SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from__________________ to_________________
Commission file number 1-13818
THE RATTLESNAKE HOLDING COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1369616
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 South Main Street S. Norwalk, Conn. 06856
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 276-8660
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes___ No X
13,098,009 Common Shares, par value $.001 per share, were outstanding as of
December 31, 1998
<PAGE>
FORM 10-QSB
THE RATTLESNAKE HOLDING COMPANY, INC.
December 31, 1998
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page No.
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<S> <C>
Item 1:Financial Statements
Condensed Consolidated Balance Sheets December 31, 1998 (Unaudited) 3
and June 28, 1998
Unaudited Condensed Consolidated Statements of Operations for three and six months 4
ended December 31, 1998 and December 28, 1997
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended 5
December 31, 1998 and December 28, 1997
Notes to Unaudited Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis 9
Liquidity 11
Safe Harbor Statement 13
Part II - Other Information
Item 1: Legal Proceedings 14
Item 2: Changes in Securities and Use of Proceeds 15
Item 3: Defaults Upon Senior Securities 15
Item 4: Submission of Matters 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 28,
ASSETS 1998 1998
(unaudited)
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<S> <C> <C>
Current assets:
Cash $ 18,135 $ 311,328
Accounts receivable 5,978 16,831
Note receivable, current installments 4,080 4,080
Inventory 15,860 29,397
Prepaid expenses and other current assets - 7,200
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Total current assets 44,053 368,836
Notes receivable, less current installment 225,920 225,920
Property and equipment, net 89,553 81,375
Intangible assets, net 24,235 30,598
Other assets, net 90,380 78,443
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$ 474,141 $ 785,172
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities
Current maturities of notes payable $ 1,402,539 $ 1,282,539
Accounts payable 1,043,223 1,019,139
Accrued expenses 839,397 629,414
Dividends payable 259,545 207,636
Other current liabilities 197,492 182,971
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Total current liabilities 3,742,196 3,321,699
Notes payable, net of current maturities 520,006 525,006
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Total liabilities 4,262,202 3,846,705
Stockholders' equity:
Preferred Stock, $.10 par value, 5,000,000 shares
authorized, 56,500 issued and outstanding, at
December 31, 1998 and June 28, 1998 5,650 5,650
Common Stock, $.001 par value, 20,000,000 shares authorized
13,183,729 and 10,889,285 issued and outstanding at
December 31, 1998 and June 28, 1998, respectively 13,183 10,890
Additional paid-in capital 12,735,155 12,554,618
Accrued dividends (259,545) (207,636)
Accumulated deficit (16,282,504) (15,425,055)
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(3,788,061) (3,061,533)
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$ 474,141 $ 785,172
============= =============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
December 31, December 28, December 31, December 28,
1998 1997 1998 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Restaurant sales $ 414,001 865,542 1,099,265 2,131,123
Less: promotional sales 14,377 16,509 44,983 65,679
----------- ------------ ------------ ------------
Net restaurant sales 399,624 849,033 1,054,282 2,065,444
Costs and expenses
Cost of food and beverage sales 152,587 275,483 421,998 665,897
Restaurant salaries and benefits 154,014 280,941 446,665 666,732
Occupancy and other 136,766 192,765 376,078 526,383
Depreciation and amortization expense 11,189 76,667 22,282 183,334
----------- ------------ ------------ ------------
Total restaurant costs and operating expenses 454,556 825,856 1,267,023 2,042,346
Selling, general and administrative 156,650 369,761 377,473 603,598
Interest expense, net 63,755 45,646 131,185 97,347
Litigation award (400,000) - 225,000 -
Miscellaneous expenses - 1,958 - 7,131
----------- ------------ ------------ ------------
Net income (loss) before extraordinary gain 124,663 (394,188) (946,399) (684,978)
----------- ------------ ------------ ------------
Extraordinary item:
Gain on extinguishment of debt 88,950 - 88,950 -
----------- ------------ ------------ ------------
Net income (loss) 213,613 (394,188) (857,449) (684,978)
----------- ------------ ------------ ------------
Dividends on preferred shares (25,954) (25,954) (51,909) (51,909)
----------- ------------ ------------ ------------
Net income (loss) available to common stockholders $ 187,659 (420,142) (909,358) (736,887)
=========== ============ ============ ============
Net income (loss) per share:
Income (loss) before extraordinary item $ 0.01 (0.16) (0.08) (0.28)
Extraordinary item 0.01 - 0.01 -
----------- ------------ ------------ ------------
Net income (loss) - Basic and diluted $ 0.01 (0.16) (0.07) (0.28)
=========== ============ ============ ============
Weighted average number of common
and common equivalent shares outstanding -
Basic and diluted 13,130,503 2,650,227 12,693,324 2,650,227
