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 30, 1997
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: 972/226-6000
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 March 30, 1997: 5,680,494 SHARES OF COMMON STOCK, PAR VALUE
$.01.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS 6/30/96 3/30/97
------ ------- -------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents....................................................... $ 8,065,364 $ 1,472,160
Accounts receivable............................................................. 659,069 553,747
Inventories..................................................................... 686,995 625,386
Income taxes receivable......................................................... 399,764 273,739
Prepaid expenses................................................................ 341,711 294,177
------- -------
Total current assets..................................................... 10,152,903 3,219,209
---------- ---------
Property and equipment, net.......................................................... 50,126,121 47,228,959
Assets scheduled for divestiture..................................................... 1,525,000 196,513
Trademark and franchise rights, net.................................................. 3,113,472 2,970,404
Deferred income taxes................................................................ 5,735,128 4,495,308
Other assets 715,565 578,711
------- -------
$71,368,189 $58,689,104
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 6,878,358 $ 1,970,836
Accounts payable 1,932,648 1,928,059
Accrued payroll and bonuses..................................................... 1,450,812 1,308,537
Other accrued liabilities....................................................... 1,585,856 1,062,806
Accrued restructuring charges................................................... 1,310,540 99,726
--------- ------
Total current liabilities................................................ 13,158,214 6,369,964
---------- ---------
Long-term debt, less current portion................................................. 12,883,642 6,897,935
Deferred compensation................................................................ 75,875 129,489
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 6,475,375 shares at 6/30/96 and 6,527,835 shares at 3/30/97 64,754 65,278
Additional paid-in capital........................................................... 36,012,761 36,246,849
Cumulative translation adjustment.................................................... (550,642) (619,435)
Retained earnings.................................................................... 16,094,924 15,996,248
---------- ----------
51,621,797 51,688,940
Less cost of 842,252 shares at 6/30/96 and 847,341 shares at 3/30/97 of
common stock held in treasury............................................ (6,371,339) (6,397,224)
---------- ----------
45,250,458 45,291,716
$71,368,189 $58,689,104
</TABLE>
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
39-Week Period 39-Week Period 13-Week Period 13-Week Period
Ended 3/31/96 Ended 3/30/97 Ended 3/31/96 Ended 3/30/97
-------------- -------------- -------------- --------------
Revenues:
<S> <C> <C> <C> <C>
Restaurant sales......................... $52,955,213 $47,264,337 $16,889,558 $15,342,375
Franchise................................ 476,817 729,796 151,622 239,558
Other.................................... 405,318 423,579 139,094 136,727
------- ------- ------- -------
Total revenues.................... 53,837,348 48,417,712 17,180,274 15,718,660
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales............................ 13,507,577 12,373,632 4,478,776 3,917,210
Operating expenses....................... 31,539,429 27,279,750 10,023,493 8,672,380
General and administrative............... 4,427,464 3,978,431 1,374,389 1,321,874
Depreciation and amortization............ 3,748,123 2,997,936 1,188,538 962,868
Restructuring charges (reversals)........ 13,875,248 (400,000) 13,875,248 -
Impairment of long-lived assets.......... - 1,759,526 - -
---------- --------- ---------- ----------
Total costs and expenses.......... 67,097,841 47,989,275 30,940,444 14,874,332
---------- ---------- ---------- ----------
Income (loss) from operations................. (13,260,493) 428,437 (13,760,170) 844,328
Net interest expense.......................... 807,538 566,214 292,840 146,810
------- ------- ------- -------
Income (loss) before income tax
expense (benefit)............................ (14,068,031) (137,777) (14,053,010) 697,518
Income tax expense (benefit).................. (5,468,721) (39,101) (5,410,724) 240,890
---------- ------- ---------- -------
Net income (loss)............................. $ (8,599,310) $ (98,676) $ (8,642,286) $ 456,628
============ ------------ ============= ============
Net income (loss) per common and
common equivalent share...................... $ (1.53) $ (.02) $ (1.54) $ .08
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding................ 5,606,291 5,653,908 5,624,274 5,810,290
========= ========= ========= =========
</TABLE>
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
39-Week
Periods Ended
------------------------------
3/31/96 3/30/97
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss).........................................................$ (8,599,310) $ (98,676)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization expense................................. 3,748,123 2,997,936
Restructuring charges (reversals)..................................... 13,875,248 (400,000)
Impairment of long-lived assets....................................... - 1,759,526
Loss on disposal of property and equipment............................ 144,809 26,833
Deferred income taxes................................................. (5,423,628) 1,144,757
Other, net............................................................ 183,112 74,958
Changes in assets and liabilities:
Accounts receivable............................................... 42,436 102,827
Inventories....................................................... 2,109 61,609
Income taxes receivable........................................... (221,416) 128,480
Prepaid expenses.................................................. (34,100) 47,534
Other assets...................................................... (752,786) (84,406)
Accounts payable.................................................. (467,130) (5,173)
Accrued payroll and bonuses....................................... (814,770) (142,275)
Other accrued liabilities......................................... (253,361) (427,411)
Accrued restructuring charges..................................... (405,297) (98,379)
-------- -------
Net cash provided by operating activities............................. 1,024,039 5,088,140
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................................ (3,569,117) (1,726,558)
Proceeds from sales of property and equipment............................. 258,045 766,418
Collection of notes receivable............................................ 6,092 -
----- -------
Net cash used in investing activities................................. (3,304,980) (960,140)
---------- --------
Cash flows from financing activities:
Net borrowings from (payments on) long-term debt.......................... 4,250,000 (10,893,229)
Purchase of treasury shares............................................... (27,000) (25,885)
Proceeds from employee stock plans........................................ 93,658 216,611
------ -------
Net cash provided by (used in) financing activities................... 4,316,658 (10,702,503)
--------- -----------
Effects of exchange rate changes on cash and cash equivalents................. (1,690) (18,701)
------ -------
Net increase (decrease) in cash and cash equivalents.......................... 2,034,027 (6,593,204)
Cash and cash equivalents at beginning of period.............................. 1,872,919 8,065,364
--------- ---------
Cash and cash equivalents at end of period....................................$ 3,906,946 $ 1,472,160
============= =============
Supplemental information:
Interest paid $ 828,830 $ 961,387
============= =============
Income taxes paid (net of refunds collected)..............................$ 213,780 $ (1,309,308)
============= =============
</TABLE>
<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 March 30, 1997
and the consolidated results of operations and cash flows for the 39-week
and 13-week periods ended March 30, 1997 and March 31, 1996. The condensed
consolidated statement of operations for the 39-week and 13-week periods
ended March 30, 1997 are not necessarily indicative of the results to be
expected for the full fiscal 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. New Financial Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, goodwill related to assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
The Company elected to adopt SFAS 121 in the first quarter of fiscal 1997.
