United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934
For the fiscal year ended June 30, 1999
Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934 for the Transition Period from _____________ to_______________
Commission File No. 1-13818
Spencer's Restaurants, Inc.
(Name of small business issuer in its charter)
Delaware The Rattlesnake 06-1369616
(State or other Holding Company, Inc. (I.R.S. Employer
jurisdiction of (Former Name) Identification No.)
incorporation or
organization)
106 Federal Road
Danbury, CT 06810
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (203) 798-1390
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
None
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 _X_ No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. ___ Yes _X_No
State issuer's revenues for its most recent fiscal year. $1,696,679
State the number of shares outstanding of each of the issuer's classes of
common equity, as of June 30, 1999. 29,979,013
As of June 30, 1999, the aggregate market value of the registrant's common stock
held by non-affiliates computed by reference to the price at which the stock was
sold was $3,485,238. The shares of the Company's Common Stock are currently
traded on the Over-the-Counter Bulletin Board under the symbol "SPST". At June
30, 1999, the shares of the Company's Common Stock were traded under the symbol
"RTTL."
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
Spencer's Restaurants, Inc. (formerly known as The Rattlesnake Holding
Company, Inc.), a Delaware corporation (unless the context otherwise indicates,
with its subsidiaries, the "Company"), was formed and commenced operations in
1993, and effected an initial public offering of its stock in 1995 to develop,
build and operate a chain of casual dining southwestern restaurants under the
name Rattlesnake(R) Southwestern Grill. At one time, the Company operated a
total of 8 restaurants in the New York metropolitan area. Management was unable
to operate the restaurants profitably, failed to control general and
administrative expenses and did not develop a workable growth strategy. As a
consequence, the Company experienced substantial losses and incurred a
significant amount of debt. In 1997, the Board of Directors elected certain of
its members as officers to take control of operations and replace the existing
management pursuant to its cost reduction plan (the "Cost Reduction Plan"). The
Company then disposed of development projects and non-performing restaurants,
negotiated severance agreements with the former management, and sharply reduced
general and administrative expenses.
In March 1998, the Company consummated a transaction with Nicolo
Ottomanelli and Joseph Ottomanelli, through which it acquired a company which
franchised Ottomanelli's Cafe(R) restaurants (casual dining New York City based
operations), an Ottomanelli's Cafe(R) and another food service operation in New
Jersey, and as well as management with expertise in the selection and sale of
meat and meat products. The Ottomanelli's Cafe(R) franchise company currently
has extremely limited operations. Company management concluded that the
Ottomanelli Cafe(R) operations were inconsistent with the Company's operating
plans and were closed in fiscal 1999, for which it recorded an impairment charge
in fiscal 1998.
In fiscal 1998, in furtherance of the Cost Reduction Plan, the Company
terminated operations at its Lynbrook, New York and Danbury, Connecticut
facilities, and in November 1998, terminated operations at its Flemington, New
Jersey facility as well, for which it recorded an impairment charge in 1998.
In fiscal 1999, 106 Federal Road Restaurant Corp., a wholly-owned
subsidiary of the Company, purchased the Danbury, Connecticut facility
previously closed. The restaurant has been remodeled and reconfigured to serve
as the first location for the Company's new restaurant concept opened November
3, 1999.
The Company continues to operate a self-sustaining Rattlesnake(R)
Southwestern Grill in South Norwalk, Connecticut.
Re-start Strategy
In the last half of calendar year 1998, the Company's management
recognized that it had a limited future as an operator of Rattlesnake
Southwestern Grill restaurants. As a result, management set out to: (i) increase
the Company's working capital through the consummation of a private placement
offering of the Company's securities; (ii) assemble a new, highly experienced
and established management team; and (iii) alter the Company's restaurant theme
and menu and develop restaurants with a new concept.
Private Placement Offering
In October 1998, the Company commenced a private placement offering
(the "Offering") of its securities, pursuant to which it offered investors
Series B Convertible Preferred Shares. See "Description of Securities -
Preferred Shares." Upon completion of the Offering in July 1999, the Company had
raised approximately $6,000,000 and converted approximately $1,350,000 of debt
to equity. After satisfying certain of its remaining debts, disbursements of and
commissions to the placement agent, and payment of other expenses of the
Offering, the Company secured approximately $4,700,000 for working capital use.
New Management Team
In order to develop and implement its new restaurant concept, the
Company installed a new management team and Board of Directors with significant
experience in the restaurant operations industry. See "Management - Agreements
with New Management." Accordingly, the Company has entered into personal service
agreements (of varying commitment levels) with certain key persons who, as
principals, have previously participated in the development of food service
chains, including Shelly Frank (Chi-Chi's), Kenneth Berry (Roy Rogers,
regionally), A.G. "Sandy" Rappaport (Outback Steakhouse) and Stephan A. Stein
(David's Cookies). See "Management". However, due to a number of factors,
including the Company's historical operating losses, small restaurant base and
geographic concentration, as well as dependence on certain external factors it
cannot control, there can be no assurance that new management will be able to
make the Company profitable or commercially viable.
New Restaurant Concept
In fiscal 1999, the Company commenced concept development of a
multi-regional chain of mid-priced steakhouses, to feature price/value steak and
distinctive shrimp (and other) dishes, named Spencer's.
Spencer's is a price/value oriented restaurant concept which is
designed to provide fresh, high quality food at moderate prices in a relaxed
atmosphere. The key elements of the Spencer's concept include the following:
o A casual, back to basics, large portions, mid-priced steakhouse;
designed to offer exceptional service, specializing in two areas:
steaks and shrimp offerings.
o The menu features house cut and aged steaks and steak burgers, as well
as bulk offerings of shrimp that are served in distinctive "house"
sauces on pasta or rice with dunking bread.
o The combination of food quality, comparatively moderate pricing,
entertaining shrimp offerings, in an atmosphere where customer focus
will be on price/value, without extensive or overbearing visual or
gimmick effects, is intended to distinguish Spencer's from competitors.
o To compliment the steak and shrimp offerings, menu items include:
appetizers, caesar and unique salads; various but basic chicken, fish,
rib, and pasta entrees; mainstay sandwiches; a separate Kid's list of
choices that are inclusive of fries and beverage; house made fries,
steamed or creamed "sides"; and desserts. Standard alcoholic beverages
as well as selection of blended specialty drinks are offered.
o The average check, exclusive of tax/tip, is anticipated to be $8.50 at
lunch and $17.50 at dinner. Lunch and dinner will be served seven days
(with a target of 17 table turns) per week and will be location
sensitive.
o A typical Spencer's should range in size from 6,000 to 8,000 square
feet with 150 to 250 seats with a 175 seat average. It is intended that
the Spencer's will be built according to a retrofit construction
strategy. As a result, each Spencer's is expected to have a somewhat
different layout. The interior image and trade dress, however, is
intended to be consistent. The first Spencer's will be located in
Danbury, Connecticut, opened November 3, 1999 in a 7,200 square foot
former Howard Johnson's restaurant building.
o Total investment to open a Spencer's is estimated to be approximately
$700,000 inclusive of retrofit expenses and exclusive of capitalized
lease costs, with an estimated 3:1 annual sales to investment ratio.
o Spencer's menu and unit economics are intended to facilitate
replication in multi-regional area development hubs through Company
owned and potentially franchised operations.
Operating Strategy
The Company's objective is to differentiate its restaurants by
exceeding customer expectations as to the quality of food, the friendliness of
service and value of steak and shrimp dinners. To achieve this objective, the
Company proposes to use the following strategies:
Quality Assurance. The Company intends to provide freshly prepared,
high quality items. The Company believes that its menu offerings will allow for
simplified food preparation, efficient delivery and consistent quality. The
Company will implement generalized procedures for quality assurance concerning
products served in its restaurants.
Commitment to Value. The Company's pricing strategy is designed to
create an attractive price-to-value relationship, thereby increasing the
Company's ability to attract value-oriented customers as well as traditional
casual dining customers. The Company believes that the featured items, steak and
shrimp, are considered quality foods, and if delivered at moderate prices, there
should be a perceived value for the menu. The objective is to attract "repeat"
business rather than "special occasion" business.
Focus on Customer Service. The Company believes that it must provide
prompt, friendly and efficient service to generate customer satisfaction. The
Company plans to staff each restaurant with an experienced management team and
keep table-to-server ratios low. Through the use of customer surveys, management
expects to receive valuable feedback on its restaurants and through prompt
response demonstrate a continuing dedication to customer satisfaction.
Employee Training and Motivation. The Company believes a well-trained,
highly motivated restaurant management team is critical to achieving the
Company's operating objectives. The Company's training and compensation systems
will be designed to create accountability at the restaurant level for the
performance of each restaurant. The Company will train, motivate and educate its
restaurant level managers and hourly co-workers. Each new manager will
participate in a comprehensive training program which includes hands-on
experience in one of the Company's restaurants. To instill a sense of ownership
in restaurant management, compensation is proposed to be based, in part, on
restaurant profits and low employee turnover. Management believes this focus on
unit level operations creates a "single store mentality" and provides an
incentive for managers to focus on increasing same store sales and restaurant
profitability.
Growth Strategy
The Company's growth strategy is to open new Company-owned Spencer's
restaurants by converting existing restaurants to the Spencer's concept. In
developing the Spencer's format, there will be an emphasis on objective
standards, so that the format and operating procedure can be readily duplicated.
The Company plans to cluster new restaurants in existing metropolitan markets,
which, management believes, will enhance supervisory, marketing and distribution
efficiencies.
Restaurant Layout
It is anticipated that Spencer's restaurants will be 6,000-8,000 square
feet in size. Seating will vary from 150-250. The restaurants will be designed
to include family dining with some privacy, and booths will be used when
appropriate. Kitchen areas should be as open as possible to the dining areas.
Decor should be uniform and designed to be distinctive. The Company will seek
visible main road locations which are suitable for Spencer's unit economics but
are below the size believed to be acceptable to general menu national restaurant
chain operations.
Support Operations
Advertising and Marketing. The Company plans to ultimately develop an
ongoing defined advertising and marketing plan for the potential development of
radio and newspaper advertising but will initially use point of sale and local
store marketing. The Company's advertising is planned to focus on building brand
loyalty and emphasizing the distinctiveness of the Spencer's atmosphere and menu
offerings. In addition to advertising, the Company will encourage unit level
personnel to become active in their communities through local charities and
other organizations and sponsorships.
Restaurant Reporting. Systems and technology are essential for the
management oversight needed to monitor the Company's restaurant operations.
Operational and financial controls are planned to be maintained through the use
of point of sale systems in each restaurant and an automated data processing
system at the home office. Management will utilize this data to monitor the
effectiveness of controls and to prepare periodic financial and management
reports. The system will also be utilized for financial and budgetary analysis,
including analysis of sales by restaurant, product mix and labor utilization.
All of the Company's systems are, because of the use of current software,
anticipated to be Year 2000 compliant. See "Year 2000 Modifications."
Human Resources. The Company will ultimately maintain a human resources
department that supports restaurant operations through the design and
implementation of policies, programs, procedures and benefits for the Company's
employees. The eventual human resources department will include an employee
relations manager.
Franchise Activities
The Company presently franchises Ottomanelli's Cafe(R). The operation
involves one restaurant with nominal royalty revenues. No franchises have been
sold during the past approximately five years. The Company has determined not to
expand such operations. The Company may determine to franchise the Spencer's
concept through area development agreements once several prototype restaurants
are established and operating in a profitable manner, but there can be no
assurance as to if or when any franchising program would be commenced for
Spencer's restaurants.
Trademarks
The Company is presently the licensee of Rattlesnake(R) and
Ottomanelli's Cafe(R). Rattlesnake(R) is licensed from a non-affiliated person
under an agreement expiring in or about the year 2000, with a right of renewal,
and requiring minimum royalty payments of $5,000 per year. The Company has
determined to not maintain nor ultimately renew its Rattlesnake license.
Ottomanelli's Cae(R) is licensed from a corporation, the capital stock of which
is owned by Nicolo and Joseph Ottomanelli, with a term co-extensive with the
licensor's rights and for no separate consideration, entered into as part of the
merger transaction between such persons and the Company (see "Certain
Transactions").
The Company has filed an application with the United State Patent and
Trademark Office ("PTO") to trademark Spencer's. There can be no assurance as to
the opposition to these filings by the PTO and/or third parties, or if or when
the trademarks would be granted to the Company. Names and marks similar to the
trademarks of the Company may be used by third parties in certain limited
geographical areas. Such third party use may prevent the Company from licensing
the use of its service marks for restaurants in such areas. The Company intends
to protect its trademarks by appropriate legal action whenever necessary.
Government Regulation
The Company is subject to various federal, state and local laws
affecting its business. In addition, each of the Company's restaurants will most
likely be subject to licensing and regulation by a number of governmental
authorities, which may include alcoholic beverage control, health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Most municipalities in which the Company's restaurants
will be located require local business licenses. Difficulties in obtaining or
failure to obtain the required licenses or approvals could delay or prevent the
development of a new restaurant in a particular area. The Company is also
subject to Federal and state environmental regulations, but such regulations
have not had a material adverse effect on the Company's operations to date.
Approximately ten to twenty percent of the Company's restaurant sales
is anticipated to be attributable to the sale of alcoholic beverages. Each
restaurant, where permitted by local law, will require appropriate licenses from
regulatory authorities allowing it to sell liquor, beer and wine and in some
states or localities to provide service for extended hours and on Sunday. Each
restaurant requires food service licenses from local health authorities. The
failure of a restaurant to obtain or retain liquor or food service licenses
could adversely affect, or in an extreme case, terminate its operations.
However, each restaurant is expected to operate in accordance with standardized
procedures designed to assist in compliance with all applicable codes and
regulations. The Company is subject in the states in which it operates
restaurants and proposes to operate restaurants, to "dram-shop" statutes or
judicial interpretations, which generally provide a person injured by an
intoxicated person the right to cover damages from an establishment which
wrongfully served alcoholic beverages to such person.
The Americans With Disabilities Act (the "Disabilities Act") prohibits
discrimination on the basis of disability in public accommodations and
employment. The Company designs its restaurants to be accessible to the disabled
and believes that it is in substantial compliance with all current applicable
regulations relating to restaurant accommodations for the disabled. The Company
intends to comply with future regulations relating to accommodating the needs of
the disabled, and the Company does not currently anticipate that such compliance
will require the Company to expend substantial funds.
The development and construction of additional restaurants will be
subject to compliance with applicable zoning, land use and environmental
regulations. The Company's operations are also subject to Federal and state
minimum wage laws and other laws governing such matters as working conditions,
citizenship requirements, overtime and tip credits. In the event a proposal is
adopted which materially increases the applicable minimum wage, such an increase
would result in an increase in the Company's payroll and benefits expense.
Employees
At June 30, 1999, the Company employed approximately 39 persons, 4 of
whom were home office management and staff personnel, and the remainder of whom
were restaurant personnel employed on a part-time basis. None of the Company's
employees are covered by a collective bargaining agreement. The Company
considers its employee relations to be good.
Competition
The restaurant industry is intensely competitive with respect to price,
service, location and food quality, and there are many well-established
competitors with substantially greater financial and other resources than the
Company. Such competitors include a large number of national and regional
restaurant chains. Although the Company believes that its concept will
distinguish it from competitors, steakhouse chains with which the Company will
compete include Outback, Longhorn, Lone Star and Bugaboo Creek restaurants. Some
of the Company's competitors have been in existence for a substantially longer
period than the Company and may be better established in the markets where the
Company's restaurants are or may be located. The restaurant business is often
affected by changes in consumer tastes, national, regional or local economic
conditions, demographic trends, traffic patterns, and the type, number and
location of competing restaurants. In addition, factors such as inflation,
increased food, labor and employee benefits costs and the lack of experienced
management and hourly employees may adversely affect the restaurant industry in
general and the Company's restaurants in particular. Any restaurant unit may
face intense competition from a competitor opening a restaurant with a similar
format in the near vicinity, at least in the short term, since newly opened
restaurants frequently generate a high volume of customers.
Forward Looking Statements
The words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "projected", "intends to" or similar
expressions are intended to identify "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including but not limited to:
the Company's history of losses and cash flow deficit; existing indebtedness and
adverse litigation; the development and implementation of a new restaurant
format and menu, and the leasing and development of a chain of restaurants;
dietary trends; competition; ability to manage growth; quality control and
customer service aspects of the Company's business; limited manufacturing and
warehouse facilities; ability to obtain and maintain NASDAQ listing; government
regulation and other factors affecting the food service industry; trademark and
service marks; insurance and potential liability; control by management; the
Penny Stock Rules and liquidity of the Company's Common Stock, that could cause
the Company's actual results to differ materially from historical earnings and
those presently anticipated or projected. Such factors, which are discussed in
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the notes to financial statements, as well as
unanticipated problems, could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods
expressed herein. See "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Risk Factors
Operating Losses; Future Operating Results. The Company has a history
of losses since its inception in 1993. As of the end of its June 30, 1999 fiscal
year, losses aggregated $18,777,090 including losses of $3,352,035 and
$3,236,039 for its fiscal years ended June 30, 1999 and June 28, 1998,
respectively. The Company's future profitability will depend upon, among other
things, the Company's ability to generate a level of revenues sufficient to
offset its cost structure in addition to reducing its operating costs on a per
location basis. The Company believes that generation of that level of revenues
is dependent upon the timely opening of restaurants and achieving and
maintaining market acceptance. There can be no assurance that the Company will
achieve significantly increased revenues or maintain profitable operations.
Significant Capital Requirements; Need for Additional Financing;
Indebtedness. The Company's capital requirements have been significant and its
cash requirements have been exceeding its cash flow from operations (at June 30,
1999, the Company had working capital of $581,830) due to, among other things,
costs associated with the prior development and operation of its Rattlesnake(R)
Southwestern Grill restaurants and the Company's proposed modified and expanded
operations. As a result, the Company has been dependent upon sales of its equity
securities and loans to finance its working capital requirements. The Company is
dependent upon the proceeds of the Offering to initially finance its proposed
expansion. Based on the Company's current proposed plans and assumptions
relating to the implementation of its expansion strategy, the Company
anticipates that the net proceeds of the Offering, together with anticipated
cash flow from operations and equipment, food vendor and landlord financing,
will be sufficient to satisfy its contemplated cash requirements through July
2000. In the event that the Company's plans change or its assumptions prove to
be inaccurate (due to unanticipated expenses, construction delays or other
difficulties) or the proceeds of the Offering otherwise prove to be insufficient
to fund operations and implement the Company's proposed expansion strategy, the
Company could be required to seek additional financing sooner than anticipated.
The Company has no current arrangements with banks or otherwise with respect to,
or potential sources of additional financing, and it is not anticipated that any
officers, directors or stockholders will provide loans to the Company.
Consequently there can be no assurance that any additional financing will be
available to the Company when needed, on commercially reasonable terms, or at
all. Any inability to obtain additional financing when needed would have a
material adverse effect on the Company, including requiring it to curtail its
expansion efforts. In addition, any additional equity financing may involve
substantial dilution to the interests of the Company's then existing
stockholders. At June 30, 1999, short term debt and liabilities totaled
$1,794,205 and long term debt totaled approximately $242,504. At June 30, 1999,
$35,839 of the Company's outstanding notes payable were past due and in default.
There can be no assurance that cash flow from operations will be sufficient to
repay remaining indebtedness and trade payables.
Litigation. The Company is a party defendant to certain material
litigations. If such litigations are concluded on relatively unfavorable terms,
the litigations could have a material adverse effect on the Company and its
prospects. (See "Legal Proceedings".)
Dependence Upon Key Personnel; Varying Commitment Levels. The success
of the Company will be dependent on its ability to attract and retain
experienced management and restaurant industry personnel. The Company
anticipates the receipt of strategic advice from Shelly Frank, A.G. (Sandy)
Rappaport, and Stephan A. Stein, and full time services from Kenneth Berry as
President, Nicolo Ottomanelli as Senior Vice President and Frank T. Ferro as
Chief Financial Officer. These individuals have entered into agreements with the
Company including varying levels of commitment, one of which, an advisory
service agreement of Mr. Frank, is terminable by Mr. Frank without recourse by
the Company. The loss of the advice or services of any one or more of these
persons could have a material adverse effect on the business and prospects of
the Company. The Company faces considerable competition from other food service
businesses for personnel, many of which have significantly greater resources
than the Company. There can be no assurance that the Company will be able to
attract and retain personnel in the future, and the inability to do so could
have a material adverse effect on the Company.
Competition. The restaurant industry is intensely competitive with
respect to price, service, location and food quality and variety. There are many
well-established competitors with substantially greater financial and other
resources than the Company, as well as a significant number of new market
entrants. Such competitors include national, regional and local full-service
casual dining chains, many of which specialize in or offer steak and seafood
products, as well as single location restaurants. Some of the Company's
competitors have been in existence for substantially longer periods than the
Company, may be better established in the markets where the Company's
restaurants are or will be located and engage in extensive advertising and
promotional campaigns, both generally and in response to efforts by competitors
to open new locations or introduce new concepts or menu offerings. The Company
can also be expected to face competition from a broad range of other restaurants
and food service establishments which specialize in a variety of cuisines. While
the Company believes that it is focusing on exciting and profitable menu items,
there can be no assurance that consumers will regard the Company's menu and
concepts as sufficiently distinguishable from competitive menus and restaurant
concepts or that substantially equivalent menus and restaurant concepts will not
be introduced by the Company's competitors.
High Restaurant Failure Rate. The opening of new restaurants is
characterized by a very high failure rate. The Company proposes to initiate and
construct a new restaurant chain. During the initial operation of a newly opened
restaurant, such restaurant could operate at a loss. In the event of a prolonged
period of unfavorable operating results for a restaurant, the Company may be
required to close such restaurant, which could have a material adverse effect on
the financial condition and results of operations of the Company. In the short
term, the Company will remain dependent upon a limited number of restaurants for
substantially all of its revenues. The lack of success or closing of the
Company's existing restaurant, or the unsuccessful operation of a new
restaurant, could have material adverse effect upon the financial condition and
results of operations of the Company.
Risks Relating to Proposed Expansion. The Company is currently
implementing a strategy to change its concept and build a restaurant chain. The
Company has limited experience in effectuating rapid expansion and in managing a
large number of locations or locations that are geographically dispersed (and
has enlisted the assistance of persons experienced in these areas effective with
the Offering). The Company's proposed expansion will be dependent on, among
other things, achieving significant market acceptance for its Spencer's concept,
developing customer recognition and loyalty for the Spencer's name, identifying
a sufficient number of prime locations and entering into lease arrangements for
such locations on favorable terms, timely development and construction of
locations, securing required governmental permits and approvals, hiring,
training and retaining skilled management and other personnel, the Company's
ability to integrate new restaurants into its operations and the general ability
to successfully manage growth (including monitoring restaurant operations,
controlling costs and maintaining effective equality controls). In the event
that cash flow from operations is insufficient or that the Company is unable to
obtain adequate equipment, food vendor or landlord financing, or other
unexpected events occur, such as delays in identifying suitable locations,
negotiating leases, obtaining permits or design and construction delays, the
Company may not be able to open all of such locations in a timely manner, or at
all. Moreover, the Company is using a new name and developing a new concept,
both of which will have to be tested and will have to demonstrate commercial
acceptance and financial viability. There can be no assurance that the Company
will be successful in opening the number of restaurants currently planned in a
timely manner, or at all, or that, if opened, those restaurants will operate
profitably.
Long Start-up Cycles; Fluctuations in Operating Results; Start-up
Expense. The Company's restaurant start-up cycle, which generally commences with
site selection and ends upon the opening of the restaurant to customers, will
vary by location and could extend for a period of months. Difficulties or delays
in site selection or events over which the Company will have no control, such as
delays in construction due to governmental regulatory approvals, shortage of or
the inability to obtain labor and/or materials, inability of the general
contractor or subcontractors to perform under their contracts, strikes or
availability and cost of needed debt or lease financing, could materially
adversely affect the start-up costs and completion times of new locations. The
Company expects that future quarterly operating results will fluctuate as a
result of the timing of, and expenses related to, the openings of new
restaurants (since the Company will incur significant expenses during the months
preceding the opening of a restaurant), as well as due to various other factors,
including the seasonal nature of its business and weather conditions.
Accordingly, the Company's sales and earnings may fluctuate significantly from
quarter to quarter and operating results for any quarter will not necessarily be
indicative of the results that may be achieved for a full year. In addition, the
capital resources required to construct each new location are significant. The
Company estimates that the costs of opening its future locations (location
acquisition and concept conversion) will be approximately $700,000 per location,
net of any anticipated landlord contributions. The Company expects that it will
incur approximately $75,000 in additional pre-opening costs in connection with
the opening of future sites. There can be no assurance that the costs to
construct and open a new location will not be significantly higher than
currently anticipated.
Consumer Preferences; Factors Affecting the Restaurant Industry. The
restaurant industry is characterized by the continuing introduction of new
concepts and is subject to rapidly changing consumer preferences, tastes and
eating and purchasing habits. While the demand for steak restaurants has grown
significantly over the past several years, there can be no assurance that such
demand will continue to grow or that these trends will not be reversed. The
Company's success will depend on its ability to anticipate and respond to
changing consumer preferences, tastes and eating and purchasing habits, as well
as other factors affecting the food service industry, including new market
entrants, demographic trends and unfavorable national, regional and local
economic conditions, inflation, increasing seafood and other food and labor
costs. Failure to respond to such factors in a timely manner could have a
material adverse effect on the Company.
Geographic Concentration. The Company's existing restaurant, and the
initial site selection(s), are to be in the New York metropolitan tri-state
area. Given the Company's geographic concentration, adverse publicity relating
to the Company's restaurants could have a more pronounced adverse effect on the
Company's operating results than might be the case if the Company's restaurants
were more geographically dispersed. A decline in tourism, or in general economic
conditions, which affects the New York metropolitan area economy or tourism
industry, particularly during the time of peak sales, could have a material
adverse effect on the Company's operations and prospects.
Seasonality. The restaurant business is seasonal, and could be adversely
affected by extreme weather during what would
otherwise be a period of higher sales.
Menu Emphasis on Steak and Shrimp. The focus of the Company's
restaurant expansion will be on a menu featuring mid-priced steaks and a variety
of shrimp selections (as well as other foods). Although the Company believes
that this menu will prove attractive, it is very limited in relation to the
variety of foods served in a "full menu" restaurant. Accordingly, if these menu
items do not prove attractive, the Company will be adversely affected and would
have to restructure its menu, with the attendant costs and loss of momentum
resulting from a second start up effort.
Fluctuations in Food and Other Costs; Supply of Food. The Company's
profitability is dependent on its ability to anticipate and react to increases
in food, labor, employee benefits, and similar costs over which the Company has
limited control. Specifically the Company's dependence on frequent deliveries of
meat, seafood and produce subjects it to the risk of possible shortages or
interruptions in supply caused by adverse weather, labor, transportation or
other conditions which could affect the availability and cost of such items. The
Company believes it will be able to anticipate and react to fluctuations in food
costs through selected menu price adjustments, purchasing steak and shrimp
directly from suppliers and promoting certain alternative menu selections (in
response to price and availability of supply). However, there can be no
assurance that the Company will be able to continue to anticipate and respond to
such supply and price fluctuations in the future or that the Company will not be
subject to significantly increased costs in the future. Moreover, the Company
does not maintain long term supply contracts with any of its suppliers, and
purchases products pursuant to purchase orders placed from time to time in the
ordinary course of business. Although the Company believes that its
relationships with its suppliers are satisfactory and that alternative sources
are available, the loss of certain suppliers, or substantial price increases,
could have a material adverse effect on the Company.
Potential Liability for Sale of Alcoholic Beverages. The Company's
restaurants will be subject to "dram-shop" statutes, which generally provide a
person injured by an intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person. New York law currently provides that a vendor of alcoholic beverages may
be held liable in a civil cause of action for injury or damage caused by or
resulting from the intoxication of a minor (under 21 years of age) if the vendor
willfully, knowingly and unlawfully sells or furnishes alcoholic beverages to
the minor and knows that the minor will soon thereafter be driving a motor
vehicle. A vendor can similarly be held liable if it knowingly provides
alcoholic beverages to a person who is in a noticeable state of intoxication,
knows that person will soon thereafter be driving a motor vehicle and injury or
damage is caused by that person. In addition, significant national attention is
focused on the problem of drunk driving, which could result in the adoption of
additional legislation and increased potential liability of the Company for
damage or injury caused by its customers. The Company carries insurance for this
liability.