=========== ============ ============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (857,449) (684,978)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 25,085 198,653
Litigation award 225,000 -
Gain on extinguishment of debt (88,950) -
Valuation of warrants for services 4,331 -
Stock issued for services provided 25,000 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 10,853 (22,785)
Decrease in inventory 13,537 219
Increase in prepaids and other assets (4,738) (5,982)
Increase in accounts payable and accrued expenses 88,017 294,753
(Decrease) increase in other current liabilities 14,521 (61,927)
------- -------
Net cash used in operating activities (544,793) (282,047)
------- -------
Cash flows from investing activities
Capital expenditures (26,900) -
------- --------
Net cash used in investing activities (26,900) -
------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible notes 150,000 750,000
Net proceeds from issuance of common stock 153,500 -
Principal repayments of borrowings (25,000) (515,854)
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Net cash provided by financing activities 278,500 234,146
Net decrease in cash (293,193) (47,901)
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Cash, beginning of period 311,328 68,022
-------- ------
Cash, end of period $ 18,135 $ 20,121
============ ===========
Cash paid during the period for:
Interest $ 51,036 $ 7,599
Income taxes - 6,891
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
THE RATTLESNAKE HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of consolidation
The consolidated financial statements include the accounts of The
Rattlesnake Holding Company, Inc. and subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. Consolidated financial statements
The accompanying unaudited consolidated financial statements as shown in
the index were prepared in accordance with generally accepted accounting
principles. These statements include all adjustments which, in the opinion of
management are necessary to present fairly the consolidated financial position
of the Company as of December 31, 1998 and June 28, 1998; the results of
operations for the three and six month periods ended December 31, 1998 and
December 28, 1997; and the cash flows for the six month periods ended December
31, 1998 and December 28, 1997. In the opinion of management, all necessary
adjustments that were made are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, reclassified or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year end June 28, 1998. The results of operations for the
period ended December 31, 1998 are not necessarily indicative of the operating
results that may be achieved for the full year.
3. Basis of presentation
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
However, due to the matters discussed below, its continuation as a going concern
cannot be reasonably assured.
The Company has incurred aggregate losses since inception of $16,282,504,
inclusive of a net loss for the six months ended December 31, 1998 of $946,399,
excluding an extraordinary gain of $88,950 on the forgiveness of debt. Based
upon interim financial information prepared by management, the Company has
continued to incur losses in fiscal 1999. Additionally, $303,749 of 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, $100,000 convertible
subordinated note payable matured on August 31, 1998, $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, $50,000 note payable matured on
October 31, 1998, and a $2,089 subordinated note payable matured on August 6,
1996, such obligations aggregating $1,232,547 and all of which are in default as
of December 31, 1998. Additionally, $259,545 of accumulated dividends on Series
A Preferred Stock were also past due and unpaid.
Subsequent to the completion of the private placement in February 1999
which effectively satisfied all short and long-term debt that was in default
(see Private Placement Offering below), the Company has assembled a new
management team and developed a new restaurant theme which will be introduced at
the recently reacquired Danbury, Connecticut location.
Management believes that the finalization of its cost reduction plan and
its approximately $6,000,000 private placement financing will enable the Company
to achieve profitable operations and restore liquidity. However, no assurance
can be made regarding the achievement of the goals outlined in the strategic
plan as outlined above, or if such plans are achieved, that the Company's
operations will be profitable.
Private Placement Offering
On October 27, 1998, the Company commenced an offering (the "Offering") of
its Series B Convertible Preferred Shares, $.10 par value. Between February 17,
1999 and July 2, 1999, the Company sold approximately $6,000,000 of Series B
Preferred Shares pursuant to the Offering and converted approximately $1,350,000
of its debt to Company equity. During the Offering, the Company satisfied, by
payment of cash and/or equity in the form of preferred and/or common stock, the
following: (a) all outstanding Series C promissory notes; (b) certain
outstanding Series B promissory notes; (c) all outstanding promissory notes
related to the Fairfield facility; and (d) all outstanding promissory notes from
(i) September 1997, (ii) March through June 1998, and (iii) October and November
1998, effectively satisfying all short term and long term debt which was in
default.
