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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 29, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
402 WEST I-30
Garland, Texas 75043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 226-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
______________________________
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by nonaffiliates of the
registrant, based on the sale trade price of the Common Stock as reported by the
New York Stock Exchange, Inc. on September 12, 1997 was $32,541,705. For
purposes of this computation, all officers, directors and 10% beneficial owners
of the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors or 10% beneficial owners are,
in fact, affiliates of the registrant. As of September 12, 1997, 5,655,494
shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement in connection with the Annual Meeting
of Shareholders to be held October 28, 1997, to be filed with the Commission
pursuant to Regulation 14A, is incorporated by reference into Part III of this
report.
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PART I
ITEM 1. BUSINESS.
General Development and Scope of Business
Spaghetti Warehouse, Inc. (the "Company"), which was incorporated in Texas in
June 1972, operates as a holding company and conducts substantially all of its
operations through its subsidiaries. Unless the context otherwise requires, all
references herein to the Company include the Company and its subsidiaries. The
Company's principal executive offices are located at 402 West I-30, Garland,
Texas 75043. See Item 2.
The Company operates 28 restaurants and franchises five restaurants in 14
states under two concepts using the names "The Spaghetti Warehouse" and
"Spaghetti Warehouse Italian Grill." The Spaghetti Warehouse and Spaghetti
Warehouse Italian Grill concepts are full-service restaurants serving high-
quality, value-priced, classic Italian food in a casual atmosphere. The Company
also operates a joint-venture restaurant, and franchises six restaurants in
Canada under the name "The Old Spaghetti Factory." Each of the Company's
restaurants offer a memorable dining experience by serving freshly prepared
authentic Italian recipes in a casual and relaxing atmosphere.
The Company owns Old Spaghetti Factory Canada Ltd., the franchisor of Old
Spaghetti Factory restaurants in Canada, and the trademark rights to the Old
Spaghetti Factory concept in Canada. These Canadian restaurants have a similar
restaurant concept and menu to the Company's Spaghetti Warehouse restaurant
concept and menu in the United States. Old Spaghetti Factory Canada Ltd. is not
related to OSF International, which operates restaurants under the name "The Old
Spaghetti Factory" in the United States, Japan and Germany.
Many of the Company's restaurants are located in distinctive, older, restored
buildings in urban locations. Dining room seating capacity in downtown
Spaghetti Warehouse restaurants range from approximately 300 to 600 persons,
with an average dining room seating capacity of approximately 450. The typical
downtown Company restaurant has approximately 15,200 square feet devoted to
restaurant use, including kitchen and storage. The Company also operates eight
restaurants in suburban markets. The typical suburban Company restaurant is
approximately 9,600 square feet in size with seating capacity for around 300
persons.
Full alcoholic beverage service is available at the Company's restaurants.
Because of the family orientation of Spaghetti Warehouse restaurants, alcoholic
beverages are served primarily at the dining table with meal service. A bar
area is located adjacent to the dining area, primarily to accommodate customers
waiting for dining tables. The Company adheres to a strict program requiring
moderation in the service and consumption of alcoholic beverages. During the
fiscal years ended June 29, 1997, June 30, 1996 and July 2, 1995, sales of
alcoholic beverages accounted for approximately 9%, 9% and 10% of the Company's
revenues, respectively.
The following table sets forth, for the periods indicated, selected restaurant
information:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------
JULY 4, JULY 3, JULY 2, JUNE 30, JUNE 29,
1993 1994 1995 1996 1997
-------------------------------------------------------------------
(Sales data shown in thousands)
<S> <C> <C> <C> <C> <C>
Sales per restaurant open for full year:
Average..................................... $2,460 $2,246 $2,109 $2,173 $2,217
High........................................ $4,301 $4,300 $4,494 $4,546 $4,620
Low......................................... $1,493 $1,234 $1,048 $1,514 $1,418
Check average per customer, including
alcoholic beverages (all stores):
Lunch....................................... $ 6.18 $ 6.19 $ 6.40 $ 6.73 $ 6.98
Dinner...................................... $ 8.45 $ 8.41 $ 8.32 $ 8.64 $ 8.90
Restaurants open for full year................. 24 31 36 29 28
Restaurants open at year-end................... 31 36 37 30 28
</TABLE>
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The Company closed its Cappellini's location in Addison, Texas on December
31, 1996. Cappellini's, which opened in January 1996, was a full-service,
upscale concept featuring authentic Italian dishes served in large portions
intended for sharing. The Company's non-cash, pre-tax charge of $2.0 million in
fiscal 1997 related primarily to the write-down of Cappellini's property and
equipment to its estimated fair market value. Cappellini's posted pre-tax
operating losses of $171,000 for the first six months of fiscal 1997 while in
operation.
RESTAURANT CONCEPTS
THE SPAGHETTI WAREHOUSE
Spaghetti Warehouse restaurants are full-service, family-oriented restaurants
serving high quality, value-priced, classic Italian food in a casual atmosphere.
The Company currently operates 19 Spaghetti Warehouse restaurants. Each of the
Company's Spaghetti Warehouse restaurants offers a memorable dining experience
amid a decor of authentic, unusual and eclectic antiques and memorabilia. The
Company's first Spaghetti Warehouse restaurant opened in Dallas, Texas in 1972.
The Spaghetti Warehouse menu includes spaghetti entrees with a choice of 11
sauces and five pastas, meat and vegetable lasagna, ravioli, cannelloni,
manicotti, baked ziti, fettucini alfredo, hand-rolled meatballs, Italian
sausage, veal, chicken and eggplant parmigiana, sandwiches and combination
platters. The menu also includes soups, appetizers, house and Caesar salads,
desserts, soft drinks, alcoholic beverages, including many locally available
imported beers, and fresh sourdough bread. The Company endeavors to serve a
uniformly high-quality product by preparing most menu items fresh daily. In
order to provide maximum customer value perception, emphasis is placed on
serving substantial portions of quality food at modest prices. Entree
selections, which include soup or salad and sourdough bread, currently range in
price from $3.89 to $7.99 during lunch and $4.19 to $8.99 during dinner.
The decor of a typical Spaghetti Warehouse restaurant features authentic,
unusual and eclectic artifacts and memorabilia, including stained glass windows,
advertising signs, taxidermy, chandeliers, antique furniture and a dine-on
trolley car. The Company's restaurants feature quick, efficient and friendly
table service designed to minimize customer waiting time and facilitate table
turnover, while at the same time making the customer feel at ease in a relaxed
atmosphere.
SPAGHETTI WAREHOUSE ITALIAN GRILL
The Spaghetti Warehouse Italian Grill is an updated version of the
Company's existing Spaghetti Warehouse concept. Thus far, the Company has
converted nine existing Spaghetti Warehouse restaurants to the Italian Grill
format. The Italian Grill features updated decor, an expanded menu and improved
customer value. The Italian Grill's expanded menu features grilled meats and
fish, pizza and a larger selection of appetizers and salads. Traditional
Spaghetti Warehouse menu items have been improved to enhance taste profiles and
presentations. Additionally, various portion sizes have been increased to
improve the price/value relationship.
Entree prices at the Italian Grill currently range from $3.99 to $12.99 at
lunch and $4.49 to $12.99 at dinner. Both lunch and dinner entrees include a
"Bottomless Warehouse Salad" and fresh baked bread. In addition to traditional
Spaghetti Warehouse menu items, the Italian Grill offers grilled chicken,
halibut, pork chops and New York strip steak, four pizza selections, chicken and
veal marsala, shrimp alfredo, shrimp marinara and chicken cacciatore. An
expanded selection of wine and beers has contributed to a modest increase in
alcoholic beverage sales at Italian Grill units.
The first Italian Grill conversion was completed at the Company's Marietta,
Georgia location on November 1, 1995. Due to favorable sales results and
customer response, the Company converted an additional eight units to the
Italian Grill format subsequent to the Marietta conversion. The Company plans
to convert six to eight existing Spaghetti Warehouse restaurants to the Italian
Grill format in fiscal 1998. Italian Grill development plans beyond fiscal 1998
will be made based on operating results achieved in the current and newly
converted Italian Grill units.
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FUTURE EXPANSION
The Company intends to open two to three new Company-operated Italian Grill
restaurants during fiscal 1998. The Company has scheduled the opening of its
sixth unit in the Dallas-Fort Worth market. The new restaurant, located in a
suburb of Dallas, is scheduled to open in the second quarter of fiscal 1998,
marking the Company's first new store opening in three years. The Company
anticipates additional new store openings during fiscal 1998 in markets where it
currently operates restaurants, thereby increasing certain supervisory and
marketing efficiencies.
The Company also anticipates new store openings subsequent to fiscal 1998.
The Company plans to open Italian Grill units predominantly in the Midwest,
Southwest, Central and Eastern United States. The Company also intends to
expand Old Spaghetti Factory restaurants within Canada by means of joint-venture
owned or franchised Old Spaghetti Factory restaurants. There can be no
assurance, however, that the Company will be able to achieve these objectives.
FRANCHISING
The Company has developed a franchise program under which it has attracted two
franchisees in the United States. Currently operating franchise units include
those located in Wichita, Kansas; Newport News (Norfolk), Virginia; Columbia,
South Carolina; Richmond, Virginia and Glen Allen (Richmond), Virginia. During
fiscal 1997, the Company executed a contract to sell its Richmond, Virginia
restaurant to its Virginia franchisee. The Wichita franchise operates under the
original Spaghetti Warehouse format, while all other franchise locations operate
under the Italian Grill format.
Franchisees pay an initial franchise fee of $35,000 per unit, and pay ongoing
royalty fees and marketing fees of 3.5% and 0.5% of restaurant sales,
respectively. The Company generally does not plan to grant franchises in
markets containing Company-operated restaurants or in markets that it has
reserved for future Company-operated restaurants. This strategy is designed to
enable the Company to expand the number of Spaghetti Warehouse and Italian Grill
restaurants without significant capital outlays and to expand into new markets
that the Company does not intend to develop with Company-operated restaurants in
the near future. The Company has limited experience in franchising, and there
is no assurance that any additional franchise agreements will be consummated.
RESTAURANT OPERATIONS
All Spaghetti Warehouse and Italian Grill restaurants are operated under
uniform standards and specifications set forth in the Company's operating manual
and internal procedures memoranda. The standards govern the restaurants'
operation of the kitchen, dining room and bar area; repair and maintenance of
premises and equipment; and the administration, training and conduct of
restaurant personnel. The Company also emphasizes uniform standards for product
quality, facility maintenance, portion control, sanitation and customer service.
The Company requires franchisees to maintain these same uniform standards. The
Company maintains financial, accounting and management controls for its
restaurants through the use of centralized accounting and information systems.
RESTAURANT MANAGEMENT
The Company emphasizes both quality and efficiency in its operations.
Operational standards are set through the development of annual business plans
and are maintained by restaurant management personnel and regional operations
directors. Each operations director is generally responsible for seven to 11
restaurants. Each restaurant staff consists of a general manager, a senior
kitchen manager, three to five assistant managers and 65 to 150 hourly
employees. Restaurant managers are responsible for day-to-day operations,
including customer relations, food preparation and quality control, cost
control, restaurant maintenance and human resource functions. In order to
control labor costs, the managers use customer count forecasts and employee
work-schedule systems designed to match employee work hours to anticipated
customer traffic. Each restaurant also has an inventory control system designed
to aid the manager in food cost and waste control, as well as in the evaluation
of purchasing needs. A restaurant manager receives a fixed salary plus a bonus
based upon the sales
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and profitability of the restaurant under his or her supervision. Regional
operations directors and general managers who exhibit superior performance are
also eligible for stock options.