Limited Insurance Coverage. At the present time, the Company carries
limited liability insurance and casualty insurance and effective July 15, 1999
retroactive to February 17, 1999, an officer/director liability insurance policy
as well. The Company did not have such insurance during the period from January
1998 to such date. The Company maintains health insurance for its management
personnel. The Company intends to periodically upgrade its insurance coverage,
but there can be no assurance as to when upgrades will be effected and as to any
claims which may be made, or to the impact of the same.
Government Regulation. The Company is subject to extensive state and
local government regulation by various governmental agencies, including state
and local licensing, zoning, land use, construction and environmental
regulations and various regulation relating to the sale of food and beverages,
sanitation, disposal of refuse and waste products, public health, safety and
fire standards. The Company's restaurants are subject to periodic inspections by
governmental agencies to assure conformity with such regulations. Difficulties
or failure in obtaining required licensing or other regulatory approvals could
delay or prevent the opening of a new restaurant, and the suspension of, or
inability to renew, a license at an existing restaurant would adversely affect
the operations of the Company. Restaurant operating costs are also affected by
other government actions which are beyond the Company's control, including
increases in the minimum hourly wage requirements, workers compensation
insurance rates, health care insurance costs and unemployment and other taxes.
The Federal Americans With Disabilities ("ADA") prohibits discrimination on the
basis of disability in public accommodations and employment. The Company's
restaurants are currently designed to be accessible to the disabled, and the
Company believes that it is in compliance with all current applicable
regulations relating to accommodations for the disabled. However, there can be
no assurance that the Company will not be deemed to violate the ADA, and could
be required to expend significant funds to provide service to or make reasonable
accommodations for disabled persons.
Uncertainty of Protection of Proprietary Information. The Company's
business prospects will depend in part on the Company's ability to develop
favorable consumer recognition of the Spencer's name. Although the Company has
applied for trademark registration for use of the Spencer's name by the United
States Patent and Trademark Office, there can be no assurance that: (i) the
Company's registrations will be issued and will not violate the proprietary
rights of others or that the Company's trademarks would be upheld; or (ii) that
the Company would not be prevented from using its trademarks, if challenged, any
of which could have an adverse effect on the Company. In addition, the Company
will rely on trade secrets and proprietary know-how, and will employ various
methods, to protect its concepts and recipes. However, such methods may not
afford adequate protection and there can be no assurance that others will not
independently develop similar know-how or obtain access to the Company's
know-how, concepts and recipes. The Company does not maintain confidentiality
and non-competition agreements with all of its executives, key personnel or
suppliers. There can be no assurance that the Company will be able to adequately
protect its trade secrets. In the event competitors independently develop or
otherwise obtain access to the Company's know-how, concepts, recipes or trade
secrets, the Company could be adversely affected.
Control by Management. The Company's current officers and directors own
approximately 25% of the outstanding Common Stock of the Company. Accordingly,
such persons could be able to control the Company and generally direct the
Company's affairs, including electing a majority of the Company's directors and
causing an increase in the Company's authorized capital or the dissolution,
merger or sale of the Company or substantially all of its assets.
No Dividends. The Company has never paid any dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future,
except for possible cash dividends on the Preferred Shares. The Company accrued
dividends on the Series B preferred shares as of June 30, 1999 with an
approximate value of $198,846. In September 1999, the Company issued 7,954
shares of Series B Preferred Stock to satisfy this obligation. The Company
currently intends to retain any and all earnings for use in connection with the
expansion of its business and for general corporate purposes. The declaration
and payment of future cash dividends, if any, will be at the sole discretion of
the Company's Board of Directors and will depend upon the Company's
profitability, financial condition, cash requirements future prospects, and
other factors deemed relevant by the Board of Directors.
Shares Eligible for Future Sale. On June 30, 1999, the Company had
approximately 200,000,000 shares of Common Stock outstanding (assuming
conversion of convertible securities but no exercise of any warrants or
options), of which approximately 15,000,000 shares of Common Stock are freely
tradable without restriction or further registration under the Securities Act of
1933, as amended (the "Securities Act"). All of the remaining shares of Common
Stock outstanding are "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act and all of such restricted shares
will become eligible for sale, pursuant to Rule 144, at the present time or
later, but in no event later than one year from the date hereof, subject to the
agreements set forth below. The Company has filed a registration statement under
the Securities Act of 1933 including substantially all of the restricted
securities which may be issued upon the conversion of convertible securities and
the exercise of options and warrants (approximately 300,000,000 shares of common
stock). It is anticipated that such registration statement will become effective
in or about January 2000. No prediction can be made as to the effect, if any,
that sales of shares of Common Stock or even the availability of such shares for
sale will have on the market prices prevailing from time to time. The
substantial amounts of Common Stock that may be sold in the public market once
such registration statement is effective is likely to adversely affect the
prevailing market price for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities at future
dates.
Possible Adverse Effect of Outstanding Warrants and Options. Upon the
consummation of the Offering in July 1999, there were approximately 165,000,000
shares of Common Stock reserved for issuance upon conversion of the Company's
outstanding Series B Preferred Stock, and an additional approximately
125,000,000 shares reserved for issuance upon the exercise of other options and
warrants. Upon issuance of these shares, dilution of the interests of the
holders of the Company's Common Stock will occur and any sales in the public
market of the shares may adversely affect prevailing market prices for the
Common Stock. Moreover, the terms upon which the Company will be able to obtain
additional equity may be adversely affected since the holders of the Series B
Preferred Stock, outstanding warrants and options can be expected to convert or
exercise them at a time when the Company would, in all likelihood, be able to
obtain capital on terms more favorable to the Company than those provided by
such securities.
Delaware Anti-Takeover Statute; Possible Adverse Effects of
Authorization of Preferred Shares. As a Delaware corporation, the Company will
become subject to prohibitions imposed by Section 203 of the Delaware General
Corporation Law ("DGCL"). In general, this statute prohibits the Company from
entering into certain business combinations without the approval of its Board of
Directors and/or stockholders and, as such, could prohibit or delay mergers or
other attempted takeovers or changes in control with respect to the Company.
Such provisions may discourage attempts to acquire the Company. In addition, the
Company's Certificate of Incorporation authorizes the board of Directors to
issue up to 5,000,000 shares of "blank check" preferred shares (the "Preferred
Shares") without stockholder approval, in one or more series and to fix the
dividend rights, terms, conversation rights, voting rights, redemption rights
and terms, liquidation preferences, and any other rights, preferences,
privileges, and restrictions applicable to each new series of Preferred Shares.
The issuance of shares of Preferred Shares in the future could, among other
results, adversely affect the voting power of the holders of Common Stock and,
under certain circumstances, could make it difficult for a third party to gain
control of the Company, prevent or substantially delay a change in control,
discourage bids for the Common Stock at a premium, or otherwise adversely affect
the market price of the Common Stock. See "Description of Capital Stock".
Failure to List Common Stock on NASDAQ Small Cap or National Market
System; Risks Relating to Low-Prices Stocks. The Company will seek to list the
Common Stock on NASDAQ Small Cap or National Market System as soon as deemed
practical. The Company would have approximately 300,000,000 shares of Common
Stock outstanding, assuming conversion of all convertible securities and the
exercise of all outstanding options and warrants (of which there can be no
assurance). It would be necessary for the Company to seek authorization from its
stockholders for a Common Stock combination (i.e. a reduction in the outstanding
number of shares of Common Stock) to achieve a market price which will enable
the Company to obtain a NASDAQ listing. If approved, this could sharply reduce
the number of shares of Common Stock outstanding (and the number of shares owned
by any stockholder). There are also stringent net worth requirements that the
Company does not currently meet, and may not meet in the future. The failure to
meet listing or maintenance criteria will result in the failure to effect the
listing of the Company's Common Stock on NASDAQ, and trading, if any, in the
Company's Common Stock would be limited to the non-NASDAQ Bulletin Board market.
As a result, there could be a significant lack of liquidity, and an investor
could find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of, the Company's Common Stock.
Possible Adverse Effect of Penny Stock Rules on Liquidity for the
Company's Common Stock. The Securities and Exchange Commission (the
"Commission") regulations define a "penny stock" to be an equity security not
registered on a national securities exchange, or for which quotation information
is disseminated not on the NASDAQ SmallCap Market, that has a market price (as
therein defined) of less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exemptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to a transaction
in a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks. The
foregoing required penny stock restrictions will not apply to the Company's
Common Stock if the Common Stock becomes listed on the NASDAQ SmallCap Market,
and if certain price and volume information is provided on a current and
continuing basis or, or if the Company meets certain minimum net tangible assets
or average return criteria. In any event, even if the Common Stock was exempt
from such restrictions, the Company would remain subject to Section 15(b)(6) of
the Securities Act, as amended, which gives the Commission the authority to
prohibit any person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Common Stock remains
subject to the rules on penny stocks, the market liquidity for the Company's
securities could be materially and adversely affected. Any disruption in the
liquid market of the Common Stock could limit the Company's access to the equity
markets in the future, and could have a materially adverse effect on the
Company's business, financial conditions and results of operations.
ITEM 2. DESCRIPTION OF PROPERTIES
Properties
The Company's principal office is located at 106 Federal Road, Danbury,
Connecticut 06810 at the location of its first Spencer's Restaurant.
At June 30, 1999, the Company operated its only remaining
Rattlesnake(R) Southwestern Grill restaurant as follows:
Location Size/Seating Lease Expiration
South Norwalk, CT 3,270 sf/120 May 2002
106 Federal Road Restaurant Corp., a wholly-owned subsidiary of the
Company purchased the Danbury, Connecticut Rattlesnake Southwestern Grill
restaurant (which was closed June 22, 1998) and the underlying real estate on
April 15, 1999 for conversion to the Spencer's prototype, and opened November 3,
1999. The size and seating of the restaurant are 7,200 square feet and 175
seats, respectively.
ITEM 3. LEGAL PROCEEDINGS.
At June 30, 1999, the Company was engaged in certain material
litigation as follows:
Peck v. Rattlesnake Ventures, Inc. et. al.
Plaintiff, the owner of an apartment situated above the South Norwalk
Rattlesnake Grill operated by Rattlesnake Ventures, Inc. ("RVI"), a wholly-owned
subsidiary of the Company, brought an action for negligence per se, intentional
infliction of emotional distress, negligent infliction of emotional distress,
and violations of the Connecticut Unfair Trade Practices Act based on
allegations of excessive noise, and rude and or threatening conduct of employees
of RVI including the Corporate Chairman and CEO at the time, William Opper
("Opper").
A jury verdict in the amount of $225,000 was entered against RVI and
Opper jointly on the negligence per se counts of the plaintiff's complaint. In
addition, verdicts in the amount of $200,000 were entered against both Opper and
RVI separately on the intentional and negligent infliction of emotional distress
counts of the complaint. The trial court subsequently set aside the emotional
distress awards against both Opper and RVI leaving only the negligence per se
award against Opper and RVI jointly in the amount of $225,000 referred to above.
This award is currently on appeal by RVI and Opper. The plaintiff has also
appealed the trial court's post trial reduction of the jury award. It should be
noted that an Offer of Judgment was filed in Peck in 1994. As a result there is
the potential that interest at the statutory rate of 12% will be applied to any
ultimate final award in Peck.
Plaintiff's claims are arguably covered by one or more of RVIs'
insurance policies. Farmington Casualty Company (Travelers Property Casualty is
successor in interest to Aetna Property and Casualty who was successor in
interest to Farmington Casualty Company) and Insurance Company of Greater New
York retained counsel to defend Rattlesnake under a reservation of rights. The
third insurance carrier, Public Service Mutual denied coverage. Greater New York
and Farmington have continued to prosecute the appeal under a reservation of
rights. RVI has advised all three insurance companies that it intends to pursue
its rights in an action for damages and declaratory relief against them in the
event that the appeal is unsuccessful and the insurance carriers refuse to
provide coverage for plaintiff's claims.
Settlement negotiations are ongoing during the appeal process.
William Opper Indemnification Demand/Peck
On or about July 7, 1999, a demand letter was tendered to the Company
by Mr. Opper's attorney seeking indemnification from potential liabilities
arising out of Peck (above). This demand is based on an indemnification
provision in an agreement between Mr. Opper and the Company. The Company has
been advised that viable defenses to this demand may exist.
Travelers Property Casualty as Successor in Interest to Aetna Property
and Casualty v. Rattlesnake Bar and Grill Holding Company, Inc. et. al.
Plaintiff seeks declaratory judgment that Travelers is not obligated
to indemnify the defendants in the underlying Peck action. Plaintiff alleges the
absence of a qualifying incident of bodily injury or property damage due to the
lack of an "occurrence" defined in the policy as accidental, the lack of a
bodily injury as defined in the policy and the lack of property damage as
defined in the policy. The plaintiff furthermore argues for exclusion of
coverage due to the alleged intent to harm the plaintiff and alleged existence
of property damage expected or intended from the standpoint of the insured.
Preliminary analysis suggests viable arguments may exists for extension of
coverage in this matter.
Jack Cioffi Trust v. Rattlesnake Lynbrook and Rattlesnake Holding.
This is 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. The plaintiff has inadequately responded to Rattlesnake's demand for
discovery and inspection and interrogatories.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In February 1999, the holders of a majority of the issued and
outstanding shares of the Company's Common Stock, by written consent in lieu of
a meeting pursuant to Section 228 of the DGCL, adopted an amendment to the
Company's Certificate of Incorporation, increasing the Company's capitalization.
As a result of this amendment to the Certificate of Incorporation, the Company
is authorized to issue a total of 405,000,000 shares, of which 400,000,000 are
shares of Common Stock and 5,000,000 shares of Preferred Stock.
In September 1999, the holders of a majority of the issued and
outstanding shares of the Company's Common Stock by written consent in lieu of a
meeting pursuant to Section 228 of the DGCL adopted an option plan providing for
incentive stock options and non-incentive stock options for employees and
non-employees, under which options may be granted for a total of 25,000,000
shares of common stock and adopted an option plan for the members of the Board
of Directors under which options may be granted for a total of 10,000,000 shares
of common stock.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The high and low bid quotations for fiscal years 1998 and 1999 for the
Common Stock on the NASDAQ SmallCap Market (until September 1997) and the NASDAQ
Bulletin Board (thereafter), is as follows (fractions converted to approximate
decimal values):
BID
Fiscal Year 1998 Low High
Quarter ended September 30, 1997 .17 .65
Quarter ended December 31, 1997 .17 .31
Quarter ended March 31, 1998 .17 .65
Quarter ended June 28, 1998 .44 .65
Fiscal Year 1999
Quarter ended September 30, 1998 .22 1.03
Quarter ended December 31, 1998 .13 .45
Quarter ended March 31, 1999 .13 .31
Quarter ended June 30, 1999 .09 .31
As of the close of business on June 30, 1999, there were 164 holders of
record of the Common Stock. The Company has paid no dividends on its common
stock for the last three years and does not expect to pay such dividends in the
future.
Description of Securities
Authorized Capital Stock
As of June 30, 1999, the Company's authorized capital stock consisted
of 400,000,000 shares of Common Stock, par value of $.001 per share; 5,000,000
shares of preferred shares, of which 500,000 are designated Series B Preferred
Shares. As of June 30, 1999, there were 29,979,013 shares of Common Stock issued
and outstanding (not including shares of Common Stock issuable upon conversion
of convertible securities, or exercise of options and warrants) and 328,563
shares of Series B Preferred Stock issued and outstanding.
Common Stock
Holder of shares of Common Stock are entitled to one vote per share,
without cumulative voting, on all matters to be voted on by shareholders.
Therefore, the holders of more than 50% of the shares of Common Stock voting for
the election of directors can elect all of the directors, subject to the right
of the holders of the Preferred Shares (upon a default in the payment of
dividends) to elect one director (which right is to be exercised for the holders
of Preferred Shares by the Placement Agent) so long as Preferred Shares remain
outstanding. The Company's Certificate of Incorporation provides for a staggered
Board of Directors, which is intended to allow for the election of one third of
the Board every year for three year terms. This provision is designed to
maintain the continuity of the Board of Directors. Since there has not been a
meeting of stockholders for approximately three years, at the next meeting, the
Board of Directors structure, which has lapsed, will be reestablished, and one
third of the directors will be elected for a term of one year, one third of the
directors will be elected for a term of two years and the remaining one third of
the director will be elected for a term of three years. Subject to preferences
that may be applicable to any outstanding preferred shares, holders of Common
Stock are entitled to receive ratably, such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation or dissolution of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preference of the outstanding Preferred Shares. The Common Stock has
no preemptive or other subscription rights, and there are no conversion rights
or redemption or sinking-fund provisions with respect to such shares. All the
shares of Common Stock presently outstanding are fully paid and non-assessable.
Conversion of Preferred Shares. 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 obligation to process a registration statement (see
below). In the case of a consolidation or merger of the Company with or into any
other corporation, or in case of any sale or transfer of substantially all the
assets of the Company, a holder of Preferred Shares will be entitled to receive
on conversion the consideration which the holder would have received had he
converted immediately prior to the occurrence of the event. The conversion price
is subject to the adjustments on the terms set forth in the Certificate of
Designation. The outstanding Preferred Shares may, at the option of the Company,
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 (20) consecutive trading days is at least four time the conversion price
($0.20 based on the initial conversion price of $0.05).
Filing of Registration Statement. On August 16, 1999 the Company filed
a Registration Statement under the Securities Act of 1933, as amended (the
"Act"), covering the shares of Common Stock issuable upon conversion of the
Preferred Shares sold in the Offering, and is required to use its best efforts
to cause such Registration Statement to be declared effective. In the event the
Company fails to use its best efforts to have such Registration Statement
declared effective within ninety (90) days thereafter, the conversion price will
be automatically reduced by 10% for each month of such failure, and the dividend
rate on the Preferred Shares will be increased to 14% per annum from issuance.
All expenses incurred in any registration of the holder's shares of Common Stock
will be paid by the Company; provided, however, that the Company will not be
liable for any discounts or commissions to any underwriter, any stock transfer
taxes incurred in respect of shares sold by the offering holders, or for any
legal fees and expenses to effect the sale of the respective holder's shares.
The holders and the Company will indemnify each other for certain liabilities
under the Act.
Dividends. Holders of Preferred Shares are entitled to receive,
semi-annual 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,
then 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 process the Registration Statement (see above), the
dividend rate will increase to 14% per annum from issuance. The Company declared
and accrued Preferred Share dividends for the quarterly period ended June 30,
1999, with a valuation of $198,846 which was paid in September 1999.
Liquidation Preference. Holders of Preferred Shares are entitled to
receive $25.00 per share (plus all unpaid dividends), and no more before any
distribution or payment is made to holders of Common Stock or other junior stock
in the event of the dissolution, liquidation, or winding up the Company. If, in
any such event, the assets of the Company are insufficient to permit full
payment, the holders of Preferred Shares will be entitled to a ratable
distribution of the available assets. A consolidation, merger, or sale of all or
substantially all of the assets of the Company will not be considered a
liquidation, dissolution, or winding up for these purposes.
Voting Rights. The Preferred Shares are non-voting (however, the shares
of Common Stock into which the Shares are convertible will be entitled to one
vote for each share). The Preferred Shares will have certain additional voting
rights provided by law and/or the Certificate of Designation. The Company may
not, without the consent of the majority of the holders of the then outstanding
Preferred Shares, voting as a class (i) alter, amend, or modify the authorizing
resolution or Certificate of Designation creating the Preferred Shares; (ii)
adversely affect rights or preferences of the Preferred Shares; or (iii) issue
any stock that ranks in liquidation equal or senior to the Preferred Shares.
Warrants
The following chart provides a summary with respect to the warrants
granted by the Company which are outstanding as of June 30, 1999:
- ------------------------------- --------------------------------------
Number of Warrants 110,000,000
- ------------------------------- --------------------------------------
Price Range of Warrants $0.05 to $16.00
- ------------------------------- --------------------------------------
Series A Convertible Preferred Shares
At June 28, 1998, the Company had 56,500 shares of Series A Preferred
Shares outstanding. Based on a prior exchange offer and acceptance, these shares
were exchanged with the Company in February 1999 for 55,370 Series B Preferred
Shares, and retired by the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis contains forward-looking
statements which involve risks and uncertainties. When used herein, the words
"anticipate," "believe," "estimate," and "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company's actual results, performance or
achievements could differ materially from the results expressed in or implied by
these forward-looking statements.
The Company's original strategy of aggressive growth, utilizing a low
cost Rattlesnake Southwestern Grill restaurant concept adaptable to different
leasehold configurations in a short construction timetable, met with significant
difficulty, particularly in the areas of inconsistent operational performance of
newer units. As a result, the Board of Directors voted in January 1997 to adopt
a revised business plan (the "Cost Reduction Plan") that focused on
profitability of existing restaurants and the closing of marginal restaurants.
In late fiscal 1998, the Company modified its expansion and operating
strategy to facilitate a more rapid course to profitability and accelerate the
reduction of losses pursuant to the Cost Reduction Plan. This new strategy
incorporates a sharpened focus on existing profitable restaurants, the
elimination or conversion of unprofitable restaurants and the implementation of
aggressive cost cutting measures designed to reduce operating expenses and
improve restaurant operating performance. The Company has, accordingly,
terminated operations at seven locations.
At June 30, 1999, The Rattlesnake Holding Company, Inc. was the parent
corporation of one operating subsidiary company, Rattlesnake Ventures, Inc.,
operating a Rattlesnake Grill in South Norwalk, Connecticut and the parent
corporation of one subsidiary company, 106 Federal Road, owner of the site at
which the Company opened its first Spencer's restaurant November 3, 1999.
Fiscal Year Ended June 30, 1999 as Compared
with Fiscal Year Ended June 28, 1998
Net restaurant sales decreased 56.7% to $1,627,245 in fiscal 1999 from
$3,761,300 in fiscal 1998. The decrease in net restaurant sales resulted from
the closing of the Danbury, CT and Flemington, NJ restaurants. In fiscal 1999,
the Company generated a net loss of $3,352,035 as compared to a net loss of
$3,236,039 in fiscal 1998, an increase of $115,996.
The increased loss was attributable to a combination of several factors
including; $1,533,000 increase in selling, general and administrative expenses
attributable to a $1,075,000 charge incurred for the issuance of warrants to Mr.
Frank and increased professional fees; a litigation charge of $225,000 relating
to a verdict in an action brought by an owner of an apartment above the South
Norwalk restaurant; a $1,100,000 reduction in losses on closure of restaurant
sites and impairment charges and a $512,429 extraordinary gain in 1999 on the
extinguishment of debt.
Restaurant Sales
Gross restaurant sales decreased 56.4% to $1,696,679 in fiscal 1999 from
$3,888,643 in fiscal 1998. The decrease in restaurant sales resulted from the
decrease in number of operating restaurants during the fiscal year 1998 period
due to the closure of the Danbury, Connecticut and Flemington, New Jersey
restaurants, and lack of working capital to adequately support restaurant
operations. Same store sales for comparable periods for fiscal year ended June
30, 1999 decreased by $78,252.
Promotional Sales
Promotional sales decreased from $127,343 in fiscal 1998 to $69,434 in
fiscal 1999. This decrease is attributed to a reduction in the number of
restaurants operating during the period. Promotional sales have increased as a
percentage of gross sales in fiscal 1999 to 4.1% from 3.3% in fiscal 1998. This
increase as a percentage of sales is the result of increase usage of discount
dining services.
Food and Beverage Costs
Food and beverage costs increased as a percentage of net restaurant sales
at 38.2% in fiscal 1999 and 32.6% in fiscal 1998. The percentage increase is
attributable to inefficiencies of the Flemington unit closed in November 1998.
The cost of food and beverage sales decreased to $621,595 for fiscal 1999, as
compared with $1,225,982 for fiscal 1998, resulting from the reduction in the
number of restaurants operating during the period.
Restaurant Salaries and Fringe Benefits
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
decreased to $662,343 in fiscal 1999 as compared to $1,322,119 in fiscal 1998.
This decrease is attributable to the operation of fewer restaurants during
fiscal 1999. As a percentage of net sales, these costs increased to 40.7% in
fiscal 1999 from 35.2% in fiscal 1998, principally due to allocating management
salaries over a smaller restaurant base.
Occupancy and Related Expenses
Occupancy and related expenses, which include linen, repairs, maintenance,
utilities, rent, insurance and other occupancy related expenses, decreased to
$485,200 in fiscal 1999 from $1,072,796 in fiscal 1998. As a percentage of net
restaurant sales, these costs increased to 29.9% in fiscal 1999 from 28.5% in
fiscal 1998. The decrease in actual occupancy costs is attributable to a
reduction in the number of units operating during the period.
Depreciation and Amortization Expense
Depreciation and amortization expenses decreased as a percentage of net
restaurant sales to 2.7% in fiscal 1999 from 8.3% in fiscal 1998. These expenses
decreased to $44,096 in fiscal 1999 from $314,017 in fiscal 1998. This decrease
is primarily attributable to the reduction in the number of restaurants which
were in operation during fiscal 1999.
General and Administrative Expenses
General and administrative expenses increased to $2,812,917 in fiscal 1999
from $1,279,831 in fiscal 1998. This increase is attributable to a $1,075,000
charge incurred for the issuance of warrants to Mr. Frank and increased
professional fees.
Interest Expenses
Interest expense decreased to $175,248 in fiscal 1999 from $261,276 in
fiscal 1998. This decrease resulted from the reduction of outstanding
indebtedness attributable to debt conversions, principal reductions and
forgiveness of debt associated with the private placement of Series B Preferred
Stock.
Loss of Closure of Restaurant Sites and Impairment Charges
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 1998 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 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 1999.
Litigation Award
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.
Extraordinary Gain
The Company has recorded an extraordinary gain on the forgiveness of debt
of $512,429 in 1999, principally resulting from a series of debt satisfaction
agreements associated with the Company's private placement of Series B Preferred
Stock and related settlements with trade creditors.
Subsequent Events
On July 2, 1999, the Company sold an additional 2,000 shares of its Series
B Preferred Stock for a value of $50,000 as part of its Offering.
On September 9, 1999, the Company formally changed its name with the
appropriate authorities to Spencer's Restaurants, Inc.
(symbol: "SPST") from The Rattlesnake Holding Company Inc. (symbol: "RTTL").
In September 1999, the Company finalized its agreement with the landlord
of its previously closed restaurant in Flemington, New Jersey. The agreement
completely satisfied all remaining obligations for past due rents, real estate
taxes, utilities and outstanding $39,998 note payable. The Company assigned the
liquor license in satisfaction of the note payable and issued 4,660 shares of
Series B Preferred Stock with a valuation of $116,500 to complete the
settlement.
In September 1999, the holders of a majority of the issued and outstanding
shares of the Company's common stock by written consent in lieu of a meeting
pursuant to Delaware Law adopted an option plan providing for incentive stock
options and non-incentive stock options for employees and non-employees, under
which options may be granted for a total of 25,000,000 shares of common stock
and adopted an option plan for the members of the Board of Directors under which
options may be granted for a total of 10,000,000 shares of common stock.
In September 1999, the Company paid $198,846 of dividends to the preferred
shareholders of record by issuing 7,954 additional shares of Series B Preferred
Stock in lieu of cash payments.
Fiscal Year Ended June 28, 1998 as Compared
with Fiscal Year Ended June 29, 1997
Net restaurant sales decreased 52.1% to $3,761,300 for the fiscal year
ended June 28, 1998 from $7,851,950 for the twelve months ended June 29, 1997.
The decrease in net restaurant sales resulted from the closing of the Fairfield,
Connecticut, White Plains and Yorktown Heights, New York restaurants in fiscal
1997. For the fiscal year ended June 28, 1998, the Company generated a net loss
of $3,236,039 as compared to a net loss of $4,797,857 for the fiscal year ended
June 29, 1997, a decrease of $1,561,818. The decreased loss was principally
attributed to the modified expansion and operating strategy adopted by the Board
of Directors in January of 1997.
Restaurant operating losses were $173,614 for the fiscal year ended June
28, 1998 as compared with $136,256 for the fiscal year ended June 29, 1997. This
decrease in operating losses was principally attributable to the implementation
of the Company's Cost Reduction Plan and closure of unprofitable restaurants.
