-----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, E//jCkYznbSNs83UGQLuiUxzf97XUih0McoPWId6+hH6+Kgw6woA96AZ0yfPd2vK SIifwIOeqWnUGjO/6xVCwQ== 0000930661-96-001229.txt : 19960923 0000930661-96-001229.hdr.sgml : 19960923 ACCESSION NUMBER: 0000930661-96-001229 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960920 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: 1934 Act SEC FILE NUMBER: 001-10291 FILM NUMBER: 96632736 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 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED JUNE 30, 1996 OR _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission File Number 1-10291 SPAGHETTI WAREHOUSE, INC. (Exact name of registrant as specified in its charter) TEXAS 75-1393176 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 402 WEST I-30 GARLAND, TEXAS 75043 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (972) 226-6000 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC. Securities registered pursuant to Section 12(g) of the Act: NONE (Title of Class) ______________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Common Stock held by nonaffiliates of the registrant, based on the sale trade price of the Common Stock as reported by the New York Stock Exchange, Inc. on September 13, 1996 was $24,711,553. 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 13, 1996, 5,632,140 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 29, 1996, 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") 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. The Company operates 30 restaurants under three concepts using the names "The Spaghetti Warehouse," "Spaghetti Warehouse Italian Grill," and "Cappellini's." 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. Cappellini's offers an up-scale Italian dining experience featuring chef-prepared entrees served in large portions, designed for sharing. 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 products 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. The Company intends to expand the Old Spaghetti Factory restaurants within Canada by means of Company or joint-venture owned, and franchised Old Spaghetti Factory restaurants. 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. The following table sets forth, for the periods indicated, selected restaurant information.
YEAR ENDED ----------------------------------------------------------- JULY 4, JULY 4, JULY 3, JULY 2, JUNE 30, 1992* 1993 1994 1995 1996 -------- -------- -------- -------- --------- (SALES AND CUSTOMER COUNT DATA SHOWN IN THOUSANDS) Sales per restaurant open for full year: Average ............................... $2,700 $2,460 $2,246 $2,109 $2,173 High .................................. $4,459 $4,301 $4,300 $4,494 $4,546 Low ................................... $1,689 $1,493 $1,234 $1,048 $1,514 Check average per customer, including alcoholic beverages (all stores): Lunch ................................. $ 6.08 $ 6.18 $ 6.19 $ 6.40 $ 6.73 Dinner ................................ $ 8.43 $ 8.45 $ 8.41 $ 8.32 $ 8.64 Total customer count .................... 6,964 8,297 9,835 9,920 8,470 Average customer count per restaurant open for full year ...................... 346 307 287 269 266 Percentage change from prior year ....... 1.3% (11.1%) (6.5%) (6.3%) (1.1%) Restaurants open for full year .......... 18 24 31 36 29 Restaurants open at year end ............ 25 31 36 37 30
* The fiscal year ended July 4, 1992 was comprised of 53 weeks. 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 24 Spaghetti Warehouse restaurants in 11 states. Each of the Company's Spaghetti Warehouse restaurants offer 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 nine 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, deli sandwiches and combination platters called "feasts." The menu also includes soups, appetizers, house and Caesar salads, desserts, soft drinks, alcoholic beverages, including many locally available imported beers, and genuine San Francisco sourdough bread shipped from California. 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 San Francisco sourdough bread, currently range in price from $3.69 to $7.99 during lunch and $4.19 to $8.99 during dinner. Full alcoholic beverage service is available at the Company's restaurants. Because of the family atmosphere 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 30, 1996, July 2, 1995, and July 3, 1994, sales of alcoholic beverages accounted for approximately 9%, 10% and 11% of the Company's revenues, respectively, which, in each case, is less than the industry average for full-service restaurants. Management attributes the decline in sales of alcoholic beverages to consumer trends of reduced alcohol consumption. Many of the Company's restaurants are located in distinctive, older, restored buildings in urban locations. Dining room seating capacity in the traditional downtown Spaghetti Warehouse restaurant ranges from approximately 300 to 600 persons, with an average dining room seating capacity of approximately 450. The typical traditional downtown Company restaurant has approximately 15,200 square feet devoted to restaurant use, including kitchen and storage. The Company opened its first suburban Spaghetti Warehouse restaurant in Marietta, Georgia in August 1987. In January 1993, the Company opened its second Spaghetti Warehouse suburban restaurant in Addison (Dallas), Texas. Additional suburban restaurants similar to the Addison design containing approximately 9,600 square feet and 300 seats, have been opened in Elk Grove Village (Chicago) and Aurora (Chicago), Illinois, as well as Plano (Dallas), Arlington (Fort Worth), Stafford (Houston) and Willowbrook (Houston), Texas. The Company's last suburban restaurant located in Bedford (Fort Worth), Texas, which opened in October 1994, incorporated a new design and smaller investment in comparison to the previous suburban restaurants. 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. The Company currently operates five Italian Grill restaurants in two states. 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, portion sizes have been increased to improve the price/value relationship. -2- Entree prices at the Italian Grill currently range from $3.99 to $12.99 at lunch and $4.49 to $12.99 at dinner. 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. Although Italian Grill check averages per customer are approximately 10% higher than the original Spaghetti Warehouse concept, much of this increase is given back to the customer in the form of increased portions and improved plate presentations. An expanded selection of wine and beers has contributed to an 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. Based on favorable sales results and customer response at the Marietta Italian Grill, subsequent conversions were completed at the Company's Plano (Dallas) and Bedford (Fort Worth), Texas locations during the fiscal year ended June 30, 1996. The Stafford (Houston) and Austin, Texas locations were converted to the Italian Grill format during the first quarter of fiscal 1997. In addition to the Stafford and Austin locations, a minimum of four additional Italian Grill conversions are currently planned for the remainder of fiscal 1997. CAPPELLINI'S Cappellini's is a full-service, upscale restaurant featuring authentic Italian dishes prepared fresh to order, served in large portions intended for sharing. Menu items include appetizers, fresh salads, seafood, steaks, chicken and pasta entrees and made from scratch desserts. Entrees range in price from $7.95 to $24.95. Cappellini's opened on January 23, 1996 in the Company's previous Addison (Dallas), Texas Spaghetti Warehouse location. The Addison Spaghetti Warehouse was closed on October 23, 1995 to undergo conversion to the Cappellini's concept. Although Cappellini's was designed to generate check averages and revenues significantly greater than the traditional Spaghetti Warehouse restaurant, it has not yet produced sufficient revenues in order to sustain profitable operations. The Company currently does not plan to open or convert any additional locations to the Cappellini's concept during fiscal 1997. FUTURE EXPANSION The Company does not currently intend to open or begin construction on any new Company-operated restaurants during fiscal 1997. The Company's long-term objective, nevertheless, is to commence expansion by opening additional Company- operated restaurants subsequent to fiscal 1997. The Company anticipates expanding Italian Grill restaurants subsequent to fiscal 1997 predominantly in the Midwest, Southwest and Central United States and Old Spaghetti Factory restaurants in Canada. There can be no assurance, however, that the Company will be able to achieve these objectives. The Company plans to convert additional Spaghetti Warehouse units to the Italian Grill format over the next several years. The Company currently intends to convert a minimum of six Spaghetti Warehouse units to the Italian Grill concept during fiscal 1997. Italian Grill development plans beyond fiscal 1997 will be made based on operating results achieved in the current Italian Grill units. FRANCHISING The Company has developed a franchise program under which it has attracted three franchisees in the United States. Currently operating franchise units include those located in Wichita, Kansas; Newport News, Virginia; and Columbia, South Carolina. 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 franchise located in Knoxville, Tennessee closed during fiscal 1996 due to unsatisfactory operating results. The Wichita franchise operates under the original Spaghetti Warehouse format, while both the Newport News and Columbia units operate under the Italian Grill format. The Richmond unit will also operate under the Italian Grill format upon completion of its sale. 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- -3- 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 operations directors. Each operations director is generally responsible for nine 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, cost control, restaurant maintenance and personnel relations. In order to control labor costs, the managers use customer count forecasts and employee work-schedule systems designed to match employee work hours to anticipated customer traffic. Each restaurant also has an inventory control system designed to aid the manager in food cost and waste control, as well as in the evaluation of purchasing needs. A restaurant manager receives a fixed salary plus a bonus based upon the sales and profitability of the restaurant under his or her supervision. 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 non-perishable 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 30, 1996, the Company's expenditures for advertising (including local promotions) were approximately 4.6% of revenues. -4- 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 substantial 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 wage passed by Congress, which becomes effective October 1, 1996, 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 accomplish this. 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," and "THE SPAGHETTI WAREHOUSE RESTAURANT & Design" service marks with the U.S. Patent and Trademark office. The Company has applied for registration of "CAPPELLINI'S, CAPPELLINI'S (stylized)" 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. -5- The Company currently has 40 registered service marks and six applications pending for service marks in 16 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 it 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 800 persons on a full-time basis, 45 of whom are corporate management and staff personnel and 755 of whom are restaurant personnel. The Company also employs approximately 1,800 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 satisfactory. Restaurant managers are paid a base salary, plus incentive compensation, which is contingent upon achieving certain objectives. The Company believes that managers who produce superior economic results and deliver quality customer experiences earn more at the Company than the average compensation in the industry for similar positions and experience levels. COMPETITION The restaurant business is highly competitive, and competition in the Italian restaurant segment has increased in recent years. The Company believes that the primary competitive concerns in its business are the variety, quality and price of the food offered, the quality of the service provided by the restaurant's employees, and the location and atmosphere of the restaurant. The business of the Company is also affected by general economic conditions, changes in consumer tastes, population, traffic patterns, and spending habits of consumers. The Company competes with various food service operations in each of its markets, including locally owned restaurants, as well as national and regional restaurant chains, some of which operate more restaurants and have greater financial resources than the Company. The Company believes that its competitive position depends upon its ability to offer and maintain its quality food, unusual decor, a moderately priced menu and a comfortable full-service, family-oriented dining atmosphere. There is also active competition for quality management personnel and desirable commercial real estate sites suitable for restaurants. Management believes that financial resources and size are important factors in obtaining suitable sites, and that such factors, as well as compensation, are important in attracting quality management personnel. ITEM 2. PROPERTIES. The Company owns 21 and leases space for nine of its Company-operated restaurants. One of the Company's owned restaurants is subject to a ground lease. 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 1997 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 30 -6- 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. 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 the previous Spaghetti Warehouse franchise restaurant located in Knoxville, Tennessee. Mr. & Mrs. Bright claim 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. In addition to this lawsuit, BK has submitted a claim against the Company to the American Arbitration Association in Dallas, Texas based substantially on the same allegations contained in the lawsuit mentioned above. BK is seeking damages in excess of $9.0 million from this arbitration claim. On January 3, 1996, upon the Company's application, the Circuit Court judge ordered that the lawsuit be stayed until resolution of the arbitration proceedings with the American Arbitration Association. The arbitration hearing is currently scheduled to be completed in October 1996, with a decision from the arbitrators expected at the end of the second quarter of fiscal 1997. 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. 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 30, 1996. PART II 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." The following table sets forth the range of quarterly high and low closing sale prices on the New York Stock Exchange since July 4, 1994.
HIGH LOW ------ ------- Fiscal year ending July 2, 1995: First Quarter 7 1/4 5 5/8 Second Quarter 6 3/8 4 3/4 Third Quarter 6 3/8 4 3/4 Fourth Quarter 6 1/8 5 1/4 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 (through September 13) 5 5/8 4 3/4
As of September 13, 1996, the Company estimates that there were approximately 4,200 beneficial owners of the Company's Common Stock, represented by approximately 665 holders of record. -7- 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. -8- 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 30, 1996. The selected financial data under the captions "Operations 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 3, 1994, July 2, 1995, and June 30, 1996, and for each of the years in the three-year period ended June 30, 1996, 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 4, July 3, July 2, July 30, 1992 1993 1994 1995 1996 ---------- ---------- --------- ---------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RESTAURANT DATA) OPERATIONS STATEMENT DATA: Revenues ............................................. $ 55,377 $ 66,443 $ 78,384 $ 78,956 $ 70,957 --------- --------- --------- --------- ---------- Costs and expenses: Cost of sales ....................................... 13,508 16,517 19,749 20,036 17,965 Operating expenses .................................. 28,843 35,453 44,221 44,768 41,122 General and administrative .......................... 3,418 3,677 5,447 5,619 5,767 Depreciation and amortization ....................... 3,264 4,815 5,843 5,251 4,871 Restructuring charges ............................... -- -- -- -- 13,875 Loss (gain) on asset scheduled for divestiture....... -- 143 50 -- (47) Unusual charge ...................................... -- -- -- 600 -- Loss on closed restaurant ........................... -- 359 -- -- -- --------- --------- --------- --------- --------- Total costs and expenses ...................... 49,033 60,964 75,310 76,274 83,553 --------- --------- --------- --------- --------- Income (loss) from operations ........................ 6,344 5,479 3,074 2,682 (12,596) Net interest income (expense) ........................ 680 20 (904) (1,198) (1,045) --------- --------- --------- --------- --------- Income (loss) before income tax expense .............. 7,024 5,499 2,170 1,484 (13,641) (benefit) Income tax expense (benefit) ......................... 1,596 1,493 461 234 (5,308) --------- --------- --------- --------- --------- Net income (loss) .................................... $ 5,428 $ 4,006 $ 1,709 $ 1,250 $ (8,333) ========= ========== --------- ========= ========= Net income (loss) per common share (1): Primary ............................................. $ 0.84 $ 0.62 $ 0.28 $ 0.22 $ (1.49) ========= ========= ========== ========= ========= Fully diluted ....................................... $ 0.84 $ 0.62 $ 0.28 $ 0.22 $ (1.49) ========= ========= ========== ========== ========== Weighted average common and common share equivalents outstanding (1): Primary ............................................. 6,495 6,445 6,069 5,697 5,611 Fully diluted ....................................... 6,495 6,445 6,069 5,697 5,611 BALANCE SHEET DATA: Cash and cash equivalents ........................... $ 10,830 $ 1,600 $ 1,918 $ 1,873 $ 8,065 Working capital (deficit) (2) ....................... 8,499 (95) (3,154) (2,602) (3,005) Total assets ........................................ 57,913 70,693 78,648 75,511 71,368 Long-term debt ...................................... 156 9,620 18,584 15,548 19,762 Stockholders' equity ................................ 52,154 55,979 52,482 53,436 45,250 RESTAURANT DATA: Company-owned restaurants open for full year......... 18 24 31 36 29 Company-owned restaurants open at end of year........ 25 31 36 37 30
_______________________ (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." -9- 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 3, JULY 2, JUNE 30, 1994 1995 1996 ------ ------ ------ Revenues ............................... 100.0% 100.0% 100.0% ----- ----- ----- Costs and expenses: Cost of sales ........................ 25.2 25.4 25.3 Operating expenses ................... 56.4 56.7 58.0 General and administrative expenses .. 6.9 7.1 8.1 Depreciation and amortization ........ 7.5 6.6 6.9 Restructuring charges ................ -- -- 19.6 Loss (gain) on asset scheduled for ... 0.1 -- (0.1) divestiture .......................... Unusual charge ....................... -- 0.8 -- ----- ----- ----- Total costs and expenses ............ 96.1 96.6 117.8 ----- ----- ----- Income (loss) from operations .......... 3.9 3.4 (17.8) Net interest expense ................... (1.1) (1.5) (1.4) ----- ----- ----- Income before income tax expense (benefit) ............................. 2.8 1.9 (19.2) Income tax expense (benefit) ........... 0.6 0.3 (7.5) ----- ----- ----- Net income (loss) ...................... 2.2% 1.6% (11.7%) ===== ===== =====
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 $4.8 million reduction in sales resulting from the closure of seven under-performing restaurants in February 1996, a $2.8 million, or 4.4%, decline in sales experienced by the 28 stores that were open for the full year in both fiscal 1996 and 1995 ("same-stores"), and $.4 million in lost sales due to the temporary closure of the Marietta and Addison restaurants for their conversion to other concepts. The decline in same-store sales was the result of an 8.5% decrease in customer counts offset by a 4.4% increase in check averages. Management believes that same-store customer count comparisons were negatively affected by the continued growth of competitors in the casual dining and Italian restaurant segments and to periods of unusually severe winter weather in January and early February. The increase in check averages was primarily the result of new menu items introduced over the last 18 months. Additionally, higher check averages at the Italian Grill units and modest menu price adjustments made during the last 18 months also contributed to the increase in check averages. Although total same-store sales declined by 4.4% from fiscal 1995, during current year periods operating under the Italian Grill format, the two Italian Grill same-store sales showed increases of 23.8% in comparison to corresponding periods in fiscal 1995. These increases in Italian Grill same-store sales were the result of a 5.6% increase in customer counts coupled with a 17.2% increase in check averages. Due to these favorable sales results, the Company plans to convert a minimum of six units to the Italian Grill format in fiscal 1997. -10- 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 the last 18 months. Due to higher food costs associated with the Italian Grill and Cappellini's concepts, management anticipates that cost of sales as a percentage of total revenues will increase modestly in fiscal 1997 as more units are converted to the Italian Grill format. 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 also 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. Operating expenses as a percentage of revenues are expected to decline slightly in fiscal 1997 due to the closure of the seven low- volume units in February 1996. 