-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LOXS5ZseIjj97CcfLJl1uSHPCRKViF0niRfSOXNdbNJzZO1Sr3xEG6UJa4mKj6i/ 0HUPQarZL9DUQ3CXnTmUeA== 0000950129-96-002336.txt : 19961010 0000950129-96-002336.hdr.sgml : 19961010 ACCESSION NUMBER: 0000950129-96-002336 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 DATE AS OF CHANGE: 19961009 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATERMARC FOOD MANAGEMENT CO CENTRAL INDEX KEY: 0000884131 STANDARD INDUSTRIAL CLASSIFICATION: 5812 IRS NUMBER: 742605598 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20143 FILM NUMBER: 96637725 BUSINESS ADDRESS: STREET 1: C/O BILLY BLUES STREET 2: 10777 WESTHEIMER RD STE 1030 CITY: HOUSTON STATE: TX ZIP: 77042-3461 BUSINESS PHONE: 2108249414 MAIL ADDRESS: STREET 1: C/O BILLY BLUES STREET 2: 10777 WESTHEIMER RD STE 1030 CITY: HOUSTON STATE: TX ZIP: 77042-3461 FORMER COMPANY: FORMER CONFORMED NAME: BILLY BLUES FOOD CORP DATE OF NAME CHANGE: 19930328 10-K 1 WATERMARC FOOD MANAGEMENT CO. - DATED 06/30/96 1 ================================================================================ 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 30, 1996 Commission File No. 0-20143 WATERMARC FOOD MANAGEMENT CO. (Name of Registrant in Its Charter) TEXAS 74-2605598 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 10777 WESTHEIMER, SUITE 1030 77042 HOUSTON, TEXAS (Zip Code) (Address of Principal Executive Offices) Issuer's Telephone Number, Including Area Code: (713) 783-0500 ----------------------------------- Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, $.05 PAR VALUE PER SHARE (Title of Class) 9% CUMULATIVE PREFERRED STOCK, $1.00 PAR VALUE PER SHARE (Title of Class) ----------------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K._____ The issuer's revenues for its fiscal year ended on June 30, 1996 were $40,129,443. As of September 20, 1996, the aggregate market value of the Common Stock held by non-affiliates of the issuer was $9,235,640 based on the closing bid price of $.69 per share of Common Stock as quoted in the NASDAQ SmallCap Market. The aggregate market value of the 9% Cumulative Convertible Preferred Stock (the "Preferred Stock") held by non-affiliates of the issuer, as of September 20, 1996, was $411,925 based on the closing bid price of $1.25 per share of Preferred Stock as quoted in the NASDAQ SmallCap Market. As of September 20, 1996, 13,433,658 shares of the issuer's Common Stock and 329,540 shares of the issuer's Preferred Stock were outstanding, respectively. DOCUMENTS INCORPORATED BY REFERENCE No documents, other than certain exhibits, have been incorporated by reference in this report. ================================================================================ 2 ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Watermarc Food Management Co., a Texas corporation, (the "Company"), currently owns and operates, both directly and through subsidiaries, full-service restaurants under the names Marco's Mexican Restaurants (the "Marco's Restaurants"), The Original Pasta Co. Restaurants (the "Pasta Co. Restaurants"), Billy Blues Barbecue Bar & Grill (the "Billy Blues Restaurant"), Longhorn Cafe, Pete's BBQ Rib and Steakhouse (the "Pete's Restaurants") and H. D. Hotspurs ("Hotspurs"). See "Restaurant Descriptions" and "Current Operating Activities." Marco's Restaurants are table service restaurants that feature high quality, moderately priced Mexican food. The style and decor of Marco's Restaurants are distinctive and colorful and are designed to present a Mexican style motif in a family oriented environment. Marco's Restaurants have a standardized menu with a variety of offerings, including Black Angus beef fajitas, tacos, enchiladas and numerous appetizers. Each Marco's Restaurant offers full bar service. As of June 30, 1996, the Company had a total of 23 Marco's Restaurants in operation in Southeast Texas, including the Houston metropolitan area, College Station, Texas City, Victoria, and Lake Jackson, Texas. The Company acquired ten Pasta Co. Restaurants in January of 1996. Pasta Co. Restaurants are distinctive, colorful, Italian-style, family oriented restaurants that feature full-service and offer moderately priced food and beverages. The restaurants include a brick oven for the preparation of pizzas, as well as a cooking area where entrees are produced. Both the oven and the cooking area are visible to customers. Decor items, ingredients and produce displayed on shelves and cases throughout the restaurants give the impression of an open-air Italian marketplace. As of June 30, 1996, the Company had a total of 13 Pasta Co. Restaurants in operation, all of which were located in the Houston Metropolitan area. Billy Blues Restaurant, Longhorn Cafe, Pete's Restaurants and Hotspurs (collectively, the "Barbecue Restaurants") generate an exciting and vibrant "Texas Roadhouse" ambiance enhanced by Texas artifacts, recorded and live music, neon signage and other memorabilia. The Company's Barbecue Restaurants feature Texas-style barbecue, steak and other entrees served in an informal, lively atmosphere intended to appeal to a broad customer base. The Barbecue Restaurants offer a limited, moderately-priced menu of freshly prepared foods made with high quality ingredients, with full bar service. As of June 30, 1996, a total of five Barbecue Restaurants were in operation in Texas and Washington, of which one was operated as Billy Blues Restaurant, one as Longhorn Cafe, two as Pete's Restaurants, and one as Hotspurs. The Company also produces and markets two brands of barbecue sauce products and a spice rub, Billy Blues Barbecue Sauce, Chris' & Pitt's Bar-B-Q Sauce and Chris' & Pitt's Spice Rub. Billy Blues Barbecue Sauce is a tangy, coffee- spiked formulation packaged in three different flavors and is available in supermarkets and other retail outlets. The Company's Chris' & Pitt's Bar-B-Q Sauce is a medium priced barbecue sauce product line which was acquired in March 1994. Chris' & Pitt's Bar-B-Q Sauce is packaged in six different flavors and is available in supermarkets and other retail outlets located primarily in the State of California. The Company periodically engages in advertising campaigns to enhance customer awareness of barbecue sauce products in the areas where they are currently available in supermarkets and other retail outlets. The Company also markets and packages its Chris' & Pitt's Bar-B-Q Sauce products for food service distribution to restaurant chains and commissaries. The Company's primary growth strategy has been to expand its restaurant and barbecue sauce operations through internal growth and by acquiring businesses with concepts and themes compatible with the Company's operations. This strategy is evidenced by the Company's acquisition in June 1993 of three Longhorn Cafes in Houston, Texas and the acquisition in August 1993 of two Pete's Restaurants and Hotspurs, each being located in the Seattle, Washington metropolitan area. In July of 1994, the Company acquired Marco's Mexican Restaurants, Inc. ("Marco's") which owned and operated the Marco's Restaurants and in January of 1996, the Company acquired The Original Pasta Co. ("Pasta Co.") which owned and operated the Pasta Co. Restaurants. See "Current Operating Activities." The Company was organized as Billy Blues Food Corporation, a Texas corporation, on June 17, 1991 as the successor to 410 Arsenal Holdings, Inc. ("Arsenal Holdings"), an affiliated company, to develop, own and operate restaurants and to produce and market a uniquely flavored barbecue sauce developed by Arsenal Holdings. In March -2- 3 of 1995, the name was changed to Watermarc Food Management Co. Unless the context requires otherwise, references to the "Company" refer to Watermarc Food Management Co., its predecessors and subsidiaries. CURRENT OPERATING ACTIVITIES For the fiscal years ended July 2, 1995 and June 30, 1996, the Company recorded revenues of $37,651,657 and $40,129,443, respectively, and had a net loss of $7,036,741 and net income of $48,696, respectively. As of June 30, 1996, the Company had total current assets of $1,934,667 and total current liabilities of $6,419,570, resulting in a working capital deficit of $4,484,903. Currently, the Company does not have a bank line of credit. The Company has funded its operating losses and expansion costs primarily through a combination of public and private offerings of debt and equity. During fiscal 1995, the Company reorganized its executive management and Board of Directors to strengthen operational capabilities and has continued to reduce general and administrative expenses. The ability of the Company to alleviate its working capital deficit, and to obtain the necessary capital resources to fund future costs associated with its operations and expansion plans is dependent upon: (i) continuing to improve restaurant operations through implementation of stringent cost controls and marketing efforts intended to increase revenues; (ii) improving barbecue sauce operations through price increases, product cost reductions, increased market penetration, and implementation of cost controls on selling, marketing and distribution expenses; (iii) obtaining additional equity capital or debt financing; (iv) refinancing short-term debt obligations; and (v) its ability to acquire compatible restaurant businesses. However, even if the Company achieves some success with its operational strategy, there can be no assurance that it will be able to generate sufficient revenues to continue to achieve profitable operations or to fund its expansion efforts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". During fiscal 1995, the Company experienced significant operating losses associated with certain of its Billy Blues Restaurants, resulting in a re-evaluation of the feasibility of continuing to operate such restaurants. As a result, the Company took the actions listed below: o In May 1995, the Company closed a Billy Blues Restaurant located in Denver, Colorado as it represented a non- performing asset of the Company. The Company recorded loss provisions of approximately $1.3 million in the fourth quarter of fiscal 1995 to reduce the assets to net realizable value and accrue for estimated liabilities. During fiscal 1996, the Company disposed of such assets and satisfied its lease and other obligations. o In July 1995, the Company sold fixed assets associated with and sub-leased a Billy Blues Restaurant facility located in San Antonio, Texas to individuals unaffiliated with the Company. The Company recorded a loss of approximately $320,000 on this transaction in the fourth quarter of fiscal 1995. o In June 1995, the Company decided to close a Billy Blues Restaurant located in Dallas, Texas and recorded loss provisions of approximately $670,000 in the fourth quarter of fiscal 1995 to reduce the assets to net realizable value and accrue for estimated liabilities. During fiscal 1996, the Company disposed of such assets and satisfied its lease and other obligations. o The Company has agreed to sell its interest in its Billy Blues Restaurant located in Heidelberg, Germany. A loss reserve of approximately $140,000 was recorded in the fourth quarter of fiscal 1995 to reduce the Company's investment to net realizable value. In fiscal 1996, the Company sold fixed assets associated with and assigned its lease of one of its Longhorn Cafe Restaurants located in Houston, Texas to individuals unaffiliated with the Company. The Company recorded a gain of approximately $150,000 on this transaction. The Company does not anticipate closing or selling any of its other existing restaurants due to associated operating or cash flow losses. -3- 4 On June 23, 1995, the Company entered into a Sale and Option Agreement with The Original Pasta Co. ("Pasta Co.") pursuant to which the Company was granted an option to purchase Pasta Co. which was solely owned by Ghulam M. Bombaywala, the Chairman of the Board, Chief Executive Officer and a director of the Company. In September 1995, the Company entered into a formal agreement with Mr. Bombaywala for the purchase of Pasta Co. The agreement was subject to majority approval by the Company's stockholders other than Mr. Bombaywala. Such approval was obtained at the Company's Annual Meeting of Shareholders held in January of 1996. The purchase was consummated on January 26, 1996. See Note 2 of Notes to Consolidated Financial Statements and "Item 13. Certain Relationships and Related Transactions." The Company intends to continue to expand its business, in part, through the acquisition of compatible restaurant businesses. The ability of the Company to consummate acquisitions will depend upon, among other things, obtaining sufficient financing on acceptable terms, of which there can be no assurance. [THIS SPACE IS INTENTIONALLY LEFT BLANK] -4- 5 RECENT FINANCINGS In March 1996, the Company borrowed $1.2 million from a bank. The loan is evidenced by a 9.75% promissory note with a five year amortization and is collateralized by fixed assets associated with certain Pasta Co. Restaurants. The proceeds were used to pay off an existing note in the amount of $861,420, with the balance being used to fund the opening of new Pasta Co. Restaurants. In June 1995, the Company borrowed $1 million from an unaffiliated foreign corporation. The loan is evidenced by a 10% promissory note, which matures on May 31, 1999. The note is secured by the restaurant equipment located in three Marco's Restaurants, and is personally guaranteed by Mr. Bombaywala. The Company also issued to the recipient of the note, warrants to purchase 75,000 shares of Common Stock at an exercise price of $3.00 per share, which expire on May 31, 1997. In June 1995, the Company received proceeds of approximately $1,476,000 from the sale of 621,500 shares of its Common Stock pursuant to a Regulation S offering as promulgated under the Securities Act (the "1995 Reg. S Offering"). On March 30, 1994, the Company completed a private offering of approximately $2.7 million of 5-Year 9% Convertible Subordinated Debentures (the "Debentures") to qualified purchasers (the "Debentureholders"). After payment of commissions and other expenses of the offering, the Company realized net proceeds of approximately $2.2 million. The Company utilized approximately $2 million of the proceeds to fund a portion of the purchase price for the Chris' & Pitt's Bar-B-Q Sauce product line. On May 31, 1995, the Company offered the Debentureholders the right to convert, until June 30, 1995, the principal and accrued interest owed on their Debentures into Common Stock at a modified conversion rate (the "Modified Conversion Rate") of $2.3125 of Debenture principal and accrued interest for one share of Common Stock. Debentureholders owed an aggregate of $2,529,665 of Debenture principal and accrued interest agreed to the conversion of their Debentures at the Modified Conversion Rate and were issued an aggregate of 1,093,904 shares of Common Stock. There is currently outstanding $217,000 of Debenture principal held by Debentureholders who elected not to convert their Debentures at the Modified Conversion Rate. The outstanding Debentures may be converted voluntarily at any time until maturity at a conversion rate of $5.00 of Debenture principal and accrued interest for one share of Common Stock. The Company, pursuant to a registration statement (the "July 1995 Registration Statement") declared effective by the Securities and Exchange Commission ("SEC") on July 28, 1995, has registered the 1,093,904 shares of Common Stock issued to Debentureholders who converted their Debentures at the Modified Conversion Rate and 43,400 shares of Common Stock which will be issued to Debentureholders who in the future elect to convert their Debentures into shares of Common Stock at the original $5.00 conversion rate. In connection with the Company's offering of the Debentures, the Company paid approximately $260,000 in commissions and issued warrants (the "Placement Agent Debenture Warrants") to Gene Morgan Financial ("GMF") and to Noble, as placement agents for the offering, to acquire $164,100 and $105,000 of Debenture principal, respectively. The Placement Agent Debenture Warrants expire April 6, 1999. The warrants issued to Noble have been assigned to Nico B. Letschert, a director of the Company. The Debentures issuable upon exercise of the Placement Agent Debenture Warrants are convertible into shares of Common Stock at a conversion rate of $5.00 of Debenture principal and accrued interest for one share of Common Stock. Included in the July 1995 Registration Statement were 53,280 shares of Common Stock issuable upon exercise of the Placement Agent Debenture Warrants. The July 1995 Registration Statement also includes 408,202 shares of Common Stock issued in satisfaction of certain payment obligations of the Company, including obligations to trade vendors, and 875,500 shares of Common Stock issuable upon exercise of the Company's Series A Warrants. See "Item 5 - Market for Common Equity." -5- 6 In December 1994, the Company completed a private offering of $3 million of 12% Subordinated Notes due March 31, 1996 (the "Subordinated Notes"). Holders of the Subordinated Notes received warrants (the "Subordinated Note Warrants") to purchase an aggregate of 1,333,320 shares of Common Stock at a purchase price of $2.25 per share until December 31, 1999. Interest on the Subordinated Notes is payable quarterly. The Subordinated Notes are unsecured and may be subordinated to certain defined senior indebtedness. A portion of the proceeds were used to satisfy all remaining obligations owed in connection with the acquisition of the Chris' & Pitt's Bar-B-Q Sauce product line with the balance being used for working capital. In March 1996, the maturity date was extended to July 31, 1997, the warrant exercise price was reduced to $1.00 per share and 100% of the outstanding stock of Marco's Mexican Restaurants, Inc. was pledged as collateral. Ghulam M. Bombaywala, Chairman of the Board, Chief Executive Officer and a director of the Company, purchased $500,000 principal amount of the Subordinated Notes and received 222,220 Subordinated Note Warrants. Mr. Bombaywala has agreed to purchase the remaining Subordinated Notes if they are not paid at maturity. The Company has not independently reviewed the financial position or income of Mr. Bombaywala or his ability to perform under such commitment. If the Company fails to repay the Subordinated Notes, there can be no assurance that Mr. Bombaywala will be able to fully perform under such commitment. In connection with the private offering of the Subordinated Notes, the Company entered into an 18-month Financial Advisory Agreement (the "Advisory Agreement") with Sanders Morris Mundy Inc. ("SMM"), the placement agent in the offering. As placement agent, SMM received a 10% commission on the sale of the Subordinated Notes, excluding the $500,000 of Subordinated Notes purchased by Mr. Bombaywala. Under the terms of the Advisory Agreement, the Company paid SMM a monthly fee of $10,000 in consideration for assistance in the Company's acquisition efforts and capital raising endeavors. Also, pursuant to the Advisory Agreement, the Company issued to SMM warrants to purchase 150,000 shares of Common Stock at an exercise price of $2.50 per share (the "SMM Advisory Warrants"), which expire on December 31, 1999. SMM subsequently transferred 45,000 of the SMM Advisory Warrants to Michael S. Chadwick, Senior Vice President of SMM and a director of the Company. In connection with the extension of the maturity date of the Subordinated Notes, the warrant exercise price was reduced to $1.00 per share and the Advisory Agreement was extended for an additional 18 months at a fee of $5,000 per month. In September 1994, the Company received proceeds of approximately $1 million from the sale of 375,438 shares of its Common Stock pursuant to a Regulation S offering under the Act (the "1994 Regulation S Offering"). The proceeds from the 1994 Regulation S Offering were used by the Company to meet its note obligations and for working capital purposes. GROWTH STRATEGY The Company's growth strategy includes the following: o The opening of additional company-operated Marco's Restaurants and Pasta Co. Restaurants. o The franchising of Marco's Restaurants and Pasta Co. Restaurants. o The remodeling of certain Marco's Restaurants. o Increasing food products sales. o Acquiring additional restaurant chains. MARCO'S RESTAURANTS. During fiscal 1996, the Company opened one new Marco's Restaurant. In the upcoming fiscal year, the Company plans to open one new unit in Southeast Texas and plans to remodel at least eight existing restaurants. In the most recently opened units, a new prototype was introduced. New units are brighter, more upbeat, more entertaining and are expected to position Marco's Restaurants to be more competitive. The remodeling program will retrofit the restaurants to the new prototype. The Company also plans to continue to improve customer service. -6- 7 PASTA CO. RESTAURANTS. Since the acquisition of Pasta Co. in January 1996, three new Pasta Co. Restaurants were opened in the Houston, Texas area. The Company intends to continue the expansion of the chain over the next year by opening at least four additional units in Southeast Texas. BARBECUE RESTAURANTS. The Company does not plan to change nor expand its Barbecue Restaurant concepts. The focus for these restaurants will be to increase sales and improve operating efficiencies. FRANCHISING PROGRAM. The Company intends to establish an aggressive franchise program for Marco's Restaurants and Pasta Co. Restaurants during fiscal 1997. Management believes that franchising will provide significant growth for the Company in upcoming years. FOOD PRODUCTS. The Company currently markets two brands of barbecue sauce products and a spice rub. The Company's strategy to increase food product sales includes reinforcing existing markets, expanding distribution to new market areas (primarily in the Sun Belt states), introducing more aggressive marketing programs, adding methods of distribution and developing new products. PROPOSED ACQUISITIONS. The Company continues to investigate possible acquisition candidates in the restaurant industry, but does not currently have any arrangements, undertakings or commitments with respect to any acquisition. RESTAURANT DESCRIPTIONS MARCO'S RESTAURANTS. Marco's Restaurants are distinctive and colorful Mexican restaurants that feature full service and mid-priced Tex-Mex food. A typical Marco's Restaurant consists of 4,000 to 6,000 square feet for dining and bar facilities, and has a seating capacity for 200 to 300 patrons. The decorative scheme in each restaurant incorporates a centrally located Tortilla Room where tortillas are prepared and served fresh to the customer. The exterior design of the Marco's Restaurants normally conforms to the shopping center in which it is located. The restaurants have varying floor plans and configurations. Marco's Restaurants specialize in a wide variety of Tex-Mex cuisine, serving fresh, high quality products at reasonable prices. Entrees include Black Angus beef fajitas, combination plates and Mexican platters. Entrees range in price from $4.79 to $12.99. Marco's Restaurants also offer a full service bar specializing in various flavored margaritas, as well as numerous brands of Mexican and domestic beer and wine. PASTA CO. RESTAURANTS. The Pasta Co. Restaurants are distinctive, colorful Italian-style family oriented restaurants that feature full-service and offer moderately priced food and beverages. Typical units are approximately 3,600 - 4,000 square feet each, and all but one have an outside patio of approximately 400 additional square feet. The units have seating capacities of 160 to 200 persons. Eleven of the restaurants are situated in neighborhood retail shopping centers in corner or end-cap locations. The other two are on pad sites in front of retail shopping centers, sharing a free-standing building with another retail business. The exterior of each of the locations generally conforms to that of the center of which it is located, with the restaurant's name and logo prominently displayed. In addition, numerous windows make the restaurants more inviting from the outside and lighter and brighter on the inside. It is anticipated that expansion of the concept will be in the same type of facilities. The restaurants are open for lunch and dinner seven days a week. The Pasta Co. Restaurants offer a wide variety of appetizers, soups, salads, pasta and other entrees, pizzas, desserts and beverages. The restaurants specialize in generous portions at reasonable prices, with any item on the menu available for $7.95 or less. The price range for entrees and pizzas is $5.95 to $7.95. A children's menu is also available. Beverages sold consist of coffee, tea, sodas, bottled water, espresso, cappuccino, beer and wine. Most menu items are available for take-out. -7- 8 BILLY BLUES RESTAURANT. The Billy Blues Restaurant provides its patrons with high quality, moderately priced dining and entertainment in a casual atmosphere. The restaurant consists of approximately 8,000 square feet for dining and bar/entertainment facilities, and has a dining and bar seating capacity for 240 customers and features a night club called the "Blues Room" which seats an additional 200 customers. A section of the restaurant is used for the display and retail sale of Billy Blues Barbecue Sauce and novelty items featuring the Billy Blues name and logo, including T- shirts, caps and sweat shirts. The decorative scheme incorporates memorabilia associated with blues music, focusing on legendary blues figures, photographs, musical instruments and framed newspaper and other articles relating to the blues musical culture. The Billy Blues Restaurant serves lunch and dinner with full bar service, featuring a moderately priced, limited menu of high quality smoked barbecue and other entrees. Entrees range in price from $5.95 to $13.95. In the Blues Room, full liquor service is provided and patrons can enjoy a light snack or an entire meal with cocktails while being entertained by a blues band or recorded blues music. PETE'S RESTAURANTS AND HOTSPURS. Pete's Restaurants and Hotspurs specialize in barbecue beef, chicken, pork and seafood entrees served in an informal, lively, family atmosphere. Hotspurs is a full service restaurant with a substantial lounge area. The lounge is utilized for live entertainment and dancing. Entrees at the restaurants range in price for $4.25 to $21.95 and are served with a variety of salads, vegetables and desserts. Full liquor service is available. LONGHORN CAFE. The Longhorn Cafe features a casual dining atmosphere with a Texas Roadhouse decor and interior design. The decor includes wooden booths and tables with an open layout permitting customers to view the bar and Texas memorabilia. The restaurant serves lunch and dinner and features a selection of moderately priced, high quality steaks, chicken, burgers and sandwiches, with full liquor services. The specialty is chicken fried steak served with cream gravy and french fries. The Longhorn Cafe has a varied menu featuring Black Angus steaks, fresh grilled red fish and homemade stuffed jalapenos and also offers several specialty appetizers and homemade desserts. Entrees range in price from $5.95 to $14.95. RESTAURANT LOCATIONS AND SITE SELECTION The following table provides information with respect to the restaurants which were owned and operated by the Company as of June 30, 1996:
