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 26, 2000
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)
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Delaware The Rattlesnake Holding Company, Inc. 06-1369616
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(State or other jurisdiction of (Former Name) (I.R.S. Employer Identification No.)
incorporation or organization)
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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 No X
State issuer's revenues for its most recent fiscal year. $2,645,770
State the number of shares outstanding of each of the issuer's classes of common
equity, as of June 26, 2000. 51,002,981
As of June 26, 2000, 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 $2,392,040. The shares of the Company's Common Stock are currently
traded on the Over-the-Counter Bulletin Board under the symbol "SPST".
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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 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 fiscal 1998, we terminated operations at our Lynbrook, New York and
Danbury, Connecticut facilities, and in November 1998, terminated operations at
our Flemington, New Jersey facility as well, for which we recorded an impairment
charge in 1998.
In fiscal 1999, 106 Federal Road Restaurant Corp., our wholly-owned
subsidiary, purchased the Danbury, Connecticut facility previously closed. The
restaurant has been remodeled and reconfigured to serve as the first location
for our new 200 seat Spencer's Steak and Shrimp restaurant concept.
In fiscal 2000, we opened the new Spencer's Steak and Shrimp restaurant and
its operations have been satisfactory.
We continue to operate a self-sustaining Rattlesnake(R) Southwestern Grill
in South Norwalk, Connecticut.
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.
Due to the purchase and development of the Danbury location and as a result of
the operating losses, the Company's cash balance decreased to $374,507 at June
26, 2000.
New Concept and Menu
The Company developed a concept for a multi-regional chain of mid-priced
steakhouses, to feature price/value steak and distinctive shrimp (and other)
dishes, named Spencer's. Our first Spencer's Restaurant opened in November 1999
in Danbury, Connecticut.
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:
- A casual, back to basics, large portions, mid-priced steakhouse;
designed to offer exceptional service, specializing in two areas:
steaks and shrimp offerings.
- The menu features house cut and aged steaks and steak burgers
(intended to be comparable quality to high priced steakhouse
offerings), as well as bulk offerings of shrimp that are served in
distinctive "house" sauces on pasta or rice with dunking bread.
- 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, distinguish Spencer's from competitors.
- To compliment the steak and shrimp offerings, menu items include:
appetizers, unique salads; chicken, fish, rib, and pasta entrees;
mainstay sandwiches; a separate Kid's list of choices that are
inclusive of fries and beverage; and desserts. Standard alcoholic
beverages as well as selection of blended specialty drinks are
offered.
- 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, located in Danbury,
Connecticut, has a size of 7,200 square feet.
- The Spencer's menu and unit economics are intended to facilitate
replication in multi-regional area development hubs through
Company-owned and ultimately 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.
Franchise Activities
The Company previously franchised Ottomanelli's Cafes(R). That operation
involved approximately five restaurants with nominal royalty revenues. No
franchises were sold during the past approximately five years. We determined not
to expand such operations and in April 2000, we transferred to Nicolo
Ottomanelli and his brother, Joseph Ottomanelli, the outstanding capital stock
of Ottomanelli's Cafe Franchising Corp., which had no associated book value. We
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 presently is the licensee of Rattlesnake(R). The Company
previously was the licensee of Ottomanelli's Cafe(R), which license was
terminated in April 2000. 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. We have not
determined whether to continue operations under the Rattlesnake(R) name.
Ottomanelli's Cafe(R) was 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
our merger transaction with such persons (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 26, 2000, the Company employed approximately 101 persons, 4 of whom
were home office management and staff personnel, 8 are full time management and
approximately 20 are full time restaurant personnel. The remainder are 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 26, 2000 fiscal
year, losses aggregated $19,736,463 including losses of $929,373 and $3,352,035
for its fiscal years ended June 26, 2000 and June 30, 1999, 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 26,
2000, the Company had negative working capital of $1,044,162) due to, among
other things, costs associated with opening a new restaurant and the prior
development and operation of its Rattlesnake(R) Southwestern Grill restaurants.
As a result, the Company has been dependent upon sales of its equity securities
and loans to finance its working capital requirements. The Company was dependent
upon the proceeds of the Offering to initially finance its proposed expansion.
The Offering was sufficient to satisfy the Company's cash requirements through
fiscal 2000. However, based on the Company's expansion strategy it has become
necessary to seek a second offering in addition to financing its real estate
holding at 106 Danbury Road, Danbury, CT. The Company is currently in
negotiations with several institutions to secure financing. 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 26, 2000,
short term debt and liabilities totaled $1,493,190 and long term debt totaled
$0. At June 26, 2000, $20,839 of the Company's outstanding notes payable were
past due and in default with the remainder, $237,505, coming due July 7, 2000.
The Company wil seek to restructure these notes and/or to exchange the same for
equity, although there can be no assurance of the same. 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 defendant to a certain material litigation. If
such litigation is concluded on relatively unfavorable terms, the litigation
could have a material adverse effect on the Company and its prospects. (See
"Legal Proceedings".)
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. Connecticut 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 an officer/director
liability insurance policy as well. The Company did not have such insurance
during the period from January 1998 to February 17, 1999. 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
beneficially own approximately 42% 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 26, 2000 with an
approximate value of $347,904. In September 2000, the Company issued 13,916
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 26, 2000, 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 2001. 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 (as of June 26, 2000 there were approximately
158,000,000 shares 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 26, 2000, the Company operated in two locations: the Norwalk
location operating as the Rattlesnake(R) Southwestern Grill and the Danbury
location operating as a Spencer's Steak and Shrimp restaurant.
Location Size/Seating Lease Expiration
-------- ------------ ----------------
South Norwalk, CT 3,270 sf/120 May 2002
Danbury, CT 7200 sf/200 N/A
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 200 seats,
respectively.
Commitments
One of the Company's operations is conducted in a leased premises.
Remaining lease terms range through 2002 and include no options for extension.
The lease contains contingent rental provisions based upon a percentage of gross
sales in addition to common area maintenance and taxes. As of June 26, 2000, the
Company has operating lease base rent commitments as follows, for its South
Norwalk restaurant:
2001 $ 62,338
2002 57,143
---- ------
Total $119,481
ITEM 3. LEGAL PROCEEDINGS.
As of June 26, 2000, the Company was engaged in a certain material
litigation as follows:
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. 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 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. The Company intends to vigorously defend this
action.
