<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 29, 1996
-------------------------------------------------
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
------------------ ---------------------------
Commission File Number: 0-20143
---------------------------------------------------------
Watermarc Food Management Co.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-2605598
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11111 Wilcrest Green, Suite 350 Houston, Texas 77042
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 783-0500
- --------------------------------------------------------------------------------
(Registrant's telephone number)
10777 WESTHEIMER, SUITE 1030, HOUSTON, TEXAS 77042
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
As of September 29, 1996, the registrant had 13,433,658 shares of its common
stock and 329,540 shares of its preferred stock outstanding, respectively.
<PAGE> 2
WATERMARC FOOD MANAGEMENT CO.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - 2
September 29, 1996 and June 30, 1996
Condensed Consolidated Statements of Operations - 3
Thirteen Weeks Ended
September 29, 1996 and October 1, 1995
Condensed Consolidated Statements of Cash Flows - 4
Thirteen Weeks Ended
September 29, 1996 and October 1, 1995
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 7
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 9
</TABLE>
<PAGE> 3
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 29, 1996 JUNE 30, 1996
------------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60,645 $ 463,166
Accounts receivable, trade 527,761 397,744
Accounts receivable from affiliates 469,993 252,440
Inventories 609,818 715,538
Prepaid expenses and other current assets 285,230 105,779
------------ ------------
Total current assets 1,953,447 1,934,667
Property and equipment, net 8,642,290 9,328,526
Notes and other receivables from affiliate 2,217,784 2,217,784
Intangible assets, net 12,094,792 12,200,047
Other assets 163,649 183,686
------------ ------------
$ 25,071,962 $ 25,864,710
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 3,351,921 $ 3,186,690
Accrued liabilities 1,335,345 1,831,055
Current portion of long-term debt and
note payable to stockholder 3,997,787 1,401,825
------------ ------------
Total current liabilities 8,685,053 6,419,570
Long-term debt, less current portion 3,131,099 5,698,692
Notes payable to stockholder 4,569,201 5,069,202
Deferred rent 427,309 435,949
Commitments and contingencies
Stockholders' equity:
Preferred stock 329,540 329,540
Common stock 671,682 671,682
Additional paid-in capital 26,639,690 26,640,385
Accumulated deficit (19,381,612) (19,400,310)
------------ ------------
Total stockholders' equity 8,259,300 8,241,297
------------ ------------
$ 25,071,962 $ 25,864,710
============ ============
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
2
<PAGE> 4
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
SEPTEMBER 29, 1996 OCTOBER 1, 1995
------------------ ---------------
<S> <C> <C>
Revenues $ 11,483,050 $ 9,443,334
------------ ------------
Costs and expenses:
Costs of revenues 3,455,687 3,032,376
Other restaurant operations 6,114,629 4,758,737
Selling, marketing and distribution 440,764 488,739
General and administrative 706,624 672,005
Depreciation and amortization 644,914 455,930
------------ ------------
Total costs and expenses 11,362,618 9,407,787
------------ ------------
Income from operations 120,432 35,547
Non-operating income (expense):
Interest income 29,855 40,815
Interest expense (323,767) (169,575)
Other, net 192,178 174,838
------------ ------------
Total non-operating income (expense) (101,734) 46,078
------------ ------------
Income before income taxes 18,698 81,625
Income taxes -- --
------------ ------------
Net income 18,698 81,625
Preferred stock dividends 74,149 74,149
------------ ------------
Net income less preferred stock dividends $ (55,451) $ 7,476
============ ============
Net income (loss) per common share $ (0.00) $ 0.00
============ ============
Weighted average common and common equivalent
shares outstanding 13,433,658 11,112,026
============ ============
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
3
<PAGE> 5
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
SEPTEMBER 29, 1996 OCTOBER 1, 1995
------------------ ---------------
<S> <C> <C>
Operating activities:
Net income for the period $ 18,698 $ 81,625
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 644,914 455,930
Changes in assets and liabilities:
Accounts receivable, trade (130,017) (289,618)
Accounts receivable from affiliates (217,553) (72,168)
Inventories 105,719 (7,798)
Prepaid expenses and other current assets (179,452) (123,956)
Accounts payable and accrued liabilities (339,118) (753,969)
Other assets 20,038 18,664
----------- -----------
Net cash used in operating activities (76,771) (691,290)
Investing activities:
Purchase of property and equipment (203,424) (130,621)
Proceeds from sale of assets 350,000 --
Investment in note receivable -- (17,579)
Repayment of notes receivable -- 6,308
----------- -----------
Net cash provided by (used in) investing activities 146,576 (141,892)
----------- -----------
Financing activities:
Cash dividends (695) --
Payments on borrowings (471,631) (193,453)
----------- -----------
Net cash used in financing activities (472,326) (193,453)
----------- -----------
Net decrease in cash and cash equivalents (402,521) (1,026,635)
Cash and cash equivalents, beginning of period 463,166 2,101,729
----------- -----------
Cash and cash equivalents, end of period $ 60,645 $ 1,075,094
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
4
<PAGE> 6
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Watermarc Food Management Co. (The "Company"), owns and operates 41
restaurants, primarily in the Houston Metropolitan area, under the names
"Marco's Mexican Restaurants"; "The Original Pasta Co."; "Billy Blues";
"Longhorn Cafe"; "Pete's Barbecue"; and "Hotspurs". All but the Billy
Blues restaurant are operated by wholly-owned subsidiaries of the Company.
