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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 29, 199728, 1998
Commission File No. 0-20143
WATERMARC FOOD MANAGEMENT CO.
(Name of Registrant in Its Charter)
TEXAS 74-2605598
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11111 WILCREST GREEN, SUITE 350
77042
HOUSTON, TEXAS (Zip Code)77042
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (713) 783-0500
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.05 PAR VALUE PER SHARE
(Title of Class)
9% CUMULATIVE PREFERRED STOCK, $1.00 PAR VALUE PER SHARE
(Title of Class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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[X] No --- ---[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. -----[ ]
As of October 1, 1997,September 11, 1998, the aggregate market value of the Common Stock
held by non-affiliates of the issuer was approximately $1,706,000$2,087,902 based on the
average bid and ask prices of $.22$.085 per share of Common Stock as quoted inon the
NASDAQ SmallCap Market.Over the Counter Bulletin Board. As of October 1, 1997, 14,263,230September 11, 1998, 24,563,564 shares of
the issuer's Common Stock and 329,540 shares of the issuer's Preferred Stock
were outstanding, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
No documents, other than certain exhibits, have been incorporated by
reference in this report.
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ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
As of June 29, 1997,28, 1998, Watermarc Food Management Co., a Texas corporation, (the
"Company"), owned and operated, both directly and through subsidiaries,
full-service restaurants under the names Marco's Mexican Restaurants (the
"Marco's Restaurants"), The Original Pasta Co. Restaurants (the "Pasta Co.
Restaurants"), and Billy Blues Barbecue Bar & Grill (the "Billy Blues
Restaurant")
and Longhorn Cafe.. During the first quarter 1998, the Company's Longhorn Cafe was
sold to an unaffiliated party. See "Concepts and Menus".
The Company was organized as Billy Blues Food Corporation, a Texas
corporation, on June 17, 1991 to develop, own and operate restaurants and to
produce and market a uniquely flavored barbecue sauce. In March of 1995, the
name was changed to Watermarc Food Management Co. In the fourth quarter of
fiscal 1994, the Company acquired twenty one Marco's Restaurants. Two Marco's
Restaurants have beenwere subsequently built and one non-performing Marco's
Restaurant sold.built. In the third quarter of fiscal 1994, the
Company acquired Chris' & Pitt's Bar-B-Q Sauce, a medium priced barbecue sauce
product line. In the third quarter of fiscal 1996, the Company acquired ten
Pasta Co. Restaurants. Furthermore, the Company opened three new Pasta Co.
restaurants in fiscal 1996, and four new restaurants in fiscal 1997.1997, and one new
restaurant during the first quarter of fiscal 1998. Unless the context requires
otherwise, references to the "Company" refer to Watermarc Food Management Co.,
its predecessors and subsidiaries.
CONCEPTS AND MENUS
MARCO'S RESTAURANTS. Marco's Restaurants are full service restaurants that
feature high quality, moderately priced Mexican food. The style and decor of
Marco's Restaurants are distinctive and colorful and are designed to present a
Mexican style motif in a family oriented environment. Marco's Restaurants have a
standardized menu with a variety of offerings, including Black Angus beef
fajitas, tacos, enchiladas and numerous appetizers. Entrees range in price from
$5.49$4.99 to $12.99. Marco's Restaurants also offer a full service bar specializing
in various flavored margaritas, as well as numerous brands of Mexican and
domestic beer and wine. The restaurants are open for lunch and dinner seven days
a week. A typical Marco's Restaurant consists of 4,000 to 6,000 square feet for
dining and bar facilities, and has a seating capacity for 175 to 300 patrons.
The decorative scheme in each restaurant incorporates a centrally located
Tortilla Room where tortillas are prepared and served fresh to the customer. The
exterior design of the Marco's Restaurants normally conforms to the shopping
center in which it is located.located, with the restaurant's name and logo prominantly
displayed. The restaurants have varying floor plans and configurations. During
the third quarter of fiscal 1998, the Company closed its Marco's Mexican
Restaurant in College Station, Texas. As of June 29, 1997,28, 1998, the Company had a
total of twenty-twotwenty-one Marco's Restaurants in operation in Southeast Texas,
including the Houston metropolitan area, College Station, Victoria, and Lake Jackson, Texas.
During the first quarter of fiscal 1999, the Company closed its Lake Jackson
Marco's Mexican Restaurant.
PASTA CO. RESTAURANTS. Pasta Co. Restaurants are distinctive, colorful,
Italian-style, family oriented restaurants that feature full-service and offer
moderately priced food and beverages. The restaurants include a brick oven for
the preparation of pizzas, as well as a cooking area where entrees are produced.
Both the oven and the cooking area are visible to customers. The Pasta Co.
Restaurants offer a wide variety of appetizers, soups, salads, pasta and other
entrees, pizzas, desserts and beverages. The restaurants specialize in generous
portions at reasonable prices, with any item on the menu available for $7.99$8.69 or
less. A children's menu is also available. Beverages sold consist of coffee,
tea, sodas, bottled water, espresso, cappuccino, beer and wine. Most menu items
are available for take-out. As of June 29, 1997, the Company had a
total of seventeen Pasta Co. Restaurants in operation, all of which were
located in Southeast Texas. The exterior of each of the locations generally
conforms to that of the center of which it is located, with the restaurant's
name and logo prominently displayed. In addition, numerous windows make the
restaurants more inviting from the outside and lighter and brighter on the
inside. Decor items, ingredients and produce displayed on shelves and cases
throughout the restaurants give the impression of an open-air Italian
marketplace. Typical units are approximately 3,600 to 4,000 square feet each,
and most have an outside patio of approximately 400 additional square feet. The
units have seating capacities of 160 to 200 persons. The restaurants are open
for lunch and dinner seven days a week. As of June 28, 1998, the Company had a
total of eighteen Pasta Co. Restaurants in operation, all of which were located
in Southeast Texas.
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BILLY BLUES RESTAURANT AND LONGHORN CAFE.RESTAURANT. The Billy Blues Restaurant and
Longhorn Cafe (collectively, the "Barbecue Restaurants") generategenerates an exciting and
vibrant "Texas Roadhouse" ambiance enhanced by recorded and -2-
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live music, Texas
artifacts, neon signage and other memorabilia. The Company's
Barbecue Restaurants feature Texas-style barbecue, steak and other entrees
served in an informal, lively atmosphere intended to appeal to a broad customer
base. The Barbecue Restaurants offer a limited, moderately priced menu of
freshly prepared foods made with high quality ingredients, with full bar
service in a casual atmosphere. As of June 29, 1997, two Barbecue Restaurants,
one operated as Billy Blues Restaurant and one as Longhorn Cafe, were in
operation in Texas. The Billy Blues Restaurant
consists of approximately 8,000 square feet for dining and bar/entertainment
facilities. The restaurant has dining and bar seating capacity for 240 customers
and features a night club called the "Blues Room" which seats an additional 200
customers. A section of the restaurant is used for the display and retail sale
of Billy Blues Barbecue Sauce and novelty items featuring the Billy Blues name and logo, including T-shirts,
caps and sweat shirts. The decorative scheme incorporates memorabilia associated
with blues music, focusing on legendary blues figures, photographs, musical
instruments and framed newspaper and other articles relating to the blues
musical culture. The Billy Blues Restaurant serves dinner with full bar service,
featuring a moderately priced, limited menu of high quality smoked barbecue and
other entrees. Entrees range in price from $7.95 to $16.95. In the Blues Room,
full bar service is provided and patrons can enjoy a light snack or an entire
meal with cocktails while being entertained by a blues band or recorded blues
music.
The Longhorn Cafe serves lunch and dinner and features a variety of high
quality, moderately priced menu items featuring Black Angus steaks, fresh
grilled red fish and homemade stuffed jalapenos with full bar service and also
offers several specialty appetizers and homemade desserts. The specialty is
chicken fried steak served with cream gravy and french fries. Entrees range in
price from $5.95 to $14.95. The decor includes wooden booths and tables with an
open layout permitting customers to view the bar and Texas memorabilia. During
the first quarter of fiscal 1998, the Longhorn Cafe was sold to an unaffiliated
party.
FOOD PRODUCTS. The Company also produces and markets two brands of barbecue sauce products
and a spice rub, Billy Blues Barbecue Sauce, Chris' & Pitt's Bar-B-Q Sauce and
Chris' & Pitt's Spice Rub. Billy Blues Barbecue Sauce is a tangy, coffee-spiked
formulation packaged in three different flavors andflavors. Billy Blues Barbecue Sauce is
available in supermarkets and other retail outlets.sold on a special order basis, primarily to restaurants. Chris' & Pitt's Bar-B-Q
Sauce is packaged in six different flavors and is available in supermarkets and
other retail outlets located primarily in the State of California. The Company
also markets and packages its Chris' & Pitt's Bar-B-Q Sauce products for food
service distribution to restaurant chains and commissaries. The Company
periodically engages in advertising campaigns to enhance customer awareness of
barbecue sauce products in the areas where they are currently available in
supermarkets and other retail outlets.
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The Company currently engages, on an order to order basis, an unaffiliated food
processor and packaging company (the "Co-Packer") in Riverside, California for
the processing and packaging of its food product lines. Under its production
arrangement with the Co-Packer, the Co-Packer procures all ingredients and
packaging materials, and performs product preparation and packing at an agreed
upon price. The Company engages food brokers to assist in selling its products
to regional and national supermarket chains. The Company generally pays its food
brokers a 5% commission on the amount they sell. To date, the Company's food
brokers have accounted for most of the Company's sales to supermarket chains. To
achieve greater market penetration, the Company intends to expandhas expanded its food broker
network. The Company utilizes a distribution warehouse in California and another in Texas for storage
of products. The Company pays handling and storage fees based on the actual
monthly volume shipped to the warehouse. The Company contracts with independent
freight carriers for the delivery of its product lines, or provides special
pricing for customers who pick up the product at a storage warehouse. The
Company's product lines are distributed to supermarkets either through: (1)
direct shipment to a supermarket chain warehouse which then distributes to its
individual supermarkets from the warehouse; (2) direct shipment to an
independent grocery warehouse, which performs the same function as a supermarket
chain warehouse for a fee; or (3) an independent food distributor who picks up
the products at the storage warehouse and delivers directly to the supermarkets.
A fee is paid to the food distributor based on volume. The Company generally
sells its food products pursuant to customer purchase orders and usually fills
the orders within approximately ten days of receipt. Because orders are filled
shortly after receipt, backlog is not material to the Company's business.
Food product revenues, as a percent of total revenues, for the last three fiscal
years ended June 28, 1998, June 29, 1997 and June 30, 1996 were 6.6%, 4.9% and
July 2, 1995 were 4.9%,
7.2% and 8.1% respectively. Even though the Company believes it has achieved limited
consumer awareness and market acceptance of its food products, there can be no
assurance that either of the Company's product lines will ever achieve significant
consumer acceptance or that supermarket and other retail chains will re-order
the Company's food products.
GROWTHBUSINESS STRATEGY
Historically, the Company's primary growthbusiness strategy has been to expand its
restaurant and barbecue sauce operations through internal growth and by
acquiring businesses with concepts and themes compatible with the Company's
operations. This strategy was evidenced by the Company's acquisition in March
1994 of the Chris & Pitts Bar-B-Q Sauce line, in July 1994 of Marco's Mexican
Restaurants, Inc., which owned and operated twenty one Marco's Restaurants, and
in January 1996 of The Original Pasta Co., which owned and operated ten Pasta
Co. Restaurants.
In addition, the Company has developed a franchise program to
expand the Pasta Co. restaurant concept outside of the Houston, Texas
metropolitan area. As of June 29, 1997 the Company had not yet sold any
franchises.-3-
During the fourth quarter of fiscal 1997, management was reorganized.
Previously successful management was engaged to restore the Company to
profitability. Ghulam M. Bombaywala, Chairman of the Board and Chief Executive
Officer, has beenwas elected President and Chief Operating Officer of the Company.
Future growth by acquisition or restaurant expansion is not planned at this time
until the Company is restored to profitability.
The Company's new growth strategyplan to return to profitability for fiscal 19981999 includes the
following:
o ControllingIncreasing revenues from the sale of food products by reinforcing existing
markets, expanding distribution to new market areas, introducing more
aggressive marketing programs,adding methods of distribution and
labor costs.developing new products.
o Outsourcing labor intensive food preparation processes.Further reductions in operating expenses through improved cost controls.
o Further reductions in general and administrative expenses.
o Increasing restaurant sales through targeted marketing.revenues in existing restaurants by improving marketing
programs and customer service.
o Instituting store management incentives correlating to increased
store performance.
o Increasing customer satisfaction with intensive employee training.
o Remodeling certainSelling or closing its Billy Blues Restaurant and non-performing Marco's Restaurants.
o Franchising Marco's Restaurants
and Pasta Co. Restaurants.
o ClosingRenegotiating and extending the terms of the Company's existing
indebtedness
o Obtaining additional equity capital or selling non-performing restaurants.
o Favorably renegotiating expiring restaurant leases.
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5debt financing.
MARCO'S RESTAURANTS. During fiscal 1997,1998, the Company remodeled three
existing restaurants. The restaurants were remodeled after the new prototype
which was introducedclosed its restaurant
located in the most recently opened units. These units are
brighter, more upbeat, more entertaining and are expected to position Marco's
Restaurants to be more competitive. The Company plans to continue remodeling
Marco's restaurants from available cash flow at a rate of one restaurant every
three to four months. Additionally, a training coordinator will be focusing on
intensive employee training to better satisfy Marco's customers. In June 1997,
the Company sold one Marco's Restaurant locationCollege Station, Texas due to poor operating performance. TheDuring the
first quarter of fiscal 1999, the Company closed its Lake Jackson restaurant,
continuesalso due to be operated as a Marco's Restaurant
pursuantpoor operating performance. During fiscal 1999, the Company will
continue to a license agreement. The Company anticipates selling three Marco's
Restaurants during fiscal 1998.monitor the performance of each restaurant and, if necessary, close
or sell those which are not profitable. No new restaurant construction is
planned at this time.
PASTA CO. RESTAURANTS. During fiscal 1997, four new Pasta Co. Restaurants
were opened in Texas. One new Pasta Co. restaurant was opened in the
first quarter of fiscal 1998. Growth in the Pasta Co. concept should be
achieved by concentrating on increasing customer satisfaction, focusing on
controlling food costs and outsourcing labor intensive food preparation
processes as a measure to reduce costs and maximize revenue. Outsourcing
products will also aid in achieving product consistency from restaurant to
restaurant. No new restaurant construction is planned at this time.
BARBECUE RESTAURANTS. The Company does not plan to expand its BarbecueBilly Blues
Restaurant concepts.concept. As a measure to reduce costs and maximize revenues, the
Billy Blues Restaurant no longer serves lunch. It is now open exclusively for
dinner and evening entertainment. The Company anticipates selling the Billy
Blues Restaurant in fiscal 1999. During the first quarter of fiscal 1998, the
Longhorn Cafe was sold to an unaffiliated party.
The Company anticipates
selling the Billy Blues Restaurant in fiscal 1998.
FRANCHISING PROGRAM.FRANCHISING. To date, no restaurants have been franchised. The Company intendsdoes
not intend to establish an aggressiveemphasize a franchise program for Marco's Restaurants and Pasta
Co. Restaurants during fiscal 1998.1999 unless or until the Company's profitability
is restored. Management believes that franchising willcould provide significant
growth for the Company in upcoming years.
FOOD PRODUCTS. The Company currently marketsproduces two brands of barbecue sauce
products and a spice rub. The Company's strategy to increase food product sales
is focused on its Chris' & Pitt's product line and includes reinforcing existing
markets, including recapturing lost commercial customers, expanding distribution
to new market areas (primarily in the Sun Belt states), introducing more
aggressive marketing programs, adding methods of distribution and developing new
products.
PROPOSED ACQUISITIONS.POSSIBLE SALE OF COMPANY OR ASSETS. If the Company cannot achieve profitable
operations during fiscal 1999 or 2000 it will consider a sale or merger of all
or part of the Company, its divisions or assets. The Company continues to investigate possiblehas discontinued
its strategy of pursuing acquisition candidates in the restaurant industry but does not currently haveat
this time, except where any arrangements, undertakingssuch acquisition or commitments with respectbusiness combination could
enhance the Company's ability to any acquisition.continue as a going concern.
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RESTAURANT LOCATIONS AND SITE SELECTION
The Company believes that the locations of its restaurants are critical to
its long-term success. Senior management devotes significant time and resources
to analyzing each respective site. The Company utilizes, and continually
enhances, specific site selection criteria which focuses on local demographics
such as target population, density and household income levels; specific site
characteristics such as visibility, accessibility and traffic volume; proximity
to activity centers; parking availability; and potential competition in the
area. Currently, all restaurants are located in Texas.
The Company periodically reevaluates restaurant sites to ensure that site
selection attributes have not deteriorated below minimum standards. In the event
site deterioration occurs, the Company makes a concerted effort to improve the
restaurant's performance by providing physical, operating and marketing
enhancements unique to each restaurant's situation. If efforts to restore the
restaurant's performance to acceptable minimum standards are unsuccessful, the
Company considers relocation to a proximate, more desirable site, or evaluates
closing the restaurant if the Company's criteria, such as return on investment
and area demographic data, do not support a relocation. Since inception through
June 29, 1997,28, 1998, the Company has closed or sold nineeleven restaurants, including fourtwo
in fiscal 1997,1998, which were performing below the Company's standards primarily
due to declining trade area demographics. In
addition, the Board of Directors of the Company in late fiscal 1997 approved a
strategic plan targeted to support the Company's long-term growth objectives.
The plan focuses on continued
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development of those restaurant concepts that have the greatest return potential
for the Company and its shareholders. In conjunction with this plan, one
concept, Pete's Hospitality Co., Inc. and its related restaurants, was sold to
the Company's former President (see "Item 13. Certain Relationships and Related
Transactions") and the Company anticipates selling its barbecue restaurant
concept. These and future closings will be key
to a successful reallocationrehabilitation of the Company. With each restaurant closing, the
Company incurs losses from the disposal of fixed assets and must negotiate a
lease settlement with the landlord for the restaurant location involving the
settlement of future payment obligations. The Company has limited resources to
the stronger performing concepts.make these payments. (See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" (hereinafter referred to as
"MD&A".))
The following table provides information with respect to the restaurants
which were owned and operated by the Company as of June 29, 1997:
NO. OF APPROXIMATE
CONCEPT UNITS SQUARE FOOTAGE
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Marco's Mexican Restaurants 22 3,850 - 6,900
The Original Pasta Co. 1728, 1998:
NO. OF APPROXIMATE
CONCEPT UNITS SQUARE FOOTAGE
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Marco's Mexican Restaurants 21 3,850 - 6,900
The Original Pasta Co. 18 3,600 - 4,200
Billy Blues Bar & Grill 1 8,000
Longhorn Cafe 1 2,500
UNIT ECONOMICS
The average initial cash investment (including leasehold improvements,
furniture and fixtures, equipment, food and beverage inventory, and other
pre-
openingpre-opening expenses) for each Marco's Restaurant and Pasta Co. Restaurant is
approximately $350,000 to $500,000 with pre-opening expenses projected to be
approximately $50,000 for each future restaurant. All of the Company's
restaurants are leased.
RESTAURANT MANAGEMENT AND OPERATIONS
MANAGEMENT AND EMPLOYEES. The management staff of the Company's restaurants
consists of a general manager and assistant managers. Each Marco's Restaurant employs 20 to 30 hourly employees. Eachand Pasta Co.
Restaurant employs approximately30 to 40 to 50 hourly employees. Each BarbecueThe Billy Blues Restaurant employs
approximately 50 to 7030 hourly employees. At all of the restaurants, the general
manager has the primary responsibility for the day to day operations of the
restaurant and is required to comply with Company established operating
standards. Many of the hourly employees work part-time.
SUPERVISION AND TRAINING. The Company employs general managers with
significant experience in the food service industry. Executive management of the
Company regularly visits the restaurants to insure that the Company's concept,
strategy and standards of quality are being adhered to in all aspects of
restaurant operations. The restaurant general manager and designated personnel
of the Company are responsible for selecting and training the employees for each
restaurant. The training period for new employees lasts approximately five days
and is characterized by on the job supervision by an in store trainer. Ongoing
employee training remains the responsibility of the restaurant general manager.
Written tests and physical observation are used to evaluate each employee's
performance. In addition, a training coordinator hascoordinators have been hired to focus on
improving customer satisfaction through better employee training for both the
Marco's Restaurant concept.and Pasta Co. Restaurant concepts.
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PURCHASING AND SUPPLIES. Management negotiates directly with suppliers for
food and beverage products to insure uniform quality and adequate supplies and
to obtain competitive prices. The Company purchases substantially all food and
beverage products and novelty items from local or national suppliers. The
Company does not anticipate any difficulty in continuing to obtain food and
beverage requirementsproducts within the localities in which the Company currently operates.
ADVERTISING AND PROMOTION. The Company pursues advertising and promotional
opportunities within each of its restaurant's geographic locales, relying
principally on the direct mailing of coupons, newspaper, and radio. In addition,
the Company has instituted an intense, targeted marketing effort focusing on
individual locations with poor operating performance. Location specific research
and targeted marketing efforts are being implemented.
RESTAURANT REPORTING. Each restaurant has a stand-alone point of sales system
monitored by its management. The restaurant's staff prepares daily cash and
other reports regarding sales, inventory, sales mix, labor cost and
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7 the number
of customers. Daily reports are forwarded to the Company's corporate offices in
Houston, Texas where weekly summaries of all reported data are analyzed by the
Company's key management.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality. There are many well established competitors
with substantially greater financial and other resources than the Company. Most
of the Company's competitors have been in existence for substantially longer
periods than the Company and are more established in the markets where the
Company's restaurants are located. The Company's competitors have achieved
significant national, regional and local brand name and product recognition and
engage in extensive advertising and promotional programs, both generally and in
response to efforts by additional competitors to enter new markets or introduce
new products. The restaurant business is often characterized by a high failure
rate and affected by changes in consumer tastes and discretionary spending,
national, regional and local economic conditions, demographic trends, traffic
patterns, and the type, number and location of competing restaurants. Any change
in these factors could adversely affect the Company's restaurant operations.
Multi-unit foodservice operations such as those of the Company can also be
substantially affected by adverse publicity resulting from food quality,
illness, injury, health concerns, or operating issues stemming from a single
restaurant. The Company attempts to manage these factors, but the occurrence of
any one of these factors could cause the Company to be adversely affected.
Competition in the Houston geographic area is particularly acute which may
partially explain the Company's declining restaurant sales for the past three
years. (See "MD&A".)
TRADEMARKS
The mark "Marco's Mexican Restaurants" was registered in the U.S. Patent and
Trademark Office on January 15, 1991 and in the State of Texas in 1987. The mark
"The Original Pasta Co." was registered in the U.S. Patent and Trademark Office
on October 8, 1996.1996 and in the State of Texas in 1998. The Billy Blues Barbecue
Bar & Grill and Billy Blues Barbecue Sauce logos were registered in the State of
Texas in 1991. The Chris' & Pitt's mark and logo were registered prior to the
Company's acquisition of the Chris' & Pitt's product line. The mark "Billy
Blues" was registered in the U.S. Patent and Trademark Office on November 17,
1992 as a service mark for restaurant and bar services. The mark "Billy Blues"
as a trademark for the Company's barbecue sauce was registered in the U.S.
Patent and Trademark Office on October 13, 1992. The Company has no reason to
believe that there are any conflicting rights which might impair the Company's
use of its marks; however, there can be no assurance that such conflicting
rights do not exist. The Company believes that these trademarks are valuable to
the operation of its restaurants and marketing of its food products. The
Company's policy is to pursue registration of its marks whenever possible and to
vigorously oppose any infringement of its marks.
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GOVERNMENT REGULATION
RESTAURANT OPERATIONS. The Company is subject to various federal, state
and local laws and regulations and administrative policies affecting its
business and must comply with provisions regulating health and sanitation, equal
employment, minimum wages and licensing for the sale of food and alcoholic
beverages. Difficulties or failures in obtaining or maintaining the required
licenses or approvals could adversely affect the operations of existing
restaurants or delay or prevent the opening of new restaurants. Approximately 15% of the revenues generated by the Marco's
Restaurants are attributable to the sale of alcoholic beverages, while
approximately 7%6% of the revenues generated by the Pasta Co. Restaurant and
approximately 25%40% of the revenues generated by the Barbecue RestaurantsBilly Blues Restaurant are
the result of the sale of alcoholic beverages. The service of alcoholic
beverages is material to the business of the Company. Alcoholic beverage control
regulations require each of the Company's restaurants to apply to a state
authority and, in certain locations, county or municipal authorities, for a
license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Typically, licenses must be renewed
annually and may be revoked or suspended for cause at any time. The Company does
not anticipate experiencing any delays or other problems in obtaining or
renewing licenses or permits to sell alcoholic beverages; however, the failure
to receive or retain, or a delay in obtaining, a liquor license in a particular
location could adversely affect the Company's operations in that location. The
Company
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8 may be subject in certain states to "dram-shop" statutes or common laws,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment which wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
insurance.
The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and tip
credits; the Immigration and Naturalization Act, which governs employee
citizenship requirements; and the Americans with Disabilities Act, which governs
non-discriminating employment practices and reasonable accommodations for
disabled persons, both employees and customers. Significant numbers of the
Company's food service and preparation personnel are paid at rates related to
the federal minimum wage and, accordingly, future increases in the minimum wage
or decreases in the allowable tip credit will increase the Company's labor
costs. The Company has experienced an increase in its labor costs on an absolute
basis and as a percentage of declining sales which significantly affects the
Company's profitability. Increasing labor costs may continue due to relatively
tight labor market conditions. (See "MD&A".)
FOOD PRODUCT OPERATIONS. The Company's and the Co-Packer's food processing
activities are subject to extensive regulation by the United States Food and
Drug Administration, and by other state and local authorities. The Company
believes that it is currently in compliance with all governmental laws and
regulations and that the Company has all material permits and licenses relating
to its food processing operations. The Company has no reason to believe that the
Co-Packer is not in substantial compliance with all material governmental laws
and regulations and believes that the Co-Packer has all material permits and
licenses relating to its food processing operations. Nevertheless, there can be
no assurance that the Company or the Co-Packer will continue to be in
substantial compliance with current laws and regulations or that the Company or
the Co-Packer will be able to comply with any future laws and regulations.
Failure by the Company or the Co-Packer to comply with applicable laws and
regulations could subject the Company to civil remedies, including fines,
injunctions, recalls or seizures which could have a material adverse effect on
the Company.
Federal, state and local environmental regulations are not expected to
have a material effect on the Company's operations, but more stringent and
varied requirements of local governmental bodies with respect to zoning, land
use and environmental factors may restrict the Company's site selection for new
restaurants.
WORKERS' COMPENSATION. The Company has elected to be a non-subscriber
under the Texas Workers' Compensation Act. The Company offers, at no cost to the
employees, a Voluntary Employee Injury Benefit Plan ("Benefit Plan") which
provides certain benefits to employees injured during the course and scope of
their employment. The Benefit Plan is funded out of the general assets of the
Company. Management believes that the Benefit Plan will decrease the Company's
overall net cost in future periods. Management intends to review this election
on an annual basis. The Company does not believe it would encounter any
impediments if it elected in the future to become a subscriber under the Texas
Workers' Compensation Act. The Company does not believe that personal injury
claims by current or former employees of the Company, either individually or in
the
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aggregate, will have a material adverse effect on the Company, its properties or
business. The Company does not maintain a reserve fund for potential claims, but
carries catastrophic loss coverage with a limit of $1,000,000 and a deductible
of $150,000 per incident.