MONTH AND APPROXIMATE --------- ----------- BILLY BLUES RESTAURANT YEAR OPENED SQUARE FOOTAGE - - ---------------------- ----------- -------------- Houston, Texas February 1993 8,000 LONGHORN CAFE - - ------------- Houston, Texas March 1987 2,500 PETE'S RESTAURANTS - - ------------------ Tacoma, Washington November 1972 5,900 Tacoma, Washington November 1984 7,500 HOTSPURS - - -------- Kent, Washington May 1979 11,000 MARCO'S RESTAURANTS - - ------------------- Houston, Texas Metropolitan Area Kuykendahl at Louetta March 1984 6,400 Hwy. 6 N. At FM 259 December 1984 4,850 Mason Road at I-10 September 1985 5,200 Sawdust Road at I-45 April 1986 5,040 W. Nasa Road September 1986 6,900 Westheimer at Hwy. 6 March 1987 5,040
-8- 9 Meyer Park October 1987 6,250 I-10 at Uvalde November 1987 5,200 Willowbrook at FM 1960 December 1987 5,040 First Colony at Hwy. 6 June 1988 5,100 Greenspoint September 1984 5,000 Woodlake Square December 1989 6,300 Almeda Mall January 1990 5,000 Astrodome April 1990 4,820 Kingwood September 1993 4,120 Northwest May 1994 4,000 FM 1960 at I-45 February 1995 4,000 Victoria, Texas February 1989 4,000 Galveston, Texas March 1990 3,850 College Station, Texas February 1992 3,900 Pasadena, Texas December 1992 3,942 Texas City, Texas April 1995 4,180 Lake Jackson, Texas December 1995 4,000 PASTA CO. RESTAURANTS - - --------------------- Houston, Texas Metropolitan Area Meyer Park September 1993 3,600 Sugar Land December 1993 4,000 Kingwood February 1994 3,600 Nasa Rd. April 1994 3,600 Westheimer @ Dairy Ashford September 1994 3,600 The Woodlands November 1994 4,200 FM 1960 @ I-45 December 1994 3,600 43rd St. @ Hwy. 290 December 1994 3,600 Nottingham Shopping Ctr. July 1995 3,600 Woodway @ Augusta August 1995 3,600 FM 1960 @ Veterans Memorial March 1996 3,600 Hwy. 249 @ Cypresswood May 1996 3,600 Katy May 1996 4,200
The Company believes that the locations of its restaurants are critical to its long-term success. Senior management devotes significant time and resources to analyzing each respective site. The Company utilizes, and continually enhances, specific site selection criteria which focuses on local demographics such as target population, density and household income levels; specific site characteristics such as visibility, accessibility and traffic volume; proximity to activity centers; parking availability; and potential competition in the area. The Company's ability to open new restaurants is contingent upon locating satisfactory sites, purchasing land or buildings or negotiating leases on acceptable terms, securing appropriate governmental permits and approvals, obtaining liquor licenses, recruiting and training additional qualified management personnel and securing adequate financing. Once space has been leased and made available to the Company, approximately 90 to 180 days are required to complete construction, obtain necessary licenses and approvals and open a new restaurant. UNIT ECONOMICS The Company's average initial cash investment (including leasehold improvements, furniture and fixtures, equipment, food and beverage inventory, and other pre-opening expenses) for its Barbecue Restaurants (all of which are leased) ranged from approximately $750,000 to $1,500,000. The Company has no plans to add additional Barbecue Restaurants. -9- 10 The average initial cash investment (including leasehold improvements, furniture and fixtures, equipment, food and beverage inventory, and other pre-opening expenses) for each Marco's Restaurant and Pasta Co. Restaurant is approximately $350,000 to $500,000 with pre-opening expenses projected to be approximately $25,000 for each future restaurant. RESTAURANT MANAGEMENT AND OPERATIONS MANAGEMENT AND EMPLOYEES. The management staff of a typical Barbecue Restaurant and Marco's Restaurant consists of a general manager, one or two assistant managers and a kitchen manager. Each Barbecue Restaurant employs approximately 50 to 70 hourly employees. Each Marco's Restaurant employs 20 to 30 hourly employees. Each Pasta Co. Restaurant employs approximately 40 - 50 persons, of which one is a general manager, two are assistant managers, with the rest being hourly employees. At all of the restaurants, the general manager has the primary responsibility for the day to day operations of the restaurant and is required to comply with Company established operating standards. Many of the hourly employees work part-time. PURCHASING AND SUPPLIES. Management negotiates directly with suppliers for food and beverage products to insure uniform quality and adequate supplies and to obtain competitive prices. The Company purchases substantially all food and beverage products and novelty items from local or national suppliers. The Company does not anticipate any difficulty in continuing to obtain food and beverage requirements within the localities in which the Company currently operates or in which it expects to open additional restaurants. SUPERVISION AND TRAINING. The Company requires its restaurant general managers to have significant experience in the food service industry. Currently, executive management of the Company regularly visits the restaurants to insure that the Company's concept, strategy and standards of quality are being adhered to in all aspects of restaurant operations. The restaurant general manager and designated personnel of the Company are responsible for selecting and training the employees for each new restaurant. The training period for new employees lasts approximately five days and is characterized by on the job supervision by an experienced employee. Ongoing employee training will remain the responsibility of the restaurant general manager. Written tests and physical observation are used to evaluate each employee's performance. ADVERTISING AND PROMOTION. The Company pursues advertising and promotional opportunities within each of its restaurant's geographic locales, relying principally on newspaper, radio and the direct mailing of coupons. RESTAURANT REPORTING. Each restaurant has a stand-alone point of sales system monitored by its management. The restaurant's staff prepares daily cash and other reports regarding sales, inventory, sales mix, labor cost and the number of customers. Daily reports are forwarded to the Company's corporate offices in Houston, Texas where weekly summaries of all reported data are analyzed by the Company's executive management. FOOD PRODUCT LINES GENERAL. Billy Blues Barbecue Sauce is available in three different flavors: Original, Smoky Pecan, and Hot and Spicy, which are marketed as high quality premium priced barbecue sauces and are currently being distributed at an average retail price of $2.29 per 14 oz. bottle in over 600 supermarkets and other retail outlets primarily in Texas, California, Florida and Oregon. Chris' & Pitt's Bar-B-Q Sauce is available in six flavors: Original, Hot, Sweet & Smokey, Mesquite, Hickory and Bold 'n Hearty, and are marketed as medium priced barbecue sauce. The Chris' & Pitt's product line is currently being distributed at an average retail price of $1.69 per 14 oz. bottle in over 2,000 supermarkets and other retail outlets primarily in California, Oregon, and Washington. In late fiscal 1995, the Company introduced Chris' & Pitt's Spice Rub, an award winning seasoning developed by the Company. The spice rub is sold in the barbecue sauce section of retail outlets and is also offered through food service distributors. To date, spice rub sales have not constituted a material portion of food product revenues. -10- 11 PROCESSING OF PRODUCTS. The Company currently engages, on an order to order basis, an unaffiliated food processor and packaging company (the "Co-Packer") in Riverside, California for the processing and packaging of its food product lines. Under its production arrangement with the Co-Packer, the Co-Packer procures all ingredients and packaging materials, and performs product preparation and packing at an agreed upon price. The Company believes that its present Co-Packer has the capability to process sufficient quantities of the Company's products to meet anticipated demand for at least the next 12 months. The Company does not believe that the loss of the services of the Co-Packer would have an adverse effect on the Company's ability to process its orders since there are other co-packers in Texas, California and in the localities in which it intends to market its product lines that have available facilities with excess capacity. The Company believes that the ingredients for its products are readily available from multiple sources in Texas, California and in the other areas of the United States in which the Company intends to engage in business operations. MARKETING AND DISTRIBUTION. The Company engages food brokers to assist in selling its products to regional and national supermarket chains. The food brokers are responsible in their respective geographic markets for identifying customers, soliciting customer orders and inspecting the placement and display of products on supermarket shelves. The Company generally pays its food brokers a 5% commission on the amount they sell. To date, the Company's food brokers have accounted for most of the Company's sales to supermarket chains. To achieve greater market penetration, the Company intends to expand its food broker network. The Company does not believe that the loss of one or all of its food brokers would have a material adverse effect on the Company's ability to market its products to its current customers or other supermarket or retail chains as the Company believes there are other available food brokers in the areas in which the Company markets its product lines which it can engage on comparable terms and who have established relationships with such customers. The Company utilizes a distribution warehouse in California and another in Texas for storage of products. The Company pays handling and storage fees based on the actual monthly volume shipped to the warehouse. The Company contracts with independent freight carriers for the delivery of its product lines, or provides special pricing for customers who pick up the product at a storage warehouse. The Company's product lines are distributed to supermarkets either through: (1) direct shipment to a supermarket chain warehouse which then distributes to its individual supermarkets from the warehouse; (2) direct shipment to an independent grocery warehouse, which performs the same function as a supermarket chain warehouse for a fee; or (3) an independent food distributor who picks up the products at the storage warehouse and delivers directly to the supermarkets. A fee is paid to the food distributor based on volume. The Company generally sells its food products pursuant to customer purchase orders and usually fills the orders within approximately ten days of receipt. Because orders are filled shortly after receipt, backlog is not material to the Company's business. For the fiscal year ended June 30, 1996, revenues from sales of food products were $2,902,242 or approximately 7.2% of the Company's total revenues for such period. For the fiscal year ended July 2, 1995, food product revenues were $3,051,392 or approximately 8.1% of total revenues for such period. Even though the Company believes it has achieved limited consumer awareness and market acceptance of its barbecue sauce products, there can be no assurance that either of the Company's barbecue sauce product lines will ever achieve significant consumer acceptance or that supermarket and other retail chains will re-order the Company's barbecue sauce products. ADVERTISING AND PROMOTION. The Company periodically engages in advertising and marketing campaigns to enhance customer awareness of Billy Blues Barbecue Sauce and Chris' & Pitt's Bar-B-Q Sauce in the geographic areas where the sauces are available in supermarkets and other retail outlets. The Company relies principally upon the sponsorship with supermarket chains of special promotional programs, including discount coupons, in-store displays and free sample distributions, to promote its barbecue sauce products. The Company also utilizes newspaper advertising in certain markets where economically feasible. -11- 12 COMPETITION RESTAURANTS. The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many well established competitors with substantially greater financial and other resources than the Company. Most of the Company's competitors have been in existence for substantially longer periods than the Company and are more established in the markets where the Company's restaurants are or may be located. The Company's competitors have achieved significant national, regional and local brand name and product recognition and engage in extensive advertising and promotional programs, both generally and in response to efforts by additional competitors to enter new markets or introduce new products. The restaurant business is often characterized by a high failure rate and affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the type, number and location of competing restaurants. FOOD PRODUCTS. The Company has encountered substantial competition in the marketing and sale of its food product lines. The Company's barbecue sauce products compete for consumer recognition and shelf space with products which have achieved significant national, regional and local brand name recognition and consumer loyalty. The Company's barbecue sauce product lines also indirectly compete with other condiment products including steak and other meat sauces. These products are marketed by companies with significantly greater financial, marketing, distribution, personnel and other resources than the Company, thereby permitting such companies to procure supermarket shelf space and to implement extensive advertising and promotional programs, both generally and in response to efforts by new competitors entering the marketplace. The food industry is also characterized by the frequent introduction of new products, accompanied by substantial promotional campaigns. While the Company believes that its barbecue sauce products compete favorably in the areas where they are currently being marketed and that its increased marketing and sales efforts will result in increased product recognition and market penetration for its products, there can be no assurance that the Company will be able to compete successfully, particularly as it seeks to enter new markets. TRADEMARKS The Billy Blues Barbecue Bar & Grill and Billy Blues Barbecue Sauce logos were registered in the State of Texas in 1991. The Chris' & Pitt's mark and logo were registered prior to the Company's acquisition of the Chris' & Pitt's product line. The mark "Billy Blues" was registered in the U.S. Patent and Trademark Office on November 17, 1992 as a service mark for restaurant and bar services. The mark "Billy Blues" as a trademark for the Company's barbecue sauce was registered in the U.S. Patent and Trademark Office on October 13, 1992. The mark "Marco's Mexican Restaurants" was registered in the U.S. Patent and Trademark Office on January 15, 1991 and in the State of Texas in 1987. The mark "The Original Pasta Co." has been allowed by the U.S. Patent and Trademark Office. The Company has no reason to believe that there are any conflicting rights which might impair the Company's use of its marks; however, there can be no assurance that such conflicting rights do not exist. The Company believes that these trademarks are valuable to the operation of its restaurants and marketing of its food products. The Company's policy is to pursue registration of its marks whenever possible and to oppose vigorously any infringement of its marks. -12- 13 GOVERNMENT REGULATION RESTAURANT OPERATIONS. The Company is subject to various federal, state and local laws and regulations and administrative policies affecting its business and must comply with provisions regulating health and sanitation, equal employment, minimum wages and licensing for the sale of food and alcoholic beverages. Difficulties or failures in obtaining or maintaining the required licenses or approvals could delay or prevent the opening of new restaurants or adversely affect the operations of existing restaurants. Approximately 25% of revenues generated by the Barbecue Restaurants are attributable to the sale of alcoholic beverages, while approximately 15% of the revenues generated by the Marco's Restaurants and approximately 7% of the revenues generated by the Pasta Co. Restaurants are the result of the sale of alcoholic beverages. The service of alcoholic beverages is material to the business of the Company. Alcoholic beverage control regulations require each of the Company's restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. The Company has not experienced and does not presently anticipate experiencing any delays or other problems in obtaining or renewing licenses or permits to sell alcoholic beverages; however, the failure to receive or retain, or a delay in obtaining, a liquor license in a particular location could adversely affect the Company's operations in that location. The Company may be subject in certain states to "dram-shop" statutes or common laws, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to the intoxicated person. The Company's restaurant operations are also subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits; the Immigration and Naturalization Act, which governs employee citizenship requirements; and the Americans with Disabilities Act, which governs non-discriminating employment practices and reasonable accommodations for disabled persons, both employees and customers. Significant numbers of the Company's food service and preparation personnel are paid at rates related to the federal minimum wage and, accordingly, future increases in the minimum wage or decreases in the allowable tip credit will increase the Company's labor costs. Federal, state and local environmental regulations are not expected to have a material effect on the Company's operations, but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors may restrict the Company's site selection for new restaurants. FOOD PRODUCT OPERATIONS. The Company's and the Co-Packer's food processing activities are subject to extensive regulation by the United States Food and Drug Administration, and by other state and local authorities. The Company believes that it is currently in compliance with all governmental laws and regulations and that the Company has all material permits and licenses relating to its food processing operations. The Company has no reason to believe that the Co-Packer is not in substantial compliance with all material governmental laws and regulations and believes that the Co- Packer has all material permits and licenses relating to their food processing operations. Nevertheless, there can be no assurance that the Company or the Co-Packer will continue to be in substantial compliance with current laws and regulations or that the Company or the Co-Packer will be able to comply with any future laws and regulations. Failure by the Company or the Co-Packer to comply with applicable laws and regulations could subject the Company to civil remedies, including fines, injunctions, recalls or seizures which could have a material adverse effect on the Company. WORKERS' COMPENSATION. The Company has elected to be a non-subscriber of the Texas Workers' Compensation Act and is currently self-insured. Management believes that self-insuring the Company will decrease the Company's overall net cost in future periods. Management intends to review this election on an annual basis. The Company does not believe it would encounter any impediments if it elected in the future to become a subscriber under the Texas Workers' Compensation Act. The Company does not believe that personal injury claims by current or former employees of the Company, either individually or in the aggregate, will have a material adverse effect on the Company, its properties or business. The Company does not maintain a reserve fund for potential claims, but carries catastrophic loss coverage with a limit of $1,000,000 and a deductible of $150,000 per incident. -13- 14 EMPLOYEES At June 30, 1996, the Company employed 1,868 persons of whom 38 are management and administrative personnel, 129 are restaurant management personnel, with the remainder serving as hourly restaurant employees. The Company intends to increase its management and clerical staff as needed. The Company is not a party to a collective bargaining agreement and considers its relationship with its employees to be good. ITEM 2. DESCRIPTION OF PROPERTY. As of June 30, 1996, the Company leased all of its Barbecue Restaurants and Pasta Co. Restaurants and all but one of its Marco's Restaurants. The leases have terms that expire between 1996 and 2012 and have an average remaining term of approximately seven years. The Company has obtained real estate and developed its restaurants using four methods: (i) acquiring land and constructing the restaurant (a "Company owned building"); (ii) leasing land and constructing the restaurant (a "ground lease"); (iii) leasing the land and building (a "land/building lease"); or (iv) leasing a "shell" where the landlord may or may not contribute to the construction of the improvements (a "shell lease"). The method the Company pursues has been determined on an individual site basis, depending on the cost and location of the property and the negotiations between the Company and the owner of the desired property. Of the Company's restaurants, one is in a Company owned building, one is a ground lease, three are land/building leases, and thirty-six are shell leases. In the case of leased facilities, the leases generally provide for rental rates based upon a stated minimum rental and percentage rent payments based upon a certain sales base. The Company's monthly lease cost for its restaurants ranges from approximately $4,000 to $9,000 per month. Under substantially all of its leases, the Company is required to pay real estate taxes, insurance, and maintenance expenses. The Company's executive offices are located in approximately 6,400 square feet of leased space at 10777 Westheimer, Suite 1030, Houston, Texas 77042-3498. The Company's monthly lease cost for this office is $6,347. In October of 1996, the Company expects to move its offices to approximately 12,300 square feet of lease space at 11111 Wilcrest Green, Suite 350, Houston, TX 77042, at a monthly lease cost of $8,656. The Company anticipates the loss of a substantial amount of leasehold improvements paid for and made by the Company to its present and future facilities when such leases expire or if prematurely terminated. ITEM 3. LEGAL PROCEEDINGS. On or about August 29, 1995, John Coleman, a former officer of the Company, filed a suit in State District Court in Harris County, Texas for wrongful termination, intentional infliction of emotional distress and breach of employment contract. The Company filed a general denial and believes Mr. Coleman's claims are without merit. The Company is vigorously defending this claim. Mr. Coleman had an employment agreement with the Company which provided for severance pay equal to the remaining salary due under his employment agreement if he was terminated without cause. Mr. Coleman is seeking $500,000 in actual damages and $1,000,000 in punitive damages. The Company is a party to numerous other legal proceedings which arise in the ordinary course of business. The Company does not believe that any of the above legal proceedings will have a material adverse effect on its financial position or operations either individually or in the aggregate. See Note 6 of Notes to the Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through solicitation of proxies or otherwise. -14- 15 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock and Series A Warrants are traded on the NASDAQ SmallCap Market under the symbols of WAMA and WAMAW, respectively. The following table sets forth the range of high and low closing bid prices for the Company's Common Stock and Series A Warrants for the periods indicated as reported by the National Quotation Bureau, Incorporated. These prices represent inter-dealer prices, without adjustment for retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions.
