ITEM 1. BUSINESS.
GENERAL DEVELOPMENT AND SCOPE OF BUSINESS
Spaghetti Warehouse, Inc. (the "Company") was incorporated in Texas in June 1972 and 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.
ITEM 2. PROPERTIES.
The Company owns 27 and leases space for 10 of its presently operating Spaghetti Warehouse restaurants. One of the Company's owned restaurants is subject to a ground lease. When possible, the Company prefers to own rather than lease properties for its restaurants. The Company also owns its corporate office headquarters/warehouse facilities, comprised of two buildings containing a combined total of approximately 30,000 square feet of space, which are situated on approximately 2.5 acres of land in Garland, Texas, a suburb of Dallas. None of the Company's properties are encumbered by mortgage indebtedness, except for a parking lot adjacent to the San Antonio restaurant. The Company believes that its corporate office/warehouse facilities are adequate to meet its requirements through at least fiscal 1996 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 nine of its 37 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.
ITEM 3. LEGAL PROCEEDINGS.
On August 11, 1995, Elizabeth Bright and Thomas C. Bright III, the principal shareholders in Bright-Kaplan International Corporation ("BK"), filed a lawsuit against the Company in the Circuit Court of Hamilton County, Tennessee. BK is the owner of a Spaghetti Warehouse Franchise Restaurant located in Knoxville, Tennessee. Mr. & Mrs. Bright are claiming that the Company misrepresented and concealed numerous material facts in order to induce them to enter into a franchise agreement and that the Company engaged in deceptive trade practices. Mr. & Mrs. Bright are seeking damages in excess of $2.5 million and are seeking trebling of such damages under the Texas Deceptive Trade Practices Act. The Company intends to vigorously defend this lawsuit. In addition to this lawsuit, BK has submitted a claim against the Company to the American Arbitration Association based substantially on the same allegations contained in the lawsuit mentioned above. BK is seeking damages in excess of $6.6 million from this arbitration claim.
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.
ITEM 4.
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 July 2, 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange under the symbol "SWH." Quotations of the Company's Common Stock began on the National Association of Securities Dealers' Automated Quotation System ("NASDAQ") National Market System on November 5, 1985. From August 15, 1989, to June 26, 1991, the Common Stock traded on the American Stock Exchange. On June 27, 1991, the Common Stock began trading on the New York Stock Exchange.
The following table sets forth the range of quarterly high and low closing sale prices on the New York Stock Exchange since July 5, 1993.
As of September 15, 1995, the Company estimates that there were approximately 3,900 beneficial owners of the Company's Common Stock, represented by approximately 658 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.
ITEM 6.
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 July 2, 1995. The selected financial data under the captions "Income Statement Data" and "Balance Sheet Data" for periods prior to and including July 3, 1994, are derived from the Consolidated Financial Statements of the Company and its subsidiaries, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants, and for periods subsequent to July 3, 1994, are derived from the Consolidated Financial Statements of the Company and its subsidiaries, which have been audited by Arthur Andersen LLP, independent public accountants. The Consolidated Financial Statements as of July 4, 1993, July 3, 1994, and July 2, 1995, and for each of the years in the three-year period ended July 2, 1995, 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.
____________________________________ Footnotes on following page.
(1) Certain reclassifications have been made to various prior year balances in order to conform with current presentation. Specifically, net interest income (expense) have been reclassified below income from operations. In addition, all restaurant level overhead and marketing expenses previously classified as general and administrative expenses have been reclassified as operating expenses. Finally, all pre-opening costs, net of amounts amortized, and computer equipment inventory have been classified as non- current assets for financial statement purposes. (2) Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, was adopted in fiscal 1993 and its provisions were applied retroactively to July 1, 1990. The results of operations for fiscal 1991 have been restated to retroactively record the cumulative effect of this change in accounting principle. See Note 1 of Notes to Consolidated Financial Statements. (3) See Note 1 (m) of Notes to Consolidated Financial Statements. (4) Dilution results from outstanding stock options granted to employees and directors, which totaled 542,324 in fiscal 1991; 560,265 in fiscal 1992; 601,706 in fiscal 1993; 728,896 in fiscal 1994; and 308,072 in 1995. (5) See "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
DIFFERENCE IN LENGTH OF FISCAL YEAR
The Company has historically reported on a fiscal year ending on the Saturday nearest July 1. Due to operational considerations, management adopted a Sunday period ending nearest July 1, commencing with the first month of fiscal 1993. Accordingly, the twelve-month period ending July 4, 1993 is comprised of 52 weeks and one day compared to fiscal 1994 and fiscal 1995 which are comprised of 52 weeks.
