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 27, 1998
-----------------------------------
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)
N/A (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 27, 1998, the registrant had 24,563,564 shares of its common
stock and 329,540 shares of its preferred stock outstanding, respectively.
<PAGE>
WATERMARC FOOD MANAGEMENT CO.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - 2
September 27, 1998 and June 28, 1998
Condensed Consolidated Statements of Operations - 3
Thirteen Weeks Ended
September 27, 1998 and September 28, 1997
Condensed Consolidated Statements of Cash Flows - 4
Thirteen Weeks Ended
September 27, 1998 and September 28, 1997
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 10
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PART II. OTHER INFORMATION 14
ITEM 6. Exhibits and Reports on Form 8-K
1
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 27, 1998 JUNE 28, 1998
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................... $ 48,560 $ 90,775
Accounts receivable, trade ................... 80,391 204,106
Accounts receivable from affiliates .......... 164,283 115,244
Inventories .................................. 327,018 316,334
Prepaid expenses and other current assets .... 258,832 38,872
------------ ------------
Total current assets .................... 879,084 765,331
Property and equipment, net ....................... 6,011,200 6,213,441
Notes and other receivables from affiliate ........ 1,398,583 1,398,583
Intangible assets, net ............................ 3,901,455 4,041,433
Other assets ...................................... 263,725 264,382
------------ ------------
$ 12,454,047 $ 12,683,170
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade .................... $ 5,351,727 $ 4,969,793
Accrued liabilities ........................ 3,305,509 2,605,392
Current portion of long-term debt .......... 2,919,648 2,919,648
------------ ------------
Total current liabilities ............... 11,576,884 10,494,833
Long-term debt, less current portion .............. 6,833,689 7,230,348
Deferred rent ..................................... 602,411 602,411
Commitments and contingencies
Stockholders' equity:
Preferred stock ............................ 329,540 329,540
Common stock ............................... 1,189,155 1,189,155
Additional paid-in capital ................. 30,114,040 30,114,052
Accumulated deficit ........................ (38,191,672) (37,277,169)
------------ ------------
Total stockholders' equity .............. (6,558,937) (5,644,422)
------------ ------------
$ 12,454,046 $ 12,683,170
============ ============
</TABLE>
2
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WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
13 WEEKS ENDED
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
------------ ------------
Revenues ....................................... $ 9,120,877 $ 10,868,076
------------ ------------
Costs and expenses:
Costs of revenues ......................... 2,882,842 3,448,816
Other restaurant operations ............... 5,678,173 6,903,597
Selling, marketing and distribution ....... 237,592 209,250
General and administrative ................ 646,828 724,583
Depreciation and amortization ............. 481,431 561,788
------------ ------------
Total costs and expenses ............. 9,926,866 11,848,034
------------ ------------
Income (loss) from operations .................. (805,989) (979,958)
Non-operating income (expense):
Interest income ........................... 30,037 30,075
Interest expense .......................... (156,370) (185,299)
Other, net ................................ 17,819 618,845
------------ ------------
Total non-operating income (expense) . (108,514) 463,621
------------ ------------
Income (loss) before income taxes .............. (914,503) (516,337)
Income tax provision (benefit) ................. -- --
------------ ------------
Net income (loss) .............................. ($ 914,503) ($ 516,337)
Preferred stock dividends ...................... 12 47
------------ ------------
Net income (loss) less preferred stock dividends ($ 914,515) ($ 516,384)
============ ============
Loss per common share - Basic and fully diluted ($ 0.04) ($ 0.04)
============ ============
Weighted average common and common equivalent
shares .................................... 24,554,988 14,263,230
============ ============
See notes to condensed consolidated financial statements (unaudited).
