<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(b) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) May 15, 1997
----------------------------
WATERMARC FOOD MANAGEMENT CO.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Texas
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-20143 74-2605598
- --------------------------------- -------------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
11111 Wilcrest Green, Suite 350, Houston, Texas 77042
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(713) 783-0500
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
INFORMATION INCLUDED IN REPORT ON 8-K
ITEM 5. OTHER EVENTS
On September 14, 1995, The Original Pasta Co., executed Promissory Notes (the
"Notes") in the principal amounts of $2,750,000 and $1,000,000 in favor of
Ghulam M. Bombaywala, Chairman of the Board and Chief Executive Officer of the
Company, in connection with the acquisition of The Original Pasta Co. by the
Company. On May 15, 1997 Mr. Bombaywala and the Company entered into a
Conversion and Offset Agreement (attached hereto as Exhibit 99.1 to the
Company's Form 10-Q and incorporated herein by reference) whereby the parties to
the Notes agreed to convert the $3,750,000 of debt evidenced by the Notes to
7,500,000 Common Stock Rights (the "Rights"). Each of the Rights can be
converted to one share of the Company's Common Stock at a later date assuming
the Company has a sufficient number of shares authorized and freely issuable. In
exchange for the Rights, Mr. Bombaywala forgave the Notes. The Company intends
to proceed with an amendment to its Articles of Incorporation to increase its
authorized Common Stock to a sufficient level to enable it to issue all of the
shares. However, there can be no assurance that such amendment will be
adopted.
The Company also agreed with Mr. Bombaywala to offset $819,202 in additional
notes payable to, against notes receivable from, Mr. Bombaywala.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The Company's Form 10-Q for the period ending March 30, 1997 is
incorporated herein by reference and attached hereto as Exhibit 1.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Watermarc Food Management Co.
------------------------------------------
(Registrant)
Date May 19, 1997 By /s/ THOMAS J. BUCKLEY
---------------------- ----------------------------------------
(Signature)
By Thomas J. Buckley
----------------------------------------
Title Chief Financial Officer
-------------------------------------
<PAGE> 3
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
1 10-Q for the period ending March 30, 1997.
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 30, 1997
--------------
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
--------------------------- ------------------
Commission File Number: 0-20143
------------------------------------------------------
Watermarc Food Management Co.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-2605598
- ------------------------------- ------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11111 Wilcrest Green, Suite 350 Houston, Texas 77042
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 783-0500
- -------------------------------------------------------------------------------
(Registrant's telephone number)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
As of March 30, 1997, the registrant had 13,670,847 shares of its common stock
and 329,540 shares of its preferred stock outstanding, respectively.
<PAGE> 2
WATERMARC FOOD MANAGEMENT CO.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - 2
March 30, 1997 and June 30, 1996
Condensed Consolidated Statements of Operations - 3
Thirteen Weeks Ended
March 30, 1997 and March 31, 1996
Condensed Consolidated Statements of Operations - 4
Thirty-nine Weeks Ended
March 30, 1997 and March 31, 1996
Condensed Consolidated Statements of Cash Flow - 5
Thirty-nine Weeks Ended
March 30, 1997 and March 31, 1996
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 9
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 12
</TABLE>
1
<PAGE> 3
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 30, 1997 JUNE 30, 1996
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 56,806 $ 463,166
Accounts receivable, trade 522,590 397,744
Accounts receivable from affiliates 421,470 252,440
Inventories 507,961 715,538
Prepaid expenses and other current assets 515,780 105,779
----------- -----------
Total current assets 2,024,607 1,934,667
Property and equipment, net 8,293,756 9,328,526
Notes and other receivable from affiliate 2,217,784 2,217,784
Intangible assets, net 11,594,726 12,200,047
Other assets 177,087 183,686
----------- -----------
$24,307,960 $25,864,710
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 4,667,015 $ 3,186,690
Accrued liabilities 1,813,212 1,831,055
Current portion of long-term debt and note payable
to stockholder 3,997,863 1,401,825
----------- -----------
Total current liabilities 10,478,090 6,419,570
Long-term debt, less current portion 3,485,840 5,698,692
Notes payable to stockholder 4,569,202 5,069,202
Deferred rent 434,510 435,949
Commitments and contingencies
Stockholders' equity:
Preferred stock 329,540 329,540
Common stock 671,682 671,682
Additional paid-in capital 26,639,641 26,640,385
Accumulated deficit (22,150,545) (19,400,310)
Treasury stock (150,000) 0
----------- -----------
Total stockholders' equity 5,340,318 8,241,297
----------- -----------
$24,307,960 $25,864,710
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
2
<PAGE> 4
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
MARCH 30, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Revenues $11,427,721 $10,118,214
----------- -----------
Costs and expenses:
Costs of revenues 3,668,951 3,121,995
Other restaurant operations 7,548,932 5,710,491
Selling, marketing and distribution 516,590 208,970
General and administrative 770,228 518,662
Depreciation and amortization 648,949 636,044
----------- -----------
Total costs and expenses 13,153,650 10,196,162
----------- -----------
Income (loss) from operations (1,725,929) (77,948)
Non-operating income (expense):
Interest income 30,038 30,760
Interest expense (327,331) (258,665)
Other, net 28,293 208,963
----------- -----------
Total non-operating income (expense) (269,000) (18,942)
----------- -----------
Income (loss) before income taxes (1,994,929) (96,890)
Income taxes - -
----------- -----------
Net income (loss) (1,994,929) (96,890)
Preferred stock dividends 74,732 74,732
----------- -----------
Net income (loss) less preferred stock dividends $(2,069,661) $ (171,622)
=========== ===========
Net income (loss) per common share $ (0.15) $ (0.01)
=========== ===========
Weighted average common and common equivalent
shares outstanding 13,631,750 12,662,160
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
3
<PAGE> 5
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
MARCH 30, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Revenues $33,374,792 $28,003,586
----------- -----------
Costs and expenses:
Costs of revenues 10,257,935 8,695,945
Other restaurant operations 19,884,104 14,868,223
Selling, marketing and distribution 1,389,230 1,057,191
General and administrative 2,126,998 1,786,013
Depreciation and amortization 1,928,454 1,554,489
----------- -----------
Total costs and expenses 35,586,721 27,961,861
----------- -----------
Income (loss) from operations (2,211,929) 41,725
Non-operating income (expense):
Interest income 87,494 126,724
Interest expense (945,240) (578,039)
Other, net 319,440 487,515
----------- -----------
Total non-operating income (expense) (538,306) 36,200
----------- -----------
Income (loss) before income taxes (2,750,235) 77,925
Income taxes - -
----------- -----------
Net income (loss) (2,750,235) 77,925
Preferred stock dividends 222,447 223,030
----------- -----------
Net income (loss) less preferred stock dividends $(2,972,682) $ (145,105)
=========== ===========
Net income (loss) per common share $ (0.22) $ (0.01)
=========== ===========
Weighted average common and common equivalent
shares outstanding 13,499,689 11,650,166
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
4
<PAGE> 6
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
MARCH 30, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Operating activities:
Net income (loss) for the period $(2,750,235) $ 77,925
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 1,928,454 1,554,489
Changes in assets and liabilities:
Accounts receivable, trade (124,846) (259,206)
Accounts receivable from affiliates (169,030) (348,805)
Inventories 207,577 (81,080)
Prepaid expenses and other current assets (410,005) (236,927)
Accounts payable and accrued liabilities 1,760,998 (448,243)
Other assets 6,600 623,903
----------- ------------
Net cash provided by operating activities 449,513 882,056
----------- ------------
Investing activities:
Purchase of property and equipment (1,038,363) (1,654,003)
Repayment of notes receivable 0 6,500
Proceeds from sale of equipment 750,000 0
Cost of acquisitions, net of cash acquired 0 (231,745)
----------- ------------
Net cash provided by (used in) investing activities (288,363) (1,879,248)
----------- ------------
Financing activities:
Net proceeds from borrowings 598,365 315,863
Payments on notes payable to affiliates 0 (150,000)
Payments on other borrowings (1,015,179) (1,133,716)
Cash dividends on preferred stock (696) 0
Purchase of treasury stock (150,000) 0
----------- ------------
Net cash provided by (used in) financing activities (567,510) (967,853)
----------- ------------
Net (decrease) increase in cash and cash equivalents (406,360) (1,965,045)
Cash and cash equivalents, beginning of period 463,166 2,101,729
----------- ------------
Cash and cash equivalents, end of period $ 56,806 $ 136,684
=========== ============
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
5
<PAGE> 7
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Watermarc Food Management Co. (The "Company"), owns and operates 43
restaurants, primarily in the Houston Metropolitan area, under the names
"Marco's Mexican Restaurants"; "The Original Pasta Co."; "Billy Blues";
"Longhorn Cafe"; "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.
BASIS OF PRESENTATION
The accompanying unaudited financial information includes the results of
operations of the Company for the thirteen week and thirty-nine week
periods ended March 30, 1997 and March 31, 1996. In the opinion of
management, the information reflects all adjustments (consisting only of
normal recurring adjustments) which are necessary for a fair presentation
of the results of operations for the periods presented but should not be
considered as indicative of results for a full year.
The June 30, 1996 condensed consolidated balance sheet data was derived
from the audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. Accordingly, the
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements.
The accompanying financial statements have been prepared assuming the
Company will be able to continue as a going concern. The Company has a
working capital deficit of approximately $8.5 million at March 30, 1997 and
a net loss of $2,750,235 for the thirty-nine weeks ended March 30, 1997.
The Company's continuation as a going concern in both the short-term and
the long-term 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. For a further discussion
of the Company's liquidity and capital resources, see pages 11 and 12
hereof.
