U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 28, 1998
Commission File No. 0-20143
WATERMARC FOOD MANAGEMENT CO.
(Name of Registrant in Its Charter)
TEXAS 74-2605598
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11111 WILCREST GREEN, SUITE 350
HOUSTON, TEXAS 77042
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (713) 783-0500
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.05 PAR VALUE PER SHARE
(Title of Class)
9% CUMULATIVE PREFERRED STOCK, $1.00 PAR VALUE PER SHARE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 11, 1998, the aggregate market value of the Common Stock
held by non-affiliates of the issuer was approximately $2,087,902 based on the
average bid and ask prices of $.085 per share of Common Stock as quoted on the
Over the Counter Bulletin Board. As of September 11, 1998, 24,563,564 shares of
the issuer's Common Stock and 329,540 shares of the issuer's Preferred Stock
were outstanding, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
No documents, other than certain exhibits, have been incorporated by
reference in this report.
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ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
As of June 28, 1998, Watermarc Food Management Co., a Texas corporation, (the
"Company"), owned and operated, both directly and through subsidiaries,
full-service restaurants under the names Marco's Mexican Restaurants (the
"Marco's Restaurants"), The Original Pasta Co. Restaurants (the "Pasta Co.
Restaurants") and Billy Blues Barbecue Bar & Grill (the "Billy Blues
Restaurant"). During the first quarter 1998, the Company's Longhorn Cafe was
sold to an unaffiliated party. See "Concepts and Menus".
The Company was organized as Billy Blues Food Corporation, a Texas
corporation, on June 17, 1991 to develop, own and operate restaurants and to
produce and market a uniquely flavored barbecue sauce. In March of 1995, the
name was changed to Watermarc Food Management Co. In the fourth quarter of
fiscal 1994, the Company acquired twenty one Marco's Restaurants. Two Marco's
Restaurants were subsequently built. In the third quarter of fiscal 1994, the
Company acquired Chris' & Pitt's Bar-B-Q Sauce, a medium priced barbecue sauce
product line. In the third quarter of fiscal 1996, the Company acquired ten
Pasta Co. Restaurants. Furthermore, the Company opened three new Pasta Co.
restaurants in fiscal 1996, four new restaurants in fiscal 1997, and one new
restaurant during the first quarter of fiscal 1998. Unless the context requires
otherwise, references to the "Company" refer to Watermarc Food Management Co.,
its predecessors and subsidiaries.
CONCEPTS AND MENUS
MARCO'S RESTAURANTS. Marco's Restaurants are full service restaurants that
feature high quality, moderately priced Mexican food. The style and decor of
Marco's Restaurants are distinctive and colorful and are designed to present a
Mexican style motif in a family oriented environment. Marco's Restaurants have a
standardized menu with a variety of offerings, including Black Angus beef
fajitas, tacos, enchiladas and numerous appetizers. Entrees range in price from
$4.99 to $12.99. Marco's Restaurants also offer a full service bar specializing
in various flavored margaritas, as well as numerous brands of Mexican and
domestic beer and wine. The restaurants are open for lunch and dinner seven days
a week. A typical Marco's Restaurant consists of 4,000 to 6,000 square feet for
dining and bar facilities, and has a seating capacity for 175 to 300 patrons.
The decorative scheme in each restaurant incorporates a centrally located
Tortilla Room where tortillas are prepared and served fresh to the customer. The
exterior design of the Marco's Restaurants normally conforms to the shopping
center in which it is located, with the restaurant's name and logo prominantly
displayed. The restaurants have varying floor plans and configurations. During
the third quarter of fiscal 1998, the Company closed its Marco's Mexican
Restaurant in College Station, Texas. As of June 28, 1998, the Company had a
total of twenty-one Marco's Restaurants in operation in Southeast Texas,
including the Houston metropolitan area, Victoria, and Lake Jackson, Texas.
During the first quarter of fiscal 1999, the Company closed its Lake Jackson
Marco's Mexican Restaurant.
PASTA CO. RESTAURANTS. Pasta Co. Restaurants are distinctive, colorful,
Italian-style, family oriented restaurants that feature full-service and offer
moderately priced food and beverages. The restaurants include a brick oven for
the preparation of pizzas, as well as a cooking area where entrees are produced.
Both the oven and the cooking area are visible to customers. The Pasta Co.
Restaurants offer a wide variety of appetizers, soups, salads, pasta and other
entrees, pizzas, desserts and beverages. The restaurants specialize in generous
portions at reasonable prices, with any item on the menu available for $8.69 or
less. A children's menu is also available. Beverages sold consist of coffee,
tea, sodas, bottled water, espresso, cappuccino, beer and wine. Most menu items
are available for take-out. The exterior of each of the locations generally
conforms to that of the center of which it is located, with the restaurant's
name and logo prominently displayed. In addition, numerous windows make the
restaurants more inviting from the outside and lighter and brighter on the
inside. Decor items, ingredients and produce displayed on shelves and cases
throughout the restaurants give the impression of an open-air Italian
marketplace. Typical units are approximately 3,600 to 4,000 square feet each,
and most have an outside patio of approximately 400 additional square feet. The
units have seating capacities of 160 to 200 persons. The restaurants are open
for lunch and dinner seven days a week. As of June 28, 1998, the Company had a
total of eighteen Pasta Co. Restaurants in operation, all of which were located
in Southeast Texas.
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BILLY BLUES RESTAURANT. The Billy Blues Restaurant generates an exciting and
vibrant "Texas Roadhouse" ambiance enhanced by recorded and live music, Texas
artifacts, neon signage and other memorabilia. 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 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.
FOOD PRODUCTS. The Company also produces 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. Billy Blues Barbecue Sauce is
sold on a special order basis, primarily to restaurants. Chris' & Pitt's Bar-B-Q
Sauce is packaged in six different flavors and is available in supermarkets and
other retail outlets located primarily in the State of California. The Company
also markets and packages its Chris' & Pitt's Bar-B-Q Sauce products for food
service distribution to restaurant chains and commissaries. The Company
periodically engages in advertising campaigns to enhance customer awareness of
barbecue sauce products in the areas where they are currently available in
supermarkets and other retail outlets.
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 has expanded its food broker
network. The Company utilizes a distribution warehouse in California for storage
of products. The Company pays handling and storage fees based on the actual
monthly volume shipped to the warehouse. The Company contracts with independent
freight carriers for the delivery of its product lines, or provides special
pricing for customers who pick up the product at a storage warehouse. The
Company's product lines are distributed to supermarkets either through: (1)
direct shipment to a supermarket chain warehouse which then distributes to its
individual supermarkets from the warehouse; (2) direct shipment to an
independent grocery warehouse, which performs the same function as a supermarket
chain warehouse for a fee; or (3) an independent food distributor who picks up
the products at the storage warehouse and delivers directly to the supermarkets.
A fee is paid to the food distributor based on volume. The Company generally
sells its food products pursuant to customer purchase orders and usually fills
the orders within approximately ten days of receipt. Because orders are filled
shortly after receipt, backlog is not material to the Company's business.
Food product revenues, as a percent of total revenues, for the last three fiscal
years ended June 28, 1998, June 29, 1997 and June 30, 1996 were 6.6%, 4.9% and
7.2% 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 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.
BUSINESS STRATEGY
Historically, the Company's primary business 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.
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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, was elected President and Chief Operating Officer of the Company.
Future growth by acquisition or restaurant expansion is not planned at this time
until the Company is restored to profitability.
The Company's plan to return to profitability for fiscal 1999 includes the
following:
o Increasing revenues from the sale of food products by reinforcing existing
markets, expanding distribution to new market areas, introducing more
aggressive marketing programs,adding methods of distribution and
developing new products.
o Further reductions in operating expenses through improved cost controls.
o Further reductions in general and administrative expenses.
o Increasing revenues in existing restaurants by improving marketing
programs and customer service.
o Selling or closing its Billy Blues Restaurant and non-performing Marco's
and Pasta Co. Restaurants.
o Renegotiating and extending the terms of the Company's existing
indebtedness
o Obtaining additional equity capital or debt financing.
MARCO'S RESTAURANTS. During fiscal 1998, the Company closed its restaurant
located in College Station, Texas due to poor operating performance. During the
first quarter of fiscal 1999, the Company closed its Lake Jackson restaurant,
also due to poor operating performance. During fiscal 1999, the Company will
continue to monitor the performance of each restaurant and, if necessary, close
or sell those which are not profitable. No new restaurant construction is
planned at this time.
PASTA CO. RESTAURANTS. One new Pasta Co. restaurant was opened in the
first quarter of fiscal 1998. Growth in the Pasta Co. concept should be
achieved by concentrating on increasing customer satisfaction, focusing on
controlling food costs and outsourcing labor intensive food preparation
processes as a measure to reduce costs and maximize revenue. Outsourcing
products will also aid in achieving product consistency from restaurant to
restaurant. No new restaurant construction is planned at this time.
BARBECUE RESTAURANTS. The Company does not plan to expand its Billy Blues
Restaurant concept. As a measure to reduce costs and maximize revenues, the
Billy Blues Restaurant no longer serves lunch. It is now open exclusively for
dinner and evening entertainment. The Company anticipates selling the Billy
Blues Restaurant in fiscal 1999. During the first quarter of fiscal 1998, the
Longhorn Cafe was sold to an unaffiliated party.
FRANCHISING. To date, no restaurants have been franchised. The Company does
not intend to emphasize a franchise program for Marco's Restaurants and Pasta
Co. Restaurants during fiscal 1999 unless or until the Company's profitability
is restored. Management believes that franchising could provide significant
growth for the Company in upcoming years.
FOOD PRODUCTS. The Company currently produces two brands of barbecue sauce
products and a spice rub. The Company's strategy to increase food product sales
is focused on its Chris' & Pitt's product line and includes reinforcing existing
markets, including recapturing lost commercial customers, expanding distribution
to new market areas (primarily in the Sun Belt states), introducing more
aggressive marketing programs, adding methods of distribution and developing new
products.
POSSIBLE SALE OF COMPANY OR ASSETS. If the Company cannot achieve profitable
operations during fiscal 1999 or 2000 it will consider a sale or merger of all
or part of the Company, its divisions or assets. The Company has discontinued
its strategy of pursuing acquisition candidates in the restaurant industry at
this time, except where any such acquisition or business combination could
enhance the Company's ability to continue as a going concern.
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RESTAURANT LOCATIONS AND SITE SELECTION
The Company believes that the locations of its restaurants are critical to
its long-term success. Senior management devotes significant time and resources
to analyzing each respective site. The Company utilizes, and continually
enhances, specific site selection criteria which focuses on local demographics
such as target population, density and household income levels; specific site
characteristics such as visibility, accessibility and traffic volume; proximity
to activity centers; parking availability; and potential competition in the
area. Currently, all restaurants are located in Texas.
The Company periodically reevaluates restaurant sites to ensure that site
selection attributes have not deteriorated below minimum standards. In the event
site deterioration occurs, the Company makes a concerted effort to improve the
restaurant's performance by providing physical, operating and marketing
enhancements unique to each restaurant's situation. If efforts to restore the
restaurant's performance to acceptable minimum standards are unsuccessful, the
Company considers relocation to a proximate, more desirable site, or evaluates
closing the restaurant if the Company's criteria, such as return on investment
and area demographic data, do not support a relocation. Since inception through
June 28, 1998, the Company has closed or sold eleven restaurants, including two
in fiscal 1998, which were performing below the Company's standards primarily
due to declining trade area demographics. These and future closings will be key
to a successful rehabilitation of the Company. With each restaurant closing, the
Company incurs losses from the disposal of fixed assets and must negotiate a
lease settlement with the landlord for the restaurant location involving the
settlement of future payment obligations. The Company has limited resources to
make these payments. (See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" (hereinafter referred to as
"MD&A".))
The following table provides information with respect to the restaurants
which were owned and operated by the Company as of June 28, 1998:
NO. OF APPROXIMATE
CONCEPT UNITS SQUARE FOOTAGE
------- ----- --------------
Marco's Mexican Restaurants 21 3,850 - 6,900
The Original Pasta Co. 18 3,600 - 4,200
Billy Blues Bar & Grill 1 8,000
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 and Pasta Co.
Restaurant employs 30 to 40 hourly employees. The Billy Blues Restaurant employs
approximately 30 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, training coordinators have been hired to focus on
improving customer satisfaction through better employee training for both the
Marco's Restaurant and Pasta Co. Restaurant concepts.
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PURCHASING AND SUPPLIES. Management negotiates directly with suppliers for
food and beverage products to insure uniform quality and adequate supplies and
to obtain competitive prices. The Company purchases substantially all food and
beverage products and novelty items from local or national suppliers. The
Company does not anticipate any difficulty in continuing to obtain food and
beverage products 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 the number
of customers. Daily reports are forwarded to the Company's corporate offices in
Houston, Texas where weekly summaries of all reported data are analyzed by the
Company's key management.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality. There are many well established competitors
with substantially greater financial and other resources than the Company. Most
of the Company's competitors have been in existence for substantially longer
periods than the Company and are more established in the markets where the
Company's restaurants are located. The Company's competitors have achieved
significant national, regional and local brand name and product recognition and
engage in extensive advertising and promotional programs, both generally and in
response to efforts by additional competitors to enter new markets or introduce
new products. The restaurant business is often characterized by a high failure
rate and affected by changes in consumer tastes and discretionary spending,
national, regional and local economic conditions, demographic trends, traffic
patterns, and the type, number and location of competing restaurants. Any change
in these factors could adversely affect the Company's restaurant operations.
Multi-unit foodservice operations such as those of the Company can also be
substantially affected by adverse publicity resulting from food quality,
illness, injury, health concerns, or operating issues stemming from a single
restaurant. The Company attempts to manage these factors, but the occurrence of
any one of these factors could cause the Company to be adversely affected.
Competition in the Houston geographic area is particularly acute which may
partially explain the Company's declining restaurant sales for the past three
years. (See "MD&A".)
TRADEMARKS
The mark "Marco's Mexican Restaurants" was registered in the U.S. Patent and
Trademark Office on January 15, 1991 and in the State of Texas in 1987. The mark
"The Original Pasta Co." was registered in the U.S. Patent and Trademark Office
on October 8, 1996 and in the State of Texas in 1998. The Billy Blues Barbecue
Bar & Grill and Billy Blues Barbecue Sauce logos were registered in the State of
Texas in 1991. The Chris' & Pitt's mark and logo were registered prior to the
Company's acquisition of the Chris' & Pitt's product line. The mark "Billy
Blues" was registered in the U.S. Patent and Trademark Office on November 17,
1992 as a service mark for restaurant and bar services. The mark "Billy Blues"
as a trademark for the Company's barbecue sauce was registered in the U.S.
Patent and Trademark Office on October 13, 1992. The Company has no reason to
believe that there are any conflicting rights which might impair the Company's
use of its marks; however, there can be no assurance that such conflicting
rights do not exist. The Company believes that these trademarks are valuable to
the operation of its restaurants and marketing of its food products. The
Company's policy is to pursue registration of its marks whenever possible and to
vigorously oppose any infringement of its marks.
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GOVERNMENT REGULATION
RESTAURANT OPERATIONS. The Company is subject to various federal, state
and local laws and regulations and administrative policies affecting its
business and must comply with provisions regulating health and sanitation, equal
employment, minimum wages and licensing for the sale of food and alcoholic
beverages. Difficulties or failures in obtaining or maintaining the required
licenses or approvals could adversely affect the operations of existing
restaurants. Approximately 15% of the revenues generated by the Marco's
Restaurants are attributable to the sale of alcoholic beverages, while
approximately 6% of the revenues generated by the Pasta Co. Restaurant and
approximately 40% of the revenues generated by the Billy Blues Restaurant are
the result of the sale of alcoholic beverages. The service of alcoholic
beverages is material to the business of the Company. Alcoholic beverage control
regulations require each of the Company's restaurants to apply to a state
authority and, in certain locations, county or municipal authorities, for a
license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Typically, licenses must be renewed
annually and may be revoked or suspended for cause at any time. The Company does
not anticipate experiencing any delays or other problems in obtaining or
renewing licenses or permits to sell alcoholic beverages; however, the failure
to receive or retain, or a delay in obtaining, a liquor license in a particular
location could adversely affect the Company's operations in that location. The
Company may be subject in certain states to "dram-shop" statutes or common laws,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment which wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
insurance.
The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and tip
credits; the Immigration and Naturalization Act, which governs employee
citizenship requirements; and the Americans with Disabilities Act, which governs
non-discriminating employment practices and reasonable accommodations for
disabled persons, both employees and customers. Significant numbers of the
Company's food service and preparation personnel are paid at rates related to
the federal minimum wage and, accordingly, future increases in the minimum wage
or decreases in the allowable tip credit will increase the Company's labor
costs. The Company has experienced an increase in its labor costs on an absolute
basis and as a percentage of declining sales which significantly affects the
Company's profitability. Increasing labor costs may continue due to relatively
tight labor market conditions. (See "MD&A".)
FOOD PRODUCT OPERATIONS. The Company's and the Co-Packer's food processing
activities are subject to extensive regulation by the United States Food and
Drug Administration, and by other state and local authorities. The Company
believes that it is currently in compliance with all governmental laws and
regulations and that the Company has all material permits and licenses relating
to its food processing operations. The Company has no reason to believe that the
Co-Packer is not in substantial compliance with all material governmental laws
and regulations and believes that the Co-Packer has all material permits and
licenses relating to its food processing operations. Nevertheless, there can be
no assurance that the Company or the Co-Packer will continue to be in
substantial compliance with current laws and regulations or that the Company or
the Co-Packer will be able to comply with any future laws and regulations.
Failure by the Company or the Co-Packer to comply with applicable laws and
regulations could subject the Company to civil remedies, including fines,
injunctions, recalls or seizures which could have a material adverse effect on
the Company.
Federal, state and local environmental regulations are not expected to
have a material effect on the Company's operations, but more stringent and
varied requirements of local governmental bodies with respect to zoning, land
use and environmental factors may restrict the Company's site selection for new
restaurants.
WORKERS' COMPENSATION. The Company has elected to be a non-subscriber
under the Texas Workers' Compensation Act. The Company offers, at no cost to the
employees, a Voluntary Employee Injury Benefit Plan ("Benefit Plan") which
provides certain benefits to employees injured during the course and scope of
their employment. The Benefit Plan is funded out of the general assets of the
Company. Management believes that the Benefit Plan will decrease the Company's
overall net cost in future periods. Management intends to review this election
on an annual basis. The Company does not believe it would encounter any
impediments if it elected in the future to become a subscriber under the Texas
Workers' Compensation Act. The Company does not believe that personal injury
claims by current or former employees of the Company, either individually or in
the
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aggregate, will have a material adverse effect on the Company, its properties or
business. The Company does not maintain a reserve fund for potential claims, but
carries catastrophic loss coverage with a limit of $1,000,000 and a deductible
of $150,000 per incident.
EMPLOYEES
At September 11, 1998, the Company employed 1,370 persons of whom 30 are
management and administrative personnel, 90 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 28, 1998, the Company leases all of its Marco's Restaurants,
Pasta Co. Restaurants and the Billy Blues Restaurant. The leases have terms that
expire between 1999 and 2012 and have an average remaining term of approximately
six years. The Company obtains real estate and develops its restaurants using
two methods: (i) leasing the land and building (a "land/building lease"); or
(ii) leasing a "shell" where the landlord may or may not contribute to the
construction of the improvements (a "shell lease"). The method the Company
pursues is determined on an individual site basis, depending on the cost and
location of the property and the negotiations between the Company and the owner
of the desired property. Of the Company's restaurants, 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 leases usually contain a renewal right for terms ranging from 5 to 15
years at then prevailing market rates.
The equipment located at most of the Company's restaurants has been
pledged as collateral to secure various loans, notes, and leases of the Company,
including landlord liens.
The Company's executive office is located in approximately 6,300 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.
The Company is a party to a lawsuit filed by one of its vendors arising
out of goods sold to Pete's Hospitality Co., Inc., ("Pete's") formerly a
subsidiary of the Company. The Company had guaranteed an open account of Pete's.
Pete's filed for bankrupcy and failed to pay the account. The vendor filed suit
against the Company on the guarantee.
Except as stated above, in management's opinion, the Company is not a
party to any litigation other than ordinary routine matters which are incidental
to the Company's business, including employee personal injury claims and
disputes with vendors and suppliers. The Company believes that no current legal
proceedings, individually, will have a material adverse effect upon the Company
or its business. However, in the view of the Company's overall financial
condition including a negative working capital position of $9.7 million at June
28, 1998, one or more of such litigation matters, or such matters in the
aggregate, could have a material adverse effect on the Company if such matters
are not settled on favorable terms or result in unfavorable judgments. (See
"MD&A" and "Note 1 of Notes to Consolidated Financial Statements.")
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of fiscal 1998.
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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 Over The Counter Bulletin
Board under the symbol of WAMA. The following table sets forth the range of low
and high closing bid prices for the Company's Common Stock for the periods
indicated as reported by the National Quotation Bureau, Incorporated. These
prices represent inter-dealer prices, without adjustment for retail mark-ups,
mark-downs or commissions and do not necessarily represent actual transactions.
COMMON STOCK
BID PRICE
------------
FISCAL YEAR 1997 LOW HIGH
---------------- --- ----
First Quarter..................... .50 1.06
Second Quarter.................... .47 1.31
Third Quarter..................... .28 .75
Fourth Quarter.................... .22 .50
FISCAL YEAR 1998 LOW HIGH
---------------- --- ----
First Quarter..................... .22 .38
Second Quarter.................... .05 .31
Third Quarter..................... .05 .18
Fourth Quarter.................... .14 .32
On September 11, 1998, the closing bid price for the Company's Common
Stock was $.08 per share. As of September 11, 1998, 24,563,564 shares of the
Company's Common Stock were outstanding. The Company believes that the actual
number of security holders of the Company's Common Stock is approximately 2,200,
including beneficial owners.
The Company has neither paid nor declared any cash dividends on its shares
of Common Stock since inception. The current policy of the Board of Directors is
to retain all available earnings of the Company for use in the operation of the
Company's business. The payment of cash dividends in the future will depend upon
such factors as earnings levels, capital requirements, the Company's financial
condition and other factors deemed relevant by the Board of Directors. Due to
its negative shareholders' equity, the Company is precluded by law from paying
cash dividends at this time. The Company is required to pay dividends on its
Preferred Stock before any dividends can be paid on the Common Stock.
With respect to sales of unregistered securities and a description therof,
reference is made to Note 11 - "Related Party Transactions" to the Consolidated
Financial Statements.
On March 27, 1998, 7,500,000 shares of the Company's Common Stock were
issued to Ghulam M. Bombaywala, Chief Executive Officer and director of the
Company, in a private transaction based on exemption 4(2) under the Securities
Act of 1933, as amended, pursuant to a Conversion and Offset Agreement in
exchange for the conversion by him of $3,750,000 owed to him by the Company at a
conversion price of $.50 per share. (See "Item 13. Certain Relationships and
Related Transactions.")
Amendments adopted to the listing requirements for NASDAQ Small Cap
companies resulted in the delisting of the Company's Common Stock, Preferred
Stock and Warrants from NASDAQ during the second quarter of fiscal 1998. To
remain listed on NASDAQ, the Company's shares must trade at $1.00 or above and
the Company must have a tangible net worth of $2,000,000. The Company was unable
to meet the new requirements without substantial equity capital. Shareholders
may find it more difficult to dispose of or obtain accurate quotations as to the
value of the Company's securities.
-9-
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 40,172 $ 49,125 $ 40,129 $ 37,652 $ 37,008
Net Income (Loss) $ (6,964) $(10,913) $ 49 $ (7,037) $ (8,360)
Net Income (Loss) Per
Common Share* - Basic $ (0.42) $ (0.83) $ (0.02) $ (0.82) $ (1.10)
BALANCE SHEET DATA (end of
period)
Total Assets $ 12,683 $ 16,715 $ 25,865 $ 17,672 $ 20,133
Long-term Debt $ 7,230 $ 4,985 $ 10,768 $ 1,709 $ 1,507
</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 The comparability of the information presented above is predicated upon the
Company's ability to continue as a going concern of which there is
substantial doubt without immediate additional financing - (See "MD&A" and
"Note 1 to Notes to the Consolidated Financial Statements.")
o In the third quarter of fiscal 1998 the Marco's Mexican Restaurant in College
Station, Texas was closed.
o In the first quarter of fiscal 1998 the Longhorn Cafe Restaurant - Downtown
was sold.
o In the fourth quarter of fiscal 1997 Pete's Hospitality and Marco's Mexican
Restaurant in Texas City, Texas were sold.
o Early in the third quarter of fiscal 1996, ten Pasta Co. restaurants were
acquired (See "Item 13. Certain Relationships and Related Transactions".) The
Pasta Co. contributed approximately $5 million in revenues in fiscal 1996 and
approximately $14 million in revenues in fiscal 1997.
o In the fourth quarter of fiscal 1995 and during fiscal 1996 four Billy Blues
Restaurants and one Longhorn Cafe Restaurant were closed or sold reducing
revenues for 1996 by approximately $2.5 million.
o In the fourth quarter of fiscal 1994 the Marco's Restaurants were acquired.
Marco's contributed approximately $22 million in revenues in fiscal 1994 and
approximately $23 million in revenues in fiscal 1995.
o Notwithstanding the restaurant acquisitions and closings described above, it
should be noted that the Company's comparable store revenues have shown
significant adverse declines in the past two years, 14% and 7.4% in fiscal
1998 and 1997, respectively. These declines, combined with an increase in
certain costs, have negatively impacted the Company's operating and net
income irrespective of any asset impairment charges or writedowns in any
particular year. (See "MD&A" and "Note 1 to Notes to the Consolidated
Financial Statements.")
-10-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company acquired The Original Pasta Co. on January 26, 1996. The
acquisition was accounted for under the purchase method and, accordingly, the
Company's Consolidated Financial Statements include the results of operations of
Pasta Co. from its acquisition date.
During fiscal 1998 the general economy was positive. Southeast Texas also
has been rebounding from depressed times. The restaurant industry in general is
supported by a positive economy yet the average failure rate in the restaurant
business is approximately one in ten in part due to changing customer tastes,
trade demographics and fierce competition. The Company has once again focused
its marketing strategy around direct mail and newspaper coupons which have
traditionally been successful in an effort to combat declining sales. The
Company believes its restaurant concepts offer a strong price to value
relationship in their markets. The Company continues to attempt to enhance and
develop its concepts by offering the consumer more health conscious alternatives
and daily dinner/lunch specials at an attractive price. However, as discussed
below, the Company continues to suffer comparable restaurant sales declines with
respect to many of its Marco's and Pasta Co. Restaurants and with respect to
overall comparable restaurant sales.
The Company utilizes a 52-53 week fiscal year which ends on the Sunday
closest to June 30. References to 1998, 1997 and 1996 are all 52 week periods
ended June 28, 1998, June 29, 1997 and June 30, 1996, respectively.
At the end of each fiscal year, the Company had the following restaurants
in operation:
RESTAURANTS: 1998 1997 1996
- ----------- ---- ---- ----
Marco's Mexican Restaurants 21 22 23
Pasta Co. Restaurants 18 17 13
Billy Blues Restaurant 1 1 1
Longhorn Cafe 0 1 1
Pete's Restaurants 0 0 2
Hotspurs 0 0 1
---- ---- ----
Total 40 41 41
==== ==== ====
(This space intentionally left blank.)
-11-
<PAGE>
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 for
its restaurant and food product divisions.
