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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 30, 1996
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)
10777 WESTHEIMER, SUITE 1030 77042
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
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)
-----------------------------------
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 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._____
The issuer's revenues for its fiscal year ended on June 30, 1996 were
$40,129,443.
As of September 20, 1996, the aggregate market value of the Common Stock
held by non-affiliates of the issuer was $9,235,640 based on the closing bid
price of $.69 per share of Common Stock as quoted in the NASDAQ SmallCap
Market. The aggregate market value of the 9% Cumulative Convertible Preferred
Stock (the "Preferred Stock") held by non-affiliates of the issuer, as of
September 20, 1996, was $411,925 based on the closing bid price of $1.25 per
share of Preferred Stock as quoted in the NASDAQ SmallCap Market. As of
September 20, 1996, 13,433,658 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
Watermarc Food Management Co., a Texas corporation, (the "Company"),
currently owns and operates, 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"), Billy Blues Barbecue Bar & Grill (the "Billy Blues Restaurant"),
Longhorn Cafe, Pete's BBQ Rib and Steakhouse (the "Pete's Restaurants") and
H. D. Hotspurs ("Hotspurs"). See "Restaurant Descriptions" and "Current
Operating Activities."
Marco's Restaurants are table 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. Each Marco's Restaurant
offers full bar service. As of June 30, 1996, the Company had a total of 23
Marco's Restaurants in operation in Southeast Texas, including the Houston
metropolitan area, College Station, Texas City, Victoria, and Lake Jackson,
Texas.
The Company acquired ten Pasta Co. Restaurants in January of 1996. 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. Decor items, ingredients and produce
displayed on shelves and cases throughout the restaurants give the impression
of an open-air Italian marketplace. As of June 30, 1996, the Company had a
total of 13 Pasta Co. Restaurants in operation, all of which were located in
the Houston Metropolitan area.
Billy Blues Restaurant, Longhorn Cafe, Pete's Restaurants and Hotspurs
(collectively, the "Barbecue Restaurants") generate an exciting and vibrant
"Texas Roadhouse" ambiance enhanced by Texas artifacts, recorded and live
music, 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. As of June 30,
1996, a total of five Barbecue Restaurants were in operation in Texas and
Washington, of which one was operated as Billy Blues Restaurant, one as
Longhorn Cafe, two as Pete's Restaurants, and one as Hotspurs.
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 and is available in
supermarkets and other retail outlets. The Company's Chris' & Pitt's Bar-B-Q
Sauce is a medium priced barbecue sauce product line which was acquired in
March 1994. 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 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.
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's primary growth 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 is evidenced by the Company's acquisition in June 1993 of three
Longhorn Cafes in Houston, Texas and the acquisition in August 1993 of two
Pete's Restaurants and Hotspurs, each being located in the Seattle, Washington
metropolitan area. In July of 1994, the Company acquired Marco's Mexican
Restaurants, Inc. ("Marco's") which owned and operated the Marco's Restaurants
and in January of 1996, the Company acquired The Original Pasta Co. ("Pasta
Co.") which owned and operated the Pasta Co. Restaurants. See "Current
Operating Activities."
The Company was organized as Billy Blues Food Corporation, a Texas
corporation, on June 17, 1991 as the successor to 410 Arsenal Holdings, Inc.
("Arsenal Holdings"), an affiliated company, to develop, own and operate
restaurants and to produce and market a uniquely flavored barbecue sauce
developed by Arsenal Holdings. In March
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of 1995, the name was changed to Watermarc Food Management Co. Unless the
context requires otherwise, references to the "Company" refer to Watermarc Food
Management Co., its predecessors and subsidiaries.
CURRENT OPERATING ACTIVITIES
For the fiscal years ended July 2, 1995 and June 30, 1996, the Company
recorded revenues of $37,651,657 and $40,129,443, respectively, and had a net
loss of $7,036,741 and net income of $48,696, respectively. As of June 30,
1996, the Company had total current assets of $1,934,667 and total current
liabilities of $6,419,570, resulting in a working capital deficit of
$4,484,903. Currently, the Company does not have a bank line of credit. The
Company has funded its operating losses and expansion costs primarily through a
combination of public and private offerings of debt and equity. During fiscal
1995, the Company reorganized its executive management and Board of Directors
to strengthen operational capabilities and has continued to reduce general and
administrative expenses.
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 expansion plans is dependent upon: (i) continuing to improve
restaurant operations through implementation of stringent cost controls and
marketing efforts intended to increase revenues; (ii) improving barbecue sauce
operations through price increases, product cost reductions, increased market
penetration, and implementation of cost controls on selling, marketing and
distribution expenses; (iii) obtaining additional equity capital or debt
financing; (iv) refinancing short-term debt obligations; and (v) its ability to
acquire compatible restaurant businesses. 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 continue to achieve
profitable operations or to fund its expansion efforts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
During fiscal 1995, the Company experienced significant operating losses
associated with certain of its Billy Blues Restaurants, resulting in a
re-evaluation of the feasibility of continuing to operate such restaurants. As
a result, the Company took the actions listed below:
o In May 1995, the Company closed a Billy Blues Restaurant located in Denver,
Colorado as it represented a non- performing asset of the Company. The
Company recorded loss provisions of approximately $1.3 million in the
fourth quarter of fiscal 1995 to reduce the assets to net realizable value
and accrue for estimated liabilities. During fiscal 1996, the Company
disposed of such assets and satisfied its lease and other obligations.
o In July 1995, the Company sold fixed assets associated with and sub-leased
a Billy Blues Restaurant facility located in San Antonio, Texas to
individuals unaffiliated with the Company. The Company recorded a loss of
approximately $320,000 on this transaction in the fourth quarter of fiscal
1995.
o In June 1995, the Company decided to close a Billy Blues Restaurant located
in Dallas, Texas and recorded loss provisions of approximately $670,000 in
the fourth quarter of fiscal 1995 to reduce the assets to net realizable
value and accrue for estimated liabilities. During fiscal 1996, the
Company disposed of such assets and satisfied its lease and other
obligations.
o The Company has agreed to sell its interest in its Billy Blues Restaurant
located in Heidelberg, Germany. A loss reserve of approximately $140,000
was recorded in the fourth quarter of fiscal 1995 to reduce the Company's
investment to net realizable value.
In fiscal 1996, the Company sold fixed assets associated with and assigned
its lease of one of its Longhorn Cafe Restaurants located in Houston, Texas to
individuals unaffiliated with the Company. The Company recorded a gain of
approximately $150,000 on this transaction.
The Company does not anticipate closing or selling any of its other
existing restaurants due to associated operating or cash flow losses.
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On June 23, 1995, the Company entered into a Sale and Option Agreement with
The Original Pasta Co. ("Pasta Co.") pursuant to which the Company was granted
an option to purchase Pasta Co. which was solely owned by Ghulam M.
Bombaywala, the Chairman of the Board, Chief Executive Officer and a director
of the Company. In September 1995, the Company entered into a formal agreement
with Mr. Bombaywala for the purchase of Pasta Co. The agreement was subject to
majority approval by the Company's stockholders other than Mr. Bombaywala.
Such approval was obtained at the Company's Annual Meeting of Shareholders held
in January of 1996. The purchase was consummated on January 26, 1996. See
Note 2 of Notes to Consolidated Financial Statements and "Item 13. Certain
Relationships and Related Transactions."
The Company intends to continue to expand its business, in part, through
the acquisition of compatible restaurant businesses. The ability of the
Company to consummate acquisitions will depend upon, among other things,
obtaining sufficient financing on acceptable terms, of which there can be no
assurance.
[THIS SPACE IS INTENTIONALLY LEFT BLANK]
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RECENT FINANCINGS
In March 1996, the Company borrowed $1.2 million from a bank. The loan is
evidenced by a 9.75% promissory note with a five year amortization and is
collateralized by fixed assets associated with certain Pasta Co. Restaurants.
The proceeds were used to pay off an existing note in the amount of $861,420,
with the balance being used to fund the opening of new Pasta Co. Restaurants.
In June 1995, the Company borrowed $1 million from an unaffiliated foreign
corporation. The loan is evidenced by a 10% promissory note, which matures on
May 31, 1999. The note is secured by the restaurant equipment located in three
Marco's Restaurants, and is personally guaranteed by Mr. Bombaywala. The
Company also issued to the recipient of the note, warrants to purchase 75,000
shares of Common Stock at an exercise price of $3.00 per share, which expire on
May 31, 1997.
In June 1995, the Company received proceeds of approximately $1,476,000
from the sale of 621,500 shares of its Common Stock pursuant to a Regulation S
offering as promulgated under the Securities Act (the "1995 Reg. S Offering").
On March 30, 1994, the Company completed a private offering of
approximately $2.7 million of 5-Year 9% Convertible Subordinated Debentures
(the "Debentures") to qualified purchasers (the "Debentureholders"). After
payment of commissions and other expenses of the offering, the Company realized
net proceeds of approximately $2.2 million. The Company utilized approximately
$2 million of the proceeds to fund a portion of the purchase price for the
Chris' & Pitt's Bar-B-Q Sauce product line. On May 31, 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 (the "Modified Conversion Rate") of $2.3125 of
Debenture principal and accrued interest for one share of Common Stock.
Debentureholders owed an aggregate of $2,529,665 of Debenture principal and
accrued interest agreed to the conversion of their Debentures at the Modified
Conversion Rate and were issued an aggregate of 1,093,904 shares of Common
Stock. There is currently outstanding $217,000 of Debenture principal held by
Debentureholders who elected not to convert their Debentures at the Modified
Conversion Rate. The outstanding Debentures may be converted voluntarily at
any time until maturity at a conversion rate of $5.00 of Debenture principal
and accrued interest for one share of Common Stock. The Company, pursuant to a
registration statement (the "July 1995 Registration Statement") declared
effective by the Securities and Exchange Commission ("SEC") on July 28, 1995,
has registered the 1,093,904 shares of Common Stock issued to Debentureholders
who converted their Debentures at the Modified Conversion Rate and 43,400
shares of Common Stock which will be issued to Debentureholders who in the
future elect to convert their Debentures into shares of Common Stock at the
original $5.00 conversion rate.
In connection with the Company's offering of the Debentures, the Company
paid approximately $260,000 in commissions and issued warrants (the "Placement
Agent Debenture Warrants") to Gene Morgan Financial ("GMF") and to Noble, as
placement agents for the offering, to acquire $164,100 and $105,000 of
Debenture principal, respectively. The Placement Agent Debenture Warrants
expire April 6, 1999. The warrants issued to Noble have been assigned to Nico
B. Letschert, a director of the Company. The Debentures issuable upon exercise
of the Placement Agent Debenture Warrants are convertible into shares of Common
Stock at a conversion rate of $5.00 of Debenture principal and accrued interest
for one share of Common Stock. Included in the July 1995 Registration
Statement were 53,280 shares of Common Stock issuable upon exercise of the
Placement Agent Debenture Warrants. The July 1995 Registration Statement also
includes 408,202 shares of Common Stock issued in satisfaction of certain
payment obligations of the Company, including obligations to trade vendors, and
875,500 shares of Common Stock issuable upon exercise of the Company's Series A
Warrants. See "Item 5 - Market for Common Equity."
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In December 1994, the Company completed a private offering of $3 million of
12% Subordinated Notes due March 31, 1996 (the "Subordinated Notes"). Holders
of the Subordinated Notes received warrants (the "Subordinated Note Warrants")
to purchase an aggregate of 1,333,320 shares of Common Stock at a purchase
price of $2.25 per share until December 31, 1999. Interest on the Subordinated
Notes is payable quarterly. The Subordinated Notes are unsecured and may be
subordinated to certain defined senior indebtedness. A portion of the proceeds
were used to satisfy all remaining obligations owed in connection with the
acquisition of the Chris' & Pitt's Bar-B-Q Sauce product line with the balance
being used for working capital. In March 1996, the maturity date was extended
to July 31, 1997, the warrant exercise price was reduced to $1.00 per share and
100% of the outstanding stock of Marco's Mexican Restaurants, Inc. was pledged
as collateral.
Ghulam M. Bombaywala, Chairman of the Board, Chief Executive Officer and a
director of the Company, purchased $500,000 principal amount of the
Subordinated Notes and received 222,220 Subordinated Note Warrants. Mr.
Bombaywala has agreed to purchase the remaining Subordinated Notes if they are
not paid at maturity. The Company has not independently reviewed the financial
position or income of Mr. Bombaywala or his ability to perform under such
commitment. If the Company fails to repay the Subordinated Notes, there can be
no assurance that Mr. Bombaywala will be able to fully perform under such
commitment.
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 agent 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 paid
SMM a monthly fee of $10,000 in consideration for assistance in the Company's
acquisition efforts and capital raising endeavors. Also, pursuant to the
Advisory Agreement, the Company 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 Michael S. Chadwick, Senior
Vice President of SMM and a director of the Company. In connection with the
extension of the maturity date of the Subordinated Notes, the warrant exercise
price was reduced to $1.00 per share and the Advisory Agreement was extended
for an additional 18 months at a fee of $5,000 per month.
In September 1994, the Company received proceeds of approximately $1
million from the sale of 375,438 shares of its Common Stock pursuant to a
Regulation S offering under the Act (the "1994 Regulation S Offering"). The
proceeds from the 1994 Regulation S Offering were used by the Company to meet
its note obligations and for working capital purposes.
GROWTH STRATEGY
The Company's growth strategy includes the following:
o The opening of additional company-operated Marco's Restaurants and
Pasta Co. Restaurants.
o The franchising of Marco's Restaurants and Pasta Co. Restaurants.
o The remodeling of certain Marco's Restaurants.
o Increasing food products sales.
o Acquiring additional restaurant chains.
MARCO'S RESTAURANTS. During fiscal 1996, the Company opened one new
Marco's Restaurant. In the upcoming fiscal year, the Company plans to open one
new unit in Southeast Texas and plans to remodel at least eight existing
restaurants.
In the most recently opened units, a new prototype was introduced. New
units are brighter, more upbeat, more entertaining and are expected to position
Marco's Restaurants to be more competitive. The remodeling program will
retrofit the restaurants to the new prototype. The Company also plans to
continue to improve customer service.
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PASTA CO. RESTAURANTS. Since the acquisition of Pasta Co. in January 1996,
three new Pasta Co. Restaurants were opened in the Houston, Texas area. The
Company intends to continue the expansion of the chain over the next year by
opening at least four additional units in Southeast Texas.
BARBECUE RESTAURANTS. The Company does not plan to change nor expand its
Barbecue Restaurant concepts. The focus for these restaurants will be to
increase sales and improve operating efficiencies.
FRANCHISING PROGRAM. The Company intends to establish an aggressive
franchise program for Marco's Restaurants and Pasta Co. Restaurants during
fiscal 1997. Management believes that franchising will provide significant
growth for the Company in upcoming years.
FOOD PRODUCTS. The Company currently markets two brands of barbecue sauce
products and a spice rub. The Company's strategy to increase food product
sales includes reinforcing existing markets, 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. The Company continues to investigate possible
acquisition candidates in the restaurant industry, but does not currently have
any arrangements, undertakings or commitments with respect to any acquisition.
RESTAURANT DESCRIPTIONS
MARCO'S RESTAURANTS. Marco's Restaurants are distinctive and colorful
Mexican restaurants that feature full service and mid-priced Tex-Mex food. 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 200 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. The restaurants have varying floor plans and
configurations.
Marco's Restaurants specialize in a wide variety of Tex-Mex cuisine,
serving fresh, high quality products at reasonable prices. Entrees include
Black Angus beef fajitas, combination plates and Mexican platters. Entrees
range in price from $4.79 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.
PASTA CO. RESTAURANTS. The Pasta Co. Restaurants are distinctive, colorful
Italian-style family oriented restaurants that feature full-service and offer
moderately priced food and beverages. Typical units are approximately 3,600 -
4,000 square feet each, and all but one have an outside patio of approximately
400 additional square feet. The units have seating capacities of 160 to 200
persons.
Eleven of the restaurants are situated in neighborhood retail shopping
centers in corner or end-cap locations. The other two are on pad sites in
front of retail shopping centers, sharing a free-standing building with another
retail business. 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. It is
anticipated that expansion of the concept will be in the same type of
facilities. The restaurants are open for lunch and dinner seven days a week.
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 $7.95 or less. The price range for entrees and
pizzas is $5.95 to $7.95. 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.
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BILLY BLUES RESTAURANT. The Billy Blues Restaurant provides its patrons
with high quality, moderately priced dining and entertainment in a casual
atmosphere. The restaurant consists of approximately 8,000 square feet for
dining and bar/entertainment facilities, and has a 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 lunch and dinner with full bar service,
featuring a moderately priced, limited menu of high quality smoked barbecue and
other entrees. Entrees range in price from $5.95 to $13.95. In the Blues
Room, full liquor 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.
PETE'S RESTAURANTS AND HOTSPURS. Pete's Restaurants and Hotspurs
specialize in barbecue beef, chicken, pork and seafood entrees served in an
informal, lively, family atmosphere. Hotspurs is a full service restaurant
with a substantial lounge area. The lounge is utilized for live entertainment
and dancing.
Entrees at the restaurants range in price for $4.25 to $21.95 and are
served with a variety of salads, vegetables and desserts. Full liquor service
is available.
LONGHORN CAFE. The Longhorn Cafe features a casual dining atmosphere with
a Texas Roadhouse decor and interior design. The decor includes wooden booths
and tables with an open layout permitting customers to view the bar and Texas
memorabilia.
The restaurant serves lunch and dinner and features a selection of
moderately priced, high quality steaks, chicken, burgers and sandwiches, with
full liquor services. The specialty is chicken fried steak served with cream
gravy and french fries. The Longhorn Cafe has a varied menu featuring Black
Angus steaks, fresh grilled red fish and homemade stuffed jalapenos and also
offers several specialty appetizers and homemade desserts. Entrees range in
price from $5.95 to $14.95.
RESTAURANT LOCATIONS AND SITE SELECTION
The following table provides information with respect to the restaurants
which were owned and operated by the Company as of June 30, 1996:
<TABLE>
<CAPTION>
MONTH AND APPROXIMATE
--------- -----------
BILLY BLUES RESTAURANT YEAR OPENED SQUARE FOOTAGE
- - ---------------------- ----------- --------------
<S> <C> <C>
Houston, Texas February 1993 8,000
LONGHORN CAFE
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Houston, Texas March 1987 2,500
PETE'S RESTAURANTS
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Tacoma, Washington November 1972 5,900
Tacoma, Washington November 1984 7,500
HOTSPURS
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Kent, Washington May 1979 11,000
MARCO'S RESTAURANTS
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Houston, Texas Metropolitan Area
Kuykendahl at Louetta March 1984 6,400
Hwy. 6 N. At FM 259 December 1984 4,850
Mason Road at I-10 September 1985 5,200
Sawdust Road at I-45 April 1986 5,040
W. Nasa Road September 1986 6,900
Westheimer at Hwy. 6 March 1987 5,040
</TABLE>
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<TABLE>
<S> <C> <C>
Meyer Park October 1987 6,250
I-10 at Uvalde November 1987 5,200
Willowbrook at FM 1960 December 1987 5,040
First Colony at Hwy. 6 June 1988 5,100
Greenspoint September 1984 5,000
Woodlake Square December 1989 6,300
Almeda Mall January 1990 5,000
Astrodome April 1990 4,820
Kingwood September 1993 4,120
Northwest May 1994 4,000
FM 1960 at I-45 February 1995 4,000
Victoria, Texas February 1989 4,000
Galveston, Texas March 1990 3,850
College Station, Texas February 1992 3,900
Pasadena, Texas December 1992 3,942
Texas City, Texas April 1995 4,180
Lake Jackson, Texas December 1995 4,000
PASTA CO. RESTAURANTS
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Houston, Texas Metropolitan Area
Meyer Park September 1993 3,600
Sugar Land December 1993 4,000
Kingwood February 1994 3,600
Nasa Rd. April 1994 3,600
Westheimer @ Dairy Ashford September 1994 3,600
The Woodlands November 1994 4,200
FM 1960 @ I-45 December 1994 3,600
43rd St. @ Hwy. 290 December 1994 3,600
Nottingham Shopping Ctr. July 1995 3,600
Woodway @ Augusta August 1995 3,600
FM 1960 @ Veterans Memorial March 1996 3,600
Hwy. 249 @ Cypresswood May 1996 3,600
Katy May 1996 4,200
</TABLE>
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. The Company's ability to open new restaurants is
contingent upon locating satisfactory sites, purchasing land or buildings or
negotiating leases on acceptable terms, securing appropriate governmental
permits and approvals, obtaining liquor licenses, recruiting and training
additional qualified management personnel and securing adequate financing.
Once space has been leased and made available to the Company, approximately 90
to 180 days are required to complete construction, obtain necessary licenses
and approvals and open a new restaurant.
UNIT ECONOMICS
The Company's average initial cash investment (including leasehold
improvements, furniture and fixtures, equipment, food and beverage inventory,
and other pre-opening expenses) for its Barbecue Restaurants (all of which are
leased) ranged from approximately $750,000 to $1,500,000. The Company has no
plans to add additional Barbecue Restaurants.
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The average initial cash investment (including leasehold improvements,
furniture and fixtures, equipment, food and beverage inventory, and other
pre-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 $25,000 for each future restaurant.
RESTAURANT MANAGEMENT AND OPERATIONS
MANAGEMENT AND EMPLOYEES. The management staff of a typical Barbecue
Restaurant and Marco's Restaurant consists of a general manager, one or two
assistant managers and a kitchen manager. Each Barbecue Restaurant employs
approximately 50 to 70 hourly employees. Each Marco's Restaurant employs 20 to
30 hourly employees. Each Pasta Co. Restaurant employs approximately 40 - 50
persons, of which one is a general manager, two are assistant managers, with
the rest being 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.
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 requirements within the localities in which the Company currently
operates or in which it expects to open additional restaurants.
SUPERVISION AND TRAINING. The Company requires its restaurant general
managers to have significant experience in the food service industry.
Currently, 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 new restaurant. The training
period for new employees lasts approximately five days and is characterized by
on the job supervision by an experienced employee. Ongoing employee training
will remain the responsibility of the restaurant general manager. Written
tests and physical observation are used to evaluate each employee's
performance.
ADVERTISING AND PROMOTION. The Company pursues advertising and promotional
opportunities within each of its restaurant's geographic locales, relying
principally on newspaper, radio and the direct mailing of coupons.
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 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 executive management.
FOOD PRODUCT LINES
GENERAL. Billy Blues Barbecue Sauce is available in three different
flavors: Original, Smoky Pecan, and Hot and Spicy, which are marketed as high
quality premium priced barbecue sauces and are currently being distributed at
an average retail price of $2.29 per 14 oz. bottle in over 600 supermarkets and
other retail outlets primarily in Texas, California, Florida and Oregon.
Chris' & Pitt's Bar-B-Q Sauce is available in six flavors: Original, Hot,
Sweet & Smokey, Mesquite, Hickory and Bold 'n Hearty, and are marketed as
medium priced barbecue sauce. The Chris' & Pitt's product line is currently
being distributed at an average retail price of $1.69 per 14 oz. bottle in over
2,000 supermarkets and other retail outlets primarily in California, Oregon,
and Washington. In late fiscal 1995, the Company introduced Chris' & Pitt's
Spice Rub, an award winning seasoning developed by the Company. The spice rub
is sold in the barbecue sauce section of retail outlets and is also offered
through food service distributors. To date, spice rub sales have not
constituted a material portion of food product revenues.
-10-
<PAGE> 11
PROCESSING OF PRODUCTS. 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 believes
that its present Co-Packer has the capability to process sufficient quantities
of the Company's products to meet anticipated demand for at least the next 12
months. The Company does not believe that the loss of the services of the
Co-Packer would have an adverse effect on the Company's ability to process its
orders since there are other co-packers in Texas, California and in the
localities in which it intends to market its product lines that have available
facilities with excess capacity. The Company believes that the ingredients for
its products are readily available from multiple sources in Texas, California
and in the other areas of the United States in which the Company intends to
engage in business operations.
MARKETING AND DISTRIBUTION. The Company engages food brokers to assist in
selling its products to regional and national supermarket chains. The food
brokers are responsible in their respective geographic markets for identifying
customers, soliciting customer orders and inspecting the placement and display
of products on supermarket shelves. 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 expand its food
broker network.
The Company does not believe that the loss of one or all of its food
brokers would have a material adverse effect on the Company's ability to market
its products to its current customers or other supermarket or retail chains as
the Company believes there are other available food brokers in the areas in
which the Company markets its product lines which it can engage on comparable
terms and who have established relationships with such customers.
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.
For the fiscal year ended June 30, 1996, revenues from sales of food
products were $2,902,242 or approximately 7.2% of the Company's total revenues
for such period. For the fiscal year ended July 2, 1995, food product revenues
were $3,051,392 or approximately 8.1% of total revenues for such period. Even
though the Company believes it has achieved limited consumer awareness and
market acceptance of its barbecue sauce products, there can be no assurance
that either of the Company's barbecue sauce product lines will ever achieve
significant consumer acceptance or that supermarket and other retail chains
will re-order the Company's barbecue sauce products.
ADVERTISING AND PROMOTION. The Company periodically engages in advertising
and marketing campaigns to enhance customer awareness of Billy Blues Barbecue
Sauce and Chris' & Pitt's Bar-B-Q Sauce in the geographic areas where the
sauces are available in supermarkets and other retail outlets. The Company
relies principally upon the sponsorship with supermarket chains of special
promotional programs, including discount coupons, in-store displays and free
sample distributions, to promote its barbecue sauce products. The Company also
utilizes newspaper advertising in certain markets where economically feasible.
-11-
<PAGE> 12
COMPETITION
RESTAURANTS. The restaurant industry is intensely competitive with respect
to price, service, location and food quality, and 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 or may be
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, national, regional or local economic conditions,
demographic trends, traffic patterns, and the type, number and location of
competing restaurants.
FOOD PRODUCTS. The Company has encountered substantial competition in the
marketing and sale of its food product lines. The Company's barbecue sauce
products compete for consumer recognition and shelf space with products which
have achieved significant national, regional and local brand name recognition
and consumer loyalty. The Company's barbecue sauce product lines also
indirectly compete with other condiment products including steak and other meat
sauces. These products are marketed by companies with significantly greater
financial, marketing, distribution, personnel and other resources than the
Company, thereby permitting such companies to procure supermarket shelf space
and to implement extensive advertising and promotional programs, both generally
and in response to efforts by new competitors entering the marketplace. The
food industry is also characterized by the frequent introduction of new
products, accompanied by substantial promotional campaigns. While the Company
believes that its barbecue sauce products compete favorably in the areas where
they are currently being marketed and that its increased marketing and sales
efforts will result in increased product recognition and market penetration for
its products, there can be no assurance that the Company will be able to
compete successfully, particularly as it seeks to enter new markets.
TRADEMARKS
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 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." has been allowed by the U.S. Patent and
Trademark Office. 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 oppose vigorously any
infringement of its marks.
-12-
<PAGE> 13
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 delay or prevent the opening of new
restaurants or adversely affect the operations of existing restaurants.
Approximately 25% of revenues generated by the Barbecue Restaurants are
attributable to the sale of alcoholic beverages, while approximately 15% of the
revenues generated by the Marco's Restaurants and approximately 7% of the
revenues generated by the Pasta Co. Restaurants 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 has not experienced
and does not presently 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 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'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.
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.
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 their 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.
WORKERS' COMPENSATION. The Company has elected to be a non-subscriber of
the Texas Workers' Compensation Act and is currently self-insured. Management
believes that self-insuring the Company 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
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.
-13-
<PAGE> 14
EMPLOYEES
At June 30, 1996, the Company employed 1,868 persons of whom 38 are
management and administrative personnel, 129 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 good.
ITEM 2. DESCRIPTION OF PROPERTY.
As of June 30, 1996, the Company leased all of its Barbecue Restaurants and
Pasta Co. Restaurants and all but one of its Marco's Restaurants. The leases
have terms that expire between 1996 and 2012 and have an average remaining term
of approximately seven years. The Company has obtained real estate and
developed its restaurants using four methods: (i) acquiring land and
constructing the restaurant (a "Company owned building"); (ii) leasing land and
constructing the restaurant (a "ground lease"); (iii) leasing the land and
building (a "land/building lease"); or (iv) 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 has been 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 in a Company owned building, one is a ground
lease, three are land/building leases, and thirty-six are shell leases.
In the case of leased facilities, 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 executive offices are located in approximately 6,400 square
feet of leased space at 10777 Westheimer, Suite 1030, Houston, Texas
77042-3498. The Company's monthly lease cost for this office is $6,347. In
October of 1996, the Company expects to move its offices to approximately
12,300 square feet of lease space at 11111 Wilcrest Green, Suite 350, Houston,
TX 77042, at a monthly lease cost of $8,656.
The Company anticipates the loss of a substantial amount of leasehold
improvements paid for and made by the Company to its present and future
facilities when such leases expire or if prematurely terminated.
ITEM 3. LEGAL PROCEEDINGS.
On or about August 29, 1995, John Coleman, a former officer of the Company,
filed a suit in State District Court in Harris County, Texas for wrongful
termination, intentional infliction of emotional distress and breach of
employment contract. The Company filed a general denial and believes Mr.
Coleman's claims are without merit. The Company is vigorously defending this
claim. Mr. Coleman had an employment agreement with the Company which provided
for severance pay equal to the remaining salary due under his employment
agreement if he was terminated without cause. Mr. Coleman is seeking $500,000
in actual damages and $1,000,000 in punitive damages. The Company is a party
to numerous other legal proceedings which arise in the ordinary course of
business. The Company does not believe that any of the above legal proceedings
will have a material adverse effect on its financial position or operations
either individually or in the aggregate. See Note 6 of Notes to the
Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders, through solicitation
of proxies or otherwise.
-14-
<PAGE> 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Series A Warrants are traded on the NASDAQ
SmallCap Market under the symbols of WAMA and WAMAW, respectively. The
following table sets forth the range of high and low closing bid prices for the
Company's Common Stock and Series A Warrants 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.
<TABLE>
<CAPTION>
Common Stock Series A Warrants
Bid Price Bid Price
---------------- ------------------
<S> <C> <C> <C> <C>
Fiscal Year 1995 Low High Low High
---------------- --- ---- --- ----
First Quarter . . . . . . . . . . . $ 3.00 $ 7.50 $ .75 $ 2.63
Second Quarter . . . . . . . . . . 1.88 3.38 .38 .75
Third Quarter . . . . . . . . . . . 2.00 3.19 .50 .63
Fourth Quarter . . . . . . . . . . 2.13 3.00 .25 .75
Calendar Year 1996
------------------
First Quarter . . . . . . . . . . . 1.56 2.44 .13 .37
Second Quarter . . . . . . . . . . 1.25 2.06 .13 .25
Third Quarter . . . . . . . . . . . 1.00 1.87 .13 .13
Fourth Quarter . . . . . . . . . . .69 1.22 .06 .36
</TABLE>
On September 20, 1996, the closing bid prices for the Company's Common
Stock and Series A Warrants were $.69 per share and $.06 per Series A Warrant,
respectively. As of September 20, 1996, 13,433,658 shares of the Company's
Common Stock, and 875,500 Series A Warrants were outstanding. The Company
believes that its Common Stock and Series A Warrants are held of record and
beneficially by approximately 450 to 475 persons.
Each Series A Warrant entitles the holder thereof to purchase one share of
Common Stock at $6.50 per share, subject to certain adjustments, until May 15,
1997. The Company may redeem the Series A Warrants in whole or ratably in
part, at its option, for $.01 per Series A Warrant, at any time after the
average of the closing sale price for the Company's Common Stock exceeds $7.80
per share during any consecutive 20 business days ending within 15 days of the
date on which notice of the redemption is given.
The Company's preferred stock, $1.00 par value (the "Preferred Stock") is
quoted on the NASDAQ SmallCap Market under the symbol of WAMAP. The following
table sets forth the range of high and low closing bid prices as reported by
the National Quotation Bureau, Incorporated. These prices represent
interdealer prices without adjustment for retail mark- ups, mark-downs or
commissions and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Preferred Stock
Bid Price
------------------
<S> <C> <C>
Fiscal Year 1995 . . . . . . . . . Low High
---------------- ------ -----
First Quarter . . . . . . . . . . . $ 4.50 $ 9.00
Second Quarter . . . . . . . . . . 2.50 4.50
Third Quarter . . . . . . . . . . . 2.88 4.50
Fourth Quarter . . . . . . . . . . 3.38 4.50
Fiscal Year 1996
----------------
First Quarter . . . . . . . . . . . 3.00 3.50
Second Quarter . . . . . . . . . . 3.00 3.88
Third Quarter . . . . . . . . . . . 2.75 3.75
Fourth Quarter . . . . . . . . . . 1.75 2.50
</TABLE>
-15-
<PAGE> 16
On September 20, 1996, the closing bid price for the Company's Preferred
Stock was $1.25 per share. The Company believes that its Preferred Stock is
held of record and beneficially by approximately 200 to 300 persons.
The Preferred Stock is convertible at any time at the option of the holder
into shares of Common Stock at a ratio of 1.25 shares of Common Stock for each
share of Preferred Stock converted. As of September 20, 1996, 120,460 shares
of the Preferred Stock had been converted into 150,575 shares of Common Stock
and 329,540 shares of Preferred Stock were outstanding. The Company currently
intends to continue to pay dividends on its Preferred Stock by issuing Common
Stock.
Holders of shares of the Preferred Stock are entitled to receive, when and
if declared by the Board of Directors, out of funds legally available
therefore, cash dividends or cash equivalent value stock dividends of Common
Stock at the rate of $.90 per share per annum, payable in semi-annual
installments on June 30 and December 31. The number of shares of Common Stock
to be issued as a stock dividend is determined by the current market price of a
share of Common Stock on the record date for such stock dividend. During
calendar 1994, 1995, and 1996, dividends on the Preferred Stock were paid by
issuing Common Stock (except for certain small holders who received the
dividend in cash).
The Company has neither paid nor declared any cash or other dividends on
its shares of Common Stock since inception and management does not presently
anticipate that dividends will be paid on its shares of Common Stock in the
foreseeable future. The Company is required to pay dividends on the Preferred
Stock before any dividends can be paid on the Common Stock.
-16-
<PAGE> 17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------------------
JUNE 30, 1996 JULY 2, 1995 JULY 3, 1994 JUNE 27, 1993 JUNE 28, 1992
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $40,129,443 $37,651,657 $37,008,494 $27,711,911 $22,726,670
Net Income (Loss) $48,696 ($7,036,741) ($8,359,981) ($4,483,173) ($1,090,256)
Net Income (Loss) Per Common Share * ($0.02) ($0.82) ($1.10) ($0.68) ($0.19)
BALANCE SHEET DATA (end of period)
Total Assets $25,864,710 $17,672,244 $20,133,288 $12,916,257 $9,839,039
Long-term Debt $10,767,894 $1,708,654 $1,507,439 $987,607 $567,925
</TABLE>
* After giving effect to preferred stock dividends.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
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 been accounted for as purchases and, accordingly, the
Company's Consolidated Financial Statements include the results of operations
of the acquired companies from their respective dates of acquisition.
The Company utilizes a 52-53 week fiscal year which ends on the Sunday
closest to June 30. References to 1994, 1995 and 1996 are to the 53, 52 and 52
week periods ended July 3, 1994, July 2, 1995, and June 30, 1996, respectively.
At the end of each fiscal year, the Company had the following restaurants
in operation:
<TABLE>
<CAPTION>
Restaurants: 1996 1995 1994
- - ----------- ---- ---- ----
<S> <C> <C> <C>
Marco's Mexican Restaurants 23 22 20
Pasta Co. Restaurants 13 - -
Billy Blues Restaurant 1 3 4
Longhorn Cafe 1 2 2
Pete's Restaurants 2 2 2
Hotspurs 1 1 1
---- ---- ----
Total 41 30 29
==== ==== ====
</TABLE>
-17-
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) operating
results as a percentage of total revenues unless otherwise indicated and (ii)
selected operating data.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
June 30, 1996 July 2, 1995 July 3, 1994
------------- ------------ -------------
<S> <C> <C> <C>
Statements of Operations Data:
-----------------------------
Revenues
Restaurants 92.8% 91.9% 93.6%
Food products 7.2 8.1 6.4
----- ----- -----
Total revenues 100.0 100.0 100.0
Costs and expenses:
Cost of restaurant revenues: (1)
Cost of food and beverage 29.4 30.3 29.8
Labor and other operations 58.0 62.2 61.5
----- ----- -----
87.4 92.5 90.3
Cost of food product revenues: (2)
Cost of food products 52.3 54.8 54.1
Selling, marketing and distribution 38.8 50.4 106.3
----- ----- -----
91.1 105.2 160.4
General and administrative 6.9 8.8 14.2
Depreciation and amortization 5.4 5.5 4.4
Provision for restaurant closings - 7.6 2.5
Merger and acquisition costs - - 2.7
Provision for doubtful accounts - - 1.6
Interest income .4 .4 .4
Interest (expense) (2.1) (2.2) (1.4)
Other non-operating income (expense) 1.8 .8 ( .6)
Income tax provision (benefit) - - -
Net income (loss) .1% (19.5)% (23.4)%
Operating Data:
--------------
Restaurants open at end of period 41 30 29
Change in comparable restaurant revenues (3) (.8)% (6.8)% (2.1)%
</TABLE>
- - --------------------
(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.
-18-
<PAGE> 19
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
RESTAURANT REVENUES. Revenues increased $2,626,936 or 7.6% to $37,227,201
in 1996, as compared to $34,600,265 in 1995. Revenues attributable to the
Pasta Co. Restaurants were $5,098,590. Remaining revenues decreased by
$2,471,654 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.
For fiscal 1995, comparable restaurant revenues had declined by 6.8%.
Management believes that improvement in same store sales will continue into
fiscal 1997 due to new marketing programs, new menu items, remodeling and other
enhancements. In addition, menu prices may be increased within the next year
to partially offset an increase in the federal minimum wage.
Approximately 16% of restaurant revenues were derived from the sale of
alcoholic beverages for fiscal 1996 and 1995.
FOOD PRODUCTS REVENUES. Revenues declined by $149,150 due to the fact that
during fiscal 1996, the Company discontinued service to certain accounts which
had proved to be unprofitable.
COST OF RESTAURANT REVENUES. Costs of food and beverage revenues as a
percentage of restaurant sales declined from 30.3% in 1995 to 29.4% in 1996.
The decrease is due to operational efficiencies implemented by management, new
buying programs, and the introduction of new menu items with lower cost
percentages. Significant changes in this percentage are not anticipated for
fiscal 1997. However, management is unable to predict future meat and other
product costs or the impact of any increases in such costs on the Company's
future results of operations.
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. These costs declined as a percentage of restaurant revenues from
62.2% in 1995 to 58% in 1996 due to disproportionally higher expenses
associated with the Billy Blues Restaurants which were closed or sold.
COST OF FOOD PRODUCTS REVENUES. The cost of food products as a percentage
of food product revenues decreased from 54.8% in 1995, to 52.3% in 1996 due
operational efficiencies implemented in 1996.
SELLING, MARKETING AND DISTRIBUTION. These expenses, related to the sale
of food products, decreased from 50.4% in 1995 to 38.8% in 1996 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 EXPENSE. These expenses decreased by $568,757
from $3,321,296 in 1995, to $2,752,539 in 1996 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. Depreciation and amortization increased
from $2,071,972 in 1995 to $2,178,218 in 1996. Of this amount, $456,696 was
associated with The Original Pasta Co. The remaining decline of $350,450 is
due to the closure or sale of Billy Blues Restaurants and to assets becoming
fully depreciated or amortized.
PROVISION FOR CLOSED RESTAURANTS. In 1995, the Company recorded a
provision for restaurant closings 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. Interest income of $166,566 in fiscal 1996 and $156,550
in fiscal 1995 resulted primarily from a note receivable from Mr. Bombaywala.
-19-
<PAGE> 20
INTEREST EXPENSE. Interest expense increased from $813,153 in 1995 to
$850,224 in 1996 due to $257,352 in interest associated with notes associated
with The Original Pasta Co., offset by a decrease of $220,281 of interest on
other debt due to principal reductions made on such debt.
LOSS ON CONVERSION OF DEBT TO EQUITY. 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. Debentureholders
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
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. Other income, net, increased by $399,100 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 to Pasta Co. prior to its acquisition.
EXTRAORDINARY ITEM. 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 debt in fiscal 1995.
INCOME TAXES. The Company had no income tax provision nor benefit in 1995
or 1996.
NET INCOME (LOSS). As a result of the changes in the relationships between
revenues and costs and expenses described above, the Company recorded a net
loss of $7,036,741 in 1995 and net income of $48,696 in 1996.
Management's plans to continue to achieve profitability include the
following:
o Increasing revenues in existing restaurants by remodeling certain
Marco's 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 The opening of new restaurants.
o The acquisition of profitable restaurants.
o Continued reduction of operating expenses through improved cost
controls.
o Continued reduction of general and administrative expenses.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
REVENUES. Total revenues increased $643,163 or 1.7% to $37,651,657, in
1995, as compared to $37,008,494 in 1994. Food product sales increased by
approximately $750,000 while restaurant sales decreased by approximately
$100,000. The increase in food product revenues of 30% is due to the
acquisition of the Chris' & Pitt's product line in March 1994. Restaurant
revenues were impacted by the following combination of factors:
o Fiscal 1994 included 53 weeks, while fiscal 1995 included 52 weeks.
o The acquisition of two Pete's Barbecue and one Hotspurs restaurant in
August of 1993.
o The sale of a Longhorn Cafe restaurant in fiscal 1994.
o Heavy promotional activity in Billy Blues restaurants in fiscal 1994
which resulted in higher than normal sales volumes during that time.
o The opening of a Billy Blues restaurant in early fiscal 1995.
o Declining sales volumes in a number of Billy Blues restaurants. Of
the five Billy Blues restaurants that were in operation during fiscal
1995, four have now been either closed, subleased or the Company is
negotiating sale of its interest.
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<PAGE> 21
o The opening of two new Marco's restaurants in fiscal 1994 and two in
fiscal 1995.
o A decline in comparable restaurant revenues of 6.8%.
Approximately 16% of restaurant revenues were derived from the sale of
alcoholic beverages for fiscal 1995 and 1994.
COST OF RESTAURANT REVENUES. Costs of restaurant food and beverage as a
percentage of restaurant sales remained almost constant from 1994 to 1995 at
just over 30%. Cost increases were offset by improvements in buying programs
and purchasing power.
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, entertainment expenses,
pre-opening expenses, advertising and other occupancy costs. A substantial
portion of these expenses are fixed or indirectly variable. These costs
increased as a percentage of restaurant revenues to 62.2% in 1995 from 61.5% in
1994. This increase resulted primarily from lower sales volumes per
restaurant.
COST OF FOOD PRODUCTS REVENUES. Costs of food products as a percentage of
food product revenues increased from 54.1% in 1994 to 54.8% in 1995. The
increase is due primarily to increases in packaging costs.
Selling, marketing and distribution expenses as a percent of food product
revenues improved from 106.3% in 1994 to 50.4% in 1995. Approximately half of
this decrease is due to costs related to a change in the packaging of Billy
Blues Barbecue Sauce in 1994. The remainder of the decrease is due primarily
to reductions in marketing and other costs implemented by management in fiscal
1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $1,936,524 from $5,257,820 in 1994 to $3,321,296 in 1995. A
portion of this decrease is due to combining corporate offices at the beginning
of fiscal 1995, which eliminated duplicate expenditures and personnel. The
balance of the decrease is due to cost reductions implemented by management in
fiscal 1995, which included a significant reduction in corporate salaries.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
from $1,622,554 in 1994 to $2,071,972 in 1995. The increase was due to the
opening and purchase of new restaurants.
PROVISION FOR CLOSED RESTAURANTS. In the fourth quarter of 1995, the
Company recorded a provision for restaurant closings 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 includes the
write-down of assets to net realizable value as well as estimated amounts for
lease and other obligations associated with the restaurants.
In fiscal 1994, a provision for restaurant closings of $930,691 was
recorded as a result of management's reassessment of the feasibility of opening
new restaurants for which the Company had already made financial commitments.
Also included in this provision was a reserve for the settlement of a lease
related to a closed Billy Blues Restaurant.
MERGER AND ACQUISITION COSTS. In fiscal 1994, the Company recorded merger
and acquisition costs related to the acquisition of Marco's. Such costs
included investment banking fees, legal and accounting fees, stock registration
expenses, severance costs and other expenses.
PROVISION FOR DOUBTFUL ACCOUNTS. In fiscal 1994, the Company reevaluated
certain notes and accounts receivable and recorded valuation allowances based
on estimated net realizable values. No additional provision was recorded
during fiscal 1995.
INTEREST INCOME. Interest income of $156,550 in fiscal 1995 and $129,728
in fiscal 1994 resulted from a note receivable from Mr. Bombaywala.
INTEREST EXPENSE. Interest expense increased from $511,826 in 1994 to
$813,153 in 1995 primarily due to increases in long-term debt associated with
the acquisition of the Chris' & Pitt's product line. This debt included the
Subordinated Debentures and a note associated with the acquisition of the
Chris' & Pitt's product
-21-
<PAGE> 22
line, both issued in March 1994. The balance of the Chris' & Pitt's note to
was paid from the proceeds of the Subordinated Notes issue in December 1994.
LOSS ON CONVERSION OF DEBT TO EQUITY. 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. Debentureholders
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
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.
EXTRAORDINARY ITEM. The note 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 debt in fiscal 1995.
INCOME TAXES. The Company had an income tax benefit in fiscal 1994 related
to Marco's and had no tax provision nor benefit in 1995.
NET LOSS. As a result of the changes in the relationships between revenues
and costs and expenses described above, the Company's net loss decreased from
$8,359,981 in 1994 to $7,036,741 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has incurred losses from operations and, as of
June 30, 1996, has an accumulated deficit of $19,400,310.
During 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.
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.
For fiscal 1994, operating activities utilized $1,854,535 of cash,
primarily due to a net loss less non-cash expenses. Investing activities
utilized $6,534,228 of cash due primarily to purchases of property and
equipment and the acquisition of Pete's Hospitality, Inc. Financing activities
generated $7,167,785 in cash due primarily to the issuance of common stock and
debentures.
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.
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.
As of June 30, 1996, the Company had negative working capital of
$4,484,903, as compared to $7,217,233 on July 2, 1995. The improvement is due
primarily to the extension to July 1997 of $3 million in Subordinated Notes
which were classified as a current liability at July 2, 1995.
FISCAL 1997 CAPITAL REQUIREMENTS.
The Company has a working capital deficit of approximately $4.5 million at
June 30, 1996. The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its obligations on a
timely basis, to obtain additional financing or capital and to refinance its
debt.
Management's plans include the following:
o Increasing revenues in existing restaurants by remodeling certain
Marco's Mexican Restaurants and by improving marketing programs and
customer service.
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<PAGE> 23
o Increasing revenues from the sale of food products by reinforcing
existing markets, expanding distribution to new market areas,
introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
o Franchising new restaurants.
o Maintaining cost controls while increasing revenues.
o Obtaining additional equity capital or debt financing.
o Refinancing debt, primarily $3 million in subordinated notes due in
July of 1997.
The material capital commitments of the Company for fiscal 1997 are as
follows:
o Accumulation of funds for the payment of the principal of the $3
million 12% Subordinated Notes due July 31, 1997.
o Opening new Marco's and Pasta Co. Restaurants.
o Remodeling Marco's Restaurants.
o Reduction of the Company's working capital deficit, including payments
on notes, accounts payable and accrued liabilities.
Plans for fiscal 1997 include opening one new Marco's Restaurant and four
new Pasta Co. Restaurants. Both Marco's and Pasta Co. Restaurants require an
initial capital investment of approximately $400,000, or a total investment of
approximately $2,000,000 to open five restaurants. Of this amount, the Company
expects that approximately half can be financed using the acquired assets as
collateral. The Company intends to finance the balance either through cash flow
from operations, from additional borrowings or from the sale of equity. There
is no assurance that such funds will be available on a timely basis. The
actual number of new restaurants opened will depend upon the availability of
capital.
The Company expects to continue to achieve positive cash flow from
operations in fiscal 1997, principally from its Marco's and Pasta Co.
Restaurants. However, cash generated from operations may not be sufficient to
meet all of its fiscal 1997 capital commitments set forth above. Without debt
refinancing or additional debt or equity financing in the short-term, the
Company may not be able to (i) repay the $3 million in 12% Subordinated Notes
due July 31, 1997, (ii) meet its targeted expansion goals, and (iii) reduce its
current working capital deficit.
NEW ACCOUNTING STANDARDS. In October 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123 "Accounting for Stock-Based Compensation" which establishes
accounting and reporting standards for stock-based employee compensation plans.
Companies are encouraged to utilize the fair-value method to measure stock
based compensation but may continue to utilize the methods prescribed by APB
Opinion No. 25 and disclose the pro-forma effects of the SFAS No. 123 method.
The Company has decided to adopt the disclosure requirements of SFAS No. 123.
In June 1996, the FASB Issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" which uses a
"financial components" approach that focuses on content and provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The pronouncement is effective for
transactions occurring after December 31, 1996.
FORWARD LOOKING INFORMATION. The statements continued in this report on
Form 10-K ("Annual Report") which are not historical facts, including, but not
limited to, statements found under the captions "Results of Operations",
"Liquidity and Capital Resources" and "Fiscal 1997 Capital Requirements" above,
are forward-looking statements that involve a number of risks and
uncertainties. The actual results of the future events described in such
forward-looking statements in this Annual Report could differ materially from
those contemplated by such forward-looking statements.
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<PAGE> 24
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.
There were no changes in or disagreements with accountants on accounting
and financial disclosure covered by this report.
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<PAGE> 25
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.
<TABLE>
<CAPTION>
Employed
Name Age Position Since
---- --- -------- -----
<S> <C> <C> <C>
Ghulam Bombaywala 41 Chairman of the Board, Chief Executive Officer 1994
and Director
Angelo Pitillo 59 President, Chief Operating Officer and Director 1994
Thomas J. Buckley 49 Chief Financial Officer and Secretary 1994
Michael S. Chadwick 44 Director 1994
Nico B. Letschert(2) 41 Director 1994
Philip M. Mount(1)(2) 38 Director 1994
Sarosh J. Collector(1)(2) 49 Director 1995
</TABLE>
- - ------------------------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
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 President and 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 SPP, Inc., the holder of a chain of James Coney Island restaurants serving
hot dogs and chili. Mr. Bombaywala serves on the Board of Directors of the Sam
Houston Area Boy Scouts of America, the Fort Bend Independent School District
Education Foundation and the Conrad N. Hilton College of Hotel & Restaurant
Management of the University of Houston.
ANGELO PITILLO was elected President and Chief Operating Officer in
September 1994 and has been a director of the Company since March 17, 1995.
From 1989 to 1993, Mr. Pitillo served as President of Prufrock Restaurants,
Inc., where his responsibilities included management of the Black-Eyed Pea
Restaurant division. From 1976 to 1989, Mr. Pitillo served as Senior Vice
President and Regional Vice President of Jerrico, Inc. While with Jerrico,
Inc., Mr. Pitillo supervised various restaurant divisions, including Long John
Silver's, Florenz and Fazzoli's. Mr. Pitillo has over 30 years of experience
in the restaurant and hospitality industry, including the development of fast
food, full service and catering concepts.
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 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, a publicly traded corporation, Moody-Price, Inc., and
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<PAGE> 26
Brazos Sportswear, Inc. 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.
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 currently the CEO of Noesis Capital Corp., a Florida-based
investment banking and money management firm that Mr. Letschert started in
1995. 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. Letshcert
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: Capitol Multimedia, Inc., Futuremedia
PLC and Foodquest.
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
currently serves as a member of the Audit and Compensation Committees of the
Board of Directors. 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.
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.
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 the fiscal year ended June 30, 1996.
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 1992 and 1994
Stock Compensation Plans (the "Stock Compensation Plans"). All actions
undertaken by the Compensation Committee during the last fiscal year were
effected by unanimous consent in lieu of holding scheduled or special meetings.
Each director who is not an employee of the Company is 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 1996,
the Board of Directors held its annual meeting on January 9, 1996, conducted
meetings in March and May of 1996 and approved actions undertaken by management
of the Company by unanimous consent in lieu of meetings on three separate
occasions.
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<PAGE> 27
SECTION 16 REPORTS
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 1996, or written representations from certain
reporting persons, except as set forth below, the Company believes that all
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
been timely complied with in accordance with Section 16(a) of the Exchange Act.
Ghulam Bombaywala, an officer and director of the Company, failed to timely
file his Form 4 - Statement of Changes in Beneficial Ownership of Securities
with the Commission in February 1996. Sarosh J. Collector also failed to
timely file a Form 4 - in July of 1996. Angelo Pitillo, an executive officer
and director of the Company, and Thomas Buckley, an executive officer of the
Company, failed to timely file Form 4 in July 1996. In addition, all directors
and executive officers of the Company each failed to timely file Form 5 -
Annual Changes in Beneficial Ownership of Securities for fiscal 1995. All late
reports were filed in September of 1996.
