artifacts 24,114 23,952
----------- ---------
1,542,371 2,921,581
Less accumulated depreciation
and amortization (535,279) (546,733)
----------- ---------
$ 1,007,092 2,374,848
=========== =========
Related depreciation and amortization expenses were $478,611, $334,695 and
$200,592 for the year ended June 29, 1997, June 30, 1996 and 1995,
respectively. Accumulated depreciation and amortization of $490,065
and $125,662 relating to the disposal of fixed assets at the locations
which were closed (note 4).
(6) Other Assets
Other assets consist of the following:
June 29, June 30,
1997 1996
-------- -------
Promotional meal programs $ 71,071 132,058
Deposits 47,779 96,737
Loans receivable 10,607 17,493
-------- -------
$129,457 246,288
======== =======
(7) Capital Structure
The Company's capital structure is as follows:
Shares issued
and outstanding
---------------
Shares June 29, June 30,
Security Par value authorized 1997 1996
-------- --------- ---------- ---- ----
Common stock $.001 per share 20,000,000 2,650,227 2,643,734
Preferred stock, Series A $.10 per share 5,000,000 56,500 54,500
(Continued)
F-14
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company amended its Certificate of Incorporation in December 1994 to
increase the authorized capital stock and effect a 1:2.8077 reverse
stock split. In March 1995, an additional 1:2 reverse common stock
split was approved by the Company's Board of Directors.
The Company's preferred stock bears a dividend rate of 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 the lesser of (i) 120% of the average of the last reported sale
price of the common stock for the 10 trading days immediately
preceding the first closing of the offering, or $4.50, whichever is
lower; or (ii) 85% of the average of the last reported sale 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 Board of Directors has the authority to
establish the specific provisions of the preferred stock, i.e.,
liquidation rights, dividend parameters, at the date of issuance.
The preferred stock is redeemable only at the option of the Company,
commencing one year from the date of issuance, based upon the sales
price of the Company's common stock. The preferred stock has a
liquidation preference of $24.50 per share, together with accrued and
unpaid dividends. The Board of Directors has the authority to
establish the specific provisions of the preferred stock, i.e.,
liquidation rights, dividend parameters, at the date of issuance.
To date, the Board of Directors have not declared any dividends, although
cumulative dividends relating to the preferred stock of $103,818 have
been accrued in the June 29, 1997 consolidated balance sheet.
(8) Notes Payable
Notes payable consists of the following:
June 29, June 30,
1997 1996
---- ----
Series A subordinated notes payable due
August 6, 1996, with interest at 9%
converted to Series C notes $ 2,089 525,000
Series B convertible subordinated notes
payable due July 7, 2000 with interest
at 9%, convertible at $3.85 per share
(including $58,338 held by a related party) 500,000 525,000
Note payable to shareholder relating to the
acquisition of Pen-Z Corp., payable in
monthly payments of $2,700 at June 30, 1996
with interest at 1% over prime (9.25%
at June 30, 1996). The Company was released
from this debt in fiscal year 1997 as a result
of the sale of this location (note 4) 225 289,227
Series C subordinated notes payable due
August 6, 1997, with interest at 15%
(including $58,338 held by a related party) 303,749 --
Convertible subordinated notes payable due
September 4, 1997, with interest at 18% 500,000 --
(Continued)
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 29, June 30,
1997 1996
---- ----
Note payable to related party relating to
the acquisition of the Fairfield building,
due January 2, 1997 with interest at 15% $ 425,000 --
Note payable to a related party, due in
monthly installments of $1,270, including
principal and interest at 18% through
February 1998 9,505 21,799
Note payable to a stockholder relating to
purchase of furniture and equipment for
the Penz Corp., due in monthly installments
of $900 at June 30, 1996 including principal
and interest at prime plus 1% through
2009. The Company was released from this
debt in fiscal year 1997 as a result of the
sale of this location (note 4) 173 96,274
Note payable relating to acquisition of lease,
due in monthly installments of $2,867,
including principal and interest
at 8% through July 2010. The Company was
released from this debt subsequent to
year-end as a result of the sale of
the location (note 4) 277,516 289,206
Notes payable relating to acquisition
of lease, due in monthly installments
of $1,666 of principal plus interest
at 1% over prime (9.5% at June 29, 1997
through September 1, 2000) 64,998 86,069
---------- ---------
2,083,255 1,832,575
Less: Current maturities 835,335 576,852
Less: Liabilities relating to assets
held for sale 702,914 --
---------- ---------
$ 545,006 1,255,723
========== =========
Notes payable to shareholders and other related parties (Company officers and
directors) were $551,579 and $523,976 at June 29, 1997 and June 30, 1996,
respectively.
