SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from__________________ to_________________
Commission file number 1-13818
THE RATTLESNAKE HOLDING COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1369616
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
439 East 82nd Street, New York, NY 10028
(Address of principal executive offices) (Zip Code)
(212) 452-2359
Registrant's telephone number, including area code
________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last
report.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes___ No_X__
APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding
of each of the issuer's classes of common equity, as of the latest practicable
date: 11,303,564
<PAGE>
FORM 10-QSB
THE RATTLESNAKE HOLDING COMPANY, INC.
December 28, 1997
INDEX
Page No.
Part I - Financial Information
Item 1:Financial Statements
Consolidated Balance Sheet December 28, 1997 3
(Unaudited) and June 29, 1997
Consolidated Statements of Operations 4
for six months ended December 28, 1997
(Unaudited) and December 29, 1996 (Unaudited)
Consolidated Statements of Cash Flows 5
for the six months ended December 28, 1997
(Unaudited) and December 29, 1996 (Unaudited)
Consolidated Statements of Operations 6
for three and six months ended December 28, 1997
(Unaudited) and December 29, 1996 (Unaudited)
Notes to Consolidated Financial Statements 7
(Unaudited)
Management's Discussion and Analysis 11
Liquidity 13
Safe Harbor Statement 16
Part II - Other Information
Item 1: Legal Proceedings 18
Item 2: Changes in securities and Use of Proceeds 19
Item 3: Defaults Upon Senior Securities 19
Item 4: Submission of Matters 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
December 28, June 29,
ASSETS 1997 1997
------------ ------------
Current Assets:
<S> <C> <C>
Cash $ 20,121 $ 68,022
Accounts receivable, net 36,072 13,287
Inventory 41,900 42,119
Prepaid expenses and other current assets 55,137 23,272
Assets held for sale 318,559 679,544
------------ ------------
Total current assets $ 471,789 $ 826,244
Property and equipment, net 809,703 1,007,092
Intangible assets, net 297,838 299,102
Other assets, net 103,574 129,457
------------ ------------
$ 1,682,904 $ 2,261,895
============ ============
LIABILITIES AND STOCKHOLDER' EQUITY
Current liabilities:
Current maturities of notes payable $ 1,074,489 $ 835,335
Accounts payable 737,180 280,528
Liabilities related to assets held for sale 628,373 1,133,257
Accrued expenses 339,407 357,407
Dividends payable 0 103,818
Other current liabilities 156,293 218,220
------------ ------------
Total current liabilities $ 2,935,742 $ 2,928,565
Notes payable, net of current maturities 539,998 545,006
------------ ------------
Stockholders' equity
Preferred stock, $.10 par value, 5,000,000 shares
authorized, 56,000 issued and outstanding, on 5,650 5,650
December 28, 1997 and June 29, 1997, respectively
Common Stock, $.001 par value -20,000,000 shares authorized,
2,650,227 issued and outstanding at
December 28, 1997 and June 29, 1997, respectively 2,651 2,651
Additional paid-in capital 11,072,857 11,072,857
Accrued Dividends 0 (103,818)
Accumulated deficit (12,873,994) (12,189,016)
------------ ------------
(1,792,836) (1,211,676)
$ 1,682,904 $ 2,261,895
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three months ended Six months ended
------------------------------------------------------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Restaurant sales $ 865,542 $ 2,143,801 2,131,123 4,823,340
Less: promotional sales 16,509 112,526 65,679 223,536
----------- ----------- ----------- -----------
Net restaurant sales 849,033 2,031,275 2,065,444 4,599,804
Costs and expenses:
Cost of food and beverage sales 275,483 651,494 665,897 1,477,201
Restaurant salaries and benefits 280,941 745,726 666,732 1,695,166
Occupancy and other 192,765 579,971 526,383 1,202,833
Depreciation and amortization expense 76,667 195,450 183,334 399,920
----------- ----------- ----------- -----------
Total restaurant costs
and operating expenses 825,856 2,172,641 2,042,346 4,775,120
General and administration 369,761 648,888 603,598 1,372,387
Restaurant closing costs 0 243,218 0 243,218
Interest expense, net 45,646 41,553 97,347 68,089
Miscellaneous expenses 1,958 9,972 7,131 14,637
----------- ----------- ----------- -----------
Net loss (394,188) (1,084,997) (684,978) (1,873,647)
=========== =========== =========== ===========
Basic and diluted Net