Management's plans include the following:
o Increasing revenues in existing restaurants by improving marketing
programs and customer service and by remodeling certain Marco's
Mexican Restaurants when and if funds become available.
o Franchising new restaurants.
o Reducing costs.
o Obtaining additional equity capital or debt financing.
o Refinancing debt, primarily $3 million in Subordinated Notes due in
July of 1997.
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 accounting method prescribed
by APB Opinion No. 25 and disclose the pro-forma effects of the SFAS No.
123 method. The Company has decided to continue to use the accounting
method prescribed by APB Opinion No. 25 and to adopt the disclosure
requirements of SFAS No. 123.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which
changes the computation and presentation of Earnings Per Share. Companies
will be required to present basic and diluted earnings per share on
the face of the Statement of Operations. The statement is effective
December 15, 1997. The Company does not expect any material impact on its
earnings per share due to the implementation of SFAS No. 128.
6
<PAGE> 8
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of income and expenses during
the reporting periods. Actual results could differ from those estimated.
2. CONTINGENCIES:
The Company is involved in various lawsuits arising in the ordinary course
of its business, but believes that the resolution of these matters will not
have a material adverse impact on its financial position, results of
operations or cash flows.
3. BUSINESS COMBINATIONS:
Effective January 26, 1996, the Company acquired all of the outstanding
common stock of The Original Pasta Co. (Pasta Co.). The purchase price was
$6,666,667, consisting of $3,750,000 of notes and the issuance of 1,666,667
shares of the Company's common stock valued at $2,916,667. 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 over the fair value of
the net assets acquired 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 the period presented:
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
MARCH 31, 1996 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Revenues $10,897,038 $33,772,816
Net Income (loss) (216,995) (761,584)
Net loss per common share (.02) (.08)
</TABLE>
4. ISSUANCE OF COMMON STOCK:
In January of 1997, the Company issued 237,189 shares of common stock as
payment of a dividend to Preferred Stockholders.
5. RELATED PARTY TRANSACTIONS:
In October 1996, the Company sold equipment associated with three of its
restaurants to Ghulam Bombaywala, the majority shareholder, officer and a
director of the Company, and subsequently leased the assets back from Mr.
Bombaywala. The Company believes that the selling price of $750,000 and
the lease rate are comparable to those which could be attained from an
unrelated third party. There was no gain or loss to the Company on this
transaction.
7
<PAGE> 9
6. SUBSEQUENT EVENTS:
In April 1997, the Company agreed to sell equipment associated with three
new restaurants to Mr. Bombaywala and lease the assets back. The three
restaurants are to be opened in the fourth quarter of fiscal 1997. The
Company believes that the selling price of $750,000 and the lease rate are
comparable to those which could be attained from an unrelated third party.
There was no gain or loss to the Company on this transaction.
On September 14, 1995, The Original Pasta Co., executed Promissory Notes
(the "Notes") in the principal amounts of $2,750,000 and $1,000,000 in
favor of Mr. Bombaywala, in connection with the acquisition of The Original
Pasta Co. by the Company. On May 15, 1997 Mr. Bombaywala and the Company
entered into a Conversion and Offset Agreement (attached hereto as
Exhibit 99.1 and incorporated herein by reference) whereby the parties to
the Notes agreed to convert the $3,750,000 of debt evidenced by the Notes
to 7,500,000 Common Stock Rights (the "Rights"). Each of the Rights can be
converted to one share of the Company's Common Stock at a later date
assuming the Company has a sufficient number of shares authorized and
freely issuable. In exchange for the Rights, Mr. Bombaywala forgave the
Notes. The Company intends to proceed with an amendment to its Articles of
Incorporation to increase its authorized Common Stock to a sufficient level
to enable it to issue all of the shares. However, there can be no
assurance that such amendment will be adopted.
The Company also agreed with Mr. Bombaywala to offset $819,202 in
additional notes payable to, against notes receivable from, Mr. Bombaywala.
The following table presents the capitalization of the Company as of March
30, 1997 as reported and on a pro forma basis assuming the conversion and
offset had occurred on that date (in thousands):
<TABLE>
<CAPTION>
MARCH 30, 1997
-------------------------
AS REPORTED PRO FORMA
----------- ---------
(Unaudited)
<S> <C> <C>
Long-Term Debt and Other
Obligations, Including
Current Portion:
Long-term debt $ 7,484 $ 7,484
Notes payable to stockholder 4,569 0
Deferred Rent 435 435
-------- --------
$ 12,488 $ 7,919
======== ========
Stockholders' Equity:
Preferred stock $329 $329
Common stock 672 672
Additional paid-in capital 26,640 30,390
Accumulated deficit (22,151) (22,151)
-------- --------
Treasury stock (150) (150)
-------- --------
$ 5,340 $ 9,090
======== ========
</TABLE>
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
The Company utilizes a 52-53 week fiscal year which ends on the Sunday
closest to June 30. References to the third quarter of fiscal years 1997
and 1996 are to the thirteen week periods ended March 30, 1997 and March
31, 1996 respectively. References to the first three quarters of fiscal
year 1997 and 1996 are to the thirty-nine week periods ending on those same
dates.