Restaurant salaries and benefits were reduced as a result of a reduction in the
number of personnel being reduced. Furthermore, depreciation and amortization
reduced as the number of operating restaurant facilities was reduced.
Restaurant Sales
Gross restaurant sales decreased 53% to $3,888,643 for the fiscal year
ended June 28, 1998 from $8,265,474 for the fiscal year ended June 29, 1997. The
decrease in restaurant sales resulted from the decrease in number of operating
restaurants during the fiscal year 1998 period, the closure of the Danbury,
Connecticut restaurant, and lack of working capital to adequately maintain and
provide the restaurant operations. Store sales for comparable periods for fiscal
year ended June 28, 1998 decreased $897,008.
Promotional Sales
Promotional sales decreased from $413,524 for fiscal year ended June 29,
1997 to $127,343 for fiscal year ended June 28, 1998. This decrease is
attributed to a reduction in direct mail advertisement incentives and closer
controls of in-house manager promotions. Promotional sales have decreased as a
percentage of gross sales in fiscal year 1998 to 3.3% from 5.0% in fiscal year
1997. This decrease as a percentage of sales is the result of Corporate policy
to reduce promotional sales.
Food and Beverage Costs
Food and beverage costs increased slightly as a percentage of net
restaurant sales at 32.6% in fiscal year 1998 and 31.1% in 1997. The cost of
food and beverage sales decreased to $1,225,982 for the fiscal year ended June
28, 1998, as compared with $2,443,860 for the fiscal year ended June 29, 1997.
The slight increase is due to menu changes, price increases and the loss of
purchasing efficiencies based on fewer restaurants in operation. This decrease
as a percentage of sales is the result of the beneficial effects of clustered
marketing efforts and shared costs among all of the Company's restaurants.
Restaurant Salaries and Fringe Benefits
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
decreased to $1,322,119 for the fiscal year ended June 28, 1998 as compared to
$2,792,622 for the fiscal year ended June 29, 1997. This decrease is
attributable to the operation of fewer restaurants during fiscal 1998. As a
percentage of net sales, these costs decreased to 35.2% in fiscal 1998 from
35.6% in fiscal 1997, principally due to the implementation of the Company's
cost reduction plan under which it reduced restaurant management and staff
during the fourth quarter of fiscal year 1997.
Occupancy and Related Expenses
Occupancy and related expenses, which include linen, repairs, maintenance,
utilities, rent, insurance and other occupancy related expenses, decreased to
$1,072,796 for the fiscal year ended June 28, 1998 from $2,025,198 for the
fiscal year end June 29, 1997. As a percentage of net restaurant sales, these
costs increased to 28.5% in fiscal 1998 from 25.8% in fiscal 1997. The increase
as a percentage of sales can be attributed primarily to the costs associated
with the maintenance of the Fairfield restaurant which closed in fiscal year
1997 and which was not sold until March 24, 1998.
Depreciation and Amortization Expense
Depreciation and amortization expenses decreased as a percentage of net
restaurant sales to 8.3% for the fiscal year ended June 28, 1998 from 9.3% for
the fiscal year end June 29, 1997. These expenses decreased to $314,017 in
fiscal year ended June 28, 1998 from $726,526 for the fiscal year end June 29,
1997. This decrease is primarily attributable to the reduction in the number of
restaurants which were in operation during fiscal year 1998.
General and Administrative Expenses
Selling, general and administrative expenses decreased to $1,279,831 in
fiscal year ended June 28, 1998 from $2,715,293 for the fiscal year end June 29,
1997. As a percentage of net sales, selling, general and administrative expenses
increased from 34.6% in 1997 to 34.0% in 1998. These reductions in expense are a
direct result of the Company's implementation of its cost reduction plan.
Interest Expenses
Interest expense increased to $261,276 for the fiscal year ended June 28,
1998 from $172,886 for the fiscal year end June 29, 1997. This increase resulted
from additional borrowing by the Company and the increased interest rate
relating to the extension of the Series C Notes payable.
Loss of Closure of Restaurant Sites and Impairment Charges
In fiscal 1998, the Company performed a further analysis of historical and
projected operating results, which reflected a pattern of historical operating
losses and negative cash flow, as well as future projected negative cash flow
and operating results for fiscal 1999 for its Flemington restaurant.
Accordingly, the Company recorded an impairment charge for this restaurant to
write-down the impaired asset of $558,282 in fiscal 1998 and contemplated the
future closure based upon future operating results.
The restaurant was subsequently closed in November 1998.
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.
In fiscal 1998, Company management concluded that the operations of the
former Ottomanelli Group were inconsistent with the Company's operating plans
and were terminated in fiscal 1998, including the operations of its two New
Jersey restaurants. Accordingly, the Company concluded that the goodwill
relating to the acquisition was impaired and recorded an impairment charge of
approximately $436,000 in fiscal 1998.
In fiscal 1998, the Company recorded an additional loss of $88,559
relating to the ultimate sale of the Fairfield, Connecticut location closed in
June 1997 and an additional loss of $55,725 relating to the Lynbrook facility
closed in September 1997.
Seasonality and External Influences
on Quarterly Results
The Company's sales and earnings reflect the seasonality of the business.
Quarterly results have been and, in the future are likely to be, substantially
affected by the timing of new restaurant openings. Because of the impact of new
restaurant openings, results for any quarter are not necessarily indicative of
the results that may be achieved for a full fiscal year and cannot be used to
indicate financial performance for the entire year.
Recent Accounting Announcements
In April 1998, Statement of Position 98-5 ("SOP 98-5"), "Reporting the
Cost of Start-up Activities," was issued. SOP 98-5 requires that costs incurred
during start-up activities, including pre-opening costs, be expensed as
incurred. The Company will adopt SOP 98-5 in the first quarter of fiscal 2000
and management does not believe that the adoption of SOP 98-5 will have a
material impact on the Company's financial position or results of operations.
In June 1997, the FASB issues 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 standards for related
disclosures 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 an din
assessing performance. This Statement requires reporting segment profit or loss,
certain specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profits or 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 Company does
not believe that adoption of the Statement will have a significant impact on the
financial statements disclosures. The Company will adopt this accounting
standard effective in fiscal 1999, as required.
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 after 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 determined the impact that Statement 133 will have on its financial
statements and believes that such determination will not be meaningful until
closer to the date of initial adoption.
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 to $2,337,675 during the year ended
June 30, 1999, principally as a result of the proceeds of a private placement of
common stock, the proceeds from the sale of a convertible note, which was
subsequently converted into common stock, and certain bridge financing
arrangements, which were partially offset by operating losses and principal
repayments.
On June 22, 1998, the Company closed its facility in Danbury, Connecticut
for renovations; lost its tenancy pursuant to a foreclosure action against its
landlord by the mortgage lender; purchased the property for $1,350,000 cash from
the prior landlord's mortgage lender via its wholly-owned subsidiary, 106
Federal Road, Inc. on April 15, 1999; 106 Federal Road, Inc. leased it to
another Company wholly-owned subsidiary, Federal Road Restaurants, Inc. on April
15, 1999; the Company plans to mortgage its purchase.
On July 2, 1998, the Company entered into a contract for the purchase of a
restaurant facility in New York City for $400,000 in a combination of cash and
notes. The Company ultimately chose to not purchase this property.
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 to not purchase this property.
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 connection with this sale, the placement agent received warrants to
purchase 750,000 shares of the Company's common stock at $.15 per share.
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 fiscal
1999.
Between October 1998 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 (90) days,
respectively. These debts were satisfied by payment of cash and conversion to
Company equity at the initial closing of the Offering.
In December 1998, certain management personnel deferred a portion of their
salary pending completion of the Offering. This debt was satisfied by payment of
cash and conversion to Company equity at the initial closing of the Offering.
In connection with the private placement, the Company sold 236,279 of
Series B Preferred Stock at $25 per share, generating gross proceeds of
$5,906,975. 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 2, 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. Additionally, the
Company entered into a series of settlement agreements, whereby various
creditors accepted cash payment of $84,811 and 446,714 shares of common stock in
exchange for the release of trade obligations. As a result of these
transactions, the Company recognized an extraordinary gain on the forgiveness of
debt of $423,479 in fiscal 1999.
In connection with this financing, 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 the payment of accumulated dividends of $259,545.
The preferred shares will be convertible, at the option of the holder at
any time after November 1999, at the 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 obligation to 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 the preferred shares are entitled to receive, semi-annually,
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 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.
At June 30, 1999, the following obligations are past due and in default;
$18,750 of Series C subordinated notes payable, matured in August 1997, a $2,089
subordinated note payable matured in August 1996 (the Company has been unable to
locate either noteholder); and a $15,000 note payable relating to the
acquisition of a lease (subsequently satisfied).
At June 30, 1999, the Company had available a net operating loss carry
forward (NOL) for Federal and State income tax purposes of approximately
$17,331,000, 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, the
launch of its new restaurant concept Spencer's 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.
Inflation
The impact of general inflation on the Company's business has been
insignificant to date and the Company believes that it will continue to be
insignificant for the foreseeable future.
Market Risk
The Company is not subject to interest rate risk, as substantially all
borrowings are fixed rate obligations. However, the Company has exposure to
commodity risk, including the dependence on the rapid availability of food,
principally steak and shrimp, and fluctuations in price of these commodities.
Although the Company believes that its relationships with suppliers are
satisfactory and that alternative sources are available, the loss of certain
suppliers, or substantial price increases, could have a material adverse effect
on the Company.
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 First Union 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.
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.
ITEM 7. FINANCIAL STATEMENTS.
The information required by this item is incorporated by reference to the
Company's financial statements. See Pages F-1 to F-30.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning each of the
executive officers, directors and advisors as of June 30, 1999 (See "Agreements
with New Management" below for information on contractual commitments related to
certain of these persons). The Company's officers are elected to serve in such
capacities until the earlier to occur of the election and qualification of their
respective successors or until their respective deaths, resignations or removals
by the Company's board of directors from such position. The Company does not pay
any compensation to any person for serving, as such, as a director. Current
officers and directors include:
NAME AGE POSITIONS
Kenneth Berry 46 President, CEO and Director
Stephan A. Stein 47 Consultant, Secretary and
Director
Nicolo Ottomanelli 57 Senior Vice President and
Director
Frank T. Ferro 47 Vice-President, CFO and
Treasurer
- -------------------------
Shelly Frank* 54 Consultant and Director
A.G. (Sandy) Rappaport* 50 Consultant and Director
* Messrs. Frank and Rappaport are anticipated to join the Company's
Board of Directors, with Mr. Frank to serve as Chairman, at such time as the
Company finalizes its officers and directors insurance and upon the resolution
of certain other matters. See "Agreements with New Management".
Kenneth Berry From 1997 until February 1999, Mr. Berry was a Director
of Operations for Briad Group, a $75 million per year multi-unit restaurant
operations company in the Metro-New York area operating primarily Wendy's and
TGIF Friday's restaurants. From 1989 to 1996, Mr. Berry was a principal in the
Kerry Organization, which acquired and operated Roy Rogers Restaurants in
Connecticut, during which period he served on the Board of the Roy Rogers
National Franchisee Advisory Council. Prior to that, and from 1985 to 1989, Mr.
Berry was a Regional Vice-President of Operations for KFC National Management
Company, a PepsiCo subsidiary. Mr. Berry attended Pace University.
Stephan A. Stein Mr. Stein has been a Director of the Company since
1996 and served as its Acting Chairman from inception of the 1997 Cost Reduction
Plan until the Initial Closing of the Offering. Mr. Stein was a Managing
Director of the Corporate Finance Department of Commonwealth Associates, until
May 31, 1999. Prior to joining Commonwealth Associates, and from 1977 to 1996,
Mr. Stein had broad based transaction and business management experience,
initially as a practicing attorney in New York City and thereafter as a
principal of various food-service related companies involved in manufacturing,
distribution, retailing and franchising, both domestically and internationally.
Mr. Stein has a B.A. degree in economics from Ohio State University and a Juris
Doctor degree from The Vermont Law School.
Nicolo Ottomanelli For more than forty years, Mr. Ottomanelli has been
engaged in the food business in New York as a member of Ottomanelli Bros., a
century old retail meat purveyor, and has operated a number of casual dining
restaurants under the Ottomanelli's Cafe(R) name. He has also operated steak
restaurants and is the founder of the Ottomanelli's Cafe franchising operation,
which is now owned by the Company.
Frank T. Ferro From 1997 until February 1999, Mr. Ferro was
employed by Deloitte and Touche, LLP as a special projects financial and tax
accountant. From 1995 to 1997, Mr. Ferro was a financial and tax consultant
for Royal Par Industries. From 1991 to 1994, Mr. Ferro was CFO for CAT
Entertainment, a New York City based restaurant turnaround company.
Mr. Ferro is a CPA and has B.S. and MBA degrees from St. John's University.
Shelly Frank During the past 10 years, Mr. Frank has been a private
investor and, among other things, a consultant to the restaurant industry. From
1977 to 1986, Mr. Frank was Chairman and CEO of Chi-Chi's, Inc. a casual dining
restaurant chain that established the Mexican food sit-down segment and as a
public company expanded nationally from one location to more than 200
restaurants and yearly revenues in excess of $500 million per year during his
tenure. Prior to 1977, Mr. Frank held various executive positions in the
restaurant industry with Kentucky Fried Chicken, Burger King International and
General Mills. Mr. Frank is a past recipient of the Wall Street Transcript's CEO
of The Year Award as well as the MUFSO (Multi-Unit Food Service Operator) Golden
Chain Award given by the Nations Restaurant News. Mr. Frank has a B.S. degree in
accounting from the University of New Haven and attended the MBA program at the
University of Miami, Florida.
A.G. (Sandy) Rappaport Mr. Rappaport is currently a
co-owner and development partner of R&A Food Services, L.P., the master
franchise of Boston Market for the State of Florida and a development partner
of Einstein's Bros. Bagels, for which he has opened more than 150 locations
combined. Mr. Rappaport was president of the first franchise and a
development partner of the Outback Steakhouse concept. Mr. Rappaport also
engages in investment activities. Mr. Rappaport has a Masters degree from
the University of South Florida and is an Advisory Board Member of the
University as well.
Committees of the Board of Directors
The Company's Board of Directors currently has no committees, though it
anticipates the formation of an Audit Committee and Compensation Committee prior
to the next annual meeting of stockholders.
Section 16(a) Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors and persons who own more than ten (10%) percent
of a registered class of the Company's equity securities (collectively, the
"Reporting Persons") to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and to furnish the Company with copies of
these reports. Based solely on the Company's review of the copies of such forms
received by it during its fiscal year ended June 28, 1998, the Company believes
that all filing requirements applicable to the Reporting Persons were not
complied with by its executive officers and directors during such period. As of
June 30, 1999, the Company is in compliance with all Section 16 requirements and
believes its current management and directors to be in compliance.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth as of June 30, 1999 the cash compensation paid by
the Company, as well as any other compensation paid to or earned by the
President of the Company and those executive officers compensated at or greater
than $100,000 for services rendered to the Company in all capacities during the
three most recent fiscal years:
<TABLE>
Summary Compensation Table
<S> <C>
Name of Individual Stock Long-Term
and Principal Position Year Salary Bonus Compensation Compensation
- ---------------------------- ------------- ----------------- ------------- ------------------ ------------------
Kenneth Berry, 1999 $29,535 $30,000 --- ---
President 1998* $ --- --- --- ---
1997* $ --- --- --- ---
Nicolo Ottomanelli, 1999 $119,992 --- $75,236 ---
Senior Vice President 1998 $ 69,230 --- --- ---
1997** $ --- --- --- ---
Stephan A. Stein, 1999 $90,550 --- $114,867 ---
Secretary 1998 $53,519 --- --- ---
1997 $86,250 --- --- ---
- -------------
* Mr. Berry was not employed by the Company in fiscal years 1998 and 1997.
** Mr. Ottomanelli was not employed by the Company in fiscal year 1997
</TABLE>
Executive Compensation
The following table sets forth information with respect to the
compensation of the Company's officers for the fiscal year ended June 30, 1999:
Name Compensation
Kenneth Berry (1) $59,535
Nicolo Ottomanelli (2) $195,238
Stephan A. Stein (3) $205,417
Frank Ferro (4) $12,633
Louis Malikow(5) $56,500
1. Kenneth Berry is being compensated under a three year employment agreement
which commenced March 31, 1999, providing for payments of $3,958.33 twice
monthly. In addition, a signing bonus of $30,000 was provided as part of
his compensation package.
See "Agreements with New Management below".
2. Nicolo Ottomanelli was compensated under an employment agreement entered
into in March 1998 and terminating in 2002 pursuant to which he was to
receive a salary of $150,000 per annum. The Company and Nicolo Ottomanelli
amended his employment agreement effective February 1999 to reduce the
fixed compensation to $85,000, to make him a participant in the Company's
incentive bonus program and to provide a payment of $25,000 in early 1999.
Mr. Ottomanelli received payments of $119,992 during fiscal 1999 for
current and deferred salary. The Company also issued 1,504,720 shares of
common stock with a value of $75,236 to satisfy other deferred salary not
compensated for in cash.
3. A corporation wholly owned by Mr. Stein, SAS Ventures, Inc. entered into a
1996 consulting agreement with the Company under which it is to provide his
services to the Corporation. The agreement was amended in March 1997 and
May 1998 and expires in 2001. The consulting fee under the agreement is
$6,250 per month. In addition, Mr. Stein was granted the common stock and
warrants described in "Security Ownership of Certain Beneficial Owners and
Management". Mr. Stein received approximately $90,550 in cash payments for
the current and deferred portion of his consulting contract. The Company
issued 500,000 shares of common stock with a value of $25,000 to Mr. Stein
for services rendered. Mr. Stein also received approximately 1,664,000
shares of common stock with a value of $83,200 to compensate him for his
deferred portion of consulting fees not paid in cash. The Company issued
warrants in the amount of $6,667 as part of his consulting agreement.
4. Frank Ferro is being paid under a three year employment agreement which
calls for an annual salary of $52,000 payable for year one. See "Agreements
with New Management below".
5. Mr. Malikow, a Director since 1995, acted as Co-CEO with Mr. Stein during
the 1997 Cost Reduction Plan period authorized by the Board of Directors
and received cash and warrants in consideration of services provided. Mr.
Malikow resigned his position with the Company effective February 17, 1999.
Mr. Malikow received 880,000 shares of common stock with a value of $44,000
and $12,500 in cash.
Agreements with New Management
In fiscal 1999, the Company entered into a three year advisory service
agreement, as revised, with Mr. Shelly Frank. Mr. Frank's agreement does not
obligate him to also serve as a director or Chairman of the Board of Directors
until the Company obtains at least $10 million of officer/director liability
insurance and certain other conditions are satisfied. Mr. Frank's agreement is
terminable by Mr. Frank without recourse by the Company. Mr. Frank will receive
no regular compensation but will be entitled to participate in the Company's
performance bonus plan. Mr. Frank may receive consulting compensation prior to
commencing as Chairman of the Board of Directors. In addition, Mr. Frank was
granted the warrant described in "Security Ownership of Certain Beneficial
Owners and Management".
In fiscal 1999, the Company entered into a three year employment
agreement, as revised, with Kenneth Berry which commenced on March 31, 1999,
providing for fixed compensation of $95,000 a year, a signing bonus of $30,000,
participation in the Company's performance bonus plan, and receipt of $250,000
of term life insurance coverage. In addition, Mr. Berry was granted the warrant
described in "Security Ownership of Certain Beneficial Owners and Management".
In fiscal 1999, the Company entered into a three year employment
agreement, as revised, with Frank T. Ferro providing for fixed compensation of
$52,000 in year one, with a time allowance in year one to complete certain
projects, and commercially standard compensation for full time services to be
determined for years two and three. Mr. Ferro has also been granted options to
purchase Common Stock as follows: 100,000 vesting at close of year one; 100,000
vesting at close of year two; 100,000 vesting at close of year three at the
exercise price of $.05, with additional options to purchase 200,000 shares,
exercisable at the close of each years two and three.
In fiscal 1999, the Company entered into a three year advisory service
agreement with A. G. (Sandy) Rappaport providing for certain consultative
services on an as need basis and providing for compensation of $12,000 per year
plus the warrant described in "Security Ownership of Certain Beneficial Owners
and Management".
The performance bonus plan for senior management creates a bonus pool
based on the yearly targeted number of restaurant openings, the aggregate
revenues and pre-tax (and pre-bonus) income of the Company. The plan initially
has a five year term. The pool, if created, would be allocated by the Chairman
of the Board, currently anticipated to be Shelly Frank, including to himself. It
is anticipated that the bonus pool could vary from a maximum of approximately
$100,000 in the first year to $1,000,000 (or more) in the fifth year, based on
meeting or exceeding targeted goals. There can be no assurance as to the size of
the bonus pool, if any, during any year of operations.
Limited Liability of Directors and Executive Officers
The Certificate of Incorporation of the Company provides that the Company
shall indemnify to the fullest extent permitted by Delaware law any person whom
it may indemnify thereunder, which includes directors, officers, employees and
agents of the Company. Such indemnification (other than as ordered by a court)
shall be made by the Company only upon a determination that indemnification is
proper in the circumstances because the individual met the applicable standard
of conduct. Advances for such indemnification may be made pending such
determination. In addition, the Certificate of Incorporation provides for the
elimination, to the extent permitted by Delaware law, of personal liability of
directors to the Company and its stockholders for monetary damages for breach of
fiduciary duty as directors.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of the expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company, will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy, as expressed in the Securities Act, and will be governed by the
final adjudication of such issue.
Stock Option Plans
1994 Employees Stock Option Plan
In December 1994, the Company adopted the 1994 Employees Stock Option
Plan (the "Employees Plan"), which provides for the issuance of incentive stock
options (ISO's) and non-qualified options (Non-ISO's) to officers and key
employees. Up to 1,000,000 shares of the Company's common stock have been
reserved for issuance under the Plan. The Plan is currently administered by the
Board of Directors of the Company. The term of the options is generally for a
period of 5 years. The exercise price for non-qualified options outstanding
under the Employees Plan can be no less than 100% of the fair market value, as
defined, of the Company's common stock at the date of the grant. For ISO's the
exercise price can be generally no less than the fair market value of the
Company's common stock at the date of the grant, with the exception of any
employee who prior to the granting of the option, is a 10% or greater
stockholder as defined, for which the exercise price can be no less than 110% of
the fair market value of the Company's common stock at the date of grant. There
are presently approximately 1,000,000 shares available for option under the
Employees Plan. The Company anticipates terminating this plan during fiscal
2000.
1994 Director Plan
In December 1994, the Company adopted the non-Executive Director Stock
Option Plan (the "Director Plan"), which provides for the issuance of non-ISO's
to non-executive directors, as defined, and members of any advisory board
established by the Company who are not full-time employees of the Company. The
Company has reserved 500,000 shares for issuance under the provisions of the
Director Plan. The Director Plan provides that each non-executive director will
automatically be granted an option to purchase 25,000 shares upon joining the
Board of Directors and 15,000 shares on each December 1 thereafter, provided
such person has served as a director for the 12 months immediately prior to such
December 1. The exercise price for options granted under the Director Plan shall
be 100% of the fair market value of the Common Stock on the date of grant. There
are presently 295,000 shares available for option under the Directors Plan. The
Company anticipates terminating this plan during fiscal 2000.
1999 Stock Option Plan
On April 18, 1999, the Board of Directors approved the adoption of the
1999 Stock Option Plan (the "1999 Plan"), subject to the approval of
stockholders which was obtained in September 1999, which provides for the
issuance of ISOs, Non-ISOs, and stock appreciation rights to officers and key
employees of the Company. Up to 25,000,000 shares have been reserved for
issuance under the 1999 Plan, which is administered by the Board of Directors of
the Company. The term of the options is generally for a period of five (5)
years. The exercise price for Non-ISOs outstanding under the 1999 Plan can be no
less than 100% of the fair market value as, defined, of the Company's Common
Stock on the date of grant. For ISOs, the exercise price can generally be no
less than the fair market value of the Company's Common Stock at the date of
grant, without the exception of any employee who prior to the option grant, is a
10% or greater stockholder, as defined, for which the exercise price can be no
less than 110% of the fair market value of the Company's Common Stock at the
date of grant. There are presently no options granted under the 1999 Plan.
1999 Non-Employee Directors Stock Option Plan
On April 18, 1999, the Board of Directors approved the adoption of the
1999 Non-Employee Directors Stock Option Plan (the "1999 Directors Plan"),
subject to the approval of stockholders which was obtained in September 1999,
which provides for the issuance of non-qualified stock options to non-employee
directors of the Company. Up to 10,000,000 shares have been reserved for
issuance under the 1999 Directors Plan, which is administered by the Board of
Directors of the Company. The term of the options is generally for a period of
five (5) years. The exercise price for options outstanding under the 1999 Plan
can be no less than 100% of the fair market value as, defined, of the Company's
Common Stock on the date of the grant. There are presently no options granted
under the 1999 Directors Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock as of June 30, 1999, based on
information obtained from the persons named below, by (i) each person known to
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) each executive officer and director of the Company, and (iii) all
officers and directors of the Company as a group:
<PAGE>
Name and Address of Amount and Nature of Percentage****
Beneficial Owner** Beneficial Ownership***
- --------------------------------------------------------------------------------
Kenneth Berry 10,000,000 (1) 25.3%
Nicolo Ottomanelli 5,415,749 (2) 18.1%
Joseph Ottomanelli 4,271,029 (3) 14.3%
Stephan A. Stein 6,151,224 (4) 18.1%
Frank T. Ferro (5) *
Shelly Frank***** 45,000,000 (6) 60.0%
16 Arrowhead Way
Weston, CT 06883
Andrew Silverman***** 2,000,000 6.7%
A.G. (Sandy) Rappaport***** 1,500,000 (7) 4.8%
c/o Wellington Realty Advisors
11015 North Dale Mabry Highway
Tampa, FL 33618
Commonwealth Associates 15,650,000 (8) 37.3%
830 Third Avenue
New York, New York 10022
Guy Snowden 2,254,126 (9) 7.5%
4080 Ibis Point Circle
Boca Raton, FL 33431
- -----------------------------------------------------
All Directors and Officers
as group (5 Persons) 66,566,973 73.6%
* Less than 1% of outstanding shares of Common Stock.
** Unless otherwise indicated, the beneficial owner's address is the principal
office of the Company.
*** The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly, they may
include securities owned by or for, among others, the spouse and/or minor
children of the individual and any other relative who has the same home as such
individual, as well as other securities as to which the individual has or shares
voting or investment power or has the right to acquire under outstanding stock
options within 60 days after the date of this table. Beneficial ownership may be
disclaimed as to certain of the securities.
**** In computing the "Percentage of Class" figures as to each person,
there is added to the numerator and denominator, for such person, the
number of shares of Common Stock such person could acquire within 60 days by the
conversion of a convertible security owned by such person or the exercise of an
option or warrant held by such person. This presentation maximizes the
percentage of each person, since it assumes that no other holder of rights to
convert or purchase preferred stock or warrants or notes is then exercising
the same, and often results in a combined listing percentage of ownership
that exceeds 100%.
***** Not a director at June 30,
1999.
(1) Includes warrants to purchase 10,000,000 shares of Common Stock at an
exercise price of $.05. Does not include warrants to purchase 20,000,000
shares of Common Stock at $.05 per share, which are not exercisable within
sixty (60) days.
(2) Does not include any shares beneficially owed by Mr. J. Ottomanelli, Mr. N.
Ottomanelli's brother, of which Mr. N. Ottomanelli disclaims beneficial
ownership.
(3) Does not include any shares beneficially owned by Mr. N. Ottomanelli, Mr.
J. Ottomanelli's brother, of which Mr. J. Ottomanelli disclaims beneficial
ownership.
(4) Includes warrants to purchase 3,920,548 shares of Common Stock at an
exercise price of $.05 per share.
(5) Does not include warrants to purchase up to 700,000 shares of Common Stock
at an exercise price of $.05, exercisable annually in one-third increments
beginning after year one of his employment by the Company.
(6) Includes warrant to acquire 45,000,000 shares of common stock at $.05 per
share.
(7) Includes warrants granted in conjunction with Mr. Rappaport's consulting
agreement. See "Agreements of New Management."
