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 March 31, 1996
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 .
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1996: 5,624,366 shares of common stock, par value
$.01.
<PAGE>
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<CAPTION>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Assets 7/2/95 3/31/96
(Unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents.................................................... $ 1,872,919 $ 3,906,946
Accounts receivable.......................................................... 608,515 561,432
Inventories.................................................................. 689,395 687,286
Income taxes refundable...................................................... 386,273 607,395
Prepaid expenses............................................................. 377,884 412,026
Total current assets................................................... 3,934,986 6,175,085
Property and equipment, net....................................................... 66,767,369 50,268,648
Assets scheduled for divestiture.................................................. 381,651 5,173,568
Trademark and franchise rights, net............................................... 3,215,494 3,156,241
Deferred income taxes............................................................. 379,658 5,893,666
Other assets...................................................................... 831,868 1,309,512
$ 75,511,026 $ 71,976,720
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt (note 4)................................... $ 36,000 $ 1,329,929
Accounts payable............................................................. 2,769,654 2,302,997
Accrued payroll and bonuses.................................................. 1,888,514 1,073,744
Deferred income taxes........................................................ 35,573 126,294
Other accrued liabilities.................................................... 1,806,888 1,553,527
Accrued restructuring charges (note 3)....................................... -- 2,095,902
Long-term debt under re-negotiation (note 4)................................. -- 18,441,071
Total current liabilities.............................................. 6,536,629 26,923,464
Long-term debt, less current portion (note 4)..................................... 15,512,000 --
Deferred compensation............................................................. 26,624 63,150
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 6,466,618 shares
at 3/31/96............................................................. 64,097 64,666
Additional paid-in capital........................................................ 35,747,731 36,004,596
Cumulative translation adjustment................................................. (575,874) (536,889)
Retained earnings................................................................. 24,428,382 15,829,072
59,664,336 51,361,445
Less cost of 812,457 shares at 7/2/95 and 842,252 shares at 3/31/96
of common stock held in treasury....................................... (6,228,563) (6,371,339)
53,435,773 44,990,106
$ 75,511,026 $ 71,976,720
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</TABLE>
<TABLE>
<CAPTION>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
39-Week Period 39-Week Period
Ended 4/2/95 Ended 3/31/96
Revenues:
........................................................................................
<S> <C> <C>
Restaurant sales ..................................................................... $ 58,476,822 $ 52,955,213
Franchise ............................................................................ 459,130 476,817
Other ................................................................................ 410,482 405,318
Total revenues .................................................................. 59,346,434 53,837,348
Costs and expenses:
Cost of sales ........................................................................ 15,155,923 13,507,577
Operating expenses ................................................................... 33,691,577 31,539,429
General and administrative expenses .................................................. 4,198,291 4,427,464
Depreciation and amortization ........................................................ 4,009,948 3,748,123
Restructuring charges (note 3) ....................................................... -- 13,875,248
Total costs and expenses ........................................................ 57,055,739 67,097,841
Income (loss) from operations .............................................................. 2,290,695 (13,260,493)
Net interest expense ....................................................................... 924,812 807,538
Income (loss) before income tax expense (benefit) .......................................... 1,365,883 (14,068,031)
Income tax expense (benefit) ............................................................... 324,274 (5,468,721)
Net income (loss) .......................................................................... $ 1,041,609 $ (8,599,310)
Net income (loss) per common share:
Primary .............................................................................. $. 18 ($ 1.53)
Fully diluted ........................................................................ $. 18 ($ 1.53)
Weighted average common and common share equivalents outstanding:
Primary .............................................................................. 5,686,517 5,606,291
Fully diluted ........................................................................ 5,692,124 5,606,291
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
13-Week Period 13-Week Period
Ended 4/2/95 Ended 3/31/96
Revenues:
........................................................................................