Common Stock Series A Warrants Bid Price Bid Price ---------------- ------------------ Fiscal Year 1995 Low High Low High ---------------- --- ---- --- ---- First Quarter . . . . . . . . . . . $ 3.00 $ 7.50 $ .75 $ 2.63 Second Quarter . . . . . . . . . . 1.88 3.38 .38 .75 Third Quarter . . . . . . . . . . . 2.00 3.19 .50 .63 Fourth Quarter . . . . . . . . . . 2.13 3.00 .25 .75 Calendar Year 1996 ------------------ First Quarter . . . . . . . . . . . 1.56 2.44 .13 .37 Second Quarter . . . . . . . . . . 1.25 2.06 .13 .25 Third Quarter . . . . . . . . . . . 1.00 1.87 .13 .13 Fourth Quarter . . . . . . . . . . .69 1.22 .06 .36
On September 20, 1996, the closing bid prices for the Company's Common Stock and Series A Warrants were $.69 per share and $.06 per Series A Warrant, respectively. As of September 20, 1996, 13,433,658 shares of the Company's Common Stock, and 875,500 Series A Warrants were outstanding. The Company believes that its Common Stock and Series A Warrants are held of record and beneficially by approximately 450 to 475 persons. Each Series A Warrant entitles the holder thereof to purchase one share of Common Stock at $6.50 per share, subject to certain adjustments, until May 15, 1997. The Company may redeem the Series A Warrants in whole or ratably in part, at its option, for $.01 per Series A Warrant, at any time after the average of the closing sale price for the Company's Common Stock exceeds $7.80 per share during any consecutive 20 business days ending within 15 days of the date on which notice of the redemption is given. The Company's preferred stock, $1.00 par value (the "Preferred Stock") is quoted on the NASDAQ SmallCap Market under the symbol of WAMAP. The following table sets forth the range of high and low closing bid prices as reported by the National Quotation Bureau, Incorporated. These prices represent interdealer prices without adjustment for retail mark- ups, mark-downs or commissions and do not necessarily represent actual transactions.
Preferred Stock Bid Price ------------------ Fiscal Year 1995 . . . . . . . . . Low High ---------------- ------ ----- First Quarter . . . . . . . . . . . $ 4.50 $ 9.00 Second Quarter . . . . . . . . . . 2.50 4.50 Third Quarter . . . . . . . . . . . 2.88 4.50 Fourth Quarter . . . . . . . . . . 3.38 4.50 Fiscal Year 1996 ---------------- First Quarter . . . . . . . . . . . 3.00 3.50 Second Quarter . . . . . . . . . . 3.00 3.88 Third Quarter . . . . . . . . . . . 2.75 3.75 Fourth Quarter . . . . . . . . . . 1.75 2.50
-15- 16 On September 20, 1996, the closing bid price for the Company's Preferred Stock was $1.25 per share. The Company believes that its Preferred Stock is held of record and beneficially by approximately 200 to 300 persons. The Preferred Stock is convertible at any time at the option of the holder into shares of Common Stock at a ratio of 1.25 shares of Common Stock for each share of Preferred Stock converted. As of September 20, 1996, 120,460 shares of the Preferred Stock had been converted into 150,575 shares of Common Stock and 329,540 shares of Preferred Stock were outstanding. The Company currently intends to continue to pay dividends on its Preferred Stock by issuing Common Stock. Holders of shares of the Preferred Stock are entitled to receive, when and if declared by the Board of Directors, out of funds legally available therefore, cash dividends or cash equivalent value stock dividends of Common Stock at the rate of $.90 per share per annum, payable in semi-annual installments on June 30 and December 31. The number of shares of Common Stock to be issued as a stock dividend is determined by the current market price of a share of Common Stock on the record date for such stock dividend. During calendar 1994, 1995, and 1996, dividends on the Preferred Stock were paid by issuing Common Stock (except for certain small holders who received the dividend in cash). The Company has neither paid nor declared any cash or other dividends on its shares of Common Stock since inception and management does not presently anticipate that dividends will be paid on its shares of Common Stock in the foreseeable future. The Company is required to pay dividends on the Preferred Stock before any dividends can be paid on the Common Stock. -16- 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
FISCAL YEAR ENDED ---------------------------------------------------------------------------- JUNE 30, 1996 JULY 2, 1995 JULY 3, 1994 JUNE 27, 1993 JUNE 28, 1992 OPERATING DATA: Revenues $40,129,443 $37,651,657 $37,008,494 $27,711,911 $22,726,670 Net Income (Loss) $48,696 ($7,036,741) ($8,359,981) ($4,483,173) ($1,090,256) Net Income (Loss) Per Common Share * ($0.02) ($0.82) ($1.10) ($0.68) ($0.19) BALANCE SHEET DATA (end of period) Total Assets $25,864,710 $17,672,244 $20,133,288 $12,916,257 $9,839,039 Long-term Debt $10,767,894 $1,708,654 $1,507,439 $987,607 $567,925
* After giving effect to preferred stock dividends. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION Effective July 1, 1994, the Company exchanged 4,600,000 shares of the Company's Common Stock for all of the issued and outstanding capital stock of Marco's Mexican Restaurants, Inc. ("Marco's). The merger was accounted for as a pooling-of-interests and, accordingly, the Company's Consolidated Financial Statements have been restated for all periods prior to the merger to combine the financial position and results of operations of Marco's with the Company. For additional information concerning business combinations, see Note 2 to Notes to Consolidated Financial Statements. Additionally, the Company acquired The Original Pasta Co. on January 26, 1996, Pete's Hospitality on August 24, 1993 and the Chris' & Pitt's product line on March 25, 1994. These acquisitions have been accounted for as purchases and, accordingly, the Company's Consolidated Financial Statements include the results of operations of the acquired companies from their respective dates of acquisition. The Company utilizes a 52-53 week fiscal year which ends on the Sunday closest to June 30. References to 1994, 1995 and 1996 are to the 53, 52 and 52 week periods ended July 3, 1994, July 2, 1995, and June 30, 1996, respectively. At the end of each fiscal year, the Company had the following restaurants in operation:
Restaurants: 1996 1995 1994 - - ----------- ---- ---- ---- Marco's Mexican Restaurants 23 22 20 Pasta Co. Restaurants 13 - - Billy Blues Restaurant 1 3 4 Longhorn Cafe 1 2 2 Pete's Restaurants 2 2 2 Hotspurs 1 1 1 ---- ---- ---- Total 41 30 29 ==== ==== ====
-17- 18 RESULTS OF OPERATIONS The following table sets forth for the periods indicated (i) operating results as a percentage of total revenues unless otherwise indicated and (ii) selected operating data.
Fiscal Year Ended ----------------- June 30, 1996 July 2, 1995 July 3, 1994 ------------- ------------ ------------- Statements of Operations Data: ----------------------------- Revenues Restaurants 92.8% 91.9% 93.6% Food products 7.2 8.1 6.4 ----- ----- ----- Total revenues 100.0 100.0 100.0 Costs and expenses: Cost of restaurant revenues: (1) Cost of food and beverage 29.4 30.3 29.8 Labor and other operations 58.0 62.2 61.5 ----- ----- ----- 87.4 92.5 90.3 Cost of food product revenues: (2) Cost of food products 52.3 54.8 54.1 Selling, marketing and distribution 38.8 50.4 106.3 ----- ----- ----- 91.1 105.2 160.4 General and administrative 6.9 8.8 14.2 Depreciation and amortization 5.4 5.5 4.4 Provision for restaurant closings - 7.6 2.5 Merger and acquisition costs - - 2.7 Provision for doubtful accounts - - 1.6 Interest income .4 .4 .4 Interest (expense) (2.1) (2.2) (1.4) Other non-operating income (expense) 1.8 .8 ( .6) Income tax provision (benefit) - - - Net income (loss) .1% (19.5)% (23.4)% Operating Data: -------------- Restaurants open at end of period 41 30 29 Change in comparable restaurant revenues (3) (.8)% (6.8)% (2.1)%
- - -------------------- (1) As a percentage of restaurant revenues. (2) As a percentage of food product sales. (3) Includes only restaurants open during the entire periods under comparison. -18- 19 FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 RESTAURANT REVENUES. Revenues increased $2,626,936 or 7.6% to $37,227,201 in 1996, as compared to $34,600,265 in 1995. Revenues attributable to the Pasta Co. Restaurants were $5,098,590. Remaining revenues decreased by $2,471,654 due to the closing or sale of four Billy Blues Restaurants and the sale of one Longhorn Cafe Restaurant partially offset by the opening of two Marco's Restaurants during 1995 and one in 1996. Comparable restaurant revenues declined by .8% for fiscal 1996. For fiscal 1995, comparable restaurant revenues had declined by 6.8%. Management believes that improvement in same store sales will continue into fiscal 1997 due to new marketing programs, new menu items, remodeling and other enhancements. In addition, menu prices may be increased within the next year to partially offset an increase in the federal minimum wage. Approximately 16% of restaurant revenues were derived from the sale of alcoholic beverages for fiscal 1996 and 1995. FOOD PRODUCTS REVENUES. Revenues declined by $149,150 due to the fact that during fiscal 1996, the Company discontinued service to certain accounts which had proved to be unprofitable. COST OF RESTAURANT REVENUES. Costs of food and beverage revenues as a percentage of restaurant sales declined from 30.3% in 1995 to 29.4% in 1996. The decrease is due to operational efficiencies implemented by management, new buying programs, and the introduction of new menu items with lower cost percentages. Significant changes in this percentage are not anticipated for fiscal 1997. However, management is unable to predict future meat and other product costs or the impact of any increases in such costs on the Company's future results of operations. Labor and other restaurant operations include all other unit-level operating expenses, comprised principally of labor and benefits, operating supplies, rent, utilities, repair and maintenance, pre-opening expenses, advertising and other costs. A substantial portion of these expenses are fixed or indirectly variable. These costs declined as a percentage of restaurant revenues from 62.2% in 1995 to 58% in 1996 due to disproportionally higher expenses associated with the Billy Blues Restaurants which were closed or sold. COST OF FOOD PRODUCTS REVENUES. The cost of food products as a percentage of food product revenues decreased from 54.8% in 1995, to 52.3% in 1996 due operational efficiencies implemented in 1996. SELLING, MARKETING AND DISTRIBUTION. These expenses, related to the sale of food products, decreased from 50.4% in 1995 to 38.8% in 1996 due to reductions in promotions and allowances granted to customers as well as efficiencies gained in distribution expenses such as warehousing and freight. GENERAL AND ADMINISTRATIVE EXPENSE. These expenses decreased by $568,757 from $3,321,296 in 1995, to $2,752,539 in 1996 due to cost reductions implemented by management in fiscal 1995, which included the elimination of personnel and a consolidation of corporate offices. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from $2,071,972 in 1995 to $2,178,218 in 1996. Of this amount, $456,696 was associated with The Original Pasta Co. The remaining decline of $350,450 is due to the closure or sale of Billy Blues Restaurants and to assets becoming fully depreciated or amortized. PROVISION FOR CLOSED RESTAURANTS. In 1995, the Company recorded a provision for restaurant closings of approximately $2.9 million as a result of management's decision to either close or sell its interest in four Billy Blues Restaurants. The provision included the write-down of assets to net realizable value as well as estimated amounts for lease and other obligations associated with the restaurants. The Company utilized substantially all of the provision by the end of fiscal 1996. INTEREST INCOME. Interest income of $166,566 in fiscal 1996 and $156,550 in fiscal 1995 resulted primarily from a note receivable from Mr. Bombaywala. -19- 20 INTEREST EXPENSE. Interest expense increased from $813,153 in 1995 to $850,224 in 1996 due to $257,352 in interest associated with notes associated with The Original Pasta Co., offset by a decrease of $220,281 of interest on other debt due to principal reductions made on such debt. LOSS ON CONVERSION OF DEBT TO EQUITY. In May of 1995, the Company offered its Debentureholders the right to convert the principal and accrued interest owed on their Debentures into Common Stock at a modified conversion rate of $2.3125 of Debenture principal and interest for one share of Common Stock, as opposed to the stated conversion rate of $5.00 per share. Debentureholders owed an aggregate of approximately $2.5 million agreed to the conversion and were issued an aggregate of 1,093,904 shares of Common Stock. The Company recorded a loss on conversion of approximately $1.3 million, which is equal to the market value of the shares actually issued less the market value of the shares which would have been issued had the conversion been at the stated conversion rate. OTHER INCOME, NET. Other income, net, increased by $399,100 from 1995 to 1996 due to a gain of approximately $150,000 on the sale of a Longhorn Cafe restaurant, with the balance of the increase due primarily to consulting fees charged to Pasta Co. prior to its acquisition. EXTRAORDINARY ITEM. A note payable for the purchase of the Chris' & Pitt's product line was paid off at a discount from the face amount of the note plus accrued interest. The amount of the discount is reported as a gain on extinguishment of debt in fiscal 1995. INCOME TAXES. The Company had no income tax provision nor benefit in 1995 or 1996. NET INCOME (LOSS). As a result of the changes in the relationships between revenues and costs and expenses described above, the Company recorded a net loss of $7,036,741 in 1995 and net income of $48,696 in 1996. Management's plans to continue to achieve profitability include the following: o Increasing revenues in existing restaurants by remodeling certain Marco's Restaurants and by improving marketing programs and customer service. o Increasing revenues from the sale of food products by reinforcing existing markets, expanding distribution to new market areas, introducing more aggressive marketing programs, adding methods of distribution and developing new products. o The opening of new restaurants. o The acquisition of profitable restaurants. o Continued reduction of operating expenses through improved cost controls. o Continued reduction of general and administrative expenses. FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 REVENUES. Total revenues increased $643,163 or 1.7% to $37,651,657, in 1995, as compared to $37,008,494 in 1994. Food product sales increased by approximately $750,000 while restaurant sales decreased by approximately $100,000. The increase in food product revenues of 30% is due to the acquisition of the Chris' & Pitt's product line in March 1994. Restaurant revenues were impacted by the following combination of factors: o Fiscal 1994 included 53 weeks, while fiscal 1995 included 52 weeks. o The acquisition of two Pete's Barbecue and one Hotspurs restaurant in August of 1993. o The sale of a Longhorn Cafe restaurant in fiscal 1994. o Heavy promotional activity in Billy Blues restaurants in fiscal 1994 which resulted in higher than normal sales volumes during that time. o The opening of a Billy Blues restaurant in early fiscal 1995. o Declining sales volumes in a number of Billy Blues restaurants. Of the five Billy Blues restaurants that were in operation during fiscal 1995, four have now been either closed, subleased or the Company is negotiating sale of its interest. -20- 21 o The opening of two new Marco's restaurants in fiscal 1994 and two in fiscal 1995. o A decline in comparable restaurant revenues of 6.8%. Approximately 16% of restaurant revenues were derived from the sale of alcoholic beverages for fiscal 1995 and 1994. COST OF RESTAURANT REVENUES. Costs of restaurant food and beverage as a percentage of restaurant sales remained almost constant from 1994 to 1995 at just over 30%. Cost increases were offset by improvements in buying programs and purchasing power. Labor and other restaurant operations include all other unit-level operating expenses, comprised principally of labor and benefits, operating supplies, rent, utilities, repair and maintenance, entertainment expenses, pre-opening expenses, advertising and other occupancy costs. A substantial portion of these expenses are fixed or indirectly variable. These costs increased as a percentage of restaurant revenues to 62.2% in 1995 from 61.5% in 1994. This increase resulted primarily from lower sales volumes per restaurant. COST OF FOOD PRODUCTS REVENUES. Costs of food products as a percentage of food product revenues increased from 54.1% in 1994 to 54.8% in 1995. The increase is due primarily to increases in packaging costs. Selling, marketing and distribution expenses as a percent of food product revenues improved from 106.3% in 1994 to 50.4% in 1995. Approximately half of this decrease is due to costs related to a change in the packaging of Billy Blues Barbecue Sauce in 1994. The remainder of the decrease is due primarily to reductions in marketing and other costs implemented by management in fiscal 1995. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased by $1,936,524 from $5,257,820 in 1994 to $3,321,296 in 1995. A portion of this decrease is due to combining corporate offices at the beginning of fiscal 1995, which eliminated duplicate expenditures and personnel. The balance of the decrease is due to cost reductions implemented by management in fiscal 1995, which included a significant reduction in corporate salaries. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from $1,622,554 in 1994 to $2,071,972 in 1995. The increase was due to the opening and purchase of new restaurants. PROVISION FOR CLOSED RESTAURANTS. In the fourth quarter of 1995, the Company recorded a provision for restaurant closings of approximately $2.9 million as a result of management's decision to either close or sell its interest in four Billy Blues Restaurants. The provision includes the write-down of assets to net realizable value as well as estimated amounts for lease and other obligations associated with the restaurants. In fiscal 1994, a provision for restaurant closings of $930,691 was recorded as a result of management's reassessment of the feasibility of opening new restaurants for which the Company had already made financial commitments. Also included in this provision was a reserve for the settlement of a lease related to a closed Billy Blues Restaurant. MERGER AND ACQUISITION COSTS. In fiscal 1994, the Company recorded merger and acquisition costs related to the acquisition of Marco's. Such costs included investment banking fees, legal and accounting fees, stock registration expenses, severance costs and other expenses. PROVISION FOR DOUBTFUL ACCOUNTS. In fiscal 1994, the Company reevaluated certain notes and accounts receivable and recorded valuation allowances based on estimated net realizable values. No additional provision was recorded during fiscal 1995. INTEREST INCOME. Interest income of $156,550 in fiscal 1995 and $129,728 in fiscal 1994 resulted from a note receivable from Mr. Bombaywala. INTEREST EXPENSE. Interest expense increased from $511,826 in 1994 to $813,153 in 1995 primarily due to increases in long-term debt associated with the acquisition of the Chris' & Pitt's product line. This debt included the Subordinated Debentures and a note associated with the acquisition of the Chris' & Pitt's product -21- 22 line, both issued in March 1994. The balance of the Chris' & Pitt's note to was paid from the proceeds of the Subordinated Notes issue in December 1994. LOSS ON CONVERSION OF DEBT TO EQUITY. In May of 1995, the Company offered its Debentureholders the right to convert the principal and accrued interest owed on their Debentures into Common Stock at a modified conversion rate of $2.3125 of Debenture principal and interest for one share of Common Stock, as opposed to the stated conversion rate of $5.00 per share. Debentureholders owed an aggregate of approximately $2.5 million agreed to the conversion and were issued an aggregate of 1,093,904 shares of Common Stock. The Company recorded a loss on conversion of approximately $1.3 million, which is equal to the market value of the shares actually issued less the market value of the shares which would have been issued had the conversion been at the stated conversion rate. EXTRAORDINARY ITEM. The note for the purchase of the Chris' & Pitt's product line was paid off at a discount from the face amount of the note plus accrued interest. The amount of the discount is reported as a gain on extinguishment of debt in fiscal 1995. INCOME TAXES. The Company had an income tax benefit in fiscal 1994 related to Marco's and had no tax provision nor benefit in 1995. NET LOSS. As a result of the changes in the relationships between revenues and costs and expenses described above, the Company's net loss decreased from $8,359,981 in 1994 to $7,036,741 in 1995. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has incurred losses from operations and, as of June 30, 1996, has an accumulated deficit of $19,400,310. During 1996, net cash flow from operating activities totaled $1,346,354 primarily due to depreciation and amortization added back to net income, offset by a reduction in accrued liabilities. Investing activities utilized $1,616,660 of cash, principally resulting from purchases of property and equipment. Financing activities utilized $1,368,257 of cash, primarily due to net payments on borrowings. For fiscal 1995, operating activities utilized $1,340,986 of cash, primarily due to a net loss less non-cash expenses. Investing activities utilized $612,575 in cash due to purchases of property and equipment of approximately $1.4 million offset by a $756,000 collection on a note receivable. Financing activities provided $3,523,580 in cash primarily due to the issuance of common stock and an increase in net borrowings. For fiscal 1994, operating activities utilized $1,854,535 of cash, primarily due to a net loss less non-cash expenses. Investing activities utilized $6,534,228 of cash due primarily to purchases of property and equipment and the acquisition of Pete's Hospitality, Inc. Financing activities generated $7,167,785 in cash due primarily to the issuance of common stock and debentures. In March of 1996, the Company received proceeds from a $1.2 million bank loan, of which approximately $860,000 was used to pay off an existing loan. In June 1995, the Company received proceeds from a $1.0 million loan from an unaffiliated foreign corporation and approximately $1.1 million from a private placement of Common Stock. As of June 30, 1996, the Company had negative working capital of $4,484,903, as compared to $7,217,233 on July 2, 1995. The improvement is due primarily to the extension to July 1997 of $3 million in Subordinated Notes which were classified as a current liability at July 2, 1995. FISCAL 1997 CAPITAL REQUIREMENTS. The Company has a working capital deficit of approximately $4.5 million at June 30, 1996. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or capital and to refinance its debt. Management's plans include the following: o Increasing revenues in existing restaurants by remodeling certain Marco's Mexican Restaurants and by improving marketing programs and customer service. -22- 23 o Increasing revenues from the sale of food products by reinforcing existing markets, expanding distribution to new market areas, introducing more aggressive marketing programs, adding methods of distribution and developing new products. o Franchising new restaurants. o Maintaining cost controls while increasing revenues. o Obtaining additional equity capital or debt financing. o Refinancing debt, primarily $3 million in subordinated notes due in July of 1997. The material capital commitments of the Company for fiscal 1997 are as follows: o Accumulation of funds for the payment of the principal of the $3 million 12% Subordinated Notes due July 31, 1997. o Opening new Marco's and Pasta Co. Restaurants. o Remodeling Marco's Restaurants. o Reduction of the Company's working capital deficit, including payments on notes, accounts payable and accrued liabilities. Plans for fiscal 1997 include opening one new Marco's Restaurant and four new Pasta Co. Restaurants. Both Marco's and Pasta Co. Restaurants require an initial capital investment of approximately $400,000, or a total investment of approximately $2,000,000 to open five restaurants. Of this amount, the Company expects that approximately half can be financed using the acquired assets as collateral. The Company intends to finance the balance either through cash flow from operations, from additional borrowings or from the sale of equity. There is no assurance that such funds will be available on a timely basis. The actual number of new restaurants opened will depend upon the availability of capital. The Company expects to continue to achieve positive cash flow from operations in fiscal 1997, principally from its Marco's and Pasta Co. Restaurants. However, cash generated from operations may not be sufficient to meet all of its fiscal 1997 capital commitments set forth above. Without debt refinancing or additional debt or equity financing in the short-term, the Company may not be able to (i) repay the $3 million in 12% Subordinated Notes due July 31, 1997, (ii) meet its targeted expansion goals, and (iii) reduce its current working capital deficit. NEW ACCOUNTING STANDARDS. In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation" which establishes accounting and reporting standards for stock-based employee compensation plans. Companies are encouraged to utilize the fair-value method to measure stock based compensation but may continue to utilize the methods prescribed by APB Opinion No. 25 and disclose the pro-forma effects of the SFAS No. 123 method. The Company has decided to adopt the disclosure requirements of SFAS No. 123. In June 1996, the FASB Issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which uses a "financial components" approach that focuses on content and provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The pronouncement is effective for transactions occurring after December 31, 1996. FORWARD LOOKING INFORMATION. The statements continued in this report on Form 10-K ("Annual Report") which are not historical facts, including, but not limited to, statements found under the captions "Results of Operations", "Liquidity and Capital Resources" and "Fiscal 1997 Capital Requirements" above, are forward-looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this Annual Report could differ materially from those contemplated by such forward-looking statements. -23- 24 ITEM 8. FINANCIAL STATEMENTS. The financial information required by this Item is found beginning at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no changes in or disagreements with accountants on accounting and financial disclosure covered by this report. -24- 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the names, ages, titles and dates of employment of the members of the Board of Directors and the executive officers of the Company.