(8) Includes warrants to purchase 12,000,000 shares of Common Stock at an
exercise price of $.05.
(9) Does not include 54,126 shares of Common Stock owned by Mr. Snowden's
spouse, of which Mr. Snowden disclaims any beneficial ownership. Does not
include 3,000 shares of Preferred B Shares owned by Mr. Snowden.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain Transactions
Nicolo Ottomanelli
In August 1997, Nicolo Ottomanelli and his brother, Joseph Ottomanelli,
entered into a Reorganization Agreement with the Company, whereby they agreed to
exchange the stock of certain corporations owned by them for certain shares of
Common Stock of the Company and certain warrants. This transaction was closed in
March 1998. After amendment to the transaction, the Ottomanellis transferred the
stock of (i) a corporation which franchises Ottomanelli's Cafe(R) and (ii) a
corporation which operated two restaurants in Paramus, New Jersey (since
closed), for a total of approximately 6,975,000 shares of Common Stock
(including an estimated 4,152,750 shares of Common Stock issued on account of
the 55,370 Preferred Shares, convertible into 6,921,250 shares of Common Stock,
exchanged for the outstanding shares of Series A Preferred Shares). In
accordance with the agreement, Nicolo Ottomanelli and a designee of Joseph
Ottomanelli (who has since resigned) were designated directors, and the
Ottomanellis received employment agreements, one of which has been terminated
and the other of which has been modified (see "Management--Executive
Compensation").
The Ottomanellis own the outstanding stock of a corporation which
licenses the name Ottomanelli's Cafe(R) to the Company. There is no license fee.
The Ottomanellis own the premises at which the Company's offices were
located until December 1, 1998, and at which the Company occupied approximately
600 square feet of space as a month-to-month tenant at a rent of $2,200 per
month. The Company believes these terms were at least as favorable to the
Company as could have been obtained from a non-affiliated person. Following the
Initial Closing, the Company terminated this tenancy without penalty and moved
its offices to one of its restaurants.
Stephan A. Stein
Mr. Stein was an employee of the placement agent in the Offering until
May 31, 1999. Commencing in March 1998, the placement agent raised approximately
$850,000 for the Company, principally by the sale of common stock, and to a
lesser extent, by the sale of notes with warrants. The Placement Agent received
a commission of approximately $75,000 and warrants to purchase 750,000 shares of
common stock at $0.15 per share for a term of five years. Commencing October
1998, the placement agent raised approximately $6,000,000 for the Company,
principally by the sale of Series B Preferred Stock, and to a lesser extent, by
the sale of notes with warrants. The placement agent received a commission of
approximately $650,000 and warrants to purchase approximately 30,000,000 shares
of common stock at $.05 per share for a term of five (5) years.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a)
Exhibit No. Description
3.1 Form of Restated Certificate of Incorporation of the
Registrant (1)
3.1.1 Designation of Preferred Stock (2)
3.1.2 Amendment to Certificate of Incorporation regarding
capitalization of Registrant
3.2 By-Laws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Series B Preferred Stock Certificate
10.1 1994 Employee Stock Option Plan (1)
10.2 1994 Non-executive Directors Stock Option Plan (1)
10.3 Employment Agreement with Stephan A. Stein (2)
10.3.1 Revised Employment Agreement with Stephan A. Stein
10.4 Lease Agreement with Jack Cioffi Trust ULWT dated April 15,
1996 together with Exhibits (2)
10.5 Form of Series C Note (2)
10.6 License Agreement by and between Ottomanelli Bros., Ltd. and
The Rattlesnake Holding Company, Inc. (3)
10.7 Convertible Subordinated Secured 18% Promissory Note dated
March 4, 1997, in favor of J.L.B. of Nevada, Inc.
10.8 Convertible Subordinated Secured 18% Promissory Note dated
March 4, 1997, in favor of Michael Lauer
10.9 Reorganization and Stock Exchange Agreement among The
Rattlesnake Holding Company, Inc. and Ottomanelli Brothers
west, Ltd., Ottomanelli's Cafe Franchising Corp., 34th St.
Cafe Associates Inc., Garden State Cafe Corp. (3)
10.10 Modification Agreement to the Reorganization and Stock
Exchange Agreement among The Rattlesnake Holding Company,
Inc. and Ottomanelli Brothers West, Ltd., Ottomanelli Cafe
Franchising Corp., 34th St. Cafe Associates, Inc., Garden
State Cafe Corp. and their shareholders, dated February 26,
1998 (3)
10.11 Amendment Agreement among The Rattlesnake Holding Company,
Inc. and Ottomanelli Brothers West, Ltd., Ottomanelli
Cafe Franchising Corp., 34th St. Cafe Associates, Inc.,
Garden State Cafe Corp., Nicolo Ottomanelli and Joseph
Ottomanelli, dated April 27, 1998 (3)
10.12 Registration Rights Agreement dated February 26, 1997 (3)
10.13 William J. Opper Severance Agreement
10.14 Shelly Frank Consulting Agreement dated as of October 1998 (3)
10.15 Kenneth Berry Employment Agreement dated as of October 1998(3)
10.16 A.G. (Sandy) Rappaport Consulting Agreement dated as of
July 20, 1998 (3)
10.17 Frank Ferro Employment Agreement dated as of September 1998(3)
10.18 Stephan A. Stein Consulting Agreement dated as of May 1, 1998
(3)
10.18.1 Amendment to Stephan A. Stein Consulting Agreement dated as of
March 15, 1997 (3)
10.19 Nicolo Ottomanelli Employment Agreement dated as of
February 26, 1998 (3)
10.19.1 Amendment to Nicolo Ottomanelli Employment Agreement dated as
of October 1998 (3)
10.20 Form of Shelly Frank and Kenneth Berry Warrants (3)
10.21 Form of Investor Rights Agreement for Subscribers in Offering
(3)
10.22 Form of Warrant Issued to Commonwealth Associates in Offering
(3)
22 Subsidiary List (2)
27 Financial Data Schedule
- ------------------------
(1) Previously filed with the Commission with the Company's registration on
Form SB-2 (File No. 33-88486)
(2) Previously filed with the Company's
10-KSB for the year ended June 30, 1996
(3) Previously filed with the
Company's report on Form 10-KSB for the year ended June 28, 1998.
(b) Reports on Form 8-K
None.
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Spencer's Restaurants, Inc.
By:/s/ Kenneth Berry
--------------------
Kenneth Berry
President, CEO
By:/s/ Frank Ferro
------------------
Frank Ferro
Vice President, CFO, Treasurer
Dated: November 18, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dated indicated.
Signature Title Date
- --------------------------------------------------------------------------------
Senior
Vice President
and Director
/s/ Nicolo Ottomanelli
- ---------------------------------- November 18, 1999
Nicolo Ottomanelli
Secretary and
/s/ Stephan A. Stein Director
- ---------------------------------- November 18, 1999
Stephan A. Stein
/s/ Kenneth Berry Director
- ---------------------------------- November 18, 1999
Kenneth Berry
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries )
Index to Consolidated Financial Statements
(a) Report of Independent Auditors......................................F-2
(b) Consolidated Balance Sheets as of
June 30, 1999 and June 28, 1998.....................................F-3
(c) Consolidated Statements of Operations
for the Years Ended June 30, 1999
and June 28, 1998 ..................................................F-4
(d) Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1999
and June 28, 1998...................................................F-5
(e) Consolidated Statements of Cash Flows
for the Years Ended June 30, 1999
and June 28, 1998...................................................F-7
(f) Notes to Consolidated Financial Statements..........................F-8
<PAGE>
- ----------------------------------
[KPMG LETTERHEAD]
Consolidated Financial Statements
June 30, 1999 and June 28, 1998
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors and Stockholders
Spencer's Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of Spencer's
Restaurants, Inc. and subsidiaries ( formerly The Rattlesnake Holding Company,
Inc. and subsidiaries) as of June 30, 1999 and June 28, 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the year in the two-year period ended June 30, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spencer's Restaurants, Inc. and
subsidiaries as of June 30, 1999 and June 28, 1998 and the results of their
operations and their cash flows for each of the years in the two-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Between February 17, 1999 and July 2, 1999, the Company completed
a private placement of approximately $6,000,000 of Series B preferred stock.
During the private placement, the Company satisfied principally all short and
long term debt that was previously in default. 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
rights to the unpaid and accumulated dividends. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
Melville, New York
October 26, 1999
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Consolidated Balance Sheets
June 30, 1999 and June 28, 1998
Assets 1999 1998
Current assets:
Cash $ 2,337,675 311,328
Accounts receivable 9,754 16,831
Notes receivable, current installments --- 4,080
Inventory 16,688 29,397
Prepaid expenses and other current assets 11,918 7,200
----------- --------
Total current assets $ 2,376,035 368,836
Notes receivable, less current installments --- 225,920
Land, building and equipment, net 1,445,079 81,375
Intangible assets, net 20,769 30,598
Other assets 76,383 78,443
------------ --------
$ 3,918,266 785,172
============ ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of notes payable,
including amounts due to $ 55,838 1,282,539
related parties of
$553,385 at June 28, 1998
Accounts payable 689,679 1,019,139
Accrued expenses 678,221 629,414
Dividends payable 198,846 207,636
Other current liabilities 171,621 182,971
-------- ---------
Total current liabilities $ 1,794,205 3,321,699
----------- ---------
Notes payable, net of current maturities 242,504 525,006
----------- ---------
Total liabilities $ 2,036,709 3,846,705
----------- ---------
Stockholders' equity (deficit):
Series A Preferred Stock, $.10 par value,
200,000 shares authorized,
56,000 issued and outstanding,
at June 28, 1998, --- 5,650
Series B Preferred Stock $0.10 par value,
5,000,000 shares authorized, 32,856 ---
328,563 issued and outstanding
at June 30, 1999
Common stock, $.001 par value - 29,980 10,890
400,000,000
shares authorized, 29,979,013 and
10,889,285 issued and
outstanding, at June 30, 1999 and
June 28, 1998, respectively
Additional paid-in capital 20,794,657 12,554,618
Accrued dividends (198,846) (207,636)
Accumulated deficit (18,777,090) (15,425,055)
------------ ------------
1,881,557 (3,061,533)
------------ ------------
$ 3,918,266 785,172
See accompanying notes to consolidated financial statements.
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Consolidated Statements of Operations
Years ended June 30, 1999 and, June 28, 1998
Year ended Year ended
June 30, 1999 June 28, 1998
Restaurant sales $ 1,696,679 3,888,643
Less: promotional sales 69,434 127,343
------------ ---------
Net restaurant sales 1,627,245 3,761,300
Costs and expenses:
Cost of food and beverage sales 621,595 1,225,982
Restaurant salaries and fringe 662,343 1,322,119
benefits
Occupancy and related expenses 485,200 1,072,796
Depreciation and amortization
expense 44,096 314,017
------------ ---------
Total restaurant costs and 1,813,234 3,934,914
expenses
Selling, general and administrative 2,812,917 1,279,831
Loss on closure of restaurant sites 365,000 1,464,756
and impairment charges
Interest expense 175,248 261,276
Litigation award 269,000 ---
Miscellaneous expenses 19,456 56,562
--------- ---------
Total expenses 5,491,709 6,997,339
--------- ---------
Net loss before extraordinary item (3,894,464) (3,236,039)
Extraordinary item:
Gain on extinguishment of debt 512,429 ---
------- ---
Net loss
(3,352,035) (3,236,039)
----------- -----------
Dividends on preferred shares (198,846) (103,818)
--------- ---------
Net loss available common $ (3,550,881) (3,339,857)
stockholders ============= ===========
Net loss per share:
Loss before extraordinary item $ (0.21) (0.80)
Extraordinary item 0.03 ---
Net loss - Basic and diluted $ (0.18) (0.80)
=========== ===========
Weighted average number of
common and common equivalent
shares outstanding -
Basic and diluted 19,205,208 4,173,985
========== =========
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1999 and June 28, 1998
<TABLE>
<S> <C>
Common Common Preferred Preferred Additional
Shares Stock Shares Stock Paid-in
Series A Series B Series A Series B Capital
Balance, June 29, 1997 2,650,227 $ 2,651 56,500 5,650 11,072,857
Issuance of common stock in 2,822,058 2,822 --- 437,419
connection with acquisition
of Ottomanelli Group
Net proceeds from issuance 4,480,000 4,480 539,068
of common stock in connection
with private placement
Conversion of debt to equity 937,000 937 --- 499,063
Issuance of warrants for services --- --- --- --- 25,100
performed
Deferred compensation --- --- --- --- (18,889)
Accrued dividends --- --- --- --- ---
Net loss --- --- --- --- ---
-------------------------------------------------------------------------------------------------
Balance, June 28, 1998 10,889,285 10,890 56,500 5,650 12,554,618
Net proceeds received from 1,100,000 1,100 --- --- --- --- 152,400
issuance of common stock
Net proceeds received from issuance --- --- --- 236,279 --- 23,627 5,111,392
of Series B preferred stock
Issuance of warrants for services --- --- --- --- --- --- 1,098,547
performed
Deferred Compensation --- --- --- --- --- --- 12,221
Issuance of common stock
for services performed 2,651,991 806 --- --- --- --- 132,692
Conversion of debt to common 10,421,070 12,267 --- 36,914 --- 3,692 1,500,091
and preferred stock
Conversion of Series A preferred --- --- (56,500) 55,370 (5,650) 5,537 113
stock to Series B
preferred stock
Additional issuance of common 5,000,000 5,000 --- --- --- --- 245,000
stock in connection with
acquisition of the
Ottomanelli Group
Cancellation of common shares (83,333) (83) --- --- --- --- (12,417)
Accrued dividends - Series A --- --- --- --- --- --- ---
Forgiveness of dividends --- --- --- --- --- --- ---
Accrued dividends - Series B --- --- --- --- --- --- ---
Net loss --- --- --- --- --- --- ---
--------------------------------------------------------------------------------------------------
Balance, June 30,1999 29,979,013 29,980 --- 328,563 --- 32,856 20,794,657
--------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<S> <C>
Accrued Accumulated Total Stockholders'
Dividends Deficit Equity
----------------------------------------------------------------------------------------
Balance, June 29, 1997 (103,818) (12,189,016) (1,211,676)
Issuance of common stock in
connection with acquisition of
Ottomanelli Group 440,241
Net proceeds received from issuance
of common stock in connection
with private placement 543,548
Conversion of debt to equity 500,000
Issuance of warrants for services -- -- 25,100
performed
Deferred compensation -- -- (18,889)
Accrued dividends (103,818) -- (103,818)
Net loss -- (3,236,039) (3,236,039)
---------------------------------------------------------------------------------------
Balance, June 28, 1998 (207,636) (15,425,055) (3,061,533)
Net proceeds received from issuance -- -- 153,500
of common stock
Net proceeds received from issuance -- -- 5,135,019
of Series B preferred stock
Issuance of warrants for services -- -- 1,098,547
performed
Deferred Compensation -- -- 12,221
Issuance of common stock for services -- -- 133,498
performed
Conversion of debt to common and -- -- 1,516,050
preferred stock
Conversion of Series A preferred stock -- -- --
to Series B preferred stock
Additional issuance of common stock -- -- 250,000
in connection with acquisition of the
Ottomanelli Group
Cancellation of common shares -- -- (12,500)
Accrued dividends - Series A (51,909) -- (51,909)
Forgiveness of dividends 259,545 -- 259,545
Accrued dividends - Series B (198,846) -- (198,846)
Net loss -- (3,352,035) (3,352,035)
----------------------------------------------------------------------------------------
Balance, June 30, 1999 (198,846) (18,777,090) 1,881,557
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Consolidated Statements of Cash Flows
Years ended June 30, 1999 and June 28, 1998
<TABLE>
<S> <C>
Year ended Year ended
June 30, 1999 June 28, 1998
Cash flows from operating activities:
Net loss $ (3,352,035) (3,236,039)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 44,096 314,017
Litigation award 225,000 --
Gain on extinguishment of debt (512,429) --
Loss on closure of restaurant sites 365,000 1,437,136
Warrants issued for services provided 1,110,769 6,211
Debt issued for services provided -- 50,000
Stock issued for services provided 133,498 --
Changes in assets and liabilities:
Decrease in accounts receivable 7,077 9,832
Decrease in inventory 12,709 15,072
Decrease (increase) in prepaid and other (2,658) 54,550
assets
Decrease in assets held for sale -- 25,000
Increase in accounts payable and accrued 192,937 902,214
expenses
Decrease in other liabilities (11,350) --
Decrease in liabilities related to assets
held for sale -- (330,041)
----------- -------------
(1,787,386) (752,048)
Cash flows from investing activities:
Capital expenditures (1,397,972) --
----------- -------------
Net cash used in investing activities (1,397,972) --
Cash flows from financing activities:
Proceeds from issuance of common stock 153,500 --
Proceeds from issuance of convertible notes 250,000 --
Proceeds from private placement -- 543,548
Proceeds from issuance of preferred stock 5,135,019 --
Payments relating to cancelled common stock (12,500) --
subscription agreements
Proceeds from borrowings -- 900,000
Principal repayments of borrowings (314,314) (448,194)
----------- -------------
Net cash provided by financing activities 5,211,705 995,354
----------- -------------
Net increase in cash 2,026,347 243,306
----------- -------------
Cash, beginning of period 311,328 68,022
----------- -------------
Cash, end of period $ 2,337,675 311,328
=========== =============
Cash paid during the period for:
Interest $ 53,616 $ 5,263
Income taxes $ -- 9,800
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1999 and June 28, 1998
(1) Description of Business
As of June 30, 1999, Spencer's Restaurants Inc. and subsidiaries (formerly The
Rattlesnake Holding Company, Inc. and subsidiaries), (collectively, the
Company), operated one restaurant in South Norwalk, Connecticut featuring a
casual dining concept with a southwestern theme. Additionally, the Company owned
one site under construction in Danbury, Connecticut at which it anticipates
operating the first of its new concept restaurants named Spencer's, featuring a
casual steakhouse theme.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. The consolidated financial statements have been
presented on a historical cost basis for the consolidated statements of
operations. All significant inter-company balances and transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. However, due to
the matters discussed below, its continuation as a going concern can not be
reasonably assured.
The Company has incurred aggregate losses since inception of $18,777,090,
inclusive of a net loss in fiscal 1999 of $3,352,035. Based upon interim
financial information prepared by management, the Company has continued to incur
losses in fiscal 2000. Additionally, $18,750 of Series C subordinated notes
payable matured on August 6, 1997, $15,000 of the note payable relating to the
acquisition of a lease, and a $2,089 subordinated note payable matured on August
6, 1996, such obligations aggregating $35,839 are in default as of June 30,
1999.
Management completed its Cost Reduction Plan, which included the closure of the
Flemington N. J. restaurant as non-performing, in fiscal 1999. Subsequent to the
completion of its private placement of Series B preferred stock, which satisfied
primarily all short and long-term debt that was in default, except as noted
above, (note 9), the Company assembled a new management team and developed a new
restaurant concept (Spencer's) which will be introduced at the reacquired
Danbury, Connecticut location.
Management believes that the finalization of its Cost Reduction Plan and the
approximate $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.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Notes to Consolidated Financial Statements, continued)
(b) Reporting Periods
On April 2, 1996, the Board of Directors approved a change, effective July 1,
1996, in the Company's fiscal year to a 52 week cycle ending on the last Sunday
in June. On May 12, 1999, the Board of Directors approved a further change of
its fiscal year to June 30, effective for fiscal 1999.
(c) Accounts Receivable
Accounts receivable consist principally of bank credit card accounts receivable.
(d) Inventories
Inventories consist primarily of restaurant food items and supplies and are
stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method.
(e) Pre-Opening Costs
Certain costs relating to hiring and training of employees prior to the opening
of new restaurants are capitalized and amortized over a twelve month period
commencing upon restaurant opening. At June 30, 1999 and June 28, 1998, there
were no unamortized pre-opening costs.
(f) Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated primarily
on the straight-line basis over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the estimated useful
life or the lease term of the related asset. The estimated useful lives are as
follows:
Artifacts 3 years
Original small wares 3 years
Furniture and fixtures 5 years
Restaurant and office equipment 7 years
Leasehold improvements 7 years
Building 40 years
(g) Intangible Assets
Intangible assets consist principally of costs to acquire leased facilities.
These costs are amortized over the life of the related lease, 7 years.
Accumulated amortization at June 30, 1999 and June 28, 1998 was $79,771 and
$69,942 respectively. Amortization expense was $9,829 and $44,501 for the years
ended June 30, 1999 and June 28, 1998, respectively. In connection with the
Flemington location, the Company wrote off approximately $258,490 in leasehold
and related costs, net of accumulated amortization of $48,012, in fiscal 1998.
In connection with the Danbury location, the Company wrote off approximately
$41,285 in leasehold and related costs, net of accumulated amortization of
$29,023, in fiscal 1998.
As a result of the fiscal 1998 acquisition of the Ottomanelli Group (note 3),
goodwill of $436,383 was recorded. Upon further analysis, the operations of the
former Ottomanelli Group were deemed inconsistent with the Company's operating
plans, were authorized to be terminated in fiscal 1998 and operating restaurants
were closed in early fiscal 1999. Accordingly, the Company concluded that the
goodwill was impaired and recorded an impairment charge in the 1998 Consolidated
Statement of Operations.
(h) Other Assets
The Company utilizes an outside service to provide financing and promotional
activities. The costs relating to these activities are capitalized and are being
amortized over the repayment period.
(i) Financial Instruments
Management of the Company believes that the book value of its monetary assets
and liabilities, exclusive of long-term debt, approximates fair value as a
result of the short-term nature of such assets and liabilities. Management
further believes that the fair market value of long-term debt does not differ
materially from carrying value.
(j) Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of
Effective July 1, 1996, the Company adopted "Statement of Financial Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No.121 requires, among
other things, that long-lived assets held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of SFAS No.121
on July 1, 1996 did not have a material impact on the Company's consolidated
financial position or results of operations (note 4).
(k) Accounting for Stock-Based Compensation
Effective July 1, 1996, the Company adopted SFAS No.123 "Accounting for
Stock-Based Compensation", which encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation under the existing accounting rules contained in Accounting
Principles Board Opinion No.25, "Accounting for Stock Issued to Employees", and
related interpretations, but has provided disclosures of stock-based
compensation expense determined under the fair value provisions of SFAS No.123.
(l) Advertising Expense
Advertising costs are expensed as incurred. Advertising expenses were $6,939
and $15,500, in 1999 and 1998, respectively.
(m) Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Diluted earnings per share is calculated in a manner
similar to the previously reported fully diluted earnings per share. Earnings
per share amounts for all periods have been presented and, where appropriate,
restated to conform to the Statement 128 requirements (note 17).
(n) Comprehensive Income
Effective for fiscal 1998, the Company has adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income", which requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income. The Company has no activities which
represent items of other comprehensive income and, accordingly, the adoption of
SFAS No. 130 did not have a material effect in the Company's consolidated
financial statements.
(o) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amount of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
(3) Acquisition
On August 21, 1997, the Company signed a Reorganization and Stock Exchange
Agreement with the Ottomanelli Group, which was later amended pursuant to a
Modification Agreement dated February 26, 1998 and the transaction closed in
March 1998.
After amendment to the transaction, the Ottomanelli Group transferred the stock
of (i) a franchising corporation which has limited operations and (ii) a
corporation which operated two restaurants in Paramus, New Jersey (since closed
- - note 4), for a total of 2,822,058 shares of common stock with a fair value
determined by an independent appraisal of approximately $440,000. The Agreement
also contains certain anti-dilution provisions, as discussed below. The
acquisition was accounted for as a purchase transaction, and, accordingly, the
purchase price was allocated to identifiable assets and liabilities based upon
their fair values at the date of acquisition. The excess of the aggregate
purchase price over the fair value of the net assets acquired was recorded as
goodwill and amortizable over the period to be benefited, fifteen years.
As indicated in note 4, management concluded that upon further analysis, the
operations of the former Ottomanelli Group were deemed inconsistent with the
Company's operating plans and were authorized to be terminated. Accordingly, the
Company concluded that the goodwill was impaired and recorded an impairment
charge in the 1998 Consolidated Statement of Operations. The Company's 1998
financial statements contain approximately three months of operations of the
Ottomanelli Group. Pro-forma data has not been provided as they were deemed
immaterial to the operations of the Company by management.
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 1998 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 fiscal 1999.
(4) Closure of Restaurant Sites
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 were written off. The building is reflected at its
estimated realizable value and was accounted for in the financial statements in
"net assets held for sale". A net loss of $394,941 relating to the closing of
the Fairfield location was recorded in fiscal 1997. In March 1998, this location
was sold with the Company receiving a $230,000 note from the purchaser (note 5).
Pursuant to the finalization of the terms of sale, an additional loss of $88,559
was recorded in fiscal 1998.
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 (note
10) and an additional $115,000 loss on restaurant closure was recognized in
fiscal 1999.
In fiscal 1997, the Board of Directors authorized the closing of the Rattlesnake
Southwestern Grill Restaurant located in White Plains, New York. The facility
was closed on March 1, 1997 and sold on July 16, 1997. The Company recorded a
loss of $224,135 related to the closing of this location in 1997. The Company
sold all of the assets of White Plains except for cash, receivables and certain
items specified in the Asset Purchase Agreement in exchange for a release from
its note payable to the landlord of $276,499, the purchaser's assumption of food
credits and other miscellaneous liabilities and the receipt of a $23,500 note
receivable from the purchaser. The facility was sold to a group which includes
the Company's then Chairman of the Board and the Company is a guarantor of the
remaining lease obligation (note 13).
The restaurant location on 86th Street in New York was never opened and on May
29, 1997 the Company sold the fixed assets and transferred its interest in the
lease at that location for cash of $289,387. The Company continues to guarantee
the lease obligation (note 13). A net loss of $306,456, relating the sale of the
86th Street location, was recorded in fiscal 1997.
In fiscal 1997, the Board of Directors authorized the disposition of the
Rattlesnake Southwestern Grill Restaurant located in Lynbrook, New York. On
September 17, 1997, the Company closed the restaurant and wrote-off the related
assets to its estimated realizable value. A net loss of $374,852 relating to the
closing of this location was recorded in fiscal 1997. An additional loss of
$55,725 was recorded in fiscal 1998 relating to the Lynbrook facility,
principally relating to additional exit costs.
As indicated in notes 2 and 3, Company management concluded that the operations
of the former Ottomanelli Group were inconsistent with the Company's operating
plans and were authorized to be terminated in fiscal 1998, including the
operations of its two New Jersey restaurants. Accordingly, the Company concluded
that the goodwill relating to the acquisition was impaired and recorded an
impairment charge of approximately $436,000 in fiscal 1998.
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 acquired the Danbury facility for
$1,350,000 in cash (note 2).
In fiscal 1998, the Company performed a further analysis of historical and
projected operating results, which reflected a pattern of historical operating
losses and negative cash flow, as well as future projected negative cash flow
and operating results for fiscal 1999 for its Flemington restaurant.
Accordingly, the Company recorded an impairment charge for this restaurant to
write-down the impaired asset of $558,282 in fiscal 1998. The restaurant was
subsequently closed in fiscal 1999.
(5) Note Receivable
At June 28, 1998, a $230,000 note receivable was outstanding relating to the
sale of the Company's Fairfield, Connecticut facility. The note bore interest at
7%, was secured by a leasehold mortgage on the restaurant, and provided for
stipulated monthly payments of principal and interest and a balloon payment due
in March 2003.
As indicated in note 4, the note receivable was eventually assigned to a related
party in partial satisfaction of the Company's indebtedness to that party.
(6) Land, Building and Equipment
Property and equipment consists of the following:
June 30,1999 June 28, 1998
Land $ 1,000,000 --
Buildings 358,067 --
Leasehold improvements 100,047 100,047
Restaurant and office equipment 138,483 110,578
Furniture and fixtures 31,425 31,425
Construction in progress 12,000 0
--------- --------
1,640,022 242,050
Less accumulated (194,943) (160,675)
depreciation --------- ---------
and amortization
$ 1,445,079 81,375
============ =========
Related depreciation and amortization expenses were $34,268 and $269,516 for the
years ended June 30, 1999 and June 28, 1998, respectively.