Adoption of SFAS 121 requires the Company to review its long-lived assets
and certain identifiable intangibles to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset or group of assets may not be recoverable. As a result
of applying provisions of SFAS 121, the Company groups and evaluates its
assets for impairment at the individual restaurant level. The Company
considers each restaurant's historical operating losses a primary indicator
of potential impairment. The Company deems a restaurant's assets to be
impaired if a forecast of undiscounted future cash flows directly related
to the assets, including disposal value, if any, is less than their
carrying amount. If a restaurant's assets are deemed to be impaired, the
loss is measured as the amount by which the carrying amount of the assets
exceeds their estimated fair market value based on quoted market prices for
similar assets.
<PAGE>
The Company recorded a pre-tax, non-cash charge of $1,759,526 during the
first quarter of fiscal 1997 as a result of adopting SFAS 121. The charge
related to the write-down of the Company's Cappellini's restaurant in
Addison, Texas to its estimated fair market value. This restaurant was
subsequently closed on December 31, 1996 due to poor operating results.
4. Restructuring Charges
In the third quarter of fiscal 1996, the Company implemented a
restructuring plan intended to strengthen its competitive position and
improve cash flow and profitability. In conjunction with the plan, the
Company closed seven under-performing restaurants in February 1996 and
identified one additional restaurant to be sold as an operating unit. The
Company recorded a pre-tax charge of $13.9 million in the third quarter of
fiscal 1996 to cover costs related to the execution of this plan, including
the write-down of property and equipment to its estimated net realizable
value, severance packages, and various other store closing and corporate
obligations.
As a result of obtaining more favorable disposal terms on the seven
restaurant properties closed in the restructuring plan, total costs
relating to this plan were less than the previously recorded charge.
Therefore, the Company reversed $400,000 in pre-tax restructuring charges
in the second quarter of fiscal 1997.
5. Commitments & Contingencies
As discussed in the Company's Form 10-K for the fiscal year ended June 30,
1996, Bright-Kaplan International Corporation ("BK") filed a claim in
arbitration against the Company with the American Arbitration Association
("AAA") in Dallas, Texas. BK is the owner of the previous Spaghetti
Warehouse franchise restaurant located in Knoxville, Tennessee. BK claimed
that the Company misrepresented and concealed numerous material facts in
order to induce BK to enter into a franchise agreement, failed to provide a
variety of services in support of BK's franchise, engaged in deceptive
trade practices and violated Federal Trade Commission disclosure rules. BK
was seeking damages in excess of $9.0 million. Following an extensive
hearing before the arbitration panel in Dallas, the panel unanimously ruled
that the Company had no liability in this matter. All AAA arbitration
expenses were awarded in favor of the Company. The Company has filed a
motion to confirm the arbitration award and dismiss a lawsuit previously
filed by Elizabeth Bright and Thomas C. Bright, the principal shareholders
of BK, in the circuit court of Hamilton County, Tennessee on August 11,
1995. The lawsuit contains essentially the same claims as were submitted to
the AAA, decided in favor of the Company by the arbitration panel.
<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
3/31/96 3/30/97 3/31/96 3/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Cost of sales................................ 25.1 25.6 26.1 24.9
Operating expenses........................... 58.6 56.3 58.3 55.2
General and administrative................... 8.2 8.2 8.0 8.4
Depreciation and amortization................ 6.9 6.2 6.9 6.1
Restructuring charges (reversals)............ 25.8 (0.8) 80.8 0.0
Impairment of long-lived assets.............. 0.0 3.6 0.0 0.0
--- --- --- ---
Total costs and expenses........... 124.6 99.1 180.1 94.6
----- ---- ----- ----
Income (loss) from operations...................... (24.7) 0.9 (80.1) 5.4
Net interest expense............................... 1.5 1.2 1.7 1.0
--- --- --- ---
Income (loss) before income taxes.................. (26.1) (0.3) (81.8) 4.4
Income tax expense (benefit)....................... (10.1) (0.1) (31.5) 1.5
----- ---- ----- ---
Net income (loss).................................. (16.0%) (0.2%) (50.3%) 2.9%
===== ==== ===== ===
</TABLE>
Results of Operations
Revenues
Revenues decreased $1.5 million, or 8.5%, during the quarter ended March
30, 1997 in comparison to the same quarter in the preceding year. This decrease
in revenues was due primarily to the closure of seven under-performing stores in
February 1996, the sale of the Company's Richmond, Virginia operation to a
franchisee in November 1996 and the closing of the Company's Cappellini's unit
on December 31, 1996. Same-store sales (stores open the full quarter in both
fiscal years) decreased 0.4% during the third quarter. Although the current
quarter comparison was positively impacted by New Year's Eve falling in the
third quarter of this fiscal year as compared to the second quarter a year ago,
the benefit was offset by this year's Easter falling in March as compared to
April a year ago. The decrease in same-store sales was the result of a 3.3%
decrease in customer counts offset by a 3.1% check average increase.
<PAGE>
Revenues for the nine months ended March 30, 1997 decreased $5.4 million,
or 10.1%, compared to the same period last year. The decrease was due to the
reduction in the number of restaurants in comparison to last year as mentioned
above. Same-store sales through the first nine months of fiscal 1997 increased
0.2% compared to the same period last year. Additionally, franchise income
increased $234,193 in comparison to fiscal 1996, due primarily to fees
associated with the sale of the Company's Richmond, Virginia restaurant, an
exclusive territory agreement to the Company's Virginia franchisee and the
opening of two additional franchise units. The nine-month increase in same-store
sales was the result of a 3.2% increase in check average, partially offset by a
2.8% decrease in customer counts.
