10QSB Quarterly Report
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission File No. 1-13818
Spencer's Restaurants, Inc.
(Name of small business issuer in its charter)
Delaware 06-1369616
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
106 Federal Road
Danbury, CT 06810
(Address of principal executive offices) (Zip Code)
The Rattlesnake Holding Company, Inc.
(former Name)
Registrant's telephone number, including area code: (203) 798-1390
Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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
29,979,013 Common Shares, par value $.001 per share were outstanding as of
December 27, 1999
<PAGE>
FORM 10-QSB
Spencer's Restaurants, Inc.
December 27, 1999
INDEX
Part I - Financial Information
Condensed Consolidated Balance Sheets as of December 27, 1999 (unaudited) 3
and June 30, 1999
Unaudited Condensed Consolidated Statements of Operations for three months
and six months ended December 27, 1999 and December 31, 1998 4
Unaudited Condensed Consolidated Statements of Cash Flows for six months
ended December 27, 1999 and December 31, 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis 9
Liquidity 11
Subsequent Events 13
Safe Harbor Statement 14
Part II - Other Information
Item 1: Legal Proceedings 15
Item 2: Defaults Upon Senior Securities
Item 3: Recent Sales of Unregistered Securities
Item 4: Submission of Matters Stockholders' vote
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
Signatures 17
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 27, 1999 and June 30, 1999
<TABLE>
<S> <C> <C>
December 27, 1999 June 30, 1999
Unaudited
ASSETS
Cash $ 1,032,825 $ 2,337,675
Accounts receivable 3,981 9,754
Inventory 14,298 16,688
Prepaids and other assets 13,165 11,918
--------------------------------------
Total current assets 1,064,269 2,376,035
Fixed assets, net 2,085,164 1,445,079
Intangibles, net 21,584 20,769
Other assets 82,133 76,383
--------------------------------------
2,188,881 1,542,231
----------------- ------------
Total Assets $ 3,253,150 $ 3,918,266
--------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long term debt 258,344 55,838
Accounts payable 812,313 689,679
Accrued expenses 469,625 678,221
Dividends payable 343,318 198,846
Other current liabilities 147,783 171,621
--------------------------------------
Total current liabilities $ 2,031,383 1,794,205
Notes payable, net of current maturities - 242,504
----------------- ------------
Total Liabilities $ 2,031,383 2,036,709
Series B Preferred Stock 34,317 32,856
$.10 par value, 5,000,000 shares authorized
December 27 and June 30, 1999 and 343,177
and 328,563 shares issued and outstanding
at December 27 and June 30, 1999, respectively
Common Stock 29,980 29,980
$.001 par value, 4,000,000 shares
authorized; 29,979,013 issued and
outstanding at December 27 and June 30, 1999
Additional paid in capital 20,986,092 20,794,657
Accrued dividends (343,318) (198,846)
Accumulated deficit (19,485,304) (18,777,090)
--------------------------------------
Total stockholders' equity
1,221,767 1,881,557
Total liabilities & stockholder's equity $ 3,253,150 3,918,266
--------------------------------------
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
Three Months and Six Months Ended December 27, 1999 and December 31, 1998
<TABLE>
<S> <C> <C>
Three Months Ended: Six Months Ended:
December 27, 1999 December 31, 1998 December 27, 1999 December 31, 1998
Restaurant Sales $ 558,114 $ 414,001 $ 881,811 $ 1,099,265
Less: promotional sales (16,453) (14,377) (23,904) (44,983)
------------------------------------------------------------------------------
Net Restaurant Sales 541,661 399,624 857,907 1,054,282
Cost and expenses:
Cost of food and beverage sales 234,220 152,587 313,910 421,998
Restaurant salaries and fringe benefits. 393,307 154,014 562,064 446,665
Occupancy and related expenses 27,745 136,766 55,530 376,078
Depreciation and amortization 7,840 11,189 17,571 22,282
Loss on restaurant closure - - 42,800 -
------------------------------------------------------------------------------