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 decrease in revenues, contributed to the increase in G&A as a percentage of total revenues. Additionally, increased marketing research costs, legal fees, travel costs and a non-cash write-off of certain costs incurred in the preparation of the Addison property for its conversion to Cappellini's also contributed to the current 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 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 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. The Company has disposed of all of the closed locations except Hartford, which is currently under contract to be sold at the end of the first quarter of fiscal 1997. The Company anticipates that the original $13.9 million pre-tax charge will be sufficient to complete the restructuring plan by the end of fiscal 1997. -11- 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. In fiscal 1994, the Company recorded a non-cash charge of $50,000 to write-down the alternate property to its estimated net realizable value at that time. 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 also helped reduce current year net interest expense. To the extent allowable by 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 conversions, capital expenditures and possible further repurchases of the Company's stock. 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 prior year rate is 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 current year restructuring charges that have been deferred for income tax purposes for future years. See Note 5 of Notes to Consolidated Financial Statements for further information. 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 fiscal 1995 same-store sales. 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 new menu items introduced during the second half of fiscal 1995. Some slight menu price adjustments made throughout fiscal 1995 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 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. Operating Expenses Operating expenses as a percentage of total revenues increased from 56.4% in fiscal 1994 to 56.7% in fiscal 1995. This increase was 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. The fixed nature of certain costs, relative to the decline in fiscal 1995 same-store sales, also contributed to the increase in fiscal 1995 operating -12- expenses as a percentage of total revenues. In addition, 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. 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 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 as a percentage of total revenues decreased from 7.5% in fiscal 1994 to 6.6% in fiscal 1995. This 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 fiscal 1995 same-store sales. 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. NET INTEREST EXPENSE Net interest expense increased from $0.9 million in fiscal 1994 to $1.2 million in fiscal 1995. This increase was 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. INCOME TAXES The Company's effective income tax rate decreased from 21.2% in fiscal 1994 to 15.8% in fiscal 1995. During this period, the Company utilized the federal targeted jobs tax credit and the FICA tax tip credit to reduce its effective rates below the statutory rates. The 5.4% decrease in the effective tax rate over this period was due primarily to the increase in the benefit received from the targeted jobs tax credit and the FICA tax tip credit relative to the decline in pre-tax income over the same period. -13- LIQUIDITY AND CAPITAL RESOURCES The Company's working capital deficit increased from $2.6 million on July 2, 1995 to $3.0 million on June 30, 1996. This increase is due to an increase in the current portion of long-term debt resulting from the execution of a new amendment to the Company's existing credit facility. This increase was partially offset by increases in cash and cash equivalents resulting from the fourth quarter disposal of six of the seven restaurant properties closed in February 1996 and the disposal of the excess Austin, Texas property. 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 $6.1 in fiscal 1995 to $2.3 million in fiscal 1996. The decrease was attributed to the decline in current year earnings, certain cash expenses incurred in relation to the fiscal 1996 restructuring plan, and to changes in certain components of working capital. In order to obtain approval of the restructuring plan from its lenders, the Company amended certain provisions of its existing bank credit facility in March 1996. This amendment reduced the total amount available under the credit facility from $30.0 million to $22.5 million and added a covenant requiring the Company to meet a certain funded debt to cash flow ratio prior to borrowing any additional funds under such agreement. Long-term debt outstanding on June 30, 1996 consisted primarily of amounts borrowed under the Company's existing bank credit facility, including a $15.0 million fixed rate term loan and $4.75 million borrowed against its floating rate revolving credit facility. Due to the Company's failure to meet the fixed charge coverage requirement contained in its existing bank credit facility at March 31, 1996, the Company negotiated with its lenders to amend the terms of its borrowing arrangements and to obtain a waiver for this event of technical default. On August 12, 1996, the Company executed a new amendment to its bank credit facility, effective June 30, 1996, and received a waiver from its lenders for the March 31, 1996 event of default. The terms of the amended credit agreement contain, among other things, the immediate paydown of approximately $4.0 million of debt, future additional debt payments upon the disposal of assets and settlement of the Bright-Kaplan litigation, variable interest rates on both revolving credit loans and term loans based on Company performance, and various changes to minimum financial ratio requirements. Additionally, in the event that the Company has a material default 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 30, 1996, the Company was in compliance with all requirements under the amended credit agreement. 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 30, 1996, the Company had repurchased 780,952 shares of common stock under this program, including 29,795 shares in fiscal 1996. Further purchases with respect to this program are dependent upon various business and financial considerations. The Company's capital expenditures increased from $3.9 million in fiscal 1995 to $4.0 million in fiscal 1996. Fiscal 1996 expenditures consistent primarily of renovations made to four Spaghetti Warehouse restaurants, replacement of point-of sale equipment in five restaurants, and costs relating to the conversion of three of its locations to the Italian Grill format and one unit to the Cappellini's concept. During fiscal 1996, the Company converted three of its existing Spaghetti Warehouse units to the "Spaghetti Warehouse Italian Grill" format. Two additional units have also been converted to the Italian Grill format during the first quarter of fiscal 1997. The Italian Grill, an updated version of the existing Spaghetti Warehouse concept, features a lighter, brighter decor package, increased menu variety, and enhanced service. Based on favorable sales and operating results achieved thus far in units previously converted to the Italian Grill format, the Company plans to convert six units to the new format during fiscal 1997. In a separate endeavor, the Company's newest concept called "Cappellini's" opened on January 23, 1996 in Addison, Texas. The Company's previous Addison Spaghetti Warehouse was closed on October 23, 1995 to undergo conversion to the Cappellini's concept. Cappellini's is an upscale restaurant featuring authentic Italian dishes prepared fresh to order, served in large portions. Although Cappellini's was designed to generate check averages and revenues significantly greater than the traditional Spaghetti Warehouse restaurant, it has not yet -14- produced sufficient revenues necessary to sustain profitable operations. The Company currently does not plan to open or convert any additional locations to the Cappellini's concept in fiscal 1997. In addition to Italian Grill conversions, the Company plans to continue to make necessary replacements and upgrades to its existing restaurants and information systems during fiscal 1997. Total planned capital expenditures relating to these fiscal 1997 projects are $2.5 million. Cash flow from operations and current cash balances are expected to be sufficient to fund planned capital expenditures, payment of required debt maturities under the Company's bank credit facility and possible further repurchases of Company stock in fiscal 1997. 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. 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. Among the factors that could cause actual results to differ materially are: 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 of this Report. 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. 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. -15- 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. 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). -16- + 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 (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). -17- 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). 10.29 - 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). -18- *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. 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. -19- SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Reports of Independent Public Accountants.............................................................. F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of July 2, 1995 and June 30, 1996..................................... F-4 Consolidated Statements of Operations for each of the years in the three-year period ended June 30, 1996...................................................................................... F-5 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended June 30, 1996...................................................................................... F-6 Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 1996...................................................................................... F-7 Notes to Consolidated Financial Statements............................................................ F-8
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 July 2, 1995 and June 30, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the fiscal years in the two-year period ended June 30, 1996. 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 July 2, 1995 and June 30, 1996, and the consolidated results of operations and cash flows for each of the fiscal years in the two-year period ended June 30, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas August 19, 1996 F-2 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Spaghetti Warehouse, Inc.: We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of Spaghetti Warehouse, Inc. and subsidiaries for the year ended 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 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 consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Spaghetti Warehouse, Inc. and subsidiaries for the year ended July 3, 1994, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Dallas, Texas August 19, 1994 F-3 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JULY 2, 1995 AND JUNE 30, 1996
ASSETS 1995 1996 ------ ----------- ------------ Current assets: Cash and cash equivalents....................... $ 1,872,919 $ 8,065,364 Accounts receivable............................. 608,515 659,069 Inventories..................................... 689,395 686,995 Income taxes receivable......................... 386,273 399,764 Prepared expenses............................... 377,884 341,711 ----------- ------------ Total current assets.......................... $75,511,026 10,152,903 ----------- ------------ Property and equipment, net (note 2).............. 66,767,369 49,893,172 Assets scheduled for divestiture (notes 2 and 8).. 381,651 1,525,000 Trademark and franchise rights, net (note 3)...... 3,215,494 3,113,472 Pre-opening costs, net............................ 49,501 171,862 Deferred income taxes (note 5).................... 379,658 5,735,128 Other assets...................................... 782,367 776,652 ----------- ------------ $75,511,026 $71,368,189 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt (note 4)...... $ 36,000 $ 6,878,358 Accounts payable................................ 2,769,654 1,932,648 Accrued payroll and bonuses..................... 1,888,514 1,450,812 Other accrued liabilities (note 1).............. 1,806,888 1,487,488 Accrued restructuring charges (note 8).......... - 1,310,540 Deferred income taxes (note 5).................. 35,573 98,368 ----------- ------------ Total current liabilities..................... 6,536,629 13,158,214 ----------- ------------ Long-term debt, less current portion.............. 15,512,000 12,883,64 (note 4) Deferred compensation............................. 26,624 75,875 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 6,409,666 shares in 1995 and 6,475,375 shares in 1996........................ 64,097 64,754 Additional paid-in capital....................... 35,747,731 36,012,76 Cumulative translation adjustment................ (575,874) (550,642) Retained earnings................................ 24,428,382 16,094,924 ----------- ------------ 59,664,336 51,621,797 Less cost of 812,457 shares in 1995 and 842,252 shares in 1996 of common stock held in treasury................... (6,228,563) (6,371,339) ----------- ------------ 53,435,773 45,250,458 ----------- ------------ $75,511,026 $71,368,189
=========== ============ See accompanying notes to consolidated financial statements F-4 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JULY 3, 1994, JULY 2, 1995 AND JUNE 30, 1996
1994 1995 1996 ------------- ------------- ------------- Revenues: Restaurant sales......................................... $77,283,049 $77,805,987 $ 69,662,500 Franchise fees........................................... 574,677 618,604 705,876 Other.................................................... 526,523 531,874 588,243 ---------- ----------- ------------ Total revenues............................... 78,384,249 78,956,465 70,956,619 ---------- ----------- ------------ Costs and expenses: Cost of sales............................................ 19,748,811 20,036,174 17,964,938 Operating expenses....................................... 44,221,600 44,768,067 41,121,545 General and administrative............................... 5,446,661 5,618,702 5,766,812 Depreciation and amortization............................ 5,843,091 5,251,319 4,871,376 Restructuring charges (note 8)........................... - - 13,875,248 Loss (gain) on asset scheduled for divestiture (note 2).. 50,000 - (47,178) Unusual charge (note 9).................................. - 600,000 - ----------- ----------- ------------ Total costs and expenses............................. 75,310,163 76,274,262 83,552,741 ----------- ----------- ------------ Income (loss) from operations........................ 3,074,086 2,682,203 (12,596,122) ----------- ----------- ------------ Interest income (expense): Interest income.......................................... 69,587 85,301 192,080 Interest expense......................................... (973,892) (1,283,718) (1,236,740) ----------- ----------- ------------ (904,305) (1,198,417) (1,044,660) ----------- ----------- ------------ Income (loss) before income tax...................... 2,169,781 1,483,786 (13,640,782) expense (benefit) Income tax expense (benefit) (note 5)...................... 460,417 233,759 (5,307,324) ----------- ----------- ------------ Net income (loss)......................... $ 1,709,364 $ 1,250,027 $ (8,333,458) =========== =========== ============ Primary net income (loss) per common share................. $ .28 $ .22 $ (1.49) =========== =========== ============ Fully diluted net income (loss) per common share........... $ .28 $ .22 $ (1.49) =========== =========== ============
See accompanying notes to consolidated financial statements. F-5 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL CUMULATIVE TREASURY STOCK TOTAL ----------------- ----------------------- NUMBER OF PAID-IN TRANSLATION RETAINED NUMBER STOCKHOLDERS' SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS OF SHARES AMOUNT EQUITY -------- ------- ----------- ----------- ----------- --------- ----------- ------------ Balances at July 4, 1993.... 6,302,686 $63,026 $35,240,867 $ (247,817) $21,468,991 (61,300) $ (545,678) $55,979,389 Exercise of employee stock. options................... 71,768 719 330,551 - - - - 331,270 Stock options issued as compensation (note 6)..... - - 15,000 - - - - 15,000 Purchase of treasury shares, at cost.................. - - - - - (672,857) (5,215,065) (5,215,065) Foreign currency translation adjustment............... - - - (337,479) - - - (337,479) Net income.................. - - - - 1,709,364 - - 1,709,364 --------- ------- ----------- ---------- ----------- --------- ----------- ----------- 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 Exercise of employee stock options and ESP Plan purchases................ 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 Exercise of employee stock options and ESP Plan purchases................ 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 ========= ======= =========== ========== =========== ========= =========== ===========
See accompanying notes to consolidated financial statements. F-6 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JULY 3, 1994, JULY 2, 1995 AND JUNE 30, 1996
1994 1995 1996 ------------- ------------ ------------ Cash flows from operating activities: Net income (loss)................................................ $ 1,709,364 $ 1,250,027 ($ 8,333,458) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense....................... 5,843,091 5,251,319 4,871,376 (Gain) loss on disposal of property and equipment........... (30,992) 32,396 144,972 Restructuring charges (net of cash payments)................ - - 13,115,347 Unusual charge.............................................. - 600,000 - Deferred income taxes....................................... (349,295) (486,834) (5,292,905) Other, net.................................................. 370,586 78,425 151,718 Changes in assets and liabilities: Accounts receivable.................................... 92,171 (81,435) (55,619) Inventories............................................ 720,956 354,688 2,400 Income taxes refundable................................ (94,317) 128,024 (44,078) Prepaid expenses....................................... 16,733 64,605 36,215 Other assets........................................... (1,469,952) (103,301) (766,550) Accounts payable....................................... 499,973 (667,529) (807,087) Accrued payroll and bonuses............................ 1,737,992 (1,107,044) (437,702) Other accrued liabilities.............................. 588,849 813,679 (319,400) ------------ ----------- ------------- Net cash provided by operating activities................... 9,635,159 6,127,020 2,265,229 ------------ ----------- ------------- Cash flows from investing activities: Purchase of property and equipment............................... (13,497,677) (3,864,744) (4,045,220) Proceeds from sales of property and equipment.................... 126,836 988,287 3,654,513 Collection of notes receivable................................... 46,000 75,511 6,092 ------------ ----------- ------------- Net cash used in investing activities....................... (13,324,841) (2,800,946) (384,615) ------------ ----------- ------------- Cash flows from financing activities: Net borrowings from (payments on) long-term debt................. 8,964,000 (3,036,000) 4,214,000 Purchase of treasury shares...................................... (5,215,065) (467,820) (142,776) Proceeds from employee stock plans............................... 331,270 143,865 244,687 ------------ ----------- ------------- Net cash provided by (used in) financing activities......... 4,080,205 (3,359,955) 4,315,911 ------------ ----------- ------------- Effects of exchange rates on cash and Cash equivalents.............. (73,135) (10,879) (4,080) ------------ ----------- ------------- Net increase (decrease) in cash and cash equivalents................ 317,388 (44,760) 6,192,445 Cash and cash equivalents at beginning of year...................... 1,600,291 1,917,679 1,872,919 ------------ ----------- ------------- Cash and cash equivalents at end of year............................ $ 1,917,679 $ 1,872,919 $ 8,065,364 ============ =========== ============= Supplemental information: Interest paid (net of amounts capitalized)....................... $ 890,281 $ 1,020,187 $ 1,111,677 ============ =========== ============= Income taxes paid (net of refunds)............................... $ 1,044,051 $ 541,608 $ 15,238 ============ =========== =============
See accompanying notes to consolidated financial statements. F-7 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 revenues and 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 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 $651,857 and $822,795 at July 2, 1995 and June 30, 1996, 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. Amortization of F-8 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) pre-opening costs was approximately $1,440,000, $510,000 and $180,000 for fiscal years 1994, 1995 and 1996, respectively. (i) Property and Equipment Property and equipment are recorded at cost, including interest capitalized during the construction period. Total interest of $95,104, $18,340 and $0 was capitalized in fiscal years 1994, 1995 and 1996, 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 $4,260,000, $4,610,000 and $4,500,000 for fiscal years 1994, 1995 and 1996, 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 is required to adopt the Statement no later than fiscal 1997, although earlier implementation is permitted. The Statement is required to be applied prospectively for assets to be held and used. The Company plans to adopt the Statement during fiscal 1997. Based on a preliminary review, the Company expects to recognize a non-cash impairment loss in the range of $1 to $2 million (pre-tax) in fiscal 1997 as a result of applying provisions of the Statement. (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 $140,000, $130,000 and $190,000 in fiscal years 1994, 1995 and 1996, 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 June 30, 1996. (k) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. F-9 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOES TO CONSOLDATED FINANCIALS STATEMENTS --(CONTINUED) (l) Other Accrued Liabilities Other accrued liabilities consist of the following:
1995 1996 ----------- ----------- Property taxes $ 553,228 $ 577,806 Workers' compensation and general 707,673 316,619 liability insurance Other current liabilities 545,987 593,063 ---------- ---------- Other accrued liabilities $1,806,888 $1,487,488 ========== ==========
(m) Net Income (Loss) per Common Share Both primary and fully diluted net income (loss) per common share are based on the weighted average number of shares outstanding during the year increased by, in periods in which they have a dilutive effect, 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 1994, 1995 and 1996:
1994 1995 1996 ---- ---- ---- Weighted average number of shares outstanding: Primary....................................... 6,068,905 5,696,653 5,611,181 Fully diluted................................. 6,069,126 5,696,672 5,611,181
(2) PROPERTY AND EQUIPMENT Property and equipment consists of the following:
1995 1996 ------------ ------------ Land.......................................................... $ 10,619,122 $ 9,190,860 Buildings..................................................... 38,665,944 28,236,923 Equipment, furniture and fixtures............................. 29,596,281 24,269,638 Leasehold improvements........................................ 11,825,996 10,884,219 Construction in progress...................................... 36,651 2,903 ------------ ------------ 90,743,994 72,584,543 Less accumulated depreciation and amortization................ (23,976,625) (22,691,371) ------------ ------------ $ 66,767,369 $ 49,893,172 ============ ============
In fiscal 1992, the Company purchased the existing Austin, Texas location and ceased development of an alternate Austin location. In fiscal 1994, the Company recognized a loss of $50,000 on the alternate location to reflect a reduction in its estimated net realizable value at that time. 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. F-10 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (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. (4) LONG-TERM DEBT Long-term debt consists of the following:
1995 1996 ------------ ------------ Term note payable to banks, bearing interest at 7.1% at June 30, 1996, unsecured, interest payable quarterly and principal payable quarterly beginning on October 1, 1996 through July 1,2001, at which date the remaining principal balance is due............................... $15,000,000 $15,000,000 Revolving credit notes payable to banks, bearing interest at variable rates (the average rate at June 30, 1996 was 8.4%), unsecured, interest payable quarterly and principal due on July 1, 1998.................................................. 500,000 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............................................ 48,000 12,000 ----------- ----------- 15,548,000 19,762,000 Less current portion................................................................ 36,000 6,878,358 ----------- ----------- Long-term debt, excluding current portion...................................... $15,512,000 $12,883,642 =========== ===========
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 and an additional $15,000,000 in term loans. 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. The credit agreement requires the Company to maintain a certain rolling 12-month fixed charge coverage ratio, as defined in the credit agreement. As of March 31, 1996, the Company failed to meet this fixed charge coverage requirement. On August 12, 1996, the Company executed a new amendment to its credit agreement, effective June 30, 1996, that granted a waiver from its banks for the March 31, 1996 event of default. The terms of the amended credit agreement contain, among other things, the immediate paydown of approximately $4.0 million of debt, future additional debt payments upon the disposal of assets or the settlement of the Bright-Kaplan litigation (see Note 7), and various changes to minimum financial ratio requirements. These quarterly financial requirements, as defined in the credit agreement, are an adjusted cash flow ratio, funded debt to ETITDA ratio, fixed charge coverage ratio, minimum tangible net worth requirement and debt to net worth ratio. 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 F-11 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) properties in order to secure their interest in the loans. As of June 30, 1996, the Company was in compliance with all requirements under the amended credit agreement. The aggregate maturities of long-term debt at June 30, 1996, after giving effect to the August 1996 amendment, are as follows: 1997.......................................... 6,878,358 1998.......................................... 1,972,622 1999.......................................... 6,965,777 2000.......................................... 1,972,622 2001.......................................... 1,972,621 ------------ Total.................................... $ 19,762,000 ============
(5) INCOME TAXES The provision for income tax expense is summarized as follows for fiscal years 1994, 1995 and 1996:
1994 1995 1996 --------- --------- ----------- Current: Federal...................... $ 616,426 $ 599,803 $ 26,234 State and local.............. 193,159 117,687 (32,366) Deferred....................... (349,168) (483,731) (5,301,192) --------- --------- ------------ $ 460,417 $ 233,759 ($5,307,324) ========= ========= ============
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 1994, 1995 and 1996:
1994 1995 1996 --------- --------- ----------- Computed "expected" tax expense...... $ 737,726 $ 504,487 ($4,637,866) Targeted jobs tax credit............. (363,451) (326,493) - State and local taxes, net of federal benefit.............................. 127,485 77,673 (545,631) General business tax credits......... (132,592) (57,027) - Nondeductible organizational costs... 21,984 - - Other................................ 69,265 35,119 (123,827) --------- --------- ----------- $ 460,417 $ 233,759 ($5,307,324) ========= ========= ===========
F-12 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of July 2, 1995 and June 30, 1996 are as follows:
1995 1996 ----------- ----------- Deferred tax assets: General business credit carryforwards............... $ 3,642,318 $ 3,494,972 Net operating loss.................................. - 2,470,000 Restructuring related reserves...................... - 1,837,302 Other............................................... 267,847 475,404 ----------- ----------- Deferred tax .................................. 3,910,165 8,277,678 ----------- ----------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation and basis adjustments.. (3,465,797) (2,504,677) Pre-opening costs.................................. (16,830) (65,307) Other.............................................. (83,453) (70,934) ----------- ----------- Deferred tax liabilities....................... (3,566,080) (2,640,918) ----------- ----------- Net deferred tax asset........................ $ 344,085 $ 5,636,760 =========== ===========
As of June 30, 1996, the Company had approximately $3,495,000 of Federal 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 tax tip credits that were generated in all prior years, beginning in fiscal 1991. Based upon historical and forecasted 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 30, 1996. The Company has a net operating loss of approximately $6,500,000 as of June 30, 1996. It is the Company's intent to carry the majority of this loss back to offset prior years' tax expenses. (6) COMMON STOCK AND OPTIONS (a) Incentive Stock Option Plan The Company has an Incentive Stock Option Plan (Plan) covering 932,938 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. F-13 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Information with respect to options under the above plan follows (various options were repriced in fiscal 1994, 1995 and 1996 to the then current market price):
NUMBER OF OPTION PRICE SHARES PER SHARE ---------- ------------------- Outstanding at July 4, 1993 393,346 $1.39 -- 21.75 Granted............................ 457,050 $7.25 -- 9.00 Exercised.......................... (103,536) $1.39 -- 9.73 Lapsed............................. (68,068) $5.76 -- 8.63 ---------- Outstanding at July 3, 1994............ 678,792 $2.08 -- 21.75 Granted............................ 301,875 $5.25 -- 6.50 Exercised.......................... (13,835) $2.45 -- 3.31 Lapsed............................. (217,089) $2.08 -- 9.00 ---------- Outstanding at July 2, 1995............ 749,743 $2.08 -- 9.00 Granted............................ 124,000 $4.88 -- 5.13 Exercised.......................... (13,337) $2.08 -- 2.08 Lapsed............................. (109,756) $5.13 -- 5.88 ---------- Outstanding at June 30, 1996........... 750,650 $4.88 -- 9.00 ========== Options exercisable at June 30, 1996... 317,487 $5.13 -- 9.00 ==========
(b) Other Plans The Company's Board of Directors granted certain officers and directors of the Company nonqualified options to purchase 3,290 shares of common stock at an option price per share of $4.56 in fiscal 1994, 862 and 5,335 shares of common stock at an option price of $3.25 and $2.81, respectively, in fiscal 1995 and 8,197 shares of common stock at an option price of $2.56 in fiscal 1996. 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 June 30, 1996. The options were granted as part of the officers' and directors' compensation and are recorded as compensation expense and additional paid-in capital of $15,000 in fiscal 1993 and 1994, $17,800 in fiscal 1995 and $21,000 in fiscal 1996. As of June 30, 1996, there have been no exercises under this plan. Certain directors of the Company have nonqualified stock options to purchase an aggregate of 47,500 shares of common stock at option prices per share ranging from $5.375 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 34,500 shares are exercisable as of June 30, 1996. As of June 30, 1996, 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. A total of 28,713 shares and 56,624 shares were purchased by employees of the Company under this plan during fiscal 1995 and 1996, respectively. F-14 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (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 June 30, 1996 are as follows: 1997........................................ $ 548,748 1998........................................ 573,279 1999........................................ 506,158 2000........................................ 426,157 2001........................................ 417,085 Thereafter.................................. 3,828,494 ---------- Total............................. $6,299,921 ==========
Rental expense under operating leases was approximately $660,000, $750,000 and $710,000 for fiscal years 1994, 1995 and 1996, respectively. In fiscal 1996, 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 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, 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 is vigorously defending each claim. As of June 30, 1996, damages, if any, arising from such litigation are not estimable. The arbitration hearing is currently scheduled to be completed in October, with a decision from the arbitrators expected at the end of the second quarter of fiscal 1997. 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 has contracted to sell its Richmond, Virginia location to its Virginia franchisee during the second quarter of fiscal 1997. 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 properties during the fourth quarter of fiscal 1996 and is currently negotiating the sale of the remaining closed property. As of June 30, 1996, the remaining balance of accrued restructuring charges was $1,310,540 relating primarily to the disposal of the Hartford property, Richmond restaurant, a corporate warehouse property and excess antique and equipment inventory. Management believes that this reserve will be adequate to complete the restructuring plan by the end of fiscal 1997. The estimated net realizable value for the remaining properties and assets to be disposed is $1,525,000 and is reflected in the June 30, 1996 Consolidated Balance Sheet as Assets scheduled for divestiture. F-15 SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (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 30, 1996, 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 October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provision no later than fiscal years beginning after December 15, 1995 and adoption of the recognition and measurement provision for nonemployee transactions entered into after December 15, 1995. Pursuant to the new standard, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. The Company expects to comply with the disclosure-only provision relative to SFAS No. 123. (11) QUARTERLY FINANCIAL DATA (UNAUDITED) Unaudited summarized quarterly financial data follows:
QUARTERS ENDED ---------------------------------------------------- OCTOBER 2, JANUARY 1, APRIL 2, JULY 2, 1994 1995 1995 1995 ------------ ------------- ----------- ---------- Year ended July 2, 1995: Revenues $20,648,090 19,332,643 19,365,701 19,610,031 =========== ========== ========== ========== Gross profit (a) $ 3,596,296 3,141,504 3,761,134 3,653,290 =========== ========== ========== ========== Net income $ 402,495 143,419 495,695 208,418 =========== ========== ========== ========== Net income per common share: Primary $ .07 .03 .09 .04 =========== ========== ========== ========== Fully diluted $ .07 .03 .09 .04 =========== ========== ========== ========== 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: Primary $ .08 (.07) (1.54) .05 =========== ========== ========== ========== Fully diluted $ .08 (.07) (1.54) .05 =========== ========== ========== ==========
(a) Gross profit is calculated as total revenues less cost of sales and operating expenses. F-16 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 20, 1996. 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 20, 1996 - --------------------------- Phillip Ratner President, Chief Executive Officer, and a Director (Principal Executive Officer) /s/ H.G. Carrington, Jr. Executive Vice President, September 20, 1996 - --------------------------- H. G. Carrington, Jr. Chief Financial Officer, Secretary and a Director (Principal Financial Officer) /s/ Robert E. Bodnar Treasurer and Controller September 20, 1996 - --------------------------- Robert E. Bodnar (Principal Accounting Officer) /s/ C. Cleave Buchanan, Jr. Director September 20, 1996 - --------------------------- C. Cleave Buchanan, Jr. /s/ Frank Cuellar, Jr. Director September 20, 1996 - --------------------------- Frank Cuellar, Jr. /s/ John T. Ellis Director September 20, 1996 - --------------------------- John T. Ellis /s/ Robert R. Hawk Director September 20, 1996 - --------------------------- Robert R. Hawk /s/ Peter Hnatiw Director September 20, 1996 - --------------------------- Peter Hnatiw /s/ James F. Moore Director September 20, 1996 - --------------------------- James F. Moore /s/ Cynthia I. Pharr Director September 20, 1996 - --------------------------- Cynthia I. Pharr /s/ William B. Rea, Jr. Director September 20, 1996 - --------------------------- 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 30, 1996 _________ 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 (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).
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT DESCRIPTION PAGE - -------- ------------------------------------------- ------------ 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- 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).
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT DESCRIPTION PAGE - -------- ------------------------------------------- ------------ 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, 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. 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 * 23.2- Consent of KPMG Peat Marwick LLP * 27.1- Financial Data Schedule
__________________ + Compensation plan, benefit plan or employment contract or arrangement. * Filed herewith. EX-10.36 2 AMENDED AND RESTATED LOAN AGREEMENT EXHIBIT 10.36 AMENDED AND RESTATED LOAN AGREEMENT This Amended and Restated Loan Agreement is executed as of this 12th day of August, 1996, by and among SPAGHETTI WAREHOUSE, INC., a Texas corporation ("Parent") with its principal office at 402 Interstate 30, Garland, Texas 75043, - -------- the subsidiaries of Parent listed on the signature pages hereof and BANK ONE, TEXAS, N.A., a national banking association with an office at 1717 Main Street, Dallas, Texas 75201 and NATIONSBANK OF TEXAS, N.A., a national banking association with an office at 901 Main Street, Dallas, Texas 75202 (such banks being referred to collectively as the "Lenders" and individually as a "Lender"). ------- ------ W I T N E S S E T H: - - - - - - - - - - WHEREAS, Co-obligors and Lenders entered into an Amended and Restated Loan Agreement, dated November 1, 1993 in order to provide revolving credit and term loan facilities, subject to the terms and conditions set forth therein and as amended by an Amendment No. 1 dated December 21, 1993, an Amendment No. 2 dated February 9, 1995 and an Amendment No. 3 dated March 29,1996 (collectively, the "Prior Agreement"); WHEREAS, the parties to the Prior Agreement desire to further amend and restate the Prior Agreement: NOW, THEREFORE, in consideration of the terms and conditions contained herein, and of any extensions of credit heretofore, now or hereafter made by Lenders, the parties hereto agree as follows: SECTION 1. DEFINITIONS 1.1 Certain Defined Terms. When used herein, the following terms shall --------------------- have the following meanings: "Adjusted Cash Flow": For any twelve-month period, shall be the sum of (i) ------------------ parent's consolidated net income (after income taxes but before any gains from the sale or other disposition of any company-owned restaurant units the write- down of which occurred on January 30, 1996 and was included in the $13,875,248 pre-tax accounting charge incurred by Parent for such period) and (ii) all noncash charges (including, but not limited to, deferred taxes, depreciation, amortization of goodwill and write-down of assets); less an annual capital expenditure allowance equal to the product of the number of company-owned restaurant units opened at least one full calendar year at the end of such period times $32,000. For any twelve-month period that includes the date that a one-time charge is incurred by Parent in connection with the settlement of the Bright Litigation, the amount of such charge (not to exceed $500,000) shall be excluded from the foregoing computation, to the extent such charge has been deducted from net income; provided that such charge shall be excluded from such computation only if (i) the date of such settlement is prior to June 30, 1997, (ii) the date of such settlement is within ten (10) days after receipt of the arbitrator's final decision in the Bright Litigation, and (iii) the Litigation Prepayment is timely made by Co-obligors as provided in Section 4.2(c) hereof. "Agent": Bank One, Texas, N.A., in its capacity as agent for the Lenders ----- hereunder, and its successors and assigns in such capacity. "Agreement": This Amended and Restated Loan Agreement, including all --------- Exhibits and Schedules hereto, as the same may be from time to time amended, modified or supplemented. "Amendment Date": The date this Amended and Restated Loan Agreement is -------------- executed by the parties. "Applicable Rate": See Section 4.6(c) of this Agreement. --------------- "Asset Sale Prepayment": See Section 4.2(c) of this Agreement. --------------------- "Bankruptcy Code": Title 11 of the United States Code, as in effect from --------------- time to time, or any successor thereto. "Borrowing Agent": Parent or such other person or entity designated in --------------- writing by the Co-obligors, each of whom is hereby authorized by each Co-obligor to bind such Co-obligor as its agent in all matters relating to this Agreement and the Loans. "Breakage Loss": With respect to a prepayment of any Fixed Rate Revolving ------------- Loan on a day other than the last day of the Interest Period related thereto, except under those circumstances expressly provided in this Agreement wherein a Co-obligor is not liable therefor, any loss, cost or expense incurred by any Lender as a result of the timing of such payment, including the interest which, but for such payment, such Lender would have earned in respect of such principal amount so paid for the remainder of the Interest Period applicable to such sum, less the amount, if any, actually earned by such Lender from relending such principal amount during the remainder of the Interest Period applicable thereto. Breakage Loss shall represent compensation to the Lenders for the privilege herein granted to the Co-obligors under certain circumstances to repay a Fixed Rate Revolving Loan prior to the last day of the Interest Period therefor, in the nature of a prepayment penalty. "Bright Litigation": The existing dispute between Parent and Bright-Kaplan ----------------- International Corporation, a franchisee of Parent. "Business Day": A day on which commercial banks are open for business in ------------ Dallas, Texas. 