FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended DECEMBER 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10291
SPAGHETTI WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1393176
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
402 WEST I-30, GARLAND, TEXAS 75043
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 972/226-6000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 29, 1996: 5,681,490 SHARES OF COMMON STOCK, PAR
VALUE $.01.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS 6/30/96 12/29/96
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents.................................................... $ 8,065,364 $ 2,025,660
Accounts receivable.......................................................... 659,069 484,411
Inventories.................................................................. 686,995 641,320
Income taxes receivable...................................................... 399,764 303,339
Prepaid expenses............................................................. 341,711 198,143
-------------- ---------------
Total current assets.................................................. 10,152,903 3,652,873
-------------- ---------------
Property and equipment, net....................................................... 49,893,172 47,491,682
Assets scheduled for divestiture.................................................. 1,525,000 250,000
Trademark and franchise rights, net............................................... 3,113,472 3,033,563
Deferred income taxes............................................................. 5,735,128 4,708,051
Other assets...................................................................... 948,514 832,036
-------------- ---------------
$ 71,368,189 $ 59,968,205
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ $ 6,878,358 $ 1,970,836
Accounts payable............................................................. 1,932,648 2,070,807
Accrued payroll and bonuses.................................................. 1,450,812 1,016,343
Other accrued liabilities.................................................... 1,487,488 1,382,017
Accrued restructuring charges................................................ 1,310,540 126,425
Deferred income taxes........................................................ 98,368 11,001
-------------- ---------------
Total current liabilities............................................. 13,158,214 6,577,429
-------------- ---------------
Long-term debt, less current portion.............................................. 12,883,642 8,390,644
Deferred compensation............................................................. 75,875 111,742
Commitments and contingencies..................................................... - -
Stockholders' equity:
Preferred stock of $1.00 par value; authorized 1,000,000 shares;
no shares issued...................................................... - -
Common stock of $.01 par value; authorized 20,000,000 shares;
issued 6,475,375 shares at 6/30/96 and 6,526,973 shares at 12/29/96... 64,754 65,270
Additional paid-in capital........................................................ 36,012,761 36,244,056
Cumulative translation adjustment................................................. (550,642) (572,622)
Retained earnings................................................................. 16,094,924 15,539,620
-------------- ---------------
51,621,797 51,276,324
Less cost of 842,252 shares at 6/30/96 and 845,483 shares at 12/29/96 of
common stock held in treasury......................................... (6,371,339) (6,387,934)
-------------- ---------------
45,250,458 44,888,390
============== ===============
$ 71,368,189 $ 59,968,205
============== ===============
</TABLE>
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
26-Week Period 26-Week Period 13-Week Period 13-Week Period
Ended 12/31/95 Ended 12/29/96 Ended 12/31/95 Ended 12/29/96
Revenues:
<S> <C> <C> <C> <C>
Restaurant sales..................................... $ 36,065,655 $ 31,921,962 $ 17,480,555 $ 15,343,895
Franchise............................................ 325,195 490,238 130,142 155,216
Other................................................ 266,224 286,852 127,395 143,413
--------------- ------------ --------------- ----------------
Total revenues.................................. 36,657,074 32,699,052 17,738,092 15,642,524
--------------- ------------ --------------- ----------------
Costs and expenses:
Cost of sales........................................ 9,028,801 8,456,422 4,458,222 4,094,652
Operating expenses................................... 21,515,936 18,607,370 10,701,115 9,033,607
General and administrative........................... 3,053,075 2,656,557 1,568,297 1,275,820
Depreciation and amortization........................ 2,559,585 2,035,068 1,274,183 999,148
Reversal of restructuring charges.................... - (400,000) - (400,000)
Impairment of long-lived assets.............. ... - 1,759,526 - -
--------------- ------------ --------------- ----------------
Total costs and expenses..................... 36,157,397 33,114,943 18,001,817 15,003,227
--------------- ------------ --------------- ----------------