The Company also produces and markets two brands of barbecue sauces, "Billy
Blues Barbecue Sauce" and "Chris' & Pitt's Bar-B-Que Sauce". Both are
marketed to supermarkets, other retail stores and food service outlets.
BASIS OF PRESENTATION
The unaudited financial information for the quarters ended September 29,
1996 and October 1, 1995 includes the results of operations of the Company.
In the opinion of management, the information reflects all adjustments
(consisting only of normal recurring adjustments) which are necessary for a
fair presentation of the results of operations for such periods but should
not be considered as indicative of results for a full year.
The June 30, 1996 condensed consolidated balance sheet data was derived from
the audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. Accordingly, the
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements.
The accompanying financial statements have been prepared assuming the
Company will be able to continue as a going concern. The Company has a
working capital deficit of approximately $6.7 million at September 29,
1996. The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis, to obtain additional financing or capital and to refinance
its debt.
Management's plans include the following:
o Increasing revenues in existing restaurants by remodeling certain
Marco's Mexican Restaurants and by improving marketing programs and
customer service.
o Increasing revenues from the sale of food products by reinforcing
existing markets, expanding distribution to new market areas,
introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
o Franchising new restaurants.
o Maintaining cost controls while increasing revenues.
o Obtaining additional equity capital or debt financing.
o Refinancing debt, primarily $3 million in Subordinated Notes due in
July of 1997.
IMPACT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting
for Stock-Based Compensation" which establishes accounting and reporting
standards for stock-based employee compensation plans. Companies are
encouraged to utilize the fair-value method to measure stock based
compensation but may continue to utilize the methods prescribed by APB
Opinion No. 25 and disclose the pro-forma effects of the SFAS No. 123
method. The Company has decided to adopt the disclosure requirements of
SFAS No. 123.
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" which
provides standards for transfers and servicing of financial assets and
extinguishments of liabilities that are based on a "financial components"
approach that focuses on control. The pronouncement is effective for
transactions occurring after December 31, 1996.
5
<PAGE> 7
MANAGEMENT'S ESTIMATES
The preparation of 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 dates of the
financial statements and the reported amounts of income and expenses during
the reporting periods. Actual results could differ from those estimated.
2. CONTINGENCIES:
Effective July 1, 1992, the Company voluntarily discontinued its workers'
compensation coverage in the State of Texas. The Company anticipates that
the ultimate expense of representing itself in the settlement of claims
will be less than the cost of insurance. The Company intends to vigorously
defend and pursue all unreasonable claims. Management does not believe
that any existing claims will have a material adverse impact on the
financial position, results of operations, or cash flows of the Company.
The Company is currently involved in, and is vigorously defending, a lawsuit
related to alleged wrongful termination and the plaintiff is suing for
$500,000 in actual damages and $1,000,000 in punitive damages. The Company
is also involved in various other lawsuits arising in the ordinary course of
its business. The Company believes that the resolution of these matters
will not have a material adverse impact on its financial position, results
of operations or cash flows.
3. BUSINESS COMBINATIONS:
Effective January 26, 1996, the Company acquired all of the outstanding
common stock of The Original Pasta Co. (Pasta Co.). The purchase price was
$6,666,667, consisting of $3,750,000 of notes and the issuance of 1,666,667
shares of the Company's common stock valued at $2,916,667. The acquisition
has been accounted for as a purchase and, accordingly, the assets and
liabilities of Pasta Co. have been recorded at their fair value at the date
of acquisition. The excess of the purchase price over the fair value of
the net assets acquired is reported as goodwill and is being amortized over
15 years.
The statement of operations includes the results of Pasta Co. from the date
of acquisition. The following table summarizes the unaudited pro forma
results of operations of the Company as if the acquisition had occurred at
the beginning of the period presented:
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------
OCTOBER 1, 1995
---------------
<S> <C>
Revenues $11,977,293
Net loss (220,292)
Net loss per common share (.02)
</TABLE>
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The Company utilizes a 52-53 week fiscal year which ends on the Sunday
closest to June 30. References to the first quarter of fiscal years 1997
and 1996 are to the thirteen week periods ended September 29, 1996 and
October 1, 1995 respectively.