Employed Name Age Position Since ---- --- -------- ----- Ghulam Bombaywala 41 Chairman of the Board, Chief Executive Officer 1994 and Director Angelo Pitillo 59 President, Chief Operating Officer and Director 1994 Thomas J. Buckley 49 Chief Financial Officer and Secretary 1994 Michael S. Chadwick 44 Director 1994 Nico B. Letschert(2) 41 Director 1994 Philip M. Mount(1)(2) 38 Director 1994 Sarosh J. Collector(1)(2) 49 Director 1995
- - ------------------------------ (1) Member of the Audit Committee of the Board of Directors. (2) Member of the Compensation Committee of the Board of Directors. GHULAM BOMBAYWALA was elected as a director of the Company on August 5, 1994. Effective September 21, 1994, Mr. Bombaywala was elected Chairman of the Board of Directors and Chief Executive Officer of the Company. Since 1984, Mr. Bombaywala has served as President and sole director of Marco's. Mr. Bombaywala also served as President and Chairman of the Board of Directors of the publicly traded Two Pesos, Inc. from April 1990 to June 1993 when it was sold to Taco Cabana, Inc. Mr. Bombaywala is also a shareholder and President of SPP, Inc., the holder of a chain of James Coney Island restaurants serving hot dogs and chili. Mr. Bombaywala serves on the Board of Directors of the Sam Houston Area Boy Scouts of America, the Fort Bend Independent School District Education Foundation and the Conrad N. Hilton College of Hotel & Restaurant Management of the University of Houston. ANGELO PITILLO was elected President and Chief Operating Officer in September 1994 and has been a director of the Company since March 17, 1995. From 1989 to 1993, Mr. Pitillo served as President of Prufrock Restaurants, Inc., where his responsibilities included management of the Black-Eyed Pea Restaurant division. From 1976 to 1989, Mr. Pitillo served as Senior Vice President and Regional Vice President of Jerrico, Inc. While with Jerrico, Inc., Mr. Pitillo supervised various restaurant divisions, including Long John Silver's, Florenz and Fazzoli's. Mr. Pitillo has over 30 years of experience in the restaurant and hospitality industry, including the development of fast food, full service and catering concepts. THOMAS J. BUCKLEY was elected Chief Financial Officer and Secretary of the Company in December 1994. From May 1990 to January 1994, Mr. Buckley was Vice President - Finance and Franchising of Western Sizzlin, Inc. ("WSI"), a restaurant franchising and operating company. From 1986 to 1989, Mr. Buckley was President of SDO, Inc., a regional franchising company. From 1980 to 1985, Mr. Buckley was Executive Vice President and a director of the publicly traded USACafes, franchisor and operator of Bonanza Restaurants. Mr. Buckley has over 15 years experience in the restaurant industry and extensive experience in franchising. Mr. Buckley received a B.S. degree in accounting from the University of New Orleans. MICHAEL S. CHADWICK has served as a director of the Company since August 1994. Mr. Chadwick is Senior Vice President and a Managing Director of the Corporate Finance Department of Sanders Morris Mundy Inc., a Houston-based financial services and investment banking firm. From 1988 to August 1994, Mr. Chadwick served as President and Co-Owner of Chadwick, Chambers & Associates, Inc., an investment and merchant banking firm specializing in corporate finance services. From 1984 to 1988, Mr. Chadwick served as Vice President, Corporate Finance at Lovett Mitchell Webb & Garrison, Inc., a Houston-based investment banking firm. Mr. Chadwick has been engaged in investment banking since 1978. Mr. Chadwick presently serves on the Board of Directors of Blue Dolphin Energy Company, a publicly traded corporation, Moody-Price, Inc., and -25- 26 Brazos Sportswear, Inc. Mr. Chadwick received an M.B.A. in finance from Southern Methodist University and a B.A. degree in economics from the University of Texas. NICO B. LETSCHERT was elected to the Board of Directors in September 1994 and serves as a member of the Compensation Committee of the Board of Directors. Mr. Letschert is currently the CEO of Noesis Capital Corp., a Florida-based investment banking and money management firm that Mr. Letschert started in 1995. From 1984 until July 1995, Mr. Letschert was President of Noble Investment Co. of Palm Beach. A native of The Netherlands, Mr. Letschert began his career on the Amsterdam Stock Exchange before relocating to the U.S. and becoming involved with venture capital and corporate finance. Mr. Letshcert received his degree from the Dutch Institute for Banking and Finance and is a Certified Financial Planner. He also serves on the Board of Directors of the following publicly traded corporations: Capitol Multimedia, Inc., Futuremedia PLC and Foodquest. PHILIP M. MOUNT has been a director of the Company since August 5, 1994 and is a partner with the law firm of Kelly, Sutter, Mount & Kendrick. Mr. Mount currently serves as a member of the Audit and Compensation Committees of the Board of Directors. Mr. Mount has engaged in the practice of law in Houston, Texas since 1983. Mr. Mount's principal areas of practice are corporate finance and securities. Mr. Mount received his B.B.A. with honors from the University of Texas at Austin in 1980 and a J.D. from the University of Houston College of Law in 1983. From August 1990 until its acquisition in 1993, Mr. Mount served as a director and a member of the Compensation and Executive Committees of Two Pesos, Inc., a publicly traded Houston, Texas based restaurant company. SAROSH J. COLLECTOR has been a director of the Company since March 17, 1995 and currently serves as a member of the Audit and Compensation Committees of the Board of Directors. Mr. Collector is a certified public accountant and has served as President of the accounting firm of Collector, Dart & Moore P.C. since 1987. From 1986 to 1987, Mr. Collector was a manager with the accounting firm of Spicer & Oppenheim, and from 1981 to 1986 served as a partner with the accounting firm of Malow Cohen & Co. Mr. Collector's principal areas of practice are taxation, business consulting and business valuation. Mr. Collector also served as a director of Two Pesos, Inc., a publicly traded corporation, from April 1990 to August 1993. COMMITTEES AND FEES The Board of Directors of the Company has established an Audit Committee and a Compensation Committee. The purpose of the Audit Committee is to review and make recommendations to the Board of Directors with respect to the engagement of the Company's independent public accountants, reviewing with such accountants the plans for and the results and scope of the auditing engagement and certain other matters relating to the services provided to the Company, including the independence of such accountants. The Audit Committee held no meetings during the fiscal year ended June 30, 1996. The Compensation Committee reviews on behalf of, and makes recommendations to, the Board of Directors with respect to compensation of executive officers and key employees of the Company and administers the Company's 1992 and 1994 Stock Compensation Plans (the "Stock Compensation Plans"). All actions undertaken by the Compensation Committee during the last fiscal year were effected by unanimous consent in lieu of holding scheduled or special meetings. Each director who is not an employee of the Company is paid $250 for each meeting of the Board of Directors attended (exclusive of telephonic meetings) and $250 for each meeting of a Committee of the Board of Directors attended (exclusive of committee meetings occurring on the same day as Board Meetings), and are reimbursed for expenses incurred in attending such meetings. Directors who are employees of the Company are not paid any additional compensation for attendance at Board of Directors or Committee meetings. During fiscal 1996, the Board of Directors held its annual meeting on January 9, 1996, conducted meetings in March and May of 1996 and approved actions undertaken by management of the Company by unanimous consent in lieu of meetings on three separate occasions. -26- 27 SECTION 16 REPORTS Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership of the Company's securities with the Securities and Exchange Commission (the "Commission"). Based solely on its review of the copies of such report forms received by it with respect to fiscal year 1996, or written representations from certain reporting persons, except as set forth below, the Company believes that all filing requirements applicable to its directors, officers and persons who own more than 10% of a registered class of the Company's equity securities have been timely complied with in accordance with Section 16(a) of the Exchange Act. Ghulam Bombaywala, an officer and director of the Company, failed to timely file his Form 4 - Statement of Changes in Beneficial Ownership of Securities with the Commission in February 1996. Sarosh J. Collector also failed to timely file a Form 4 - in July of 1996. Angelo Pitillo, an executive officer and director of the Company, and Thomas Buckley, an executive officer of the Company, failed to timely file Form 4 in July 1996. In addition, all directors and executive officers of the Company each failed to timely file Form 5 - Annual Changes in Beneficial Ownership of Securities for fiscal 1995. All late reports were filed in September of 1996. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION INFORMATION The following table sets forth certain information regarding all cash compensation paid or to be paid by the Company or any of its subsidiaries, as well as other compensation paid or accrued, during the Company's fiscal year ended June 30, 1996, to the Company's Chief Executive officer and to those other executive officers who received salary and bonus compensation in excess of $100,000 during the fiscal year (the "named executive officers"). [This space is intentionally left blank.] -27- 28 SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Awards Payouts -------------------------- ----------------------------- --------- Restricted Securities Other Annual Stock Underlying LTIP All Other Compensation(1) Award(s) Options/SARs(2) Payouts Compensation Name and Principal Position Year Salary($) Bonus($) ($) ($) (#) ($) ($) - - --------------------------- ---- --------- -------- -------------- ---------- --------------- ------- ------------ Ghulam Bombaywala, Chairman of 1996 $ -0- $ -0- $ -0- $ -0- -0- -0- $ -0- the Board and Chief Executive 1995 -0- -0- -0- -0- -0- -0- -0- Officer* 1994 610,000 -0- -0- -0- -0- -0- 2,175,310 Angelo Pitillo, President 1996 $150,000 $ -0- $ -0- $ -0- 250,000 -0- $ -0- Chief Operating Officer 1995 121,154 -0- -0- -0- 250,000 -0- -0- 1994 -0- -0- -0- -0- -0- -0- -0-
*Mr. Bombaywala served as Chief Executive Officer of Marco's during the Company's fiscal year ended July 3, 1994. On July 1, 1994, the Company and Marco's entered into a share exchange transaction whereby Marco's became a wholly-owned subsidiary of the Company. Effective September 1, 1994, Mr. Bombaywala was elected Chairman of the Board and Chief Executive Officer of the Company. Mr. Bombaywala's compensation as Chief Executive Officer of Marco's for the period beginning June 29, 1993 and ending July 3, 1994 is reported in the above table. (1) Excludes certain incidental perquisites, the total of which did not exceed the lesser of $50,000 or 10% of cash compensation for any named individual. (2) Incentive stock options to acquire shares of Common Stock pursuant to the Company's Stock Compensation Plan. See "Report on Repricing of Options/SARS". OPTION GRANTS DURING FISCAL YEAR 1996 The following table provides information related to options to acquire shares of Common Stock granted to the Chief Executive Officer and the other named executive officers of the Company referenced in the Summary Compensation Table, above, during fiscal year 1996. The Company does not have any outstanding Stock Appreciation Rights ("SARs"). OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable ----------------- value at assumed annual rates of stock price appreciation for option term --------------- Number of Securities % of Total Options/ Exercise or Underlying Options/ SARs Granted to Base Price Expiration Name SARs Granted (#) (1)(2) Employees in Fiscal Year ($/Sh)(3) Date 5%($) 10%($) - - ---- ----------------------- ------------------------ ---------- ------------ ----- ------ Ghulam Bombaywala. . . . -0- -0-% N/A N/A N/A N/A Angelo Pitillo . . . . 250,000 54% $ 1.00 12/99 $ -0- $ 12,500
- - ----------------------------------------- (1) Incentive stock options to acquire shares of Common Stock granted pursuant to the Company's Stock Compensation Plan, for a term of five years from date of grant. Options issued to Mr. Pitillo vest at the rate of 20% per year commencing one year from the date of the original grant, are nontransferable and are subject to termination under certain conditions upon cessation of employment. (2) On December 29, 1994, the Company granted options to purchase 250,000 shares of Common Stock at a purchase price of $2.00 per share to Mr. Pitillo. On May 17, 1996, these options were canceled and new options were issued to Mr. Pitillo to purchase 250,000 shares of Common Stock at a purchase price of $1.00 per share. See "Reports on Repricing of Options/SARS". (3) The exercise price per share of each option granted in 1996 was equal to or greater than 100% of the fair market value of the Common Stock on the date of grant pursuant to the requirements of the Stock Compensation Plan. -28- 29 OPTION EXERCISES AND 1996 FISCAL YEAR END HOLDINGS The following table sets forth information with respect to options exercised by named executive officers of the Company referenced in the Summary Compensation Table, above, during fiscal year 1996 and the number and value of options held at fiscal year end. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs Options/SARs at FY-End(#) At FY-End($) (1) Shares Acquired ------------------------- ----------------------------- Name On Exercise(#) Value Realized($) Exercisable Unexercisable Exercisable Unexercisable - - ---- -------------- ----------------- ----------- ------------- ----------- ------------- Ghulam Bombaywala. . . . -0- $ -0- -0- -0- N/A N/A Angelo Pitillo . . . . -0- -0- 50,000 200,000 $ -0- $ -0-
- - --------------- (1) The closing bid price for the Company's Common Stock as reported by NASDAQ SmallCap Market on June 28, 1996 was $0.69 per share. The indicated value is calculated on the basis of the difference between the option exercise price per share and $0.69, multiplied by the number of shares of Common Stock underlying each option. REPORT ON REPRICING OF OPTIONS/SARS In December 1994, the Compensation Committee of the Board of Directors canceled all options originally issued to Angelo Pitillo, President and Chief Operating Officer, under the Stock Compensation Plan for the purpose of reissuing the canceled options at a lower exercise price. The options, prior to cancellation, were issued with an exercise price of $4.83 per share and would have expired in September 1999. As a result of the decline in the value of the Company's Common Stock within two months of Mr. Pitillo's employment by the Company, the Compensation Committee of the Board of Directors decided that it would be in the best interests of the Company to cancel and reissue the options to purchase the identical number of shares at an exercise price of $2.00 to encourage Mr. Pitillo to remain in the employ of the Company and to provide additional incentive for him to continue to promote the success and business of the Company. Due to the continued decline in the value of the Company's Common Stock, the Board of Directors decided that it would be in the best interests of the Company to cancel and reissue the options to purchase the identical number of shares at an exercise price of $1.00 to encourage Mr. Pitillo to remain in the employ of the Company and as an incentive for him to continue to promote the success and business of the Company. TEN-YEAR OPTION/SAR REPRICINGS
- - ---------------------------------------------------------------------------------------------------------------- NAME DATE NUMBER OF PER SHARE EXERCISE PRICE NEW LENGTH OF SECURITIES MARKET PRICE AT TIME OF EXERCISE ORIGINAL OPTION UNDERLYING OF STOCK AT REPRICING PRICE TERM REMAINING AT OPTIONS TIME OF DATE OF REPRICING REPRICED REPRICING OR AMENDMENT - - ---------------------------------------------------------------------------------------------------------------- Angelo Pitillo, December 29, 1994 250,000 $2.00 $4.63 $2.00 58 months President - - ---------------------------------------------------------------------------------------------------------------- Angelo Pitillo, May 17, 1996 250,000 $0.75 $2.00 $1.00 43 months President - - ---------------------------------------------------------------------------------------------------------------- Thomas Buckley, May 17, 1996 100,000 $0.75 $2.00 $1.00 43 months Chief Financial Officer - - ----------------------------------------------------------------------------------------------------------------
-29- 30 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Company is comprised of three persons selected by the Board of Directors. Throughout fiscal 1996, Philip M. Mount, Nico B. Letschert and Sarosh Collector served on the Compensation Committee. Philip M. Mount, a director of the Company and a member of the Company's Audit and Compensation Committees, is a shareholder of Kelly, Sutter, Mount & Kendrick, P.C. ("KSMK"). Nico B. Letschert was the sole owner and President of Noble Investment Co. of Palm Beach ("Noble") and is the Chief Executive Officer of Noesis Capital Corp. ("Noesis"). Michael S. Chadwick is Senior Vice President and a Managing Director of Corporate Finance of Sanders Morris Mundy, Inc., a Houston based financial services and investment banking firm ("SMM"). See, "Item 13. Certain Relationships and Related Transactions". During fiscal 1995 and 1996, KSMK rendered legal services as counsel to the Company. In June of 1995, the Company issued 100,000 shares of Common Stock to KSMK as partial payment for outstanding invoices. In February, 1996, the Company issued an additional 100,000 shares of Common Stock to KSMK as payment for legal services. Mr. Mount disclaims any beneficial ownership in the shares issued to KSMK. See, "Item 13. Certain Relationships and Related Transactions". Noble received approximately $191,880 in commissions and a nonaccountable expense allowance in connection with the Company's 1995 Reg S Offering. Also in connection with the offering, the Company issued to Noble warrants to purchase 71,250 shares of Common Stock at an exercise price of $3.00 per share, which expire on May 31, 1997. The warrants were subsequently assigned to Mr. Letschert. See, "Description of Business - Recent Financings". In August 1995, the Company entered into an eight-month financial advisory agreement with Noesis providing for a $5,000 per month advisory fee. See, "Item 13. Certain Relationships and Related Transactions". In December 1994, in connection with the offering of the Company's $3 million Subordinated Notes, SMM received approximately $250,000 as a placement fee. Also in connection with the offering, the Company entered into an eighteen month advisory agreement with SMM calling for payments of $10,000 per month and issued options to purchase 150,000 shares of common stock at an exercise price of $2.50 per share which expire on December 31, 1999. In March of 1996, the payment terms of the Subordinated Notes was extended, the advisory agreement was extended through July of 1997 at a rate of $5,000 per month and the exercise price of the warrants was reduced to $1.00 per share. See, "Description of Business - Recent Financings". EMPLOYMENT AGREEMENTS On May 26, 1992, the Company entered into an employment agreement with John H. Coleman, III, (the "Coleman Agreement"). The Coleman Agreement provided for an annual base salary and health, medical and life insurance benefits and allowed participation in the Company's employee benefit plans. The Coleman Agreement was for a term ending April 30, 1997, subject to certain specified termination provisions, and provided for employment on a full time basis. The Coleman Agreement originally provided that in the event of a termination without cause, or upon a change of control, Mr. Coleman would be entitled to receive 100% of his base salary for six months and 50% of his salary for an additional six months thereafter. On June 15, 1994, the Coleman Agreement was amended to provide that if Mr. Coleman was terminated for any reason other than for death, disability, or for cause by the Company Mr. Coleman would be entitled to receive his full salary for the remaining term of the agreement which was increased to $125,000 per year. In June 1995, the Company terminated the Coleman Agreement in accordance with specified termination provisions, and terminated the employment of Mr. Coleman. The Company is no longer paying salary nor providing benefits to Mr. Coleman. Effective July 1, 1994, the Company entered into an employment agreement (the "Bombaywala Agreement") with Ghulam Bombaywala, Chairman of the Board, Chief Executive Officer and a director of the Company. Under the terms of the Bombaywala Agreement, Mr. Bombaywala is entitled to receive an annual salary of $60,000 plus annual cost of living increases. In addition, Mr. Bombaywala is entitled to receive a bonus in an amount based on such factors as the Board of Directors of the Company may elect to consider. Mr. Bombaywala has elected not to accept any salary due and owing to him under this agreement for an indefinite period of time. The Bombaywala Agreement also provides for health, medical and life insurance benefits and -30- 31 allows participation in the Company's employee benefit plans. The Bombaywala Agreement is for a term ending April 30, 1997, subject to certain specified termination provisions similar to the Coleman Agreement, and provides for employment on a full time basis. The Bombaywala Agreement contains provisions, relating to payments upon termination and payment of bonuses. The non-competition provisions of the Bombaywala Agreement provide that upon termination, Mr. Bombaywala will not engage or participate in a barbecue or Mexican restaurant business within a radius of ten miles of any existing or proposed barbecue or Mexican restaurant owned, licensed, managed or operated by the Company as of the termination date of the Bombaywala Agreement. No bonuses have been awarded to Mr. Bombaywala under the Bombaywala Agreement. REPORT ON EXECUTIVE COMPENSATION The Compensation Committee, currently consisting of Messrs. Mount, Collector and Letschert, determines the compensation of the Company's executive officers, consisting of Messrs. Bombaywala (C.E.O.), Pitillo (President) and Buckley (C.F.O.). Mr. Bombaywala decided not to receive a salary or bonus in neither fiscal 1995 nor fiscal 1996 due to the fact that the Company has been and is in the process of a "turnaround." Mr. Bombaywala is not currently receiving a salary under the Bombaywala Agreement for fiscal 1997. Mr. Bombaywala owns 6,286,667 shares of the Company's Common Stock or approximately 46.8% of the outstanding shares. The Compensation Committee believes that Mr. Bombaywala is very motivated due to his stock ownership and commitment to the Company to represent the interests of all stockholders and maximize the performance of the Company. The Compensation Committee agreed with Mr. Bombaywala's decision to forego any salary or bonus during fiscal 1995 and 1996. The compensation which would have been payable to Mr. Bombaywala during fiscal years 1995 and 1996 was determined by the Bombaywala Agreement, which was negotiated between the Company and Mr. Bombaywala when Marco's was acquired in fiscal 1994. The Compensation Committee believes that salaries paid to Messrs. Pitillo and Buckley are reasonable, but less than competitive with amounts paid to executives with comparable qualifications, experience and responsibilities at companies of comparable size in light of their responsibilities and experience. Neither Mr. Pitillo nor Mr. Buckley received a bonus in fiscal 1995 or 1996, and both have received higher compensation packages in previous positions. Both Messrs. Pitillo and Buckley have made a commitment to the Company in terms of using their best efforts to move the Company towards profitability and are willing to be rewarded through the appreciation of the Company's stock and through future bonuses, if and when determined by the Board of Directors of the Company or the Compensation Committee. In December 1994, Mr. Pitillo and Mr. Buckley received options to purchase 250,000 and 100,000 shares of Common Stock, respectively. The Compensation Committee plans to use the Company's Common Stock to retain and provide incentive to the Company's executive officers. The Board of Directors believes that significant stock ownership is a major factor in aligning the interests of management and shareholders. [This space is intentionally left blank.] -31- 32 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN The graph set forth below compares the cumulative total shareholder return on the Company's Common Stock commencing on June 26, 1992 and ending on June 30, 1996 against the cumulative total return of the Nasdaq Stock Market and a peer group consisting of certain Nasdaq Stocks whose business activities fall within the same standard industrial classification code as the Company. The graph assumes a $100 investment in the Company's Common Stock and that all dividends paid by companies in each index were reinvested. [Comparison of Five-Year-Cumulative Total Returns Performance Graph] Total Shareholder Returns - Dividends Reinvested
Fiscal Year: June Annual Return Percentages Years Ending 6/26/92 - Company \ Index Name 6/30/92 6/30/93 6/30/94 6/30/95 6/28/96 ============================================================================================================================= WATERMARC FOOD MGMT CO -5.41 154.29 -44.94 -60.21 -64.10 NASDAQ 2.61 25.79 0.96 33.48 28.38 PEER GROUP (Companies in SIC 5800-5899) 5.16 29.48 -10.94 3.41 16.91
Indexed Returns Base Period Return Return Return Return Return Company \ Index Name 6/26/92 6/30/92 6/30/93 6/30/94 6/30/95 6/28/96 ============================================================================================================================== WATERMARC FOOD MGMT CO 100 94.59 240.54 132.43 52.69 18.92 NASDAQ 100 102.61 129.07 130.31 173.93 223.30 PEER GROUP (Companies in SIC 5800-5899) 100 105.16 136.16 121.26 125.39 146.60
-32- 33 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of September 20, 1996, by (i) each person who beneficially owns 5% or more of the Common Stock, (ii) each Director and named executive officer of the Company, and (iii) all officers and Directors of the Company as a group. Unless otherwise noted, the persons and entities named below have sole voting and investment power with respect to such shares.