RESULTS OF OPERATIONS
The following table presents, for the fiscal periods indicated, certain selected financial data as a percentage of total revenues.
1995 COMPARED TO 1994
REVENUES
Fiscal 1995 revenues increased $0.6 million, or 0.7%, over fiscal 1994 due to $4.2 million of incremental sales from the six restaurants opened after July 4, 1993. This increase was offset by a $3.6 million (5.2%) decline in sales of stores open for the full year in both fiscal 1994 and 1995 ("same-stores"). Average restaurant sales volumes for stores open as of the beginning of each fiscal year declined 6.1%, from $2.25 million in fiscal 1994 to $2.11 million in fiscal 1995.
The decline in same-store sales was the result of a 5.9% decrease in customer counts offset by a 0.7% increase in check averages. Same-store customer count comparisons were negatively affected by the rapid growth of competitors in the casual dining and Italian restaurant segments and to the normal decline in customer traffic for stores in their second and third years of operation. The increase in check averages was primarily the result of an expanded menu offering new appetizers, Caesar salads, pasta selections, and five new entrees. Some slight menu price adjustments made throughout the year also contributed modestly to the increase in check averages.
COSTS AND EXPENSES
Cost of Sales
Cost of sales as a percentage of total revenues increased slightly from 25.2% in fiscal 1994 to 25.4% in fiscal 1995. This 0.2% increase was the result of menu price reductions made in the fourth quarter of fiscal 1994 which continued throughout the first half of fiscal 1995. Additionally, temporary increases in various raw material costs including lettuce, pasta and tomato products also contributed to the increase in cost of sales in fiscal 1995. As the result of improved inventory controls and an increase in check averages during the second half of fiscal 1995, management anticipates that cost of sales as a percentage of total revenues will remain relatively flat in fiscal 1996.
Operating Expenses
Operating expenses as a percentage of total revenues increased 0.3%, from 56.4% in fiscal 1994 to 56.7% in fiscal 1995. This increase is primarily attributable to increased store management costs resulting from a new salary structure that was implemented in the fourth quarter of fiscal 1994 to enable the Company to be more competitive in attracting high-quality management personnel and to reduce management turnover. In addition to this increase in management costs, server labor, utility costs and property taxes were all higher in fiscal 1995. These increases were largely offset by reductions in cashier labor, group medical costs and workman's compensation insurance resulting from the implementation of various cost reduction initiatives in fiscal 1995.
The fixed nature of certain costs, relative to the decline in average restaurant sales volumes, also contributed to the increase in fiscal 1995 operating expenses as a percentage of total revenues. Operating expenses as a percentage of total revenues are not expected to return to levels achieved prior to fiscal 1994 until customer counts and same-store sales volumes show considerable improvement over current levels.
General and Administrative Expenses (G&A)
G&A expenses as a percentage of total revenues increased from 6.9% in fiscal 1994 to 7.1% in fiscal 1995. This 0.2% increase was primarily the result of increased corporate labor costs. The increase in labor costs is attributable to positions in place in fiscal 1995 that were not in place for all of fiscal 1994, including President and Chief Executive Officer, Vice President of Operations, Vice President of Product Development and Purchasing, Health Benefits Coordinator, one additional Regional Director, and two additional information systems employees. These salary increases were largely offset by the reduction of 12 corporate level positions in the first quarter of fiscal 1995; however, the Company did not receive the full cost benefit of these reductions in fiscal 1995 due to severance packages paid to these former employees.
In addition to the increase in corporate labor costs, computer maintenance, management relocation costs and property taxes were all higher in fiscal 1995. These increases were offset by reductions in management training
expenses, recruitment expenses, donations and a loss on the write-off of certain previously incurred costs in searching for new locations no longer under consideration for Company-owned restaurant expansion.