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
On February 9, 2000, at the Annual Shareholders Meeting, the shareholders
approved the 1999 Stock Option Plan and the 1999 Non-Employee Director's Stock
Option Plan. The shareholders also re-elected to the Board; Kenneth R. Berry to
a three-year term, Stephen A. Stein to a two-year term and Nicolo Ottomanelli to
a one-year term. To date, employee stock options were issued to purchase
3,450,000 of the 25,000,000 shares allocated for the 1999 Stock Option Plan. All
options were granted at fair market value on the day of grant.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The high and low bid quotations for fiscal years 1999 and 2000 for the
Common Stock on the NASDAQ Bulletin Board is as follows (fractions converted to
approximate decimal values):
BID
Fiscal Year 1999 Low High
---------------- --- ----
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
Fiscal Year 2000
----------------
Quarter ended September 27, 1999 .09 .30
Quarter ended December 27, 1999 .09 .20
Quarter ended March 27, 2000 .06 .19
Quarter ended June 26, 2000 .03 .16
As of the close of business on June 26, 2000, there were 181 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 26, 2000, 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 26, 2000, there were 51,002,981 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 315,076
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. 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 are convertible, at
the option of the holder, 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 - Filing of Registration Statement). 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")
with the Securities and Exchange Commission ("SEC"), 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. The Company filed a
first amendment to the Registration Statement on July 2000 and is awaiting
comments from the SEC. 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 26,
2000, with a valuation of $168,103 (representing 6,724 shares of Preferred
Stock) which was paid in September 2000.
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 converted, if and when there is
conversion, 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 26, 2000:
--------------------------------------------------------------
Number of Warrants 121,000,000
--------------------------------------------------------------
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 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.
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"). At June 26, 2000, Spencer's
Restaurants, Inc. was the parent corporation of two operating subsidiary
companies; Rattlesnake Ventures, Inc., operating a Rattlesnake Grill in South
Norwalk, Connecticut, Federal Road Restaurant, Corp., operating a Spencer's
Steak and Shrimp in Danbury, Connecticut and the parent corporation of two
subsidiary companies; 106 Federal Road, owner of the site at which the Company
opened its first Spencer's Steak and Shrimp restaurant November 3, 1999 and
Spencer's Payroll Company, Inc..
Fiscal Year Ended June 26, 2000 as Compared
with Fiscal Year Ended June 30, 1999
Net restaurant sales increased $927,605 or 57.0% to $2,554,850 in fiscal
2000 from $1,627,245 in fiscal 1999. The increase in net restaurant sales
resulted from the opening of the Danbury, CT, Spencer's Steak and Shrimp. In
fiscal 2000, the Company generated a net loss of $959,373 as compared to a net
loss of $3,352,035 in fiscal 1999, a decrease of $2,392,660 or 71.4%.
The decreased loss was attributable to a combination of several factors
including; $949,091 increase in restaurant sales due to the opening of the
Spencer's Steak and Shrimp in Danbury; $1,422,307 decrease in selling, general
and administrative expenses attributable to a one time fiscal 1999 charge of
$1,075,000 incurred for the issuance of warrants to a consultant; a litigation
charge reversal of $180,000 in fiscal 2000, relating to a settlement in an
action brought by an owner of an apartment above the South Norwalk restaurant; a
$332,200 reduction in losses on closure of restaurant sites and impairment
charges; and a $139,682 extraordinary gain in 2000 on the extinguishment of
debt.
Restaurant Sales
Gross restaurant sales increased $949,091 or 55.9% to $2,645,770 in fiscal
2000 from $1,696,679 in fiscal 1999. The increase in restaurant sales resulted
from the opening of the Spencer's Steak and Shrimp in Danbury. The fiscal 1999
restaurant sales represent sales from Flemington (which closed November 1998)
and Norwalk. Same store sales (for the Rattlesnake Bar & Grill Norwalk location
only) for comparable periods for fiscal year ended June 26, 2000 increased by
5.2%.
Promotional Sales
Promotional sales increased $21,486 or 30.9% to $90,920 in fiscal 2000 from
$69,434 in fiscal 1999. This increase is attributed to the opening of the
Danbury location. Promotional sales have decreased as a percentage of gross
sales in fiscal 2000 to 3.4% from 4.1% in fiscal 1999. This decrease as a
percentage of sales is the result of economies realized from the Danbury store
opening.
Food and Beverage Costs
The cost of food and beverage sales increased $336,986 or 54.2% to
$958,581for fiscal 2000, as compared with $621,595 for fiscal 1999, resulting
from the increase in the number of restaurants operating during the period. Food
and beverage costs decreased as a percentage of net restaurant sales to 37.5% in
fiscal 2000 from 38.2% in fiscal 1999.
Restaurant Salaries and Fringe Benefits
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
increased $293,241 or 44.3% to $955,584 in fiscal 2000 as compared to $662,343
in fiscal 1999, principally due to the opening of the Danbury restaurant. As a
percentage of net sales, these costs decreased to 37.4% in fiscal 2000 from
40.7% in fiscal 1999, due to cost corrective measures implemented in early
fiscal 2000.
Occupancy and Related Expenses
Occupancy and related expenses, which include linen, repairs, maintenance,
utilities, rent, insurance and other occupancy related expenses, decreased
$188,696 or 38.9% to $296,504 in fiscal 2000 from $485,200 in fiscal 1999. As a
percentage of net restaurant sales, these costs decreased to 11.6% in fiscal
2000 from 29.8% in fiscal 1999. The decrease in occupancy costs is attributable
to the closing of the Flemington and Danbury Rattlesnake operations in November
1998 and June 1999 respectively.
Depreciation and Amortization Expense
Depreciation and amortization expenses increased $42,477 or 96.3% to
$86,573 in fiscal 2000 as compared to $44,096 in fiscal 1999. Depreciation and
amortization expenses as a percentage of net restaurant sales increased to 3.4%
in fiscal 2000 from 2.7% in fiscal 1999. The increase, $42,477, is primarily
attributable to the opening of the Danbury Spencer's Steak and Shrimp.
General and Administrative Expenses
General and administrative expenses decreased $1,422,307 or 49.9% to
$1,427,464 in fiscal 2000 from $2,849,771 in fiscal 1999. The decrease is
attributable to a $1,075,000 charge incurred in fiscal 1999 for the issuance of
warrants to Mr. Frank and a decrease of $47,873 in corporate salaries in fiscal
2000. General and administrative expenses as a percent of net restaurant sales
decreased to 55.9% in fiscal 2000 from 175.1% in fiscal 1999.
Loss on Closure of Restaurant Sites and Impairment Charges
Loss on closure of restaurant sites and impairment charges decreased
$322,200 or 88.3% to $42,800 in fiscal 2000 from $365,000 in fiscal 1999. Loss
on closure of restaurant sites and impairment charges as a percent of net
restaurant sales decreased to 1.7% in fiscal 2000 from 22.4% in fiscal 1999. The
loss on closure of restaurant sites and impairment charges is attributable to:
(1) pursuant to the March 1998 agreement to acquire the Ottomanelli Group,
additional consideration, due to anti-dilution provisions contained in the
agreements, common stock was payable to the Ottomanelli Group shareholders, as a
result of the private placement. In February 1999, 5,000,000 shares of common
stock were issued pursuant to such anti-dilution provisions, which included a
maximum addition which was met. As the Company recorded an impairment charge in
fiscal 1999 relating to the termination of the operations of the Ottomanelli
restaurants, the fair value of the common stock issued, $250,000 was recognized
as a further impairment loss in 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. In fiscal 2000, the Company finalized
its agreement with the landlord of its previously closed restaurant in
Flemington, New Jersey resulting in a $42,800 loss on closure. 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. The note payable $39,998 was credited to additional paid in capital.