The Company's revenues are derived from restaurant sales and food product
sales to third party retail outlets. Certain costs and expenses relate only to
restaurant sales (food and beverage, restaurant labor and other operations) or
food products (cost of food products), while other operating costs and expenses
relate to both restaurant and food products (general and administrative and
depreciation and amortization).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
JUNE 28, 1998 JUNE 29, 1997 JUNE 30,1996
------------- ------------- ------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
------------------------------
Revenues
Restaurants 93.4% 95.1% 92.8%
Food products 6.6 4.9 7.2
----- ----- -----
Total revenues 100.0% 100.0% 100.0
Costs and expenses:
Cost of restaurant revenues: (1)
Cost of food and beverage 29.9 26.8 29.4
Labor and other operations 70.3 68.5 58.0
----- ----- -----
100.2 95.3 87.4
Cost of food product revenues: (2)
Cost of food products 44.7 93.5 52.3
General and administrative 7.4 8.9 6.9
Depreciation and amortization 11.8 12.3 5.4
Provision for restaurant closings 1.3 2.4 --
Interest income .3 .3 .4
Interest (expense) (2.4) (2.5) (2.1)
Other non-operating income (expense) 1.8 .3 1.8
Income tax provision (benefit) -- -- --
Net income (loss) (17.3)% (22.2)% .1%
OPERATING DATA:
- ---------------
Restaurants open at end of period 40 41 41
Change in comparable restaurant revenues (3) (14.0)% (7.4)% (.8)%
</TABLE>
(1) As a percentage of restaurant revenues.
(2) As a percentage of food product sales.
(3) Includes only restaurants open during the entire periods under comparison.
For the fiscal years ended June 28, 1998, June 29, 1997 and June 30, 1996 the
Company recorded revenues of $40.2, $49.1 million and $40.1 million,
respectively. Before extraordinary items and the effect of preferred stock
dividends, the Company recorded a net loss of $7.0 million, a net loss of $10.9
million, and net income of $49,000 for these same years, respectively. As of
June 28, 1998, the Company had total current assets of $765 thousand and total
current liabilities of $10.5 million, resulting in a working capital deficit of
$9.7 million. The Company has funded its operating losses and expansion costs
primarily through a combination of public and private offerings of debt and
equity and extended payment terms, allowances and write-downs with respect to
vendor payables and certain indebtedness. During the first quarter of fiscal
1998, the Company sold its Longhorn Cafe Downtown Restaurant. The Company closed
its Marco's Mexican Restaurants in College Station and Lake
-12-
<PAGE>
Jackson, Texas during the third quarter of fiscal 1998 and the first quarter of
fiscal 1999, respectively, in an effort to decrease its losses.
As discussed in more detail below, 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 primarily upon, among other things: (i) its ability to
generate sufficient cash flow to meet its obligations on a timely basis; (ii)
obtaining additional equity capital or debt financing and renegotiating the
terms of existing indebtedness; and (iii) ultimately to attain profitable
operations. However, even if the Company achieves some success with its
operational strategy, there can be no assurance that it will be able to generate
sufficient cash flow to continue as a going concern without substantial
additional capital in the short-term. The Company had negative cash flow from
operations during fiscal 1998 and did not generate sufficient cash flow to meet
its needs, primarily as a result of declining sales and rising labor costs and
costs of food and beverage revenues.
During fiscal 1997 and 1998, the Company experienced significant operating
losses. These losses raise doubt about the Company's ability to continue as a
going concern. In an effort to decrease its losses, the Company took the actions
listed below:
o In June 1997, the Company reorganized its top management in an attempt to
return the Company to profitability and has substantially reduced general and
administrative expenses in the past year.
o In September 1997, the Company sold its remaining Longhorn Cafe Restaurants
to an unrelated party in an asset purchase transaction. The Company recorded
income of approximately $138,000 reflected in other income in the first
quarter of fiscal 1998. The Longhorn Cafe contributed approximately $220
thousand in revenues in fiscal 1998.
o In February 1998, the Company closed its Marco's Mexican Restaurant located
in College Station, Texas because the location was performing below the
Company's standards primarily due to declining trade area demographics. The
Company recorded a loss of approximately $49,000 on this transaction in the
third quarter of fiscal 1998. The College Station, Texas location contributed
approximately $359,000 in revenues in fiscal 1998.
o In August 1998, the Company closed its Marco's Mexican Restaurant located in
Lake Jackson, Texas because the location was performing below the Company's
standards primarily due to declining trade area demographics. The Company
recorded a loss of approximately $82,500 on this transaction in the fourth
quarter of fiscal 1998. The Lake Jackson, Texas location contributed
approximately $558,000 in revenues in fiscal 1998.
Until the Company is able to obtain profitable operations and cash flow from
its core restaurant concepts, the Marco's Restaurants and the Pasta Co.
Restaurants, the Company intends to postpone restaurant expansion from new
restaurant construction. The Company plans to sell or close its non-performing
Marco's and Pasta Co. Restaurants and its Billy Blues Restaurant in fiscal 1999.
The Billy Blues Restaurant contributed $1.5 million in revenues in fiscal 1998
and had an operating loss of $343,000. The Company will consider material
restaurant acquisitions or combinations if they could significantly enhance the
projected revenues and profitability of the Company on a consolidated basis
and/or allow the Company to continue as a going concern. Any material
acquisition or business combination by the Company could substantially change
the Company's business structure, capitalization and operating performance. As
of June 28, 1998 the Company had no agreements or understandings regarding any
material restaurant acquisitions or combinations. Any acquisition or
combination, if unsuccessful, could materially and adversely affect the
Company's ability to continue as a going concern. The Company may consider the
sale of all or part of the assets of the Company if it continues to incur
substantial operating losses and the terms of any such sale may be detrimental
to overall shareholder value.
-13-
<PAGE>
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
RESTAURANT REVENUES. Revenues decreased $9,194,169 or 19.7% to $37,540,093
in 1998 as compared to $46,734,262 in 1997. Revenue decreases are primarily due
to (i) the closing or sale of Pete's Hospitality Restaurants and the sale of one
Marco's Mexican Restaurant partially offset by the opening of one Original Pasta
Co. Restaurant during 1998, and (ii) a decline in comparable restaurant revenues
of 14%.
For fiscal 1997, comparable restaurant revenues had declined by 7.4%.
Management is working to improve same store sales in fiscal 1999 by changing
marketing strategies to concentrate on local store marketing and improving
quality and service. The decline in comparable restaurant revenues could be
attributable to increased competition, the age of the Marco's and Pasta Co.
Restaurants, previously unsuccessful advertising strategies, the core restaurant
concepts being less compatible with changing consumer tastes or other factors.
Management cannot predict whether the decline in comparable store restaurant
sales will continue, but such declines are likely if management is unable to
determine the cause of such declines and implement substantial remedial steps.
In view of the Company's financial condition, it may not have the resources to
fund changes in advertising strategy, improvements in quality and service or
changes to the restaurant concepts, including their trade dress and menu items.
Approximately 12% of restaurant revenues were derived from the sale of
alcoholic beverages for fiscal 1998 and 20% in fiscal 1997.
FOOD PRODUCTS REVENUES. Revenues increased by $240,957 due to an
aggressive marketing program.
COST OF RESTAURANT REVENUES. Costs of food and beverage revenues as a
percentage of restaurant sales increased from 26.8% in 1997 to 29.9% in 1998.
The increase is due in part to increases in prices of certain high volume
products used in menu item preparation. In addition, due to the Company's
financial condition and payment terms with suppliers, the Company is unable to
obtain the most favorable pricing. Significant changes in this percentage are
not anticipated for fiscal 1999. However, management is unable to predict future
product costs or the impact of any increases in such costs on the Company's
future results of operations.
Labor and other restaurant operating costs include all other unit-level
operating expenses, comprised principally of labor and benefits, operating
supplies, rent, utilities, repair and maintenance, pre-opening expenses,
advertising and other costs. A substantial portion of these expenses are fixed
or indirectly variable. These costs increased as a percentage of restaurant
revenues from 68.5% in 1997 to 70.3% in 1998 due to lower sales and increased
labor costs associated with the federal minimum wage rate increase in September
1997 and a tightening labor market. These factors are expected to continue to
put upward pressure on the Company's labor costs.
COST OF FOOD PRODUCTS REVENUES. The cost of food products as a percentage
of food product revenues decreased from 93.5% in 1997 to 44.7% in 1998 due to
operational efficiencies and an agressive marketing strategy implemented in
1998.
GENERAL AND ADMINISTRATIVE EXPENSE. These expenses decreased by $1,381,786
from $4,364,147 in 1997, to $2,982,361 in 1998 due to the reorganization of
corporate and management personnel and decreases in management and corporate
office personnel.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
from $6,035,811 in 1997 to $4,755,760 in 1998. The decline is due primarily to
the sale of Pete's Hospitality in fiscal year 1997 offset by an impairment of
Pasta Co. goodwill of $2,600,000.
PROVISION FOR CLOSED RESTAURANTS. In fiscal 1997, the Company recorded a
provision for restaurant closings of approximately $1.2 million as a result of
management's decision to either close or sell its interest in the Billy Blues
Restaurant. The provision included the write-down of assets to net realizable
value. In 1998, the Company recorded an additional $115,084 for the closing of
its Marco's Mexican Restaurant in Texas City, Texas. The assets of this
restaurant were sold in the fourth quarter of fiscal 1997. The buyer defaulted
on the loan agreement. Therefore, the location was repossessed and an additional
provision established.
INTEREST INCOME. Interest income of $120,186 in fiscal 1998 and
$121,260 in fiscal 1997 resulted primarily from a note receivable from Mr.
Bombaywala.
INTEREST EXPENSE. Interest expense decreased from $1,220,666 in 1997 to
$997,609 in 1998 due primarily to the principal payment of $1,250,000 on the 12%
subordinated notes as well as conversion of debt to equity owed to Mr.
Bombaywala. (See "Item 13. Certain Relationships and Related Transactions.")
OTHER INCOME, NET. Other income, net, increased by $571,896 from 1997 to
1998 due to a gain of approximately $138,000 on the sale of a Longhorn Cafe
restaurant and recovery of a previously written-off note from a former related
party of approximately $454,000. (See "Item 13. Certain Relationships and
Related Transactions".)
-14-
<PAGE>
INCOME TAXES. The Company had no income tax provision nor benefit in
fiscal 1998 or fiscal 1997.
NET INCOME (LOSS). As a result of the changes in the relationships between
revenues and costs and expenses described above (decreasing revenues and
increasing labor and costs of food and beverage), the Company recorded a net
loss of $10,912,775 in 1997 and a net loss of $6,964,084 in fiscal 1998. The
losses in fiscal 1997 included the asset writedowns of approximately $4.5
million for the Chris & Pitt's Barbecue Sauce line and restaurant closings and
losses in fiscal 1998 include the asset writedowns of $2,600,000 for Pasta Co.
MANAGEMENT'S PLANS. Management's plans to return to profitability include
the following:
o Increasing revenues from the sale of food products by reinforcing
existing markets, expanding distribution to new market areas,
introducing more aggressive marketing programs, adding methods of
distribution and developing new products.
o Further reductions in operating expenses through improved cost controls.
o Further reductions in general and administrative expenses.
o Increasing revenues in existing restaurants by improving marketing
programs and customer service.
o Selling or closing its Billy Blues Restaurant and non-performing Marco's
and Pasta Co. Restaurants.
o Renegotiating and extending the terms of the Company's existing
indebtedness.
o Obtaining additional equity capital or debt financing.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUES. Total revenues increased 22.4% or $9.0 million in fiscal 1997
over fiscal 1996. Revenues increased approximately $9.3 million due to having
owned the Pasta Co. Restaurants for a full year in fiscal 1997 versus
approximately 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,
which the Company believes was a result of, among other things, extremely
competitive conditions and a general softness in restaurant sales in the
Company's Houston, Texas market and the factors discussed for fiscal 1998.
Furthermore, fiscal 1996 contained approximately $390,000 of revenue related to
a fair in the State of Washington that was not included in fiscal 1997. The sale
of one of the Longhorn Cafes during fiscal 1996 further reduced revenues. The
remaining Longhorn Cafe contributed $.9 million in revenues in fiscal 1997.
Approximately 20% of restaurant revenues were derived from the sale of
alcoholic beverages in fiscal 1997 versus 16% from fiscal 1996.
OPERATING COSTS AND EXPENSES. Generally, all restaurant related and
administrative costs increased due to an overall increase in revenue by 22.4%
primarily as a result of incorporating the Pasta Co. Restaurants operations for
a full year versus one-half year in fiscal 1996. Furthermore, these costs
increased due to the opening of four new Pasta Co. Restaurants in fiscal 1997.
Food and beverage costs increased 14.5% overall (but declined as a percentage of
revenue from 29.4% to 26.8%). Labor costs increased 26.2% overall additionally
due to an increase in the minimum wage in October 1996, a tightening labor
market, increased restaurant staff coverage to meet customers needs and as a
result of the additional Pasta Co. Restaurants which are more labor intensive
than the Marco's Restaurants. Costs of other restaurant operations increased
72.9% and include remodeling costs for Marco's Restaurants, preopening costs for
four Pasta Co. Restaurants, research and development costs for Marco's and Pasta
Co. menus, and advertising and marketing for the restaurant concepts.
Advertising and marketing increased by approximately $987,000 due to new
television and radio promotions undertaken in fiscal 1997. 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
intended, but was unable, to sell or close the Billy Blues Restaurant in fiscal
1998, which contributed $1.9 million in revenues in fiscal 1997.
-15-
<PAGE>
General and administrative costs increased 58.6% or $1.6 million over
fiscal 1996 and include corporate salaries and wages, legal fees and settlements
and professional fees. Legal fees included approximately $200,000 for settlement
of various claims. Additional expenses included costs to develop and market the
Company's franchise program which was put on hold in fiscal 1998. Corporate
salaries for fiscal 1997 included $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.
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 Barbecue Sauce to be impaired. Management
estimated the fair value and, accordingly, an impairment expense of
approximately $3.45 million was recorded during 1997 and is included in
depreciation and amortization expense.
NON-OPERATING INCOME (EXPENSE)
Interest expense increased 43.6% primarily due to interest on debt related
to the acquisition of Pasta Co. in January 1996. (See "Item 13. Certain
Relationships and Related Transactions.")
INCOME TAX
The Company had no income tax provision nor benefit in fiscal 1997 or
fiscal 1996.
NON-OPERATING INCOME (EXPENSE)
A loss of approximately $750,000 was recorded on the sale of Pete's
Hospitality concept sold in June 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily incurred losses from operations
and, as of June 28, 1998, has an accumulated deficit of $37,277,169.
During fiscal 1998, net cash flow used in operating activities totaled
$845,623 primarily due to depreciation and amortization of $4,755,760 added back
to net income, offset by an increase in accrued liabilities and accounts payable
of $535,175. Investing activities utilized $354,613 of cash, principally
resulting from purchases of property and equipment. Financing activities
provided $1,027,469 of cash, due to additional borrowings.
-16-
<PAGE>
During fiscal 1997, net cash provided by operating activities of $385,783 was
primarily due to adding back of non-cash deductions from depreciation and
amortization of $6,035,811, provision for restaurant closings of $1,175,434, and
increase in accounts payable and accrued liabilities of $2,027,007. Net cash of
$606,131 used in investing activities was primarily due to cash outflow for
purchases of restaurant property and equipment in excess of proceeds from the
sale of property and equipment. Net cash provided by financing activities
totaling $20,724 was due to proceeds from borrowings in excess of repayments of
borrowings, and purchase of treasury stock.
During fiscal 1996, net cash flow from operating activities totaled
$1,346,354 primarily due to depreciation and amortization added back to net
income, offset by a reduction in accrued liabilities. Investing activities
utilized $1,616,660 of cash, principally resulting from purchases of property
and equipment. Financing activities utilized $1,368,257 of cash, primarily due
to net payments on borrowings. In March of 1996, the Company received proceeds
from a $1.2 million bank loan, of which approximately $860,000 was used to pay
off an existing loan.
The Company has a working capital deficit of approximately $9.7 million at
June 28, 1998. The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing or capital, refinance its debt and to
ultimately attain profitable operations. (See "MD&A - Results of Operations"
above) The Company did not generate adequate cash flow to meet its needs in
fiscal 1998. The Company needs immediate capital in the short-term and
additional capital in the long-term to meet its needs which are identified
below. The Company cannot generate positive cash flow from operations unless it
can increase its sales and achieve further cost reductions. Even if profitable
operations can be achieved by the Company in the short-term, it will not have
sufficient cash flow to cover general and administrative expenses, materially
reduce its payables and accrued liabilities and meet its debt service
requirements.
Management's plans include the following:
o Decreasing food and labor costs while increasing revenues.
o Increasing revenues in existing restaurants 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 Obtaining additional equity capital or debt financing.
o Selling or closing its Billy Blues Restaurant.
o Selling or closing its other non-performing restaurants.
The material capital commitments of the Company for fiscal 1999 are as
follows:
o Reduction of the Company's working capital deficit, including payments
on notes, accounts payable and accrued liabilities.
o Accumulation of funds for the payment of the principal balance of $1.25
million currently owed on the $3 Million 12% Subordinated Notes. The
notes were due July 10, 1998, but have been extended to December 31,
1999. A principal payment of $100,000 was made on September 1, 1998,
with a principal payment of $150,000 due December 31, 1998.
o Accumulation of funds for the payment of the principal balance of $1
million owed on the note payable to an unaffiliated foreign investor
due June 1999. Unless a settlement agreement can be reached, the
Company is in default on this note and received a notice of
acceleration and default on September 11, 1998.
o Funding of negative cash flow from operations if operating results are
not improved. Increasing sales (or preventing further sales declines)
and controlling or reducing operating costs will be critical for the
Company to generate positive operating cash flow.
In the first quarter of fiscal 1998, the Company opened one new Pasta Co.
Restaurant. Pasta Co. Restaurants require an initial capital investment of
approximately $400,000. Of this amount, the Company financed approximately half
of the investment using the acquired assets as collateral. The Company financed
the balance through cash flow from operations. There are no further plans to
open new restaurants during fiscal 1999 due to capital restraints and overall
operating results at existing restaurants.
-17-
<PAGE>
The Company may achieve positive cash flow from operations in fiscal 1999,
principally from its Marco's and Pasta Co. Restaurants, only if it can increase
its restaurant sales and reduce its labor and other operating costs. As
discussed in "Results of Operations", the Company has been unable to reverse the
21.4% decline in comparable restaurant sales over the last two fiscal years. The
Company may experience further sales declines in fiscal 1999 which could have a
material adverse effect on the Company's liquidity if additional financing is
not available. During the first quarter of fiscal 1998, the Company sold its
remaining Longhorn Cafe Restaurant to raise additional cash. The Company also
plans to supplement cash flow from operations by selling its last barbecue
restaurant, Billy Blues. However, cash generated from operations, if any, will
not be sufficient to meet all of the Company's fiscal 1999 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 Subordinated
Notes due December 31, 1999,(iii) repay the $1 million note due June 1999, or
(iv) fund negative cash flow from operations if the Company's negative operating
cash flow continues. There is no assurance that the Company will be able to
refinance its debt or obtain additional debt or equity financing in the short
term or long-term. The Company has not been successful in raising debt or equity
financing in fiscal 1998.
For fiscal 1998 the Company had negative cash flow from operations of
$845,623. The Company did not have sufficient cash flow during fiscal 1998 to
satisfy its direct operating expenses and pay its substantial indebtedness and
reduce its accounts payable and short-term liabilities which increased
$2,027,007 in fiscal 1997 and $535,175 in fiscal 1998. The Company cannot
continue to fund negative cash flow from operations and meet its other
obligations by increasing its payables to vendors in the short or long-term. In
order to meet its liabilities and obligations, the Company was required to
obtain additional debt financings and borrowings as discussed above, renegotiate
and extend the terms of various borrowings and renegotiate and extend the
amounts and the timing of payment to various vendors.
The Company may experience further losses or negative cash flow from
operations in fiscal 1999. Continued losses raise doubt about the Company's
ability to continue as a going concern. The financial statements do not reflect
any adjustments that might result from the outcome of this uncertainty. If the
substantial losses continue, the value of the Company's long-lived assets may
become further impaired resulting in further write-downs to such assets to their
estimated fair value.
The inability of the Company to obtain additional financing and achieve
profitable operations and positive cash flow has resulted in the curtailment of
the Company's expansion activities which may continue indefinitely. Cash
generated from operations will not be sufficient to allow the Company to timely
meet all of its obligations and commitments. Since it has been unable to obtain
profitable operations and positive cash flow from operations, or additional
financing, the Company has curtailed its expansion, is selling non-core assets
and is seeking further financings on terms which may prove unfavorable to the
Company and its shareholders. If operating results do not improve or if
additional financing is not available, the Company may be forced to further
curtail or reduce its operations or sell all or part of its core assets on terms
unfavorable to its shareholders. The Company has not been able to raise any
material debt or equity financing in fiscal 1998 although it has renegotiated,
consolidated and/or extended certain indebtedness.
YEAR 2000 ISSUES. The Company is working to resolve the potential impact
of the year 2000 on the ability of the Company's computerized information
systems to accurately process information that may be date-sensitive. Any of the
Company's programs that recognize a date using "00" as the year 1900 rather than
the year 2000 could result in errors or systems failures. The Company utilizes a
number of computer programs in its operations. The Company has retained a
consultant to assess the potential impact of the year 2000 on its own
operations. In addition, the Company is also evaluating the year 2000 readiness
of those third parties, including vendors and suppliers, with whom the Company
does business, and the potential impact on the Company if these third parties
are unable to address this issue in a timely manner. The Company has not
completed its assessment, but currently believes that the costs of addressing
this issue will not have a material adverse impact on the Company's financial
position. However, if the Company and third parties upon which it relies are
unable to address this issue in a timely manner, it could result in a material
financial risk to the Company. In order to assure that this does not occur, the
Company plans to devote all resources necessary to resolve any significant year
2000 issues in a timely manner. The Company is presently evaluating its
estimated costs for the year 2000 conversion.
NEW ACCOUNTING STANDARDS. In May 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share", which changes the manner in which earnings per share (EPS)
amounts are calculated and presented. Basic earnings per common share is
calculated by dividing net income by the weighted average number of common
shares outstanding during the period presented. Fully diluted earnings per
common share is calculated by dividing net income by the weighted average number
of common shares and common share equivalents. Stock options are regarded as
common stock equivalents and are computed using the treasury stock method. Stock
options will have a dilutive effect under the treasury stock method when the
average market price of the common stock during the period exceeds the exercise
price of the options.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure", which establishes standards for disclosing information
about the Company's capital structure. This statement does not change any
previous disclosures but consolidates them in this statement for ease of
retrieval and greater visibility.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" which established standards for reporting and displaying comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. The adoption of this
statement requires incremental financial statement disclosure, and thus will
have no effect on the Company's financial position or results of operations.
FORWARD-LOOKING INFORMATION. Information in this Annual Report and Form
10-K contains forward-looking statements and information relating to the Company
that are based on the beliefs of the Company's management, as well as
assumptions made by, and information currently available to the Company's
management. When used in this Annual Report and Form 10-K, words such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "probably" and
similar expressions, as they relate to the Company, its operations or
management, identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events, and are subject to
certain risks, uncertainties, and assumptions relating to the operations and
results of operations of the Company, competitive factors and pricing pressures,
shifts in consumer demand, the costs of
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<PAGE>
products and services, general economic conditions, and the acts of third
parties, as well as other factors described in this Annual Report and Form 10-K,
and, from time to time, in the Company's periodic earnings releases and reports
filed with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein as anticipated, believed, estimated, expected, or intended, or the like.
ITEM 8. FINANCIAL STATEMENTS.
The financial information required by this Item is found beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As previously reported in a Form 8-K filing dated August 20, 1997,
incorporated herein by reference, the Company changed its principal independent
accountant. (See "Item 10. Directors and Executive Officers of the Registrant -
Committees and Fees.)
(This space is intentionally left blank.)
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages, titles and dates of
employment of the members of the Board of Directors and the executive officers
of the Company.
TERM OF
OFFICE
NAME AGE POSITION SINCE
---- --- -------- -------
Ghulam Bombaywala(1) 43 Chairman of the Board, Chief Executive 1994
Officer President, Chief Operating Officer
and Director
Sarosh J. Collector(2)(3) 50 Director 1995
Michael S. Chadwick(2) 46 Director 1994
Nico B. Letschert(3) 43 Director 1994
Philip M. Mount 40 Director 1994
Darrin Straughan 37 Director 1998
(1) The principal financial and accounting officer resigned in July 1997 and has
not been replaced. Mr. Bombaywala is currently signing in these capacities.
(2) Member of the Audit Committee of the Board of Directors.
(3) Member of the Compensation Committee of the Board of Directors.
GHULAM BOMBAYWALA was elected as a director of the Company on August 5,
1994. Effective September 21, 1994, Mr. Bombaywala was elected Chairman of the
Board of Directors and Chief Executive Officer of the Company. Since 1984, Mr.
Bombaywala has served as sole director of Marco's. Mr. Bombaywala also served as
President and Chairman of the Board of Directors of the publicly traded Two
Pesos, Inc. from April 1990 to June 1993 when it was sold to Taco Cabana, Inc.
Mr. Bombaywala is also a shareholder and President of James Original Coney
Island, Inc., the corporation owning the James Coney Island restaurants which
serve hot dogs and chili. Mr. Bombaywala serves on the Board of Directors of the
Sam Houston Area Boy Scouts of America, the National Conference of Christians
and Jews, and the United Way of Texas Gulf Coast.
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.
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<PAGE>
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: Futuremedia PLC and PSI
Industries, Inc.
PHILIP M. MOUNT has been a director of the Company since August 5, 1994
and is a partner with the law firm of Kelly, Sutter, Mount & Kendrick. Mr. Mount
has engaged in the practice of law in Houston, Texas since 1983. Mr. Mount's
principal areas of practice are corporate finance and securities. Mr. Mount
received his B.B.A. with honors from the University of Texas at Austin in 1980
and a J.D. from the University of Houston College of Law in 1983. From August
1990 until its acquisition in 1993, Mr. Mount served as a director and a member
of the Compensation and Executive Committees of Two Pesos, Inc., a publicly
traded Houston, Texas based restaurant company. Mr. Mount is also a member of
the Board of Directos of Star Resources Corporation, a corporation organized
under the laws of British Columbia, which is public company traded on the
Vancouver and Toronto Stock Exchanges in Canada and the OTC Bulletin Board in
the United States.
SAROSH J. COLLECTOR has been a director of the Company since March 17,
1995 and currently serves as a member of the Audit and Compensation Committees
of the Board of Directors. Mr. Collector is a certified public accountant and
has served as President of the accounting firm of Collector, Dart & Moore P.C.
since 1987. From 1986 to 1987, Mr. Collector was a manager with the accounting
firm of Spicer & Oppenheim, and from 1981 to 1986 served as a partner with the
accounting firm of Malow Cohen & Co. Mr. Collector's principal areas of practice
are taxation, business consulting and business valuation. Mr. Collector also
served as a director of Two Pesos, Inc., a publicly traded corporation, from
April 1990 to August 1993.
DARRIN STRAUGHAN has been a director of the Company since April 2, 1998.
Mr. Straughan has served as Vice President of James Original Coney Island, Inc.,
the corporation which owns the James Coney Island restaurant chain, since 1993.
From 1986 to 1993, Mr. Straughan was Director of Marketing for Kettle
Restaurants. Mr. Straughan also provides operational consulting services to the
Company pursuant to a Professional Services Agreement under which he has
received options to purchase 100,000 shares of the Company's Common Stock,
vesting over a period of three years, at an exercise price of $.14 per share.