3
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss) for the period ........................ ($ 914,503) ($ 516,337)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ...................... 481,431 561,788
Changes in assets and liabilities:
Accounts receivable, trade ......................... 123,715 313,274
Accounts receivable from affiliates ................ (49,039) 241,607
Inventories ........................................ (10,684) 45,268
Prepaid expenses and other current assets .......... (219,960) (697,551)
Accounts payable and accrued liabilities ........... 1,082,051 (639,036)
Other assets ....................................... 657 (336,371)
----------- -----------
Net cash provided by (used in) operating activities ..... 493,668 (1,027,358)
Investing activities:
Purchase of property and equipment ...................... (139,212) (266,307)
Proceeds from sale of assets ............................ -- 470,663
Collection of bad debt .................................. -- 453,864
Investment in note receivable ........................... -- (270,663)
Repayment of notes receivable ........................... -- 5,653
----------- -----------
Net cash provided by (used in) investing activities ..... (139,212) 393,210
----------- -----------
Financing activities:
Net proceeds from borrowings ............................ -- 2,255,047
Cash dividends .......................................... (12) (46)
Payments on borrowings .................................. (396,659) (1,806,942)
----------- -----------
Net cash provided by (used in) financing activities ..... (396,671) 448,059
----------- -----------
Net increase (decrease) in cash and cash equivalents ......... (42,215) (186,089)
Cash and cash equivalents, beginning of period ............... 90,775 263,542
----------- -----------
Cash and cash equivalents, end of period ..................... $ 48,560 $ 77,453
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
4
<PAGE>
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
As of September 27, 1998, Watermarc Food Management Co. (the "Company"),
owned and operated 39 restaurants, primarily in the Houston Metropolitan
area, under the names "Marco's Mexican Restaurants" ("Marco's Restaurants");
"The Original Pasta Co." ("Pasta Co."); Billy Blues Barbecue Bar & Grill
("Billy Blues"). The Company also produces and markets two brands of barbecue
sauce and a spice rub, "Billy Blues Barbecue Sauce", "Chris' & Pitt's
Bar-B-Que Sauce" and "Chris' & Pitt's Spice Rub". Billy Blues Barbecue Sauce
is sold on a special order basis, primarily to restaurants. The Chris' and
Pitt's products are marketed to supermarkets, other retail stores and food
service outlets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
BASIS OF PRESENTATION
The accompanying unaudited financial information for the quarters ended
September 27, 1998 and September 28, 1997 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 28, 1998 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 $10,697,800 at September 27, 1998 and a net
loss of $914,503 for the thirteen weeks ended September 27, 1998 and
experienced significant losses in fiscal 1998 and the first quarter of fiscal
1999 which raise doubts about the Company's ability to continue as a going
concern. 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
and ultimately attain profitable operations.
For a further discussion of the Company's liquidity and capital resources,
see pages 10 through 12 hereof.
Management's plans include the following:
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 Further reductions in operating expenses through improved cost controls.
o Further reductions in general and administrative expenses.
o Increasing revenues in existing restaurants by improving marketing
programs and customer service.
o Selling or closing its Billy Blues Restaurant and non-performing
Marco's and Pasta Co. Restaurants.
5
<PAGE>
o Renegotiating and extending the terms of the Company's existing
indebtedness.
o Obtaining additional equity capital or debt financing.
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share", which
changes the manner in which earnings per share (EPS) amounts are calculated
and presented. Basic earnings per common share is calculated by dividing net
income by the weighted average number of common shares outstanding during the
period presented. Fully diluted earnings per common share is calculated by
dividing net income by the weighted average number of common shares and
common share equivalents. Stock options are regarding as common stock
equivalents and are computed using the treasury stock method. Stock options
will have a dilutive effect under the treasury stock method when the average
market price of the common stock during the period exceeds the exercise price
of the options.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure", which establishes standards for disclosing
information about the Company's capital structure. This statement does not
change any previous disclosures but consolidates them in this statement for
ease of retrieval and greater visibility.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which established standards for reporting and displaying comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of this
statement requires incremental financial statement disclosure, and thus will
have no effect on the Company's financial position or results of operations.