EMPLOYEES
At October 1, 1997,September 11, 1998, the Company employed 1,8401,370 persons of whom 30 are
management and administrative personnel, 13090 are restaurant management personnel,
with the remainder serving as hourly restaurant employees. The Company intends
to increase its management and clerical staff as needed. The Company is not a
party to a collective bargaining agreement and considers its relationship with
its employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
As of June 29, 1997,28, 1998, the Company leases all of its Marco's Restaurants,
Pasta Co. Restaurants and Barbecue Restaurants.the Billy Blues Restaurant. The leases have terms that
expire between 19971999 and 2012 and have an average remaining term of approximately
sevensix years. The Company obtains real estate and develops its restaurants using
threetwo methods: (i) leasing land and constructing the
restaurant (a "ground lease"); (ii) leasing the land and building (a -8-
9
"land/building lease"); or
(iii)(ii) leasing a "shell" where the landlord may or may not contribute to the
construction of the improvements (a "shell lease"). The method the Company
pursues is determined on an individual site basis, depending on the cost and
location of the property and the negotiations between the Company and the owner
of the desired property. Of the Company's restaurants, one is a ground lease, four are land/building
leases, and thirty-
sixthirty-six are shell leases.
The leases generally provide for rental rates based upon a stated minimum
rental and percentage rent payments based upon a certain sales base. The
Company's monthly lease cost for its restaurants ranges from approximately
$4,000 to $9,000 per month. Under substantially all of its leases, the Company
is required to pay real estate taxes, insurance, and maintenance expenses. The
Company's leases usually contain a renewal right for terms ranging from 5 to 15
years at then prevailing market rates.
The equipment located at most of the Company's restaurants has been
pledged as collateral to secure various loans, notes, and leases of the Company,
including landlord liens.
The Company's executive office is located in approximately 12,3006,300 square
feet of leased space in Houston, Texas.
The Company considers that its properties are suitable, adequate,
well-
maintainedwell-maintained and sufficient for the operations contemplated.
ITEM 3. LEGAL PROCEEDINGS.
During the second quarter of fiscal 1997,The Company is a party to a lawsuit filed by John
Coleman,one of its vendors arising
out of goods sold to Pete's Hospitality Co., Inc., ("Pete's") formerly a
former officersubsidiary of the Company, for wrongful termination, intentional
infliction of emotional distress and breach of employment contract was settled
out of court for an immaterial amount payable to Mr. Coleman.Company. The Company does
not admit any liability by settling this case.had guaranteed an open account of Pete's.
Pete's filed for bankrupcy and failed to pay the account. The vendor filed suit
against the Company believes that it wason the guarantee.
Except as stated above, in its best interests financially, based on projected defense costs, to settle
this case.
Themanagement's opinion, the Company is not a
party to any litigation other than ordinary routine matters which are incidental
to the Company's business.business, including employee personal injury claims and
disputes with vendors and suppliers. The Company believes that no current legal
proceedings, individually, or in the aggregate, will have a material adverse effect upon the Company
or its business. However, in the view of the Company's overall financial
condition including a negative working capital position of $9.7 million at June
28, 1998, one or more of such litigation matters, or such matters in the
aggregate, could have a material adverse effect on the Company if such matters
are not settled on favorable terms or result in unfavorable judgments. (See
"MD&A" and "Note 1 of Notes to Consolidated Financial Statements.")
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of fiscal 1997.
-9-1998.
-8-
10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ SmallCap MarketOver The Counter Bulletin
Board under the symbol of WAMA. The following table sets forth the range of low
and high closing bid prices for the Company's Common Stock for the periods
indicated as reported by the National Quotation Bureau, Incorporated. These
prices represent inter-dealer prices, without adjustment for retail mark-ups,
mark-downs or commissions and do not necessarily represent actual transactions.
Common Stock
Bid Price
--------------
Fiscal Year 1996 Low High
---------------- ---- ----
First Quarter . . . . . . . . . . . . . . . . . . . . 1.56 2.50
Second Quarter . . . . . . . . . . . . . . . . . . . . 1.25 2.06
Third Quarter . . . . . . . . . . . . . . . . . . . . .94 1.88
Fourth Quarter . . . . . . . . . . . . . . . . . . . . .69 1.25
Fiscal Year 1997 Low High
---------------- ---- ----
First Quarter . . . . . . . . . . . . . . . . . . . . .50 1.06
Second Quarter . . . . . . . . . . . . . . . . . . . . .47 1.31
Third Quarter . . . . . . . . . . . . . . . . . . . . .28 .75
Fourth Quarter . . . . . . . . . . . . . . . . . . . .COMMON STOCK
BID PRICE
------------
FISCAL YEAR 1997 LOW HIGH
---------------- --- ----
First Quarter..................... .50 1.06
Second Quarter.................... .47 1.31
Third Quarter..................... .28 .75
Fourth Quarter.................... .22 .50
FISCAL YEAR 1998 LOW HIGH
---------------- --- ----
First Quarter..................... .22 .38
Second Quarter.................... .05 .31
Third Quarter..................... .05 .18
Fourth Quarter.................... .14 .32
On October 1, 1997,September 11, 1998, the closing bid price for the Company's Common
Stock was $.22$.08 per share. As of October 1, 1997, 14,263,230September 11, 1998, 24,563,564 shares of the
Company's Common Stock were outstanding; provided, however, subject to certain conditions,
the Company has agreed to issue to Ghulam M. Bombaywala, Chairman of the Board,
Chief Executive Officer and a director of the Company, 7,500,000 shares of the
Company's Common Stock. (See "Certain Relationships and Related Transactions.")outstanding. The Company believes that the actual
number of security holders of the Company's Common Stock is approximately 2,000 holders,2,200,
including beneficial owners.
The Company has neither paid nor declared any cash dividends on its shares
of Common Stock since inception. The current policy of the Board of Directors intendsis
to retain all available earnings of the Company to support operations and to finance expansion
and does not intend to pay dividends on its sharesfor use in the operation of Common Stock for the
foreseeable future.Company's business. The payment of cash dividends in the future will depend upon
such factors as earnings levels, capital requirements, the Company's financial
condition and other factors deemed relevant by the Board of Directors. Due to
its negative shareholders' equity, the Company is precluded by law from paying
cash dividends at this time. The Company is required to pay dividends on its
Preferred Stock before any dividends can be paid on the Common Stock.
With respect to recent sales of unregistered securities and a description thereof,therof,
reference is made to Item 7. Management's DiscussionNote 11 - "Related Party Transactions" to the Consolidated
Financial Statements.
On March 27, 1998, 7,500,000 shares of the Company's Common Stock were
issued to Ghulam M. Bombaywala, Chief Executive Officer and Analysisdirector of Financial Conditionthe
Company, in a private transaction based on exemption 4(2) under the Securities
Act of 1933, as amended, pursuant to a Conversion and ResultsOffset Agreement in
exchange for the conversion by him of Operations -- Liquidity$3,750,000 owed to him by the Company at a
conversion price of $.50 per share. (See "Item 13. Certain Relationships and
Capital
Resources.
Recent amendmentsRelated Transactions.")
Amendments adopted to the listing requirements for NASDAQ Small Cap
companies may resultresulted in the delisting of the Company's Common Stock, Preferred
Stock and Warrants from NASDAQ.NASDAQ during the second quarter of fiscal 1998. To
remain listed on NASDAQ, the Company's shares must trade at $1.00 or above. The Company plans a substantial reverse
stock split in fiscal 1998 to attempt to maintain its NASDAQ listing. There is
no assurance that the reverse stock split will have the intended effect of
increasing the market price for the Company's Common Stock. In addition, NASDAQ
has proposed certain other conditions for continued listing which may not be met
byabove and
the Company includingmust have a standard for minimum tangible net worth of $2,000,000 which is not met by$2,000,000. The Company was unable
to meet the Company at this time and which cannot be met
by the Companynew requirements without obtaining substantial equity capital. If the Company is
unable to maintain its listings on the NASDAQ Small Cap Market, it will pursue
the trading of its shares on the OTC Bulletin Board or otherwise in the
non-NASDAQ over-the-counter market in what is commonly referred to as the
electronic bulletin board and the "pink sheets". If the Company is unable to
maintain its NASDAQ Small Cap listing, shareholdersShareholders
may find it more difficult to dispose of or obtain accurate quotations as to the
value of the Company's securities.
-10--9-
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
FISCAL YEAR
------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993---- ---- ---- ---- ----
(in thousands, except per share data)
OPERATING DATA:
Revenues $49,125 $40,129 $37,652 $37,008 $27,712$ 40,172 $ 49,125 $ 40,129 $ 37,652 $ 37,008
Net Income (Loss) (10,913) $49 ($7,037) ($8,360) ($4,483)$ (6,964) $(10,913) $ 49 $ (7,037) $ (8,360)
Net Income (Loss) Per
Common Share * ($0.83) ($0.02) ($0.82) ($1.10) ($0.68)Share* - Basic $ (0.42) $ (0.83) $ (0.02) $ (0.82) $ (1.10)
BALANCE SHEET DATA (end of
period)
Total Assets $16,715 $25,865 $17,672 $20,133 $12,916$ 12,683 $ 16,715 $ 25,865 $ 17,672 $ 20,133
Long-term Debt $ 7,230 $ 4,985 $10,768 $1,709 $1,507 $988$ 10,768 $ 1,709 $ 1,507
* After giving effect to preferred stock dividends.
NOTE: Cash dividends have never been paid on Common Stock.
The following lists significant items that may affect the comparability of the
above selected financial data:
o The comparability of the information presented above is predicated upon the
Company's ability to continue as a going concern of which there is
substantial doubt without immediate additional financing - (See "MD&A" and
"Note 1 to Notes to the Consolidated Financial Statements.")
o In the third quarter of fiscal 1998 the Marco's Mexican Restaurant in College
Station, Texas was closed.
o In the first quarter of fiscal 1998 the Longhorn Cafe Restaurant - Downtown
was sold.
o In the fourth quarter of fiscal 1997 Pete's Hospitality and Marco's Mexican
Restaurant in Texas City, Texas were sold.
o Early in the third quarter of fiscal 1996, ten Pasta Co. restaurants were
acquired (See Item"Item 13. Certain Relationships and Related Transactions".) The
Pasta Co. contributed approximately $5 million in revenues in fiscal 1996 and
approximately $14 million in revenues in fiscal 1997.
o In the fourth quarter of fiscal 1995 and during fiscal 1996 four Billy Blues
Restaurants and one Longhorn Cafe Restaurant were closed or sold reducing
revenues for 1996 by approximately $2.5 million.
o In the fourth quarter of fiscal 1994 the Marco's Restaurants were acquired.
Marco's contributed approximately $22 million in revenues in fiscal 1994 and
approximately $23 million in revenues in fiscal 1995.
o Notwithstanding the restaurant acquisitions and closings described above, it
should be noted that the Company's comparable store revenues have shown
significant adverse declines in the past two years, 14% and 7.4% in fiscal
1998 and 1997, respectively. These declines, combined with an increase in
certain costs, have negatively impacted the Company's operating and net
income irrespective of any asset impairment charges or writedowns in any
particular year. (See "MD&A" and "Note 1 to Notes to the Consolidated
Financial Statements.")
-10-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Effective July 1, 1994, the Company exchanged 4,600,000 shares of the
Company's Common Stock for all of the issued and outstanding capital stock of
Marco's Mexican Restaurants, Inc. ("Marco's"). The merger was accounted for as a
pooling-of-interests and, accordingly, the Company's Consolidated Financial
Statements have been restated for all periods prior to the merger to combine
the financial position and results of operations of Marco's with the Company.
For additional information concerning business combinations, see Note 2 to
Notes to Consolidated Financial Statements. Additionally, the Company acquired The Original Pasta Co. on January 26, 1996, Pete's Hospitality on August 24,
1993 and the Chris' & Pitt's product line on March 25, 1994. These acquisitions
have been1996. The
acquisition was accounted for as purchasesunder the purchase method and, accordingly, the
Company's Consolidated Financial Statements include the results of operations of
the
acquired companiesPasta Co. from their respective dates of acquisition.its acquisition date.
During fiscal 19971998 the general economy was upbeat.positive. Southeast Texas also
has been rebounding from depressed times. The restaurant industry in general is
supported by a positive economy yet the average failure -11-
12
rate in the restaurant
business is approximately one in ten in part due to changing customer tastes,
trade demographics and fierce competition. During the
fiscal year the Company spent approximately $500,000 trying a new marketing
strategy using television and radio and temporarily suspended coupon marketing.
The Company had previously been successful using direct mail coupons and
newspaper coupons. The television and radio marketing was not successful. The Company has returnedonce again focused
its marketing strategy around direct mail and newspaper coupons which have
traditionally been successful in an effort to coupon marketing and has experienced a small increase in
comparative sales during the first quarter of fiscal 1998 compared to the same
period in fiscal 1997.combat declining sales. The
Company believes it is in a favorable position within
its market withrestaurant concepts offer a strong price to value
relationship.relationship in their markets. The Company continues to be competitiveattempt to enhance and
develop its concepts by additionally offering the consumer healthymore health conscious alternatives
and daily dinner/lunch specials at an attractive price. Furthermore,However, as discussed
below, the Company intendscontinues to continue its remodelingsuffer comparable restaurant sales declines with
respect to many of its Marco's concept.and Pasta Co. Restaurants and with respect to
overall comparable restaurant sales.
The Company utilizes a 52-53 week fiscal year which ends on the Sunday
closest to June 30. References to 1998, 1997 1996 and 19951996 are all 52 week periods
ended June 28, 1998, June 29, 1997 and June 30, 1996, and July 2, 1995 respectively.
At the end of each fiscal year, the Company had the following restaurants
in operation:
Restaurants: 1997 1996 1995
- ----------- ---- ---- ----
Marco's Mexican Restaurants 22 23 22
Pasta Co. Restaurants 17 13 -
Billy Blues Restaurant 1 1 3
Longhorn Cafe 1 1 2
Pete's Restaurants 0 2 2
Hotspurs 0 1 1
--- -- --
Total 41 41 30
=== === ===
-12-RESTAURANTS: 1998 1997 1996
- ----------- ---- ---- ----
Marco's Mexican Restaurants 21 22 23
Pasta Co. Restaurants 18 17 13
Billy Blues Restaurant 1 1 1
Longhorn Cafe 0 1 1
Pete's Restaurants 0 0 2
Hotspurs 0 0 1
---- ---- ----
Total 40 41 41
==== ==== ====
(This space intentionally left blank.)
-11-
13
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) operating
results as a percentage of total revenues and (ii) selected operating data.data for
its restaurant and food product divisions.
The Company's revenues are derived from restaurant sales and food product
sales to third party retail outlets. Certain costs and expenses relate only to
restaurant sales (food and beverage, restaurant labor and other operations) or
food products (cost of food products), while other operating costs and expenses
relate to both restaurant and food products (general and administrative and
depreciation and amortization).
Percentage Change
Fiscal Year -------------------
------------------------------FISCAL YEAR ENDED
-----------------
JUNE 28, 1998 JUNE 29, 1997 vs 1996 vs
1997 1996 1995 1996 1995
------ ------ ------ ------- ------
Statements of Operations Data:
- -----------------------------JUNE 30,1996
------------- ------------- ------------
STATEMENTS OF OPERATIONS DATA:
------------------------------
Revenues
Restaurants 93.4% 95.1% 92.8%
91.9% 25.5% 7.6%
Food products 6.6 4.9 7.2
8.1 (17.6) ( 4.9)
------ ------ ------ ------ ----------- ----- -----
Total revenues 100.0% 100.0% 100.0% 22.4% 6.6%100.0
Costs and expenses:
Cost of restaurant revenues: (1)
Cost of food and beverage 25.5 27.3 27.8 14.5 4.629.9 26.8 29.4
Labor and other operations 70.3 68.5 58.0
----- ----- -----
100.2 95.3 87.4
Cost of restaurant labor 29.2 28.3 30.6 26.2 (1.4)
Cost of other operations 36.0 25.5 26.6 72.9 2.0food product revenues: (2)
Cost of food products 4.6 6.6 8.5 (15.5) (17.7)44.7 93.5 52.3
General and administrative 7.4 8.9 6.9 8.8 58.6 (17.1)
Depreciation and amortization 11.8 12.3 5.4 5.5 177.1 5.0
Provision for restaurant closings 1.3 2.4 -- 7.6 100.0 (100.0)
Loss on sale of Pete's Hospitality 1.5 -- -- 100.0 --
------ ------ ------ ------ ------
Total Costs and Expenses 120.4% 100.0% 115.4% 47.4% (7.7)
Income (loss) from operations (18.8)% 0.0% (15.4)% * 100.5%
Interest income .3 .3 .4 .4 (27.2) 6.4
Interest (expense) (2.4) (2.5) (2.1) (2.2) 43.6 4.6
Loss on conversion of debt to equity -- -- (3.5) -- (100.0)
Other net 0.3 1.8 .8 (76.2) 130.54
------ ------ ------ ------ ------
Other non-operating income (expense) (1.0%) .1% (4.5)% * 101.31.8 .3 1.8
Income tax provision (benefit) -- -- --
Net income (loss) (17.3)% (22.2)% .1%
(19.5)% * 100.7%
Operating Data:OPERATING DATA:
- -----------------------------
Restaurants open at end of period 40 41 41 30
Change in comparable restaurant revenues (1)(3) (14.0)% (7.4)% (.8)% (6.8)%
- ----------------------
(1) As a percentage of restaurant revenues.
(2) As a percentage of food product sales.
(3) Includes only restaurants open during the entire periods under comparison.
* Calculation yields numbers greater than 8,000%.
-13-
14
For the fiscal years ended June 28, 1998, June 29, 1997 and June 30, 1996 and July 2, 1995 the
Company recorded revenues of $40.2, $49.1 million $40.1 million and $37.7$40.1 million,
respectively. Before extraordinary items and the effect of preferred stock
dividends, the Company recorded a net loss of $7.0 million, a net loss of $10.9
million, and net income of $49,000 and a net loss of $7.5 million for thosethese same years, respectively. As of
June 29, 1997,28, 1998, the Company had total current assets of $1.7 million$765 thousand and total
current liabilities of $9.8$10.5 million, resulting in a working capital deficit of
$8.2$9.7 million. As of June 29, 1997, the Company had a bank line of credit of
$300,000 and $25,000 was available for use. The Company has funded its operating losses and expansion costs
primarily through a combination of public and private offerings of debt and
equity.equity and extended payment terms, allowances and write-downs with respect to
vendor payables and certain indebtedness. During the fourthfirst quarter of fiscal
1997,1998, the Company reorganized its executive management to strengthen
operational capabilities, sold its Pete's Hospitality conceptLonghorn Cafe Downtown Restaurant. The Company closed
its Marco's Mexican Restaurants in College Station and Lake
-12-
Jackson, Texas during the third quarter of fiscal 1998 and the first quarter of
fiscal 1999, respectively, in an effort to decrease its former
President and sold one Marco's restaurantlosses.
As discussed in Texas City, Texas with a
licensing agreement to continue usingmore detail below, the "Marco's" name.
The ability of the Company to alleviate
its working capital deficit, and to obtain the necessary capital resources to
fund future costs associated with its operations and to continue as a going
concern is dependent upon:primarily upon, among other things: (i) its ability to
generate sufficient cash flow to meet its obligations on a timely basis; (ii)
obtaining additional equity capital or debt financing;financing and renegotiating the
terms of existing indebtedness; and (iii) ultimately to attain profitable
operations. However, even if the Company achieves some success with its
operational strategy, there can be no assurance that it will be able to generate
sufficient revenues to achieve profitable
operations orcash flow to continue as a going concern.concern without substantial
additional capital in the short-term. The Company had negative cash flow from
operations during fiscal 1998 and did not generate sufficient cash flow to meet
its needs, primarily as a result of declining sales and rising labor costs and
costs of food and beverage revenues.
During fiscal 1997 and 1998, the Company experienced significant operating
losses. These losses raise doubt about the Company's ability to continue as a
going concern. In an effort to decrease its losses, the Company took the actions
listed below:
o In June 1997, the Company reorganized its top management in order toan attempt to
return the Company to profitability.profitability and has substantially reduced general and
administrative expenses in the past year.
o In JuneSeptember 1997, the Company sold one of its concepts, Pete's Hospitality Co.,
Inc. ("Pete's"), a wholly owned subsidiary,remaining Longhorn Cafe Restaurants
to a relatedan unrelated party in a stockan asset purchase transaction because of poor concept performance. Pete's owned and
operated two Pete's BBQ Rib and Steakhouse restaurants and the H.D.
Hotspurs Restaurant in the Seattle, Washington area.transaction. The Company recorded
a
lossincome of approximately $750,000 recorded$138,000 reflected in other income (loss), net on this
transaction in the fourthfirst
quarter of fiscal 1997. Pete's Hospitality1998. The Longhorn Cafe contributed approximately $5.1 million$220
thousand in revenues in fiscal 1997.1998.
o In June 1997,February 1998, the Company sold fixed assets associated with aclosed its Marco's Mexican Restaurant located
in College Station, Texas City, Texas, with the actual transfer
of assets in July 1997 to a former district manager of the Company because the location was performing below the
Company's standards primarily due to declining trade area demographics. The
Company recorded a loss of approximately $75,000$49,000 on this transaction in the
third quarter of fiscal 1998. The College Station, Texas location contributed
approximately $359,000 in revenues in fiscal 1998.
o In August 1998, the Company closed its Marco's Mexican Restaurant located in
Lake Jackson, Texas because the location was performing below the Company's
standards primarily due to declining trade area demographics. The Company
recorded a loss of approximately $82,500 on this transaction in the fourth
quarter of fiscal 1997.1998. The Texas City,Lake Jackson, Texas location contributed
approximately $548,000$558,000 in revenues in fiscal 1997.1998.
Until the Company is able to obtain profitable operations and cash flow from
its core restaurant concepts, the Marco's Restaurants and the Pasta Co.
Restaurants, the Company intends to postpone restaurant expansion from new
restaurant construction. The Company plans to sell three more ofor close its non-
performingnon-performing
Marco's storesand Pasta Co. Restaurants and its Billy Blues Restaurant in fiscal 1998.
Additionally, the Company plans to proceed with its restaurant franchising
program for the Marco's1999.
The Billy Blues Restaurant contributed $1.5 million in revenues in fiscal 1998
and Pasta Co. Restaurants.had an operating loss of $343,000. The Company will consider material
restaurant chain acquisition possibilitiesacquisitions or combinations if the acquisition(s) (i)they could significantly enhance the
projected revenues and profitability of the Company on a consolidated basis
(ii)and/or allow the restaurant concepts are compatible
with the Company's core concepts, and (iii) the acquired restaurants are
geographically compatible with the Company's existing operations.Company to continue as a going concern. Any material
acquisition or business combination by the Company could substantially change
the Company's business structure, capitalization and operating performance. As
of June 29, 199728, 1998 the Company had no agreements or understandings regarding any
-14-
15
material restaurant acquisitions.acquisitions or combinations. Any acquisition or
combination, if unsuccessful, could materially and adversely affect the
Company's ability to continue as a going concern. The Company may consider the
sale of all or part of the assets of the Company if it continues to incur
substantial operating losses and the terms of any such sale may be detrimental
to overall shareholder value.
-13-
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
RESTAURANT REVENUES. Revenues decreased $9,194,169 or 19.7% to $37,540,093
in 1998 as compared to $46,734,262 in 1997. Revenue decreases are primarily due
to (i) the closing or sale of Pete's Hospitality Restaurants and the sale of one
Marco's Mexican Restaurant partially offset by the opening of one Original Pasta
Co. Restaurant during 1998, and (ii) a decline in comparable restaurant revenues
of 14%.
For fiscal 1997, comparable restaurant revenues had declined by 7.4%.
Management is working to improve same store sales in fiscal 1999 by changing
marketing strategies to concentrate on local store marketing and improving
quality and service. The decline in comparable restaurant revenues could be
attributable to increased competition, the age of the Marco's and Pasta Co.
Restaurants, previously unsuccessful advertising strategies, the core restaurant
concepts being less compatible with changing consumer tastes or other factors.
Management cannot predict whether the decline in comparable store restaurant
sales will continue, but such declines are likely if management is unable to
determine the cause of such declines and implement substantial remedial steps.
In view of the Company's financial condition, it may not have the resources to
fund changes in advertising strategy, improvements in quality and service or
changes to the restaurant concepts, including their trade dress and menu items.
Approximately 12% of restaurant revenues were derived from the sale of
alcoholic beverages for fiscal 1998 and 20% in fiscal 1997.
FOOD PRODUCTS REVENUES. Revenues increased by $240,957 due to an
aggressive marketing program.
COST OF RESTAURANT REVENUES. Costs of food and beverage revenues as a
percentage of restaurant sales increased from 26.8% in 1997 to 29.9% in 1998.
The increase is due in part to increases in prices of certain high volume
products used in menu item preparation. In addition, due to the Company's
financial condition and payment terms with suppliers, the Company is unable to
obtain the most favorable pricing. Significant changes in this percentage are
not anticipated for fiscal 1999. However, management is unable to predict future
product costs or the impact of any increases in such costs on the Company's
future results of operations.
Labor and other restaurant operating costs include all other unit-level
operating expenses, comprised principally of labor and benefits, operating
supplies, rent, utilities, repair and maintenance, pre-opening expenses,
advertising and other costs. A substantial portion of these expenses are fixed
or indirectly variable. These costs increased as a percentage of restaurant
revenues from 68.5% in 1997 to 70.3% in 1998 due to lower sales and increased
labor costs associated with the federal minimum wage rate increase in September
1997 and a tightening labor market. These factors are expected to continue to
put upward pressure on the Company's labor costs.
COST OF FOOD PRODUCTS REVENUES. The cost of food products as a percentage
of food product revenues decreased from 93.5% in 1997 to 44.7% in 1998 due to
operational efficiencies and an agressive marketing strategy implemented in
1998.
GENERAL AND ADMINISTRATIVE EXPENSE. These expenses decreased by $1,381,786
from $4,364,147 in 1997, to $2,982,361 in 1998 due to the reorganization of
corporate and management personnel and decreases in management and corporate
office personnel.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
from $6,035,811 in 1997 to $4,755,760 in 1998. The decline is due primarily to
the sale of Pete's Hospitality in fiscal year 1997 offset by an impairment of
Pasta Co. goodwill of $2,600,000.
PROVISION FOR CLOSED RESTAURANTS. In fiscal 1997, the Company recorded a
provision for restaurant closings of approximately $1.2 million as a result of
management's decision to either close or sell its interest in the Billy Blues
Restaurant. The provision included the write-down of assets to net realizable
value. In 1998, the Company recorded an additional $115,084 for the closing of
its Marco's Mexican Restaurant in Texas City, Texas. The assets of this
restaurant were sold in the fourth quarter of fiscal 1997. The buyer defaulted
on the loan agreement. Therefore, the location was repossessed and an additional
provision established.