Interest Expenses (Income) net
Interest expense (income) net increased ($195,190) or 111.4% to ($19,942)
in fiscal 2000 from $175,248 in fiscal 1999. Interest expense (income) net as a
percent of net restaurant sales decreased to (.9%) in fiscal 2000 from 10.8% in
fiscal 1999. This increase (in income) 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 in fiscal 1999 and placement of idle cash in an interest bearing
account in fiscal 2000 generating $48,108 in earnings.
Litigation Award
Litigation award expense (income) decreased $449,000 or 166.9% to
($180,000) in fiscal 2000 from $269,000 in fiscal 1999. Litigation award expense
(income) as a percent of net restaurant sales decreased to (7.1%) in fiscal 2000
from 16.5% in fiscal 1999.
In August 1998, a jury awarded a verdict in the amount of $625,000 against
various defendants, including the Company and its former Chairman. On November
20, 1998, the Court set aside the jury's verdict as to all counts against the
Company except for plaintiff's claim for negligence per se and accordingly
reduced the jury's award to $225,000. The Company has recorded a charge in the
1999 Statement of Operations of $225,000 for the litigation award. On June 26,
2000 agreement was reached between the Company and the plaintiff. The plaintiff
received $300,000 for total release of all claims and demands against the
Company. The settlement required the Company pay $45,000 with the remainder to
be paid by the two co-defendant insurance companies. This resulted in a $180,000
reversal of prior year litigation charge.
Extraordinary Gain
The Company recorded a decrease in extraordinary gain on the forgiveness of
debt of $372,747 or 72.7% to $139,682 in fiscal 2000 compared with $512,429 in
fiscal 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 in fiscal 1999 and the fiscal 2000
discharge of payables of the prior closed restaurants. Extraordinary gain as a
percent of net restaurant sales decreased to 5.5% in fiscal 2000 from 31.5% in
fiscal 1999.
Subsequent Events
On June 28, 2000 the Company hired a new Chief Financial Officer.
On August 21, 2000 the Company filed form 8-K with the Securities and
Exchange Commission, reporting a change in registrant's certifying accountants.
In September 2000, the Company paid $347,904 of dividends to the preferred
shareholders of record by issuing 13,916 additional shares of Series B Preferred
Stock in lieu of cash payments.
The Company is currently in default on its notes payable of $237,505 in
addition to interest of approximately $150,000, which were due on July 8, 2000.
The Company wil seek to restructure these notes and/or to exchange the same for
equity, although there canbe no assurance of the same.
As of October 2, 2000 the Company received notification from its attorneys
regarding the Cioffi Trust case (see "Legal Proceedings") indicating the case is
Certified, ready for trial. Plaintiff has until October 30, 2000 to file a note
of issue requesting a trial date.
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 adopted SOP 98-5 in the first quarter of fiscal 2000 and
did not result in any cumulative effect of a change in accounting principle. .
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 adopted 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 and amended by Statement 138 in June, 2000 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 does not believe that the
adoption of the Statement will have a material impact on the Company's financial
postion or the results of operations.
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. In April 1999, 106 Federal Road Corporation, a wholly
owned subsidiary of the Company, purchased the former Rattlesnake Restaurant
building and accompanying land in Danbury, CT. for $1,350,000 in cash. Federal
Road Restaurant Corporation, another wholly owned subsidiary of the Company
leases this building from 106 Federal Road Corporation as the building has been
renovated and styled per the new Spencer's Restaurants theme. The Company is
pursuing refinancing for this property but there is no assurance when or if this
will occur. The Company is also seeking to obtain capital through the sale of
additional equity. Such financing, or the aforesaid refinancing, will be
required for continued operations for the next twelve months through fiscal
2001. 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 has incurred aggregate losses since inception of $19,736,463
inclusive of a net loss for fiscal 2000 of $959,373. The Company's cash position
decreased to $374,507 during the year ended June 26, 2000, principally as a
result of the opening of the Danbury store and startup costs associated with it.
Cash flows used in operating activities for fiscal 2000 were ($1,352,743)
as opposed to ($1,787,386) for fiscal 1999.
Cash flows used in investing activities were ($655,925) for fiscal 2000
compared to ($1,397,972) in fiscal 1999. This can be attributed to the
preparations of the new restaurant, Spencer's. The Company does not have further
commitments for capital expenditures beyond the completion of the Danbury
location except those normally associated with day-to-day operations. However,
the Company does plan to expand the Spencer's concept and should that occur,
further capital expenditures would be required.
Cash flows from financing activities were $45,500 for fiscal 2000 as
compared to $5,211,705 in fiscal 1999 due to the sale of Series B Preferred
Stock in Fiscal 1999.
Given the above, cash for fiscal 2000 decreased by ($1,963,168) as compared
to a increase of $2,026,347 during fiscal 1999. The increase during prior year
is attributable to the successful sale of approximately six million dollars in
Series B stock.
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 now closed 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.
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.
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.
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 Company filed a registration statement on August 16, 1999, which has
not yet been declared effective. In July 2000 the Company filed a first
amendment to the registration statement and is awaiting comments from the SEC.
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 26, 2000, the following obligations are past due and in default;
$18,749 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). The remainder of notes payable, $237,506 matures July
7, 2000. The Company wil seek to restructure these notes and/or to exchange the
same for equity, although there canbe no assurance of the same.
At June 26, 2000, the Company had available a net operating loss carry
forward ("NOL") for Federal and State income tax purposes of approximately
$18,290,000, which are available to offset future taxable income, if any, before
2015. 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.
Inflation
The Company's food, labor and energy costs have increased recently but the
Company beeives such costs are within industry norms. 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 did not experience any year 2000 issues.
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 26, 2000 (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:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Kenneth Berry 47 President, CEO and Director
John S. Reuther, Jr. 46 Vice President - CFO
Stephan A. Stein 48 Consultant, Secretary and
Director
Nicolo Ottomanelli 57 Director
</TABLE>
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.
John S. Reuther, Jr. Mr. Reuther became Chief Financial Officer of the
Company in June 2000. Prior to this time, he served in various capacities,
including MIS Director, Financial Controller, and Consultant for Magic
Restaurants, Inc./Redheads, Inc. from 1994 until he joined the Company, except
for a one-year period from 1998 to 1999, in which he served as Financial
Controller/MIS Director for Mars 2112, Inc. Both companies for which Mr. Reuther
previously served work under a theme/entertainment restaurant concept. Mr.
Reuther has a B.S. in Accounting/Finance from the University of Connecticut
School of Business Administration.
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 is currently a managing
member of Island Star Capital, LLC, and Director of Investment Banking of Joseph
Gunnar & Co., LLC, a broker-dealer. 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 a founder of the Ottomanelli's Cafe franchising operation.