The preferred shares will be convertible, at the option of the holder at
any time after November 1999, at a conversion price initially equal to $0.05 per
share of common stock. The conversion rate will be reduced by 10% per month for
each month the Company fails to comply with its obligations to file, and in good
faith process, a registration statement.
The conversion price is subject to the adjustments on the terms set forth
in the Certificate of Designation. The outstanding preferred shares shall be
converted, with no action on the part of the holder, if, at any time after
February 2000, the common stock into which the same is converted is registered
under the Securities Act and the closing bid price of the common stock for
twenty consecutive trading days is at least four times the conversion price
($0.20 based on the initial conversion price of $0.05).
Holders of preferred shares are entitled to receive, quarterly, dividends
at the rate of 8% per annum before any dividends may be paid with respect to the
Common Stock, which shall be paid in cash or preferred shares at the election of
the Company. If there is a failure to pay dividends, the Placement Agent, on
behalf of such holders, has the right to designate one director to the Company's
Board. In addition, if the Company fails to comply with its obligations to file
and process a Registration Statement, the dividend rate will increase to 14% per
annum from issuance.
Pursuant to the March 1998 agreement to acquire the Ottomanelli Group,
additional consideration due to anti-dilution provisions contained in the
agreements in the form of common stock was payable to the Ottomanelli Group
shareholders as a result of the private placement. In February 1999, 5,000,000
shares of common stock were issued pursuant to such provisions, as amended.
4. Financing Arrangements
On December 8, 1997, the Company entered into a refinancing arrangement in
which it raised $500,000. Four hundred thousand dollars of the proceeds
therefrom were applied to reduce the indebtedness (including accrued interest)
resulting from a financing the Company conducted in March 1997. In October 1998,
$50,000 of this was paid and the remaining $100,000 of this debt was converted
into common stock of the Company.
In August 1998, the Company issued a sixty day convertible note in the
principal amount of $100,000 at an interest rate of 8% to an investment bank in
consideration for professional services rendered. In February 1999, such note
was satisfied by conversion into Company equity.
During the quarter ended September 30, 1998, the Company privately sold
1,100,000 shares of its common stock at $.15 per share for an aggregate of
$165,000.
In October 1998, a noteholder of a $100,000 remaining outstanding balance
from a $500,000 convertible note due September 4, 1997, with unpaid accrued
interest of approximately $90,000, accepted common stock with a fair value of
$100,000 in exchange for the forgiveness of all outstanding obligations.
Accordingly, the Company has recorded an extraordinary gain of $88,950 in the
quarter ended December 31, 1998.
Between October and December 1998, the Company entered into private
financing arrangements with three individuals to provide $150,000 of bridge
financing at 16% interest per annum, plus warrants, with due dates of the
earlier of the closing of the proposed private placement or ninety days,
respectively. All notes were satisfied by payment of cash and/or conversion to
Company equity at the initial closing of the private placement on February 17,
1999.
5. Restaurant Operations
On July 2, 1998, The Rattlesnake Holding Company, Inc. signed an agreement
to purchase some of the assets of 1562 Restaurant Corp. located at 1562 2nd
Avenue, New York City. The purchase price was $425,000 payable $20,000 on
contract, $105,000 at closing, and a promissory note at 8.5% payable in 72
payments of $5,332.52. The Company decided not to pursue the acquisition of this
restaurant.
On July 3, 1998, the Company entered into a contract for the purchase of a
restaurant facility in Greenwich, Connecticut for $400,000 in a combination of
cash and notes. The Company ultimately chose not to purchase this property.
On April 15, 1999, the Company reacquired the Danbury, Connecticut facility
for $1,350,000 in cash.
6. Recent Accounting Pronouncements
In June 1997, the FASB issued Statement 131, "Disclosures About Segments of
an Enterprise and Related Information", effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standard for related disclosure
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This Statement requires reporting segment profit and loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit and loss, total
segment assets and other amounts disclosed for segments to corresponding amounts
reported in the consolidated financial statements. Restatement of comparative
information for earlier periods presented is required in the initial year of
application. Interim information is not required until the second year of
application, at which time comparative information is required. The adoption of
the Statement in fiscal 1999 will not have a material impact on its financial
reporting as the Company has one operating segment.
