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 December 31, 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 other jurisdiction of (IRS
Employer Identification
incorporation or organization)
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 December 31, 1995: 5,624,038
shares of common stock, par value $.01.
<PAGE>
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Assets 7/2/95 12/31/95
(Unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $1,872,919 $5,306,140
Accounts receivable 608,515 839,748
Inventories 689,395 814,246
Income taxes refundable 386,273 571,680
Prepaid expenses 377,884 441,928
Total current assets 3,934,986 7,973,742
Property and equipment, net 66,767,369 66,570,951
Assets scheduled for divestiture 381,651 381,651
Trademark and franchise rights, net 3,215,494 3,183,184
Deferred income taxes 379,658 483,133
Other assets 831,868 1,071,340
$75,511,026 $79,664,001
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $36,000 $565,714
Accounts payable 2,769,654 2,952,614
Accrued payroll and bonuses 1,888,514 1,300,860
Deferred income taxes 35,573 90,583
Other accrued liabilities 1,806,888 1,858,690
Total current liabilities 6,536,629 6,768,461
Long-term debt, less current portion 15,512,000 19,214,286
Deferred compensation 26,624 58,439
Commitments and contingencies
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 6,466,290 shares
at 12/31/95 64,097 64,663
Additional paid-in capital 35,747,731 36,002,801
Cumulative translation adjustment (575,874) (544,668)
Retained earnings 24,428,382 24,471,358
59,664,336 59,994,154
Less cost of 812,457 shares at 7/2/95
and 842,252 shares at
12/31/95 of common stock
held in treasury (6,228,563) (6,371,339)
53,435,773 53,622,815
$ 75,511,026 $79,664,001
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
26-Week 26-Week 13-Week 13-Week
Period Period Period Period
Ended Ended Ended Ended
1/1/95 12/31/95 1/1/95 12/31/95
Revenues:
<S> <C> <C> <C> <C>
Restaurant sales $39,369,979 $36,065,655 $19,070,898 $17,480,555
Franchise 316,601 325,195 139,124 130,142
Other 294,153 266,224 122,621 127,395
Total revenues 39,980,733 36,657,074 19,332,643 17,738,092
Costs and expenses:
Cost of sales 10,376,355 9,028,801 5,038,572 4,458,222
Operating expenses 22,866,578 21,515,936 11,152,567 10,701,115
General and
administrative
expenses 2,680,818 3,053,075 1,286,962 1,568,297
Depreciation and
amortization 2,742,299 2,559,585 1,355,041 1,274,183
Total costs
and expenses 38,666,050 36,157,397 18,833,142 18,001,817
Income (loss)
from operations 1,314,683 499,677 499,501 (263,725)
Net interest expense 609,030 514,698 320,122 264,380
Income (loss) before
income tax expense
(benefit) 705,653 (15,021) 179,379 (528,105)
Income tax expense
(benefit) 159,739 (57,997) 35,960 (142,960)
Net income
(loss) $545,914 $42,976 $143,419 $(385,145)
Net income (loss)
per common share:
Primary $.10 $ .01 $ .03 ($.07 )
Fully diluted $.10 $ .01 $ .03 ($.07 )
Weighted average common and common share equivalents outstanding:
Primary 5,664,130 5,689,296 5,668,190 5,597,590
Fully diluted 5,664,130 5,689,296 5,668,190 5,597,590
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
26-Week
Periods Ended
<S> <C> <C>
1/1/95 12/31/95
Cash flows from
operating activities:
Net income $545,914 $42,976
Adjustments to reconcile net income
to cash provided by
operating activities:
Depreciation and amortization
expense 2,742,299 2,559,585
Loss on disposal of
property and equipment 1,833 143,236
Deferred income taxes (133,847) (48,744)
Other, net 34,001 52,815
Changes in assets and liabilities:
Accounts receivable (160,815) (236,150)
Inventories 87,484 (124,851)
Income taxes receivable (233,783) (185,483)
Prepaid expenses 116,233 (64,002)
Other assets (245,381) (250,079)
Accounts payable (206,122) 182,497
Accrued payroll and bonuses (1,565,681) (587,654)
Other accrued liabilities 726,463 51,802
Net cash provided by
operating activities 1,708,598 1,535,948
Cash flows from investing activities:
Purchase of property
and equipment (2,022,431) (2,589,806)
Proceeds from sales of
property and equipment 61,365 159,369
Collection of notes receivable 48,221 6,092
Net cash used in
investing activities (1,912,845) (2,424,345)
Cash flows from financing activities:
Borrowings from long-term debt 741,000 4,250,000
Principal payments on
long-term debt (9,000) (18,000)
Purchase of treasury shares (370,695) (142,776)
Proceeds from sale of common
stock and exercise of employee
stock options 144,564 234,636
Net cash provided by
financing activities 505,869 4,323,860
Effects of exchange rate
changes on cash and
cash equivalents (25,819) (2,242)
Net decrease/increase in cash
</TABLE>
and cash equivalents 275,803 3,433,221
Cash and cash equivalents
at beginning of period 1,917,679 1,872,919
Cash and cash equivalents
at end of period $2,193,482 $5,306,140
Interest paid
(net of amounts capitalized) $350,428 $550,766
Income taxes paid
(net of refunds collected) $539,913 $194,425
<PAGE>
SPAGHETTI WAREHOUSE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of the Company, the accompanying condensed
consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals and adjustments)
necessary for a fair presentation of the consolidated financial
position as of December 31, 1995 and the consolidated results of
operations and cash flows for the 26-week and 13-week periods
ended December 31, 1995 and January 1, 1995. The condensed
consolidated statement of income for the 26-week and 13-week
periods ended December 31, 1995 are 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.