Shares Beneficially Owned -------------------------- Name of Beneficial Owner Number Percent - - ------------------------ ---------- ----------- Ghulam Bombaywala(1) 6,508,889 46.8% Angelo Pitillo(2)(3) 336,125 2.5% Michael S. Chadwick(4)(8) 119,444 * Nico B. Letschert(5)(8) 408,554 3.0% Philip M. Mount(6)(8) 32,222 * Sarosh J. Collector(7)(8) 17,000 * All officers and directors as a group (7 persons) 7,567,234 51.9%
- - ------------------------------ * Indicates ownership of less than or equal to one percent of the outstanding Common Stock of the Company. (1) Mr. Bombaywala's address is 10777 Westheimer, Suite 1030, Houston, Texas 77042-3498. Includes warrants to purchase 222,222 shares of Common Stock issued in connection with the Company's Subordinated Notes. (2) Mr. Pitillo's address is 10777 Westheimer, Suite 1030, Houston, Texas 77042-3498. (3) Includes options to purchase 330,000 shares of Common Stock granted under the Company's Stock Compensation Plan and 3,300 shares of the Company's Preferred Stock convertible to 4,125 shares of Common Stock. (4) Mr. Chadwick's address is 3100 Texas Commerce Tower, Houston, Texas 77002. Includes warrants to purchase 89,444 shares of Common Stock issued in connection with the Company's Subordinated Notes. (5) Includes warrants to purchase 97,000 shares of Common Stock and 97,000 Series A Warrants, which Series A Warrants may be converted into 97,000 shares of Common Stock upon payment of the $6.50 exercise price. Includes warrants to purchase 45,000 shares of Preferred Stock, which Preferred Stock is convertible into 56,250 shares of Common Stock. Includes warrants to purchase 45,000 shares of Common Stock originally issued to Noble under the terms of the 1993 Regulation S offering and subsequently assigned to Mr. Letschert. Includes 21,000 shares of Common Stock issuable to Mr. Letschert upon the conversion of $105,000 in Debenture principle, at a conversion ratio of one share of Common Stock for each $5.00 in principle converted. Mr. Letschert may acquire Debentures in the principal amount of $105,000 upon the exercise of warrants originally granted to Noble as placement agent for the Company's offering of Debentures and subsequently assigned to Mr. Letschert. Includes warrants to purchase 71,250 shares of Common Stock at $3 per share. Also includes 10,000 Series A Warrants which entitle Mr. Letschert to acquire 10,000 shares of Common Stock upon the payment of the exercise price of $6.50 per share. Mr. Letschert's address is 1801 Clint Moore Road, Suite 110, Boca Raton, Florida 33487. (6) Mr. Mount's address is 1600 Smith, Suite 3700, Houston, Texas 77002. Includes warrants to purchase 22,222 shares of Common Stock issued in connection with the Company's Subordinated Notes. (7) Mr. Collector's address is 3000 Richmond Avenue, Suite 270, Houston, Texas 77002. (8) Includes options to purchase 10,000 shares of Common Stock granted under the Company's Outside Director's Stock Option Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On June 18, 1993, the Company entered into three area development agreements with Clucker's Wood Roasted Chicken, Inc. ("Clucker's"), for the development of Clucker's franchises in Texas, Mexico and Central Ameria (the "Development Rights"). As consideration for the Development Rights, the Company issued to Clucker's 47,000 shares of its Common Stock valued at $8.50 per share for an aggregate consideration of $399,500. William J. Gallagher, a former officer and director of the Company, was a director of Clucker's. -33- 34 In June 1993, the Company assigned to Tex-Mex Venture, Inc. ("Tex-Mex"), an affiliated corporation, the Development Rights in consideration of an $800,000 five-year convertible promissory note (the "Tex-Mex Note") payable to the Company. The principal amount of the Tex-Mex Note was due on June 30, 1998. The Tex-Mex Note was secured with substantially all of the assets of Tex-Mex. The negotiations for the assignment of the Development Rights by the Company to Tex-Mex were conducted by William J. Gallagher, the then current Chairman of the Board of the Company, on behalf of the Company and by Steve Rosser, on behalf of Tex-Mex. The Company determined the $800,000 value of the Development Rights assigned to Tex-Mex based on estimated market value at the time. The Company believed that the valuation placed on the Clucker's Development Rights was consistent with other similar development rights owned by other restaurant chains for the identical geographic areas. On June 30, 1994, the Company and Tex-Mex entered into an agreement whereby the Company agreed to forgive the remaining principal balance of approximately $600,000 due under the Tex-Mex Note in exchange for an unsecured promissory note in the principal amount of $199,500 and 600,000 shares of Tex- Mex's common stock (the "Tex-Mex Shares"). Tex-Mex was organized by Steve Rosser, a son-in-law of Mr. Gallagher. Mr. Rosser was the President, Chief Executive Officer, Secretary and a director of Tex-Mex. William J. Gallagher, John H. Coleman, III, former Executive Vice President and a former director of the Company, and Dr. Henry H. Salzarulo, a former director of the Company, were also directors of Tex-Mex. Mr. Mount, a director of the Company, is a shareholder in the law firm of Kelly, Sutter, Mount & Kendrick, P.C. ("KSMK"). The Company issued KSMK 100,000 shares of Common Stock valued at $2.25 per share in June of 1995 in partial payment of outstanding legal fees owed to KSMK. The Company also issued 100,000 shares in February of 1996 valued at $1.50 per share as payment of additional outstanding legal fees. See, "Executive Compensation - Compensation Committee Interlocks and Insider Participation". On August 3, 1994, the Company issued to Mr. Michael S. Chadwick, a director of the Company, and to an unaffiliated third party, 20,000 restricted shares of the Company's Common Stock, respectively, in satisfaction of commissions due and owing to Mr. Chadwick and the unaffiliated third party as a result of the Marco's transaction. Mr. Chadwick and the unaffiliated third party had been retained by Marco's as business brokers for the purpose of finding a suitable purchaser for Marco's. Mr. Chadwick was elected to the Board of Directors of the Company as one of the three nominees appointed to the Board of Directors by Mr. Bombaywala pursuant to the terms and conditions of the Marco's Agreement. Mr. Chadwick is also affiliated with Sanders Morris Mundy, Inc. ("SMM"), an investment banking firm, which served as placement agent in connection with the Company's December 1994 offering of $3 million of 12% Subordinated Notes. SMM received a 10% commission in that offering, warrants to purchase the Company's Common Stock and consulting fees pursuant to a financial advisory agreement. See, "Description of Business - Recent Financings" and "Executive Compensation - Compensation Committee Interlocks and Insider Participation". On July 31, 1994, Ghulam Bombaywala, Chairman of the Board and Chief Executive Officer of the Company, executed a promissory note in the principal amount of $2,175,310 made payable to Marco's (the "Bombaywala Note"). The Bombaywala Note accrues interest at the rate 6% per annum until maturity, with accrued interest being payable annually on the 1st day of July of each year for which a principal balance is due and owing. The principal balance of the Bombaywala Note is due as follows: $200,000 on July 1, 1996, 1997 and 1998, with all remaining principal and interest due and owing under the Bombaywala Note to be paid in full on July 31, 1999. The Bombaywala Note is secured by the securities more particularly set forth in that certain Pledge and Security Agreement entered into by and between Marco's and Mr. Bombaywala on July 31, 1994. In September of 1995, the Company's Board of Directors voted to defer the interest payment due July 1, 1995 until December 31, 1995. Messrs. Bombaywala and Chadwick also participated in the offering of the Subordinated Notes in December 1994 and purchased $500,000 and $100,000 in principal amount of Subordinated Notes, respectively. Messrs. Bombaywala and Chadwick also received warrants to purchase 222,222 and 44,444 shares of Common Stock, respectively, at $2.25 per share, expiring December 31, 1999. Mr. Mount, a director of the Company, also purchased $50,000 in principal amount of Subordinated Notes and received warrants to purchase 22,222 shares of Common Stock on the same terms. The warrants received by Messrs. Bombaywala, Chadwick and -34- 35 Mount represent their pro rata purchase of Subordinated Notes in the offering and the terms of their notes and warrants are identical to those received by the unaffiliated purchasers of Subordinated Notes and Warrants. See "Description of Business - Recent Financings". On June 17, 1992, the Company loaned William J. Gallagher, a former officer and director of the Company, $53,000 evidenced by an unsecured promissory note providing for interest at prime. The note was renewed on June 17, 1993, whereby the principal balance due under the note was increased to $124,000 to include additional advances made by the Company during fiscal 1993. The principal balance of the note accrues interest at the rate of 6% per annum, with accrued interest being due and payable annually on July 1. The entire principal balance is due and payable on July 1, 1999. The note is an unsecured debt obligation of Mr. Gallagher to the Company. The interest payments due July 1, 1995 and 1996 had not been made by Mr. Gallagher as of September 20, 1996. On June 30, 1994, John H. Coleman, III, a former officer and director of the Company, executed a promissory note in the principal amount of $31,291 for the purpose of evidencing a debt obligation resulting from advances made by the Company to Mr. Coleman during fiscal 1994. The principal amount of the note accrues interest at the rate of 6% per annum and is due and payable on the first day of July for each year the principal balance remains outstanding. The principal balance of the note is due and payable in full on July 1, 1999. The note is an unsecured debt obligation of Mr. Coleman to the Company. The interest payments due July 1, 1995 and 1996 had not been made by Mr. Coleman as of September 20, 1996. In May of 1995, the Company began factoring accounts receivable through Catalyst Financial Co., ("Catalyst") paying factoring fees of approximately $19,000 in fiscal 1995, and approximately $75,000 in fiscal 1996. Such factoring was discontinued early in fiscal 1996. The Company believes that the fees paid were comparable to those that would be charged by a competing factoring company. Mr. Bombaywala is a principal of Catalyst. In September of 1995, the Company entered into an eight month financial advisory agreement with Noesis Capital Corp. ("Noesis"), in order to obtain assistance in identifying sources of financing, developing its acquisition program and with shareholder relations. Under the terms of the agreement, the Company paid a monthly fee of $5,000 to Noesis. Nico B. Letschert is President of Noesis and a director of the Company. Mr. Letschert was also a principal of Noble which received fees and warrants in connection with the Company's 1995 Reg. S. Offering. See "Description of Business - Recent Financings" and "Executive Compensation - Compensation Committee Interlocks and Insider Participation". Mr. Bombaywala has an ownership interest in and participates in the management of other businesses, including the Houston-based James Coney Island restaurant chain. PASTA CO. ACQUISITION On September 7, 1995, the Board of Directors of the Company approved the acquisition of all of the issued and outstanding shares (the "Shares") of Pasta Co. from Mr. Bombaywala, the sole stockholder and director of Pasta Co. On September 14, 1995, the Company, Mr. Bombaywala, Pasta Co. and the Company, entered into an Agreement and Plan of Merger (the "Merger Agreement") which provided for the merger of Pasta Co. with and into the Company as the surviving corporation (the "Merger"). The principal assets of Pasta Co. consisted of its ownership of ten (10) restaurants in Houston, Texas. In consideration for the Shares, Mr. Bombaywala received 1,666,667 shares of the Company's Common Stock (the "Merger Shares") and two promissory notes in the aggregate principal amount of $3,750,000 (the "Notes"). The Merger Shares were valued at $1.78 per share which was the market value of the Common Stock on the date of the Merger. The total consideration paid to Mr. Bombaywala was $2,966,667; however, as provided below, a portion of the Merger Shares are subject to future release and earn out. In addition, the Company assumed approximately $3.6 million of liabilities and indebtedness of Pasta Co. outstanding as of January 26, 1996. -35- 36 Although not required by law, the Board of Directors of the Company elected to submit the Merger to its independent shareholders for approval at its Annual Meeting of Shareholders which was held January 9, 1996. Mr. Bombaywala, who then owned 4,620,000 shares of the Company's Common Stock, or 41.6%, excluding the Merger Shares, did not vote on the Merger at the Annual Meeting. The Merger was approved, and the effective date of the Merger (the "Effective Date") was January 26, 1996. As of the Escrow Closing Date, the Company was granted the right to manage Pasta Co. and received a management fee of three percent (3%) of the gross revenues of Pasta Co. through the Effective Date. Such fees amounted to approximately $137,000. The Merger Shares are restricted securities but have demand and incidental registration rights. A total of 350,000 Merger Shares are subject to a Development Escrow Agreement which provides for the earnout and release of such shares based upon (i) the opening of five additional Pasta Co. restaurants on or before December 31, 1996 at an average cost not to exceed $400,000 per restaurant, or (ii) the share price for the Company's Common Stock exceeding $5.00 per share for any ten consecutive business days on or before June 30, 1996 or $7.00 per share on or before June 30, 1997. The Notes consist of (i) a promissory note from PAC in the principal amount of $2,750,000, bearing interest at 10% per annum which, subject to certain mandatory prepayment provisions, is due and payable September 15, 2002, and (ii) a promissory note from PAC in the principal amount of $1,000,000 bearing interest at 10% per annum, the principal amount of which, subject to certain mandatory prepayment provisions, is due and payable in two equal annual installments on December 31, 1996 and December 31, 1997. Quarterly payments of interest are due and payable on the Notes on the 15th day of December, March, June and September of each year the Notes are outstanding. Commencing September 15, 2000, the outstanding principal on the $2,750,000 Note will be amortized and paid in quarterly installments over the remaining two year term. The Notes require mandatory prepayment in the amount of and to the extent of (i) fifty percent of the proceeds from any public offering received by the Company, and (ii) proceeds from private financings in excess of $1,000,000 received by the Company. Mr. Bombaywala has agreed to defer any and all principal and interest until July of 1997. On the Effective Date, a promissory note of Pasta Co. to Mr. Bombaywala in the principal amount of $1,260,000 was paid by the Company. Payment was made as follows: $150,000 in cash, transfer of ownership of land and building valued at $515,000 and a note to Mr. Bombaywala in the amount of $595,000. The land and building transferred had been a non- productive asset of the Company. Mr. Bombaywala received an additional note from the Company in the amount of $224,202 for other obligations of Pasta Co. arising prior to the Effective Date. The Notes are secured by a guarantee of the Company, a pledge by the Company of all issued and outstanding shares of Pasta Co. and a security interest in all of the assets relating to the first ten restaurants opened by Pasta Co. The lien of Mr. Bombaywala will be junior to any prior liens granted by Pasta Co. on or before the Effective Date. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents Filed as Part of this Report. (1) The Consolidated Financial Statements listed in the Index to the Consolidated Financial Statements on page F-1 are filed as part of this report and are incorporated by reference. (2) No financial statement schedules are filed as part of this report. (3) The Exhibits filed as part of this report are listed on the Exhibit Index appearing on page E-1 which is incorporated herein by reference. -36- 37 (b) Reports on Form 8-K None. (c) Exhibits Required by Item 601 of Regulation S-K The Exhibits required by Item 601 of Regulation S-K and listed in the Exhibit Index on page E-1 are filed as part of this report. (d) Financial Statement Schedules None. [This space is intentionally left blank.] -37- 38 SIGNATURES In accordance with section 13 or 15(d) of the Exchange Act, the Registrant caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. WATERMARC FOOD MANAGEMENT CO. (Registrant) Date: September 20, 1996 By: /s/ -------------------------- Ghulam Bombaywala, Chairman of the Board, Chief Executive Officer and Director In accordance with the Exchange Act, this report on Form 10-K has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated.