(7) Other Assets
Other assets consist of the following:
June 30, 1999 June 28, 1998
Promotional meal programs $ 75,383 76,738
Deposits 1,000 1,705
----- -----
$ 76,383 78,443
======== ======
(8) Capital Structure
The Company's capital structure is as follows:
Shares June 30, June 28,
Par value Authorized 1999 1998
Common stock $.001 per share 400,000,000 29,979,013 10,899,285
Preferred stock:
Series A $.10 per share -- -- 56,500
Series B $.10 per share 5,000,000 328,563 --
The Company's Series A preferred stock bears a dividend rate of 7-1/2% per annum
payable semi-annually in arrears on May 15 and November 15 of each year
commencing November 15, 1996. The shares are convertible at any time, one year
after issuance into common stock at a conversion price equal the lesser of (i)
120% of the average of the last reported sale price of the common stock for the
10 trading days immediately preceding the first closing of the offering, or
$4.50, whichever is lower; or (ii) 85% of the average of the last reported sale
price of the common stock for the 10 trading days immediately preceding the
first anniversary of the first closing, subject to certain anti-dilution
adjustments. The Board of Directors has the authority to establish the specific
provisions of the preferred stock, i.e., liquidation rights, dividend
parameters, at the date of issuance.
The Series A preferred stock is redeemable only at the option of the Company,
commencing one year from the date of issuance, based upon the sales price of the
Company's common stock. The Series A preferred stock has a liquidation
preference of $24.50 per share, together with accrued and unpaid dividends. The
Board of Directors has the authority to establish the specific provisions of the
preferred stock, i.e., liquidation rights, dividend parameters, at the date of
issuance.
The Board of Directors had not declared any dividends, although cumulative
dividends relating to the Series A preferred stock of $207,636 have been accrued
in the June 28, 1998 consolidated balance sheet. As at June 30, 1999, the
Company had raised net proceeds of $5,135,019 from the private placement of
Series B preferred stock. 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 rights to the unpaid and
accumulated dividends of $259,545.
In February 1999, the holders of a majority of the issued and outstanding shares
of the Company's common stock, by written consent in lieu of a meeting pursuant
to Section 228 of Delaware's General Corporation Law, adopted an amendment to
the Company's Certificate of Incorporation, increasing the Company's
capitalization. As a result of this amendment to the Certificate of
Incorporation, the Company is authorized to issue a total of 405,000,000 shares,
of which 400,000,000 are shares of common stock and 5,000,000 shares of Series B
preferred stock.
In fiscal 1999, the Company principally completed an offering of its Series B
Convertible Preferred Stock selling 236,279 shares at $25 per share and received
proceeds of $5,135,019, net of offering expenses. In connection with the
offering, the underwriter received a warrant to purchase approximately
25,000,000 shares of the Company's common stock at $.05 per share.
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, semi-annually, 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.
To date, the Board of Directors has declared dividends relating to the Series B
preferred stock of $198,836 which have been accrued at June 30, 1999. The
payment of dividends was in the form of 7,954 additional shares of Series B
preferred stock issued in September 1999.
<PAGE>
(9) Notes Payable
Notes payable consists of the following:
June 30, June 28,
1999 1998
Series A subordinated notes payable
due August 6, 1996, with interest at 9% $ 2,089* 2,089
Series B convertible subordinated
notes payable due July 7, 2000 with
interest at 9%, convertible at
$3.85 per share 237,506 500,000
Series C subordinated notes payable
due August 6, 1997, with interest at 15% 18,750* 303,749
Convertible subordinated notes payable
due September 4, 1997, with interest at 18% -- 100,000
Note payable to related party
relating to the acquisition of the
Fairfield building, due January 2,
1997 with interest at 15% -- 425,000
Note payable to a related party,
due in monthly installments of $1,270,
including principal and interest at 18%
through February 1998 -- 11,709
Notes payable relating to bridge financing,
due December 31, 1997 with interest at 10%
and a default interest rate of 14% for
$120,000 of principal -- 220,000
Notes payable relating to bridge financing
due May 31, 1998 with interest of 14%. -- 100,000
Note payable to investment banking firm
due May 31, 1998 with interest at 8%. -- 50,000
Note payable relating to bridge financing
due October 31, 1998 with interest at 16%. -- 50,000
Notes payable relating to acquisition of lease,
due in monthly installments of $1,666 of
principal plus interest at 1% over prime
(9.5% at June 29, 1997 through Septemb 39,998** 44,998
---------- ---------
$298,342 1,807,545
Less: Current maturities 55,838 1,282,539
---------- ---------
* Obligation in default at June 30, 1999 $ 242,504 $ 525,006
=========== =========
**$15,000 of these Notes were in default
at June 30, 1999
Notes payable to shareholders and other related parties (Company officers and
directors) were $553,385 at June 28, 1998.
Maturities of these notes is as follows:
Fiscal year ended:
2000 $55,838
2001 242,504
--------
$298,342
(10) Financing Arrangements
On March 4, 1997, the Company entered into a private financing arrangement for
$500,000 of convertible subordinated notes. The notes are payable on September
4, 1997. The principal amount of the Notes may be converted into the Company's
common stock at a conversion price of $0.75 per share anytime before the
repayment of principal. The notes are fully subordinated to all "senior
indebtedness" of the Company and are secured by all the issued and outstanding
shares of certain of the Company's wholly-owned subsidiaries. In fiscal 1998,
$400,000 of the principal outstanding was paid in cash.
In fiscal 1999, the noteholder accepted common stock, with a fair value of
$100,000, in exchange for the forgiveness of the remaining principal balance and
accrued interest. The Company recorded an extraordinary gain of $88,950 in
fiscal 1999 recognizing this settlement.
In September 1997, the Company completed a bridge financing under which it sold
units consisting of notes and warrants totaling $250,000, which were due
December 31, 1997. Each full unit consisted of (i) the Company's ten percent
(10%) promissory note in the principal amount of $50,000 (the "Note"), and (ii)
upon repayment of the Note, one four-year warrant for each dollar of financing
provided, at the rate of one warrant convertible into one share of the Company's
common stock at the average bid price on the date of the receipt of the
financing. The Company made principal payments of $30,000 in fiscal 1998 and
satisfied the remaining principal and interest by payment of cash and conversion
to Company equity in connection with the Offering in fiscal 1999.
In fiscal 1998, the Company entered into private financing arrangements to
provide an aggregate of $150,000 of bridge financing at interest rates ranging
from 14% to 16%, payable on dates ranging between May 31, 1998 and October 31,
1998. In fiscal 1999, the Company satisfied principal and interest by payment of
cash and conversion to Company equity in connection with the Offering.
In fiscal 1998, the Company executed a $50,000 convertible note agreement with
an investment banking firm for services rendered. The note is convertible into
250,000 shares of common stock, bears interest at 8% and matured on May 31,
1998.
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 connection with the private placement offering in February 1999, the
investment bank notes were satisfied by conversion to 1,750,000 shares of
Company common stock.
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 connection with this sale the placement agent received warrants to
purchase 750,000 shares of the Company's common stock at $.15 per share.
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.
In connection with the private placement, the Company sold 236,279 shares of
Series B preferred stock at $25 per share, generating gross proceeds of
$5,906,975. 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. Additionally, the
Corporation entered into a series of settlement agreements, whereby various
creditors accepted cash payments of $84,811 and 446,714 shares of common stock
in exchange for the release of trade obligations. As a result of these
transactions, the Corporation recognized an extraordinary gain on the
forgiveness of debt of $423,479 in fiscal 1999.
In connection with this private placement financing, 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 the payment of accumulated dividends of
$259,545.
(11) Accrued Expenses and Other Liabilities
(a) Accrued Expenses
Accrued expenses consist of the following:
June 30, 1999 June 28, 1998
Litigation award $ 225,000 --
Accrued rent 140,099 --
Interest payable 125,363 424,160
Professional fees 120,000 --
Other 52,292 152,664
Accrued payroll 15,467 52,140
----------- -------
$ 678,221 629,414
=========== =======
(b) Other Liabilities
The Company has entered into marketing agreements whereby it received temporary
financing in exchange for participating in discounted price meal programs. At
June 30, 1999 and June 28, 1998, the balances outstanding under this program
were $171,621 and $182,971, respectively, which are included in other
liabilities in the accompanying consolidated balance sheets.
(12) Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No.109, "Accounting for Income Taxes".
SFAS 109 requires a change from the deferred method of accounting for income
taxes of APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
There was no income tax expense for any period presented due to losses incurred
by the Company. Components of the deferred tax assets and deferred tax
liabilities at June 30, 1999 and June 28, 1998 are presented below:
June 30, 1999 June 28,1998
Deferred tax assets:
Net operating loss carry-forward $6,947,521 5,584,600
Fixed assets -- 15,324
----------- ---------
Total gross deferred tax assets 6,947,521 5,599,924
Less valuation allowance 6,947,521 5,599,924
----------- ---------
Net deferred tax assets $ --- ---
=========== =========
The valuation allowance for deferred tax assets as of June 30, 1999 and June 28,
1998 was $6,947,521 and $5,599,924, respectively. The change in the total
valuation allowance for the years ended June 30, 1999 and June 28, 1998 was
$1,347,597 and $1,263,924 , respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the net operating losses and
temporary differences become deductible. Management considers projected future
taxable income and tax planning strategies in making this assessment. At June
30, 1999 and June 28, 1998, the Company has net operating loss carry forwards
for Federal and State income tax purposes of approximately $ 17,330,993 and
$13,962,000 , respectively (the "NOL carry forwards"), which are available to
offset future taxable income, if any, through 2013. Based upon the limited
operating history of the Company and losses incurred to date, management has
fully reserved the deferred tax asset.
In accordance with Section 382 of the Internal Revenue Code of 1986, as amended,
as it applies to the NOL carry forwards, a change in more than 50% in the
beneficial ownership of the Company within a three-year period (an "Ownership
Change") will place an annual limitation on the Company's ability to utilize its
existing NOL carryforwards to offset United States Federal taxable income in
future years. Generally, such limitation would be equal to the value of the
Company as of the date of the Ownership Change multiplied by the Federal
long-term tax exempt interest rate, as published by the Internal Revenue
Service. The Company believes that Ownership Changes have occurred and would
cause the annual limitations as described above to apply. The Company has not
determined what the maximum annual amount of taxable income is that can be
reduced by the NOL carryforwards.
(13) Commitments
Commitments
The Company's operations are principally conducted in leased premises. Remaining
lease terms range through 2002 and include options for extension. The leases
contain contingent rental provisions based upon a percentage of gross sales. As
of June 30, 1999, the Company has operating lease commitments as follows, for
its South Norwalk restaurant:
2000 $ 50,400
2001 50,400
2002 46,200
Certain shareholders and former officers have personally guaranteed lease
payments for the South Norwalk location.
Pursuant to sales agreements for the Company's New York City and White Plains,
New York restaurants (note 4), the Company guaranteed specified lease
obligations. As of June 30, 1999, the Company has not been notified of any
claims against these guarantees.
The Company is also a defendant in litigation regarding lease guarantees for its
former Lynbrook, New York facility (note 16).
On July 2, 1998, the Company entered into a contract for the purchase of a
restaurant facility in New York City for $400,000 in a combination of cash and
notes. The Company ultimately chose not to purchase this property and in
connection with the termination of contract incurred an expense of approximately
$12,500.
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.
Contingent rental payments on building leases are typically made based on the
percentage of gross sales on the individual restaurants that exceed
predetermined levels. The percentage of gross sales to be paid and related gross
sales level vary by unit. There were no contingent rental payments in any of the
periods presented.
Rent expense was $190,733 and $426,923 for the years ended June 30, 1999 and
June 28, 1998, respectively.
(14) Employee Benefit Plans
(a) Stock Option Plan
In December 1994, the Company adopted the 1994 Employees Stock Option Plan (the
Employees Plan), which provides for the issuance of incentive stock options
(ISO's) and non-qualified options (Non-ISO's) to officers and key employees. Up
to 1,000,000 shares of the Company's common stock have been reserved for
issuance under the Plan. The Plan is currently administered by the Board of
Directors of the Company. The term of the options is generally for a period of 5
years. The exercise price for non-qualified options outstanding under the
Employees Plan can be no less that 100% of the fair market value, as defined, of
the Company's common stock at the date of the grant. For ISO's, the exercise
price can be generally no less than the fair market value of the Company's
common stock at the date of the grant, with the exception of any employee who
prior to the granting of the option, is a 10% or greater stockholder as defined,
for which the exercise price can be no less than 110% of the fair market value
of the Company's common stock at the date of grant.
In December 1994, the Company adopted the non-Executive Director Stock Option
Plan (the Director Plan), which provides for the issuance of non-ISO's to
non-executive directors, as defined, and members of any advisory board
established by the Company who are not full-time employees of the Company. The
Company has reserved 500,000 shares for issuance under the provisions of the
Director Plan. The Director Plan provides that each non-executive director will
automatically be granted an option to purchase 25,000 shares upon joining the
Board of Directors and 15,000 shares on each December 1st thereafter, provided
such person has served as a director for the 12 months immediately prior to such
December 1st. The exercise price for options granted under the Director Plan
shall be 100% of the fair market value of the Common Stock on the date of grant.
At June 30, 1999, there were 1,000,000 and 295,000 additional shares available
for grant under the Employees and Director Plans, respectively. The per share
weighted-average fair value of stock options granted during 1997 and 1996 was
$0.51 and $1.22, respectively for those options whose exercise price equaled the
market price of the stock on the date of grant and $.05 and $0, respectively for
those options whose exercise price was above the market price of the stock on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1997 and 1996 - expected dividend yield
0%, risk-free interest rate of between 5.07% and 5.86%, an expected life of
between approximately 2.5 - 5 years and expected stock volatility of between 38
- - 130%. There were no options granted in 1999 and 1998.
The Company applies APB Opinion No.25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its employees and
directors stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No.123, the Company's net loss would have been increased to
the pro forma amounts indicated below:
1999 1998
Net loss available to common
shareholders:
As reported $(3,352,035) (3,339,957)
Pro-forma $(3,550,881) (3,422,957)
Loss per share: As reported $(0.18) (0.80)
Pro-forma $(0.18) (0.82)
Pro forma net loss reflects only options and warrants granted in 1997.
Therefore, the full impact of calculating compensation cost for stock options
and warrants under SFAS No.123 is not reflected in the pro forma net income
amounts presented above because compensation cost for options and warrants
granted prior to July 1, 1995 were not considered.
Activity in non-ISO's was as follows:
Number Option Price Weighted
of Shares per Share Average
Exercise
Price
Options outstanding
June 29, 1997 693,000 $0.25-5.25 $ 3.11
Options granted --- --- ---
Terminated options (488,000) 0.25 - 5.25 ---
--------- ------------ -------
Options outstanding
June 28, 1998 205,000 $4.50-5.25 $ 4.88
======= ========== =======
Options granted --- --- ---
Terminated options --- --- ---
--------- ------------ -------
Options outstanding
June 30,1999 205,000 $4.50-5.25 $ 4.88
======= ========== =======
Activity in ISO's was as follows:
Number Option Price Weighted
of Shares per Share Average
Exercise
Price
Options outstanding
June 29, 1997 103,500 $0.25-5.50 5.35
Options granted --- --- ---
Terminated options (103,500) $0.25-5.50 5.35
--------- ---------- ----
Options outstanding
June 28, 1998 and
June 30, 1999 --- --- ---
========= ========== ======
The Employees and Director Plans expire in December 2004, unless terminated
earlier by the Board of Directors under conditions specified in the respective
Plans. No options have been exercised as of June 30, 1999 and June 28, 1998.
At June 30, 1999, the range of exercise prices and range of the remaining
contractual life of outstanding options was $4.50 - $5.25 and approximately
1.5 - 2.5 years, respectively.
At June 30, 1999 and June 28, 1998, the number of options exercisable was
205,000 and the weighted-average exercise price of those options was $4.88.
On April 18, 1999, the Board of Directors approved the adoption of the 1999
Stock Option Plan (the "1999 Plan"), subject to the approval of Stockholders
which was obtained in September 1999, which provides for the issuance of ISOs,
Non-ISOs, and stock appreciation rights to officers and key employees of the
Company. Up to 25,000,000 shares have been reserved for issuance under the 1999
Plan, which is administered by the Board of Directors of the Company. The term
of the options is generally for a period of five (5) years. The exercise price
for Non-ISOs outstanding under the 1999 Plan can be no less than 100% of the
fair market value, as defined, of the Company's Common Stock on the date of
grant. For ISOs, the exercise price can generally be no less than the fair
market value of the Company's Common Stock at the date of grant, without the
exception of any employee who prior to the option grant, is a 10% or greater
stockholder, as defined, for which the exercise price can be no less than 110%
of the fair market value of the Company's Common Stock at the date of grant.
There are presently no options granted under the 1999 Plan.
On April 18, 1999, the Board of Directors approved the adoption of the 1999
Non-Employee Directors' Stock Option Plan (the "1999 Directors' Plan"), subject
to the approval of Stockholders which was obtained in September 1999, which
provides for the issuance of non-qualified stock options to non-employee
directors of the Company. Up to 10,000,000 shares have been reserved for
issuance under the 1999 Directors' Plan, which is administered by the Board of
Directors of the Company. The term of the options is generally for a period of
five (5) years. The exercise price for options outstanding under the 1999 Plan
can be no less than 100% of the fair market value, as defined, of the Company's
Common Stock on the date of the grant. There are presently no options granted
under the 1999 Directors' Plan.
(b) Employment Agreements
The Company and its Vice-Chairman and Chief Administrative Officer entered into
a part-time employment agreement in December 1995 for a period commencing
December 1995 through December 1998. The agreement provides for annual
compensation of $90,000 increasing 10% per annum, plus certain other benefits.
An additional $20,000 was paid for services rendered in fiscal 1996 provided
over and above the part-time agreement. The employee is also entitled to receive
a bonus during each year of this agreement, determined by the Board of
Directors. The Board of Directors and/or the Compensation Committee shall set
forth a formula for determining the bonus for each year.
On March 15, 1997 an agreement was signed between the Company and Vice Chairman
and Chief Administrative Officer which amended the December 1995 employment
agreement. Under the new agreement, the former Vice Chairman and Chief
Administrative Officer will accept the position of Acting Co-Chief Executive
Officer. This agreement waives any base rate or annual rate increases per the
previous agreement and modified the term to March 1, 1997 through February 28,
1999. Services are provided on a part-time consulting basis. The compensation
for the period March 1, 1997 through February 28, 1999 will be $75,000, plus
benefits. This agreement also included the grant of an option to purchase
125,000 shares of stock at the closing price on the date of this agreement. The
agreement also includes that in the event the stock options previously granted
under the current Company stock option plans are repriced for any employee, the
existing stock option grants for the acting Co-CEO will be repriced at the same
time as any repricing and under the same terms and conditions. No such options
were repriced and the agreement was replaced with a May 1998 consulting
agreement (note 15).
Subsequent to June 1998, the Company entered into a three year employment
agreement, as amended, with the Chief Financial Officer providing for fixed
compensation of $52,000 in year one, with a time allowance in year one to
complete certain projects and commercially standard compensation for full time
services to be determined for years two and three. The executive has also been
granted options to purchase common stock as follows: 100,000 vesting at close of
year one; 100,000 vesting at close of year two; 100,000 vesting at close of year
three at the exercise price of $.05, the fair value at the date of grant, with
additional options to purchase 200,000 shares exercisable at the close of each
of years two and three.
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, effective upon the
completion of the private placement in February 1999. In consideration, the
employee is to receive a monthly fee of $7,917 plus reasonable expenses and a
$30,000 sign-on bonus. 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%) of the outstanding common stock of the Company, on a
fully diluted basis, after the private placement financing at $0.05 per share,
the fair value at the date of grant, representing 30,000,000 shares, exercisable
for a period of five years, one third 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 February 1998, the Company executed a four year employment agreement with the
then President and Chief Executive Officer, which provides for annual
compensation of $150,000. The agreement was amended in October 1998 to reduce
the annual compensation to $85,000, provided for a $25,000 cash payment and the
executive accepted a new position as Vice President. The employee received
payments of $119,992 during fiscal 1999 for current and deferred salary. The
Company also issued 1,504,720 shares of common stock with a value of $75,236 to
satisfy other deferred salary not compensated for in cash.
(c) Separation Agreements
In October 1998, the Company and a Vice President terminated a March 1998
employment agreement. The executive is to receive $15,000 over a one year
period.
(15) Consulting Agreements
On May 1, 1998, the Company entered into a three year consulting agreement with
its former Vice Chairman and current Secretary, which replaced a March 15, 1997
employment agreement to provide financial and related services to the Company
with compensation of $7,000 per month. The consultant, in consideration for
services, received 500,000 shares of the Company's common stock, with a value of
$25,000, of which 250,000 shares are subject to anti-dilution provisions and
250,000 shares which may be repurchased at the Company's option under specified
conditions. In addition, the consultant received a warrant, expiring in April
30, 2003, to purchase an additional 250,000 shares of Company Common Stock at an
exercise price of $0.15 per share. The consultant also received approximately
1,664,000 shares of common stock with a value of $83,200 to compensate him for
his deferred portion of consulting fees not paid in cash.
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. The
consultant purchased $100,000 of common stock and received a warrant to purchase
300,000 shares of the Company's common stock, with an initial exercise price of
$0.48 per share expiring in July 2002, vesting one-third annually.
In October 1998, the Company entered into a three year consulting agreement, as
revised, 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, immediately exercisable, to purchase an amount of common
stock equal to fifteen 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, representing 45,000,000 shares.
(16) 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. 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. The Company reduced its original accrual from
$625,000 to $225,000 which represents the appealed verdict in the quarter ended
December 31,1998.
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 valid defenses to the indemnification claim may exist.
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 all three insurance carriers
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.
In May 1999, the Company was served with an eviction notice by the landlord of
the South Norwalk restaurant. The suit was settled and the eviction notice was
withdrawn.
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. 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.
(17) Earnings Per Share
As discussed in note 2, the Company adopted Statement 128, which replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Dilutive net loss per share for fiscal 1999 and 1998
are the same as basic net loss per share due to the anti-dilutive effect of the
assumed conversion of preferred stock, and exercise of stock options and
warrants.
The following table reconciles net loss per share with net loss per share
available to common stockholders:
1999 1998
---- ----
Net loss per share $(0.20) (0.78)
Net gain on extraordinary item $0.03 ---
Net loss per share attributable to
preferred stock dividends $(0.01) (0.02)
------- ------
Net loss per share available to
common stockholders $(0.18) (0.80)
======= ======
(18) Subsequent Events
On July 2, 1999, the Company sold an additional 2,000 shares of its Series B
preferred stock for a value of $50,000 as part of its Offering.
On September 9, 1999, the Company formally changed its name with the appropriate
authorities to Spencer's Restaurants, Inc. (symbol: SPST) from
Rattlesnake Holding Company Inc.
In September 1999, the Company finalized its agreement with the landlord of its
previously closed restaurant in Flemington, New Jersey. The agreement satisfied
all remaining obligations for past due rents, real estate taxes, utilities, and
outstanding $39,998 note payable (note 9). The Company assigned its liquor
license in satisfaction of the note payable and issued 4,660 shares of Series B
preferred stock with a valuation of $116,500 to complete the settlement.
In September 1999, the holders of a majority of the issued and outstanding
shares of the Company's Common Stock, by written consent in lieu of a meeting
pursuant to Delaware Law, adopted an option plan providing for incentive stock
options and non-incentive stock options for employees and non-employees, under
which options may be granted for a total of 25,000,000 shares of common stock
and adopted an option plan for the members of the Board of Directors under which
options may be granted for a total of 10,000,000 shares of common stock.
In September 1999, the Company paid dividends in the amount of $198,846 to the
preferred shareholders of record in the form of 7,954 additional shares of
Series B Preferred Stock in lieu of cash payment.
(19) Other Information
On September 17, 1997, the Company received a letter from NASDAQ indicating that
the Company would be removed from the NASDAQ Small Cap listing at the close of
business on September 17, 1997 due to its failure to comply with the minimum
capital and surplus requirement of $1,000,000 and the $1.00 minimum stock price.
On November 4, 1997 the Boston Stock Exchange suspended trading and has applied
for the delisting of the Company common stock from such exchange pursuant to
Rule 12d-2f2.
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE RATTLESNAKE HOLDING COMPANY, INC.
Under Section 242 of the General Corporation Law
IT IS HEREBY CERTIFIED THAT:
1. The name of the corporation is The Rattlesnake Holding Company, Inc.
2. The Certificate of Incorporation was filed with the Department of State on
the 8th day of June, 1993 under the original name of Rattlesnake Bar &
Grill Holding Company. An Amendment to the Certificate of Incorporation was
filed with the Department of State on April 10, 1995 which amended the name
of the corporation to The Rattlesnake Holding Company, Inc.
3. The Certificate of Incorporation is hereby amended to effect a change in
the name of the corporation.
4. To effectuate such change, Article FIRST of the Certificate of
Incorporation of the corporation is hereby amended in its entirety to read
as follows:
"FIRST: The name of the corporation is Spencer's Restaurants, Inc."
IN WITNESS WHEREOF, this Certificate of Amendment has been subscribed this
1st day of September, 1999 by the undersigned who affirms that the statements
made herein are true under penalties of perjury.
/s/ Kenneth Berry
-----------------
Kenneth Berry, President
NUMBER INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SHARES
THE RATTLESNAKE HOLDING COMPANY, INC.
SERIES B CONVERTIBLE PREFERRED STOCK
$.10 PAR VALUE PER SHARE
500,000 SHARES AUTHORIZED SEE LEGEND ON REVERSE
This is to certify that ___________________ is the owner of________________
___________________________________________fully paid and non-assessable shares
of the above Corporation transferable only on the books of the Corporation by
the holder hereof in person or by duly authorized Attorney upon surrender of the
Certificate properly endorsed.
Witness, the seal of the Corporation and the signatures of its duly authorized
officers.
Dated:
__________________________ _______________________
Secretary President
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT--.....Custodian........
TEN BNT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act..........................
in common (State)
Additional abbreviations may also be used though not in the above
list
For Value Received, _____ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE)
________________________________________________________________________________
__________________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably constitute
and appoint ___________________________________ Attorney to transfer the said
Shares on the books of the within named Corporation with full power of
substitution in the premises.
Dated _____________________ ________________________________
In presence of
____________________________________ ________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
RATTLESNAKE HOLDING COMPANY
3 STAMFORD LANDING
STAMFORD, CONNECTICUT 06902
March 15, 1997
Stephan Stein
Dear Stephan:
This letter shall serve to amend your current employment contract with
Rattlesnake Holding Company.
Under your current contract you serve in the positions of Vice Chairman and
Chief Administrative Officer.
Your current contract provides for an annual salary of $125,000 plus benefits,
on a full time basis (as defined therein), prorated to $91,000 for less than
"full time". In addition you are entitled to annual increases of 10%. To day you
have not taken the increases in your base rate. Your current agreement runs
through December 1998.
Based on discussions with the compensation committee you are agreeable to
amending your current contract as follows:
1. You will resign your position as Vice Chairman and Chief Administrative
Officer effective March 1, 1997.
2. Subject to board approval, you will accept the position of Acting Chief
Executive Officer of Rattlesnake Holding Company.
3. You will serve on the committee to search for a permanent CEO. This
committee should be formally constituted within the next thirty (30) days. If
asked to do so, you will serve as head of this committee.
4. In consideration for your agreement to waive any base rate or annual
rate increases otherwise due you, and your agreement increases otherwise due
you, and your agreement to paragraph 1, your employment agreement is hereby
modified (or will be replaced if necessary) to run from March 1, 1997 through
February 28, 1999, and shall provide for partial-time, as needed, New Business
Development Services on a consulting basis. This contract will be extended for a
period of one year, if terms acceptable to you are arrived at after negotiation.
5. Your compensation for the period March 1, 1997 through February 28, 1999
will be $75,000 plus benefits annually, payable as an independent contractor.
6. As compensation for your having served in a crisis management capacity
at the request of the board and company over the previous five (5) months you
are hereby granted an option to purchase 125,000 shares of Rattlesnake Holding
Company stock at the closing price of the stock on March 1, 1997.
This option grant is fully vested as of March 1, 1997 and is exercisable from
March 1, 1997 for a period not to exceed that allowable under the Rattlesnake
Holding Company Employee stock option plan.