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:
The Company is involved in various lawsuits arising in the ordinary course of
its business, but believes that the resolution of these matters will not have
a material adverse impact on its financial position, results of operations or
cash flows.
In the fourth quarter of fiscal year ended June 28, 1998, the Company accrued
a liability of $150,000 for a claim of monies owed on a guarantee by the
Company of an open account of Pete's Hospitality Co., Inc., formerly a
subsidiary of the Company, owed to a vendor for sale of goods. Pete's filed
for bankruptcy and failed to pay the account. The vendor has filed suit
against the Company on the guarantee.
Except as stated above, in management's opinion, the Company is not a party
to any litigation other than ordinary routine matters which are incidental to
the Company's business, including personal injury claims and disputes with
vendors and suppliers. The Company believes that no current legal
proceedings, individually, will have a material adverse effect upon the
Company or its business.
6
<PAGE>
3. RELATED PARTY TRANSACTIONS:
In the fourth quarter of fiscal 1997 the Company sold Pete's Hospitality Co.,
Inc., ("Pete's") a wholly-owned subsidiary, pursuant to a Stock Purchase
Agreement, to Angelo Pitillo, former President, Chief Operating Officer and
director of the Company. Mr. Pitillo acquired all of the issued and
outstanding shares of Pete's in exchange for a promissory note of Pete's
payable to the Company in the principal amount of $300,000 (the "Pete's
Note"). The Pete's Note accrues interest at the rate of 10% per annum over
approximately five years. The Pete's Note is secured by the assets of Pete's.
The Company recorded a loss of approximately $750,000 on the transaction. On
December 18, 1997, Pete's Hospitality Co., Inc. filed for bankruptcy.
Therefore, the Company wrote off the note receivable balance of $294,904 in
fiscal 1998. The Company is a secured creditor of the bankrupt estate,
however, there is no assurance that there will be sufficient assets in the
estate to fully satisfy the claims of all creditors, including the Company's,
in whole or in part.
On May 1, 1998 the Board of Directors of the Company adopted a resolution
approving the issuance to Mr. Bombaywala of warrants to purchase 10,000,000
pre-reverse stock split shares of the Company's Common Stock at the
pre-reverse stock split exercise price of $.14 per share, which was the
market price of the stock on April 2, 1998 when the Board of Directors first
considered a proposal to compensate Mr. Bombaywala for the bank loans, notes,
accounts payable, taxes, contracts and leases that he had personally
guaranteed on behalf of the Company in order for the Company to continue to
do business.
In approving the issuance of the warrants to Mr. Bombaywala, the Board
considered, among other things, (i) its prior commitment to Mr. Bombaywala to
compensate him for his personal guarantees of Company obligations and his
loans and advances to the Company (collectively the "Guarantees"), (ii) the
importance of the Guarantees to the Company's financial survival and the
aggregate amount of such Guarantees, particularly in the past year, (iii) the
personal risk of the Guarantees to Mr. Bombaywala and the pledge of his
personal assets to partially collateralize certain of the Guarantees, (iv)
the fact that the market price of the Company's Common Stock was equal to the
exercise price of the warrants at the time of the request by Mr. Bombaywala,
(v) the short- and long-term value to the Company of the commitment of Mr.
Bombaywala to guarantee up to $5 million of future obligations of the Company
if requested by the Company for additional financing or the renewal of
existing leasehold or debt obligations of the Company, (vi) the waiver and/or
accrual and nonpayment of all prior compensation payable to Mr. Bombaywala as
an executive officer of the Company, (vii) the lock-up agreement with respect
to the shares underlying the warrants, and (viii) the fact that the Company
will pursue a fairness opinion with respect to the warrants and approval of
the independent shareholders of the Company with respect to the issuance of
the warrants.
The warrants will have a four year term and the underlying shares will be
subject to a two year lock-up agreement which will expire if a total of $5
million in debt or equity financing is raised by the Company within the two
year period.