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 30, 1996, to the Company's Chief Executive officer and to those
other executive officers who received salary and bonus compensation in excess
of $100,000 during the fiscal year (the "named executive officers").
[This space is intentionally left blank.]
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<PAGE> 28
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards Payouts
-------------------------- ----------------------------- ---------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Compensation(1) Award(s) Options/SARs(2) Payouts Compensation
Name and Principal Position Year Salary($) Bonus($) ($) ($) (#) ($) ($)
- - --------------------------- ---- --------- -------- -------------- ---------- --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ghulam Bombaywala, Chairman of 1996 $ -0- $ -0- $ -0- $ -0- -0- -0- $ -0-
the Board and Chief Executive 1995 -0- -0- -0- -0- -0- -0- -0-
Officer* 1994 610,000 -0- -0- -0- -0- -0- 2,175,310
Angelo Pitillo, President 1996 $150,000 $ -0- $ -0- $ -0- 250,000 -0- $ -0-
Chief Operating Officer 1995 121,154 -0- -0- -0- 250,000 -0- -0-
1994 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
*Mr. Bombaywala served as Chief Executive Officer of Marco's during the
Company's fiscal year ended July 3, 1994. On July 1, 1994, the Company and
Marco's entered into a share exchange transaction whereby Marco's became a
wholly-owned subsidiary of the Company. Effective September 1, 1994, Mr.
Bombaywala was elected Chairman of the Board and Chief Executive Officer of the
Company. Mr. Bombaywala's compensation as Chief Executive Officer of Marco's
for the period beginning June 29, 1993 and ending July 3, 1994 is reported in
the above table.
(1) Excludes certain incidental perquisites, the total of which did not
exceed the lesser of $50,000 or 10% of cash compensation for any named
individual.
(2) Incentive stock options to acquire shares of Common Stock pursuant to
the Company's Stock Compensation Plan. See "Report on Repricing of
Options/SARS".
OPTION GRANTS DURING FISCAL YEAR 1996
The following table provides information related to options to acquire
shares of Common Stock granted to the Chief Executive Officer and the other
named executive officers of the Company referenced in the Summary Compensation
Table, above, during fiscal year 1996. The Company does not have any
outstanding Stock Appreciation Rights ("SARs").
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------- value at assumed
annual rates of stock
price appreciation
for option term
---------------
Number of Securities % of Total Options/ Exercise or
Underlying Options/ SARs Granted to Base Price Expiration
Name SARs Granted (#) (1)(2) Employees in Fiscal Year ($/Sh)(3) Date 5%($) 10%($)
- - ---- ----------------------- ------------------------ ---------- ------------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Ghulam Bombaywala. . . . -0- -0-% N/A N/A N/A N/A
Angelo Pitillo . . . . 250,000 54% $ 1.00 12/99 $ -0- $ 12,500
</TABLE>
- - -----------------------------------------
(1) Incentive stock options to acquire shares of Common Stock granted pursuant
to the Company's Stock Compensation Plan, for a term of five years from
date of grant. Options issued to Mr. Pitillo vest at the rate of 20% per
year commencing one year from the date of the original grant, are
nontransferable and are subject to termination under certain conditions
upon cessation of employment.
(2) On December 29, 1994, the Company granted options to purchase 250,000
shares of Common Stock at a purchase price of $2.00 per share to Mr.
Pitillo. On May 17, 1996, these options were canceled and new options were
issued to Mr. Pitillo to purchase 250,000 shares of Common Stock at a
purchase price of $1.00 per share. See "Reports on Repricing of
Options/SARS".
(3) The exercise price per share of each option granted in 1996 was equal to or
greater than 100% of the fair market value of the Common Stock on the date
of grant pursuant to the requirements of the Stock Compensation Plan.
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<PAGE> 29
OPTION EXERCISES AND 1996 FISCAL YEAR END HOLDINGS
The following table sets forth information with respect to options
exercised by named executive officers of the Company referenced in the Summary
Compensation Table, above, during fiscal year 1996 and the number and value of
options held at fiscal year end.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at FY-End(#) At FY-End($) (1)
Shares Acquired ------------------------- -----------------------------
Name On Exercise(#) Value Realized($) Exercisable Unexercisable Exercisable Unexercisable
- - ---- -------------- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ghulam Bombaywala. . . . -0- $ -0- -0- -0- N/A N/A
Angelo Pitillo . . . . -0- -0- 50,000 200,000 $ -0- $ -0-
</TABLE>
- - ---------------
(1) The closing bid price for the Company's Common Stock as reported by NASDAQ
SmallCap Market on June 28, 1996 was $0.69 per share. The indicated value
is calculated on the basis of the difference between the option exercise
price per share and $0.69, multiplied by the number of shares of Common
Stock underlying each option.
REPORT ON REPRICING OF OPTIONS/SARS
In December 1994, the Compensation Committee of the Board of Directors
canceled all options originally issued to Angelo Pitillo, President and Chief
Operating Officer, under the Stock Compensation Plan for the purpose of
reissuing the canceled options at a lower exercise price. The options, prior
to cancellation, were issued with an exercise price of $4.83 per share and
would have expired in September 1999. As a result of the decline in the value
of the Company's Common Stock within two months of Mr. Pitillo's employment by
the Company, the Compensation Committee of the Board of Directors decided that
it would be in the best interests of the Company to cancel and reissue the
options to purchase the identical number of shares at an exercise price of
$2.00 to encourage Mr. Pitillo to remain in the employ of the Company and to
provide additional incentive for him to continue to promote the success and
business of the Company. Due to the continued decline in the value of the
Company's Common Stock, the Board of Directors decided that it would be in the
best interests of the Company to cancel and reissue the options to purchase the
identical number of shares at an exercise price of $1.00 to encourage Mr.
Pitillo to remain in the employ of the Company and as an incentive for him to
continue to promote the success and business of the Company.
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
NAME DATE NUMBER OF PER SHARE EXERCISE PRICE NEW LENGTH OF
SECURITIES MARKET PRICE AT TIME OF EXERCISE ORIGINAL OPTION
UNDERLYING OF STOCK AT REPRICING PRICE TERM REMAINING AT
OPTIONS TIME OF DATE OF REPRICING
REPRICED REPRICING OR AMENDMENT
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Angelo Pitillo, December 29, 1994 250,000 $2.00 $4.63 $2.00 58 months
President
- - ----------------------------------------------------------------------------------------------------------------
Angelo Pitillo, May 17, 1996 250,000 $0.75 $2.00 $1.00 43 months
President
- - ----------------------------------------------------------------------------------------------------------------
Thomas Buckley, May 17, 1996 100,000 $0.75 $2.00 $1.00 43 months
Chief Financial
Officer
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
-29-
<PAGE> 30
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company is comprised of three persons
selected by the Board of Directors. Throughout fiscal 1996, Philip M. Mount,
Nico B. Letschert and Sarosh Collector served on the Compensation Committee.
Philip M. Mount, a director of the Company and a member of the Company's Audit
and Compensation Committees, is a shareholder of Kelly, Sutter, Mount &
Kendrick, P.C. ("KSMK"). Nico B. Letschert was the sole owner and President of
Noble Investment Co. of Palm Beach ("Noble") and is the Chief Executive Officer
of Noesis Capital Corp. ("Noesis"). Michael S. Chadwick is Senior Vice
President and a Managing Director of Corporate Finance of Sanders Morris Mundy,
Inc., a Houston based financial services and investment banking firm ("SMM").
See, "Item 13. Certain Relationships and Related Transactions".
During fiscal 1995 and 1996, 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. See, "Item 13. Certain Relationships and Related
Transactions".
Noble received approximately $191,880 in commissions and a nonaccountable
expense allowance in connection with the Company's 1995 Reg S Offering. Also
in connection with the offering, the Company issued to Noble warrants to
purchase 71,250 shares of Common Stock at an exercise price of $3.00 per share,
which expire on May 31, 1997. The warrants were subsequently assigned to Mr.
Letschert. See, "Description of Business - Recent Financings". In August 1995,
the Company entered into an eight-month financial advisory agreement with
Noesis providing for a $5,000 per month advisory fee. See, "Item 13. Certain
Relationships and Related Transactions".
In December 1994, in connection with the offering of the Company's $3
million Subordinated Notes, 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 options to purchase 150,000 shares of common stock at an
exercise price of $2.50 per share which expire on December 31, 1999. In March
of 1996, the payment terms of the Subordinated Notes was extended, the advisory
agreement was extended through July of 1997 at a rate of $5,000 per month and
the exercise price of the warrants was reduced to $1.00 per share. See,
"Description of Business - Recent Financings".
EMPLOYMENT AGREEMENTS
On May 26, 1992, the Company entered into an employment agreement with John
H. Coleman, III, (the "Coleman Agreement"). The Coleman Agreement provided for
an annual base salary and health, medical and life insurance benefits and
allowed participation in the Company's employee benefit plans. The Coleman
Agreement was for a term ending April 30, 1997, subject to certain specified
termination provisions, and provided for employment on a full time basis. The
Coleman Agreement originally provided that in the event of a termination
without cause, or upon a change of control, Mr. Coleman would be entitled to
receive 100% of his base salary for six months and 50% of his salary for an
additional six months thereafter. On June 15, 1994, the Coleman Agreement was
amended to provide that if Mr. Coleman was terminated for any reason other than
for death, disability, or for cause by the Company Mr. Coleman would be
entitled to receive his full salary for the remaining term of the agreement
which was increased to $125,000 per year. In June 1995, the Company terminated
the Coleman Agreement in accordance with specified termination provisions, and
terminated the employment of Mr. Coleman. The Company is no longer paying
salary nor providing benefits to Mr. Coleman.
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. 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. Mr. Bombaywala has elected not
to accept any salary due and owing to him under this agreement for an
indefinite period of time. The Bombaywala Agreement also provides for health,
medical and life insurance benefits and
-30-
<PAGE> 31
allows participation in the Company's employee benefit plans. The Bombaywala
Agreement is for a term ending April 30, 1997, subject to certain specified
termination provisions similar to the Coleman Agreement, and provides for
employment on a full time basis. The Bombaywala Agreement contains provisions,
relating to 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 as of the termination date of the Bombaywala Agreement. No bonuses
have been awarded to Mr. Bombaywala under the Bombaywala Agreement.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, currently consisting of Messrs. Mount,
Collector and Letschert, determines the compensation of the Company's executive
officers, consisting of Messrs. Bombaywala (C.E.O.), Pitillo (President) and
Buckley (C.F.O.).
Mr. Bombaywala decided not to receive a salary or bonus in neither fiscal
1995 nor fiscal 1996 due to the fact that the Company has been and is in the
process of a "turnaround." Mr. Bombaywala is not currently receiving a salary
under the Bombaywala Agreement for fiscal 1997. Mr. Bombaywala owns 6,286,667
shares of the Company's Common Stock or approximately 46.8% of the outstanding
shares. The Compensation Committee believes that Mr. Bombaywala is very
motivated due to his stock ownership and commitment to the Company to represent
the interests of all stockholders and maximize the performance of the Company.
The Compensation Committee agreed with Mr. Bombaywala's decision to forego any
salary or bonus during fiscal 1995 and 1996. The compensation which would have
been payable to Mr. Bombaywala during fiscal years 1995 and 1996 was determined
by the Bombaywala Agreement, which was negotiated between the Company and Mr.
Bombaywala when Marco's was acquired in fiscal 1994.
The Compensation Committee believes that salaries paid to Messrs. Pitillo
and Buckley are reasonable, but less than competitive with amounts paid to
executives with comparable qualifications, experience and responsibilities at
companies of comparable size in light of their responsibilities and experience.
Neither Mr. Pitillo nor Mr. Buckley received a bonus in fiscal 1995 or 1996,
and both have received higher compensation packages in previous positions.
Both Messrs. Pitillo and Buckley have made a commitment to the Company in
terms of using their best efforts to move the Company towards profitability and
are willing to be rewarded through the appreciation of the Company's stock and
through future bonuses, if and when determined by the Board of Directors of the
Company or the Compensation Committee. In December 1994, Mr. Pitillo and Mr.
Buckley received options to purchase 250,000 and 100,000 shares of Common
Stock, respectively.
The Compensation Committee plans to use the Company's Common Stock to
retain and provide incentive to the Company's executive officers. The Board of
Directors believes that significant stock ownership is a major factor in
aligning the interests of management and shareholders.
[This space is intentionally left blank.]
-31-
<PAGE> 32
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
The graph set forth below compares the cumulative total shareholder return
on the Company's Common Stock commencing on June 26, 1992 and ending on June
30, 1996 against the cumulative total return of the Nasdaq Stock Market and a
peer group consisting of certain Nasdaq Stocks whose business activities fall
within the same standard industrial classification code as the Company. The
graph assumes a $100 investment in the Company's Common Stock and that all
dividends paid by companies in each index were reinvested.
[Comparison of Five-Year-Cumulative Total Returns Performance Graph]
Total Shareholder Returns - Dividends Reinvested
<TABLE>
<CAPTION>
Fiscal Year: June
Annual Return Percentages
Years Ending
6/26/92 -
Company \ Index Name 6/30/92 6/30/93 6/30/94 6/30/95 6/28/96
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
WATERMARC FOOD MGMT CO -5.41 154.29 -44.94 -60.21 -64.10
NASDAQ 2.61 25.79 0.96 33.48 28.38
PEER GROUP (Companies in SIC 5800-5899) 5.16 29.48 -10.94 3.41 16.91
</TABLE>
<TABLE>
<CAPTION>
Indexed Returns
Base
Period Return Return Return Return Return
Company \ Index Name 6/26/92 6/30/92 6/30/93 6/30/94 6/30/95 6/28/96
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
WATERMARC FOOD MGMT CO 100 94.59 240.54 132.43 52.69 18.92
NASDAQ 100 102.61 129.07 130.31 173.93 223.30
PEER GROUP (Companies in SIC 5800-5899) 100 105.16 136.16 121.26 125.39 146.60
</TABLE>
-32-
<PAGE> 33
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 September 20, 1996, by
(i) each person who beneficially owns 5% or more of the Common Stock, (ii) each
Director and named executive officer of the Company, and (iii) all officers and
Directors 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.
<TABLE>
<CAPTION>
Shares Beneficially Owned
--------------------------
Name of Beneficial Owner Number Percent
- - ------------------------ ---------- -----------
<S> <C> <C>
Ghulam Bombaywala(1) 6,508,889 46.8%
Angelo Pitillo(2)(3) 336,125 2.5%
Michael S. Chadwick(4)(8) 119,444 *
Nico B. Letschert(5)(8) 408,554 3.0%
Philip M. Mount(6)(8) 32,222 *
Sarosh J. Collector(7)(8) 17,000 *
All officers and directors as a group (7 persons) 7,567,234 51.9%
</TABLE>
- - ------------------------------
* Indicates ownership of less than or equal to one percent of the outstanding
Common Stock of the Company.
(1) Mr. Bombaywala's address is 10777 Westheimer, Suite 1030, Houston, Texas
77042-3498. Includes warrants to purchase 222,222 shares of Common Stock
issued in connection with the Company's Subordinated Notes.
(2) Mr. Pitillo's address is 10777 Westheimer, Suite 1030, Houston, Texas
77042-3498.
(3) Includes options to purchase 330,000 shares of Common Stock granted under
the Company's Stock Compensation Plan and 3,300 shares of the Company's
Preferred Stock convertible to 4,125 shares of Common Stock.
(4) Mr. Chadwick's address is 3100 Texas Commerce Tower, Houston, Texas 77002.
Includes warrants to purchase 89,444 shares of Common Stock issued in
connection with the Company's Subordinated Notes.
(5) Includes warrants to purchase 97,000 shares of Common Stock and 97,000
Series A Warrants, which Series A Warrants 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 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 Debenture principle, at a
conversion ratio of one share of Common Stock for each $5.00 in principle
converted. Mr. Letschert may acquire 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 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 110, Boca Raton, Florida 33487.
(6) Mr. Mount's address is 1600 Smith, Suite 3700, Houston, Texas 77002.
Includes warrants to purchase 22,222 shares of Common Stock issued in
connection with the Company's Subordinated Notes.
(7) Mr. Collector's address is 3000 Richmond Avenue, Suite 270, Houston, Texas
77002.
(8) Includes options to purchase 10,000 shares of Common Stock granted under
the Company's Outside Director's Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On June 18, 1993, the Company entered into three area development
agreements with Clucker's Wood Roasted Chicken, Inc. ("Clucker's"), for the
development of Clucker's franchises in Texas, Mexico and Central Ameria (the
"Development Rights"). As consideration for the Development Rights, the
Company issued to Clucker's 47,000 shares of its Common Stock valued at $8.50
per share for an aggregate consideration of $399,500. William J. Gallagher, a
former officer and director of the Company, was a director of Clucker's.
-33-
<PAGE> 34
In June 1993, the Company assigned to Tex-Mex Venture, Inc. ("Tex-Mex"), an
affiliated corporation, the Development Rights in consideration of an $800,000
five-year convertible promissory note (the "Tex-Mex Note") payable to the
Company. The principal amount of the Tex-Mex Note was due on June 30, 1998.
The Tex-Mex Note was secured with substantially all of the assets of Tex-Mex.
The negotiations for the assignment of the Development Rights by the Company to
Tex-Mex were conducted by William J. Gallagher, the then current Chairman of
the Board of the Company, on behalf of the Company and by Steve Rosser, on
behalf of Tex-Mex. The Company determined the $800,000 value of the
Development Rights assigned to Tex-Mex based on estimated market value at the
time. The Company believed that the valuation placed on the Clucker's
Development Rights was consistent with other similar development rights owned
by other restaurant chains for the identical geographic areas. On June 30,
1994, the Company and Tex-Mex entered into an agreement whereby the Company
agreed to forgive the remaining principal balance of approximately $600,000 due
under the Tex-Mex Note in exchange for an unsecured promissory note in the
principal amount of $199,500 and 600,000 shares of Tex- Mex's common stock (the
"Tex-Mex Shares").
Tex-Mex was organized by Steve Rosser, a son-in-law of Mr. Gallagher. Mr.
Rosser was the President, Chief Executive Officer, Secretary and a director of
Tex-Mex. William J. Gallagher, John H. Coleman, III, former Executive Vice
President and a former director of the Company, and Dr. Henry H. Salzarulo, a
former director of the Company, were also directors of Tex-Mex.
Mr. Mount, a director of the Company, is a shareholder in the law firm of
Kelly, Sutter, Mount & Kendrick, P.C. ("KSMK"). The Company issued KSMK
100,000 shares of Common Stock valued at $2.25 per share in June of 1995 in
partial payment of outstanding legal fees owed to KSMK. The Company also
issued 100,000 shares in February of 1996 valued at $1.50 per share as payment
of additional outstanding legal fees. See, "Executive Compensation -
Compensation Committee Interlocks and Insider Participation".
On August 3, 1994, the Company issued to Mr. Michael S. Chadwick, a
director of the Company, and to an unaffiliated third party, 20,000 restricted
shares of the Company's Common Stock, respectively, in satisfaction of
commissions due and owing to Mr. Chadwick and the unaffiliated third party as a
result of the Marco's transaction. Mr. Chadwick and the unaffiliated third
party had been retained by Marco's as business brokers for the purpose of
finding a suitable purchaser for Marco's. Mr. Chadwick was elected to the
Board of Directors of the Company as one of the three nominees appointed to the
Board of Directors by Mr. Bombaywala pursuant to the terms and conditions of
the Marco's Agreement. Mr. Chadwick is also affiliated with Sanders Morris
Mundy, Inc. ("SMM"), an investment banking firm, which served as placement
agent in connection with the Company's December 1994 offering of $3 million of
12% Subordinated Notes. SMM received a 10% commission in that offering,
warrants to purchase the Company's Common Stock and consulting fees pursuant to
a financial advisory agreement. See, "Description of Business - Recent
Financings" and "Executive Compensation - Compensation Committee Interlocks and
Insider Participation".
On July 31, 1994, Ghulam Bombaywala, Chairman of the Board and 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 1, 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.
Messrs. Bombaywala and Chadwick also participated in the offering of the
Subordinated Notes in December 1994 and purchased $500,000 and $100,000 in
principal amount of Subordinated Notes, respectively. Messrs. Bombaywala and
Chadwick also received warrants to purchase 222,222 and 44,444 shares of Common
Stock, respectively, at $2.25 per share, expiring December 31, 1999. Mr.
Mount, a director of the Company, also purchased $50,000 in principal amount of
Subordinated Notes and received warrants to purchase 22,222 shares of Common
Stock on the same terms. The warrants received by Messrs. Bombaywala, Chadwick
and
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<PAGE> 35
Mount represent their pro rata purchase of Subordinated Notes in the offering
and the terms of their notes and warrants are identical to those received by
the unaffiliated purchasers of Subordinated Notes and Warrants. See
"Description of Business - Recent Financings".
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 and 1996 had not been made by Mr. Gallagher as of September 20,
1996.
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 had not been made by Mr. Coleman as
of September 20, 1996.
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 approximately $75,000 in fiscal 1996. Such
factoring was discontinued early 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.
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 a monthly fee of $5,000 to Noesis. Nico B. Letschert is President
of Noesis and a director of the Company. Mr. Letschert was also a principal of
Noble which received fees and warrants in connection with the Company's 1995
Reg. S. Offering. See "Description of Business - Recent Financings" and
"Executive Compensation - Compensation Committee Interlocks and Insider
Participation".
Mr. Bombaywala has an ownership interest in and participates in the
management of other businesses, including the Houston-based James Coney Island
restaurant chain.
PASTA CO. ACQUISITION
On September 7, 1995, the Board of Directors of the Company approved the
acquisition of all of the issued and outstanding shares (the "Shares") of Pasta
Co. from 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 1,666,667 shares
of the Company's Common Stock (the "Merger Shares") and two promissory notes in
the aggregate principal amount of $3,750,000 (the "Notes"). The Merger Shares
were valued at $1.78 per share which was the market value of the Common Stock
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 are
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.
-35-
<PAGE> 36
Although not required by law, the Board of Directors of the Company elected
to submit the Merger to its independent shareholders for approval at its Annual
Meeting of Shareholders which was held January 9, 1996. Mr. Bombaywala, who
then owned 4,620,000 shares of the Company's Common Stock, or 41.6%, excluding
the Merger Shares, did not vote on the Merger at the Annual Meeting. The
Merger was approved, and the effective date 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 are subject to a
Development Escrow Agreement which provides 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.
The Notes consist of (i) a promissory note from PAC in the principal amount
of $2,750,000, bearing interest at 10% per annum which, subject to certain
mandatory prepayment provisions, is due and payable September 15, 2002, and
(ii) a promissory note from PAC 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, is due and payable in two equal annual
installments on December 31, 1996 and December 31, 1997. Quarterly payments of
interest are due and payable on the Notes on the 15th day of December, March,
June and September of each year the Notes are outstanding. Commencing
September 15, 2000, the outstanding principal on the $2,750,000 Note will be
amortized and paid in quarterly installments over the remaining two year term.
The Notes require 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 has agreed to defer any and all
principal and interest until July of 1997.
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. The land
and building transferred had been a non- productive asset of the Company. 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 Notes are 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 lien of Mr. Bombaywala will be junior to any prior liens granted
by Pasta Co. on or before the Effective Date.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 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.
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<PAGE> 37
(b) Reports on Form 8-K
None.
(c) Exhibits Required by Item 601 of 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 Schedules
None.
[This space is intentionally left blank.]
-37-
<PAGE> 38
SIGNATURES
In accordance with section 13 or 15(d) of the Exchange Act, the Registrant
caused this report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
WATERMARC FOOD MANAGEMENT CO.
(Registrant)
Date: September 20, 1996
By: /s/
--------------------------
Ghulam Bombaywala, Chairman of
the Board, Chief Executive
Officer and Director
In accordance with the Exchange Act, this report on Form 10-K has been
signed below by the following person on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>2
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Chairman of the Board, Chief Executive September 20th, 1996
-------------------------------- Officer and Director
Ghulam Bombaywala
/s/ President, Chief Operating Officer and September 20th, 1996
-------------------------------- Director
Angelo Pitillo
/s/
--------------------------------
Tom Buckley Chief Financial Officer and Secretary September 20th, 1996
/s/
--------------------------------
Philip M. Mount Director September 20th, 1996
/s/
--------------------------------
Michael S. Chadwick Director September 20th, 1996
/s/
--------------------------------
Nico B. Letschert Director September 20th, 1996
/s/
--------------------------------
Sarosh J. Collector Director September 20th, 1996
</TABLE>
-38-
<PAGE> 39
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
INDEX TO AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-7
F-1
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Watermarc Food Management Co.
We have audited the consolidated balance sheets of Watermarc Food Management
Co. and subsidiaries (the "Company") as of June 30, 1996 and July 2, 1995 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the fiscal years ended June 30, 1996, July 2, 1995 and July 3,
1994. 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 July 2, 1995 and the
consolidated results of their operations and their cash flows for the fiscal
years ended June 30, 1996, July 2, 1995, and July 3, 1994, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
September 27, 1996
F - 2
<PAGE> 41
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
JUNE 30, JULY 2,
1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 463,166 $ 2,101,729
Accounts receivable, trade 397,744 106,385
Accounts receivable from affiliates 252,440 289,982
Inventories 715,538 435,866
Prepaid expenses and other current assets 105,779 382,953
----------- -----------
Total current assets 1,934,667 3,316,915
Property and equipment, net 9,328,526 6,394,512
Notes and other receivables from affiliate 2,217,784 2,217,784
Intangible assets, net 12,200,047 4,878,624
Other assets 183,686 864,409
----------- -----------
$25,864,710 $17,672,244
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, trade $ 3,186,690 $ 2,655,001
Accrued liabilities 1,831,055 2,999,133
Current portion of long-term debt and
note payable to stockholder 1,401,825 4,880,015
----------- -----------
Total current liabilities 6,419,570 10,534,149
Long-term debt, less current portion 5,698,692 1,967,899
Notes payable to stockholder 5,069,202 -
Deferred rent 435,949 291,416
Commitments and contingencies (notes 1, 5, 6 and 8)
Stockholders' equity:
Preferred stock, $1 par value, 329,540 329,540
5,000,000 shares authorized,
329,540 issued and outstanding
as of June 30, 1996 and July 2, 1995;
stated at $10 liquidation preference
Common stock, $.05 par value, 671,682 555,601
20,000,000 shares authorized,
13,433,658 issued and outstanding as
of June 30, 1996, and 11,112,026 issued
and outstanding as of July 2, 1995
Additional paid-in capital 26,640,385 23,442,645
Accumulated deficit (19,400,310) (19,449,006)
----------- -----------
Total stockholders' equity 8,241,297 4,878,780
----------- -----------
$25,864,710 $17,672,244
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
<PAGE> 42
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JUNE 30, 1996 JULY 2, 1995 JULY 3, 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue:
Restaurants $37,227,201 $34,600,265 $34,657,347
Food products 2,902,242 3,051,392 2,351,147
----------- ----------- -----------
Total revenues: 40,129,443 37,651,657 37,008,494
Costs and expenses:
Cost of restaurant revenues:
Cost of food and beverage 10,956,113 10,471,159 10,328,556
Labor and benefits 11,348,823 11,507,171 10,924,499
Other restaurant operations 10,222,633 10,025,239 10,389,828
Cost of food product revenues:
Cost of products 1,517,539 1,671,724 1,271,668
Selling, marketing and distribution 1,126,055 1,538,664 2,498,372
General and administrative 2,752,539 3,321,296 5,257,820
Depreciation and amortization 2,178,218 2,071,972 1,622,554
Provision for restaurant closings - 2,856,105 930,691
Provision for doubtful accounts - - 589,502
Merger and acquisition costs - - 980,358
----------- ----------- -----------
Total costs and expenses 40,101,920 43,463,330 44,793,848
----------- ----------- -----------
Income (loss) from operations 27,523 (5,811,673) (7,785,354)
Non-operating income (expenses):
Interest income 166,566 156,550 129,728
Interest expense (850,224) (813,153) (511,826)
Loss on conversion of debt to equity - (1,329,775) -
Other, net 704,831 305,731 (204,996)
----------- ----------- -----------
Total non-operating income (expenses) 21,173 (1,680,647) (587,094)
----------- ----------- -----------
Income (loss) before income taxes and extraordinary item 48,696 (7,492,320) (8,372,448)
Income tax provision (benefit) - - (12,467)
----------- ----------- -----------
Income (loss) before extraordinary item 48,696 (7,492,320) (8,359,981)
Extraordinary item - gain on extinguishment of debt - 455,579 -
----------- ----------- -----------
Net income (loss) 48,696 (7,036,741) (8,359,981)
Preferred stock dividends 296,586 294,680 300,591
----------- ----------- -----------
Net income (loss) less preferred stock dividends ($247,890) ($7,331,421) ($8,660,572)
=========== =========== ===========
Loss per common share before extraordinary item ($0.02) ($0.87) ($1.10)
Extraordinary item per common share - 0.05 -
----------- ----------- -----------
Net loss per common share ($0.02) ($0.82) ($1.10)
=========== =========== ===========
Weighted average common and common equivalent shares
outstanding 12,040,163 8,921,543 7,894,816
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
<PAGE> 43
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-------- -------- ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 27,1993 449,000 $449,000 7,124,345 $ 356,218 $ 9,316,208 ($4,052,284) $ 6,069,142
Issuance of common stock - - 1,111,931 55,596 7,295,952 - 7,351,548
Conversion of preferred (118,660) (118,660) 148,325 7,416 111,244 - -
Preferred stock dividends:
Cash - - - - (32,294) - (32,294)
Common stock - - 38,714 1,936 (1,936) - -
Exercise of stock options - - 2,500 125 7,375 - 7,500
Dividend paid to - - - - (193,000) - (193,000)
Net loss - - - - - (8,359,981) (8,359,981)
-------- -------- ---------- ----------- ----------- ------------ -----------
Balance, July 3, 1994 330,340 330,340 8,425,815 421,291 16,503,549 (12,412,265) 4,842,915
Conversion of debentures - - 1,093,904 54,695 2,474,958 - 2,529,653
Issuance of common stock - - 1,458,156 72,907 4,448,591 - 4,521,498
Conversion of preferred (800) (800) 1,000 50 750 - -
Preferred stock dividends:
Cash - - - - (4,295) - (4,295)
Common stock - - 133,151 6,658 (6,658) - -
Issuance of warrants - - - - 25,750 - 25,750
Net loss - - - - - (7,036,741) (7,036,741)
-------- -------- ---------- ----------- ----------- ------------ -----------
Balance, July 2, 1995 329,540 329,540 11,112,026 555,601 23,442,645 (19,449,006) 4,878,780
Issuance of common stock - - 2,003,667 100,183 3,214,388 - 3,314,571
Preferred stock dividends:
Cash - - - - (750) - (750)
Common stock - - 317,965 15,898 (15,898) - -
Net income - - - - - 48,696 48,696
-------- -------- ---------- ----------- ----------- ------------ -----------
Balance, June 30, 1996 329,540 $329,540 13,433,658 $ 671,682 $26,640,385 ($19,400,310) $ 8,241,297
======== ======== ========== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
<PAGE> 44
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
June 30, 1996 July 2, 1995 July 3, 1994
------------- ------------- ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $48,696 ($7,036,741) ($8,359,981)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,178,217 2,071,972 1,644,444
Provision for restaurant closings - 2,856,105 930,691
Provision for doubtful accounts - - 589,502
Loss on conversion of debt to equity - 1,329,775 -
Provision for inventory write-down - - 671,632
Gain on disposal of assets (163,175) - (53,516)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, trade (292,209) 312,140 (129,759)
Accounts receivable from affiliates 37,542 (245,469) (10,490)
Inventories (192,446) 177,089 526,913
Prepaid expenses and other current assets 255,759 (66,995) (57,108)
Accounts payable to affiliates - - 2,503,377
Accounts payable and accrued liabilities (673,405) (325,571) (25,371)
Other assets (6,031) (331,377) (10,508)
Noncurrent liabilities 153,406 (81,914) (74,361)
---------- ---------- ------------
Net cash provided by (used in) 1,346,354 (1,340,986) (1,854,535)
---------- ---------- ------------
Investing activities:
Purchases of property and equipment (1,642,333) (1,438,320) (3,599,764)
Proceeds from sale of assets 197,027 - -
Marketable securities - - 119,468
Investment in note receivable - - (1,500,000)
Collection of note receivable 60,391 756,000 500,000
Investments in receivables from affiliates - - (1,845,201)
Collection of receivables from affiliates - 69,745 2,184,662
Cost of acquisitions, net of cash acquired (231,745) - (2,393,393)
---------- ---------- ------------
Net cash used in investing (1,616,660) (612,575) (6,534,228)
---------- ---------- ------------
Financing activities:
Net proceeds from issuance of common stock - 2,166,295 5,093,352
Contributions from minority partners - - (19,292)
Net proceeds from issuance of debentures - - 2,253,190
Proceeds from affiliate borrowings - - 360,000
Repayment of affiliate borrowings (150,000) (519,507) (362,993)
Proceeds from other borrowings and warrants 1,221,790 4,986,550 1,225,400
Repayment of other borrowings (2,439,297) (3,105,463) (1,129,916)
Cash dividends (750) (4,295) (251,956)
---------- ---------- ------------
Net cash provided by financing (1,368,257) 3,523,580 7,167,785
---------- ---------- ------------
Net increase (decrease) in cash and cash equivalents (1,638,563) 1,570,019 (1,220,978)
Cash and cash equivalents, beginning of period 2,101,729 531,710 1,752,688
---------- ---------- ------------
Cash and cash equivalents, end of period $463,166 $2,101,729 $ 531,710
========== ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
<PAGE> 45
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Watermarc Food Management Co. (the "Company"), owns and operates 41
restaurants, primarily in the Houston Metropolitan area, under the names
"Marco's Mexican Restaurants"; "The Original Pasta Co."; "Billy Blues";
"Longhorn Cafes"; "Pete's Barbecue"; and "Hotspurs". All but the Billy
Blues restaurant are operated by wholly-owned subsidiaries of the Company.
The Company also produces and markets two brands of barbecue sauces, "Billy
Blues Barbecue Sauce" and "Chris' & Pitt's Bar-B-Que Sauce". Both are
marketed to supermarkets, other retail stores and food service outlets.
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 $4.5 million at June 30, 1996.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis,
to obtain additional financing or capital and to refinance its debt.
Management's plans include the following:
o Increasing revenues in existing restaurants by remodeling certain
Marco's Mexican Restaurants and by improving marketing programs and
customer service.
o Increasing revenues from the sale of food products by reinforcing
existing markets, expanding distribution to new market areas,
introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
o Franchising new restaurants.
o Maintaining cost controls while increasing revenues.
o Obtaining additional equity capital or debt financing.
o Refinancing debt, primarily $3 million in subordinated notes due in
July of 1997.
FISCAL YEAR
The Company utilizes a 52-53 week fiscal year which ends on the Sunday
closest to June 30. References to 1994, 1995 and 1996 are to the 53, 52
and 52 week periods ended July 3, 1994, July 2, 1995 and June 30, 1996,
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 - 7
<PAGE> 46
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
Organization costs are included in other assets and are being amortized on
a straight-line basis over five years.
INTANGIBLE ASSETS
Included in intangible assets is goodwill associated with the purchase of
The Original Pasta Co., Pete's Hospitality, Inc. and Chris' & Pitt's
Barbecue Sauce. These assets are being amortized using the straight-line
method over the expected period to be benefited (fifteen years for The
Original Pasta Co., twenty-five years for Pete's Hospitality and Chris' &
Pitt's). 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.
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 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 - 8
<PAGE> 47
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONT'D:
IMPACT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting
for Stock-Based Compensation" which establishes accounting and reporting
standards for stock-based employee compensation plans. Companies are
encouraged to utilize the fair-value method to measure stock based
compensation but may continue to utilize the methods prescribed by APB
Opinion No. 25 and disclose the pro-forma affects of the SFAS No. 123
method. The Company has decided to adopt the disclosure requirements of
SFAS No. 123.
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" which
uses a "financial components" financial assets that are sales from
transfers that are secured borrowings. The pronouncement is effective for
transactions occurring after December 31, 1996.
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.
RECLASSIFICATIONS
Certain 1995 and 1994 financial statement amounts have been reclassified to
conform with the June 30, 1996 presentation. These reclassifications had no
effect on total stockholders' equity or net income.
2. BUSINESS COMBINATIONS:
THE ORIGINAL PASTA CO.
Effective January 26, 1996, the Company acquired all of the outstanding
common stock of The Original Pasta Co. (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 each period presented:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues $46,086,307 $44,960,944
Net loss (679,509) (8,201,187)
Net loss per common share (.08) (.95)
</TABLE>
F - 9
<PAGE> 48
2. BUSINESS COMBINATIONS CONT'D:
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:
<TABLE>
<S> <C>
Net of liabilities over tangible assets $ (768,955)
Intangible Assets 131,250
Goodwill 7,634,255
------------
Total purchase price allocation $ 6,996,550
============
</TABLE>
MARCO'S MEXICAN RESTAURANTS, INC.
Effective July 1, 1994, the Company exchanged 4,600,000 shares of the
Company's common stock for all of the outstanding capital stock of Marco's
Mexican Restaurants, Inc. ("Marco's Restaurants"). The merger has been
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 include the results of operations, financial position and
cash flows of Marco's Restaurants.
The effect of the merger on previously reported revenues, net loss, and net
loss per share for fiscal year 1994 is summarized below:
<TABLE>
<CAPTION>
Net Loss
Revenues Net Loss Per Share
-------------- ------------ ----------
<S> <C> <C> <C>
Billy Blues, prior to merger $14,584,320 $(8,240,378) $ (2.59)
Marco's Restaurants 22,424,174 ( 119,603) -
----------- ----------- --------
Consolidated $37,008,494 $(8,359,981) $ (1.10)
=========== =========== ========
</TABLE>
Net loss per share, for the periods presented, includes the shares issued
in connection with the mergers. There were no extraordinary items, other
changes in stockholders' equity or intercompany transactions for either
company. Additionally, there were no adjustments related to changes in
accounting policies. During the fourth quarter of 1994, the Company
recorded merger and acquisition costs of $980,358, which included
investment banking fees, legal and accounting fees, stock registration
expenses, severance and benefit related costs and other costs associated
with combining the operations of the Company and Marco's Restaurants.
CHRIS' & PITT'S
Effective March 25, 1994, the Company purchased the Chris' & Pitt's Bar-B-Q
Sauce product line ("Chris' & Pitt's") for approximately $4,647,000. The
assets acquired include the inventories and the rights to manufacture, sell
and distribute the product line under a short term licensing agreement,
which includes the right to use trademarks, formulae and other intangible
assets. To fund the purchase price, the Company issued $2.7 million of
subordinated debentures, of which $2 million was used as a down payment,
and issued notes payable to the seller totaling $2,647,000 for the
remaining balance. The acquisition has been accounted for as a purchase.
The excess of the purchase price, including related acquisition expenses of
approximately $100,000, over the net assets acquired, is recorded as an
intangible asset and is being amortized over 25 years.
The allocation of the total purchase price, including related expenses, for
Chris' & Pitt's based on the estimated fair value of the net assets
acquired, at the date of acquisition, was as follows:
<TABLE>
<S> <C>
Inventories $ 600,682
License agreement 4,146,318
------------
$ 4,747,000
============
</TABLE>
F - 10
<PAGE> 49
2. BUSINESS COMBINATIONS CONT'D:
PETE'S HOSPITALITY CO., INC.
Effective August 24, 1993, the Company acquired all of the outstanding
common stock of Pete's Hospitality Co., Inc. ("Pete's Hospitality"). The
purchase price was approximately $2,000,000, consisting of approximately
$60,000 in cash and the issuance of 377,325 shares of the Company's common
stock. The acquisition has been accounted for as a purchase and,
accordingly, the assets and liabilities of Pete's Hospitality have been
adjusted to their fair values at the date of acquisition. The excess of
the purchase price, including related acquisition costs of approximately
$333,000, over the fair values of the net assets acquired is reported as
goodwill and is being amortized over 25 years.
The allocation of the total purchase price, including related expenses, for
Pete's Hospitality based on the estimated fair value of the net assets
acquired, at the date of acquisition, is as follows:
<TABLE>
<S> <C>
Net tangible assets $ 1,251,527
Favorable lease acquired 209,000
Goodwill 872,077
------------
Total purchase price allocation $ 2,332,604
============
</TABLE>
The statement of operations includes the results of operations of Chris' &
Pitt's and Pete's Hospitality from their respective acquisition dates. The
following table summarizes the unaudited pro forma results of operations of
the Company as if the acquisitions had occurred at the beginning of fiscal
year 1994.
<TABLE>
<CAPTION>
1994
------------
<S> <C>
Revenues $ 39,314,131
Net loss (8,309,987)
Net loss per common share ( 1.06)
</TABLE>
[This space is intentionally left blank.]
F - 11
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at
June 30, 1996 and July 2, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Inventories:
Food products $ 399,946 $ 181,262
Restaurant food, beverage and other 315,592 254,604
----------- ------------
$ 715,538 $ 435,866
=========== ============
Property and Equipment:
Land $ 50,000 $ 50,000
Building and leasehold improvements 7,770,515 4,825,270
Furniture, fixtures and equipment 9,828,449 7,697,834
Transportation equipment 178,293 152,096
----------- ------------
17,827,257 12,725,200
Less accumulated depreciation and amortization (8,498,731) (6,330,688)
----------- ------------
$ 9,328,526 $ 6,394,512
=========== ============
Intangible Assets:
License agreement $ 4,401,572 $ 4,146,318
Goodwill 8,458,728 872,077
Favorable lease 209,000 209,000
----------- ------------
13,069,300 5,227,395
Less accumulated amortization (869,253) (348,771)
----------- ------------
$12,200,047 $ 4,878,624
=========== ============
Other assets:
Debt issue costs $ 77,178 $ 253,572
Organizational costs 2,024 2,790
Land and building held for sale - 515,000
Other 104,484 93,047
----------- ------------
$ 183,686 $ 864,409
=========== ============
Accrued liabilities:
Payroll and related costs $ 487,820 $ 455,362
Taxes, other than payroll and income taxes 409,093 314,185
Reserve for restaurant closings - 866,000
Rent 457,673 414,828
Interest 139,182 120,201
Other 337,287 828,557
----------- ------------
$ 1,831,055 $ 2,999,133
=========== ============
</TABLE>
F - 12
<PAGE> 51
4. LONG-TERM DEBT AND NOTES PAYABLE TO STOCKHOLDER:
At June 30, 1996 and July 2, 1995, long-term debt consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable to bank, due in monthly installments with interest
at 9.25%, maturing in May 1999, collateralized by certain
property and equipment $ 583,333 $ 783,333
Mortgage note payable, due in monthly installments with interest
at 10%, collateralized by certain land and building. The note
was repaid in August of 1996. 254,125 255,765
Note payable to bank, due in annual principal installments with
interest payable monthly at 1.5% above prime - 100,000
Notes payable to banks and trade vendors, due in monthly
installments with interest ranging from 0% to 12.50%, maturing
at various dates through 1998, collateralized by certain property
and equipment 840,057 1,371,265
Notes payable to banks, due in monthly installments with interest
rates ranging from 8% to 9.5%, maturing at various dates through
January 1998, collateralized by certain vehicles 26,483 40,999
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. 2,500,000 2,500,000
Notes 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,
collateralized by certain property and equipment 519,878 -
Note payable to bank, due in monthly principal installments with
interest payable quarterly at 9.75% maturing March 2001,
collateralized by certain property and equipment 1,148,644 -
9% convertible subordinated debentures due March 1999, 217,000 217,000
collateralized by inventories and accounts receivable, licenses,
trademarks and equipment
Capital lease obligations 10,997 79,552
------------- ------------
7,100,517 6,347,914
Less current portion ( 1,401,825) ( 4,380,015)
------------- ------------
$ 5,698,692 $ 1,967,899
============= ============
</TABLE>
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
F - 13
<PAGE> 52
4. LONG-TERM DEBT AND NOTES PAYABLE TO STOCKHOLDER CONT'D:
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 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.
At June 30, 1996 and 1995, notes payable to stockholder consisted of the
following (see "Note 10 - Related Party Transactions"):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note associated with the acquisition of Pasta Co. with principal and
interest at 10% due in July 1997, collateralized by assets related to
Pasta Co. $ 595,000 $ -
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 assets related to Pasta Co. 2,750,000 -
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. 1,000,000 -
Note associated with the acquisition of Pasta Co. with principal and
interest at 6% due July 1997, collateralized by assets related to
Pasta Co. 224,202 -
Subordinated note, interest at 12% payable
quarterly, principal due in July 1997 500,000 500,000
------------ ------------
5,069,202 500,000
Less current portion - (500,000)
------------ ------------
$ 5,069,202 $ -
============ ============
</TABLE>
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 30, 1996, the Company had no credit facilities available.
The carrying amounts of notes payable approximates fair value.
Annual maturities of long-term debt and notes payable to stockholder, as of
June 30, 1996 are: $1,401,825 in 1997; $5,556,057 in 1998; $1,811,311 in
1999; $412,518 in 2000; $1,613,009 in 2001; $1,375,000 in 2002; and no
amounts thereafter.
5. LEASE OBLIGATIONS:
The Company leases restaurant facilities and certain equipment and
leasehold improvements under operating lease agreements having terms
expiring at various dates through 2004. The leases have renewal
F - 14
<PAGE> 53
5. LEASE OBLIGATIONS CONT'D:
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 $2,662,000, $2,507,000 and $2,599,000 in 1994, 1995 and 1996
respectively.
Future minimum lease payments, excluding contingent rentals, at June 30,
1996, were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING
<S> <C>
1997 $ 2,924,019
1998 2,599,213
1999 2,209,756
2000 1,955,205
2001 1,702,924
Thereafter 6,655,116
-------------
Total future minimum lease payments $ 18,046,233
=============
</TABLE>
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.
The Company is currently involved in, and is vigorously defending, a
lawsuit for alleged wrongful termination and the plaintiff is suing for
$500,000 in actual damages and $1,000,000 in punitive damages. The Company
is also involved in various other lawsuits arising in the ordinary course
of its business. The Company believes the resolution of these matters will
not have a material adverse impact on its financial position, results of
operations or cash flows.
At June 30, 1996, the Company has accrued approximately $30,000 for any
potential settlements of the above contingencies.
7. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS:
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest paid $624,855 $608,074 $380,959
Income taxes paid - - 80,000
</TABLE>
F - 15
<PAGE> 54
7. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS CONT'D:
Supplemental disclosure of noncash investing and financing activities:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Restaurant development rights received in satisfaction
of note receivable $ - $ 150,000 $ -
Conversion of preferred stock to common stock - 800 -
Capital leases - - 167,282
Conversion of note receivable to common stock of affiliate - - 400,500
Conversion of warrants in lieu of payment of affiliate advances - - 50,000
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 15,898 6,658 -
Issuance of debt in payment of liabilities 548,680 - -
</TABLE>
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:
<TABLE>
<S> <C>
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
===========
</TABLE>
During 1994, the Company completed purchase acquisitions of Pete's
Hospitality, Chris' & Pitt's product line, and a restaurant located in
Arizona. Components of cash used for these acquisitions, as reflected in
the Consolidated Statement of Cash Flows for 1994 are summarized as
follows:
<TABLE>
<S> <C>
Fair value of current assets, net of cash acquired $ 927,320
Fair value of noncurrent assets, excluding intangibles 2,396,111
Intangible assets 5,227,395
Liabilities assumed or incurred (3,941,738)
Stock issued at closing (2,215,695)
------------
Cash paid at closing, net of cash acquired $ 2,393,393
============
</TABLE>
F - 16
<PAGE> 55
8. INCOME TAXES:
The significant components of the Company's deferred tax assets and
liabilities, as of June 30, 1996 and July 2, 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts $ - $ 75,491
Accrued liabilities 275,723 524,430
Net operating loss 6,117,025 5,592,377
Property and equipment 44,044 276,799
------------ --------------
Total deferred tax assets 6,436,792 6,469,097
------------ --------------
Deferred tax liabilities:
Deductible intangible assets 421,350 349,858
------------ --------------
Total deferred tax liabilities 421,350 349,858
------------ --------------
Net deferred tax assets before valuation allowance 6,015,442 6,119,239
Valuation allowance (6,015,442) (6,119,239)
------------ --------------
Net deferred tax asset $ - $ -
============ ==============
</TABLE>
F - 17
<PAGE> 56
8. 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:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax provision (benefit) at statutory $ 16,557 $ (2,392,492) $ (2,846,631)
rate
Amortization of goodwill 69,382 - -
Loss on conversion of debt to equity - 452,124 -
Merger transaction expenses - - 231,308
Change in valuation allowance (103,797) 1,695,325 2,341,914
Other 17,858 245,043 260,942
----------- ------------- ------------
Total provision (benefit) for income $ - $ - $ (12,467)
taxes =========== ============ ============
</TABLE>
As of June 30, 1996, the Company had consolidated net operating loss
carryforwards (NOL's) of approximately $18 million which expire in varying
amounts through the fiscal years 2005 through 2010. 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. The Company has not filed its federal income
tax returns for December 31, 1994 and 1995. The preparation of such returns
could result in changes to the disclosures herein. The Company does not
expect penalties to be assessed since management believes that no taxes are
due.
An uncertainty exists as to whether the Company can file a consolidated
federal income tax return that includes Marco's Restaurants. Should the
Company be precluded from filing consolidated federal income tax returns
with Marco's Restaurants, the Company could not offset the taxable income of
Marco's Restaurants against the losses of other entities. No liability has
been recorded for income taxes, if any, that may be payable. Management
believes that it is reasonably possible that the Company will prevail;
however, should the Company not prevail in this matter, the Company could
owe income taxes of approximately $200,000 on Marco's estimated taxable
income for the years ended December 31, 1994 and 1995.
9. STOCKHOLDERS' EQUITY:
ISSUANCES OF COMMON STOCK
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.
F - 18
<PAGE> 57
9. STOCKHOLDERS' EQUITY CONT'D:
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.
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.
F - 19
<PAGE> 58
9. STOCKHOLDERS' EQUITY CONT'D:
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.
FISCAL YEAR 1994:
In August 1993, the Company issued 170,549 shares of common stock in
connection with the acquisition of Pete's Hospitality. As provided for in
the acquisition agreement, the total amount of the Company's common stock
issued was subsequently increased to 377,325 shares due to a decline in
valuation of the Company's stock.
In October 1993, the Company issued 450,000 shares of common stock through
a private offering. Proceeds from the sale, net of offering costs, were
approximately $3.8 million.
In December 1993, the Company issued 14,500 shares of common stock valued
at $12 per share, or $175,000, in connection with the acquisition of a
restaurant in Arizona.
During 1994, the Company issued 231,900 shares of common stock in
connection with the exercise of 231,900 Series A Warrants. Net proceeds
received were $1,307,420, net of related costs.
Additionally, in 1994, the Company issued 38,206 shares of its common stock
to two individuals satisfying the Company's obligations to them.
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.
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 until January 1997.
None of these warrants have been exercised.
COMMON STOCK WARRANTS AND STOCK OPTION PLANS
The Company has the following common stock warrants and option plans:
o SERIES A WARRANTS - The Company has 875,500 Series A Warrants
outstanding at June 30, 1996. 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
warrants were to expire on May 15, 1995. However, in January 1995,
the Company extended the expiration date to May 15, 1996, and in
April, 1996 the Company extended the expiration date to May 15, 1997.
The Company has the right 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.
F - 20
<PAGE> 59
9. STOCKHOLDERS' EQUITY CONT'D:
o OTHER WARRANTS - At the close of its initial public offering, the
Company issued, to the underwriter, warrants to purchase 97,000 units
at an exercise price of $6.15 per unit, exercisable until May 15,
1997. Each unit consists of one share of common stock and one Series
A Warrant. None of these warrants have been exercised.
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, said purchase
price was reduced to $1.00 per share.
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
December 31, 1999. In connection with an agreement to extend the
repayment date of the notes, said purchase price was reduced to $1.00
per share.
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.
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.
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 five 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 388,500 options were available for
grant.
A summary of stock option activities during 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
<S> <C> <C>
Options outstanding at June 27, 1993 195,000 $ 3.00 to $ 7.84
Granted 502,000 4.63 to 10.50
Canceled (237,500) 5.12 to 10.50
Exercised (2,500) 3.00
--------
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
--------
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
========
Exercisable at June 30, 1996 149,000 1.00 to 2.88
========
</TABLE>
F - 21
<PAGE> 60
10. RELATED PARTY TRANSACTIONS
On September 7, 1995, the Board of Directors of the Company approved the
acquisition of all of the issued and outstanding shares (the "Shares") of
Pasta Co. from 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. were associated with its ownership of ten (10) restaurants in
Houston, Texas.
In consideration for the Shares, Mr. Bombaywala received 1,666,667 shares
of the Company's Common Stock (the "Merger Shares") and two promissory
notes in the aggregate principal amount of $3,750,000 (the "Notes"). The
Merger Shares were valued at $1.78 per share which was the market value of
the Common Stock 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 are 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, including
amounts due to Mr. Bombaywala as noted below.
Although not required by law, the Board of Directors of the Company elected
to submit the Merger to its independent shareholders for approval at its
Annual Meeting of Shareholders which was held January 9, 1996. Mr.
