U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
----------------
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the
Commission Only
(as Permitted by Rule 14a-6(e) (2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
WATERMARC FOOD MANAGEMENT CO.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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WATERMARC FOOD MANAGEMENT CO.
11111 WILCREST GREEN, SUITE 350
HOUSTON, TX 77042
(713) 783-0500
-------------------------------
PROXY STATEMENT
for the
ANNUAL MEETING OF SHAREHOLDERS
to be held December 18, 1998
-------------------------------
THE MEETING
MEETING DATE, TIME AND PLACE
A Proxy in the accompanying form is being solicited by the Board of
Directors of Watermarc Food Management Co. (the "Company") for use at the
Company's Annual Meeting of Shareholders (the "Meeting") to be held at Billy
Blues Bar & Grill, 6025 Richmond, Houston, Texas 77057, at 3:00 P.M., local
time, on December 18, 1998, and at any adjournment or postponement thereof. The
Company will bear the cost of such solicitation. Proxies together with copies of
this Proxy Statement, are being mailed to shareholders of the Company on or
about November 23, 1998.
MATTERS TO BE VOTED ON AND RECORD DATE
This Proxy Statement is being furnished to holders of record of the common
stock, $.05 par value, of the Company (the "Common Stock") as of October 29,
1998 (the "Record Date") in connection with the Meeting the purposes of which
are to:
1. To consider and vote upon a proposal to amend the Company's Restated
Articles of Incorporation to (a) effect a reverse stock split on a one for
ten basis of the outstanding Common Stock of the Company and (b) to reduce
the par value of the Company's Common Stock from $.05 to $.01 per share,
effective upon the close of business on the day a Certificate of Amendment
is filed with the Secretary of the State of Texas.
2. To elect a board of five directors to serve until the next Annual Meeting
of Shareholders and until their successors have been duly elected and
qualified.
3. To ratify the appointment of Mann Frankfort Stein & Lipp, P.C. as
independent public accountants to audit the consolidated financial
statements of the Company and its subsidiaries for the fiscal year ending
June 27, 1999.
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4. To transact such other business as may properly come before the Meeting or
any adjournments thereof.
VOTING AND REVOCABILITY OF PROXY
Execution and return of the enclosed Proxy will not in any way affect a
shareholder's right to attend the Meeting and to vote in person, and any
shareholder giving a Proxy has the power to revoke it at any time before it is
voted by filing with the Secretary of the Company a written revocation or duly
executed Proxy bearing a later date or by voting in person by ballot at the
Meeting. A Proxy, when executed and not revoked, will be voted in accordance
with the instructions thereon. In the absence of specific instructions, Proxies
will be voted by the individuals named in the Proxy (i) "FOR" an amendment to
the Company's Restated Articles of Incorporation to (a) effect a reverse stock
split on a one for ten basis of the outstanding Common Stock of the Company and
(b) to reduce the par value of the Company's Common Stock from $.05 to $.01 per
share effective upon the close of business on the day a Certificate of Amendment
is filed with the Secretary of the State of Texas; (ii) "FOR" the election as
director of those five nominees named in this Proxy Statement; (iii) "FOR" the
appointment of Mann Frankfort Stein & Lipp, P.C. as the Company's independent
public accountants to audit the consolidated financial statements of the Company
and its subsidiaries for the fiscal year ending June 27, 1999; and (iv) in
accordance with their best judgment and discretion on all other matters that may
properly come before the Meeting or which are incidental to the conduct of the
Meeting.
MANAGEMENT RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" EACH OF
THE MATTERS SET FORTH ABOVE TO BE VOTED ON AT THE MEETING.
SHARES ENTITLED TO VOTE AND QUORUM
On the Record Date, the Company had 24,563,564 shares of Common Stock
issued and outstanding and entitled to notice of and to vote at the Meeting. The
presence, in person or by Proxy, of the holders of a majority of the issued and
outstanding shares of Common Stock entitled to vote as of the Record Date is
necessary to constitute a quorum at the Meeting. All shares represented in
person or proxy at the Meeting, whether voting "FOR", "AGAINST", "ABSTAIN" or to
"WITHHOLD AUTHORITY" with respect to any matter will be counted for purposes of
determining a quorum. Each holder of Common Stock will be entitled to one vote
per share held on each matter to be voted on at the Meeting. Neither the
Articles of Incorporation nor the Bylaws of the Company, as amended, provide for
cumulative voting rights.