However, at this time the Board has decided to defer the issuance of the
warrants to Mr. Bombaywala for an indefinite period of time. If in the future
the Board decides that it is in the best interests of the Company to issue
the warrants to Mr. Bombaywala, the Board will seek shareholder approval at
the next annual meeting or at a special meeting.
In December 1994, in connection with the offering of the Company's $3 million
12% Subordinated Notes, Sanders Morris Mundy, Inc. ("SMM") received
approximately $250,000 as a placement fee. Also in connection with the
offering, the Company entered into an eighteen month advisory agreement with
SMM calling for payments of $10,000 per month and issued warrants to purchase
150,000 shares of common stock at an exercise price of $2.50 per share which
currently expire on August 31, 2002. Michael S. Chadwick, a director of the
Company, is Senior Vice President and a Managing Director of Corporate
Finance of SMM. Mr. Chadwick was assigned 45,000 of the warrants by SMM. In
July 1998, the payment terms of the 12% Subordinated Notes were extended and
the exercise price of the warrants was reduced to $.09 per share. In
consideration for the extension of the note term, an additional 1,150,000
warrants exercisable at $.25 per share and expiring August 31, 2003 unless
the note is paid at its maturity date, were issued to the noteholders. In
December 1997, the advisory agreement was extended to July 1998,
7
<PAGE>
after which it expired. However, the amount owing under the advisory
agreement ($75,000) is due on December 31, 1999 pursuant to a non-interest
bearing note.
4. DETERMINATION OF EARNINGS PER INCREMENTAL SHARE:
The following tables present the reconciliation of the numerators and
denominators in calculating diluted earnings per share ("EPS") from
continuing operations in accordance with Statement of Financial Accounting
Standards No. 128.
<TABLE>
<CAPTION>
INCREASE IN EARNINGS PER
1998 INCREASE IN NUMBER OF INCREMENTAL
INCOME SHARES SHARE
--------------------------------------------
<S> <C>
Options ....................... -- 639,205
Dividends on convertible
preferred stock .......... $ 74,147 411,925
Interest on 9% convertible
subordinated debenture ... $ 2,633 13,400
--------------------------------------------
$ 76,780 1,064,530 $ 0.07
============================================
Computation of Diluted Earnings per Share
INCOME AVAILABLE
FROM CONTINUING COMMON PER
OPERATIONS SHARES SHARE
--------------------------------------------
($ 914,515) 24,554,988 ($ 0.04)
Common Stock Options ......... 639,205
--------------------------------------------
($ 914,515) 25,194,193 ($ 0.04)
Dividend on convertible
preferred stock ......... 74,147 411,925
Interest on 9% convertible
subordinated debenture .. 2,633 13,400
--------------------------------------------
($ 837,735) 25,619,518 ($ 0.03) Antidilutive
============================================
INCREASE IN EARNINGS PER
1997 INCREASE IN NUMBER OF INCREMENTAL
INCOME SHARES SHARE
--------------------------------------------
Options ...................... -- 3,880,108
Dividends on convertible
preferred stock ......... $ 74,147 411,925
Interest on 9% convertible
subordinated debenture .. $ 2,633 43,400
--------------------------------------------
$ 76,780 4,335,433 $ 0.02
============================================
</TABLE>
8
<PAGE>
4. DETERMINATION OF EARNINGS PER INCREMENTAL SHARE CONT'D:
Computation of Diluted Earnings per Share
<TABLE>
<CAPTION>
INCOME AVAILABLE
FROM CONTINUING COMMON PER
OPERATIONS SHARES SHARE
--------------------------------------------
<S> <C> <C> <C>
($ 516,384) 14,263,230 ($ 0.04)
Common Stock Options .......... 3,880,108
--------------------------------------------
($ 516,384) 18,143,338 ($ 0.03) Antidilutive
Dividend on convertible
preferred stock .......... 74,147 411,925
Interest on 9% convertible
subordinated debenture ... 2,633 43,400
--------------------------------------------
($ 439,604) 18,598,663 ($ 0.02) Antidilutive
============================================
</TABLE>
NOTE: Because diluted EPS from continuing operations increased from ($0.04)
to ($0.03) in 1998 and increased from ($0.04) to ($0.02) in 1997, when
convertible preferred stock and convertible subordinated debentures are
included in the computation, those convertible preferred shares and
convertible subordinated debentures are antidilutive and are ignored in the
computation of Diluted EPS from Continuing Operations. Therefore, Diluted EPS
from Continuing Operations is reported as ($0.04) in 1998 and 1997,
respectively.
