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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 29, 1997
Commission File No. 0-20143
WATERMARC FOOD MANAGEMENT CO.
(Name of Registrant in Its Charter)
TEXAS 74-2605598
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11111 WILCREST GREEN, SUITE 350 77042
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (713) 783-0500
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.05 PAR VALUE PER SHARE
(Title of Class)
9% CUMULATIVE PREFERRED STOCK, $1.00 PAR VALUE PER SHARE
(Title of Class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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As of October 1, 1997, the aggregate market value of the Common Stock
held by non-affiliates of the issuer was approximately $1,706,000 based on
the average bid and ask prices of $.22 per share of Common Stock as quoted
in the NASDAQ SmallCap Market. As of October 1, 1997, 14,263,230 shares of
the issuer's Common Stock and 329,540 shares of the issuer's Preferred Stock
were outstanding, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
No documents, other than certain exhibits, have been incorporated by
reference in this report.
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ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
As of June 29, 1997, Watermarc Food Management Co., a Texas corporation,
(the "Company"), owned and operated, both directly and through subsidiaries,
full-service restaurants under the names Marco's Mexican Restaurants (the
"Marco's Restaurants"), The Original Pasta Co. Restaurants (the "Pasta Co.
Restaurants"), Billy Blues Barbecue Bar & Grill (the "Billy Blues Restaurant")
and Longhorn Cafe. During the first quarter 1998, the Longhorn Cafe was sold to
an unaffiliated party. See "Concepts and Menus".
The Company was organized as Billy Blues Food Corporation, a Texas
corporation, on June 17, 1991 to develop, own and operate restaurants and to
produce and market a uniquely flavored barbecue sauce. In March of 1995, the
name was changed to Watermarc Food Management Co. In the fourth quarter of
fiscal 1994, the Company acquired twenty one Marco's Restaurants. Two Marco's
Restaurants have been subsequently built and one non-performing Marco's
Restaurant sold. In the third quarter of fiscal 1994, the Company acquired
Chris' & Pitt's Bar-B-Q Sauce, a medium priced barbecue sauce product line. In
the third quarter of fiscal 1996, the Company acquired ten Pasta Co.
Restaurants. Furthermore, the Company opened three new Pasta Co. restaurants in
fiscal 1996 and four new restaurants in fiscal 1997. Unless the context
requires otherwise, references to the "Company" refer to Watermarc Food
Management Co., its predecessors and subsidiaries.
CONCEPTS AND MENUS
MARCO'S RESTAURANTS. Marco's Restaurants are full service restaurants
that feature high quality, moderately priced Mexican food. The style and decor
of Marco's Restaurants are distinctive and colorful and are designed to present
a Mexican style motif in a family oriented environment. Marco's Restaurants
have a standardized menu with a variety of offerings, including Black Angus
beef fajitas, tacos, enchiladas and numerous appetizers. Entrees range in price
from $5.49 to $12.99. Marco's Restaurants also offer a full service bar
specializing in various flavored margaritas, as well as numerous brands of
Mexican and domestic beer and wine. The restaurants are open for lunch and
dinner seven days a week. A typical Marco's Restaurant consists of 4,000 to
6,000 square feet for dining and bar facilities, and has a seating capacity for
175 to 300 patrons. The decorative scheme in each restaurant incorporates a
centrally located Tortilla Room where tortillas are prepared and served fresh
to the customer. The exterior design of the Marco's Restaurants normally
conforms to the shopping center in which it is located. The restaurants have
varying floor plans and configurations. As of June 29, 1997, the Company had a
total of twenty-two Marco's Restaurants in operation in Southeast Texas,
including the Houston metropolitan area, College Station, Victoria, and Lake
Jackson, Texas.
PASTA CO. RESTAURANTS. Pasta Co. Restaurants are distinctive, colorful,
Italian-style, family oriented restaurants that feature full-service and offer
moderately priced food and beverages. The restaurants include a brick oven for
the preparation of pizzas, as well as a cooking area where entrees are
produced. Both the oven and the cooking area are visible to customers. The
Pasta Co. Restaurants offer a wide variety of appetizers, soups, salads, pasta
and other entrees, pizzas, desserts and beverages. The restaurants specialize
in generous portions at reasonable prices, with any item on the menu available
for $7.99 or less. A children's menu is also available. Beverages sold consist
of coffee, tea, sodas, bottled water, espresso, cappuccino, beer and wine. Most
menu items are available for take-out. As of June 29, 1997, the Company had a
total of seventeen Pasta Co. Restaurants in operation, all of which were
located in Southeast Texas. The exterior of each of the locations generally
conforms to that of the center of which it is located, with the restaurant's
name and logo prominently displayed. In addition, numerous windows make the
restaurants more inviting from the outside and lighter and brighter on the
inside. Decor items, ingredients and produce displayed on shelves and cases
throughout the restaurants give the impression of an open-air Italian
marketplace. Typical units are approximately 3,600 to 4,000 square feet each,
and most have an outside patio of approximately 400 additional square feet. The
units have seating capacities of 160 to 200 persons. The restaurants are open
for lunch and dinner seven days a week.
BILLY BLUES RESTAURANT AND LONGHORN CAFE. Billy Blues Restaurant and
Longhorn Cafe (collectively, the "Barbecue Restaurants") generate an exciting
and vibrant "Texas Roadhouse" ambiance enhanced by recorded and
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live music, Texas artifacts, neon signage and other memorabilia. The Company's
Barbecue Restaurants feature Texas-style barbecue, steak and other entrees
served in an informal, lively atmosphere intended to appeal to a broad customer
base. The Barbecue Restaurants offer a limited, moderately priced menu of
freshly prepared foods made with high quality ingredients, with full bar
service in a casual atmosphere. As of June 29, 1997, two Barbecue Restaurants,
one operated as Billy Blues Restaurant and one as Longhorn Cafe, were in
operation in Texas.
The Billy Blues Restaurant consists of approximately 8,000 square feet
for dining and bar/entertainment facilities. The restaurant has dining and bar
seating capacity for 240 customers and features a night club called the "Blues
Room" which seats an additional 200 customers. A section of the restaurant is
used for the display and retail sale of Billy Blues Barbecue Sauce and novelty
items featuring the Billy Blues name and logo, including T-shirts, caps and
sweat shirts. The decorative scheme incorporates memorabilia associated with
blues music, focusing on legendary blues figures, photographs, musical
instruments and framed newspaper and other articles relating to the blues
musical culture. The Billy Blues Restaurant serves dinner with full bar
service, featuring a moderately priced, limited menu of high quality smoked
barbecue and other entrees. Entrees range in price from $7.95 to $16.95. In the
Blues Room, full bar service is provided and patrons can enjoy a light snack or
an entire meal with cocktails while being entertained by a blues band or
recorded blues music.
The Longhorn Cafe serves lunch and dinner and features a variety of high
quality, moderately priced menu items featuring Black Angus steaks, fresh
grilled red fish and homemade stuffed jalapenos with full bar service and also
offers several specialty appetizers and homemade desserts. The specialty is
chicken fried steak served with cream gravy and french fries. Entrees range in
price from $5.95 to $14.95. The decor includes wooden booths and tables with an
open layout permitting customers to view the bar and Texas memorabilia. During
the first quarter of fiscal 1998, the Longhorn Cafe was sold to an unaffiliated
party.
FOOD PRODUCTS. The Company also produces and markets two brands of
barbecue sauce products and a spice rub, Billy Blues Barbecue Sauce, Chris' &
Pitt's Bar-B-Q Sauce and Chris' & Pitt's Spice Rub. Billy Blues Barbecue Sauce
is a tangy, coffee-spiked formulation packaged in three different flavors and
is available in supermarkets and other retail outlets. Chris' & Pitt's Bar-B-Q
Sauce is packaged in six different flavors and is available in supermarkets and
other retail outlets located primarily in the State of California. The Company
also markets and packages its Chris' & Pitt's Bar-B-Q Sauce products for food
service distribution to restaurant chains and commissaries. The Company
periodically engages in advertising campaigns to enhance customer awareness of
barbecue sauce products in the areas where they are currently available in
supermarkets and other retail outlets.
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The Company currently engages, on an order to order basis, an
unaffiliated food processor and packaging company (the "Co-Packer") in
Riverside, California for the processing and packaging of its food product
lines. Under its production arrangement with the Co-Packer, the Co-Packer
procures all ingredients and packaging materials, and performs product
preparation and packing at an agreed upon price. The Company engages food
brokers to assist in selling its products to regional and national supermarket
chains. The Company generally pays its food brokers a 5% commission on the
amount they sell. To date, the Company's food brokers have accounted for most
of the Company's sales to supermarket chains. To achieve greater market
penetration, the Company intends to expand its food broker network. The Company
utilizes a distribution warehouse in California and another in Texas for
storage of products. The Company pays handling and storage fees based on the
actual monthly volume shipped to the warehouse. The Company contracts with
independent freight carriers for the delivery of its product lines, or provides
special pricing for customers who pick up the product at a storage warehouse.
The Company's product lines are distributed to supermarkets either through: (1)
direct shipment to a supermarket chain warehouse which then distributes to its
individual supermarkets from the warehouse; (2) direct shipment to an
independent grocery warehouse, which performs the same function as a
supermarket chain warehouse for a fee; or (3) an independent food distributor
who picks up the products at the storage warehouse and delivers directly to the
supermarkets. A fee is paid to the food distributor based on volume. The
Company generally sells its food products pursuant to customer purchase orders
and usually fills the orders within approximately ten days of receipt. Because
orders are filled shortly after receipt, backlog is not material to the
Company's business.
Food product revenues, as a percent of total revenues, for the last three
fiscal years ended June 29, 1997, June 30, 1996 and July 2, 1995 were 4.9%,
7.2% and 8.1% respectively. Even though the Company believes it has achieved
limited consumer awareness and market acceptance of its food products, there
can be no assurance that either of the Company's product lines will ever
achieve significant consumer acceptance or that supermarket and other retail
chains will re-order the Company's food products.
GROWTH STRATEGY
Historically, the Company's primary growth strategy has been to expand
its restaurant and barbecue sauce operations through internal growth and by
acquiring businesses with concepts and themes compatible with the Company's
operations. This strategy was evidenced by the Company's acquisition in March
1994 of the Chris & Pitts Bar-B-Q Sauce line, in July 1994 of Marco's Mexican
Restaurants, Inc. which owned and operated twenty one Marco's Restaurants, and
in January 1996 of The Original Pasta Co. which owned and operated ten Pasta
Co. Restaurants. In addition, the Company has developed a franchise program to
expand the Pasta Co. restaurant concept outside of the Houston, Texas
metropolitan area. As of June 29, 1997 the Company had not yet sold any
franchises.
During the fourth quarter of fiscal 1997, management was reorganized.
Previously successful management was engaged to restore the Company to
profitability. Ghulam M. Bombaywala, Chairman of the Board and Chief Executive
Officer, has been elected President and Chief Operating Officer of the Company.
The Company's new growth strategy for fiscal 1998 includes the following:
o Controlling food and labor costs.
o Outsourcing labor intensive food preparation processes.
o Increasing restaurant sales through targeted marketing.
o Instituting store management incentives correlating to increased
store performance.
o Increasing customer satisfaction with intensive employee training.
o Remodeling certain Marco's Restaurants.
o Franchising Marco's Restaurants and Pasta Co. Restaurants.
o Closing or selling non-performing restaurants.
o Favorably renegotiating expiring restaurant leases.
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MARCO'S RESTAURANTS. During fiscal 1997, the Company remodeled three
existing restaurants. The restaurants were remodeled after the new prototype
which was introduced in the most recently opened units. These units are
brighter, more upbeat, more entertaining and are expected to position Marco's
Restaurants to be more competitive. The Company plans to continue remodeling
Marco's restaurants from available cash flow at a rate of one restaurant every
three to four months. Additionally, a training coordinator will be focusing on
intensive employee training to better satisfy Marco's customers. In June 1997,
the Company sold one Marco's Restaurant location due to poor operating
performance. The restaurant continues to be operated as a Marco's Restaurant
pursuant to a license agreement. The Company anticipates selling three Marco's
Restaurants during fiscal 1998.
PASTA CO. RESTAURANTS. During fiscal 1997, four new Pasta Co. Restaurants
were opened in Texas. One new Pasta Co. restaurant was opened in the first
quarter of fiscal 1998. Growth in the Pasta Co. concept should be achieved by
concentrating on increasing customer satisfaction, focusing on controlling food
costs and outsourcing labor intensive food preparation processes as a measure
to reduce costs and maximize revenue. Outsourcing products will also aid in
achieving product consistency from restaurant to restaurant.
BARBECUE RESTAURANTS. The Company does not plan to expand its Barbecue
Restaurant concepts. As a measure to reduce costs and maximize revenues, the
Billy Blues Restaurant no longer serves lunch. It is now open exclusively for
dinner and evening entertainment. During the first quarter of fiscal 1998, the
Longhorn Cafe was sold to an unaffiliated party. The Company anticipates
selling the Billy Blues Restaurant in fiscal 1998.
FRANCHISING PROGRAM. To date, no restaurants have been franchised. The
Company intends to establish an aggressive franchise program for Marco's
Restaurants and Pasta Co. Restaurants during fiscal 1998. Management believes
that franchising will provide significant growth for the Company in upcoming
years.
FOOD PRODUCTS. The Company currently markets two brands of barbecue sauce
products and a spice rub. The Company's strategy to increase food product sales
includes reinforcing existing markets, including recapturing lost commercial
customers, expanding distribution to new market areas (primarily in the Sun
Belt states), introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
PROPOSED ACQUISITIONS. The Company continues to investigate possible
acquisition candidates in the restaurant industry, but does not currently have
any arrangements, undertakings or commitments with respect to any acquisition.
RESTAURANT LOCATIONS AND SITE SELECTION
The Company believes that the locations of its restaurants are critical
to its long-term success. Senior management devotes significant time and
resources to analyzing each respective site. The Company utilizes, and
continually enhances, specific site selection criteria which focuses on local
demographics such as target population, density and household income levels;
specific site characteristics such as visibility, accessibility and traffic
volume; proximity to activity centers; parking availability; and potential
competition in the area. Currently, all restaurants are located in Texas.
The Company periodically reevaluates restaurant sites to ensure that site
selection attributes have not deteriorated below minimum standards. In the
event site deterioration occurs, the Company makes a concerted effort to
improve the restaurant's performance by providing physical, operating and
marketing enhancements unique to each restaurant's situation. If efforts to
restore the restaurant's performance to acceptable minimum standards are
unsuccessful, the Company considers relocation to a proximate, more desirable
site, or evaluates closing the restaurant if the Company's criteria, such as
return on investment and area demographic data, do not support a relocation.
Since inception through June 29, 1997, the Company has closed or sold nine
restaurants, including four in fiscal 1997, which were performing below the
Company's standards primarily due to declining trade area demographics. In
addition, the Board of Directors of the Company in late fiscal 1997 approved a
strategic plan targeted to support the Company's long-term growth objectives.
The plan focuses on continued
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development of those restaurant concepts that have the greatest return potential
for the Company and its shareholders. In conjunction with this plan, one
concept, Pete's Hospitality Co., Inc. and its related restaurants, was sold to
the Company's former President (see "Item 13. Certain Relationships and Related
Transactions") and the Company anticipates selling its barbecue restaurant
concept. These and future closings will be key to a successful reallocation of
resources to the stronger performing concepts.
The following table provides information with respect to the restaurants
which were owned and operated by the Company as of June 29, 1997:
<TABLE>
<CAPTION>
NO. OF APPROXIMATE
CONCEPT UNITS SQUARE FOOTAGE
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<S> <C> <C>
Marco's Mexican Restaurants 22 3,850 - 6,900
The Original Pasta Co. 17 3,600 - 4,200
Billy Blues Bar & Grill 1 8,000
Longhorn Cafe 1 2,500
</TABLE>
UNIT ECONOMICS
The average initial cash investment (including leasehold improvements,
furniture and fixtures, equipment, food and beverage inventory, and other pre-
opening expenses) for each Marco's Restaurant and Pasta Co. Restaurant is
approximately $350,000 to $500,000 with pre-opening expenses projected to be
approximately $50,000 for each future restaurant. All of the Company's
restaurants are leased.
RESTAURANT MANAGEMENT AND OPERATIONS
MANAGEMENT AND EMPLOYEES. The management staff of the Company's
restaurants consists of a general manager and assistant managers. Each Marco's
Restaurant employs 20 to 30 hourly employees. Each Pasta Co. Restaurant employs
approximately 40 to 50 hourly employees. Each Barbecue Restaurant employs
approximately 50 to 70 hourly employees. At all of the restaurants, the general
manager has the primary responsibility for the day to day operations of the
restaurant and is required to comply with Company established operating
standards. Many of the hourly employees work part-time.
SUPERVISION AND TRAINING. The Company employs general managers with
significant experience in the food service industry. Executive management of
the Company regularly visits the restaurants to insure that the Company's
concept, strategy and standards of quality are being adhered to in all aspects
of restaurant operations. The restaurant general manager and designated
personnel of the Company are responsible for selecting and training the
employees for each restaurant. The training period for new employees lasts
approximately five days and is characterized by on the job supervision by an in
store trainer. Ongoing employee training remains the responsibility of the
restaurant general manager. Written tests and physical observation are used to
evaluate each employee's performance. In addition, a training coordinator has
been hired to focus on improving customer satisfaction through better employee
training for the Marco's Restaurant concept.
PURCHASING AND SUPPLIES. Management negotiates directly with suppliers
for food and beverage products to insure uniform quality and adequate supplies
and to obtain competitive prices. The Company purchases substantially all food
and beverage products and novelty items from local or national suppliers. The
Company does not anticipate any difficulty in continuing to obtain food and
beverage requirements within the localities in which the Company currently
operates.
ADVERTISING AND PROMOTION. The Company pursues advertising and
promotional opportunities within each of its restaurant's geographic locales,
relying principally on the direct mailing of coupons, newspaper, and radio. In
addition, the Company has instituted an intense, targeted marketing effort
focusing on individual locations with poor operating performance. Location
specific research and targeted marketing efforts are being implemented.
RESTAURANT REPORTING. Each restaurant has a stand-alone point of sales
system monitored by its management. The restaurant's staff prepares daily cash
and other reports regarding sales, inventory, sales mix, labor cost and
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the number of customers. Daily reports are forwarded to the Company's corporate
offices in Houston, Texas where weekly summaries of all reported data are
analyzed by the Company's key management.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality. There are many well established competitors
with substantially greater financial and other resources than the Company. Most
of the Company's competitors have been in existence for substantially longer
periods than the Company and are more established in the markets where the
Company's restaurants are located. The Company's competitors have achieved
significant national, regional and local brand name and product recognition and
engage in extensive advertising and promotional programs, both generally and in
response to efforts by additional competitors to enter new markets or introduce
new products. The restaurant business is often characterized by a high failure
rate and affected by changes in consumer tastes and discretionary spending,
national, regional and local economic conditions, demographic trends, traffic
patterns, and the type, number and location of competing restaurants. Any
change in these factors could adversely affect the Company's restaurant
operations. Multi-unit foodservice operations such as those of the Company can
also be substantially affected by adverse publicity resulting from food
quality, illness, injury, health concerns, or operating issues stemming from a
single restaurant. The Company attempts to manage these factors, but the
occurrence of any one of these factors could cause the Company to be adversely
affected.
TRADEMARKS
The mark "Marco's Mexican Restaurants" was registered in the U.S. Patent
and Trademark Office on January 15, 1991 and in the State of Texas in 1987. The
mark "The Original Pasta Co." was registered in the U.S. Patent and Trademark
Office on October 8, 1996. The Billy Blues Barbecue Bar & Grill and Billy Blues
Barbecue Sauce logos were registered in the State of Texas in 1991. The Chris'
& Pitt's mark and logo were registered prior to the Company's acquisition of
the Chris' & Pitt's product line. The mark "Billy Blues" was registered in the
U.S. Patent and Trademark Office on November 17, 1992 as a service mark for
restaurant and bar services. The mark "Billy Blues" as a trademark for the
Company's barbecue sauce was registered in the U.S. Patent and Trademark Office
on October 13, 1992. The Company has no reason to believe that there are any
conflicting rights which might impair the Company's use of its marks; however,
there can be no assurance that such conflicting rights do not exist. The
Company believes that these trademarks are valuable to the operation of its
restaurants and marketing of its food products. The Company's policy is to
pursue registration of its marks whenever possible and to vigorously oppose any
infringement of its marks.
GOVERNMENT REGULATION
RESTAURANT OPERATIONS. The Company is subject to various federal, state
and local laws and regulations and administrative policies affecting its
business and must comply with provisions regulating health and sanitation,
equal employment, minimum wages and licensing for the sale of food and
alcoholic beverages. Difficulties or failures in obtaining or maintaining the
required licenses or approvals could adversely affect the operations of
existing restaurants or delay or prevent the opening of new restaurants.
Approximately 15% of the revenues generated by the Marco's Restaurants are
attributable to the sale of alcoholic beverages, while approximately 7% of the
revenues generated by the Pasta Co. Restaurant and approximately 25% of the
revenues generated by the Barbecue Restaurants are the result of the sale of
alcoholic beverages. The service of alcoholic beverages is material to the
business of the Company. Alcoholic beverage control regulations require each of
the Company's restaurants to apply to a state authority and, in certain
locations, county or municipal authorities, for a license or permit to sell
alcoholic beverages on the premises and to provide service for extended hours
and on Sundays. Typically, licenses must be renewed annually and may be revoked
or suspended for cause at any time. The Company does not anticipate
experiencing any delays or other problems in obtaining or renewing licenses or
permits to sell alcoholic beverages; however, the failure to receive or retain,
or a delay in obtaining, a liquor license in a particular location could
adversely affect the Company's operations in that location. The Company
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may be subject in certain states to "dram-shop" statutes or common laws, which
generally provide a person injured by an intoxicated person the right to
recover damages from an establishment which wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
insurance.
The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and
tip credits; the Immigration and Naturalization Act, which governs employee
citizenship requirements; and the Americans with Disabilities Act, which
governs non-discriminating employment practices and reasonable accommodations
for disabled persons, both employees and customers. Significant numbers of the
Company's food service and preparation personnel are paid at rates related to
the federal minimum wage and, accordingly, future increases in the minimum wage
or decreases in the allowable tip credit will increase the Company's labor
costs.
FOOD PRODUCT OPERATIONS. The Company's and the Co-Packer's food
processing activities are subject to extensive regulation by the United States
Food and Drug Administration, and by other state and local authorities. The
Company believes that it is currently in compliance with all governmental laws
and regulations and that the Company has all material permits and licenses
relating to its food processing operations. The Company has no reason to
believe that the Co-Packer is not in substantial compliance with all material
governmental laws and regulations and believes that the Co-Packer has all
material permits and licenses relating to its food processing operations.
Nevertheless, there can be no assurance that the Company or the Co-Packer will
continue to be in substantial compliance with current laws and regulations or
that the Company or the Co-Packer will be able to comply with any future laws
and regulations. Failure by the Company or the Co-Packer to comply with
applicable laws and regulations could subject the Company to civil remedies,
including fines, injunctions, recalls or seizures which could have a material
adverse effect on the Company.
Federal, state and local environmental regulations are not expected to
have a material effect on the Company's operations, but more stringent and
varied requirements of local governmental bodies with respect to zoning, land
use and environmental factors may restrict the Company's site selection for new
restaurants.
WORKERS' COMPENSATION. The Company has elected to be a non-subscriber
under the Texas Workers' Compensation Act. The Company offers, at no cost to
the employees, a Voluntary Employee Injury Benefit Plan ("Benefit Plan") which
provides certain benefits to employees injured during the course and scope of
their employment. The Benefit Plan is funded out of the general assets of the
Company. Management believes that the Benefit Plan will decrease the Company's
overall net cost in future periods. Management intends to review this election
on an annual basis. The Company does not believe it would encounter any
impediments if it elected in the future to become a subscriber under the Texas
Workers' Compensation Act. The Company does not believe that personal injury
claims by current or former employees of the Company, either individually or in
the aggregate, will have a material adverse effect on the Company, its
properties or business. The Company does not maintain a reserve fund for
potential claims, but carries catastrophic loss coverage with a limit of
$1,000,000 and a deductible of $150,000 per incident.
EMPLOYEES
At October 1, 1997, the Company employed 1,840 persons of whom 30 are
management and administrative personnel, 130 are restaurant management
personnel, with the remainder serving as hourly restaurant employees. The
Company intends to increase its management and clerical staff as needed. The
Company is not a party to a collective bargaining agreement and considers its
relationship with its employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
As of June 29, 1997, the Company leases all of its Marco's Restaurants,
Pasta Co. Restaurants and Barbecue Restaurants. The leases have terms that
expire between 1997 and 2012 and have an average remaining term of
approximately seven years. The Company obtains real estate and develops its
restaurants using three methods: (i) leasing land and constructing the
restaurant (a "ground lease"); (ii) leasing the land and building (a
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"land/building lease"); or (iii) leasing a "shell" where the landlord may or
may not contribute to the construction of the improvements (a "shell lease").
The method the Company pursues is determined on an individual site basis,
depending on the cost and location of the property and the negotiations between
the Company and the owner of the desired property. Of the Company's
restaurants, one is a ground lease, four are land/building leases, and thirty-
six are shell leases.
The leases generally provide for rental rates based upon a stated minimum
rental and percentage rent payments based upon a certain sales base. The
Company's monthly lease cost for its restaurants ranges from approximately
$4,000 to $9,000 per month. Under substantially all of its leases, the Company
is required to pay real estate taxes, insurance, and maintenance expenses.
The Company's executive office is located in approximately 12,300 square
feet of leased space in Houston, Texas.
The Company considers that its properties are suitable, adequate, well-
maintained and sufficient for the operations contemplated.
ITEM 3. LEGAL PROCEEDINGS.
During the second quarter of fiscal 1997, a lawsuit filed by John
Coleman, a former officer of the Company, for wrongful termination, intentional
infliction of emotional distress and breach of employment contract was settled
out of court for an immaterial amount payable to Mr. Coleman. The Company does
not admit any liability by settling this case. The Company believes that it was
in its best interests financially, based on projected defense costs, to settle
this case.
The Company is not a party to any litigation other than ordinary routine
matters which are incidental to the Company's business. The Company believes
that no current legal proceedings, individually or in the aggregate, will
have a material adverse effect upon the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of fiscal 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ SmallCap Market under
the symbol of WAMA. The following table sets forth the range of low and high
closing bid prices for the Company's Common Stock for the periods indicated as
reported by the National Quotation Bureau, Incorporated. These prices represent
inter-dealer prices, without adjustment for retail mark-ups, mark-downs or
commissions and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock
Bid Price
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<S> <C> <C>
Fiscal Year 1996 Low High
---------------- ---- ----
First Quarter . . . . . . . . . . . . . . . . . . . . 1.56 2.50
Second Quarter . . . . . . . . . . . . . . . . . . . . 1.25 2.06
Third Quarter . . . . . . . . . . . . . . . . . . . . .94 1.88
Fourth Quarter . . . . . . . . . . . . . . . . . . . . .69 1.25
Fiscal Year 1997 Low High
---------------- ---- ----
First Quarter . . . . . . . . . . . . . . . . . . . . .50 1.06
Second Quarter . . . . . . . . . . . . . . . . . . . . .47 1.31
Third Quarter . . . . . . . . . . . . . . . . . . . . .28 .75
Fourth Quarter . . . . . . . . . . . . . . . . . . . . .22 .50
</TABLE>
On October 1, 1997, the closing bid price for the Company's Common Stock
was $.22 per share. As of October 1, 1997, 14,263,230 shares of the Company's
Common Stock were outstanding; provided, however, subject to certain conditions,
the Company has agreed to issue to Ghulam M. Bombaywala, Chairman of the Board,
Chief Executive Officer and a director of the Company, 7,500,000 shares of the
Company's Common Stock. (See "Certain Relationships and Related Transactions.")
The Company believes that the actual number of security holders of the Company's
Common Stock is approximately 2,000 holders, including beneficial owners.
The Company has neither paid nor declared any cash dividends on its
shares of Common Stock since inception. The Board of Directors intends to
retain earnings of the Company to support operations and to finance expansion
and does not intend to pay dividends on its shares of Common Stock for the
foreseeable future. The payment of cash dividends in the future will depend
upon such factors as earnings levels, capital requirements, the Company's
financial condition and other factors deemed relevant by the Board of
Directors. The Company is required to pay dividends on its Preferred Stock
before any dividends can be paid on the Common Stock.
With respect to recent sales of unregistered securities and a description
thereof, reference is made to Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources.
Recent amendments adopted to the listing requirements for NASDAQ Small Cap
companies may result in the delisting of the Company's Common Stock, Preferred
Stock and Warrants from NASDAQ. To remain listed on NASDAQ, the Company's
shares must trade at $1.00 or above. The Company plans a substantial reverse
stock split in fiscal 1998 to attempt to maintain its NASDAQ listing. There is
no assurance that the reverse stock split will have the intended effect of
increasing the market price for the Company's Common Stock. In addition, NASDAQ
has proposed certain other conditions for continued listing which may not be met
by the Company, including a standard for minimum tangible net worth of
$2,000,000 which is not met by the Company at this time and which cannot be met
by the Company without obtaining substantial equity capital. If the Company is
unable to maintain its listings on the NASDAQ Small Cap Market, it will pursue
the trading of its shares on the OTC Bulletin Board or otherwise in the
non-NASDAQ over-the-counter market in what is commonly referred to as the
electronic bulletin board and the "pink sheets". If the Company is unable to
maintain its NASDAQ Small Cap listing, shareholders may find it more difficult
to dispose of or obtain accurate quotations as to the value of the Company's
securities.
-10-
<PAGE> 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------------------
1997 1996 1995 1994 1993
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $49,125 $40,129 $37,652 $37,008 $27,712
Net Income (Loss) (10,913) $49 ($7,037) ($8,360) ($4,483)
Net Income (Loss) Per Common Share * ($0.83) ($0.02) ($0.82) ($1.10) ($0.68)
BALANCE SHEET DATA (end of period)
Total Assets $16,715 $25,865 $17,672 $20,133 $12,916
Long-term Debt $ 4,985 $10,768 $1,709 $1,507 $988
</TABLE>
* After giving effect to preferred stock dividends.
NOTE: Cash dividends have never been paid on Common Stock.
The following lists significant items that may affect the comparability
of the above selected financial data:
o Early in the third quarter of fiscal 1996, ten Pasta Co. restaurants were
acquired (See Item 13. Certain Relationships and Related Transactions".)
The Pasta Co. contributed approximately $5 million in revenues in fiscal
1996 and approximately $14 million in revenues in fiscal 1997.
o In the fourth quarter of fiscal 1995 and during fiscal 1996 four Billy
Blues Restaurants and one Longhorn Cafe Restaurant were closed or sold
reducing revenues for 1996 by approximately $2.5 million.
o In the fourth quarter of fiscal 1994 the Marco's Restaurants were
acquired. Marco's contributed approximately $22 million in revenues in
fiscal 1994 and approximately $23 million in revenues in fiscal 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Effective July 1, 1994, the Company exchanged 4,600,000 shares of the
Company's Common Stock for all of the issued and outstanding capital stock of
Marco's Mexican Restaurants, Inc. ("Marco's"). The merger was accounted for as a
pooling-of-interests and, accordingly, the Company's Consolidated Financial
Statements have been restated for all periods prior to the merger to combine
the financial position and results of operations of Marco's with the Company.
For additional information concerning business combinations, see Note 2 to
Notes to Consolidated Financial Statements. Additionally, the Company acquired
The Original Pasta Co. on January 26, 1996, Pete's Hospitality on August 24,
1993 and the Chris' & Pitt's product line on March 25, 1994. These acquisitions
have been accounted for as purchases and, accordingly, the Company's
Consolidated Financial Statements include the results of operations of the
acquired companies from their respective dates of acquisition.
During fiscal 1997 the general economy was upbeat. Southeast Texas also
has been rebounding from depressed times. The restaurant industry in general is
supported by a positive economy yet the average failure
-11-
<PAGE> 12
rate in the restaurant business is approximately one in ten in part due to
changing customer tastes, trade demographics and fierce competition. During the
fiscal year the Company spent approximately $500,000 trying a new marketing
strategy using television and radio and temporarily suspended coupon marketing.
The Company had previously been successful using direct mail coupons and
newspaper coupons. The television and radio marketing was not successful. The
Company has returned to coupon marketing and has experienced a small increase in
comparative sales during the first quarter of fiscal 1998 compared to the same
period in fiscal 1997. The Company believes it is in a favorable position within
its market with a strong price to value relationship. The Company continues to
be competitive by additionally offering the consumer healthy alternatives and
daily dinner/lunch specials at an attractive price. Furthermore, the Company
intends to continue its remodeling of its Marco's concept.
The Company utilizes a 52-53 week fiscal year which ends on the Sunday
closest to June 30. References to 1997, 1996 and 1995 are all 52 week periods
ended June 29, 1997, June 30, 1996 and July 2, 1995 respectively.
At the end of each fiscal year, the Company had the following restaurants
in operation:
<TABLE>
<CAPTION>
Restaurants: 1997 1996 1995
- ----------- ---- ---- ----
<S> <C> <C> <C>
Marco's Mexican Restaurants 22 23 22
Pasta Co. Restaurants 17 13 -
Billy Blues Restaurant 1 1 3
Longhorn Cafe 1 1 2
Pete's Restaurants 0 2 2
Hotspurs 0 1 1
--- -- --
Total 41 41 30
=== === ===
</TABLE>
-12-
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) operating
results as a percentage of total revenues and (ii) selected operating data.
The Company's revenues are derived from restaurant sales and food product
sales to third party retail outlets. Certain costs and expenses relate only to
restaurant sales (food and beverage, restaurant labor and other operations) or
food products (cost of food products), while other operating costs and expenses
relate to both restaurant and food products (general and administrative and
depreciation and amortization).
<TABLE>
<CAPTION>
Percentage Change
Fiscal Year -------------------
------------------------------ 1997 vs 1996 vs
1997 1996 1995 1996 1995
------ ------ ------ ------- ------
Statements of Operations Data:
- -----------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Restaurants 95.1% 92.8% 91.9% 25.5% 7.6%
Food products 4.9 7.2 8.1 (17.6) ( 4.9)
------ ------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 22.4% 6.6%
Costs and expenses:
Cost of restaurant food and beverage 25.5 27.3 27.8 14.5 4.6
Cost of restaurant labor 29.2 28.3 30.6 26.2 (1.4)
Cost of other operations 36.0 25.5 26.6 72.9 2.0
Cost of food products 4.6 6.6 8.5 (15.5) (17.7)
General and administrative 8.9 6.9 8.8 58.6 (17.1)
Depreciation and amortization 12.3 5.4 5.5 177.1 5.0
Provision for restaurant closings 2.4 -- 7.6 100.0 (100.0)
Loss on sale of Pete's Hospitality 1.5 -- -- 100.0 --
------ ------ ------ ------ ------
Total Costs and Expenses 120.4% 100.0% 115.4% 47.4% (7.7)
Income (loss) from operations (18.8)% 0.0% (15.4)% * 100.5%
Interest income .3 .4 .4 (27.2) 6.4
Interest (expense) (2.5) (2.1) (2.2) 43.6 4.6
Loss on conversion of debt to equity -- -- (3.5) -- (100.0)
Other net 0.3 1.8 .8 (76.2) 130.54
------ ------ ------ ------ ------
Other non-operating income (expense) (1.0%) .1% (4.5)% * 101.3
Income tax provision (benefit) -- -- --
Net income (loss) (22.2)% .1% (19.5)% * 100.7%
Operating Data:
- --------------
Restaurants open at end of period 41 41 30
Change in comparable restaurant revenues (1) (7.4)% (.8)% (6.8)%
</TABLE>
- ----------------------
(1) Includes only restaurants open during the entire periods under comparison.
* Calculation yields numbers greater than 8,000%.
-13-
<PAGE> 14
For the fiscal years ended June 29, 1997, June 30, 1996 and July 2, 1995 the
Company recorded revenues of $49.1 million, $40.1 million and $37.7 million,
respectively. Before extraordinary items and the effect of preferred stock
dividends, the Company recorded a net loss of $10.9 million, net income of
$49,000 and a net loss of $7.5 million for those same years, respectively. As of
June 29, 1997, the Company had total current assets of $1.7 million and total
current liabilities of $9.8 million, resulting in a working capital deficit of
$8.2 million. As of June 29, 1997, the Company had a bank line of credit of
$300,000 and $25,000 was available for use. The Company has funded its
operating losses and expansion costs primarily through a combination of public
and private offerings of debt and equity. During the fourth quarter of fiscal
1997, the Company reorganized its executive management to strengthen
operational capabilities, sold its Pete's Hospitality concept to its former
President and sold one Marco's restaurant in Texas City, Texas with a
licensing agreement to continue using the "Marco's" name.
The ability of the Company to alleviate its working capital deficit, and to
obtain the necessary capital resources to fund future costs associated with its
operations and to continue as a going concern is dependent upon: (i) its
ability to generate sufficient cash flow to meet its obligations on a timely
basis; (ii) obtaining additional equity capital or debt financing; and (iii)
ultimately to attain profitable operations. However, even if the Company
achieves some success with its operational strategy, there can be no assurance
that it will be able to generate sufficient revenues to achieve profitable
operations or to continue as a going concern.
During fiscal 1997, the Company experienced significant operating losses.
These losses raise doubt about the Company's ability to continue as a going
concern. In an effort to decrease its losses, the Company took the actions
listed below:
o In June 1997, the Company reorganized its top management in order to
attempt to return the Company to profitability.
o In June 1997, the Company sold one of its concepts, Pete's Hospitality Co.,
Inc. ("Pete's"), a wholly owned subsidiary, to a related party in a stock
purchase transaction because of poor concept performance. Pete's owned and
operated two Pete's BBQ Rib and Steakhouse restaurants and the H.D.
Hotspurs Restaurant in the Seattle, Washington area. The Company recorded a
loss of approximately $750,000 recorded in other income (loss), net on this
transaction in the fourth quarter of fiscal 1997. Pete's Hospitality
contributed approximately $5.1 million in revenues in fiscal 1997.
o In June 1997, the Company sold fixed assets associated with a Marco's
Mexican Restaurant located in Texas City, Texas, with the actual transfer
of assets in July 1997 to a former district manager of the Company because
the location was performing below the Company's standards primarily due to
declining trade area demographics. The Company recorded a loss of
approximately $75,000 on this transaction in the fourth quarter of fiscal
1997. The Texas City, Texas location contributed approximately $548,000 in
revenues in fiscal 1997.
Until the Company is able to obtain profitable operations and cash flow
from its core restaurant concepts, the Marco's Restaurants and the Pasta Co.
Restaurants, the Company intends to postpone restaurant expansion from new
restaurant construction. The Company plans to sell three more of its non-
performing Marco's stores and its Billy Blues Restaurant in fiscal 1998.
Additionally, the Company plans to proceed with its restaurant franchising
program for the Marco's and Pasta Co. Restaurants. The Company will consider
material restaurant chain acquisition possibilities if the acquisition(s) (i)
could significantly enhance the projected revenues and profitability of the
Company on a consolidated basis, (ii) the restaurant concepts are compatible
with the Company's core concepts, and (iii) the acquired restaurants are
geographically compatible with the Company's existing operations. Any material
acquisition by the Company could substantially change the Company's business
structure, capitalization and operating performance. As of June 29, 1997 the
Company had no agreements or understandings regarding any
-14-
<PAGE> 15
material restaurant acquisitions. Any acquisition, if unsuccessful, could
materially and adversely affect the Company's ability to continue as a going
concern.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUES. Total revenues increased 22.4% or $9.0 million in fiscal 1997 over
fiscal 1996. Revenues increased approximately $9.3 million due to having owned
the Pasta Co. Restaurants for a full year in fiscal 1997 versus roughly half of
fiscal 1996. This increase includes revenues contributed by four new Pasta Co.
Restaurants opened in fiscal 1997, two opened late in the second quarter and two
opened late in the fourth quarter. Revenues related to these new stores were
approximately $1.8 million. Conversely, comparable restaurant revenues declined
7.4% compared to a decline of .8% in fiscal 1996, due to extremely competitive
conditions and a general softness in restaurant sales in the Company's Houston,
Texas market. Management anticipates an increase in restaurant revenues in
fiscal 1998 due to a new training program and an intense concentration on
increasing customer satisfaction. Furthermore, fiscal 1996 contained
approximately $390,000 of revenue related to a fair in the State of Washington
that was not included in fiscal 1997. The sale of one of the Longhorn Cafes
during fiscal 1996 further reduced revenues. The remaining Longhorn Cafe
contributed $.9 million in revenues in fiscal 1997.
Approximately 20% of restaurant revenues were derived from the sale of
alcoholic beverages in fiscal 1997 versus 16% from fiscal 1996.
OPERATING COSTS AND EXPENSES. Generally, all restaurant related and
administrative costs increased due to an overall increase in revenue by 22.4%
and incorporating the Pasta Co. Restaurants operations for a full year versus
one-half year in fiscal 1996. Furthermore, these costs increased due to the
opening of four new Pasta Co. Restaurants in fiscal 1997. Food and beverage
costs increased 14.5% overall due additionally to decreased purchasing leverage
brought on by cash flow limitations. Labor costs increased 26.2% overall
additionally due to an increase in the minimum wage in October 1996 and
increased restaurant staff coverage to meet customers needs. Costs of other
restaurant operations increased 72.9% and include remodeling costs for Marco's
Restaurants, preopening costs for four Pasta Co. Restaurants, research and
development costs for Marco's and Pasta Co. menus, and advertising and
marketing for the restaurant concepts. Advertising and marketing increased by
approximately $987,000 due to new television and radio promotions undertaken in
fiscal 1997. These are not anticipated to be continued in fiscal 1998. The
approximately $300,000 spent for remodeling Marco's Restaurants in fiscal 1997
is expected to be reduced in fiscal 1998 due to less intensive remodels. These
costs additionally increased due to added training costs for the new Pasta Co.
Restaurants. During fiscal 1997 provisions of $1.1 million for the anticipated
losses on the sale or closure of the Billy Blues Restaurant and $75,000 for the
sale of the Texas City, Texas Marco's location were recorded as provisions for
restaurant closings. Management intends to sell or close the Billy Blues
Restaurant in fiscal 1998, which contributed $1.9 million in revenues in fiscal
1997.
General and administrative costs increased 58.6% or $1.6 million over
fiscal 1996 and include corporate salaries and wages, legal fees and
settlements, professional fees and all gains and losses on sales and/or
closures for all Company concepts. Legal fees included approximately $200,000
for settlement of various claims. Additional expenses include costs to develop
and market the Company's franchise program. Corporate salaries for fiscal 1997
include $120,000 of deferred salary and bonus for Ghulam Bombaywala, Chairman
of the Board and Chief Executive Officer. No salary or bonus was taken by Mr.
Bombaywala in the previous two years.
A loss of approximately $750,000 was recorded on the sale of Pete's
Hospitality concept sold in June 1997.
In the fourth quarter of fiscal 1997, the Company made a decision to sell
the remaining Billy Blues Restaurant. Accordingly, the assets were deemed to be
impaired and written down to their estimated fair value. An impairment expense
of $1.1 million was recognized during 1997. Additionally, the Company sold one
Marco's Restaurant in the fourth quarter for a loss of approximately $75,000. In
1997, an impairment expense was recorded to reflect the loss on sale.
In the fourth quarter of fiscal 1997, the Company deemed the intangible
assets associated with Chris' & Pitt's Barbeque Sauce to be impaired. Management
estimated the fair value and, accordingly, an impairment expense of
approximately $3.45 million was recorded during 1997 and is included in
depreciation and amortization expense.
NON-OPERATING INCOME (EXPENSE)
Interest expense increased 43.6% primarily due to interest on debt related
to the acquisition of Pasta Co. in January 1996.
INCOME TAX
The Company had no income tax provision nor benefit in 1997 or 1996.
MANAGEMENT'S PLANS
Management's plans to return to profitability include the following:
o Controlling food costs by improving vendor relations and
renegotiating contracts.
o Reducing labor costs by outsourcing certain labor intensive food
preparation processes.
-15-
<PAGE> 16
o Increasing revenues from the sale of food products by reinforcing
existing markets, expanding distribution to new market areas,
introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
o Reducing operating expenses through improved cost controls.
o Reducing general and administrative expenses.
o Increasing revenues in existing restaurants by remodeling certain
Marco's Restaurants and by improving marketing programs and
customer service.
o Franchising new restaurants.
o Selling or closing its Billy Blues Restaurant.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
REVENUES.
Total revenues increased 6.6% to $40,129,000 in fiscal 1996 over fiscal
1995. Revenues attributable to the Pasta Co. Restaurants were approximately
$5,100,000. Remaining revenues decreased by approximately $2,500,000 due to the
closing or sale of four Billy Blues Restaurants and the sale of one Longhorn
Cafe Restaurant partially offset by the opening of two Marco's Restaurants
during 1995 and one in 1996. Comparable restaurant revenues declined by .8% for
fiscal 1996 compared to a decline of 6.8% in fiscal 1995. Approximately 16% of
restaurant revenues were derived from the sale of alcoholic beverages for
fiscal 1996 and 1995. Revenues from food products declined by approximately
$150,000 due to the fact that during fiscal 1996, the Company discontinued
service to certain accounts which had proved to be unprofitable.
OPERATING COSTS AND EXPENSES.
Restaurant related operating costs generally increased principally
attributable to the 7.6% increase in restaurant revenues. Food and beverage
costs increased 4.6% in fiscal 1996 compared to fiscal 1995. As a percentage of
restaurant revenues, food and beverage costs declined to 29.4% in 1996 from
30.3% in 1995. The decrease was due to operational efficiencies implemented by
management, new buying programs and the introduction of new menu items with
lower cost percentages. Labor and other restaurant operations include all other
unit-level operating expenses, comprised principally of labor and benefits,
operating supplies, rent, utilities, repair and maintenance, pre-opening
expenses, advertising and other costs. A substantial portion of these expenses
are fixed or indirectly variable. Labor costs declined as a percentage of
restaurant revenues to 30.5% in 1996 from 33.3% in 1995 and other restaurant
operations costs declined to 27.5% in 1996 from 29.0% in 1995, due to
disproportionally higher expenses associated with the Billy Blues Restaurants
which were closed or sold.
The cost of food products declined in proportion to the decrease in food
product revenues in fiscal 1996. Costs declined additionally due to operational
efficiencies implemented in 1996. Food products selling, marketing and
distribution costs, included in the cost of food products, also declined due to
reductions in promotions and allowances granted to customers as well as
efficiencies gained in distribution expenses such as warehousing and freight.
General and administrative expenses decreased by approximately $570,000 to
$2,753,000 in 1996 from $3,321,000 in 1995 due to cost reductions implemented
by management in fiscal 1995, which included the elimination of personnel and a
consolidation of corporate offices.
Depreciation and amortization increased to $2.2 million in 1996 from
$2.1 million in 1995. Of this amount, approximately $457,000 was associated with
The Original Pasta Co. The remaining decline of approximately $350,000 was due
to the closure or sale of Billy Blues Restaurants and to assets becoming fully
depreciated or amortized.
-16-
<PAGE> 17
NON-OPERATING INCOME (EXPENSE).
In 1995, the Company recorded a provision for restaurant closings of
approximately $2.9 million as a result of management's decision to either close
or sell its interest in four Billy Blues Restaurants. The provision included
the write-down of assets to net realizable value as well as estimated amounts
for lease and other obligations associated with the restaurants. The Company
utilized substantially all of the provision by the end of fiscal 1996.
Interest income of approximately $167,000 in fiscal 1996 and $157,000 in
fiscal 1995 resulted primarily from a note receivable from Mr. Bombaywala.
Interest expense increased to $850,000 in 1996 from $813,000 in 1995 due to
$257,000 in interest associated with notes associated with The Original Pasta
Co., offset by a decrease of $220,000 of interest on other debt due to
principal reductions made on such debt.
In May of 1995, the Company offered its Debentureholders the right to
convert the principal and accrued interest owed on their Debentures into Common
Stock at a modified conversion rate of $2.3125 of Debenture principal and
interest for one share of Common Stock, as opposed to the stated conversion
rate of $5.00 per share. The Debentureholders, who were owed an aggregate of
approximately $2.5 million, agreed to the conversion and were issued an
aggregate of 1,093,904 shares of Common Stock. The Company recorded a loss on
conversion of approximately $1.3 million, which is equal to the market value of
the shares actually issued less the market value of the shares which would have
been issued had the conversion been at the stated conversion rate.
Other income, net, increased by $399,000 from 1995 to 1996 due to a gain
of approximately $150,000 on the sale of a Longhorn Cafe restaurant, with the
balance of the increase due primarily to consulting fees charged Pasta Co.
prior to its acquisition.
A note payable for the purchase of the Chris' & Pitt's product line was
paid off at a discount from the face amount of the note plus accrued interest.
The amount of the discount is reported as a gain on extinguishment of debt in
fiscal 1995.
The Company had no income tax provision nor benefit in 1995 or 1996.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flows for the
last three fiscal years:
<TABLE>
<CAPTION>
(In Thousands)
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Net cash provided by
(used in) operating activities $ 386 $ 1,346 ($1,341)
Net cash used in investing activities (606) (1,617) (613)
Net cash provided by
(used in) financing activities 21 (1,368) 3,524
------ ------ -------
Net increase (decrease) in cash
and cash equivalents ($199) ($1,639) $ 1,570
====== ====== =======
</TABLE>
The Company continues to experience substantial losses from operations
and, as of June 29, 1997, has an accumulated deficit of $30.3 million.
During 1997, net cash provided by operating activities of $385,783 was
primarily due to adding back of non-cash deductions from depreciation and
amortization of $6,035,811, provision for restaurant closings of $1,175,434, and
increase in accounts payable and accrued liabilities of $2,027,007. Net cash of
$606,131 used in investing activities was primarily due to cash outflow for
purchases of restaurant property and equipment in excess of proceeds from the
sale of property and equipment. Net cash provided by financing activities
totaling $20,724 was due to proceeds from borrowings in excess of repayments of
borrowings, and purchase of treasury stock.
During 1996, net cash flow from operating activities totaled $1,346,354
primarily due to depreciation and amortization added back to net income, offset
by a reduction in accrued liabilities. Investing activities utilized $1,616,660
of cash, principally resulting from purchases of property and equipment.
Financing activities utilized $1,368,257 of cash, primarily due to net payments
on borrowings. In March of 1996, the Company received proceeds from a $1.2
million bank loan, of which approximately $860,000 was used to pay off an
existing loan.
For fiscal 1995, operating activities utilized $1,340,986 of cash,
primarily due to a net loss less non-cash expenses. Investing activities
utilized $612,575 in cash due to purchases of property and equipment of
approximately $1.4 million offset by a $756,000 collection on a note
receivable. Financing activities provided $3,523,580 in cash primarily due to
the issuance of common stock and an increase in net borrowings. In June 1995,
the Company received proceeds from a $1.0 million loan from an unaffiliated
foreign corporation and approximately $1.1 million from a private placement of
Common Stock.
-17-
<PAGE> 18
In the fourth quarter of fiscal 1997 (June 1997) the Company offered a
private placement of $4 Million of 11% Convertible Subordinated Notes due June
30, 2002 (the "Convertible Subordinated Notes") pursuant to exemptions from
registration under the Securities Act of 1933, as amended (the "Act") and the
rules and regulations promulgated thereunder, including, without limitation,
Section 4(2) and Regulation D. The Convertible Subordinated Notes are being
offered directly by the Company to qualified accredited investors. The Company
has not retained a broker or underwriter to assist with the offering although
it may elect to do so in the future on terms to be negotiated. Holders of the
Convertible Subordinated Notes received warrants (the "Convertible Subordinated
Note Warrants") to purchase shares of Common Stock at a purchase price of $1.50
per share until June 30, 2002. Interest on the Convertible Subordinated Notes
is payable quarterly beginning September 30, 1997. The Convertible Subordinated
Notes are currently unsecured and may be subordinated to certain defined senior
indebtedness. As of September 1997, $700,000 principal amount of the
Convertible Subordinated Notes has been subscribed. The proceeds of the
offering were used to repay a portion of the $3 million principal amount of 12%
Subordinated Notes originally due July 31, 1997. The balance of the
Subordinated Notes was extended to July 10, 1998. Ghulam M. Bombaywala,
Chairman of the Board, Chief Executive Officer and a director of the Company,
converted the $500,000 principal amount of 12% Subordinated Notes owed to him
into the 11% Convertible Subordinated Notes, pursuant to a Subordinated Note
Conversion Agreement dated June 1, 1997 (the "Conversion Agreement"). Pursuant
to the Conversion Agreement, Mr. Bombaywala canceled the $500,000 principal
amount of 12% Subordinated Notes owed him by the Company and received an 11%
Convertible Subordinated Note of equal principal amount with the same terms and
conditions as the Convertible Subordinated Notes being offered by the Company
to prospective investors. Additionally, in September 1997, the Company
guaranteed a promissory note with United Central Bank for $850,000 due
September 2002. The proceeds of the note were used to repay a portion of the $3
million principal amount of 12% Subordinated Notes originally due July 31,
1997.
In April 1997, the Company secured a $300,000 (at prime + 2%) unsecured
line of credit with MetroBank in Houston, Texas maturing in April 1998. These
funds were used to supplement working capital needs. As of June 29, 1997
approximately $25,000 was available. Also, in April 1997, the Company secured a
$300,000 note (at prime) with United Central Bank in Houston, Texas maturing
April 2004, for the purpose of financing equipment and leasehold improvements
for a Pasta Co. Restaurant.
In February 1997, the Company secured a $250,000 note (at prime +1%) with
Langham Creek National Bank in Houston, Texas for the purpose of financing
equipment and leasehold improvements for a Pasta Co. Restaurant.
The Company frequently has not been able to make timely payments to its
trade and other creditors. The Company has renegotiated new terms with most of
its suppliers and vendors, which include more favorable pricing, extended
payment terms and discounts. If the Company is unable to comply with these
terms, its suppliers and vendors may suspend deliveries and the Company's
ability to continue to operate could be materially affected. The Company is
currently seeking sources of working capital financing sufficient to fund its
ongoing trade obligations.
-18-
<PAGE> 19
FISCAL 1998 CAPITAL REQUIREMENTS.
The Company has a working capital deficit of approximately $8.2 million at
June 29, 1997. The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its obligations on a
timely basis, to obtain additional financing or capital, refinance its debt and
to ultimately attain profitable operations.
