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 DECEMBER 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
incorporation or organization) Identification No.)
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 December 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. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 27, 1998 JUNE 29, 1998
------------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................... $ 87,687 $ 90,775
Accounts receivable, trade ................... 76,396 204,106
Accounts receivable from affiliates .......... 292,525 115,244
Inventories .................................. 221,655 316,334
Prepaid expenses and other current assets .... 331,174 38,872
------------------ -------------
Total current assets .................... 1,009,437 765,331
Property and equipment, net ....................... 5,726,267 6,213,441
Notes and other receivables from affiliate ........ 1,398,583 1,398,583
Intangible assets, net ............................ 3,558,511 4,041,433
Other assets ...................................... 243,531 264,382
------------------ -------------
$ 11,936,329 $ 12,683,170
================== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ...................... $ 5,828,919 $ 4,969,793
Accrued liabilities .......................... 3,215,924 2,605,392
Current portion of long-term debt ............ 4,123,878 2,919,648
------------------ -------------
Total current liabilities ............... 13,168,721 10,494,833
Long-term debt, less current portion .............. 5,693,077 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 .......................... (39,160,615) (37,277,169)
------------------ -------------
Total stockholders' equity .............. (7,527,880) (5,644,422)
------------------ -------------
$ 11,936,329 $ 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)
<TABLE>
<CAPTION>
13 WEEKS ENDED
DECEMBER 27, 1998 DECEMBER 28, 1997
----------------- -----------------
<S> <C> <C>
Revenues ........................................... $ 7,958,807 $ 9,450,564
----------------- -----------------
Costs and expenses:
Costs of revenues ............................. 2,355,957 2,884,301
Other restaurant operations ................... 4,990,357 5,709,677
Selling, marketing and distribution ........... 217,548 230,182
General and administrative .................... 872,669 482,337
Depreciation and amortization ................. 167,218 459,804
----------------- -----------------
Total costs and expenses ................. 8,603,749 9,766,301
----------------- -----------------
Income (loss) from operations ...................... (644,942) (315,737)
Non-operating income (expense):
Interest income ............................... 30,037 30,037
Interest expense .............................. (471,413) (152,835)
Other, net .................................... 117,375 10,994
----------------- -----------------
Total non-operating income (expense) ..... (324,001) (111,804)
----------------- -----------------
Income (loss) before income taxes .................. (968,943) (427,541)
Income tax provision (benefit) ..................... -- --
----------------- -----------------
Net income (loss) .................................. (968,943) (427,541)
Preferred stock dividends .......................... -- --
----------------- -----------------
Net income (loss) less preferred stock dividends ... $ (968,943) $ (427,541)
================= =================
Loss per common share - basic and fully diluted .... $ (0.04) $ (0.03)
================= =================
Weighted average common and common equivalent shares 24,563,564 14,233,560
================= =================
</TABLE>
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 STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
DECEMBER 27, 1998 DECEMBER 28, 1997
----------------- -----------------
<S> <C> <C>
Revenues ........................................... $ 17,079,684 $ 20,318,635
----------------- -----------------
Costs and expenses:
Costs of revenues ............................. 5,238,799 6,333,833
Other restaurant operations ................... 10,668,530 12,747,992
Selling, marketing and distribution ........... 455,140 434,834
General and administrative .................... 1,519,197 1,079,332
Depreciation and amortization ................. 648,649 1,021,588
----------------- -----------------
Total costs and expenses ................. 18,530,315 21,617,579
----------------- -----------------
Income (loss) from operations ...................... (1,450,631) (1,298,944)
Non-operating income (expense):
Interest income ............................... 60,074 60,112
Interest expense .............................. (628,083) (334,882)
Other, net .................................... 135,194 629,836
----------------- -----------------
Total non-operating income (expense) ..... (432,815) 355,066
----------------- -----------------
Income (loss) before income taxes .................. (1,883,446) (943,878)
Income tax provision (benefit) ..................... -- --
----------------- -----------------
Net income (loss) .................................. (1,883,446) (943,878)
Preferred stock dividends .......................... 12 47
----------------- -----------------
Net income (loss) less preferred stock dividends ... $ (1,883,458) $ (943,925)
================= =================
Loss per common share - basic and fully diluted .... $ (0.08) $ (0.07)
================= =================
Weighted average common and common equivalent shares 24,554,988 14,248,395
================= =================
</TABLE>
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>