3. Subsequent Event
On January 30, 1996, the Board of Directors of the Company
approved a restructuring plan intended to strengthen the
Company s competitive position and improve corporate cash flow
and profitability. In conjunction with this plan, the Company
closed seven of its 37 Company-owned stores in February 1996 and
will accrue certain other restructuring expenses. The seven
stores closed include those previously located in Hartford,
Connecticut; Providence, Rhode Island; Buffalo, New York;
Rochester, New York; Columbia, South Carolina; Greenville, South
Carolina and Little Rock, Arkansas. The Company expects to
record an estimated pre-tax charge of $13.9 million in the third
quarter of fiscal 1996 to cover the costs related to the
execution of this plan.
<PAGE>
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.
<TABLE>
26-Week 13-Week
Periods Ended Periods Ended
1/1/95 12/31/95 1/1/95 12/31/95
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales . . . . . . . . 26.0 24.6 26.0 25.1
Operating expenses . . . . . 57.2 58.7 57.7 60.3
General and administrative expenses 6.7 8.3 6.7
8.9
Depreciation and amortization 6.8 7.0 7.0 7.2
Total costs and expenses 96.7 98.6 97.4
101.5
Income (loss) from operations . . 3.3 1.4 2.6 (1.5)
Net interest expense . . . . . . 1.5 1.4 1.7 1.5
Income (loss) before income taxes 1.8 0.0 0.9 (3.0)
Income tax expense (benefit) . . 0.4 (0.1) 0.2 (0.8)
Net income (loss) . . . . . . . . 1.4% 0.1% 0.7% (2.2%)
</TABLE>
Results of Operations
Revenues
Revenues for the second quarter of fiscal 1996 decreased
$1.6 million, or 8.2%, in comparison to the same quarter in
the preceding year. This decrease is due primarily to a
4.7% decline in sales experienced by the 35 restaurants
opened prior to July 4, 1994 that were also open at the end
of the second quarter (annual same-stores) coupled with a
$0.4 million loss in sales due to the temporary closure of
the Marietta and Addison locations for their conversions to
other concepts. The decline in annual same-store sales was
the result of a 9.0% decline in customer counts offset by a
4.8% increase in check average.
Revenues for the six months ended December 31, 1995
decreased $3.3 million, or 8.3%, compared to the same period
last year. This decrease is the result of a 7.8% decrease
in annual same-store sales coupled with the $0.4 million
loss in sales due to the temporary closure of Marietta and
Addison. This six-month decline in annual same-store sales
<PAGE>
was the result of a 12.5% decline in customer counts offset
by a 5.3% 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 and to the normal
decline in customer counts for stores in their second and
third year of operation. 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 25.1% for
the current quarter compared to 26.0% for the same quarter
last year. For the first six months of fiscal 1996, cost of
sales as a percentage of revenues were 24.6% compared to
26.0% during the same period last year. The current year
decreases are attributed to improved food inventory controls
and the utilization of the Company s new theoretical food
costing system.
Operating Expenses
Operating expenses as a percentage of revenues were 60.3%
for the current quarter as compared to 57.7% 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 and kitchen labor,
occupancy costs and certain employee benefits, relative to
the decline in annual same-store sales volumes.
Additionally, marketing expenditures were substantially
higher in the current quarter compared to the same quarter
last year. These cost percentage increases were offset to
some extent by cost reduction initiatives in the areas of
cashier labor, group medical expenses and security costs.