Maturities of these notes is as follows:
Fiscal year ended:
1997 and 1998 $1,538,249
1999 19,992
2000 519,992
2001 5,002
2002 --
Thereafter --
----------
$2,083,255
==========
(Continued)
F-16
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Financing Arrangements
Commencing in November 1993, the Company sold through a private placement a
$1,800,000 unit offering, with each $25,000 unit consisting of 1,469
shares of common stock and a $25,000 subordinated note. The
subordinated notes mature in one year from the date of issuance,
subject to a 180 day extension period, exercisable at the option of
the Company. The subordinated notes bear interest at 9%, commencing on
the date of issue, increasing to 11% for the 180 day extension period,
with all interest payable at the maturity of the subordinated notes.
The underwriter's compensation arrangement included the receipt of
82,367 shares of common stock and a 9.33% commission. The value of the
common stock issued to the underwriter was determined by an
independent appraisal, based upon the value of the stock at the
various dates in which the units were sold, ranging between $7.40 and
$12.46 per share. Debt issuance costs were calculated based upon the
relative proportional value of the common stock and subordinated notes
payable.
In July 1995, the Company redeemed $225,000 of the 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, valued at the IPO
price of $5.50 per share. The value of the common stock was recorded
as interest expense by the Company. 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 a
9% $8,333 Series B Note (the Series B Notes) due five years after the
first payment was 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 70% of the initial
public offering price of the common stock sold, 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. As a result of the
restructuring of this debt, the related debt issuance costs were
written off in July 1995. An extraordinary gain of $89,710, net of the
write-off of $72,114 debt issuance costs was recognized in fiscal
1996.
In fiscal 1997, the Company offered an extension agreement to the Series
A noteholders, providing 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. Through October 7, 1996, noteholders aggregating $303,749
accepted the terms of the extension and the remaining $221,243 was
paid in cash.
During December 1994 and January 1995, the Company received $500,000 in
proceeds from a new unit offering, each unit consisting of a $20,000
principal amount six-month 12% convertible subordinated note and 3,650
common stock purchase warrants exercisable at $11.80 per share until
March 1997 (the "Units"). The due date of these notes was extended to
December 10, 1995 in consideration of a reduction of the conversion
price and warrant exercise price to $4.00 and $4.50, respectively, and
an increase in the number of warrants per Unit to 7,300. The value of
the warrants, $0.10 per share was determined by an independent
appraisal and has been recorded as a debt discount and additional paid
in capital. In December 1995, $300,000 of the debt and $30,000 of
accrued interest was exchanged into 82,500 shares of common stock and
the remaining $200,000 was paid.
(Continued)
F-17
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During May and June 1995, the Company issued $510,000 of 12% subordinated
debt which was automatically converted into shares of Common Stock at
the rate of $4.00 per share upon the effective date of the initial
public offering.
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 27,250 shares of common stock at $3.78 per share which expire
on August 31, 2001. The net proceeds of the offering were $1,129,082,
net of commissions and expenses of $233,418. The offering period
expired on June 30, 1996.
In July 1996, the Company sold to an outside investor, through a separate
offering, an additional 2,000 shares of preferred stock under the same
terms as noted above.
On October 10, 1996, a letter of intent was executed with an investment
banking firm to raise a maximum of $3,000,000 through a private
placement to be sold on a "best efforts" basis. No funds were raised
through this placement.
On March 4, 1997, the Company entered into a private financing
arrangement for $500,000 of convertible subordinated notes. The notes
are payable on September 4, 1997. 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. The notes matured on September 4, 1997 and
were not satisfied by the Company and are in default (note 16).