26 WEEKS ENDED
DECEMBER 27, 1998 DECEMBER 28, 1997
----------------- -----------------
<S> <C> <C>
Operating activities:
Net income (loss) for the period ................... $ (1,883,446) $ (943,878)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization ................. 648,649 1,021,588
Changes in assets and liabilities:
Accounts receivable, trade .................... 127,710 358,834
Accounts receivable from affiliates ........... (177,281) 69,439
Inventories ................................... 94,679 109,057
Prepaid expenses and other current assets ..... (292,302) (335,811)
Accounts payable and accrued liabilities ...... 1,469,658 (512,531)
Other assets .................................. 20,851 (341,962)
----------------- -----------------
Net cash provided by (used in) operating activities 8,518 (575,264)
Investing activities:
Purchase of property and equipment ................. (294,627) (365,287)
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 (178,553) 285,745
----------------- -----------------
Financing activities:
Net proceeds from borrowings ....................... 500,000 2,255,047
Cash dividends on preferred stock .................. (12) (46)
Payments on borrowings ............................. (333,041) (2,166,251)
----------------- -----------------
Net cash provided by (used in) financing activities 166,947 88,750
----------------- -----------------
Net decrease in cash and cash equivalents ............... (3,088) (200,769)
Cash and cash equivalents, beginning of period .......... 90,775 263,542
----------------- -----------------
Cash and cash equivalents, end of period ................ $ 87,687 $ 62,773
================= =================
</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 has submitted its plan of reorganization to the
Bankruptcy Court.
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 eight
real property leases in connection with the closing of six of its Marco's
restaurants and two 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.
Although the Company continues to negotiate with the creditors' committee in
an attempt to maximize value for all of the Company's creditors and the
holders of the Company's capital stock, there can be no assurance that the
Company will be successful in its negotiations or that holders of the
Company's capital stock will receive or retain any property under a plan of
reorganization or otherwise. 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 December 27, 1998, the Company, owned and operated 36 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 twenty-six week periods
ended December 27, 1998 and December 28, 1997. 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 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 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) aggregate
pre-petition liability amounts that may be allowed for claims or
contingencies, or their status or priority, (c) the effect of any changes to
the Company's capital structure or in the Company's reorganization, or (d)
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. DEBTOR-IN-POSSESSION FINANCING:
The Company is exploring opportunities to obtain debtor-in-possession
financing during the pendency of the bankruptcy and long-term financing to
support the Company's business plan after it emerges from Chapter 11,
however, there can be no assurance that the Company will be able to obtain
such financing on satisfactory terms, if at all.
4. 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.
5. SALE OF CHRIS' & PITT'S FOOD PRODUCTS DIVISION:
On December 4, 1998 the Company sold its Chris' & Pitt's Food Products
Division to an unaffiliated third party for $300,000 and the assumption of
$117,000 in liabilities owed by the Company to its 9% Convertible
Subordinated Debenture holders.
6. 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.
8
<PAGE>
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.
7. 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.
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
9
<PAGE>
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.
8. 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 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>
9. 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
QUARTER ENDED 12/27/98 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
---------------- ----------- ------
$ (1,883,446) 24,554,988 $(0.08)
Common Stock Options .. -- 1,475,910 --
---------------- ----------- ------
$ (1,883,446) 26,030,898 $(0.07) Antidilutive
INCREASE IN EARNINGS PER
QUARTER ENDED 12/28/97 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
============ =========== ============
Computation of Diluted Earnings per Share
<TABLE>
<CAPTION>
INCOME AVAILABLE
FROM CONTINUING COMMON PER
OPERATIONS SHARES SHARE
---------------- -------------- -------
<S> <C> <C> <C>
$ (943,925) 14,248,395 $ (0.07)
Common Stock Options ......... -- 3,880,108 --
---------------- -------------- -------
$ (943,925) 18,128,503 $ (0.05) Antidilutive
Dividend on convertible
preferred stock ......... 74,147 411,925 --
Interest on 9% convertible
subordinated debenture .. 2,633 43,400 --
---------------- -------------- -------
$ (867,115) 18,583,828 $ (0.05) Antidilutive
================ ============== =======
</TABLE>
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 second quarter of fiscal years 1999 and
1998 are to the thirteen week periods ended December 27, 1998 and December
28, 1997, respectively.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED DECEMBER 28, 1997 COMPARED TO THE
THIRTEEN WEEKS ENDED DECEMBER 27, 1998.