Effective January 26, 1996, the Company acquired The Original Pasta Co.
which operated a chain of ten restaurants (the "Pasta Co. Restaurants").
The acquisition was accounted for as a purchase, and no revenues or
expenses are reported for past periods. Cost percentages for the acquired
restaurants are similar to those of the Company's existing restaurant
operations.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED OCTOBER 1, 1995 COMPARED TO THE
THIRTEEN WEEKS ENDED SEPTEMBER 29, 1996.
REVENUES. Revenues increased $2,039,716 or 21.6% to $11,483,050 for the
first quarter of fiscal 1997 as compared to $9,443,334 for the first
quarter of fiscal 1996. Revenues attributable to the Pasta Co. Restaurants
were $3,182,067. Remaining revenues decreased by $1,142,351.
Approximately $390,000 of this decline is due to revenues associated with a
fair held in the State of Washington. The Company participated in the fair
in fiscal 1996, but not in fiscal 1997. The remainder of the decrease is
due to the sale of a Longhorn Cafe restaurant during fiscal 1996 along with
a decline in comparable revenues.
To counteract the decline in comparable revenues, management is currently
taking action in an attempt to increase sales, including stepped-up
marketing activities and restaurant remodeling. However, there can be no
assurance that such actions will result in the desired sales increases.
Management is also implementing cost reduction strategies in order to
decrease the impact of the sales decline.
COSTS AND EXPENSES. Total cost of revenues decreased to 30.1% of revenues
in 1997 as compared to 32.1% of revenues in 1996. The decline is due to
operational efficiencies introduced by management.
Restaurant operations include all other unit-level operating expenses,
comprised principally of labor, supplies, rent, utilities, repairs and
maintenance, and other direct expenses. As a percentage of restaurant
revenues, these costs increased from 50.4% of revenues in fiscal 1996 to
53.2% of revenues in fiscal 1997 primarily due to the decline in comparable
sales.
Selling, marketing and distribution expenses decreased by $47,975 primarily
due to a reduction of marketing activities during the quarter. Such
expenditures were increased early in the second quarter of this fiscal year
in an effort to counteract sales declines.
General and administrative expenses increased by $34,619 primarily due to
the acquisition of the Pasta Co. Restaurants.
Depreciation and amortization increased by $188,984 primarily due to the
acquisition of the Pasta Co. Restaurants.
7
<PAGE> 9
NON-OPERATING INCOME (EXPENSE). Interest expense increased by $154,192 due
to interest accrued on notes payable associated with the acquisition of the
Pasta Co. Restaurants, partially offset by reductions in other interest
bearing debt.
NET INCOME. As a result of the changes in the relationship between
revenues and costs and expenses discussed above, the Company reported net
income of $18,698 for the first quarter of fiscal 1997 compared to net
income of $81,625 for the first quarter of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Company has experienced losses from operations
and, as of September 29, 1996, has an accumulated deficit of $19,381,612.
During the thirteen weeks ended September 29, 1996, net cash flow used in
operating activities equaled $76,771 which resulted from reductions in
accrued liabilities and increases in current assets, partially offset by
depreciation and amortization. Investing activities generated $146,576 in
cash due to the sale of fixed assets partially offset by purchases of
property and equipment. Financing activities utilized $472,326 in cash due
to payments on borrowings.
For the thirteen weeks ended October 1, 1995, net cash flow used in
operating activities equaled $691,290 due primarily to a reduction in
current liabilities. Investing activities utilized $141,892 primarily due
to the purchase of property and equipment. Financing activities utilized
$193,453 in cash due to payments on borrowings.
As of September 29, 1996, the Company had negative working capital of
$6,731,606, as compared to negative working capital of $4,484,903 at June
30, 1996. The increase is due primarily to $3 million in Subordinated
Notes being classified as a current liability as of September 29, 1996.
CAPITAL REQUIREMENTS. The Company renegotiated the payment terms of
its $3 million 12% Subordinated Notes which were due on March 31, 1996.
Principal is now due on July 31, 1997. The material capital commitments of
the Company over the coming year are related to:
o Expansion of Marco's and Pasta Co. Restaurants.
o Remodeling of certain Marco's Restaurants.
o Reduction of the Company's working capital deficit, including payments
on notes, accounts payable and accrued liabilities.
o Refinancing the Subordinated Notes.
Plans for fiscal 1997 include opening one new Marco's Restaurant and four
additional Pasta Co. Restaurants, two of which are currently under
construction. Both Marco's and Pasta Co. Restaurants require an initial
capital investment of approximately $400,000, or a total investment of
approximately $2 million to open five restaurants. The Company intends to
finance these expenditures either through cash flow from operations or from
additional outside financing. There is no assurance that such funds will
be available on a timely basis, especially considering the Company's
upcoming debt service requirements. The actual number of new restaurants
opened will depend upon the availability of capital.