Management attributes the increase in check averages to new menu items
introduced over the past year, modest price increases and to increased check
averages in the Company's repositioned Spaghetti Warehouse Italian Grill
("Italian Grill") units. Sales for the 39-week period ended March 30, 1997 in
the Company's seven Italian Grill units, during the periods operating under the
Italian Grill format in the current year, increased 6.1% over comparable periods
in the prior year. Same-store sales in the Company's traditional Spaghetti
Warehouse concept declined 1.0% during the first nine months of fiscal 1997.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of total revenues were 24.9% for the current
quarter as compared to 26.1% for the same quarter last year. For the first nine
months of fiscal 1997, cost of sales as a percentage of revenues were 25.6% as
compared to 25.1% during the same period last year. The current quarter decrease
is due to the closing of Cappellini's, which had higher food costs than typical
Spaghetti Warehouse restaurants, lower commodity prices and tighter inventory
controls. The nine-month increase in cost of sales as a percentage of revenues
was due to higher food costs associated with Cappellini's and the Italian Grill,
and higher commodity prices on certain meat, dairy and pasta products during the
first two quarters of fiscal 1997. Management anticipates that cost of sales as
a percentage of revenues will decline slightly from prior year levels due to the
closing of Cappellini's and a return to lower commodity prices.
Operating Expenses
Operating expenses as a percentage of total revenues were 55.2% for the
current quarter as compared to 58.3% for the same quarter last year. Much of
this decrease is due to the closure of the seven low-volume units in February
1996 and Cappellini's on December 31, 1996. These units generally incurred
higher operating expenses as a percentage of revenues than the typical Company
restaurant. In addition, improved controls over restaurant labor expenses and
security costs, and reduced marketing expenditures contributed to the current
year decline in operating expenses as a percentage of revenues.
For the 39-week period ended March 30, 1997, operating expenses as a
percentage of revenues were 56.3% as compared to 58.6% in the same period last
year. The nine-month decline in operating expenses as a percentage of revenues
was due primarily to the same factors mentioned above.
<PAGE>
General and Administrative Expenses (G&A)
G&A expenses as a percentage of total revenues were 8.4% for the current
quarter as compared to 8.0% for the same quarter last year. The relatively fixed
nature of certain G&A costs compared to the decline in total revenues
contributed to the increase in G&A costs as a percentage of total revenues. G&A
expenses for the third quarter actually declined $52,515 in comparison to the
same quarter last year.
G&A expenses were 8.2% of total revenues for both the nine-month period of
fiscal 1997 and 1996. G&A expensed decreased $183,573 in the to nine-month
period ended March 30, 1997 compared to the corresponding period a year ago.
Depreciation and Amortization (D&A)
D&A as a percentage of total revenues were 6.1% for the current quarter as
compared to 6.9% for the same quarter last year. For the 39-week period ended
March 30, 1997, D&A as a percentage of revenues were 6.2% compared to 6.9% for
the same period last year. This reduction was the result of the elimination of
depreciation expense on the seven low-volume units closed in February 1996, and
pre-opening cost amortization at Cappellini's.
Restructuring Charges (Reversals)
As a result of obtaining more favorable disposal terms on the seven
restaurant properties closed in the February 1996 restructuring plan, total
costs relating to this plan were less than the $13.9 million charge recorded in
the third quarter of fiscal 1996. As a result, the Company reversed $400,000 in
pre-tax restructuring charges in the second quarter of fiscal 1997. See Note 4
of Notes to Condensed Consolidated Financial Statements for further information.
Impairment of Long-Lived Assets
The Company adopted Financial Accounting Standards Board Statement No. 121
during the first quarter of fiscal 1997 resulting in a pre-tax, non-cash
impairment charge of $1,759,526. This charge related to the write-down of the
Company's Cappellini's restaurant in Addison, Texas to its estimated fair market
value. See Note 3 of Notes to Condensed Consolidated Financial Statements for
further information.
Net Interest Expense
The Company incurred net interest expense of $146,810 during the current
quarter compared to $292,840 during the same quarter last year. For the nine
months ended March 30, 1997, net interest expense was $566,214 compared to
$807,538 in the same period last year.
<PAGE>
These current year decreases are attributed to decreases in average debt
outstanding under the Company's credit facilities in comparison to the same
periods last year.
Income Taxes
The Company's effective tax rate decreased from a benefit of 38.5% in the
third quarter of fiscal 1996 to a provision of 34.5% in the current quarter. For
the nine months ended March 30, 1997, the Company's effective rate was a benefit
of 28.4% compared to a benefit of 38.9% in the corresponding period last year.
The decline in the current year rate is primarily attributable to the fact that
a higher proportion of the Company's consolidated pre-tax earnings is being
generated by the Company's Canadian operations (which is taxed at a lower rate)
this year as compared to last year. The reduction in current year U.S. pre-tax
earnings as a percentage of consolidated pre-tax earnings is primarily
attributable to the $1.8 million asset impairment charge recorded in the first
quarter of fiscal 1997.
Liquidity and Capital Resources
The Company's working capital deficit increased from $3.0 million at June
30, 1996 to $3.2 million on March 30, 1997. 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 $5.1 million for the 39-week
period ending March 30, 1997 compared to $1.0 million during the first three
quarters of fiscal 1996. This increase is attributed to the improvement in
current year earnings, the receipt of prior year income tax refunds, and changes
in certain components of working capital.
Long-term debt outstanding on March 30, 1997 consisted of an $8.9 million
fixed rate term loan borrowed under the Company's existing bank credit facility.
Subject to meeting a certain funded debt to cash flow requirement prior to
borrowing any additional funds, the Company had an additional $5.0 million
available under its bank revolving credit facility on March 30, 1997.
Capital expenditures were $1.7 million for the 39-week period ended March
30, 1997 as compared to $3.6 million for the same period last year. Fiscal 1997
expenditures consisted primarily of the conversion of four Company restaurants
to the Italian Grill format and normal purchases of new and replacement
restaurant equipment and decor.
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 purchased 1,858 shares during the third quarter
of fiscal 1997 and has purchased a total of 5,089 shares since the beginning of
fiscal 1997. The Company has repurchased 786,041 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.
<PAGE>
The Spaghetti Warehouse Italian Grill concept is an updated version of the
traditional Spaghetti Warehouse and features new decor, an expanded menu and
even greater customer value. The menu was broadened to include grilled entrees,
sauteed pastas, new sandwiches, appetizers and pizza. Additionally, traditional
menu items were improved, and portion sizes increased to enhance the price/value
relationship offered to customers.
The Company will continue its Italian Grill re-positioning strategy in the
fourth quarter of fiscal 1997, converting its Philadelphia, Pennsylvania unit to
a modified version of its previous Italian Grill format. This modified format
will attempt to increase operating profits while reducing the required
investment associated with Grill conversion. The modified Grill will feature
greater menu variety while maintaining traditional Spaghetti Warehouse portion
sizes, thus lower operating costs and improving profit margins.
The Company closed its Cappellini's location in Addison, Texas on December
31, 1996. The Company's non-cash, pre-tax charge of $1.8 million in the first
quarter related to the write-down of the Cappellini's restaurant to its
estimated fair market value. Cappellini's posted a pre-tax operating loss of
$232,000 during fiscal 1997.
Total planned capital expenditures relating to all projects during the next
12 months are approximately $2.5 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, payment of
required debt maturities under the Company's bank credit facility and possible
further repurchases of Company stock for the next 12 months.
Forward-Looking Information
Statements contained in this Form 10-Q that are not historical facts,
including, but not limited to, statements found in this Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
forward-looking statements and involve a number of risks and uncertainties. The
actual results of the future events described in such forward-looking statements
in this Form 10-Q could differ materially from those stated in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are: adverse conditions in the restaurant industry and other
competitive factors, governmental regulation, pending and possible future
litigation, seasonality of business, loss of material suppliers or increases in
the costs of raw materials used in the Company's food products, termination of
key franchise and/or license agreements, as well as the risks and uncertainties
discussed elsewhere in this Form 10-Q.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Company's Form 10-K for the fiscal year ended June 30,
1996, Bright-Kaplan International Corporation ("BK") filed a claim in
arbitration against the Company with the American Arbitration Association
("AAA") in Dallas, Texas. BK is the owner of the previous Spaghetti Warehouse
franchise restaurant located in Knoxville, Tennessee. BK claimed that the
Company misrepresented and concealed numerous material facts in order to induce
BK to enter into a franchise agreement, failed to provide a variety of services
in support of BK's franchise, engaged in deceptive trade practices and violated
Federal Trade Commission disclosure rules. BK was seeking damages in excess of
$9.0 million. Following an extensive hearing before the arbitration panel in
Dallas, the panel unanimously ruled that the Company had no liability in this
matter. All AAA arbitration expenses were awarded in favor of the Company. The
Company has filed a motion to confirm the arbitration award and dismiss a
lawsuit previously filed by Elizabeth Bright and Thomas C. Bright, the principal
shareholders of BK, in the circuit court of Hamilton County, Tennessee on August
11, 1995.
The lawsuit contains essentially the same claims as were submitted to the AAA,
decided in favor of the Company by the arbitration panel.
ITEM 6. EXHIBITS
Exhibit
Number: Document Description
------- --------------------
10.1 Employment Agreement, dated as of
October 28, 1996, by and between the
Company and Phillip Ratner.
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: May 7, 1997 By: /s/Phillip Ratner
----------- -----------------
Phillip Ratner
Chairman and
Chief Executive Officer
Dated: May 7, 1997 By: /s/ H. G. Carrington, Jr.
----------- -------------------------
H.G. Carrington, Jr.
Executive Vice President and
Chief Financial Officer
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "AGREEMENT"), dated as of the 28th day
of October, 1996 ("EFFECTIVE DATE"), is by and between Spaghetti Warehouse,
Inc., a Texas corporation (hereinafter referred to as the "COMPANY"), and
Phillip Ratner (hereinafter referred to as the "EXECUTIVE") and supersedes that
prior Employment Agreement, dated as of June 25, 1994, by and between the
Company and the Executive.
W I T N E S S E T H:
WHEREAS, the Company desires to renew the employment of the Executive in
the capacity of President and Chief Executive Officer; and
WHEREAS, the Board of Directors of the Company (the "BOARD") agreed with
the Executive on October 28, 1996 as to the terms and conditions of such
employment and such parties desire to memorialize such agreement; and
WHEREAS, the Executive agrees to accept such employment on the terms and
conditions agreed to as herein set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Company and the
Executive as follows:
DURATION
1. This Agreement shall commence on the Effective Date and shall
continue in effect until terminated as provided in Paragraphs 24-29.
COMPENSATION
2. The Company agrees to compensate the Executive at an annual base
compensation rate of Two Hundred Seventy-Five Thousand Dollars ($275,000) per
year, payable in equal bi-weekly payments. The Executive agrees such
compensation is fair and adequate compensation for his services, and for the
mutual promises described below.
3. The Company and the Executive acknowledge that during the term of
employment of the Executive pursuant to this Agreement, the Executive's
compensation will be subject to an annual review and adjustment by the Board at
the beginning of each fiscal year.
4. The Company agrees that it will grant to Executive stock options to
acquire One Hundred Thousand (100,000) shares of the Company's common stock
("OPTIONS") at an option price of $53/8 per share. The Options will be granted
on the Effective Date under the Spaghetti
EMPLOYMENT AGREEMENT - PAGE 1
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<PAGE>
Warehouse, Inc. 1990 Incentive Stock Option Plan (the "Option Plan"). The
Options shall consist of Incentive Stock Options exercisable into shares having
a value of $400,000 on the date of grant, and which will vest in four (4) equal
installments of twenty-five percent (25%) on each of June 25, 1999, 2000, 2001,
and 2002. The remainder of the Options will be nonqualified options and also
will vest in four (4) installments on such dates. The nonqualified options shall
vest with respect to that number of shares subject to the nonqualified options
which, when added to the shares of Incentive Stock Options vesting on the
corresponding date, will equal 25,000 shares on each vesting date. See
Attachment I, which is incorporated herein by reference, for an example of the
above vesting rules. In addition, the Options will provide that, (a) in the
event of the termination of this Agreement in manner set forth in Paragraphs 25
or 27, then, in addition to the Options that already have vested in accordance
with the above schedules, both the Incentive Stock Options, and the nonqualified
options will vest in an amount equal to (x) in the case of a termination under
Paragraph 25, the product of (i) a fraction, whose numerator is the full months
of employment completed between the termination date and the immediately
preceding Effective Date or anniversary of the Effective Date as the case may
be, and whose denominator is twelve (12), and (ii) the number of shares that
would have become vested on the next succeeding anniversary of the Effective
Date had the Executive remained in the employ of the Company until that
anniversary, and (y) in the case of a termination under Paragraph 27, the number
of shares that would have become vested on the next anniversary of the Effective
Date had Executive remained in the employ of the Company until that anniversary.
In the case of a termination of the Executive's employment hereunder without
"Cause" (as defined in Paragraph 26 below), then the Executive shall have six
(6) months to exercise any Options outstanding to him that have vested
(including options outstanding prior to the Effective Date hereof). The Company
will amend the Option Plan to allow and any related option agreements will
provide for such six-month exercisability period. The Options will have other
terms and conditions for Options granted to other executives under the Option
Plan.
5. In addition, (i) during all periods of employment by the Company
during which the Executive is insurable at standard rates, the Company will
purchase and maintain a life insurance policy(ies) (which policy(ies) shall
remain an asset of the Company) that will provide a death benefit to Executive's
designated beneficiary in an amount equal to one (1) times the Executive's
annual base compensation in the event of his death while employed by the
Company; PROVIDED, FURTHER, that, without limitation, such amount shall be in
addition to any amount provided under any other employee benefit plan of the
Company and the amount provided in Paragraph 27, and (ii) in the event the
Executive is not insurable at standard rates at any time of reference, the
Company will pay to Executive on a quarterly basis, one fourth of the premium
that would be required to purchase one year nonrenewable term insurance on the
life of the Executive in the amount provided in (i) if the Executive were
insurable at standard rates.
Also, during all periods of employment by the Company during
which the Executive is insurable at the standard rates, the Company will
purchase and maintain a disability policy(ies) (which policy(ies) shall remain
an asset of the Company) that will provide a disability benefit to the Executive
equal to sixty percent (60%) of his base compensation rate, as provided under
the Company's executive disability policies currently in effect.
EMPLOYMENT AGREEMENT - PAGE 2
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<PAGE>
6. The Company and the Executive acknowledge and agree that the Company
shall reimburse the Executive for any reasonable expenses, including, but not
limited to, travel expenses, lodging expenses, meals or entertainment expenses,
that the Executive may incur in the performance of his duties and obligations
under this Agreement. PROVIDED, HOWEVER, that the Executive shall be required to
submit receipts or other acceptable documentation to the Company to verify such
expenses prior to any reimbursements.
7. Notwithstanding any provision hereof to the contrary, in the event
of termination of this Agreement for any reason, the Company will pay Executive
accrued vacation pay, and sick leave compensation, pursuant to the applicable
Company policy in effect at the time of termination.
8. The Company and the Executive acknowledge and agree that, in the
sole discretion of the Board, the Executive may be entitled to bonus
compensation. The Executive acknowledges and agrees that any such bonus
compensation shall be payable at such times and under such terms and conditions
as are provided in this Agreement and as the Board may from time to time
approve.
9. The Executive acknowledges and agrees that, at the discretion of the
Company, certain employee benefits may be provided to the Executive incident to
the Executive's employment with the Company. The Executive acknowledges and
agrees that any employee benefits provided to the Executive by the Company
incident to the Executive's employment are governed by the applicable plan
documents, summary plan descriptions or employment policies, and may be
modified, suspended or revoked at any time, in accordance with the terms and
provisions of the applicable documents. The Executive agrees that any employee
benefits provided to the Executive by the Company incident to the Executive's
employment are not a part of this Agreement, except as expressly provided
herein.
RESPONSIBILITIES
10. The Executive shall perform such duties as are customary for a
President and Chief Executive Officer of comparable companies. The Executive
shall also assume such responsibilities, perform such duties not inconsistent
with his position, and shall have such authority, as may from time to time be
assigned or delegated by the Board.
11. The Executive understands and agrees that, without limitation, the
Executive has a fiduciary duty of loyalty to the Company, and that he will do no
act that in any way harms the business, business interests or reputation of the
Company.
12. Subject to reasonable vacation and holiday periods consistent with
Company policy, and absences due to illness or disability, the Executive shall
devote one hundred percent of his business time to his duties hereunder;
provided, however, that the foregoing shall not prevent the Executive from
serving as a member of the board of directors of a corporation if the Board, or
EMPLOYMENT AGREEMENT - PAGE 3
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<PAGE>
the appropriate Committee thereof, determines in its sole discretion that such
membership is not adverse to the interests of the Company. Subject to the
foregoing, the Executive shall not engage in any business activities that are
directly or indirectly competitive with any business then conducted by the
Company or any of its subsidiaries. Notwithstanding the foregoing, the Executive
may continue to serve as a member of the board of directors of all corporations
on which he is serving on the date of this Agreement.
13. The Executive may be an investor, shareholder, joint venturer or
partner in any enterprise, association, corporation, joint venture or
partnership ("INVESTMENT"); provided, however, that any such Investment does not
(i) violate the Company's conflict of interest policy as in effect from time to
time, (ii) require the Executive's involvement in the management (except service
on boards of directors to the extent permitted by Paragraph 12) hereof) or
operation of such Investment (recognizing that the Executive shall be permitted
to monitor and oversee the Investment, as would any prudent Investor) or (iii)
interfere with the performance of the Executive's duties and obligations
hereunder.
NONDISCLOSURE
14. Information concerning the Company's products, processes,
techniques and equipment was developed at considerable effort and expense to the
Company, and for the Company's sole and exclusive use, and which, if
misappropriated by the Company's competitors, would give them an unfair business
advantage. Consequently, the Executive understands and agrees that all such
information constitutes a trade secret, and the Executive understands and agrees
that this information will not be disclosed to any person who is not a current
employee of the Company whose job requires such disclosure at any time prior to,
or subsequent to, the termination of this Agreement without the express, written
consent of the Company.
15. The Executive understands and agrees that the Company will provide
the Executive with certain confidential and highly sensitive information
including, without limitation, information relating to the Company's customers,
confidential market studies, current and prospective products, and financial
information. The Executive understands and agrees that this information, if
disclosed, could place the Company at a competitive disadvantage. Consequently,
the Executive understands and agrees that all such information constitutes a
trade secret, and the Executive understands and agrees not to disclose such
information to any person who is not a current employee of the Company.
NONCOMPETITION
16. The Executive understands and agrees that as President and Chief
Executive Officer he is responsible for building and maintaining business
relationships which are crucial to the profitable performance of the Company.
The Executive understands and agrees that this
EMPLOYMENT AGREEMENT - PAGE 4
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<PAGE>
responsibility creates a special relationship of trust and confidence between
the Company and the Executive.
17. Executive recognizes that he will be exposed to and will acquire
information regarding the "Spaghetti Warehouse Concept" consisting, without
limitation, of design, pricing, service policies, food items and other aspects
of its operation, and that the use of the Spaghetti Warehouse Concept is a
unique approach and is essential for the Company to maintain its competitive
advantage in the marketplace.
18. The Executive understands and agrees that in consideration of the
execution of the noncompetition agreements mentioned below at Paragraphs 19 and
20, the Executive will receive substantial, valuable consideration including:
(i) confidential trade secret and proprietary information including, without
limitation, the Company's current and prospective products and inventories, the
Company's business projections and market studies, the Company's pricing
studies, and confidential financial information; (ii) employment pursuant to the
terms and conditions of this Agreement; and (iii) compensation and benefits as
described above in Paragraphs 2-9. The Executive understands and agrees that (i)
- - (iii) above constitute fair and adequate consideration for the execution of
the noncompetition agreements contained in Paragraphs 19 and 20.
19. In consideration of the valuable consideration described above, the
Executive understands and agrees that for a period of twelve (12) months
following the date on which this Agreement shall terminate for any reason, the
Executive will not, directly or indirectly, solicit, recruit or hire, or assist
others in recruiting or hiring, any person who, within the preceding twelve
months was an employee of the Company.
20. In consideration of the valuable consideration described above, the
Executive understands and agrees that for a period of twelve (12) months
following the date on which this Agreement shall terminate for any reason, the
Executive will not, directly or indirectly (including without limitation, as an
owner, manager, employee, director or consultant) operate, work for, or
otherwise provide services (including, without limitation, advisory or
consulting services whether or not compensated) to any business which owns,
operates, licenses, or manages one or more restaurants (i) which receives
twenty-five percent (25%) or more of its gross revenues directly or indirectly
from the sale of food which is commonly considered "Italian" in character,
including, without limitation, any menu item(s) that feature pasta as an
integral element, which would include, without limitation, spaghetti, lasagna,
ravioli, parmigiana, cannelloni, manicotti and similar items, and pizza, and
(ii) which is located in the Continental United States or in those provinces of
Canada in which are located a Company owned or franchised restaurant at the time
of reference.
21. The Executive acknowledges and agrees that the noncompetition
agreements set forth above in Paragraphs 19 and 20 are ancillary to an otherwise
enforceable agreement and supported by independent valuable consideration as
required by Tex. Bus. & Com. Code Ann. ss. 15.50. The Executive further
acknowledges and agrees that the limitations as to time,
EMPLOYMENT AGREEMENT - PAGE 5
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<PAGE>
geographical area, and scope of activity to be restrained by Paragraphs 19 and
20 are reasonable and acceptable to the Executive, and do not impose any greater
restraint than is reasonably necessary to protect the goodwill and other
business interests of the Company.
22. The Executive acknowledges and agrees that if, at some later date,
a court of competent jurisdiction determines that the noncompetition agreements
set forth in Paragraphs 19 and 20 do not meet the criteria set forth in Tex.
Bus. & Com. Code Ann. ss. 15.50(2), the Executive covenants and agrees that
these paragraphs may be reformed by the court, pursuant to Tex. Bus. & Com. Code
Ann. ss. 15.51(c) or other applicable law, and enforced to the maximum extent
permitted under law.
REMEDIES
23. In the event that the Executive violates any of the provisions set
forth in Paragraphs 14-22 of this Agreement relating to NONDISCLOSURE and/or
NONCOMPETITION, the Executive understands and agrees that the Company will
suffer immediate and irreparable harm that cannot be accurately calculated
purely in monetary damages. Consequently, in the event of a violation of such
provisions, the Executive understands and agrees that the Company shall be
entitled to immediate injunctive relief, either by temporary or permanent
injunction, to prevent such a violation. The Executive understands and agrees
that this injunctive relief shall be in addition to any other legal or equitable
relief to which the Company would be entitled. The parties agree that each party
will pay its own legal fees incurred in connection with any action to enforce
this Agreement .
TERMINATION
24. The Executive may resign by providing sixty (60) days advance
written notice of the effective date of his resignation; PROVIDED, HOWEVER that
the Board, in its sole discretion, may accelerate the date of the resignation to
any date on or after receipt of the notice. In such event, the Company's sole
obligation to the Executive shall be to pay the Executive, in cash, an amount
equal his unreimbursed expenses and bonuses specifically declared in an amount
with respect to the Executive (but unpaid) prior to the termination. Without
limitation, it is the specific intention of the Executive and the Company that
regardless of the reason for the termination of this Agreement, the Executive
shall not be entitled to all or any portion of a bonus that is attributable to
the Executive's period of employment, but which has not been specifically
declared in an amount and time of payment with respect to the Executive prior to
the termination of this Agreement.
25. The Executive understands and agrees that the Company may terminate
his employment and this Agreement at any time, without notice and without
"Cause" (as defined in Paragraph 26 below), and further that he may, with 60
days' notice, terminate his employment and this Agreement at any time for "Good
Reason" (as defined below). In either such event the
EMPLOYMENT AGREEMENT - PAGE 6
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<PAGE>
Company's sole obligations to the Executive under this Agreement will be (i) to
continue the medical benefits coverage, which is then in effect for the
Executive, during the continuance of the severance payment period; and (ii) to
pay the Executive monthly, in cash, the monthly base pay of the Executive at the
rate in effect at the time of the termination, which monthly payments shall
continue for six (6) months; provided, however, that such monthly payments shall
continue for an additional six (6) months, unless the Executive has obtained
other employment during such period, in which case such monthly payments shall
be reduced by the amount of the monthly base pay received by the Executive under
such new employment. For all purposes hereof, "GOOD REASON" shall mean (i)
without his express written consent, the assignment to the Executive of any
duties materially inconsistent with his positions, duties, responsibilities and
status with the Company as President and Chief Executive Officer, or a change in
his titles or offices, or any removal of the Executive from or any failures to
re-elect the Executive to the Board, except in connection with the termination
of his employment for Cause or as a result of his Disability or death, or
termination by the Executive other than for Good Reason; (ii) a reduction of his
base compensation below Two Hundred Seventy-Five Thousand Dollars ($275,000) per
year; (iii) relocation of Executive's principal location of work to any location
that is in excess of fifty (50) miles from the location of the Executive's
principal location of work on the date of the relocation; (iv) failure by the
Company to require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company, by agreement in form and substance reasonably
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place; or (v) any
material breach of this Agreement by the Company.
26. The Executive understands and agrees that the Company may terminate
his employment and this Agreement at any time, without notice, for Cause. In
such event the Company's sole obligation to the Executive under this Agreement
will be to pay Executive, in cash, the amounts provided under Paragraph 24. For
all purposes hereof, a termination shall be for "CAUSE" if Executive has (i)
committed an intentional act of fraud, embezzlement or theft in connection with
his duties or in the course of his employment with the Company; (ii) violated
the provisions of any one of Paragraphs 14-22; (iii) committed an intentional
breach of fiduciary duty resulting in personal gain or personal enrichment at
the expense of the Company to which the Executive is not legally entitled; (iv)
been convicted of, or entered a plea of guilty to or nolo contendere to, any
felony; or (v) intentionally failed to perform material stated duties (but only
after receiving written notice thereof and being given a reasonable period, not
less than 30 days, to cure said intentional failure by taking such reasonable
corrective action as shall be reasonably within his power at the time of
reference).
27. The Executive understands and agrees that this Agreement will
terminate immediately, without notice, in the event of his death and may be
terminated at any time by the Company, without notice, if, during any ninety
(90) consecutive-day period, the Executive failed for a material period of time
to perform material duties of his position on a substantially full time basis by
reason of a disability as defined in the Company's long term disability plan at
the time of reference, and he cannot perform the essential functions of his
position, with reasonable
EMPLOYMENT AGREEMENT - PAGE 7
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<PAGE>
accommodation. The Executive understands and agrees that in the event of his
death or such disability, except as expressly provided to the contrary
hereunder, the Company's sole obligation under the Agreement will be to pay to
the Executive or his estate the amounts that it would have paid to Executive in
the event of a termination under Paragraph 24, plus, but only in the event of
his disability, the product of the monthly base pay of the Executive at the rate
in effect at the time of his termination, and twelve (12).
28. The Executive shall not be required to mitigate the amount of any
payment or benefit provided by this Agreement nor shall the amount of any
payment or benefit provided for by this Agreement be reduced by any compensation
earned by the Executive as the result of employment by another employer
following termination of this Agreement.
29. The Executive understands and agrees that in the event of
termination of this Agreement for any reason, the Executive will return to the
Company within seventy-two (72) hours of the time when notice of termination is
communicated by either party, or sooner if requested by the Company, any and all
equipment, literature, documents, data, information, memoranda, correspondence,
records, cards or notes acquired, compiled or coming into the Executive's
knowledge, possession or control in connection with his employment by the
Company.
SURVIVAL OF OBLIGATIONS
30. It is the intention and understanding of Executive and the Company
that the obligations of the Executive under Paragraphs 14-22 shall survive the
expiration of this Agreement.
WITHHOLDING
31. The Company may withhold from any amounts or benefits payable under
this Agreement all Federal, State, City, or other taxes as it shall reasonably
determine to be required pursuant to any law or governmental regulations or
rulings.
SEVERABILITY
32. The Executive understands and agrees that each covenant and/or
provision of this Agreement shall be enforceable independently of every other
covenant and/or provision. Furthermore, the Executive understands and agrees
that, in the event any covenant and/or provision of this Agreement is determined
unenforceable for any reason, the remaining covenants and/or provisions will
remain effective, binding and enforceable.
EMPLOYMENT AGREEMENT - PAGE 8
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<PAGE>
WAIVER
33. The Executive understands and agrees that the failure of the
Company to enforce any provision of this Agreement shall not constitute a waiver
of that particular provision, or of any other provisions of this Agreement.
SUCCESSORS AND ASSIGNS
34. The Executive understands and agrees that this Agreement may be
assigned by the Company to any successor-in-interest, without notice to or the
consent of the Executive, and shall inure to the benefit of, and be fully
enforceable by, any successor and/or assignee.
35. The Executive understands and agrees that his obligations, duties
an responsibilities under this Agreement are personal and shall not be
assignable. In the event of the Executive's death, this Agreement shall be
enforceable by the Executive's heirs, executors and/or legal representatives, to
the extent provided herein.
CHOICE OF LAW
36. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT
OF LAWS. THE COMPANY AND THE EXECUTIVE AGREE THAT THE STATE AND FEDERAL COURTS
SITUATED IN DALLAS COUNTY, TEXAS SHALL HAVE PERSONAL JURISDICTION OVER THE
COMPANY AND THE EXECUTIVE TO HEAR ALL DISPUTES ARISING UNDER THIS AGREEMENT.
THIS AGREEMENT IS TO BE AT LEAST PARTIALLY PERFORMED IN DALLAS COUNTY, TEXAS,
AND, AS SUCH, THE COMPANY AND THE EXECUTIVE AGREE THAT VENUE SHALL BE PROPER
WITH THE STATE OR FEDERAL COURTS IN DALLAS COUNTY, TEXAS TO HEAR SUCH DISPUTES.
IN THE EVENT EITHER THE COMPANY OR EXECUTIVE IS NOT ABLE TO EFFECT SERVICE OF
PROCESS UPON THE OTHER WITH RESPECT TO SUCH DISPUTES, THE COMPANY AND THE
EXECUTIVE EXPRESSLY AGREE THAT THE SECRETARY OF STATE FOR THE STATE OF TEXAS
SHALL BE AN AGENT TO RECEIVE SERVICE OF PROCESS WITH RESPECT TO SUCH DISPUTES.
The captions of this Agreement are not part of the provisions hereof and shall
have no force or effect. This Agreement may not be amended or modified otherwise
than by a written agreement executed by the parties hereto or their respective
successors and legal representatives.
37. All notices and other communications hereunder shall be in writing
and shall be given by hand-delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
EMPLOYMENT AGREEMENT - PAGE 9
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<PAGE>
If to the Executive, to him at:
His residential address as reflected on the records of the Company.
If to the Company, to it at:
Spaghetti Warehouse, Inc.
402 West I-30
Garland, Texas 75043
Attention: Chief Financial Officer
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications shall be effective
when actually received by the addressee. Without limitation, both parties
confirm their understanding and agreement that the law of Texas will govern the
validity, interpretation and effect of this Agreement.
ARBITRATION
38. The Executive and the Company acknowledge and agree that any claim
or controversy arising out of or relating to this Agreement or the breach of
this Executive Agreement, or any other dispute arising out of or relating to the
employment of the Executive by the Company, shall be settled by final and
binding arbitration in the City of Dallas, Texas in accordance with the
Commercial Arbitration Rules of the American Arbitration Association in effect
on the date the claim or controversy arises. The Executive and the Company
further acknowledge and agree that either party must request arbitration of any
claim or controversy within ninety (90) days of the date the claim or
controversy accrues or first arises by giving written notice of the party's
request for arbitration by certified U.S. mail or personal delivery addressed to
the Company's principal business address or to the Executive's last known
address reflected in the Company's personnel records. Notice shall be effective
upon delivery or mailing. Failure to give notice of any claim or controversy
within ninety (90) days shall constitute a waiver of the claim or controversy.
39. All claims or controversies subject to arbitration shall be
submitted to arbitration within six (6) months from the date the written notice
of a request for arbitration is effective. All claims or controversies shall be
resolved by a panel of three (3) arbitrators who are licensed to practice law in
the State of Texas and who are experienced in the arbitration of labor and
employment disputes. These arbitrators shall be selected in accordance with the
Commercial Arbitration Rules of the American Arbitration Association in effect
at the time the claim or controversy arises. Either party may request that the
arbitration proceeding be stenographically recorded by a Certified Shorthand
Reporter. The arbitrators shall issue a written decision with respect to all
claims or controversies within thirty (30) days from the date the claims or
controversies are submitted to arbitration. The parties shall be entitled to be
represented by legal
EMPLOYMENT AGREEMENT - PAGE 10
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<PAGE>
counsel at any arbitration proceeding. The Executive and the Company acknowledge
and agree that each party will bear fifty percent (50%) of the cost of the
arbitration proceeding. The parties shall be responsible for paying their own
attorneys' fees, if any.
40. The Company and the Executive acknowledge and agree that the
arbitration provisions in Paragraphs 38 and 39 may be specifically enforced by
either party, and submission to arbitration proceedings compelled, by any court
of competent jurisdiction. The Company and the Executive further acknowledge and
agree that the decision of the arbitrators may be specifically enforced by
either party in any court of competent jurisdiction.
41. Notwithstanding the arbitration provisions set forth at Paragraphs
38-40, the Executive and the Company acknowledge and agree that nothing in this
Agreement shall be construed to require the arbitration of any claim or
controversy arising under the NONDISCLOSURE, NONCOMPETITION and NON-INTERFERENCE
provisions set forth at Paragraphs 14-22 of this Agreement, or the termination
for Cause provisions set forth in Paragraph 26(i) or (iii). These provisions
shall be enforceable by any court of competent jurisdiction and shall not be
subject to ARBITRATION pursuant to Paragraphs 38-41. The Executive and the
Company further acknowledge and agree that nothing in this Agreement shall be
construed to require arbitration of any claim for workers' compensation benefits
(although any claims arising under Texas Labor Code ss. 450.001 shall be subject
to arbitration) or any claim for unemployment compensation.
MODIFICATION
42. Both parties understand and agree that this Agreement constitutes
the complete and entire agreement between the parties, and that no previous
agreement, either oral or written, shall have any effect on its terms or
provisions; and that all previous agreements, either oral or written, are
expressly superseded and revoked by this Agreement.
43. Both parties understand and agree that the covenants and/or
provisions of this Agreement may not be modified by any subsequent agreement
unless the modifying agreement: (i) is in writing; (ii) contains an express
provision referencing this Agreement; (iii) is signed and executed by an
authorized representative of the Company; and, (iv) is signed by the Executive.
LEGAL CONSULTATION
EMPLOYMENT AGREEMENT - PAGE 11
CORPDAL:58668.5 08099-00002
<PAGE>
44. The Executive and the Company acknowledge and agree that both
parties have been accorded a reasonable opportunity to review this Agreement
with legal counsel prior to executing the Agreement.
COUNTERPARTS
45. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute a
single Agreement.
IN WITNESS WHEREOF, the Company has duly executed this Agreement and
the Executive has duly signed this Agreement, both as of the date first above
written.
/s/Phillip Ratner
--------------------
Phillip Ratner
SPAGHETTI WAREHOUSE, INC.
By: /s/ C. Cleave Buchanan, Jr.
----------------------------
Print Name: C. Cleave Buchanan, Jr.
------------------------
Title: Director - Member Compensation Committee
-----------------------------------------
EMPLOYMENT AGREEMENT - PAGE 12
CORPDAL:58668.5 08099-00002
<PAGE>
ATTACHMENT I.
The following example illustrates the intention of the parties with
respect to the vesting of the Options.
Example:
The option price of the shares on the Effective Date is $5.375.
That means 74,418 shares will be subject to an ISO (Proof: $400,000 / 5.375
= 74,418.6).
That means the remaining 25,583 shares (Proof: 100,000 - 74,418 = 25,582)
will be subject to a nonqualified option.
The Agreement provides that 25% of the option shares will vest on each
vesting date. That means, on each such date, exactly 18,604.5 shares will vest
under the ISO and exactly 6,395.5 shares will vest as nonqualified options.
The Agreement provides that a specified total number of shares will vest on
each vesting date, and that the number of shares subject to the nonqualified
option shall be the total that vest on each vesting date, less the ISO shares
vesting on such date.
EMPLOYMENT AGREEMENT - PAGE 13
CORPDAL:58668.5 08099-00002
<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 WAREHOUSE, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-30-1997
<CASH> 1,472,160
<SECURITIES> 0
<RECEIVABLES> 553,747
<ALLOWANCES> 0
<INVENTORY> 625,386
<CURRENT-ASSETS> 3,219,209
<PP&E> 72,620,509
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0
0
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</TABLE>