INTEREST INCOME. Interest income of $120,186 in fiscal 1998 and
$121,260 in fiscal 1997 resulted primarily from a note receivable from Mr.
Bombaywala.
INTEREST EXPENSE. Interest expense decreased from $1,220,666 in 1997 to
$997,609 in 1998 due primarily to the principal payment of $1,250,000 on the 12%
subordinated notes as well as conversion of debt to equity owed to Mr.
Bombaywala. (See "Item 13. Certain Relationships and Related Transactions.")
OTHER INCOME, NET. Other income, net, increased by $571,896 from 1997 to
1998 due to a gain of approximately $138,000 on the sale of a Longhorn Cafe
restaurant and recovery of a previously written-off note from a former related
party of approximately $454,000. (See "Item 13. Certain Relationships and
Related Transactions".)
-14-
INCOME TAXES. The Company had no income tax provision nor benefit in
fiscal 1998 or fiscal 1997.
NET INCOME (LOSS). As a result of the changes in the relationships between
revenues and costs and expenses described above (decreasing revenues and
increasing labor and costs of food and beverage), the Company recorded a net
loss of $10,912,775 in 1997 and a net loss of $6,964,084 in fiscal 1998. The
losses in fiscal 1997 included the asset writedowns of approximately $4.5
million for the Chris & Pitt's Barbecue Sauce line and restaurant closings and
losses in fiscal 1998 include the asset writedowns of $2,600,000 for Pasta Co.
MANAGEMENT'S PLANS. Management's plans to return to profitability include
the following:
o Increasing revenues from the sale of food products by reinforcing
existing markets, expanding distribution to new market areas,
introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
o Further reductions in operating expenses through improved cost controls.
o Further reductions in general and administrative expenses.
o Increasing revenues in existing restaurants by improving marketing
programs and customer service.
o Selling or closing its Billy Blues Restaurant and non-performing Marco's
and Pasta Co. Restaurants.
o Renegotiating and extending the terms of the Company's existing
indebtedness.
o Obtaining additional equity capital or debt financing.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUES. Total revenues increased 22.4% or $9.0 million in fiscal 1997
over fiscal 1996. Revenues increased approximately $9.3 million due to having
owned the Pasta Co. Restaurants for a full year in fiscal 1997 versus
roughlyapproximately half of fiscal 1996. This increase includes revenues contributed
by four new Pasta Co. Restaurants opened in fiscal 1997, two opened late in the
second quarter and two opened late in the fourth quarter. Revenues related to
these new stores were approximately $1.8 million. Conversely, comparable
restaurant revenues declined 7.4% compared to a decline of .8% in fiscal 1996,
due towhich the Company believes was a result of, among other things, extremely
competitive conditions and a general softness in restaurant sales in the
Company's Houston, Texas market. Management anticipates an increase in restaurant revenues inmarket and the factors discussed for fiscal 1998 due to a new training program and an intense concentration on
increasing customer satisfaction.1998.
Furthermore, fiscal 1996 contained approximately $390,000 of revenue related to
a fair in the State of Washington that was not included in fiscal 1997. The sale
of one of the Longhorn Cafes during fiscal 1996 further reduced revenues. The
remaining Longhorn Cafe contributed $.9 million in revenues in fiscal 1997.
Approximately 20% of restaurant revenues were derived from the sale of
alcoholic beverages in fiscal 1997 versus 16% from fiscal 1996.
OPERATING COSTS AND EXPENSES. Generally, all restaurant related and
administrative costs increased due to an overall increase in revenue by 22.4%
andprimarily as a result of incorporating the Pasta Co. Restaurants operations for
a full year versus one-half year in fiscal 1996. Furthermore, these costs
increased due to the opening of four new Pasta Co. Restaurants in fiscal 1997.
Food and beverage costs increased 14.5% overall due additionally(but declined as a percentage of
revenue from 29.4% to decreased purchasing leverage
brought on by cash flow limitations.26.8%). Labor costs increased 26.2% overall additionally
due to an increase in the minimum wage in October 1996, anda tightening labor
market, increased restaurant staff coverage to meet customers needs.needs and as a
result of the additional Pasta Co. Restaurants which are more labor intensive
than the Marco's Restaurants. Costs of other restaurant operations increased
72.9% and include remodeling costs for Marco's Restaurants, preopening costs for
four Pasta Co. Restaurants, research and development costs for Marco's and Pasta
Co. menus, and advertising and marketing for the restaurant concepts.
Advertising and marketing increased by approximately $987,000 due to new
television and radio promotions undertaken in fiscal 1997. These are not anticipated to be continued in fiscal 1998. The
approximately $300,000 spent for remodeling Marco's Restaurants in fiscal 1997
is expected to be reduced in fiscal 1998 due to less intensive remodels. These
costs additionally increased due to added training costs for the new Pasta Co.
Restaurants. During fiscal 1997
provisions of $1.1 million for the anticipated losses on the sale or closure of
the Billy Blues Restaurant and $75,000 for the sale of the Texas City, Texas
Marco's location were recorded as provisions for restaurant closings. Management
intendsintended, but was unable, to sell or close the Billy Blues Restaurant in fiscal
1998, which contributed $1.9 million in revenues in fiscal 1997.
-15-
General and administrative costs increased 58.6% or $1.6 million over
fiscal 1996 and include corporate salaries and wages, legal fees and settlements
and professional fees and all gains and losses on sales and/or
closures for all Company concepts.fees. Legal fees included approximately $200,000 for settlement
of various claims. Additional expenses includeincluded costs to develop and market the
Company's franchise program.program which was put on hold in fiscal 1998. Corporate
salaries for fiscal 1997 includeincluded $120,000 of deferred salary and bonus for
Ghulam Bombaywala, Chairman of the Board and Chief Executive Officer. No salary
or bonus was taken by Mr. Bombaywala in the previous two years.
A loss of approximately $750,000 was recorded on the sale of Pete's
Hospitality concept sold in June 1997.
In the fourth quarter of fiscal 1997, the Company made a decision to sell
the remaining Billy Blues Restaurant. Accordingly, the assets were deemed to be
impaired and written down to their estimated fair value. An impairment expense
of $1.1 million was recognized during 1997. Additionally, the Company sold one
Marco's Restaurant in the fourth quarter for a loss of approximately $75,000. In
1997, an impairment expense was recorded to reflect the loss on sale.
In the fourth quarter of fiscal 1997, the Company deemed the intangible
assets associated with Chris' & Pitt's BarbequeBarbecue Sauce to be impaired. Management
estimated the fair value and, accordingly, an impairment expense of
approximately $3.45 million was recorded during 1997 and is included in
depreciation and amortization expense.
NON-OPERATING INCOME (EXPENSE)
Interest expense increased 43.6% primarily due to interest on debt related
to the acquisition of Pasta Co. in January 1996. (See "Item 13. Certain
Relationships and Related Transactions.")
INCOME TAX
The Company had no income tax provision nor benefit in fiscal 1997 or
1996.
MANAGEMENT'S PLANS
Management's plans to return to profitability include the following:
o Controlling food costs by improving vendor relations and
renegotiating contracts.
o Reducing labor costs by outsourcing certain labor intensive food
preparation processes.
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16
o Increasing revenues from the sale of food products by reinforcing
existing markets, expanding distribution to new market areas,
introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
o Reducing operating expenses through improved cost controls.
o Reducing general and administrative expenses.
o Increasing revenues in existing restaurants by remodeling certain
Marco's Restaurants and by improving marketing programs and
customer service.
o Franchising new restaurants.
o Selling or closing its Billy Blues Restaurant.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
REVENUES.
Total revenues increased 6.6% to $40,129,000 in fiscal 1996 over fiscal
1995. Revenues attributable to the Pasta Co. Restaurants were approximately
$5,100,000. Remaining revenues decreased by approximately $2,500,000 due to the
closing or sale of four Billy Blues Restaurants and the sale of one Longhorn
Cafe Restaurant partially offset by the opening of two Marco's Restaurants
during 1995 and one in 1996. Comparable restaurant revenues declined by .8% for
fiscal 1996 compared to a decline of 6.8% in fiscal 1995. Approximately 16% of
restaurant revenues were derived from the sale of alcoholic beverages for
fiscal 1996 and 1995. Revenues from food products declined by approximately
$150,000 due to the fact that during fiscal 1996, the Company discontinued
service to certain accounts which had proved to be unprofitable.
OPERATING COSTS AND EXPENSES.
Restaurant related operating costs generally increased principally
attributable to the 7.6% increase in restaurant revenues. Food and beverage
costs increased 4.6% in fiscal 1996 compared to fiscal 1995. As a percentage of
restaurant revenues, food and beverage costs declined to 29.4% in 1996 from
30.3% in 1995. The decrease was due to operational efficiencies implemented by
management, new buying programs and the introduction of new menu items with
lower cost percentages. Labor and other restaurant operations include all other
unit-level operating expenses, comprised principally of labor and benefits,
operating supplies, rent, utilities, repair and maintenance, pre-opening
expenses, advertising and other costs. A substantial portion of these expenses
are fixed or indirectly variable. Labor costs declined as a percentage of
restaurant revenues to 30.5% in 1996 from 33.3% in 1995 and other restaurant
operations costs declined to 27.5% in 1996 from 29.0% in 1995, due to
disproportionally higher expenses associated with the Billy Blues Restaurants
which were closed or sold.
The cost of food products declined in proportion to the decrease in food
product revenues in fiscal 1996. Costs declined additionally due to operational
efficiencies implemented in 1996. Food products selling, marketing and
distribution costs, included in the cost of food products, also declined due to
reductions in promotions and allowances granted to customers as well as
efficiencies gained in distribution expenses such as warehousing and freight.
General and administrative expenses decreased by approximately $570,000 to
$2,753,000 in 1996 from $3,321,000 in 1995 due to cost reductions implemented
by management in fiscal 1995, which included the elimination of personnel and a
consolidation of corporate offices.
Depreciation and amortization increased to $2.2 million in 1996 from
$2.1 million in 1995. Of this amount, approximately $457,000 was associated with
The Original Pasta Co. The remaining decline of approximately $350,000 was due
to the closure or sale of Billy Blues Restaurants and to assets becoming fully
depreciated or amortized.
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17
NON-OPERATING INCOME (EXPENSE).
In 1995, the Company recorded a provision for restaurant closings
A loss of approximately $2.9 million as a result of management's decision to either close
or sell its interest in four Billy Blues Restaurants. The provision included
the write-down of assets to net realizable value as well as estimated amounts
for lease and other obligations associated with the restaurants. The Company
utilized substantially all of the provision by the end of fiscal 1996.
Interest income of approximately $167,000 in fiscal 1996 and $157,000 in
fiscal 1995 resulted primarily from a note receivable from Mr. Bombaywala.
Interest expense increased to $850,000 in 1996 from $813,000 in 1995 due to
$257,000 in interest associated with notes associated with The Original Pasta
Co., offset by a decrease of $220,000 of interest on other debt due to
principal reductions made on such debt.
In May of 1995, the Company offered its Debentureholders the right to
convert the principal and accrued interest owed on their Debentures into Common
Stock at a modified conversion rate of $2.3125 of Debenture principal and
interest for one share of Common Stock, as opposed to the stated conversion
rate of $5.00 per share. The Debentureholders, who were owed an aggregate of
approximately $2.5 million, agreed to the conversion and were issued an
aggregate of 1,093,904 shares of Common Stock. The Company$750,000 was recorded a loss on
conversion of approximately $1.3 million, which is equal to the market value of
the shares actually issued less the market value of the shares which would have
been issued had the conversion been at the stated conversion rate.
Other income, net, increased by $399,000 from 1995 to 1996 due to a gain
of approximately $150,000 on the sale of a Longhorn Cafe restaurant, with the
balance of the increase due primarily to consulting fees charged Pasta Co.
prior to its acquisition.
A note payable for the purchase of the Chris' & Pitt's product line was
paid off at a discount from the face amount of the note plus accrued interest.
The amount of the discount is reported as a gain on extinguishment of debtPete's
Hospitality concept sold in fiscal 1995.
The Company had no income tax provision nor benefit in 1995 or 1996.June 1997.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary ofSince inception, the Company's cash flows for the
last three fiscal years:
(In Thousands)
1997 1996 1995
------ ------ -------
Net cash provided by
(used in) operating activities $ 386 $ 1,346 ($1,341)
Net cash used in investing activities (606) (1,617) (613)
Net cash provided by
(used in) financing activities 21 (1,368) 3,524
------ ------ -------
Net increase (decrease) in cash
and cash equivalents ($199) ($1,639) $ 1,570
====== ====== =======
The Company continues to experience substantialhas primarily incurred losses from operations
and, as of June 29, 1997,28, 1998, has an accumulated deficit of $30.3 million.$37,277,169.
During fiscal 1998, net cash flow used in operating activities totaled
$845,623 primarily due to depreciation and amortization of $4,755,760 added back
to net income, offset by an increase in accrued liabilities and accounts payable
of $535,175. Investing activities utilized $354,613 of cash, principally
resulting from purchases of property and equipment. Financing activities
provided $1,027,469 of cash, due to additional borrowings.
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During fiscal 1997, net cash provided by operating activities of $385,783 was
primarily due to adding back of non-cash deductions from depreciation and
amortization of $6,035,811, provision for restaurant closings of $1,175,434, and
increase in accounts payable and accrued liabilities of $2,027,007. Net cash of
$606,131 used in investing activities was primarily due to cash outflow for
purchases of restaurant property and equipment in excess of proceeds from the
sale of property and equipment. Net cash provided by financing activities
totaling $20,724 was due to proceeds from borrowings in excess of repayments of
borrowings, and purchase of treasury stock.
During fiscal 1996, net cash flow from operating activities totaled
$1,346,354 primarily due to depreciation and amortization added back to net
income, offset by a reduction in accrued liabilities. Investing activities
utilized $1,616,660 of cash, principally resulting from purchases of property
and equipment. Financing activities utilized $1,368,257 of cash, primarily due
to net payments on borrowings. In March of 1996, the Company received proceeds
from a $1.2 million bank loan, of which approximately $860,000 was used to pay
off an existing loan.
For fiscal 1995, operating activities utilized $1,340,986 of cash,
primarily due to a net loss less non-cash expenses. Investing activities
utilized $612,575 in cash due to purchases of property and equipment of
approximately $1.4 million offset by a $756,000 collection on a note
receivable. Financing activities provided $3,523,580 in cash primarily due to
the issuance of common stock and an increase in net borrowings. In June 1995,
the Company received proceeds from a $1.0 million loan from an unaffiliated
foreign corporation and approximately $1.1 million from a private placement of
Common Stock.
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18
In the fourth quarter of fiscal 1997 (June 1997) the Company offered a
private placement of $4 Million of 11% Convertible Subordinated Notes due June
30, 2002 (the "Convertible Subordinated Notes") pursuant to exemptions from
registration under the Securities Act of 1933, as amended (the "Act") and the
rules and regulations promulgated thereunder, including, without limitation,
Section 4(2) and Regulation D. The Convertible Subordinated Notes are being
offered directly by the Company to qualified accredited investors. The Company
has not retained a broker or underwriter to assist with the offering although
it may elect to do so in the future on terms to be negotiated. Holders of the
Convertible Subordinated Notes received warrants (the "Convertible Subordinated
Note Warrants") to purchase shares of Common Stock at a purchase price of $1.50
per share until June 30, 2002. Interest on the Convertible Subordinated Notes
is payable quarterly beginning September 30, 1997. The Convertible Subordinated
Notes are currently unsecured and may be subordinated to certain defined senior
indebtedness. As of September 1997, $700,000 principal amount of the
Convertible Subordinated Notes has been subscribed. The proceeds of the
offering were used to repay a portion of the $3 million principal amount of 12%
Subordinated Notes originally due July 31, 1997. The balance of the
Subordinated Notes was extended to July 10, 1998. Ghulam M. Bombaywala,
Chairman of the Board, Chief Executive Officer and a director of the Company,
converted the $500,000 principal amount of 12% Subordinated Notes owed to him
into the 11% Convertible Subordinated Notes, pursuant to a Subordinated Note
Conversion Agreement dated June 1, 1997 (the "Conversion Agreement"). Pursuant
to the Conversion Agreement, Mr. Bombaywala canceled the $500,000 principal
amount of 12% Subordinated Notes owed him by the Company and received an 11%
Convertible Subordinated Note of equal principal amount with the same terms and
conditions as the Convertible Subordinated Notes being offered by the Company
to prospective investors. Additionally, in September 1997, the Company
guaranteed a promissory note with United Central Bank for $850,000 due
September 2002. The proceeds of the note were used to repay a portion of the $3
million principal amount of 12% Subordinated Notes originally due July 31,
1997.
In April 1997, the Company secured a $300,000 (at prime + 2%) unsecured
line of credit with MetroBank in Houston, Texas maturing in April 1998. These
funds were used to supplement working capital needs. As of June 29, 1997
approximately $25,000 was available. Also, in April 1997, the Company secured a
$300,000 note (at prime) with United Central Bank in Houston, Texas maturing
April 2004, for the purpose of financing equipment and leasehold improvements
for a Pasta Co. Restaurant.
In February 1997, the Company secured a $250,000 note (at prime +1%) with
Langham Creek National Bank in Houston, Texas for the purpose of financing
equipment and leasehold improvements for a Pasta Co. Restaurant.
The Company frequently has not been able to make timely payments to its
trade and other creditors. The Company has renegotiated new terms with most of
its suppliers and vendors, which include more favorable pricing, extended
payment terms and discounts. If the Company is unable to comply with these
terms, its suppliers and vendors may suspend deliveries and the Company's
ability to continue to operate could be materially affected. The Company is
currently seeking sources of working capital financing sufficient to fund its
ongoing trade obligations.
-18-
19
FISCAL 1998 CAPITAL REQUIREMENTS.
The Company has a working capital deficit of approximately $8.2$9.7 million at
June 29, 1997.28, 1998. The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing or capital, refinance its debt and to
ultimately attain profitable operations. (See "MD&A - Results of Operations"
above) The Company did not generate adequate cash flow to meet its needs in
fiscal 1998. The Company needs immediate capital in the short-term and
additional capital in the long-term to meet its needs which are identified
below. The Company cannot generate positive cash flow from operations unless it
can increase its sales and achieve further cost reductions. Even if profitable
operations can be achieved by the Company in the short-term, it will not have
sufficient cash flow to cover general and administrative expenses, materially
reduce its payables and accrued liabilities and meet its debt service
requirements.
Management's plans include the following:
o Decreasing food and labor costcosts while increasing revenues.
o Increasing revenues in existing restaurants by remodeling certain
Marco's Mexican Restaurants and by improving marketing
programs and customer service.
o Increasing revenues from the sale of food products by reinforcing
existing markets, expanding distribution to new market areas,
introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
o Franchising new restaurants.
o Obtaining additional equity capital or debt financing.
o Selling or closing its Billy Blues Restaurant.
o Selling or closing its other non-performing restaurants.
The material capital commitments of the Company for fiscal 19981999 are as
follows:
o Reduction of the Company's working capital deficit, including payments
on notes, accounts payable and accrued liabilities.
o Accumulation of funds for the payment of the principal balance of $1.25
million currently owed on the $3 Million 12% Subordinated Notes originallyNotes. The
notes were due July 31, 199710, 1998, but have been extended to July 10,December 31,
1999. A principal payment of $100,000 was made on September 1, 1998,
with a principal payment of $150,000 due December 31, 1998.
o Remodeling Marco's Restaurants.Accumulation of funds for the payment of the principal balance of $1
million owed on the note payable to an unaffiliated foreign investor
due June 1999. Unless a settlement agreement can be reached, the
Company is in default on this note and received a notice of
acceleration and default on September 11, 1998.
o Funding of negative cash flow from operations if operating results are
not improved. Increasing sales (or preventing further sales declines)
and controlling or reducing operating costs will be critical for the
Company to generate positive operating cash flow.
In the first quarter of fiscal 1998, the Company opened one new Pasta Co.
Restaurant. Pasta Co. Restaurants require an initial capital investment of
approximately $400,000. Of this amount, the Company financed approximately half
of the investment using the acquired assets as collateral. The Company financed
the balance through cash flow from operations. There are no further plans to
open new restaurants during fiscal 1998.1999 due to capital restraints and overall
operating results at existing restaurants.
-17-
The Company expects tomay achieve positive cash flow from operations in fiscal 1998,1999,
principally from its Marco's and Pasta Co. Restaurants, only if it can increase
its restaurant sales and reduce its labor and other operating costs. As
discussed in "Results of Operations", the Company has been unable to reverse the
21.4% decline in comparable restaurant sales over the last two fiscal years. The
Company may experience further sales declines in fiscal 1999 which could have a
material adverse effect on the Company's liquidity if additional financing is
not available. During the first quarter of fiscal 1998, the Company sold its
remaining Longhorn Cafe Restaurant.Restaurant to raise additional cash. The Company also
plans to supplement cash flow from operations by selling its last barbecue
restaurant, Billy Blues. However, cash generated from operations, mayif any, will
not be sufficient to meet all of the Company's fiscal 19981999 capital commitments
set forth above. Without debt refinancing or additional debt or equity financing
in the short-term, the Company will not be able to (i) reduce its current
working capital deficit (ii) repay the $1.25 million balance of the 12%
Subordinated
Notes due July 10, 1998,December 31, 1999,(iii) repay the $1 million note due June 1999, or
(iii) continue its remodeling efforts
on(iv) fund negative cash flow from operations if the Marco's restaurants.Company's negative operating
cash flow continues. There is no assurance that the Company will be able to
refinance its debt or obtain additional debt or equity financing in the short
term or long-term. The Company has not been successful in raising debt or equity
financing in fiscal 1998.
For fiscal 19971998 the Company had negative cash flow from operations of
$1,641,224 (after subtracting the increase in accounts payable of $2,027,007).$845,623. The Company did not have sufficient cash flow during fiscal 19971998 to
satisfy its direct operating expenses and pay its substantial indebtedness and
reduce its accounts payable and short-term liabilities.liabilities which increased
$2,027,007 in fiscal 1997 and $535,175 in fiscal 1998. The Company cannot
continue to fund negative cash flow from operations and meet its other
obligations by increasing its payables to vendors in the short or long-term. In
order to meet its liabilities and obligations, the Company was required to
obtain additional debt financingfinancings and borrowings as discussed above, renegotiate
and extend the terms of various borrowings and renegotiate and extend the
amounts and the timing of paymentspayment to various vendors.
The Company may experience further losses or negative cash flow from
operations in fiscal 1998.1999. Continued losses raise doubt about the Company's
ability to continue as a going concern. The financial statements do not reflect
any adjustments that might result from the outcome of this uncertainty. If the
substantial losses continue, the value of the Company's long-lived assets may
become further impaired resulting in further write-downs to such assets to their
estimated fair value.
The inability of the Company to obtain substantial additional financing and achieve
profitable operations and positive cash flow has resulted in the curtailment of
the Company's expansion activities which may continue indefinitely. Cash
generated from operations will not be sufficient to allow the Company to timely
meet all of its obligations and continue remodeling the Marco's Restaurants and
continue restaurant expansion. Without obtainingcommitments. Since it has been unable to obtain
profitable operations and positive cash flow from operations, or additional
financing, the Company may have to curtailhas curtailed its operations, sell coreexpansion, is selling non-core assets
or seekand is seeking further financingfinancings on terms which may prove unfavorable to the
Company and its shareholders. If operating results do not improve or if
additional financing is not available, the Company may be forced to further
curtail or reduce its operations or sell all or part of its core assets on terms
unfavorable to its shareholders. The Company has not been able to raise any
material debt or equity financing in fiscal 1998 although it has renegotiated,
consolidated and/or extended certain indebtedness.
YEAR 2000 ISSUES. The Company is working to resolve the potential impact
of the year 2000 on the ability of the Company's computerized information
systems to accurately process information that may be date-sensitive. Any of the
Company's programs that recognize a date using "00" as the year 1900 rather than
the year 2000 could result in errors or systems failures. The Company utilizes a
number of computer programs in its operations. The Company has retained a
consultant to assess the potential impact of the year 2000 on its own
operations. In addition, the Company is also evaluating the year 2000 readiness
of those third parties, including vendors and suppliers, with whom the Company
does business, and the potential impact on the Company if these third parties
are unable to address this issue in a timely manner. The Company has not
completed its assessment, but currently believes that the costs of addressing
this issue will not have a material adverse impact on the Company's financial
position. However, if the Company and third parties upon which it relies are
unable to address this issue in a timely manner, it could result in a material
financial risk to the Company. In order to assure that this does not occur, the
Company plans to devote all resources necessary to resolve any significant year
2000 issues in a timely manner. The Company is presently evaluating its
estimated costs for the year 2000 conversion.
NEW ACCOUNTING STANDARDS. In May 1997, the FASBFinancial Accounting Standards
Board (FASB) issued SFASStatement 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. The pronouncementBasic 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 regarded as
common stock equivalents and are computed using the treasury stock method. Stock
options will have a dilutive effect under the treasury stock method when the
average market price of the common stock during the period exceeds the exercise
price of the options.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure", which establishes standards for disclosing information
about the Company's capital structure. This statement does not change any
previous disclosures but consolidates them in this statement for ease of
retrieval and greater visibility.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" which established standards for reporting and displaying comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for annual and interim periods endingfiscal years beginning after December 15, 1997. -19-
20The 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.
FORWARD-LOOKING INFORMATION. Information in this Annual Report and Form
10-K 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 Annual Report and Form 10-K, words such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "probably" and
similar expressions, as they relate to the Company, its operations or the Company's
management, identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events, and are subject to
certain risks, uncertainties, and assumptions relating to the operations and
results of operations of the Company, competitive factors and pricing pressures,
shifts in consumer demand, the costs of
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products and services, general economic conditions, and the acts of third
parties, as well as other factors described in this Annual Report and Form 10-K,
and, from time to time, in the Company's periodic earnings releases and reports
filed with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein as anticipated, believed, estimated, expected, or intended, or the like.
ITEM 8. FINANCIAL STATEMENTS.
The financial information required by this Item is found beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As previously reported in a Form 8-K filing dated August 20, 1997,
incorporated herein by reference, the Company changed its principal independent
accountant. (See "Item 10. Directors and Executive Officers of the Registrant ---
Committees and Fees"Fees.).
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(This space is intentionally left blank.)
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21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages, titles and dates of
employment of the members of the Board of Directors and the executive officers
of the Company.
Term of
Office
Name Age Position Since
- ---- --- -------- -----
Ghulam Bombaywala 41 Chairman of the Board, 1994
Chief Executive Officer
and Director
Thomas J. Buckley(3)TERM OF
OFFICE
NAME AGE POSITION SINCE
---- --- -------- -------
Ghulam Bombaywala(1) 43 Chairman of the Board, Chief Executive 1994
Officer President, Chief Operating Officer
and Director
Sarosh J. Collector(2)(3) 50 Former Chief Financial 1994
Officer & Secretary
Michael S. Chadwick(1) 45 Director 1994
Nico B. Letschert(2) 42 Director 1994
Philip M. Mount 39 Director 1994
Sarosh J. Collector(1)(2) 49 Director 1995
- -----------------Michael S. Chadwick(2) 46 Director 1994
Nico B. Letschert(3) 43 Director 1994
Philip M. Mount 40 Director 1994
Darrin Straughan 37 Director 1998
(1) The principal financial and accounting officer resigned in July 1997 and has
not been replaced. Mr. Bombaywala is currently signing in these capacities.
