<PAGE>
[LOGO OF SPAGHETTI WAREHOUSE APPEARS HERE]
September 23, 1998
Dear Shareholders:
You are cordially invited to attend the 1998 Annual Meeting of
Shareholders of Spaghetti Warehouse, Inc. (the "Company"), to be held at 1815
North Market Street, Dallas, Texas, on the second floor on the 27th day of
October, 1998, at 10:00 a.m. Central Time. In connection with this meeting and
for your review, we have enclosed the Company's (i) Annual Report on Form 10-K
for the period ended June 28, 1998, (ii) Proxy Statement and (iii) Proxy Card.
Additionally, as you know, on Friday, September 18, 1998, the Company
announced that it entered into an Agreement and Plan of Merger with Dallas-based
Consolidated Restaurant Companies, Inc. ("CRC"). The Merger Agreement provides
for CRC to pay the Company's shareholders $8.00 in cash for each of their shares
of common stock and assume the Company's indebtedness. The transaction is valued
at approximately $60 million. The Merger Agreement is subject to shareholder
approval and certain other conditions. A special meeting of shareholders will be
held at the appropriate time for this purpose. CRC was formed this year by
Cracken, Harkey, Street & Hartnett, L.L.C. to acquire a portfolio of compatible,
proven restaurant companies competing in the largest segments within the
restaurant sector. CRC's portfolio restaurant companies include El Chico
Restaurants, Inc., Good Eats Holding Company, Inc. and Cool River Restaurants,
Inc.
Thank you for your continuing support of the Company, and we look
forward to seeing those of you who will be in attendance at the Annual Meeting
of Shareholders.
Sincerely,
/s/ ROBERT R. HAWK
Robert R. Hawk
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
================================================================================
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 28, 1998
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 (Zip Code)
offices)
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 11, 1998 was $28,362,230. 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 11, 1998, 5,662,085
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 27, 1998, to be filed with the Commission
pursuant to Regulation 14A, is incorporated by reference into Part III of this
report.
================================================================================
<PAGE>
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 30 restaurants and franchises three restaurants in 13
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 two joint-venture restaurants and franchises five restaurants in
Canada under the name "The Old Spaghetti Factory." Each of the Company's
restaurants offers 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 10
restaurants in suburban markets. The typical suburban Company restaurant ranges
from 6,500 to 9,600 square feet in size with seating capacity for 275 to 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 28, 1998, June 29, 1997, and June 30, 1996, sales of
alcoholic beverages accounted for approximately 8%, 9% and 9% of the Company's
revenues, respectively.
The following table sets forth, for the periods indicated, selected restaurant
information:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------
JULY 3, JULY 2, JUNE 30, JUNE 29, JUNE 28,
1994 1995 1996 1997 1998
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales per restaurant open for full year:
Average.............................. $2,246 $2,109 $2,173 $2,217 $2,226
High................................. $4,300 $4,494 $4,546 $4,620 $4,425
Low.................................. $1,234 $1,048 $1,514 $1,418 $1,376
Check average per customer, including
alcoholic beverages (all stores):
Lunch................................ $ 6.19 $ 6.40 $ 6.73 $ 6.98 $ 7.17
Dinner............................... $ 8.41 $ 8.32 $ 8.64 $ 8.90 $ 9.14
Restaurants open for full year.......... 31 36 29 28 28
Restaurants open at year-end............ 36 37 30 28 30
</TABLE>
<PAGE>
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 nine 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 12
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-baked 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 $3.99 to $8.99 during lunch and $4.59 to $9.59 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 opened two new
units and converted 19 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. 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 $4.29 to $9.59 at
lunch and $4.59 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 and New York strip steak, oven-baked pizza, and grilled shrimp alfredo
and marinara.
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 18 units to the Italian
Grill format subsequent to the Marietta conversion. The Company plans to
convert additional units on a periodic basis in fiscal 1999. Italian Grill
development plans beyond fiscal 1999 will be made based on operating results
achieved in the current and newly converted Italian Grill units.
FUTURE EXPANSION
The Company intends to open one to two new Company-operated Italian Grill
restaurants during fiscal 1999. The Company has scheduled the opening of a new
unit in Corpus Christi, Texas, in the second quarter of fiscal 1999. The
Company anticipates additional new store openings in the future in markets where
it currently has operations, thereby increasing certain supervisory and
marketing efficiencies.
-2-
<PAGE>
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; and Glen
Allen (Richmond), Virginia. All franchise units 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 currently does not plan to grant any additional
franchises in the United States.
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 five to eight
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 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
favorable pricing. 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.
-3-
<PAGE>
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 28, 1998, the Company's
expenditures for advertising (including local promotions and production costs)
were approximately 4.0% of revenues.
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 regulations 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 increases in the Federal minimum, which became
effective October 1, 1996 and September 1, 1997, have caused a corresponding
increase in the Company's labor costs. 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
-4-
<PAGE>
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 1,030 persons on a full-time
basis, 41 of whom are corporate management and staff personnel while the
remainder are restaurant management and staff. The Company also employs
approximately 2,450 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 30 full-time and 80 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.
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.
-5-
<PAGE>
ITEM 2. PROPERTIES.
The Company owns 20 and leases space for 10 of its Company-operated
restaurants. Two of the currently operating Company-owned units are subject to
ground leases. 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 1999
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 2029, 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. One lease provides for a bargain
purchase option at the end of the lease term. 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 eight of its 30 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 29,
1997, Bright-Kaplan International Corporation ("BK") submitted a claim against
the Company to the American Arbitration Association ("AAA") in Dallas, Texas.
BK, a former franchisee, 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 sought damages in excess of $9.0 million. In 1996, the
AAA arbitration panel heard the evidence presented to the arbitration
proceeding, and in a unanimous opinion delivered in January 1997, ruled that the
Company had no liability to BK, and awarded no damages to BK. Subsequent to the
conclusion of the arbitration case, the Circuit Court of Hamilton County,
Tennessee, dismissed a lawsuit filed by Elizabeth Bright and Thomas C. Bright,
the principal shareholders of BK, attempting to litigate the same claims decided
by the arbitration panel. Elizabeth Bright and Thomas C. Bright appealed the
Circuit Court's dismissal to the Court of Appeals of Tennessee at Knoxville, and
on April 29, 1998, that appellate court unanimously affirmed the trial court's
decision in favor of the Company. The judgement of the Court of Appeals became
final on June 30, 1998, without further appeal of the plaintiffs, thus
effectively ending the lawsuit and claim against the Company.
The Company is involved in routine litigation from time to time. Such
litigation in which the Company is currently involved is not material to the
Company's consolidated financial condition or results of operations.
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 28, 1998.
-6-
<PAGE>
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 1, 1996.
High LOW
----- -----
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 7 1/8 5 1/4
Second Quarter 7 3/8 5 5/8
Third Quarter 7 5 1/2
Fourth Quarter 8 3/8 5 15/16
Fiscal year ending July 4, 1999:
First Quarter (through September 11) 8 5 3/4
As of September 11, 1998, the Company estimates that there were approximately
1,500 beneficial owners of the Company's Common Stock, represented by
approximately 545 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.
-7-
<PAGE>
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 28, 1998, which are derived
from the Consolidated Financial Statements of the Company and its subsidiaries,
which have been audited. The Consolidated Financial Statements as of June 29,
1997 and June 28, 1998, and for each of the years in the three-year period ended
June 28, 1998, 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 3, JULY 2, JUNE 30, JUNE 29, JUNE 28,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RESTAURANT DATA)
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenues................................................. $78,384 $78,956 $ 70,957 $64,904 $66,027
------- ------- -------- ------- -------
Costs and expenses:
Cost of sales............................................ 19,749 20,036 17,965 16,516 17,054
Operating expenses....................................... 44,221 44,768 41,122 36,222 36,419
General and administrative............................... 5,447 5,619 5,767 5,279 6,480
Depreciation and amortization............................ 5,843 5,251 4,871 3,954 3,822
Restructuring charges (reversals) (1).................... -- -- 13,875 (740) --
Impairment of long-lived assets (2)...................... -- -- -- 2,009 --
Unusual charge (3)....................................... -- 600 -- -- --
Loss (gain) on asset scheduled for divestiture........... 50 -- (47) -- --
------- ------- -------- ------- -------
Total costs and expenses.............................. 75,310 76,274 83,553 63,240 63,775
------- ------- -------- ------- -------
Income (loss) from operations............................ 3,074 2,682 (12,596) 1,664 2,252
Net interest expense..................................... 904 1,198 1,045 691 343
------- ------- -------- ------- -------
Income (loss) before income tax expense (benefit)........ 2,170 1,484 (13,641) 973 1,909
Income tax expense (benefit)............................. 461 234 (5,308) 314 716
------- ------- -------- ------- -------
Net income (loss)........................................ $ 1,709 $ 1,250 $ (8,333) $ 659 $ 1,193
======= ======= ======== ======= =======
Net income (loss) per common share (4):
Basic.................................................. $ .28 $ .22 $ (1.48) $ .12 $ .21
======= ======= ======== ======= =======
Diluted................................................ $ .28 $ .22 $ (1.48) $ .11 $ .20
======= ======= ======== ======= =======
Weighted average common shares outstanding (4):
Basic.................................................. 6,013 5,618 5,612 5,658 5,604
======= ======= ======== ======= =======
Diluted................................................ 6,131 5,698 5,612 5,769 5,828
======= ======= ======== ======= =======
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 1,918 $ 1,873 $ 8,065 $ 1,917 $ 943
Working capital deficit (5).............................. (3,154) (2,602) (3,405) (2,235) (3,546)
Total assets............................................. 78,648 75,511 71,368 58,630 57,739
Long-term debt........................................... 18,584 15,548 19,762 7,883 5,439
Stockholders' equity..................................... 52,482 53,436 45,250 45,934 47,195
RESTAURANT DATA:
Company-owned restaurants open for full year............. 31 36 29 28 28
Company-owned restaurants open at end of year............ 36 37 30 28 30
</TABLE>
- --------------------
(1) See Note 8 of Notes to Consolidated Financial Statements.
(2) See Note 1 (i) of Notes to Consolidated Financial Statements.
(3) The Company recorded a $600,000 write-down of its one-third investment in
F.P. Corporation PTY Ltd. and F.P. Restaurants PTY Ltd. in fiscal 1995. The
write-down of this investment was the result of an alleged misappropriation
of assets by the joint-venture's former managing director.
(4) See Note 1 (m) of Notes to Consolidated Financial Statements.
(5) See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
-8-
<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
------------------------------------------------
June 30, June 29, June 28,
1996 1997 1998
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of sales........................................ 25.3 25.4 25.8
Operating expenses................................... 58.0 55.8 55.2
General and administrative........................... 8.1 8.1 9.8
Depreciation and amortization........................ 6.9 6.1 5.8
Restructuring charges (reversals).................... 19.6 (1.1) --
Impairment of long-lived assets...................... -- 3.1 --
Gain on asset scheduled for divestiture.............. (0.1) -- --
----- ----- -----
Total costs and expenses............................ 117.8 97.4 96.6
----- ----- -----
Income (loss) from operations.......................... (17.8) 2.6 3.4
Net interest expense................................... 1.4 1.1 0.5
----- ----- -----
Income (loss) before income tax expense (benefit)...... (19.2) 1.5 2.9
Income tax expense (benefit)........................... (7.5) 0.5 1.1
----- ----- -----
Net income (loss)...................................... (11.7%) 1.0% 1.8%
===== ===== =====
</TABLE>
1998 COMPARED TO 1997
REVENUES
Fiscal 1998 revenues increased $1.1 million, or 1.7%, in comparison to
fiscal 1997. This increase is attributable to the opening of two new units
during the fiscal year and a 0.4% sales increase experienced by the 28 stores
that were open for the full year in both fiscal 1998 and 1997 ("same-stores").
These increases were partially offset by a reduction in U.S. franchise income
and a decline in revenue from the sale of the Company's Richmond, Virginia, unit
to a franchisee in November 1996 and the closure of the Company's Cappellini's
unit in December 1996.
The increase in same-store sales was the result of a 2.6% increase in check
averages partially offset by a 2.1% 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 year also contributed to the increase in check averages.
Fiscal 1998 sales in the Company's Italian Grill units, during current year
periods while operating under the Italian Grill format, increased 5.1% over
comparable periods in fiscal 1997, while sales in the Company's traditional
Spaghetti Warehouse concept declined 2.5% in fiscal 1998. Due to the favorable
sales results in the Italian Grill units, the Company plans to convert
additional units to the Italian Grill format in fiscal 1999.
