-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CFNZ972AA8jIR7VxY4q/i1gwB10S9jHOLKvJM7N6MsFho+IJjHjvc4CXoMP//MqM 1lT/5hzeDH52y7DphuqRVA== 0000930661-97-002245.txt : 19970924 0000930661-97-002245.hdr.sgml : 19970924 ACCESSION NUMBER: 0000930661-97-002245 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970629 FILED AS OF DATE: 19970923 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPAGHETTI WAREHOUSE INC CENTRAL INDEX KEY: 0000775298 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 751393176 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10291 FILM NUMBER: 97684168 BUSINESS ADDRESS: STREET 1: 402 WEST I 30 CITY: GARLAND STATE: TX ZIP: 75043 BUSINESS PHONE: 2142266000 MAIL ADDRESS: STREET 1: 402 WEST I 30 CITY: GARLAND STATE: TX ZIP: 75043 FORMER COMPANY: FORMER CONFORMED NAME: OLD SPAGHETTI WAREHOUSE INC DATE OF NAME CHANGE: 19901113 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 29, 1997 OR ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-10291 SPAGHETTI WAREHOUSE, INC. (Exact name of registrant as specified in its charter) TEXAS 75-1393176 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 402 WEST I-30 Garland, Texas 75043 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 226-6000 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC. Securities registered pursuant to Section 12(g) of the Act: NONE (Title of Class) ______________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of Common Stock held by nonaffiliates of the registrant, based on the sale trade price of the Common Stock as reported by the New York Stock Exchange, Inc. on September 12, 1997 was $32,541,705. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant. As of September 12, 1997, 5,655,494 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Company's definitive proxy statement in connection with the Annual Meeting of Shareholders to be held October 28, 1997, to be filed with the Commission pursuant to Regulation 14A, is incorporated by reference into Part III of this report. ================================================================================ PART I ITEM 1. BUSINESS. General Development and Scope of Business Spaghetti Warehouse, Inc. (the "Company"), which was incorporated in Texas in June 1972, operates as a holding company and conducts substantially all of its operations through its subsidiaries. Unless the context otherwise requires, all references herein to the Company include the Company and its subsidiaries. The Company's principal executive offices are located at 402 West I-30, Garland, Texas 75043. See Item 2. The Company operates 28 restaurants and franchises five restaurants in 14 states under two concepts using the names "The Spaghetti Warehouse" and "Spaghetti Warehouse Italian Grill." The Spaghetti Warehouse and Spaghetti Warehouse Italian Grill concepts are full-service restaurants serving high- quality, value-priced, classic Italian food in a casual atmosphere. The Company also operates a joint-venture restaurant, and franchises six restaurants in Canada under the name "The Old Spaghetti Factory." Each of the Company's restaurants offer a memorable dining experience by serving freshly prepared authentic Italian recipes in a casual and relaxing atmosphere. The Company owns Old Spaghetti Factory Canada Ltd., the franchisor of Old Spaghetti Factory restaurants in Canada, and the trademark rights to the Old Spaghetti Factory concept in Canada. These Canadian restaurants have a similar restaurant concept and menu to the Company's Spaghetti Warehouse restaurant concept and menu in the United States. Old Spaghetti Factory Canada Ltd. is not related to OSF International, which operates restaurants under the name "The Old Spaghetti Factory" in the United States, Japan and Germany. Many of the Company's restaurants are located in distinctive, older, restored buildings in urban locations. Dining room seating capacity in downtown Spaghetti Warehouse restaurants range from approximately 300 to 600 persons, with an average dining room seating capacity of approximately 450. The typical downtown Company restaurant has approximately 15,200 square feet devoted to restaurant use, including kitchen and storage. The Company also operates eight restaurants in suburban markets. The typical suburban Company restaurant is approximately 9,600 square feet in size with seating capacity for around 300 persons. Full alcoholic beverage service is available at the Company's restaurants. Because of the family orientation of Spaghetti Warehouse restaurants, alcoholic beverages are served primarily at the dining table with meal service. A bar area is located adjacent to the dining area, primarily to accommodate customers waiting for dining tables. The Company adheres to a strict program requiring moderation in the service and consumption of alcoholic beverages. During the fiscal years ended June 29, 1997, June 30, 1996 and July 2, 1995, sales of alcoholic beverages accounted for approximately 9%, 9% and 10% of the Company's revenues, respectively. The following table sets forth, for the periods indicated, selected restaurant information:
YEAR ENDED ------------------------------------------------------------------- JULY 4, JULY 3, JULY 2, JUNE 30, JUNE 29, 1993 1994 1995 1996 1997 ------------------------------------------------------------------- (Sales data shown in thousands) Sales per restaurant open for full year: Average..................................... $2,460 $2,246 $2,109 $2,173 $2,217 High........................................ $4,301 $4,300 $4,494 $4,546 $4,620 Low......................................... $1,493 $1,234 $1,048 $1,514 $1,418 Check average per customer, including alcoholic beverages (all stores): Lunch....................................... $ 6.18 $ 6.19 $ 6.40 $ 6.73 $ 6.98 Dinner...................................... $ 8.45 $ 8.41 $ 8.32 $ 8.64 $ 8.90 Restaurants open for full year................. 24 31 36 29 28 Restaurants open at year-end................... 31 36 37 30 28
The Company closed its Cappellini's location in Addison, Texas on December 31, 1996. Cappellini's, which opened in January 1996, was a full-service, upscale concept featuring authentic Italian dishes served in large portions intended for sharing. The Company's non-cash, pre-tax charge of $2.0 million in fiscal 1997 related primarily to the write-down of Cappellini's property and equipment to its estimated fair market value. Cappellini's posted pre-tax operating losses of $171,000 for the first six months of fiscal 1997 while in operation. RESTAURANT CONCEPTS THE SPAGHETTI WAREHOUSE Spaghetti Warehouse restaurants are full-service, family-oriented restaurants serving high quality, value-priced, classic Italian food in a casual atmosphere. The Company currently operates 19 Spaghetti Warehouse restaurants. Each of the Company's Spaghetti Warehouse restaurants offers a memorable dining experience amid a decor of authentic, unusual and eclectic antiques and memorabilia. The Company's first Spaghetti Warehouse restaurant opened in Dallas, Texas in 1972. The Spaghetti Warehouse menu includes spaghetti entrees with a choice of 11 sauces and five pastas, meat and vegetable lasagna, ravioli, cannelloni, manicotti, baked ziti, fettucini alfredo, hand-rolled meatballs, Italian sausage, veal, chicken and eggplant parmigiana, sandwiches and combination platters. The menu also includes soups, appetizers, house and Caesar salads, desserts, soft drinks, alcoholic beverages, including many locally available imported beers, and fresh sourdough bread. The Company endeavors to serve a uniformly high-quality product by preparing most menu items fresh daily. In order to provide maximum customer value perception, emphasis is placed on serving substantial portions of quality food at modest prices. Entree selections, which include soup or salad and sourdough bread, currently range in price from $3.89 to $7.99 during lunch and $4.19 to $8.99 during dinner. The decor of a typical Spaghetti Warehouse restaurant features authentic, unusual and eclectic artifacts and memorabilia, including stained glass windows, advertising signs, taxidermy, chandeliers, antique furniture and a dine-on trolley car. The Company's restaurants feature quick, efficient and friendly table service designed to minimize customer waiting time and facilitate table turnover, while at the same time making the customer feel at ease in a relaxed atmosphere. SPAGHETTI WAREHOUSE ITALIAN GRILL The Spaghetti Warehouse Italian Grill is an updated version of the Company's existing Spaghetti Warehouse concept. Thus far, the Company has converted nine existing Spaghetti Warehouse restaurants to the Italian Grill format. The Italian Grill features updated decor, an expanded menu and improved customer value. The Italian Grill's expanded menu features grilled meats and fish, pizza and a larger selection of appetizers and salads. Traditional Spaghetti Warehouse menu items have been improved to enhance taste profiles and presentations. Additionally, various portion sizes have been increased to improve the price/value relationship. Entree prices at the Italian Grill currently range from $3.99 to $12.99 at lunch and $4.49 to $12.99 at dinner. Both lunch and dinner entrees include a "Bottomless Warehouse Salad" and fresh baked bread. In addition to traditional Spaghetti Warehouse menu items, the Italian Grill offers grilled chicken, halibut, pork chops and New York strip steak, four pizza selections, chicken and veal marsala, shrimp alfredo, shrimp marinara and chicken cacciatore. An expanded selection of wine and beers has contributed to a modest increase in alcoholic beverage sales at Italian Grill units. The first Italian Grill conversion was completed at the Company's Marietta, Georgia location on November 1, 1995. Due to favorable sales results and customer response, the Company converted an additional eight units to the Italian Grill format subsequent to the Marietta conversion. The Company plans to convert six to eight existing Spaghetti Warehouse restaurants to the Italian Grill format in fiscal 1998. Italian Grill development plans beyond fiscal 1998 will be made based on operating results achieved in the current and newly converted Italian Grill units. -2- FUTURE EXPANSION The Company intends to open two to three new Company-operated Italian Grill restaurants during fiscal 1998. The Company has scheduled the opening of its sixth unit in the Dallas-Fort Worth market. The new restaurant, located in a suburb of Dallas, is scheduled to open in the second quarter of fiscal 1998, marking the Company's first new store opening in three years. The Company anticipates additional new store openings during fiscal 1998 in markets where it currently operates restaurants, thereby increasing certain supervisory and marketing efficiencies. The Company also anticipates new store openings subsequent to fiscal 1998. The Company plans to open Italian Grill units predominantly in the Midwest, Southwest, Central and Eastern United States. The Company also intends to expand Old Spaghetti Factory restaurants within Canada by means of joint-venture owned or franchised Old Spaghetti Factory restaurants. There can be no assurance, however, that the Company will be able to achieve these objectives. FRANCHISING The Company has developed a franchise program under which it has attracted two franchisees in the United States. Currently operating franchise units include those located in Wichita, Kansas; Newport News (Norfolk), Virginia; Columbia, South Carolina; Richmond, Virginia and Glen Allen (Richmond), Virginia. During fiscal 1997, the Company executed a contract to sell its Richmond, Virginia restaurant to its Virginia franchisee. The Wichita franchise operates under the original Spaghetti Warehouse format, while all other franchise locations operate under the Italian Grill format. Franchisees pay an initial franchise fee of $35,000 per unit, and pay ongoing royalty fees and marketing fees of 3.5% and 0.5% of restaurant sales, respectively. The Company generally does not plan to grant franchises in markets containing Company-operated restaurants or in markets that it has reserved for future Company-operated restaurants. This strategy is designed to enable the Company to expand the number of Spaghetti Warehouse and Italian Grill restaurants without significant capital outlays and to expand into new markets that the Company does not intend to develop with Company-operated restaurants in the near future. The Company has limited experience in franchising, and there is no assurance that any additional franchise agreements will be consummated. RESTAURANT OPERATIONS All Spaghetti Warehouse and Italian Grill restaurants are operated under uniform standards and specifications set forth in the Company's operating manual and internal procedures memoranda. The standards govern the restaurants' operation of the kitchen, dining room and bar area; repair and maintenance of premises and equipment; and the administration, training and conduct of restaurant personnel. The Company also emphasizes uniform standards for product quality, facility maintenance, portion control, sanitation and customer service. The Company requires franchisees to maintain these same uniform standards. The Company maintains financial, accounting and management controls for its restaurants through the use of centralized accounting and information systems. RESTAURANT MANAGEMENT The Company emphasizes both quality and efficiency in its operations. Operational standards are set through the development of annual business plans and are maintained by restaurant management personnel and regional operations directors. Each operations director is generally responsible for seven to 11 restaurants. Each restaurant staff consists of a general manager, a senior kitchen manager, three to five assistant managers and 65 to 150 hourly employees. Restaurant managers are responsible for day-to-day operations, including customer relations, food preparation and quality control, cost control, restaurant maintenance and human resource functions. In order to control labor costs, the managers use customer count forecasts and employee work-schedule systems designed to match employee work hours to anticipated customer traffic. Each restaurant also has an inventory control system designed to aid the manager in food cost and waste control, as well as in the evaluation of purchasing needs. A restaurant manager receives a fixed salary plus a bonus based upon the sales -3- and profitability of the restaurant under his or her supervision. Regional operations directors and general managers who exhibit superior performance are also eligible for stock options. PURCHASING The Company uses its own standardized recipes for menu items in all of its restaurants to ensure uniform quality and freshness. The Company's ability to maintain consistent product quality throughout its chain