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 MARCH 28, 1999
-------------------------------
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 March 28, 1999, 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 -
March 28, 1999 and June 28, 1998 2
Condensed Consolidated Statements of Operations - 3
Thirteen Weeks Ended
March 28, 1999 and March 29, 1998
Condensed Consolidated Statements of Operations - 4
Thirty Nine Weeks Ended
March 28, 1999 and March 29, 1998
Condensed Consolidated Statements of Cash Flows - 5
Thirty Nine Weeks Ended
March 28, 1999 and March 29, 1998
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 12
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PART II. OTHER INFORMATION 16
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Senior Securities
ITEM 6. Exhibits and Reports on Form 8-K
1
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 28, 1999 June 28, 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................... $ 660,500 $ 90,775
Accounts receivable, trade ................... 195 204,106
Accounts receivable from affiliates .......... 364,203 115,244
Inventories .................................. 180,747 316,334
Prepaid expenses and other current assets .... 271,307 38,872
------------ ------------
Total current assets .................... 1,476,952 765,331
Property and equipment, net ....................... 5,550,848 6,213,441
Notes and other receivables from affiliate ........ 1,398,583 1,398,583
Intangible assets, net ............................ 3,431,407 4,041,433
Other assets ...................................... 235,685 264,382
------------ ------------
$ 12,093,475 $ 12,683,170
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities Not Subject to Compromise
Current liabilities:
Accounts payable, trade ...................... $ 849,048 $ 4,969,793
Accrued liabilities .......................... 427,349 2,605,392
Current portion of long-term debt ............ 2,919,648
------------ ------------
Total current liabilities ............... 1,276,397 10,494,833
Long-term debt, less current portion .............. -- 7,230,348
Deferred rent ..................................... -- 602,411
Liabilities Subject to Compromise
Secured Notes ................................ 9,288,718
Priority Claims .............................. 2,350,721
Unsecured Liabilities ........................ 8,111,412
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 .......................... (40,566,508) (37,277,169)
------------ ------------
Total stockholders' equity .............. (8,933,773) (5,644,422)
------------ ------------
$ 12,093,475 $ 12,683,170
============ ============
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
2
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
13 Weeks Ended
March 28, 1999 March 29, 1998
-------------- -------------
Revenues ....................................... $ 7,339,679 $ 10,138,939
------------ ------------
Costs and expenses:
Costs of revenues ......................... 2,063,603 3,113,061
Other restaurant operations ............... 5,327,833 5,886,128
Selling, marketing and distribution ....... 130,738 224,684
General and administrative ................ 826,017 514,688
Depreciation and amortization ............. 424,596 496,686
------------ ------------
Total costs and expenses ............. 8,772,787 10,235,247
------------ ------------
Income (loss) from operations .................. (1,433,108) (96,308)
Non-operating income (expense):
Interest income ........................... 30,037 30,037
Interest expense .......................... -- (296,971)
Other, net ................................ (2,822) 15,730
------------ ------------
Total non-operating income (expense) . 27,215 (251,204)
------------ ------------
Income (loss) before income taxes .............. (1,405,893) (347,512)
Income tax provision (benefit) ................. -- --
------------ ------------
Net income (loss) .............................. (1,405,893) (347,512)
Preferred stock dividends ...................... -- 36
------------ ------------
Net income (loss) less preferred stock dividends ($ 1,405,893) ($ 347,548)
============ ============
Loss per common share - basic and fully diluted ($ 0.06) ($ 0.02)
============ ============
Weighted average common and common equivalent
shares .................................... 24,563,564 16,449,301
============ ============
See notes to condensed consolidated financial statements (unaudited).