REVENUES. Revenues decreased $1,491,757 or 15.8% to $7,958,807 for the second
quarter of fiscal 1999 as compared to $9,450,564 for the second 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 29.6% of revenues in
1999 as compared to 30.5% 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 60.4% of revenues in fiscal 1998 to 62.7% of revenues in
fiscal 1999 primarily due to the increase in minimum wage.
Selling, marketing and distribution expenses increased by $12,634.
General and administrative expenses increased by $390,332 primarily due to
increased legal cost.
Depreciation and amortization decreased by $292,586 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 increased by $318,578.
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 $968,943 for the second quarter of fiscal 1999 compared to net loss of
$427,541 for the second 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.
TWENTY-SIX WEEKS ENDED DECEMBER 28, 1997 COMPARED TO THE
TWENTY-SIX WEEKS ENDED DECEMBER 27, 1998.
REVENUES. Revenues decreased $3,238,951 or 15.9% to $17,079,684 for the first
half of fiscal 1999 as compared to $20,318,635 for the first half of fiscal
1998.
12
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COSTS AND EXPENSES. Total cost of revenues decreased to 30.7% of revenues in
1999 as compared to 31.2% 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 62.7% of revenues in fiscal 1998 to 62.5% of revenues in
fiscal 1999 primarily due to continued cost reduction strategies.
Selling, marketing and distribution expenses increased by $20,306.
General and administrative expenses increased by $439,865 due to increased
legal cost.
Depreciation and amortization decreased by $372,939 primarily due to closing
of non-performing restaurants.
NON-OPERATING INCOME (EXPENSE). Interest expense increased by $293,201.
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 $1,883,446 for the first half of fiscal 1999 compared to net loss of
$943,878 for the first half 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 December 27, 1998, has an accumulated deficit of
$39,160,615.
During the twenty-six weeks ended December 27, 1998, net cash flow provided
by operating activities equaled $8,518 which resulted from increases in
accrued liabilities and accounts payable. Investing activities used $178,553
in cash for purchases of fixed assets. Financing activities provided $166,947
in cash for payments on borrowings.
During the twenty-six weeks ended December 28, 1997, net cash flow used in
operating activities equaled $575,264 which resulted from decreases in
accrued liabilities and accounts payable. Investing activities provided
$285,745 in cash due to the sale of fixed assets and collection of bad debt.
Financing activities provided $88,750 in cash from borrowings.
As of December 27, 1998, the Company had negative working capital of $12.2
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.
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. In
addition to cash flow generated by store operations, the Company is seeking
debtor-in-possession financing to fund its cash requirements. In addition,
the Company is exploring opportunities to obtain long-term financing to
support its business plan after it emerges from Chapter 11. However, there
can be no assurance that the Company will be able to obtain either
debtor-in-possession financing or long-term financing on satisfactory terms,
if at all.
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
13
<PAGE>
Bankruptcy Court, certain of these obligations may be paid prior to approval
of the plan of reorganization. To date, the Company has received approval to
pay pre-petition wages, salaries and 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.
As part of the reorganization, the Company expects to reduce its current debt
by exchanging its outstanding subordinated debt for equity. The ultimate
amount of, and settlement terms for, such liabilities are subject to an
approved plan of reorganization and, accordingly, are not presently
determinable.
MARKETING OF THE COMPANY'S RESTAURANTS.
The Company has requested permission from the Bankruptcy Court to establish
procedures for marketing and possibly selling some or all of its restaurants
in an effort to determine whether sufficient interest exists in the
marketplace for the sale of the restaurants. This effort is supported by the
creditors' committee.
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. 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
14
<PAGE>
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 efforts to negotiate the exchange of outstanding debt for
equity, reduce debt levels, market its restaurants, and other aspects of any
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 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; 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.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
The information set forth under Notes 1 and 6 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. Although the Company is exploring
opportunities to preserve some value for existing shareholders, there can be
no assurance that the existing holders of the Company's Common Stock or
Preferred Stock will receive or retain any property under a plan of
reorganization or otherwise.