Depreciation and Amortization (D&A)
D&A expenses as a percentage of total revenues decreased from 7.5% in fiscal 1994 to 6.6% in fiscal 1995. This 0.9% decrease was the result of a significant decrease in pre-opening expense amortization on new stores due to the reduction in the number of new stores opened by the Company. This decrease was partially offset by an increase in depreciation on Company information systems and by the relatively fixed nature of depreciation expense relative to the decline in average restaurant sales volumes.
Unusual Charge
The Company recorded a $600,000 write-down of its one-third investment in F.P. Corporation PTY Ltd. and F.P. Restaurants PTY Ltd. (collectively "Fasta Pasta") in the fourth quarter of fiscal 1995. The write-down of the Company's investment in Fasta Pasta was the result of an alleged misappropriation of Fasta Pasta assets by the joint-venture's former managing director discovered during the fourth quarter of fiscal 1995. The Company is pursuing all possible remedies with this matter at this time; however, there can be no assurance that the Company will recover any of these charges.
NET INTEREST EXPENSE
Net interest expense increased from $0.9 million in fiscal 1994 to $1.2 million in fiscal 1995. This increase is attributable to an increase in the average debt outstanding under the Company's credit facilities and to increases in short-term borrowing rates on the Company's revolving credit facility during fiscal 1995. Management intends to incur additional long-term debt to the extent that future cash flow from operations is insufficient to cover planned expansion, capital expenditures and possible further repurchases of the Company's stock.
INCOME TAXES
The Company's effective income tax rate decreased from 21.2% in fiscal 1994 to 15.8% in fiscal 1995. These tax rates were lower than statutory rates as a result of the use of the targeted jobs tax credit and the FICA tip credit. The 5.4% decrease in the effective tax rate over this period is due primarily to the increase in the benefit received from the targeted jobs tax credit and FICA tip credit relative to the decline in pre-tax income over the same period. The Company will continue to benefit from the use of the FICA tip credit in the future. However, the availability of the targeted jobs tax credit has not been assured as Congress has not reinstated this program since its expiration in December 1994.
1994 COMPARED TO 1993
REVENUES
Fiscal 1994 revenues increased $11.9 million, or 18.0%, over fiscal 1993 due to $7.7 million from the five new stores that opened in fiscal 1994, $7.6 million of incremental sales from seven restaurants that opened in fiscal 1993 and a $0.2 million increase in franchise income. These increases were offset by a $2.7 million (4.6%) decline in sales of stores open for the full year in both fiscal 1993 and 1994 ("same stores"), a decrease of $0.6 million due to closing of the South Bend restaurant in December of 1992 and a $0.2 million decrease in sales due to a one-day difference between fiscal 1993 and 1994. Average restaurant sales volumes, for stores open as of the beginning of each fiscal year, declined 8.7% from $2.46 million in fiscal 1993 to $2.25 million in fiscal 1994.
The decline in same-store sales was due to a 2.9% decrease in customer counts, mainly during the dinner period, and a 1.7% decline in check averages. Factors contributing to the decline in customer counts included the growth of competitors in the casual dining and Italian restaurant segments, periods of severe weather in the third quarter of fiscal 1994, and the normal decline in customer counts for stores in their second and third year of operation. The decline in check averages was primarily the result of menu price reductions made in the fourth quarter of fiscal 1994 and declining alcohol sales.
COSTS AND EXPENSES
Cost of Sales
Cost of sales as a percentage of revenues increased from 24.9% in fiscal 1993 to 25.2% in fiscal 1994. This increase was due to reduced menu prices in the fourth quarter of fiscal 1994, increased portion sizes on spaghetti entrees, the use of higher quality ingredients in selected items and increases in certain raw product costs.
Operating Expenses
Operating expenses as a percentage of revenues increased from 53.4% in fiscal 1993 to 56.4% in fiscal 1994. This increase was due primarily to increased employee and marketing expenses at the restaurants. In addition, repair and maintenance expenses, utility costs and property taxes were all significantly higher as a percentage of total revenues in fiscal 1994 due in part to the fixed nature of these costs relative to the decline in average restaurant sales volumes. The increase in employee costs was due to a new salary schedule for store managers implemented in the fourth quarter of fiscal 1994, an increase in claims paid by the Company's self-funded group medical plan and increased expenditures related to worker's compensation claims.