Effective January 26, 1996, the Company acquired The Original Pasta Co.
which operated a chain of ten restaurants (the "Pasta Co. Restaurants").
The acquisition was accounted for as a purchase, and no revenues or
expenses are reported for past periods. Cost percentages for the acquired
restaurants are similar to those of the Company's existing restaurant
operations.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 31, 1996 COMPARED TO THE
THIRTEEN WEEKS ENDED MARCH 30, 1997.
REVENUES. Revenues increased $1,309,507 or 11.5% to $11,427,721 for the
third quarter of fiscal 1997 as compared to $10,118,214 for the third
quarter of fiscal 1996. Revenues attributable to the Pasta Co. Restaurants
were $3,617,670 in the third quarter of fiscal 1997 as compared to
$1,888,397 in the third quarter of fiscal 1996. The increase of $1,729,273
is attributable to the fact that revenues from Pasta Co. Restaurants were
only included for two months of the third quarter of fiscal 1996 along with
the fact that five additional restaurants were opened by the third quarter
of fiscal 1997. Remaining revenues decreased by $419,766. This decrease
is due to the sale of a Longhorn Cafe restaurant during fiscal 1996, and a
decline in comparable restaurant revenues. The Company believes the decline
in comparable revenues was related to competitive conditions and a general
softness in restaurant sales in the Company's Houston, Texas market.
To counteract the decline in comparable revenues, management has taken
action to increase sales, including stepped-up marketing and promotional
activities and restaurant remodeling. There can be no assurance that such
actions will result in the desired sales increases.
COSTS AND EXPENSES. Total cost of revenues increased to 32.1% of revenues
in 1997 as compared to 30.9% of revenues in 1996. The increase is due to
higher raw product costs experienced in 1997.
Restaurant operations include all other unit-level operating expenses,
comprised principally of labor, supplies, rent, utilities, repairs and
maintenance, and other direct expenses. As a percentage of restaurant
revenues, these costs increased from 56.4% of revenues in fiscal 1996 to
66.1% of revenues in fiscal 1997 primarily due to the decline in comparable
sales, since a number of these expenses are fixed or indirectly variable.
Labor expense also increased due to an increase in the federal minimum wage
rate in October 1996.
Selling, marketing and distribution expenses increased from 2.1% of
revenues to 4.5% of revenues due to stepped-up marketing and promotional
activities.
General and administrative expenses increased by $251,566 primarily due to
the acquisition of the Pasta Co. Restaurants.
9
<PAGE> 11
Depreciation and amortization increased by $12,905 primarily due to the
acquisition of the Pasta Co. Restaurants, offset by reductions due to
assets becoming fully depreciated or amortized.
NON-OPERATING INCOME (EXPENSE). Interest expense increased by $68,666 due
to interest accrued on notes payable associated with the acquisition of the
Pasta Co. Restaurants, partially offset by reductions in other interest
bearing debt.
NET INCOME (LOSS). As a result of the changes in the relationship between
revenues and costs and expenses discussed above, the Company reported a net
loss of $1,994,929 for the third quarter of fiscal 1997 compared to a net
loss of $96,890 for the third quarter of fiscal 1996. The fiscal 1997 loss is
generally due to increasing costs along with declining comparable revenues. If
such trends continue, the Company will incur substantial losses in the future
which would have a material impact upon its cash flow.
THIRTY-NINE WEEKS ENDED MARCH 31, 1996 COMPARED TO THE
THIRTY-NINE WEEKS ENDED MARCH 30, 1997.
REVENUES. Revenues increased $5,371,206 or 16.1% to $33,374,792 for the first
three quarters of fiscal 1997 as compared to $28,003,586 for the first three
quarters of fiscal 1996. Revenues attributable to the Pasta Co. Restaurants
were $10,042,662 compared to $1,888,397 included in fiscal 1996. Remaining
revenues decreased by $2,783,059. Approximately $390,000 of this decline is
due to revenues associated with a fair held in the State of Washington. The
Company participated in the fair in fiscal 1996, but not in fiscal 1997. The
remainder of the decrease is due to the sale of a Longhorn Cafe restaurant
during fiscal 1996, severe weather in the Company's Seattle, Washington market
and a decline in comparable restaurant revenues. The Company believes the
decline in comparable revenues was related to competitive conditions and a
general softness in restaurant sales in the Company's Houston, Texas market.
COSTS AND EXPENSES. Total cost of revenues decreased to 30.7% of revenues
in 1997 as compared to 31.1% of revenues in 1996. The decline is due to
operational efficiencies introduced by management, partially offset by
higher raw product costs.
Restaurant operations include all other unit-level operating expenses,
comprised principally of labor, supplies, rent, utilities, repairs and
maintenance, and other direct expenses. As a percentage of restaurant
revenues, these costs increased from 53.1% of revenues in fiscal 1996 to
59.6% of revenues in fiscal 1997 primarily due to the decline in comparable
sales, since a number of these expenses are fixed or indirectly variable.
