10QSB Quarterly Report
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission File No. 1-13818
Spencer's Restaurants, Inc.
(Name of small business issuer in its charter)
Delaware 06-1369616
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
106 Federal Road
Danbury, CT 06810
(Address of principal executive offices) (Zip Code)
The Rattlesnake Holding Company, Inc.
(former Name)
Registrant's telephone number, including area code: (203) 798-1390
Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to
file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
29,979,013 Common Shares, par value $.001 per share were outstanding as of
March 27, 2000
<PAGE>
FORM 10-QSB
Spencer's Restaurants, Inc.
March 27, 2000
INDEX
<TABLE>
<S> <C>
Part I - Financial Information
Condensed Consolidated Balance Sheets as of March 27, 2000 (unaudited) 3
and June 30, 1999
Unaudited Condensed Consolidated Statements of Operations for three months
and nine months ended March 27, 2000 and March 31, 1999 4
Unaudited Condensed Consolidated Statements of Cash Flows for nine months ended 5
March 27, 2000 and March 31, 1999
Notes to Unaudited Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis 9
Liquidity
11
Safe Harbor Statement 13
Part II - Other Information
Item 1: Legal Proceedings 13
Item 2: Changes in Securities and use of Proceeds 14
Item 3: Defaults Upon Senior Securities 14
Item 4: Submission of Matters Stockholders' vote 14
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 14
Signatures 14
</TABLE>
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 27, 2000 and June 30, 1999
<TABLE>
<S> <C> <C>
March 27, 2000 June 30, 1999
ASSETS Unaudited
Cash $ 605,347 $ 2,337,675
Accounts receivable 10,083 9,754
Inventory 41,814 16,688
Prepaids and other assets 29,082 11,918
---------------------------------------------------
Total current assets 686,326 2,376,035
Fixed assets, net 2,069,563 1,445,079
Intangibles, net 10,256 20,769
Other assets 82,605 76,383
--------------------- ----------------
2,162,424 1,542,231
---------------------------------------------------
Total assets $ 2,848,750 $ 3,918,266
===================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long term debt $ 258,344 55,838
Accounts payable 792,973 689,679
Accrued expenses 451,309 678,221
Dividends payable 178,450 198,846
Other current liabilities 156,976 171,621
---------------------------------------------------
Total current liabilities 1,838,052 1,794,205
Notes payable, net of current maturities - 242,504
--------------------- ----------------
Total liabilities $ 1,838,052 2,036,709
===================================================
Series B Preferred Stock 35,690 32,856
$.10 par value, 5,000,000 shares authorized
March 27, 2000 and June 30, 1999 and 356,909
and 328,563 shares issued and outstanding
at March 27, 2000 and June 30, 1999, respectively
Common Stock 29,980 29,980
$.001 par value, 400,000,000 shares
authorized; 29,979,013 issued and
outstanding at March 27, 2000 and June 30, 1999
Additional paid in capital 20,986,092 20,794,657
Accrued dividends (178,450) (198,846)
Accumulated deficit (19,862,614) (18,777,090)
----------------------------------------------------
Total stockholders' equity 1,010,698 1,881,557
----------------------------------------------------
Total liabilities & stockholders' equity $ 2,848,750 3,918,266
====================================================
See accompanying notes to the unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended March 27, 2000 and March 31, 1999
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended: Nine Months Ended:
March 27, 2000 March 31, 1999 March 27, 2000 March 31, 1999
Restaurant sales $ 893,869 $ 322,808 $ 1,775,680 $ 1,421,073
Less: promotional sales (28,058) (10,548) (51,962) (55,664)
------------- -------------- -------------- ---------------
Net restaurant sales 865,811 312,260 1,723,718 1,365,409
Cost and expenses:
Cost of food and beverage sales 299,778 98,763 613,688 520,759
Restaurant salaries and fringe benefits 467,100 112,429 1,029,164 560,770
Occupancy and related expenses 48,082 40,271 103,611 416,747
Depreciation and amortization 20,786 13,893 38,357 36,175
------------------------------------------------------------------------------------
835,746 265,356 1,784,820 1,534,451
Selling, general and administrative 358,121 1,587,185 932,367 2,050,405
Loss on closure of restaurant sites and - 365,000 42,800 365,000
impairment charges
Interest expense, net 26,663 65,154 26,663 196,340
Litigation award - - - 225,000
Miscellaneous expenses (income) - (2,332) - (1,708)