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 our 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 us with copies of these reports. As of June
26, 2000, we believe we are in compliance with all Section 16 requirements and
we believe our current management and directors to be in compliance.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth as of June 26, 2000 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:
Summary Compensation Table
<TABLE>
<CAPTION>
Name of Individual Stock Long-Term
and Principal Position Year Salary Bonus Compensation Compensation
------------------------------ ------------ ----------------- ------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Kenneth Berry, 2000 $95,000 --- --- ---
President 1999 $31,000 $30,000 --- ---
1998* $ --- --- --- ---
Nicolo Ottomanelli, 2000 $56,666 --- --- ---
Director (1) 1999 $89,567 $25,000 --- ---
1998 $69,230 --- --- ---
Stephan A. Stein, 2000 $75,000 --- --- ---
Secretary 1999 $90,550 --- $114,867 ---
1998 $53,519 --- --- ---
-------------
* Mr. Berry was not employed by the Company in fiscal year 1998.
<FN>
(1) Nicolo Ottomanelli served as President until Kenneth Berry became President
during fiscal year 2000. 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 in October
1998 to reduce the fixed compensation to $85,000, to make him a participant
in our incentive bonus program and to provide a payment of $25,000 in early
1999. The Company and Mr. Ottomanelli terminated his employment agreement
in January 2000. See "Beneficial Ownership" and "Management."
</FN>
</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 26, 2000:
Name Compensation
---- ------------
Kenneth Berry (1) $95,000
Nicolo Ottomanelli (2) $56,666
Stephan A. Stein (3) $75,000
1. 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 our performance bonus plan, and receipt of $250,000 of term life
insurance coverage. In March of 1999, Mr. Berry's employment agreement was
modified to provide him with the option to elect, on one occasion only, to
extend the term of his agreement for a period of two years until 2004,
during which time he should be paid at an annual rate of $150,000 per year.
In addition, Mr. Berry was granted the warrant described in "Security
Ownership of Certain Beneficial Owners and Management."
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 $56,666 during fiscal 2000 for current
and deferred salary. In fiscal 1999 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. On January 31, 2000 the Company
accepted the resignation of its Senior Vice President, Nicolo Ottomanelli.
Mr. Ottomanelli remains on the Board of Directors. Mr. Ottomanelli's
contract was terminated effective with the resignation and without payment
or further remuneration. See "Security Ownership of Certain Beneficial
Owners and Management."
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". In fiscal 1999 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, in fiscal 1999 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. In fiscal 1999, the Company issued
warrants in the amount of $6,667 as part of his consulting agreement. Mr.
Stein received $75,000 in cash payments, in fiscal 2000 for the current
portion of his consulting contract.
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. The Company terminated this contract in
December 1999 and Mr. Ferro received 1,000,000 common stock warrants, vesting
immediately, exercisable at $0.05 per share. This resulted in a non-cash charge
of $30,000 in fiscal 2000.
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, 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. No bonuses were paid in fiscal 2000.
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
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 February 2000, 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 February 2000, 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 26, 2000, 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:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Beneficial
Beneficial Owner** Ownership*** Percentage****
------------------------------------------------------ ---------------------------------- -------------------
<S> <C> <C> <C>
Kenneth Berry 20,000,000 (1) 28.2%
Nicolo Ottomanelli 4,815,749 (2) 9.8%
Joseph Ottomanelli 3,911,029 (3) 7.7%
1549 York Avenue
New York, New York 10028
Stephan A. Stein 6,151,224 (4) 11.1%
Frank T. Ferro***** 1,000,000 (5) 1.9%
5 Cornell Court
Tinton Falls, New Jersey 07724
Shelly Frank 45,000,000 (6) 46.9%
16 Arrowhead Way
Weston, CT 06883
Commonwealth Associates 15,650,000 (7) 37.3%
830 Third Avenue
New York, New York 10022
------------------------------------------------------
All Directors and Officers as group 31,900,306 42.0%
(4 Persons)
<FN>
* 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%.
*****Contract terminated December 1999.
(1) Includes warrants to purchase 20,000,000 shares of Common Stock at an
exercise price of $.05. Does not include warrants to purchase 10,000,000
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, or Mr. N. Ottomanelli's children, 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, or Mr. N. Ottomanelli's children, 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) Includes warrants to purchase up to 1,000,000 shares of Common Stock at an
exercise price of $.05.
(6) Includes warrant to acquire 45,000,000 shares of common stock at $.05 per
share.
(7) Includes warrants to purchase 12,000,000 shares of Common Stock at an
exercise price of $.05.
</FN>
</TABLE>
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"). In April 2000, the Company transferred the shares of the above
entities back to Nicolo Ottomanelli and his brother, and terminated a license
agreement which had licensed the name Ottomanelli's Cafe(R) to us
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)
3.2 By-Laws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Series B Preferred Stock Certificate (1)
10.1 Employment Agreement with Stephan A. Stein (2)
10.1.1 Revised Employment Agreement with Stephan A. Stein (2)
10.2 Lease Agreement with Jack Cioffi Trust ULWT dated April 15,
1996 together with Exhibits (2)
10.3 Form of Series C Note (2)
10.4 License Agreement by and between Ottomanelli Bros., Ltd. and
The Rattlesnake Holding Company, Inc. (3)
10.5 Convertible Subordinated Secured 18% Promissory Note dated
March 4, 1997, in favor of J.L.B. of Nevada, Inc.
10.6 Convertible Subordinated Secured 18% Promissory Note dated
March 4, 1997, in favor of Michael Lauer
10.7 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)
10.8 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)
10.9 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)
10.10 Registration Rights Agreement dated February 26, 1997 (3)
10.11 A.G. (Sandy) Rappaport Consulting Agreement dated as of July
20, 1998 (3)
10.12 Stephan A. Stein Consulting Agreement dated as of May 1, 1998
(3)
10.12.1 Amendment to Stephan A. Stein Consulting Agreement dated as
of March 15, 1997 (3)
10.13 Nicolo Ottomanelli Employment Agreement dated as of February
26, 1998 (3)
10.13.1 Amendment to Nicolo Ottomanelli Employment Agreement dated
as of October 1998
10.14 Form of Shelly Frank and Kenneth Berry Warrants (3)
10.15 Form of Investor Rights Agreement for Subscribers in Offering
(3)
10.16 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/ John S. Reuther, Jr.
------------------------
John S. Reuther, Jr.
Vice President, CFO
Dated: October 10, 2000
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.
<TABLE>
<CAPTION>
Signature Title Date
----------------------------------- -------------------------------------------------- -----------------
<S> <C> <C>
Senior Vice President and Director October 10, 2000
/s/ Nicolo Ottomanelli
-----------------------------------
Nicolo Ottomanelli
/s/ Stephan A. Stein Secretary and Director October 10, 2000
-----------------------------------
Stephan A. Stein
/s/ Kenneth Berry Director October 10, 2000
-----------------------------------
Kenneth Berry
</TABLE>
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Notes to Consolidated Financial Statements, continued)
ITEM 7. FINANCIAL STATEMENTS.