loss per common share ($ 0.15) ($ 0.41) ($ 0.26) ($ 0.71)
Weighted average number of common
and common equivalent shares
outstanding 2,650,227 2,643,734 2,650,227 2,643,734
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six months ended
------------------------------------------------------
December 28, December 29,
1997 1996
----------- -----------
<S> <C> <C>
Cash Flow from operating activities:
Net Loss ($ 684,978) ($1,873,647)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 198,653 430,802
Loss on closure of restaurant sites 243,218
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (22,785) 31,035
Decrease (increase) in inventory 219 4,260
(Increase) decrease in prepaids and other assets (5,982) 44,559
(Increase) decrease accounts payable and accrued expenses 294,753 24,822
(Decrease) increase in other current liabilities (61,927) 276,169
----------- -----------
Net cash used in operating activities (282,047) (818,782)
Cash Flow from investing activities
Capital expenditures 0 (250,352)
Payments for acquisitions of leaseholds 0 (206,515)
----------- -----------
Net cash used in investing activities 0 (456,867)
----------- -----------
Cash flow from financing activities:
Net proceeds from issuance of convertible notes 0 0
Proceeds from issuance of preferred stock 0 1,272,387
Deferred financing costs 0 0
Proceeds from borrowings 750,000 0
Principal repayment of borrowings (515,854) (252,155)
----------- -----------
Net cash provided by financing activities 234,146 1,020,232
Net decrease in cash and cash equivalents (47,901) (255,417)
Cash, beginning of period 68,022 684,414
----------- -----------
Cash, end of period $ 20,121 $ 428,997
=========== ===========
Cash paid during the period for:
Interest $ 7,599 $ 71,917
=========== ===========
Income taxes $ 6,891 $ 4,736
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE OPERATING STORES ONLY
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three months ended Six months ended
------------------------------------------------------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Restaurant sales $ 865,543 $ 1,042,722 1,867,058 2,284,817
Less: promotional sales 18,573 47,984 59,564 94,335
----------- ----------- ----------- -----------
Net restaurant sales 846,970 994,738 1,807,494 2,190,482
Costs and expenses:
Cost of food and beverage sales 274,754 311,920 576,388 686,462
Restaurant salaries and benefits 280,941 345,634 567,937 760,080
Occupancy and other 204,120 203,219 411,767 454,687
Depreciation and amortization expense 91,667 74,622 183,334 160,718
----------- ----------- ----------- -----------
Total restaurant costs
and operating expenses 851,482 935,395 1,739,426 2,061,947
General and administration 445,587 578,936 670,949 1,215,971
Restaurant closing costs 0 0 0 0
Interest expense, net 46,187 30,649 93,127 53,185
Miscellaneous expenses 1,718 6,299 6,891 (456)
----------- ----------- ----------- -----------
Net loss (498,004) (556,541) (702,899) (1,140,165)
=========== =========== =========== ===========
Per share:
Book and diluted net loss per common ($ 0.19) ($ 0.21) ($ 0.27) ($ 0.43)
share
Weighted average number of common
and common equivalent shares
outstanding 2,650,227 2,643,734 2,650,227 2,643,734
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1997
(Unaudited)
1. Principles of consolidation
The consolidated financial statements include the accounts of The
Rattlesnake Holding Company, Inc. and subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. Consolidated financial statements
The accompanying unaudited consolidated financial statements as shown in
the index were prepared in accordance with generally accepted accounting
principles. These statements include all adjustments which, in the opinion of
management are necessary to present fairly the consolidated financial position
of the Company as of December 28, 1997 and June 29, 1997; the results of
operations for the three and six month periods ended December 28, 1997 and
December 29, 1996; and the cash flows for the six month periods ended December
28, 1997 and December 29, 1996. In the opinion of management, all necessary
adjustments that were made are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, reclassified or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for fiscal year end June 29, 1997. The results of operations for
the period ended December 28, 1997 are not necessarily indicative of the
operating results that may be achieved for the full year.