Bombaywala, who then owned 4,620,000 shares of the Company's Common Stock,
or 41.6%, excluding the Merger Shares, did not vote on the Merger at the
Annual Meeting. The Merger was approved, and the effective date 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 are subject to a
Development Escrow Agreement which provides 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.
The Notes consist of (i) a promissory note from PAC in the principal amount
of $2,750,000, bearing interest at 10% per annum which, subject to certain
mandatory prepayment provisions, is due and payable September 15, 2002, and
(ii) a promissory note from PAC 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, is due and payable in two equal
annual installments on December 31, 1996 and December 31, 1997. Quarterly
payments of interest are due and payable on the Notes on the 15th day of
December, March, June and September of each year the Notes are outstanding.
Commencing September 15, 2000, the outstanding principal on the $2,750,000
Note will be amortized and paid in quarterly installments over the
remaining two year term. The Notes require 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
has agreed to defer any and all principal and interest until July of 1997.
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. The land and building transferred had been a non-productive
asset of the Company, and 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.
The Notes are 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 ten restaurants owned by
Pasta Co. on the Effective Date. The lien of Mr. Bombaywala will be junior
to any prior liens granted by Pasta Co. on or before the Effective Date.
F - 22
<PAGE> 61
10. RELATED PARTY TRANSACTIONS CONT'D:
At June 30, 1996, the Company has 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 voted to modify the terms of the
note by deferring payment of the interest due until December 31, 1995. In
May 1996, the Company and Mr. Bombaywala agreed to offset interest due from
Mr. Bombaywala under the note against interest due to Mr. Bombaywala under
notes associated 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.
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 million of the subordinated notes if they have
not been paid in full at maturity.
Mr. Bombaywala has also guaranteed other obligations of the Company,
including notes payable and leases associated with Marco's and Pasta Co.
restaurants.
In August of 1996, the Company sold land, building and equipment related to
a Marco's Restaurant for a total of $350,000 and leased the assets back
from Mr. Bombaywala. The Company believes that both the selling price and
lease rate are comparable to those which could be attained from an
unrelated third party.
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.
Until April 1, 1996, the Company was obligated under a long-term lease
commitment associated with a closed Billy Blues restaurant located in
Denver, Colorado. At such time, as incentive for being relieved of such
obligation, the Company transferred the fixed assets of the restaurant to a
limited partnership of which the general partner is an unaffiliated third
party. As additional incentive to such general partner, Mr. Bombaywala and
Angelo Pitillo, Director, President and Chief Operating Officer of the
Company, invested in the partnership as limited partners. The limited
partnership will not operate the restaurant as a Billy Blues restaurant.
In June 1993, the Company entered into area development agreements for the
development of restaurant franchises in Texas, Mexico and Central America
(the "Development Rights"). As consideration for the Development Rights,
the Company issued 47,000 shares of its restricted stock, valued at $8.50
per share, or an aggregate consideration of $399,500. Also in June 1993,
the Company sold the Development Rights to Tex-Mex Ventures, Inc.
("Tex-Mex"), an affiliated company, for an $800,000 five-year promissory
note to the Company. The note was convertible, at the option of the
Company, in whole or in part, into an equity position of Tex-Mex of up to
20%. The principal of the note is due in June 1998 and accrues interest at
8%, which is payable semi-annually. The note was initially collateralized
by the Development Rights and all other assets of Tex-Mex. Four principal
shareholders of Tex-Mex were or are former officers and/or directors of the
Company.
In June 1994, the Company elected to convert a portion of the note
receivable from Tex-Mex into 600,000 shares of Tex-Mex common stock (the
"Tex-Mex Shares") and modify the note to an uncollateralized obligation for
the remaining balance of $199,500.
F - 23
<PAGE> 62
10. RELATED PARTY TRANSACTIONS CONT'D:
On June 30, 1994, the Company sold the Tex-Mex Shares to JEB Investment
Corporation ("JEB"), an unaffiliated entity, for a $1,800,000 promissory
note, with interest at 9% collateralized by the Tex-Mex Shares. The note
matured on June 30, 1996. In 1996, Tex-Mex went public under the name
CluckCorp International, Inc. ("CluckCorp"). In June of 1996, the Company
agreed to accept 240,000 shares of CluckCorp as settlement of all principal
and interest due under the JEB note. The Company also agreed that the
maximum amount that the Company can derive from the sale of the stock is
$600,000. The Company intends to sell the stock as soon as possible. For
financial reporting purposes, no gain has been recognized on the 1993 sale
of the Development Rights or the 1994 sale of the Tex-Mex Shares. As of
June 30, 1996 neither the Tex-Mex nor the JEB notes are reflected on the
books of the Company. Any net proceeds from the sale of CluckCorp stock
will be recorded as a gain when collected.
As a result of the acquisitions of the Longhorn Cafes in 1993, Julian
Fertitta (Mr. Fertitta), former owner of Longhorn Cafes, was elected as an
officer and director of the Company. The Company also assumed notes
payable to Mr. Fertitta of $1,323,753. During 1994, the Company repaid
$250,000 of the principal balance and interest of $66,738.
In May 1994, the Company and Mr. Fertitta entered into a settlement
agreement for the purpose of releasing the Company from the remaining
indebtedness of the notes, in consideration for which the Company
transferred to Mr. Fertitta all the common stock of Lake Longhorn, Inc.
and entered into a 12-month consulting agreement with Mr. Fertitta calling
for a consulting fee of $10,000 per month. The consulting agreement
expired in May 1995. Mr. Fertitta was issued 13,000 shares of common
stock in payment for the last four months of the consulting agreement.
Michael S. Chadwick, ("Mr. Chadwick"), a director of the Company received
20,000 shares of the Company's common stock in satisfaction of a commission
owed to him in connection with the merger of the Company with Marco's
Restaurants.
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 March 1996, in connection with an extension on
the payment terms of the Subordinated Notes, the exercise price of the
warrants was reduced to $1.00 per share and the Advisory Agreement was
extended for an additional 18 months with a monthly fee of $5,000 per
month.
In May 1995, the Company entered into an agreement with L. Douglas
Peterson, (the "Peterson Agreement") to amend the then existing employment
agreement between the two parties. The Peterson Agreement provided for the
termination of Mr. Peterson and the establishment of an ongoing consulting
relationship. As compensation for amending the employment agreement, Mr.
Peterson received 68,800 shares of the Company's Common Stock valued at
$172,000. Mr. Peterson also received the license to use certain of the
Company's trade names at the Annual Puyallup Fair (the "Fair") held in the
Seattle, Washington area. The license is automatically renewable on a
year-to-year basis but shall terminate if Mr. Peterson fails to obtain the
Fair concession for two consecutive years. Peterson is not obligated to
make payments related to the use of the Company's trade names at the Fair.
F - 24
<PAGE> 63
10. RELATED PARTY TRANSACTIONS CONT'D:
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.
11. QUARTERLY INFORMATION (UNAUDITED):
The following table sets forth certain quarterly operating data.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTER ENDED
--------------------------------------------------------------------------
OCTOBER 1, 1995 DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996
<S> <C> <C> <C> <C>
Revenues $9,443,334 $8,442,038 $10,118,214 $12,125,857
Income (loss) from operations 35,547 84,126 (77,948) (14,202)
Net income (loss) 81,625 93,190 (96,890) (29,228)
Net income (loss) per common $ -0- $ -0- ($.01) $ -0-
share
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1995 QUARTER ENDED
--------------------------------------------------------------------------
OCTOBER 2, 1994 JANUARY 1, 1995 APRIL 2, 1995 JULY 2, 1995
<S> <C> <C> <C> <C>
Revenues $10,063,635 $8,897,447 $8,948,210 $ 9,742,365
Loss from operations (547,772) (346,915) (224,564) (4,692,422)
Loss before extraordinary item (581,840) (419,437) (345,815) (6,145,228)
Net income (loss) (581,840) 36,142 (345,815) (6,145,228)
Loss per common share
before extraordinary item ($.08) ($.06) ($.05) ($.68)
Net loss per common share ($.08) ($.01) ($.05) ($.68)
</TABLE>
During the fourth quarter of 1995, the Company decided to either close or
sell its interest in four of its Billy Blues restaurants and recorded a
provision for restaurant closings of approximately $2.9 million. Also
included in this amount was a provision for a lease obligation related to
management's reassessment of the feasibility of opening a new restaurant.
In May of 1995, the Company offered its Subordinated Debentureholders the
right to convert the principal and accrued interest owed on their
debentures into common stock at a modified conversion rate of $2.31
principal and accrued interest for one share of common stock.
Debentureholders owed an aggregate of approximately $2.5 million agreed to
the conversion and received 1,093,904 shares of stock. The Company
recorded a fourth quarter loss on conversion of $1.3 million equal to the
then current market value of the number of shares actually issued less the
number of shares which would have been issued had the conversion been at
the stated conversion rate of $5 per share.
F - 25
<PAGE> 64
12. 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 1996, 1995 or 1994.
F - 26
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
------ ---------------------- -------------
<S> <C> <C>
4.1 Amendment 1 to Warrant Agreement covering Series A Warrants
4.2 Amendment 2 to Warrant Agreement covering Series A Warrants
4.3 Notice of Extension of Warrant Expiration Date to May 15,
1997
4.4 First Amendment to Purchase Agreement dated effective as of
March 31, 1996, among the Company and the Purchasers
relating to $3,000,000 12% Subordinated Notes due March 31,
1996
4.5 Security Agreement dated as of May 20, 1996 by the Company
in favor of the Purchasers relating to $3,000,000 12%
Subordinated Notes
4.6 First Amendment to Financial Advisory Agreement dated
March 31, 1996 between the Company and Sanders Morris Mundy,
Inc. ("SMM")
4.7 Form of Amendment to 12% Subordinated Notes of the Company
due March 31, 1996 extending maturity date to July 31, 1997
10.1 1994 Stock Compensation Plan of the Company
10.2 First Amendment to the 1994 Stock Compensation Plan of the
Company
10.3 Second Amendment to the 1994 Stock Compensation Plan of the
Company
10.4 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
10.5 $2,750,000 promissory note from Pasta Acquisition Co. to
Ghulam M. Bombaywala dated effective September 14, 1995
10.6 $1,000,000 promissory note from Pasta Acquisition Co. to
Ghulam M. Bombaywala dated effective September 14, 1995
10.7 $595,000 promissory note from Pasta Acquisition Co. to
Ghulam M. Bombaywala dated effective January 26, 1996
10.8 $224,202 promissory note from Pasta Acquisition Co. to
Ghulam M. Bombaywala dated effective January 26, 1996
10.9 $1,200,000 promissory note from the Company to Metrobank,
N.A. dated March 15, 1996
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
------ ---------------------- -------------
<S> <C> <C>
10.10 Security Agreement between Pasta Acquisition Co., The
Original Pasta Co. and Ghulam M. Bombaywala dated September
14, 1995
10.11 Security Agreement Pledge between the Company and
Ghulam M. Bombaywala dated September 14, 1995
10.12 Guaranty Agreement Pledge between the Company and
Ghulam M. Bombaywala dated September 14, 1995
10.13 Service Mark License Agreement between Pasta Acquisition
Co. and Ghulam M. Bombaywala dated September 14, 1995
11.1 Statement regarding computation of per share earnings
21.1 List of subsidiaries
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
AMENDMENT NO. 1 TO WARRANT AGREEMENT
THIS AMENDMENT NO. 1 TO WARRANT AGREEMENT (the "Agreement") is dated
January 25, 1995, by and between Billy Blues Food Corporation, a Texas
corporation with its principal offices in Houston, Texas (the "Company"), and
North American Transfer Co., as warrant agent (the "Warrant Agent").
W I T N E S S E T H:
WHEREAS, the parties hereto previously entered into that certain
Warrant Agreement dated May 15, 1992 (the "Original Agreement"), a copy of
which is attached hereto as Exhibit A, for the purpose of setting forth the
terms and conditions of the issuance, registration, transfer, exchange and
redemption of the Company's Series A Redeemable Common Stock Purchase Warrants
(the "Series A Warrants");
WHEREAS, all capitalized terms used herein shall have the same meaning
assigned them in the Original Agreement unless otherwise set forth herein.
Furthermore, this Agreement confirms and ratifies all terms and conditions set
forth in the Original Agreement except as expressly modified herein; and
WHEREAS, the parties hereto desire to amend the Original Agreement for
the purpose of extending the Warrant Expiration Date from May 15, 1995 to May
15, 1996;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. Amendment and Restatement of Section 1(i) of the Original
Agreement. Section 1(i) of the Original Agreement is hereby amended and
restated in its entirety as follows for the purpose of extending the Warrant
Expiration Date from May 15, 1995 to May 16, 1996:
1(i) "Warrant Expiration Date" shall mean 5:00 p.m. (New
York time) on May 15, 1996, with respect to the
Series A Warrants, or the redemption date as defined
in Section 8, whichever is earlier; provided that if
such date shall in the State of New York be a holiday
or a day on which banks are authorized to close, then
5:00 p.m. (New York time) on the next following day
which in the State of New York is not a holiday or a
day on which banks are authorized to close. The
Company may, at its election, extend the Warrant
Expiration Date with respect to the Series A
Warrants.
2. Current Prospectus. The Company agrees to monitor the market
price of its common stock, par value $.05 per share (the "Common Stock") and
will undertake to file a post-effective amendment to its registration statement
dated February 8, 1994, Registration No. 33-54684 (the "Registration
Statement"), at such time as the exercise of the Series A Warrants appears more
likely. Furthermore, the Company will not, without the opinion of counsel to
the Company, issue any of its Common Stock pursuant to the exercise of any of
the Series A Warrants
AMENDMENT NO. 1 TO WARRANT AGREEMENT - Page 1
<PAGE> 2
unless there is a post-effective amendment to the Registration Statement in
effect containing a current prospectus meeting the requirements of Section
10(a)(3) of the Securities Act of 1933, as amended.
3. Miscellaneous.
(a) This Agreement shall be binding upon and inure to the
benefit of the Company and the Warrant Agent and their respective
successors and assigns, and the holders from time to time of Warrant
Certificates. Nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim,
in equity or at law, or to impose upon any other person any duty,
liability or obligation.
(b) This Agreement shall be governed and construed in
accordance with the laws of the State of New York; provided, however,
that the Series A Warrants shall be governed by and construed in
accordance with the laws of the State of Texas, without reference to
principles of conflict of laws.
(c) If any term of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity of all other terms
hereof shall in no way be effected thereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1
to Warrant Agreement as of the date first above set forth.
COMPANY:
BILLY BLUES FOOD CORPORATION
By: /s/ ANGELO PITILLO
-------------------------------------
Name: Angelo Pitillo
-----------------------------------
Title: President
----------------------------------
WARRANT AGENT:
NORTH AMERICAN TRANSFER CO.
By: /s/ MILDRED ROSTOLDER
-------------------------------------
Name: Mildred Rostolder
-----------------------------------
Title: Principal
----------------------------------
AMENDMENT NO. 1 TO WARRANT AGREEMENT - Page 2
<PAGE> 1
AMENDMENT NO. 2 TO WARRANT AGREEMENT
THIS AMENDMENT NO. 2 TO WARRANT AGREEMENT (the "Agreement") is dated
April 15, 1996, by and between Watermarc Food Management Co., formerly known as
Billy Blues Food Corporation, a Texas corporation with its principal offices in
Houston, Texas (the "Company"), and North American Transfer Co., as warrant
agent (the "Warrant Agent").
W I T N E S S E T H:
WHEREAS, the parties hereto previously entered into that certain
Warrant Agreement dated May 15, 1992 (the "Original Agreement"), a copy of
which is attached hereto as Exhibit A, for the purpose of setting forth the
terms and conditions of the issuance, registration, transfer, exchange and
redemption of the Company's Series A Redeemable Common Stock Purchase Warrants
(the "Series A Warrants"):
WHEREAS, all capitalized terms used herein shall have the same meaning
assigned them in the Original Agreement unless otherwise set forth herein.
Furthermore, this Agreement confirms and ratifies all terms and conditions set
forth in the Original Agreement except as expressly modified herein; and
WHEREAS, the parties hereto desire to amend the Original Agreement for
the purpose of extending the Warrant Expiration Date from May 15, 1996 to
May 15, 1997:
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. Amendment and Restatement of Section 1(i) of the Original
Agreement. Section 1(i) of the Original Agreement is hereby amended and
restated in its entirety as follows for the purpose of extending the Warrant
Expiration Date from May 15, 1996 to May 15, 1997:
1(i) "Warrant Expiration Date" shall mean 5:00 p.m. (New
York time) on May 15, 1997, with respect to the
Series A Warrants, or the redemption date as defined
in Section 8, whichever is earlier; provided that if
such date shall in the State of New York be a holiday
or a day on which banks are authorized to close, then
5:00 p.m. (New York time) on the next following day
which in the State of New York is not a holiday or a
day on which banks are authorized to close. The
Company may, at its election, extend the Warrant
Expiration Date with respect to the Series A
Warrants.
2. Current Prospectus. The Company agrees to monitor the market
price of its common stock, par value $.05 per share (the "Common Stock") and
will undertake to file a post-
AMENDMENT NO. 2 TO WARRANT AGREEMENT - Page 1
<PAGE> 2
effective amendment to its registration statement dated July, 26, 1995,
Registration No. 33-93450 (the "Registration Statement"), at such time as the
exercise of the Series A Warrants appears more likely. Furthermore, the Company
will not, without the opinion of counsel to the Company, issue any of its
Common Stock pursuant to the exercise of any of the Series A Warrants unless
there is a post-effective amendment to the Registration Statement in effect
containing a current prospectus meeting the requirements of Section 10(a)(3) of
the Securities Act of 1933, as amended.
3. Miscellaneous.
(a) This Agreement shall be binding upon and inure to
the benefit of the Company and the Warrant Agent and their respective
successors and assigns, and the holders from time to time to Warrant
Certificates. Nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim,
in equity or at law, or to impose upon any other person any duty,
liability or obligation.
(b) This Agreement shall be governed and construed in
accordance with the laws of the State of New York; provided, however,
that the Series A Warrants shall be governed by and construed in
accordance with the laws of the State of Texas, without reference to
principles of conflict of laws.
(c) If any term of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity of all other terms
hereof shall in no way be effected thereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 2
to Warrant Agreement as of the date first above set forth.
COMPANY:
WATERMARC FOOD MANAGEMENT CO.
By: /s/ ANGELO PITILLO
-------------------------------------
Name: Angelo Pitillo
-----------------------------------
Title: President & Chief Operating Officer
----------------------------------
WARRANT AGENT:
NORTH AMERICAN TRANSFER CO.
By: /s/ MILDRED ROSTOLDER
---------------------------------------
Name: Mildred Rostolder
--------------------------------------
Title: Principal
-------------------------------------
AMENDMENT NO. 2 TO WARRANT AGREEMENT - Page 2
<PAGE> 1
NOTICE OF EXTENSION OF WARRANT EXPIRATION DATE
NOTICE is hereby given that Watermarc Food Management Co., formerly
known as Billy Blues Food Corporation, (the "Company") has extended the
expiration date of its Series A Redeemable Common Stock Purchase Warrants (the
"Series A Warrants") from 5:00 p.m. (Eastern time) on May 15, 1996 to 5:00 p.m.
(Eastern time) on May 15, 1997. The extension was effected pursuant to an
amendment of the Warrant Agreement, dated May 15, 1992, between the Company and
North American Transfer Co., as Warrant Agent for the holders of the Series A
Warrants.
The Company will monitor the market price of its common stock, par
value $.05 per share (the "Common Stock") and, if necessary, file a
post-effective amendment to its Registration Statement dated July 26, 1995, No.
33-93450 (the "Registration Statement") at such time as the exercise of the
Series A Warrants appears more likely. The Company will not, without the
opinion of counsel to the Company, issue any shares of its Common Stock
pursuant to the exercise of any of the outstanding Series A Warrants unless a
post-effective amendment to the Registration Statement is in effect, which
Registration Statement shall contain a current prospectus meeting the
requirements of Section 10(a)(3) of the Securities Act of 1933, as amended.
Any comments or questions regarding the extension of the expiration
date for the Company's Series A Warrants should be addressed to Mr. Angelo
Pitillo, President, Watermarc Food Management Co., 10777 Westheimer, Suite
1030, Houston, TX 77042-3498, (713) 783-0500.
PLEASE ATTACH THIS NOTICE TO THE
CERTIFICATE EVIDENCING THE SERIES A WARRANTS
CURRENTLY HELD BY YOU
<PAGE> 1
FIRST AMENDMENT
TO
PURCHASE AGREEMENT
First Amendment to Purchase Agreement dated effective as of March 31,
1996 (the "Amendment"), among WATERMARC FOOD MANAGEMENT CO., a Texas
corporation formerly known as Billy Blues Food Corporation (the "Company"), and
the persons listed in Schedule 1 hereto (the "Purchasers");
WITNESSETH:
Whereas, the Company and the Purchasers are parties to a Purchase
Agreement dated as of December 19, 1994 (the "Purchase Agreement"), pursuant to
which the Company issued and the Purchasers purchased 60 investment units (the
"Units") each consisting of (a) $50,000 of the Company's 12% Subordinated Notes
due March 31, 1996 (the "Notes") and (b) warrants (the "Warrants") evidencing
the right to purchase 22,222 shares of Common Stock, $.05 par value (the
"Company Common Stock"), of the Company, at $2.25 per share; and
Whereas, the Company has requested that the Purchasers agree to extend
the maturity date of the Notes until July 31, 1997; and
Whereas, the Purchasers are willing to extend the maturity date of the
Notes upon the terms and subject to the conditions set forth herein;
Now, therefore, in consideration of the foregoing premises, the
following mutual agreement, and other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Purchasers agree to amend the Purchase Agreement as follows:
1. Definitions. Capitalized terms used herein shall have the
meaning assigned to them in the Purchase Agreement unless otherwise defined
herein or the context otherwise requires.
2. Amendments to the Purchase Agreement. The Purchase Agreement
is hereby amended as follows:
(a) Section 1 of the Purchase Agreement is hereby amended by:
(i) deleting the words "March 31, 1996" and substituting
in place thereof the words "July 31, 1997" and
(ii) deleting reference to "$2.25" and substituting in
place thereof "$1.00."
<PAGE> 2
(b) Section 7 of the Purchase Agreement is hereby amended by
inserting the following new Sections 7.11, 7.11, and 7.12 immediately after
Section 7.10:
7.11 SECURITY AGREEMENT. The Company shall execute and
deliver to the Purchasers a Security Agreement substantially in the
form attached hereto as Exhibit D pursuant to which the Company will
grant the Purchasers a security interest in 100% of the outstanding
securities of Marco's Mexican Restaurants, Inc., a Texas corporation
("Marco's"), and its rights to the name "Marco's" and any variations
thereof, the trademark covered by Registration No. 1631944 issued on
January 15, 1991, on the mark "Marco's", and all proceeds thereof.
7.12 LIMITATION ON LIENS. The Company will not (and will
not permit Marco's to), directly or indirectly, create, incur,
assume, or permit to exist any lien, mortgage, pledge, security
interest, charge or encumbrance of any kind (including any conditional
sale or other title retention agreement, any lease in the nature
thereof, and any agreement to give any security interest)
(collectively, referred to as "Liens") on or with respect to the
capital stock of, or any property or asset (including any document or
instrument in respect of goods or accounts receivable) of Marco's, now
owned or any income or profits therefrom, except for Liens created in
the ordinary course of business to secure borrowings incurred in
connection with the Company's continued development of its business.
7.13 LIMITATION ON PAYMENT OF DISTRIBUTIONS BY MARCO'S. The
Company will not (and will not permit Marco's to) and Marco's will not
declare or make any dividend payment or other distribution of
assets, properties, cash, rights, obligations, or securities on
account of any shares of any class of capital stock of Marco's, or
purchase, redeem, or otherwise acquire for value (or permit Marco's to
do so) any shares of any class of capital stock of Marco's or any
warrants, rights, or options to acquire any such shares, now or
hereafter outstanding, except that Marco's may declare and make any
dividend payment or other distribution payable in common stock of
Marco's.
7.14 LIMITATION ON INVESTMENTS, LOANS, ETC. BY MARCO'S.
Marco's shall not (and the Company shall not permit Marco's to) make
any expenditure or incur any liabilities (contingent or otherwise)
(i) for the acquisition of stock or indebtedness of any other Person,
(ii) for loans, advances, capital contributions, or transfers of
property to any other Person, or (iii) in respect of any guaranties
(or other commitments) or obligations of, any other Person, including
without limitation the Company, other than intercompany transfers
between Marco's and the Company, provided that such transfers are made
in the ordinary course of business of Marco's and the Company in
accordance with their past practice.
2
<PAGE> 3
3. Amendments to the Notes. Each of the Notes is hereby amended
by deleting the words "March 31, 1996" wherever they may appear and
substituting in place thereof the words "July 31, 1997."
4. Amendments to the Warrants. Each of the Warrants is hereby
amended by deleting the number "$2.25" in the first paragraph and substituting
in place thereof the number "$1.00."
5. Representations and Warranties. The Company represents and
warrants as follows:
(a) The execution, delivery and performance of this
Amendment and the Purchase Agreement, as modified by this Amendment,
and the transactions contemplated hereby and thereby (i) are within
the corporate authority of the Company, (ii) have been authorized by
all necessary corporate proceedings on the part of the Company, (iii)
do not conflict with or result in any material breach or contravention
of any provision of law, statute, rule, or regulation to which the
Company is subject or any judgment, order, writ, injunction, license,
or permit applicable to the Company, and (iv) do not conflict with any
provision of the corporate charter or bylaws of the Company or any
agreement or other instrument binding upon the Company.
(b) The execution, delivery, and performance of this
Amendment and the Purchase Agreement, as modified by this Amendment,
will result in valid and legally binding obligations of the Company
enforceable against it in accordance with the respective terms and
provisions hereof and thereof.
(c) The execution, delivery, and performance of this
Amendment and the Purchase Agreement, as modified by this Amendment,
and the consummation by the Company of the transactions contemplated
hereby and thereby do not require any approval or consent of, or
filing with, any governmental agency or authority.
6. Ratification. Except as expressly amended hereby, the Purchase
Agreement, the Notes, and the Warrants are hereby ratified and confirmed in all
respects and shall continue in full force and effect. This Amendment and the
Purchase Agreement shall hereafter be read and construed together as a single
document, and all references to the Purchase Agreement or any agreement or
instrument related to the Purchase Agreement shall hereafter refer to the
Purchase Agreement as amended by this Amendment. This ratification and
amendment is made effective as of March 31, 1996, and the Purchasers agree
that, as amended, the Notes are not in default and, if due to timing factors a
default in the Notes existed for a temporary period, such default is waived
and/or cured by this Amendment.
7. Notation on Notes and Warrants. Promptly following execution
of this Amendment and in any event within 30 days thereof, each holder of a
Note and/or a Warrant
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<PAGE> 4
agrees to deliver such Note and/or Warrant to the Company so that the
amendments effected by this Amendment may be noted thereon.
8. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
counterparts taken together shall be deemed to constitute one and the same
instrument.
9. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas (without reference
to conflict of laws).
10. Execution by Marco's. Marco's has executed this Amendment to
evidence its agreement comply with the covenant's contained in Sections 7.13
and 7.14 of the Purchase Agreement.
In witness whereof, the Company and the Purchasers have executed this
Amendment effective as of the date first above written.
WATERMARC FOOD MANAGEMENT CO.
By: /s/ ANGELO PITILLO
------------------------------------------
Name: Angelo Pitillo
------------------------------------------
Title: President & Chief Operating Officer
------------------------------------------
MARCO'S MEXICAN RESTAURANTS, INC.
By: /s/ GHULAM BOMBAYWALA
------------------------------------------
Name: Ghulam Bombaywala
------------------------------------------
Title: Chief Executive Officer
------------------------------------------
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<PAGE> 5
----------------------------------------
Don A. Sanders
----------------------------------------
Ghulam M. Bombaywala
----------------------------------------
Atlantis Software Company Employee
Profit Sharing Plan
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
----------------------------------------
Philip M. Mount
----------------------------------------
John I. Mundy
----------------------------------------
Katherine U. Sanders
----------------------------------------
Ben T. Morris
----------------------------------------
Quinlan Quiros Schnitzer
----------------------------------------
Neil Lande, Custodian for Lynne Lande,
Stephen Lande, Sara Lande,
and Caroline Lande
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<PAGE> 6
----------------------------------------
John E. Drury
----------------------------------------
Geroge L. Ball
----------------------------------------
John M. O'Quinn
----------------------------------------
J-All Partnership
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
----------------------------------------
Nolan Ryan
----------------------------------------
Roger P. Lindstedt
----------------------------------------
Ray C. Childress
----------------------------------------
Kara S. Childress
----------------------------------------
Morton A. Cohn
----------------------------------------
Michael S. Chadwick
6
<PAGE> 7
EXHIBIT D
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of May 20, 1996, among WATERMARC FOOD
MANAGEMENT CO., a Texas corporation ("Debtor"), the owner of all of the capital
stock of MARCO'S MEXICAN RESTAURANTS, INC., a Texas corporation (the
"Company"), and the persons identified on Exhibit A hereto (collectively,
"Secured Party").
RECITALS
A. Secured Party has loaned $3,000,000 to Debtor pursuant to the
Purchase Agreement dated as of December 19, 1994, by and between Debtor and
Secured Party (the "Original Purchase Agreement").
B. Secured Party and Debtor have this date entered into a First
Amendment to Purchase Agreement (the "First Amendment"), under which, among
other things, Secured Party has agreed to waive all defaults, if any, occurring
on or before the date of the First Amendment and to extend the maturity date of
the Notes (as defined in the Original Purchase Agreement), in consideration for
which Debtor has agreed to pledge the capital stock in the Company as security
therefor and to grant Secured Party a security interest in all of the Debtor's
rights to the name "Marco's" and Trademark No. 1631944 issued on January 15,
1991, on the mark "Marco's" (the Original Purchase Agreement, as amended by the
First Amendment, is hereafter referred to as the "Purchase Agreement").
C. Debtor is the record and beneficial owner of the issued and
outstanding shares of capital stock issued by the Company described in Schedule
I (being hereinafter referred to as the "Pledged Shares").
AGREEMENT
In consideration of the premises and the covenants hereinafter
contained and for other good and valuable consideration, receipt of which is
hereby acknowledged, it is agreed as follows:
1. Definitions. The following terms shall have (unless otherwise
provided elsewhere in this Security Agreement) the following respective
meanings (such meanings being equally applicable to both the singular and
plural form of the terms defined):
"Agreement" shall mean this Security Agreement, including all
amendments, modifications and supplements and any exhibits or schedules to any
of the foregoing, and shall refer to the Agreement as the same may be in effect
at the time such reference becomes operative.
<PAGE> 8
"Business Day" shall mean any day that is not a Saturday, a Sunday or
a day on which banks are required or permitted to be closed in the State of
Texas.
"Code" shall mean the Texas Uniform Commercial Code as in effect from
time to time.
"Collateral" shall mean the Pledged Collateral and the Mark
Collateral.
"Default" shall mean any event which, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.
"Event of Default" shall have the meaning assigned to it in the
Purchase Agreement.
"Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any lease or title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement
perfecting a security interest under the Code or comparable law of any
jurisdiction).
"Loan Documents" shall mean this Agreement, the Purchase Agreement,
those other ancillary agreements as to which Secured Party, the Company or the
Debtor is a party or a beneficiary, and all other agreements, instruments,
documents and certificates, including, without limitation, pledges, powers of
attorney, consents, assignments, contracts, notices, and all other written
matter whether heretofore, now or hereafter executed by or on behalf of Debtor
and delivered to Secured Party, in connection with this Agreement or the
transactions contemplated hereby.
"Mark Collateral" shall have the meaning assigned to such term on
Section 3 hereof.
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether Federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Pledged Collateral" shall have the meaning assigned to such term in
Section 2 hereof.
"Purchase Agreement" shall have the meaning set forth in the recitals.
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<PAGE> 9
"Secured Obligations" shall have the meaning assigned to such term in
Section 3 hereof.
2. Pledge. Debtor hereby pledges, assigns, hypothecates,
transfers and delivers all the Pledged Shares owned by it and hereby grants to
Secured Party a first priority lien on, and security interest in, and agrees to
accept any interest in the Pledged Shares that is received by it as Secured
Party's agent and to hold the same in trust on behalf of and for the ratable
benefit of Secured Party and to deliver the same forthwith to Secured Party in
the exact form received, with the endorsement of Debtor when necessary and/or
appropriate undated stock powers duly executed in blank, to be held by Secured
Party, subject to the terms hereof, all of the following (herein, the "Pledged
Collateral"):
(a) The Pledged Shares and the certificates representing
the Pledged Shares (including, without limitation, any certificate representing
a stock dividend or a distribution in connection with any reclassification,
increase or reduction of capital, or issued in connection with any
reorganization), options or rights, and all dividends, cash, instruments and
other property or proceeds from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of the Pledged Shares.
(b) All additional shares of stock (including, without
limitation, any certificate representing a stock dividend or a distribution in
connection with any reclassification, increase or reduction of capital, or
issued in connection with any reorganization), options or rights of the issuer
of the Pledged Shares from time to time acquired by Debtor in any manner (which
shares shall be deemed to be part of the Pledged Shares), and the certificates
representing such additional shares, and all dividends, cash, instruments and
other property or proceeds from time to time received, receivable or otherwise
distributed in respect of, in exchange for, as an addition to, or in
substitution of any or all of such shares.
3. Security Interest. Debtor hereby grants to Secured Party a
security interest in (and hereby pledges and assigns as applicable) and agrees
that Secured Party shall continue to have a security interest in (and a pledge
and assignment as applicable) all of Debtor's right, title and interest in the
right to use the name "Marco's" and Trademark No. 1631944 issued on January 15,
1991, on the mark "Marco's" and any accessions, additions and attachments
thereto and the proceeds and products thereof, including without limitation,
all cash, general intangibles, accounts, inventory, equipment, fixtures, notes,
drafts, acceptances, securities, instruments, chattel paper, or other property,
benefits or rights arising therefrom, or other proceeds of any sale or other
disposition of such property (herein the "Mark Collateral").
4. Security for Obligations. This Agreement secures, and the
Collateral is security for, the prompt payment in full when due, whether at
stated maturity, by acceleration or otherwise, of the unpaid principal of and
interest on any promissory notes issued to evidence loans made and to be made
by Secured Party to Debtor pursuant to the Purchase Agreement; and performance
of the obligations, whether for principal, premium, interest, fees, costs and
expenses, and all obligations of Debtor now or hereafter existing under the
Purchase Agreement
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<PAGE> 10
or of Debtor now existing or hereafter arising under this Agreement
(collectively, the "Secured Obligations").
5. Delivery of Pledged Collateral. All certificates representing
or evidencing the Pledged Shares shall be delivered to and held by or on behalf
of Secured Party pursuant hereto and shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory to Secured Party. Secured Party shall have the right, at any time
in its discretion and without notice to Debtor, to transfer to or to register
in the name of Secured Party or any of its nominees any or all of the Pledged
Shares. In addition, Secured Party shall have the right at any time to exchange
certificates or instruments representing or evidencing Pledged Shares for
certificates or instruments of smaller or larger denominations.
6. Representation and Warranties. Debtor represents and warrants
to Secured Party that:
(a) Debtor is, and at the time of delivery of the Pledged
Shares to Secured Party pursuant to Section 4 hereof, the legal holder of
record and the sole beneficial owner of the Pledged Shares and has good and
marketable title to the Pledged Shares free and clear of any Lien, mortgage,
hypothecation, security interest, charge, option or other encumbrance
whatsoever, except for the Lien created by this Agreement.
(b) All of the Pledged Shares have been duly authorized,
validly issued and are fully paid and non-assessable.
(c) Debtor has the full power, authority and legal right
to pledge, assign, transfer, deliver, deposit and set over the Pledged
Collateral pledged by Debtor to Secured Party as provided herein.
(d) None of the Pledged Shares has been issued or
transferred in violation of the securities registration, securities disclosure
or similar laws of any jurisdiction to which such issuance or transfer may be
subject.
(e) The Pledged Shares constitute one hundred percent
(100%) of the issued and outstanding shares of stock of the Company,
(f) No consent, approval, authorization or other order of
any Person and no consent, authorization, approval, or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required either (i) for the pledge by Debtor of the Pledged Collateral pursuant
to this Agreement or for the execution, delivery or performance of this
Agreement by Debtor or (ii) for the exercise by the Secured Party of the voting
or other rights provided for in this Agreement or the remedies in respect of
the Pledged Collateral pursuant to this Agreement, except as may be required in
connection with such disposition by laws affecting the offering and sale of
securities generally.
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<PAGE> 11
(g) Except for the security interest (and pledges and
assignments as applicable) granted hereby, Debtor is, and as to any property
acquired after the date hereof which is included within the Collateral, Debtor
will be, the owner of all such Collateral free and clear from all charges,
liens, security interests, adverse claims and encumbrances of any and every
nature whatsoever.
(h) There is no financing statement or similar filing now
on file in any public office covering any part of the Collateral, and Debtor
will not execute and there will not be on file in any public office any
financing statement or similar filing except the financing statements filed or
to be filed in favor of Secured Party.
(i) All information furnished to Secured Party concerning
Debtor, the Collateral and the Secured Obligations, or otherwise for the
purpose of obtaining or maintaining credit, is or will be at the time the same
is furnished, accurate and complete in all material respects.
(j) The pledge, assignment and delivery of the Collateral
pursuant to this Agreement will create a valid first priority lien on and a
first priority perfected security interest in the Collateral pledged by Debtor,
and the proceeds thereof, subject to no prior pledge, lien, mortgage,
hypothecation, security interest, charge, option or encumbrance or to any
agreement purporting to grant to any third party a security interest in the
property or assets of Debtor which would include the Collateral, securing the
payment of the Secured Obligations.
(k) This Agreement has been duly authorized, executed and
delivered by Debtor and constitutes a legal, valid and binding obligation of
Debtor enforceable in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, or other similar laws affecting the
rights of creditors generally or by the application of general equity
principles.
The representations and warranties set forth in this Section 5 shall
survive the execution and delivery of this Agreement.
7. Covenants. Debtor, with respect to the Pledged Collateral held
in his or its name, covenants and agrees that until the Notes are paid in full
and the Secured Obligations are satisfied:
(a) Without the prior written consent of Secured Party,
Debtor agrees that it will not sell, assign, transfer, exchange or otherwise
dispose of, or grant any option with respect to, the Collateral, nor will it
create, incur or permit to exist any pledge, lien, mortgage, hypothecation,
security interest, charge, option or any other encumbrance with respect to any
of the Collateral or any interest therein except for the Lien provided by this
Agreement. Without the prior written consent of Secured Party, Debtor agrees
that it will not vote to enable and will not otherwise permit the Company to,
issue any stock or other securities of any nature in addition to or in exchange
or substitution for such Pledged Shares.
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<PAGE> 12
(b) Debtor will, at its expense, promptly execute,
acknowledge and deliver all such instruments and take all such action as
Secured Party from time to time may request in order to ensure to Secured Party
the benefits of the Lien in and to the Collateral intended to be created by
this Agreement.
(c) Debtor has and will defend the title to the
Collateral and the Liens of Secured Party thereon against the claim of any
Person and will maintain and preserve such Liens. Debtor covenants and agrees
that it will have like title to and right to pledge any other property which at
any time hereafter may be pledged to Secured Party as Pledged Collateral
hereunder and will likewise defend Secured Party's right thereto and security
interest therein.
(d) Debtor shall promptly pay when due all taxes,
assessments, license fees, registration fees, and governmental charges levied
or assessed against Debtor or with respect to the Collateral or any part
thereof.
(e) Debtor agrees not to suffer or permit any charge,
lien, security interest, adverse claim or encumbrance of any and every nature
whatsoever against the Collateral or any part thereof, except for the Liens.
(f) Except as otherwise provided in this Agreement with
respect to inventory, and except in the ordinary course of business with
respect to other Collateral, Debtor shall not, without the prior written
consent of Secured Party, sell, assign, transfer, lease, charter, encumber,
hypothecate or dispose of the Collateral, or any part thereof, or interest
therein, or offer to do any of the foregoing.
(g) Debtor shall promptly notify Secured Party in writing
of any change in the name, identity or structure of Debtor, any charge, lien,
security interest, claim or encumbrance asserted against the Collateral, any
theft, loss, injury or similar incident involving the Collateral, and any other
material matter or litigation adversely affecting Debtor or the Collateral.
Debtor shall furnish such other reports, information and data regarding
Debtor's financial condition and operations, the Collateral and such other
matters as Secured Party may reasonably request from time to time.
(h) Debtor agrees to execute and deliver such financing
statement or statements, or amendments thereof or supplements thereto, or other
documents as Secured Party may from time to time require in order to comply
with the Code (or other applicable state law of the jurisdiction where any of
the Collateral is located) and to preserve and protect the Secured Party's
rights to the Collateral.
(i) Secured Party, at its option, whether before or after
default, but without any obligation whatsoever to do so, may (a) discharge
taxes, claims, charges, liens, security interests, assessments or other
encumbrances of any and every nature whatsoever at any time levied, placed upon
or asserted against the Collateral, (b) place and pay for insurance on the
Collateral, including insurance that only protects Secured Party's interest,
(c) pay for the repair,
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<PAGE> 13
improvement, testing, maintenance and preservation of the Collateral, (d) pay
any filing, recording, registration, licensing or certification fees or other
fees and charges related to the Collateral, or (e) take any other action to
preserve and protect the Collateral and Secured Party's rights and remedies
under this Agreement as Secured Party may deem necessary or appropriate. Debtor
agrees that Secured Party shall have no duty or obligation whatsoever to take
any of the foregoing action. Debtor agrees to promptly reimburse Secured Party
upon demand for any payment made or any expense incurred by the Secured Party
pursuant to this authorization. These payments and expenditures, together with
interest thereon from date incurred until paid by Debtor at the maximum
contract rate allowed under applicable laws, which Debtor agrees to pay, shall
constitute additional Obligations and shall be secured by and entitled to the
benefits of this Agreement.
(j) Debtor shall do, make, procure, execute and deliver
all such additional and further acts, things, deeds, interests and assurances
as Secured Party may require from time to time to protect, assure and enforce
Secured Party's rights and remedies.
8. Debtor's Rights. As long as no Default or Event of Default
under this Agreement, the Notes, the Purchase Agreement or any other agreement
executed to evidence and/or secure the Secured Obligations (the "Other
Agreements"), shall have occurred and be continuing and until written notice
shall be given to Debtor in accordance with Section 9(a) hereof:
(a) Debtor shall have the right, from time to time, to
vote and give consents, ratifications and waivers with respect to the Pledged
Collateral or any part thereof for all purposes not inconsistent with the
provisions of this Agreement, the Purchase Agreement, and any Other Agreement;
provided, however, that no vote shall be cast, and no consent, ratification, or
waiver shall be given or action taken, which would have the effect of
materially impairing the position or interest of Secured Party in respect of
the Pledged Collateral, be inconsistent with or violate any provision of this
Agreement, the Purchase Agreement, or the Other Agreements;
(b) (i) Debtor shall be entitled, from time to time, to
collect and receive for its own use all cash dividends paid in respect
of the Pledged Shares to the extent not in violation of this
Agreement, the Purchase Agreement, or the Other Agreements, other than
any and all (A) dividends paid or payable other than in cash in
respect of, and instruments and other property received, receivable or
otherwise distributed in respect of, or in redemption of or exchange
for, any Pledged Collateral, (B) distributions paid or payable in
cash in respect of any Pledged Collateral in connection with a partial
or total liquidation or dissolution or reorganization of the Company,
(C) cash paid, or payable or otherwise distributed in redemption of,
or in exchange for, any Pledged Collateral, in addition, until
actually paid all rights to such dividends shall remain subject to the
Lien created by this Agreement; and
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<PAGE> 14
(ii) all dividends (other than such cash dividends as are
permitted to be paid to Debtor in accordance with clause (i) above)
and all other distributions in respect of the Pledged Collateral,
whenever paid or made, shall be delivered to Secured Party to hold as
Pledged Collateral and shall, if received by Debtor, be received in
trust for the benefit of Secured Party, be segregated from the other
property or funds of Debtor, and be forthwith delivered to Secured
Party as Pledged Collateral as additional Collateral for the Secured
Obligations in the form so received (with any necessary endorsement).
9. Defaults and Remedies. Upon the occurrence of an Event of
Default and during the continuation of such Event of Default, then or at any
time after such declaration (provided that such declaration is not rescinded by
the Secured Party), without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below of time
and place of public or private sale) to or upon Debtor or any other person (all
and each of which demands, advertisements and/or notices are hereby expressly
waived), Secured Party (personally or through an agent) is hereby authorized
and empowered subject to the approval of any governmental authority (to the
extent such consent or approval of any governmental authority is required), to
(a) Transfer and register in its name or in the name of its
nominee the whole or any part of the Pledged Collateral, to exercise the voting
rights with respect thereto, to collect and receive all cash dividends and
other distributions made thereon, and to exercise any and all rights of
conversion, exchange, subscription or any other rights, privileges or options
pertaining to any shares of the Pledged Shares as if it were the absolute owner
thereof, including without limitation, the right to exchange at its discretion,
any and all of the Pledged Shares upon the merger, consolidation,
reorganization, recapitalization or other readjustment of any corporation
issuing any of such shares or upon the exercise by any such issuer or Secured
Party of any right, privilege or option pertaining to any shares of the Pledged
Shares, and in connection therewith, to deposit and deliver any and all of the
Pledged Shares with any committee, depositary, transfer agent, registrar other
designated agency upon such terms and conditions as it may determine, all
without liability except to account for property actually received by it, but
Secured Party shall have no duty to exercise any of the aforesaid rights,
privileges or options and shall not be responsible for any failure to do so or
delay in so doing.
(b) Collect, receive, appropriate and realize upon the Collateral,
or any part thereof, and/or sell, assign, give option or options to purchase,
contract to sell or otherwise dispose of and deliver said Collateral, or any
part thereof, in one or more parcels at public or private sale or sales, at any
exchange, broker's board or at any of Secured Party's offices or elsewhere in
one or more sales after ten (10) days' notice of the time and place of any
public sale or of the time after which a private sale is to take place (which
notice Debtor agrees is commercially reasonable), but without any previous
notice or advertisement, the whole or any part of the Collateral and to
otherwise act with respect to the Collateral as though Secured Party was the
outright owner thereof, Debtor hereby irrevocably constituting and appointing
Secured Party as the proxy and attorney-in-fact of Debtor, with full power of
substitution to do so;
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<PAGE> 15
provided, however, Secured Party shall not have any duty to exercise any such
right or to preserve the same and shall not be liable for any failure to do so
or for any delay in doing so. Any sale shall be made either for cash or upon
credit or for future delivery without assumption of any credit risk at such
price as Secured Party may deem fair, and such terms and conditions as Secured
Party may deem advisable and Secured Party may be the purchaser of the whole or
any part of the Collateral so sold and hold the same thereafter in its own
right free from any claim of Debtor or any right or equity of redemption in
Debtor, which right or equity is hereby expressly waived and released. Each
sale shall be made to the highest bidder, but Secured Party reserves the right
to reject any and all bids at such sale which, in its discretion, it shall deem
inadequate. Demands of performance, except as otherwise herein specifically
provided for, notices of sale, advertisements and the presence of property at
sale are hereby waived and any sale hereunder may be conducted by an auctioneer
or any officer or agent of Secured Party.
(c) If, at the original time or times appointed for the sale of
the whole or any part of the Collateral, the highest bid, if there be but one
sale, shall be inadequate to discharge in full all the Secured Obligations, or
if the Collateral be offered for sale in lots, if at any of such sales, the
highest bid for the lot offered for sale would indicate to Secured Party, in
its discretion, the unlikelihood of the proceeds of the sales of the whole of
the Collateral being sufficient to discharge all the Secured Obligations,
Secured Party may, on one or more occasions and in its discretion, postpone any
of said sales by public announcement at the time of sale or the time of
previous postponement of sale, and no other notice of such postponement or
postponements of sale need be given, any other notice being hereby waived;
provided, however, that any sale or sales made after such postponement shall be
after ten (10) days' notice to Debtor.
(d) In the event of any sales hereunder, Secured Party shall pay
over the proceeds of any such collection, recovery, receipt, appropriation,
realization or sale in accordance with Section 10 of this Agreement.
(e) In addition to the rights and remedies granted to it in this
Agreement and in any other instrument or agreement securing, evidencing or
relating to any of the Secured Obligations, Secured Party shall have all the
rights and remedies of a secured party under the Code.
(f) Debtor agrees that following the occurrence and during the
continuance of an Event of Default it will not at any time plead, claim or take
the benefit of any appraisal, valuation, stay, extension, moratorium or
redemption law now or hereafter in force in order to prevent or delay the
enforcement of this Agreement, or the absolute sale of the whole or any part of
the Collateral or the possession thereof by any purchaser at any sale
hereunder, and Debtor waives the benefit of all such laws to the extent it
lawfully may do so. Debtor agrees that it will not interfere with any right,
power and remedy of Secured Party provided for in this Agreement or now or
hereafter existing at law or in equity or by statute or otherwise, or the
exercise or beginning of the exercise by Secured Party of any one or more of
such rights, powers or remedies. No failure or delay on the part of Secured
Party to exercise any such right,
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<PAGE> 16
power or remedy and no notice or demand which may be given to or made upon
Debtor by Secured Party with respect to any such remedies shall operate as a
waiver thereof, or limit or impair Secured Party's right to take any action or
to exercise any power or remedy hereunder, without notice or demand, or
prejudice its rights as against Debtor in any respect.
(g) Debtor further agrees that a breach of any of the covenants
contained in this Section 9 will cause irreparable injury to Secured Party,
that Secured Party has no adequate remedy at law in respect of such breach and,
as a consequence, agrees that each and every covenant contained in this Section
9 shall be specifically enforceable against Debtor, and Debtor hereby waives
and agrees not to assert any defenses against an action for specific
performance of such covenants except for a defense that the Secured Obligations
are not then due and payable in accordance with the agreements and instruments
governing and evidencing such obligations. Debtor further acknowledges the
impossibility of ascertaining the amount of damages which would be suffered by
Secured Party by reason of a breach of any of such covenants and, consequently,
agrees that, if Secured Party shall sue for damages for breach, it shall pay,
as liquidated damages and not as a penalty, an amount equal to the value of the
Collateral pledged by Debtor on the date Secured Party shall demand compliance
with this Section 9.
(h) If, at any time when Secured Party shall determine to exercise
its right to sell the whole or any part of the Pledged Collateral hereunder,
such Pledged Collateral or the part thereof to be sold shall not, for any
reason whatsoever, be effectively registered under the Securities Act of 1933,
as amended (the "Act"), Secured Party may, in its discretion (subject only to
applicable requirements of law), sell such Pledged Collateral or part thereof
by private sale in such manner and under such circumstances as Secured Party
may deem necessary or advisable, but subject to the other requirements of this
Section 9, and shall not be required to effect such registration or to cause
the same to be effected. Without limiting the generality of the foregoing, in
any such event Secured Party in its discretion (x) may, in accordance with
applicable securities laws, proceed to make such private sale notwithstanding
that a registration statement for the purpose of registering such Pledged
Collateral or part thereof could be or shall have been filed under said Act (or
similar statute), (y) may approach and negotiate with a single possible
purchaser to effect such sale, and (z) may restrict such sale to a purchaser
who will represent and agree that such purchaser is purchasing for its own
account, for investment and not with a view to the distribution or sale of such
Pledged Collateral or part thereof. In addition to a private sale as provided
above in this Section 9, if any of the Pledged Collateral shall not be freely
distributable to the public without registration under the Act (or similar
statute) at the time of any proposed sale pursuant to this Section 9, then
Secured Party shall not be required to effect such registration or cause the
same to be effected but, in its discretion (subject only to applicable
requirements of law), may require that any sale hereunder (including a sale at
auction) be conducted subject to restrictions (i) as to the financial
sophistication and ability of any Person permitted to bid or purchase at any
such sale, (ii) as to the content of legends to be placed upon any certificates
representing the Pledged Collateral sold in such sale, including restrictions
on future transfer thereof, (iii) as to the representations required to be made
by each Person bidding or purchasing at such sale relating to that Person's
access to financial information about the Debtor and such Person's intentions
as to the holding of the Pledged Collateral so sold for
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<PAGE> 17
investment, for its own account, and not with a view to the distribution
thereof, and (iv) as to such other matters as Secured Party may, in its
discretion, deem necessary or appropriate in order that such sale
(notwithstanding any failure so to register) may be effected in compliance with
the Code and other laws affecting the enforcement of creditors' rights and the
Act and all applicable state securities laws.