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
PAGE
----
(a) Report of Independent Auditors F-1
(b) Consolidated Balance Sheets as of June 26, 2000 and
June 30, 1999 F-2
(c) Consolidated Statemetns of Operations for the Years
Ended June 26, 2000 and June 30, 1999 F-3
(d) Consolidated Statements of Stockholders' Equity for
the Years Ended June 26, 2000 and June 30, 1999 F-4 to F-5
(e) Consolidated Statements of Cash Flows for the Years
Ended June 26, 2000 and June 30, 1999 F-6 to F-7
(f) Notes to Consolidated Financial Statements F-8 to F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Spencer's Restaurants, Inc.
Danbury, Connecticut
We have audited the accompanying consolidated balance sheet of Spencer's
Restaurants, Inc. and Subsidiaries as of June 26, 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the fifty-two weeks then ended. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Spencer's Restaurants, Inc. and Subsidiaries as of June 26, 2000 and the results
of their operations and cash flows for the fifty-two weeks then ended., 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, the
Company has incurred recurring losses from operations and at June 26, 2000 has a
working capital deficit of $1,044,162. Continuation of the Company as a going
concern is dependent upon future successful operations and the ability to
generate sufficient cash flows from operations and capital/financing sources to
meet its obligations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
September 15, 2000
<PAGE>
Independent Auditor's Report
The Board of Directors and Stockholders
Spencer's Restaurants, Inc.:
We have audited the accompanying consolidated balance sheet of Spencer's
Restaurants, Inc. and subsidiaries (formerly The Rattlesnake Holding Company,
Inc. and subsidiaries) as of June 30, 1999, and the related consolidated
statements of operations, stockholder's equity and cash flows for the year then
ended. 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 audit.
We conducted our audit 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 audit provides 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 the results of their operations and
their cash flows for the year then ended 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 holding 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.
/s/ KPMG LLP
Melville, New York
October 26, 1999
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 26, 2000 AND JUNE 30, 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 374,507 $ 2,337,675
Accounts receivable 24,500 9,754
Inventory 47,862 16,688
Prepaid expenses and other current assets 2,159 11,918
---------- -----------
TOTAL CURRENT ASSETS 449,028 2,376,035
LAND, BUILDING AND EQUIPMENT - Net 2,021,456 1,445,079
INTANGIBLE ASSETS - Net 13,744 20,769
OTHER ASSETS 18,776 76,383
----------- -----------
TOTAL ASSETS $ 2,503,004 $ 3,918,266
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable $ 258,344 $ 55,838
Accounts payable 486,714 689,679
Accrued expenses 322,673 678,221
Dividends payable 347,904 198,846
Other current liabilities 77,555 171,621
--------- ---------
TOTAL CURRENT LIABILITIES 1,493,190 1,794,205
NOTES PAYABLE, NET OF CURRENT MATURITIES - 242,504
--------- ---------
TOTAL LIABILITIES 1,493,190 2,036,709
========= =========
PREFERRED STOCK - Series B 9% Convertible - $0.10 par value; 5,000,000 shares
authorized; 315,076 shares issued and outstanding at 2000; 328,563 shares
issued and outstanding at 1999 31,507 32,856
ADDITIONAL PAID-IN CAPITAL - Preferred stock 6,535,088 7,204,095
COMMON STOCK - $0.001 par value; 400,000,000 shares authorized; 51,002,981
shares issued and outstanding at 2000; 29,979,013 shares issued and 51,003 29,980
outstanding at 1999
ADDITIONAL PAID-IN CAPITAL - Common stock 14,476,583 13,590,562
ACCRUED DIVIDENDS (347,904) (198,846)
ACCUMULATED DEFICIT (19,736,463) (18,777,090)
============ ============
TOTAL STOCKHOLDERS' EQUITY 1,009,814 1,881,557
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,503,004 $ 3,918,266
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FIFTY-TWO WEEKS ENDED
JUNE 26, 2000 AND FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
SALES $ 2,645,770 $ 1,696,679
Less: Promotional sales 90,920 69,434
----------- -----------
NET SALES 2,554,850 1,627,245
----------- -----------
COSTS AND EXPENSES
Cost of food and beverage sales 958,581 621,595
Restaurant salaries and fringe benefits 955,584 662,343
Occupancy and related expenses 296,504 485,200
Depreciation and amortization expense 86,573 44,096
----------- -----------
TOTAL RESTAURANT COSTS AND EXPENSES 2,297,242 1,813,234
SELLING, GENERAL AND ADMINISTRATIVE 1,427,464 2,849,771
LOSS ON CLOSURE OF RESTAURANT SITES
AND IMPAIRMENT CHARGES 42,800 365,000
INTEREST EXPENSE (INCOME) - Net (19,942) 175,248
LITIGATION AWARD (INCOME) (180,000) 269,000
MISCELLANEOUS EXPENSES 86,341 19,456
----------- -----------
TOTAL EXPENSES 3,653,905 5,491,709
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (1,099,055) (3,864,464)
EXTRAORDINARY ITEM - Gain from extinguishment of debt,
no applicable income tax expense 139,682 512,429
----------- -----------
NET LOSS (959,373) (3,352,035)
DIVIDENDS ON PREFERRED STOCK (691,222) (198,846)
============ ============
NET LOSS AVAILABLE COMMON STOCKHOLDERS $(1,650,595) $(3,550,881)
============ ============
NET LOSS PER SHARE
Loss before extraordinary item $ (0.05) $ (0.21)
Extraordinary item - 0.03
---------- ----------
Net loss - basic and diluted $ (0.05) $ (0.18)
========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING OF COMMON STOCK 33,889,578 19,205,208
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JUNE 28, 1998 TO JUNE 26, 2000
<TABLE>
<CAPTION>
Common Common Preferred Stock
Shares Stock Series A Series B Series A
------ ----- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 28, 1998 10,889,285 $ 10,890 56,500 -- $ 5,650
Net proceeds received from issuance
of common stock 1,100,000 1,100 -- -- --
Net proceeds received from
issuances of Series B preferred stock -- -- -- 236,279 --
Issuance of warrants for services -- -- -- -- --
performed
Deferred compensation -- -- -- -- --
Issuance of common stock for
services performed 2,651,991 806 -- -- --
Conversion of debt to common and
preferred stock 10,421,070 12,267 -- 36,914 --
Conversion of Series A preferred
stock to Series B preferred stock -- -- (56,500) 55,370 (5,650)
Additional issuance of common stock
in connection with acquisition of the 5,000,000 5,000 -- -- --
Ottomanelli Group
Cancellation of common shares (83,333) (83) -- -- --
Accrued dividends - Series A -- -- -- -- --
Forgiveness of dividends -- -- -- -- --
Accrued dividends - Series B -- -- -- -- --
Net loss for fifty-two weeks
ended June 30, 1999 -- -- -- -- --
---------- ------ -------- -------- --------
BALANCE AT JUNE 30, 1999 29,979,013 29,980 -- 328,563 --
</TABLE>
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD JUNE 28, 1998 TO JUNE 26, 2000
<TABLE>
<CAPTION>
Preferred Additional Additional
Stock Paid-in Capital Accrued Accumulated Paid-in Capital
Series B Preferred Stock Dividends Deficit Common Stock