On June 2, 1997, the Company executed a letter of intent with an
investment banking firm for a proposed $2,000,000 private placement of
convertible preferred stock on a "best efforts" basis.
(10) Accrued Expenses and Other Liabilities
(a) Accrued Expenses
Accrued expenses consist of the following:
June 29, June 30,
1997 1996
---- ----
Interest payable $166,515 94,500
Severance liabilities 80,696 --
Other 57,867 109,604
Accrued payroll 52,329 284,100
-------- -------
$357,407 488,204
======== =======
(Continued)
F-18
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) Other Liabilities
The Company has entered into marketing agreements whereby it receives
temporary financing in exchange for participating in discounted price
meal programs. At June 29, 1997 and June 30, 1996, the balances
outstanding under this program were $218,220 and $283,234,
respectively, which are included in other liabilities in the
accompanying consolidated balance sheets.
(11) Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No.109, "Accounting for
Income Taxes". SFAS 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and
liability method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are recognized
for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carry forwards. 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. Under SFAS 109, 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. The Company
adopted the provisions of SFAS 109 in 1992.
There was no income tax expense for any period presented due to losses
incurred by the Company.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
June 29, 1997 and June 30, 1996 are presented below:
June 29, June 30,
1997 1996
---- ----
Deferred tax assets:
Net operating loss carry forward $4,349,000 2,381,000
---------- ---------
Total gross deferred tax assets 4,349,000 2,381,000
Less valuation allowance 4,336,000 2,350,000
---------- ---------
Net deferred tax assets 13,000 31,000
---------- ---------
Deferred tax liabilities:
Depreciation and amortization 13,000 31,0000
---------- ---------
Net deferred tax liability 13,000 31,0000
---------- ---------
$ -- --
========== =========
The valuation allowance for deferred tax assets as of July 1, 1996 and July
1, 1995 was $2,350,000 and $1,013,000, respectively. The change in the
total valuation allowance for the years ended June 29, 1997 and June
30, 1996 and 1995 was $1,986,000, $1,337,000 and $435,000,
respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than (Continued)
F-19
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 the net operating losses and temporary differences become
deductible. Management considers projected future taxable income and
tax planning strategies in making this assessment. In order to fully
realize the deferred tax asset, the Company will need to generate
future taxable income of approximately $10,873,000. At June 29, 1997
and June 30, 1996, the Company has net operating loss carry forwards
for Federal and State income tax purposes of approximately $10,873,000
and $5,952,000, respectively (the NOL carry forwards), which are
available to offset future taxable income, if any, through 2012.
Losses for income tax purposes for the years ended June 29, 1997 and
June 30, 1996 and 1995 were approximately $4,581,000, $3,308,000 and
$2,983,000, respectively. Based upon the limited operating history of
the Company and losses incurred to date, management believes that the
value of the deferred tax asset is impaired and has fully reserved the
deferred tax asset.
In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended, as it applies to the NOL carry forwards, a change in more
than 50% in the beneficial ownership of the Company within a
three-year period (an "Ownership Change") will place an annual
limitation on the Company's ability to utilize its existing NOL
carryforwards to offset United States Federal taxable income in future
years. Generally, such limitation would be equal to the value of the
Company as of the date of the Ownership Change multiplied by the
Federal long-term tax exempt interest rate, as published by the
Internal Revenue Service. The Company believes that an Ownership
Change has occurred due to changes in the beneficial ownership of the
Company's Common Stock in the current three-year testing period
immediately prior to the initial public offering and would cause the
annual limitations as described above to apply. The Company has not
determined what the maximum annual amount of taxable income is that
can be reduced by the NOL carryforwards.
(12) Commitments and Contingent Liabilities
Commitments
The Company's operations are principally conducted in leased premises.
Remaining lease terms range from approximately 3 to 9 years. Certain
leases contain contingent rental provisions based upon a percentage of
gross sales. As of June 29, 1997, the Company has non-cancelable
operating lease commitments as follows:
1998 $ 369,524
1999 367,234
2000 355,008
2001 274,740
2002 269,545
Thereafter 608,720
----------
$2,244,771
==========
Certain shareholders and directors have personally guaranteed lease
payments for two locations.