(i) Debtor recognizes that Secured Party may be unable to effect a
public sale of any or all the Pledged Shares by reason of certain prohibitions
contained in the Act and applicable state securities laws, but may be compelled
to resort to one or more private sales thereof to a restricted group or
purchasers who will be obliged to agree, among other things to acquire such
securities for their own account for investment and not with a view to the
distribution or resale thereof. Debtor acknowledges and agrees that any such
private sale may result in prices and other terms less favorable to the Secured
Party than if such sale were a public sale and, notwithstanding such
circumstances, agrees that any such private sale shall be deemed to have been
made in a commercially reasonable manner. Secured Party shall be under no
obligation to delay a sale of any of the Pledged Shares for the period of time
necessary to permit the issuer of such securities to register such securities
for public sale under the Act, or under applicable state securities laws, even
if the issuer would agree to do so.
(j) Debtor further agrees to do or cause to be done all such other
acts and things as may be reasonably necessary to make such sale or sales of
any portion or all of the Pledged Shares owned by it valid and binding and in
compliance with any and all applicable laws, regulations, orders, writs,
injunctions, decrees or awards of any and all courts, arbitrators or
governmental instrumentalities, domestic or foreign, having jurisdiction over
any such sale or sales, all at Debtor's expense.
(k) Debtor shall be liable for and agrees to pay the reasonable
expenses incurred by Secured Party in enforcing its rights and remedies, in
retaking, holding, testing, repairing, improving, selling, leasing or disposing
of the Collateral, or like expenses, including, without limitation, attorneys'
fees and legal expenses incurred by Secured Party. These expenses, together
with interest thereon from the date incurred until paid by Debtor at the
maximum contract rate allowed under applicable laws, which Debtor agrees to
pay, shall constitute additional Secured Obligations and shall be secured by
and entitled to the benefits of this Agreement.
(l) The rights and remedies of Secured Party are cumulative and
the exercise of any one or more of the rights or remedies shall not be deemed
an election of rights or remedies or a waiver of any other right or remedy.
Secured Party may remedy any default and may waive any default without waiving
the default remedied or without waiving any other prior or subsequent default.
10. Application of Proceeds. Any cash held by Secured Party as
Collateral and all cash proceeds received by Secured Party in respect of any
sale of, liquidation of, or other realization upon all or any part of the
Collateral shall be applied by Secured Party as follows:
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<PAGE> 18
(a) First, to the payment of the costs and expenses of such sale,
including (i) reasonable compensation to the Secured Party and its agents and
counsel, and (ii) all expenses, liabilities and advances made or incurred by
Secured Party in connection therewith including those incurred for care,
safekeeping, collection, sale, delivery or otherwise of the Collateral.
(b) Next, to the payment of the Secured Obligations in such order
as Secured Party may elect.
(c) Finally, after payment in full of all Secured Obligations,
payment to the Debtor, or its successors or assigns, or to whomsoever may be
lawfully entitled to receive the same or as a court of competent jurisdiction
may direct, of any surplus then remaining from such proceeds.
11. Waiver. No delay on Secured Party's part in exercising any
power of sale, Lien, option or other right hereunder, and no notice or demand
which may be given to or made upon Debtor by Secured Party with respect to any
power of sale, Lien, option or other right hereunder shall constitute a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege constitute a waiver thereof; or
limit or impair Secured Party's right to take any action or to exercise any
power of sale, Lien, option, or any other right hereunder, without notice or
demand, or prejudice Secured Party's rights as against Debtor in any respect.
The rights and remedies herein provided are cumulative and may be exercised
singly or concurrently, and are not exclusive of any rights or remedies
provided by law.
12. Assignment and Amendment. Secured Party may assign, endorse or
transfer any instrument evidencing all or any part of the Secured Obligations
as provided in, and in accordance with, the Purchase Agreement, and the holder
of such instrument shall be entitled to the benefits of this Agreement. None of
the terms or provisions of this Agreement may be waived, altered, modified or
amended except by an instrument in writing, duly executed by Secured Party and
Debtor.
13. Termination. Immediately following the payment of all Secured
Obligations, Secured Party shall deliver to Debtor the Pledged Collateral
pledged by Debtor at the time subject to this Agreement and all instruments of
assignment executed in connection therewith, free and clear of the Lien hereof
and, except as otherwise provided herein, all of Debtor's obligations hereunder
shall at such time terminate.
14. Lien Absolute. All rights of Secured Party hereunder, and all
obligations of the Debtor hereunder, shall be absolute and unconditional
irrespective of:
(a) Any lack of validity or enforceability of the Purchase
Agreement, any other Loan Document or any other agreement or instrument
governing or evidencing any Secured Obligations.
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<PAGE> 19
(b) Any change in the time, manner or place of payment of, or in
any other term of, all or any part of the Secured Obligations, or any other
amendment or waiver of or any consent to any departure from the Purchase
Agreement, any other Loan Document or any other agreement or instrument
governing or evidencing any Secured Obligations.
(c) Any exchange, release or non-perfection of any other
collateral, or any release or amendment or waiver of or consent to departure
from any guaranty, for all or any of the Secured Obligations.
(d) Any other circumstance which might otherwise constitute a
defense available to, or a discharge of, Debtor.
15. Indemnification. Debtor severally agrees to indemnify and hold
Secured Party harmless from and against any taxes, liabilities, claims and
damages, including reasonable attorney's fees and disbursements, and other
expenses incurred or arising by reason of the taking or the failure to take
action by Secured Party, in good faith, in respect of any transaction effected
under this Agreement or in connection with the Lien provided for herein,
including, without limitation, any taxes payable in connection with the
delivery or registration of any of the Pledged Collateral as provided herein.
Debtor severally agrees to be liable for payment to Secured Party of all
Secured Party's out-of-pocket costs and expenses incurred in connection with
this Agreement after the date hereof and all reasonable fees, expenses and
disbursements, including registration costs under the Act (or similar statute)
and the reasonable fees of Secured Party's agents or representatives, incurred
in connection with this Agreement and the performance by Secured Party of the
provisions of this Agreement and of any transactions effected in connection
with this Agreement. The obligations of the Debtor under this Section 15 shall
survive the termination of this Agreement. Notwithstanding any other provision
of this paragraph, or any other paragraph of this Agreement, if Debtor tenders
his Pledged Collateral to Secured Party pursuant to the terms of this
Agreement, but is prevented from tendering the Pledged Collateral to Secured
Party by virtue of the actions of any Person other than Debtor, or any Person
controlled or in common control with Debtor, then Debtor shall only be liable
for delivery of good, valid and marketable title to all of the Pledged
Collateral immediately upon legally being permitted to do so, and in such case
shall not be liable for any costs, arising from Debtor's obligation to
indemnify Secured Party as discussed in this Section 15.
16. Reinstatement. This Agreement shall remain in full force and
effect and continue to be effective should any petition be filed by or against
Debtor for liquidation or reorganization, should Debtor become insolvent or
make an assignment for the benefit of creditors or should a receiver or trustee
be appointed for all or any significant part of Debtor's assets, and shall
continue to be effective or be reinstated, as the case may be, if at any time
payment and performance of the Secured Obligations, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise
be restored or returned by any obligee of the Secured Obligations, whether as a
"voidable preference", "fraudulent conveyance", or otherwise, all as though
such payment or performance had not been made. In the event that any payment,
or any part thereof, is rescinded, reduced, restored or returned, the
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<PAGE> 20
Secured Obligations shall be reinstated and deemed reduced only by such amount
paid and not so rescinded, reduced, restored or returned.
17. Miscellaneous. (a) Secured Party may execute any of its duties
hereunder by or through agents or employees and shall be entitled to advice of
counsel concerning all matters pertaining to its duties hereunder.
(b) Neither Secured Party nor any of its officers, directors,
employees, agents or counsel shall be liable for any action lawfully taken or
omitted to be taken by it or them hereunder or in connection herewith, except
for its or their own gross negligence or willfull misconduct.
(c) This Agreement shall be binding upon Debtor and its successors
and assigns, and shall inure to the benefit of, and be enforceable by, Secured
Party and its successors and assigns, and shall be governed by, and construed
and enforced in accordance with, the internal laws in effect in the State of
Texas without giving effect to principles of choice of law, and none of the
terms or provisions of this Agreement may be waived, altered, modified or
amended except in writing, signed by Secured Party, duly signed for and on
behalf of Secured Party and the Debtors and then only to the extent therein set
forth.
(d) Notwithstanding any provision to the contrary herein, or in
any of the documents evidencing the Secured Obligations or otherwise relating
thereto, no such provision shall require the payment or permit the collection
of interest in excess of the maximum permitted by applicable usury laws. If any
such excessive interest is so provided for, then in such event (i) the
provisions of this paragraph shall govern and control, (ii) neither Debtor nor
its successors or assigns or any other party liable for the payment thereof,
shall be obligated to pay the amount of such interest to the extent that is in
excess of the maximum amount permitted by law, (iii) any such excess interest
that may have been collected shall be, at the option of the holder of the
instrument evidencing the Secured Obligations, either applied as a credit
against the then unpaid principal amount thereof or refunded to the maker
thereof, and (iv) the effective rate of interest shall be automatically reduced
to the maximum lawful rate under applicable usury laws as now or hereafter
construed by the courts having jurisdiction.
(e) Any carbon, photographic or other reproduction of any
financing statement signed by Debtor is sufficient as a financing statement for
all purposes, including without limitation, filing in any state as may be
permitted by the provisions of the Uniform Commercial Code of such state.
18. Severability. If for any reason any provision or provisions
hereof are determined to be invalid and contrary to any existing or future law
in any jurisdiction, such invalidity in any jurisdiction shall not impair the
operation of or effect those portions of this Agreement which are valid in any
other jurisdiction.
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<PAGE> 21
19. Notices. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by any other party, or whenever any of the parties desires to
give or serve upon any other a communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and either shall be delivered in person with
receipt acknowledged or sent by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
(a) If to Secured Party, at
Sanders Morris Mundy
3100 Texas Commerce Tower
Houston, Texas 77002
Attn: Michael S. Chadwick
(b) If to Debtor, at
Watermarc Food Management Co.
10777 Westheimer, Suite 1030
Houston, Texas 77042-3498
Attention: Joan Payton
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, or three (3) Business Days after the same shall have
been deposited in the United States mail. Failure or delay in delivering copies
of any notice, demand, request, consent, approval, declaration or other
communication to the persons designated above to receive copies shall in no way
adversely affect the effectiveness of such notice, demand, request, consent,
approval, declaration or other communication.
20. Section Titles. The Section titles contained in this Agreement
are and shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreement between the parties hereto.
21. Counterparts. This Agreement may be executed in any number of
counterparts, which shall, collectively and separately, constitute one
agreement.
22. Further Assurances. Debtor agrees that at any time and from
time to time, upon the written request of Secured Party, Debtor will execute
and deliver such further documents and do such further acts and things as
Secured Party may reasonably request in order to effect the purposes of this
Agreement.
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<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have caused this
Security Agreement to be duly executed as of the date first written above.
WATERMARC FOOD MANAGEMENT CO.
By:
-------------------------------------
Name:
---------------------------------
Title:
--------------------------------
16
<PAGE> 23
SCHEDULE I
DEBTOR PLEDGED SHARES
Watermarc Food Management Co. 47,500 shares of Common
Stock, $.01 par value, of
Marco's Mexican Restaurants,
Inc., a Texas corporation,
evidenced by the certificate
heretofore delivered to
Secured Party.
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<PAGE> 24
EXHIBIT A
Secured Parties
Don A. Sanders
Ghulam M. Bombaywala
Atlantis Software Company Employee Profit Sharing Plan
Philip M. Mount
John I. Mundy
Katherine U. Sanders
Ben T. Morris
Quinlan Quiros Schnitzer
Neil Lande, Custodian for Lynne Lande,
Stephen Lande, Sara Lande, and
Caroline Lande
John E. Drury
George L. Ball
John M. O'Quinn
J-All Partnership
Nolan Ryan
Roger P. Lindstedt
Ray C. Childress
Kara S. Childress
Morton A. Cohn
Michael S. Chadwick
c/o Sanders Morris Mundy Inc.
3100 Texas Commerce Tower
600 Travis
Houston, Texas 77002
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<PAGE> 1
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of May 20, 1996, among WATERMARC FOOD
MANAGEMENT CO., a Texas corporation ("Debtor"), the owner of all of the capital
stock of MARCO'S MEXICAN RESTAURANTS, INC., a Texas corporation (the
"Company"), and the persons identified on Exhibit A hereto (collectively,
"Secured Party").
RECITALS
A. Secured Party has loaned $3,000,000 to Debtor pursuant to the
Purchase Agreement dated as of December 19, 1994, by and between Debtor and
Secured Party (the "Original Purchase Agreement").
B. Secured Party and Debtor have this date entered into a First
Amendment to Purchase Agreement (the "First Amendment"), under which, among
other things, Secured Party has agreed to waive all defaults, if any, occurring
on or before the date of the First Amendment and to extend the maturity date of
the Notes (as defined in the Original Purchase Agreement), in consideration for
which Debtor has agreed to pledge the capital stock in the Company as security
therefor and to grant Secured Party a security interest in all of the Debtor's
rights to the name "Marco's" and Trademark No.1631944 issued on January 15,
1991, on the mark "Marco's" (the Original Purchase Agreement, as amended by the
First Amendment, is hereafter referred to as the "Purchase Agreement").
C. Debtor is the record and beneficial owner of the issued and
outstanding shares of capital stock issued by the Company described in Schedule
I (being hereinafter referred to as the "Pledged Shares").
AGREEMENT
In consideration of the premises and the covenants hereinafter
contained and for other good and valuable consideration, receipt of which is
hereby acknowledged, it is agreed as follows:
1. Definitions. The following terms shall have (unless otherwise
provided elsewhere in this Security Agreement) the following respective
meanings (such meanings being equally applicable to both the singular and
plural form of the terms defined):
"Agreement" shall mean this Security Agreement, including all
amendments, modifications and supplements and any exhibits or schedules to any
of the foregoing, and shall refer to the Agreement as the same may be in effect
at the time such reference becomes operative.
<PAGE> 2
"Business Day" shall mean any day that is not a Saturday, a Sunday or
a day on which banks are required or permitted to be closed in the State of
Texas.
"Code" shall mean the Texas Uniform Commercial Code as in effect from
time to time.
"Collateral" shall mean the Pledged Collateral and the Mark
Collateral.
"Default" shall mean any event which, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.
"Event of Default" shall have the meaning assigned to it in the
Purchase Agreement.
" Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any lease or title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement
perfecting a security interest under the Code or comparable law of any
jurisdiction).
"Loan Documents" shall mean this Agreement, the Purchase Agreement,
those other ancillary agreements as to which Secured Party, the Company or the
Debtor is a party or a beneficiary, and all other agreements, instruments,
documents and certificates, including, without limitation, pledges, powers of
attorney, consents, assignments, contracts, notices, and all other written
matter whether heretofore, now or hereafter executed by or on behalf of Debtor
and delivered to Secured Party, in connection with this Agreement or the
transactions contemplated hereby.
"Mark Collateral" shall have the meaning assigned to such term on
Section 3 hereof.
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether Federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Pledged Collateral" shall have the meaning assigned to such term in
Section 2 hereof.
"Purchase Agreement" shall have the meaning set forth in the recitals.
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<PAGE> 3
"Secured Obligations" shall have the meaning assigned to such term in
Section 3 hereof.
2. Pledge. Debtor hereby pledges, assigns, hypothecates,
transfers and delivers all the Pledged Shares owned by it and hereby grants to
Secured Party a first priority lien on, and security interest in, and agrees to
accept any interest in the Pledged Shares that is received by it as Secured
Party's agent and to hold the same in trust on behalf of and for the ratable
benefit of Secured Party and to deliver the same forthwith to Secured Party in
the exact form received, with the endorsement of Debtor when necessary and/or
appropriate undated stock powers duly executed in blank, to be held by Secured
Party, subject to the terms hereof, all of the following (herein, the "Pledged
Collateral"):
(a) The Pledged Shares and the certificates representing
the Pledged Shares (including, without limitation, any certificate representing
a stock dividend or a distribution in connection with any reclassification,
increase or reduction of capital, or issued in connection with any
reorganization), options or rights, and all dividends, cash, instruments and
other property or proceeds from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of the Pledged Shares.
(b) All additional shares of stock (including, without
limitation, any certificate representing a stock dividend or a distribution in
connection with any reclassification, increase or reduction of capital, or
issued in connection with any reorganization), options or rights of the issuer
of the Pledged Shares from time to time acquired by Debtor in any manner (which
shares shall be deemed to be part of the Pledged Shares), and the certificates
representing such additional shares, and all dividends, cash, instruments and
other property or proceeds from time to time received, receivable or otherwise
distributed in respect of, in exchange for, as an addition to, or in
substitution of any or all of such shares.
3. Security Interest. Debtor hereby grants to Secured Party a
security interest in (and hereby pledges and assigns as applicable) and agrees
that Secured Party shall continue to have a security interest in (and a pledge
and assignment as applicable) all of Debtor's right, title and interest in the
right to use the name "Marco's" and Trademark No.1631944 issued on January 15,
1991, on the mark "Marco's" and any accessions, additions and attachments
thereto and the proceeds and products thereof, including without limitation,
all cash, general intangibles, accounts, inventory, equipment, fixtures, notes,
drafts, acceptances, securities, instruments, chattel paper, or other property,
benefits or rights arising therefrom, or other proceeds of any sale or other
disposition of such property (herein the "Mark Collateral").
4. Security for Obligations. This Agreement secures, and the
Collateral is security for, the prompt payment in full when due, whether at
stated maturity, by acceleration or otherwise, of the unpaid principal of and
interest on any promissory notes issued to evidence loans made and to be made
by Secured Party to Debtor pursuant to the Purchase Agreement; and performance
of the obligations, whether for principal, premium, interest, fees, costs and
expenses, and all obligations of Debtor now or hereafter existing under the
Purchase Agreement
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<PAGE> 4
or of Debtor now existing or hereafter arising under this Agreement
(collectively, the "Secured Obligations").
5. Delivery of Pledged Collateral. All certificates representing
or evidencing the Pledged Shares shall be delivered to and held by or on behalf
of Secured Party pursuant hereto and shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory to Secured Party. Secured Party shall have the right, at any time
in its discretion and without notice to Debtor, to transfer to or to register
in the name of Secured Party or any of its nominees any or all of the Pledged
Shares. In addition, Secured Party shall have the right at any time to exchange
certificates or instruments representing or evidencing Pledged Shares for
certificates or instruments of smaller or larger denominations.
6. Representation and Warranties. Debtor represents and warrants
to Secured Party that:
(a) Debtor is, and at the time of delivery of the Pledged
Shares to Secured Party pursuant to Section 4 hereof, the legal holder of
record and the sole beneficial owner of the Pledged Shares and has good and
marketable title to the Pledged Shares free and clear of any Lien, mortgage,
hypothecation, security interest, charge, option or other encumbrance
whatsoever, except for the Lien created by this Agreement.
(b) All of the Pledged Shares have been duly authorized,
validly issued and are fully paid and non-assessable.
(c) Debtor has the full power, authority and legal right
to pledge, assign, transfer, deliver, deposit and set over the Pledged
Collateral pledged by Debtor to Secured Party as provided herein.
(d) None of the Pledged Shares has been issued or
transferred in violation of the securities registration, securities disclosure
or similar laws of any jurisdiction to which such issuance or transfer may be
subject.
(e) The Pledged Shares constitute one hundred percent
(100%) of the issued and outstanding shares of stock of the Company.
(f) No consent, approval, authorization or other order of
any Person and no consent, authorization, approval, or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required either (i) for the pledge by Debtor of the Pledged Collateral pursuant
to this Agreement or for the execution, delivery or performance of this
Agreement by Debtor or (ii) for the exercise by the Secured Party of the voting
or other rights provided for in this Agreement or the remedies in respect of
the Pledged Collateral pursuant to this Agreement, except as may be required in
connection with such disposition by laws affecting the offering and sale of
securities generally.
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<PAGE> 5
(g) Except for the security interest (and pledges and
assignments as applicable) granted hereby, Debtor is, and as to any property
acquired after the date hereof which is included within the Collateral, Debtor
will be, the owner of all such Collateral free and clear from all charges,
liens, security interests, adverse claims and encumbrances of any and every
nature whatsoever.
(h) There is no financing statement or similar filing now
on file in any public office covering any part of the Collateral, and Debtor
will not execute and there will not be on file in any public office any
financing statement or similar filing except the financing statements filed or
to be filed in favor of Secured Party.
(i) All information furnished to Secured Party concerning
Debtor, the Collateral and the Secured Obligations, or otherwise for the
purpose of obtaining or maintaining credit, is or will be at the time the same
is furnished, accurate and complete in all material respects.
(j) The pledge, assignment and delivery of the Collateral
pursuant to this Agreement will create a valid first priority lien on and a
first priority perfected security interest in the Collateral pledged by Debtor,
and the proceeds thereof, subject to no prior pledge, lien, mortgage,
hypothecation, security interest, charge, option or encumbrance or to any
agreement purporting to grant to any third party a security interest in the
property or assets of Debtor which would include the Collateral, securing the
payment of the Secured Obligations.
(k) This Agreement has been duly authorized, executed and
delivered by Debtor and constitutes a legal, valid and binding obligation of
Debtor enforceable in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, or other similar laws affecting the
rights of creditors generally or by the application of general equity
principles.
The representations and warranties set forth in this Section 5 shall
survive the execution and delivery of this Agreement.
7. Covenants. Debtor, with respect to the Pledged Collateral held
in his or its name, covenants and agrees that until the Notes are paid in full
and the Secured Obligations are satisfied:
(a) Without the prior written consent of Secured Party, Debtor
agrees that it will not sell, assign, transfer, exchange or otherwise dispose
of, or grant any option with respect to, the Collateral, nor will it create,
incur or permit to exist any pledge, lien, mortgage, hypothecation, security
interest, charge, option or any other encumbrance with respect to any of the
Collateral or any interest therein except for the Lien provided by this
Agreement. Without the prior written consent of Secured Party, Debtor agrees
that it will not vote to enable and will not otherwise permit the Company to,
issue any stock or other securities of any nature in addition to or in exchange
or substitution for such Pledged Shares.
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<PAGE> 6
(b) Debtor will, at its expense, promptly execute, acknowledge and
deliver all such instruments and take all such action as Secured Party from
time to time may request in order to ensure to Secured Party the benefits of
the Lien in and to the Collateral intended to be created by this Agreement.
(c) Debtor has and will defend the title to the Collateral and the
Liens of Secured Party thereon against the claim of any Person and will
maintain and preserve such Liens. Debtor covenants and agrees that it will
have like title to and right to pledge any other property which at any time
hereafter may be pledged to Secured Party as Pledged Collateral hereunder and
will likewise defend Secured Party's right thereto and security interest
therein.
(d) Debtor shall promptly pay when due all taxes, assessments,
license fees, registration fees, and governmental charges levied or assessed
against Debtor or with respect to the Collateral or any part thereof.
(e) Debtor agrees not to suffer or permit any charge, lien,
security interest, adverse claim or encumbrance of any and every nature
whatsoever against the Collateral or any part thereof, except for the Liens.
(f) Except as otherwise provided in this Agreement with respect to
inventory, and except in the ordinary course of business with respect to other
Collateral, Debtor shall not, without the prior written consent of Secured
Party, sell, assign, transfer, lease, charter, encumber, hypothecate or dispose
of the Collateral, or any part thereof, or interest therein, or offer to do any
of the foregoing.
(g) Debtor shall promptly notify Secured Party in writing of any
change in the name, identity or structure of Debtor, any charge, lien, security
interest, claim or encumbrance asserted against the Collateral, any theft,
loss, injury or similar incident involving the Collateral, and any other
material matter or litigation adversely affecting Debtor or the Collateral.
Debtor shall furnish such other reports, information and data regarding
Debtor's financial condition and operations, the Collateral and such other
matters as Secured Party may reasonably request from time to time.
(h) Debtor agrees to execute and deliver such financing statement
or statements, or amendments thereof or supplements thereto, or other documents
as Secured Party may from time to time require in order to comply with the Code
(or other applicable state law of the jurisdiction where any of the Collateral
is located) and to preserve and protect the Secured Party's rights to the
Collateral.
(i) Secured Party, at its option, whether before or after default,
but without any obligation whatsoever to do so, may (a) discharge taxes,
claims, charges, liens, security interests, assessments or other encumbrances
of any and every nature whatsoever at any time levied, placed upon or asserted
against the Collateral, (b) place and pay for insurance on the Collateral,
including insurance that only protects Secured Party's interest, (c) pay for
the repair,
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<PAGE> 7
improvement, testing, maintenance and preservation of the Collateral, (d) pay
any filing, recording, registration, licensing or certification fees or other
fees and charges related to the Collateral, or (e) take any other action to
preserve and protect the Collateral and Secured Party's rights and remedies
under this Agreement as Secured Party may deem necessary or appropriate. Debtor
agrees that Secured Party shall have no duty or obligation whatsoever to take
any of the foregoing action. Debtor agrees to promptly reimburse Secured Party
upon demand for any payment made or any expense incurred by the Secured Party
pursuant to this authorization. These payments and expenditures, together with
interest thereon from date incurred until paid by Debtor at the maximum
contract rate allowed under applicable laws, which Debtor agrees to pay, shall
constitute additional Obligations and shall be secured by and entitled to the
benefits of this Agreement.
(j) Debtor shall do, make, procure, execute and deliver all such
additional and further acts, things, deeds, interests and assurances as Secured
Party may require from time to time to protect, assure and enforce Secured
Party's rights and remedies.
8. Debtor's Rights. As long as no Default or Event of Default
under this Agreement, the Notes, the Purchase Agreement or any other agreement
executed to evidence and/or secure the Secured Obligations (the "Other
Agreements"), shall have occurred and be continuing and until written notice
shall be given to Debtor in accordance with Section 9(a) hereof:
(a) Debtor shall have the right, from time to time, to vote and
give consents, ratifications and waivers with respect to the Pledged Collateral
or any part thereof for all purposes not inconsistent with the provisions of
this Agreement, the Purchase Agreement, and any Other Agreement; provided,
however, that no vote shall be cast, and no consent, ratification, or waiver
shall be given or action taken, which would have the effect of materially
impairing the position or interest of Secured Party in respect of the Pledged
Collateral, be inconsistent with or violate any provision of this Agreement,
the Purchase Agreement, or the Other Agreements;
(b) (i) Debtor shall be entitled, from time to time, to
collect and receive for its own use all cash dividends paid in respect
of the Pledged Shares to the extent not in violation of this
Agreement, the Purchase Agreement, or the Other Agreements, other than
any and all (A) dividends paid or payable other than in cash in
respect of, and instruments and other property received, receivable or
otherwise distributed in respect of, or in redemption of or exchange
for, any Pledged Collateral, (B) distributions paid or payable in cash
in respect of any Pledged Collateral in connection with a partial or
total liquidation or dissolution or reorganization of the Company, (C)
cash paid, or payable or otherwise distributed in redemption of, or in
exchange for, any Pledged Collateral, in addition, until actually paid
all rights to such dividends shall remain subject to the Lien created
by this Agreement; and
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<PAGE> 8
(ii) all dividends (other than such cash dividends as are
permitted to be paid to Debtor in accordance with clause (i) above)
and all other distributions in respect of the Pledged Collateral,
whenever paid or made, shall be delivered to Secured Party to hold as
Pledged Collateral and shall, if received by Debtor, be received in
trust for the benefit of Secured Party, be segregated from the other
property or funds of Debtor, and be forthwith delivered to Secured
Party as Pledged Collateral as additional Collateral for the Secured
Obligations in the form so received (with any necessary endorsement).
9. Defaults and Remedies. Upon the occurrence of an Event of
Default and during the continuation of such Event of Default, then or at any
time after such declaration (provided that such declaration is not rescinded by
the Secured Party), without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below of time
and place of public or private sale) to or upon Debtor or any other person (all
and each of which demands, advertisements and/or notices are hereby expressly
waived), Secured Party (personally or through an agent) is hereby authorized
and empowered subject to the approval of any governmental authority (to the
extent such consent or approval of any governmental authority is required), to
(a) Transfer and register in its name or in the name of its
nominee the whole or any part of the Pledged Collateral, to exercise the voting
rights with respect thereto, to collect and receive all cash dividends and
other distributions made thereon, and to exercise any and all rights of
conversion, exchange, subscription or any other rights, privileges or options
pertaining to any shares of the Pledged Shares as if it were the absolute owner
thereof, including without limitation, the right to exchange at its discretion,
any and all of the Pledged Shares upon the merger, consolidation,
reorganization, recapitalization or other readjustment of any corporation
issuing any of such shares or upon the exercise by any such issuer or Secured
Party of any right, privilege or option pertaining to any shares of the Pledged
Shares, and in connection therewith, to deposit and deliver any and all of the
Pledged Shares with any committee, depositary, transfer agent, registrar other
designated agency upon such terms and conditions as it may determine, all
without liability except to account for property actually received by it, but
Secured Party shall have no duty to exercise any of the aforesaid rights,
privileges or options and shall not be responsible for any failure to do so or
delay in so doing.
(b) Collect, receive, appropriate and realize upon the Collateral,
or any part thereof, and/or sell, assign, give option or options to purchase,
contract to sell or otherwise dispose of and deliver said Collateral, or any
part thereof, in one or more parcels at public or private sale or sales, at any
exchange, broker's board or at any of Secured Party's offices or elsewhere in
one or more sales after ten (10) days' notice of the time and place of any
public sale or of the time after which a private sale is to take place (which
notice Debtor agrees is commercially reasonable), but without any previous
notice or advertisement, the whole or any part of the Collateral and to
otherwise act with respect to the Collateral as though Secured Party was the
outright owner thereof, Debtor hereby irrevocably constituting and appointing
Secured Party as the proxy and attorney-in-fact of Debtor, with full power of
substitution to do so;
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<PAGE> 9
provided, however, Secured Party shall not have any duty to exercise any such
right or to preserve the same and shall not be liable for any failure to do so
or for any delay in doing so. Any sale shall be made either for cash or upon
credit or for future delivery without assumption of any credit risk at such
price as Secured Party may deem fair, and such terms and conditions as Secured
Party may deem advisable and Secured Party may be the purchaser of the whole or
any part of the Collateral so sold and hold the same thereafter in its own
right free from any claim of Debtor or any right or equity of redemption in
Debtor, which right or equity is hereby expressly waived and released. Each
sale shall be made to the highest bidder, but Secured Party reserves the right
to reject any and all bids at such sale which, in its discretion, it shall deem
inadequate. Demands of performance, except as otherwise herein specifically
provided for, notices of sale, advertisements and the presence of property at
sale are hereby waived and any sale hereunder may be conducted by an auctioneer
or any officer or agent of Secured Party.
(c) If, at the original time or times appointed for the sale of
the whole or any part of the Collateral, the highest bid, if there be but one
sale, shall be inadequate to discharge in full all the Secured Obligations, or
if the Collateral be offered for sale in lots, if at any of such sales, the
highest bid for the lot offered for sale would indicate to Secured Party, in
its discretion, the unlikelihood of the proceeds of the sales of the whole of
the Collateral being sufficient to discharge all the Secured Obligations,
Secured Party may, on one or more occasions and in its discretion, postpone any
of said sales by public announcement at the time of sale or the time of
previous postponement of sale, and no other notice of such postponement or
postponements of sale need be given, any other notice being hereby waived;
provided, however, that any sale or sales made after such postponement shall be
after ten (10) days' notice to Debtor.
(d) In the event of any sales hereunder, Secured Party shall pay
over the proceeds of any such collection, recovery, receipt, appropriation,
realization or sale in accordance with Section 10 of this Agreement.
(e) In addition to the rights and remedies granted to it in this
Agreement and in any other instrument or agreement securing, evidencing or
relating to any of the Secured Obligations, Secured Party shall have all the
rights and remedies of a secured party under the Code.
(f) Debtor agrees that following the occurrence and during the
continuance of an Event of Default it will not at any time plead, claim or take
the benefit of any appraisal, valuation, stay, extension, moratorium or
redemption law now or hereafter in force in order to prevent or delay the
enforcement of this Agreement, or the absolute sale of the whole or any part of
the Collateral or the possession thereof by any purchaser at any sale
hereunder, and Debtor waives the benefit of all such laws to the extent it
lawfully may do so. Debtor agrees that it will not interfere with any right,
power and remedy of Secured Party provided for in this Agreement or now or
hereafter existing at law or in equity or by statute or otherwise, or the
exercise or beginning of the exercise by Secured Party of any one or more of
such rights, powers or remedies. No failure or delay on the part of Secured
Party to exercise any such right,
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<PAGE> 10
power or remedy and no notice or demand which may be given to or made upon
Debtor by Secured Party with respect to any such remedies shall operate as a
waiver thereof, or limit or impair Secured Party's right to take any action or
to exercise any power or remedy hereunder, without notice or demand, or
prejudice its rights as against Debtor in any respect.
(g) Debtor further agrees that a breach of any of the covenants
contained in this Section 9 will cause irreparable injury to Secured Party,
that Secured Party has no adequate remedy at law in respect of such breach and,
as a consequence, agrees that each and every covenant contained in this Section
9 shall be specifically enforceable against Debtor, and Debtor hereby waives
and agrees not to assert any defenses against an action for specific
performance of such covenants except for a defense that the Secured Obligations
are not then due and payable in accordance with the agreements and instruments
governing and evidencing such obligations. Debtor further acknowledges the
impossibility of ascertaining the amount of damages which would be suffered by
Secured Party by reason of a breach of any of such covenants and, consequently,
agrees that, if Secured Party shall sue for damages for breach, it shall pay,
as liquidated damages and not as a penalty, an amount equal to the value of the
Collateral pledged by Debtor on the date Secured Party shall demand compliance
with this Section 9.
(h) If, at any time when Secured Party shall determine to exercise
its right to sell the whole or any part of the Pledged Collateral hereunder,
such Pledged Collateral or the part thereof to be sold shall not, for any
reason whatsoever, be effectively registered under the Securities Act of 1933,
as amended (the "Act"), Secured Party may, in its discretion (subject only to
applicable requirements of law), sell such Pledged Collateral or part thereof
by private sale in such manner and under such circumstances as Secured Party
may deem necessary or advisable, but subject to the other requirements of this
Section 9, and shall not be required to effect such registration or to cause
the same to be effected. Without limiting the generality of the foregoing, in
any such event Secured Party in its discretion (x) may, in accordance with
applicable securities laws, proceed to make such private sale notwithstanding
that a registration statement for the purpose of registering such Pledged
Collateral or part thereof could be or shall have been filed under said Act (or
similar statute), (y) may approach and negotiate with a single possible
purchaser to effect such sale, and (z) may restrict such sale to a purchaser
who will represent and agree that such purchaser is purchasing for its own
account, for investment and not with a view to the distribution or sale of such
Pledged Collateral or part thereof. In addition to a private sale as provided
above in this Section 9, if any of the Pledged Collateral shall not be freely
distributable to the public without registration under the Act (or similar
statute) at the time of any proposed sale pursuant to this Section 9, then
Secured Party shall not be required to effect such registration or cause the
same to be effected but, in its discretion (subject only to applicable
requirements of law), may require that any sale hereunder (including a sale at
auction) be conducted subject to restrictions (i) as to the financial
sophistication and ability of any Person permitted to bid or purchase at any
such sale, (ii) as to the content of legends to be placed upon any certificates
representing the Pledged Collateral sold in such sale, including restrictions
on future transfer thereof, (iii) as to the representations required to be made
by each Person bidding or purchasing at such sale relating to that Person's
access to financial information about the Debtor and such Person's intentions
as to the holding of the Pledged Collateral so sold for
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<PAGE> 11
investment, for its own account, and not with a view to the distribution
thereof, and (iv) as to such other matters as Secured Party may, in its
discretion, deem necessary or appropriate in order that such sale
(notwithstanding any failure so to register) may be effected in compliance with
the Code and other laws affecting the enforcement of creditors' rights and the
Act and all applicable state securities laws.
(i) Debtor recognizes that Secured Party may be unable to effect a
public sale of any or all the Pledged Shares by reason of certain prohibitions
contained in the Act and applicable state securities laws, but may be compelled
to resort to one or more private sales thereof to a restricted group or
purchasers who will be obliged to agree, among other things to acquire such
securities for their own account for investment and not with a view to the
distribution or resale thereof. Debtor acknowledges and agrees that any such
private sale may result in prices and other terms less favorable to the Secured
Party than if such sale were a public sale and, notwithstanding such
circumstances, agrees that any such private sale shall be deemed to have been
made in a commercially reasonable manner. Secured Party shall be under no
obligation to delay a sale of any of the Pledged Shares for the period of time
necessary to permit the issuer of such securities to register such securities
for public sale under the Act, or under applicable state securities laws, even
if the issuer would agree to do so.
(j) Debtor further agrees to do or cause to be done all such other
acts and things as may be reasonably necessary to make such sale or sales of
any portion or all of the Pledged Shares owned by it valid and binding and in
compliance with any and all applicable laws, regulations, orders, writs,
injunctions, decrees or awards of any and all courts, arbitrators or
governmental instrumentalities, domestic or foreign, having jurisdiction over
any such sale or sales, all at Debtor's expense.
(k) Debtor shall be liable for and agrees to pay the reasonable
expenses incurred by Secured Party in enforcing its rights and remedies, in
retaking, holding, testing, repairing, improving, selling, leasing or disposing
of the Collateral, or like expenses, including, without limitation, attorneys'
fees and legal expenses incurred by Secured Party. These expenses, together
with interest thereon from the date incurred until paid by Debtor at the
maximum contract rate allowed under applicable laws, which Debtor agrees to
pay, shall constitute additional Secured Obligations and shall be secured by
and entitled to the benefits of this Agreement.
(l) The rights and remedies of Secured Party are cumulative and
the exercise of any one or more of the rights or remedies shall not be deemed
an election of rights or remedies or a waiver of any other right or remedy.
Secured Party may remedy any default and may waive any default without waiving
the default remedied or without waiving any other prior or subsequent default.
10. Application of Proceeds. Any cash held by Secured Party as
Collateral and all cash proceeds received by Secured Party in respect of any
sale of, liquidation of, or other realization upon all or any part of the
Collateral shall be applied by Secured Party as follows:
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<PAGE> 12
(a) First, to the payment of the costs and expenses of such sale,
including (i) reasonable compensation to the Secured Party and its agents and
counsel, and (ii) all expenses, liabilities and advances made or incurred by
Secured Party in connection therewith including those incurred for care,
safekeeping, collection, sale, delivery or otherwise of the Collateral.
(b) Next, to the payment of the Secured Obligations in such order
as Secured Party may elect.
(c) Finally, after payment in full of all Secured Obligations,
payment to the Debtor, or its successors or assigns, or to whomsoever may be
lawfully entitled to receive the same or as a court of competent jurisdiction
may direct, of any surplus then remaining from such proceeds.
11. Waiver. No delay on Secured Party's part in exercising any
power of sale, Lien, option or other right hereunder, and no notice or demand
which may be given to or made upon Debtor by Secured Party with respect to any
power of sale, Lien, option or other right hereunder shall constitute a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege constitute a waiver thereof; or
limit or impair Secured Party's right to take any action or to exercise any
power of sale, Lien, option, or any other right hereunder, without notice or
demand, or prejudice Secured Party's rights as against Debtor in any respect.
The rights and remedies herein provided are cumulative and may be exercised
singly or concurrently, and are not exclusive of any rights or remedies
provided by law.
12. Assignment and Amendment. Secured Party may assign, endorse or
transfer any instrument evidencing all or any part of the Secured Obligations
as provided in, and in accordance with, the Purchase Agreement, and the holder
of such instrument shall be entitled to the benefits of this Agreement. None of
the terms or provisions of this Agreement may be waived, altered, modified or
amended except by an instrument in writing, duly executed by Secured Party and
Debtor.
13. Termination. Immediately following the payment of all Secured
Obligations, Secured Party shall deliver to Debtor the Pledged Collateral
pledged by Debtor at the time subject to this Agreement and all instruments of
assignment executed in connection therewith, free and clear of the Lien hereof
and, except as otherwise provided herein, all of Debtor's obligations hereunder
shall at such time terminate.
14. Lien Absolute. All rights of Secured Party hereunder, and all
obligations of the Debtor hereunder, shall be absolute and unconditional
irrespective of:
(a) Any lack of validity or enforceability of the Purchase
Agreement, any other Loan Document or any other agreement or instrument
governing or evidencing any Secured Obligations.
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<PAGE> 13
(b) Any change in the time, manner or place of payment of, or in
any other term of, all or any part of the Secured Obligations, or any other
amendment or waiver of or any consent to any departure from the Purchase
Agreement, any other Loan Document or any other agreement or instrument
governing or evidencing any Secured Obligations.
(c) Any exchange, release or non-perfection of any other
collateral, or any release or amendment or waiver of or consent to departure
from any guaranty, for all or any of the Secured Obligations.
(d) Any other circumstance which might otherwise constitute a
defense available to, or a discharge of, Debtor.
15. Indemnification. Debtor severally agrees to indemnify and hold
Secured Party harmless from and against any taxes, liabilities, claims and
damages, including reasonable attorney's fees and disbursements, and other
expenses incurred or arising by reason of the taking or the failure to take
action by Secured Party, in good faith, in respect of any transaction effected
under this Agreement or in connection with the Lien provided for herein,
including, without limitation, any taxes payable in connection with the
delivery or registration of any of the Pledged Collateral as provided herein.
Debtor severally agrees to be liable for payment to Secured Party of all
Secured Party's out-of-pocket costs and expenses incurred in connection with
this Agreement after the date hereof and all reasonable fees, expenses and
disbursements, including registration costs under the Act (or similar statute)
and the reasonable fees of Secured Party's agents or representatives, incurred
in connection with this Agreement and the performance by Secured Party of the
provisions of this Agreement and of any transactions effected in connection
with this Agreement. The obligations of the Debtor under this Section 15 shall
survive the termination of this Agreement. Notwithstanding any other provision
of this paragraph, or any other paragraph of this Agreement, if Debtor tenders
his Pledged Collateral to Secured Party pursuant to the terms of this
Agreement, but is prevented from tendering the Pledged Collateral to Secured
Party by virtue of the actions of any Person other than Debtor, or any Person
controlled or in common control with Debtor, then Debtor shall only be liable
for delivery of good, valid and marketable title to all of the Pledged
Collateral immediately upon legally being permitted to do so, and in such case
shall not be liable for any costs, arising from Debtor's obligation to
indemnify Secured Party as discussed in this Section 15.
16. Reinstatement. This Agreement shall remain in full force and
effect and continue to be effective should any petition be filed by or against
Debtor for liquidation or reorganization, should Debtor become insolvent or
make an assignment for the benefit of creditors or should a receiver or trustee
be appointed for all or any significant part of Debtor's assets, and shall
continue to be effective or be reinstated, as the case may be, if at any time
payment and performance of the Secured Obligations, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise
be restored or returned by any obligee of the Secured Obligations, whether as a
"voidable preference", "fraudulent conveyance", or otherwise, all as though
such payment or performance had not been made. In the event that any payment,
or any part thereof, is rescinded, reduced, restored or returned, the
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<PAGE> 14
Secured Obligations shall be reinstated and deemed reduced only by such amount
paid and not so rescinded, reduced, restored or returned.
17. Miscellaneous. (a) Secured Party may execute any of its duties
hereunder by or through agents or employees and shall be entitled to advice of
counsel concerning all matters pertaining to its duties hereunder.
(b) Neither Secured Party nor any of its officers, directors,
employees, agents or counsel shall be liable for any action lawfully taken or
omitted to be taken by it or them hereunder or in connection herewith, except
for its or their own gross negligence or willful misconduct.
(c) This Agreement shall be binding upon Debtor and its successors
and assigns, and shall inure to the benefit of, and be enforceable by, Secured
Party and its successors and assigns, and shall be governed by, and construed
and enforced in accordance with, the internal laws in effect in the State of
Texas without giving effect to principles of choice of law, and none of the
terms or provisions of this Agreement may be waived, altered, modified or
amended except in writing, signed by Secured Party, duly signed for and on
behalf of Secured Party and the Debtors and then only to the extent therein set
forth.
(d) Notwithstanding any provision to the contrary herein, or in
any of the documents evidencing the Secured Obligations or otherwise relating
thereto, no such provision shall require the payment or permit the collection
of interest in excess of the maximum permitted by applicable usury laws. If any
such excessive interest is so provided for, then in such event (i) the
provisions of this paragraph shall govern and control, (ii) neither Debtor nor
its successors or assigns or any other party liable for the payment thereof,
shall be obligated to pay the amount of such interest to the extent that is in
excess of the maximum amount permitted by law, (iii) any such excess interest
that may have been collected shall be, at the option of the holder of the
instrument evidencing the Secured Obligations, either applied as a credit
against the then unpaid principal amount thereof or refunded to the maker
thereof, and (iv) the effective rate of interest shall be automatically reduced
to the maximum lawful rate under applicable usury laws as now or hereafter
construed by the courts having jurisdiction.
(e) Any carbon, photographic or other reproduction of any
financing statement signed by Debtor is sufficient as a financing statement for
all purposes, including without limitation, filing in any state as may be
permitted by the provisions of the Uniform Commercial Code of such state.
18. Severability. If for any reason any provision or provisions
hereof are determined to be invalid and contrary to any existing or future law
in any jurisdiction, such invalidity in any jurisdiction shall not impair the
operation of or effect those portions of this Agreement which are valid in any
other jurisdiction.
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<PAGE> 15
19. Notices. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by any other party, or whenever any of the parties desires to
give or serve upon any other a communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and either shall be delivered in person with
receipt acknowledged or sent by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
(a) If to Secured Party, at
Sanders Morris Mundy
3100 Texas Commerce Tower
Houston, Texas 77002
Attn: Michael S. Chadwick
(b) If to Debtor, at
Watermarc Food Management Co.
10777 Westheimer, Suite 1030
Houston, Texas 77042-3498
Attention: Joan Payton
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, or three (3) Business Days after the same shall have
been deposited in the United States mail. Failure or delay in delivering copies
of any notice, demand, request, consent, approval, declaration or other
communication to the persons designated above to receive copies shall in no way
adversely affect the effectiveness of such notice, demand, request, consent,
approval, declaration or other communication.
20. Section Titles. The Section titles contained in this Agreement
are and shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreement between the parties hereto.
21. Counterparts. This Agreement may be executed in any number of
counterparts, which shall, collectively and separately, constitute one
agreement.
22. Further Assurances. Debtor agrees that at any time and from
time to time, upon the written request of Secured Party, Debtor will execute
and deliver such further documents and do such further acts and things as
Secured Party may reasonably request in order to effect the purposes of this
Agreement.
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<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have caused this
Security Agreement to be duly executed as of the date first written above.
WATERMARC FOOD MANAGEMENT CO.
By: /s/ ANGELO PITILLO
---------------------------------------
Name: Angelo Pitillo
-------------------------------------
Title: President & Chief Operating Officer
------------------------------------
16
<PAGE> 17
SCHEDULE I
DEBTOR PLEDGED SHARES
Watermarc Food Management Co. 48,500 shares of
Common Stock, $.01 par value,
of Marco's Mexican
Restaurants, Inc., a Texas
corporation, evidenced by the
certificate heretofore
delivered to Secured Party.
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<PAGE> 18
EXHIBIT A
Secured Parties
Don A. Sanders
Ghulam M. Bombaywala
Atlantis Software Company Employee Profit Sharing Plan
Philip M. Mount
John I. Mundy
Katherine U. Sanders
Ben T. Morris
Quinlan Quiros Schnitzer
Neil Lande, Custodian for Lynne Lande,
Stephen Lande, Sara Lande, and
Caroline Lande
John E. Drury
George L. Ball
John M. O'Quinn
J-All Partnership
Nolan Ryan
Roger P. Lindstedt
Ray C. Childress
Kara S. Childress
Morton A. Cohn
Michael S. Chadwick
c/o Sanders Morris Mundy Inc.
3100 Texas Commerce Tower
600 Travis
Houston, Texas 77002
18
<PAGE> 1
FIRST AMENDMENT
TO
FINANCIAL ADVISORY AGREEMENT
First Amendment to Financial Advisory Agreement dated as of March 31,
1996 (the "Amendment"), among WATERMARC FOOD MANAGEMENT CO., a Texas
corporation formerly known as Billy Blues Food Corporation (the "Company"), and
SANDERS MORRIS MUNDY INC., a Texas corporation (the "Advisor");
WITNESSETH:
Whereas, the Company and the Advisor are parties to a Financial
Advisor Agreement dated as of January 1, 1995 (the "Advisory Agreement"),
pursuant to which the Company has retained the Advisor to provide certain
advice and consulting services to the Company; and
Whereas, the Company and the Advisor wish to extend the term of and
amend the Advisory Agreement in certain respects;
Now, therefore, in consideration of the foregoing premises, the
following mutual agreement, and other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Advisor agree to amend the Advisory Agreement as follows:
1. Definitions. Capitalized terms used herein shall have the
meaning assigned to them in the Advisory Agreement unless otherwise defined
herein or the context otherwise requires.
2. Amendments to the Advisory Agreement. The Advisory Agreement
is hereby amended as follows:
(a) Section 2.1 of the Advisory Agreement is hereby amended by
adding the following sentence:
Commencing July 1, 1996, the monthly financial advisory fee
shall be reduced to $5,000 per 30-day period.
(b) Section 2.3 of the Advisory Agreement is hereby amended by
deleting reference to "$2.50" and substituting in place thereof "$1.00"
(c) Section 6 of the Advisory Agreement is hereby amended by
deleting all references to "eighteen months" in the first and second sentence
and substituting in place thereof "36 months."
(d) The Advisory Agreement is hereby amended by inserting the
following new Section 13 immediately after Section 12:
<PAGE> 2
13. ADDITIONAL AGREEMENTS BY THE COMPANY.
(a) Nomination of Director. So long as any of the 12%
Subordinated Notes due July 31, 1997 remain outstanding, the Advisor
shall have the right to nominate one individual to serve on the Board
of Directors of the Company. It is agreed that Michael S. Chadwick
shall be deemed the nominee of the Advisor until the first to occur of
(i) his resignation as a director of the Company or (ii) the
termination of his employment with the Advisor. Ghulam M. Bombaywala
agrees to vote, whether at an annual meeting of shareholders, by
unanimous consent in lieu thereof, or otherwise, all shares of the
capital stock of the Company that he may now or hereafter beneficially
own, directly or indirectly, in favor of the election as a director of
the Company the person designated by the Advisor. If the Advisor so
requests, Mr. Bombaywala shall vote all shares of capital stock of the
Company that he may at the time beneficially own, directly or
indirectly, in favor of (i) the removal of a director previously
designated by the Advisor and (ii) the election of a replacement
designated by the Advisor. If Mr. Bombaywala votes in favor of the
removal of a director designated by the Advisor other than as
requested by the Advisor, he shall simultaneously vote all shares of
capital stock of the Company that he may at the time beneficially own,
directly or indirectly, in favor of the election of a replacement
designated by the Advisor.
(b) Financial Information. The Company agrees to provide
to the Advisor promptly upon their issuance copies of the Company's
monthly, quarterly, and annual financial statements and an annual
budget with periodic updates.
3. Amendments to the Advisor's Warrants. Each of the Advisor's
Warrants is hereby amended by deleting the number "$2.50" in the first paragraph
and substituting in place thereof the number "$1.00."
4. Representations and Warranties. The Company represents and
warrants as follows:
(a) The execution, delivery and performance of this
Amendment and the Advisory Agreement, as modified by this Amendment,
and the transactions contemplated hereby and thereby (i) are within
the corporate authority of the Company, (ii) have been authorized by
all necessary corporate proceedings on the part of the Company, (iii)
do not conflict with or result in any material breach or contravention
of any provision of law, statute, rule, or regulation to which the
Company is subject or any judgment, order, writ, injunction, license,
or permit applicable to the Company, and (iv) do not conflict with any
provision of the corporate charter or bylaws of the Company or any
agreement or other instrument binding upon the Company.
(b) The execution, delivery, and performance of this
Amendment and the Advisory Agreement, as modified by this Amendment,
will result in valid and
2
<PAGE> 3
legally binding obligations of the Company enforceable against it in
accordance with the respective terms and provisions hereof and
thereof.
(c) The execution, delivery, and performance of this
Amendment and the Advisory Agreement, as modified by this Amendment,
and the consummation by the Company of the transactions contemplated
hereby and thereby do not require any approval or consent of, or
filing with, any governmental agency or authority.
5. Ratification. Except as expressly amended hereby, the Advisory
Agreement and the Advisor's Warrants are hereby ratified and confirmed in all
respects and shall continue in full force and effect. This Amendment and the
Advisory Agreement shall hereafter be read and construed together as a single
document, and all references to the Advisory Agreement or any agreement or
instrument related to the Advisory Agreement shall hereafter refer to the
Advisory Agreement as amended by this Amendment.
6. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas (without reference
to conflict of laws).
In Witness Whereof, the Company and the Advisor have executed this
Amendment as of the date first above written.
WATERMARC FOOD MANAGEMENT CO.