Labor expense also increased due to an increase in the federal minimum wage
rate in October 1996.
Selling, marketing and distribution expenses increased from 3.8% of
revenues to 4.2% of revenues due to stepped-up marketing and promotional
activities.
General and administrative expenses increased by $340,985 primarily due to
the acquisition of the Pasta Co. Restaurants.
Depreciation and amortization increased by $373,965 primarily due to the
acquisition of the Pasta Co. Restaurants, partially offset by reductions
due to assets becoming fully depreciated or amortized.
NON-OPERATING INCOME (EXPENSE). Interest expense increased by $367,201 due
to interest accrued on notes payable associated with the acquisition of the
Pasta Co. Restaurants, partially offset by reductions in other interest
bearing debt.
NET INCOME (LOSS). As a result of the changes in the relationship between
revenues and costs and expenses discussed above, the Company reported a net
loss of $2,750,235 for the first three quarters of fiscal 1997 compared to
net income of $77,925 for the first three quarters of fiscal 1996.
10
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Company continues to experience substantial
losses from operations and, as of March 30, 1997, has an accumulated
deficit of $22,150,545.
The Company anticipates an additional loss in the fourth quarter of fiscal
1997. There can be no assurance that the Company will be profitable in the
future or that its losses will decline.
These losses raise doubt about the Company's ability to continue as a going
concern. The financial statements do not reflect any adjustments that
might result from the outcome of this uncertainty. 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 ultimately to attain profitable
operations.
If substantial losses continue, the value of certain of the Company's
long-lived assets may become impaired. If so, the Company would be required
to write-down the book value of these assets to their fair value. The
Company may also consider disposing of certain under-performing assets.
During the thirty-nine weeks ended March 30, 1997, net cash provided by
operating activities was $449,513 which resulted from an increase in
accounts payable and accrued liabilities offset by a net loss less non-cash
expenses. Investing activities used $288,363 in cash due to purchases of
property and equipment partially offset by the sale of fixed assets.
Financing activities utilized $567,510 in cash due to payments on borrowings
and the purchase of treasury stock partially offset by new borrowings.
For the thirty-nine weeks ended March 31, 1996, net cash provided by
operating activities was $882,056 due primarily to a net profit plus
non-cash expenses. Investing activities utilized $1,879,248 primarily due
to the purchase of property and equipment. Financing activities used $967,853
in cash due primarily to payments on borrowings.
As of March 30, 1997, the Company had negative working capital of
$8,453,483, as compared to negative working capital of $4,484,903 at June
30, 1996. The increase is due primarily to $3 million in Subordinated
Notes being classified as a current liability as of March 30, 1997 and due
to an increase in accounts payable.
CAPITAL REQUIREMENTS. The Company renegotiated the payment terms of its $3
million 12% Subordinated Notes which were due on March 31, 1996. All
principal and remaining interest is now due on July 31, 1997. It is unlikely
that payment terms can be re-negotiated or extended again and the Company will
therefore be required to pay these notes when due. There is no assurance that
funds will be available to make timely payment. The Notes are collateralized
by the stock of Marco's Mexican Restaurants, Inc. and a default could result
in foreclosure. Revenues from Marco's Mexican Restaurants currently constitute
approximately 48% of the Company's total revenues. The loss of or a
substantial reduction in such revenues would have a material adverse impact on
the Company and its ability to continue as a going concern. The Company is
currently seeking additional financing to provide funds for timely payment.
However, there is no assurance that such funds will be obtained on a timely
basis or at all.
The material capital commitments of the Company over the coming year are
related to:
o Reduction of the Company's working capital deficit, including
payments on notes, accounts payable and accrued liabilities.
o Refinancing the Subordinated Notes.
11
<PAGE> 13
By the end of fiscal 1997, the Company expects to have opened five additional
Pasta Co. Restaurants, two of which have already been opened and the other
three are under construction. The Pasta Co. Restaurants require an initial
capital investment of approximately $400,000 each, or a total investment of
approximately $2 million to open the five restaurants. The Company has
financed these expenditures through cash flow from operations and from
additional outside financing. There is no assurance that such funds will
be available for further expansion, especially considering the Company's
current cash flow and its upcoming debt service requirements.
Cash generated from operations will not be sufficient to meet these
commitments. Without additional debt or equity financing in the
short-term, the Company may not be able to repay the $3 million in 12%
Subordinated Notes due July 31, 1997 or reduce its current working capital
deficit. There is no assurance that such debt or equity financing will
become available.
The inability of the Company to obtain such financing and achieve improved
operating results could result in the curtailment by the Company of its
expansion activities and restructuring and/or downsizing of the Company's
operations, including the sale of material assets of the Company.