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VOTES REQUIRED
The affirmative vote of a majority of the outstanding shares of Common
Stock is required with respect to PROPOSAL ONE. The affirmative vote of the
holders of a majority of the outstanding shares of Common Stock present in
person or by proxy at the Meeting at which a quorum is present is required for
the approval of PROPOSAL TWO, PROPOSAL THREE, and all other matters presented at
the Meeting.
DISSENTERS' RIGHTS OF APPRAISAL
Under Texas law, the proposals to be voted on at the Meeting do not
require the Company to provide dissenting shareholders with a right of
appraisal.
COSTS AND SOLICITATION OF PROXIES
The solicitation is made by the Company. The costs of soliciting proxies
will be borne by the Company. The Company has decided not to retain a proxy
solicitation firm at this time, but may elect to do so prior to the Meeting. If
the Company retains a proxy solicitation firm, the Company will pay any standard
fees charged by such firm and its reasonable out of pocket expenses. In
addition, the Company will reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Proxies may also be solicited
by certain of the Company's directors, officers and regular employees without
additional compensation, personally or by telephone, telegram or facsimile.
Total solicitation costs, which will be paid by the Company, are not expected to
exceed $5,000 - $10,000 in the aggregate.
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PROXY STATEMENT INFORMATION
Certain information with respect to the proposed amendment to the Restated
Articles of Incorporation to effect a reverse stock split on a one for ten basis
of the outstanding Common Stock of the Company is provided below under PROPOSAL
ONE - AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION TO EFFECT A ONE FOR
TEN REVERSE STOCK SPLIT OF THE COMPANY'S OUTSTANDING COMMON STOCK AND TO REDUCE
THE PAR VALUE OF THE COMMON STOCK. Information with respect to the Company
including, Directors and Executive Officers of the Company, Executive
Compensation, and Certain Relationships and Related Transactions is provided
under PROPOSAL TWO - ELECTION OF DIRECTORS. Additional information with respect
to the Company is included in the Company's Annual Report on Form 10-K for its
fiscal year ended June 28, 1998, filed with the Commission (the "Annual Report
on Form 10-K"), which is being provided to shareholders of the Company with this
Proxy Statement. Information with respect to the Company's current accountant is
provided under PROPOSAL THREE - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
FOR FISCAL 1999.
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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 warrants to purchase
10,000,000 shares of Common Stock if the Company's Independent shareholders
are requested to and approve the issuance of such warrants to Mr.
Bombaywala at an annual or special meeting. However, at this time the Board
of Directors has decided to defer the issuance of such warrants for an
indefinite period of time. 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 "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 "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 resigned as a member of the Company's Board of Directors in
October 1998 and is not a nominee for re-election. 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 "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 "Certain Relationships and
Related Transactions.")
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CHANGES IN CONTROL
On May 15, 1997, Mr. Bombaywala and the Company entered into a Conversion
and Offset Agreement whereby the parties agreed to convert $3,750,000 of debt
owed by the Company to Mr. Bombaywala into the right to receive 7,500,000 shares
of the Company's Common Stock at a later date when the Company had a sufficient
number of authorized shares for issuance. In exchange for this right, Mr.
Bombaywala forgave the debt. The Company also agreed with Mr. Bombaywala to
offset $819,202 in additional notes payable to, against notes receivable from,
Mr. Bombaywala.
On January 23, 1998, the Company's shareholders voted to increase the
Company's authorized shares of Common Stock to 100,000,000. On February 12, 1998
the Company's Restated Articles of Incorporation were amended to increase the
authorized shares of Common Stock to 100,000,000. On March 27, 1998, Mr.
Bombaywala was issued 7,500,000 shares of the Company's Common Stock pursuant to
the Conversion and Offset Agreement.
Prior to the March 27, 1998, issuance of the 7,500,000 shares to Mr.
Bombaywala, he owned approximately 46.8% of the Company's Common Stock. No
single shareholder held a majority of the shares of the Company's Common Stock
prior to Mr. Bombaywala's acquisition of these shares. As of the Record Date,
Mr. Bombaywala owns 13,458,889 shares, which includes warrants to acquire
272,222 shares of the Company's Common Stock, or approximately 53.7% of the
Company's outstanding shares of Common Stock.
The Company's Restated Articles of Incorporation provide that the
affirmative vote of a majority of the shares of the Company's Common Stock is
required for any action to be taken by the shareholders of the Company. Mr.
Bombaywala, as majority shareholder, has control over any action to be taken by
the shareholders.