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 4. Submission of Matters to a Vote of Security Holders.
On December 18, 1998 the Annual Meeting of the shareholders of the Company
was held. The matters which were voted upon at the meeting were as follows:
PROPOSAL NO. 1: To amend the Company's Restated Articles of Incorporation to
(a) effect a reverse stock split on a one for ten basis of the outstanding
Common Stock of the Company and (b) to reduce the par value of the Company's
Common Stock from $.05 to $.01 per share.
NUMBER OF VOTES
FOR AGAINST ABSTAIN BROKER NON-VOTE
---------- ---------- ---------- ---------------
22,432,577 419,281 61,059 -0-
PROPOSAL NO. 2: Election of Directors.
NUMBER OF VOTES
FOR AGAINST ABSTAIN BROKER NON-VOTE
---------- ---------- ---------- ---------------
Ghulam Bombaywala 22,705,676 8,725 198,516 -0-
Sarosh Collector 22,706,151 8,250 198,516 -0-
Philip Mount 22,706,151 8,250 198,516 -0-
Michael Chadwick 22,706,151 8,250 198,516 -0-
Darrin Straughan 22,706,151 8,250 198,516 -0-
16
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PROPOSAL NO. 3: Approval of the selection by the Board of Directors of the
Company of Mann Frankfort Stein & Lipp, P.C. as independent public
accountants for the current fiscal year.
NUMBER OF VOTES
FOR AGAINST ABSTAIN BROKER NON-VOTE
---------- ---------- ---------- ---------------
22,842,468 46,404 24,045 -0-
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: 2/16/99 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.
17
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.50 Assets Sale and Purchase Agreement dated December 4, 1998
between the Company and Lone Star Laser Technologies for the
sale of the Company's Chris' & Pitt's Food Products Division
10.51 $520,000 promissory note from the Company to The Bombaywala
Family Trust dated October 15, 1998
27.1 Financial Data Schedule
99.5 Form 8-K dated January 12, 1999 and filed January 15, 1999
EXHIBIT 10.50
ASSETS SALE AND PURCHASE AGREEMENT
This Sale and Purchase Agreement ("Agreement") dated as of the 4th day of
December, 1998 by and between LONE STAR LASER TECHNOLOGIES, ("Purchaser"), and
WATERMARC FOOD MANAGEMENT CO., a Texas corporation ("Seller").
INTRODUCTION
Seller desires to sell and Purchaser desires to purchase all of the assets
set forth in Article I below, of Seller's Chris' & Pitt's Food Products
Division, ("Chris' & Pitt's") as a going concern on the terms and conditions set
forth in this Agreement.
In consideration of the mutual promises of the parties; in reliance on the
representations, warranties, covenants, and conditions contained in this
Agreement; and for other good and valuable consideration, the parties agree as
follows:
ARTICLE I
SALE
SALE OF ASSETS
1.01. Seller agrees to sell, convey, transfer, assign, and deliver to
Purchaser, and Purchaser agrees to purchase and accept from Seller, all of the
following assets of Chris' & Pitt's:
(a) All raw materials, packaging materials and inventories of Chris' &
Pitt's in existence at the close of business on December 3, 1998.
(b) All of Seller's rights and interests in and to all contracts
associated with Chris' & Pitt's to the extent that they can lawfully be assigned
or transferred to Purchaser.
(c) All papers and records (whether in written or other form) of any
kind presently in or in the future coming into the care, custody, or control of
Seller relating to any of the assets sold to Purchaser pursuant to this
Agreement.
(d) All permits, licenses, franchises, consents, authorities, special
authorities, and other similar acts of any government body (federal, state,
local or foreign) held by Seller relating to Chris' & Pitt's that may lawfully
be assigned or transferred, subject to any action by such body that may be
required in connection with such assignment or transfer.
(e) All of Seller's rights, titles, and interests in and to the
trademarks, service marks, and trade names related to Chris' & Pitt's and its
products.
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(f) All of Seller's rights, titles, and interests in and to the Chris'
& Pitt's name or any variant thereof.
(g) Accounts receivable of Chris' & Pitt's on and after December 4,
1998 (the "Closing Date").