-------- --------------- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 28, 1998 $ -- $ 1,173,432 $ (207,636) $(15,425,055) $ 11,381,186
Net proceeds received from issuance
of common stock -- -- -- -- 152,400
Net proceeds received from
issuances of Series B preferred stock 23,627 5,111,392 -- -- --
Issuance of warrants for services -- -- -- -- 1,098,547
performed
Deferred compensation -- -- -- -- 12,221
Issuance of common stock for
services performed -- -- -- -- 132,692
Conversion of debt to common and
preferred stock 3,692 919,158 -- -- 580,933
Conversion of Series A preferred
stock to Series B preferred stock 5,537 113 -- -- --
Additional issuance of common stock
in connection with acquisition of the -- -- -- -- 245,000
Ottomanelli Group
Cancellation of common shares -- -- -- -- (12,417)
Accrued dividends - Series A -- -- (51,909) -- --
Forgiveness of dividends -- -- 259,545 -- --
Accrued dividends - Series B -- -- (198,846) -- --
Net loss for fifty-two weeks
ended June 30, 1999 -- -- -- (3,352,035)
---------- --------- --------- ----------- ----------
BALANCE AT JUNE 30, 1999 32,856 7,204,095 (198,846) (18,777,090) 13,590,562
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD JUNE 28, 1998 TO JUNE 26, 2000
<TABLE>
<CAPTION>
Common Common Preferred Stock
Shares Stock Series A Series B
------ ----- -------- --------
<S> <C> <C> <C> <C>
Net proceeds received from issuance
of common stock 7,613 7 -- --
Issuance of options for salary -- -- -- --
Net proceeds received from issuance
of Series B preferred stock -- -- -- 2,000
Issuance of Series B preferred
stock as settlement with previous landlord -- -- -- 4,660
Issuance
settlement of lawsuit 100,000 100 -- --
Conversion of Series B preferred
stock to common stock 20,916,355 20,916 -- (41,833)
Issuance
stock as dividend -- -- -- 21,686
Accrued dividends - Series B -- -- -- --
Net loss for the fifty-two weeks
ended June 26, 2000 -- -- -- --
---------- ------ -------- --------
BALANCE, JUNE 26, 2000 51,002,981 $ 51,003 -- 315,076
</TABLE>
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD JUNE 28, 1998 TO JUNE 26, 2000
<TABLE>
<CAPTION>
Additional Additional
Preferred Stock Paid-in Capital Accrued Accumulated Paid-in Capital
Series A Series B Preferred Stock Dividends Deficit Common Stock
-------- -------- --------------- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Net proceeds received from issuance
of common stock -- -- -- -- -- 493
Issuance of options for salary -- -- -- -- -- 30,000
Net proceeds received from issuance
of Series B preferred stock -- 200 44,800 -- -- --
Issuance of Series B preferred
stock as settlement with previous landlord -- 466 156,032 -- -- --
Issuance
of common stock for
settlement of lawsuit -- -- -- -- -- 4,590
Conversion of Series B preferred
stock to common stock -- (4,183) (867,671) -- -- 850,938
Issuance
of series B preferred
stock as dividend -- 2,168 (2,168) 542,164 -- --
Accrued dividends - Series B -- -- -- (691,222) -- --
Net loss for the fifty-two weeks
ended -- -- -- -- (959,373) --
-------- ------ --------- -------- ------------ -----------
BALANCE, JUNE 26, 2000 $ -- $ 31,507 $ 6,535,088 $ (347,904)$(19,736,463) $14,476,583
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIFTY-TWO WEEKS ENDED
JUNE 26, 2000 AND FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (959,373) $(3,352,035)
Net loss
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 86,573 44,096
Litigation award (180,000) 225,000
Gain on extinguishment of debt (139,682) (512,429)
Loss on closure of restaurant sites 42,800 365,000
Options issued for salary 30,000 -
Warrants issued for services provided - 1,110,769
Stock issued for services provided - 133,498
Stock issued for settlement of lawsuit 4,690 -
(Increase) decrease in assets
Accounts receivable (14,746) 7,077
Inventory (31,174) 12,709
Increase in prepaid and other assets 67,366 (2,658)
Increase (decrease) in liabilities
Accounts payable and accrued expenses (165,131) 192,937
Other liabilities (94,066) (11,350)
-------- --------
Net cash used in operating activities (1,352,743) (1,787,386)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (655,925) (1,397,972)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 500 153,500
Proceeds from issuance of convertible notes - 250,000
Proceeds from issuance of preferred stock 45,000 5,135,019
Payments relating to cancelled common stock
subscription agreements - (12,500)
Principal repayments of borrowings - (314,314)
------ ---------
Net cash provided by financing activities 45,500 5,211,705
------ ---------
NET INCREASE (DECREASE) IN CASH (1,963,168) 2,026,347
CASH - BEGINNING OF PERIOD 2,337,675 311,328
--------- -------
CASH - END OF PERIOD $ 374,507 $ 2,337,675
========= ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 3,747 $ 53,616
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE FIFTY-TWO WEEKS ENDED
JUNE 26, 2000 AND FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Issuance of Series B - Preferred Stock as settlement
with previous landlord:
<S> <C> <C>
Accrued expenses $73,700 $ -
Loss on closure of restaurant sites 42,800 -
Forgiveness of debt 39,998 -
-------- -----
Series B Preferred Stock $156,498 $ -
======== =====
Conversion of Series B Preferred Stock
to Common Stock $871,854 $ -
======== =====
Issuance of Series B Preferred Stock
as dividend $ 2,168 $ -
======= =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
As of June 26, 2000 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 named Rattlesnake Southwestern
Grill. Additionally, the Company owned a site in Danbury, Connecticut at which
it operates the Company's new concept restaurant named Spencer's, featuring a
casual steakhouse theme, which began operations on November 3, 1999.
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.
Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated in consolidation.
Reporting Periods
On May 12, 1999, the Board of Directors approved a change of its fiscal year
from the last Sunday in June to June 30, effective for Fiscal 1999. On June 1,
2000, the Board of Directors approved a further change in the Company's fiscal
year to a fifty-two week cycle ending on the last Monday in June, effective for
Fiscal 2000.
Comprehensive Income
The Company follows the Statement of Financial Accounting Standard ("SFAS") No.
130, "Reporting Comprehensive Income." 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. Since the company has no items of other comprehensive income, no
separate statement of comprehensive income has been presented.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short -term receivables,
payables, and accrued expenses. The carrying values of cash, short-term
receivables, payables and accrued expenses approximate fair value because of
their short maturities.
The carrying value of the long-term debt approximates fair value since the
interest rate associated with the debt approximates the current market interest
rate.
Concentration of Credit Risk Involving Cash
At June 26, 2000, the Company has deposits with major financial institutions
which exceed Federal Depository Insurance limits. These financial institutions
have strong credit ratings, and management believes that credit risk related to
these deposits is minimal.