PROPOSAL ONE
AMENDMENT TO RESTATED ARTICLES OF INCORPORATION TO EFFECT A
REVERSE STOCK SPLIT, TO REDUCE THE NUMBER OF SHARES OF AUTHORIZED COMMON
STOCK AND TO REDUCE THE PAR VALUE OF THE COMMON STOCK
GENERAL
On May 1, 1998, the Board of Directors unanimously adopted a resolution
approving a proposal to amend the Restated Articles of Incorporation of the
Company to effect a reverse stock split on a one for ten basis of the
outstanding Common Stock of the Company (the "Reverse Stock Split") and to
reduce the number of shares of Common Stock which the Company may issue,
effective upon the close of business on the day a Certificate of Amendment is
filed with the Secretary of the State of Texas (the "Effective Date") (the
"Amendment"). On October 1, 1998, the Board of Directors unanimously adopted a
resolution approving a proposal to amend the Restated Articles of Incorporation
of the Company to reduce the par value of the Company's Common Stock from $.05
to $.01 per share, effective upon the close of business on the day a Certificate
of Amendment is filed with the Secretary of the State of Texas. The text of the
Amendment is set forth in Appendix A and is incorporated herein by reference,
however, such text is subject to change to the extent required by the Texas
Secretary of State. Upon filing of the Certificate of Amendment with the Texas
Secretary of State, the Reverse Stock Split will be effective, the par value of
the Common Stock will be reduced to $.01, and each certificate representing
shares of Common Stock outstanding immediately prior to the Reverse Stock Split
("Old Shares") will be deemed automatically, and without any action on the part
of
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the shareholders, to represent one-tenth the number of shares of Common Stock,
$.01 par value per share, after the Reverse Stock Split ("New Shares");
PROVIDED, HOWEVER, that no fractional New Shares will be issued as a result of
the Reverse Stock Split. In lieu thereof, any fractional shares shall be rounded
up to the next whole number. After the Reverse Stock Split becomes effective,
shareholders may surrender certificates representing Old Shares. Upon such
surrender, a certificate representing the New Shares will be issued and
forwarded to the shareholders, however, each certificate representing Old Shares
will continue to be valid and represent New Shares equal to one-tenth the number
of Old Shares until surrendered. The Common Stock issued pursuant to the Reverse
Stock Split will be fully paid and nonassessable.
In addition, the Company is presently authorized to issue up to
105,000,000 shares of capital stock, of which 100,000,000 shares are Common
Stock, and 5,000,000 shares are Preferred Stock. The Amendment will reduce the
number of shares of capital stock authorized by the Restated Articles of
Incorporation to 15,000,000 shares, of which 10,000,000 shares will be Common
Stock, and 5,000,000 shares will be Preferred Stock. The voting and other rights
that presently characterize the Old Shares of Common Stock will not be altered
by the Amendment.
Pursuant to the TBCA, the Company's shareholders are not entitled to
dissenters' rights of appraisal with respect to the Amendment.
PRINCIPAL EFFECTS OF THE AMENDMENT
There were approximately 2000 beneficial owners, including 196 shareholders
of record, of the Company on the Record Date. The Reverse Stock Split is not
expected to reduce the number of shareholders of record or the Company's
beneficial shareholders. The Company has no plans for the cancellation or
purchase of its shares from individuals holding a nominal number of shares of
Common Stock after the Reverse Stock Split Effective Date or to deregister the
Common Stock.
The Common Stock is currently registered under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and, as a result, the Company is
subject to the periodic reporting and other requirements of the Exchange Act.
The Reverse Stock Split will not affect the registration of the Common Stock
under the Exchange Act. After the Effective Date, trades of the New Shares will
continue to be reported on the Over-the-Counter Bulletin Board ("OTCBB") under
the symbol "WAMA".
The principal effects of the Amendment will be:
1. Based upon the 24,563,564 Old Shares outstanding as of October 29, 1998,
the Reverse Stock Split will decrease the outstanding shares of Common
Stock by approximately 90%, and thereafter approximately 2,456,356 New
Shares will be outstanding. The Reverse Stock Split will not affect any
shareholder's proportionate equity interest in the Company, subject to the
provisions for the elimination of fractional shares as described herein.
2. The Company is authorized under its Restated Articles of Incorporation to
issue up to 100,000,000 shares of Common Stock, $.05 par value, and
5,000,000 shares of Preferred Stock, $1.00 par value. The Amendment
reduces the authorized Common Stock to 10,000,000 shares and the par value
to $.01 per share. The authorized shares of Preferred Stock remain the
same at 5,000,000. The $1.00 par value of the Company's authorized and
outstanding Preferred Stock will not be changed by the Amendment and the
329,540 outstanding shares of Preferred Stock will remain the same. After
the Reverse Stock Split, the Common Stock issued and outstanding will
continue to represent approximately 24.5% of the Company's authorized
Common Stock and approximately 7,543,644
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shares of Common Stock and 4,670,460 shares of Preferred Stock will be
available for future issuance by the Board of Directors without further
action by the shareholders.