Total restaurant costs and expenses 663,112 454,556 991,875 1,267,023
Selling, general and administrative 341,253 156,650 574,246 377,473
Interest expense, net - 63,755 - 131,185
Litigation award - (400,000) - 225,000
------------------------------------------------------------------------------
341,243 (179,595) 574,246 733,658
Total Expenses 1,004,365 274,961 1,566,121 2,000,681
----------------- ---------------- --------------- ----------------
Net Income/(loss) before Extraordinary Item (462,704) 124,663 (708,214) (946,399)
Extraordinary Item:
Gain on the Extinguishment of Debt - 88,950 - 88,950
----------------- ---------------- --------------- ----------------
Net Income/(loss) before Preferred Dividends (462,704) 213,613 (708,214) (857,449)
Dividends on Preferred Shares (171,659) (25,954) (343,318) (51,909)
----------------- ---------------- --------------- ----------------
Net Income/(loss) Available to Common
Stockholders $ (634,363) $ 187,659 $ (1,051,532) $ (909,358)
------------------------------------ -----------------------------------
Weighted Average of Common Shares 29,979,013 13,130,503 29,979,013 12,693,324
Outstanding at 12/27/99 and 12/31/98:
Net Income/(Loss) Per Common Shareholder $ (0.02) $ 0.01 $ (0.04) $ (0.07)
------------------------------------------------------------------------------
</TABLE>
See the notes to the unaudited condensed consolidated
financial statements.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended December 27, 1999 and December 31, 1998
<TABLE>
<S> <C> <C>
December 27, 1999 December 31, 1998
Cash flows from operating activities:
Net loss $ (708,214) (857,449)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 17,571 25,085
Loss on restaurant closure 42,800
Litigation Award 225,000
Gain on the Extinguishment of Debt (88,950)
Valuation of warrants for services 4,331
Issuance of stock for services 72,909 25,000
Changes in assets and liabilities
Decrease in accounts receivable 5,773 10,853
Decrease in inventory 2,390 13,537
Increase in prepaid expenses and other assets (6,997) (4,738)
(Decrease) increase in accounts payable and accrued
expenses (85,962) 88,017
(Decrease) increase in other current liabilities (23,838) 14,521
----------------- -----------------------------
Net cash used in operating activities (683,568) (544,793)
Cash flows from investing activities:
Capital expenditures (671,282) (26,900)
----------------- -----------------------------
Net cash used in investing activities (671,282) (26,900)
Cash flows from financing activities
Proceeds from Issuance of preferred stock 50,000 -
Proceeds from Issuance of Convertible Notes - 150,000
Proceeds from issuance in common stock - 153,500
Principal repayments from borrowings - (25,000)
----------------- -----------------------------
Net cash provided by financing activities 50,000 278,500
Net decrease in cash (1,304,850) (293,193)
Cash at beginning of period 2,337,675 311,328
----------------- -----------------------------
Cash at end of period 1,032,825 18,135
----------------- -----------------------------
Cash paid during the period for:
Interest - 51,036
Income taxes - -
</TABLE>
See the notes to the unaudited condensed consolidated
financial statements.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES: NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
As of December 27, 1999, Spencer's Restaurant's and subsidiaries
("Company") owned and operated two restaurants: One in South Norwalk,
Connecticut and the other in Danbury, Connecticut. The South Norwalk location,
Rattlesnake Ventures Inc., features a casual dining concept with a Southwestern
theme.
The Danbury restaurant, opened on November 3, 1999, is the prototype of the
new Spencer's Restaurants theme. "Spencer's" specializes in steak, distinctive
shrimp dishes and various other offerings in a casual, family dining
environment.
2. Principles of Consolidation.
The consolidated financial statements include the accounts of Spencer's
Restaurants, Inc. and subsidiaries (the "Company"). All significant
inter-company accounts and transactions have been eliminated in consolidation.
