FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended October 1, 1995
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 number: 1-10291
Spaghetti Warehouse, Inc.
(Exact name of registrant as specified in its charter)
Texas 75-1393176
(State or otherjurisdiction of (IRS Employer
incorporation or organization) Identification
Number)
402 West I-30, Garland, Texas 75043
Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 214/226-6000
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 .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of October 1, 1995: 5,597,209 shares
of common stock, par value $.01.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidated Balance Sheets
Assets 7/2/95 10/1/95
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $1,872,919 $1,409,272
Accounts receivable 602,423 543,580
Note receivable 6,0921,847
Inventories 689,395 782,941
Income taxes receivable 386,273 265,265
Prepaid expenses 377,884 330,071
Total current assets 3,934,986 3,332,976
Property and equipment, net 66,767,369 66,648,860
Assets scheduled for divestiture 381,651 381,651
Trademark and franchise rights, net 3,215,494 3,245,041
Pre-opening costs, net 49,501 105,724
Deferred income taxes 379,658 421,203
Other assets 782,367 816,915
$75,511,026 $74,952,370
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $36,000 $36,000
Accounts payable 2,769,654 3,015,960
Accrued payroll and bonuses 1,888,514 1,065,327
Deferred income taxes 35,573 48,441
Other accrued liabilities 1,806,888 1,538,513
Total current liabilities 6,536,629 5,704,241
Long-term debt, less current portion 15,512,000 15,253,000
Deferred compensation 26,624 42,754
Stockholders' equity:
Preferred stock of $1.00 par value;
authorized 1,000,000 shares;
no shares issued - -
Common stock of $.01 par value;
authorized 20,000,000 shares;
issued 6,409,666 shares at
7/2/95 and 10/1/95 64,097 64,097
Additional paid-in capital 35,747,731 35,747,731
Cumulative translation
adjustment (575,874) (487,393)
Retained earnings 24,428,382 24,856,503
59,664,336 60,180,938
Less cost of 812,457 shares at
7/2/95 and 10/1/95 of common stock
held in treasury (6,228,563) (6,228,563)
53,435,773 53,952,375
$75,511,026 $74,952,370
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<CAPTION>
SPAGHETTI WAREHOUSE, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Thirteen-Week
Periods Ended
10/2/94 10/1/95
Revenues:
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Restaurant sales $20,299,081 $18,585,100
Franchise 177,477 195,053
Other 171,532 138,829
Total revenues 20,648,090 18,918,982
Costs and expenses:
Cost of sales 5,337,783 4,570,579
Operating expenses 11,714,011 10,814,821
General and administrative expenses 1,393,856 1,484,778
Depreciation and amortization 1,387,258 1,285,402
Total costs and expenses 19,832,908 18,155,580
Income from operations 815,182 763,402
Net interest expense 288,908 250,318
Income before income tax expense 526,274 513,084
Income tax expense 123,779 84,963
Net income $402,495 $428,121
Net income per common share:
Primary $.07 $.08
Fully diluted $.07 $.08
Weighted average common and
common share equivalents outstanding:
Primary 5,639,944 5,684,000
Fully diluted 5,639,944 5,684,090
</TABLE>
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<CAPTION>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Thirteen-Week
Periods Ended
10/2/94 10/1/95
Cash flows from operating activities:
<S> <C> <C>
Net income $402,495 $428,121
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 1,387,258 1,285,402
Loss on sale of property and equipment 789 4,900
Write off of costs previously
capitalized for future sites 22,256
Recovery of loss on investment
in joint venture (25,000)
Deferred income taxes (29,220) (29,273)
Receipts into deferred
compensation plan 16,130
Stock options issued as compensation 15,000
Loss on assets scheduled for divestiture 2,817
Changes in assets and liabilities:
Accounts receivable 39,602 60,923
Inventories 62,548 (93,546)
Income taxes receivable (10,059) 121,235
Prepaid expenses 36,197 47,855
Pre-opening costs (135,956) (88,035)
Other assets (68,685) (14,381)
Accounts payable (408,630) 245,468
Accrued payroll and bonuses (1,145,127) (823,187)
Other accrued liabilities 267,844 (268,375)
Net cash provided by operating activities 414,129 893,237
Cash flows from investing activities:
Purchase of property and equipment (1,331,640) (1,145,113)
Proceeds from sales of
property and equipment 15,800 17,669
Collection of notes receivable 11,500 4,245
Net cash used in
investing activities (1,304,340) (1,123,199)
Cash flows from financing activities:
Net borrowings from
(payments on) long-term debt 500,000 (250,000)