3. On October 29, 1998, the closing bid price of the Common Stock on the OTC
Bulletin Board was $0.06 per share. By decreasing the number of shares of
Common Stock outstanding, without altering the aggregate economic interest
in the Company represented by such shares, the Board of Directors believes
that the trading price will increase to a price more appropriate for a
publicly-traded security, provided, however, the Company cannot provide
any assurance that the Reverse Stock Split will result in an increase in
the price of its Common Stock to ten (10) times the price before the
Reverse Stock Split or at all.
4. As of October 29, 1998, there were outstanding options to purchase an
aggregate of 517,500 shares of Common Stock under the Company's 1994 Stock
Compensation Plan (the "Stock Compensation Plan") with per share exercise
prices ranging from $.09 to $.25. A total of 1,000,000 shares of Common
Stock are available for issuance under the Stock Compensation Plan. All of
the outstanding options include provisions for a proportional downward
adjustment in the number of shares covered thereby and a corresponding
increase in the exercise price thereof, in the event of a reverse stock
split. Each outstanding option after the Reverse Stock Split will evidence
the right to purchase 10 % of the shares of Common Stock previously
covered thereby, and the exercise price per share will be 10 times the
previous exercise price. After the Reverse Stock Split there will be
outstanding options to purchase an aggregate of 51,750 shares of Common
Stock and 48,250 shares reserved for issuance under the Stock Compensation
Plan.
5. A proportional downward adjustment in the number of shares issuable and a
corresponding increase in the exercise or conversion price thereof will be
made with respect to all the Company's outstanding warrants, options, and
convertible securities, if applicable, in connection with the Reverse
Stock Split.
6. Holders of shares of Common Stock are entitled to receive distributions of
cash or other property, if any, that may be declared from time to time by
the Board of Directors in its discretion from funds legally available
therefor, subject to the dividend priority of the holders of any
outstanding Preferred Stock. The Company has never paid cash dividends on
the Common Stock and has no plans to pay cash dividends in the foreseeable
future. The current policy of the Board of Directors is to retain all
available earnings for use in the operation of the Company's business. Any
future dividends will depend upon the Company's earnings, capital
requirements, financial condition and other relevant factors. Due to its
negative shareholders' equity and other factors, the Company is precluded
by law from paying cash dividends at this time.
REASONS FOR THE AMENDMENT
The Board of Directors believes the Amendment is desirable for several
reasons. The Reverse Stock Split may enhance the acceptability and marketability
of the Common Stock by the financial community and investing public. The
reduction in the number of shares of Common Stock outstanding caused by the
Reverse Stock Split may result in a market price increase which may, in turn,
lead to a broader market for the Common Stock than that which currently exists.
Many brokerage firms and institutional investors do not effect transactions in
stock such as the Company's Common Stock because of its relatively low trading
price. In addition, the structure of trading commissions also tends to have an
adverse impact upon holders of lower priced stock
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because the brokerage commission on a sale of lower priced stock generally
represents a higher percentage of the sales price than the commission on a
relatively higher priced issue. Although there can be no assurance that the
price of the Company's Common Stock after the Reverse Stock Split will actually
increase in an amount proportionate to the decrease in the number of outstanding
shares, the Reverse Stock Split is intended to result in a price level for the
Common Stock that may broaden investor interest and provide greater liquidity.
The Board also believes that the Reverse Stock Split may enhance the ability of
the Company to attract capital.
The Board of Directors is seeking shareholder approval at the Annual
Meeting for the Reverse Stock Split. However, the Board reserves the right, in
its sole discretion, to delay or waive entirely the implementation and
effectiveness of the Reverse Stock Split if it determines that it would not then
be in the best interests of the shareholders. If the Board has not effectuated
the Reverse Stock Split by the next annual meeting of shareholders of the
Company following the annual meeting described herein, the Board will again seek
shareholder approval prior to effectuating the Reverse Stock Split.