PURCHASING
The Company uses its own standardized recipes for menu items in all of its
restaurants to ensure uniform quality and freshness. The Company's ability to
maintain consistent product quality throughout its chain of restaurants depends
upon acquiring specified food products and related items from reliable sources,
and involves negotiating purchases directly from manufacturers to obtain reduced
prices. The Company has a contract with a national wholesale distributor to
deliver the majority of the nonperishable and frozen food products used in its
Spaghetti Warehouse and Italian Grill restaurants. The use of a national
distributor has helped to reduce average restaurant inventory levels. Food
products and related restaurant supplies not purchased through the national
wholesale distributor are purchased from independent wholesale food distributors
and manufacturers, while other items, including fresh produce, dairy and some
meat products, are purchased locally by each restaurant. The Company does not
maintain a central product warehouse or commissary. Management believes that
all essential food and beverage products are available from several qualified
suppliers in all cities in which the Company's restaurants are located.
ADVERTISING AND MARKETING
The Company's primary markets are the business trade for lunch and the family
trade for dinner. In addition to word-of-mouth advertising, the Company relies
primarily on radio, print and billboard advertising and special promotions to
increase customer traffic and sales. The Company's marketing department
develops and implements Company-wide and local promotions emphasizing value,
menu variety, food quality and fun. Emphasis is also placed on local community
involvement. During the fiscal year ended June 29, 1997, the Company's
expenditures for advertising (including local promotions) were approximately
4.1% of revenues.
During fiscal 1998, the Company intends to produce and air television
commercials in selected markets. The commercials will be aired in markets in
which it can purchase television airtime efficiently.
GOVERNMENT REGULATION
The Company is subject to various Federal, state and local laws affecting its
business. The Company's restaurants are subject to health, sanitation and
safety standards, as well as state and local licensing and regulation with
respect to the sale and service of alcoholic beverages. The sale and service of
alcoholic beverages is material to the business of the Company, and as such, the
failure or delay in receiving or retaining a liquor license in a particular
location could adversely affect the Company's operations in that location and
could impair the Company's ability to obtain licenses elsewhere. Typically,
licenses must be renewed annually and may be revoked or suspended for cause at
any time. The Company has not encountered any material problems relating to
alcoholic beverage licenses and permits to date. In certain states, the Company
is subject to "dram-shop" statutes, which generally give a person injured by an
intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to such person. The Company carries
liquor liability insurance coverage as part of its existing comprehensive
general liability insurance.
Management is not aware of any Federal or state environmental regulations that
have had a material effect on the Company's operations to date. However, more
stringent and varied requirements of local governmental bodies with respect to
waste disposal, zoning, construction and land use have increased both the cost
of and the time required for construction of new restaurants and the cost of
operating existing Company restaurants.
The Company is also subject to the Fair Labor Standards Act, which governs
such matters as minimum wages, overtime and other working conditions. Because a
number of the Company's food service personnel are paid at rates related to the
Federal minimum wage, the recent increase in the Federal minimum, which became
effective September 1, 1997, will cause a corresponding increase in the
Company's labor costs. The Company intends to pass on these increased labor
costs through selective menu price increases; however, due to the competitive
environment of the restaurant industry, there can be no assurance that the
Company will be able to
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accomplish this objective. Furthermore, the Company also operates in states with
minimum wage rates in excess of the Federal minimum requirement, thus causing
the Company to incur higher labor costs in those markets.
The Company's franchising program is subject to a substantial number of laws,
rules and regulations governing the sale and operation of franchises. In recent
years, many states have enacted laws that require detailed disclosure in the
offer and sale of franchises and the registration of the franchisor with state
administrative agencies. The Company is also subject to Federal Trade Commission
regulations relating to disclosure requirements in the sale of franchises.
Certain states have enacted, and others may enact, legislation governing the
termination or nonrenewal of a franchise and other aspects of the franchise
relationship that are intended to protect franchisees. The laws applicable to
franchise operations and relationships is rapidly developing and the Company is
unable to predict the effect on its franchising program of additional
requirements or restrictions that may be enacted or promulgated or of court
decisions that may be adverse to franchisors.
SERVICE MARKS AND PATENTS
The Company has registered "SPAGHETTI WAREHOUSE & Design," "THE SPAGHETTI
WAREHOUSE & Design," "PASTA POWER & Design," "THE SPAGHETTI WAREHOUSE,"
"OCTOBERFEAST," "THE SPAGHETTI WAREHOUSE GREAT ITALIAN FOOD. ALL-AMERICAN FUN. &
Design," "THE SPAGHETTI WAREHOUSE RESTAURANT & Design" and "THE SPAGHETTI
WAREHOUSE ITALIAN GRILL & Design" service marks with the U.S. Patent and
Trademark office. The Company also has 10 registered state service marks. The
range of expiration dates of the initial terms of the Company's federally
registered service marks is from 2000 to 2010. The Company intends to renew
these service mark registrations.
The range of initial and renewal terms of the Company's Canadian service mark
registrations in connection with the Old Spaghetti Factory restaurant concept in
Canada is from 2003 to 2006. The Company intends to renew these service mark
registrations.
The Company currently has 40 registered service marks and five applications
pending for service marks in 18 foreign countries. The Company does not
currently anticipate that it will be using its service marks in foreign
countries other than Canada during the next 12 months. The Company generally
intends to renew the terms of those registered service marks that it deems of
value at the time of renewal.
The Company regards its service marks and trademarks as having significant
value and being an important factor in the marketing of its restaurants. The
Company's policy is to pursue registrations of its service marks wherever
practicable and to oppose vigorously any infringement of its marks. The laws of
some foreign countries, however, do not protect the Company's proprietary rights
to the same extent as do the laws of the United States.
EMPLOYEES
The Company presently employs approximately 750 persons on a full-time basis,
42 of whom are corporate management and staff personnel and 708 of whom are
restaurant personnel. The Company also employs approximately 1,500 part-time
restaurant employees. Except for corporate and restaurant management personnel,
employees are generally paid on an hourly basis. Company restaurants employ an
average of 20 full-time and 60 part-time hourly employees. None of the
Company's employees are covered by collective bargaining agreements, and the
Company has never experienced a major work stoppage, strike or labor dispute.
The Company believes that its working conditions and compensation arrangements
compare favorably with its competition and considers relations with its
employees to be good. Restaurant managers are paid a base salary, plus
incentive compensation, that is contingent upon achieving certain objectives.
The Company believes that managers who produce superior economic results and
deliver quality customer experiences earn more at the Company than the average
compensation in the industry for similar positions and experience levels.
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COMPETITION
The restaurant business is highly competitive, and competition in the Italian
restaurant segment has increased in recent years. The Company believes that the
primary competitive concerns in its business are the variety, quality and price
of the food offered, the quality of the service provided by the restaurant's
employees and the location and atmosphere of the restaurant. The business of
the Company is also affected by general economic conditions, changes in consumer
tastes, population, traffic patterns and spending habits of consumers. The
Company competes with various food service operations in each of its markets,
including locally owned restaurants, as well as national and regional restaurant
chains, some of which operate more restaurants and have greater financial
resources than the Company. The Company believes that its competitive position
depends upon its ability to offer and maintain its quality food, unusual decor,
a moderately priced menu and a comfortable full-service, family-oriented dining
atmosphere. There is also active competition for quality management personnel
and desirable commercial real estate sites suitable for restaurants. Management
believes that financial resources and size are important factors in obtaining
suitable sites, and that such factors, as well as compensation, are important in
attracting quality management personnel.
ITEM 2. PROPERTIES.
The Company owns 19 and leases space for nine of its Company-operated
restaurants. One of the currently operating Company-owned units is subject to a
ground lease. The Company also owns its corporate office headquarters and
warehouse facilities, comprised of two buildings containing a combined total of
28,000 square feet of space. These buildings are situated on two separate
properties totaling approximately two acres of land in Garland, Texas, a suburb
of Dallas. None of the Company's properties are encumbered by mortgage
indebtedness. The Company believes that its corporate office and warehouse
facilities are adequate to meet its requirements through at least fiscal 1998
and that suitable additional space will be available, as needed, to accommodate
further physical expansion of corporate operations.
The Company's restaurant leases, including renewal options, expire at various
times from 2007 to 2027, and generally provide for minimum annual rentals and,
in five cases, for payment of additional rent based on a percentage of
restaurant sales. Five of the Company's leases provide for a preferential right
of first refusal upon sale of the property. The Company is required to pay real
estate taxes, insurance, maintenance expenses and utilities under substantially
all of its leases. The Company depends on short-term leases for parking at 10
of its 28 restaurants. There can be no assurance that adequate parking will
continue to be available, or that the lack of such parking will not have an
adverse impact on the operations of the respective restaurants.
ITEM 3. 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. In addition to the arbitration claim, Elizabeth Bright and Thomas
C. Bright III, the principal shareholders of BK, filed a lawsuit against the
Company seeking damages in excess of $2.5 million, along with trebling of such
damages under the Texas Deceptive Trade Practices Act. Following an extensive
hearing before the arbitration panel in Dallas, the panel unanimously ruled that
the Company had no liability in this matter. On June 10, 1997, the lawsuit was
dismissed by the trial judge on the grounds that matters in controversy had been
decided in the previous AAA ruling. The plaintiffs have since appealed the
dismissal. The Company will continue to vigorously defend itself in this
matter. As of June 29, 1997, damages, if any, arising from such litigation are
not estimable. A ruling from the appellate court is expected in the fourth
quarter of fiscal 1998.
The Company is also involved in other routine litigation from time to time.
Such other litigation in which the Company is currently involved is not material
to the Company's consolidated financial condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the shareholders of the Company during
the fourth quarter of the fiscal year ended June 29, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange under the
symbol "SWH." The following table sets forth the range of quarterly high and low
closing sale prices of the Company's Common Stock since July 3, 1995.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
Fiscal year ending June 30, 1996:
First Quarter 5 3/4 4 3/4
Second Quarter 5 1/8 4 5/8
Third Quarter 5 3/4 4 5/8
Fourth Quarter 5 3/4 5 1/4
Fiscal year ending June 29, 1997:
First Quarter 5 5/8 4 3/4
Second Quarter 6 5
Third Quarter 5 3/8 5
Fourth Quarter 6 4 3/4
Fiscal year ending June 28, 1998:
First Quarter (through September 12) 7 5 1/4
</TABLE>
As of September 12, 1997, the Company estimates that there were
approximately 2,200 beneficial owners of the Company's Common Stock, represented
by approximately 575 holders of record.