FORWARD LOOKING INFORMATION
The statements contained in this report on Form 10-Q which are not
historical facts, including, but not limited to, statements found under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations", are based on current expectations that involve a
number of risks and uncertainties. The Company cannot provide any
assurance that these expectations will actually be met. The factors that
could cause actual results to differ materially from those described in the
forward-looking statements include, but are not limited to, the following:
changes in general economic and financial conditions within the markets
that the Company serves; changes in the political and/or regulatory
environments in which the Company operates; changes in consumer demand for
the Company's products and services; competitive factors; and other risk
factors described from time to time in the Company's Securities and
Exchange Commission filings. The actual results of the future events
described in such forward-looking statements in this Form 10-Q could differ
materially from those contemplated by such forward-looking statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 11.1 and 99.1 required by Item 601 of Regulation S-K are filed
as part of this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WATERMARC FOOD MANAGEMENT CO.
Date: May 19, 1997 By: /s/ Thomas J. Buckley
------------------- ------------------------------------------
Thomas J. Buckley
Chief Financial Officer
(Duly Authorized Signatory and
Principal Financial & Accounting Officer)
12
<PAGE> 14
WATERMARC FOOD MANAGEMENT CO.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
11.1. Watermarc Food Management Co. and Subsidiaries -
Computation of Earnings (Loss) Per Common and Common
Equivalent Shares
27 Financial Data Schedule
99.1 Conversion and Exchange Agreement
</TABLE>
<PAGE> 15
EXHIBIT 11.1 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES
<TABLE>
<CAPTION>
13 WEEKS ENDED
MARCH 30, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Computation of primary earnings (loss) per
common and common equivalent shares:
Net earnings (loss) applicable to common stock $ (2,069,661) $ (171,622)
============ ============
Weighted average number of common shares outstanding 13,631,750 12,662,160
============ ============
Primary earnings (loss) per common share ($0.15) ($0.01)
============ ============
Computation of earnings (loss) per common share
assuming full dilution (A):
Net earnings (loss) applicable to common stock $ (2,069,661) $ (171,622)
Dividends on preferred stock 74,732 74,732
Interest on 9% convertible subordinated debentures 4,882 4,882
------------ ------------
Earnings (loss) assuming full dilution $(1,990,047) $ (92,008)
============ ============
Weighted average number of shares outstanding 13,631,750 12,662,160
Common shares issuable from stock option plans
and from warrants 0 3,319,070
Less shares assumed repurchased with proceeds 0 (9,855,519)
Shares assumed issued upon conversion of
preferred stock 411,925 411,925
Shares assumed issued upon conversion of 9%
subordinated debentures 43,400 43,400
------------ ------------
Common shares outstanding assuming full dilution 14,087,075 6,581,036
============ ============
Earnings (loss) per common and common equivalent
share assuming full dilution $ (0.14) $ (0.01)
============ ============
</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> 16
EXHIBIT 11.1 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES
<TABLE>
<CAPTION>
39 Weeks Ended
March 30, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Computation of primary earnings (loss) per
common and common equivalent shares:
Net earnings (loss) applicable to common stock $ (2,972,682) $ (145,105)
============ ============
Weighted average number of common shares outstanding 13,499,689 11,650,166
============ ============
Primary earnings (loss) per common share $ (0.22) $ (0.01)
============ ============
Computation of earnings (loss) per common share
assuming full dilution (A):
Net earnings (loss) applicable to common stock $ (2,972,682) $ (145,105)
Dividends on preferred stock 222,447 223,030
Interest on 9% convertible subordinated debentures 14,646 14,646
------------ ------------
Earnings (loss) assuming full dilution $ (2,735,589) $ 92,571
============ ============
Weighted average number of shares outstanding 13,499,689 11,650,166
Common shares issuable from stock option plans
and from warrants 0 3,305,737
Less shares assumed repurchased with proceeds 0 (8,647,880)
Shares assumed issued upon conversion of
preferred stock 411,925 411,925
Shares assumed issued upon conversion of 9%
subordinated debentures 43,400 43,400
------------ ------------
Common shares outstanding assuming full dilution 13,955,014 6,763,348
============ ============
Earnings (loss) per common and common equivalent
share assuming full dilution $ 0.20 $ (0.01)