of restaurants depends upon acquiring specified food products and related items from reliable sources, and involves negotiating purchases directly from manufacturers to obtain reduced prices. The Company has a contract with a national wholesale distributor to deliver the majority of the nonperishable and frozen food products used in its Spaghetti Warehouse and Italian Grill restaurants. The use of a national distributor has helped to reduce average restaurant inventory levels. Food products and related restaurant supplies not purchased through the national wholesale distributor are purchased from independent wholesale food distributors and manufacturers, while other items, including fresh produce, dairy and some meat products, are purchased locally by each restaurant. The Company does not maintain a central product warehouse or commissary. Management believes that all essential food and beverage products are available from several qualified suppliers in all cities in which the Company's restaurants are located. ADVERTISING AND MARKETING The Company's primary markets are the business trade for lunch and the family trade for dinner. In addition to word-of-mouth advertising, the Company relies primarily on radio, print and billboard advertising and special promotions to increase customer traffic and sales. The Company's marketing department develops and implements Company-wide and local promotions emphasizing value, menu variety, food quality and fun. Emphasis is also placed on local community involvement. During the fiscal year ended June 29, 1997, the Company's expenditures for advertising (including local promotions) were approximately 4.1% of revenues. During fiscal 1998, the Company intends to produce and air television commercials in selected markets. The commercials will be aired in markets in which it can purchase television airtime efficiently. GOVERNMENT REGULATION The Company is subject to various Federal, state and local laws affecting its business. The Company's restaurants are subject to health, sanitation and safety standards, as well as state and local licensing and regulation with respect to the sale and service of alcoholic beverages. The sale and service of alcoholic beverages is material to the business of the Company, and as such, the failure or delay in receiving or retaining a liquor license in a particular location could adversely affect the Company's operations in that location and could impair the Company's ability to obtain licenses elsewhere. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. The Company has not encountered any material problems relating to alcoholic beverage licenses and permits to date. In certain states, the Company is subject to "dram-shop" statutes, which generally give a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to such person. The Company carries liquor liability insurance coverage as part of its existing comprehensive general liability insurance. Management is not aware of any Federal or state environmental regulations that have had a material effect on the Company's operations to date. However, more stringent and varied requirements of local governmental bodies with respect to waste disposal, zoning, construction and land use have increased both the cost of and the time required for construction of new restaurants and the cost of operating existing Company restaurants. The Company is also subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions. Because a number of the Company's food service personnel are paid at rates related to the Federal minimum wage, the recent increase in the Federal minimum, which became effective September 1, 1997, will cause a corresponding increase in the Company's labor costs. The Company intends to pass on these increased labor costs through selective menu price increases; however, due to the competitive environment of the restaurant industry, there can be no assurance that the Company will be able to -4- accomplish this objective. Furthermore, the Company also operates in states with minimum wage rates in excess of the Federal minimum requirement, thus causing the Company to incur higher labor costs in those markets. The Company's franchising program is subject to a substantial number of laws, rules and regulations governing the sale and operation of franchises. In recent years, many states have enacted laws that require detailed disclosure in the offer and sale of franchises and the registration of the franchisor with state administrative agencies. The Company is also subject to Federal Trade Commission regulations relating to disclosure requirements in the sale of franchises. Certain states have enacted, and others may enact, legislation governing the termination or nonrenewal of a franchise and other aspects of the franchise relationship that are intended to protect franchisees. The laws applicable to franchise operations and relationships is rapidly developing and the Company is unable to predict the effect on its franchising program of additional requirements or restrictions that may be enacted or promulgated or of court decisions that may be adverse to franchisors. SERVICE MARKS AND PATENTS The Company has registered "SPAGHETTI WAREHOUSE & Design," "THE SPAGHETTI WAREHOUSE & Design," "PASTA POWER & Design," "THE SPAGHETTI WAREHOUSE," "OCTOBERFEAST," "THE SPAGHETTI WAREHOUSE GREAT ITALIAN FOOD. ALL-AMERICAN FUN. & Design," "THE SPAGHETTI WAREHOUSE RESTAURANT & Design" and "THE SPAGHETTI WAREHOUSE ITALIAN GRILL & Design" service marks with the U.S. Patent and Trademark office. The Company also has 10 registered state service marks. The range of expiration dates of the initial terms of the Company's federally registered service marks is from 2000 to 2010. The Company intends to renew these service mark registrations. The range of initial and renewal terms of the Company's Canadian service mark registrations in connection with the Old Spaghetti Factory restaurant concept in Canada is from 2003 to 2006. The Company intends to renew these service mark registrations. The Company currently has 40 registered service marks and five applications pending for service marks in 18 foreign countries. The Company does not currently anticipate that it will be using its service marks in foreign countries other than Canada during the next 12 months. The Company generally intends to renew the terms of those registered service marks that it deems of value at the time of renewal. The Company regards its service marks and trademarks as having significant value and being an important factor in the marketing of its restaurants. The Company's policy is to pursue registrations of its service marks wherever practicable and to oppose vigorously any infringement of its marks. The laws of some foreign countries, however, do not protect the Company's proprietary rights to the same extent as do the laws of the United States. EMPLOYEES The Company presently employs approximately 750 persons on a full-time basis, 42 of whom are corporate management and staff personnel and 708 of whom are restaurant personnel. The Company also employs approximately 1,500 part-time restaurant employees. Except for corporate and restaurant management personnel, employees are generally paid on an hourly basis. Company restaurants employ an average of 20 full-time and 60 part-time hourly employees. None of the Company's employees are covered by collective bargaining agreements, and the Company has never experienced a major work stoppage, strike or labor dispute. The Company believes that its working conditions and compensation arrangements compare favorably with its competition and considers relations with its employees to be good. Restaurant managers are paid a base salary, plus incentive compensation, that is contingent upon achieving certain objectives. The Company believes that managers who produce superior economic results and deliver quality customer experiences earn more at the Company than the average compensation in the industry for similar positions and experience levels. -5- COMPETITION The restaurant business is highly competitive, and competition in the Italian restaurant segment has increased in recent years. The Company believes that the primary competitive concerns in its business are the variety, quality and price of the food offered, the quality of the service provided by the restaurant's employees and the location and atmosphere of the restaurant. The business of the Company is also affected by general economic conditions, changes in consumer tastes, population, traffic patterns and spending habits of consumers. The Company competes with various food service operations in each of its markets, including locally owned restaurants, as well as national and regional restaurant chains, some of which operate more restaurants and have greater financial resources than the Company. The Company believes that its competitive position depends upon its ability to offer and maintain its quality food, unusual decor, a moderately priced menu and a comfortable full-service, family-oriented dining atmosphere. There is also active competition for quality management personnel and desirable commercial real estate sites suitable for restaurants. Management believes that financial resources and size are important factors in obtaining suitable sites, and that such factors, as well as compensation, are important in attracting quality management personnel. ITEM 2. PROPERTIES. The Company owns 19 and leases space for nine of its Company-operated restaurants. One of the currently operating Company-owned units is subject to a ground lease. The Company also owns its corporate office headquarters and warehouse facilities, comprised of two buildings containing a combined total of 28,000 square feet of space. These buildings are situated on two separate properties totaling approximately two acres of land in Garland, Texas, a suburb of Dallas. None of the Company's properties are encumbered by mortgage indebtedness. The Company believes that its corporate office and warehouse facilities are adequate to meet its requirements through at least fiscal 1998 and that suitable additional space will be available, as needed, to accommodate further physical expansion of corporate operations. The Company's restaurant leases, including renewal options, expire at various times from 2007 to 2027, and generally provide for minimum annual rentals and, in five cases, for payment of additional rent based on a percentage of restaurant sales. Five of the Company's leases provide for a preferential right of first refusal upon sale of the property. The Company is required to pay real estate taxes, insurance, maintenance expenses and utilities under substantially all of its leases. The Company depends on short-term leases for parking at 10 of its 28 restaurants. There can be no assurance that adequate parking will continue to be available, or that the lack of such parking will not have an adverse impact on the operations of the respective restaurants. ITEM 3. LEGAL PROCEEDINGS. As discussed in the Company's Form 10-K for the fiscal year ended June 30, 1996, Bright-Kaplan International Corporation ("BK") filed a claim in arbitration against the Company with the American Arbitration Association ("AAA") in Dallas, Texas. BK is the owner of the previous Spaghetti Warehouse franchise restaurant located in Knoxville, Tennessee. BK claimed that the Company misrepresented and concealed numerous material facts in order to induce BK to enter into a franchise agreement, failed to provide a variety of services in support of BK's franchise, engaged in deceptive trade practices and violated Federal Trade Commission disclosure rules. BK was seeking damages in excess of $9.0 million. In addition to the arbitration claim, Elizabeth Bright and Thomas C. Bright III, the principal shareholders of BK, filed a lawsuit against the Company seeking damages in excess of $2.5 million, along with trebling of such damages under the Texas Deceptive Trade Practices Act. Following an extensive hearing before the arbitration panel in Dallas, the panel unanimously ruled that the Company had no liability in this matter. On June 10, 1997, the lawsuit was dismissed by the trial judge on the grounds that matters in controversy had been decided in the previous AAA ruling. The plaintiffs have since appealed the dismissal. The Company will continue to vigorously defend itself in this matter. As of June 29, 1997, damages, if any, arising from such litigation are not estimable. A ruling from the appellate court is expected in the fourth quarter of fiscal 1998. The Company is also involved in other routine litigation from time to time. Such other litigation in which the Company is currently involved is not material to the Company's consolidated financial condition or results of operations. -6- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of the shareholders of the Company during the fourth quarter of the fiscal year ended June 29, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED MATTERS. The Company's Common Stock is listed on the New York Stock Exchange under the symbol "SWH." The following table sets forth the range of quarterly high and low closing sale prices of the Company's Common Stock since July 3, 1995.
HIGH LOW ----- ----- Fiscal year ending June 30, 1996: First Quarter 5 3/4 4 3/4 Second Quarter 5 1/8 4 5/8 Third Quarter 5 3/4 4 5/8 Fourth Quarter 5 3/4 5 1/4 Fiscal year ending June 29, 1997: First Quarter 5 5/8 4 3/4 Second Quarter 6 5 Third Quarter 5 3/8 5 Fourth Quarter 6 4 3/4 Fiscal year ending June 28, 1998: First Quarter (through September 12) 7 5 1/4
As of September 12, 1997, the Company estimates that there were approximately 2,200 beneficial owners of the Company's Common Stock, represented by approximately 575 holders of record. The Company has never paid cash dividends. Management presently intends to retain any earnings for the operation and expansion of the Company's business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of dividends will depend upon results of operations, capital requirements, the financial condition of the Company and such other factors as the Board of Directors of the Company may consider. -7- ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial data regarding the Company's results of operations and financial position for, and as of the end of, each of the fiscal years in the five-year period ended June 29, 1997, which are derived from the Consolidated Financial Statements of the Company and its subsidiaries, which have been audited. The Consolidated Financial Statements as of July 2, 1995, June 30, 1996, and June 29, 1997, and for each of the years in the three-year period ended June 29, 1997, and the independent auditors' reports thereon, are included elsewhere in this Report. The information below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included elsewhere in this Report.