General and Administrative Expenses (G&A)
G&A expenses, as a percentage of revenues, increased from 5.5% in fiscal 1993 to 6.9% in fiscal 1994. This increase resulted from a substantial increase in corporate employee costs due to the addition of six corporate positions, the reinstatement of bonus payments for corporate officers and to the occurrence of substantially higher management information system expenses.
Also contributing to the increase in fiscal 1994 G&A costs were severance packages paid in connection with the departure of several employees including the former President and Chief Executive Officer and former Chief Operating Officer, recruitment expenses related to the search for the Company's current President and Chief Executive Officer, write-off of certain previously incurred costs in searching for new locations no longer under consideration for Company- owned restaurant expansion, increased legal and accounting fees related to the Company's corporate reorganization, an increase in medical and worker's compensation insurance and a write-off of costs previously incurred in registering the Company's trademarks in foreign countries no longer under consideration for franchising expansion. The master franchise agreement with TGI Friday's for foreign countries and the development agreement with the Good Spaghetti Company in California were terminated in fiscal 1994 due to the lack of any probability of franchised restaurants being opened under these agreements.
Depreciation and Amortization (D&A)
D&A expenses, as a percentage of revenues, increased from 7.2% in fiscal 1993 to 7.5% in fiscal 1994. This increase was due primarily to depreciation incurred on the Company's new information system and to the relatively fixed nature of depreciation relative to the decline in average restaurant sales volumes. These increases were partially offset by a decrease in pre-opening expense amortization on new-stores resulting from a reduction in the number of new stores opened by the Company.
Loss on Assets Scheduled For Divestiture
In fiscal 1993, the Company recorded a non-cash charge of $143,307 to write-down surplus real estate in Austin, Texas to its net realizable value as estimated by an independent appraiser at that time. The Company recorded an additional non-cash charge of $50,000 in fiscal 1994 to write-down the property based on indications of interest received by the Company from unrelated third parties at that time.
Loss on Closed Restaurant
During fiscal 1993, the Company recorded a charge of $358,671 as a result of closing a restaurant in South Bend, Indiana. This amount related primarily to the non-cash write-offs of certain property and equipment and unamortized pre- opening costs.
NET INTEREST INCOME (EXPENSE)
In fiscal 1993, the Company recorded net interest income of $20,000. The Company incurred net interest expense of $904,000 in fiscal 1994 due to the $18.5 million of long-term debt incurred by the Company to fund its expansion and share repurchase program.
INCOME TAXES
The Company's effective income tax rate decreased from 27.1% in fiscal 1993 to 21.2% in fiscal 1994. The fiscal 1993 rate was lower than statutory rates as a result of the use of targeted jobs tax credits and rehabilitation credits for the renovation of pre-1936 buildings. Beginning in fiscal 1994, the Company's expansion plans focused exclusively on the construction of new suburban buildings which are not eligible for rehabilitation tax credits; however, the effective tax rate decreased in fiscal 1994 due to a substantial increase in the targeted jobs tax credit relative to the decline in pre-tax net income and to the utilization of the FICA tip credit enacted by Congress at that time.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit decreased from $3.2 million on July 3, 1994 to $2.6 million on July 2, 1995. This $0.6 million decrease is due to the timing of year-end payments of salaries and wages and to a reduction in accounts payable. The Company is currently operating with a working capital deficit, which is common in the restaurant industry, since restaurant companies do not normally require significant investment in either accounts receivable or inventory.
Net cash provided by operating activities decreased from $9.6 million in fiscal 1994 to $6.1 million in fiscal 1995 primarily due to changes in certain components of working capital, including decreases in accrued payroll, accounts payable and deferred taxes and the decrease in net income.
The Company supplements cash provided by operations with long-term debt borrowed under its bank credit facilities. Long-term debt outstanding at July 2, 1995, consisted primarily of a $15.0 million fixed rate 10-year term loan and $0.5 million borrowed against the Company's floating rate revolving credit facility. The Company had an additional $14.2 million available under this revolving credit facility at July 2, 1995.