By: /s/ ANGELO PITILLO
---------------------------------------
Name: Angelo Pitillo
----------------------------------
Title: President & Chief Operating
---------------------------------
Officer
---------------------------------
SANDERS MORRIS MUNDY
By: /s/ MICHAEL S. CHADWICK
---------------------------------------
Name: /s/ Michael S. Chadwick
-------------------------------------
Title: Sr. VP
------------------------------------
/s/ GHULAM M. BOMBAYWALA
------------------------------------------
Ghulam M. Bombaywala
3
<PAGE> 1
AMENDMENT TO WARRANT TO PURCHASE COMMON STOCK OF
WATERMARC FOOD MANAGEMENT CO. (FORMERLY BILLY BLUES FOOD CORPORATION)
Pursuant to the terms of the First Amendment to Purchase Agreement
dated as of March 31, 1996, among Watermarc Food Management Co., a Texas
corporation formerly known as Billy Blues Food Corporation (the "Company") and
the holders of the Warrants to Purchase Common Stock of the Company expiring on
December 31, 1999 (the "Warrants") the initial Exercise Price (as defined in
the Warrants) shall be $1.00.
<PAGE> 1
================================================================================
* * * * *
1994 STOCK COMPENSATION PLAN
OF
BILLY BLUES FOOD CORPORATION
(A TEXAS CORPORATION)
* * * * *
================================================================================
<PAGE> 2
TABLE OF CONTENTS
* * *
1994 STOCK COMPENSATION PLAN
OF
BILLY BLUES FOOD CORPORATION
================================================================================
<TABLE>
<CAPTION>
SECTION SUBJECT PAGE
<S> <C> <C>
1. Purpose of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Stock Subject to the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Administration of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(b) Changes in Law Applicable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. Types of Awards Under the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5. Persons to Options Shall Be Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(a) Nonqualified Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(b) Incentive Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. Factors to Be Considered in Granting Options . . . . . . . . . . . . . . . . . . . . . . . . 6
7. Time of Granting Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
8. Terms and Conditions of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(a) Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(b) Type of Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(c) Option Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(1) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(2) Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(3) Cessation of Service as Director or Advisor . . . . . . . . . . . . . . . . . . 7
(4) Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(5) Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(6) Acceleration and Exercise Upon Change of Control . . . . . . . . . . . . . . . . 9
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C> <C>
(d) Option Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(1) Nonqualified Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(2) Incentive Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(3) Determination of Fair Market Value . . . . . . . . . . . . . . . . . . . . . . 12
(e) Exercise of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(f) Nontransferability of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(g) Limitations on 10% Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(h) Limits on Vesting of Incentive Options . . . . . . . . . . . . . . . . . . . . . . . 14
(i) Compliance with Securities Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(j) Additional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9. Medium and Time of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10. Alternate Stock Appreciation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(a) Award of Alternate Stock Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(b) Alternate Stock Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(c) Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(d) Amount of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(e) Form of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(f) Termination of SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(g) Effect of Exercise of SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(h) Effect of Exercise of Related Option . . . . . . . . . . . . . . . . . . . . . . . . 20
(i) Nontransferability of SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
11. Reload Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(a) Authorization of Reload Options . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(b) Reload Option Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(c) Reload Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(d) Term and Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(e) Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(f) Applicability of Other Sections . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12. Rights as a Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
13. Optionee's Agreement to Serve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
14. Adjustments on Changes in Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 23
(a) Changes in Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(b) Reorganization, Dissolution or Liquidation . . . . . . . . . . . . . . . . . . . . . 24
(c) Change in Par Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(d) Notice of Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(e) Effect Upon Holder of Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(f) Right of Company to Make Adjustments . . . . . . . . . . . . . . . . . . . . . . . . 26
15. Investment Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
16. No Obligation to Exercise Option or SAR . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C> <C>
17. Modification, Extension, and Renewal of Options . . . . . . . . . . . . . . . . . . . . . 27
18. Effective Date of the Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
19. Termination of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
20. Amendment of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
21. Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
22. Indemnification of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
23. Application of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
24. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
(iii)
<PAGE> 5
1994 STOCK COMPENSATION PLAN
OF
BILLY BLUES FOOD CORPORATION
1. Purpose of Plan. This 1994 Stock Compensation Plan ("Plan") is
intended to encourage ownership of the common stock of Billy Blues Food
Corporation ("Company") by certain officers, directors, employees and advisors
of the Company or any Subsidiary or Subsidiaries of the Company (as hereinafter
defined) in order to provide additional incentive for such persons to promote
the success and the business of the Company or its Subsidiaries and to
encourage them to remain in the employ of the Company or its Subsidiaries by
providing such persons an opportunity to benefit from any appreciation of the
common stock of the Company through the issuance of stock options and related
stock appreciation rights to such persons in accordance with the terms of the
Plan. It is further intended that options granted pursuant to this Plan shall
constitute either incentive stock options ("Incentive Options") within the
meaning of Section 422 (formerly Section 422A) of the Internal Revenue Code of
1986, as amended ("Code"), or options which do not constitute Incentive Options
("Nonqualified Options") as determined by the Committee (as hereinafter
defined) at the time of issuance of such options. Incentive Options,
Nonqualified Options and Reload Options (as defined in Section 11 hereof) are
herein sometimes referred to collectively as "Options". As used herein, the
term Subsidiary or Subsidiaries shall mean any corporation (other than the
employer corporation) in an unbroken chain of corporations beginning with the
employer corporation if, at the time of granting of the Option, each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing fifty percent (50%) or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
1994 STOCK COMPENSATION PLAN - Page 1
<PAGE> 6
2. Stock Subject to the Plan. Subject to adjustment as provided in
Section 14 hereof, there will be reserved for the use upon the exercise of
Options to be granted from time to time under the Plan, an aggregate of 250,000
shares of the common stock, $.05 par value, of the Company ("Common Stock"),
which shares in whole or in part shall be authorized, but unissued, shares of
the Common Stock or issued shares of Common Stock which shall have been
reacquired by the Company as determined from time to time by the Board of
Directors of the Company ("Board of Directors"). To determine the number of
shares of Common Stock available at any time for the granting of Options under
the Plan, there shall be deducted from the total number of reserved shares of
Common Stock, the number of shares of Common Stock in respect of which Options
have been granted pursuant to the Plan which remain outstanding or which have
been exercised. If and to the extent that any Option to purchase reserved
shares shall not be exercised by the optionee for any reason or if such Option
to purchase shall terminate as provided herein, such shares which have not been
so purchased hereunder shall again become available for the purposes of the
Plan unless the Plan shall have been terminated, but such unpurchased shares
shall not be deemed to increase the aggregate number of shares specified above
to be reserved for purposes of the Plan (subject to adjustment as provided in
Section 14 hereof).
3. Administration of the Plan.
(a) General. The Plan shall be administered by a Compensation
Committee ("Committee") appointed by the Board of Directors, which
Committee shall consist of not less than two (2) members of the Board of
Directors who are not eligible to participate in the Plan, and have not,
for a period of at least one (1) year prior thereto been eligible to
participate in the Plan, except that if at any time there shall be less
than two (2) directors who are qualified to serve on the Committee, then
the Plan shall be administered by the full Board of Directors. All
references in this Plan to the Committee shall be deemed to refer
1994 STOCK COMPENSATION PLAN - Page 2
<PAGE> 7
instead to the full Board of Directors at any time there is not a
committee of two (2) members qualified to act hereunder. The Board of
Directors may from time to time appoint members of the Committee in
substitution for or in addition to members previously appointed and may
fill vacancies, however caused, in the Committee. If the Board of
Directors does not designate a Chairman of the Committee, the Committee
shall select one of its members as its Chairman. The Committee shall hold
its meetings at such times and places as it shall deem advisable. A
majority of its members shall constitute a quorum. Any action of the
Committee shall be taken by a majority vote of its members at a meeting at
which a quorum is present. Notwithstanding the preceding, any action of
the Committee may be taken without a meeting by a written consent signed
by all of the members, and any action so taken shall be deemed fully as
effective as if it had been taken by a vote of the members present in
person at the meeting duly called and held. The Committee may appoint a
Secretary, shall keep minutes of its meetings, and shall make such rules
and regulations for the conduct of its business as it shall deem
advisable.
The Committee shall have the sole authority and power, subject to
the express provisions and limitations of the Plan, to construe the Plan
and option agreements granted hereunder, and to adopt, prescribe, amend,
and rescind rules and regulations relating to the Plan, and to make all
determinations necessary or advisable for administering the Plan,
including, but not limited to, (i) who shall be granted Options under the
Plan, (ii) the term of each Option, (iii) the number of shares covered by
such Option, (iv) whether the Option shall constitute an Incentive Option
or a Nonqualified Option or a Reload Option, (v) the exercise price for
the purchase of the shares of the Common Stock covered by the Option, (vi)
the period during which the Option may be exercised, (vii) whether the
right to purchase the number of shares covered by the Option shall be
fully vested on issuance of
1994 STOCK COMPENSATION PLAN - Page 3
<PAGE> 8
the Option so that such shares may be purchased in full at one time or
whether the right to purchase such shares shall become vested over a
period of time so that such shares may only be purchased in installments,
and (viii) the time or times at which Options shall be granted. The
Committee's determinations under the Plan, including the above enumerated
determinations, need not be uniform and may be made by it selectively
among the persons who receive, or are eligible to receive, Options under
the Plan, whether or not such persons are similarly situated.
The interpretation by the Committee of any provision of the Plan or
of any option agreement entered into hereunder with respect to any
Incentive Option shall be in accordance with Section 422 of the Code and
the regulations issued thereunder, as such section or regulations may be
amended from time to time, in order that the rights granted hereunder and
under said option agreements shall constitute "Incentive Stock Options"
within the meaning of such section. The interpretation and construction by
the Committee of any provision of the Plan or of any Option granted
hereunder shall be final and conclusive, unless otherwise determined by
the Board of Directors. No member of the Board of Directors or the
Committee shall be liable for any action or determination made in good
faith with respect to the Plan or any Option granted under it. Upon
issuing an Option under the Plan, the Committee shall report to the Board
of Directors the name of the person granted the Option, whether the Option
is an Incentive Option or a Nonqualified Option, the number of shares of
Common Stock covered by the Option, and the terms and conditions of such
Option.
(b) Changes in Law Applicable. If the laws relating to Incentive
Options or Nonqualified Options are changed, altered or amended during the
term of the Plan, the Board of Directors shall have full authority and
power to alter or amend the Plan with
1994 STOCK COMPENSATION PLAN - Page 4
<PAGE> 9
respect to Incentive Options or Nonqualified Options, respectively, to
conform to such changes in the law without the necessity of obtaining
further shareholder approval, unless the changes require such approval.
4. Types of Awards Under the Plan. Awards under the Plan may be in the
form of either Options, alternate stock appreciation rights (as described in
Section 10 hereof), or a combination thereof.
5. Persons to Whom Options Shall be Granted.
(a) Nonqualified Options. Nonqualified Options shall be granted
only to officers, directors (other than "Outside Directors" of the Company or a
Subsidiary [as hereinafter defined]), employees and advisors of the Company or
a Subsidiary who, in the judgment of the Committee, are responsible for or
contribute to the management or success of the Company or a Subsidiary and who,
at the time of the granting of the Nonqualified Options, are either officers,
directors (other than Outside Directors), employees or advisors of the Company
or a Subsidiary. As used herein, the term "Outside Director" shall mean any
director of the Company or a Subsidiary who is not an employee of the Company
or a Subsidiary.
(b) Incentive Options. Incentive Options shall be granted only to
employees of the Company or a Subsidiary who, in the judgment of the Committee,
are responsible for or contribute to the management or success of the Company
or a Subsidiary and who, at the time of the granting of the Incentive Option
are either an employee of the Company or a Subsidiary. Subject to the
provisions of Section 8(g) hereof, no individual shall be granted an Incentive
Option who, immediately before such Incentive Option was granted, would own
more than ten percent (10%) of the total combined voting power or value of all
classes of stock of the Company ("10% Shareholder").
1994 STOCK COMPENSATION PLAN - Page 5
<PAGE> 10
6. Factors to Be Considered in Granting Options. In making any
determination as to persons to whom Options shall be granted and as to the
number of shares to be covered by such Options, the Committee shall take into
account the duties and responsibilities of the respective officers, directors,
employees, or advisors, their current and potential contributions to the
success of the Company or a Subsidiary, and such other factors as the Committee
shall deem relevant in connection with accomplishing the purpose of the Plan.
7. Time of Granting Options. Neither anything contained in the Plan or
in any resolution adopted or to be adopted by the Board of Directors or the
Shareholders of the Company or a Subsidiary nor any action taken by the
Committee shall constitute the granting of any Option. The granting of an
Option shall be effected only when a written Option Agreement acceptable in
form and substance to the Committee, subject to the terms and conditions hereof
including those set forth in Section 8 hereof, shall have been duly executed
and delivered by or on behalf of the Company and the person to whom such Option
shall be granted. No person shall have any rights under the Plan until such
time, if any, as a written Option Agreement shall have been duly executed and
delivered as set forth in this Section 7.
8. Terms and Conditions of Options. All Options granted pursuant to
this Plan must be granted within ten (10) years from the date the Plan is
adopted by the Board of Directors of the Company. Each Option Agreement
governing an Option granted hereunder shall be subject to at least the
following terms and conditions, and shall contain such other terms and
conditions, not inconsistent therewith, that the Committee shall deem
appropriate:
(a) Number of Shares. Each Option shall state the number of shares
of Common Stock which it represents.
(b) Type of Option. Each Option shall state whether it is intended
to be an Incentive Option or a Nonqualified Option.
1994 STOCK COMPENSATION PLAN - Page 6
<PAGE> 11
(c) Option Period.
(1) General. Each Option shall state the date upon which it
is granted. Each Option shall be exercisable in whole or in part
during such period as is provided under the terms of the Option
subject to any vesting period set forth in the Option, but in no
event shall an Option be exercisable either in whole or in part
after the expiration of ten (10) years from the date of grant;
provided, however, if an Incentive Option is granted to a 10%
Shareholder, such Incentive Option shall not be exercisable more
than five (5) years from the date of grant thereof.
(2) Termination of Employment. Except as otherwise provided
in case of Disability (as hereinafter defined), death or Change of
Control (as hereinafter defined), no Option shall be exercisable
after an optionee who is an employee of the Company or a Subsidiary
ceases to be employed by the Company or a Subsidiary as an employee;
provided, however, that the Committee shall have the right in its
sole discretion, but not the obligation, to extend the exercise
period for not more than three (3) months following the date of
termination of such optionee's employment; provided further,
however, that no Option shall be exercisable after the expiration of
ten (10) years from the date it is granted and provided further, no
Incentive Option granted to a 10% Shareholder shall be exercisable
after the expiration of five (5) years from the date it is granted.
(3) Cessation of Service as Director or Advisor. Except as
otherwise provided in case of Disability, death or Change of
Control, no Option shall be exercisable after an optionee who was a
director or advisor of the Company or a Subsidiary ceases to be a
director or advisor of the Company or a Subsidiary; provided,
however, that the Committee shall have the right in its sole
discretion,
1994 STOCK COMPENSATION PLAN - Page 7
<PAGE> 12
but not the obligation, to extend the exercise period for not more
than three (3) months following the date such optionee ceases to be
a director or advisor of the Company or a Subsidiary; provided
further, however, that no Option shall be exercisable after the
expiration of ten (10) years from the date it is granted.
(4) Disability. If an optionee's employment is terminated by
reason of the permanent and total Disability (as hereinafter
defined) of such optionee or if an optionee who is a director or
advisor of the Company or a Subsidiary ceases to serve as a director
or advisor by reason of the permanent and total Disability of such
optionee, the Committee shall have the right in its sole discretion,
but not the obligation, to extend the exercise period for not more
than one (1) year following the date of termination of the
optionee's employment or the date such optionee ceases to be a
director or advisor of the Company or a Subsidiary, as the case may
be, subject to the condition that no Option shall be exercisable
after the expiration of ten (10) years from the date it is granted
and subject to the further condition that no Incentive Option
granted to a 10% Shareholder shall be exercisable after the
expiration of five (5) years from the date it is granted. For
purposes of this Plan, the term "Disability" shall mean the
inability of the optionee to fulfill such optionee's obligations to
the Company or a Subsidiary by reason of any physical or mental
impairment which can be expected to result in death or which has
lasted or can be expected to last for a continuous period of not
less than twelve (12) months as determined by a physician acceptable
to the Committee in its sole discretion.
(5) Death. If an optionee dies while in the employ of the
Company or a Subsidiary, or while serving as a director or advisor
of the Company or a Subsidiary, and shall not have fully exercised
Options granted pursuant to the Plan,
1994 STOCK COMPENSATION PLAN - Page 8
<PAGE> 13
such Options may be exercised in whole or in part at any time within
one (1) year after the optionee's death, by the executors or
administrators of the optionee's estate or by any person or persons
who shall have acquired the Options directly from the optionee by
bequest or inheritance, but only to the extent that the optionee was
entitled to exercise such Option at the date of such optionee's
death, subject to the condition that no Option shall be exercisable
after the expiration of ten (10) years from the date it is granted
and subject to the further condition that no Incentive Option
granted to a 10% Shareholder shall be exercisable after the
expiration of five (5) years from the date it is granted.
(6) Acceleration and Exercise Upon Change of Control.
Notwithstanding the preceding provisions of this Section 8(c), if
any Option granted under the Plan provides for either (a) an
incremental vesting period whereby such Option may only be exercised
in installments as such incremental vesting period is satisfied or
(b) a delayed vesting period whereby such Option may only be
exercised after the lapse of a specified period of time, such as
after the expiration of one (1) year, such vesting period shall be
accelerated upon the occurrence of a Change of Control (as
hereinafter defined) of the Company, or a threatened Change of
Control of the Company as determined by the Committee, so that such
Option shall thereupon become exercisable immediately in part or its
entirety by the holder thereof, as such holder shall elect. For the
purposes of this Plan, a "Change of Control" shall be deemed to have
occurred if.
(i) Any "person", including a "group" as
determined in accordance with Section 13(d)(3) of the
Securities Exchange Act of 1934 ("Exchange Act") and the Rules
and Regulations promulgated thereunder,
1994 STOCK COMPENSATION PLAN - Page 9
<PAGE> 14
is or becomes, through one or a series of related transactions
or through one or more intermediaries, the beneficial owner,
directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the
Company's then outstanding securities, other than a person who
is such a beneficial owner on the effective date of the Plan
and any affiliate of such person;
(ii) As a result of, or in connection with, any
tender offer or exchange offer, merger or other business
combination, sale of assets or contested election, or any
combination of the foregoing transactions ("Transaction"), the
persons who were Directors of the Company before the
Transaction shall cease to constitute a majority of the Board
of Directors of the Company or any successor to the Company;
(iii) Following the effective date of the Plan, the
Company is merged or consolidated with another corporation and
as a result of such merger or consolidation less than 40% of
the outstanding voting securities of the surviving or
resulting corporation shall then be owned in the aggregate by
the former stockholders of the Company, other than (x) any
party to such merger or consolidation, or (y) any affiliates
of any such party;
(iv) A tender offer or exchange offer is made and
consummated for the ownership of securities of the Company
representing 25% or more of the combined voting power of the
Company's then outstanding voting securities; or
1994 STOCK COMPENSATION PLAN - Page 10
<PAGE> 15
(v) The Company transfers more than 50% of its
assets, or the last of a series of transfers result in the
transfer of more than 50% of the assets of the Company, to
another corporation that is not a wholly-owned corporation of
the Company. For purposes of this subsection 8(c)(6)(v), the
determination of what constitutes more than 50% of the assets
of the Company shall be determined based on the sum of the
values attributed to (i) the Company's real property as
determined by an independent appraisal thereof, and (ii) the
net book value of all other assets of the Company, each taken
as of the date of the Transaction involved.
In addition, upon a Change of Control, any Options previously
granted under the Plan to the extent not already exercised may be
exercised in whole or in part either immediately or at any time
during the term of the Option as such holder shall elect.
(d) Option Prices.
(1) Nonqualified Options. The purchase price or prices of
the shares of the Common Stock which shall be offered to any person
under the Plan and covered by a Nonqualified Option shall be the
price determined by the Committee at the time of granting of the
Nonqualified Option, which price may be less than, equal to or
higher than one hundred percent (100%) of the fair market value of
the Common Stock at the time of granting the Nonqualified Option.
(2) Incentive Options. The purchase price or prices of the
shares of the Common Stock which shall be offered to any person
under the Plan and covered by an Incentive Option shall be one
hundred percent (100%) of the fair market value of the Common Stock
at the time of granting the Incentive Option or such
1994 STOCK COMPENSATION PLAN - Page 11
<PAGE> 16
higher purchase price as may be determined by the Committee at the
time of granting the Incentive Option; provided, however, if an
Incentive Option is granted to a 10% Shareholder, the purchase price
of the shares of the Common Stock of the Company covered by such
Incentive Option may not be less than one hundred ten percent (110%)
of the fair market value of such shares on the day the Incentive
Option is granted.
(3) Determination of Fair Market Value. During such time as
the Common Stock of the Company is not listed upon an established
stock exchange, the fair market value per share shall be deemed to
be the closing sales price of the Common Stock on the National
Association of Securities Dealers Automated Quotation System
("NASDAQ") on the day the Option is granted, as reported by NASDAQ,
if the Common Stock is so quoted, and if not so quoted, the mean
between dealer "bid" and "ask," prices of the Common Stock in the
New York over-the-counter market on the day the Option is granted,
as reported by the National Association of Securities Dealers, Inc.
If the Common Stock is listed upon an established stock exchange or
exchanges, such fair market value shall be deemed to be the highest
closing price of the Common Stock on such stock exchange or
exchanges on the day the Option is granted or, if no sale of the
Common Stock of the Company shall have been made on established
stock exchange on such day, on the next preceding day on which there
was a sale of such stock. If there is no market price for the Common
Stock, then the Board of Directors and the Committee may, after
taking all relevant facts into consideration, determine the fair
market value of the Common Stock.
1994 STOCK COMPENSATION PLAN - Page 12
<PAGE> 17
(e) Exercise of Options. To the extent that a holder of an
Option has a current right to exercise, the Option may be exercised
from time to time by written notice to the Company at its principal
place of business. Such notice shall state the election to exercise
the Option, the number of whole shares in respect of which it is
being exercised, shall be signed by the person or persons so
exercising the Option, and shall contain any investment
representation required by Section 8(i) hereof. Such notice shall be
accompanied by payment of the full purchase price of such shares and
by the Option Agreement evidencing the Option. In addition, if the
Option shall be exercised, pursuant to Section 8(c)(4) or Section
8(c)(5) hereof, by any person or persons other than the optionee,
such notice shall also be accompanied by appropriate proof of the
right of such person or persons to exercise the Option. The Company
shall deliver a certificate or certificates representing such shares
as soon as practicable after the aforesaid notice and payment of
such shares shall be received. The certificate or certificates for
the shares as to which the Option shall have been so exercised shall
be registered in the name of the person or persons so exercising the
Option. In the event the Option shall not be exercised in full, the
Secretary of the Company shall endorse or cause to be endorsed on
the Option the number of shares which has been exercised thereunder
and the number of shares that remain exercisable under the Option
and return such Option Agreement to the holder thereof.
(f) Nontransferability of Options. An Option granted
pursuant to the Plan shall be exercisable only by the optionee or
the optionee's court appointed guardian as set forth in Section
8(c)(4) hereof during the optionee's lifetime and shall not be
assignable or transferable by the optionee otherwise than by Will or
the
1994 STOCK COMPENSATION PLAN - Page 13
<PAGE> 18
laws of descent and distribution. An Option granted pursuant to the
Plan shall not be assigned, pledged or hypothecated in any way
(whether by operation of law or otherwise other than by Will or the
laws of descent and distribution) and shall not be subject to
execution, attachment, or similar process. Any attempted transfer,
assignment, pledge, hypothecation, or other disposition of any
Option or of any rights granted thereunder contrary to the foregoing
provisions of this Section 8(f), or the levy of any attachment or
similar process upon an Option or such rights, shall be null and
void.
(g) Limitations on 10% Shareholders. No Incentive Option may
be granted under the Plan to any 10% Shareholder unless (i) such
Incentive Option is granted at an option price not less than one
hundred ten percent (110%) of the fair market value of the shares
on the day the Incentive Option is granted and (ii) such Incentive
Option expires on a date not later than five (5) years from the date
the Incentive Option is granted.
(h) Limits on Vesting of Incentive Options. An individual
may be granted one or more Incentive Options, provided that the
aggregate fair market value (as determined at the time such
Incentive Option is granted) of the stock with respect to which
Incentive Options are exercisable for the first time by such
individual during any calendar year shall not exceed $100,000. To
the extent the $100,000 limitation in the preceding sentence is
exceeded, such option shall be treated as an option which is not an
Incentive Option.
(i) Compliance with Securities Laws. The Plan and the grant
and exercise of the rights to purchase shares hereunder, and the
Company's obligations to sell and deliver shares upon the exercise
of rights to purchase shares, shall be
1994 STOCK COMPENSATION PLAN - Page 14
<PAGE> 19
subject to all applicable federal and state laws, rules and
regulations, and to such approvals by any regulatory or governmental
agency as may, in the opinion of counsel for the Company, be
required, and shall also be subject to all applicable rules and
regulations of any stock exchange upon which the Common Stock of the
Company may then be listed. At the time of exercise of any Option,
the Company may require the optionee to execute any documents or
take any action which may be then necessary to comply with the
Securities Act of 1933, as amended ("Securities Act"), and the rules
and regulations promulgated thereunder, or any other applicable
federal or state laws regulating the sale and issuance of
securities, and the Company may, if it deems necessary, include
provisions in the stock option agreements to assure such compliance.
The Company may, from time to time, change its requirements with
respect to enforcing compliance with federal and state securities
laws, including the request for and enforcement of letters of
investment intent, such requirements to be determined by the Company
in its judgment as necessary to assure compliance with said laws.
Such changes may be made with respect to any particular Option or
stock issued upon exercise thereof. Without limiting the generality
of the foregoing, if the Common Stock issuable upon exercise of an
Option granted under the Plan is not registered under the Securities
Act, the Company at the time of exercise will require that the
registered owner execute and deliver an investment representation
agreement to the Company in form acceptable to the Company and its
counsel, and the Company will place a legend on the certificate
evidencing such Common Stock restricting the transfer thereof, which
legend shall be substantially as follows:
1994 STOCK COMPENSATION PLAN - Page 15
<PAGE> 20
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW BUT HAVE BEEN
ACQUIRED FOR THE PRIVATE INVESTMENT OF THE HOLDER HEREOF AND
MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL EITHER (i) A
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE
WITH REGARD THERETO, OR (ii) THE COMPANY SHALL HAVE RECEIVED
AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AND ITS
COUNSEL THAT REGISTRATION UNDER SUCH SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION
WITH SUCH PROPOSED OFFER, SALE OR TRANSFER.
(j) Additional Provisions. The option Agreements authorized
under the Plan shall contain such other provisions as the Committee
shall deem advisable, including, without limitation, restrictions
upon the exercise of the Option. Any such Option Agreement with
respect to an Incentive Option shall contain such limitations and
restrictions upon the exercise of the Incentive Option as shall be
necessary in order that the option will be an "Incentive Stock
Option" as defined in Section 422 of the Code.
9. Medium and Time of Payment. The purchase price of the shares of the
Common Stock as to which the Option shall be exercised shall be paid in full
either (i) in cash at the time of exercise of the Option, (ii) by tendering to
the Company shares of the Company's Common Stock having a fair market value (as
of the date of receipt of such shares by the Company) equal to the purchase
price for the number of shares of Common Stock purchased, or (iii) partly in
cash and partly in shares of the Company's Common Stock valued at fair market
value as of the date of receipt of such shares by the Company. Cash payment for
the shares of the Common Stock purchased upon exercise of the Option shall be
in the form of either a cashier's check, certified
1994 STOCK COMPENSATION PLAN - Page 16
<PAGE> 21
check or money order. Personal checks may be submitted, but will not be
considered as payment for the shares of the Common Stock purchased and no
certificate for such shares will be issued until the personal check clears in
normal banking channels. If a personal check is not paid upon presentment by
the Company, then the attempted exercise of the Option will be null and void.
In the event the optionee tenders shares of the Company's Common Stock in full
or partial payment for the shares being purchased pursuant to the Option, the
shares of Common Stock so tendered shall be accompanied by fully executed stock
powers endorsed in favor of the Company with the signature on such stock power
being guaranteed. If an optionee tenders shares, such optionee assumes sole and
full responsibility for the tax consequences, if any, to such optionee arising
therefrom, including the possible application of Code Section 424(c), or its
successor Code section, which negates any nonrecognition of income rule with
respect to such transferred shares, if such transferred shares have not been
held for the minimum statutory holding period to receive preferential tax
treatment.
10. Alternate Stock Appreciation Rights.
(a) Award of Alternate Stock Rights. Concurrently with or
subsequent to the award of any Option to purchase one or more shares of
Common Stock, the Committee may in its sole discretion, subject to the
provisions of the Plan and such other terms and conditions as the
Committee may prescribe, award to the optionee with respect to each share
of Common Stock covered by an Option ("Related Option"), a related
alternate stock appreciation right ("SAR"), permitting the optionee to be
paid the appreciation on the Related Option in lieu of exercising the
Related Option. A SAR granted with respect to an Incentive Option must be
granted together with the Related Option. A SAR granted with respect to a
Nonqualified Option may be granted together with or subsequent to the
grant of such Related Option.
1994 STOCK COMPENSATION PLAN - Page 17
<PAGE> 22
(b) Alternate Stock Rights Agreement. Each SAR shall be on such
terms and conditions not inconsistent with this Plan as the Committee may
determine and shall be evidenced by a written agreement executed by the Company
and the optionee receiving the Related Option.
(c) Exercise. An SAR may be exercised only if and to the extent
that its Related Option is eligible to be exercised on the date of exercise of
the SAR. To the extent that a holder of a SAR has a current right to exercise,
the SAR may be exercised from time to time by written notice to the Company at
its principal place of business. Such notice shall state the election to
exercise the SAR, the number of shares in respect of which it is being
exercised, shall be signed by the person so exercising the SAR and shall be
accompanied by the agreement evidencing the SAR and the Related Option. In the
event the SAR shall not be exercised in full, the Secretary of the Company
shall endorse or cause to be endorsed on the SAR and the Related Option the
number of shares which have been exercised thereunder and the number of shares
that remain exercisable under the SAR and the Related Option and return such
SAR and Related Option to the holder thereof.
(d) Amount of Payment. The amount of payment to which an optionee
shall be entitled upon the exercise of each SAR shall be equal to 100% of the
amount, if any, by which the fair market value of a share of Common Stock on
the exercise date exceeds the fair market value of a share of Common Stock on
the date the Option related to said SAR was granted or became effective, as the
case may be; provided, however, the Company may, in its sole discretion,
withhold from such cash payment any amount necessary to satisfy the Company's
obligation for withholding taxes with respect to such payment. For this
purpose, the fair market value of a share of Common Stock shall be determined
as set forth in Section 8(d) hereof.
1994 STOCK COMPENSATION PLAN - Page 18
<PAGE> 23
(e) Form of Payment. The amount payable by the Company to an
optionee upon exercise of a SAR may be paid in shares of Common Stock, cash or
a combination thereof. The number of shares of Common Stock to be paid to an
optionee upon such optionee's exercise of SAR shall be determined by dividing
the amount of payment determined pursuant to Section 10(d) hereof by the fair
market value of a share of Common Stock on the exercise date of such SAR. For
purposes of this Plan, the exercise date of a SAR shall be the date the Company
receives written notification from the optionee of the exercise of the SAR in
accordance with the provisions of Section 10(c) hereof. As soon as practicable
after exercise, the Company shall either deliver to the optionee the amount of
cash due such optionee or a certificate or certificates for such shares of
Common Stock. All such shares shall be issued with the rights and restrictions
specified herein.
(f) Termination of SAR. Except as otherwise provided in case of
Disability (as defined in Section 8(c)(4) hereof) or death, no SAR shall be
exercisable after an optionee ceases to be an employee, director or advisor of
the Company or Subsidiary; provided, however, that the Committee shall have the
right in its sole discretion, but not the obligation, to extend the exercise
period for not more than three (3) months following the date such optionee
ceases to be an employee, director or advisor of the Company or a Subsidiary;
provided further, that the Committee may not extend the period during which an
optionee may exercise a SAR for a period greater than the period during which
an optionee may exercise the Related Option. If an optionee's position as an
employee, director or advisor of the Company is terminated due to the
Disability or death of such optionee, the Committee shall have the right, in
its sole discretion, but not the obligation, to extend the exercise period
applicable to the SAR for a period not to exceed the period
1994 STOCK COMPENSATION PLAN - Page 19
<PAGE> 24
in which the optionee may exercise the Option related to said SAR as set forth
in Sections 8(c)(4) and 8(c)(5) hereof, respectively.
(g) Effect of Exercise of SAR. The exercise of any SAR shall
cancel and terminate the right to purchase an equal number of shares covered by
the Related Option.
(h) Effect of Exercise of Related Option. Upon the exercise or
termination of any Related Option, the SAR with respect to such Related Option
shall terminate to the extent of the number of shares of Common Stock as to
which the Related Option was exercised or terminated.
(i) Nontransferability of SAR. A SAR granted pursuant to this Plan
shall be exercisable only by the optionee or the optionee's court appointed
guardian as set forth in Section 8(c)(4) hereof during the optionee's lifetime
and, subject to the provisions of Section 10(f) hereof, shall not be assignable
or transferable by the optionee. A SAR granted pursuant to the Plan shall not
be assigned, pledged or hypothecated in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment, or similar
process. Any attempted transfer, assignment, pledge, hypothecation, or other
disposition of any SAR or of any rights granted thereunder contrary to the
foregoing provisions of this Section 10(i), or the levy of any attachment or
similar process upon a SAR or such rights, shall be null and void.
11. Reload Options.
(a) Authorization of Reload Options. Concurrently with
the award of Nonqualified Options and/or the award of Incentive
Options to any participant in the Plan, the Committee may authorize
reload options ("Reload Options") to purchase for cash or shares that
number of shares of Common Stock equal to the sum of:
1994 STOCK COMPENSATION PLAN - Page 20
<PAGE> 25
(1) The number of shares of Common Stock used to
exercise the underlying Nonqualifying Option or Incentive
Option; and
(2) To the extent authorized by the Committee,
the number of shares of Common Stock used to satisfy any tax
withholding requirement incident to the exercise of the
underlying Nonqualifying Option or Incentive Options.
The grant of a Reload Option will become effective upon the exercise of the
underlying Nonqualifying Option, Incentive Option or Reload Option through the
use of shares of Common Stock held by the optionee for at least 12 months.
Notwithstanding the fact that the underlying option may be an Incentive Option,
a Reload Option is not intended to qualify as an "incentive stock option" under
Section 422 of the Code.
(b) Reload Option Amendment. Each Option Agreement shall
state whether the Committee has authorized Reload Options with respect
to the underlying Nonqualifying Option and/or Incentive Option. Upon
the exercise of an underlying Option or Incentive Option, the Reload
Option will be evidenced by an amendment to the underlying Option
Agreement.
(c) Reload Option Price. The option price per share of
Common Stock deliverable upon the exercise of a Reload Option shall be
the fair market value of a share of Common Stock on the date the grant
of the Reload Option becomes effective.
(d) Term and Exercise. Each Reload Option is fully
exercisable six months from the effective date of grant. The term of
each Reload Option shall be equal to the remaining option term of the
underlying Nonqualifying Option and/or Incentive Option.
(e) Termination of Employment. No additional Reload
Options shall be granted to optionees when Nonqualifying Options,
Incentive Option and/or Reload Options are
1994 STOCK COMPENSATION PLAN - Page 21
<PAGE> 26
exercised pursuant to the terms of this Plan following termination of
the optionee's employment.
(f) Applicability of Other Sections. To the extent not
inconsistent with the foregoing provisions of this Section, the other
Sections of this Plan pertaining to Options, including Sections 5, 8,
and 9, are incorporated herein by this reference thereto as through
fully set forth herein.
12. Rights as a Shareholder. The holder of an Option or a SAR
shall have no rights as a shareholder with respect to the shares covered by the
Option or SAR until the due exercise of the Option, Related Option, or SAR and
the date of issuance of one or more stock certificates to such holder for such
shares. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such stock certificate is
issued, except as provided in Section 14 hereof.
13. Optionee's Agreement to Serve. Each employee receiving an
Option shall, as one of the terms of the Option Agreement agree that such
employee will remain in the employ of the Company or Subsidiary for a period of
at least one (1) year from the date on which the Option shall be granted to
such employee; and that such employee will, during such employment, devote such
employee's entire time, energy, and skill to the service of the Company or a
Subsidiary as may be required by the management thereof, subject to vacations,
sick leaves, and military absences. Such employment, subject to the provisions
of any written contract between the Company or a Subsidiary and such employee,
shall be at the pleasure of the Board of Directors of the Company or a
Subsidiary, and at such compensation as the Company or a Subsidiary shall
reasonably determine. Any termination of such employee's employment during the
period which the employee has agreed pursuant to the foregoing provisions of
this Section 13 to remain in
1994 STOCK COMPENSATION PLAN - Page 22
<PAGE> 27
employment that is either for cause or voluntary on the part of the employee
shall be deemed a violation by the employee of such employee's agreement. In
the event of such violation, any Option or Options held by such employee, to
the extent not theretofore exercised, shall forthwith terminate, unless
otherwise determined by the Committee. Notwithstanding the preceding, neither
the action of the Company in establishing the Plan nor any action taken by the
Company, a Subsidiary or the Committee under the provisions hereof shall be
construed as granting the optionee the right to be retained in the employ of
the Company or a Subsidiary, or to limit or restrict the right of the Company
or a Subsidiary, as applicable, to terminate the employment of any employee of
the Company or a Subsidiary, with or without cause.
14. Adjustments on Changes in Capitalization.
(a) Changes in Capitalization. Subject to any required
action by the Shareholders of the Company, the number of shares of
Common Stock covered by the Plan, the number of shares of Common Stock
covered by each outstanding Option, and the exercise price per share
thereof specified in each such Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares
of Common Stock of the Company resulting from a subdivision or
consolidation of shares or the payment of a stock dividend (but only
on the Common Stock) or any other increase or decrease in the number
of such shares effected without receipt of consideration by the
Company after the date the Option is granted, so that upon exercise of
the Option, the optionee shall receive the same number of shares the
optionee would have received had the optionee been the holder of all
shares subject to such optionee's outstanding Option immediately
before the effective date of such change in the number of issued
shares of the Common Stock of the Company.
1994 STOCK COMPENSATION PLAN - Page 23
<PAGE> 28
(b) Reorganization, Dissolution or Liquidation. Subject
to any required action by the Shareholders of the Company, if the
Company shall be the surviving corporation in any merger or
consolidation, each outstanding Option shall pertain to and apply to
the securities to which a holder of the number of shares of Common
Stock subject to the Option would have been entitled. A dissolution or
liquidation of the Company or a merger or consolidation in which the
Company is not the surviving corporation, shall cause each outstanding
Option to terminate as of a date to be fixed by the Committee (which
date shall be as of or prior to the effective date of any such
dissolution or liquidation or merger or consolidation); provided, that
not less than thirty (30) days written notice of the date so fixed as
such termination date shall be given to each optionee, and each
optionee shall, in such event, have the right, during the said period
of thirty (30) days preceding such termination date, to exercise such
optionee's Option in whole or in part in the manner herein set forth.
(c) Change in Par Value. In the event of a change in the
Common Stock of the Company as presently constituted, which change is
limited to a change of all of its authorized shares with par value
into the same number of shares with a different par value or without
par value, the shares resulting from any change shall be deemed to be
the Common Stock within the meaning of the Plan.
(d) Notice of Adjustments. To the extent that the
adjustments set forth in the foregoing paragraphs of this Section 14
relate to stock or securities of the Company, such adjustments, if
any, shall be made by the Committee, whose determination in that
respect shall be final, binding and conclusive, provided that each
Incentive Option granted pursuant to this Plan shall not be adjusted
in a manner that causes the Incentive Option to fail to continue to
qualify as an "Incentive Stock Option" within the meaning of Section
422 of
1994 STOCK COMPENSATION PLAN - Page 24
<PAGE> 29
the Code. The Company shall give timely notice of any adjustments made
to each holder of an Option under this Plan and such adjustments shall
be effective and binding on the optionee.
(e) Effect Upon Holder of Option. Except as hereinbefore
expressly provided in this Section 14, the holder of an Option shall
have no rights by reason of any subdivision or consolidation of shares
of stock of any class or the payment of any stock dividend or any
other increase or decrease in the number of shares of stock of any
class by reason of any dissolution, liquidation, merger,
reorganization, or consolidation, or spin-off of assets or stock of
another corporation, and any issue by the Company of shares of stock
of any class, or securities convertible into shares of stock of any
class, shall not affect, and no adjustment by reason thereof shall be
made with respect to, the number or price of shares of Common Stock
subject to the Option. Without limiting the generality of the
foregoing, no adjustment shall be made with respect to the number or
price of shares subject to any Option granted hereunder upon the
occurrence of any of the following events:
(1) The grant or exercise of any other options
which may be granted or exercised under any qualified or
nonqualified stock option plan or under any other employee
benefit plan of the Company whether or not such options were
outstanding on the date of grant of the Option or thereafter
granted;
(2) The sale of any shares of Common Stock in the
Company's initial or any subsequent public offering,
including, without limitation, shares sold upon the exercise
of any overallotment option granted to the underwriter in
connection with such offering;
1994 STOCK COMPENSATION PLAN - Page 25
<PAGE> 30
(3) The issuance, sale or exercise of any
warrants to purchase shares of Common Stock whether or not
such warrants were outstanding on the date of grant of the
Option or thereafter issued;
(4) The issuance or sale of rights, promissory
notes or other securities convertible into shares of Common
Stock in accordance with the terms of such securities
("Convertible Securities") whether or not such Convertible
Securities were outstanding on the date of grant of the Option
or were thereafter issued or sold;
(5) The issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities, whether
or not any adjustment in the purchase price was made or
required to be made upon the issuance or sale of such
Convertible Securities and whether or not such Convertible
Securities were outstanding on the date of grant of the Option
or were thereafter issued or sold; or
(6) Upon any amendment to or change in the terms
of any rights or warrants to subscribe for or purchase, or
options for the purchase of, Common Stock or Convertible
Securities or in the terms of any Convertible Securities,
including, but not limited to, any extension of any expiration
date of any such right, warrant or option, any change in any
exercise or purchase price provided for in any such right,
warrant or option, any extension of any date through which any
Convertible Securities are convertible into or exchangeable
for Common Stock or any change in the rate at which any
Convertible Securities are convertible into or exchangeable
for Common Stock.
(f) Right of Company to Make Adjustments. The grant of an
Option pursuant to the Plan shall not affect in any way the right or
power of the Company to make
1994 STOCK COMPENSATION PLAN - Page 26
<PAGE> 31
adjustments, reclassification, reorganizations, or changes of its
capital or business structure or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or any part of its
business or assets.
15. Investment Purpose. Each Option under the Plan shall be
granted on the condition that the purchase of the shares of stock thereunder
shall be for investment purposes, and not with a view to resale or
distribution; provided, however, that in the event the shares of stock subject
to such Option are registered under the Securities Act or in the event a resale
of such shares of stock without such registration would otherwise be
permissible, such condition shall be inoperative if in the opinion of counsel
for the Company such condition is not required under the Securities Act or any
other applicable law, regulation, or rule of any governmental agency.
16. No Obligation to Exercise Option or SAR. The granting of an
Option or SAR shall impose no obligation upon the optionee to exercise such
Option or SAR.
17. Modification, Extension, and Renewal of Options. Subject to
the terms and conditions and within the limitations of the Plan, the Committee
and the Board of Directors may modify, extend or renew outstanding Options
granted under the Plan, or accept the surrender of outstanding Options (to the
extent not theretofore exercised). Neither the Committee nor the Board of
Directors shall, however, modify any outstanding Options so as to specify a
lower price or accept the surrender of outstanding Options and authorize the
granting of new Options in substitution therefor specifying a lower price.
Notwithstanding the foregoing, however, no modification of an Option shall,
without the consent of the optionee, alter or impair any rights or obligations
under any Option theretofore granted under the Plan.
18. Effective Date of the Plan. The Plan shall become effective on
the date of execution hereof, which date is the date the Board of Directors
approved and adopted the Plan ("Effective Date"); provided, however, if the
Shareholders of the Company shall not have approved the Plan
1994 STOCK COMPENSATION PLAN - Page 27
<PAGE> 32
by the requisite vote of the Shareholders, within twelve (12) months after the
Effective Date, then the Plan shall terminate and all Options theretofore
granted under the Plan shall terminate and be null and void.
19. Termination of the Plan. This Plan shall terminate as of the
expiration of ten (10) years from the Effective Date. Options may be granted
under this Plan at any time and from time to time prior to its termination. Any
Option outstanding under the Plan at the time of its termination shall remain
in effect until the Option shall have been exercised or shall have expired.
20. Amendment of the Plan. The Plan may be terminated at any time
by the Board of Directors of the Company. The Board of Directors may at any
time and from time to time without obtaining the approval of the Shareholders
of the Company or a Subsidiary, modify or amend the Plan (including such form
of Option Agreement as hereinabove mentioned) in such respects as it shall deem
advisable in order that the Incentive Options granted under the Plan shall be
"Incentive Stock Options" as defined in Section 422 of the Code or to conform
to any change in the law, or in any other respect which shall not change: (a)
the maximum number of shares for which Options may be granted under the Plan,
except as provided in Section 14 hereof, or (b) the option prices other than to
change the manner of determining the fair market value of the Common Stock for
the purpose of Section 8(d) hereof to conform with any then applicable
provisions of the Code or regulations thereunder; or (c) the periods during
which Options may be granted or exercised; or (d) the provisions relating to
the determination of persons to whom Options shall be granted and the number of
shares to be covered by such Options; or (e) the provisions relating to
adjustments to be made upon changes in capitalization. The termination or any
modification or amendment of the Plan shall not, without the consent of the
person to whom any Option shall theretofore have been granted, affect that
person's rights under an Option theretofore granted to such person. With the
consent of the person to whom such Option was granted, an outstanding Option
may be
1994 STOCK COMPENSATION PLAN - Page 28
<PAGE> 33
modified or amended by the Committee in such manner as it may deem appropriate
and consistent with the requirements of this Plan applicable to the grant of a
new Option on the date of modification or amendment.
21. Withholding. Whenever an optionee shall recognize compensation
income as a result of the exercise of any Option or SAR granted under the Plan,
the optionee shall remit in cash to the Company or Subsidiary the minimum
amount of federal income and employment tax withholding which the Company or
Subsidiary is required to remit to the Internal Revenue Service in accordance
with the then current provisions of the Code. The full amount of such
withholding shall be paid by the optionee simultaneously with the award or
exercise of an Option or SAR, as applicable.
22. Indemnification of Committee. In addition to such other rights
of indemnification as they may have as Directors or as members of the
Committee, the members of the Committee shall be indemnified by the Company
against the reasonable expenses, including attorneys' fees actually and
necessarily incurred in connection with the defense of any action, suit or
proceedings, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is
approved by independent legal counsel selected by the Company) or paid by them
in satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Committee member is liable for negligence or misconduct in
the performance of his duties; provided that within sixty (60) days after
institution of any such action, suit or proceeding a Committee member shall in
writing offer the Company the opportunity, at its own expense, to pursue and
defend the same.
1994 STOCK COMPENSATION PLAN - Page 29
<PAGE> 34
23. Application of Funds. The proceeds received by the Company
from the sale of Common Stock pursuant to Options granted hereunder will be
used for general corporate purposes.
24. Governing Law. This Plan shall be governed and construed in
accordance with the laws of the state of incorporation of the Company.
EXECUTED this 12th day of January, 1994.
BILLY BLUES FOOD CORPORATION
By: /s/ WILLIAM J. GALLAGHER
------------------------------------
William J. Gallagher, President
ATTEST:
/s/ PENELOPE S. GALLAGHER
- - ----------------------------------
Penelope S. Gallagher, Secretary
1994 STOCK COMPENSATION PLAN - Page 30
<PAGE> 1
EXHIBIT 10.2
<PAGE> 2
EXHIBIT B
FIRST AMENDMENT TO THE 1994 STOCK COMPENSATION
PLAN OF BILLY BLUES FOOD CORPORATION
WHEREAS, on March 18, 1994, the Shareholders of the Billy Blues Food
Corporation (the "Company") approved and adopted the 1994 Stock Compensation
Plan (the "1994 Plan") which authorized the reservation of 250,000 shares of
the Company's common stock, $.05 par value ("Common Stock"), for issuance to
eligible participants under the 1994 Plan;
WHEREAS, on December 16, 1994, the Board of Directors of the Company
authorized the amendment of the 1994 Plan in order to (i) increase the number
of shares reserved for issuance under the 1994 Plan from 250,000 to 500,000
shares, (ii) authorize Outside Directors, those directors not also serving as
employees of the Company, to be eligible to receive nonqualified stock options
under the 1994 Plan, and (iii) authorize the issuance of "Restricted Stock", as
hereinafter defined, to eligible participants under the 1994 Plan;
WHEREAS, Section 20 of the current 1994 Plan requires the approval of the
shareholders of the Company to change the number of shares of Common Stock
eligible for issuance under the 1994 Plan and to modify the provisions related
to the determination of persons eligible to participate under the 1994 Plan;
WHEREAS, although not required, the Company has sought approval of its
shareholders to the proposed amendment authorizing the issuance of "Restricted
Stock" to eligible participants under the 1994 Plan; and
WHEREAS, on March 17, 1995, the shareholders of the Company ratified the
proposal to amend the 1994 Plan in order to incorporate each of the foregoing
amendments into the 1994 Plan:
NOW, THEREFORE, for and in consideration of the above stated premises, the
1994 Plan is hereby amended by this "First Amendment" thereto as follows:
1. Amendments of the 1994 Plan.
(a) Section 2 of the 1994 Plan is hereby amended to read in its
entirety as follows:
2. Stock Subject to the Plan. Subject to
adjustment as provided in Section 14 hereof, there will be
reserved for the use upon the exercise of Options to be
granted from time to time under the Plan, an aggregate of
five hundred thousand (500,000) shares of the common stock,
$.05 par value, of the Company ("Common Stock"), which
shares in whole or in part shall be authorized, but
unissued, shares of the Common Stock or issued shares of
Common Stock which shall have been reacquired by the
Company as determined from time to time by the Board of
Directors of the Company ("Board of Directors"). To
determine the number of shares of Common Stock available at
any time for the granting of Options under the Plan, there
shall be deducted from the total number of reserved shares
of Common Stock, the number of shares of Common Stock in
respect of which Options have been granted pursuant to the
Plan which remain outstanding or which have been exercised.
If and to the extent that any Option to purchase reserved
shares shall not be exercised by the optionee for any reason
or if such Option to purchase shall terminate as provided
herein, such shares which have not been so purchased
hereunder shall again become available for the purposes of
the Plan unless the
FIRST AMENDMENT TO THE
1994 STOCK COMPENSATION PLAN - Page 1
<PAGE> 3
Plan shall have been terminated, but such unpurchased shares
shall not be deemed to increase the aggregate number of shares
specified above to be reserved for purposes of the Plan (subject
to adjustment as provided in Section 14 hereof).
(b) Section 5(a) of the 1994 Plan is hereby amended to read
in its entirety as follows:
5. Persons to Whom Options Shall be Granted.
(a) Nonqualified Options. Nonqualified
Options shall be granted only to officers, directors
(including "Outside Directors" of the Company or a
Subsidiary [as hereinafter defined]), employees and
advisors of the Company or a Subsidiary who, in the
judgment of the Committee, are responsible for or
contribute to the management or success of the
Company or a Subsidiary and who, at the time of the
granting of the Nonqualified Options, are either
officers, directors (including Outside Directors),
employees or advisors of the Company or a Subsidiary.
As used herein, the term "Outside Director" shall
mean any director of the Company or a Subsidiary who
is not an employee of the Company or a Subsidiary.
(c) Section 18 of the 1994 Plan is hereby added to read in its
entirety as follows:
18. Outside Director Options. Nonqualified options
for 5,000 shares shall automatically be granted pursuant to
the Plan and without any action of the Board of Directors
to each person who hereafter becomes or is re-elected as an
Outside Director of the Company, to be effective as of, and
deemed granted on, the date of commencement of such
director's term. Each such option shall be for a term of
five (5) years from the date of grant and shall be
exercisable at the closing sales price of the Common Stock
on the date of the grant as quoted on any stock exchange or
national quotation system. The provisions of
sub-paragraphs (3), (4) and (5) of Section 8(c) of the Plan
shall not be applicable to any option granted to an Outside
Director under this Section. Furthermore, the Board of
Directors may organize a committee comprised of non-Outside
Directors to review the feasibility of and to grant options
to purchase additional shares of Common Stock to the
Outside Directors.
(d) Section 19 of the 1994 Plan is hereby added to read in its
entirety as follows:
19. Restricted Stock.
(a) Grant of Restricted Stock. Subject to the
provisions of Sections 2 and 21, the Committee, at
any time and from time to time, may grant shares of
Restricted Stock
FIRST AMENDMENT TO THE
1994 STOCK COMPENSATION PLAN - Page 2
<PAGE> 4
under the Plan to such participants and in such amounts as
it shall determine. Each grant of Restricted Stock shall
be in writing.