7. In the event the stock options previously granted under the current
Rattlesnake stock option plans are repriced for any employee, your existing
stock option grants (excluding the above grant) will be repriced at the same
time as any repricing and under the same terms and conditions.
If you are in agreement with these changes to your current agreement, paragraph
6 being separate therefrom, please sign and return one copy of this letter to
Roger Rankin, Chairman of the Compensation Committee.
Sincerely,
Louis R. Malikow
Agreed to: ________________________
Date: 3/15/97
NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK INTO WHICH THIS NOTE IS
CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDERTHE ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THIS NOTE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN SUBSCRIPTION
AGREEMENT OF EVEN DATE (THE "SUBSCRIPTION AGREEMENT").
18% Convertible Subordinated Secured Promissory Note
Due September 4, 1997
of
THE RATTLESNAKE HOLDING COMPANY, INC.
March 4, 1997
$250,000
The Rattlesnake Holding Company, Inc , a Delaware corporation (hereinafter
called the "Company"), for value received, hereby promises to pay to J.L.B. of
Nevada, Inc., 1500 East Tropicana Avenue, Suite 100, Las Vegas, NE 89119, or
registered assigns, on the 4th day of September, 1997 (the "Due Date"), the
principal amount of Two Hundred Fifty Thousand Dollars ($250,000) and to pay
interest on the Due Date (computed on the basis of a 360-day year of twelve
30-day months) on the unpaid portion of said principal amount from the date
hereof at the rate of 18% per annum. Both the principal hereof and interest
hereon are payable at the principal office of the Company in Stamford,
Connecticut, in such coin or currency of the United States of America as at the
time of payment shall be legal tender for the payment of public and private
debts.
1. Authorized Issue. This Note is one of a duly authorized issue of 18%
Convertible Subordinated Promissory Notes due September 4, 1997 (herein called
the "Notes") made or to be made by the Company in an aggregate amount of up to
$500,000, in original authorized principal amount, similar in terms except for
dates, principal amounts and named payees, offered by the Company pursuant to a
subscription agreement of even date.
2. Conversion. (a) Commencing 120 days from the date hereof, or sooner with
the consent of the Company, and until payment in full, the unpaid principal
amount of this Note, or any portion thereof may, at the election of the holder
thereof, at any time, be converted, at the conversion price per share of Common
Stock equal to $.75, as adjusted and readjusted from time to time Paragraph 2
(such conversion price, as so adjusted and readjusted and in effect at any time,
being herein called the "Conversion Price"), into the number of fully paid and
nonassessable shares of Common Stock (the "Conversion Shares") determined by
dividing the principal amount to be so converted by the Conversion Price in
effect at the time of such conversion.
(b) (i) Any Note may be converted in full or in part by the holder thereof
by surrender of such Note with the notice of conversion thereon duly executed by
such holder (specifying the portion of the principal amount thereof to be
converted in the case of a partial conversion) to the Company at its principal
office, or at the office of the agency maintained for such purpose. Upon any
partial conversion of a Note, the Company at its expense will forthwith issue
and deliver to or upon the order of the holder thereof a new Note or Notes in
principal amount equal to the unpaid and unconverted principal amount of such
surrendered Note, such new Note or Notes to be dated and to bear interest from
the date to which interest has been paid on such surrendered Note. Each
conversion shall be deemed to have been effected immediately prior to the close
of business on the date on which such Note shall have been so surrendered to the
Company or such agency; and at such time the rights of the holder of such Note
as such shall, to the extent of the principal amount thereof converted, cease,
and the person or persons in whose name or names any certificate or certificates
for shares of Common Stock (or Other Securities) shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record
thereof.
(ii) No payment or adjustment of interest or dividends shall be made upon
the conversion of any Note or Notes.
(c) As promptly as practicable after the conversion of any Note in full or
in part, and in any event within 15 calendar days thereafter, the Company at its
expense (including the payment by it or any applicable issue taxes) will issue
and deliver to the holder of such Note, or as such holder (upon payment of such
holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of full shares of Common Stock (or Other Securities)
issuable upon such conversion, plus, in lieu of any fractional shares to which
such holder would otherwise be entitled, cash equal to such fraction multiplied
by the market value determined in good faith by the Board of Directors of the
Company of one full share as of the close of business on the date of such
conversion.
(d) Adjustments to Conversion Price and Number of Securities.
(i) In case at any time or from time to time the Company shall subdivide as
a whole, split its Common Stock or issue a dividend payable in shares or
otherwise, the number of shares of Common Stock then outstanding into a greater
or lesser number of shares, the Conversion Price then in effect shall be
increased or reduced proportionately, and the number of shares issuable upon
conversion of this Note shall accordingly be increased proportionately.
(ii) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon conversion of this Note (other than change in par
value, or from par value to no par value, or from no par value to par value, or
as a result or a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than a merger in
which the Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of Common Stock, other than a
change in number of the shares issuable upon conversion of the Note) or in case
of any sale or conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, the holder of this Note shall
have the right thereafter to convert this Note into the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of shares of Common Stock of the Company for which the Note might
have been converted immediately prior to such reclassifications, change,
consolidation, merger, sale or conveyance. The above provisions of this
Paragraph 2 shall similarly apply to successive reclassifications and changes of
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
(e) The Company will at all time reserve and keep available, solely for
issuance and delivery upon the conversion of the Notes, all shares of Common
Stock (or Other Securities) from time to time issuable upon the conversion of
the Notes. All shares of Common Stock issuable upon conversion of the Notes
shall be duly authorized and, when issued, validly issued, fully paid and
nonassessable with no liability on the part of the holders thereof.
3. Restrictions on Transfer.
The holder acknowledges that he has been advised by the Company that this
Note and the shares of Common Stock (the "Conversion Shares") issuable upon
exercise thereof (collectively the "Securities") have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), that the Note is
being issued, and the shares issuable upon exercise of the Note will be issued,
on the basis of the statutory exemption provided by section 4(2) of the
Securities Act relating to transactions by an issuer not involving any public
offering, and that the Company's reliance upon this statutory exemption is based
in part upon the representations made by the holder contained herein. The holder
acknowledges that he has been informed by the Company of, or is otherwise
familiar with, the nature of the limitations imposed by the Securities Act and
the rules and regulations thereunder on the transfer of securities. In
particular, the holder agrees that no sale, assignment or transfer of the
Securities shall be valid or effective, and the Company shall not be required to
give any effect to any such sale, assignment or transfer, unless (i) the sale,
assignment or transfer of the Securities is registered under the Securities Act,
and the Company has no obligations or intention to so register the Securities,
or (ii) the Securities are sold, assigned or transferred in accordance with all
the requirements and limitations of Rule 144 under the Securities Act or such
sale, assignment, or transfer is otherwise exempt from registration under the
Securities Act. The holder represents and warrants that he has acquired this
Note and will acquire the Securities for his own account for investment and not
with a view to the sale or distribution thereof or the granting of any
participation therein, and that he has no present intention of distributing or
selling to others any of such interest or granting any participation therein.
The holder acknowledges that the securities shall bear the following legend:
"These securities have not been registered under the
Securities Act of 1933. Such securities may not be sold or
offered for sale, transferred, hypothecated or otherwise
assigned in the absence of an effective registration
statement with respect thereto under such Act or an opinion
of counsel to the Company that an exemption from
registration for such sale, offer, transfer, hypothecation
or other assignment is available under such Act."
3A. Registration Rights.
3A.1 The Company shall advise the Holder of this Note
or of the Conversion Shares or any then holder of
Notes or Conversion Shares (such persons being collectively referred to herein
as "holders") by written notice at least four weeks prior to the filing of any
registration statement under the Securities Act of 1933 (the "Act") covering
securities of the Company, except on Forms S-4 or S-8, and upon the request of
any such holder within ten days after the date of such notice, include in any
such registration statement such information as may be required to permit a
public offering of the Conversion Shares. The Company shall supply prospectuses
and other documents as the Holder may request in order to facilitate the public
sale or other disposition of the Conversion Shares, qualify the Conversion
Shares for sale in such states as any such holder designates and do any and all
other acts and things which may be necessary or desirable to enable such Holders
to consummate the public sale or other disposition of the Conversion Shares, and
furnish indemnification in the manner as set forth in Subsection 3A.2 of this
Section 3A. Such holders shall furnish information and indemnification as set
forth in Subsection 3A.2 of this Section 3A. For the purpose of the foregoing,
inclusion of the Conversion Shares in a Registration Statement pursuant to this
sub-paragraph 3A.1 under a condition that the offer and/or sale of such
Conversion Shares not commence until a date not to exceed 90 days from the
effective date of such registration statement shall be deemed to be in
compliance with this sub-paragraph 3A.1.
3A.2 The following provisions of this Section 3A shall also be applicable
to the exercise of the registration rights granted under this Section 3A.l:
(A) The foregoing registration rights shall be contingent on the holders
furnishing the Company with such appropriate information (relating to the
intentions of such holders) as the Company shall reasonably request in writing.
Following the effective date of such registration, the Company shall upon the
request of any owner of Notes and/or Conversion Shares forthwith supply such
number of prospectuses meeting the requirements of the Act as shall be requested
by such owner to permit such holder to make a public offering of all Conversion
Shares from time to time offered or sold to such holder, provided that such
holder shall from time to time furnish the Company with such appropriate
information (relating to the intentions of such holder) as the Company shall
request in writing. The Company shall also use its best efforts to qualify the
Conversion Shares for sale in such states as such holder shall reasonably
designate.
(B) The Company shall bear the entire cost and expense of any registration
of securities initiated by it under Subsection 3A.1 of this Section 3A
notwithstanding that Conversion Shares subject to this Note may be included in
any such registration. Any holder whose Conversion Shares are included in any
such registration statement pursuant to this Section 3A shall, however, bear the
fees of his own counsel and any registration fees, transfer taxes or
underwriting discounts or commissions applicable to the Conversion Shares sold
by him pursuant thereto.
(C) The Company shall indemnify and hold harmless each such holder and each
underwriter, within the meaning of the Act, who may purchase from or sell for
any such holder any Conversion Shares from and against any and all losses,
claims, damages and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
post-effective amendment thereto or any registration statement under the Act or
any prospectus included therein required to be filed or furnished by reason of
this Section 3A or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or alleged untrue statement
or omission or alleged omission based upon information furnished or required to
be furnished in writing to the Company by such holder or underwriter expressly
for use therein, which indemnification shall include each person, if any, who
controls any such underwriter within the meaning of such Act; provided, however,
that the Company shall not be obliged so to indemnify any such holder or
underwriter or controlling person unless such holder or underwriter shall at the
same time agree to indemnify the Company, its directors, each officer signing
the related registration statement and each person, if any, who controls the
Company within the meaning of such Act, from and against any and all losses,
claims, damages and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in any registration statement or any
prospectus required to be filed or furnished by reason of this Section 3A or
caused by any omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading insofar as
such losses, claims, damages or liabilities are caused by any untrue statement
or alleged untrue statement or omission based upon information furnished in
writing to the Company by any such holder or underwriter expressly for use
therein.
4. Transfer and Exchange. This Note is transferable on the
Note Register of the Company at the expense of the Company (except for any stamp
tax or other governmental charge with respect to any transfer) upon surrender of
this Note for transfer at the principal office of the Company, accompanied by a
written instrument of transfer in form reasonably satisfactory to the Company
duly executed by the holder of this Note or his attorney duly authorized in
writing, and thereupon one or more new Notes, each in the denomination of
$50,000 or an integral multiple thereof and for the same aggregate principal
amount as the Note surrendered, and dated the date to which interest has been
paid on the Notes, will be issued to the designated transferee or transferees.
This Note is exchangeable for a like aggregate principal amount of Notes of
different denominations, as requested by the holder or his attorney surrendering
the same.
The Company and its agents may treat the holder of this Note as the owner
for purposes of receiving payment as herein provided and for all other purposes,
whether or not this Note be overdue, and neither the Company nor any such agent
shall be affected by notice to the contrary.
Any new Note or Notes to be delivered to you or upon your order,
pursuant to this Section 4, in substitution for or in lieu of any Note held by
you, will be delivered to you at your address as shown on the records of the
Company, or at such other address within the United States of America as you may
request, without any expense to you in connection with such delivery and insured
to your satisfaction.
5. Prepayment Provisions. (a) This Note may be prepaid, at the option of
the Company, as a whole or in part, pro rata as to each Note holder, at any time
or from time to time, in each case on any date on or after the date of issuance
and prior to maturity, at a redemption price of 100% of the principal amount of
such Note, together with accrued interest through the date of prepayment.
(b) If this Note is called for prepayment pursuant to subsection 5(a) of
this Note, the Company shall give written notice to the holder of this Note not
less than 30 nor more than 60 day prior to the date fixed for the prepayment
thereof. Such notice and all other notices to be given to any holder of a Note
shall be mailed by registered mail to the holder thereof at the address shown on
the Note Register.
Upon notice of any prepayment being given as provided in this subsection 5
(b), the Company covenants and agrees that it will prepay on the date therein
fixed for prepayment the entire principal amount of this Note so as to be
prepaid as specified in such notice at the principal amount thereof, together
with interest accrued thereon to such date fixed for prepayment, plus the
applicable premium, if any.
(c) Upon any partial redemption of the Notes, upon presentation as herein
provided, there shall be paid to the holder the principal amount of the portion
of the Notes so to be prepaid with the unpaid interest accrued in respect
thereof (in cash or in shares of Common Stock of the Company, as the Company may
elect), and either (i) the Note to be partially prepaid shall be surrendered by
the holder, in which event the Company shall execute and deliver to or on the
order of such holder, at the expense of the Company, a new Note for the
principal amount of the Note remaining unpaid, dated as of the date to which
interest has been paid on the Note surrendered, and registered in the name of
the holder, or (ii) if the holder and the Company shall so determine, the Note
to be partially prepaid need not be so surrendered, but may be made available to
the Company, at the place of payment specified herein, for notation thereon of
the payment of the portion of the principal so paid, in which case the Company
shall make such notation and return the Note to or on the order of such holder.
(d) All Notes which may be prepaid shall not be considered outstanding for
purposes of this Section 5.
(e) Notwithstanding the foregoing, the Holder shall be entitled to convert
this Note into shares of Common Stock of the Company in accordance with
paragraph 2 up until the date of prepayment.
6. Subordination of Indebtedness; Security
6.1 (a) This Note is issued subject to the provisions of this Section 6;
and each person taking or holding this Note, accepts and agrees to be bound by
these provisions.
(b) This Note is a junior general obligation of the Company and is fully
subordinated to all "senior indebtedness" of the Company now existing or
hereafter incurred. Senior indebtedness is all indebtedness, liabilities and
obligations of the Company for money borrowed from banks, savings and loan
associations, the Small Business Administration and other financial
institutions, and their affiliates, whether or not evidenced by notes or other
instruments or evidences of indebtedness, and any deferrals, renewals or
extensions of any such senior indebtedness and notes or other instruments or
evidences of indebtedness issued in respect of or in exchange for any such
senior indebtedness or any funding to pay or replace any such senior
indebtedness or credit unless in the instrument creating or evidencing the same,
or pursuant to which it is outstanding, it is provided that such indebtedness or
such deferral, renewal or extension thereof is not senior in right of payment to
this Note. No payment or distribution of any kind or character on account of
principal, premium, if any, or interest on this Note shall be permitted during
the continuance of any default in the payment of principal, premium, if any, or
interest on any senior indebtedness.
6.2 Subject to the foregoing, this Note is secured by all of the issued and
outstanding shares of the Company's wholly owned subsidiaries Rattlesnake
Ventures, Inc., Rattlesnake-Danbury, Inc., Rattlesnake-Lynbrook, Inc. and
Rattlesnake-Flemington, Inc. The security interest provided for herein shall be
subject to a certain Security Agreement dated as of the date hereof (the
"Security Agreement") and the rights of the Holder to pursue his remedies under
such Security Agreement shall not be affected by the subordination and
moratorium described in paragraph 6.1 above.
7. Default. If one or more of the following events (herein
called "Events of Default") shall occur for any reason whatsoever (and whether
such occurrence shall be voluntary or involuntary or come about or be effected
by operation of law or pursuant to or in compliance with any judgment, decree or
order of any court or any order, rule or regulation of any administrative or
governmental body), and the holder of this Note shall have given fifteen (15)
days prior written notice to the Company by certified or registered mail, return
receipt requested, and the Company shall not have cured shall default within
such period:
(i) default in the due and punctual payment of the principal of, or
interest on, any Note when and as the same shall become due and payable, whether
at maturity or at a date fixed for prepayment or by acceleration or otherwise;
(ii) default by the Company in any provision of the Subscription Agreement
executed in connection with the sale and purchase of the Notes; or
(iii) the Company makes an assignment for the benefit of creditors or
admits in writing its inability to pay its debts generally as they become due;
or
(iv) an order, judgment or decree is entered
adjudicating the Company or any subsidiary bankrupt or
insolvent; or
(v) the Company petitions or applies to any tribunal for the appointment of
a trustee or receiver of the Company within the meaning of the Securities Act,
or of any substantial part of the assets of the Company, or commences any
proceedings (other than proceedings for the voluntary liquidation and
dissolution of a subsidiary) relating to the Company or any subsidiary under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction whether now or hereafter in
effect; or
(vi) any such petition or application is filed, or any such proceedings are
commenced, against the Company, and the Company by any act indicates its
approval thereof, consent or acquiescence therein, or an order, judgment or
decree is entered appointing any such trustee or receiver, or approving the
petition in any such proceedings, and such order, judgment or decree remains
unstayed and in effect for more than 60 days; or
(vii) any order, judgment or decree is entered in any proceedings against
the Company or any subsidiary within the meaning of the Securities Act decreeing
the dissolution of the Company and such order, judgment or decree remains
unstayed and in effect for more than 60 days; or
(viii) any order, judgment or decree is entered in any proceedings against
the Company or any subsidiary decreeing a split-up of the Company which requires
the divestiture of a substantial part of the consolidated assets of the Company
and its subsidiaries, or the divestiture of the stock of a subsidiary and such
order, judgment or decree remains unstayed and in effect for more than 60 days;
Then and in each and every such case, so long as such Event of Default shall not
have been remedied, the holder of any Note, by notice in writing to the Company,
may declare the principal of this Note then outstanding and the interest accrued
thereon if not already due and payable, to be due and payable immediately, and
upon any such declaration the same shall become and shall be immediately due and
payable, anything in this Note contained to the contrary notwithstanding.
8. Miscellaneous. (a) To the extent permitted by applicable law, the
Company hereby agrees to waive, and does hereby absolutely and irrevocably waive
and relinquish, the benefit and advantage of any valuation, stay, appraisement,
extension or redemption law now existing or which may hereafter exist, which,
but for this provision, might be applicable to any sale made under the judgment,
order or decree of any court, or otherwise, based on the Notes or on any claim
for principal or interest on the Notes.
(b) Each Note is issued upon the express condition, to which each
successive holder expressly assents and by receiving the same agrees, that no
recourse under or upon any obligation, covenant or agreement of the Notes, or
for the payment of the principal of, or premium, if any, or the interest on, a
Note, or for any claim based on a Note, or otherwise in respect hereof, shall be
had against any incorporator or any past, present or future stockholder, officer
or director, as such, of the Company or of any successor corporation, whether by
virtue of the constitution, statute or rule of law or by any assessment or
penalty or otherwise howsoever, all such individual liability being hereby
expressly waived and released as a condition of and as a part of the
consideration for the execution and issue of the Notes; provided, however, that
nothing herein shall prevent enforcement of the liability, if any, of any
stockholder or subscriber to capital stock upon or in respect of capital stock
not fully paid.
(c) Upon receipt by the Company of evidence satisfactory to it of the loss,
theft, destruction or mutilation of any Note and of indemnity reasonably
satisfactory to it, and upon reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of any such
Note if mutilated, the Company will make and deliver a new Note or like tenor in
lieu of any such Note so lost, stolen, destroyed or mutilated. Any new Note made
and delivered in accordance with the provisions of this subsection 8(c) shall be
dated as of the date from which unpaid interest has then accrued on the Note so
lost, stolen, destroyed or mutilated.
(d) Any notice or demand which by any provision of the Notes is required or
provided to be given or served to or upon the Company shall be deemed to have
been sufficiently given or served for all purposes by being sent as registered
mail, postage prepaid, addressed to the Company at its principal office.
(e) No course of dealing between the Company and the holder of any Note or
any delay on the part of the holder in exercising any rights under a Note shall
operate as a waiver of any rights of any holder of the Note.
(f) The Company hereby waives presentment and notice of dishonor. In the
event the holder is successful in any action at law or equity to enforce the
provisions of this Note, the Holder shall be entitled to recover from the
Company all reasonable attorney's fees and costs of collection.
9. Binding Effect. The Company agrees that the provisions of this Note
shall bind and shall inure to the benefit of the parties hereto and their
successors and assigns.
10. Amendment and Waiver. This Note may be amended, and the performance and
observance of any term of this Note may be waived, with (and only with) the
written consent of the Company and such Note purchaser as to whom performance is
to be waived.
11. Interest Rate. If any interest rate specified herein is held to be
impermissible, then the rate charged on the indebtedness represented hereby
shall be reduced to the highest rate then permitted by law.
12. Communications. All notices and other communications provided for
hereunder or under the Notes shall be in writing, and, if to you, shall be
delivered or mailed by registered mail addressed to you at your address as shown
in the records of the Company in this Note hereto or to such other address as
you may designate to the Company in writing and, if to the Company, shall be
delivered or mailed by registered mail to the Company at 3 Stamford Landing,
Suite 130, Stamford, Connecticut 06902, attention: Office of the president, or
to such other address as the Company may designate to you in writing.
13. Delaware Law. This Note shall be construed in accordance
with and governed by the laws of the State of Delaware without regard to
principles of conflicts of law, and cannot be changed, discharged or terminated
orally but only by an instrument in writing signed by the party against whom
enforcement of any change, discharge or termination is sought.
14. Counterparts. This Note may be executed simultaneously in any number of
counterparts each of which when so executed and delivered shall be an original,
but such counter parts together shall constitute but one and the same
instrument.
15. Headings. The headings of the sections of this Note are inserted for
convenience only and do not affect the meaning of such section.
IN WITNESS WHEREOF, the undersigned has caused this Note to be signed in
its corporate name by a duly authorized officer and to be dated the date and
year first above written.
THE RATTLESNAKE HOLDING
COMPANY, INC.
By:/s/ William J. Opper
--------------------
William J. Opper
Chairman
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement") dated as of March 4, 1997 is
made by The Rattlesnake Holding Company., Inc., a Delaware corporation (the
"Company") in favor of J.L.B. OF NEVADA, INC. and Michael Lauer (the "Secured
Party").
The Secured Promissory Notes dated as of March 4, 1997 in the aggregate
amount of Five Hundred Thousand Dollars ($500,000) (collectively the "Note")
executed by the Company in favor of the Secured Party provides, subject to its
terms and conditions, for a concurrent loan to the Company. It is a condition to
the concurrent loan under the Note by the Secured Party that the Company shall
have executed and delivered, and granted the Lien provided for in this
Agreement.
To induce the Secured Party to enter into, and to extend credit under, the
Note and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company has agreed to pledge, assign and
grant a security interest in the Collateral as security for the Secured
Obligations. Accordingly, the Company agrees with the Secured Party as follows:
1. Definitions and Interpretation.
1.1 Certain Defined Terms. The following terms shall have the following
meanings under this Agreement:
"Basic Document" shall mean the Note and this Agreement.
"Code" shall mean the Uniform Commercial Code as in effect in the State of
New York from time to time or, by reason of mandatory application, any other
applicable jurisdiction.
"Collateral" shall mean all right, title and interest of the Company in the
shares of capital stock (the "Stock") held by the Company in the following
subsidiaries (collectively the "Subsidiaries") of the company: 100 shares of
Rattlesnake Ventures, Inc., 100 shares of Rattlesnake-Danbury, Inc., 100 shares
of Rattlesnake-Lynbrook, Inc. and 100 shares of Common Stock of
Rattlesnake-Flemington, Inc.
"Default" shall mean any default described in the Note.
"Lien" shall mean, with respect to any property, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
property or any agreement to give, or notice of, any of the foregoing.
"Secured Obligations" shall mean any and all obligations of the Company for
the performance of its agreements, covenants and undertakings under or in
respect of the Note, including the payment of all amounts owed thereunder.
1.2 Interpretation. In this Agreement, unless otherwise indicated, the
singular includes the plural and plural the singular; words importing either
gender include the other gender; references to statutes or regulations are to be
construed as including all statutory or regulatory provisions consolidating,
amending or replacing the statute or regulation referred to; references to
"writing" include printing, typing, lithography and other means of reproducing
words in a tangible visible form; the words "including," "includes" and
"include" shall be deemed to be followed by the words "without limitation";
references to articles, sections (or subdivisions of sections), exhibits,
annexes or schedules are to this Agreement; references to agreements and other
contractual instruments shall be deemed to include all subsequent amendments,
extensions and other modifications to such instruments (without, however,
limiting any prohibition on any such amendments, extensions and other
modifications by the terms of any such document) ; and references to persons or
entities including their respective permitted successors and assigns.
2. Collateral.
2.1 Grant. As collateral security for the prompt payment in full when due
(whether at stated maturity, by acceleration or otherwise) and performance of
the Secured Obligations, the Company hereby pledges, assigns and grants to the
Secured Party a security interest in all of the Company's right, title and
interest in and to the Collateral.
2.2 Perfection. Concurrently with the execution and delivery
of this Agreement, the Company shall (i) file such financing statements and
other documents in such offices as the Secured Party may reasonably request in
writing to perfect and establish the Lien granted by this Agreement, (ii)
deliver to the attorneys for the Secured Party and pledge to the Secured Party
certificates representing the Stock, and (iii) take all such other actions as
shall be necessary or as the Secured Party may request to perfect and establish
the priority of the Lien granted by this Agreement.
2.3 Preservation and Protection of Security Interests. The Company shall:
(a) upon the acquisition after the date of this Agreement by the Company of
any instrument or chattel paper evidencing all or any part of the interests
constituting the Collateral, promptly deliver and pledge to the Secured Party
all such instruments or chattel paper, endorsed or accompanied by such
instruments of assignment and transfer in such form and substance as the Secured
Party may request; and
(b) give, execute, deliver, file or record any and all financing
statements, notices, contracts, agreements or other instruments, obtain any and
all governmental approvals and take any and all steps that may be necessary or
as the Secured Party may request to create, perfect, establish the priority of,
or to preserve the validity, perfection or priority of, the Lien granted by this
Agreement or to enable the Secured Party to exercise and enforce its rights,
remedies, powers and privileges under this Agreement with respect to such Lien.
2.4 Attorney-in-Fact.
(a) The Secured Party is hereby appointed the attorney-in-fact of the
Company for the purpose of carrying out the provisions of this Agreement and
taking any action and executing any instruments which the Secured Party may deem
necessary or advisable to accomplish the purposes of this Agreement, to preserve
the validity, perfection and priority of the Lien granted by this Agreement
(including, without limitation, the filing or recording of such financing
statements as Secured Party may deem appropriate or necessary) and, following
any Default, to exercise its rights, remedies, powers and privileges under this
Agreement. This appointment as attorney-in-fact is irrevocable and coupled with
an interest. Without limiting the generality of the foregoing, the Secured Party
shall be entitled under this Agreement upon- the occurrence and continuation of
any Default (i) to ask, demand, collect, sue for, recover, receive and give
receipt and discharge for amounts due and to become due under and in respect of
all or any part of the Collateral; (ii) to receive, endorse and collect any
instruments or other drafts, instruments, documents and chattel paper in
connection with clause (i) above (including any draft or check representing the
proceeds of insurance or the return of unearned premiums); (iii) to file any
claims or take any action or proceeding that the Secured Party may deem
necessary or advisable for the collection of all or any part of the Collateral,
including the collection of any compensation due and to become due under any
contract or agreement with respect to all or any part of the Collateral; and
(iv) to execute, in connection with any sale or disposition of the Collateral
under Section 4, any endorsements, assignments, bills of sale or other
instruments of conveyance or transfer with respect to all or any part of the
Collateral.
(b) So long as no Default shall have occurred and be continuing, the
Company shall have the right to exercise all voting, consensual and other powers
of ownership pertaining to the Collateral for all purposes not inconsistent with
the terms of this Agreement.