In June 1998, Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"), was issued which is effective for fiscal years beginning June 15, 2000.
Statement 133 standardizes the accounting for derivative instruments and
requires that all derivative instruments be carried at fair value. The Company
has not yet determined the impact that Statement 133 will have on its
consolidated financial statements and believes that such determination will not
be meaningful until closer to the date of initial adoption.
7. Litigation
The Company is a co-defendant in an action brought by an owner of an
apartment above the South Norwalk Company restaurant for negligence per se,
intentional infliction of emotional distress, negligent infliction of emotional
distress, and violations of the Connecticut Unfair Trade Practices Act (CUTPA)
based upon alleged excessive noise and rude and/or threatening conduct of
employees. The jury awarded a verdict in the amount of $625,000 against various
defendants, including the Company's former Chairman on August 5, 1998.
Accordingly, the Company has recorded a $625,000 charge in the quarter ended
September 30, 1998 to accrue this judgment. On November 20, 1998, the Court set
aside the jury's verdict as to all counts against the Company except for
plaintiff's claim for negligence per se and accordingly reduced the jury's award
to $225,000. Accordingly, the Company reduced by $400,000, in the quarter ended
December 31, 1998, the amount of the charge recognized in the quarter ended
September 30, 1998. The jury's award is currently on appeal by the Company, and
plaintiff has appealed the Court's decision to set aside a portion of the jury's
verdict and reduce the award. There are also potential claims of indemnification
by other defendants against the Company in the event the plaintiff's appeal is
successful.
In July 1999, a demand letter was tendered to the Company by the legal
counsel of the former Chairman seeking indemnification from potential
liabilities arising out of this matter. This demand is based on an
indemnification provision in an agreement between the former Chairman and the
Company. The Company believes that there are valid defenses to the
indemnification claim.
Plaintiff's negligence claims in this matter are arguably covered by one or
more of the Company's insurance policies. Farmington Casualty Company
("Farmington") and Insurance Company of Greater New York ("GNY"), two out of
three of the Company's insurance carriers, retained counsel to represent the
Company and defended the Company in this case under a reservation of rights. The
third, Public Service Mutual Ins. Co., denied coverage for the claim altogether.
GNY and Farmington have continued to prosecute the appeal in this matter, but
under a reservation of rights. The Company has advised Farmington and GNY that
it intends to pursue its rights in an action for damages and declaratory relief
in the event that the appeal is unsuccessful and the insurance carriers refuse
to provide coverage for plaintiff's claims. GNY and Farmington continue to
reserve all rights with respect to coverage.
Settlement negotiations are ongoing, however, there can be no assurance of
a satisfactory settlement.
The Company is a defendant in an action for an alleged breach of a
commercial lease in which damages exceeding $190,000 are being sought. The
Company has disputed this claim and believes that the plaintiff has inadequately
responded to the Company's demand for discovery and inspection and
interrogatories. A compliance conference was adjourned to September 15, 1999.
The Company intends to vigorously defend this action.
The Company is also a party in various other legal actions incidental to
the normal conduct of its business. Management does not believe that the
ultimate resolution of these actions will have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
8. Dividends in arrears
The Company's preferred stock bears a dividend rate of 7-1/2% per annum.
These dividends are payable semi-annually in arrears on May 15 and November 15
of each year, commencing November 15, 1996. At December 31, 1998, the accrued
dividends aggregated $259,545.
In July 1999, the Company completed a private placement of approximately
$6,000,000 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.
The Company is currently prohibited from paying cash dividends by virtue of
Delaware General Corporation Law.
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto.
OPERATING RESULTS FOR THE QUARTER AND SIX MONTHS ENDED DECEMBER 31, 1998 AS
COMPARED WITH DECEMBER 28, 1997
Gross restaurant sales decreased 52.2% to $414,001 for the quarter ended
December 31, 1998 from $865,542 for the quarter ended December 28, 1997. For the
six months ended December 31, 1998. Gross restaurant sales decreased 48.4% to
$1,099,265 from $2,131,123. Likewise, net restaurant sales decreased 52.9% to
$399,624 for the quarter ended December 31, 1998 from $849,033 for the quarter
ended December 28, 1997. For the six months ended December 31, 1998 net
restaurant sales decreased 49.0% to $1,054,282 from $2,065,444. The
decrease in
restaurant sales resulted from a decrease in the number of restaurants operating
during fiscal 1999.