(2) Member of the Audit Committee of the Board of Directors.
(2)(3) Member of the Compensation Committee of the Board of Directors.
(3) Thomas J. Buckley resigned effective July 1, 1997 and as of the date of
this filing has not been replaced.
GHULAM BOMBAYWALA was elected as a director of the Company on August 5,
1994. Effective September 21, 1994, Mr. Bombaywala was elected Chairman of the
Board of Directors and Chief Executive Officer of the Company. Since 1984, Mr.
Bombaywala has served as sole director of Marco's. Mr. Bombaywala also served as
President and Chairman of the Board of Directors of the publicly traded Two
Pesos, Inc. from April 1990 to June 1993 when it was sold to Taco Cabana, Inc.
Mr. Bombaywala is also a shareholder and President of James Original Coney
Island, Inc., the corporation owning the James Coney Island restaurants servingwhich
serve hot dogs and chili. Mr. Bombaywala serves on the Board of Directors of the
Sam Houston Area Boy Scouts of America, the National Conference of Christians
and Jews, and the United Way of Texas Gulf Coast.
THOMAS J. BUCKLEY was elected Chief Financial Officer and Secretary of the
Company in December 1994. From May 1990 to January 1994, Mr. Buckley was Vice
President - Finance and Franchising of Western Sizzlin, Inc. ("WSI"), a
restaurant franchising and operating company. From 1986 to 1989, Mr. Buckley
was President of SDO, Inc., a regional franchising company. From 1980 to 1985,
Mr. Buckley was Executive Vice President and a director of the publicly traded
USACafes, franchisor and operator of Bonanza Restaurants. Mr. Buckley has over
15 years experience in the restaurant industry and extensive experience in
franchising. Mr. Buckley received a B.S. degree in accounting from the
University of New Orleans.
MICHAEL S. CHADWICK has served as a director of the Company since August
1994. Mr. Chadwick serves on the Audit Committee of the Board of Directors. Mr.
Chadwick is Senior Vice President and a Managing Director of the Corporate
Finance Department of Sanders Morris Mundy Inc., a Houston-based financial
services and investment banking firm. From 1988 to August 1994, Mr. Chadwick
served as President and Co-Owner of Chadwick, Chambers & Associates, Inc., an
investment and merchant banking firm specializing in corporate finance services.
From 1984 to 1988, Mr. Chadwick served as Vice President, Corporate Finance at
Lovett Mitchell Webb & Garrison, Inc., a Houston-based investment banking firm.
Mr. Chadwick has been engaged in investment banking since 1978. Mr. Chadwick
presently serves on the Board of Directors of Blue Dolphin Energy Company and
Brazos Sportswear, Inc., both publicly traded corporations, and Moody-Price,
Inc., a privately held concern. Mr. Chadwick received an M.B.A. in finance from
Southern Methodist University and a B.A. degree in economics from the University
of Texas.
-21--20-
22
NICO B. LETSCHERT was elected to the Board of Directors in September 1994
and serves as a member of the Compensation Committee of the Board of Directors.
Mr. Letschert is the CEO of Noesis Capital Corp., a Florida-based investment
banking and money management firm. From 1984 until July 1995, Mr. Letschert was
President of Noble Investment Co. of Palm Beach. A native of The Netherlands,
Mr. Letschert began his career on the Amsterdam Stock Exchange before relocating
to the U.S. and becoming involved with venture capital and corporate finance.
Mr. Letschert received his degree from the Dutch Institute for Banking and
Finance and is a Certified Financial Planner. He also serves on the Board of
Directors of the following publicly traded corporations: Celerity Solutions,
Inc., Futuremedia PLC and PSI
Industries, Inc.
PHILIP M. MOUNT has been a director of the Company since August 5, 1994
and is a partner with the law firm of Kelly, Sutter, Mount & Kendrick. Mr. Mount
has engaged in the practice of law in Houston, Texas since 1983. Mr. Mount's
principal areas of practice are corporate finance and securities. Mr. Mount
received his B.B.A. with honors from the University of Texas at Austin in 1980
and a J.D. from the University of Houston College of Law in 1983. From August
1990 until its acquisition in 1993, Mr. Mount served as a director and a member
of the Compensation and Executive Committees of Two Pesos, Inc., a publicly
traded Houston, Texas based restaurant company. Mr. Mount is also a member of
the Board of Directos of Star Resources Corporation, a corporation organized
under the laws of British Columbia, which is public company traded on the
Vancouver and Toronto Stock Exchanges in Canada and the OTC Bulletin Board in
the United States.
SAROSH J. COLLECTOR has been a director of the Company since March 17,
1995 and currently serves as a member of the Audit and Compensation Committees
of the Board of Directors. Mr. Collector is a certified public accountant and
has served as President of the accounting firm of Collector, Dart & Moore P.C.
since 1987. From 1986 to 1987, Mr. Collector was a manager with the accounting
firm of Spicer & Oppenheim, and from 1981 to 1986 served as a partner with the
accounting firm of Malow Cohen & Co. Mr. Collector's principal areas of practice
are taxation, business consulting and business valuation. Mr. Collector also
served as a director of Two Pesos, Inc., a publicly traded corporation, from
April 1990 to August 1993.
DARRIN STRAUGHAN has been a director of the Company since April 2, 1998.
Mr. Straughan has served as Vice President of James Original Coney Island, Inc.,
the corporation which owns the James Coney Island restaurant chain, since 1993.
From 1986 to 1993, Mr. Straughan was Director of Marketing for Kettle
Restaurants. Mr. Straughan also provides operational consulting services to the
Company pursuant to a Professional Services Agreement under which he has
received options to purchase 100,000 shares of the Company's Common Stock,
vesting over a period of three years, at an exercise price of $.14 per share.
Such compensation is not in consideration for any service provided by Mr.
Straughan as director of the Company.
COMMITTEES AND FEES
The Board of Directors of the Company has established an Audit Committee
and a Compensation Committee. The purpose of the Audit Committee is to review
and make recommendations to the Board of Directors with respect to the
engagement of the Company's independent public accountants, reviewing with such
accountants the plans for and the results and scope of the auditing engagement
and certain other matters relating to the services provided to the Company,
including the independence of such accountants. The Audit Committee held no
meetings during fiscal 1997. Furthermore, the Audit Committee met in
August 1997 and approved a change of principal independent accountants for the
fiscal year 1997 audited financial statements. Mann, Frankfort, Stein & Lipp,
P.C. was engaged as the Company's principal independent accountant to replace
PricewaterhouseCoopers LLP (formerly Coopers & Lybrand L.L.P.) who resigned on
August 20, 1997. (See Form 8-K and
Form 8-K Amendment No. 1 dated August 20, 1997 and filed on
August 27, 1997 and September 9, 1997, respectively, which are attached hereto
as exhibits and incorporated herein by reference.)
The Compensation Committee reviews on behalf of, and makes recommendations
to, the Board of Directors with respect to compensation of executive officers
and key employees of the Company and administers the Company's 1994 Stock
Compensation Plan (the "Stock Compensation Plan"). All actions undertaken by
theThe Compensation Committee
held two meetings during the last fiscal year were effected by
unanimous consent in lieu of holding scheduled or special meetings.ended June 28, 1998.
-21-
Each director who is not an employee of the Company is entitled to be paid
$250 for each meeting of the Board of Directors attended (exclusive of
telephonic meetings) and $250 for each meeting of a Committee of the Board of
Directors attended (exclusive of committee meetings occurring on the same day as
Board Meetings), and are reimbursed for expenses incurred in attending such
meetings. Directors who are employees of the Company are not paid any additional
compensation for attendance at Board of Directors or Committee meetings. During
fiscal 19971998 the Directors chose to forego any compensation for attending
meetings. During fiscal 1997,1998, the Board of Directors held its annual
meeting on December 13, 1996, conducted nine meetings, in September 1996, April and
May of 1997,
and approved actions undertaken by management of the Company.
-22-
23Company by unanimous
written consent.
SECTION 16(A)16(a) - BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership of the Company's securities
with the Securities and Exchange Commission (the "Commission").
Based solely on its review of the copies of such report forms received by
it with respect to fiscal year 1997,1998, or written representations from certain
reporting persons, the Company believes that filing requirements applicable to
its directors, officers and persons who own more than 10% of a registered class
of the Company's equity securities have not been timely complied with in accordance
with Section 16(a) of the Exchange Act as follows. Sarosh J.
Collector, a director of the Company, failed to timely file a Form 4 in August
of 1996. Angelo Pitillo, a former executive officer and director of the Company
failed to timely file Form 4 in August 1996, January 1997, and July 1997 for
one transaction each. Thomas Buckley, a former executive officer of the Company
failed to timely file Form 4 in August 1996, January 1997 and July 1997 for a
total of six transactions (two each). In addition, all directors and executive
officers of the Company (except Ghulam Bombaywala, who was not required to file
a Form 5) each failed to timely file Form 5 - Annual Changes in Beneficial
Ownership of Securities for fiscal 1997. All late reports were filed in
September and October of 1997.Act.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION INFORMATION
The following table sets forth certain information regarding all cash
compensation paid or to be paid by the Company or any of its subsidiaries, as
well as other compensation paid or accrued, during the Company's fiscal year
ended June 29, 1997,28, 1998, to the Company's Chief Executive officer and to those other
executive officers who received salary and bonus compensation in excess of
$100,000 during the fiscal year (the "named executive officers").
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
---------------------------------- --------------------------LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- ------------------------- -------
Restricted Securities
Other Annual Stock UnderlyingRESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP All Other
Compensation(2) Award(s) Options/SARs(3) Payouts Compensation
Name and Principal Position Year Salary($ALL OTHER
COMPENSATION(2) AWARD(S) OPTIONS/SARS(3) PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) Bonus($BONUS($) ($) ($) (#) ($) ($)
- --------------------------- ---- --------- -------- -------------- ---------- -------------- ------- --------------- --- --- --- ---
GhulamBombaywala,Ghulam Bombaywala, Chairman of 1997 $60,000(1) $60,000(1)1998 $120,000(1) $-0- $-0- -0- -0-$-0- $-0- $-0- $-0-
the Board and Chief Executive 1996 -0- -0-1997 $ 60,000(1) $ 60,000(1) -0- -0- -0- -0- -0-
Officer 19951996 -0- -0- -0- -0- -0- -0- -0-
Angelo Pitillo, former President 1997 $150,000 $-0- $-0- $-0- 80,000 -0- $-0-
and Chief Operating Officer(4) 1996 $150,000 $-0- $-0- $-0- -0- -0- $-0-
1995 121,154 -0- -0- -0- 250,000 -0- -0-
(1) Includes salary or bonus amounts earned but deferred at the officer's
election.
(2) Excludes certain incidental perquisites, the total of which did not exceed
the lesser of $50,000 or 10% of cash compensation for any named individual.
(3) Incentive stock options to acquire shares of Common Stock pursuant to the
Company's Stock Compensation Plan.
(4) Mr. Pitillo resigned June 1997 and has not been replaced as of the date of
this filing, and has a consulting agreement and severance beginning in
fiscal 1998 of $4,167 per month for twelve months along with 180,000 common
stock warrants exercisable at $.50 per warrant until expiration on June 30,
1999.
-23--22-
24
OPTION GRANTS AND EXERCISES DURING FISCAL YEAR 1997
The following table provides information related to1998
There were no options to acquire shares of Common Stock granted to the
Chief Executive Officer, andnor were any options exercised by the other
named executive officers of the Company referenced in the Summary Compensation
Table, above,Chief Executive
Officer during fiscal year 1997.1998. The Company does not have any outstanding Stock
Appreciation Rights ("SARs").
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Potential Realizable
value at assumed
annual rates of stock
price appreciation
for option term
Number of Securities % of Total Options/ Exercise or ------------------------
Underlying Options/ SARs Granted to Base Price Expiration
Name SARs Granted(#) (1) Employees in Fiscal Year ($/Sh)(2) Date 5%($) 10%($)
------------------- ------------------------ ---------- ---------- ----- ------
Ghulam Bombaywala -0- -0-% N/A N/A N/A N/A
Angelo Pitillo 80,000 40% $.50 08/01 $ -0- $ -0-
- ---------------------
(1) Incentive stock options to acquire shares of Common Stock granted pursuant
to the Company's Stock Compensation Plan. Options issued to Mr. Pitillo
vest at 100% commencing six months from the date of the original grant
(August 1996), are nontransferable and are subject to termination under
certain conditions upon cessation of employment. At his termination date,
June 25, 1997, these options, along with all other options granted to Mr.
Pitillo, were canceled and Mr. Pitillo was granted 180,000 Common Stock
warrants exercisable at $.50 per warrant until expiration on June 30,
1999.
(2) The exercise price per share of each option granted in 1997 was equal to or
greater than 100% of the fair market value of the Common Stock on the date
of grant pursuant to the requirements of the Stock Compensation Plan.
-24-
25
OPTION EXERCISES AND FISCAL 1997 YEAR END HOLDINGS
The following table sets forth information with respect to options
exercised by named executive officers of the Company referenced in the Summary
Compensation Table, above, during fiscal year 1997 and the number and value of
options held at fiscal year end.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at FY-End(#) At FY-End($)(1)
Shares Acquired ------------------------- ----------------------------
Name On Exercise(#) Value Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- ----------------- ----------- ------------- ----------- -------------
Ghulam Bombaywala -0- $ -0- -0- -0- N/A N/A
Angelo Pitillo -0- -0- -0- -0- $ -0- $ -0-
- ---------------
(1) The closing bid price for the Company's Common Stock as reported by NASDAQ
SmallCap Market on June 29, 1997 was $0.25 per share. The indicated value
is calculated on the basis of the difference between the option exercise
price per share and $0.25, multiplied by the number of shares of Common
Stock underlying each option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company is currently comprised of two
persons selected by the Board of Directors. Throughout fiscal 1997,1998, Nico B.
Letschert and Sarosh J. Collector served on the Compensation Committee. Nico B.
Letschert was the President of Noble Investment Co. of Palm Beach ("Noble") and
is the Chief Executive Officer of Noesis Capital Corp. ("Noesis"). Sarosh J.
Collector is a certified public accountant and President of the Houston based
accounting firm of Collector, Dart & Moore, P.C.
Through May 1997, Philip M. Mount served
on the Compensation Committee. Mr. Mount isDarrin Straughan, a shareholder of Kelly, Sutter,
Mount & Kendrick, P.C. ("KSMK"), a Houston based law firm. In May 1997, Mr.
Mount resigned from the Compensation Committee.
During fiscal 1995, 1996, and 1997 KSMK rendered legal services as counsel
to the Company. In June of 1995, the Company issued 100,000 shares of Common
Stock to KSMK as partial payment for outstanding invoices. In February, 1996,
the Company issued an additional 100,000 shares of Common Stock to KSMK as
payment for legal services. Mr. Mount disclaims any beneficial ownership in the
shares issued to KSMK. During fiscal 1997, KSMK returned the shares in exchange
for cash of $1.50 per share and the agreementdirector of the Company, to payis the balance
owed to KSMK in monthly installments in the ordinary course of business.
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
expire on December 31, 1999. Mr. Chadwick, Senior Vice President andof
James Original Coney Island, Inc., a Managing
Director of Corporate Finance of SMM,privately-held corporation which owns the
James Coney Island restaurants. Mr. Bombaywala, Chief Executive Officer and a
director of the Company, was
assigned 45,000is a shareholder and director of the warrants by SMM. In July of 1997, the payment terms of
the Subordinated Notes were extended, the advisory agreement was extended
through December 1997 at a rate of $5,000 per monthJames Original Coney
Island, Inc. and the exercise price of
the warrants was reduced to $.25 per share.also serves as its President. (See "Item 13.
Certain Relationships and Related Transactions").
EMPLOYMENT CONTRACTS
Effective July 1, 1994, the Company entered into an employment agreement
(the "Bombaywala Agreement") with Ghulam Bombaywala, Chairman of the Board,
Chief Executive Officer and a director of the Company (the "Bombaywala Agreement").Company. Under the terms of the
Bombaywala Agreement, Mr. Bombaywala is entitled to receive an annual salary of
$60,000 plus annual cost of living increases. In addition, Mr. Bombaywala is
entitled to receive a bonus in an amount based on such factors as the Board of
Directors of the Company may elect to consider.
The Bombaywala Agreement expired April 30, 1997, however, during the
second quarter of fiscal 1998, the Board of Directors approved a one year
extension of the Bombaywala Agreement, increased Mr. Bombaywala's base salary to
$120,000 and awarded Mr. Bombaywala a bonus of $60,000 for fiscal 1997. During
the fourth quarter of fiscal 1998, the Board of Directors approved a second
extension of the Bombaywala Agreement to April 30, 1999 with the same base
salary of $120,000. No bonus was awarded to Mr. Bombaywala for fiscal 1998.
Mr. Bombaywala has elected to defer any salary or bonus due and owing to
him under thishis employment agreement for fiscal 19971998 and all prior years for an
-25-
26
indefinite period of time. The Bombaywala Agreement also provides for health,
medical and life insurance benefits and allows participation in the Company's
employee benefit plans. The Bombaywala Agreement expired April 30, 1997,
however, the Board of Directors approved a one year extension during the second
quarter of fiscal 1998. The Bombaywala Agreement contains provisions for
employment on a full time basis, as well as payments upon termination and
payment of bonuses. The non-competition provisions of the Bombaywala Agreement
provide that upon termination, Mr. Bombaywala will not engage or participate in
a barbecue or Mexican restaurant business within a radius of ten miles of any
existing or proposed barbecue or Mexican restaurant owned, licensed, managed or
operated by the Company for a period of twelve months beginning on the date of
termination of the Bombaywala Agreement. All amounts due to Mr. Bombaywala have
been accrued.
-23-
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, currently consisting of Messrs. Collector and
Letschert, determines the compensation of the Company's sole executive officer,
Mr. Bombaywala (C.E.O.).Bombaywala.
Mr. Bombaywala decided to forego awaive any salary or bonus in fiscal 1995 and
fiscal 1996 due to the fact that the Company has been and is in the process of a
"turnaround." For fiscal 1997, Mr. Bombaywala deferred a salary of $60,000 per
year and a bonus of $60,000 for an indefinite period of time. For fiscal 1998,
Mr. Bombaywala deferred a salary of $120,000 for an indefinite period of time.
The Compensation Committee agreed with Mr. Bombaywala's decision to forego any
salary or bonus during fiscal 1995, 1996, 1997 and 1998. The compensation which
would have been payable to Mr. Bombaywala through fiscal 1998 was determined by
the original Bombaywala Agreement, which was negotiated between the Company and
Mr. Bombaywala when Marco's was acquired in fiscal 1994. As discussed above, the
Board of Directors elected to amend the Bombaywala Agreement in fiscal 1998.
Mr. Bombaywala owns 6,558,88913,458,889 shares of the Company's Common Stock or
approximately 43.8%53.7% of the outstanding shares. Included in this calculation is
the following: Mr. Bombaywala received warrants with the right to purchase
222,222 shares of the Company's common stock at a price of $1.00 per share,
which were subsequently repriced to $.25 per share, issued in connection with
the issue of the 12% Subordinated Notes in December 1994. When Mr. Bombaywala
converted his 12% Subordinated Note to the 11% Convertible Subordinated Note he
received warrants with the right to purchase 50,000 shares of the Company's
Common Stock at $1.50 per share. As an incentive to Mr. Bombaywala for
converting his note, his 222,222 warrants were not canceled. (See "Liquidity and Capital Resources"). Not included in the above calculation
is the following: Mr. Bombaywala received 7,500,000 common stock rights at a
value of $.50 per share in connection withOn March 27, 1998
pursuant to the Conversion and Offset Agreement, in May 1997.Mr. Bombaywala received
7,500,000 shares of Common Stock. (See "Item 13. Certain Relationships and
Related Transactions".)
In April 1998, the Compensation Committee considered the terms of
compensation to Mr. Bombaywala for the extension of personal guarantees and
other consideration made or provided by Mr. Bombaywala on behalf of the Company.
The Committee received and evaluated information received from Mr. Bombaywala
and the Company and determined that Mr. Bombaywala had personally guaranteed at
least $10.5 million in debt and lease obligations of the Company. Mr. Bombaywala
also committed to guarantee up to $5,000,000 of additional Company obligations
if requested or necessary. The Compensation Committee reported and referred the
matter to the full Board of Directors for consideration. On May 1, 1998 the
Board of Directors approved 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. The Board
decided to seek approval prior to the issuance of the warrants from the
Company's independent shareholders (all shareholders excluding Mr. Bombaywala)
and received a fairness opinion for the transaction from a third-party. However,
at this time the Board has decided to defer the issuance of the warrants to Mr.
Bombaywala for an indefinite period of time. If in the future the Board decides
that it is in the best interests of the Company to issue the warrants to Mr.
Bombaywala, the Board will seek shareholder approval at the next annual meeting
or at a special meeting.
The Compensation Committee believes that Mr. Bombaywala is very motivated
due to his stock ownership and warrant rights and financial commitment to the
Company to represent the interests of all stockholders and maximize the
performance of the Company. The Compensation Committee agreedbelieves the salary
payable to Mr. Bombaywala pursuant to his employment agreement to be less than
the amount a CEO of a public company of comparable size would receive. The
Compensation Committee agrees with Mr. Bombaywala's decision, as stated above,
to forego any
salary or bonus during fiscal 1995 and 1996. Thedefer all cash compensation which would have
been payable to Mr. Bombaywala through April 1997 was determined by the
Bombaywala Agreement, which was negotiated between the Companyhim as salary and Mr.
Bombaywala when Marco's was acquired in fiscal 1994.
The Compensation Committee plans to usebonuses since 1995
until the Company's Common Stock to
retain and provide incentive to the Company's key employees. The Board of
Directors believes that significant stock ownership is a major factor in
aligning the interests of management and shareholders.
-26-operating performance improves.
-24-
27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of October 1, 1997,September 11, 1998, by
(i) each person who is known by the Company to beneficially ownsown 5% or more of
the Common Stock, (ii) each Directordirector and named executive officer of the Company,
and (iii) all officers and Directorsdirectors of the Company as a group. Unless otherwise
noted, the persons and entities named below have sole voting and investment
power with respect to such shares.
Shares Beneficially Owned
-------------------------
Name of Beneficial Owner Number Percent
- ------------------------ ------ -------
Ghulam Bombaywala(1) 6,558,889 43.8%
Thomas J. Buckley 12,584 *
Michael S. Chadwick(2)(6) 124,444 *
Nico B. Letschert(3)(6) 311,554 2.1%
Philip M. Mount(4)(6) 37,222 *
Sarosh J. Collector(5)(6) 24,000 *
All Officers and Directors as a Group (5 Persons) (7) 7,051,109 47.1%
SHARES BENEFICIALLY OWNED
-------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ----------------------------------------------- ------ -------
Ghulam Bombaywala(1) 23,458,889 67.3%
Michael S. Chadwick(2)(6) 155,444 *
Nico B. Letschert(3)(6) 82,054 *
Philip M. Mount(4)(6) 65,222 *
Sarosh J. Collector(5)(6) 29,000 *
Darrin Straughan (7) 100,000 *
GTI Partners, LLC (8) 9,500,000 27.8%
All officers and directors as a group (6 persons) 23,890,609 69.0%
- -------------
* Indicates ownership of less than or equal to one percent of the outstanding
Common Stock of the Company.
(1) Mr. Bombaywala's address is 11111 Wilcrest Green, Suite 350, Houston, Texas
77042. Includes warrants to purchase 222,222 shares of Common Stock issued
in connection with the Company's 12% Subordinated Notes. Includes warrants
to purchase 50,000 shares of Common Stock issued in connection with the
Company's 11% Convertible Subordinated Notes. It does not include 7,500,000Includes the warrants to
purchase 10,000,000 shares rights of Common Stock issued in connection withif the Company's Conversionindependent
shareholders approve the issuance of 10,000,000 warrants to Mr. Bombaywala
at the Company's next Annual Meeting of Shareholders. Mr. Bombaywala holds
the voting rights to 9,500,000 shares represented by the warrants issued or
issuable to GTI Partners, LLC. Mr. Bombaywala disclaims beneficial
ownership to the shares issuable to GTI and Offset Agreement. These rightssuch shares are exercisable only with
Board of Directors approvalnot included as
shares beneficially owned by Mr. Bombaywala in the table above. (See "Item
13. Certain Relationships and possible authorization of new common
shares.Related Transactions.")
(2) Mr. Chadwick's address is 3100 Texas CommerceChase Tower, Houston, Texas 77002.
Includes warrants to purchase 89,444135,444 shares of Common Stock issued in
connection with the Company's 12% Subordinated Notes. (See "Item 13.
Certain Relationships and Related Transactions.")
(3) Includes 97,000 Series A Warrants, which may be converted into 97,000 shares
of Common Stock upon payment of the $6.50 exercise price. Includes warrants
to purchase 45,000 shares of Preferred Stock, which Preferred Stock is
convertible into 56,250 shares of Common Stock. Includes warrants to purchase 45,000 shares of Common Stock originally
issued to Noble Investment Co. under the terms of the 1993 Regulation S
offering and subsequently assigned to Mr. Letschert. Includes 21,000 shares
of Common Stock issuable to Mr. Letschert upon the conversion of $105,000
in 9% Debenture principle,principal, at a conversion ratio of one share of Common
Stock for each $5.00 in principleprincipal converted. Mr. Letschert may acquire the
9% Debentures in the principal amount of $105,000 upon the exercise of
warrants originally granted to Noble as placement agent for the Company's
offering of 9% Debentures and subsequently assigned to Mr. Letschert. Includes warrants to purchase 71,250 shares of Common Stock at $3
per share. Also includes 10,000 Series A Warrants which entitle Mr.
Letschert to acquire 10,000 shares of Common Stock upon the payment of the
exercise price of $6.50 per share. Mr.
Letschert's address is 1801 Clint Moore Road, Suite 100, Boca Raton,
Florida 33487.
(4) Mr. Mount's address is 1600 Smith, Suite 3700, Houston, Texas 77002.
Includes warrants to purchase 22,22245,222 shares of Common Stock issued in
connection with the Company's 12% Subordinated Notes.
(5) Mr. Collector's address is 3000 Richmond Avenue, Suite 270, Houston, Texas
77002.
(6) Includes options to purchase 15,00020,000 shares of Common Stock granted under
the Company's Outside Director's Stock OptionCompensation Plan.
(7) Does not include former Chief Financial Officer (resigned July 1997) Tom
Buckley's 12,584Mr. Straughan's address is 11111 Katy Frwy., Suite 700, Houston, Texas
77079. Includes options to purchase 100,000 shares or former President (resigned June 1997) Angelo
Pitillo's 12,382of the Company's Common
Stock, which options are exercisable as to 33,000 shares owned.after April 2,
1999, as to an additional 33,000 shares after April 2, 2000, and as to the
remaining 34,000 shares after April 2, 2001. (See "Item 13. Certain
Relationships and Related Transactions.")
(8) All beneficial ownership is derived from warrants, 8,500,000 of which is
contingent and 1,000,000 of which is not. (See "Item 13. Certain
Relationships and Related Transactions.")