-9-
<PAGE>
COSTS AND EXPENSES
Cost of Sales
Cost of sales as a percentage of total revenues increased from 25.4% in
fiscal 1997 to 25.8% in fiscal 1998. This increase was due to higher food costs
associated with the Italian Grill format and higher commodity prices incurred on
certain meat and poultry 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 1999 as additional units are
converted to the Italian Grill format.
Operating Expenses
Operating expenses as a percentage of total revenues decreased from 55.8% in
fiscal 1997 to 55.2% in fiscal 1998. This decrease was due primarily to lower
workers' compensation costs and unemployment taxes relative to the previous
year. These declines were partially offset by increases in hourly labor costs
and rent expense in comparison to the prior year. Management anticipates that
operating expenses as a percentage of total revenues will increase modestly in
fiscal 1999 due to higher kitchen labor costs associated with the Italian Grill
format.
General and Administrative Expenses (G&A)
G&A expenses as a percentage of total revenues increased from 8.1% in fiscal
1997 to 9.8% in fiscal 1998. The current year increase was due largely to a
noncash, pre-tax charge of approximately $975,000 relating to stock option
exercises. Current year severance costs and costs associated with the Company's
auction process also contributed to the increase in G&A as a percentage of total
revenues. These increases were partially offset by a reduction in the Company's
corporate bonus expense.
Depreciation and Amortization (D&A)
D&A as a percentage of total revenues decreased from 6.1% in fiscal 1997 to
5.8% in fiscal 1998. This decrease was primarily due to certain information
system equipment becoming fully depreciated, certain equipment items still in
use becoming fully depreciated and the aforementioned increase in same-store
sales.
NET INTEREST EXPENSE
Net interest expense decreased from $691,000 in fiscal 1997 to $343,000 in
fiscal 1998. This decrease is 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 and
capital expenditures.
INCOME TAXES
The Company's effective income tax rate increased from 32.3% in fiscal 1997
to 37.5% in fiscal 1998. The increase is primarily attributable to the fact
that a lower proportion of the Company's consolidated pre-tax earnings was
generated by the Company's Canadian operations in fiscal 1998 as compared to
fiscal 1997. These Canadian earnings are taxed at a substantially lower rate
than U.S. earnings, thereby increasing the Company's overall tax rate.
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 and the sale of the Company's Richmond,
Virginia, operation and the closing of Cappellini's in fiscal 1997. These
declines were partially offset by a 0.7% increase in fiscal 1997 same-store
sales and a $0.2 million increase in U.S. franchise income.
-10-
<PAGE>
The increase in fiscal 1997 same-store sales was the result of a 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 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 fiscal 1997 periods operating under the Italian Grill format, increased
6.4% over comparable periods in fiscal 1996, while sales in traditional
Spaghetti Warehouse units declined 0.6% in fiscal 1997.
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 in fiscal 1997.
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 fiscal 1997 decrease. These
decreases were partially offset by an increase in group medical costs in
comparison to fiscal 1996.
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
fiscal 1997 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 the 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 initially recorded charge. Therefore, the Company reversed
$740,000 in pre-tax restructuring charges in fiscal 1997. See Note 8 of Notes
to Consolidated Financial Statements for further information.
-11-
<PAGE>
Impairment of Long-Lived Assets
The Company adopted Financial Accounting Standards Board Statement No. 121
("SFAS 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.
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.
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 that
year. See Note 4 of Notes to Consolidated Financial Statements for further
information.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit increased from $2.2 million on June
29, 1997 to $3.5 million on June 28, 1998. This increase is primarily
attributable to a reduction of cash and cash equivalents on hand in comparison
to the prior year. 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 decreased from $7.4 million in
fiscal 1997 to $6.4 million in fiscal 1998. The decline is attributed to the
fiscal 1997 receipt of prior year income tax refunds.
Long-term debt outstanding on June 28, 1998, consisted of a $5.4 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 28, 1998, 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 28, 1998, the Company had repurchased 996,041
shares of common stock under this program, including 185,000 shares purchased in
fiscal 1998.
Capital expenditures were $5.8 million in fiscal 1998 as compared to $2.6
million in fiscal 1997. Fiscal 1998 expenditures relate primarily to the
purchase and construction of the Mesquite and Irving, Texas, restaurants, and
the conversion of nine traditional Spaghetti Warehouse restaurants to the
Italian Grill format.
During fiscal 1998, the Company converted nine of its traditional Spaghetti
Warehouse restaurants to the Italian Grill format. 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 additional units to the Italian Grill format during fiscal
1999.
-12-
<PAGE>
In addition to Italian Grill conversions, the Company plans to open one to
two new units and to continue to make necessary replacements and upgrades to its
existing restaurants and information systems during fiscal 1999. Total planned
capital expenditures relating to fiscal 1999 projects are $5.0 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 and payment of required term loan maturities in
fiscal 1999.
YEAR 2000 COMPLIANCE
In the past, a number of computer software programs were written using two
digits rather than four to determine the applicable year. As a result, date-
sensitive computer software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in major system failures or
miscalculations, and is generally referred to as the "Year 2000" problem. An
extensive review of the Company's information systems has been completed and a
comprehensive program is currently in process to modify or replace those systems
that are not Year 2000 compliant. Management believes that all Company systems
are compliant, or will be compliant by June 1999. Additional validation of the
Company's systems will be conducted through testing throughout 1999.
In addition to the assessment of in-house systems, the Company is currently
assessing the readiness of its vendors for the Year 2000 issue. To determine
the status of third parties, letters inquiring as to their readiness have been
sent to substantially all of the Company's vendors. The Company is currently
assessing the vendors' responses and prioritizing them in order of significance
to the business of the Company. Contingency plans will be developed in the
event that business-critical vendors do not provide the Company with
satisfactory evidence of their readiness to handle Year 2000 issues. The
Company intends to make every reasonable effort to assess the Year 2000
readiness of these critical business partners and to create action plans to
address the identified risks.
The Company anticipates that it will have substantially completed an
assessment of the Year 2000 compliance status of all information technology and
non-information technology by December 31, 1998, and will then address the Year
2000 compliance of such equipment.
All maintenance and modification costs will be expensed as incurred, while the
cost of new software, if material is being capitalized and depreciated over its
expected useful life. Testing and remediation of all of the Company's systems
and applications is expected to cost approximately $275,000 from inception in
fiscal 1998 through completion in fiscal 2000. Of these costs, approximately
$55,000 was incurred through June 28, 1998 with the remaining $220,000 to be
incurred in fiscal 1999. All estimated costs have been budgeted and are
expected to be funded by cash flows from operations.
The Company does not believe the costs related to the Year 2000 compliance
project will be material to its financial position or results of operation.
However, the cost of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans, and
other factors. Unanticipated failures by critical vendors as well as the
failure by the Company to execute its own remediation efforts could have a
material adverse effect on the cost of the project and its completion date. As
a result, there can be no assurance that these forward-looking estimates will be
achieved and the actual cost and vendor compliance could differ materially from
those plans, resulting in material financial risk.
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.
-13-
<PAGE>
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128 ("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. The Company adopted SFAS No. 128 in fiscal 1998
and thus has restated reported EPS data for all prior periods presented.
In June 1997, the FASB issued Statement No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components in the financial statements.
SFAS No. 130 is effective for the Company's first quarter financial statements
in fiscal 1999.
In June 1997, the FASB issued Statement No. 131 ("SFAS No. 131"), "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports. SFAS No. 131 is effective for the Company's fiscal 1999
annual financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting of the Costs of Start-up
Activities." SOP 98-5 is effective for financial statements issued for years
beginning after December 15, 1998; therefore, the Company will be required to
implement its provisions by the first quarter of fiscal 2000. At that time, the
Company will be required to change the method currently used to account for pre-
opening costs. The application of SOP 98-5 will result in pre-opening costs on
the Company's Consolidated Balance Sheet as of the date of adoption, net of
related tax effects, being charged to operations as the cumulative effect of a
change in accounting principle. Under the new requirements for accounting for
pre-opening costs, the subsequent costs of start-up activities will be expensed
as incurred.
In June 1998, the FASB issued Statement No. 133 ("SFAS No. 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 is effective for the Company's first quarter financial
statements in fiscal 2000. The Company is currently not involved in derivative
instruments or hedging activities and, therefore, will measure the impact of
this statement as it becomes necessary.
The Company does not expect that the adoption of the above standards will have
a significant impact on its consolidated results of operations, financial
position or cash flows.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates on debt
and changes in commodity prices.
The Company's exposure to interest rate risk relates to variable rate
revolving credit loans that are benchmarked to US and European short-term
interest rates. The Company does not use derivative financial instruments to
manage overall borrowing costs or reduce exposure to adverse fluctuations in
interest rates. The
-14-
<PAGE>
impact on the Company's results of operations of a one-point interest rate
change on the outstanding balance of the variable rate debt as of June 28, 1998
would be immaterial.
The Company purchases certain commodities used in food preparation. These
commodities are generally purchased based upon market prices established with
vendors. These purchase arrangements may contain contractual features that
limit the price paid by establishing certain price floors or caps. The Company
does not use financial instruments to hedge commodity prices because these
purchase arrangements help control the ultimate cost paid and any commodity
price aberrations are generally short term in nature.
This market risk discussion contains forward-looking statements. Actual
results may differ materially from this discussion based upon general market
conditions and changes in domestic and global financial markets.
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.
As previously disclosed in the Company's Form 8-K filed on February 10, 1998,
with the Securities and Exchange Commission, on February 3, 1998, the Company
engaged KPMG Peat Marwick LLP as its independent auditors for the fiscal year
ending June 28, 1998, to replace Arthur Andersen, LLP, who resigned as auditors
of the Company effective February 3, 1998.
The Company has had no disagreements with either 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.
-15-
<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:
--------
2.1 - Agreement and Plan of Merger, dated September 18, 1998,
by and among Spaghetti Warehouse, Inc., Spaghetti
Warehouse Acquisition, Inc. and Consolidated Restaurant
Companies, Inc. (incorporated by reference to Exhibit
2.1 of the Company's current report on Form 8-K filed
with the Securities and Exchange Commission on
September 24, 1998).
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 10Q for the
quarter ended April 2, 1995, filed by the Company with
the Securities and Exchange Commission).
* 3.2 - Third Amended and Restated Bylaws of the Company.
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).
+* 10.3 - Amended and Restated Spaghetti Warehouse, Inc. 1992
Bonus Stock Option Plan.
+ 10.4 - 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).
10.5 - 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).
10.6 - 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).
10.7 - 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).
-16-
<PAGE>
10.8 - 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).
10.9 - 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).
10.10 - 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).
10.11 - 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).
10.12 - 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).
10.13 - 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).
10.14 - 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).
10.15 - 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).
10.16 - 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).
10.17 - 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).
-17-
<PAGE>
10.18 - 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).
10.19 - 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).
10.20 - 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).
10.21 - 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).
10.22 - 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).
+ 10.23 - 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).
10.24 - Amended and Restated Loan Agreement, dated April 30,
1998 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. 4 thereto, dated August 12, 1996,
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
(incorporated by reference to Exhibit 10.36 of the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 29, 1998, filed with the Securities
and Exchange Commission).
+ 10.25 - Employment Agreement, dated as of January 30, 1996, by
and between the Company and Robert R. Hawk
(incorporated by reference to Exhibit 10.37 of the
Company's Annual Report on Form 10-K for the fiscal
year ending June 30, 1996, filed with the Securities
and Exchange Commission).
+ 10.26 - 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).
+ 10.27 - 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).
-18-
<PAGE>
+ 10.28 - 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).
+*10.29 - Retention Incentive Policy for Designated Executive
Officers, dated as of June 8, 1998.
10.30 - Escrow Agreement, dated September 18, 1998, by and
between Spaghetti Warehouse, Inc. and Consolidated
Restaurant Companies, Inc. (incorporated by reference
to Exhibit 2.1 of the Company's current report on Form
8-K filed with the Securities and Exchange Commission
on September 24, 1998).
16.1 - Letter regarding change in certifying accountant, dated
February 9, 1998 (incorporated by reference to Exhibit
16.1 of the Company's current report on Form 8-K filed
with the Securities and Exchange Commission on February
10, 1998).
* 21.1 - Subsidiaries of the Company.
* 23.1 - Consent of KPMG Peat Marwick LLP
* 23.2 - 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.
-19-
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORTS OF INDEPENDENT AUDITORS........................................................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AS OF JUNE 29, 1997 AND JUNE 28, 1998..................................... F-4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED
JUNE 28, 1998........................................................................................ F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED
JUNE 28, 1998........................................................................................ F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED
JUNE 28, 1998........................................................................................ F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................ F-8
</TABLE>
ALL SCHEDULES ARE OMITTED AS THE REQUIRED INFORMATION IS INAPPLICABLE OR THE
INFORMATION IS PRESENTED IN THE FINANCIAL STATEMENTS OR RELATED NOTES.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of
Spaghetti Warehouse, Inc.:
We have audited the accompanying consolidated balance sheet of Spaghetti
Warehouse, Inc. (a Texas Corporation) and subsidiaries as of June 28, 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the fiscal year then ended. 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
audit.
