As filed with the Securities and Exchange Commission on July ____2000
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
SPENCER'S RESTAURANTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
The Rattlesnake Holding Company, Inc.
(Former Name)
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Delaware 5812 06-1369616
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
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106 Federal Road
Danbury, CT 06810
Telephone: (203) 798-1390
(Address and Telephone Number of Principal Executive Offices)
Kenneth Berry
President
Spencer's Restaurants, Inc.
106 Federal Road
Danbury, CT 06810
Telephone: (203) 798-1390
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Stuart M. Sieger, Esq.
Seth I. Rubin, Esq.
Ruskin, Moscou, Evans & Faltischek, P.C.
170 Old Country Road
Mineola, NY 11501
Telephone: (516) 663-6546
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: _____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: _____
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: _____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: |_|
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Each Class Maximum Maximum
of Securities to be Number of Shares to Offering Price Aggregate Offering Amount of
Registered be Registered Per Share (1) Price (1) Registration Fee
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Common Stock 200,000,000 Shares $0.05 $10,000,000 $2,640
Total Registration Fee: ---- ---- $10,000,000 *
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended (the
"Securities Act").
* Registration fee paid with original filing of S-1 Registration Statement on
August 16, 1999.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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CROSS REFERENCE SHEET
Item and Heading Location in Prospectus
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1. Forepart of the Registration Statement Outside Front Page of Prospectus
Front Cover
2. Inside Front and Outside Back Cover Inside Front Back Cover Pages of Prospectus
and Outside Pages of Prospectus
3. Summary Information, Risk Factors Summary of Summary Information, Risk Factors Summary of
Prospectus; and Ratio of Earnings to Fixed Charges Prospectus; and Ratio of Earnings to Fixed Charges Risk
Risk Factors Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Determination of Offering Price
6. Selling Security Holders Selling Security Holders
7. Plan of Distribution Plan of Distribution
8. Description of Securities to be Registered Description of Securities to be Registered
9. Interest of Named Experts and Legal Matters Legal Matters; Experts
10. Information with Respect to the Registrant Information with Respect to the Registrant
11. Incorporation of certain information Incorporation of certain information
12. Disclosure of Commission Position on Position on Indemnification Act
Indemnification for Securities
13. Other Expenses of Issuance and Distribution Other Expenses of Issuance and Distribution
14. Indemnification of Officers and Directors Indemnification of Directors and Officers
15. Exhibits Exhibits
16. Undertakings Undertakings
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SUBJECT TO COMPLETION, DATED JULY ___, 2000
PROSPECTUS
SPENCER'S RESTAURANTS, INC.
200,000,000 SHARES OF COMMON STOCK OFFERED BY SELLING
SECURITY HOLDERS
This is an offering of up to 200,000,000 shares (the "Shares") of Common
Stock of Spencer's Restaurants, Inc., f/k/a The Rattlesnake Holding Company,
Inc. (the "Company"), by the Selling Security Holders named herein. The selling
security holders may be deemed to be underwriters when they sell their shares.
See "Plan of Distribution."
The Company will pay certain costs and expenses incurred in connection with
the registration of the shares of Common Stock ("Shares") offered hereby, but
the Selling Security Holders shall be responsible for all selling commissions,
transfer taxes and related charges in connection with the offer and sale of such
Shares. See "Plan of Distribution." The Company anticipates incurring expenses
totaling approximately $__________ payable in connection with the shares being
registered hereby.
The Common Stock of the Company, par value $.001 per share, is quoted on
the NASDAQ Bulletin Board under the symbol "SPST"; prior to September 9, 1999,
it traded under the symbol "RTTL." On July 14, 2000 the closing sale price of
the Company's Common Stock on the NASDAQ Bulletin Board was $.05 per share. The
Selling Security Holders may sell all or a portion of the Shares offered hereby
in private transactions or in the over-the-counter market at prices related to
the prevailing prices of the Shares on the NASDAQ Bulletin Board at the time of
sale. Any securities covered by this Prospectus which qualify for sale pursuant
to Rule 144 under the Securities Act may be sold by a Selling Security holder
under Rule 144 rather than pursuant to this Prospectus. See "Plan of
Distribution."
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SECURITY HOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THE SHARES AND THE SELLING SECURITY HOLDERS
ARE NOT SOLICITING AN OFFER TO BUY THE SHARES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
THE DATE OF THIS PROSPECTUS IS _________, 2000.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that you
should consider before deciding to invest in our shares. We urge you to read
this entire prospectus carefully including the "Risk Factors" section which
begins on page __ and the consolidated financial statements and the notes to
those statements. An investment in these securities involves a high degree of
risk.
This prospectus includes forward-looking statements which involve known and
unknown risks and uncertainties or other factors that may cause actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed under the heading "Risk Factors."
In this "Prospectus Summary" section, "we," "our" and "ours" refer to the
Company, and "you," "your" and "yours" refer to a purchaser of the Shares
offered by this prospectus.
The Company
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, we 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, we
experienced substantial losses and incurred a significant amount of debt. In
1997, our Board of Directors elected certain of its members as officers to take
control of operations and replace the existing management pursuant to its cost
reduction plan (the "Cost Reduction Plan"). We then disposed of development
projects and non-performing restaurants, negotiated severance agreements with
the former management, and sharply reduced general and administrative expenses.
In late fiscal 1998, the Company modified its expansion and operating
strategy to facilitate a more rapid course to profitability and accelerate the
reduction of losses pursuant to the Cost Reduction Plan. This new strategy
incorporates a sharpened focus on existing profitable restaurants, the
elimination or conversion of unprofitable restaurants and the implementation of
aggressive cost cutting measures designed to reduce operating expenses and
improve restaurant operating performance. The Company has, accordingly,
terminated operations at seven locations.
In fiscal 1998, in furtherance of the Cost Reduction Plan, we terminated
operations at its Lynbrook, New York and Danbury, Connecticut facilities, and in
November 1998, terminated operations at its Flemington, New Jersey facility as
well, for which 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 restaurant concept opened in November 1999.
We continue to operate a self-sustaining Rattlesnake(R) Southwestern Grill
in South Norwalk, Connecticut.
In October 1998, we commenced a private placement offering (the "Offering")
of our securities, pursuant to which we offered investors Series B Convertible
Preferred Shares. See "Description of Securities - Preferred Shares." Upon
completion of the Offering in July 1999, we had raised approximately $6,000,000
and converted approximately $1,350,000 of debt to equity. After satisfying
certain of our remaining debts, disbursements of and commissions to the
placement agent, and payment of other expenses of the Offering, we secured
approximately $4,000,000 for working capital use.
We have commenced concept development of a multi-regional chain of
mid-priced steakhouses, to feature price/value steak and distinctive shrimp (and
other) dishes, tentatively named Spencer's. Spencer's is a price/value oriented
restaurant concept which is designed to provide fresh, high quality food at
moderate prices in a relaxed atmosphere.
The principal office of the Company is 106 Federal Road, Danbury, CT 06810
and our telephone number is (203) 798-1390.
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The Offering
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Common Stock Offered................................... 200,000,000 shares
Common Stock Outstanding After the Offering................ 229,973,019 shares
Use of Proceeds............................................ We will not receive any of the proceeds
of the shares of Common Stock sold by
the Selling Security Holders. See
"Plan of Distribution" and Use of
Proceeds".
Risk Factors............................................... This Offering involves a high degree of
risk. See "Risk Factors".
Over-the-Counter Bulletin Board Symbol..................... "SPST" (formerly "RTTL")
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RISK FACTORS
An investment by you in the shares offered by this prospectus is
speculative and involves a high degree of risk. You should only purchase these
securities if you can afford to lose your entire investment. Before making an
investment, you should carefully consider the following risks and speculative
factors, as well as the other information contained in this prospectus. As
discussed in the Summary, this prospectus contains forward-looking statements
that involve risks and uncertainties. The actual results of the Company's
operations could be significantly different from the information contained in
those forward-looking statements. Those differences could result from the risk
factors discussed immediately below, as well as factors discussed in other
places in this prospectus.
We have a history of operating losses. We have a history of losses since
our inception in 1993. As of the end of our June 30, 1999 fiscal year, losses
aggregated $18,777,090 including losses of $3,236,039 and $3,352,035 for our
fiscal years ended June 28, 1998 and June 30, 1999, respectively. For the nine
months ended March 27, 2000, we recorded losses of $1,085,524 before preferred
dividends payable in stock. Our future profitability will depend upon, among
other things, our ability to generate a level of revenues sufficient to offset
our cost structure in addition to reducing our operating costs on a per location
basis. We believe 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 we will achieve significantly
increased revenues or maintain profitable operations.
We need significant capital and have no agreements to obtain same. Our
capital requirements have been significant and our cash requirements have been
exceeding our cash flow from operations (at March 27, 2000, we had a working
capital deficit of $1,151,726) due to, among other things, costs associated with
the prior development and operation of our Rattlesnake(R) Southwestern Grill
restaurants and our Spencer's Restaurants operations. At March 27, 2000, current
liabilities totaled approximately $1,838,000. We have been dependent upon sales
of our equity securities and loans to finance our working capital requirements.
We have no current arrangements with banks or otherwise with respect to, or
potential sources of additional financing, and it is not anticipated that any
officers, directors or stockholders will provide loans to us. Consequently there
can be no assurance that any additional financing will be available to us when
needed, on commercially reasonable terms, or at all. Any inability to obtain
additional financing when needed would have a material adverse effect on us,
including requiring us to curtail our expansion efforts. In addition, any
additional equity financing may involve substantial dilution to the interests of
our then existing stockholders.
We are involved in litigation. We are a party defendant to certain
litigation and may, in the future, be involved in additional litigation. If such
litigations are concluded on unfavorable terms, the litigations could have a
material adverse effect on us and our prospects. (See "Legal Proceedings.")
We depend on key management and advisors. The success of the Company will
be dependent on its ability to attract and retain experienced management and
restaurant industry personnel. We anticipate the receipt of strategic advice
from Stephan A. Stein, and full time services from Kenneth Berry as President.
These individuals have entered into agreements with us including varying levels
of commitment. The loss of the advice or services of any one or more of these
persons could have a material adverse effect on the business and prospects of
the Company. We face considerable competition from other food service businesses
for personnel, many of which have significantly greater resources than we have.
There can be no assurance that we will be able to attract and retain personnel
in the future, and the inability to do so could have a material adverse effect
on us.
Our business is highly competitive. 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 we have, 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 our
competitors have been in existence for substantially longer periods than we
have, may be better established in the markets where our 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. We 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 we believe that
we are focusing on exciting and profitable menu items, there can be no assurance
that consumers will regard our 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 our competitors.
We have experienced a high failure rate of restaurants we opened. The
opening of new restaurants is characterized by a very high failure rate, such as
our Rattlesnake Southwestern Grill restaurants. We propose 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, we 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,
we will remain dependent upon a limited number of restaurants for substantially
all of its revenues. The lack of success or closing of our existing restaurants,
or the unsuccessful operation of a new restaurant, could have material adverse
effect upon the financial condition and results of operations of the Company.
Our new concept is unproven and expansion carries high risks. We are
currently implementing a strategy to change our concept and build a restaurant
chain. We have limited experience in effectuating rapid expansion and in
managing a large number of locations or locations that are geographically
dispersed. Our proposed expansion will be dependent on, among other things,
achieving significant market acceptance for our 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, our ability to
integrate new restaurants into our 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 we are 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, we may not be able
to open all of such locations in a timely manner, or at all. Moreover, we are
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 we 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.
Our restaurants will have significant startup expenses. Our 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 we 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. We expect that future quarterly operating
results will fluctuate as a result of the timing of, and expenses related to,
the openings of new restaurants (since we 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, our 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. We
estimate that the costs of opening our future locations (location acquisition
and concept conversion) will be approximately $700,000 per location, net of any
anticipated landlord contributions. We expect that we 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.
Our restaurants must meet changing consumer preferences. 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. Our
success will depend on our 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 our business.
We will concentrate in the New York Metropolitan area. Our existing
restaurant, and the initial site selection(s), are to be in the New York
metropolitan tri-state area. Given our geographic concentration, adverse
publicity relating to our restaurants could have a more pronounced adverse
effect on our operating results than might be the case if our 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 our operations and prospects.
Our business is less active in extreme Summer and Winter seasons. The
restaurant business is seasonal, and could be adversely affected by extreme
weather during what would otherwise be a period of higher sales.
Our menu features steak and shrimp. The focus of our restaurant expansion
will be on a menu featuring mid-priced steaks and a variety of shrimp selections
(as well as other foods). Although we believe 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, we 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.
Our product costs are subject to fluctuation. Our profitability is
dependent on our ability to anticipate and react to increases in food, labor,
employee benefits, and similar costs over which we have limited control.
Specifically our dependence on frequent deliveries of meat, seafood and produce
subjects us 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. We believe we 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 we will be able to continue to
anticipate and respond to such supply and price fluctuations in the future or
that we will not be subject to significantly increased costs in the future.
Moreover, we do not maintain long term supply contracts with any of our
suppliers, and purchases products pursuant to purchase orders placed from time
to time in the ordinary course of business. Although we believe that our
relationships with our 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 us.
Our alcoholic beverage sales can expose us to liability. Our restaurants
are 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. 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 our
customers. We carry insurance for this liability.
We are subject to extensive government regulation. We are 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. Our 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 our 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. Our restaurants are currently designed to be accessible to the
disabled, and we believe that we are in compliance with all current applicable
regulations relating to accommodations for the disabled. However, there can be
no assurance that we 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.
We may be unable to protect our proprietary information. Our business
prospects will depend in part on our ability to develop favorable consumer
recognition of the Spencer's name, which is only a proposed name and not a
trademark. Although we 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) our registration will be issued and will not violate the
proprietary rights of others or that our trademarks would be upheld; or (ii)
that we would not be prevented from using our trademarks, if challenged, any of
which could have an adverse effect on us. In addition, we will rely on trade
secrets and proprietary know-how, and will employ various methods, to protect
our 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 our know-how, concepts and recipes.
We do not maintain confidentiality and non-competition agreements with all of
our executives, key personnel or suppliers. There can be no assurance that we
will be able to adequately protect our trade secrets. In the event competitors
independently develop or otherwise obtain access to our know-how, concepts,
recipes or trade secrets, we could be adversely affected.
We don't plan to pay dividends. We have never paid any dividends on our
Common Stock and does not anticipate paying cash dividends in the foreseeable
future, except for possible cash dividends on the Preferred Shares. We currently
intend to retain any and all earnings for use in connection with the expansion
of our business and for general corporate purposes. The declaration and payment
of future cash dividends, if any, will be at the sole discretion of our Board of
Directors and will depend upon our profitability, financial condition, cash
requirements future prospects, and other factors deemed relevant by the Board of
Directors.
We have a large number of shares eligible for future sale. As of March 27,
2000, we 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. We filed a registration statement under the
Securities Act of 1933 in August 1999 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 during the third quarter of calendar 2000. No prediction can be
made as to the effect, if any, that sales of shares of Common Stock or even the
availability of such shares for sale will have on the market prices prevailing
from time to time. The possibility that substantial amounts of Common Stock may
be sold in the public market is likely to adversely affect the prevailing market
price for the Common Stock and could impair our ability to raise capital through
the sale of its equity securities at future dates.
Our outstanding options and warrants are many time the number of shares now
outstanding. There are approximately 165,000,000 shares of Common Stock reserved
for issuance upon conversion of our 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 our 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 we 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 we would, in all likelihood, be able to obtain
capital on terms more favorable to us than those provided by such securities.
The Delaware Anti-Takeover Statute and the issuance of preferred stock
would make a take-over more difficult. As a Delaware corporation, we will become
subject to prohibitions imposed by Section 203 of the Delaware General
Corporation Law ("DGCL"). In general, this statute prohibits us from entering
into certain business combinations without the approval of our 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 us. In addition, our
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.
Our NASDAQ Bulletin Board listing limits interest in our stock. We will
seek to list the Common Stock on Nasdaq Small Cap or National Market System as
soon as deemed practical. We 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 us to seek authorization from our
stockholders for a Common Stock combination (ie: a reduction in the outstanding
number of shares of Common Stock) to achieve a market price which will enable us
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 we do 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 our
Common Stock on Nasdaq, and trading, if any, in our Common Stock would be
limited to the non-Nasdaq Bulletin Board market. As a result, there would 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, our
Common Stock.
The price of our stock results in additional regulation. 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 our 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 we meet certain minimum net tangible
assets or average return criteria. In any event, even if the Common Stock was
exempt from such restrictions, we 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 our securities
could be materially and adversely affected. Any disruption in the liquid market
of the Common Stock could limit our access to the equity markets in the future,
and could have a materially adverse effect on our business, financial conditions
and results of operations.
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Year Year Year Year Nine Months Ended
ended ended ended ended ended March 31, March 27,
June 30, June 30, June 29, June 28, June 30, 1999 2000
1995 1996 1997 1998 1999
(dollars in thousands, except share per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Restaurant sales, net $5,341 $8,243 $7,852 $3,761 $1,627 1,365 1,724
Cost of restaurant expenses 5,222 8,402 7,988 3,935 1,813 1,534 1,785
Income (loss) from 119 (159) (136) (174) (186) (169) (61)
restaurant operations
Selling, general and 1,583 2,810 2,715 1,280 2,850 2,050 932
administrative expense
Loss on closure of restaurant --- 192 1,732 1,465 365 365 43
sites and impairment
charges
Interest expense and 1,292 109 173 261 175 196 27
amortization of debt
issuance costs
Loss before income taxes and (2,758) (3,283) (4,798) (3,236) (3,894) (3,004) (1,063)
extraordinary item
Income taxes --- --- --- --- --- --- 23
-------- -------- --------- --------- -------- -------- --------
Net loss before (2,758) (3,283) (4,798) (3,236) (3,894) (3,004) (1,086)
extraordinary
item
Extraordinary item: Gain
on forgiveness of debt --- 90 -- -- 512 343 ---
-------- -------- --------- --------- -------- -------- --------
Net loss (2,758) (3,193) (4,798) (3,236) (3,352) (2,661) (1,086)
Dividends on preferred
shares --- --- (104) (104) (199) --- (521)
-------- -------- --------- --------- -------- -------- --------
Net loss applicable to
common stockholders $(2,758) $(3,193) $(4,902) $(3,340) $(3,551) $(2,661) $(1,607)
======== ======== ======== ======== ======== ======== ========
Net loss per share -
Basic and diluted:
Loss before extraordinary
item $(2.46) $(1.26) $(1.85) $(0.80) $(0.21) $(0.19) $(0.05)
Extraordinary item --- .03 -- -- .03 0.02 ---
-------- -------- --------- --------- -------- -------- --------
Net loss $(2.46) $(1.23) $(1.85) $(0.80) $(0.18) $(0.17) $(0.05)
======= ======= ========= ========= ======= ======= ========
Shares used in computing net
loss per share, basic and
diluted 1,122,678 2,605,808 2,645,335 4,173,985 19,205,208 15,609,352 29,979,013
========= ========= ========= ========= ========== ========== ==========
Consolidated Balance
Sheet Data:
Cash $ 28 $1,922 $ 68 $ 311 $2,338 $3,660 $ 605
Total assets 10,293 6,500 2,262 785 3,918 3,888 2,849
Long-term debt, including
current portion 3,299 1,833 1,380 1,808 298 482 258
Total stockholders' equity
(deficit) 5,084 3,321 (1,212) (3,062) 1,882 2,171 1,011
</TABLE>
<PAGE>
DIVIDEND POLICY
We have not declared or paid any Common Stock dividends in the past and do
not anticipate doing so in the foreseeable future. We intend to retain any
earnings to finance our growth. Any future payments of dividends will be at the
discretion of our Board of Directors and will depend upon such factors as the
Board of Directors deems relevant. We cannot assure you that we will pay
dividends in the foreseeable future.
CAPITALIZATION
The following table sets forth our capitalization as of March 27, 2000. The
table should be read in conjunction with our consolidated financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
As of
March 27, 2000
<S> <C>
Current maturities of long-term debt $258,344
Notes payable, net of current maturities -0-
--------
Total long-term debt $258,344
--------
Stockholder's equity:
Series B Preferred stock $0.10 par value, 5,000,000 shares authorized,
356,909 shares issued and outstanding 35,690
Common stock, $.001 par value, 400,000,000 shares authorized at March 27, 29,980
2000, 29,979,013 issued and outstanding
Additional paid-in capital 20,986,092
Accrued dividends (178,450)
Accumulated deficit (19,862,614)
-----------
TOTAL STOCKHOLDERS' EQUITY $1,010,698
----------
TOTAL CAPITALIZATION $1,269,042
==========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions as they relate to
the Company or its management are intended to identify such forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Company's actual results, performance or achievements could differ
materially from the results expressed in or implied by these forward-looking
statements.
The Company's original strategy of aggressive growth, utilizing a low cost
Rattlesnake Southwestern Grill restaurant concept adaptable to different
leasehold configurations in a short construction timetable, met with significant
difficulty, particularly in the areas of inconsistent operational performance of
newer units. As a result, the Board of Directors voted in January 1997 to adopt
a revised business plan (the "Cost Reduction Plan") that focused on
profitability of existing restaurants and the closing of marginal restaurants.