The Company has never paid cash dividends. Management presently intends to
retain any earnings for the operation and expansion of the Company's business
and does not anticipate paying cash dividends in the foreseeable future. Any
future determination as to the payment of dividends will depend upon results of
operations, capital requirements, the financial condition of the Company and
such other factors as the Board of Directors of the Company may consider.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data regarding the
Company's results of operations and financial position for, and as of the end
of, each of the fiscal years in the five-year period ended June 29, 1997, which
are derived from the Consolidated Financial Statements of the Company and its
subsidiaries, which have been audited. The Consolidated Financial Statements as
of July 2, 1995, June 30, 1996, and June 29, 1997, and for each of the years in
the three-year period ended June 29, 1997, and the independent auditors' reports
thereon, are included elsewhere in this Report. The information below should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------
July 4, July 3, July 2, June 30, June 29,
1993 1994 1995 1996 1997
-------------- ------- -------- -------- ----------
(In thousands, except per share amounts and Restaurant Data)
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenues................................................. $66,443 $78,384 $78,956 $ 70,957 $64,904
------- ------- ------- -------- -------
Costs and expenses:
Cost of sales............................................ 16,517 19,749 20,036 17,965 16,516
Operating expenses....................................... 35,453 44,221 44,768 41,122 36,222
General and administrative............................... 3,677 5,447 5,619 5,767 5,279
Depreciation and amortization............................ 4,815 5,843 5,251 4,871 3,954
Restructuring charges (reversals)........................ -- -- -- 13,875 (740)
Impairment of long-lived assets.......................... -- -- -- -- 2,009
Unusual charge........................................... -- -- 600 -- --
Loss (gain) on asset scheduled for divestiture........... 143 50 -- (47) --
Loss on closed restaurant................................ 359 -- -- -- --
------- ------- ------- -------- -------
Total costs and expenses.............................. 60,964 75,310 76,274 83,553 63,240
------- ------- ------- -------- -------
Income (loss) from operations............................... 5,479 3,074 2,682 (12,596) 1,664
Net interest income (expense)............................... 20 (904) (1,198) (1,045) (691)
------- ------- ------- -------- -------
Income (loss) before income tax expense (benefit)........... 5,499 2,170 1,484 (13,641) 973
Income tax expense (benefit)................................ 1,493 461 234 (5,308) 314
------- ------- ------- -------- -------
Net income (loss)........................................... $ 4,006 $ 1,709 $ 1,250 $ (8,333) $ 659
======= ======= ======= ======== =======
Net income (loss) per common and
common equivalent share (1)............................. $ .62 $ .28 $ .22 $ (1.49) $ .11
======= ======= ======= ======== =======
Weighted average common and common
equivalent shares outstanding (1)....................... 6,445 6,069 5,697 5,611 5,769
======= ======= ======= ======== =======
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 1,600 $ 1,918 $ 1,873 $ 8,065 $ 1,917
Working capital deficit (2).............................. (95) (3,154) (2,602) (3,405) (2,235)
Total assets............................................. 70,693 78,648 75,511 71,368 58,630
Long-term debt........................................... 9,620 18,584 15,548 19,762 7,883
Stockholders' equity..................................... 55,979 52,482 53,436 45,250 45,934
RESTAURANT DATA:
Company-owned restaurants open for full year............. 24 31 36 29 28
Company-owned restaurants open at end of year............ 31 36 37 30 28
</TABLE>
- --------------------
(1) See Note 1 (m) of Notes to Consolidated Financial Statements.
(2) See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources."
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table presents, for the fiscal periods indicated, certain
selected financial data as a percentage of total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
FISCAL YEAR ENDED
----------------------------------------
July 2, June 30, June 29,
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Revenues....................................................... 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of sales............................................... 25.4 25.3 25.4
Operating expenses.......................................... 56.7 58.0 55.8
General and administrative.................................. 7.1 8.1 8.1
Depreciation and amortization............................... 6.6 6.9 6.1
Restructuring charges (reversals)........................... -- 19.6 (1.1)
Impairment of long-lived assets............................. -- -- 3.1
Unusual charge.............................................. 0.8 -- --
Gain on asset scheduled for divestiture..................... -- (0.1) --
----- ----- -----
Total costs and expenses................................. 96.6 117.8 97.4
----- ----- -----
Income (loss) from operations.................................. 3.4 (17.8) 2.6
Net interest expense........................................... (1.5) (1.4) (1.1)
----- ----- -----
Income (loss) before income tax expense (benefit).............. 1.9 (19.2) 1.5
Income tax expense (benefit)................................... 0.3 (7.5) 0.5
----- ----- -----
Net income (loss).............................................. 1.6% (11.7%) 1.0%
===== ===== =====
</TABLE>
1997 COMPARED TO 1996
REVENUES
Fiscal 1997 revenues declined $6.1 million, or 8.5%, in comparison to
fiscal 1996. This decrease was attributable to the closure of seven under-
performing restaurants 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 in December 1996. These declines were partially
offset by a 0.7% increase in sales experienced by the 28 stores that were open
for the full year in both fiscal 1997 and 1996 ("same-stores") and a $0.2
million increase in U.S. franchise income.
The increase in same-store sales was the result of an 3.0% increase in
check averages partially offset by a 2.3% decline in customer counts. The
increase in check averages was primarily the result of new menu items introduced
over the past year and increased check averages associated with the Company's
repositioned Italian Grill units. Additionally, modest menu price adjustments
made during the last 18 months also contributed to the increase in check
averages. Fiscal 1997 sales in the Company's eight Italian Grill units, during
current year periods while operating under the Italian Grill format, increased
6.4% over comparable periods in fiscal 1996, while sales in the Company's
traditional Spaghetti Warehouse concept declined 0.6% in fiscal 1997. Due to
these favorable sales results, the Company plans to convert six to eight units
to the Italian Grill format in fiscal 1998.
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<PAGE>
COSTS AND EXPENSES
Cost of Sales
Cost of sales as a percentage of total revenues increased from 25.3% in fiscal
1996 to 25.4% in fiscal 1997. This increase was due to higher food costs
associated with the Italian Grill and higher commodity prices incurred on
certain meat, dairy and pasta products. Due to the higher food costs associated
with the Italian Grill, management anticipates that cost of sales as a
percentage of total revenues will increase modestly in fiscal 1998 as more units
are converted to the Italian Grill format.
Operating Expenses
Operating expenses as a percentage of total revenues decreased from 58.0% in
fiscal 1996 to 55.8% in fiscal 1997. Much of this decrease is due to the
closure of the seven low-volume units in February 1996. These units generally
incurred higher operating expenses as a percentage of revenues than typical
Company restaurants. Improved controls over restaurant labor and reduced
marketing expenditures also contributed to the current year decrease. These
decreases were partially offset by an increase in group medical costs in
comparison to prior year. Management anticipates that operating expenses as a
percentage of total revenues will be comparable with current year levels during
fiscal 1998.
General and Administrative Expenses (G&A)
G&A expenses as a percentage of total revenues were 8.1% in both fiscal 1997
and 1996. The fixed nature of certain G&A costs, relative to the decline in
total revenues, put upward pressure on G&A as a percentage of total revenues;
however, reductions in recruitment expenses and legal fees, coupled with the
fiscal 1996 write-off of costs incurred in the preparation of the Addison
property for its conversion to Cappellini's, caused G&A as a percentage of total
revenues to remain flat in fiscal 1997.
Depreciation and Amortization (D&A)
D&A as a percentage of total revenues decreased from 6.9% in fiscal 1996 to
6.1% in fiscal 1997. This decrease was primarily due to elimination of
depreciation expense on the seven low-volume units closed in February 1996.
Restructuring Charges (Reversals)
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
$740,000 in pre-tax restructuring charges in fiscal 1997. Due to the recent
disposal of all remaining identified corporate assets, the Company completed its
original restructuring plan, thus resulting in a $0 balance of accrued
restructuring charges at June 29, 1997. See Note 8 of Notes to Consolidated
Financial Statements for further information.
Impairment of Long-Lived Assets
The Company adopted Financial Accounting Standards Board Statement No. 121
during fiscal 1997, resulting in pre-tax, noncash impairment charges of
$2,009,526. These charges relate to the write-down of the Company's
Cappellini's restaurant in Addison, Texas to its estimated fair market value.
See Note 1 (i) of Notes to Consolidated Financial Statements for further
information.
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<PAGE>
NET INTEREST EXPENSE
Net interest expense decreased from $1.0 million in fiscal 1996 to $0.7
million in fiscal 1997. This decrease was primarily attributable to decreases
in the average debt outstanding under the Company's credit facilities. Subject
to provisions of the Company's credit facilities, management intends to incur
additional long-term debt to the extent that future cash flow from operations is
insufficient to cover planned restaurant openings, Italian Grill conversions,
capital expenditures and possible further repurchases of the Company's stock.
INCOME TAXES
The Company's effective income tax rate decreased from a 38.9% benefit in
fiscal 1996 to a 32.3% provision in fiscal 1997. The decline is primarily
attributable to the fact that a higher proportion of the Company's consolidated
pre-tax earnings was generated by the Company's Canadian operations in fiscal
1997 as compared to fiscal 1996. These Canadian earnings are taxed at a lower
rate thereby reducing the Company's overall tax rate. The reduction in fiscal
1997 U.S. pre-tax earnings as a percentage of consolidated pre-tax earnings was
attributable to the $2.0 million in asset impairment charges recorded in the
current year. See Note 5 of Notes to Consolidated Financial Statements for
further information.
1996 COMPARED TO 1995
REVENUES
Fiscal 1996 revenues declined $8.0 million, or 10.1%, in comparison to
fiscal 1995. This decrease was attributable to a reduction in sales resulting
from the closure of seven under-performing restaurants in February 1996, a 4.4%
decline in fiscal 1996 same-store sales and reduced sales resulting from the
temporary closure of the Marietta and Addison restaurants for their conversion
to other concepts.
The decline in fiscal 1996 same-store sales was the result of an 8.5%
decrease in customer counts offset by a 4.4% increase in check averages. Same-
store customer count comparisons were negatively affected by the continued
growth of competitors in the casual dining and Italian restaurant segments and
by periods of unusually severe winter weather in the third quarter. The
increase in check averages was primarily the result of new menu items introduced
over the last 18 months, higher check averages at Italian Grill units and modest
menu price adjustments made during the last 18 months.
COSTS AND EXPENSES
Cost of Sales
Cost of sales as a percentage of total revenues decreased slightly from
25.4% in fiscal 1995 to 25.3% in fiscal 1996. This decrease was the result of
improved inventory controls and modest price adjustments made during fiscal 1995
and fiscal 1996.
Operating Expenses
Operating expenses as a percentage of total revenues increased from 56.7%
in fiscal 1995 to 58.0% in fiscal 1996. This increase is primarily attributed to
a significant increase in marketing expenditures over fiscal 1995. Additionally,
increases in management labor, kitchen labor and property taxes as a percentage
of revenues contributed to the overall increase. These increases were partially
offset by decreases in dining room labor, group medical costs and general
liability insurance costs as a percentage of revenues. The fixed nature of
certain costs, relative to the decline in same-store sales, also contributed to
the increase in fiscal 1996 operating expenses as a percentage of total
revenues.
General and Administrative Expenses (G&A)
G&A expenses as a percentage of total revenues increased from 7.1% in
fiscal 1995 to 8.1% in fiscal 1996. The fixed nature of certain G&A expenses,
relative to the fiscal 1996 decrease in total revenues,
-11-
<PAGE>
contributed to the increase in G&A as a percentage of total revenues.
Additionally, increased marketing research costs, legal fees, travel costs and a
noncash write-off of certain costs incurred in the preparation of the Addison
property for its conversion to Cappellini's contributed to the fiscal 1996 year
increase in G&A as a percentage of revenues.
Depreciation and Amortization (D&A)
D&A as a percentage of total revenues increased from 6.6% in fiscal 1995 to
6.9% in fiscal 1996. This increase was due to the fixed nature of depreciation
relative to the decline in fiscal 1996 same-store sales and to an increase in
depreciation incurred on new point-of-sale (POS) equipment. This increase was
partially offset by a decrease in pre-opening amortization on new stores
resulting from a reduction in the Company's new unit expansion rate.
Restructuring Charges (Reversals)
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 and identified one additional
restaurant to be sold as an operating unit. The seven closed stores 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. Additionally, the Company has executed
a contract to sell its Richmond, Virginia restaurant to its Virginia franchisee
during the second quarter of fiscal 1997. The Company recorded a $13.9 million
pre-tax charge in the third quarter of fiscal 1996 to cover costs associated
with the implementation of this plan, including the write-down of property and
equipment to its net realizable value, severance packages and various other
store closing and corporate obligations.