Such compensation is not in consideration for any service provided by Mr.
Straughan as director of the Company.
COMMITTEES AND FEES
The Board of Directors of the Company has established an Audit Committee
and a Compensation Committee. The purpose of the Audit Committee is to review
and make recommendations to the Board of Directors with respect to the
engagement of the Company's independent public accountants, reviewing with such
accountants the plans for and the results and scope of the auditing engagement
and certain other matters relating to the services provided to the Company,
including the independence of such accountants. The Audit Committee met in
August 1997 and approved a change of principal independent accountants for the
fiscal year 1997 audited financial statements. Mann, Frankfort, Stein & Lipp,
P.C. was engaged as the Company's principal independent accountant to replace
PricewaterhouseCoopers LLP (formerly Coopers & Lybrand L.L.P.) who resigned on
August 20, 1997.
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 Stock
Compensation Plan (the "Stock Compensation Plan"). The Compensation Committee
held two meetings during the fiscal year ended June 28, 1998.
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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 1998 the Directors chose to forego any compensation for attending
meetings. During fiscal 1998, the Board of Directors conducted nine meetings,
and approved actions undertaken by management of the Company by unanimous
written consent.
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 1998, or written representations from certain
reporting persons, the Company believes that filing requirements applicable to
its directors, officers and persons who own more than 10% of a registered class
of the Company's equity securities have been timely complied with in accordance
with Section 16(a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION INFORMATION
The following table sets forth certain information regarding all cash
compensation paid or to be paid by the Company or any of its subsidiaries, as
well as other compensation paid or accrued, during the Company's fiscal year
ended June 28, 1998, to the Company's Chief Executive officer and to those other
executive officers who received salary and bonus compensation in excess of
$100,000 during the fiscal year (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- ------------------------- -------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
COMPENSATION(2) AWARD(S) OPTIONS/SARS(3) PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) ($) (#) ($) ($)
--------------------------- ---- --------- -------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ghulam Bombaywala, Chairman of 1998 $120,000(1) $-0- $-0- $-0- $-0- $-0- $-0-
the Board and Chief Executive 1997 $ 60,000(1) $ 60,000(1) -0- -0- -0- -0- -0-
Officer 1996 -0- -0- -0- -0- -0- -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.
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<PAGE>
OPTION GRANTS AND EXERCISES DURING FISCAL YEAR 1998
There were no options to acquire shares of Common Stock granted to the
Chief Executive Officer, nor were any options exercised by the Chief Executive
Officer during fiscal year 1998. The Company does not have any outstanding Stock
Appreciation Rights ("SARs").
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company is currently comprised of two
persons selected by the Board of Directors. Throughout fiscal 1998, Nico B.
Letschert and Sarosh J. Collector served on the Compensation Committee. Nico B.
Letschert was the President of Noble Investment Co. of Palm Beach ("Noble") and
is the Chief Executive Officer of Noesis Capital Corp. ("Noesis"). Sarosh J.
Collector is a certified public accountant and President of the Houston based
accounting firm of Collector, Dart & Moore, P.C.
Darrin Straughan, a director of the Company, is the Vice President of
James Original Coney Island, Inc., a privately-held corporation which owns the
James Coney Island restaurants. Mr. Bombaywala, Chief Executive Officer and a
director of the Company, is a shareholder and director of James Original Coney
Island, Inc. and also serves as its President. (See "Item 13.
Certain Relationships and Related Transactions").
EMPLOYMENT CONTRACTS
Effective July 1, 1994, the Company entered into an employment agreement
(the "Bombaywala Agreement") with Ghulam Bombaywala, Chairman of the Board,
Chief Executive Officer and a director of the Company. Under the terms of the
Bombaywala Agreement, Mr. Bombaywala is entitled to receive an annual salary of
$60,000 plus annual cost of living increases. In addition, Mr. Bombaywala is
entitled to receive a bonus in an amount based on such factors as the Board of
Directors of the Company may elect to consider.
The Bombaywala Agreement expired April 30, 1997, however, during the
second quarter of fiscal 1998, the Board of Directors approved a one year
extension of the Bombaywala Agreement, increased Mr. Bombaywala's base salary to
$120,000 and awarded Mr. Bombaywala a bonus of $60,000 for fiscal 1997. During
the fourth quarter of fiscal 1998, the Board of Directors approved a second
extension of the Bombaywala Agreement to April 30, 1999 with the same base
salary of $120,000. No bonus was awarded to Mr. Bombaywala for fiscal 1998.
Mr. Bombaywala has elected to defer any salary or bonus due and owing to
him under his employment agreement for fiscal 1998 and all prior years for an
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 contains provisions for
employment on a full time basis, as well as payments upon termination and
payment of bonuses. The non-competition provisions of the Bombaywala Agreement
provide that upon termination, Mr. Bombaywala will not engage or participate in
a barbecue or Mexican restaurant business within a radius of ten miles of any
existing or proposed barbecue or Mexican restaurant owned, licensed, managed or
operated by the Company for a period of twelve months beginning on the date of
termination of the Bombaywala Agreement. All amounts due to Mr. Bombaywala have
been accrued.
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<PAGE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, currently consisting of Messrs. Collector and
Letschert, determines the compensation of the Company's sole executive officer,
Mr. Bombaywala.
Mr. Bombaywala decided to waive any salary or bonus in fiscal 1995 and
fiscal 1996 due to the fact that the Company has been and is in the process of a
"turnaround." For fiscal 1997, Mr. Bombaywala deferred a salary of $60,000 per
year and a bonus of $60,000 for an indefinite period of time. For fiscal 1998,
Mr. Bombaywala deferred a salary of $120,000 for an indefinite period of time.
The Compensation Committee agreed with Mr. Bombaywala's decision to forego any
salary or bonus during fiscal 1995, 1996, 1997 and 1998. The compensation which
would have been payable to Mr. Bombaywala through fiscal 1998 was determined by
the original Bombaywala Agreement, which was negotiated between the Company and
Mr. Bombaywala when Marco's was acquired in fiscal 1994. As discussed above, the
Board of Directors elected to amend the Bombaywala Agreement in fiscal 1998.
Mr. Bombaywala owns 13,458,889 shares of the Company's Common Stock or
approximately 53.7% of the outstanding shares. Included in this calculation is
the following: Mr. Bombaywala received warrants with the right to purchase
222,222 shares of the Company's common stock at a price of $1.00 per share,
which were subsequently repriced to $.25 per share, issued in connection with
the issue of the 12% Subordinated Notes in December 1994. When Mr. Bombaywala
converted his 12% Subordinated Note to the 11% Convertible Subordinated Note he
received warrants with the right to purchase 50,000 shares of the Company's
Common Stock at $1.50 per share. As an incentive to Mr. Bombaywala for
converting his note, his 222,222 warrants were not canceled. On March 27, 1998
pursuant to the Conversion and Offset Agreement, Mr. Bombaywala received
7,500,000 shares of Common Stock. (See "Item 13. Certain Relationships and
Related Transactions".)
In April 1998, the Compensation Committee considered the terms of
compensation to Mr. Bombaywala for the extension of personal guarantees and
other consideration made or provided by Mr. Bombaywala on behalf of the Company.
The Committee received and evaluated information received from Mr. Bombaywala
and the Company and determined that Mr. Bombaywala had personally guaranteed at
least $10.5 million in debt and lease obligations of the Company. Mr. Bombaywala
also committed to guarantee up to $5,000,000 of additional Company obligations
if requested or necessary. The Compensation Committee reported and referred the
matter to the full Board of Directors for consideration. On May 1, 1998 the
Board of Directors approved the issuance to Mr. Bombaywala of warrants to
purchase 10,000,000 pre-reverse stock split shares of the Company's Common Stock
at the pre-reverse stock split exercise price of $.14 per share. The Board
decided to seek approval prior to the issuance of the warrants from the
Company's independent shareholders (all shareholders excluding Mr. Bombaywala)
and received a fairness opinion for the transaction from a third-party. However,
at this time the Board has decided to defer the issuance of the warrants to Mr.
Bombaywala for an indefinite period of time. If in the future the Board decides
that it is in the best interests of the Company to issue the warrants to Mr.
Bombaywala, the Board will seek shareholder approval at the next annual meeting
or at a special meeting.
The Compensation Committee believes that Mr. Bombaywala is very motivated
due to his stock ownership and warrant rights and financial commitment to the
Company to represent the interests of all stockholders and maximize the
performance of the Company. The Compensation Committee believes the salary
payable to Mr. Bombaywala pursuant to his employment agreement to be less than
the amount a CEO of a public company of comparable size would receive. The
Compensation Committee agrees with Mr. Bombaywala's decision, as stated above,
to defer all cash compensation payable to him as salary and bonuses since 1995
until the Company's operating performance improves.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 11, 1998, by
(i) each person who is known by the Company to beneficially own 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.
SHARES BENEFICIALLY OWNED
-------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------ ------ -------
Ghulam Bombaywala(1) 23,458,889 67.3%
Michael S. Chadwick(2)(6) 155,444 *
Nico B. Letschert(3)(6) 82,054 *
Philip M. Mount(4)(6) 65,222 *
Sarosh J. Collector(5)(6) 29,000 *
Darrin Straughan (7) 100,000 *
GTI Partners, LLC (8) 9,500,000 27.8%
All officers and directors as a group (6 persons) 23,890,609 69.0%
- -------------
* Indicates ownership of less than or equal to one percent of the outstanding
Common Stock of the Company.
(1) Mr. Bombaywala's address is 11111 Wilcrest Green, Suite 350, Houston, Texas
77042. Includes warrants to purchase 222,222 shares of Common Stock issued
in connection with the Company's 12% Subordinated Notes. Includes warrants
to purchase 50,000 shares of Common Stock issued in connection with the
Company's 11% Convertible Subordinated Notes. Includes the warrants to
purchase 10,000,000 shares of Common Stock if the Company's independent
shareholders approve the issuance of 10,000,000 warrants to Mr. Bombaywala
at the Company's next Annual Meeting of Shareholders. Mr. Bombaywala holds
the voting rights to 9,500,000 shares represented by the warrants issued or
issuable to GTI Partners, LLC. Mr. Bombaywala disclaims beneficial
ownership to the shares issuable to GTI and such shares are not included as
shares beneficially owned by Mr. Bombaywala in the table above. (See "Item
13. Certain Relationships and Related Transactions.")
(2) Mr. Chadwick's address is 3100 Chase Tower, Houston, Texas 77002.
Includes warrants to purchase 135,444 shares of Common Stock issued in
connection with the Company's 12% Subordinated Notes. (See "Item 13.
Certain Relationships and Related Transactions.")
(3) Includes warrants to purchase 45,000 shares of Common Stock originally
issued to Noble Investment Co. under the terms of the 1993 Regulation S
offering and subsequently assigned to Mr. Letschert. Includes 21,000 shares
of Common Stock issuable to Mr. Letschert upon the conversion of $105,000
in 9% Debenture principal, at a conversion ratio of one share of Common
Stock for each $5.00 in principal converted. Mr. Letschert may acquire the
9% Debentures in the principal amount of $105,000 upon the exercise of
warrants originally granted to Noble as placement agent for the Company's
offering of 9% Debentures and subsequently assigned to Mr. Letschert. 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 45,222 shares of Common Stock issued in
connection with the Company's 12% Subordinated Notes.
(5) Mr. Collector's address is 3000 Richmond Avenue, Suite 270, Houston, Texas
77002.
(6) Includes options to purchase 20,000 shares of Common Stock granted under
the Company's Stock Compensation Plan.
(7) Mr. Straughan's address is 11111 Katy Frwy., Suite 700, Houston, Texas
77079. Includes options to purchase 100,000 shares of the Company's Common
Stock, which options are exercisable as to 33,000 shares after April 2,
1999, as to an additional 33,000 shares after April 2, 2000, and as to the
remaining 34,000 shares after April 2, 2001. (See "Item 13. Certain
Relationships and Related Transactions.")
(8) All beneficial ownership is derived from warrants, 8,500,000 of which is
contingent and 1,000,000 of which is not. (See "Item 13. Certain
Relationships and Related Transactions.")
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In the fourth quarter of fiscal 1997 the Company sold Pete's Hospitality
Co., Inc., ("Pete's") a wholly-owned subsidiary, pursuant to a Stock Purchase
Agreement, to Angelo Pitillo, former President, Chief Operating Officer and
director of the Company. Mr. Pitillo acquired all of the issued and outstanding
shares of Pete's in exchange for a promissory note of Pete's payable to the
Company in the principal amount of $300,000 (the "Pete's Note"). The Pete's Note
accrues interest at the rate of 10% per annum over approximately five years. The
Pete's Note is secured by the assets of Pete's. The Company recorded a loss of
approximately $750,000 on the transaction. On December 18, 1997, Pete's
Hospitality Co., Inc. filed for bankruptcy. Therefore, the Company wrote off the
note receivable balance of $294,904 in fiscal 1998. The Company is a secured
creditor of the bankrupt estate, however, there is no assurance that there will
be sufficient assets in the estate to fully satisfy the claims of all creditors,
including the Company's, in whole or in part.
Ghulam M. Bombaywala, the Company's Chief Executive Officer and director,
has an ownership interest in and participates in the management of other
businesses, including James Original Coney Island, Inc., the Houston-based
corporation which owns the James Coney Island restaurant chain.
On April 2, 1998 the Company entered into a Professional Services
Agreement with Darrin Straughan to provide operational consulting services to
the Company and its subsidiaries. As compensation for his services, Mr.
Straughan was issued stock options to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $.14 per share. The stock options vest pro
rata over a period of three years. Mr. Straughan is a director of the Company
and the Vice President of James Original Coney Island, Inc., the corporation
which owns the James Coney Island restaurant chain.
Mr. Bombaywala has an employment contract with the Company providing for
annual compensation of $120,000. (See "Item 11. Executive Compensation -
Employment Contracts.")
On May 1, 1998 the Board of Directors of the Company adopted a resolution
approving the issuance to Mr. Bombaywala of warrants to purchase 10,000,000
pre-reverse stock split shares of the Company's Common Stock at the pre-reverse
stock split exercise price of $.14 per share, which was the market price of the
stock on April 2, 1998 when the Board of Directors first considered a proposal
to compensate Mr. Bombaywala for the bank loans, notes, accounts payable, taxes,
contracts and leases that he had personally guaranteed on behalf of the Company
in order for the Company to continue to do business.
In approving the issuance of the warrants to Mr. Bombaywala, the Board
considered, among other things, (i) its prior commitment to Mr. Bombaywala to
compensate him for his personal guarantees of Company obligations and his loans
and advances to the Company (collectively the "Guarantees"), (ii) the importance
of the Guarantees to the Company's financial survival and the aggregate amount
of such Guarantees, particularly in the past year, (iii) the personal risk of
the Guarantees to Mr. Bombaywala and the pledge of his personal assets to
partially collateralize certain of the Guarantees, (iv) the fact that the market
price of the Company's Common Stock was equal to the exercise price of the
warrants at the time of the request by Mr. Bombaywala, (v) the short- and
long-term value to the Company of the commitment of Mr. Bombaywala to guarantee
up to $5 million of future obligations of the Company if requested by the
Company for additional financing or the renewal of existing leasehold or debt
obligations of the Company, (vi) the waiver and/or accrual and nonpayment of all
prior compensation payable to Mr. Bombaywala as an executive officer of the
Company, (vii) the lock-up agreement with respect to the shares underlying the
warrants, and (viii) the fact that the Company will pursue a fairness opinion
with respect to the warrants and approval of the independent shareholders of the
Company with respect to the issuance of the warrants.
The warrants will have a four year term and the underlying shares will be
subject to a two year lock-up agreement which will expire if a total of $5
million in debt or equity financing is raised by the Company within the two year
period.
At this time the Board has decided to defer the issuance of the warrants
to Mr. Bombaywala for an indefinite period of time. If in the future the Board
decides that it is in the best interests of the Company to issue the warrants to
Mr. Bombaywala, the Board will seek shareholder approval at the next annual
meeting or at a special meeting.
On May 13, 1998 the Company entered into a Consulting Agreement with GTI
Partners, L.L.C. ("GTI") to seek sources of financing for the Company. In
consideration for the performance of these services, the Company agreed to issue
to GTI warrants to purchase up to 9,500,000 shares of pre-reverse stock split
shares of the Company's Common Stock at a pre-reverse stock split exercise price
of $.09 per share, which was the average
-26-
<PAGE>
market price of the Common Stock during the period of negotiations with GTI. The
Board of Directors, in making its decision to approve the Consulting Agreement,
considered the following factors, among others, (i) the Company's immediate and
substantial need for working capital, (ii) the lack of other financing
alternatives available to the Company, (iii) the fact that approximately 90% of
the consideration payable to GTI is based on the closing of a $2,500,000
financing, (iv) the fact that the terms of the financing may be accepted or
rejected by the Company in its discretion, (v) the nonexclusive arrangement with
GTI, (vi) the fact that the exercise price of the GTI warrants was non-dilutive
to the market price when initial negotiations were undertaken, (vii)
representations of GTI that the financing is not expected to be materially
dilutive to the market price of the Company's stock at the time the financing is
consummated, (viii) the fact that the shares issued to GTI are subject to a two
(2) year Lock-Up Agreement subject to early termination if the Company receives
$5,000,000 in GTI arranged financings within such two (2) year period, and (ix)
the financing track record of GTI and its affiliates.
Warrants to purchase 1,000,000 pre-reverse stock split shares of the
Company's Common stock were issued upon the execution of the GTI Consulting
Agreement. The remaining warrants for 8,500,000 pre-reverse stock split shares
will be issued to GTI upon the completion of at least $2,500,000 of initial
financing. The shares underlying the warrants are subject to a lock-up agreement
prohibiting resale thereof for a period of two years from the date of the
issuance of the respective warrants subject to the Company's consent to any
proposed public or private resales, or the expiration of the lock-up agreement
upon GTI arranging a total of $5,000,000 of financing on terms acceptable to the
Company. The warrant shares are subject to a voting agreement and proxy in favor
of Mr. Bombaywala, the Company's Chief Executive Officer, which shall expire as
to 250,000 post-reverse stock split shares every ninety days from the date of
exercise of the warrants. The warrants may be exercised in whole, but not in
part, and are not transferable except to entities affiliated with GTI or with
the Company's consent.
On May 15, 1997, Mr. Bombaywala and the Company entered into a Conversion
and Offset Agreement whereby the $3,750,000 of debt evidenced by certain
promissory notes issued to Mr. Bombaywala by the Company in connection with the
acquisition of Pasta Co. from Mr. Bombaywala in 1996 were converted to 7,500,000
Common Stock Rights (the "Rights"). Each of the Rights automatically converted
to one share of the Company's Common Stock at a later date, without further
action or consideration by Mr. Bombaywala when the Company amended its Articles
of Incorporation to increase its authorized shares. In exchange for the Rights,
Mr. Bombaywala forgave the Notes. A value of $.50 per share was determined by
the Board of Directors in connection with the conversion. The Company's
shareholders approved the increase in the Company's authorized shares on January
23, 1998, and the shares were issued to Mr. Bombaywala.
The Company also agreed with Mr. Bombaywala to offset $819,202 represented
by certain Pasta Co. promissory notes payable to Mr. Bombaywala in connection
with the acquisition of Pasta Co. against a note receivable from Mr. Bombaywala
payable to Marco's.
During fiscal 1998 the Company utilized the law firm of Kelly, Sutter,
Mount & Kendrick, P.C. ("KSMK") to perform certain legal services for the
Company. Philip M. Mount, a director of the Company, is a principal of KSMK. The
amount of fees paid to KSMK during fiscal 1998 did not exceed five percent of
the law firm's gross revenues during the fiscal year.
In December 1994, in connection with the offering of the Company's $3
million 12% Subordinated Notes, Sanders Morris Mundy, Inc. ("SMM") received
approximately $250,000 as a placement fee. Also in connection with the offering,
the Company entered into an eighteen month advisory agreement with SMM calling
for payments of $10,000 per month and issued warrants to purchase 150,000 shares
of common stock at an exercise price of $2.50 per share which currently expire
on August 31, 2002. Michael S. Chadwick, a director of the Company, is Senior
Vice President and a Managing Director of Corporate Finance of SMM. Mr. Chadwick
was assigned 45,000 of the warrants by SMM. In July 1998, the payment terms of
the 12% Subordinated Notes were extended and the exercise price of the warrants
was reduced to $.09 per share. In consideration for the extension of the note
term, an additional 1,150,000 warrants exercisable at $0.25 per share and
expiring on August 31, 2003 unless the note is paid at its maturity date, were
issued to the noteholders. In December 1997, the advisory agreement was extended
to July 1998, after which it expired. However, the amount owing under the
advisory agreement ($75,000) is due on December 31, 1999 pursuant to a
non-interest bearing note.
-27-
<PAGE>
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 1998, the Company filed Form
8-K, dated May 13, 1998, reporting under "Item 5. Other Events", the
Consulting Agreement entered into with GTI Partners, L.L.C. to seek
sources of financing for the Company, and the approval by the Board
of Directors, subject to shareholder ratification, of the issuance
to Mr. Bombaywala of 10,000,000 shares of the Company's Common Stock
in consideration for his guarantees of the Company's present and
future indebtedness.
(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.]
-28-
<PAGE>
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 12, 1998 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.
NAME TITLE DATE
---- ----- ----
/s/ GHULAM BOMBAYWALA Chairman of the Board, Chief October 12,
Ghulam Bombaywala Executive Officer and Director 1998
(Principal Executive Officer
and acting as Principal
Financial and Accounting
Officer) (1)
/s/ PHILIP M. MOUNT Director October 12
Philip M. Mount 1998
/s/ MICHAEL S. CHADWICK Director October 12
Michael S. Chadwick 1998
/s/ NICO B. LETSCHERT Director October 12
Nico B. Letschert 1998
/s/ SAROSH J. COLLECTOR Director October 12
Sarosh J. Collector 1998
/s/ DARRIN STRAUGHAN Director October 12
Darrin Straughan 1998
(1) The principal financial and accounting officer resigned in July 1997 and
has not been replaced as of the date of this filing. Mr. Bombaywala is
signing in these capacities.
-29-
<PAGE>
WATERMARC FOOD MANAGEMENT CO. SUBSIDIARIES
INDEX TO AUDITED FINANCIAL STATEMENTS
Reports to Independent Accountants............................F-2; F-3
Consolidated Balance Sheets...................................F-4
Consolidated Statements of Operations.........................F-5
Consolidated Statements of Stockholders' Equity...............F-6
Consolidated Statements of Cash Flows.........................F-7
Notes to Consolidated Financial Statements....................F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Watermarc Food Management Co.
We have audited the consolidated balance sheets of Watermarc Food Management Co.
and subsidiaries (the "Company") as of June 28, 1998 and June 29, 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the fiscal years 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
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.
As more fully described Note 1, the Company recorded an adjustment of $2,600,000
relating to the impairment of intangible assets associated with the acquisition
of a subsidiary. The Company's estimate of undiscounted cash flows related to
such assets indicates that the remaining carrying value of intangible assets was
expected to be recovered. Nonetheless, it is possible given the Company's
financial condition, as explained below, that the estimate of undiscounted cash
flow may change in the future, resulting in the need to adjust the carrying
value of intangible assets and related long-lived assets.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Watermarc Food
Management Co. and subsidiaries as of June 28, 1998 and June 29, 1997 and the
consolidated results of their operations and their cash flows for the fiscal
years then ended, in conformity with generally accepted accounting principles.
The Accompanying Financial Statements have been prepared assuming that the
Company will continue as a going concern.
As shown in the Financial Statements, the Company incurred a net loss of
$6,964,084 for 1998 and has incurred substantial net losses for each of the past
two years. At June 28, 1998, current liabilities exceeed current assets by
$9,729,502 and total liabilities exceed total assets by $5,644,422. These
factors and others discussed in Note 1, raise substantial doubt about the
Company's ability to continue as a going concern. The Financial Statements do
not include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classifications of liabilities that might be
necessary in the event the Company cannot continue in existence.
MANN, FRANKFORT, STEIN & LIPP, P.C.