In late fiscal 1998, the Company modified its expansion and operating
strategy to facilitate a more rapid course to profitability and accelerate the
reduction of losses pursuant to the Cost Reduction Plan. This new strategy
incorporates a sharpened focus on existing profitable restaurants, the
elimination or conversion of unprofitable restaurants and the implementation of
aggressive cost cutting measures designed to reduce operating expenses and
improve restaurant operating performance. The Company has, accordingly,
terminated operations at seven locations.
At March 27, 2000, The Rattlesnake Holding Company, Inc. was the parent
corporation of two operating subsidiary company, Rattlesnake Ventures, Inc.,
operating a Rattlesnake Grill in South Norwalk, Connecticut and the parent
corporation of one subsidiary company, 106 Federal Road, owner of the site at
which the Company opened its first Spencer's restaurant November 3, 1999.
Nine Months and Three Months Ended March 27, 2000 as Compared with Nine Months
and Three Months Ended March 31, 1999
Restaurant Sales
Net restaurant sales increased 177.3% to $865,811 for the quarter ended
March 27, 2000 from $312,260 for the quarter ended March 31, 1999. For the nine
months ended March 27, 2000 net restaurant sales increased 26.2% to $1,723,718
from $1,365,409. These increases in restaurant sales for the nine months and
quarter ended March 27, 2000 are due to the new Spencer's restaurant opening in
November of 1999 and to a 16.3 % sales increase at the Rattlesnake restaurant.
Promotional Sales
Promotional sales increased from $10,548, for the three months ended March
31, 1999 to $28,058 for the quarter ending March 27, 2000. This 166.0% increase
is attributable to the commencement of operations of the new Spencer's
restaurant which opened November 3, 1999. Promotional sales for the nine months
ended March 27, 2000 decreased from $55,664 for the nine months ended March 31,
1999 to $51,962, a 6.7% decrease.
Food and Beverage Costs
Cost of food and beverage sales increased as a percentage of net sales from
31.6% for the three months ended March 31, 1999 to 34.6% for the quarter ended
March 27, 2000. The cost of food and beverage sales increased to $299,778 for
the three months ended March 27, 2000 from $98,763 for the three months ended
March 31, 1999. For the nine months ended March 27, 2000, the cost of food and
beverage sales decreased as a percentage of net sales from 38.1% for the nine
months ended March 31, 1999 to 35.6%. The percentage increase for the three
months ended March 27, 2000 is attributable to the Spencer's restaurant which
features a high quality, high value menu. The cost of food and beverage sales
increased to $613,688 for the nine months ended March 27, 2000 from $520,759 for
the nine months ended March 31, 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 to $467,100 for the three months ended March 27, 2000 from $112,429
for the three months ended March 31, 1999. Restaurant salaries and fringe
benefits as a percentage of net sales increased to 53.9% for the three months
ended March 27, 2000 from 36.0% for the three months ended March 31, 1999. For
the nine months ended March 27, 2000 restaurant salaries and fringe benefits
increased to $1,029,164 from $560,770 for the nine months ended March 31, 1999.
For the nine months ended March 27, 2000 restaurant salaries and fringe benefits
as a percentage of net sales increased to 59.7% from 41.1% for the nine months
ended March 31, 1999. This increase is primarily attributable to the new
Spencer's restaurant, the preparation of the staff for the opening of such
restaurant and a Manager in Training Program geared toward future expansion.
Occupancy and Related Expenses
Occupancy and other related expenses, which include linen, repairs,
maintenance, utilities, rent, insurance and other occupancy related expenses,
increased to $48,082 for the three months ended March 27, 2000 from $40,271 for
the three months ended March 31, 1999. The increase is due to the additional
restaurant, Spencer's. As a percentage of net restaurant sales, these costs
decreased from 12.9% in the three months ended March 31, 1999 to 5.6% for the
quarter ended March 27, 2000. For the nine months ended March 27, 2000 occupancy
and other related expenses decreased to $103,611 from $416,747 for the nine
months ended March 31, 1999. As a percentage of net restaurant sales these costs
decreased from 30.5% to 6.0% for the nine months ended March 31, 1999 and March
27, 2000 respectively. The decrease in occupancy and other related expenses as a
percentage of sales is due to the fact the Company no longer incurs rent at its
Danbury location as the Company has purchased the property.
Depreciation and Amortization Expenses
Depreciation and amortization expense increased from $13,893 for the three
months ended March 31, 1999, to $20,786 for the three months ended March 27,
2000. As a percentage of net sales, depreciation and amortization expense
decreased from 4.4% for the three months ended March 31, 1999 to 2.4% for the
three months ended March 27, 2000. Depreciation and amortization expense
increased from $36,175 for the nine months ended March 31, 1999 to $38,357 for
the nine months ended March 27, 2000. As a percentage of net sales, depreciation
and amortization expense decreased from 2.6% of net sales to 2.2% of net sales
for the nine months ended March 27, 2000. The percentage reduction from prior
year is the result of added sales from the new Spencer's restaurant opened
November 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased from $1,587,185, or
508.3% of net sales for the quarter ended March 31, 1999, to $358,121, or 41.4%
of net sales, for the three months ended March 27, 2000. Selling, general and
administrative expenses decreased from $2,050,405 or 150.2% of net restaurant
sales for the nine months ended March 31, 1999 to $932,367 or 54.1% of net
restaurant sales for the nine months ended March 27, 2000. Selling, general and
administrative expenses in the prior year included costs attributable to the
value of a warrant issued to a consultant pursuant to the terms of a consulting
agreement, $1,075,000, which was immediately exercisable and not subject to a
forfeiture provision.
Interest Expenses
The Company incurred interest expense, net, for the three months ended
March 27, 2000 and for the nine months ended March 27, 2000 of $26,663 compared
to costs of $65,154 and $196,340 for the three months ended March 31, 1999 and
the nine months ended March 31, 1999 respectively. Interest expense is for
Series B notes payable, due July 2000 that carry interest of 15% per annum.
Litigation Award
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.
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. In June 2000, all claims against the Company were settled by
aggregate payments by the Company of approximately $60,000.
Fiscal Year Ended June 30, 1999 as Compared
with Fiscal Year Ended June 28, 1998
Net restaurant sales decreased 56.7% to $1,627,245 in fiscal 1999 from
$3,761,300 in fiscal 1998. The decrease in net restaurant sales resulted from
the closing of the Danbury, CT and Flemington, NJ restaurants. In fiscal 1999,
the Company generated a net loss of $3,352,035 as compared to a net loss of
$3,236,039 in fiscal 1998, an increase of $115,996.
The increased loss was attributable to a combination of several factors
including; $1,569,940 increase in selling, general and administrative expenses
attributable to a $1,075,000 charge incurred for the issuance of warrants to Mr.
Frank and increased professional fees; a litigation charge of $225,000 relating
to a verdict in an action brought by an owner of an apartment above the South
Norwalk restaurant; a $1,100,000 reduction in losses on closure of restaurant
sites and impairment charges and a $512,429 extraordinary gain in 1999 on the
extinguishment of debt.
Restaurant Sales
Gross restaurant sales decreased 56.4% to $1,696,679 in fiscal 1999 from
$3,888,643 in fiscal 1998. The decrease in restaurant sales resulted from the
decrease in number of operating restaurants during the fiscal year 1998 period
due to the closure of the Danbury, Connecticut and Flemington, New Jersey
restaurants, and lack of working capital to adequately support restaurant
operations. Same store sales for comparable periods for fiscal year ended June
30, 1999 decreased by $78,252.
Promotional Sales
Promotional sales decreased from $127,343 in fiscal 1998 to $69,434 in
fiscal 1999. This decrease is attributed to a reduction in the number of
restaurants operating during the period. Promotional sales have increased as a
percentage of gross sales in fiscal 1999 to 4.1% from 3.3% in fiscal 1998. This
increase as a percentage of sales is the result of increase usage of discount
dining services.
Food and Beverage Costs
Food and beverage costs increased as a percentage of net restaurant sales
at 38.2% in fiscal 1999 and 32.6% in fiscal 1998. The percentage increase is
attributable to inefficiencies of the Flemington unit closed in November 1998.
The cost of food and beverage sales decreased to $621,595 for fiscal 1999, as
compared with $1,225,982 for fiscal 1998, resulting from the reduction in the
number of restaurants operating during the period.
Restaurant Salaries and Fringe Benefits
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
decreased to $662,343 in fiscal 1999 as compared to $1,322,119 in fiscal 1998.
This decrease is attributable to the operation of fewer restaurants during
fiscal 1999. As a percentage of net sales, these costs increased to 40.7% in
fiscal 1999 from 35.2% in fiscal 1998, principally due to allocating management
salaries over a smaller restaurant base.
Occupancy and Related Expenses
Occupancy and related expenses, which include linen, repairs, maintenance,
utilities, rent, insurance and other occupancy related expenses, decreased to
$485,200 in fiscal 1999 from $1,072,796 in fiscal 1998. As a percentage of net
restaurant sales, these costs increased to 29.9% in fiscal 1999 from 28.5% in
fiscal 1998. The decrease in actual occupancy costs is attributable to a
reduction in the number of units operating during the period.
Depreciation and Amortization Expense
Depreciation and amortization expenses decreased as a percentage of net
restaurant sales to 2.7% in fiscal 1999 from 8.3% in fiscal 1998. These expenses
decreased to $44,096 in fiscal 1999 from $314,017 in fiscal 1998. This decrease
is primarily attributable to the reduction in the number of restaurants which
were in operation during fiscal 1999.
General and Administrative Expenses
General and administrative expenses increased to $2,849,771 in fiscal 1999
from $1,279,831 in fiscal 1998. This increase is attributable to a $1,075,000
charge incurred for the issuance of warrants to Mr. Frank and increased
professional fees.
Interest Expenses
Interest expense decreased to $175,248 in fiscal 1999 from $261,276 in
fiscal 1998. This decrease resulted from the reduction of outstanding
indebtedness attributable to debt conversions, principal reductions and
forgiveness of debt associated with the private placement of Series B Preferred
Stock.
Loss of Closure of Restaurant Sites and Impairment Charges
The loss on closure of restaurant sites and impairment charges is
attributable to: (1) pursuant to the March 1998 agreement to acquire the
Ottomanelli Group, additional consideration, due to anti-dilution provisions
contained in the agreements, common stock was payable to the Ottomanelli Group
shareholders, as a result of the private placement. In February 1999, 5,000,000
shares of common stock were issued pursuant to such anti-dilution provisions,
which included a maximum addition which was met. As the Company recorded an
impairment charge in fiscal 1998 relating to the termination of the operations
of the Ottomanelli restaurants, the fair value of the common stock issued,
$250,000 was recognized as a further impairment loss in 1999. (2) A note
receivable of $230,000, which was received as partial consideration for the sale
of the Company's Fairfield facility, was exchanged with a value assigned of
$115,000 in partial satisfaction of a $425,000 note payable and an additional
$115,000 loss on restaurant closure was recognized in 1999.
Litigation Award
In August 1998, a jury awarded a verdict in the amount of $625,000 against
various defendants, including the Company and our former Chairman. On November
20, 1998, the Court set aside the jury's verdict as to all counts against us
except for plaintiff's claim for negligence per se and accordingly reduced the
jury's award to $225,000. We recorded a charge in the 1999 Statement of
Operations of $225,000 for the litigation award. The jury's award is currently
on appeal by the Company, and plaintiff has appealed the Court's decision to set
aside a portion of the jury's verdict and reduce the award. There are also
potential claims of indemnification by other defendants against us in the event
the plaintiff's appeal is successful.
Extraordinary Gain
We recorded an extraordinary gain on the forgiveness of debt of $512,429 in
1999, principally resulting from a series of debt satisfaction agreements
associated with our private placement of Series B Preferred Stock and related
settlements with trade creditors.
Subsequent Events
On July 2, 1999, we sold an additional 2,000 shares of its Series B
Preferred Stock for a value of $50,000 as part of its Offering.
On September 9, 1999, we formally changed our name with the appropriate
authorities to Spencer's Restaurants, Inc. (symbol: "SPST") from The Rattlesnake
Holding Company Inc. (symbol: "RTTL").
In September 1999, we finalized our agreement with the landlord of our
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. We assigned the liquor license
in satisfaction of the note payable and issued 4,660 shares of Series B
Preferred Stock with a valuation of $116,500 to complete the settlement.
In September 1999, the holders of a majority of the issued and outstanding
shares of our common stock by written consent in lieu of a meeting pursuant to
Delaware Law adopted an option plan providing for incentive stock options and
non-incentive stock options for employees and non-employees, under which options
may be granted for a total of 25,000,000 shares of common stock and adopted an
option plan for the members of the Board of Directors under which options may be
granted for a total of 10,000,000 shares of common stock.
In September 1999, we paid $198,846 of dividends to the preferred
shareholders of record by issuing 7,954 additional shares of Series B Preferred
Stock in lieu of cash payments.
On December 15, 1999, the Company's contract with its Chief Financial
Officer was terminated without payment or further remuneration.
On December 31, 1999, a contract scheduled to expire October, 2001 for
consulting services being provided the Company was terminated by the consultant.
A new contract, effective January 10, 2000 and scheduled to expire December 31,
2000, was substituted.
On January 31, 2000, the Company accepted the resignation of its Senior
Vice President, Nicolo Ottomanelli. Mr. Ottomanelli remains on the Board of
Directors and provides consulting services to the Company on an as-needed basis.
Mr. Ottomanelli's contract was terminated effective with the resignation and
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, Stephan A. Stein to a two-year term and Nicolo Ottomanelli to
a one-year term. To date, employee stock options were issued to purchase
2,575,000 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.
In March 2000, the Company paid dividends to holders of Series B Preferred
Stock in the form of 13,732 additional shares of Series B Preferred Stock.
Fiscal Year Ended June 28, 1998 as Compared
with Fiscal Year Ended June 29, 1997
Net restaurant sales decreased 52.1% to $3,761,300 for the fiscal year
ended June 28, 1998 from $7,851,950 for the twelve months ended June 29, 1997.
The decrease in net restaurant sales resulted from the closing of the Fairfield,
Connecticut, White Plains and Yorktown Heights, New York restaurants in fiscal
1997. For the fiscal year ended June 28, 1998, the Company generated a net loss
of $3,236,039 as compared to a net loss of $4,797,857 for the fiscal year ended
June 29, 1997, a decrease of $1,561,818. The decreased loss was principally
attributed to the modified expansion and operating strategy adopted by the Board
of Directors in January of 1997.
Restaurant operating losses were $173,614 for the fiscal year ended June
28, 1998 as compared with $136,256 for the fiscal year ended June 29, 1997. This
decrease in operating losses was principally attributable to the implementation
of the Company's Cost Reduction Plan and closure of unprofitable restaurants.
Restaurant salaries and benefits were reduced as a result of a reduction in the
number of personnel being reduced. Furthermore, depreciation and amortization
reduced as the number of operating restaurant facilities was reduced.
Restaurant Sales
Gross restaurant sales decreased 53% to $3,888,643 for the fiscal year
ended June 28, 1998 from $8,265,474 for the fiscal year ended June 29, 1997. The
decrease in restaurant sales resulted from the decrease in number of operating
restaurants during the fiscal year 1998 period, the closure of the Danbury,
Connecticut restaurant, and lack of working capital to adequately maintain and
provide the restaurant operations. Store sales for comparable periods for fiscal
year ended June 28, 1998 decreased $897,008.
Promotional Sales
Promotional sales decreased from $413,524 for fiscal year ended June 29,
1997 to $127,343 for fiscal year ended June 28, 1998. This decrease is
attributed to a reduction in direct mail advertisement incentives and closer
controls of in-house manager promotions. Promotional sales have decreased as a
percentage of gross sales in fiscal year 1998 to 3.3% from 5.0% in fiscal year
1997. This decrease as a percentage of sales is the result of Corporate policy
to reduce promotional sales.
Food and Beverage Costs
Food and beverage costs increased slightly as a percentage of net
restaurant sales at 32.6% in fiscal year 1998 and 31.1% in 1997. The cost of
food and beverage sales decreased to $1,225,982 for the fiscal year ended June
28, 1998, as compared with $2,443,860 for the fiscal year ended June 29, 1997.
The slight increase is due to menu changes, price increases and the loss of
purchasing efficiencies based on fewer restaurants in operation. This decrease
as a percentage of sales is the result of the beneficial effects of clustered
marketing efforts and shared costs among all of the Company's restaurants.
Restaurant Salaries and Fringe Benefits
Restaurant salaries and fringe benefits, which consist of direct salaries
of restaurant managers, hourly employee wages and related fringe benefits,
decreased to $1,322,119 for the fiscal year ended June 28, 1998 as compared to
$2,792,622 for the fiscal year ended June 29, 1997. This decrease is
attributable to the operation of fewer restaurants during fiscal 1998. As a
percentage of net sales, these costs decreased to 35.2% in fiscal 1998 from
35.6% in fiscal 1997, principally due to the implementation of the Company's
cost reduction plan under which it reduced restaurant management and staff
during the fourth quarter of fiscal year 1997.
Occupancy and Related Expenses
Occupancy and related expenses, which include linen, repairs, maintenance,
utilities, rent, insurance and other occupancy related expenses, decreased to
$1,072,796 for the fiscal year ended June 28, 1998 from $2,025,198 for the
fiscal year end June 29, 1997. As a percentage of net restaurant sales, these
costs increased to 28.5% in fiscal 1998 from 25.8% in fiscal 1997. The increase
as a percentage of sales can be attributed primarily to the costs associated
with the maintenance of the Fairfield restaurant which closed in fiscal year
1997 and which was not sold until March 24, 1998.
Depreciation and Amortization Expense
Depreciation and amortization expenses decreased as a percentage of net
restaurant sales to 8.3% for the fiscal year ended June 28, 1998 from 9.3% for
the fiscal year end June 29, 1997. These expenses decreased to $314,017 in
fiscal year ended June 28, 1998 from $726,526 for the fiscal year end June 29,
1997. This decrease is primarily attributable to the reduction in the number of
restaurants which were in operation during fiscal year 1998.
General and Administrative Expenses
Selling, general and administrative expenses decreased to $1,279,831 in
fiscal year ended June 28, 1998 from $2,715,293 for the fiscal year end June 29,
1997. As a percentage of net sales, selling, general and administrative expenses
increased from 34.6% in 1997 to 34.0% in 1998. These reductions in expense are a
direct result of the Company's implementation of its cost reduction plan.
Interest Expenses
Interest expense increased to $261,276 for the fiscal year ended June 28,
1998 from $172,886 for the fiscal year end June 29, 1997. This increase resulted
from additional borrowing by the Company and the increased interest rate
relating to the extension of the Series C Notes payable.
Loss of Closure of Restaurant Sites and Impairment Charges
In fiscal 1998, we performed a further analysis of historical and projected
operating results, which reflected a pattern of historical operating losses and
negative cash flow, as well as future projected negative cash flow and operating
results for fiscal 1999 for its Flemington restaurant. Accordingly, we recorded
an impairment charge for this restaurant to write-down the impaired asset of
$558,282 in fiscal 1998 and contemplated the future closure based upon future
operating results. The restaurant was subsequently closed in November 1998.
On June 22, 1998, we closed our Danbury, Connecticut facility and
subsequently lost its tenancy pursuant to a foreclosure action. Accordingly, we
recognized a loss of $270,426 in fiscal 1998 relating to the closure.
In fiscal 1998, our management concluded that the operations of the former
Ottomanelli Group were inconsistent with our operating plans and were terminated
in fiscal 1998, including the operations of its two New Jersey restaurants.
Accordingly, we concluded that the goodwill relating to the acquisition was
impaired and recorded an impairment charge of approximately $436,000 in fiscal
1998.
In fiscal 1998, we recorded an additional loss of $88,559 relating to the
ultimate sale of the Fairfield, Connecticut location closed in June 1997 and an
additional loss of $55,725 relating to the Lynbrook facility closed in September
1997.
Seasonality and External Influences
on Quarterly Results
Our sales and earnings reflect the seasonality of the business. Quarterly
results have been and, in the future are likely to be, substantially affected by
the timing of new restaurant openings. Because of the impact of new restaurant
openings, results for any quarter are not necessarily indicative of the results
that may be achieved for a full fiscal year and cannot be used to indicate
financial performance for the entire year.
Recent Accounting Announcements
In April 1998, Statement of Position 98-5 ("SOP 98-5"), "Reporting the Cost
of Start-up Activities," was issued. SOP 98-5 requires that costs incurred
during start-up activities, including pre-opening costs, be expensed as
incurred. The Company will adopt SOP 98-5 in the first quarter of fiscal 2000
and management does not believe that the adoption of SOP 98-5 will have a
material impact on the Company's financial position or results of operations.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"), was issued which is effective for fiscal years beginning after June 15,
2000. Statement 133 standardizes the accounting for derivative instruments and
requires that all derivative instruments be carried at fair value. The Company
has not determined the impact that Statement 133 will have on its financial
statements and believes that such determination will not be meaningful until
closer to the date of initial adoption.