Promotional sales decreased for the three and six months ended December 31,
1998 by $2,132 and $20,696, respectively. These decreases were attributable to a
reduction in the number of units operating in fiscal 1999.
For the three months ended December 31, 1998, the Company's cost of food
and beverage sales increased as a percentage of net sales to 38.2% as compared
to 32.5% for the three months ended December 28, 1997. The cost of food and
beverage sales decreased to $152,587 for the three months ended December 31,
1998 from $275,483 for the three months ended December 28, 1997. As a percentage
of net sales for the six months ended December 31, 1998 cost of sales was 40.0%
as compared to 32.2% for the six months ended December 28, 1997. The cost of
food and beverage sales decreased to $421,998 for the six months ended December
31, 1998 from $665,897 for the six months ended December 28, 1997. The
percentage increase is attributable to inefficiencies of the Flemington unit
closed in November 1998. The decrease in cost is attributable to the reduction
in the number of restaurants operating during the period.
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
decreased to $154,014 for the three months ended December 31, 1998 as compared
to $280,941 for the three months ended December 28, 1997. As a percentage of net
restaurant sales, these costs increased to 38.5% in 1998 as compared to 33.1% in
1997. For the six months ended December 31, 1998 restaurant salaries and fringe
benefits increased as a percentage of sales to 42.4% from 32.3% for the six
months ended December 28, 1997. The percentage increase is attributable to
allocating manager salaries over a smaller restaurant base. Actual restaurant
salaries and fringe benefits decreased to $446,665 for the six months ended
December 31, 1998 from $666,732 for the six months ended December 28, 1997. This
decrease is attributable to the closed units.
Occupancy and other related expenses, which include linen, repairs,
maintenance, utilities, rent, insurance and other occupancy related expenses,
decreased to $136,766 for the three months ended December 31, 1998 from $192,765
for the three months ended December 28, 1997. As a percentage of net restaurant
sales, these costs increased to 34.2% in the three months ended December 31,
1998 from 22.7% in the three months ended December 28, 1997. For the six months
ended December 31, 1998 these costs increased to 35.7% from 25.5% for the six
months ended December 28, 1997. The actual occupancy and related costs decreased
to $376,078 for the six months ended December 31, 1998 as compared to $526,383
for the six months ended December 28, 1997. The decrease in occupancy costs is
attributable to the closed units.
Depreciation and amortization expenses, decreased to $11,189 or 2.8% of net
restaurant sales for the three months ended December 31, 1998 from $76,667 or
9.0% for the three months ended December 28, 1997. For the six months ended
December 31, 1998 these expenses decreased as a percentage of sales to 2.1% from
8.9% for the six months ended December 28, 1997. Depreciation and related
expenses were $22,282 for the six months ended December 31, 1998 as compared to
$183,334 for the six months ended December 28, 1997. This decrease is
attributable to fewer units in operation as compared to the prior period due to
restaurant closures.
Selling, general and administrative expenses decreased as a percentage of
net sales from 43.6% for the three months ended December 28, 1997 to 39.2% for
the three months ended December 31, 1998. General and administrative expenses
decreased to $156,650 for the three months ended December 31, 1998 from $369,761
for the three months ended December 28, 1997. General and administrative
expenses increased as a percentage of net sales from 29.2% for the six months
ended December 28, 1997 to 35.8% for the six months ended December 31, 1998.
General and administrative expenses decreased to $377,473 for the six months
ended December 31, 1998 from $603,598 for the six months ended December 28 1997.
The decrease in selling, general and administrative expenses is attributable to
further cost reduction measures.
Interest expense increased to $63,755 for the three months ended December
31, 1998 from $45,646 for the three months ended December 28, 1997. Interest
expense increased to $131,185 for the six months ended December 31, 1998 from
$97,347 for the six months ended December 28, 1997. The increase in interest
expense is attributable to equity.
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 forgiveness of all outstanding obligations.
Accordingly, the Company has recorded an extraordinary gain of $88,950 in the
quarter ended December 31, 1998.
The Company is a co-defendant in an action brought by an owner of an
apartment above the South Norwalk Company restaurant for negligence per se,
intentional infliction of emotional distress, negligent infliction of emotional
distress, and violations of the Connecticut Unfair Trade Practices Act (CUTPA)
based upon alleged excessive noise and rude and/or threatening conduct of
employees. The jury awarded a verdict in the amount of $625,000 against various
defendants, including the Company's former Chairman on August 5, 1998.