2 NAME TITLE DATE ---- ----- ---- /s/ Chairman of the Board, Chief Executive September 20th, 1996 -------------------------------- Officer and Director Ghulam Bombaywala /s/ President, Chief Operating Officer and September 20th, 1996 -------------------------------- Director Angelo Pitillo /s/ -------------------------------- Tom Buckley Chief Financial Officer and Secretary September 20th, 1996 /s/ -------------------------------- Philip M. Mount Director September 20th, 1996 /s/ -------------------------------- Michael S. Chadwick Director September 20th, 1996 /s/ -------------------------------- Nico B. Letschert Director September 20th, 1996 /s/ -------------------------------- Sarosh J. Collector Director September 20th, 1996
-38- 39 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES INDEX TO AUDITED FINANCIAL STATEMENTS Report of Independent Accountants . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Stockholders' Equity . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-7 F-1 40 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Watermarc Food Management Co. We have audited the consolidated balance sheets of Watermarc Food Management Co. and subsidiaries (the "Company") as of June 30, 1996 and July 2, 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for the fiscal years ended June 30, 1996, July 2, 1995 and July 3, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Watermarc Food Management Co. and subsidiaries as of June 30, 1996 and July 2, 1995 and the consolidated results of their operations and their cash flows for the fiscal years ended June 30, 1996, July 2, 1995, and July 3, 1994, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Houston, Texas September 27, 1996 F - 2 41 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30, JULY 2, 1996 1995 Current assets: Cash and cash equivalents $ 463,166 $ 2,101,729 Accounts receivable, trade 397,744 106,385 Accounts receivable from affiliates 252,440 289,982 Inventories 715,538 435,866 Prepaid expenses and other current assets 105,779 382,953 ----------- ----------- Total current assets 1,934,667 3,316,915 Property and equipment, net 9,328,526 6,394,512 Notes and other receivables from affiliate 2,217,784 2,217,784 Intangible assets, net 12,200,047 4,878,624 Other assets 183,686 864,409 ----------- ----------- $25,864,710 $17,672,244 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 3,186,690 $ 2,655,001 Accrued liabilities 1,831,055 2,999,133 Current portion of long-term debt and note payable to stockholder 1,401,825 4,880,015 ----------- ----------- Total current liabilities 6,419,570 10,534,149 Long-term debt, less current portion 5,698,692 1,967,899 Notes payable to stockholder 5,069,202 - Deferred rent 435,949 291,416 Commitments and contingencies (notes 1, 5, 6 and 8) Stockholders' equity: Preferred stock, $1 par value, 329,540 329,540 5,000,000 shares authorized, 329,540 issued and outstanding as of June 30, 1996 and July 2, 1995; stated at $10 liquidation preference Common stock, $.05 par value, 671,682 555,601 20,000,000 shares authorized, 13,433,658 issued and outstanding as of June 30, 1996, and 11,112,026 issued and outstanding as of July 2, 1995 Additional paid-in capital 26,640,385 23,442,645 Accumulated deficit (19,400,310) (19,449,006) ----------- ----------- Total stockholders' equity 8,241,297 4,878,780 ----------- ----------- $25,864,710 $17,672,244 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F - 3 42 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED JUNE 30, 1996 JULY 2, 1995 JULY 3, 1994 -------------- -------------- -------------- Revenue: Restaurants $37,227,201 $34,600,265 $34,657,347 Food products 2,902,242 3,051,392 2,351,147 ----------- ----------- ----------- Total revenues: 40,129,443 37,651,657 37,008,494 Costs and expenses: Cost of restaurant revenues: Cost of food and beverage 10,956,113 10,471,159 10,328,556 Labor and benefits 11,348,823 11,507,171 10,924,499 Other restaurant operations 10,222,633 10,025,239 10,389,828 Cost of food product revenues: Cost of products 1,517,539 1,671,724 1,271,668 Selling, marketing and distribution 1,126,055 1,538,664 2,498,372 General and administrative 2,752,539 3,321,296 5,257,820 Depreciation and amortization 2,178,218 2,071,972 1,622,554 Provision for restaurant closings - 2,856,105 930,691 Provision for doubtful accounts - - 589,502 Merger and acquisition costs - - 980,358 ----------- ----------- ----------- Total costs and expenses 40,101,920 43,463,330 44,793,848 ----------- ----------- ----------- Income (loss) from operations 27,523 (5,811,673) (7,785,354) Non-operating income (expenses): Interest income 166,566 156,550 129,728 Interest expense (850,224) (813,153) (511,826) Loss on conversion of debt to equity - (1,329,775) - Other, net 704,831 305,731 (204,996) ----------- ----------- ----------- Total non-operating income (expenses) 21,173 (1,680,647) (587,094) ----------- ----------- ----------- Income (loss) before income taxes and extraordinary item 48,696 (7,492,320) (8,372,448) Income tax provision (benefit) - - (12,467) ----------- ----------- ----------- Income (loss) before extraordinary item 48,696 (7,492,320) (8,359,981) Extraordinary item - gain on extinguishment of debt - 455,579 - ----------- ----------- ----------- Net income (loss) 48,696 (7,036,741) (8,359,981) Preferred stock dividends 296,586 294,680 300,591 ----------- ----------- ----------- Net income (loss) less preferred stock dividends ($247,890) ($7,331,421) ($8,660,572) =========== =========== =========== Loss per common share before extraordinary item ($0.02) ($0.87) ($1.10) Extraordinary item per common share - 0.05 - ----------- ----------- ----------- Net loss per common share ($0.02) ($0.82) ($1.10) =========== =========== =========== Weighted average common and common equivalent shares outstanding 12,040,163 8,921,543 7,894,816 ============ =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F - 4 43 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL ACCUMULATED TOTAL PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY -------- -------- ---------- ------------ ----------- ------------ ------------- Balance, June 27,1993 449,000 $449,000 7,124,345 $ 356,218 $ 9,316,208 ($4,052,284) $ 6,069,142 Issuance of common stock - - 1,111,931 55,596 7,295,952 - 7,351,548 Conversion of preferred (118,660) (118,660) 148,325 7,416 111,244 - - Preferred stock dividends: Cash - - - - (32,294) - (32,294) Common stock - - 38,714 1,936 (1,936) - - Exercise of stock options - - 2,500 125 7,375 - 7,500 Dividend paid to - - - - (193,000) - (193,000) Net loss - - - - - (8,359,981) (8,359,981) -------- -------- ---------- ----------- ----------- ------------ ----------- Balance, July 3, 1994 330,340 330,340 8,425,815 421,291 16,503,549 (12,412,265) 4,842,915 Conversion of debentures - - 1,093,904 54,695 2,474,958 - 2,529,653 Issuance of common stock - - 1,458,156 72,907 4,448,591 - 4,521,498 Conversion of preferred (800) (800) 1,000 50 750 - - Preferred stock dividends: Cash - - - - (4,295) - (4,295) Common stock - - 133,151 6,658 (6,658) - - Issuance of warrants - - - - 25,750 - 25,750 Net loss - - - - - (7,036,741) (7,036,741) -------- -------- ---------- ----------- ----------- ------------ ----------- Balance, July 2, 1995 329,540 329,540 11,112,026 555,601 23,442,645 (19,449,006) 4,878,780 Issuance of common stock - - 2,003,667 100,183 3,214,388 - 3,314,571 Preferred stock dividends: Cash - - - - (750) - (750) Common stock - - 317,965 15,898 (15,898) - - Net income - - - - - 48,696 48,696 -------- -------- ---------- ----------- ----------- ------------ ----------- Balance, June 30, 1996 329,540 $329,540 13,433,658 $ 671,682 $26,640,385 ($19,400,310) $ 8,241,297 ======== ======== ========== =========== =========== ============ ===========
The accompanying notes are an integral part of the consolidated financial statements. F - 5 44 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED June 30, 1996 July 2, 1995 July 3, 1994 ------------- ------------- ------------ Operating activities: Net income (loss) $48,696 ($7,036,741) ($8,359,981) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,178,217 2,071,972 1,644,444 Provision for restaurant closings - 2,856,105 930,691 Provision for doubtful accounts - - 589,502 Loss on conversion of debt to equity - 1,329,775 - Provision for inventory write-down - - 671,632 Gain on disposal of assets (163,175) - (53,516) Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable, trade (292,209) 312,140 (129,759) Accounts receivable from affiliates 37,542 (245,469) (10,490) Inventories (192,446) 177,089 526,913 Prepaid expenses and other current assets 255,759 (66,995) (57,108) Accounts payable to affiliates - - 2,503,377 Accounts payable and accrued liabilities (673,405) (325,571) (25,371) Other assets (6,031) (331,377) (10,508) Noncurrent liabilities 153,406 (81,914) (74,361) ---------- ---------- ------------ Net cash provided by (used in) 1,346,354 (1,340,986) (1,854,535) ---------- ---------- ------------ Investing activities: Purchases of property and equipment (1,642,333) (1,438,320) (3,599,764) Proceeds from sale of assets 197,027 - - Marketable securities - - 119,468 Investment in note receivable - - (1,500,000) Collection of note receivable 60,391 756,000 500,000 Investments in receivables from affiliates - - (1,845,201) Collection of receivables from affiliates - 69,745 2,184,662 Cost of acquisitions, net of cash acquired (231,745) - (2,393,393) ---------- ---------- ------------ Net cash used in investing (1,616,660) (612,575) (6,534,228) ---------- ---------- ------------ Financing activities: Net proceeds from issuance of common stock - 2,166,295 5,093,352 Contributions from minority partners - - (19,292) Net proceeds from issuance of debentures - - 2,253,190 Proceeds from affiliate borrowings - - 360,000 Repayment of affiliate borrowings (150,000) (519,507) (362,993) Proceeds from other borrowings and warrants 1,221,790 4,986,550 1,225,400 Repayment of other borrowings (2,439,297) (3,105,463) (1,129,916) Cash dividends (750) (4,295) (251,956) ---------- ---------- ------------ Net cash provided by financing (1,368,257) 3,523,580 7,167,785 ---------- ---------- ------------ Net increase (decrease) in cash and cash equivalents (1,638,563) 1,570,019 (1,220,978) Cash and cash equivalents, beginning of period 2,101,729 531,710 1,752,688 ---------- ---------- ------------ Cash and cash equivalents, end of period $463,166 $2,101,729 $ 531,710 ========== ========== ============
The accompanying notes are an integral part of the consolidated financial statements. F - 6 45 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION Watermarc Food Management Co. (the "Company"), owns and operates 41 restaurants, primarily in the Houston Metropolitan area, under the names "Marco's Mexican Restaurants"; "The Original Pasta Co."; "Billy Blues"; "Longhorn Cafes"; "Pete's Barbecue"; and "Hotspurs". All but the Billy Blues restaurant are operated by wholly-owned subsidiaries of the Company. The Company also produces and markets two brands of barbecue sauces, "Billy Blues Barbecue Sauce" and "Chris' & Pitt's Bar-B-Que Sauce". Both are marketed to supermarkets, other retail stores and food service outlets. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. BASIS OF PRESENTATION The accompanying financial statements have been prepared assuming the Company will be able to continue as a going concern. The Company has a working capital deficit of approximately $4.5 million at June 30, 1996. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or capital and to refinance its debt. Management's plans include the following: o Increasing revenues in existing restaurants by remodeling certain Marco's Mexican Restaurants and by improving marketing programs and customer service. o Increasing revenues from the sale of food products by reinforcing existing markets, expanding distribution to new market areas, introducing more aggressive marketing programs, adding methods of distribution and developing new products. o Franchising new restaurants. o Maintaining cost controls while increasing revenues. o Obtaining additional equity capital or debt financing. o Refinancing debt, primarily $3 million in subordinated notes due in July of 1997. FISCAL YEAR The Company utilizes a 52-53 week fiscal year which ends on the Sunday closest to June 30. References to 1994, 1995 and 1996 are to the 53, 52 and 52 week periods ended July 3, 1994, July 2, 1995 and June 30, 1996, respectively. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company places substantially all of its cash and cash equivalents with nationally recognized financial institutions and money market mutual funds. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and consist primarily of restaurant food, beverages, supplies, and food products (primarily barbecue sauce) held for sale. F - 7 46 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONT'D: PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Leasehold improvements are amortized on a straight-line basis over the lesser of the life of the lease (ranging from approximately ten to fifteen years) or the estimated useful lives of the improvements. Building, furniture, fixtures and equipment are depreciated using straight-line and accelerated methods over the estimated useful life of the assets, which range from five to thirty years. Major additions which extend service lives are charged to the property accounts as incurred, whereas minor amounts are expensed. Disposals are removed at cost less accumulated depreciation with the resulting gain or loss reflected in current operations. ORGANIZATION COSTS Organization costs are included in other assets and are being amortized on a straight-line basis over five years. INTANGIBLE ASSETS Included in intangible assets is goodwill associated with the purchase of The Original Pasta Co., Pete's Hospitality, Inc. and Chris' & Pitt's Barbecue Sauce. These assets are being amortized using the straight-line method over the expected period to be benefited (fifteen years for The Original Pasta Co., twenty-five years for Pete's Hospitality and Chris' & Pitt's). The Company's management periodically assesses the recorded balances of its intangible assets in light of historic and projected operating trends and profitability and general economic conditions. Management's assessment includes projecting cash flows from each intangible asset over the estimated remaining life. Should this undiscounted amount not equal the unamortized balance related to the asset, an impairment would be indicated and the asset would be written down to fair value. PREOPENING COSTS Certain expenses incurred in connection with the opening of a restaurant (principally the costs of food products and staff training) are accumulated and then expensed at the date of opening. INCOME TAXES Income taxes are provided using the liability method. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years, of temporary differences between the tax basis of the assets and the liabilities and their financial statement amounts. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. REVENUE RECOGNITION Revenues from food product sales are recognized when the order is shipped and ownership passes to the buyer. NET LOSS PER COMMON SHARE Net loss per common share is based on the weighted average number of common shares outstanding during the periods, adjusted for dividends on preferred stock and interest expense, where applicable, plus common equivalent shares, reflected under the treasury stock method, unless the effects of common equivalent shares were antidilutive. Fully diluted loss per share is not presented as it is antidilutive. F - 8 47 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONT'D: IMPACT OF NEW ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation" which establishes accounting and reporting standards for stock-based employee compensation plans. Companies are encouraged to utilize the fair-value method to measure stock based compensation but may continue to utilize the methods prescribed by APB Opinion No. 25 and disclose the pro-forma affects of the SFAS No. 123 method. The Company has decided to adopt the disclosure requirements of SFAS No. 123. In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which uses a "financial components" financial assets that are sales from transfers that are secured borrowings. The pronouncement is effective for transactions occurring after December 31, 1996. MANAGEMENT'S ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimated. RECLASSIFICATIONS Certain 1995 and 1994 financial statement amounts have been reclassified to conform with the June 30, 1996 presentation. These reclassifications had no effect on total stockholders' equity or net income. 2. BUSINESS COMBINATIONS: THE ORIGINAL PASTA CO. Effective January 26, 1996, the Company acquired all of the outstanding common stock of The Original Pasta Co. (Pasta Co.) from the Company's largest shareholder. The purchase price was $6,716,667, consisting of $3,750,000 of notes and the issuance of 1,666,667 shares of the Company's common stock valued at $2,966,667. The acquisition has been accounted for as a purchase and, accordingly, the assets and liabilities of Pasta Co. have been recorded at their fair value at the date of acquisition. The excess of the purchase price including related acquisition costs of approximately $280,000, over the fair values of the net identifiable assets acquired less liabilities assumed, is reported as goodwill and is being amortized over 15 years. The statement of operations includes the results of Pasta Co. from the date of acquisition. The following table summarizes the unaudited pro forma results of operations of the Company as if the acquisition had occurred at the beginning of each period presented:
1996 1995 ---- ---- Revenues $46,086,307 $44,960,944 Net loss (679,509) (8,201,187) Net loss per common share (.08) (.95)
F - 9 48 2. BUSINESS COMBINATIONS CONT'D: The allocation of the total purchase price, including related expenses, for Pasta Co. based on the estimated fair value of the net assets acquired, at the date of acquisition is as follows: Net of liabilities over tangible assets $ (768,955) Intangible Assets 131,250 Goodwill 7,634,255 ------------ Total purchase price allocation $ 6,996,550 ============
MARCO'S MEXICAN RESTAURANTS, INC. Effective July 1, 1994, the Company exchanged 4,600,000 shares of the Company's common stock for all of the outstanding capital stock of Marco's Mexican Restaurants, Inc. ("Marco's Restaurants"). The merger has been accounted for as a pooling-of-interests and, accordingly, the Company's consolidated financial statements have been restated for all periods prior to the merger to include the results of operations, financial position and cash flows of Marco's Restaurants. The effect of the merger on previously reported revenues, net loss, and net loss per share for fiscal year 1994 is summarized below:
Net Loss Revenues Net Loss Per Share -------------- ------------ ---------- Billy Blues, prior to merger $14,584,320 $(8,240,378) $ (2.59) Marco's Restaurants 22,424,174 ( 119,603) - ----------- ----------- -------- Consolidated $37,008,494 $(8,359,981) $ (1.10) =========== =========== ========
Net loss per share, for the periods presented, includes the shares issued in connection with the mergers. There were no extraordinary items, other changes in stockholders' equity or intercompany transactions for either company. Additionally, there were no adjustments related to changes in accounting policies. During the fourth quarter of 1994, the Company recorded merger and acquisition costs of $980,358, which included investment banking fees, legal and accounting fees, stock registration expenses, severance and benefit related costs and other costs associated with combining the operations of the Company and Marco's Restaurants. CHRIS' & PITT'S Effective March 25, 1994, the Company purchased the Chris' & Pitt's Bar-B-Q Sauce product line ("Chris' & Pitt's") for approximately $4,647,000. The assets acquired include the inventories and the rights to manufacture, sell and distribute the product line under a short term licensing agreement, which includes the right to use trademarks, formulae and other intangible assets. To fund the purchase price, the Company issued $2.7 million of subordinated debentures, of which $2 million was used as a down payment, and issued notes payable to the seller totaling $2,647,000 for the remaining balance. The acquisition has been accounted for as a purchase. The excess of the purchase price, including related acquisition expenses of approximately $100,000, over the net assets acquired, is recorded as an intangible asset and is being amortized over 25 years. The allocation of the total purchase price, including related expenses, for Chris' & Pitt's based on the estimated fair value of the net assets acquired, at the date of acquisition, was as follows: Inventories $ 600,682 License agreement 4,146,318 ------------ $ 4,747,000 ============
F - 10 49 2. BUSINESS COMBINATIONS CONT'D: PETE'S HOSPITALITY CO., INC. Effective August 24, 1993, the Company acquired all of the outstanding common stock of Pete's Hospitality Co., Inc. ("Pete's Hospitality"). The purchase price was approximately $2,000,000, consisting of approximately $60,000 in cash and the issuance of 377,325 shares of the Company's common stock. The acquisition has been accounted for as a purchase and, accordingly, the assets and liabilities of Pete's Hospitality have been adjusted to their fair values at the date of acquisition. The excess of the purchase price, including related acquisition costs of approximately $333,000, over the fair values of the net assets acquired is reported as goodwill and is being amortized over 25 years. The allocation of the total purchase price, including related expenses, for Pete's Hospitality based on the estimated fair value of the net assets acquired, at the date of acquisition, is as follows: Net tangible assets $ 1,251,527 Favorable lease acquired 209,000 Goodwill 872,077 ------------ Total purchase price allocation $ 2,332,604 ============
The statement of operations includes the results of operations of Chris' & Pitt's and Pete's Hospitality from their respective acquisition dates. The following table summarizes the unaudited pro forma results of operations of the Company as if the acquisitions had occurred at the beginning of fiscal year 1994.