Liquidity and Capital Resources
The Company has a long history of losses, which has depleted its capital
resources and has resulted in the incurrence of a significant amount of
indebtedness. Without additional funds, the Company will have to abandon its
long-term plans for the Spencer's concept development and the opening of
additional restaurants, and drastically reduce its corporate overhead. The
Company estimates that the financing obtained at the Offering will enable the
Company to affect some expansion and to operate through 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 $19,862,614
inclusive of a net loss for the nine months ended March 27, 2000 of $1,085,524.
Based upon interim financial information prepared by management, the Company has
continued to incur losses through the remainder of 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, which has
not yet been declared effective.
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 third quarter were accrued at 8% per annum.
Dividends were paid in September 1999 and March 2000 in the form of 7,954
and 13,732 additional shares of Series B Preferred Stock respectively.
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 until March 26,
2001.
Cash flows used in operating activities for the nine months ended March 27,
2000 were ($1,118,562) as opposed to ($1,274,367) for the same period in the
previous year.
Cash flows used in investing activities were ($663,766) for the nine months
ended March 27, 2000 whereas in 1999, for the first nine 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 nine months ended
March 27, 2000 due to the sale of Series B Preferred Stock in July 1999, whereas
in 1999 for the first nine months cash flows from financing activities were
$4,650,293. The increase during the prior year is attributable to the sale of
approximately $6,000,000 of Series B Preferred Stock.
Given the above, cash during the nine months' ended March 27, 2000
decreased by $1,732,328 as compared to a increase of $3,349,026 during the same
nine months in 1999. The increase during prior year is attributable to the
successful sale of approximately six million dollars in Series B stock.
At March 27, 2000, the following obligations are past due and in default;
$18,750 of Series C subordinated notes payable, matured in August 1997, and a
$2,089 subordinated note payable matured in August 1996 (the Company has been
unable to locate either noteholder).
Inflation
The impact of general inflation on our business has been insignificant to
date and we believe that it will continue to be insignificant for the
foreseeable future.
Market Risk
We are not subject to interest rate risk, as substantially all borrowings
are fixed rate obligations. However, we have 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 we believe
that our 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 us.
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 our 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 believes that its internal computer systems and applications
are Year 2000 compliant, and has not experienced any adverse impact as a result
of Year 2000 issues relating to its internal computer systems and applications,
nor as a result of any Year 2000 issues affecting any of its key suppliers,
vendors or other entities with which the Company does business. The Company does
not anticipate any significant costs or future adverse impact on its business,
results of operations, or financial condition as a result of the Year 2000
issue.
In the event our computer systems, or the systems of our external agents,
are materially adversely affected by the Year 2000 issue, our business and
operations could be materially adversely affected by disruptions in the
operations of other entities with which we interact. However, we believe that
the most likely worst case scenario is that there will be some localized
disruptions of systems that will affect individual facilities or services for a
short time rather than systematic or long-term problems affecting its business
operations as a whole. In such event, we have contingency plans for certain
critical applications and we are working on plans for others. These contingency
plans involve, among other actions, increasing inventories, and adjusting
staffing strategies.
USE OF PROCEEDS
We will not receive any of the proceeds of the shares of Common Stock sold
by the Selling Security Holders. See "Plan of Distribution". We will pay
expenses of Offering which we estimate will be $100,000.
DETERMINATION OF OFFERING PRICE
The shares of Common Stock sold by the Selling Security Holders will be
sold in customary brokerage transactions at then-prevailing market prices.
[Balance of Page Intentionally Left Blank]
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth the number of shares of Common Stock
beneficially owned by each of the Selling Security Holders as of the date of
this Prospectus, the number of shares (the "Shares") covered by this Prospectus
and the amount and percentage ownership of the Selling Security Holders after
the offering assuming all the shares covered by this Prospectus are sold by the
Selling Security Holders. Except as otherwise indicated by footnote below, none
of the Selling Security Holders has had any position, office or other material
relationship with us within the past three years other than as a result of the
ownership of the Shares or other of our securities.
<TABLE>
<CAPTION>
NAME OF COMMON STOCK NUMBER OF COMMON STOCK
SELLING BENEFICIALLY OWNED PRIOR SHARES BENEFICIALLY OWNED AFTER
SECURITY TO THE OFFERING** REGISTERED THE OFFERING
HOLDER HEREUNDER
NUMBER PERCENT*** NUMBER PERCENT***
-------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Abrams, Richard 900,000 2.9 900,000 --- ---
Abrams, Rodney 900,000 2.9 900,000 --- ---
Adametz, James ---
Adams, Richard 3,000 * 3,000 --- ---
Adinaro, Joseph
Al Bahar, Alya 1,000,000 3.2 1,000,000 --- ---
Anasazi Partners 962,500 2.1 962,500 --- ---
Anderson, Don
Anderson,
Ferdinand F., Jr. 1,000,000 3.3 1,000,000 --- ---
Andriopoulos,
William 2,000 * 2,000 --- ---
Appelbaum, Michael 883,329 2.8 883,329 --- ---
Apploff, Evelyn 5,598 * 5,598 --- ---
Ardigliano,
Pasquale J. 200 * 200 --- ---
Asciutto, Basil 194,771 * 194,771 --- ---
Astor, Michael
R.L. 500,000 1.6 500,000 --- ---
Aukstuolis, Jim 500,000 1.6 500,000 --- ---
Baddour, Elias & 200,000 * 200,000 --- ---
Rosanne
Baker, Chris 912,500 2.8 912,500 --- ---
Ballin, Scott 500,000 1.6 500,000 --- ---
Baquet, William
Bayat, Behrouz 100,000 * 100,000 --- ---
Benninger, Thomas W. 400,000 1.3 400,000 --- ---
Berglund, Donald 200,000 * 200,000 --- ---
Berk, Lawrence 405,625 1.3 405,625 --- ---
Berman, Marc G. 200,000 * 200,000 --- ---
Berry, Kenneth 20,000,000 40 20,000,000 --- ---
Beuret, Robert 1,727,334 5.4 1,727,334 --- ---
Bitner, Mark 300,000 * 300,000 --- ---
Blitz, Craig & 200,000 * 200,000 --- ---
Annette
Blitz, Craig 32,880 * 32,880 --- ---
Blomstedt, Jeffrey &
Susan Lascala
BNB Associates 2,000,000 6.6 2,000,000 --- ---
Boatright, Modyk 700,000 2.3 700,000 --- ---
Bodmer, Hans 5,000,000 16.6 5,000,000 --- ---
Bollag, Michael 3,000,000 10 3,000,000 --- ---
Bolognue, Joseph T. 500,000 1.6 500,000 --- ---
Bowert, James 6,325 * 6,325 --- ---
Braun, Elliott 166,500 * 166,500 --- ---
Briggs, Tom P. 800,000 2.6 800,000 --- ---
Profit Sharing Plan
Brown, Ralph 2,000,000 6.6 2,000,000 --- ---
Bull, Belinda Breeze
Calabrese Property 10,000 * 10,000 --- ---
Management
Campanella, Richard 77,556 * 77,556 --- ---
Capriolo, Maragaret 100 * 100 --- ---
A. Soca - Custodian
for Edward Guy
Capriolo
Carbone, Anthony F. 100 * 100 --- ---
Cardwell, J.A. 1,000,000 3.3 1,000,000 --- ---
Cardwell, J.A., Jr. 500,000 1.6 500,000 --- ---
Carlegren, Anders 200,000 * 200,000 --- ---
Cass, C. Wyllys & 500,000 1.6 500,000 --- ---
Ellen M.
Cede & Co.
Celenatnao, Lucille
Chedda, Vasant 253,777 * 253,777 --- ---
Clariden Bank
Clark, Oliver & 200,000 * 200,000 --- ---
Sharon
Clemens, John Barry 500,000 1.6 500,000 --- ---
Cohen, David 2,000,000 6.6 2,000,000 --- ---
Cole, Julia R. 2,000,000 6.6 2,000,000 --- ---
Cole, Robert S. 200,000 * 200,000 --- ---
Collins, William 178 * 178 --- ---
Commonwealth 15,650,000 36.1 15,650,000 --- ---
Associates
Conzett Europa - 4,000,000 13.3 4,000,000 --- ---
Invest Ltd.
Corney, David & 1,500,000 5 1,500,000 --- ---
Victoria
Coyle, David 1,000,000 3.3 1,000,000 --- ---
Cummings, Orman F. 500,000 1.6 500,000 --- ---
D'Avanzo, Thomas & 200,000 * 200,000 --- ---
Marie
Dacey, Karen 21,196 * 21,196 --- ---
Daniel, Jerry 790,000 2.6 790,000 --- ---
Daughney, Brian 49,634 * 49,634 --- ---
Davenport, James & 500,000 1.6 500,000 --- ---
Rebecca
DeAtkine, David, Jr. 500,000 1.6 500,000 --- ---
DeFini, Joseph 2,957 * 2,957 --- ---
DeStefano, Philip 5,823 * 5,823 --- ---
Delaware Charter
Guarantee & Trust
Company Custodian
FBO David A.
Schechter
Dell, Samuel M. & 121,220 * 121,220 --- ---
Geraldine M.
Despland, George 100,000 * 100,000 --- ---
Diagi, Scott
Dickey, David L. & 700,000 2.3 700,000 --- ---
Susan M.
DiGioia, Victor 223,357 * 223,357 --- ---
DiLallo, Lisa A. 100 * 100 --- ---
Dold, Richard 1,000,000 3.3 1,000,000 --- ---
DW Trustees (BV1) 500,000 3.3 500,000 --- ---
Limited: The
Rectory Farm
Settlement: Main
Fund
DW Trustees (BV1) 1,000,000 * 1,000,000 --- ---
Limited: The
Rectory Farm
Settlement:
Children's Fund
Eldridge, Cornelia F. 100,000 * 100,000 --- ---
Elmo, Robert
Engfer, Abrams, Jodi 200,000 * 200,000 --- ---
Epstein, Dr. 500,000 1.6 500,000 --- ---
Fredrick B.
Epstein, Richard 500,000 * 500,000 --- ---
Falk, Else 5,598 * 5,598 --- ---
Falk, Michael S. 2,225,410 3.3 2,225,410 --- ---
Falk Family 636,547 2.1 636,547 --- ---
Foundation
Falknor, Harry & 100 * 100 --- ---
Andrea - Joint
Tenants
Feldman, Emily - 10,000 * 10,000 --- ---
Trustee
Ferrell, Ann 650 * 650 --- ---
Finkle, S. Marcus 1,000,000 3.3 1,000,000 --- ---
Fioretti, Charles 1,000,000 3.3 1,000,000 --- ---
Edward
Fleming (Jersey) Ltd.
FM Grandchildren 500,000 * 500,000 --- ---
Trust
Fox, Karen A. 200,000 * 200,000 --- ---
Frank, Shelly 45,000,000 60 45,000,000 --- ---
French, Joshua W. 25 * 25 --- ---
Friedlander, Charles 500,000 1.6 500,000 --- ---
L.
Friedlander, 500,000 1.6 500,000 --- ---
Lawrence & Nancy
Friedman, Richard 1,335,500 4.4 1,335,000 --- ---
Fusco, Donna Kae 500 * 500 --- ---
Fusco, Donna -
Custodian
Fusco, Tara 500 * 500 --- ---
Gaba, Ilya & Alice 200,000 * 200,000 --- ---
Galena, Dr. Harold 400,000 1.3 400,000 --- ---
Gangel Roth IRA, 722,190 2.4 722,190 --- ---
Martin
Garcao, Jose
Gardos, Stephen 239,333 * 239,333 --- ---
Generation Capital
Associates
Gersh, Steven T. 500,000 1.6 500,000 --- ---
Giambattista, Aflred 1,090 * 1,090 --- ---
Giambattista, Joseph 500 * 500 --- ---
Giambattista, Sarah 3,562 * 3,562 --- ---
Giardina, Anthony J. 118,948 * 118,948 --- ---
Giordano, Charles 1,334 * 1,334 --- ---
Giordano, Chris 2,939 * 2,939 --- ---
Glaser, Bruce 277,670 * 277,670 --- ---
Glazier, Edwin M. 500,000 1.6 500,000 --- ---
Godbout, Jacqueline 1,780 * 1,780 --- ---
Goffredi, Lawrence & 540 * 540 --- ---
Patricia - Joint
Tenants
Goldberg, Mark & 400,000 1.3 400,000 --- ---
Joanna
Goldenheim, Paul D. 500,000 1.6 500,000 --- ---
Goldman, Fred 300,000 1 300,000 --- ---
Goldstein, Stanley 223,357 * 223,357 --- ---
Greenfield, William 100,000 * 100,000 --- ---
Griffin, Paul 300 * 300 --- ---
Gruenwald, John 1,000,000 3.2 1,000,000 --- ---
Thomas
Grysikiewicz, Bryan 500 * 500 --- ---
S.
Gubitosa, Paul & 30,000 1 30,000 --- ---
Linda
Gustafson, A. William 200,000 * 200,000 --- ---
Haag, Bernadette
Hannahs, Gerald E.
Hart, Kenneth &
Catherine - Joint
Tenants
Hart, Frank
Heinrich, Claudia, J.
Henderson, Phyllis 1,000 * 1,000 --- ---
Henry, William O.E. 500,000 1.6 500,000 --- ---
Hicks, S. Maurice, 600,000 2 600,000 --- ---
Jr.
Hodas, Martin 336,437 1.1 336,437 --- ---
Holladay, Judy, IRA 200,000 * 200,000 --- ---
Horseflesh, LLC
Howell, Robert O. 5,200 * 5,200 --- ---
Hubbard, Richard L., 397,000 1.3 397,000 --- ---
IRA
Hyman, Alan 1,000,000 3.3 1,000,000 --- ---
Ianazzi, Jeanine 10,457 * 10,457 --- ---
Jahn, Robert J.
Janowitz, Norman
Jeffers Family 250,000 * 250,000 --- ---
Limited Partnership
JLB of Nevada, Inc. 347,222 1.1 347,222 --- ---
Johnson, L. Wayne 257,390 * 257,390 --- ---
Jones, Lelia M.
Joos-Vanderwalle,
John
Jordan, Bette P. 231,000 * 231,00 --- ---
Jordan, Edward 250,000 * 250,000 --- ---
K & K Development 500,000 1.6 500,000 --- ---
Kabuki Partners ADP 1,000,000 3.3 1,000,000 --- ---
G.P.
Kahla, Nicolas 8,773,095 28.6 8,773,095 --- ---
Kaiser, Jay 200,000 * 200,000 --- ---
Kalafer, Milton 2,000 * 2,000 --- ---
Kalifer, Steve
Kasper, Martin 1,469 * 1,469 --- ---
Kay, Scott & Regina 734,500 * 734,500 --- ---
- Joint Tenants
Keating, Patrick N. 500,000 1.6 500,000 --- ---
Kelley, Brad M. 500 * 500 --- ---
Kelley, Jaclyn 500 * 500 --- ---
Kennett, David R. 200,000 * 200,000 --- ---
Kessler, Rita G.
Khaled, Lulwa Al 300,000 1 300,000 --- ---
(Bahar JT.)
Khulpateea, 300,000 1 300,000 --- ---
Neekianund
Kirsner, Bernard, 400,000 1.3 400,000 --- ---
Trust
Koniver, Garth A. 535,000 1.7 535,000 --- ---
Kuhe, James H. 374 * 374 --- ---
Lama, Julian F. 100 * 100
Landau, Haskell 397,500 1.3 397,500 --- ---
Lauer, Michael
Layne, Marlene P. 10,000 * 10,000 --- ---
Leppla, Craig 65,167 * 65,167 --- ---
Lerner, Brian C. 200,000 * 200,000 --- ---
Letertre-Vogel, 100,000 * 100,000 --- ---
Sophie
Levy, Stephan R. 200,000 * 200,000 --- ---
Libby, Daniel M. 400,000 1.3 400,000 --- ---
Licona, Gladys 28,000 * 28,000 --- ---
Lim, Cassandra 10,916 * 10,916 --- ---
Lipman, Beth Kramer 50,000 * 50,000
Little, John
LoBue, Katelyn 210,450 * 210,450 --- ---
Loeb, Chris 400 * 400 --- ---
Low, Eng-Chye
Luck, John V. 500,000 1.6 500,000 --- ---
Maffucci, Todd 31,828 * 31,828 --- ---
Magnusen, Robert 275 * 275 --- ---
Malikow, Katherine 1,000 * 1,000 --- ---
L.
Malikow, Louis R. 1,056,714 3.5 1,056,714 --- ---
Malikow, Marvin 1,178 * 1,178 --- ---
Mallis, Stephen 250,000 * 250,000 --- ---
Mandarino, Joseph 85,422 * 85,422
Marcus, Jed 308,865 1 308,865 --- ---
Marguet, Pierre Alain 320,000 1.3 320,000 --- ---
Markatos, Peter C. 36,084 * 36,084 --- ---
Martin, John & 500,000 1.6 500,000 --- ---
Victoria
Matar, Emily
Charlotte
Mazzocchi, Dr. Leo 1,000,000 3.3 1,000,000 --- ---
McClain, Robert 200,000 * 200,000 --- ---
McCleeary, Robert A. 500,000 1.6 500,000 --- ---
McGrath, Richard & 320,000 1.3 320,000 --- ---
Eleanor
McLellan, Elizabeht 1,000 * 1,000 --- ---
A.
McNamee, John H. 300 * 300 --- ---
McWilliams, Adam 300 * 300 --- ---
McWilliams, Alston 300 * 300 --- ---
McWilliams, Cody 300 * 300 --- ---
Meinershagen, Alan J. 1,000,000 3.3 1,000,000 --- ---
Meshel, Miriam & 1,756,500 5.8 1,756,500 --- ---
Robert
Meshel, Robert E.
Metzger, James 166,500 * 166,500 --- ---
Meyers, Fred 103,000 103,000
Michael Association, 250,000,000 250,000,000 --- ---
The
Miller, Walter
Million Dollar
Mediat Inc.
Monie, Vijaykumar S. 500,000 1.6 500,000 --- ---
Moravec, John E. 500,000 1.6 500,000 --- ---
Morfesis, F. Andrew 1,000,000 3.3 1,000,000 ---
& Gail
Moriber, Lloyd A. 500,000 1.6 500,000 --- ---
Morley, David 500,000 1.6 500,000 --- ---
Flemming Jersey, Ltd.
Moschetta, Ron 1,287,264 4.1 1,287,264 --- ---
Mulkey II Limited 500,000 1.6 500,000 --- ---
Partnership
Muzea, George 190,964 190,964 --- ---
Nelson, David R. & 800,000 2.6 800,000 --- ---
Donna L.
Nelson, Edward E. 250,000 250,000 --- ---
Nelson, Virginia R., 1,000,000 3.3 1,000,000 --- ---
Trust
Norman, Greg 500,000 1.6 500,000 --- ---
Nussbaum, Samuel R.
O'Banner-Owens, 100 .0000033 100 --- ---
Jeanette - Trustee
O'Neill, David 1,000 * 1,000 --- ---
O'Neill Foundation,
Inc. - Mark O'Neill
O'Sullivan, Robert A. 298,298 * 298,298 --- ---
O'Toole, Diana 10,457 * 10,457 --- ---
Olsen, Ken 140,000 * 140,000
Opper, Lincoln 1,000 * 1,000 --- ---
Opper, Thomas 61,087 * 61,087 --- ---
Opper, William 526,917 1.7 526,917 --- ---
Ornstein, Steven 50,000 * 50,000 --- ---
Ottomanelli, Daniel 100,000 * 100,000 --- ---
and Rosie
Ottomanelli, Gary 100,000 * 100,000 --- ---
and Michelle
Ottomanelli, Gina 100,000 * 100,000 --- ---
Ottomanelli, Joseph 3,911,029 14.2 3,911,029 --- ---
Ottomanelli, Joseph 100,000 * 100,000 --- ---
and Kristine
Ottomanelli, Nicolo 4,815,749 16.1 4,815,749 --- ---
Ottomanelli, Suzanne 100,000 * 100,000 --- ---
Ottomanelli, Joseph 1,200 * 1,200 --- ---
P. - Custodian for
Angela Ottomanelli
Ottomanelli, Joseph 1,200 * 1,200 --- ---
P. - Custodian for
Joseph Anthony
Ottomanelli
Ovits, Jacob
Palmer, Richard & 500,000 1.6 500,000 --- ---
Lynne
Pamela Equities Corp. 500,000 1.6 500,000 --- ---
Pannu, Jaswant & 250,000 * 250,000 --- ---
Debra
Panzer, Sid
Partoyan, Garo A. 500,000 1.6 500,000 --- ---
Patil, Jayakumar & 500,000 1.6 500,000 --- ---
Purinama
Perreira, Richard 5,598 * 5,598 --- ---
Petrus, Paul F. 200,000 * 200,000 --- ---
Piccolo, August 300,000 1 300,000 --- ---
Piccolo, John 500,000 1.6 500,000 --- ---
Pizitz, Richard
Pocisk, Anna M. 700,000 2.3 700,000 --- ---
Porter, Craig M. 400 * 400 --- ---
Priddy, Robert L., 4,606,428 15 4,606,428 --- ---
IRA
Priddy, Robert L. 5,273,095 17.2 5,273,095 --- ---
Pucci Family 2,016,000 6.7 2,106,000 --- ---
Foundation
Purvis, Davis S. 532,964 1.7 532,964 --- ---
Raimondi, Peter J. 1,000 * 1,000 --- ---
Raimondi, Peter J. - 1,000 * 1,000 --- ---
Custodian For
Jessica Raimondi
Rankin, Roger 837,352.65 2.7 837,352.65 --- ---
Rankin, Roger - 1,000 * 1,000 --- ---
Custodian for Ashley
Diane Bentley
Rappaport, David A. 400,000 1.3 400,000 --- ---
Rappaport, A.G. and 1,273,095 4.1 1,273,095 --- ---
Diane M. - Joint
Tenants
Raulston, O.D. 504,000 1.8 504,000 --- ---
Reichelt, Kurt V. & 300,000 1 300,000 --- ---
Laura M.