(c) If any Default shall have occurred and be continuing, and whether or
not the Secured Party exercises any available right to declare any Secured
Obligation due and payable or seeks or pursues any other right, remedy, power or
privilege available to it under applicable law, this Agreement or any other
Basic Document, all payments and other distributions on the Collateral shall be
paid directly to the Secured Party or its designee, retained by it and applied
as set forth in Section 4.04.
2.5 Rights and Obligations.
(a) The Company shall remain liable to perform its duties and obligations
under the contracts and agreements included in the Collateral in accordance with
their respective terms to the same extent as if this Agreement had not been
executed and delivered. The exercise by the Secured Party of any right, remedy,
power or privilege in respect of this Agreement shall not release the Company
from any of its duties and obligations under such contracts and agreements. The
Secured Party shall have no duty, obligation or liability under such contracts
and agreements by reason of this Agreement or any other Basic Document, nor
shall the Secured Party be obligated to perform any of the duties or obligations
of the Company under any such contract or agreement or to take any action to
collect or enforce any claim under any such contract or agreement.
(b) No Lien granted by this Agreement in the Company's right, title and
interest in any contract or agreement shall be deemed to be a consent by the
Secured Party to any such contract or agreement.
(c) No reference in this Agreement to proceeds or to the sale or other
disposition of Collateral shall authorize the Company to sell or otherwise
dispose of any Collateral.
(d) The Secured Party shall not be required to take steps necessary to
preserve any rights against prior parties to any part of the Collateral.
3. Representations Warranties and Covenants. As of the date of this
Agreement, the Company represents, warrants and covenants to the Secured Party
as follows:
3.1 Title. The Company is the sole beneficial owner of the Collateral in
which it purports to grant a Lien pursuant to this Agreement, and such
Collateral is free and clear of all Liens. The Lien granted by this Agreement in
favor of the Secured Party has attached and constitutes a perfected security
interest in all of such Collateral prior to all other Liens.
3.2 Sales and Other Liens. The Company shall not dispose of any Collateral,
create, incur, assume or suffer to exist any Lien upon any Collateral or file or
suffer to be on file or authorize to be filed, in any jurisdiction, any
financing statement or like instrument with respect to all or any part of the
Collateral in which the Secured Party is not named as the sole secured party.
3.3 Principal Place of Business. The Company's chief executive office and
principal place of business is located at the address set forth below.
3.4 Further Assurances. The Company agrees that, from time to time upon the
written request of the Secured Party, the Company will execute and deliver such
further documents and do such other acts and things as the Secured Party may
reasonably request in order fully to effect the purposes of this Agreement.
3.5 Stock and Future Issuances. The Stock constitutes all of the issued and
outstanding shares of capital stock of the Subsidiaries. No additional capital
stock of the Subsidiaries may be issued, and no transfer of assets of the
Subsidiaries shall be made, until the repayment of the Note in full.
4. Remedies.
4.1 Events of Default, Etc. If any Default shall have occurred and be
continuing:
(a) The Secured Party in its discretion. may make any reasonable compromise
or settlement it deems desirable. with respect to any of the Collateral and may
extend the time of payment, arrange for payment in installments, or otherwise
modify the terms of, all or any part of the Collateral;
(b) The Secured Party in its discretion may, in its name or in the name of
the Company or otherwise, demand, sue for, collect or receive any money or
property at any time payable or receivable on account of or in exchange for all
or any part of the Collateral, but shall be under no obligation to do so;
(c) The Secured Party in its discretion may, upon ten business days' prior
written notice to the Company of the time and place, with respect to all or any
part of the Collateral which shall then be or shall thereafter come into the
possession, custody or control of the Secured Party or any of its agents, sell,
lease or otherwise dispose of all or any part of such Collateral, at such place
or places as the Secured Party deems best, for cash, for credit or for future
delivery (without thereby assuming any credit risk) and at public or private
sale, without demand of performance or notice of intention to effect any such
disposition or of time or place of any such sale (except such notice as is
required above or by applicable statute and cannot be waived) , and the Secured
Party or any other person or entity may be the purchaser, lessee or recipient of
any or all of the Collateral so disposed of at any public sale (or, to the
extent permitted by law, at any private sale) and thereafter hold the same
absolutely, free from any claim or right of whatsoever kind, including any right
or equity of redemption (statutory or otherwise) , of the Company, any such
demand, notice and right or equity being hereby expressly waived and released.
The Secured Party may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by announcement
at the time and place fixed for the sale, and such sale may be made at any time
or place to which the sale may be so adjourned; and
(d) The Secured Party shall have, and in its discretion may exercise, all
of the rights, remedies, powers and privileges with respect to the Collateral of
a secured party under the Code (whether or not the Code is in effect in the
jurisdiction where such rights, remedies, powers and privileges are asserted)
and such additional rights, remedies, powers and privileges to which a secured
party is entitled under the laws in effect in any jurisdiction where any rights,
remedies, powers and privileges in respect of this Agreement or the Collateral
may be asserted, including the right, to the maximum extent permitted by law, to
exercise all voting, consensual and other powers of ownership pertaining to the
Collateral as if the Secured Party were the sole and absolute owner of the
Collateral (and the Company agrees to take all such action as may be appropriate
to give effect to such right).
The proceeds of, and other realization upon, the Collateral by virtue of the
exercise of remedies under this Section 4.01 shall be applied in accordance with
Section 4.4.
4.2 Deficiency. If the proceeds of, or other realization upon, the
Collateral by virtue of the exercise of remedies under Section 4.01 are
insufficient to cover the costs and expenses of such exercise and the payment in
full of the other Secured Obligations, the Company shall remain liable for any
deficiency.
4.3 Private Sale.
(a) The Secured Party shall incur no liability as a result of the sale,
lease or other disposition of all or any part of the Collateral at any private
sale pursuant to Section 4.01 conducted in a commercially reasonable manner. The
Company hereby waives any claims against the Secured Party arising by reason of
the fact that the price at which the Collateral may have been sold at such a
private sale was less than the price which might have been obtained at a public
sale or was less than the aggregate amount of the Secured Obligations, even if
the Secured Party accepts the first offer received and does not offer the
Collateral to more than one offeree.
(b) The Company recognizes that, by reason of certain prohibitions
contained in the Securities Act of 1933 and applicable state securities laws,
the Secured Party may be compelled, with respect to any sale of all or any part
of the Collateral, to limit purchasers to those who will agree, among other
things, to acquire the Collateral for their own account, for investment and not
with a view to distribution or resale. The Company acknowledges that any such
private sales may be at prices and on terms less favorable to the Secured Party
than those obtainable through a public sale without such restrictions, and,
notwithstanding such circumstances, agree that any such private sale shall be
deemed to have been made in a commercially reasonable manner and that. the
Secured Party shall have no obligation to engage in public sales and no
obligation to delay the sale of any Collateral for the period of time necessary
to permit the respective Issuer of such Collateral to register it for public
sale.
4.4 Application of Proceeds. Except as otherwise expressly
provided in this Agreement and except as provided below in this Section 4.04,
the proceeds of, or other realization upon, all or any part of the Collateral by
virtue of the exercise of remedies under Section 4.01 and any other cash at the
time held by the Secured Party under this Agreement, shall be applied by the
Secured Party:
First, to the payment of the costs and expenses of such exercise of
remedies, including reasonable out-of-pocket costs and expenses of the Secured
Party, the fees and expenses of its agents and counsel and all other expenses
incurred and advances made by the Secured Party in that connection;
Next, to the payment in full of the remaining Secured Obligations in such
manner as the Secured Party may determine; and
Finally, to the payment to the Company, or its respective successors or
assigns, or as a court of competent jurisdiction may direct, of any surplus then
remaining.
As used in this Section 4, "proceeds" of Collateral shall mean cash,
securities and other property realized in respect of, and distributions in kind
of, Collateral, including any property received under any bankruptcy,
reorganization or other similar proceeding as to the Company or any issuer of,
or account debtor or other obligor on, any of the Collateral.
5. Miscellaneous.
5.1 Waiver. No failure on the part of the Secured Party to exercise and no
delay in exercising, and no course of dealing with respect to, any right,
remedy, power or privilege under this Agreement shall operate as a waiver of
such right, remedy, power or privilege, nor shall any single or partial exercise
of any right, remedy, power or privilege under this Agreement preclude any other
or further exercise of any such right, remedy, power or privilege or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges provided in this Agreement are cumulative and not
exclusive of any rights, remedies, powers and privileges provided by law.
5.2 Notices. All notices and communications to be given under this
Agreement shall be given or made in writing to the intended recipient at the
address specified below or, as to any party, at such other address as shall be
designated by such party in a notice to each other party. Except as otherwise
provided in this Agreement, all such communications shall be deemed to have been
duly given when transmitted by telex or telecopier, delivered to the telegraph
or cable office or personally delivered or, in the case of a mailed notice, upon
receipt, in each case, given or addressed as provided in this Section 5.02:
To the Company: The Rattlesnake Holding Company, Inc.
3 Stamford Landing, Suite 130
Stamford, Connecticut 06902
Fax No.: (203) 975-7973
Attention: David Sederholt
With a copy to: Goldstein & DiGioia, LLP
369 Lexington Avenue
New York, New York 10017
Fax No.: (212) 557-0295
Attn: Victor J. DiGioia
To the Secured Party:
Michael Lauer J.L.B. of Nevada, Inc.
c/o Lancer Group 1500 East Tropicana Avenue
200 Park Avenue Suite 100
Suite 3900 Las Vegas, NE 89119
New York, NY 10166 Attn: Jay Botchman
With a copy to: Caplin & Drysdale
One Thomas Circle NW
Washington, D.C. 20005
Fax No. (202) 429-3301
Attn: Graeme Bush
5.3 Expenses, Etc. The Company agrees to pay or to reimburse the Secured
Party for all costs and expenses (including reasonable attorney's fees and
expenses) that may be incurred by the Secured Party in any effort to enforce any
of the provisions of Section 4 or any of the obligations of the Company in
respect of the Collateral or in connection with (a) the preservation of the Lien
of, or the rights of the Secured Party under this Agreement or (b) any actual or
attempted sale, lease, disposition, exchange, collection, compromise, settlement
or other realization in respect of, or care of, the Collateral, including all
such costs and expenses (and reasonable attorney's fees and expenses) incurred
in any bankruptcy, reorganization, workout or other similar proceeding relating
to the Company.
5.4 Amendments, Etc. Any provision of this Agreement may be modified,
supplemented or waived only by an instrument in writing duly executed by the
Company and the Secured Party. Any such modification, supplement or waiver shall
be for such period and subject to such conditions as shall be specified in the
instrument effecting the same and shall be binding upon the Secured Party, each
holder of any of the Secured Obligations and the Company, and any such waiver
shall be effective only in the specific instance and for the purposes for which
given.
5.5 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the Company, the Secured Party and each holder of any of the
Secured Obligations and their respective successors and permitted assigns. The
Company shall not assign or transfer its rights under this Agreement without the
prior written consent of the Secured Party.
5.6 Survival. All representations and warranties made in this Agreement or
in any certificate or other document delivered pursuant to or in connection with
this Agreement shall survive the execution and delivery of this Agreement or
such certificate or other document (as the case may be) or any deemed repetition
of any such representation or warranty.
5.7 Agreements Superseded. This Agreement supersedes all prior agreements
and understandings, written or oral, among the parties with respect to the
subject matter of this Agreement.
5.8 Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as. to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
5.9 GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS ~~AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
THE COMPANY HEREBY SUBMITS TO THE NQNEXCLUSIVE JURISDICTION OF THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE
COURT SITTING IN NEW YORK, NEW YORK FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY
THIS AGREEMENT. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM
THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
THE RATTLESNAKE HOLDING COMPANY, INC.
a Delaware corporation
By:/s/ William J. Opper
-----------------------
William J. Opper, Chairman
NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK INTO WHICH THIS NOTE IS
CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDERTHE ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THIS NOTE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN SUBSCRIPTION
AGREEMENT OF EVEN DATE (THE "SUBSCRIPTION AGREEMENT").
18% Convertible Subordinated Secured Promissory Note
Due September 4, 1997
of
THE RATTLESNAKE HOLDING COMPANY, INC.
March 4, 1997
$250,000
The Rattlesnake Holding Company, Inc., a Delaware corporation (hereinafter
called the "Company"), for value received, hereby promises to pay to Michael
Lauer, c/o Lancer Group, 200 Park Avenue, Suite 3900, New York, N.Y. 10166, or
registered assigns, on the 4th day of September, 1997 (the "Due Date"), the
principal amount of Two Hundred Fifty Thousand Dollars ($250,000) and to pay
interest on the Due Date (computed on the basis of a 360-day year of twelve
30-day months) on the unpaid portion of said principal amount from the date
hereof at the rate of 18% per annum. Both the principal hereof and interest
hereon are payable at the principal office of the Company in Stamford,
Connecticut, in such coin or currency of the United States of America as at the
time of payment shall be legal tender for the payment of public and private
debts.
1. Authorized Issue. This Note is one of a duly authorized issue of 18%
Convertible Subordinated Promissory Notes due September 4, 1997 (herein called
the "Notes") made or to be made by the Company in an aggregate amount of up to
$500,000, in original authorized principal amount, similar in terms except for
dates, principal amounts and named payees, offered by the Company pursuant to a
subscription agreement of even date.
2. Conversion. (a) Commencing 120 days from the date hereof, or sooner with
the consent of the Company, and until payment in full, the unpaid principal
amount of this Note, or any portion thereof may, at the election of the holder
thereof, at any time, be converted, at the conversion price per share of Common
Stock equal to $.75, as adjusted and readjusted from time to time Paragraph 2
(such conversion price, as so adjusted and readjusted and in effect at any time,
being herein called the "Conversion Price"), into the number of fully paid and
nonassessable shares of Common Stock (the "Conversion Shares") determined by
dividing the principal amount to be so converted by the Conversion Price in
effect at the time of such conversion.
(b) (i) Any Note may be converted in full or in part by the holder thereof
by surrender of such Note with the notice of conversion thereon duly executed by
such holder (specifying the portion of the principal amount thereof to be
converted in the case of a partial conversion) to the Company at its principal
office, or at the office of the agency maintained for such purpose. Upon any
partial conversion of a Note, the Company at its expense will forthwith issue
and deliver to or upon the order of the holder thereof a new Note or Notes in
principal amount equal to the unpaid and unconverted principal amount of such
surrendered Note, such new Note or Notes to be dated and to bear interest from
the date to which interest has been paid on such surrendered Note. Each
conversion shall be deemed to have been effected immediately prior to the close
of business on the date on which such Note shall have been so surrendered to the
Company or such agency; and at such time the rights of the holder of such Note
as such shall, to the extent of the principal amount thereof converted, cease,
and the person or persons in whose name or names any certificate or certificates
for shares of Common Stock (or Other Securities) shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record
thereof.
(ii) No payment or adjustment of interest or dividends shall be made upon
the conversion of any Note or Notes.
(c) As promptly as practicable after the conversion of any Note in full or
in part, and in any event within 15 calendar days thereafter, the Company at its
expense (including the payment by it or any applicable issue taxes) will issue
and deliver to the holder of such Note, or as such holder (upon payment of such
holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of full shares of Common Stock (or Other Securities)
issuable upon such conversion, plus, in lieu of any fractional shares to which
such holder would otherwise be entitled, cash equal to such fraction multiplied
by the market value determined in good faith by the Board of Directors of the
Company of one full share as of the close of business on the date of such
conversion.
(d) Adjustments to Conversion Price and Number of Securities.
(i) In case at any time or from time to time the Company shall subdivide as
a whole, split its Common Stock or issue a dividend payable in shares or
otherwise, the number of shares of Common Stock then outstanding into a greater
or lesser number of shares, the Conversion Price then in effect shall be
increased or reduced proportionately, and the number of shares issuable upon
conversion of this Note shall accordingly be increased proportionately.
(ii) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon conversion of this Note (other than change in par
value, or from par value to no par value, or from no par value to par value, or
as a result or a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than a merger in
which the Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of Common Stock, other than a
change in number of the shares issuable upon conversion of the Note) or in case
of any sale or conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, the holder of this Note shall
have the right thereafter to convert this Note into the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of shares of Common Stock of the Company for which the Note might
have been converted immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. The above provisions of this
Paragraph 2 shall similarly apply to successive reclassifications and changes of
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
(e) The Company will at all time reserve and keep available, solely for
issuance and delivery upon the conversion of the Notes, all shares of Common
Stock (or Other Securities) from time to time issuable upon the conversion of
the Notes. All shares of Common Stock issuable upon conversion of the Notes
shall be duly authorized and, when issued, validly issued, fully paid and
nonassessable with no liability on the part of the holders thereof.
3. Restrictions on Transfer.
The holder acknowledges that he has been advised by the Company that this
Note and the shares of Common Stock (the "Conversion Shares") issuable upon
exercise thereof (collectively the "Securities") have not been registered under
the Securities Act of 1933, as amended (the "Securities Act") , that the Note is
being issued, and the shares issuable upon exercise of the Note will be issued,
on the basis of the statutory exemption provided by section 4(2) of the
Securities Act relating to transactions by an issuer not involving any public
offering, and that the Company's reliance upon this statutory exemption is based
in part upon the representations made by the holder contained herein. The holder
acknowledges that he has been informed by the Company of, or is otherwise
familiar with, the nature of the limitations imposed by the Securities Act and
the rules and regulations thereunder on the transfer of securities. In
particular, the holder agrees that no sale, assignment or transfer of the
Securities shall be valid or effective, and the Company shall not be required to
give any effect to any such sale, assignment or transfer, unless (i) the sale,
assignment or transfer of the Securities is registered under the Securities Act,
and the Company has no obligations or intention to so register the Securities,
or (ii) the Securities are sold, assigned or transferred in accordance with all
the requirements and limitations of Rule 144 under the Securities Act or such
sale, assignment, or transfer is otherwise exempt from registration under the
Securities Act. The holder represents and warrants that he has acquired this
Note and will acquire the Securities for his own account for investment and not
with a view to the sale or distribution thereof or the granting of any
participation therein, and that he has no present intention of distributing or
selling to others any of such interest or granting any participation therein.
The holder acknowledges that the securities shall bear the following legend:
"These securities have not been registered under the
Securities Act of 1933. Such securities may not be sold or
offered for sale, transferred, hypothecated or otherwise
assigned in the absence of an effective registration
statement with respect thereto under such Act or an opinion
of counsel to the Company that an exemption from registration
for such sale, offer, transfer, hypothecation or other
assignment is available under such Act."
3A. Registration Rights.
3A.1 The Company shall advise the Holder of this Note or of the Conversion
Shares or any then holder of Notes or Conversion Shares (such persons being
collectively referred to herein as "holders") by written notice at least four
weeks prior to the filing of any registration statement under the Securities Act
of 1933 (the "Act") covering securities of the Company, except on Forms S-4 or
S-8, and upon the request of any such holder within ten days after the date of
such notice, include in any such registration statement such information as may
be required to permit a public offering of the Conversion Shares. The Company
shall supply prospectuses and other documents as the Holder may request in order
to facilitate the public sale or other disposition of the Conversion Shares,
qualify the Conversion Shares for sale in such states as any such holder
designates and do any and all other acts and things which may be necessary or
desirable to enable such Holders to consummate the public sale or other
disposition of the Conversion Shares, and furnish indemnification in the manner
as set forth in Subsection 3A.2 of this Section 3A. Such holders shall furnish
information and indemnification as set forth in Subsection 3A.2 of this Section
3A. For the purpose of the foregoing, inclusion of the Conversion Shares in a
Registration Statement pursuant to this sub-paragraph 3A.1 under a condition
that the offer and/or sale of such Conversion Shares not commence until a date
not to exceed 90 days from the effective date of such registration statement
shall be deemed to be in compliance with this sub-paragraph 3A.1.
3A.2 The following provisions of this Section 3A shall also be applicable
to the exercise of the registration rights granted under this Section 3A.1:
(A) The foregoing registration rights shall be contingent on the holders
furnishing the Company with such appropriate information (relating to the
intentions of such holders) as the Company shall reasonably request in writing.
Following the effective date of such registration, the Company shall upon the
request of any owner of Notes and/or Conversion Shares forthwith supply such
number of prospectuses meeting the requirements of the Act as shall be requested
by such owner to permit such holder to make a public offering of all Conversion
Shares from time to time offered or sold to such holder, provided that such
holder shall from time to time furnish the Company with such appropriate
information (relating to the intentions of such holder) as the Company shall
request in writing. The Company shall also use its best efforts to qualify the
Conversion Shares for sale in such states as such holder shall reasonably
designate.
(B) The Company shall bear the entire cost and expense of any registration
of securities initiated by it under Subsection 3A.1 of this Section 3A
notwithstanding that Conversion Shares subject to this Note may be included in
any such registration. Any holder whose Conversion Shares are included in any
such registration statement pursuant to this Section 3A shall, however, bear the
fees of his own counsel and any registration fees, transfer taxes or
underwriting discounts or commissions applicable to the Conversion Shares sold
by him pursuant thereto.
(C) The Company shall indemnify and hold harmless each such holder and each
underwriter, within the meaning of the Act, who may purchase from or sell for
any such holder any Conversion Shares from and against any and all losses,
claims, damages and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
post-effective amendment thereto or any registration statement under the Act or
any prospectus included therein required to be filed or furnished by reason of
this Section 3A or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or alleged untrue statement
or omission or alleged omission based upon information furnished or required to
be furnished in writing to the Company by such holder or underwriter expressly
for use therein, which indemnification shall include each person, if any, who
controls any such underwriter within the meaning of such Act; provided, however,
that the Company shall not be obliged so to indemnify any such holder or
underwriter or controlling person unless such holder or underwriter shall at the
same time agree to indemnify the Company, its directors, each officer signing
the related registration statement and each person, if any, who controls the
Company within the meaning of such Act, from and against any and all losses,
claims, damages and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in any registration statement or any
prospectus required to be filed or furnished by reason of this Section 3A or
caused by any omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading insofar as
such losses, claims, damages or liabilities are caused by any untrue statement
or alleged untrue statement or omission based upon information furnished in
writing to the Company by any such holder or underwriter expressly for use
therein.
4. Transfer and Exchange. This Note is transferable on the Note Register of
the Company at the expense of the Company (except for any stamp tax or other
governmental charge with respect to any transfer) upon surrender of this Note
for transfer at the principal office of the Company, accompanied by a written
instrument of transfer in form reasonably satisfactory to the Company duly
executed by the holder of this Note or his attorney duly authorized in writing,
and thereupon one or more new Notes, each in the denomination of $50,000 or an
integral multiple thereof and for the same aggregate principal amount as the
Note surrendered, and dated the date to which interest has been paid on the
Notes, will be issued to the designated transferee or transferees. This Note is
exchangeable for a like aggregate principal amount of Notes of different
denominations, as requested by the holder or his attorney surrendering the same.
The Company and its agents may treat the holder of this Note as the
owner for purposes of receiving payment as herein provided and for all other
purposes, whether or not this Note be overdue, and neither the Company nor any
such agent shall be affected by notice to the contrary.
Any new Note or Notes to be delivered to you or upon your order, pursuant
to this Section 4, in substitution for or in lieu of any Note held by you, will
be delivered to you at your address as shown on the records of the Company, or
at such other address within the United States of America as you may request,
without any expense to you in connection with such delivery and insured to your
satisfaction.
5. Prepayment Provisions. (a) This Note may be prepaid, at the option of
the Company, as a whole or in part, pro rata as to each Note holder, at any time
or from time to time, in each case on any date on or after the date of issuance
and prior to maturity, at a redemption price of 100% of the principal amount of
such Note, together with accrued interest through the date of prepayment.
(b) If this Note is called for prepayment pursuant to subsection 5(a) of
this Note, the Company shall give written notice to the holder of this Note not
less than 30 nor more than 60 day prior to the date fixed for the prepayment
thereof. Such notice and all other notices to be given to any holder of a Note
shall be mailed by registered mail to the holder thereof at the address shown on
the Note Register.
Upon notice of any prepayment being given as provided in this
subsection 5 (b), the Company covenants and agrees that it will prepay on the
date therein fixed for prepayment the entire principal amount of this Note so as
to be prepaid as specified in such notice at the principal amount thereof,
together with interest accrued thereon to such date fixed for prepayment, plus
the applicable premium, if any.
(c) Upon any partial redemption of the Notes, upon presentation as herein
provided, there shall be paid to the holder the principal amount of the portion
of the Notes so to be prepaid with the unpaid interest accrued in respect
thereof (in cash or in shares of Common Stock of the Company, as the Company may
elect), and either (i) the Note to be partially prepaid shall be surrendered by
the holder, in which event the Company shall execute and deliver to or on the
order of such holder, at the expense of the Company, a new Note for the
principal amount of the Note remaining unpaid, dated as of the date to which
interest has been paid on the Note surrendered, and registered in the name of
the holder, or (ii) if the holder and the Company shall so determine, the Note
to be partially prepaid need not be so surrendered, but may be made available to
the Company, at the place of payment specified herein, for notation thereon of
the payment of the portion of the principal so paid, in which case the Company
shall make such notation and return the Note to or on the order of such holder.
(d) All Notes which may be prepaid shall not be considered outstanding for
purposes of this Section 5.
(e) Notwithstanding the foregoing, the Holder shall be entitled to convert
this Note into shares of Common Stock of the Company in accordance with
paragraph 2 up until the date of prepayment.
6. Subordination of Indebtedness; Security
6.1 (a) This Note is issued subject to the provisions of this Section 6;
and each person taking or holding this Note, accepts and agrees to be bound by
these provisions.
(b) This Note is a junior general obligation of the Company and is fully
subordinated to all "senior indebtedness" of the Company now existing or
hereafter incurred. Senior indebtedness is all indebtedness, liabilities and
obligations of the Company for money borrowed from banks, savings and loan
associations, the Small Business Administration and other financial
institutions, and their affiliates, whether or not evidenced by notes or other
instruments or evidences of indebtedness, and any deferrals, renewals or
extensions of any such senior indebtedness and notes or other instruments or
evidences of indebtedness issued in respect of or in exchange for any such
senior indebtedness or any funding to pay or replace any such senior
indebtedness or credit unless in the instrument creating or evidencing the same,
or pursuant to which it is outstanding, it is provided that such indebtedness or
such deferral, renewal or extension thereof is not senior in right of payment to
this Note. No payment or distribution of any kind or character on account of
principal, premium, if any, or interest on this Note shall be permitted during
the continuance of any default in the payment of principal, premium, if any, or
interest on any senior indebtedness.
6.2 Subject to the foregoing, this Note is secured by all of the issued and
outstanding shares of the Company's wholly owned subsidiaries Rattlesnake
Ventures, Inc., Rattlesnake-Danbury, Inc., Rattlesnake-Lynbrook, Inc. and
Rattlesnake-Flemington, Inc. The security interest provided for herein shall be
subject to a certain Security Agreement dated as of the date hereof (the
"Security Agreement") and the rights of the Holder to pursue his remedies under
such Security Agreement shall not be affected by the subordination and
moratorium described in paragraph 6.1 above.
7. Default. If one or more of the following events (herein called "Events
of Default") shall occur for any reason whatsoever (and whether such occurrence
shall be voluntary or involuntary or come about or be effected by operation of
law or pursuant to or in compliance with any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body), and the holder of this Note shall have given fifteen (15) days prior
written notice to the Company by certified or registered mail, return receipt
requested, and the Company shall not have cured shall default within such
period:
(i) default in the due and punctual payment of the principal of, or
interest on, any Note when and as the same shall become due and payable, whether
at maturity or at a date fixed for prepayment or by acceleration or otherwise;
(ii) default by the Company in any provision of the Subscription Agreement
executed in connection with the sale and purchase of the Notes; or
(iii) the Company makes an assignment for the benefit of creditors or
admits in writing its inability to pay its debts generally as they become due;
or
(iv) an order, judgment or decree is entered adjudicating the Company or
any subsidiary bankrupt or insolvent, or
(v) the Company petitions or applies to any tribunal for the appointment of
a trustee or receiver of the Company within the meaning of the Securities Act,
or of any substantial part of the assets of the Company, or commences any
proceedings (other than proceedings for the voluntary liquidation and
dissolution of a subsidiary) relating to the Company or any subsidiary under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction whether now or hereafter in
effect; or
(vi) any such petition or application is filed, or any such proceedings are
commenced, against the Company, and the Company by any act indicates its
approval thereof, consent or acquiescence therein, or an order, judgment or
decree is entered appointing any such trustee or receiver, or approving the
petition in any such proceedings, and such order, judgment or decree remains
unstayed and in effect for more than 60 days; or
(vii) any order, judgment or decree is entered in any proceedings against
the Company or any subsidiary within the meaning of the Securities Act decreeing
the dissolution of the Company and such order, judgment or decree remains
- -unstayed and in effect for more than 60 days; or
(viii) any order, judgment or decree is entered in any proceedings against
the Company or any subsidiary decreeing a split-up of the Company which requires
the divestiture of a substantial part of the consolidated assets of the Company
and its subsidiaries, or the divestiture of the stock of a subsidiary and such
order, judgment or decree remains unstayed and in effect for more than 60 days;
Then and in each and every such case, so long as such Event of Default shall not
have been remedied, the holder of any Note, by notice in writing to the Company,
may declare the principal of this Note then outstanding and the interest accrued
thereon if not already due and payable, to be due and payable immediately, and
upon any such declaration the same shall become and shall be immediately due and
payable, anything in this Note contained to the contrary notwithstanding.