(Continued)
F-20
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Contingent rental payments on building leases are typically made based on
the percentage of gross sales on the individual restaurants that
exceed predetermined levels. The percentage of gross sales to be paid
and related gross sales level vary by unit. There were no contingent
rental payments in any of the periods presented.
Rent expense was $930,676, $677,877 and $347,525 for the periods ended June
29, 1997, June 30, 1996 and 1995, respectively.
In connection with the sale of preferred stock, the Company is required to
pay a 7-1/2% dividend payment to the preferred stockholders. These
dividends are payable semi-annually in arrears on May 15 and November
15 of each year commencing November 15, 1996. At June 29, 1997,
dividends totaling $103,818 have been accrued but not yet declared or
paid.
Pursuant to a leasehold acquisition agreement, the Company paid $65,000 and
issued a warrant to purchase 30,000 shares of the Company's common
stock at an exercise price of $5.00 per share, exercisable until
October 31, 1997.
Pursuant to a restaurant lease agreement, the Company has the option to
purchase a facility during the period January 1995 through January
2000 for a purchase price ranging between $1,365,000 to $1,580,000.
In August 2, 1995, the Company executed an agreement with a public
relations firm providing for annual compensation of $24,000 and an
option to purchase 20,000 shares of the Company's common stock at a
price of $5.50 per share, exercisable for a five year period.
The Company entered into a twelve month agreement with an investment
banking firm commencing September 1, 1996 which was subsequently
revised on October 10, 1996, under which the investment banking firm
will provide advisory services related to corporate finance and
mergers and acquisitions. The investment banking firm will receive an
initial retainer of $10,000 and monthly payments of $3,000 for the
first three months, $4,000 for the next four months and $5,000 for the
remaining six months and warrants to purchase 125,000 shares of the
Company's common stock exercisable within five years at a price equal
to 120% of the average closing bid price of the Company's common stock
for the five preceding days. The Company has made payments totaling
$16,000 and has accrued the remaining $34,000 at June 29, 1997.
The Company entered into a thirteen month agreement with an independent
research firm which will produce research reports with respect to the
securities of the Company. In consideration of the firm's services, it
received 100,000 warrants to purchase the Company's common stock,
which are exercisable at amounts ranging from $4.00 - $5.50 per share
which expire on July 8, 2001.
(13) Employee Benefit Plans
(a) Stock Option Plan
In December 1994, the Company adopted the 1994 Employees Stock Option Plan
(the Employees Plan), which provides for the issuance of incentive
stock options (ISO's) and non-qualified options (Non-ISO's) to
officers and key employees. Up to 1,000,000 shares of the Company's
common stock have been reserved for issuance under the Plan. The Plan
is currently administered by the Board of
(Continued)
F-21
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Directors of the Company. The term of the options is generally for a
period of 5 years. The exercise price for non-qualified options
outstanding under the Employees Plan can be no less that 100% of the
fair market value, as defined, of the Company's common stock at the
date of the grant. For ISO's, the exercise price can be generally no
less than the fair market value of the Company's common stock at the
date of the grant, with the exception of any employee who prior to the
granting of the option, is a 10% or greater stockholder as defined,
for which the exercise price can be no less than 110% of the fair
market value of the Company's common stock at the date of grant.
In December 1994, the Company adopted the non-Executive Director Stock
Option Plan (the Director Plan), which provides for the issuance of
non-ISO's to non-executive directors, as defined, and members of any
advisory board established by the Company who are not full-time
employees of the Company. The Company has reserved 500,000 shares for
issuance under the provisions of the Director Plan. The Director Plan
provides that each non-executive director will automatically be
granted an option to purchase 25,000 shares upon joining the Board of
Directors and 15,000 shares on each December 1st thereafter, provided
such person has served as a director for the 12 months immediately
prior to such December 1st. The exercise price for options granted
under the Director Plan shall be 100% of the fair market value of the
Common Stock on the date of grant.