Reynolds, Suzan 500 * 500 --- ---
Richardson, Donald 200,000 * 200,000 --- ---
Richter, Faye J.
Rev. Trust
Rion, James H., Jr. 500,000 1.6 500,000 --- ---
Robinson, Tom
Rodler, Lawrence J. 500,000 1.6 500,000 --- ---
Roeske, Charles 8,000,000 26.7 8,0000,000 --- ---
Roggen, Jesse
Ronco, Edmund J. 200,000 * 200,00 --- ---
Rosenblum, Keith 513,239 1.6 513,239 --- ---
Rosenblum, Stanley 397,500 1.3 397,500 --- ---
Rosenfield, Larry & 400,000 1.3 400,00 --- ---
Jan
Rothenberg, James
Rothenberg, Stephen 500 * 500 --- ---
Rothman, Douglas 1,469 * 1,469 --- ---
Rubin, Alan J. 166,500 * 166,500 --- ---
Runckel, Douglas & 500,000 1.6 500,000 --- ---
Evelyn
Sadler, Steven - 1,000 * 1,000 --- ---
Custodian for
Matthew Sadler
Salkind, Scott
Samela, Steven J. 500 * 500 --- ---
Samuels, James P.
Sanderson, Stephanie 500,000 1.6 500,000 --- ---
Sandhu, Baljeet 255,110 * 255,110 --- ---
Sandnu, Autar
Schechter, David A. 2,707,142 8.7 2,707,142 --- ---
Schenker, Monroe H. 500,000 1.6 500,000 --- ---
& Barbara P.
Schoen, William R. & 250,000 * 250,000 --- ---
Barbara J.
Schorlemmer, Rodney 1,000,000 3.3 1,000,000 --- ---
& Vikki
Schriver, James &
Jayne
Schwarzwaelder, 500,000 1.6 500,000 --- ---
Douglas
Schwickert, Kim (Mr.) 500,000 1.6 500,000 --- ---
Sederholt, David 3,562 * 3,562 --- ---
Sederholt, Karl
Sederholt, Richard
Sederholt, David - 3,562 * 3,562 --- ---
Custodian for
Kristin Sederholt
Sederholt, David & 283,206 * 283,206 --- ---
Maria - Joint Tenants
Shah, Harish, Dr. 397,500 * 397,500 --- ---
Shapero, Larry R. 2,000,000 * 2,000,000 --- ---
Shea Co., Inc., John 300,000 1.0 300,000 --- ---
F. Shea
Shea, Jr., Edmund H. 404,985 1.3 404,985 --- ---
Sheppard, Matt 200,000 * 200,000 --- ---
Sherman, William
Shrager, Jay & Carole 1,000,000 3.3 1,000,000 --- ---
Shulansky, John D. 500 * 500 --- ---
Sieber, Dale H. 800 * 800
Sieger, Stuart M. 482,387 1.5 482,387 --- ---
Silverman, Andrew 2,000,000 6.6 2,000,000 --- ---
Sink, James D. 2,000,000 6.6 2,000,000 --- ---
Sivak, George C., 200,000 * 200,000 --- ---
M.D.
Skoly, Dr. Stephen 500,000 1.6 500,000 --- ---
T., Jr.
Slafkosky, John P. 500 * 500 --- ---
Sleeper, Mitchell J. 671,547 2.2 671,547 --- ---
Smith, James
Sober, Amy Lynn 500 * 500 --- ---
Solomon, Michael Gary 318,274 1 318,274 --- ---
Somerville, William 79,569 * 79,569 --- ---
Earl
Spigarelli, Anthony 500,000 1.6 500,000 --- ---
M. & Nancy M.
Spivack, Joel 500,000 1.6 500,000 --- ---
Spreitzer, Thomas & 7,500 * 7,500 --- ---
Barbara - Joint
Tenants
Stein, Stephan 6,151,224 16.9 6,151,224 --- ---
Steiner, Philip H. 1,000,000 3.3 1,000,000 --- ---
Steiner, Richard H. 1,000,000 3.3 1,000,00 --- ---
Stellway, David 500,000 1.6 500,000 --- ---
Sterling, Roman J.
Sterling Computer
Services
Stout Living Trust 1,000 3.3 1,000 --- ---
Sullivan, Marc
Swiaek, Nicole 10,457 * 10,457 --- ---
Swimmers Gold, LLC
Sybesma, William 500,000 1.6 500,000 --- ---
Tachibana, Rick Glenn 257,390 * 257,390 --- ---
Tancredi, Jr., 1,000,000 3.3 1,000,000 --- ---
Samuel A.
Taylor, Donna M. 268 * 268 --- ---
Terry, Hilda L. 40 40 --- ---
Thompson, George 500,000 1.6 500,000 --- ---
Tjahjono, Bagus 500,000 1.6 500,000 --- ---
Toombs, Walter F. 4,675,000 15.6 4,675,000 --- ---
Trident III LLC 1,487,193 4.8 1,487,193 --- ---
Trombone, Mario 60,643 60,643 --- ---
Tuttle, Kerry 398,969 1.3 398,969 --- ---
Tuttle, Kerry & 398,969 1.3 398,969 --- ---
Carol - Joint Tenants
Underhill, James R.
Vainberg, Vladik 1,000 1,000 --- ---
Verbin, Syd & Helen 200,000 * 200,000 --- ---
Trust
Verdino, Lorraine 10,457 * 10,457 --- ---
Virkler, Timothy 100 * 100 --- ---
Voss, W. Cary & 300,000 1 300,000 ---
Barbara G.p
Voss, Warren 500,000 1.6 500,000 --- ---
Ward, Tom 3,152 * 3,152 --- ---
Weidenbener, Erich J. 250,000 * 250,000 --- ---
Weider Alexander
Wibel, Mark 1,000,000 3.3 1,000,000 --- ---
Wilkinson, Christine 1,000,000 3.3 1,000,000 --- ---
M.
Wilkinson, Renee 500,000 1.6 500,000 --- ---
Wilkinson, Susan 4,000 6.6 4,000 --- ---
Williams, Debra
Winton, Don (to be 408,065 1.3 408,065 --- ---
issued to Denise K.
Shull)
Wisseman, Dr. 600,000 2 600,000 --- ---
Charles Louis, III
Woodhol Properties 300,000 1 300,000 --- ---
Inc.
Wrobleski Joseph A. 500 * 500 --- ---
& Beverly A.
Wynne, Joseph 299,847 299,847 --- ---
</TABLE>
-----------------------------------
* Less than 1% of outstanding shares of Common Stock.
** 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%.
<PAGE>
PLAN OF DISTRIBUTION
The sale of Shares by the Selling Security Holders may be effected from
time to time in private transactions or in the over-the-counter market at prices
related to the prevailing prices of the Shares on the NASDAQ Bulletin Board at
the time of the sale or at negotiated prices. The Selling Security Holders may
effect such transactions by selling to or through one or more broker-dealers,
and such broker-dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Selling Security Holders. The
Selling Security Holders and any broker-dealers that participate in the
distribution may under certain circumstances be deemed to be "underwriters"
within the meaning of the Securities Act, and any commissions received by such
broker-dealers and any profits realized on the resale of Shares by them may be
deemed to be underwriting discounts and commissions under the Securities Act. We
and the Selling Security Holders may agree to indemnify such broker-dealers
against certain liabilities, including liabilities under the Securities Act. In
addition, we have agreed to indemnify certain of the Selling Security Holders
with respect to the Shares of Common Stock offered hereby against certain
liabilities, including certain liabilities under the Securities Act.
To the extent required under the Securities Act, a supplemental Prospectus
will be filed, disclosing (a) the name of any such broker-dealers, (b) the
number of shares involved, (c) the price at which such shares are to be sold,
(d) the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable, (e) that such broker-dealers did not conduct
any investigation to verify the information set out or incorporated by reference
in this Prospectus, as supplemented, and (f) other facts material to the
transaction.
Each Selling Shareholder may be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which provisions may limit the timing of purchases of
any of the securities by the Selling Security Holders.
We can give no assurance that any of the Selling Security Holders will sell
any of the Shares.
We have agreed to pay certain costs and expenses incurred in connection
with the registration of the Shares offered hereby, except that the Selling
Security Holders shall be responsible for all selling commissions, transfer
taxes and related charges in connection with the offer and sale of such Shares.
We propose to keep the registration statement relating to the offering and
sale by the Selling Security Holders of the Shares continuously effective until
such date as such Shares may be resold without registration under the provisions
of the Securities Act, under Rule 144 thereof or otherwise, but we may, at such
time as it determines, file an amendment to remove any unsold Shares.
DESCRIPTION OF SECURITIES
Authorized Capital Stock
As of March 27, 2000, the Company's authorized capital stock consisted of
400,000,000 shares of Common Stock, par value of $.001 per share; and 5,000,000
shares of preferred stock. As of March 27, 2000, there were 29,979,013 shares of
Common Stock issued and outstanding (not including shares of Common Stock
issuable upon conversion of convertible securities, or exercise of options and
warrants) and 356,909 shares of Series B Preferred Stock issued and outstanding,
presently convertible into 178,454,500 shares of Common Stock.
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. Our 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. At a recent meeting of stockholders, three
directors were elected for a term of one year and the Board of Directors was not
"staggered." 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 our liquidation or dissolution, 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.
Preferred Shares
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 we fail to comply with its obligations, in good faith, process a
registration statement (see below). In the case of our consolidation or merger
with or into any other corporation, or in case of any sale or transfer of
substantially all our assets, 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 our option, 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. We are required to cause a registration
statement under the Securities Act of 1933, as amended (the "Act") to be filed
under the Act covering the shares of Common Stock issuable upon conversion of
the Preferred Shares sold in the Offering, by August 17, 1999, and are required
thereafter to use our best efforts to cause such Registration Statement to be
declared effective. The Registration Statement was timely filed, so if we fail
to use our 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. We believe we
have used our best efforts, although, this registration statement is not
presently effective. All expenses incurred in any registration of the holder's
shares of Common Stock will be paid by us; provided, however, that we 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 we will indemnify each other for certain liabilities
under the Act.
Dividends. 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 our election. 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 our Board. In addition, if we fail to comply with our obligations to
file and process a Registration Statement (see above), the dividend rate will
increase to 14% per annum from issuance.
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 our dissolution, liquidation, or winding up. If, in any such
event, our assets 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 our
assets, will not be considered a liquidation, dissolution, or winding up for
these purposes.
Voting Rights. The Preferred Shares are non voting (however, the shares of
Common Stock into which the Shares are convertible will be entitled to one vote
for each share). The Preferred Shares will have certain additional voting rights
provided by law and/or the Certificate of Designation. We 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.
<PAGE>
OUR BUSINESS
General
Spencer's Restaurants, Inc. a Delaware corporation (unless the context
otherwise indicates, with its subsidiaries, "we" or 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 Southwestern Grill. At one
time, we 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, we 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. We 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, in furtherance of our Cost Reduction Plan, 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 April 1999, 106 Federal Road Restaurant Corp., our wholly-owned
subsidiary, purchased the Danbury, Connecticut facility previously closed. The
closed restaurant was remodeled and reconfigured to serve as the first location
for our new restaurant concept and opened for business as a Spencer's Restaurant
in November 1999.
We continue to operate a self sustaining Rattlesnake(R) Southwestern Grill
in South Norwalk, Connecticut.
New Restaurant Concept
In the last half of calendar year 1998, our management recognized that we
had a limited future as an operator of Rattlesnake Southwestern Grill
restaurants. As a result, management set out to: (i) increase our working
capital through the consummation of a private placement offering of our
securities, with Commonwealth Associates serving as placement agent (the
"Placement Agent"); (ii) assemble a new, highly experienced and established
management team; and (iii) alter our restaurant theme and menu and develop
restaurants with a new concept.
Private Placement Offering
In October 1998, we commenced a private placement offering (the "Private
Placement Offering") of our securities, pursuant to which we offered investors
Series B Convertible Preferred Shares. See "Description of Securities -
Preferred Shares." Upon completion of the Offering in July 1999, we had raised
approximately $6,000,000 and converted approximately $1,350,000 of debt to
equity. After satisfying certain of our remaining debts, disbursements of and
commissions to the placement agent, and payment of other expenses of the
Offering, we secured approximately $4,000,000 for working capital use. As a
result of the continued operating losses incurred, the Company's cash balance
decreased to $605,347 at March 27, 2000.
New Management Team
In order to develop and implement its new restaurant concept, we installed
a new management team and Board of Directors with significant experience in the
restaurant operations industry. See "Management - Agreements with New
Management." Accordingly, we have entered into personal service agreements (of
varying commitment levels) with certain key persons who, as principals, have
previously participated in the development of food service chains, including
Shelly Frank (Chi-Chi's), Kenneth Berry (Roy Rogers, regionally), A.G. "Sandy"
Rappaport (Outback Steakhouse) and Stephan A. Stein (David's Cookies). See
"Management". However, due to a number of factors, including our historical
operating losses, small restaurant base and geographic concentration, as well as
dependence on certain external factors we cannot control, there can be no
assurance that new management will be able to make us profitable or commercially
viable.
New Concept and Menu
We 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 will feature 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, is intended to
distinguish Spencer's from competitors.
- To compliment the steak and shrimp offerings, menu items are
expected to include: appetizers, caesar and unique salads;
various but basic chicken, fish, rib, and pasta entrees;
mainstay sandwiches; a separate Kid's list of choices that are
inclusive of fries and beverage; house made fries, steamed or
creamed "sides"; and desserts. Standard alcoholic beverages as
well as selection of blended specialty drinks will be offered.
- The average check, exclusive of tax/tip, is estimated to be
$8.50 at lunch and $17.50 at dinner. Lunch and dinner will be
served seven days (with a target of 18 table turns) per week
and will be location sensitive.
- 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.
- Total investment to open a Spencer's is estimated to be
approximately $700,000 inclusive of retrofit expenses and
exclusive of capitalized lease costs, with an estimated 3:1
annual sales to investment ratio.
- 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
Our 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, we propose to use the
following strategies:
Quality Assurance. We intend to provide freshly prepared, high quality
items. We believe that our menu offerings will allow for simplified food
preparation, efficient delivery and consistent quality. We will implement
generalized procedures for quality assurance concerning products served in our
restaurants.
Commitment to Value. Our pricing strategy is designed to create an
attractive price-to-value relationship, thereby increasing our ability to
attract value-oriented customers as well as traditional casual dining customers.
We believe 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. We believe that we must provide prompt, friendly
and efficient service to generate customer satisfaction. We plan 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. We believe a well-trained, highly
motivated restaurant management team is critical to achieving our operating
objectives. Our training and compensation systems will be designed to create
accountability at the restaurant level for the performance of each restaurant.
We 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 our 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
Our growth strategy is to open new Spencer's restaurants by converting
existing restaurants to its Spencer's concept. In developing the Spencer's
format, there will be an emphasis on objective standards, so that the format and
operating procedure could be readily duplicated. We plan to cluster new
restaurants in existing metropolitan markets, which, management believes, would
enhance supervisory, marketing and distribution efficiencies.
Restaurant Layout
It is anticipated that Spencer's restaurants will be 6,000-8,000 square
feet in size. Seating will vary from 150-250. The Danbury, Connecticut Spencer's
restaurant is 7,200 square feet in size and seats 175. The restaurants will be
designed to include family dining with some privacy, and booths will be used
when appropriate. Kitchen areas should be as open as possible to the dining
areas. Decor should be uniform and designed to be distinctive. We will seek
visible main road locations which are suitable for Spencer's unit economics but
are below the size believed to be acceptable to general menu national restaurant
chain operations.
Support Operations
Advertising and Marketing. We plan to develop an ongoing defined
advertising and marketing plan for the potential development of radio and
newspaper advertising but will initially use point of sale and local store
marketing. Our advertising is planned to focus on building brand loyalty and
emphasizing the distinctiveness of the Spencer's atmosphere and menu offerings.
In addition to advertising, we will encourage unit level personnel to become
active in their communities through local charities and other organizations and
sponsorships.
Restaurant Reporting. Systems and technology are essential for the
management oversight needed to monitor our restaurant operations. Operational
and financial controls are planned to be maintained through the use of point of
sale systems in each restaurant and an automated data processing system at the
home office. Management will utilize this data to monitor the effectiveness of
controls and to prepare periodic financial and management reports. The system
will also be utilized for financial and budgetary analysis, including analysis
of sales by restaurant, product mix and labor utilization. All of the Company's
systems are, because of the use of current software, anticipated to be Year 2000
compliant.
Human Resources. We will ultimately maintain a human resources department
that supports restaurant operations through the design and implementation of
policies, programs, procedures and benefits for our employees. The eventual
human resources department will include an employee relations manager.
Franchise Activities
We 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. 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
We are presently the licensee of Rattlesnake(R). We were previously 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) is
licensed from a corporation, the capital stock of which is owned by Nicolo and
Joseph Ottomanelli, with a term co-extensive with the licensor's rights and for
no separate consideration, entered into as part of our merger transaction with
such persons (see "Certain Transactions").
We filed an application with the United States Patent and Trademark Office
("PTO") to trademark Spencer's. There can be no assurance as to the opposition
to this filing by the PTO and/or third parties, or if or when the trademark
would be granted to us. Names and marks similar to our trademarks 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. We intend to protect its trademarks by appropriate legal action
whenever necessary.
Government Regulation
We are subject to various federal, state and local laws affecting its
business. In addition, each of our restaurants will be subject to licensing and
regulation by a number of governmental authorities, which will 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 our restaurants will be located require local business licenses.
Difficulties in obtaining or failures to obtain the required licenses or
approvals could delay or prevent the development of a new restaurant in a
particular area. We are also subject to Federal and state environmental
regulations, but such regulations have not had a material adverse effect on our
operations to date.
Approximately ten to twenty (10-20%) percent of our 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. In the states in which we operate restaurants and propose to
operate restaurants, we are subject 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. We design our restaurants to be accessible to the disabled and
believe that we are in substantial compliance with all current applicable
regulations relating to restaurant accommodations for the disabled. We intend to
comply with future regulations relating to accommodating the needs of the
disabled, and we do 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.
Our 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 our payroll and benefits expense.
Employees
At March 27, 2000, we employed approximately 115 persons, 4 of whom were
home office management and staff personnel, and the remainder of whom were
restaurant personnel. A substantial number of our restaurant personnel are
employed on a part-time basis. None of our employees are covered by a collective
bargaining agreement. We consider our 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 we
have. Such competitors include a large number of national and regional
restaurant chains. Although we believe that our concept will distinguish us from
competitors, steakhouse chains with which we will compete include Outback,
Longhorn, Lone Star and Bugaboo Creek restaurants. Some of our competitors have
been in existence for a substantially longer period than we and may be better
established in the markets where our 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 our 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.
Properties
At March 27, 2000, our principal office was and is located at 106 Federal
Road, Danbury, Connecticut at the location of the Spencer's restaurant. As of
March 27, 2000, the South Norwalk, Connecticut restaurant continues in
operation.
Legal Proceedings
As of March 27, 2000, the Company was engaged in certain active litigation
as follows:
Peck v. Rattlesnake Ventures, Inc. et. al.
Plaintiff, the owner of an apartment situated above the South Norwalk
Rattlesnake Grill operated by Rattlesnake Ventures, Inc. ("RVI"), a wholly-owned
subsidiary of the Company, brought an action for negligence per se, intentional
infliction of emotional distress, negligent infliction of emotional distress,
and violations of the Connecticut Unfair Trade Practices Act based on
allegations of excessive noise, and rude and or threatening conduct of employees
of RVI including the Corporate Chairman and CEO at the time, William Opper
("Opper").
A jury verdict in the amount of $225,000 was entered against RVI and Opper
jointly on the negligence per se counts of the plaintiff's complaint. In
addition, verdicts in the amount of $200,000 were entered against both Opper and
RVI separately on the intentional and negligent infliction of emotional distress
counts of the complaint. The trial court subsequently set aside the emotional
distress awards against both Opper and RVI leaving only the negligence per se
award against Opper and RVI jointly in the amount of $225,000 referred to above.
This award is currently on appeal by RVI and Opper. The plaintiff has also
appealed the trial court's post trial reduction of the jury award. It should be
noted that an Offer of Judgment was filed in Peck in 1994. As a result there is
the potential that interest at the statutory rate of 12% will be applied to any
ultimate final award in Peck.