1994 ------------ Revenues $ 39,314,131 Net loss (8,309,987) Net loss per common share ( 1.06)
[This space is intentionally left blank.] F - 11 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS: Additional information regarding certain balance sheet accounts at June 30, 1996 and July 2, 1995 is as follows:
1996 1995 Inventories: Food products $ 399,946 $ 181,262 Restaurant food, beverage and other 315,592 254,604 ----------- ------------ $ 715,538 $ 435,866 =========== ============ Property and Equipment: Land $ 50,000 $ 50,000 Building and leasehold improvements 7,770,515 4,825,270 Furniture, fixtures and equipment 9,828,449 7,697,834 Transportation equipment 178,293 152,096 ----------- ------------ 17,827,257 12,725,200 Less accumulated depreciation and amortization (8,498,731) (6,330,688) ----------- ------------ $ 9,328,526 $ 6,394,512 =========== ============ Intangible Assets: License agreement $ 4,401,572 $ 4,146,318 Goodwill 8,458,728 872,077 Favorable lease 209,000 209,000 ----------- ------------ 13,069,300 5,227,395 Less accumulated amortization (869,253) (348,771) ----------- ------------ $12,200,047 $ 4,878,624 =========== ============ Other assets: Debt issue costs $ 77,178 $ 253,572 Organizational costs 2,024 2,790 Land and building held for sale - 515,000 Other 104,484 93,047 ----------- ------------ $ 183,686 $ 864,409 =========== ============ Accrued liabilities: Payroll and related costs $ 487,820 $ 455,362 Taxes, other than payroll and income taxes 409,093 314,185 Reserve for restaurant closings - 866,000 Rent 457,673 414,828 Interest 139,182 120,201 Other 337,287 828,557 ----------- ------------ $ 1,831,055 $ 2,999,133 =========== ============
F - 12 51 4. LONG-TERM DEBT AND NOTES PAYABLE TO STOCKHOLDER: At June 30, 1996 and July 2, 1995, long-term debt consisted of the following:
1996 1995 ---- ---- Note payable to bank, due in monthly installments with interest at 9.25%, maturing in May 1999, collateralized by certain property and equipment $ 583,333 $ 783,333 Mortgage note payable, due in monthly installments with interest at 10%, collateralized by certain land and building. The note was repaid in August of 1996. 254,125 255,765 Note payable to bank, due in annual principal installments with interest payable monthly at 1.5% above prime - 100,000 Notes payable to banks and trade vendors, due in monthly installments with interest ranging from 0% to 12.50%, maturing at various dates through 1998, collateralized by certain property and equipment 840,057 1,371,265 Notes payable to banks, due in monthly installments with interest rates ranging from 8% to 9.5%, maturing at various dates through January 1998, collateralized by certain vehicles 26,483 40,999 Subordinated notes, interest at 12% payable quarterly, principal due in July 1997, collateralized by all of the outstanding stock of Marco's Mexican Restaurants, Inc. 2,500,000 2,500,000 Notes payable to an unaffiliated foreign investor, interest at 10% payable quarterly, principal due in June 1999, collateralized by certain property and equipment 1,000,000 1,000,000 Note payable to bank, due in monthly principal installments with interest payable monthly at 10%, maturing in August 2000, collateralized by certain property and equipment 519,878 - Note payable to bank, due in monthly principal installments with interest payable quarterly at 9.75% maturing March 2001, collateralized by certain property and equipment 1,148,644 - 9% convertible subordinated debentures due March 1999, 217,000 217,000 collateralized by inventories and accounts receivable, licenses, trademarks and equipment Capital lease obligations 10,997 79,552 ------------- ------------ 7,100,517 6,347,914 Less current portion ( 1,401,825) ( 4,380,015) ------------- ------------ $ 5,698,692 $ 1,967,899 ============= ============
In March 1994, the Company issued $2,691,000 of 9% Convertible Subordinated Debentures which are due on March 16, 1999. Interest is payable semi-annually on March 15 and September 15. The debentures are convertible at any time prior to maturity at the option of the holder, unless previously redeemed, into shares of common stock at a conversion price of $5.00 of principal into one share of common stock. The debentures are redeemable at the option of the Company, in whole or in part, at any time, at prices ranging from 105% of the principal amount in 1994 to 100% of the principal amount in 1999. The debentures are also subject to mandatory conversion at the option of the Company if at any time the closing bid price of the Company's common stock exceeds $12 per share for twenty consecutive days. The debentures are collateralized by a second lien on the inventories, licensing, trademarks and other intangibles related to the F - 13 52 4. LONG-TERM DEBT AND NOTES PAYABLE TO STOCKHOLDER CONT'D: In May of 1995, the Company offered the debentureholders the right to convert (until June 30, 1995) the principal and accrued interest owed on their debentures into common stock at a modified conversion rate of $2.3125 of debenture principal and interest for one share of common stock. The Company recorded a $1.3 million charge in 1995 pursuant to "sweetened" conversion terms. Debentureholders owed an aggregate of $2,474,000 in principal agreed to the conversion. There is currently outstanding $217,000 of debentures held by debentureholders who elected not to convert at the modified conversion rate. In connection with the subordinated debenture issuance, the Company incurred debt issue costs of approximately $438,000 which were capitalized and amortized using a method which approximates the interest method. Unamortized debt issue costs associated with debentures which were converted to stock were charged to paid-in-capital. At June 30, 1996 and 1995, notes payable to stockholder consisted of the following (see "Note 10 - Related Party Transactions"):
1996 1995 ---- ---- Note associated with the acquisition of Pasta Co. with principal and interest at 10% due in July 1997, collateralized by assets related to Pasta Co. $ 595,000 $ - Note associated with the acquisition of Pasta Co. with interest at 10% due quarterly with principal due in quarterly payments beginning September 15, 2000 and ending September 15, 2002, collateralized by assets related to Pasta Co. 2,750,000 - Note associated with the acquisition of Pasta Co. with interest at 10% due quarterly with principal payments due on July 15 and December 31, 1997 at $500,000 each, collateralized by assets related to Pasta Co. 1,000,000 - Note associated with the acquisition of Pasta Co. with principal and interest at 6% due July 1997, collateralized by assets related to Pasta Co. 224,202 - Subordinated note, interest at 12% payable quarterly, principal due in July 1997 500,000 500,000 ------------ ------------ 5,069,202 500,000 Less current portion - (500,000) ------------ ------------ $ 5,069,202 $ - ============ ============
The Company and its subsidiaries' various loan agreements contain certain restrictive financial and other covenants. Additionally, some existing loan covenants contain provisions which limit the amount of funds available for transfer from certain subsidiaries to the parent corporation without the consent of the lender. At June 30, 1996, the Company had no credit facilities available. The carrying amounts of notes payable approximates fair value. Annual maturities of long-term debt and notes payable to stockholder, as of June 30, 1996 are: $1,401,825 in 1997; $5,556,057 in 1998; $1,811,311 in 1999; $412,518 in 2000; $1,613,009 in 2001; $1,375,000 in 2002; and no amounts thereafter. 5. LEASE OBLIGATIONS: The Company leases restaurant facilities and certain equipment and leasehold improvements under operating lease agreements having terms expiring at various dates through 2004. The leases have renewal F - 14 53 5. LEASE OBLIGATIONS CONT'D: clauses of 5 to 10 years, at the option of the Company, and have provisions for contingent rentals based upon a percentage of revenues in excess of a minimum amount. Rental expense under operating lease agreements was approximately $2,662,000, $2,507,000 and $2,599,000 in 1994, 1995 and 1996 respectively. Future minimum lease payments, excluding contingent rentals, at June 30, 1996, were as follows:
FISCAL YEAR OPERATING 1997 $ 2,924,019 1998 2,599,213 1999 2,209,756 2000 1,955,205 2001 1,702,924 Thereafter 6,655,116 ------------- Total future minimum lease payments $ 18,046,233 =============
6. CONTINGENCIES: Effective July 1, 1992, the Company voluntarily discontinued its workers' compensation coverage in the state of Texas. The Company anticipates that the ultimate expense of representing itself in the settlement of claims will be less than the cost of insurance. The Company intends to vigorously defend and pursue all unreasonable claims. Management does not believe that any existing claims will have a material adverse impact on the financial position, results of operations, or cash flows of the Company. The Company is currently involved in, and is vigorously defending, a lawsuit for alleged wrongful termination and the plaintiff is suing for $500,000 in actual damages and $1,000,000 in punitive damages. The Company is also involved in various other lawsuits arising in the ordinary course of its business. The Company believes the resolution of these matters will not have a material adverse impact on its financial position, results of operations or cash flows. At June 30, 1996, the Company has accrued approximately $30,000 for any potential settlements of the above contingencies. 7. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS: Supplemental disclosure of cash flow information is as follows:
1996 1995 1994 -------- -------- -------- Interest paid $624,855 $608,074 $380,959 Income taxes paid - - 80,000
F - 15 54 7. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS CONT'D: Supplemental disclosure of noncash investing and financing activities:
1996 1995 1994 ---------- ----------- ----------- Restaurant development rights received in satisfaction of note receivable $ - $ 150,000 $ - Conversion of preferred stock to common stock - 800 - Capital leases - - 167,282 Conversion of note receivable to common stock of affiliate - - 400,500 Conversion of warrants in lieu of payment of affiliate advances - - 50,000 Conversion of subordinated debt to equity, net of issuance cost - 2,171,912 - Issuance of warrants in lieu of payment of brokers fees - 25,752 - Issuance of common stock in lieu of payment of liabilities 347,904 1,418,761 - Issuance of common stock for preferred stock dividend 15,898 6,658 - Issuance of debt in payment of liabilities 548,680 - -
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 ===========
During 1994, the Company completed purchase acquisitions of Pete's Hospitality, Chris' & Pitt's product line, and a restaurant located in Arizona. Components of cash used for these acquisitions, as reflected in the Consolidated Statement of Cash Flows for 1994 are summarized as follows: Fair value of current assets, net of cash acquired $ 927,320 Fair value of noncurrent assets, excluding intangibles 2,396,111 Intangible assets 5,227,395 Liabilities assumed or incurred (3,941,738) Stock issued at closing (2,215,695) ------------ Cash paid at closing, net of cash acquired $ 2,393,393 ============
F - 16 55 8. INCOME TAXES: The significant components of the Company's deferred tax assets and liabilities, as of June 30, 1996 and July 2, 1995, were as follows:
1996 1995 ---- ---- Deferred tax assets: Allowance for bad debts $ - $ 75,491 Accrued liabilities 275,723 524,430 Net operating loss 6,117,025 5,592,377 Property and equipment 44,044 276,799 ------------ -------------- Total deferred tax assets 6,436,792 6,469,097 ------------ -------------- Deferred tax liabilities: Deductible intangible assets 421,350 349,858 ------------ -------------- Total deferred tax liabilities 421,350 349,858 ------------ -------------- Net deferred tax assets before valuation allowance 6,015,442 6,119,239 Valuation allowance (6,015,442) (6,119,239) ------------ -------------- Net deferred tax asset $ - $ - ============ ==============
F - 17 56 8. INCOME TAXES CONT'D: The reconciliation of the provision for income taxes to the income tax expense resulting from the application of the federal statutory tax rates to pretax income is as follows:
1996 1995 1994 ---- ---- ---- Tax provision (benefit) at statutory $ 16,557 $ (2,392,492) $ (2,846,631) rate Amortization of goodwill 69,382 - - Loss on conversion of debt to equity - 452,124 - Merger transaction expenses - - 231,308 Change in valuation allowance (103,797) 1,695,325 2,341,914 Other 17,858 245,043 260,942 ----------- ------------- ------------ Total provision (benefit) for income $ - $ - $ (12,467) taxes =========== ============ ============
As of June 30, 1996, the Company had consolidated net operating loss carryforwards (NOL's) of approximately $18 million which expire in varying amounts through the fiscal years 2005 through 2010. Due to the merger with Marco's Restaurants in 1994, the consolidated pre-acquisition NOL's of approximately $11 million are not available to offset any future taxable income that may be generated by Marco's Restaurants. In addition, the utilization of pre-acquisition NOL's is further limited due to a greater than 50% change in ownership. The Company has not filed its federal income tax returns for December 31, 1994 and 1995. The preparation of such returns could result in changes to the disclosures herein. The Company does not expect penalties to be assessed since management believes that no taxes are due. An uncertainty exists as to whether the Company can file a consolidated federal income tax return that includes Marco's Restaurants. Should the Company be precluded from filing consolidated federal income tax returns with Marco's Restaurants, the Company could not offset the taxable income of Marco's Restaurants against the losses of other entities. No liability has been recorded for income taxes, if any, that may be payable. Management believes that it is reasonably possible that the Company will prevail; however, should the Company not prevail in this matter, the Company could owe income taxes of approximately $200,000 on Marco's estimated taxable income for the years ended December 31, 1994 and 1995. 9. STOCKHOLDERS' EQUITY: ISSUANCES OF COMMON STOCK FISCAL YEAR 1996: In December 1995, the Company issued 225,000 shares of common stock valued at approximately $180,000 in partial satisfaction of a settlement of a lawsuit. In January 1996, the Company issued 112,598 shares of common stock as payment of a dividend to preferred shareholders. In January 1996, the Company issued 1,666,667 shares of common stock valued at $2,966,667 in connection with the acquisition of Pasta Co. In February 1996, the Company issued 100,000 shares of common stock as payment of legal fees of $150,000. F - 18 57 9. STOCKHOLDERS' EQUITY CONT'D: In February of 1996, the Company issued 12,000 shares of common stock valued at $18,000 in settlement of a lawsuit. In June 1996, the Company issued 205,367 shares of common stock as payment of a dividend to preferred shareholders. FISCAL YEAR 1995: In July 1994, the Company issued 40,000 shares of common stock valued at $260,000 in satisfaction of a commission in connection with the merger with Marco's Restaurants, of which 20,000 shares were issued to a director of the Company. In August 1994, the Company issued 53,516 shares of common stock valued at approximately $241,000 in satisfaction of construction liabilities related to a Billy Blues restaurant in Dallas, Texas. In September 1994, the Company received net proceeds of approximately $1.0 million from a private placement of 375,438 shares of common stock. In September 1994, the Company issued 16,435 shares of common stock in lieu of cash equivalent interest payments of $47,250 related to its subordinated debentures. In November 1994, the Company issued 33,493 shares of common stock valued at $70,000 in satisfaction of construction liabilities related to a Billy Blues restaurant in Dallas, Texas. In December 1994, the Company issued 69,132 shares of common stock as payment of a dividend to preferred stockholders. In February 1995, a preferred stockholder converted 800 shares of preferred stock into 1,000 shares of common stock. In March 1995, the Company issued 16,435 shares of common stock in lieu of cash equivalent interest payments of $47,250 related to its subordinated debentures. In June 1995, the Company issued 153,477 shares of common stock in satisfaction of trade payables of approximately $321,000. In June 1995, the Company issued 39,750 shares of common stock in satisfaction of approximately $80,000 in construction liabilities related to its Billy Blues restaurant in Denver, Colorado. In June 1995, the Company issued 13,000 shares of common stock in satisfaction of a liability of approximately $40,000 related to a consulting agreement. In June 1995, the Company issued 68,800 shares of common stock in satisfaction of an employment contract settlement of $172,000. In June 1995, the Company issued 26,312 shares of common stock in satisfaction of notes payable of $50,000. In June 1995, the Company issued 64,019 shares of common stock as payment of a dividend to preferred stockholders. In June 1995, the Company issued 1,093,904 shares of common stock for the conversion of approximately $2.5 million of subordinated principal and accrued interest on debentures. F - 19 58 9. STOCKHOLDERS' EQUITY CONT'D: In June 1995, the Company issued 621,500 shares of common stock in a private placement and received net proceeds of approximately $1.2 million. FISCAL YEAR 1994: In August 1993, the Company issued 170,549 shares of common stock in connection with the acquisition of Pete's Hospitality. As provided for in the acquisition agreement, the total amount of the Company's common stock issued was subsequently increased to 377,325 shares due to a decline in valuation of the Company's stock. In October 1993, the Company issued 450,000 shares of common stock through a private offering. Proceeds from the sale, net of offering costs, were approximately $3.8 million. In December 1993, the Company issued 14,500 shares of common stock valued at $12 per share, or $175,000, in connection with the acquisition of a restaurant in Arizona. During 1994, the Company issued 231,900 shares of common stock in connection with the exercise of 231,900 Series A Warrants. Net proceeds received were $1,307,420, net of related costs. Additionally, in 1994, the Company issued 38,206 shares of its common stock to two individuals satisfying the Company's obligations to them. PREFERRED STOCK In February 1993, the Company issued 450,000 shares of 9% Cumulative Convertible Preferred Stock ("Preferred Stock") with a face amount of $10 per share. Dividends are cumulative and are payable in semi-annual installments, on June 30 and December 31, at a rate of $.90 per share per annum. Dividends may be paid in either cash or an equivalent value of common stock. The Preferred Stock has no voting rights and has a liquidation preference of $10 per share plus accumulated and unpaid dividends. Holders of the shares of Preferred Stock have the right, at the holder's option, to convert any or all such shares into common stock at any time. If at any time the closing sale price of the Company's common stock exceeds $10 per share, the Company may convert the Preferred Stock to common stock. The Preferred Stock is convertible at a rate of one share of common stock for each $8 in face value of Preferred Stock converted. The Preferred Stock is redeemable at the Company's option at $12 per share. At the close of the Company's public offering of its Preferred Stock, the Company issued, to the underwriter, warrants to purchase 45,000 shares of preferred stock at an exercise price of $12 per share until January 1997. None of these warrants have been exercised. COMMON STOCK WARRANTS AND STOCK OPTION PLANS The Company has the following common stock warrants and option plans: o SERIES A WARRANTS - The Company has 875,500 Series A Warrants outstanding at June 30, 1996. Each warrant entitles the holder to purchase one share of common stock at a price of $6.50 per share, subject to certain adjustments, until the warrants expire. The warrants were to expire on May 15, 1995. However, in January 1995, the Company extended the expiration date to May 15, 1996, and in April, 1996 the Company extended the expiration date to May 15, 1997. The Company has the right to redeem the warrants at $.01 per warrant, upon written notice, if the daily common stock closing price exceeds $7.80 per share during any twenty consecutive business days. F - 20 59 9. STOCKHOLDERS' EQUITY CONT'D: o OTHER WARRANTS - At the close of its initial public offering, the Company issued, to the underwriter, warrants to purchase 97,000 units at an exercise price of $6.15 per unit, exercisable until May 15, 1997. Each unit consists of one share of common stock and one Series A Warrant. None of these warrants have been exercised. In connection with the issuance of $3 million in subordinated notes, the Company issued 1,333,320 warrants, each of which evidence the right to purchase a share of the Company's common stock at a purchase price of $2.25 per share until December 31, 1999. In connection with an agreement to extend the repayment date of the notes, said purchase price was reduced to $1.00 per share. Also, in connection with the subordinated notes, the Company issued warrants to purchase 150,000 shares of common stock to the placement agent at an exercise price of $2.50 per share, which expire on December 31, 1999. In connection with an agreement to extend the repayment date of the notes, said purchase price was reduced to $1.00 per share. In connection with a borrowing of $1 million from an unaffiliated foreign corporation, the Company issued warrants to purchase 75,000 shares of common stock to said corporation at a purchase price of $3 per share until May 31, 1997. In connection with the issuance of common stock in a private offering, the Company issued warrants to purchase 71,250 shares of common stock to the placement agent at a purchase price of $3 per share until May 31, 1997. o STOCK OPTION PLAN - The Company has a Stock Compensation Plan under which either incentive stock options or non-qualified stock options may be issued to officers, key employees and non-employee directors of the Company. All options granted under the plan have been at fair market value or greater on the date of grant and expire five years from the date of grant. The Company has reserved a total of 1,000,000 shares of common stock for the plans and an additional 388,500 options were available for grant. A summary of stock option activities during 1994, 1995 and 1996 is as follows:
NUMBER OF OPTION PRICE SHARES PER SHARE Options outstanding at June 27, 1993 195,000 $ 3.00 to $ 7.84 Granted 502,000 4.63 to 10.50 Canceled (237,500) 5.12 to 10.50 Exercised (2,500) 3.00 -------- Options outstanding at July 3, 1994 457,000 4.63 to 5.09 Granted 747,000 2.00 to 2.88 Canceled (687,000) 4.63 to 5.09 -------- Options outstanding at July 2, 1995 517,000 2.00 to 4.63 Granted 134,500 1.00 Canceled (40,000) 2.00 to 4.63 -------- Options outstanding at June 30, 1996 611,500 1.00 to 2.88 ======== Exercisable at June 30, 1996 149,000 1.00 to 2.88 ========