At June 29, 1997, there were 73,500 and 295,000 additional shares
available for grant under the Employees and Director Plans,
respectively. The per share weighted-average fair value of stock
options granted during 1997 and 1996 was $0.51 and $1.22, respectively
for those options whose exercise price equaled the market price of the
stock on the date of grant and $.05 and $0, respectively for those
options whose exercise price was above the market price of the stock
on the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions: 1997 and 1996 - expected
dividend yield 0%, risk-free interest rate of between 5.07% and 5.86%,
an expected life of between approximately 2.5 - 5 years and expected
stock volatility of between 38 - 130%.
The Company applies APB Opinion No.25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its
employees and directors stock options in the 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 income would have been reduced to the pro forma amounts indicated
below:
1997 1996
---- ----
Net loss As reported $ (4,797,857) (3,193,155)
Pro forma (5,267,816) (3,403,118)
Loss per share As reported $ (1.81) (1.23)
Pro forma (1.99) (1.31)
Pro forma net income reflects only options and warrants granted in 1997 and
1996. Therefore, the full impact of calculating compensation cost for
stock options and warrants under SFAS No.123 is not reflected in the
pro forma net income amounts presented above because compensation cost
for options and warrants granted prior to July 1, 1995 were not
considered.
(Continued)
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Activity in non-ISO's was as follows:
Weighted
Average
Number Option Price Exercise
of Shares per Share Price
--------- --------- -----
Options outstanding June 30, 1995 600,000 $ 4.50 2.63
Options Granted 124,000 5.25 3.06
------- ---------- ----
Options outstanding June 30, 1996 724,000 4.50-5.25 4.25
Options Granted 396,000 0.25-2.25 .44
Terminated Options (427,000) .375-5.25 3.21
------- ---------- ----
Options outstanding June 29, 1997 693,000 $0.25-5.25 3.11
======= ========== ====
Activity in ISO's was as follows:
Weighted
Average
Number Option Price Exercise
of Shares per Share Price
--------- --------- -----
Options outstanding June 30, 1995 87,000 $4.50-5.50 2.41
Options Granted 78,500 3.50-5.25 2.99
Terminated Options (36,000) 4.50 2.91
------- ---------- ----
Options outstanding June 30, 1996 129,500 3.50-5.50 4.14
Options Granted 44,000 0.25-2.63 3.53
Terminated Options (70,000) 2.50-5.25 3.62
------- ---------- ----
Options outstanding June 29, 1997 103,500 $0.25-5.50 5.35
======= ========== ====
The Employees and Director Plans expire in December 2004, unless
terminated earlier by the Board of Directors under conditions
specified in the respective Plans. No options have been exercised as
of June 29, 1997 and June 30, 1996.
At June 29, 1997, the range of exercise prices and range of the remaining
contractual life of outstanding options was $0.25 - $5.50 and
approximately 2.5 - 4.5 years, respectively.
At June 29, 1997 and June 30, 1996 and 1995, the number of options
exercisable was 653,500, 346,167 and 100,000, respectively, and the
weighted-average exercise price of those options was $3.40, $4.24 and
$2.60, respectively.
(Continued)
F-23
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company granted 335,000 shares of restricted warrants to employees and
directors during the 1997 fiscal year. The warrants were granted on
June 2, 1997; 200,000 as a result of the separation agreement signed
between the Company and the Executive Vice President (note 13(c)) and
135,000 shares of options previously issued to the Vice President of
Finance which were terminated as of this date and warrants were issued
in their place with the exercise price equal to the market price of
the stock on the date of grant. The weighted average grant date fair
value of the warrants was not material using the Black Scholes option
pricing model with assumptions utilized similar to that noted above
for the options.
The Company granted 717,992 shares of warrants to non-employees during 1997
for services performed. The total compensation cost recognized in
fiscal 1997 for these stock-based compensation awards was
approximately $294,000 using the Black Scholes option-pricing model
with the following assumptions - expected dividend yield 0%, risk-free
interest rate of 5.25%, expected life of 5 years and expected stock
volatility of 86%.