============ ============
</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> 17
EXHIBIT 99.1
CONVERSION AND OFFSET AGREEMENT
This Agreement is made effective as of the 15th day of May, 1997, by
and between The Original Pasta Co., a Texas corporation f/k/a Pasta Acquisition
Co. ("Pasta Co."), Marco's Mexican Restaurants, Inc., a Texas corporation
("Marco's"), both wholly owned subsidiaries of Watermarc Food Management Co.,
Watermarc Food Management Co., a Texas corporation ("Watermarc"), and Ghulam
M. Bombaywala, (hereafter jointly referred to as "the Parties").
WHEREAS, on the 14th day of September 1995, Pasta Co. executed a note
in the principal amount of Two Million Seven Hundred Fifty Thousand Dollars
($2,750,000.00) in favor of Ghulam M. Bombaywala; and
WHEREAS, on the 14th day of September 1995, Pasta Co. executed a note
in the principal amount of One Million Dollars ($1,000,000.00) in favor of
Ghulam M. Bombaywala (both notes hereafter jointly referred to as the "Notes");
and
WHEREAS, the Notes were guaranteed by Watermarc pursuant to a Guaranty
Agreement dated September 14, 1995, in favor of Mr. Bombaywala; and
WHEREAS, the Parties wish to convert the Notes payable by Pasta Co. to
Mr. Bombaywala in the total principal amount of Three Million Seven Hundred
Fifty Thousand Dollars ($3,750,000.00) for Seven Million Five Hundred Thousand
(7,500,000) shares (the "Shares") of the common stock of Watermarc, $.05 par
value (the "Common Stock") and/or the right to receive the Shares at a later
date as hereinafter described in Section 2 hereof (the "Rights"); and
WHEREAS, on the 26th day of January 1996, Pasta Co. executed notes in
the principal amounts of Two Hundred Twenty Four Thousand Two Hundred Two
Dollars ($224,202.00) and Five Hundred Ninety Five Thousand Dollars
($595,000.00) in favor of Ghulam M. Bombaywala (hereafter jointly referred to as
the "Exchange Notes"); and
WHEREAS, on the 31st day of July 1994, Ghulam M. Bombaywala executed a
note in the principal amount of Two Million One Hundred Seventy Five Thousand
Three Hundred Ten Dollars and Forty Cents ($2,175,310.40) in favor of Marco's
(the "Marco's Note"); and
WHEREAS, the Parties wish to offset the Exchange Notes so that the
collective principal amount of Eight Hundred Nineteen Thousand Two Hundred Two
Dollars ($819,202.00) due to Mr. Bombaywala shall be offset against the Marco's
Note due to Marco's; and
<PAGE> 18
NOW, THEREFORE, for and in consideration of the premises hereunder,
the Parties agree as follows:
1. Ghulam M. Bombaywala forgives and forever discharges the
following Notes owed to him by Pasta Co. in the total principal sum of Three
Million Seven Hundred Fifty Thousand Dollars ($3,750,000.00), together with all
interest, accrued and unaccrued, and forever releases and discharges Watermarc
from its corporate guarantee of such obligations:
That certain Promissory Note dated September 14, 1995 by and
between Pasta Acquisition Co., as Maker, and Ghulam M.
Bombaywala, as Payee, in the amount of Two Million Seven
Hundred Fifty Thousand Dollars ($2,750,000.00) attached
hereto as Exhibit A ; and
That certain Promissory Note dated September 14, 1995 by and
between Pasta Acquisition Co., as Maker, and Ghulam M.
Bombaywala, as Payee, in the amount of One Million Dollars
($1,000,000.00) attached hereto as Exhibit B; and
2. Mr. Bombaywala shall have the right to receive Seven Million
Five Hundred Thousand (7,500,000) Shares of Watermarc's Common Stock based upon
a value of Fifty Cents ($.50) per share (hereinafter referred to as "Rights").
The Parties acknowledge and agree that the Shares cannot be issued immediately
due to insufficient authorized shares of Common Stock of Watermarc and
Watermarc's obligation to reserve shares of Common Stock for future issuances
pursuant to outstanding obligations, including those related to its outstanding
Series A Warrants, its 9% Cumulative Convertible Preferred Stock and other
warrant or option agreements. In addition, Watermarc desires to retain a portion
of its authorized but unissued Common Stock for general corporate purposes.
Accordingly, the Parties agree that Watermarc may issue some portion of the
Shares prior to the shareholder's meeting (the "Meeting") referred to below as
determined by the Board of Directors of Watermarc in its sole discretion. All
Shares not approved and issued by the Board of Directors prior to the Meeting
shall be issued if and only if Watermarc receives shareholder approval at the
Meeting of an increase in Watermarc's authorized shares of Common Stock or a
reverse stock split (which would have the effect of increasing Watermarc's
authorized but unissued shares of Common Stock), which Watermarc shall
diligently seek at the next annual or other Meeting of shareholders.
<PAGE> 19
3. The Rights of Mr. Bombaywala to receive the Shares (or any
unissued portion of the Shares) shall be proportionately adjusted to reflect
any share combinations, divisions, stock splits, reverse stock splits, stock
dividends or other increases or decreases in Common Stock that proportionately
affect all holders of the Common Stock and he shall have, with respect to the
Rights, the right to receive a proportionate share of any consideration or
securities as a result of any exchange, reclassification, reorganization,
merger, business combination or other transaction on the same basis as any
holders of the outstanding shares of Common Stock.
4. Ghulam M. Bombaywala forgives and forever discharges the
Exchange Notes owed to him by Pasta Co. in the total principal sum of Eight
Hundred Nineteen Thousand Two Hundred Two Dollars ($819,202.00), together with
all interest, accrued and unaccrued, specifically:
That certain Promissory Note dated January 26, 1996, by and
between Pasta Acquisition Co., as Maker, and Ghulam M.