Income (loss) from operations........................... 499,677 (415,891) (263,725) 639,297
Net interest expense........................................ 514,698 419,404 264,380 182,640
--------------- ------------ --------------- ----------------
Income (loss) before income tax expense (benefit)...... (15,021) (835,295) (528,105) 456,657
Income tax expense (benefit)........................... (57,997) (279,991) (142,960) 181,690
--------------- ------------ --------------- ----------------
Net income (loss)....................................... $ 42,976 $ (555,304) $ (385,145) $ 274,967
============================= =============== ================
Net income (loss) per common share:
Primary........................................... $ .01 ($ .10) ($ .07) $ .05
===== ===== ====== =====
Fully diluted..................................... $ .01 ($ .10) ($ .07) $ .05
===== ===== ====== =====
Weighted average common and common share equivalents outstanding:
Primary........................................... 5,689,296 5,640,641 5,597,590 5,764,543
Fully diluted..................................... 5,689,296 5,640,641 5,597,590 5,764,543
</TABLE>
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
26-Week
Periods Ended
12/31/95 12/29/96
Cash flows from operating activities:
<S> <C> <C>
Net income (loss)....................................................... $ 42,976 $ (555,304)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization expense............................ 2,559,585 2,035,068
Reversal of restructuring charges................................ - (400,000)
Impairment of long-lived assets.................................. - 1,759,526
Loss on disposal of property and equipment....................... 143,236 2,233
Deferred income taxes............................................ (48,744) 939,897
Other, net....................................................... 52,815 57,211
Changes in assets and liabilities:
Accounts receivable.......................................... (236,150) 174,513
Inventories.................................................. (124,851) 45,675
Income taxes receivable...................................... (185,483) 106,895
Prepaid expenses............................................. (64,002) 143,568
Other assets................................................. (250,079) (84,356)
Accounts payable............................................. 182,497 127,853
Accrued payroll and bonuses.................................. (587,654) (434,469)
Other accrued liabilities.................................... 51,802 (105,471)
Accrued restructuring charges................................ - (80,800)
------------- -------------
Net cash provided by operating activities................ 1,535,948 3,732,039
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment...................................... (2,589,806) (1,223,076)
Proceeds from sales of property and equipment........................... 159,369 660,539
Collection of notes receivable.......................................... 6,092 -
------------- -------------
Net cash used in investing activities.................... (2,424,345) (562,537)
------------- -------------
Cash flows from financing activities:
Net borrowings from (payments on) long-term debt........................ 4,232,000 (9,400,520)
Purchase of treasury shares............................................. (142,776) (16,595)
Proceeds from employee stock plans...................................... 234,636 213,811
------------- -------------
Net cash provided by (used in) financing activities...... 4,323,860 (9,203,304)
------------- -------------
Effects of exchange rate changes on cash and cash equivalents................ (2,242) (5,902)
------------- -------------
Net increase (decrease) in cash and cash equivalents......................... 3,433,221 (6,039,704)
Cash and cash equivalents at beginning of period............................. 1,872,919 8,065,364
------------- -------------
Cash and cash equivalents at end of period................................... $ 5,306,140 $ 2,025,660
============= =============
Supplemental information:
Interest paid........................................................... $ 550,766 $ 738,864
============= =============
Income taxes paid (net of refunds collected)............................ $ 194,425 $ (1,316,126)
============= =============
</TABLE>
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments necessary for a fair
presentation of the consolidated financial position as of December 29, 1996
and the consolidated results of operations and cash flows for the 26-week
and 13-week periods ended December 29, 1996 and December 31, 1995. The
condensed consolidated statement of operations for the 26-week and 13-week
period ended December 29, 1996 are not necessarily indicative of the
results to be expected for the full fiscal year.
2. Accounting Policies
During the interim periods the Company follows the accounting policies set
forth in its consolidated financial statements in its Annual Report (Form
10-K) (File No.1-10291). Reference should be made to such financial
statements for information on such accounting policies and further
financial details.