----------------------------------------------------------------------------------
384,784 2,015,007 1,001,830 2,835,037
-----------------------------------------------------------------------------------
Total expenses 1,220,530 2,280,363 2,786,650 4,369,488
Net loss before income taxes and extraordinary (354,719) (1,968,103) (1,062,932) (3,004,079)
item
Income taxes (22,592) - (22,592) -
-----------------------------------------------------------------------------------
Net loss before extraordinary item (377,311) (1,968,103) (1,085,524) (3,004,079)
Extraordinary item:
Gain on extinguishments of debt - 254,360 - 343,310
-----------------------------------------------------------------------------------
Net loss before preferred dividends (377,311) (1,713,743) (1,085,524) (2,660,769)
===================================================================================
Dividends on preferred shares (178,450) - (521,768) -
-----------------------------------------------------------------------------------
Net loss available to common stockholders $ (557,761) (1,713,743) (1,607,292) (2,660,769)
===================================================================================
Weighted average number of common shares 29,979,013 21,441,412 29,979,013 15,609,352
outstanding at 3/27/00 and 3/31/99: ===================================================================================
Net loss per common share $ (0.02) (0.08) (0.05) (0.17)
===================================================================================
</TABLE>
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 27, 2000 and March 31, 1999
<TABLE>
<S> <C> <C>
March 27, 2000 March 31, 1999
Cash flows from operating activities:
Net loss $ (1,085,524) $ (2,660,769)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 38,357 36,175
Loss on restaurant closure 42,800
Litigation award 225,000
Gain on the extinguishment of debt - (343,310)
Issuance of stock for services 72,909 218,676
Impairment charge - 365,000
Valuation of warrants for services - 1,093,873
Stock compensation - 106,077
Changes in assets and liabilities
Increase in accounts receivable (329) (5,012)
(Increase) decrease in inventory (25,126) 13,369
Increase in prepaid expenses and other assets (23,386) (978)
Decrease in accounts payable and accrued expenses (123,618) (322,576)
(Decrease) increase in other current liabilities (14,645) 108
------------------ -----------------
Net cash used in operating activities (1,118,562) (1,274,367)
Cash flows from investing activities:
Capital expenditures (663,766) (26,900)
------------------- ------------------
Net cash used in investing activities (663,766) (26,900)
Cash flows from financing activities
Proceeds from issuance of preferred stock 50,000 -
Proceeds from issuance of convertible notes - 150,000
Proceeds from issuance in common stock - 153,500
Proceeds from issuance of Series B preferred stock, net - 4,732,624
Principal repayments from borrowings - (385,831)
---------------------------------------------
Net cash provided by financing activities 50,000 4,650,293
---------------------------------------------
Net (decrease) increase in cash (1,732,328) 3,349,026
Cash at beginning of period 2,337,675 311,328
------------------- ------------------
Cash at end of period $ 605,347 3,660,354
===============================================
Cash paid during the period for:
Interest $ - 223,202
Income taxes $ 22,592 -
</TABLE>
See the notes to the unaudited condensed consolidated financial
statements.
<PAGE>
SPENCER'S RESTAURANTS, INC. AND SUBSIDIARIES: NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
As of 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 June 30, 1999, and the results of operations and cash flows for the periods
ended March 27, 2000 and March 31, 1999. 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.
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")
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.
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.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto issued in its 10-K report for the fiscal
period June 30, 1999.
This analysis by management contains some forward-looking statements. When
we use the words" "anticipate," "believe," "estimate," "expect," and similar
expressions that relate to the Company and its management, they are intended to
identify such forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Our actual results performance and
achievements could differ materially from the results expressed or implied by
these forward-looking statements.