Principal payments on long-term debt (9,000) (9,000)
Purchase of treasury shares (26,200)
Proceeds from sale of
common stock and exercise of employee
stock options 7,280
Net cash provided by
financing activities 472,080 (259,000)
Effects of exchange rate changes on
cash and cash equivalents 310 25,315
Net decrease in cash and cash
equivalents (417,821) (463,647)
Cash and cash equivalents
at beginning of period 1,917,679 1,872,919
Cash and cash equivalents at
end of period $1,499,858 $1,409,272
Interest paid
(net of amounts capitalized) $- $282,183
Income taxes paid
(net of refunds collected) $188,318 $(32,774)
</TABLE>
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<PAGE>
SPAGHETTI WAREHOUSE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments
necessary for a fair presentation of the consolidated
financial position as of October 1, 1995 and the
consolidated results of operations and cash flows for the
13-week periods ended October 1, 1995 and October 2,
1994. The condensed consolidated statement of income for
the 13-week period ended October 1, 1995 is not
necessarily indicative of the results to be expected for
the full year.
2.Accounting Policies
During the interim periods the Company follows the
accounting policies set forth in its consolidated
financial statements in its Annual Report (Form 10-K)
(File No.1-10291). Reference should be made to such
financial statements for information on such accounting
policies and further financial details.
<PAGE>
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Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table presents expenses as a percentage of
total revenues for certain selected financial data included
in the Condensed Consolidated Statements of Income.
Percentage of Total Revenues
Thirteen-Week Periods Ended
10/2/94 10/1/95
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Revenues 100.0% 100.0%
Costs and expenses:
Cost of sales 25.9 24.2
Operating expenses 56.7 57.2
General and administrative expenses 6.8 7.8
Depreciation and amortization 6.7 6.8
Total costs and expenses 96.1 96.0
Income from operations 3.9 4.0
Net interest expense 1.4 1.3
Income before income tax expense 2.5 2.7
Income tax expense 0.6 0.4
Net income 1.9% 2.3%
Results of Operations
Revenues
Revenues decreased $1.7 million, or 8.4%, for the quarter
ended October 1, 1995 in comparison to the same quarter in
the preceding year. This decrease is due primarily to a
$2.2 million (10.7%) decline in sales experienced by the 36
restaurants open for the full quarter in both fiscal years
( same-stores ). The decline in same-store sales was
partially offset by current quarter sales generated by the
Bedford, Texas location which opened in the second quarter
of fiscal 1995. The decline in same-store sales was the
result of a 15.6% decline in customer counts coupled with a
5.8% increase in check average.
Management attributes the decline in same-store customer
counts to the increased number of restaurants in the casual
dining and Italian restaurant segments, to the normal
decline in customer counts for stores in their second and
third year of operation, and to a planned reduction in
marketing expenditures in comparison to the same quarter in
the preceding year. Fiscal 1995 first quarter marketing
expenditures were significantly higher than normal levels
due to the extensive use of television advertising at that
time. The increase in same-store check averages is the
result of new menu items added in the second half of fiscal
1995 and to modest price adjustments made to selected menu
items over the last 12 months.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of revenues were 24.2% for
the current quarter as compared to 25.9% for the same
quarter last year. This decrease is due to the improved
inventory controls, utilization of the Company s new
theoretical food costing system and to the current quarter
increase in same-store check averages.
Operating Expenses
Operating expenses as a percentage of revenues were 57.2%
for the current quarter as compared to 56.7% for the same
quarter last year. Much of this increase as a percentage of
revenues is due to the relatively fixed nature of certain
operating expenses, including management labor, occupancy
costs and property taxes, relative to the decline in same-
store sales volumes. These cost percentage increases were
offset somewhat by cost reduction initiatives in the areas
of cashier labor, worker s compensation insurance, group
medical expenses and security costs. Furthermore, as
previously discussed, marketing expenses were substantially
less than the comparable quarter in the prior year.