(b) Transferability. Except as provided in
Section 19 hereof, the shares of Restricted Stock granted
hereunder may not be sold, transferred, pledged, assigned
or otherwise alienated or hypothecated for such period
of time as shall be determined by the Committee and shall be
specified in the Restricted Stock grant, or upon earlier
satisfaction of other conditions as specified by the
Committee in its sole discretion and set forth in the
Restricted Stock grant.
(c) Other Restrictions. The Committee may
impose such other restrictions on any shares of Restricted
Stock granted pursuant to the Plan as it may deem advisable
including, without limitation, restrictions under
applicable federal or state securities laws, and may legend
the certificates representing Restricted Stock to give
appropriate notice of such restrictions.
(d) Certificate Legend. In addition to any
legends placed on certificates pursuant to Subsection 19(c)
hereof, each certificate representing shares of Restricted
Stock granted pursuant to the Plan shall bear the following
legend:
"The sale or other transfer of shares
of stock represented by this certificate,
whether voluntary, involuntary or by
operation of law, is subject to certain
restrictions on transfer set forth in
the 1994 Stock Compensation Plan of
_________________, rules of
administration adopted pursuant to such
Plan and a Restricted Stock grant dated
______________. A copy of the Plan, such
rules and such Restricted Stock grant may
be obtained from the Secretary of
_____________________.
(e) Removal of Restrictions. Except as
otherwise provided in Section 19 hereof, shares of
Restricted Stock covered by each Restricted Stock grant
made under the Plan shall become freely transferable by
the participant after the last day of the Period of
Restriction. Once the shares are released from the
restrictions, the participant shall be entitled to have
the legend required by Subsection 19(d) removed from the
participant's stock certificate.
(f) Voting Rights. During the Period of
Restriction, participants holding shares of Restricted
Stock granted hereunder may exercise full voting rights
with respect to those shares.
FIRST AMENDMENT TO THE
1994 STOCK COMPENSATION PLAN - Page 3
<PAGE> 5
(g) Dividends and Other Distributions. During
the Period of Restriction, participants holding shares of
Restricted Stock granted hereunder shall be entitled to
receive all dividends and other distributions paid with
respect to those shares while they are so held. If any
such dividends or distributions are paid in shares of Common
Stock, the shares shall be subject to the same restrictions
on transferability as the shares of Restricted Stock with
respect to which they were paid.
(h) Termination of Employment Due to
Retirement. The Committee may provide in its Restricted
Stock grant that in the event a participant terminated his
or her employment with the Company because of retirement,
any remaining Period of Restriction applicable to the
Restricted Stock pursuant to Subsection 19(b) hereof shall
automatically terminate and, except as otherwise provided
in Subsection 19(c), the shares of Restricted Stock granted
does not automatically terminate such restrictions and a
participant terminates his or her employment with the
Company because of retirement, the Committee may, in its
sole discretion, waive the restrictions remaining on any or
all shares of Restricted Stock pursuant to Subsection 19(b)
hereof and/or add such new restrictions to those shares of
Restricted Stock as it deems appropriate.
(i) Termination of Employment Due to Death or
Disability. The Committee may provide in its Restricted
Stock grant that in the event a participant terminates his
or her employment with the Company because of death or
total and permanent disability during the Period of
Restriction, the restrictions applicable to the shares of
Restricted Stock pursuant to Subsection 19(b) hereof shall
terminate automatically with respect to all of the shares
or that number of shares (rounded to the nearest whole
number) equal to the total number of shares of Restricted
Stock granted to such participant multiplied by the number
of full months which had elapsed since the date of grant
divided by the maximum number of full months of the Period
of Restriction. All remaining shares shall be forfeited and
returned to the Company; provided, however, that the
Committee may, in its sole discretion, waive the
restrictions remaining on any or all such remaining shares.
(j) Termination of Employment for Reasons
Other than Death, Disability or Retirement. In the event
that a participant terminates his or her employment with the
Company for any reason other than those set forth in
Subsections 19(i) and (j) hereof during the Period of
Restriction, then any shares of Restricted Stock still
subject to restrictions at the date of such termination
shall automatically be forfeited and returned to the
Company; provided, however,
FIRST AMENDMENT TO THE
1994 STOCK COMPENSATION PLAN - Page 4
<PAGE> 6
that, in the event of an involuntary termination of
employment of a participant by the Company, the Committee
may, in its sole discretion, waive the automatic forfeiture
of any or all such shares and/or may add such new
restrictions to such shares of Restricted Stock as it deems
appropriate.
(k) Nontransferability of Restricted Stock.
No shares of Restricted Stock granted under the Plan may be
sold, transferred, pledged, assigned or otherwise alienated
or hypothecated, otherwise than by will or by the laws of
descent and distribution until the termination of the
applicable Period of Restriction. All rights with respect
to Restricted Stock granted to a participant under the Plan
shall be exercisable during the participant's lifetime
only by such participant.
2. Cross References. Sections 18 through 24 of the 1994 Plan are
hereby renumbered as Sections 20 through 26, with all cross references to these
Sections in the 1994 Plan being modified hereby.
3. Ratification of Plan. Except as modified hereby, the 1994 Plan is
hereby approved, ratified and confirmed in all respects.
Executed and effective this 17th day of March, 1995.
WATERMARC FOOD MANAGEMENT CO.
By:
------------------------------------------
Ghulam Bombaywala, Chief Executive Officer
ATTEST:
By:
---------------------------------
Thomas J. Buckley, Secretary
FIRST AMENDMENT TO THE
1994 STOCK COMPENSATION PLAN - Page 5
<PAGE> 1
EXHIBIT C
SECOND AMENDMENT TO THE 1994 STOCK COMPENSATION
PLAN OF WATERMARC FOOD MANAGEMENT CO.
WHEREAS, on March 18, 1994, the Shareholders of Watermarc Food Management
Co. (the "Company"), approved and adopted the 1994 Stock Compensation Plan (the
"1994 Plan") which authorized the reservation of 250,000 shares of the
Company's common stock, $.05 par value ("Common Stock"), for issuance to
eligible participants under the 1994 Plan;
WHEREAS, on December 16, 1994, the Board of Directors of the Company
authorized the amendment of the 1994 Plan in order to (i) increase the number
of shares reserved for issuance under the 1994 Plan from 250,000 to 500,000
shares, (ii) authorize "Outside Directors", those directors not also serving as
employees of the Company, to be eligible to receive nonqualified stock options
under the 1994 Plan, and (iii) authorize the issuance of "Restricted Stock" to
eligible participants under the 1994 Plan which amendments were approved by the
Shareholders of the Company at the Company's Annual Meeting of Shareholders
held March 17, 1995;
WHEREAS, Section 22 of the 1994 Plan, among other things, requires the
approval of the Shareholders of the Company to change the number of shares of
Common Stock eligible for issuance under the 1994 Plan and to modify the
provisions related to the determination of persons eligible to participate
under the 1994 Plan;
WHEREAS, on January 27, 1992, the Company adopted the 1992 Stock
Compensation Plan (the "1992 Plan") pursuant to which a total of 240,000 shares
of Common Stock were authorized and reserved for issuance to officers,
directors, employees and advisors of the Company or any subsidiary of the
company pursuant to the grant of nonqualified options, incentive stock options
and stock appreciation rights;
WHEREAS, the terms and provisions of the 1994 Plan and the 1992 Plan are
substantially similar;
WHEREAS, the Board of Directors of the Company proposes to consolidate the
Company's 1992 and 1994 Plans by eliminating the 1992 Plan and increasing the
number of shares of Common Stock available for issuance under the Company's
1994 Plan by the number of shares which are available under the 1992 Plan
(240,000), plus an additional 260,000 shares, for a total of 1,000,000 shares
available for issuance under the 1994 Plan;
WHEREAS, subject to the approval of the Company's Shareholders of this
Second Amendment to the Company's 1994 Plan, such amendment is hereby ratified,
confirmed and approved as of _______________, 1995;
NOW, THEREFORE, for and in consideration of the premises, the 1994 Plan is
hereby amended by this "Second Amendment" thereto as follows:
1. Amendments to the 1994 Plan.
(a) Section 1 of the 1994 Plan is hereby amended to read in its
entirety as follows:
1. Purpose of Plan. This 1994 Stock Compensation Plan
("Plan") is intended to encourage ownership of the common stock of
Watermarc Food Management Co. ("Company") by certain officers,
directors, employees and advisors of the Company or any Subsidiary
or Subsidiaries of the Company (as hereinafter defined) in order to
provide additional incentive for such persons to promote the
success and the business of the Company or its Subsidiaries and to
encourage them to remain in the employ of the Company or its
Subsidiaries by providing such persons an opportunity to benefit
from any appreciation of the common stock of the Company through
the issuance of stock options, restricted stock and related stock
appreciation rights to such persons in accordance with the terms of
the Plan. It is further intended that options granted pursuant
to this
<PAGE> 2
Plan shall constitute either incentive stock options ("Incentive
Options") within the meaning of Section 422 (formerly Section 422A)
of the Internal Revenue Code of 1986, as amended ("Code"), or
options which do not constitute Incentive Options ("Nonqualified
Options") as determined by the Committee (as hereinafter defined) at
the time of issuance of such options. Incentive Options,
Nonqualified Options and Reload Options (as defined in Section 11
hereof) are herein sometimes referred to collectively as "Options".
The term "Options(s)" also includes Restricted Stock (as defined in
Section 19 hereof) unless the context in which such term is used is
inconsistent with the definition of Restricted Stock. As used
herein, the term Subsidiary or Subsidiaries shall mean any
corporation (other than the employer corporation) in an unbroken
chain of corporations beginning with the employer corporation if,
at the time of granting of the Option, each of the corporations
other than the last corporation in the unbroken chain owns stock
possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in
such chain.
(b) Section 2 of the 1994 Plan is hereby amended to read in its
entirety as follows:
2. Stock Subject to the Plan. Subject to adjustment as
provided in Section 14 hereof, there will be reserved for use upon
the exercise of Options and the issuance of Restricted Stock
granted from time to time under the Plan, an aggregate of one
million (1,000,000) shares of the common stock, $.05 par value, of
the Company ("Common Stock"), which shares in whole or in part
shall be authorized, but unissued, shares of the Common Stock or
issued shares of Common Stock which shall have been reacquired by
the Company as determined from time to time by the Board of
Directors of the Company ("Board of Directors"). To determine the
number of shares of Common Stock available at any time for the
granting of Options or Restricted Stock under the Plan, there shall
be deducted from the total number of reserved shares of Common
Stock, the number of shares of Common Stock in respect of which
Options have been granted pursuant to the Plan which remain
outstanding or which have been exercised and the number of shares of
Restricted Stock which have been issued and remain outstanding,
whether or not any vesting schedule or other conditions thereto
have been met. If and to the extent that any Option to purchase
reserved shares shall not be exercised by the optionee for any
reason or if such Option to purchase shall terminate as provided
herein, or if shares of Restricted Stock have been issued which are
subject to vesting or other requirements and such requirements have
not been met or satisfied, such shares which have not been so
purchased or which have not met the vesting or other requirements
associated therewith hereunder shall again become available for the
purposes of the Plan unless the Plan shall have been terminated,
but such unpurchased or unvested shares shall not be deemed to
increase the aggregate number of shares specified above to be
reserved for purposes of the Plan (subject to adjustment as
provided in Section 14 hereof).
(c) Section 17 of the 1994 Plan is hereby amended to read in
its entirety as follows:
17. Modification, Extension, and Renewal of Options. Subject
to the terms and conditions and within the limitation of the Plan,
the Committee and the Board of Directors may modify, extend or
renew outstanding Options granted under the Plan, or accept the
surrender of outstanding Options (to the extent not theretofore
exercised). The Committee or the Board of Directors may amend the
terms of any Options or other award theretofore granted
prospectively or retroactively, and may also substitute new Options
for previously granted Options including previously granted Options
having higher option prices. Notwithstanding the foregoing,
however, no modification of an Option shall, without the consent of
the optionee or holder, alter or impair any rights or obligations
under any Option theretofore granted under the Plan.
2. Ratification of Plan. Except as modified hereby, the 1994 Plan is
hereby approved, ratified and confirmed in all respects.
<PAGE> 3
Executed and effective this ______ day of ________________, 1995.
WATERMARC FOOD MANAGEMENT CO.
---------------------------------------
Ghulam Bombaywala,
Chief Executive Officer
ATTEST:
By:
--------------------------------
Thomas J. Buckley, Secretary
<PAGE> 1
LICENSE AGREEMENT
This License Agreement is entered into on this 21st day of February,
1996 by and between BEVO'S ENTERPRISES, a Limited Liability Company,
(hereinafter referred to as "Licensor") and WATERMARC FOOD MANAGEMENT CO., a
Texas Corporation, (hereinafter referred to as "Licensee").
RECITALS
WHEREAS, Licensor is the owner of the trademarks, service marks,
tradenames, names, and any variant thereof, related to the Long Horn Cafes.
Longhorn Cafes, Longhorn Saloon and Cafe, Longhorn Cafe Uptown and Longhorn
Cafe Downtown (hereinafter referred to as the "Longhorn Names"):
WHEREAS, Licensor desires to grant to Licensee a license to use the
Longhorn Names at Licensee's restaurant located at 509 Louisiana Street,
Houston, Texas:
NOW, THEREFORE, in consideration of the mutual promises and
representations of the parties, and for other good and valuable consideration,
the receipt of which is hereby acknowledged, Licensor and Licensee agree as
follows:
Article I
GRANT OF LICENSE
Licensor grants to Licensee to use the Longhorn Names, and all recipes,
processes, and products associated with or used in the business conducted under
the Longhorn Names, in the operation of Licensee's restaurant located at 509
Louisiana Street, Houston, Texas (hereinafter referred to as "Longhorn Cafe -
Downtown"). This license shall include the right to use the Longhorn Names in
advertisements, signs, and displays associated with the operation of Licensee's
Longhorn Cafe - Downtown.
Article II
FEE
Licensee shall pay to Licensor the sum of ONE DOLLAR ($1.00) per year,
payable in advance, for the initial term of this License.
Article III
TERM
The initial term of this License shall be fifteen (15) years from the
date of this License Agreement. The term of this License may be extended at the
option of Licensee for an additional period of ten (10) years, at the same fee
of ONE DOLLAR ($1.00) per year, by giving Licensor ninety (90) days written
notice prior to the expiration of the initial term.
- 1 -
<PAGE> 2
ARTICLE IV
LICENSOR'S REPRESENTATION AND WARRANTS
Licensor warrants that no other licenses to sue the Longhorn Names
will be granted by Licensor within a one-half (1/2) mile radius of the Longhorn
Cafe - Downtown. However, Licensor shall be permitted to relocate its
restaurant currently known as the Longhorn Cafe - Uptown and currently located
at 1200 McKinney, Houston, Texas, to a different location no closer than
one-quarter (1/4) mile radius from the Longhorn Cafe - Downtown, during the
terms of this License Agreement.
ARTICLE V
ASSIGNMENT
Licensee shall be permitted to assign its rights under this License
Agreement to a parent, subsidiary or affiliated company, successor in interest,
or purchaser of the restaurant located at 509 Louisiana, Houston, Texas without
the consent of Licensor. However, Licensee shall provide written notice to
Licensor of any such assignment. Should Licensee sell its restaurant located
at 509 Louisiana Street, Houston, Texas to any purchaser other than BEVO'S
ENTERPRISES, any assignment of this License Agreement to said purchaser shall
contain a provision that said purchaser/assignee shall not use the Longhorn
Names at any location other than 509 Louisiana Street, Houston, Texas or engage
in any expansion, licensing or promotion of the Longhorn Names.
ARTICLE VI
GOVERNING LAW
This License Agreement shall be interpreted and governed by the laws of
the State of Texas.
EXECUTED at Houston, Texas on the date first above written.
WATERMARC FOOD MANAGEMENT CO.
By: /s/ ANGELO PITILLO
-------------------------------------
ANGELO PITILLO
President and Chief Operating Officer
BEVO'S ENTERPRISES
By: /s/ SANTIAGO TRUJILLO
-------------------------------------
SANTIAGO TRUJILLO
President
-2-
<PAGE> 1
PROMISSORY NOTE
$2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995
PASTA ACQUISITION CO., a Texas corporation (hereinafter called
"Maker"), for value received, promises and agrees to pay in installments and
as herein provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort
Bend County, Texas, whose business address is 10777 Westheimer, Suite 1030,
Houston, Texas 77042 or at such other address as Payee shall designate, in
lawful currency of the United States of America, the principal sum of TWO
MILLION SEVEN HUNDRED FIFTY THOUSAND DOLLARS ($2,750,000.00), together with
interest thereon from and after the date hereof at the rate of ten percent
(10%) per annum until maturity. All past due principal and interest shall bear
interest until paid at twelve percent (12%) per annum (but in no event to
exceed the maximum rate of nonusurious interest allowed by law). All sums paid
hereon shall apply first to the satisfaction of accrued interest and the
balance to the unpaid principal.
INTEREST AND PRINCIPAL ON THIS NOTE is payable as follows: interest on
the outstanding principal hereof shall be payable quarterly on the 15th day of
December, March, June and September of each year in which any principal remains
outstanding hereunder; provided, however, commencing September 15, 2000, on
each quarterly interest payment date, Maker shall make quarterly payments of
principal in amount sufficient to amortize and pay all then remaining principal
in pro rata quarterly installments by September 15, 2002. Notwithstanding
anything herein to the contrary, this Note shall not accrue or bear interest
during the "Pre Effective Period" as such term is defined in the Merger
agreement (as herein after defined).
IT IS ESPECIALLY agreed between the parties hereto that time is of the
essence with respect to the payment of this Note and, if an "Event of Default"
(as defined below) occurs, the owner and holder of this Note may, at its
option, declare all sums owing hereon at once due and payable. If default is
made in the payment of this Note at maturity (regardless of how its maturity
may be brought about) and the same is placed in the hands of an attorney for
collection, or suit is filed hereon, or proceedings are had in bankruptcy,
probate, receivership, reorganization, arrangement, or other judicial
proceedings for the establishment or collection of any amount called for
hereunder, or any amount payable or to be payable hereunder is collected
through any such proceedings, Maker agrees and is also to pay to the owner and
holder of this Note all reasonable attorney's or collection fees incurred.
IT IS the intention of Maker and Payee to conform strictly to
applicable usury laws. Accordingly, if the transactions contemplated hereby
would be usurious under any applicable law (including the laws of the State of
Texas and the laws of the United States of America), then, in that event,
notwithstanding anything to the contrary in any agreement entered into in
connection with or as security for this Note, it is agreed as follow: (i) the
aggregate of all consideration which constitutes interest under applicable law
that is taken, reserved, contracted for, charged or received under this Note or
under any of the other aforesaid agreements or otherwise in connection with this
Note shall under no circumstances exceed the maximum amount of interest allowed
by applicable law, and any excess shall be credited on this Note by the holder
hereof (or,
--------
Page 1 of 5 INITIALS
<PAGE> 2
$2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995
if this Note shall have been paid in full, refunded to Maker); (ii) in the
event that maturity of the Note is accelerated by reason of an election by the
holder hereof resulting from any default hereunder or otherwise, or in the
event of any required or permitted prepayment, then such consideration that
constitutes interest may never include more than the maximum amount allowed by
applicable law, and excess interest, if any, provided for in this Note or
otherwise shall be canceled automatically as of the date of such acceleration
or prepayment and, if theretofore prepaid, shall be credited on this Note (or
if this Note shall have been paid in full, refunded to Maker); and (iii) it is
further agreed, without limitation of the foregoing, that all calculations of
the rate of interest contracted for, charged, or received on this Note that are
made for the purpose of determining whether such rate exceeds the maximum
amount of interest allowed by applicable law, shall be made, to the extent
permitted by applicable law, by amortizing, prorating, allocating, and
spreading throughout the full stated term of this Note so that such rate of
interest on account of this Note, as so calculated, is uniform throughout the
term thereof; and (iv) that the Maker and Payee agree that for the purposes of
this paragraph, the applicable interest ceiling is the Highest Lawful Rate
under the laws of any jurisdiction which may be held to apply to this Note.
EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the
following events:
1. Maker's failure to pay principal of, or interest on, this Note as
and when due and payable or the failure of Maker or the Guarantor,
as defined below, to pay when due any installment or payment of
principal or interest owed by Maker or Guarantor to Payee under the
Notes as defined in Section 2.02 of the Merger Agreement;
2. Maker or Guarantor fails to perform or observe any material term,
covenant or agreement contained in the Guaranty Agreement or the
Security Documents referred to below;
3. Maker, Guarantor or any of their material subsidiaries shall
individually or collectively: (a) make an assignment for the
benefit of creditors or petition or apply to any tribunal for the
appointment of a custodian, receiver or trustee for it or for a
substantial part of its assets; (b) commence any proceeding under
any bankruptcy, reorganization, rearrangement, readjustment of
debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; (c) have had any
such petition or application filed or any such proceeding commenced
against it in which an order for relief is entered or an
adjudication or appointment is made, and which remains undismissed
for a period of thirty (30) days or more; (d) take any board or
shareholder action approving any such petition, application,
proceeding, or order for relief or the appointment of a custodian.
--------
Page 2 of 5 INITIALS
<PAGE> 3
$2,750,000 HOUSTON, TEXAS SEPTEMBER 14, 1995
receiver or trustee for all or any substantial part of its properties; or
(e) suffer any such custodianship, receivership or trusteeship to continue
undischarged for a period of thirty (30) days or more; or
4. The Guaranty Agreement or Security Documents shall at any time after
execution and delivery thereof and for any reason cease to be in full force
and effect or shall be declared null and void, or the validity or
enforceability thereof shall be contested by the Guarantor or Maker or if
Guarantor or Maker shall deny that it or they have any liability or
obligation under, or shall fail to perform their respective obligations
under, the Guaranty Agreement or Security Agreements.
IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note,
Payee or any owner and holder of this Note agrees to provide Maker and the
Guarantor hereof thirty (30) days prior written notice specifying such default
and providing Maker an opportunity to cure such default within such period
prior to any acceleration of this Note; provided, however, no notice shall be
required upon the occurrence of the Events of Default set forth in clauses (a),
(b) or (d) of number subparagraph 3 of this Note above and sixty (60) days
prior written notice shall be provided upon the occurrence of the Events of
Default set forth in numbered subparagraphs 2 and 4 above. Following such
written notice, if required, and the failure of Maker to cure such default in
every respect all indebtedness represented by this Note shall be immediately
due and payable without further action or notice by Payee or any holder hereof
to Maker. If Maker cures such default after receiving notice thereof, Maker
shall provide written notice to Payee or the owner and holder hereof stating
the steps taken to cure such default and stating that the default is cured
within the specified notice period.
MAKER reserves the option of prepaying the principal of this Note, in
whole or in part, at any time after the date hereof without penalty. Accrued
and unpaid interest with respect to such principal amount prepaid is due and
payable on the date of such prepayment. Maker shall be required to prepay the
Note to the extent and in the circumstances set forth in Section 2.02 of the
Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The
Original Pasta Company dated effective as of September 14, 1995 (the "Merger
Agreement"). Payment of this Note is subordinated in the circumstances set
forth in Section 2.02 of the Merger Agreement.
THIS NOTE is entitled to the benefits of and the security afforded by (i)
that certain Security Agreement between Maker and Payee dated September 14,
1995; (ii) Pledge and Security Agreement dated September 14, 1995 between
Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995;
(iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee
dated September 14, 1995; and (iv) any other agreements, instruments or filings
intended to provide security for this Note as provided for in Section 2.02 of
the Merger Agreement (collectively, the "Security Documents").
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Page 3 of 5 INITIALS
<PAGE> 4
$2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995
IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the
Maker or Guarantor or any other person or party with respect to this Note, the
Merger Agreement or the Security Documents or with respect to any other matter,
thing, event or occurrence, whether past, present or arising in the future, the
Maker waives all rights of set off, offset and the right to interpose make any
legal claims or counterclaims, the effect of which would be to delay, reduce,
deny, limit or offset its obligations under this Note.
IF THE EVENT OF ANY CONFLICT between the terms and provisions of this
Note, the Security Documents or the Merger Agreement or any other agreement
relating hereto or thereto, the terms and provisions of this Note shall control.
EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any
endorsers or guarantors of this Note severally waive notice, grace,
presentment and demand for payment, notice of dishonor, notice of intent to
accelerate maturity, notice of acceleration of maturity, protest and notice of
protest and non-payment, bringing of suit, and diligence in taking any action
to collect any sums owing under Note or in proceeding against any of the rights
and properties securing payment of this Note, and indulgences of every kind.
Maker and any endorsers or guarantors of this Note agree that, from time to
time, both before and after the maturity date of this Note and without notice,
Payee may renew the indebtedness evidenced by this Note, extend the time for
any payments on the Note, consent to the substitution of security, accept
additional security, or release any existing security for this Note and accept
partial payments of this Note without in any manner effecting the liability of
maker or any endorser or guarantor under or with respect to this Note, even
though Maker or such endorser or guarantor is not a party to any agreement
regarding such actions.
NEITHER THE Payee's acceptance of partial or delinquent performance or
payment nor any forbearance, failure or delay by Payee or any holder hereof in
exercising any right, power or remedy shall be deemed a waiver of any
obligation of the Maker or any endorser, guarantor or other party liable for
payment of this Note or of any right, power or remedy of the Payee or any
holder hereof or preclude any other or further exercise thereof; and no single
or partial exercise of any right, power or remedy shall preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated
orally, but only by an agreement in writing, signed by the Maker and Payee or
any holder hereof. If any term or provision of this Note shall be held invalid,
illegal or unenforceability, the validity of all other terms and provisions
shall in no way be effected thereby. Any waiver or forbearance must be in
writing to be effective against the Payee or any holder hereof and shall only
be applicable in the specific instance for which it is given.
THIS NOTE has been executed and delivered in and shall be construed in
accordance with and governed by the laws of the State of Texas and of the
United States of America.
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Page 4 or 5 INITIALS
<PAGE> 5
$2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995
PASTA ACQUISITION CO.
By: /s/ ANGELO PITILLO
___________________________
Angelo Pitillo, President
--------
Page 5 of 5 INITIALS
<PAGE> 1
PROMISSORY NOTE
$1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995
PASTA ACQUISITION CO., a Texas corporation (hereinafter called
"Maker"), for value received, promises and agrees to pay in installments and as
herein provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend
County, Texas, whose business address is 10777 Westheimer, Suite 1030, Houston,
Texas 77042 or at such other address as Payee shall designate, in lawful
currency of the United States of America, the principal sum of ONE MILLION AND
NO/100 DOLLARS ($1,000,000.00), together with interest thereon from and after
the date hereof at the rate of ten percent (10%) per annum until maturity. All
past due principal and interest shall bear interest until paid at twelve
percent (12%) per annum (but in no event to exceed the maximum rate of
nonusurious interest allowed by law). All sums paid hereon shall apply first to
the satisfaction of accrued interest and the balance to the unpaid principal.
INTEREST AND PRINCIPAL ON THIS NOTE is payable as follows: interest on
the outstanding principal hereof shall be payable quarterly on the 15th day of
December, March, June and September of each year in which any principal remains
outstanding hereunder; $500,000.00 of the principal hereof is due December 31,
1996 and all remaining principal and any interest remaining unpaid on this Note
is due and payable on December 31, 1997. Notwithstanding anything to the
contrary, this Note shall not accrue or bear interest during the "Pre Effective
Period" as such term is defined in the Merger Agreement (as hereinafter
defined).
IT IS ESPECIALLY agreed between the parties hereto that time is of the
essence with respect to the payment of this Note and, if an "Event of Default"
(as defined below) occurs, the owner and holder of this Note may, at its
option, declare all sums owing hereon at once due and payable. If default is
made in the payment of this Note at maturity (regardless of how its maturity
may be brought about) and the same is placed in the hands of an attorney for
collection, or suit is filed hereon, or proceedings are had in bankruptcy,
probate, receivership, reorganization, arrangement, or other judicial
proceedings for the establishment or collection of any amount called for
hereunder, or any amount payable or to be payable hereunder is collected
through any such proceedings, Maker agrees and is also to pay to the owner and
holder of this Note all reasonable attorney's or collection fees incurred.
IT IS the intention of Maker and Payee to conform strictly to
applicable usury laws. Accordingly, if the transactions contemplated hereby
would be usurious under any applicable law (including the laws of the State of
Texas and the laws of the United States of America), then, in that event,
notwithstanding anything to the contrary in any agreement entered into in
connection with or as security for this Note, it is agreed as follows: (i) the
aggregate of all consideration which constitutes interest under applicable law
that is taken, reserved, contracted for, charged or received under this Note or
under any of the other aforesaid agreements or otherwise in connection with
this Note shall under no circumstances exceed the maximum amount of interest
allowed by applicable law, and any excess shall be credited on this Note by the
holder hereof (or, if this Note shall have been paid in full, refunded to
Maker); (ii) in the event that maturity of the Note is accelerated by reason of
an election by the holder hereof resulting from any default
________
Page 1 of 5 INITIALS
<PAGE> 2
$1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995
hereunder or otherwise, or in the event of any required or permitted
prepayment, then such consideration that constitutes interest may never include
more than the maximum amount allowed by applicable law, and excess interest, if
any, provided for in this Note or otherwise shall be canceled automatically as
of the date of such acceleration or prepayment and, if theretofore prepaid,
shall be credited on this Note (or if this Note shall have been paid in full,
refunded to Maker); and (iii) it is further agreed, without limitation of the
foregoing, that all calculations of the rate of interest contracted for,
charged, or received on this Note that are made for the purpose of determining
whether such rate exceeds the maximum amount of interest allowed by applicable
law, shall be made, to the extent permitted by applicable law, by amortizing,
prorating, allocating, and spreading throughout the full stated term of this
Note so that such rate of interest on account of this Note, as so calculated,
is uniform throughout the term thereof; and (iv) that the Maker and Payee agree
that for the purposes of this paragraph, the applicable interest ceiling is the
Highest Lawful Rate under the laws of any jurisdiction which may be held to
apply to this Note.
EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the
following events:
1. Maker's failure to pay the principal of, or interest on, this Note
as and when due and payable or the failure of Maker or the
Guarantor, as defined below, to pay when due any installment or
payment of principal or interest owed by Maker or Guarantor to Payee
under the Notes as defined in Section 2.02 of the Merger Agreement;
2. Maker or Guarantor fails to perform or observe any material term,
covenant or agreement contained in the Guaranty Agreement or the
Security Documents referred to below;
3. Maker, Guarantor or any of their material subsidiaries shall
individually or collectively: (a) make an assignment for the
benefit of creditors or petition or apply to any tribunal for the
appointment of a custodian, receiver or trustee for it or for a
substantial part of its assets; (b) commence any proceeding under
any bankruptcy, reorganization, rearrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction,
whether now or hereafter in effect; (c) have had any such petition
or application filed or any such proceeding commenced against it in
which an order for relief is entered or an adjudication or
appointment is made, and which remains undismissed for a period of
thirty (30) days or more; (d) take any board or shareholder action
approving any such petition, application, proceeding, or order for
relief or the appointment of a custodian, receiver or trustee for
all or any substantial part of its properties; or (e)
________
Page 2 of 5 INITIALS
<PAGE> 3
$1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995
suffer any such custodianship, receivership or trusteeship to
continue undischarged for a period of thirty (30) days or more;
or
4. The Guaranty Agreement or Security Documents shall at any time
after execution and delivery thereof and for any reason cease
to be in full force and effect or shall be declared null and
void, or the validity or enforceability thereof shall be
contested by the Guarantor or Maker or if Guarantor or Maker
shall deny that it or they have any liability or obligation
under, or shall fail to perform their respective obligations
under, the Guaranty Agreement or Security Agreements.
IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note,
Payee or any owner and holder of this Note agrees to provide Maker and the
Guarantor hereof thirty (30) days prior written notice specifying such default
and providing Maker an opportunity to cure such default within such period prior
to any acceleration of this Note; provided, however, no notice shall be required
upon the occurrence of the Events of Default set forth in clauses (a), (b) or
(d) of numbered subparagraph 3 of this Note above and sixty (60) days prior
written notice shall be provided upon the occurrence of the Events of Default
set forth in numbered subparagraphs 2 and 4 above. Following such written
notice, if required, and the failure of Maker to cure such default in every
respect all indebtedness represented by this Note shall be immediately due and
payable without further action or notice by Payee or any holder hereof to Maker.
If Maker cures such default after receiving notice thereof, Maker shall provide
written notice to Payee or the owner and holder hereof stating the steps taken
to cure such default and stating that the default is cured within the specified
notice period.
MAKER reserves the option of prepaying the principal of this Note, in
whole or in part, at any time after the date hereof without penalty. Accrued
and unpaid interest with respect to such principal amount prepaid is due and
payable on the date of such prepayment. Maker shall be required to prepay the
Note to the extent and in the circumstances set forth in Section 2.02 of the
Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The
Original Pasta Company dated effective as of September 14, 1995 (the "Merger
Agreement"). Payment of this Note is subordinated in the circumstances set
forth in Section 2.02 of the Merger Agreement.
THIS NOTE is entitled to the benefits of and the security afforded by
(i) that certain Security Agreement between Maker and Payee dated September 14,
1995; (ii) the Pledge and Security Agreement dated September 14, 1995 between
Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995;
(iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee
dated September 14, 1995; and (iv) any other agreements, instruments or filings
intended to provide security for this Note as provided for in Section 2.02 of
the Merger Agreement (collectively the "Security Documents").
--------
Page 3 of 5 INITIALS
<PAGE> 4
$1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995
IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the Maker
or Guarantor or any other person or party with respect to this Note, the Merger
Agreement or the Security Documents or with respect to any other matter, thing,
event or occurrence, whether past, present or arising in the future, the Maker
waives all rights of set off, offset and the right to interpose make any legal
claims or counterclaims, the effect of which would be to delay, reduce, deny,
limit or offset its obligations under this Note.
IN THE EVENT OF ANY CONFLICT between the terms and provisions of this
Note, the Security Documents or the Merger Agreement or any other agreement
relating hereto or thereto, the terms and provisions of this Note shall control.
EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any
endorsers or guarantors of this Note severally waive notice, grace, presentment
and demand for payment, notice of dishonor, notice of intent to accelerate
maturity, notice of acceleration of maturity, protest and notice of protest and
non-payment, bringing of suit, and diligence in taking any action to collect
any sums owing under this Note or in proceeding against any of the rights and
properties securing payment of this Note, and indulgences of every kind. Maker
and any endorsers or guarantors of this Note agree that, from time to time,
both before and after the maturity date of this Note and without notice, Payee
may renew the indebtedness evidenced by this Note, extend the time for any
payments on the Note, consent to the substitution of security, accept
additional security, or release any existing security for this Note and accept
partial payments of this Note without in any manner effecting the liability of
Maker or any endorser or guarantor under or with respect to this Note, even
though Maker or such endorser or guarantor is not a party to any agreement
regarding such actions.
NEITHER THE Payee's acceptance of partial or delinquent performance or
payment nor any forebearance, failure or delay by Payee or any holder hereof in
exercising any right, power or remedy shall be deemed a waiver of any
obligation of the Maker or any endorser, guarantor or other party liable for
payment of this Note or of any right, power or remedy of the Payee or any
holder hereof or preclude any other or further exercise thereof; and no single
or partial exercise of any right, power or remedy shall preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated
orally, but only by an agreement in writing, signed by the Maker and Payee or
any holder hereof. If any term or provision of this Note shall be held
invalid, illegal or unenforceability, the validity of all other terms and
provisions shall in no way be effected thereby. Any waiver or forbearance must
be in writing to be effective against the Payee or any holder hereof and shall
only be applicable in the specific instance for which it is given.
--------
Page 4 of 5 INITIALS
<PAGE> 5
$1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995
THIS NOTE has been executed and delivered in and shall be construed in
accordance with and governed by the laws of the State of Texas and of the
United States of America.
PASTA ACQUISITION CO.
By: /s/ ANGELO PITILLO
___________________________
Angelo Pitillo, President
________
Page 5 of 5 INITIALS
<PAGE> 1
PROMISSORY NOTE
$595,000.00 HOUSTON, TEXAS JANUARY 26, 1996
PASTA ACQUISITION CO., a Texas corporation (hereinafter called "Maker"),
for value received, promises and agrees to pay in installments and as herein
provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend
County, Texas, whose business address is 10777 Westheimer, Suite 1030, Houston,
Texas 77042 or at such other address as Payee shall designate, in lawful
currency of the United States of America, the principal sum of FIVE HUNDRED
NINETY FIVE THOUSAND AND NO/100 DOLLARS ($595,000.00), together with interest
thereon from and after the date hereof at the rate of ten percent (10%) per
annum until maturity. All past due principal and interest shall bear interest
until paid at twelve percent (12%) per annum (but in no event to exceed the
maximum rate of nonusurious interest allowed by law). All sums paid hereon
shall apply first to the satisfaction of accrued interest and the balance to
the unpaid principal.
INTEREST AND PRINCIPAL ON THIS NOTE is payable one (1) year from the date
hereof.
IT IS ESPECIALLY agreed between the parties hereto that time is of the
essence with respect to the payment of this Note and, if an "Event of Default"
(as defined below) occurs, the owner and holder of this Note may, at its
option, declare all sums owing hereon at once due and payable. If default is
made in the payment of this Note at maturity (regardless of how its maturity
may be brought about) and the same is placed in the hands of an attorney for
collection, or suit is filed hereon, or proceedings are had in bankruptcy,
probate, receivership, reorganization, arrangement, or other judicial
proceedings for the establishment or collection of any amount called for
hereunder, or any amount payable or to be payable hereunder is collected
through any such proceedings, Maker agrees and is also to pay to the owner and
holder of this Note all reasonable attorney's or collection fees incurred.
IT IS the intention of Maker and Payee to conform strictly to applicable
usury laws. Accordingly, if the transactions contemplated hereby would be
usurious under any applicable law (including the laws of the State of Texas and
the laws of the United States of America), then, in that event, notwithstanding
anything to the contrary in any agreement entered into in connection with or as
security for this Note, it is agreed as follows: (i) the aggregate of all
consideration which constitutes interest under applicable law that is taken,
reserved, contracted for, charged or received under this Note or under any of
the other aforesaid agreements or otherwise in connection with this Note shall
under no circumstances exceed the maximum amount of interest allowed by
applicable law, and any excess shall be credited on this Note by the holder
hereof (or, if this Note shall have been paid in full, refunded to Maker); (ii)
in the event that maturity of the Note is accelerated by reason of an election
by the holder hereof resulting from any default hereunder or otherwise, or in
the event of any required or permitted prepayment, then such consideration that
constitutes interest may never include more than the maximum amount allowed by
applicable law, and excess interest, if any, provided for in this Note or
otherwise shall be canceled automatically as of the date of such acceleration
or prepayment and, if theretofore prepaid, shall be credited on this Note (or
if this Note
----------
Page 1 of 5 INITIALS
<PAGE> 2
$595,000.00 HOUSTON, TEXAS JANUARY 26, 1996
shall have been paid in full, refunded to Maker); and (iii) it is further
agreed, without limitation of the foregoing, that all calculations of the rate
of interest contracted for, charged, or received on this Note that are made for
the purpose of determining whether such rate exceeds the maximum amount of
interest allowed by applicable law, shall be made, to the extent permitted by
applicable law, by amortizing, prorating, allocating, and spreading throughout
the full stated term of this Note so that such rate of interest on account of
this Note, as so calculated, is uniform throughout the term thereof, and (iv)
that the Maker and Payee agree that for the purposes of this paragraph, the
applicable interest ceiling is the Highest Lawful Rate under the laws of any
jurisdiction which may be held to apply to this Note.
EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the
following events:
1. Maker's failure to pay the principal of, or interest on, this Note
as and when due and payable or the failure of Maker or the
Guarantor, as defined below, to pay when due any installment or
payment of principal or interest owed by Maker or Guarantor to
Payee under the Notes as defined in Section 2.02 of the Merger
Agreement;
2. Maker or Guarantor fails to perform or observe any material term,
covenant or agreement contained in the Guaranty Agreement or the
Security Documents referred to below;
3. Maker, Guarantor or any of their material subsidiaries shall
individually or collectively: (a) make an assignment for the
benefit of creditors or petition or apply to any tribunal for the
appointment of a custodian, receiver or trustee for it or for a
substantial part of its assets; (b) commence any proceeding under
any bankruptcy, reorganization, rearrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction,
whether now or hereafter in effect; (c) have had any such petition
or application filed or any such proceeding commenced against it in
which an order for relief is entered or an adjudication or
appointment is made, and which remains undismissed for a period of
thirty (30) days or more; (d) take any board or shareholder action
approving any such petition, application, proceeding, or order for
relief or the appointment of a custodian, receiver or trustee for
all or any substantial part of its properties; or (e) suffer any
such custodianship, receivership or trusteeship to continue
undischarged for a period of thirty (30) days or more; or
________
Page 2 of 5 INITIALS
<PAGE> 3
$595,000.00 HOUSTON, TEXAS JANUARY 26, 1996
4. The Guaranty Agreement or security Documents shall at any time
after execution and delivery thereof and for any reason cease to be
in full force and effect or shall be declared null and void, or the
validity or enforceability thereof shall be contested by the
Guarantor or Maker or if Guarantor or Maker shall deny that it or
they have any liability or obligation under, or shall fail to
perform their respective obligations under the Guaranty Agreement
or Security Agreements.
IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note,
Payee or any owner and holder of this Note agrees to provide Maker and the
Guarantor hereof thirty (30) days prior written notice specifying such default
and providing Maker an opportunity to cure such default within such period
prior to any acceleration of this Note; provided, however, no notice shall be
required upon the occurrence of the Events of Default set forth in clauses (a),
(b) or (d) of numbered subparagraph 3 of this Note above and sixty (60) days
prior written notice shall be provided upon the occurrence of the Events of
Default set forth in numbered subparagraphs 2 and 4 above. Following such
written notice, if required, and the failure of Maker to cure such default in
every respect, all indebtedness represented by this Note shall be immediately
due and payable without further action or notice by the Payee or any holder
hereof to Maker. If Maker cures such default after receiving notice thereof,
Maker shall provide written notice to Payee or the owner and holder hereof
stating the steps taken to cure such default and stating that the default is
cured within the specified notice period.
MAKER reserves the option of prepaying the principal of this Note, in
whole or in part, at any time after the date hereof without penalty. Accrued
and unpaid interest with respect to such principal amount prepaid is due and
payable on the date of such prepayment. Maker shall be required to prepay the
Note to the extent and in the circumstances set forth in Section 2.02 of the
Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The
Original Pasta Co. dated effective as of September 14, 1995 (the "Merger
Agreement"). Payment of this Note is subordinated in the circumstances set
forth in Section 2.02 of the Merger Agreement.
THIS NOTE is entitled to the benefits of and the security afforded by
(I) that certain Security Agreement between Maker and Payee dated September 14,
1995; (ii) the Pledge and Security Agreement dated September 14, 1995 between
Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995;
(iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee
dated September 14, 1995; and (iv) any other agreements, instruments or filings
intended to provide security for this Note as provided for in Section 2.02 of
the Merger Agreement (collectively the "Security Documents").
IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the
Maker or Guarantor or any other person or party with respect to this Note, the
Merger Agreement or the Security Documents or with respect to any other matter,
thing, event or occurrence, whether past, present or arising in the future, the
Maker waives all rights of set off, offset and the right to interpose
Page 3 of 5
<PAGE> 4
$595,000.00 HOUSTON, TEXAS JANUARY 26, 1996
any legal claims or counterclaims, the effect of which would be to delay,
reduce, deny, limit or offset its obligations under this Note.
IN THE EVENT OF ANY CONFLICT between the terms and provisions of this
Note, the Security Documents or the Merger Agreement or any other agreement
relating hereto or thereto, the terms and provisions of this Note shall
control.
EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any
endorsers or guarantors of this Note severally waive notice, grace, presentment
and demand for payment, notice of dishonor, notice of intent to accelerate
maturity, notice of acceleration of maturity, protest and notice of protest and
non-payment, bringing of suit, and diligence in taking any action to collect
any sums owing under this Note, and indulgences of every kind. Maker and any
endorsers or guarantors of this Note Agree that, from time to time, both before
and after the maturity date of this Note and without notice, Payee may renew
the indebtedness evidenced by this Note, extend the time for any payments on
the Note, consent to the substitution of security, accept additional security,
or release any existing security for this Note and accept partial payments of
this Note without in any manner effecting the liability of Maker or any
endorser or guarantor under or with respect to this Note, even though Maker or
such endorser or guarantor is not a party to any agreement regarding such
actions.
NEITHER THE Payee's acceptance of partial or delinquent performance or
payments nor any forebearance, failure or delay by Payee or any holder hereof
in exercising any right, power or remedy shall be deemed a waiver of any
obligation of the Maker or any endorser, guarantor or other party liable for
payment of this Note or of any right, power or remedy of the Payee or any
holder hereof or preclude any other or further exercise thereof, and no single
or partial exercise of any right, power or remedy shall preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated
orally, but only by an agreement in writing, signed by the Maker and Payee or
any holder hereof. If any term or provision of this Note shall be held invalid,
illegal or unenforceable, the validity of all other terms and provisions shall
in no way be effected thereby. Any waiver or forbearance must be in writing to
be effective against the Payee or any holder hereof and shall only be
applicable in the specific instance for which it is given.
--------
Page 4 of 5 INITIALS
<PAGE> 5
$595,000.00 HOUSTON, TEXAS JANUARY 26, 1996
THIS NOTE has been executed and delivered in and shall be construed in
accordance with and governed by the laws of the State of Texas and of the
United States of America.
PASTA ACQUISITION CO.
By: /s/ THOMAS BUCKLEY
---------------------------------
Thomas Buckley, Treasurer
--------
Page 5 of 5 INITIALS
<PAGE> 1
PROMISSORY NOTE
$224,202.00 HOUSTON, TEXAS January 26, 1995
PASTA ACQUISITION CO., a Texas corporation (hereinafter called "Maker"),
for value received, promises and agrees to pay in installments and as herein
provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend County,
Texas, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas
77042 or at such other address as Payee shall designate, in lawful currency of
the United States of America, the principal sum of TWO HUNDRED TWENTY FOUR
THOUSAND TWO HUNDRED TWO AND NO/100 DOLLARS ($224,202.00), together with
interest thereon from and after the date hereof at the rate of six percent (6%)
per annum until maturity. All past due principal and interest shall bear
interest until paid at twelve percent (12%) per annum (but in no event to exceed
the maximum rate of nonusurious interest allowed by law). All sums paid hereon
shall apply first to the satisfaction of accrued interest and the balance to the
unpaid principal.
INTEREST AND PRINCIPAL ON THIS NOTE is payable one (1) year from the
date hereof.
IT IS ESPECIALLY agreed between the parties hereto that time is of the
essence with respect to the payment of this Note and, if an "Event of Default"
(as defined below) occurs, the owner and holder of this Note may, at its
option, declare all sums owing hereon at once due and payable. If default is
made in the payment of this Note at maturity (regardless of how its maturity
may be brought about) and the same is placed in the hands of an attorney for
collection, or suit is filed hereon, or proceedings are had in bankruptcy,
probate, receivership, reorganization, arrangement, or other judicial
proceedings for the establishment or collection of any amount called for
hereunder, or any amount payable or to be payable hereunder is collected
through any such proceedings, Maker agrees and is also to pay to the owner and
holder of this Note all reasonable attorney's or collection fees incurred.
IT IS the intention of Maker and Payee to conform strictly to applicable
usury laws. Accordingly, if the transactions contemplated hereby would be
usurious under any applicable law (including the laws of the State of Texas and
the laws of the United States of America), then, in that event, notwithstanding
anything to the contrary in any agreement entered into in connection with or as
security for this Note, it is agreed as follow: (i) the aggregate of all
consideration which constitutes interest under applicable law that is taken,
reserved, contracted for, charged or received under this Note or under any of
the other aforesaid agreements or otherwise in connection with this Note shall
under no circumstances exceed the maximum amount of interest allowed by
applicable law, and any excess shall be credited on this Note by the holder
hereof (or, if this Note shall have been paid in full, refunded to Maker); (ii)
in the event that maturity of the Note is accelerated by reason of an election
by the holder hereof resulting from any default hereunder or otherwise, or in
the event of any required or permitted prepayment, then such consideration that
constitutes interest may never include more than the maximum amount allowed by
applicable law, and excess interest, if any, provided for in this Note or
otherwise shall be canceled automatically as of the date of such
--------
Page 1 of 5 INITIALS
<PAGE> 2
$224,202.00 HOUSTON, TEXAS JANUARY 26, 1996
acceleration or prepayment and, if theretofore prepaid, shall be credited on
this Note (or if this Note shall have been paid in full, refunded to Maker);
and (iii) it is further agreed, without limitation of the foregoing, that all
calculations of the rate of interest contracted for, charged, or received on
this Note that are made for the purpose of determining whether such rate
exceeds the maximum amount of interest allowed by applicable law, shall be
made, to the extent permitted by applicable law, by amortizing, prorating,
allocating, and spreading throughout the full stated term of this Note so that
such rate of interest on account of this Note, as so calculated, is uniform
throughout the term thereof; and (iv) that the Maker and Payee agree that for
the purposes of this paragraph, the applicable interest ceiling is the Highest
Lawful Rate under the laws of any jurisdiction which may be held to apply to
this Note.
EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the
following events:
1. Maker's failure to pay principal of, or interest on, this Note as
and when due and payable or the failure of Maker or the Guarantor,
as defined below, to pay when due any installment or payment of
principal or interest owed by Maker or Guarantor to Payee under the
Notes as defined in Section 2.02 of the Merger Agreement;
2. Maker or Guarantor fails to perform or observe any material term,
covenant or agreement contained in the Guaranty Agreement or the
Security Documents referred to below;
3. Maker, Guarantor or any of their material subsidiaries shall
individually or collectively: (a) make an assignment for the
benefit of creditors or petition or apply to any tribunal for the
appointment of a custodian, receiver or trustee for it or for a
substantial part of its assets; (b) commence any proceeding under
any bankruptcy, reorganization, rearrangement, readjustment of
debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; (c) have had any
such petition or application filed or any such proceeding commenced
against it in which an order for relief is entered or an
adjudication or appointment is made, and which remains undismissed
for a period of thirty (30) days or more; or (d) take any board or
shareholder action approving any such petition, application,
proceeding, or order for relief or the appointment of a custodian,
receiver or trustee for all or any substantial part of its
properties; or (e) suffer any such custodianship, receivership or
trusteeship to continue undischarged for a period of thirty (30)
days or more; or
Page 2 of 5
<PAGE> 3
$224,202.00 HOUSTON, TEXAS JANUARY 26, 1996
4. The Guaranty Agreement or Security Documents shall at any time
after execution and delivery thereof and for any reason cease to
be in full force and effect or shall be declared null and void, or
the validity or enforceability thereof shall be contested by the
Guarantor or Maker or if Guarantor or Maker shall deny that it or
they have any liability or obligation under, or shall fail to
perform their respective obligations under the Guaranty Agreement
or Security Agreements.
IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note,
Payee or any owner and holder of this Note agrees to provide Maker and the
Guarantor hereof thirty (30) days prior written notice specifying such default
and providing Maker an opportunity to cure such default within such period prior
to any acceleration of this Note; provided, however, no notice shall be required
upon the occurrence of the Events of Default set forth in clauses (a), (b) or
(d) of number subparagraph 3 of this Note above and sixty (60) days prior
written notice shall be provided upon the occurrence of the Events of Default
set forth in numbered subparagraphs 2 and 4 above. Following such written
notice, if required, and the failure of Maker to cure such default in every
respect, all indebtedness represented by this Note shall be immediately due and
payable without further action or notice by Payee or any holder hereof to Maker.
If Maker cures such default after receiving notice thereof, Maker shall provide
written notice to Payee or the owner and holder hereof stating the steps taken
to cure such default and stating that the default is cured within the specified
notice period.
MAKER reserves the option of prepaying the principal of this Note, in
whole or in part, at any time after the date hereof without penalty. Accrued
and unpaid interest with respect to such principal amount prepaid is due and
payable on the date of such prepayment. Maker shall be required to prepay the
Note to the extent and in the circumstances set forth in Section 2.02 of the
Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The
Original Pasta Company dated effective as of September 14, 1995 (the "Merger
Agreement"). Payment of this Note is subordinated in the circumstances set
forth in Section 2.02 of the Merger Agreement.
THIS NOTE is entitled to the benefits of and the security afforded by
(I) that certain Security Agreement between Maker and Payee dated September 14,
1995; (ii) Pledge and Security Agreement dated September 14, 1995 between
Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995;
(iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee
dated September 14, 1995; and (iv) any other agreements, instruments or filings
intended to provide security for this Note as provided for in Section 2.02 of
the Merger Agreement (collectively, the "Security Documents").
IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the
Maker or Guarantor or any other person or party with respect to this Note, the
Merger Agreement or the Security Documents or with respect to any other matter,
thing, event or occurrence, whether past, present or arising in the future, the
Maker waives all rights of set off, offset and the right to interpose
Page 3 of 5
<PAGE> 4
$224,202.00 HOUSTON, TEXAS JANUARY 26, 1996
any legal claims or counterclaims, the effect of which would be to delay,
reduce, deny, limit or offset its obligations under this Note.