Plaintiff's claims are arguably covered by one or more of RVI's insurance
policies. Farmington Casualty Company (Travelers Property Casualty is successor
in interest to Aetna Property and Casualty who was successor in interest to
Farmington Casualty Company) and Insurance Company of Greater New York retained
counsel to defend Rattlesnake under a reservation of rights. The third insurance
carrier, Public Service Mutual denied coverage. Greater New York and Farmington
have continued to prosecute the appeal under a reservation of rights. RVI has
advised all three insurance companies that it intends to pursue its rights in an
action for damages and declaratory relief against them in the event that the
appeal is unsuccessful and the insurance carriers refuse to provide coverage for
plaintiff's claims.
William Opper Indemnification Demand/Peck
On or about July 7, 1999, a demand letter was tendered to the Company by
Mr. Opper's attorney seeking indemnification from potential liabilities arising
out of Peck (above). This demand is based on an indemnification provision in an
agreement between Mr. Opper and the Company. The Company has been advised that
viable defenses to this demand may exist.
Travelers Property Casualty as Successor in Interest to Aetna Property and
Casualty v. Rattlesnake Bar and Grill Holding Company, Inc. et. al.
Plaintiff seeks declaratory judgement that Travelers is not obligated to
indemnify the defendants in the underlying Peck action. Plaintiff alleges the
absence of a qualifying incident of bodily injury or property damage due to the
lack of an "occurrence" defined in the policy as accidental, the lack of a
bodily injury as defined in the policy and the lack of property damage as
defined in the policy. The plaintiff furthermore argues for exclusion of
coverage due to the alleged intent to harm the plaintiff and alleged existence
of property damage expected or intended from the standpoint of the insured.
Preliminary analysis suggests viable arguments may exists for extension of
coverage in this matter.
Settlement
In June 2000, all of the above claims and proceedings against the Company
were settled for a payment by the Company of an aggregate of approximately
$60,000.
Jack Cioffi Trust v. Rattlesnake Lynbrook and Rattlesnake Holding
This is an action for an alleged breach of a commercial lease in which
damages exceeding $190,000 are being sought. The Company has answered and denied
liability. Depositions are in process. A compliance conference was scheduled for
May 4, 2000.
Market for Common Equity and Related Stockholder Matters
The high and low bid quotations for the preceding three fiscal years for
the Common Stock of the Company on the NASDAQ SmallCap Market (until September
1997) and the NASDAQ Bulletin Board (thereafter), is as follows (fractions
converted to approximate decimal values):
BID
Fiscal Year 1998 Low High
---------------- --- ----
Quarter ended September 30, 1997 .17 .65
Quarter ended December 31, 1997 .17 .31
Quarter ended March 31, 1998 .17 .65
Quarter ended June 28, 1998 .44 .65
Fiscal Year 1999
----------------
Quarter ended September 30, 1998 .22 1.03
Quarter ended December 31, 1998 .13 .45
Quarter ended March 31, 1999 .13 .31
Quarter ended June 30, 1999 .09 .31
Fiscal Year 2000
----------------
Quarter ended September 21, 1999 .08 .24
Quarter ended December 27, 1999 .07 .21
Quarter ended March 27, 2000 .06 .19
As of the close of business on March 27, 2000, there were 146 holders of
record of the Common Stock. We have paid no dividends on our common stock for
the last three years and does not expect to pay dividends in the future.
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 consultants as of March 27, 2000 (See
"Agreements with New Management" below for information on contractual
commitments related to certain of these persons). Our 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 our Board of Directors from such position. We do not
pay any compensation to any person for serving, as such, as a director. Current
officers and directors include:
NAME AGE POSITIONS
---- --- ---------
Kenneth Berry 47 President, CEO and Director
John Reuther 46 Vice President - Finance
Stephan A. Stein 48 Consultant, Secretary and
Director
Nicolo Ottomanelli 57 Director
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 Reuther 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 February 1999. Mr. Stein was a Managing Director of the Corporate Finance
Department of the Placement Agent until May 31, 1999. Prior to joining the
Placement Agent, and from 1977 to 1996, Mr. Stein had broad based transaction
and business management experience, initially as a practicing attorney in New
York City and thereafter as a principal of various food-service related
companies involved in manufacturing, distribution, retailing and franchising,
both domestically and internationally. Mr. Stein has a B.A. degree in economics
from Ohio State University and a Juris Doctor degree from The Vermont Law
School.
Nicolo Ottomanelli For more than forty years, Mr. Ottomanelli has been
engaged in the food business in New York as a member of Ottomanelli Bros., a
century old retail meat purveyor, and has operated a number of casual dining
restaurants under the Ottomanelli's Cafe(R) name. He has also operated steak
restaurants and is the founder of the Ottomanelli's Cafe franchising operation,
which the Company owns and plans to dispose of.
Committees of the Board of Directors
Our 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 March
27, 2000, we believe we are in compliance with all Section 16 requirements and
believes our current management and directors to be in compliance.
Executive Compensation
The following table sets forth as of June 30, 2000 the cash compensation
paid by us, as well as any other compensation paid to or earned by our President
and those executive officers compensated at or greater than $100,000 for
services rendered to us 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 $74,375 25,000 --- ---
Director (1) 1999 $89,567 --- --- ---
1998 $69,230 --- --- ---
</TABLE>
-------------
* Kenneth Berry was not employed by the Company during fiscal year 1998.
(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. We 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.
We and Mr. Ottomanelli terminated his employment agreement in January 2000.
See "Beneficial Ownership" and "Management."
Agreements with Management
We 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."
Subsequent to June 28, 1998, we entered into a three year advisory service
agreement with A. G. (Sandy) Rappaport providing for certain consultative
services on an as need basis and providing for compensation of $12,000 per year
plus the warrant described in "Security Ownership of Certain Beneficial Owners
and Management."
The performance bonus plan for senior management creates a bonus pool based
on the yearly targeted number of restaurant openings, and our 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.
Limited Liability of Directors and Executive Officers
Our Certificate of Incorporation provides that we shall indemnify to the
fullest extent permitted by Delaware law any person whom it may indemnify
thereunder, which includes our directors, officers, employees and agents. Such
indemnification (other than as ordered by a court) shall be made by us 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 our personal liability of directors to us 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 our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have 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 us 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, we will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy, as expressed in the Securities Act, and will be
governed by the final adjudication of such issue.
Stock Option Plans
1994 Employees Stock Option Plan
In December 1994, we adopted the 1994 Employees Stock Option Plan (the
Employees Plan), which provided 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 our common stock were reserved for issuance under the
Plan. The Plan was administered by our Board of Directors. The term of the
options was generally for a period of 5 years. The exercise price for
non-qualified options outstanding under the Employees Plan could be no less than
100% of the fair market value, as defined, of our common stock at the date of
the grant. For ISO's the exercise price could be generally no less than the fair
market value of our 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 our common stock at the date of grant. There are
presently approximately 1,000,000 shares available for option under the
Employees Plan.
1994 Director Plan
In December 1994, we adopted the non-Executive Director Stock Option Plan
(the "Director Plan"), which provided for the issuance of non-ISO's to
non-executive directors, as defined, and members of any advisory board
established by us who were not our full-time employees. We reserved 500,000
shares for issuance under the provisions of the Director Plan. The Director Plan
provided that each non-executive director would 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 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. Options to purchase
295,000 shares were granted under the Directors Plan.
1999 Stock Option Plan
On April 18, 1999, our Board of Directors approved the adoption of the 1999
Stock Option Plan (the "1999 Plan"), which provides for the issuance of ISOs,
Non-ISOs, and stock appreciation rights to our officers and key employees. Up to
25,000,000 shares have been reserved for issuance under the 1999 Plan, which is
administered by our Board of Directors. 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
our Common Stock on the date of grant. For ISOs, the exercise price can
generally be no less than the fair market value of our 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 our Common Stock at the date of
grant. There are presently no options granted under the 1999 Plan.
1999 Director Plan
On April 18, 1999, we 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 us who are not our full-time employees. We have reserved
10,000,000 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 shares upon joining the Board of Directors and
options to purchase shares each year 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. There are presently
10,000,000 shares available for option under the Directors Plan.
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 May 31, 2000, based on
information obtained from the persons named below, by (i) each person known to
us to beneficially own more than 5% of the outstanding shares of Common Stock,
(ii) each executive officer and director of the Company, and (iii) all officers
and directors of the Company as a group:
<PAGE>
Name and Address of Amount and Nature of
Beneficial Owner** Beneficial Ownership*** Percentage****
--------------------------------------------------------------------------------
Kenneth Berry 20,000,000 (1) 40%
Nicolo Ottomanelli 4,815,749 (2) 16.2%
Joseph Ottomanelli 3,911,029 (3) 13.1%
Stephan A. Stein 6,151,224 (4) 18.4%
Shelly Frank***** 45,000,000 (5) 64.3%
16 Arrowhead Way
Weston, CT 06883
Commonwealth Associates 15,650,000 (6) 37.7%
830 Third Avenue
New York, New York 10022
Guy Snowden 2,254,126 (7) 7.6%
4080 Ibis Point Circle
Boca Raton, FL 33431
All Directors and Officers as 30,966,973 57.5%
group (5 Persons)
-----------------------------------------
* Less than 1% of outstanding shares of Common Stock.
** Unless otherwise indicated, the beneficial owner's address is the principal
office of the Company.
*** The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly, they may
include securities owned by or for, among others, the spouse and/or minor
children of the individual and any other relative who has the same home as such
individual, as well as other securities as to which the individual has or shares
voting or investment power or has the right to acquire under outstanding stock
options within 60 days after the date of this table. Beneficial ownership may be
disclaimed as to certain of the securities.
**** In computing the "Percentage of Class" figures as to each person, there is
added to the numerator and denominator, for such person, the number of shares of
Common Stock such person could acquire within 60 days by the conversion of a
convertible security owned by such person or the exercise of an option or
warrant held by such person. This presentation maximizes the percentage of each
person, since it assumes that no other holder of rights to convert or purchase
preferred stock or warrants or notes is then exercising the same, and often
results in a combined listing percentage of ownership that exceeds 100%.
***** Not a director at the date hereof
(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. J. 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 warrant to acquire 45,000,000 shares of common stock at $.05 per
share.
(6) Includes warrants to purchase 12,000,000 shares of Common Stock at an
exercise price of $.05.
(7) Does not include 54,126 shares of Common Stock owned by Mr. Snowden's
spouse, of which Mr. Snowden disclaims any beneficial ownership. Does not
include 3,000 shares of Preferred B Shares owned by Mr. Snowden.
Certain Relationships and Related Transactions
Nicolo Ottomanelli
In August 1997, Nicolo Ottomanelli and his brother, Joseph Ottomanelli,
entered into a Reorganization Agreement with us, whereby they agreed to exchange
the stock of certain corporations owned by them for certain shares of our Common
Stock 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 Cafes(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 to be issued on account of the 55,370 Preferred Shares,
convertible into 6,921,250 shares of Common Stock, to be 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, both of which has since been terminated (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.
The Ottomanellis own the premises at which our offices were located until
December 1, 1998, and at which we occupied approximately 600 square feet of
space as a month-to-month tenant at a rent of $2,200 per month. We believe these
terms were at least as favorable to us as could have been obtained from a
non-affiliated person. After February 1999, we terminated this tenancy without
penalty and to moved its offices to one of its restaurants.
Stephan A. Stein
Mr. Stein was an employee of the placement agent in the Offering until May
31, 1999. Commencing in March 1998, the placement agent raised approximately
$850,000 for us, 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.
LEGAL MATTERS
The validity of the shares of common stock hereby and certain legal matters
in connection with this offering will be passed upon for us by Ruskin, Moscou,
Evans & Faltischek, P.C.
EXPERTS
Our consolidated financial statements as of June 28, 1998 and June 30, 1999
and for each of the years in three-year period ended June 30, 1999 have been
included herein and in the Registration Statement in reliance upon the report of
KPMG LLP, independent public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Commission a registration statement (of which this
prospectus is a part and which term shall encompass any amendments thereto) on
Form S-1 pursuant to the Securities Act with respect to the common stock being
offered. This prospectus does not contain all of the information set forth in
the registration statement. Certain portions of the registration statement, and
the exhibits and schedules thereto are omitted, as permitted by the Commission.
Statements made in this prospectus about the contents of any document referred
to are not necessarily complete; with respect to any such document filed as an
exhibit to the registration statement, reference is made to the exhibit itself
for a more complete description of the matter involved. Each such statement
shall be deemed qualified in its entirety by reference to the registration
statement exhibits.
This Registration Statement and all other information filed by us with the
Commission may be inspected without charge at the principal reference facilities
maintained by the Commission at:
450 Fifth Street, N.W.
Washington, D.C. 20549,
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661,
7 World Trade Center
13th Floor
New York, New York 10048.
Copies of all or any part thereof may be obtained upon payment of fees
prescribed by the Commission from the Public Reference Section of the Commission
at its principal office in Washington, D.C. set forth above. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov.
The common stock is expected to be listed on the Over-the-Counter Bulletin
Board and, upon listing, copies of such reports, proxy statements and other
information concerning the Company can also be inspected and copied at the
library of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C.
20006.
[Balance of page intentionally left blank]
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. and Subsidiaries)
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Report of Independent Auditors............................................................................F-2
(b) Consolidated Balance Sheets as of June 28, 1998 and June 30, 1999.........................................F-3
(c) Consolidated Statements of Operations for the years ended June 29, 1997, June 28, 1998 and
June 30, 1999.............................................................................................F-4
(d) Consolidated Statements of Shareholders' Equity for the years ended June 29, 1997, June 28, 1998,
June 30, 1999.............................................................................................F-5
(e) Consolidated Statements of Cash Flows for the years ended June 29, 1997, June 28, 1998,
June 30, 1999............................................................................................F-7
(f) Notes to Consolidated Financial Statements................................................................F-8
(g) Interim (Unaudited) Condensed Consolidated Balance Sheet as of March 27, 2000.............................F-18
(h) Interim (Unaudited) Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended March 31, 1999 and March 27, 2000.......................................................F-19
(i) Interim (Unaudited) Condensed Consolidated Statements of Cash Flows for the Three and
Nine Months Ended March 31, 1999 and March 27, 2000.......................................................F-20
(j) Notes to Interim (Unaudited) Condensed Consolidated Financial Statements..................................F-22
</TABLE>
<PAGE>
----------------------------------
SPENCER'S RESTAURANTS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
June 29, 1997, June 28, 1998 and June 30, 1999
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors and Stockholders
Spencer's Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of Spencer's
Restaurants, Inc. and subsidiaries (formerly The Rattlesnake Holding Company,
Inc. and subsidiaries) as of June 28, 1998 and June 30, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spencer's Restaurants, Inc. and
subsidiaries as of June 28, 1998 and June 30, 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Between February 17, 1999 and July 2, 1999, the Company completed
a private placement of approximately $6,000,000 of Series B preferred stock.
During the private placement, the Company satisfied principally all short and
long term debt that was previously in default. Coincident with the private
placement, the holders of 56,500 shares of Series A preferred stock exchanged
their holdings for 55,370 shares of Series B preferred stock and waived their
rights to the unpaid and accumulated dividends. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
Melville, New York
October 26, 1999
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Consolidated Balance Sheets
June 28, 1998 and June 30, 1999
<TABLE>
<CAPTION>
June 28, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash $ 311,328 2,337,675
Accounts receivable 16,831 9,754
Notes receivable, current installments 4,080 --
Inventory 29,397 16,688
Prepaid expenses and other current assets 7,200 11,918
------------- -------------
Total current assets $ 368,836 $ 2,376,035
Notes receivable, less current installments 225,920 --
Land, Building and equipment, net 81,375 1,445,079
Intangible assets, net 30,598 20,769
Other assets 78,443 76,383
------------- -------------
$ 785,172 $ 3,918,266
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of notes payable, including amounts
due to related parties of $553,385 at June 28, 1998 $ 1,282,539 55,838
Accounts payable 1,019,139 689,679
Accrued expenses 629,414 678,221
Dividends payable 207,636 198,846
Other current liabilities 182,971 171,621
------- -------
Total current liabilities 3,321,699 1,794,205
--------- ---------
Notes payable, net of current maturities 525,006 242,504
------- -------
Total liabilities $ 3,846,705 $ 2,036,709
------------- -------------
Stockholders' equity (deficit):
Preferred stock, Series A, $.10 par value, 5,000,000
shares authorized, 56,500 issued and outstanding at June 28, 1998 5,650 --
Preferred stock, Series B, $0.10 value, 5,000,000 shares authorized
328,563 issued and outstanding at June 30, 1999 -- 32,856
Common stock, $.001 par value - 400,000,000
shares authorized,10,889,285 and 29,979,013 issued and
outstanding, at June 28, 1998 and June 30, 1999,
respectively 10,890 29,980
Additional paid-in capital 12,554,618 20,794,657
Accrued dividends (207,636) (198,846)
Accumulated deficit (15,425,055) (18,777,090)
----------- ------------
(3,061,533) 1,881,557
---------- ---------
$ 785,172 3,918,266
============= ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Consolidated Statements of Operations
Years ended June 29, 1997, June 28, 1998 and June 30, 1999
<TABLE>
<CAPTION>
June 29, 1997 June 28, 1998 June 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Restaurant Sales 8,265,474 3,888,643 1,696,679
Less: promotional sales 413,524 127,343 69,434
--------- --------- ---------
Net restaurant sales 7,851,950 3,761,300 1,627,245
Costs and expenses:
Cost of food and beverage sales 2,443,860 1,225,982 621,595
Restaurant salaries and fringe benefits 2,792,622 1,322,119 662,343
Occupancy and related expenses 2,025,198 1,072,796 485,200
Depreciation and amortization expenses 726,526 314,017 44,096
--------- --------- ---------
Total restaurant costs and expenses 7,988,206 3,934,914 1,813,234
Selling, general and administrative 2,715,293 1,279,831 2,849,771
Loss on closure of restaurant sites 1,731,842 1,464,756 365,000
and impairment charges
Interest expense 172,886 261,276 175,248
Litigation award --- --- 269,000
Miscellaneous expenses 41,580 56,562 19,456
--------- --------- ---------
Total expenses 12,649,807 6,997,339 5,491,709
---------- --------- ---------
Net loss before income taxes and extraordinary item (4,797,857) (3,236,039) (3,894,464)
Income taxes --- --- ---
--------- --------- ---------
Net loss before extraordinary item (4,797,857) (3,236,039) (3,894,464)
Extraordinary item:
Gain on early extinguishments of debt --- --- 512,429
--------- --------- ---------
Net loss (4,797,857) (3,236,039) (3,352,035)
----------- ----------- -----------
Dividends on preferred shares (103,818) (103,818) (198,846)
--------- --------- ---------
Net loss available common stockholders (4,901,675) (3,339,857) (3,550,881)
=========== =========== ===========
Net loss per share:
Loss before extraordinary item (1.85) (0.80) (0.21)
Extraordinary item --- --- 0.03
--------- --------- ---------
Net loss - Basic and diluted (1.85) (0.80) (0.18)
====== ====== ======
Weighted average number of common and
common equivalent shares outstanding -
Basic and diluted 2,645,335 4,173,985 19,205,208
========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Consolidated Statements of Stockholders' Equity
Years ended June 29, 1997, June 28, 1998 and June 30, 1999
<TABLE>
<CAPTION>
Preferred Shares Preferred Stock Additional
Common Common Paid In
Shares Stock Series A Series B Series A Series B Capital
------ ----- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 2,643,734 $ 2,644 54,500 --- $ 5,450 --- $10,704,315
Proceeds from issuance of preferred --- --- 2,000 --- 200 --- 49,800
stock
Conversion of debt to equity 6,493 7 --- --- --- --- 24,992
Accrued dividends --- --- --- --- --- --- ---
Issuance of warrants for services --- --- --- --- --- --- 293,750
performed
Net loss --- --- --- --- --- --- ---
--------- -------- ------ ------- ------- -------- -----------
Balance, June 29, 1997 2,650,227 $2,651 56,500 --- 5,650 --- 11,072,857
Issuance of common stock in 2,822,058 2,822 --- --- --- --- 437,419
connection with acquisition of
Ottomanelli Group
Net proceeds from issuance of common 4,480,000 4,480 --- --- --- --- 539,068
stock in connection with private
placement
Conversion of debt to equity 937,000 937 --- --- --- --- 499,063
Issuance of warrants for services --- --- --- --- --- --- 25,100
performed
Deferred compensation --- --- --- --- --- --- (18,889)
Accrued dividends --- --- --- --- --- --- ---
Net loss --- --- --- --- --- --- ---
--------- -------- ------ ------- ------- -------- -----------
Balance, June 28, 1998 10,889,285 $10,890 56,500 --- 5,650 --- 12,554,618
Net proceeds received from issuance 1,100,000 1,100 --- --- --- --- 152,400
of common stock
Net proceeds received from issuance --- --- --- 236,279 --- 23,627 5,111,392
of Series B preferred stock
Issuance of warrants for services --- --- --- --- --- --- 1,098,547
performed
Deferred Compensation --- --- --- --- --- --- 12,221
Issuance of common stock for services 2,651,991 806 --- --- --- --- 132,692
performed
Conversion of debt to common and 10,421,070 12,267 --- 36,914 --- 3,692 1,500,091
preferred stock
Conversion of Series A preferred stock --- --- (56,500) 55,370 (5,650) 5,537 113
to Series B preferred stock
Additional issuance of common stock 5,000,000 5,000 --- --- --- --- 245,000
in connection with acquisition of
the Ottomanelli Group
Cancellation of common shares (83,333) (83) --- --- --- --- (12,417)
Accrued dividends - Series A --- --- --- --- --- --- ---
Forgiveness of dividends --- --- --- --- --- --- ---
Accrued dividends - Series B --- --- --- --- --- --- ---
Net loss --- --- --- --- --- --- ---
--------- -------- ------ ------- ------- -------- -----------
Balance, June 30, 1999 29,979,013 $ 29,980 --- 328,563 --- $32,856 $20,794,657
========== ========== ========= ======= ======= ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Total
Accrued Accumulated Stockholders'
Dividends Deficit Equity
--------- ------- ------
<S> <C> <C> <C>
Balance, June 30, 1996 --- $(7,391,159) $3,321,250
Proceeds from issuance of preferred stock --- --- 50,000
Conversion of debt to equity --- --- 24,999
Accrued dividends (103,818) --- (103,818)
Issuance of warrants for services performed --- --- 293,750
Net loss --- (4,797,857) (4,797,857)
--------- ----------- -----------
Balance, June 29, 1997 (103,818) (12,189,016) (1,211,676)
Issuance of common stock in connection --- --- 440,241
with acquisition of Ottomanelli Group
Net proceeds received from issuance of --- --- 543,548
common stock in connection with private
placement
Conversion of debt to equity --- --- 500,000
Issuance of warrants for services performed --- --- 25,100
Deferred compensation --- --- (18,889)
Accrued dividends (103,818) --- (103,818)
Net loss --- (3,236,039) (3,236,039)
--------- ----------- -----------
Balance, June 28, 1998 (207,636) (15,425,055) (3,061,533)
Net proceeds received form issuance --- --- 153,500
of common stock
Net proceeds received from issuance of --- --- 5,135,019
Series B preferred stock
Issuance of warrants for services performed --- --- 1,098,547
Deferred Compensation --- --- 12,221
Issuance of common stock for services performed --- --- 133,498
Conversion of debt to common and preferred stock --- --- 1,516,050
Conversion of Series A preferred stock --- --- ---
to Series B preferred stock
Additional issuance of common stock in --- --- 250,000
connection with acquisition of the
Ottomanelli Group
Cancellation of common shares --- --- (12,500)
Accrued dividends - Series A (51,909) --- (51,909)
Forgiveness of dividends 259,545 --- 259,545
Accrued dividends - Series B (198,846) --- (198,846)
Net loss --- (3,352,035) (3,352,035)
--------- ----------- -----------
Balance, June 30, 1999 $(198,846) $(18,777,090) $1,881,557
========== ============= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Consolidated Statements of Cash Flows
Years ended June 28, 1997, June 28, 1998 and June 30, 1999
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 29, 1997 June 28, 1998 June 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,797,857) $(3,236,039) $(3,352,035)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 797,092 314,017 44,096
Litigation Award --- --- 225,000
Loss from fixed asset disposals 26,989 --- ---
Gain on early extinguishments of debt --- --- (512,429)
Loss on closure of restaurant sites 1,850,043 1,437,136 365,000
Warrants issued for services performed 293,750 6,211 1,110,769
Issuance of stock in connection with --- --- ---
debt restructuring
Debt issued for services provided --- 50,000 ---
Stock issued for services provided --- --- 133,498
Changes in assets and liabilities:
Decrease in accounts receivable 50,308 9,832 7,077
Decrease in inventory 27,356 15,072 12,709
Decrease (increase) in prepaid and 119,016 54,550 (2,658)
other assets
Decrease in assets held for sale --- 25,000 ---
Increase (decrease) in accounts payable (177,779) 902,214 192,937
and accrued expenses
Increase (decrease) in other liabilities 157,016 --- (11,350)
Decrease in liabilities related to --- (330,041) ---
assets held for sale ----------- --------- -----------
Net cash used in operating activities (1,654,066) (752,048) (1,787,386)
Cash flows from investing activities
Capital expenditures (269,237) --- (1,397,972)
Payments for acquisitions of leaseholds
and lease costs (208,627) --- ---
----------- --------- -----------
Net cash used in investing activities (477,864) --- (1,397,972)
Cash flows from financing activities:
Proceeds from issuance of convertible notes 500,000 --- 250,000
Proceeds from private placement --- 543,548 ---
Proceeds from issuance of common stock 1,287,625 --- 153,500
Proceeds from issuance of preferred stock --- --- 5,135,019
Costs of issuance of preferred stock --- --- ---
Payments relating to canceled common stock --- --- (12,500)
subscription agreements
Proceeds from borrowings --- 900,000 ---
Principal repayments of borrowings (272,087) (448,194) (314,314)
----------- --------- -----------
Net cash provided by financing activities 1,515,538 995,354 5,211,705
Net increase (decrease) in cash (616,392) 243,306 2,026,347
Cash, beginning of period 684,414 68,022 311,328
----------- --------- -----------
Cash, end of period $68,022 $311,328 2,337,675
======= ======== =========
Cash paid during the period for:
Interest $ 100,871 5,263 53,616
Income taxes $ 31,963 9,800 ---
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business
As of June 30, 1999, Spencer's Restaurants Inc. and subsidiaries (formerly The
Rattlesnake Holding Company, Inc. and subsidiaries), (collectively, the
Company), operated one restaurant in South Norwalk, Connecticut featuring a
casual dining concept with a southwestern theme. Additionally, the Company owned
one site under construction in Danbury, Connecticut at which it anticipates
operating the first of its new concept restaurants named Spencer's, featuring a
casual steakhouse theme.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. The consolidated financial statements have been
presented on a historical cost basis for the consolidated statements of
operations. All significant intercompany balances and transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. However, due to
the matters discussed below, its continuation as a going concern can not be
reasonably assured.