2 "CD Interest Period": With respect to any CD Loan, (i) initially, the ------------------ period commencing on the date such CD Loan is made and ending 30, 60 or 90 days thereafter as selected by the Borrowing Agent pursuant to Section 4.5(c) and thereafter, (ii) each period commencing on the last day of the next preceding Interest Period applicable to such CD Loan and (in each case) ending 30, 60 or 90 days thereafter, as selected by the Borrowing Agent pursuant to Section 4.5(c); provided that if any CD Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day. "CD Loans": Any Revolving Loan bearing interest at the CD Rate, or which -------- would bear interest at such rate if the Maximum Rate were not in effect at a particular time. "CD Margin": shall mean, on any date, the applicable percentage set forth --------- below, based on the Fixed Charge Coverage Ratio of Parent as of its most recently ended fiscal quarter for which financial statements in compliance with Section 8.3(b) hereof have been supplied to Lenders: Fixed Charge Coverage Ratio Percentage --------------------- ---------- Greater than or equal to 2.5 2.00% 1.50 to 2.49 2.50% Equal to or less than 1.49 3.00% "CD Quoted Rate": With respect to each CD Loan for each CD Interest -------------- Period, the rate of interest per annum then most recently published or reported by Telerate Systems, Inc. through its Telerate Financial Information Network service, by reference to the screen page designated Daily Selected Money Market Rates (page 120) (or any equivalent successor to such page or service selected by the Agent and approved by the Borrowing Agent) for certificates of deposit in the secondary market, or if no such rate is published or reported (and no such equivalent rate or service is mutually agreed upon), then the per annum rate most recently published in The Wall Street Journal in the "Money Rates" column, ----------------------- as the typical rate per annum offered by large U.S. money center commercial banks in the secondary certificate of deposit market, in either case two (2) Business Days before the beginning of such CD Interest Period, for a face value in the amount equal or comparable to the principal amount of the corresponding CD Loan and for a period of time equal or comparable to the length of such CD Interest Period, expressed as a percentage rounded to the nearest one hundredth (.01) of one percent (1%). "CD Rate": With respect to each CD Loan for each CD Interest Period a rate ------- per annum equal to the following: 3 [CD Quoted Rate] + FDIC Percentage + CD Margin ---------------------------- [1.00-CD Reserve Requirement] "CD Reserve Requirement": On any day, that percentage (expressed as a ---------------------- decimal) which is in effect on such day, as provided by the Board of Governors of the Federal Reserve System (or any successor governmental body) applied for determining the maximum reserve requirements (including, without limitation, any basic, supplemental and emergency reserves) under Regulation D applicable to nonpersonal time deposits in units of $100,000 or more having a maturity comparable to the related CD Interest Period (issued by member banks of the Federal Reserve Bank of Dallas having time deposits exceeding one billion dollars) rounded to the nearest one hundredth (.01) of one percent (1%). "Change of Control": Shall be deemed to mean any of the following events: ----------------- (i) a merger or consolidation of Parent with any Person if the Parent shall not be the surviving or continuing corporation, (ii) a sale, transfer or other disposition by the Parent to any Person of all or substantially all of the assets of the Parent, or (iii) any tender offer, sale of voting securities by the Parent or other event or series of events as a result of which more than 66-2/3% of the voting securities of Parent is acquired, directly or indirectly, by any Person or group (as defined in Section 13(d)(3) of the Securities and Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder as in effect on the Amendment Date). "Code": The Internal Revenue Code of 1986, as amended from time to time. ---- "Co-obligor": Each of Spaghetti Warehouse, Inc., a Texas corporation, ---------- Spaghetti Warehouse Service Corporation, a Delaware corporation, SWEATAC, Inc. a Delaware corporation, Spaghetti Warehouse of Texas, L.P., a Delaware limited partnership, Spaghetti Warehouse of Ohio, Inc., a Delaware corporation and any other subsidiary of Parent that (with the prior written consent of Lenders) executes and delivers a counterpart signature page of this Agreement thereby becoming bound as a "Co-obligor" hereunder and "Co-obligors" shall mean all of the foregoing. "Consolidated Tangible Net Worth": See Section 8.1(g) of this Agreement. ------------------------------- "Default": Any event which with the passage of time or the giving of ------- notice or both will be an Event of Default. "EBITDA:" The consolidated net earnings of Parent (i) before (A) provision ------ for income taxes, and (B) any effect during each period within the initial twelve-month period of any change in accounting principles promulgated by the FASB becoming effective after the Amendment Date, (ii) for each twelve-month period that includes (A) January 30, 1996, before the effect of a pre-tax accounting charge of $13,875,248 in connection with the write-down of certain underperforming assets on January 30, 1996, and (B) the date (but no later than July 1, 1997) on which the existing Norfolk, Virginia restaurant is sold to a third party, before the effect of any loss (in an amount not to exceed $744,000) realized on such sale, and (iii) before interest expense, depreciation and 4 amortization, in each case, for the immediately preceding twelve-month period. For any twelve-month period that includes the date that a one-time charge is incurred by Parent in connection with the settlement of the Bright Litigation, the amount of such charge (not to exceed $500,000) shall be excluded from the foregoing computation, to the extent such charge has been deducted from net income; provided that such charge shall be excluded from such computation only if (i) the date of such settlement is prior to June 30, 1997, (ii) the date of such settlement is within ten (10) days after receipt of the arbitrator's final decision in the Bright Litigation, and (iii) the Litigation Prepayment is timely made by Co-obligors as provided in Section 4.2(c) hereof. "Environmental Laws": Any and all laws, statutes, ordinances, rules and ------------------ regulations, or orders or determinations of any governmental authority pertaining to the environment or to health and safety in the workplace, in any and all jurisdictions in which Parent or any other Co-obligor or their respective subsidiaries are conducting business, or where any real property of Parent or any other Co-obligor or their respective subsidiaries is located or where any hazardous substances generated by or disposed of by Parent or any other Co-obligor or their respective subsidiaries are located, including, without limitation, the Occupational Safety & Health Act of 1970, as amended, the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, and other environmental conservation or protection laws. The terms "hazardous substance," "release" and "threatened release" have the meanings specified in CERCLA, and the terms "solid waste," "hazardous waste," and "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, that in the event either CERCLA or RCRA is amended so -------- ------- as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment with respect to all provisions of this Agreement, and in the event that either CERCLA or RCRA is amended so as to narrow the meaning of any term defined thereby, such narrower meaning shall apply during the effective period of such amendment, provided further that, to the extent the laws of the state in which any real property of Parent or any other Co-obligor or their respective subsidiaries is located have a meaning for "hazardous substance," "release," "solid waste," "hazardous waste" or "disposal" which is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply. "ERISA": The Employee Retirement Income Security Act of 1974, as amended ----- from time to time. "ERISA Affiliate": See Section 7.9 of this Agreement. --------------- "Event of Default": See Section 9.1 of this Agreement. ---------------- "FASB": Financial Accounting Standards Board or any successor entity. ---- 5 "FDIC Percentage": On any date, the net annual assessment rate (expressed --------------- as a percentage rounded to the nearest one hundredth (.01) of one percent (1%)) which is in effect on such day (under the regulations of the Federal Deposit Insurance Corporation or any successor) for determining the assessments paid by a Lender to the Federal Deposit Insurance Corporation (or any successor) for insuring time deposits made in dollars at such Lender's principal offices in Dallas, Texas. "Fixed Charge Coverage Ratio": Ratio of (x) the sum of (i) Parent's --------------------------- consolidated net income for the twelve-month period then ended (before (A) income taxes, (B) any effect during each period within the initial twelve-month period of any change in accounting principles promulgated by the FASB becoming effective after the Amendment Date, and (C) any gains from the sale or other disposition of any company-owned restaurant units the write-down of which occurred on January 30, 1996 and was included in the $13,875,248 pre-tax accounting charge incurred by Parent for such period), (ii) all interest charges paid or accrued ("Interest Expense"), and (ii) all rentals and other charges under capitalized or operating leases ("Lease Expense"), over (y) the sum of (i) Interest Expense, and (ii) Lease Expense; provided, however, that for each -------- ------- twelve-month period that includes (Y) January 30, 1996, consolidated net income shall be calculated before the effect of a pre-tax accounting charge of $13,875,248 in connection with the write-down of certain underperforming assets on January 30, 1996, and (Z) the date (but no later than July 1, 1997) on which the existing Norfolk, Virginia restaurant is sold to a third party, consolidated net income shall be calculated before the effect of any loss (in an amount not to exceed $744,000) realized on such sale. For any twelve-month period that includes the date that a one-time charge is incurred by Parent in connection with the settlement of the Bright Litigation, the amount of such charge (not to exceed $500,000) shall be excluded from the foregoing computation, to the extent such charge has been deducted from net income; provided that such charge shall be excluded from such computation only if (i) the date of such settlement is prior to June 30, 1997, (ii) the date of such settlement is within ten (10) days after receipt of the arbitrator's final decision in the Bright Litigation, and (iii) the Litigation Prepayment is timely made by Co-obligors as provided in Section 4.2(c) hereof. "Fixed Rate Revolving Loan:" A LIBOR Loan or a CD Loan. ------------------------- "Funded Debt": The Obligations and all indebtedness and other obligations ----------- which in accordance with generally accepted accounting principles should be carried on the consolidated balance sheet of Parent as liabilities of Parent or its subsidiaries, and in any event shall include (i) obligations of Parent or its subsidiaries for borrowed money or which have been incurred in connection with the acquisition of property or assets, (ii) obligations secured by any Lien upon the property or assets of Parent or any of its subsidiaries, and (iii) the full face amount of all issued letters of credit (regardless of whether such letters have been drawn upon) issued for the benefit of Parent of any of its Subsidiaries, provided, however, that trade payables incurred in the ordinary -------- ------- course of business shall be excluded therefrom. Co-obligors may elect to reduce the amount of the Obligations for purposes of the foregoing computation of Funded Debt at the end of any fiscal quarter ending on or before December 31, 1996 by an amount not to exceed the stated amount of a certificate or certificates of deposit, provided that within two (2) Business Days after the earlier of (i) the date any Co-obligor becomes aware that it will in fact be necessary to reduce the amount of the Obligations in the foregoing computation in order to avoid breaching a covenant contained in this 6 Agreement, or (ii) the date financial statements for such quarter are to be provided to Lenders in accordance with the terms of Section 8.3 hereof, Co- obligors shall apply all or such portion of such certificate or certificates of deposit to the unpaid principal balance of the Loans as may be necessary to avoid any such breach. Any such certificate or certificates of deposit, in order to be eligible for the foregoing purposes, shall be (i) issued by Bank One, Texas, N.A., (ii) irrevocably pledged to Lenders as additional security for the Loans on or before the last day of such quarter, and (iii) thereafter continuously so pledged until such time as it is applied to the principal amount of the Loans or it is established to the satisfaction of Lenders that Co- obligors will not be in breach of any such covenant. "Interest Period": A LIBOR Interest Period or a CD Interest Period. --------------- "Lenders": The banks listed on the signature pages of this Agreement and ------- their respective successors-in-interest as owners and holders of any Revolving Note or Term Note. "LIBOR Interest Period": With respect to any LIBOR Loan, (i) initially, --------------------- the period commencing on the date such LIBOR Loan is made and ending one, three or six months thereafter as selected by the Borrowing Agent pursuant to Section 4.5(c), and thereafter, (ii) each period commencing on the last day of the next preceding Interest Period applicable to such LIBOR Loan and ending one, three or six months thereafter, as selected by the Borrowing Agent pursuant to Section 4.5(c); provided, that if any LIBOR Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day. Any LIBOR Interest Period pertaining to a LIBOR Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "LIBOR Loans": Any Revolving Loan bearing interest at the LIBOR Rate, or ----------- which would bear interest at such rate if the Maximum Rate were not in effect at a particular time. "LIBOR Margin" shall mean, on any date subsequent to June 30, 1996, the ------------ applicable percentage set forth below, based on the Fixed Charge Coverage Ratio of Parent as of its most recently ended fiscal quarter: Fixed Charge Coverage Ratio Percentage --------------------- ---------- Greater than or equal to 2.5 2.00% 1.50 to 2.49 2.50% Equal to or less than 1.49 3.00% 7 "LIBOR Quoted Rate": With respect to each LIBOR Loan for each LIBOR ----------------- Interest Period, the rate of interest per annum then most recently published or reported by Telerate Systems, Inc. through its Telerate Financial Information Network service, by reference to the screen page designated British Bankers Association Interest Settlement Rates (page 3750) (or any equivalent successor to such page or service selected by the Agent and approved by the Borrowing Agent) for Eurodollar deposits, or if no such rate is published or reported (and no such equivalent rate or service is mutually agreed upon), then the rate of interest most recently published in The Wall Street Journal in the "Money Rates" ----------------------- column as the average rate per annum at which Eurodollar deposits are offered by major banks in the London Interbank Eurodollar Market, in either case two (2) Business Days before the beginning of such LIBOR Interest Period in the amount equal or comparable to the principal amount of the corresponding LIBOR Loan, and for a period of time equal or comparable to the length of such LIBOR Interest Period expressed as a percentage rounded to the nearest one hundredth (.01) of one percent (1%). "LIBOR Rate": With respect to each LIBOR Loan for each LIBOR Interest ---------- Period, a rate per annum equal to the sum of (i) the LIBOR Quoted Rate, plus (ii) the LIBOR Margin. "Lien": Any mortgage, lien (statutory or other), pledge, hypothecation, ---- assignment, security interest, title retention arrangement, encumbrance, or other security agreement of any kind or nature whatsoever (including without limitation, any conditional sale or other title retention agreement, any sale of receivables or any capital lease), and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing. "Litigation Prepayment": See Section 4.2(c) of this Agreement. --------------------- "Loans": All Revolving Loans and Term Loans. ----- "Maximum Rate": The maximum rate of interest, if any, permitted by ------------ applicable law. "Obligations": All of each Co-obligor's liabilities, obligations and ----------- indebtedness owing to Lenders of any and every kind and nature (including, without limitation, the obligations of the Co-obligors under the indemnities contained in Section 8.1(c) of this Agreement, the fees and expenses described in Section 11.2 of this Agreement, interest, charges, expenses, reasonable attorneys' fees and other sums chargeable to Co-obligors by the Lenders, each Co-obligor's joint and several Obligations with respect to the Obligations of each of the other Co-obligors and future advances made to or for the benefit of any Co-obligor), arising under this Agreement, the Revolving Notes and the Term Notes, whether heretofore, now or hereafter owing, arising, due or payable from Co-obligors to Lenders and howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed or otherwise, including obligations of performance. "Permitted Liens: Any of the following: --------------- 8 (a) liens for property taxes and assessments or governmental charges or levies and liens securing claims or demands of mechanics and materialmen, as long as such assessments and claims are timely paid and discharged or the validity, applicability or amount thereof is being contested in good faith by appropriate proceedings which will prevent the forfeiture or sale of any property of a Co-obligor or any interference with the use thereof by a Co- obligor; (b) liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which the Co-obligor shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured; (c) liens, charges, encumbrances and priority claims incidental to the conduct of business or the ownership of properties and assets (including warehousemen's and attorneys' liens and statutory landlords' liens) and deposits, pledges or liens to secure the performance of bids, tenders or trade contracts, or to secure statutory obligations, surety or appeal bonds or other liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money, provided in each case, the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate proceedings; (d) minor survey exceptions or minor encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which are necessary for the conduct of the activities of a Co-obligor or which customarily exist on properties of corporations engaged in similar activities and similarly situated and which do not in any event materially impair their use in the operation of the business of such Co-obligor; (e) mortgages, conditional sale contracts, security interests or other arrangements for the retention of title (including capitalized leases) incurred after the date hereof given to secure the payment of the purchase price incurred in connection with the acquisition of property by a Co-obligor, including liens existing on such property at the time of acquisition thereof or at the time of acquisition by a Co-obligor of any business entity then owning such property, whether or not such existing liens were given to secure the payment of the purchase price of the property to which they attach, provided that (i) the lien or charge shall attach solely to the property acquired or purchased, (ii) at the time of acquisition of such property, the aggregate amount remaining unpaid on all indebtedness secured by liens on such property whether or not assumed by a Co-obligor shall not exceed an amount equal to the lesser of the total purchase price or fair market value at the time of acquisition of such property (as determined in good faith by the Board of Directors of the Parent), and (iii) all such indebtedness shall have been incurred within the applicable limitations provided in Section 8.2(a) hereof; 9 (f) liens for the benefit of Lenders resulting from this Agreement; and (g) liens in addition to those permitted by paragraphs (a) through (e) above securing indebtedness of a Co-obligor specifically identified on Schedule A hereto. "Person": Any individual, sole proprietorship, partnership, joint venture, ------ trust, unincorporated organization, association, corporation, institution, entity, party or government (whether national, federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Plans": See Section 7.9 of this Agreement. ----- "Prime Rate": For any period, the greatest per annum rate of interest then ---------- most recently published in The Wall Street Journal in the "Money Rates" column ----------------------- as the base rate on corporate loans at large U.S. money center commercial banks. Co-obligors hereby acknowledge that the Prime Rate in effect from time to time merely serves as a basis upon which effective rates of interest are calculated for loans making reference thereto and that such Prime Rate may not be the lowest or best rate at which interest is calculated or credit is extended by the Lenders. "Prime Rate Loan": Any Revolving Loan bearing interest at the Prime Rate, --------------- or which would bear interest at such rate if the Maximum Rate were not in effect at a particular time. "Reportable Event": Any of the events set forth in Section 4043(b) of ---------------- ERISA or the regulations thereunder. "Revolving Commitment": The several agreements of each of the Lenders to -------------------- make Revolving Loans to Co-obligors pursuant to Section 2.1 of this Agreement. "Revolving Commitment Period": The period from and including the Amendment --------------------------- Date to (but not including) the Revolving Commitment Termination Date. "Revolving Commitment Termination Date": July 1, 1998, or such other date ------------------------------------- on which the Revolving Commitment is terminated pursuant to the provisions hereof. "Revolving Loan": See Section 2.1 of this Agreement. -------------- "Revolving Note": See Section 2.2 of this Agreement. -------------- "Section 9.3 Event of Default": See Section 9.3 of this Agreement. ---------------------------- "Term Loan": See Section 3.1 of this Agreement. --------- 10 "Term Loan Margin" shall mean, on any date subsequent to June 30, 1996, ---------------- the applicable percentage set forth below, based on the Fixed Charge Coverage Ratio of Parent as of its most recently ended fiscal quarter: Fixed Charge Coverage Ratio Percentage --------------------------- ---------- Greater than or equal to 1.15 1.50% 1.14 1.60% 1.13 1.70% 1.12 1.80% 1.11 1.90% 1.10 2.00% 1.09 2.10% 1.08 2.20% 1.07 2.30% 1.06 2.40% 1.05 2.50% 1.04 2.60% 1.03 2.70% 1.02 2.80% 1.01 2.90% 1.00 3.00% 0.99 3.10% 0.98 3.20% 0.97 or less 3.25% "Term Loan Reference Rate": Five and two hundred ninety seven one- ------------------------ hundredths percent (5.297%) per annum. "Term Note": See Section 3.2 of this Agreement. --------- "Term Loan Rate": With respect to each Term Loan, a rate per annum -------------- equal to the sum of (i) the Term Loan Reference Rate, plus (ii) the Term Loan Margin. 