Upon the finalization in 1999 of the $6,000,000 Series B Preferred Stock
private placement offering, the Company completed its Cost Reduction Plan
commenced in fiscal year 1997.
The Company presently operates a Rattlesnake Southwestern Grill in South
Norwalk, Connecticut and the Spencer's Restaurant in Danbury, CT. The Company
has closed all other restaurants previously owned as of June 30, 1999.
The Company's new management team of experienced industry-specific
personnel has developed a strategy through Company and franchised operation of a
multi-regional chain of mid-priced steakhouse restaurants.
Operating results for the quarter and nine months ended March 27, 2000 as
compared with the quarter and nine months ended March 31, 1999 are as follows:
Gross restaurant sales increased 176.9% to $893,869 for the quarter ended
March 27, 2000 from $322,808 for quarter ended March 31, 1999. For the nine
months ended March 27, 2000 gross restaurant sales increased 25.0% to $1,775,680
from $1,421,073 for the nine months ended March 31, 2000. Likewise, net
restaurant sales increased 177.3% to $865,811 for the quarter in 2000 from
$312,260 for this same quarter in 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 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 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.
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 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, 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 53.4% 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 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 the fact the Company does not incur rent at its
Danbury location as the Company owns the property.
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 3.3% 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 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 partially 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.
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.
The Company is a co-defendant in an action brought by an owner of an
apartment above the South Norwalk Company restaurant for negligence per se,
intentional infliction of emotional distress, negligent infliction of emotional
distress, and violations of the Connecticut Unfair Trade Practices Act (CUTPA)
based upon alleged excessive noise and rude and/or threatening conduct of
employees. The jury awarded a verdict in the amount of $625,000 against various
defendants, including the Company's former Chairman on August 5, 1998.
Accordingly, the Company recorded a $625,000 charge in the quarter ended
September 30, 1998 to accrue this judgment. On November 20, 1998, the Court set
aside the jury's verdict as to all counts against the Company except for the
plaintiff's claim for negligence per se and accordingly reduced the jury's award
to $225,000. Accordingly, the Company reduced by $400,000, in the quarter ended
December 31, 1998; the amount of the charge recognized in the quarter ended
September 30, 1998. The jury's award is currently on appeal by the Company, and
plaintiff has appealed the Court's decision to set aside a portion of the jury's
verdict and reduce the award. There are also potential claims of indemnification
by the other defendants against the Company in the event the plaintiff's appeal
is successful.
ACCOUNTING STANDARDS TO BE ADOPTED
Statement of Financial Accounting Standards ("SFAS") No. 137,"Accounting
for Derivative Instruments and Hedging Activities Deferral of the Effective Date
of SFAS No. 133" ("Statement 137") amends Statement 133"Accounting for
Derivative Instruments and Hedging Activities" ("Statement 133"), which was
issued in June 1998 and was to be effective for fiscal quarters beginning after
June 15, 1999. Statement 137 defers the effective date of Statement 133 to all
fiscal quarters of 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 consolidated financial statements
and believes that such determination will not be meaningful until closer to the
date of initial adoption.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The inherent risk in market risk sensitive instruments and positions
primarily relates to potential losses arising from adverse changes interest
rates. The Company is subject to market risk from exposure to changes in
interest rates based on its financing activities. Although the Company has
currently financed its operations through fixed rate preferred stock
instruments, future operations will need to be financed through either
additional equity or debt instruments. To date, the Company has not entered into
interest rate swap agreements to manage exposure to interest rate fluctuations.
YEAR 2000 MODIFICATIONS:
The Year 2000 Issue was the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may have recognized a date
using "00" as the year 1900 rather than the year 2000, resulting in possible
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process certain transactions, send
invoices, or engage in similar normal business activities.