We conducted our audit 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 audit provides 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 28, 1998, and the results of their
operations and their cash flows for the fiscal year then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
August 7, 1998, except as for
Note 10, which is as of September 18, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors of
Spaghetti Warehouse, Inc.:
We have audited the accompanying consolidated balance sheet of Spaghetti
Warehouse, Inc. (a Texas Corporation) and subsidiaries as of June 29, 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the fiscal years in the two-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 29, 1997 and the consolidated
results of operations and cash flows for each of the fiscal years in the two-
year period ended June 29, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 14, 1997
F-3
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 29, 1997 AND JUNE 28, 1998
<TABLE>
<CAPTION>
ASSETS 1997 1998
------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 1,916,983 $ 942,622
Accounts receivable..................................................... 637,803 569,349
Inventories............................................................. 616,253 642,379
Prepaid expenses........................................................ 274,111 333,779
Deferred income taxes (Note 4).......................................... 469,145 273,934
----------- -----------
Total current assets.............................................. 3,914,295 2,762,063
----------- -----------
Property and equipment, net (Note 2)..................................... 45,732,390 47,923,834
Assets scheduled for divestiture (Note 8)................................ 1,534,714 -
Trademark and franchise rights, net (Note 1)............................. 2,942,852 2,641,235
Pre-opening costs, net................................................... - 109,977
Deferred income taxes (Note 4)........................................... 3,961,274 3,553,571
Other assets............................................................. 544,342 747,936
----------- -----------
$58,629,867 $57,738,616
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt (Note 3).............................. $ 1,478,127 $ 1,359,837
Accounts payable........................................................ 2,082,150 2,451,987
Accrued payroll and bonuses............................................. 1,673,336 1,683,173
Other accrued liabilities (Note 1)...................................... 915,226 813,428
----------- -----------
Total current liabilities......................................... 6,148,839 6,308,425
----------- -----------
Long-term debt, less current portion (Note 3)............................ 6,405,226 4,079,507
Deferred compensation.................................................... 141,901 155,641
Commitments and contingencies (Note 6)................................... - -
Stockholders' equity (Note 5):
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
6,527,835 shares in 1997 and 6,717,759 shares in 1998.................. 65,278 67,178
Additional paid-in capital.............................................. 36,246,849 37,508,055
Cumulative translation adjustment....................................... (611,499) (829,325)
Retained earnings....................................................... 16,753,859 17,946,524
----------- -----------
52,454,487 54,692,432
Less cost of 872,341 shares in 1997 and 1,057,341 shares in 1998 of
common stock held in treasury.......................................... (6,520,586) (7,497,389)
----------- -----------
45,933,901 47,195,043
----------- -----------
$58,629,867 $57,738,616
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, JUNE 29, 1997 AND JUNE 28, 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Restaurant sales................................................ $ 69,662,500 $63,372,287 $64,599,577
Franchise....................................................... 705,876 932,355 670,501
Other........................................................... 588,243 598,931 756,796
------------ ----------- -----------
Total revenues......................................... 70,956,619 64,903,573 66,026,874
------------ ----------- -----------
Costs and expenses:
Cost of sales................................................... 17,964,938 16,515,660 17,054,112
Operating expenses.............................................. 41,121,545 36,221,808 36,418,811
General and administrative...................................... 5,766,812 5,278,589 6,480,367
Depreciation and amortization................................... 4,871,376 3,954,334 3,821,440
Restructuring charges (reversals) (Note 8)...................... 13,875,248 (740,000) -
Impairment of long-lived assets (Note 1)........................ - 2,009,526 -
Gain on asset scheduled for divestiture (Note 2)................ (47,178) - -
------------ ----------- -----------
Total costs and expenses...................................... 83,552,741 63,239,917 63,774,730
------------ ----------- -----------
Income (loss) from operations................................. (12,596,122) 1,663,656 2,252,144
------------ ----------- -----------
Interest income (expense):
Interest income................................................. 192,080 189,357 145,962
Interest expense................................................ (1,236,740) (879,925) (489,208)
------------ ----------- -----------
(1,044,660) (690,568) (343,246)
------------ ----------- -----------
Income (loss) before income tax expense (benefit)............. (13,640,782) 973,088 1,908,898
Income tax expense (benefit) (Note 4)............................ (5,307,324) 314,153 716,233
------------ ----------- -----------
Net income (loss)...................................... $ (8,333,458) $ 658,935 $ 1,192,665
============ =========== ===========
Net income (loss) per common share (Note 1):
Basic.......................................................... $ (1.48) $ .12 $ .21
============ =========== ===========
Diluted........................................................ $ (1.48) $ .11 $ .20
============ =========== ===========
Weighted average common shares outstanding:
Basic.......................................................... 5,612,193 5,657,782 5,604,334
============ =========== ===========
Diluted........................................................ 5,612,193 5,769,261 5,827,962
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL CUMULATIVE
NUMBER OF PAID-IN TRANSLATION
SHARES AMOUNT CAPITAL ADJUSTMENT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at July 2, 1995........ 6,409,666 $ 64,097 $ 35,747,731 $ (575,874)
Employee ESP plan purchases
and stock option exercises..... 65,709 657 244,030 -
Stock options issued as
compensation (Note 5).......... - - 21,000 -
Purchase of treasury shares,
at cost........................ - - - -
Foreign currency translation
adjustment..................... - - - 25,232
Net loss........................ - - - -
----------- ----------- ----------- -----------
Balances at June 30, 1996....... 6,475,375 64,754 36,012,761 (550,642)
Employee ESP plan purchases
and stock option exercises..... 52,460 524 216,088 -
Stock options issued as
compensation (Note 5).......... - - 18,000 -
Purchase of treasury shares,
at cost........................ - - - -
Foreign currency translation
adjustment..................... - - - (60,857)
Net income...................... - - - -
----------- ----------- ----------- -----------
Balances at June 29, 1997....... 6,527,835 65,278 36,246,849 (611,499)
Employee ESP plan purchases
and stock option exercises..... 189,924 1,900 1,243,206 -
stock options issued as
compensation (Note 5).......... - - 18,000 -
Purchase of treasury shares,
at cost........................ - - - -
Foreign currency translation
adjustment..................... - - - (217,826)
Net income...................... - - - -
----------- ----------- ----------- -----------
Balances at June 28, 1998....... 6,717,759 $ 67,178 $ 37,508,055 $ (829,325)
=========== =========== =========== ===========
<CAPTION>
TREASURY STOCK
------------------------- TOTAL
RETAINED NUMBER STOCKHOLDERS'
EARNINGS OF SHARES AMOUNT EQUITY
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at July 2, 1995........ $24,428,382 (812,457) $(6,228,563) $53,435,773
Employee ESP plan purchases
and stock option exercises..... - - - 244,687
Stock options issued as
compensation (Note 5).......... - - - 21,000
Purchase of treasury shares,
at cost........................ - (29,795) (142,776) (142,776)
Foreign currency translation
adjustment..................... - - - 25,232
Net loss........................ (8,333,458) - - (8,333,458)
----------- ----------- ----------- -----------
Balances at June 30, 1996....... 16,094,924 (842,252) (6,371,339) 45,250,458
Employee ESP plan purchases
and stock option exercises..... - - - 216,612
Stock options issued as
compensation (Note 5).......... - - - 18,000
Purchase of treasury shares,
at cost........................ - (30,089) (149,247) (149,247)
Foreign currency translation
adjustment..................... - - - (60,857)
Net income...................... 658,935 - - 658,935
----------- ----------- ----------- -----------
Balances at June 29, 1997....... 16,753,859 (872,341) (6,520,586) 45,933,901
Employee ESP plan purchases
and stock option exercises..... - - - 1,245,106
stock options issued as
compensation (Note 5).......... - - - 18,000
Purchase of treasury shares,
at cost........................ - (185,000) (976,803) (976,803)
Foreign currency translation
adjustment..................... - - - (217,826)
Net income...................... 1,192,665 - - 1,192,665
----------- ----------- ----------- -----------
Balances at June 28, 1998....... $17,946,524 (1,057,341) $(7,497,389) $47,195,043
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, JUNE 29, 1997 AND JUNE 28, 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $(8,333,458) $ 658,935 $ 1,192,665
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization expense......................... 4,871,376 3,954,334 3,821,440
(Gain) loss on disposal of property and equipment............. 144,972 36,150 (59,878)
Restructuring charges (reversals)............................. 13,875,248 (740,000) -
Impairment of long-lived assets............................... - 2,009,526 -
Stock compensation expense.................................... - - 975,063
Deferred income taxes......................................... (5,336,983) 1,599,585 607,035
Other, net.................................................... 151,718 89,719 33,920
Changes in assets and liabilities:
Accounts receivable....................................... (55,619) 20,213 63,165
Inventories............................................... 2,400 70,742 (26,126)
Prepaid expenses.......................................... 36,215 67,600 (59,668)
Other assets.............................................. (766,550) (55,183) (440,151)
Accounts payable.......................................... (807,087) 157,845 373,832
Accrued payroll and bonuses............................... (437,702) 222,524 9,837
Other accrued liabilities................................. (319,400) (572,262) (101,799)
Accrued restructuring charges............................. (759,901) (138,512) -
----------- ------------ -----------
Net cash provided by operating activities..................... 2,265,229 7,381,216 6,389,335
----------- ------------ -----------
Cash flows from investing activities:
Purchase of property and equipment................................ (4,045,220) (2,552,683) (5,842,463)
Proceeds from sales of property and equipment..................... 3,654,513 854,734 1,647,783
Collection of notes receivable.................................... 6,092 - -
----------- ------------ -----------
Net cash used in investing activities......................... (384,615) (1,697,949) (4,194,680)
----------- ------------ -----------
Cash flows from financing activities:
Net borrowings from (payments on) long-term debt.................. 4,214,000 (11,878,647) (2,444,009)
Purchase of treasury shares....................................... (142,776) (149,247) (976,803)
Proceeds from employee stock plans................................ 244,687 216,612 270,043
----------- ------------ -----------
Net cash provided by (used in) financing activities........... 4,315,911 (11,811,282) (3,150,769)
----------- ------------ -----------
Effects of exchange rates on cash and cash equivalents............. (4,080) (20,366) (18,247)
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents............... 6,192,445 (6,148,381) (974,361)
Cash and cash equivalents at beginning of year..................... 1,872,919 8,065,364 1,916,983
----------- ------------ -----------
Cash and cash equivalents at end of year........................... $ 8,065,364 $ 1,916,983 $ 942,622
=========== ============ ===========
Supplemental information:
Interest paid (net of amounts capitalized)........................ $ 1,111,677 $ 1,145,638 $ 514,324
=========== ============ ===========
Income taxes paid (net of refunds)................................ $ 15,238 $ (1,291,952) $ 113,319
=========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<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
Statement 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 $696,899 and $857,888 at June 29, 1997 and June 28, 1998, 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-8
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
pre-opening costs was approximately $180,000, $170,000 and $75,000 for fiscal
years 1996, 1997 and 1998, respectively.
(i) Property and Equipment
Property and equipment are recorded at cost, including interest capitalized
during the construction period. Total interest of $0, $0 and $26,699 was
capitalized in fiscal years 1996, 1997 and 1998, 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 $4,500,000, $3,780,000 and $3,600,000, for
fiscal years 1996, 1997, and 1998 respectively.
In March 1995, the Financial Accounting Standard Board issued Statement No.
121 ("SFAS No. 121") on accounting for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to assets to be held and
used. SFAS No. 121 also established accounting standards for long-lived assets
and certain identifiable intangibles to be disposed of. The Company adopted
SFAS No. 121 in the first quarter of fiscal 1997.
Adoption of SFAS No. 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. 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 a pre-tax, noncash charge of $1,759,526 during the first
quarter of fiscal 1997 as a result of adopting SFAS No. 121. 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. Amortization of
trademark and franchise rights was approximately $130,000 per year in fiscal
years 1996, 1997 and 1998. Accumulated amortization was $624,586 and $703,374
as of June 29, 1997, and June 28, 1998, respectively.
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 28,
1998.
F-9
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(k) 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 and operating losses and tax credit carryforwards. 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:
1997 1998
-------- --------
Property taxes......................... $458,304 $449,675
Insurance reserves..................... 197,582 103,169
Interest............................... 145,459 103,208
Other.................................. 113,881 157,376
-------- --------
$915,226 $813,428
======== ========
(m) Net Income (Loss) per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128") "Earnings Per Share,"
which requires presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. As required, the Company adopted the
provisions of SFAS No. 128 in the second quarter of fiscal 1998. All prior year
weighted average and per share information has been restated in accordance with
SFAS No. 128.