3
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
CONDENSED CONSOLIDATED STATEMENTS OPERATIONS (UNAUDITED)
39 Weeks Ended
March 28, 1999 March 29, 1998
-------------- --------------
Revenues ....................................... $ 24,419,362 $ 30,457,572
------------ ------------
Costs and expenses:
Costs of revenues ......................... 7,302,401 9,446,898
Other restaurant operations ............... 15,536,336 18,324,490
Selling, marketing and distribution ....... 1,001,847 664,127
General and administrative ................ 2,396,943 1,896,077
Depreciation and amortization ............. 1,073,245 1,518,271
------------ ------------
Total costs and expenses ............. 27,310,772 31,849,863
------------ ------------
Income (loss) from operations .................. (2,891,410) (1,392,291)
Non-operating income (expense):
Interest income ........................... 90,112 90,149
Interest expense .......................... (620,414) (631,853)
Other, net ................................ 132,373 642,605
------------ ------------
Total non-operating income (expense) . (397,929) 100,901
------------ ------------
Income (loss) before income taxes .............. (3,289,339) (1,291,390)
Income tax provision (benefit) ................. -- --
------------ ------------
Net income (loss) .............................. (3,289,339) (1,291,390)
Preferred stock dividends ...................... 12 83
------------ ------------
Net income (loss) less preferred stock dividends ($ 3,289,351) ($ 1,291,473)
============ ============
Loss per common share - basic and fully diluted ($ 0.13) ($ 0.09)
============ ============
Weighted average common and common equivalent
shares .................................... 24,560,705 14,982,030
============ ============
See notes to condensed consolidated financial statements (unaudited).
4
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
39 Weeks Ended
March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
Operating activities:
Net income (loss) for the period ................... ($3,289,339) ($1,291,426)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization ................. 1,073,245 1,518,271
Changes in assets and liabilities:
Accounts receivable, trade .................... 203,911 291,243
Accounts receivable from affiliates ........... (248,959) 32,177
Inventories ................................... 135,587 113,222
Prepaid expenses and other current assets ..... (232,435) (814,031)
Accounts payable and accrued liabilities ...... 3,018,892 (134,654)
Other assets .................................. 28,697 (449,968)
----------- -----------
Net cash provided by (used in) operating activities 689,599 (735,166)
Investing activities:
Purchase of property and equipment ................. (402,895) (473,555)
Proceeds from sale of assets ....................... 116,074 470,663
Collection of bad debt ............................. -- 453,864
Investment in note receivable ...................... -- (279,148)
Repayment of notes receivable ...................... -- 5,653
----------- -----------
Net cash provided by (used in) investing activities (286,821) 177,477
----------- -----------
Financing activities:
Net proceeds from borrowings ....................... 500,000 4,281,099
Cash dividends on preferred stock .................. (12) (82)
Payments on borrowings ............................. (333,041) (3,789,240)
----------- -----------
Net cash provided by (used in) financing activities 166,947 491,777
----------- -----------
Net decrease in cash and cash equivalents ............... 569,725 (65,912)
Cash and cash equivalents, beginning of period .......... 90,775 263,542
----------- -----------
Cash and cash equivalents, end of period ................ $ 660,500 $ 197,630
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
5
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PETITION FOR REORGANIZATION UNDER CHAPTER 11:
On January 12, 1999, Watermarc Food Management Co. (the "Company") and its
subsidiaries, The Original Pasta Co. ("Pasta Co.") and Marco's Mexican
Restaurants, Inc. ("Marco's") filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy
Court for the Southern District of Texas, Houston Division. The Company is
currently operating its business as a debtor-in-possession, subject to the
jurisdiction of the Bankruptcy Court under Case No. 99-30427-H1-11, Caption
In re: Watermarc Food Management Co.
As a debtor-in-possession, the Company is authorized to operate its business,
but may not engage in transactions outside of the normal course of business
without approval, after notice and hearing, of the Bankruptcy Court. An
unsecured creditors' committee was formed by the U.S. Trustee on January 15,
1999, which has the right to review and object to business transactions
outside the ordinary course and participate, as do certain other parties with
claims against the Company's bankruptcy estate, in any plan of
reorganization. The Company filed its First Amended Plan of Reorganization
and First Amended Disclosure Statement with the Bankruptcy Court on May 10,
1999. The First Amended Plan of Reorganization has not yet been confirmed.
As of the petition date, actions to collect pre-petition indebtedness are
stayed and other contractual obligations may not be enforced against the
Company. In addition, the Company may reject executory contracts and lease
obligations, and parties affected by these rejections may file claims with
the Bankruptcy Court in accordance with the reorganization process.