For the six-month period ending December 31, 1995,
operating expenses as a percentage of revenues were 58.7%
compared to 57.2% in the same period last year. Much of the
current year increase is also attributed to the relatively
fixed nature of certain operating expenses relative to the
six-month decline in annual same-store sales volumes. The
remaining change in operating costs for the current six-
month period is due to an increase in marketing expenditures
compared to the same period last year.
General and Administrative Expenses (G&A)
G&A expenses as a percentage of revenues were 8.9% for
the current quarter compared to 6.7% in the same quarter
<PAGE>
last year. Similar to some operating expenses, the
relatively fixed nature of certain G&A expenses, relative to
the decline in annual same-store sales volumes, contributed
to the increase in G&A as a percentage of total revenues.
Also contributing to the increase in current quarter G&A
expenses was the implementation of the Company s new
regional marketing manager program and increases in
marketing research costs, management recruiting costs and
salaries paid to managers in-training. Furthermore, the
Company recorded a non-cash charge of $99,808 to G&A in the
current quarter to write-off certain costs relating to the
preparation of the Addison facility for its conversion to a
new concept.
G&A expenses as a percentage of revenues were 8.3% in the
current six-month period compared to 6.7% in the same period
last year. This current year increase is due primarily to
the reasons mentions above.
Depreciation and Amortization (D&A)
D&A as a percentage of revenues was 7.2% for the current
quarter as compared to 7.0% for the same quarter last year.
For the six months ended December 31, 1995, D&A as a
percentage of revenues was 7.0% compared to 6.8% for the
same period last year. These increases as a percentage of
revenues are due to additional depreciation incurred on new
restaurant point-of-sale (POS) equipment and to the fixed
nature of depreciation relative to the decline in annual
same-store sales volumes. These increases were offset by
decreases in pre-opening expense amortization on new stores
resulting from a reduction in the Company s new unit
expansion rate.
Net Interest Expense
The Company incurred net interest expense of $264,380
during the second quarter compared to $320,122 during the
same quarter last year. For the six months ended December
31, 1996, net interest expense was $514,698 compared to
$609,030 in the same period last year. These current year
decreases are attributed to decreases in average debt
outstanding under the Company s credit facilities in
comparison to the prior year.
Income Taxes
The Company s effective income tax rate for the second
quarter of fiscal 1996 was 27.1% compared to 20.0% in the
same quarter last year. Due to the decrease in pre-tax net
income, the Company determined that it is unable to utilize
the FICA tip tax credit to the extent that it had in prior
years. As a result, the effective tax rate increased in the
<PAGE>
quarter ended December 31, 1995 compared to the same quarter
last year.
As a result of a Canadian income tax benefit recorded in
the first quarter of fiscal 1996 and the pre-tax net loss
reported for the six-month period ended December 31, 1995,
the Company realized an income tax benefit during the first
six months of fiscal 1996. Alternatively, the Company
incurred income tax expense at an effective rate of 22.6%
during the first six months of fiscal 1995.
<PAGE>
Liquidity and Capital Resources
The Company had working capital of $1.2 million at
December 31, 1995 compared to a working capital deficit of
$2.6 million at July 2, 1995. The positive working capital
balance at December 31, 1995 is the result of excess funds
borrowed under the Company s revolving credit facility
during the second quarter which are classified as long-term
debt for balance sheet purposes. Although the Company is
currently operating with a positive working capital balance,
the Company normally operates 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 was $1.5
million for the first six months of fiscal 1996 compared to
$1.7 million for the same period last year. This decrease
is due primarily to the decline in current year net income
offset somewhat by changes in certain components of working
capital.
Long-term debt outstanding at December 31, 1995 consisted
primarily of a $15.0 million fixed rate term loan and $4.75
million borrowed against the Company s floating rate
revolving credit facility. The Company had an additional
$9.35 million available under the revolving credit facility
at December 31, 1995.
Capital expenditures were $2.6 million for the first six
months of fiscal 1996 compared to $2.0 million for the same
period last year. Fiscal 1996 expenditures consist
primarily of renovations and additions made to three
existing Spaghetti Warehouse restaurants, costs of replacing
point-of-sale (POS) equipment in five restaurants, and costs
relating to the conversion of the Marietta and Addison
locations into two new concepts.
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. During the second quarter of fiscal 1996, the
Company repurchased 29,795 shares of common stock and has
repurchased 780,952 shares of common stock under this
program since its inception. Further repurchases with
respect to this program are dependent upon various business
and financial considerations.