<S> <C> <C>
Restaurant sales ..................................................................... $ 19,106,843 $ 16,889,558
Franchise ............................................................................ 142,529 151,622
Other ................................................................................ 116,329 139,094
Total revenues .................................................................. 19,365,701 17,180,274
Costs and expenses:
Cost of sales ........................................................................ 4,779,568 4,478,776
Operating expenses ................................................................... 10,824,999 10,023,493
General and administrative expenses .................................................. 1,517,473 1,374,389
Depreciation and amortization ........................................................ 1,267,649 1,188,538
Restructuring charges (note 3) ....................................................... -- 13,875,248
Total costs and expenses ........................................................ 18,389,689 30,940,444
Income (loss) from operations .............................................................. 976,012 (13,760,170)
Net interest expense ....................................................................... 315,782 292,840
Income (loss) before income tax expense (benefit) .......................................... 660,230 (14,053,010)
Income tax expense (benefit) ............................................................... 164,535 (5,410,724)
Net income (loss) .......................................................................... $ 495,695 $ (8,642,286)
Net income (loss) per common share:
Primary .............................................................................. $ .09 ($ 1.54)
Fully diluted ........................................................................ $ .09 ($ 1.54)
Weighted average common and common share equivalents outstanding:
Primary .............................................................................. 5,729,745 5,624,274
Fully diluted ........................................................................ 5,732,396 5,624,274
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
39-Week
Periods Ended
4/2/95
3/31/96
Cash flows from operating activities:
<S> <C> <C>
Net income (loss)........................................................ $ 1,041,609 $(8,599,310)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation and amortization expense.............................. 4,009,948 3,748,123
Loss on disposal of property and equipment......................... 15,222 144,809
Deferred income taxes.............................................. (206,915) (5,423,628)
Restructuring charges.............................................. --
13,875,248
Other, net......................................................... 47,972 183,112
Changes in assets and liabilities:
Accounts receivable............................................ (209,235) 42,436
Inventories.................................................... 282,02 2,109
Income taxes receivable........................................ (126,783) (221,416)
Prepaid expenses............................................... (69,891) (34,100)
Other assets................................................... (85,816) (752,786)
Accounts payable............................................... (522,032) (467,130)
Accrued payroll and bonuses.................................... (1,670,309) (814,770)
Other accrued liabilities...................................... 750,751 (253,361)
Accrued restructuring charges.................................. -- (405,297)
Net cash provided by operating activities.................. 3,256,550 1,024,039
Cash flows from investing activities:
Purchase of property and equipment....................................... (2,591,339) (3,569,117)
<PAGE>
Proceeds from sales of property and equipment .............................. 106,379 258,045
Collection of notes receivable ............................................. 59,721 6,092
Net cash used in investing activities ........................ (2,425,239) (3,304,980)
Cash flows from financing activities:
Borrowings from long-term debt ............................................. 250,000 4,250,000
Principal payments on long-term debt ....................................... (27,000)
(27,000)
Purchase of treasury shares ................................................ (370,695)
(142,776)
Proceeds from sale of common stock and exercise of employee
stock options ........................................................... 144,564 236,434
Net cash provided by financing activities .................... (3,131)
4,316,658
Effects of exchange rate changes on cash and cash equivalents .................. (21,726)
(1,690)
Net increase in cash and cash equivalents ...................................... 806,454
2,034,027
Cash and cash equivalents at beginning of period ............................... 1,917,679
1,872,919
Cash and cash equivalents at end of period ..................................... $ 2,724,133 $
3,906,946
Interest paid (net of amounts capitalized) ..................................... $ 653,224 $
828,830
Income taxes paid (net of refunds collected) ................................... $ 657,871 $
213,780
</TABLE>
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: May 14, 1996 By: /S/Phillip Ratner
Phillip Ratner
Chairman and
Chief Executive Officer
<PAGE>
Dated: May 14, 1996
By: /S/ H. G. Carrington, Jr.
H.G. Carrington, Jr.
Executive Vice President and
Chief Financial Officer
<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 March 31, 1996 and the
consolidated results of operations and cash flows for the 39-week and
13-week periods ended March 31, 1996 and April 2, 1995. The condensed
consolidated statement of operations for the 39-week and 13-week periods
ended March 31, 1996 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.