As part of its "first day orders," the Bankruptcy Court approved the
Company's payment of pre-petition employee wages, salaries, and reimbursable
employee expenses, and the continued payment of these items. The Bankruptcy
Court also approved the interim use of cash collateral for the purpose of
meeting payroll, ongoing operational expenses and other ordinary course of
business costs and expenses. In addition, the Bankruptcy Court approved the
Company's request to honor outstanding pre-petition gift certificates sold to
customers in the ordinary course of business. The Company believes that its
ability to honor these gift certificates may help to preserve its customer
base and goodwill in a highly competitive market.
As permitted under the Bankruptcy Code, the Company has elected to reject
certain real estate leases. The Company has filed motions to reject ten real
property leases in connection with the closing of seven of its Marco's
restaurants and three of its Pasta Co. restaurants. The Company has not yet
completed its review of all of its pre-petition executory contracts and
leases for assumption or rejection. The Company will continue to analyze, and
may assume or reject, additional leases and other executory contracts. The
Company cannot presently determine or reasonably estimate the aggregate
liability resulting from rejection of executory contracts and unexpired
leases for which claims have been, or may be, filed.
On May 8, 1999 the unsecured creditors' committee filed a motion seeking the
appointment of a trustee in the bankruptcy case. The Company has filed its
response to the motion. The bankruptcy court has not yet heard the motion.
Although the Company continues to negotiate with the creditors' committee in
an attempt to maximize value for all of the Company's creditors, there can be
no assurance that the Company will be successful in its negotiations. The
Chapter 11 filings, the uncertainty regarding the eventual outcome of the
reorganization of the Company and the effect of other unknown adverse factors
could threaten the Company's existence as a going concern.
6
<PAGE>
2. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
As of March 28, 1999, the Company, owned and operated 34 restaurants,
primarily in the Houston Metropolitan area, under the names "Marco's Mexican
Restaurants"; "The Original Pasta Co."; and Billy Blues Barbecue Bar & Grill
("Billy Blues").
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 includes the results of
operations of the Company for the thirteen week and thirty-nine week periods
ended March 28, 1999 and March 29, 1998. 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 condensed consolidated balance sheet data was derived from the June 28,
1998 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 consolidated interim financial statements have been prepared
on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course
of business. As a result of the Company's Chapter 11 filings, however, such
matters are subject to significant uncertainty. Continuing on a going concern
basis is dependent upon, among other things, approval of the Company's First
Amended Plan of Reorganization, the success of future business operations,
and the generation of sufficient cash from operations and potential financing
sources to meet the Company's obligations. The accompanying consolidated
interim financial statements do not reflect (a) the realizable value of
assets on a liquidation basis or their availability to satisfy liabilities,
(b) the effect of any changes to the Company's capital structure or in the
Company's reorganization, or (c) adjustments to the carrying value of assets
or liability amounts that may be necessary as the result of actions by the
Bankruptcy Court.
For a further discussion of the Company's liquidity and capital resources,
see pages 13 through 14 hereof.
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.
7
<PAGE>
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.
3. STORE CLOSINGS:
In connection with the bankruptcy filing, the Company has closed six Marco's
restaurants (two in the second quarter of fiscal 1999) and two Pasta Co.
restaurants (one in the second quarter of fiscal 1999 and one in the third
quarter of fiscal 1999) which had declining sales and profits. The Company
plans to close one additional Marco's restaurant and one additional Pasta Co.
restaurant.
4. 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, Sysco Food Services
of Seattle, filed suit on November 21, 1997 against the Company on the
guarantee. The suit was filed in the Superior Court of the State of
Washington for King County. The suit has been stayed by the Chapter 11
filings.