On November 1, 1995, the Company opened a re-engineered
version of its existing concept in Marietta, Georgia under
the name Spaghetti Warehouse Italian Grill. The Marietta
restaurant underwent a renovation to improve its ambiance,
while the menu was expanded with the addition of new items
including grilled entrees, sandwiches, pizza and new
<PAGE>
appetizers. Additionally, existing menu items were
reformulated to enhance taste profiles, and portion sizes
were increased to improve the price/value relationship
offered to the customer. Based on favorable operating
results achieved in Marietta thus far, the Company will
convert a second Spaghetti Warehouse location into the
Italian Gill format in the third quarter of fiscal 1996.
In a separate endeavor, the Company s newest concept
called Cappellini s opened on January 23, 1996 in Addison,
Texas. The Company s previous Addison Spaghetti Warehouse
was closed on October 23, 1995 to undergo conversion to the
Cappellini s concept. Cappellini s is an upscale restaurant
featuring authentic Italian dishes prepared fresh to order,
served in family-style portions in an atmosphere that is
intended to invoke a feeling of genuine hospitality.
Cappellini s is designed to generate check averages and
revenues significantly greater than the traditional
Spaghetti Warehouse.
In January 1996, the Company announced the approval of a
restructuring plan calling for the closure and disposition
of seven of its Company-owned stores. It is currently
anticipated that this plan will generate proceeds from the
sale of assets of approximately $4 million over the next
three years.
In addition to the conversion of the second Italian
Grill, 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
currently $2.0 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
As discussed in the Company s Form 10-Q for the fiscal
quarter ended October 1, 1995, a former restaurant employee
of the Company filed a suit in the 44th Judicial District
Court, Dallas County, Texas, on October 18, 1995 alleging
wrongful termination, or alternatively, breach of contract,
by the Company. The claimant was seeking $1,450,000 in
compensatory and punitive damages. The Company disposed of
this lawsuit on January 25, 1996 in an out of court
settlement with the claimant.
As discussed in the Company s Form 10-K for the fiscal
year ended July 2, 1996, Elizabeth Bright and Thomas C.
Bright III, the principal shareholders in Bright-Kaplan
International Corporation ( BK ), filed a lawsuit against
the Company in the Circuit Court of Hamilton County,
Tennessee on August 11, 1995. BK is the owner of a
Spaghetti Warehouse Franchise Restaurant located in
Knoxville, Tennessee. Mr. & Mrs. Bright claimed that the
Company misrepresented and concealed numerous material facts
in order to induce them to enter into a franchise agreement
and that the Company engaged in deceptive trade practices.
Mr. and Mrs. Bright were seeking damages in excess of $2.5
million and were seeking trebling of such damages under the
Texas Deceptive Trade Practices Act. On January 3, 1996,
upon the Company s application, the Circuit Court judge
ordered that such action be stayed until resolution of the
arbitration proceedings with the American Arbitration
Association in Dallas, Texas. BK is seeking damages in
excess of $6.6 million in its arbitration claim against the
Company.
Item 6. EXHIBITS
Exhibit
Number: Document Description
27.1 Financial Data Schedule
<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.
Dated: February 12, 1996 By: /S/Phillip Ratner
Phillip Ratner
President and
Chief Executive Officer
Dated: February 12 , 1996 By: /S/ H. G. Carrington, Jr.
H.G. Carrington, Jr.
Sr. Vice President of
Finance and Chief Financial
Officer
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Document Description Page
27.1- Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000775298
<NAME> SPAGHETTI WHAREHOUSE, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,306,140
<SECURITIES> 0
<RECEIVABLES> 839,748
<ALLOWANCES> 0
<INVENTORY> 814,246
<CURRENT-ASSETS> 7,973,742
<PP&E> 92,915,809
<DEPRECIATION> 26,344,858
<TOTAL-ASSETS> 79,664,001
<CURRENT-LIABILITIES> 6,774,461
<BONDS> 19,780,000
<COMMON> 0
0
64,663
<OTHER-SE> 53,558,152
<TOTAL-LIABILITY-AND-EQUITY> 79,664,001
<SALES> 36,065,655
<TOTAL-REVENUES> 36,657,074
<CGS> 9,028,801
<TOTAL-COSTS> 30,544,737
<OTHER-EXPENSES> 5,612,660
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 514,698
<INCOME-PRETAX> (15,021)
<INCOME-TAX> (57,997)
<INCOME-CONTINUING> 42,976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,976
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