1.2 Accounting Terms. All accounting terms defined in this Section 1 ---------------- or used in this Agreement not defined in this Section 1 shall, except as otherwise provided for herein, be construed in accordance with generally accepted accounting principles applied on a consistent basis. 11 SECTION 2. REVOLVING LOANS 2.1 Revolving Credit Commitment. Subject to the terms and conditions --------------------------- hereof, and upon satisfaction of the conditions precedent set forth in Section 6 hereto, the Lenders severally agree to make revolving credit loans (the "Revolving Loans") to the Co-obligors at the Borrowing Agent's request from time --------------- to time during the Revolving Commitment Period; provided, however, that the -------- ------- aggregate unpaid principal balance of all Revolving Loans to all Co-obligors outstanding at any one time shall not exceed $5,000,000. Each Lender shall participate on an equal pro rata basis in all Revolving Loans. During the Revolving Commitment Period, the Co-obligors may use the Revolving Commitment by borrowing, repaying in accordance with the provisions of this Agreement in whole or in part, and reborrowing, all in accordance with the terms and conditions of this Agreement. Each Revolving Loan will be either a Prime Rate Loan, a CD Loan or a LIBOR Loan as the Borrowing Agent may request pursuant to Section 4.5. 2.2 Letters of Credit. In addition to the Revolving Commitment, up ----------------- to an aggregate of $900,000 in Revolving Loans may be used to support letters of credit issued by Lenders on behalf of the Co-obligors with a maturity date not to extend beyond the Revolving Commitment Termination Date. In connection with such letters of credit, Co-obligors agree that: (a) any draw under a letter of credit may, at the option of Lenders, be added to the principal amount outstanding under the Revolving Loans; such sum to bear interest and to be due in the same manner as the Revolving Loans; (b) if there is an Event of Default, Co-obligors will fully reimburse Lenders upon demand for any subsequent draw made under any outstanding letters of credit within five (5) days of each such draw; (c) the issuance of any letter of credit or any amendment to a letter of credit is subject to Lenders' written approval, the payment of Lenders' issuance and/or other fees Lenders may charge for issuing or processing letters of credit in accordance with the schedule of fees established from time to time by each Lender and completion of such documentation as Lenders may reasonably require; and (d) any reduction from time to time in the aggregate amount of letters of credit issued by Lenders under this Agreement shall permanently reduce the amount available under this Section 2.2 for the support of letters of credit. 2.3 Promissory Notes for Revolving Loans. All Revolving Loans made ------------------------------------ by each Lender shall be evidenced by a single master promissory note executed by all of the Co-obligors, substantially in the form of Exhibit A attached hereto --------- with appropriate insertions (the "Revolving Note"), payable to the order of such -------------- Lender, evidencing the joint and several obligation of each of the Co-obligors to pay the aggregate unpaid principal amount of all Revolving Loans made by such Lender, together with interest thereon as prescribed by this Agreement. Each Revolving Note shall (i) be in the stated principal amount of $2,950,000, (ii) be dated the Amendment Date, (iii) be stated to mature on July 1, 1998, and (iv) bear interest for the period from the date thereof on the unpaid principal amount of all Revolving Loans from time to time outstanding at a fluctuating rate per annum as provided in accordance with this Agreement. 2.4 Revolving Commitment Fees. The Co-obligors agree to pay Lenders ------------------------- a commitment fee during the Revolving Commitment Period computed at a rate per annum (based on a year of 365 12 or 366 days, as the case may be) equal to three-eights of one percent (3/8%) of the average daily unborrowed amount of the Revolving Commitment. For purposes of the foregoing computation, the aggregate stated amount of all outstanding letters of credit issued by Bank One, Texas, N.A., or its successors or assigns, under which any of the Co-obligors is an account party shall be deemed to be borrowed. Payments of such fee shall be payable quarterly in arrears on the last day of each March, June, September and December during the Revolving Commitment Period, and on the Revolving Commitment Termination Date. The Agent shall be entitled to sixty percent (60%) of each payment of this commitment fee. SECTION 3. TERM LOANS 3.1 Term Loan Commitment. Subject to the terms and conditions of the -------------------- Prior Agreement, the Lenders have made term loans (the "Term Loans") to the Co- ---------- obligors in an aggregate amount equal to $15,000,000. On or before the Amendment Date, the aggregate unpaid principal balance of the Term Loans shall be reduced by the sum of: (i) $3,550,000, plus, (ii) the Asset Sale Prepayment for all sales prior to the Amendment Date. Each Lender shall participate on a pro rata basis in the Term Loans in accordance with its respective share of the Revolving Commitment as indicated on the signature pages of this Agreement. 3.2 Term Notes. Each Term Loan shall be evidenced by a master ---------- promissory note ("the Term Note") executed by all of the Co-obligors which shall --------- (i) be dated as of the Amendment Date, (ii) be in the principal amount of $5,725,000, (iii) bear interest for the period from the date thereof on the unpaid principal balance of the Term Loan outstanding at a fixed rate as provided in accordance with this Agreement and (iv) be in the form of Exhibit B --------- attached hereto with appropriate insertions, payable to the order of each Lender, evidencing the joint and several obligations of each Co-obligor to pay the aggregate unpaid principal of, and interest on, each Term Loan in accordance with the provisions of this Agreement. 3.3 Amendment Fees. The Co-obligors agree to pay Lenders a one time -------------- amendment fee of $77,076.56, upon execution of and delivery of this Agreement, to be equally divided among the Lenders. SECTION 4. TERMS OF REVOLVING AND TERM LOANS 4.1 Revolving Credit Loans. With respect to each proposed Revolving ---------------------- Loan, Agent shall receive irrevocable notice from the Borrowing Agent by 11:00 a.m. on a Business Day prior to the advance by the Lenders of the proceeds of such Revolving Loan, as follows: Prime Rate Loan One (1) full Business Day CD Loan Two (2) full Business Days LIBOR Loan Three (3) full Business Days 13 No Revolving Loan shall be in an amount less than two hundred fifty thousand dollars ($250,000) and, absent the election for such Revolving Loan to be advanced as a Fixed Rate Loan in accordance with Section 4.5 hereof, each Revolving Loan shall be a Prime Rate Loan. 4.2 Principal Payments. ------------------ (a) Revolving Loans. The unpaid principal amount of each Revolving --------------- Loan, and all accrued and unpaid interest thereon, shall be due and payable on the earliest of: (i) the last day of the applicable Interest Period, in the case of a Fixed Rate Revolving Loan, (ii) the Revolving Commitment Termination Date, or (iii) upon the acceleration of the Obligations pursuant to Section 9.2 of this Agreement. (b) Term Loans. Unless the maturity of the Term Loans has been ---------- accelerated pursuant to Section 9.2 of this Agreement, the unpaid principal amount of the Term Loans on the Amendment Date shall be payable in twenty (20) consecutive, quarterly installments commencing on October 1, 1996, and continuing on the first day of each January, April, July or October thereafter; and on July 1, 2001 the entire unpaid principal balance of the Term Loans shall be due and payable in full. Each quarterly installment of principal shall be in an amount equal to $522,500 (subject to adjustment as set forth in Section 4.2(e) below); provided, however, that the amount of the final installment shall be in an amount equal to the entire unpaid principal balance of the Term Loans. (c) Mandatory Prepayments. On or before the Amendment Date the Co- --------------------- obligors shall make a payment equal to the sum of (i) all accrued and unpaid interest on the principal amount of the Term Loan prepaid, plus (ii) $3,550,000, plus (iii) an initial Asset Sale Prepayment (as defined below). Commencing on the Amendment Date, immediately upon the consummation of the sale of any of their restaurant units, Co-obligors shall make a payment equal to the sum of (i) 50% of the net cash proceeds from such sale (to be applied to the outstanding principal amount of the Term Loans) and (ii) all accrued and unpaid interest on the principal amount prepaid (an "Asset Sale Prepayment"); provided that on the Amendment Date (y) the first $250,000 of such proceeds shall be applied to the outstanding principal amount of the Revolving Loans, and (z) the initial Asset Sale Prepayment shall be based on sales of the following properties consummated prior to the Amendment Date: Rochester, Buffalo and Austin. On or before June 30,1997 and within ten (10) days after receipt of the arbitrator's final decision in the Bright Litigation, Co-obligors shall make a payment equal to $1,000,000 less one-half ( 1/2) of the amount, if any, of the arbitrators award in the Bright Litigation (the "Litigation Prepayment"). Each Asset Sale Prepayment and the Litigation Prepayment shall be applied to the installments of principal coming due under the Term Loan in reverse chronological order and subsequent installments of principal under the Term Loans shall be adjusted in accordance with Section 4.2(e) hereof. (d) Optional Prepayments. Each Co-obligor shall have the right to -------------------- prepay the outstanding principal of, and accrued and unpaid interest on, any Term Loan and Prime Rate Loan at any time. A Co-obligor may not prepay any Fixed Rate Revolving Loan before the expiration of 14 the applicable Interest Period for such Fixed Rate Revolving Loan unless (i) otherwise set forth in Sections 5.2 and 5.4 of this Agreement, or (ii) such prepayment is of the entire outstanding principal balance of, and accrued and unpaid interest on, such Fixed Rate Revolving Loan and no other Fixed Rate Revolving Loans are to be advanced or remain outstanding immediately after such prepayment and is accompanied by reimbursement for any Breakage Loss in accordance with Section 5.4 of this Agreement. (e) Adjustment of Quarterly Installments. Upon the occurrence of an ------------------------------------ Asset Sale Prepayment, the remaining quarterly installments of principal of the Term Loans shall be adjusted to an amount (rounded to the next one dollar) that will amortize the then remaining unpaid principal amount of the Term Loans over the remaining quarterly installments pursuant to Section 4.2(b) of this Agreement. Upon the occurrence of the Litigation Prepayment, if the amount of the Litigation Prepayment is less than $1,000,000 the remaining quarterly installments of principal of the Term Loans shall be increased to an amount (rounded to the next one dollar) that will amortize the difference over the remaining quarterly installments pursuant to Section 4.2 (b) of this Agreement. 4.3 Interest Payments. Accrued and unpaid interest on outstanding ----------------- Loans shall be due and payable (i) quarterly, on the first day of each consecutive January, April, July and October, (ii) with respect to the principal amount of any Loan prepaid, at the time of any optional or mandatory prepayment of such Loan, and (iii) at maturity. 4.4 Interest. -------- (a) Prime Rate Loans. The unpaid principal balance from day to day ---------------- outstanding of each Revolving Loan for which no other interest rate is permitted or provided for under this Agreement (such Loan, a "Prime Rate Loan") shall bear interest at a rate per annum from day to day equal to the lesser of (i) the Prime Rate or (ii) the Maximum Rate. (b) LIBOR Loans. If the Borrowing Agent shall have elected to pay ----------- interest on any Revolving Loan at a LIBOR Rate (such Loan, a "LIBOR Loan"), the Co-obligors shall pay interest on such LIBOR Loan to the Lender for the Interest Period applicable thereto at a rate per annum which equals the lesser of (i) the LIBOR Rate or (ii) the Maximum Rate. (c) CD Loans. If the Borrowing Agent shall have elected to pay -------- interest on any Revolving Loan at a CD Rate (such Loan, a "CD Loan"), the Co- obligors shall pay interest on such CD Loan to the Lender for the Interest Period applicable thereto at a rate per annum which equals the lesser of (i) the CD Rate or (ii) the Maximum Rate. (d) Term Loans. Each Term Loan shall bear interest at a fixed rate ---------- per annum equal to the lesser of (i) the Term Loan Rate or (ii) the Maximum Rate. (e) Default Rate. Upon the acceleration of any Loan after the ------------ occurrence of any Event of Default, the principal balance of such Loan and (to the extent permitted by applicable law) 15 accrued, unpaid interest thereon at the time of such acceleration may, at the Lenders' option, bear interest at a rate per annum which from day to day shall equal the lesser of (i) Maximum Rate, or (ii) the Prime Rate plus five percent (5%) per annum. 4.5 Election of LIBOR Rate and CD Rate. ---------------------------------- (a) The Borrowing Agent shall have the right from time to time, subject to the terms and conditions set forth in this Agreement, to elect to have a LIBOR Rate or a CD Rate apply to a Revolving Loan (such an election in the case of a LIBOR Loan, a "LIBOR Rate Election," and in the case of a CD Loan, a "CD Rate Election"). Notwithstanding anything herein to the contrary, (i) no LIBOR Rate Election or CD Rate Election may be made by the Borrowing Agent without the Lenders' consent if an Event of Default has occurred and is continuing, (ii) no LIBOR Rate Election or CD Rate Election may be made by the Borrowing Agent if the Lenders may not lawfully maintain the LIBOR Rate or CD Rate under all applicable laws, and (iii) no Interest Period selected for a Fixed Rate Revolving Loan shall end after the Revolving Commitment Termination Date. (b) Any number of Revolving Loans may be outstanding at any time, each with a different interest rate and, if a Fixed Rate Revolving Loan, a different Interest Period. (c) In order to make a LIBOR Rate Election or a CD Rate Election, the Borrowing Agent shall, no later than 11:00 a.m. (Dallas, Texas time), three (in the case of a LIBOR Election) or two (in the case of a CD Rate Election) Business Days prior to the commencement of the applicable Interest Period the Borrowing Agent proposes to select pursuant to such LIBOR Rate Election or CD Rate Election, give the Agent telephonic notice (promptly confirmed in writing) to the effect that the Borrowing Agent is making such LIBOR Rate or CD Rate Election. Such notice shall also specify the commencement date and duration of the Interest Period applicable thereto. Except as otherwise provided in this paragraph (b), telephonic notice (whether or not so confirmed) shall be irrevocable when given to the Agent. Upon the Agent's receipt of such notice, the Agent shall, no later than 11:00 a.m. (Dallas, Texas time) two Business Days after Agent receives such notice, determine the LIBOR Rate for such LIBOR Interest Period, or CD Rate for such CD Interest Period, applicable to the Loan, and notify the Lenders and the Borrowing Agent of such LIBOR Rate or CD Rate. Such LIBOR Rate or CD Rate shall apply to such LIBOR Loan or CD Loan during such Interest Period. Each LIBOR Rate Election and CD Rate Election made by the Borrowing Agent shall be binding upon all Co-obligors. 4.6 Interest; Computation, Savings Clause. ------------------------------------- (a) Interest under this Agreement shall be calculated on the basis of a year of 365 days or 366 days (as the case may be) and the actual number of days elapsed during the period for which interest is calculated. Interest shall be so calculated with respect to each day during such period by multiplying the outstanding principal balance of the Loan at the close of business on such day by a daily interest factor, which interest factor shall be calculated by dividing the interest rate per annum in effect on such day with respect to the Loan by 365 or 366 (as the case may be). For 16 such purpose, a day includes (i) the date on which such Loan is advanced by a Lender and (ii) the day on which any interest or principal due under this Agreement is paid by a Co-obligor if federal funds immediately available to the Agent in the place designated for such payment are not received by the Agent by 11:00 a.m. (Dallas, Texas time). Interest at a LIBOR Rate or CD Rate shall be calculated as to each Interest Period from and including the first day thereof to and excluding the last day thereof. (b) It is the intention of the parties hereto to comply with applicable usury laws (now or hereafter enacted); accordingly, notwithstanding any provision to the contrary in this Agreement, the Revolving Notes, the Term Notes or any other document relating hereto, in no event shall this Agreement or any such other document require the payment or permit the collection of interest in excess of the maximum amount permitted by such laws. If from any circumstances whatsoever, fulfillment of any provision of this Agreement or of any other document pertaining hereto, shall involve transcending the limit of validity prescribed by law for the collection or charging of interest, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if from any such circumstances a Lender shall ever receive anything of value as interest or deemed interest by applicable law under this Agreement, the Revolving Notes, the Term Notes or any other document pertaining hereto or otherwise, an amount that would exceed the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the principal amount owing under the Revolving Notes, or the Term Notes or on account of any other indebtedness of any Co-obligor to such Lender, and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of such indebtedness, such excess shall be refunded to the Co-obligors. In determining whether or not the interest paid or payable with respect to any indebtedness of any Co-obligor to a Lender, under any specific contingency, exceeds the highest lawful rate, the Co-obligor and such Lender shall, to the maximum extent permitted by applicable law, (i) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (ii) amortize, prorate, allocate and spread the total amount of interest throughout the full term of such indebtedness, and/or (iii) allocate interest between portions of such indebtedness, to the end that no such portion shall bear interest at a rate greater than that permitted by applicable law. (c) Notwithstanding anything to the contrary in the Revolving Notes, the Term Notes or herein contained, in the event that the interest rate applicable to any Loan hereunder (the "Applicable Rate") should ever exceed the Maximum Rate, thereby causing the interest accruing on any of the indebtedness evidenced by the Note to be limited to such Maximum Rate, then any subsequent reduction in the Applicable Rate shall not reduce the rate of interest charged hereunder below the Maximum Rate until the total amount of interest accrued on such indebtedness equals the amount of interest which would have accrued on such indebtedness if the otherwise applicable rate had been in effect at all times in the period during which the rate charged thereon was limited to the Maximum Rate. 4.7 Use of Proceeds. All Loan proceeds shall be used by the Co- --------------- obligors (i) for the purchase or leasing of real estate for the location of additional restaurants of a Co-obligor and the construction, furnishing, equipping and pre-opening expenses for Spaghetti Warehouse concept 17 restaurants (either "warehouse" units or the new "prototype" units) thereon, (ii) for general corporate purposes, (iii) for the repurchase of shares of common stock of Parent to the extent permitted pursuant to Section 8.2(f), or (iv) for the making of loans and advances by a Co-obligor to any other Co- obligor, to be used for the purposes set forth in clause (i) above. In any case all Loan proceeds shall be used only for legal and proper purposes which are consistent with all applicable laws and statutes. 4.8 Manner of Payments. All payments made by Co-obligors to the ------------------ Lenders hereunder on account of principal, interest or otherwise shall be made not later than 11:00 a.m., Dallas, Texas time, to the Agent in Dallas, Dallas County, Texas, or at such other place as the Agent shall direct, in immediately available United States funds. If any payment by a Co-obligor under this Agreement, the Revolving Notes or the Term Notes is to be made on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time will in such case be included in computing interest in connection with such payment. 