The Company has incurred aggregate losses since inception of $18,777,090,
inclusive of a net loss in fiscal 1999 of $3,352,035. Based upon interim
financial information prepared by management, the Company has continued to incur
losses in fiscal 2000. Additionally, $18,750 of Series C subordinated notes
payable matured on August 6, 1997, $15,000 of the note payable relating to the
acquisition of a lease, and a $2,089 subordinated note payable matured on August
6, 1996, such obligations aggregating $35,839 are in default as of June 30,
1999.
Management completed its Cost Reduction Plan, which included the closure of the
Flemington N. J. restaurant as non-performing, in fiscal 1999. Subsequent to the
completion of its private placement of Series B preferred stock, which satisfied
primarily all short and long-term debt that was in default, except as noted
above, (note 9), the Company assembled a new management team and developed a new
restaurant concept (Spencer's) which will be introduced at the reacquired
Danbury, Connecticut location.
Management believes that the finalization of its Cost Reduction Plan and the
approximate $6,000,000 private placement financing will enable the Company to
achieve profitable operations and restore liquidity. However, no assurance can
be made regarding the achievement of the goals outlined in the strategic plan as
outlined above, or if such plans are achieved, that the Company's operations
will be profitable.
(b) Reporting Periods
On April 2, 1996, the Board of Directors approved a change, effective July 1,
1996, in the Company's fiscal year to a 52 week cycle ending on the last Sunday
in June. On May 12, 1999, the Board of Directors approved a further change of
its fiscal year to June 30, effective for fiscal 1999.
(c) Accounts Receivable
Accounts receivable consist principally of bank credit card accounts receivable.
(d) Inventories
Inventories consist primarily of restaurant food items and supplies and are
stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
(e) Pre-Opening Costs
Certain costs relating to hiring and training of employees prior to the opening
of new restaurants are capitalized and amortized over a twelve month period
commencing upon restaurant opening. At June 28, 1998 and June 30, 1999, there
were no unamortized pre-opening costs.
(f) Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated primarily
on the straight-line basis over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the estimated useful
life or the lease term of the related asset. The estimated useful lives are as
follows:
Artifacts 3 years
Original small wares 3 years
Furniture and fixtures 5 years
Restaurant and office equipment 7 years
Leasehold improvements 7 years
Building 40 years
(g) Intangible Assets
Intangible assets consist principally of costs to acquire leased facilities.
These costs are amortized over the life of the related lease, 7 years.
Accumulated amortization at June 28, 1998 and June 30, 1999 was $69,942 and
$79,771 respectively. Amortization expense was $201,377, $44,501 and $9,829 for
the years ended June 29, 1997, June 28, 1998 and June 30, 1999, respectively. In
connection with the Flemington location, the Company wrote off approximately
$258,490 in leasehold and related costs, net of accumulated amortization of
$48,012, in fiscal 1998. In connection with the Danbury location, the Company
wrote off approximately $41,285 in leasehold and related costs, net of
accumulated amortization of $29,023, in fiscal 1998. In connection with the
closing of the Fairfield, White Plains, Yorktown Heights, Lynbrook and 86th
Street locations, the Company wrote-off approximately $1,239,000 in leasehold
costs, organization costs, and lease costs net of accumulated amortization of
$494,541 in fiscal 1997.
As a result of the fiscal 1998 acquisition of the Ottomanelli Group (note 3),
goodwill of $436,383 was recorded. Upon further analysis, the operations of the
former Ottomanelli Group were deemed inconsistent with the Company's operating
plans, were authorized to be terminated in fiscal 1998 and operating restaurants
were closed in early fiscal 1999. Accordingly, the Company concluded that the
goodwill was impaired and recorded an impairment charge in the 1998 Consolidated
Statement of Operations.
(h) Other Assets
The Company utilizes an outside service to provide financing and promotional
activities. The costs relating to these activities are capitalized and are being
amortized over the repayment period.
(i) Financial Instruments
Management of the Company believes that the book value of its monetary assets
and liabilities, exclusive of long-term debt, approximates fair value as a
result of the short-term nature of such assets and liabilities. Management
further believes that the fair market value of long-term debt does not differ
materially from carrying value.
(j) Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of
Effective July 1, 1996, the Company adopted "Statement of Financial Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No.121 requires, among
other things, that long-lived assets held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of SFAS No.121
on July 1, 1996 did not have a material impact on the Company's consolidated
financial position or results of operations (note 4).
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
(k) Accounting for Stock-Based Compensation
Effective July 1, 1996, the Company adopted SFAS No.123 "Accounting for
Stock-Based Compensation", which encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation under the existing accounting rules contained in Accounting
Principles Board Opinion No.25, "Accounting for Stock Issued to Employees", and
related interpretations, but has provided disclosures of stock-based
compensation expense determined under the fair value provisions of SFAS No.123.
(l) Advertising Expense
Advertising costs are expensed as incurred. Advertising expenses were $128,736,
$15,500 and $6,939 in 1997, 1998 and 1999, respectively.
(m) Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Diluted earnings per share is calculated in a manner
similar to the previously reported fully diluted earnings per share. Earnings
per share amounts for all periods have been presented and, where appropriate,
restated to conform to the Statement 128 requirements (note 17).
(n) Comprehensive Income
Effective for fiscal 1998, the Company has adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income", which requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income. The Company has no activities which
represent items of other comprehensive income and, accordingly, the adoption of
SFAS No. 130 did not have a material effect in the Company's consolidated
financial statements.
(o) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amount of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
(3) Acquisition
On August 21, 1997, the Company signed a Reorganization and Stock Exchange
Agreement with the Ottomanelli Group, which was later amended pursuant to a
Modification Agreement dated February 26, 1998 and the transaction closed in
March 1998.
After amendment to the transaction, the Ottomanelli Group transferred the stock
of (i) a franchising corporation which has limited operations and (ii) a
corporation which operated two restaurants in Paramus, New Jersey (since closed
- note 4), for a total of 2,822,058 shares of common stock with a fair value
determined by an independent appraisal of approximately $440,000. The Agreement
also contains certain anti-dilution provisions, as discussed below. The
acquisition was accounted for as a purchase transaction, and, accordingly, the
purchase price was allocated to identifiable assets and liabilities based upon
their fair values at the date of acquisition. The excess of the aggregate
purchase price over the fair value of the net assets acquired was recorded as
goodwill and amortizable over the period to be benefited, fifteen years.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
As indicated in note 4, management concluded that upon further analysis, the
operations of the former Ottomanelli Group were deemed inconsistent with the
Company's operating plans and were authorized to be terminated. Accordingly, the
Company concluded that the goodwill was impaired and recorded an impairment
charge in the 1998 Consolidated Statement of Operations. The Company's 1998
financial statements contain approximately three months of operations of the
Ottomanelli Group. Pro-forma data has not been provided as they were deemed
immaterial to the operations of the Company by management.
Pursuant to the March 1998 agreement to acquire the Ottomanelli Group,
additional consideration due to anti-dilution provisions contained in the
agreements in the form of common stock was payable to the Ottomanelli Group
shareholders as a result of the private placement. In February 1999, 5,000,000
shares of common stock were issued pursuant to such anti-dilution provisions,
which included a maximum addition which was met. As the Company recorded an
impairment charge in fiscal 1998 relating to the termination of the operations
of the Ottomanelli restaurants, the fair value of the common stock issued,
$250,000, was recognized as a further impairment loss in fiscal 1999.
(4) Closure of Restaurant Sites
In fiscal 1997, the Board of Directors authorized the closing of the Rattlesnake
Southwestern Grill Restaurant located in Fairfield, Connecticut. The facility
was closed on January 4, 1997. The fixed assets, leasehold improvements and
intangibles at the facility were written off. The building is reflected at its
estimated realizable value and was accounted for in the financial statements in
"net assets held for sale". A net loss of $394,941 relating to the closing of
the Fairfield location was recorded in fiscal 1997. In March 1998, this location
was sold with the Company receiving a $230,000 note from the purchaser (note 5).
Pursuant to the finalization of the terms of sale, an additional loss of $88,559
was recorded in fiscal 1998.
A note receivable of $230,000, which was received as partial consideration for
the sale of the Company's Fairfield facility, was exchanged with a value
assigned of $115,000 in partial satisfaction of a $425,000 note payable (note
10) and an additional $115,000 loss on restaurant closure was recognized in
fiscal 1999.
In fiscal 1997, the Board of Directors authorized the closing of the Rattlesnake
Southwestern Grill Restaurant located in White Plains, New York. The facility
was closed on March 1, 1997 and sold on July 16, 1997. The Company recorded a
loss of $224,135 related to the closing of this location in 1997. The Company
sold all of the assets of White Plains except for cash, receivables and certain
items specified in the Asset Purchase Agreement in exchange for a release from
its note payable to the landlord of $276,499, the purchaser's assumption of food
credits and other miscellaneous liabilities and the receipt of a $23,500 note
receivable from the purchaser. The facility was sold to a group which includes
the Company's then Chairman of the Board and the Company is a guarantor of the
remaining lease obligation (note 13).
The restaurant location on 86th Street in New York was never opened and on May
29, 1997 the Company sold the fixed assets and transferred its interest in the
lease at that location for cash of $289,387. The Company continues to guarantee
the lease obligation (note 13). A net loss of $306,456, relating the sale of the
86th Street location, was recorded in fiscal 1997.
In fiscal 1997, the Board of Directors authorized the disposition of the
Rattlesnake Southwestern Grill Restaurant located in Lynbrook, New York. On
September 17, 1997, the Company closed the restaurant and wrote-off the related
assets to its estimated realizable value. A net loss of $374,852 relating to the
closing of this location was recorded in fiscal 1997. An additional loss of
$55,725 was recorded in fiscal 1998 relating to the Lynbrook facility,
principally relating to additional exit costs.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
As indicated in notes 2 and 3, Company management concluded that the operations
of the former Ottomanelli Group were inconsistent with the Company's operating
plans and were authorized to be terminated in fiscal 1998, including the
operations of its two New Jersey restaurants. Accordingly, the Company concluded
that the goodwill relating to the acquisition was impaired and recorded an
impairment charge of approximately $436,000 in fiscal 1998.
On June 22, 1998, the Company closed its Danbury, Connecticut facility and
subsequently lost its tenancy pursuant to a foreclosure action. Accordingly, the
Company recognized a loss of $270,426 in fiscal 1998 relating to the closure. On
April 15, 1999, the Company subsequently acquired the Danbury facility for
$1,350,000 in cash (note 2).
In fiscal 1998, the Company performed a further analysis of historical and
projected operating results, which reflected a pattern of historical operating
losses and negative cash flow, as well as future projected negative cash flow
and operating results for fiscal 1999 for its Flemington restaurant.
Accordingly, the Company recorded an impairment charge for this restaurant to
write-down the impaired asset of $558,282 in fiscal 1998. The restaurant was
subsequently closed in fiscal 1999.
(5) Note Receivable
At June 28, 1998, a $230,000 note receivable was outstanding relating to the
sale of the Company's Fairfield, Connecticut facility. The note bore interest at
7%, was secured by a leasehold mortgage on the restaurant, and provided for
stipulated monthly payments of principal and interest and a balloon payment due
in March 2003.
As indicated in note 4, the note receivable was eventually assigned to a related
party in partial satisfaction of the Company's indebtedness to that party.
(6) Land, Building and Equipment
Property and equipment consists of the following:
June 28, 1998 June 30,1999
------------- ------------
Land $ -- 1,000,000
Buildings -- 358,067
Leasehold improvements 100,047 100,047
Restaurant and office equipment 110,578 138,483
Furniture and fixtures 31,425 31,425
Construction in progress --- 12,000
------------- ----------
$ 242,050 1,640,022
Less accumulated depreciation (160,675) (194,943)
and amortization ------------- ----------
$ 81,375 1,445,079
============= ==========
Related depreciation and amortization expenses were $478,611, $269,516 and
$34,268 for the years ended June 29, 1997, June 28, 1998 and June 30, 1999,
respectively.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
(7) Other Assets
Other assets consist of the following:
June 28, 1998 June 30, 1999
------------- -------------
Promotional meal programs $ 76,738 75,383
Deposits 1,705 1,000
------------- ------------
$ 78,443 76,383
============= ============
(8) Capital Structure
The Company's capital structure is as follows:
<TABLE>
<CAPTION>
Shares
Par Value Authorized June 28, 1998 June 30, 1999
--------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Common stock $.001 per share 400,000,000 10,899,285 29,979,013
Preferred stock:
Series A $.10 per share --- 56,500 ---
Series B $.10 per share 5,000,000 --- 328,563
</TABLE>
The Company's Series A preferred stock bears a dividend rate of 7-1/2% per annum
payable semi-annually in arrears on May 15 and November 15 of each year
commencing November 15, 1996. The shares are convertible at any time, one year
after issuance into common stock at a conversion price equal the lesser of (i)
120% of the average of the last reported sale price of the common stock for the
10 trading days immediately preceding the first closing of the offering, or
$4.50, whichever is lower; or (ii) 85% of the average of the last reported sale
price of the common stock for the 10 trading days immediately preceding the
first anniversary of the first closing, subject to certain anti-dilution
adjustments. The Board of Directors has the authority to establish the specific
provisions of the preferred stock, i.e., liquidation rights, dividend
parameters, at the date of issuance.
The Series A preferred stock is redeemable only at the option of the Company,
commencing one year from the date of issuance, based upon the sales price of the
Company's common stock. The Series A preferred stock has a liquidation
preference of $24.50 per share, together with accrued and unpaid dividends. The
Board of Directors has the authority to establish the specific provisions of the
preferred stock, i.e., liquidation rights, dividend parameters, at the date of
issuance.
The Board of Directors had not declared any dividends, although cumulative
dividends relating to the Series A preferred stock of $207,636 have been accrued
in the June 28, 1998 consolidated balance sheet. As at June 30, 1999, the
Company had raised net proceeds of $5,135,019 from the private placement of
Series B preferred stock. Coincident with the private placement, the holders of
56,500 shares of Series A preferred stock exchanged their holdings for 55,370
shares of Series B preferred stock and waived their rights to the unpaid and
accumulated dividends of $259,545.
In February 1999, the holders of a majority of the issued and outstanding shares
of the Company's common stock, by written consent in lieu of a meeting pursuant
to Section 228 of Delaware's General Corporation Law, adopted an amendment to
the Company's Certificate of Incorporation, increasing the Company's
capitalization. As a result of this amendment to the Certificate of
Incorporation, the Company is authorized to issue a total of 405,000,000 shares,
of which 400,000,000 are shares of common stock and 5,000,000 shares of Series B
preferred stock.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
In fiscal 1999, the Company principally completed an offering of its Series B
Convertible Preferred Stock selling 236,279 shares at $25 per share and received
proceeds of $5,135,019, net of offering expenses. In connection with the
offering, the underwriter received a warrant to purchase approximately
25,000,000 shares of the Company's common stock at $.05 per share.
The preferred shares will be convertible, at the option of the holder at any
time after November 1999, at a conversion price initially equal to $0.05 per
share of common stock. The conversion rate will be reduced by 10% per month for
each month the Company fails to comply with its obligations to file, and in good
faith process, a registration statement.