Management's plans include the following:
o Decreasing food and labor cost while increasing revenues.
o Increasing revenues in existing restaurants by remodeling certain
Marco's Mexican Restaurants and by improving marketing programs and
customer service.
o Increasing revenues from the sale of food products by reinforcing
existing markets, expanding distribution to new market areas,
introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
o Franchising new restaurants.
o Obtaining additional equity capital or debt financing.
The material capital commitments of the Company for fiscal 1998 are as
follows:
o Reduction of the Company's working capital deficit, including payments
on notes, accounts payable and accrued liabilities.
o Accumulation of funds for the payment of the principal balance of
$1.25 million owed on the $3 Million 12% Subordinated Notes originally
due July 31, 1997 but extended to July 10, 1998.
o Remodeling Marco's Restaurants.
In the first quarter of fiscal 1998, the Company opened one new Pasta Co.
Restaurant. Pasta Co. Restaurants require an initial capital investment of
approximately $400,000. Of this amount, the Company financed approximately half
of the investment using the acquired assets as collateral. The Company financed
the balance through cash flow from operations. There are no further plans to
open new restaurants during fiscal 1998.
The Company expects to achieve positive cash flow from operations in fiscal
1998, principally from its Marco's and Pasta Co. Restaurants, if it can increase
its restaurant sales and reduce its labor and operating costs. During the first
quarter of fiscal 1998, the Company sold its Longhorn Cafe Restaurant. The
Company also plans to supplement cash flow from operations by selling its last
barbecue restaurant, Billy Blues. However, cash generated from operations may
not be sufficient to meet all of the Company's fiscal 1998 capital commitments
set forth above. Without debt refinancing or additional debt or equity financing
in the short-term, the Company will not be able to (i) reduce its current
working capital deficit, (ii) repay the $1.25 million balance of the 12%
Subordinated Notes due July 10, 1998, or (iii) continue its remodeling efforts
on the Marco's restaurants. There is no assurance that the Company will be able
to refinance its debt or obtain additional debt or equity financing in the short
term or long-term.
For fiscal 1997 the Company had negative cash flow from operations of
$1,641,224 (after subtracting the increase in accounts payable of $2,027,007).
The Company did not have sufficient cash flow during fiscal 1997 to satisfy its
direct operating expenses and pay its substantial indebtedness and reduce its
accounts payable and short-term liabilities. In order to meet its liabilities
and obligations, the Company was required to obtain additional debt financing
and borrowings as discussed above, renegotiate and extend the terms of various
borrowings and renegotiate and extend the amounts and the timing of payments to
various vendors.
The Company may experience further losses or negative cash flow from
operations in fiscal 1998. Continued losses raise doubt about the Company's
ability to continue as a going concern. The financial statements do not
reflect any adjustments that might result from the outcome of this
uncertainty. If the substantial losses continue, the value of the Company's
long-lived assets may become impaired resulting in further write-downs to such
assets to their estimated fair value.
The inability of the Company to obtain substantial additional financing
and achieve profitable operations has resulted in the curtailment of the
Company's expansion activities which may continue indefinitely. Cash
generated from operations will not be sufficient to allow the Company to timely
meet its obligations and continue remodeling the Marco's Restaurants and
continue restaurant expansion. Without obtaining profitable operations and
positive cash flow from operations the Company may have to curtail its
operations, sell core assets or seek further financing on terms which may prove
unfavorable to the Company and its shareholders.
NEW ACCOUNTING STANDARDS.
In May 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which
changes the manner in which earnings per share are calculated and presented.
The pronouncement is effective for annual and interim periods ending after
December 15, 1997.
-19-
<PAGE> 20
FORWARD-LOOKING INFORMATION. Information in this Annual Report and
Form 10-K contains forward-looking statements and information relating to the
Company that are based on the beliefs of the Company's management, as well as
assumptions made by, and information currently available to the Company's
management. When used in this Annual Report and Form 10-K, words such as
"anticipate," "believe," "estimate," "expect," "intend," and similar
expressions, as they relate to the Company or the Company's management, identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events, and are subject to certain risks,
uncertainties, and assumptions relating to the operations and results of
operations of the Company, competitive factors and pricing pressures, shifts in
consumer demand, the costs of products and services, general economic
conditions, and the acts of third parties, as well as other factors described in
this Annual Report and Form 10-K, and, from time to time, in the Company's
periodic earnings releases and reports filed with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results or outcomes may
vary materially from those described herein as anticipated, believed, estimated,
expected, or intended, or the like.
ITEM 8. FINANCIAL STATEMENTS.
The financial information required by this Item is found beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As previously reported in a Form 8-K filing dated August 20, 1997, the
Company changed its principal independent accountant. (See "Item 10.
Directors and Executive Officers of the Registrant -- Committees and
Fees").
-20-
<PAGE> 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages, titles and dates of
employment of the members of the Board of Directors and the executive officers
of the Company.
<TABLE>
<CAPTION>
Term of
Office
Name Age Position Since
- ---- --- -------- -----
<S> <C> <C> <C>
Ghulam Bombaywala 41 Chairman of the Board, 1994
Chief Executive Officer
and Director
Thomas J. Buckley(3) 50 Former Chief Financial 1994
Officer & Secretary
Michael S. Chadwick(1) 45 Director 1994
Nico B. Letschert(2) 42 Director 1994
Philip M. Mount 39 Director 1994
Sarosh J. Collector(1)(2) 49 Director 1995
</TABLE>
- -----------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Thomas J. Buckley resigned effective July 1, 1997 and as of the date of
this filing has not been replaced.
GHULAM BOMBAYWALA was elected as a director of the Company on August 5,
1994. Effective September 21, 1994, Mr. Bombaywala was elected Chairman of the
Board of Directors and Chief Executive Officer of the Company. Since 1984, Mr.
Bombaywala has served as sole director of Marco's. Mr. Bombaywala also served
as President and Chairman of the Board of Directors of the publicly traded Two
Pesos, Inc. from April 1990 to June 1993 when it was sold to Taco Cabana, Inc.
Mr. Bombaywala is also a shareholder and President of James Coney Island
restaurants serving hot dogs and chili. Mr. Bombaywala serves on the Board of
Directors of the Sam Houston Area Boy Scouts of America, the National
Conference of Christians and Jews, and the United Way of Texas Gulf Coast.
THOMAS J. BUCKLEY was elected Chief Financial Officer and Secretary of the
Company in December 1994. From May 1990 to January 1994, Mr. Buckley was Vice
President - Finance and Franchising of Western Sizzlin, Inc. ("WSI"), a
restaurant franchising and operating company. From 1986 to 1989, Mr. Buckley
was President of SDO, Inc., a regional franchising company. From 1980 to 1985,
Mr. Buckley was Executive Vice President and a director of the publicly traded
USACafes, franchisor and operator of Bonanza Restaurants. Mr. Buckley has over
15 years experience in the restaurant industry and extensive experience in
franchising. Mr. Buckley received a B.S. degree in accounting from the
University of New Orleans.
MICHAEL S. CHADWICK has served as a director of the Company since August
1994. Mr. Chadwick serves on the Audit Committee of the Board of Directors. Mr.
Chadwick is Senior Vice President and a Managing Director of the Corporate
Finance Department of Sanders Morris Mundy Inc., a Houston-based financial
services and investment banking firm. From 1988 to August 1994, Mr. Chadwick
served as President and Co-Owner of Chadwick, Chambers & Associates, Inc., an
investment and merchant banking firm specializing in corporate finance
services. From 1984 to 1988, Mr. Chadwick served as Vice President, Corporate
Finance at Lovett Mitchell Webb & Garrison, Inc., a Houston-based investment
banking firm. Mr. Chadwick has been engaged in investment banking since 1978.
Mr. Chadwick presently serves on the Board of Directors of Blue Dolphin Energy
Company and Brazos Sportswear, Inc., both publicly traded corporations, and
Moody-Price, Inc., a privately held concern. Mr. Chadwick received an M.B.A. in
finance from Southern Methodist University and a B.A. degree in economics from
the University of Texas.
-21-
<PAGE> 22
NICO B. LETSCHERT was elected to the Board of Directors in September 1994
and serves as a member of the Compensation Committee of the Board of Directors.
Mr. Letschert is the CEO of Noesis Capital Corp., a Florida-based investment
banking and money management firm. From 1984 until July 1995, Mr. Letschert was
President of Noble Investment Co. of Palm Beach. A native of The Netherlands,
Mr. Letschert began his career on the Amsterdam Stock Exchange before
relocating to the U.S. and becoming involved with venture capital and corporate
finance. Mr. Letschert received his degree from the Dutch Institute for Banking
and Finance and is a Certified Financial Planner. He also serves on the Board
of Directors of the following publicly traded corporations: Celerity Solutions,
Inc., Futuremedia PLC and PSI Industries, Inc.
PHILIP M. MOUNT has been a director of the Company since August 5, 1994 and
is a partner with the law firm of Kelly, Sutter, Mount & Kendrick. Mr. Mount
has engaged in the practice of law in Houston, Texas since 1983. Mr. Mount's
principal areas of practice are corporate finance and securities. Mr. Mount
received his B.B.A. with honors from the University of Texas at Austin in 1980
and a J.D. from the University of Houston College of Law in 1983. From August
1990 until its acquisition in 1993, Mr. Mount served as a director and a member
of the Compensation and Executive Committees of Two Pesos, Inc., a publicly
traded Houston, Texas based restaurant company.
SAROSH J. COLLECTOR has been a director of the Company since March 17, 1995
and currently serves as a member of the Audit and Compensation Committees of
the Board of Directors. Mr. Collector is a certified public accountant and has
served as President of the accounting firm of Collector, Dart & Moore P.C.
since 1987. From 1986 to 1987, Mr. Collector was a manager with the accounting
firm of Spicer & Oppenheim, and from 1981 to 1986 served as a partner with the
accounting firm of Malow Cohen & Co. Mr. Collector's principal areas of
practice are taxation, business consulting and business valuation. Mr.
Collector also served as a director of Two Pesos, Inc., a publicly traded
corporation, from April 1990 to August 1993.
COMMITTEES AND FEES
The Board of Directors of the Company has established an Audit Committee
and a Compensation Committee. The purpose of the Audit Committee is to review
and make recommendations to the Board of Directors with respect to the
engagement of the Company's independent public accountants, reviewing with such
accountants the plans for and the results and scope of the auditing engagement
and certain other matters relating to the services provided to the Company,
including the independence of such accountants. The Audit Committee held no
meetings during fiscal 1997. Furthermore, the Audit Committee met in August
1997 and approved a change of principal independent accountants for the
fiscal year 1997 audited financial statements. Mann, Frankfort, Stein & Lipp,
P.C. was engaged as the Company's principal independent accountant to replace
Coopers & Lybrand L.L.P. who resigned on August 20, 1997. (See Form 8-K and
Form 8-K Amendment No. 1 dated August 20, 1997 and filed on
August 27, 1997 and September 9, 1997, respectively, which are attached hereto
as exhibits and incorporated herein by reference.)
The Compensation Committee reviews on behalf of, and makes recommendations
to, the Board of Directors with respect to compensation of executive officers
and key employees of the Company and administers the Company's 1994 Stock
Compensation Plan (the "Stock Compensation Plan"). All actions undertaken by
the Compensation Committee during the last fiscal year were effected by
unanimous consent in lieu of holding scheduled or special meetings.
Each director who is not an employee of the Company is entitled to be paid
$250 for each meeting of the Board of Directors attended (exclusive of
telephonic meetings) and $250 for each meeting of a Committee of the Board of
Directors attended (exclusive of committee meetings occurring on the same day
as Board Meetings), and are reimbursed for expenses incurred in attending such
meetings. Directors who are employees of the Company are not paid any
additional compensation for attendance at Board of Directors or Committee
meetings. During fiscal 1997 the Directors chose to forego any compensation for
attending meetings. During fiscal 1997, the Board of Directors held its annual
meeting on December 13, 1996, conducted meetings in September 1996, April and
May of 1997, and approved actions undertaken by management of the Company.
-22-
<PAGE> 23
SECTION 16(A) - BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership of the Company's securities
with the Securities and Exchange Commission (the "Commission").
Based solely on its review of the copies of such report forms received by
it with respect to fiscal year 1997, or written representations from certain
reporting persons, the Company believes that filing requirements applicable to
its directors, officers and persons who own more than 10% of a registered class
of the Company's equity securities have not been timely complied with in
accordance with Section 16(a) of the Exchange Act as follows. Sarosh J.
Collector, a director of the Company, failed to timely file a Form 4 in August
of 1996. Angelo Pitillo, a former executive officer and director of the Company
failed to timely file Form 4 in August 1996, January 1997, and July 1997 for
one transaction each. Thomas Buckley, a former executive officer of the Company
failed to timely file Form 4 in August 1996, January 1997 and July 1997 for a
total of six transactions (two each). In addition, all directors and executive
officers of the Company (except Ghulam Bombaywala, who was not required to file
a Form 5) each failed to timely file Form 5 - Annual Changes in Beneficial
Ownership of Securities for fiscal 1997. All late reports were filed in
September and October of 1997.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION INFORMATION
The following table sets forth certain information regarding all cash
compensation paid or to be paid by the Company or any of its subsidiaries, as
well as other compensation paid or accrued, during the Company's fiscal year
ended June 29, 1997, to the Company's Chief Executive officer and to those
other executive officers who received salary and bonus compensation in excess
of $100,000 during the fiscal year (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
---------------------------------- -------------------------- -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Compensation(2) Award(s) Options/SARs(3) Payouts Compensation
Name and Principal Position Year Salary($) Bonus($) ($) ($) (#) ($) ($)
- --------------------------- ---- --------- -------- -------------- ---------- -------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GhulamBombaywala,Chairman of 1997 $60,000(1) $60,000(1) $-0- $-0- -0- -0- $-0-
the Board and Chief Executive 1996 -0- -0- -0- -0- -0- -0- -0-
Officer 1995 -0- -0- -0- -0- -0- -0- -0-
Angelo Pitillo, former President 1997 $150,000 $-0- $-0- $-0- 80,000 -0- $-0-
and Chief Operating Officer(4) 1996 $150,000 $-0- $-0- $-0- -0- -0- $-0-
1995 121,154 -0- -0- -0- 250,000 -0- -0-
</TABLE>
(1) Includes salary or bonus amounts earned but deferred at the officer's
election.
(2) Excludes certain incidental perquisites, the total of which did not exceed
the lesser of $50,000 or 10% of cash compensation for any named individual.
(3) Incentive stock options to acquire shares of Common Stock pursuant to the
Company's Stock Compensation Plan.
(4) Mr. Pitillo resigned June 1997 and has not been replaced as of the date of
this filing, and has a consulting agreement and severance beginning in
fiscal 1998 of $4,167 per month for twelve months along with 180,000 common
stock warrants exercisable at $.50 per warrant until expiration on June 30,
1999.
-23-
<PAGE> 24
OPTION GRANTS DURING FISCAL YEAR 1997
The following table provides information related to options to acquire
shares of Common Stock granted to the Chief Executive Officer and the other
named executive officers of the Company referenced in the Summary Compensation
Table, above, during fiscal year 1997. The Company does not have any
outstanding Stock Appreciation Rights ("SARs").
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
<TABLE>
<CAPTION>
Potential Realizable
value at assumed
annual rates of stock
price appreciation
for option term
Number of Securities % of Total Options/ Exercise or ------------------------
Underlying Options/ SARs Granted to Base Price Expiration
Name SARs Granted(#) (1) Employees in Fiscal Year ($/Sh)(2) Date 5%($) 10%($)
------------------- ------------------------ ---------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Ghulam Bombaywala -0- -0-% N/A N/A N/A N/A
Angelo Pitillo 80,000 40% $.50 08/01 $ -0- $ -0-
</TABLE>
- ---------------------
(1) Incentive stock options to acquire shares of Common Stock granted pursuant
to the Company's Stock Compensation Plan. Options issued to Mr. Pitillo
vest at 100% commencing six months from the date of the original grant
(August 1996), are nontransferable and are subject to termination under
certain conditions upon cessation of employment. At his termination date,
June 25, 1997, these options, along with all other options granted to Mr.
Pitillo, were canceled and Mr. Pitillo was granted 180,000 Common Stock
warrants exercisable at $.50 per warrant until expiration on June 30,
1999.
(2) The exercise price per share of each option granted in 1997 was equal to or
greater than 100% of the fair market value of the Common Stock on the date
of grant pursuant to the requirements of the Stock Compensation Plan.
-24-
<PAGE> 25
OPTION EXERCISES AND FISCAL 1997 YEAR END HOLDINGS
The following table sets forth information with respect to options
exercised by named executive officers of the Company referenced in the Summary
Compensation Table, above, during fiscal year 1997 and the number and value of
options held at fiscal year end.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at FY-End(#) At FY-End($)(1)
Shares Acquired ------------------------- ----------------------------
Name On Exercise(#) Value Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ghulam Bombaywala -0- $ -0- -0- -0- N/A N/A
Angelo Pitillo -0- -0- -0- -0- $ -0- $ -0-
</TABLE>
- ---------------
(1) The closing bid price for the Company's Common Stock as reported by NASDAQ
SmallCap Market on June 29, 1997 was $0.25 per share. The indicated value
is calculated on the basis of the difference between the option exercise
price per share and $0.25, multiplied by the number of shares of Common
Stock underlying each option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company is comprised of two persons
selected by the Board of Directors. Throughout fiscal 1997, Nico B. Letschert
and Sarosh J. Collector served on the Compensation Committee. Nico B. Letschert
was the President of Noble Investment Co. of Palm Beach ("Noble") and is the
Chief Executive Officer of Noesis Capital Corp. ("Noesis"). Sarosh J. Collector
is a certified public accountant and President of the Houston based accounting
firm of Collector, Dart & Moore, P.C. Through May 1997, Philip M. Mount served
on the Compensation Committee. Mr. Mount is a shareholder of Kelly, Sutter,
Mount & Kendrick, P.C. ("KSMK"), a Houston based law firm. In May 1997, Mr.
Mount resigned from the Compensation Committee.
During fiscal 1995, 1996, and 1997 KSMK rendered legal services as counsel
to the Company. In June of 1995, the Company issued 100,000 shares of Common
Stock to KSMK as partial payment for outstanding invoices. In February, 1996,
the Company issued an additional 100,000 shares of Common Stock to KSMK as
payment for legal services. Mr. Mount disclaims any beneficial ownership in the
shares issued to KSMK. During fiscal 1997, KSMK returned the shares in exchange
for cash of $1.50 per share and the agreement of the Company to pay the balance
owed to KSMK in monthly installments in the ordinary course of business.
In December 1994, in connection with the offering of the Company's $3
million 12% Subordinated Notes, Sanders Morris Mundy, Inc. ("SMM") received
approximately $250,000 as a placement fee. Also in connection with the
offering, the Company entered into an eighteen month advisory agreement with
SMM calling for payments of $10,000 per month and issued warrants to purchase
150,000 shares of common stock at an exercise price of $2.50 per share which
expire on December 31, 1999. Mr. Chadwick, Senior Vice President and a Managing
Director of Corporate Finance of SMM, and a director of the Company, was
assigned 45,000 of the warrants by SMM. In July of 1997, the payment terms of
the Subordinated Notes were extended, the advisory agreement was extended
through December 1997 at a rate of $5,000 per month and the exercise price of
the warrants was reduced to $.25 per share.
EMPLOYMENT CONTRACTS
Effective July 1, 1994, the Company entered into an employment agreement
with Ghulam Bombaywala, Chairman of the Board, Chief Executive Officer and a
director of the Company (the "Bombaywala Agreement"). Under the terms of the
Bombaywala Agreement, Mr. Bombaywala is entitled to receive an annual salary of
$60,000 plus annual cost of living increases. In addition, Mr. Bombaywala is
entitled to receive a bonus in an amount based on such factors as the Board of
Directors of the Company may elect to consider. Mr. Bombaywala has elected to
defer any salary or bonus due and owing to him under this agreement for fiscal
1997 for an
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<PAGE> 26
indefinite period of time. The Bombaywala Agreement also provides for health,
medical and life insurance benefits and allows participation in the Company's
employee benefit plans. The Bombaywala Agreement expired April 30, 1997,
however, the Board of Directors approved a one year extension during the second
quarter of fiscal 1998. The Bombaywala Agreement contains provisions for
employment on a full time basis, as well as payments upon termination and
payment of bonuses. The non-competition provisions of the Bombaywala Agreement
provide that upon termination, Mr. Bombaywala will not engage or participate in
a barbecue or Mexican restaurant business within a radius of ten miles of any
existing or proposed barbecue or Mexican restaurant owned, licensed, managed or
operated by the Company for a period of twelve months beginning on the date of
termination of the Bombaywala Agreement.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, currently consisting of Messrs. Collector and
Letschert, determines the compensation of the Company's executive officer, Mr.
Bombaywala (C.E.O.).
Mr. Bombaywala decided to forego a salary or bonus in fiscal 1995 and
fiscal 1996 due to the fact that the Company has been and is in the process of
a "turnaround." For fiscal 1997, Mr. Bombaywala deferred a salary of $60,000
per year and a bonus of $60,000 for an indefinite period of time. Mr.
Bombaywala owns 6,558,889 shares of the Company's Common Stock or approximately
43.8% of the outstanding shares. Included in this calculation is the following:
Mr. Bombaywala received warrants with the right to purchase 222,222 shares of
the Company's common stock at a price of $1.00 per share issued in connection
with the issue of the 12% Subordinated Notes in December 1994. When Mr.
Bombaywala converted his 12% Subordinated Note to the 11% Convertible
Subordinated Note he received warrants with the right to purchase 50,000 shares
of the Company's Common Stock at $1.50 per share. As incentive to Mr.
Bombaywala for converting his note, his 222,222 warrants were not canceled.
(See "Liquidity and Capital Resources"). Not included in the above calculation
is the following: Mr. Bombaywala received 7,500,000 common stock rights at a
value of $.50 per share in connection with the Conversion and Offset Agreement
in May 1997. (See "Item 13. Certain Relationships and Related Transactions".)
The Compensation Committee believes that Mr. Bombaywala is very motivated due
to his stock ownership and commitment to the Company to represent the interests
of all stockholders and maximize the performance of the Company. The
Compensation Committee agreed with Mr. Bombaywala's decision to forego any
salary or bonus during fiscal 1995 and 1996. The compensation which would have
been payable to Mr. Bombaywala through April 1997 was determined by the
Bombaywala Agreement, which was negotiated between the Company and Mr.
Bombaywala when Marco's was acquired in fiscal 1994.
The Compensation Committee plans to use the Company's Common Stock to
retain and provide incentive to the Company's key employees. The Board of
Directors believes that significant stock ownership is a major factor in
aligning the interests of management and shareholders.
-26-
<PAGE> 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of October 1, 1997, by
(i) each person who beneficially owns 5% or more of the Common Stock, (ii) each
Director and named executive officer of the Company, and (iii) all officers and
Directors of the Company as a group. Unless otherwise noted, the persons and
entities named below have sole voting and investment power with respect to such
shares.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-------------------------
Name of Beneficial Owner Number Percent
- ------------------------ ------ -------
<S> <C> <C>
Ghulam Bombaywala(1) 6,558,889 43.8%
Thomas J. Buckley 12,584 *
Michael S. Chadwick(2)(6) 124,444 *
Nico B. Letschert(3)(6) 311,554 2.1%
Philip M. Mount(4)(6) 37,222 *
Sarosh J. Collector(5)(6) 24,000 *
All Officers and Directors as a Group (5 Persons) (7) 7,051,109 47.1%
</TABLE>
- -----------------------
* Indicates ownership of less than or equal to one percent of the outstanding
Common Stock of the Company.
(1) Mr. Bombaywala's address is 11111 Wilcrest Green, Suite 350, Houston, Texas
77042. Includes warrants to purchase 222,222 shares of Common Stock issued
in connection with the Company's Subordinated Notes. Includes warrants to
purchase 50,000 shares of Common Stock issued in connection with the
Company's 11% Convertible Subordinated Notes. It does not include 7,500,000
shares rights of Common Stock issued in connection with the Company's
Conversion and Offset Agreement. These rights are exercisable only with
Board of Directors approval and possible authorization of new common
shares.
(2) Mr. Chadwick's address is 3100 Texas Commerce Tower, Houston, Texas 77002.
Includes warrants to purchase 89,444 shares of Common Stock issued in
connection with the Company's Subordinated Notes.
(3) Includes 97,000 Series A Warrants, which may be converted into 97,000 shares
of Common Stock upon payment of the $6.50 exercise price. Includes warrants
to purchase 45,000 shares of Preferred Stock, which Preferred Stock is
convertible into 56,250 shares of Common Stock. Includes warrants to
purchase 45,000 shares of Common Stock originally issued to Noble under the
terms of the 1993 Regulation S offering and subsequently assigned to Mr.
Letschert. Includes 21,000 shares of Common Stock issuable to Mr. Letschert
upon the conversion of $105,000 in Debenture principle, at a conversion
ratio of one share of Common Stock for each $5.00 in principle converted.
Mr. Letschert may acquire Debentures in the principal amount of $105,000
upon the exercise of warrants originally granted to Noble as placement agent
for the Company's offering of Debentures and subsequently assigned to Mr.
Letschert. Includes warrants to purchase 71,250 shares of Common Stock at $3
per share. Also includes 10,000 Series A Warrants which entitle Mr.
Letschert to acquire 10,000 shares of Common Stock upon the payment of the
exercise price of $6.50 per share. Mr. Letschert's address is 1801 Clint
Moore Road, Suite 100, Boca Raton, Florida 33487.
(4) Mr. Mount's address is 1600 Smith, Suite 3700, Houston, Texas 77002.
Includes warrants to purchase 22,222 shares of Common Stock issued in
connection with the Company's Subordinated Notes.
(5) Mr. Collector's address is 3000 Richmond Avenue, Suite 270, Houston, Texas
77002.
(6) Includes options to purchase 15,000 shares of Common Stock granted under
the Company's Outside Director's Stock Option Plan.
(7) Does not include former Chief Financial Officer (resigned July 1997) Tom
Buckley's 12,584 shares or former President (resigned June 1997) Angelo
Pitillo's 12,382 shares owned.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Late in the fourth quarter of fiscal 1997 the Company sold Pete's
Hospitality Co., Inc., ("Pete's") a wholly-owned subsidiary, pursuant to a
Stock Purchase Agreement, to Angelo Pitillo, former President, Chief Operating
Officer and director of the Company. Mr. Pitillo acquired all of the issued and
outstanding shares of Pete's in exchange for a promissory note payable to the
Company in the principal amount of $300,000 (the "Pete's Note"). The Pete's
Note accrues interest at the rate of 10% per annum over approximately five
years. The Pete's Note is secured by assets of Pete's. The Company
recorded a loss of approximately $750,000 on the transaction.
-27-
<PAGE> 28
In August 1996, the Company sold for $350,000 previously mortgaged
real property located at the Victoria, Texas Marco's Restaurant location to the
Bombaywala Family Trust ("The Trust"). The Trust is administered by M.U.
Bombaywala, Trustee, for the purpose of his grandchildren's
education. The real property and certain assets are now being leased by the
Company from the Trust. The Trust also owns the real property on which one of
the Company's Pasta Co. Restaurants is located, having purchased it from an
unaffiliated third party. The Trust leases this property to the Company. The
Company believes that both leases are at rates comparable to those which could
be attained from unrelated third parties.
In April 1997, the Company agreed to sell equipment associated with three
new restaurants to Mr. Bombaywala and lease the assets back. The three
restaurants were opened in the second and fourth quarters of fiscal 1997. The
Company believes that the selling price of $750,000 and the lease rate are
comparable to those which could be attained from an unrelated third party.
There was no gain or loss to the Company on this transaction.
On July 31, 1994, Ghulam Bombaywala, Chairman of the Board and Chief
Executive Officer of the Company, executed a promissory note in the principal
amount of $2,175,310 made payable to Marco's (the "Bombaywala Note"). The
Bombaywala Note accrues interest at the rate 6% per annum until maturity, with
accrued interest being payable annually on the 1st day of July of each year for
which a principal balance is due and owing. The principal balance of the
Bombaywala Note is due as follows: $200,000 on July 31, 1996, 1997 and 1998,
with all remaining principal and interest due and owing under the Bombaywala
Note to be paid in full on July 31, 1999. The Bombaywala Note is secured by the
securities more particularly set forth in that certain Pledge and Security
Agreement entered into by and between Marco's and Mr. Bombaywala on July 31,
1994. In September of 1995, the Company's Board of Directors voted to defer the
interest payment due July 1, 1995 until December 31, 1995. During fiscal 1997,
the principal amount due under the Bombaywala Note was reduced by $819,202
pursuant to a Conversion and Offset Agreement further described below. During
1997, the Company earned interest of $123,877 on the note receivable from Mr.
Bombaywala and was charged interest of $123,757 on various notes payable to
him. The interest receivable and payable, together with interest receivable at
June 30, 1996 of $94,974 were offset with a remaining receivable from Mr.
Bombaywala of $95,093 outstanding at June 29, 1997.
On June 17, 1992, the Company loaned William J. Gallagher, a former officer
and director of the Company, $53,000 evidenced by an unsecured promissory note
providing for interest at prime. The note was renewed on June 17, 1993, whereby
the principal balance due under the note was increased to $124,000 to include
additional advances made by the Company during fiscal 1993. The principal
balance of the note accrues interest at the rate of 6% per annum, with accrued
interest being due and payable annually on July 1. The entire principal balance
is due and payable on July 1, 1999. The note is an unsecured debt obligation of
Mr. Gallagher to the Company. The interest payments Due July 1, 1995, 1996 and
1997 had not been made by Mr. Gallagher as of October 1, 1997.
On June 30, 1994, John H. Coleman, III, a former officer and director of
the Company, executed a promissory note in the principal amount of $31,291 for
the purpose of evidencing a debt obligation resulting from advances made by the
Company to Mr. Coleman during fiscal 1994. The principal amount of the note
accrues interest at the rate of 6% per annum and is due and payable on the
first day of July for each year the principal balance remains outstanding. The
principal balance of the note is due and payable in full on July 1, 1999. The
note is an unsecured debt obligation of Mr. Coleman to the Company. The
interest payments due July 1, 1995 and 1996 were not made by Mr. Coleman. Mr.
Coleman was also the plaintiff in a lawsuit against the Company (see Item 3
"Legal Proceedings".) As part of the settlement of this lawsuit, this note was
canceled.
Mr. Bombaywala has an ownership interest in and participates in the
management of other businesses, including the Houston-based James Coney Island
restaurant chain.
PASTA CO. ACQUISITION
On September 7, 1995, the Board of Directors of the Company approved the
acquisition of all of the issued and outstanding shares (the "Shares") of Pasta
Co. from Mr. Bombaywala, the sole stockholder and director of Pasta Co. On
September 14, 1995, the Company, Mr. Bombaywala, and Pasta Co. entered into an
Agreement and Plan of Merger (the "Merger Agreement") which provided for the
merger of Pasta Co. with and
-28-
<PAGE> 29
into the Company as the surviving corporation (the "Merger"). The principal
assets of Pasta Co. consisted of its ownership of ten (10) restaurants in
Houston, Texas.
In consideration for the Shares, Mr. Bombaywala received 1,666,667 shares
of the Company's Common Stock (the "Merger Shares") and two promissory notes in
the aggregate principal amount of $3,750,000 (the "Notes"). The Merger Shares
were valued at $1.78 per share which was the market value of the Common Stock
on the date of the Merger. The total consideration paid to Mr. Bombaywala was
$2,966,667; however, as provided below, a portion of the Merger Shares was
subject to future release and earn out. In addition, the Company assumed
approximately $3.6 million of liabilities and indebtedness of Pasta Co.
outstanding as of January 26, 1996.
Although not required by law, the Board of Directors of the Company elected
to submit the Merger to its independent shareholders for approval at its Annual
Meeting of Shareholders which was held January 9, 1996. Mr. Bombaywala, who
then owned 4,620,000 shares of the Company's Common Stock, or 41.6%, excluding
the Merger Shares, did not vote on the Merger at the Annual Meeting. The Merger
was approved, and the effective date of the Merger (the "Effective Date") was
January 26, 1996. As of the Escrow Closing Date, the Company was granted the
right to manage Pasta Co. and received a management fee of three percent (3%)
of the gross revenues of Pasta Co. through the Effective Date. Such fees
amounted to approximately $137,000.
The Merger Shares are restricted securities but have demand and incidental
registration rights. A total of 350,000 Merger Shares were subject to a
Development Escrow Agreement which provided for the earnout and release of such
shares based upon (i) the opening of five additional Pasta Co. Restaurants on
or before December 31, 1996 at an average cost not to exceed $400,000 per
restaurant, or (ii) the share price for the Company's Common Stock exceeding
$5.00 per share for any ten consecutive business days on or before June 30,
1996 or $7.00 per share on or before June 30, 1997. The Company completed the
opening of the five additional Pasta Co. Restaurants before December 31, 1996
and, therefore, the Merger Shares have been released to Mr. Bombaywala.
The Notes consisted of (i) a promissory note from Pasta Co. in the
principal amount of $2,750,000, bearing interest at 10% per annum, and due and
payable on September 15, 2002, subject to certain mandatory prepayment
provisions, and (ii) a promissory note from Pasta Co. in the principal amount
of $1,000,000 bearing interest at 10% per annum, the principal amount of which,
subject to certain mandatory prepayment provisions, was due and payable in two
equal annual installments on December 31, 1996 and December 31, 1997. Quarterly
payments of interest were due and payable on the Notes on the 15th day of
December, March, June and September of each year the Notes were outstanding.
Commencing September 15, 2000, the outstanding principal on the $2,750,000 Note
was to be amortized and paid in quarterly installments over the remaining two
year term. The Notes required mandatory prepayment in the amount of and to the
extent of (i) fifty percent of the proceeds from any public offering received
by the Company, and (ii) proceeds from private financings in excess of
$1,000,000 received by the Company. Mr. Bombaywala agreed to defer or offset
any and all principal and interest until July of 1997. The Company incurred
$392,337 in interest expense on two notes aggregating $3,750,000. In
connection with the Conversion and Offset Agreement, Mr. Bombaywala forgave
such interest which has been recorded as a contribution to capital.
On the Effective Date, a promissory note of Pasta Co. to Mr. Bombaywala in
the principal amount of $1,260,000 was paid by the Company. Payment was made as
follows: $150,000 in cash, transfer of ownership of land and building valued at
$515,000 and a note to Mr. Bombaywala in the amount of $595,000. Mr. Bombaywala
received an additional note from the Company in the amount of $224,202 for other
obligations of Pasta Co. arising prior to the Effective Date (the $595,000 note
and the $224,202 note are collectively referred to as "Additional Pasta Co.
Notes") .
The Notes were secured by a guarantee of the Company, a pledge by the
Company of all issued and outstanding shares of Pasta Co. and a security
interest in all of the assets relating to the first ten restaurants opened by
Pasta Co. The lien of Mr. Bombaywala was junior to any prior liens granted by
Pasta Co. on or before the Effective Date.
On May 15, 1997 Mr. Bombaywala and the Company entered into a Conversion
and Offset Agreement whereby the $3,750,000 of debt evidenced by the Notes was
converted to 7,500,000 Common Stock Rights (the
-29-
<PAGE> 30
"Rights"). Each of the Rights shall automatically convert to one share of the
Company's Common Stock at a later date, without further action or consideration
by Mr. Bombaywala, assuming the Company has a sufficient number of shares
authorized and freely issuable. In exchange for the Rights, Mr. Bombaywala
forgave the Notes. A value of $.50 per share was determined by the Board of
Directors in connection with the conversion. The Company 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 the $819,202 in
Additional Notes payable to Mr. Bombaywala in connection with the acquisition
of Pasta Co. against the Bombaywala Note receivable from Mr. Bombaywala in
connection with the Marco's merger.
In May of 1995, the Company began factoring accounts receivable through
Catalyst Financial Co., ("Catalyst") paying factoring fees of approximately
$19,000 in fiscal 1995 and $75,000 in fiscal 1996. The Company believes that
the fees paid were comparable to those that would be charged by a competing
factoring company. Mr. Bombaywala is a principal of Catalyst.
The Company acquired 240,000 shares (the "CluckCorp Shares") of the
outstanding common stock $0.1 par value of CluckCorp International, Inc., a
Texas corporation ("CluckCorp") on June 30, 1994 upon the conversion of, and as
partial payment for, a promissory note of CluckCorp owed to the Company in the
principal amount of $800,000 (the "CluckCorp Note") issued in June 1993 and in
exchange for certain other advances owed to the Company. The CluckCorp Note has
a maturity date of June 30, 1998, and was payable, at the option of CluckCorp,
in whole or in part, in cash or with Common Stock of CluckCorp. During 1994
CluckCorp repaid a portion of the CluckCorp Note in cash and the remaining
portion of the CluckCorp Note and certain advances were paid with the CluckCorp
Shares. The Company subsequently sold the CluckCorp Shares to JEB Investment
Corporation, a Texas corporation ("JEB") in exchange for a $1,800,000 recourse
promissory note executed by JEB as maker (the "JEB Note") bearing interest at 9%
per annum, payable annually, with a final maturity date of June 30, 1996. The
JEB Note was secured by the CluckCorp Shares pursuant to a Pledge Agreement. JEB
defaulted on the payments required under the JEB Note. In May 1997, JEB and the
Company executed an agreement whereby JEB relinquished all right, title and
interest in the CluckCorp Shares to the Company pursuant to the Company's
foreclosure rights in consideration for the Company relinquishing all of its
rights under the JEB Note. The Company is currently selling the CluckCorp Shares
in public and private transactions.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Report.
(1) The Consolidated Financial Statements listed in the Index to
the Consolidated Financial Statements on page F-1 are filed as
part of this report and are incorporated by reference.
(2) No financial statement schedules are filed as part of this
report.
(3) The Exhibits filed as part of this report are listed on the
Exhibit Index appearing on page E-1 which is incorporated
herein by reference.
(b) Reports on Form 8-K
During the fourth quarter of fiscal 1997, the Company filed Form
8-K, dated May 15, 1997, reporting under "Item 5. Other Events,"
the Conversion and Offset Agreement whereby the Company converted
$3,750,000 of debt owed to Mr. Bombaywala as a result of the
acquisition of The Original Pasta Co. into 7,500,000 Common Stock
Rights, and offset $819,202 in additional notes payable to, against
notes receivable from, Mr. Bombaywala. Furthermore, the Company
filed Form 8-K, Amendment No. 1, dated May 15, 1997, reporting
under "Items 1 and 5. Changes In Control of Registrant; Other
Events", a change in control of the Company should Mr. Bombaywala
be issued the 7,500,000 shares of Common Stock. No financial
statements were included in either Form 8-K.
(c) Exhibits Required by Item 601 of Regulation S-K
The Exhibits required by Item 601 of Regulation S-K and listed in
the Exhibit Index on page E-1 are filed as part of this report.
(d) Financial Statement Schedules
None.
[This space is intentionally left blank.]
-30-
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WATERMARC FOOD MANAGEMENT CO.
(Registrant)
Date: October 13, 1997
By: /s/ Ghulam Bombaywala
----------------------------------------
Ghulam Bombaywala, Chairman of the Board,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Ghulam Bombaywala Chairman of the Board, Chief Executive
- --------------------------- Officer and Director (Principal October 13, 1997
Ghulam Bombaywala Executive Officer and acting as
Principal Financial and Accounting
Officer) (1)
/s/ Philip M. Mount
- ---------------------------
Philip M. Mount Director October 13, 1997
/s/ Michael S. Chadwick
- ---------------------------
Michael S. Chadwick Director October 13, 1997
/s/ Nico B. Letschert
- ---------------------------
Nico B. Letschert Director October 13, 1997
/s/ Sarosh J. Collector
- ---------------------------
Sarosh J. Collector Director October 13, 1997
</TABLE>
(1) The principal financial and accounting officer resigned in July 1997
and has not been replaced as of the date of this filing. Mr. Bombaywala is
signing as these positions.
-31-
<PAGE> 32
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
INDEX TO AUDITED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Accountants . . . . . . . . . . . . F-2; F-3
Consolidated Balance Sheets . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity . . . . . F-6
Consolidated Statements of Cash Flows . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . F-8
</TABLE>
F - 1
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Watermarc Food Management Co.
We have audited the consolidated balance sheet of Watermarc Food Management Co.
and subsidiaries (the "Company") as of June 29, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the fiscal year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Watermarc Food
Management Co. and subsidiaries as of June 29, 1997 and the consolidated
results of their operations and their cash flows for the fiscal year then
ended, in conformity with generally accepted accounting principles.
MANN, FRANKFORT, STEIN & LIPP, P.C.
Houston, Texas
October 9, 1997
F - 2
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Watermarc Food Management Co.
We have audited the consolidated balance sheet of Watermarc Food Management Co.
and subsidiaries (the "Company") as of June 30, 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the fiscal years ended June 30, 1996 and July 2, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Watermarc Food
Management Co. and subsidiaries as of June 30, 1996 and the consolidated
results of their operations and their cash flows for the fiscal years ended
June 30, 1996 and July 2, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
September 27, 1996
F-3
<PAGE> 35
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS June 29, 1997 June 30, 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 263,542 $ 463,166
Accounts receivable, trade 540,406 397,744
Accounts receivable from affiliates 299,518 252,440
Inventories 483,302 715,538
Prepaid expenses and other current assets 73,217 105,779
------------ ------------
Total current assets 1,659,985 1,934,667
Property and equipment, net 6,050,631 9,328,526
Notes and other receivables from affiliate 1,679,374 2,217,784
Intangible assets, net 7,213,457 12,200,047
Other assets 111,381 183,686
------------ ------------
16,714,828 $ 25,864,710
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 4,780,931 $ 3,186,690
Accrued liabilities 2,263,821 1,831,055
Current portion of long-term debt 2,787,814 1,401,825
------------ ------------
Total current liabilities 9,832,566 6,419,570
Long-term debt, less current portion 4,484,539 5,698,692
Notes payable to stockholder 500,000 5,069,202
Deferred rent 577,976 435,949
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value, 5,000,000 shares authorized, 329,540 329,540
329,540 issued and outstanding as of June 29, 1997
and June 30, 1996; stated at $10 liquidation preference
Common stock, $.05 par value, 20,000,000 shares authorized, 713,161 671,682
14,263,230 issued and outstanding as of June 29, 1997, and
13,433,658 issued and outstanding as of June 30, 1996
Additional paid-in capital 30,740,131 26,640,385
Accumulated deficit (30,313,085) (19,400,310)
------------ ------------
1,469,747 8,241,297
Less treasury stock, cost method (150,000) --
------------ ------------
Total stockholders' equity 1,319,747 8,241,297
------------ ------------
$ 16,714,828 $ 25,864,710
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
<PAGE> 36
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
52 Weeks Ended
--------------------------------------------
June 29, 1997 June 30, 1996 July 2, 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Restaurants $ 46,734,262 $ 37,227,201 $ 34,600,265
Food products 2,391,099 2,902,242 3,051,392
------------ ------------ ------------
Total revenues: 49,125,361 40,129,443 37,651,657
Costs and expenses:
Cost of restaurant revenues:
Cost of food and beverage 12,539,192 10,956,113 10,471,159
Labor and benefits 14,326,414 11,348,823 11,507,171
Other restaurant operations 17,678,805 10,222,633 10,025,239
Cost of food product revenues 2,235,076 2,643,594 3,210,388
General and administrative 4,364,147 2,752,539 3,321,296
Depreciation and amortization 6,035,811 2,178,218 2,071,972
Provision for restaurant closings 1,175,434 -- 2,856,105
Loss on sale of Pete's Hospitality 751,614 -- --
------------ ------------ ------------
Total costs and expenses 59,106,493 40,101,920 43,463,330
------------ ------------ ------------
Income (loss) from operations (9,981,132) 27,523 (5,811,673)
Non-operating income (expenses):
Interest income 121,260 166,566 156,550
Interest expense (1,220,666) (850,224) (813,153)
Loss on conversion of debt to equity -- -- (1,329,775)
Other, net 167,763 704,831 305,731
------------ ------------ ------------
Total non-operating income (expenses) (931,643) 21,173 (1,680,647)
------------ ------------ ------------
Income (loss) before income taxes and extraordinary item (10,912,775) 48,696 (7,492,320)
Income tax provision (benefit) -- -- --
------------ ------------ ------------
Income (loss) before extraordinary item (10,912,775) 48,696 (7,492,320)
Extraordinary item - gain on extinguishment of debt -- -- 455,579
------------ ------------ ------------
Net income (loss) (10,912,775) 48,696 (7,036,741)
Preferred stock dividends 296,586 296,586 294,680
============ ============ ============
Net income (loss) less preferred stock dividends $(11,209,361) $ (247,890) $ (7,331,421)
============ ============ ============
Loss per common share before extraordinary item $ (0.83) $ (0.02) $ (0.87)
Extraordinary item per common share -- -- 0.05
------------ ------------ ------------
Net loss per common share $ (0.83) $ (0.02) $ (0.82)
============ ============ ============
Weighted average common and common equivalent shares 13,451,487 12,040,163 8,921,543
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
<PAGE> 37
WATERMARC FOOD MANAGEMENT CO.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, July 3, 1994 330,340 $ 330,340 8,425,815 $ 421,291 -- $ --
Conversion of debentures -- -- 1,093,904 54,695 -- --
Issuance of common stock -- -- 1,458,156 72,907 -- --
Conversion of preferred stock (800) (800) 1,000 50 -- --
Preferred stock dividends:
Cash -- -- -- -- -- --
Common stock -- -- 133,151 6,658 -- --
Issuance of warrants -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, July 2, 1995 329,540 329,540 11,112,026 555,601 -- --
Issuance of common stock -- -- 2,003,667 100,183 -- --
Preferred stock dividends:
Cash -- -- -- -- -- --
Common stock -- -- 317,965 15,898 -- --
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1996 329,540 329,540 13,433,658 671,682 -- --
Conversion of stockholder's debt -- -- -- -- -- --
Conversion of interest on
on stockholder's debt -- -- -- -- -- --
Repurchase of common stock -- -- -- -- 100,000 (150,000)
Preferred stock dividends:
Cash -- -- -- -- -- --
Common stock -- -- 829,572 41,479 -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 29, 1997 329,540 $ 329,540 14,263,230 $ 713,161 100,000 $ (150,000)
============ ============ ============ ============ ============ ============
<CAPTION>
Additional Accumulated Total
Paid-In Earnings Stockholders'
Capital (Deficit) Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance, July 3, 1994 $ 16,503,549 $(12,412,265) $ 4,842,915
Conversion of debentures 2,474,958 -- 2,529,653
Issuance of common stock 4,448,591 -- 4,521,498
Conversion of preferred stock 750 -- --
Preferred stock dividends:
Cash (4,295) -- (4,295)
Common stock (6,658) -- --
Issuance of warrants 25,750 -- 25,750
Net loss -- (7,036,741) (7,036,741)
------------ ------------ ------------
Balance, July 2, 1995 23,442,645 (19,449,006) 4,878,780
Issuance of common stock 3,214,388 -- 3,314,571
Preferred stock dividends:
Cash (750) -- (750)
Common stock (15,898) -- --
Net income -- 48,696 48,696
------------ ------------ ------------
Balance, June 30, 1996 26,640,385 (19,400,310) 8,241,297
Conversion of stockholder's debt 3,750,000 -- 3,750,000
Conversion of interest on
on stockholder's debt 392,337 -- 392,337
Repurchase of common stock -- -- (150,000)
Preferred stock dividends:
Cash (1,112) -- (1,112)
Common stock (41,479) -- --
Net loss -- (10,912,775) (10,912,775)
------------ ------------ ------------
Balance, June 29, 1997 $ 30,740,131 ($30,313,085) $ 1,319,747
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
<PAGE> 38
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 29, 1997 June 30, 1996 July 2, 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $(10,912,775) $ 48,696 $ (7,036,741)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 6,035,811 2,178,217 2,071,972
Provision for restaurant closings 1,175,434 -- 2,856,105
Loss on conversion of debt to equity -- -- 1,329,775
(Gain)/loss on disposal of assets 726,399 (163,175) --
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, trade (142,662) (292,209) 312,140
Accounts receivable from affiliates (47,078) 37,542 (245,469)
Inventories 232,236 (192,446) 177,089
Prepaid expenses and other current assets 32,562 255,759 (66,995)
Accounts payable and accrued liabilities 2,027,007 (673,405) (325,571)
Other assets 1,116,822 (6,031) (331,377)
Noncurrent liabilities 142,027 153,406 (81,914)
------------ ------------ ------------
Net cash provided by (used in) operating activities 385,783 1,346,354 (1,340,986)
------------ ------------ ------------
Investing activities:
Purchases of property and equipment (1,535,684) (1,642,333) (1,438,320)
Proceeds from sale of assets 1,210,345 197,027 --
Collection of note receivable -- 60,391 756,000
Investments in receivables from affiliates (280,792) -- --
Collection of receivables from affiliates -- -- 69,745
Cost of acquisitions, net of cash acquired -- (231,745) --
------------ ------------ ------------
Net cash used in investing activities (606,131) (1,616,660) (612,575)
------------ ------------ ------------
Financing activities:
Net proceeds from issuance of common stock -- -- 2,166,295
Repayment of affiliate borrowings -- (150,000) (519,507)
Proceeds from other borrowings and warrants 1,591,572 1,221,790 4,986,550
Repayment of other borrowings (1,419,736) (2,439,297) (3,105,463)
Cash dividends (1,112) (750) (4,295)
Purchase of treasury stock (150,000)
------------ ------------ ------------
Net cash provided by financing activities 20,724 (1,368,257) 3,523,580
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (199,624) (1,638,563) 1,570,019
Cash and cash equivalents, beginning of period 463,166 2,101,729 531,710
------------ ------------ ------------
Cash and cash equivalents, end of period $ 263,542 $ 463,166 $ 2,101,729
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 7
<PAGE> 39
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Watermarc Food Management Co. (the "Company"), owns and operates 41
restaurants, primarily in the Houston Metropolitan area, under the names
"Marco's Mexican Restaurants" ("Marco's Restaurants"); "The Original Pasta
Co." ("Pasta Co."); "Billy Blues Barbecue Bar & Grill" ("Billy Blues"); and
"Longhorn Cafe". The Company also produces and markets two brands of
barbecue sauce and a spice rub, "Billy Blues Barbecue Sauce", "Chris'
& Pitt's Bar-B-Que Sauce" and "Chris' & Pitt's Spice Rub". They are
marketed to supermarkets, other retail stores and food service outlets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming the
Company will be able to continue as a going concern. The Company has a
working capital deficit of approximately $8.2 million at June 29, 1997 and
experienced significant losses in fiscal 1997 which raise doubts about the
Company's ability to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis,
to obtain additional financing or capital and to refinance its debt and
ultimately attain profitable operations.
Management's plans include the following:
# Increasing revenues in existing restaurants by remodeling certain
Marco's Restaurants and by improving marketing programs and customer
service at Marco's and Pasta Co.
# Increasing revenues from the sale of food products by reinforcing
existing markets, expanding distribution to new market areas,
introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
# Franchising new restaurants.
# Maintaining cost controls while increasing revenues.
# Obtaining additional equity capital or debt financing.
FISCAL YEAR
The Company utilizes a 52-53 week fiscal year which ends on the Sunday
closest to June 30. References to 1997, 1996 and 1995 are all 52 week
periods ended June 29, 1997, June 30, 1996 and July 2, 1995, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
The Company places substantially all of its cash and cash equivalents with
nationally recognized financial institutions and money market mutual funds.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of restaurant food, beverages, supplies, and
food products (primarily barbecue sauce) held for sale.
F - 8
<PAGE> 40
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONT'D:
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Leasehold improvements are
amortized on a straight-line basis over the lesser of the life of the lease
(ranging from approximately ten to fifteen years) or the estimated useful
lives of the improvements. Building, furniture, fixtures and equipment are
depreciated using straight-line and accelerated methods over the estimated
useful life of the assets, which range from five to thirty years. Major
additions which extend service lives are charged to the property accounts
as incurred, whereas minor amounts are expensed. Disposals are removed at
cost less accumulated depreciation with the resulting gain or loss
reflected in current operations.
ORGANIZATION COSTS
Organization costs are included in other assets and are being amortized on
a straight-line basis over five years.
INTANGIBLE ASSETS
Intangible assets are associated with the purchase of Pasta Co., Pete's
Hospitality Co., Inc. and Chris' and Pitt's Barbeque Sauce. These assets
are being amortized using the straight-line method over the expected period
to be benefited (fifteen years for The Pasta Co.). The Company's management
periodically assesses the recorded balances of its intangible assets in
light of historic and projected operating trends and profitability and
general economic conditions. Management's assessment includes projecting
cash flows from each intangible asset over the estimated remaining life.
Should this undiscounted amount not equal the unamortized balance related to
the asset, an impairment would be indicated and the asset would be written
down to fair value.
In the fourth quarter of fiscal 1997, management deemed the intangible
assets associated with Chris' and Pitt's Barbeque Sauce to be impaired and
charged off $3.45 million to reduce the assets to an estimated fair value of
$250,000. Also, in the fourth quarter of fiscal 1997, the Company sold
Pete's Hospitality Co., Inc. to a related party and wrote off its goodwill.
PREOPENING COSTS
Certain expenses incurred in connection with the opening of a restaurant
(principally the costs of food products and staff training) are accumulated
and then expensed at the date of opening.
INCOME TAXES
Income taxes are provided using the liability method. Under this method,
deferred income taxes are recorded to reflect the tax consequences on
future years, of temporary differences between the tax basis of the assets
and the liabilities and their financial statement amounts. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized.
REVENUE RECOGNITION
Revenues from food product sales are recognized when the order is shipped
and ownership passes to the buyer.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding during the periods, adjusted for dividends on preferred
stock and interest expense, where applicable, plus common equivalent
shares, reflected under the treasury stock method, unless the effects of
common equivalent shares were antidilutive. Fully diluted loss per share
is not presented as it is antidilutive.
F - 9
<PAGE> 41
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONT'D:
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which changes
the manner in which earnings per share are calculated and presented. The
pronouncement is effective for annual and interim periods ending after
December 15, 1997.
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of income and expenses during
the reporting periods. Actual results could differ from those estimated.
2. BUSINESS COMBINATIONS:
THE ORIGINAL PASTA CO.
Effective January 26, 1996, the Company acquired all of the outstanding
common stock of The Pasta Co. from the Company's largest shareholder. The
purchase price was $6,716,667, consisting of $3,750,000 of notes and the
issuance of 1,666,667 shares of the Company's common stock valued at
$2,966,667. The acquisition has been accounted for as a purchase and,
accordingly, the assets and liabilities of Pasta Co. have been recorded at
their fair value at the date of acquisition. The excess of the purchase
price including related acquisition costs of approximately $280,000, over
the fair values of the net identifiable assets acquired less liabilities
assumed, is reported as goodwill and is being amortized over 15 years.
The statement of operations includes the results of Pasta Co. from the date
of acquisition. The following table summarizes the unaudited pro forma
results of operations of the Company as if the acquisition had occurred at
the beginning of each period presented:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues $46,086,307 $44,960,944
Net loss (679,509) (8,201,187)
Net loss per common share (.08) (0.95)
</TABLE>
The allocation of the total purchase price, including related expenses, for
Pasta Co. based on the estimated fair value of the net assets acquired, at
the date of acquisition is as follows:
<TABLE>
<S> <C>
Net of liabilities over tangible assets $ (768,955)
Intangible Assets 131,250
Goodwill 7,634,255
-------------
Total purchase price allocation $ 6,996,550
=============
</TABLE>
F - 10
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at June
29, 1997 and June 30, 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Inventories:
Food products $ 225,319 $ 399,946
Restaurant food, beverage and other 257,983 315,592
------------ ------------
$ 483,302 $ 715,538
============ ============
Property and Equipment:
Land $ -- $ 50,000
Building and leasehold improvements 6,982,563 7,770,515
Furniture, fixtures and equipment 8,781,908 9,828,449
Transportation equipment 61,246 178,293
------------ ------------
15,825,717 17,827,257
Less accumulated depreciation and amortization (9,775,086) (8,498,731)
------------ ------------
$ 6,050,631 $ 9,328,526
============ ============
Intangible Assets:
License agreement $ 4,398,528 $ 4,401,572
Goodwill 7,626,255 8,458,728
Favorable lease -- 209,000
------------ ------------
12,024,783 13,069,300
Less accumulated amortization (4,811,326) (869,253)
------------ ------------
$ 7,213,457 $ 12,200,047
============ ============
Other assets:
Debt issue costs $ -- $ 77,178
Organizational costs -- 2,024
Other 111,381 104,484
------------ ------------
$ 111,381 $ 183,686
============ ============
Accrued liabilities:
Payroll and related costs $ 911,861 $ 487,820
Taxes, other than payroll and income taxes 831,332 409,093
Rent -- 457,673
Interest 104,162 139,182
Other 416,466 337,287
------------ ------------
$ 2,263,821 $ 1,831,055
============ ============
</TABLE>
F - 11
<PAGE> 43
4. LONG-TERM DEBT:
At June 29, 1997 and June 30, 1996, long-term debt consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note payable to bank, due in monthly installments with interest
at prime plus 1%, maturing in May 1999, collateralized by certain
property and equipment $ 383,333 $ 583,333
Mortgage note payable, due in monthly installments with interest
at 10%, collateralized by certain land and building -- 254,125
Notes payable to banks and trade vendors, due in monthly
installments with interest ranging from 0% to 12.0%, maturing at
various dates through 1999, collateralized by certain property
and equipment 965,610 840,057
Notes payable to banks, due in monthly installments with interest
rates ranging from 8.5% to 9.5%, maturing at various dates
through January 1998, collateralized by certain vehicles 13,103 26,483
Subordinated notes, interest at 12% payable quarterly, principal
due in July 1997, collateralized by all of the outstanding stock
of Marco's Mexican Restaurants, Inc. (See Subsequent Events.) 2,500,000 2,500,000
Note payable to an unaffiliated foreign investor, interest at 10%
payable quarterly, principal due in June 1999, collateralized by
certain property and equipment 1,000,000 1,000,000
Note payable to bank, due in monthly principal installments with
interest payable monthly at 10%, maturing in August 2000, 415,176 519,878
collateralized by certain property and equipment
Note payable to bank, due in monthly principal installments with
interest payable quarterly at 10% maturing March 2001,
collateralized by certain property and equipment 974,832 1,148,644
9% convertible subordinated debentures due March 1999,
collateralized by inventories and accounts receivable, licenses,
trademarks and equipment 217,000 217,000
Note payable to bank, due in monthly principal installments with
interest payable monthly at the bank's prime rate, maturing in
April 2004, collateralized by real property and guaranteed by
stockholder 295,099 --
Note payable to bank, due in monthly principal installments with
interest payable monthly at the bank's prime plus 1% maturing in
February 2002, guaranteed by stockholder 233,333 --
Note payable to bank, due in monthly principal installments with
interest payable monthly at the bank's prime plus 2% maturing in
April 1998, guaranteed by stockholder 274,867 --
Capital lease obligations -- 10,997
----------- -----------
7,272,353 7,100,517
Less current portion (2,787,814) (1,401,825)
----------- -----------
$ 4,484,539 $ 5,698,692
=========== ===========
</TABLE>
F - 12
<PAGE> 44
4. LONG-TERM DEBT CONT'D:
In March 1994, the Company issued $2,691,000 of 9% Convertible Subordinated
Debentures which are due on March 16, 1999. Interest is payable
semi-annually on March 15 and September 15. The debentures are convertible
at any time prior to maturity at the option of the holder, unless
previously redeemed, into shares of common stock at a conversion price of
$5.00 of principal into one share of common stock. The debentures are
redeemable at the option of the Company, in whole or in part, at any time,
at prices ranging from 105% of the principal amount in 1994 to 100% of the
principal amount in 1999. The debentures are also subject to mandatory
conversion at the option of the Company if at any time the closing bid
price of the Company's common stock exceeds $12 per share for twenty
consecutive days. The debentures are collateralized by a second lien on
the inventories, licensing, trademarks and other intangibles related to the
Chris' and Pitt's product line and by a continuing security interest in
various restaurant equipment.
In May of 1995, the Company offered the debentureholders the right to
convert (until June 30, 1995) the principal and accrued interest owed on
their debentures into common stock at a modified conversion rate of $2.3125
of debenture principal and interest for one share of common stock. The
Company recorded a $1.3 million charge in 1995 pursuant to "sweetened"
conversion terms. Debentureholders owed an aggregate of $2,474,000 in
principal agreed to the conversion. There is currently outstanding
$217,000 of debentures held by debentureholders who elected not to convert
at the modified conversion rate. In connection with the subordinated
debenture issuance, the Company incurred debt issue costs of approximately
$438,000 which were capitalized and amortized using a method which
approximates the interest method. Unamortized debt issue costs associated
with debentures which were converted to stock were charged to
paid-in-capital.
Annual maturities of long-term debt, as of June 29, 1997 are: $2,787,814
in 1998; $3,296,031 in 1999; $674,268 in 2000; $338,189 in 2001; $81,611 in
2002; and $94,440 thereafter.
The carrying amounts of notes payable approximate fair value.
5. NOTES PAYABLE TO STOCKHOLDER:
At June 29, 1997 and June 30, 1996, notes payable to stockholder consisted
of the following (see "Note 11 - Related Party Transactions"):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note associated with the acquisition of Pasta Co. with principal and
interest at 10% due in July 1997, collateralized by assets related to $ -- $ 595,000
Pasta Co. In May 1997, the Company and the Stockholder agreed to
offset their debts between them. (See Related Party Transactions.)
Note associated with the acquisition of Pasta Co. with interest at 10%
due quarterly with principal due in quarterly payments beginning
September 15, 2000 and ending September 15, 2002, collateralized by -- 2,750,000
assets related to Pasta Co. In May 1997, the Company and the
Stockholder agreed to convert this note to common stock rights.(See
Related Party Transactions.)
Note associated with the acquisition of Pasta Co. with interest at 10%
due quarterly with principal payments due on July 15 and December 31,
1997 at $500,000 each, collateralized by assets related to Pasta Co. In
May 1997, the Company and the Stockholder agreed to convert this note -- 1,000,000
to common stock rights. (See Related Party Transactions.)
Note associated with the acquisition of Pasta Co. with principal and
interest at 6% due July 1997, collateralized by assets related to Pasta -- 224,202
Co. In May 1997, the Company and the Stockholder agreed to offset their
debts between them. (See Related Party Transactions.)
Subordinated note, interest at 11% (12% in 1996) payable quarterly,
principal due in June 2002. (See Subsequent Events.) 500,000 500,000
----------- -----------
$ 500,000 $ 5,069,202
=========== ===========
</TABLE>
F - 13
<PAGE> 45
5. PAYABLE TO STOCKHOLDER CONT'D:
The Company and its subsidiaries' various loan agreements contain certain
restrictive financial and other covenants. Additionally, some existing
loan covenants contain provisions which limit the amount of funds available
for transfer from certain subsidiaries to the parent corporation without
the consent of the lender.
At June 29, 1997, the Company had no significant credit facilities
available.
6. LEASE OBLIGATIONS:
The Company leases restaurant facilities and certain equipment and
leasehold improvements under operating lease agreements having terms
expiring at various dates through 2012. The leases have renewal clauses of
5 to 10 years, at the option of the Company, and have provisions for
contingent rentals based upon a percentage of revenues in excess of a
minimum amount. Rental expense under operating lease agreements was
approximately $2,507,000, $2,599,000 and $2,774,000 in 1995, 1996 and 1997
respectively.
Future minimum lease payments, excluding contingent rentals, at June 29,
1997, were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING
<S> <C>
1998 $ 3,584,000
1999 3,146,000
2000 3,367,000
2001 2,573,000
2002 2,435,000
Thereafter 8,061,000
------------
Total future minimum lease payments $ 23,166,000
============
</TABLE>
7. CONTINGENCIES:
Effective July 1, 1992, the Company voluntarily discontinued its workers'
compensation coverage in the State of Texas. The Company anticipates that
the ultimate expense of representing itself in the settlement of claims
will be less than the cost of insurance. The Company intends to vigorously
defend and pursue all unreasonable claims. Management does not believe
that any existing claims will have a material adverse impact on the
financial position, results of operations, or cash flows of the Company.
At June 29, 1997, the Company has accrued for all anticipated settlements.
8. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS:
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest paid $585,000 $624,855 $608,074
Income taxes paid -- -- --
</TABLE>
F - 14
<PAGE> 46
8. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS CONT'D:
Supplemental disclosure of noncash investing and financing activities:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Restaurant development rights received in satisfaction
of note receivable $ -- $ -- $ 150,000
Conversion of preferred stock to common stock -- -- 800
Conversion of subordinated debt to equity, net of issuance cost -- -- 2,171,912
Issuance of warrants in lieu of payment of brokers fees -- -- 25,752
Issuance of common stock in lieu of payment of liabilities -- 347,904 1,418,761
Issuance of common stock for preferred stock dividend 41,479 15,898 6,658
Issuance of debt in payment of liabilities -- 548,680 --
Conversion of stockholder's debt and interest to equity 4,142,337 -- --
Note receivable from sale of Pete's Hospitality 300,000 -- --
Offset of stockholder debt and interest against receivables 819,202 -- --
Assumption of debt by buyer upon sale of Pete's Hospitality 79,491 -- --
</TABLE>
During 1996, the Company acquired Pasta Co. Components of cash used for
the acquisition, as reflected in the Consolidated Statement of Cash Flows
for 1996 are summarized as follows:
<TABLE>
<S> <C>
Fair value of current assets, net of cash acquired $ 125,352
Fair value of noncurrent assets 2,891,627
Goodwill and other intangible assets 7,634,255
Liabilities assumed (2,733,620)
Notes payable to stockholder (4,719,202)
Stock issued at closing (2,966,667)
-----------
Cash paid, net of cash acquired $ 231,745
===========
</TABLE>
9. INCOME TAXES:
The significant components of the Company's deferred tax assets and
liabilities, as of June 29, 1997 and June 30, 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Intangible assets $ 1,020,000 $ --
Accrued liabilities 196,000 275,723
Net operating loss 8,262,000 6,117,025
Property and equipment 442,000 44,044
----------- -----------
Total deferred tax assets 9,920,000 6,436,792
----------- -----------
Deferred tax liabilities:
Deductible intangible assets -- 421,350
----------- -----------
Total deferred tax liabilities -- 421,350
----------- -----------
Net deferred tax assets before valuation allowance 9,920,000 6,015,442
Valuation allowance (9,920,000) (6,015,442)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
F - 15
<PAGE> 47
9. INCOME TAXES CONT'D:
The reconciliation of the provision for income taxes to the income tax
expense resulting from the application of the federal statutory tax rates
to pretax income is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate ($ 3,710,344) $ 16,557 $(2,392,492)
Amortization of goodwill 37,590 69,382 --
Loss on conversion of debt to equity -- -- 452,124
Merger transaction expenses -- -- --
Change in valuation allowance 3,904,558 (103,797) 1,695,325
Other 231,804 17,858 245,043
----------- ----------- -----------
Total provision (benefit) for income taxes $ -- $ -- $ --
=========== =========== ===========
</TABLE>
As of June 29, 1997, the Company had consolidated net operating loss
carryforwards (NOL's) of approximately $24.3 million which expire in varying
amounts through the fiscal years 2006 through 2011. Due to the merger with
Marco's Restaurants in 1994, the consolidated pre-acquisition NOL's of
approximately $11 million are not available to offset any future taxable
income that may be generated by Marco's Restaurants. In addition, the
utilization of pre-acquisition NOL's is further limited due to a greater
than 50% change in ownership.
10. STOCKHOLDERS' EQUITY:
ISSUANCES OF COMMON STOCK
FISCAL YEAR 1997:
In December 1996, the Company issued 236,607 shares of common stock as
payment of a dividend to preferred shareholders.
In June 1997, the Company declared 592,965 shares of common stock as
payment of a dividend to preferred shareholders.
FISCAL YEAR 1996:
In December 1995, the Company issued 225,000 shares of common stock valued
at approximately $180,000 in partial satisfaction of a settlement of a
lawsuit.
In January 1996, the Company issued 112,598 shares of common stock as
payment of a dividend to preferred shareholders.
In January 1996, the Company issued 1,666,667 shares of common stock valued
at $2,966,667 in connection with the acquisition of Pasta Co.
In February 1996, the Company issued 100,000 shares of common stock as
payment of legal fees of $150,000.
In February of 1996, the Company issued 12,000 shares of common stock
valued at $18,000 in settlement of a lawsuit.
In June 1996, the Company issued 205,367 shares of common stock as payment
of a dividend to preferred shareholders.
F - 16
<PAGE> 48
FISCAL YEAR 1995:
In July 1994, the Company issued 40,000 shares of common stock valued at
$260,000 in satisfaction of a commission in connection with the merger with
Marco's Restaurants, of which 20,000 shares were issued to a director of
the Company.
In August 1994, the Company issued 53,516 shares of common stock valued at
approximately $241,000 in satisfaction of construction liabilities related
to a Billy Blues restaurant in Dallas, Texas.
In September 1994, the Company received net proceeds of approximately $1.0
million from a private placement of 375,438 shares of common stock.
In September 1994, the Company issued 16,435 shares of common stock in lieu
of cash equivalent interest payments of $47,250 related to its subordinated
debentures.
In November 1994, the Company issued 33,493 shares of common stock valued
at $70,000 in satisfaction of construction liabilities related to a Billy
Blues restaurant in Dallas, Texas.
In December 1994, the Company issued 69,132 shares of common stock as
payment of a dividend to preferred stockholders.
In February 1995, a preferred stockholder converted 800 shares of preferred
stock into 1,000 shares of common stock.
In March 1995, the Company issued 16,435 shares of common stock in lieu of
cash equivalent interest payments of $47,250 related to its subordinated
debentures.
In June 1995, the Company issued 153,477 shares of common stock in
satisfaction of trade payables of approximately $321,000.
In June 1995, the Company issued 39,750 shares of common stock in
satisfaction of approximately $80,000 in construction liabilities related
to its Billy Blues restaurant in Denver, Colorado.
In June 1995, the Company issued 13,000 shares of common stock in
satisfaction of a liability of approximately $40,000 related to a
consulting agreement.
In June 1995, the Company issued 68,800 shares of common stock in
satisfaction of an employment contract settlement of $172,000.
In June 1995, the Company issued 26,312 shares of common stock in
satisfaction of notes payable of $50,000.
In June 1995, the Company issued 64,019 shares of common stock as payment
of a dividend to preferred stockholders.
In June 1995, the Company issued 1,093,904 shares of common stock for the
conversion of approximately $2.5 million of subordinated principal and
accrued interest on debentures.
In June 1995, the Company issued 621,500 shares of common stock in a
private placement and received net proceeds of approximately $1.2 million.
PREFERRED STOCK
In February 1993, the Company issued 450,000 shares of 9% Cumulative
Convertible Preferred Stock ("Preferred Stock") with a face amount of $10
per share. Dividends are cumulative and are payable in semi-annual
installments, on June 30 and December 31, at a rate of $.90 per share per
annum. Dividends may be paid in either cash or an equivalent value of
common stock. The Preferred Stock has no voting rights and has a
liquidation preference of $10 per share plus accumulated and unpaid
dividends.
F - 17
<PAGE> 49
10. STOCKHOLDERS' EQUITY CONT'D:
Holders of the shares of Preferred Stock have the right, at the holder's
option, to convert any or all such shares into common stock at any time.
If at any time the closing sale price of the Company's common stock exceeds
$10 per share, the Company may convert the Preferred Stock to common stock.
The Preferred Stock is convertible at a rate of one share of common stock
for each $8 in face value of Preferred Stock converted. The Preferred Stock
is redeemable at the Company's option at $12 per share.
At the close of the Company's public offering of its Preferred Stock, the
Company issued, to the underwriter, warrants to purchase 45,000 shares of
preferred stock at an exercise price of $12 per share extended until
January 1998. None of these warrants have been exercised.
COMMON STOCK WARRANTS AND STOCK OPTION PLANS
The Company has the following common stock warrants and option plans:
o SERIES A WARRANTS - The Company has 875,500 Series A Warrants
outstanding at June 29, 1997. Each warrant entitles the holder
to purchase one share of common stock at a price of $6.50 per
share, subject to certain adjustments, until the warrants
expire. The expiration date has been extended to May 15, 1998.
The Company has the right to redeem the warrants at $.01 per
warrant, upon written notice, if the daily common stock
closing price exceeds $7.80 per share during any twenty
consecutive business days.
o OTHER WARRANTS - In connection with the issuance of $3 million
in subordinated notes, the Company issued 1,333,320 warrants,
each of which evidence the right to purchase a share of the
Company's common stock at a purchase price of $2.25 per share
until December 31, 1999. In connection with an agreement to
extend the repayment date of the notes, the purchase price was
reduced to $ .25 per share.
Also, in connection with the subordinated notes, the Company
issued warrants to purchase 150,000 shares of common stock to
the placement agent at an exercise price of $2.50 per share,
which expire on December 31, 1999. In connection with an
agreement to extend the repayment date of the notes, said
purchase price was reduced to $ .25 per share.
In connection with the subordinated note conversion of Mr.
Bombaywala from the 12% Subordinated Note to the 11%
Subordinated Note in June 1997, 50,000 warrants to purchase
common stock at $1.50 per share were issued to Mr. Bombaywala.
In connection with a borrowing of $1 million from an
unaffiliated foreign corporation, the Company issued warrants
to purchase 75,000 shares of common stock to said corporation
at a purchase price of $3 per share until May 31, 1997. The
Company extended the expiration date to January 1998. In
January 1996, the Company issued additional warrants to this
corporation to purchase (1) 50,000 shares of common stock at
$3.00 per share exercisable until January 1, 1999 and (2)
50,000 shares of common stock at $4.00 per share exercisable
until January 1, 2001.
In connection with the issuance of common stock in a private
offering, the Company issued warrants to purchase 71,250
shares of common stock to the placement agent at a purchase
price of $3 per share until May 31, 1997. The Company
extended the expiration date to January 1998.
In June 1997, the Company issued warrants to the former
President of the Company to purchase 180,000 shares of common
stock exercisable at $.50 until June 30, 1999.
o STOCK OPTION PLAN - The Company has a Stock Compensation Plan
under which either incentive stock options or non-qualified
stock options may be issued to officers, key employees and
non-employee directors of the Company. All options granted
under the plan have been at fair market value or greater on
the date of grant and expire five years from the date of
grant.
The Company has reserved a total of 1,000,000 shares of common
stock for the plans and an additional 589,500 options were
available for grant at June 29, 1997.
The Company has elected to follow Accounting Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair value
accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use by the
Company in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock
options either exceeds or equals the market price of the
underlying stock on the date of grant, no compensation expense
has been recognized.
The existing stock option valuation models were developed for
use in estimating the fair value of traded options which have
no vestings restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions including the expected price
volatility. Because the Company's stock options have
characteristics significantly different from those of traded
options, and because changes in subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee
stock options.
Pro forma information regarding net income and earnings per
share is required by FASB Statement No. 123, and has been
determined as if the Company had accounted for its employee
stock options under the fair value based accounting method of
that Statement. In the opinion of the management, the pro
forma net income and earnings per share under the fair value
based accounting method were not materially different than
those accounted for using the intrinsic value based accounting
method prescribed by APB 25.
F - 18
<PAGE> 50
A summary of stock option activities during 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
<S> <C> <C>
Options outstanding at July 3, 1994 457,000 4.63 to 5.09
Granted 747,000 2.00 to 2.88
Canceled (687,000) 4.63 to 5.09
--------- ------- ----
Options outstanding at July 2, 1995 517,000 2.00 to 4.63
Granted 134,500 1.00
Canceled (40,000) 2.00 to 4.63
--------- ------- ----
Options outstanding at June 30, 1996 611,500 1.00 to 2.88
Granted 180,000 .25 to .50
Canceled (381,000) 1.00 to 4.63
--------- ------- ----
Options outstanding at June 29, 1997 410,500 .25 to 1.00
========= ------- ----
Exercisable at June 29, 1997 188,700 .25 to 1.00
========= ------- ====
</TABLE>
11. RELATED PARTY TRANSACTIONS
On September 7, 1995, the Board of Directors of the Company approved the
acquisition of all of the issued and outstanding shares (the "Shares") of
Pasta Co. from Mr. Bombaywala, the sole stockholder and director of Pasta
Co. On September 14, 1995, the Company, Mr. Bombaywala, Pasta Co. and the
Company, entered into an Agreement and Plan of Merger (the "Merger
Agreement") which provided for the merger of Pasta Co. with and into the
Company as the surviving corporation (the "Merger"). The principal assets
of Pasta Co. consisted of its ownership of ten (10) restaurants in Houston,
Texas.
In consideration for the Shares, Mr. Bombaywala received 1,666,667 shares
of the Company's Common Stock (the "Merger Shares") and two promissory
notes in the aggregate principal amount of $3,750,000 (the "Notes"). The
Merger Shares were valued at $1.78 per share which was the market value of
the Common Stock on the date of the Merger. The total consideration paid
to Mr. Bombaywala was $2,966,667; however, as provided below, a portion of
the Merger Shares was subject to future release and earn out. In addition,
the Company assumed approximately $3.6 million of liabilities and
indebtedness of Pasta Co. outstanding as of January 26, 1996, including
amounts due to Mr. Bombaywala as noted below.
Although not required by law, the Board of Directors of the Company elected
to submit the Merger to its independent shareholders for approval at its
Annual Meeting of Shareholders which was held January 9, 1996. Mr.
Bombaywala, who then owned 4,620,000 shares of the Company's Common Stock,
or 41.6%, excluding the Merger Shares, did not vote on the Merger at the
Annual Meeting. The Merger was approved, and the effective date of the
Merger (the "Effective Date") was January 26, 1996. As of the Escrow
Closing Date, the Company was granted the right to manage Pasta Co. and
received a management fee of three percent (3%) of the gross revenues of
Pasta Co. through the Effective Date. Such fees amounted to approximately
$137,000.
The Merger Shares are restricted securities but have demand and incidental
registration rights. A total of 350,000 Merger Shares were subject to a
Development Escrow Agreement which provided for the earnout and release of
such shares based upon (i) the opening of five additional Pasta Co.
restaurants on or before December 31, 1996 at an average cost not to exceed
$400,000 per restaurant, or (ii) the share price for the Company's Common
Stock exceeding $5.00 per share for any ten consecutive business days on or
before June 30, 1996 or $7.00 per share on or before June 30, 1997. The
Company completed the opening of the five additional Pasta Co. Restaurants
before December 31, 1996 and, therefore, the Merger Shares have been
released to Mr. Bombaywala.
On the Effective Date, a promissory note of Pasta Co. to Mr. Bombaywala in
the principal amount of $1,260,000 was paid by the Company. Payment was
made as follows: $150,000 in cash, transfer of ownership of land and
building valued at $515,000 and a note to Mr. Bombaywala in the amount of
$595,000. Management is of the opinion that the value represented its fair
value at the time of transfer. Mr. Bombaywala received an additional note
from the Company in the amount of $224,202 for other obligations of Pasta
Co. arising prior to the Effective Date. These notes payable, totaling
$819,202, were offset against notes receivable from Mr. Bombaywala. (See
below.)
F - 19
<PAGE> 51
11. RELATED PARTY TRANSACTIONS CONT'D:
At June 30, 1996, the Company had a noncurrent, 6% note receivable from
Ghulam Bombaywala ("Mr. Bombaywala"), the majority shareholder, officer and
a director of the Company in the amount of $2,175,310, payable in three
annual principal installments of $200,000 each beginning July 31, 1996, and
a final payment of the remaining principal and interest on July 31, 1999.
The note is collateralized by certain assets of the shareholder. Accrued
interest of $170,844 as of July 2, 1995 was due July 31, 1995. In
September of 1995, the Board of Directors voted to modify the terms of the
note by deferring payment of the interest due until December 31, 1995. In
May 1996, the Company and Mr. Bombaywala agreed to offset interest due from
Mr. Bombaywala under the note against interest due to Mr. Bombaywala under
notes associated with the purchase of Pasta Co. At June 30, 1996, $206,388
of interest payable to Mr. Bombaywala was offset against interest
receivable from Mr. Bombaywala. The remaining balance of interest
receivable at June 30, 1996 was $94,974. Such amount, along with amounts
accruing in the future will be offset against interest payable to Mr.
Bombaywala. During 1997, the Company earned interest of $123,877 on the
note receivable from Mr. Bombaywala and was charged interest of $123,757 on
various notes payable to him. The interest receivable and payable,
together with interest receivable at June 30, 1996 of $94,974 were offset
with a remaining receivable from Mr. Bombaywala of $95,093 outstanding at
June 29, 1997. Additionally, the Company incurred $392,337 in interest
expense on two notes aggregating $3,750,000. In connection with the
Conversion and Offset Agreement, Mr. Bombaywala forgave such interest
which has been recorded as a contribution to capital.
On May 15, 1997 Mr. Bombaywala and the Company entered into a Conversion
and Offset Agreement whereby the parties to the notes agreed to convert the
$3,750,000 of debt evidenced by the Notes to 7,500,000 Common Stock Rights
(the "Rights"). Each of the Rights shall automatically convert to one
share of the Company's Common Stock at a later date without further action
or consideration by Mr. Bombaywala, assuming the Company has a sufficient
number of shares authorized and freely issuable. In exchange for the
Rights, Mr. Bombaywala forgave the Notes. A value of $.50 per share was
determined by the Board of Directors in connection with the conversion.
The Company 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.
During 1997, the Company sold the stock of Pete's Hospitality Co., Inc. to
its former president for a 10% note receivable of $300,000 payable over
approximately five years. The Company recorded a loss on disposal of
approximately $750,000 during 1997.
In April 1997, the Company agreed to sell equipment associated with three
new restaurants to Mr. Bombaywala and lease the assets back. The three
restaurants were opened in the second and fourth quarters of fiscal 1997.
The Company believes that the selling price of $750,000 and the lease rate
are comparable to those which could be attained from an unrelated third
party. There was no gain or loss to the Company on this transaction.
During fiscal 1997, 100,000 shares of common stock were returned to the
Company from a Director of the Company in exchange for cash of $1.50 per
share and the agreement of the Company to pay the balance owed to the
Director's law firm in monthly installments in the ordinary course of
business.
In December 1994, Mr. Bombaywala purchased $500,000 principal amount of the
Company's subordinated notes and received 222,222 warrants to purchase a
like number of shares of common stock. Mr. Bombaywala is also obligated to
purchase the remaining $2.5 million of the Subordinated Notes if they have
not been paid in full at maturity. In June 1997, Mr. Bombaywala converted
this 12% subordinated debt to 11% subordinated debt, due June 2002.
Mr. Bombaywala has also guaranteed other obligations of the Company,
including notes payable and leases associated with Marco's and Pasta Co.
restaurants.
In August 1996, the Company sold for $350,000 previously mortgaged real
property located at the Victoria, Texas Marco's Restaurant location to the
Bombaywala Family Trust ("The Trust"). The Trust is administered by
M.U. Bombaywala, Trustee, for the purpose of his grandchildrens' education.
The real property and certain assets are now being leased by the Company
from the Trust. The Trust also owns the real property on which one of the
Company's Pasta Co. Restaurants is located, having purchased it from an
unaffiliated third party. The Trust leases this property to the Company.
The Company believes that both leases are at rates comparable to those which
could be attained from unrelated third parties.
In May of 1995, the Company began factoring accounts receivable through
Catalyst Financial Co., ("Catalyst") paying factoring fees of approximately
$19,000 in fiscal 1995 and $75,000 in fiscal 1996. The Company believes
that the fees paid were comparable to those that would be charged by a
competing factoring company. Mr. Bombaywala is a principal of Catalyst.
F - 20
<PAGE> 52
11. RELATED PARTY TRANSACTIONS CONT'D:
In connection with the private offering of the Subordinated Notes, the
Company entered into an 18-month Financial Advisory Agreement (the
"Advisory Agreement") with Sanders Morris Mundy Inc. ("SMM"), the placement
agency in the offering. As placement agent, SMM received a 10% commission
on the sale of the Subordinated Notes, excluding the $500,000 of
Subordinated Notes purchased by Mr. Bombaywala.
Under the terms of the Advisory Agreement, the Company also agreed to pay
SMM a monthly fee of $10,000 in consideration for assistance in the
Company's acquisition efforts and capital raising endeavors. Furthermore,
pursuant to the Advisory Agreement, the Company also issued to SMM warrants
to purchase 150,000 shares of Common Stock at an exercise price of $2.50
per share (the "SMM Advisory Warrants"), which expire on December 31, 1999.
SMM subsequently transferred 45,000 of the SMM Advisory Warrants to Mr.
Chadwick, Senior Vice President and a Managing Director of SMM and a
director of the Company. In July 1997, in connection with an extension on
the payment terms of the Subordinated Notes, the exercise price of the
warrants was reduced to $.25 per share and the Advisory Agreement was
extended until December 31, 1997.
In September of 1995, the Company entered into an eight month financial
advisory agreement with Noesis Capital Corp. ("Noesis"), in order to obtain
assistance in identifying sources of financing, developing its acquisition
program and with shareholder relations. Under the terms of the agreement,
the Company paid $60,000 to Noesis during fiscal 1996. Nico B. Letschert
is President of Noesis and a director of the Company.
12. SUBSEQUENT EVENTS:
In the fourth quarter of fiscal 1997 (June 1997) the Company offered a
private placement of $4 Million of 11% Convertible Subordinated Notes due
June 30, 2002 (the "Convertible Subordinated Notes") pursuant to exemptions
from registration under the Securities Act of 1933, as amended (the "Act")
and the rules and regulations promulgated thereunder, including, without
limitation, Section 4(2) and Regulation D. The Convertible Subordinated
Notes are being offered directly by the Company to qualified accredited
investors. The Company has not retained a broker or underwriter to assist
with the offering although it may elect to do so in the future on terms to
be negotiated. Holders of the Convertible Subordinated Notes received
warrants (the "Convertible Subordinated Note Warrants") to purchase shares
of Common Stock at a purchase price of $1.50 per share until June 30, 2002.
Interest on the Convertible Subordinated Notes is payable quarterly
beginning September 30, 1997. The Convertible Subordinated Notes are
currently unsecured and may be subordinated to certain defined senior
indebtedness. As of September 30, 1997, $700,000 principal amount of the
Convertible Subordinated Notes has been subscribed. The proceeds of the
offering were used to repay a portion of the $3 million principal amount of
12% Subordinated Notes originally due July 31, 1997. The balance of the
Subordinated Notes was extended to July 10, 1998. Ghulam M. Bombaywala,
Chairman of the Board, Chief Executive Officer and a director of the
Company, converted the $500,000 principal amount of 12% Subordinated Notes
owed to him into the 11% Convertible Subordinated Notes, pursuant to a
Subordinated Note Conversion Agreement dated June 1, 1997 (the "Conversion
Agreement"). Pursuant to the Conversion Agreement, Mr. Bombaywala canceled
the $500,000 principal amount of 12% Subordinated Notes owed him by the
Company and received an 11% Convertible Subordinated Note of equal
principal amount with the same terms and conditions as the Convertible
Subordinated Notes being offered by the Company to prospective investors.
Additionally, in September 1997, the Company guaranteed a promissory note
with United Central Bank for $850,000 due September 2002. The proceeds of
the note were used to repay a portion of the $3 million principal amount of
12% Subordinated Notes originally due July 31, 1997.
The Company acquired 240,000 shares (the "CluckCorp Shares") of the out-
standing common stock, $0.1 par value of CluckCorp International, Inc., a
Texas corporation ("CluckCorp") on June 30, 1994 upon the conversion of and
as partial payment for, a promissory note of CluckCorp owed to the Company
in the principal amount of $800,000 (the "CluckCorp Note") issued in June
1993 and in exchange for certain other advances owed to the Company. The
CluckCorp Note has a maturity date of June 30, 1998, and was payable, at the
option of CluckCorp, in whole or in part, in cash or with Common Stock of
CluckCorp. During 1994 CluckCorp repaid a portion of the CluckCorp Note in
cash and the remaining portion of the CluckCorp Note and certain advances
were paid with the CluckCorp Shares. The Company subsequently sold the
CluckCorp Shares to JEB Investment Corporation, a Texas corporation ("JEB")
in exchange for a $1,800,000 recourse promissory note executed by JEB as
maker (the "JEB Note") bearing interest at 9% per annum, payable annually,
with a final maturity date of June 30, 1996. The JEB Note was secured by
the CluckCorp Shares pursuant to a Pledge Agreement. JEB defaulted on the
payments required under the JEB Note. In May 1997, JEB and the Company
executed an agreement whereby JEB relinquished all right, title and interest
in the CluckCorp Shares to the Company pursuant to the Company's foreclosure
rights in consideration for the Company relinquishing all of its rights
under the JEB Note. The Company is currently selling the CluckCorp Shares in
public and private transactions.
F - 21
<PAGE> 53
13. IMPAIRMENT OF ASSETS:
Property and Equipment. In the fourth quarter of fiscal 1997, the Company
made a decision to sell the remaining Billy Blues Restaurant. Accordingly,
the assets were deemed to be impaired and written down to their estimated
fair value. An impairment expense of $1.1 million was recognized during
1997. Additionally, the Company sold one Marco's Restaurant in the fourth
quarter for a loss of approximately $75,000. In 1997, an impairment
expense was recorded to reflect the loss on sale.
Intangible Assets. In the fourth quarter of fiscal 1997, the Company
deemed the intangible assets associated with Chris' & Pitt's Barbeque
Sauce to be impaired. Management estimated the fair value and,
accordingly, an impairment expense of approximately $3.45 million was
recorded during 1997 and is included in depreciation and amortization
expense.
14. EMPLOYEE BENEFIT PLANS:
An incentive savings plan has been established which is a qualified profit
sharing plan under Section 401(k) of the Internal Revenue Code.
Contributions to the incentive savings plan are determined by the board of
directors. Employees may also make contributions to the incentive savings
plan based upon a percentage of qualified compensation in accordance with
the Internal Revenue Service rules and regulations. No contributions were
made to this plan by the Company during 1997, 1996 or 1995.
F - 22
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
2.1 Stock Purchase Agreement dated June 29, 1997 between Watermarc Food
Management Co. (the "Company") and Angelo Pitillo
4.1 Amendment No. 3 to Warrant Agreement covering Series A Warrants
4.2 Notice of Extension of Warrant Expiration Date to May 15, 1998
4.3 Second Amendment to Purchase Agreement dated effective as of July 31,
1997, among the Company and the Purchasers relating to $3,000,000 12%
Subordinated Notes due July 31, 1997
4.4 Second Amendment to Financial Advisory Agreement dated July 31, 1997
between the Company and Sanders Morris Mundy, Inc.
4.5 Conversion and Offset Agreement dated May 15, 1997 between The
Original Pasta Co., Marco's Mexican Restaurants, Inc., the Company
and Ghulam M. Bombaywala
4.6 Subordinated Note Conversion Agreement dated June 1, 1997 between the
Company and Ghulam M. Bombaywala
4.7 Specimen of Purchase Agreement for 11% Convertible Subordinated Notes
due June 30, 2002
4.8 Form of 11% Convertible Subordinated Promissory Note due June 30, 2002
4.9 Form of Warrant to Purchase Common Stock of the Company expiring on
June 30, 2002 issued to purchasers of 11% Subordinated Notes
10.1 License Agreement dated June 29, 1997 between Marco's Mexican
Restaurants, Inc. and Mohammed S. and Rubina S. Akhtar licensing the
use of the name Marco's in the operation of a restaurant
10.2 $300,000 promissory note from the Company to MetroBank dated April 11,
1997
10.3 $300,000 promissory note from the Company to United Central Bank
dated April 7, 1997
10.4 $250,000 promissory note from the Company to Langham Creek National
Bank dated February 14, 1997
11.1 Statement regarding computation of per share earnings
21.1 Subsidiaries of the Registrant
27.0 Financial Data Schedule
99.1 Form 8-K dated August 20, 1997
99.2 Form 8-K Amendment No. 1 dated August 20, 1997
</TABLE>
<PAGE> 1
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement is made effective as of June 29, 1997
(referred to as effective date), between Watermarc Food Management Co., a
corporation organized under the laws of the State of Texas, with offices at
11111 Wilcrest Green, Suite 350, City of Houston, County of Harris, State of
Texas, referred to as Seller, and Angelo Pitillo, with an address of 62 Legend
Lane, City of Houston, County of Harris, State of Texas, referred to as Buyer.
RECITALS
A. Seller is the owner of all of the issued and outstanding
shares of common stock, called the Shares, of Pete's Hospitality Co., Inc., a
corporation organized under the laws of the State of Washington and having its
principal office at 1020 S. 344th Street, Suite 210, City of Federal Way, State
of Washington, called Company.
B. Buyer desires to acquire the Shares from Seller upon the terms
and conditions set forth in this Agreement, and Seller desires to sell the
Shares to Buyer upon those terms and conditions.
C. Buyer desires to pay for the Shares with, and Seller desire to
accept as payment, a promissory note, called the Note.
For the reasons set forth above, and in consideration of the mutual
covenants contained in this Agreement, the Parties agree as follows:
Section I
Sale and Purchase
Subject to the terms and conditions set forth in this Agreement,
Seller shall sell the Shares of Company to Buyer, and Buyer shall purchase the
Shares of Company from Seller.
<PAGE> 2
Section II
Consideration
The consideration for the total issued and outstanding Shares of the
Company stocks shall be the sum of Three Hundred Thousand Dollars ($300,000.00)
to be paid to Seller by Buyer in accordance with the terms of the Note to be
executed contemporaneously with this Agreement and attached hereto as Exhibit A
and incorporated herein by reference. Seller shall have a continuing security
interest in all inventory, equipment, furniture, and fixtures now owned or
later acquired by Buyer as collateral security for Buyer's payment obligations
contained this Agreement and the Note, as more fully set forth in the Security
Agreement attached hereto as Exhibit B and incorporated herein by reference.
Buyer agrees to execute any financing statements as Seller may reasonably
require to perfect Seller's security interests. If Buyer defaults in any
installment of Buyer's payment obligation, or assigns, pledges, or otherwise
disposes of Buyer's stock without the prior written consent of Seller, then
Seller shall have the option to declare the remaining balance at once due and
payable. Seller shall also be entitled to recover reasonable attorneys' fees
incurred in the collection of the balance due.
Section III
Representations and Warranties of Seller
Seller represents and warrants to Buyer that:
(1) Company is a corporation duly organized and validly existing
and in good standing under the laws of the State of Washington, and has all of
the corporate powers necessary to engage in the business in which it is
currently engaged.
(2) The authorized capital stock of Company consists of 59,726
shares of common stock, having a par value of $.50 per share, of which all
59,726 shares of common stock are issued and outstanding.
(3) Company has good and marketable title to all of its property
and assets. In some instances, the property and assets are subject to
mortgages, pledges, liens, conditional sales agreements, leases, encumbrances,
or charges.
(4) Seller has full and valid title to the Shares to be delivered
by Seller, and there will be no existing impediment to the sale and transfer of
the Shares to Buyer. Upon delivery to Buyer, the Shares shall be free and clear
of all liens, charges, and encumbrances whatsoever, and the Shares shall be
legally
<PAGE> 3
issued, fully paid, and nonassessable Shares of Company. The Shares of Company
delivered to Buyer shall constitute all of the issued and outstanding shares of
Company.
(5) Seller has the full right, power, legal capacity, and
authority to enter into this Agreement and to sell and to deliver to Buyer the
Shares to be sold and delivered under this Agreement.
Section IV
Representations and Warranties of Buyer
Buyer represents and warrants to Seller that:
(1) Buyer is acquiring the Shares solely for its own account as an
investment and not with a view to any distribution or resale thereof within the
meaning of such terms under the Securities Act of 1933, as amended. Buyer will
not effect any disposition of the Shares in violation of United States Federal
or state securities or similar laws or in a manner which would subject Seller
or any of its affiliates to any liability or sanction under any such securities
or similar laws.
(2) Buyer acknowledges receipt of the original corporate books and
records of Company.
Section V
Conditions Precedent to Seller's Obligations
Seller's obligation to perform and complete the transactions provided
for in this Agreement shall be subject to the Buyer performing all acts
required of Buyer. Seller's obligations shall be further subject to the
material accuracy of the representations and warranties of Buyer contained in
this Agreement.
Section VI
Conditions Precedent to Buyer's Obligations
Buyer's obligation to perform and complete the transactions provided
for in this Agreement shall be subject to the Seller performing all acts
required of it. Buyer's obligation shall be further subject to the material
accuracy and correctness of the representations and warranties of Seller
contained in this Agreement.
<PAGE> 4
Section VII
Indemnity By Buyer
Buyer shall defend, indemnify and hold harmless Seller, and its
directors, officers and employees, against any and all loss, liability, and
expense, including attorney's fees, resulting from or arising out of any
obligations, including, but not limited to, taxes levied, imposed, or assessed
by any governmental authority, with respect to the income and operations of
Company for all periods prior to and after June 29, 1997. Buyer shall be
entitled to the benefit of any refunds and credits for taxes for those periods.
Buyer shall further indemnify Seller against any liability,claim or loss
resulting from Buyer's breach of or failure to perform, after the effective
date, any duty or obligation of Seller under any contract, lease, loan
agreement, or other agreement relating to Company or its assets or properties
to which Seller is a party or by which Seller is otherwise bound at the
effective date.
Section VIII
Expenses of Sale
Buyer and Seller shall bear their own counsel fees and other costs and
expenses relating to the sale.
Section IX
No Brokerage Fees
Buyer and Seller each represent that neither of them has employed any
broker or entered into any agreement for the payment of any fees, compensation,
or expenses to any person, firm, or corporation in connection with this
transaction. Each shall indemnify the other against any fees, compensation, or
expenses that may be suffered, particularly any claim for a finder's fee.
Section X
Notices
Any notice, report, or demand required or permitted by any provision
of this Agreement shall be deemed to have been sufficiently given or served for
all purposes if it is sent by certified mail, postage and charges prepaid, as
follows:
(1) If to Seller, to Ghulam M. Bombaywala, Watermarc Food
Management Co., 11111 Wilcrest Green, Suite 350, Houston, Texas 77042, or to
any other address or addresses as may be designated by Seller.
<PAGE> 5
(2) If to Buyer, to Angelo Pitillo, 62 Legend Lane, Houston, Texas
77024, or to any other address or addresses as may be designated by Buyer.
Section XI
Binding Effect
This Agreement shall inure to the benefit of and be binding upon Buyer
and Seller and their respective heirs, executors, administrators, successors,
and assigns. This Agreement shall not be assignable by Buyer without the
express written consent of Seller. All representations and warranties shall
survive the closing of this transaction. The liability of Seller arising out of
or in connection with breach of the covenants, warranties, or representations
made in this Agreement shall be limited to the amount of consideration that
Seller shall receive, and further, that the liabilities shall exist only for a
period of one year from the effective date.
Section XII
Entire Agreement
This Agreement and all other agreements and instruments referred to
herein set forth and constitute the entire understanding and agreement among
the parties hereto pertaining to the subject matter hereof.
Section XIII
Waiver
No waiver by any party of any term or provision contained in this
Agreement shall be effective unless it is in writing and signed by the party or
parties against whom such waiver is sought to be enforced. Neither the failure
nor any delay on the part of any party to this Agreement in exercising any
right, power or remedy hereunder shall operate as a waiver thereof, or of any
other right, power or remedy; nor shall any single or partial exercise of any
right, power or remedy preclude any further or other exercise thereof, or the
exercise of any other right, power or remedy.
Section XIV
Severability
Any provision of this Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or
<PAGE> 6
unenforceability of such provisions in any other jurisdiction.
Section XV
Governing Law
This Agreement shall be deemed to be a contract made under the laws of
the State of Texas and for all purposes shall be governed, construed,
interpreted and enforced in accordance with the laws of the State of Texas,
without regard to the principles of conflicts of laws.
Section XVI
Counterparts
This Agreement may be executed in any number of counterparts, each of
which when executed and delivered shall be an original, but all counterparts
shall constitute one and the same instrument.
In witness whereof, Parties have executed this Agreement at Houston,
Texas on the 29th day of June, 1997.
SELLER
Watermarc Food Management Co.
By: /s/ GHULAM M. BOMBAYWALA
--------------------------------
Ghulam M. Bombaywala
Chief Executive Officer
BUYER
/s/ ANGELO PITILLO
-----------------------------------
Angelo Pitillo
<PAGE> 7
EXHIBIT A
PROMISSORY NOTE
$300,000.00 July 1, 1997
FOR VALUE RECEIVED, PETE'S HOSPITALITY CO., INC. (hereinafter referred
to as "Borrower") promises to pay to the order of WATERMARC FOOD MANAGEMENT CO.
(together with its successors and assigns hereinafter referred to as "Lender")
at Houston, Texas or such other place as the holder hereof may from time to
time appoint in writing, in lawful money of the United States of America, the
principal sum of Three Hundred Thousand Dollars ($300,000.00), together with
interest on the principal balance from time to time unpaid at the fixed rate of
ten percent (10%) per annum, until maturity. Interest shall be compounded
monthly.
This Note is payable as follows: interest only for the first six (6)
months beginning on August 1, 1997 due and payable on the first day of each
successive month, followed by sixty (60) equal monthly installments in the
amount of $6325.00, inclusive of principal and interest, beginning on February
1, 1998 and due and payable on the first day of each successive month until the
Note has been fully paid.
If any payment of principal or interest hereunder shall become due on
a day on which banks in the City of Houston generally are not open for
business, such payment shall be made on the next following day on which banks
in the City of Houston generally are open for business and such extension of
time shall be included in computing interest in connection with such payment.
Any installments of principal and interest that become past due shall
bear interest from the time when due until paid at the lower of the (i) maximum
rate permitted by applicable state or federal law, or (ii) eighteen percent
(18%) per annum.
Upon the occurrence and during the continuance of a default by
Borrower in its obligations hereunder, Lender shall have all of the rights and
remedies provided in this Note, as well as those rights and remedies provided
by any other applicable law, rule or regulation.
Borrower, and its successors or assigns, waive presentment for
payment, demand, protest, and notice of demand, protest, and nonpayment, and
consent to any and all renewals, extensions or modifications that might be made
by Lender as to the time of payment of this Note from time to time, and further
agree that any security for this Note or any portion thereof may, from time to
time, be modified or released in whole or in part without affecting the
liability of any party liable for the payment of this Note.
This Note is hereby expressly limited so that in no contingency or
event whatsoever, whether by acceleration of maturity of the indebtedness
evidenced hereby or otherwise, shall the amount paid or agreed to be paid to
Lender for the use, forbearance or detention of the money advanced or to be
advanced hereunder exceed the highest lawful rate permissible under applicable
law. If, from any
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<PAGE> 8
circumstances whatsoever, fulfillment of any provision hereof or of any other
consideration received or agreement evidencing or securing the indebtedness, at
the time payment of such consideration or performance of such provision occurs,
shall involve the payment of interest in excess of that authorized by law, the
obligation to be fulfilled shall be reduced to the limit so authorized by law,
and if, from any circumstances whatsoever, Lender shall ever receive as
interest an amount that would exceed the highest lawful rate applicable to
Borrower, such amount that would be excessive interest shall be applied to the
reduction of the unpaid principal balance of the indebtedness evidenced hereby
and not to the payment of interest, and if the principal amount of this Note is
paid in full, any remaining excess shall forthwith be paid to Borrower. In
determining whether or not the interest paid or payable under any specific
contingency exceeds the maximum rate permissible under applicable law, Lender
and Borrower shall, to the maximum extent permitted under applicable law, (i)
characterize any nonprincipal payments as an expense, fee or premium rather
than as interest; (ii) exclude voluntary prepayments and the effects thereof,
and (iii) amortize, prorate, allocate and spread, in equal parts, the total
amount of interest throughout the entire contemplated term of this Note so that
the interest rate is uniform throughout the entire term; provided that, if this
Note is paid and performed in full prior to the end of the full contemplated
term hereof, and if the interest received for the actual period of existence
hereof exceeds the highest lawful rate permissible under applicable law, Lender
shall refund to Borrower the amount of such excess or credit the amount of such
excess against the principal amount of this Note and, in such event, Lender
shall not be subject to any penalties provided by any laws for contracting for,
charging, taking, reserving or receiving interest in excess of the highest
lawful rate permissible under applicable law.
Borrower may prepay this Note in any amount at any time prior to
maturity without premium or penalty, and interest shall immediately cease on
any amount so prepaid. Any prepayment will be applied first toward the payment
of accrued interest and next to the principal installment(s) last maturing on
this Note; that is, in the inverse order of maturity and without reducing the
amount or time of payment of the remaining obligatory installments.
The entire unpaid principal balance of, and all accrued interest on,
this Note plus any other sums payable pursuant to this Note or pursuant to any
other instrument or document evidencing or securing the indebtedness
represented by this Note shall immediately become due and payable at the option
of the holder hereof upon the occurrence of any one or more of the following
events ("Events of Default"):
(a) Failure by Borrower to pay any installment of principal,
interest or principal and interest as and when same becomes due and payable in
accordance with the terms of this Note;
(b) Failure by Borrower or any other party to observe or perform
any covenant, obligation, term or condition to be observed or performed by them
pursuant to, or default or an "Event of Default" shall otherwise occur under,
the Security Agreement (as hereinafter defined) and/or any other instrument or
document evidencing or securing the indebtedness represented by this Note or
related hereto, and the continuance of such failure for a period of thirty (30)
days following written notice thereof to Borrower, but if the curing of such
failure cannot by its nature be reasonably
2
<PAGE> 9
cured within such 30-day period, Borrower shall have such longer period of time
as is reasonably necessary in the circumstances to cure such failure provided
that Borrower (i) actually commences the cure within such 30-day period, (ii)
thereafter pursues the completion of the cure with due diligence and (iii) in
all events completes the cure within ninety (90) days following Borrower's
receipt of the aforesaid written notice;
(c) Any representation or warranty made by Borrower or any other
party liable, in whole or in part, for the payment of this Note, whether as
borrower, endorser, guarantor, surety or otherwise, herein, or by Borrower or
any other party in any other instrument or document modifying, renewing,
extending, evidencing, securing or pertaining to this Note, is or proves to
have been false, misleading or erroneous in any material respect;
(d) The insolvency of Borrower or any other party liable, in whole
or in part, for the payment of this Note, whether as borrower, endorser,
guarantor, surety or otherwise;
(e) The appointment of a trustee or receiver for the assets, or
any portion thereof, of Borrower or for any material portion of the property or
assets of any other party liable, in whole or in part, for the payment of this
Note, whether as borrower, endorser, guarantor, surety or otherwise;
(f) The entry in bankruptcy of an order for relief for or against
Borrower or any other party liable, in whole or in part, for the payment of
this Note, whether as borrower, endorser, guarantor, surety or otherwise;
(g) The admission of Borrower or any other party liable, in whole
or in part, for the payment of this Note, whether as borrower, endorser,
guarantor, surety or otherwise, in writing of any such parties' inability to
pay said parties' debts as they become due; or
(h) If Borrower or any other party liable, in whole or in part,
for the payment of this Note, whether as borrower, endorser, guarantor, surety
or otherwise, should suffer a material and adverse change in the financial
condition of such party.
In the event any one or more of the Events of Default specified above
shall have occurred, the holder of this Note may proceed to protect and enforce
its rights either by suit in equity and/or by action at law, nonjudicial
foreclosure or by other appropriate proceedings. All rights and remedies of
Lender, or any other subsequent holder of this Note, shall be cumulative and
concurrent and may be pursued singularly, successively or together, at the sole
discretion of Lender, and may be exercised as often as the occasion therefor
shall arise. If this Note is placed in the hands of an attorney for collection,
or if collected through judicial or bankruptcy proceedings, Borrower shall pay,
in addition to the other sums referred to herein, a reasonable sum as a
collection or attorneys' fee and all other reasonable costs incurred by the
holder of this Note in collection of the unpaid sums due hereunder.
This Note is secured by a Security Agreement of even date executed by
Borrower in favor
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<PAGE> 10
of Lender, covering all of Borrower's right, title and interest in and to that
certain personal property and collateral (collectively, the "Collateral") as
more particularly described in the Security Agreement. Borrower agrees to
execute any document necessary for Lender to secure its financial interest in
the Collateral securing this Note.
The form and essential validity of this Note shall be governed by the
laws of the State of Texas. If any provision of this Note is prohibited by, or
is unlawful or unenforceable under, any applicable law of any jurisdiction,
such provision shall, as to such jurisdiction, be ineffective to the extent of
such prohibition without invalidating the remaining provisions hereof.
Time is of the essence with respect to all of Borrower's obligations a
nd agreements under this Note.
All notices, demands or other communications required or permitted
hereunder or given in regard to this Note shall be in writing, and shall be
deemed to have been served, given and received (a) if hand delivered, when
delivered in person to the address set forth hereinafter for the party to whom
notice is given, or (b) if mailed, whether or not actually received, when
deposited in a regularly maintained receptacle for the United States mail,
certified mail, return receipt requested, postage prepaid, properly addressed
to the party to whom notice is given at the address hereafter specified;
provided, however, that notice of any sale or other disposition of the
Collateral covered by the Security Agreement shall be given in the manner
prescribed by the Security Agreement. Any party may change its address for
notices hereunder to such other address within the continental United States as
such party has provided to the other party by ten (10) days' advance written
notice given in the manner herein provided. Until changed in the foregoing
manner, the parties' respective addresses for notices hereunder are as follows:
If to Borrower:
Angelo Pitillo
Pete's Hospitality Co., Inc.
1020 S. 344th Street, Suite 210
Federal Way, Washington 98003
If to Lender:
Ghulam M. Bombaywala
Watermarc Food Management Co.
11111 Wilcrest Green, Suite 350
Houston, Texas 77042
This Note and all of the covenants, promises and agreements contained
herein shall be binding upon and shall inure to the benefit of Lender's and
Borrower's respective heirs, legal representatives, successors and assigns.
Nothing herein shall permit any assignment of this Note by
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<PAGE> 11
Borrower, other than to an affiliate or successor in interest; provided,
however, that in no event will any assignment relieve Borrower of any
obligation or liability under this Note or the Security Agreement.
THIS WRITTEN NOTE, THE SECURITY AGREEMENT AND THE OTHER WRITTEN LOAN
DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Lender makes the following disclosure to Borrower:
THIS NOTE IS PAYABLE IN FULL AT THE END OF SIXTY SIX (66) MONTHS. YOU
MUST REPAY THE ENTIRE PRINCIPAL BALANCE OF THE NOTE AND UNPAID
INTEREST THEN DUE. THE NOTEHOLDER IS UNDER NO OBLIGATION TO REFINANCE
THE LOAN AT THAT TIME. YOU WILL THEREFORE BE REQUIRED TO MAKE PAYMENT
OUT OF OTHER ASSETS YOU MAY OWN, OR YOU WILL HAVE TO FIND A LENDER
WILLING TO LEND THE MONEY AT PREVAILING MARKET RATES WHICH MAY BE
CONSIDERABLY HIGHER OR LOWER THAN THE INTEREST RATE ON THIS NOTE. IF
YOU REFINANCE THIS LOAN AT MATURITY, YOU MAY HAVE TO PAY SOME OR ALL
CLOSING COSTS NORMALLY ASSOCIATED WITH A NEW LOAN EVEN IF YOU OBTAIN
REFINANCING FROM THE NOTEHOLDER.
IN WITNESS WHEREOF, Borrower has executed this Note on the date first
hereinabove written.
PETE'S HOSPITALITY CO., INC.
By:
-----------------------------
Angelo Pitillo
President
5
<PAGE> 12
SECURITY AGREEMENT
EXHIBIT B
THIS SECURITY AGREEMENT (this "Security Agreement") is executed and
delivered this lst day of July, 1997, by PETE'S HOSPITALITY CO., INC.
(hereinafter referred to as "Debtor"), to and in favor of WATERMARC FOOD
MANAGEMENT CO., a Texas corporation ("Secured Party").
WITNESSETH:
A. Of even date herewith, Debtor has executed a certain Promissory
Note (the "Note") in the stated principal amount of $300,000.00, payable to the
order of Secured Party.
B. In order to secure the Secured Obligations (as hereinafter
defined), Debtor desires to execute and deliver to and in favor of Secured
Party this Security Agreement.
NOW, THEREFORE, for and in consideration of the premises, the sum of
Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confessed, Debtor
hereby grants to Secured Party a security interest in and to the Collateral (as
defined and described hereinbelow) to secure the Secured Obligations, upon the
terms and conditions set forth herein.
ARTICLE I
SECURED OBLIGATIONS AND COLLATERAL
1.01. Secured Obligations. The security interest herein granted and
created shall secure, all and singular, the following:
(a) The payment (in accordance with the terms of the Note) of all
principal, interest and other sums due under or in regard to
the Note and all documents and instruments given as security
for, or executed in connection with, the Note (the Note and
all such other documents and instruments being sometimes
collectively herein called the "Loan Documents");
(b) All other notes or instruments in substitution for the Note,
or any portion thereof, or in renewal or extension thereof, in
whole or in part;
(c) All indebtedness incurred or arising pursuant to the
provisions of this Security Agreement and/or any of the other
Loan Documents; and
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(d) The performance by Debtor of its obligations under this
Security Agreement and the other Loan Documents.
The indebtedness and obligations referred to in subparagraphs (a) through (d)
above are herein sometimes collectively referred to as the "Secured
Obligations."
1.02. Collateral. As used herein, the term "Collateral" shall mean
and refer to all of the following:
(a) Fixtures. All fixtures now or hereafter attached to or
installed in, upon or on those certain properties and
businesses of Pete's Hospitality Co., Inc. situated in the
State of Washington, more particularly described on Exhibit
"A" attached hereto and incorporated herein by reference, or
any improvements thereon, which in some fashion are deemed to
be fixtures to the land or the improvements under the laws of
the State of Texas.
(b) Inventory. All of Debtor's inventory located at the properties
and businesses of Pete's Hospitality Co., Inc. described on
Exhibit "A", whether now owned or hereafter acquired,
including all goods which are held for sale or which are to be
furnished under contract for services, or which have been so
furnished or which are raw materials, work in process or
materials used or consumed in Debtor's business.
(c) Equipment. All of Debtor's equipment, whether now owned or
hereafter acquired located at the properties and businesses of
Pete's Hospitality Co., Inc. described on Exhibit "A".
(d) Other Personal Property: General Intangibles. All other
personal property now owned or hereafter at any time acquired
by Debtor located at the properties and businesses of Pete's
Hospitality Co., Inc. described on Exhibit "A", which are held
for sale or lease, or are furnished or to be furnished under
contracts of service, or is held as raw materials, work in
process or materials used or consumed or to be used or
consumed in Debtor's business, and all general intangibles.
(e) Proceeds; Replacements; Substitutions. All proceeds of (unless
substitute collateral is provided pursuant to and in
accordance with Section 2.13 herein) products of, replacements
for, additions to, increases of, repairs to, improvements to,
substitutions for, excessions of, and property necessary for
the operation of, any of the foregoing, including, without
limitation, insurance payable as a result of loss or damage to
the foregoing property and any proceeds thereunder, refunds of
unearned premiums of any such insurance policy and claims
against third parties.
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<PAGE> 14
(f) Books and Records. All books and records related to any of the
foregoing, including, without limitation, any and all books of
account, customer lists and other records relating in any way
to the accounts and/or inventory.
1.03. Certain Definitions. As used herein, unless the context shall
otherwise require, the terms "equipment," "fixtures," "general intangibles,"
"goods," "inventory" and "proceeds" shall have the same meanings given such
terms in the Uniform Commercial Code as presently in effect in the State of
Texas, Texas Business and Commerce Code, Chapters 1-9 (the "Code").
ARTICLE H
COVENANTS
So long as the Secured Obligations, or any portion thereof, remain
unpaid or unsatisfied, Debtor (and each person or party comprising Debtor)
covenants and agrees with Secured Party as follows:
2.01. Payment and Performance of Secured Obligations. Debtor shall
make prompt payment, as the same becomes due, of all indebtedness comprising
the Secured Obligations, and shall punctually and fully perform the other
obligations comprising the Secured Obligations, in accordance with the terms
and provisions of the agreements and instruments evidencing the Secured
Obligations.
2.02. Costs and Expenses. Debtor shall pay all expenses and reimburse
Secured Party for any expenditures, including, without limitation, reasonable
attorneys' fees and legal expenses, in connection with Secured Party's exercise
of any of Secured Party's rights and remedies under Article IV hereof, or
otherwise, or Secured Party's protection of the Collateral and Secured Party's
security interest therein, and such amounts shall bear interest at the lesser
of (a) eighteen percent (18%) per annum or (b) the maximum rate of interest
permitted by applicable law (the "Maximum Lawful Rate"), computed from the date
of payment by Secured Party until repaid by Debtor, and shall become part of
the Secured Obligations.
2.03. Financing Statements. Debtor shall sign and execute, alone or
with Secured Party or any other necessary party, any financing statement,
continuation statement or other document, or procure any document, and pay all
connected costs necessary to protect the security interest under this Security
Agreement against the rights or interests of third persons.
2.04. Prohibition on Assignment. Notwithstanding the security
interest in proceeds granted herein, without the prior written consent of
Secured Party, Debtor shall not, except as otherwise specifically permitted
pursuant to the terms of this Security Agreement, assign this Security
Agreement or the Collateral except to an affiliate or successor in interest.
Notwithstanding the above, in no event will any assignment act to relieve
Debtor of any obligation or liability under this Security Agreement or the
Note.
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<PAGE> 15
2.05. No Waivers, Pledges or Other Actions. Debtor shall not waive,
release or relinquish any rights, privileges or benefits that Debtor, or any
person or party comprising Debtor, may have with respect to the Collateral,
pledge or assign the Collateral to any party whatsoever other than Secured
Party, or encumber the Collateral, or take any other action of any kind or
character whatsoever that would be adverse to the Collateral or to the rights
and security interests of Secured Party under this Security Agreement.
2.06. Assignment of Rights and Interests. Debtor hereby directly and
absolutely assigns and transfers to Secured Party all of Debtor's right, title,
interest, benefit and privilege, but not Debtor's obligations, responsibilities
or liabilities, in or with respect to the Collateral, and such assignment and
transfer shall be effective until such time as all the events described in
Section 5.01 hereof have occurred, at which time this assignment and transfer
shall terminate. Debtor hereby agrees to indemnify, hold harmless and defend
Secured Party from and against any and all liabilities, costs, claims, causes
of action and expenses that may at any time arise out of or be connection with
Debtor, the Collateral, this Security Agreement, the Loan Documents and/or the
Secured Obligations.
2.07. Insecurity. If Secured Party shall at any time be of the
opinion that the Collateral is not sufficient or has declined or may decline in
value, or should Secured Party deem payment or performance of the Secured
Obligations to be insecure, then Secured Party shall have the right to call for
additional collateral satisfactory to Secured Party, and Debtor promises to
furnish such additional collateral within five (5) days after such request.
Debtor shall, at its expense, do, make, procure, execute and deliver all acts,
things, writings and assurances as Secured Party may at any time require to
protect, assure or enforce its interests, rights and remedies created by,
provided in or emanating from this Security Agreement.
2.08. Change of Location. Debtor will notify Secured Party on or
before the date of any change in location of the Collateral. Debtor will give
Secured Party prior written notice of (a) the opening or closing of Debtor's
business in which the Collateral is located or (b) any change in the location
of Debtor's principal place of business or of Debtor's business address.
2.09. Payment of Taxes. Debtor agrees to pay prior to delinquency
all taxes, charges, liens and assessments against the Collateral, and upon the
failure of Debtor to do so, Secured Party at its option (but without any
obligation to do so) may pay any of them and shall be the sole judge of the
legality or validity thereof and the amount necessary to discharge the same.
Any such payment by Secured Party shall become part of the Secured Obligations
secured hereunder and shall be paid to Secured Party by Debtor immediately upon
demand, with interest thereon at the lesser of (a) eighteen percent (18%) per
annum or (b) the Maximum Lawful Rate.
2.10. Records. Debtor shall keep accurate and complete records of
the Collateral (including proceeds). These records shall reflect complete and
accurate stock records of inventory and all facts pertaining to Debtor's
warranties, representations and agreements under this Security Agreement.
Secured Party may at any time have access to, examine, audit, make extracts
from, and inspect without hindrance or delay the Collateral and Debtor's
records and files relating to the
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<PAGE> 16
Collateral. Debtor will transmit to Secured Party promptly all information
which in any way relates to or affects (a) the filing of any financing
statements or other public notes or recordings or the delivery and possession
of items of Collateral for the purpose of perfecting a security interest in
Collateral or (b) the business, affairs or financial condition of Debtor in a
material or adverse manner. Any balance sheets or financial statements
requested by Secured Party pursuant to this Section 2.10 shall conform to
generally accepted accounting principles consistently applied.
2.11. Insurance. Debtor shall maintain, with financially sound and
reputable insurers, insurance satisfactory in all respects to Secured Party
covering all insurable risks to the Collateral, including standard extended
coverage, in an amount at least equal to the value of the Collateral. The
policies evidencing any such insurance shall contain a standard mortgagee's
endorsement providing for payment of any loss to Secured Party, and such
policies shall further provide for thirty (30) days' written minimum
cancellation notice to Secured Party. Debtor shall furnish evidence
satisfactory to Secured Party of compliance with these insurance provisions.
2.12. Claims by Others. Debtor will promptly notify Secured Party in
writing of any claim, proceeding or litigation affecting the Collateral,
whether or not the claim is covered by insurance, and of any suit or
administrative proceeding which may materially or adversely affect Debtor's
business, assets, operations or condition, financial or otherwise.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Debtor hereby represents and warrants to Secured Party as follows:
3.01. Authority of Debtor. Debtor (and/or each person or party
comprising Debtor or executing this Security Agreement) has good right, title
and authority to pledge and assign to Secured Party all of Debtor's right,
privilege and interest in and to the Collateral without the joinder of any
other party, with the result being that, following Debtor's execution hereof,
this Security Agreement shall be valid and binding against Debtor with respect
to the Collateral in accordance with the terms and provisions hereof.
3.02 Lien Priority. The security interests herein granted are first
and prior security interests in and to all of the Collateral.
3.03. Compliance With Laws. Debtor is in compliance with all
necessary governmental requirements, laws, regulations, orders, injunctions,
judgments, decrees and writs, and Debtor possesses adequate assets, capital,
licenses, patents, patent applications, copyrights, trademarks and/or trade
names for the conduct of Debtor's business and the use of the Collateral and
the enforcement of Debtor's rights with respect thereto (including, without
limitation, any requirements for qualification to do business in any
jurisdiction).
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3.04. Accurate Information. All information supplied and statements
made by Debtor to Secured Party in any financial, credit or accounting
statement or application for credit prior to, contemporaneously with or
subsequent to the execution of this Security Agreement are and shall continue
to be true, correct, complete, valid and genuine.
3.05. No Violation of Other Agreements. Debtor's execution and
delivery of this Security Agreement will not and does not violate or contravene
the terms of any contract or agreement to which Debtor, or any person or party
comprising Debtor, is a party.
3.06. No Litigation. There is no pending or threatened litigation,
arbitration, or other action or proceeding which would materially and adversely
affect any aspect of Debtor's business or the Collateral. Debtor is not subject
to any labor dispute, and no labor contract to which Debtor is a party is
scheduled to expire during the term of this Security Agreement.
3.07. Adequate Records. Debtor shall at all times keep adequate
records concerning the Collateral and permit representatives of Secured Party
at any reasonable time to inspect such records.
3.08. Communications. Debtor shall, at its expense, promptly deliver
to Secured Party a copy of each notice or other communication received by it in
respect of the Collateral and shall at all times keep Secured Party apprised of
all matters respecting the Collateral.
3.09. No Counterclaim. No set-off or counterclaim to any money due
or to become due to Debtor by virtue of the Collateral, or any part thereof or
any interest therein, exists as of the date of this Security Agreement, and no
agreement has been made with any person or party pursuant to which any
deduction or discount therefrom may be claimed.
3.10. Material Facts. Debtor knows of no fact or circumstance that
Debtor has not disclosed in writing to Secured Party that could materially and
adversely affect the properties, business or financial condition of Debtor
(including, without limitation, the ability of Debtor to pay any indebtedness
owed to Secured Party) or the value of the Collateral as security for the
payment and performance of the Secured Obligations.
ARTICLE IV
EVENTS OF DEFAULT: REMEDIES
4.01. Events of Default. The term "Event of Default," as used in this
Security Agreement, shall mean the occurrence of any one or more of the
following events:
(a) An Event of Default occurs under the Note; or
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(b) The occurrence of any event or condition which is, in Secured
Party's sole opinion, materially adverse to the Collateral, or
the loss, theft, substantial damage, destruction, sale or
encumbrance of, to or on any of the Collateral or any other
collateral for the Secured Obligations, or - the making of any
levy, seizure or attachment thereof or thereon.
4.02. Certain Remedies. Upon the occurrence of an Event of Default
and during the continuation thereof, Secured Party may, at its option, without
any notice or demand to Debtor, Debtor hereby expressly waiving same, (a)
exercise the sole right, power and authority to act for and on behalf of Debtor
and/or all persons or parties comprising Debtor (but without any liability or
obligation whatsoever) with respect to the Collateral, in place of Debtor and
to the exclusion of Debtor, or designate any other party to act as such, and
Debtor hereby waives and relinquishes any and all benefits and rights (but not
obligations) that Debtor may have with respect to the Collateral from and after
such date, (b) declare all indebtedness comprising Secured Obligations to be
immediately due and payable, (c) collect and/or continue to collect all amounts
which may become distributable or payable to Debtor with respect to the
Collateral and apply all amounts collected in reduction of the unpaid balance
of the indebtedness comprising the Secured Obligations, and/or (d) advance and
pay such sum or sums as may be required to cure or attempt to cure any such
Event of Default, and all such sums so advanced and paid by Secured Party to
cure or attempt to cure such Event of Default, together with interest on the
sums so advanced at the lesser of (i) eighteen percent (18%) per annum or (ii)
the Maximum Lawful Rate, computed from the date of such advance until repaid by
Debtor, shall be secured hereby and paid by Debtor to Secured Party on demand
at Secured Party's address described below. Debtor hereby covenants and agrees
to pay to Secured Party, as aforesaid, any and all sums that may, under the
provisions of this section, be due to Secured Party.
4.03. Take Possession of Collateral. Upon the occurrence of an Event
of Default and during the continuation thereof, Secured Party may take
possession of the Collateral or, at Secured Party's request, Debtor shall, at
Debtor's sole cost and expense, assemble the Collateral and make it available
at a location to be specified by Secured Party which is reasonably convenient
to Debtor and Secured Party. Secured Party may, at its option, render any
equipment unusable that may be included in the Collateral, or, at Secured
Party's request, Debtor will render it unusable. In any event, the risk of
accidental loss or damage to, or diminution in value of, the Collateral shall
be on Debtor, and Secured Party shall have no liability whatsoever for failure
to obtain or maintain insurance, nor to determine whether any insurance ever in
force is adequate as to the amount or as to the risk insured. In addition to
the foregoing, Secured Party may seize all books and records of Debtor
pertaining to the Collateral. Secured Party shall have the authority to enter
upon any real property or improvements thereon in order to seize any such books
or records, or any Collateral located thereon, and remove the same therefrom
without liability.
4.04. Sale of Collateral. Upon the occurrence of an Event of Default
and during the continuation thereof, Secured Party shall have and may exercise
all of the rights and remedies of a secured party under the Code. Reasonable
notification of the time and place of any public sale of the Collateral, or
reasonable notification of the time after which any private sale or other
7
<PAGE> 19
intended disposition of the Collateral is to be made, shall be sent to Debtor
and any other person entitled to notice under the Code. Notice given not less
than five (5) calendar days prior to the taking of the action to which the
notice relates is reasonable notification for purposes of this section. Secured
Party shall be entitled to apply the proceeds of any sale or other disposition
of the Collateral in the following order: first, to the payment of all of
Secured Party's reasonable expenses including attorneys' fees and other legal
expenses, incurred in holding and preparing the Collateral, or any part
thereof, for sale(s) or other disposition, and in actually selling or disposing
of the same; and next, toward payment of the Secured Obligations. Secured Party
shall account to Debtor for any surplus. If the proceeds of any sale are not
sufficient to pay any and all such sums due to Secured Party, Debtor shall
remain liable for any deficiency. In the event any of the Collateral is in the
form of cash, it will be applied to reduce the unpaid Secured Obligations and
shall not be sold. If only part of the Collateral is sold or disposed of such
that the Secured Obligations remain outstanding, in whole or in part, Secured
Party's rights and remedies hereunder shall not be exhausted, waived or
modified, and Secured Parry is specifically empowered to make one or more
successive sales or dispositions until all of the Collateral shall be sold or
disposed of and all of the Secured Obligations have been paid and satisfied. In
the event that Secured Party elects not to sell or dispose of the Collateral,
or any portion thereof, it retains its rights to lease or otherwise dispose of
or utilize the Collateral, or any part or parts thereof, in any manner
authorized or permitted by law, and to apply the proceeds of the same towards
payment of the Secured Obligations.
4.05. Appointment of Agents. Secured Party may appoint any party as
agent to perform any act or acts necessary or incident to any sale or other
disposition by Secured Party of the Collateral. Additionally, any sale or other
disposition hereunder may be conducted by an auctioneer or any officer or agent
of Secured Party.
4.06. Cumulative Rights. In addition to the above, Secured Party
shall have and may exercise any and all other rights conferred by law or under
this Security Agreement or the other Loan Documents and may resort to any
remedy existing at law or in equity for the collection and satisfaction of the
Secured Obligations and for the enforcement of the covenants and agreements
contained herein, and the resort to any remedy shall not prevent the concurrent
or subsequent employment of any other appropriate remedy or remedies.
4.07. No Waiver. The rights granted hereunder are cumulative of any
and all other security now or hereafter held by Secured Party for payment and
performance of the Secured Obligations and Secured Party may resort to any
security now or hereafter existing for the payment and performance of the
Secured Obligations in such portions and in such order as may seem best to
Secured Party in Secured Party's sole and uncontrolled discretion. No failure
on the part of Secured Party to exercise and no delay in exercising any right,
power or remedy hereunder or otherwise shall operate as a waiver thereof, nor
shall any single or partial exercise by Secured Party of any right, power or
remedy hereunder or otherwise preclude any other or further exercise thereof or
the exercise of any other right, power or remedy.
8
<PAGE> 20
ARTICLE V
MISCELLANEOUS
5.01. Release of Collateral. When (a) the Note has been paid in full
and (b) all obligations and liabilities comprising the Secured Obligations
shall have been performed and discharged in full, the security interest
evidenced hereby and provided for herein shall terminate and shall be released
at the expense of Debtor and the Collateral shall become free and clear of such
security interest.
5.02. Secured Party's Consent to Modifications, Etc.. Secured Party
may remedy any default in any reasonable manner without waiving the default
remedied and may waive any default without waiving any prior or subsequent
default. No modification or waiver of any provision of this Security Agreement
nor consent to any departure by Debtor therefrom shall in any event be
effective unless the same shall be in writing and signed by Secured Party, and
then such waiver or consent shall be effective only in the specific instances,
for the purpose for which given and to the extent therein specified. No notice
to or demand on Debtor in any case shall of itself entitle Debtor to any other
or further notice or demand in similar or other circumstances.
5.03. Financing Statement Sufficiency. A carbon, photographic or
other reproduction of this Security Agreement or of any other reproduction of
this Security Agreement shall be sufficient as a financing statement.
5.04. Assignment of Rights. Secured Party may assign this Security
Agreement, in whole or in part, and the assignee shall be entitled to the
rights and remedies of Secured Party hereunder (to the extent so assigned).
5.05. Partial Invalidity. A determination that any provision of this
Security Agreement is unenforceable or invalid shall not affect the validity or
enforceability of any other provision.
5.06. Binding Effect. The terms and provisions of this Security
Agreement shall inure to the benefit of and be binding upon the respective
heirs, legal and personal representatives, successors and assigns of Debtor and
Secured Party.
5.07. Governing Law. The laws governing this Security Agreement and
the security interest herein granted shall be those of the State of Texas and
those of the United States applicable to transactions in Texas.
5.08. Construction. In construing this Security Agreement, words in
any gender shall be deemed to include the other genders; words in the singular
tense shall be deemed to include the plural, and vice versa.
9
<PAGE> 21
5.09. Notices. For purposes hereof, the addresses of the parties to
which notices are to be sent are as provided in the Note. Except as may be
otherwise provided herein, all notices shall be deemed given as is provided in
the Note.
5.10. Time of Essence. Time is of the essence of this Security
Agreement.
5.11. Further Assurances. Debtor agrees to do such further acts and
things, and to execute and deliver such additional pledges, conveyances,
assignments, agreements and instruments, as Secured Party may at any time
reasonably request in connection with the administration or enforcement of this
Security Agreement or related to the Collateral, or any part thereof, or in
order to better assure and confirm unto Secured Party its rights, powers and
remedies under this Security Agreement.
5.12. Headings. The section and paragraph headings contained in this
Security Agreement have been inserted for convenience of reference only and
shall not affect the meaning or construction of any of the provisions of this
Security Agreement.
IN WITNESS WHEREOF, this Security Agreement has been executed and
delivered as of the date first above written.
DEBTOR:
PETE'S HOSPITALITY CO., INC.
By:
--------------------------------
Angelo Pitillo
President
SECURED PARTY:
WATERMARC FOOD MANAGEMENT CO.
By:
--------------------------------
Ghulam M. Bombaywala
Chief Executive Officer
10
<PAGE> 22
STATE OF TEXAS )
COUNTY OF HARRIS )
This instrument was acknowledged before me on 1997, by Angelo
Pitillo, as President, of Pete's Hospitality Co., Inc., a Washington
corporation: on behalf of said corporation.
-----------------------------
Notary Public, State of Texas
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on 1997, by Ghulam M.
Bombaywala, as Chief Executive Officer, of Watermarc Food Management Co., a
Texas corporation, on behalf of said corporation.
-----------------------------
Notary Public, State of Texas
Exhibits:
"A" - Legal Description of and/or Address of properties and businesses of
Pete's Hospitality Co., Inc. where Collateral is located
11
<PAGE> 23
EXHIBIT "A"
LEGAL DESCRIPTION OF AND/OR ADDRESS OF THE PROPERTIES AND
BUSINESSES OF PETE'S HOSPITALITY CO., INC. WHERE COLLATERAL IS LOCATED
Pete's Barbecue Restaurant located at 1602 S. Mildred Street, Tacoma,
Washington 98465
Pete's Barbecue Restaurant located at 1314 E. 72nd Avenue, Tacoma, Washington
98404
H. D. Hotspurs located at 315 S. Washington, Kent, Washington 98031
<PAGE> 1
EXHIBIT 4.1
AMENDMENT NO. 3 TO WARRANT AGREEMENT
THIS AMENDMENT NO. 3 TO WARRANT AGREEMENT (the "Agreement") is dated
April 15, 1997, by and between Watermarc Food Management Co., formerly known
as Billy Blues Food Corporation, a Texas corporation with its principal offices
in Houston, Texas (the "Company"), and North American Transfer Co., as warrant
agent (the "Warrant Agent").
WITNESSETH:
WHEREAS, the parties hereto previously entered into that certain Warrant
Agreement dated May 15, 1992 (the "Original Agreement"), a copy of which is
attached hereto as Exhibit A, for the purpose of setting forth the terms and
conditions of the issuance, registration, transfer, exchange and redemption of
the Company's Series A Redeemable Common Stock Purchase Warrants (the "Series A
Warrants");
WHEREAS, all capitalized terms used herein shall have the same meaning
assigned them in the Original Agreement unless otherwise set forth herein.
Furthermore, this Agreement confirms and ratifies all terms and conditions set
forth in the Original Agreement except as expressly modified herein; and
WHEREAS, the parties hereto desire to amend the Original Agreement for
the purpose of extending the Warrant Expiration Date from May 15, 1997 to May
15, 1998;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. Amendment and Restatement of Section 1(i) of the Original Agreement.
Section 1(i) of the Original Agreement is hereby amended and restated in its
entirety as follows for the purpose of extending the Warrant Expiration Date
from May 15, 1997 to May 16, 1998:
1(i) "Warrant Expiration Date" shall mean 5:00 p.m. (New York time)
on May 15, 1998, with respect to the Series A Warrants, or the
redemption date as defined in Section 8, whichever is earlier;
provided that if such date shall in the State of New York be a
holiday or a day on which banks are authorized to close, then
5:00 p.m. (New York time) on the next following day which in
the State of New York is not a holiday or a day on which banks
are authorized to close. The Company may, at its election,
extend the Warrant Expiration Date with respect to the
Series A Warrants.
2. Current Prospectus. The Company agrees to monitor the market
price of its common stock, par value $.05 per share (the "Common Stock") and
will undertake to file a posteffective amendment to its registration statement
dated July 26, 1995, Registration No. 33-93450
AMENDMENT NO. 3 TO WARRANT AGREEMENT - Page 1
<PAGE> 2
(the "Registration Statement"), at such time as the exercise of the Series A
Warrants appears more likely. Furthermore, the Company will not, without the
opinion of counsel to the Company, issue any of its Common Stock pursuant to
the exercise of any of the Series A Warrants unless there is a post-effective
amendment to the Registration Statement in effect containing a current
prospectus meeting the requirements of Section 10(a)(3) of the Securities Act
of 1933, as amended.
3. Miscellaneous.
(a) This Agreement shall be binding upon and inure to the
benefit of the Company and the Warrant Agent and their respective successors
and assigns, and the holders from time to time to Warrant Certificates.
Nothing in this Agreement is intended or shall be construed to confer upon
any other person any right, remedy or claim, in equity or at law, or to impose
upon any other person any duty, liability or obligation.
(b) This Agreement shall be governed and construed in
accordance with the laws of the State of New York; provided, however, that the
Series A Warrants shall be governed by and construed in accordance with the laws
of the State of Texas, without reference to principles of conflict of laws.
(c) If any term of this Agreement shall be held to be invalid,
illegal or unenforceable, the validity of all other terms hereof shall in no
way be effected thereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 3
to Warrant Agreement as of the date first above set forth.
COMPANY:
WATERMARC FOOD MANAGEMENT CO.
By: ANGELO PITILLO
---------------------------
Name: Angelo Pitillo
Title: President and Chief
Operating Officer
WARRANT AGENT:
NORTH AMERICAN TRANSFER CO.
By: MILDRED ROSTOLDER
---------------------------
Name: Mildred Rostolder
Title: Principal
<PAGE> 1
EXHIBIT 4.2
NOTICE OF EXTENSION OF WARRANT EXPIRATION DATE
NOTICE is hereby given that Watermarc Food Management Co., formerly
known as Billy Blues Food Corporation, (the "Company") has extended the
expiration date of its Series A Redeemable Common Stock Purchase Warrants (the
"Series A Warrants") from 5:00 p.m. (Eastern time) on May 15, 1997 to 5:00 p.m.
(Eastern time) on May 15, 1998. The extension was effected pursuant to an
amendment of the Warrant Agreement, dated May 15, 1992, between the Company and
North American Transfer Co., as Warrant Agent for the holders of the Series A
Warrants.
The Company will monitor the market price of its common stock, par
value $.05 per share (the "Common Stock") and, if necessary, file a
post-effective amendment to its Registration Statement dated July 26, 1995, No.
33-93450 (the "Registration Statement") at such time as the exercise of the
Series A Warrants appears more likely. The Company will not, without the
opinion of counsel to the Company, issue any shares of its Common Stock
pursuant to the exercise of any of the outstanding Series A Warrants unless a
post-effective amendment to the Registration Statement is in effect, which
Registration Statement shall contain a current prospectus meeting the
requirements of Section 10(a)(3) of the Securities Act of 1933, as amended.
Any comments or questions regarding the extension of the expiration
date for the Company's Series A Warrants should be addressed to Mr. Angelo
Pitillo, President, Watermarc Food Management Co., 11111 Wilcrest Green, Suite
350, Houston, TX 77042, (713) 783-0500.
PLEASE ATTACH THIS NOTICE TO THE
CERTIFICATE EVIDENCING THE SERIES A WARRANTS
CURRENTLY HELD BY YOU
<PAGE> 1
EXHIBIT 4.3
SECOND AMENDMENT
TO
PURCHASE AGREEMENT
Second Amendment to Purchase Agreement dated effective as of July 31,
1997 (the "Amendment"), among WATERMARC FOOD MANAGEMENT CO., a Texas
corporation formerly known as Billy Blues Food Corporation (the "Company"), and
the persons listed in Schedule 1 hereto (the "Purchasers");
WITNESSETH:
Whereas, the Company and the Purchasers are parties to a Purchase
Agreement dated as of December 19, 1994, as amended by the First Amendment to
Purchase Agreement dated as of March 31, 1996, (such Purchase Agreement, as
amended, being referred to herein as the "Purchase Agreement"), pursuant to
which the Company issued and the Purchasers purchased (a) the Company's 12%
Subordinated Notes due March 31, 1996, in the aggregate principal amount of
$3,000,000 (the "Notes") and (b) warrants (the "Warrants") evidencing the right
to purchase an aggregate of 1,333,320 shares of Common Stock, $.05 par value
(the "Company Common Stock"), of the Company, at $2.25 per share; and
Whereas, the Company has paid $1,250,000 in principal amount on the
Notes and has paid accrued interest on the Notes through August 31, 1997, and
$500,000 in aggregate principal amount of the Notes has been converted to other
debt; and
Whereas, the Company has requested that the Purchasers agree to extend
the maturity date of the remaining Notes until July 10, 1998; and
Whereas, the Purchasers are willing to extend the maturity date of the
Notes upon the terms and subject to the conditions set forth herein;
Now, therefore, in consideration of the foregoing premises, the
following mutual agreement, and other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Purchasers agree to amend the Purchase Agreement as follows:
1. Definitions. Capitalized terms used herein shall have the
meaning assigned to them in the Purchase Agreement unless otherwise defined
herein or the context otherwise requires.
2. Amendments to the Purchase Agreement. The Purchase Agreement
is hereby amended as follows:
(a) Section 1 of the Purchase Agreement is hereby amended by:
<PAGE> 2
(i) deleting the words "July 31, 1997" and substituting
in place thereof the words "July 10, 1998,"
(ii) deleting reference to "$1.00" and substituting in
place thereof "$0.25," and
(iii) deleting the third sentence in its entirety and
substituting in place there of the following sentence:
Each Note issued hereunder will be dated the date purchased by
you hereunder, will mature on July 10, 1998, and will bear
interest on its unpaid balance at the rate of 12% per annum,
payable monthly on the last day of each month, commencing on
September 30, 1997, and will have the other terms and
provisions provided herein and in the form of Note attached
hereto as Exhibit A.
(b) Section 7 of the Purchase Agreement is hereby amended by
inserting the following new Sections 7.15 and 7.16 immediately after Section
7.14:
7.15 ADDITIONAL SECURITY AGREEMENT. Ghulam M. Bombaywala
shall execute and deliver to the Purchasers a Security Agreement
substantially in the form attached hereto as Exhibit E pursuant to
which he will grant the Purchasers a security interest in 100% of the
outstanding securities of Michelangelo's, Inc., a Texas corporation.
7.16 GUARANTY OF GHULAM M. BOMBAYWALA. Ghulam M.
Bombaywala shall unconditionally and irrevocably guarantee the full
punctual payment when due, whether at stated maturity, by
acceleration, or otherwise, of all obligations of the Company to the
Purchasers under this Purchase Agreement and the Notes now or
hereafter existing whether for principal, interest, fees, expenses or
otherwise.
3. Amendments to the Notes. Each of the Notes is hereby amended
by deleting the words "July 31, 1997" wherever they may appear and substituting
in place thereof the words "July 10,1998."
4. Amendments to the Warrants. Each of the Warrants is hereby
amended by deleting the number "$1.00" in the first paragraph and substituting
in place thereof the number "$0.25" and by deleting the words "December 31,
1999" in the introduction and first paragraph and substituting in place thereof
the words "August 31, 2002."
2
<PAGE> 3
5. Representations and Warranties. The Company represents and
warrants as follows:
(a) The execution, delivery and performance of this
Amendment and the Purchase Agreement, as modified by this Amendment,
and the transactions contemplated hereby and thereby (i) are within
the corporate authority of the Company, (ii) have been authorized by
all necessary corporate proceedings on the part of the Company, (iii)
do not conflict with or result in any material breach or contravention
of any provision of law, statute, rule, or regulation to which the
Company is subject or any judgment, order, writ, injunction, license,
or permit applicable to the Company, and (iv) do not conflict with any
provision of the corporate charter or bylaws of the Company or any
agreement or other instrument binding upon the Company.
(b) The execution, delivery, and performance of this
Amendment and the Purchase Agreement, as modified by this Amendment,
will result in valid and legally binding obligations of the Company
enforceable against it in accordance with the respective terms and
provisions hereof and thereof,
(c) The execution, delivery, and performance of this
Amendment and the Purchase Agreement, as modified by this Amendment,
and the consummation by the Company of the transactions contemplated
hereby and thereby do not require any approval or consent of, or
filing with, any governmental agency or authority.
6. Ratification. Except as expressly amended hereby, the Purchase
Agreement, the Notes, and the Warrants are hereby ratified and confirmed in all
respects and shall continue in full force and effect. This Amendment and the
Purchase Agreement shall hereafter be read and construed together as a single
document, and all references to the Purchase Agreement or any agreement or
instrument related to the Purchase Agreement shall hereafter refer to the
Purchase Agreement as amended by this Amendment. This ratification and
amendment is made effective as of July 31, 1997, and the Purchasers agree that,
as amended, the Notes are not in default and, if due to timing factors a
default in the Notes existed for a temporary period, such default is waived
and/or cured by this Amendment.
7. Notation on Notes and Warrants. Promptly following execution
of this Amendment and in any event within 30 days thereof, each holder of a
Note and/or a Warrant agrees to deliver such Note and/or Warrant to the Company
so that the amendments effected by this Amendment may be noted thereon.
8. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
counterparts taken together shall be deemed to constitute one and the same
instrument.
3
<PAGE> 4
9. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas (without reference
to conflict of laws).
10. Execution by Marco's. Marco's has executed this Amendment to
evidence its agreement to comply with the covenant's contained in Sections 7.13
and 7.14 of the Purchase Agreement.
11. Execution by Ghulam M. Bombaywala. Mr. Bombaywala has executed
this Amendment to evidence his agreement to comply with the covenants contained
in Section 7.15 of the Purchase Agreement and his agreement that the Put Option
Agreement dated as of December 19, 1994, between Mr. Bombaywala and the
Purchasers is hereby ratified and confirmed in all respects and shall continue
in full force and effect.
In witness whereof, the Company and the Purchasers have executed this
Amendment effective as of the date first above written.
WATERMARC FOOD MANAGEMENT CO.
By:
-----------------------------------
Name:
Title:
MARCO'S MEXICAN RESTAURANTS, INC.
By:
-----------------------------------
Name:
Title:
---------------------------------------
GHULAM M. BOMBAYWALA
4
<PAGE> 5
---------------------------------------
Don A. Sanders
Atlantis Software Company Employee
Profit Sharing Plan
By:
-----------------------------------
Name:
-----------------------------
Title:
-----------------------------
---------------------------------------
Philip M. Mount
---------------------------------------
John I. Mundy
---------------------------------------
Katherine U. Sanders
---------------------------------------
Ben T. Morris
---------------------------------------
Neil Lande, Custodian for Lynne Lande,
Stephen Lande, Sara Lande, and
Caroline Lande
---------------------------------------
John E. Drury
---------------------------------------
George L. Ball
5
<PAGE> 6
---------------------------------------
John M. O'Quinn
---------------------------------------
Nolan Ryan
---------------------------------------
Roger P. Lindstedt
---------------------------------------
Ray C. Childress
---------------------------------------
Kara S. Childress
---------------------------------------
Morton A. Cohn
---------------------------------------
Michael S. Chadwick
6
<PAGE> 7
EXHIBIT A
Secured Parties
Don A. Sanders
Atlantis Software Company Employee Profit Sharing Plan
Philip M. Mount
John I. Mundy
Katherine U. Sanders
Ben T. Morris
Neil Lande, Custodian for Lynne Lande,
Stephen Lande, Sara Lande, and
Caroline Lande
John E. Drury
George L. Ball
John M. O'Quinn
Nolan Ryan
Roger P. Lindstedt
Ray C. Childress
Kara S. Childress
Morton A. Cohn
Michael S. Chadwick
c/o Sanders Morris Mundy Inc.
3100 Texas Commerce Tower
600 Travis
Houston, Texas 77002
7
<PAGE> 8
EXHIBIT E
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of July 31, 1997, among GHULAM M.
BOMBAYWALA, a resident of the State of Texas ("Debtor"), and the persons
identified on Exhibit A hereto (collectively, "Secured Party").
RECITALS
A. Secured Party has loaned $1,250,000 to Watermarc Food
Management Co., a Texas corporation (the "Company") pursuant to the Purchase
Agreement dated as of December 19, 1994, by and between the Company and Secured
Party (such Purchase Agreement, as amended by the First Amendment to Purchase
Agreement, being referred to herein as the "Original Purchase Agreement") and
the Company's 12% Subordinated Notes due July 31, 1997 (the "Notes").
B. Debtor and Secured Party are parties to a Put Option Agreement
dated as of December 19, 1994, pursuant to which Debtor agreed to purchase the
Notes under certain conditions.
C. Secured Party and Debtor have this date entered into a Second
Amendment to Purchase Agreement (the "Second Amendment"), under which, among
other things, Secured Party has agreed to waive all defaults, if any, occurring
on or before the date of the Second Amendment and to extend the maturity date
of the Notes (as defined in the Original Purchase Agreement), in consideration
for which DEBTOR has agreed to pledge the capital stock of Michelangelo's,
Inc., a Texas corporation ("Michelangelo's") as security therefor (the Original
Purchase Agreement, as amended by the First Amendment, is hereafter referred to
as the "Purchase Agreement").
A. Debtor is the record and beneficial owner of the issued and
outstanding shares of Capital stock issued by Michelangelo's described in
Schedule I (being hereinafter referred to as the "Pledged Shares").
AGREEMENT
In consideration of the premises and the covenants hereinafter
contained and for other good and valuable consideration, receipt of which is
hereby acknowledged, it is agreed as follows:
1. Definitions. The following terms shall have (unless otherwise
provided elsewhere in this Security Agreement) the following respective
meanings (such meanings being equally applicable to both the singular and
plural form of the terms defined):
"Agreement" shall mean this Security Agreement, including all
amendments, modifications and supplements and any exhibits or schedules to any
of the foregoing, and shall refer to the Agreement as the same may be in effect
at the time such reference becomes operative.
<PAGE> 9
"Business Day" shall mean any day that is not a Saturday, a Sunday or
a day on which banks are required or permitted to be closed in the State of
Texas.
"Code" shall mean the Texas Uniform Commercial Code as in effect from
time to time.
"Collateral" shall mean the Pledged Collateral.
"Default" shall mean any event which, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.
"Event of Default" shall have the meaning assigned to it in the
Purchase Agreement.
"Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any lease or title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement
perfecting a security interest under the Code or comparable law of any
jurisdiction).
"Loan Documents" shall mean this Agreement, the Purchase Agreement,
those other ancillary agreements as to which Secured Party, the Company or the
Debtor is a party or a beneficiary, and all other agreements, instruments,
documents and certificates, including, without limitation, pledges, powers of
attorney, consents, assignments, contracts, notices, and all other written
matter whether heretofore, now or hereafter executed by or on behalf of Debtor
and delivered to Secured Party, in connection with this Agreement or the
transactions contemplated hereby.
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether Federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Pledged Collateral" shall have the meaning assigned to such term in
Section 2 hereof.
"Purchase Agreement" shall have the meaning set forth in the recitals.
"Secured Obligations" shall have the meaning assigned to such term in
Section 3 hereof.
2. Pledge. Debtor hereby pledges, assigns, hypothecates,
transfers and delivers all the Pledged Shares owned by it and hereby grants to
Secured Party a lien on, and security interest in, and agrees to accept any
interest in the Pledged Shares that is received by it as Secured Party's agent
and to hold the same in trust on behalf of and for the ratable benefit of
Secured Party and
2
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to deliver the same forthwith to Secured Party in the exact form received, with
the endorsement of Debtor when necessary and/or appropriate undated stock
powers duly executed in blank, to be held by Secured Party, subject to the
terms hereof, all of the following (herein, the "Pledged Collateral"):
(a) The Pledged Shares and the certificates representing
the Pledged Shares (including, without limitation, any certificate
representing a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital, or issued in
connection with any reorganization), options or rights, and all
dividends, cash, instruments and other property or proceeds from time
to time received, receivable or otherwise distributed in respect of or
in exchange for any or all of the Pledged Shares.
(b) All additional shares of stock (including, without
limitation, any certificate representing a stock dividend or a
distribution in connection with any reclassification, increase or
reduction of capital, or issued in connection with any
reorganization), options or rights of the issuer of the Pledged Shares
from time to time acquired by Debtor in any manner (which shares shall
be deemed to be part of the Pledged Shares), and the certificates
representing such additional shares, and all dividends, cash,
instruments and other property or proceeds from time to time received,
receivable or otherwise distributed in respect of, in exchange for, as
an addition to, or in substitution of any or all of such shares.
3. Security for Obligations. This Agreement secures, and the
Collateral is security for, the prompt payment in full when due, whether at
stated maturity, by acceleration or otherwise, of the unpaid principal of and
interest on any promissory notes issued to evidence loans made and to be made
by Secured Party to Debtor pursuant to the Purchase Agreement; and performance
of the obligations, whether for principal, premium, interest, fees, costs and
expenses, and all obligations of Debtor now or hereafter existing under the
Purchase Agreement or of Debtor now existing or hereafter arising under this
Agreement (collectively, the "Secured Obligations").
4. Delivery of Pledged Collateral. All certificates representing
or evidencing the Pledged Shares shall be delivered to and held by or on behalf
of Secured Party pursuant hereto and shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory to Secured Party. Secured Party shall have the right, at any time
in its discretion and without notice to Debtor, to transfer to or to register
in the name of Secured Party or any of its nominees any or all of the Pledged
Shares. In addition, Secured Party shall have the right at any time to exchange
certificates or instruments representing or evidencing Pledged Shares for
certificates or instruments of smaller or larger denominations.
5. Representations and Warranties. Debtor represents and warrants
to Secured Party that:
(a) Debtor is, and at the time of delivery of the Pledged
Shares to Secured Party pursuant to Section 4 hereof, the legal holder
of record and the sole beneficial owner of the Pledged Shares and has
good and marketable title to the Pledged Shares free and clear
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<PAGE> 11
of any Lien, mortgage, hypothecation, security interest, charge,
option or other encumbrance whatsoever, except for the Lien created by
this Agreement.
(b) All of the Pledged Shares have been duly authorized,
validly issued and are fully paid and non-assessable.
(c) Debtor has the full power, authority and legal right
to pledge, assign, transfer, deliver, deposit and set over the Pledged
Collateral pledged by Debtor to Secured Party as provided herein.
(d) None of the Pledged Shares has been issued or
transferred in violation of the securities registration, securities
disclosure or similar laws of any jurisdiction to which such issuance
or transfer may be subject.
(e) The Michelangelo's Pledged Shares constitute one
hundred percent (100%) of the issued and outstanding shares of stock
of Michelangelo's.
(f) No consent, approval, authorization or other order of
any Person and no consent, authorization, approval, or other action
by, and no notice to or filing with any governmental authority or
regulatory body is required either (i) for the pledge by Debtor of the
Pledged Collateral pursuant to this Agreement or for the execution,
delivery or performance of this Agreement by Debtor or (ii) for the
exercise by the Secured Party of the voting or other rights provided
for in this Agreement or the remedies in respect of the Pledged
Collateral pursuant to this Agreement, except as may be required in
connection with such disposition by laws affecting the offering and
sale of securities generally.
(g) Except for the security interest (and pledges and
assignments as applicable) granted hereby and as disclosed in
paragraph (a) above, Debtor is, and as to any property acquired after
the date hereof which is included within the Collateral, Debtor will
be, the owner of all such Collateral free and clear from all charges,
Liens, security interests, adverse claims and encumbrances of any and
every nature whatsoever.
(h) There is no financing statement or similar filing now
on file in any public office covering any part of the Collateral, and
Debtor will not execute and there will not be on file in any public
office any financing statement or similar filing except the financing
statements filed or to be filed in favor of Secured Party.
(i) All information furnished to Secured Party concerning
Debtor, the Collateral and the Secured Obligations, or otherwise for
the purpose of obtaining or maintaining credit, is or will be at the
time the same is furnished, accurate and complete in all material
respects.
(j) The pledge, assignment and delivery of the Collateral
pursuant to this Agreement will create a valid first priority lien on
and a first priority perfected security
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<PAGE> 12
interest in the Michelangelo's Pledged Shares pledged by Debtor, and
the proceeds thereof, subject to no prior pledge, lien, mortgage,
hypothecation, security interest, charge, option or encumbrance or to
any agreement purporting to grant to any third party a security
interest in the property or assets of Debtor which would include the
Collateral, securing the payment of the Secured Obligations.
(k) This Agreement has been duly authorized, executed and
delivered by Debtor and constitutes a legal, valid and binding
obligation of Debtor enforceable in accordance with its terms, except
as enforceability may be limited by bankruptcy, insolvency, or other
similar laws affecting the rights of creditors generally or by the
application of general equity principles.
The representations and warranties set forth in this Section 5 shall
survive the execution and delivery of this Agreement.
6. Covenants. Debtor, with respect to the Pledged Collateral held
in his or its name, covenants and agrees that until the Notes are paid in full
and the Secured Obligations are satisfied:
(a) Without the prior written consent of Secured Party,
Debtor agrees that it will not sell, assign, transfer, exchange or
otherwise dispose of, or grant any option with respect to, the
Collateral, nor will it create, incur or permit to exist any pledge,
lien, mortgage, hypothecation, security interest, charge, option or
any other encumbrance with respect to any of the Collateral or any
interest therein except for the Lien provided by this Agreement.
Without the prior written consent of Secured Party, Debtor agrees that
it will not vote to enable and will not otherwise permit the Company
to, issue any stock or other securities of any nature in addition to
or in exchange or substitution for such Pledged Shares.
(b) Debtor will, at its expense, promptly execute,
acknowledge and deliver all such instruments and take all such action
as Secured Party from time to time may request in order to ensure to
Secured Party the benefits of the Lien in and to the Collateral
intended to be created by this Agreement.
(c) Debtor has and will defend the title to the
Collateral and the Liens of Secured Party thereon against the claim of
any Person and will maintain and preserve such Liens. Debtor covenants
and agrees that it will have like title to and right to pledge any
other property which at any time hereafter may be pledged to Secured
Party as Pledged Collateral hereunder and will likewise defend Secured
Party's right thereto and security interest therein.
(d) Debtor shall promptly pay when due all taxes,
assessments, license fees, registration fees, and governmental charges
levied or assessed against Debtor or with respect to the Collateral or
any part thereof.
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(e) Debtor agrees not to suffer or permit any charge,
lien, security interest, adverse claim or encumbrance of any and every
nature whatsoever against the Collateral or any part thereof, except
for the Liens.
(f) Except as otherwise provided in this Agreement with
respect to inventory, and except in the ordinary course of business
with respect to other Collateral, Debtor shall not, without the prior
written consent of Secured Party, sell, assign, transfer, lease,
charter, encumber, hypothecate or dispose of the Collateral, or any
part thereof, or interest therein, or offer to do any of the
foregoing.
(g) Debtor shall promptly notify Secured Party in writing
of any change in the name, identity or structure of Debtor, any
charge, lien, security interest, claim or encumbrance asserted against
the Collateral, any theft, loss, injury or similar incident involving
the Collateral, and any other material matter or litigation adversely
affecting Debtor or the Collateral. Debtor shall furnish such other
reports, information and data regarding Debtor's financial condition
and operations, the Collateral and such other matters as Secured Party
may reasonably request from time to time.
(h) Debtor agrees to execute and deliver such financing
statement or statements, or amendments thereof or supplements thereto,
or other documents as Secured Party may from time to time require in
order to comply with the Code (or other applicable state law of the
jurisdiction where any of the Collateral is located) and to preserve
and protect the Secured Party's rights to the Collateral.
(i) Secured Party, at its option, whether before or after
default, but without any obligation whatsoever to do so, may (a)
discharge taxes, claims, charges, liens, security interests,
assessments or other encumbrances of any and every nature whatsoever
at any time levied, placed upon or asserted against the Collateral,
(b) place and pay for insurance on the Collateral, including insurance
that only protects Secured Party's interest, (c) pay for the repair,
improvement, testing, maintenance and preservation of the Collateral,
(d) pay any filing, recording, registration, licensing or
certification fees or other fees and charges related to the
Collateral, or (e) take any other action to preserve and protect the
Collateral and Secured Party's rights and remedies under this
Agreement as Secured Party may deem necessary or appropriate. Debtor
agrees that Secured Party shall have no duty or obligation whatsoever
to take any of the foregoing action. Debtor agrees to promptly
reimburse Secured Party upon demand for any payment made or any
expense incurred by the Secured Party pursuant to this authorization.
These payments and expenditures, together with interest thereon from
date incurred until paid by Debtor at the maximum contract rate
allowed under applicable laws, which Debtor agrees to pay, shall
constitute additional Obligations and shall be secured by and entitled
to the benefits of this Agreement.
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<PAGE> 14
(j) Debtor shall do, make, procure, execute and deliver
all such additional and further acts, things, deeds, interests and
assurances as Secured Party may require from time to time to protect,
assure and enforce Secured Party's rights and remedies.
7. Debtor's Right. As long as no Default or Event of Default
under this Agreement, the Notes, the Purchase Agreement or any other agreement
executed to evidence and/or secure the Secured Obligations (the "Other
Agreements"), shall have occurred and be continuing and until written notice
shall be given to Debtor in accordance with Section 8(a) hereof:
(a) Debtor shall have the right, from time to time, to
vote and give consents, ratifications and waivers with respect to the
Pledged Collateral or any part thereof for all purposes not
inconsistent with the provisions of this Agreement, the Purchase
Agreement, and any Other Agreement; provided, however, that no vote
shall be cast, and no consent, ratification, or waiver shall be given
or action taken, which would have the effect of materially impairing
the position or interest of Secured Party in respect of the Pledged
Collateral, be inconsistent with or violate any provision of this
Agreement, the Purchase Agreement, or the Other Agreements;
(b) (i) Debtor shall be entitled, from time to time,
to collect and receive for its own use all cash dividends paid in
respect of the Pledged Shares to the extent not in violation of this
Agreement, the Purchase Agreement, or the Other Agreements, other than
any and all (A) dividends paid or payable other than in cash in
respect of, and instruments and other property received, receivable or
otherwise distributed in respect of, or in redemption of or exchange
for, any Pledged Collateral, (B) distributions paid or payable in cash
in respect of any Pledged Collateral in connection with a partial or
total liquidation or dissolution or reorganization of the Company, (C)
cash paid, or payable or otherwise distributed in redemption of, or in
exchange for, any Pledged Collateral, in addition, until actually paid
all rights to such dividends shall remain subject to the Lien created
by this Agreement; and
(ii) all dividends (other than such cash dividends
as are permitted to be paid to Debtor in accordance with clause (i)
above) and all other distributions in respect of the Pledged
Collateral, whenever paid or made, shall be delivered to Secured Party
to hold as Pledged Collateral and shall, if received by Debtor, be
received in trust for the benefit of Secured Party, be segregated from
the other property or funds of Debtor, and be forthwith delivered to
Secured Party as Pledged Collateral as additional Collateral for the
Secured Obligations in the form so received (with any necessary
endorsement).
8. Defaults and Remedies. Upon the occurrence of an Event of
Default and during the continuation of such Event of Default, then or at any
time after such declaration (provided that such declaration is not rescinded by
the Secured Party), without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below of time
and place of public or private sale) to or upon Debtor or any other person (all
and each of which demands, advertisements and/or notices are hereby expressly
waived), Secured Party (personally or through
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<PAGE> 15
an agent) is hereby authorized and empowered subject to the approval of any
governmental authority (to the extent such consent or approval of any
governmental authority is required), to
(a) Transfer and register in its name or in the name of
its nominee the whole or any part of the Pledged Collateral, to
exercise the voting rights with respect thereto, to collect and
receive all cash dividends and other distributions made thereon, and
to exercise any and all rights of conversion, exchange, subscription
or any other rights, privileges or options pertaining to any shares of
the Pledged Shares as if it were the absolute owner thereof, including
without limitation, the right to exchange at its discretion, any and
all of the Pledged Shares upon the merger, consolidation,
reorganization, recapitalization or other readjustment of any
corporation issuing any of such shares or upon the exercise by any
such issuer or Secured Party of any right, privilege or option
pertaining to any shares of the Pledged Shares, and in connection
therewith, to deposit and deliver any and all of the Pledged Shares
with any committee, depositary, transfer agent, registrar other
designated agency upon such terms and conditions as it may determine,
all without liability except to account for property actually received
by it, but Secured Party shall have no duty to exercise any of the
aforesaid rights, privileges or options and shall not be responsible
for any failure to do so or delay in so doing.
(b) Collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or sell, assign, give option or
options to purchase, contract to sell or otherwise dispose of and
deliver said Collateral, or any part thereof, in one or more parcels
at public or private sale or sales, at any exchange, broker's board or
at any of Secured Party's offices or elsewhere in one or more sales
after ten (10) days' notice of the time and place of any public sale
or of the time after which a private sale is to take place (which
notice Debtor agrees is commercially reasonable), but without any
previous notice or advertisement, the whole or any part of the
Collateral and to otherwise act with respect to the Collateral as
though Secured Party was the outright owner thereof, Debtor hereby
irrevocably constituting and appointing Secured Party as the proxy and
attorney-in-fact of Debtor, with full power of substitution to do so;
provided, however, Secured Party shall not have any duty to exercise
any such right or to preserve the same and shall not be liable for any
failure to do so or for any delay in doing so. Any sale shall be made
either for cash or upon credit or for future delivery without
assumption of any credit risk at such price as Secured Party may deem
fair, and such terms and conditions as Secured Party may deem
advisable and Secured Party may be the purchaser of the whole or any
part of the Collateral so sold and hold the same thereafter in its own
right free from any claim of Debtor or any right or equity of
redemption in Debtor, which right or equity is hereby expressly waived
and released. Each sale shall be made to the highest bidder, but
Secured Party reserves the right to reject any and all bids at such
sale which, in its discretion, it shall deem inadequate. Demands of
performance, except as otherwise herein specifically provided for,
notices of sale, advertisements and the presence of property at sale
are hereby waived and any sale hereunder may be conducted by an
auctioneer or any officer or agent of Secured Party.
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(c) If, at the original time or times appointed for the
sale of the whole or any part of the Collateral, the highest bid, if
there be but one sale, shall be inadequate to discharge in full all
the Secured Obligations, or if the Collateral be offered for sale in
lots, if at any of such sales, the highest bid for the lot offered for
sale would indicate to Secured Party, in its discretion, the
unlikelihood of the proceeds of the sales of the whole of the
Collateral being sufficient to discharge all the Secured Obligations,
Secured Party may, on one or more occasions and in its discretion,
postpone any of said sales by public announcement at the time of sale
or the time of previous postponement of sale, and no other notice of
such postponement or postponements of sale need be given, any other
notice being hereby waived; provided, however, that any sale or sales
made after such postponement shall be after ten (10) days' notice to
Debtor.
(d) In the event of any sales hereunder, Secured Party
shall pay over the proceeds of any such collection, recovery, receipt,
appropriation, realization or sale in accordance with Section 9 of
this Agreement.
(e) In addition to the rights and remedies granted to it
in this Agreement and in any other instrument or agreement securing,
evidencing or relating to any of the Secured Obligations, Secured
Party shall have all the rights and remedies of a secured party under
the Code.
(f) Debtor agrees that following the occurrence and
during the continuance of an Event of Default it will not at any time
plead, claim or take the benefit of any appraisal, valuation, stay,
extension, moratorium or redemption law now or hereafter in force in
order to prevent or delay the enforcement of this Agreement, or the
absolute sale of the whole or any part of the Collateral or the
possession thereof by any purchaser at any sale hereunder, and Debtor
waives the benefit of all such laws to the extent it lawfully may do
so. Debtor agrees that it will not interfere with any right, power and
remedy of Secured Party provided for in this Agreement or now or
hereafter existing at law or in equity or by statute or otherwise, or
the exercise or beginning of the exercise by Secured Party of any one
or more of such rights, powers or remedies. No failure or delay on the
part of Secured Party to exercise any such right, power or remedy and
no notice or demand which may be given to or made upon Debtor by
Secured Party with respect to any such remedies shall operate as a
waiver thereof, or limit or impair Secured Party's right to take any
action or to exercise any power or remedy hereunder, without notice or
demand, or prejudice its rights as against Debtor in any respect.
(g) Debtor further agrees that a breach of any of the
covenants contained in this Section 8 will cause irreparable injury to
Secured Party, that Secured Party has no adequate remedy at law in
respect of such breach and, as a consequence, agrees that each and
every covenant contained in this Section 8 shall be specifically
enforceable against Debtor, and Debtor hereby waives and agrees not to
assert any defenses against an action for specific performance of such
covenants except for a defense that the Secured Obligations are not
then due and payable in accordance with the agreements and instruments
governing and
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evidencing such obligations. Debtor further acknowledges the
impossibility of ascertaining the amount of damages which would be
suffered by Secured Party by reason of a breach of any of such
covenants and, consequently, agrees that, if Secured Party shall sue
for damages for breach, it shall pay, as liquidated damages and not as
a penalty, an amount equal to the value of the Collateral pledged by
Debtor on the date Secured Party shall demand compliance with this
Section 8.
(h) Debtor recognizes that Secured Party may be unable to
effect a public sale of any or all the Pledged Shares by reason of
certain prohibitions contained in the Act and applicable state
securities laws, but may be compelled to resort to one or more private
sales thereof to a restricted group or purchasers who will be obliged
to agree, among other things to acquire such securities for their own
account for investment and not with a view to the distribution or
resale thereof. Debtor acknowledges and agrees that any such private
sale may result in prices and other terms less favorable to the
Secured Party than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale
shall be deemed to have been made in a commercially reasonable manner.
Secured Party shall be under no obligation to delay a sale of any of
the Pledged Shares for the period of time necessary to permit the
issuer of such securities to register such securities for public sale
under the Act, or under applicable state securities laws, even if the
issuer would agree to do so.
(i) Debtor further agrees to do or cause to be done all
such other acts and things as may be reasonably necessary to make such
sale or sales of any portion or all of the Pledged Shares owned by it
valid and binding and in compliance with any and all applicable laws,
regulations, orders, writs, injunctions, decrees or awards of any and
all courts, arbitrators or governmental instrumentalities, domestic or
foreign, having jurisdiction over any such sale or sales, all at
Debtor's expense.
(j) Debtor shall be liable for and agrees to pay the
reasonable expenses incurred by Secured Party in enforcing its rights
and remedies, in retaking, holding, testing, repairing, improving,
selling, leasing or disposing of the Collateral, or like expenses,
including, without limitation, attorneys' fees and legal expenses
incurred by Secured Party. These expenses, together with interest
thereon from the date incurred until paid by Debtor at the maximum
contract rate allowed under applicable laws, which Debtor agrees to
pay, shall constitute additional Secured Obligations and shall be
secured by and entitled to the benefits of this Agreement.
(k) The rights and remedies of Secured Party are
cumulative and the exercise of any one or more of the rights or
remedies shall not be deemed an election of rights or remedies or a
waiver of any other right or remedy. Secured Party may remedy any
default and may waive any default without waiving,the default remedied
or without waiving any other prior or subsequent default.
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9. Application of Proceeds. Any cash held by Secured Party as
Collateral and all cash proceeds received by Secured Party in respect of any
sale of, liquidation of, or other realization upon all or any part of the
Collateral shall be applied by Secured Party as follows:
(a) First, to the payment of the costs and expenses of
such sale, including (i) reasonable compensation to the Secured Party
and its agents and counsel, and (ii) all expenses, liabilities and
advances made or incurred by Secured Party in connection therewith
including those incurred for care, safekeeping, collection, sale,
delivery or otherwise of the Collateral.
(b) Next, to the payment of the Secured Obligations in
such order as Secured Party may elect.
(c) Finally, after payment in full of all Secured
Obligations, payment to the Debtor, or its successors or assigns, or
to whomsoever may be lawfully entitled to receive the same or as a
court of competent jurisdiction may direct, of any surplus then
remaining from such proceeds.
10. Waiver. No delay on Secured Party's part in exercising any
power of sale, Lien, option or other right hereunder, and no notice or demand
which may be given to or made upon Debtor by Secured Party with respect to any
power of sale, Lien, option or other right hereunder shall constitute a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege constitute a waiver thereof; or
limit or impair Secured Party's right to take any action or to exercise any
power of sale, Lien, option, or any other right hereunder, without notice or
demand, or prejudice Secured Party's rights as against Debtor in any respect.
The rights and remedies herein provided are cumulative and may be exercised
singly or concurrently, and are not exclusive of any rights or remedies
provided by law.
11. Assignment and Amendment. Secured Party may assign, endorse or
transfer any instrument evidencing all or any part of the Secured Obligations
as provided in, and in accordance with, the Purchase Agreement, and the holder
of such instrument shall be entitled to the benefits of this Agreement. None of
the terms or provisions of this Agreement may be waived, altered, modified or
amended except by an instrument in writing, duly executed by Secured Party and
Debtor.
12. Termination. Immediately following the payment of all Secured
Obligations, Secured Party shall deliver to Debtor the Pledged Collateral
pledged by Debtor at the time subject to this Agreement and all instruments of
assignment executed in connection therewith, free and clear of the Lien hereof
and, except as otherwise provided herein, all of Debtor's obligations hereunder
shall at such time terminate.
13. Lien Absolute. All rights of Secured Party hereunder, and all
obligations of the Debtor hereunder, shall be absolute and unconditional
irrespective of:
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(a) Any lack of validity or enforceability of the
Purchase Agreement, any other Loan Document or any other agreement or
instrument governing or evidencing any Secured Obligations.
(b) Any change in the time, manner or place of payment
of, or in any other term of, all or any part of the Secured
Obligations, or any other amendment or waiver of or any consent to any
departure from the Purchase Agreement, any other Loan Document or any
other agreement or instrument governing or evidencing any Secured
Obligations.
(c) Any exchange, release or non-perfection of any other
collateral, or any release or amendment or waiver of or consent to
departure from any guaranty, for all or any of the Secured
Obligations.
(d) Any other circumstance which might otherwise
constitute a defense available to, or a discharge of, Debtor.
14. Indemnification. Debtor severally agrees to indemnify and hold
Secured Party harmless from and against any taxes, liabilities, claims and
damages, including reasonable attorney's fees and disbursements, and other
expenses incurred or arising by reason of the taking or the failure to take
action by Secured Party, in good faith, in respect of any transaction effected
under this Agreement or in connection with the Lien provided for herein,
including, without limitation, any taxes payable in connection with the
delivery or registration of any of the Pledged Collateral as provided herein.
Debtor severally agrees to be liable for payment to Secured Party of all
Secured Party's out-of-pocket costs and expenses incurred in connection with
this Agreement after the date hereof and all reasonable fees, expenses and
disbursements, including registration costs under the Act (or similar statute)
and the reasonable fees of Secured Party's agents or representatives, incurred
in connection with this Agreement and the performance by Secured Party of the
provisions of this Agreement and of any transactions effected in connection
with this Agreement. The obligations of the Debtor under this Section 14 shall
survive the termination of this Agreement. Notwithstanding any other provision
of this paragraph, or any other paragraph of this Agreement, if Debtor tenders
his Pledged Collateral to Secured Party pursuant to the terms of this
Agreement, but is prevented from tendering the Pledged Collateral to Secured
Party by virtue of the actions of any Person other than Debtor, or any Person
controlled or in common control with Debtor, then Debtor shall only be liable
for delivery of good, valid and marketable title to all of the Pledged
Collateral immediately upon legally being permitted to do so, and in such case
shall not be liable for any costs, arising from Debtor's obligation to
indemnify Secured Party as discussed in this Section 14.
15. Reinstatement. This Agreement shall remain in full force and
effect and continue to be effective should any petition be filed by or against
Debtor for liquidation or reorganization, should Debtor become insolvent or
make an assignment for the benefit of creditors or should a receiver or trustee
be appointed for all or any significant part of Debtor's assets, and shall
continue to be effective or be reinstated, as the case may be, if at any time
payment and performance of the Secured Obligations, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in
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amount, or must otherwise be restored or returned by any obligee of the Secured
Obligations, whether as a "voidable preference", "fraudulent conveyance", or
otherwise, all as though such payment or performance had not been made. In the
event that any payment, or any part thereof, is rescinded, reduced, restored or
returned, the Secured Obligations shall be reinstated and deemed reduced only
by such amount paid and not so rescinded, reduced, restored or returned.
16. Miscellaneous.
(a) Secured Party may execute any of its duties hereunder
by or through agents or employees and shall be entitled to advice of
counsel concerning all matters pertaining to its duties hereunder.
(b) Neither Secured Party nor any of its officers,
directors, employees, agents or counsel shall be liable for any action
lawfully taken or omitted to be taken by it or them hereunder or in
connection herewith, except for its or their own gross negligence or
willful misconduct.
(c) This Agreement shall be binding upon Debtor and its
successors and assigns, and shall inure to the benefit of, and be
enforceable by, Secured Party and its successors and assigns, and
shall be governed by, and construed and enforced in accordance with,
the internal laws in effect in the State of Texas without giving
effect to principles of choice of law, and none of the terms or
provisions of this Agreement may be waived, altered, modified or
amended except in writing, signed by Secured Party, duly signed for
and on behalf of Secured Party and the Debtors and then only to the
extent therein set forth.
(d) Notwithstanding any provision to the contrary herein,
or in any of the documents evidencing the Secured Obligations or
otherwise relating thereto, no such provision shall require the
payment or permit the collection of interest in excess of the maximum
permitted by applicable usury laws. If any such excessive interest is
so provided for, then in such event (i) the provisions of this
paragraph shall govern and control, (ii) neither Debtor nor its
successors or assigns or any other party liable for the payment
thereof, shall be obligated to pay the amount of such interest to the
extent that is in excess of the maximum amount permitted by law, (iii)
any such excess interest that may have been collected shall be, at the
option of the holder of the instrument evidencing the Secured
Obligations, either applied as a credit against the then unpaid
principal amount thereof or refunded to the maker thereof, and (iv)
the effective rate of interest shall be automatically reduced to the
maximum lawful rate under applicable usury laws as now or hereafter
construed by the courts having jurisdiction.
(e) Any carbon, photographic or,other reproduction of any
financing statement signed by Debtor is sufficient as a financing
statement for all purposes, including without limitation, filing in
any state as may be permitted by the provisions of the Uniform
Commercial Code of such state.
13
<PAGE> 21
17. Severability. If for any reason any provision or provisions
hereof are determined to be invalid and contrary to any existing or future law
in any jurisdiction, such invalidity in any jurisdiction shall not impair the
operation of or effect those portions of this Agreement which are valid in any
other jurisdiction.
18. Notices. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by any other party, or whenever any of the parties desires to
give or serve upon any other a communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and either shall be delivered in person with
receipt acknowledged or sent by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
(a) If to Secured Party, at
Sanders Morris Mundy
3100 Texas Commerce Tower
Houston, Texas 77002
Attn: Michael S. Chadwick
(b) If to Debtor, at
Ghulam M. Bombaywala
Watermarc Food Management Co.
11111 Wilcrest Green, Suite 350
Houston, Texas 77042
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, or three (3) Business Days after the same shall have
been deposited in the United States mail. Failure or delay in delivering copies
of any notice, demand, request, consent, approval, declaration or other
communication to the persons designated above to receive copies shall in no way
adversely affect the effectiveness of such notice, demand, request, consent,
approval, declaration or other communication.
19. Section Titles. The Section titles contained in this Agreement
are and shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreement between the parties hereto.
20. Counterparts. This Agreement may be executed in any number of
counterparts, which shall, collectively and separately, constitute one
agreement.
14
<PAGE> 22
21. Further Assurances. Debtor agrees that at any time and from
time to time, upon the written request of Secured Party, Debtor will execute
and deliver such further documents and do such further acts and things as
Secured Party may reasonably request in order to effect the purposes of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed as of the date first written above.
---------------------------------------
Ghulam M. Bombaywala
15
<PAGE> 23
SCHEDULE I
<TABLE>
<CAPTION>
DEBTOR PLEDGED SHARES
- ------ --------------
<S> <C>
Ghulam M. Bombaywala 750 shares of Common Stock, $1,00
par value, of Michelangelo's, Inc.,
Texas corporation, evidenced by the
certificate heretofore delivered to
Secured Party.
</TABLE>
16
<PAGE> 1
EXHIBIT 4.4
SECOND AMENDMENT
TO
FINANCIAL ADVISORY AGREEMENT
Second Amendment to Financial Advisory Agreement dated as of July 31,
1997 (the "Amendment"), among WATERMARC FOOD MANAGEMENT CO., a Texas
corporation formerly known as Billy Blues Food Corporation (the "Company"), and
SANDERS MORRIS MUNDY INC., a Texas corporation (the "Advisor");
WITNESSETH:
Whereas, the Company and the Advisor are parties to a Financial
Advisory Agreement dated as of January 1, 1995, as amended by the First
Amendment to Financial Advisory Agreement dated as of March 31, 1996 (as so
amended, the "Advisory Agreement") pursuant to which the Company has retained
the Advisor to provide certain advice and consulting services to the Company;
and
Whereas, the Company and the Advisor wish to extend the term of and
amend the Advisory Agreement in certain respects;
Now, therefore, in consideration of the foregoing premises, the
following mutual agreement, and other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Advisor agree to amend the Advisory Agreement as follows:
1. Definitions. Capitalized terms used herein shall have the
meaning assigned to them in the Advisory Agreement unless otherwise defined
herein or the context otherwise requires.
2. Amendments to the Advisory Agreement. The Advisory Agreement
is hereby amended as follows:
(a) Section 2.3 of the Advisory Agreement is hereby amended by
deleting reference to "$1.00" and substituting in place thereof "$0.25" and
deleting the reference to "a term of five years" in the second sentence and
substituting in place thereof "a term expiring on August 31, 2002."
3. Amendments to the Advisor's Warranty. Each of the Advisor's
Warrants is hereby amended by deleting the number "$1.00" in the first
paragraph and substituting in place thereof the number "$0.25" and by deleting
the date "December 31, 1999" in Section 1.a. and substituting in place thereof
the date "August 31, 2002."
<PAGE> 2
4. Representations and Warranties. The Company represents and
warrants as follows:
(a) The execution, delivery and performance of this
Amendment and the Advisory Agreement, as modified by this Amendment,
and the transactions contemplated hereby and thereby (i) are within
the corporate authority of the Company, (ii) have been authorized by
all necessary corporate proceedings on the part of the Company, (iii)
do not conflict with or result in any material breach or contravention
of any provision of law, statute, rule, or regulation to which the
Company is subject or any judgment, order, writ, injunction, license,
or permit applicable to the Company, and (iv) do not conflict with any
provision of the corporate charter or bylaws of the Company or any
agreement or other instrument binding upon the Company.
(b) The execution, delivery, and performance of this
Amendment and the Advisory Agreement, as modified by this Amendment,
will result in valid and legally binding obligations of the Company
enforceable against it in accordance with the respective terms and
provisions hereof and thereof.
(c) The execution, delivery, and performance of this
Amendment and the Advisory Agreement, as modified by this Amendment,
and the consummation by the Company of the transactions contemplated
hereby and thereby do not require any approval or consent of, or
filing with, any governmental agency or authority.
5. Payment of Fees. The Company covenants and agrees that the
balance of the non-refundable financial advisory fees due under the Advisory
Agreement in the amount of $75,000 shall be paid in full on or before December
31, 1997.
6. Ratification. Except as expressly amended hereby, the Advisory
Agreement and the Advisor's Warrants are hereby ratified and confirmed in all
respects and shall continue in full force and effect. This Amendment and the
Advisory Agreement shall hereafter be read and construed together as a single
document, and all references to the Advisory Agreement or any agreement or
instrument related to the Advisory Agreement shall hereafter refer to the
Advisory Agreement as amended by this Amendment.
7. Termination. The Company and the Advisor agree that the term
of the Advisory Agreement shall end on December 31, 1997, in accordance with
the provisions of Section 6 of the Advisory Agreement.
8. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
counterparts taken together shall be deemed to constitute one and the same
instrument.
2
<PAGE> 3
9. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas (without reference
to conflict of laws).
In Witness Whereof, the Company and the Advisor have executed this
Amendment as of the date first above written.
WATERMARC FOOD MANAGEMENT CO.
By:
-----------------------------------
Name:
Title:
SANDERS MORRIS MUNDY
By:
-----------------------------------
Name:
Title:
---------------------------------------
Ghulam M. Bombaywala
3
<PAGE> 1
EXHIBIT 4.5
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> 2
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> 3
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> 4
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> 5
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> 6
$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> 7
$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> 8
$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 of 5 INITIALS
<PAGE> 9
$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> 10
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> 11
$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> 12
$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> 13
$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> 14
$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> 15
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> 16
$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> 17
$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> 18
$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> 19
$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> 20
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> 21
$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> 22
$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> 23
$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> 24
$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> 25
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
-----------
INITIALS
Page 1 of 2
<PAGE> 26
$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
<PAGE> 1
EXHIBIT 4.6
SUBORDINATED NOTE CONVERSION AGREEMENT
This Agreement is made effective as of the lst day of June, 1997, by
and between Watermarc Food Management Co., a Texas corporation f/k/a Billy
Blues Food Corporation ("Watermarc"), and Ghulam M. Bombaywala, (hereafter
jointly referred to as the "Parties").
WHEREAS, on the 19th day of December 1994, Ghulam M. Bombaywala
purchased Five Hundred Thousand Dollars ($500,000.00) principal amount of
Watermarc's 12% Subordinated Notes (hereafter referred to as the "Subordinated
Note"); and
WHEREAS, the Parties wish to convert the Subordinated Note payable by
Watermarc to Mr. Bombaywala in the total principal amount of Five Hundred
Thousand Dollars ($500,000.00) into an 11% Subordinated Note of equal principal
amount due June 30, 2002; and
NOW, THEREFORE, for and in consideration of the premises hereunder,
the Parties agree as follows:
1. In exchange for the consideration provided for in Section 2
below, Ghulam M. Bombaywala forgives and forever discharges the Subordinated
Note owed to him by Watermarc and due on July 31, 1997 in the total principal
sum of Five Hundred Thousand Dollars ($500,000.00), together with all interest,
accrued and unaccrued effective June 1, 1997.
2. Mr. Bombaywala shall receive a promissory note from Watermarc
in the principal amount of Five Hundred Thousand Dollars ($500,000.00)
constituting a part of Watermarc's 11% Convertible Subordinated Notes and
Warrants being offered to prospective investors pursuant to Watermarc's
Confidential Private Placement Memorandum dated June 1, 1997.
3. 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.
4. 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.
This Agreement is executed by the Parties on the day and year first
above written.
Watermarc Food Management Co.
/s/ GHULAM M. BOMBAYWALA
- ---------------------------------
Ghulam M. Bombaywala Individually /s/ ANGELO PITILLO
--------------------------------
By: Angelo Pitillo
President and Chief Operating Officer
<PAGE> 1
EXHIBIT 4.7
WATERMARC FOOD MANAGEMENT CO.
11111 WILCREST GREEN, SUITE 350
HOUSTON, TEXAS 77042
Purchase Agreement
11% Convertible Subordinated Notes Due
June 30, 2002 (the "Notes")
Warrants to Purchase Common Stock
(the "Warrants")
(collectively the "Securities")
To: The Purchasers of the
above Securities listed in
Schedule 1 hereto:
Gentlemen:
WATERMARC FOOD MANAGEMENT CO., A TEXAS CORPORATION (THE "COMPANY"), IS
OFFERING (THE "OFFERING") THE SECURITIES PURSUANT TO ITS CONFIDENTIAL PRIVATE
PLACEMENT MEMORANDUM DATED JUNE 1, 1997 (THE "MEMORANDUM") OF WHICH THIS
PURCHASE AGREEMENT IS A PART. THE MEMORANDUM SHOULD BE REVIEWED CAREFULLY BY
ALL PURCHASERS AS IT CONTAINS FURTHER TERMS, CONDITIONS AND DISCLOSURES
RELATING TO THE SECURITIES IN ADDITION TO THOSE CONTAINED HEREIN WHICH TERMS,
CONDITIONS AND DISCLOSURES ARE INCORPORATED HEREIN BY REFERENCE AND CONSTITUTE
A PART OF THIS PURCHASE AGREEMENT AND MODIFY AND SUPPLEMENT THIS PURCHASE
AGREEMENT IN CERTAIN RESPECTS.
THE COMPANY HEREBY AGREES WITH YOU AS FOLLOWS:
1. AUTHORIZATION OF NOTES AND WARRANTS. The Company will
authorize the issuance and sale of up to $4,000,000 aggregate principal amount
of its 11% Convertible Subordinated Notes due June 30, 2002 (the "Notes"). The
Company will accept subscriptions to purchase a minimum of $25,000 of the Notes.
Each Note issued hereunder will mature on June 30, 2002 (the "Maturity Date"),
will bear interest on its unpaid principal balance at the rate of 11% per annum,
with accrued and unpaid interest being payable quarterly on March 31, June 30,
September 30, and December 31 each year, commencing on September 30, 1997. The
principal balance of the Notes shall be payable based upon an equal quarterly
amortization of unpaid principal due and owing as of June 30, 1999 which amount
will be payable quarterly commencing on September 30, 1999 through the Maturity
Date. The Notes will have the other terms and provisions as provided herein and
in the form of Note attached hereto as Exhibit 1. For each $25,000 Note, the
Company will issue warrants (the "Warrants") evidencing the right to purchase
2,500 shares of Common Stock, $.05 par value (the "Common Stock), of the
Company, at $1.50 per share, such number of shares and the purchase price being
subject to adjustment as provided in the Warrant. The Warrants will be in the
form of the Warrant attached hereto as Exhibit 2. Certain capitalized terms
used in this Agreement are defined in Section 14.
1
<PAGE> 2
2. PURCHASE AND SALE OF NOTES AND WARRANTS. The Company will
issue and sell to you and, subject to the terms and conditions of this Purchase
Agreement (including the Form of Note, Form of Warrant and the Memorandum,
collectively the "Agreement"), you will purchase from the Company, the
principal amount of Notes and number of Warrants, specified opposite your name
in the Schedule of Purchasers, in each case at the purchase price of 100% of
the principal amount thereof.
3. DELIVERY OF NOTES. All subscriptions for the Notes and
Warrants will be accepted when received and the purchases will be deemed final
and closed upon receipt and acceptance by the Company of an executed copy of
this Agreement and Subscription Agreement, a copy of which was provided with
the Company's Memorandum, along with payment of the applicable purchase price.
The Company will deliver to you the Note or Notes to be purchased by you,
subject to the provisions of this Section 3, in the form of one Note (or such
greater number of Notes as you may request) and a Warrant in the form of a
single Warrant (or such greater number of Warrants as you may request) to
purchase the number of shares of the Company's Common Stock equal to 2,500
multiplied by the number of Notes you purchase, dated the date of issuance and
registered in your name (or in the name of your nominee as indicated on the
Schedule of Purchasers or otherwise made known in writing by you to the Company
prior to the issuance thereof), against prior or, where applicable,
simultaneous delivery by you to the Company, or its order, of immediately
available funds in the amount of the purchase price therefor. The receipt and
acceptance by the Company of subscriptions for Notes and Warrants and the
issuance thereof are individually and collectively referred to as "subscription
closings" or "closings", whether one or more.
The closing, as necessary, will take place as subscriptions are
received at any time or times prior to September 30, 1997, unless the Offering
is extended by the Company at its sole discretion (the "Expiration Date").
4. REPRESENTATIONS AND WARRANTS. The Company represents and
warrants to you that:
4.1 ORGANIZATION, QUALIFICATIONS, STANDING, CAPITAL STOCK,
SUBSIDIARIES, ETC. The Company and its material Subsidiaries are
corporations duly organized, validly existing and in good standing
under the laws of their respective jurisdictions of incorporation,
have the corporate power to own their respective properties and to
carry on their respective businesses as the same are now being
conducted and are duly qualified to do business and are in good
standing in each jurisdiction in which the character of the respective
properties owned by them or the nature of their respective businesses
makes such qualification necessary. The authorized capital stock of
the Company consists of (a) 20,000,000 shares of common stock, $0.05
par value (the "Common Stock"), of which 13,670,847 shares were issued
and outstanding at March 30, 1997, and (b) 5,000,000 shares of
Preferred Stock, $1.00 par value, of which 329,540 shares of 9%
Cumulative Convertible Preferred Stock were issued and outstanding at
March 30, 1997. All of such outstanding shares have been validly
issued, are fully paid and nonassessable. The Company has reserved
approximately 3.4 million shares of such Common Stock for issuance
pursuant to previously outstanding options, warrants, and convertible
securities and has not reserved any shares of Common Stock for the
conversion of the Notes and/or the exercise of the Warrants
(collectively "Derivative Securities"). Except as stated in this
Section 4.1 or as described in the Memorandum, the Company has not
reserved any additional shares for issuance (except as expressly
required by this Agreement). Except as noted above, there are not
outstanding, nor is the Company subject to any formal agreement,
arrangement, or understanding under which there may become
outstanding, any option, warrant or other right to purchase or
subscribe to, any Derivative Securities as of March 30, 1997. The
Company has not reserved any shares of Common Stock underlying the
Rights of Mr. Bombaywala to receive 7,500,000 shares of the Company's
Common Stock as described in the Memorandum. The Company currently
has an insufficient number of authorized shares of Common Stock for
issuance as a result of the Rights and the Derivative Securities.
2
<PAGE> 3
4.2 FINANCIAL STATEMENTS, SUBSEQUENT CHANGES, ETC. The Memorandum
includes a number of reports filed by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities and Exchange
Act of 1934, as amended (the "Exchange Act") including, but not limited to:
A-1 The Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1996 (the "Form 10-K");
A-2 The Company's Current Reports on Form 8-K, dated May 15, 1997, as
amended May 30, 1997;
A-3 The Company's Quarterly Reports on Form 10-Q, for the quarter ended
September 29, 1996;
A-4 The Company's Quarterly Reports on Form 10-Q, for the quarter ended
December 29, 1996;
A-5 The Company's Quarterly Reports on Form 10-Q, for the quarter ended
March 30, 1997; and
A-6 Proxy Statement for the Annual Meeting of Shareholders of the Company
held on December 13, 1996;
The foregoing reports are collectively referred to as the "SEC
Reports." The SEC Reports, copies of which have been furnished to you as
exhibits to and part of the Memorandum, contain consolidated balance sheets and
statements of operations, stockholder's equity and cash flow, including the
notes thereto which have been audited through June 30, 1996 (the "Audited
Financial Statements") and are unaudited for the three, six and nine month
periods ended September 29, 1996, December 29, 1996, and March 30, 1997,
respectively (the "Unaudited Financial Statements") (collectively the
"Financial Statements").
Subject to the assumptions and qualifications contained therein, and
the additional financial disclosures and risk factors contained in the
Memorandum, all of the Financial Statements fairly present the financial
condition of the Company and its consolidated Subsidiaries at the respective
dates of said balance sheets and the results of operations of the Company and
its consolidated Subsidiaries for the respective periods covered thereby. To
the best knowledge of the Company, such Financial Statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as otherwise noted
therein). To the best knowledge of the Company, there were no material
liabilities, direct or indirect, fixed or contingent, of the Company and its
consolidated Subsidiaries (on a consolidated basis) as of the respective dates
of such balance sheets which are not reflected therein or in the notes thereto
or in the Memorandum.
4.3 OTHER INFORMATION AS TO THE COMPANY. The Memorandum, together
with the Exhibits thereto and the documents incorporated by reference therein
(collectively the "Memorandum"), does not contain any misstatement of a material
fact or omit to state any material fact necessary to be stated therein or
necessary in order to make the statements therein not misleading; provided,
however, that with respect to all projections and estimates furnished to you or
statements or assumptions regarding future events, plans, contingencies, trends,
circumstances, intentions, proposals or other forward looking statements (the
"Forward Looking Statements"), the Company represents and warrants only that the
same were based, to the best of its knowledge, upon reasonable assumptions and
that nothing has occurred or, to the best of the Company's knowledge, may occur,
which has caused or may cause any Forward Looking Statement to be or to become
inaccurate in any material adverse respect as of the date hereof or if anything
has so occurred, the Company may furnish to you a revised statement. In the
event the Company has furnished to you information which corrects information
previously furnished, the information last furnished is deemed to govern for
purposes of this Section 4.3. The Company has no obligation to update the
Memorandum or any Forward Looking Statement during the Offering or before or
after any subscription.
3
<PAGE> 4
4.4 Due Authorization and Compliance with Other Instruments. This
Agreement is, and the Notes when executed and delivered will be, valid and
legally binding obligations of the Company and the Notes will be entitled to
the benefits of this Agreement. The shares of Common Stock issuable upon
exercise of the Warrants or conversion of the Notes hereunder have been duly
authorized and when issued will be validly issued, fully paid and
nonassessable. The shares of Common Stock issuable upon the exercise of the
Warrants or the conversion of the Notes have been authorized, are not subject
to any preemptive or similar rights on the part of holders of shares of capital
stock of the Company, and upon such exercise or conversion, will be validly
issued, fully paid and nonassessable. The Company does not have sufficient
authorized shares of Common Stock at this time for issuance upon exercise of
the Warrants and/or conversion of the Notes.
4.5 Offering of the Securities. Neither the Company nor anyone
authorized to act on its behalf has or will directly or indirectly sell or
offer the Securities or any part thereof or any similar securities to, or
solicit any offer to buy any thereof from, any Person so as to bring the issue
and sale of the Notes within the provisions of Section 5 of the Securities Act.
5. REDEMPTION OF NOTES.
5.1 Optional. The Company at its option may redeem, without penalty, all
or any portion of the outstanding principal of the Notes at any time, such
redemption to be accompanied by payment of all interest accrued and unpaid on
the principal being redeemed with each holder of the Notes being entitled to a
premium equal to 3% of the outstanding principal balance of the Notes redeemed
prior to June 30, 1998, which premium will be reduced by 1% for each year that
the Notes remain outstanding until June 30, 2000 when no premium will be paid
if the Notes are redeemed subsequent to such date. The right of the Company to
redeem the Notes pursuant to this Section 5.1 shall also be subject to the
Company having fully complied with the procedures set forth in Section 5.2
below.
5.2 Notice of Redemption, Etc. Notice of redemption shall be mailed to
the holders of the Notes not less than twenty (20) nor more than sixty (60)
days prior to the date fixed for redemption at its last address as it appears
upon the records of the Company. If the Notes are redeemed in part, the Company
shall, without charge to the holder or holders hereof, either (1) execute and
deliver to the holder or holders a like Note for the unredeemed balance of the
principal amount thereof, or (2) make note thereon of the principal amount
called for redemption and redeemed, upon surrender of the Notes at the office
of the Company. Following the date fixed for redemption, interest shall be
payable only on the portion of the Notes not called for redemption.
6. CONDITIONS PRECEDENT
6.1 Purchase Obligations. Your obligation to purchase from the Company
the principal amount of Notes specified opposite your name in the Schedule of
Purchasers shall be subject to the following conditions precedent:
(a) Representations and Defaults. The representations and warranties made by
the Company herein shall be true on and as of the date the Note is issued
with the same effects as if they had been made on and as of said date
(except as to any changes resulting from transactions expressly reflected
herein or contemplated hereby including the Memorandum) and no Event of
Default as defined in Section 11 hereof, nor any condition or event which,
after notice or lapse of time, or both, would constitute such an Event of
Default, shall exist.
(b) Documents. All proceedings to be taken in connection with the transactions
contemplated by this Agreement to be consummated by the Company prior to
acceptance of a subscription to purchase the Notes, and all documents
incident thereto, shall be delivered to you (including the Note and
Warrant) within ten (10) business days from acceptance of your
subscription.
4
<PAGE> 5
(c) No Material Adverse Change. As of the date of this Agreement, no
change has occurred in the business or financial condition of the
Company or any of its Subsidiaries that would have a Material
Adverse Change in the sole discretion of the Company and excluding
all events and risk factors described in the Memorandum.
7. COVENANTS OF THE COMPANY. The Company covenants and agrees that, so
long as any of the Notes are outstanding it will comply with the following
provisions, subject to the provisions of Section 16 hereof:
7.1 Use of Proceeds. The proceeds (net of costs directly related
to the preparation and negotiation of this Agreement and the offering and
sale of the Notes) derived from the sale of the Notes will be used (I) to
repay the Company's Subordinated Notes due on July 31, 1997 (the "July
Subordinated Notes") and, subject to payment of the Subordinated Notes,
(ii) to fund capital improvements to the Company's Marco's Mexican
Restaurants and for general working capital purposes.
7.2 Payment of Principal and Interest. The Company will make all
payments of principal of and interest on the Notes at the time the same
shall become due thereunder or hereunder.
7.3 Notice of Default. The Company will promptly notify you upon the
occurrence of any Event of Default hereunder (or the occurrence of any
event or existence of any condition which with notice or lapse of time, or
both, might become an Event of Default) or any event of default under any
instrument evidencing or pursuant to which there shall be issued any
indebtedness of the Company or Subsidiary for borrowed money.
7.4 Covenant to Provide Security. The Company hereby grants the
holders of the Notes a security interest in all of the outstanding common
stock (the "Marco's Stock") of Marco's Mexican Restaurants, Inc., a Texas
corporation and a wholly-owned subsidiary of the Company ("Marco's"). The
Marco's Stock is currently subject to a security agreement and pledge in
favor of the holders of the Company's 12% Subordinated Notes due July 31,
1997, in the principal amount of $3,000,000. Prior to payment of the July
Subordinated Notes in full the holders thereof shall have a prior,
perfected security interest and lien on the Marco's Stock and the lien
granted hereunder is subject to the rights of the holders of the July
Subordinated Notes. Upon payment of the July Subordinated Notes (if the
Offering is completed as described in the Memorandum), the Company will
execute and deliver a definitive pledge and security agreement (the "Pledge
Agreement") providing for the delivery, possession and pledge of the
Marco's Stock as security for the Notes with and to an independent third
party who shall serve as the agent and representative of the holders of the
Notes pursuant to the Pledge Agreement (the "Agent") and the Agent shall
have the right, responsibilities and duties provided for therein and herein
with respect to the Marco's Stock and the enforcement of the rights of the
holders of the Notes under this Purchase Agreement, the Notes and the
Pledge Agreement and shall hold, protect and preserve the security interest
in the Marco's Stock granted herein and therein. The holders of the Notes
hereby agree and appoint the Agent as their agent, representative, attorney
and designee to act on their behalf pursuant to the terms of the Note, this
Purchase Agreement and the Pledge Agreement, and hereby grant to such Agent
the power of attorney to enforce all rights of the holders of the Notes
with respect to the Marco's Stock and their security interest therein. The
Pledge Agreement shall contain customary and standard terms and conditions
utilized in commercial pledge and security agreements. The Agent shall be
obligated to protect and defend the rights of the holders of the Notes with
respect to the Marco's Stock and may take and is hereby authorized by the
Company and the holders of the Notes to take any and all actions on behalf
of, and as attorney for, the holders of the Notes, and the Agent is
authorized to execute any and all documents, agreements, instruments,
certificates and filings to protect the rights of the holders of the Notes,
subject to the right of the holders of 51% of the principal amount of the
Notes (excluding any principal amount held by Mr. Bombaywala) to modify the
Pledge Agreement, change or terminate the Agent or direct the Agent to take
or not to take any action.
5
<PAGE> 6
8. PAYMENT, REGISTRATION AND TRANSFER OF NOTES. The Company will
promptly and punctually pay the interest on the Notes held by you without any
presentment thereof and without any notation of such payment being made thereon;
and the Company will pay all amounts payable to you in respect of principal and
interest on the Notes to you or your nominees at the address specified in
schedule 1, or at such other place as you may from time to time designate in
writing. The Company agrees to maintain an office (or to appoint an agent having
an office) in Houston, Texas, or such other city as the Company may designate by
notice in writing to you, at which Notes may be surrendered for transfer and
reissuance, for exchange, replacement, conversion or cancellation. The Company
shall keep or cause to be kept, at the office or agency so maintained, a
register or registers in which the Company or its agent shall register the names
and addresses of the holders of the Notes and shall transfer registered Notes in
accordance with this Agreement. Upon surrender for transfer of any registered
Note duly assigned by the registered holder (or its duly authorized attorney) to
the transferee(s) thereof and subject to satisfaction of the requirements set
forth in Section 13.4 hereof, the Company shall execute and deliver a new
registered Note (or Notes in appropriately subdivided denominations of
principal), dated the most recent date to which interest shall have been paid on
the surrendered Note, in an equal principal amount with notation of payments of
principal made thereon, or in a principal amount equal to the original principal
amount as reduced by payments of principal theretofore made on the Note
surrendered, in the name of, and payable to the order of, the transferee(s)
thereof. No service charge shall be assessed for any transfer, registration,
reissuance, exchange, conversion, or notation of payment hereunder.
9. SUBORDINATION OF NOTES. The Company covenants and agrees and
each holder of any Note, by acceptance thereof, likewise covenants and agrees
that the payment of the principal of and interest on the Notes shall be
subordinated in accordance with the provisions of this Section 9, and each
Person holding any Notes, whether upon original issue or upon transfer or
assignment thereof, accepts and agrees to be bound hereby.
9.1 Subordination to Senior Indebtedness. The indebtedness
evidenced by, and payment of the principal of and interest on, the Notes
shall be subordinated and subject in right of payment to the extent and
in the manner set forth in this Section 9 to the prior payment in full
of all Senior Indebtedness.
9.2 No Payment of Notes in Certain Events. No part of the
Notes shall have any claim to the assets of the company on a parity with
or prior to the claim of the Senior Indebtedness which includes the July
Subordinated Notes. In the event and during the continuation of a Senior
Indebtedness Default, no payment of principal or interest shall be made
on the Notes unless and until such Senior Indebtedness Default shall
have been waived or remedied, nor shall any such payment be made if
after giving effect, as if paid, to such payment, any Senior
Indebtedness Default would exist; provided, that with respect to a
Senior Indebtedness Default other than a default in the payment of
principal (including mandatory prepayments) or of sinking fund
installments, if any, with respect to, fees in respect of or interest
on, Senior Indebtedness, nothing in this Section 9.2 shall prevent any
regularly scheduled payment of principal or interest for a period longer
than the longer of (i) 90 days of (ii) any period during which a Senior
Indebtedness Default so exists or has been declared due and payable in
its entirety and such acceleration has not been rescinded or annulled or
such Senior Indebtedness has not been paid in full.
9.3 Priority of Payment of Senior Indebtedness in Certain
Events. Upon any payment or distribution of assets of the Company of any
kind or character, whether in cash, property, or securities, to
creditors, upon any dissolution or winding up or total or partial
liquidation or reorganization of the company, whether voluntary or
involuntary, assignment for the benefit of creditors, or in bankruptcy,
insolvency, receivership, reorganization or other proceedings, all
Senior Indebtedness shall first be paid in full or provision for the
payment thereof (subject to the power of a court of competent
jurisdiction to make other equitable provision), shall be made before
the holders of the Notes shall be entitled to retain any assets so paid
or distributed in respect thereof (for principal or interest); and upon
any such dissolution or winding up or liquidation or reorganization, any
payment or distribution of assets of the Company of any kind or
character, whether in cash, property, or securities, to which the
holders of the Notes would be entitled, except for these provisions,
shall be paid by the Company or by any receiver, trustee in bankruptcy,
liquidating trustee, agent, or other Person making such payment or
distribution, or by the holders of the Notes if received by them,
directly to the holders of Senior Indebtedness (pro rata to each
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holder on the basis of the respective amounts of Senior Indebtedness held by
such holder) or their representatives, to the extent necessary to pay all
Senior Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of such Senior Indebtedness, before any
payment or distribution is made to the holders of the Notes.
9.4 Payments Due Holders of Senior Indebtedness. In the event that
any payment or distribution of assets of the Company of any kind or character,
whether in cash, property, or securities, which, by virtue of the provisions of
Sections 9.2 or 9.3 should not be paid to the holders of the Notes, shall
nevertheless be received by the holders of the Notes before all Senior
Indebtedness is paid in full, or provision made for such payment, in accordance
with its terms, such payment or distribution shall be held in trust for the
benefit of, and shall be paid over or delivered to, the holders of such Senior
Indebtedness or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any
of such Senior Indebtedness may have been issued, as their respective interests
may appear, or to a bank or trust Company having a combined capital and surplus
of not less than $10,000,000 which is in good standing and has its principal
office in the State of Texas, to be held in escrow, for application to the
payment of all Senior Indebtedness remaining unpaid to the extent necessary to
pay all such Senior Indebtedness in full in accordance with its terms, after
giving effect to any concurrent payment or distribution to or for the holders
of such Indebtedness.
9.5 Notice of Acceleration. The holders of the Notes agree to give
the holders of Senior Indebtedness notice in writing 20 days prior to declaring
the unpaid principal amount of the Notes immediately due and payable pursuant
to the provisions of Section 11.
9.6 Enforcement, Subrogation, Etc. The foregoing subordination
provisions shall be for the benefit of the present and future holders of the
Senior Indebtedness and may be enforced directly by such holders against the
holders of the Notes. Upon any payment or distribution of assets of the Company
referred to in Section 9.3, the holder of a Note shall be entitled to rely upon
a certificate of the receiver, trustee in bankruptcy, liquidating trustee, the
Company, any agent or other Person making such payment or distribution,
delivered to the holder of a Note for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertaining thereto or to the provisions of this Section 9. Subject
to the payment in full of all Senior Indebtedness, the holders of the Notes
together and pro rata with the holders of any other indebtedness of the Company
(which is subordinate in right of payment to the payment of other indebtedness
of the Company, but is not subordinate in right of payment to the Notes and by
its terms grants the right of subrogation to the holders thereof) shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of assets of the Company made on the Senior
Indebtedness until the principal of and interest on the Notes shall be paid in
full; and, for the purposes of such subrogation, no payments or distributions
to the holders of Senior Indebtedness of any cash, property, or securities to
which the holders of the Notes would be entitled except for these provisions
shall, as between the Company, its creditors, other than the holders of Senior
Indebtedness, and the holders of the Notes, be deemed to be a payment by the
Company to or on account of Senior Indebtedness, it being understood that these
provisions are intended solely for the purpose of defining the relative rights
of the holders of the Notes, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
9.7 Obligations Unimpaired. Nothing contained in this Section 9 is
intended to or shall impair as between the Company, its creditors, other than
the holders of Senior Indebtedness, and the holders of the Notes, the
obligation of the Company, which shall be absolute and unconditional, to pay to
the holders of the Notes the principal of and premium, if any, and interest on
the Notes, as and when the same will become due and payable in accordance with
the terms thereof, or to affect the relative rights of the holders of the Notes
and creditors of the Company other than the holders of Senior Indebtedness, nor
shall anything herein or therein prevent the holder of any Note from exercising
all remedies otherwise permitted by applicable law upon default, subject to the
rights, if any, under this Section 9 of the holders of Senior Indebtedness in
respect of any required notice of the exercise of any such remedy or right, or
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property, or securities of the Company received upon the exercise of any
such remedy. Each holder of the Notes by his acceptance thereof shall be
deemed to acknowledge and agree that the subordination provisions of this
Section 9 are, and are intended to be, an inducement and a consideration to
each holder of any Senior Indebtedness, whether such Senior Indebtedness
was created or acquired before or after the issuance of the Notes, to
acquire and continue to hold, such Senior Indebtedness, and each holder of
Senior Indebtedness shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold, or in
continuing to hold, such Senior Indebtedness.
10. SUBSTITUTION OF NOTES. Upon receipt by the Company of satisfactory
evidence of the loss, theft, destruction, or mutilation of any Note, and of
satisfactory indemnity (which, in the case of any original purchaser of the
Notes, shall be a contractual obligation of such purchaser) and upon surrender,
at the office or agency maintained in accordance with Section 8 hereof, and
cancellation of any Note, if mutilated, the Company will execute and deliver a
new Note of like tenor, in lieu of such Note, dated the most recent date to
which interest on such Note shall have been paid.
11. EVENTS OF DEFAULT. If any one or more of the following events (herein
called "Events of Default") shall occur and be continuing:
(a) except and subject to the provisions of Section 9.2, default
shall be made in the payment of principal of any of the Notes when due and
payable, either at maturity or at a date fixed for prepayment or by
acceleration or otherwise;
(b) except and subject to the provisions of Section 9.2, default
shall be made in the payment of interest on the Notes when the same becomes
due and payable and the default continues for a period of 10 days;
(c) default shall be made in the due performance of observance of any
other material covenant, agreement, or provision herein to be performed or
observed by the Company or a breach shall exist in any material
representation or warranty herein contained, and such default or breach is
material and shall have continued for a period of 30 days after written
notice thereof to the Company from any holder or holders of Notes
aggregating not less than 51% of the aggregate principal amount of the
Notes then outstanding; provided, however, that if any such default or
breach shall be such that it cannot be cured or corrected within such
30-day period, such period shall be extended for such additional period of
time (not exceeding 30 days) as shall be necessary to effect such cure or
correction if curative or corrective action is instituted within said
30-day period and thereafter diligently pursued;
(d) the Company or any material Subsidiary shall (i) apply for or
consent to the appointment of a receiver, trustee, or liquidator of the
Company or such Subsidiary or any of its assets, (ii) make a general
assignment for the benefit of creditors, (iii) be adjudicated a bankrupt or
insolvent or (iv) file a voluntary petition in bankruptcy, or a petition or
answer seeking reorganization or an arrangement with creditors to take
advantage of any bankruptcy, reorganization, insolvency, readjustment of
debt, moratorium, dissolution, liquidation, or debtor relief law, or any
chapter of any such law, or an answer admitting the material allegations of
a petition filed against it in any proceeding under any such law or
chapter, or corporate action shall be taken by the Company or such material
Subsidiary for the purpose of effecting any of the foregoing; or an order,
judgment, or decree shall be entered, without the application, approval, or
consent of the Company, by any court of competent jurisdiction, approving a
petition seeking liquidation or reorganization of the Company or such
material Subsidiary or of all or a substantial part of the assets of the
Company or such material Subsidiary;
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(e) default shall occur with respect to any other indebtedness for
borrowed money of the Company or any Subsidiary or under any agreement
under which such indebtedness may be issued by the Company or any material
Subsidiary and such default shall continue for more than the period of
grace, if any, therein specified, if the aggregate amount of all such
indebtedness for which such default shall have occurred exceeds $2,000,000
and, if not already matured in accordance with its terms, such default
shall result in acceleration of the maturity of such indebtedness;
provided, however, that if such default shall be remedied or cured by the
Company or a Subsidiary, or waived by the holders of such indebtedness,
then the Event of Default hereunder by reason thereof shall be deemed
likewise to have been thereupon remedied, cured, or waived without further
action upon the part of and holders of the Notes; or
(f) final judgment for the payment in excess of $1,000,000 shall be
rendered against the Company or any material Subsidiary and the same shall
remain undischarged for a period of 90 days during which execution shall
not be effectively stayed by appeal, posting of a bond, or agreement of the
parties thereto;
then and in each and every such case the holders of Notes aggregating not
less than 51% of the aggregate principal amount of the Notes then outstanding
may by notice in writing to the Company declare the unpaid principal of the
Notes, with accrued interest and the premium chargeable thereon as though
payment hereunder were a redemption under Section 5.1, to be forthwith due and
payable and thereupon such principal, premium, if any, and interest shall be
due and payable without presentment, protest, or further demand or notice of
any kind, all of which are hereby expressly waived.
This Section 11, however, is subject to the condition that, if at any time
after the principal of the Notes shall have become so due and payable, and
before any judgment or decree for the payment of the monies so due, or any
thereof, shall be entered and if all arrears of interest upon the Notes and all
other sums payable under the Notes (except the principal of and premium on the
Notes which solely by reason of such declaration shall have become payable)
shall have been duly paid, then and in every such case the holders of Notes
aggregating not less than 51% of the aggregate principal amount of the Notes
then outstanding may, by written notice to the Company, either temporarily
suspend or permanently rescind and annul such declaration and its
consequences; but no such suspension or rescission and annulment shall extend
to or affect any prior, concurrent, or subsequent default or Event of Default
(other than the ones identified by the holders of the Notes declaring them due
as the ones upon which such declaration was based) or impair any right
consequent thereon.
Notwithstanding anything to the contrary herein, if default shall be made
in the payment of any principal of, or interest on, any Note when and as the
same shall become due and payable, either at maturity or at a date scheduled
for redemption (but not merely by virtue of any acceleration pursuant to the
foregoing provisions of this Section 11), the holder of such Note may by
notice in writing to the Company declare the unpaid principal of such Note, with
accrued interest, to be forthwith due and payable and thereupon such principal
and interest shall be due and payable without presentment, protest, or further
demand or notice of any kind, all of which are hereby expressly waived.
If any holder of a Note shall demand payment thereof or take any other
action (of which the Company has actual knowledge) in respect of an Event of
Default, the Company will forthwith give written notice thereof, specifying
such action and the nature of such event, to each holder of record of the Notes
then outstanding. The Company will also give prompt written notice to each
holder of record of the Notes at the time outstanding of any written notice of
suspension, rescission, or annulment given to it as aforesaid.
The Company covenants, that if default be made in any payment of
principal of or interest on any Note, it will pay to the holder thereof such
further amount as shall be sufficient to cover the cost and expense of
collection, including, without limitation, court costs and reasonable
compensation to the attorneys and counsel of the holder for all services
rendered in connection therewith.
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No course of dealing between the Company and any holder of a Note or
any delay on the part of the holder of a Note in exercising any rights
thereunder or hereunder shall operate as a waiver of any rights of any such
holder.
12. CONVERSION OF NOTES.
12.1 Voluntary Conversion. The holders of the Notes will be
entitled at any time prior to the close of business on the Maturity
Date, subject to redemption of the Notes by the Company, to convert the
entire principal amount and accrued interest due and owing thereunder
into shares of the Common Stock at the conversion price of $1.50 of
principal and accrued interest for one share of Common Stock.
12.2 Fractional Shares. In lieu of issuing any fraction of a
share upon the conversion of the Notes, the Company shall pay to the
holder thereof, for any fraction of a share otherwise issuable upon
conversion, cash equal to the same fraction of the closing bid price (or
last sales prices) of the Common Stock as quoted on the Nasdaq Small Cap
Market (or any over-the-counter market or exchange) on the trading day
preceding the date of conversion.
12.3 Adjustment of Conversion Price. The conversion price is
subject to adjustment if the Company at any time pays to the holders of
its Common Stock a dividend in Common Stock and the number of shares of
Common Stock issuable upon the conversion of the Notes shall be
proportionately increased, effective as of the close of business on the
Record Date for determination of the holders of the Common Stock
entitled to the dividend.
If the Company at any time subdivides or combines in a larger
or smaller number of shares its outstanding shares of Common Stock, then
the number of shares of Common Stock issuable upon the conversion of the
Notes shall be proportionately increased in the case of a subdivision
and decreased in the case of a combination, effective in either case at
the close of business on the date that the subdivision or combination
becomes effective.
In the Case of any reclassification of the Common Stock, any
consolidation of the Company with, or merger of the Company into any
other entity, any merger of any entity into the Company (other than a
merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock), any
sales or transfer of all or substantially all of the assets of the
Company or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or other property, then provision
shall be made such that the holders of the Notes shall have the right
thereafter, during the period that the shares shall be convertible, to
convert the shares only into the kind and amount of securities, cash and
other property receivable upon such reclassification, consolidation,
merger, sale, transfer or share exchange by a holder of the number of
shares of Common Stock into which the Notes might be converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange.
12.4 Mandatory Conversion. The Notes are subject to
mandatory conversion, either in whole or in part, at the option of the
Company, upon 30 days written notice, if at any time the closing bid
price or last sales price, as the case may be, of the Common Stock as
quoted on the Nasdaq Small Cap Market (or any exchange or
over-the-counter market) for a period of twenty (20) consecutive trading
days ending within fifteen (15) days of the date on which notice of
conversion is given exceeds $4.50 per share. Upon a mandatory conversion
of the Notes by the Company, such Notes shall be converted into shares
of Common Stock at the conversion ratio of $1.50 of principal and
accrued interest for one share of Common Stock. All of the provisions
with respect to conversion rights generally, including but not limited
to the adjustment of the conversion rate in certain events, shall be
applicable hereto in the event the Company exercises its option to cause
a mandatory conversion of the Notes.
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13. SECURITIES ACT.
13.1 Investment Intent, Etc. Each of you and each other Person who
has been designated by you as a registered holder to whom Notes will be
initially issued, by acceptance of such Notes, represent and in making this
sale it is specifically understood and agreed that you and each such other
Person are acquiring the Notes to be purchased for your, or such Person's, own
account, or for the account of one or more trusts which you, or such Person,
manage, and not with a view to or for sale in connection with any distribution
thereof, provided that the disposition of your, or such Person's property shall
at all times be and remain within your, or such Person's, control.
13.2 Restrictions on Transferability. The Notes shall not be
transferable except upon the conditions specified in this Section 13, which
conditions are intended to ensure compliance with the provisions of the
Securities Act in respect to the transfer of any Note.
13.3 Restrictive Legends. Each Note shall (unless otherwise
permitted by the provisions of Section 13.4 hereof) be stamped or otherwise
imprinted with a legend in substantially the following form:
"This Note has not been registered under the Securities Act of 1933, as
amended, and is transferable only upon the conditions specified in the
Purchase Agreement referred to herein."
Each certificate of Common Stock issued upon conversion of the Notes
pursuant to Section 12 hereof and each certificate for Common Stock issued to a
subsequent transferee shall (unless otherwise permitted by the provisions of
Section 13.4 hereof) be stamped or otherwise imprinted with a legend in
substantially the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or any state securities act.
The shares have been acquired for investment and may not be sold,
transferred, pledged or hypothecated unless (i) they shall have been
registered under the Securities Act of 1933 and any applicable state
securities act, or (ii) the corporation shall have been furnished with
an opinion of counsel, satisfactory to counsel for the corporation, that
registration is not required under any such acts."
13.4 Notice of Proposed Transfers.
(a) Except as otherwise provided in paragraph (b) of this
Section 13.4 prior to any transfer or attempted transfer of any
Restricted Note or Restricted Common Stock, the holder thereof shall
give written notice to the Company of such holder's intention to effect
such transfer. Each such notice shall describe the manner and
circumstances of the proposed transfer and shall be accompanied by an
opinion of counsel for such holder satisfactory to the Company, to the
effect that such transfer may be affected without registration of such
Restricted Note or Restricted Common Stock, as the case may be, under
the Securities Act. If such notice is accompanied by such an opinion,
such holder shall be entitled to transfer such security in conformity
with the terms of such notice, and if the opinion of counsel so
specifies, the securities issued upon such transfer shall not bear the
restrictive legend set forth in section 13.3.
(b) The procedures set forth in paragraph (a) of this Section
13.4 shall not apply to any transfer by you (or a transferee pursuant to
this paragraph (b) of any Restricted Note or Restricted Common Stock to
any of your Subsidiaries or Affiliates; provided, however, that at the
time of such transfer the transferee shall execute and deliver to the
Company an "Investment Letter" containing substantially the
representations provided in Section 13.1 hereof with respect to the
Notes or Common Stock which are the subject of such transfer and its
agreement to be
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bound by the provisions of this Section 13. Notes or Common Stock issued
upon such transfer shall bear the appropriate restrictive legend set forth
in Section 13.3 hereof.
13.5 Required Registration. The Company shall use its best efforts to
effect, upon demand made by the holders of at least 51% of the number of shares
of Common Stock issued or issuable upon conversion of the Notes issued in the
Offering or upon exercise of the Warrants, the registration under the
Securities Act of all shares of Restricted Common Stock issued or issuable upon
such conversion or exercise and held by you and/or any other holder or holders
of shares of Restricted Common Stock (the holders of Restricted Common Stock
are sometimes referred to herein, as the "Eligible Holders") on a form
appropriate for the registration of the Restricted Common Stock in accordance
with the intended method of disposition of the Eligible Holders; provided,
however, that (i) if the Company is engaged in negotiations in respect of a
merger, acquisition, combination or other business opportunity or has filed, or
proposes to file, a registration statement under the Securities Act covering
shares of Common Stock or other securities for sale by the Company and in the
good faith judgment of the Board of Directors of the Company such transaction
would be adversely affected by such registration, the Company shall be entitled
to postpone the filing but, in no event for a period not to exceed 180 days and
(ii) at the time demand is made, the conversion price or exercise price is
equal to or less than the average of the closing bid price (or the last sales
price) of a share of Common Stock as quoted on the Nasdaq SmallCap Market or
any exchange or over-the-counter market in which trading in the Common Stock is
then reported for any period of ten (10) conservative trading days during the
90 days preceding the date demand is made.
13.6 Incidental Registration. If the Company at any time proposes to
register any of its Common Stock under the Securities Act (on a form available
for the registration of Restricted Common Stock by the holders thereof other
than a registration on Form S-8, or any successor or similar forms or a shelf
registration under Rule 415 for the sole purpose of registering shares to be
issued in connection with acquisitions), it will at each such time give written
notice to the Eligible Holders of its intention so to do and, upon written
request given by the Eligible Holders within 30 days after receipt of any such
notice (which request shall state the intended method of disposition of such
securities by such Eligible Holder), the Company will use its best efforts to
cause all or any Restricted Common Stock held by such Eligible Holder or which
such Eligible Holder is then entitled to acquire to be registered so as to
permit the sale or other disposition (in accordance with the intended methods
thereof), as aforesaid by such Eligible Holder, provided, however, that the
Company may at any time withdraw or cease proceeding with any such registration
if it shall at the same time withdraw or cease proceeding with the registration
of such other securities originally proposed to be registered. If an offering
pursuant to this Section 13.6 is to be made through underwriters, the managing
underwriter may, if in its reasonable opinion marketing factors so require,
limit (pro rata according to the market value of securities proposed to be
registered by each Eligible Holder) the number of (or eliminate entirely from
the offering all of the) securities which Eligible Holders may register
pursuant to this Section 13.6.
13.7 Registration Procedures. If and whenever the Company is required by
the provisions of Section 13.5 or 13.6 to use its best efforts to effect the
registration of any of its securities under the Securities Act, the Company
will, as promptly as possible:
(a) prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become effective and, in the case of a
registration required by Section 13.5, to remain effective for a period of
two years after the effective date of registration, or such shorter period
that terminates on the earlier or (i) a date specified by a majority of the
Eligible Holders (by number of shares) of the securities covered by the
registration statement or (ii) the date all the securities covered by the
statement have been sold or withdrawn, but in no case prior to the 90-day
period referred to in Rule 174 under the Securities Act;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary
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to keep such registration statement effective and to comply with the
requirements of the Securities Act, and the rules and regulations promulgated
by the Commission thereunder relating to the sale or other disposition of the
securities covered by such registration statement;
(c) furnish to each Eligible Holder selling securities in such offering
such numbers of copies of a prospectus, including a preliminary prospectus,
complying with the requirements of the Securities Act, and such other documents
as such Eligible Holder may reasonably request in order to facilitate the
public sale or other disposition of the securities owned by such Eligible
Holder; and
(d) use its best efforts to register or qualify the securities covered by
such registration statement under the securities or blue sky laws of such states
as each Eligible Holder selling securities in such offering shall request, and
do any and all such other acts and things as may be necessary or advisable to
enable such Eligible Holder to consummate the public sale or other disposition
in such jurisdictions of the securities owned by you; provided, however, that
the Company shall not be obligated to register or qualify such securities in any
jurisdiction in which such registration or qualification would require the
Company to qualify as a foreign corporation or file any general consent to
service of process where it is not so qualified or has not theretofore so
consented.
13.8 Expenses; Conditions Precedent. Except as provided below in this
Section 13.8, all expenses incurred by the Company or any holder of Restricted
Common Stock in connection with action taken by the Company to comply with this
Section 13, including, without limitation, all registration and filing fees,
printing expenses, accounting fees, fees and disbursements of counsel and other
experts, premiums for liability insurance obtained in connection with a
registration statement filed to effect such compliance, the expenses (including
counsel fees) of complying with securities or blue sky laws, and the fees and
disbursements of a single counsel retained by the Eligible Holders of more than
75% of the securities being offered, shall be paid by the Company. The Company
shall not be obligated in any way in connection with any registration pursuant
to this Section 13 for any underwriting discounts or commissions payable by any
Eligible Holder to any underwriter of securities to be sold by such Eligible
Holder. It shall be a condition precedent to the obligation of the Company to
take any action under Section 13.5 that the Company shall receive an undertaking
satisfactory to it from each Eligible Holder of securities registered or to be
registered as herein provided to pay all expenses required to be borne by such
Eligible Holder and to furnish or cause to be furnished to the Company
specifically for use in preparation of the registration statement and prospectus
written information concerning the securities held by such Eligible Holder and
also concerning any underwriter of such securities and the intended method of
disposition thereof as the Company shall reasonably request and as may be
required in connection with the action to be taken by the Company hereunder.
13.9 Company Indemnification. In the event of any registration of any
securities under the Securities Act pursuant to this Section 13, the Company
will indemnify and hold harmless each offering Eligible Holder, each underwriter
of such securities and each other Person, if any, who controls such Eligible
Holder, or such underwriter within the meaning of the Securities Act, against
any losses, claims, damages, or liabilities, joint or several, to which such
Eligible Holder, such underwriter or such controlling Person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages,
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary prospectus or final prospectus contained therein, or any
amendment or restatement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; and will
reimburse such Eligible Holder, such underwriter and each such controlling
Person for any legal and any other expenses reasonably incurred by such Eligible
Holder, such underwriter, or such controlling Person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
extent
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that any such loss, claim, damage, or liability arises out of or is based upon
an untrue statement or an untrue statement or omission or alleged omission made
in said registration statement, said preliminary prospectus, or said prospectus
or said amendment or supplement in reliance upon and in conformity written
information furnished to the Company through an instrument duly executed by
such Eligible Holder or such underwriter specifically for use in the
preparation thereof.
13.10 Your Indemnification. In the event of any registration of any
securities under the Securities Act pursuant to this Section 13, such Eligible
Holder will (or will furnish the written undertaking of such other controlling
Person or Persons as shall be acceptable to the Company to) indemnify and hold
harmless the Company and each other Person, if any, who controls the Company
within the meaning of the Securities Act, against any losses, claims, damages,
or liabilities, joint or several, to which the Company or such controlling
Person may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent that any such
loss, claim, damage, or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
said registration statement, said preliminary prospectus, or said prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Eligible Holder or any underwriter
of such Eligible Holder's securities specifically for use in the preparation
thereof, and such Eligible Holder will (or will furnish the written undertaking
of such other Person or Persons as shall be acceptable to the Company to)
reimburse the Company and each such controlling Person for any legal and any
other expenses reasonably incurred by the Company or such controlling Person in
connection with investigation or defending any such loss, claim, damage, or
liability or action.
13.11 Conduct of Litigation; Procedure. If an action is brought
against any Person entitled to indemnification under Section 13.9 or 13.10
above (the "Indemnitee"), the Indemnitee shall promptly notify the Person or
Persons obligated to indemnify the Indemnitee (whether one or more, the
"Indemnitor") of such action and the Indemnitor shall assume the defense of
such action, including the employment of counsel, reasonably satisfactory to
Indemnitee, and the payment of all court costs and other expenses. The
Indemnitee shall have the right to employ its own counsel in any such action,
but the fees and expenses of such counsel shall be at the Indemnitee's expense
unless the Indemnitee shall have reasonably concluded that there may be
defenses available to it which are different from or additional to those
available to the Indemnitor (in which case the Indemnitor shall not have the
right to direct the defense of such action on behalf of Indemnitee), in any of
which events such fees and expenses shall be borne by the Indemnitor.
Notwithstanding anything to the contrary in this Section 13.11, the Indemnitor
shall not be liable for any settlement of any claim or action effected without
its written consent. The Company covenants and agrees that it will not settle
any action against it involving possible claims against an Indemnitee without
also using its best efforts to settle the action against such Indemnitee.
13.12 Termination of Restrictions. The restrictions imposed by this
Section 13 upon the transferability of the Restricted Notes and the Restricted
Common Stock, shall cease and terminate as to any particular Restricted Note or
share of Restricted Common Stock when such Note or share shall have been
effectively registered under the Securities Act and disposed of by the Holder
thereof in accordance with the method of disposition described in the
registration statement or when opinions of counsel shall have been given
pursuant to Section 13.4 hereof to the effect that the legend set forth in
Section 13.3 hereof is not required. Whenever the restrictions imposed by this
Section 13 shall terminate, as hereinabove provided, the holder of any
Restricted Note or Restricted Common Stock as to which such restrictions shall
have terminated shall be entitled to receive from the Company, without expense,
a new
14
<PAGE> 15
Note or stock certificate not bearing the restrictive legend set forth
in Section 13.3 hereof and not containing any other reference to the
restrictions imposed by this Section 13.
13.13 Transfer of Your Rights. Your rights under this Section
13 shall inure to the benefit of all Persons who shall at any time be
the holders of Restricted Notes or Restricted Common Stock originally
purchased by you hereunder, pro rata in accordance with their respective
interests and each such holder, by such holder's acceptance of such
Restricted Note or Restricted Common Stock, as the case may be, agrees
to be and shall be deemed to be bound by all of your covenants set forth
in this Section 13, to the extent that such covenants are applicable to
such holder's Restricted Notes or Restricted Common Stock.
14. DEFINITIONS.
"AFFILIATES" of any Person shall mean any Person directly or indirectly
controlling, controlled by or under direct or indirect common control with such
Person. A Person shall be deemed to control a corporation if such Person
possesses, directly or indirectly, the power to direct or cause the direction
of the management and policies of such corporation, whether through the
ownership of voting securities, by contract or otherwise. Each director,
executive officer, and holder of 5% or more of and class of the outstanding
voting securities of the Company shall be deemed to be an "Affiliate" of the
Company.
"BUSINESS DAY" shall mean any day that the NASDAQ system (or other
exchange or market on which the Company's securities are traded) is open for
trading.
"COMMISSION" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"ELIGIBLE HOLDER" shall have the meaning given such term in Section
13.5 hereof.
"EVENT OF DEFAULT" shall have the meaning given such term in Section 11
hereof.
"FORM 10-K" shall mean the Company's Annual Report Pursuant to Section
12 or Section 15(d) of the Securities Exchange Act of 1934 for the fiscal year
ended June 30, 1996.
"FORM 10-Q" shall mean the Company's Quarterly Report Pursuant to
Section 12 or 15(d) of the Securities Exchange Act of 1934 for the fiscal
quarters ended September 29, 1996, December 29, 1996 and March 31, 1997,
respectively.
"MATERIAL ADVERSE CHANGE" shall mean any single circumstance or event
(or series of circumstances or events) having a Material Adverse Effect.
"MATERIAL ADVERSE EFFECT" shall mean any material adverse effect on the
financial condition or business operations of the Company and any of its
Subsidiaries on a consolidated basis, excluding, however, all Forward Looking
Statements and the specific and general risk factors disclosed in the
Memorandum and the occurrence, results of consequences with respect thereto.
"NASDAQ" shall mean the National Association of Securities Dealers
Automatic Quotation system.
"PERSON" shall mean and include an individual, a partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a
government or any department or agency thereof, and any other entity.
"RESTRICTED NOTE" shall mean any Note bearing the restrictive legend
set forth in Section 13.3 hereof.
15
<PAGE> 16
"RESTRICTED COMMON STOCK" shall mean shares of Common Stock on conversion
of the Notes or exercise of the Warrants issued pursuant to this Agreement and
evidenced by a certificate bearing the restrictive legend set forth in Section
13.3 hereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"SENIOR INDEBTEDNESS" shall mean the principal of (and premium, if any),
unpaid interest on, and any fees, expenses or other amounts or reimbursement
obligations on letters of credit in respect of, the following, whether
presently outstanding or hereafter incurred (a) all indebtedness (including
indebtedness of others guaranteed by the Company), whether outstanding on the
date hereof or thereafter created, incurred, assumed or guaranteed, of the
Company which is borrowed from and owed to any bank, insurance company, savings
and loan association, commercial finance company, commercial institution or
pension or profit sharing trust which makes loans or investments as a part of
its regular business, (b) the Company's 5-Year 9% Convertible Subordinated
Debentures due March 31, 1999, (c) the Company's 12% Subordinated Notes due
July 31, 1997, and (d) renewals, extensions, modifications and refunding of any
such indebtedness. Notwithstanding anything to the contrary in this Agreement.
"Senior Indebtedness" shall not include (A) any indebtedness of the types
referred to in clauses (a) through (d) in the preceding sentence if the terms
of the instrument provide that such indebtedness is not senior in right of
payment to the payment of principal of and interest on the Notes, (B) any
indebtedness of the Company which, by its terms or the terms of the instrument
creating or evidencing it, is subordinate in right of payment to or pari passu
with the Notes, (C) any indebtedness of the Company to any Affiliate, and (D)
any account payable created or assumed by the Company in the ordinary course of
business in connection with the obtaining of materials or services or any
obligation of the Company to any Affiliate. The exclusion of any indebtedness
from the definition of Senior Indebtedness is not intended and shall not be
deemed to limit the ability of the Company to grant any holder or guarantor,
which holder or guarantor may be an Affiliate, of indebtedness of the Company a
lien on or security interest in any assets of the Company to secure the
obligation or indebtedness of the Company to such person. Notwithstanding
anything to the contrary herein, it is intended that the Notes be secured by
100% of the outstanding stock (the "Marco's Stock") of Marco's Mexican
Restaurants, Inc., a Texas corporation and wholly-owned subsidiary of the
Company ("Marco's"), subject to such stock being released as security on the
full payment of the July Subordinated Notes as described in the Memorandum. The
holders of the Notes shall be entitled to the security afforded by a pledge of
the Marco's Stock and the receipt by the holders of the Notes of such security
and the sale thereof upon an Event of Default which results in the payment or
satisfaction of whole or in part of the Notes shall not be subject to the
payment or preferential rights of holders of any Senior Indebtedness and the
Notes are not subordinated to the extent of the right of the holders to receive
the benefits of the Marco's Stock as collateral.
"SENIOR INDEBTEDNESS DEFAULT" shall mean a default in payment of the
principal of or sinking fund installments, if any, due with respect to, fees in
respect of or interest on, any Senior Indebtedness, or any default, or any
event which, with notice or lapse of time or both, would constitute a default,
in any other agreement, term or condition contained in any agreement under
which any Senior Indebtedness is issued.
"SUBSIDIARY" shall mean any Person of which at the time of determination
the Company and/or one or more Subsidiaries owns or controls directly or
indirectly more than 50% of the shares of voting stock.
15. WAIVERS: MODIFICATIONS OF AGREEMENT. Any provision in this Agreement
to the contrary notwithstanding, changes in or additions to this Agreement or
the Notes may be made, and compliance with any covenant or condition herein set
forth may be omitted, if the Company (a) shall obtain from the holders of
record of Notes aggregating not less than 51% of the aggregate principal amount
of the Notes at the time outstanding (excluding the principal amount of the
Notes owned by Ghulam M. Bombaywala) their consent thereto in writing and (b)
shall deliver copies of such consent in writing to any such holders of record
who did not execute the same; such consent, without limiting the foregoing,
shall be effective to reduce the principal of or rate of interest payable on,
or to postpone any date fixed for the payment of principal of or any
installment of interest on, the Notes held by all holders, to increase the
percentage specified in Section 11 hereof of the principal amount of
16
<PAGE> 17
the Notes the holders of which may, in accordance with the provisions of such
Section 11, accelerate the maturity of the Notes upon an Event of Default or to
reduce the percentage of the principal amount of the Notes (or Restricted
Common Stock) the consent of the holders of which shall be required under this
Section 15.
16. SURVIVAL OF COVENANTS, ETC. All covenants, agreements,
representations, and warranties made herein and in the Notes and in any
certificate delivered pursuant hereto shall survive any investigation made by
you and the execution and delivery to you of the Notes to be purchased by you
and your payment therefor.
17. BROKERS; ISSUANCE TAXES. The Company will hold you free and harmless
from any claim, demand, liability for, or expense in connection with, any
brokers' or finders' fees or commissions claimed by any Person assertedly
acting on behalf of the Company in connection with this Agreement or the
transactions contemplated herein and taxes (excluding federal income taxes), if
any, payable upon, or on account of, issuance of the Notes.
18. GOVERNING LAW. This Agreement and the Notes are being delivered in
the State of Texas and shall be governed by and construed according to the laws
of the State of Texas.
19. NOTICES. Any notice, consent, request, or other communication
required or permitted hereunder shall be in writing and shall be deemed given
when either (a) personally delivered to the intended recipient or (b) sent and
delivered, by certified or registered mail, return receipt requested, addressed
to the intended recipient as follows:
if to the Company, to: Watermarc Food Management Co.
11111 Wilcrest Green, Suite 350
Houston, Texas 77042;
Attention: Chief Financial Officer
if to any of you, to the address given for such of you on Schedule 1 hereto; if
to any other holder of a Note to the address of such holder given to the
Company in accordance with Section 8; and if to any other holder of Restricted
Common Stock, to the address of such holder as set forth in the stock transfer
records of the Company. Any Person (other than the Company) may change the
address to which notice is to be sent pursuant to the preceding sentence by
giving notice of such new address to the Company in accordance with this
Section 19. The Company may change the address to which notice is to be sent
hereunder by giving notice of such change, in accordance with this Section 19,
to each Person against whom such change shall be effective. Any notice mailed
as aforesaid shall, unless otherwise provided herein, be deemed given on the
fifth day after deposited in the United States mail in accordance with the
first sentence of this Section 19.
20. PARTIES IN INTEREST. All of the terms and provisions of this
Agreement shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns.
21. BUSINESS DAYS. Should any installment of the principal of or interest
on any Note become due and payable upon a day other than a day on which
national banks located in Houston, Texas, are open for the conduct of banking
business, the maturity thereof shall be extended to the next succeeding day
upon which such banks are open for the conduct of banking business and, in the
case of an installment of principal, interest shall be payable thereon at the
rate per annum specified in such Note during such extension.
22. HEADINGS. The headings of the various sections and subsections hereof
have been inserted for convenience of reference only and shall not be deemed to
in any way modify any of the terms or provisions hereof.
23. COUNTERPARTS. This Agreement may be signed by each party hereto upon
a separate copy, in which event all of said copies shall constitute a single
counterpart of this Agreement. This Agreement may be
17
<PAGE> 18
executed in two or more counterparts, each of which shall be deemed an
original, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
If the foregoing is in accordance with your understanding, please sign
the form of confirmation and acceptance on the enclosed counterpart of this
Agreement and return the same to the Company, whereupon this Agreement shall be
a binding agreement between you and the Company.
EXECUTED this ________ day of _____________, 1997.
WATERMARC FOOD MANAGEMENT CO.
By:
--------------------------------
Ghulam M. Bombaywala, Chairman of
the Board and Chief Executive
Officer
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above written.
- -------------------------------------
(Signature)
- -------------------------------------
(Print Name)
18
<PAGE> 19
SCHEDULE 1
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF NUMBER OF
NAME ADDRESS NOTES WARRANTS
- ----------------------- -------------------- --------- ---------
<S> <C> <C> <C>
</TABLE>
19
<PAGE> 1
EXHIBIT 4.8
FORM OF 11% CONVERTIBLE SUBORDINATED PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND IS TRANSFERABLE ONLY UPON CONDITIONS SPECIFIED IN THE PURCHASE AGREEMENT
REFERRED TO HEREIN.
WATERMARC FOOD MANAGEMENT CO.
11% Convertible Subordinated Note
Due June 30, 2002
Watermarc Food Management Co., a Texas corporation (the "Company), for
value received, promises to pay to __________________ or registered assigns,
the principal amount of $__________________ as provided herein, and to pay
interest on outstanding principal at the rate of 11% per annum quarterly on
March 31, June 30, September 30 and December 31 of each year any principal
amount hereof remains outstanding (each an "Interest Payment Date") commencing
an September 30, 1997. The principal balance of this Note shall be paid based
on a three (3) year equal quarterly amortization of unpaid principal due and
owing as of June 30, 1999, which amount will be payable quarterly on the
Interest Payment Dates commencing on September 30, 1999, with the final payment
of all outstanding principal and interest due and payable on June 30, 2002.
Payment of principal and interest shall be made at the offices of the Company
in lawful money of the United States of America, and shall be mailed to the
registered owner or owners hereof at the address appearing on the books of the
Company.
1. Series. This Note is one of a duly authorized issue of notes of the
Company designated as its 11% Convertible Subordinated Notes due June 30, 2002
(the "Notes") and shall be issued in minimum demonstrations of $25,000, all of
like date, tenor and maturity, except variations necessary to express the
amount and payee of each Note, and is issued pursuant to that certain Purchase
Agreement (the "Purchase Agreement"), between the Company and the Purchasers of
the Notes. The terms of this Note include those stated in the Purchase
Agreement Reference is hereby made to the Purchase Agreement and all
supplements thereto for a complete statement of the respective rights,
limitations of rights and immunities thereunder of the Company and the holders
of the Notes, respectively.
2. Equal Rank. All Notes of this issue rank equally and ratably
without priority over one another.
3. Conversion. The holder or holders of this Note may convert, at any
time prior to the maturity hereof, the entire principal amount of and the
accrued interest on this Note into Common Stock of the Company at the
conversion rate of $1.50 of principal and accrued interest for one share of
Common Stock; provided that if the Company has called this Note for redemption,
the right to convert shall terminate at the close of business on the fifth
business day prior to the date fixed as the date for the redemption. If this
Note is not called for redemption and is converted between a record date for
the payment of interest and the next succeeding Interest Payment Date, the
interest payable on such succeeding Interest Payment Date shall be paid to the
holder hereof at the close of business on such record date despite such
conversion, unless earlier converted into shares of Common Stock in accordance
herewith.
To convert this Note, the holder or holders must surrender the same at
the office of the Company, accompanied by a written notice of conversion and by
a written instrument of transfer in a form satisfactory to the Company,
properly completed and executed by the registered holder or holders hereof or a
duly authorized attorney.
1
<PAGE> 2
4. FRACTIONAL SHARES. In lieu of issuing any fraction of a share
upon conversion of this Note, the Company, shall pay to the holder hereof, for
any fraction of a share otherwise issuable upon the conversion, cash equal to
the same fraction at the then closing bid or last sale price of the company's
Common Stock as quoted on the Nasdaq Small Cap Market, an exchange or otherwise
on any over-the-counter market on the trading day preceding such conversion.
5. ADJUSTMENTS TO CONVERSION. If the Company at any time pays to
the holders of its Common Stock a dividend in Common Stock, the number of
shares of Common Stock issuable upon the conversion of this Note shall be
proportionally increased, effective at the close of business on the record date
for determination of the holders of the Common Stock entitled to the dividend.
If the Company at any time subdivides or combines in a larger or
smaller number of shares its outstanding shares of Common Shares, then the
number of shares of Common Stock issuable upon the conversion of this Note
shall be proportionally increased in the case of a subdivision and decreased in
the case of a combination, effective in either case at the close of business on
the date that the subdivision or combination becomes effective.
In case of any reclassification of the Common Stock, any consolidation
of the Company with, or merger of the Company into, any other entity, any
merger of any entity into the Company (other than a merger which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock), any sales or transfer of all or
substantially all of the assets of the Company, or any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or
other property, then provisions shall be made such that the holders of this
Note shall have the right thereafter, during the period that this note shall be
convertible, to convert this Note only into the kind and amount of securities,
cash and other property receivable upon such reclassification, consolidation,
merger, sale, transfer or share exchange by a holder of the number of shares of
Common Stock into which this Note might be converted immediately prior to such
reclassification, consolidation, merger, sale, transfer or share exchange.
6. SUBORDINATION. The rights of holders of the Notes to receive
payment of any principal or interest thereon is subject and subordinate to the
prior payment of the principal of, (and premium, if any) and the interest on,
the Company's Senior Indebtedness, as defined in the Purchase Agreement. Upon
any receivership, insolvency, assignment for the benefit of creditors,
bankruptcy, reorganization, sale of all or substantially all of the assets,
dissolution, liquidation, or any other marshalling of the assets and
liabilities of the Company, or if the Notes are declared due and payable upon
the occurrence of an Event of Default, as described below, then no amount shall
be paid by the Company with respect to principal and interest thereon unless
and until the principal of, and interest on, all Senior Indebtedness then
outstanding is paid in full.
7. SECURITY. It is intended that this Note be secured by the
Common Stock of Marco's Mexican Restaurants, Inc., as provided in, and subject
to, the terms and conditions set forth in the Memorandum and the Purchase
Agreement.
8. DEFAULT. If any of the events described in Section 11 of the
Purchase Agreement occur (an "Event of Default"), the entire unpaid principal
amount of, and accrued and unpaid interest on, this Note shall immediately be
due and payable.
9. MANDATORY CONVERSION AT OPTION OF COMPANY. The Note is subject
to mandatory conversion at the option of the Company, upon thirty (30) days
written notice, if at any time the closing bid or last sales price of the
Common Stock as quoted on the Nasdaq Small Cap Market, an exchange or otherwise
on any over-the-counter market for a period of twenty (20) consecutive trading
days ending within fifteen (15) days of the date on which notice of conversion
is given exceeds $4.50 per share. Upon a mandatory conversion of the Note by
the Company, the Note shall be converted to Common Stock of the
2
<PAGE> 3
Company at the conversion ratio of $1.50 of principal and accrued interest for
one share of Common Stock. All other provisions with respect to conversion
rights generally, including but not limited to the adjustment of the conversion
rate in certain events, shall be applicable hereto in the event the Company
exercises its option to cause a mandatory conversion of the Note.
If the Note is mandatorily converted between a record date for the
payment of interest and the next succeeding Interest Payment Date, interest
payable on such succeeding Payment Date shall be paid to the holders thereof at
the close of business on such record date despite conversion.
Holders of the Note will be entitled to the same rights applicable at
the time of conversion to other holders of Common Stock.
10. Redemption This Note maybe redeemed at anytime prior to maturity,
as a whole at any time or in part from time to time at the office of the
Company, upon the notice referred to below, at the following redemption prices
(expressed in percentages of the principal amount of this Note) together with
accrued interest to the date of redemption:
If Redeemed During 12 Percentage of
Month Period Beginning Principal Amount
June 30, 1997 ............................................ 103
June 30, 1998 ............................................ 102
June 30, 1999 ............................................ 101
June 30, 2000 ............................................ 100
June 30, 2001 ............................................ 100
11. Notice of Redemption, Etc. Notice of redemption shall be mailed to
the holders of this Note not less than twenty (20) nor more than sixty (60)
days prior to the date fixed for redemption at their last address as it appears
upon the records of the Company. If this Note is redeemed in part, the Company
shall, without charge to the holder or holders hereof, either (1) execute and
deliver to the holder or holders a like note for the unredeemed balance of the
principal amount hereof, or (2) make note hereon of the principal amount called
for redemption and redeemed, upon offender of this Note at the office of the
Company. Following the date fixed for redemption, interest shall be payable
only on the portion of this Note not called for redemption.
12. Exchange. The holder of this Note may, at any time on or before
the date of its maturity or the date fixed for its redemption, by surrendering
this Note to the Company at its office, exchange this Note and/or any other of
the Notes for another note or notes of a like principal amount and of like
tenor, date and maturity in denominations of $5,000 or any multiple of that
amount.
13. Registered Owner. The Company may treat the person or persons
whose name or names appear hereon as the absolute owner or owners of this Note
for the purpose of receiving payment of, or on account of, the principal and
interest due on this Note for all other purposes, and it shall not be affected
by any notice to the contrary.
14. Registration Rights. The shares of Common Stock issuable on
conversion of the principal and accrued but unpaid interest due and owing
hereunder shall have certain registration rights more particularly set forth in
the applicable provisions of the Purchase Agreement.
15. Company Obligation. The holder or holders of this Note shall not
have any recourse for the payment in whole or of any part of the principal or
interest on this Note against any incorporator, or present or future
shareholder of the Company by virtue of any law, or by the enforcement of any
assessment, or otherwise, or against any officer, director, employee or
attorney of the Company by reason
3
<PAGE> 4
of any matter arising prior to or after the delivery of this Note, or against
any present or future officer, director, employee or attorney of the Company.
The holder or holders of this Note, by the acceptance hereof and as a part of
the consideration for this Note, expressly agree that the Notes are obligations
solely of the Company and expressly release all claims and waive all liability
against the foregoing persons in connection with this Note.
IN WITNESS WHEREOF, the Company has signed and sealed this Note this ___ day of
___, 1997.
WATERMARC FOOD MANAGEMENT CO.
By:
------------------------------------
Ghulam M. Bombaywala, Chairman of the
Board and Chief Executive Officer
4
<PAGE> 1
EXHIBIT 4.9
FORM OF WARRANT
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES ACT OF ANY STATE (COLLECTIVELY, THE "ACTS"). NEITHER
THIS WARRANT NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED,
PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT WITH RESPECT HERETO UNDER ALL THE APPLICABLE ACTS, OR AN OPINION OF
COUNSEL SATISFACTORY TO WATERMARC FOOD MANAGEMENT CO. TO THE EFFECT THAT SUCH
REGISTRATIONS ARE NOT REQUIRED. THIS WARRANT IS SUBJECT TO OTHER LIMITATIONS ON
TRANSFER.
WARRANT
to Purchase Common Stock of
WATERMARC FOOD MANAGEMENT CO.
Expiring on June 30, 2002
THIS IS TO CERTIFY THAT, for value received ______________, or
permitted assigns, is entitled to purchase, from the date hereof, from
WATERMARC FOOD MANAGEMENT CO., a Texas corporation (the "Company"), at the
place where the Warrant Office designated pursuant to Section 2.1 is located,
at a purchase price per share of $1.50 (the "Exercise Price"),
_________________ shares of duly authorized, validly issued, fully paid and
nonaccessable shares of Common Stock, $.05 par value, of the Company (the
"Common Stock"), and is entitled also to exercise the other appurtenant rights,
powers and privileges hereinafter set forth. The number of shares of the Common
Stock purchasable hereunder are subject to adjustment in accordance with
Article III hereof. This Warrant shall expire at 5:00 p.m., C.S.T. June 30,
2002.
Certain Terms used in this Warrant are defined in Article IV.
ARTICLE I
Exercise of Warrant
1.1 Method of Exercise. This Warrant may be exercised as a whole or in
part from the date hereof until June 30, 2002. To exercise this Warrant, the
holder hereof or permitted assignees of all rights of the registered owner
hereof shall deliver to the Company, at the Warrant Office designated in
Section 2.1, (a) a written notice in the form of the Subscription Notice
attached as an exhibit hereto, stating therein the election of such holder or
such permitted assignees of the holder to exercise this Warrant in the manner
provided in the Subscription Notice, (b) payment in full of the Exercise Price
(in the manner described below) for all Warrant Shares purchased hereunder, and
(c) this Warrant. This Warrant shall be deemed to be exercised on the date of
receipt by the Company of the Subscription Notice, accompanied by payment for
the Warrant Shares and surrender of this Warrant, as aforesaid, and such date
is referred to herein as the "Exercise Date". Upon such exercise (subject as
aforesaid), the Company shall issue and deliver to such holder a certificate
for the full number of the Warrant Shares.
1.2 Fractional Shares. Instead of any fractional shares of Common
Stock which would otherwise be issuable upon exercise of this Warrant no shares
will be issued for less than one-half a share and the Company shall issue a
certificate for the next higher number of whole shares of Common Stock for any
fraction of a share which is one-half or greater.
1
<PAGE> 2
ARTICLE II
Warrant Office: Transfer
2.1 Warrant Office The Company shall maintain an office for certain.
purposes specified herein (the "Warrant Office"), which office shall initially
be the Company's office at 11111 Wilcrest Green, Suite 350, Houston, Texas
77042 and may subsequently be such other office of the Company or of any
transfer agent of the Common Stock in the continental United States as to which
written notice has previously been given to the holder of this Warrant. The
Company shall maintain, at the Warrant Office, a register for the Warrant, in
which the Company shall record the name and address of the person in whose mine
this Warrant has been issued, as well as the name and address of each permitted
assignee of the rights of the registered owner hereof.
2.2 Ownership of Warrant. The Company may deem and treat the person in
whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary, until presentation of this Warrant for registration of transfer
as provided in this Article II.
2.3 Restrictions on Exercise and Transfer of Warrants. The Company
agrees to maintain at the Warrant Office books for the registration and
transfer of this Warrant. Subject to the restrictions on transfer of Warrants
in this Section 2.3, the Company, from time to time, shall register the
transfer of this Warrant in such books upon surrender of this Warrant at the
Warrant Office properly endorsed or accompanied by appropriate instruments of
transfer and written instructions for transfer satisfactory to the Company.
Upon any such transfer, a new Warrant shall be issued to the transferee and the
surrendered Warrant shall be canceled by the Company. The Company shall pay all
taxes (other than securities transfer taxes) and all other expenses and charges
payable in connection with the transfer of Warrants pursuant to this Section
2.3.
(a) Restrictions in General. Notwithstanding any provisions
contained in this Warrant to the contrary, this Warrant shall not be
exercisable or transferable and the related shares of Common Stock issuable
upon exercise of this Warrant (the "Warrant Shares") shall not be transferable
except upon the conditions specified in this Section 2.3, which conditions are
intended, among other things, to insure compliance with the provisions of the
Securities Act in respect of the exercise or transfer of this Warrant or
transfer of such Warrant Shares. The registered holder of this Warrant agrees
that it will neither (i) transfer this Warrant prior to delivery to the Company
of the opinion of counsel referred to in, and to the effect described in,
clause (1) of Section 2.3(b), or until registration hereof under the Securities
Act and any applicable state securities or blue sky laws, (ii) exercise this
Warrant prior to delivery to the Company of the opinion of counsel referred to
in, and to the effect described in, clause (1) of Section 2.3(b), or until
registration of the related Warrant Shares under the Securities Act and any
applicable state securities or blue sky laws have become effective, nor (iii)
transfer such Warrant Shares prior to delivery to the Company of the opinion of
counsel referred to in, and to the effect described in clause (1) of Section
2.3(b), or until registration of such Warrant Shares under the Securities Act
and any applicable state securities or blue sky laws have become effective.
(b) Statement of Intention to Exercise; Opinion of Counsel. The
registered holder of this Warrant, by its acceptance hereof, agrees that prior
to any exercise or transfer of this Warrant or any transfer of the related
Warrant Shares, said holder will deliver to the Company a statement setting
forth either said holder's intention with respect to the retention or
disposition of any Warrant Shares, or the intention of said holder's
prospective transferee with respect to its retention or disposition of this
Warrant or of said Warrant Shares (whichever is involved in such transfer), in
either such case, together with a signed copy of the opinion of said holder's
counsel, or such other counsel as shall be acceptable to the Company, as to the
necessity or non-necessity for registration under the Securities Act and any
applicable state securities or blue sky laws in connection with such exercise
or such transfer. The following provisions shall then apply:
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(1) If, in the opinion of said holder's counsel, concurred in by
counsel to the Company, the proposed exercise or transfer of this Warrant
or the proposed transfer of such Warrant Shares may be effected without
registration under the Securities Act and any applicable state securities
or blue sky laws of this Warrant or such Warrant Shares, as the case may
be, then the registered holder of this Warrant shall be entitled to
exercise or transfer this Warrant or to transfer such Warrant Shares in
accordance with the statement of intention delivered by said holder to the
Company.
(2) If, in the opinion of said counsel, concurred in by counsel
to the Company, either the proposed exercise or transfer of this Warrant or
the proposed transfer of such Warrant Shares may not be effected without
registration under the Securities Act and any applicable state securities
or blue sky laws of this Warrant or such Warrant Shares, as the case may
be, the registered holder of this Warrant shall not be entitled to
exercise or transfer this Warrant or to transfer such Warrant Shares, as
the case may be, until such registration is effected.
2.4 Registration Rights. The registered holder of this Warrant shall
be entitled to all of the rights and benefits of a purchaser under the Purchase
Agreement dated __________, 1997 (the "Purchase Agreement"), among the Company
and the purchasers of the Company's 11% Subordinated Notes due June 30, 2002
(the "Notes") and the Warrants (as defined in the Purchase Agreement). The
Warrant Shares shall be considered Restricted Stock under the Purchase
Agreement. The terms of the Purchase Agreement are hereby incorporated herein
for all purposes and shall be considered a part of this Agreement as if they
had been fully set forth herein. The holder acknowledges that the Warrant is
being issued in connection with the purchase by the holder of the Notes
referred to in the Purchase Agreement entered into pursuant to, and which
constitutes part of, the Company's offering of Notes and Warrants pursuant to
the Company's Confidential Private Placement Memorandum dated June 1, 1997 (the
"Memorandum"). The terms, conditions, restrictions, risk factors and other
information contained in the Memorandum are incorporated by reference into and
constitute a part of the Purchase Agreement, the Notes and this Warrant.
2.5 Acknowledgement of Rights. The Company will, at the time of the
exercise of this Warrant in accordance with the terms hereof, upon the request
of the registered holder hereof, acknowledge in writing its continuing
obligation to afford to such holder any rights (including without limitation,
any right to registration of the Warrant Shares) to which such holder shall
continue to be entitled after such exercise in accordance with the provisions
of this Warrant, provided that if the holder of this Warrant shall fail to make
any such request, such failure shall not affect the continuing obligation of
the Company to afford to such holder any such rights.
2.6 Expenses of Delivery of Warrants. The Company shall pay all
expenses, taxes (other than transfer taxes) and other charges payable in
connection with the preparation, issuance and delivery of Warrants and related
Warrant Shares hereunder.
2.7 Compliance with Securities Laws. The holder hereof understands and
agrees that the following restrictions and limitations shall be applicable to
all Warrant Shares and resales or other transfers of such Shares pursuant to the
Securities Act.
(a) The holder hereof agrees that the Warrant Shares shall not be
sold or otherwise transferred unless the Warrant Shares are registered
under the Securities Act and state securities laws or are exempt therefrom.
(b) A legend in substantially the following form has been or will
be placed on the certificate(s) evidencing the Warrant Shares:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933 or any state securities act. The shares
have been acquired for investment and may not be sold, transferred, pledged
or hypothecated unless (i) they shall have been registered under the
Securities Act of 1933 and any applicable state securities act, or (ii)
the corporation shall have been furnished with an
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opinion of counsel, satisfactory to counsel for the corporation, that
registration is not required under any of such acts."
(c) Stop transfer instructions have been or will be imposed with
respect to the Warrant Shares so as to restrict resale or other transfer
thereof, subject to this Section 2.7.
ARTICLE III
Warrant Adjustment Provisions
3.1 Adjustment of Warrant Shares. The Number of Warrant shares
purchasable upon exercise of this Warrant may be adjusted from time to time as
set forth below.
(a) If the Company at any time pays to the holders of its Common
Stock a dividend in Common Stock, the number of Warrant Shares
issuable upon the exercise of this Warrant shall be proportionally
increased, effective at the close of business on the record date for
determination of the holders of the Common Stock entitled to the
dividend.
(b) If the Company at any time subdivides or combines in a larger or
smaller number of shares its outstanding shares of Common Stock, then
the number of shares of Common Stock issuable upon the exercise of
this Warrant shall be proportionally increased in the case of a
subdivision and decreased in the case of combination, effective in
either case at the close of business on the date that the subdivision
or combination becomes effective.
(c) In case of any reclassification of the Common Stock, any
consolidation of the Company with, or merger of the Company into, any
other entity, any merger of any entity into the Company (other than a
merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock), any
sales or transfer of all or substantially all of the assets of the
Company, or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or other property, then
provisions shall be made such that the holders of this Warrant shall
have the right thereafter, during the period that this Warrant shall
be exercisable, to exercise this Warrant and receive the kind and
amount of securities, cash and other property receivable upon such
reclassification, consolidation, merger, sale, transfer or share
exchange by a holder of the number of shares of Common Stock issuable
upon exercise of this Warrant immediately prior to such
reclassification, consolidation, merger, sale, transfer or share
exchange. In addition to the adjustments provided for above to the
number of Warrant Shares purchasable hereunder upon exercise of the
Warrant in certain circumstances, the Company may, in its sole
discretion, provide for further adjustments to the number of Warrant
Shares purchasable hereunder and/or the Exercise Price thereof based
on additional or other facts and circumstances where the Company
determines that such an adjustment would be fair and equitable to the
holders of the Warrants.
3.2 Costs. The Company shall pay all documentary, stamp, transfer or
other transactional taxes attributable to the issuance or delivery of shares of
Common Stock of the Company upon exercise of this Warrant; provided, however
that the Company shall not be required to pay any taxes which may be payable in
respect of any transfer involved in the issuance or delivery of any certificate
for such shares in a name other than that of the holder of this Warrant in
respect of which such shares are being issued.
3.3 Reservations of Shares. Subject to an increase in the Company's
authorized or available shares of Common Stock for future issuance, the Company
shall reserve at all times so long as this Warrant remains outstanding, free
from preemptive rights, out of its treasury Common Stock or its authorized but
unissued shares
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of Common Stock, or both, solely for the purpose of effecting the exercise of
this Warrant, sufficient shares of Common Stock to provide for the exercise
hereof
3.4 Valid Issuance. All shares of Common Stock which may be issued
upon exercise of this Warrant will upon issuance by the Company be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof attributable to any act or
omission by the Company, and the Company shall take no action which will cause
a contrary result (including without limitation, any action which would cause
the Exercise Price to be less than the par value, if any, of the Common Stock).
ARTICLE IV
Terms Defined
As used in this Warrant, unless the context otherwise requires, the
following terms have the respective meanings set forth below or in the Section
indicated:
Board of Directors - the Board of Directors of the Company.
Common Stock - The Company's authorized Common Stock, par value $.05
per share.
Company - Watermarc Food Management Co., a Texas corporation, and any
other corporation assuming or required to assume the obligations undertaken in
connection with this Warrant
Person - any individual, corporation, partnership, trust,
organization, association or other entity or individual.
Securities Act - the Securities Act of 1933 and the rules and
regulations thereunder, all as the same shall be in effect at the time.
Warrant - this Warrant and any successor or replacement Warrant
delivered in accordance with Section 2.3 or 6.8.
Warrant Office - Section 2.1.
Warrant Shares - shall mean the shares of Common Stock purchased or
purchasable by the registered holder of this Warrant or the permitted assignees
of such holder upon exercise thereof pursuant to Article I hereof.
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ARTICLE V
Covenant of the Company
The Company covenants and agrees that this Warrant shall be binding
upon any corporation succeeding to the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets.
ARTICLE VI
Miscellaneous
6.1 Entire Agreement. This Warrant, the Purchase Agreement and the
Memorandum collectively contain and describe the entire agreement between the
holder hereof and the Company with respect to the shares which he can purchase
upon exercise hereof and the related transactions and supersedes all prior
arrangements or understanding with respect thereto.
6.2 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Texas.
6.3 Waiver and Amendment. Any term or provision of this Warrant may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of this Warrant may be amended or supplemented at any
time by agreement of the holder hereof and the Company, except that any waiver
of any term or condition, or any amendment or supplementation, of this Warrant
must be in writing. A waiver of any breach or failure to enforce any of the
term or conditions of this Warrant shall not in any way affect, limit or waive a
party's rights hereunder at any time to enforce strict compliance thereafter
with every term or condition of this Warrant.
6.4 Illegality. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom the
benefit of the provisions exists, be in any way impaired.
6.5 Copy of Warrant. A copy of this Warrant shall be filed among the
records of the Company.
6.6 Notice. Any notice or other document required or permitted to be
given or delivered to the holder hereof shall be delivered at, or sent by
certified or registered mail to such holder at, the last address shown on the
books of the Company maintained at the Warrant Office for the registration of
this Warrant or at any more recent address of which the holder hereof shall
have notified the Company in writing. Any notice or other document required or
permitted to be given or delivered to the Company, other than such notice or
documents required to be delivered to the Warrant Office, shall be delivered
at, or sent by certified or registered mail to, the office of the Company at
11111 Wilcrest Green Suite 350, Houston, Texas 77042 or such other address
within the continental United States of America as shall have been furnished by
the Company to the holders of this Warrant
6.7 Limitation of Liability. Not Stockholders. No provision of this
Warrant shall be construed as conferring upon the holder hereof the right to
vote, consent, receive dividends or receive notices (other than as herein
expressly provided) in respect of meetings of stockholders for the election of
directors of the Company or any other right whatsoever as a stockholder of the
Company. No provision hereof, in the absence of affirmative action by the holder
hereof to purchase shares of Common Stock and no enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price of any shares of Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company
or by creditors of the Company.
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6.8 Exchange, Loss, Destruction, etc. of Warrant. Upon receipt of
evidence satisfactory to the Company of the loss, theft, mutilation or
destruction of this Warrant, and in the case of any such loss, theft or
destruction upon delivery of a bond of indemnity in such form and amount as
shall be reasonably satisfactory to the Company, or in the event of such
mutilation upon surrender and cancellation of this Warrant, the Company will
make and deliver a new Warrant of like tenor, in lieu of such lost, stolen,
destroyed or mutilated Warrant. Any Warrant issued under the provisions of this
Section 6.8 in lieu of any Warrant alleged to be lost, destroyed or stolen, or
in lieu of any mutilated Warrant, shall constitute an original contractual
obligation on the part of the Company. This Warrant shall be promptly canceled
by the Company upon the surrender hereof in connection with any exchange or
replacement. The Company shall pay all taxes (other than securities transfer
taxes) and all other expenses and charges payable in connection with the
preparation execution and delivery of Warrants pursuant to this Section 6.8.
6.9 Headings. The Article and Section and other headings herein are for
convenience only and are not a part of this Warrant and shall not affect the
interpretation thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
in its name.
Dated: , 1997
-----------------
WATERMARC FOOD MANAGEMENT CO.
BY:
-----------------------------------
Ghulam M. Bombaywala
Chairman of the Board and
Chief Executive Officer
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SUBSCRIPTION NOTICE
The undersigned, the holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented by said Warrant for, and to purchase
thereunder ______________________ shares of the Common Stock covered by said
Warrant and (Choose one option)
[ ] (i) herewith makes payments in full therefore pursuant to
Section 1.1 of such Warrant, or
[ ] (ii) elects the Conversion Right as set forth in Section 1.3 of the
Warrant
and requests (a) that certificates for such shares (and any securities or other
property issuable upon such exercise) be issued in the name of, and delivered
to, _______________________ and (b) if such shares shall not include all of the
shares issuable as provided in said Warrant, that a new Warrant of like tenor
and date for the balance of the shares issuable thereunder be delivered to the
undersigned.
---------------------
Dated: , 19
---------------------- --
ASSIGNMENT
For value received, ______________________, hereby sells, assigns and
transfers unto _____________________________ the within Warrant, together with
all right, title and interest therein and does hereby irrevocably constitute
and appoint _______________________ attorney, to transfer said Warrant on the
books of the Company, with full power of substitution.
---------------------
Dated: , 19
---------------------- --
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EXHIBIT 10.1
MARCO'S MEXICAN RESTAURANTS, INC.
LICENSE AGREEMENT
THIS AGREEMENT is made and entered into this 29th day of June, 1997,
by and between MARCO'S MEXICAN RESTAURANTS, INC., a corporation incorporated
under the laws of the State of Texas, whose principal place of business is
11111 Wilcrest Green, Suite 350, Houston, Texas 77042 (hereinafter referred to
as the "Licensor") and Mohammed S. Akhtar and Rubina S. Akhtar, with an address
of 335 E. San Augustine, #94, Deer Park, Texas 77536 (hereinafter referred to
as the "Licensees").
WITNESSETH:
WHEREAS, the Licensor holds the exclusive rights to a proprietary
system, which has been developed through significant expenditures of time,
skill, effort and money (hereinafter the "System") relating to the
establishment, development and operation of a MARCO'S MEXICAN RESTAURANT
(hereinafter the "Licensed Business" and signifying both licensed and
company-managed outlets) which offers Mexican-style dishes and bar service in a
full service casual dining restaurant environment;
WHEREAS, the System features a distinctive exterior and interior
design, decor, color scheme, fixtures and furnishings for the Licensed Business
restaurant, as well as uniform standards, specifications, methods, policies and
procedures for the restaurant operations, inventory and management control,
training and assistance, and advertising and promotional programs, all of which
may be changed, improved upon, and further developed from time to time;
WHEREAS, the Licensor, through its dedicated operations, marketing
methods, and merchandising policies, has developed the reputation, public image
and good will of its System and established a firm foundation for its
restaurant operations consisting of the highest standards of training,
management, supervision, appearance, services and quality of products;
WHEREAS, the System is identified by means of certain trade names,
service marks, trade marks, logos, emblems and indicia of origin, including the
mark MARCO'S MEXICAN RESTAURANTS and logo, and such other trade names, service
marks, and trademarks as are now, and may hereafter be designated for use in
connection with the System (the "Proprietary Marks") which Proprietary Marks
are owned by the Licensor;
WHEREAS, the Licensor continues to develop, expand, use, control and
add to the Proprietary Marks and the System for the benefit of and exclusive
use by the Licensor in order to identify for the public the source of the
products and services marketed thereunder and to represent the System's high
standards of quality and service;
WHEREAS, the Licensees desire to operate a Licensed Business under the
System and the Proprietary Marks and to obtain a license from the Licensor for
that purpose;
WHEREAS, the Licensees hereby acknowledge that they have read this
Agreement and understand and accept the terms, conditions and covenants
contained in this Agreement as being reasonably necessary to maintain the
Licensor's high standards of quality and service and the
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uniformity of those standards at all facilities which operate pursuant to the
System and thereby to protect and preserve the goodwill of the Proprietary
Marks; and
WHEREAS, the Licensees understand and acknowledge the importance of
the Licensor's uniformly high standards of quality and service and the
necessity of operating the Licensed Business granted hereunder in strict
conformity with the Licensor's quality control standards and specifications.
NOW, THEREFORE, the parties, for and in consideration of the sum of
one dollar ($1.00) and the promises, undertakings and commitments of each party
to the other set forth herein, hereby mutually agree as follows:
I. GRANT OF LICENSE
A. GRANT. The Licensor hereby grants to the Licensees and Licensees
accept, upon the terms and conditions herein contained, the nonexclusive and
personal license, right and authority to operate a Licensed Business only at
the specific location located at 3402 Palmer Highway, Texas City, Galveston
County, Texas 77590 (the "Site") in strict conformity with the Licensor's
quality control standards and specifications which are a material part of the
System, which may be changed, improved and further developed from time to time.
The Licensees hereby accept such license and agree to perform all of its
obligations in connection therewith as set forth herein. The Licensees shall
pay to the Licensor the sum of Five Dollars ($5.00) for the term of this
License.
B. The Licensor reserves the right to:
1. Establish or grant licenses or franchises for restaurants providing
products or services under marks other than the Proprietary Marks;
2. Offer and sell food products, under the Proprietary Marks or any
other marks, through grocery stores, convenience stores or other retail
locations, or through mail order or catalogues;
3. Offer or sell food products under the Proprietary Marks at special
events;
4. Offer or sell any products or services, under the Proprietary Marks
or any other marks, through any other channel of distribution; and
5. Establish company-owned Licensed Businesses or license or franchise
other Licensees or franchisees to establish Marco's Mexican Restaurants at any
other site or location that the Licensor deems appropriate.
C. RESERVATION OF CERTAIN RIGHTS. Subject to Section I.B. hereinabove,
the Licensor reserves the right to establish Licensed or Franchised Businesses
at any site the Licensor deems appropriate. The Licensor also reserves the
right to sell related products and services in other channels of distribution.
The Licensor reserves the right to offer, grant and support licenses or
franchises in similar and other lines of business. The Licensor makes no
representation or warranty to the Licensees that there will be any right to
participate in such licenses or franchises.
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II. TERM AND RENEWAL
A. INITIAL TERM. Except as otherwise provided herein, the term of this
Agreement shall commence on June 29, 1997 and terminate on June 29, 1998,
provided, however, that if the Licensees lease their business premises and in
the event that the lease agreement for the Licensees' business premises is
terminated prior to the expiration of the term of this Agreement, then the
Licensor may, at its option, terminate this Agreement. Notwithstanding the
foregoing or anything in this Agreement to the contrary, this Agreement shall
terminate if the Licensees do not maintain ownership of the restaurant and/or
the assets located at the Site.
B. RENEWAL. Upon expiration, this License may be extended in the sole
discretion of the Licensor upon terms and conditions to be determined by the
Licensor, which shall include the payment of royalties by the Licensees to the
Licensor.
III. DUTY OF LICENSOR
To provide the Licensees with written specifications for the operation
of the Licensed Business (the "Manuals"). The Manuals are confidential and
remain the property of the Licensor. The Licensor may modify the Manuals from
time to time.
IV. DUTIES OF LICENSEES
A. COMPLIANCE WITH SYSTEM. The Licensees understand and acknowledge
that every detail of the appearance and operation of the Licensed Business in
compliance with the System is critical to the Licensor, the Licensees and other
Licensees in order to:
1. Develop and maintain high and uniform operating standards;
2. Increase the demand for the products and services sold by
Licensees, and
3. Protect the Proprietary Marks and the System, and the Licensor's
trade secrets, reputation and goodwill.
B. LEASEHOLD IMPROVEMENT REQUIREMENTS. Before commencing any
construction or improvements of the Licensed Business in compliance with the
System is critical to the Licensor, the Licensees, and other Licensees in order
to:
1. The Licensees shall have received the Licensor's prior written
approval of the
2. The proposed improvements must be in compliance with all applicable
local and state laws, regulations and ordinances including all zoning, signage
and parking requirements;
3. The Licensees shall be responsible for all reasonable expenses
pertaining to the Licensor's review and approval of the proposed improvements,
the Licensor's monitoring and review of the construction and the final
inspection of the improvements;
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4. The Licensees shall employ a qualified general contractor or such
other qualified person as the Licensor may approve in its absolute and sole
discretion for the purposes of supervising the construction and ensuring the
completion of all construction or leaseholder improvements. The Licensees shall
submit to the Licensor a statement identifying the general contractor and
describing the general contractor's qualifications and financial
responsibility; and
5. The Licensees shall obtain all liquor and business licenses,
permits and certifications required for lawful construction of improvements and
ongoing operation of the Licensed Business (including, without limitation,
zoning, access, variances, health and safety, and fire requirements) and shall
certify in writing to the Licensor that all such licenses, permits and
certifications have been obtained.
6. The Licensees shall completely construct any improvements at and
equip, at Licensees's expense, the Licensed Site in accordance with Licensor's
standards and specifications. Licensor and its agents shall have the right to
inspect the construction at all reasonable times. Licensees shall promptly
notify Licensor of the date of completion of construction and thereafter the
Licensor may conduct a final inspection of the restaurant and its premises.
C. SUPERVISION REQUIREMENTS. The Licensed Business shall at all times
be under the direct on-premises supervision of the Licensees or an operating
manager ("Operating Manager") designated by Licensees and approved by Licensor.
D. TRAINING. The Licensees shall cause their employees, which shall
include the Licensees, their Operating Manager and any person subsequently
acting as the manager of the Licensed Business to attend and complete, to the
Licensor's satisfaction, such special programs or periodic training as the
Licensor may require in writing from time to time. The Licensees shall pay all
reasonable expenses incurred by the Licensor and/or its employees in connection
with such programs and training and shall be responsible for all expenses of
their employees associated therewith, including meals, lodging, travel and
wages.
E. OPERATION OF THE LICENSED BUSINESS. The Licensees shall use the
Licensed Business solely for the operation of the Licensed Business that is
licensed hereunder in strict accordance with the Licensor's specifications;
shall keep the Licensed Business open and in normal operation for such minimum
hours and days as the Licensor may from time to time prescribe; and shall
refrain at all times from using or permitting the use of the premises of the
Licensed Business for any other purpose or activity other than as contemplated
by this Agreement without first obtaining the written consent of the Licensor.
F. MAINTENANCE. The Licensees shall continuously maintain the Licensed
Business in the highest degree of sanitation, repair and condition as the
Licensor may reasonably require, and in connection therewith shall make such
additions, alterations, repairs and replacements thereto (but not without the
Licensor's prior written consent) as may be required for that purpose,
including without limitation, such periodic redecorating, replacement of
inventory and replacement of obsolete signs, fixtures or materials as the
Licensor may reasonably direct, or as otherwise required under the lease for
the Licensed Business.
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G. HEALTH AND SAFETY STANDARDS. The Licensees shall meet and maintain
the highest safety standards and ratings applicable to the operation and
management of the Licensed Business and its personnel as the Licensor may
reasonably require.
H. WORKING CAPITAL. The Licensees shall meet and maintain sufficient
levels of working capital for use in connection with the management and
operation of the Licensed Business as the Licensor may reasonably require.
I. REFURBISHMENT. At the Licensor's request, the Licensees shall
refurbish the Licensed Business, at their expense, to conform to the then
current Licensed Business design and decor, trade dress, color scheme and
presentation of trademarks and service marks consistent with the design
concepts then in effect for new Licensed Businesses licensed to operate under
the System, including, without limitation, such structural changes, remodeling,
redecoration and other modifications to existing improvements as deemed
necessary by the Licensor.
J. COMPLIANCE WITH UNIFORM STANDARDS. The Licensees shall operate the
Licensed Business in conformity with such uniform methods, standards and
specifications as the Licensor may from time to time prescribe to ensure that
the highest degree of product quality and service is uniformly maintained. The
Licensees shall conduct their business in a manner which reflects favorably at
all times on the System and the Proprietary Marks. The Licensees shall at no
time engage in deceptive, misleading or unethical practices or conduct any
other act which may have a negative impact on the reputation and goodwill of
the Licensor or any other Licensees or franchisees operating under the System.
Pursuant to this ongoing responsibility, the Licensees agree;
1. To maintain in sufficient supply as the Licensor may require and
use at all times only such products and supplies as conform to the Licensor's
standards and specifications, and to refrain from deviating therefrom without
the Licensor's prior written consent;
2. To sell or offer for sale only such products and services as meet
the Licensor's uniform standards of quality and quantity which have been
expressly approved for sale in writing by the Licensor in accordance with the
Licensor's methods and techniques; to sell or offer for sale all approved
items; to refrain from any deviation from the Licensor's standards and
specifications for serving or selling such products or services; and to
discontinue selling and offering for sale any such products or services as the
Licensor may, in its sole discretion, disapprove in writing at any time;
3. To lease or purchase and install at the Licensees' expense all
fixtures, furnishings, signs and equipment as the Licensor may reasonably
specify from time to time, and to refrain from installing or permitting to be
installed on or about the Licensed Business without the Licensor's prior
written consent any fixtures, furnishings, signs, cards, promotional
literature, equipment or other items not previously specifically approved as
meeting the Licensor's standards and conforming to the Licensor's
specifications;
4. To purchase and maintain any and all signs for use at the Licensed
Business, whether for interior or exterior use, in conformity with the
Licensor's quality control standards and specifications;
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5. To employ such minimum number of employees as may be prescribed by
the Licensor and to comply with all applicable federal, state and local laws,
rules and regulations with respect to such employees;
6. To maintain a competent, conscientious staff; and
7. To maintain all licenses and permits in good standing.
K. PURCHASE AND LEASE OF PRODUCTS, EQUIPMENT AND SUPPLIES. Licensees
shall lease or purchase all products, initial inventory, equipment, supplies
and other materials required for the operation of the Licensed Business solely
from approved suppliers who shall have proved, to the continuing reasonable
satisfaction of the Licensor, the ability to meet the Licensor's then current
standards and specifications for such products and related items. Such approved
suppliers must meet all of the Licensor's specifications and standards as to
content, quality, appearance, warranty, performance and serviceability and must
adequately demonstrate their capacity and facilities to supply the Licensees's
needs for an effective and efficient operation of the Licensed Business as well
as all Licensed Businesses operating under the Licensor's System.
L. INSPECTION OF PREMISES. The Licensees shall permit the Licensor or
its agents or representatives to enter upon the premises of the Licensed
Business at any time for purposes of conducting inspections, taking photographs
and interviewing employees and customers. The Licensees shall cooperate fully
with the Licensor's agents or representatives in such inspections by rendering
such assistance as they may reasonably request. Upon notice from the Licensor
or its agents or representatives, and without limiting the Licensor's other
rights under this Agreement, the Licensees shall take such steps as may be
necessary to immediately and diligently correct any deficiencies detected
during such inspections, including, without limitation, immediately ceasing and
preventing the further use of any products, equipment, inventory, advertising
materials, supplies or other items that do not conform to the Licensor's then
current specifications, standards or requirements. In the event the Licensees
fails or refuses to correct such deficiencies, the Licensor shall have the
right to enter upon the premises of the Licensed Business, without being guilty
of trespass or any other tort, for the purpose of making or causing to be made
such corrections as may be required, at the sole expense of the Licensees.
M. PROPRIETARY METHODS. The Licensees acknowledge and agree that the
Licensor has developed certain products, services, operational systems and
management techniques and may continue to develop additional products and
proprietary methods and techniques for use in the operation of the Licensed
Business which are all highly confidential and which are trade secrets of the
Licensor. Because of the importance of quality control, uniformity of product
and the significance of such proprietary products in the System, it is to the
mutual benefit of the parties that the Licensor closely control the
dissemination of this proprietary information. Accordingly, the Licensees
agrees that in the event such information and techniques become a part of the
System, the Licensees shall comply and strictly follow these techniques in the
operation of its business and shall purchase from an approved source designated
by the Licensor any supplies or materials necessary to protect and implement
such techniques.
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N. DEVELOPMENT OF THE MARKET. The Licensees shall at all times use its
best efforts to promote and increase the sales and consumer recognition of the
products and services offered at the Licensed Business pursuant to the System,
to effect the widest and best possible distribution of the Licensor's products
and services from the Licensed Business and to devote its best efforts in
controlling the Licensed Business, its managers, assistants and employees
O. DISPLAY OF PROPRIETARY MARKS AND LOGOS. The Licensees shall display
the Licensor's Proprietary Marks and logos at the Licensed Business, on
uniforms and otherwise in the manner prescribed by the Licensor. The color,
design and location of said displays shall be specified by the Licensor and may
be changed from time to time in the sole discretion of the Licensor. The
Licensees shall not display any signs or posters at the premises or elsewhere
without the prior written consent of the Licensor,
P. OTHER REQUIREMENTS. The Licensees shall comply with all other
requirements set forth in this Agreement or as the Licensor may designate from
time to time.
V. PROPRIETARY MARKS
A. GRANT OF LICENSE. The Licensor hereby grants the Licensees the
right and license to use the Proprietary Marks only in connection with the
operation of its Licensed Business and the provision of services and products
to its customers. The Licensor represents with respect to the Proprietary Marks
that: (1) the Licensor has, to the best of the Licensor's knowledge, all right,
title and interest in and to the Proprietary Marks in the United States; (2)
the Licensor has taken all steps which it deems reasonably necessary to
preserve and protect the ownership and validity of such Proprietary Marks in
the United States; and (3) the Licensor will use and license the Licensees and
other Licensees to use the Proprietary Marks only in accordance with the System
and the operating standards and quality control specifications attendant
thereto which underlie the goodwill associated with and symbolized by the
Proprietary Marks.
B. CONDITIONS FOR USE. With respect to the Licensees' use of the
Proprietary Marks pursuant to the license granted under this Agreement, the
Licensees agree that:
1. The Licensees shall use only the Proprietary Marks designated by
the Licensor and shall use them only in the manner required or authorized and
permitted by the Licensor.
2. The Licensees shall use the Proprietary Marks only in connection
with the right and license to operate the Licensed Business granted hereunder.
3. During the term of this Agreement and any renewal hereof, the
Licensees shall identify themselves as licensees and not the owner of the
Proprietary Marks and shall make any necessary filings under state law to
reflect such status, In addition, the Licensees shall identify themselves as
licensees of the Proprietary Marks on all invoices, order forms, receipts,
business stationary and contracts, as well as at the Licensed Business on any
sign required by the Licensor which shall be conspicuously displayed to
customers.
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4. The Licensees' right to use the Proprietary Marks is limited to
such uses as are authorized under this Agreement, and any unauthorized use
thereof shall constitute an infringement of the Licensor's rights and grounds
for termination of this Agreement.
5. The Licensees shall not use the Proprietary Marks to incur or
secure any obligation or indebtedness.
6. The Licensees shall not use the Proprietary Marks as part of
business or other legal name.
7. The Licensees shall comply with the Licensor's instructions in
filing and maintaining the requisite trade name or fictitious name
registrations, and shall execute any documents deemed necessary by the Licensor
or its counsel to obtain protection for the Proprietary Marks or to maintain
their continued validity and enforceability.
8. In the event that the Licensees becomes aware of any infringement
of the Proprietary Marks or if the Licensees' use of the Proprietary Marks is
challenged by a third party, then the Licensees are obligated to immediately
notify the Licensor, and the Licensor will have the sole discretion to take
such action as it deems appropriate. If the Licensor determines that no action
to protect the Proprietary Marks is necessary, than the Licensees may take any
action they deem necessary to protect their own interest, at their own expense.
If it becomes advisable at any time in the sole discretion of the Licensor to
modify or discontinue the use of any name or mark and/or use one or more
additional or substitute names or marks, the Licensees shall modify or
discontinue the use of any such name or mark, and use such additional or
substitute name or mark, and shall be responsible for the tangible costs (such
as replacing signs and materials) of complying with this obligation. In the
event that litigation alleging that the Proprietary Marks infringe a third
party's rights is instituted or threatened against the Licensees, the Licensees
shall promptly notify the Licensor and shall cooperate fully in defending or
settling such litigation.
C. ACKNOWLEDGEMENTS. The Licensees expressly understand and
acknowledge that:
1. The Licensor is the exclusive owner of all right, title and
interest in and to the Proprietary Marks and the goodwill associated with and
symbolized by them;
2. The Proprietary Marks are valid and serve to identify the System
and those who are licensed to operate a Licensed Business in accordance with
the System;
3. The Licensees' use of the Proprietary marks pursuant to this
Agreement does not give the Licensees any ownership interest or other interest
in or to the Proprietary Marks, except the nonexclusive license granted herein;
4. Any and all goodwill arising from the Licensees' use of the
Proprietary Marks and/or the System shall inure solely and exclusively to the
Licensor's benefit, and upon expiration or termination of this Agreement no
monetary amount shall be assigned as attributable to any goodwill associated
with the Licensees' use of the System or the Proprietary Marks;
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5. The license and rights to use the Proprietary Marks granted
hereunder to the Licensees are nonexclusive, and the Licensor thus may: (a)
itself use, and grant franchises and licenses to others to use, the Proprietary
Marks and the System, (b) establish, develop, license and franchise other
systems, different from the System licensed to the Licensees herein, without
offering or providing the Licensees any rights in, to or under such other
systems; and (c) modify or change, in whole or in part, any aspect of the
Proprietary Marks or the System, so long as the Licensees' rights thereto are
in no way materially harmed thereby;
6. The Licensor reserves the right to substitute different trade
names, trademarks and service marks for use in identifying the System, the
Licensed Business and other Licensed or Franchised Businesses operating
thereunder, all of which shall become Proprietary Marks;
7. The Licensor shall have no liability to the Licensees for any
senior users that may claim rights to the Proprietary Marks; and
8. The Licensees shall not register or attempt to register the
Proprietary Marks in the Licensees' name or that of any other person, firm,
entity or corporation.
VI. CONFIDENTIAL MANUALS
A. COMPLIANCE. In order to protect the reputation and goodwill of the
Licensor and to maintain uniform standards of operation in connection with the
Proprietary Marks, the Licensees shall conduct its business in strict
compliance with the operational systems, procedures, policies, methods and
requirements prescribed in the Licensor's Manuals and any supplemental
bulletins, notices, revisions, modifications or amendments thereto, all of
which shall be deemed a part thereof.
B. USE. The Licensees agree to immediately adopt and use the programs,
services, methods, standards, materials, policies and procedures set forth in
the Manuals, as they may be modified by the Licensor from time to time. The
Licensees acknowledge that the Licensor is the owner or licensee of all
proprietary rights in and to the System, and the Manuals, and any changes or
supplements thereto
C. CONFIDENTIALITY. The Licensees shall at all times treat the
Manuals, any other manuals created for or approved for use in the operation of
the Licensed Business and all of the information contained therein as
proprietary and confidential, and shall use all reasonable efforts to maintain
such information as confidential. The Manuals must remain on the premises of
the Licensed Business at all times.
D. TRADE SECRETS. The Licensees acknowledge, know and agree that
designated portions of the Manuals are "trade secrets" owned and treated as
such by the Licensor.
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E. ACCESS. The trade secrets must be accorded maximum security
consistent with the Licensees' need to make frequent reference thereto. The
Licensees shall strictly limit access to the Manuals to employees who have a
demonstrable and valid need to know the information contained therein in order
to perform their duties. The Licensees shall strictly follow any provisions in
the Manuals regarding the care, storage and use of the Manuals and all related
proprietary information.
F. DUPLICATION. The Licensees shall not at any time, without the
Licensor's prior written consent, copy, duplicate, record or otherwise
reproduce in any manner any part of the Manuals, updates, supplements or
related materials, in whole or in part, or otherwise make the same available to
any unauthorized person.
G. LICENSOR'S PROPERTY. The Manuals shall at all times remain the sole
property of the Licensor. Upon the expiration or termination of this Agreement
for any reason, the Licensees shall return to the Licensor the Manuals and all
supplements thereto.
H. UPDATES OR REVISIONS. The Licensor retains the right to prescribe
additions to, deletions from or revisions to the Manuals, which shall become
binding upon the Licensees upon being mailed or otherwise delivered to the
Licensees, as if originally set forth therein. The Manuals, and any such
additions, deletions or revisions thereto, shall not alter the Licensees'
rights and obligations hereunder.
I. MASTER SET. The Licensees shall at all times insure that their set
of the Manuals is kept current and up-to-date, and in the event of any dispute
as to the contents of the Manuals, the terms contained in the master set of the
Manuals maintained by the Licensor at the Licensor's headquarters shall be
controlling.
J. REPLACEMENT FEE. If The Manuals are lost, stolen or destroyed, the
Licensees shall pay the costs to replace each volume of the Manuals.
VII. CONFIDENTIAL INFORMATION
A. CONFIDENTIAL RELATIONSHIP. The parties expressly understand and
agree that the relationship established between the Licensor and the Licensees
by this Agreement is one of confidence and trust, and that as a result, the
Licensor will be disclosing and transmitting to the Licensees certain trade
secrets and other confidential and proprietary information concerning various
aspects of the Licensees' operation of the Licensed Business, its methods of
operation, techniques and all proprietary systems, procedures and materials
relevant thereto pursuant to the System and this Agreement.
B. OBLIGATIONS OF LICENSEES. In order to preserve and protect the
trade secrets and the confidential and proprietary information (the
"Confidential Information") which are disclosed to the Licensees during the
term of this Agreement, the Licensees agree that:
1. The Licensees shall treat and maintain the Confidential Information
as confidential both during the term of this Agreement and thereafter;
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2. The Licensees shall use the Confidential Information only for its
operation of the Licensed Business under this Agreement;
3. The Licensees shall disclose the Confidential Information only as
necessary to their employees or agents who have a demonstrable and valid need
to know the Confidential Information and not to anyone else;
4. The Licensees shall restrict disclosure of the Confidential
Information to only those of their employees or agents who are directly
connected with the performance of work requiring knowledge thereof and shall
disclose only so much of the Confidential Information as is required to
enable those employees or agents to carry out their assigned duties;
5. The Licensees shall advise their employees or agents of the
confidential nature of such information and the requirements of nondisclosure
thereof; and
6. The Licensor and the Licensees shall conduct a review to determine
which employees will have access to the Confidential Information and to the
Manuals. The Licensees shall not disclose any Confidential Information or
provide access to the Manuals to such employee or agent until that person
executes a nondisclosure agreement in a form prescribed by the Licensor,
acknowledging the confidential and proprietary nature of the Confidential
Information and agreeing not to disclose such information during the course of
employment or thereafter. The Licensor shall be designated a third-party
beneficiary of such nondisclosure agreements with the right to enforce its
provisions independently of the Licensees.
C. CONFIDENTIAL INFORMATION DEFINED. Any and all information,
knowledge, know-how, systems, programs and other methods and techniques which
the Licensor designates as confidential shall be deemed Confidential
Information for purposes of this Agreement, except information which the
Licensees can demonstrate had become a part of the public domain through
publication or communication by others or which, after disclosure to the
Licensees by the Licensor, becomes a part of the public domain through
publication or communication by others. It is understood and agreed that
information, improvements to the System or techniques prepared, compiled or
developed by the Licensees, its employees or agents during the term of this
Agreement and relating to the Licensed Business, whether developed separately
or in conjunction with the Licensor, shall be considered as part of the
Confidential Information. The Licensees hereby grant to the Licensor an
irrevocable, worldwide, exclusive, royalty-free license, with the right to
sub-license such information, improvement or technique.
D. PROTECTION OF INFORMATION. The Licensees acknowledge that they have
knowledge of confidential matters, trade secrets, management and training
techniques, operational, accounting, quality control procedures, programs and
other methods developed by the Licensor through and in its System which, for
purposes of this Agreement are owned by the Licensor and which are necessary
and essential to the operation of the Licensed Business, without which
information the Licensees could not efficiently, effectively and profitably
operate the same. The Licensees further acknowledges that the unique and novel
combination of "know how" and methods developed by the Licensor and licensed to
the Licensees by the Licensor for the operation of the Licensed Business are
peculiar to the Licensor. The Licensees shall take all steps necessary, at
their own expense, to protect the Confidential Information and shall not
divulge the same either during or upon the termination of this Agreement
without the prior written consent of the Licensor.
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E. REMEDIES. The Licensees acknowledge that in addition to any
remedies available to the Licensor under Section XII hereunder, the Licensees
agree to pay all court costs and reasonable attorneys' fees incurred by the
Licensor in obtaining specific performance of, a temporary restraining order
and/or an injunction against violation of the requirements of this Section VII.
F. COMMUNICATION WITH CUSTOMERS. In order to maintain the high
standards of quality control throughout the System, the Licensor reserves the
right to use test customers from time to time, without prior notification to
the Licensees, in order to determine whether the Licensed Business is
maintaining high standards of quality, integrity, safety, appearance and
customer service.
VIII. ACCOUNTING, INSPECTIONS AND RECORDS
A. MAINTENANCE OF BOOKS AND RECORDS. The Licensees shall maintain
during the term of this Agreement and shall preserve for not less than seven
(7) years from the date of preparation full, complete and accurate books,
records and accounts in accordance with the System and in the form and manner
prescribed by the Licensor in the Manuals or otherwise in writing from time to
time.
B. FINANCIAL AND RELATED REPORTING. During the term of this Agreement,
the Licensees shall, at the Licensees' expense, submit to the Licensor an
annual financial statement which shall include an income statement and balance
sheet prepared in accordance with generally accepted accounting principles and
copies of federal and state tax returns for the Licensees within ninety (90)
days of the completion of the fiscal year of the Licensees. Each annual
financial statement and tax return shall be compiled by an independent
certified public accounting firm and signed by the Licensees attesting that the
statement is true and correct. The Licensor also reserves the right to require
the Licensees to submit to the Licensor certified financial statements for any
period or periods of any fiscal year, which shall be certified by the
Licensees' accounting firm and attested to by the Licensees. In addition,
Licensees shall submit exact copies of the Licensees' invoices for goods
purchased from suppliers and copies of the Licensees' operating reports to its
landlord, immediately following the Licensor's request for such information.
C. OTHER SUBMISSIONS. The Licensees shall also submit to the Licensor,
for review and auditing, such other forms and reports, including annual
accounting of local advertising expenditures and any and all other information
and data, as the Licensor may reasonably designate, in the form and at the
times and places reasonably required by the Licensor, upon request and as
specified from time to time in the Manuals or otherwise in writing, at any time
during the term of this Agreement.
D. INSPECTION. The Licensor or its designated agents shall have the
right at all reasonable times to examine and copy, at its expense, the books,
records, receipts and tax returns of the Licensees.
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IX. ADVERTISING
Recognizing the value of advertising, and the importance of the
standardization of advertising programs to the furtherance and protection of
the Proprietary marks, goodwill and public image of the System, the parties
agree as follows:
SUBMISSION AND APPROVAL OF PROMOTIONAL AND MARKETING MATERIALS. All
promotional and marketing materials to be used by the Licensees in any medium
shall be presented in a dignified manner and shall conform to such standards
and requirements as the Licensor may specify from time to time in the Manuals
or otherwise. The Licensees shall submit to the Licensor for its prior written
approval, samples of all promotional and marketing material in whatever form
that the Licensees desire to use at least ten (10) days before their intended
use. The Licensor shall approve, disapprove, or revise such materials. The
Licensees shall comply with all revisions to said promotional and marketing
materials which the Licensor may require prior to approving said promotional
and marketing materials. The Licensees shall not use any advertising or
promotional plans or materials which have not been approved in writing by the
Licensor, and the Licensees shall cease to use any plans or materials promptly
upon notice by the Licensor. Failure by the Licensees to obtain the prior
written approval of the Licensor for all proposed advertising shall be deemed a
default of this agreement in accordance with Section XII.A hereof.
X. INSURANCE
A. PROCUREMENT. The Licensees shall maintain in full force and effect
during the terms of this agreement, at the Licensees' expense, an insurance
policy or policies protecting the Licensees and the Licensor, and their
officers, directors, partners and employees, against any loss, liability,
personal injury, death, property damage or expense whatsoever from fire,
lightning, theft, vandalism, malicious mischief and the perils included in the
extended coverage endorsement, arising or occurring upon or in connection with
the Licensed Business or the leasehold improvements to the Licensed Business,
or by reason of the operation or occupancy of the Licensed Business, as well as
such other insurance applicable to such other special risks, if any, as the
Licensor may reasonably require for its own and the Licensees' protection.
B. MINIMUM COVERAGE. Such policy or policies shall be written by an
insurance company satisfactory to the Licensor in accordance with the standards
and specifications set forth in the Manuals or otherwise in writing, and shall
include, at a minimum (except as additional coverage and higher policy limits
may reasonably be specified from time to time by the Licensor in the Manuals or
otherwise in writing) the following:
1. Comprehensive general liability insurance, including contractual
liability, broad form property damage, personal injury, advertising injury,
product liability, completed operations and independent contractors coverage,
and fire damage coverage in the amount of at least One Million Dollars
($1,000,000), or such higher amount as required by the lease, combined single
limit, and naming the Licensor and any landlord as an additional insured in
each such policy or policies;
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2. Worker's compensation and employer's liability insurance as well as
such other insurance as may be required by statute or rule of the state in
which the Licensed Business is located and operated;
3. Fire, vandalism and extended coverage insurance with primary and
excess limits of not less than the full replacement value of the Licensed
Business and its furniture, fixtures and equipment; and
C. CONSTRUCTION COVERAGE. In connection with any leasehold
improvements, renovation, refurbishment or remodeling of the premises of the
Licensed Business, the Licensees shall cause the general contractor to maintain
with a reputable insurer comprehensive general liability insurance (with
comprehensive automobile liability coverage for both owned and non-owned
vehicles, builder's risk, product liability and independent contractors
coverage) in at least the amount of One Million Dollars ($1,000,000) with the
Licensor named as an additional insured, and worker's compensation and
employees liability insurance as required by state law. Copies of the
Certificates of Insurance for such coverage shall be provided to the Licensor.
D. CERTIFICATES. The Licensees shall submit to the Licensor, original
or duplicate copies of all policies and policy amendments. The evidence of
insurance shall include a statement by the insurer that the policy or policies
will not be canceled or materially altered without at least thirty (30) days
prior written notice to the Licensor.
E. INDEPENDENCE OF COVERAGE REQUIREMENTS. The Licensees' obligation to
obtain and maintain the foregoing policy or policies in the amounts specified
shall not be limited in any way by reason of any insurance which may be
maintained by the Licensor, and the Licensees' performance of that obligation
shall not relieve them of liability under the indemnity provision set forth in
Section XVII of this Agreement.
F. FAILURE TO PROCURE. Should the Licensees for any reason fail to
procure or maintain the insurance required by this Agreement, as revised from
time to time for all Licensees by the Manuals or otherwise in writing, the
Licensor shall have the right and authority (without, however, any obligation)
to immediately procure such insurance and to charge the same to the Licensees,
which charges, together with a reasonable fee for the Licensor's expenses in so
acting, including all attorneys' fees, shall be payable by the Licensees
immediately upon notice.
G. THIRD PARTIES. The Licensees shall ensure that all third parties
with which the Licensees conduct business, are properly insured.
XI. TRANSFER OF INTEREST: OPERATION BY LICENSOR
A. TRANSFER BY LICENSOR. The Licensor shall have the right to assign
this Agreement, and all of its rights and privileges hereunder, to any person,
firm, corporation or other entity provided that, with respect to any assignment
resulting in the subsequent performance by the assignee of the functions of
the Licensor, (i) the assignee shall, at the time of such assignment, be
capable of performing the obligations of the Licensor hereunder, and (ii) the
assignee shall expressly assume and agree to perform such obligations.
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Specifically, and without limitation to the foregoing, the Licensees
expressly affirm and agree that the Licensor may sell its assets, its rights to
the Proprietary Marks and the System outright to a third party; may engage in a
private placement of some or all of its securities; may merge, acquire other
corporations, or be acquired by another corporation; may undertake a
refinancing, recapitalization, leveraged buy-out or other economic or financial
restructuring; and, with regard to any or all of the above sales, assignments
and dispositions, the Licensees expressly and specifically waive any claims,
demands or damages arising from or related to the loss of said Proprietary
Marks (or any variation thereof) and/or the loss of association with or
identification of "Marco's Mexican Restaurants" as the Licensor hereunder.
Nothing contained in this Agreement shall require the Licensor to
remain in the restaurant business or to offer the same products and services,
whether or not bearing the Licensor's Proprietary Marks, in the event that the
Licensor exercises its rights hereunder to assign its rights in this Agreement.
B. TRANSFER BY LICENSEES.
The License granted hereunder is personal to Licensees and is
nontransferable and nonassignable. Notwithstanding the foregoing, Licensees
shall have the right to transfer this Agreement to an affiliated corporation or
entity in which Licensees have a controlling voting and ownership interest with
the written consent of the Licensor. Such corporation or entity must enter into
an agreement acknowledging the terms, conditions and restrictions contained in
this Agreement, including the limitations on transfer of the License. Any
corporation or entity not 100% beneficially owned by Licensees shall be subject
to standard licensing fees and royalties which the Licensor receives or may
receive in the future from licensees using the System. Licensees, except as
specifically provided above for affiliated entities, shall have no right to
license, sublicense, franchise or otherwise grant any person or entity any
rights with respect to the use of the System. Neither Licensees nor any
permitted transferee shall encumber or grant any lien with respect to his or
their rights arising under, or interest in, this Agreement and the License. Any
purported assignment or transfer, by operation of law or otherwise, not having
the written consent of the Licensor shall be null and void and shall constitute
a material breach of this Agreement, for which the Licensor may then terminate
this Agreement without opportunity to cure pursuant to Section XII.A. of this
Agreement.
C. NON-WAIVER OF CLAIMS. The Licensor's consent to a transfer of any
interest in the Licensed Business shall not constitute a waiver of any claims
it may have against the transferring party, and it will not be deemed a waiver
of the Licensor's right to demand exact compliance with any of the terms of
this Agreement, or any other agreement to which the Licensor and the transferee
are parties, by the transferee.
D. OPERATION OF THE LICENSED BUSINESS BY LICENSOR. In order to prevent
any interruption of the business of the Licensed Business and any injury to the
goodwill and reputation thereof which would cause harm to the Licensed Business
and thereby depreciate the value thereof, the Licensees hereby authorize the
Licensor, and the Licensor shall have the right, but not the obligation, to
operate said Licensed Business for so long as the Licensor deems necessary and
practical, and without waiver of any other rights or remedies the Licensor may
have under this Agreement, in the event that: (i) any of the Licensees'
principals, shareholders or partners is absent or incapacitated by reason of
illness or death and that the Licensees are not, therefore, in the sole
judgment of the Licensor, able to do the business licensed hereunder, or (ii)
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any allegation or claim is made against the Licensed Business, the Licensees or
any principals, directors, shareholders, partners or employees of the
Licensees, involving or relating to misrepresentations or any fraudulent or
deceptive practice. If, as herein provided, the Licensor elects to temporarily
operate the Licensed Business on behalf of the Licensees, the Licensees hereby
agrees to indemnify and hold the Licensor harmless from any and all claims
arising from the acts and omissions of the Licensor and its representatives.
XII. DEFAULT AND TERMINATION
A. DEFAULT WITH NO OPPORTUNITY TO CURE. The Licensees shall be deemed
to be in default and the Licensor may, at its option, terminate this Agreement
and all rights granted hereunder, without affording the Licensees any
opportunity to cure the default, effective immediately upon receipt of notice
from the Licensor to the Licensees, upon the occurrence of any of The following
events:
1. If the Licensees become insolvent or makes a general assignment for
the benefit of creditors, or if a petition in bankruptcy is filed by the
Licensees or such a petition is filed against and consented to by the
Licensees, or if the Licensees are adjudicated bankrupt, or if a bill in equity
or other proceeding for the appointment of a receiver of the Licensees or other
custodian for the Licensees' business or assets is filed and consented to by
the Licensees, or if a receiver or other custodian (permanent or temporary) of
the Licensees' business or assets is appointed by any court of competent
jurisdiction, or if proceedings for a conference with a committee of creditors
under any state, federal or foreign law should be instituted by or against the
Licensees, or if a final judgment remains unsatisfied or of record for thirty
(30) days or longer (unless supersedeas bond is filed), or if execution is
levied against the Licensees' operating location or property, or suit to
foreclose any lien or mortgage against the premises or equipment is instituted
against the Licensees and not dismissed within thirty (30) days, or if any
substantial real or personal property of the Licensed Business shall be sold
after levy thereupon by any sheriff, shall or constable;
2. If the Licensees cease to do business at the Licensed Business for
two (2) or more consecutive days, excluding holidays, or lose the right to
possession of the premises upon which the Licensed Business is located or
otherwise forfeit the right to do or transact business in the jurisdiction
where the Licensed Business is located;
3. If the Licensees have made any material misrepresentation or
omission in this Agreement or any other agreement to which the Licensees and
the Licensor are parties;
4. If the Licensees (or the principal shareholder or general partner
of a corporation or partnership Licensees) engage in the use and/or abuse of
drugs;
5. If the Licensees, by act or omission, permit a continued violation
in connection with the operation of the Licensed Business of any law,
ordinance, rule or regulation of a governmental agency, in the absence of a
good faith dispute over its application or legality and without promptly
resorting to an appropriate administrative or judicial forum for relief
therefrom;
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6. If the Licensees fail to obtain and maintain all required licenses
under state and local law;
7. If the Licensees misuse or make any unauthorized use of the
Proprietary Marks, engage in any business or market any service or products
under a name or mark which is confusingly similar to the Proprietary Marks, or
otherwise materially impair the goodwill associated therewith or the Licensor's
rights therein;
8. If a threat or danger to public safety results from the
construction, maintenance or operation of the Licensed Business;
9. If the Licensees are convicted of a crime of moral turpitude or
similar felony or are convicted of any other crime or offense that the Licensor
reasonably believes is likely to have an adverse effect on the System, the
Proprietary Marks, the goodwill associated therewith or the Licensor's interest
therein;
10. If a judgment or a consent decree against the Licensees, or any of
their officers, directors, shareholders or partners is entered in any case or
proceeding involving allegations of fraud, racketeering, unfair, improper or
deceptive trade practices or similar claim which is likely to have an adverse
effect on the System, or the Proprietary Marks, the goodwill associated
therewith or the Licensor's interest therein;
11. If the Licensees purport to transfer any rights or obligations
under this Agreement to any third party without the Licensor's prior written
consent, contrary to any of the terms of Section XI of this Agreement;
12. If the Licensees fail to comply with any of the covenants
contained in Section XIV hereof;
13. If, contrary to Sections VI and VII hereof, the Licensees disclose
or divulge the contents of the Manuals or any other trade secrets or
Confidential Information provided to the Licensees by the Licensor;
14. If the Licensees knowingly maintain false books or records or
submit any false statements, applications or reports to the Licensor or any
assignee of the Licensor;
15. If the Licensees willfully and repeatedly engage in a course of
conduct which constitutes a misrepresentation or a deceptive or unlawful act or
practice in connection with their sale of the services and products offered at
the Licensed Business;
16. If the Licensees fail to strictly comply with the product and
quality control standards and specifications, fail to utilize suppliers
approved by the Licensor or otherwise fail to meet any other significant
specifications or guidelines set forth in the Manuals;
17. If any other license or franchise agreement issued to the
Licensees by the Licensor is terminated for any reason;
18. If the Licensees receive three (3) or more notices of default
under Section XII.B. hereof during the term of this Agreement whether or not
such defaults are cured after notice;
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19. If the Licensees willfully engage in any illegal, immoral or
unethical acts or any act in violation of the mission and values of the
Licensor;
20. If the Licensees default under their sublease agreement for the
premises on which the Licensed Business is located or under any other agreement
to which the Licensees and the Licensor, or any parent or subsidiary
corporation or any other affiliated entity of the Licensor, are parties and
fail to cure said default within the grace period (if any) provided for in such
agreement; or
B. DEFAULT WITH THIRTY (30) DAY OPPORTUNITY TO CURE. Except as
provided in Section XII.A. of this Agreement, the Licensees shall have thirty
(30) days after receiving from the Licensor a written notice of default within
which to remedy any default described in this Section XII.B. and provide
evidence thereof to the Licensor. If any such default is not cured within that
time, or such longer period as applicable law may require, this Agreement, at
Licensor's option, shall terminate without further notice to the Licensees
effective immediately upon the expiration of the thirty (30) day period or such
longer period as applicable law may require. The Licensees shall be in default
hereunder for any failure to comply substantially with any of the requirements
imposed by this Agreement, as it may from time to time reasonably be
supplemented by updates to the Manuals, or for any failure to carry out the
terms of this Agreement in good faith. Such defaults shall include, without
limitation, the occurrence of any of the following events:
1. If the Licensees fail to maintain any of the standards or
procedures prescribed by the Licensor in this Agreement, the Manuals, any other
license or franchise agreement between the Licensor and the Licensees, or any
other written agreements between the parties or otherwise;
2. If the Licensees fail to comply with their duties set forth in
Section IV of this Agreement or fail to perform any obligation owing to the
Licensor or to observe any covenant or agreement made by the Licensees, whether
such obligation, covenant or agreement is set forth in this Agreement or in any
other agreement with the Licensor including any other license or franchise
agreement by and between the Licensor and the Licensees or any entity related
to the Licensor;
3. If the Licensees fail to adequately promote the Licensed Business
as provided in the Manuals or otherwise in writing;
4. If the Licensees fail to maintain and submit to the Licensor all
reports required pursuant to Section VIII hereof;
5. If the Licensees fail to maintain the Licensor's quality control
standards with respect to its use of signage and other uses of the Proprietary
Marks;
6. If the Licensees, its Operating Manager or employees fail to attend
and successfully complete any mandatory training program unless attendance is
excused or waived, in writing, by the Licensor;
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7. If the Licensees fail to obtain the prior written approval of the
Licensor of any and all advertising, marketing or promotional plans and
materials in whatever form used by the Licensees in connection with its
promotion of the Licensed Business or otherwise fail to comply with Licensor's
policies and procedures with respect to advertising, marketing or promotion; or
8. If the Licensees fail, refuse or neglect to pay promptly any monies
owing to the Licensor or its subsidiaries or affiliates or suppliers when due.
C. NO RIGHT OR REMEDY. No right or remedy herein conferred upon or
reserved to the Licensor is exclusive of any other right or remedy provided or
permitted by law or equity.
D. DEFAULT AND TERMINATION. The events of default and grounds for
termination described in this Section XII shall be in addition to any other
grounds for termination contained elsewhere in this Agreement or otherwise.
E. RIGHT TO PURCHASE. In the event of termination of this Agreement
for any reason, including a default under this Section XII, the Licensor shall
have the right and option, but not the obligation, to purchase the Licensees'
interest in the tangible assets of the Licensed Business as set forth in
Paragraph XIII.K below. In the event that the Licensor elects to purchase the
Licensees' interest in said assets, the Licensees shall also execute an
assignment of the lease for the premises of the Licensed Business.
XIII. OBLIGATIONS UPON TERMINATION
Upon termination or expiration of this Agreement, all rights granted
hereunder to the Licensees shall forthwith terminate, and Licensees shall
observe and perform the following:
A. CESSATION OF OPERATION. The Licensees shall immediately cease to
operate the Licensed Business and shall not thereafter, directly or indirectly,
represent to the public or hold themselves out as a Licensees of the Licensor.
B. CESSATION OF USE OF PROPRIETARY MARKS. The Licensees shall
immediately and permanently cease to use, in any manner whatsoever, any
equipment, format, confidential methods, customer data base, programs,
literature, procedures and techniques associated with the System, the name
MARCO'S MEXICAN RESTAURANTS and any Proprietary Marks and distinctive trade
dress, forms, slogans, uniforms, signs, symbols or devices associated with the
System. In particular, the Licensees shall cease to use, without limitation,
all signs, fixtures, furniture, equipment, advertising materials or promotional
displays, uniforms, stationery, forms and any other articles which display the
Proprietary Marks associated with the System.
C. CANCELLATION OF NAME. The Licensees shall take such action as may
be necessary to cancel any assumed name or equivalent registration which
contains the Proprietary Marks or any other trademark, trade name or service
mark of the Licensor, and the Licensees shall furnish the Licensor with
evidence satisfactory to the Licensor of compliance with this obligation within
ten (10) days after termination or expiration of this Agreement.
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D. OPTIONAL ASSIGNMENT OF LEASE. The Licensees shall, at the
Licensor's option pursuant to Section XII.E. above, assign to the Licensor any
interest which the Licensees has in any lease or sublease for the premises of
the Licensed Business. In the event the Licensor elects to exercise its option
to acquire such lease or sublease, the Licensor shall pay for any furniture,
equipment, supplies and signs acquired by the Licensor as a result of such
assignment, at the Licensees' cost or fair market value (whichever is less),
less any sums of money owed by the Licensees to the Licensor and less any sums
of money necessary to upgrade and renovate the premises to meet the Licensor's
then current standards for its Licensed Business and less any sums necessary to
acquire clear title to the lease or sublease interest. In the event that the
Licensor and the Licensees are unable to agree on the fair market value of
said items, an independent appraiser shall be appointed by the Licensor to
determine the fair market value of said items. The determination of said
appraiser shall be final and binding upon the parties. The costs and expenses
associated with the appointment of an independent appraiser shall be paid by
the Licensees.
In the event that the Licensor does not elect to exercise its option
to acquire such lease or sublease, the Licensees shall make such modifications
or alterations to the premises of the Licensed Business immediately upon
termination or expiration of this Agreement as may be necessary to distinguish
the appearance of said premises from that of other Licensed Businesses under
the System, and shall make such specific additional changes thereto as the
Licensor may reasonably request for that purpose. In the event the Licensees
fail or refuse to comply with the requirements of this Section XIII, the
Licensor shall have the right to enter upon the premises of the Licensed
Business without being guilty of trespass or any other tort for the purpose of
making or causing to be made such changes as may be required, at the expense of
the Licensees, which expense the Licensees agree to pay upon demand.
E. LICENSOR'S RIGHT TO CONTINUE OPERATIONS. In the event this
Agreement is terminated, the Licensor may, at its option, immediately enter the
premises of the Licensed Business and continue to provide services to customers
of the Licensed Business and apply receipts therefrom to debts owed to the
Licensor by the Licensees. The Licensor shall have no other obligations to the
Licensees in connection with the Licensor's operation of the Licensed Business
following said termination.
F. NON-USAGE OF MARKS. The Licensees agree, in the event they continue
to operate or subsequently begin to operate any other business, not to use any
reproduction, counterfeit, copy or colorable imitation of the Proprietary Marks
or trade dress, either in connection with such other business or the promotion
thereof, which is likely to cause confusion, mistake or deception, or which is
likely to dilute the Licensor's exclusive rights in and to the Proprietary
Marks or trade dress, and agree not to utilize any designation of origin or
description or representation which falsely suggests or represents an
association or connection with the Licensor so as to constitute unfair
competition.
G. PROMPT PAYMENT UPON DEFAULT. The Licensees shall promptly pay all
sums owing to the Licensor and its subsidiaries, affiliates and suppliers. In
the event of termination for any default of the Licensees, such sums shall
include all damages, costs and expenses, including reasonable attorneys' fees,
incurred by the Licensor as a result of the default, which obligation shall
give rise to and remain, until paid in full, a lien in favor of the Licensor
against any and all of the personal property, machinery, furniture, fixtures,
equipment and inventory owned by the Licensees and on the premises of the
Licensed Business at the time of default.
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H. PAYMENT OF COSTS. The Licensees shall pay to the Licensor all
damages, costs and expenses, including reasonable attorneys' fees, incurred by
the Licensor subsequent to the termination or expiration of this Agreement in
obtaining injunctive or other relief for the enforcement of any provision of
this Section XIII or any other obligation under this Agreement.
I. RETURN OF MATERIALS. The Licensees shall immediately turn over to
the Licensor all copies of all materials in the Licensees' possession including
the Manuals, all records, files, instructions, correspondence, customer
database, brochures, agreements, disclosure statements and any and all other
materials relating to the operation of the Licensed Business in tile Licensees'
possession, and all copies thereof (all of which are acknowledged to be the
Licensor's property), and shall retain no copy or record of any of the
foregoing, excepting only the Licensees' copy of this Agreement, any
correspondence between the parties and any other documents which the Licensees
reasonably needs for compliance with any provision of law. In addition to the
foregoing, the Licensees shall deliver to the Licensor a complete list,
including names, addresses, and phone numbers, of all persons employed by the
Licensees during the three (3) years immediately preceding termination. All
costs of delivering all materials required by this Section XIII.I. shall be
borne by the Licensees. The Licensees shall retain all business records,
including employment files, for at least six (6) years (or such longer period
as may be required by law) after the date of the termination of this Agreement
and must keep the Licensor advised of the location of these records. The
Licensor shall be permitted to inspect such records at any time during normal
business hours.
J. ASSIGNMENT OF TELEPHONE LISTINGS. The Licensees shall promptly
notify the appropriate telephone company and all telephone directory listing
agencies of the termination or expiration of its right to use any telephone
number and any regular, classified or other telephone directory listings
associated with any Proprietary Marks and authorize the transfer of same to or
at the direction of the Licensor. The Licensees agree to execute updated
letters of direction to any telephone companies and telephone directory listing
agencies directing termination and/or transfer of the Licensees' right to use
any telephone number associated with the Proprietary Marks, which the Licensor
may hold until termination or expiration hereof. The Licensees acknowledge that
as between the Licensor and the Licensees, the Licensor has the sole right to
and interest in all telephone numbers and directory listings associated with
any Proprietary Marks. The Licensees authorize the Licensor, and hereby appoint
the Licensor and any officer of the Licensor as its attorney in fact, to direct
the appropriate telephone company and all listing agencies to transfer all such
listings to the Licensor upon termination of this Agreement.
K. OPTION TO PURCHASE. The Licensor shall have the right, but not the
obligation, to purchase any or all of the tangible assets of the Licensed
Business, including the signs, advertising materials, promotional displays,
supplies, forms, inventory, software, furniture or other items bearing the
Proprietary Marks, at the Licensees' cost or fair market value, whichever is
less. If the parties cannot agree on fair market value within a reasonable
time, an independent appraiser shall be designated by the Licensor, and the
appraiser's determination shall be final and binding. The Licensor's election
to purchase provided for herein must be exercised by written notice to the
Licensees within thirty (30) days after termination or expiration of this
Agreement. If the Licensor elects to exercise any option to purchase provided
herein it shall have the right to set off all amounts due from the Licensees
under this Agreement and the cost of the appraisal, if any, against any
payment therefor.
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L. COVENANT OF FURTHER ASSURANCES. The Licensees shall execute any
legal document that may be necessary to effectuate the termination hereunder
and shall furnish to the Licensor, within thirty (30) days after the effective
date of termination, written evidence satisfactory to the Licensor of the
Licensees' compliance with the foregoing obligations.
M. COMPLIANCE WITH COVENANTS. The Licensees shall comply with all
applicable covenants contained in Section XIV of this Agreement.
N. NO FURTHER INTEREST. Other than as specifically set forth above,
the Licensees shall have no interest in the Licensed Business upon termination
or expiration of this Agreement.
XIV. COVENANTS
A. BEST EFFORTS. The Licensees covenant that during the term of this
Agreement, and subject to the post-termination provisions contained herein, and
except as otherwise approved in writing by the Licensor, the Licensees will
devote their full time, energy and best efforts to the efficient and effective
management and operation of the Licensed Business.
B. NON-SOLICITATION AND NON-COMPETITION. The Licensees have heretofore
specifically acknowledged that pursuant to this Agreement, the Licensees shall
receive valuable specialized training and confidential and other information
regarding the business, promotional, sales, marketing and operational methods
and techniques of the Licensor and the System. The Licensees covenant that
during the term of this Agreement and subject to the post-termination
provisions contained herein, and except as otherwise approved in writing by the
Licensor, the Licensees shall not, either directly or indirectly, for
themselves or through, on behalf of or in conjunction with any person, persons,
partners or corporation:
1. Divert or attempt to divert any business or customer of the
Licensed Business to any competitor, by direct or indirect inducement or
otherwise, or do or perform, directly or indirectly, any other act injurious or
prejudicial to the goodwill associated with the Proprietary Marks and the
System;
2. Employ or seek to employ any person who is at that time employed by
the Licensor or by any other Licensees, Franchisee or multi-unit operator of
the Licensor, or otherwise directly or indirectly induce such person to leave
his or her employment;
3. Own, maintain, engage in, be employed by, advise, assist, invest
in, franchise, make loans to or have any interest in any business which is the
same as or substantially similar to the Licensed Business; or
4. Sell, or offer for sale, products or services offered by, or
similar to those offered by, the Licensed Business in any venue other than
through, and on the premises of, the Licensed Business.
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C. RESTRICTIVE COVENANTS. The Licensees covenant that, except as
otherwise approved in writing by the Licensor, for a continuous uninterrupted
period commencing upon the expiration or termination of this Agreement,
regardless of the cause for termination, and continuing for two (2) years
thereafter, the Licensees will not either directly or indirectly, for
themselves or through, on behalf of or in conjunction with any person, persons,
partnership or corporation, own, maintain, engage in, be employed by, advise,
assist, invest in, franchise, make loans to or have any interest in any
business which is the same as or substantially similar to the Licensed Business
and which is located within a radius of ten (10) miles of the Site or the
location of any Licensor-owned or operated or other licensees-operated Licensed
Business or franchisee-operated Franchise Business for the System which is in
existence on the date of expiration or termination of this Agreement.
If the period of time or the area specified above, should be adjudged
unreasonable in any proceeding, then the period of time will be reduced by such
number of months or the area will be reduced by the elimination of such portion
thereof, or both, so that such restrictions may be enforced in such area and
for such time as is adjudged to be reasonable.
D. NO UNDUE HARDSHIP. The Licensees acknowledge and agree that the
covenants not to compete set forth in this Agreement are fair and reasonable
and will not impose any undue hardship on the Licensees, or the Licensees'
shareholders or partners, if the Licensees are a corporation or partnership,
since the Licensees, its shareholders or partners have other considerable
skills, experience and education which afford the Licensees, its shareholders
or partners the opportunity to derive income from other endeavors
E. INDEPENDENCE OF COVENANTS. The parties agree that each of the
covenants in this Agreement shall be construed as independent of any other
covenant or provision of this Agreement. If any or all portions of the
covenants in this Section XIV is held unreasonable or unenforceable by a court
or agency having valid jurisdiction in an unappealed final decision to which
the Licensor is a party, the Licensees expressly agree to be bound by any
lesser covenant subsumed within the terms of such covenant that imposes the
maximum duty permitted by law, as if the resulting covenant were separately
stated in and made a part of this Agreement.
F. MISSION. The Licensees agree to support the Licensor's mission and to
conduct the Licensed Business in accordance with the Licensor's operating
policies and stated principles.
G. MODIFICATION OF COVENANTS. The Licensees understand and acknowledge
that the Licensor shall have the right, in its sole discretion, to reduce the
scope of any covenant set forth in this Section XIV or any portion thereof,
without the Licensees' consent, effective immediately upon receipt by the
Licensees of written notice thereof, and the Licensees agree that they shall
forthwith comply with any covenant as so modified, which shall be fully
enforceable notwithstanding the provisions of Section XXII hereof.
H. ENFORCEMENT OF COVENANTS. The Licensees expressly agree that the
existence of any claims they may have against the Licensor, whether or not
arising from this Agreement, shall not constitute a defense to the enforcement
by the Licensor of the covenants in this Agreement. The Licensees agree to pay
all costs and expenses (including reasonable attorneys' fees) incurred by the
Licensor in connection with the enforcement of the covenants set forth in this
Agreement.
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I. INJUNCTIVE RELIEF. The Licensees acknowledge that their violation of
the covenants not to compete contained in this Agreement would result in
immediate and irreparable injury to the Licensor for which no adequate remedy
at law will be available. Accordingly, the Licensees hereby consent to the
entry of an injunction prohibiting any conduct by the Licensees in violation of
the terms of the covenants not to compete set forth in this Agreement. The
Licensees expressly agree that it may be presumed conclusively that any
violation of the terms of said covenants not to compete was accomplished by and
through the Licensees' unlawful utilization of the Licensor's confidential
information, know-how, methods and procedures.
J. WRITTEN AGREEMENTS. At the Licensor's request, the Licensees shall
require and obtain execution of covenants similar to those set forth in this
Section XIV (including covenants applicable upon the termination of a person's
relationship with Licensees) from the Licensees' officers, directors,
shareholders, and employees. All covenants required by this Section XIV.K.
shall be in forms satisfactory to Licensor, including, without limitation,
specific identification of Licensor as a third party beneficiary of such
covenants with the independent right to enforce them. Failure by Licensees to
obtain execution of a covenant required by this Section XIV.K. shall constitute
a default under Section XII.B hereof.
XV. CHANGES AND MODIFICATIONS
The Licensor may modify this Agreement only upon the execution of a
written agreement by the Licensor and the Licensees. The Licensor reserves and
shall have the sole right to make changes in the Manuals, the System and the
Proprietary Marks at any time and without prior notice to Licensees. Licensees
shall promptly alter any signs, products, business materials or related items,
at their sole cost and expense, upon written receipt of written notice of such
change or modification in order to conform with the Licensor's revised
specifications. In the event that any improvement or addition to the Manuals,
the System or the Proprietary Marks is developed by the Licensees, then the
Licensee agrees to grant to the Licensor an irrevocable, world-wide, exclusive,
royalty-free license, with the right to sublicense such improvement or
addition.
The Licensees understand and agree that due to changes in competitive
circumstances, presently unforeseen changes in the needs of customers, and/or
presently unforeseen technological innovations, the Licensor's System MUST NOT
remain static, in order that it best serve the interests of Licensor, Licensees
and the System. Accordingly, Licensees expressly understand and agree that
Licensor may from time to time change the components of the System, including
altering the programs, services, methods, standards, forms, policies and
procedures of that System; adding to, deleting from or modifying those
programs, products and services which the Licensed Business is authorized to
offer; and changing, improving or modifying the Proprietary Marks. Subject to
the other provisions of this Agreement, Licensees expressly agree to abide by
any such modifications, changes, additions, deletions and alterations.
XVI. TAXES AND INDEBTEDNESS
A. PAYMENT. The Licensees shall promptly pay, when due, all taxes levied
or assessed by any federal, state or local tax authority and any and all other
indebtedness incurred by the Licensees in the operation of the Licensed
Business.
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B. DISPUTE. In the event of any bona fide dispute as to liability for
taxes assessed or other indebtedness, the Licensees may contest the validity or
the amount of the tax or indebtedness in accordance with procedures of the
taxing authority or applicable law; provided, however, in no event shall the
Licensees permit a tax sale or seizure by levy of execution or similar writ or
warrant, or attachment by a creditor, to occur against the premises of the
Licensed Business or any improvements thereon.
C. COMPLIANCE WITH FEDERAL, STATE AND LOCAL LAWS. The Licensees shall
comply with all federal, state, and local laws, rules and regulations, and
shall timely obtain any and all permits, certificates, licenses and bonds
necessary for the full and proper operation and management of the Licensed
Business, including, without limitation, a license to do business and provide
services, fictitious name registration and sales tax permits. Copies of all
subsequent inspection reports, warnings, certificates and ratings, issued by
any governmental entity during the term of this Agreement in connection with
the conduct of the Licensed Business which indicate Licensees' failure to meet
or maintain the highest governmental standards or less than full compliance by
Licensees with any applicable law, rule or regulation, shall be forwarded to
Licensor by Licensees within three (3) days of Licensees' receipt thereof.
D. DUTY TO NOTIFY. The Licensees shall notify the Licensor in writing
within three (3) days of the commencement of any action, suit or proceeding,
and of the issuance of any order, writ, injunction, award or decree of any
court, agency or other governmental instrumentality, which may adversely affect
the operation or financial condition of the Licensed Business. Additionally,
any and all consumer related complaints shall be answered by the Licensees
within fifteen (IS) days after receipt thereof or such shorter period of time
as may be provided in said complaint. A copy of said answer shall be forwarded
to the Licensor within three (3) days of the date that said answer is forwarded
to the complainant.
XVII. INDEPENDENT CONTRACTOR AND INDEMNIFICATION
A. INDEPENDENT CONTRACTOR.
1. It is understood and agreed by the parties hereto that this Agreement
does not create a fiduciary relationship between them, that the Licensees shall
be independent contractors, and that nothing in this Agreement is intended to
make either party an agent, legal representative, subsidiary, joint venturer,
partner, employee or servant of the other for any purpose whatsoever.
2. During the term of this Agreement and any extensions hereof, the
Licensees shall hold themselves out to the public as independent contractors
operating the Licensed Business pursuant to a license from the Licensor and as
authorized users of the System and the Proprietary marks which are owned by the
Licensor. The Licensees agree to take such affirmative action as may be
necessary to do so, including exhibiting to customers a sign provided by
Licensor in a conspicuous place on the premises of the Licensed Business.
3. The Licensor shall not have the power to hire or fire the Licensees'
employees, and except as herein expressly provided, the Licensor may not
control or have access to the Licensees' funds or the expenditures thereof, or
in any other way exercise dominion or control over the Licensed Business.
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B. NO LIABILITY. IT IS UNDERSTOOD AND AGREED THAT NOTHING IN THIS
AGREEMENT AUTHORIZES THE LICENSEES TO MAKE ANY CONTRACT, AGREEMENT, WARRANTY OR
REPRESENTATION ON THE LICENSOR'S BEHALF, OR TO INCUR ANY DEBT OR OTHER
OBLIGATION IN THE LICENSOR'S NAME, AND THAT THE LICENSOR SHALL IN NO EVENT
ASSUME LIABILITY FOR OR BE DEEMED LIABLE HEREUNDER AS A RESULT OF ANY SUCH
ACTION OR BY REASON OF ANY ACT OR OMISSION OF THE LICENSEES IN THE LICENSEES'
CONDUCT OF THE LICENSED BUSINESS OR ANY CLAIM OR JUDGMENT ARISING THEREFROM
AGAINST THE LICENSOR. THE LICENSEES AGREE AT ALL TIMES TO DEFEND AT THEIR OWN
COST, AND TO INDEMNIFY AND HOLD HARMLESS TO THE FULLEST EXTENT PERMITTED BY
LAW, THE LICENSOR, ITS CORPORATE PARENT, THE CORPORATE SUBSIDIARIES,
AFFILIATES, SUCCESSORS, ASSIGNS AND DESIGNEES OF EITHER ENTITY, AND THE
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, SHAREHOLDERS, DESIGNEES, AND
REPRESENTATIVES OF EACH (LICENSOR AND ALL OTHER HEREINAFTER REFERRED TO
COLLECTIVELY AS "INDEMNITEES") FROM ALL LOSSES AND EXPENSES INCURRED IN
CONNECTION WITH ANY ACTION, SUIT, PROCEEDING, CLAIM, DEMAND, INVESTIGATION, OR
FORMAL OR INFORMAL INQUIRY (REGARDLESS OF WHETHER SAME IS REDUCED TO JUDGMENT)
OR ANY SETTLEMENT THEREOF WHICH ARISES OUT OF OR IS BASED UPON ANY OF THE
FOLLOWING: THE LICENSEES' ALLEGED INFRINGEMENT OR ANY OTHER VIOLATION OR ANY
OTHER ALLEGED VIOLATION OF ANY PATENT, TRADEMARK OR COPYRIGHT OR OTHER
PROPRIETARY RIGHT OWNED OR CONTROLLED BY THIRD PARTIES; THE LICENSEES' ALLEGED
VIOLATION OR BREACH OF ANY CONTRACT, FEDERAL, STATE OR LOCAL LAW, REGULATION,
RULING, STANDARD OR DIRECTIVE OF ANY INDUSTRY STANDARD; LIBEL, SLANDER OR ANY
OTHER FORM OF DEFAMATION BY THE LICENSEES; THE LICENSEES' ALLEGED VIOLATION OR
BREACH OF ANY WARRANTY, REPRESENTATION, AGREEMENT OR OBLIGATION IN THIS
AGREEMENT; ANY ACTS, ERRORS OR OMISSIONS OF THE LICENSEES OR ANY OF THEIR
AGENTS, SERVANTS, EMPLOYEES, CONTRACTORS, OWNERS, PARTNERS, PROPRIETORS,
AFFILIATES, OR REPRESENTATIVES; LATENT OR OTHER DEFECTS IN THE LICENSED
BUSINESS, WHETHER OR NOT DISCOVERABLE BY THE LICENSOR OR THE LICENSEES; THE
INACCURACY, LACK OF AUTHENTICITY OR NONDISCLOSURE OF ANY INFORMATION BY ANY
CUSTOMER OF THE LICENSED BUSINESS; ANY SERVICES OR PRODUCTS PROVIDED BY THE
LICENSEES AT, FROM OR RELATED TO THE OPERATION AT THE LICENSED BUSINESS; ANY
SERVICES OR PRODUCTS PROVIDED BY ANY AFFILIATED OR NONAFFILIATED PARTICIPATING
ENTITY; ANY ACTION BY ANY CUSTOMER OF THE LICENSED BUSINESS; AND, ANY DAMAGE TO
THE PROPERTY OF THE LICENSEES OR THE LICENSOR, THEIR AGENTS OR EMPLOYEES, OR
ANY THIRD PERSON, FIRM OR CORPORATION, WHETHER OR NOT SUCH LOSSES, CLAIMS,
COSTS, EXPENSES, DAMAGES, OR LIABILITIES WERE ACTUALLY OR ALLEGEDLY CAUSED
WHOLLY OR IN PART THROUGH THE ACTIVE OR PASSIVE NEGLIGENCE OF THE LICENSOR OR
ANY OF ITS AGENTS OR EMPLOYEES, OR RESULTED FROM ANY STRICT LIABILITY IMPOSED
ON THE LICENSOR OR ANY OF ITS AGENTS OR EMPLOYEES.
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C. IDENTIFICATION. The Licensees shall conspicuously identify themselves
and the Licensed Business and in all dealings with their clients, contractors,
suppliers, public officials and others, as an independent Licensees of the
Licensor, and shall place such notice of independent ownership on all forms,
business cards, stationery, advertising, signs and other materials and in such
fashion as the Licensor may, in its sole and exclusive discretion, specify and
require from time to time, in its Manuals (as same may be amended from time to
time) or otherwise.
D. NO FALSE REPRESENTATIONS. Except as otherwise expressly authorized by
this Agreement, neither party hereto will make any express or implied
agreements, warranties, guarantees or representations or incur any debt in the
name of or on behalf of the other party, or represent that the relationship
between the Licensor and the Licensees is other than that of Licensor and
Licensees. The Licensor does not assume any liability, and will not be deemed
liable, for any agreements, representations, or warranties made by the
Licensees which are not expressly authorized under this Agreement, nor will the
Licensor be obligated for any damages to any person or property which directly
or indirectly arise from or relate to the operation of the Licensed Business
XVIII. APPROVALS AND WAIVERS
A. WRITTEN CONSENT. Whenever this Agreement requires the prior approval
or consent of the Licensor, the Licensees shall make a timely written request
to Licensor therefor and such approval or consent shall be obtained in writing.
B. NO WAIVER. No failure of the Licensor to exercise any power or right
reserved to it by this Agreement, or to insist upon strict compliance by the
Licensees with any obligation or condition hereunder, and no custom or practice
of the parties at variance with the terms hereof, shall constitute a waiver of
the Licensor's right to demand exact compliance with any of the terms herein.
Waiver by the Licensor of any particular default by the Licensees shall not
affect or impair the Licensor's rights with respect to any subsequent default
of the same, similar or different nature, nor shall any delay, forbearance or
omission of the Licensor to exercise any power or right arising out of any
breach or default by the Licensees of any of the terms, provisions or covenants
hereof affect or impair the Licensor's right to exercise the same, nor shall
such constitute a waiver by the Licensor of any right hereunder or the right to
declare any subsequent breach or default and to terminate this License
Agreement prior to the expiration of its term. Subsequent acceptance by the
Licensor of any payments due to it hereunder shall not be deemed to be a waiver
by the Licensor of any preceding breach by the Licensees of any terms,
covenants or conditions of this Agreement.
C. WAIVER TO JURY TRIAL. The Licensees hereby waive any right to a jury
trial with respect to this Agreement and/or any matters arising hereunder.
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XIX. NOTICES
Any and all notices required or permitted under this Agreement shall be in
writing and shall be personally delivered or mailed by certified mail, return
receipt requested, or dispatched by overnight delivery envelope, to the
respective parties at the following addresses unless and until a different
address has been designated by written notice to the other party:
Notices to Licensor: Marco's Mexican Restaurants, Inc.
Attention: Legal Department
11111 Wilcrest Green, Suite 350
Houston, Texas 77042
Notices to Licensees: Mohammed S. and Rubinas S. Akhtar
335 E. San Augustine, #94
Deer Park, Texas 77536
Any notice sent by certified mail shall be deemed to have been given at the
date and time of mailing.
XX. RELEASE OF PRIOR CLAIMS
By executing this Agreement, the Licensees, individually and on behalf of
the Licensees' heirs, legal representatives, successors and assigns, and each
assignee of this Agreement by accepting assignment of the same, hereby forever
releases and discharges the Licensor and its officers, directors, employees,
agents and servants, including the Licensor's parent, subsidiary and affiliated
corporations, their respective officers, directors, employees, agents and
servants, from any and all claims relating to or arising under any license
agreement or any other agreement between the parties executed prior to the date
of this Agreement including any and all claims, whether presently known or
unknown, suspected or unsuspected, arising under the franchise, securities or
antitrust laws of the United States or of any state or territory thereof
XXI. DISCLOSURE STATEMENT AND DISCLAIMER
ACKNOWLEDGEMENT. The Licensees acknowledge and accept the following:
THE SUCCESS OF THE LICENSEES IN OPERATING A LICENSED BUSINESS IS
SPECULATIVE AND WILL DEPEND ON MANY FACTORS INCLUDING, TO A LARGE EXTENT, THE
LICENSEES' INDEPENDENT BUSINESS ABILITY. THIS OFFERING IS NOT A SECURITY AS
THAT TERM IS DEFINED UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS. THE
OBLIGATION TO TRAIN, MANAGE, PAY, RECRUIT AND SUPERVISE EMPLOYEES OF THE
LICENSED BUSINESS RESTS SOLELY WITH THE LICENSEES. THE LICENSEES HAVE NOT
RELIED ON ANY WARRANTY OR REPRESENTATION, EXPRESSED OR IMPLIED, AS TO THE
POTENTIAL SUCCESS OR PROJECTED INCOME OF THE BUSINESS VENTURE CONTEMPLATED
HEREBY. NO REPRESENTATIONS OR PROMISES HAVE BEEN MADE BY THE LICENSOR TO INDUCE
THE LICENSEES TO ENTER INTO THIS AGREEMENT EXCEPT AS
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SPECIFICALLY INCLUDED HEREIN. THE LICENSOR HAS NOT MADE ANY REPRESENTATION,
WARRANTY OR GUARANTY, EXPRESS OR IMPLIED, AS TO THE POTENTIAL REVENUES, PROFITS
OR SERVICES OF THE BUSINESS VENTURE TO THE LICENSEES AND CANNOT, EXCEPT UNDER
THE TERMS OF THIS AGREEMENT, EXERCISE CONTROL OVER THE LICENSEES' BUSINESS. THE
LICENSEES ACKNOWLEDGE AND AGREE THAT THEY HAVE NO KNOWLEDGE OF ANY
REPRESENTATION MADE BY THE LICENSOR OR ITS REPRESENTATIVES OF ANY INFORMATION
THAT IS CONTRARY TO THE TERMS CONTAINED HEREIN.
[PLEASE INITIAL TO ACKNOWLEDGE THAT YOU HAVE READ AND UNDERSTAND THIS PARAGRAPH
XXI.]
XXII. ENTIRE AGREEMENT
This Agreement, the documents referred to herein and the attachments
hereto, if any, constitute the entire, full and complete Agreement between the
parties hereto concerning the subject matter hereof, and supersede all prior
agreements with no other representations having induced the Licensees to
execute this Agreement. No amendment, change or variance from this Agreement
shall be binding on the parties hereto unless mutually agreed to by the parties
and executed by themselves or their authorized officers or agents in writing.
XXIII. SEVERABILITY AND CONSTRUCTION
A. SEVERABILITY. Except as expressly provided to the contrary herein, each
section, part, term and/or provision of this Agreement shall be considered
severable, and if, for any reason, any section, part, term and/or provision
herein is determined to be invalid and contrary to, or in conflict with, any
existing or future law or regulation by a court or agency having valid
jurisdiction, such shall not impair the operation of, or have any other effect
upon, such other portions, sections, parts, terms and/or provisions of this
Agreement as may remain otherwise intelligible, and the latter shall continue
to be given full force and effect and bind the parties hereto, and said invalid
sections, parts, terms and/or provisions shall be deemed not to be a part of
this Agreement; provided, however, that if the Licensor determines that such
finding of invalidity or illegality adversely affects the basic consideration
of this Agreement, the Licensor, at its option, may terminate this Agreement.
B. COVENANTS. The Licensees expressly agree to be bound by any promise or
covenant imposing the maximum duty permitted by law which is subsumed within
the terms of any provision hereof, as though it were separately articulated in
and made a part of this Agreement, that may result from striking from any of
the provisions hereof any portion or portions which a court may hold to be
unreasonable and unenforceable in a final decision to which the Licensor is a
party, or from reducing the scope of any promise or covenant to the extent
required to comply with such a court order.
C. CAUTIONS. All captions in this Agreement are intended solely for the
convenience of the parties, and none of the captions shall be deemed to affect
the meaning or construction of any provision hereof.
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D. REFERENCES. All references herein to the masculine, neuter or singular
shall be construed to include the masculine, feminine, neuter or plural, where
applicable, and all acknowledgements, promises, covenants, agreements and
obligations herein made or undertaken by the Licensees shall be deemed jointly
and severally undertaken by all of the parties executing this Agreement in his
individual capacity on behalf of the Licensees. This Agreement may be executed
in one or more originals, each of which shall be deemed an original.
E. DEFINITION OF LICENSEES. As used in this Agreement, the term
"Licensees" shall include all persons who succeed to the interest of the
original Licensees by transfer or operation of law and shall be deemed to
include not only the individuals or entity defined as the "Licensees" in the
introductory paragraph of this Agreement.
F. FORCE MAJEURE. If, as a result of hurricane, tornado, typhoon,
flooding, lightning, blizzard and other unusually severe weather, earthquake,
avalanche, volcanic eruption, fire, riot. insurrection, war, explosion,
unavoidable calamity or other act of God (a "Force Majeure"), compliance by any
party with the terms of this Agreement is rendered impossible or would
otherwise create an undue hardship upon any party, all parties shall be excused
from their respective obligations hereunder for the duration of the Force
Majeure and for a reasonable recovery period thereafter, but otherwise this
Agreement shall continue in full force and effect,
XXIV. APPLICABLE LAW
A. GOVERNING LAW. This Agreement takes effect upon its acceptance and
execution by the Licensor. This Agreement shall be interpreted and construed
under the laws of the State of Texas except to the extent governed by the
United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Section 105 1 et
seq.).
B. JURISDICTION AND VENUE. Except as otherwise expressly provided by
applicable state law or regulation, the parties agree that any action brought
by either party against the other shall be brought in Harris County, Texas and
the parties do hereby waive all questions of personal jurisdiction or venue for
the purpose of carrying out this provision.
C. REMEDY. No right or remedy conferred upon or reserved by the Licensor
or the Licensees by this Agreement is intended and it shall not be deemed to be
exclusive of any other right or remedy provided or permitted herein, by law or
at equity, but each right or remedy shall be cumulative of every other right or
remedy.
D. INJUNCTIVE RELIEF. Nothing herein contained shall bar the Licensor's
right to obtain injunctive relief against threatened conduct that will cause it
loss or damage under the usual equity rules, including the applicable rules for
obtaining restraining orders and preliminary injunctions
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XXV. MEDIATION
Except as specifically otherwise provided in this Agreement, the parties
agree that any and all disputes between them and any claim by either party that
cannot be amicably settled shall first be submitted to mediation. The parties
shall select a mutually acceptable independent mediator who is experienced in
license and restaurant business matters to preside over the mediation. Except
as otherwise expressly provided by applicable state law or regulation, the
mediator shall hear the dispute in Houston, Texas or at such other location as
may be designated by the Licensor. Each party shall bear all of its own fees,
costs and attorneys' fees. The decision of the mediator shall be non-binding and
any unsatisfied party may pursue litigation after mediation. The Licensees
know, understand and agree that it is the intent of the parties that any
mediation between the Licensor and the Licensees shall be of the Licensees'
individual claims and that the claims subject to mediation shall not be
mediated on a classwide basis.
Notwithstanding any provision contained in this Section XXV, the Licensor
may, at its sole option, institute an action or actions for temporary,
preliminary, or permanent injunctive relief or seeking any other equitable
relief against the Licensees in addition to any other rights and remedies
provided herein. In no event shall the Licensees be entitled to make, the
Licensees shall not make, and the Licensees hereby waive, any claim for money
damages by way of set-off, counterclaim, defense or otherwise based upon any
claim or assertion by the Licensees that the Licensor has unreasonably withheld
or unreasonably delayed any consent or approval to a proposed act by the
Licensees under any of the terms of this License Agreement. The Licensees' sole
remedy for any such claim shall be an action or proceeding to enforce any such
provisions, for specific performance or declaratory judgment. .
XXVI. ACKNOWLEDGMENTS
The Licensees acknowledge that they have conducted an independent
investigation of all aspects relating to the Licensed Business and recognizes
that the business venture contemplated by this Agreement involves business
risks and that its success will be largely dependent upon the skills and
ability of the Licensees as independent business persons or organization. The
Licensees acknowledge that they have received, read and understand this
Agreement, the attachments hereto and agreements relating thereto, and that the
Licensor has accorded the Licensees ample time and opportunity to consult with
advisors of the Licensees' own choosing about the potential benefits and risks
of entering into this Agreement.
The Licensees understand and accept the terms, conditions and covenants
contained in this Agreement as being reasonably necessary to maintain the
Licensor's high standards of quality and service and the uniformity of those
standards at all MARCO'S MEXICAN restaurants and thereby to protect and
preserve the goodwill of the Proprietary Marks. The Licensor expressly
disclaims the making of, and the Licensees acknowledge that they have not
received or relied upon, any guaranty, express or implied, as to the revenue,
profits or success of the business venture contemplated by this Agreement or
the extent to which the Licensor will continue to develop and expand the
network of MARCO'S MEXICAN restaurants. The Licensees acknowledge and agree
that the Licensor's directors, officers, employees and agents act only in a
representative, and not in a personal, capacity in connection with any of their
dealings with the Licensees. The Licensees further acknowledge that they have
not received or relied on any
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representations about the license, the Licensed Business, the Licensor or its
licensing program or policies made by the Licensor or its directors, officers,
employees or agents that are contrary to the terms herein.
[PLEASE INITIAL TO ACKNOWLEDGE THAT YOU HAVE READ AND UNDERSTAND THIS PARAGRAPH
XXVI]
IN WITNESS WHEREOF, the parties hereto have duly executed, sealed and
delivered this Agreement on the day and year first above written,
LICENSOR:
MARCO'S MEXICAN RESTAURANTS, INC.
By: /s/ GHULAM M. BOMBAYWALA
-----------------------------------------
GHULAM M. BOMBAYWALA
Title: President and Chief Operating Officer
LICENSEES:
By: /s/ MOHAMMED S. AKHTAR
-----------------------------------------
MOHAMMED S. AKHTAR
By: /s/ RUBINA S. AKHTAR
-----------------------------------------
Rubina S. Akhtar
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<PAGE> 1
EXHIBIT 10.2
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
WATERMARC FOOD MANAGEMENT METROBANK, N.A. GALLERIA ACCOUNT #: LDG-43
11111 WILCREST GREEN STE 350 BRANCH Loan Number 7201212570
HOUSTON, TX 77042 5065 WESTHEIMER, STE. #1111 Date April 11, 1997
HOUSTON, TX 77056 Maturity Date April 11, 1998
Loan Amount $300,000.00
BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS Renewal Of _________________
"I" Includes each borrower above, "You" means the lender, its SSN/TIN: 76-2660869
joint and severally. successors and assigns.
- ---------------------------------------------------------------------------------------------------
</TABLE>
For value received, I promise to pay to you, or your order, at your address
listed above the PRINCIPAL sum of THREE HUNDRED THOUSAND AND NO/100 Dollars
$300,000.00
/ / SINGLE ADVANCE: I will receive all of this principal sum on _____________.
No additional advances are contemplated under this note.
/X/ MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On _____________ I will receive the
amount of $_____________ and future principal advances are contemplated.
CONDITIONS: The conditions for future advances are **EACH ADVANCE TO BE
REPAID WITHIN 30 DAYS FROM DATE OF ADVANCE OR AT MATURITY, WHICHEVER COMES
FIRST. ANY ADVANCE OUTSTANDING BEYOND 30 DAYS WILL REQUIRE ADDED
COLLATERAL.
/X/ Open End Credit: You and I agree that I may borrow up to the maximum
amount of principal more than one time. This feature is subject to all
other conditions and expires on APRIL 11, 1998.
/ / Closed End Credit: You and I agree that I may borrow up to the maximum
only one time (and subject to all other conditions).
INTEREST: I agree to pay interest on the outstanding principal balance from
APRIL 11, 1997 at the rate of 10.500% per year until FIRST CHANGE
DATE.
/X/ VARIABLE RATE: This rate may then change as stated below. * QUARTERLY
/X/ INDEX RATE: This future rate will be 2.000% OVER the following index
rate: PRIME RATE AS PUBLISHED IN THE WALL STREET JOURNAL.
/X/ CEILING RATE: The interest rate ceiling for this note is the *
ceiling rate announced by the Credit Commissioner from time to time.
/X/ FREQUENCY AND TIMING: The rate on this note may change as often as
DAILY. A change in the interest rate will take effect ON THE SAME DAY.
/ / LIMITATIONS: During the term of this loan, the applicable annual
interest rate will not be more than ________% or less than _______%.
The rate may not change more than ________% each _____________.
EFFECT OF VARIABLE RATE: A change in the interest rate will have the
following effect on the payments:
/X/ The amount of each scheduled payment will change.
/X/ The amount of the final payment will change.
/ / _____________________________________________________________________
ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note
owing after maturity, and until paid in full, as stated below:
/X/ on the same fixed or variable rate basis in effect before maturity
(as indicated above).
/ / at a rate equal to __________________________________________________
/ / LATE CHARGE: If a payment is made more than _________ days after it is
due, I agree to pay a late charge of _____________________________________
__________________________________________________________________________
/X/ ADDITIONAL CHARGES: In addition to interest, I agree to pay the following
charges which / / are /X/ are not included in the principal amount
above: 1.0% ($3,000) LOAN FEE.
PAYMENTS: I agree to pay this note as follows:
/X/ INTEREST: I agree to pay accrued interest ON DEMAND, BUT IF NO DEMAND IS
MADE THEN ON THE 11TH DAY OF EACH MONTH BEGINNING MAY 11, 1997
/X/ PRINCIPAL: I agree to pay the principal ON DEMAND, BUT IF NO DEMAND IS
MADE THEN ON APRIL 11, 1998
/ / INSTALLMENTS: I agree to pay this note in ____________ payments. The first
payment will be in the amount of $__________ and will be due _____________.
A payment of $____________ will be due ______________ thereafter. The final
payment of the entire unpaid balance of principal and interest will be due
__________________________.
ADDITIONAL TERMS:
** REPAYMENT TERMS: ACCRUED INTEREST PAYABLE MONTHLY. EACH PRINCIPAL ADVANCE TO
BE REPAID WITHIN 30 DAYS FROM THE DATE OF ADVANCE OR AT MATURITY, WHICHEVER
COMES FIRST.
** GENERAL PROVISION: THIS NOTE IS SUBJECT TO THE ARBITRATION PROGRAM ENTERED
INTO BETWEEN BORROWER AND LENDER.
- -----------------------------------------------------------------------------
/X/ SECURITY: This note is separately secured by (describe separate document
by type and date): LINE OF CREDIT AGREEMENT; GUARANTY AGREEMENT; ARBITRATION
AGREEMENT; ALL DATED APRIL 11, 1997
(If this section is for your internal use. Failure to list a separate security
document does not mean the agreement will not secure this note.)
- ------------------------------------------------------------------------------
------------------------------------------------------------------
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
------------------------------------------------------------------
Signature for Lender
X
- ---------------------------------------
LALITA DAS GUPTA, BANKING OFFICER
- ---------------------------------------
PURPOSE: The purpose of this loan is BUSINESS: PROVIDE WORKING CAPITAL.
SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE 2).
I have received a copy on today's date.
WATERMARC FOOD MANAGEMENT CO.
BY: /s/ TOM BUCKLEY, CFO
- ----------------------------------
TOM BUCKLEY, CFO
- ----------------------------------
UNIVERSAL NOTE
<PAGE> 1
EXHIBIT 10.3
PROMISSORY NOTE
$300,000.00 Houston, Texas April 7, 1997
FOR VALUE RECEIVED, the undersigned, Watermarc Food Management Co., a Texas
corporation ("Maker") hereby promises to pay to the order of United Central
Bank ("Payee"), at its offices at 8585 South Gessner, Houston, Texas
77074-9826, as provided herein, in lawful money of the United States of
America, the principal sum of Three Hundred Thousand and No/100 Dollars
$300,000.00, or so much thereof as shall be advanced and outstanding hereunder,
together with interest on the outstanding principal balance hereof, at a
varying rate per annum which shall from day to day prior to maturity be equal
to the lessor of (a) the maximum rate permitted by applicable law as the same
exists from day to day during the term hereof ("Maximum Rate"), including, as
to Article 5069-1.04. Vernon's Texas Civil Statutes (and as the same may be
incorporated by reference in other Texas statutes), but otherwise without
limitation, that rate based upon the "indicated rate ceiling", calculated on a
365 day or 366 day year, as applicable or (b) the sum of the Base Rate
(hereinafter defined) in effect from day to day, based on a 360 day year and
the actual number of days elapsed, unless such calculation would result in a
usurious rate, in which case interest shall be calculated on a per annum basis
of a year of 365 or 366 days, as the case may be, each such change in the rate
of interest, charged hereunder to become effective, without notice to Maker, on
the effective date of each change in the Base Rate; provided however, if any
time the rate of interest specified in clause (b) preceding shall exceed the
Maximum Rate, thereby causing the interest rate hereon to be limited to the
Maximum Rate, then any subsequent reduction in the Base Rate will not reduce
the rate of interest hereon below the Maximum Rate until the total amount of
interest accrued hereon equals the amount of interest which would have accrued
hereon if the rate specified in clause (b) preceding had at all times been in
effect.
The Note is payable as follows:
Payments of principal and accrued interest, in the amount of $5,004.02
each, shall be due and payable in consecutive monthly installments
beginning one month from the date hereof and continuing regularly monthly
thereafter until the date which is eighty four (84) months from the date
hereof, at which time the entire balance of this Note, being principal and
accrued interest shall be due and payable in full. Interest will be
calculated on the unpaid principal to the date of each installment paid.
Payments will be credited first to the accrued interest and then to the
reduction of principal.
Payee has the right to raise or lower the monthly payment so as to maintain
the principal balance within the stated maturity.
All past due principal and interest shall bear interest at the Maximum
Rate. As used herein, the term "Base Rate" means at the time of determination
thereof the prime commercial lending rate per annum as quoted by United Central
Bank at its principal office in Houston, Texas as in effect from time to time,
with the understanding that the Base Rate may be one of several base rates and
serves as a basis upon which effective rates are from time to time calculated
for loans by making reference thereto and may not be the lowest of the base
rates of United Central Bank.
In the event that any payment, installment or amount due hereunder
continues unpaid for more than ten (10) days following the date such payment is
due, including Saturdays, Sundays and holidays, Maker agrees to pay Holder a
late charge in the amount of five percent (5%) of such past due payment,
installment or amount due; however, nothing in this paragraph shall be
construed to allow Holder to charge or collect interest in excess of the
Maximum Rate. Such late charge shall be due and payable upon demand, however,
only one late charge shall be paid for each late payment, installment or amount
due.
[ILLEGIBLE]
---------------
INITIALED FOR
IDENTIFICATION
page 1 of 3 pages
<PAGE> 2
In the event that more than twenty (20%) percent of the outstanding
principal balance of this Note is prepaid, either voluntarily or through an
acceleration of the maturity date of the Note due to an event of default
hereunder or under the Deed of Trust, or any other document or instrument
securing this Note at any time prior to the first anniversary hereof. Maker
shall pay to Payee a prepayment penalty equal to three percent (3.00%) of the
amount of the prepayment; or should such prepayment be made following the first
anniversary hereof, but prior to the second anniversary hereof, Maker shall pay
to Payee a prepayment penalty equal to two percent (2.00%) of the amount of the
prepayment or should such prepayment be made following the second anniversary
hereof, but prior to the third anniversary hereof, Maker shall pay to Payee a
prepayment penalty equal to one percent (1.00%) of the amount of the
prepayment.
Notwithstanding anything to the contrary contained herein, no provisions of
this Note shall require the payment or permit the collection of interest in
excess of the Maximum Rate. If any excess of interest in such respect is herein
provided for, or shall be adjudicated to be so provided, in this Note or
otherwise in connection with this loan transaction, the provisions of this
paragraph shall govern and prevail, and neither Maker nor the sureties,
guarantors, successors or assigns of Maker shall be obligated to pay the excess
amount of such interest, or any other excess sum paid for the use, forbearance
or detention of sums loaned pursuant hereto. If for any reason interest in
excess of the Maximum Rate shall be deemed charged, required or permitted by
any court of competent jurisdiction, any such excess shall be applied as a
payment and reduction of the principal of indebtedness evidenced by this Note;
and, if the principal amount hereof has been paid in full, any remaining excess
shall forthwith be paid to Maker.
If default be made in the payment of principal or interest under this Note,
or upon the occurrence of any other Event of Default, as such term is defined
in the Deed of Trust (as hereinafter defined), the holder hereof may, at its
option, declare the entire unpaid principal of and accrued interest on this
Note immediately due and payable without additional notice, demand or
presentment, all of which are hereby waived, and upon such declaration, the same
shall become and shall be immediately due and payable, and the holder hereof
shall have the right to foreclose or otherwise enforce all liens or security
interests securing payment hereof, or any part hereof, and offset against this
Note any sum or sums owed by the holder hereof to Maker. Failure of the holder
hereof to exercise this option shall not constitute a waiver of the right to
exercise the same upon the occurrence of a subsequent Event of Default.
If the holder hereof expends any effort in any attempt to enforce payment
of all or any part or installment of any sum due the holder hereunder, or if
this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceedings, Maker agrees to pay all reasonable
collection costs and fees incurred by the holder, including reasonable
attorney's fees.
THIS NOTE IS PERFORMABLE IN HOUSTON, HARRIS COUNTY, TEXAS, AND MAKER AND
EACH SURETY, GUARANTOR, ENDORSER AND OTHER PARTY EVER LIABLE FOR PAYMENT OF ANY
SUMS OF MONEY PAYABLE ON THIS NOTE, JOINTLY AND SEVERALLY WAIVE THE RIGHT TO BE
SUED HEREON ELSEWHERE. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA. MAKER AND EACH SUCH OTHER PARTY HEREBY IRREVOCABLY
(I) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (II) WAIVES
ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION
OR PROCEEDING BROUGHT IN SUCH COURT OR THAT SUCH COURT IS AN INCONVENIENT
FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF PAYEE TO BRING ANY ACTION OR
PROCEEDING AGAINST MAKER OR ANY OTHER PARTY LIABLE HEREUNDER OR WITH RESPECT TO
ANY COLLATERAL IN ANY STATE OR FEDERAL COURT IN ANY OTHER JURISDICTION. ANY
ACTION OR PROCEEDING BY MAKER OR ANY OTHER PARTY LIABLE HEREUNDER AGAINST PAYEE
SHALL BE BROUGHT ONLY IN A COURT LOCATED IN HARRIS COUNTY, TEXAS.
[ILLEGIBLE]
--------------
INITIALED FOR
IDENTIFICATION
page 2 of 3 pages
<PAGE> 3
Maker and surety, guarantor, endorser and other party ever liable for
payment of any sums of money payable on this Note jointly and severally waive
presentment and demand for payment, protest, notice of protest and non-payment
or dishonor, notice of acceleration or intent to accelerate, notice of intent
to demand, diligence in collecting, and grace, and consent aid all extensions
notice for and period or periods of time and partial payments, before or after
maturity, without prejudice to the holder. The holder shall similarly have the
right to deal in any way, any time, with one or more of the foregoing parties
without notice to any other party, and to grant any such party any extensions
of time for payment of any of said indebtedness, or to release part or all of
the collateral securing this Note, or grant any other indulgence or forbearance
whatsoever, without notice to any other party and without in any way affecting
the personal liability of any party hereunder.
This Note is entitled to the benefit of, among other documents, a valid and
perfected first lien security interest in and to certain real property
described in the Deed of Trust securing same being executed by GMB Consulting,
Inc., a Texas corporation for the benefit of Payee; Security Agreement executed
by The Original Pasta Co., a Texas corporation; UCC-1 Financing Statement(s);
Guaranty Agreement(s) executed by The Original Pasta Co., a Texas corporation,
Ghulam Bombaywala and Shaheen S. Bombaywala, each of the foregoing being
executed of even date herewith.
THIS NOTE AND THE OTHER LOAN DOCUMENTS EXECUTED CONTEMPORANEOUSLY WITH THIS
NOTE REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
MAKER:
WATERMARC FOOD MANAGEMENT CO.,
A TEXAS CORPORATION
By: /s/ THOMAS J. BUCKLEY
-------------------------------------------
Thomas J. Buckley, Chief Financial Officer
and Secretary
page 3 of 3 pages
<PAGE> 1
EXHIBIT 10.4
---------------------------------
LANGHAM CREEK BORROWER VARIABLE RATE
NATIONAL BANK WATERMARC FOOD MANAGEMENT CO. COMMERCIAL
Post Office Box 840439 PROMISSORY
Houston, Texas 77254-0439 ADDRESS NOTE
(713) 859-2225 "LENDER" 11111 WILCREST GREEN STE. 350
HOUSTON, TX 77042
PHONE NUMBER IDENTIFICATION NO.
281-783-0500 74-2605598
- --------------------------------------------------------------------------------
LENDER INTEREST PRINCIPAL FUNDING MATURITY CUSTOMER LOAN
INITIALS RATE AMOUNT DATE DATE NUMBER NUMBER
MDO VARIABLE $250,000.00 02/14/97 02/14/02 11505883
- --------------------------------------------------------------------------------
PROMISE TO PAY
For value received, Borrower promises to pay to the order of Lender indicated
above the principal amount of TWO HUNDRED FIFTY THOUSAND AND NO/100 Dollars
($250,000.00) plus interest on the unpaid principal balance at the rate and in
the manner described below. All amounts received by Lender shall be applied
first to expenses, then to accrued unpaid interest, and then to outstanding
principal, or in any other manner as determined by Lender, in Lender's
discretion, as permitted by law.
INTEREST RATE: The Note has a variable interest rate feature. Interest on the
Note may change from time to time if the Index Rate identified below changes.
Interest shall be computed on the basis of 360 days and the actual number of
days per year (and in any event, 365 or 366 days per year during periods when
the Maximum Lawful Rate, which is certified on the reverse, is in effect) and
the actual number of days elapsed. Interest on this Note shall be calculated at
the variable rate of ONE AND NO/1000 percent (1.000%) per annum over the Index
Rate provided that such rate shall not exceed the Maximum Lawful Rate. The
Initial Index Rate is NINE AND 250/1000 percent (9.250%) per annum. Therefore,
the Initial Interest rate on the Note shall be TEN AND 250/1000 percent
(10.250%) per annum. Any change in the interest rate resulting from a change in
the Index Rate will be effective on THE SAME DAY AS THE RATE CHANGES.
INDEX RATE: The Index Rate for this Note shall be: Lender's Base or Reference
Rate, which Lender may increase or decrease at any time in Lender's discretion
and which may not necessarily reflect the rate Lender charges to its other
customers.
If the index becomes unavailable during the term of the loan, Lender may
substitute another index which is similar.
MINIMUM RATE/MAXIMUM RATE: The minimum interest rate on this Note shall be
THREE AND NO/1000 percent (3.000%) per annum. The maximum interest rate on this
Note shall not exceed EIGHTEEN AND NO/1000 percent (18.000%) per annum or the
Maximum Lawful Rate, whichever is less.
DEFAULT RATE: In the event of a default under this Note, the Lender may, in its
discretion determine that all amounts owing to Lender shall bear interest as
follows: 18.00, or the Maximum Lawful Rate, whichever is less.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to
the following schedule:
ON DEMAND, BUT IF NO DEMAND IS MADE, THEN 59 PAYMENTS OF PRINCIPAL
IN THE AMOUNT OF $4,166.67 PLUS ACCRUED INTEREST BEGINNING MARCH 14,
1997 AND CONTINUING AT MONTHLY TIME INTERVALS THEREAFTER. A FINAL
PAYMENT OF THE UNPAID PRINCIPAL BALANCE PLUS ACCRUED INTEREST IS DUE
AND PAYABLE ON FEBRUARY 14, 2002.
All payments will be made to Lender at its address in the county described
above and in lawful currency of the United States of America.
RENEWAL: If checked [ ] this Note is given in renewal of, but not in novation
or discharge of, Loan Number ______________.
SECURITY: To secure the payment and performance of obligations incurred under
this Note. Borrower grants Lender a security interest in, and pledges and
assigns to Lender all of Borrower's rights, title, and interest in all monies,
instruments, and savings, checking, and other deposit accounts of Borrower's,
(excluding IRA, Keogh, and trust accounts and deposits subject to tax penalties
as assigned), that are now of in the future in Lender's custody or control.
Upon default, and to the extent permitted by applicable law, Lender may
exercise its security interest in all such property which shall be in addition
to and cumulative of Lender's right of common law setoff. [X] If checked, the
obligations under this Note are also secured by a lien and/or security interest
in the property described in the documents executed in connection with this
Note as well as any other property designated as security for this Note now or
in the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before its
maturity date. If this Note contains more than one installment, all prepayments
shall be applied as determined by Lender and as permitted by law.
- --------------------------------------------------------------------------------
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE SIDE.
BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
THIS NOTE AND RELATED DOCUMENTS HAVE BEEN SIGNED IN THE COUNTY OF LENDER'S
ADDRESS UNLESS OTHERWISE SPECIFIED: Harris
NOTE DATE: FEBRUARY 14, 1997
BORROWER: WATERMARC FOOD MANAGEMENT CO. BORROWER:
/s/ GHULAM M. BOMBAYWALA
- --------------------------------------- --------------------------------------
GHULAM M. BOMBAYWALA
CHAIRMAN AND CEO
BORROWER: BORROWER:
- --------------------------------------- --------------------------------------
BORROWER: BORROWER:
- --------------------------------------- --------------------------------------
BORROWER: BORROWER:
- --------------------------------------- --------------------------------------
<PAGE> 1
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES EXHIBIT 11.1
COMPUTATION OF EARNINGS (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARES
<TABLE>
<CAPTION>
52 Weeks Ended
-------------------------------------------------
June 29, 1997 June 30, 1996 July 2, 1995
------------- ------------- ------------
<S> <C> <C> <C>
Computation of primary earnings (loss) per
common and common equivalent shares:
Net loss applicable to common stock $(11,209,361) $ (247,890) $ (7,331,421)
============ ============ ============
Weighted average number of common shares outstanding 13,451,487 12,040,163 8,921,543
============ ============ ============
Primary loss per common share $ (0.83) $ (0.02) $ (0.82)
============ ============ ============
Computation of earnings (loss) per common share assuming
full dilution (A):
Net loss applicable to common stock $(11,209,361) $ (247,890) $ (7,331,421)
Dividends on preferred stock 296,586 296,586 294,680
Interest on 9% convertible subordinated debentures 19,530 19,530 222,660
------------ ------------ ------------
Income (loss) assuming full dilution $(10,893,245) $ 68,226 $ (6,814,081)
============ ============ ============
Weighted average number of shares outstanding 13,451,487 12,040,163 10,003,426
Common shares issuable from stock option plans
and from warrants 2,998,903 3,121,633 2,814,320
Less shares assumed repurchased with proceeds (14,299,639) (6,098,472) (3,620,946)
Shares assumed issued upon conversion of
preferred stock 411,925 411,925 411,925
Shares assumed issued upon conversion of 9%
subordinated debentures 43,400 43,400 43,400
------------ ------------ ------------
Common shares outstanding assuming full dilution 2,606,076 9,518,649 9,652,125
============ ============ ============
Earnings (loss) per common and common equivalent
share assuming full dilution $ (4.18) $ 0.01 $ (0.71)
============ ============ ============
</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 for years ended June 30, 1996 and July 2, 1995.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
BILLY BLUES FOOD CORPORATION OF ARIZONA, AN ARIZONA CORPORATION
BILLY BLUES HOLDING, S.A., A SWISS CORPORATION
J II Z, INC., A TEXAS CORPORATION
LCU, INC., A TEXAS CORPORATION
MARCO'S MEXICAN RESTAURANTS, INC., A TEXAS CORPORATION
THE ORIGINAL PASTA CO., A TEXAS CORPORATION
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS IN FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-29-1997
<CASH> 263,542
<SECURITIES> 0
<RECEIVABLES> 839,924
<ALLOWANCES> 0
<INVENTORY> 483,302
<CURRENT-ASSETS> 1,659,985
<PP&E> 15,825,717
<DEPRECIATION> 9,775,086
<TOTAL-ASSETS> 16,714,828
<CURRENT-LIABILITIES> 9,832,566
<BONDS> 0
0
329,540
<COMMON> 713,161
<OTHER-SE> 427,046
<TOTAL-LIABILITY-AND-EQUITY> 16,714,828
<SALES> 49,125,361
<TOTAL-REVENUES> 49,125,361
<CGS> 14,774,268
<TOTAL-COSTS> 59,106,493
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,220,666
<INCOME-PRETAX> (10,912,775)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,912,775)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,912,775)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (4.18)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
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) August 20, 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 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On August 20, 1997, Coopers & Lybrand L.L.P. resigned as Registrant's principal
independent accountant (hereafter referred to as "former principal
accountant"). The former principal accountant's report dated September 27, 1996
on the Registrant's financial statements for the fiscal years ended June 30,
1996 and July 2, 1995 was unqualified.
The decision to change accountants was approved by the Audit Committee of
Registrant's Board of Directors.
During Registrant's two most recent fiscal years preceding the former principal
accountant's resignation, there were no disagreements with the former principal
accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
On August 26, 1997, Registrant engaged Mann Frankfort Stein & Lipp, P.C. as its
new principal accountant to audit Registrant's financial statements for the
fiscal year ended June 29, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The former principal accountant's letter addressed to the Securities and
Exchange Commission regarding this report is attached hereto as Exhibit 16.
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 August 27, 1997 By /s/
------------------------ ----------------------------------------
(Signature)
By Ghulam M. Bombaywala
-----------------------------------------
Title Chief Executive Officer
--------------------------------------
<PAGE> 3
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
16 Letter regarding change of certifying accountant
<PAGE> 4
EXHIBIT 16
[COOPERS & LYBRAND L.L.P. LETTERHEAD]
August 25, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements (copy attached) made by Watermarc Food Management
Co. (the "Company"), which we understand will be filed with the Commission,
pursuant to Item 4 of Form 8-K, as part of the Company's Form 8-K report dated
August 20, 1997. We agree with the statements concerning our Firm in such Form
8-K.
Very truly yours,
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND
Attachment
<PAGE> 5
INFORMATION INCLUDED IN REPORT ON 8-K
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On August 20, 1997, Coopers & Lybrand L.L.P. resigned as Registrant's principal
independent accountant (hereafter referred to as "former principal
accountant"). The former principal accountant's report dated September 27, 1996
on the Registrant's financial statements for the fiscal years ended June 30,
1996 and July 2, 1995 was unqualified.
The decision to change accountants was approved by the Audit Committee of
Registrant's Board of Directors.
During Registrant's two most recent fiscal years preceding the former principal
accountant's resignation, there were no disagreements with the former principal
accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
On August 26, 1997, Registrant engaged Mann Frankfort Stein & Lipp, P.C. as its
new principal accountant to audit Registrant's financial statements for the
fiscal year ended June 29, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The former principal accountant's letter addressed to the Securities and
Exchange Commission regarding this report is attached hereto as Exhibit 16.
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 August 27, 1997 By /s/
------------------------ ----------------------------------------
(Signature)
By Ghulam M. Bombaywala
-----------------------------------------
Title Chief Executive Officer
--------------------------------------
<PAGE> 1
EXHIBIT 99.2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
AMENDMENT NO. 1
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(b) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) August 20, 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 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On August 20, 1997, Coopers & Lybrand L.L.P. resigned as Registrant's principal
independent accountant (hereafter referred to as "former principal
accountant"). The former principal accountant's report dated September 27, 1996
on the Registrant's financial statements for the fiscal years ended June 30,
1996 and July 2, 1995 was unqualified.
The decision to change accountants was approved by the Audit Committee of
Registrant's Board of Directors.
During Registrant's fiscal years ended July 2, 1995 and June 30, 1996 and the
subsequent interim period through August 20, 1997 preceding the former principal
accountant's August 20, 1997 resignation, there were no disagreements or
reportable events with the former principal accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
On August 26, 1997, Registrant engaged Mann Frankfort Stein & Lipp, P.C. as its
new principal accountant to audit Registrant's financial statements for the
fiscal year ended June 29, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The former principal accountant's letter addressed to the Securities and
Exchange Commission regarding this amended report is attached hereto as
Exhibit 16.
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 September 9, 1997 By /s/
------------------------ ----------------------------------------
(Signature)
By Ghulam M. Bombaywala
-----------------------------------------
Title Chief Executive Officer
--------------------------------------
<PAGE> 3
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
16 Letter regarding change of certifying accountant
<PAGE> 4
EXHIBIT 16
[COOPERS & LYBRAND LETTERHEAD]
September 9, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements (copy attached) made by Watermarc Food Management
Co. (the "Company"), which we understand will be filed with the Commission,
pursuant to Item 4 of Form 8-K, as part of the Company's Form 8-K Amendment
No. 1 report dated September 9, 1997. We agree with the statements concerning
our Firm in such Form 8-K Amendment No. 1.
Very truly yours,
/s/ COOPERS & LYBRAND L.L.P.
Attachment
<PAGE> 5
INFORMATION INCLUDED IN REPORT ON 8-K
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On August 20, 1997, Coopers & Lybrand L.L.P. resigned as Registrant's principal
independent accountant (hereafter referred to as "former principal
accountant"). The former principal accountant's report dated September 27, 1996
on the Registrant's financial statements for the fiscal years ended June 30,
1996 and July 2, 1995 was unqualified.
The decision to change accountants was approved by the Audit Committee of
Registrant's Board of Directors.
During Registrant's fiscal years ended July 2, 1995 and June 30, 1996 and the
subsequent interim period through August 20, 1997 preceding the former principal
accountant's August 20, 1997 resignation, there were no disagreements or
reportable events with the former principal accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
On August 26, 1997, Registrant engaged Mann Frankfort Stein & Lipp, P.C. as its
new principal accountant to audit Registrant's financial statements for the
fiscal year ended June 29, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The former principal accountant's letter addressed to the Securities and
Exchange Commission regarding this amended report is attached hereto as
Exhibit 16.
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 September 9, 1997 By /s/
------------------------ ----------------------------------------
(Signature)
By Ghulam M. Bombaywala
-----------------------------------------
Title Chief Executive Officer
--------------------------------------