Accordingly, the Company has recorded a $625,000 charge in the quarter ended
September 30, 1998 to accrue this judgment. On November 20, 1998, the Court set
aside the jury's verdict as to all counts against the Company except for
plaintiff's claim for negligence per se and accordingly reduced the jury's award
to $225,000. Accordingly, the Company reduced by $400,000, in the quarter ended
December 31, 1998, the amount of the charge recognized in the quarter ended
September 30, 1998. The jury's award is currently on appeal by the Company, and
plaintiff has appealed the Court's decision to set aside a portion of the jury's
verdict and reduce the award. There are also potential claims of indemnification
by other defendants against the Company in the event the plaintiff's appeal is
successful.
YEAR 2000 MODIFICATIONS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process certain transactions, send
invoices, or engage in similar normal business activities.
The Company does not believe the Year 2000 Issue will significantly affect
its operations since it is in a "re-start" mode with respect to its business and
uses little or no computer equipment outside of its accounting programs.
Based on recent assessments, the Company determined that it will not
require significant modifications of its hardware or software so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with little or no modifications to its existing
software, the Year 2000 Issue can be mitigated.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. As of June
30, 1999, the Company has fully completed its assessment of all internal systems
that could be significantly affected by the Year 2000. The completed assessment
indicated that most of the Company's significant information technology systems
will not be significantly affected, particularly the general ledger, and
inventory systems. The Company does not believe that the Year 2000 presents a
material exposure as it relates to the Company's products or services. In
addition, the Company has begun to gather information about the Year 2000
compliance status of its external agents and continues to monitor their
compliance. To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. The Company has requested from its bank an
assessment of the extent of the bank's Year 2000 compliance. However, the
Company has no means of ensuring that external agents will be Year 2000 ready.
The inability of external agents to complete their Year 2000 resolution process
in a timely fashion could materially and adversely impact the Company. The
effect of non-compliance by external agents is not determinable.
The Company will utilize external software and service providers to
reprogram, test and implement software for the Year 2000 modification as needed,
the cost of which is not expected to be significant. The Company will evaluate
the status of completion of Year 2000 modifications in September 30, 1999 and
will undertake all remaining necessary steps to seek to ensure its systems are
Year 2000 compliant.
In the event the Company's computer systems are materially adversely
affected by the Year 2000 issue, the Company's business and operations could be
materially adversely affected by disruptions in the operations of other entities
with which the Company interacts. However, the Company believes that the most
likely worst case scenario is that there will be some localized disruptions of
systems that will affect individual facilities or services for a short time
rather than systematic or long-term problems affecting its business operations
as a whole. In such event the Company has contingency plans for certain critical
applications and is working on plans for others. These contingency plans
involve, among other actions, increasing inventories, and adjusting staffing
strategies.
LIQUIDITY
At September 30, 1998, the Company was past due and in default of a
majority of its financing arrangements as $303,749 of Series C subordinated
notes payable matured August 6, 1997, of which noteholders with principal
balances aggregating $62,499 extended the repayment date to December 15, 1997,
$100,000 convertible subordinated notes payable matured August 31, 1998, a
$425,000 note payable matures on January 2, 1997, a $11,709 note payable matured
in February 1998, a $190,000 note payable matured on December 31, 1997, $150,000
notes payable matured on May 31, 1998, a $50,000 note payable matured on October
31, 1998, and a $2,089 subordinated note payable matured on August 6, 1996, such
obligations aggregating $1,232,547 and all of which were in default as of
December 31, 1998. Additionally, $259,545 of accumulated dividends Series A
Preferred Stock were also past due and unpaid. All of the foregoing have
subsequently been satisfied through the proceeds from the private placement of
the Series B preferred stock and the exchange of Series A preferred stock for
Series B preferred stock.
The Company's cash position decreased by $ 293,193 during the six months
ended December 31, 1998, principally as a result of the net cash used in
operating activities offset by cash provided by the sale of common stock and
placement of convertible notes.
Net cash used in operating activities was $544,793, principally relating to
the Company's net loss, offset by expenses related to warrants issued for
services and an increase in accounts payable and accrued expenses. The Company
generated $278,500 from financing activities principally relating to the receipt
of proceeds from bridge financing borrowings and issuance of common stock,
offset by repayments of outstanding indebtedness.