The Company did not experience any problems as related to the Year 2000
Issue nor does the Company anticipate any latent Y2K as its operations use only
updated computers with Y2K compliant systems. In sum, the Company's plan to
prepare for and resolve the Year 2000 Issue involved the following four phases:
assessment, remediation, testing and implementation. As of December 27, 1999,
the Company has fully completed its assessment of all internal systems that
could be significantly affected by the Year 2000. The completed assessment
indicated that most of the Company's significant information technology systems
will not be significantly affected, particularly the general ledger, and
inventory systems.
LIQUIDITY
The Company has a long history of losses, which has depleted its capital
resources and has resulted in the incurrence of a significant amount of
indebtedness. Without additional funds, the Company will have to abandon its
long-term plans for the Spencer's concept development and the opening of
additional restaurants, and drastically reduce its corporate overhead. The
Company estimates that the financing obtained at the Offering will enable the
Company to affect some expansion and to operate through July 2000. There can be
no assurance that the Company will have adequate resources after such time
unless it conducts profitable operations and/or obtains additional financing of
which there can be no assurance. The Company continues to explore equity
investments but there is no assurance the Company will be successful.
The Company has incurred aggregate losses since inception of $19,862,614
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 in fiscal 2000.
Subsequent to the completion of the private placement in February 1999,
which effectively satisfied all short and long-term debt that was in default,
the Company has assembled a new management team and developed a new restaurant
theme, which was introduced at the recently reacquired Danbury, Connecticut
location (as described in note number one above in "Description of Business").
On October 27, 1998, the Company commenced an offering (the "Offering") of
its Series B Convertible Preferred Shares, $.10 par value. Between February 17,
1999 and July 2, 1999, the Company sold approximately $6,000,000 of Series B
Preferred Shares pursuant to the Offering and converted approximately $1,350,000
of its debt to Company equity. During the Offering, the Company satisfied, by
payment of cash and/or equity in the form of preferred and/or common stock, the
following: (a) all outstanding Series C promissory notes; (b) certain
outstanding Series B promissory notes; (c) all outstanding promissory notes
related to the now-closed Fairfield facility; and (d) all outstanding promissory
notes from (i) September 1997, (ii) March through June 1998, and (iii) October
and November 1998, effectively satisfying all short term and long term debt
which was in default.
In connection with this financing, the holders of 56,500 shares of Series A
Preferred Stock exchanged their holdings for 55,370 shares of Series B Preferred
Stock and waived the payment of accumulated dividends of $259,545.
On July 2, 1999 the Company sold an additional 2,000 shares of its Series B
Preferred Stock for a value of $50,000 as part of its Offering.
The preferred shares will be convertible, at the option of the holder at
any time after November 1999, at a conversion price initially equal to $0.05 per
share of common stock. The conversion rate will be reduced by 10% per month for
each month the Company fails to comply with its obligations to file, and in good
faith process, a registration statement.
The Company did file a registration statement on August 16, 1999 and plans
to file an amended registration statement during the 4th quarter.
The conversion price is subject to the adjustments on the terms set forth
in the Certificate of Designation. The outstanding preferred shares shall be
converted, with no action on the part of the holder, if, at any time after
February 2000, the common stock into which the same is converted is registered
under the Securities Act and the closing bid price of the common stock for
twenty consecutive trading days is at least four times the conversion price
($0.20 based on the initial conversion price of $0.05).
Holders of preferred shares are entitled to receive, semi-annually,
dividends at the rate of 8% per annum before any dividends may be paid with
respect to the Common Stock, which shall be paid in cash or preferred shares at
the election of the Company. If there is a failure to pay dividends, the
Placement Agent, on behalf of such holders, has the right to designate one
director to the Company's Board. In addition, if the Company fails to comply
with its obligations to file and process a Registration Statement, the dividend
rate will increase to 14% per annum from issuance.
Dividends for the 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.
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).
SAFE HARBOR STATEMENT
Certain statements in this Form 10-QSB, including information set forth
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Act"). The Company
desires to avail itself of certain "safe harbor" provisions of the Act and is
therefore including this special note to enable the Company to do so.