(This space intentionally left blank.)
9
<PAGE>
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 1999 and
1998 are to the thirteen week periods ended September 27, 1998 and September
28, 1997, respectively.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 28, 1997 COMPARED TO THE
THIRTEEN WEEKS ENDED SEPTEMBER 27, 1998.
REVENUES. Revenues decreased $1,747,199 or 16.1% to $9,120,877 for the first
quarter of fiscal 1999 as compared to $10,868,076 for the first quarter of
fiscal 1998.
To counteract the decline in comparable revenues, management is currently
taking action in an attempt to increase sales, including an intense
concentration on increasing customer satisfaction. However, there can be no
assurance that such actions will result in the desired sales increases.
Management continues to implement cost reduction strategies in order to
attempt to decrease the impact of the sales decline on the Company's bottom
line.
COSTS AND EXPENSES. Total cost of revenues decreased to 31.6% of revenues in
1999 as compared to 31.7% of revenues in 1998. The decline is due to
operational efficiencies and cost controls on food and labor introduced by
management.
Other operations include all other operating expenses, comprised principally
of labor and benefits, operating supplies, rent, utilities, repairs and
maintenance and other costs. As a percentage of revenues, these costs
decreased from 63.5% of revenues in fiscal 1998 to 62.3% of revenues in
fiscal 1999 primarily due to continued cost reduction strategies.
Selling, marketing and distribution expenses increased by $28,342.
General and administrative expenses decreased by $77,755 primarily due to
continued downsizing of corporate staff and cost controls.
Depreciation and amortization decreased by $80,357 primarily due to closing
of non-performing restaurants.
NON-OPERATING INCOME (EXPENSE). Interest expense decreased by $28,929 due to
reductions in interest bearing debt.
NET INCOME (LOSS). As a result of the changes in the relationship between
revenues and costs and expenses discussed above, the Company showed net loss
of $914,503 for the first quarter of fiscal 1999 compared to net loss of
$516,337 for the first quarter of fiscal 1998. The fiscal 1999 loss is
generally due to decline in comparable revenues. If such trends continue, the
Company will incur substantial losses in the future which would have a
material impact upon its cash flow.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Company continues to experience losses from
operations and, as of September 27, 1998, has an accumulated deficit of
$38,191,672.
10
<PAGE>
For the thirteen weeks ended September 27, 1998, net cash flow provided by
operating activities equaled $493,668 which resulted from increases in
accrued liabilities and accounts payable. Investing activities used $139,212
in cash due to the purchase of fixed assets. Financing activities used
$396,671 in cash for payments on borrowings.
For the thirteen weeks ended September 28, 1997, net cash flow used in
operating activities equaled $1,027,358 which resulted from reductions in
accrued liabilities and increases in current assets, partially offset by
depreciation and amortization added back to net income. Investing activities
generated $393,210 in cash due to the sale of fixed assets and collection of
bad debt, partially offset by purchases of property and equipment. Financing
activities contributed $448,059 in cash created by borrowing from banks and a
stockholder.
As of September 27, 1998, the Company had negative working capital of $10.7
million, as compared to negative working capital of approximately $9.7
million at June 28, 1998. The increase is due primarily to an increase in
accounts payable and accrued expenses.