Employment Agreements
In October 1998, the Company entered into a three year employment
agreement, as revised, with an individual to act as President and/or Chief
Executive Officer and as a member of the Board of Directors of the Company. In
consideration, the employee is to receive a monthly fee of $7,917 plus
reasonable expenses. In addition, the employee shall be entitled to a
performance bonus and shall receive a warrant to purchase an amount of Common
Stock equal to ten (10%) percent of the outstanding common stock of the Company,
on a fully diluted basis, representing 30,000,000, shares after the private
placement financing at $0.05 per share, the fair value on the date of grant,
exercisable for a period of five (5) years, one third (1/3) of the number of
shares covered thereby vesting at the time of the private placement financing,
and one third (1/3) at the end of each one (1) year period thereafter during the
term.
In October 1998, the Company entered into a three year employment
agreement, as revised, with an individual to provide services as Chief Financial
Officer and Vice President of the Company. In consideration, the employee is to
receive a monthly fee of $4,333 plus reasonable expenses. In addition, an option
to purchase up to 300,000 shares of the Company's common stock with an initial
exercise price of $0.05 per share, exercisable for five (5) years, which option
will vest as to one-third (1/3) of the number of shares covered thereby at the
end of each one year period during the term. Additionally, the right to purchase
200,000 shares in each of years two and three were granted.
Consulting Agreements
On July 20, 1998, the Company entered into a three year consulting
agreement with an individual to provide services to design and implement the
future expansion of the Company's planned restaurant concepts. In consideration,
the consultant is to receive a monthly fee of $1,000 plus reasonable expenses.
In addition a warrant to purchase an additional 300,000 shares of the Company's
non-restricted common stock with an initial exercise price of $0.48 per share.
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 (15%) of the outstanding Common Stock of the Company on a
fully diluted basis after the offering of Series B Preferred Stock at $0.05 per
share, exercisable for a period of five (5) years, representing 45,000,000
shares, and a right to purchase an amount of Common Stock equal to 15% of
outstanding options and warrants.
Subsequent Events
In February 1999, the Company converted all of its Series A Preferred
Shares, 56,500 shares, into 55,370 shares of Series B Preferred Shares, pursuant
to an Exchange and Waiver Agreement previously entered into with the Series A
Preferred Shareholders in February 1998.
Between February and July 1999, the Company conducted the Offering raising
approximately $6,000,000 and issued a new Series B Preferred stock at an
issuance price of $25 per share. Each preferred shares is convertible into 500
shares of the Company's common stock ($0.05 per share). The proceeds were used
for the acquisition of the Danbury property and other future acquisitions, the
payment of debt and to provide working capital .
In February 1999 and in connection with the financing, warrants were issued
to various individuals for services rendered in connection with the Offering and
note holders of the Company.
SAFE HARBOR STATEMENT
Certain statements in this Form 10-QSB, including information set forth
under "Management's Discussion and Analysis "constitute" forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). The Company desires to avail itself of certain "safe
harbor" provisions of the Act and is therefore including this special note to
enable the Company to do so. Forward-looking statements included in this Form
10-QSB or hereafter included in other publicly available documents filed with
the Securities and Exchange Commission, reports to the Company's stockholders
and other publicly available statements issued or released by the Company
involve known and unknown risks, uncertainties, and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ from the future results, performance (financial or
operating) or achievements expressed or implied by such forward looking
statements. Such future results are based upon management's best estimates based
upon current conditions and the most recent results of operations. These risks
include, but are not limited to, risks associated with potential acquisitions
and development of new locations; successful implementation of the Company's
cost containment plan and new operating strategy; immediate need for additional
capital; competition; new management; the addition of a new restaurant format;
and other risks detailed in the Company's Securities and Exchange Commission
filings, including its Annual Report on Form 10-KSB for the fiscal year 1998,
each of which could adversely affect the Company's business and the accuracy of
the forward looking statements contained herein.