(b) Employment Agreements
The Company and its Chairman, President and Executive Vice President
(collectively, the Senior Management Group) entered into employment
agreements in December 1994 for a period commencing in December 1994
through December 1997. The agreements provide for annual compensation
for the Senior Management Group collectively of $250,000, increasing
by 10% annually, plus certain other benefits. The agreements also
provide for annual aggregate incentive compensation for the Senior
Management Group based on consolidated pre-tax earnings of the
Company, as defined, as follows:
Pre-tax earnings Percentage
---------------- ----------
$0 - $1,000,000 10.0%
$1,000,001 - 2,000,000 7.5%
$2,000,001 and over 5.0%
The agreement also provides that upon a change in control, as defined, that
all stock options held by the employee become immediately exercisable
and that a credit equivalent to three times the employee's annual
compensation be credited against the exercise price of the options.
The Company and its Vice-Chairman & Chief Administration Officer entered
into a part-time employment agreement in December 1995 for a period
commencing December 1995 through December 1998. The agreement provides
for annual compensation of $90,000 increasing 10% per annum, plus
certain other benefits. An additional $20,000 was paid for services
rendered in fiscal 1996 provided over and above the part-time
agreement. The employee is also entitled to receive a bonus during
each year of this agreement, determined by the Board of Directors. The
Board of Directors and/or the Compensation Committee shall set forth a
formula for determining the bonus for each year.
On June 6, 1996, the board of directors authorized additional compensation
aggregating $70,000 for the aforementioned executive officers.
(Continued)
F-24
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(c) Separation Agreements
On March 15, 1997 an agreement was signed between the Company and Vice
Chairman & Chief Administrative Officer which amended the December
1995 employment agreement. Under the new agreement, the former Vice
Chairman & Chief Administrative Officer will accept the position of
Acting Co-Chief Executive Officer. This agreement waives any base rate
or annual rate increases per the previous agreement and modified the
term to March 1, 1997 through February 28, 1999. Services are provided
on a part-time consulting basis. The compensation for the period March
1, 1997 through February 28, 1999 will be $75,000, plus benefits. This
agreement also included the grant of an option to purchase 125,000
shares of stock at the closing price on the date of this agreement
($1-1/16). The agreement also includes that in the event the stock
options previously granted under the current Company stock option
plans are repriced for any employee, the existing stock option grants
for the acting Co-CEO will be repriced at the same time as any
repricing and under the same terms and conditions.
On March 15, 1997 an agreement was signed between the Company and
Chairman & Chief Executive Officer which terminated the previous
December 1, 1994 employment agreement and any and all oral agreements
relating to his employment. The agreement included payments for
expense reimbursement, accrued and unused vacation, medical, dental,
disability and life insurance and severance payments, all unpaid
amounts are accrued at June 29, 1997. In connection with this
agreement, the Chief Executive Officer's employee stock options shall
be immediately vested and shall be amended to constitute non-qualified
employee stock options and the strike price is reduced to an exercise
price of $2.00 (note 13).
On May 29, 1997 an agreement was signed between the Company and the
Director of the Corporation for acceptance of the position of acting
Co-CEO for up to 150 days. This agreement included five months of
compensation at $5,000 a month and 100,000 warrants at the closing bid
on the date of this agreement.
On June 2, 1997 an agreement was signed between the Company & Executive
Vice President which terminated the December 1, 1994 employment
agreement and any and all oral agreements relating to his employment.
The agreement included payments for expense reimbursement, accrued and
unused vacation, medical, dental, disability and life insurance and
severance payments, all of which is accrued at June 29, 1997. In
connection with this agreement, the Executive Vice President's stock
options were replaced by a warrant to purchase up to 200,000 shares of
common stock exercisable at the closing bid on the date of this
agreement ($0.25).
(d) Other Benefits
The Company provides, on a contributory basis, medical benefits to active
employees. The Company does not provide medical benefits to retirees,
except as disclosed above.
(14) Litigation
The Company is a defendant in litigation arising from the normal course of
its affairs. Management is of the opinion, pursuant to the advice of
counsel, that settlement, if any, of the aforementioned litigation
will not have a material adverse impact on the financial position or
results of operations of the Company.