In the third quarter of fiscal 1999, suit was filed against the Company for
default on a promissory note in the principal amount of $1,000,000 owed to an
unaffiliated foreign investor, Fantasia Stiftung. The suit was filed on
December 31, 1998 in the 11th Judicial District Court of Harris County,
Texas. The suit has been stayed by the Chapter 11 filings.
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, either individually or in aggregate, will have a material
adverse effect upon the Company or its business.
5. 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
8
<PAGE>
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.
However, the Board decided to defer the issuance of the warrants to Mr.
Bombaywala for an indefinite period of time. Due to the Chapter 11 filings,
the Company does not expect to issue such warrants to Mr. Bombaywala.
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 former 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, after which
it expired. The amount owing under the advisory agreement ($75,000), due on
December 31, 1999 pursuant to a non-interest bearing note, was not paid prior
to the Chapter 11 filing.
On October 15, 1998 the Company executed a promissory note in the principal
amount of $520,000 in favor of the Bombaywala Family Trust (the "Trust"). A
loan in that amount was made by the Trust to the Company, the proceeds of
which were used to pay operating expenses and other obligations of the
Company. The loan is unsecured and bears interest at the rate of 10% per
annum. The amount owing under the note was not paid prior to the Chapter 11
filing.
6. SUBSEQUENT EVENTS:
On January 12, 1999, the Company and its subsidiaries, The Original Pasta Co.
and Marco's Mexican Restaurants, Inc., filed voluntary petitions for
reorganization under Chapter 11 of the United States
9
<PAGE>
Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of
Texas, Houston Division. The Company is currently operating its business as a
debtor-in-possession, subject to the jurisdiction of the Bankruptcy Court.
(See Note 1).
On December 18, 1998 Philip M. Mount resigned as a director of the Company.
On January 21, 1999 Michael S. Chadwick resigned as a director of the
Company.
(This space intentionally left blank.)
10
<PAGE>
7. 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.
INCREASE IN EARNINGS PER
39 Weeks Ended 3/28/99 INCREASE IN NUMBER OF INCREMENTAL
INCOME SHARES SHARE
-------------------------------------------
Options - 1,475,910 $0.00
Computation of Diluted Earnings per Share
INCOME AVAILABLE
FROM CONTINUING COMMON PER
OPERATIONS SHARES SHARE
-------------------------------------------
($3,289,339) 24,560,705 ($0.13)
Common Stock Options 1,475,910
-------------------------------------------
($3,289,339) 26,036,615 ($0.13) Antidilutive
INCREASE IN EARNINGS PER
39 Weeks Ended 3/29/98 INCREASE IN NUMBER OF INCREMENTAL
INCOME SHARES SHARE
-------------------------------------------
Options - 3,591,058
Dividends on convertible
preferred stock $ 83 411,925
Interest on 9% convertible
subordinated debenture $14,649 43,400
-------------------------------------------
$14,732 4,046,383 $0.00
===========================================
11
<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 third quarter of fiscal years 1999 and
1998 are to the thirteen week periods ended March 28, 1999 and March 29,
1998, respectively.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 29, 1998 COMPARED TO THE
THIRTEEN WEEKS ENDED MARCH 28, 1999.
REVENUES. Revenues decreased $2,799,260 or 27.6% to $7,339,679 for the third
quarter of fiscal 1999 as compared to $10,138,939 for the third 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 28.1% of revenues in
1999 as compared to 30.7% 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
increased from 58.1% of revenues in fiscal 1998 to 72.6% of revenues in
fiscal 1999 primarily due to the increase in minimum wage and continued
expenses accruing on closed restaurants.
Selling, marketing and distribution expenses decreased by $93,946.
General and administrative expenses increased by $311,329.
Depreciation and amortization decreased by $72,090 primarily due to closing
of non-performing restaurants, the write down of The Original Pasta Co.
goodwill and the sale of the Chris' & Pitt's Food Products Division.
NON-OPERATING INCOME (EXPENSE). Interest expense decreased by $296,971 due to
the filing for reorganization under Chapter 11 of the United States
Bankruptcy Code.