IF THE EVENT OF ANY CONFLICT between the terms and provisions of this
Note, the Security Documents or the Merger Agreement or any other agreement
relating hereto or thereto, the terms and provisions of this Note shall control.
EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any
endorsers or guarantors of this Note severally waive notice, grace,
presentment and demand for payment, notice of dishonor, notice of intent to
accelerate maturity, notice of acceleration of maturity, protest and notice of
protest and non-payment, bringing of suit, and diligence in taking any action
to collect any sums owing under Note or in proceeding against any of the rights
and properties securing payment of this Note, and indulgences of every kind.
Maker and any endorsers or guarantors of this Note agree that, from time to
time, both before and after the maturity date of this Note and without notice,
Payee may renew the indebtedness evidenced by this Note, extend the time for
any payments on the Note, consent to the substitution of security, accept
additional security, or release any existing security for this Note and accept
partial payments of this Note without in any manner effecting the liability of
maker or any endorser or guarantor under or with respect to this Note, even
though Maker or such endorser or guarantor is not a party to any agreement
regarding such actions.
NEITHER THE Payee's acceptance of partial or delinquent performance or
payment nor any forbearance, failure or delay by Payee or any holder hereof in
exercising any right, power or remedy shall be deemed a waiver of any
obligation of the Maker or any endorser, guarantor or other party liable for
payment of this Note or of any right, power or remedy of the Payee or any
holder hereof or preclude any other or further exercise thereof; and no single
or partial exercise of any right, power or remedy shall preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated
orally, but only by an agreement in writing, signed by the Maker and Payee or
any holder hereof. If any term or provision of this Note shall be held invalid,
illegal or unenforceability, the validity of all other terms and provisions
shall in no way be effected thereby. Any waiver or forbearance must be in
writing to be effective against the Payee or any holder hereof and shall only
be applicable in the specific instance for which it is given.
Page 4 of 5
<PAGE> 5
$224,202.00 HOUSTON, TEXAS JANUARY 26, 1996
THIS NOTE has been executed and delivered in and shall be construed in
accordance with and governed by the laws of the State of Texas and of the
United States of America.
PASTA ACQUISITION CO.
By: /s/ THOMAS BUCKLEY
---------------------------
Thomas Buckley, Treasurer
Page 5 of 5
<PAGE> 1
PROMISSORY NOTE
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,200,000.00 03-15-1996 03-15-2001 7201135970 510 3102 43
- - ---------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Borrower: PASTA ACQUISITION CO. AND WATERMARC FOOD Lender: Metrobank, N.A.
MANAGEMENT CO. (TIN: ) Galleria Branch
10777 WESTHEIMER #1030 5065 Westheimer, Suite #1111
HOUSTON, TEXAS 77042 Houston, TX 77056
=========================================================================================================
</TABLE>
<TABLE>
<S> <C> <C>
Principal Amount: $1,200,000.00 Initial Rate: 9.750% Date of Note: March 15, 1996
</TABLE>
PROMISE TO PAY. PASTA ACQUISITION CO. AND WATERMARC FOOD MANAGEMENT CO.
("Borrower") promises to pay to Metrobank, N.A. ("Lender"), or order, in lawful
money of the United States of America, the principal amount of One Million Two
Hundred Thousand & 00/100 Dollars ($1,200,000.00), together with interest on
the unpaid principal balance from March 15, 1996, until maturity.
PAYMENT. Subject to any payment changes resulting from changes in the Index,
Borrower will pay this loan on demand, or if no demand is made, in 59 payments
of $25,437.10 each payment and an irregular last payment estimated at
$25,436.61. Borrower's first payment is due April 15, 1996, and all subsequent
payments are due on the same day of each month after that. Borrower's final
payment will be due on March 15, 2001, and will be for all principal and all
accrued interest not yet paid. Payments include principal and interest.
Interest on this Note is computed on a 365/360 simple interest basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding, unless such calculation would
result in a usurious rate, in which case interest shall be calculated on a per
diem basis of a year of 365 or 366 days, as the case may be. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and takes charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent Index which is the PRIME
RATE AS PUBLISHED IN THE WALL STREET JOURNAL (the "Index"). The Index is not
necessarily the lowest rate charged by Lender on its loans. If the Index
becomes unavailable during the term of this loan, Lender may designate a
substitute index after notice to Borrower. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The interest rate change will not
occur more often than each DAY. The Index currently is 8.250% per annum. The
Interest rate to be applied prior to maturity to the unpaid principal balance of
this Note will be at a rate of 1.500 percentage points over the Index, adjusted
if necessary for the minimum or maximum rate limitations described below,
resulting in an initial rate of 9.750% per annum. Notwithstanding any other
provisions of this Note, the variable interest rate or rates provided for in
this Note will be subject to the following minimum and maximum rates. NOTICE:
Under no circumstances will the interest rate on this Note be less than 8.500%
per annum or more than the maximum rate allowed by applicable law. For purposes
of this Note, the "maximum rate allowed by applicable law" means the greater of
(a) the maximum rate of interest permitted under federal or other law applicable
to the indebtedness evidenced by this Note, or (b) the "Indicated Rate Ceiling"
as referred to in Article 5069-1.04(a)(1) V.T.C.S. Whenever increases occur in
the interest rate, Lender, at its option, may do one or more of the following:
(a) increase Borrower's payments to ensure Borrower's loan will pay off by its
original final maturity date, (b) increase Borrower's payments to cover accruing
interest, (c) increase the number of Borrower's payments at the same amount and
increase Borrower's final payment.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to make
payments under the payment schedule. Rather, they will reduce the principal due
and may result in Borrower making fewer payments.
POST MATURITY RATE. The Post Maturity Rate on this Note is the maximum rate
allowed by applicable law. Borrower will pay interest on all sums due after
final maturity, whether by acceleration or otherwise, at that rate, with the
exception of any amounts added to the principal balance of this Note based on
Lender's payment of insurance premiums, which will continue to accrue interest
at the pre-maturity rate.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note.
(h) A material adverse change occurs in Borrower's financial condition, or
Lender believes the prospect of payment or performance of the Indebtedness is
impaired. (i) Lender in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire indebtedness,
including the unpaid principal balance on this Note, all accrued unpaid
interest, and all other amounts, costs and expenses for which Borrower is
responsible under this Note or any other agreement with Lender pertaining to
this loan, immediately due, without notice, and then Borrower will pay that
amount. Lender may hire an attorney to help collect this Note is Borrower does
not pay, and Borrower will pay Lender's reasonable attorneys' fees. Borrower
also will pay Lender all other amounts actually incurred by Lender as court
costs, lawful fees for filing, recording, or releasing to any public office any
instrument securing this loan; the reasonable cost actually expended for
repossessing, storing, preparing for sale, and selling any security; and fees
for noting a lien on or transferring a certificate of title to any motor
vehicle offered as security for this loan, or premiums or identifiable charges
received in connection with the sale of authorized insurance. This Note has
been delivered to Lender and accepted by Lender in the State of Texas. If
there is a lawsuit, and if the transaction evidenced by this Note occurred in
HARRIS County, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts in HARRIS County, the State of Texas. This Note
shall be governed by and construed in accordance with the laws of the State of
Texas and applicable Federal laws.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender at Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
GENERAL PROVISIONS:. THIS NOTE IS SUBJECT TO THE ARBITRATION PROGRAM ENTERED
INTO BETWEEN BORROWER AND LENDER.
<PAGE> 2
03-15-1996 PROMISSORY NOTE Page 2
Loan No 7201135970 (Continued)
================================================================================
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. If any part of this Note cannot be
enforced, this fact will not affect the rest of the Note. In particular, this
section means (among other things) that Borrower does not agree or intend to
pay, and Lender does not agree or intend to contract for, charge, collect,
take, reserve or receive (collectively referred to herein as "charge or
collect"), any amount in the nature of interest or in the nature of a fee for
this loan, which would in any way or event (including demand, prepayment, or
acceleration) cause Lender to charge or collect more for this loan than the
maximum Lender would be permitted to charge or collect by federal law or the
law of the State of Texas (as applicable). Any such excess interest or
unauthorized fee shall, instead of anything stated to the contrary, be applied
first to reduce the principal balance of this loan, and when the principal has
been paid in full, be refunded to Borrower. The right to accelerate maturity
of sum due under this Note does not include the right to accelerate any
interest which has not otherwise accrued on the date of such acceleration, and
Lender does not intend to charge or collect any unearned interest in the event
of acceleration. All sums paid or agreed to be paid to Lender for the use,
forbearance or detention of sums due hereunder shall, to the extent permitted
by applicable law, be amortized, prorated, allocated and spread throughout the
full term of the loan evidenced by this Note until payment in full so that the
rate or amount of interest on account of the loan evidenced hereby does not
exceed the applicable usury ceiling. Lender may delay or forgo enforcing any
of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, protest, notice of
dishonor, notice of intent to accelerate the maturity of this Note, and notice
of acceleration of the maturity of this Note. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who signs
this Note, whether as maker, guarantor, accommodation maker or endorser, shall
be released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral without the consent of or notice to anyone.
All such parties also agree that Lender may modify this loan without the
consent of or notice to anyone other than the party with whom the modification
is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
PASTA ACQUISITION CO. AND WATERMARC FOOD MANAGEMENT CO.
By: ____________________________________
_____________ ________________, ____
By: ____________________________________
_____________ ________________, ____
================================================================================
Variable Rate Installment. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver.
3.20b(c) 1996 CFI ProServices, Inc., All rights
reserved. [TX-D20 E3.21 F3.21 P3.21 PA135970.LN]
<PAGE> 1
EXHIBIT F
Security Agreement
THIS Security Agreement (the "Security Agreement" or "Agreement") is
entered into as of September 14, 1995 by and among THE ORIGINAL PASTA CO., a
Texas corporation ("TOPC") and PASTA ACQUISITION CO., a Texas corporation
("PAC"), whose business addresses are 10777 Westheimer, Suite 1030, Houston,
Texas 77041. (collectively PAC and TOPC are hereinafter referred to as the
"Obligor" or the "Obligors") and GHULAM M. BOMBAYWALA, an individual residing
in Fort Bend County, Texas with a business address of 10777 Westheimer, Suite
1030, Houston, Texas 77042, ("Secured Party"),
WITNESSETH:
WHEREAS, WATERMARC FOOD MANAGEMENT CO., a Texas corporation ("WAMA") is
the owner of all of the issued and outstanding equity securities of PAC (the
"Securities");
WHEREAS, of even date herewith, WAMA, the Obligors and Secured Party
have executed an Agreement and Plan of Merger (the "Merger Agreement") whereby
TOPC Will be merged with and into PAC (the "Merger") and Secured Party, as the
sole shareholder of TOPC, will receive (i) common stock of WAMA, and (ii) two
promissory notes of PAC referred to in Section 2.02 of the Merger Agreement in
the aggregate principal amount of $3,750,000.00 (the "Notes");
WHEREAS, the Notes are to be secured by (i) certain restaurant assets of
TOPC to be acquired by PAC in the Merger pursuant to this Security Agreement,
(ii) the unconditional, irrevocable and absolute guarantee of WAMA of the Notes
pursuant to the Guaranty Agreement as of the date hereof between WAMA and
Secured Party and (iii) the Security Agreement-Pledge between WAMA and Secured
Party whereby WAMA is pledging the Securities as collateral for its Guaranty
Agreement;
WHEREAS, the parties to the Merger Agreement agreed to execute and
deliver the Merger Agreement, the Notes, the Security Documents (as defined in
Section 2.02 of the Merger Agreement) and certain other consideration to be
delivered by each of the parties thereto into escrow, with such consideration
and documents to be released on and as of the "Effective Date" as defined in
the Merger Agreement; and
WHEREAS, since the restaurant assets will be transferred by operation of
law on the Effective Date of the Merger from TOPC to PAC, both TOPC and PAC are
executing this Security Agreement in favor of Secured Party.,
NOW, THEREFORE, in order to comply with the terms and conditions of the
Merger Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Obligors hereby agree with
the Secured Party as follows:
<PAGE> 2
SECTION 1.
SECTION 1.01 TERMS DEFINED ABOVE. As used in this Security Agreement,
the terms "Effective Date", "Merger", "Merger Agreement", "PAC", "Obligors",
"Secured Party", "Securities", "Security Agreement", and "TOPC" will have the
meanings indicated above.
SECTION 1.02 SECURITY DOCUMENTS. As used in this Security Agreement, the
term "Security Documents" will mean the Merger Agreement, the Notes, the
Security Agreement-Pledge, this Security Agreement, the Guaranty Agreement and
any other documents, instruments or agreements representing obligations of PAC
and/or WAMA to Secured Party or intended to provide security to Secured Party
in connection with the Merger and the Merger Agreement.
SECTION 1.03 ASSIGNMENT AND GRANT OF SECURITY. The Obligors hereby
assign and grant to the Secured Party a security interest in all of its right,
title and interest in and to the following, whether now owned or hereafter
acquired (the "Collateral"):
(1) All assets of TOPC constituting equipment located at or used in
connection with the operation of the ten (10) existing restaurants of TOPC at
the first 10 locations listed in Schedule 4.13 to the Merger Agreement
(collectively referred as "TOPC Restaurants") and all fixtures constituting a
part of the TOPC Restaurants and all parts thereof and all accessions thereto
(any and all such equipment, fixtures, parts, and accessions being the
"Equipment");
(2) All assets of TOPC constituting inventory or supplies of the TOPC
Restaurants now owned or hereafter acquired by Obligor and used in connection
with the TOPC Restaurants (any and all such inventory and supplies being the
"Inventory");
(3) All other assets, rights or interests of TOPC relating to,
located on or used in connection with the operation of the TOPC Restaurants,
whether tangible or intangible, now owned or hereinafter acquired, real or
personal, including, but not limited to accounts, receivables, contract rights,
chattel paper, licenses, cash, bank accounts, instruments, permits, deposits,
conditional sales contracts and interests or rights under any real property or
personal property leases; and
(4) All proceeds of any and all of the foregoing Collateral
(including, without limitation, proceeds which constitute property of the types
described in clauses (1)-(3) of this Section 1.03), and, to the extent not
otherwise included, all payments under insurance (whether or not the Secured
Party is the loss payee thereof), or any indemnity, warranty, or guaranty,
payable by reason of loss or damage to or otherwise with respect to any of the
foregoing Collateral.
Notwithstanding anything in this Section 1.03 to the contrary, the
Obligor is not granting Secured Party a security interest in the name, concept,
trademark, service mark, logo, tradedress, design or proprietary recipes or
products relating to the operation of the TOPC Restaurants under the name and
concept "The Original Pasta Company" as it currently
<PAGE> 3
conducted or as it later develops which assets (the "Excluded Assets") are
subject to a Service Mark License Agreement of even date herewith between
Secured Party and PAC.
SECTION 2.
SECURITY FOR OBLIGATIONS.
This Agreement secures the payment of all obligations of Obligor under
the Notes and the Security Documents (collectively the "Obligations").
SECTION 3.
PERFORMANCE OF AGREEMENTS.
Anything herein to the contrary notwithstanding, (1) Obligor shall
remain liable under the contracts and agreements included in the Collateral to
the extent set forth therein to perform all of its duties and obligations
thereunder to the same extent as if this Agreement had not been executed; (2)
the exercise by Secured Party of any rights hereunder shall not release Obligor
from any of its duties or obligations under the contracts and agreements
included in the Collateral; and (3) the Secured Party shall not have any
obligation or liability under the contracts and agreements included in the
Collateral by reason of this Agreement, nor shall the Secured Party be
obligated to perform any of the obligations or duties of Obligor thereunder or
to take any action to collect or enforce any claim for payment or performance.
SECTION 4.
REPRESENTATIONS AND WARRANTIES.
To the extent the representations and warranties below address facts
(pertaining to any of the Collateral or TOPC) existing prior to the Effective
Date, such representations and warranties are made in reliance on the
representations and warranties of the Secured Party in the Merger Agreement.
Subject to the foregoing, Obligor represents and warrants as follows:
(1) All of the Equipment and Inventory are located at the locations
of the TOPC Restaurants listed in Schedule 4.13 to the Merger Agreement.
(2) Obligor is the legal and beneficial owner of the Collateral.
(3) Obligor has exclusive possession and control of the Equipment and
Inventory.
(4) Subject to the consents described in Section 3.03 of the Merger
Agreement, this Agreement creates a valid security interest in the Collateral,
securing the payment of the Obligations, and all filings and other actions
necessary or desirable to perfect and protect such security interest shall have
been duly taken by the Effective Date.
<PAGE> 4
(5) Obligors are corporations duly incorporated, validly existing, and
in good standing under the laws of the jurisdiction of Texas, and have the
corporate power and authority to own their assets and to transact their business
as currently conducted.
(6) The execution and performance by Obligors of this Agreement has
been duly authorized by all necessary corporate action and does not and will
not (a) subject to obtaining the consents referred to in Section 3.03 of the
Merger Agreement, require any consent or approval of any third party; (b)
contravene such corporation's charter or bylaws; (c) violate any provision of
any law, rule, or regulation; or (d) subject to obtaining the consents referred
to in Section 3.03 of the Merger Agreement, result in a breach of or constitute
a default under any indenture or loan or credit agreement or any other material
agreement, lease, or instrument to which such corporation is a party or by
which it or its properties may be bound or affected.
(7) This Agreement is the legal, valid, and binding obligation of
Obligors enforceable in accordance with its respective terms, except to the
extent that such enforcement may be limited by applicable bankruptcy,
insolvency, and other similar laws affecting creditors' rights generally or
equitable principles.
(8) Except for the consents set forth in Section 3.03 of the Merger
Agreement and those contemplated by this Agreement, no consent of any other
person or entity and no authorization, approval, or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required (a) for the grant by Obligors of the security interest granted hereby
or for the execution, delivery, or performance of this Agreement by Obligors;
(b) for the perfection or maintenance of the security interest created hereby;
or (c) for the exercise by the Secured Party of the rights provided for in this
Agreement or the remedies in respect of the Collateral pursuant to this
Agreement.
(9) As of the Effective Date, there shall be no conditions precedent
to the effectiveness of this Agreement that have not been satisfied or waived.
SECTION 5.
FURTHER ASSURANCES.
(1) Obligors agrees that from time to time, at its expense, Obligors
will promptly execute and deliver all further instruments and documents, and
take all further action, that may be necessary or desirable, or that the
Secured Party may reasonably request, in order to perfect and protect any
assignment or security interest granted or purported to be granted hereby or to
enable the Secured Party to exercise and enforce its rights and remedies
hereunder with respect to any Collateral. Without limiting the generality of
the foregoing, Obligors will execute and file such financing or continuation
statements, or amendments thereto, and such other instruments or notices, as
may be necessary or desirable, or as the Secured Party may request, in order to
perfect and preserve the assignment and security interest granted or purported
to be granted hereby.
<PAGE> 5
(2) Obligors hereby authorize the Secured Party to file one or more
financing or continuation statements, and amendments thereto, relating to all
or any part of the Collateral without the signature of Obligors where permitted
by law, including the real property record filings referred in subparagraph (4)
below. A photocopy or other reproduction of this Agreement or any financing
statement covering the Collateral or any part thereof shall be sufficient as a
financing statement where permitted by law.
(3) Obligors will furnish to the Secured Party from time to time
statements and schedules further identifying and describing the Collateral and
such other reports in connection with the Collateral as the Secured Party may
reasonably request, all in reasonable detail.
(4) With respect to the interests of Obligor as lessee under the real
estate leases (the "Leases") for the TOPC Restaurants and the security interest
therein granted to Secured Party hereby, upon any Event of Default with respect
to the Obligations (as "Event of Default" is defined in the Notes) all of
Obligor's interest in such Leases shall without further action be assigned to
Secured Party and Obligor's interests are assigned hereby. As Secured Party may
reasonably request to perfect its security interest in and to receive an
effective and valid assignment of the Leases or to perfect its security
interest in and to the other Collateral, Obligor shall assist Secured Party in
obtaining from the Lessors of the Leases such consents, waivers and assignments
as are necessary to perfect and obtain the security interests and assignments
granted hereunder. Obligors authorize Secured Party to file this Agreement in
such form as is required by law on its behalf and on behalf of Obligor in the
real property records where the property subject to the Leases is located.
SECTION 6.
AS TO EQUIPMENT AND INVENTORY.
(1) Obligors shall keep the Equipment and Inventory (other than
Inventory sold in the ordinary course of business) at the existing locations
for the TOPC Restaurants.
(2) Obligors shall cause the Equipment to be maintained and preserved
in the same condition, repair, and working order as when new, ordinary wear and
tear excepted, and in accordance with any manufacturer's manual, and shall
forthwith, or in the case of any loss or damage to any of the Equipment as
quickly as practicable after the occurrence thereof, make or cause to be made
all repairs, replacements, and other improvements in connection therewith which
are necessary or desirable to such end. Obligors shall promptly furnish to the
Secured Party a statement respecting any loss or damage to any of the
Equipment.
(3) Obligors shall pay promptly when due all property and other
taxes, assessments, and governmental charges or levies imposed upon, and all
claims (including claims for labor, materials, and supplies) against, the
Equipment and Inventory.
<PAGE> 6
SECTION 7.
INSURANCE.
Obligor shall, at its own expense, maintain insurance with respect to
the Collateral in such amounts, against such risks, in such form and with such
insurers, as shall be satisfactory to the Secured Party from time to time.
SECTION 8.
TRANSFERS AND OTHER LIENS.
Obligors shall not without Secured Party's consent which may be withheld
in his sole discretion, (a) sell, assign (by operation of law or otherwise), or
otherwise dispose of, any of the Collateral, except Inventory and Equipment in
the ordinary course of business, or (b) create or permit to exist any lien upon
or with respect to any of the Collateral, except for the security interests
under this Agreement and the security interests disclosed in the Merger
Agreement or permitted thereby. Notwithstanding the foregoing, Obligors shall
have the right, without the prior written consent of the Secured Party, to
grant a junior security interest and lien in and to the Collateral to any
person or entity in connection with financing which is directly related to the
Additional Restaurants as disclosed in Section 3.02 of the Merger Agreement.
Secured Party shall also subordinate his lien and security interest hereunder
in favor of any bank or institution providing financing for the Additional
Restaurants as provided in Section 3.02 of the Merger Agreement.
SECTION 9.
PERFORMANCE BY SECURED PARTY.
If Obligor fails to perform any agreement contained herein, the Secured
Party may himself perform, or cause performance of, such agreement, and the
expenses of the Secured Party incurred in connection therewith shall be payable
by Obligors hereunder.
Obligors hereby irrevocably appoint Secured Party as its
attorney-in-fact, with full authority in the place and stead of Obligors and in
the name of Obligors or otherwise, from time to time in Secured Party's
discretion, to take any action and to execute any instrument which the Secured
Party may deem necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation:
(1) To obtain and adjust insurance required to protect the
Collateral;
(2) To ask, demand, collect, sue for, recover, compromise, receive
and give acquittance and receipts for moneys due and to become due under or in
connection with the Collateral;
<PAGE> 7
(3) To receive, endorse, and collect any draft or other instruments,
documents and chattel paper, in connection therewith;
(4) To file any claims or take any action or institute any
proceedings which the Secured Party may deem reasonably necessary for the
collection of any of the Collateral or otherwise to enforce compliance with the
terms and conditions of any agreement constituting part of the Collateral; and
(5) To file any additional filings relating to the security interest
and assignments granted hereby including those referred to in Section 5 hereof
and to enter into any agreements, consents and waivers as required with the
owners of the real property represented by the Leases on behalf of Obligor.
The powers conferred on the Secured Party hereunder are solely to
protect his interests in the Collateral and shall not impose any duty upon him
to exercise any such powers. Except for the safe custody of any Collateral in
its possession and the accounting for moneys actually received by him
hereunder, the Secured Party shall have no duty as to any Collateral.
SECTION 10.
REMEDIES.
If any Event of Default (as defined in the Notes) shall have occurred
and shall not be cured as provided for in such Notes:
(1) The Secured Party may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party on default
under the Uniform Commercial Code in effect in the State of Texas at that time
(the "Code") (whether or not the code applies to the affected Collateral).
Notice of sale shall be at least thirty (30) days notice to Obligors of the
time and place of any public sale or the time after which any private sale is
to be made. The parties agree that thirty (30) days' notice shall constitute
reasonable notification. The Secured Party shall not be obligated to make any
sale of Collateral regardless of notice of sale having been given. The Secured
Party may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further
notice, be made at the time and place to which it was so adjourned.
(2) All cash proceeds received by the Secured Party in respect of any
sale of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Secured Party, be held by the Secured
Party as Collateral, and/or then or any time thereafter be applied in whole or
in part by the Secured Party against, all or any part of the Obligations in
such order as the Secured Party shall elect. Any surplus of such cash proceeds
held by the Secured Party and remaining after payment in full of all the
Obligations shall be paid over to Obligors or to whomsoever may be lawfully
entitled to received such surplus.
<PAGE> 8
(3) The Secured Party may exercise any and all rights and remedies of
Obligors under or in connection with the any agreements constituting a part of
or otherwise in respect of the Collateral, including, without limitation, any
and all rights of Obligors to demand or otherwise require payment of any amount
under, or performance of any provision of, any agreement constituting part of
the Collateral. Secured Party or his agents shall have the right to take
possession of and operate the TOPC Restaurants and to collect and receive the
proceeds from such operations.
(4) All payments received by Obligors under or in connection with any
agreement or otherwise in respect of the Collateral shall be received in trust
for the benefit of the Secured Party, shall be segregated from other funds of
Obligors and shall be forthwith paid over to the Secured Party in the same form
as so received (with any necessary endorsement).
SECTION 11.
MISCELLANEOUS.
(1) Indemnity. Obligors agree to indemnify the Secured Party from and
against any and all claims, losses, and liabilities (including reasonable
attorneys' fees) growing out of or resulting from this Agreement (including,
without limitation, enforcement of this Agreement), except claims, losses, or
liabilities resulting from the Secured Party's gross negligence or willful
misconduct.
(2) Expenses. Obligor will upon demand pay to the Secured Party the
amount of any and all reasonable expenses, including the reasonable fees and
expenses of their counsel and of any experts and agents, which the Secured
Party may incur in connection with (a) the administration of this Agreement;
(b) the custody, preservation, use or operation of, or the sale of, collection
from, or other realization upon, any of the Collateral; (c) the exercise or
enforcement of any of the rights of the Secured Party hereunder; or (d) the
failure by Obligors to perform or observe any of the provisions hereof.
(3) Modification of Obligations. As of the Effective Date and
thereafter, all rights of the Secured Party and the assignment, and security
interest hereunder, and all obligations of Obligors hereunder, shall be
absolute and unconditional, irrespective of (i) any change in the time, manner,
or place of payment of, or in any other term of, all or any of the Obligations,
or any other amendment or waiver of or any consent to any departure from the
Merger Agreement, or the Security Documents or any other agreement relating
thereto, (ii) any taking, exchange, release, or nonperfection of any other
collateral, or any taking, release, or amendment or waiver of or consent to
departure from any guaranty; for all or any of the Obligations, or (iii) any
change, restructuring, or termination of the corporation structure or existence
of Obligors or any of its subsidiaries.
(4) Amendments; Etc. No amendment, modification, termination, or
waiver of any provision of this Agreement, and no consent to any departure by
Obligors herefrom, shall in
<PAGE> 9
any event be effective unless the same shall be in writing and signed by the
Secured Party, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
(5) Addresses for Notices. All notices and other communications
provided for hereunder shall be in writing (including telegraphic, telex, and
facsimile transmissions) and mailed or transmitted or delivered, if to
Obligors, at its address, at 10777 Westheimer, Suite 1030, Houston, Texas
77042, Attention: President, and if to the Secured Party, at his address or, as
to either party, at such other address as shall be designated by such party in
a written notice to the other party. All such notices and other communications
shall be effective when received.
(6) Continuing Security Interest; Assignments. This Agreement shall
create a continuing security interest in the Collateral and shall (1) remain in
full force and effect until the payment in full of the Obligations and all
other amounts payable under this Agreement, (2) be binding upon Obligor, its
successors and assigns; and (3) inure to the benefit of, and be enforceable by,
the Secured Party and his personal representatives, successors, transferees,
and assigns. Without limiting the generality of the foregoing clause (3), the
Secured Party may assign or otherwise transfer all or any portion of his rights
and obligations under the Notes to any other person or entity, and such other
person or entity shall thereupon become vested with all the benefits in respect
thereof granted to the assigning party herein or otherwise.
(7) Governing Law; Terms. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, except to the
extent that the validity or perfection of the security interest hereunder, or
remedies hereunder, in respect of any particular Collateral are governed by the
laws of a jurisdiction other than the State of Texas.
IN WITNESS WHEREOF, Obligors and Secured Party have executed this
Agreement as of the date first above written.
PASTA ACQUISITION CO.
By:
--------------------------------
Name: Angelo Pitillo, President
THE ORIGINAL PASTA CO.
By:
------------------------------ -----------------------------------
GHULAM M. BOMBAYWALA, President GHULAM M. BOMBAYWALA,
Individually and as Secured Party
<PAGE> 1
EXHIBIT G
SECURITY AGREEMENT
(Pledge)
by
WATERMARC FOOD MANAGEMENT CO.
to
GHULAM M. BOMBAYWALA
as Payee under the
Notes dated September 14, 1995
and as Secured Party
hereunder
<PAGE> 2
Security Agreement - Pledge
THIS Security Agreement-Pledge (this "Security Agreement") is entered
into as of September 14, 1995 by and between WATERMARC FOOD MANAGEMENT CO., a
Texas corporation, whose business address is 10777 Westheimer, Suite 1030,
Houston, Texas 77042 ("Guarantor") and GHULAM M. BOMBAYWALA, an individual
residing in Fort Bend County, Texas with a business address of 10777
Westheimer, Suite 1030, Houston, Texas 77042, ("Secured Party").
WITNESSETH:
WHEREAS, the Guarantor is the owner of all of the issued and outstanding
equity securities of Pasta Acquisition Co. ("PAC"), a Texas corporation (the
"Securities");
WHEREAS, of even date herewith, Guarantor and Secured Party have
executed an Agreement and Plan of Merger (the "Merger Agreement") whereby The
Original Pasta Co., a Texas corporation ("TOPC") will be merged with and into
PAC (the "Merger") and Secured Party, as the sole shareholder of TOPC will
receive common stock of Guarantor and two promissory notes in the aggregate
principal amount of $3,750,000.00 (the "Notes");
WHEREAS, the Notes are to be secured by (i) certain restaurant assets of
TOPC to be acquired by PAC in the Merger pursuant to a "Restaurant Assets
Security Agreement" dated as of the date hereof by and between TOPC, PAC and
Secured Party, (ii) the unconditional, irrevocable and absolute guarantee of
the Guarantor (the "Guarantee") pursuant to the Guaranty Agreement as of the
date hereof between Guarantor and Secured Party, and (iii) this Security
Agreement; and
WHEREAS, the parties to the Merger Agreement agreed to execute and
deliver the Merger Agreement, the Notes, the Security Documents and the
consideration to be delivered by each of the parties thereto into escrow, with
such consideration to be released on the "Effective Date" of the Merger as
defined in the Merger Agreement.
NOW, THEREFORE, in order to comply with the terms and conditions of the
Merger Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Guarantor hereby agrees with the
Secured Party as follows:
ARTICLE I
DEFINITIONS
1.01 Terms Defined Above. As used in this Security Agreement, the terms
"Guarantor", "Secured Party", "Securities", and "Security Agreement" will have
the meanings indicated above.
<PAGE> 3
1.02 Security Documents. As used in this Security Agreement, the term
"Security Documents" will mean the Merger Agreement, the Notes, the Security
Agreement, the Restaurant Assets Security Agreement, the Guaranty Agreement and
any other documents, instruments or agreements representing obligations of PAC
and/or Guarantor to Secured Party or intended to provide security to Secured
Party in connection with the Merger and the transactions contemplated by the
Merger Agreement and the foregoing agreements.
1.03 Terms Defined in Security Agreement. As used in this Security
Agreement, terms defined in the Security Documents will have the meanings
assigned to such terms in the Security Documents, unless herein expressly
provided to the contrary.
1.04 Additional Defined Terms.
(a) "Collateral" will mean
(i) the Securities and the certificates representing
the Securities, and all dividends, cash, instruments and other
property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of the
Securities; and
(ii) all additional shares of stock or securities,
including debt obligations, preferred stock or any other equity
or debt securities of PAC from time to time acquired by Guarantor
in any manner while this Security Agreement remains in effect,
whether by way of stock dividend, additional capital contribution
or in any other manner and the certificates representing such
additional shares or securities, and all dividends, cash,
instruments or other property from time to time received,
receivable or otherwise distributed in respect of or in exchange
for any or all of such shares or securities (the term
"Securities" as used herein shall also include the additional
debt and equity securities described in this Section
1.04(a)(ii)).
(b) "Obligations" will mean all present and future loans, advances,
liabilities, obligations, covenants, duties, and indebtedness of Guarantor or
PAC to the Secured Party under the Security Documents; and any and all
renewals, extensions for any period, rearrangements or enlargements of any of
the foregoing, whether evidenced by any note or other instrument or agreement,
whether arising by an extension of credit, letter of credit, overdraft,
endorsement, loan, guaranty, indemnification or otherwise, whether direct or
indirect, including without limitation any of the foregoing acquired by
assignment or participation, absolute or contingent, due or to become due. The
Obligations shall also include all interest, charges, customary out-of-pocket
expenses, reasonable attorneys' or other fees and any other sums incurred by
the Secured Party in connection with the execution, administration or
enforcement of the Secured Party's rights and remedies under the Security
Documents or under any other agreement with Guarantor
<PAGE> 4
ARTICLE 2
SECURITY INTEREST
2.01 Grant of Security Interest in Collateral. Guarantor, for value
received, the receipt and sufficiency of which are hereby acknowledged, and to
induce the Secured Party to enter into the Security Documents and to accept
debt obligations of PAC, hereby pledges to the Secured Party and hereby grants
to the Secured Party a first lien on and security interest in the Collateral.
2.02 Indebtedness Secured. The security interest created in Section 2.01
is granted to the Secured Party to secure the Obligations.
2.03 Delivery of Securities. All certificates or instruments representing
or evidencing the Securities shall be delivered to and held by and shall be in
suitable form for transfer by delivery, or shall be accompanied by duly
executed instruments of transfer or assignment in blank, all in form and
substance satisfactory to the Secured Party and Secured Party shall at all
times have actual possession of the Securities and shall be deemed to have
possession of any of the Collateral in transit to Secured Party.
2.04 Power of Attorney. The Guarantor hereby irrevocably constitutes and
appoints the Secured Party and any authorized officer or agent thereof, with
full power of substitution, as its true and lawful attorney-in-fact with full
irrevocable power and authority in the place and stead of Guarantor and in the
name of Guarantor or in its own name, from time to time in the Secured Party's
discretion, for the purpose of carrying out the terms of this Security
Agreement, and without notice to Guarantor, to take any and all appropriate
action and to execute any and all documents and instruments which may be
necessary or desirable to accomplish the purposes of this Security Agreement,
including, without limitation, as necessary to do the following:
(a) upon the occurrence and continuance of any Event of
Default, to transfer to or register in the name of the Secured Party, or
any of its nominees, any or all of the Collateral;
(b) to exchange the certificates or instruments representing
or evidencing the Collateral for certificates or instruments of smaller
or larger denominations;
(c) (i) to receive payment of any and all moneys, claims and
other amounts due and to become due at any time in respect of or arising
out of any Collateral, (ii) to commence and prosecute any suits, actions
or proceedings at law or in equity in any court of competent
jurisdiction to collect the Collateral or any part thereof and to
enforce any other right in respect of any Collateral, (iii) to defend
any suit, action or proceeding brought against Guarantor with respect to
any Collateral, (iv) to settle, compromise or adjust any suit, action or
proceeding described above and, in connection therewith, to give such
discharges or releases as the Secured Party may deem appropriate, and
(v) to
<PAGE> 5
complete any blanks contained in any instruments of transfer or
assignment appended to or delivered with the certificates representing
the Securities; and
(d) to exchange any of the Collateral for other property upon
reorganization, recapitalization or other readjustment, and in
connection therewith to deposit any of the Collateral with any committee
or depository upon such terms as the Secured Party may determine, and,
subsequent to any Event of Default, to exercise voting rights as to any
of the Collateral, all without notice and without liability except to
account for property actually received by the Secured Party.
The Guarantor hereby ratifies all that said attorney shall lawfully do or cause
to be done within the scope of the power of attorney granted hereunder. This
power of attorney is a power coupled with an interest and shall be irrevocable.
The powers conferred on the Secured Party hereunder are solely to protect its
interests in the Collateral and shall not impose any duty upon him to exercise
any such powers. The Secured Party shall be accountable only for amounts that
he actually receives as a result of the exercise of such powers, and neither he
nor any of his employees or agents shall be responsible to Guarantor for any
act or failure to act, except for gross negligence or willful misconduct.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.01 Valid Issuance. The Guarantor represents, warrants and agrees that
the Securities have been duly authorized, validly issued and are validly
outstanding, fully paid and nonassessable, and were not issues in violation of
the preemptive rights of any person or of any agreement by which Guarantor or
any issuer of such Collateral is bound.
3.02 No Material Misstatements. No information, exhibit or report
furnished by Guarantor or any subsidiary to the Secured Party in connection
with the negotiation of the Security Documents contained or contains any
material misstatement of fact or omitted to state a material fact or any fact
necessary to make the statements obtained herein or therein not misleading.
3.03 Ownership and Liens. The Guarantor represents, warrants and agrees
that Guarantor owns (and at the time of transfer or delivery of the Collateral
to Secured Party, owned or will own) good and indefeasible title to the
Collateral free and clear of any other security interests, liens, adverse
claims or options (other than, with respect to encumbrances permitted by the
Security Documents).
3.04 Status of Securities Generally. The Guarantor represents, warrants
and agrees that the Securities were properly issued, drawn, made and/or
accepted and are genuine; the Securities have not been materially altered; all
signatures on the Securities are genuine or authorized; the
<PAGE> 6
Guarantor's transfer of the Securities to Secured Party for the purposes herein
stated, is effective; and Guarantor knows of no fact that might impair the
validity of the Securities.
ARTICLE 4
COVENANTS AND AGREEMENTS
4.01 Taxes. The Guarantor covenants and agrees that Guarantor will pay,
prior to delinquency, all taxes, charges, liens and assessments against the
Collateral and, upon the failure of Guarantor to do so, the Secured Party at
its option may, but will not be obligated to, pay any of them and shall be the
sole judge of the legality or validity thereof and of the amount necessary to
discharge the same.
4.02 Delivery of Collateral. The Guarantor covenants and agrees that if
Guarantor receives any dividend or distribution, whether in cash, Securities or
other property, declared and paid with respect to the Securities, Guarantor
will immediately deliver the same to the Secured Party to be held as additional
Collateral and/or apply them to the Obligations at the election of the Secured
Party. So long as the Obligations are outstanding, Guarantor shall not vote
for, approve or acquiesce in the issuance of additional Securities of PAC to
any person or party other than Guarantor, except for commercial bank loans,
which are not owned or held by Guarantor and delivered to Secured Party
hereunder.
4.03 Further Assurances. The Guarantor covenants and agrees that
Guarantor will sign, execute, deliver and file, alone or with the Secured
Party, any financing statement, security agreements or other documents or
procure any document as may be requested by the Secured Party from time to time
to confirm, perfect and preserve the security interest created hereby, and in
addition, the Guarantor hereby authorizes the Secured Party to execute and
deliver on behalf of Guarantor and to file such financing statements without
the signature of Guarantor. The Guarantor will do all such additional and
further acts, things, deeds, give such assurances and execute such instruments
as the Secured Party reasonably requires to vest more completely in and assure
to the Secured Party his rights under this Security Agreement.
4.04 Filing Reproductions. The Guarantor covenants and agrees that, at
the option of the Secured Party, a carbon, photographic or other reproduction
of this Security Agreement or of a financial statement covering the Collateral
shall be sufficient as a financing statement and may be filed as a financing
statement.
4.05 Prohibited Liens and Filings. The Guarantor covenants and agrees
that Guarantor will not pledge, mortgage, or otherwise encumber, create or
suffer a security interest to exist in any of the Collateral (other than in
favor of the Secured Party and liens and other encumbrances permitted by the
Security Documents) or sell, assign or otherwise transfer any of the
Collateral, to or in favor of anyone other than the Secured Party, for the
benefit of the Secured Party, and Guarantor will not file or permit to be filed
any financing statement or other
<PAGE> 7
security instrument with respect to the Collateral other than in favor of the
Secured Party or other than liens or other encumbrances permitted by the
Security Documents.
ARTICLE 5
RIGHTS AND REMEDIES
5.01 Voting Rights and Dividends.
(a) So long as no Event of Default shall have occurred and be
continuing:
(i) The Guarantor will be entitled to exercise any and all
voting and other consensual rights pertaining to the Collateral or any
part thereof for any purpose not inconsistent with the terms of this
Security Agreement.
(ii) The Secured Party shall execute and deliver (or cause to
be executed and delivered) to Guarantor all such proxies and other
instruments as Guarantor may reasonably request for the purposes of
enabling Guarantor to exercise the voting and other rights which it is
entitled to exercise pursuant to subsection (i).
(b) Upon the occurrence and during the continuance of an Event of
Default all rights of Guarantor to exercise the voting and other consensual
rights which it would otherwise be entitled to exercise pursuant to Subsection
5.01(a)(i) shall cease and Secured Party shall be entitled to vote the
Securities.
5.02 Default Events. "Event of Default" shall have the meaning ascribed
to such term in the Notes or other Security Documents. Upon the occurrence of
an Event of Default, all of the Obligations shall immediately become due and
payable irrespective of any agreed maturity or period of grace and/or any
obligation of the Secured Party for further financial accommodation shall
terminate.
5.03 Default Remedies. If all or any part of the Obligation shall become
due and payable as specified in Section 5.02, the Secured Party may then, or at
any time thereafter, apply, set-off, collect, sell in one or more sales, or
otherwise dispose of, any or all of the Collateral, in its then condition or
following any commercial reasonable preparation or processing, in such order as
the Secured Party may elect, and any such sale may be made either at public or
private sale at its place of business or elsewhere, or at any brokers' board or
securities exchange, either for cash or upon credit or for future delivery, at
such price as the Secured Party may deem fair, and the Secured Party may be the
purchaser of any or all Collateral so sold and may hold the same thereafter in
its own right free from any claim of Guarantor or right of redemption. No such
purchase or holding by the Secured Party shall be deemed a retention by the
Secured Party in satisfaction of the Obligations. All demands, notices and
advertisements, and the presentment of property at sale are hereby waived. If,
notwithstanding the foregoing provisions, any applicable provision of the
Uniform Commercial Code or other law requires the Secured Party
<PAGE> 8
to give reasonable notice of any such sale or disposition or other action, five
days' prior written notice shall constitute reasonable notice. The Secured
Party may require Guarantor to assemble the Collateral, to the extent not in
the possession of the Secured Party, and make it available to the Secured Party
at a place designated by the Secured Party that is reasonably convenient to the
Secured Party. Any sale hereunder may be conducted by an auctioneer or any
officer or agent of the Secured Party. In connection with the sale of
Collateral which is stock or other investment securities, in the absence of
registration of the Securities under the Securities act of 1933, as amended
(the "Act"), and any applicable state securities laws, by Guarantor or, at the
election of the Secured Party, the Secured Party must limit prospective
purchasers to the extent deemed necessary or advisable by the Secured Party to
render such sale exempt from the registration requirements of the Act, and any
applicable state securities laws, and no sale so made in good faith by the
Secured Party shall be deemed not to be "commercially reasonable" because so
made.
5.04 Proceeds. Prior to all or any part of the Obligations becoming due
and payable as specified in Section 5.02, all cash sums paid to and received by
the Secured Party on account of the Collateral shall be promptly applied by the
Secured Party on the Obligations, whether or not such Obligations shall have by
their terms matured, such application to be made to principal or interest as
the Secured Party may determine; provided, however, the Secured Party need not
apply or give credit for any item included in such sums until the Secured Party
has received final payment thereof. After all or any part of the Obligations
becomes due and payable as specified in Section 5.02, the proceeds of any sale
or other disposition of the Collateral and all sums received or collected by
the Secured Party for or on account of the Collateral shall be applied by the
Secured Party in the manner set forth in Section 9.504 of the Texas Uniform
Commercial Code - Secured Transactions.
5.05 Secured Party's Duties. The Secured Party shall be under no duty
whatsoever to make or give any presentment, demand for performance, notice of
nonperformance, protest, notice of protest, notice of dishonor, or other notice
or demand in connection with any Collateral or the Obligations, or to take any
steps necessary to preserve any rights against prior parties. The Secured Party
shall not be liable for failure to collect or realize upon any or all of the
Obligations or Collateral, or for any delay in so doing, nor shall the Secured
Party be under any duty to take any action whatsoever with regard thereto. The
Secured Party shall use reasonable care in the custody and preservation of any
Collateral in its possession. The Secured Party shall have no duty to comply
with any recording, filing, or other legal requirements necessary to establish
or maintain the validity, priority or enforceability of, or the Secured Party's
rights in or to, any of the Collateral.
5.06 Secured Party's Actions. The Guarantor waives any right to require
the Secured Party to proceed against any Person, exhaust any collateral or
pursue any other remedy in the Secured Party's power; waives any and all notice
of acceptance of this Security Agreement or of creation, modification renewal
or extension for any period of any of the Obligations from time to time; and
waives any defense arising by reason of any disability or other defense of
Guarantor or any other party liable on the Obligations, or by reason of the
cessation from any
<PAGE> 9
cause whatsoever of the liability of Guarantor, or any other party liable on
the Obligations. All dealings between Guarantor and the Secured Party shall
conclusively be presumed to have been had or consummated in reliance upon this
Security Agreement. Until all Obligations shall have been paid in full,
Guarantor shall have no right to subrogation, and Guarantor waives any right to
enforce any remedy that the Secured Party now has or may hereafter have against
Guarantor, or any other party liable on the Obligations and, except as
otherwise expressly provided in this Security Agreement, waives any benefit of
and right to participate in any Collateral or security whatsoever now or
hereafter held by the Secured Party.
ARTICLE 6
MISCELLANEOUS
6.01 Transfer of Indebtedness and Collateral. Subject to the limitations
of the Security Documents, the Secured Party may transfer any or all of the
Obligations, and upon any such transfer such Secured Party may transfer any and
all of the Collateral and shall be fully discharged thereafter form all
liability, if any, with respect to the Collateral so transferred, and the
transferee shall be vested with all rights, powers and remedies of such Secured
Party hereunder with respect to the Collateral so transferred; but with respect
to any Collateral not so transferred, the Secured Party shall retain all
rights, powers and remedies hereby given. The Secured Party may at any time
deliver any or all of the Collateral to Guarantor, whose receipt shall be a
complete and full acquittance for the Collateral so delivered, and the Secured
Party shall thereafter be discharged from any liability therefor.
6.02 Cumulative Security. The execution and delivery of this Security
Agreement in no manner shall impair or affect any other security by
(endorsement or otherwise) for the payment of the Obligations. No security
taken hereafter as security for payment of the Obligations shall impair in any
manner or affect this Security Agreement. All such present and future
additional security is to be considered as cumulative security.
6.03 Continuing Agreement. This is a continuing agreement and the
conveyance hereunder shall remain in full force and effect, and all the rights,
powers and remedies of the Secured Party hereunder shall continue to exist
until the Obligations shall be paid in full as the same become due and payable,
and until the Secured Party, upon request of Guarantor, has executed a written
termination statement, and reassigned to Guarantor, without recourse,
representation or warranty of any kind, the Collateral and all rights and Liens
conveyed hereby and returned possession of the Collateral to Guarantor. This
Security Agreement shall continue irrespective of the fact that the liability
of any other party liable for the Obligations may have ceased, and
notwithstanding the death or incapacity of Guarantor or any other person liable
for the Obligations, or any other event or proceeding affecting Guarantor
and/or any other person liable for the Obligations.
6.04 Cumulative Rights. The rights, powers and remedies of the Secured
Party hereunder shall be in addition to all rights, powers and remedies given
by statute or rule of law
<PAGE> 10
and are cumulative. The exercise of any one or more of the rights, powers and
remedies provided herein shall not be construed as a waiver of any other
rights, powers and remedies of the Secured Party. Furthermore, regardless of
whether or not the Uniform Commercial Code is in effect in the jurisdiction
where such rights, powers and remedies are asserted, the Secured Party shall
have the rights, powers and remedies of a secured party under the Texas Uniform
Commercial Code, as amended.
6.05 Exercise of Rights. Time shall be of the essence for the
performance of any act under this Security Agreement by Guarantor or any other
party liable for the Obligations, but neither the Secured Party's acceptance of
partial or delinquent payments nor any forbearance, failure or delay by the
Secured Party in exercising any right, power or remedy shall be deemed a waiver
of any obligation of Guarantor or any other party liable for the Obligations or
of any right, power or remedy of the Secured Party or preclude any other or
further exercise thereof; and no single or partial exercise of any right, power
or remedy shall preclude any other or further exercise thereof, or the exercise
of any other right, power or remedy.
6.06 Remedy and Waiver. The Secured Party may remedy any default and may
waive any default without waiving the default remedied or waiving any prior or
subsequent default, subject only to the requirements of the Security Documents
in this regard.
6.07 Non-Judicial Remedies. The Secured Party may enforce his rights
hereunder without prior judicial process or judicial hearing, and Guarantor
expressly waives, renounces and knowingly relinquishes any and all legal rights
which might otherwise require the Secured Party to enforce his rights by
judicial process. In so providing for non-judicial remedies, Guarantor
recognizes and concedes that such remedies are consistent with the usage of the
trade, are responsive to commercial necessity, and are the result of bargain at
arm's length. Nothing herein is intended to prevent the Secured Party or
Guarantor from resorting to judicial process at such party's option.
6.08 Guarantor. The term "the Guarantor", as used throughout this
Security Agreement, shall (regardless of use of the singular form) mean
Guarantor individually and/or collectively and shall, subject to the
limitations of the Security Documents, include the respective successors, legal
representatives, heirs and assigns of Guarantor.
6.09 Preservation of Liability. Neither this Security Agreement nor the
exercise by the Secured Party of (or the failure to so exercise) any right,
power or remedy conferred herein or by law shall be construed as relieving any
person liable on the Obligations from full liability on the Obligations and for
any deficiency thereon.
6.10 Notices. Any notice or demand to Guarantor under this Security
Agreement or in connection with this Security Agreement may be driven and shall
conclusively be deemed and considered to have been given and received if in
compliance with the applicable provisions of the Security Documents.
<PAGE> 11
6.11 Construction. This Security Agreement shall be governed by the laws
of the State of Texas in all respects, including matters of construction,
validity, enforcement and performance.
6.12 Amendment and Waiver. This Security Agreement may not be amended
(or may any of its terms be waived) except in writing duly signed by an
authorized officer of the Secured Party and by Guarantor.
6.13 Terms Defined in Uniform Commercial Code. Except as the context may
otherwise require, any term used herein that is defined in the Texas Uniform
Commercial Code shall have the meaning given therein.
6.14 Invalidity. In the event that any one or more of the provisions
contained in this Security Agreement shall, for any reason, be held invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability will not affect any other provision of this Security
Agreement, or any other instrument executed in connection herewith.
6.15 Successors and Assigns. The covenants, representations, warranties
and agreements herein set forth shall be binding upon Guarantor and its
successors and assigns as permitted pursuant to the Security Documents and
shall inure to the benefit of the Secured Party and his successors and assigns.
6.16 Counterparts. This Security Agreement may be executed in two or
more counterparts, and it will not be necessary that the signatures of all
parties hereto be contained on any one counterpart hereof; each counterpart
will be deemed an original, but all of which together will constitute one and
the said instrument.
IN WITNESS WHEREOF, this Security Agreement is executed as of the date
first hereinabove written.
Guarantor:
WATERMARC FOOD MANAGEMENT CO.
------------------------------
By: Angelo Pitillo
Its: President
Secured Party:
------------------------------
GHULAM M. BOMBAYWALA
<PAGE> 12
SCHEDULE I
Attached to and forming a part of that certain Security Agreement (Pledge)
dated to be effective as of September 14, 1995 by WATERMARC FOOD MANAGEMENT
CO., as the Guarantor to GHULAM M. BOMBAYWALA as Secured Party.
<TABLE>
<CAPTION>
Stock Number
Stock Class of Certificate Par of
Issuer Stock No(s). Value Shares
----- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Pasta Common 1 $.01 100
Acquisition
Co.
</TABLE>
<PAGE> 1
EXHIBIT H
GUARANTY AGREEMENT
THIS GUARANTY AGREEMENT is entered into on September 14, 1995 by
Watermarc Food Management Co., a Texas corporation, whose business address is
10777 Westheimer, Suite 1030, Houston, Texas 77042 ("Guarantor"), in favor of
Ghulam M. Bombaywala, a resident of Fort Bend County, Texas whose business
address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 (together with
any successor holders of the hereinafter defined Notes, the "Holder"). For
purposes of the application of certain provisions hereof, the "Borrower" (as
defined below) is joined as a party to this Guaranty Agreement.