Notwithstanding the intended purposes of the Reverse Stock Split, no
assurance can be given that any or all of the intended purposes will occur,
including, without limitation, that the market price per New Share of Common
Stock after the Reverse Stock Split will be ten (10) times the market price per
Old Share of Common Stock before the Reverse Stock Split, or that such price
will either exceed or remain in excess of the current market price. Further, no
assurance can be given that the market price or liquidity of the Common Stock
will be improved. Shareholders should be aware that the Board of Directors
cannot predict what effect the Reverse Stock Split will have on the market price
or liquidity of the Common Stock.
Additionally, the Board of Directors believes that changing the par value
of the Company's Common Stock is in the best interests of the Company and its
shareholders to enable the Company to issue additional securities at issue
prices which may be less than the current par value of $.05 per share of the
Common Stock if deemed necessary and in the best interests of the shareholders
by the Board of Directors.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of the proposed Reverse Stock Split. This summary does not purport to be
complete and does not address the tax consequences to holders that are subject
to special tax rules, such as banks, insurance companies, regulated investment
companies, personal holding companies, foreign entities, nonresident foreign
individuals, broker-dealers and tax-exempt entities. This summary is based on
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations
and proposed regulations, court decisions and current administrative rulings and
pronouncements of the Internal Revenue Service ("IRS"), all of which are subject
to change, possibly with retroactive effect, and assumes that the New Shares of
Common Stock will be held as a "capital asset" as defined in the Code. Holders
of Old Shares of Common Stock are advised to consult their own tax advisers
regarding the federal income tax consequences of the Reverse Stock Split in
light of their personal circumstances and the consequences under state, local
and foreign tax laws.
1. The Reverse Stock Split will qualify as a recapitalization as described in
Section 386(a)(1)(E) of the Code.
2. No gain or loss will be recognized by the Company or its shareholders in
connection with the Reverse Stock Split.
3. The aggregate basis of the New Shares of Common Stock to be received in
the Reverse Stock Split (including any fractional share deemed received)
will be the same as the aggregate basis of the Old Shares of Common Stock
surrendered in exchange therefor.
4. The holding period of the New Shares of Common Stock to be received in the
Reverse Stock Split (including any fractional share deemed received) will
include the holding period of the Old Shares of Common Stock surrendered
in exchange therefor.
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THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH HOLDER OF COMMON STOCK OF THE COMPANY IS URGED TO CONSULT WITH
THEIR OWN TAX ADVISER WITH RESPECT TO THE TAX CONSEQUENCES OF THE PROPOSED
REVERSE STOCK SPLIT, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY
STATE, MUNICIPAL, FOREIGN OR OTHER TAXING JURISDICTION.
VOTE REQUIRED; VOTE OF PRINCIPAL SHAREHOLDER
The Reverse Stock Split proposal requires the approval of a majority of
the outstanding shares of Common Stock of the Company. Mr. Bombaywala currently
owns approximately 53.7% of the Company's outstanding shares of Common Stock.
The Company has been advised by Mr. Bombaywala that such shares will be voted in
favor of the Reverse Stock Split proposal. Accordingly, it is likely that the
required number of votes will be obtained to approve the Reverse Stock Split
proposal.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
ADOPTION OF THE AMENDMENT TO EFFECT THE REVERSE STOCK SPLIT AND REDUCE THE PAR
VALUE OF THE COMMON STOCK.
This space intentionally left blank.
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PROPOSAL TWO
ELECTION OF DIRECTORS
The Company's Bylaws provide that the Board of Directors shall consist of
not less than three, nor more than fifteen, directors. The Board of Directors
currently consists of five directors, Ghulam M. Bombaywala, Michael S. Chadwick,
Sarosh J. Collector, Philip M. Mount and Darrin Straughan. Each of the current
directors is a nominee for re-election to the Board of Directors. The names,
ages, positions and offices of each director, nominee and executive officer of
the Company and their business experience is set forth below. With the exception
of Mr. Straughan, each of the Company's directors was elected as a director of
the Company by the Company's shareholders at the Annual Meeting of Shareholders
held on January 23, 1998. Mr. Straughan was elected as a director of the Company
by the Board of Directors on April 2, 1998. All directors are to serve until the
next Annual Meeting of Shareholders or until their successors have been duly
elected and qualified. All nominees were designated by the Board of Directors.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock present in person or by proxy at the Meeting at which a
quorum is present is required for approval.
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
Director/
Employed Officer
NAME AGE POSITION SINCE SINCE
---- --- -------- ----- -----
<S> <C> <C> <C>
Ghulam Bombaywala(1) 43 Chairman of the Board, Chief Executive 1994 1994
Officer, President, Chief Operating
Officer, and Director
Michael S. Chadwick(2) 46 Director N/A 1994
Philip M. Mount 40 Director N/A 1994
Sarosh J. Collector(2)(3) 50 Director N/A 1995
Darrin Straughan 37 Director N/A 1998
</TABLE>
(1) The principal financial and accounting officer resigned in July 1997 and
has not been replaced. Mr. Bombaywala is currently serving 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.