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Late inIn 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. -27-
28
In August 1996,On December 18, 1997, Pete's
Hospitality Co., Inc. filed for bankruptcy. Therefore, the Company sold for $350,000 previously mortgaged
real property located atwrote off the
Victoria, Texas Marco's Restaurant location to the
Bombaywala Family Trust ("note receivable balance of $294,904 in fiscal 1998. The Trust"). The TrustCompany is administered by M.U.
Bombaywala, Trustee, for the purpose of his grandchildren's
education. The real property and certain assets are now being leased by the
Company from the Trust. The Trust also owns the real property on which onea secured
creditor of the Company's Pasta Co. Restaurantsbankrupt estate, however, there is located, having purchased it from an
unaffiliated third party. The Trust leases this property to the Company. The
Company believesno assurance that both leases are at rates comparable to those which couldthere will
be attained from unrelated third parties.
In April 1997, the Company agreed to sell equipment associated with three
new restaurants to Mr. Bombaywala and lease thesufficient assets back. The three
restaurants were opened in the second and fourth quartersestate to fully satisfy the claims of fiscal 1997. The
Company believes thatall creditors,
including the selling price of $750,000 andCompany's, in whole or in part.
Ghulam M. Bombaywala, the lease rate are
comparable to those which could be attained from an unrelated third party.
There was no gain or loss to the Company on this transaction.
On July 31, 1994, Ghulam Bombaywala, Chairman of the Board andCompany's Chief Executive Officer of the Company, executed a promissory note in the principal
amount of $2,175,310 made payable to Marco's (the "Bombaywala Note"). The
Bombaywala Note accrues interest at the rate 6% per annum until maturity, with
accrued interest being payable annually on the 1st day of July of each year for
which a principal balance is due and owing. The principal balance of the
Bombaywala Note is due as follows: $200,000 on July 31, 1996, 1997 and 1998,
with all remaining principal and interest due and owing under the Bombaywala
Note to be paid in full on July 31, 1999. The Bombaywala Note is secured by the
securities more particularly set forth in that certain Pledge and Security
Agreement entered into by and between Marco's and Mr. Bombaywala on July 31,
1994. In September of 1995, the Company's Board of Directors voted to defer the
interest payment due July 1, 1995 until December 31, 1995. During fiscal 1997,
the principal amount due under the Bombaywala Note was reduced by $819,202
pursuant to a Conversion and Offset Agreement further described below. During
1997, the Company earned interest of $123,877 on the note receivable from Mr.
Bombaywala and was charged interest of $123,757 on various notes payable to
him. The interest receivable and payable, together with interest receivable at
June 30, 1996 of $94,974 were offset with a remaining receivable from Mr.
Bombaywala of $95,093 outstanding at June 29, 1997.
On June 17, 1992, the Company loaned William J. Gallagher, a former officer
and director, of the Company, $53,000 evidenced by an unsecured promissory note
providing for interest at prime. The note was renewed on June 17, 1993, whereby
the principal balance due under the note was increased to $124,000 to include
additional advances made by the Company during fiscal 1993. The principal
balance of the note accrues interest at the rate of 6% per annum, with accrued
interest being due and payable annually on July 1. The entire principal balance
is due and payable on July 1, 1999. The note is an unsecured debt obligation of
Mr. Gallagher to the Company. The interest payments Due July 1, 1995, 1996 and
1997 had not been made by Mr. Gallagher as of October 1, 1997.
On June 30, 1994, John H. Coleman, III, a former officer and director of
the Company, executed a promissory note in the principal amount of $31,291 for
the purpose of evidencing a debt obligation resulting from advances made by the
Company to Mr. Coleman during fiscal 1994. The principal amount of the note
accrues interest at the rate of 6% per annum and is due and payable on the
first day of July for each year the principal balance remains outstanding. The
principal balance of the note is due and payable in full on July 1, 1999. The
note is an unsecured debt obligation of Mr. Coleman to the Company. The
interest payments due July 1, 1995 and 1996 were not made by Mr. Coleman. Mr.
Coleman was also the plaintiff in a lawsuit against the Company (see Item 3
"Legal Proceedings".) As part of the settlement of this lawsuit, this note was
canceled.
Mr. Bombaywala
has an ownership interest in and participates in the management of other
businesses, including James Original Coney Island, Inc., the Houston-based
corporation which owns the James Coney Island restaurant chain.
PASTA CO. ACQUISITION
On September 7, 1995,April 2, 1998 the Company entered into a Professional Services
Agreement with Darrin Straughan to provide operational consulting services to
the Company and its subsidiaries. As compensation for his services, Mr.
Straughan was issued stock options to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $.14 per share. The stock options vest pro
rata over a period of three years. Mr. Straughan is a director of the Company
and the Vice President of James Original Coney Island, Inc., the corporation
which owns the James Coney Island restaurant chain.
Mr. Bombaywala has an employment contract with the Company providing for
annual compensation of $120,000. (See "Item 11. Executive Compensation -
Employment Contracts.")
On May 1, 1998 the Board of Directors of the Company approvedadopted a resolution
approving the acquisition of all of the issued and outstanding shares (the "Shares") of Pasta
Co. fromissuance to Mr. Bombaywala the sole stockholder and director of Pasta Co. On
September 14, 1995, the Company, Mr. Bombaywala, and Pasta Co. entered into an
Agreement and Plan of Merger (the "Merger Agreement") which provided for the
merger of Pasta Co. with and
-28-
29
into the Company as the surviving corporation (the "Merger"). The principal
assets of Pasta Co. consisted of its ownership of ten (10) restaurants in
Houston, Texas.
In consideration for the Shares, Mr. Bombaywala received 1,666,667warrants to purchase 10,000,000
pre-reverse stock split shares of the Company's Common Stock (the "Merger Shares") and two promissory notes inat the aggregate principal amountpre-reverse
stock split exercise price of $3,750,000 (the "Notes"). The Merger Shares
were valued at $1.78$.14 per share, which was the market valueprice of the
Common Stockstock on the date of the Merger. The total consideration paid to Mr. Bombaywala was
$2,966,667; however, as provided below, a portion of the Merger Shares was
subject to future release and earn out. In addition, the Company assumed
approximately $3.6 million of liabilities and indebtedness of Pasta Co.
outstanding as of January 26, 1996.
Although not required by law,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
electedin order for the Company to submitcontinue to do business.
In approving the Mergerissuance of the warrants to Mr. Bombaywala, the Board
considered, among other things, (i) its prior commitment to Mr. Bombaywala to
compensate him for his personal guarantees of Company obligations and his loans
and advances to the Company (collectively the "Guarantees"), (ii) the importance
of the Guarantees to the Company's financial survival and the aggregate amount
of such Guarantees, particularly in the past year, (iii) the personal risk of
the Guarantees to Mr. Bombaywala and the pledge of his personal assets to
partially collateralize certain of the Guarantees, (iv) the fact that the market
price of the Company's Common Stock was equal to the exercise price of the
warrants at the time of the request by Mr. Bombaywala, (v) the short- and
long-term value to the Company of the commitment of Mr. Bombaywala to guarantee
up to $5 million of future obligations of the Company if requested by the
Company for additional financing or the renewal of existing leasehold or debt
obligations of the Company, (vi) the waiver and/or accrual and nonpayment of all
prior compensation payable to Mr. Bombaywala as an executive officer of the
Company, (vii) the lock-up agreement with respect to the shares underlying the
warrants, and (viii) the fact that the Company will pursue a fairness opinion
with respect to the warrants and approval of the independent shareholders of the
Company with respect to the issuance of the warrants.
The warrants will have a four year term and the underlying shares will be
subject to a two year lock-up agreement which will expire if a total of $5
million in debt or equity financing is raised by the Company within the two year
period.
At this time the Board has decided to defer the issuance of the warrants
to Mr. Bombaywala for an indefinite period of time. If in the future the Board
decides that it is in the best interests of the Company to issue the warrants to
Mr. Bombaywala, the Board will seek shareholder approval at its Annual
Meetingthe next annual
meeting or at a special meeting.
On May 13, 1998 the Company entered into a Consulting Agreement with GTI
Partners, L.L.C. ("GTI") to seek sources of Shareholders which was held January 9, 1996. Mr. Bombaywala, who
then owned 4,620,000financing for the Company. In
consideration for the performance of these services, the Company agreed to issue
to GTI warrants to purchase up to 9,500,000 shares of pre-reverse stock split
shares of the Company's Common Stock or 41.6%, excludingat a pre-reverse stock split exercise price
of $.09 per share, which was the Merger Shares, did not voteaverage
-26-
market price of the Common Stock during the period of negotiations with GTI. The
Board of Directors, in making its decision to approve the Consulting Agreement,
considered the following factors, among others, (i) the Company's immediate and
substantial need for working capital, (ii) the lack of other financing
alternatives available to the Company, (iii) the fact that approximately 90% of
the consideration payable to GTI is based on the Mergerclosing of a $2,500,000
financing, (iv) the fact that the terms of the financing may be accepted or
rejected by the Company in its discretion, (v) the nonexclusive arrangement with
GTI, (vi) the fact that the exercise price of the GTI warrants was non-dilutive
to the market price when initial negotiations were undertaken, (vii)
representations of GTI that the financing is not expected to be materially
dilutive to the market price of the Company's stock at the Annual Meeting.time the financing is
consummated, (viii) the fact that the shares issued to GTI are subject to a two
(2) year Lock-Up Agreement subject to early termination if the Company receives
$5,000,000 in GTI arranged financings within such two (2) year period, and (ix)
the financing track record of GTI and its affiliates.
Warrants to purchase 1,000,000 pre-reverse stock split shares of the
Company's Common stock were issued upon the execution of the GTI Consulting
Agreement. The Merger
was approved, andremaining warrants for 8,500,000 pre-reverse stock split shares
will be issued to GTI upon the effectivecompletion of at least $2,500,000 of initial
financing. The shares underlying the warrants are subject to a lock-up agreement
prohibiting resale thereof for a period of two years from the date of the
Merger (the "Effective Date") was
January 26, 1996. Asissuance of the Escrow Closing Date,respective warrants subject to the Company was grantedCompany's consent to any
proposed public or private resales, or the right to manage Pasta Co. and received a management fee of three percent (3%)expiration of the gross revenues of Pasta Co. through the Effective Date. Such fees
amounted to approximately $137,000.
The Merger Shares are restricted securities but have demand and incidental
registration rights. Alock-up agreement
upon GTI arranging a total of 350,000 Merger Shares were$5,000,000 of financing on terms acceptable to the
Company. The warrant shares are subject to a Development Escrow Agreement which provided for the earnoutvoting agreement and release of such
shares based upon (i) the opening of five additional Pasta Co. Restaurants on
or before December 31, 1996 at an average cost not to exceed $400,000 per
restaurant, or (ii) the share price for the Company's Common Stock exceeding
$5.00 per share for any ten consecutive business days on or before June 30,
1996 or $7.00 per share on or before June 30, 1997. The Company completed the
opening of the five additional Pasta Co. Restaurants before December 31, 1996
and, therefore, the Merger Shares have been released to Mr. Bombaywala.
The Notes consisted of (i) a promissory note from Pasta Co.proxy in the
principal amount of $2,750,000, bearing interest at 10% per annum, and due and
payable on September 15, 2002, subject to certain mandatory prepayment
provisions, and (ii) a promissory note from Pasta Co. in the principal amount
of $1,000,000 bearing interest at 10% per annum, the principal amount of which,
subject to certain mandatory prepayment provisions, was due and payable in two
equal annual installments on December 31, 1996 and December 31, 1997. Quarterly
payments of interest were due and payable on the Notes on the 15th day of
December, March, June and September of each year the Notes were outstanding.
Commencing September 15, 2000, the outstanding principal on the $2,750,000 Note
was to be amortized and paid in quarterly installments over the remaining two
year term. The Notes required mandatory prepayment in the amount of and to the
extent of (i) fifty percent of the proceeds from any public offering received
by the Company, and (ii) proceeds from private financings in excess of
$1,000,000 received by the Company. Mr. Bombaywala agreed to defer or offset
any and all principal and interest until July of 1997. The Company incurred
$392,337 in interest expense on two notes aggregating $3,750,000. In
connection with the Conversion and Offset Agreement, Mr. Bombaywala forgave
such interest which has been recorded as a contribution to capital.
On the Effective Date, a promissory note of Pasta Co. to Mr. Bombaywala in
the principal amount of $1,260,000 was paid by the Company. Payment was made as
follows: $150,000 in cash, transfer of ownership of land and building valued at
$515,000 and a note to Mr. Bombaywala in the amount of $595,000. Mr. Bombaywala
received an additional note from the Company in the amount of $224,202 for other
obligations of Pasta Co. arising prior to the Effective Date (the $595,000 note
and the $224,202 note are collectively referred to as "Additional Pasta Co.
Notes") .
The Notes were secured by a guarantee of the Company, a pledge by the
Company of all issued and outstanding shares of Pasta Co. and a security
interest in all of the assets relating to the first ten restaurants opened by
Pasta Co. The lienfavor
of Mr. Bombaywala, was juniorthe Company's Chief Executive Officer, which shall expire as
to any prior liens granted by
Pasta Co. on250,000 post-reverse stock split shares every ninety days from the date of
exercise of the warrants. The warrants may be exercised in whole, but not in
part, and are not transferable except to entities affiliated with GTI or beforewith
the Effective Date.Company's consent.
On May 15, 1997, Mr. Bombaywala and the Company entered into a Conversion
and Offset Agreement whereby the $3,750,000 of debt evidenced by certain
promissory notes issued to Mr. Bombaywala by the Notes wasCompany in connection with the
acquisition of Pasta Co. from Mr. Bombaywala in 1996 were converted to 7,500,000
Common Stock Rights (the -29-
30
"Rights"). Each of the Rights shall automatically convertconverted
to one share of the Company's Common Stock at a later date, without further
action or consideration by Mr. Bombaywala assumingwhen the Company has a sufficient numberamended its Articles
of sharesIncorporation to increase its authorized and freely issuable.shares. In exchange for the Rights,
Mr. Bombaywala forgave the Notes. A value of $.50 per share was determined by
the Board of Directors in connection with the conversion. The Company intendsCompany's
shareholders approved the increase in the Company's authorized shares on January
23, 1998, and the shares were issued to proceed
with an amendment to its Articles of Incorporation to increase its authorized
Common Stock to a sufficient level to enable it to issue all of the shares.
However, there can be no assurance that such amendment will be adopted.Mr. Bombaywala.
The Company also agreed with Mr. Bombaywala to offset the $819,202 in
Additional Notesrepresented
by certain Pasta Co. promissory notes payable to Mr. Bombaywala in connection
with the acquisition of Pasta Co. against the Bombaywala Notea note receivable from Mr. Bombaywala
payable to Marco's.
During fiscal 1998 the Company utilized the law firm of Kelly, Sutter,
Mount & Kendrick, P.C. ("KSMK") to perform certain legal services for the
Company. Philip M. Mount, a director of the Company, is a principal of KSMK. The
amount of fees paid to KSMK during fiscal 1998 did not exceed five percent of
the law firm's gross revenues during the fiscal year.
In December 1994, in connection with the Marco's merger.
In Mayoffering of 1995,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 began factoring accounts receivable through
Catalyst Financial Co., ("Catalyst") paying factoring feesentered into an eighteen month advisory agreement with SMM calling
for payments of approximately
$19,000 in fiscal 1995$10,000 per month and $75,000 in fiscal 1996. The Company believes that
the fees paid were comparableissued warrants to those that would be charged bypurchase 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 competing
factoring company. Mr. Bombaywala is a principal of Catalyst.
The Company acquired 240,000 shares (the "CluckCorp Shares")director of the outstanding common stock $0.1 par valueCompany, is Senior
Vice President and a Managing Director of CluckCorp International, Inc., a
Texas corporation ("CluckCorp")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 $0.25 per share and
expiring on June 30, 1994 uponAugust 31, 2003 unless the conversion of, and as
partial payment for, a promissory note of CluckCorp owedis paid at its maturity date, were
issued to the Company innoteholders. In December 1997, the principaladvisory agreement was extended
to July 1998, after which it expired. However, the amount of $800,000 (the "CluckCorp Note") issued in June 1993 and in
exchange for certain other advances owed toowing under the
Company. The CluckCorp Note has
a maturity date of June 30, 1998, and was payable, at the option of CluckCorp,
in whole or in part, in cash or with Common Stock of CluckCorp. During 1994
CluckCorp repaid a portion of the CluckCorp Note in cash and the remaining
portion of the CluckCorp Note and certain advances were paid with the CluckCorp
Shares. The Company subsequently sold the CluckCorp Shares to JEB Investment
Corporation, a Texas corporation ("JEB") in exchange for a $1,800,000 recourse
promissory note executed by JEB as maker (the "JEB Note") bearing interest at 9%
per annum, payable annually, with a final maturity date of June 30, 1996. The
JEB Note was secured by the CluckCorp Sharesadvisory agreement ($75,000) is due on December 31, 1999 pursuant to a
Pledge Agreement. JEB
defaulted on the payments required under the JEB Note. In May 1997, JEB and the
Company executed an agreement whereby JEB relinquished all right, title and
interest in the CluckCorp Shares to the Company pursuant to the Company's
foreclosure rights in consideration for the Company relinquishing all of its
rights under the JEB Note. The Company is currently selling the CluckCorp Shares
in public and private transactions.non-interest bearing note.
-27-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Report.DOCUMENTS FILED AS PART OF THIS REPORT.
(1) The Consolidated Financial Statements listed in the Index to
the Consolidated Financial Statements on page F-1 are filed as
part of this report and are incorporated by reference.
(2) No financial statement schedules are filed as part of this
report.
(3) The Exhibits filed as part of this report are listed on the
Exhibit Index appearing on page E-1 which is incorporated
herein by reference.
(b) Reports on FormREPORTS ON FORM 8-K
During the fourth quarter of fiscal 1997,1998, the Company filed Form
8-K, dated May 15, 1997,13, 1998, reporting under "Item 5. Other Events,"Events", the
Conversion and OffsetConsulting Agreement wherebyentered into with GTI Partners, L.L.C. to seek
sources of financing for the Company, converted
$3,750,000and the approval by the Board
of debt owedDirectors, subject to shareholder ratification, of the issuance
to Mr. Bombaywala as a resultof 10,000,000 shares of the acquisition of The Original Pasta Co. into 7,500,000Company's Common Stock
Rights, and offset $819,202 in additional notes payable to, against
notes receivable from, Mr. Bombaywala. Furthermore, the Company
filed Form 8-K, Amendment No. 1, dated May 15, 1997, reporting
under "Items 1 and 5. Changes In Control of Registrant; Other
Events", a change in controlconsideration for his guarantees of the Company should Mr. Bombaywala
be issued the 7,500,000 shares of Common Stock. No financial
statements were included in either Form 8-K.Company's present and
future indebtedness.
(c) Exhibits Required by ItemEXHIBITS REQUIRED BY ITEM 601 of RegulationOF REGULATION S-K
The Exhibits required by Item 601 of Regulation S-K and listed in
the Exhibit Index on page E-1 are filed as part of this report.
(d) Financial Statement SchedulesFINANCIAL STATEMENT SCHEDULES
None.
[This space is intentionally left blank.]
-30--28-
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WATERMARC FOOD MANAGEMENT CO.
(Registrant)
Date: October 13, 199712, 1998 By: /s/ Ghulam Bombaywala
----------------------------------------/s/ GHULAM BOMBAYWALA
Ghulam Bombaywala, Chairman
of the Board, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Ghulam Bombaywala Chairman of the Board, Chief Executive
- --------------------------- Officer and Director (Principal October 13, 1997
Ghulam Bombaywala Executive Officer and acting as
Principal Financial and Accounting
Officer) (1)
/s/ Philip M. Mount
- ---------------------------
Philip M. Mount Director October 13, 1997
/s/ Michael S. Chadwick
- ---------------------------
Michael S. Chadwick Director October 13, 1997
/s/ Nico B. Letschert
- ---------------------------
Nico B. Letschert Director October 13, 1997
/s/ Sarosh J. Collector
- ---------------------------
Sarosh J. Collector Director October 13, 1997
NAME TITLE DATE
---- ----- ----
/s/ GHULAM BOMBAYWALA Chairman of the Board, Chief October 12,
Ghulam Bombaywala Executive Officer and Director 1998
(Principal Executive Officer
and acting as Principal
Financial and Accounting
Officer) (1)
/s/ PHILIP M. MOUNT Director October 12
Philip M. Mount 1998
/s/ MICHAEL S. CHADWICK Director October 12
Michael S. Chadwick 1998
/s/ NICO B. LETSCHERT Director October 12
Nico B. Letschert 1998
/s/ SAROSH J. COLLECTOR Director October 12
Sarosh J. Collector 1998
/s/ DARRIN STRAUGHAN Director October 12
Darrin Straughan 1998
(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 asin these positions.
-31-capacities.
-29-
32
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
INDEX TO AUDITED FINANCIAL STATEMENTS
Reports of Independent Accountants . . . . . . . . . . . . F-2; F-3
Consolidated Balance Sheets . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity . . . . . F-6
Consolidated Statements of Cash Flows . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . F-8
F - 1Reports to Independent Accountants............................F-2; F-3
Consolidated Balance Sheets...................................F-4
Consolidated Statements of Operations.........................F-5
Consolidated Statements of Stockholders' Equity...............F-6
Consolidated Statements of Cash Flows.........................F-7
Notes to Consolidated Financial Statements....................F-8
F-1
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Watermarc Food Management Co.
We have audited the consolidated balance sheetsheets of Watermarc Food Management Co.
and subsidiaries (the "Company") as of June 28, 1998 and June 29, 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the fiscal yearyears then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.audits.
We conducted our auditaudits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit providesaudits provide a
reasonable basis for our opinion.
As more fully described Note 1, the Company recorded an adjustment of $2,600,000
relating to the impairment of intangible assets associated with the acquisition
of a subsidiary. The Company's estimate of undiscounted cash flows related to
such assets indicates that the remaining carrying value of intangible assets was
expected to be recovered. Nonetheless, it is possible given the Company's
financial condition, as explained below, that the estimate of undiscounted cash
flow may change in the future, resulting in the need to adjust the carrying
value of intangible assets and related long-lived assets.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Watermarc Food
Management Co. and subsidiaries as of June 28, 1998 and June 29, 1997 and the
consolidated results of their operations and their cash flows for the fiscal
yearyears then ended, in conformity with generally accepted accounting principles.
The Accompanying Financial Statements have been prepared assuming that the
Company will continue as a going concern.
As shown in the Financial Statements, the Company incurred a net loss of
$6,964,084 for 1998 and has incurred substantial net losses for each of the past
two years. At June 28, 1998, current liabilities exceeed current assets by
$9,729,502 and total liabilities exceed total assets by $5,644,422. These
factors and others discussed in Note 1, raise substantial doubt about the
Company's ability to continue as a going concern. The Financial Statements do
not include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classifications of liabilities that might be
necessary in the event the Company cannot continue in existence.
MANN, FRANKFORT, STEIN & LIPP, P.C.
Houston, Texas
October 9, 1997
F - 212, 1998
F-2
34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Watermarc Food Management Co.
We have audited the consolidated balance sheet of Watermarc Food Management Co.
and subsidiaries (the "Company") as of June 30, 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the fiscal years ended June 30, 1996 and July 2, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Watermarc Food
Management Co. and subsidiaries as of June 30, 1996 and the consolidated results
of their operations and their cash flows for the fiscal years ended June 30,
1996 and July 2, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.PRICEWATERHOUSECOOPERS LLP
Houston, Texas
September 27, 1996
F-3
35
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
Consolidated Balance SheetsCONSOLIDATED BALANCE SHEETS
ASSETS JuneJUNE 28, 1998 JUNE 29, 1997
June 30, 1996
------------ ------------------------- -------------
Current assets:
Cash and cash equivalents ..................................... $ 90,775 $ 263,542 $ 463,166
Accounts receivable, trade .................................... 204,106 540,406 397,744
Accounts receivable from affiliates ........................... 115,244 299,518
252,440
Inventories ................................................... 316,334 483,302 715,538
Prepaid expenses and other current assets ..................... 38,872 73,217
105,779
------------ ------------------------- -------------
Total current assets ....................................... 765,331 1,659,985 1,934,667
Property and equipment, net .......................................... 6,213,441 6,050,631 9,328,526
Notes and other receivables from affiliate ........................... 1,398,583 1,679,374 2,217,784
Intangible assets, net ............................................... 4,041,433 7,213,457 12,200,047
Other assets ......................................................... 264,382 111,381
183,686
------------ ------------------------- -------------
$ 12,683,170 $ 16,714,828
$ 25,864,710
============ ========================= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ....................................... $ 4,969,793 $ 4,780,931
$ 3,186,690
Accrued liabilities ........................................... 2,605,392 2,263,821 1,831,055
Current portion of long-term debt ............................. 2,919,648 2,787,814
1,401,825
------------ ------------------------- -------------
Total current liabilities .................................. 10,494,833 9,832,566 6,419,570
Long-term debt, less current portion ................................. 7,230,348 4,484,539 5,698,692
Notes payable to stockholder ......................................... -- 500,000 5,069,202
Deferred rent ........................................................ 602,411 577,976 435,949
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value, 5,000,000 shares authorized,
329,540 329,540
329,540shares issued and outstanding as of June 29, 199728, 1998
and June 30, 1996; stated at29, 1997; $10 liquidation preferencepreference............. 329,540 329,540
Common stock, $.05 par value, 20,000,000100,000,000 shares authorized,
713,161 671,682
14,263,23023,783,114 issued and outstanding as of June 29, 1997,28, 1998, and
13,433,65814,263,230 issued and 14,163,230 outstanding as of
June 30, 199629, 1997 .......................................... 1,189,155 713,161
Additional paid-in capital .................................... 30,114,052 30,740,131 26,640,385
Accumulated deficit ........................................... (37,277,169) (30,313,085)
(19,400,310)
------------ ------------------------- -------------
(5,644,422) 1,469,747 8,241,297
Less treasury stock, cost method ........................... -- (150,000)
--
------------ ------------------------- -------------
Total stockholders' equity ................................. (5,644,422) 1,319,747
8,241,297
------------ ------------------------- -------------
$ 12,683,170 $ 16,714,828
$ 25,864,710
============ ========================= =============
The accompanying notes are an integral
part of the consolidated financial statements.