ALLOCATION OF PURCHASE PRICE
1.02. In consideration of the sale and transfer of the assets of Chris' &
Pitt's and the representations, warranties, and covenants of Seller set forth in
this Agreement, Purchaser shall do the following:
(a) Forgive and cancel the promissory note dated November 2, 1998 in
the amount of $300,000.00 executed by Seller, as maker, in favor of Purchaser,
attached hereto as Exhibit 1;
(b) Assume and discharge, and indemnify and hold Seller harmless
against all debts, obligations and liabilities of Seller relating to Seller's
5-Year 9% Convertible Subordinated Debentures due on March 16, 1999;
(c) Issue a lien on the assets of Chris' & Pitt's, including, but not
limited to, the raw materials, packaging materials and inventories, in the name
of Dallas Collateral Agency, Inc. as Collateral Agent for the 9% Convertible
Subordinated Debentureholders, for the purpose of securing said
Debentureholders' interests under the 9% Convertible Subordinated Debentures;
(d) Pay to Seller the sum of $_______0__________ in cash at closing.
ASSUMPTION OF LIABILITIES
COMPLETION OF CONTRACTS
1.03 Purchaser will assume all liabilities of Seller relating to Chris' &
Pitt's and the assets of Chris' & Pitt's that existed prior to or arise after
the Closing Date, including, but not limited to, accounts payable, notes,
contracts and taxes.
ARTICLE II
SELLER'S REPRESENTATIONS
AND WARRANTIES
Seller hereby represents and warrants to Purchaser that the following
facts and circumstances are and at all times up to the Closing Date will be true
and correct.
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<PAGE>
ORGANIZATION
2.01 Seller is a corporation duly organized, validly existing, and in good
standing under the laws of Texas. Seller has all requisite power and authority
(corporate and, when applicable, government) to own, operate, and carry on the
Chris' & Pitt's business as now being conducted.
2.02. Seller is the sole owner of Chris' & Pitt's with the right to sell
or dispose of its assets.
INVENTORIES
2.03. All inventories of Chris' & Pitt's owned by Seller ("Inventories")
are being sold to Purchaser "AS IS, WHERE IS" WITHOUT WARRANTIES, GUARANTEES OR
REPRESENTATIONS OF ANY KIND OR CHARACTER WHATSOEVER, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, WARRANTY OF MERCHANTABILITY AND WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE.
OTHER TANGIBLE PERSONAL PROPERTY
2.04. All other tangible personal property sold under this Agreement is
being sold to Purchaser "AS IS, WHERE IS" WITHOUT WARRANTIES, GUARANTEES OR
REPRESENTATIONS OF ANY KIND OR CHARACTER WHATSOEVER, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, WARRANTY OF MERCHANTABILITY AND WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE.
TITLE TO ASSETS AND PROPERTIES
2.05. Seller has good and marketable title to all of the assets and
properties, tangible and intangible, that are material to the Chris' and Pitt's
business.
INSURANCE POLICIES
2.06. Seller has maintained and now maintains insurance on the assets and
properties sold under this Agreement of a type customarily insured. The
insurance covers property damage by fire or other casualty, as well as
adequately protects against all normal liabilities, claims, and risks against
which it is customary to insure. Seller shall maintain this insurance until
December 31, 1998. Seller and Purchaser agree to a mutual waiver of subrogation
between the parties during this period. After December 31, 1998 Seller's
insurance coverage shall terminate and Purchaser shall be responsible for
obtaining its own insurance coverage on the assets purchased.
EMPLOYEES
2.07. Seller shall terminate the employment of all employees of the Chris'
& Pitt's Food Products Division at the close of business on December 20, 1998.
All employment benefits and fringe benefits, including, but not limited to,
health insurance, 401K plans, bonuses, vacations, worker's compensation and the
like, for these employees shall terminate on December
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<PAGE>
20, 1998. Thereafter, those employees shall be considered employees of Purchaser
for all purposes.
AUTHORITY
2.08. Seller has full power and authority to execute, deliver, and/or
consummate this Agreement. All reports and returns required to be filed with any
government or regulatory agency with respect to this transaction have been or
will be properly filed.