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 July 2, 1995, the Company had repurchased 751,157 shares of common stock under this program. Further purchases with respect to this program are dependent upon various business and financial considerations.
The Company's capital expenditures decreased from $13.5 million in fiscal 1994 to $3.9 million in fiscal 1995 due to the reduction in the number of new stores opened by the Company. Fiscal 1995 expenditures consisted primarily of Bedford restaurant construction costs, purchases of new and replacement equipment and decor for the Company's existing restaurants, and costs associated with the replacement of point-of-sale (POS) equipment in 16 Company restaurants.
In fiscal 1996, the Company plans to increase seating capacity in various existing high-volume restaurants, complete replacement of POS equipment in seven additional restaurants, make construction and equipment modifications to an existing restaurant for a new concept currently under development and continue to make necessary replacements and upgrades to its existing restaurants and information systems. Total planned capital expenditures related to these fiscal 1996 projects is $4.5 million. Cash flow from operations, current cash balances
and funds available under the Company's revolving credit facility are expected to be sufficient to fund planned capital expenditures and possible further repurchases of Company stock in fiscal 1996.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data are set forth herein commencing on page of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
As previously disclosed in the Company's Form 8-K filed on November 1, 1994 with the Securities and Exchange Commission, on October 26, 1994, the Company dismissed KPMG Peat Marwick LLP as its independent public accountants and engaged Arthur Andersen LLP in place thereof.
The Company has had no disagreements with either independent accounting firm to report under this item.
PART III
ITEM 10.
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.
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.
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.
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.
PART IV
ITEM 14.
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 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).
+ 10.3 - Stock Option of Spaghetti Warehouse, Inc., dated March 25, 1991, for Louis P. Neeb (incorporated by reference to Exhibit 10.23 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).
+ 10.5 - Letter dated April 2, 1991 relating to the Company's employment arrangement with Louis P. Neeb (incorporated by reference to Exhibit 10.26 of the Company's Registration Statement on Form S-2, registration no. 33-40257, filed by the Company with the Securities and Exchange Commission).
+ 10.6 - 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).
10.11 - Loan Agreement, dated as of December 1, 1981, between the Company and City of Toledo, Ohio (incorporated by reference to Exhibit 10.10 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).
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).
10.24 - Spaghetti Warehouse, Inc. Amended and Restated Master Development Agreement, dated as of February 10, 1993, between the Company and TGI Friday's, Inc. (incorporated by reference to Exhibit 10.24 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).
10.25 - Amended and Restated Loan Agreement, dated as of November 1, 1993, among the Company, certain subsidiaries of the Company, Bank One Texas, N.A. and NationsBank of Texas, N.A., and Amendment No. 1 thereto, dated December 21, 1993 (incorporated by reference to Exhibit 10.25 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).
10.26 - Stock Purchase Agreement, dated as of September 1, 1992, among Old Spaghetti Factory (Canada) Limited, Heather Buckley, Patti Hnatiw, Peter Buckley, Peter Hnatiw, 998757 Ontario Inc. and the Company (incorporated by reference to Exhibit 10.21 of the Company's Form 10-K for the fiscal year ended July 4, 1992, filed with the Securities and Exchange Commission).
10.27 - Asset Purchase Agreement, dated as of September 1, 1992, among Esplanade Restaurants Ltd., Peter Hnatiw, SWEATAC Canada, Inc. and the Company (incorporated by reference to Exhibit 10.22 of the Company's Form 10-K for the fiscal year ended July 4, 1992, filed with the Securities and Exchange Commission).
10.28 - Asset Purchase Agreement, dated as of September 1, 1992, among Old Spaghetti Factory (Western) Limited, Heather Buckley, Peter Buckley, SWEATAC Canada, Inc. and the Company (incorporated by reference to Exhibit 10.23 of the Company's Form 10-K for the fiscal year ended July 4, 1992, 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).
+ 10.32 - Employment Agreement, dated as of June 25, 1994, by and between the Company and Phillip Ratner (incorporated by reference to Exhibit 10.32 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).