CAPITAL REQUIREMENTS. 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,
refinance its debt and to ultimately attain profitable operations. The
Company did not generate adequate cash flow to meet its needs in fiscal 1998,
nor in the first quarter of fiscal 1999. The Company needs immediate capital
in the short-term and additional capital in the long-term to meet its needs
which are identified below. The Company cannot generate positive cash flow
from operations unless it can increase its sales and achieve further cost
reductions. Even if profitable operations can be achieved by the Company in
the short-term, the Company will not have sufficient cash flow to cover
general and administrative expenses, materially reduce its payables and
accrued liabilities, and meet its debt service requirements.
The material capital commitments of the Company for fiscal 1999 are as
follows:
o Reduction of the Company's working capital deficit, including payments
on notes, accounts payable and accrued liabilities.
o Accumulation of funds for the payment of the principal balance of $1.25
million currently owed on the $3 Million 12% Subordinated Notes. The
notes were due July 10, 1998, but have been extended to December 31,
1999. A principal payment of $100,000 was made September 1, 1998, with
a principal payment of $150,000 due December 31, 1998.
o Accumulation of funds for the payment of the principal balance of $1
million owed on the note payable to an unaffiliated foreign investor
due June 1999. Unless a settlement agreement can be reached, the
Company is in default on this note and received a notice of
acceleration and default on September 11, 1998.
o Funding of negative cash flow from operations if operating results are
not improved. Increasing sales (or preventing further sales declines)
and controlling or reducing operating costs will be critical for the
Company to generate positive operating cash flow.
Management's plans include the following:
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 Further reductions in operating expenses through improved cost
controls.
o Further reductions in general and administrative expenses.
o Increasing revenues in existing restaurants by improving marketing
programs and customer service.
11
<PAGE>
o Selling or closing its Billy Blues Restaurant and non-performing
Marco's and Pasta Co. Restaurants.
o Renegotiating and extending the terms of the Company's existing
indebtedness.
o Obtaining additional equity capital or debt financing.
The Company may achieve positive cash flow from operations in fiscal 1999,
principally from its Marco's and Pasta Co. Restaurants, only if it can
increase its restaurant sales and reduce its labor and other operating costs.
The Company may experience further sales declines in fiscal 1999 which could
have a material adverse effect on the Company's liquidity if additional
financing is not available. The Company plans to supplement cash flow from
operations by selling its last barbecue restaurant, Billy Blues. However,
cash generated from operations, if any, will not be sufficient to meet all of
the Company's fiscal 1999 capital commitments set forth above. Without debt
refinancing or additional debt or equity financing in the short-term, the
Company will not be able to (i) reduce its current working capital deficit,
(ii) repay the $1.25 million balance of the Subordinated Notes due December
31, 1999, (iii) repay the $1 million note due June 1999, or (iv) fund
negative cash flow from operations if the Company's negative operating cash
flow continues. There is no assurance that the Company will be able to
refinance its debt or obtain additional debt or equity financing in the short
term or long-term. The Company was not successful in raising debt or equity
financing in fiscal 1998.
The Company did not have sufficient cash flow during the quarter to satisfy
its direct operating expenses and pay its substantial indebtedness and reduce
its accounts payable and short-term liabilities. The Company cannot continue
to fund negative cash flow from operations and meet its other obligations by
increasing its payables to vendors in the short or long-term. In order to
meet its liabilities and obligations, the Company was required to obtain
additional debt financings and borrowings, renegotiate and extend the terms
of various borrowings and renegotiate and extend the amounts and the timing
of payment to various vendors.
The Company may experience further losses or negative cash flow from
operations during the remainder of fiscal 1999. Continued losses raise doubt
about the Company's ability to continue as a going concern. The financial
statements do not reflect any adjustments that might result from the outcome
of this uncertainty. If the substantial losses continue, the value of the
Company's long-lived assets may become further impaired resulting in further
write-downs to such assets to their estimated fair value.