Accounts receivable
Accounts receivable consists principally of bank credit card accounts
receivable.
Inventory
Inventory consists of food, liquor, bar and other supplies and is stated at the
lower of cost (determined by the first-in, first-out method) or market.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Depreciation
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. The cost of leasehold improvements is amortized
over the lesser of the length of the related leases or the estimated useful
lives of the assets. Depreciation is computed using the straight line method.
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
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 26, 2000 and June 30, 1999 was $86,796 and
$79,771. Amortization expense was $7,025 and $9,829 for the fifty-two weeks
ended June 26, 2000 and June 30, 1999.
Cost of Start-up Activities
The Company adopted Statement of Positions 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5") beginning July 1, 1999. It requires costs of
start-up activities and organization costs to be expenses as incurred. SOP 98-5
is effective for all fiscal years beginning after December 15, 1998 with initial
adoption reported as a cumulative effect of a change in accounting principle.
The adoption of SOP 98-5 did not result in any cumulative effect of a change in
accounting principle. At June 30, 1999, there were no unamortized start-up
costs.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes", which requires an
asset and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed annually for
temporary differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates based on management's
knowledge and experience. Accordingly, actual results could differ from those
estimates.
Recoverability of Long Lived Assets
The Company follows SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." The Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. The Company is not aware of
any events or circumstances which indicate the existence of an impairment which
would be material to the Company's annual financial statements.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Disclosures About Segments of an Enterprise and Related Information
The Company adopted SFAS No. 131, "Disclosures About Segments of and Enterprise
and Related Information" beginning Fiscal 1999. This statement is not applicable
to the Company at the present time since there is only one reportable segment
and there are no required disclosures related to product and services,
geographic areas and major customers.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("Statement 133"), was issued
and amended by Statement 138 in June 2000 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 does not believe that the adoption of the Statement
will have a material impact on the Company's financial position results of
operations.
Accounting for Stock-Based Compensation
Compensation costs attributable to stock option and similar plans are recognized
based on any difference between the quoted market price of the stock on the date
of the grant over the amount the employee is required to pay to acquire the
stock (the intrinsic value method under Accounting Principles Board Opinion 25).
Such amount, if any, is accrued over the related vesting period, as appropriate.
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation." The
Statement encourages employers to account for stock compensation awards based on
their fair value on their date of grant. Entities may choose not to apply the
new accounting method but instead, disclose in the notes to the financial
statements the pro forma effects on net income and earnings per share as if the
new method had been applied. The Company has adopted the disclosure-only
approach of the Standard.
Earnings (Loss) Per Share
The Company follows SFAS No. 128, "Earnings Per Share" ("EPS"). This statement
establishes standards for computing and presenting EPS. For entities with
complex capital structures, the statement requires the dual presentation of both
Basic EPS and Diluted EPS on the face of the statement of operations. Under this
standard, Basic EPS is computed based on weighted average shares outstanding and
excludes any potential dilution; Diluted EPS reflects potential dilution from
the exercise or conversion of securities into common stock or from other
contracts to issue common stock.
Basic earnings (loss) per share include the weighted average number of shares
outstanding during the year. Diluted earnings (loss) per share include the
weighted average number of shares outstanding and dilutive potential common
shares, such as warrants and convertible securities. Assumed conversion of the
warrants and convertible securities would be either immaterial or antidilutive,
therefore, basic and diluted earnings (loss) per share are the same.
Net loss applicable to common stockholders for the fifty-two weeks ended June
26, 2000 and June 30, 1999 has been increased by $691,222 and $198,846 for
preferred dividends.
NOTE 2 - BUSINESS PLAN
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.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 2 - BUSINESS PLAN (Continued)
Fiscal 2000
The Company has incurred aggregate losses since inception of $19,736,463,
inclusive of a net loss in fiscal 2000 of $959,373 and at June 26, 2000 had a
working capital deficit of $1,044,162. Additionally, $18,749 of Series C
subordinated notes payable matured on August 6, 1997, and a $2,089 Series A
subordinated note payable matured on August 6, 1996, are in default as of June
26, 2000.
At June 26, 2000 the Company anticipates that it will require additional working
capital to fund operations. The Company believes that it will have sufficient
capital to meet these obligations and implement an expansion strategy through a
second stock offering and by obtaining financing on its real estate holdings at
106 Danbury Road. The Company is currently in negotiations with several
institutions to secure this financing. However there can be no assurance that
the Company will have sufficient capital to support operations and implement its
business plan.
Fiscal 1999
At June 30, 1999 the Company had 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, $18,749 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 $35,838 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 5), 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.
At June 30, 1999 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.
NOTE 3 - LAND, BUILDING AND EQUIPMENT
Land, building and equipment consist of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Land $1,000,000 $1,000,000
Buildings 421,191 358,067
Leasehold improvements 504,135 100,047
Restaurant fixtures and equipment 223,637 110,577
Furniture and fixtures 146,985 59,331
Construction in progress - 12,000
--------- ---------
2,295,948 1,640,022
Less: Accumulated depreciation 274,492 194,943
--------- ---------
$2,021,456 $1,445,079
========== ==========
</TABLE>
Related depreciation and amortization expenses were $79,549 and $34,268 for the
fifty-two weeks ended June 26, 2000 and June 30, 1999.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 4 - OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Promotional meal programs $ - $75,383
Deposits 18,776 1,000
------- -------
$18,776 $76,383
======= =======
</TABLE>
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
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 237,506 237,506
Series C subordinated notes payable due August 6, 1997,
with interest at 15% 18,749 * 18,749 *
Notes payable relating to acquisition of lease, due in monthly
installments of $1,666 of principal plus interest at 1% over
prime (9.5% at June 29, 1997 through September) - 39,998 **
------- ------
258,344 298,342
Less: Current maturities 258,344 55,838
------- -------
$ - $242,504
===== ========
<FN>
* - Obligation in default at June 26, 2000 and June 30, 1999.
** - $15,000 of these notes were in default at June 30, 1999.
</FN>
</TABLE>
Interest expense for the fifty-two weeks ended June 26, 2000 and June 30, 1999
was $28,165 and $212,315.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 6 - 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.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 6 - FINANCING ARRANGEMENTS (Continued)
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.
For the fifty-two weeks ended June 26, 2000 the Company recognized an
extraordinary gain on the forgiveness of debt of $139,682, resulting from the
discharge of payables associated with restaurants closed in prior years.
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following:
2000 1999
---- ----
Litigation award $ - $225,000
Accrued rent 80,000 140,099
Interest payable 149,781 125,363
Professional fees 30,000 120,000
Other 32,343 52,292
Accrued payroll 30,549 15,467
-------- --------
$322,673 $678,221
NOTE 8 - 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 26, 2000 and June 30, 1999, the balances outstanding under this program
were $77,555 and $171,621, which are included in other current liabilities in
the accompanying consolidated balance sheets.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 9 - COMMITMENTS
The Company leases its restaurant premises located in South Norwalk,
Connecticut, under an operating leases expiring May 31, 2002. The lease contains
contingent rental provisions based upon a percentage of gross sales that exceed
a predetermined level. There were no contingent rental payments for the
fifty-two weeks ended June 26, 2000 and June 30, 1999. Rent expense for the
fifty-two weeks ended June 26, 2000 and June 30, 1999 was $101,878 and $190,733.