Forward-looking statements included in this Form 10-QSB or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company`s stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) or achievements expressed or
implied by such forward looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. These risks include, but are not limited to, risks
associated with potential acquisitions, successful implementation of the
Company`s cost containment plan and new operating strategy, immediate need for
additional capital, competition, and other risks detailed in the Company`s
Securities and Exchange Commission filings, including its Annual Report on Form
10-KSB for the fiscal year 1999, each of which could adversely affect the
Company's business and the accuracy of the forward looking statements contained
herein.
PART II - OTHER INFORMATION
Item 1: - Legal Proceedings
South Norwalk, Connecticut
The Company is a co-defendant in an action brought by an owner of an
apartment above the South Norwalk Company restaurant for negligence per se,
intentional infliction of emotional distress, negligent infliction of emotional
distress, and violations of the Connecticut Unfair Trade Practices Act (CUTPA)
Based upon alleged excessive noise and rude and/or threatening conduct of
employees. The jury awarded a verdict in the amount of $625,000 against various
defendants, including the Company`s former Chairman on August 5, 1998. On
November 20, 1998, the Court set aside the jury's verdict as to all counts
against the Company except for plaintiff's claim for negligence per se and
accordingly reduced the jury's award to $225,000. The jury's award is currently
on appeal by the Company, and plaintiff has appealed the Court's decision to set
aside a portion of the jury's verdict and reduce the award. There are also
potential claims of indemnification by other defendants against the Company in
the event the plaintiff's appeal is successful.
In July 1999, a demand letter was tendered to the Company by the legal
counsel of the former Chairman seeking indemnification from potential
liabilities arising out of this matter. This demand is based on an
indemnification provision in an agreement between the former Chairman and the
Company. The Company believes that there are valid defenses to the
indemnification claim.
Plaintiff's negligence claims in this matter are arguably covered by one or
more of the Company's insurance policies. Farmington Casualty Company
("Farmington") and Insurance Company of Greater New York ("GNY"), two out of
three of the Company`s insurance carriers, retained counsel to represent the
Company and defended the Company in this case under a reservation of rights. The
third, Public Service Mutual Ins. Co., denied coverage for the claim altogether.
GNY and Farmington have continued to prosecute the appeal in this matter, but
under a reservation of rights. The Company has advised Farmington and GNY that
it intends to pursue its rights in an action for damages and declaratory relief
in the event that the appeal is unsuccessful and the insurance carriers refuse
to provide coverage for plaintiff's claims. GNY and Farmington continue to
reserve all rights with respect to coverage.
Settlement negotiations are ongoing, however, there can be no assurance of
a satisfactory settlement.
Lynbrook, New York
The Company is defending an action brought by Jack Cioffi Trust, the
landlord of a former Rattlesnake restaurant in Lynbrook New York leased by a
subsidiary of the Company. The action against the Company is based on an alleged
guaranty of the lease payments due from the subsidiary of the Company. The
Company is of the position that the landlord waived the guarantee at the time of
the surrender of the premises in September 1997. The action seeks the sum of
approximately $190,000. A Compliance Conference was adjourned until June 21,
2000. The Company intends to vigorously defend this action.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None in this quarter.
Item 4 - Submission of Matters to a Vote of Stockholders during the quarter
ending March 27, 2000:
None.
Item 5. - Other Information.
The Company securities are traded on the NASDAQ Bulletin Board. Due to the
nature of such markets and the "penny stock' rules to which the common stock
trades (Rule 15g-9 promulgated under the SEC Act) there may not be a liquid
trading market in the common stock.
Item 6. - Exhibits and Reports on Forms 8-K.
During the quarter ended March 27, 2000, the Company filed no reports on
Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Spencer's Restaurants, Inc.
(Registrant)
May 12, 2000 By: /s/ Kenneth Berry
--------------------
Kenneth Berry
President and Acting CFO
May 12, 2000 By: /s/ Henry Zowine
--------------------
Henry Zowine
Chief Accountant