3. Basis of presentation
The accompanying consolidated financial statements have been prepared on a
going concern basis that contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
However, due to the matters discussed below, its continuation as a going concern
cannot be reasonably assured.
The Company has incurred aggregate losses since inception of $12,873,994,
inclusive of a net loss for the quarter ended December 28, 1997 of $394,188 and
for the six months ended December 28, 1997 of $684,978. 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 note holders with principal balances
7
<PAGE>
aggregating $62,499 have extended the repayment date to December 15, 1997. The
Series C notes may be converted to common stock or repaid at the time of a
future private placement of securities by the Company. Also, $500,000 of
convertible subordinated notes payable matured September 4, 1997, of which
$400,000 was repaid from an interim financing on December 8, 1997. The remaining
$150,000 (which includes accrued interest of $50,000) is payable $50,000 on or
before March 15, 1998 or earlier in certain events, $50,000 on or before May 1,
1998 and $50,000 on or before July 1, 1998. In addition, a $425,000 note payable
associated with the acquisition of the Fairfield restaurant matured on January
2, 1997. The restaurant was sold on March 24, 1998 and the note has been
restructured to provide for interest payments of $5,500.44 monthly through June
24, 1998, with the remaining principal and any unpaid interest due on June 24,
1998. The outstanding principal balance is $440,035. The noteholder has taken a
$230,000 note due the company and received on the sale of the restaurant as
additional collateral for the $440,035 note. It is anticipated that the
difference between the oustanding balance due and the note due the company
assigned be repaid from a private placement anticipated by the Company.
4. Financing Arrangements
Between April 1998 and July 1998, the Company sold approximately $750,000
of common stock (at $.15 per share) and issued notes with warrants for
approximately $50,000.00.
The Company is seeking to consummate a significant private placement, which
will permit it to consummate several pending restaurant acquisitions and further
develop its business. It is expected to try to consummate the private placement
during August 1998.
On December 8, 1997, the Company entered into a refinancing arrangement in
which it raised $500,000. $400,000 of the proceeds therefrom were applied to
reduce the approximately $550,000 of indebtedness (including accrued interest)
resulting from a financing the company conducted in March 1997. The $150,000
balance from the March refinancing was restructured as follows: $50,000 shall be
payable on or before March 15, 1998 or earlier in certain events, $50,000
payable on or before May 1, 1998 and $50,000 payable on or before July 1, 1998.
If the private placement is closed prior to March 15, 1998 and if the price is
$.50 or less per share, the Company, at it's option, may pay the $50,000 due
March 15, 1998 in cash or may satisfy the entire $150,000 obligation in stock at
a price per share equal to eighty percent (80%) of the per share price sold in
the private placement. If the private placement price is more than fifty cents
($.50) per share the note holders may request payment of the remaining two
installments in stock rather than cash at 100% of the per share price sold at
the proposed private placement.
8
<PAGE>
5. Restaurant closing costs
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 the estimated realizable value and is currently accounted for in the
financial statements in "net assets held for sale." The restaurant was sold on
March 24, 1998 and the note has been restructured to provide for interest
payments of $5,500.44 monthly through June 24, 1998, with the remaining
principal and any unpaid interest due on June 24, 1998. The outstanding
principal balance is $440,035. The noteholder has taken a $230,000 note due the
company and received on the sale of the restaurant as additional collateral for
the $440,035 note. It is anticipated that the difference between the note due
and the note receivable assigned will be paid from a private placement
anticipated by the Company.
As of December 28, 1997, consistent with the Board's approval for the
closure of the Fairfield location 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 December 28, 1997
consolidated balance sheet includes the following components:
Fairfield restaurant facility $318,559
--------
Assets held for sale $318,559
========
Notes payable $425,000
Accounts payable and accrued interest 203,373
--------
Liabilities related to assets
held for sale $628,373
========
6. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
128, "Earnings Per Share" (Statement 128). Statement 128 replaces the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share excludes any dilution. It
is based upon the weighted average number of common shares outstanding during
the period. Dilutive earnings per share reflects the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Adoption of Statement 128 did not have
any effect on the Company's December 28, 1997 earnings per share or previously
reported earnings per share because all common stock equivalents were
antidilutive in those periods.