11
<PAGE>
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. Effective July
10, 1997, Mr. Bombaywala was also elected President and Chief Operating 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 the 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.
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 Directors of Star Resources Corporation, a corporation organized
under the laws of British Columbia, which is a public company traded on the
Vancouver and Toronto Stock Exchanges in Canada and the OTC Bulletin Board in
the United States.
12
<PAGE>
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 a director of the Company.
COMMITTEES AND FEES
The Board of Directors of the Company has established an Audit Committee
and a Compensation Committee. The purpose of the Audit Committee is to review
and make recommendations to the Board of Directors with respect to the
engagement of the Company's independent public accountants, reviewing with such
accountants the plans for and the results and scope of the auditing engagement
and certain other matters relating to the services provided to the Company,
including the independence of such accountants. The Audit Committee held one
meeting during the fiscal year ended June 28, 1998.
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 Compensation Committee held two meetings during the
fiscal year ended June 28, 1998.
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 (9) meetings
and approved actions undertaken by management of the Company on various
occasions by unanimous written consent.
13
<PAGE>
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.
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 $100,000 during the fiscal year (the "named executive
officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------------- ------------------------ ---------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
COMPENSATION(2) AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) 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.
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
Sarosh J. Collector currently serves on the Compensation Committee of the
Company. Throughout fiscal 1998, Nico B. Letschert and Sarosh J. Collector
served on the Compensation Committee. Mr. Letschert resigned from the Board of
Directors in October 1998. Mr. Letschert was the President of Noble Investment
Co. of Palm Beach
14
<PAGE>
("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 "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.
Although the Company has accrued all amounts owed to Mr. Bombaywala for
fiscal 1998 and prior years, 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.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee 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
15
<PAGE>
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 Mexican Restaurants, Inc. ("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 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 "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 on 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 of 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.
16
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
The graph set forth below compares the cumulative total shareholder return
on the Company's Common Stock commencing on June 30, 1993 and ending on June 28,
1998 against the cumulative total return of the NASDAQ Stock Market and a peer
group consisting of certain NASDAQ Stocks whose business activities fall within
the same standard industrial classification code as the Company. The graph
assumes a $100 investment in the Company's Common Stock and that all dividends
paid by companies in each index were reinvested.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
TOTAL SHAREHOLDER RETURNS
(DIVIDENDS REINVESTED)
ANNUAL RETURN PERCENTAGE
YEARS ENDING
COMPANY NAME/INDEX JUN 94 JUN 95 JUN 96 JUN 97 JUN 98
- --------------------------------------------------------------------------------
WATERMARC FOOD MGMT CO -44.94 -60.21 -64.10 -67.89 -32.38
NASDAQ 0.96 33.48 28.38 21.59 32.01
PEER GROUP 5.73 21.53 20.36 1.16 25.97
INDEXED RETURNS
BASE YEARS ENDING
PERIOD
COMPANY NAME/INDEX JUN 93 JUN 94 JUN 95 JUN 96 JUN 97 JUN 98
- --------------------------------------------------------------------------------
WATERMARC FOOD MGMT CO 100 55.06 21.91 7.87 2.53 1.71
NASDAQ 100 100.96 134.76 173.01 210.36 277.69
PEER GROUP 100 105.73 128.49 154.64 156.44 197.07
PEER GROUP = SIC 5800-5899
17
<PAGE>
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. 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 those of the Company, in whole or in part.
Ghulam M. Bombaywala has an ownership interest in and participates in the
management of other businesses, including James Original Coney Island, Inc., the
Houston-based corporation which owns the James Coney Island restaurant chain.
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 "Executive Officers and Directors --
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 (i) the bank loans, notes, accounts payable,
taxes, contracts and leases that he had personally guaranteed on behalf of the
Company and (ii) certain loans made by Mr. Bombaywala or his affiliates directly
to 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.
18
<PAGE>
and if either one cannot be obtained, the fact that the Board will reconsider
the issuance of the warrants, or the terms thereof, in whole or in part.
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.
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.
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 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.
19
<PAGE>
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 The Original Pasta Co. ("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 $.25 per share and
expiring 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 December 31, 1999 pursuant to a non-interest
bearing note.