Gain on Asset Scheduled for Divestiture
In fiscal 1992, the Company purchased its existing Austin, Texas location
and ceased development of an alternate Austin location. The Company sold the
alternate Austin location in fiscal 1996 for an amount exceeding its recorded
book value, thus recognizing a $47,178 gain at the time of its sale.
NET INTEREST EXPENSE
Net interest expense decreased from $1.2 million in fiscal 1995 to $1.0
million in fiscal 1996. This decrease was primarily attributed to decreases in
the average debt outstanding under the Company's credit facilities.
Additionally, interest earned on cash proceeds from the disposal of closed
restaurants helped reduce fiscal 1996 net interest expense.
INCOME TAXES
The Company's effective income tax rate increased from a 15.8% provision in
fiscal 1995 to a 38.9% benefit in fiscal 1996. The fiscal 1995 rate was below
statutory rates due primarily to the utilization of the Federal FICA tax tip
credit. The increase from fiscal 1995 was primarily the result of the tax
benefit relating to fiscal 1996 restructuring charges that were deferred for
income tax purposes for future years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit decreased from $3.4 million on June
30, 1996 to $2.2 million on June 29, 1997. This decrease is primarily
attributable to the elimination of accrued restructuring charges in fiscal 1997,
as compared to fiscal 1996. The Company is currently operating with a working
capital deficit, which is common in the restaurant industry since restaurant
companies do not normally require significant investment in either accounts
receivable or inventory.
Net cash provided by operating activities increased from $2.3 million in
fiscal 1996 to $7.4 million in fiscal 1997. The increase was attributed to the
increase in current year earnings, the receipt of prior year income tax refunds
and changes in certain components of working capital.
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<PAGE>
Long-term debt outstanding on June 29, 1997 consisted of a $7.9 million
term loan borrowed under the Company's existing bank credit facility. The
Company has an additional $5.0 million available under its bank revolving credit
facility as of June 29, 1997, subject to meeting a certain funded debt to cash
flow requirement prior to borrowing any additional funds.
In fiscal 1994, the Company's Board of Directors authorized a program for
the repurchase of up to 1,000,000 shares of the Company's common stock for
investment purposes. As of June 29, 1997, the Company had repurchased 811,041
shares of common stock under this program, including 30,089 shares in fiscal
1997. Further purchases with respect to this program are dependent upon various
business and financial considerations.
The Company's capital expenditures decreased from $4.0 million in fiscal
1996 to $2.6 million in fiscal 1997. Fiscal 1997 expenditures consist primarily
of the conversion of five Company restaurants to the Italian Grill format and
normal purchases of new and replacement restaurant equipment and decor.
During fiscal 1997, the Company converted five of its traditional Spaghetti
Warehouse restaurants to the Italian Grill format. One additional unit has also
been converted to the Italian Grill format during the first quarter of fiscal
1998. The Italian Grill concept is an updated version of the traditional
Spaghetti Warehouse concept and features new decor, an expanded menu and even
greater customer value. Based on favorable sales and operating results achieved
in previously converted units, the Company plans to convert six to eight
existing units to the Italian Grill format during fiscal 1998.
In addition to Italian Grill conversions, the Company plans to open two to
three new units and to continue to make necessary replacements and upgrades to
its existing restaurants and information systems during fiscal 1998. Total
planned capital expenditures relating to fiscal 1998 projects are $4.4 million.
Cash flow from operations, current cash balances and amounts available under the
Company's bank revolving credit facility are expected to be sufficient to fund
planned capital expenditures, payment of required term loan maturities and
possible further repurchases of Company stock in fiscal 1998.
EFFECT OF INFLATION
Management does not believe inflation has had a significant effect on the
Company's operations during the past several years. The Company has
historically been able to pass on increased costs through menu price increases;
however, due to the competitive environment of the restaurant industry, there
can be no assurance that the Company will be able to pass on such cost increases
in the future.
SEASONALITY
The Company's business is subject to seasonality, with revenues generally
being highest during the months of July and August and lowest during the months
of September through January. This seasonality is due to the dining-out
patterns of the Company's customers.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This statement establishes new standards for
computing and presenting earnings per share ("EPS"). SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company does not expect adoption of this statement to
have a significant impact on previously reported EPS.
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<PAGE>
FORWARD-LOOKING INFORMATION
Statements contained in this Form 10-K that are not historical facts,
including, but not limited to, statements found in this Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 that involve a number of risks
and uncertainties. The actual results of the future events described in such
forward-looking statements in this Form 10-K could differ materially from those
stated in such forward-looking statements. The following factors, among others,
could cause actual results to differ materially: adverse retail industry
conditions, industry competition and other competitive factors, government
regulation and possible future litigation, seasonality of business, as well as
the risks and uncertainties discussed in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data are set forth herein
commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has had no disagreements with its independent accounting firm to
report under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of Report.
1. Financial Statements:
--------------------
The Financial Statements are listed in the index to Consolidated Financial
Statements on page F-1 of this Report.
2. Exhibits:
--------
3.1 - Second Amended and Restated Articles of Incorporation of
the Company, as amended (incorporated by reference to
Exhibit 3.1 of the Company's Form 10-Q for the quarter
ended April 2, 1995, filed by the Company with the
Securities and Exchange Commission).
3.2 - Second Amended and Restated Bylaws of the Company, as
amended (incorporated by reference to Exhibit 3.2 of the
Company's Form 10-Q for the quarter ended January 1,
1995, filed by the Company with the Securities and
Exchange Commission).
4.1 - Rights Agreement, dated February 2, 1995 between the
Company and Chemical Bank (incorporated by reference to
Exhibit 1 of the Company's Registration Statement on Form
8-A, filed by the Company with the Securities and
Exchange Commission on February 27, 1995).
+ 10.1 - First Amended and Restated 1990 Spaghetti Warehouse, Inc.
Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.3 of the Company's Registration Statement on
Form S-8, registration no. 33-69024, filed by the Company
with the Securities and Exchange Commission).
+ 10.2 - 1991 Nonemployee Director Stock Option Plan (incorporated
by reference to Exhibit 10.3 of the Company's
Registration Statement on Form S-2, registration no. 33-
40257, filed by the Company with the Securities and
Exchange Commission).
+ 10.4 - Spaghetti Warehouse, Inc. 1992 Bonus Stock Option Plan
(incorporated by reference to Exhibit 4.8 of the
Company's Registration Statement on Form S-8,
registration no. 33-69024, filed by the Company with the
Securities and Exchange Commission).
+ 10.6 - Letter Agreement, dated as of August 23, 1993, relating
to the Company's employment arrangement with H.G.
Carrington, Jr. (incorporated by reference to Exhibit
10.6 of the Company's Annual Report on Form 10-K for the
Fiscal Year Ended July 4, 1993).
10.7 - Lease Agreement, dated June 13, 1977, between the Company
and Oscar L. Thomas, Jr., relating to certain premises in
Columbus, Ohio (incorporated by reference to Exhibit 10.5
of the Company's Registration Statement on Form S-1,
registration no. 2-99832, filed by the Company with the
Securities and Exchange Commission).
10.8 - Lease Agreement, dated September 1, 1980 between the
Company and Gagel Construction, Inc. (incorporated by
reference to Exhibit 10.6 of the Company's Registration
Statement on Form S-1, registration no. 2-99832, filed by
the Company with the Securities and Exchange Commission).
10.9 - Lease Agreement, dated November 18, 1981 between the
Company and Samuel Geraldo, Trustee, as amended, relating
to certain premises in Toledo, Ohio (incorporated by
reference to Exhibit 10.6 of the Company's Registration
Statement on Form S-1, registration no. 33-30676, filed
by the Company with the Securities and Exchange
Commission).
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<PAGE>
10.10 - Lease Agreement, dated November 30, 1981, between the
Company and Ybor Square, Ltd., relating to certain
premises in Tampa, Florida (incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement on
Form S-1, registration no. 2-99832, filed by the Company
with the Securities and Exchange Commission).
10.12 - Financing and Operating Agreement, dated September 2,
1982, among the Company, the City of Tampa, Florida, The
Spaghetti Consultants of Florida, Inc., Ybor Square, Ltd.
and Continental National Bank of Fort Worth, Texas
(incorporated by reference to Exhibit 10.11 of the
Company's Registration Statement on Form S-1,
registration no. 2-99832, filed by the Company with the
Securities and Exchange Commission).
10.13 - Lease Agreement, dated April 1, 1987, between the Company
and Memphis Center City Revenue Finance Corporation,
relating to certain premises in Memphis, Tennessee
(incorporated by reference to Exhibit 10.16 of the
Company's Annual Report on Form 10-K for the Fiscal Year
Ended July 4, 1987, filed by the Company with the
Securities and Exchange Commission).
10.14 - Lease, dated May 28, 1988, between the Company and Ward
and Shirley Olander, relating to certain premises in
Pittsburgh, Pennsylvania (incorporated by reference to
Exhibit 10.18 of the Company's Registration Statement on
Form S-1, registration no. 33-30676, filed by the Company
with the Securities and Exchange Commission).
10.15 - Lease Agreement, dated as of February 15, 1989, between
the Company and North Clinton Associates, relating to
certain premises in Syracuse, New York (incorporated by
reference to Exhibit 10.21 of the Company's Registration
Statement on Form S-1, registration no. 33-30676, filed
by the Company with the Securities and Exchange
Commission).
10.16 - Deed of Trust, Security Agreement and Assignment of
Rents, dated July 24, 1989, between the Company, as
grantor, and Deposit Guaranty Bank, as beneficiary, and
related promissory note (incorporated by reference to
Exhibit 10.22 of the Company's Registration Statement on
Form S-1, registration no. 33-30676, filed by the Company
with the Securities and Exchange Commission).
10.17 - Lease Agreement, dated May 29, 1990, between Spring-Ten
Associates and the Company, as amended on July 18, 1990,
October 26, 1990, and December 13, 1990, relating to
certain premises in Philadelphia, Pennsylvania
(incorporated by reference to Exhibit 10.24 of the
Company's Registration Statement on Form S-2,
registration no. 33-40257, filed by the Company with the
Securities and Exchange Commission).
10.18 - Lease Agreement, dated as of November 27, 1990, between
the Company and The Foundry Associates, L.P., relating to
certain premises in Providence, Rhode Island
(incorporated by reference to Exhibit 10.25 of the
Company's Registration Statement on Form S-2,
registration no. 33-40257, filed by the Company with the
Securities and Exchange Commission).
10.19 - Contract for Sale of Real Estate, dated September 12,
1991, among the Company, Elie Guggenheim and Catherine
Guggenheim (incorporated by reference to Exhibit 10.18 of
the Company's Form 10-K for the fiscal year ended July 4,
1992, filed with the Securities and Exchange Commission).
10.20 - Real Estate Term Note in original principal amount of
$180,000, dated November 21, 1991, executed by the
Company as maker, payable to the order of Elie Guggenheim
and Catherine Guggenheim (incorporated by reference to
Exhibit 10.19 of the Company's Form 10-K for the fiscal
year ended July 4, 1992, filed with the Securities and
Exchange Commission).
10.21 - Lease Agreement, dated as of July 6, 1991, between the
Company and Nautica Peninsula Land Limited Partnership,
relating to certain premises in Cleveland, Ohio
(incorporated by reference to Exhibit 10.21 of the
Company's Annual Report on Form 10-K for the fiscal year
ended July 4, 1993, filed with the Securities and
Exchange Commission).
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<PAGE>
10.22 - Lease Agreement, dated as of September 2, 1992, between
the Company and Canal Place, Ltd., relating to certain
premises in Akron, Ohio (incorporated by reference to
Exhibit 10.22 of the Company's Annual Report on Form 10-K
for the fiscal year ended July 4, 1993, filed with the
Securities and Exchange Commission).