The conversion price is subject to the adjustments on the terms set forth in the
Certificate of Designation. The outstanding preferred shares shall be converted,
with no action on the part of the holder, if, at any time after February 2000,
the common stock into which the same is converted is registered under the
Securities Act and the closing bid price of the common stock for twenty
consecutive trading days is at least four times the conversion price ($0.20
based on the initial conversion price of $0.05).
Holders of preferred shares are entitled to receive, semi-annually, dividends at
the rate of 8% per annum before any dividends may be paid with respect to the
Common Stock, which shall be paid in cash or preferred shares at the election of
the Company. If there is a failure to pay dividends, the Placement Agent, on
behalf of such holders, has the right to designate one director to the Company's
Board. In addition, if the Company fails to comply with its obligations to file
and process a registration statement, the dividend rate will increase to 14% per
annum from issuance.
To date, the Board of Directors has declared dividends relating to the Series B
preferred stock of $198,836 which have been accrued at June 30, 1999. The
payment of dividends was in the form of 7,954 additional shares of Series B
preferred stock issued in September 1999.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
(9) Notes Payable
Notes payable consists of the following:
<TABLE>
<CAPTION>
June 28, 1998 June 30, 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 500,000 237,505
Series C subordinated notes payable due August 6, 1997,
with interest at 15% 303,749 18,750*
Convertible subordinated notes payable due September 4,
1997, with interest at 18% 100,000 --
Note payable to related party relating to the
acquisition of the Fairfield building, due January 2,
1997 with interest at 15% 425,000 --
Note payable to a related party, due in monthly
installments of $1,270, including principal and interest
at 18% through February 1998 11,709 --
Notes payable relating to bridge financing, due December
31, 1997 with interest at 10% and a default interest rate of
14% for $120,000 of principal 220,000 --
Notes payable relating to bridge financing due May 31,
1998 with interest of 14%. 100,000 --
Note payable to investment banking firm due May 31, 1998
with interest at 8%. 50,000 --
Note payable relating to bridge financing due October
31, 1998 with interest at 16%. 50,000 --
Notes payable relating to acquisition of lease, due in
monthly installments of $1,666 of principal plus interest at
1% over prime (9.5% at June 29, 1997 through September
1, 2000) 44,998 39,998**
------------- --------------
1,807,545 $298,342
Less: Current maturities 1,282,539 55,838
------------- --------------
$ 525,006 $ 242,504
============= ==============
</TABLE>
* Obligation in default at June 30, 1999
**$15,000 of these Notes were in default at June 30, 1999
Notes payable to shareholders and other related parties (Company officers and
directors) were $553,385 at June 28, 1998.
Maturities of these notes is as follows:
Fiscal year ended:
2000 $ 55,838
2001 242,504
--------
$298,342
========
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
(10) Financing Arrangements
On March 4, 1997, the Company entered into a private financing arrangement for
$500,000 of convertible subordinated notes. The notes are payable on September
4, 1997. The principal amount of the Notes may be converted into the Company's
common stock at a conversion price of $0.75 per share anytime before the
repayment of principal. The notes are fully subordinated to all "senior
indebtedness" of the Company and are secured by all the issued and outstanding
shares of certain of the Company's wholly-owned subsidiaries. In fiscal 1998,
$400,000 of the principal outstanding was paid in cash.
In fiscal 1999, the noteholder accepted common stock, with a fair value of
$100,000, in exchange for the forgiveness of the remaining principal balance and
accrued interest. The Company recorded an extraordinary gain of $88,950 in
fiscal 1999 recognizing this settlement.
In September 1997, the Company completed a bridge financing under which it sold
units consisting of notes and warrants totaling $250,000, which were due
December 31, 1997. Each full unit consisted of (i) the Company's ten percent
(10%) promissory note in the principal amount of $50,000 (the "Note"), and (ii)
upon repayment of the Note, one four-year warrant for each dollar of financing
provided, at the rate of one warrant convertible into one share of the Company's
common stock at the average bid price on the date of the receipt of the
financing. The Company made principal payments of $30,000 in fiscal 1998 and
satisfied the remaining principal and interest by payment of cash and conversion
to Company equity in connection with the Offering in fiscal 1999.
In fiscal 1998, the Company entered into private financing arrangements to
provide an aggregate of $150,000 of bridge financing at interest rates ranging
from 14% to 16%, payable on dates ranging between May 31, 1998 and October 31,
1998. In fiscal 1999, the Company satisfied principal and interest by payment of
cash and conversion to Company equity in connection with the Offering.
In fiscal 1998, the Company executed a $50,000 convertible note agreement with
an investment banking firm for services rendered. The note is convertible into
250,000 shares of common stock, bears interest at 8% and matured on May 31,
1998.
In August 1998, the Company issued a sixty day convertible note in the principal
amount of $100,000 at an interest rate of 8% to an investment bank in
consideration for professional services rendered.
In connection with the private placement offering in February 1999, the
investment bank notes were satisfied by conversion to 1,750,000 shares of
Company common stock.
During the quarter ended September 30, 1998, the Company privately sold
1,100,000 shares of its common stock at $.15 per share for an aggregate of
$165,000. In connection with this sale the placement agent received warrants to
purchase 750,000 shares of the Company's common stock at $.15 per share.
Between October and December 1998, the Company entered into private financing
arrangements with three individuals to provide $150,000 of bridge financing at
16% interest per annum, plus warrants, with due dates of the earlier of the
closing of the proposed private placement or ninety days, respectively.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
In connection with the private placement, the Company sold 236,279 shares of
Series B preferred stock at $25 per share, generating gross proceeds of
$5,906,975. As part of the private placement, noteholders, including $293,332
Series C subordinated notes payable matured on August 6, 1997, of which
noteholders with principal balances aggregating $62,499 extended the repayment
date to December 15, 1997, $425,000 note payable matured on January 2, 1997,
$11,709 note payable matured in February 1998, $190,000 note payable matured on
December 31, 1997, $150,000 notes payable matured on May 31, 1998, $270,828
Series B subordinated notes payable due July 7, 2000, $50,000 notes payable
matured on October 31, 1998, $100,000 note payable matured on August 31, 1998
and $150,000 notes payable matured on February 1, 1999, such obligations
aggregating $1,640,869 and all of which were in default, including accrued and
unpaid interest of approximately $428,500, entered into a series of debt
satisfaction agreements, whereby in exchange for cash payments the issuance of
2,200,000 shares of common stock with a fair value of $0.05 per share, the
issuance of 29,645 shares of Series B preferred stock at $25 per share and to
the mortgage holder of the Fairfield facility, a discounted note receivable
arising from the sale of the Fairfield property with a fair value of $115,000,
all of the above mentioned indebtedness was extinguished. Additionally, the
Corporation entered into a series of settlement agreements, whereby various
creditors accepted cash payments of $84,811 and 446,714 shares of common stock
in exchange for the release of trade obligations. As a result of these
transactions, the Corporation recognized an extraordinary gain on the
forgiveness of debt of $423,479 in fiscal 1999.
In connection with this private placement financing, the holders of 56,500
shares of Series A Preferred Stock exchanged their holdings for 55,370 shares of
Series B Preferred Stock and waived the payment of accumulated dividends of
$259,545.
(11) Accrued Expenses and Other Liabilities
(a) Accrued Expenses
Accrued expenses consist of the following:
June 28, 1998 June 30, 1999
Litigation award $ --- $ 225,000
Accrued rent --- 140,099
Interest payable 424,160 125,363
Professional fees --- 120,000
Other 153,114 52,292
Accrued payroll 52,140 15,467
-------- ----------
$ 629,414 $ 678,221
========= =========
(b) Other Liabilities
The Company has entered into marketing agreements whereby it received temporary
financing in exchange for participating in discounted price meal programs. At
June 28, 1998 and June 30, 1999, the balances outstanding under this program
were $182,971 and $171,621, respectively, which are included in other
liabilities in the accompanying consolidated balance sheets.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
(12) Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No.109, "Accounting for Income Taxes".
SFAS 109 requires a change from the deferred method of accounting for income
taxes of APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
There was no income tax expense for any period presented due to losses incurred
by the Company. Components of the deferred tax assets and deferred tax
liabilities at June 28, 1998 and June 30, 1999 are presented below:
June 28,1998 June 30, 1999
Deferred tax assets:
Net operating loss carry-forward $ 5,584,600 $6,947,521
Fixed assets 15,324 --
------------ ----------
Total gross deferred tax assets 5,599,924 6,947,521
Less valuation allowance 5,599,924 6,947,521
------------ ---------
Net deferred tax assets $ --- $ ---
============ ==========
The valuation allowance for deferred tax assets as of June 28, 1998 and June 30,
1999 was $5,599,924 and $6,947,521, respectively. The change in the total
valuation allowance for the years ended June 28, 1998 and June 30, 1999 was
$1,263,924 and $1,347,597, respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the net operating losses and
temporary differences become deductible. Management considers projected future
taxable income and tax planning strategies in making this assessment. At June
28, 1998 and June 30, 1999, the Company has net operating loss carry forwards
for Federal and State income tax purposes of approximately $13,962,000 and
$17,331,000, respectively (the "NOL carry forwards"), which are available to
offset future taxable income, if any, through 2013. Based upon the limited
operating history of the Company and losses incurred to date, management has
fully reserved the deferred tax asset.
In accordance with Section 382 of the Internal Revenue Code of 1986, as amended,
as it applies to the NOL carry forwards, a change in more than 50% in the
beneficial ownership of the Company within a three-year period (an "Ownership
Change") will place an annual limitation on the Company's ability to utilize its
existing NOL carryforwards to offset United States Federal taxable income in
future years. Generally, such limitation would be equal to the value of the
Company as of the date of the Ownership Change multiplied by the Federal
long-term tax exempt interest rate, as published by the Internal Revenue
Service. The Company believes that Ownership Changes have occurred and would
cause the annual limitations as described above to apply. The Company has not
determined what the maximum annual amount of taxable income is that can be
reduced by the NOL carryforwards.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
(13) Commitments
Commitments
The Company's operations are principally conducted in leased premises. Remaining
lease terms range through 2002. The leases contain contingent rental provisions
based upon a percentage of gross sales. As of June 30, 1999, the Company has
operating lease commitments as follows, for its South Norwalk restaurant:
2000 $ 50,400
2001 50,400
2002 46,200
Certain shareholders and former officers have personally guaranteed lease
payments for the South Norwalk location.
Pursuant to sales agreements for the Company's New York City and White Plains,
New York restaurants (note 4), the Company guaranteed specified lease
obligations. As of June 30, 1999, the Company has not been notified of any
claims against these guarantees.
The Company is also a defendant in litigation regarding lease guarantees for its
former Lynbrook, New York facility (note 16).
On July 2, 1998, the Company entered into a contract for the purchase of a
restaurant facility in New York City for $400,000 in a combination of cash and
notes. The Company ultimately chose not to purchase this property and in
connection with the termination of contract incurred an expense of approximately
$12,500.
On July 3, 1998, the Company entered into a contract for the purchase of a
restaurant facility in Greenwich, Connecticut for $400,000 in a combination of
cash and notes. The Company ultimately chose not to purchase this property.
Contingent rental payments on building leases are typically made based on the
percentage of gross sales on the individual restaurants that exceed
predetermined levels. The percentage of gross sales to be paid and related gross
sales level vary by unit. There were no contingent rental payments in any of the
periods presented.
Rent expense was $930,676, $426,923 and $190,733 for the years ended June 29,
1997, June 28, 1998 and June 30, 1999, respectively.
(14) Employee Benefit Plans
(a) Stock Option Plan
In December 1994, the Company adopted the 1994 Employees Stock Option Plan (the
Employees Plan), which provides for the issuance of incentive stock options
(ISO's) and non-qualified options (Non-ISO's) to officers and key employees. Up
to 1,000,000 shares of the Company's common stock have been reserved for
issuance under the Plan. The Plan is currently administered by the Board of
Directors of the Company. The term of the options is generally for a period of 5
years. The exercise price for non-qualified options outstanding under the
Employees Plan can be no less that 100% of the fair market value, as defined, of
the Company's common stock at the date of the grant. For ISO's, the exercise
price can be generally no less than the fair market value of the Company's
common stock at the date of the grant, with the exception of any employee who
prior to the granting of the option, is a 10% or greater stockholder as defined,
for which the exercise price can be no less than 110% of the fair market value
of the Company's common stock at the date of grant.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
In December 1994, the Company adopted the non-Executive Director Stock Option
Plan (the Director Plan), which provides for the issuance of non-ISO's to
non-executive directors, as defined, and members of any advisory board
established by the Company who are not full-time employees of the Company. The
Company has reserved 500,000 shares for issuance under the provisions of the
Director Plan. The Director Plan provides that each non-executive director will
automatically be granted an option to purchase 25,000 shares upon joining the
Board of Directors and 15,000 shares on each December 1st thereafter, provided
such person has served as a director for the 12 months immediately prior to such
December 1st. The exercise price for options granted under the Director Plan
shall be 100% of the fair market value of the Common Stock on the date of grant.
At June 30, 1999, there were 1,000,000 and 295,000 additional shares available
for grant under the Employees and Director Plans, respectively. The per share
weighted-average fair value of stock options granted during 1997 and 1996 was
$0.51 and $1.22, respectively for those options whose exercise price equaled the
market price of the stock on the date of grant and $.05 and $0, respectively for
those options whose exercise price was above the market price of the stock on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1997 and 1996 - expected dividend yield
0%, risk-free interest rate of between 5.07% and 5.86%, an expected life of
between approximately 2.5 - 5 years and expected stock volatility of between 38
- 130%. There were no options granted in 1999 and 1998.
The Company applies APB Opinion No.25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its employees and
directors stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No.123, the Company's net loss would have been increased to
the pro forma amounts indicated below:
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Net loss available to common shareholders:
As reported $(4,901,675) (3,339,957) $(3,352,035)
Pro-forma (5,371,634) (3,422,957) $(3,550,881)
Loss per share: As reported (1.85) $(0.18)
(0.80)
Pro-forma (2.03) (0.82) $ (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.
Activity in non-ISO's was as follows:
<TABLE>
<CAPTION>
Number Option Price Weighted
of Shares per Share Average
Exercise
Price
--------- ------------ --------
<S> <C> <C> <C>
Options outstanding June 29, 1997 693,000 0.25-5.25 $ 3.11
Options granted --- --- ---
Terminated options (488,000) 0.25 - 5.25 _______
------------ ----------- -------
Options outstanding June 28, 1998 205,000 $4.50-5.25 $ 4.88
======= ========== =========
Options granted --- --- ---
Terminated options --- --- ---
--------- --------- ---------
Options outstanding June 30,1999 205,000 $4.50-5.25 $ 4.88
======= ========== =========
</TABLE>
Activity in ISO's was as follows:
<TABLE>
<CAPTION>
Number Option Price Weighted
of Shares per Share Average
Exercise
Price
--------- ------------ --------
<S> <C> <C> <C>
Options outstanding June 29, 1997 103,500 $0.25-5.50 5.35
Options granted --- --- ---
Terminated options (103,500) $0.25-5.50 5.35
--------- --------- ----
Options outstanding June 28, 1998 and June
30, 1999 --- --- ---
========= ========== ========
</TABLE>
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 28, 1998 and June 30, 1999.
At June 30, 1999, the range of exercise prices and range of the remaining
contractual life of outstanding options was $4.50 - $5.25 and approximately 1.5
- 2.5 years, respectively.
At June 28, 1998 and June 30, 1999, the number of options exercisable was
205,000 and the weighted-average exercise price of those options was $4.88.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
On April 18, 1999, the Board of Directors approved the adoption of the 1999
Stock Option Plan (the "1999 Plan"), subject to the approval of Stockholders
which was obtained in September 1999, which provides for the issuance of ISOs,
Non-ISOs, and stock appreciation rights to officers and key employees of the
Company. Up to 25,000,000 shares have been reserved for issuance under the 1999
Plan, which is administered by the Board of Directors of the Company. The term
of the options is generally for a period of five (5) years. The exercise price
for Non-ISOs outstanding under the 1999 Plan can be no less than 100% of the
fair market value, as defined, of the Company's Common Stock on the date of
grant. For ISOs, the exercise price can generally be no less than the fair
market value of the Company's Common Stock at the date of grant, without the
exception of any employee who prior to the option grant, is a 10% or greater
stockholder, as defined, for which the exercise price can be no less than 110%
of the fair market value of the Company's Common Stock at the date of grant.
There are presently no options granted under the 1999 Plan.
On April 18, 1999, the Board of Directors approved the adoption of the 1999
Non-Employee Directors' Stock Option Plan (the "1999 Directors' Plan"), subject
to the approval of Stockholders which was obtained in September 1999, which
provides for the issuance of non-qualified stock options to non-employee
directors of the Company. Up to 10,000,000 shares have been reserved for
issuance under the 1999 Directors' Plan, which is administered by the Board of
Directors of the Company. The term of the options is generally for a period of
five (5) years. The exercise price for options outstanding under the 1999 Plan
can be no less than 100% of the fair market value, as defined, of the Company's
Common Stock on the date of the grant. There are presently no options granted
under the 1999 Directors' Plan.
(b) Employment Agreements
The Company and its Vice-Chairman and Chief Administrative Officer entered into
a part-time employment agreement in December 1995 for a period commencing
December 1995 through December 1998. The agreement provides for annual
compensation of $90,000 increasing 10% per annum, plus certain other benefits.
An additional $20,000 was paid for services rendered in fiscal 1996 provided
over and above the part-time agreement. The employee is also entitled to receive
a bonus during each year of this agreement, determined by the Board of
Directors. The Board of Directors and/or the Compensation Committee shall set
forth a formula for determining the bonus for each year.
On March 15, 1997 an agreement was signed between the Company and Vice Chairman
and Chief Administrative Officer which amended the December 1995 employment
agreement. Under the new agreement, the former Vice Chairman and Chief
Administrative Officer will accept the position of Acting Co-Chief Executive
Officer. This agreement waives any base rate or annual rate increases per the
previous agreement and modified the term to March 1, 1997 through February 28,
1999. Services are provided on a part-time consulting basis. The compensation
for the period March 1, 1997 through February 28, 1999 will be $75,000, plus
benefits. This agreement also included the grant of an option to purchase
125,000 shares of stock at the closing price on the date of this agreement. The
agreement also includes that in the event the stock options previously granted
under the current Company stock option plans are repriced for any employee, the
existing stock option grants for the acting Co-CEO will be repriced at the same
time as any repricing and under the same terms and conditions. No such options
were repriced and the agreement was replaced with a May 1998 consulting
agreement (note 15).
Subsequent to June 1998, the Company entered into a three year employment
agreement, as amended, with the Chief Financial Officer providing for fixed
compensation of $52,000 in year one, with a time allowance in year one to
complete certain projects and commercially standard compensation for full time
services to be determined for years two and three. The executive has also been
granted options to purchase common stock as follows: 100,000 vesting at close of
year one; 100,000 vesting at close of year two; 100,000 vesting at close of year
three at the exercise price of $.05, the fair value at the date of grant, with
additional options to purchase 200,000 shares exercisable at the close of each
of years two and three.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
In October 1998, the Company entered into a three year employment agreement, as
revised, with an individual to act as President and/or Chief Executive Officer
and as a member of the Board of Directors of the Company, effective upon the
completion of the private placement in February 1999. In consideration, the
employee is to receive a monthly fee of $7,917 plus reasonable expenses and a
$30,000 sign-on bonus. In addition, the employee shall be entitled to a
performance bonus and shall receive a warrant to purchase an amount of Common
Stock equal to ten (10%) of the outstanding common stock of the Company, on a
fully diluted basis, after the private placement financing at $0.05 per share,
the fair value at the date of grant, representing 30,000,000 shares, exercisable
for a period of five years, one third of the number of shares covered thereby
vesting at the time of the private placement financing, and one third (1/3) at
the end of each one year period thereafter during the term.
In February 1998, the Company executed a four year employment agreement with the
then President and Chief Executive Officer, which provides for annual
compensation of $150,000. The agreement was amended in October 1998 to reduce
the annual compensation to $85,000, provided for a $25,000 cash payment and the
executive accepted a new position as Vice President. The employee received
payments of $119,992 during fiscal 1999 for current and deferred salary. The
Company also issued 1,504,720 shares of common stock with a value of $75,236 to
satisfy other deferred salary not compensated for in cash.
(c) Separation Agreements
In October 1998, the Company and a Vice President terminated a March 1998
employment agreement. The executive is to receive $15,000 over a one year
period.
(15) Consulting Agreements
On May 1, 1998, the Company entered into a three year consulting agreement with
its former Vice Chairman and current Secretary, which replaced a March 15, 1997
employment agreement to provide financial and related services to the Company
with compensation of $7,000 per month. The consultant, in consideration for
services, received 500,000 shares of the Company's common stock, with a value of
$25,000, of which 250,000 shares are subject to anti-dilution provisions and
250,000 shares which may be repurchased at the Company's option under specified
conditions. In addition, the consultant received a warrant, expiring in April
30, 2003, to purchase an additional 250,000 shares of Company Common Stock at an
exercise price of $0.15 per share. The consultant also received approximately
1,664,000 shares of common stock with a value of $83,200 to compensate him for
his deferred portion of consulting fees not paid in cash.