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 $1,405,893 for the third quarter of fiscal 1999 compared to net loss of
$347,512 for the third 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.
THIRTY-NINE WEEKS ENDED MARCH 29, 1998 COMPARED TO THE
THIRTY-NINE WEEKS ENDED MARCH 28, 1999.
REVENUES. Revenues decreased $6,038,210 or 19.8% to $24,419,362 for the first
three quarters of fiscal 1999 as compared to $30,457,572 for the first half
of fiscal 1998.
12
<PAGE>
COSTS AND EXPENSES. Total cost of revenues decreased to 29.9% of revenues in
1999 as compared to 31% 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
increased from 60.2% of revenues in fiscal 1998 to 63.6% of revenues in
fiscal 1999 primarily due to continued cost of closed restaurants.
Selling, marketing and distribution expenses increased by $337,720.
General and administrative expenses increased by $500,866 due to increased
legal costs.
Depreciation and amortization decreased by $445,026 primarily due to closing
of non-performing restaurants.
NON-OPERATING INCOME (EXPENSE). Interest expense decreased by $11,439.
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 $3,289,339 for the first three quarters of fiscal 1999 compared to net
loss of $1,291,390 for the first three quarters 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 March 28, 1999, has an accumulated deficit of
$40,566,508.
During the thirty-nine weeks ended March 28, 1999, net cash flow provided by
operating activities equaled $689,599 which resulted from increases in
accrued liabilities and accounts payable. Investing activities used $286,821
in cash for purchases of fixed assets. Financing activities provided $166,947
in cash for payments on borrowings.
During the thirty-nine weeks ended March 28, 1999, net cash flow used in
operating activities equaled $735,166 which resulted from decreases in
accrued liabilities and accounts payable. Investing activities provided
$177,477 in cash due to the sale of fixed assets and collection of bad debt.
Financing activities provided $491,777 in cash from borrowings.
As of March 28, 1999, the Company had negative working capital of $200,555,
as compared to negative working capital of approximately $9.7 million at June
28, 1998. The decrease is due primarily to the reclassification of
pre-petition debt due to the Company's Chapter 11 filing.
EXPECTED SOURCES AND USES OF CASH.
The Company's liquidity position for the remainder of fiscal 1999 will be
impacted primarily by the success of initiatives undertaken to improve store
level cash flows. The Company believes that sales have been negatively
impacted as a result of the publicity concerning the bankruptcy filings. The
Company's uses of capital for the remainder of fiscal 1999 include working
capital for store operations and costs associated with the reorganization.
As a debtor-in-possession under Chapter 11, actions to collect pre-petition
indebtedness are stayed and other contractual obligations may not be enforced
against the Company. With the approval of the Bankruptcy Court, certain of
these obligations may be paid prior to approval of the First Amended Plan of
Reorganization. To date, the Company has received approval to pay
pre-petition wages, salaries and
13
<PAGE>
reimbursable expenses to employees who have agreed to remain employees of the
Company throughout the pendency of the bankruptcy.
As permitted under the Bankruptcy Code, the Company has elected to reject
certain real estate leases. The Company has not completed its review of all
of its pre-petition executory contracts and leases for assumption or
rejection. The ultimate amount of, and settlement terms for, such liabilities
are subject to an approved plan of reorganization and, accordingly, the
timing and form of settlement are not presently determinable. While under
bankruptcy protection, the Company does not expect to pay the principal or
interest obligations of its subordinated debt.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs written to identify
the applicable year with two digits rather than four. As written, these
programs may identify the year "00" as 1900 rather than 2000, which could
result in system miscalculations or failures leading to potentially
substantial business disruption.
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. The Company anticipates completing its assessment by August 1, 1999
and any necessary remediation by December 1, 1999. 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 financial risk to the Company.
There can be no assurance that all of the Company's information technology
systems and material third party vendors will be year 2000 compliant, or that
the Company will successfully develop and implement satisfactory contingency
plans on a timely basis. The occurrence of any such event could have a
material adverse effect on the financial condition or results of operations
of the Company. The Company is 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.