F - 4F-4
36
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
Consolidated Statements of OperationsCONSOLIDATED STATEMENTS OF OPERATIONS
52 Weeks Ended
--------------------------------------------
JuneWEEKS ENDED
-----------------------------------------------
JUNE 28, 1998 JUNE 29, 1997 JuneJUNE 30, 1996
July 2, 1995
------------ ------------ ------------------------- ------------- -------------
Revenue:
Restaurants ...................................... $ 37,540,093 $ 46,734,262 $ 37,227,201
$ 34,600,265
Food products .................................... 2,632,056 2,391,099 2,902,242
3,051,392
------------ ------------ ------------------------- ------------- -------------
Total revenues: .............................. 40,172,149 49,125,361 40,129,443 37,651,657
Costs and expenses:
Cost of restaurant revenues:
Cost of food and beverage .................. 11,224,209 12,539,192 10,956,113 10,471,159
Labor and benefits ......................... 13,030,787 14,326,414 11,348,823 11,507,171
Other restaurant operations ................ 13,342,796 17,678,805 10,222,633 10,025,239
Cost of food product revenues .................... 1,177,684 2,235,076 2,643,594 3,210,388
General and administrative ....................... 2,982,361 4,364,147 2,752,539 3,321,296
Depreciation and amortization .................... 4,755,760 6,035,811 2,178,218 2,071,972
Provision for restaurant closings ................ 209,968 1,175,434 --
2,856,105
Loss on saleProvision of Bad Debt for Pete's Hospitality ..... 294,904 751,614 --
--
------------ ------------ ------------------------- ------------- -------------
Total costs and expenses ................... 47,018,469 59,106,493 40,101,920
43,463,330
------------ ------------ ------------------------- ------------- -------------
Income (loss) from operations .......................... (6,846,320) (9,981,132) 27,523 (5,811,673)
Non-operating income (expenses):
Interest income .................................. 120,186 121,260 166,566
156,550
Interest expense ................................. (977,609) (1,220,666) (850,224)
(813,153)
Loss on conversion of debt to equity -- -- (1,329,775)
Other, net ....................................... 739,659 167,763 704,831
305,731
------------ ------------ ------------------------- ------------- -------------
Total non-operating income (expenses) ...... (117,764) (931,643) 21,173
(1,680,647)
------------ ------------ ------------------------- ------------- -------------
Income (loss) before income taxes and extraordinary item...................... (6,964,084) (10,912,775) 48,696 (7,492,320)
Income tax provision (benefit) ......................... -- -- --
------------ ------------ ------------
Income (loss) before extraordinary item (10,912,775) 48,696 (7,492,320)
Extraordinary item - gain on extinguishment of debt -- -- 455,579
------------ ------------ ------------------------- ------------- -------------
Net income (loss) ...................................... (6,964,084) (10,912,775) 48,696 (7,036,741)
Preferred stock dividends .............................. 296,586 296,586 294,680
============ ============ ============296,586
------------- ------------- -------------
Net income (loss) less preferred stock dividends $(11,209,361)....... $ (7,260,670) $ (11,209,361) $ (247,890)
$ (7,331,421)
============ ============ ========================= ============= =============
Loss per common share before extraordinary item- Basic and Fully Diluted......... $ (0.83)(0.42) $(0.83) $ (0.02)
$ (0.87)
Extraordinary item per common share -- -- 0.05
------------ ------------ ------------
Net loss per common share $ (0.83) $ (0.02) $ (0.82)
============ ============ ========================= ============= =============
Weighted average common and common equivalent shares ... 17,190,810 13,451,487 12,040,163
8,921,543
============ ============ ========================= ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
F - 5F-5
37
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
Consolidated Statements of Stockholders' EquityCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------PREFERRED STOCK COMMON STOCK TREASURY STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- ----------- ----------- -------- ---------
Balance, July 3, 1994 330,3402, 1995 ................. 329,540 $329,540 11,112,026 $ 330,340 8,425,815 $ 421,291 -- $ --
Conversion of debentures -- -- 1,093,904 54,695555,601 -- --
Issuance of common stock ....... -- -- 1,458,156 72,907 -- --
Conversion of preferred stock (800) (800) 1,000 502,003,667 $ 100,183 -- --
Preferred stock dividends:
Cash ...................... -- -- -- -- -- --
Common stock .............. -- -- 133,151 6,658317,965 $ 15,898 -- --
Issuance of warrantsNet income ..................... -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, July 2, 1995 329,540 329,540 11,112,026 555,601 -- --
Issuance of common stock -- -- 2,003,667 100,183 -- --
Preferred stock dividends:
Cash -- -- -- -- -- --
Common stock -- -- 317,965 15,898 -- --
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------------- -------- ----------- ----------- -------- ---------
Balance, June 30, 1996 ................ 329,540 329,540$329,540 13,433,658 $ 671,682 -- --
Conversion of stockholder's debt -- -- -- -- -- --
Conversion of interest on
on stockholder's debt ..... -- -- -- -- -- --
Repurchase of common stock ..... -- -- -- -- 100,000 (150,000)$(150,000)
Preferred stock dividends:
Cash ...................... -- -- -- -- -- --
Common stock .............. -- -- 829,572 $ 41,479 -- --
Net loss ....................... -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------------- -------- ----------- ----------- -------- ---------
Balance, June 29, 1997 ................ 329,540 $ 329,540$329,540 14,263,230 $ 713,161 100,000 $ (150,000)
============ ============ ============ ============ ============ ============
Additional Accumulated Total
Paid-In Earnings Stockholders'
Capital (Deficit) Equity
------------ ------------ ------------
Balance, July 3, 1994 $ 16,503,549 $(12,412,265) $ 4,842,915
Conversion of debentures 2,474,958 -- 2,529,653
Issuance of common stock 4,448,591 -- 4,521,498
Conversion of preferred stock 750 -- --$(150,000)
Preferred stock dividends:
Cash (4,295)...................... -- (4,295)-- -- -- -- --
Common stock (6,658).............. -- -- Issuance2,119,884 $ 105,994 -- --
Conversion of warrants 25,750stockholder's debt . -- 25,750-- 7,500,000 $ 375,000 -- --
Cancel treasury stock ............ -- -- (100,000) $ (5,000) (100,000) $ 150,000
Net loss ....................... -- (7,036,741) (7,036,741)-- -- -- -- --
------- -------- ----------- ----------- -------- ---------
Balance, June 28, 1998 ................ $ 329,540 $329,540 $ 23,783,114 $ 1,189,155 0 $ 0
======= ======== ============ =========== ======== =========
PAID-IN EARNINGS STOCKHOLDERS'
CAPITAL (DEFICIT) EQUITY
------------ ------------ ------------
Balance, July 2, 1995 ................. $ 23,442,645 (19,449,006)$(19,449,006) $ 4,878,780
Issuance of common stock ....... $ 3,214,388 -- $ 3,314,571
Preferred stock dividends:
Cash ...................... $ (750) -- $ (750)
Common stock .............. $ (15,898) -- --
Net income ..................... -- $ 48,696 $ 48,696
------------ ------------ ------------
Balance, June 30, 1996 ................ $ 26,640,385 (19,400,310)$(19,400,310) $ 8,241,297
Conversion of stockholder's debt $ 3,750,000 -- $ 3,750,000
Conversion of interest on
on stockholder's debt ..... $ 392,337 -- $ 392,337
Repurchase of common stock ..... -- -- $ (150,000)
Preferred stock dividends:
Cash ...................... $ (1,112) -- $ (1,112)
Common stock .............. $ (41,479) -- --
Net loss ....................... -- (10,912,775) (10,912,775)$(10,912,775) $(10,912,775)
------------ ------------ ------------
Balance, June 29, 1997 ................ $ 30,740,131 ($30,313,085)$(30,313,085) $ 1,319,747
Preferred stock dividends:
Cash ...................... $ (85) -- $ (85)
Common stock .............. $ (105,994) -- --
Conversion of stockholder's debt . $ (375,000) -- --
Cancel treasury stock ............ $ (145,000) -- --
Net loss ....................... -- $ (6,964,084) $ (6,964,084)
------------ ------------ ------------
Balance, June 28, 1998 ................ $ 30,114,052 $(37,277,169) $ (5,644,422)
============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F - 6F-6
38
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
Consolidated Statements of Cash FlowsCONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
June52 WEEKS ENDED
-----------------------------------------------
JUNE 28, 1998 JUNE 29, 1997 JuneJUNE 30, 1996
July 2, 1995
------------ ------------ ------------------------- ------------- -------------
Operating activities:
Net income (loss) $(10,912,775)......................................................... $ 48,696(6,964,084) $ (7,036,741)(10,912,775) $ 48,696
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ......................................... 4,755,760 6,035,811 2,178,217 2,071,972
Provision for restaurant closings ..................................... 94,884 1,175,434 -- 2,856,105
Loss on conversion of debt to equity -- -- 1,329,775
(Gain)/loss on disposal of assets ..................................... 153,171 726,399 (163,175) --
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable, trade ........................................... 336,300 (142,662) (292,209) 312,140
Accounts receivable from affiliates .................................. 184,274 (47,078) 37,542
(245,469)
Inventories .......................................................... 166,968 232,236 (192,446) 177,089
Prepaid expenses and other current assets ............................ 34,345 32,562 255,759 (66,995)
Accounts payable and accrued liabilities ............................. 530,433 2,027,007 (673,405)
(325,571)
Other assets and intangible assets ................................... (162,109) 1,116,822 (6,031)
(331,377)
Noncurrent liabilities ............................................... 24,435 142,027 153,406
(81,914)
------------ ------------ ------------------------- ------------- -------------
Net cash provided by (used in) operating activities ............. (845,623) 385,783 1,346,354
(1,340,986)
------------ ------------ ------------------------- ------------- -------------
Investing activities:
Purchases of property and equipment ....................................... (635,404) (1,535,684) (1,642,333) (1,438,320)
Proceeds from sale of assets .............................................. -- 1,210,345 197,027 --
Collection of note receivable ............................................. -- -- 60,391 756,000
Investments in receivables from affiliates ................................ -- (280,792) -- --
Collection of receivables from affiliates ................................. 280,791 -- -- 69,745
Cost of acquisitions, net of cash acquired ................................ -- -- (231,745)
--
------------ ------------ ------------------------- ------------- -------------
Net cash used in investing activities ........................... (354,613) (606,131) (1,616,660)
(612,575)
------------ ------------ ------------------------- ------------- -------------
Financing activities:
Net proceeds from issuance of common stock -- -- 2,166,295
Repayment of affiliate borrowings ......................................... -- -- (150,000) (519,507)
Proceeds from other borrowings and warrants ............................... 5,036,587 1,591,572 1,221,790 4,986,550
Repayment of other borrowings ............................................. (4,009,033) (1,419,736) (2,439,297)
(3,105,463)
Cash dividends ............................................................ (85) (1,112) (750) (4,295)
Purchase of treasury stock ................................................ (150,000)
------------ ------------ ------------------------- ------------- -------------
Net cash provided by financing activities ....................... 1,027,469 20,724 (1,368,257)
3,523,580
------------ ------------ ------------------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ............................ (172,767) (199,624) (1,638,563) 1,570,019
Cash and cash equivalents, beginning of period .................................. 263,542 463,166 2,101,729
531,710
------------ ------------ ------------------------- ------------- -------------
Cash and cash equivalents, end of period ........................................ $ 90,775 $ 263,542 $ 463,166
$ 2,101,729
============ ============ ========================= ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
F - 7F-7
39
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
As of June 28, 1998, Watermarc Food Management Co. (the "Company"), ownsowned and
operates 41operated 40 restaurants, primarily in the Houston Metropolitan area, under
the names "Marco's Mexican Restaurants" ("Marco's Restaurants"); "The
Original Pasta Co." ("Pasta Co."); "Billyand Billy Blues Barbecue Bar & Grill"Grill
("Billy Blues"); and
"Longhorn Cafe". The Company also produces and markets two brands of barbecue sauce and a
spice rub, "Billy Blues Barbecue Sauce", "Chris' & Pitt's Bar-B-Que Sauce"
and "Chris'Chris' & Pitt's Spice Rub". TheyRub. Billy Blues Barbecue Sauce is sold on a
special order basis, primarily to restaurants. The Chris' & Pitt's products
are marketed to supermarkets, other retail stores and food service outlets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming the Company
will be able to continue as a going concern. The Company has a working
capital deficit of approximately $8.2$9.7 million at June 29, 199728, 1998 and
experienced significant losses in fiscal 19971998 which raise doubts about the
Company's ability to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to obtain additional
financing or capital and to refinance its debt and ultimately attain
profitable operations.
Management's plans include the following:
#o Further reductions in general and administrative expenses.
o Further reductions in operating expenses through improved cost controls.
o Increasing revenues in existing restaurants by remodeling certain
Marco's Restaurants and by improving marketing programs
and customer service at Marco's and Pasta Co. #Restaurants.
o Increasing revenues from the sale of food products by reinforcing existing
markets, expanding distribution to new market areas, introducing more
aggressive marketing programs, adding methods of distribution and developing
new products.
# Franchising new restaurants.
# Maintaining cost controls while increasing revenues.
#o Selling or closing its non-performing Marco's and/or Pasta Co. Restaurants
and the Billy Blues Restaurant.
o Obtaining additional equity capital or debt financing.
o Renegotiating and extending the terms of the Company's existing indebtedness.
FISCAL YEAR
The Company utilizes a 52-53 week fiscal year which ends on the Sunday
closest to June 30. References to 1998, 1997 1996 and 19951996 are all 52 week periods
ended June 28, 1998, June 29, 1997 and June 30, 1996, and July 2, 1995, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents. The
Company places substantially all of its cash and cash equivalents with
nationally recognized financial institutions and money market mutual funds.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of restaurant food, beverages, supplies, and
food products (primarily barbecue sauce) held for sale.
F - 8F-8
40
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONT'D:
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Leasehold improvements are
amortized on a straight-line basis over the lesser of the life of the lease
(ranging from approximately ten to fifteen years) or the estimated useful
lives of the improvements. Building, furniture, fixtures and equipment are
depreciated using straight-line and accelerated methods over the estimated
useful life of the assets, which range from five to thirty years. Major
additions which extend service lives are charged to the property accounts as
incurred, whereas minor amounts are expensed. Disposals are removed at cost
less accumulated depreciation with the resulting gain or loss reflected in
current operations.
ORGANIZATION COSTS
OrganizationOTHER ASSETS
Debt issue costs are included in other assets and are being amortized on a
straight-line basis over five years.
INTANGIBLE ASSETS
Intangible assets are associated with the purchase of Pasta Co., Pete's
Hospitality Co., Inc. and Chris'
and Pitt's BarbequeBarbecue Sauce. These assets are being amortized using the
straight-line method over the expected period to be benefited (fifteen years
for The Pasta Co.). The Company's management periodically assesses the
recorded balances of its intangible assets in light of historic and projected
operating trends and profitability and general economic conditions.
Management's assessment includes projecting cash flows from each intangible
asset over the estimated remaining life. Should this undiscounted amount not
equal the unamortized balance related to the asset, an impairment would be
indicated and the asset would be written down to fair value. In the fourth
quarter of fiscal year ended June 29, 1997, management deemed the intangible
assets associated with Chris' and Pitt's BarbequeBarbecue Sauce to be impaired and
charged off $3.45 million to reduce the assets to an estimated fair value of
$250,000. Also, inIn the fourth quarter of fiscal 1997,year ended June 28, 1998,
management deemed the Company sold
Pete's Hospitalityintangible assets associated with Pasta Co., Inc. to a related partybe
impaired and wrotecharged off $2.6 million to reduce the asset to an estimated
fair value of $4,167,706. Management will continue to evaluate the fair value
of the intangible asset of Pasta Co. quarterly based on its goodwill.cash flow.
PREOPENING COSTS
Certain expenses incurred in connection with the opening of a restaurant
(principally the costs of food products and staff training) are accumulated
and then expensed at the date of opening.
INCOME TAXES
Income taxes are provided for using the liability method. Under this method,
deferred income taxes are recorded to reflect the tax consequences on future
years, of temporary differences between the tax basis of the assets and the
liabilities and their financial statement amounts. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
REVENUE RECOGNITION
Revenues from food product sales are recognized when the order is shipped and
ownership passes to the buyer.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding during the periods, adjusted for dividends on preferred
stock and interest expense, where applicable, plus common equivalent
shares, reflected under the treasury stock method, unless the effects of
common equivalent shares were antidilutive. Fully diluted loss per share
is not presented as it is antidilutive.
F - 9F-9
41
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONT'D:
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1997, the FASBFinancial Accounting Standards Board (FASB) issued SFASStatement
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. The
pronouncementBasic 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 regarded as common stock
equivalents and are computed using the treasury stock method. Stock options
will have a dilutive effect under the treasury stock method when the average
market price of the common stock during the period exceeds the exercise price
of the options.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure", which establishes standards for disclosing
information about the Company's capital structure. This statement does not
change any previous disclosures but consolidates them in this statement for
ease of retrieval and greater visibility.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which established standards for reporting and displaying comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
annual and interim periods endingfiscal years beginning after December 15, 1997. The adoption of this
statement requires incremental financial statement disclosure, and thus will
have no effect on the Company's financial position or results of operations.
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements
and the reported amounts of income and expenses during the reporting periods.
Actual results could differ from those estimated.
2. BUSINESS COMBINATIONS:
THE ORIGINAL PASTA CO.
Effective January 26, 1996, the Company acquired all of the outstanding
common stock of The Pasta Co. from the Company's largest shareholder. The
purchase price was $6,716,667, consisting of $3,750,000 of notes and the
issuance of 1,666,667 shares of the Company's common stock valued at
$2,966,667. The acquisition has been accounted for as a purchase and,
accordingly, the assets and liabilities of Pasta Co. have been recorded at
their fair value at the date of acquisition. The excess of the purchase price
including related acquisition costs of approximately $280,000, over the fair
values of the net identifiable assets acquired less liabilities assumed, is
reported as goodwill and is being amortized over 15 years.
The statement of operations includes the results of Pasta Co. from the date
of acquisition. The following table summarizes the unaudited pro forma
results of operations of the Company as if the acquisition had occurred at
the beginning of eachthe period presented:
1996 1995
----------- -----------
Revenues $46,086,307 $44,960,944
Net loss (679,509) (8,201,187)
Net loss per common share (.08) (0.95)
The allocation of the total purchase price, including related expenses, for
Pasta Co. based on the estimated fair value of the net assets acquired, at
the date of acquisition is as follows:
Net of liabilities over tangible assets $ (768,955)
Intangible Assets 131,250
Goodwill 7,634,255
-------------
Total purchase price allocation $ 6,996,550
=============
F - 10Tangible assets,
net of liabilities $ (768,955)
Intangible assets 131,250
Goodwill 7,634,255
-------------
Total purchase price allocation $ 6,996,550
F-10
423. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at June 29, 199728, 1998
and June 30, 199629, 1997 is as follows:
1998 1997 1996
------------ ------------
Inventories:
Food products ................................ $ 103,696 $ 225,319 $ 399,946
Restaurant food, beverage and other .......... 212,638 257,983 315,592
------------ ------------
$ 483,302316,334 $ 715,538483,302
============ ============
Property and Equipment:
Land $ -- $ 50,000
Building and leasehold improvements .......... $ 6,723,287 $ 6,982,563 7,770,515
Furniture, fixtures and equipment ............ 10,143,543 8,781,908 9,828,449
Transportation equipment ..................... 61,246 178,29361,246
------------ ------------
16,928,076 15,825,717 17,827,257
Less accumulated depreciation and amortization (10,714,635) (9,775,086) (8,498,731)
------------ ------------
$ 6,050,6316,213,441 $ 9,328,5266,050,631
============ ============
Intangible Assets:
License agreement ............................ $ 4,396,318 $ 4,398,528
$ 4,401,572
Goodwill ..................................... 7,626,255 8,458,728
Favorable lease -- 209,0007,626,255
------------ ------------
12,022,573 12,024,783 13,069,300
Less accumulated amortization ................ 7,981,140 (4,811,326) (869,253)
------------ ------------
$ 7,213,4574,041,433 $ 12,200,0477,213,457
============ ============
Other assets:
Debt issue costs ............................. $ 149,300 $ --
$ 77,178
Organizational costs -- 2,024
Other ........................................ 115,082 111,381 104,484
------------ ------------
$ 111,381264,382 $ 183,686111,381
============ ============
Accrued liabilities:
Payroll and related costs .................... $ 1,364,646 $ 911,861 $ 487,820
Taxes, other than payroll and income taxes ... 672,545 831,332
409,093
Rent ......................................... 63,513 --
457,673
Interest ..................................... 105,267 104,162
139,182
Other ........................................ 399,421 416,466 337,287
------------ ------------
$ 2,263,8212,605,392 $ 1,831,0552,263,821
============ ============
F - 11F-11
43
4. LONG-TERM DEBT:
At June 29, 199728, 1998 and June 30, 1996,29, 1997, long-term debt consisted of the
following:
1997 1996
----------- -----------
Note payable to bank, due in monthly installments with interest
at prime plus 1%, maturing in May 1999, collateralized by certain
property and equipment $ 383,333 $ 583,333
Mortgage note payable, due in monthly installments with interest
at 10%, collateralized by certain land and building -- 254,125
Notes payable to banks and trade vendors, due in monthly
installments with interest ranging from 0% to 12.0%, maturing at
various dates through 1999, collateralized by certain property
and equipment 965,610 840,057
Notes payable to banks, due in monthly installments with interest
rates ranging from 8.5% to 9.5%, maturing at various dates
through January 1998, collateralized by certain vehicles 13,103 26,483
Subordinated notes, interest at 12% payable quarterly, principal
due in July 1997, collateralized by all of the outstanding stock
of Marco's Mexican Restaurants, Inc. (See Subsequent Events.) 2,500,000 2,500,000
Note payable to an unaffiliated foreign investor, interest at 10%
payable quarterly, principal due in June 1999, collateralized by
certain property and equipment 1,000,000 1,000,000
Note payable to bank, due in monthly principal installments with
interest payable monthly at 10%, maturing in August 2000, 415,176 519,878
collateralized by certain property and equipment
Note payable to bank, due in monthly principal installments with
interest payable quarterly at 10% maturing March 2001,
collateralized by certain property and equipment 974,832 1,148,644
9% convertible subordinated debentures due March 1999,
collateralized by inventories and accounts receivable, licenses,
trademarks and equipment 217,000 217,000
Note payable to bank, due in monthly principal installments with
interest payable monthly at the bank's prime rate, maturing in
April 2004, collateralized by real property and guaranteed by
stockholder 295,099 --
Note payable to bank, due in monthly principal installments with
interest payable monthly at the bank's prime plus 1% maturing in
February 2002, guaranteed by stockholder 233,333 --
Note payable to bank, due in monthly principal installments with
interest payable monthly at the bank's prime plus 2% maturing in
April 1998, guaranteed by stockholder 274,867 --
Capital lease obligations -- 10,997
----------- -----------
7,272,353 7,100,517
Less current portion (2,787,814) (1,401,825)
----------- -----------1998 1997
--------- ---------
Note payable to bank, due in monthly
installments with interest at prime plus 1%,
maturing in May 1999, collateralized by
certain property and equipment $ 247,312 $ 383,333
Notes payable to banks, related parties and
trade vendors, due in monthly installments
with interest ranging from 0% to 12.0%,
maturing at various dates through 2002,
collateralized by certain property and
equipment 1,803,234 978,713
Subordinated notes, interest at 12% payable
monthly, principal due in December 1999,
collateralized by all of the outstanding stock
of Marco's Mexican Restaurants, Inc. (See
Subsequent Events) 1,250,000 2,500,000
Note payable to an unaffiliated foreign
investor, interest at 10% payable quarterly,
principal due in June 1999, collateralized by
certain property and equipment and guaranteed
by stockholder. 1,000,000 1,000,000
Note payable to corporation owned by majority
stockholder, due in monthly principal
installments with interest payable monthly at
10%, maturing in August 2000, collateralized by
certain property and equipment 309,302 415,176
Note payable to bank, due in monthly principal
installments with interest payable quarterly at
10% maturing March 2001, collateralized by
certain property and equipment - 974,832
9% convertible subordinated debentures due March
1999, collateralized by inventories and accounts
receivable, licenses, trademarks and equipment 117,000 217,000
Note payable to bank, due in monthly principal
installments with interest payable monthly at
the bank's prime rate, maturing in April 2004,
collateralized by real property and guaranteed
by stockholder 264,310 295,099
Note payable to bank, due in monthly principal
installments with interest payable monthly at
the bank's prime plus 1% maturing in February
2002, guaranteed by stockholder 183,333 233,333
Note payable to bank, due in monthly principal
installments with interest payable monthly at
the bank's prime plus 2% maturing in April 1998,
guaranteed by stockholder - 274,867
Note payable to corporation owned by majority
stockholder, due in monthly installments with
interest at Prime + one % maturing in 2002,
guaranteed by stockholder 1,651,714 -
Private placement, interest at 11% payable
quarterly, principal due quarterly beginning
September 1999 through June 2002, including
$500,000 payable to majority stockholder 1,200,000 -
Note payable to corporation owned by majority
stockholder, due in monthly installments with
interest at 11% maturing in 2003, guaranteed
by stockholder 727,867 -
Note payable to corporation owned by majority
stockholder, due in monthly installments with
interest at Prime +2% maturing in 2001,
guaranteed by stockholder 555,829 -
Note payable to corporation owned by majority
stockholder, due in monthly installments with
interest at Prime +1% maturing in 2003,
guaranteed by stockholder 840,095 -
---------- ---------
10,149,996 7,272,353
Less current portion (2,919,648) (2,787,814)
---------- ---------
$ 7,230,348 $ 4,484,539 $ 5,698,692
=========== ===========
F - 12F-12
44
4. LONG-TERM DEBT CONT'D:
In March 1994, the Company issued $2,691,000 of 9% Convertible Subordinated
Debentures which are due on March 16, 1999. Interest is payable semi-annually
on March 15 and September 15. The debentures are convertible at any time
prior to maturity at the option of the holder, unless previously redeemed,
into shares of common stock at a conversion price of $5.00 of principal into
one share of common stock. The debentures are redeemable at the option of the
Company, in whole or in part, at any time, at prices ranging from 105% of the
principal amount in 1994 to 100% of the principal amount in 1999. The
debentures are also subject to mandatory conversion at the option of the
Company if at any time the closing bid price of the Company's common stock
exceeds $12 per share for twenty consecutive days. The debentures are
collateralized by a second lien on the inventories, licensing, trademarks and
other intangibles related to the Chris' and Pitt's product line and by a
continuing security interest in various restaurant equipment.
In May of 1995, the Company offered the debentureholders the right to convert
(until June 30, 1995) the principal and accrued interest owed on their
debentures into common stock at a modified conversion rate of $2.3125 of
debenture principal and interest for one share of common stock. The Company
recorded a $1.3 million charge in 1995 pursuant to "sweetened" conversion
terms. Debentureholders owed an aggregate of $2,474,000 in principal agreed
to the conversion. There is currently outstanding $217,000$117,000 of debentures held
by debentureholders who elected not to convert at the modified conversion
rate. In connection with the subordinated debenture issuance, the Company
incurred debt issue costs of approximately $438,000 which were capitalized
and amortized using a method which approximates the interest method.
Unamortized debt issue costs associated with debentures which were converted
to stock were charged to paid-in-capital.
The $1 million note payable to an unaffiliated foreign investor, referred to
above, is delinquent unless the Company is able to reach a settlement
agreement with the noteholder. The entire note payable balance has been
classified as current portion of long-term debt.
Annual maturities of long-term debt, as of June 29, 199728, 1998 are: $2,787,814
in 1998; $3,296,031$2,919,648 in
1999; $674,268$2,494,032 in 2000; $338,189$840,792 in 2001; $81,611$1,050,497 in 2002; $2,480,789 in
2003; and $94,440$364,238 thereafter.
The carrying amounts of notes payable approximate fair value.