1. Restructuring Plan
On January 30, 1996, the Company's Board of Directors approved a
restructuring plan intended to strengthen the Company's competitive
position and improve cash flow and profitability. In conjunction with the
plan, the Company closed seven under-performing restaurants in February
1996. The Company recorded a pre-tax charge of approximately $13.9 million
in the third quarter of fiscal 1996 to cover costs related to the execution
of this plan. These plan costs include the write-down of property and
equipment to its net realizable value, severance packages and various other
store closing obligations. As of March 31, 1996, the remaining balance of
accrued restructuring charges was approximately $2.1 million, which
management believes is adequate to complete the restructuring plan by the
end of fiscal 1997. The Company completed the sale of three of the closed
properties subsequent to March 31, 1996 and is currently negotiating the
disposal of the remaining closed properties.
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<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. Debt
As of March 31, 1996, the Company failed to meet the fixed charge coverage
covenant requirement contained in its Amended and Restated Loan Agreement
with two banks. The Company, which presently has $19.75 million outstanding
under such agreement, is currently negotiating with its lenders to amend
the terms of its borrowing arrangements and to obtain a waiver for this
event of technical default.
Although management is optimistic that terms of the loan agreement will be
amended in a manner which will provide a waiver for this event of technical
default, the ultimate outcome of the negotiation is not known at this time.
Generally accepted accounting principles require that all such debt be
classified as current until definitive agreements are reached. Accordingly,
$18.4 million of long-term debt under re-negotiation has been classified as
a current liability in the accompanying consolidated balance sheet as of
March 31, 1996.
6
<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 Operations.
<TABLE>
<CAPTION>
39-Week 13-Week
Periods Ended Periods Ended
4/2/95 3/31/96 4/2/95 3/31/96
<S> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales................................ 25.5 25.1 24.7 26.1
Operating expenses........................... 56.8 58.6 55.9 58.3
General and administrative expenses.......... 7.1 8.2 7.8 8.0
Depreciation and amortization................ 6.7 6.9 6.6 6.9
Restructuring charges........................ -- 25.8 -- 80.8
Total costs and expenses.................. 96.1 124.6 95.0 180.1
Income (loss) from operations...................... 3.9 (24.7) 5.0 (80.1)
Net interest expense............................... 1.6 1.5 1.6 1.7
Income (loss) before income taxes.................. 2.3 (26.1) 3.4 (81.8)
Income tax expense (benefit)....................... 0.5 (10.1) 0.8 (31.5)
Net income (loss).................................. 1.8% (16.0%) 2.6% (50.3%)
</TABLE>
Results of Operations
Revenues
Revenues for the third quarter of fiscal 1996 decreased $2.2 million, or
11.3%, in comparison to the same quarter of the preceding year. This decrease is
attributed to a $1.7 million reduction in sales from the closure of seven
under-performing restaurants in February 1996, coupled with a 2.1% decline in
sales experienced by the 28 restaurants opened prior to July 4, 1994 that were
also open at the end of the third quarter (annual same-stores). The decline in
annual same-store sales was the result of a 5.3% decline in customer counts
offset by a 3.3% increase in check average.
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<PAGE>
Revenues for the 39 weeks ended March 31, 1996 decreased $5.5 million, or
9.3%, compared to the same period last year. This decrease is the result of a
5.4% decrease in annual same-store sales, the $1.7 million reduction in sales
due to the closure of seven underperforming restaurants in February 1996, and
$.4 million in lost sales due to the temporary closure of the Marietta and
Addison restaurants for their conversions to other concepts. The 39-week decline
in annual same-store sales was the result of a 9.9% decline in customer counts
offset by a 5.0% increase in check average.
Management attributes the quarterly decline in annual same-store customer
counts to periods of unusually severe winter weather in January and early
February and to increased competition within the casual dining and Italian
restaurant segments. The increase in samestore check averages is attributed to
the addition of new menu items and moderate price increases 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 26.1% for the current
quarter compared to 24.7% for the same quarter last year. The current quarter
increases are attributed to higher food costs incurred at the new Spaghetti
Warehouse Italian Grill and Cappellini's concepts, recent price increases on
certain raw material costs, and to higher food costs on new shrimp entrees
promoted during the months of February and March.