On January 12, 1999, the Company and its subsidiaries, The Original Pasta Co.
and Marco's Mexican Restaurants, Inc., filed voluntary petitions for
protection under Chapter 11 of the United States Bankruptcy Code and are
operating as debtors-in-possession. All forward-looking statements relating
to the Company's plan of reorganization submitted in connection with its
Chapter 11 proceedings are dependent upon, among other things, further
improvements in Marco's and Pasta Co. store-level operating performance and
Bankruptcy Court approval of the Company's First Amended Plan of
Reorganization.
In general, the results, performance or achievements of the Company and its
stores are dependent upon a number of factors including, without limitation,
the following: store performance (including sales and profit margins);
competition; shift in consumer demand; success of operating initiatives;
operating costs;
14
<PAGE>
advertising and promotional efforts; brand awareness; adverse publicity;
acceptance of new product offerings (e.g., menu items and pricing
structures); changes in business strategy; availability and cost of capital;
food, labor and employee benefit costs; changes in government regulations;
general economic conditions; and other factors referenced 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. These cautionary
statements by the Company should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company. 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.
(This space intentionally left blank.)
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
The information set forth under Notes 1 and 4 of the Company's Notes to
Consolidated Financial Statements contained in Part I of this Form 10-Q is
incorporated herein by reference thereto.
ITEM 2. Changes in Securities.
On December 19, 1998 the shareholders of the Company approved a reverse stock
split of the Company's outstanding Common Stock on a one for ten basis and
the reduction of the par value from $.05 to $.01 per share. However, the
Board of Directors reserved the right, in its sole discretion, to delay or
waive entirely the implementation and effectiveness of the reverse stock
split. The Board has decided to defer implementation of the reverse stock
split for an indefinite period of time. While under bankruptcy protection the
Company does not expect to implement the reverse stock split.
Due to the financial condition of the Company, the Board of Directors did not
declare a dividend on its 9% Cumulative Preferred Stock for the semi-annual
period ended December 31, 1998. The amount of the arrearage is $148,293.
While under bankruptcy protection, the Company does not expect to pay
dividends on its preferred stock. The Company's First Amended Plan of
Reorganization seeks authorization from the bankruptcy court to cancel the
Company's Common and Preferred Stock. If approved, the holders of the
Company's Common Stock and Preferred Stock will not receive or retain any
property under the First Amended Plan of Reorganization.
ITEM 3. Defaults Upon Senior Securities.
The information set forth under Item 2 in this Part II of this Form 10-Q with
respect to the Company's Preferred Stock dividends is incorporated herein by
reference thereto.
ITEM 6. Exhibits and Reports on Form 8-K.
(a)Exhibits: See Exhibit Index appearing elsewhere herein, which is
incorporated herein by reference.
(b)REPORTS ON FORM 8-K. The Company filed a report on Form 8-K on January 15,
1999, reporting under Item 3 "Bankruptcy or Receivership", that on January
12, 1999 the Company and its subsidiaries, The Original Pasta Co. and
Marco's Mexican Restaurants, Inc. had filed for protection under Chapter
11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for
the Southern District of Texas, Houston Division.
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: 5/17/99 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.
16
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
27.0 -- 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 3RD QUARTER OF FISCAL 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-END> MAR-28-1999
<CASH> 660,500
<SECURITIES> 0
<RECEIVABLES> 364,398
<ALLOWANCES> 0
<INVENTORY> 180,747
<CURRENT-ASSETS> 1,476,952
<PP&E> 17,145,841
<DEPRECIATION> 11,594,993
<TOTAL-ASSETS> 12,093,475
<CURRENT-LIABILITIES> 1,276,397
<BONDS> 0
0
329,540
<COMMON> 1,189,155
<OTHER-SE> (10,452,468)
<TOTAL-LIABILITY-AND-EQUITY> 12,093,475
<SALES> 24,419,362
<TOTAL-REVENUES> 24,419,362
<CGS> 7,302,401
<TOTAL-COSTS> 27,310,772
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,289,339)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,289,339)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