3. New Financial Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, goodwill related to assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
The Company elected to adopt SFAS 121 in the first quarter of fiscal 1997.
Adoption of SFAS 121 requires the Company to review its long-lived assets
and certain identifiable intangibles to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset or group of assets may not be recoverable. As a result
of applying provisions of SFAS 121, the Company groups and evaluates its
assets for impairment at the individual restaurant level. The Company
considers each restaurant's historical operating losses a primary indicator
of potential impairment. The Company deems a restaurant's assets to be
impaired if a forecast of undiscounted future cash flows directly related
to the assets, including disposal value, if any, is less than their
carrying amount. If a restaurant's assets are deemed to be impaired, the
loss is measured as the amount by which the carrying amount of the assets
exceeds their estimated fair market value based on quoted market prices for
similar assets.
The Company recorded a pre-tax non-cash charge of $1,759,526 during the
first quarter of fiscal 1997 as a result of adopting SFAS 121. The charge
relates to the write-down of the Company's Cappellini's restaurant in
Addison, Texas to its estimated fair market value.
4. Restructuring Charges
In the third quarter of fiscal 1996, the Company implemented a
restructuring plan intended to strengthen its competitive position and
improve cash flow and profitability. In conjunction with the plan, the
Company closed seven under-performing restaurants in February 1996 and
identified one additional restaurant to be sold as an operating unit. The
Company recorded a pre-tax charge of $13.9 million in the third quarter of
fiscal 1996 to cover costs related to the execution of this plan, including
the write-down of property and equipment to its estimated net realizable
value, severance packages, and various other store closing and corporate
obligations.
As a result of obtaining more favorable disposal terms on the seven
restaurant properties closed in the restructuring plan, total costs
relating to this plan will be less than the previously recorded charge.
Therefore, the Company reversed $400,000 in pre-tax restructuring charges
in the second quarter of fiscal 1997.
5. Subsequent Event
Due to poor operating results, the Company closed its Cappellini's
restaurant location in Addison, Texas on December 31, 1996. Prior to its
closing, Cappellini's posted a pre-tax operating loss of $171,000 during
the first six months of fiscal 1997.
6. Commitments & Contingencies
As discussed in the Company's Form 10-K for the fiscal year ended June 30,
1996, Bright-Kaplan International Corporation ("BK"), submitted a claim
against the Company to 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. On January 8, 1997 the AAA
informed the Company that it has no liability with regard to any claims
made by BK. All AAA arbitration expenses were awarded in favor of the
Company. The Company will seek the dismissal of a lawsuit previously filed
by Elizabeth Bright and Thomas C. Bright, the principal shareholders of BK,
in the circuit court of Hamilton County, Tennessee on August 11, 1995. The
lawsuit contains essentially the same claims as were submitted to the AAA.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table presents expenses as a percentage of total revenues for
certain selected financial data included in the Condensed Consolidated
Statements of Operations.
<TABLE>
<CAPTION>
26-Week 13-Week
Periods Ended Periods Ended
12/31/95 12/29/96 12/31/95 12/29/96
<S> <C> <C> <C> <C>
Revenues .......................................... 100.0% 100.0% 100.0% 100.0%
-------- -------- ------- -------
Costs and expenses:
Cost of sales................................ 24.6 25.9 25.1 26.2
Operating expenses........................... 58.7 56.9 60.3 57.8
General and administrative expenses.......... 8.3 8.1 8.9 8.1
Depreciation and amortization................ 7.0 6.2 7.2 6.4
Reversal of restructuring charges............ 0.0 (1.2) 0.0 (2.6)
Impairment of long-lived assets.............. 0.0 5.4 0.0 0.0
-------- -------- ------- -------
Total costs and expenses........... 98.6 101.3 101.5 95.9
-------- -------- ------- -------
Income (loss) from operations...................... 1.4 (1.3) (1.5) 4.1
Net interest expense............................... 1.4 1.3 1.5 1.2
-------- -------- ------- -------
Income (loss) before income taxes.................. 0.0 (2.6) (3.0) 2.9
Income tax expense (benefit)....................... (0.1) (0.9) (0.8) 1.1
-------- -------- ------- -------
Net income (loss).................................. 0.1% (1.7%) (2.2%) 1.8%
======== ======== ======= =======
</TABLE>
Results of Operations
Revenues
Revenues decreased $2.1 million, or 11.8%, during the quarter ended
December 29, 1996 in comparison to the same quarter in the preceding year. This
decrease in revenues was due primarily to the closure of seven under-performing
stores in February 1996 and the sale of the Company's Richmond, Virginia
location to a franchisee in September 1996. Same-store sales (stores open the
full quarter in both fiscal years) decreased 0.2% during the second quarter.
Second quarter same-store sales were adversely impacted by New Year's Eve
falling in the second quarter of fiscal 1996, but in the third quarter of the
current fiscal year. The decrease in same-store sales was also the result of a
3.2% decrease in customer counts offset by a 3.1% check average increase.
Revenues for the six months ended December 29, 1996 decreased $4.0 million,
or 10.8%, compared to the same period last year. The decrease was due to the
reduction in the number of restaurants in comparison to last year as mentioned
above. Same-store sales for the first half of fiscal 1997 actually increased
0.4% compared to the same period last year. Additionally, franchise income
increased $165,043 in comparison to fiscal 1996, due primarily to fees
associated with the sale of the Company's Richmond, Virginia restaurant and an
exclusive territory agreement to the Company's Virginia franchisee. The
six-month increase in same-store sales was the result of a 3.2% increase in
check average, partially offset by a 2.7% decrease in customer counts.
Management attributes the increase in check averages to new menu items
introduced over the past year, modest price increases and to increased check
averages in the Company's repositioned "Spaghetti Warehouse Italian Grill"
(Italian Grill) units. Sales for the 26-week period ended December 29, 1996 in
the Company's seven Italian Grill units, during the periods operating under the
Italian Grill format in the current year, increased 9.3% over comparable periods
in the prior year. Same-store sales in the Company's traditional Spaghetti
Warehouse concept declined 1.1% during the first six months of fiscal 1997.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of total revenues were 26.2% for the current
quarter as compared to 25.1% for the same quarter last year. For the first six
months of fiscal 1997, cost of sales as a percentage of revenues were 25.9% as
compared to 24.6% during the same period last year. The current year increases
are due to higher food costs at the Company's Italian Grill and Cappellini's
restaurants, and to higher commodity prices on certain meat, pasta and dairy
products. Management anticipates that cost of sales as a percentage of revenues
will continue to exceed prior year levels as additional Spaghetti Warehouse
units are converted to the Italian Grill format.
Operating Expenses
Operating expenses as a percentage of total revenues were 57.8% for the
current quarter as compared to 60.3% for the same quarter last year. Much of
this decrease is due to the closure of the seven low-volume units in February
1996, most which incurred higher operating expenses as a percentage of revenues
than the typical Company restaurant. In addition, decreased marketing
expenditures, property taxes and occupancy costs contributed to the current year
decline in operating expenses.
For the first half of fiscal 1997, operating expenses as a percentage of
revenues were 56.9% as compared to 58.7% in the same period last year. The
six-month decline in operating expenses as a percentage of revenues was due
primarily to the same factors as mentioned above.
General and Administrative Expenses (G&A)
G&A expenses as a percentage of total revenues were 8.1% for the current
quarter as compared to 8.9% for the same quarter last year. In addition to the
prior year non-cash write-off of certain capitalized costs to G&A, current year
decreases in research and development costs and professional fees contributed to
the decrease in G&A as a percentage of revenues.
For the first half of fiscal 1997, G&A expenses were 8.1% of total revenues
as compared to 8.3% for the first half of the prior year. This decrease is
primarily attributable to a decrease in compensation costs, resulting from the
elimination of several corporate positions, and to the non-cash write-offs in
the prior year mentioned above.
Depreciation and Amortization (D&A)
D&A as a percentage of total revenues were 6.4% for the current quarter as
compared to 7.2% for the same quarter last year. For the six months ended
December 29, 1996, D&A as a percentage of revenues were 6.2% compared to the
7.0% for the same period last year. This reduction was the result of the
elimination of depreciation expense on the seven low-volume units closed in
February 1996.
Reversal of Restructuring Charges
As a result of obtaining more favorable disposal terms on the seven
restaurant properties closed in the February 1996 restructuring plan, total
costs relating to this plan will be less than the $13.9 million charge recorded
in the third quarter of fiscal 1996. As a result, the Company reversed $400,000
in pre-tax restructuring charges in the second quarter of fiscal 1997. See Note
4 of Notes to Condensed Consolidated Financial Statements for further
information.
Impairment of Long-Lived Assets
The Company adopted Financial Accounting Standards Board Statement No. 121
during the first quarter of fiscal 1997 resulting in a pre-tax, non-cash
impairment charge of $1,759,526. This charge related to the write-down of the
Company's Cappellini's restaurant in Addison, Texas to its estimated fair market
value. See Note 3 of Notes to Condensed Consolidated Financial Statements for
further information.
Net Interest Expense
The Company incurred net interest expense of $182,640 during the current
quarter compared to $264,380 during the same quarter last year. For the six
months ended December 29, 1996, net interest expense was $419,404 compared to
$514,698 in the same period last year. These current year decreases are
attributed to decreases in average debt outstanding under the Company's credit
facilities in comparison to the same periods last year.
Income Taxes
The Company's effective tax rate increased from a 27.1% benefit in the
second quarter of fiscal 1996 to a 39.8% provision in the current year. The
prior year rate was below statutory rates due to various costs which were not
includable in the calculation of taxable income for tax purposes. As a result,
the actual pre-tax loss reported in the second quarter of the prior year was
greater than the calculated taxable loss for that period.
For the six months ended December 29, 1996, the Company realized an income
tax benefit of 33.5%. This benefit was below statutory rates due to the same
reason as mentioned above. A Canadian income tax benefit and pre-tax loss for
the six-month period ended December 31, 1995 resulted in an income tax benefit
in the prior year.
Liquidity and Capital Resources
Due to a reduction in accrued restructuring charges and to the timing of
period-end payments of salaries and wages, the Company's working capital deficit
decreased from $3.0 million at June 30, 1996 to $2.9 million on December 29,
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 was $3.7 million for the first half of
fiscal 1997 compared to $1.5 million during the first half of fiscal 1996.
Long-term debt outstanding on December 29, 1996 consisted of amounts
borrowed under the Company's existing bank credit facility, including a $9.4
million fixed rate term loan and $1.0 million borrowed against its floating rate
revolving credit facility. Subject to meeting a certain funded debt to cash flow
requirement prior to borrowing any additional funds, the Company had an
additional $4.0 million available under this revolving credit facility on
December 29, 1996.
Capital expenditures were $1.2 million for the 26-week period ended
December 29, 1996 as compared to $2.6 million for the same period last year.
Fiscal 1997 expenditures consisted primarily of the conversion of four Company
restaurants to the Italian Grill format and normal purchases of new and
replacement restaurant equipment and decor.
In fiscal 1994, the Company's Board of Directors authorized a program for
the repurchase of up to 1,000,000 shares of the Company's common stock for
investment purposes. Including the 3,231 shares repurchased during the first six
months of fiscal 1997, the Company has repurchased 784,183 shares of common
stock under this program since its inception. Further repurchases with respect
to this program are dependent upon various business and financial
considerations.