For the 39 weeks ended March 31, 1996, cost of sales as a percentage of
revenues were 25.1% compared to 25.5% during the same period last year. The
39-week decrease in cost of sales as a percentage of revenues is due to the
utilization of a new theoretical food cost system and to the increase in check
average over the prior year.
Operating Expenses
Operating expenses as a percentage of revenues were 58.3% for the current
quarter as compared to 55.9% for the same quarter last year. This increase is
attributed to a significant increase in marketing expenditures over the third
quarter of last year and to higher labor costs at the newly opened Cappellini's
concept.
For the 39-week period ended March 31, 1996, operating expenses as a
percentage of revenues were 58.6% compared to 56.8% in the same period last
year. Much of the current year increase is attributed to the relatively fixed
nature of certain operating expenses, including management labor, kitchen labor
and occupancy costs, relative to the 39-week decline in annual same-store sales
volumes. The remaining change in operating costs for the
8
<PAGE>
current nine-month period is due to increases in marketing expenditures in
comparison to the same period last year.
General and Administrative Expenses (G&A)
G&A expenses as a percentage of revenues were 8.0% for the current quarter
compared to 7.8% in the same quarter last year. The relatively fixed nature of
certain G&A expenses, relative to the reduction in total revenues, contributed
to the increase in G&A as a percentage of total revenues. Third quarter G&A
costs actually decreased by $143,084, or 9.4%, in comparison to the same quarter
last year.
G&A expenses as a percentage of revenues were 8.2% in the current 39-week
period compared to 7.1% in the same period last year. Much of the current year
increase is due to the somewhat fixed nature of certain G&A expenses relative to
the 39-week decline in total revenues. Additionally, increased marketing
research costs and a non-cash write-off of certain costs incurred in the
preparation of the Addison property for its conversion to Cappellini's also
contributed to the 39-week increase in G&A expenses as a percentage of total
revenues.
Depreciation and Amortization (D&A)
D&A as a percentage of revenues was 6.9% for the current quarter as
compared to 6.6% for the same quarter last year. For the 39 weeks ended March
31, 1996, D&A as a percentage of revenues was 6.9% compared to 6.7% 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. The 39-week increases were offset by decreases in
pre-opening amortization on new stores resulting from a reduction in the
Company's new unit expansion rate.
Restructuring Charges
On January 30, 1996, the Company's Board of Directors approved a
restructuring plan intended to strengthen the company's competitive position and
improve cash flow and profitability. In conjunction with the plan, the Company
closed seven under-performing restaurants in February 1996. 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 recorded a
pre-tax charge of $13,875,248 in the third quarter of fiscal 1996 to cover costs
related to the execution of this plan.
Net Interest Expense
- 9 -
<PAGE>
The Company incurred net interest expense of $292,840 during the third
quarter of fiscal 1996 compared to $315,782 during the same quarter last year.
For the 39 weeks ended March 31, 1996, net interest expense was $807,538
compared to $924,812 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.
10
<PAGE>
Income Taxes
The Company's fiscal 1996 effective income tax rates were 38.5% and 38.9%
for the third quarter and year-to-date, respectively, compared to 24.9% and
23.7% in the same periods last year. Prior year rates were below statutory rates
due primarily to an increased utilization of the federal FICA tax tip credit.
The Company reported tax benefits in both the quarter and nine-month periods
ended March 31, 1996 due to fiscal 1996 restructuring charges that have been
deferred for future tax years.
Liquidity and Capital Resources
Due to the classification of $18.4 million in long-term debt as a current
liability as of March 31, 1996, the Company's working capital deficit increased
from $2.6 million on July 2, 1995 to $20.7 million on March 31, 1996. Excluding
the aforementioned classification of long-term debt as a current liability, 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 was $1.0 million for the first 39
weeks of fiscal 1996 compared to $3.3 million for the same period last year.
This decrease is attributed to the decline in current year earnings, cash
expenses incurred in relation to the restructuring plan, and to changes in
certain components of working capital.