BROKERS
2.09. Neither Seller nor any of its officers, directors, employees, or
shareholders has retained, consented to, or authorized any broker, investment
banker, or third party to act on Seller's behalf, directly or indirectly, as a
broker or finder in connection with the transaction contemplated by this
Agreement.
ARTICLE III
PURCHASER'S REPRESENTATIONS AND WARRANTIES
Purchaser hereby represents and warrants to Seller that:
AUTHORITY
3.01. Purchaser has full power and authority to execute, deliver, and/or
consummate this Agreement. All corporate acts, reports, and returns required to
be filed by Purchaser with any government or regulatory agency with respect to
this transaction have been or will be properly filed prior to the Closing Date.
No provisions exist in any contract, document, or other instrument to which
Purchaser is a party or by which Purchaser is bound that would be violated by
consummation of the transaction contemplated by this Agreement.
LICENSES AND PERMITS
3.02 Purchaser shall take all necessary steps to obtain in its own name
all licenses and permits necessary or required for the operation of the Chris' &
Pitt's business. Purchaser shall defend, indemnify and hold Seller harmless from
any claims, costs, fines, actions and liabilities of any kind or character
brought by any individual or entity arising out of Purchaser's operation of the
Chris' & Pitt's business on or after the Closing Date prior to receiving said
licenses and permits in its own name.
TAXES
3.03. All real and personal property taxes assessed on the Chris' & Pitt's
business by any taxing authority for the 1998 tax year shall be paid by
Purchaser when the same are due.
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<PAGE>
BROKERS
3.04. Neither Purchaser nor any of Purchaser's officers, directors,
employees or shareholders, has retained, consented to, or authorized any broker,
investment banker, or third party to act on its behalf, directly or indirectly,
as a broker or finder in connection with the transaction contemplated by this
Agreement.
ARTICLE IV
INDEMNIFICATION
4.01. To the extent not assumed by Purchaser under the terms of this
Agreement, Seller shall indemnify, defend and hold harmless Purchaser, including
specifically its officers, directors, shareholders, and employees, from and
against all claims, expenses, obligations, damages, costs, payments,
liabilities, refunds, fines, and penalties, including, but not limited to, costs
and expenses of litigation (including costs of investigation) and reasonable
attorney's fees, that are caused by, arise out of or are attributable to:
(a) The assets sold under this Agreement which occurred prior to the
Closing Date; or
(b) The non-performance of any covenants, agreements or other
obligations pursuant to this Agreement required to be performed by Seller after
the Closing Date; or
(c) The breach by Seller of any of its representations and warranties
contained in this Agreement.
4.02. Purchaser shall indemnify, defend and hold harmless Seller and its
officers, directors, shareholders, and employees, from and against all claims,
expenses, obligations, damages, costs, payments, liabilities, refunds, taxes,
fines and penalties, including, but not limited to, costs and expenses of
litigation (including costs of investigation) and reasonable attorney's fees,
that are caused by, arise out of or are attributable to:
(a) The assets sold under this Agreement which occurred on or after
the Closing Date; or
(b) The non-performance of any covenants, agreements, or other
obligations pursuant to this Agreement required to be performed by Purchaser on,
at or subsequent to the Closing Date; or
(c) The breach by Purchaser of any of its representations and
warranties contained in this Agreement; or
(d) Purchaser's operation of the Chris' & Pitt's business without
permits or licenses in its own name on or after the Closing Date.
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<PAGE>
4.03. When either party proposes to assert the right to be indemnified
under this Article IV with respect to third-party claims, actions, suits, or
proceedings, that party (hereinafter referred to as "Indemnitee") shall, within
30 days after the receipt of notice of the commencement of the claim, action,
suit, or proceeding, notify the other party (hereinafter referred to as
"Indemnitor") in writing, enclosing a copy of all papers served or received. On
receipt of this notice, Indemnitor shall have the right to direct the defense of
the matter, but Indemnitee shall be entitled to participate in the defense by
employing its own separate counsel in any such action at its own expense.
ARTICLE V
GENERAL PROVISIONS
SURVIVAL OF REPRESENTATIONS,
WARRANTIES AND COVENANTS
5.01. The representations, warranties, covenants, and agreements of the
parties contained in this Agreement or contained in any writing delivered
pursuant to this Agreement shall survive the Closing Date for the period of time
set forth in this Agreement.