4.9 Joint and Several Obligations. Each Co-obligor acknowledges and ----------------------------- agrees by its execution of this Agreement, the Revolving Notes and the Term Notes and in consideration of Lenders making the Loans to Co-obligors and the availability of the proceeds of such loans to each Co-obligor as provided in Section 4.7 above, to be jointly and severally liable for each Loan and all other Obligations as a co-maker of each Revolving Note and Term Note, and that its obligations under this Agreement shall be primary, absolute and unconditional, irrespective and unaffected by (i) the lack of genuineness, validity, regularity, enforceability or any further amendment, extension or modification of any such Note, this Agreement or any other agreement or instrument to which the Co-obligors are or may be a party, (ii) the absence of any action to enforce any such Note or this Agreement or the waiver or consent by Lenders with respect to any provision thereof or hereof, (iii) the release of any Co-obligor from its Obligations under this Agreement, (iv) the insolvency, bankruptcy, arrangement, adjustment, composition, disability, dissolution or lack of authority of any Co-obligor, whether now or hereafter arising, (v) any action, omission, election or notice by the Borrowing Agent, or (vi) any other action or circumstance which might otherwise constitute a legal or equitable discharge or defense, it being agreed by the Co-obligors that their Obligations under this Agreement shall not be discharged except by payment and performance as provided herein. SECTION 5. SPECIAL PROVISIONS FOR FIXED RATE REVOLVING LOANS 5.1 Inadequacies of Loan Pricing. If, with respect to any Interest ---------------------------- Period for any Fixed Rate Revolving Loan, (i) a Lender determines that, by reason of circumstances affecting the interbank Eurodollar market generally, deposits in dollars (in the applicable amount) are not being offered to such Lender in the interbank Eurodollar market for such Interest Period, (ii) no timely quotations of the applicable CD Quoted Rate are offered to such Lender by certificate of deposit dealers as contemplated herein, or (iii) such Lender determines in good faith that the LIBOR Rate or CD Rate (as the case may be) will not adequately and fairly reflect the cost to such Lender of maintaining such a LIBOR Loan or CD Loan, such Lender may by notice to the Borrowing Agent (y) suspend the obligation of such Lender to make LIBOR Loans and/or CD Loans (as the case may 18 be) and (z) the Co-obligors shall convert any such outstanding Fixed Rate Revolving to a Prime Loan (or, if not so suspended, a LIBOR Loan or CD Loan) on the last day of the current Interest Period applicable to such Loan. 5.2 Illegality. If the adoption of any applicable law, rule or ---------- regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by a Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impracticable for such Lender to make, maintain or fund a Fixed Rate Revolving Loan, such Lender shall so notify the Borrowing Agent. Upon receipt of such notice, Co-obligors shall either (i) repay in full the then outstanding principal amount of any affected Fixed Rate Revolving Loan, together with accrued interest thereon, or (ii) convert the affected Fixed Rate Revolving Loan to another interest rate option on either (A) the last day of the then current Interest Period applicable to the affected Fixed Rate Revolving Loan if such Lender may lawfully continue to maintain and fund such Fixed Rate Revolving Loan to such day, or (B) immediately if such Lender may not lawfully continue to fund and maintain such Fixed Rate Revolving Loan to such day. 5.3 Increased Costs for Fixed Rate Loans. The following provisions ------------------------------------ shall apply with respect to Fixed Rate Revolving Loans: (a) If any governmental authority, central bank or other comparable authority, shall at any time modify any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System but excluding any reserve requirement included in the CD Reserve Requirement), special deposit, capital adequacy or similar requirement against assets of, deposits with or for the account of, or credit extended by, a Lender (collectively a "Reserve") existing on the Amendment Date or shall thereafter impose or deem applicable any additional Reserve, or shall impose on a Lender (or its Eurodollar lending office or the interbank Eurodollar market) any other condition affecting such Lender's Fixed Rate Revolving Loans, the Revolving Notes or Lender's obligation to make Fixed Rate Revolving Loans; and the result of any of the foregoing is to increase the cost to such Lender of making or maintaining its Fixed Rate Revolving Loans, or to reduce the amount of any sum received or receivable by such Lender under this Agreement or under the Revolving Notes by an amount deemed by such Lender to be material then, within five (5) days after demand by such Lender, Co-obligors shall pay to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction. A Lender shall promptly notify the Borrowing Agent of any event of which it has knowledge which will entitle such Lender to compensation pursuant to this Section 5.3. If a Lender demands compensation under this Section 5.3, then Co-obligors may at any time, upon at least five (5) Business Days' prior notice from the Borrowing Agent to such Lender, either (i) repay in full the then outstanding affected Fixed Rate Revolving Loan(s), together with accrued interest thereon to the date of prepayment, or (ii) convert such Fixed Rate Revolving Loans to another interest rate option in accordance with the provisions of this Agreement; provided, however, that Co- obligors shall not be liable for any Breakage Loss arising pursuant to such actions. 19 (b) If either (i) the introduction of, or any change in, or in the interpretation of, any law or regulation, or (ii) compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by a Lender or any corporation controlling such Lender and such Lender reasonably determines that the amount of such capital is increased by or based upon the existence of such Lender's advances hereunder or of such Lender's commitment to lend hereunder and other commitments of this type, then, upon demand by such Lender, the Co-obligors shall pay to such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's advances hereunder or of such Lender's commitment to lend hereunder. A certificate as to such amounts submitted to the Borrowing Agent by such Lender shall be conclusive and binding for all purposes, absent manifest error. 5.4 Payments Not At End of Interest Period. If the Co-obligors make -------------------------------------- any voluntary payment of principal with respect to any Fixed Rate Revolving Loan on any date other than the last day of the Interest Period applicable to such Fixed Rate Revolving Loan, then unless otherwise expressly provided herein, the Co-obligors shall reimburse each Lender on demand the Breakage Loss incurred by such Lender as a result of the timing of such payment. SECTION 6. CONDITIONS PRECEDENT TO LOANS 6.1 Conditions to Initial Revolving Loan. The obligations of each ------------------------------------ Lender to continue to make Revolving Loans and Term Loans on and after the Amendment Date are subject to the satisfaction of the following conditions precedent: (a) Notes. Each Lender shall have received a Revolving Note and a ----- Term Note, conforming to the requirements hereof and executed on behalf of the Co-obligors by a duly authorized executive officer of each Co-obligor. (b) Loan Agreement. The Agreement shall have been executed and -------------- delivered on behalf of each Co-obligor by a duly authorized executive officer of each Co-obligor. (c) Representations and Warranties, Defaults and Judgments. The ------------------------------------------------------ Agent shall have received a certificate executed by an executive officer of each Co-obligor dated the Amendment Date to the effect that: (i) the representations and warranties made by each Co-obligor in the Agreement or which are contained in any certificate, document or other statement of a Co-obligor furnished at any time under or in connection with the Agreement shall be correct on and as of the date requested for the making of the Loan as if made on and as of such date, (ii) no Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the advance to be made on such date, and (iii) no actions, suits or proceedings before any court or before any governmental or administrative body or agency which might prevent or preclude the consummation 20 of the transactions contemplated by the Agreement are pending or, to the best of its knowledge, threatened against any Co-obligor. (d) Corporate Proceedings. The Agent shall have received a --------------------- certificate signed by an executive officer of each Co-obligor dated the Amendment Date indicating that each Co-obligor has the authority to (i) execute, deliver and perform this Agreement, the Revolving Notes and Term Notes (ii) consummate the transactions contemplated by this Agreement, the Revolving Notes and Term Notes, and (iii) become jointly and severally obligated with respect to the Loans under the Agreement. Such certificate shall state that such authority has not been amended, modified, revoked or rescinded as of the date of such certificate and shall also state that the Borrowing Agent is duly authorized to act for and bind such Co-obligor and that Lenders shall be entitled to rely upon any act or omission of the Borrowing Agent. (e) Corporate Documents. Each Co-obligor shall have delivered to the ------------------- Agent (i) a copy of each corporate Co-obligor's articles of incorporation and bylaws, or the certificate and agreement of limited partnership of each Co- obligor organized as a limited partnership, in each case together with all amendments thereto, and (ii) a certificate dated the Amendment Date from an executive officer of each Co-obligor (or the general partner of each Co-obligor organized as a partnership) to the effect that the documents delivered pursuant to clause (i) are true and correct copies of such documents and no action has been taken to amend, modify or repeal such documents delivered pursuant to clause (i), the same being in full force and effect in such form on the Amendment Date. (f) Transaction Costs. The Co-obligors shall have paid each Lender ----------------- all of its out-of-pocket costs attendant to the Loans, including but not limited to, each Lender's attorneys' fees and closing costs, in accordance with Section 11.2 hereof. (g) Opinion of Counsel. The Agent shall have received from legal ------------------ counsel for Co-obligors a favorable opinion, dated the Amendment Date, addressed to each Lender and in form and substance acceptable to each Lender and its respective counsel, as to such matters as each Lender may reasonably request. (h) Absence of Material Adverse Changes. No material adverse change ----------------------------------- shall have occurred in the business, assets, operations, prospects or condition (financial or otherwise) of any Co-obligor since March 31, 1996. (i) Payments. The payments necessary to reduce the aggregate -------- outstanding principal balance of the Revolving Loans to $5,000,000 and the mandatory prepayments of the Term Loans required by Sections 4.2(b) and (c) shall have been made by Co-obligors to Lenders. (j) Additional Matters. All other documents and legal matters in ------------------ connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to each Lender and its respective counsel. 21 6.2 Conditions to Each Subsequent Revolving Loan. The obligation of -------------------------------------------- each Lender to make each Revolving Loan subsequent to the Amendment Date shall be subject to the initial satisfaction of the conditions precedent set forth in Section 6.1 hereof, as well as the following conditions precedent: (a) Representations. All of the representations and warranties of Co- --------------- obligors, contained in the Agreement shall be true and correct on the date of each such Revolving Loan, as the case may be, as though made on and as of such date. (b) Defaults. No event shall have occurred and be continuing, or -------- would result from the Revolving Loan, which constitutes or would constitute an Event of Default. (c) Co-obligor. The Co-obligor requesting such Revolving Loan or on ---------- whose behalf such Loan is to be made continues to be a direct or indirect wholly-owned subsidiary of Parent. (d) Additional Matters. Co-obligors shall deliver to each Lender all ------------------ such other documents, certificates and opinions as each Lender may reasonably request in connection with the Revolving Loan. (e) Funded Debt/EBITDA Ratio. Both immediately prior to such ------------------------ Revolving Loan and immediately subsequent to and after giving effect to such Revolving Loan, the ratio of Funded Debt to EBITDA shall not exceed the following: Date of Revolving Loan Ratio ---------------------- ----- Prior to September 29, 1996 2.50 On or after September 29, 1996 but prior to December 31, 1997 2.25 On or after December 31, 1997 2.00 The acceptance by a Co-obligor of the proceeds of any Revolving Loan shall be deemed to constitute, as of the date of such acceptance, a representation and warranty by each Co-obligor that the applicable conditions in this Section 6.2 have been satisfied. SECTION 7. REPRESENTATIONS AND WARRANTIES In order to induce the Lenders to enter into this Agreement and to make the Loans, the Co-obligors hereby covenant, represent and warrant to each Lender that: 7.1 Corporate Existence; Compliance with Law. Each Co-obligor and ---------------------------------------- each of its respective subsidiaries (a) is a duly organized and validly existing corporation or limited partnership, in good standing under the laws of the jurisdiction of its formation, (b) has the power 22 and authority to conduct the business in which it is currently engaged, and (c) is qualified under the laws of any jurisdiction where the conduct of its business requires such qualification. 7.2 Power, Authorization; Enforceable Obligations. Each Co-obligor --------------------------------------------- has the corporate power and authority to make, deliver and perform this Agreement and to become obligated with respect to borrowings hereunder, and has taken all action necessary to be taken by it to authorize such borrowings, its obligations under the Revolving Notes and the Term Notes and to authorize the execution, delivery and performance of this Agreement and the Revolving Notes and the Term Notes. No consent, waiver or authorization of, or filing with, any Person is required in connection with the borrowings hereunder or the execution, delivery, performance by, or the validity or enforceability against, any Co- obligor of this Agreement or the Revolving Notes or the Term Notes. This Agreement has been duly executed and delivered on behalf of each Co-obligor, and this Agreement constitutes, and the Revolving Notes and the Term Notes when executed and delivered hereunder will constitute, legal, valid and binding obligations of each Co-obligor, enforceable against each Co-obligor, in accordance with their respective terms, except as enforceability may be limited by general equitable principles or by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. 7.3 No Legal Bar. The execution, delivery and performance of this ------------ Agreement, and the Revolving Notes and the Term Notes, the borrowings hereunder and the use of the proceeds thereof and the consummation of the transactions contemplated hereunder or thereunder do not and will not violate any provisions of the articles of incorporation, bylaws or organizational documents of any Co- obligor or any law, regulation, order, injunction, judgment, decree or writ, or any lease, contract or agreement, to which any Co-obligor is subject and do not and will not result in or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any requirement of law or contractual obligation. 7.4 No Litigation. Except as disclosed on Schedule A hereto, no ------------- ---------- investigation by or litigation before, any court, tribunal, arbitrator, mediator, referee or governmental authority is pending, nor to the knowledge of any Co-obligor, is any of the foregoing threatened, by or against any Co-obligor or any of its subsidiaries, or against any of their respective properties or revenues (a) with respect to this Agreement, the Revolving Notes or the Term Notes, or any of the transactions contemplated hereby or thereby or (b) which involves the possibility of any judgment, decision or order that may have a material adverse effect on the business, operations, property, assets or condition (financial or otherwise) of any Co-obligor or any such subsidiary. 7.5 Indebtedness. Except (i) as provided in Schedule A attached ------------ ---------- hereto, (ii) the indebtedness incurred pursuant to this Agreement and (iii) indebtedness incurred after the Amendment Date in accordance with Section 8.2(a) hereof, no Co-obligor or any of their subsidiaries has, and on the Amendment Date will have, any indebtedness for borrowed money. 23 7.6 Ownership of Property; Liens. Except as set forth on Schedule A ---------------------------- ---------- attached hereto, each Co-obligor and each of its subsidiaries has good and indefeasible title to all of its respective properties and assets, and none of such property is subject to any Lien other than Permitted Liens. 7.7 Margin Securities. None of the Co-obligors or any of their ----------------- subsidiaries is engaged nor will engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulations G and X of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any loans hereunder will be used for "purchasing" or "carrying" any "margin stock" (other than the repurchase of Common Stock of Parent) within the respective meanings as so defined. If requested by any Lender, each Co-obligor will furnish to such Lender a statement in conformity with the requirements of Federal Reserve Form G-3 referred to in said Regulation G to the foregoing effect. 7.8 Investment Company Act. None of the Co-obligors nor any of their ---------------------- subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 7.9 ERISA. Neither Parent nor any Person which is a member of the ----- same controlled group of corporations (within the meaning of Section 414(b) of the Code) as Parent or is under common control (within the meaning of Section 414(c) of the Code) with Parent (collectively, an "ERISA Affiliate") currently has, nor has Parent or any ERISA Affiliate ever had, any employee benefit plan or pension plan as such plans are defined in Section 3(2) of ERISA (such plans herein collectively referred to as a "Plan"), except as described on Schedule A ---------- attached hereto. Each Plan which is required to be qualified under Section 401 of the Code has been determined by the Internal Revenue Service to be qualified and nothing has occurred which would cause the loss of such qualification. Parent and each ERISA Affiliate have filed all reports with respect to each Plan and each Plan has been maintained in material compliance with applicable law. Neither Parent nor any ERISA Affiliate has failed to make any contributions or pay any amounts under the terms of any Plan or applicable law. No accumulated funding deficiency (as defined in Section 412 of the Code) or Reportable Event has occurred with respect to any Plan. 7.10 Subsidiaries. Parent has no direct or indirect subsidiaries ------------ other than those set forth on Schedule A attached hereto. ---------- 7.11 Possession of Franchises, Licenses, etc. None of the Co-obligors ---------------------------------------- nor any of their subsidiaries is in violation of any law, ordinance, rule or regulation of any governmental authority to which it or any of its properties is subject, except for violations that would not individually or in the aggregate have a material adverse effect on the business, operations, property, assets or condition (financial or otherwise) of Parent. Each Co-obligor and each of their subsidiaries possesses all franchises, certificates, licenses, permits and other authorizations from governmental authorities, free from burdensome restrictions, that are necessary in any material respect for operation of their respective businesses, and are not in violation of any provision thereof in any material respect. There 24 are no pending actions, suits or proceedings seeking to revoke, rescind, suspend, alter or annul any license, permit or authorization pursuant to which any Co-obligor or any of their subsidiaries conducts any business; and, to the knowledge of Co-obligors, there are no claims or investigations for such purpose pending or threatened. 7.12 Financial Condition. Parent has delivered to the Lenders copies ------------------- of the consolidated and consolidating balance sheet of Parent and its subsidiaries as of March 31, 1996, and the related consolidated and consolidating statements of income, stockholders' equity and cash flows for the fiscal period ended such date; and all such financial statements are true and correct, fairly represent the financial condition of Parent and its subsidiaries as of such dates and have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with that of prior periods. As of the date hereof, except as set forth on Schedule A, there ---------- are no obligations, liabilities or indebtedness of Parent or any of its subsidiaries which are material and are not reflected in such financial statements; and no changes having a material adverse effect on the financial condition of Parent and its subsidiaries taken as a whole have occurred since the date of such financial statements. 7.13 Full Disclosure. There is no material fact that Co-obligors have --------------- not disclosed to Lender which could have a material adverse effect on the properties, assets, operations, business, prospects or condition (financial or otherwise) of Parent and its subsidiaries taken as a whole. Neither the financial statements referenced in Section 7.12 hereof, nor any certificate or statement delivered herewith or heretofore by any Co-obligors in connection with negotiations of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to keep the statements contained herein or therein from being misleading. 7.14 No Default. Giving effect to this Agreement, no event has ---------- occurred and is continuing which constitutes a Default or an Event of Default. 