The inability of the Company to obtain additional financing and achieve
profitable operations and positive cash flow has resulted in the curtailment
of the Company's expansion activities which may continue indefinitely. Cash
generated from operations will not be sufficient to allow the Company to
timely meet all of its obligations and commitments. Since it has been unable
to obtain profitable operations and positive cash flow from operations, or
additional financing, the Company has curtailed its expansion, is selling
non-core assets and is seeking further financings on terms which may prove
unfavorable to the Company and its shareholders. If operating results do not
improve or if additional financing is not available, the Company may be
forced to further curtail or reduce its operations or sell all or part of its
core assets on terms unfavorable to the shareholders.
YEAR 2000 ISSUES
The Company is working to resolve the potential impact of the year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or systems failures. The Company utilizes a number of
computer programs in its operations. The Company has retained a consultant to
assess the potential impact of the year 2000 on its own operations. In
addition, the Company is also evaluating the year 2000 readiness of those
third parties, including vendors and suppliers, with whom the Company does
business, and the potential impact on the Company if these third parties are
unable to address this issue in a timely manner. The Company has not
completed its assessment, but currently believes that the costs of addressing
this issue will not have a material adverse impact on the Company's financial
position. However, if the Company and third parties upon which it relies are
unable to address this issue in a timely manner, it could result in a
material
12
<PAGE>
financial risk to the Company. In order to assure that this does not occur,
the Company plans to devote all resources necessary to resolve any
significant year 2000 issues in a timely manner. The Company is presently
evaluating its estimated costs for the year 2000 conversion.
FORWARD-LOOKING INFORMATION.
Information contained in this report on Form 10-Q which are not historical
facts, contains forward-looking statements and information relating to the
Company that are based on the beliefs of the Company's management, as well as
assumptions made by, and information currently available to the Company's
management. When used in this Form 10-Q, words such as "anticipate,"
"believe," "estimate," "expect," "intend," "may," "probably" and similar
expressions, as they relate to the Company, its operations and management,
identify forward-looking statements. Such statements reflect the current
views of the Company with respect to future events, and are subject to
certain risks, uncertainties, and assumptions relating to the operations and
results of operations of the Company, competitive factors and pricing
pressures, shifts in consumer demand, the costs of products and services,
general economic conditions, and the acts of third parties, as well as other
factors described in this Form 10-Q, and, from time to time, in the Company's
periodic earnings releases and reports filed with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results or outcomes
may vary materially from those described herein as anticipated, believed,
estimated, expected, or intended, or the like.
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.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a)Exhibit 27 required by Item 601 of Regulation S-K is filed as part of this
report.
(b)REPORTS ON FORM 8-K. None.
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: 11/11/98 By: /s/ GHULAM BOMBAYWALA
Ghulam Bombaywala, Chairman of the Board,
Chief Executive Officer and Director (Duly
Authorized Signatory and Principal Executive
Officer and acting as Principal Financial and
Accounting Officer) (1)
(1) The principal financial and accounting officer resigned in July 1997 and
has not been replaced as of the date of this filing. Mr. Bombaywala is
signing as these capacities.
14
<PAGE>
WATERMARC FOOD MANAGEMENT CO.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM WATERMARC FOOD MANAGEMENT CO. FORM 10-Q FOR THE 1ST QUARTER OF FISCAL 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-END> SEP-27-1998
<CASH> 48,560
<SECURITIES> 0
<RECEIVABLES> 244,674
<ALLOWANCES> 0
<INVENTORY> 327,018
<CURRENT-ASSETS> 879,084
<PP&E> 6,011,200
<DEPRECIATION> 481,431
<TOTAL-ASSETS> 12,454,047
<CURRENT-LIABILITIES> 11,576,884
<BONDS> 0
0
329,540
<COMMON> 1,189,155
<OTHER-SE> (8,077,632)
<TOTAL-LIABILITY-AND-EQUITY> 12,454,046
<SALES> 9,120,877
<TOTAL-REVENUES> 9,120,877
<CGS> 2,882,842
<TOTAL-COSTS> 9,926,866
<OTHER-EXPENSES> 7,044,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156,370
<INCOME-PRETAX> (914,503)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (914,503)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