Certain stockholders 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, closed in Fiscal 1997, the Company guaranteed specified
lease obligations. As of June 26, 2000, 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 15).
Future minimum annual rentals are as follows:
Fifty-two Weeks Amount
Ending June,
2001 $62,338
2002 57,143
------
$119,481
========
NOTE 10 - CAPITAL STRUCTURE
Preferred Stock
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 had 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.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 10 - CAPITAL STRUCTURE (Continued)
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 Company filed a registration
statement on August 16, 1999 and filed a first amendment during July 2000.
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 divided rate will increase to 14% per
annum from issuance.
In July 1999, the Company sold an additional 2,000 shares of Series B preferred
stock at $25 per share and received $45,000, net of expenses.
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. 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.
The issuance of the 4,660 shares of Series B preferred stock resulted in a
charge of $42,800 to loss on closure of restaurant sites and the $39,998
forgiveness of debt was credited against additional paid-in capital.
In September 1999, the Company issued 7,954 shares of Series B preferred stock
as payment of the June 30, 1999 accrued dividends of $198,846.
In March 2000, the Company issued 13,732 shares of Series B preferred stock as
payment of dividends declared for the first and second quarter of Fiscal 2000
totalling $343,318.
During the fourth quarter of Fiscal 2000, 41,833 shares of Series B preferred
stock was converted to 20,916,355 shares of common stock.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 10 - CAPITAL STRUCTURE (Continued)
The Board of Directors declared dividends relating to the Series B preferred
stock for the third and fourth quarter Fiscal 2000 totaling $347,904 which have
been accrued as of June 26, 2000.
Common Stock
In May 2000, the Company sold 7,613 shares of common stock for $500, net of
expenses.
In June 2000, the Company issued 100,000 shares of common stock valued at $4,690
and $15,000 of cash as settlement of an outstanding claim against the company.
NOTE 11- INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS 109 requires a change from the deferred method of accounting for income
taxes of APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
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 26, 2000 and June 30, 1999 are presented below:
June 26, 2000 June 30, 1999
------------- -------------
Deferred tax assets:
Net operating loss carry-forward $7,316,000 $6,947,521
Less: Valuation allowance 7,316,000 6,947,521
--------- ---------
Net deferred tax assets $ - $ -
---------- ----------
The valuation allowance for deferred tax assets as of June 26, 2000 and June 30,
1999 was $7,316,000 and $6,947,521. The change in the total valuation allowance
for the years ended June 26, 2000 and June 30, 1999 was $368,479 and $1,347,597.
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 taxible 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 26, 2000 and June 30, 1999, the Company has
net operating loss carry forwards for Federal and State income tax purposes of
approximately $18,290,000 and $17,330,993 (the "NOL carry forwards"), which are
available to offset future taxable income, if any, through fiscal 2015. Based
upon the limited operating history of the Company and losses incurred to date,
management has fully reserved the deferred tax asset.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 11- INCOME TAXES (Continued)
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
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.
NOTE 12 - EMPLOYEE BENEFIT PLANS
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. The Employees Plan was
canceled in April 1999.
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.
The Director Plan was canceled in April 1999.
At June 26, 2000 and June 30, 1999, there were 1,000,000 and 295,000 additional
shares available for grant under the Employees and Director Plans. 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 2000, 1999 and 1998.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
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:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net loss available to common shareholders:
As reported $(1,650,595) $(3,550,881)
Pro-forma $(1,650,595) $(3,550,881)
Loss per share: As reported $ (0.03) $ (0.18)
Pro-forma $ (0.03) $ (0.18)
</TABLE>
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.
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 26, 2000 and June 30, 1999.
As of June 26, 2000 and June 30, 1999 there were no ISO's outstanding options
and 205,000 non-ISO's outstanding options. There were no ISO or non-ISO options
granted or terminated during Fiscal 2000 and Fiscal 1999.
At June 26, 2000, the range of exercise prices and range of the remaining
contractual life of outstanding non-ISO's options was $4.50 - $5.25 and
approximately 0.5 - 1.5 years.
At June 26, 2000 and June 30, 1999, the number of non-ISO's 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 ISO's,
non-ISO's, 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 years. The exercise price for
non-ISO's 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 ISO's, 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.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
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.
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 13).
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. This employment agreement was terminated in its
entirety, in December 1999. In January 2000, the Company issued 1,000,000
options to this officer of the Company as a severance payment. The Company
recognized $30,000 of compensation expense upon issuance of those options since
the fair market value per share ($0.08) was greater than the exercise price
($0.05).
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.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
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.
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.
NOTE 13 - 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,
1997employment 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.
This consulting agreement was terminated on December 31, 1999.
NOTE 14 - LOSS ON CLOSURE OF RESTAURANTS AND IMPAIRMENT CHARGES
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. 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.
The issuance of the 4,660 shares of Series B preferred stock resulted in a
charge of $42,800 to loss on closure of restaurant sites and the $39,998
forgiveness of debt was credited against additional paid-in capital.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 14 - LOSS ON CLOSURE OF RESTAURANTS AND IMPAIRMENT CHARGES (Continued)
Pursuant to a 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.
A note receivable of $230,000, which was received as partial consideration for
the March 1998 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 fiscal
1999.
NOTE 15 - LITIGATION
The Company was 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 Comapny
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. For Fiscal 1999, the Company reduced its
original accrual from $625,000 to $225,000 which represented the appealed
verdict in the quarter ended December 31, 1998.
During June 2000, the lawsuit was settled for $300,000 of which $225,000 was
paid by insurance companies and $45,000 was paid by the Company. As a result of
this settlement, the Company recognized $180,000 of litigation income in fiscal
2000, which represents the difference between the June 30, 1999 litigation
accrual of $225,000 and the actual payment of $45,000.
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
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 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.
NOTE 16 - EARNINGS (LOSS) PER SHARE
As discussed in Note 1, 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 2000 and 1999
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.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 2000 AND JUNE 30, 1999
NOTE 16 - EARNINGS (LOSS) PER SHARE (Continued)
The following table reconciles net loss per share with net loss per share
available to common stockholders:
2000 1999
---- ----
Net loss per share $(0.03) $(0.20)
Net gain on extraordinary item - 0.03
Net loss per share attributable to
preferred stock dividends (0.02) (0.01)
------- ------
Net loss per share available to
common stockholders $(0.05) $(0.18)
======= =======
NOTE 17 - SUBSEQUENT EVENTS
In July 2000, the Company was in default of the $237,506 of Series B convertible
subordinated notes payable, and additional accrued interest of approximately
$150,000 which matured on July 7, 2000.
In September 2000, the Company issued 13,916 shares of Series B preferred stock
as payment of the $347,904 of accrued dividends as of June 26, 2000.