8. Miscellaneous. (a) To the extent permitted by applicable law, the
Company hereby agrees to waive, and does hereby absolutely and irrevocably waive
and relinquish, the benefit and advantage of any valuation, stay, appraisement,
extension or redemption law now existing or which may hereafter exist, which,
but for this provision, might be applicable to any sale made under the judgment,
order or decree of any court, or otherwise, based on the Notes or on any claim
for principal or interest on the Notes.
(b) Each Note is issued upon the express condition, to which each
successive holder expressly assents and by receiving the same agrees, that no
recourse under or upon any obligation, covenant or agreement of the Notes, or
for the payment of the principal of, or premium, if any, or the interest on, a
Note, or for any claim based on a Note, or otherwise in respect hereof, shall be
had against any incorporator or any past, present or future stockholder, officer
or director, as such, of the Company or of any successor corporation, whether by
virtue of the constitution, statute or rule of law or by any assessment or
penalty or otherwise howsoever, all such individual liability being hereby
expressly waived and released as a condition of and as a part of the
consideration for the execution and issue of the Notes; provided, however, that
nothing herein shall prevent enforcement of the liability, if any, of any
stockholder or subscriber to capital stock upon or in respect of capital stock
not fully paid.
(c) Upon receipt by the Company of evidence satisfactory to it of the loss,
theft, destruction or mutilation of any Note and of indemnity reasonably
satisfactory to it, and upon reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of any such
Note if mutilated, the Company will make and deliver a new Note or like tenor in
lieu of any such Note so lost, stolen, destroyed or mutilated. Any new Note made
and delivered in accordance with the provisions of this subsection 8(c) shall be
dated as of the date from which unpaid interest has then accrued on the Note so
lost, stolen, destroyed or mutilated.
(d) Any notice or demand which by any provision of the Notes is required or
provided to be given or served to or upon the Company shall be deemed to have
been sufficiently given or served for all purposes by being sent as registered
mail, postage prepaid, addressed to the Company at its principal office.
(e) No course of dealing between the Company and the holder of any Note or
any delay on the part of the holder in exercising any rights under a Note shall
operate as a waiver of any rights of any holder of the Note.
(f) The Company hereby waives presentment and notice of dishonor. In the
event the holder is successful in any action at law or equity to enforce the
provisions of this Note, the Holder shall be entitled to recover from the
Company all reasonable attorney's fees and costs of collection.
9. Binding Effect. The Company agrees that the provisions of this Note
shall bind and shall inure to the benefit of the parties hereto and their
successors and assigns.
10. Amendment and Waiver. This Note may be amended, and the performance and
observance of any term of this Note may be waived, with (and only with) the
written consent of the Company and such Note purchaser as to whom performance is
to be waived.
11. Interest Rate. If any interest rate specified herein is held to be
impermissible, then the rate charged on the indebtedness represented hereby
shall be reduced to the highest rate then permitted by law.
12. Communications. All notices and other communications provided for
hereunder or under the Notes shall be in writing, and, if to you, shall be
delivered or mailed by registered mail addressed to you at your address as shown
in the records of the Company in this Note hereto or to such other address as
you may designate to the Company in writing and, if to the Company, shall be
delivered or mailed by registered mail to the Company at 3 Stamford Landing,
Suite 130, Stamford, Connecticut 06902, attention: Office of the President, or
to such other address as the Company may designate to you in writing.
13. Delaware Law. This Note shall be construed in accordance with and
governed by the laws of the State of Delaware without regard to principles of
conflicts of law, and cannot be changed, discharged or terminated orally but
only by an instrument in writing signed by the party against whom enforcement of
any change, discharge or termination is sought.
14. Counterparts. This Note may be executed simultaneously in any number of
counterparts each of which when so executed and delivered shall be an original,
but such counter parts together shall constitute but one and the same
instrument.
15. Headings. The headings of the sections of this Note are inserted for
convenience only and do not affect the meaning of such section.
IN WITNESS WHEREOF, the undersigned has caused this Note to be signed in
its corporate name by a duly authorized officer and to be dated the date and
year first above written.
THE RATTLESNAKE HOLDING
COMPANY, INC.
By:/s/ William J. Opper
-----------------------
William J. Opper
Chairman
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement") dated as of March 4, 1997 is
made by The Rattlesnake Holding Company., Inc., a Delaware corporation (the
"Company") in favor of J.L.B. OF NEVADA, INC. and Michael Lauer (the "Secured
Party").
The Secured Promissory Notes dated as of March 4, 1997 in the aggregate
amount of Five Hundred Thousand Dollars ($500,000) (collectively the "Note")
executed by the Company in favor of the Secured Party provides, subject to its
terms and conditions, for a concurrent loan to the Company. It is a condition to
the concurrent loan under the Note by the Secured Party that the Company shall
have executed and delivered, and granted the Lien provided for in this
Agreement.
To induce the Secured Party to enter into, and to extend credit under, the
Note and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company has agreed to pledge, assign and
grant a security interest in the Collateral as security for the Secured
Obligations. Accordingly, the Company agrees with the Secured Party as follows:
1. Definitions and Interpretation.
1.1 Certain Defined Terms. The following terms shall have the following
meanings under this Agreement:
"Basic Document" shall mean the Note and this Agreement.
"Code" shall mean the Uniform Commercial Code as in effect in the State of
New York from time to time or, by reason of mandatory application, any other
applicable jurisdiction.
"Collateral" shall mean all right, title and interest of the Company in the
shares of capital stock (the "Stock") held by the Company in the following
subsidiaries (collectively the "Subsidiaries") of the company: 100 shares of
Rattlesnake Ventures, Inc., 100 shares of Rattlesnake-Danbury, Inc., 100 shares
of Rattlesnake-Lynbrook, Inc. and 100 shares of Common Stock of
Rattlesnake-Flemington, Inc.
"Default" shall mean any default described in the Note.
"Lien" shall mean, with respect to any property, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect of
such property or any agreement to give, or notice of, any of the foregoing.
"Secured Obligations" shall mean any and all obligations of the Company for
the performance of its agreements, covenants and undertakings under or in
respect of the Note, including the payment of all amounts owed thereunder.
1.2 Interpretation. In this Agreement, unless otherwise indicated, the
singular includes the plural and plural the singular; words importing either
gender include the other gender; references to statutes or regulations are to be
construed as including all statutory or regulatory provisions consolidating,
amending or replacing the statute or regulation referred to; references to
"writing" include printing, typing, lithography and other means of reproducing
words in a tangible visible form; the words "including," "includes" and
"include" shall be deemed to be followed by the words "without limitation"
references to articles, sections (or subdivisions of sections), exhibits,
annexes or schedules are to this Agreement; references to agreements and other
contractual instruments shall be deemed to include all subsequent amendments,
extensions and other modifications to such instruments (without, however,
limiting any prohibition on any such amendments, extensions and other
modifications by the terms of any such document); and references to persons or
entities including their respective permitted successors and assigns.
2. Collateral.
2.1 Grant. As collateral security for the prompt payment in full when due
(whether at stated maturity, by acceleration or otherwise) and performance of
the Secured Obligations, the Company hereby pledges, assigns and grants to the
Secured Party a security interest in all of the Company's right, title and
interest in and to the Collateral.
2.2 Perfection. Concurrently with the execution and delivery of this
Agreement, the Company shall (i) file such financing statements and other
documents in such offices as the Secured Party may reasonably request in writing
to perfect and establish the Lien granted by this Agreement, (ii) deliver to the
attorneys for the Secured Party and pledge to the Secured Party certificates
representing the Stock, and (iii) take all such other actions as shall be
necessary or as the Secured Party may request to perfect and establish the
priority of the Lien granted by this Agreement.
2.3 Preservation and Protection of Security Interests. The Company shall:
(a) upon the acquisition after the date of this Agreement by the Company of
any instrument or chattel paper evidencing all or any part of the interests
constituting the Collateral, promptly deliver and pledge to the Secured Party
all such instruments or chattel paper, endorsed or accompanied by such
instruments of assignment and transfer in such form and substance as the Secured
Party may request; and
(b) give, execute, deliver, file or record any and all financing
statements, notices, contracts, agreements or other instruments, obtain any and
all governmental approvals and take any and all steps that may be necessary or
as the Secured Party may request to create, perfect, establish the priority of,
or to preserve the validity, perfection or priority of, the Lien granted by this
Agreement or to enable the Secured Party to exercise and enforce its rights,
remedies, powers and privileges under this Agreement with respect to such Lien.
2.4 Attorney-in-Fact.
(a) The Secured Party is hereby appointed the attorney-in-fact of the
Company for the purpose of carrying out the provisions of this Agreement and
taking any action and executing any instruments which the Secured Party may deem
necessary or advisable to accomplish the purposes of this Agreement, to preserve
the validity, perfection and priority of the Lien granted by this Agreement
(including, without limitation, the filing or recording of such financing
statements as Secured Party may deem appropriate or necessary) and, following
any Default, to exercise its rights, remedies, powers and privileges under this
Agreement. This appointment as attorney-in-fact is irrevocable and coupled with
an interest. Without limiting the generality of the foregoing, the Secured Party
shall be entitled under this Agreement upon the occurrence and continuation of
any Default (i) to ask, demand, collect, sue for, recover, receive and give
receipt and discharge for amounts due and to become due under and in respect of
all or any part of the Collateral; (ii) to receive, endorse and collect any
instruments or other drafts, instruments, documents and chattel paper in
connection with clause (i) above (including any draft or check representing the
proceeds of insurance or the return of unearned premiums) ; (iii) to file any
claims or take any action or proceeding that the Secured Party may deem
necessary or advisable for the collection of all or any part of the Collateral,
including the collection of any compensation due and to become due under any
contract or agreement with respect to all or any part of the Collateral; and
(iv) to execute, in connection with any sale or disposition of the Collateral
under Section 4, any endorsements, assignments, bills of sale or other
instruments of conveyance or transfer with respect to all or any part of the
Collateral.
(b) So long as no Default shall have occurred and be continuing, the
Company shall have the right to exercise all voting, consensual and other powers
of ownership pertaining to the Collateral for all purposes not inconsistent with
the terms of this Agreement.
(c) If any Default shall have occurred and be continuing, and whether or
not the Secured Party exercises any available right to declare any Secured
Obligation due and payable or seeks or pursues any other right, remedy, power or
privilege available to it under applicable law, this Agreement or any other
Basic Document, all payments and other distributions on the Collateral shall be
paid directly to the Secured Party or its designee, retained by it and applied
as set forth in Section 4.04.
2.5 Rights and Obligations.
(a) The Company shall remain liable to perform its duties and obligations
under the contracts and agreements included in the Collateral in accordance with
their respective terms to the same extent as if this Agreement had not been
executed and delivered. The exercise by the Secured Party of any right, remedy,
power or privilege in respect of this Agreement shall not release the Company
from any of its duties and obligations under such contracts and agreements. The
Secured Party shall have no duty, obligation or liability under such contracts
and agreements by reason of this Agreement or any other Basic Document, nor
shall the Secured Party be obligated to perform any of the duties or obligations
of the Company under any such contract or agreement or to take any action to
collect or enforce any claim under any such contract or agreement.
(b) No Lien granted by this Agreement in the Company's right, title and
interest in any contract or agreement shall be deemed to be a consent by the
Secured Party to any such contract or agreement.
(c) No reference in this Agreement to proceeds or to the sale or other
disposition of Collateral shall authorize the Company to sell or otherwise
dispose of any Collateral.
(d) The Secured Party shall not be required to take steps necessary to
preserve any rights against prior parties to any part of the Collateral.
3. Representations, Warranties and Covenants. As of the date of this
Agreement, the Company represents, warrants and covenants to the Secured Party
as follows:
3.1 Title. The Company is the sole beneficial owner of the Collateral in
which it purports to grant a Lien pursuant to this Agreement, and such
Collateral is free and clear of all Liens. The Lien granted by this Agreement in
favor of the Secured Party has attached and constitutes a perfected security
interest in all of such Collateral prior to all other Liens.
3.2 Sales and Other Liens. The Company shall not dispose of any Collateral,
create, incur, assume or suffer to exist any Lien upon any Collateral or file or
suffer to be on file or authorize to be filed, in any jurisdiction, any
financing statement or like instrument with respect to all or any part of the
Collateral in which the Secured Party is not named as the sole secured party.
3.3 Principal Place of Business. The Company's chief executive office and
principal place of business is located at the address set forth below.
3.4 Further Assurances. The Company agrees that, from time to time upon the
written request of the Secured Party, the Company will execute and deliver such
further documents and do such other acts and things as the Secured Party may
reasonably request in order fully to effect the purposes of this Agreement.
3.5 Stock and Future Issuances. The Stock constitutes all of the issued and
outstanding shares of capital stock of the Subsidiaries. No additional capital
stock of the Subsidiaries may be issued, and no transfer of assets of the
Subsidiaries shall be made, until the repayment of the Note in full.
4. Remedies.
4.1 Events of Default, Etc. If any Default shall have occurred and be
continuing:
(a) The Secured Party in its discretion may make any reasonable compromise
or settlement it deems desirable with respect to any of the Collateral and may
extend the time of payment, arrange for payment in installments, or otherwise
modify the terms of, all or any part of the Collateral;
(b) The Secured Party in its discretion may, in its name or in the name of
the Company or otherwise, demand, sue for, collect or receive any money or
property at any time payable or receivable on account of or in exchange for all
or any part of the Collateral, but shall be under no obligation to do 50;
(c) The Secured Party in its discretion may, upon ten business days' prior
written notice to the Company of the time and place, with respect to all or any
part of the Collateral which shall then be or shall thereafter come into the
possession, custody or control of the Secured Party or any of its agents, sell,
lease or otherwise dispose of all or any part of such Collateral, at such place
or places as the Secured Party deems best, for cash, for credit or for future
delivery (without thereby assuming any credit risk) and at public or private
sale, without demand of performance or notice of intention to effect any such
disposition or of time or place of any such sale (except such notice as is
required above or by applicable statute and cannot be waived) , and the Secured
Party or any other person or entity may be the purchaser, lessee or recipient of
any or all of the Collateral so disposed of at any public sale (or, to the
extent permitted by law, at any private sale) and thereafter hold the same
absolutely, free from any claim or right of whatsoever kind, including any right
or equity of redemption (statutory or otherwise) , of the Company, any such
demand, notice and right or equity being hereby expressly waived and released.
The Secured Party may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by announcement
at the time and place fixed for the sale, and such sale may be made at any time
or place to which the sale may be so adjourned; and
(d) The Secured Party shall have, and in its discretion may exercise, all
of the rights, remedies, powers and privileges with respect to the Collateral of
a secured party under the Code (whether or not the Code is in effect in the
jurisdiction where such rights, remedies, powers and privileges are asserted)
and such additional rights, remedies, powers and privileges to which a secured
party is entitled under the laws in effect in any jurisdiction where any rights,
remedies, powers and privileges in respect of this Agreement or the Collateral
may be asserted, including the right, to the maximum extent permitted by law, to
exercise all voting, consensual and other powers of ownership pertaining to the
Collateral as if the Secured Party were the sole and absolute owner of the
Collateral (and the Company agrees to take all such action as may be appropriate
to give effect to such right).
The proceeds of, and other realization upon, the Collateral by virtue of the
exercise of remedies under this Section 4.01 shall be applied in accordance with
Section 4.4.
4.2 Deficiency. If the proceeds of, or other realization upon, the
Collateral by virtue of the exercise of remedies under Section 4.01 are
insufficient to cover the costs and expenses of such exercise and the payment in
full of the other Secured Obligations, the Company shall remain liable for any
deficiency.
4.3 Private Sale.
(a) The Secured Party shall incur no liability as a result of the sale,
lease or other disposition of
all or any part of the Collateral at any private sale pursuant to Section 4.01
conducted in a commercially reasonable manner. The Company hereby waives any
claims against the Secured Party arising by reason of the fact that the price at
which the Collateral may have been sold at such a private sale was less than the
price which might have been obtained at a public sale or was less than the
aggregate amount of the Secured Obligations, even if the Secured Party accepts
the first offer received and does not offer the Collateral to more than one
offeree.
(b) The Company recognizes that, by reason of certain
prohibitions contained in the Securities Act of
1933 and applicable state securities laws, the Secured Party may be compelled,
with respect to any sale of all or any part of the Collateral, to limit
purchasers to those who will agree, among other things, to acquire the
Collateral for their own account, for investment and not with a view to
distribution or resale. The Company acknowledges that any such private sales may
be at prices and on terms less favorable to the Secured Party than those
obtainable through a public sale without such restrictions, and, notwithstanding
such circumstances, agree that any such private sale shall be deemed to have
been made in a commercially reasonable manner and that. the Secured Party shall
have no obligation to engage in public sales and no obligation to delay the sale
of any Collateral for the period of time necessary to permit the respective
Issuer of such Collateral to register it for public sale.
4.4 Application of Proceeds. Except as otherwise expressly provided in this
Agreement and except as provided below in this Section 4.04, the proceeds of, or
other realization upon, all or any part of the Collateral by virtue of the
exercise of remedies under Section 4.01 and any other cash at the time held by
the Secured Party under this Agreement, shall be applied by the Secured Party:
First, to the payment of the costs and expenses of such exercise of
remedies, including reasonable out-of-pocket costs and expenses of the Secured
Party, the fees and expenses of its agents and counsel and all other expenses
incurred and advances made by the Secured Party in that connection;
Next, to the payment in full of the remaining Secured Obligations in such
manner as the Secured Party may determine; and
Finally, to the payment to the Company, or its respective successors or
assigns, or as a court of competent
jurisdiction may direct, of any surplus then remaining.
As used in this Section 4, "proceeds" of Collateral shall mean cash,
securities and other property realized in respect of, and distributions in kind
of, Collateral, including any property received under any bankruptcy,
reorganization or other similar proceeding as to the Company or any issuer of,
or account debtor or other obligor on, any of the Collateral.
5. Miscellaneous.
5.1 Waiver. No failure on the part of the Secured Party to exercise and no
delay in exercising, and no course of dealing with respect to, any right,
remedy, power or privilege under this Agreement shall operate as a waiver of
such right, remedy, power or privilege, nor shall any single or partial exercise
of any right, remedy, power or privilege under this Agreement preclude any other
or further exercise of any such right, remedy, power or privilege or the
exercise of any other -right, remedy, power or privilege. The rights, remedies,
powers and privileges provided in this Agreement are cumulative and not
exclusive of any rights, remedies, powers and privileges provided by law.
5.2 Notices. All notices and communications to be given under this
Agreement shall be given or made in writing to the intended recipient at the
address specified below or, as to any party, at such other address as shall be
designated by such party in a notice to each other party. Except as otherwise
provided in this Agreement, all such communications shall be deemed to have been
duly given when transmitted by telex or telecopier, delivered to the telegraph
or cable office or personally delivered or, in the case of a mailed notice, upon
receipt, in each case, given or addressed as provided in this Section 5.02:
To the Company: The Rattlesnake Holding Company, Inc.
3 Stamford Landing, Suite
130 Stamford, Connecticut 06902
Fax No.: (203) 975-7973
Attention: David Sederholt
With a copy to: Goldstein & DiGioia, LLP
369 Lexington Avenue
New York, New York 10017
Fax No.: (212) 557-0295
Attn: Victor J. DiGioia
To the Secured Party:
Michael Lauer J.L.B. of Nevada, Inc.
c/o Lancer Group 1500 East Tropicana Avenue
200 Park Avenue Suite 100
Suite 3900 Las Vegas, NE 89119
New York, NY 10166 Attn: Jay Botchman
With a copy to: Caplin.& Drysdale
One Thomas Circle NW
Washington, D.C. 20005
Fax No. (202) 429-3301
Attn: Graeme Bush
5.3 Expenses, Etc. The Company agrees to pay or to reimburse the Secured
Party for all costs and expenses (including reasonable attorney's fees and
expenses) that may be incurred by the Secured Party in any effort to enforce any
of the provisions of Section 4 or any of the obligations of the Company in
respect of the Collateral or in connection with (a) the preservation of the Lien
of, or the rights of the Secured Party under this Agreement or (b) any actual or
attempted sale, lease, disposition, exchange, collection, compromise, settlement
or other realization in respect of, or care of, the Collateral, including all
such costs and expenses (and reasonable attorney's fees and expenses) incurred
in any bankruptcy, reorganization, workout or other similar proceeding relating
to the Company.
5.4 Amendments, Etc. Any provision of this Agreement may be modified,
supplemented or waived only by an instrument in writing duly executed by the
Company and the Secured Party. Any such modification, supplement or waiver shall
be for such period and subject to such conditions as shall be specified in the
instrument effecting the same and shall be binding upon the Secured Party, each
holder of any of the Secured Obligations and the Company, and any such waiver
shall be effective only in the specific instance and for the purposes for which
given.
5.5 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the Company, the Secured Party and each holder of any of the
Secured Obligations and their respective successors and permitted assigns. The
Company shall not assign or transfer its rights under this Agreement without the
prior written consent of the Secured Party.
5.6 Survival. All representations and warranties made in this Agreement or
in any certificate or other document delivered pursuant to or in connection with
this Agreement shall survive the execution and delivery of this Agreement or
such certificate or other document (as the case may be) or any deemed repetition
of any such representation or warranty.
5.7 Agreements Superseded. This Agreement supersedes all prior
agreements and understandings, written or oral, among the parties with respect
to the subject matter of this Agreement.
5.8 Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Agreement, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
5.9 GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
THE COMPANY HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE
COURT SITTING IN NEW YORK, NEW YORK FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY
THIS AGREEMENT. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM
THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
THE RATTLESNAKE HOLDING COMPANY, INC.
By:/s/ William J. Opper
-----------------------
William J. Opper, Chairman
AGREEMENT made as of the 17th day of February, 1998, by and between THE
RATTLESNAKE HOLDING COMPANY, INC. ("Rattlesnake" or the "Company"), a Delaware
corporation, with having offices c/or Rattlesnake Holding Company, 435 S. 82nd
Street, New York, New York 10028 and WILLIAM J. OPPER ("Opper"), an individual
residing at 123 Sharp Hill Road, Wilton, Connecticut 06897.
W I T N E S S E T H:
WHEREAS, Opper was heretofore employed, pursuant to an Executive Employment
Agreement dated December 1, 1994, (the "Employment Agreement") as the Chief
Executive Officer of the Company, which employment, upon the mutual agreement of
the parties, has since been terminated; and
WHEREAS, Opper, subsequent to the termination of his employment agreement,
continued to serve on the Board of Directors of
the Company; and
WHEREAS, Opper desires to resign from the Board of Directors of the Company
and Rattlesnake desires to accept such resignation, and settle any and all
obligations owing by the Company to Opper on the terms set forth below.
NOW, THEREFORE, in consideration of the agreements and covenants herein set
froth, the parties hereby agree as follows:
1. Subject to the terms and conditions set forth below, Opper hereby agrees
to resign from the Company's Board of Directors effective as of the date first
set forth above by executing and delivering the resignation set forth as Exhibit
I hereto.
2. In settlement of any and all reimbursement for expenses due to Opper,
Rattlesnake agrees to pay to Opper or on Opper's behalf, as the case may be, the
following amounts on the terms set forth below.
(a) A cash payment on the execution hereof equal to two (2) weeks of
Opper's base salary under the Employment Agreement in full satisfaction of any
amounts owing to Opper for accrued and unused vacation;
(b) An amount equal to the cost for a period of six (6) months subsequent
to the execution hereof of medical, dental, disability and life insurance
currently provided to Opper to be paid directly to the insurer on behalf of
Opper by Rattlesnake in payment of Opper's COBRA payments for such period. The
Company represents and warrants that since the termination of Opper's
employment, the Company has made all such COBRA payments on Opper's behalf on a
timely basis.
3. All of Opper's employee stock options shall be cancelled and
simultaneously therewith, the Company shall issue to Opper 150,000 non-qualified
employee stock options to purchase 150,000 shares of the Company's common stock
at an exercise price of seventeen ((cent).17) cents per share. All such options
shall be fully vested upon issuance and shall have a term of three (3) years
from the date hereof, and be exercisable in whole or in part at any time and
from time to time, and shall have piggyback registration rights with respect to
all registration statements filed by the Company subsequent to the execution
hereof.
4. Rattlesnake will indemnify and hold Opper harmless from any and all
claims, liabilities, expenses or responsibilities arising out of the actions
commenced by Allen Peck and Washington ___ Preservation III, Inc., including
costs of collection and reasonable attorneys' fees; provided, however, that
Opper shall not engage independent counsel unless the Company consents to same
or the representation of Opper in the matter for which Opper intends to engage
counsel would constitute a conflict of interest if Opper was represented by
counsel engaged in the Company.
5. Rattlesnake shall cause to have Opper continue to be covered under the
Company's directors and officers' liability insurance and shall further have
Opper insured under what it commonly knows as a "tail" insurance for any claims
against Opper while Opper was an officer or a director of Rattlesnake or any
subsidiary of Rattlesnake.
6. This Agreement is the entire agreement and supercedes any previous
agreement, understandings or representations between Opper and Rattlesnake with
respect to the subject matter hereof. This Agreement may not be modified in any
respect except by a written agreement signed by both parties.
7. The provisions of this Agreement shall be binding upon the parties and
their respective agents, employees, directors, officers, shareholders, heirs,
executors, administrators, legal representatives, successors and assigns.
8. In the event this Agreement, or any portion thereof, is held invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this Agreement shall not in any way be effected or impaired
thereby.
9. This Agreement shall not be transferred or assigned without the written
consent of both parties.
10. All notices and other communications permitted or required under this
Agreement shall be in writing and shall be sufficiently given if and when hand
delivered to the persons set forth below, or if sent by registered or certified
mail, postage prepaid, return receipt requested, or by facsimile transmission,
addressed as set forth below or to such other person or persons and/or at such
other address or addresses as shall be furnished in writing by any party to the
other or by personal delivery thereof. Any such notice or communication which is
mailed or faxed shall be deemed to have been given as of the date received or
delivery was attempted, as evidenced as of the date received with respect to a
letter or the official notation of time and date of delivery of a facsimile.
If to Opper:
123 Sharp Hill Road
Wilton, CT 06897
with a copy simultaneously by like means to:
Zukerman Gore & Brandeis, LLP
300 Third Avenue
New York, NY 10022
Attention: Clifford A. Brandeis, Esq.
If to Rattlesnake:
Rattlesnake Holding Company, Inc.
439 East 82nd Street
New York, New York 10028
with a copy simultaneously by like means to:
Robinson Brog Leinwand Greene
Genovese & Gluck, P.C.
1345 Avenue of the Americas
New York, NY 10105
Attn: S. Asher Graffney
11. Notwithstanding anything set forth hereunder to the contrary, Articles
V and VI of the Employment Agreement shall be deemed to remain in full force and
effect, and Opper shall be deemed to have voluntarily resigned for purposes of
such Article VI.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
THE RATTLESNAKE HOLDING COMPANY, INC.
By:/s/ Louis R. Malikow
-----------------------
Co-Chief Executive Officer
/s/William J. Opper
-----------------------
WILLIAM J. OPPER
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<PERIOD-START> JUN-29-1998
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32,856
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