General and Administrative Expenses (G&A)
G&A expenses as a percentage of revenues were 7.8% for the
current quarter as compared to 6.8% for the same quarter
last year. In addition to increases in professional fees
and expenses associated with the annual general managers'
conference, the relatively fixed nature of coporate labor
costs, relative to the decline in same-store sales volumes,
caused the increase in G&A costs as a percentage of total
revenues. These increases were partially offset by the
prior year write-off of certain previously incurred costs in
searching for new locations no longer under consideration
for Company-owned restaurant expansion.
Depreciation and Amortization (D&A)
D&A as a percentage of revenues were 6.8% for the current
quarter as compared to 6.7% for the same quarter last year.
This increase as a percentage of revenues is due to
depreciation expense incurred on new point-of-sale (POS)
equipment installed in 21 units over the last 12 months and
to the fixed nature of depreciation relative to the decline
in same-store sales volumes. These increases were offset by
a decrease in pre-opening expense amortization on new stores
resulting from a reduction in the Company s new unit
expansion rate.
The Company incurred net interest expense of $250,318
during the current quarter compared to $288,908 during the
same quarter last year. This decrease is attributed to a
decrease in average debt outstanding under the Company s
credit facilities in comparison to the same quarter last
year.
Income Taxes
The Company s effective tax rate for the quarter ended
October 1, 1995 was 16.6% compared to 23.5% in the same
quarter last year. These tax rates were lower than
statutory rates as a result of the use of the FICA tip tax
credit in the current quarter and the targeted jobs tax
credit and the FICA tip tax credit in the same quarter last
year. The Company was unable to use the targeted jobs tax
credit in the current quarter because the program expired on
December 31, 1994. The decrease in the effective rate from
the prior year is due primarily to a tax benefit recorded in
the first quarter of the current year for Canadian income
taxes.
Liquidity and Capital Resources
The Company s working capital deficit decreased from $2.6
million at July 2, 1995 to $2.4 million at October 1, 1995,
due to the payout of fiscal 1995 bonuses during the first
quarter of fiscal 1996 and to the timing of period-end
payments of salaries and wages. The Company is currently
operating with a working capital deficit, which is common in
the restaurant industry, since restaurant companies do not
normally require significant investment in either accounts
receivable or inventory.
Net cash provided by operating activities increased from
$0.4 million for the quarter ended October 2, 1994 to $0.9
million for the current fiscal quarter. This increase is
due primarily to changes in certain components of working
capital, including an increase in accounts payable, a
decrease in income taxes receivable and, a decline in
accrued payroll and bonuses in comparison to the same
quarter last year.
Long-term debt outstanding at October 1, 1995 consisted
primarily of a $15.0 million fixed rate term loan and $0.25
million borrowed against the Company s floating rate
revolving credit facility. The Company had an additional
$13.85 million available under this revolving credit
facility at October 1, 1995.
Capital expenditures were $1.1 million for the quarter
ended October 2, 1995 as compared to $1.3 million for the
same quarter last year. Fiscal 1996 expenditures consist
primarily of renovations and additions made to four existing
restaurants, costs of replacing point-of-sale (POS)
equipment in five restaurants, and the normal purchases of
new and replacement restaurant equipment and decor. The
higher capital expenditures in fiscal 1995 were due to the
construction costs relating to the Bedford restaurant.
In fiscal 1994, the Company s Board of Directors
authorized a program for the repurchase of up to 1,000,000
shares of the Company s common stock for investment
purposes. As of October 2, 1995, the Company had
repurchased 751,157 shares of common stock under this
program since its inception. The Company did not repurchase
any shares during the first quarter of fiscal 1996; however,
the Company repurchased an additional 24,800 shares
subsequent to October 2, 1995. Further repurchases with
respect to this program are dependent upon various business
and financial considerations.