Houston, Texas
October 12, 1998
F-2
<PAGE>
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.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
September 27, 1996
F-3
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 28, 1998 JUNE 29, 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 90,775 $ 263,542
Accounts receivable, trade .................................... 204,106 540,406
Accounts receivable from affiliates ........................... 115,244 299,518
Inventories ................................................... 316,334 483,302
Prepaid expenses and other current assets ..................... 38,872 73,217
------------- -------------
Total current assets ....................................... 765,331 1,659,985
Property and equipment, net .......................................... 6,213,441 6,050,631
Notes and other receivables from affiliate ........................... 1,398,583 1,679,374
Intangible assets, net ............................................... 4,041,433 7,213,457
Other assets ......................................................... 264,382 111,381
------------- -------------
$ 12,683,170 $ 16,714,828
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ....................................... $ 4,969,793 $ 4,780,931
Accrued liabilities ........................................... 2,605,392 2,263,821
Current portion of long-term debt ............................. 2,919,648 2,787,814
------------- -------------
Total current liabilities .................................. 10,494,833 9,832,566
Long-term debt, less current portion ................................. 7,230,348 4,484,539
Notes payable to stockholder ......................................... -- 500,000
Deferred rent ........................................................ 602,411 577,976
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value, 5,000,000 shares authorized,
329,540 shares issued and outstanding as of June 28, 1998
and June 29, 1997; $10 liquidation preference............. 329,540 329,540
Common stock, $.05 par value, 100,000,000 shares authorized,
23,783,114 issued and outstanding as of June 28, 1998, and
14,263,230 issued and 14,163,230 outstanding as of
June 29, 1997 .......................................... 1,189,155 713,161
Additional paid-in capital .................................... 30,114,052 30,740,131
Accumulated deficit ........................................... (37,277,169) (30,313,085)
------------- -------------
(5,644,422) 1,469,747
Less treasury stock, cost method ........................... -- (150,000)
------------- -------------
Total stockholders' equity ................................. (5,644,422) 1,319,747
------------- -------------
$ 12,683,170 $ 16,714,828
============= =============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-4
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------------
JUNE 28, 1998 JUNE 29, 1997 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Restaurants ...................................... $ 37,540,093 $ 46,734,262 $ 37,227,201
Food products .................................... 2,632,056 2,391,099 2,902,242
------------- ------------- -------------
Total revenues: .............................. 40,172,149 49,125,361 40,129,443
Costs and expenses:
Cost of restaurant revenues:
Cost of food and beverage .................. 11,224,209 12,539,192 10,956,113
Labor and benefits ......................... 13,030,787 14,326,414 11,348,823
Other restaurant operations ................ 13,342,796 17,678,805 10,222,633
Cost of food product revenues .................... 1,177,684 2,235,076 2,643,594
General and administrative ....................... 2,982,361 4,364,147 2,752,539
Depreciation and amortization .................... 4,755,760 6,035,811 2,178,218
Provision for restaurant closings ................ 209,968 1,175,434 --
Provision of Bad Debt for Pete's Hospitality ..... 294,904 751,614 --
------------- ------------- -------------
Total costs and expenses ................... 47,018,469 59,106,493 40,101,920
------------- ------------- -------------
Income (loss) from operations .......................... (6,846,320) (9,981,132) 27,523
Non-operating income (expenses):
Interest income .................................. 120,186 121,260 166,566
Interest expense ................................. (977,609) (1,220,666) (850,224)
Other, net ....................................... 739,659 167,763 704,831
------------- ------------- -------------
Total non-operating income (expenses) ...... (117,764) (931,643) 21,173
------------- ------------- -------------
Income (loss) before income taxes ...................... (6,964,084) (10,912,775) 48,696
Income tax provision (benefit) ......................... -- -- --
------------- ------------- -------------
Net income (loss) ...................................... (6,964,084) (10,912,775) 48,696
Preferred stock dividends .............................. 296,586 296,586 296,586
------------- ------------- -------------
Net income (loss) less preferred stock dividends ....... $ (7,260,670) $ (11,209,361) $ (247,890)
============= ============= =============
Loss per common share - Basic and Fully Diluted......... $ (0.42) $(0.83) $ (0.02)
============= ============= =============
Weighted average common and common equivalent shares ... 17,190,810 13,451,487 12,040,163
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE>
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> <C>
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)
Preferred stock dividends:
Cash ...................... -- -- -- -- -- --
Common stock .............. -- -- 2,119,884 $ 105,994 -- --
Conversion of stockholder's debt . -- -- 7,500,000 $ 375,000 -- --
Cancel treasury stock ............ -- -- (100,000) $ (5,000) (100,000) $ 150,000
Net loss ....................... -- -- -- -- -- --
------- -------- ----------- ----------- -------- ---------
Balance, June 28, 1998 ................ $ 329,540 $329,540 $ 23,783,114 $ 1,189,155 0 $ 0
======= ======== ============ =========== ======== =========
PAID-IN EARNINGS STOCKHOLDERS'
CAPITAL (DEFICIT) EQUITY
------------ ------------ ------------
Balance, July 2, 1995 ................. $ 23,442,645 $(19,449,006) $ 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
Preferred stock dividends:
Cash ...................... $ (85) -- $ (85)
Common stock .............. $ (105,994) -- --
Conversion of stockholder's debt . $ (375,000) -- --
Cancel treasury stock ............ $ (145,000) -- --
Net loss ....................... -- $ (6,964,084) $ (6,964,084)
------------ ------------ ------------
Balance, June 28, 1998 ................ $ 30,114,052 $(37,277,169) $ (5,644,422)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------------
JUNE 28, 1998 JUNE 29, 1997 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ......................................................... $ (6,964,084) $ (10,912,775) $ 48,696
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ......................................... 4,755,760 6,035,811 2,178,217
Provision for restaurant closings ..................................... 94,884 1,175,434 --
(Gain)/loss on disposal of assets ..................................... 153,171 726,399 (163,175)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable, trade ........................................... 336,300 (142,662) (292,209)
Accounts receivable from affiliates .................................. 184,274 (47,078) 37,542
Inventories .......................................................... 166,968 232,236 (192,446)
Prepaid expenses and other current assets ............................ 34,345 32,562 255,759
Accounts payable and accrued liabilities ............................. 530,433 2,027,007 (673,405)
Other assets and intangible assets ................................... (162,109) 1,116,822 (6,031)
Noncurrent liabilities ............................................... 24,435 142,027 153,406
------------- ------------- -------------
Net cash provided by (used in) operating activities ............. (845,623) 385,783 1,346,354
------------- ------------- -------------
Investing activities:
Purchases of property and equipment ....................................... (635,404) (1,535,684) (1,642,333)
Proceeds from sale of assets .............................................. -- 1,210,345 197,027
Collection of note receivable ............................................. -- -- 60,391
Investments in receivables from affiliates ................................ -- (280,792) --
Collection of receivables from affiliates ................................. 280,791 -- --
Cost of acquisitions, net of cash acquired ................................ -- -- (231,745)
------------- ------------- -------------
Net cash used in investing activities ........................... (354,613) (606,131) (1,616,660)
------------- ------------- -------------
Financing activities:
Repayment of affiliate borrowings ......................................... -- -- (150,000)
Proceeds from other borrowings and warrants ............................... 5,036,587 1,591,572 1,221,790
Repayment of other borrowings ............................................. (4,009,033) (1,419,736) (2,439,297)
Cash dividends ............................................................ (85) (1,112) (750)
Purchase of treasury stock ................................................ (150,000)
------------- ------------- -------------
Net cash provided by financing activities ....................... 1,027,469 20,724 (1,368,257)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ............................ (172,767) (199,624) (1,638,563)
Cash and cash equivalents, beginning of period .................................. 263,542 463,166 2,101,729
------------- ------------- -------------
Cash and cash equivalents, end of period ........................................ $ 90,775 $ 263,542 $ 463,166
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
<PAGE>
WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
As of June 28, 1998, Watermarc Food Management Co. (the "Company"), owned and
operated 40 restaurants, primarily in the Houston Metropolitan area, under
the names "Marco's Mexican Restaurants" ("Marco's Restaurants"); "The
Original Pasta Co." ("Pasta Co."); and Billy Blues Barbecue Bar & Grill
("Billy Blues"). The Company also produces 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. Billy Blues Barbecue Sauce is sold on a
special order basis, primarily to restaurants. The Chris' & Pitt's products
are marketed to supermarkets, other retail stores and food service outlets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming the Company
will be able to continue as a going concern. The Company has a working
capital deficit of approximately $9.7 million at June 28, 1998 and
experienced significant losses in fiscal 1998 which raise doubts about the
Company's ability to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to obtain additional
financing or capital and to refinance its debt and ultimately attain
profitable operations.
Management's plans include the following:
o Further reductions in general and administrative expenses.
o Further reductions in operating expenses through improved cost controls.
o Increasing revenues in existing restaurants by improving marketing programs
and customer service at Marco's and Pasta Co. Restaurants.
o Increasing revenues from the sale of food products by reinforcing existing
markets, expanding distribution to new market areas, introducing more
aggressive marketing programs, adding methods of distribution and developing
new products.
o Selling or closing its non-performing Marco's and/or Pasta Co. Restaurants
and the Billy Blues Restaurant.
o Obtaining additional equity capital or debt financing.
o Renegotiating and extending the terms of the Company's existing indebtedness.
FISCAL YEAR
The Company utilizes a 52-53 week fiscal year which ends on the Sunday
closest to June 30. References to 1998, 1997 and 1996 are all 52 week periods
ended June 28, 1998, June 29, 1997 and June 30, 1996, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents. The
Company places substantially all of its cash and cash equivalents with
nationally recognized financial institutions and money market mutual funds.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of restaurant food, beverages, supplies, and
food products (primarily barbecue sauce) held for sale.
F-8
<PAGE>
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.
OTHER ASSETS
Debt issue costs are included in other assets and are being amortized on a
straight-line basis over five years.
INTANGIBLE ASSETS
Intangible assets are associated with the purchase of Pasta Co. and Chris'
and Pitt's Barbecue Sauce. These assets are being amortized using the
straight-line method over the expected period to be benefited (fifteen years
for The Pasta Co.). The Company's management periodically assesses the
recorded balances of its intangible assets in light of historic and projected
operating trends and profitability and general economic conditions.
Management's assessment includes projecting cash flows from each intangible
asset over the estimated remaining life. Should this undiscounted amount not
equal the unamortized balance related to the asset, an impairment would be
indicated and the asset would be written down to fair value. In the fourth
quarter of fiscal year ended June 29, 1997, management deemed the intangible
assets associated with Chris' and Pitt's Barbecue Sauce to be impaired and
charged off $3.45 million to reduce the assets to an estimated fair value of
$250,000. In the fourth quarter of fiscal year ended June 28, 1998,
management deemed the intangible assets associated with Pasta Co. to be
impaired and charged off $2.6 million to reduce the asset to an estimated
fair value of $4,167,706. Management will continue to evaluate the fair value
of the intangible asset of Pasta Co. quarterly based on its cash flow.
PREOPENING COSTS
Certain expenses incurred in connection with the opening of a restaurant
(principally the costs of food products and staff training) are accumulated
and then expensed at the date of opening.
INCOME TAXES
Income taxes are provided for using the liability method. Under this method,
deferred income taxes are recorded to reflect the tax consequences on future
years, of temporary differences between the tax basis of the assets and the
liabilities and their financial statement amounts. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
REVENUE RECOGNITION
Revenues from food product sales are recognized when the order is shipped and
ownership passes to the buyer.
F-9
<PAGE>
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONT'D:
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share", which
changes the manner in which earnings per share (EPS) amounts are calculated
and presented. Basic earnings per common share is calculated by dividing net
income by the weighted average number of common shares outstanding during the
period presented. Fully diluted earnings per common share is calculated by
dividing net income by the weighted average number of common shares and
common share equivalents. Stock options are regarded as common stock
equivalents and are computed using the treasury stock method. Stock options
will have a dilutive effect under the treasury stock method when the average
market price of the common stock during the period exceeds the exercise price
of the options.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure", which establishes standards for disclosing
information about the Company's capital structure. This statement does not
change any previous disclosures but consolidates them in this statement for
ease of retrieval and greater visibility.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which established standards for reporting and displaying comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of this
statement requires incremental financial statement disclosure, and thus will
have no effect on the Company's financial position or results of operations.
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements
and the reported amounts of income and expenses during the reporting periods.
Actual results could differ from those estimated.
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 the period presented:
1996
-----------
Revenues $46,086,307
Net loss (679,509)
Net loss per common share (.08)
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:
Tangible assets,
net of liabilities $ (768,955)
Intangible assets 131,250
Goodwill 7,634,255
-------------
Total purchase price allocation $ 6,996,550
F-10
<PAGE>
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at June 28, 1998
and June 29, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Inventories:
Food products ................................ $ 103,696 $ 225,319
Restaurant food, beverage and other .......... 212,638 257,983
------------ ------------
$ 316,334 $ 483,302
============ ============
Property and Equipment:
Building and leasehold improvements .......... $ 6,723,287 $ 6,982,563
Furniture, fixtures and equipment ............ 10,143,543 8,781,908
Transportation equipment ..................... 61,246 61,246
------------ ------------
16,928,076 15,825,717
Less accumulated depreciation and amortization (10,714,635) (9,775,086)
------------ ------------
$ 6,213,441 $ 6,050,631
============ ============
Intangible Assets:
License agreement ............................ $ 4,396,318 $ 4,398,528
Goodwill ..................................... 7,626,255 7,626,255
------------ ------------
12,022,573 12,024,783
Less accumulated amortization ................ 7,981,140 (4,811,326)
------------ ------------
$ 4,041,433 $ 7,213,457
============ ============
Other assets:
Debt issue costs ............................. $ 149,300 $ --
Other ........................................ 115,082 111,381
------------ ------------
$ 264,382 $ 111,381
============ ============
Accrued liabilities:
Payroll and related costs .................... $ 1,364,646 $ 911,861
Taxes, other than payroll and income taxes ... 672,545 831,332
Rent ......................................... 63,513 --
Interest ..................................... 105,267 104,162
Other ........................................ 399,421 416,466
------------ ------------
$ 2,605,392 $ 2,263,821
============ ============
</TABLE>
F-11
<PAGE>
4. LONG-TERM DEBT:
At June 28, 1998 and June 29, 1997, long-term debt consisted of the
following:
1998 1997
--------- ---------
Note payable to bank, due in monthly
installments with interest at prime plus 1%,
maturing in May 1999, collateralized by
certain property and equipment $ 247,312 $ 383,333
Notes payable to banks, related parties and
trade vendors, due in monthly installments
with interest ranging from 0% to 12.0%,
maturing at various dates through 2002,
collateralized by certain property and
equipment 1,803,234 978,713
Subordinated notes, interest at 12% payable
monthly, principal due in December 1999,
collateralized by all of the outstanding stock
of Marco's Mexican Restaurants, Inc. (See
Subsequent Events) 1,250,000 2,500,000
Note payable to an unaffiliated foreign
investor, interest at 10% payable quarterly,
principal due in June 1999, collateralized by
certain property and equipment and guaranteed
by stockholder. 1,000,000 1,000,000
Note payable to corporation owned by majority
stockholder, due in monthly principal
installments with interest payable monthly at
10%, maturing in August 2000, collateralized by
certain property and equipment 309,302 415,176
Note payable to bank, due in monthly principal
installments with interest payable quarterly at
10% maturing March 2001, collateralized by
certain property and equipment - 974,832
9% convertible subordinated debentures due March
1999, collateralized by inventories and accounts
receivable, licenses, trademarks and equipment 117,000 217,000
Note payable to bank, due in monthly principal
installments with interest payable monthly at
the bank's prime rate, maturing in April 2004,
collateralized by real property and guaranteed
by stockholder 264,310 295,099
Note payable to bank, due in monthly principal
installments with interest payable monthly at
the bank's prime plus 1% maturing in February
2002, guaranteed by stockholder 183,333 233,333
Note payable to bank, due in monthly principal
installments with interest payable monthly at
the bank's prime plus 2% maturing in April 1998,
guaranteed by stockholder - 274,867
Note payable to corporation owned by majority
stockholder, due in monthly installments with
interest at Prime + one % maturing in 2002,
guaranteed by stockholder 1,651,714 -
Private placement, interest at 11% payable
quarterly, principal due quarterly beginning
September 1999 through June 2002, including
$500,000 payable to majority stockholder 1,200,000 -
Note payable to corporation owned by majority
stockholder, due in monthly installments with
interest at 11% maturing in 2003, guaranteed
by stockholder 727,867 -
Note payable to corporation owned by majority
stockholder, due in monthly installments with
interest at Prime +2% maturing in 2001,
guaranteed by stockholder 555,829 -
Note payable to corporation owned by majority
stockholder, due in monthly installments with
interest at Prime +1% maturing in 2003,
guaranteed by stockholder 840,095 -
---------- ---------
10,149,996 7,272,353
Less current portion (2,919,648) (2,787,814)
---------- ---------
$ 7,230,348 $ 4,484,539
=========== ===========
F-12
<PAGE>
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 $117,000 of debentures held
by debentureholders who elected not to convert at the modified conversion
rate. In connection with the subordinated debenture issuance, the Company
incurred debt issue costs of approximately $438,000 which were capitalized
and amortized using a method which approximates the interest method.
Unamortized debt issue costs associated with debentures which were converted
to stock were charged to paid-in-capital.
The $1 million note payable to an unaffiliated foreign investor, referred to
above, is delinquent unless the Company is able to reach a settlement
agreement with the noteholder. The entire note payable balance has been
classified as current portion of long-term debt.
Annual maturities of long-term debt, as of June 28, 1998 are: $2,919,648 in
1999; $2,494,032 in 2000; $840,792 in 2001; $1,050,497 in 2002; $2,480,789 in
2003; and $364,238 thereafter.
The carrying amounts of notes payable approximate fair value.
5. LEASE OBLIGATIONS:
The Company leases restaurant facilities 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 $2,599,000, $2,774,000 and $3,335,000 in 1996, 1997 and 1998,
respectively.
F-13
<PAGE>
5. LEASE OBLIGATIONS CONT'D:
Future minimum lease payments, excluding contingent rentals, at June 28,
1998, were as follows:
FISCAL YEAR OPERATING
----------- ---------
1999 $3,102,418
2000 2,949,077
2001 2,753,594
2002 2,622,353
2003 2,276,991
Thereafter 5,864,758
------------
Total future minimum lease payments $19,569,191
============
6. CONTINGENCIES:
Effective July 1, 1992, the Company voluntarily discontinued its workers'
compensation coverage in the State of Texas. The Company anticipates that the
ultimate expense of representing itself in the settlement of claims will be
less than the cost of insurance. The Company intends to vigorously defend and
pursue all unreasonable claims. Management does not believe that any existing
claims will have a material adverse impact on the financial position, results
of operations, or cash flows of the Company. At June 28, 1998, the Company
has accrued for all anticipated settlements.
In the fourth quarter of fiscal year ended June 28, 1998, the Company accrued
a liability of $150,000 for a claim of monies owed on a guarantee by the
Company of an open account of Pete's Hospitality Co., Inc., formerly a
subsidiary of the Company, owed to a vendor for sale of goods. Pete's filed
for bankruptcy and failed to pay the account. The vendor has filed suit
against the Company on the guarantee.
Except as stated above, in management's opinion, the Company is not a party
to any litigation other than ordinary routine matters which are incidental to
the Company's business, including personal injury claims and disputes with
vendors and suppliers. The Company believes that no current legal
proceedings, individually, will have a material adverse effect upon the
Company or its business.
7. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS:
Supplemental disclosure of cash flow information is as follows:
1998 1997 1996
---------- --------- ----------
Interest paid $872,342 $585,000 $624,855
Income taxes paid - - -
Supplemental disclosure of noncash investing and financing activities:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C>
Issuance of common stock in lieu of payment
of liabilities -- -- $ 347,904
Issuance of common stock for preferred
stock dividend -- $ 41,479 15,898
Issuance of debt in payment of liabilities -- -- 548,680
Conversion of stockholder's debt and
interest to equity -- 4,142,337 --
Note receivable from sale of Pete's
Hospitality -- 300,000 --
Offset of stockholder debt and interest
against receivables -- 819,202 --
Assumption of debt by buyer upon sale of
Pete's Hospitality -- 79,491 --
Note receivable from sale of Pete's
Hospitality $ 294,904 -- --
Repossession of Marco's Mexican Restaurant
in Texas City 282,821 -- --
Issuance of debt in payment of liabilities 470,855 -- --
Equipment financed by long term debt 1,350,089 -- --
Refinancing of a related party note 500,000 -- --
Forgiveness of debt by creditor 139,807 -- --
Conversion of Stockholder's Debt 375,000 -- --
Cancel Treasury Stock 150,000 -- --
</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:
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
===========
F-14
<PAGE>
8. INCOME TAXES:
The significant components of the Company's deferred tax assets and liabilities,
as of June 28, 1998 and June 29, 1997, were as follows:
1998 1997
---- ----
Deferred tax assets:
Intangible assets $ 1,802,000 $1,020,000
Accrued liabilities 205,000 196,000
Net operating loss 9,860,000 8,262,000
Property and equipment 442,000 442,000
------------ -----------
Total deferred tax assets 12,309,000 9,920,000
------------ -----------
Deferred tax liabilities:
Deductible intangible assets - -
------------ -----------
Total deferred tax liabilities - -
------------ -----------
Net deferred tax assets before valuation
allowance 12,309,000 9,920,000
Valuation allowance 12,309,000 (9,920,000)
------------ -----------
Net deferred tax asset $ - $ -
============ ===========
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:
1998 1997 1996
---- ---- ----
Tax provision (benefit) at
statutory rate $(2,368,034) $(3,710,344) $ 16,557
Amortization of goodwill -- 37,590 69,382
Change in valuation allowance 2,389,000 3,904,558 (103,797)
Other (20,966) 231,804 17,858
----------- ----------- -----------
Total provision (benefit) for
income taxes $ -- $ -- $ --
=========== =========== ===========
As of June 28, 1998, the Company had consolidated net operating loss
carryforwards (NOL's) of approximately $29 million which expire in varying
amounts through the fiscal years 2006 through 2012. Due to the merger with
Marco's Restaurants in 1994, the consolidated pre-acquisition NOL's of
approximately $11 million are not available to offset any future taxable income
that may be generated by Marco's Restaurants. In addition, the utilization of
pre-acquisition NOL's is further limited due to a greater than 50% change in
ownership.
9. STOCKHOLDERS' EQUITY:
ISSUANCES OF COMMON STOCK
FISCAL YEAR 1998:
In December 1997, the Company cancelled 100,000 shares of common stock which had
been held as security for a debt.
In December 1997, the Company issued 2,119,434 shares of common stock as payment
of a dividend to preferred shareholders.
In March 1998, the Company issued 7,500,000 shares of common stock to Ghulam
Bombaywala, the Company's Chief Executive Officer in a debt to equity agreement
dated May 15, 1997.
In March 1998, the Company issued 450 shares of common stock as payment of a
dividend to preferred shareholders.
In 1998, the Company canceled 100,000 shares of common stock which were held in
treasury.
F-15
<PAGE>
9. STOCKHOLDERS' EQUITY CONT'D:
FISCAL YEAR 1997:
In December 1996, the Company issued 236,607 shares of common stock as payment
of a dividend to preferred shareholders.
In June 1997, the Company declared 592,965 shares of common stock as payment of
a dividend to preferred shareholders.
FISCAL YEAR 1996:
In December 1995, the Company issued 225,000 shares of common stock valued at
approximately $180,000 in partial satisfaction of a settlement of a lawsuit.
In January 1996, the Company issued 112,598 shares of common stock as payment of
a dividend to preferred shareholders.
In January 1996, the Company issued 1,666,667 shares of common stock valued at
$2,966,667 in connection with the acquisition of Pasta Co.
In February 1996, the Company issued 100,000 shares of common stock as payment
of legal fees of $150,000.
In February of 1996, the Company issued 12,000 shares of common stock valued at
$18,000 in settlement of a lawsuit.
In June 1996, the Company issued 205,367 shares of common stock as payment of a
dividend to preferred shareholders.
PREFERRED STOCK
In February 1993, the Company issued 450,000 shares of 9% Cumulative Convertible
Preferred Stock ("Preferred Stock") with a face amount of $10 per share.
Dividends are cumulative and are payable in semi-annual installments, on June 30
and December 31, at a rate of $.90 per share per annum. Dividends may be paid in
either cash or an equivalent value of common stock. The Preferred Stock has no
voting rights and has a liquidation preference of $10 per share plus accumulated
and unpaid dividends.
Holders of the shares of Preferred Stock have the right, at the holder's option,
to convert any or all such shares into common stock at any time. If at any time
the closing sale price of the Company's common stock exceeds $10 per share, the
Company may convert the Preferred Stock to common stock.
The Preferred Stock is convertible at a rate of one share of common stock for
each $8 in face value of Preferred Stock converted. The Preferred Stock is
redeemable at the Company's option at $12 per share.
At the close of the Company's public offering of its Preferred Stock, the
Company issued, to the underwriter, warrants to purchase 45,000 shares of
preferred stock at an exercise price of $12 per share which expired in January
1998. None of these warrants were exercised prior to their expiration.
COMMON STOCK WARRANTS AND STOCK OPTION PLANS
The Company has the following common stock warrants and option plans:
o SERIES A WARRANTS - The Company's 875,500 Series A Warrants
expired on May 15, 1998. None of these warrants were exercised
prior to their expiration.
o OTHER WARRANTS - In connection with the issuance of $3 million
in subordinated notes, the Company issued 1,333,320 warrants,
each of which evidence the right to purchase a share of the
Company's common stock at a purchase price of $2.25 per share
until December 31, 1999. In connection with an agreement to
extend the repayment date of the notes, the
F-16
<PAGE>
purchase price was reduced to $.09 per share and the expiration
date was extended to August 31, 2002, and 1,150,000 additional
warrants were issued to the noteholders at an exercise price of
$.25 and expiring on August 31, 2003.
Also, in connection with the subordinated notes, the Company
issued warrants to purchase 150,000 shares of common stock to
the placement agent at an exercise price of $2.50 per share,
which expire on August 31, 2002. In connection with an agreement
to extend the repayment date of the notes, said purchase price
was reduced to $.09 per share.
In connection with the subordinated note conversion of Mr.
Bombaywala from the 12% Subordinated Note to the 11%
Subordinated Note in June 1997, 50,000 warrants to purchase
common stock at $1.50 per share were issued to Mr. Bombaywala.
In connection with a borrowing of $1 million from an
unaffiliated foreign corporation, the Company issued warrants to
purchase 75,000 shares of common stock to said corporation at a
purchase price of $3 per share until May 31, 1997. The Company
extended the expiration date to January 1998. None of these
warrants were exercised prior to their expiration. In January
1996, the Company issued additional warrants to this corporation
to purchase (1) 50,000 shares of common stock at $3.00 per share
exercisable until January 1, 1999 and (2) 50,000 shares of
common stock at $4.00 per share exercisable until January 1,
2001.
In connection with the issuance of common stock in a private
offering, the Company issued warrants to purchase 71,250 shares
of common stock to the placement agent at a purchase price of $3
per share until May 31, 1997. The Company extended the
expiration date to January 1998. None of these warrants were
exercised prior to their expiration.
In June 1997, the Company issued warrants to the former
President of the Company to purchase 180,000 shares of common
stock exercisable at $.50 until June 30, 1999.
o STOCK OPTION PLAN - The Company has a Stock Compensation Plan
under which either incentive stock options or non-qualified
stock options may be issued to officers, key employees and
non-employee directors of the Company. All options granted under
the plan have been at fair market value or greater on the date
of grant and expire six 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 587,500 options were
available for grant at June 28, 1998.
The Company follows 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 vesting
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 the 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-17
<PAGE>
A summary of stock option activities during 1998, 1997 and 1996 is as
follows:
NUMBER OF OPTION PRICE
SHARES PER SHARE
------ ---------
Options outstanding at July 2, 1995 517,000 2.00 to 4.63
Granted 134,500 1.00
Canceled (40,000) 2.00 to 4.63
---------
Options outstanding at June 30, 1996 611,500 1.00 to 2.88
Granted 180,000 .25 to .50
Canceled (381,000) 1.00 to 4.63
---------
Options outstanding at June 29, 1997 410,500 .25
Granted 120,000 .14
Canceled (118,000) .25
---------
Options outstanding at June 28, 1998 412,500 .14 to .25
Exercisable at June 28, 1998 120,900 .14 to .25
10. DETERMINATION OF EARNINGS PER INCREMENTAL SHARE
The following tables present the reconciliation of the numerators and
denominators in calculating diluted earnings per share ("EPS") from
continuing operations in accordance with Statement of Financial Accounting
Standards No. 128.
INCREASE IN EARNINGS PER
1998 INCREASE IN NUMBER OF INCREMENTAL
INCOME SHARES SHARE
-------------------------------------------
Options ....................... -- 2,083,320
Dividends on convertible
preferred stock .......... $ 296,586 411,925
Interest on 9% convertible
subordinated debenture ... $ 19,530 23,400
-------------------------------------------
$ 316,116 2,518,645 $ 0.13
===========================================
Computation of Diluted Earnings per Share
<TABLE>
<CAPTION>
INCOME AVAILABLE
FROM CONTINUING COMMON PER
OPERATIONS SHARES SHARE
-------------------------------------------------
<S> <C> <C> <C>
Common Stock Options ......... ($7,260,670) 17,190,810 ($ 0.42)
2,083,320
-------------------------------------------------
($7,260,670) 19,274,130 ($ 0.38) antidilutive
Dividend on convertible
preferred stock ......... 296,586 411,925
Interest on 9% convertible
subordinated debenture .. 19,530 23,400
-------------------------------------------------
($6,944,554) 19,709,455 ($ 0.35) antidilutive
=================================================
INCREASE IN EARNINGS PER
1997 INCREASE IN NUMBER OF INCREMENTAL
INCOME SHARES SHARE
---------------------------------------------
Options ........................ -- 2,998,903
Dividends on convertible
preferred stock ........... $ 296,586 411,925
Interest on 9% convertible
subordinated debenture .... $ 19,530 43,400
---------------------------------------------
$ 316,116 3,454,228 $ 0.09
=============================================
COMPUTATION OF DILUTED EARNINGS PER SHARE
INCOME AVAILABLE
FROM CONTINUING COMMON PER
OPERATIONS SHARES SHARE
-----------------------------------------------
($ 11,209,361) 13,451,487 ($ 0.83)
Common Stock Options ......... 2,998,903
-----------------------------------------------
($ 11,209,361) 16,450,390 ($ 0.68) antidilutive
Dividend on convertible
preferred stock ......... 296,586 411,925
Interest on 9% convertible
subordinated debenture .. 19,530 43,400
-----------------------------------------------
($10,893,245) 16,905,715 ($ 0.64) antidilutive
===============================================
INCREASE IN EARNINGS PER
1996 INCREASE IN NUMBER OF INCREMENTAL
INCOME SHARES SHARE
-------------------------------------------
Options ......................... -- 3,121,633
Dividends on convertible
preferred stock ............ $ 296,586 411,925
Interest on 9% convertible
subordinated debenture ..... $ 19,530 23,400
-------------------------------------------
$316,116 3,556,958 $ 0.09
===========================================
COMPUTATION OF DILUTED EARNINGS PER SHARE
INCOME AVAILABLE
FROM CONTINUING COMMON PER
OPERATIONS SHARES SHARE
-------------------------------------------
($ 247,890) 12,040,163 ($0.02)
Common Stock Options .......... 3,121,633
-------------------------------------------
($ 247,890) 15,161,796 ($0.02)
Dividend on convertible
preferred stock .......... 296,586 411,925
Interest on 9% convertible
subordinated debenture ... 19,530 43,400
-------------------------------------------
$ 68,226 15,617,121 $ 0.00 antidilutive
===========================================
</TABLE>
Note: Because Diluted EPS from Continuing Operations increases from ($0.42) to
($0.35) and from ($0.83) to ($0.64) and from ($0.03) to ($0.00) in 1998, 1997
and 1996, respectively, when convertible preferred stock and convertible
subordinated debentures are included in the computation, those convertible
preferred shares and convertible subordinated debentures are antidilutive and
are ignored in the computation of Diluted EPS from Continuing Operations.
Therefore, Diluted EPS from Continuing Operations is reported as ($0.42),
($0.83) and ($0.02) in 1998, 1997 and 1996, respectively. All warrants have been
excluded from the calculations of Diluted EPS as they are anti-dilutive for all
periods.
11. RELATED PARTY TRANSACTIONS
In the fourth quarter of fiscal 1997 the Company sold Pete's Hospitality Co.,
Inc., ("Pete's") a wholly-owned subsidiary, pursuant to a Stock Purchase
Agreement, to Angelo Pitillo, former President, Chief Operating Officer and
director of the Company. Mr. Pitillo acquired all of the issued and
outstanding shares of Pete's in exchange for a promissory note of Pete's
payable to the Company in the principal amount of $300,000 (the "Pete's
Note"). The Pete's Note accrues interest at the rate of 10% per annum over
approximately five years. The Pete's Note is secured by assets of Pete's. The
Company recorded a loss of approximately $750,000 on the transaction. On
December 18, 1997, Pete's Hospitality Co., Inc. filed for bankruptcy.
Therefore, the Company wrote off the note receivable balance as of $294,904.
The Company is a secured creditor of the bankrupt estate, however, there is
no assurance that there will be sufficient assets in the estate to fully
satisfy the claims of all creditors.
Ghulam M. Bombaywala, the Company's Chief Executive Officer and director, has
an ownership interest in and participates in the management of other
businesses, including James Original Coney Island, Inc., the Houston-based
corporation which owns the James Coney Island restaurant chain.
On April 2, 1998 the Company entered into a Professional Services Agreement
with Darrin Straughan to provide operational consulting services to the
Company and its subsidiaries. As compensation for his services, Mr.
Straughan was issued stock options to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $.14 per share. The stock
options vest prorata over a period of three years. Mr. Straughan is a
director of the Company and the Vice President of James Original Coney
Island, Inc., the corporation which owns the James Coney Island restaurant
chain.
Mr. Bombaywala has an employment contract with the Company providing for
annual compensation of $120,000. (See "Item 11. Executive Compensation -
Employment Contracts.")
On May 1, 1998 the Board of Directors of the Company adopted a resolution
approving the issuance to Mr. Bombaywala of warrants to purchase 10,000,000
pre-reverse stock split shares of the Company's Common Stock at the
pre-reverse stock split exercise price of $.14 per share, which was the
market price of the stock on April 2, 1998 when the Board of Directors first
considered a proposal to compensate Mr. Bombaywala for the bank loans, notes,
accounts payable, taxes, contracts and leases that he had personally
guaranteed on behalf of the Company in order for the Company to continue to
do business.
In approving the issuance of the warrants to Mr. Bombaywala, the Board
considered, among other things, (i) its prior commitment to Mr. Bombaywala to
compensate him for his personal guarantees of Company obligations and his
loans and advances to the Company (collectively the "Guarantees"), (ii) the
importance of the Guarantees to the Company's financial survival and the
aggregate amount of such Guarantees, particularly in the past year, (iii) the
personal risk of the Guarantees to Mr. Bombaywala and the pledge of his
personal assets to partially collateralize certain of the Guarantees, (iv)
the fact that the market price of the Company's Common Stock was equal to the
exercise price of the warrants at the time of the request by Mr. Bombaywala,
(v) the short- and long-term value to the Company of the commitment of Mr.
Bombaywala to guarantee up to $5 million of future obligations of the Company
if requested by the
F-18
<PAGE>
Company for additional financing or the renewal of existing leasehold or debt
obligations of the Company, (vi) the waiver and/or accrual and nonpayment of
all prior compensation payable to Mr. Bombaywala as an executive officer of
the Company, (vii) the lock-up agreement with respect to the shares
underlying the warrants, and (viii) the fact that the Company will pursue a
fairness opinion with respect to the warrants and approval of the independent
shareholders of the Company with respect to the issuance of the warrants.
The warrants will have a four year term and the underlying shares will be
subject to a two year lock-up agreement which will expire if a total of $5
million in debt or equity financing is raised by the Company within the two
year period.
At this time the Board has decided to defer the issuance of the
warrants to Mr. Bombaywala for an indefinite period of time. If in the future
the Board decides that it is in the best interests of the Company to issue
the warrants to Mr. Bombaywala, the Board will seek shareholder approval at
the next annual meeting or at a special meeting.
On May 13, 1998 the Company entered into a Consulting Agreement with GTI
Partners, L.L.C. ("GTI") to seek sources of financing for the Company. In
consideration for the performance of these services, the Company agreed to
issue to GTI warrants to purchase up to 9,500,000 shares of pre-reverse stock
split shares of the Company's Common Stock at a pre-reverse stock split
exercise price of $.09 per share, which was the average market price of the
Common Stock during the period of negotiations with GTI. The Board of
Directors, in making its decision to approve the Consulting Agreement,
considered the following factors, among others, (i) the Company's immediate
and substantial need for working capital, (ii) the lack of other financing
alternatives available to the Company, (iii) the fact that approximately 90%
of the consideration payable to GTI is based on the closing of a $2,500,000
financing, (iv) the fact that the terms of the financing may be accepted or
rejected by the Company in its discretion, (v) the nonexclusive arrangement
with GTI, (vi) the fact that the exercise price of the GTI warrants was
non-dilutive to the market price when initial negotiations were undertaken,
(vii) representations of GTI that the financing is not expected to be
materially dilutive to the market price of the Company's stock at the time
the financing is consummated, (viii) the fact that the shares issued to GTI
are subject to a two (2) year Lock-Up Agreement subject to early termination
if the Company receives $5,000,000 in GTI arranged financings within such two
(2) year period, and (ix) the financing track record of GTI and its
affiliates.
Warrants to purchase 1,000,000 pre-reverse stock split shares of the
Company's Common stock were issued upon the execution of the Consulting
Agreement. The remaining warrants for 8,500,000 pre-reverse stock split
shares will be issued to GTI upon the completion of at least $2,500,000 of
initial financing. The shares underlying the warrants are subject to a
lock-up agreement prohibiting resale thereof for a period of two years from
the date of the issuance of the respective warrants subject to the Company's
consent to any proposed public or private resales, or the expiration of the
lock-up agreement upon GTI arranging a total of $5,000,000 of financing on
terms acceptable to the Company. The warrant shares are subject to a voting
agreement and proxy in favor of Mr. Bombaywala, the Company's Chief Executive
Officer, which shall expire as to 250,000 post-reverse stock split shares
every ninety days from the date of exercise of the warrants. The warrants may
be exercised in whole, but not in part, and are not transferable except to
entities affiliated with GTI or with the Company's consent.
On May 15, 1997, Mr. Bombaywala and the Company entered into a Conversion and
Offset Agreement whereby the $3,750,000 of debt evidenced by certain
promissory notes issued to Mr. Bombaywala by the Company in connection with
the acquisition of Pasta Co. from Mr. Bombaywala in 1996 were converted to
7,500,000 Common Stock Rights (the "Rights"). Each of the Rights
automatically converted to one share of the Company's Common Stock at a later
date, without further action or consideration by Mr. Bombaywala when the
Company amended its Articles of Incorporation to increase its authorized
shares. In exchange for the Rights, Mr. Bombaywala forgave the Notes. A value
of $.50 per share was determined by the Board of Directors in connection with
the conversion. The Company's shareholders approved the increase in the
Company's authorized shares on January 23, 1998, and the shares were issued
to Mr. Bombaywala.
The Company also agreed with Mr. Bombaywala to offset $819,202 represented
by certain Pasta Co. promissory notes payable to Mr. Bombaywala in
connection with the acquisition of Pasta Co. against a note receivable from
Mr. Bombaywala payable to Marco's.
In December 1994, Mr. Bombaywala purchased $500,000 principal amount of the
Company's subordinated notes and received 222,222 warrants to purchase a like
number of shares of common stock. Mr. Bombaywala is also obligated to
purchase the remaining $1.25 million of the Subordinated Notes if they have
not been paid in full at maturity. In June 1997, Mr. Bombaywala converted
this 12% subordinated debt to 11% subordinated debt, due June 2002.
F-19
<PAGE>
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 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
were offered directly by the Company to qualified accredited investors. The
Company did not retain a broker or underwriter to assist with the offering.
Holders of the Convertible Subordinated Notes received warrants (the
"Convertible Subordinated Note Warrants") to purchase shares of Common Stock
at a purchase price of $1.50 per share until June 30, 2002. Interest on the
Convertible Subordinated Notes is payable quarterly beginning September 30,
1997. The Convertible Subordinated Notes are currently unsecured and are
subordinated to certain defined senior indebtedness. As of September 30,
1997, $700,000 principal amount of the Convertible Subordinated Notes had
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 has been extended to December
31, 1999. Ghulam M. Bombaywala, Chairman of the Board, Chief Executive
Officer and a director of the Company, converted the $500,000 principal
amount of 12% Subordinated Notes owed to him into the 11% Convertible
Subordinated Notes, pursuant to a Subordinated Note Conversion Agreement
dated June 1, 1997 (the "Conversion Agreement"). Pursuant to the Conversion
Agreement, Mr. Bombaywala canceled the $500,000 principal amount of 12%
Subordinated Notes owed him by the Company and received an 11% Convertible
Subordinated Note of equal principal amount with the same terms and
conditions as the Convertible Subordinated Notes being offered by the Company
to prospective investors. Additionally, in September 1997, the Company
guaranteed a promissory note with United Central Bank for $850,000 due
September 2002. The proceeds of the note were used to repay a portion of the
$3 million principal amount of 12% Subordinated Notes originally due July 31,
1997.
The Company acquired 240,000 shares (the "CluckCorp Shares") of the
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 had 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 sold
the CluckCorp Shares in public and private transactions during fiscal 1998.
F-20
<PAGE>
12. 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 of fiscal 1997 for a loss
of approximately $75,000. In 1997, an impairment expense was recorded to
reflect the loss on sale.
INTANGIBLE ASSETS.
In the fourth quarter of fiscal 1997, the Company deemed the intangible
assets associated with Chris' & Pitt's Barbeque Sauce to be impaired.
Management estimated the fair value and, accordingly, an impairment expense
of approximately $3.45 million was recorded during fiscal 1997 and is
included in depreciation and amortization expense. In the fourth quarter of
fiscal 1998, the Company deemed the intangible asset associated with Pasta
Co. to be impaired. Management estimated the fair value and, accordingly, an
impairment expense of $2.6 million was recorded in fiscal 1998 and is
included in depreciation and amortization expense. Management will continue
to evaluate the fair value of the intangible asset of Pasta Co. quarterly
based on its cash flow.
13. EMPLOYEE BENEFIT PLANS:
An incentive savings plan has been established which is a qualified profit
sharing plan under Section 401(k) of the Internal Revenue Code. Contributions
to the incentive savings plan are determined by the board of directors.
Employees may also make contributions to the incentive savings plan based
upon a percentage of qualified compensation in accordance with the Internal
Revenue Service rules and regulations. No contributions were made to this
plan by the Company during 1998, 1997 or 1996.
F-21
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT (1)
------- --------------------------
2.1 Stock Exchange Agreement dated July 1, 1994 between Ghulam M.
Bombaywala ("GMB"), Marco's Mexican Restaurants, Inc., a Texas
Corporation ("Marco's") and Watermarc Food Management Co., a Texas
corporation, f/k/a Billy Blues Food Corporation (the "Company")
(2)(3)
2.2 Agreement and Plan of Merger dated September 14, 1995 by and among
the Company, GMB, Pasta Acquisition Co., a Texas corporation
("PAC") and The Original Pasta Co., a Texas Corporation ("TOPC")
(4)
2.3 Sale and Option Agreement between the Company, GMB and TOPC dated
June 23, 1995 (4)
2.4 Stock Purchase Agreement dated June 29, 1997 between the Company
and Angelo Pitillo (9)
3.1 Amended, Restated and Corrected Articles of Incorporation of the
Company (4)
3.2 Amended and Restated Bylaws of the Company (4)
3.3 Amendment to Restated Articles of Incorporation of the Company
filed February 12, 1998 regarding an increase in authorized shares
of Common Stock
4.1 Specimen of Common Stock Certificate (5)
4.2 Form of Warrant Agreement covering Series A Warrants (5)
4.3 Specimen of Series A Warrant (5)
4.5 Statement of Resolution Establishing Series of Preferred Stock (9%
Cumulative Convertible Preferred Stock) as filed with the Secretary
of the State of Texas on January 13, 1993 (included as part of
Exhibit Number 3.1 above) (4)
4.6 Specimen of 9% Cumulative Convertible Preferred Stock Certificate
(6)
4.7 Form of 5-Year 9% Convertible Subordinated Debenture Due March 16,
1999 (6)
4.8 Form of Notification of the Voluntary Conversion Rate of 5-year 9%
Convertible Subordinated Debentures (4)
4.9 Forms of 12% Subordinated Note due December 19, 1994 and Warrant to
purchase Common Stock at $2.25 per share expiring December 31, 1999
(4)
4.10 Amendment 1 to Warrant Agreement covering Series A Warrants (8)
4.11 Amendment 2 to Warrant Agreement covering Series A Warrants (8)
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT (1)
------- --------------------------
4.12 Notice of Extension of Warrant Expiration Date to May 15, 1997 (8)
4.13 First Amendment to Purchase Agreement dated effective as of March
31, 1996, among the Company and the Purchasers relating to
$3,000,000 12% Subordinated Notes due March 31, 1996 (8)
4.14 Security Agreement dated as of May 20, 1996 by the Company in favor
of the Purchasers relating to $3,000,000 12% Subordinated Notes (8)
4.15 First Amendment to Financial Advisory Agreement dated March 31,
1996 between the Company and Sanders Morris Mundy, Inc. ("SMM") (8)
4.16 Form of Amendment to 12% Subordinated Notes of the Company due
March 31, 1996 extending maturity date to July 31, 1997 (8)
4.17 Amendment No. 3 to Warrant Agreement covering Series A Warrants (9)
4.18 Notice of Extension of Warrant Expiration Date to May 15, 1998 (9)
4.19 Second Amendment to Purchase Agreement dated effective as of July
31, 1997, among the Company and the Purchasers relating to
$3,000,000 12% Subordinated Notes due July 31, 1997 (9)
4.20 Second Amendment to Financial Advisory Agreement dated July 31,
1997 between the Company and SMM (9)
4.21 Conversion and Offset Agreement dated May 15, 1997 between The
Original Pasta Co., Marco's Mexican Restaurants, Inc., the Company
and GMB(9)
4.22 Subordinated Note Conversion Agreement dated June 1, 1997 between
the Company and GMB (9)
4.23 Specimen of Purchase Agreement for 11% Convertible Subordinated
Notes due June 30, 2002 (9)
4.24 Form of 11% Convertible Subordinated Promissory Note due June 30,
2002 (9)
4.25 Form of Warrant to Purchase Common Stock of the Company expiring on
June 30, 2002 issued to purchasers of 11% Subordinated Notes (9)
4.26 Form of Third Amendment to Purchase Agreement dated July 10, 1998
among the Company and the Purchasers relating to $3,000,000 12%
Subordinated Notes
4.27 Form of Third Amendment to Financial Advisory Agreement dated July
10, 1998 between the Company and SMM
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT (1)
------- --------------------------
10.1 Form of Management Agreement between the Company and TOPC dated
effective September 14, 1995 (4)
10.2 Form of Escrow Closing Agreement dated effective September 14, 1995
by and among GMB, PAC, TOPC, the Company and the Escrow Agent (4)
10.3 Form of Bank Escrow Agreement by and among the Company, GMB and the
Bank Escrow Agent dated effective September 14, 1995 (4)
10.4 Form of Development Escrow Agreement by and among TOPC, PAC, the
Company, GMB and the Escrow Agent dated effective September 14,
1995 (4)
10.11 Form of $1,260,000 Promissory Note from TOPC to GMB dated effective
September 14, 1995 (4)
10.12 Placement Agent Agreement dated December 12, 1994 by and between
the Company and SMM as Placement Agent, with first amendment
thereto (4)
10.13 Form of Purchase Agreement dated December 19, 1994 between the
Company and SMM relating to $3,000,000 12% Subordinated Notes due
March 31, 1996 (4)
10.14 Form of 12% Subordinated Note dated December 19, 1994 of the
Company due March 31, 1996 (4)
10.15 Form of Warrant dated December 19, 1994, to purchase shares of
common stock of the Company at $2.25 per share, expiring December
31, 1999, issued to purchasers of 12% Subordinated Notes (4)
10.16 Put Option Agreement dated December 19, 1994 by and among GMB and
the purchasers of the Company's 12% Subordinated Notes (4)
10.17 Financial Advisory Agreement dated December 19, 1994 between the
Company and SMM (4)
10.18 Warrant Certificate dated December 19, 1994 from the Company to SMM
to purchase 105,000 shares of Common Stock at $2.50 per share
expiring December 31, 1999 (4)
10.19 Warrant Certificate dated December 19, 1994 from the Company to
Michael S. Chadwick to purchase 45,000 shares of Common Stock at
$2.50 per share expiring December 31, 1999 (4)
10.21 Form of Promissory Note, dated May 31, 1995, executed by the
Company in favor of Fantasia Stiftung (7)
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT (1)
------- --------------------------
10.22 Security Agreement, dated May 31, 1995, between Fantasia Stiftung
and the Company (7)
10.23 Guaranty Agreement, dated May 31, 1995 between Fantasia Stiftung
and GMB (7)
10.28 Employment Agreement dated July 1, 1994 between the Company and GMB
(4)
10.29 Pledge and Security Agreement from GMB in favor of the Company
dated July 31, 1994 (4)
10.30 $2,175,310.40 Promissory Note of GMB to the Company dated July 31,
1994 (4)
10.31 1994 Stock Compensation Plan of the Company (8)
10.32 First Amendment to the 1994 Stock Compensation Plan of the Company
(8)
10.33 Second Amendment to the 1994 Stock Compensation Plan of the Company
(8)
10.34 License Agreement dated February 21, 1996 between the Company and
Bevo's Enterprises licensing the Company to use the name Longhorn
Cafe in the operation of the business (8)
10.35 $2,750,000 promissory note from PAC to GMB dated effective
September 14, 1995 (8)
10.36 $1,000,000 promissory note from PAC to GMB dated effective
September 14, 1995 (8)
10.37 $595,000 promissory note from PAC to GMB dated effective January
26, 1996 (8)
10.38 $224,202 promissory note from PAC to GMB dated effective January
26, 1996 (8)
10.39 $1,200,000 promissory note from the Company to MetroBank, N.A.
dated March 15, 1996 (8)
10.40 Security Agreement between PAC, TOPC and GMB dated September 14,
1995 (8)
10.41 Security Agreement Pledge between the Company and GMB dated
September 14, 1995 (8)
10.42 Guaranty Agreement Pledge between the Company and GMB dated
September 14, 1995 (8)
10.43 Service Mark License Agreement between PAC and GMB dated September
14, 1995 (8)
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT (1)
------- --------------------------
10.44 License Agreement dated June 29, 1997 between Marco's Mexican
Restaurants, Inc. and Mohammed S. and Rubina S. Akhtar licensing
the use of the name Marco's in the operation of a restaurant (9)
10.45 $300,000 promissory note from the Company to MetroBank dated April
11, 1997 (9)
10.46 $300,000 promissory note from the Company to United Central Bank
dated April 7, 1997 (9)
10.47 $250,000 promissory note from the Company to Langham Creek National
Bank dated February 14, 1997 (9)
10.48 Agreement dated May 20, 1998 between the Company and GMB relating
to the issuance of 10,000,000 warrants to GMB
10.49 Professional Services Agreement dated April 2, 1998 between the
Company and Darrin Straughan for operational consulting services
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
99.3 Form 8-K dated May 13, 1998
99.4 Letter dated September 30, 1998 from E. Ted Davis & Associates,
Inc. regarding the issuance of warrants to GMB
______________
FOOTNOTES
(1) Unless otherwise footnoted, the Exhibits described below are filed
herewith.
(2) Certain terms initially defined in this Exhibit List are used consistently
throughout the Exhibit List.
(3) Filed as an Exhibit to the Company's Form 8-KSB/A dated September 14, 1994
and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Form 10-K dated July 2, 1995 and
incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
as amended (SEC File No. 33-45906) effective May 15, 1992, and
incorporated herein by reference.
(6) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-3, as amended (SEC File No. 33-773344) effective May 10, 1994, and
incorporated herein by this reference.
(7) Previously filed as an Exhibit to the Company's Registration Statement as
Form S-3, as amended (SEC File No. 33-93450), effective July 28, 1995 and
incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Form 10-K dated June 30, 1996 and
incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Form 10-K dated June 29, 1997 and
incorporated herein by reference.
EXHIBIT 3.3
ARTICLES OF AMENDMENT
TO THE
RESTATED ARTICLES OF INCORPORATION
OF
WATERMARC FOOD MANAGEMENT CO.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, Watermarc Food Management Co., the undersigned corporation (the
"Corporation") adopts the following Articles of Amendment to its Restated
Articles of Incorporation:
ARTICLE ONE
AMENDMENT
The following amendment to the Restated Articles of Incorporation of the
Corporation was adopted by the Shareholders of the Corporation on January 23,
1998, in order to provide for the issuance of additional shares of common stock.
Article Four, Section 1 of the Restated Articles of Incorporation of the
Corporation is hereby amended to read in its entirety as follows:
ARTICLE FOUR
CAPITALIZATION, PREEMPTIVE RIGHTS AND VOTING
Section 1. AUTHORIZED SHARES. The Corporation shall have authority to
issue two classes of shares to be designated respectively "Common Stock" and
"Preferred Stock". The total number of shares which the Corporation is
authorized to issue is ONE HUNDRED FIVE MILLION (105,000,000) shares of which
ONE HUNDRED MILLION (100,000,000) shall be Common Stock and FIVE MILLION
(5,000,000) shall be Preferred Stock. Each share of Common Stock shall have a
par value of FIVE CENTS ($.05), and each share of Preferred Stock shall have a
par value of ONE DOLLAR ($1.00).
ARTICLE TWO
OUTSTANDING SHARES
The number of shares of the Corporation outstanding at the time of such
adoption was 14,163,230 shares of Common Stock, $.05 par value per share; and
the number of shares of Common Stock entitled to vote thereon was 14,163,230.
ARTICLE THREE
VOTE
The number of shares voted for and against such amendment was as follows:
FOR AGAINST
Authorized Shares 8,531,423 559,267
EXECUTED this 30th day of January, 1998.
WATERMARC FOOD MANAGEMENT CO.
By: /s/ GHULAM M. BOMBAYWALA
Ghulam M. Bombaywala, Chief Executive
Officer
EXHIBIT 4.26
THIRD AMENDMENT
TO
PURCHASE AGREEMENT
Third Amendment to Purchase Agreement dated effective as of July 10, 1998
(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, and a Second Amendment to
Purchase Agreement dated as of July 31, 1997, (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
(%f$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 July 31, 1998, 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 December 31, 1999; 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 bv:
<PAGE>
(i) deleting the words "July 10, 1998" and substituting in
place thereof the words "December 31, 1999,"
(ii) deleting reference to "$0.25" and substituting in place
thereof "$0.09," 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 December 31, 1999, and will bear interest
on its unpaid balance at the rate of 12% per annum, payable monthly
on or before the first day of each month for the preceding month,
commencing on September 1, 1998, and will have the other terms and
provisions provided herein and in the form of Note attached hereto
as EXHIBIT A.
(b) The Company's breach of any of its covenants and agreements contained
in this Agreement, including its agreement to reduce the outstanding principal
amount of the Notes by $150,000 on or before December 31, 1998, shall constitute
an "Event of Default" under the Purchase Agreement.
3. AMENDMENTS TO THE NOTES. Each of the Notes is hereby amended by
deleting the words "July 10, 1998" wherever they may appear and substituting in
place thereof the words "December 31, 1999" and by deleting "and to pay interest
thereon quarterly on March 31, June 30, September 30, and December 31 (each an
"Interest Payment Date"), in each year commencing March 31, 1995," in the first
paragraph of the Note and substituting in place thereof the following "and to
pay interest thereon monthly on or before the first (1st) day of each month for
the preceding month (each an "Interest Payment Date"), in each year commencing
on September 1, 1998."
4. AMENDMENTS TO THE WARRANTS. Each of the Warrants is hereby amended by
deleting the number "$0.25" in the first paragraph and substituting in place
thereof the number "$0.09."
5. PRINCIPAL PAYMENTS. The Company shall make a principal payment on the
Notes in the aggregate amount of $100,000 and shall pay accrued interest through
July 31, 1998, upon execution of this Agreement. The Company shall make an
additional payment of principal on the Notes in the aggregate amount of $150,000
on or before December 31, 1998.
6. ADDITIONAL WARRANTS. The Company will issue to the Purchasers the
number of warrants (the "New Warrants") evidencing the right to purchase
1,150,000 shares of Common Stock of the Company at $0.25 per share, such number
of shares and the purchase price being subject to adjustment as provided in the
New Warrant, specified opposite their names on Exhibit A.. Each New warrant
shall be in the form attached hereto as Exhibit B. The shares of Common
2
<PAGE>
Stock issued or issuable upon exercise of the New Warrants shall be deemed
"Restricted Stock" under the Purchase Agreement and the holder of the New
Warrants shall be deemed "Eligible Holders" under the Purchase Agreement. The
New Warrants shall expire on the fifth anniversary of their issuance; provided,
however, if the Company pays the Notes in full on or before December 31, 1999,
the New Warrants shall expire on the later of December 31, 1999, or 30 days
after the date the Notes are paid in full.
7. 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.
8. RATIFICATION. Except as expressly amended hereby, the Purchase
Agreement, the Notes, the Warrants, and the Security Agreement dated as of May
20, 1996, by the Company in favor of the Purchasers with respect to the shares
of Marco's, 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 10, 1998, 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.
9. 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
3
<PAGE>
such Note and/or Warrant to the Company so that the amendments effected by this
Amendment may be noted thereon.
10. 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.
11. 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).
12. 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.
13. EXECUTION BV 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; the two Security Agreements dated as of July 31, 1997, by Mr.
Bombaywala in favor of the Purchasers with. respect to the shares of
Michelangelo's, Inc. and S.P.P., Inc.; and the Guaranty dated as of October23,
1997, by Mr. Bombaywala in favor of the Purchasers are 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:/s/ GHULAM M. BOMBAYWALA
Name:_______________________________
Title:______________________________
MARCO'S MEXICAN RESTAURANTS, INC.
By:/s/ GHULAM M. BOMBAYWALA
Name:_______________________________
Title:______________________________
/s/ GHULAM M. BOMBAYWALA
---------------------------------
GHULAM M. BOMBAYWALA
4
<PAGE>
---------------------------------
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>
_________________________________
John M. O'Quinn
_________________________________
Nolan Ryan
_________________________________
Roger P. Lindstedt
_________________________________
Ray C. Childress
_________________________________
Kara S. Chudress
_________________________________
Morton A. Cohn
_________________________________
Michael S. Chadwick
_________________________________
Laura K. Sanders
_________________________________
Quinlan Quiros Schnitzer
6
<PAGE>
Exhibit B
NO.*
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 REGIS~ON STATEMENT WITH
RESPECT HERETO UNDER ALL OF THE APPLICABLE ACTS, OR AN OPIMON OF COUNSEL
SATISFACTORY TO WATERMARC FOOD MANAGEMENT CO. TO THE EFFECT THAT SUCH REGIS~ONS
ARE NOT REQUIRED. THIS WARRANT IS SUBJECT TO OTHER LIMITATIONS ON TRANSFER.
WARRANT
to Purchase Common Stock of
WATERMARC FOOD MANAGEMENT CO.
Expiring on August 31, 2003
THIS IS TO CERTIFY THAT, for value received,*, or permitted assigns, is
entitled to purchase 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 $0.25 (as adjusted
pursuant to the terms of this Warrant, the "Exercise Price'1), * shares of duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock,
$.05 par value, of the Company (the '1Common 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 and the
Exercise Price are subject to adjustment in accordance with Article III hereof.
This Warrant shall expire at 5:00 p.m., Houston Time, on August 31, 2003;
provided, however, if the Company pays in full all outstanding principal and
interest on its 12% Subordinated Notes (the "Notes") issued pursuant to the
Purchase Agreement dated December 19, 1994, as amended (the "Purchase
Agreement"), on or before December 31, 1999, this warrant shall expire on the
later of (i) December 31, 1999, or (ii) the date 30 days following the date that
the Notes are paid in full.
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 time to time. 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 here-
<PAGE>
to, 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. Subject
to compliance with Section 3. l(a)(vii), 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 purchasable by
such holder hereunder, against the receipt by the Company of the total Exercise
Price payable hereunder for all the Warrant Shares, (a) in cash or by certified
or cashier's check or by surrendering Warrant Shares having a Current Market
Value equal to the Exercise Price for all of the Warrant Shares, so purchased.
The Person in whose name the certificate(s) for Common Stock is to be issued
shall be deemed to have become a holder of record of such Common Stock on the
Exercise Date.
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.
1.3 CONVERSION RIGHT. This Warrant may be converted as a whole or in part
from time to time into shares of Common Stock. To convert 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 convert this Warrant in the manner provided in the
Subscript ion Notice and (1,) this Warrant. Subject to compliance with Section
3. 1(a)(vii), this Warrant shall be deemed to be converted on the date of
receipt by the Company of the Subscription Notice, accompanied by this Warrant,
as aforesaid, and such date is referred to herein as the "Conversion Date". Upon
such conversion (subject as aforesaid), the Company shall issue and deliver to
such holder (without payment of any Exercise Price) a certificate for the full
number of the Warrant Shares equal to the quotient obtained by dividing (a) the
amount determined by subtracting the aggregate Exercise Price on the Conversion
Date for the Warrant Shares purchasable by such holder hereunder from the
Current Market Value (as hereinafter defined) for such Warrant Shares on the
Conversion Date by (b) the Current Market Value of one share of Common Stock on
the Conversion Date. The Person in whose name the certificate(s) for Common
Stock is to be issued shall be deemed to have become a holder of record of such
Common Stock on the Conversion Date.
2
<PAGE>
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 name 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 Sect ion 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
3
<PAGE>
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), 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:
(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. 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.
2.5 ACKNOWLEDGMENT 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.
4
<PAGE>
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 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
ANTI-DILUTION PROVISIONS
3.1 ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The
Exercise Price shall be subject to adjustment from time to time as hereinafter
in this Article III provided. Upon each adjustment of the Exercise Price, except
pursuant to 3. 1(a)(vi) and 3. 1(a)(vii), the registered holder of the Warrant
shall thereafter be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of shares of the Common Stock (calculated to the
nearest whole share pursuant to Section 1.2) obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
shares of the Common Stock purchasable pursuant hereto immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) EXERCISE PRICE ADJUSTMENTS. The Exercise Price shall be subject
to adjustment from time to time as follows:
5
<PAGE>
(i) ISSUANCES OF COMMON STOCK. (A) If, at any time, during the
period (the "Note Period") that any principal amount is outstanding on the
Notes (as defined in the Purchase Agreement), the Company shall issue any
Common Stock other than Excluded Stock or Additional Excluded Stock (as
hereinafter defined) without consideration or for a consideration per
share less than the Exercise Price applicable immediately prior to such
issuance, the Exercise Price in effect immediately prior to each such
issuance shall immediately (except as provided below) be reduced to the
price equal to the greater of (I) the result obtained by dividing (aa) the
consideration, if any, received by the Company upon such issuance by (b)
the total number of shares of Common Stock issued by the Company upon such
issuance and (II) $0.05 or
(B) If, at any time, subsequent to the Note Period, the Company
shall issue any Common Stock other than Excluded Stock (as hereinafter
defined) without consideration or for a consideration per share less than
the Exercise Price applicable immediately prior to such issuance, the
Exercise Price in effect immediately prior to each such issuance shall
immediately (except as provided below) be reduced to the price determined
as follows:
by dividing (A) an amount equal to the sum of (x) the number of shares of
Common Stock outstanding immediately prior to such issuance multiplied by
the Exercise Price immediately prior to such issuance and ~) the
consideration, if ~ received by the Company upon such issuance, by ~) the
total number of shares of Common Stock outstanding immediately after such
issuance;
provided, however, that if the number of shares of Common Stock (other than
Excluded Stock) issued or reserved or agreed to be reserved for issuance by the
Company should at any time exceed 5 % of the Company's issued and outstanding
shares of Common Stock none of such shares (whether or not previously issued or
reserved for issuance by the Company) shall be considered Additional Excluded
Stock for purposes of determining the Exercise Price adjustment in Section 3.1
(a) (i) (A) and the Exercise Price shall be readjusted accordingly in accordance
with the provisions of Section 3. 1(a)(i)(A) using the lowest per share price of
any Common Stock so issued or reserved or agreed to be reserved for issuance.
For the purpose of any adjustment of the Exercise Price pursuant to this
clause (i) of this Section 3.1(a), the following provisions shall be applicable:
(A) CASH. In the case of the issuance of Common Stock for
cash, the amount of the consideration received by the Company shall
be deemed to be the amount of the cash proceeds received by the
Company for such Common Stock before deducting therefrom any
reasonable discounts, commissions, taxes or other expenses allowed,
paid or incurred by the Company for any underwriting or otherwise in
connection with the issuance and sale thereof.
(B) CONSIDERATION OTHER THAN CASH. In the case of the issuance
of Common Stock (otherwise than upon the conversion of shares of
capital stock or other securities of the Company) for a
consideration in whole or in part other than
6
<PAGE>
cash, including securities acquired in exchange therefor (other than
securities by their terms so exchangeable), the consideration other
than cash shall be deemed to be the fair value thereof as determined
by the Board of Directors in good faith, irrespective of any
accounting treatment.
(ii) OPTIONS AND CONVERTIBLE SECURITIES ETC. In case, at any time, the
Company shall issue any (i) options, warrants or other rights to purchase or
acquire Common Stock other than Excluded Stock (whether or not at the time
exercisable), (ii) securities by their terms convertible into or exchangeable
for Common Stock (whether or not at the time so convertible or exercisable) or
(i~) options, warrants or rights to purchase such convertible or exchangeable
securities (whether or not at the time exercisable), and such securities so
issued or rights granted in the cases of (i), (ii) or (iii) are not Excluded
Stock, the Exercise Price in effect immediately prior to each such issuance
shall immediately (except as provided below) be reduced to the price determined
in accordance with Section 3. 1(a)(i) and the following:
(1) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options, warrants or other rights to
purchase or acquire Common Stock shall be deemed to have been issued at
the time such options, warrants or rights were issued and for a
consideration equal to the consideration (determined in the manner
provided in subclauses (A) and (B) above), if any, received by the Company
upon the issuance of such options, warrants or rights plus the minimum
purchase price provided in such options, warrants or rights for the Common
Stock covered thereby;
(2) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities, or upon the exercise of options, warrants or
other rights to purchase or acquire such convertible or exchangeable
securities and the subsequent conversion or exchange thereof, shall be
deemed to have been issued at the time such securities were issued or such
options, warrants or rights were issued and for a consideration equal to
the consideration, if any, received by the Company for any such securities
and related options, warrants or rights (excluding any cash received on
account of accrued interest or accrued dividends), plus the additional
consideration, if any, to be received by the Company upon the conversion
or exchange of such securities and the exercise of any related options,
warrants or rights (the consideration in each case to be determined in the
manner provided in subclauses (A) and (B) above);
(3) on any change in the number of shares of Common Stock
deliverable upon exercise of any such options, warrants or rights or
conversion or of exchange for such convertible or exchangeable securities
or any change in the consideration to be received by the Company upon such
exercise, conversion or exchange, including, but not limited to, a change
resulting from the antidilution provisions
7
<PAGE>
thereof, the Exercise Price as then in effect shall forthwith be
readjusted to such Exercise Price as would have been obtained had an
adjustment been made upon the issuance of such options, warrants or
rights not exercised prior to such change, or securities not converted or
exchanged prior to such change, on the basis of such change;
(4) on the expiration or cancellation of any such options, warrants
or rights, or the termination of the right to convert or exchange such
convertible or exchangeable securities, if the Exercise Price shall have
been adjusted upon the issuance thereof, the Exercise Price shall
forthwith be readjusted to such Exercise Price as would have been obtained
had an adjustment been made upon the issuance of such options, warrants,
rights or securities on the basis of the issuance of only the number of
shares of Common Stock actually issued upon the exercise of such options,
warrants or rights, or upon the conversion or exchange of such securities;
and
(5) if the Exercise Price shall have been adjusted upon the issuance
of any such options, warrants, rights or convertible or exchangeable
securities, no further adjustment of the Exercise Price shall be made for
the actual issuance of Common Stock upon the exercise, conversion or
exchange thereof;
PROVIDED, HOWEVER, that no increase in the initial Exercise Price shall be made
pursuant to this Section 3.1 (a)(ii).
(iii) EXCLUDED STOCK. "Excluded Stock" shall mean shares of Common Stock
issued or reserved or agreed to be reserved for issuance by the Company (A)
under options, warrants, or other securities convertible or exercisable into
Common Stock (whether pursuant to a stock option plan or otherwise), provided
the same are issued to officers, directors or employees of the Company and
provided that the aggregate number of shares of Common Stock issued or issuable
under this clause (A) shall not exceed 10% of the Company's issued and
outstanding shares of Common Stock, (B) pursuant to anti-dilution provisions or
rights with respect to any other presently issued and outstanding securities of
the Company convertible into, exchangeable for, or giving the holder thereof the
option or right to purchase shares of Common Stock, (C) pursuant to warrants to
purchase 1,111,100 shares of Common Stock issued under the Purchase Agreement
dated as of December 19,1994, (D) pursuant to up to 950,000 warrants issued to
GTI Partners LLC pursuant to the Consulting Agreement dated May 13, 1998, and
pursuant up to 10,000,000 warrants to be issued to Ghulam Bombaywala, both as
authorized by the Board of Directors of the Company on May 1, 1998, or (E)
pursuant to a stock dividend, subdivision or split-up covered by clause (iv) of
this Section 3.1(a). "Additional Excluded Stock" shall mean shares of Common
Stock (other than Excluded Stock) issued or reserved or agreed to be reserved
for issuance by the Company whether directly or under options, warrants, or
other securities convertible or exercisable into Common Stock, provided that the
aggregate number of shares of Common Stock issued or issuable under such
options,
8
<PAGE>
warrants, or other convertible securities shall not exceed 5% of the Company's
issued and outstanding shares of Common Stock.
(iv) STOCK DIVIDENDS AND SPLITS. If the number of shares of Common Stock
outstanding at any time after the date of this Warrant is increased by a stock
dividend payable in shares of Common Stock or increased or decreased by a
subdivision or split-up of shares of Common Stock, then immediately after the
record date fixed for the determination of holders of Common Stock entitled to
receive such stock dividend or the effective date of such subdivision or
split-up, as the case may be, the Exercise Price shall be appropriately adjusted
so that the adjusted Exercise Price shall bear the same relation to the Exercise
Price in effect immediately prior to such adjustment as the total number of
shares of Common Stock outstanding immediately prior to such action shall bear
to the total number of shares of Common Stock outstanding immediately after such
action.
(v) COMBINATION OF STOCK. If the number of shares of Common Stock
outstanding at any time after the date of issuance of this Warrant is decreased
by a combination of the outstanding shares of Common Stock, then, immediately
after the effective date of such combination, the Exercise Price shall be
appropriately adjusted so that the adjusted Exercise Price shall bear the same
relation to the Exercise Price in effect immediately prior to such adjustment as
the total number of shares of Common Stock outstanding immediately prior to such
action shall bear to the total number of shares of Common Stock outstanding
immediately after such action.
(vi) REORGANIZATIONS. ETC. In case of any capital reorganization of the
Company, or of any reclassification of the Common Stock, or in case of the
consolidation of the Company with or the merger of the Company with or into any
other Person or of the sale, lease or other transfer of all or substantially all
of the assets of the Company to any other Person, this Warrant shall, after such
capital reorganization, reclassification, consolidation, merger, sale, lease or
other transfer, be exercisable for the number of shares of stock or other
securities or property to which the Common Stock issuable (at the time of such
capital reorganization, reclassification, consolidation, merger, sale, lease or
other transfer) upon exercise of this Warrant would have been entitled to
receive upon such capital reorganization, reclassification, consolidation,
merger, sale, lease or other transfer if such exercise had taken place; and in
any such case, if necessary, the provisions set forth herein with respect to the
rights and interests thereafter of the holder of this Warrant shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any shares of stock or other securities or property thereafter deliverable on
the exercise of this Warrant. In case of any distribution by the Company of any
security (including rights or warrants to subscribe for any such securities but
excluding Common Stock and any securities referred to in Section 3. l(a)(ii)) of
the Company, evidences of its indebtedness, cash or other assets to all of the
holders of its Common Stock, then in each such case the Exercise Price in effect
thereafter shall be determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction the numerator of which shall be the
total number of outstanding shares of Common Stock multiplied by the
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<PAGE>
Current Market Price on the record date mentioned below, less the fair market
value (as determined in good faith by the Board of Directors) of the securities,
evidences of its indebtedness, cash or other assets distributed by the Company
and the denominator of which shall be the total number of outstanding shares of
Common Stock multiplied by the Current Market Price; such adjustment shall
become effective as of the record date for the determination of stockholders
entitled to receive such distribution. The subdivision or combination of shares
of Common Stock issuable upon exercise of this Warrant at any time outstanding
into a greater or lesser number of shares of Common Stock (whether with or
without par value) shall not be deemed to be a reclassification of the Common S
tock of the Company for the purposes of this clause (vi).
(vii) ROUNDING OF CALCULATIONS: MINIMUM ADJUSTMENT. All calculations under
this Section 3.1(a) shall be made to the nearest cent or to the nearest whole
share (as provided in Section 1.2) share, as the case may be. Any provision of
this Section 3.1 to the contrary notwithstanding, no adjustment in the Exercise
Price shall be made if the amount of such adjustment would be less than $.05,
but any such amount shall be carried forward and an adjustment with respect
thereto shall be made at the time of and together with any subsequent adjustment
which, together with such amount and any other amount or amounts so carried
forward, shall aggregate $.05 or more. In case ~e Company shall at any time
issue shares of Common Stock in any transaction described in Section 3. l(a)(iv)
or 3. 1(a)(v), such amount of $.05 per share (as theretofore increased or
decreased, if such amount shall have been adjusted in accordance with the
provisions of this Section 3. 1(a)(vii)) shall forthwith be proportionately
increased in the case of a transaction described in Section 3. 1(a)(v) or
decreased in the case of a transaction described in Section 3. 1(a)(iv) so as
appropriately to reflect such transaction.
(viii) TIMING OF ISSUANCE OF ADDITIONAL COMMON STOCK UPON CERTAIN
ADJUSTMENTS. In any case in which the provisions of this Section 3.1(a) shall
require that an adjustment shall become effective immediately after a record
date for an event, the Company may defer until the occurrence of such event
issuing to the holder of this Warrant after such record date and before the
occurrence of such event the additional shares of Common Stock or other property
issuable or deliverable upon exercise by reason of the adjustment required by
such event over and above the shares of Common Stock or other property issuable
or deliverable upon such exercise before giving effect to such adjustment;
PROVIDED, HOWEVER, that the Company upon request shall deliver to such holder a
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares or other property, and such cash, upon the
occurrence of the event requiring such adjustment.
(b) CURRENT MARKET PRICE. The Current Market Price shall mean, as of any
date, 10 % of the sum of the average, for each of the 10 consecutive Trading
Days immediately prior to such date, of either: (i) the high and low sales
prices of the Common Stock on such Trading Day as reported on the composite tape
for the principal national securities exchange on which the Common Stock may
then be listed, or (ii) if the Common Stock shall not be so listed on any such
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<PAGE>
Trading Day, the high and low sales prices of Common Stock in the
over-the-counter market as reported by the Nasdaq Stock Market ("Nasdaq") for
National Market Issues, or (iii) if the Common Shares shall not be included in
the Nasdaq National Market on any such Trading Day, the representative bid and
asked prices at the end of such Trading Day in such market as reported by
Nasdaq, or 1(iv) if there be no such representative prices reported by Nasdaq,
the lowest bid and highest asked prices at the end of such Trading Day in the
over-the-counter market as reported by the National Quotation Bureau, Inc., or
any successor organization. For purposes of determining Current Market Price,
the term 'tTrading Day" shall mean a day on which an amount greater than zero
can be calculated with respect to the Common Stock under any one or more of the
foregoing categories (i), (ii), (iii) and (iv), and the "end" thereof, for the
purposes of categories (iii) and (iv), shall mean the exact time at which
trading shall end on the New York Stock Exchange. If the Current Market Price
cannot be determined under any of the foregoing methods, Current Market Price
shall mean the fair value per share of Common Stock on such date determined by
the Board of Directors in good faith, irrespective of any accounting treatment,
upon a review of relevant factors.
(c) STATEMENT REGARDING ADJUSTMENTS. Whenever the Exercise Price shall be
adjusted as provided in Section 3.1(a), and upon each change in the number of
shares ~f the Common Stock issuable upon exercise of this Warrant, the Company
shall forthwith file, at the office of any transfer agent for this Warrant and
at the principal office of the Company, a statement showing in detail the facts
requiring such adjustment and the Exercise Price and new number of shares
issuable that shall be in effect after such adjustment, and the Company shall
also cause a copy of such statement to be given to the holder of this Warrant.
Each such statement shall be signed by the Company's chief financial or
accounting officer. Where appropriate, such copy may be given in advance and may
be included as part of a notice required to be mailed under the provisions of
Section 3.1(d).
(d) NOTICE TO HOLDERS. In the event the Company shall propose to take any
action of the type described in clause (i) or (ii) (but only if the action of
the type described in such clause would result in an adjustment in the Exercise
Price), (iv), (v) or (vi) of Section 3.1(a), the Company shall give notice to
the holder of this Warrant, in the manner set forth in Section 6.6, which notice
shall specify the record date, if any, with respect to any such action and the
approximate date on which such action is to take place. Such notice shall also
set forth such facts with respect thereto as shall be reasonably necessary to
indicate the effect of such action (to the extent such effect may be known at
the date of such notice) on the Exercise Price and the number, kind or class of
shares or other securities or property which shall be deliverable upon exercise
of this Warrant. In the case of any action which would require the fixing of a
record date, such notice shall be given at least 10 days prior to the date so
fixed, and in case of all other action, such notice shall be given at least 15
days prior to the taking of such proposed action. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of any such
action.
(e) TREASURV STOCK. For the purposes of this Section 3.1, the sale or
other disposition of any Common Stock of the Company theretofore held in its
treasury shall be deemed to be an issuance thereof.
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<PAGE>
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. 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 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.
CURRENT MARKET PRICE -- Section 3.1(b).
EXCLUDED STOCK -- Section 3. l(a)(iii).
OUTSTANDING -- when used with reference to Common Stock at any date, all
issued shares of Common Stock (including, but without duplication, shares deemed
issued pursuant to Article III) at such date, except shares then held in the
treasury of the Company.
NASDAQ -- Section 3(b).
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<PAGE>
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.
TRADING DAY -- Section 3. l~).
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.
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 contains 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 terms or
conditions of this Warrant shall not in any way effect, limit or waive a party's
rights
13
<PAGE>
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 provision 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 mere 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.
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
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<PAGE>
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: August __, 1998
WATERMARC FOOD MANAGEMENT CO.
By:________________________
Ghulam M. Bombaywala,
Chairman of the Board and Chief
Executive Officer
15
<PAGE>
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 payment in full therefor 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__
16
EXHIBIT 4.27
THIRD AMENDMENT
TO
FINANCIAL ADVISORY AGREEMENT
Third Amendment to Financial Advisory Agreement dated as of July 10, 1998
(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, and the Second
Amendment to Financial Advisory Agreement dated as of July 31, 1997 (as so
amended, the "Advisory Agreement") pursuant to which the Company retained the
Advisor to provide certain advice and consulting services to the Company; and
Whereas, pursuant to the Advisory Agreement, the Company issued the
Advisor the Advisor's Warrant
Whereas, the Company 'and the Advisor wish amend the Advisor's Warrant
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 Advisor's Warrant 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 ADVISOR'S WARRANTS. Each of the Advisor's Warrants is
hereby amended by deleting the number "$0.25" in the first paragraph and
substituting in place thereof the number "$0.09."
4. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants as follows:
(a)The execution, delivery and performance of 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
<PAGE>
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 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 consummation by the Company of the transactions contemplated hereby
and thereby do not require any approval or consent of, or filing with, any
governmental agency or authority.
5. RATIFICATION. Except as expressly amended hereby, the 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 a~amended by this
Amendment.
6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. GOVERNING LAW. This Amendment shall be governed by and construed
in accordance with the laws of the State of Texas (without reference to
conflict of laws).
In Witness Whereof, the Company and the Advisor have executed this
Amendment as of the date first above written.
WATERMARC FOOD MA AGEMENT CO. SANDERS MORRIS MUNDY INC.
By:____________________________
Name:__________________________
Title:___________________________
2
EXHIBIT 10.48
AGREEMENT
THIS AGREEMENT ("Agreement") is entered into as of May 20, 1998, by and
between Watermarc Food Management Co., a Texas corporation (the "Company"), and
Ghulam M. Bombaywala ("Bombaywala").
WHEREAS, Bombaywala has personally guaranteed approximately $12.9 million
in debt and lease obligations of the Company (collectively referred to as
"Guarantees") and pledged many of his personal assets to partially collateralize
certain of the Guarantees;
WHEREAS, the Guarantees are important to the Company's financial survival;
WHEREAS, Bombaywala has waived and/or deferred the payment of all
compensation payable to him to date as an executive officer of the Company;
NOW, THEREFORE, FOR VALUABLE CONSIDERATION, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. Bombaywala agrees to personally guarantee up to $5 million of future
indebtedness of the Company whether in leases, notes, accounts payable or
contractual obligations (or renewals of the foregoing), or any other obligations
of the Company. However, in the event of a "Change of Control" as hereafter
defined, Bombaywala shall be released from any remaining obligation to
personally guarantee up to $5 million of future indebtedness of the Company.
"Change of Control" is defined as a decrease in Bombaywala's beneficial
ownership interest in the Company to less than 51% of the outstanding shares of
the Common Stock of Company.
2. The Board of Directors of the Company has approved the issuance to Bombaywala
of Warrants to purchase 10,000,000 shares of the Company's Common Stock
(pre-reverse stock split amount) at the exercise price of $.14 per share
(pre-reverse stock split exercise price), which was the market price of the
stock when the Board of Directors first considered the proposal.
3. The issuance of the Warrants will be submitted to the independent
shareholders for ratification at a special meeting or the next annual meeting,
however the Board of Directors shall retain the right to proceed with the
issuance of the Warrants even if not ratified by a majority of the independent
shareholders.
4. The Warrants shall have a four year term from the date of issuance and shall
be set forth in a Warrant Agreement in the form attached hereto as EXHIBIT A.
5. The underlying shares ("Warrant Shares") shall be subject to a Lock-Up
Agreement in the form attached hereto as EXHIBIT B prohibiting resale thereof
for a period of two (2) years from the date of the issuance of the respective
Warrants, which shall expire sooner if a total of $5 million in debt or equity
financing is raised by the Company within the two year period.
6. Bombaywala shall have customary demand and piggyback registration rights
subject to the terms of the Lock-Up Agreement.
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<PAGE>
7. If a reverse stock split is approved by the Company's shareholders, the
number of Warrants and Warrant Shares shall be proportionately decreased and the
exercise price for each Warrant or Warrant Share shall be proportionately
increased.
8. SEVERABILITY. In the event that any one or more of the provisions of this
Agreement shall be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
contained herein.
9. AMENDMENT; MODIFICATION. This Agreement constitutes the entire Agreement
between the Company and Bombaywala with respect to the matters set forth herein,
and no amendment or modification hereof shall be valid unless made by
supplemental written agreement, executed and approved by the Company and
Bombaywala.
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to applicable
choice of law principles.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
"COMPANY":
WATERMARC FOOD MANAGEMENT CO.
a Texas corporation
ADDRESS:
11111 Wilcrest Green, Suite 350
Houston, Texas 77042
By: /s/ CAROLYN RICHARDS
Carolyn Richards, Secretary
GHULAM M. BOMBAYWALA
ADDRESS:
11 Greenlaw Street
Sugar Land, Texas 77479
/s/ GHULAM M. BOMBAYWALA
2
<PAGE>
EXHIBIT A
WARRANT AGREEMENT AND CERTIFICATE
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE SUBJECT TO
CERTAIN RESTRICTIONS, CONTAINED HEREIN, WITH RESPECT TO THEIR TRANSFER.
WARRANT TO PURCHASE SHARES OF COMMON STOCK OF
WATERMARC FOOD MANAGEMENT CO.
__________ Warrants
This Warrant Certificate certifies that GHULAM M. BOMBAYWALA (together
with his successors and assigns as herein provided, the "Holder") is the owner
of __________ Warrants (subject to adjustment as provided herein), each of which
represents the right to subscribe for and purchase from WATERMARC FOOD
MANAGEMENT CO., a Texas corporation (the "Company"), one share of the common
stock, par value $0.05 per share, of the Company (the common stock, including
any stock into which it may be changed, reclassified or converted, is herein
referred to as the "Common Stock") at the purchase price (the "Exercise Price")
of $_______ per share.
The Warrants represented by this Warrant Certificate are subject to the
following provisions, terms and conditions:
ARTICLE I
EXERCISE OF WARRANTS
1.1 METHOD OF EXERCISE. The Warrants may only be exercised by the Holder
in whole or in part by surrender of this Warrant Certificate at the office of
the Company (or such other office or agency of the Company as may be designated
by notice in writing to the Holder at the address of such Holder appearing on
the books of the Company) with the appropriate form attached hereto duly
completed, at any time within the period beginning on the date hereof and
expiring at 5:00 p.m. Houston, Texas time, on _________, 2002 (the "Exercise
Period") and by payment to the Company by certified check or bank draft of the
Exercise Price for such shares. The Company agrees that the shares of Common
Stock so purchased shall be and are deemed to be issued to the Holder as the
record owner of such shares of Common Stock as of the close of business on the
date on which the Warrant Certificate shall have been surrendered and payment
made for such shares of Common Stock. Certificates representing the shares of
Common Stock so purchased shall be delivered to the Holder promptly.
1
<PAGE>
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.
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 name the
Warrants have 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 EXCEPT TO (I) ENTITIES OR PERSONS UNDER COMMON CONTROL WITH, OR WHO
ARE CONTROLLED BY, HOLDER OR PERSONS WHO CONTROL HOLDER, OR (II) WITH THE PRIOR
WRITTEN CONSENT OF THE COMPANY, WHICH MAY BE WITHHELD IN THE COMPANY'S SOLE
DISCRETION. 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 THE LOCK-UP AGREEMENT attached hereto as Exhibit 1 and
incorporated herein by reference, and as specified in this Article 2.3, which
conditions are intended, among other things, to insure compliance with the
provisions of the Securities Act of 1933 as amended (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, Article 2.3(b), (ii) exercise
this Warrant prior to delivery to the Company of the opinion of counsel referred
to in, and to the effect described in, Article 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, Article 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.
2
<PAGE>
(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.
2.4 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.
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 holders of the Company's Common Stock. 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
<PAGE>
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. 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 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).
3.5 APPROVALS. If any shares of Common Stock to be reserved for the
purpose of exercise of this Warrant require registration with or approval of any
governmental authority under any Federal or state law before such shares may be
validly issued or delivered upon exercise, then the Company and the holders of
this Warrant will in good faith and as expeditiously as possible endeavor to
secure such registration or approval, as the case may be.
ARTICLE IV
RESTRICTIVE LEGENDS
4.1 Each Warrant shall (unless otherwise permitted by the provisions
hereof) be stamped or otherwise imprinted with a legend in substantially the
following form:
"This Warrant has not been registered under the Securities Act of 1933, as
amended, and is transferable only upon the conditions specified in the
Warrant Agreement referred to herein."
4
<PAGE>
4.2 Each certificate for Common Stock issued upon exercise of a Warrant
and each certificate for Common Stock issued to a subsequent transferee shall
(unless otherwise permitted by the provisions hereof) be stamped or otherwise
imprinted with legends in substantially the following forms:
"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 opinion of counsel,
satisfactory to counsel for the corporation, that registration is not
required under any such acts."
"The shares represented by this certificate are subject to the provisions
of a Lock-up Agreement dated as of ___________, 1998 ("Lock-up
Agreement"), which restrict the transfer of such shares, and the rights of
the holder of the shares represented by this certificate are subject to
all the terms and provisions of the Lock-up Agreement, by which such
holder, by acceptance of this certificate, agrees to be bound. A
counterpart of the Lock-up Agreement has been deposited with Watermarc
Food Management Co. at its principal office and will be provided to any
holder or transferee upon request."
ARTICLE V
REGISTRATION RIGHTS
5.1 REQUIRED REGISTRATION. The Company shall use its best efforts to
effect the registration under the Securities Act of the shares of Common Stock
issued pursuant to this Warrant Certificate upon exercise of the Warrants and
evidenced by a certificate bearing the restrictive legends set forth in Article
IV hereof (the "Restricted Stock") on a form appropriate for the registration of
the Restricted Stock in order to permit the Holder to dispose of the Restricted
Stock in accordance with its intended method of disposition and the terms of the
Lock-up Agreement.
5.2 INCIDENTAL REGISTRATION. Notwithstanding the provisions of Article 5.1
of this Agreement, if the Company at any time during the Exercise Period
proposes to register any of its Common Stock under the Securities Act (on a form
appropriate for the registration of the Restricted Stock for public offering 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 the acquisition of stock or
assets of another person) and there is then not an effective registration
statement covering the shares of Common Stock to be issued upon exercise of the
Warrants, it will each such time give written notice to the holder of this
Warrant and any holders of Restricted Stock (the holders of Restricted Stock are
sometimes referred to herein as the "Eligible Holders") of its intention so to
do and, upon written request from Eligible Holders given 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 (but not less than 1,000 shares if less
than all) Restricted Stock held by such Eligible Holder or which such Eligible
Holder is then entitled to acquire pursuant to a Warrant to be registered under
the Securities Act, all to the extent requisite 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 Article 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) the number of
(or eliminate entirely from the offering all of the) securities which eligible
Holders may register pursuant to this Article.
5
<PAGE>
5.3 EXPENSES: CONDITIONS PRECEDENT. Except as provided below, all expenses
incurred by the Company in connection with action taken by the Company to comply
with this Article V, 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, shall be paid by the
Company; PROVIDED, HOWEVER, that all such expenses in connection with any
amendment or supplement to any registration statement filed by the Company
hereunder or the related prospectus which is required to be filed more than nine
months after the effective date of such registration statement because any
seller or sellers of securities of the Company covered thereby or any
underwriter of such securities has not effected the disposition of the
securities required to be registered shall be paid by such seller or sellers pro
rata, in the case of two or more such sellers, in accordance with the respective
market values of such securities. The Company shall not be obligated in any way
in connection with any registration pursuant to this Article V 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
Article 5.2 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 the
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.
ARTICLE VI
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 VII
MISCELLANEOUS
7.1 ENTIRE AGREEMENT. This Warrant, contains and describes the entire
agreement between the holder hereof and the Company with respect to the shares
which can be purchased upon exercise hereof and supersedes all prior
arrangements or understanding with respect thereto.
6
<PAGE>
7.2 GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of Texas without regard to applicable
choice of law principles.
7.3 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 terms 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.
7.4 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.
7.5 COPY OF WARRANT. A copy of this Warrant shall be filed among the
records of the Company.
7.6 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 holder of this Warrant.
7.7 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 mere 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.
7.8 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 Article 7.8 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.
7
<PAGE>
7.9 HEADINGS. The Article 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: ___________________, 1998
WATERMARC FOOD MANAGEMENT CO.
By: ________________________________
Carolyn Richards
Secretary
8
<PAGE>
[FORM OF ELECTION TO PURCHASE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate to purchase _______ shares of Common
Stock and herewith, in accordance with the terms hereof, tenders in payment for
such shares a certified check or bank draft payable to the order of Watermarc
Food Management Co. in the amount of $_________________.
The undersigned requests that a certificate for such shares be issued in
the name of_______________________________________ and that such certificate be
delivered to__________________________________________ and 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: ________________ __________________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant.)
ASSIGNMENT
For value received, ________________________________, herevy sells,
assigns and transfers unto _________________________________ the within Warrant,
together with all rights, title and interest therein and does hereby irrevocable
constitute and appoint __________________________________________ attorney, to
transfer said Warrant on the books of the Company, with full power of
substitution.
____________________________
Dated: _________________, 19___
9
<PAGE>
EXHIBIT B
LOCK-UP AGREEMENT
This agreement is entered into on this ____ day of _____________, 1998 by
and between Ghulam M. Bombaywala ("Bombaywala") and Watermarc Food Management
Co. ("the Company").
WHEREAS, on May 20, 1998 Bombaywala and the Company entered into an
Agreement whereby the Company agreed to issue to Bombaywala warrants to purchase
10,000,000 shares of the Company's Common Stock (pre-reverse stock split amount)
(the "Warrant Shares") in consideration for Bombaywala's prior personal
guarantees of approximately $12.9 million in debt and lease obligations of the
Company and his agreement to personally guarantee up to $5 million of future
indebtedness of the Company whether in leases, notes, accounts payable or
contractual obligations (or renewals of the foregoing), or any other obligations
of the Company.
It is hereby agreed to by the parties that:
1. The Warrant Shares shall not be resold, disposed of, or transferred,
directly or indirectly, by Bombaywala for a period of two (2) years from the
date of the issuance of the Warrants.
2. All certificates representing the Warrant Shares shall be imprinted on
the face or back thereof with the following statement:
"The shares represented by this certificate are subject to the
provisions of a Lock-up Agreement dated as of ________________, 1998
("Lock-up Agreement"), which restrict the transfer of such shares, and the
rights of the holder of the shares represented by this certificate are
subject to all the terms and provisions of the Lock-up Agreement, by which
such holder, by acceptance of this certificate, agrees to be bound. A
counterpart of the Lock-up Agreement has been deposited with Watermarc
Food Management Co. at its principal office and will be provided to any
holder or transferee upon request."
3. This Lock-up Agreement shall terminate upon the earliest of the
following occurrences: (i) the expiration of two (2) years from the date of the
issuance of the Warrants; or (ii) if a total of five million dollars
($5,000,000) in debt or equity financing is raised by the Company within the two
year period.
1
<PAGE>
4. This Lock-up Agreement shall be governed by and construed in accordance
with the laws of the State of Texas without regard to applicable choice of law
principles.
IN WITNESS WHEREOF, the parties hereto have executed this Lock-up
Agreement as of the date first set forth above.
"COMPANY"
WATERMARC FOOD MANAGEMENT CO.,
a Texas Corporation
ADDRESS:
11111 Wilcrest Green, Suite 350
Houston, Texas 77042
By: ______________________________
Carolyn Richards, Secretary
GHULAM M. BOMBAYWALA
ADDRESS:
11 Greenlaw Street
Sugar Land, Texas 77479
__________________________________
2
EXHIBIT 10.49
PROFESSIONAL SERVICES AGREEMENT
This Agreement is entered into this 2nd day of April, 1998, by and between
WATERMARC FOOD MANAGEMENT CO., a Texas corporation, with offices located at
11111 Wilcrest Green, Suite 350, Houston, Texas 77042 (hereinafter called
"Company"), and Darrin Straughan, with offices located at 11111 Katy Freeway,
Suite 700, Houston, Texas 77079 (hereinafter called "Consultant").
WITNESSETH
That for and in consideration of the mutual covenants and agreements contained
herein, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Consultant shall provide the following Professional Services in accordance
with the terms and conditions of this Agreement:
Operational consulting services to Company and its subsidiaries.
2. As compensation for the above-referenced services, Company shall issue to
Consultant stock options to purchase One Hundred Thousand (100,000) shares of
the Company's Common Stock at an exercise price of $.14 per share vesting over a
period of three (3) years in the following manner: 33,000 shares on April 2,
1999, an additional 33,000 shares on April 2, 2000, and the remainder of 34,000
on April 2, 2001.
3. Consultant warrants that it will perform the Professional Services with the
highest degree of care and skill practiced by other members of Consultant's
profession performing similar Professional Services.
4. Consultant agrees that any writings, specifications or other documents used
in or generated by the conduct of the Professional Services are works made for
hire, prepared at the request of Company for the sole use of Company and paid
for by Company, and, as such, all copyrights and other proprietary rights in
said writings, specifications or other documents belong exclusively to and are
expressly reserved and owned by Company. Consultant shall keep such information,
and all other information obtained by it or provided to it by Company regarding
the Company's business, including but not limited to trade secrets and
proprietary information, confidential and shall not release any such information
to third parties at any time during or after the term of this Agreement. At the
end of this Agreement, Consultant shall return all of Company's property which
is then in its possession to Company.
<PAGE>
5. Consultant shall do and perform the Professional Services required hereunder
as an independent contractor. Nothing in this Agreement shall be construed as
establishing or creating a relationship of master and servant or principal and
agent between Company and Consultant. Consultant shall not have the authority to
contractually bind, obligate or otherwise make any agreements for or on behalf
of Company.
6. Consultant agrees to perform all Professional Services in accordance with all
applicable federal, state and local laws, regulations and ordinances.
7. This Agreement is personal to Consultant and Consultant shall not assign or
subcontract this Agreement or any part thereof nor assign to any other person or
persons all or part of the remuneration due or which may become due to
Consultant hereunder.
8. This Agreement represents the entire agreement between the parties and
supersedes all prior negotiations, representations or agreements, either written
or oral. This Agreement may only be amended by a written agreement signed by
both parties.
9. This Agreement shall have an initial term of three (3) years from the date
hereof, but may be terminated by either party at any time with or without cause
upon the giving of prior written notice to the other party. If this Agreement is
terminated by either party for any reason prior to the expiration of the initial
term, any stock options not fully vested at the time of termination shall
expired pursuant to the terms of the Stock Option Agreement executed
contemporaneously herewith.
10. If any one or more provisions of this Agreement shall be found to be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
11. This Agreement shall be construed and governed in accordance with the laws
of the State of Texas.
This Agreement is entered into on the date first written above.
WATERMARC FOOD MANAGEMENT CO. DARRIN STRAUGHAN
- ----------------------------- -----------------
Company Consultant
By: /s/ GHULAM M. BOMBAYWALA /s/ DARRIN STRAUGHAN
Ghulam M. Bombaywala
Title: President
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
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
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-END> JUN-28-1998
<CASH> 90,775
<SECURITIES> 0
<RECEIVABLES> 319,350
<ALLOWANCES> 0
<INVENTORY> 316,334
<CURRENT-ASSETS> 765,331
<PP&E> 16,928,076
<DEPRECIATION> 10,714,635
<TOTAL-ASSETS> 12,683,170
<CURRENT-LIABILITIES> 10,494,833
<BONDS> 0
0
329,540
<COMMON> 1,189,155
<OTHER-SE> (7,163,117)
<TOTAL-LIABILITY-AND-EQUITY> 12,683,170
<SALES> 40,172,149
<TOTAL-REVENUES> 40,172,149
<CGS> 11,224,209
<TOTAL-COSTS> 47,018,469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 977,609
<INCOME-PRETAX> (6,964,084)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,964,084)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,964,084)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
EXHIBIT 99.3
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(b) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) MAY 13, 1998
WATERMARC FOOD MANAGEMENT CO.
(Exact Name of Registrant as Specified in Its Charter)
TEXAS
(State or Other Jurisdiction of Incorporation)
0-20143 74-2605598
(Commission File Number) (I.R.S. Employer Identification No.)
11111 WILCREST GREEN, SUITE 350, HOUSTON, TEXAS 77042
(Address of Principal Executive Offices) (Zip Code)
(713) 783-0500
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
INFORMATION INCLUDED IN REPORT ON 8-K
ITEM 5. OTHER EVENTS.
On May 13, 1998 Watermarc Food Management Co. (the "Company") entered into a
Consulting Agreement with GTI Partners, LLC ("GTI") whereby GTI will provide
financial consulting services to seek sources of financing for the Company. As
compensation for its services, GTI will be issued warrants to purchase the
equivalent of 950,000 shares of post 10 for 1 reverse stock split Common Stock
of the Company. The warrants have a term of two years at a post reverse stock
split exercise price of $0.90 per share, which represents the post reverse stock
split equivalent of the average market price of the Company's Common Stock
during the period of negotiations with GTI. The Company has agreed to register
the shares underlying the warrants. The shares are subject to a Voting Agreement
and a two year Lock-Up Agreement. Warrants to purchase the equivalent of 100,000
post reverse stock split shares (i.e. 1,000,000 pre-reverse stock split shares
at $0.09 per share) were issued upon the execution of the Consulting Agreement.
Warrants to purchase the remaining 850,000 shares will be issued to GTI upon the
successful completion of not less than $2.5 million in financing for the
Company. The actual terms of any debt or equity financing will be negotiated by
the Company and must be acceptable to the Company in its sole discretion.
GTI is a consortium consisting of Tariq S. Khan, Managing Director of Manhattan
West, Inc., Ibrahim Mohammed, Principal of Luminary Investments, and Gregg
Rondinelli, Investment Advisor with Rondinelli & Associates.
In connection with the proposed financing, the Company will seek shareholder
approval of a 10 for 1 reverse split of its Common Stock.
On May 20,1998 the Board of Directors of the Company approved the issuance of
warrants to purchase 10,000,000 shares of the Company's Common Stock to Ghulam
M. Bombaywala, Chairman of the Board, Chief Executive Officer, and principal
shareholder of the Company. The issuance of the warrants was in consideration
for Mr. Bombaywala's personal guarantees of approximately $12.9 million in debt
and leases obligations of the Company (a portion of which was personally
collateralized by Mr. Bombaywala) and his agreement to personally guarantee an
additional $5 million of future indebtedness of the Company whether in leases,
notes, accounts payable or contractual obligations (or renewals of the
foregoing), or any other obligations of the Company. The warrants are subject to
definitive documentation and shareholder ratification. The issuance of the
warrants will be submitted to the independent shareholders for ratification at a
special meeting. However, the Board retained the right to proceed with the
issuance of the warrants even if not ratified by a majority of the independent
shareholders. The warrants have an exercise price of $0.14 per share, which was
the market price of the stock when the Board of Directors first considered the
proposal. The warrants will have a four year term and the underlying shares will
be subject to a two year Lock-Up Agreement.
ITEM 7. EXHIBITS.
The Consulting Agreement and the exhibits thereto are attached hereto as EXHIBIT
10.1 and incorporated herein by reference. The description herein of such
agreement is qualified by reference to the actual terms thereof incorporated
herein.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WATERMARC FOOD MANAGEMENT CO.
-----------------------------
(Registrant)
Date MAY 21, 1998 By /s/ GHULAM BOMBAYWALA
(Signature)
By GHULAM M. BOMBAYWALA
Title CHIEF EXECUTIVE OFFICER
<PAGE>
WATERMARC FOOD MANAGEMENT CO.
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
10.1 Consulting Agreement
<PAGE>
EXHIBIT 10.1
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is entered into as of May 13,
1998, by and between Watermarc Food Management Co., a Texas corporation (the
"Company"), and GTI Partners, LLC, a California limited liability company
("Consultant").
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which is
hereby acknowledged, the parties agree as follows:
1. SERVICES. Consultant shall provide the following services (the "Services")
to Company:
a. Consultant shall introduce Company to various sources of capital with
the aim of raising a minimum of two million five hundred thousand dollars
($2,500,000) and a maximum of five million dollars ($5,000,000) on a best
efforts basis (the "Initial Financing").
b. Consultant shall prepare (or cause to be prepared) the documentation
for, and conduct (or cause to be conducted), an offering or series of offerings
(collectively, the "Offerings") of Company's securities in an effort to raise
capital including the Initial Financing for the Company upon terms and
conditions acceptable to the Company. Company shall have final approval of all
documentation and the terms of the Initial Financing.
c. Upon completion of the Initial Financing, and during the term of this
Agreement, Consultant may introduce Company to other sources of financing all to
be conducted on a best efforts basis.
d. Consultant shall provide such other consulting services in connection
with the foregoing Services as reasonably requested by the Company, including,
advice and consultation in (i) developing the corporate and capital structure of
the Company, (ii) completing the transactions contemplated by the Services, and
(iii) assisting in creating an orderly market for the Company's securities.
e. Consultant shall be considered an agent of the Company and shall at
all times act in the best interests of the Company without regard to
Consultant's own interests or those of third parties.
2. COMPENSATION. In consideration for the performance of the Services by
Consultant, Company shall provide Consultant with the following compensation:
a. Company shall issue to Consultant (or to such persons or entities as
directed by Consultant) warrants to purchase, at $.90 per share, up to 950,000
shares of post 10 to 1 reverse split common stock of Company (the "Warrants").
Warrants to purchase one hundred thousand (100,000) shares of common stock of
the Company (or the pre-split equivalent) shall be issued to Consultant
immediately upon execution of this Agreement pursuant to the Warrant Agreement
in the form attached hereto as SCHEDULE A. Warrants for the remaining shares, in
the form attached hereto as Schedule A, shall be issued to Consultant upon the
completion of at least two million five hundred thousand dollars ($2,500,000) of
Initial Financing. A registration statement to register the shares underlying
the warrants (the "Warrant Shares") shall be filed by the Company within ninety
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(90) days from the date hereof. The Warrant Shares shall be subject to a lock-up
agreement prohibiting resale thereof for a period of two (2) years from the date
of the issuance of the respective Warrants subject to (i) the Company's consent
to any proposed public or private resales, or (ii) the expiration of the lock-up
agreement upon Consultant arranging the full $5,000,000 Initial Financing on
terms acceptable to the Company in one or more installments. The Warrant Shares
shall be subject to a voting agreement and proxy in favor of Ghulam Bombaywala,
which shall expire as to 250,000 shares every ninety (90) days from the date of
exercise of the Warrants. The Warrants may be exercised in whole but not in
part. The Warrants are not transferable except to (i) entities or persons
affiliated with Consultant, or (ii) with the consent of the Company. The lock-up
and voting agreements shall be attached as exhibits to the Warrant Agreement and
incorporated therein by reference.
b. Company shall reimburse Consultant for all reasonable and necessary
out of pocket costs and expenses incurred by Consultant in the performance of
the Services under this Agreement, provided such expenses have been preapproved
by the Company.
3. Retention of Consultant by the Company to assist in raising the Initial
Financing (or any other capital) is on a nonexclusive basis and may be
terminated by the Company at any time subject to its obligations (i) to issue
100,000 warrants on the execution of this Agreement (or the pre-split equivalent
thereof), (ii) to issue warrants for 850,000 additional shares (or the pre-split
equivalent thereof) if $2,500,000 is raised through financing sources of
Consultant prior to the termination of this Agreement by the Company, and (iii)
to reimburse Consultant for its reasonable expenses incurred pursuant to Section
2b hereof.
4. It is the intention of the Consultant to assist the Company in raising the
initial $2,500,000 within the next sixty (60) days. If the initial $2,500,000 of
financing is obtained and received in more than one installment, said
installments shall be paid into an escrow account until the entire $2,500,000 of
financing shall have been received into escrow, at which time the entire
$2,500,000 shall be released to the Company.
5. Within ninety (90) days from the date hereof, the Company will file the
registration statement referred to above with the SEC and will file a proxy
statement or information statement with respect to the 10 to 1 reverse stock
split. To provide Consultant assurance that the 10 to 1 reverse stock split will
be effectuated, Ghulam M. Bombaywala will execute the Letter Agreement in the
form attached hereto as SCHEDULE B agreeing to vote all of his shares in favor
of the reverse stock split.
6. CONFIDENTIALITY. In connection with this Agreement, Company will be
furnishing Consultant with certain information which is either non-public,
confidential or proprietary in nature. All such information furnished to
Consultant, its partners, principals, officers, employees, agents, and
representatives (collectively, "representatives"), by Company, including
information furnished prior to the execution of this Agreement, and all
analyses, compilations, data, studies or other documents prepared by Consultant
or its representatives containing or based in whole or in part on any such
furnished information or reflecting Consultant's review of Company is
hereinafter referred to as the "Information". In consideration of Consultant
being furnished with the Information, Consultant agrees that:
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a. The Information will be kept confidential and will not, without the
prior written consent of Company, be disclosed by Consultant or its
representatives, in any manner whatsoever, in whole or in part, and will not be
used by Consultant or its representatives directly or indirectly for any purpose
other than in performing the Services referred to above. Moreover, Consultant
agrees to transmit the Information only to those third parties (hereafter
referred to as the "Third Parties") who need to know the Information for the
purpose of evaluating whether to provide financing to Company, who are informed
by Consultant of the confidential nature of the Information and who agree to be
bound by the terms of this Agreement. Consultant agrees to notify Company prior
to the delivery or disclosure of any Information to its representatives or to
the Third Parties, as to the identity of such representatives or the Third
Parties. Consultant will be responsible for any actions by its representatives
or the Third Parties which are not in accordance with this Agreement.
b. Should any person seek to legally compel Consultant or anyone to whom
Consultant transmits the Information to disclose any of the Information,
Consultant will provide Company with prompt written notice so that Company may
seek a protective order or other appropriate remedy and/or waive compliance with
the confidentiality provisions of this Agreement, provided that nothing herein
will prevent, limit or delay Consultant in disclosing any Information which it
is legally compelled to disclose. In any event, Consultant will furnish only
that portion of the Information which it is advised by its counsel is legally
required and will exercise its best efforts to obtain reliable assurance that
confidential treatment will be accorded the Information.
c. Consultant (i) acknowledges that neither Company nor any of its
directors, officers, employees, or attorneys have made any representation or
warranty (express or implied) as to the accuracy or completeness of the
Information and (ii) agrees, to the full extent permitted by law, that neither
Company nor any of its directors, officers, employees, or attorneys shall have
any liability whatsoever to Consultant on any basis (including, without
limitation, in contract, tort, under federal or state securities laws, or
otherwise) as a result of the use of the Information by Consultant, its
representatives or the Third Parties.
d. Consultant acknowledges the ownership by Company of all Information
furnished and agrees not to disclose or use any part of it except in accordance
with this Agreement. All Information and any copies thereof, including those
given to the Third Parties, will be returned to Company upon completion of the
Services.
7. PROHIBITED ACTIVITIES. Consultant covenants and agrees that for a period of
two (2) years from the date hereof, unless specifically invited in writing by
Company (it being understood that execution of this Agreement does not
constitute such invitation), neither Consultant nor any of its Representatives
and affiliates (including any person or entity directly or indirectly, through
one or more intermediaries, controlling Consultant or controlled by or under
common control with Consultant) will, directly or indirectly, (a) solicit, seek
or offer to effect, negotiate with or provide any Information to any party with
respect to, or make any statement, proposal or inquiry, whether written or oral,
whether alone or in concert with others, to Company or to any shareholder of
Company, or otherwise make any public announcement or proposal or offer
whatsoever, with respect to (i) any form of business combination or transaction
relating to Company or any of its subsidiaries or affiliates, including without
limitation, a merger, consolidation, tender or exchange offer, sale or purchase
of assets or securities, or dissolution or liquidation of Company or any of its
subsidiaries or affiliates, (ii) any form of restructuring, recapitalization or
similar transaction with respect to Company or any of its subsidiaries or
affiliates, (iii) any demand, request or proposal to
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amend, waive or terminate any provision of this Agreement, (iv) any proposal or
other statement inconsistent with the terms of this Agreement or (v) seeking or
offering to control or influence in any manner the management, Board of
Directors or policies of Company or any of its subsidiaries or affiliates; or
(b) instigate, encourage or assist any party to do any of the foregoing.
8. PROHIBITION OF SECURITIES TRANSACTIONS. Consultant covenants and agrees that
for a period of two (2) years after the date hereof, without the express prior
written consent of Company, it will not and will cause each of its
Representatives not to, singly or in concert with others, including without
limitation as a part of a Partnership, Limited Partnership, Syndicate or other
group, directly or indirectly, through one or more intermediaries or otherwise:
a. make, or in any way participate in, any solicitation of proxies with
respect to Company's securities (including by the execution of action by written
consent), become a participant in any election contest with respect to Company,
seek to advise, encourage or influence any party with respect to the voting of
Company's securities or demand a copy of the stock ledger, list of stockholders,
or other books and records of Company;
b. participate in or encourage the formation of any group which seeks or
offers to affect control of Company or any of its subsidiaries or affiliates or
for the purpose of circumventing any provision of this Agreement; or
c. otherwise act, alone or in concert with others to seek or offer to
control or influence, in any manner, the management, Board of Directors or
policies of Company or any of its subsidiaries or affiliates.
9. INDEMNIFICATION.
a. In contacting various sources of financing, Consultant shall limit
the representations and statements made to those representations and statements
contained in non-confidential written documents prepared or approved in writing
by Company. Consultant shall defend, indemnify and hold Company, its directors,
officers, employees, and attorneys, harmless from any and all claims, actions,
and liabilities arising out of or in any way connected with representations
and/or statements made by Consultant outside the scope of said written
documents.
b. Company shall defend, indemnify and hold Consultant, its partners,
principals and employees, harmless from any and all claims, actions, and
liabilities arising out of or in any way connected with representations and/or
statements made in written documents prepared or approved in writing by Company.
10. DAMAGES. Consultant agrees that Company would be irreparably injured by a
breach of this Agreement by Consultant or any of its Representatives or the
Third Parties and Company shall be entitled to equitable relief, including
injunctive relief and specific performance, in the event of any breach of the
provisions of this Agreement. Such remedies shall not be deemed to be the
exclusive remedies for a breach of this Agreement by Consultant or its
Representatives or the Third Parties, but shall be in addition to all other
remedies available at law or in equity.
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11. SURVIVAL OF TERMS; NON-WAIVER. Consultant understands and agrees that
paragraphs 6, 7, 8 and 9 of this Agreement shall survive the termination of this
Agreement notwithstanding that some or all of the Information shall have become
publicly disclosed or outdated or that any portion of this Agreement shall
become inoperative as to any portion of the Information. It is further
understood and agreed that no failure or delay by Company in exercising any
right, power or privilege under this Agreement shall operate as waiver thereof
nor shall any single or partial exercise thereof preclude any other or further
exercise of any right, power or privilege hereunder.
12. SEVERABILITY. In the event that any one or more of the provisions of this
Agreement shall be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
contained herein.
13. AMENDMENT; MODIFICATION. This Agreement constitutes the entire Agreement
between Company and Consultant with respect to the matters set forth herein, and
no amendment or modification hereof shall be valid unless made by supplemental
written agreement, executed and approved by Company and Consultant.
14. SCHEDULES. All schedules referred to herein will be prepared and delivered,
in form and substance satisfactory to each party, within ten (10) days from the
date hereof. Warrants for the initial 100,000 shares referred to above will not
be issued until such Schedules are finalized and agreed to.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to applicable
choice of law principles.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
"COMPANY": "CONSULTANT":
WATERMARC FOOD MANAGEMENT CO. GTI PARTNERS, LLC.
a Texas corporation a California limited liability
company
ADDRESS: ADDRESS:
11111 Wilcrest Green, Suite 350 233 Wilshire Blvd., Suite 930
Houston, Texas 77042 Santa Monica, CA 90401
By: s/____________________________ By: s/_________________________
Ghulam M. Bombaywala, CEO Name: Ibrahim Mohammed
Title: Partner
<PAGE>
SCHEDULE A
WARRANT AGREEMENT AND CERTIFICATE
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE SUBJECT TO
CERTAIN RESTRICTIONS, CONTAINED HEREIN, WITH RESPECT TO THEIR TRANSFER.
WARRANT TO PURCHASE SHARES OF COMMON STOCK OF
WATERMARC FOOD MANAGEMENT CO.
__________ Warrants
This Warrant Certificate certifies that GTI PARTNERS, LLC (together with
its successors and assigns as herein provided, the "Holder") is the owner of
__________ Warrants (subject to adjustment as provided herein), each of which
represents the right to subscribe for and purchase from WATERMARC FOOD
MANAGEMENT CO., a Texas corporation (the "Company"), one share of the common
stock, par value $0.05 per share, of the Company (the common stock, including
any stock into which it may be changed, reclassified or converted, is herein
referred to as the "Common Stock") at the purchase price (the "Exercise Price")
of $_______ per share.
The Warrants represented by this Warrant Certificate are subject to the
following provisions, terms and conditions:
ARTICLE I
EXERCISE OF WARRANTS
EXERCISE. The Warrants may only be exercised by the Holder as a whole by
surrender of this Warrant Certificate at the office of the Company (or such
other office or agency of the Company as may be designated by notice in writing
to the Holder at the address of such Holder appearing on the books of the
Company) with the appropriate form attached hereto duly completed, at any time
within the period beginning on the date hereof and expiring at 5:00 p.m.
Houston, Texas time, on May _____, 2000 (the "Exercise Period") and by payment
to the Company by certified check or bank draft of the Exercise Price for such
shares. The Company agrees that the shares of Common Stock so purchased shall be
and are deemed to be issued to the Holder as the record owner of such shares of
Common Stock as of the close of business on the date on which the Warrant
Certificate shall have been surrendered and payment made for such shares of
Common Stock. Certificates representing the shares of Common Stock so purchased
shall be delivered to the Holder promptly.
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
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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 name the Warrants have 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 except to (i) entities or persons under common control with, or
who are controlled by, Holder or persons who control Holder, or (ii) with the
prior written consent of the Company, which may be withheld in the Company's
sole discretion. 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 the Lock-up Agreement and Voting Agreement attached
hereto as Exhibits A and B respectively, and incorporated herein by reference,
and as specified in this Article 2.3, which conditions are intended, among other
things, to insure compliance with the provisions of the Securities Act of 1933
as amended (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, Article 2.3(b), (ii) exercise this Warrant prior to delivery to
the Company of the opinion of counsel referred to in, and to the effect
described in, Article 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, Article 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
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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.
2.4 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.
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 holders of
the Company's Common Stock. 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
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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. 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 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).
3.5 APPROVALS. If any shares of Common Stock to be reserved for the
purpose of exercise of this Warrant require registration with or approval of any
governmental authority under any Federal or state law before such shares may be
validly issued or delivered upon exercise, then the Company and the holders of
this Warrant will in good faith and as expeditiously as possible endeavor to
secure such registration or approval, as the case may be.
ARTICLE IV
RESTRICTIVE LEGENDS
4.1 Each Warrant shall (unless otherwise permitted by the provisions
hereof) be stamped or otherwise imprinted with a legend in substantially the
following form:
"This Warrant has not been registered under the Securities Act of 1933,
as amended, and is transferable only upon the conditions specified in
the Warrant Agreement referred to herein."
4.2 Each certificate for Common Stock issued upon exercise of a Warrant
and each certificate for Common Stock issued to a subsequent transferee shall
(unless otherwise permitted by the provisions hereof) be stamped or otherwise
imprinted with legends in substantially the following forms:
"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 opinion of
counsel, satisfactory to counsel for the corporation, that registration
is not required under any such acts."
"The shares represented by this certificate are subject to the
provisions of a Voting Agreement dated as of ___________, 1998 ("Voting
Agreement"), which restrict the rights of the holder of the shares
represented by this certificate to vote such
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shares as provided for therein, by which such holder, by acceptance of
this certificate, agrees to be bound. A counterpart of the Voting
Agreement has been deposited with Watermarc Food Management Co. at its
principal office and will be provided to any holder or transferee upon
request."
"The shares represented by this certificate are subject to the
provisions of a Lock-up Agreement dated as of ___________, 1998
("Lock-up Agreement"), which restrict the transfer of such shares, and
the rights of the holder of the shares represented by this certificate
are subject to all the terms and provisions of the Lock-up Agreement, by
which such holder, by acceptance of this certificate, agrees to be
bound. A counterpart of the Lock-up Agreement has been deposited with
Watermarc Food Management Co. at its principal office and will be
provided to any holder or transferee upon request."
ARTICLE V
REGISTRATION RIGHTS
5.1 REQUIRED REGISTRATION. The Company shall use its best efforts to
effect the registration under the Securities Act of the shares of Common Stock
issued pursuant to this Warrant Certificate upon exercise of the Warrants and
evidenced by a certificate bearing the restrictive legends set forth in Article
IV hereof (the "Restricted Stock") on a form appropriate for the registration of
the Restricted Stock in order to permit the Holder to dispose of the Restricted
Stock in accordance with its intended method of disposition and the terms of the
Lock-up Agreement.
5.2 INCIDENTAL REGISTRATION. Notwithstanding the provisions of Article
5.1 of this Agreement, if the Company at any time during the Exercise Period
proposes to register any of its Common Stock under the Securities Act (on a form
appropriate for the registration of the Restricted Stock for public offering 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 the acquisition of stock or
assets of another person) and there is then not an effective registration
statement covering the shares of Common Stock to be issued upon exercise of the
Warrants, it will each such time give written notice to the holder of this
Warrant and any holders of Restricted Stock (the holders of Restricted Stock are
sometimes referred to herein as the "Eligible Holders") of its intention so to
do and, upon written request from Eligible Holders given 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 (but not less than 1,000 shares if less
than all) Restricted Stock held by such Eligible Holder or which such Eligible
Holder is then entitled to acquire pursuant to a Warrant to be registered under
the Securities Act, all to the extent requisite 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 Article 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) the number of
(or eliminate entirely from the offering all of the) securities which eligible
Holders may register pursuant to this Article.
5
<PAGE>
5.3 EXPENSES: CONDITIONS PRECEDENT. Except as provided below, all
expenses incurred by the Company in connection with action taken by the Company
to comply with this Article V, 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, shall
be paid by the Company; PROVIDED, HOWEVER, that all such expenses in connection
with any amendment or supplement to any registration statement filed by the
Company hereunder or the related prospectus which is required to be filed more
than nine months after the effective date of such registration statement because
any seller or sellers of securities of the Company covered thereby or any
underwriter of such securities has not effected the disposition of the
securities required to be registered shall be paid by such seller or sellers pro
rata, in the case of two or more such sellers, in accordance with the respective
market values of such securities. The Company shall not be obligated in any way
in connection with any registration pursuant to this Article V 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
Article 5.2 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 the
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.
ARTICLE VI
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 VII
MISCELLANEOUS
7.1 ENTIRE AGREEMENT. This Warrant, contains and describes the entire
agreement between the holder hereof and the Company with respect to the shares
which can be purchased upon exercise hereof and supersedes all prior
arrangements or understanding with respect thereto.
7.2 GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of Texas without regard to applicable
choice of law principles.
7.3 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 terms
6
<PAGE>
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.
7.4 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.
7.5 COPY OF WARRANT. A copy of this Warrant shall be filed among the
records of the Company.
7.6 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 holder of this Warrant.
7.7 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 mere 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.
7.8 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
Article 7.8 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.
7
<PAGE>
7.9 HEADINGS. The Article 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: ___________________, 1998
WATERMARC FOOD MANAGEMENT CO.
By: ________________________________
Ghulam M. Bombaywala
Chairman of the Board and CEO
Attest:
- -------------------------
Secretary
8
<PAGE>
[FORM OF ELECTION TO PURCHASE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate to purchase _______ shares of Common
Stock and herewith, in accordance with the terms hereof, tenders in payment for
such shares a certified check or bank draft payable to the order of Watermarc
Food Management Co. in the amount of $_________________.
The undersigned requests that a certificate for such shares be issued in
the name of __________________________ and that such certificate be delivered to
____________________
- ---------------------------.
Dated: ________________ ______________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant.)
9
<PAGE>
EXHIBIT A
LOCK-UP AGREEMENT
This agreement is entered into on this ____ day of _____________, 1998
by and between GTI Partners, LLC ("GTI") and Watermarc Food Management Co. ("the
Company").
WHEREAS, on May _____, 1998 GTI and the Company entered into a
Consulting Agreement whereby in consideration for GTI providing certain Services
to the Company, the Company agreed to issue to GTI Warrants to purchase up to
nine hundred fifty thousand shares of post 10 to 1 reverse split Common Stock of
the Company (the "Warrant Shares").
It is hereby agreed to by the parties that:
1. The Warrant Shares shall not be resold, disposed of, or transferred,
directly or indirectly, by GTI for a period of two (2) years from the date of
the issuance of the respective Warrants except with the prior written consent of
the Company, which may be withheld in the Company's sole discretion.
2. All certificates representing the Warrant Shares shall be imprinted
on the face or back thereof with the following statement:
"The shares represented by this certificate are subject to the
provisions of a Lock-up Agreement dated as of ________________, 1998
("Lockup Agreement"), which restrict the transfer of such shares, and
the rights of the holder of the shares represented by this certificate
are subject to all the terms and provisions of the Lock-up Agreement, by
which such holder, by acceptance of this certificate, agrees to be
bound. A counterpart of the Lock-up Agreement has been deposited with
Watermarc Food Management Co. at its principal office and will be
provided to any holder or transferee upon request."
3. This Lock-up Agreement shall terminate upon the earliest of the
following occurrences: (i) the expiration of two (2) years from the date of the
issuance of the last Warrant; or (ii) GTI arranging the full five million
dollars ($5,000,000) Initial Financing on terms acceptable to the Company in the
Company's sole discretion, pursuant to the Consulting Agreement.
1
<PAGE>
4. This Lock-up Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to applicable
choice of law principles.
IN WITNESS WHEREOF, the parties hereto have executed this Lock-up
Agreement as of the date first set forth above.
WATERMARC FOOD MANAGEMENT CO.,
a Texas Corporation
ADDRESS:
11111 Wilcrest Green, Ste. 350
Houston, Texas 77042
By: ______________________________
Ghulam Bombaywala
President and CEO
GTI PARTNERS, LLC,
a California liability company
ADDRESS:
____________________________________
____________________________________
By: _______________________________
Name: ______________________________
Title: ___________________________
2
<PAGE>
EXHIBIT B
VOTING AGREEMENT
This Voting Agreement ("Agreement") established as of the ____ day of
______________, 1998, between GTI Partners, LLC (the "Shareholders"), who are
the owners of Warrants to purchase an aggregate of 950,000 shares of post 10 to
1 reverse split Common Stock, $.05 par value (together with any shares of such
stock which may heretofore or hereafter be owned by the Shareholders or any of
their transferees or assigns, by operation of law or otherwise, the "Shares"),
of Watermarc Food Management Co., a Texas corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company and the Shareholders are parties to that certain
Consulting Agreement dated as of _______________, 1998 (the "Consulting
Agreement"), pursuant to which the Company issued to the Shareholders Warrants
to purchase 950,000 shares of post 10 to 1 reverse split Common Stock, par value
$.05 per share, of the Company; and
WHEREAS, the Shareholders deem it to be in the best interests of the
Company and of themselves to establish this Agreement in order to secure
continuity and stability of policy in the management of the Company, and to this
end, to unite the voting power represented by the Shares and held by the
Shareholders as hereinafter provided.
NOW, THEREFORE, it is mutually agreed as follows:
Article 1.
Appointment and Rights of Shareholders' Representative
1.1 APPOINTMENT OF SHAREHOLDERS' REPRESENTATIVE. The Shareholders hereby
agree that, until the termination of this Agreement, Ghulam Bombaywala as
representative and proxy ("Shareholders' Representative"), shall have the
exclusive right, without the consent of the Shareholders, to exercise, in person
or by his nominee or proxy, all the rights and powers of the Shareholders with
respect to the Shares, including the right to vote and to take part in or
consent to any corporate or shareholder action of any kind whatsoever. In
support and not in limitation thereof, the Shareholders hereby irrevocably name,
constitute and appoint the Shareholders' Representative, with full powers of
substitution and resubstitution, as its true and lawful agent, attorney-in-fact
and proxy, in its name, place and stead, during the term of this Agreement to
vote the Shares (whether
<PAGE>
in a meeting, by a consent of shareholders in lieu of a meeting or otherwise)
and take any related actions, including without limitation signing any waiver of
notice, all in such manner as the Shareholders' Representative determines in his
sole discretion. Other than in those instances in which the Shareholders'
Representative acts for his own account in connection with the exercise of
preemptive or similar rights, in exercising such discretion, the Shareholders'
Representative is specifically authorized to consider his own best interests,
and the Shareholders' Representative will not be acting hereunder as a fiduciary
to the Shareholders.
1.2 POWERS OF SHAREHOLDERS' REPRESENTATIVE. Without limiting the
generality of the foregoing provisions of this Article 1, the Shareholders'
Representative shall have the power to vote, or direct the voting of, the Shares
with respect to (i) any removal of any director, (ii) any election of any
director, (iii) any amendment of bylaws, articles or certificates of
incorporation or other instruments, (iv) any removal or relocation of offices or
records and any change of registered address or registered agent, and (v) any
merger, sale of assets or dissolution and liquidation, in each case to (but only
to) the fullest extent permitted by applicable law. If in any particular
instance (whether or not enumerated in the proceeding sentence), the rights
granted under this Agreement are determined by a court of competent jurisdiction
to be invalid with respect to any particular issue or instance, the Shareholders
desire that such rights nevertheless continue with respect to all other issues
and instances.
1.3 IRREVOCABLE PROXY. The Shareholders further agree that the proxy
granted by this Article 1 is coupled with an interest and is therefore
irrevocable and will survive any attempt at revocation (other than any
termination of the Agreement pursuant to the provisions of Article 3 hereof) and
the death or incapacity of any Shareholder (other than the Shareholders'
Representative as set forth in Article 3 hereof).
Article 2.
Liability of Shareholders' Representative
The Shareholders' Representative shall not be personally liable with
respect to any action taken or omitted to be taken under this Agreement,
provided such commission or omission does not amount to willful misconduct on
his part.
Article 3.
Term
This Agreement shall become effective on the date hereof and shall
continue in effect for a period of one year after the date of the exercise of
all of the Warrants, provided, however, that the proxy shall expire as to
250,000 shares every ninety (90) days from the date of the exercise of the
Warrants, until the proxy is completely expired at the end of the one year
period. This Agreement may not be sooner revoked except as provided above.
<PAGE>
Article 4.
Stock Certificate Legends
All certificates representing the Shares shall be imprinted on the face
or back thereof with the following statement:
"The shares represented by this certificate are subject to the
provisions of a Voting Agreement dated as of _______________, 1998
("Voting Agreement"), which restrict the rights of the holder of the
shares represented by this certificate to vote such shares as provided
for therein, by which such holder, by acceptance of this certificate,
agrees to be bound. A counterpart of the Voting Agreement has been
deposited with Watermarc Food Management Co. at its principal office and
will be provided to any holder or transferee upon request".
Such certificates shall be endorsed conspicuously on the front thereof as
follows:
"See restrictions on transfer hereof on reverse side."
The Shareholders agree to surrender all certificates representing the
Shares subject to this Agreement to the Shareholders' Representative for
endorsement by the Company in accordance with this Article 4. As soon as the
certificates have been endorsed, they shall be returned to the Shareholders, or
deposited with the Company if and as instructed by the Shareholders'
Representative.
Article 5.
Compensation, Reimbursement and Expenses of
Shareholders' Representative
The Shareholders' Representative shall serve hereunder without
compensation. The Shareholders' Representative shall have the right to incur and
pay such reasonable expenses and charges, to employ and pay such agents,
attorneys and other persons as he may deem necessary and proper for carrying out
the terms of this Agreement. Monies to pay any such expenses or charges incurred
by the Shareholders' Representative shall be reimbursed by the Shareholders.
Nothing contained in this Agreement shall disqualify the Shareholders'
Representative or incapacitate him from serving the Company as an officer or
director, or in any other capacity, or from receiving compensation in any such
capacity.
Article 6.
Dividends or Subscriptions
If any dividends with respect to the Shares are declared in stock of the
Company having voting power, or if any such stock is issued in connection with
any stock split or other distribution with respect to the Shares, or if the
Shareholders or any of its partners or principals should acquire stock by
subscription, purchase or otherwise, or acquire any
<PAGE>
voting rights with respect to any shares of the Company, such stock shall be
deemed to be subject to the terms of this Agreement. The Shareholders agree to
surrender such certificates promptly to the Shareholders' Representative for
endorsement by the Company in accordance with Article 4 of this Agreement. As
soon as the certificates have been endorsed, they shall be returned to the
Shareholders, or deposited with the Company if and as instructed by the
Shareholders' Representative.
Article 7.
Miscellaneous Provisions
7.1 GOVERNING LAWS. This Agreement shall be subject to and governed by
the laws of the State of Texas without regard to applicable choice of law
principles.
7.2 GENDER. Whenever the context requires, the gender of all words used
herein shall include the masculine, feminine and neuter, and the number of all
words shall include the singular and plural.
7.3 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Shareholders and their respective heirs, executors, administrators, successors
and assigns.
7.4 NO PARTNERSHIP OR JOINT VENTURE. Nothing in this Agreement shall be
deemed to constitute the formation of a partnership or joint venture between the
parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
multiple counterparts, each of which shall be deemed an original, on the date
and year first above written.
GTI Partners, LLC
By: ______________________
Name: ______________________
Title: ______________________
By: ______________________
Name: ______________________
Title: ______________________
<PAGE>
April 22, 1998 SCHEDULE B
Mr. Gregg Rondinelli
3 Civic Plaza, Suite 170
Newport Beach, CA 92660
Mr. Tariq Khan
Manhattan West, Inc.
233 Wilshire Blvd., Suite 930
Santa Monica, CA 90401
Gentlemen:
This letter will serve as my agreement as a shareholder of Watermarc Food
Management Co. (the "Company") to vote all shares owned by me, both of record
and beneficially, in favor of a ten to one reverse stock split of the Company's
Common Stock.
Sincerely,
Ghualam M. Bombaywala
President and CEO
GMB/lw
EXHIBIT 99.4
E. TED DAVIS & ASSOCIATES, INC.
September 30, 1998
Board of Directors
WATERMARC FOOD MANAGEMENT COMPANY
11111 Wilcrest Green, Suite 350
Houston, Texas 77042
Re: An opinion as to the reasonableness of a plan to issue warrants as
compensation for guarantees and other financial assistance provided by Mr.
Ghulam Bombaywala, Chairman of the Board and Chief Executive officer of
Watermarc Food Management Co. ("Watermarc" or the "Company")
Dear Sirs:
You have requested that E. Ted Davis and Associates, Inc. ("ETD&A") render its
opinion to the Board of Directors of Watermarc, a Texas Corporation, as to the
reasonableness, from a financial point of view to the shareholders, of a plan to
issue certain warrants as a fee for the guarantees and other financial
assistance provided by Mr. Ghulam M. Bombaywala, Chairman and CEO of Watermarc,
and a major shareholder in the Company ("Bombaywala"). The plan is evidenced by
an agreement by and between Watermarc and Bombaywala dated May 20, 1998 (the
"Agreement") which provides among other things, that Watermarc issue Warrants to
purchase 10,000,000 shares of the Company's Common Stock (pre-reverse stock
split amount, the "Warrants") at the exercise price of $0.14 per share
(pre-reverse stock split exercise price), which was the market price of the
stock when the Board of Directors first considered the proposal. Bombaywala has
personally guaranteed approximately $12.9 million in debt and lease obligations
of the Company and pledged many of his personal assets to partially
collateralize certain of the guarantees, and the Agreement calls for Bombaywala
to personally guarantee up to $5 million of future indebtedness of the Company
(collectively the "Guarantees").
As a continuing part of its business, ETD&A performs valuations of securities in
connection with public offerings, private placements, business combinations,
estate and gift tax valuations and similar transactions. ETD&A has been
providing such services since 1981. For our services, Watermarc will pay ETD&A a
fee with the understanding that ETD&A will have no liability for actions taken
on the basis of the opinion absent bad faith or gross negligence.
In the case of this assignment, we have analyzed (a) the proposed transaction,
(b) the business, assets, and liabilities of the Company, as presented by
publicly filed Forms 10-K, which included audited statements, (c) comparable
transactions by publicly traded companies in similar or closely related
businesses, (d) Internal Revenue Service court cases involving the issuance of
similar securities in connection with loan guarantees by shareholders, and (e)
other information deemed appropriate. Specifically, we reviewed the following:
<PAGE>
WATERMARC FOOD MANAGEMENT CO. SEPTEMBER 30, 1998
1. The Agreement complete with the Warrant Agreement and Certificate and
the Lock-up Agreement.
2. Minutes of Board of Directors Meeting held May 1, 1998, including the
Board's discussion of the plan evidenced by the Agreement of (1) above,
and a list of the loans and indebtedness guaranteed by Bombaywala and
the personal assets pledged against said loans.
3. Watermarc Annual Reports and Form 10-K for the fiscal years ending the
Sunday closest to June 30, 1995 to 1998.
4. Billy Blues Food Corporation (the predecessor company) Annual Reports
and Form 10-K for the fiscal years ending the Sunday closest to June
30, 1992 to 1994.
5. Watermarc Form 10-Q, quarterly report, for the three-month, and
nine-month periods ending March 29, 1998.
6. COMPACT DISCLOSURE RECORDS summary information regarding Watermarc for
the fiscal periods 1994-1997.
7. A review of 10-K's filed by approximately 160 peer group companies
with regard to similar transactions.
8. Various Internal Revenue Service letter rulings and court cases
regarding the deductibility of fees for shareholder loan guarantees and
concerning the reasonableness of said fees.
9. Other miscellaneous information regarding share pricing, warrants and
warrant valuation techniques from a variety of sources.
10. Other information deemed appropriate for this opinion.
The above information is on file at the offices of ETD&A.
Many of the conclusions about the nature of the business, stock and warrant
histories, and the future outlook for the Company were derived from public data
and U.S. Securities and Exchange Commission filings and were not confirmed by
actual audit. Moreover, we have assumed the accuracy of the financial statements
presented to us and have accepted as authentic the documents reviewed by us.
During the course of our review, nothing has come to our attention which would
cause us to believe that the information reviewed was inaccurate or misleading.
However, we express no opinion as to the accuracy of said data. Our opinion is
necessarily based solely upon information available to us and business, market,
economic and other conditions as they exist on, and can be evaluated as of, the
date hereof.
E. TED DAVIS & ASSOCIATES, INC. PAGE 2
<PAGE>
WATERMARC FOOD MANAGEMENT CO. SEPTEMBER 30, 1998
Factors considered in determining the reasonableness of the transaction include
the following:
1. Given the financial condition of the Company, it is extremely unlikely
that loans and other credit sources would be available without
guarantees.
2. The Company's operations are continuing to show losses, and as the
latest 10-Q notes: "The Company's continuation as a going concern in
both the short-term and the long-term is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely
basis, to obtain addition financing or capital and to refinance its
debt and ultimately attain profitable operations."
3. Peer group and court cases support reasonable fees for loan origination
and/or loan guarantees that range from one to as high as five percent
of the amount borrowed.
4. Historical, peer group, and theoretical calculations of Warrant value
ranges indicate that the value of the warrants being received are
generally less than reasonable fees associated with similar debt
guarantees.
5. The guarantees are not pro rata among the shareholders and no other
shareholders are being asked to guarantee the debt, nor have any
stepped forward to do so.
Based on the foregoing and such other factors as we consider relevant, it is our
opinion that the plan to issue Warrants as compensation for guarantees and other
financial assistance to Mr. Ghulam Bombaywala as described in the Agreement is
reasonable to the shareholders from a financial point of view.
QUALIFICATIONS AND CERTIFICATION.
The undersigned certifies that:
1. We hold ourselves out to the public as an appraiser and perform
appraisals with regard to public and privately held stock on a regular basis.
2. We have read the pertinent Regulations regarding appraisals for
property, stock values, and/or interest in partnerships, and in our opinion are
qualified to make an opinion on the transaction covered by the Agreement under
those regulations.
E. TED DAVIS & ASSOCIATES, INC. PAGE 3
<PAGE>
WATERMARC FOOD MANAGEMENT CO. SEPTEMBER 30, 1998
3. ETD&A has no relation or affiliation with Watermarc Food Management Co.
or Ghulam Bombaywala, or any other subsidiaries or affiliates to either party,
is in no way a party to any stock transactions with the Company or affiliates,
and has never been employed by the Company, or any affiliates or owners in a
capacity other than that of an independent consultant, contractor, and/or
appraiser.
4. No part of the fee arrangement was contingent on the results reported
herein and ETD&A received no fees based on a percentage of the assets the
subject of the transaction.
Sincerely,
E. TED DAVIS & ASSOCIATES, INC.
/s/ E. TED DAVIS
E. Ted Davis,
President
E. TED DAVIS & ASSOCIATES, INC. PAGE 4