9
<PAGE>
7. Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement 130
"Reporting Comprehensive Income". This Statement requires that companies
disclose comprehensive income, which includes net income, foreign currency
translation adjustments, minimum pension liability adjustments, and unrealized
gains and losses on marketable securities classified as available-for-sale. The
provisions of Statement 130 are effective for financial statements issued for
fiscal years beginning after December 15, 1997. In the opinion of management,
adoption of Statement 130 will not have a material effect on the Company because
the Company does not have any foreign currency translation adjustments, minimum
pension liability adjustments, or unrealized gains or losses on marketable
securities classified as available-for-sale.
8. Dividends in arrears
The Company's preferred stock bears a dividend rate of 7-1/2% per annum.
These dividends are payable semi-annually in arrears on May 15 and November 15
of each year, commencing November 15, 1996. At December 28, 1997, the accrued
dividends aggregated $103,818 in February 1998, all accrued dividends in arrears
were waived by the preferred shareholders.
10
<PAGE>
MANAGEMENT DISCUSSION and ANALYSIS
Of OPERATIONS and FINANCIAL CONDITION
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.
OPERATING RESULTS FOR THE QUARTER AND SIX MONTHS ENDED DECEMBER 28, 1997 AS
COMPARED WITH DECEMBER 29, 1996
Gross restaurant sales decreased 59.6% to $865,542 for the quarter ended
December 28, 1997 from $2,143,801 for the quarter ended December 29, 1996. For
the six months ended December 28, 1997 Gross restaurant sales decreased 55.8% to
$2,131,123 from $4,823,340. Likewise, net restaurant sales decreased 58.2% to
$849,033 for the quarter ended December 28, 1997 from $2,031,275 for the quarter
ended December 29, 1996. For the six months ended December 28, 1997 net
restaurant sales decreased 55.1% to $2,065,444 from $4,599,804. The decrease in
restaurant sales resulted from a decrease in the number of restaurants operating
during the period. Three restaurants were operating for the entire quarter ended
December 28, 1997 as compared to six during the quarter ended December 29, 1996.
For the three restaurants operating for both periods, same store sales declined
17.5% from $2,190,482 in 1996 to $1,807,494 in 1997. The decrease in sales
resulted from the transition of management, The reduction in advertising
expenditures and the maturity of the concept in the markets being served.
Promotional sales decreased as a percentage of gross sales from 5.2% for
the three months ended December 29, 1996 to 1.9% for the quarter ended December
28, 1997. This decrease is attributable to no new units being opened during the
second quarter ended December 28, 1997. Also contributing to this decline is a
concentrated focus on reducing manager complimentary sales at the units.
For the three months ended December 28, 1997, the Company's cost of food
and beverage sales increased slightly as a percentage of net sales to 32.4% as
compared to December 29, 1996 cost of sales which was 32.1%. The cost of food
and beverage sales decreased to $275,483 for the three months ended December 28,
1997 from $651,494 for the three months ended December 29, 1996. As a percentage
of net sales for the six months ended December 28, 1997 cost of sales was 32.2%
as compared to December 29, 1996 cost of sales which was 32.1%. The cost of food
and beverage sales decreased to $665,897 for the six months ended December 28,
1997 from $1,477,201 for the six months ended December 29, 1996. The nominal
percentage increase in cost of sales is due to higher food costs for
11
<PAGE>
various items and also due to inflation trends. The Company has attempted to
diminish the effect of these increased prices through changes to the Company's
menu, centralized purchasing and low food cost specials.
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
decreased to $280,941 for the three months ended December 28, 1997 as compared
to $745,726 for the three months ended December 29, 1996. As a percentage of net
restaurant sales, these costs decreased to 33.1% in 1997 as compared to 36.7% in
1996. For the six months ended December 28, 1997 restaurant salaries and fringe
benefits decreased as a percentage of sales to 32.2% from 36.8% for the six
months ended December 29, 1996. Actual restaurant salaries and fringe benefits
were $666,732 for the six months-ended December 28,1997 as compared to
$1,695,166 for the six months ended December 29, 1996. This decrease is
attributed to a reduction in restaurant managers and other personnel.
Occupancy and other related expenses, which include linen, repairs,
maintenance, utilities, rent, insurance and other occupancy related expenses,
decreased to $192,765 for the three months ended December 28, 1997 from $579,971
for the three months ended December 29, 1996. As a percentage of net restaurant
sales, these costs decreased to 22.7% in the three months ended December 28,
1997 from 28.5% in the three months ended December 29, 1996. For the six months
ended December 28, 1997 these costs decreased to 25.5% from 26.1% for the six
months ended December 29, 1996. The actual occupancy and related costs were
$526,383 for the six months-ended December 28,1997 as compared to $1,202,833 for
the six months ended December 29, 1996. The decrease is attributable to
occupancy costs relating to the closed units.
Depreciation and amortization expenses, decreased to $76,667 or 9.0% of net
restaurant sales for the three months ended December 28, 1997 from $195,450 or
9.6% for the three months ended December 29, 1996. For the six months ended
December 28, 1997 these expenses increased slightly as a percentage of sale to
8.8% from 8.7% for the six months ended December 29, 1996. The actual
depreciation and related expenses were $183,334 for the six months-ended
December 28,1997 as compared to $399,920 for the six months ended December 29,
1996. This decrease is attributed to fewer units in operation as compared to the
prior period.
General and administrative expenses increased as a percentage of net sales
from 31.9% for the three months ended December 29, 1996 to 43.6% for the three
months ended December 28, 1997. General and administrative expenses decreased to
$369,761 for the three months ended December 28, 1997 from
12
<PAGE>
$648,888 for the three months ended December 29, 1996. General and
administrative expenses decreased as a percentage of net sales from 29.8% for
the six months ended December 29, 1996 to 29.2% for the six months ended
December 28, 1997. General and administrative expenses decreased to $603,598 for
the six months ended December 28, 1997 from $1,372,387 for the six months ended
December 29, 1996. The percentage increase during the three months period ended
December 28, 1997 is primarily attributed to expenses incurred in relation to
the severance of prior management's employment agreements as part of the
Company's implementation of its cost reduction plan. The Company has implemented
cost reduction measures, which should reduce general and administrative costs at
both the corporate and unit levels.
Interest expense increased to $45,646 for the three months ended December
28, 1997 from $41,553 for the three months ended December 29, 1996. Interest
expense increased to $97,347 for the six months ended December 28, 1997 from
$68,089 for the six months ended December 29, 1996. The increase in interest
expense is attributable to the Company's additional financing arrangements.
The net loss as a percentage of net sales decreased from 53.4% for the
three months ended December 29, 1996 to 46.4% for the three months ended
December 28, 1997. The net loss as a percentage of net sales decreased from
40.7% for the six months ended December 29, 1996 to 33.2% for the six months
ended December 28, 1997. This improvement in net loss is primarily due to the
decrease in general and administrative costs at the unit level, reduction of the
restaurant salaries and benefits, and reduced occupancy costs.
LIQUIDITY
At December 28, 1997, the Company had a working capital deficit of
$2,463,953. At such date (but after giving effect to the December 1997
Refinancing described herein) (i)$500,000 of notes payable (inclusive of $50,000
of accrued interest) had been declared in default, (ii)$303,749 of notes payable
(inclusive of $72,140 of accrued interest) had become due and payable but had
not yet been declared in default (note holders with principal balances
aggregating $62,499 have extended the repayment date to December 15, 1997),
(iii)$270,740 of notes or similar obligations becomes due in the period ending
September 27, 1998, and (iv)$366,673 was owed or owing to the Company's
suppliers. A $425,000 note payable associated with the acquisition of the
Fairfield Rattlesnake restaurant matured on January 2, 1997. The restaurant was
sold on March 24, 1998 and the note has been restructured to provide for
interest payments of $5,500 monthly through June 24, 1998, with the remaining
principal and any unpaid interest due on June 24, 1998. The outstanding
principal balance is $440,035. The $425,000 note and
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<PAGE>
$47,812 of accrued interest is included in liabilities related to assets held
for sale.
Management has used the equity raised and the sale of the Fairfield
Restaurant to meet these liquidity and capital resource shortfalls. In the
future, management anticipates additional equity or debt financing, deferment of
payment of accounts payable, the conversion of certain indebtedness into equity,
and the implementation of certain cost containment steps including reducing the
general and administrative expenses at the corporate and unit levels in fiscal
1998 to meet any future liquidity and capital shortfalls. No assurance can be
given that any or all of such steps will be accomplished or that they will be
sufficient to overcome these financial problems. The failure to address these
shortfalls would have a material adverse effect on the Company. Additional funds
may be required in connection with the Ottomanelli transaction and the
transactions contemplated thereby. No assurance can be given that such funds
will be available.
The Company's cash position decreased by $ 47,902 during the six months
ended December 28, 1997, principally as a result of the net cash used in
operating activities exceeded the borrowing proceeds.
Net cash used in operating activities was $282,047, principally relating to
the Company's net loss, increases in accounts receivable, prepaid and other
assets and decrease in other current liabilities offset by depreciation and
amortization expenses and an increase in accounts payable and accrued expenses.
The Company generated $234,146 from financing activities principally relating to
the receipt of proceeds from bridge financing borrowings, offset by repayments
of outstanding indebtedness.
In August 1997 the Company entered into a Stock Exchange Agreement (the
"Agreement") with The Ottomanelli Group (the "Group"). The Agreement was amended
on several occasions, and closed in March of 1998. At such time, the Group
caused the merger with newly formed subsidiaries of the Company of Ottomanelli's
Cafe Franchising Corp., the franchisor of Ottomanelli's Cafe (R) restaurants,
and Garden State Cafe Corp., the operator of two restaurants at the Macys
department store in Paramus, New Jersey. The consideration was approximately
5,000,000 shares of common stock of the Company. Nicolo Ottomanelli became a
director and Chief Executive Officer of the Company. Joseph Ottomanelli became a
Vice President. Each of the Ottomanellis entered into an employment agreement
with the Company. An affiliate of the Ottomanelli' licensed the Ottomanelli's
Cafe(R) trademark to the Company.
14
<PAGE>
During September 1997, the Company entered into a private financing
arrangement to provide $250,000 of bridge financing at 10% interest per annum
and with a due date of December 31, 1997 or earlier, under certain
circumstances. At December 28, 1997 this financing has not been repaid. It is
anticipated that these amounts will be repaid from future financing activity.
On December 8, 1997, the Company entered into a refinancing arrangement in
which it raised $500,000. Four hundred thousand dollars of the proceeds
therefrom were applied to reduce the approximately $550,000 of indebtedness
(including accrued interest) resulting from a financing the Company conducted in
March 1997. The $150,000 balance from the March refinancing was restructured as
follows: $50,000 is to be paid on or before March 15, 1998 or earlier in certain
events, $50,000 on or before May 1, 1998 and $50,000 on or before July 1, 1998.
On July 2, 1998 The Company signed an agreement to purchase some of the
assets of 1562 Restaurant Corp. located at 1562 2nd Avenue, New York City.
Rattlesnake has the right to assign the contract to a subsidiary. The purchase
price is $425,000 payable $20,000 on contract, $105,000 at closing, and a
$300,000 promissory note at 8.5% payable in 72 payments of $5,333. The first
payment is due thirty days after closing, and may be prepaid at any time without
penalty. The note is secured by a security interest in the fixtures and
equipment purchased, as well as by a re-assignment of the lease to the seller.
In the event of a subsequent sale of the restaurant by the Company, the note
shall become due at the option of the seller. The sale is subject to Rattlesnake
obtaining a temporary liquor permit and the consent of the landlord to an
assignment of the lease to the Company. The closing shall take place 10 days
after the issuance of the liquor permit.
On July 3, 1998 Rattlesnake Greenwich, Inc. signed an agreement to purchase
some of the assets of Max Water Street, LLC located at 2 South Water Street,
Greenwich, Connecticut. The purchase price is $400,000 payable $20,000 on
contract, $155,000 at closing, and a $225,000 promissory note at 8% payable in
60 payments of $2,729.88 based on a 10 year pay out and a five year balloon. The
first payment is due thirty days after closing, and may be prepaid at any time
without penalty. The note is secured by a security interest in the fixtures and
equipment purchased, as well as by a conditional assignment of the lease to the
seller. In the event of a subsequent sale of the restaurant by the Company, the
note shall become due at the option of the seller. The sale is subject to the
consent of the landlord to an assignment of the lease to the Company. The
Company also executed a management agreement under the terms of which, the
Company is presently managing the restaurant. The management agreement will
terminate at the closing of the sale of the assets.
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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
and Fairfield, Connecticut locations as well as the sale of its New York City
property. In September 1997, the Company 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 third and fourth quarters of fiscal 1998.
Between April 1998 and July 1998, the Company sold approximately $750,000
of common stock (at $.15 per share) and issued notes with warrants for
approximately $50,000.00.
The Company is seeking to consummate a significant private placement, which
will permit it to consummate several pending restaurant acquisitions and further
develop its business. It is expected to try to consummate the private placement
during August 1998.
Liquidity remains a critical factor in the further development of the
restaurants' two concepts and the implementation of the current business plan.
Continued short-term operations will depend on, among other matters, the receipt
of additional financing.
SAFE HARBOR STATEMENT
Certain statements in this Form 10-QSB, including information set forth
under "Management's Discussion and Analysis" constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). The Company desires to avail itself of certain "safe
harbor" provisions of the Act and is therefore including this special note to
enable the Company to do so. Forward-looking statements included in this Form
10-QSB or hereafter included in other publicly available documents filed with
the Securities and Exchange Commission, reports to the Company's stockholders
and other publicly available statements issued or released by the Company
involve known and unknown risks, uncertainties, and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ from the future results, performance (financial or
operating) achievements expressed or implied by such forward looking statement.
Such future results are based upon management's best estimates based upon
current conditions and the most recent results of operations. These risks
include, but are not limited to, risks associated with potential acquisitions
and development of new locations; successful implementation of the Company's
cost containment plan and new operating strategy; immediate need for
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additional capital; competition; new management; the addition of a new
restaurant format; and other risks detailed in the Company's Securities and
Exchange Commission filings, including its Annual Report on Form 10-KSB for the
fiscal year 1997, each of which could adversely affect the Company's business
and the accuracy of the forward looking statements contained herein.
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PART II
Item 1: - Legal Proceedings
South Norwalk, Connecticut
An action was commenced in 1996 by Ellen Peck against Rattlesnake Ventures,
Inc. ("RVI"), a wholly owned subsidiary of the Company (and the tenant of the
RVI Rattlesnake restaurant), a former chief executive officer of the Company
(the "Former CEO"), and the landlord of the RVI Rattlesnake restaurant in South
Norwalk, Connecticut (the "Landlord"). The action was based on an allegation of
excessive noise from the restaurant. A jury verdict was rendered on August 4,
1998 against RVI for $425,000, against the Former CEO for $200,000 and against
the Landlord for $250,000. The Company has an indemnity agreement with the
Former CEO and RVI has an indemnity agreement with the Landlord. The Company
believes that the verdicts are excessive in that the plaintiff did not show or
offer evidence of loss of work, medical treatment or any injury. The verdicts
are being appealed on that and other legal bases. RVI had three different
insurance policies covering the period of the alleged offensive behavior and
although the insurance carriers have or may disclaim or reserve as to liability,
RVI will vigorously pursue its rights under said policies. If claimed, the
Company will resist indemnification of the Former CEO, since his alleged actions
were wrongful. In view of the above, the Company does not believe that the
verdicts will have a material adverse effect on the Company or RVI.
Danbury, Connecticut
A foreclosure action was commenced in 1998 by Union Savings Bank (the
"Bank") against the landlord of The Rattlesnake Southwestern Grill (closed for
renovations) in Danbury, Connecticut based on the landlords mortgage arrears.
Rattlesnake Danbury, Inc., the lessee of the restaurant, has been joined as a
defendant. The Bank has obtained an order of strict foreclosure, and unless the
mortgage debt of $1,177,000 is paid off or restructured with the Bank, the
restaurant will become a tenant at will, and will be subject to eviction. The
Company, however, has a letter of intent with the landlord owner, which is
believed to be acceptable to the Bank, whereby some or all of the arrearage to
the bank, totaling approximately $350,000, will be brought up to date by a new
entity consisting of the present owner and the Company. The letter of intent
provides that the Company supply all necessary arrearage funds and that the
Company and the present owner each have a one-half interest in the new owner
entity and that the current lease amount payments will amortize the mortgage.
Binding agreements have not been entered into with respect to such transaction.
In the event that such agreements are not entered into, the Company's Danbury
restaurant may be evicted if title is transferred to an owner-user, or may
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be subjected to a renegotiation of its lease on terms less favorable to the
Company than the present lease. The Company may also choose to not enter into
binding agreement based on the letter of intent.
Lynbrook, New York
The Company is defending an action brought by Jack Ciotti Trust, the
landlord of a former restaurant in Lynbrook New York leased by a subsidiary of
the Company. The action against the Company is based on an alleged guaranty of
the lease payments due from the subsidiary of the Company. The Company is of the
position that the landlord waived the guarantee at the time of the surrender of
the premises in September 1997. The action seeks the sum of approximately
$200,000.
Collection Actions
The Company is defending a series of collection actions, under which the
aggregate sum sought is approximately not more than $100,000. The Company
believes it has full or partial defenses to a number of such actions and
believes it can settle all or most of the others for a sum which, in the
aggregate, is lower than that set forth above.
Judgments
The Company was subject to a judgment for $150,000 granted to the holder of
certain notes issued in March 1997. However, the Company has a written agreement
with the judgment holder to convert the sum due into Common stock at the time of
the Offering at prices ranging form $0.25 to $0.225 per share. The Company is
subject to another note holder judgment for approximately $50,000, and is
discussing a similar conversion with the judgment holder. There can be no
assurance that such conversions will be effected.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3. - Defaults upon Senior Securities
$303,749 of Series C subordinated notes payable matured on August 6, 1997,
of which note holders with principal balances aggregating $62,499 have extended
the repayment date to December 15, 1997. These Series C notes and accrued
interest of $60,749 are in default for non-payment. The Series C noteholders
have waived the accrued interest on their notes in return for $500,000
convertible subordinated notes dated March 4, 1997, matured
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September 4, 1997. These notes were in default for non-payment, but were
restructured on December 8, 1997, and are no longer in default.
A $425,000 note payable associated with the acquisition of the Fairfield
restaurant matured on January 2, 1997. The restaurant was sold on March 24, 1998
and the note has been restructured to provide for interest payments of $5,500.44
monthly through June 24, 1998, with the remaining principal and any unpaid
interest due on June 24, 1998. The outstanding principal balance is $440,034.81.
The noteholder has taken a $230,000 note due the company and received on the
sale of the restaurant, as additional collateral for the $440,034.81 note.
The Company is currently prohibited from paying cash dividends by virtue of
the Delaware General Corporation Law.
Item 4. - Submission of Matters to A Vote of Security Holders
None.
Item 5. - Other Information
The Company's Common Stock was delisted from the NASDAQ SmallCap Market in
September 1997 and as of November 4, 1997 was suspended from trading on the
Boston Stock Exchange (the "BSE"). The BSE has applied for the delisting of the
Company common stock from such exchange pursuant to Rule 12d-2f2.
The Company securities are quoted on the "pink sheets" or the NASD's
Electronic Bulletin Board. Due to the nature of such markets and the "penny
stock" rules to which the common stock trades (Rule 15g-9 promulgated under the
SEC Act) there may not be a liquid trading market in the common stock.
Item 6. - Exhibits and Reports on Forms 8-K.
During the quarter ended December 28 1997, the Company filed no reports on Form
8-K.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE RATTLESNAKE HOLDING COMPANY, INC.
(Registrant)
Date October 15, 1998 /s/ Nicolo Ottomanelli
------------------- ------------------------
Nicolo Ottomanelli
Chief Executive Officer
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