In March 1996, the Company amended certain provisions of its Amended and
Restated Loan Agreement with two banks, thus reducing the total amount available
thereunder from $30.0 million to $22.5 million. Additionally, a covenant was
added which requires the Company to meet a certain funded debt to cash flow
ratio prior to borrowing any additional funds under such agreement.
Debt outstanding on March 31, 1996 consisted primarily of amounts borrowed
under the Company's Amended and Restated Loan Agreement, including a $15.0
million fixed rate term loan and $4.75 million floating rate revolving credit
facility. Because the Company failed to meet the fixed charge coverage
requirement contained in its Amended and Restated Loan Agreement at March 31,
1996, it is currently negotiating with its lenders to amend the terms of its
borrowing arrangements and to obtain a waiver for this event of technical
default.
Although management is optimistic that terms of the loan agreement will be
amended in a manner which will provide a waiver for this event of technical
default, the ultimate outcome of the negotiation is not known at this time.
Generally accepted accounting principles require that all such debt be
classified as current until definitive agreements are reached. Accordingly,
$18.4 million of long-term debt under re-negotiation has been classified as a
current liability as of March 31, 1996.
- 11 -
<PAGE>
Capital expenditures were $3.6 million for the first nine months of fiscal
1996 compared to $2.6 million for the same period last year. Fiscal 1996
expenditures consist primarily of renovations and additions made to three
existing Spaghetti Warehouse restaurants, replacement of point-of-sale (POS)
equipment in five restaurants, and costs relating to the conversion of three of
its locations to 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. The Company has repurchased 780,952 shares of common stock
under this program since its inception, including 29,795 shares in fiscal 1996.
Further repurchases under this program are dependent upon various business and
financial considerations.
On March 3, 1996 the Company converted its second restaurant to the
"Spaghetti Warehouse Italian Grill" at its Plano, Texas location. This
re-engineered version of the existing Spaghetti Warehouse concept features new
decor, an expanded menu, and patio dining. The menu was broadened to include
grilled entrees, sandwiches, pizza, and a larger variety of 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 sales and operating results achieved thus
far in both the Marietta and Plano Italian Grill locations, the Company recently
converted its Bedford, Texas location into the Italian Grill format. Management
intends to evaluate the results of all three Grill locations carefully as fiscal
1997 development plans are formulated.
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.
Cappellini's is designed to generate check averages and revenues significantly
greater than the traditional Spaghetti Warehouse restaurant. Although sales
trends have shown steady improvement since its opening, Cappellini's posted an
operating loss during the third quarter of fiscal 1996.
In addition to the conversion of the Bedford, Texas location into the
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 and current cash balances are
expected to be sufficient to fund planned capital expenditures and the share
repurchase program for the next 12 months.
12
<PAGE>
PART II - OTHER INFORMATION
Item 3. DEFAULTS UPON SENIOR SECURITIES
As of March 31, 1996, the Company failed to meet the fixed charge coverage
covenant requirement contained in its Amended and Restated Loan Agreement with
two banks. The Company, which presently has $19.75 million outstanding under
such agreement, is currently negotiating with its lenders to amend the terms of
its borrowing arrangements and to obtain a waiver for this event of technical
default.
Item 6. EXHIBITS
Exhibit
Number: Document Description
10.35
Amendment No. 3, dated March 31, 1996, to the Amended and Restated Loan
Agreement, dated as of November 1,1993, June 7, 1993, among the Company, certain
subsidiaries of the Company, Bank One Texas, N.A., and NationsBank of Texas,
N.A., and Amendment No. 1 thereto, dated December 21, 1993, and Amendment No. 2
thereto, dated February 9, 1995.