7.15 Material Agreements. Neither any Co-obligors nor any of their ------------------- subsidiaries is in default in any material respect under any contract, lease, loan agreement, indenture, mortgage, security agreement or other agreement or obligation to which it is a party or by which any of its properties is bound, which default might have a material adverse effect on the business, operations, property, assets or condition (financial or otherwise) of Parent and its subsidiaries taken as a whole. 7.16 Taxes. All income tax returns required to be filed by Parent and ----- each of its subsidiaries in any jurisdiction have been filed (or appropriate extensions obtained) and all taxes, assessments, fees and other governmental charges upon Parent and each of its subsidiaries or upon any of its or their properties, income or franchises have been paid prior to the time that such taxes could give rise to a lien thereon, except to the extent the validity, applicability or amount thereof is being contested in good faith by appropriate proceedings. 7.17 Environmental Matters. To the best of each Co-obligor's --------------------- knowledge, each Co-obligor and each of their subsidiaries have obtained all environmental, health and safety permits, licenses 25 and other authorizations required under all Environmental Laws to carry on their respective businesses as now being (or as proposed to be) conducted, except to the extent failure to have any such permit, license or authorization would not reasonably be expected to have a material adverse effect on the business, operations, properties, prospects or condition (financial or otherwise) of such Co-obligor. To the best of each Co-obligor's knowledge, each of such permits, licenses and authorizations is in good standing and each Co-obligor and each of its subsidiaries is in compliance with the terms and conditions of all such permits, licenses and authorizations, and is also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Environmental Law or in any regulation, code, plan, order, or demand letter issued, entered, promulgated or approved thereunder, except to the extent the failure thereof to be in good standing or the failure to comply therewith would not reasonably be expected to have a material adverse effect on the business, operations, properties, prospects of condition (financial or otherwise) of such Co-obligor. SECTION 8. COVENANTS AND CONTINUING AGREEMENTS 8.1 Affirmative Covenants. Each Co-obligor covenants and agrees --------------------- that, unless the Lenders shall otherwise consent in writing: (a) Maintenance of Existence. Each Co-obligor and each of their ------------------------ subsidiaries will do or cause to be done all things necessary to preserve and maintain at all times their respective existence. (b) Inspection. Each Co-obligor will permit any officer, employee or ---------- agent of any Lender at any time to visit and inspect any of the properties of the Co-obligors and their subsidiaries, and discuss the affairs, finances and accounts of each Co-obligor with its executive officers, all at such reasonable times and as often as any Lender may reasonably request. In addition, after the occurrence and continuation of a Default, any Lender shall also be entitled to examine each Co-obligor and their subsidiaries' respective books of record and accounts, take copies and abstracts therefrom, conduct an audit of such books of record and account and of Parent's consolidated operations, all at such reasonable times and as often as such Lender may desire. (c) Environmental Indemnity. Each Co-obligor, hereby, jointly and ----------------------- severally, indemnifies and agrees to hold each Lender, and its respective officers, directors, employees, representatives, agents and affiliates (each an "Indemnified Party"), harmless against, and agrees to promptly pay on demand or reimburse each of them with respect to, any and all claims, demands, causes of action, loss, damage, liabilities, costs and expenses of any and every kind or nature whatsoever, INCLUDING, WITHOUT LIMITATION, THOSE BASED UPON NEGLIGENCE, ----------------------------------------------------------- SOLE NEGLIGENCE, COMPARATIVE NEGLIGENCE, CONCURRENT NEGLIGENCE OR GROSS - ----------------------------------------------------------------------- NEGLIGENCE, ASSERTED AGAINST OR INCURRED BY ANY OF THEM (EXCLUDING, HOWEVER, ALL - -------------------------------------------------------------------------------- CLAIMS, DEMANDS, CAUSES OF ACTION, LOSS, DAMAGE, LIABILITIES, COSTS AND EXPENSES - -------------------------------------------------------------------------------- OF AN INDEMNIFIED PARTY WHICH ARISE FROM OR RELATE TO THE WILLFUL MISCONDUCT OR - ------------------------------------------------------------------------------- THE GROSS NEGLIGENCE OF SUCH INDEMNIFIED PARTY), by reason of or arising out of - ----------------------------------------------- or in any way related to (a) the breach of any representation, warranty or covenant as 26 set forth herein regarding Environmental Laws, and (b) the failure of any Co- obligor or any of their subsidiaries to perform any obligation required to be performed pursuant to Environmental Laws (collectively "Environmental Indemnity Matters"). Without limiting the generality of the foregoing, each Co-obligor shall be obligated to pay or reimburse each Indemnified Party for all out-of- pocket costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by such Indemnified Party in the defense of any claims arising out of any Environmental Indemnity Matter at the time such costs and expenses are incurred. The provisions of this Section 8.1(c) shall be payable upon written demand therefor, shall survive the final payment of all of the Obligations and the termination of this Agreement and shall continue thereafter in full force and effect. (d) Compliance with Laws and Preservation of Rights and Properties. -------------------------------------------------------------- Each Co-obligor and each of their subsidiaries will remain in compliance with all Environmental Laws (except for violations that would not have a material adverse effect on the business, operations, property, assets or condition (financial or otherwise) of such Co-obligor), and shall otherwise comply with all other laws, except to the extent being contested by a Co-obligor or its subsidiaries in good faith, and otherwise do or cause to be done all things necessary to preserve and keep in full force and effect all rights and franchises necessary to the conduct of their respective businesses. Each Co- obligor and each of its subsidiaries will do or cause to be done all things necessary to preserve and keep in full force and effect at all times all rights, licenses and franchises necessary to the conduct of their respective businesses and to comply with all laws applicable to each of them and all applicable rules, regulations and orders issued by any governmental authority, except to the extent being contested by a Co-obligor or such subsidiary in good faith; to continue to conduct their respective businesses substantially as now proposed to be conducted; and at all times to maintain, preserve and protect all licenses, franchises and trade names, preserve all property necessary to the conduct of their respective businesses and keep the same in good repair, working order and condition, ordinary wear and tear excepted, and from time to time make, or cause to be made, all repairs, renewals, replacements, betterments and improvements thereto as may be necessary to the conduct of their respective businesses. (e) Cash Flow. Parent will maintain Adjusted Cash Flow as of the end --------- of each twelve month period, measured at the end of each of Parent's fiscal quarters, in an amount equal to or greater than the amount set forth below times the annual principal debt service requirements for the next twelve (12) months on (i) the then outstanding balance of the Loans (assuming, for purposes of this calculation, that the principal balance of all outstanding Revolving Loans is being amortized over five years and the principal balance of all Term Loans is being amortized on the actual amortization schedule provided for herein), (ii) all current installments of indebtedness of Parent and its subsidiaries (other than balloon payments of the entire outstanding principal amount of long-term debt), and (iii) 20% of any balloon payments which otherwise would have been included in current maturities of long-term debt of Parent and its subsidiaries: For the twelve month period ending September 29, 1996 1.25 For each twelve month period ending on or about December 31, 1996 and thereafter 1.45 27 Co-obligors may elect to reduce the outstanding balance of the Loans for purposes of the computation of the foregoing covenant at the end of any fiscal quarter ending on or before December 31, 1996 by an amount not to exceed the stated amount of a certificate or certificates of deposit, provided that within two (2) Business Days after the earlier of (i) the date any Co-obligor becomes aware that it will in fact be necessary to reduce the amount of the Obligations in the foregoing computation in order to avoid breaching a covenant contained in this Agreement, or (ii) the date financial statements for such quarter are to be provided to Lenders in accordance with the terms of Section 8.3 hereof, Co- obligors shall apply all or such portion of such certificate or certificates of deposit to the unpaid principal balance of the Loans as may be necessary to avoid any such breach. Any such certificate or certificates of deposit, in order to be eligible for the foregoing purposes, shall be (i) issued by Bank One, Texas, N.A., (ii) irrevocably pledged to Lenders as additional security for the Loans on or before the last day of such quarter, and (iii) thereafter continuously so pledged until such time as it is applied to the principal amount of the Loans or it is established to the satisfaction of Lenders that Co- obligors will not be in breach of any such covenant. (f) Fixed Charge Coverage. Parent shall maintain a Fixed Charge --------------------- Coverage Ratio measured as of the end of each of Parent's fiscal quarters as follows: For the quarter ended June 30, 1996 1.50 For the twelve months ended June 30, 1996 1.00 For the quarter ending September 29, 1996 1.30 For the twelve months ending September 29, 1996 0.90 For each twelve month period ending on or about December 31, 1996 and each quarter thereafter 1.15 (g) Minimum Tangible Net Worth. Parent's total shareholders' equity -------------------------- (including capital stock, additional paid-in capital and retained earnings, after deducting all treasury stock) as of the end of each fiscal quarter of Parent, which would appear on a consolidated balance sheet of Parent and its subsidiaries prepared as of such date in accordance with generally accepted accounting principles, consistently applied (but exclusive of any effect of any change in accounting principles promulgated by the FASB becoming effective after the Amendment Date), less the aggregate book value of all intangible assets (such as goodwill, intellectual property and unamortized debt discount or expense) (the result of such computation being herein referred to as "Consolidated Tangible Net Worth") shall be not less than the greater of (i) $39,600,000 less, in the event the existing Norfolk, Virginia restaurant unit is sold to a third party, the lesser of (AA) $744,000 or (BB) the after tax difference between the actual sales price of such unit and the book value of such unit, or (ii) the sum 28 of (A) $39,600,000, plus (B) an amount (not less than zero) equal to 50% of Parent's consolidated net income (after income taxes) calculated on a cumulative basis commencing with the period beginning January 29, 1996, plus (C) an amount equal to 50% of the net proceeds from the sale of any equity securities by Parent after January 28, 1996, minus (D) in the event the existing Norfolk, Virginia restaurant unit is sold to a third party, the lesser of (y) $744,000 or (z) the after tax difference between the actual sales price of such unit and the book value of such unit. (h) Debt to Net Worth Ratio. Parent shall at all times maintain a ----------------------- ratio of (i) total consolidated liabilities, determined in accordance with generally accepted accounting principles, consistently applied, to (ii) Consolidated Tangible Net Worth, no greater than 1 to 1. (i) Funded Debt to EBITDA. Parent shall maintain a ratio of Funded --------------------- Debt to EBITDA measured at the end of each fiscal quarter of Parent not to exceed the following for each quarter ending on or about: September 29, 1996 2.50 December 31, 1996 - September 30, 1997 2.25 December 31, 1997 and thereafter 2.00 (j) Insurance. Each Co-obligor and its subsidiaries shall at all --------- times maintain or cause to be maintained, with reputable insurers, insurance with respect to its properties and business against fire, theft, burglary, public liability, property damage, product liability and workers' compensation and all other casualties and contingencies and of such other types, and in such amounts, as is customary in the case of businesses engaged in the same or similar businesses or having similar properties similarly situated. (k) Litigation. At all times until the payment in full of the ---------- Obligations, each Co-obligor will furnish to Lender notification, promptly upon such Co-obligor's learning thereof, but in no event later than five (5) Business Days after its learning thereof, of (i) any litigation which may materially and adversely affect the business, operations, prospects, property, assets or condition (financial or otherwise) of any Co-obligor, and (ii) all suits and proceedings relating to any Plan. 8.2 Negative Covenants. Each Co-obligor covenants and agrees that, ------------------ unless the Lenders shall otherwise agree in writing: (a) Debt. Each Co-obligor and its subsidiaries shall neither incur ---- nor assume any indebtedness for borrowed money except for (i) trade payables incurred in the ordinary course of business, (ii) purchase money indebtedness incurred or assumed as a result of an acquisition of property or capital stock of another Person, not to exceed $2,500,000 with respect to all Co-obligors taken together on an aggregate basis, (iii) indebtedness of a Co-obligor to another Co-obligor or indebtedness of any subsidiary of a Co-obligor to such Co- obligor, and (iv) existing indebtedness on the Amendment Date expressly identified on Schedule A hereto. ---------- 29 (b) Liens. No Co-obligor shall, nor permit any of its subsidiaries ----- to, create, incur, grant, permit or suffer to exist any Lien upon any of its property or assets, now owned or hereinafter acquired, other than Permitted Liens. (c) Sale of Assets. No Co-obligor shall convey, sell, lease, transfer -------------- or otherwise dispose of, whether by sale, merger, consolidation, liquidation, dissolution, or otherwise (including, but not limited to, the sale, transfer or other disposition of any of the capital stock, limited partnership interest or other equity interest held by any Co-obligor in any other Co-obligor or subsidiary thereof), in one transaction or a series of related transactions, any Material Portion of the business, property or assets of such Co-obligor, provided however, that (i) a Co-obligor may convey, sell, lease, transfer or otherwise dispose of any assets, business or property to any other Co-obligor, and (ii) a Co-obligor may engage in sale/leaseback transactions involving real property constituting more than a Material Portion of its assets as long as the aggregate consideration to be received by such Co-obligor upon the sale of such property is no less than the value of such real property as reflected on the accounting records of the Co-obligor ("Book Value"), and the net proceeds from such sale (after deduction of reasonable expenses) are used by Co-obligor to acquire additional fixed assets. Sale proceeds will be maintained by the Co- obligor in cash or invested only in high quality, short-term liquid instruments prior to their deployment to acquire fixed assets. As used in this Section 8.2(c) "Material Portion" shall mean assets or property having a Book Value greater than ten percent (10%) of consolidated assets of Parent and its subsidiaries taken as a whole as of the end of the fiscal quarter of Parent then most recently ended. In computing "Material Portion," all assets or property disposed of by all Co-obligors within the preceding twelve (12) months shall be aggregated together. Sales or other disposition of any restaurant unit, regardless of whether such assets represent a Material Portion, shall be subject to the mandatory prepayment of the Term Loans as set forth in Section 4.2(c) hereof. (d) Seller Financing. No Co-obligor shall convey, sell, lease, ---------------- transfer or otherwise dispose of any restaurant unit for a consideration other than cash unless (i) Lenders shall have been granted a first priority security interest in, and collateral assignment of, any promissory note or other instrument received by a Co-obligor as consideration for such disposition, in form and substance reasonably accepted to Lenders, and (ii) such promissory note or other instrument shall be secured by the assets being disposed of. (e) Nature of Business. No Co-obligor shall permit any material ------------------ change to be made in the character of its principal line of business (i.e. the ownership, operation and/or management of restaurants) as carried on at the date hereof. The ownership, operation and management of different or additional restaurant concepts as those now operated shall not constitute any change in the character of any Co-obligor's principal line of business. (f) Stock Repurchase. As long as any Loans are outstanding, Parent ---------------- will not purchase, redeem or otherwise acquire shares of its capital stock in an amount that would cause the total cumulative dollar amount of shares of capital stock reacquired by the Company since March 31, 1996 to exceed $500,000. 30 8.3 Reporting Requirements. So long as this Agreement is in effect ---------------------- and until the payment in full of the Loans, Co-obligors will furnish to Lenders the following: (a) Defaults. As soon as possible and in any event within five (5) -------- Business Days after a Co-obligor has knowledge of the occurrence of any Default or Event of Default, a statement of an executive officer of such Co-obligor setting forth details of such Default or Event of Default and the action which such Co-obligor has taken or proposes to take with respect thereto. (b) Financial Statements. -------------------- (i) As soon as available and in any event within 45 days after the end of each fiscal quarter, either (A) consolidated balance sheets of Parent and related statements of income of Parent on a quarterly and fiscal year-to-date basis, duly certified by the chief financial officer of Parent as having been prepared in accordance with generally accepted accounting principles (except for customary year-end adjustments) consistently applied, or (B) a copy of Parent's Quarterly Report on Form 10-Q, as filed with the Securities and Exchange Commission for such period, in either case, together with (Y) a certificate of an executive officer of Parent stating that no Default or Event of Default has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action that Parent has taken or proposes to take with respect thereto, and (Z) a schedule of the computations used by Parent in determining compliance with the covenants contained in Sections 8.1(e), (f), (g), (h) and (i) of this Agreement. (ii) As soon as available and in any event within 90 days after the end of each fiscal year of Parent, a copy of the annual audit report for such year for Parent, prepared by Arthur Andersen LLP or other firm of independent certified public accountants of recognized national standing, including therein consolidated balance sheets of Parent as of the end of such fiscal year and related statements of income, shareholders' equity and cash flow for such fiscal year, setting forth in each case in comparative form the corresponding figures of the previous fiscal year, accompanied in each case by (A) a report of Arthur Andersen LLP or other independent accountants of recognized national standing, to the effect that such accountants have examined such financial statements and that the examination by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary under the circumstances and such report shall state that in the opinion of such accountants such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the financial position and the results of operations of Parent and its subsidiaries; (B) upon the reasonable request of any Lender, the management letter, if any, of such accounting firm commenting on the accounting or auditing practices of Parent and 31 its subsidiaries; (C) a certificate of such accounting firm to the Lenders stating that in the course of such audit of the businesses of Parent and its subsidiaries such accounting firm (i) has obtained no knowledge that any information provided to Lenders by a Co-obligor in connection with this Agreement is incorrect or incomplete and (ii) has obtained no knowledge that a Default or Event of Default has occurred and is continuing, or if, in the opinion of such accounting firm, such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof, all of which shall be in form satisfactory to Agent, and (D) a certificate of the chief financial officer of Parent which shall state that such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied. (iii) Such other information pertaining to any Co-obligor as any Lender may from time to time reasonably request. (c) Operating Data. As soon as available and in any event within 90 -------------- days after the end of each fiscal year of Parent, store-by-store operating data setting forth in comparative form the corresponding data from the previous fiscal year. 8.4. Survival of Obligations Upon Termination of Agreement. Upon ----------------------------------------------------- indefeasible payment of the outstanding principal amount of the Loan and all other Obligations, all of the undertakings, agreements, covenants, warranties and representations contained in this Agreement, the Revolving Notes and the Term Notes shall thereupon be terminated and the parties thereto released from all prospective obligations hereunder and thereunder; provided that the -------- Obligations of Co-obligors pursuant to Sections 8.1(c) and 11.2 of this Agreement to indemnify and reimburse Lenders shall survive such termination. SECTION 9. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 9.1 Events of Default. The occurrence of any one or more of the ----------------- following events shall constitute an "Event of Default": (a) The principal amount of any of the Loans is not paid when due and such default shall continue for a period of five (5) Business Days after notice thereof has been sent to the Borrowing Agent; or the interest on any of the Loans is not paid when due and such default shall continue for a period of five (5) Business Days after notice thereof has been sent to the Borrowing Agent; or (b) A Co-obligor fails to perform, keep or observe any term, provision, condition, or covenant contained in Section 8.1(a), (e), (f), (g), (h) or (i) or Section 8.2(a) or (c) of this Agreement; or 32 (c) A Co-obligor fails to perform, keep or observe any other term, provision, or covenant contained in this Loan Agreement and such failure shall continue for a period of thirty (30) days after notice thereof has been sent to the Borrowing Agent; or (d) A default shall occur and remain unremedied beyond any applicable cure period under any agreement, document or instrument evidencing indebtedness for borrowed money to which a Co-obligor is a party, other than this Agreement; or (e) Any statement, representation, warranty, report, financial statement or certificate contained herein or made or delivered by a Co-obligor or any of its officers, employees or agents, to Lender is not true and correct in any material respect when made or deemed to have been made; or (f) An application is made by a Co-obligor for the appointment of a receiver, trustee or custodian for any assets of such Co-obligor; a petition under any section or chapter of the Bankruptcy Code or any similar law or regulation shall be filed by a Co-obligor; a Co-obligor makes an assignment for the benefit of its creditors; or any case or proceeding is filed by a Co-obligor for its dissolution, liquidation, or termination; or (g) A Co-obligor ceases to conduct its business substantially as now conducted; a petition under any section or chapter of the Bankruptcy Code or any similar law or regulation is filed against a Co-obligor or any case or proceeding is filed against a Co-obligor for its dissolution or liquidation, and such injunction, restraint or petition is not dismissed within 60 days after the entry or filing thereof; or (h) A Co-obligor becomes insolvent or admits in writing its inability to pay its debts as they mature; or (i) A Change of Control shall occur; or (j) Any final judgment(s) for the payment of money in excess of the sum of $1,000,000 in the aggregate shall be rendered against a Co-obligor or any of its subsidiaries and such judgment(s) shall not be satisfied or discharged at least 10 days prior to the date on which any of its assets could be lawfully seized to satisfy such judgment. 9.2 Acceleration of the Obligations. Upon the occurrence of any ------------------------------- Event of Default of the kind referred to in any of paragraphs, (f), (g), (h) or (i) of Section 9.1 above, all of the Obligations (and accrued interest thereon) shall automatically and without demand, notice of legal process of any kind, become due and payable and the Revolving Commitment and the Lenders' commitments to make Term Loans shall automatically terminate. Upon the occurrence and continuation of any other Event of Default, all of the Obligations (and accrued interest thereon), may, at the option of Lenders, be declared, and immediately shall become, due and payable and the Revolving Commitment and the Lenders' commitments to make Term Loans may, at the option of Lenders, be terminated. 33 9.3 Lien. Without limiting Lenders' rights upon the occurrence of ---- any single Event of Default, within ten (10) days following the request of Lenders following the occurrence of an Event of Default or Events of Default with respect to the payment of any Obligation due hereunder or compliance with any covenant contained in Sections 8.1(e), (f), (g), (h) or (i) (each a "Section 9.3 Event of Default") which occur(s) or exist(s) as of the end of two (2) or more consecutive fiscal quarters of Parent beginning June 30, 1996, which request Lenders may make at their option, Co-obligors agree to execute for the Lenders' benefit a deed or deeds of trust, in form and substance reasonably acceptance to Lenders, granting Lenders a first priority lien upon a sufficient number of properties of Co-obligors located in the State of Texas (or if such properties are inadequate in value, properties located in other states) with a then current fair market value (confirmed by the third-party appraisals described below) of not less than 125% of the then outstanding principal balance of the Loans. It is expressly agreed and understood that the second Section 9.3 Event of Default triggering the foregoing agreement may be with respect to the same or a different covenant or payment as the first Section 9.3 Event of Default. Such deed or deeds of trust shall be recorded, at the expense of the Co-obligors, with such filing offices as may be required to evidence Lenders' Lien on all such properties. Co-obligors shall provide Lenders within sixty (60) days after the request of Lenders, at the expense of Co-obligors, such additional documentation as Lenders would ordinarily require in connection with real estate loans, including, without limitation, the following: an appraisal of such property by an independent, qualified third-party appraiser, a Phase I environmental assessment of such property, a mortgagee's policy of title insurance, a survey of the property and policies of hazard, casualty and liability insurance naming Lenders as an additional loss payee, in each of the foregoing cases, reasonably acceptable to Lenders. SECTION 10. THE AGENT 10.1 Appointment and Authorization. Each Lender irrevocably appoints ----------------------------- and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. 10.2 Agent and Affiliates. Bank One, Texas, N.A. shall have the same -------------------- rights and powers under this Agreement as any other Lender and may exercise or refrain from exercising the same as though it were not the Agent, and Bank One, Texas, N.A. and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Co-obligors or any subsidiary or affiliate of a Co-obligor as if it were not the Agent hereunder. 10.3 Action by Agent and Lenders. The obligations of the Agent --------------------------- hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default or Event of Default. Any action, consent, election, right, remedy or approval stated herein to be permitted of, or required by, the Lenders shall require the unanimous consent of the Lenders. 34 10.4 Consultation with Experts. The Agent may consult with legal ------------------------- counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. 10.5 Liability of Agent. Neither the Agent nor any of its directors, ------------------ officers, agents, or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Lenders or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or the borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Co-obligors; (iii) the satisfaction of any condition specified in Section 6, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Revolving Notes or the Term Notes of any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, telecopy or similar writing) believed by it in good faith to be genuine or to be signed or authorized by the Borrowing Agent or any other proper party or parties. 10.6 Indemnification. Each Lender shall, ratably in accordance with --------------- its share of the Revolving Commitment, indemnify the Agent (to the extent not reimbursed by the Co-obligors) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent's gross negligence or willful misconduct) that the Agent may suffer or incur in connection with this Agreement or any action taken or omitted by the Agent hereunder. 10.7 Credit Decision. Each Lender acknowledges that it has, --------------- independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. 10.8 Successor Agent. The Agent may resign at any time by giving --------------- written notice thereof to the Lenders and the Borrowing Agent. Upon any such resignation, the Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Lender, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring 35 Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. SECTION 11. MISCELLANEOUS 11.1 Sale of Interest; Parties. No Co-obligor may sell, assign or ------------------------- transfer this Agreement, or any portion hereof, including, without limitation, a Co-obligor's rights, title, interests, remedies, powers, liabilities, obligations and/or duties hereunder. This Agreement shall be binding upon and inure to the benefit of the successors and, subject to the first sentence of this Section 10.1, assigns of Co-obligor and Agent and the Lenders. 11.2 Expenses (Including Attorneys' Fees). Co-obligors shall ------------------------------------ reimburse Lenders on demand (giving reasonable notice upon request) for all the Lenders' expenses (including, but not limited to, reasonable attorneys' fees) of, or incidental to: (a) The preparation of this Agreement, the Revolving Notes and the Term Notes and any amendment to or modification or waiver of this Agreement or said Notes and all other out-of-pocket expenses of the Lender incurred in connection with the closing of this Loan Agreement; (b) Any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, a Co-obligor or any other Person) in any way relating to this Agreement, the Revolving Notes, the Term Notes or a Co- obligor's obligations or affairs; provided, however, that a Co-obligor shall have no obligation to a Lender hereunder with respect to defenses, rights or remedies by a Co-obligor available against such Lender pursuant to this Agreement if and only if a Co-obligor prevails against such Lender by means of such defenses, rights or remedies as evidenced by a final judgment upholding such defenses, rights or remedies; and (c) Any attempt to enforce any rights of the Lenders against a Co- obligor or any other Person which may be obligated to Lenders by virtue of this Agreement. Such expenses shall be additional Obligations. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include reasonable legal fees, costs and expenses; photocopying and duplicating expenses; court reporter fees, costs and expenses (to the extent permitted by applicable law); long distance telephone charges; air express charges; telegram charges; secretarial overtime charges; and reasonable expenses for travel, lodging and food paid or incurred in connection with such legal services. 11.3 Nonwaiver by Lenders. Lenders' failure, at any time or times -------------------- hereafter, to require strict performance by a Co-obligor of any provision of this Agreement shall not waive, affect or diminish any right of Lenders to demand strict compliance and performance by a Co-obligor thereafter. Any suspension or waiver by Lenders of an Event of Default under this Agreement shall not suspend, waive or affect any other Event of Default under this Agreement, whether the same is 36 prior to or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations contained in this Agreement and no Event of Default under this Agreement shall be deemed to have been suspended or waived by Lenders, unless such suspension or waiver is by an instrument in writing signed by an officer of Lenders and directed to the Co-obligors specifying such suspension or waiver. All rights and remedies provided for in this Agreement shall be cumulative with all other rights and remedies available to Lenders hereunder or otherwise available at law or in equity upon the occurrence of an Event of Default. The rights of Lenders under Section 9.3 hereof and the imposition or maintenance of an increased LIBOR Margin or Term Loan Margin shall expressly be cumulative with all other rights and remedies of Lenders in connection with the occurrence of an Event of Default and shall in no event be construed to be an election of remedies or the waiver of any other right or remedy belonging to Lenders. 11.4 Construction of Agreement; Modifications. ---------------------------------------- (a) THIS AGREEMENT, TOGETHER WITH THE NOTES, AND ALL SCHEDULES AND EXHIBITS HERETO REFERRED TO HEREIN, EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. Except as otherwise provided in this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in the Notes or any other document relating hereto, the provision contained in this Agreement shall govern and control. (b) Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If, however, any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. (c) The section titles contained in this Agreement are included for convenience only and are without substantive meaning or content and are not a part of the agreement between the parties hereto. (d) This Agreement may not be modified, altered or amended, except by an agreement in writing signed by all parties. 11.5 Waivers by Co-obligors. Except as otherwise provided in this ---------------------- Agreement, each Co-obligor waives, to the extent permitted by law (i) presentment, demand and protest and notice of presentment, notice of intent to accelerate the maturity of the Obligations and notice of such 37 acceleration, protest, default, non-payment, maturity, release, compromise, settlement, extension or renewal and hereby ratifies and confirms whatever the Lenders may do in this regard; and (ii) the benefit of all valuation, appraisal, stay, extension, marshaling-of-assets or similar laws, whether now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance of the Obligations by Co-obligors or the enforcement of the Obligations by the Lenders. Each Co-obligor acknowledges that it has been advised by counsel with respect to this Agreement and the transactions evidenced by this Agreement. 11.6 GOVERNING LAW. THIS AGREEMENT HAS BEEN DELIVERED AT AND SHALL BE ------------- DEEMED TO HAVE BEEN MADE AT DALLAS, TEXAS, AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO AGREEMENTS EXECUTED, DELIVERED AND PERFORMED WITHIN SUCH STATE. AS PART OF THE CONSIDERATION FOR NEW VALUE THIS DAY RECEIVED, EACH CO-OBLIGOR HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN DALLAS COUNTY, TEXAS. 11.7 Notice. Except as otherwise provided herein, any notice required ------ hereunder shall be in writing, and shall be deemed to have been validly served, given or delivered upon the earlier of: (i) three (3) Business Days following deposit in the United States mails, with proper postage prepaid, and addressed to the party to be notified at its address on the first page of this Agreement, (ii) at the time of transmission by facsimile or telecopier, so long as such transmission is sent during the hours of 8:30 a.m. to 5:00 p.m., Dallas, Texas time, on a Business Day, or (iii) actual delivery. 11.8 Counterparts. To facilitate execution, this Agreement may be ------------ executed in as many counterparts as may be required; and it shall not be necessary that the signature of, or on behalf of, each party, or that the signatures of all persons required to bind any party, appear on such counterpart, but it shall be sufficient that the signature of, or on behalf of, each party, or that the signature of the persons required to bind any party, appear on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in making proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of, or on behalf of, all of the parties hereto. IN WITNESS WHEREOF, this Agreement has been duly executed by the Co- obligors and by Lenders in Dallas, Texas as of the day and year specified at the beginning hereof. CO-OBLIGORS ----------- SPAGHETTI WAREHOUSE, INC. By: /s/ H.G. Carrington, Jr. ---------------------------------- 38 SPAGHETTI WAREHOUSE SERVICE CORPORATION By: /s/ H.G. Carrington, Jr. ---------------------------------- SWEATAC, INC. By: /s/ H.G. Carrington, Jr. ---------------------------------- SPAGHETTI WAREHOUSE OF TEXAS, L.P. By: SPAGHETTI WAREHOUSE SERVICE CORPORATION, General Partner By: /s/ H.G. Carrington, Jr. ----------------------------- SPAGHETTI WAREHOUSE OF OHIO, INC. By: /s/ H.G. Carrington, Jr. ---------------------------------- LENDERS: ------- BANK ONE, TEXAS, N.A. By: /s/ Paul C. Koch ---------------------------------- NATIONSBANK OF TEXAS, N.A. By: /s/ Rachel R. Johnston ---------------------------------- 39 EX-10.37 3 EMPLOYMENT AGREEMENT EXHIBIT 10.37 EMPLOYMENT AGREEMENT THIS AGREEMENT, effective January 30, 1996 ("EFFECTIVE DATE") by and between Spaghetti Warehouse, Inc., a Texas Corporation, ("COMPANY"), and Robert R. Hawk, ("HAWK"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Hawk is the founder of the Company, and as Chairman of the Board and President, has rendered long an valuable service critical to its success; and WHEREAS, both the Company and Hawk desire to have Hawk undertake to serve the Company, as an employee, when needed on a wide range of matters pertaining to its business which would make beneficial use of Hawk's background and experience. NOW THEREFORE, IT IS HEREBY AGREED by and between Company and Hawk: 1 TERM OF EMPLOYMENT. Company hereby employs Hawk, and Hawk accepts and agrees to employment by the Company commencing on the Effective Date for a term that will continue until the date of Hawk's death. During such period Hawk agrees that, upon the request and direction of the Company, he will render advise with respect to such matters as, in the reasonable judgement of the Company, his experience and skill qualify him to render valuable advise and assistance to the Company. Hawk agrees to be available for such assignments upon reasonable notice, at such times as Company may desire, all in Company's reasonable discretion, provided such services do not require Hawk to render more than 16 hours in any 30 day period unless he voluntarily elects to do so. 2 COMPENSATION. For and in consideration of his services hereunder, Hawk shall be paid a salary of One Thousand Dollars ($1,000) bi-weekly, and that amount will be increased by 3% (over the amount payable under this sentence during December of the prior year) effective on the first day of each calendar year following the Effective Date. All of Hawk's reasonable and necessary expenses during periods of time Hawk is actively working for Company under this Agreement shall be reimbursed to him monthly by Company, upon presentation of the proper invoices or vouchers therefore. 3. WITHHOLDING. Company will withhold from any amounts payable hereunder all Federal, State, City or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 4. CONTINUATION OF BENEFITS. Hawk will have all benefits to which his status (which is expressly agreed to be a full time employee) entitle him during the term of this Agreement, including, without limitation, the participation in the Company's group hospitalization and medical insurance program. 5. NONCOMPETE. During the term of this Agreement, Hawk agrees that he will not become employed in any capacity, for any period of time, whether part time or full time, either as an employee, officer, director, independent contractor, agent or servant for himself or any other person, partnership, corporation or other entity which owns, operates, manages or has any ownership interest in a restaurant or food service operation open to the public, of whatsoever nature or type. 6. SOLE AGREEMENT. This Agreement constitutes the sole agreement between the parties hereto with respect to the subject matter, and all prior agreements are terminated, and all discussions, negotiations and communications by and between the parties with respect to the subject hereof are merged herein. This Agreement may not be amended or terminated except by writing subscribed by each party hereto. 7. NOTICES. Any notice required or permitted under the terms hereof shall be effective upon deposit in the United States Mails, properly addressed, postage prepaid, or upon personal delivery, to each party, in the case of the Company, at its home office, and in the case of Hawk, at the addresses indicated hereinbelow or, in each case, at such other address as may be communicated in writing to the other party. IN WITNESS WHEREOF, the parties have entered into this Agreement as of this 28 day of May, 1996. SPAGHETTI WAREHOUSE, INC. /s/ Phillip Ratner /s/ Robert R. Hawk - --------------------------- -------------------------------- Phillip Ratner, President Robert R. Hawk 5610 Cambria Drive Rockwall, Tx. 75087 EX-23.1 4 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 10-K of our report dated August 19, 1996 included in Registration Statement File No. 33-86756, 33-33555, 33-38603, and 33-69024. It should be noted that we have not examined any financial statements of the company subsequent to June 30, 1996 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Dallas, Texas September 20, 1996 EX-23.2 5 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.2 ------------ INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors Spaghetti Warehouse, Inc.: We consent to the incorporation by reference in the registration statements (No. 33-33555, No. 33-38603, No. 33-69024 and No. 33-86756) on Form S-8 of Spaghetti Warehouse, Inc. of our report dated August 19, 1994, relating to the consolidated statements of operations, stockholders' equity, and cash flows for the year ended July 3, 1994, which report appears in the June 30, 1996 annual report on Form 10-K of Spaghetti Warehouse, Inc. KPMG Peat Marwick LLP Dallas, Texas September 20, 1996 EX-27 6 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the accompanying consolidated financial statements and is qualified in its entirety by reference to such financial statements. YEAR JUN-30-1996 JUL-03-1995 JUN-30-1996 $8,065,364 0 659,069 0 686,995 10,152,903 72,584,543 22,691,371 71,368,189 13,158,214 12,883,642 0 0 64,754 45,185,704 71,368,189 69,662,500 70,956,619 17,964,938 59,086,483 24,466,258 0 1,044,660 (13,640,782) (5,307,324) (8,333,458) 0 0 0 (8,333,458) (1.49) (1.49)
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