PROPOSAL THREE
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
FOR FISCAL 1999
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On August 20, 1997, PricewaterhouseCoopers LLP (formerly Coopers & Lybrand
L.L.P.) resigned as the Company's principal independent accountant (hereafter
referred to as "former principal accountant"). The former principal accountant's
report dated September 27, 1996 on the Company's financial statements for the
fiscal years ended June 30, 1996 and July 2, 1995 was unqualified.
On August 26, 1997, the Company engaged Mann Frankfort Stein & Lipp, P.C.
as its new principal accountant to audit the Company's financial statements for
the fiscal year ended June 29, 1997. The decision to change accountants for
fiscal 1997 was approved by the Audit Committee of the
20
<PAGE>
Company's Board of Directors. On January 23, 1998 the Shareholders of the
Company ratified the appointment of Mann Frankfort Stein & Lipp, P.C. as
independent public accountants for fiscal 1998.
During the Company's fiscal years ended June 30, 1996 and June 29, 1997
and the subsequent interim period through August 20, 1997 preceding the former
principal accountant's August 20, 1997 resignation, there were no disagreements
or reportable events with the former principal accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
RATIFICATION OF ACCOUNTANTS
Although shareholder ratification and approval of the selection of Mann
Frankfort Stein & Lipp, P.C. as independent public accountants to audit the
Company's consolidated financial statements for fiscal 1999 is not required by
law or otherwise, in keeping with the Company's policy that its shareholders
should be entitled to a voice in this regard and as a matter of good corporate
practice, the Board of Directors is seeking ratification of this appointment. If
the appointment is not ratified, the Board of Directors must then determine
whether to appoint other auditors prior to the end of the current fiscal year,
and in such case, the opinions of shareholders will be taken into consideration.
Mann Frankfort Stein & Lipp, P.C. expects to have representatives present
at the Meeting who will have the opportunity to make a statement, if they desire
to do so, and who will be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS
Shareholders are entitled to submit proposals on matters appropriate for
shareholder action consistent with the requirements of the Securities and
Exchange Commission. Should a shareholder intend to present a proposal at the
Company's Annual Meeting following the fiscal year ending June 27, 1999, the
proposal must be in writing and received by the Company's Corporate Secretary at
11111 Wilcrest Green, Suite 350, Houston, Texas 77042, on or before July 25,
1999, to be eligible for inclusion in the Company's fiscal 1999 Proxy materials.
Among such requirements, the shareholder submitting the proposal must be the
record or beneficial owner of either 1% or $1,000 in market value of the
Company's Common Stock for one year.
OTHER MATTERS
The Board of Directors is not aware of any other matters to be brought
before the Meeting. If, however, any other matters are properly brought before
the Meeting, the persons named in the enclosed Proxy will have discretionary
authority to vote all Proxies in accordance with their best judgment.
21
<PAGE>
ANNUAL REPORT ON FORM 10-K
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE
COMMISSION FOR THE FISCAL YEAR ENDED JUNE 28, 1998, INCLUDING THE FINANCIAL
STATEMENTS AND SCHEDULES THERETO, AND A LIST OF EXHIBITS FILED THEREWITH, IS
BEING PROVIDED TO THE COMPANY'S SHAREHOLDERS TOGETHER WITH THIS PROXY STATEMENT.
EXHIBITS TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K WILL BE FURNISHED ONLY IF
SPECIFICALLY REQUESTED IN WRITING AND UPON PAYMENT TO THE COMPANY OF REASONABLE
COPYING AND HANDLING CHARGES. REQUESTS SHOULD BE DIRECTED TO CAROLYN RICHARDS,
THE COMPANY'S CORPORATE SECRETARY, 11111 WILCREST GREEN, SUITE 350, HOUSTON,
TEXAS 77042.
BY ORDER OF THE BOARD OF DIRECTORS
GHULAM M. BOMBAYWALA
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER
Houston, Texas
October 29, 1998
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<PAGE>
APPENDIX A
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 December 18,
1998, in order to effect a reverse stock split on a one for ten basis of the
outstanding Common Stock of the Corporation and to reduce the par value of the
Common Stock from $.05 to $.01 per share.
Article Four, Section 1 of the Restated Articles of Incorporation of the
Corporation is hereby amended to read in its entirety as follows:
ARTICLE FOUR
CAPITALIZATION, PREEMPTIVE RIGHTS AND VOTING
Section 1. AUTHORIZED SHARES. The Corporation shall have authority to
issue two classes of shares to be designated respectively "Common Stock" and
"Preferred Stock". The total number of shares which the Corporation is
authorized to issue is FIFTEEN MILLION (15,000,000) shares of which TEN MILLION
(10,000,000) shall be Common Stock and FIVE MILLION (5,000,000) shall be
Preferred Stock. Each share of Common Stock shall have a par value of ONE CENT
($.01), and each share of Preferred Stock shall have a par value of ONE DOLLAR
($1.00).