10.23 - Form of Spaghetti Warehouse, Inc. Franchise Offering
Circular (incorporated by reference to Exhibit 10.23 of
the Company's Annual Report on Form 10-K for the fiscal
year ended July 4, 1993, filed with the Securities and
Exchange Commission).
10.29 - Lease Agreement, dated as of August 11, 1993, between the
Company and the State of Texas, relating to certain
premises in Harris County, Texas, as amended by First
Amendment to Lease Agreement effective October 25, 1993
and Second Amendment to Lease Agreement, undated
(incorporated by reference to Exhibit 10.29 of the
Company's Annual Report on Form 10-K for the fiscal year
ended July 3, 1994, filed with the Securities and
Exchange Commission).
10.30 - Second Lease Addendum, dated as of July 29, 1994, by and
between Patricia D. Thomas, Oscar L. Thomas III and
Spaghetti Warehouse of Ohio, Inc., relating to certain
premises in Columbus, Ohio (incorporated by reference to
Exhibit 10.30 of the Company's Annual Report on Form 10-K
for the fiscal year ended July 3, 1994, filed with the
Securities and Exchange Commission).
+10.31 - Spaghetti Warehouse, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.31 of the
Company's Annual Report on Form 10-K for the fiscal year
ended July 3, 1994, filed with the Securities and
Exchange Commission).
10.33 - Shareholders Agreement, undated, among Competitive Foods
Australia Limited, Tarlina PTY Limited, MCS (Australia)
PTY Limited, SWH Antiques, Inc. and F.P. Corporation PTY
Limited, with respect to Fasta Pasta (incorporated by
reference to Exhibit 10.33 of the Company's Annual Report
on Form 10-K for the fiscal year ended July 2, 1995,
filed with the Securities and Exchange Commission).
10.36 - Amended and Restated Loan Agreement, dated August 12,
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. 3
thereto, dated March 29, 1996, Amendment No. 2 thereto,
dated February 9, 1995 and Amendment No. 1 thereto, dated
December 21, 1993.
+10.37 - Employment Agreement, dated as of January 30, 1996, by
and between the Company and Robert R. Hawk.
+10.38 - Amended Employment Agreement, dated as of September 1,
1996 by and between the Company and Robert R. Hawk
(incorporated by reference to Exhibit 10.38 of the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 29, 1996, filed with the
Securities and Exchange Commission).
+10.39 - Employment Agreement, dated as of October 1, 1996, by and
between the Company and John T. Ellis (incorporated by
reference to Exhibit 10.39 of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
September 29, 1996, filed with the Securities and
Exchange Commission).
+10.40 - Employment Agreement, dated as of October 28, 1996, by
and between the Company and Phillip Ratner (incorporated
by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March
30, 1997, filed with the Securities and Exchange
Commission).
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<PAGE>
21.1 - Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 of the Company's Annual Report on Form 10-K
for the fiscal year ended July 3, 1994, filed with the
Securities and Exchange Commission).
*23.1 - Consent of Arthur Andersen LLP
*27.1 - Financial Data Schedule
_______________
+ Compensation plan, benefit plan or employment contract or arrangement.
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the last quarter of the
period covered by this Report.
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SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants............................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of July 30, 1996 and June 29, 1997..................................... F-3
Consolidated Statements of Operations for each of the years in the three-year period ended
June 29, 1997........................................................................................ F-4
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended
June 29, 1997........................................................................................ F-5
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
June 29, 1997........................................................................................ F-6
Notes to Consolidated Financial Statements............................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors of
Spaghetti Warehouse, Inc.:
We have audited the accompanying consolidated balance sheets of Spaghetti
Warehouse, Inc. (a Texas Corporation) and subsidiaries as of June 30, 1996 and
June 29, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the fiscal years in the three-
year period ended June 29, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Spaghetti
Warehouse, Inc. and subsidiaries as of June 30, 1996 and June 29, 1997, and the
consolidated results of operations and cash flows for each of the fiscal years
in the three-year period ended June 29, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 14, 1997
F-2
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND JUNE 29, 1997
<TABLE>
<CAPTION>
ASSETS 1996 1997
------------ ------------- -------------
Current assets:
<S> <C> <C>
Cash and cash equivalents............ $ 8,065,364 $ 1,916,983
Accounts receivable.................. 659,069 637,803
Inventories.......................... 686,995 616,253
Prepaid expenses..................... 341,711 274,111
Deferred income taxes (note 5)....... -- 469,145
----------- -----------
Total current assets............ 9,753,139 3,914,295
----------- -----------
Property and equipment, net (note 2)...... 49,893,172 45,732,390
Assets scheduled for divestiture
(notes 2 and 8).......................... 1,525,000 1,534,714
Trademark and franchise rights, net
(note 3)................................. 3,113,472 2,942,852
Pre-opening costs, net.................... 171,862 --
Deferred income taxes (note 5)............ 6,134,892 3,961,274
Other assets.............................. 776,652 544,342
----------- -----------
$71,368,189 $58,629,867
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------
Current liabilities:
Current portion of long-term debt
(note 4)............................ $ 6,878,358 $ 1,478,127
Accounts payable..................... 1,932,648 2,082,150
Accrued payroll and bonuses.......... 1,450,812 1,673,336
Other accrued liabilities (note 1)... 1,487,488 915,226
Accrued restructuring charges
(note 8) charges.................... 1,310,540 --
Deferred income taxes (note 5)....... 98,368 --
----------- -----------
Total current liabilities....... 13,158,214 6,148,839
----------- -----------
Long-term debt, less current portion
(note 4)............................. 12,883,642 6,405,226
Deferred compensation..................... 75,875 141,901
Commitments and contingencies (note 7).... -- --
Stockholders' equity (note 6):
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 in 1996 and
6,527,835 shares in 1997............ 64,754 65,278
Additional paid-in capital........... 36,012,761 36,246,849
Cumulative translation adjustment.... (550,642) (611,499)
Retained earnings.................... 16,094,924 16,753,859
----------- -----------
51,621,797 52,454,487
Less cost of 842,252 shares in
1996 and 872,341 shares in 1997 of
common stock held in treasury... (6,371,339) (6,520,586)
----------- -----------
45,250,458 45,933,901
----------- -----------
$71,368,189 $58,629,867
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 2, 1995, JUNE 30, 1996 AND JUNE 29, 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Restaurant sales..................... $77,805,987 $ 69,662,500 $63,372,287
Franchise............................ 618,604 705,876 932,355
Other................................ 531,874 588,243 598,931
----------- ------------ -----------
Total revenues........ 78,956,465 70,956,619 64,903,573
----------- ------------ -----------
Costs and expenses:
Cost of sales........................ 20,036,174 17,964,938 16,515,660
Operating expenses................... 44,768,067 41,121,545 36,221,808
General and administrative........... 5,618,702 5,766,812 5,278,589
Depreciation and amortization........ 5,251,319 4,871,376 3,954,334
Restructuring charges (reversals)
(note 8)............................ -- 13,875,248 (740,000)
Impairment of long-lived assets
(note 1)............................ -- -- 2,009,526
Unusual charge (note 9).............. 600,000 -- --
Gain on asset scheduled for
divestiture (note 2)................ -- (47,178) --
----------- ------------ -----------
Total costs and expenses... 76,274,262 83,552,741 63,239,917
----------- ------------ -----------
Income (loss) from
operations................ 2,682,203 (12,596,122) 1,663,656
----------- ------------ -----------
Interest income (expense):
Interest income...................... 85,301 192,080 189,357
Interest expense..................... (1,283,718) (1,236,740) (879,925)
----------- ------------ -----------
(1,198,417) (1,044,660) (690,568)
----------- ------------ -----------
Income (loss) before
income tax expense
(benefit)................. 1,483,786 (13,640,782) 973,088
Income tax expense (benefit) (note 5)..... 233,759 (5,307,324) 314,153
----------- ------------ -----------
Net income (loss)..... $ 1,250,027 $ (8,333,458) $ 658,935
=========== ============ ===========
Net income (loss) per common and
common equivalent share.............. $ .22 $ (1.49) $ .11
=========== ============ ===========
Weighted average common and common
equivalent shares outstanding........ 5,696,653 5,611,181 5,769,017
=========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
-------------------- ADDITIONAL CUMULATIVE ----------------- TOTAL
NUMBER OF PAID-IN TRANSLATION RETAINED NUMBER STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS OF SHARES AMOUNT EQUITY
---------- --------- ------------- ------------ -------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at July 3, 1994.... 6,374,454 $63,745 $35,586,418 $(585,296) $23,178,355 (734,157) $(5,760,743) $52,482,479
Employee ESP Plan purchases
and stock option
exercises.............. 35,212 352 143,513 -- -- -- -- 143,865
Stock options issued as
compensation (note 6).. -- -- 17,800 -- -- -- -- 17,800
Purchase of treasury
shares, at cost............ -- -- -- -- -- (78,300) (467,820) (467,820)
Foreign currency
translation adjustment..... -- -- -- 9,422 -- -- -- 9,422
Net income.................. -- -- -- -- 1,250,027 -- -- 1,250,027
--------- ------- ----------- -------- ----------- -------- ---------- -----------
Balances at July 2, 1995.... 6,409,666 64,097 35,747,731 (575,874) 24,428,382 (812,457) (6,228,563) 53,435,773
Employee ESP Plan purchases
and stock option
exercises............. 65,709 657 244,030 -- -- -- -- 244,687
Stock options issued as
compensation (note 6).. -- -- 21,000 -- -- -- -- 21,000
Purchase of treasury
shares, at cost............ -- -- -- -- -- (29,795) (142,776) (142,776)
Foreign currency
translation adjustment..... -- -- -- 25,232 -- -- -- 25,232
Net loss.................... -- -- -- -- (8,333,458) -- -- (8,333,458)
--------- ------- ----------- -------- ----------- -------- ----------- ----------
Balances at June 30, 1996... 6,475,375 64,754 36,012,761 (550,642) 16,094,924 (842,252) (6,371,339) 45,250,458
Employee ESP Plan purchases
and stock option
exercises............. 52,460 524 216,088 -- -- -- -- 216,612
Stock options issued as
compensation (note 6).. -- -- 18,000 -- -- -- -- 18,000
Purchase of treasury
shares, at cost............ -- -- -- -- -- (30,089) (149,247) (149,247)
Foreign currency
translation adjustment..... 37 -- -- (60,857) -- -- -- (60,857)
Net income.................. -- -- -- -- 658,935 -- -- 658,935
--------- ------- ----------- --------- ----------- -------- ----------- -----------
Balances at June 29, 1997... 6,527,835 $65,278 $36,246,849 $(611,499) $16,753,859 (872,341) $(6,520,586) $45,933,901
========= ======= =========== ========= =========== ======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 2, 1995, JUNE 30, 1996 AND JUNE 29, 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $ 1,250,027 $(8,333,458) $ 658,935
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization
expense................................ 5,251,319 4,871,376 3,954,334
(Gain) loss on disposal of
property and equipment................. 32,396 144,972 36,150
Restructuring charges (reversals)....... -- 13,875,248 (740,000)
Unusual charge.......................... 600,000 -- --
Impairment of long-lived assets......... -- -- 2,009,526
Deferred income taxes................... (358,810) (5,336,983) 1,599,585
Other, net.............................. 78,425 151,718 89,719
Changes in assets and liabilities:
Accounts receivable.................. (81,435) (55,619) 20,213
Inventories.......................... 354,688 2,400 70,742
Prepaid expenses..................... 64,605 36,215 67,600
Other assets......................... (103,301) (766,550) (55,183)
Accounts payable..................... (667,529) (807,087) 157,845
Accrued payroll and bonuses.......... (1,107,044) (437,702) 222,524
Other accrued liabilities............ 813,679 (319,400) (572,262)
Accrued restructuring charges........ -- (759,901) (138,512)
----------- ----------- ------------
Net cash provided by operating
activities............................. 6,127,020 2,265,229 7,381,216
----------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment........ (3,864,744) (4,045,220) (2,552,683)
Proceeds from sales of property
and equipment............................ 988,287 3,654,513 854,734
Collection of notes receivable............ 75,511 6,092 --
----------- ----------- ------------
Net cash used in investing
activities............................... (2,800,946) (384,615) (1,697,949)
----------- ----------- ------------
Cash flows from financing activities:
Net borrowings from (payments on)
long-term debt.......................... (3,036,000) 4,214,000 (11,878,647)
Purchase of treasury shares............... (467,820) (142,776) (149,247)
Proceeds from employee stock plans........ 143,865 244,687 216,612
----------- ----------- ------------
Net cash provided by (used in)
financing activities...................... (3,359,955) 4,315,911 (11,811,282)
----------- ----------- ------------
Effects of exchange rates on cash and
cash equivalents.......................... (10,879) (4,080) (20,366)
----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents.......................... (44,760) 6,192,445 (6,148,381)
Cash and cash equivalents at beginning
of year................................... 1,917,679 1,872,919 8,065,364
----------- ----------- ------------
Cash and cash equivalents at end of year..... $ 1,872,919 $ 8,065,364 $ 1,916,983
=========== =========== ============
Supplemental information:
Interest paid (net of amounts
capitalized)............................. $ 1,020,187 $ 1,111,677 $ 1,145,638
=========== =========== ============
Income taxes paid (net of refunds)........... $ 541,608 $ 15,238 $ (1,291,952)
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Spaghetti
Warehouse, Inc. and its wholly-owned subsidiaries (collectively, the Company).
All significant intercompany balances and transactions have been eliminated in
consolidation.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from these estimates.
(b) Fiscal Year
The Company's fiscal year ends on the Sunday nearest July 1.
(c) Foreign Currency Translation
The accounts of the Company's operations in Canada are translated into United
States dollars in accordance with Statement of Financial Accounting Standards
No. 52. Assets and liabilities are translated at the rate of exchange on the
balance sheet date. Income and expense items are translated at average monthly
rates of exchange. Adjustments resulting from the translation are reported as a
separate component of stockholders' equity.
(d) Reclassifications
Certain prior years' balances have been reclassified to conform with the
current year presentation. These reclassifications had no effect on previously
reported net income (loss) or stockholders' equity.
(e) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. The Company held cash equivalents
of $822,795 and $696,899 at June 30, 1996 and June 29, 1997, respectively.
(f) Accounts Receivable
Accounts receivable primarily consist of credit card receivables and
franchise royalty fees.
(g) Inventories
Inventories, which primarily consist of food and beverages, are stated at the
lower of cost (first-in, first-out method) or market.
(h) Pre-opening Costs
The costs of hiring and training personnel, supplies and certain general and
administrative costs relating to new restaurants are capitalized and amortized
over the restaurant's first 12 months of operations. Amortization of
F-7
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
pre-opening costs was approximately $510,000, $180,000 and $170,000 for fiscal
years 1995, 1996 and 1997, respectively.
(i) Property and Equipment
Property and equipment are recorded at cost, including interest capitalized
during the construction period. Total interest of $18,340, $0 and $0 was
capitalized in fiscal years 1995, 1996 and 1997, respectively.
Buildings, equipment, furniture and fixtures are depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from 3 to 40 years. Amortization of leasehold improvements is
provided by the straight-line method over the lesser of the term of the lease,
including renewal options, or the estimated useful lives of the assets, which
range from 18 to 25 years. Depreciation and amortization expense of property
and equipment was approximately $4,610,000, $4,500,000 and $3,780,000, for
fiscal years 1995, 1996 and 1997, respectively.
In March 1995, the Financial Accounting Standard Board issued Statement No.
121 (the Statement) on accounting for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to assets to be held and
used. The Statement also establishes accounting standards for long-lived assets
and certain identifiable intangibles to be disposed of. The Company adopted the
Statement in the first quarter of fiscal 1997.
Adoption of the Statement 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. The Company groups and
evaluates its assets for impairment at the individual restaurant level. The
Company considers each restaurant's historical operating losses as 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 its 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.
The Company recorded pre-tax, noncash charge of $1,759,526 during the first
quarter of fiscal 1997 as a result of adopting the Statement. This charge
related to the write-down of the Company's Cappellini's restaurant in Addison,
Texas to its estimated fair market value at that time. Due to unfavorable
operating results, the Company subsequently made the decision to cease
Cappellini's operations, and closed the restaurant on December 31, 1996. The
Company recorded an additional $250,000 pre-tax charge in the fourth quarter of
fiscal 1997 to write-down the former Cappellini's property to its estimated fair
market value based on current real estate market conditions.
(j) Trademark and Franchise Rights
The costs of the Canadian operation's trademark (approximately $2,200,000)
and franchise rights (approximately $1,700,000) are being amortized using the
straight-line method over 40 years and 20 years, respectively (see Note 3).
Amortization of trademark and franchise rights was approximately $130,000 per
year in fiscal years 1995, 1996 and 1997.
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the asset balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows. The Company believes that no
impairment or adjustment of estimated useful lives is warranted as of June 29,
1997.
F-8
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(l) Other Accrued Liabilities
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1997
----------- ---------
<S> <C> <C>
Property taxes.............. $ 577,806 $458,304
Insurance reserves.......... 316,619 197,582
Interest.................... 411,172 145,459
Other....................... 181,891 113,881
---------- --------
$1,487,488 $915,226
========== ========
</TABLE>
(m) Net Income (Loss) per Common Share
Net income (loss) per common share has been computed by dividing net income
by the weighted average common and common equivalent shares outstanding, if
material. Common equivalent shares, which relate primarily to stock options,
are included in the weighted average using the treasury stock method. Fully
diluted net income (loss) per share for fiscal 1995, 1996 and 1997 is not
presented as the dilutive effect is not material.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Land................................... $ 9,190,860 $ 8,571,206
Buildings.............................. 28,236,923 27,654,242
Equipment, furniture and fixtures...... 24,269,638 24,556,542
Leasehold improvements................. 10,884,219 11,120,348
Construction in progress............... 2,903 --
------------ ------------
72,584,543 71,902,338
Less accumulated depreciation and
amortization.......................... (22,691,371) (26,169,948)
------------ ------------
$ 49,893,172 $ 45,732,390
============ ============
</TABLE>
In fiscal 1992, the Company purchased the existing Austin, Texas location and
ceased development of an alternate Austin location. The Company sold the
alternate Austin location in fiscal 1996 for an amount exceeding its recorded
book value, thus recognizing a $47,178 gain at the time of sale.
(3) TRADEMARKS AND FRANCHISE RIGHTS
On September 1, 1992, the Company acquired the common stock of Old Spaghetti
Factory Canada, Ltd. and the assets of certain of its affiliates, including the
trademark to the Old Spaghetti Factory concept in Canada and the franchise
contracts and related royalty streams for five Old Spaghetti Factory restaurants
in Canada. The acquisition was accounted for as a purchase. The cash purchase
price of $3,900,000 was allocated primarily to the aforementioned trademark and
franchise contract rights.
F-9
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
(4) LONG-TERM DEBT
Long-term debt consists of the
following:
1996 1997
----------- ----------
Term note payable to banks, bearing
interest at 6.8% at June 29, 1997,
unsecured, interest payable quarterly
and $492,709 in principal payable
quarterly through July 1, 2001, at
which date the remaining principal
balance is due............................ $15,000,000 $7,883,353
Revolving credit notes payable to
banks, bearing interest at variable
rates, unsecured, interest payable
quarterly and principal due on
July 1, 1998.............................. 4,750,000 --
Note payable, bearing interest at prime
plus 1.0%, with a floor rate of 9.5%,
secured by parking lot for San Antonio
restaurant with interest and principal
payable monthly until November 1, 1996.... 12,000 --
----------- ----------
19,762,000 7,883,353
Less current portion......................... 6,878,358 1,478,127
----------- ----------
Long-term debt, excluding
current portion..................... $12,883,642 $6,405,226
=========== ==========
</TABLE>
The Company has an unsecured revolving credit and term loan agreement with
two banks, enabling the Company to borrow up to $5,000,000 in revolving credit
loans. The Company also has $7,883,353 in term loans borrowed under this credit
agreement as of June 29, 1997. Revolving credit loans bear interest at the
Company's option of (a) the prime rate, (b) the certificate of deposit rate plus
the Federal Deposit Insurance Corporation assessment rate plus 2.0% to 3.0% or
(c) the LIBOR rate plus 2.0% to 3.0%. The term loan bears interest at rates
ranging between 6.8% and 8.5%, based on the Company's performance. The Company
incurs a commitment fee of 3/8 of 1% on the unused portion of the revolving
credit facility, payable on a quarterly basis. The terms of the credit agreement
require the Company to maintain certain minimum financial ratios. Additionally,
in the event that the Company has a material default, as defined in the credit
agreement, spanning two consecutive quarters, the lenders may request that the
Company grant to them a lien on a sufficient number of properties in order to
secure their interest in the loans. As of June 29, 1997, the Company was in
compliance with all requirements under the credit agreement.
The aggregate maturities of long-term debt at June 29, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998............................. $1,478,127
1999............................. 2,463,545
2000............................. 1,970,836
2001............................. 1,970,845
----------
Total............................. $7,883,353
==========
</TABLE>
F-10
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(5) INCOME TAXES
The provision (benefit) for income taxes is summarized as follows for fiscal
years 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal........... $ 599,803 $ 26,234 $(1,345,112)
State and local... 117,687 (32,366) 53,160
Deferred............ (483,731) (5,301,192) 1,606,105
--------- ----------- -----------
$ 233,759 $(5,307,324) $ 314,153
========= =========== ===========
</TABLE>
The actual income tax expense differs from the expected income tax expense
computed by applying the U.S. federal corporate tax rate to income before income
tax expense as follows for fiscal years 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ------------ ----------
<S> <C> <C> <C>
Computed "expected" tax expense....... $ 504,487 $(4,637,866) $330,850
Targeted jobs tax credit.............. (326,493) -- --
State and local taxes, net of
federal benefit.................... 77,673 (545,631) 35,086
General business tax credits.......... (57,027) -- --
Other................................. 35,119 (123,827) (51,783)
--------- ----------- --------
$ 233,759 $(5,307,324) $314,153
========= =========== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of June 30,
1996 and June 29, 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
Deferred tax assets:
<S> <C> <C>
General business credit carryforwards. $ 3,292,342 $ 3,585,218
Alternative minimum tax credit
carryforwards........................ 202,630 912,335
Federal and state net operating loss
carryforwards........................ 2,470,000 1,627,209
Restructuring related reserves........ 1,837,302 404,091
Other................................. 875,168 609,994
----------- -----------
Deferred tax assets................... 8,677,442 7,138,847
----------- -----------
Deferred tax liabilities:
Property and equipment................ (2,504,677) (2,668,221)
Pre-opening costs..................... (65,307) --
Other................................. (70,934) (40,207)
----------- -----------
Deferred tax liabilities.............. (2,640,918) (2,708,428)
----------- -----------
Net deferred tax asset................ $ 6,036,524 $ 4,430,419
=========== ===========
</TABLE>
As of June 29, 1997, the Company's general business credit carryforwards for
income tax purposes will begin to expire in 2006. These carryforwards are
comprised of targeted jobs tax credits, rehabilitation credits and FICA tax tip
credits that were generated in all prior years, beginning in fiscal 1991. Based
upon historical and forecasted
F-11
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
levels of earnings and considering the reversal of temporary differences
resulting in future tax liabilities, the Company believes it will more likely
than not be able to realize the deferred tax assets recorded at June 29, 1997.