YEAR ENDED ------------------------------------------------------------ July 4, July 3, July 2, June 30, June 29, 1993 1994 1995 1996 1997 -------------- ------- -------- -------- ---------- (In thousands, except per share amounts and Restaurant Data) OPERATIONS STATEMENT DATA: Revenues................................................. $66,443 $78,384 $78,956 $ 70,957 $64,904 ------- ------- ------- -------- ------- Costs and expenses: Cost of sales............................................ 16,517 19,749 20,036 17,965 16,516 Operating expenses....................................... 35,453 44,221 44,768 41,122 36,222 General and administrative............................... 3,677 5,447 5,619 5,767 5,279 Depreciation and amortization............................ 4,815 5,843 5,251 4,871 3,954 Restructuring charges (reversals)........................ -- -- -- 13,875 (740) Impairment of long-lived assets.......................... -- -- -- -- 2,009 Unusual charge........................................... -- -- 600 -- -- Loss (gain) on asset scheduled for divestiture........... 143 50 -- (47) -- Loss on closed restaurant................................ 359 -- -- -- -- ------- ------- ------- -------- ------- Total costs and expenses.............................. 60,964 75,310 76,274 83,553 63,240 ------- ------- ------- -------- ------- Income (loss) from operations............................... 5,479 3,074 2,682 (12,596) 1,664 Net interest income (expense)............................... 20 (904) (1,198) (1,045) (691) ------- ------- ------- -------- ------- Income (loss) before income tax expense (benefit)........... 5,499 2,170 1,484 (13,641) 973 Income tax expense (benefit)................................ 1,493 461 234 (5,308) 314 ------- ------- ------- -------- ------- Net income (loss)........................................... $ 4,006 $ 1,709 $ 1,250 $ (8,333) $ 659 ======= ======= ======= ======== ======= Net income (loss) per common and common equivalent share (1)............................. $ .62 $ .28 $ .22 $ (1.49) $ .11 ======= ======= ======= ======== ======= Weighted average common and common equivalent shares outstanding (1)....................... 6,445 6,069 5,697 5,611 5,769 ======= ======= ======= ======== ======= BALANCE SHEET DATA: Cash and cash equivalents................................ $ 1,600 $ 1,918 $ 1,873 $ 8,065 $ 1,917 Working capital deficit (2).............................. (95) (3,154) (2,602) (3,405) (2,235) Total assets............................................. 70,693 78,648 75,511 71,368 58,630 Long-term debt........................................... 9,620 18,584 15,548 19,762 7,883 Stockholders' equity..................................... 55,979 52,482 53,436 45,250 45,934 RESTAURANT DATA: Company-owned restaurants open for full year............. 24 31 36 29 28 Company-owned restaurants open at end of year............ 31 36 37 30 28
- -------------------- (1) See Note 1 (m) of Notes to Consolidated Financial Statements. (2) See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." -8- 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.
PERCENTAGE OF TOTAL REVENUES FISCAL YEAR ENDED ---------------------------------------- July 2, June 30, June 29, 1995 1996 1997 ------- -------- -------- Revenues....................................................... 100.0% 100.0% 100.0% ----- ----- ----- Costs and expenses: Cost of sales............................................... 25.4 25.3 25.4 Operating expenses.......................................... 56.7 58.0 55.8 General and administrative.................................. 7.1 8.1 8.1 Depreciation and amortization............................... 6.6 6.9 6.1 Restructuring charges (reversals)........................... -- 19.6 (1.1) Impairment of long-lived assets............................. -- -- 3.1 Unusual charge.............................................. 0.8 -- -- Gain on asset scheduled for divestiture..................... -- (0.1) -- ----- ----- ----- Total costs and expenses................................. 96.6 117.8 97.4 ----- ----- ----- Income (loss) from operations.................................. 3.4 (17.8) 2.6 Net interest expense........................................... (1.5) (1.4) (1.1) ----- ----- ----- Income (loss) before income tax expense (benefit).............. 1.9 (19.2) 1.5 Income tax expense (benefit)................................... 0.3 (7.5) 0.5 ----- ----- ----- Net income (loss).............................................. 1.6% (11.7%) 1.0% ===== ===== =====
1997 COMPARED TO 1996 REVENUES Fiscal 1997 revenues declined $6.1 million, or 8.5%, in comparison to fiscal 1996. This decrease was attributable to the closure of seven under- performing restaurants in February 1996, the sale of the Company's Richmond, Virginia operation to a franchisee in November 1996 and the closing of the Company's Cappellini's unit in December 1996. These declines were partially offset by a 0.7% increase in sales experienced by the 28 stores that were open for the full year in both fiscal 1997 and 1996 ("same-stores") and a $0.2 million increase in U.S. franchise income. The increase in same-store sales was the result of an 3.0% increase in check averages partially offset by a 2.3% decline in customer counts. The increase in check averages was primarily the result of new menu items introduced over the past year and increased check averages associated with the Company's repositioned Italian Grill units. Additionally, modest menu price adjustments made during the last 18 months also contributed to the increase in check averages. Fiscal 1997 sales in the Company's eight Italian Grill units, during current year periods while operating under the Italian Grill format, increased 6.4% over comparable periods in fiscal 1996, while sales in the Company's traditional Spaghetti Warehouse concept declined 0.6% in fiscal 1997. Due to these favorable sales results, the Company plans to convert six to eight units to the Italian Grill format in fiscal 1998. -9- COSTS AND EXPENSES Cost of Sales Cost of sales as a percentage of total revenues increased from 25.3% in fiscal 1996 to 25.4% in fiscal 1997. This increase was due to higher food costs associated with the Italian Grill and higher commodity prices incurred on certain meat, dairy and pasta products. Due to the higher food costs associated with the Italian Grill, management anticipates that cost of sales as a percentage of total revenues will increase modestly in fiscal 1998 as more units are converted to the Italian Grill format. Operating Expenses Operating expenses as a percentage of total revenues decreased from 58.0% in fiscal 1996 to 55.8% in fiscal 1997. Much of this decrease is due to the closure of the seven low-volume units in February 1996. These units generally incurred higher operating expenses as a percentage of revenues than typical Company restaurants. Improved controls over restaurant labor and reduced marketing expenditures also contributed to the current year decrease. These decreases were partially offset by an increase in group medical costs in comparison to prior year. Management anticipates that operating expenses as a percentage of total revenues will be comparable with current year levels during fiscal 1998. General and Administrative Expenses (G&A) G&A expenses as a percentage of total revenues were 8.1% in both fiscal 1997 and 1996. The fixed nature of certain G&A costs, relative to the decline in total revenues, put upward pressure on G&A as a percentage of total revenues; however, reductions in recruitment expenses and legal fees, coupled with the fiscal 1996 write-off of costs incurred in the preparation of the Addison property for its conversion to Cappellini's, caused G&A as a percentage of total revenues to remain flat in fiscal 1997. Depreciation and Amortization (D&A) D&A as a percentage of total revenues decreased from 6.9% in fiscal 1996 to 6.1% in fiscal 1997. This decrease was primarily due to elimination of depreciation expense on the seven low-volume units closed in February 1996. Restructuring Charges (Reversals) In the third quarter of fiscal 1996, the Company implemented a restructuring plan intended to strengthen its competitive position and improve cash flow and profitability. In conjunction with the plan, the Company closed seven under- performing restaurants in February 1996 and identified one additional restaurant to be sold as an operating unit. The Company recorded a pre-tax charge of $13.9 million in the third quarter of fiscal 1996 to cover costs related to the execution of this plan, including the write-down of property and equipment to its estimated net realizable value, severance packages and various other store closing and corporate obligations. As a result of obtaining more favorable disposal terms on the seven restaurant properties closed in the restructuring plan, total costs relating to this plan were less than the previously recorded charge. Therefore, the Company reversed $740,000 in pre-tax restructuring charges in fiscal 1997. Due to the recent disposal of all remaining identified corporate assets, the Company completed its original restructuring plan, thus resulting in a $0 balance of accrued restructuring charges at June 29, 1997. See Note 8 of Notes to Consolidated Financial Statements for further information. Impairment of Long-Lived Assets The Company adopted Financial Accounting Standards Board Statement No. 121 during fiscal 1997, resulting in pre-tax, noncash impairment charges of $2,009,526. These charges relate to the write-down of the Company's Cappellini's restaurant in Addison, Texas to its estimated fair market value. See Note 1 (i) of Notes to Consolidated Financial Statements for further information. -10- NET INTEREST EXPENSE Net interest expense decreased from $1.0 million in fiscal 1996 to $0.7 million in fiscal 1997. This decrease was primarily attributable to decreases in the average debt outstanding under the Company's credit facilities. Subject to provisions of the Company's credit facilities, management intends to incur additional long-term debt to the extent that future cash flow from operations is insufficient to cover planned restaurant openings, Italian Grill conversions, capital expenditures and possible further repurchases of the Company's stock. INCOME TAXES The Company's effective income tax rate decreased from a 38.9% benefit in fiscal 1996 to a 32.3% provision in fiscal 1997. The decline is primarily attributable to the fact that a higher proportion of the Company's consolidated pre-tax earnings was generated by the Company's Canadian operations in fiscal 1997 as compared to fiscal 1996. These Canadian earnings are taxed at a lower rate thereby reducing the Company's overall tax rate. The reduction in fiscal 1997 U.S. pre-tax earnings as a percentage of consolidated pre-tax earnings was attributable to the $2.0 million in asset impairment charges recorded in the current year. See Note 5 of Notes to Consolidated Financial Statements for further information. 1996 COMPARED TO 1995 REVENUES Fiscal 1996 revenues declined $8.0 million, or 10.1%, in comparison to fiscal 1995. This decrease was attributable to a reduction in sales resulting from the closure of seven under-performing restaurants in February 1996, a 4.4% decline in fiscal 1996 same-store sales and reduced sales resulting from the temporary closure of the Marietta and Addison restaurants for their conversion to other concepts. The decline in fiscal 1996 same-store sales was the result of an 8.5% decrease in customer counts offset by a 4.4% increase in check averages. Same- store customer count comparisons were negatively affected by the continued growth of competitors in the casual dining and Italian restaurant segments and by periods of unusually severe winter weather in the third quarter. The increase in check averages was primarily the result of new menu items introduced over the last 18 months, higher check averages at Italian Grill units and modest menu price adjustments made during the last 18 months. COSTS AND EXPENSES Cost of Sales Cost of sales as a percentage of total revenues decreased slightly from 25.4% in fiscal 1995 to 25.3% in fiscal 1996. This decrease was the result of improved inventory controls and modest price adjustments made during fiscal 1995 and fiscal 1996. Operating Expenses Operating expenses as a percentage of total revenues increased from 56.7% in fiscal 1995 to 58.0% in fiscal 1996. This increase is primarily attributed to a significant increase in marketing expenditures over fiscal 1995. Additionally, increases in management labor, kitchen labor and property taxes as a percentage of revenues contributed to the overall increase. These increases were partially offset by decreases in dining room labor, group medical costs and general liability insurance costs as a percentage of revenues. The fixed nature of certain costs, relative to the decline in same-store sales, also contributed to the increase in fiscal 1996 operating expenses as a percentage of total revenues. General and Administrative Expenses (G&A) G&A expenses as a percentage of total revenues increased from 7.1% in fiscal 1995 to 8.1% in fiscal 1996. The fixed nature of certain G&A expenses, relative to the fiscal 1996 decrease in total revenues, -11- contributed to the increase in G&A as a percentage of total revenues. Additionally, increased marketing research costs, legal fees, travel costs and a noncash write-off of certain costs incurred in the preparation of the Addison property for its conversion to Cappellini's contributed to the fiscal 1996 year increase in G&A as a percentage of revenues. Depreciation and Amortization (D&A) D&A as a percentage of total revenues increased from 6.6% in fiscal 1995 to 6.9% in fiscal 1996. This increase was due to the fixed nature of depreciation