10.34 - Amendment No. 2, dated February 9, 1995 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. 1 thereto, dated December 21, 1993 (incorporated by reference to Exhibit 10.34 of the Company's Form 10-Q for the quarter ended January 1, 1995, filed by the Company with the Securities and Exchange Commission).
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
* 23.2 - Consent of KPMG Peat Marwick 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.
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------
The Board of Directors Spaghetti Warehouse, Inc.:
We have audited the accompanying consolidated balance sheet of Spaghetti Warehouse, Inc. (a Texas Corporation) and subsidiaries as of July 2, 1995, and the related consolidated statements of income, stockholders' equity and cash flows of Spaghetti Warehouse, Inc. and subsidiaries for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Spaghetti Warehouse, Inc. and subsidiaries as of July 2, 1995, and the consolidated results of operations and cash flows of Spaghetti Warehouse, Inc. and subsidiaries for the year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas August 18, 1995
INDEPENDENT AUDITORS' REPORT ----------------------------
The Board of Directors Spaghetti Warehouse, Inc.:
We have audited the accompanying consolidated balance sheet of Spaghetti Warehouse, Inc. and subsidiaries as of July 3, 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the two-year period ending July 3, 1994. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spaghetti Warehouse, Inc. and subsidiaries as of July 3, 1994, and the results of their operations and their cash flows for each of the years in the two-year period ended July 3, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas August 19, 1994
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 3, 1994 AND JULY 2, 1995
See accompanying notes to consolidated financial statements.
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JULY 4, 1993, JULY 3, 1994 AND JULY 2, 1995
See accompanying notes to consolidated financial statements.
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 4, 1993, JULY 3, 1994 AND JULY 2, 1995
See accompanying notes to consolidated financial statements.
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.
(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 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 $360,075 and $651,857 at July 3, 1994 and July 2, 1995, respectively.
(f) Accounts Receivable
Accounts receivable primarily consist of credit card receivables and Canadian 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.
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(i) Property and Equipment
Property and equipment are recorded at cost, including interest capitalized during the construction period. Total interest of $164,448, $95,104 and $18,340 was capitalized in fiscal years 1993, 1994 and 1995, 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.
(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.
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 at July 2, 1995.
(k) Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (Statement 109). Statement 109 requires a change from the deferred method of accounting for income taxes to the asset and liability method. Under the asset and liability method, 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. Under Statement 109, 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.
The Company adopted Statement 109 in fiscal 1993 and all periods presented are in accordance with Statement 109.
(l) Other Accrued Liabilities
Other accrued liabilities consist of the following:
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(m) Net Income per Common Share
Both primary and fully diluted net income per common share are based on the weighted average number of shares outstanding during the year increased by common equivalent shares (primarily stock options) determined using the treasury stock method.
The weighted average numbers of shares outstanding for the primary and fully diluted net income per common share computations are as follows for fiscal years 1993, 1994, and 1995:
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
In fiscal 1992, the Company purchased the existing Austin location and ceased development of an alternate Austin location. In fiscal 1993 and 1994, the Company recognized a loss of $143,307 and $50,000, respectively, on the alternate location to reflect a reduction in the estimated value of the property to its expected recovery amount. The resulting current value of the alternate Austin location is reflected as an asset scheduled for divestiture in the accompanying consolidated balance sheets. In August 1995, a contract was entered into to sell the location for an amount exceeding the recorded net book value. Upon sale, the Company expects to recognize a net tax benefit of approximately $19,000.
(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.
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) LONG-TERM DEBT
Long-term debt consists of the following:
On June 7, 1993, the Company executed a new unsecured revolving credit and term loan agreement with two banks which enables the Company to borrow up to $30,000,000 in the aggregate. The Company may borrow $15,000,000 in revolving credit loans and an additional $15,000,000 in term loans. Revolving credit loans bear per annum 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 1.25% or (c) the LIBOR rate plus 1.50%. The Company incurs a commitment fee of 1/4 of 1% per annum 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.
The aggregate maturities of long-term debt at July 2, 1995 are as follows:
(5) INCOME TAXES
As discussed in note 1, the Company adopted Statement 109 in fiscal 1993 and all periods presented are in accordance with Statement 109.