Bombaywala, as Payee, in the amount of Two Hundred Twenty
Four Thousand Two Hundred Two Dollars ($224,202.00) attached
hereto as Exhibit C; and
That certain Promissory Note dated January 26, 1996, by and
between Pasta Acquisition Co., as Maker, and Ghulam M.
Bombaywala, as Payee, in the amount of Five Hundred Ninety
Five Thousand Dollars ($595,000.00) attached hereto as
Exhibit D.
5. Watermarc and Marco's agree that the principal amount due
under the Marco's Note, attached hereto as Exhibit E, shall be reduced by the
sum of Eight Hundred Nineteen Thousand Two Hundred Two Dollars ($819,202.00).
6. This Agreement shall be construed according to and be
governed by the laws of the State of Texas. The Parties agree that venue for
any litigation arising out of this Agreement shall lie in Houston, Harris
County, Texas.
7. This Agreement contains the entire agreement of the Parties
with respect to the matters covered by its terms. No other agreement,
statement, or promise made by any party, or to any employee, officer, or agent
of any party, that is not contained in this Agreement shall be of any force or
effect.
<PAGE> 20
This Agreement is executed by the Parties on the day and year first
above written.
/s/ GHULAM M. BOMBAYWALA
-----------------------------------
Ghulam M. Bombaywala, Individually
Watermarc Food Management Co.
/s/ ANGELO PITILLO
------------------------------------
By: Angelo Pitillo
President and Chief Operating Officer
The Original Pasta Co.
/s/ ANGELO PITILLO
------------------------------------
By: Angelo Pitillo
President
Marco's Mexican Restaurants, Inc.
/s/ ANGELO PITILLO
--------------------------------------
By: Angelo Pitillo
President
<PAGE> 21
EXHIBIT A
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> 22
$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> 23
$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").
--------
Page 3 of 5 INITIALS
<PAGE> 24
$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.
--------
Page 4 or 5 INITIALS
<PAGE> 25
$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> 26
EXHIBIT B
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> 27
$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> 28
$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> 29
$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> 30
$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> 31
EXHIBIT C
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> 32
$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> 33
$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> 34
$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> 35
$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> 36
EXHIBIT D
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> 37
$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> 38
$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> 39
$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.
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Page 4 of 5 INITIALS
<PAGE> 40
$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
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Page 5 of 5 INITIALS
<PAGE> 41
Exhibit E
PROMISSORY NOTE
$2,175,310.40 HOUSTON, TEXAS JULY 31, 1994
GHULAM M. BOMBAYWALA, a resident of Harris county, Texas (hereinafter
called "Maker") for value received, promises and agrees to pay in installments
and as herein provided unto the order of MARCO'S MEXICAN RESTAURANTS, INC., a
Texas corporation (hereinafter called "Payee") at its offices in Houston,
Harris County, Texas, or at such other location in Harris County, Texas as
Payee shall designate, in lawful money of the United States of America, the
principal sum of TWO MILLION ONE HUNDRED SEVENTY-FIVE THOUSAND THREE HUNDRED
TEN AND 40/100 DOLLARS ($2,175,310.40), together with interest thereon from and
after the date hereof at the rate of six percent (6%) per annum until maturity,
payable as it accrues on the maturity date of each of the hereinafter mentioned
installments, on the then unpaid principal amount hereof. All past due
principal and interest shall bear interest until paid at the highest rate
allowed by law (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 ON THIS NOTE shall be due and payable annually on July 1 of
each year beginning July 31, 1995. Principal payments of $200,000 each shall be
due on July 1, 1996, 1997 and 1998 and all remaining principal and interest
shall be due on July 31, 1999. Notwithstanding the foregoing, mandatory
prepayments of principal shall be payable within thirty (30) days of receipt by
Maker of proceeds from the sale of all shares of Billy Blues Food Corporation
by him, but only to the extent Maker has previously sold and received cash
proceeds from the sale of 2,000,000 shares of Billy Blues Food Corporation
which may be retained by him and not applied to prepayment of this Note.
IF default is made in the payment of any installment of principal or
interest hereof, as and when the same is or becomes due, or if default occurs
under any instrument securing the payment hereof or executed in connection
herewith, the owner and holder of this note may, at its option, with thirty
(30) days written notice, 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 a reasonable amount as attorney's or collection fees.
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 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
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INITIALS
Page 1 of 2
<PAGE> 42
$2,175,310.40 HOUSTON, TEXAS JULY 31, 1994
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 cancelled 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.
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.
THIS NOTE is entitled to the benefits and security afforded by a Pledge
Agreement executed by Maker to Payee of even date herewith.
NOTWITHSTANDING ANYTHING in this Agreement to the contrary, Maker shall
have no personal liability on this Note and the sole and exclusive recourse of
any owner or holder of this Note for nonpayment hereof is to exercise its
rights with respect to the collateral set forth in the above-referenced Pledge
Agreement.
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 the United
States of America.
By: /s/ GHULAM M. BOMBAYWALA
----------------------------------
GHULAM M. BOMBAYWALA
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Page 2 of 2 INITIALS