The Company has a Federal tax net operating loss of approximately $3,900,000
as of June 29, 1997, which will begin to expire in 2011. It is the Company's
intent to carry this loss forward to offset future years' tax expenses.
(6) COMMON STOCK AND OPTIONS
(a) STOCK COMPENSATION PLANS
At June 29, 1997, the Company had four stock based compensation plans which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans and its Employee Stock
Purchase plan (ESP), except for stock options granted to directors at exercise
prices below market value on the date of grant. Had compensation cost for the
Company's four stock based compensation plans been determined using the
alternative accounting method based on the fair value prescribed by FASB
Statement No. 123, the Company's proforma net income (loss) for fiscal 1996 and
1997 would have been $(9,213,906) and $114,553, respectively, and the Company's
proforma net income (loss) per common share would have been $(1.64) and $0.02,
respectively.
(b) Fixed Stock Option Plans
The Company has three fixed option plans. Under the 1990 Incentive Stock
Option Plan, the Company may grant options to its employees for up to 1,227,344
shares of common stock. This plan provides that options may be granted at
option prices not less than the fair market value of its shares on the date of
grant, or 110% of fair market value in the case of any employee holding in
excess of 10% of the combined voting power of all classes of stock at the date
of grant. Options granted under this plan have a maximum term of 10 years. The
options currently outstanding are exercisable in installments of 33% to 100% per
year. In fiscal 1996, the Company repriced 461,425 options previously granted
under this plan. These options, which had a previous weighted average exercise
price of $7.03, were repriced to the then current fair market value of $5.13.
Under the 1991 Nonemployee Director Stock Option Plan, the Company may grant
options to its nonemployee directors for up to 57,500 shares of common stock.
The option prices were the fair market values of the common stock on the dates
of grant and have a maximum term of 10 years. Options granted under this plan
are exercisable in installments of 40% to 100% per year.
Under the 1992 Bonus Stock Option Plan, the Company may grant options to
certain officers and directors for up to 100,000 shares of common stock. The
option prices were one-half of the fair market value of the common stock on the
dates of grant and have a maximum term of 10 years. Options granted under this
plan become exercisable six months subsequent to the dates of grant.
Compensation expense of $17,800 in fiscal 1995, $21,000 in fiscal 1996 and
$18,000 in fiscal 1997 was recorded for options granted as part of the officers'
and directors' compensation under this plan.
The fair value of each option grant is estimated on the date of grant for
repricing using the Black-Scholes option pricing model with the following
weighted-average assumptions for options granted or repriced in fiscal 1996 and
1997, respectively: amortization over the respective vesting periods; no
dividends; expected lives of 6.1 and 6.6 years; expected stock price volatility
of approximately 41% and 40%; and risk free interest rates of 5.6% and 6.6%.
These pro-forma results exclude consideration of options granted prior to July
3, 1995, and may not be representative of that to be expected in future years.
F-12
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
A summary of the status of the Company's three fixed stock option plans are
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- --------------------- --------------------
Wt. Ave. Wt. Ave. Wt. Ave.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
--------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year......... 728,896 $8.40 799,906 $7.34 817,214 $5.68
Granted at fair market value............. 301,875 6.01 134,000 5.09 197,875 5.17
Granted at below fair market value....... 6,197 2.87 8,197 2.56 6,000 3.00
Exercised................................ (13,835) 3.03 (13,337) 2.08 (862) 3.25
Forfeited................................ (223,227) 8.25 (111,552) 5.81 (88,860) 5.21
-------- --------- --------
Outstanding at end of year............... 799,906 7.34 817,214 5.68 931,367 5.68
======== ========= ========
Options exercisable at year-end.......... 281,794 8.05 371,051 6.35 536,495 6.01
Weighted-average fair value of options
granted during the year:
Granted at fair market value.......... -- $2.62 $2.71
Granted at below fair market value.... -- 3.61 4.20
</TABLE>
The following table summarizes information about fixed stock options
outstanding and exercisable at June 29, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Exercise Number Wt. Average Wt. Average Number Wt. Average
Price Ranges Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------ ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.56 - 3.00 19,532 8.0 years $2.77 19,532 $2.77
4.56 - 5.13 678,590 6.9 5.09 405,384 5.11
5.25 - 5.88 189,365 7.6 5.57 70,699 5.82
9.00 - 21.75 43,880 4.6 16.52 40,880 16.72
------- -------
2.56 - 21.75 931,367 7.0 5.73 536,495 6.01
======= =======
</TABLE>
(c) Employee Stock Purchase Plan
On August 23, 1993, the Company's Board of Directors approved an Employee
Stock Purchase Plan (ESP Plan). The ESP Plan authorizes 250,000 shares of the
Company's common stock to be purchased by eligible employees of the Company
through payroll deductions. The purchase price is the lesser of 85% of the fair
market value of the stock on the first business day of the plan year, or 85% of
the fair market value of the shares on the last business day of the plan year.
A total of 28,713 shares, 56,624 shares and 51,598 shares were purchased by
employees of the Company under the ESP plan during fiscal 1995, 1996 and 1997,
respectively. Compensation cost is recognized for the fair value of the
employee's purchase rights, which was estimated using the Black-Scholes model
with the following assumptions for fiscal 1996 and 1997, respectively: no
dividends; expected life of one year for both years; expected stock price
volatility of approximately 41% and 37%; and risk free interest rates of 5.3%
and 5.4%. The weighted-average fair value of those purchase rights granted in
fiscal 1996 and 1997 was $1.50 and $1.48, respectively.
F-13
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
The Company leases certain restaurant facilities under operating leases
expiring at various dates through 2027. These operating leases have renewal
options for up to five successive five-year periods. The minimum rental
commitments under all noncancelable operating leases as of June 29, 1997 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998.......... $ 612,050
1999.......... 527,244
2000.......... 447,241
2001.......... 394,568
2002.......... 320,768
Thereafter.... 3,745,936
----------
Total....... $6,047,807
==========
</TABLE>
Rental expense under operating leases was approximately $750,000, $710,000
and $690,000 for fiscal years 1995, 1996 and 1997, respectively.
In fiscal 1996, the Company was notified that a claim had been submitted
against the Company to the American Arbitration Association (the "AAA") by
Bright-Kaplan International Corporation, the owner of the previous Spaghetti
Warehouse franchise restaurant in Knoxville, Tennessee, seeking damages in
excess of $9.0 million. Additionally, Elizabeth Bright and Thomas C. Bright,
III, the principal shareholders of Bright-Kaplan International Corporation,
filed a lawsuit against the Company, seeking damages in excess of $2.5 million,
along with trebling of such damages under the Texas Deceptive Trade Practices
Act. Following a hearing before an AAA panel in Dallas, the panel, on January
8, 1997, unanimously ruled that the Company had no liability in this matter. On
June 10, 1997, the lawsuit was dismissed by the trial judge on the grounds that
matters in controversy had been decided in the previous AAA ruling. The
plaintiffs have since appealed the dismissal. The Company continues to believe
that the claims are without merit and will vigorously defend itself in this
matter. As of June 29, 1997, damages, if any, arising from such litigation are
not estimable.
The Company is also a party to several legal proceedings arising in the
ordinary course of business. After consultation with legal counsel and a review
of available facts, management believes that damages, if any, arising from such
litigation will not be material to the Company's financial position or results
of operations.
(8) 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 and identified one
additional restaurant to be sold as an operating unit. 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. Additionally, the Company
contracted to sell its Richmond, Virginia location to its Virginia franchisee.
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, including the
write-down of property and equipment to its net realizable value, severance
packages and various other store closing and corporate obligations.
The Company disposed of six of the seven closed restaurants during fiscal
1996. The Company disposed of the seventh closed restaurant and the Richmond,
Virginia location in fiscal 1997, and completed the disposal of all remaining
identified corporate assets subsequent to June 29, 1997, thus completing its
original plan. As a result, excess reserves of $740,000 were reversed in fiscal
1997 and the remaining balance of accrued restructuring charges
F-14
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
as of June 29, 1997 was $0. All restructuring-related corporate assets sold
subsequent to year-end are classified as assets scheduled for divestiture as of
June 29, 1997.
(9) UNUSUAL CHARGE
During the fourth quarter of fiscal 1995, the Company recorded a write-down
of its one-third investment in F.P. Corporation PTY Ltd. and FP Restaurants PTY
Ltd. (collectively, Fasta Pasta). The write-down was the result of an alleged
misappropriation of Fasta Pasta assets by the joint-venture's former managing
director. As of June 29, 1997, the Company's investment in Fasta Pasta has been
fully written-off and the Company has no further obligation relating to the
joint-venture.
(10) New Financial Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." This statement establishes new standards for computing
and presenting earnings per share ("EPS"). SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company does not expect adoption of this statement to
have a significant impact on previously reported EPS.
(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized quarterly financial data follows:
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------
OCTOBER 1, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Year ended June 30, 1996:
Revenues.................................. $18,918,982 17,738,092 17,180,274 17,119,271
=========== ========== ========== ==========
Gross profit (a).......................... $ 3,533,582 2,578,755 2,678,005 3,079,794
=========== ========== ========== ==========
Net income (loss)......................... $ 428,121 (385,145) (8,642,286) 265,852
=========== ========== ========== ==========
Net income (loss) per common share
and common equivalent share............... $ .08 (.07) (1.54) .05
=========== ========== =========== ==========
QUARTERS ENDED
----------------------------------------------------
SEPTEMBER 29, DECEMBER 29, MARCH 30, JUNE 29,
1995 1996 1997 1997
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Year ended June 29, 1997:
Revenues................................ $17,056,528 15,642,524 15,718,660 16,485,861
=========== ========== ========== ==========
Gross profit (a)........................ $ 3,120,995 2,514,265 3,129,070 3,401,775
=========== ========== ========== ==========
Net income (loss)....................... $ (830,271) 274,967 456,628 757,611
=========== ========== ========== ==========
Net income (loss) per common share
and common equivalent share............. $ (.15) .05 .08 .13
=========== ========== =========== ==========
</TABLE>
(a) Gross profit is calculated as total revenues less cost of sales and
operating expenses.
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Garland,
State of Texas, on September 23, 1997.
SPAGHETTI WAREHOUSE, INC.
/s/ Phillip Ratner
--------------------------------------------------
Phillip Ratner, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- --------- -------- ----
/s/ Phillip Ratner Chairman of the Board, September 23, 1997
- --------------------------- President, Chief Executive
Phillip Ratner Officer, and a Director
(Principal Executive Officer)
/s/ H.G. Carrington, Jr. Executive Vice President, September 23, 1997
- --------------------------- Chief Financial Officer,
H. G. Carrington, Jr. Secretary and a Director
(Principal Financial Officer)
/s/ Robert E. Bodnar Treasurer and Controller September 23, 1997
- --------------------------- (Principal Accounting Officer)
Robert E. Bodnar
/s/ C. Cleave Buchanan, Jr. Director September 23, 1997
- ---------------------------
C. Cleave Buchanan, Jr.
/s/ Frank Cuellar, Jr. Director September 23, 1997
- ---------------------------
Frank Cuellar, Jr.
/s/ John T. Ellis Director September 23, 1997
- ---------------------------
John T. Ellis
/s/ Robert R. Hawk Director September 23, 1997
- ---------------------------
Robert R. Hawk
/s/ Peter Hnatiw Director September 23, 1997
- ---------------------------
Peter Hnatiw
/s/ James F. Moore Director September 23, 1997
- ---------------------------
James F. Moore
/s/ Cynthia I. Pharr Director September 23, 1997
- ---------------------------
Cynthia I. Pharr
/s/ William B. Rea, Jr. Director September 23, 1997
- ---------------------------
William B. Rea, Jr.