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income tax expense is summarized as follows for fiscal years 1993, 1994 and 1995:
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 1993, 1994 and 1995:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of July 3, 1994 and July 2, 1995 are as follows:
As of July 2, 1995, the Company had approximately $3,642,000 of general business credit carryforwards for income tax purposes, which begin to expire in 2006. These carryforwards are comprised of targeted jobs tax credits, rehabilitation credits and FICA tip credits that were generated in all prior years, beginning in fiscal 1991. Based upon historical levels of earnings and considering the reversal of temporary differences resulting in future tax
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
liabilities, the Company believes it will more likely than not be able to realize the deferred tax assets recorded at July 2, 1995.
(6) COMMON STOCK AND OPTIONS
(a) Incentive Stock Option Plan
The Company has an Incentive Stock Option Plan (Plan) covering 946,275 shares of common stock. The 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. The options currently outstanding are exercisable in installments of 10% to 100% per year.
Information with respect to options under the above plan follows (various options were repriced in fiscal 1994 and 1995 to the then current market price):
(b) Other Plans
In March 1991, an officer of the Company was granted nonqualified stock options to purchase 165,000 shares of common stock at an option price per share of $14.58, the fair market value of the common stock on the date of grant. The options were generally exercisable in installments over a five-year period. During 1994, the officer left the Company and lost the rights to the stock options.
The Company's Board of Directors granted certain officers and directors of the Company nonqualified options to purchase 1,380 shares of common stock at an option price per share of $10.88 in fiscal 1993, 3,290 shares of common stock at an option price per share of $4.56 in fiscal 1994 and 862 and 5,335 shares of common stock at an option price of $3.25 and $2.81, respectively, in fiscal 1995 . The option prices were one-half of the fair market value of the common stock on the dates of grant. The options became exercisable six months subsequent to the dates of grant and, as such, all options granted are exercisable as of July 2, 1995. The options were granted as part of the officers' and directors' compensation and are recorded as compensation expense and additional paid-in capital
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of $15,000 in fiscal 1993 and 1994, and $17,800 in fiscal 1995. As of July 2, 1995, there have been no exercises under this plan.
Certain directors of the Company were granted nonqualified stock options to purchase an aggregate of 37,500 shares of common stock at option prices per share ranging from $9.88 to $21.75. The option prices were the fair market values of the common stock on the dates of grant. The options are exercisable in installments over a five-year period and 25,000 shares are exercisable as of July 2, 1995. As of July 2, 1995, there have been no exercises under this 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 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 offering period or 85% of the fair market value of the shares on the last business day of the offering period. The ESP Plan, which consists of three one-year offering periods, became effective December 1, 1993 and will terminate on November 30, 1996. During the fiscal year ended July 2, 1995, a total of 28,713 shares were purchased by the employees of the Company under this plan.
(7) COMMITMENT 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 July 2, 1995 are as follows:
Rental expense under operating leases was approximately $708,000, $660,000 and $750,000 for fiscal years 1993, 1994 and 1995, respectively.
Subsequent to the balance sheet date, the company was notified that a claim had been submitted against the Company to the American Arbitration Association by Bright-Kaplan International Corporation, the owner of a Spaghetti Warehouse franchise in Knoxville, Tennessee, seeking damages in excess of $6.6 million. Additionally, Elizabeth Bright and Thomas C. Bright, III, the principal shareholders of Bright-Kaplan International Corporation, have 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. The Company believes the claims are without merit and intends to vigorously defend each claim. As of the balance sheet date, 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.
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) 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. At July 2, 1995, the remaining net investment in Fasta Pasta of approximately $60,000 is reflected in other assets in the accompanying consolidated balance sheet.
(9) RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The reconciliation of net income to net cash provided by operating activities for the years ended July 4, 1993, July 3, 1994 and July 2, 1995 follows:
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized quarterly financial data follows:
(a) Gross profit is calculated as total revenues less cost of sales and operating expenses.
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 26, 1995.
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.
EXHIBIT INDEX
_______________ + Compensation plan, benefit plan or employment contract or arrangement. * Filed herewith.