On July 20, 1998, the Company entered into a three year consulting agreement
with an individual to provide service to design and implement the future
expansion of the Company's planned restaurant concepts. In consideration, the
consultant is to receive a monthly fee of $1,000 plus reasonable expenses. The
consultant purchased $100,000 of common stock and received a warrant to purchase
300,000 shares of the Company's common stock, with an initial exercise price of
$0.48 per share expiring in July 2002, vesting one-third annually.
In October 1998, the Company entered into a three year consulting agreement, as
revised, with an individual to provide advice and consultation in the
implementation of the future expansion of the Company's planned restaurant
concepts. In consideration, the consultant shall serve without regular, periodic
compensation. The consultant shall be entitled to a performance bonus and shall
receive a warrant, immediately exercisable, to purchase an amount of common
stock equal to fifteen percent of the outstanding common stock of the Company,
on a fully diluted basis, after the private placement financing at $0.05 per
share, exercisable for a period of five years, representing 45,000,000 shares.
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
(16) Litigation
The Company is a co-defendant in an action brought by an owner of an apartment
above the South Norwalk Company restaurant for negligence per se, intentional
infliction of emotional distress, negligent infliction of emotional distress,
and violations of the Connecticut Unfair Trade Practices Act (CUTPA) based upon
alleged excessive noise and rude and/or threatening conduct of employees. The
jury awarded a verdict in the amount of $625,000 against various defendants,
including the Company's former Chairman on August 5, 1998. On November 20, 1998,
the Court set aside the jury's verdict as to all counts against the Company
except for plaintiff's claim for negligence per se and accordingly reduced the
jury's award to $225,000. The jury's award is currently on appeal by the
Company, and plaintiff has appealed the Court's decision to set aside a portion
of the jury's verdict and reduce the award. There are also potential claims of
indemnification by other defendants against the Company in the event the
plaintiff's appeal is successful. The Company reduced its original accrual from
$625,000 to $225,000 which represents the appealed verdict in the quarter ended
December 31,1998.
In July 1999, a demand letter was tendered to the Company by the legal counsel
of the former Chairman seeking indemnification from potential liabilities
arising out of this matter. This demand is based on an indemnification provision
in an agreement between the former Chairman and the Company. The Company
believes that valid defenses to the indemnification claim may exist.
Plaintiff's negligence claims in this matter are arguably covered by one or more
of the Company's insurance policies. Farmington Casualty Company ("Farmington")
and Insurance Company of Greater New York ("GNY"), two out of three of the
Company's insurance carriers, retained counsel to represent the Company and
defended the Company in this case under a reservation of rights. The third,
Public Service Mutual Ins. Co., denied coverage for the claim altogether. GNY
and Farmington have continued to prosecute the appeal in this matter, but under
a reservation of rights. The Company has advised all three insurance carriers
that it intends to pursue its rights in an action for damages and declaratory
relief in the event that the appeal is unsuccessful and the insurance carriers
refuse to provide coverage for plaintiff's claims. GNY and Farmington continue
to reserve all rights with respect to coverage.
Settlement negotiations are ongoing. However, there can be no assurance of a
satisfactory settlement.
In May 1999, the Company was served with an eviction notice by the landlord of
the South Norwalk restaurant. The suit was settled and the eviction notice was
withdrawn.
The Company is a defendant in an action for an alleged breach of a commercial
lease in which damages exceeding $190,000 are being sought. The Company has
disputed this claim and believes that the plaintiff has inadequately responded
to the Company's demand for discovery and inspection and interrogatories. The
Company intends to vigorously defend this action.
The Company is also a party in various other legal actions incidental to the
normal conduct of its business. Management does not believe that the ultimate
resolution of these actions will have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
(17) Earnings Per Share
As discussed in note 2, the Company adopted Statement 128, which replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Dilutive net loss per share for fiscal 1997, 1998
and1999, are the same as basic net loss per share due to the anti-dilutive
effect of the assumed conversion of preferred stock, and exercise of stock
options and warrants.
The following table reconciles net loss per share with net loss per share
available to common stockholders:
<PAGE>
SPENCER'S RESTAURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net loss per share $(1.81) $(0.78) $(0.20)
Net gain on extraordinary item --- --- 0.03
Net loss per share attributable to preferred stock (0.04) (0.02) (0.01)
------ ------ ------
dividends
Net loss per share available to common stockholders $(1.85) $(0.80) $(0.18)
====== ====== =======
</TABLE>
(18) Subsequent Events
On July 2, 1999, the Company sold an additional 2,000 shares of its Series B
preferred stock for a value of $50,000 as part of its Offering.
On September 9, 1999, the Company formally changed its name with the appropriate
authorities to Spencer's Restaurants, Inc. (symbol: SPST) from Rattlesnake
Holding Company Inc.
In September 1999, the Company finalized its agreement with the landlord of its
previously closed restaurant in Flemington, New Jersey. The agreement satisfied
all remaining obligations for past due rents, real estate taxes, utilities, and
outstanding $39,998 note payable (note 9). The Company assigned its liquor
license in satisfaction of the note payable and issued 4,660 shares of Series B
preferred stock with a valuation of $116,500 to complete the settlement.
In September 1999, the holders of a majority of the issued and outstanding
shares of the Company's Common Stock, by written consent in lieu of a meeting
pursuant to Delaware Law, adopted an option plan providing for incentive stock
options and non-incentive stock options for employees and non-employees, under
which options may be granted for a total of 25,000,000 shares of common stock
and adopted an option plan for the members of the Board of Directors under which
options may be granted for a total of 10,000,000 shares of common stock.
In September 1999, the Company paid dividends in the amount of $198,846 to the
preferred shareholders of record in the form of 7,954 additional shares of
Series B Preferred Stock in lieu of cash payment.
(19) Other Information
On September 17, 1997, the Company received a letter from NASDAQ indicating that
the Company would be removed from the NASDAQ Small Cap listing at the close of
business on September 17, 1997 due to its failure to comply with the minimum
capital and surplus requirement of $1,000,000 and the $1.00 minimum stock price.
On November 4, 1997 the Boston Stock Exchange suspended trading and has applied
for the delisting of the Company common stock from such exchange pursuant to
Rule 12d-2f2.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Unaudited Condensed Consolidated Balance Sheets
March 27, 2000
<TABLE>
<CAPTION>
March 27, 2000
--------------
<S> <C>
Assets
Current assets:
Cash $ 605,347
Accounts receivable 10,083
Inventory 41,814
Prepaid expenses and other current assets 29,082
----------
Total current assets $ 686,326
Property and equipment, net 2,069,563
Intangible assets, net 10,256
Other assets 82,605
----------
$2,848,750
==========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long term debt $ 258,344
Accounts payable 792,973
Accrued expenses 451,309
Dividends payable 178,450
Other current liabilities 156,976
-------
Total current liabilities $1,838,052
----------
Notes payable, net of current maturities ---
---------
Total liabilities 1,838,052
---------
Stockholders' equity
Preferred stock, Series B, $0.10 par value, 5,000,000 shares authorized,
356,909 shares issued and outstanding at March 27, 2000 35,690
Common stock, $.001 par value - 400,000,000
shares authorized, 29,979,013 issued and
outstanding, at March 27, 2000 29,980
Additional paid-in capital 20,986,092
Accrued dividends (178,450)
Accumulated deficit (19,862,614)
------------
1,010,698
---------
$2,848,750
==========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Unaudited Condensed Consolidated Statements of Operations
Three and Nine Months Ended March 31, 1999 and March 27, 2000
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 27, March 31, March 27,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Restaurant Sales 322,808 893,869 1,421,073 1,775,680
Less: promotional sales 10,548 28,058 55,664 51,962
------ ------ ------ ------
Net restaurant sales 312,260 865,811 1,365,409 1,723,718
Costs and expenses:
Cost of food and beverage sales 98,763 299,778 520,759 613,688
Restaurant salaries and fringe benefits 112,429 467,100 560,770 1,029,164
Occupancy and related expenses 40,271 48,082 416,747 103,611
Depreciation and amortization expenses 13,893 20,786 36,175 38,357
--------- ------- --------- ---------
Total restaurant costs and expenses 265,356 835,746 1,534,451 1,784,820
Selling, general and administrative 1,587,185 358,121 2,050,405 932,367
Loss on closure of restaurant sites 365,000 --- 365,000 42,800
and impairment charges
Interest expense, net 65,154 26,663 196,340 26,663
Litigation Award --- --- 225,000 ---
Miscellaneous expenses (income) (2,332) --- (1,708) ---
--------- ------- --------- ---------
Total expenses 2,280,363 1,220,530 4,369,488 2,786,650
Net loss before income taxes and extraordinary item (1,968,103) (354,719) (3,004,079) (1,062,932)
Income Taxes --- (22,592) --- (22,592)
--------- -------- ---------- ---------
Net loss before extraordinary item (1,968,103) (377,311) (3,004,079) (1,085,524)
Extraordinary item:
Gain on early extinguishments of debt 254,360 --- 343,310 ---
--------- ------- --------- ---------
Net loss before preferred dividends (1,713,743) (377,311) (2,660,769) (1,085,524)
----------- --------- ----------- -----------
Dividends on preferred shares --- (178,450) --- (521,768)
----------- --------- ----------- ---------
Net loss available common stockholders (1,713,743) (555,761) (2,660,769) (1,607,292)
=========== ========= =========== ===========
Net loss per share:
Loss before extraordinary item (0.09) (0.02) (0.19) (0.05)
Extraordinary item 0.01 --- 0.02 ---
------- ------ ------- ------
Net loss - basic and diluted (0.08) (0.02) (0.17) (0.05)
===== ===== ====== =====
Weighted average number of common and
common equivalent shares outstanding -
Basic and diluted 21,441,412 29,979,013 15,609,352 29,979,013
========== ========== ========== ==========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
(formerly The Rattlesnake Holding Company, Inc. And Subsidiaries)
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1999 and March 27, 2000
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
March 31, 1999 March 27, 2000
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,660,769) $(1,085,524)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 36,175 38,357
Litigation Award 225,000 ---
Gain on early extinguishments of debt (343,310) ---
Loss on closure of restaurant sites 365,000 42,800
Valuation of warrants for services 1,093,873 ---
Stock compensation 106,077 ---
Issuance of stock for services 218,676 72,909
Changes in assets and liabilities:
Increase in accounts receivable (5,012) (329)
Decrease (increase) in inventory 13,369 (25,126)
Increase in prepaid and other assets (978) (23,386)
Decrease in accounts payable (322,576) (123,618)
and accrued expenses
Increase (decrease) in other liabilities 108 (14,645)
----------- -----------
Net cash used in operating activities (1,274,367) (1,118,562)
Cash flows from investing activities:
Capital expenditures (26,900) (663,766)
----------- -----------
Net cash used in investing activities (26,900) (663,766)
Cash flows from financing activities:
Proceeds from issuance of preferred stock --- 50,000
Proceeds from issuance of convertible notes 150,000 ---
Proceeds from issuance of common stock 153,500 ---
Proceeds from issuance of Series B preferred stock, net 4,732,624 ---
Principal repayments of borrowings (385,831) ---
----------- -----------
Net cash provided by financing activities 4,650,293 50,000
Net increase (decrease) in cash 3,349,026 (1,732,328)
Cash, beginning of period 311,328 2,337,675
------- ---------
Cash, end of period 3,660,354 605,347
========= =======
Cash paid during the period for:
Interest 223,202 ---
Income taxes --- 22,592
</TABLE>
See accompanying 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 March 27, 2000, Spencer's Restaurants, Inc. and subsidiaries ("The
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 condensed 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 March 27, 2000,
and the results of operations and cash flows for the periods ended March 31,
1999 and March 27, 2000. 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 March 27, 2000 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 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.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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 $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 a first amendment during the fourth fiscal quarter 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 dividend
rate will increase to 14% per annum from issuance.
Dividends were paid in September 1999 and March 2000 in the form of 7,954
and 13,732 additional shares of Series B Preferred Stock, respectively.
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 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 with 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").
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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 December 15, 1999, the Company's contract with its Chief Financial
Officer was terminated without payment or further remuneration.
On December 31, 1999, a contract scheduled to expire October, 2001 for
consulting services being provided the Company was terminated by the consultant.
A new contract, effective January 10, 2000 and scheduled to expire December 31,
2000, was substituted.
On January 31, 2000 the Company accepted the resignation of its Senior Vice
President, Nicolo Ottomanelli. Mr. Ottomanelli remains on the Board of Directors
and provides consulting services to the Company on an as needed basis. Mr.
Ottomanelli's contract was terminated effective with the resignation and 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. To date, employee stock options were issued to purchase
2,575,000 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.
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.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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 June 21, 2000. The
Company is vigorously defending 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 they will be
material or will have an adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
<PAGE>
==============================================
No dealer, sales representative or other person has been authorized to give
any information or to make any representation in connection with this offering
other than those contained in this prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company, or any underwriter. This prospectus does not constitute an offer
to sell or a solicitation of any offer to buy common stock by anyone in any
jurisdiction in which such an offer or solicitation is not authorized, or in
which the person making such an offer or solicitation is not qualified to do so,
or to any person to whom it is unlawful to make such an offer or solicitation.
Neither the delivery of this prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the information contained herein
is correct as of any date subsequent to the date of this prospectus.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary...................................
Risk Factors.........................................
Dividend Policy......................................
Capitalization.......................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................
Use of Proceeds......................................
Determination of Offering Price......................
Selling Security Holders.............................
Plan of Distribution.................................
Description of Securities............................
Our Business.........................................
Legal Matters........................................
Experts ............................................
--------------
Until , 2000 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered Securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
==============================================
<PAGE>
==============================================
200,000,000 Shares
Being sold by certain Selling Stockholders
SPENCER'S RESTAURANTS, INC.
Common Stock
PROSPECTUS
__________, 2000
====================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the Registrant in connection with the sale of
the securities being registered. All amounts are estimates except the SEC
registration fee.
SEC Registration Fee................................. $
*Printing Costs......................................
*Legal Fees and Expenses.............................
*Accounting Fees and Expenses........................
*Blue Sky Fees and Expenses..........................
*Transfer Agent and Registrar Fees...................
*Miscellaneous.......................................
Total ............................................ $
*To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Article VII of the Registrant's Bylaws provides for indemnification by
Registrant of its directors, officers and employees to the fullest extent
permitted by the Delaware General Corporation Law. Section 102(b)(7) of the
Delaware General Corporation Law permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall bot be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability ((i)for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments or
dividends or unlawful stock repurchases, redemptions or other distributions, or
(iv) for any transaction from which the director derived an improper personal
benefit. The Registrant's Amended and Restated Certificate of Incorporation
provides for such limitation of liability. The Registrant intends to obtain
directors, and officers, insurance providing indemnification for certain of the
Registrant's directors, officers and employees for certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended June 30, 1999, the Company commenced an offering
(the "Offering") of its Series B Convertible Preferred Shares, $.10 par value.
Between February 17, 1999 and July 2, 1999, the Company sold approximately
$6,000,000 of Series B Preferred Shares pursuant to the Offering and converted
approximately $1,350,000 of its debt to Company equity. During the Offering, the
Company satisfied, by payment of cash and/or equity in the form of preferred
and/or common stock, the following: (a) all outstanding Series C promissory
notes; (b) certain outstanding Series B promissory notes; (c) all outstanding
promissory notes related to the Fairfield facility; and (d) all outstanding
promissory notes from (i) September 1997, (ii) March through June 1998, and
(iii) October and November 1998, effectively satisfying all short term and long
term debt save approximately $229,000 of Series B Notes due July 2000.
During the fiscal year ended June 28, 1998, the Company privately sold
approximately $850,000 of its common stock at $.15 per share and issued
convertible promissory notes for approximately $50,000. All notes were satisfied
by payment of cash and/or conversion to Company equity at the Initial Closing of
the Offering. In addition, certain management personnel deferred a portion of
their salary pending completion of the Offering. This debt was satisfied by
payment of cash and conversion to Company equity at the Initial Closing of the
Offering.
During the fiscal year ended June 29, 1997, the Company converted debt to equity
resulting in the issuance of an additional 6,493 shares of common stock.
<PAGE>
ITEM 16. EXHIBITS
(a)
<TABLE>
<CAPTION>
<S> <C>
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 (4)
3.2 By-Laws (1)
4.1 Form of Common Stock Certificate (1)
4.2+ Form of Series B Preferred Stock Certificate
5.1+ Opinion of Ruskin, Moscou, Evans & Faltischek, P.C.
10.1 1994 Employee Stock Option Plan (1)
10.2 1994 Non-executive Directors Stock Option Plan (1)
10.3 Employment Agreement with Stephen A. Stein (2)
10.3.1+ Revised Employment Agreement with Stephen A. Stein
10.4 Lease Agreement with Jack Cioffi Trust ULWT dated April 15, 1996 together with Exhibits (2)
10.5 Form of Series C Note (2)
10.6 License Agreement by and between Ottomanelli Bros., Ltd. and The Rattlesnake Holding Company, Inc. (3)
10.7+ Convertible Subordinated Secured 18% Promissory Note dated March 4, 1997, in favor of J.L.B. of Nevada, Inc.
10.8+ Convertible Subordinated Secured 18% Promissory Note dated March 4, 1997, in favor of Michael Lauer
10.09 Reorganization and Stock Exchange Agreement among The Rattlesnake Holding Company, Inc. and Ottomanelli Brothers
West, Ltd., Ottomanelli's Cafe Franchising Corp., 34th St. Cafe Associates Inc., Garden State Cafe Corp. (3)
10.10 Modification Agreement to the Reorganization and Stock Exchange Agreement among The Rattlesnake Holding Company,
Inc. and Ottomanelli Brothers West, Ltd., Ottomanelli Cafe Franchising Corp., 34th St. Cafe Associates, Inc.,
Garden State Cafe Corp. and their shareholders, dated February 26, 1998. (3)
10.11 Amendment Agreement among The Rattlesnake Holding Company, Inc. and Ottomanelli Brothers West, Ltd., Ottomanelli
Cafe Franchising Corp., 34th St. Cafe Associates, Inc., Garden State Cafe Corp., Nicolo Ottomanelli and Joseph
Ottomanelli, dated April 27, 1998. (3)
10.12 Registration Rights Agreement dated February 26, 1997. (3)
10.13+ William J. Opper Severance Agreement
10.14 Shelly Frank Consulting Agreement dated as of October 1998. (3)
10.15 Kenneth Berry Employment Agreement dated as of October 1998. (3)
10.15.1 Amendment to Kenneth Berry Employment Agreement dated as of March 1999. (+)
10.16 A.G. (Sandy) Rappaport Consulting Agreement dated as of July 20, 1998. (3)
10.17 Frank Ferro Employment Agreement dated as of September 1998. (3)
10.18 Stephan A. Stein Consulting Agreement dated as of May 1, 1998. (3)
10.18.1 Amendment to Stephan A. Stein Consulting Agreement dated as of March 15, 1997. (3)
10.19 Nicolo Ottomanelli Employment Agreement dated as of February 26, 1998. (3)
10.19.1 Amendment to Nicolo Ottomanelli Employment Agreement dated as of October 1998. (3)
10.20 Form of Shelly Frank and Kenneth Berry Warrants. (3)
10.21 Form of Investor Rights Agreement for Subscribers in Offering. (3)
10.22 Form of Warrant Issued to Commonwealth Associates in Offering. (3)
22 Subsidiary List (+)
23.1 Consent of KPMG LLP
23.2 Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in Exhibit 5.1)
24 Power of Attorney (included on signature page) (4)
</TABLE>
------------------------
(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 10-KSB for the year ended
June 28, 1998.
(4) Previously filed with the Company's Registration in Form S-1
filed August 16, 1999.
+ To be filed by amendment.
(b) Reports on Form 8-K
None.
(c) Financial Statement Schedules. Schedules not listed above have been omitted
because the information required to be set forth herein is not applicable or is
shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933,as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant 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 Registrant 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 polity as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Act, the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Act shall be deemed to be part of
this registration statement as of the time it was declared effective. (2) For
the purpose of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
21st day of July, 2000.
/s/ Kenneth Berry
------------------------------------
Kenneth Berry, President
/s/ John Reuther
------------------------------------
John Reuther, Chief Financial Officer
POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENT, that persons whose
signatures appear below each severally constitutes and appoints Kenneth Berry
and Stephan A. Stein, and each of them, as true and lawful attorneys-in-fact and
agents, with full powers of substitution and resubstitution, for them in their
name, place and stead, in any and all capacities, to sign any and all amendments
(including pre-effective and post-effective amendments) to this Registration
Statement and to sign any registration statement (and any post-effective
amendments thereto) relating to the same offering as this Registration Statement
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all which said attorneys-in-fact and agents, or any of them, or their substitute
or substitutes, may lawfully do, or cause to be done by virtue thereof. Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------------------------------------------------------------------------------
/s/ Kenneth Berry Director July 31, 2000
----------------------------------
Kenneth Berry
/s/ Stephan A. Stein Director July 31, 2000
----------------------------------
Stephan A. Stein
/s/ Nicolo Ottomanelli Director July 31, 2000
----------------------------------
Nicolo Ottomanelli