relative to the decline in fiscal 1996 same-store sales and to an increase in depreciation incurred on new point-of-sale (POS) equipment. This increase was partially offset by a decrease in pre-opening amortization on new stores resulting from a reduction in the Company's new unit expansion rate. Restructuring Charges (Reversals) On January 30, 1996, the Company's Board of Directors approved a restructuring plan intended to strengthen the Company's competitive position and improve cash flow and profitability. In conjunction with the plan, the Company closed seven under-performing restaurants in February 1996 and identified one additional restaurant to be sold as an operating unit. The seven closed stores include those previously located in Hartford, Connecticut; Providence, Rhode Island; Buffalo, New York; Rochester, New York; Columbia, South Carolina; Greenville, South Carolina and Little Rock, Arkansas. Additionally, the Company has executed a contract to sell its Richmond, Virginia restaurant to its Virginia franchisee during the second quarter of fiscal 1997. The Company recorded a $13.9 million pre-tax charge in the third quarter of fiscal 1996 to cover costs associated with the implementation of this plan, including the write-down of property and equipment to its net realizable value, severance packages and various other store closing and corporate obligations. Gain on Asset Scheduled for Divestiture In fiscal 1992, the Company purchased its existing Austin, Texas location and ceased development of an alternate Austin location. The Company sold the alternate Austin location in fiscal 1996 for an amount exceeding its recorded book value, thus recognizing a $47,178 gain at the time of its sale. NET INTEREST EXPENSE Net interest expense decreased from $1.2 million in fiscal 1995 to $1.0 million in fiscal 1996. This decrease was primarily attributed to decreases in the average debt outstanding under the Company's credit facilities. Additionally, interest earned on cash proceeds from the disposal of closed restaurants helped reduce fiscal 1996 net interest expense. INCOME TAXES The Company's effective income tax rate increased from a 15.8% provision in fiscal 1995 to a 38.9% benefit in fiscal 1996. The fiscal 1995 rate was below statutory rates due primarily to the utilization of the Federal FICA tax tip credit. The increase from fiscal 1995 was primarily the result of the tax benefit relating to fiscal 1996 restructuring charges that were deferred for income tax purposes for future years. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital deficit decreased from $3.4 million on June 30, 1996 to $2.2 million on June 29, 1997. This decrease is primarily attributable to the elimination of accrued restructuring charges in fiscal 1997, as compared to fiscal 1996. The Company is currently operating with a working capital deficit, which is common in the restaurant industry since restaurant companies do not normally require significant investment in either accounts receivable or inventory. Net cash provided by operating activities increased from $2.3 million in fiscal 1996 to $7.4 million in fiscal 1997. The increase was attributed to the increase in current year earnings, the receipt of prior year income tax refunds and changes in certain components of working capital. -12- Long-term debt outstanding on June 29, 1997 consisted of a $7.9 million term loan borrowed under the Company's existing bank credit facility. The Company has an additional $5.0 million available under its bank revolving credit facility as of June 29, 1997, subject to meeting a certain funded debt to cash flow requirement prior to borrowing any additional funds. In fiscal 1994, the Company's Board of Directors authorized a program for the repurchase of up to 1,000,000 shares of the Company's common stock for investment purposes. As of June 29, 1997, the Company had repurchased 811,041 shares of common stock under this program, including 30,089 shares in fiscal 1997. Further purchases with respect to this program are dependent upon various business and financial considerations. The Company's capital expenditures decreased from $4.0 million in fiscal 1996 to $2.6 million in fiscal 1997. Fiscal 1997 expenditures consist primarily of the conversion of five Company restaurants to the Italian Grill format and normal purchases of new and replacement restaurant equipment and decor. During fiscal 1997, the Company converted five of its traditional Spaghetti Warehouse restaurants to the Italian Grill format. One additional unit has also been converted to the Italian Grill format during the first quarter of fiscal 1998. The Italian Grill concept is an updated version of the traditional Spaghetti Warehouse concept and features new decor, an expanded menu and even greater customer value. Based on favorable sales and operating results achieved in previously converted units, the Company plans to convert six to eight existing units to the Italian Grill format during fiscal 1998. In addition to Italian Grill conversions, the Company plans to open two to three new units and to continue to make necessary replacements and upgrades to its existing restaurants and information systems during fiscal 1998. Total planned capital expenditures relating to fiscal 1998 projects are $4.4 million. Cash flow from operations, current cash balances and amounts available under the Company's bank revolving credit facility are expected to be sufficient to fund planned capital expenditures, payment of required term loan maturities and possible further repurchases of Company stock in fiscal 1998. EFFECT OF INFLATION Management does not believe inflation has had a significant effect on the Company's operations during the past several years. The Company has historically been able to pass on increased costs through menu price increases; however, due to the competitive environment of the restaurant industry, there can be no assurance that the Company will be able to pass on such cost increases in the future. SEASONALITY The Company's business is subject to seasonality, with revenues generally being highest during the months of July and August and lowest during the months of September through January. This seasonality is due to the dining-out patterns of the Company's customers. NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS In March 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." This statement establishes new standards for computing and presenting earnings per share ("EPS"). SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and earlier application is not permitted. When adopted, the Company will be required to restate its EPS data for all prior periods presented. The Company does not expect adoption of this statement to have a significant impact on previously reported EPS. -13- FORWARD-LOOKING INFORMATION Statements contained in this Form 10-K that are not historical facts, including, but not limited to, statements found in this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this Form 10-K could differ materially from those stated in such forward-looking statements. The following factors, among others, could cause actual results to differ materially: adverse retail industry conditions, industry competition and other competitive factors, government regulation and possible future litigation, seasonality of business, as well as the risks and uncertainties discussed in this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Financial Statements and Supplementary Data are set forth herein commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The Company has had no disagreements with its independent accounting firm to report under this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION. The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. -14- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of Report. 1. Financial Statements: -------------------- The Financial Statements are listed in the index to Consolidated Financial Statements on page F-1 of this Report. 2. Exhibits: -------- 3.1 - Second Amended and Restated Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q for the quarter ended April 2, 1995, filed by the Company with the Securities and Exchange Commission). 3.2 - Second Amended and Restated Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.2 of the Company's Form 10-Q for the quarter ended January 1, 1995, filed by the Company with the Securities and Exchange Commission). 4.1 - Rights Agreement, dated February 2, 1995 between the Company and Chemical Bank (incorporated by reference to Exhibit 1 of the Company's Registration Statement on Form 8-A, filed by the Company with the Securities and Exchange Commission on February 27, 1995). + 10.1 - First Amended and Restated 1990 Spaghetti Warehouse, Inc. Incentive Stock Option Plan (incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8, registration no. 33-69024, filed by the Company with the Securities and Exchange Commission). + 10.2 - 1991 Nonemployee Director Stock Option Plan (incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-2, registration no. 33- 40257, filed by the Company with the Securities and Exchange Commission). + 10.4 - Spaghetti Warehouse, Inc. 1992 Bonus Stock Option Plan (incorporated by reference to Exhibit 4.8 of the Company's Registration Statement on Form S-8, registration no. 33-69024, filed by the Company with the Securities and Exchange Commission). + 10.6 - Letter Agreement, dated as of August 23, 1993, relating to the Company's employment arrangement with H.G. Carrington, Jr. (incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the Fiscal Year Ended July 4, 1993). 10.7 - Lease Agreement, dated June 13, 1977, between the Company and Oscar L. Thomas, Jr., relating to certain premises in Columbus, Ohio (incorporated by reference to Exhibit 10.5 of the Company's Registration Statement on Form S-1, registration no. 2-99832, filed by the Company with the Securities and Exchange Commission). 10.8 - Lease Agreement, dated September 1, 1980 between the Company and Gagel Construction, Inc. (incorporated by reference to Exhibit 10.6 of the Company's Registration Statement on Form S-1, registration no. 2-99832, filed by the Company with the Securities and Exchange Commission). 10.9 - Lease Agreement, dated November 18, 1981 between the Company and Samuel Geraldo, Trustee, as amended, relating to certain premises in Toledo, Ohio (incorporated by reference to Exhibit 10.6 of the Company's Registration Statement on Form S-1, registration no. 33-30676, filed by the Company with the Securities and Exchange Commission). -15- 10.10 - Lease Agreement, dated November 30, 1981, between the Company and Ybor Square, Ltd., relating to certain premises in Tampa, Florida (incorporated by reference to Exhibit 10.8 of the Company's Registration Statement on Form S-1, registration no. 2-99832, filed by the Company with the Securities and Exchange Commission). 10.12 - Financing and Operating Agreement, dated September 2, 1982, among the Company, the City of Tampa, Florida, The Spaghetti Consultants of Florida, Inc., Ybor Square, Ltd. and Continental National Bank of Fort Worth, Texas (incorporated by reference to Exhibit 10.11 of the Company's Registration Statement on Form S-1, registration no. 2-99832, filed by the Company with the Securities and Exchange Commission). 10.13 - Lease Agreement, dated April 1, 1987, between the Company and Memphis Center City Revenue Finance Corporation, relating to certain premises in Memphis, Tennessee (incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the Fiscal Year Ended July 4, 1987, filed by the Company with the Securities and Exchange Commission). 10.14 - Lease, dated May 28, 1988, between the Company and Ward and Shirley Olander, relating to certain premises in Pittsburgh, Pennsylvania (incorporated by reference to Exhibit 10.18 of the Company's Registration Statement on Form S-1, registration no. 33-30676, filed by the Company with the Securities and Exchange Commission). 10.15 - Lease Agreement, dated as of February 15, 1989, between the Company and North Clinton Associates, relating to certain premises in Syracuse, New York (incorporated by reference to Exhibit 10.21 of the Company's Registration Statement on Form S-1, registration no. 33-30676, filed by the Company with the Securities and Exchange Commission). 10.16 - Deed of Trust, Security Agreement and Assignment of Rents, dated July 24, 1989, between the Company, as grantor, and Deposit Guaranty Bank, as beneficiary, and related promissory note (incorporated by reference to Exhibit 10.22 of the Company's Registration Statement on Form S-1, registration no. 33-30676, filed by the Company with the Securities and Exchange Commission). 10.17 - Lease Agreement, dated May 29, 1990, between Spring-Ten Associates and the Company, as amended on July 18, 1990, October 26, 1990, and December 13, 1990, relating to certain premises in Philadelphia, Pennsylvania (incorporated by reference to Exhibit 10.24 of the Company's Registration Statement on Form S-2, registration no. 33-40257, filed by the Company with the Securities and Exchange Commission). 10.18 - Lease Agreement, dated as of November 27, 1990, between the Company and The Foundry Associates, L.P., relating to certain premises in Providence, Rhode Island (incorporated by reference to Exhibit 10.25 of the Company's Registration Statement on Form S-2, registration no. 33-40257, filed by the Company with the Securities and Exchange Commission). 10.19 - Contract for Sale of Real Estate, dated September 12, 1991, among the Company, Elie Guggenheim and Catherine Guggenheim (incorporated by reference to Exhibit 10.18 of the Company's Form 10-K for the fiscal year ended July 4, 1992, filed with the Securities and Exchange Commission). 