Effective as of the close of business on the day of the filing of the
Articles of Amendment which contain this provision with the Secretary of State
of the State of Texas, each share of Common Stock, $.05 par value per share
("Old Common Stock") issued at such time shall be and hereby is automatically
reclassified and changed into one-tenth of one share of Common Stock, $0.01 par
value per share, without any action by the holder and no fractional shares shall
be issued pursuant to such reclassification and change. Effective as of the
close of business on the day of the filing of the Articles of Amendment which
contains this provision with the Secretary of State of the State of Texas each
certificate outstanding and previously representing shares of Old Common Stock
shall, until surrendered and exchanged, be deemed for all corporate purposes to
constitute and represent the number of whole shares of Common Stock of the
Corporation into which the outstanding shares of Old Common Stock previously
represented by the certificates was converted by virtue of the reverse stock
split.
ARTICLE TWO
OUTSTANDING SHARES
The number of shares of the Corporation outstanding at the time of such
adoption was 24,563,564 shares of Common Stock, $.05 par value per share; and
the number of shares of Common Stock entitled to vote thereon was 24,563,564.
23
<PAGE>
ARTICLE THREE
VOTE
The number of shares voted for and against such amendment was as follows:
FOR AGAINST
Authorized Shares __________ ___________
EXECUTED this _____ day of December, 1998.
WATERMARC FOOD MANAGEMENT CO.
By:_______________________________
Ghulam M. Bombaywala, Chief
Executive Officer
24
<PAGE>
WATERMARC FOOD MANAGEMENT CO.
PROXY SOLICITED BY BOARD OF DIRECTORS FOR ANNUAL MEETING
OF SHAREHOLDERS TO BE HELD DECEMBER 18, 1998
The undersigned shareholder of Watermarc Food Management Co. (the "Company")
hereby appoints Ghulam M. Bombaywala as attorney and proxy of the undersigned,
with full power of substitution, to vote, as designated below, the number of
shares that the undersigned would be entitled to vote if personally present at
the Annual Meeting of Shareholders of the Company to be held at the Billy Blues
Bar & Grill located at 6025 Richmond Avenue, Houston, Texas 77057 at 3:00 p.m.,
local time, on December 18, 1998, on the matters specified below or on such
other business as may properly come before the meeting or any adjournment or
postponement thereof.
1. Proposal to amend the Restated Articles of Incorporation of the Company to
effect a reverse stock split on a one for ten basis of the Company's
Outstanding Common Stock and to reduce the par value of the Common Stock from
$.05 to $.01 per share.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. FOR the election as a director of all nominees listed below (except as marked
to the contrary below).
[ ] FOR [ ] AGAINST [ ] ABSTAIN
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below.
NOMINEES: Ghulam M. Bombaywala, Michael S. Chadwick, Sarosh J. Collector,
Philip M. Mount and Darrin Straughan.
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR INDIVIDUAL NOMINEES, WRITE
THEIR NAMES IN THE SPACE PROVIDED BELOW.
3. Proposal to ratify the appointment of Mann Frankfort Stein & Lipp, P.C. as
the Independent Public Accountants of the Company for fiscal 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, upon such other matters as may properly come before the
meeting or any adjournment or postponement thereof.
THIS PROXY MUST BE DATED AND SIGNED ON THE REVERSE SIDE
<PAGE>
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this Proxy will
be voted FOR the proposal to amend the Company's Restated Articles of
Incorporation to effect a reverse stock split on a one for ten basis of the
Company's Outstanding Common Stock and to reduce the par value of the Common
Stock from $.05 to $.01, FOR all nominees as directors, FOR the proposal to
ratify the appointment of Mann Frankfort Stein & Lipp, P.C. as the independent
public accountants of the Company for fiscal 1999 and in accordance with the
discretion of the person designated above with respect to any other business
properly before the meeting.
Please sign exactly as your name appears on this Proxy Card. When signing as
attorney, executor, administrator, trustee, guardian or corporate or partnership
official, please give full title as such and the full name of the entity on
behalf of whom you are signing. If a partnership, please sign in partnership
name by authorized person.
Dated: _______________, 199_
______________________________
Signature of Shareholder
______________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE