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
EXHIBITS
TO
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 29, 1997
--------------------------
SPAGHETTI WAREHOUSE, INC.
================================================================================
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- ------------
<C> <S> <C>
3.1 - Second Amended and Restated Articles of Incorporation of the
Company, as amended (incorporated by reference to Exhibit 3.1 of the
Company's Form 10-Q for the quarter ended April 2, 1995, filed by
the Company with the Securities and Exchange Commission).
3.2 - Second Amended and Restated Bylaws of the Company, as amended
(incorporated by reference to Exhibit 3.2 of the Company's Form 10-Q
for the quarter ended January 1, 1995, filed by the Company with the
Securities and Exchange Commission).
4.1 - Rights Agreement, dated February 2, 1995 between the Company and
Chemical Bank (incorporated by reference to Exhibit 1 of the
Company's Registration Statement on Form 8-A, filed by the Company
with the Securities and Exchange Commission on February 27,1995).
+ 10.1 - First Amended and Restated Spaghetti Warehouse, Inc. 1990 Incentive
Stock Option Plan (incorporated by reference to Exhibit 4.3 of the
Company's Registration Statement on Form S-8, registration no.
33-69024, filed by the Company with the Securities and Exchange
Commission).
+ 10.2 - 1991 Nonemployee Director Stock Option Plan (incorporated by
reference to Exhibit 10.3 of the Company's Registration Statement on
Form S-2, registration no. 33-40257, filed by the Company with the
Securities and Exchange Commission).
+ 10.4 - Spaghetti Warehouse, Inc. 1992 Bonus Stock Option Plan (incorporated
by reference to Exhibit 4.8 of the Company's Registration Statement
on Form S-8, registration no. 33-69024, filed by the Company with
the Securities and Exchange Commission).
+ 10.6 - Letter Agreement, dated as of August 23, 1993, relating to the
Company's employment arrangement with H.G. Carrington, Jr.
(incorporated by reference to Exhibit 10.6 of the Company's Annual
Report on Form 10-K for the fiscal year ended July 4, 1993).
10.7 - Lease Agreement, dated June 13, 1977, between the Company and Oscar
L. Thomas, Jr., relating to certain premises in Columbus, Ohio
(incorporated by reference to Exhibit 10.5 of the Company's
Registration Statement on Form S-1, registration no. 2-99832, filed
by the Company with the Securities and Exchange Commission).
10.8 - Lease Agreement, dated September 1, 1980 between the Company and
Gagel Construction, Inc. (incorporated by reference to Exhibit 10.6
of the Company's Registration Statement on Form S-1, registration
no. 2-99832, filed by the Company with the Securities and Exchange
Commission).
10.9 - Lease Agreement, dated November 18, 1981 between the Company and
Samuel Geraldo, Trustee, as amended, relating to certain premises in
Toledo, Ohio (incorporated by reference to Exhibit 10.6 of the
Company's Registration Statement on Form S-1, registration no.
33-30676, filed by the Company with the Securities and Exchange
Commission).
10.10 - Lease Agreement, dated November 30, 1981, between the Company and
Ybor Square, Ltd., relating to certain premises in Tampa, Florida
(incorporated by reference to Exhibit 10.8 of the Company's
Registration Statement on Form S-1, registration no. 2-99832, filed
by the Company with the Securities and Exchange Commission).
10.12 - Financing and Operating Agreement, dated September 2, 1982, among the
Company, the City of Tampa, Florida, The Spaghetti Consultants of
Florida, Inc., Ybor Square, Ltd. and Continental National Bank of
Fort Worth, Texas
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- ------------
<C> <S> <C>
(incorporated by reference to Exhibit 10.11 of the Company's
Registration Statement on Form S-1, registration no. 2-99832, filed
by the Company with the Securities and Exchange Commission).
10.13 - Lease Agreement, dated April 1, 1987, between the Company and
Memphis Center City Revenue Finance Corporation, relating to
certain premises in Memphis, Tennessee (incorporated by reference
to Exhibit 10.16 of the Company's Annual Report on Form 10-K for
the fiscal year ended July 4, 1987, filed by the Company with the
Securities and Exchange Commission).
10.14 - Lease, dated May 28, 1988, between the Company and Ward and Shirley
Olander, relating to certain premises in Pittsburgh, Pennsylvania
(incorporated by reference to Exhibit 10.18 of the Company's
Registration Statement on Form S-1, registration no. 33-30676,
filed by the Company with the Securities and Exchange Commission).
10.15 - Lease Agreement, dated as of February 15, 1989, between the Company
and North Clinton Associates, relating to certain premises in
Syracuse, New York (incorporated by reference to Exhibit 10.21 of
the Company's Registration Statement on Form S-1, registration no.
33-30676, filed by the Company with the Securities and Exchange
Commission).
10.16 - Deed of Trust, Security Agreement and Assignment of Rents, dated
July 24, 1989, between the Company, as grantor, and Deposit
Guaranty Bank, as beneficiary, and related promissory note
(incorporated by reference to Exhibit 10.22 of the Company's
Registration Statement on Form S-1, registration no. 33-30676,
filed by the Company with the Securities and Exchange Commission).
10.17 - Lease Agreement, dated May 29, 1990, between Spring-Ten Associates
and the Company, as amended on July 18, 1990, October 26, 1990, and
December 13, 1990, relating to certain premises in Philadelphia,
Pennsylvania (incorporated by reference to Exhibit 10.24 of the
Company's Registration Statement on Form S-2, registration no.
33-40257, filed by the Company with the Securities and Exchange
Commission).
10.18 - Lease Agreement, dated as of November 27, 1990, between the Company
and The Foundry Associates, L.P., relating to certain premises in
Providence, Rhode Island (incorporated by reference to Exhibit
10.25 of the Company's Registration Statement on Form S-2,
registration no. 33-40257, filed by the Company with the
Securities and Exchange Commission).
10.19 - Contract for Sale of Real Estate, dated September 12, 1991, among
the Company, Elie Guggenheim and Catherine Guggenheim (incorporated
by reference to Exhibit 10.18 of the Company's Form 10-K for the
fiscal year ended July 4, 1992, filed with the Securities and
Exchange Commission).
10.20 - Real Estate Term Note in original principal amount of $180,000,
dated November 21, 1991, executed by the Company as maker, payable
to the order of Elie Guggenheim and Catherine Guggenheim
(incorporated by reference to Exhibit 10.19 of the Company's Form
10-K for the fiscal year ended July 4, 1992, filed with the
Securities and Exchange Commission).
10.21 - Lease Agreement, dated as of July 6, 1991, between the Company and
Nautica Peninsula Land Limited Partnership, relating to certain
premises in Cleveland, Ohio (incorporated by reference to Exhibit
10.21 of the Company's Annual Report on Form 10-K for the fiscal
year ended July 4, 1993, filed with the Securities and Exchange
Commission).
10.22 - Lease Agreement, dated as of September 2, 1992, between the Company
and Canal Place, Ltd., relating to certain premises in Akron, Ohio
(incorporated by reference to Exhibit 10.22 of the Company's Annual
Report on Form 10-K for the fiscal year ended July 4, 1993, filed
with the Securities and Exchange Commission).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- ------------
<C> <S> <C>
10.23 - Form of Spaghetti Warehouse, Inc. Franchise Offering Circular
(incorporated by reference to Exhibit 10.23 of the Company's Annual
Report on Form 10-K for the fiscal year ended July 4, 1993, filed
with the Securities and Exchange Commission).
10.29 - Lease Agreement, dated as of August 11, 1993, between the Company
and the State of Texas, relating to certain premises in Harris
County, Texas, as amended by First Amendment to Lease Agreement
effective October 25, 1993 and Second Amendment to Lease Agreement,
undated (incorporated by reference to Exhibit 10.29 of the
Company's Annual Report on Form 10-K for the fiscal year ended
July 3, 1994, filed with the Securities and Exchange Commission).
10.30 - Second Lease Addendum, dated as of July 29, 1994, by and between
Patricia D. Thomas, Oscar L. Thomas III and Spaghetti Warehouse of
Ohio, Inc., relating to certain premises in Columbus, Ohio
(incorporated by reference to Exhibit 10.30 of the Company's Annual
Report on Form 10-K for the fiscal year ended July 3, 1994,
filed with the Securities and Exchange Commission).
+10.31 - Spaghetti Warehouse, Inc. Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.31 of the Company's Annual Report on
Form 10-K for the fiscal year ended July 3, 1994, filed with the
Securities and Exchange Commission).
10.33 - Shareholders Agreement, undated, among Competitive Foods Australia
Limited, Tarlina PTY Limited, MCS (Australia) PTY Limited, S.W.H.
Antiques, Inc. and F.P. Corporation PTY Limited, with respect to
Fasta Pasta (incorporated by reference to Exhibit 10.33 of the
Company's Annual Report on Form 10-K for the fiscal year ended
July 3, 1994, filed with the Securities and Exchange Commission).
10.36 - Amended and Restated Loan Agreement, dated August 12, 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. 3 thereto, dated March 29, 1996, Amendment No. 2
thereto, dated February 9, 1995 and Amendment No. 1 thereto,
dated December 21, 1993.
+10.37 - Employment Agreement, dated as of January 30, 1996, by and between
the Company and Robert R. Hawk.
+10.38 - Amended Employment Agreement, dated as of September 1, 1996 by and
between the Company and Robert R. Hawk (incorporated by reference
to Exhibit 10.38 of the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 29, 1996, filed with the
Securities and Exchange Commission).
+10.39 - Employment Agreement, dated as of October 1, 1996, by and between
the Company and John T. Ellis (incorporated by reference to Exhibit
10.39 of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 29, 1996, filed with the Securities and
Exchange Commission).
+10.40 - Employment Agreement, dated as of October 28, 1996, by and between
the Company and Phillip Ratner (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 30, 1997, filed with the Securities and
Exchange Commission).
21.1 - Subsidiaries of the Company (incorporated by reference to Exhibit
22.1 of the Company's Form 10-K for the fiscal year ended July 4,
1992 filed by the Company with the Securities and Exchange
Commission).
* 23.1 - Consent of Arthur Andersen LLP
* 27.1 - Financial Data Schedule
</TABLE>
_______________
+ Compensation plan, benefit plan or employment contract or arrangement.
* Filed herewith.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10K of our report dated August 14, 1997 included in
Registration Statement File No. 33-86756, 33-33555, 33-38603, and 33-69024. It
should be noted that we have not audited any financial statements of the company
subsequent to June 29, 1997 or performed any audit procedures subsequent to the
date of our report.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-29-1997
<CASH> 1,916,983
<SECURITIES> 0
<RECEIVABLES> 637,803
<ALLOWANCES> 0
<INVENTORY> 616,253
<CURRENT-ASSETS> 3,914,295
<PP&E> 71,902,338
<DEPRECIATION> 26,169,948
<TOTAL-ASSETS> 58,629,867
<CURRENT-LIABILITIES> 6,148,839
<BONDS> 6,405,226
0
0
<COMMON> 65,278
<OTHER-SE> 45,868,623
<TOTAL-LIABILITY-AND-EQUITY> 58,629,867
<SALES> 63,372,287
<TOTAL-REVENUES> 64,903,573
<CGS> 16,515,660
<TOTAL-COSTS> 52,737,468
<OTHER-EXPENSES> 10,502,449
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 690,568
<INCOME-PRETAX> 973,088
<INCOME-TAX> 314,153
<INCOME-CONTINUING> 658,935
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 658,935
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