ASSIGNMENT OF AGREEMENT
5.02. This Agreement shall be binding on and inure to the benefit of the
parties to this Agreement and their respective successors and permitted assigns.
This Agreement may not be assigned by any party without the written consent of
both parties and any attempt to make an assignment without consent is void.
GOVERNING LAW
5.03. This Agreement shall be construed and governed by the laws of the
state of Texas.
AMENDMENTS; WAIVER
5.04. This Agreement may be amended only in writing by the mutual consent
of all of the parties, evidenced by all necessary and proper corporate
authority. No waiver of any provision of this Agreement shall arise from any
action or inaction of any party, except an instrument in writing expressly
waiving the provision executed by the party entitled to the benefit of the
provision.
ENTIRE AGREEMENT
5.05. This Agreement, together with any documents and exhibits given or
delivered pursuant to this Agreement, constitutes the entire agreement between
the parties to this Agreement. No party shall be bound by any communications
between them on the subject matter of this Agreement unless the communication is
(a) in writing, (b) bears a date contemporaneous with or subsequent to the date
of this Agreement, and (c) is agreed to by all parties to this
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<PAGE>
Agreement. On execution of this Agreement, all prior agreements or
understandings between the parties shall be null and void.
SEVERABILITY
5.06. Any provision of this Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such provisions
in any other jurisdiction.
IN WITNESS WHEREOF, WATERMARC FOOD MANAGEMENT CO. and LONE STAR LASER
TECHNOLOGIES have executed this Agreement as of the date first above written.
WATERMARC FOOD MANAGEMENT CO.
By: S/
---------------------------------
GHULAM M. BOMBAYWALA
President
LONE STAR LASER TECHNOLOGIES
By: S/
----------------------------------
Title: OWNER
-------------------------------
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EXHIBIT 10.51
PROMISSORY NOTE
$520,000.00 October 15, 1998
FOR VALUE RECEIVED, WATERMARC FOOD MANAGEMENT CO. (hereinafter
referred to as "Borrower") promises to pay to THE BOMBAYWALA FAMILY TRUST
(together with its successors and assigns hereinafter referred to as "Lender")
at Houston, Texas or such other place as the holder hereof may from time to time
appoint in writing, in lawful money of the United States of America, the
principal sum of $520,000.00 with interest on the outstanding principal balance
hereof, at the rate of ten percent (10%) per annum, provided that the interest
rate shall not exceed the Maximum Lawful Rate.
This Note is payable as follows: (1) a payment of accrued interest only due
and payable monthly on the 15th of each and every month beginning on November
15, 1998, and (2) a final payment of the unpaid principal balance plus accrued
interest due and payable on October 15, 1999.
Notwithstanding anything to the contrary contained herein, no provisions of
this Note shall require the payment or permit the collection of interest in
excess of the Maximum Lawful Rate. If any excess of interest in such respect is
herein provided for, or shall be adjudicated to be so provided, in this Note or
otherwise in connection with this loan transaction, the provisions of this
paragraph shall govern and prevail, and neither Borrower nor the sureties,
guarantors, successors or assigns of Borrower shall be obligated to pay the
excess amount of such interest, or any other excess sum paid for the use,
forbearance or detention of sums loaned pursuant hereto. If for any reason
interest in excess of the Maximum Lawful Rate shall be deemed charged, required
or permitted by any court of competent jurisdiction, any such excess shall be
applied as a payment and reduction of the principal of indebtedness evidenced by
this Note; and, if the principal amount hereof has been paid in full, any
remaining excess shall forthwith be paid to Borrower.
If any payment hereunder shall become due on a day on which banks in the
City of Houston generally are not open for business, such payment shall be made
on the next following day on which banks in the City of Houston generally are
open for business.
Upon the occurrence and during the continuance of a default by Borrower in
its obligations hereunder, Lender shall have all of the rights and remedies
provided in this Note, as well as those rights and remedies provided by any
other applicable law, rule or regulation.
If Borrower becomes insolvent or commits an act of bankruptcy or authorizes
the filing of a voluntary petition in bankruptcy, or should involuntary
bankruptcy proceedings be filed against Borrower, Lender may accelerate the
unpaid principal immediately due and payable without notice to Borrower. If
Lender is required to enforce this provision, Borrower will not contest
<PAGE>
venue for such an action in Harris County, Texas.