5. NOTES PAYABLE TO STOCKHOLDER:
At June 29, 1997 and June 30, 1996, notes payable to stockholder consisted
of the following (see "Note 11 - Related Party Transactions"):
1997 1996
----------- -----------
Note associated with the acquisition of Pasta Co. with principal and
interest at 10% due in July 1997, collateralized by assets related to $ -- $ 595,000
Pasta Co. In May 1997, the Company and the Stockholder agreed to
offset their debts between them. (See Related Party Transactions.)
Note associated with the acquisition of Pasta Co. with interest at 10%
due quarterly with principal due in quarterly payments beginning
September 15, 2000 and ending September 15, 2002, collateralized by -- 2,750,000
assets related to Pasta Co. In May 1997, the Company and the
Stockholder agreed to convert this note to common stock rights.(See
Related Party Transactions.)
Note associated with the acquisition of Pasta Co. with interest at 10%
due quarterly with principal payments due on July 15 and December 31,
1997 at $500,000 each, collateralized by assets related to Pasta Co. In
May 1997, the Company and the Stockholder agreed to convert this note -- 1,000,000
to common stock rights. (See Related Party Transactions.)
Note associated with the acquisition of Pasta Co. with principal and
interest at 6% due July 1997, collateralized by assets related to Pasta -- 224,202
Co. In May 1997, the Company and the Stockholder agreed to offset their
debts between them. (See Related Party Transactions.)
Subordinated note, interest at 11% (12% in 1996) payable quarterly,
principal due in June 2002. (See Subsequent Events.) 500,000 500,000
----------- -----------
$ 500,000 $ 5,069,202
=========== ===========
F - 13
45
5. PAYABLE TO STOCKHOLDER CONT'D:
The Company and its subsidiaries' various loan agreements contain certain
restrictive financial and other covenants. Additionally, some existing
loan covenants contain provisions which limit the amount of funds available
for transfer from certain subsidiaries to the parent corporation without
the consent of the lender.
At June 29, 1997, the Company had no significant credit facilities
available.
6. LEASE OBLIGATIONS:
The Company leases restaurant facilities and certain equipment and
leasehold improvements under operating lease agreements
having terms expiring at various dates through 2012. The leases have renewal
clauses of 5 to 10 years, at the option of the Company, and have provisions
for contingent rentals based upon a percentage of revenues in excess of a
minimum amount. Rental expense under operating lease agreements was
approximately $2,507,000, $2,599,000, $2,774,000 and $2,774,000$3,335,000 in 1995, 1996, 1997 and 19971998,
respectively.
F-13
5. LEASE OBLIGATIONS CONT'D:
Future minimum lease payments, excluding contingent rentals, at June 29,
1997,28,
1998, were as follows:
FISCAL YEAR OPERATING
1998 $ 3,584,000
1999 3,146,000
2000 3,367,000
2001 2,573,000
2002 2,435,000
Thereafter 8,061,000
------------
Total future minimum lease payments $ 23,166,000FISCAL YEAR OPERATING
----------- ---------
1999 $3,102,418
2000 2,949,077
2001 2,753,594
2002 2,622,353
2003 2,276,991
Thereafter 5,864,758
------------
Total future minimum lease payments $19,569,191
============
7.6. CONTINGENCIES:
Effective July 1, 1992, the Company voluntarily discontinued its workers'
compensation coverage in the State of Texas. The Company anticipates that the
ultimate expense of representing itself in the settlement of claims will be
less than the cost of insurance. The Company intends to vigorously defend and
pursue all unreasonable claims. Management does not believe that any existing
claims will have a material adverse impact on the financial position, results
of operations, or cash flows of the Company. At June 29, 1997,28, 1998, the Company
has accrued for all anticipated settlements.
8.In the fourth quarter of fiscal year ended June 28, 1998, the Company accrued
a liability of $150,000 for a claim of monies owed on a guarantee by the
Company of an open account of Pete's Hospitality Co., Inc., formerly a
subsidiary of the Company, owed to a vendor for sale of goods. Pete's filed
for bankruptcy and failed to pay the account. The vendor has filed suit
against the Company on the guarantee.
Except as stated above, in management's opinion, the Company is not a party
to any litigation other than ordinary routine matters which are incidental to
the Company's business, including personal injury claims and disputes with
vendors and suppliers. The Company believes that no current legal
proceedings, individually, will have a material adverse effect upon the
Company or its business.
7. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS:
Supplemental disclosure of cash flow information is as follows:
1997 1996 1995
-------- -------- --------
1998 1997 1996
---------- --------- ----------
Interest paid $872,342 $585,000 $624,855 $608,074
Income taxes paid -- -- --
F - 14
46
8. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS CONT'D:- -
Supplemental disclosure of noncash investing and financing activities:
1998 1997 1996
1995
---------- ---------- -------------------
Restaurant development rights received in satisfaction
of note receivable $ -- $ -- $ 150,000
Conversion of preferred stock to common stock -- -- 800
Conversion of subordinated debt to equity, net of issuance cost -- -- 2,171,912
Issuance of warrants in lieu of payment of brokers fees -- -- 25,752
Issuance of common stock in lieu of payment
of liabilities -- -- $ 347,904 1,418,761
Issuance of common stock for preferred
stock dividend -- $ 41,479 15,898 6,658
Issuance of debt in payment of liabilities -- -- 548,680 --
Conversion of stockholder's debt and
interest to equity -- 4,142,337 -- --
Note receivable from sale of Pete's
Hospitality -- 300,000 -- --
Offset of stockholder debt and interest
against receivables -- 819,202 -- --
Assumption of debt by buyer upon sale of
Pete's Hospitality -- 79,491 --
Note receivable from sale of Pete's
Hospitality $ 294,904 -- --
Repossession of Marco's Mexican Restaurant
in Texas City 282,821 -- --
Issuance of debt in payment of liabilities 470,855 -- --
Equipment financed by long term debt 1,350,089 -- --
Refinancing of a related party note 500,000 -- --
Forgiveness of debt by creditor 139,807 -- --
Conversion of Stockholder's Debt 375,000 -- --
Cancel Treasury Stock 150,000 -- --
During 1996, the Company acquired Pasta Co. Components of cash used for the
acquisition, as reflected in the Consolidated Statement of Cash Flows for 1996,
are summarized as follows:
Fair value of current assets, net of cash acquired $ 125,352
Fair value of noncurrent assets 2,891,627
Goodwill and other intangible assets 7,634,255
Liabilities assumed (2,733,620)
Notes payable to stockholder (4,719,202)
Stock issued at closing (2,966,667)
-----------
Cash paid, net of cash acquired $ 231,745
===========
9.F-14
8. INCOME TAXES:
The significant components of the Company's deferred tax assets and liabilities,
as of June 29, 199728, 1998 and June 30, 1996,29, 1997, were as follows:
1997 1996
----------- -----------
Deferred tax assets:
Intangible assets $ 1,020,000 $ --
Accrued liabilities 196,000 275,723
Net operating loss 8,262,000 6,117,025
Property and equipment 442,000 44,044
----------- -----------
Total deferred tax assets 9,920,000 6,436,792
----------- -----------
Deferred tax liabilities:
Deductible intangible assets -- 421,350
----------- -----------
Total deferred tax liabilities -- 421,350
----------- -----------
Net deferred tax assets before valuation allowance 9,920,000 6,015,442
Valuation allowance (9,920,000) (6,015,442)
----------- -----------
Net deferred tax asset $ -- $ --1998 1997
---- ----
Deferred tax assets:
Intangible assets $ 1,802,000 $1,020,000
Accrued liabilities 205,000 196,000
Net operating loss 9,860,000 8,262,000
Property and equipment 442,000 442,000
------------ -----------
Total deferred tax assets 12,309,000 9,920,000
------------ -----------
Deferred tax liabilities:
Deductible intangible assets - -
------------ -----------
Total deferred tax liabilities - -
------------ -----------
Net deferred tax assets before valuation
allowance 12,309,000 9,920,000
Valuation allowance 12,309,000 (9,920,000)
------------ -----------
Net deferred tax asset $ - $ -
============ =========== ===========
F - 15
47
9. INCOME TAXES CONT'D:
The reconciliation of the provision for income taxes to the income tax expense
resulting from the application of the federal statutory tax rates to pretax
income is as follows:
1997 1996 1995
----------- ----------- -----------
Tax provision (benefit) at statutory rate ($ 3,710,344)1998 1997 1996
---- ---- ----
Tax provision (benefit) at
statutory rate $(2,368,034) $(3,710,344) $ 16,557 $(2,392,492)
Amortization of goodwill -- 37,590 69,382 --
Loss on conversion of debt to equity -- -- 452,124
Merger transaction expenses -- -- --
Change in valuation allowance 2,389,000 3,904,558 (103,797) 1,695,325
Other (20,966) 231,804 17,858 245,043
----------- ----------- -----------
Total provision (benefit) for
income taxes $ -- $ -- $ --
=========== =========== ===========
As of June 29, 1997,28, 1998, the Company had consolidated net operating loss
carryforwards (NOL's) of approximately $24.3$29 million which expire in varying
amounts through the fiscal years 2006 through 2011.2012. Due to the merger with
Marco's Restaurants in 1994, the consolidated pre-acquisition NOL's of
approximately $11 million are not available to offset any future taxable income
that may be generated by Marco's Restaurants. In addition, the utilization of
pre-acquisition NOL's is further limited due to a greater than 50% change in
ownership.
10.9. STOCKHOLDERS' EQUITY:
ISSUANCES OF COMMON STOCK
FISCAL YEAR 1998:
In December 1997, the Company cancelled 100,000 shares of common stock which had
been held as security for a debt.
In December 1997, the Company issued 2,119,434 shares of common stock as payment
of a dividend to preferred shareholders.
In March 1998, the Company issued 7,500,000 shares of common stock to Ghulam
Bombaywala, the Company's Chief Executive Officer in a debt to equity agreement
dated May 15, 1997.
In March 1998, the Company issued 450 shares of common stock as payment of a
dividend to preferred shareholders.
In 1998, the Company canceled 100,000 shares of common stock which were held in
treasury.
F-15
9. STOCKHOLDERS' EQUITY CONT'D:
FISCAL YEAR 1997:
In December 1996, the Company issued 236,607 shares of common stock as payment
of a dividend to preferred shareholders.
In June 1997, the Company declared 592,965 shares of common stock as payment of
a dividend to preferred shareholders.
FISCAL YEAR 1996:
In December 1995, the Company issued 225,000 shares of common stock valued at
approximately $180,000 in partial satisfaction of a settlement of a lawsuit.
In January 1996, the Company issued 112,598 shares of common stock as payment of
a dividend to preferred shareholders.
In January 1996, the Company issued 1,666,667 shares of common stock valued at
$2,966,667 in connection with the acquisition of Pasta Co.
In February 1996, the Company issued 100,000 shares of common stock as payment
of legal fees of $150,000.
In February of 1996, the Company issued 12,000 shares of common stock valued at
$18,000 in settlement of a lawsuit.
In June 1996, the Company issued 205,367 shares of common stock as payment of a
dividend to preferred shareholders.
F - 16
48
FISCAL YEAR 1995:
In July 1994, the Company issued 40,000 shares of common stock valued at
$260,000 in satisfaction of a commission in connection with the merger with
Marco's Restaurants, of which 20,000 shares were issued to a director of
the Company.
In August 1994, the Company issued 53,516 shares of common stock valued at
approximately $241,000 in satisfaction of construction liabilities related
to a Billy Blues restaurant in Dallas, Texas.
In September 1994, the Company received net proceeds of approximately $1.0
million from a private placement of 375,438 shares of common stock.
In September 1994, the Company issued 16,435 shares of common stock in lieu
of cash equivalent interest payments of $47,250 related to its subordinated
debentures.
In November 1994, the Company issued 33,493 shares of common stock valued
at $70,000 in satisfaction of construction liabilities related to a Billy
Blues restaurant in Dallas, Texas.
In December 1994, the Company issued 69,132 shares of common stock as
payment of a dividend to preferred stockholders.
In February 1995, a preferred stockholder converted 800 shares of preferred
stock into 1,000 shares of common stock.
In March 1995, the Company issued 16,435 shares of common stock in lieu of
cash equivalent interest payments of $47,250 related to its subordinated
debentures.
In June 1995, the Company issued 153,477 shares of common stock in
satisfaction of trade payables of approximately $321,000.
In June 1995, the Company issued 39,750 shares of common stock in
satisfaction of approximately $80,000 in construction liabilities related
to its Billy Blues restaurant in Denver, Colorado.
In June 1995, the Company issued 13,000 shares of common stock in
satisfaction of a liability of approximately $40,000 related to a
consulting agreement.
In June 1995, the Company issued 68,800 shares of common stock in
satisfaction of an employment contract settlement of $172,000.
In June 1995, the Company issued 26,312 shares of common stock in
satisfaction of notes payable of $50,000.
In June 1995, the Company issued 64,019 shares of common stock as payment
of a dividend to preferred stockholders.
In June 1995, the Company issued 1,093,904 shares of common stock for the
conversion of approximately $2.5 million of subordinated principal and
accrued interest on debentures.
In June 1995, the Company issued 621,500 shares of common stock in a
private placement and received net proceeds of approximately $1.2 million.
PREFERRED STOCK
In February 1993, the Company issued 450,000 shares of 9% Cumulative Convertible
Preferred Stock ("Preferred Stock") with a face amount of $10 per share.
Dividends are cumulative and are payable in semi-annual installments, on June 30
and December 31, at a rate of $.90 per share per annum. Dividends may be paid in
either cash or an equivalent value of common stock. The Preferred Stock has no
voting rights and has a liquidation preference of $10 per share plus accumulated
and unpaid dividends.
F - 17
49
10. STOCKHOLDERS' EQUITY CONT'D:
Holders of the shares of Preferred Stock have the right, at the holder's option,
to convert any or all such shares into common stock at any time. If at any time
the closing sale price of the Company's common stock exceeds $10 per share, the
Company may convert the Preferred Stock to common stock.
The Preferred Stock is convertible at a rate of one share of common stock for
each $8 in face value of Preferred Stock converted. The Preferred Stock is
redeemable at the Company's option at $12 per share.
At the close of the Company's public offering of its Preferred Stock, the
Company issued, to the underwriter, warrants to purchase 45,000 shares of
preferred stock at an exercise price of $12 per share extended untilwhich expired in January
1998. None of these warrants have been exercised.were exercised prior to their expiration.
COMMON STOCK WARRANTS AND STOCK OPTION PLANS
The Company has the following common stock warrants and option plans:
o SERIES A WARRANTS - The Company hasCompany's 875,500 Series A Warrants
outstanding at June 29, 1997. Each warrant entitles the holder
to purchase one share of common stock at a price of $6.50 per
share, subject to certain adjustments, until the warrants
expire. The expiration date has been extended toexpired on May 15, 1998. The Company has the rightNone of these warrants were exercised
prior to redeem the warrants at $.01 per
warrant, upon written notice, if the daily common stock
closing price exceeds $7.80 per share during any twenty
consecutive business days.their expiration.
o OTHER WARRANTS - In connection with the issuance of $3 million
in subordinated notes, the Company issued 1,333,320 warrants,
each of which evidence the right to purchase a share of the
Company's common stock at a purchase price of $2.25 per share
until December 31, 1999. In connection with an agreement to
extend the repayment date of the notes, the
F-16
purchase price was reduced to $ .25$.09 per share.share and the expiration
date was extended to August 31, 2002, and 1,150,000 additional
warrants were issued to the noteholders at an exercise price of
$.25 and expiring on August 31, 2003.
Also, in connection with the subordinated notes, the Company
issued warrants to purchase 150,000 shares of common stock to
the placement agent at an exercise price of $2.50 per share,
which expire on DecemberAugust 31, 1999.2002. In connection with an agreement
to extend the repayment date of the notes, said purchase price
was reduced to $ .25$.09 per share.
In connection with the subordinated note conversion of Mr.
Bombaywala from the 12% Subordinated Note to the 11%
Subordinated Note in June 1997, 50,000 warrants to purchase
common stock at $1.50 per share were issued to Mr. Bombaywala.
In connection with a borrowing of $1 million from an
unaffiliated foreign corporation, the Company issued warrants to
purchase 75,000 shares of common stock to said corporation at a
purchase price of $3 per share until May 31, 1997. The Company
extended the expiration date to January 1998. None of these
warrants were exercised prior to their expiration. In January
1996, the Company issued additional warrants to this corporation
to purchase (1) 50,000 shares of common stock at $3.00 per share
exercisable until January 1, 1999 and (2) 50,000 shares of
common stock at $4.00 per share exercisable until January 1,
2001.
In connection with the issuance of common stock in a private
offering, the Company issued warrants to purchase 71,250 shares
of common stock to the placement agent at a purchase price of $3
per share until May 31, 1997. The Company extended the
expiration date to January 1998. None of these warrants were
exercised prior to their expiration.
In June 1997, the Company issued warrants to the former
President of the Company to purchase 180,000 shares of common
stock exercisable at $.50 until June 30, 1999.
o STOCK OPTION PLAN - The Company has a Stock Compensation Plan
under which either incentive stock options or non-qualified
stock options may be issued to officers, key employees and
non-employee directors of the Company. All options granted under
the plan have been at fair market value or greater on the date
of grant and expire fivesix years from the date of grant.
The Company has reserved a total of 1,000,000 shares of common
stock for the plans and an additional 589,500587,500 options were
available for grant at June 29, 1997.28, 1998.
The Company has elected to followfollows Accounting Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations in accounting for
its employee stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were
not developed for use by the Company in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
either exceeds or equals the market price of the underlying stock on the date
of grant, no compensation expense has been recognized.
The existing stock option valuation models were developed for use in
estimating the fair value of traded options which have no vestingsvesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
Pro forma information regarding net income and earnings per share is required
by FASB Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value based
accounting method of thatthe Statement. In the opinion of the management, the pro
forma net income and earnings per share under the fair value based accounting
method were not materially different than those accounted for using the
intrinsic value based accounting method prescribed by APB 25.
F - 18F-17
50
A summary of stock option activities during 1998, 1997 1996 and 19951996 is as
follows:
NUMBER OF OPTION PRICE
SHARES PER SHARE
------ ---------
Options outstanding at July 2, 1995 517,000 2.00 to 4.63
Granted 134,500 1.00
Canceled (40,000) 2.00 to 4.63
---------
Options outstanding at June 30, 1996 611,500 1.00 to 2.88
Granted 180,000 .25 to .50
Canceled (381,000) 1.00 to 4.63
---------
Options outstanding at June 29, 1997 410,500 .25
Granted 120,000 .14
Canceled (118,000) .25
---------
Options outstanding at June 28, 1998 412,500 .14 to .25
Exercisable at June 28, 1998 120,900 .14 to .25
10. 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
1998 INCREASE IN NUMBER OF INCREMENTAL
INCOME SHARES SHARE
-------------------------------------------
Options ....................... -- 2,083,320
Dividends on convertible
preferred stock .......... $ 296,586 411,925
Interest on 9% convertible
subordinated debenture ... $ 19,530 23,400
-------------------------------------------
$ 316,116 2,518,645 $ 0.13
===========================================
Computation of Diluted Earnings per Share
INCOME AVAILABLE
FROM CONTINUING COMMON PER
OPERATIONS SHARES SHARE
-------------------------------------------------
Common Stock Options outstanding at July 3, 1994 457,000 4.63 to 5.09
Granted 747,000 2.00 to 2.88
Canceled (687,000) 4.63 to 5.09
--------- ------- ----......... ($7,260,670) 17,190,810 ($ 0.42)
2,083,320
-------------------------------------------------
($7,260,670) 19,274,130 ($ 0.38) antidilutive
Dividend on convertible
preferred stock ......... 296,586 411,925
Interest on 9% convertible
subordinated debenture .. 19,530 23,400
-------------------------------------------------
($6,944,554) 19,709,455 ($ 0.35) antidilutive
=================================================
INCREASE IN EARNINGS PER
1997 INCREASE IN NUMBER OF INCREMENTAL
INCOME SHARES SHARE
---------------------------------------------
Options outstanding at July 2, 1995 517,000 2.00 to 4.63
Granted 134,500 1.00
Canceled (40,000) 2.00 to 4.63
--------- ------- ----........................ -- 2,998,903
Dividends on convertible
preferred stock ........... $ 296,586 411,925
Interest on 9% convertible
subordinated debenture .... $ 19,530 43,400
---------------------------------------------
$ 316,116 3,454,228 $ 0.09
=============================================
COMPUTATION OF DILUTED EARNINGS PER SHARE
INCOME AVAILABLE
FROM CONTINUING COMMON PER
OPERATIONS SHARES SHARE
-----------------------------------------------
($ 11,209,361) 13,451,487 ($ 0.83)
Common Stock Options outstanding at June 30,......... 2,998,903
-----------------------------------------------
($ 11,209,361) 16,450,390 ($ 0.68) antidilutive
Dividend on convertible
preferred stock ......... 296,586 411,925
Interest on 9% convertible
subordinated debenture .. 19,530 43,400
-----------------------------------------------
($10,893,245) 16,905,715 ($ 0.64) antidilutive
===============================================
INCREASE IN EARNINGS PER
1996 611,500 1.00 to 2.88
Granted 180,000 .25 to .50
Canceled (381,000) 1.00 to 4.63
--------- ------- ----INCREASE IN NUMBER OF INCREMENTAL
INCOME SHARES SHARE
-------------------------------------------
Options outstanding at June 29, 1997 410,500 .25 to 1.00
========= ------- ----
Exercisable at June 29, 1997 188,700 .25 to 1.00
========= ------- ====......................... -- 3,121,633
Dividends on convertible
preferred stock ............ $ 296,586 411,925
Interest on 9% convertible
subordinated debenture ..... $ 19,530 23,400
-------------------------------------------
$316,116 3,556,958 $ 0.09
===========================================
COMPUTATION OF DILUTED EARNINGS PER SHARE
INCOME AVAILABLE
FROM CONTINUING COMMON PER
OPERATIONS SHARES SHARE
-------------------------------------------
($ 247,890) 12,040,163 ($0.02)
Common Stock Options .......... 3,121,633
-------------------------------------------
($ 247,890) 15,161,796 ($0.02)
Dividend on convertible
preferred stock .......... 296,586 411,925
Interest on 9% convertible
subordinated debenture ... 19,530 43,400
-------------------------------------------
$ 68,226 15,617,121 $ 0.00 antidilutive
===========================================
Note: Because Diluted EPS from Continuing Operations increases from ($0.42) to
($0.35) and from ($0.83) to ($0.64) and from ($0.03) to ($0.00) in 1998, 1997
and 1996, respectively, when convertible preferred stock and convertible
subordinated debentures are included in the computation, those convertible
preferred shares and convertible subordinated debentures are antidilutive and
are ignored in the computation of Diluted EPS from Continuing Operations.
Therefore, Diluted EPS from Continuing Operations is reported as ($0.42),
($0.83) and ($0.02) in 1998, 1997 and 1996, respectively. All warrants have been
excluded from the calculations of Diluted EPS as they are anti-dilutive for all
periods.
11. 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 assets of Pete's. The
Company recorded a loss of approximately $750,000 on the transaction. On
September 7, 1995,December 18, 1997, Pete's Hospitality Co., Inc. filed for bankruptcy.
Therefore, the Company wrote off the note receivable balance as of $294,904.
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.
Ghulam M. Bombaywala, the Company's Chief Executive Officer and director, has
an ownership interest in and participates in the management of other
businesses, including James Original Coney Island, Inc., the Houston-based
corporation which owns the James Coney Island restaurant chain.
On April 2, 1998 the Company entered into a Professional Services Agreement
with Darrin Straughan to provide operational consulting services to the
Company and its subsidiaries. As compensation for his services, Mr.
Straughan was issued stock options to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $.14 per share. The stock
options vest prorata over a period of three years. Mr. Straughan is a
director of the Company and the Vice President of James Original Coney
Island, Inc., the corporation which owns the James Coney Island restaurant
chain.
Mr. Bombaywala has an employment contract with the Company providing for
annual compensation of $120,000. (See "Item 11. Executive Compensation -
Employment Contracts.")
On May 1, 1998 the Board of Directors of the Company approvedadopted a resolution
approving the acquisition of all of the issued and outstanding shares (the "Shares") of
Pasta Co. fromissuance to Mr. Bombaywala the sole stockholder and director of Pasta
Co. On September 14, 1995, the Company, Mr. Bombaywala, Pasta Co. and the
Company, entered into an Agreement and Plan of Merger (the "Merger
Agreement") which provided for the merger of Pasta Co. with and into the
Company as the surviving corporation (the "Merger"). The principal assets
of Pasta Co. consisted of its ownership of ten (10) restaurants in Houston,
Texas.
In consideration for the Shares, Mr. Bombaywala received 1,666,667warrants to purchase 10,000,000
pre-reverse stock split shares of the Company's Common Stock (the "Merger Shares") and two promissory
notes inat the
aggregate principal amountpre-reverse stock split exercise price of $3,750,000 (the "Notes"). The
Merger Shares were valued at $1.78$.14 per share, which was the
market valueprice of the Common Stockstock on April 2, 1998 when the dateBoard 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 Merger. The total consideration paidCompany in order for the Company to continue to
do business.
In approving the issuance of the warrants to Mr. Bombaywala, was $2,966,667; however, as provided below, a portionthe 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 Merger SharesGuarantees 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 subjectequal to future releasethe
exercise price of the warrants at the time of the request by Mr. Bombaywala,
(v) the short- and earn out. In addition,long-term value to the Company assumed approximately $3.6of the commitment of Mr.
Bombaywala to guarantee up to $5 million of liabilitiesfuture obligations of the Company
if requested by the
F-18
Company for additional financing or the renewal of existing leasehold or debt
obligations of the Company, (vi) the waiver and/or accrual and indebtednessnonpayment of
Pasta Co. outstanding as of January 26, 1996, including
amounts dueall prior compensation payable to Mr. Bombaywala as noted below.
Although not required by law, the Board of Directorsan executive officer of
the Company, elected(vii) the lock-up agreement with respect to submit the Mergershares
underlying the warrants, and (viii) the fact that the Company will pursue a
fairness opinion with respect to itsthe warrants and approval of the independent
shareholders of the Company with respect to the issuance of the warrants.
The warrants will have a four year term and the underlying shares will be
subject to a two year lock-up agreement which will expire if a total of $5
million in debt or equity financing is raised by the Company within the two
year period.
At this time the Board has decided to defer the issuance of the
warrants to Mr. Bombaywala for an indefinite period of time. If in the future
the Board decides that it is in the best interests of the Company to issue
the warrants to Mr. Bombaywala, the Board will seek shareholder approval at
its
Annual Meetingthe next annual meeting or at a special meeting.
On May 13, 1998 the Company entered into a Consulting Agreement with GTI
Partners, L.L.C. ("GTI") to seek sources of Shareholders which was held January 9, 1996. Mr.
Bombaywala, who then owned 4,620,000financing for the Company. In
consideration for the performance of these services, the Company agreed to
issue to GTI warrants to purchase up to 9,500,000 shares of pre-reverse stock
split shares of the Company's Common Stock or 41.6%, excludingat a pre-reverse stock split
exercise price of $.09 per share, which was the Merger Shares, did not vote on the Merger at the
Annual Meeting. The Merger was approved, and the effective dateaverage market price of the
Merger (the "Effective Date") was January 26, 1996. As of the Escrow
Closing Date, the Company was granted the right to manage Pasta Co. and
received a management fee of three percent (3%) of the gross revenues of
Pasta Co. through the Effective Date. Such fees amounted to approximately
$137,000.