10.20 - Real Estate Term Note in original principal amount of $180,000, dated November 21, 1991, executed by the Company as maker, payable to the order of Elie Guggenheim and Catherine Guggenheim (incorporated by reference to Exhibit 10.19 of the Company's Form 10-K for the fiscal year ended July 4, 1992, filed with the Securities and Exchange Commission). 10.21 - Lease Agreement, dated as of July 6, 1991, between the Company and Nautica Peninsula Land Limited Partnership, relating to certain premises in Cleveland, Ohio (incorporated by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K for the fiscal year ended July 4, 1993, filed with the Securities and Exchange Commission). -16- 10.22 - Lease Agreement, dated as of September 2, 1992, between the Company and Canal Place, Ltd., relating to certain premises in Akron, Ohio (incorporated by reference to Exhibit 10.22 of the Company's Annual Report on Form 10-K for the fiscal year ended July 4, 1993, filed with the Securities and Exchange Commission). 10.23 - Form of Spaghetti Warehouse, Inc. Franchise Offering Circular (incorporated by reference to Exhibit 10.23 of the Company's Annual Report on Form 10-K for the fiscal year ended July 4, 1993, filed with the Securities and Exchange Commission). 10.29 - Lease Agreement, dated as of August 11, 1993, between the Company and the State of Texas, relating to certain premises in Harris County, Texas, as amended by First Amendment to Lease Agreement effective October 25, 1993 and Second Amendment to Lease Agreement, undated (incorporated by reference to Exhibit 10.29 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1994, filed with the Securities and Exchange Commission). 10.30 - Second Lease Addendum, dated as of July 29, 1994, by and between Patricia D. Thomas, Oscar L. Thomas III and Spaghetti Warehouse of Ohio, Inc., relating to certain premises in Columbus, Ohio (incorporated by reference to Exhibit 10.30 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1994, filed with the Securities and Exchange Commission). +10.31 - Spaghetti Warehouse, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.31 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1994, filed with the Securities and Exchange Commission). 10.33 - Shareholders Agreement, undated, among Competitive Foods Australia Limited, Tarlina PTY Limited, MCS (Australia) PTY Limited, SWH Antiques, Inc. and F.P. Corporation PTY Limited, with respect to Fasta Pasta (incorporated by reference to Exhibit 10.33 of the Company's Annual Report on Form 10-K for the fiscal year ended July 2, 1995, filed with the Securities and Exchange Commission). 10.36 - Amended and Restated Loan Agreement, dated August 12, 1996 to the Amended and Restated Loan Agreement, dated as of November 1, 1993, June 7, 1993, among the Company, certain subsidiaries of the Company, Bank One Texas, N.A. and NationsBank of Texas, N.A., and Amendment No. 3 thereto, dated March 29, 1996, Amendment No. 2 thereto, dated February 9, 1995 and Amendment No. 1 thereto, dated December 21, 1993. +10.37 - Employment Agreement, dated as of January 30, 1996, by and between the Company and Robert R. Hawk. +10.38 - Amended Employment Agreement, dated as of September 1, 1996 by and between the Company and Robert R. Hawk (incorporated by reference to Exhibit 10.38 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 1996, filed with the Securities and Exchange Commission). +10.39 - Employment Agreement, dated as of October 1, 1996, by and between the Company and John T. Ellis (incorporated by reference to Exhibit 10.39 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 1996, filed with the Securities and Exchange Commission). +10.40 - Employment Agreement, dated as of October 28, 1996, by and between the Company and Phillip Ratner (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1997, filed with the Securities and Exchange Commission). -17- 21.1 - Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1994, filed with the Securities and Exchange Commission). *23.1 - Consent of Arthur Andersen LLP *27.1 - Financial Data Schedule _______________ + Compensation plan, benefit plan or employment contract or arrangement. * Filed herewith. (b) Reports on Form 8-K The Company did not file any report on Form 8-K during the last quarter of the period covered by this Report. -18- SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants............................................................... F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of July 30, 1996 and June 29, 1997..................................... F-3 Consolidated Statements of Operations for each of the years in the three-year period ended June 29, 1997........................................................................................ F-4 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended June 29, 1997........................................................................................ F-5 Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 29, 1997........................................................................................ F-6 Notes to Consolidated Financial Statements............................................................ F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Board of Directors of Spaghetti Warehouse, Inc.: We have audited the accompanying consolidated balance sheets of Spaghetti Warehouse, Inc. (a Texas Corporation) and subsidiaries as of June 30, 1996 and June 29, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the fiscal years in the three- year period ended June 29, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Spaghetti Warehouse, Inc. and subsidiaries as of June 30, 1996 and June 29, 1997, and the consolidated results of operations and cash flows for each of the fiscal years in the three-year period ended June 29, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, August 14, 1997 F-2 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND JUNE 29, 1997
ASSETS 1996 1997 ------------ ------------- ------------- Current assets: Cash and cash equivalents............ $ 8,065,364 $ 1,916,983 Accounts receivable.................. 659,069 637,803 Inventories.......................... 686,995 616,253 Prepaid expenses..................... 341,711 274,111 Deferred income taxes (note 5)....... -- 469,145 ----------- ----------- Total current assets............ 9,753,139 3,914,295 ----------- ----------- Property and equipment, net (note 2)...... 49,893,172 45,732,390 Assets scheduled for divestiture (notes 2 and 8).......................... 1,525,000 1,534,714 Trademark and franchise rights, net (note 3)................................. 3,113,472 2,942,852 Pre-opening costs, net.................... 171,862 -- Deferred income taxes (note 5)............ 6,134,892 3,961,274 Other assets.............................. 776,652 544,342 ----------- ----------- $71,368,189 $58,629,867 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ---------------------------------------- Current liabilities: Current portion of long-term debt (note 4)............................ $ 6,878,358 $ 1,478,127 Accounts payable..................... 1,932,648 2,082,150 Accrued payroll and bonuses.......... 1,450,812 1,673,336 Other accrued liabilities (note 1)... 1,487,488 915,226 Accrued restructuring charges (note 8) charges.................... 1,310,540 -- Deferred income taxes (note 5)....... 98,368 -- ----------- ----------- Total current liabilities....... 13,158,214 6,148,839 ----------- ----------- Long-term debt, less current portion (note 4)............................. 12,883,642 6,405,226 Deferred compensation..................... 75,875 141,901 Commitments and contingencies (note 7).... -- -- Stockholders' equity (note 6): Preferred stock of $1.00 par value; authorized 1,000,000 shares; no shares issued............ -- -- Common stock of $.01 par value; authorized 20,000,000 shares; issued 6,475,375 shares in 1996 and 6,527,835 shares in 1997............ 64,754 65,278 Additional paid-in capital........... 36,012,761 36,246,849 Cumulative translation adjustment.... (550,642) (611,499) Retained earnings.................... 16,094,924 16,753,859 ----------- ----------- 51,621,797 52,454,487 Less cost of 842,252 shares in 1996 and 872,341 shares in 1997 of common stock held in treasury... (6,371,339) (6,520,586) ----------- ----------- 45,250,458 45,933,901 ----------- ----------- $71,368,189 $58,629,867 =========== ===========
See accompanying notes to consolidated financial statements. F-3 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JULY 2, 1995, JUNE 30, 1996 AND JUNE 29, 1997
1995 1996 1997 ------------- ------------- ------------- Revenues: Restaurant sales..................... $77,805,987 $ 69,662,500 $63,372,287 Franchise............................ 618,604 705,876 932,355 Other................................ 531,874 588,243 598,931 ----------- ------------ ----------- Total revenues........ 78,956,465 70,956,619 64,903,573 ----------- ------------ ----------- Costs and expenses: Cost of sales........................ 20,036,174 17,964,938 16,515,660 Operating expenses................... 44,768,067 41,121,545 36,221,808 General and administrative........... 5,618,702 5,766,812 5,278,589 Depreciation and amortization........ 5,251,319 4,871,376 3,954,334 Restructuring charges (reversals) (note 8)............................ -- 13,875,248 (740,000) Impairment of long-lived assets (note 1)............................ -- -- 2,009,526 Unusual charge (note 9).............. 600,000 -- -- Gain on asset scheduled for divestiture (note 2)................ -- (47,178) -- ----------- ------------ ----------- Total costs and expenses... 76,274,262 83,552,741 63,239,917 ----------- ------------ ----------- Income (loss) from operations................ 2,682,203 (12,596,122) 1,663,656 ----------- ------------ ----------- Interest income (expense): Interest income...................... 85,301 192,080 189,357 Interest expense..................... (1,283,718) (1,236,740) (879,925) ----------- ------------ ----------- (1,198,417) (1,044,660) (690,568) ----------- ------------ ----------- Income (loss) before income tax expense (benefit)................. 1,483,786 (13,640,782) 973,088 Income tax expense (benefit) (note 5)..... 233,759 (5,307,324) 314,153 ----------- ------------ ----------- Net income (loss)..... $ 1,250,027 $ (8,333,458) $ 658,935 =========== ============ =========== Net income (loss) per common and common equivalent share.............. $ .22 $ (1.49) $ .11 =========== ============ =========== Weighted average common and common equivalent shares outstanding........ 5,696,653 5,611,181 5,769,017 =========== ============ ===========
See accompanying notes to consolidated financial statements. F-4 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TREASURY STOCK -------------------- ADDITIONAL CUMULATIVE ----------------- TOTAL NUMBER OF PAID-IN TRANSLATION RETAINED NUMBER STOCKHOLDERS' SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS OF SHARES AMOUNT EQUITY ---------- --------- ------------- ------------ -------------- --------- ----------- ------------ Balances at July 3, 1994.... 6,374,454 $63,745 $35,586,418 $(585,296) $23,178,355 (734,157) $(5,760,743) $52,482,479 Employee ESP Plan purchases and stock option exercises.............. 35,212 352 143,513 -- -- -- -- 143,865 Stock options issued as compensation (note 6).. -- -- 17,800 -- -- -- -- 17,800 Purchase of treasury shares, at cost............ -- -- -- -- -- (78,300) (467,820) (467,820) Foreign currency translation adjustment..... -- -- -- 9,422 -- -- -- 9,422 Net income.................. -- -- -- -- 1,250,027 -- -- 1,250,027 --------- ------- ----------- -------- ----------- -------- ---------- ----------- Balances at July 2, 1995.... 6,409,666 64,097 35,747,731 (575,874) 24,428,382 (812,457) (6,228,563) 53,435,773 Employee ESP Plan purchases and stock option exercises............. 65,709 657 244,030 -- -- -- -- 244,687 Stock options issued as compensation (note 6).. -- -- 21,000 -- -- -- -- 21,000 Purchase of treasury shares, at cost............ -- -- -- -- -- (29,795) (142,776) (142,776) Foreign currency translation adjustment..... -- -- -- 25,232 -- -- -- 25,232 Net loss.................... -- -- -- -- (8,333,458) -- -- (8,333,458) --------- ------- ----------- -------- ----------- -------- ----------- ---------- Balances at June 30, 1996... 6,475,375 64,754 36,012,761 (550,642) 16,094,924 (842,252) (6,371,339) 45,250,458 Employee ESP Plan purchases and stock option exercises............. 52,460 524 216,088 -- -- -- -- 216,612 Stock options issued as compensation (note 6).. -- -- 18,000 -- -- -- -- 18,000 Purchase of treasury shares, at cost............ -- -- -- -- -- (30,089) (149,247) (149,247) Foreign currency translation adjustment..... 37 -- -- (60,857) -- -- -- (60,857) Net income.................. -- -- -- -- 658,935 -- -- 658,935 --------- ------- ----------- --------- ----------- -------- ----------- ----------- Balances at June 29, 1997... 6,527,835 $65,278 $36,246,849 $(611,499) $16,753,859 (872,341) $(6,520,586) $45,933,901 ========= ======= =========== ========= =========== ======== =========== ===========
See accompanying notes to consolidated financial statements. F-5 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JULY 2, 1995, JUNE 30, 1996 AND JUNE 29, 1997