The Company continued its Italian Grill re-positioning strategy in the
second quarter of fiscal 1997, converting its Willowbrook (Houston), Texas and
Elk Grove Village, Illinois locations. Additionally, the Company's Virginia
franchisee converted the Richmond, Virginia location to the Grill format in the
second quarter and opened a new franchise Italian Grill location in Glen Allen,
Virginia in January 1997. This updated version of the existing Spaghetti
Warehouse concept features new decor, an expanded menu and even greater customer
value. The menu was broadened to include grilled entrees, sauteed pastas, new
sandwiches, appetizers and pizza. Additionally, traditional menu items were
improved, and portion sizes increased to enhance the price/value relationship
offered to customers.
In addition to the seven Company-owned Italian Grill units in operation at
the end of the second quarter, current plans call for conversion of an
additional three units to the Italian Grill format during the second half of
fiscal 1997.
The Company closed its Cappellini's location in Addison, Texas on December
31, 1996. The Company's non-cash pre-tax charge of $1.8 million in the first
quarter related to write-down of the Cappellini's restaurant to its estimated
fair market value. Prior to its closing, Cappellini's posted a pre-tax operating
loss of $171,000 for the first six months of fiscal 1997.
In addition to the conversion of three additional units to the Italian
Grill format during the remainder of fiscal 1997, the Company plans to continue
to make necessary replacements and upgrades to its existing restaurants and
information systems. Total planned capital expenditures relating to all projects
during the next 12 months are approximately $2.5 million. Cash flow from
operations, current cash balances and funds available under the Company's
revolving credit facility are expected to be sufficient to fund planned capital
expenditures, payment of required debt maturities under the Company's bank
credit facility and possible further repurchases of Company stock for the next
12 months.
Forward-Looking Information
Statements contained in this Form 10-Q for the quarter ended December 29,
1996 that are not historical facts, including but not limited to, statements
found in this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements and involve
a number of risks and uncertainties. The actual results of the future events
described in such forward-looking statements in this Form 10-Q could differ
materially from those stated in such forward-looking statements. Among the
factors that could cause actual results to differ materially are: adverse
conditions in the restaurant industry and other competitive factors,
governmental regulation, pending and possible future litigation, seasonality of
business, loss of material suppliers or increases in the costs of raw materials
used in the Company's food products, termination of key franchise and/or license
agreements, as well as the risks and uncertainties discussed elsewhere in this
form 10-Q.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Company's Form 10-K for the fiscal year ended June 30,
1996, Bright-Kaplan International Corporation ("BK"), submitted a claim against
the Company to 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. On January
8, 1997 the AAA informed the Company that it has no liability with regard to any
claims made by BK. All AAA arbitration expenses were awarded in favor of the
Company. The Company will seek the dismissal of a lawsuit previously filed by
Elizabeth Bright and Thomas C. Bright, the principal shareholders of BK, in the
circuit court of Hamilton County, Tennessee on August 11, 1995. The lawsuit
contains essentially the same claims as were submitted to the AAA.
ITEM 6. EXHIBITS
Exhibit
Number: Document Description
27.1 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPAGHETTI WAREHOUSE, INC.
Dated: February 5, 1997 By: /s/Phillip Ratner
---------------- -----------------
Phillip Ratner
Chairman and
Chief Executive Officer
Dated: February 5, 1997 By: /s/ H. G. Carrington, Jr.
---------------- -------------------------
H.G. Carrington, Jr.
Executive Vice President
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 27.1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying condensed consolidated financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000775298
<NAME> Spaghetti Warehouse 10-Q
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> jun-29-1996
<PERIOD-START> oct-01-1996
<PERIOD-END> dec-29-1996
<EXCHANGE-RATE> 1
<CASH> 2,025,660
<SECURITIES> 0
<RECEIVABLES> 484,411
<ALLOWANCES> 0
<INVENTORY> 641,320
<CURRENT-ASSETS> 3,652,873
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0
0
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<INCOME-TAX> (279,991)
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<NET-INCOME> (555,304)
<EPS-PRIMARY> ($.10)
<EPS-DILUTED> ($.10)
</TABLE>