The number of weighted average common shares outstanding used in the
computation of diluted net income (loss) per share includes the effect of
dilutive options using the treasury stock method. For fiscal years 1996, 1997
and 1998, there are 148,015, 233,065 and 54,380 options, respectively, to
purchase common stock that were not included in the computation of diluted net
income (loss) per share because to do so would have been antidilutive for the
fiscal years presented.
(n) Financial Instruments
The Company's financial instruments at June 29, 1997 and June 28, 1998,
consist of cash equivalents, accounts receivable, accounts payable and long-term
debt. The fair value of these financial instruments approximates the carrying
amounts reported in the consolidated balance sheets. The following methods were
used in estimating the fair value of each class of financial instrument: cash
equivalents, accounts receivable and accounts payable approximate their carrying
amounts due to the short duration of those items and long-term debt is based on
quoted market prices.
F-10
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Land................................................................ $ 8,571,206 $ 9,089,052
Buildings........................................................... 27,654,242 30,671,057
Equipment, furniture and fixtures................................... 24,556,542 26,244,315
Leasehold improvements.............................................. 11,120,348 11,402,457
------------ ------------
71,902,338 77,406,881
Less accumulated depreciation and amortization...................... (26,169,948) (29,483,047)
------------ ------------
$ 45,732,390 $ 47,923,834
============ ============
</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 location in fiscal 1996 for an amount exceeding its recorded book
value, thus recognizing a $47,178 gain at the time of sale.
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Term note payable to banks, bearing interest at 6.8% at June 28, 1998,
unsecured, interest payable quarterly and $453,279 in principal payable
quarterly through July 1, 2001, at which date the remaining principal
balance is due............................................................ $7,883,353 $5,439,344
---------- ----------
Less current portion....................................................... 1,478,127 1,359,837
---------- ----------
Long-term debt, excluding current portion............................... $6,405,226 $4,079,507
========== ==========
</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. No amounts were outstanding under the revolving credit agreement at the
fiscal years ended 1997 and 1998. The Company also has $5,439,344 in term loans
borrowed under this credit agreement as of June 28, 1998. 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 28, 1998, the Company was in compliance with all requirements under
the credit agreement.
The aggregate maturities of long-term debt at June 28, 1998, are as follows:
1999.................................................... $1,359,837
2000.................................................... 1,813,116
2001.................................................... 1,813,112
2002.................................................... 453,279
----------
Total................................................ $5,439,344
==========
F-11
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(4) INCOME TAXES
The Company's income (loss) before income tax expense (benefit) attributable
to its operations is summarized as follows for fiscal years 1996, 1997 and 1998:
1996 1997 1998
------------ ------------ ------------
Domestic operations............ $(13,950,506) $ 637,467 $ 1,572,550
Foreign operations............. 309,724 335,621 336,348
------------ ------------ ------------
$(13,640,782) $ 973,088 $ 1,908,898
============ ============ ============
The provision (benefit) for income taxes is summarized as follows for fiscal
years 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal...........................$ (3,487) $(1,391,676) $ --
State and local................... (32,366) 53,160 65,161
Foreign........................... 29,721 46,564 56,001
Deferred........................... (5,301,192) 1,606,105 595,071
----------- ----------- -----------
$(5,307,324) $ 314,153 $ 716,233
=========== =========== ===========
</TABLE>
The actual income tax expense (benefit) differs from the expected income tax
expense (benefit) computed by applying the U.S. federal corporate tax rate to
income (loss) before income tax expense (benefit) as follows for fiscal years
1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).............. $(4,637,866) $ 330,850 $ 649,025
State and local taxes, net of federal effect........... (545,631) 35,086 43,006
Rehabilitation credits lost due to sale
of properties......................................... -- -- 155,364
Other.................................................. (123,827) (51,783) (131,162)
----------- ----------- -----------
$(5,307,324) $ 314,153 $ 716,233
=========== =========== ===========
</TABLE>
F-12
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of June 29,
1997 and June 28, 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
General business credit carryforwards............................... $ 3,585,218 $ 3,444,882
Alternative minimum tax credit carryforwards........................ 912,335 912,335
Federal and state net operating loss carryforwards.................. 1,627,209 1,006,121
Restructuring related reserves...................................... 404,091 -
Other............................................................... 609,994 563,673
----------- -----------
Deferred tax assets............................................... 7,138,847 5,927,011
----------- -----------
Deferred tax liabilities:
Property and equipment.............................................. (2,668,221) (2,001,928)
Pre-opening costs................................................... - (41,791)
Other............................................................... (40,207) (55,786)
----------- -----------
Deferred tax liabilities.......................................... (2,708,428) (2,099,505)
----------- -----------
Net deferred tax asset............................................ $ 4,430,419 $ 3,827,506
=========== ===========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of the deductible
differences.
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 prior years, beginning in fiscal 1991.
The Company has a Federal tax net operating loss of approximately $2,000,000
as of June 28, 1998, which will begin to expire in 2011.
(5) COMMON STOCK AND OPTIONS
(a) Stock Compensation Plans
At June 28, 1998, the Company had four stock based compensation plans that
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 Employee Stock Purchase plan ("ESP"). Additionally,
except for stock options granted to directors at exercise prices below market
value on the date of grant and for cashless exercises of stock options by
employees, no compensation cost has been recognized for the Company's fixed
stock option plans. 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 Financial Accounting Standards
F-13
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Board Statement No. 123 ("SFAS No. 123"), the Company's pro-forma net income
(loss) for fiscal years 1996, 1997 and 1998 would have been $(9,213,906),
$114,553 and $889,740, respectively, and the Company's pro-forma net income
(loss) per common share would have been $(1.64), $0.02 and $0.16, respectively.
The fair value of each option grant under SFAS No. 123 is estimated on the
date of grant or repricing using the Black-Scholes option pricing model with the
following weighted-average assumptions for options granted or repriced in fiscal
years 1996, 1997 and 1998, respectively: amortization over the respective
vesting periods; no dividends; expected lives of 6.1, 6.6 and 6.4 years;
expected stock price volatility of approximately 41%, 40% and 39%; and risk free
interest rates of 5.6%, 6.6% and 5.7%. The above 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.
(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 with a weighted
average exercise price of $7.03 to the then current fair market value of $5.13.
Compensation expense of $975,063 was recorded in fiscal 1998 for cashless
exercises of stock options under this plan.
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 60% 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 $21,000 in fiscal 1996, $18,000 in fiscal 1997 and
$18,000 in fiscal 1998 was recorded for options granted as part of the
directors' compensation under this plan.
F-14
<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 is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- ---------------------- ----------------------
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.. 799,906 $7.34 817,214 $5.68 931,367 $5.68
Granted at fair market value...... 134,000 5.09 197,875 5.17 85,500 6.15
Granted at below fair market value 8,197 2.56 6,000 3.00 5,190 3.47
Exercised......................... (13,337) 2.08 (862) 3.25 (405,247) 5.12
Forfeited......................... (111,552) 5.81 (88,860) 5.21 (138,774) 5.98
--------- -------- ---------
Outstanding at end of year........ 817,214 5.68 931,367 5.68 478,036 6.12
========= ======== =========
Options exercisable at year-end... 371,051 6.35 536,495 6.01 318,951 6.36
Weighted-average fair value of
options granted during the year:
Granted at fair market value..... $ 2.62 $ 2.71 $ 3.01
Granted at below fair market 3.61 4.20 4.77
value...........................
</TABLE>
The following table summarizes information about the fixed stock options
outstanding and exercisable at June 28, 1998:
<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 - 3.50 24,722 7.6 years $ 2.91 24,722 $ 2.91
4.56 - 5.13 256,089 6.5 5.07 184,504 5.10
5.25 - 5.88 142,845 7.1 5.78 71,345 5.81
7.18 - 21.75 54,380 5.8 13.35 38,380 15.68
------- -------
2.56 - 21.75 478,036 6.7 6.12 318,951 6.36
======= =======
</TABLE>
(c) Employee Stock Purchase Plan
On August 23, 1993, the Company's Board of Directors approved an 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 56,624 shares,
51,598 shares and 54,707 shares were purchased by employees of the Company under
the ESP plan during fiscal years 1996, 1997 and 1998, respectively. Compensation
cost under SFAS No. 123 is based on the fair value of the employee's purchase
rights, which was estimated using the Black-Scholes model with the following
assumptions for fiscal years 1996, 1997 and 1998, respectively: no dividends;
expected life of one year for all years; expected stock price volatility of
approximately 41%, 37% and 27%; and risk free interest rates of 5.3%, 5.4% and
5.9%. The weighted-average fair value of those purchase rights granted in
fiscal years 1996, 1997 and 1998 was $1.50, $1.48 and $1.13, respectively.
F-15
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
The Company leases certain restaurant facilities under operating leases
expiring at various dates through 2029. 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 28, 1998 are as
follows:
1999............................................... $ 732,333
2000............................................... 656,973
2001............................................... 604,300
2002............................................... 530,500
2003............................................... 486,441
Thereafter......................................... 4,545,214
----------
Total............................................ $7,555,760
==========
Rental expense under operating leases was approximately $710,000, $690,000
and $800,000 for fiscal years 1996, 1997 and 1998, 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, in January
1997, unanimously ruled that the Company had no liability in this matter. In
June 1997, the lawsuit was dismissed by the trial judge on the grounds that
matters in controversy had been decided in the previous AAA ruling. A Court of
Appeals affirmed the trial court's dismissal of all claims. This judgement
became final subsequent to June 28, 1998, thereby ending the lawsuit and claim.
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.
(7) ADVERTISING EXPENSES
The Company expenses advertising costs as they are incurred. Advertising
costs were approximately $3,230,000, $2,610,000 and $2,630,000 for fiscal years
1996, 1997 and 1998, respectively. These expenses are recorded under operating
expenses in the Consolidated Statement of Operations.
(8) RESTRUCTURING CHARGES
In January 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.
F-16
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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 in the first quarter of fiscal 1998, thus completing
its original plan. Excess reserves of $740,000 were reversed in fiscal 1997.
Restaurants closed under the restructuring plan recorded income (loss) from
operations of $(540,000) and $50,000 in fiscal years 1996 and 1997,
respectively, which are included in the Consolidated Statement of Operations.
(9) QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------
SEPTEMBER 29, DECEMBER 29, MARCH 30, JUNE 29,
1996 (b) 1996 (c) 1997 1997 (d)
------------- ------------ ------------ ------------
<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.............. $ (.15) .05 .08 .13
============= ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------
SEPTEMBER 28, DECEMBER 28, MARCH 29, JUNE 28,
1997 1997 1998 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended June 28, 1998:
Revenues...................................... $ 15,931,467 15,452,222 17,060,933 17,582,252
============= ============ ============ ============
Gross profit (a).............................. $ 3,177,802 2,535,654 3,429,212 3,411,283
============= ============ ============ ============
Net income (loss)............................. $ 506,350 209,154 603,822 (126,661)
============= ============ ============ ============
Net income (loss) per common share.............. $ .09 .04 .11 (.02)
============= ============ ============ ============
</TABLE>
(a) Gross profit is calculated as total revenues less cost of sales and
operating expenses.
(b) The adoption of SFAS No. 121 (see Note 1(i)) reduced net income by
$1,148,876, or $.21 per share, in the quarter ended September 29, 1996.
(c) The reversal of previously expensed restructuring charges (see Note 8)
increased net income by $225,980, or $.04 per share, in the quarter
ended December 29, 1996.
(d) The recording of an additional SFAS No. 121 charge and reversal of
remaining restructuring charges increased net income by $99,357, or
$.02 per share, in the quarter ended June 29, 1997.
(10) SUBSEQUENT EVENT
On September 18, 1998, the Company entered into an agreement and plan of
merger to sell all outstanding shares of the Company's common stock to a newly-
formed subsidiary of the investment firm Cracken, Harkey, Street & Hartnett,
L.L.C. for $8.00 per share. This agreement is subject to certain conditions
including, but not limited to, financing, shareholder approval and the
Securities and Exchange Commission's approval.
F-17
<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, 1998.
SPAGHETTI WAREHOUSE, INC.