3. Consolidated Financial Statements.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with generally accepted accounting principles and include
all adjustments which, in the opinion of management, are necessary to present
fairly the consolidated financial position of the Company as of December 27,
1999 and June 30, 1999, and the results of operations and cash flows for the
periods ended December 27, 1999 and December 31, 1998. In the opinion of
management, all necessary adjustments that were made are of a normal recurring
nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the year-end June 30, 1999. The results of operations for the period
ended December 27, 1999 are not necessarily indicative of the operating results,
which may be achieved for the full year.
4. Basis of Presentation
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
The accompanying unaudited condensed 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, the Company's
continuation as a going concern cannot be reasonably assured.
5. Private Placement Offering and Cost Reduction Plan.
Subsequent to the completion of the private placement in February 1999,
which effectively satisfied all short and long-term debt that was in default
(see Private Placement Offering below), the Company assembled a new management
team and developed a new restaurant theme which was introduced at the recently
reacquired Danbury, Connecticut location (as described in note number one above,
"Description of Business").
Management believes that the finalization of its cost reduction plan and
approximately $6,000,000 in 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 Company's
strategic plans, or if such plans are achieved, that the Company's operations
will be profitable.
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.
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 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 did file a registration statement on August 16, 1999 and plans
to file an amended registration during the 4th quarter.
The conversion price is subject to the adjustments on the terms set forth
in the Certificate of Designation. The outstanding preferred shares shall be
converted, with no action on the part of the holder, if, at any time after
February 2000, the common stock into which the same is converted is registered
under the Securities Act and the closing bid price of the common stock for
twenty consecutive trading days is at least four times the conversion price
($0.20 based on the initial conversion price of $0.05).
Holders of preferred shares are entitled to receive, semi-annually,
dividends at the rate of 8% per annum before any dividends may be paid with
respect to the Common Stock, which shall be paid in cash or preferred shares at
the election of the Company. If there is a failure to pay dividends, the
Placement Agent, on behalf of such holders, has the right to designate one
director to the Company's Board. In addition, if the Company fails to comply
with its obligations to file and process a Registration Statement, the dividend
rate will increase to 14% per annum from issuance.
Dividends for the first and second quarters have been accrued at 8%
per annum. The Company plans to pay these dividends in the form of additional
shares of Series B Stock during the 4th quarter.
Dividends were paid in September 1999 in the form of 7,954 additional
shares of Series B Preferre dStock.
Pursuant to the March 1998 agreement to acquire the Ottomanelli Group,
additional consideration due to anti-dilution provisions contained in the
agreements in the form of common stock was payable to the Ottomanelli Group
shareholders as a result of the private placement. In February 1999, 5,000,000
shares of common stock were issued pursuant to such provisions, as amended.
6. Restaurant Operations.
See Description of Business in note number one, above.
In April of 1999, 106 Federal Road Corporation, a wholly owned subsidiary
of the Company, purchased the former Rattlesnake Restaurant building and
accompanying land in Danbury, CT. 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. This first Spencer's Restaurant opened for business
on November 3, 1999.
On September 3, 1999, the Company formally changed its name with the
appropriate authorities to Spencer's Restaurants, Inc. (symbol: "SPST") from The
Rattlesnake Holding Company Inc. (symbol: "RTTL")
In September 1999, the Company finalized its agreement with the landlord of
its previously closed restaurant in Flemington, New Jersey. The agreement
completely satisfied all remaining obligations for past due rents, real estate
taxes, utilities and outstanding $39,998 note payable. The Company assigned the
liquor license in satisfaction of the note payable and issued 4,660 shares of
Series B Preferred stock with a valuation of $116,500 to complete the settlement
and to terminate the lease. The Company incurred a $42,800 loss due to the
finalization of the restaurant closure.
On July 3, 1998, the Company entered into a contract for the purchase of a
restaurant facility in Greenwich, Connecticut for $400,000 in a combination of
cash and notes. The Company ultimately chose not to purchase this property.