27.1 Financial Data Schedule
- 13 -
<PAGE>
EXHIBIT 10.35
<PAGE>
AMENDMENT NO. 3 TO
AMENDED AND RESTATED LOAN AGREEMENT
This Amendment (the "Amendment") is executed this 29th day of March,
1996, by and among BANK ONE, TEXAS, N.A., a national banking association and
NATIONSBANK OF TEXAS, N.A., a national banking association (collectively, the
"Lenders"), and SPAGHETTI WAREHOUSE, INC., a Texas corporation, SPAGHETTI
WAREHOUSE SERVICE CORPORATION, a Delaware corporation, SWEATAC, INC., a Delaware
corporation, SPAGHETTI WAREHOUSE OF TEXAS, L.P., a Delaware limited partnership
and SPAGHETTI WAREHOUSE OF OHIO, INC., a Delaware corporation (collectively, the
"Co-obligors").
WHEREAS, Co-obligors and Lenders entered into that certain Amended and
Restated Loan Agreement, dated as of November 1, 1993, Amendment No. 1 to
Amended and Restated Loan Agreement, dated as of December 21, 1993 and Amendment
No. 2 to Amended and Restated Loan Agreement, dated as of February 9, 1995
(together, the "Agreement");
WHEREAS, Co-obligors and Lenders now desire to further amend the
Agreement in accordance with the terms of this Amendment;
NOW THEREFORE, in consideration of the terms and conditions contained
herein and in the Agreement, and the extensions of credit heretofore made and
that may be made by Lenders to Co-obligors, the parties hereto agree as follows:
1. Definitions. Capitalized terms used herein without definition
shall have the same meanings as ascribed to such terms in the Agreement.
2. Representations of Co-obligors. Co-obligors represent and warrant to
Lenders that each of the representations and warranties of the Co-obligors
contained in the Agreement are true and correct on the date hereof as though
made on and as of such date. In connection therewith, Schedule A to the
Agreement is hereby amended and supplemented by Schedule A attached hereto.
Co-obligors further represent and warrant to Lender that, after giving effect to
the amendments to the Agreement herein contained, no event or circumstance has
occurred or exists and is continuing which constitutes an Event of Default.
<PAGE>
3. Amendment. (a) The definitions of "Adjusted Cash Flow," "CD Margin,"
"Fixed Charge Coverage Ratio," and "LIBOR Rate" contained in Section 1.1 of the
Agreement are hereby amended and restated in their entirety to read as follows,
respectively:
"Adjusted Cash Flow": For any twelve-month period, shall be
the sum of (i) Parent's consolidated net income (after income taxes)
and (ii) all noncash charges (including, but not limited to, deferred
taxes, depreciation, amortization of goodwill and write-down of
assets); less an annual capital expenditure allowance equal to the
product of the number of company-owned restaurant units opened at least
one full calendar year at the end of such period times $32,000.
"CD Margin": Two percent (2.0%).
"Fixed Charge Coverage Ratio": Ratio of (x) the sum of (i)
Parent's consolidated net income for the twelve-month period then ended
(before income taxes and before any effect during each period within
the initial twelve-month period of any change in accounting principles
promulgated by the FASB becoming effective after the Amendment Date),
(ii) all interest charges paid or accrued ("Interest Expense"), and
(ii) all rentals and other charges under capitalized or operating
leases ("Lease Expense"), over (y) the sum of (i) Interest Expense, and
(ii) Lease Expense; provided, however, that for each twelve-month
period that includes (Y) January 30, 1996, consolidated net income
shall be calculated before the effect of a pre-tax accounting charge of
$13,875,248 in connection with the write-down of certain
underperforming assets on January 30, 1996, and (Z) the date (but no
later than July 1, 1997) on which the existing Norfolk, Virginia
restaurant is sold to a third party, consolidated net income shall be
calculated before the effect of any loss (in an amount not to exceed
$744,000) realized on such sale.
"LIBOR Rate": With respect to each LIBOR Loan for each LIBOR
Interest Period, a rate per annum equal to the sum of (i) the LIBOR
Quoted Rate, plus (ii) two percent (2.0%).
(b) Section 1.1 of the Agreement is amended to add the following
definitions:
"Funded Debt": The Obligations and all indebtedness and other
obligations which in accordance with generally accepted accounting
principles should be carried on the consolidated balance sheet of
Parent as liabilities of Parent or its subsidiaries, and in any event
shall include (i) obligations of Parent or its subsidiaries for
borrowed money or which have been incurred in connection with the
acquisition of property or assets, (ii) obligations secured by any Lien
upon the property or assets of Parent or any of its subsidiaries, and
(iii) the full face amount of all issued letters of credit (regardless
of whether such letters have been drawn upon) issued for the benefit of
Parent or any of its Subsidiaries, provided however, that trade
payables incurred in the ordinary course of business shall be excluded
therefrom.
