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 March 31, 1999
OR
[ ]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)
2 South Main Street, So. Norwalk, Conn. 06854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860) 276-8660
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
29,505,066 Common Shares, par value $.001 per share were outstanding as of
March 31, 1999
<PAGE>
FORM 10-QSB
THE RATTLESNAKE HOLDING COMPANY, INC.
March 31, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
Part I - Financial Information
Item 1: Financial Information
<S> <C>
Condensed Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and June 28, 1998 3
Unaudited Condensed Consolidated Statements of Operations three and nine months
ended March 31, 1999 and March 29, 1998 4
Unaudited Consolidated Statements of Cash Flows nine months ended March 31, 1999
and March 29, 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis 10
Liquidity 13
Safe Harbor 15
Part II - Other Information
Item 1: Legal Proceedings 16
Item 2: Changes in securities and Use of Proceeds 17
Item 3: Defaults Upon Senior Securities 17
Item 4: Submission of Matters 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, 1999 June 28, 1998
(unaudited)
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash $3,660,354 $311,328
Accounts receivable 21,843 16,831
Notes receivable, current installments - 4,080
Inventory 16,028 29,397
Prepaid expenses and other current assets 1,000 7,200
---------- -------
Total current assets 3,699,225 368,836
---------- -------
Notes receivable, less current
installments - 225,920
Property and equipment, net 80,193 81,375
Intangible assets, net 22,502 30,598
Other assets, net 85,621 78,443
---------- -------
$3,887,541 $785,172
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of notes payable $ 252,544 $1,282,539
Accounts payable 594,460 1,019,139
Accrued expenses 457,314 629,414
Dividends payable - 207,636
Other current liabilities 183,079 182,971
---------- ---------
Total current liabilities 1,487,397 3,321,699
Notes payable, net of current maturities 229,173 525,006
---------- ---------
1,716,570 3,846,705
---------- ---------
Stockholders' equity:
Preferred stock, $.10 par value, 5,000,000 shares authorized, 200,000
designated Series A, and 56,500 issued and outstanding at June 28, 1998 - 5,650
500,000 designated Series B, 307,104 issued and
outstanding, at March 31, 1999 30,710 -
Common stock, $.001 par value, 400,000,000 and 20,000,000
shares authorized, at March 31, 1999 and June 28, 1998 respectively,
29,505,066 and 10,889,285 issued and outstanding, at March 31, 1999 and
June 28, 1998 respectively 29,506 10,890
Additional paid-in capital 20,285,532 12,554,618
Accrued dividends - (207,636)
Accumulated deficit (18,174,777) (15,425,055)
----------- ------------
2,170,971 (3,061,533)
----------- ------------
$3,887,541 $ 785,172
========== ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 29, March 31, March 29,
1998 1999 1998 1999
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Restaurant sales $ 322,808 $ 857,926 $1,421,073 $2,989,049
Less: promotional sales 10,548 41,628 55,664 107,307
--------- ---------- ---------- ----------
Net restaurant sales 312,260 816,298 1,365,409 2,881,742
Costs and expenses:
Cost of food and beverage sales 98,763 266,849 520,759 932,746
Restaurant salaries and benefits 112,429 283,145 560,770 949,877
Occupancy and related expenses 40,271 186,066 416,747 712,449
Depreciation and amortization expense 13,893 91,667 36,175 275,001
--------- --------- --------- ----------
Total restaurant costs and operating
expenses 265,356 827,727 1,534,451 2,870,073
Selling, general and administrative 1,587,185 83,205 2,050,405 686,803
Loss on closure of restaurant sites and 365,000 - 365,000 -
impairment charges
Interest expense, net 65,154 81,988 196,340 179,335
Litigation award - - 225,000 -
Miscellaneous expenses (income) (2,332) 2,907 ( 1,708) 10,038
--------- --------- --------- ----------
Net loss before extraordinary item (1,968,103) (179,529) (3,004,079) (864,507)
--------- --------- --------- ----------
Extraordinary item:
Gain on extinguishment of debt 254,360 - 343,310 -
--------- --------- --------- ----------
Net loss (1,713,743) (179,529) (2,660,769) (864,507)
Dividends on preferred shares - (77,863) - ( 77,863)
--------- --------- --------- ----------
Net loss available to common shareholders $(1,713,743) $ (257,392) $(2,660,769) $ (942,370)
========= ========= ========= ==========
Net loss per share:
Loss before extraordinary item (0.09) (0.10) (0.19) (0.36)
Extraordinary item 0.01 - 0.02 -
------ ------ ------ ------
Net loss - Basic and diluted (0.08) (0.10) (0.17) (0.36)
====== ====== ====== ======
Weighted average number of common
and common equivalent shares
outstanding - Basic and diluted 21,441,412 2,650,227 15,609,352 2,650,227
========== ========= ========== =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements Of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
March 31, March 28,
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,660,769) (864,507)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 36,175 290,321
Litigation award 225,000 -
Issuance of common stock for services rendered 218,676 -
Impairment charge 365,000 -
Stock compensation 106,077 -
Valuation of warrants for services 1,093,873 -
Gain on extinguishment of debt (343,310) -
Changes in assets and liabilities:
Increase in accounts receivable (5,012) (18,367)
Decrease in inventory 13,369 219
Increase in prepaids and other assets (978) (14,989)
(Decrease) increase accounts payable and accrued expenses (322,576) 453,388
Increase in other current liabilities 108 489
------------ -------
Net cash used in operating activities (1,274,367 (153,446)
------------ -------
Cash flows from investing activities
Capital expenditures (26,900) -
------------ -------
Net cash used in investing activities (26,900) -
Cash flows from financing activities:
Proceeds from issuance of convertible notes 150,000 750,000
Proceeds from issuance of common stock, net 153,500 -
Financing costs - (230,000)
Proceeds from issuance of Series B preferred stock, net 4,732,624 -
Principal repayments of borrowings (385,831) (415,854)
--------- -------
Net cash provided by financing activities 4,650,293 104,146
--------- -------
Net increase (decrease) in cash 3,349,026 (49,300)
Cash, beginning of period 311,328 68,022
--------- ----------
Cash, end of period 3,660,354 $ 18,722
========= ==========
Cash paid during the period for:
Interest 223,202 $ 7,599
======= ==========
Income taxes - $ 6,891
======= ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 1999 and June 28, 1998; the results of operations
for the three and nine month periods ended March 31, 1999 and March 29,1998; and
the cash flows for the nine month periods ended March 31, 1999 and March
29,1998. 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 the year end June 28, 1998. The results of operations for the
period ended March 31, 1999 are not necessarily indicative of the operating
results that may be achieved for the full year.
3. Basis of presentation
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
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 $18,174,777,
inclusive of a net loss for the nine months ended December 31, 1998 of
$3,004,079, exclusive of a $343,310 extraordinary gain on forgiveness of debt.
Based upon interim financial information prepared by management, the Company has
continued to incur losses in fiscal 1999. Additionally, $10,417 of Series C
subordinated notes payable matured on August 6, 1997, and a $2,089 subordinated
note payable matured on August 6, 1996, such obligations aggregating $12,506 and
all of which are in default as of March 31, 1999.
Subsequent to the completion of the private placement in February 1999
which effectively satisfied all short and long-term debt that was in default
(see Private Placement Offering below), the Company has assembled a new
management team and developed a new restaurant theme which will be introduced at
the recently reacquired Danbury, Connecticut location.
Management believes that the finalization of its cost reduction plan and
its approximately $6,000,000 private placement financing 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.
Private Placement Offering
On October 27, 1998, the Company commenced an offering (the "Offering") of
its Series B Convertible Preferred Shares, $.10 par value. Between February 17,
1999 and July 2, 1999, the Company sold approximately $6,000,000 of Series B
Preferred Shares pursuant to the Offering and converted approximately $1,350,000
of its debt to Company equity. During the Offering, the Company satisfied, by
payment of cash and/or equity in the form of preferred and/or common stock, the
following: (a) all outstanding Series C promissory notes; (b) certain
outstanding Series B promissory notes; (c) all outstanding promissory notes
related to the Fairfield facility; and (d) all outstanding promissory notes from
(i) September 1997, (ii) March through June 1998, and (iii) October and November
1998, effectively satisfying all short term and long term debt which was in
default.
The preferred shares will be convertible, at the option of the holder at
any time after November 1999, at a conversion price initially equal to $0.05 per
share of common stock. The conversion rate will be reduced by 10% per month for
each month the Company fails to comply with its obligations to file, and in good
faith process, a registration statement.
The conversion price is subject to the adjustments on the terms set forth
in the Certificate of Designation. The outstanding preferred shares shall be
converted, with no action on the part of the holder, if, at any time after
February 2000, the common stock into which the same is converted is registered
under the Securities Act and the closing bid price of the common stock for
twenty consecutive trading days is at least four times the conversion price
($0.20 based on the initial conversion price of $0.05).
Holders of preferred shares are entitled to receive, quarterly, dividends
at the rate of 8% per annum before any dividends may be paid with respect to the
Common Stock, which shall be paid in cash or preferred shares at the election of
the Company. If there is a failure to pay dividends, the Placement Agent, on
behalf of such holders, has the right to designate one director to the Company's
Board. In addition, if the Company fails to comply with its obligations to file
and process a Registration Statement, the dividend rate will increase to 14% per
annum from issuance.
Pursuant to the March 1998 agreement to acquire the Ottomanelli Group,
additional consideration due to anti-dilution provisions contained in the
agreements in the form of common stock was payable to the Ottomanelli Group
shareholders as a result of the private placement. In February 1999, 5,000,000
shares of common stock were issued pursuant to such anti-dilution provisions,
which included a maximum addition which was met. As the Company recorded an
impairment charge in fiscal 1999 relating to the termination of the operations
of the Ottomanelli restaurants, the fair value of the common stock issued,
$250,000, was recognized as a further impairment loss in the quarter ended March
31, 1999. (2) A note receivable of $230,000, which was received as partial
consideration for the sale of the Company's Fairfield facility, was exchanged
with a value assigned of $115,000 in partial satisfaction of a $425,000 note
payable and an additional $115,000 loss on restaurant closure was recognized in
the quarter ended March 31, 1999.
4. Financing Arrangements
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 indebtedness (including accrued interest)
resulting from a financing the Company conducted in March 1997. In October 1998,
$50,000 of this was paid and the remaining $100,000 of this debt was converted
into common stock of the Company.
In August 1998, the Company issued a sixty day convertible note in the
principal amount of $100,000 at an interest rate of 8% to an investment bank in
consideration for professional services rendered. In February 1999, such note
was satisfied by conversion into Company equity.
During the quarter ended September 30, 1998, the Company privately sold
1,100,000 shares of its common stock at $.15 per share for an aggregate of
$165,000.
In October 1998, a noteholder of a $100,000 remaining outstanding balance
from a $500,000 convertible note due September 4, 1997, with unpaid accrued
interest of approximately $90,000, accepted common stock with a fair value of
$100,000 in exchange for the forgiving of all outstanding obligations.
Accordingly, the Company has recorded an extraordinary gain of $88,950 in the
quarter ended December 31, 1998.
Between October and December 1998, the Company entered into private
financing arrangements with three individuals to provide $150,000 of bridge
financing at 16% interest per annum, plus warrants, with due dates of the
earlier of the closing of the proposed private placement or ninety days,
respectively. All notes were satisfied by payment of cash and/or conversion to
Company equity at the initial closing of the private placement on February 17,
1999.
In connection with the private placement, the Company sold 211,289 shares
of Series B preferred stock at $25 per share, generating gross proceeds of
$5,282,225. As part of the private placement, noteholders, including $293,332
Series C subordinated notes payable matured on August 6, 1997, of which
noteholders with principal balances aggregating $62,499 extended the repayment
date to December 15, 1997, $425,000 note payable matured on January 2, 1997,
$11,709 note payable matured in February 1998, $190,000 note payable matured on
December 31, 1997, $150,000 notes payable matured on May 31, 1998, $270,828
Series B subordinated notes payable due July 7, 2000, $50,000 notes payable
matured on October 31, 1998, $100,000 note payable matured on August 31, 1998
and $150,000 notes payable matured on February 1, 1999, such obligations
aggregating $1,640,869 and all of which were in default, including accrued and
unpaid interest of approximately $428,500, entered into a series of debt
satisfaction agreements, whereby in exchange for cash payments, the issuance of
2,200,000 shares of common stock, with a fair value of $0.05 per share, the
issuance of 29,645 shares of Series B preferred stock at $25 per share and to
the mortgage holder of the Fairfield facility, a discounted note receivable
arising from the sale of the Fairfield property with a fair value of $115,000,
all of the above mentioned indebtedness was extinguished.
5. Restaurant Operations
On July 2, 1998, The Rattlesnake Holding Company, Inc. signed an agreement
to purchase some of the assets of 1562 Restaurant Corp. located at 1562 2nd
Avenue, New York City. The purchase price was $425,000 payable $20,000 on
contract, $105,000 at closing, and a promissory note at 8.5% payable in 72
payments of $5,332.52. The Company decided not to pursue the acquisition of this
restaurant.
On July 3, 1998, the Company entered into a contract for the purchase of a
restaurant facility in Greenwich, Connecticut for $400,000 in a combination of
cash and notes. The Company ultimately chose not to purchase this property.
On June 22, 1998, the Company closed its Danbury, Connecticut facility and
subsequently lost its tenancy pursuant to a foreclosure action. Accordingly, the
Company recognized a loss of $270,426 in fiscal 1998 relating to the closure.
On April 15, 1999, the Company subsequently reacquired the facility for
$1,350,000 in cash.
6. Recent Accounting Pronouncements
In June 1997, the FASB issued Statement 131, "Disclosures About Segments of
an Enterprise and Related Information", effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standard for related disclosure
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This Statement requires reporting segment profit and loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit and loss, total
segment assets and other amounts disclosed for segments to corresponding amounts
reported in the consolidated financial statements. Restatement of comparative
information for earlier periods presented is required in the initial year of
application. Interim information is not required until the second year of
application, at which time comparative information is required. The adoption of
the Statement in fiscal 1999 will nit have a material impact on its financial
reporting as the Company has one operating segment.
In June 1998, Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"), was issued which is effective for fiscal years beginning June 15, 2000.
Statement 133 standardizes the accounting for derivative instruments and
requires that all derivative instruments be carried at fair value. The Company
has not yet determined the impact that Statement 133 will have on its
consolidated financial statements and believes that such determination will not
be meaningful until closer to the date of initial adoption.
7. Litigation
The Company is a co-defendant in an action brought by an owner of an
apartment above the South Norwalk Company restaurant for negligence per se,
intentional infliction of emotional distress, negligent infliction of emotional
distress, and violations of the Connecticut Unfair Trade Practices Act (CUTPA)
based upon alleged excessive noise and rude and/or threatening conduct of
employees. The jury awarded a verdict in the amount of $625,000 against various
defendants, including the Company's former Chairman on August 5, 1998.
Accordingly, the Company has recorded a $625,000 charge in the quarter ended
September 30, 1998 to accrue this judgment. On November 20, 1998, the Court set
aside the jury's verdict as to all counts against the Company except for
plaintiff's claim for negligence per se and accordingly reduced the jury's award
to $225,000. Accordingly, the Company reduced by $400,000, in the quarter ended
December 31, 1998, the amount of the accrual recognized in the quarter ended
September 30, 1998. The jury's award is currently on appeal by the Company, and
plaintiff has appealed the Court's decision to set aside a portion of the jury's
verdict and reduce the award. There are also potential claims of indemnification
by other defendants against the Company in the event the plaintiff's appeal is
successful.
In July 1999, a demand letter was tendered to the Company by the legal
counsel of the former Chairman seeking indemnification from potential
liabilities arising out of this matter. This demand is based on an
indemnification provision in an agreement between the former Chairman and the
Company. The Company believes that there are valid defenses to the
indemnification claim.
Plaintiff's negligence claims in this matter are arguably covered by one or
more of the Company's insurance policies. Farmington Casualty Company
("Farmington") and Insurance Company of Greater New York ("GNY"), two out of
three of the Company's insurance carriers, retained counsel to represent the
Company and defended the Company in this case under a reservation of rights. The
third, Public Service Mutual Ins. Co., denied coverage for the claim altogether.
GNY and Farmington have continued to prosecute the appeal in this matter, but
under a reservation of rights. The Company has advised Farmington and GNY that
it intends to pursue its rights in an action for damages and declaratory relief
in the event that the appeal is unsuccessful and the insurance carriers refuse
to provide coverage for plaintiff's claims. GNY and Farmington continue to
reserve all rights with respect to coverage.
Settlement negotiations are ongoing, however, there can be no assurance of
a satisfactory settlement.
The Company is a defendant in an action for an alleged breach of a
commercial lease in which damages exceeding $190,000 are being sought. The
Company has disputed this claim and believes that the plaintiff has inadequately
responded to the Company's demand for discovery and inspection and
interrogatories. A compliance conference was adjourned to September 15, 1999.
The Company intends to vigorously defend this action.
The Company is also a party in various other legal actions incidental to
the normal conduct of its business. Management does not believe that the
ultimate resolution of these actions will have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
8. Dividends in Arrears
None. Prior dividends due on Series A preferred shares were waived upon
conversion to Series B pursuant to an Exchange and Waiver Agreement previously
entered into with the Series A Preferred Shareholders in February 1998.
The Company is currently prohibited from paying cash dividends by virtue of
Delaware General Corporation Law.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When we use the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions as they relate to
the Company or its management, they are intended to identify such
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Our actual results, performance or achievements
could differ materially from the results expressed in or implied by these
forward-looking statements.
Upon the finalization in 1999 of the $6,000,000 Series B Preferred Stock
private placement offering, the Company completed its Cost Reduction Plan
commenced in fiscal 1997.
At March 31, 1999, the Company operated a profitable Rattlesnake
Southwestern Grill restaurant in South Norwalk, Connecticut, having closed
and/or sold all other restaurants previously owned.
At March 31, 1999, the long term and short term debt of the Company was
approximately $502,000 a significant reduction resulting from cash payments
and/or conversion to Company equity after the completion of private placement
noted above.
At March 31, 1999, the Company's new management team, comprised of industry
specific experienced personnel, continued to develop the Company's re-start
strategy of growth through Company and franchised operation of a multi-regional
chain of mid-priced steakhouse restaurants, tentatively named Spencer's.
Nine Months and Three Months Ended March 31, 1999 as Compared with Nine
Months and Three Months Ended March 29, 1998
Gross restaurant sales decreased 62.4% to $322,808 for the quarter ended
March 31, 1999 from $857,926 for the quarter ended March 29,1998. For the nine
months ended March 31, 1999, gross restaurant sales decreased 52.5% to
$1,421,073 from $2,989,049. Likewise, net restaurant sales decreased 61.8% to
$312,260 for the quarter ended March 31, 1999 from $816,298 for the quarter
ended March 29,1998. For the nine months ended March 31, 1999, net restaurant
sales decreased 52.6% to $1,365,409 from $2,881,742. The decrease in restaurant
sales resulted principally from a decrease in the number of restaurants
operating during the period.
Promotional sales decreased as a percentage of gross sales from 4.9% for
the three months ended March 29,1998 to 3.3% for the quarter ended March 31,
1999. However, for the nine months ended March 31, 1999, promotional sales
increased to 3.9% from 3.6%. Promotional sales decreased from $41,628 for the
quarter ended March 29, 1998 to $10,548 for the quarter ended March 31, 1999 and
decreased from $107,307 to $55,664 for the respective nine-month periods. These
decreases are attributable to the reduction of the number of units operating
during the period.
For the three months ended March 31, 1999, the Company's cost of food and
beverage sales decreased as a percentage of net sales to 31.6% as compared 32.7%
for the three months ended to March 29,1998. The cost of food and beverage sales
decreased to $98,763 for the three months ended March 31, 1999 from $266,849 for
the three months ended March 29,1998. As a percentage of net sales for the nine
months ended March 31, 1999, cost of sales was 38.1% as compared to 32.4% for
the nine months ended March 29,1998. The cost of food and beverage sales
decreased to $520,759 for the nine months ended March 31, 1999 from $932,746 for
the nine months ended March 29,1998. The percentage increase in the nine month
period is attributable to inefficiencies of the Flemington unit closed in
November 1998. The percentage decrease in the quarter ended March 31, 1999 is
attributable to the efficiencies of the South Norwalk unit, the only restaurant
operating during the quarter.
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
decreased to $112,429 for the three months ended March 31, 1999 as compared to
$283,145 for the three months ended March 29,1998. As a percentage of net
restaurant sales, these costs increased to 36.0% in 1999 as compared to 34.7% in
1998. For the nine months ended March 31, 1999 restaurant salaries and fringe
benefits increased as a percentage of sales to 41.1% from 33.0% for the nine
months ended March 29,1998. Actual restaurant salaries and fringe benefits
decreased from $949,877 for the nine months ended March 29,1998 to $560,770 for
the nine months ended March 31, 1999. This decrease is attributed to a reduction
in restaurant managers and other personnel relating to the closed units. The
increase as a percentage of net sales is attributable to allocating management
salaries over a smaller restaurant base.
Occupancy and other related expenses, which include linen, repairs,
maintenance, utilities, rent, insurance and other occupancy related expenses,
decreased to $40,271 for the three months ended March 31, 1999 from $186,066 for
the three months ended March 29,1998. As a percentage of net restaurant sales,
these costs decreased to 12.9% in the three months ended March 31, 1999 from
22.8% in the three months ended March 29,1998. For the nine months ended March
31, 1999, these costs increased to 30.5% from 24.7% for the nine months ended
March 29,1998. The actual occupancy and related costs decreased to $416,747 for
the nine months ended March 31, 1999 as compared to $712,449 for the nine months
ended March 29,1998. The decrease is attributable to occupancy costs relating to
the closed units.
Depreciation and amortization expenses, decreased to $13,893 or 4.5% of net
restaurant sales for the three months ended March 31, 1999 from $91,667 or 11.2%
for the three months ended March 29,1998. For the nine months ended March 31,
1999 these expenses decreased as a percentage of sales to 2.7% from 9.5% for the
nine months ended March 29,1998. The actual depreciation and related expenses
were $36,175 for the nine months-ended March 31, 1999 as compared to $275,001
for the nine months ended March 29,1998. This decrease is attributed to fewer
units in operation in fiscal 1999.
General and administrative expenses increased to $1,587,185 for the three
months ended March 31, 1999 from $83,205 for the three months ended March
29,1998. General and administrative expenses increased to $2,050,405 for the
nine months ended March 31, 1999 from $686,803 for the nine months ended March
29,1998. The increase is partially attributable to the value of a warrant issued
to a consultant pursuant to the terms of a consulting agreement, $1,075,000,
which was immediately exercisable and not subject to a forfeiture provision. The
remaining increase is attributable to additional professional fees.
The loss on closure of restaurant sites and impairment charges is
attributable to: (1) Pursuant to the March 1998 agreement to acquire the
Ottomanelli Group, additional consideration, due to anti-dilution provisions
contained in the agreements, common stock was payable to the Ottomanelli Group
shareholders, as a result of the private placement. In February 1999, 5,000,000
shares of common stock were issued pursuant to such anti-dilution provisions,
which included a maximum addition which was met. As the Company recorded an
impairment charge in fiscal 1999 relating to the termination of the operations
of the Ottomanelli restaurants, the fair value of the common stock issued,
$250,000, was recognized as a further impairment loss in the quarter ended March
31, 1999. (2) A note receivable of $230,000, which was received as partial
consideration for the sale of the Company's Fairfield facility, was exchanged
with a value assigned of $115,000 in partial satisfaction of a $425,000 note
payable and an additional $115,000 loss on restaurant closure was recognized in
the quarter ended March 31, 1999.
In August 1998, a jury awarded a verdict in the amount of $625,000 against
various defendants, including the Company and its former Chairman. On November
20, 1998, the Court set aside the jury's verdict as to all counts against the
Company except for plaintiff's claim for negligence per se and accordingly
reduced the jury's award to $225,000. The Company has recorded a charge in the
1999 Statement of Operations of $225,000 for the litigation award. The jury's
award is currently on appeal by the Company, and plaintiff has appealed the
Court's decision to set aside a portion of the jury's verdict and reduce the
award. There are also potential claims of indemnification by other defendants
against the Company in the event the plaintiff's appeal is successful.
Interest expense decreased to $65,154 for the three months ended March 31,
1999 from $81,988 for the three months ended March 29,1998. Interest expense
decreased to $196,340 for the nine months ended March 31, 1999 from $179,335 for
the nine months ended March 29,1998.
For the three and nine months ended March 31, 1999, the Company has
recorded an extraordinary gain on the forgiveness of debt in the amount of
$254,360 and $343,310, respectively, principally resulting from a series of debt
satisfaction agreements consistent with the Company's private placement of
Series B Preferred Stock.
YEAR 2000 MODIFICATIONS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process certain transactions, send
invoices, or engage in similar normal business activities.
The Company does not believe the Year 2000 Issue will significantly affect
its operations since it is in a "re-start" mode with respect to its business and
uses little or no computer equipment outside of its accounting programs.
Based on recent assessments, the Company determined that it will not
require significant modifications of its hardware or software so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with little or no modifications to its existing
software, the Year 2000 Issue can be mitigated.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. As of June
30, 1999, the Company has fully completed its assessment of all internal systems
that could be significantly affected by the Year 2000. The completed assessment
indicated that most of the Company's significant information technology systems
will not be significantly affected, particularly the general ledger, and
inventory systems. The Company does not believe that the Year 2000 presents a
material exposure as it relates to the Company's products or services. In
addition, the Company has begun to gather information about the Year 2000
compliance status of its external agents and continues to monitor their
compliance. To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. The Company has requested from its bank an
assessment of the extent of the bank's Year 2000 compliance. However, the
Company has no means of ensuring that external agents will be Year 2000 ready.
The inability of external agents to complete their Year 2000 resolution process
in a timely fashion could materially and adversely impact the Company. The
effect of non-compliance by external agents is not determinable.
The Company will utilize external software and service providers to
reprogram, test and implement software for the Year 2000 modification as needed,
the cost of which is not expected to be significant. The Company will evaluate
the status of completion of Year 2000 modifications in September 30, 1999 and
will undertake all remaining necessary steps to seek to ensure its systems are
Year 2000 compliant.
In the event the Company's computer systems are materially adversely
affected by the Year 2000 issue, the Company's business and operations could be
materially adversely affected by disruptions in the operations of other entities
with which the Company interacts. However, the Company believes that the most
likely worst case scenario is that there will be some localized disruptions of
systems that will affect individual facilities or services for a short time
rather than systematic or long-term problems affecting its business operations
as a whole. In such event the Company has contingency plans for certain critical
applications and is working on plans for others. These contingency plans
involve, among other actions, increasing inventories, and adjusting staffing
strategies.
Liquidity and Capital Resources
The Company has a long history of losses which has depleted its capital
resources and has resulted in the incurrence of a significant amount of
indebtedness. Without additional funds, the Company will have to abandon its
long term plans for the Spencer's concept development and the opening of
additional restaurants, and drastically reduce its corporate overhead. The
Company estimates that the financing obtained at the Offering will enable the
Company to effect some expansion and to operate through July 2000. There can be
no assurance that the Company will have adequate resources after such time
unless it conducts profitable operations and/or obtains additional financing, of
which there can be no assurance.
The Company's cash position increased by $3,349,026 during the nine month
period ended March 31, 1999, principally as the result of the proceeds of the
February 1999 private placement of Series B Preferred Stock, as well as the
proceeds of a bridge financing and the sale of common stock. These proceeds were
partially utilized to pay down short and long term debt that was in default at
June 28, 1998, satisfy trade obligations and fund continuing operating losses.
In connection with the private placement, the Company sold 211,289 shares
of Series B Preferred Stock at $25 per share, generating gross proceeds of
$5,282,225. As part of the private placement, noteholders, including $293,332
Series C subordinated notes payable matured on August 6, 1997, of which
noteholders with principal balances aggregating $62,499 extended the repayment
date to December 15, 1997, $425,000 note payable matured on January 2, 1997,
$11,709 note payable matured in February 1998, $190,000 note payable matured on
December 31, 1997, $150,000 notes payable matured on May 31, 1998, $270,828
Series B subordinated notes payable due July 7, 2000, $50,000 notes payable
matured on october 31, 1998, $100,000 note payable matured on August 31, 1998
and $150,000 notes payable matured on February 1, 1999, such obligations
aggregating $1,640,869 and all of which were in default, including accrued and
unpaid interest of approximately $428,500, entered into a series of debt
satisfaction agreements, whereby in exchange for cash payments, the issue of
2,200,000 shares of common stock, with a fair value of $0.05 per share, the
issuance of $29,645 of Series B Preferred Stock at $25 per share and to the
mortgage holder of the Fairfield facility, a discounted note receivable arising
from the sale of the Fairfield property with a fair value of $115,00, all of the
foregoing indebtedness was extinguished.
In connection with the private placement, $270,000 of Series B noteholders
converted their obligations into 10,800 shares of Series B preferred stock at
$25 per share. Additionally, approximately $350,000 of accounts payable,
including compensation deferred by certain promoters of management, converted
their receivable into approximately 7,000,000 shares of common stock at the fair
value of $0.05 per share.
Also coincident with the private placement, the holders of 56,500 shares of
Series A Preferred Stock exchanged their holdings for 55,370 shares of Series B
Preferred Stock and waived their right to the unpaid and accumulated dividends.
Management of the Company was completing its Cost Reduction Plan, which
included a further reduction in workforce and continuation of the closure of
unprofitable restaurants, in fiscal 1998. Such plan included the closing and/or
sale of the Yorktown Heights, White Plains, New York, Fairfield, Connecticut and
Lynbrook, New York locations, as well as the unopened New York City property. As
indicated in note 4, the Company performed an analysis of its remaining
restaurants and identified the Flemington restaurant as non-performing. The
restaurant was subsequently closed in fiscal 1999. Effective upon the completion
of the private placement, the Company has assembled a new management team and
developed a new restaurant theme which will be introduced at the recently
reacquired Danbury, Connecticut location.
Between March 1998 and September 1998, the Company privately sold
approximately $850,000 of its common stock at $.15 per share. Through September
30, 1998, the Company had sold 5,580,000 shares of common stock and received
proceeds of approximately $697,000, net of expenses.
Between October and December 1998, the Company entered into private
financing arrangements to provide an aggregate of $150,000 of bridge financing
at 16%, with due dates at the earlier of the closing of the private placement or
ninety days, respectively. The noteholders also received warrants for an
aggregate of 412,500 shares, at an exercise price of $0.05 per share expiring on
December 30, 2003. The warrants were valued at $12,375 and recognized as a debt
issuance cost.
In October 1998, a noteholder of a $100,000 remaining outstanding balance
from a $500,000 convertible note due September 4, 1997, with unpaid accrued
interest of approximately $90,000, accepted approximately 690,000 shares of
common stock with a fair value of $100,000, in exchange for the forgiving of the
outstanding interest obligation.
At June 28, 1998, the Company had available a net operating loss carry
forward (NOL) for Federal and State income tax purposes of approximately
$13,962,000, which are available to offset future taxable income, if any, before
2013. 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 carry forwards to offset
taxable income in current and future periods. The Company believes that
ownership changes have 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 carry forwards.
Management believes that the finalization of its Cost Reduction Plan and
its $6,000,000 private placement financing will enable the Company to achieve
profitable operations and restore liquidity. However, no assurance can be made
regarding 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.
Employment Agreements
In October 1998, the Company entered into a three year employment agreement
(as revised) with an individual to act as President and/or Chief Executive
Officer and as a member of the Board of Directors of the Company. In
consideration, the employee is to receive a monthly fee of $7,917 plus
reasonable expenses. In addition, the employee shall be entitled to a
performance bonus and shall receive a warrant to purchase an amount of Common
Stock equal to ten (10%) percent of the outstanding common stock of the Company,
on a fully diluted basis, after the private placement financing at $0.05 per
share, exercisable for a period of five years, one-third (1/3) of the number of
shares covered thereby vesting at the time of the private placement financing,
and one-third (1/3) at the end of each one year period thereafter during the
term.
In October 1998, the Company entered into a three year employment agreement
(as revised) with an individual to provide services as Chief Financial Officer
and Vice President of the Company. In consideration, the employee is to receive
a monthly fee of $4,333 plus reasonable expenses. In addition, an option to
purchase up to 300,000 shares of the Company's common stock with an initial
exercise price of $0.05 per share, exercisable for five (5) years, which option
will vest as to one-third (1/3) of the number of shares covered thereby at the
end of each one year period during the term.
Consulting Agreements
On July 20, 1998, the Company entered into a three year consulting
agreement with an individual to provide service to design and implement the
future expansion of the Company's planned restaurant concepts. In consideration,
the consultant is to receive a monthly fee of $1,000 plus reasonable expenses.
In addition a warrant to purchase an additional 300,000 shares of the Company's
non-restricted common stock with an initial exercise price of $.48 per share.
In October 1998, the Company entered into a three year consulting agreement
with an individual to provide advice and consultation in the implementation of
the future expansion of the Company's planned restaurant concepts. In
consideration, the consultant shall serve without regular, periodic
compensation. The consultant shall be entitled to a performance bonus and shall
receive a warrant to purchase an amount of Common Stock equal to fifteen (15%)
of the outstanding Common Stock of the Company on a fully diluted basis after
the offering of Series B Preferred Stock at $0.20 per share, exercisable for a
period of five (5) years.
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 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 1998,
each of which could adversely affect the Company's business and the accuracy of
the forward looking statements contained herein.
<PAGE>
PART II
Item 1: - Legal Proceedings
South Norwalk, Connecticut
The Company is a co-defendant in an action brought by an owner of an
apartment above the South Norwalk Company restaurant for negligence per se,
intentional infliction of emotional distress, negligent infliction of emotional
distress, and violations of the Connecticut Unfair Trade Practices Act (CUTPA)
based upon alleged excessive noise and rude and/or threatening conduct of
employees. The jury awarded a verdict in the amount of $625,000 against various
defendants, including the Company's former Chairman on August 5, 1998. On
November 20, 1998, the Court set aside the jury's verdict as to all counts
against the Company except for plaintiff's claim for negligence per se and
accordingly reduced the jury's award to $225,000. The jury's award is currently
on appeal by the Company, and plaintiff has appealed the Court's decision to set
aside a portion of the jury's verdict and reduce the award. There are also
potential claims of indemnification by other defendants against the Company in
the event the plaintiff's appeal is successful.
In July 1999, a demand letter was tendered to the Company by the legal
counsel of the former Chairman seeking indemnification from potential
liabilities arising out of this matter. This demand is based on an
indemnification provision in an agreement between the former Chairman and the
Company. The Company believes that there are valid defenses to the
indemnification claim.
Plaintiff's negligence claims in this matter are arguably covered by one or
more of the Company's insurance policies. Farmington Casualty Company
("Farmington") and Insurance Company of Greater New York ("GNY"), two out of
three of the Company's insurance carriers, retained counsel to represent the
Company and defended the Company in this case under a reservation of rights. The
third, Public Service Mutual Ins. Co., denied coverage for the claim altogether.
GNY and Farmington have continued to prosecute the appeal in this matter, but
under a reservation of rights. The Company has advised Farmington and GNY that
it intends to pursue its rights in an action for damages and declaratory relief
in the event that the appeal is unsuccessful and the insurance carriers refuse
to provide coverage for plaintiff's claims. GNY and Farmington continue to
reserve all rights with respect to coverage.
Settlement negotiations are ongoing, however, there can be no assurance of
a satisfactory settlement.
Danbury, Connecticut
A foreclosure action was commenced in September or October 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.
Lynbrook, New York
The Company is defending an action brought by Jack Cioffi Trust, the
landlord of a former Rattlesnake 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 $190,000.
Item 2 - Changes in Securities and Use of Proceeds
On October 27, 1998, the Company commenced an offering(the "Offering") of
its Series B Convertible Preferred Shares, $.10 par value. Between February 17,
1999 and July 2, 1999, the Company sold approximately $6,000,000 of Series B
Preferred Sahres pursuant to the Offering and converted approximately $1,350,000
of its debt to Company equity. During the Offering, the Company satisfied, by
payment of cash and/or equity in the form of preferred and/or common stock, the
following: (a) all outstanding Series C promissory notes; (b) certain
outstanding Series B promissory notes; (c) all outstanding promissory notes
related to the Fairfield facility; and (d) all outstanding promissory notes from
(i) September 1997, (ii) March through June 1998, and (iii) October and November
1998, effectively satisfying all short term and long term debt which was in
default.
The preferred shares will be convertible, at the option of the holder at
any time after November 1999, at a conversion price initially equal to $0.05 per
share of common stock. The conversion rate will be reduced by 10% per month for
each month the Company fails to comply with its obligations to file, and in good
faith process, a registration statement.
Item 3. - Defaults upon Senior Securities
None.
Item 4. - Submission of Matters to A Vote of Security Holders
None.
Item 5. - Other Information
The Company's Common Stock is not listed on the NASDAQ Small Cap Market 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's common stock
from such exchange pursuant to Rule 12d-2f2.
The Company securities are traded on the NASDAQ 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.
The Company is currently prohibited from paying cash dividends by virtue of
the Delaware General Corporation Law.
Item 6. - Exhibits and Reports on Forms 8-K.
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, the Company filed no reports on
Form 8-K.
<PAGE>
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)
By: /s/
-------------------------
Kenneth Berry
Chief Executive Officer
By: /s/
-------------------------
Frank Ferro
Chief Financial Officer
Date: August 12, 1999
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