On July 2, 1998, the Company signed an agreement to purchase some of the
assets of 1562 Restaurant Corp. Located at 1562 Second Avenue, New York City.
The purchase price was $425,000 payable $20,000 on contract, $105,000 at
closing, and a promissory note at 8.5% payable in 72 payments of $5,332.52. The
Company decided not to pursue the acquisition of this restaurant.
On December 15, 1999, the Company's contract with its Chief Financial
Officer was terminated without payment or further remuneration.
7. Litigation
The Company is a co-defendant in an action brought by an owner of an apartment
above the South Norwalk Company restaurant for negligence per se, intentional
infliction of emotional distress, negligent infliction of emotional distress,
and violations of the Connecticut Unfair Trade Practices Act (CUTPA) based upon
alleged excessive noise and rude and/or threatening conduct of employees. The
jury awarded a verdict in the amount of $625,000 against various defendants,
including the Company`s former Chairman on August 5, 1998. Accordingly, the
Company has recorded a $625,000 charge in the quarter ended September 30, 1998
to accrue this judgment. On November 20, 1998, the Court set aside the jury's
verdict as to all counts against the Company except for plaintiff's claim for
negligence per se and accordingly reduced the jury's award to $225,000.
Accordingly, the Company reduced by $400,000, in the quarter ended December 31,
1998; the amount of the accrual recognized in the quarter ended September 30,
1998. The jury's award is currently on appeal by the Company, and plaintiff has
appealed the Court's decision to set aside a portion of the jury's verdict and
reduce the award. There are also potential claims of indemnification by other
defendants against the Company in the event the plaintiff's appeal is
successful.
In July 1999, a demand letter was tendered to the Company by the legal
counsel of the former Chairman seeking indemnification from potential
liabilities arising out of this matter. This demand is based on an
indemnification provision in an agreement between the former Chairman and the
Company. The Company believes that there are valid defenses to the
indemnification claim.
Plaintiff's negligence claims in this matter are arguably covered by one or
more of the Company's insurance policies. Farmington Casualty Company
("Farmington") and Insurance Company of Greater New York ("GNY"), two out of
three of the Company`s insurance carriers, retained counsel to represent the
Company and defended the Company in this case under a reservation of rights. The
third, Public Service Mutual Ins. Co., denied coverage for the claim altogether.
GNY and Farmington have continued to prosecute the appeal in this matter, but
under a reservation of rights. The Company has advised Farmington and GNY that
it intends to pursue its rights in an action for damages and declaratory relief
in the event that the appeal is unsuccessful and the insurance carriers refuse
to provide coverage for plaintiff's claims. GNY and Farmington continue to
reserve all rights with respect to coverage.
Settlement negotiations are ongoing. However, there can be no assurance of
a satisfactory settlement.
The Company is a defendant in an action for an alleged breach of a
commercial lease in which damages exceeding $190,000 are being sought. The
Company has disputed this claim and believes that the plaintiff has inadequately
responded to the Company's demand for discovery and inspection and
interrogatories. A compliance conference was adjourned to May 5, 2000. 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 is not aware of the ultimate
resolution of these actions, nor believes they will be material and have an
adverse affect on the Company's consolidated financial position, results of
operations and liquidity.
MANAGEMENT DISCUSSION AND ANALYSIS
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto issued in its 10-K report for the fiscal
period June 30, 1999.
This analysis by management contains some forward-looking statements. When
we use the words" "anticipate," "believe," "estimate," "expect," and similar
expressions that relate to the Company and its management, they are intended to
identify such forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Our actual results performance and
achievements could differ materially from the results expressed or implied by
these forward-looking statements.
Upon the finalization in 1999 of the $6,000,000 Series B Preferred Stock
private placement offering, the Company completed its Cost Reduction Plan
commenced in fiscal year 1997.
The company presently operates a Rattlesnake Southwestern Grill in South
Norwalk, Connecticut and the Spencer's Restaurant in Danbury, CT. The Company
has closed all other restaurants previously owned as of June 30, 1999.
The Company's new management team of experienced industry-specific
personnel has developed a strategy through Company and franchised operation of a
multi-regional chain of mid-priced steakhouse restaurants.
Operating results for the quarter ended December 27, 1999 as compared with the
quarter and six months ended December 31, 1998 are as follows:
Gross restaurant sales increased 34.8% to $558,114 for the quarter ended
December 27, 1999 from $414,001 for quarter ended December 31, 1998. For the six
months ended December 27, 1999 gross restaurant sales decreased 19.8% to
$881,811 from $1,099,265 for the six months ended December 31, 1998. Likewise,
net restaurant sales increased 35.5% to $541,661 for the quarter in 1999 from
$399,624 for this same quarter in 1998. For the six months ended December 27,
1999 net restaurant sales decreased 18.6% to $857,907 from $1,054,282. These
increases in restaurant sales for the quarter ended December 27, 1999 are due in
part to the new Spencer's restaurant opening in November of 1999.
Promotional sales increased from $14,377 for the three months ended
December 31, 1998 to $16,453 for the quarter ending December 27, 1999. This
14.4% increase is attributable to the commencement of operations of the new
Spencer's Restaurant which opened November 3, 1999. Promotional sales for the
six months ended December 27, 1999 decreased from $44,983 for the six months
ended December 31, 1998 to $23,904, a 46.9% decrease.
Cost of food and beverage sales increased as a percentage of net sales from
38.2% for the three months ended December 31, 1998 to 43.2% for the quarter
ended December 27, 1999. The percentage increase is attributable to Training,
Research and Development, and other pre-opening costs expensed this year due to
the change in accounting rules and the opening of a new restaurant (SOP 98-5).
The cost of food and beverage sales increased to $234,220 for the three months
ended December 27, 1999 from $152,587 for the three months ended December 31,
1998. For the six months ended December 27, 1999, the cost of food and beverage
sales decreased as a percentage of net sales from 40.0% for the six months ended
December 31, 1998 to 36.6%. The cost of food and beverage sales decreased to
$313,910 for the six months ended December 27, 1999 from $421,998 for the six
months ended December 31, 1998.
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
increased to $393,307 for the three months ended December 27, 1999 from $154,014
for the three months ended December 31, 1998. The increase is attributable to
several factors, including the new restaurant opening during on November 3,
1999, preparation of staff regarding same, and a Manager in Training Program
geared towards future expansion. For the six months ended December 27, 1999
restaurant salaries and fringe benefits increased to $562,064 from $446,665 for
the six months ended December 31, 1998. This increase is mostly attibutable to
the new restaurant opening of Spencer's in November, 1999.
Occupancy and other related expenses, which include linen, repairs,
maintenance, utilities, rent, insurance and other occupancy related expenses,
decreased to $27,745 for the three months ended December 27, 1999 from $136,766
for the three months ended December 31, 1998. The decrease is due to the closure
of unprofitable units. As a percentage of net restaurant sales, these costs
decreased from 34.2% in the three months ended December 31, 1998 to 5.1% for the
quarter ended December 27, 1999. For the six months ended December 27, 1999
occupancy and other related expenses decreased to $55,530 from $376,078 for the
six months ended December 31, 1998. As a percentage of net restaurant sales
these costs decreased from 35.6% to 6.4% for the six months ended December 31,
1998 and December 27, 1999 respectively.
Depreciation and amortization expense, decreased from $11,189 or 2.8% of
net restaurant sales for the three months ended December 31, 1998, to $7,840 or
1.4% of net sales for the three months ended December 27, 1999. Depreciation and
amortization expense decreased from $22,282 or 2.1% of net restaurant sales for
the six months ended December 31, 1998 to $17,571 or 2.0% of net restaurant
sales for the six months ended December 27, 1999.
Selling, general and administrative expenses increased from $156,650, or
39.2% of net sales for the quarter ended December 31, 1998, to $341,253, or
63.0% of net sales, for the three months ended December 27, 1999. This amount of
increase experienced is due to, in part, the enactment of SOP 98-5, as well
corporate planning for expansion. (SOP 98-5 is a new accounting pronouncement
that requires that the Company to expense all pre-opening or start-up costs that
are not otherwise allowed to be capitalized. Selling, general and administrative
expenses increased from $377,473 or 35.8% of net restaurant sales for the six
months ended December 31, 1998 to $574,246 or 66.9% of net restaurant sales for
the six months ended December 27, 1999.
The Company did not incur any interest expense, net, for the three months
ended December 27, 1999 and for the six months ended December 27, 1999 compared
to costs of $63,755 and $131,185 for the three months ended December 31, 1998
and the six months ended December 31, 1998 respectively.
The Company is a co-defendant in an action brought by an owner of an
apartment above the South Norwalk Company restaurant for negligence per se,
intentional infliction of emotional distress, negligent infliction of emotional
distress, and violations of the Connecticut Unfair Trade Practices Act (CUTPA)
based upon alleged excessive noise and rude and/or threatening conduct of
employees. The jury awarded a verdict in the amount of $625,000 against various
defendants, including the company's former Chairman on August 5, 1998.
Accordingly, the Company recorded a $625,000 charge in the quarter ended
September 30, 1998 to accrue this judgment. On November 20, 1998, the Court set
aside the jury's verdict as to all counts against the Company except for the
plaintiff's claim for negligence per se and accordingly reduced the jury's award
to $225,000. Accordingly, the company reduced by $400,000, in the quarter ended
December 31, 1998, the amount of the charge recognized in the quarter ended
September 30, 1998. The jury's award is currently on appeal by the Company, and
plaintiff has appealed the Court's decision to set aside a portion of the jury's
verdict and reduce the award. There are also potential claims of indemnification
by the other defendants against the Company in the event the plaintiff's appeal
is successful.
YEAR 2000 MODIFICATIONS:
The Year 2000 Issue was 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 have recognized a date
using "00" as the year 1900 rather than the year 2000, resulting in possible
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 problems as related to the Year 2000
Issue nor does the Company anticipate any latent Y2K as its operations use only
updated computers with Y2K compliant systems. In sum, the Company's plan to
prepare for and resolve the Year 2000 Issue involved the following four phases:
assessment, remediation, testing and implementation. As of December 27, 1999,
the Company has fully completed its assessment of all internal systems that
could be significantly affected by the Year 2000. The completed assessment
indicated that most of the Company's significant information technology systems
will not be significantly affected, particularly the general ledger, and
inventory systems.
LIQUIDITY
The Company has a long history of losses, which has depleted its capital
resources and has resulted in the incurrence of a significant amount of
indebtedness. Without additional funds, the Company will have to abandon its
long-term plans for the Spencer's concept development and the opening of
additional restaurants, and drastically reduce its corporate overhead. The
Company estimates that the financing obtained at the Offering will enable the
Company to affect some expansion and to operate through July 2000. There can be
no assurance that the Company will have adequate resources after such time
unless it conducts profitable operations and/or obtains additional financing of
which there can be no assurance. The Company continues to explore equity
investments but there is no assurance the Company will be successful.
The Company has incurred aggregate losses since inception of $19,485,304
inclusive of a net loss for the six months ended December 27, 1999 of $708,214.
Based upon interim financial information prepared by management, the Company has
continued to incur losses in fiscal 2000.
Subsequent to the completion of the private placement in February 1999,
which effectively satisfied all short and long-term debt that was in default,
the Company has assembled a new management team and developed a new restaurant
theme, which was introduced at the recently reacquired Danbury, Connecticut
location (as described in note number one above in "Description of Business").
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 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 did file a registration statement on August 16, 1999 and plans
to file an amended registration statement during the 4th quarter.
The conversion price is subject to the adjustments on the terms set forth
in the Certificate of Designation. The outstanding preferred shares shall be
converted, with no action on the part of the holder, if, at any time after
February 2000, the common stock into which the same is converted is registered
under the Securities Act and the closing bid price of the common stock for
twenty consecutive trading days is at least four times the conversion price
($0.20 based on the initial conversion price of $0.05).
Holders of preferred shares are entitled to receive, semi-annually,
dividends at the rate of 8% per annum before any dividends may be paid with
respect to the Common Stock, which shall be paid in cash or preferred shares at
the election of the Company. If there is a failure to pay dividends, the
Placement Agent, on behalf of such holders, has the right to designate one
director to the Company's Board. In addition, if the Company fails to comply
with its obligations to file and process a Registration Statement, the dividend
rate will increase to 14% per annum from issuance.
Dividends for the first and second quarters have been accrued at 8% per
annum. The Company plans to pay these dividends in the form of additional shares
of Series B Preferred Stock during the 4th quarter.
Dividends were paid in September 1999 in the form of 7,954 additional
shares of Series B Preferred Stock.
In April of 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 that this will
occur.
Cash Flows from Operating Activities for the six months ended December 27,
1999 were ($683,568) as opposed to ($544,793) for the same period in the
previous year.
Cash Flows used in Investing Activities were ($671,282) for the six months
ended December 27, 1999 whereas in 1998, for the first six months, ($26,900)
accounted for the cash flows used in investing activities. This difference 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 $50,000 for the six months ended
December 27, 1999 due to the sale of Series B Preferred Stock in July, 1999
whereas in 1998 for six months cash flows from financing activities were
$278,500.
Given the above, cash during the six months' ended December 27, 1999
decreased by $1,304,850 as compared to a decrease of $293,193 during the same
six months in 1998.
At December 27, 1999, the following obligations are past due and in
default; $18,750 of Series C subordinated notes payable, matured in August 1997,
and $2,089 subordinated note payable matured in August 1996 (the Company has
been unable to locate either note or note holder).
Management believes that the finalization of its Cost Reduction Plan, the
launch of its new restaurant concept, Spencer's, and $6,000,000 in private
placement financing will enable the Company to achieve profitable operations and
restore liquidity. However, no assurances can be made that these objectives will
be met.
SUBSEQUENT EVENTS
On December 31, 1999, a contract scheduled to expire October, 2001 for
consulting services being provided the Company was terminated by the consultant.
On January 31, 2000 the Company accepted the resignation of its Senior Vice
President, Nicolo Ottomanelli. Mr. Ottomanelli remains on the Board of Director
and provides consulting services to the Company on an as needed basis. His
contract was terminated effective with the resignation without payment or
further remuneration.
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.
SAFE HARBOR STATEMENT
Certain statements in this Form 10-QSB, including information set forth
under "Management's Discussion and Analysis" constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). The Company desires to avail itself of certain "safe
harbor" provisions of the Act and is therefore including this special note to
enable the Company to do so. Forward-looking statements included in this Form
10-QSB or hereafter included in other publicly available documents filed with
the Securities and Exchange Commission, reports to the Company`s stockholders
and other publicly available statements issued or released by the Company
involve known and unknown risks, uncertainties, and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ from the future results, performance (financial or
operating) or achievements expressed or implied by such forward looking
statements. Such future results are based upon management's best estimates based
upon current conditions and the most recent results of operations. These risks
include, but are not limited to, risks associated with potential acquisitions,
successful implementation of the Company`s cost containment plan and new
operating strategy, immediate need for additional capital, competition, and
other risks detailed in the Company`s Securities and Exchange Commission
filings, including its Annual Report on Form 10-KSB for the fiscal year 1999,
each of which could adversely affect the Company's business and the accuracy of
the forward looking statements contained herein.