The re-engineered version of the Company s existing
concept opened in Marietta, Georgia on November 1, 1995,
under the name Spaghetti Warehouse Italian Grill. The
Marietta restaurant underwent a renovation in both the
dining room and kitchen, while the menu was expanded with
the addition of new items including grilled entrees,
sandwiches, pizza and new appetizers. Furthermore, existing
menu items were reformulated to enhance taste profiles, and
portion sizes were increased to improve the price/value
relationship offered to the customer. Subject to operating
results achieved in Marietta, additional Spaghetti Warehouse
locations may be converted over the next 12 months.
In a separate endeavor, the Company is developing a new
concept called Cappellini s, which will feature freshly
prepared, made-from-scratch Italian recipes, served family
style on large platters and bowls. The first Cappellini s
is scheduled to open in January 1996 in the Company-owned
location in Addison, Texas. The Addison Spaghetti Warehouse
was closed on October 23, 1995 to undergo conversion to the
Cappellini s concept.
In addition to these two projects, the Company plans to
continue to make necessary replacements and upgrades to its
existing restaurants and information systems. Total planned
capital expenditures relating to all projects during the
next 12 months are approximately $3.5 million. Cash flow
from operations, current cash balances and funds available
under the Company s revolving credit facility are expected
to be sufficient to fund planned capital expenditures and
the share repurchase program for the next 12 months.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 18, 1995, a former restaurant employee of the
Company filed a suit in the 44th Judicial District Court,
Dallas County, Texas, alleging wrongful termination, or
alternatively, breach of contract, by the Company. The
claimant is seeking $1,450,000 in compensatory and punitive
damages. The Company plans to vigorously defend the lawsuit
and believes the allegations made by the former employee are
without merit.
Item 4.Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on
October 31, 1995. At such meeting the shareholders elected
directors of the Company as follows:
Broker
Name of Nominee For Withheld Non-Votes
Robert R. Hawk 4,801,280 95,022 0
Phillip Ratner 4,802,808 93,494 0
H.G. Carrington, Jr. 4,797,438 98,864 0
C. Cleave Buchanan, Jr. 4,795,620 100,682 0
Frank Cuellar, Jr. 4,789,160 107,142 0
John T. Ellis 4,793,985 102,317 0
Peter Hnatiw 4,801,223 95,079 0
James F. Moore 4,796,420 99,882 0
Cynthia I. Pharr 4,797,400 98,902 0
William B. Rea, Jr. 4,798,580 97,722 0
Item 6. Exhibits
Exhibit
Number Document Description
27.1 Financial Data Schedule
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<PAGE>
Signatures
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
Spaghetti Warehouse, Inc.
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<CAPTION>
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Dated:November 9, 1995 By:/S/Phillip Ratner
Phillip Ratner
President and
Chief Executive Officer
Dated:November, 9, 1995 By:/S/H.G. Carrington, Jr.
H.G. Carrington, Jr.
Sr. Vice President of Finance
and Chief Financial
Officer
</TABLE>
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EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Document Description Page
27.1 -Financial Data Schedule
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying condensed consolidated financial statements and is qualified in its
entirety be reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1996
<PERIOD-END> OCT-1-1995
<CASH> 1,409,272
<SECURITIES> 0
<RECEIVABLES> 545,427
<ALLOWANCES> 0
<INVENTORY> 782,941
<CURRENT-ASSETS> 3,332,976
<PP&E> 91,803,498
<DEPRECIATION> 25,154,638
<TOTAL-ASSETS> 74,952,370
<CURRENT-LIABILITIES> 5,704,241
<BONDS> 15,253,000
<COMMON> 64,097
0
0
<OTHER-SE> 53,888,278
<TOTAL-LIABILITY-AND-EQUITY> 74,952,370
<SALES> 18,585,100
<TOTAL-REVENUES> 18,918,982
<CGS> 4,570,579
<TOTAL-COSTS> 15,385,400
<OTHER-EXPENSES> 2,770,180
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250,318
<INCOME-PRETAX> 513,084
<INCOME-TAX> 84,963
<INCOME-CONTINUING> 428,121
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 428,121
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