<PAGE>
"EBITDA": The consolidated net earnings of Parent (i) before
provision for income taxes, (ii) for each twelve-month period that
includes (A) January 30, 1996, before the effect of a pre-tax
accounting charge of $13,875,248 in connection with the write-down of
certain underperforming assets on January 30, 1996, and (B) the date
(but no later than July 1, 1997) on which the existing Norfolk,
Virginia restaurant is sold to a third party, before the effect of any
loss (in an amount not to exceed $744,000) realized on such sale, and
(iii) before interest expense, depreciation and amortization, in each
case, for the immediately preceding twelve-month period.
(c) The first sentence of Section 2.1 of the Agreement is amended and
restated in its entirety to read as follows:
"2.1 Revolving Credit Commitment. Subject to the terms and
conditions hereof, and upon satisfaction of the conditions precedent
set forth in Section 6 hereto, the Lender agrees to make revolving
credit loans (the "Revolving Loans") to the Co-obligors at the
Borrowing Agent's request from time to time during the Revolving
Commitment Period; provided, however, that the aggregate unpaid
principal balance of all Revolving Loans to all Co-obligors outstanding
at any one time shall not exceed $7,500,000.
(d) Section 2.3 of the Agreement is hereby amended and restated in its
entirety to read as
follows:
2.3 Revolving Commitment Fees. The Co-obligors agree to pay
Lenders a commitment fee during the Revolving Commitment Period
computed at a rate per annum (based on a year of 365 or 366 days, as
the case may be) equal to three-eighths of one percent (3/8%) of the
average daily unborrowed amount of the Revolving Commitment. For
purposes of the foregoing computation, the aggregate stated amount of
all outstanding letters of credit issued by Bank One, Texas, N.A., or
its successors or assigns, under which any of the Co-obligors is an
account party shall be deemed to be borrowed. Payments of such fee
shall be payable quarterly in arrears on the last day of each March,
June, September and December during the Revolving Commitment Period,
and on the Revolving Commitment Termination Date. The Agent shall be
entitled to sixty percent (60%) of each payment of this commitment fee.
The Co-obligors also agree to pay
3
<PAGE>
Lenders an additional one-time fee of $60,000 upon execution and
delivery of this Amendment, to be equally divided among the Lenders.
(e) Section 6.2 of the Agreement is amended to add a new subsection (f) to
read as follows:
(f) Funded Debt/EBITDA Ratio. Both immediately prior to such Loan and
immediately subsequent to and after giving effect to such Loan, the ratio of
Funded Debt to EBITDA shall not exceed 2.5 to 1.
(f) Section 8.1(g) of the Agreement is hereby amended and restated in its
entirety to read as follows:
(g) Minimum Tangible Net Worth. Parent's total shareholders'
equity (including capital stock, additional paid-in capital and
retained earnings, after deducting all treasury stock) as of the end of
each fiscal quarter of Parent, which would appear on a consolidated
balance sheet of Parent and its subsidiaries prepared as of such date
in accordance with generally accepted accounting principles,
consistently applied, less the aggregate book value of all intangible
assets (such as goodwill, intellectual property and unamortized debt
discount or expense) (the result of such computation being herein
referred to as "Consolidated Tangible Net Worth") shall be not less
than the greater of (i) $39,600,000 less, in the event the existing
Norfolk, Virginia restaurant unit is sold to a third party, the lesser
of (AA) $744,000 or (BB) the difference between the actual sales price
of such unit and the book value of such unit, or (ii) the sum of (A)
$39,600,000, plus (B) an amount (not less than zero) equal to 50% of
Parent's consolidated net income (after income taxes) calculated on a
cumulative basis commencing with the period beginning January 29, 1996,
plus (C) an amount equal to 50% of the net proceeds from the sale of
any equity securities by Parent after January 28, 1996, minus (D) in
the event the existing Norfolk, Virginia restaurant unit is sold to a
third party, the lesser of (y) $744,000 or (z) the difference between
the actual sales price of such unit and the book value of such unit.
(g) Section 8.2 (a)(ii) of the Agreement is hereby amended to
substitute the amount of $2,500,000 for the amount $5,000,000.
4
<PAGE>
(h) Section 8.2 of the Agreement is hereby amended to add a new subsection
(e) to read as follows:
(e) Stock Repurchase. As long as any Loans are outstanding,
Parent will not purchase, redeem or otherwise acquire shares of its
capital stock in an amount that would cause the total cumulative dollar
amount of shares of capital stock reacquired by the Company since March
31, 1996 to exceed $500,000.
(i) The several Revolving Commitments of the Lenders to make
Co-obligors Revolving Loans pursuant to Section 2.1 of the Agreement, set forth
on the signature pages of the Agreement are hereby amended to be as follows:
Lender Revolving Commitment
Bank One, Texas, N.A. $3,750,000
NationsBank of Texas, N.A. $3,750,000
4. Effect on Agreement. Except as expressly provided herein, the
Agreement shall remain in full force and effect and this Amendment shall not
operate as a waiver of any right, power or remedy of Lenders, nor constitute a
waiver of any provision of the Agreement. All amendments to the definitions and
covenants of Co-obligors contained in the Agreement provided for in this
Amendment shall be effective as of January 30, 1996. All other provisions of
this Amendment shall be effective as of the date of this Amendment, except that
the amendment of the definition of CD Margin and LIBOR Rate provided for herein
shall not be effective with respect to any outstanding Loan until commencement
of the next LIBOR Interest Period or CD Interest Period, as the case may be,
immediately following the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by
Co-obligors and by Lenders in Dallas, Texas as of the day and year specified at
the beginning hereof.
CO-OBLIGORS:
SPAGHETTI WAREHOUSE, INC.
5
<PAGE>
By: /s/ H.G. Carrington, Jr.
SPAGHETTI WAREHOUSE SERVICE
CORPORATION
By: /s/ H.G. Carrington, Jr.
SWEATAC, INC.
By: /s/ H.G. Carrington, Jr.
SPAGHETTI WAREHOUSE OF TEXAS,
L.P.
BY: SPAGHETTI WAREHOUSE
SERVICE CORPORATION,
General Partner
By: /s/ H.G. Carrington, Jr.
SPAGHETTI WAREHOUSE OF OHIO,
INC.
BY: /s/ H.G.Carrington, Jr.
LENDERS:
BANK ONE, TEXAS, N.A.
By: /s/ Paul C. Koch
Paul C. Koch,
Vice President
NATIONSBANK OF TEXAS, N.A.
By: /s/ Rachel Johnston
Rachel Johnston,
Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying condensed consolidated financial statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000775298
<NAME> Spaghetti Wharehouse
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Mar-31-1996
<CASH> 3,906,946
<SECURITIES> 0
<RECEIVABLES> 561,432
<ALLOWANCES> 0
<INVENTORY> 687,286
<CURRENT-ASSETS> 6,175,085
<PP&E> 71,951,699
<DEPRECIATION> 21,683,051
<TOTAL-ASSETS> 71,976,720
<CURRENT-LIABILITIES> 26,923,464
<BONDS> 19,771,000
0
0
<COMMON> 64,666
<OTHER-SE> 44,925,440
<TOTAL-LIABILITY-AND-EQUITY> 71,976,720
<SALES> 52,955,213
<TOTAL-REVENUES> 53,837,348
<CGS> 13,507,577
<TOTAL-COSTS> 45,047,006
<OTHER-EXPENSES> 22,050,835
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 807,538
<INCOME-PRETAX> (14,068,031)
<INCOME-TAX> (5,468,721)
<INCOME-CONTINUING> (8,599,310)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,599,310)
<EPS-PRIMARY> (1.53)
<EPS-DILUTED> (1.53)