PART II - OTHER INFORMATION
Item 1: - Legal Proceedings
South Norwalk, Connecticut
The Company is a co-defendant in an action brought by an owner of an
apartment above the South Norwalk Company restaurant for negligence per se,
intentional infliction of emotional distress, negligent infliction of emotional
distress, and violations of the Connecticut Unfair Trade Practices Act (CUTPA)
Based upon alleged excessive noise and rude and/or threatening conduct of
employees. The jury awarded a verdict in the amount of $625,000 against various
defendants, including the Company`s former Chairman on August 5, 1998. On
November 20, 1998, the Court set aside the jury's verdict as to all counts
against the Company except for plaintiff's claim for negligence per se and
accordingly reduced the jury's award to $225,000. The jury's award is currently
on appeal by the Company, and plaintiff has appealed the Court's decision to set
aside a portion of the jury's verdict and reduce the award. There are also
potential claims of indemnification by other defendants against the Company in
the event the plaintiff's appeal is successful.
In July 1999, a demand letter was tendered to the Company by the legal
counsel of the former Chairman seeking indemnification from potential
liabilities arising out of this matter. This demand is based on an
indemnification provision in an agreement between the former Chairman and the
Company. The Company believes that there are valid defenses to the
indemnification claim.
Plaintiff's negligence claims in this matter are arguably covered by one or
more of the Company's insurance policies. Farmington Casualty Company
("Farmington") and Insurance Company of Greater New York ("GNY"), two out of
three of the Company`s insurance carriers, retained counsel to represent the
Company and defended the Company in this case under a reservation of rights. The
third, Public Service Mutual Ins. Co., denied coverage for the claim altogether.
GNY and Farmington have continued to prosecute the appeal in this matter, but
under a reservation of rights. The Company has advised Farmington and GNY that
it intends to pursue its rights in an action for damages and declaratory relief
in the event that the appeal is unsuccessful and the insurance carriers refuse
to provide coverage for plaintiff's claims. GNY and Farmington continue to
reserve all rights with respect to coverage.
Settlement negotiations are ongoing, however, there can be no assurance of
a satisfactory settlement
Danbury, Connecticut
A foreclosure action was commenced in September or October 1998 by Union
Savings Bank (the "Bank") against the landlord of The Rattlesnake Southwestern
Grill (closed for renovations) in Danbury, Connecticut based on the landlords
mortgage arrears. Rattlesnake Danbury, Inc., the lessee of the restaurant, has
been joined as a defendant. The Company negotiated the purchase of this property
from the mortgage holder for $1,350,000 in March 1999.
Lynbrook, New York
The Company is defending an action brought by Jack Cioffi Trust, the
landlord of a former Rattlesnake restaurant in Lynbrook New York leased by a
subsidiary of the Company. The action against the Company is based on an alleged
guaranty of the lease payments due from the subsidiary of the Company. The
Company is of the position that the landlord waived the guarantee at the time of
the surrender of the premises in September 1997. The action seeks the sum of
approximately $190,000. A Compliance Conference was adjourned until May 5, 2000.
The Company intends to vigorously defend this action.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None in this quarter.
Item 4 - Submission of Matters to a Vote of Stockholders during the quarter
ending December 27, 1999:
None.
Item 5. - Other Information.
The Company's Common Stock is not listed on the NASDAQ Small Cap Market and
as of November 4, 1997 was suspended from trading on the Boston Stock Exchange
(the "BSE"). The BSE has applied for the de-listing of the Company common stock
from such exchange pursuant to Rule 12d-2f2.
The Company securities are traded on the NASDAQ Bulletin Board. Due to the
nature of such markets and the "penny stock' rules to which the common stock
trades (Rule 15g-9 promulgated under the SEC Act) there may not be a liquid
trading market in the common stock.
Item 6. - Exhibits and Reports on Forms 8-K.
During the quarter ended December 27, 1999, the Company filed no reports on
Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Spencer's Restaurants, Inc.
(Registrant)
By: /s/ Kenneth Berry
---------------------
Kenneth Berry
President and Acting CFO
By: /s/ Henry Zowine
--------------------
Henry Zowine
Chief Accountant