1995 1996 1997 ------------ ------------- ------------- Cash flows from operating activities: Net income (loss)........................ $ 1,250,027 $(8,333,458) $ 658,935 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense................................ 5,251,319 4,871,376 3,954,334 (Gain) loss on disposal of property and equipment................. 32,396 144,972 36,150 Restructuring charges (reversals)....... -- 13,875,248 (740,000) Unusual charge.......................... 600,000 -- -- Impairment of long-lived assets......... -- -- 2,009,526 Deferred income taxes................... (358,810) (5,336,983) 1,599,585 Other, net.............................. 78,425 151,718 89,719 Changes in assets and liabilities: Accounts receivable.................. (81,435) (55,619) 20,213 Inventories.......................... 354,688 2,400 70,742 Prepaid expenses..................... 64,605 36,215 67,600 Other assets......................... (103,301) (766,550) (55,183) Accounts payable..................... (667,529) (807,087) 157,845 Accrued payroll and bonuses.......... (1,107,044) (437,702) 222,524 Other accrued liabilities............ 813,679 (319,400) (572,262) Accrued restructuring charges........ -- (759,901) (138,512) ----------- ----------- ------------ Net cash provided by operating activities............................. 6,127,020 2,265,229 7,381,216 ----------- ----------- ------------ Cash flows from investing activities: Purchase of property and equipment........ (3,864,744) (4,045,220) (2,552,683) Proceeds from sales of property and equipment............................ 988,287 3,654,513 854,734 Collection of notes receivable............ 75,511 6,092 -- ----------- ----------- ------------ Net cash used in investing activities............................... (2,800,946) (384,615) (1,697,949) ----------- ----------- ------------ Cash flows from financing activities: Net borrowings from (payments on) long-term debt.......................... (3,036,000) 4,214,000 (11,878,647) Purchase of treasury shares............... (467,820) (142,776) (149,247) Proceeds from employee stock plans........ 143,865 244,687 216,612 ----------- ----------- ------------ Net cash provided by (used in) financing activities...................... (3,359,955) 4,315,911 (11,811,282) ----------- ----------- ------------ Effects of exchange rates on cash and cash equivalents.......................... (10,879) (4,080) (20,366) ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents.......................... (44,760) 6,192,445 (6,148,381) Cash and cash equivalents at beginning of year................................... 1,917,679 1,872,919 8,065,364 ----------- ----------- ------------ Cash and cash equivalents at end of year..... $ 1,872,919 $ 8,065,364 $ 1,916,983 =========== =========== ============ Supplemental information: Interest paid (net of amounts capitalized)............................. $ 1,020,187 $ 1,111,677 $ 1,145,638 =========== =========== ============ Income taxes paid (net of refunds)........... $ 541,608 $ 15,238 $ (1,291,952) =========== =========== ============
See accompanying notes to consolidated financial statements. F-6 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements include the accounts of Spaghetti Warehouse, Inc. and its wholly-owned subsidiaries (collectively, the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from these estimates. (b) Fiscal Year The Company's fiscal year ends on the Sunday nearest July 1. (c) Foreign Currency Translation The accounts of the Company's operations in Canada are translated into United States dollars in accordance with Statement of Financial Accounting Standards No. 52. Assets and liabilities are translated at the rate of exchange on the balance sheet date. Income and expense items are translated at average monthly rates of exchange. Adjustments resulting from the translation are reported as a separate component of stockholders' equity. (d) Reclassifications Certain prior years' balances have been reclassified to conform with the current year presentation. These reclassifications had no effect on previously reported net income (loss) or stockholders' equity. (e) Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company held cash equivalents of $822,795 and $696,899 at June 30, 1996 and June 29, 1997, respectively. (f) Accounts Receivable Accounts receivable primarily consist of credit card receivables and franchise royalty fees. (g) Inventories Inventories, which primarily consist of food and beverages, are stated at the lower of cost (first-in, first-out method) or market. (h) Pre-opening Costs The costs of hiring and training personnel, supplies and certain general and administrative costs relating to new restaurants are capitalized and amortized over the restaurant's first 12 months of operations. Amortization of F-7 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) pre-opening costs was approximately $510,000, $180,000 and $170,000 for fiscal years 1995, 1996 and 1997, respectively. (i) Property and Equipment Property and equipment are recorded at cost, including interest capitalized during the construction period. Total interest of $18,340, $0 and $0 was capitalized in fiscal years 1995, 1996 and 1997, respectively. Buildings, equipment, furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the related assets, which range from 3 to 40 years. Amortization of leasehold improvements is provided by the straight-line method over the lesser of the term of the lease, including renewal options, or the estimated useful lives of the assets, which range from 18 to 25 years. Depreciation and amortization expense of property and equipment was approximately $4,610,000, $4,500,000 and $3,780,000, for fiscal years 1995, 1996 and 1997, respectively. In March 1995, the Financial Accounting Standard Board issued Statement No. 121 (the Statement) on accounting for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to assets to be held and used. The Statement also establishes accounting standards for long-lived assets and certain identifiable intangibles to be disposed of. The Company adopted the Statement in the first quarter of fiscal 1997. Adoption of the Statement requires the Company to review its long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. The Company groups and evaluates its assets for impairment at the individual restaurant level. The Company considers each restaurant's historical operating losses as a primary indicator of potential impairment. The Company deems a restaurant's assets to be impaired if a forecast of undiscounted future cash flows directly related to the assets, including disposal value, if any, is less than its carrying amount. If a restaurant's assets are deemed to be impaired, the loss is measured as the amount by which the carrying amount of the assets exceeds their estimated fair market value. The Company recorded pre-tax, noncash charge of $1,759,526 during the first quarter of fiscal 1997 as a result of adopting the Statement. This charge related to the write-down of the Company's Cappellini's restaurant in Addison, Texas to its estimated fair market value at that time. Due to unfavorable operating results, the Company subsequently made the decision to cease Cappellini's operations, and closed the restaurant on December 31, 1996. The Company recorded an additional $250,000 pre-tax charge in the fourth quarter of fiscal 1997 to write-down the former Cappellini's property to its estimated fair market value based on current real estate market conditions. (j) Trademark and Franchise Rights The costs of the Canadian operation's trademark (approximately $2,200,000) and franchise rights (approximately $1,700,000) are being amortized using the straight-line method over 40 years and 20 years, respectively (see Note 3). Amortization of trademark and franchise rights was approximately $130,000 per year in fiscal years 1995, 1996 and 1997. The Company assesses the recoverability of these intangible assets by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows. The Company believes that no impairment or adjustment of estimated useful lives is warranted as of June 29, 1997. F-8 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (l) Other Accrued Liabilities Other accrued liabilities consist of the following:
1996 1997 ----------- --------- Property taxes.............. $ 577,806 $458,304 Insurance reserves.......... 316,619 197,582 Interest.................... 411,172 145,459 Other....................... 181,891 113,881 ---------- -------- $1,487,488 $915,226 ========== ========
(m) Net Income (Loss) per Common Share Net income (loss) per common share has been computed by dividing net income by the weighted average common and common equivalent shares outstanding, if material. Common equivalent shares, which relate primarily to stock options, are included in the weighted average using the treasury stock method. Fully diluted net income (loss) per share for fiscal 1995, 1996 and 1997 is not presented as the dilutive effect is not material. (2) PROPERTY AND EQUIPMENT Property and equipment consists of the following:
1996 1997 ------------- ------------- Land................................... $ 9,190,860 $ 8,571,206 Buildings.............................. 28,236,923 27,654,242 Equipment, furniture and fixtures...... 24,269,638 24,556,542 Leasehold improvements................. 10,884,219 11,120,348 Construction in progress............... 2,903 -- ------------ ------------ 72,584,543 71,902,338 Less accumulated depreciation and amortization.......................... (22,691,371) (26,169,948) ------------ ------------ $ 49,893,172 $ 45,732,390 ============ ============
In fiscal 1992, the Company purchased the existing Austin, Texas location and ceased development of an alternate Austin location. The Company sold the alternate Austin location in fiscal 1996 for an amount exceeding its recorded book value, thus recognizing a $47,178 gain at the time of sale. (3) TRADEMARKS AND FRANCHISE RIGHTS On September 1, 1992, the Company acquired the common stock of Old Spaghetti Factory Canada, Ltd. and the assets of certain of its affiliates, including the trademark to the Old Spaghetti Factory concept in Canada and the franchise contracts and related royalty streams for five Old Spaghetti Factory restaurants in Canada. The acquisition was accounted for as a purchase. The cash purchase price of $3,900,000 was allocated primarily to the aforementioned trademark and franchise contract rights. F-9 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(4) LONG-TERM DEBT Long-term debt consists of the following: 1996 1997 ----------- ---------- Term note payable to banks, bearing interest at 6.8% at June 29, 1997, unsecured, interest payable quarterly and $492,709 in principal payable quarterly through July 1, 2001, at which date the remaining principal balance is due............................ $15,000,000 $7,883,353 Revolving credit notes payable to banks, bearing interest at variable rates, unsecured, interest payable quarterly and principal due on July 1, 1998.............................. 4,750,000 -- Note payable, bearing interest at prime plus 1.0%, with a floor rate of 9.5%, secured by parking lot for San Antonio restaurant with interest and principal payable monthly until November 1, 1996.... 12,000 -- ----------- ---------- 19,762,000 7,883,353 Less current portion......................... 6,878,358 1,478,127 ----------- ---------- Long-term debt, excluding current portion..................... $12,883,642 $6,405,226 =========== ==========
The Company has an unsecured revolving credit and term loan agreement with two banks, enabling the Company to borrow up to $5,000,000 in revolving credit loans. The Company also has $7,883,353 in term loans borrowed under this credit agreement as of June 29, 1997. Revolving credit loans bear interest at the Company's option of (a) the prime rate, (b) the certificate of deposit rate plus the Federal Deposit Insurance Corporation assessment rate plus 2.0% to 3.0% or (c) the LIBOR rate plus 2.0% to 3.0%. The term loan bears interest at rates ranging between 6.8% and 8.5%, based on the Company's performance. The Company incurs a commitment fee of 3/8 of 1% on the unused portion of the revolving credit facility, payable on a quarterly basis. The terms of the credit agreement require the Company to maintain certain minimum financial ratios. Additionally, in the event that the Company has a material default, as defined in the credit agreement, spanning two consecutive quarters, the lenders may request that the Company grant to them a lien on a sufficient number of properties in order to secure their interest in the loans. As of June 29, 1997, the Company was in compliance with all requirements under the credit agreement. The aggregate maturities of long-term debt at June 29, 1997, are as follows:
1998............................. $1,478,127 1999............................. 2,463,545 2000............................. 1,970,836 2001............................. 1,970,845 ---------- Total............................. $7,883,353 ==========
F-10 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (5) INCOME TAXES The provision (benefit) for income taxes is summarized as follows for fiscal years 1995, 1996 and 1997:
1995 1996 1997 ---------- ------------- ------------- Current: Federal........... $ 599,803 $ 26,234 $(1,345,112) State and local... 117,687 (32,366) 53,160 Deferred............ (483,731) (5,301,192) 1,606,105 --------- ----------- ----------- $ 233,759 $(5,307,324) $ 314,153 ========= =========== ===========
The actual income tax expense differs from the expected income tax expense computed by applying the U.S. federal corporate tax rate to income before income tax expense as follows for fiscal years 1995, 1996 and 1997:
1995 1996 1997 ---------- ------------ ---------- Computed "expected" tax expense....... $ 504,487 $(4,637,866) $330,850 Targeted jobs tax credit.............. (326,493) -- -- State and local taxes, net of federal benefit.................... 77,673 (545,631) 35,086 General business tax credits.......... (57,027) -- -- Other................................. 35,119 (123,827) (51,783) --------- ----------- -------- $ 233,759 $(5,307,324) $314,153 ========= =========== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of June 30, 1996 and June 29, 1997 are as follows:
1996 1997 ------------ ------------ Deferred tax assets: General business credit carryforwards. $ 3,292,342 $ 3,585,218 Alternative minimum tax credit carryforwards........................ 202,630 912,335 Federal and state net operating loss carryforwards........................ 2,470,000 1,627,209 Restructuring related reserves........ 1,837,302 404,091 Other................................. 875,168 609,994 ----------- ----------- Deferred tax assets................... 8,677,442 7,138,847 ----------- ----------- Deferred tax liabilities: Property and equipment................ (2,504,677) (2,668,221) Pre-opening costs..................... (65,307) -- Other................................. (70,934) (40,207) ----------- ----------- Deferred tax liabilities.............. (2,640,918) (2,708,428) ----------- ----------- Net deferred tax asset................ $ 6,036,524 $ 4,430,419 =========== ===========
As of June 29, 1997, the Company's general business credit carryforwards for income tax purposes will begin to expire in 2006. These carryforwards are comprised of targeted jobs tax credits, rehabilitation credits and FICA tax tip credits that were generated in all prior years, beginning in fiscal 1991. Based upon historical and forecasted F-11 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) levels of earnings and considering the reversal of temporary differences resulting in future tax liabilities, the Company believes it will more likely than not be able to realize the deferred tax assets recorded at June 29, 1997. The Company has a Federal tax net operating loss of approximately $3,900,000 as of June 29, 1997, which will begin to expire in 2011. It is the Company's intent to carry this loss forward to offset future years' tax expenses. (6) COMMON STOCK AND OPTIONS (a) STOCK COMPENSATION PLANS At June 29, 1997, the Company had four stock based compensation plans which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans and its Employee Stock Purchase plan (ESP), except for stock options granted to directors at exercise prices below market value on the date of grant. Had compensation cost for the Company's four stock based compensation plans been determined using the alternative accounting method based on the fair value prescribed by FASB Statement No. 123, the Company's proforma net income (loss) for fiscal 1996 and 1997 would have been $(9,213,906) and $114,553, respectively, and the Company's proforma net income (loss) per common share would have been $(1.64) and $0.02, respectively. (b) Fixed Stock Option Plans The Company has three fixed option plans. Under the 1990 Incentive Stock Option Plan, the Company may grant options to its employees for up to 1,227,344 shares of common stock. This plan provides that options may be granted at option prices not less than the fair market value of its shares on the date of grant, or 110% of fair market value in the case of any employee holding in excess of 10% of the combined voting power of all classes of stock at the date of grant. Options granted under this plan have a maximum term of 10 years. The options currently outstanding are exercisable in installments of 33% to 100% per year. In fiscal 1996, the Company repriced 461,425 options previously granted under this plan. These options, which had a previous weighted average exercise price of $7.03, were repriced to the then current fair market value of $5.13. Under the 1991 Nonemployee Director Stock Option Plan, the Company may grant options to its nonemployee directors for up to 57,500 shares of common stock. The option prices were the fair market values of the common stock on the dates of grant and have a maximum term of 10 years. Options granted under this plan are exercisable in installments of 40% to 100% per year. Under the 1992 Bonus Stock Option Plan, the Company may grant options to certain officers and directors for up to 100,000 shares of common stock. The option prices were one-half of the fair market value of the common stock on the dates of grant and have a maximum term of 10 years. Options granted under this plan become exercisable six months subsequent to the dates of grant. Compensation expense of $17,800 in fiscal 1995, $21,000 in fiscal 1996 and $18,000 in fiscal 1997 was recorded for options granted as part of the officers' and directors' compensation under this plan. The fair value of each option grant is estimated on the date of grant for repricing using the Black-Scholes option pricing model with the following weighted-average assumptions for options granted or repriced in fiscal 1996 and 1997, respectively: amortization over the respective vesting periods; no dividends; expected lives of 6.1 and 6.6 years; expected stock price volatility of approximately 41% and 40%; and risk free interest rates of 5.6% and 6.6%. These pro-forma results exclude consideration of options granted prior to July 3, 1995, and may not be representative of that to be expected in future years. F-12 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) A summary of the status of the Company's three fixed stock option plans are as follows:
1995 1996 1997 -------------------- --------------------- -------------------- Wt. Ave. Wt. Ave. Wt. Ave. Shares Ex. Price Shares Ex. Price Shares Ex. Price --------- --------- -------- ---------- -------- ---------- Outstanding at beginning of year......... 728,896 $8.40 799,906 $7.34 817,214 $5.68 Granted at fair market value............. 301,875 6.01 134,000 5.09 197,875 5.17 Granted at below fair market value....... 6,197 2.87 8,197 2.56 6,000 3.00 Exercised................................ (13,835) 3.03 (13,337) 2.08 (862) 3.25 Forfeited................................ (223,227) 8.25 (111,552) 5.81 (88,860) 5.21 -------- --------- -------- Outstanding at end of year............... 799,906 7.34 817,214 5.68 931,367 5.68 ======== ========= ======== Options exercisable at year-end.......... 281,794 8.05 371,051 6.35 536,495 6.01 Weighted-average fair value of options granted during the year: Granted at fair market value.......... -- $2.62 $2.71 Granted at below fair market value.... -- 3.61 4.20
The following table summarizes information about fixed stock options outstanding and exercisable at June 29, 1997:
Options Outstanding Options Exercisable ------------------------------------------- --------------------------- Exercise Number Wt. Average Wt. Average Number Wt. Average Price Ranges Outstanding Remaining Life Exercise Price Exercisable Exercise Price - ------------------ ----------- -------------- -------------- ----------- -------------- $2.56 - 3.00 19,532 8.0 years $2.77 19,532 $2.77 4.56 - 5.13 678,590 6.9 5.09 405,384 5.11 5.25 - 5.88 189,365 7.6 5.57 70,699 5.82 9.00 - 21.75 43,880 4.6 16.52 40,880 16.72 ------- ------- 2.56 - 21.75 931,367 7.0 5.73 536,495 6.01 ======= =======
(c) Employee Stock Purchase Plan On August 23, 1993, the Company's Board of Directors approved an Employee Stock Purchase Plan (ESP Plan). The ESP Plan authorizes 250,000 shares of the Company's common stock to be purchased by eligible employees of the Company through payroll deductions. The purchase price is the lesser of 85% of the fair market value of the stock on the first business day of the plan year, or 85% of the fair market value of the shares on the last business day of the plan year. A total of 28,713 shares, 56,624 shares and 51,598 shares were purchased by employees of the Company under the ESP plan during fiscal 1995, 1996 and 1997, respectively. Compensation cost is recognized for the fair value of the employee's purchase rights, which was estimated using the Black-Scholes model with the following assumptions for fiscal 1996 and 1997, respectively: no dividends; expected life of one year for both years; expected stock price volatility of approximately 41% and 37%; and risk free interest rates of 5.3% and 5.4%. The weighted-average fair value of those purchase rights granted in fiscal 1996 and 1997 was $1.50 and $1.48, respectively. F-13 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (7) COMMITMENTS AND CONTINGENCIES The Company leases certain restaurant facilities under operating leases expiring at various dates through 2027. These operating leases have renewal options for up to five successive five-year periods. The minimum rental commitments under all noncancelable operating leases as of June 29, 1997 are as follows:
1998.......... $ 612,050 1999.......... 527,244 2000.......... 447,241 2001.......... 394,568 2002.......... 320,768 Thereafter.... 3,745,936 ---------- Total....... $6,047,807 ==========
Rental expense under operating leases was approximately $750,000, $710,000 and $690,000 for fiscal years 1995, 1996 and 1997, respectively. In fiscal 1996, the Company was notified that a claim had been submitted against the Company to the American Arbitration Association (the "AAA") by Bright-Kaplan International Corporation, the owner of the previous Spaghetti Warehouse franchise restaurant in Knoxville, Tennessee, seeking damages in excess of $9.0 million. Additionally, Elizabeth Bright and Thomas C. Bright, III, the principal shareholders of Bright-Kaplan International Corporation, filed a lawsuit against the Company, seeking damages in excess of $2.5 million, along with trebling of such damages under the Texas Deceptive Trade Practices Act. Following a hearing before an AAA panel in Dallas, the panel, on January 8, 1997, unanimously ruled that the Company had no liability in this matter. On June 10, 1997, the lawsuit was dismissed by the trial judge on the grounds that matters in controversy had been decided in the previous AAA ruling. The plaintiffs have since appealed the dismissal. The Company continues to believe that the claims are without merit and will vigorously defend itself in this matter. As of June 29, 1997, damages, if any, arising from such litigation are not estimable. The Company is also a party to several legal proceedings arising in the ordinary course of business. After consultation with legal counsel and a review of available facts, management believes that damages, if any, arising from such litigation will not be material to the Company's financial position or results of operations. (8) RESTRUCTURING CHARGES On January 30, 1996, the Company's Board of Directors approved a restructuring plan intended to strengthen the Company's competitive position and improve cash flow and profitability. In conjunction with the plan, the Company closed seven under-performing restaurants in February 1996 and identified one additional restaurant to be sold as an operating unit. The seven stores closed include those previously located in Hartford, Connecticut; Providence, Rhode Island; Buffalo, New York; Rochester, New York; Columbia, South Carolina; Greenville, South Carolina and Little Rock, Arkansas. Additionally, the Company contracted to sell its Richmond, Virginia location to its Virginia franchisee. The Company recorded a pre-tax charge of $13,875,248 in the third quarter of fiscal 1996 to cover costs related to the execution of this plan, including the write-down of property and equipment to its net realizable value, severance packages and various other store closing and corporate obligations. The Company disposed of six of the seven closed restaurants during fiscal 1996. The Company disposed of the seventh closed restaurant and the Richmond, Virginia location in fiscal 1997, and completed the disposal of all remaining identified corporate assets subsequent to June 29, 1997, thus completing its original plan. As a result, excess reserves of $740,000 were reversed in fiscal 1997 and the remaining balance of accrued restructuring charges F-14 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) as of June 29, 1997 was $0. All restructuring-related corporate assets sold subsequent to year-end are classified as assets scheduled for divestiture as of June 29, 1997. (9) UNUSUAL CHARGE During the fourth quarter of fiscal 1995, the Company recorded a write-down of its one-third investment in F.P. Corporation PTY Ltd. and FP Restaurants PTY Ltd. (collectively, Fasta Pasta). The write-down was the result of an alleged misappropriation of Fasta Pasta assets by the joint-venture's former managing director. As of June 29, 1997, the Company's investment in Fasta Pasta has been fully written-off and the Company has no further obligation relating to the joint-venture. (10) New Financial Accounting Pronouncements In March 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." This statement establishes new standards for computing and presenting earnings per share ("EPS"). SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and earlier application is not permitted. When adopted, the Company will be required to restate its EPS data for all prior periods presented. The Company does not expect adoption of this statement to have a significant impact on previously reported EPS. (11) QUARTERLY FINANCIAL DATA (UNAUDITED) Unaudited summarized quarterly financial data follows:
QUARTERS ENDED ---------------------------------------------------- OCTOBER 1, DECEMBER 31, MARCH 31, JUNE 30, 1995 1995 1996 1996 ----------- ------------ ---------- ---------- Year ended June 30, 1996: Revenues.................................. $18,918,982 17,738,092 17,180,274 17,119,271 =========== ========== ========== ========== Gross profit (a).......................... $ 3,533,582 2,578,755 2,678,005 3,079,794 =========== ========== ========== ========== Net income (loss)......................... $ 428,121 (385,145) (8,642,286) 265,852 =========== ========== ========== ========== Net income (loss) per common share and common equivalent share............... $ .08 (.07) (1.54) .05 =========== ========== =========== ========== QUARTERS ENDED ---------------------------------------------------- SEPTEMBER 29, DECEMBER 29, MARCH 30, JUNE 29, 1995 1996 1997 1997 ------------- ------------ ---------- ---------- Year ended June 29, 1997: Revenues................................ $17,056,528 15,642,524 15,718,660 16,485,861 =========== ========== ========== ========== Gross profit (a)........................ $ 3,120,995 2,514,265 3,129,070 3,401,775 =========== ========== ========== ========== Net income (loss)....................... $ (830,271) 274,967 456,628 757,611 =========== ========== ========== ========== Net income (loss) per common share and common equivalent share............. $ (.15) .05 .08 .13 =========== ========== =========== ==========