(Continued)
F-25
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Earnings Per Share
For the year ended June 29, 1997 and June 30, 1996 a weighted average
number of shares was not calculated for options and warrants
outstanding due to their anti-dilutive effect on the Company's net
loss per share calculation.
For the year ended June 30, 1995, weighted average common shares and
equivalents outstanding are 1,122,678. The 12% convertible notes do
not meet the criteria of a common stock equivalent, as its yield at
the time of issuance is greater than the AA corporate bond yield.
(16) Subsequent Events
On July 25, 1997, an agreement was signed between the Company and
President which terminated the previous December 1, 1994 agreement and
any and all oral agreements relating to the employment. The agreement
included payments for expense reimbursement, accrued and unused
vacation, medical, dental, disability and life insurance and severance
payments. In connection with this agreement, the President's employee
stock options are replaced by a warrant to purchase up to 150,000
shares of common stock exercisable at the closing bid price on July
18, 1997 ($7/16).
On August 21, 1997, the Company signed a Reorganization and Stock Exchange
Agreement (the Agreement) with the Ottomanelli Group, which includes
the following four restaurants and food service companies affiliated
through common control; 34th Street Cafe Associates, Inc., Garden
State Cafe Corporation, Ottomanelli Brothers West, Ltd. and
Ottomanelli's Cafe Franchising Corporation. The Ottomanelli Group
Companies will contribute 100% of its outstanding common stock in
exchange for 37-1/2% of Rattlesnake outstanding common stock, as well
as common stock purchase warrants equivalent to 37-1/2% of all
outstanding potentially dilutive securities, including options,
warrants, preferred stock and convertible debt. The agreement is
cancelable by either party prior to closing under specified terms in
the Agreement.
The contract also provides for the execution of employment and non-compete
agreements by specified Ottomanelli employees and the execution of the
trademark license agreements. Additionally, other conditions include:
Rattlesnake successfully entering into an agreement with the Series A
Preferred shareholders to induce into conversion of common stock; that
specified $500,000 of debt will be converted into equity; the $425,000
mortgage on the Rattlesnake Fairfield, Connecticut facility will be
paid or assumed by a third party; the securing of $150,000 bridge
financing; and securing a commitment letter by an investment banking
firm of $1.5 million equity financing under terms and conditions
subject to the acceptance of Ottomanelli.
On September 8, 1997, the Company repriced warrants issued to three
Series C noteholders with principal aggregating $62,499 in return for
extension of the re-payment period to December 15, 1997. If in the
event Rattlesnake does not make payments by the extended date, each
will receive an additional 10,000 warrants at the same exercise price.
On September 17, 1997, the Company received a letter from NASDAQ
indicating that the Company would be removed from the NASDAQ Small Cap
listing at the close of business on September 17, 1997 due to its
failure to comply with the minimum capital and surplus requirement of
$1,000,000 and the $1.00 minimum stock price.
(Continued)
F-26
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
On September 17, 1997, the Company closed its restaurant facility in
Lynbrook, New York.
On September 29, 1997, the Company received a demand for payment for the
$500,000 18% convertible notes payable due September 4, 1997. The
Company is negotiating with an investor to refinance this obligation.
In September 1997, the Company completed a bridge financing under which
it sold five $50,000 units totaling $250,000. Each full unit
consisting of (i) the Company's ten percent (10%) promissory note in
the principal amount of $50,000 (the "Note"), and (ii) upon repayment
of the Note, one four-year warrant for each dollar of financing
provided herewith, at the rate of one warrant convertible into one
share of the Company's common stock at the average bid price on the
day of the receipt of the financing. In the event that the holder of
the Note elects conversion rather than repayment of the Note, the Note
shall be automatically converted into convertible preferred stock or
promissory notes offered in a private placement offering (the
"Proposed Private Placement"). Such conversion shall occur, upon the
closing of the Proposed Private Placement, at a price per share equal
to eighty percent (80%) of the per share conversion price sold in the
Proposed Private Placement. In the event that a closing of the
proposed Private Placement shall not have occurred prior to December
31, 1997, the Holder shall be entitled to receive payment of the Note
on that date.
F-27