The Merger Shares are restricted securities but have demand and incidental
registration rights. A total of 350,000 Merger Shares were subject to a
Development Escrow Agreement which provided for the earnout and release of
such shares based upon (i) the opening of five additional Pasta Co.
restaurants on or before December 31, 1996 at an average cost not to exceed
$400,000 per restaurant, or (ii) the share price for the Company's Common Stock exceeding $5.00 per share for any ten consecutive business days on or
before June 30, 1996 or $7.00 per share on or before June 30, 1997.during the period of negotiations with GTI. The
Company completed the opening of the five additional Pasta Co. Restaurants
before December 31, 1996 and, therefore, the Merger Shares have been
released to Mr. Bombaywala.
On the Effective Date, a promissory note of Pasta Co. to Mr. Bombaywala in
the principal amount of $1,260,000 was paid by the Company. Payment was
made as follows: $150,000 in cash, transfer of ownership of land and
building valued at $515,000 and a note to Mr. Bombaywala in the amount of
$595,000. Management is of the opinion that the value represented its fair
value at the time of transfer. Mr. Bombaywala received an additional note
from the Company in the amount of $224,202 for other obligations of Pasta
Co. arising prior to the Effective Date. These notes payable, totaling
$819,202, were offset against notes receivable from Mr. Bombaywala. (See
below.)
F - 19
51
11. RELATED PARTY TRANSACTIONS CONT'D:
At June 30, 1996, the Company had a noncurrent, 6% note receivable from
Ghulam Bombaywala ("Mr. Bombaywala"), the majority shareholder, officer and
a director of the Company in the amount of $2,175,310, payable in three
annual principal installments of $200,000 each beginning July 31, 1996, and
a final payment of the remaining principal and interest on July 31, 1999.
The note is collateralized by certain assets of the shareholder. Accrued
interest of $170,844 as of July 2, 1995 was due July 31, 1995. In
September of 1995, the Board of
Directors, votedin making its decision to modifyapprove the Consulting Agreement,
considered the following factors, among others, (i) the Company's immediate
and substantial need for working capital, (ii) the lack of other financing
alternatives available to the Company, (iii) the fact that approximately 90%
of the consideration payable to GTI is based on the closing of a $2,500,000
financing, (iv) the fact that the terms of the notefinancing may be accepted or
rejected by deferring paymentthe Company in its discretion, (v) the nonexclusive arrangement
with GTI, (vi) the fact that the exercise price of the interest due until December 31, 1995. In
May 1996,GTI warrants was
non-dilutive to the market price when initial negotiations were undertaken,
(vii) representations of GTI that the financing is not expected to be
materially dilutive to the market price of the Company's stock at the time
the financing is consummated, (viii) the fact that the shares issued to GTI
are subject to a two (2) year Lock-Up Agreement subject to early termination
if the Company receives $5,000,000 in GTI arranged financings within such two
(2) year period, and (ix) the financing track record of GTI and its
affiliates.
Warrants to purchase 1,000,000 pre-reverse stock split shares of the
Company's Common stock were issued upon the execution of the Consulting
Agreement. The remaining warrants for 8,500,000 pre-reverse stock split
shares will be issued to GTI upon the completion of at least $2,500,000 of
initial financing. The shares underlying the warrants are subject to a
lock-up agreement prohibiting resale thereof for a period of two years from
the date of the issuance of the respective warrants subject to the Company's
consent to any proposed public or private resales, or the expiration of the
lock-up agreement upon GTI arranging a total of $5,000,000 of financing on
terms acceptable to the Company. The warrant shares are subject to a voting
agreement and proxy in favor of Mr. Bombaywala, agreedthe Company's Chief Executive
Officer, which shall expire as to offset interest due250,000 post-reverse stock split shares
every ninety days from Mr. Bombaywala under the note against interest duedate of exercise of the warrants. The warrants may
be exercised in whole, but not in part, and are not transferable except to
Mr. Bombaywala under
notes associatedentities affiliated with GTI or with the purchase of Pasta Co. At June 30, 1996, $206,388
of interest payable to Mr. Bombaywala was offset against interest
receivable from Mr. Bombaywala. The remaining balance of interest
receivable at June 30, 1996 was $94,974. Such amount, along with amounts
accruing in the future will be offset against interest payable to Mr.
Bombaywala. During 1997, the Company earned interest of $123,877 on the
note receivable from Mr. Bombaywala and was charged interest of $123,757 on
various notes payable to him. The interest receivable and payable,
together with interest receivable at June 30, 1996 of $94,974 were offset
with a remaining receivable from Mr. Bombaywala of $95,093 outstanding at
June 29, 1997. Additionally, the Company incurred $392,337 in interest
expense on two notes aggregating $3,750,000. In connection with the
Conversion and Offset Agreement, Mr. Bombaywala forgave such interest
which has been recorded as a contribution to capital.Company's consent.
On May 15, 1997, Mr. Bombaywala and the Company entered into a Conversion and
Offset Agreement whereby the parties to the notes agreed to convert the
$3,750,000 of debt evidenced by certain
promissory notes issued to Mr. Bombaywala by the NotesCompany in connection with
the acquisition of Pasta Co. from Mr. Bombaywala in 1996 were converted to
7,500,000 Common Stock Rights (the "Rights"). Each of the Rights
shall automatically convertconverted to one share of the Company's Common Stock at a later
date, without further action or consideration by Mr. Bombaywala assumingwhen the
Company has a sufficient
numberamended its Articles of sharesIncorporation to increase its authorized
and freely issuable.shares. In exchange for the Rights, Mr. Bombaywala forgave the Notes. A value
of $.50 per share was determined by the Board of Directors in connection with
the conversion. The Company intendsCompany's shareholders approved the increase in the
Company's authorized shares on January 23, 1998, and the shares were issued
to proceed with an amendment to its Articles of
Incorporation to increase its authorized Common Stock to a sufficient level
to enable it to issue all of the shares. However, there can be no
assurance that such amendment will be adopted.Mr. Bombaywala.
The Company also agreed with Mr. Bombaywala to offset $819,202 in additionalrepresented
by certain Pasta Co. promissory notes payable to Mr. Bombaywala in
connection with the acquisition of Pasta Co. against notesa note receivable from
Mr. Bombaywala.
During 1997, the Company sold the stock of Pete's Hospitality Co., Inc.Bombaywala payable to its former president for a 10% note receivable of $300,000 payable over
approximately five years. The Company recorded a loss on disposal of
approximately $750,000 during 1997.
In April 1997, the Company agreed to sell equipment associated with three
new restaurants to Mr. Bombaywala and lease the assets back. The three
restaurants were opened in the second and fourth quarters of fiscal 1997.
The Company believes that the selling price of $750,000 and the lease rate
are comparable to those which could be attained from an unrelated third
party. There was no gain or loss to the Company on this transaction.
During fiscal 1997, 100,000 shares of common stock were returned to the
Company from a Director of the Company in exchange for cash of $1.50 per
share and the agreement of the Company to pay the balance owed to the
Director's law firm in monthly installments in the ordinary course of
business.Marco's.
In December 1994, Mr. Bombaywala purchased $500,000 principal amount of the
Company's subordinated notes and received 222,222 warrants to purchase a like
number of shares of common stock. Mr. Bombaywala is also obligated to
purchase the remaining $2.5$1.25 million of the Subordinated Notes if they have
not been paid in full at maturity. In June 1997, Mr. Bombaywala converted
this 12% subordinated debt to 11% subordinated debt, due June 2002.
F-19
Mr. Bombaywala has also guaranteed other obligations of the Company,
including notes payable and leases associated with Marco's and Pasta Co.
restaurants.Restaurants.
In August 1996, the Company sold for $350,000 previously mortgaged real
property located at the Victoria, Texas Marco's Restaurant location to the
Bombaywala Family Trust ("The Trust"). The Trust is administered by M.U.
Bombaywala, Trustee, for the purpose of his grandchildrens' education. The
real property and certain assets are now being leased by the Company from the
Trust. The Trust also owns the real property on which one of the Company's
Pasta Co. Restaurants is located, having purchased it from an unaffiliated
third party. The Trust leases this property to the Company. The Company
believes that both leases are at rates comparable to those which could be
attained from unrelated third parties.
In May of 1995, the Company began factoring accounts receivable through
Catalyst Financial Co., ("Catalyst") paying factoring fees of approximately
$19,000 in fiscal 1995 and $75,000 in fiscal 1996. The Company believes
that the fees paid were comparable to those that would be charged by a
competing factoring company. Mr. Bombaywala is a principal of Catalyst.
F - 20
52
11. RELATED PARTY TRANSACTIONS CONT'D:
In connection with the private offering of the Subordinated Notes, the
Company entered into an 18-month Financial Advisory Agreement (the
"Advisory Agreement") with Sanders Morris Mundy Inc. ("SMM"), the placement
agency in the offering. As placement agent, SMM received a 10% commission
on the sale of the Subordinated Notes, excluding the $500,000 of
Subordinated Notes purchased by Mr. Bombaywala.
Under the terms of the Advisory Agreement, the Company also agreed to pay
SMM a monthly fee of $10,000 in consideration for assistance in the
Company's acquisition efforts and capital raising endeavors. Furthermore,
pursuant to the Advisory Agreement, the Company also issued to SMM warrants
to purchase 150,000 shares of Common Stock at an exercise price of $2.50
per share (the "SMM Advisory Warrants"), which expire on December 31, 1999.
SMM subsequently transferred 45,000 of the SMM Advisory Warrants to Mr.
Chadwick, Senior Vice President and a Managing Director of SMM and a
director of the Company. In July 1997, in connection with an extension on
the payment terms of the Subordinated Notes, the exercise price of the
warrants was reduced to $.25 per share and the Advisory Agreement was
extended until December 31, 1997.
In September of 1995, the Company entered into an eight month financial
advisory agreement with Noesis Capital Corp. ("Noesis"), in order to obtain
assistance in identifying sources of financing, developing its acquisition
program and with shareholder relations. Under the terms of the agreement,
the Company paid $60,000 to Noesis during fiscal 1996. Nico B. Letschert
is President of Noesis and a director of the Company.
12. SUBSEQUENT EVENTS:
In the fourth quarter of fiscal 1997 (June 1997) the Company offered a
private placement of $4 Million of 11% Convertible Subordinated Notes due
June 30, 2002 (the "Convertible Subordinated Notes") pursuant to exemptions
from registration under the Securities Act of 1933, as amended (the "Act")
and the rules and regulations promulgated thereunder, including, without
limitation, Section 4(2) and Regulation D. The Convertible Subordinated Notes
are beingwere offered directly by the Company to qualified accredited investors. The
Company hasdid not retainedretain a broker or underwriter to assist with the offering although it may elect to do so in the future on terms to
be negotiated.offering.
Holders of the Convertible Subordinated Notes received warrants (the
"Convertible Subordinated Note Warrants") to purchase shares of Common Stock
at a purchase price of $1.50 per share until June 30, 2002. Interest on the
Convertible Subordinated Notes is payable quarterly beginning September 30,
1997. The Convertible Subordinated Notes are currently unsecured and may beare
subordinated to certain defined senior indebtedness. As of September 30,
1997, $700,000 principal amount of the Convertible Subordinated Notes hashad
been subscribed. The proceeds of the offering were used to repay a portion of
the $3 million principal amount of 12% Subordinated Notes originally due July
31, 1997. The balance of the Subordinated Notes washas been extended to July 10, 1998.December
31, 1999. Ghulam M. Bombaywala, Chairman of the Board, Chief Executive
Officer and a director of the Company, converted the $500,000 principal
amount of 12% Subordinated Notes owed to him into the 11% Convertible
Subordinated Notes, pursuant to a Subordinated Note Conversion Agreement
dated June 1, 1997 (the "Conversion Agreement"). Pursuant to the Conversion
Agreement, Mr. Bombaywala canceled the $500,000 principal amount of 12%
Subordinated Notes owed him by the Company and received an 11% Convertible
Subordinated Note of equal principal amount with the same terms and
conditions as the Convertible Subordinated Notes being offered by the Company
to prospective investors. Additionally, in September 1997, the Company
guaranteed a promissory note with United Central Bank for $850,000 due
September 2002. The proceeds of the note were used to repay a portion of the
$3 million principal amount of 12% Subordinated Notes originally due July 31,
1997.
The Company acquired 240,000 shares (the "CluckCorp Shares") of the
out-
standingoutstanding common stock, $0.1 par value of CluckCorp International, Inc., a
Texas corporation ("CluckCorp") on June 30, 1994 upon the conversion of, and
as partial payment for, a promissory note of CluckCorp owed to the Company in
the principal amount of $800,000 (the "CluckCorp Note") issued in June 1993
and in exchange for certain other advances owed to the Company. The CluckCorp
Note hashad a maturity date of June 30, 1998, and was payable, at the option of
CluckCorp, in whole or in part, in cash or with Common Stock of CluckCorp.
During 1994 CluckCorp repaid a portion of the CluckCorp Note in cash and the
remaining portion of the CluckCorp Note and certain advances were paid with
the CluckCorp Shares. The Company subsequently sold the CluckCorp Shares to
JEB Investment Corporation, a Texas corporation ("JEB") in exchange for a
$1,800,000 recourse promissory note executed by JEB as maker (the "JEB Note")
bearing interest at 9% per annum, payable annually, with a final maturity
date of June 30, 1996. The JEB Note was secured by the CluckCorp Shares
pursuant to a Pledge Agreement. JEB defaulted on the payments required under
the JEB Note. In May 1997, JEB and the Company executed an agreement whereby
JEB relinquished all right, title and interest in the CluckCorp Shares to the
Company pursuant to the Company's foreclosure rights in consideration for the
Company relinquishing all of its rights under the JEB Note. The Company is currently sellingsold
the CluckCorp Shares in public and private transactions.
F - 21transactions during fiscal 1998.
F-20
53
13.12. IMPAIRMENT OF ASSETS:
Property and Equipment.PROPERTY AND EQUIPMENT.
In the fourth quarter of fiscal 1997, the Company made a decision to sell the
remaining Billy Blues Restaurant. Accordingly, the assets were deemed to be
impaired and written down to their estimated fair value. An impairment
expense of $1.1 million was recognized during 1997. Additionally, the Company
sold one Marco's Restaurant in the fourth quarter of fiscal 1997 for a loss
of approximately $75,000. In 1997, an impairment expense was recorded to
reflect the loss on sale.
Intangible Assets.INTANGIBLE ASSETS.
In the fourth quarter of fiscal 1997, the Company deemed the intangible
assets associated with Chris' & Pitt's Barbeque Sauce to be impaired.
Management estimated the fair value and, accordingly, an impairment expense
of approximately $3.45 million was recorded during fiscal 1997 and is
included in depreciation and amortization expense. 14.In the fourth quarter of
fiscal 1998, the Company deemed the intangible asset associated with Pasta
Co. to be impaired. Management estimated the fair value and, accordingly, an
impairment expense of $2.6 million was recorded in fiscal 1998 and is
included in depreciation and amortization expense. Management will continue
to evaluate the fair value of the intangible asset of Pasta Co. quarterly
based on its cash flow.
13. EMPLOYEE BENEFIT PLANS:
An incentive savings plan has been established which is a qualified profit
sharing plan under Section 401(k) of the Internal Revenue Code. Contributions
to the incentive savings plan are determined by the board of directors.
Employees may also make contributions to the incentive savings plan based
upon a percentage of qualified compensation in accordance with the Internal
Revenue Service rules and regulations. No contributions were made to this
plan by the Company during 1998, 1997 or 1996.
F-21
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT (1)
------- --------------------------
2.1 Stock Exchange Agreement dated July 1, 1994 between Ghulam M.
Bombaywala ("GMB"), Marco's Mexican Restaurants, Inc., a Texas
Corporation ("Marco's") and Watermarc Food Management Co., a Texas
corporation, f/k/a Billy Blues Food Corporation (the "Company")
(2)(3)
2.2 Agreement and Plan of Merger dated September 14, 1995 by and among
the Company, GMB, Pasta Acquisition Co., a Texas corporation
("PAC") and The Original Pasta Co., a Texas Corporation ("TOPC")
(4)
2.3 Sale and Option Agreement between the Company, GMB and TOPC dated
June 23, 1995 (4)
2.4 Stock Purchase Agreement dated June 29, 1997 between the Company
and Angelo Pitillo (9)
3.1 Amended, Restated and Corrected Articles of Incorporation of the
Company (4)
3.2 Amended and Restated Bylaws of the Company (4)
3.3 Amendment to Restated Articles of Incorporation of the Company
filed February 12, 1998 regarding an increase in authorized shares
of Common Stock
4.1 Specimen of Common Stock Certificate (5)
4.2 Form of Warrant Agreement covering Series A Warrants (5)
4.3 Specimen of Series A Warrant (5)
4.5 Statement of Resolution Establishing Series of Preferred Stock (9%
Cumulative Convertible Preferred Stock) as filed with the Secretary
of the State of Texas on January 13, 1993 (included as part of
Exhibit Number 3.1 above) (4)
4.6 Specimen of 9% Cumulative Convertible Preferred Stock Certificate
(6)
4.7 Form of 5-Year 9% Convertible Subordinated Debenture Due March 16,
1999 (6)
4.8 Form of Notification of the Voluntary Conversion Rate of 5-year 9%
Convertible Subordinated Debentures (4)
4.9 Forms of 12% Subordinated Note due December 19, 1994 and Warrant to
purchase Common Stock at $2.25 per share expiring December 31, 1999
(4)
4.10 Amendment 1 to Warrant Agreement covering Series A Warrants (8)
4.11 Amendment 2 to Warrant Agreement covering Series A Warrants (8)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT (1)
------- --------------------------
4.12 Notice of Extension of Warrant Expiration Date to May 15, 1997 (8)
4.13 First Amendment to Purchase Agreement dated effective as of March
31, 1996, or 1995.
F - 22among the Company and the Purchasers relating to
$3,000,000 12% Subordinated Notes due March 31, 1996 (8)
4.14 Security Agreement dated as of May 20, 1996 by the Company in favor
of the Purchasers relating to $3,000,000 12% Subordinated Notes (8)
4.15 First Amendment to Financial Advisory Agreement dated March 31,
1996 between the Company and Sanders Morris Mundy, Inc. ("SMM") (8)
4.16 Form of Amendment to 12% Subordinated Notes of the Company due
March 31, 1996 extending maturity date to July 31, 1997 (8)
4.17 Amendment No. 3 to Warrant Agreement covering Series A Warrants (9)
4.18 Notice of Extension of Warrant Expiration Date to May 15, 1998 (9)
4.19 Second Amendment to Purchase Agreement dated effective as of July
31, 1997, among the Company and the Purchasers relating to
$3,000,000 12% Subordinated Notes due July 31, 1997 (9)
4.20 Second Amendment to Financial Advisory Agreement dated July 31,
1997 between the Company and SMM (9)
4.21 Conversion and Offset Agreement dated May 15, 1997 between The
Original Pasta Co., Marco's Mexican Restaurants, Inc., the Company
and GMB(9)
4.22 Subordinated Note Conversion Agreement dated June 1, 1997 between
the Company and GMB (9)
4.23 Specimen of Purchase Agreement for 11% Convertible Subordinated
Notes due June 30, 2002 (9)
4.24 Form of 11% Convertible Subordinated Promissory Note due June 30,
2002 (9)
4.25 Form of Warrant to Purchase Common Stock of the Company expiring on
June 30, 2002 issued to purchasers of 11% Subordinated Notes (9)
4.26 Form of Third Amendment to Purchase Agreement dated July 10, 1998
among the Company and the Purchasers relating to $3,000,000 12%
Subordinated Notes
4.27 Form of Third Amendment to Financial Advisory Agreement dated July
10, 1998 between the Company and SMM
54
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
2.1 Stock Purchase Agreement dated June 29, 1997 between Watermarc Food
Management Co. (the "Company") and Angelo Pitillo
4.1 Amendment No. 3 to Warrant Agreement covering Series A Warrants
4.2 Notice of Extension of Warrant Expiration Date to May 15, 1998
4.3 Second Amendment to Purchase Agreement dated effective as of July 31,
1997, among the Company and the Purchasers relating to $3,000,000 12%
Subordinated Notes due July 31, 1997
4.4 Second Amendment to Financial Advisory Agreement dated July 31, 1997
between the Company and Sanders Morris Mundy, Inc.
4.5 Conversion and Offset Agreement dated May 15, 1997 between The
Original Pasta Co., Marco's Mexican Restaurants, Inc., the Company
and Ghulam M. Bombaywala
4.6 Subordinated Note Conversion Agreement dated June 1, 1997 between the
Company and Ghulam M. Bombaywala
4.7 Specimen of Purchase Agreement for 11% Convertible Subordinated Notes
due June 30, 2002
4.8 Form of 11% Convertible Subordinated Promissory Note due June 30, 2002
4.9 Form of Warrant to Purchase Common Stock of the Company expiring on
June 30, 2002 issued to purchasers of 11% Subordinated NotesEXHIBIT
NUMBER DESCRIPTION OF EXHIBIT (1)
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10.1 Form of Management Agreement between the Company and TOPC dated
effective September 14, 1995 (4)
10.2 Form of Escrow Closing Agreement dated effective September 14, 1995
by and among GMB, PAC, TOPC, the Company and the Escrow Agent (4)
10.3 Form of Bank Escrow Agreement by and among the Company, GMB and the
Bank Escrow Agent dated effective September 14, 1995 (4)
10.4 Form of Development Escrow Agreement by and among TOPC, PAC, the
Company, GMB and the Escrow Agent dated effective September 14,
1995 (4)
10.11 Form of $1,260,000 Promissory Note from TOPC to GMB dated effective
September 14, 1995 (4)
10.12 Placement Agent Agreement dated December 12, 1994 by and between
the Company and SMM as Placement Agent, with first amendment
thereto (4)
10.13 Form of Purchase Agreement dated December 19, 1994 between the
Company and SMM relating to $3,000,000 12% Subordinated Notes due
March 31, 1996 (4)
10.14 Form of 12% Subordinated Note dated December 19, 1994 of the
Company due March 31, 1996 (4)
10.15 Form of Warrant dated December 19, 1994, to purchase shares of
common stock of the Company at $2.25 per share, expiring December
31, 1999, issued to purchasers of 12% Subordinated Notes (4)
10.16 Put Option Agreement dated December 19, 1994 by and among GMB and
the purchasers of the Company's 12% Subordinated Notes (4)
10.17 Financial Advisory Agreement dated December 19, 1994 between the
Company and SMM (4)
10.18 Warrant Certificate dated December 19, 1994 from the Company to SMM
to purchase 105,000 shares of Common Stock at $2.50 per share
expiring December 31, 1999 (4)
10.19 Warrant Certificate dated December 19, 1994 from the Company to
Michael S. Chadwick to purchase 45,000 shares of Common Stock at
$2.50 per share expiring December 31, 1999 (4)
10.21 Form of Promissory Note, dated May 31, 1995, executed by the
Company in favor of Fantasia Stiftung (7)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT (1)
------- --------------------------
10.22 Security Agreement, dated May 31, 1995, between Fantasia Stiftung
and the Company (7)
10.23 Guaranty Agreement, dated May 31, 1995 between Fantasia Stiftung
and GMB (7)
10.28 Employment Agreement dated July 1, 1994 between the Company and GMB
(4)
10.29 Pledge and Security Agreement from GMB in favor of the Company
dated July 31, 1994 (4)
10.30 $2,175,310.40 Promissory Note of GMB to the Company dated July 31,
1994 (4)
10.31 1994 Stock Compensation Plan of the Company (8)
10.32 First Amendment to the 1994 Stock Compensation Plan of the Company
(8)
10.33 Second Amendment to the 1994 Stock Compensation Plan of the Company
(8)
10.34 License Agreement dated February 21, 1996 between the Company and
Bevo's Enterprises licensing the Company to use the name Longhorn
Cafe in the operation of the business (8)
10.35 $2,750,000 promissory note from PAC to GMB dated effective
September 14, 1995 (8)
10.36 $1,000,000 promissory note from PAC to GMB dated effective
September 14, 1995 (8)
10.37 $595,000 promissory note from PAC to GMB dated effective January
26, 1996 (8)
10.38 $224,202 promissory note from PAC to GMB dated effective January
26, 1996 (8)
10.39 $1,200,000 promissory note from the Company to MetroBank, N.A.
dated March 15, 1996 (8)
10.40 Security Agreement between PAC, TOPC and GMB dated September 14,
1995 (8)
10.41 Security Agreement Pledge between the Company and GMB dated
September 14, 1995 (8)
10.42 Guaranty Agreement Pledge between the Company and GMB dated
September 14, 1995 (8)
10.43 Service Mark License Agreement between PAC and GMB dated September
14, 1995 (8)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT (1)
------- --------------------------
10.44 License Agreement dated June 29, 1997 between Marco's Mexican
Restaurants, Inc. and Mohammed S. and Rubina S. Akhtar licensing the
use of the name Marco's in the operation of a restaurant
10.2 $300,000 promissory note from the Company to MetroBank dated April 11,
1997
10.3 $300,000 promissory note from the Company to United Central Bank
dated April 7, 1997
10.4 $250,000 promissory note from the Company to Langham Creek National
Bank dated February 14, 1997
11.1 Statement regarding computation of per share earnings
21.1 Subsidiaries of the Registrant
27.0 Financial Data Schedule
99.1 Form 8-K dated August 20, 1997
99.2 Form 8-K Amendment No. 1 dated August 20, 1997
between Marco's Mexican
Restaurants, Inc. and Mohammed S. and Rubina S. Akhtar licensing
the use of the name Marco's in the operation of a restaurant (9)
10.45 $300,000 promissory note from the Company to MetroBank dated April
11, 1997 (9)
10.46 $300,000 promissory note from the Company to United Central Bank
dated April 7, 1997 (9)
10.47 $250,000 promissory note from the Company to Langham Creek National
Bank dated February 14, 1997 (9)
10.48 Agreement dated May 20, 1998 between the Company and GMB relating
to the issuance of 10,000,000 warrants to GMB
10.49 Professional Services Agreement dated April 2, 1998 between the
Company and Darrin Straughan for operational consulting services
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
99.3 Form 8-K dated May 13, 1998
99.4 Letter dated September 30, 1998 from E. Ted Davis & Associates,
Inc. regarding the issuance of warrants to GMB
______________
FOOTNOTES
(1) Unless otherwise footnoted, the Exhibits described below are filed
herewith.
(2) Certain terms initially defined in this Exhibit List are used consistently
throughout the Exhibit List.
(3) Filed as an Exhibit to the Company's Form 8-KSB/A dated September 14, 1994
and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Form 10-K dated July 2, 1995 and
incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
as amended (SEC File No. 33-45906) effective May 15, 1992, and
incorporated herein by reference.
(6) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-3, as amended (SEC File No. 33-773344) effective May 10, 1994, and
incorporated herein by this reference.
(7) Previously filed as an Exhibit to the Company's Registration Statement as
Form S-3, as amended (SEC File No. 33-93450), effective July 28, 1995 and
incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Form 10-K dated June 30, 1996 and
incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Form 10-K dated June 29, 1997 and
incorporated herein by reference.