Borrower, its successors or assigns, waive presentment for payment, demand,
protest, and notice of demand, protest, and nonpayment, and consent to any and
all renewals, extensions or modifications that might be made by Lender as to the
time of payment of this Note from time to time.
The form and essential validity of this Note shall be governed by the laws
of the State of Texas. If any provision of this Note is prohibited by, or is
unlawful or unenforceable under, any applicable law of any jurisdiction, such
provision shall, as to such jurisdiction, be ineffective to the extent of such
prohibition without invalidating the remaining provisions hereof.
Time is of the essence with respect to all of Borrower's obligations and
agreements under this Note.
This Note supercedes those certain promissory notes as follows: (i)
Promissory Note dated February 20, 1998 in the amount of $100,000 payable to
Mohammed Bombaywala & Zeenat Bombaywala and (ii) Promissory Note dated May 19,
1998 in the amount of $200,000 payable to Bombaywala Family 1989 Trust. This
Note and all the provisions, conditions, promises and covenants hereof shall be
binding in accordance with the terms hereof upon Borrower, its successors and
assigns.
IN WITNESS WHEREOF, Borrower has executed this Note on the date first
hereinabove written.
WATERMARC FOOD MANAGEMENT CO.
S/
-----------------------------------
By: Ghulam M. Bombaywala
President
<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 SECOND 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> 87,687
<SECURITIES> 0
<RECEIVABLES> 368,921
<ALLOWANCES> 0
<INVENTORY> 221,655
<CURRENT-ASSETS> 1,009,437
<PP&E> 5,726,267
<DEPRECIATION> 167,218
<TOTAL-ASSETS> 11,936,329
<CURRENT-LIABILITIES> 13,168,721
<BONDS> 0
0
329,540
<COMMON> 1,189,155
<OTHER-SE> (9,046,575)
<TOTAL-LIABILITY-AND-EQUITY> 11,936,329
<SALES> 7,958,807
<TOTAL-REVENUES> 7,958,807
<CGS> 2,355,957
<TOTAL-COSTS> 8,603,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 471,413
<INCOME-PRETAX> (968,943)
<INCOME-TAX> 0
<INCOME-CONTINUING> (968,943)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (968,943)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(B) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) JANUARY 12, 1999
---------------------------
WATERMARC FOOD MANAGEMENT CO.
(Exact Name of Registrant as Specified in Its Charter)
TEXAS
(State or Other Jurisdiction of Incorporation)
0-20143 74-2605598
(Commission File Number) (I.R.S. Employer Identification No.)
11111 WILCREST GREEN, SUITE 350, HOUSTON, TEXAS 77042
(Address of Principal Executive Offices) (Zip Code)
(713) 783-0500
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
INFORMATION INCLUDED IN REPORT ON 8-K
ITEM 3. BANKRUPTCY OR RECEIVERSHIP.
On January 12, 1999 Watermarc Food Management Co. ("Registrant") filed Voluntary
Petitions under Chapter 11 of the United States Bankruptcy Code on behalf of
Registrant and its wholly owned subsidiaries, The Original Pasta Co. and Marco's
Mexican Restaurants, Inc. The proceeding filed on behalf of Registrant is styled
Watermarc Food Management Co., Debtor, Case Number 99-30427-H1-11. The
proceeding filed on behalf of The Original Pasta Co. is styled The Original
Pasta Co., Debtor, Case Number 99-30428-H2-11. The proceeding filed on behalf of
Marco's Mexican Restaurants, Inc. is styled Marco's Mexican Restaurants, Inc.,
Case Number 99-30429-H1-11. All proceedings were filed in the United States
Bankruptcy Court for the Southern District of Texas, Houston Division. The
proceedings will be jointly administered under Case Number 99-30427-H1-11. The
Debtors continue to operate their businesses as Debtors in Possession pursuant
to 11 U.S.C. 1107 and 1108.
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 hereunto duly authorized.
WATERMARC FOOD MANAGEMENT CO.
(Registrant)
Date JANUARY 15, 1999 By /s/ GHULAM M. BOMBAYWALA
(Signature)
By GHULAM M. BOMBAYWALA
Title CHIEF EXECUTIVE OFFICER