<PAGE>
PART II
Item 1: - Legal Proceedings
South Norwalk, Connecticut
The Company is a co-defendant in an action brought by an owner of an
apartment above the South Norwalk Company restaurant for negligence per se,
intentional infliction of emotional distress, negligent infliction of emotional
distress, and violations of the Connecticut Unfair Trade Practices Act (CUTPA)
based upon alleged excessive noise and rude and/or threatening conduct of
employees. The jury awarded a verdict in the amount of $625,000 against various
defendants, including the Company's former Chairman on August 5, 1998. On
November 20, 1998, the Court set aside the jury's verdict as to all counts
against the Company except for plaintiff's claim for negligence per se and
accordingly reduced the jury's award to $225,000. The jury's award is currently
on appeal by the Company, and plaintiff has appealed the Court's decision to set
aside a portion of the jury's verdict and reduce the award. There are also
potential claims of indemnification by other defendants against the Company in
the event the plaintiff's appeal is successful.
In July 1999, a demand letter was tendered to the Company by the legal
counsel of the former Chairman seeking indemnification from potential
liabilities arising out of this matter. This demand is based on an
indemnification provision in an agreement between the former Chairman and the
Company. The Company believes that there are valid defenses to the
indemnification claim.
Plaintiff's negligence claims in this matter are arguably covered by one or
more of the Company's insurance policies. Farmington Casualty Company
("Farmington") and Insurance Company of Greater New York ("GNY"), two out of
three of the Company's insurance carriers, retained counsel to represent the
Company and defended the Company in this case under a reservation of rights. The
third, Public Service Mutual Ins. Co., denied coverage for the claim altogether.
GNY and Farmington have continued to prosecute the appeal in this matter, but
under a reservation of rights. The Company has advised Farmington and GNY that
it intends to pursue its rights in an action for damages and declaratory relief
in the event that the appeal is unsuccessful and the insurance carriers refuse
to provide coverage for plaintiff's claims. GNY and Farmington continue to
reserve all rights with respect to coverage.
Settlement negotiations are ongoing, however, there can be no assurance of
a satisfactory settlement.
Danbury, Connecticut
A foreclosure action was commenced in September or October 1998 by Union
Savings Bank (the "Bank") against the landlord of The Rattlesnake Southwestern
Grill (closed for renovations) in Danbury, Connecticut based on the landlords
mortgage arrears. Rattlesnake Danbury, Inc., the lessee of the restaurant, has
been joined as a defendant.
Lynbrook, New York
The Company is defending an action brought by Jack Cioffi Trust, the
landlord of a former Rattlesnake restaurant in Lynbrook New York leased by a
subsidiary of the Company. The action against the Company is based on an alleged
guaranty of the lease payments due from the subsidiary of the Company. The
Company is of the position that the landlord waived the guarantee at the time of
the surrender of the premises in September 1997. The action seeks the sum of
approximately $190,000.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3. - Defaults upon Senior Securities
$303,749 of Series C subordinated notes payable matured on August 6, 1997,
of which noteholders with principal balances aggregating $62,499 had extended
the repayment date to December 15, 1997. All of these Series C notes and accrued
interest are in default for non payment. A $425,000 note payable associated with
the acquisition of a restaurant matured on January 2, 1997, $150,000 of notes or
similar obligations matured May 1998, $190,000 of notes or similar obligations
matured December 1997, $100,000 of notes or similar obligations matured August
1998, $50,000 of notes or similar obligations matured October 1998, $11,709
matured February 1998, and $2,089 matured August 1996 are currently in default.
All of the above were, with the exception of approximately $229,000 of the
Series B Notes, satisfied by the Company from the proceeds of the sale of its
Series B Preferred Stock in 1999.
Item 4 - Submission of Matters to a Vote of Stockholders
No matters were submitted to a vote of stockholders during the quarter for
which this report was filed.
Item 5. - Other Information
The Company's Common Stock is not listed on the NASDAQ Small Cap Market and
as of November 4, 1997 was suspended from trading on the Boston Stock Exchange
(the "BSE"). The BSE has applied for the delisting of the Company common stock
from such exchange pursuant to Rule 12d-2f2.
The Company securities are traded on the NASDAQ Bulletin Board. Due to the
nature of such markets and the "penny stock' rules to which the common stock
trades (Rule 15g-9 promulgated under the SEC Act) there may not be a liquid
trading market in the common stock.
Item 6. - Exhibits and Reports on Forms 8-K.
(b) Reports on Form 8-K
During the quarter ended December 31, 1998, the Company filed no reports on
Form 8-K.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE RATTLESNAKE HOLDING COMPANY, INC.
(Registrant)
By: /s/
-----------------------
Kenneth Berry
Chief Executive Officer
By: /s/
-----------------------
Frank Ferro
Chief Financial Officer
Date: August 12, 1999
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