The Company expects to achieve positive cash flow from operations in fiscal
1997, principally from its Marco's and Pasta Co. Restaurants. However, cash
generated from operations will not be sufficient to meet all of the
commitments set forth above. Without additional debt or equity financing in
the short-term, the Company may not be able to (i) repay the $3 million in
12% Subordinated Notes due July 31, 1997, (ii) meet its targeted expansion
goals, and (iii) reduce its current working capital deficit. If additional
financing is not available, the Company may be forced to curtail its
expansion efforts.
8
<PAGE> 10
FORWARD LOOKING INFORMATION
The statements contained in this report on Form 10-Q which are not
historical facts, including, but not limited to, statements found under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations", are based on current expectations that involve a
number of risks and uncertainties. The Company cannot provide any assurance
that these expectations will actually be met. The factors that could cause
actual results to differ materially from those described in the
forward-looking statements include, but are not limited to, the following:
changes in general economic and financial conditions within the markets that
the Company serves; changes in the political and/or regulatory environments
in which the Company operates; changes in consumer demand for the Company's
products and services; competitive factors; and other risk factors described
from time to time in the Company's Securities and Exchange Commission
filings. The actual results of the future events described in such
forward-looking statements in this Form 10-Q could differ materially from
those contemplated by such forward-looking statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or
unanticipated events.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11.1 required by Item 601 of Regulation S-K is filed
as part of this report.
SIGNATURES
Pursuant to the requirements 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.
WATERMARC FOOD MANAGEMENT CO.
Date: 11/12/96 By: /s/ Thomas J. Buckley
---------- ------------------------------------
Thomas J. Buckley
Chief Financial Officer
(Duly Authorized Signatory and
Principal Financial & Accounting
Officer)
9
<PAGE> 11
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11.1 Watermarc Food Management Co. and Subsidiaries -
Computation of Earnings (Loss) Per Common and Common
Equivalent Shares
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 11.1
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES
<TABLE>
<CAPTION>
13 WEEKS ENDED
SEPTEMBER 29, 1996 OCTOBER 1, 1995
------------------ ---------------
<S> <C> <C>
Computation of primary earnings (loss) per
common and common equivalent shares:
Net earnings (loss) applicable to common stock $ (55,451) $ 7,476
============ ============
Weighted average number of common shares outstanding 13,433,658 11,112,026
============ ============
Primary earnings per common share $ (0.00) $ 0.00
============ ============
Computation of earnings (loss) per common share
assuming full dilution (A):
Net earnings (loss) applicable to common stock $ (55,451) $ 7,476
Dividends on preferred stock 74,149 74,149
Interest on 9% convertible subordinated debentures 4,883 4,883
------------ ------------
Earnings assuming full dilution $ 23,581 $ 86,508
============ ============
Weighted average number of shares outstanding 13,433,658 11,112,026
Common shares issuable from stock option plans
and from warrants 3,564,070 1,172,518
Less shares assumed repurchased with proceeds (12,845,221) (1,934,733)
Shares assumed issued upon conversion of
preferred stock 411,925 411,925
Shares assumed issued upon conversion of 9%
subordinated debentures 43,400 42,200
------------ ------------
Common shares outstanding assuming full dilution 4,607,832 10,803,936
============ ============
Earnings per common and common equivalent
share assuming full dilution $ 0.01 $ 0.01
============ ============
</TABLE>
(A) This calculation is submitted in accordance with the Securities and
Exchange Act of 1934, Release No. 9083, although it is contrary to
paragraph 40 of APB Opinion No. 15 because it produced an anti-dilutive
result.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Unaudited Condensed Consolidated Balance Sheets, Statements of
Operations and Statements of Cash Flows for the quarter ended September 29, 1996
and contained in the Company's Form 10-Q and is qualified in its entirety by
reference to such Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 60,645
<SECURITIES> 0
<RECEIVABLES> 527,761
<ALLOWANCES> 0
<INVENTORY> 609,818
<CURRENT-ASSETS> 1,953,447
<PP&E> 8,642,290
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,071,962
<CURRENT-LIABILITIES> 8,685,053
<BONDS> 0
<COMMON> 671,682
0
329,540
<OTHER-SE> 7,223,078
<TOTAL-LIABILITY-AND-EQUITY> 25,071,962
<SALES> 11,483,050
<TOTAL-REVENUES> 11,483,050
<CGS> 3,455,687
<TOTAL-COSTS> 11,362,618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323,767
<INCOME-PRETAX> 18,698
<INCOME-TAX> 0
<INCOME-CONTINUING> 18,698
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,698
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