/s/ Robert R. Hawk
------------------
Robert R. Hawk, 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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------- -------- ----
<S> <C> <C>
/s/ Robert R. Hawk Chairman of the Board, September 23, 1998
- ------------------------------ President, Chief Executive Officer
Robert R. Hawk and a Director
(Principal Executive Officer)
/s/ Robert E. Bodnar Vice President, Chief Financial September 23, 1998
- ------------------------------ Officer and Secretary
Robert E. Bodnar (Principal Financial Officer)
/s/ Wendy W. Hackemack Treasurer and Controller September 23, 1998
- ------------------------------ (Principal Accounting Officer)
Wendy W. Hackemack
/s/ C. Cleave Buchanan, Jr. Director September 23, 1998
- ------------------------------
C. Cleave Buchanan, Jr.
/s/ Frank Cuellar, Jr. Director September 23, 1998
- ------------------------------
Frank Cuellar, Jr.
/s/ John T. Ellis Director September 23, 1998
- ------------------------------
John T. Ellis
/s/ Peter Hnatiw Director September 23, 1998
- ------------------------------
Peter Hnatiw
/s/ James F. Moore Director September 23, 1998
- ------------------------------
James F. Moore
/s/ Cynthia I. Pharr Director September 23, 1998
- ------------------------------
Cynthia I. Pharr
/s/ Phillip Ratner Director September 23, 1998
- ------------------------------
Phillip Ratner
/s/ William B. Rea, Jr. Director September 23, 1998
- ------------------------------
William B. Rea, Jr.
</TABLE>
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
EXHIBITS
TO
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 28, 1998
----------
SPAGHETTI WAREHOUSE, INC.
===============================================================================
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
2.1 - Agreement and Plan of Merger, dated September 18, 1998, by and among
Spaghetti Warehouse, Inc., Spaghetti Warehouse Acquisition, Inc. and
Consolidated Restaurant Companies, Inc. (incorporated by reference
to Exhibit 2.1 of the Company's current report on Form 8-K filed
with the Securities and Exchange Commission on September 24, 1998).
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 - Third Amended and Restated Bylaws of the Company.
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).
+* 10.3 - Amended and Restated Spaghetti Warehouse, Inc. 1992 Bonus Stock
Option Plan.
+ 10.4 - 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).
10.5 - 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).
10.6 - 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).
10.7 - 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).
10.8 - 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
10.9 - 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).
10.10 - 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).
10.11 - 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).
10.12 - 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).
10.13 - 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).
10.14 - 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).
10.15 - 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).
10.16 - 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).
10.17 - 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).
10.18 - 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
10.19 - 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).
10.20 - 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).
10.21 - 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).
10.22 - 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).
+ 10.23 - 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).
10.24 - 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 (incorporated by reference to Exhibit 10.36 of the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 29, 1998, filed with the Securities and Exchange Commission).
+ 10.25 - Employment Agreement, dated as of January 30, 1996, by and between
the Company and Robert R. Hawk (incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K for the fiscal
year ending June 30, 1996, filed with the Securities and Exchange
Commission).
+ 10.26 - 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).
+ 10.27 - 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).
+ 10.28 - 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).
+* 10.29 - Retention Incentive Policy for Designated Executive Officers, dated
as of June 8, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
10.30 - Escrow Agreement, dated September 18, 1998, by and between Spaghetti
Warehouse, Inc. and Consolidated Restaurant Companies, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's current
report on Form 8-K filed with the Securities and Exchange Commission
on September 24, 1998).
16.1 - Letter regarding change in certifying accountant, dated February 9,
1998 (incorporated by reference to Exhibit 16.1 of the Company's
current report on Form 8-K filed with the Securities and Exchange
Commission on February 10, 1998).
* 21.1 - Subsidiaries of the Company.
* 23.1 - Consent of KPMG Peat Marwick LLP
* 23.2 - Consent of Arthur Andersen LLP
* 27.1 - Financial Data Schedule
</TABLE>
- ---------------
+ Compensation plan, benefit plan or employment contract or arrangement.
* Filed herewith.
<PAGE>
EXHIBIT 3.2
THIRD AMENDED AND RESTATED BYLAWS OF
SPAGHETTI WAREHOUSE, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be located in the City of Dallas,
County of Dallas, State of Texas. The address of the registered office of the
corporation is 1815 North Market Street, Dallas, Texas 75202; and the name of
the registered agent at such address is William B. Rea, Jr. Such office and
agent may be changed as the Board of Directors from time to time may determine.
Section 2. The corporation may also have offices at such other places,
either within or without the State of Texas, as the Board of Directors may from
time to time determine or as the business of the corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. All annual meetings of shareholders shall be held at the
registered offices of the corporation in the City of Dallas, State of Texas, or
at such other place, within or without the State of Texas, as may be designated
by the Board of Directors and stated in the notice of the meeting or in a duly
executed waiver of notice thereof. Special meetings of shareholders may be held
at such place, within or without the State of Texas, and at such time as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual meetings of shareholders shall be held on the last
Tuesday in October of each year, if not a legal holiday, and if a legal holiday,
then on the next secular day following, at 10 a.m., at which the shareholders
shall elect a Board of Directors and transact such other business as may
properly be brought before the meeting.
Section 3. Special meetings of the shareholders may be called by the
President, the Board of Directors or the holders of not less than one-tenth
(1/10) of all shares entitled to vote at the meeting.
<PAGE>
Section 4. Written or printed notice stating the place, day and hour of
the meeting and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than ten (10) nor more
than fifty (50) days before the day of the meeting, either personally or by
mail, by or at the direction of the President, the Secretary, or the officer or
person calling the meeting, to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail addressed to the shareholder at his address
as it appears on the stock transfer books of the corporation, with postage
thereon prepaid.
Section 5. Business transacted at any special meeting shall be confined to
the purposes stated in the notice thereof.
Section 6. The holders of a majority of the shares entitled to vote,
represented in person or by proxy (counting for such purposes all abstentions
and broker non-votes), shall constitute a quorum at meetings of the
shareholders, except as otherwise provided in the Articles of Incorporation.
If, however, a quorum shall not be present or represented at any meeting of the
shareholders, the shareholders present in person or represented by proxy shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified and called. The shareholders present at a duly organized
meeting may continue to transact business notwithstanding the withdrawal of some
shareholders prior to adjournment, but in no event shall a quorum consist of the
holders of less than one-third (1/3) of the shares entitled to vote and thus
represented at such meeting.
Section 7. With respect to any matter, other than the election of
directors or a matter for which the affirmative vote of the holders of a
specified portion of the shares entitled to vote is required by the Texas
Business Corporation Act, the act of the shareholders shall be the affirmative
vote of a majority of the shares entitled to vote, and voted, on the matter at a
meeting of shareholders at which a quorum is present; provided, that, for
purposes of this sentence, all abstentions and broker non-votes shall not be
counted as voted either for or against such majority. With respect to the
election of directors, directors shall be elected by a plurality of the
2
<PAGE>
votes cast by the holders of shares entitled to vote, and voted, in the election
of directors at a meeting of shareholders at which a quorum is present;
provided, that abstentions and broker non-votes shall not be counted as voted
either for or against any nominee for director.
Section 8. Each outstanding share, regardless of class, shall be entitled
to one vote on each matter submitted to a vote at a meeting of shareholders,
except to the extent that the voting rights of the shares of any class are
limited or denied by the Articles of Incorporation or the Texas Business
Corporation Act.
Section 9. A shareholder may vote in person or by proxy executed in
writing by the shareholder or by his duly authorized attorney in fact. No proxy
shall be valid after eleven (11) months from the date of its execution unless
otherwise provided in the proxy. Each proxy shall be revocable unless expressly
provided therein to be irrevocable, and unless otherwise made irrevocable by
law.
Section 10. The officer or agent having charge of the stock transfer books
shall make, at least ten (10) days before each meeting of shareholders, a
complete list of the shareholders entitled to vote at such meeting or any
adjournment thereof, arranged in alphabetical order, with the address of and
number of shares held by each, which list, for a period of ten (10) days prior
to such meeting, shall be kept on file at the registered office of the
corporation and shall be subject to inspection by any shareholder at any time
during the usual business hours. Such list shall also be produced and kept open
at the time and place of the meeting and shall be subject to the inspection of
any shareholder during the whole time of the meeting. The original stock
transfer books shall be prima facie evidence as to who are the shareholders
entitled to examine such list or transfer book or to vote at any such meeting of
shareholders.
Section 11. Any action required by the statutes to be taken at a meeting
of the shareholders, or any action which may be taken at a meeting of the
shareholders, may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all of the shareholders entitled
to vote with respect to the subject matter thereof, and such consent shall have
the same force and effect as a unanimous vote of shareholders.
Section 12. Shareholders may participate in and hold a meeting by means of
conference telephone or similar communication equipment by means of which all
persons participating in the meeting can hear each
3
<PAGE>
other. Participation in such a meeting shall constitute presence in person at
the meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground the
meeting is not lawfully called or convened.
Section 13. At an annual meeting of shareholders, only such business shall
be conducted as shall have been brought before the meeting (a) by or at the
direction of the Board of Directors or (b) by any shareholder of the corporation
who complies with the notice procedures set forth in this Section 13. For
business to be properly brought before an annual meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary of
the corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation, not
less than twenty (20) days nor more than fifty (50) days prior to the meeting;
provided, however, that in the event that less than thirty (30) days' notice or
prior public disclosure of the date of the meeting is given or made to the
shareholders, notice by the shareholder to be timely must be received not later
than the close of business on the tenth (10th) day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A shareholder's notice to the Secretary shall set forth as
to each matter the shareholder proposes to bring before the annual meeting the
following information: (w) a brief description of the business proposed to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting; (x) the name and address, as they appear on the
corporation's books, of the shareholder proposing such business; (y) the number
of shares of the corporation which are beneficially owned by the shareholder;
and (z) any material interest of the shareholder in such business.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at an annual meeting except in accordance with the procedures set
forth in this Section 13. The presiding officer at an annual meeting shall, if
the facts warrant, determine and declare to the meeting that the business was
not properly brought before the meeting and in accordance with the provisions of
this Section 13. Upon such determination and declaration, the business not
properly brought before the meeting shall not be transacted. Notwithstanding
the foregoing provisions of this Section 13, a shareholder seeking to have a
proposal included in the corporation's proxy statement shall comply with the
requirements of Regulation 14A under the Securities Exchange Act of 1934, as
amended.
4
<PAGE>
ARTICLE III
DIRECTORS
Section 1. (a) The number of directors of the corporation shall be not
less than three (3) nor more than ten (10). The directors shall be elected at
the annual meeting of the shareholders in accordance with subsections (b) and
(c) hereof, except as provided in Section 2 of this Article. Each director
shall hold office for the term for which he is elected and until his successor
is elected and qualified. Directors need not be residents of the State of Texas
or shareholders of the corporation. Any director may be removed at any time,
with or without cause at a special meeting of the shareholders called for that
purpose.
(b) Nominations for the election of directors may be made by
the Board of Directors or a committee appointed by the Board of Directors or by
any shareholder entitled to vote in the election of directors generally.
However, any shareholder entitled to vote in the election of directors generally
may nominate one or more persons for election as directors at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been delivered to or mailed and received by the Secretary of the
corporation at the principal executive offices of the corporation not later than
(i) with respect to an election to be held at an annual meeting of shareholders,
ninety (90) days prior to the date one year from the date of the immediately
preceding annual meeting of shareholders, and (ii) with respect to an election
to be held at a special meeting of shareholders, the close of business on the
tenth (10th) day following the date on which notice of such meeting is first
given to shareholders. Each such notice shall set forth: (i) the name and
address of the shareholder who intends to make the nomination and of the person
or persons to be nominated; (ii) a representation that the shareholder is a
holder of record stock of the corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (iii) a description of all arrangements or
understandings between the shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (iv) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission, had the nominee been nominated, or intended
to be nominated, by the Board of Directors;
5
<PAGE>
and (v) the consent of each nominee to serve as a director of the corporation if
so elected. The presiding officer at the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
(c) Notwithstanding anything in these bylaws to the contrary,
whenever the holders of any one or more classes or series of stock having a
preference over the common stock, par value $.01 per share, as to dividends or
upon liquidation shall have the right, voting separately as a class, to elect
one or more directors of the corporation, the provisions of these Articles of
Incorporation (as they may be duly amended from time to time) fixing the rights
and preferences of such preferred stock shall govern with respect to the
nomination, election, term, removal, vacancies and other related matters of such
directors.
Section 2. Any vacancy occurring in the Board of Directors may be filled
by the affirmative vote of a majority of the remaining directors though less
than a quorum of the Board of Directors, except as otherwise expressly provided
herein. A director elected to fill a vacancy shall be elected for the unexpired
term of his predecessor in office. Any vacancy in the Board of Directors
resulting shall be filled only by the shareholders entitled to vote at an annual
meeting or a special meeting called for that purpose. A directorship to be
filled by reason of an increase in the number of directors may be filled by (i)
election at an annual or special meeting of shareholders called for such
purpose; or (ii) the Board of Directors, for a term of office continuing only
until the next election of one or more directors by the shareholders; provided
that the Board of Directors may not fill more than two directorships created by
an increase in the number of directors during the period between any two
successive annual meetings of shareholders.
Section 3. The business and affairs of the corporation shall be managed by
its Board of Directors which may exercise all such powers of the corporation and
do all such lawful acts and things as are not by statute or by the Articles of
Incorporation or by these bylaws directed or required to be exercised and done
by the shareholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. Meetings of the Board of Directors, regular or special, may be
held either within or without the State of Texas.
6
<PAGE>
Section 5. The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
shareholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
shareholders to fix the time and place of such first meeting of the newly
elected Board of Directors, or in the event such meeting is not held at the time
and place so fixed by the shareholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board of Directors.
Section 7. Special meetings of the Board of Directors may be called by the
President, Secretary, or any two (2) or more members of the Board of Directors
of the corporation upon notice from such members by letter or telegram,
delivered for transmission not later than during the third day immediately
preceding the date specified for such meeting, or by word of mouth, telephone or
hand delivery, received not later than during the second day immediately
preceding the day for such meeting. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the Board of Directors
need be specified in the notice or waiver of notice of such meeting.
Section 8. A majority of the directors shall constitute a quorum for the
transaction of business and the act of the majority of the directors present at
a meeting at which a quorum is present shall be the act of the Board of
Directors, unless a greater number is required by the Articles of Incorporation.
If a quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
At such adjourned meeting at which a quorum shall be present, any business may
be transacted which might have been transacted at the meeting as originally
notified and called.
Section 9. Any action required or permitted to be taken at a meeting of
the Board of Directors or the executive committee may be taken without the
meeting if a consent in writing, setting forth the action taken, is
7
<PAGE>
signed by all of the members of the Board of Directors or the executive
committee, as the case may be, and such consent shall have the same force and
effect as a unanimous vote at a meeting.
Section 10. Directors and committee members may participate in and hold a
meeting by means of conference telephone or similar communication equipment by
means of which all persons participating in the meeting can hear each other.
Participation in such a meeting shall constitute presence in person at the
meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground the
meeting is not lawfully called or convened.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors, by resolution adopted by a majority of
the whole Board, may designate from among its members an executive committee and
one or more other committees, each of which, to the extent provided in such
resolution, shall have and may exercise all of the authority of the Board of
Directors in the business and affairs of the corporation except where the action
of the Board of Directors is required by statute. Vacancies in the membership
of a committee shall be filled by the Board of Directors at a regular or special
meeting of the Board of Directors. The executive committee shall keep regular
minutes of its proceedings and report the same to the Board when required. The
designation of any such committee and the delegation thereto of authority shall
not operate to relieve the Board of Directors, or any member thereof, of any
responsibility imposed upon it or him by law.
COMPENSATION OF DIRECTORS
Section 12. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
CHAIRMAN OF THE BOARD
Section 13. The Board of Directors may, in its discretion, choose a
Chairman of the Board who shall preside at meetings of the shareholders and of
the directors and shall be an ex officio member of all standing
8
<PAGE>
committees. The Chairman of the Board shall have such other powers and shall
perform such other duties as shall be designated by the Board of Directors. The
Chairman of the Board shall be a member of the Board of Directors but no other
officers of the corporation need be a director. The Chairman of the Board shall
serve until his successor is chosen and qualified, but he may be removed at any
time by the affirmative vote of a majority of the Board of Directors.
ARTICLE IV
NOTICES
Section 1. Notices to directors and shareholders shall be in writing and
delivered personally or mailed to the directors or shareholders at their
addresses appearing on the books of the corporation. Notice by mail shall be
deemed to be given at the time when same shall be mailed. Notice to directors
may also be given by telegram, and shall be deemed delivered when same shall be
deposited at a telegraph office for transmission and all appropriate fees
therefor have been paid.
Section 2. Whenever any notice is required to be given to any shareholder
or director under the provisions of the statutes or of the Articles of
Incorporation or of these bylaws, a waiver thereof in writing signed by the
person or persons entitled to such notice, whether before or after the time
stated therein, shall be equivalent to the giving of such notice.
Section 3. Attendance of a director at a meeting shall constitute a waiver
of notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business on the ground
that the meeting is not lawfully called or convened.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall consist of a President,
one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall be
elected by the Board of Directors.
Section 2. The Board of Directors at its first meeting after each annual
meeting of shareholders shall choose a President, one or more Vice Presidents, a
Secretary and a Treasurer, none of whom need be a member of the Board.
9
<PAGE>
Section 3. Such other officers and assistant officers and agents as may be
deemed necessary may be elected or appointed by the Board of Directors. Any two
or more offices may be held by the same person, except the offices of President
and Secretary.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer or agent or member of the
executive committee elected or appointed by the Board of Directors may be
removed by the Board of Directors whenever in its judgment the best interests of
the corporation will be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Any vacancy
occurring in any office of the corporation by death, resignation, removal or
otherwise shall be filled by the Board of Directors.
THE PRESIDENT
Section 6. The President shall be the chief executive officer of the
corporation, shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect. In the absence of the Chairman of the Board
or in the event the Board of Directors shall not have designated a Chairman of
the Board, the President shall preside at meetings of the shareholders and the
Board of Directors.
Section 7. He shall execute bonds, mortgages and other contracts requiring
a seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
THE VICE PRESIDENT
Section 8. The Vice President shall, in the absence or disability of the
President, perform the duties and exercise the powers of the President. They
shall perform such other duties and have such other powers as the Board of
Directors shall prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
10
<PAGE>
Section 9. The Secretary shall attend all meetings of the Board of
Directors and all meeting of the shareholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committee
when required. He shall give, or cause to be given, notice of all meetings of
the shareholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be. He shall keep in safe custody
the seal of the corporation and, when authorized by the Board of Directors,
affix the same to any instrument requiring it and, when so affixed, it shall be
attested by his signature or by the signature of the Treasurer or an Assistant
Secretary.
Section 10. The assistant secretaries in the order of their seniority,
unless otherwise determined by the Board of Directors, shall, in the absence or
disability of the Secretary, perform the duties and exercise the powers of the
Secretary. They shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 11. The Treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 12. He shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors at
its regular meetings or when the Board of Directors requires an account of all
his transactions as Treasurer and of the financial condition of the corporation.
Section 13. If required by the Board of Directors he shall give the
corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind and in his possession or
under his control belonging to the corporation.
11
<PAGE>
Section 14. The Assistant Treasurers in the order of their seniority,
unless otherwise determined by the Board of Directors, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer. They shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATES FOR SHARES
Section 1. The corporation shall deliver certificates representing all
shares to which shareholders are entitled; and such certificates shall be signed
by the President or a Vice President, and the Secretary or an Assistant
Secretary of the corporation, and may be sealed with the seal of the corporation
or a facsimile thereof. No certificate shall be issued for any share until the
consideration therefor has been fully paid. Each certificate representing
shares shall state upon the face thereof that the corporation is organized under
the laws of the State of Texas, the name of the person to whom issued, the
number and class and the designation of the series, if any, which such
certificate represents, and the par value of each share represented by such
certificate or a statement that the shares are without par value.
Section 2. If the corporation is authorized to issue shares of more than
one class, each certificate representing shares issued by the corporation (1)
shall conspicuously set forth on the face or back of the certificate a full
statement of (a) all of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued and, (b) if the
corporation is authorized to issue shares of any preferred or special class in
series, the variations in the relative rights and preferences of the shares of
each such series to the extent they have been fixed and determined and the
authority of the Board of Directors to fix and determine the relative rights and
preferences of subsequent series; or (2) shall conspicuously state on the face
or back of the certificate that (a) such a statement is set forth in the
Articles of Incorporation on file in the office of the Secretary of State and
(b) the corporation will furnish a copy of such statement to the record holder
of the certificate without charge on written request to the corporation at its
principal place of business or registered office.
Section 3. If the corporation has by its Articles of Incorporation limited
or denied the preemptive right of shareholders to acquire unissued or treasury
shares of the corporation, every certificate representing
12
<PAGE>
shares issued by the corporation (1) shall conspicuously set forth upon the face
or back of the certificate a full statement of the limitation or denial of
preemptive rights contained in the Articles of Incorporation, or (2) shall
conspicuously state on the face or back of the certificate (a) that there is on
file in the office of the Secretary of State a full statement of the limitation
or denial of preemptive rights contained in the Articles of Incorporation, and
(b) that the corporation will furnish a copy of such statement to any
shareholder without charge upon written request to the corporation at its
principal place of business or registered office.
Section 4. The signatures of the President or Vice President and the
Secretary or Assistant Secretary upon a certificate may be facsimiles, if the
certificate is countersigned by a transfer agent, or registered by a registrar,
other than the corporation itself or an employee of the corporation. In case
any officer who has signed or whose facsimile signature has been placed upon
such certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer at the date of the issuance.
LOST CERTIFICATES
Section 5. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost or destroyed,
upon the making of an affidavit of that fact by the person claiming the
certificate of stock to be lost or destroyed. When authorizing such issue of a
new certificate or certificates, the Board of Directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost or destroyed.
Section 6. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
RESTRICTION ON TRANSFER OF SHARES
13
<PAGE>
Section 7. If the corporation issues any shares which are not registered
under the Securities Act of 1933, as amended, and registered or qualified under
any applicable state securities laws, the transfer of any such shares shall be
restricted in accordance with the following legend:
THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR UNDER APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF
1933 AND ANY APPLICABLE STATE LAW, OR (2) AN OPINION (SATISFACTORY TO THE
COMPANY) OF COUNSEL (SATISFACTORY TO THE COMPANY) THAT REGISTRATION IS NOT
REQUIRED.
In the event any restriction on the transfer, or registration of the
transfer, of shares shall be imposed or agreed to by the corporation, each
certificate representing shares so restricted (1) shall conspicuously set forth
a full or summary statement of the restriction on the face of the certificate,
or (2) shall set forth such statement on the back of the certificate and
conspicuously refer to the same on the face of the certificate, or (3) shall
conspicuously state on the face or back of the certificate that such a
restriction exists pursuant to a specified document and (a) that the corporation
will furnish to the record holder of the certificate without charge upon written
request to the corporation at its principal place of business or registered
office a copy of the specified document, or (b) if such document is one required
or permitted by law to be and has been filed, that such specified document is on
file in the office of the Secretary of State and contains a full statement of
such restriction.
CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE
Section 8. For the purpose of determining shareholders entitled to notice
of or to vote at any meeting of shareholders, or any adjournment thereof, or
entitled to receive payment of any dividend, or in order to make a determination
of shareholders for any other proper purpose, the Board of Directors may fix in
advance a date as of the record date for any such determination of shareholders,
such date in any case to be not more than fifty (50) days and, in case of a
meeting of shareholders, not less than ten (10) days prior to the date on which
the particular action requiring such determination of shareholders is to be
taken. If no record date is fixed for the
14
<PAGE>
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholder entitled to receive payment of a dividend, the date
on which the notice of the meeting is mailed or the date on which the resolution
of the Board of Directors declaring such dividend is adopted, as the case may
be, shall be the record date for such determination of shareholders.
REGISTERED SHAREHOLDERS
Section 9. The corporation shall be entitled to recognize the exclusive
rights of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by the laws of the State of Texas.
ARTICLE VII
GENERAL PROVISIONS
Section 1. The Board of Directors may declare and the corporation may pay
dividends on its outstanding shares in cash, property, or its own shares
pursuant to law and subject to the provisions of its Articles of Incorporation.
Section 2. The Board of Directors may by resolution create a reserve or
reserves out of earned surplus for any purpose or purposes, and may abolish any
such reserve in the same manner.
REPORT TO SHAREHOLDERS
Section 3. The Board of Directors must, when requested by the holders of
at least one-third (1/3) of the outstanding shares of the corporation, present
written reports of the situation and amount of business of the corporation.
CHECKS
Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
15
<PAGE>
FISCAL YEAR
Section 5. The fiscal year of the corporation shall be fixed by the
resolution of the Board of Director.
SEAL
Section 6. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal, Texas."
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or in any other manner reproduced.
ARTICLE VIII
AMENDMENT OF BYLAWS
These bylaws may be altered, amended or repealed or new bylaws may be
adopted at any meeting of the Board of Directors at which a quorum is present,
by the affirmative vote of a majority of the directors present at such meeting
(provided notice of the proposed addition, alteration, amendment or repeal is
contained in the notice of the meeting). The shareholders of the corporation
may not adopt, alter, amend or repeal these bylaws.
16
<PAGE>
EXHIBIT 10.3
AMENDED AND RESTATED
SPAGHETTI WAREHOUSE, INC.
1992 BONUS STOCK OPTION PLAN
1. PURPOSE.
The purpose of this Plan is to advance the interests of Spaghetti
Warehouse, Inc. (the "Company") and its Subsidiaries by providing additional
incentives to certain key employees of the Company, and the Directors of the
Company who are not also employees, to own stock of the Company and thereby
increase the sense of proprietorship, and to stimulate the active interest of
such persons in the development and financial success of the Company, by
granting such persons the right to take, in the case of Directors, their annual
retainer, and in the case of employees who are entitled to receive amounts under
the Company's bonus plan, up to 50% of their bonus in the form of nonqualified
options to acquire common stock of the Company.
2. DEFINITIONS. As used herein, the following terms shall have the
meaning indicated:
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "BONUS" shall mean the amount to which an Eligible Person (as
hereafter defined) shall be entitled under the Company's bonus plan with
respect to the Plan Year of reference.
(c) "COMMITTEE" shall mean the stock option committee appointed by
the Board pursuant to Section 17 hereof.
(d) "DATE OF GRANT" shall mean (i) in the case of Options granted to
Nonemployee Directors with respect to the Plan Year of reference, the date
of the annual meeting of the Company during such Plan Year at which they
are elected as Directors, and (ii) in the case of Options granted to an
Employee, the date on which such Employee is awarded the Bonus which
determines the amount of such Employee's Deferred Bonus and thus the Shares
subject to such Employee's Option; provided, in each case, that such Option
is be reduced to writing and delivered to the Optionee with a reasonable
period of time subsequent to the Date of Grant.
(e) "DEFERRED BONUS" shall mean the percentage, not to exceed fifty
percent (50%), of an Eligible Person's Bonus which the Eligible Person
properly Elects to receive in the form of an Option.
(f) "DIRECTOR" shall mean a member of the Board.
(g) "DIRECTOR FEES" shall mean the annual retainer (but not the
meeting fees or hourly fees) payable to each Nonemployee Director.
(h) "DISINTERESTED PERSON" shall mean one who is not during the one
year prior to service as an a member of the Committee, or during such
service, granted or awarded Shares or stock options or other rights
convertible into Shares under the Plan or any other plan of the Company,
except participation in the Plan or any other plans of the Company as
allowed pursuant to Rule 16b-3(c)(2)(ii) that do not disqualify such person
from being a disinterested person.
(i) "ELECT" shall mean an Eligible Person's filing of a timely
Election Form with the Committee electing to receive an Option hereunder.
(j) "ELECTION FORM" shall mean the form on which an Eligible Person
shall be entitled to elect to receive an Option in lieu of Director Fees,
or Deferred Bonus, as the case may be.
1
<PAGE>
(k) "ELECTION PERIOD" shall mean, with respect to the Bonus payable
with respect to the Plan Year of reference, (i) with respect to (x) the
Plan Year ending in 1993, and (y) the Plan Year in which the Employee is
first employed (or reemployed) the one month anniversary of the date of
such Employee's receipt of written notification that such Employee has been
designated as an Eligible Person with respect to such Plan Year and related
Bonus, and (ii) with respect to Plan Years not described in (i) with
respect to the Employee of reference, the period ending on the day before
the first day of such Plan Year.
(l) "ELIGIBLE PERSON(S)" shall mean those persons who are described
in Section 4.
(m) "ERISA" shall mean the Employee Retirement Income Security Act,
as amended.
(n) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(o) "EMPLOYEE" shall mean those persons who are full-time employees
of the Company, who are full-time employees of any Subsidiary or who are
consultants to the Company or any Subsidiary under terms pursuant to which
such person receives a specified fixed monthly retainer.
(p) "FAIR MARKET VALUE" of a Share on a particular date shall be the
closing price of Stock on such date (or, if such date is not a business
day, then on the next preceding business day), which shall be (i) if the
Stock is listed or admitted for trading on any United States national
securities exchange, the last reported sale price of Stock on such exchange
as reported in any newspaper of general circulation, (ii) if the Stock is
quoted on NASDAQ or any similar system of automated dissemination of
quotations of securities prices in common use, the mean between the closing
high bid and low asked quotations for such day of the Stock on such system
or (iii) if neither clause (i) nor (ii) is applicable, a value determined
by any fair and reasonable means prescribed by the Board.
(q) "INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of
1986, as amended from time to time.
(r) "NONEMPLOYEE DIRECTOR" shall mean each Director who is not an
Employee at the time of reference.
(s) "OPTION" (when capitalized) shall mean any Option granted under
this Plan.
(t) "OPTIONEE" shall mean a person to whom an Option is granted under
this Plan or any person who succeeds to the rights of such person under
this Plan by reason of the death of such person.
(u) "OPTION PRICE" shall mean the amount per Share which is required
to exercise an Option with respect to such Share, as determined under
Section 8.
(v) "PLAN" shall mean this Spaghetti Warehouse, Inc. 1992 Bonus Stock
Option Plan.
(w) "PLAN YEAR" shall mean the fiscal year of the Company.
(x) "SHARE(S)" shall mean a share or shares of Stock.
(y) "STOCK" shall mean the Company's common stock, $0.01 par value
per share.
(z) "SPREAD" shall mean, for each Option, the difference between the
aggregate Option Price of all Shares subject to such Option, and the
aggregate Fair Market Value, on the Date of Grant, of all of the Shares
subject to such Option.
2
<PAGE>
(aa) "SUBSIDIARY" shall mean any corporation (other than the Company)
in any unbroken chain of corporations beginning with the Company if, at the
time of the granting of the Option, each of the corporations other than the
last corporation in the unbroken chain owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain.
3. TOTAL AGGREGATE SHARES.
Subject to adjustments provided in Section 14 hereof, a total of 100,000
Shares shall be subject to the Plan. The Shares subject to the Plan shall
consist of unissued Shares or previously issued Shares reacquired and held by
the Company, or any Subsidiary, and such number of Shares shall be and hereby is
reserved for sale for such purpose. Any of such Shares that may remain unsold
and that are not subject to outstanding Options at the termination of the Plan
shall cease to be reserved for the purpose of the Plan, but until termination of
the Plan the Company shall at all times reserve a sufficient number of Shares to
meet the requirements of the Plan. Should any Option expire or be canceled
prior to its exercise in full, the Shares theretofore subject to such Option may
again be subjected to an Option under the Plan.
4. SELECTION OF ELIGIBLE PERSONS.
(a) Each Nonemployee Director who has made a timely Election shall be an
Eligible Person with respect to each Plan Year.
(b) Except as provided in subsection (c), on the date of the quarterly
meeting of the of the Board occurring in August of 1992 with respect to the Plan
Year ending in 1993, and prior to each subsequent Plan Year, the Board shall
have the right to designate those Employees who will be Eligible Persons with
respect to such Plan Year. Without limiting the generality of the foregoing,
the Board may designate Eligible Persons by name, by position, or by a
combination of such means, and may adopt procedures which automatically
designate Eligible Persons with respect to more than one Plan Year; provided,
however, that any one or more designations of Eligible Persons may be terminated
by the Board at any time prior to the first day of the Plan Year to which they
relate.
(c) For a period of thirty days after the date of employment, the Board,
or the Committee if such authority is delegated by the Board, shall have the
right to designate such new Employee as an Eligible Person with respect to Plan
Year in which such Employee's employment commences.
(d) Designation as an Eligible Person shall not confer upon any Employee
or class of Employees the right to receive a Bonus, and the grant of such Bonus
shall remain entirely within the sole discretion of the Board.
5. RULE 16b-3 PLAN AND SHAREHOLDER APPROVAL.
The Company intends for this Plan to comply with the requirements of Rule
16b-3 promulgated by the Securities and Exchange Commission pursuant to the
Exchange Act. Accordingly, this Plan and any Options shall terminate and become
null and void unless this Plan is approved at or before the next Annual Meeting
of Shareholders of the Company by shareholders of the Company owning a majority
of the issued and outstanding shares of Stock represented at such Annual
Meeting.
6. CONDITIONS RELATING TO GRANT OF OPTIONS.
3
<PAGE>
(a) Options shall be granted only to Eligible Persons.
(b) An Option granted to a Nonemployee Director under this Plan shall be
in lieu of such Nonemployee Director's Director Fees.
(c) An Option granted to an Employee under this Plan shall be in lieu of
paying such Employee's Deferred Bonus in cash.
(d) Each Option shall be evidenced by an option agreement which may
contain any term deemed necessary or desirable by the Committee, provided such
terms are not inconsistent with this Plan .
(e) The Options granted to Employees under this Plan shall be in addition
to regular salaries, Bonus, pension, life insurance or other benefits related to
their employment with the Company or its Subsidiaries.
(f) Neither the Plan nor any Option granted under the Plan shall confer
upon any person any right to continue to serve as a Director, or remain in the
employ of the Company, as the case may be.
(g) The Committee in its sole discretion shall determine in each case
whether periods of military or government service shall constitute a
continuation of employment for the purposes of this Plan or any Option.
7. DESCRIPTION OF OPTIONS.
(a) An Option granted hereunder shall be a nonqualified option, i.e. shall
not be an incentive stock option as defined in the Internal Revenue Code.
(b) In the case of a Nonemployee Director, each Option shall have a Spread
equal to such Nonemployee Director's Directors Fees for the one year period
which commences on the Date of Grant.
(c) In the case of an Employee, each Option shall have a Spread equal to
such Employee's Deferred Bonus with respect to the Plan Year preceding the Date
of Grant.
8. OPTION PRICE.
The Option Price per Share of each Share subject to an Option shall be
fifty percent of the Fair Market Value of a Share on the Date of Grant of such
Option.
9. ELECTION.
(a) Each Nonemployee Director on the effective date of the Plan shall be
entitled, on or before the date on which this Plan is adopted, to irrevocably
Elect, by notifying the Board (which notification shall be acknowledged to the
Committee in writing within 30 days after such notification), that, so long as
he shall be a Nonemployee Director and the Plan shall permit him to receive an
Option, he shall irrevocably waive his right to receive any portion of his
Director Fees in cash and, instead, receive an Option.
(b) Each person who becomes a Nonemployee Director after the effective
date of the Plan shall be entitled, on or before the last day of the month in
which he becomes a Nonemployee Director, to irrevocably Elect, by filing an
Election Form with the Committee, that, so long as he shall be a Nonemployee
Director and the Plan shall permit him to receive an Option, he shall
irrevocably waive his right to receive any portion of his Fees in cash and,
instead, receive an Option.
(c) Each Eligible Person, by filing an Election Form with the Committee
before the expiration of the Election Period with respect to such Plan Year,
shall be entitled to Elect the amount of his Deferred Bonus for
4
<PAGE>
such Plan Year, which Election will result in such Eligible Person receiving an
Option in lieu of a payment of his Deferred Bonus in cash.
(c) The Election Form filed with the Committee by a Nonemployee Director
shall be irrevocable when filed, and the Election Form filed by an Employee with
respect to any Plan Year may be changed, or totally terminated, at any time
during the Election Period with respect to such Plan Year, by filing a
subsequent Election Form with the Committee, but after the last day of the
Election Period with respect to such Plan Year the Election, if any, which is on
file with the Committee shall be irrevocable.
10. REDUCTION IN SHARES SUBJECT TO OPTIONS.
In the event there are insufficient Shares reserved under the Plan to grant
Options to all of the Eligible Persons with respect to a Plan Year, then (i) the
Committee shall grant full Options to the Nonemployee Directors (or if there are
insufficient Shares for such purpose, then shall apply the procedure described
in (ii) to the Nonemployee Directors as a class), and (ii) the Committee shall
make a prorata reduction in the Shares which otherwise would be subject to the
Options of each Eligible Employee and shall pay, in cash, to each Eligible
Person the difference between the actual Spread on such Eligible Person's
adjusted Option, and such Eligible Person's Deferred Bonus.
11. VESTING SCHEDULE.
All Options granted hereunder shall be 100% vested and nonforfeitable at
all times.
12. TERMINATION OF OPTION PERIOD.
(a) The unexercised portion of an Option shall automatically and without
notice terminate and become null and void and be forfeited upon the earliest to
occur of the following:
(i) the first anniversary of the date on which (x) an Optionee who
is an Employee on the Date of Grant ceases to be an Employee, except that
if the Optionee terminates employment prior to the tenth (10th) anniversary
of the Date of Grant by reason of retirement, then this subpart (i) shall
not apply, or (y) the Optionee who is a Nonemployee Director on the Date of
Grant ceases to be a Director; or
(ii) the tenth (10th) anniversary of the Date of Grant of such
Option.
For purposes of this subparagraph (a), "retirement" shall mean the Employee's
voluntary termination of employment after age 50 and without entering into an
employment type relationship with a business entity in the restaurant industry
for a period of 180 days after his termination of employment with the Company,
compliance with such requirement to be determined by the Committee in its sole
discretion.
(b) The Board in its sole discretion may, by giving written notice to an
Optionee ("Cancellation Notice"), cancel, effective upon the date of the
consummation of any corporate transaction described in subsection 14(d)(i),(iv)
and (v) hereof, any portion of this Option which remains unexercised on such
date. Such cancellation notice shall be given to Optionee at least sixty (60)
days prior to the date of cancellation.
13. EXERCISE OF OPTIONS.
(a) An Option shall not be exercisable prior to the six month anniversary
of the Date of Grant of such Option. After the six month anniversary of the
Date of Grant of an Option such Option may be exercised at any time and from
time to time during the term of such Option, in whole or in part.
5
<PAGE>
(b) Options may be exercised (i) during the Optionee's lifetime, solely by
the Optionee, or (ii) after Optionee's death, by the personal representative of
the Optionee's estate or the person or persons entitled thereto under his will
or under the laws of descent and distribution.
(c) An Option shall be deemed exercised when (i) the Company has received
written notice of such exercise delivered to the Company in accordance with the
notice provisions of the applicable option agreement, (ii) full payment of the
aggregate Option Price of the Shares as to which the Option is exercised has
been tendered to the Company, and (iii) arrangements that are satisfactory to
the Board in its sole discretion have been made for the Optionee's payment to
the Company of the amount, if any, that the Company determines to be necessary
for the Company to withhold in accordance with the applicable federal or state
income tax withholding requirements.
(d) The Option Price of any Shares purchased shall be paid solely in cash,
by certified or cashier's check, by money order, by personal check (if approved
by the Board), or, at the option of the Optionee, in Stock owned by such
Optionee (or by a combination of the above). For purposes of determining the
amount, if any, of the Option Price satisfied by payment in Stock, such Stock
shall be valued at its Fair Market Value on the date of exercise. Any Stock
tendered in satisfaction of all or a portion of the Option Price shall be
appropriately endorsed for transfer and assignment to the Company.
(e) The Optionee shall not be, nor have any of the rights or privileges
of, a shareholder of the Company with respect to any Shares purchasable upon the
exercise of any part of this Option unless and until certificates representing
such Shares shall have been issued by the Company to the Optionee.
14. ADJUSTMENTS.
(a) If at any time while any unexercised portion of an Option is
outstanding there shall be an increase or decrease in the number of issued and
outstanding Shares through the declaration of a stock dividend or through any
recapitalization resulting in a stock split-up, combination or exchange of
Shares, then appropriate adjustment shall be made in the number of Shares and
the Option Price per Share subject to such outstanding portion of each Option
and the number of Shares reserved for issuance under the Plan not subject to
Options, so that the same proportion of the Company's issued and outstanding
Shares shall remain subject to purchase at the same aggregate Option Price.
(b) In the event of a merger, consolidation or other reorganization of the
Company under the terms of which the Company is not the surviving corporation,
but the surviving corporation elects to assume an Option, Optionee shall be
entitled to receive, upon the exercise of such Option, with respect to each
Share (i) the number of shares of stock of the surviving corporation (or equity
interest in any other entity) and (ii) any other notes, evidences of
indebtedness or other property, that Optionee would have received in connection
with such merger, consolidation or other reorganization had Optionee exercised
such Option with respect to such Shares immediately prior to such merger,
consolidation or other reorganization.
(c) Except as otherwise expressly provided herein, the issuance by the
Company of shares of its capital stock of any class, or securities convertible
into shares of capital stock of any class, either in connection with direct sale
or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number of or Option Price of Shares then subject to
outstanding Options granted under the Plan.
(d) Without limiting the generality of the foregoing, the existence of
outstanding Options granted under the Plan shall not affect in any manner the
right or power of the Company to make, authorize or consummate (i) any or all
adjustments, recapitalization, reorganizations or other changes in the Company's
capital structure or its business; (ii) any merger or consolidation of the
Company; (iii) any issue by the Company of debt securities, or preferred or
preference stock which would rank above the Shares subject to outstanding
Options; (iv) the dissolution or liquidation of the Company; (v) any sale,
transfer or assignment of all or any part of the assets or business of the
Company; or (vi) any other corporate act or proceeding, whether of a similar
character or otherwise.
6
<PAGE>
15. TRANSFERABILITY OF OPTIONS.
Each Option shall provide that such Option shall not be transferable by the
Optionee otherwise than by will and the laws of descent and distribution, or
pursuant to a Qualified Domestic Relations Order as defined in the Internal
Revenue Code. So long as an Optionee lives, only such Optionee or his guardian
or legal representative shall have the right to exercise the Option.
16. ISSUANCE OF SHARES.
As a condition of any sale or issuance of Shares upon exercise of any
Option, the Committee may require such agreements or undertakings, if any, as
the Committee may deem necessary or advisable to assure compliance with any such
law or regulation including, but not limited to, the following:
(i) a representation and warranty by the Optionee to the Company, at
the time any Option is exercised, that he is acquiring the Shares to be
issued to him for investment and not with a view to, or for sale in
connection with, the distribution of any such Shares; and
(ii) a representation, warranty or agreement to be bound by any
legends that are, in the opinion of the Committee, necessary or appropriate
to comply with the provisions of any securities law deemed by the Committee
to be applicable to the issuance of the shares and are endorsed upon the
Share certificates.
17. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by a stock option committee (herein
called the "Committee") consisting of not less than two (2) Directors each of
whom is a Disinterested Person. The Committee shall have all of the powers of
the Board with respect to the Plan. Any member of the Committee may be removed
at any time, with or without cause, by resolution of the Board and any vacancy
occurring in the membership of the Committee may be filled by appointment by the
Board.
(b) The Committee, from time to time, may adopt rules and regulations for
carrying out the purposes of the Plan. The determinations and the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive.
(c) Any and all decisions or determinations of the Committee shall be made
either (i) by a majority vote of the members of the Committee at a meeting or
(ii) without a meeting by the written approval of a majority of the members of
the Committee.
18. INTERPRETATION.
(a) If any provision of the Plan should be held invalid for any reason,
such holding shall not affect the remaining provisions hereof, but instead the
Plan shall be construed and enforced as if such provision had never been
included in the Plan.
(b) THIS PLAN SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
(c) Headings contained in this Agreement are for convenience only and
shall in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine, or neuter gender shall be a
reference to such other gender as is appropriate.
7
<PAGE>
19. AMENDMENT, MODIFICATION, SUSPENSION OR DISCONTINUANCE OF THIS PLAN.
For the purpose of complying with changes in the Internal Revenue Code or
ERISA, the Board may amend, modify, suspend or terminate the Plan at any time.
For the purpose of meeting or addressing any other changes in legal requirements
or any other purpose, the Board may amend, modify, suspend or terminate the Plan
only once every six months. Subject to changes in law or other legal
requirements, including any change in the provisions of Rule 16b-3 that would
permit otherwise, the Plan may not be amended without the consent of the holders
of a majority of the shares of Stock then outstanding, to (i) increase
materially the aggregate number of shares of Stock that may be issued under the
Plan (except for adjustments pursuant to Section 14 of the Plan), (ii) increase
materially the benefits accruing to Optionees under the Plan, or (iii) modify
materially the requirements as to eligibility for participation in the Plan.
20. GOVERNMENT REGULATIONS.
The Plan, and the granting and exercise of Options thereunder, and the
obligation of the Company to sell and deliver shares under such Options, shall
be subject to all applicable laws, rules and regulations, and to such approvals
by any governmental agencies or national securities exchanges as may be
required.
21. EFFECTIVE DATE AND TERMINATION OF PLAN.
The Plan is effective as of August 20, 1992, the date on which the Board
approved the Plan. The Plan shall terminate on its tenth anniversary, subject
to early termination by the Board pursuant to Section 19 of the Plan.
SPAGHETTI WAREHOUSE, INC.
By: /s/ ROBERT E. BODNAR
--------------------------------
Date: September 17, 1998
------------------
8
<PAGE>
EXHIBIT 10.29
RETENTION INCENTIVE POLICY FOR DESIGNATED EXECUTIVE OFFICERS
------------------------------------------------------------
(June 8, 1998)
As a result of the Board of Directors voting to investigate the Company's
valuation through an auction process, there has been a marked increase in
concern among Company Associates about their future with the Company. This
heightened level of concern exposes the Company to disruptive instability that
would impede the Company from orderly execution of its operating strategies and
tactics during this period while the auction is being performed. This, in turn,
could impair the financial performance of the Company during this period,
resulting in unfavorable consequences to the shareholders by jeopardizing the
realizable value from a potential transaction. In order to encourage the
retention of key Associates during this period and to minimize the disruptions
and instability that would be caused by unexpected loss of key Associates and
the difficulty in replacing them considering the uncertainty of the Company's
future ownership, the Board of Directors has resolved to adopt the following
retention incentive plan for designated officers not otherwise subject to
employment agreements:
If the Company is acquired, and if, as a result of such change in ownership, any
designated officer not otherwise compensated under an employment agreement
should cease to be employed (other than as a result of voluntary termination or
termination for Cause) by the Company at (i) the same or greater base
compensation and (ii) a location within 50 miles of such officer's current place
of employment, within six (6) months of such change in ownership, then, such
officer will receive a retention incentive of twenty-six (26) weeks' base salary
upon execution of a written release satisfactory to the Company. Additionally,
any accrued but unused vacation up to a maximum of four (4) weeks will be paid
upon termination. Payment of the incentive may be either in lump sum and/or as
salary continuation at the sole discretion of the Company, and all applicable
payroll taxes and other deductions will be withheld from the payments.
For purposes of this policy, "Cause" means (a) any act by the officer that is
materially adverse to the best interests of the Company, and which, if subject
to a criminal proceeding, could result in a criminal conviction for a felony, or
(b) the failure of the officer substantially to perform their normal duties,
other than as a result of incapacitation due to medical reasons, provided that
the officer has been given written notice from the Company specifying the nature
of the failure to perform their duties and given thirty (30) days to cure the
failure prospectively.
If an acquisition or change in ownership does not occur prior to March 1, 1999,
then this policy shall automatically become null and void on March 1, 1999.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Spaghetti Warehouse of Texas, L.P., a Delaware limited partnership
2. Spaghetti Warehouse Service Corporation, a Delaware corporation
3. Spaghetti Warehouse of Ohio, Inc., a Delaware corporation
4. SWEATAC, Inc., a Delaware corporation
5. Spaghetti Warehouse of Texas, Inc., a Delaware corporation
6. Old Merchandise Company, Inc., a Texas corporation
7. SWABS, Inc., a Texas corporation
8. Old Spaghetti Factory Canada Ltd., an Ontario corporation
9. SWEATAC Holdings Canada, Inc., a British Columbia corporation
10. Noodles, Inc., a Texas corporation
11. SWH Antiques, Inc., a Texas corporation
12. Cappellini's, Inc., a Delaware corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Spaghetti Warehouse, Inc.
We consent to incorporation by reference in Registration Statement Nos. 33-
86756, 33-33555, 33-38603, and 33-69024 of Spaghetti Warehouse, Inc. of our
report dated August 7, 1998, except as for Note 10, which is as of September 18,
1998, relating to the consolidated balance sheet of Spaghetti Warehouse, Inc.
and subsidiaries as of June 28, 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended, which
report appears in the June 28, 1998 annual report on Form 10-K of Spaghetti
Warehouse, Inc.
KPMG PEAT MARWICK LLP
Dallas, Texas
September 22, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Spaghetti Warehouse, Inc.
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K 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 22, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying consolidated financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-END> JUN-28-1998
<CASH> 942,622
<SECURITIES> 0
<RECEIVABLES> 569,349
<ALLOWANCES> 0
<INVENTORY> 642,379
<CURRENT-ASSETS> 2,762,063
<PP&E> 77,406,881
<DEPRECIATION> 29,483,047
<TOTAL-ASSETS> 57,738,616
<CURRENT-LIABILITIES> 6,308,425
<BONDS> 4,079,507
0
0
<COMMON> 67,178
<OTHER-SE> 47,127,866
<TOTAL-LIABILITY-AND-EQUITY> 57,738,616
<SALES> 64,599,577
<TOTAL-REVENUES> 66,026,874
<CGS> 17,054,112
<TOTAL-COSTS> 53,472,923
<OTHER-EXPENSES> 10,301,807
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 343,246
<INCOME-PRETAX> 1,908,898
<INCOME-TAX> 716,233
<INCOME-CONTINUING> 1,192,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,192,665
<EPS-PRIMARY> .21
<EPS-DILUTED> .20
</TABLE>