WITNESSETH:
WHEREAS, Guarantor owns all of the issued and outstanding securities of
Pasta Acquisition Co., a Texas corporation ("Borrower");
WHEREAS, Borrower was organized by Guarantor to acquire The Original
Pasta Co., a Texas,Corporation ("TOPC") pursuant to a Plan and Agreement of
Merger dated September 14, 1995 (hereinafter the "Merger" and "Merger
Agreement");
WHEREAS, the Holder is the sole shareholder of TOPC and pursuant to the
Merger will receive (i) common stock of Guarantor, and (ii) two promissory
notes in the aggregate principal amount of $3,750,000.00 (the "Notes") from
Borrower, which Notes are described in Section 1.02 of the Merger Agreement;
WHEREAS, the Notes are secured by (i) a lien on certain restaurant
assets being acquired by Borrower from TOPC in the Merger pursuant to a
"Restaurant Assets Security Agreement" between Borrower, TOPC and Secured
Party; (ii) this Guaranty Agreement; and (iii) a "Security Agreement-Pledge"
between Guarantor and Secured Party and such other instruments, documents and
agreements defined as the "Security Documents" pursuant to Section 2.02 of the
Merger Agreement (the "Security Documents"); and
WHEREAS, the Holder has made it a condition precedent to the Merger
Agreement that Guarantor guarantee payment of the Notes and the related
indebtedness and obligations set forth in the Security Documents.
NOW, THEREFORE to induce the Holder to accept Notes of Borrower in
connection with and as consideration in the Merger and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Guarantor hereby agrees as follows:
<PAGE> 2
ARTICLE 1
THE INDEBTEDNESS
SECTION 1.1 THE INDEBTEDNESS. As used in this Guaranty Agreement, the
"Indebtedness" shall mean the Notes, including without limitation all principal
and all interest thereon, together with all amounts that Borrower may from time
to time become obligated to pay or reimburse to the Holder pursuant to the
Security Documents, including all attorneys' fees and costs incurred by the
Holder in enforcing the Holder's rights under the Notes or Security Documents.
ARTICLE 2
THE GUARANTY
SECTION 2.1 INDEBTEDNESS GUARANTEED. Guarantor hereby unconditionally
and irrevocably guarantees the prompt payment when due, whether at maturity or
otherwise, of all of the Indebtedness. If Borrower fails to make any payment of
any part of the Indebtedness when due after the expiration of any notice and
cure period provided in the Notes or Security Documents, if any, then said
failure shall constitute a default hereunder.
SECTION 2.2 NATURE OF GUARANTY. This is an irrevocable. absolute,
complete, and continuing guaranty of payment and performance and not a guaranty
of collection, and shall not be affected by the release or discharge of
Borrower from, or impairment or modification of, its obligations with respect
to any Indebtedness in any bankruptcy, receivership, or other insolvency
proceeding or otherwise. The fact that the Indebtedness may be rearranged,
reduced, extended for any period, and/or renewed from time to time, or paid in
full without notice to Guarantor shall not release, discharge, or reduce the
obligation of Guarantor with respect to the Indebtedness and Guarantor shall
remain fully bound hereunder. It is the intention of the Holder and Guarantor
that Guarantor's obligations hereunder shall not be discharged at any time
prior to the occurrence of payment in full of the Indebtedness. This Guaranty
Agreement may be enforced by the Holder and any subsequent holder of the
Indebtedness, and shall not be discharged by the assignment or negotiation of
all or part of the Indebtedness. This Guaranty Agreement may not be revoked by
Guarantor and shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Indebtedness is rescinded or must
otherwise be returned by the Holder under the insolvency, bankruptcy,
reorganization, receivership, or other debtor relief proceeding involving
Borrower, or after any attempted revocation by Guarantor, as if though such
payment had not been made. Except as specifically provided in Section 2.10
hereof, Guarantor hereby expressly waives presentment, demand, notice of
non-payment, protest, notice of protest and dishonor, notice of intent to
accelerate, notice of acceleration, and any other notice whatsoever on any and
all forms of such Indebtedness, and also notice of acceptance of this Guaranty
Agreement, acceptance on the part of the Holder being conclusively presumed by
its request for this Guaranty Agreement and delivery of the same to the Holder.
-2-
<PAGE> 3
SECTION 2.3 THE HOLDER'S RIGHTS. Guarantor authorizes the Holder,
without notice or demand and without affecting Guarantor's liability hereunder:
to take and hold security for the payment of this Guaranty Agreement and/or any
of the Indebtedness from Borrower or any other persons or entities, including
Guarantor, and exchange, enforce, waive, and release any such security; to
apply such security and direct the order or manner of sale thereof as the
Holder may determine; to obtain a guaranty of the Indebtedness from any one or
more persons and at any time or times; and to enforce, waive, rearrange,
modify, limit or release any of such other persons from their obligations under
such guaranties. Guarantor hereby acknowledges and agrees that the obligations
of all persons to pay and satisfy the Indebtedness pursuant to their respective
guaranties (including Guarantor's obligations under this Guaranty Agreement)
shall be joint and several. Guarantor acknowledges and agrees that the Holder
shall have complete discretion regarding whether, when and how to exercise the
foregoing rights.
SECTION 2.4 GUARANTOR'S WAIVERS. Guarantor waives any right to require
the Holder to (and it shall not be necessary for the Holder, in order to
enforce such payment by Guarantor to first) (a) proceed against Borrower or any
other person liable on the Indebtedness, (b) proceed against or exhaust any
security given to secure the Indebtedness, (c) have Borrower joined with
Guarantor in any suit arising out of this Guaranty Agreement and/or any of the
Indebtedness, (d) enforce its rights against any other guarantor of the
Indebtedness, or (e) pursue or exhaust any other remedy in the Holder's power
whatsoever. The Holder shall not be required to mitigate damages or take any
action to reduce, collect or enforce the Indebtedness. Guarantor waives any
defense or right arising by reason of any disability, lack of corporate
authority or power, impairment of recourse or of collateral under Section 3.606
of the Texas Uniform Commercial Code or otherwise, or other defense of Borrower
or any other guarantor of any of the Indebtedness, and shall remain liable
hereon regardless of whether Borrower or any other guarantor be found not
liable thereon for any reason. Guarantor shall have no right of subrogation
until such time as all of the Indebtedness has been paid in full.
SECTION 2.5 MATURITY OF INDEBTEDNESS: PAYMENT. If the maturity of any
Indebtedness is accelerated by bankruptcy or otherwise, then such maturity
shall also be deemed accelerated for the purpose of this Guaranty Agreement
without demand or notice to Guarantor. Guarantor shall, forthwith upon notice
from the Holder of the failure of Borrower to pay any Indebtedness at maturity,
pay to the Holder the amount due and unpaid by Borrower and Guaranteed hereby.
The failure of the Holder to give this notice shall not in any way release
Guarantor hereunder.
SECTION 2.6 THE HOLDER'S EXPENSES. If Guarantor fails to pay the
Indebtedness after notice from the Holder of Borrower's failure to pay any
Indebtedness at maturity, and if the Holder obtains the services of an attorney
for collection of amounts owing by Guarantor hereunder, or if suit is filed to
enforce this Guaranty Agreement, the Notes or the Security Documents, or if
proceedings are had in any bankruptcy, probate, receivership, or other judicial
proceedings for the establishment or collection of any amount owing by
Guarantor hereunder, or if any amount owing by Guarantor
-3-
<PAGE> 4
hereunder is collected through such proceedings, then Guarantor shall pay to
the Holder all court costs and the Holder's reasonable attorney's fees.
SECTION 2.7 PRIMARY LIABILITY. The liability of the Guarantor for the
payment of the Indebtedness shall be primary and not secondary.
SECTION 2.8 EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING
GUARANTOR'S OBLIGATIONS. Guarantor hereby consents and agrees to each of the
following, and agrees that Guarantor's obligations under this Guaranty
Agreement shall not be released, diminished, impaired, reduced or adversely
affected by any of the following, and waives any rights (including, without
limitation, rights to notice) which Guarantor might otherwise have as a result
of or in connection with any of the following:
(a) MODIFICATIONS, ETC. Any renewal, extension, modification,
alteration or rearrangement of all or any part of the Indebtedness, or
of the Note, or of any Security Documents, or any contract or
understanding between Borrower and the Holder or between the Holder and
Guarantor, or any other parties, pertaining to the Indebtedness or any
other matter;
(b) ADJUSTMENT, ETC. Any adjustment, indulgence, forbearance.
or compromise that might be granted or given by the Holder to Borrower,
Guarantor or any other person;
(c) CONDITION OF BORROWER OR GUARANTOR. The insolvency,
bankruptcy, arrangement, adjustment, composition, liquidation,
disability, dissolution or lack of power of Borrower or any other party
at any time liable for the payment of all or part of the Indebtedness,
or any dissolution of Borrower or Guarantor; or any sale, lease or
transfer of any or all of the assets of Borrower or Guarantor, or any
changes in the shareholders or members of Borrower or Guarantor or any
reorganization of Borrower or Guarantor;
(d) INVALIDITY OF INDEBTEDNESS. The invalidity or
unenforceability of all or any part of the Indebtedness, or any document
or agreement executed in connection with the Indebtedness, for any
reason whatsoever, including without limitation the fact that the
Indebtedness, or any part thereof, exceeds the amount permitted by law,
the act of creating the Indebtedness or any part thereof is ultra vires,
the officers or representatives executing the documents or otherwise
creating the Indebtedness acted in excess of their authority, the
Indebtedness violates applicable usury laws, Borrower or any other
person, including Guarantor, has valid defenses, claims, or offsets
(whether at law, in equity, or by agreement) which render the
Indebtedness wholly or partially uncollectible from Borrower or any
other person, including Guarantor, the creation, performance, or
repayment of the
-4-
<PAGE> 5
Indebtedness (or the execution, delivery and performance of any document
or instrument representing part of the Indebtedness, or executed in
connection with the Indebtedness, or given to secure the repayment of
the Indebtedness) is illegal, uncollectible, legally impossible, or
unenforceable, or any Security Document or other documents or
instruments pertaining to the Indebtedness have been forged or otherwise
are irregular or not genuine or authentic;
(e) RELEASE OF OBLIGORS. Any full or partial release of the
liability of Borrower on the Indebtedness or any part thereof, or of any
co-guarantors, or any other person or entity now or hereafter liable,
whether directly or indirectly, jointly, severally, or jointly and
severally, to pay, perform, guarantee or assure the payment of the
Indebtedness or any part thereof, it being recognized, acknowledged and
agreed by Guarantor that Guarantor may be required to pay the
Indebtedness in full without assistance or support of any other party,
and Guarantor has not been induced to enter into this Guaranty Agreement
on the basis of a contemplation, belief, understanding or agreement that
other parties will be liable to perform the Indebtedness, or that the
Holder will look to other parties to perform the Indebtedness;
(f) OTHER SECURITY. The taking or accepting by the Holder of
any other security, collateral, guaranty, or other assurance of payment
for all or any part of the Indebtedness from any person, including
Borrower or the Guarantor;
(g) RELEASE OF COLLATERAL. Any release, surrender, exchange,
subordination, deterioration, waste, loss, or impairment (including
without limitation negligent, willful, unreasonable, or unjustifiable
impairment) of any collateral at any time securing payment of the
Indebtedness;
(h) CARE AND DILIGENCE. The failure of the Holder the Holder
or any other person to exercise diligence or reasonable care in, or the
negligence of the Holder regarding, the preservation, protection,
enforcement, sale, or other handling or treatment of all or any part of
such collateral, including without limitation the failure of the Holder
to foreclose on any collateral mortgaged or pledged under the Security
Documents or the delay by the Holder in instituting or prosecuting any
right or remedy under the Security Documents, including without
limitation the right to foreclose on collateral by nonjudicial
foreclosure sale or otherwise;
(i) STATUS OF LIENS. The fact that any collateral, security
interest, or lien contemplated or intended to be given, created, or
granted as security for the repayment of the Indebtedness has not been
properly perfected or created, or proves to be unenforceable or
subordinate to any other security interest or lien, it being recognized
and agreed by Guarantor that Guarantor
-5-
<PAGE> 6
is not entering into this Guaranty Agreement in reliance on, or in
contemplation of the benefits of, the validity, enforceability,
collectabilty, or value of any of the collateral for the Indebtedness;
(j) SURETYSHIP DEFENSES. Any and all suretyship defenses of
material alteration of any agreement between Borrower and the Holder or
the Holder and any other party, including Guarantor;
(k) PREFERENCE. Any payment by Borrower to the Holder is held
to constitute a preference under bankruptcy laws, or for any reason the
Holder is required to refund such payment or pay such amount to Borrower
or any other person; or
(l) OTHER ACTS TAKEN OR OMITTED. Any other action taken or
omitted to be taken with respect to any Security Documents, the
Indebtedness, or the security and collateral therefor, whether or not
such action or omission prejudices Guarantor or increases the likelihood
that Guarantor will be required to pay the Indebtedness pursuant to the
terms hereof.
it being the unambiguous and unequivocal intention of Guarantor that Guarantor
shall be obligated to pay the Indebtedness when due, notwithstanding any
occurrence, circumstance, action or omission whatsoever, whether contemplated
or not contemplated, and whether or not otherwise or particularly described
herein, except for the full and final payment and satisfaction of the
Indebtedness.
SECTION 2.9 RELATIONSHIP OF PARTIES GUARANTOR ACKNOWLEDGES THAT THE
HOLDER IS A PRINCIPAL STOCKHOLDER AND A DIRECTOR OF GUARANTOR AND IS ITS CHIEF
EXECUTIVE OFFICER. THE HOLDER MAY ALSO FROM TIME TO TIME SERVE AS AN OFFICER OR
DIRECTOR OF BORROWER. NOTWITHSTANDING THE FOREGOING, GUARANTOR AND BORROWER
ACKNOWLEDGE AND AGREE THAT THE HOLDER MAY EXERCISE AND ENFORCE HIS RIGHTS UNDER
THE NOTES, THE SECURITY DOCUMENTS AND THIS GUARANTY AGREEMENT ACCORDING TO THE
TERMS AND PROVISIONS THEREOF AND HEREOF. BORROWER AND GUARANTOR EXPRESSLY
ACKNOWLEDGE THAT THEY WERE REPRESENTED AND ADVISED BY SEPARATE, INDEPENDENT
LEGAL COUNSEL AS TO THE MERGER, THE MERGER AGREEMENT, THE NOTES, THE SECURITY
DOCUMENTS AND ANY RELATED DOCUMENTS, INCLUDING THE RELATIVE LEGAL RIGHTS OF THE
PARTIES IN THE TRANSACTIONS REPRESENTED THEREBY AND HEREBY.
SECTION 2.10 NO DUTY TO MITIGATE. Without limiting any other provision
in this Guaranty Agreement, the Holder shall have no duty to mitigate the
amounts payable by Guarantor to the Holder hereunder. The Holder agrees to
comply with the notice and cure provisions contained in the Notes and Security
Documents and any notices required thereunder to be given by the Holder to
Borrower or Guarantor shall be given.
-6-
<PAGE> 7
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 BY GUARANTOR. In order to induce the Holder to accept the
Notes, Guarantor represents and warrants to the Holder (which representations
and warranties will survive the creation of the Indebtedness and any extension
of credit thereunder) that:
(a) Benefit to Guarantor. Guarantor's guaranty pursuant to
this Guaranty Agreement reasonably has benefitted or may be expected to
benefit, directly or indirectly, Guarantor, including the acquisition by
Borrower of TOPC.
(b) FAMILIARITY AND RELIANCE. Guarantor is familiar with, and
has independently reviewed books and records regarding, the financial
condition of Borrower and is familiar with the value of any and all
collateral intended to be created as security for the payment of the
Notes and other Indebtedness; however, Guarantor is not relying on such
financial condition or the collateral as an inducement to enter into
this Guaranty Agreement.
(c) NO REPRESENTATION. Neither the Holder nor any other
person, corporation, or entity has made any representation, warranty, or
statement to Guarantor with regard to Borrower or its financial
condition in order to induce Guarantor to execute this Guaranty
Agreement.
ARTICLE 4
MISCELLANEOUS
SECTION 4.1 SUCCESSORS AND ASSIGNS. This Guaranty Agreement is for and
shall inure to the benefit of the successors and assigns of the Holder and is
and shall be fully binding upon the legal representatives, successors, and
assigns of Guarantor.
SECTION 4.2 NOTICES. All notices provided for are permitted to be given
or served by depositing the same in the United States mail, addressed to the
person to be notified. postage prepaid, and registered or certified with return
receipt requested, or by Federal Express or other overnight delivery, or by
facsimile machine, or by delivering such notice by courier or by hand to such
person and shall be effective when received by the intended recipient. For
purposes of this Guaranty Agreement, Guarantor's address shall be the address
set forth on the first page of this Guaranty Agreement or any other mailing
address of which Guarantor notifies the Holder in writing.
SECTION 4.3 GOVERNING LAW. This Guaranty Agreement is a contract made
under and shall be construed in accordance with and governed by the laws of the
State of Texas.
-7-
<PAGE> 8
SECTION 4.4 EXERCISE OF RIGHTS. The rights, powers and remedies of the
Holder hereunder shall be in addition to all rights, powers and remedies given
by statute or rule of law and are cumulative. Time shall be of the essence for
the performance of any act under this Guaranty Agreement by the Guarantor.
Neither the Holder's acceptance of partial or delinquent performance by
Borrower or Guarantor nor any forbearance, failure, or delay by the Holder in
exercising any right, power or remedy shall be deemed a waiver of any
obligation of the Borrower or Guarantor or any other party liable for the
Indebtedness or of any right, power or remedy of the Holder or preclude any
other or further exercise thereof; and no single or partial exercise of any
right, power or remedy shall preclude any other or further exercise thereof, or
the exercise of any other right, power or remedy.
SECTION 4.5 NON-JUDICIAL REMEDIES. Holder may enforce his rights
hereunder without prior judicial process or judicial hearing, and the Borrower
and Guarantor expressly waive, renounce and knowingly relinquish any and all
legal rights which might otherwise require the Holder to enforce his rights by
judicial process. In so providing for non-judicial remedies, the Borrower and
Guarantor recognize and concede that such remedies are consistent with the
usage of the trade, are responsive to commercial necessity, and are the result
of bargain at arm's length. Nothing herein is intended to prevent the Holder
or the Borrower or Guarantor from resorting to judicial process at such party's
option.
SECTION 4.6 BORROWER. The terms "Borrower" and "Guarantor", as used
throughout this Agreement shall, subject to the limitations of the Security
Documents, include the respective successors, legal representatives, heirs and
assigns of the Borrower and Guarantor.
SECTION 4.7 AMENDMENT AND WAIVER. This Guaranty Agreement may not be
amended (or may any of its terms be waived) except in writing duly signed by
the Holder and the Guarantor.
SECTION 4.8 INVALIDITY. In the event that any one or more of the
provisions contained in this Guaranty Agreement shall. for any reason, be held
invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability will not affect any other provision of this Guaranty
Agreement, or any other instrument executed in connection herewith.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the undersigned has executed this Guaranty Agreement
as of the date first above written.
HOLDER GUARANTOR:
WATERMARC FOOD MANAGEMENT CO.
- - ------------------------------ ------------------------------
GHULAM M. BOMBAYWALA By: ANGELO PITILLO, President
BORROWER:
PASTA ACQUISITION CO.
------------------------------
By: ANGELO PITILLO, President
-9-
<PAGE> 1
EXHIBIT I
SERVICE MARK LICENSE AGREEMENT
This agreement (the "License Agreement") is entered into by and between
Pasta Acquisition Co. ("Licensor") a Texas corporation, and Ghulam M.
Bombaywala, a Texas citizen and resident ("Licensee"), as of September 14,
1995.
WHEREAS, Licensor is a wholly owned subsidiary of Watermarc Food
Management Co., and
WHEREAS, Licensor is acquiring by merger The Original Pasta Co.,
("TOPC"), a Texas corporation, thus acquiring the rights in and to the
patents, trademarks, trade names, assumed names and copyrights; and
WHEREAS, TOPC has applied to the United States Patent. and Trademark
Office for the issuance of service mark and trademark on The Original Pasta Co.
logos, signage and likeness thereof, collectively referred to as the "Service
Mark". As of the effective date of said merger, Licensor will have the
exclusive right, except for the rights granted under the Non-Exclusive
Trademark License Agreement, attached hereto as Exhibit "A", to use the Service
Mark and to issue licenses and sublicenses for the use of the Service Mark.
Attached hereto as Exhibit "B" is a true and correct copy of the documents
evidencing TOPC's application for and rights in and to the Service Mark. The
term Service Mark as used herein includes the name, logo, signage and likeness
of the Service Mark as reflected in the applications and
<PAGE> 2
the tradedress, goodwill and style of doing business, including, menus,
recipes, tradesecrets and know-how associated with the ownership and operation
of the restaurants under the name and style of the existing Original Pasta
Company restaurants, as the same may be amended or changed in the future;
WHEREAS, Licensee desires to obtain a license from Licensor to use the
Service Mark in connection with its restaurant business;
WHEREAS, Licensor and Licensee are parties to that certain Agreement and
Plan of Merger by and among Watermarc Food Management Co. ("WAMA"), TOPC,
Licensee, and Licensor (the "Merger Agreement"); and
WHEREAS, Licensor is willing to grant a license to Licensee, but only
upon and after the occurrence of certain events of default as described in the
Notes or the Security Documents (as defined in and attached to the Agreement
and Plan of Merger).
NOW, THEREFORE, in consideration of the covenants and promises of the
parties hereto, the parties hereto agree as follows:
1. This License Agreement and the rights of Licensee hereunder
commence only upon the occurrence and continuation of an event of default
pursuant to the terms of the Notes or the Security Documents as those documents
are defined and described in the Merger Agreement, after any opportunity to
cure such defaults provided for in the Notes or Security Documents has expired.
-2-
<PAGE> 3
2. Subject to paragraph 1 above, Licensor hereby grants to Licensee
for a period of twenty-five (25) years, the non-exclusive right to use the
Service Mark in connection with the operation, ownership, advertising,
promotion and development of Licensee's restaurant business as now or hereafter
conducted, but in no event shall Licensee use such Service Mark in connection
with a restaurant which is within five (5) miles of a then existing operating
restaurant owned and/or operated and/or licensed and/or franchised by Licensor
which uses the Service Mark. The Service Mark shall not be used in any illegal
manner or contrary to any laws regarding unfair competition or in any manner
which would impair the Service Mark's validity or in violation of any
reasonable rules promulgated by Licensor for use by all of its licensees or
franchisees. Licensor shall not grant any license to any person or entity to
use the Service Mark which would limit licensees ability to use the Service
Mark except as to the five (5) mile restriction above.
3. Licensee hereby waives and assigns to Licensor any ownership
right, title or interest, if any, which Licensee has or may acquire in and to
the Service Mark as a result of its use by Licensee, together with the goodwill
of the Service Mark and of the business with which the Service Mark is or may
be used unless express provision to the contrary is otherwise made herein.
-3-
<PAGE> 4
4. Licensee shall pay to Licensor the sum of one dollar per month as
consideration for the use of the Service Mark after such use commences. Upon
full payment of the Notes due to Licensee by Licensor, this License Agreement
shall automatically terminate any and all right, title, and interest of
Licensee in and to the Service Mark shall automatically, and without need of
action on the part of either party, revert to Licensor, except as to any
restaurants opened by Licensee or for which Licensee has incurred costs. As to
any restaurants opened or for which costs have been incurred, the license
hereunder shall continue and shall not terminate on payment of the Notes.
Licensor and Licensee agree to execute any and all documents, if any,
reasonably required to carry out the foregoing transfer of the Service Mark
upon full payment of the Notes owed to Licensee by Licensor.
5. Licensee will not in any way dispute or impugn the validity of
the Service Mark, the ownership of the Service Mark and the exclusive rights of
Licensor under the Service Mark which are licensed hereunder.
6. Licensee shall not use or permit the use of the Service Mark in
combination with any other service mark, word, symbol, letter or design, or in
its corporate or business name except as authorized in writing by Licensor.
-4-
<PAGE> 5
7. Licensee shall not during the term of this License Agreement, or
thereafter, adopt or use any word, corporate name, trade name or service mark
which is or tends to be similar to or likely to be confusing with the Service
Mark, or any design, label or advertising material used by Licensor, without
the prior written approval of Licensor.
8. All labels, advertising and other promotional materials in which
the Service Mark is to be used by Licensee shall be submitted to Licensor and
approved, in writing, by Licensor prior to such use. Licensor agrees that such
approval shall not be unreasonably withheld or delayed by Licensor.
9. Licensee agrees to notify Licensor, in writing, of any
conflicting use of or any applications or registrations for the Service Mark or
any acts of infringement or acts of unfair competition involving the Service
Mark, promptly after such matters are brought to its attention, or it has
knowledge thereof.
10. Licensor shall have the right to appoint an agent to establish
quality standards, conduct quality and account audits, and verify on Licensor's
behalf, Licensee's compliance with the terms and conditions of this License
Agreement. Licensor and its agent shall jointly and severally have the right
to inspect any premises upon which the Service Mark is used to determine
whether Licensee meets Licensor's quality standards with respect to such use.
-5-
<PAGE> 6
11. Licensee warrants, represents, and covenants that the menu items
to be sold at any restaurant where the Service Mark is being or will be used is
wholesome and fit for human consumption and Licensee agrees to defend and hold
Licensor harmless for any claims of injury or damage resulting from or arising
out of the business conducted at such restaurants, including but not limited
to, the consumption of any food and beverage products sold by Licensee on or
about its restaurant premises. Licensee shall maintain a comprehensive general
liability insurance policy and a liquor liability endorsement in amounts and
with a company reasonably satisfactory to Licensor and shall name Licensor as
an additional named insured thereunder. Licensee shall provide Licensor with a
certificate of such insurance and such certificate shall provide that at least
thirty (30) days' notice in writing shall be given to Licensor if such policy
shall be cancelled or not renewed.
12. Licensor shall not be obligated to pursue any proceedings to
prevent infringement of the Service Mark or any unfair competition proceedings
or opposition proceedings. Licensor shall have no obligation to defend the
Service Mark but may, in its sole discretion, recommend such defense where it
considers such defense to be appropriate. Licensee agrees to cooperate with and
assist Licensor in all such matters. Licensor shall have no obligation or
liability to Licensee in the event any third party asserts a claim of service
mark infringement or
-6-
<PAGE> 7
unfair competition against Licensee by reason of its use of the Service Mark
which results in the Service Mark being invalidated, cancelled or modified,
unless such claim arises out of any act or agreement of Licensor.
13. Licensee shall not have any right to further sublicense the right
to use the Service Mark, and Licensee agrees that it will not authorize the
Service Mark to be used by any other person, firm, or corporation, without
Licensor's prior written consent; provided, however, Licensee shall have the
right to assign or sublicense its rights hereunder to any corporation,
partnership, limited partnership, limited liability company or other entity in
which Licensee is an owner or affiliate, or in which Licensee retains the right
to control the use of the Service Mark.
14. This License Agreement and Licensee's rights to the Service Mark
shall [INTENTIONALLY LEFT BLANK] terminate upon the final payment of
indebtedness owed to Licensor by Licensee, except as provided herein. This
License Agreement and Licensee's rights to the Service Mark may also be
terminated by Licensor upon failure, after sixty (60) days written notice, to
cure any material default by Licensee hereunder. A material default is any
event or action by Licensee that could or would materially affect the title,
validity, quality or goodwill associated with the Service Mark. Any dispute
regarding the definition of or substance of a material default shall be
submitted to binding arbitration.
-7-
<PAGE> 8
15. Immediately upon the termination of this License Agreement for
any reason whatsoever, any rights granted by or accruing under this License
Agreement shall revert to Licensor without assignment or other act on the part
of Licensee, unless such act is required by law to re-vest such rights in
Licensor, in which latter event Licensee agrees and undertakes that it will do,
or cause to be done, whatever may be necessary to make such reversion
effective. Also, upon termination of this License Agreement for any reason
whatsoever, Licensee agrees that except as herein otherwise provided, it will
immediately cease and desist from all use of the Service Mark.
16. This License Agreement and everything herein contained shall
inure to the benefit of and be binding upon the successors and assigns of the
parties hereto, but shall not be assigned, transferred, conveyed or encumbered
by Licensee, except upon prior written authorization and consent of Licensor,
or as otherwise provided herein.
17. The waiver by either party hereto of any breach by the other
party of any term or condition hereof shall not be deemed a waiver of any
subsequent breach of such term or condition or any other term or condition. No
provision of this License Agreement shall be deemed to have been waived or
modified unless such waiver or modification is evidenced by a written
instrument which is signed by the party hereto against whom such waiver or
modification is sought to be enforced.
-8-
<PAGE> 9
18. This License Agreement contains the entire understanding between
the parties relating to the subject matter hereof and none of the provisions of
this License Agreement or exhibits hereto may be altered, modified, or amended
in any way except by an instrument in writing signed by all of the parties
hereto.
19. Any notice required or desired to be given hereunder shall be in
writing and shall be either personally served, or delivered by United States
mail, certified or registered, postage prepaid, addressed as follows:
If to Licensor: Pasta Acquisition Co.
c/o Watermarc Food Management Co.
10777 Westheimer, Suite 1030
Houston, Texas 77042
Attn: Angelo Pitillo, President
Copy to: Bennett G. Fisher
Horan & Devlin, P.C.
1300 Post Oak Blvd., Suite 2200
Houston, Texas 77056
If to Licensee: Ghulam M. Bombaywala
10777 Westheimer, Suite 1030
Houston, Texas 77042
Copy to: Kelly, Sutter, Mount & Kendrick, P.C.
1600 Smith Street, Suite 3700
Houston, Texas 77002
Attn: Philip M. Mount
or at such other address as may be designated by notice in writing to the other
party. Any notice hereunder by mail shall be deemed to have been given on the
date the same is received.
-9-
<PAGE> 10
20. This License Agreement is made and entered into in Houston, Harris
County, Texas and shall be governed by the laws of the State of Texas.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
have caused this License Agreement to be executed in multiple originals as of
the day here first above written.
Licensor: Licensee:
Pasta Acquisition Co.
By:
-------------------------- --------------------------
Angelo Pitillo, President Ghulam M. Bombaywala
-10-
<PAGE> 11
NON-COMPETE AND LICENSE AGREEMENT
THIS NON-COMPETE AND LICENSE AGREEMENT (the "Agreement") is made and
entered into to be effective as of the 17th day of September, 1993 by and
between THE ORIGINAL PASTA CO., a Texas corporation ("Company") and JAMES
HILLYER ("Hillyer").
W I T N E S S E T H:
WHEREAS, by Letter Agreement dated of even date herewith (the "Letter
Agreement"), the Company has agreed to purchase certain assets owned by Tomato
One, Inc. and used by such corporation in the operation of a restaurant known
as "The Original Pasta Co.";
WHEREAS, Hillyer is the President and a shareholder of Tomato One, Inc.
and, as such, is a party to the Letter Agreement; and
WHEREAS, in order to induce the Company to enter into the Letter
Agreement, Hillyer agreed to execute this Agreement containing certain
non-compete provisions and, in order to induce Hillyer to agree to convey the
assets of the restaurant described above, the Company agreed to grant the
license according to the provisions described herein.
NOW THEREFORE, for and in consideration of the foregoing premises and
agreements and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. CONSIDERATION. Both parties acknowledge that this Agreement is
being entered into pursuant to the terms of the Letter Agreement and in order
to induce each party hereto to execute the Letter Agreement, that irrevocable
harm and damage will be done to the Company in the event that Hillyer competes
with the Company in the areas described herein.
2. TERMS OF COVENANT NOT TO COMPETE. The provisions of this
Agreement shall be effective from September 17, 1993 and shall continue until
September 17, 1998. During such period of time, Hillyer agrees that he shall
not engage in the activities described below within a five (5) mile radius of
any Italian restaurant owned or operated by the Company.
Hillyer agrees that he shall not engage, directly or indirectly, in the
operation, ownership or management, individually or in any capacity whatsoever,
of any Italian restaurant which would compete with any Italian restaurant owned
by the Company within the geographic area described above.
Hillyer agrees that the time period and geographic area set forth above
are reasonable and acceptable to both parties hereto and are necessary to
protect the Company's legitimate business interests, given Hillyer's unique
skills and that irrevocable harm and damage will be done to the Company in the
event that Hillyer competes with the Company in the areas described herein. It
is expressly recognized and agreed that the restrained activities set forth
herein restrain Hillyer's
<PAGE> 12
5. ENTIRE AGREEMENT. This Agreement and the Letter Agreement set
forth the entire agreement between the parties as to the matters covered herein
and supersedes and replaces any prior understanding, agreement or statements
(written or oral). This Agreement shall not be amended or modified without the
written consent of both parties hereto.
6. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the state of Texas.
IN WITNESS WHEREOF, the undersigned have executed this Agreement to be
effective as of the 17th day of September, 1993.
THE ORIGINAL PASTA CO.
By: /s/ GHULAM M. BOMBAYWALA
------------------------------
Ghulam M. Bombaywala, President
/s/ JAMES HILLYER
---------------------------------
James Hillyer
-3-
<PAGE> 13
Page 01 of 01
FILING RECEIPT FOR TRADEMARK APPLICATION
05/10/95
Receipt on the DATE OF FILING of the application for registration and filing
fees is acknowledged for the mark identified below. The DATE OF FILING is
contingent upon the collection of any payment made by check or draft. Your
application will be considered in which it was received and you
will be notified as to the examination thereof. Correspondence should be
expected from the Patent and Trademark Offices in approximately 06 months.
When inquiring about this application, include the SERIAL NUMBER, DATE OF
FILING, OWNER NAME AND MARK.
TMPRE
Mark A. Oathout ATTORNEY
5615 Kirby Drive, Suite 508 REFERENCE NUMBER
Houston, TX 77005 ORIG001
***************************************************************************
* *
* PLEASE REVIEW THE ACCURACY OF THE FILING RECEIPT DATA. *
* *
* A request for correction of any information on this filing receipt *
* should be submitted within 30 days to the following address. *
* ASSISTANT COMMISSIONER FOR TRADEMARKS, 2900 Crystal Drive, *
* Arlington, Va. 22202-3513. The correspondence should be marked to *
* the attention of the Office of Program Control. The Patent and *
* Trademark Office will review the request and make corrections *
* when appropriate. *
* *
***************************************************************************
SERIAL NUMBER: 74/634115 DATE OF FILING: 02/14/1995
MARK: THE ORIGINAL PASTA CO.
MARK TYPE(S): SERVICE MARK
DRAWING TYPE: WORDS, LETTERS, OR NUMBERS AND DESIGN
SECTION 1(A): YES SECTION 1(B): NO SECTION 44: NO
- - --------------------------------------------------------------------------------
ATTORNEY: Mark A. Oathout
OWNER NAME: ORIGINAL PASTA CO., INC., THE
OWNER ADDRESS: 10777 Westheimer, Suite 1030
Houston
TEXAS 77042
ENTITY: CORPORATION
CITIZENSHIP/DOMICILE: TEXAS
- - --------------------------------------------------------------------------------
INTERNATIONAL CLASS DATE OF FIRST USE DATE OF FIRST USE IN COMMERCE
042 04/00/1994 04/00/1994
ONLY THOSE DATES OF USE AND CLASSES FILED UNDER SECTION 1(A) ARE LISTED
- - --------------------------------------------------------------------------------
GOODS/SERVICES BY INTERNATIONAL CLASS
042--restaurant and beverage services
ALL OF THE GOODS/SERVICES IN EACH CLASS ARE LISTED
- - --------------------------------------------------------------------------------
ADDITIONAL INFORMATION MAY BE PRESENT IN THE PTD RECORDS
<PAGE> 14
TRADEMARK MAILROOM Mark A. Oathout
REC'D 5615 Kirby Drive
FEB 14 1995 Suite 508
23 Houston, TX 77005
US PATENT & TRADEMARK OFFICE
Identification of Paper or fee:
Check N: 472; $1570.00
- - -------------------------------
TM APPLICATIONS ENCLOSED & LISTED BELOW:
- - -------------------------------------------
(Nature of Document, I.D. Number, PTO Date)
TM THE ORIGINAL PASTA CO. & design/Class 042 - $245 74634115
TM THE ORIGINAL PASTA CO. & design/Class 030 - $245 74634112
TM MARCO'S MEXICAN RESTAURANT & design/Class 042 - $245 74634111
TM TOTALLY BUENO! & design/Class 042 - $245 74634113
TM TOTALLY BUENO! & design/Class 030 - $245 74634114
TM AMENDMENT OF REGISTRATION N:1631944 - $100
TM WATERMARC/Class 035 - $245 74634116
<PAGE> 15
[ATTACHED CHECK]
Identification of Paper or fee:
Check N: 472; $1570.00
- - -------------------------------
TM APPLICATIONS LISTED BELOW:
- - -------------------------------------------
(Nature of Document, I.D. Number, PTO Date)
TM THE ORIGINAL PASTA CO. & design/Class 042 - $245
TM THE ORIGINAL PASTA CO. & design/Class 030 - $245
TM MARCO'S MEXICAN RESTAURANT & design/Class 042 - $245
TM TOTALLY BUENO! & design/Class 042 - $245
TM TOTALLY BUENO! & design/Class 030 - $245
TM AMENDMENT OF REGISTRATION N:1631944 - $100
TM WATERMARC/Class 035 - $245
<PAGE> 16
IN THE UNITED STATES PATENT AND TRADEMARK OFFICE
MARK: THE ORIGINAL PASTA CO. ) TRADEMARK/SERVICE MARK APPLICATION,
& design ) PRINCIPAL REGISTER WITH DECLARATION
)
)
INTERNATIONAL CLASS NO.: 042 )
) Attorney Docket No. ORIG001
TO THE ASSISTANT SECRETARY AND COMMISSIONER OF PATENTS AND TRADEMARKS:
Applicant Name: THE ORIGINAL PASTA CO., INC.
Applicant Business Address: 10777 Westheimer, Suite 1030
Houston, Texas 77042
Applicant Entity: Corporation-State of Incorporation:
Texas
Goods and/or Services:
================================================================================
Applicant requests registration of the above-identified trademark/
service mark shown in the accompanying drawing in the United
States Patent and Trademark Office on the Principal Register
established by the Act of July 5, 1946 (15 U.S.C. 1051 et.seq., as
amended) for the following goods/services.
restaurant and beverage services
================================================================================
BASIS FOR APPLICATION:
Applicant has adopted and is using the mark shown in the accompanying
drawing in commerce on or in connection with the above-identified goods/
services (15 U.S.C. 1051(a), as amended.) Three specimens showing the mark as
used in commerce are submitted with this application.
Date of first use of the mark anywhere: at least as early as April 1994
Date of first use of the mark in commerce at least as early as
which the U.S. Congress may regulate: April 1994.
Type of Commerce: Interstate
Manner or mode of use of mark on or in connection with the goods/services:
The mark is used in advertising and used other ways
customary in the industry.
1
<PAGE> 17
DECLARATION
The undersigned being hereby warned that willful false
statements and the like are punishable by fine or imprisonment, or both (18
U.S.C. 1001) and may jeopardize the validity of the application or document or
any registration resulting therefrom, declares that declarant is properly
authorized to execute this application on behalf of the applicant; that the
applicant is believed to be the owner of the mark sought to be registered; that
the mark is in use in interstate commerce; that no other entity, to the best of
declarant's knowledge and belief, has the right to use such mark in commerce,
either in the identical form or in such near resemblance as to be likely, when
applied to the goods or services of such other entity, to cause confusion, or
to cause mistake, or to deceive; that the specimens or facsimiles show the mark
as used on or in connection with the goods or services; that the facts set
forth in the application are true; and that all statements made of declarant's
own knowledge are true and that all statements made on information and belief
are believed to be true.
THE ORIGINAL PASTA CO., INC.
By: /s/ GHULAM BOMBAYWALA
----------------------------------------------------
Ghulam Bombaywala, President and Chief Executive
Officer
Date: /s/ Feb 9 '95
--------------------------------------------------
Mark A. Oathout
5615 Kirby Drive, Suite 508
Houston, Texas 77005
(713) 522-6565
ATTORNEY FOR APPLICANT
2
<PAGE> 18
IN THE UNITED STATES PATENT AND TRADEMARK OFFICE
IN RE APPLICATION OF: ) INTERNATIONAL CLASS NO.: 042
THE ORIGINAL PASTA CO., INC. )
)
SERIAL NO.: )
)
FILED: )
)
MARK: THE ORIGINAL PASTA CO. )
& design )
) Attorney Docket No.: ORIG001
POWER OF ATTORNEY
-----------------
Commissioner of Patents and Trademarks:
Washington, D.C. 20281
Sir:
The Original Pasta Co., Inc., owner of record of all right, title and
interest in and to the above-identified trademark and trademark application,
does hereby appoint Mark A. Oathout, Registration No. 33,747 as my attorney in
the above-identified trademark application, with full power to prosecute the
application and transact all business in the Patent and Trademark Office in
connection therewith.
Please address all further communications as follows:
Mark A. Oathout
5615 Kirby Drive, Suite 508
Houston, Texas 77005
(713) 522-6565
THE ORIGINAL PASTA CO., INC.
By: GHULAM BOMBAYWALA
--------------------------------------------------
Ghulam Bombaywala, President and Chief
Executive Officer
Date: Feb 9 95
------------------------------------------------
3
<PAGE> 19
APPLICANT: THE ORIGINAL PASTA CO., INC.
P.O. ADDRESS: 10777 Westheimer, Suite 1030, Houston, Texas 77042
DATE OF FIRST USE: At least as early as April 1994.
DATE OF FIRST USE IN COMMERCE: at least as early as April 1994.
GOODS/SERVICES: restaurant and beverage services.
THE ORIGINAL
PASTA CO.
Attorney Docket No.: ORIG001
Attorney: MARK A. OATHOUT
5615 Kirby Drive, Suite 508
Houston, Texas 77005
(713) 522-6565
4
<PAGE> 20
Page 01 of 01
FILING RECEIPT FOR TRADEMARK APPLICATION
05/10/95
Receipt on the DATE OF FILING of the application for registration and filing
fees is acknowledged for the mark identified below. The DATE OF FILING is
contingent upon the collection of any payment made by check or draft. Your
application will be considered in the order in which it was received and you
will be notified as to the examination thereof. Correspondence should be
expected from the Patent and Trademark Offices in approximately 06 months.
When inquiring about this application, include the SERIAL NUMBER, DATE OF
FILING, OWNER NAME AND MARK.
TMPRE
Mark A. Oathout ATTORNEY
5615 Kirby Drive, Suite 508 REFERENCE NUMBER
Houston, TX 77005 ORIG002
***************************************************************************
* *
* PLEASE REVIEW THE ACCURACY OF THE FILING RECEIPT DATA. *
* *
* A request for correction of any information on this filing receipt *
* should be submitted within 30 days to the following address. *
* ASSISTANT COMMISSIONER FOR TRADEMARKS. 2900 Crystal Drive, *
* Arlington, Va. 22202-3513. The correspondence should be marked to *
* the attention of the Office of Program Control. The Patent and *
* Trademark Office will review the request and make corrections *
* when appropriate. *
* *
***************************************************************************
SERIAL NUMBER: 74/634112 DATE OF FILING: 02/14/1995
MARK: THE ORIGINAL PASTA CO.
MARK TYPE(S): TRADEMARK
DRAWING TYPE: WORDS, LETTERS, OR NUMBERS AND DESIGN
SECTION 1(A): NO SECTION 1(B): YES SECTION 44: NO
- - --------------------------------------------------------------------------------
ATTORNEY: Mark A. Oathout
OWNER NAME: ORIGINAL PASTA CO., INC., THE
OWNER ADDRESS: 10777 Westheimer, Suite 1030
Houston
TEXAS 77042
ENTITY: CORPORATION
CITIZENSHIP/DOMICILE: TEXAS
- - --------------------------------------------------------------------------------
INTERNATIONAL CLASS DATE OF FIRST USE DATE OF FIRST USE IN COMMERCE
ONLY THOSE DATES OF USE AND CLASSES FILED UNDER SECTION 1(A) ARE LISTED
- - --------------------------------------------------------------------------------
GOODS/SERVICES BY INTERNATIONAL CLASS
030--food
032--beverage products
ALL OF THE GOODS/SERVICES IN EACH CLASS ARE LISTED
- - --------------------------------------------------------------------------------
ADDITIONAL INFORMATION MAY BE PRESENT IN THE PTD RECORDS
<PAGE> 21
[ATTACHED CHECK]
Identification of Paper or fee:
Check N: 472; $1570.00
- - -------------------------------
TM APPLICATIONS LISTED BELOW:
- - --------------------------------------------
(Nature of Document. I.D. Number, PTO Date)
TM THE ORIGINAL PASTA CO. & design/Class 042 - $245
TM THE ORIGINAL PASTA CO. & design/Class 030 - $245
TM MARCO'S MEXICAN RESTAURANT & design/Class 042 - $245
TM TOTALLY BUENO! & design/Class 042 - $245
TM TOTALLY BUENO! & design/Class 030 - $245
TM AMENDMENT OF REGISTRATION N:1631944 - $100
TM WATERMARC/Class 035 - $245
<PAGE> 22
IN THE UNITED STATES PATENT AND TRADEMARK OFFICE
MARK: THE ORIGINAL PASTA CO. ) TRADEMARK/SERVICE MARK APPLICATION,
& design ) PRINCIPAL REGISTER WITH DECLARATION
)
)
INTERNATIONAL CLASS NO.: 030 )
) Attorney Docket No. ORIG002
TO THE ASSISTANT SECRETARY AND COMMISSIONER OF PATENTS AND TRADEMARKS:
Applicant's Name: THE ORIGINAL PASTA CO., INC.
Applicant's Business Address: 10777 Westheimer, Suite 1030
Houston, Texas 77042
Applicant Entity: Corporation-State of Incorporation: Texas
Goods and/or Services:
================================================================================
Applicant requests registration of the trademark/service mark
shown in the accompanying drawing in the United States Patent
and Trademark Office on the Principal Register established by
the Act of July 5, 1946 (15 U.S.C. 1051 et. seq., as amended)
for the following goods/services.
food and beverage products
================================================================================
BASIS FOR APPLICATION:
Applicant has a bona fide intention to use the mark shown in the
accompanying drawing in commerce on or in connection with the above-identified
goods/services. (15 U.S.C. 1051(b), as amended.)
Intended manner or mode of use of mark on or in connection with the goods/
services:
applied to commercial packaging and to be used other ways customary in
the industry.
1
<PAGE> 23
DECLARATION
The undersigned being hereby warned that willful false
statements and the like are punishable by fine or imprisonment, or both (18
U.S.C. 1001) and may jeopardize the validity of the application or document or
any registration resulting therefrom, declares that declarant is properly
authorized to execute this application on behalf of the applicant; that the
applicant is believed to be the owner of the mark sought to be registered; or,
if the application is being filed under 15 U.S.C. 1051(b), that the applicant
is believed to be entitled to use such mark in commerce; that the applicant has
a bona fide intention to use the mark in commerce on or in connection with the
specified goods or services; that no other entity, to the best of declarant's
knowledge and belief, has the right to use such mark in commerce, either in
the identical form or in such near resemblance as to be likely, when applied
to the goods or services of such other entity, to cause confusion, or to cause
mistake, or to deceive; that the facts set forth in the application are true;
and that all statements made of declarant's own knowledge are true and that
all statements made on information and belief are believed to be true.
THE ORIGINAL PASTA CO., INC.
By: /s/ GHULAM BOMBAYWALA
----------------------------------------------------
Ghulam Bombaywala, President and Chief
Executive Officer
Date: /s/ Feb 9 '95
--------------------------------------------------
Mark A. Oathout
5615 Kirby Drive, # 508
Houston, Texas 77005
(713) 522-6565
ATTORNEY FOR APPLICANT
2
<PAGE> 24
IN THE UNITED STATES PATENT AND TRADEMARK OFFICE
IN RE APPLICATION OF: ) INTERNATIONAL CLASS NO.: 030
THE ORIGINAL PASTA CO., INC. )
)
SERIAL NO.: )
)
FILED: )
)
MARK: THE ORIGINAL PASTA CO. )
& design )
) Attorney Docket No.: ORIG002
POWER OF ATTORNEY
-----------------
Commissioner of Patents and Trademarks:
Washington, D.C. 20231
Sir:
The Original Pasta Co., Inc., owner of record of all right, title and
interest in and to the above-identified trademark and trademark application,
does hereby appoint Mark A. Oathout, Registration No. 33,747 as my attorney in
the above-identified trademark application, with full power to prosecute the
application and transact all business in the Patent and Trademark Office in
connection therewith.
Please address all further communications as follows:
Mark A. Oathout
5615 Kirby Drive, Suite 508
Houston, Texas 77005
(713) 522-6565
THE ORIGINAL PASTA CO., INC.
Date: Feb 9 95 By: GHULAM BOMBAYWALA
-------- ---------------------------------------------
Ghulam Bombaywala, President and Chief
Executive Officer
3
<PAGE> 25
APPLICANT: THE ORIGINAL PASTA CO., INC.
P.O. ADDRESS: 10777 Westheimer, Suite 1030, Houston, Texas 77042
GOODS/SERVICES: food and beverage products
THE ORIGINAL
PASTA CO.
ATTORNEY DOCKET NO.: ORIG002
ATTORNEY: MARK A. OATHOUT
5615 Kirby Drive, #508
Houston, Texas 77005
(713) 522-6565
4
<PAGE> 1
EXHIBIT 11.1
<PAGE> 2
Exhibit 11.1
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARES
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JUNE 30, 1996 JULY 2, 1995 JULY 3, 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Computation of primary earnings (loss) per
common and common equivalent shares:
Net loss applicable to common stock ($247,890) ($7,331,421) ($8,660,572)
============== ============== ==============
Weighted average number of common shares outstanding 12,040,163 8,921,543 7,894,816
============== ============== ==============
Primary loss per common share ($0.02) ($0.82) ($1.10)
============== ============== ==============
Computation of earnings (loss) per common share
assuming full dilution (A):
Net loss applicable to common stock ($247,890) ($7,331,421) ($8,660,572)
Dividends on preferred stock 296,586 294,680 300,591
Interest on 9% convertible subordinated debentures 19,530 222,660 66,000
-------------- -------------- --------------
Income (loss) assuming full dilution $ 68,226 $ (6,814,081) $ (8,293,981)
============== ============== ==============
Weighted average number of shares outstanding 12,040,163 10,003,426 7,894,816
Common shares issuable from stock option plans
and from warrants 3,121,633 2,814,320 1,624,900
Less shares assumed repurchased with proceeds (6,098,472) (3,620,946) (1,107,472)
Shares assumed issued upon conversion of preferred stock 411,925 411,925 450,414
Shares assumed issued upon conversion of 9%
subordinated debentures 43,400 43,400 134,550
-------------- -------------- --------------
Common shares outstanding assuming full dilution 9,518,649 9,652,125 8,997,208
============== ============== ==============
Earnings (loss) per common and common equivalent
share assuming full dilution $ 0.01 ($0.71) ($0.92)
============== ============== ==============
</TABLE>
(A) This calculation is submitted in accordance with the Securities and
Exchange Act of 1934, Release No. 9083, although it is contrary to
paragraph 40 of APB Opinion No. 15 because it produced an anti-dilutive
result.
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
BILLY BLUES FOOD CORPORATION OF COLORADO, A COLORADO CORPORATION
BILLY BLUES FOOD CORPORATION OF ARIZONA, AN ARIZONA CORPORATION
BILLY BLUES HOLDING, S.A., A SWISS CORPORATION
J II Z, INC., A TEXAS CORPORATION
LCU, INC., A TEXAS CORPORATION
MARCO'S MEXICAN RESTAURANTS, INC., A TEXAS CORPORATION
PETE'S HOSPITALITY CO., INC., A WASHINGTON CORPORATION
THE ORIGINAL PASTA CO., A TEXAS CORPORATION
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) CONSOLIDATED FINANCIAL STATEMENTS IN FORM
10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-03-1995
<PERIOD-END> JUN-30-1996
<CASH> 463,166
<SECURITIES> 0
<RECEIVABLES> 650,184
<ALLOWANCES> 0
<INVENTORY> 715,538
<CURRENT-ASSETS> 1,934,667
<PP&E> 17,827,257
<DEPRECIATION> 8,498,731
<TOTAL-ASSETS> 25,864,710
<CURRENT-LIABILITIES> 6,419,570
<BONDS> 0
<COMMON> 671,682
0
329,540
<OTHER-SE> 7,240,075
<TOTAL-LIABILITY-AND-EQUITY> 25,864,710
<SALES> 40,129,443
<TOTAL-REVENUES> 40,129,443
<CGS> 12,473,652
<TOTAL-COSTS> 40,101,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 850,224
<INCOME-PRETAX> 48,696
<INCOME-TAX> 0
<INCOME-CONTINUING> 48,696
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,696
<EPS-PRIMARY> (.02)
<EPS-DILUTED> .01
</TABLE>