(a) Gross profit is calculated as total revenues less cost of sales and operating expenses. F-15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Garland, State of Texas, on September 23, 1997. SPAGHETTI WAREHOUSE, INC. /s/ Phillip Ratner -------------------------------------------------- Phillip Ratner, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE CAPACITY DATE - --------- -------- ---- /s/ Phillip Ratner Chairman of the Board, September 23, 1997 - --------------------------- President, Chief Executive Phillip Ratner Officer, and a Director (Principal Executive Officer) /s/ H.G. Carrington, Jr. Executive Vice President, September 23, 1997 - --------------------------- Chief Financial Officer, H. G. Carrington, Jr. Secretary and a Director (Principal Financial Officer) /s/ Robert E. Bodnar Treasurer and Controller September 23, 1997 - --------------------------- (Principal Accounting Officer) Robert E. Bodnar /s/ C. Cleave Buchanan, Jr. Director September 23, 1997 - --------------------------- C. Cleave Buchanan, Jr. /s/ Frank Cuellar, Jr. Director September 23, 1997 - --------------------------- Frank Cuellar, Jr. /s/ John T. Ellis Director September 23, 1997 - --------------------------- John T. Ellis /s/ Robert R. Hawk Director September 23, 1997 - --------------------------- Robert R. Hawk /s/ Peter Hnatiw Director September 23, 1997 - --------------------------- Peter Hnatiw /s/ James F. Moore Director September 23, 1997 - --------------------------- James F. Moore /s/ Cynthia I. Pharr Director September 23, 1997 - --------------------------- Cynthia I. Pharr /s/ William B. Rea, Jr. Director September 23, 1997 - --------------------------- William B. Rea, Jr. ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- EXHIBITS TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 29, 1997 -------------------------- SPAGHETTI WAREHOUSE, INC. ================================================================================ EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT DESCRIPTION PAGE - ----------- --------------------------------------------------------------------- ------------ 3.1 - Second Amended and Restated Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q for the quarter ended April 2, 1995, filed by the Company with the Securities and Exchange Commission). 3.2 - Second Amended and Restated Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.2 of the Company's Form 10-Q for the quarter ended January 1, 1995, filed by the Company with the Securities and Exchange Commission). 4.1 - Rights Agreement, dated February 2, 1995 between the Company and Chemical Bank (incorporated by reference to Exhibit 1 of the Company's Registration Statement on Form 8-A, filed by the Company with the Securities and Exchange Commission on February 27,1995). + 10.1 - First Amended and Restated Spaghetti Warehouse, Inc. 1990 Incentive Stock Option Plan (incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8, registration no. 33-69024, filed by the Company with the Securities and Exchange Commission). + 10.2 - 1991 Nonemployee Director Stock Option Plan (incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-2, registration no. 33-40257, filed by the Company with the Securities and Exchange Commission). + 10.4 - Spaghetti Warehouse, Inc. 1992 Bonus Stock Option Plan (incorporated by reference to Exhibit 4.8 of the Company's Registration Statement on Form S-8, registration no. 33-69024, filed by the Company with the Securities and Exchange Commission). + 10.6 - Letter Agreement, dated as of August 23, 1993, relating to the Company's employment arrangement with H.G. Carrington, Jr. (incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the fiscal year ended July 4, 1993). 10.7 - Lease Agreement, dated June 13, 1977, between the Company and Oscar L. Thomas, Jr., relating to certain premises in Columbus, Ohio (incorporated by reference to Exhibit 10.5 of the Company's Registration Statement on Form S-1, registration no. 2-99832, filed by the Company with the Securities and Exchange Commission). 10.8 - Lease Agreement, dated September 1, 1980 between the Company and Gagel Construction, Inc. (incorporated by reference to Exhibit 10.6 of the Company's Registration Statement on Form S-1, registration no. 2-99832, filed by the Company with the Securities and Exchange Commission). 10.9 - Lease Agreement, dated November 18, 1981 between the Company and Samuel Geraldo, Trustee, as amended, relating to certain premises in Toledo, Ohio (incorporated by reference to Exhibit 10.6 of the Company's Registration Statement on Form S-1, registration no. 33-30676, filed by the Company with the Securities and Exchange Commission). 10.10 - Lease Agreement, dated November 30, 1981, between the Company and Ybor Square, Ltd., relating to certain premises in Tampa, Florida (incorporated by reference to Exhibit 10.8 of the Company's Registration Statement on Form S-1, registration no. 2-99832, filed by the Company with the Securities and Exchange Commission). 10.12 - Financing and Operating Agreement, dated September 2, 1982, among the Company, the City of Tampa, Florida, The Spaghetti Consultants of Florida, Inc., Ybor Square, Ltd. and Continental National Bank of Fort Worth, Texas
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT DESCRIPTION PAGE - ----------- --------------------------------------------------------------------- ------------ (incorporated by reference to Exhibit 10.11 of the Company's Registration Statement on Form S-1, registration no. 2-99832, filed by the Company with the Securities and Exchange Commission). 10.13 - Lease Agreement, dated April 1, 1987, between the Company and Memphis Center City Revenue Finance Corporation, relating to certain premises in Memphis, Tennessee (incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the fiscal year ended July 4, 1987, filed by the Company with the Securities and Exchange Commission). 10.14 - Lease, dated May 28, 1988, between the Company and Ward and Shirley Olander, relating to certain premises in Pittsburgh, Pennsylvania (incorporated by reference to Exhibit 10.18 of the Company's Registration Statement on Form S-1, registration no. 33-30676, filed by the Company with the Securities and Exchange Commission). 10.15 - Lease Agreement, dated as of February 15, 1989, between the Company and North Clinton Associates, relating to certain premises in Syracuse, New York (incorporated by reference to Exhibit 10.21 of the Company's Registration Statement on Form S-1, registration no. 33-30676, filed by the Company with the Securities and Exchange Commission). 10.16 - Deed of Trust, Security Agreement and Assignment of Rents, dated July 24, 1989, between the Company, as grantor, and Deposit Guaranty Bank, as beneficiary, and related promissory note (incorporated by reference to Exhibit 10.22 of the Company's Registration Statement on Form S-1, registration no. 33-30676, filed by the Company with the Securities and Exchange Commission). 10.17 - Lease Agreement, dated May 29, 1990, between Spring-Ten Associates and the Company, as amended on July 18, 1990, October 26, 1990, and December 13, 1990, relating to certain premises in Philadelphia, Pennsylvania (incorporated by reference to Exhibit 10.24 of the Company's Registration Statement on Form S-2, registration no. 33-40257, filed by the Company with the Securities and Exchange Commission). 10.18 - Lease Agreement, dated as of November 27, 1990, between the Company and The Foundry Associates, L.P., relating to certain premises in Providence, Rhode Island (incorporated by reference to Exhibit 10.25 of the Company's Registration Statement on Form S-2, registration no. 33-40257, filed by the Company with the Securities and Exchange Commission). 10.19 - Contract for Sale of Real Estate, dated September 12, 1991, among the Company, Elie Guggenheim and Catherine Guggenheim (incorporated by reference to Exhibit 10.18 of the Company's Form 10-K for the fiscal year ended July 4, 1992, filed with the Securities and Exchange Commission). 10.20 - Real Estate Term Note in original principal amount of $180,000, dated November 21, 1991, executed by the Company as maker, payable to the order of Elie Guggenheim and Catherine Guggenheim (incorporated by reference to Exhibit 10.19 of the Company's Form 10-K for the fiscal year ended July 4, 1992, filed with the Securities and Exchange Commission). 10.21 - Lease Agreement, dated as of July 6, 1991, between the Company and Nautica Peninsula Land Limited Partnership, relating to certain premises in Cleveland, Ohio (incorporated by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K for the fiscal year ended July 4, 1993, filed with the Securities and Exchange Commission). 10.22 - Lease Agreement, dated as of September 2, 1992, between the Company and Canal Place, Ltd., relating to certain premises in Akron, Ohio (incorporated by reference to Exhibit 10.22 of the Company's Annual Report on Form 10-K for the fiscal year ended July 4, 1993, filed with the Securities and Exchange Commission).
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT DESCRIPTION PAGE - ----------- --------------------------------------------------------------------- ------------ 10.23 - Form of Spaghetti Warehouse, Inc. Franchise Offering Circular (incorporated by reference to Exhibit 10.23 of the Company's Annual Report on Form 10-K for the fiscal year ended July 4, 1993, filed with the Securities and Exchange Commission). 10.29 - Lease Agreement, dated as of August 11, 1993, between the Company and the State of Texas, relating to certain premises in Harris County, Texas, as amended by First Amendment to Lease Agreement effective October 25, 1993 and Second Amendment to Lease Agreement, undated (incorporated by reference to Exhibit 10.29 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1994, filed with the Securities and Exchange Commission). 10.30 - Second Lease Addendum, dated as of July 29, 1994, by and between Patricia D. Thomas, Oscar L. Thomas III and Spaghetti Warehouse of Ohio, Inc., relating to certain premises in Columbus, Ohio (incorporated by reference to Exhibit 10.30 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1994, filed with the Securities and Exchange Commission). +10.31 - Spaghetti Warehouse, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.31 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1994, filed with the Securities and Exchange Commission). 10.33 - Shareholders Agreement, undated, among Competitive Foods Australia Limited, Tarlina PTY Limited, MCS (Australia) PTY Limited, S.W.H. Antiques, Inc. and F.P. Corporation PTY Limited, with respect to Fasta Pasta (incorporated by reference to Exhibit 10.33 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1994, filed with the Securities and Exchange Commission). 10.36 - Amended and Restated Loan Agreement, dated August 12, 1996 to the Amended and Restated Loan Agreement, dated as of November 1, 1993, June 7, 1993, among the Company, certain subsidiaries of the Company, Bank One Texas, N.A. and NationsBank of Texas, N.A., and Amendment No. 3 thereto, dated March 29, 1996, Amendment No. 2 thereto, dated February 9, 1995 and Amendment No. 1 thereto, dated December 21, 1993. +10.37 - Employment Agreement, dated as of January 30, 1996, by and between the Company and Robert R. Hawk. +10.38 - Amended Employment Agreement, dated as of September 1, 1996 by and between the Company and Robert R. Hawk (incorporated by reference to Exhibit 10.38 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 1996, filed with the Securities and Exchange Commission). +10.39 - Employment Agreement, dated as of October 1, 1996, by and between the Company and John T. Ellis (incorporated by reference to Exhibit 10.39 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 1996, filed with the Securities and Exchange Commission). +10.40 - Employment Agreement, dated as of October 28, 1996, by and between the Company and Phillip Ratner (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1997, filed with the Securities and Exchange Commission). 21.1 - Subsidiaries of the Company (incorporated by reference to Exhibit 22.1 of the Company's Form 10-K for the fiscal year ended July 4, 1992 filed by the Company with the Securities and Exchange Commission). * 23.1 - Consent of Arthur Andersen LLP * 27.1 - Financial Data Schedule
_______________ + Compensation plan, benefit plan or employment contract or arrangement. * Filed herewith. EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10K of our report dated August 14, 1997 included in Registration Statement File No. 33-86756, 33-33555, 33-38603, and 33-69024. It should be noted that we have not audited any financial statements of the company subsequent to June 29, 1997 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Dallas, Texas, September 23, 1997 EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR JUN-29-1997 JUL-01-1996 JUN-29-1997 1,916,983 0 637,803 0 616,253 3,914,295 71,902,338 26,169,948 58,629,867 6,148,839 6,405,226 0 0 65,278 45,868,623 58,629,867 63,372,287 64,903,573 16,515,660 52,737,468 10,502,449 0 690,568 973,088 314,153 658,935 0 0 0 658,935 .11 .11
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