F - 21 60 10. RELATED PARTY TRANSACTIONS On September 7, 1995, the Board of Directors of the Company approved the acquisition of all of the issued and outstanding shares (the "Shares") of Pasta Co. from Mr. Bombaywala, the sole stockholder and director of Pasta Co. On September 14, 1995, the Company, Mr. Bombaywala, Pasta Co. and the Company, entered into an Agreement and Plan of Merger (the "Merger Agreement") which provided for the merger of Pasta Co. with and into the Company as the surviving corporation (the "Merger"). The principal assets of Pasta Co. were associated with its ownership of ten (10) restaurants in Houston, Texas. In consideration for the Shares, Mr. Bombaywala received 1,666,667 shares of the Company's Common Stock (the "Merger Shares") and two promissory notes in the aggregate principal amount of $3,750,000 (the "Notes"). The Merger Shares were valued at $1.78 per share which was the market value of the Common Stock on the date of the Merger. The total consideration paid to Mr. Bombaywala was $2,966,667; however, as provided below, a portion of the Merger Shares are subject to future release and earn out. In addition, the Company assumed approximately $3.6 million of liabilities and indebtedness of Pasta Co. outstanding as of January 26, 1996, including amounts due to Mr. Bombaywala as noted below. Although not required by law, the Board of Directors of the Company elected to submit the Merger to its independent shareholders for approval at its Annual Meeting of Shareholders which was held January 9, 1996. Mr. Bombaywala, who then owned 4,620,000 shares of the Company's Common Stock, or 41.6%, excluding the Merger Shares, did not vote on the Merger at the Annual Meeting. The Merger was approved, and the effective date of the Merger (the "Effective Date") was January 26, 1996. As of the Escrow Closing Date, the Company was granted the right to manage Pasta Co. and received a management fee of three percent (3%) of the gross revenues of Pasta Co. through the Effective Date. Such fees amounted to approximately $137,000. The Merger Shares are restricted securities but have demand and incidental registration rights. A total of 350,000 Merger Shares are subject to a Development Escrow Agreement which provides for the earnout and release of such shares based upon (i) the opening of five additional Pasta Co. restaurants on or before December 31, 1996 at an average cost not to exceed $400,000 per restaurant, or (ii) the share price for the Company's Common Stock exceeding $5.00 per share for any ten consecutive business days on or before June 30, 1996 or $7.00 per share on or before June 30, 1997. The Notes consist of (i) a promissory note from PAC in the principal amount of $2,750,000, bearing interest at 10% per annum which, subject to certain mandatory prepayment provisions, is due and payable September 15, 2002, and (ii) a promissory note from PAC in the principal amount of $1,000,000 bearing interest at 10% per annum, the principal amount of which, subject to certain mandatory prepayment provisions, is due and payable in two equal annual installments on December 31, 1996 and December 31, 1997. Quarterly payments of interest are due and payable on the Notes on the 15th day of December, March, June and September of each year the Notes are outstanding. Commencing September 15, 2000, the outstanding principal on the $2,750,000 Note will be amortized and paid in quarterly installments over the remaining two year term. The Notes require mandatory prepayment in the amount of and to the extent of (i) fifty percent of the proceeds from any public offering received by the Company, and (ii) proceeds from private financings in excess of $1,000,000 received by the Company. Mr. Bombaywala has agreed to defer any and all principal and interest until July of 1997. On the Effective Date, a promissory note of Pasta Co. to Mr. Bombaywala in the principal amount of $1,260,000 was paid by the Company. Payment was made as follows: $150,000 in cash, transfer of ownership of land and building valued at $515,000 and a note to Mr. Bombaywala in the amount of $595,000. The land and building transferred had been a non-productive asset of the Company, and management is of the opinion that the value represented its fair value at the time of transfer. Mr. Bombaywala received an additional note from the Company in the amount of $224,202 for other obligations of Pasta Co. arising prior to the Effective Date. The Notes are secured by a guarantee of the Company, a pledge by the Company of all issued and outstanding shares of Pasta Co. and a security interest in all of the assets relating to the ten restaurants owned by Pasta Co. on the Effective Date. The lien of Mr. Bombaywala will be junior to any prior liens granted by Pasta Co. on or before the Effective Date. F - 22 61 10. RELATED PARTY TRANSACTIONS CONT'D: At June 30, 1996, the Company has a noncurrent, 6% note receivable from Ghulam Bombaywala ("Mr. Bombaywala"), the majority shareholder, officer and a director of the Company in the amount of $2,175,310, payable in three annual principal installments of $200,000 each beginning July 31, 1996, and a final payment of the remaining principal and interest on July 31, 1999. The note is collateralized by certain assets of the shareholder. Accrued interest of $170,844 as of July 2, 1995 was due July 31, 1995. In September of 1995, the Board of Directors voted to modify the terms of the note by deferring payment of the interest due until December 31, 1995. In May 1996, the Company and Mr. Bombaywala agreed to offset interest due from Mr. Bombaywala under the note against interest due to Mr. Bombaywala under notes associated with the purchase of Pasta Co. At June 30, 1996, $206,388 of interest payable to Mr. Bombaywala was offset against interest receivable from Mr. Bombaywala. The remaining balance of interest receivable at June 30, 1996 was $94,974. Such amount, along with amounts accruing in the future will be offset against interest payable to Mr. Bombaywala. In December 1994, Mr. Bombaywala purchased $500,000 principal amount of the Company's subordinated notes and received 222,222 warrants to purchase a like number of shares of common stock. Mr. Bombaywala is also obligated to purchase the remaining $2.5 million of the subordinated notes if they have not been paid in full at maturity. Mr. Bombaywala has also guaranteed other obligations of the Company, including notes payable and leases associated with Marco's and Pasta Co. restaurants. In August of 1996, the Company sold land, building and equipment related to a Marco's Restaurant for a total of $350,000 and leased the assets back from Mr. Bombaywala. The Company believes that both the selling price and lease rate are comparable to those which could be attained from an unrelated third party. In May of 1995, the Company began factoring accounts receivable through Catalyst Financial Co., ("Catalyst") paying factoring fees of approximately $19,000 in fiscal 1995 and $75,000 in fiscal 1996. The Company believes that the fees paid were comparable to those that would be charged by a competing factoring company. Mr. Bombaywala is a principal of Catalyst. Until April 1, 1996, the Company was obligated under a long-term lease commitment associated with a closed Billy Blues restaurant located in Denver, Colorado. At such time, as incentive for being relieved of such obligation, the Company transferred the fixed assets of the restaurant to a limited partnership of which the general partner is an unaffiliated third party. As additional incentive to such general partner, Mr. Bombaywala and Angelo Pitillo, Director, President and Chief Operating Officer of the Company, invested in the partnership as limited partners. The limited partnership will not operate the restaurant as a Billy Blues restaurant. In June 1993, the Company entered into area development agreements for the development of restaurant franchises in Texas, Mexico and Central America (the "Development Rights"). As consideration for the Development Rights, the Company issued 47,000 shares of its restricted stock, valued at $8.50 per share, or an aggregate consideration of $399,500. Also in June 1993, the Company sold the Development Rights to Tex-Mex Ventures, Inc. ("Tex-Mex"), an affiliated company, for an $800,000 five-year promissory note to the Company. The note was convertible, at the option of the Company, in whole or in part, into an equity position of Tex-Mex of up to 20%. The principal of the note is due in June 1998 and accrues interest at 8%, which is payable semi-annually. The note was initially collateralized by the Development Rights and all other assets of Tex-Mex. Four principal shareholders of Tex-Mex were or are former officers and/or directors of the Company. In June 1994, the Company elected to convert a portion of the note receivable from Tex-Mex into 600,000 shares of Tex-Mex common stock (the "Tex-Mex Shares") and modify the note to an uncollateralized obligation for the remaining balance of $199,500. F - 23 62 10. RELATED PARTY TRANSACTIONS CONT'D: On June 30, 1994, the Company sold the Tex-Mex Shares to JEB Investment Corporation ("JEB"), an unaffiliated entity, for a $1,800,000 promissory note, with interest at 9% collateralized by the Tex-Mex Shares. The note matured on June 30, 1996. In 1996, Tex-Mex went public under the name CluckCorp International, Inc. ("CluckCorp"). In June of 1996, the Company agreed to accept 240,000 shares of CluckCorp as settlement of all principal and interest due under the JEB note. The Company also agreed that the maximum amount that the Company can derive from the sale of the stock is $600,000. The Company intends to sell the stock as soon as possible. For financial reporting purposes, no gain has been recognized on the 1993 sale of the Development Rights or the 1994 sale of the Tex-Mex Shares. As of June 30, 1996 neither the Tex-Mex nor the JEB notes are reflected on the books of the Company. Any net proceeds from the sale of CluckCorp stock will be recorded as a gain when collected. As a result of the acquisitions of the Longhorn Cafes in 1993, Julian Fertitta (Mr. Fertitta), former owner of Longhorn Cafes, was elected as an officer and director of the Company. The Company also assumed notes payable to Mr. Fertitta of $1,323,753. During 1994, the Company repaid $250,000 of the principal balance and interest of $66,738. In May 1994, the Company and Mr. Fertitta entered into a settlement agreement for the purpose of releasing the Company from the remaining indebtedness of the notes, in consideration for which the Company transferred to Mr. Fertitta all the common stock of Lake Longhorn, Inc. and entered into a 12-month consulting agreement with Mr. Fertitta calling for a consulting fee of $10,000 per month. The consulting agreement expired in May 1995. Mr. Fertitta was issued 13,000 shares of common stock in payment for the last four months of the consulting agreement. Michael S. Chadwick, ("Mr. Chadwick"), a director of the Company received 20,000 shares of the Company's common stock in satisfaction of a commission owed to him in connection with the merger of the Company with Marco's Restaurants. In connection with the private offering of the Subordinated Notes, the Company entered into an 18-month Financial Advisory Agreement (the "Advisory Agreement") with Sanders Morris Mundy Inc. ("SMM"), the placement agency in the offering. As placement agent, SMM received a 10% commission on the sale of the Subordinated Notes, excluding the $500,000 of Subordinated Notes purchased by Mr. Bombaywala. Under the terms of the Advisory Agreement, the Company also agreed to pay SMM a monthly fee of $10,000 in consideration for assistance in the Company's acquisition efforts and capital raising endeavors. Furthermore, pursuant to the Advisory Agreement, the Company also issued to SMM warrants to purchase 150,000 shares of Common Stock at an exercise price of $2.50 per share (the "SMM Advisory Warrants"), which expire on December 31, 1999. SMM subsequently transferred 45,000 of the SMM Advisory Warrants to Mr. Chadwick, Senior Vice President and a Managing Director of SMM and a director of the Company. In March 1996, in connection with an extension on the payment terms of the Subordinated Notes, the exercise price of the warrants was reduced to $1.00 per share and the Advisory Agreement was extended for an additional 18 months with a monthly fee of $5,000 per month. In May 1995, the Company entered into an agreement with L. Douglas Peterson, (the "Peterson Agreement") to amend the then existing employment agreement between the two parties. The Peterson Agreement provided for the termination of Mr. Peterson and the establishment of an ongoing consulting relationship. As compensation for amending the employment agreement, Mr. Peterson received 68,800 shares of the Company's Common Stock valued at $172,000. Mr. Peterson also received the license to use certain of the Company's trade names at the Annual Puyallup Fair (the "Fair") held in the Seattle, Washington area. The license is automatically renewable on a year-to-year basis but shall terminate if Mr. Peterson fails to obtain the Fair concession for two consecutive years. Peterson is not obligated to make payments related to the use of the Company's trade names at the Fair. F - 24 63 10. RELATED PARTY TRANSACTIONS CONT'D: In September of 1995, the Company entered into an eight month financial advisory agreement with Noesis Capital Corp. ("Noesis"), in order to obtain assistance in identifying sources of financing, developing its acquisition program and with shareholder relations. Under the terms of the agreement, the Company paid $60,000 to Noesis during fiscal 1996. Nico B. Letschert is President of Noesis and a director of the Company. 11. QUARTERLY INFORMATION (UNAUDITED): The following table sets forth certain quarterly operating data.
FISCAL 1996 QUARTER ENDED -------------------------------------------------------------------------- OCTOBER 1, 1995 DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996 Revenues $9,443,334 $8,442,038 $10,118,214 $12,125,857 Income (loss) from operations 35,547 84,126 (77,948) (14,202) Net income (loss) 81,625 93,190 (96,890) (29,228) Net income (loss) per common $ -0- $ -0- ($.01) $ -0- share
FISCAL 1995 QUARTER ENDED -------------------------------------------------------------------------- OCTOBER 2, 1994 JANUARY 1, 1995 APRIL 2, 1995 JULY 2, 1995 Revenues $10,063,635 $8,897,447 $8,948,210 $ 9,742,365 Loss from operations (547,772) (346,915) (224,564) (4,692,422) Loss before extraordinary item (581,840) (419,437) (345,815) (6,145,228) Net income (loss) (581,840) 36,142 (345,815) (6,145,228) Loss per common share before extraordinary item ($.08) ($.06) ($.05) ($.68) Net loss per common share ($.08) ($.01) ($.05) ($.68)
During the fourth quarter of 1995, the Company decided to either close or sell its interest in four of its Billy Blues restaurants and recorded a provision for restaurant closings of approximately $2.9 million. Also included in this amount was a provision for a lease obligation related to management's reassessment of the feasibility of opening a new restaurant. In May of 1995, the Company offered its Subordinated Debentureholders the right to convert the principal and accrued interest owed on their debentures into common stock at a modified conversion rate of $2.31 principal and accrued interest for one share of common stock. Debentureholders owed an aggregate of approximately $2.5 million agreed to the conversion and received 1,093,904 shares of stock. The Company recorded a fourth quarter loss on conversion of $1.3 million equal to the then current market value of the number of shares actually issued less the number of shares which would have been issued had the conversion been at the stated conversion rate of $5 per share. F - 25 64 12. EMPLOYEE BENEFIT PLANS: An incentive savings plan has been established which is a qualified profit sharing plan under Section 401(k) of the Internal Revenue Code. Contributions to the incentive savings plan are determined by the board of directors. Employees may also make contributions to the incentive savings plan based upon a percentage of qualified compensation in accordance with the Internal Revenue Service rules and regulations. No contributions were made to this plan by the Company during 1996, 1995 or 1994. F - 26 65
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE ------ ---------------------- ------------- 4.1 Amendment 1 to Warrant Agreement covering Series A Warrants 4.2 Amendment 2 to Warrant Agreement covering Series A Warrants 4.3 Notice of Extension of Warrant Expiration Date to May 15, 1997 4.4 First Amendment to Purchase Agreement dated effective as of March 31, 1996, among the Company and the Purchasers relating to $3,000,000 12% Subordinated Notes due March 31, 1996 4.5 Security Agreement dated as of May 20, 1996 by the Company in favor of the Purchasers relating to $3,000,000 12% Subordinated Notes 4.6 First Amendment to Financial Advisory Agreement dated March 31, 1996 between the Company and Sanders Morris Mundy, Inc. ("SMM") 4.7 Form of Amendment to 12% Subordinated Notes of the Company due March 31, 1996 extending maturity date to July 31, 1997 10.1 1994 Stock Compensation Plan of the Company 10.2 First Amendment to the 1994 Stock Compensation Plan of the Company 10.3 Second Amendment to the 1994 Stock Compensation Plan of the Company 10.4 License Agreement dated February 21, 1996 between the Company and Bevo's Enterprises licensing the Company to use the name Longhorn Cafe in the operation of the business 10.5 $2,750,000 promissory note from Pasta Acquisition Co. to Ghulam M. Bombaywala dated effective September 14, 1995 10.6 $1,000,000 promissory note from Pasta Acquisition Co. to Ghulam M. Bombaywala dated effective September 14, 1995 10.7 $595,000 promissory note from Pasta Acquisition Co. to Ghulam M. Bombaywala dated effective January 26, 1996 10.8 $224,202 promissory note from Pasta Acquisition Co. to Ghulam M. Bombaywala dated effective January 26, 1996 10.9 $1,200,000 promissory note from the Company to Metrobank, N.A. dated March 15, 1996
66
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE ------ ---------------------- ------------- 10.10 Security Agreement between Pasta Acquisition Co., The Original Pasta Co. and Ghulam M. Bombaywala dated September 14, 1995 10.11 Security Agreement Pledge between the Company and Ghulam M. Bombaywala dated September 14, 1995 10.12 Guaranty Agreement Pledge between the Company and Ghulam M. Bombaywala dated September 14, 1995 10.13 Service Mark License Agreement between Pasta Acquisition Co. and Ghulam M. Bombaywala dated September 14, 1995 11.1 Statement regarding computation of per share earnings 21.1 List of subsidiaries 27.1 Financial Data Schedule
EX-4.1 2 AMEND. 1 TO WARRANT AGREEMENT - SERIES A WARRANTS 1 AMENDMENT NO. 1 TO WARRANT AGREEMENT THIS AMENDMENT NO. 1 TO WARRANT AGREEMENT (the "Agreement") is dated January 25, 1995, by and between Billy Blues Food Corporation, a Texas corporation with its principal offices in Houston, Texas (the "Company"), and North American Transfer Co., as warrant agent (the "Warrant Agent"). W I T N E S S E T H: WHEREAS, the parties hereto previously entered into that certain Warrant Agreement dated May 15, 1992 (the "Original Agreement"), a copy of which is attached hereto as Exhibit A, for the purpose of setting forth the terms and conditions of the issuance, registration, transfer, exchange and redemption of the Company's Series A Redeemable Common Stock Purchase Warrants (the "Series A Warrants"); WHEREAS, all capitalized terms used herein shall have the same meaning assigned them in the Original Agreement unless otherwise set forth herein. Furthermore, this Agreement confirms and ratifies all terms and conditions set forth in the Original Agreement except as expressly modified herein; and WHEREAS, the parties hereto desire to amend the Original Agreement for the purpose of extending the Warrant Expiration Date from May 15, 1995 to May 15, 1996; NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties hereto agree as follows: 1. Amendment and Restatement of Section 1(i) of the Original Agreement. Section 1(i) of the Original Agreement is hereby amended and restated in its entirety as follows for the purpose of extending the Warrant Expiration Date from May 15, 1995 to May 16, 1996: 1(i) "Warrant Expiration Date" shall mean 5:00 p.m. (New York time) on May 15, 1996, with respect to the Series A Warrants, or the redemption date as defined in Section 8, whichever is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company may, at its election, extend the Warrant Expiration Date with respect to the Series A Warrants. 2. Current Prospectus. The Company agrees to monitor the market price of its common stock, par value $.05 per share (the "Common Stock") and will undertake to file a post-effective amendment to its registration statement dated February 8, 1994, Registration No. 33-54684 (the "Registration Statement"), at such time as the exercise of the Series A Warrants appears more likely. Furthermore, the Company will not, without the opinion of counsel to the Company, issue any of its Common Stock pursuant to the exercise of any of the Series A Warrants AMENDMENT NO. 1 TO WARRANT AGREEMENT - Page 1 2 unless there is a post-effective amendment to the Registration Statement in effect containing a current prospectus meeting the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended. 3. Miscellaneous. (a) This Agreement shall be binding upon and inure to the benefit of the Company and the Warrant Agent and their respective successors and assigns, and the holders from time to time of Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. (b) This Agreement shall be governed and construed in accordance with the laws of the State of New York; provided, however, that the Series A Warrants shall be governed by and construed in accordance with the laws of the State of Texas, without reference to principles of conflict of laws. (c) If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be effected thereby. IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 to Warrant Agreement as of the date first above set forth. COMPANY: BILLY BLUES FOOD CORPORATION By: /s/ ANGELO PITILLO ------------------------------------- Name: Angelo Pitillo ----------------------------------- Title: President ---------------------------------- WARRANT AGENT: NORTH AMERICAN TRANSFER CO. By: /s/ MILDRED ROSTOLDER ------------------------------------- Name: Mildred Rostolder ----------------------------------- Title: Principal ---------------------------------- AMENDMENT NO. 1 TO WARRANT AGREEMENT - Page 2 EX-4.2 3 AMEND. 2 TO WARRANT AGREEMENT - SERIES A WARRANTS 1 AMENDMENT NO. 2 TO WARRANT AGREEMENT THIS AMENDMENT NO. 2 TO WARRANT AGREEMENT (the "Agreement") is dated April 15, 1996, by and between Watermarc Food Management Co., formerly known as Billy Blues Food Corporation, a Texas corporation with its principal offices in Houston, Texas (the "Company"), and North American Transfer Co., as warrant agent (the "Warrant Agent"). W I T N E S S E T H: WHEREAS, the parties hereto previously entered into that certain Warrant Agreement dated May 15, 1992 (the "Original Agreement"), a copy of which is attached hereto as Exhibit A, for the purpose of setting forth the terms and conditions of the issuance, registration, transfer, exchange and redemption of the Company's Series A Redeemable Common Stock Purchase Warrants (the "Series A Warrants"): WHEREAS, all capitalized terms used herein shall have the same meaning assigned them in the Original Agreement unless otherwise set forth herein. Furthermore, this Agreement confirms and ratifies all terms and conditions set forth in the Original Agreement except as expressly modified herein; and WHEREAS, the parties hereto desire to amend the Original Agreement for the purpose of extending the Warrant Expiration Date from May 15, 1996 to May 15, 1997: NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties hereto agree as follows: 1. Amendment and Restatement of Section 1(i) of the Original Agreement. Section 1(i) of the Original Agreement is hereby amended and restated in its entirety as follows for the purpose of extending the Warrant Expiration Date from May 15, 1996 to May 15, 1997: 1(i) "Warrant Expiration Date" shall mean 5:00 p.m. (New York time) on May 15, 1997, with respect to the Series A Warrants, or the redemption date as defined in Section 8, whichever is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company may, at its election, extend the Warrant Expiration Date with respect to the Series A Warrants. 2. Current Prospectus. The Company agrees to monitor the market price of its common stock, par value $.05 per share (the "Common Stock") and will undertake to file a post- AMENDMENT NO. 2 TO WARRANT AGREEMENT - Page 1 2 effective amendment to its registration statement dated July, 26, 1995, Registration No. 33-93450 (the "Registration Statement"), at such time as the exercise of the Series A Warrants appears more likely. Furthermore, the Company will not, without the opinion of counsel to the Company, issue any of its Common Stock pursuant to the exercise of any of the Series A Warrants unless there is a post-effective amendment to the Registration Statement in effect containing a current prospectus meeting the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended. 3. Miscellaneous. (a) This Agreement shall be binding upon and inure to the benefit of the Company and the Warrant Agent and their respective successors and assigns, and the holders from time to time to Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. (b) This Agreement shall be governed and construed in accordance with the laws of the State of New York; provided, however, that the Series A Warrants shall be governed by and construed in accordance with the laws of the State of Texas, without reference to principles of conflict of laws. (c) If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be effected thereby. IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 2 to Warrant Agreement as of the date first above set forth. COMPANY: WATERMARC FOOD MANAGEMENT CO. By: /s/ ANGELO PITILLO ------------------------------------- Name: Angelo Pitillo ----------------------------------- Title: President & Chief Operating Officer ---------------------------------- WARRANT AGENT: NORTH AMERICAN TRANSFER CO. By: /s/ MILDRED ROSTOLDER --------------------------------------- Name: Mildred Rostolder -------------------------------------- Title: Principal ------------------------------------- AMENDMENT NO. 2 TO WARRANT AGREEMENT - Page 2 EX-4.3 4 NOTICE OF EXTENSION OF WARANT EXPIRATION 1 NOTICE OF EXTENSION OF WARRANT EXPIRATION DATE NOTICE is hereby given that Watermarc Food Management Co., formerly known as Billy Blues Food Corporation, (the "Company") has extended the expiration date of its Series A Redeemable Common Stock Purchase Warrants (the "Series A Warrants") from 5:00 p.m. (Eastern time) on May 15, 1996 to 5:00 p.m. (Eastern time) on May 15, 1997. The extension was effected pursuant to an amendment of the Warrant Agreement, dated May 15, 1992, between the Company and North American Transfer Co., as Warrant Agent for the holders of the Series A Warrants. The Company will monitor the market price of its common stock, par value $.05 per share (the "Common Stock") and, if necessary, file a post-effective amendment to its Registration Statement dated July 26, 1995, No. 33-93450 (the "Registration Statement") at such time as the exercise of the Series A Warrants appears more likely. The Company will not, without the opinion of counsel to the Company, issue any shares of its Common Stock pursuant to the exercise of any of the outstanding Series A Warrants unless a post-effective amendment to the Registration Statement is in effect, which Registration Statement shall contain a current prospectus meeting the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended. Any comments or questions regarding the extension of the expiration date for the Company's Series A Warrants should be addressed to Mr. Angelo Pitillo, President, Watermarc Food Management Co., 10777 Westheimer, Suite 1030, Houston, TX 77042-3498, (713) 783-0500. PLEASE ATTACH THIS NOTICE TO THE CERTIFICATE EVIDENCING THE SERIES A WARRANTS CURRENTLY HELD BY YOU EX-4.4 5 1ST AMEND. TO PURCHASE AGREEMENT 1 FIRST AMENDMENT TO PURCHASE AGREEMENT First Amendment to Purchase Agreement dated effective as of March 31, 1996 (the "Amendment"), among WATERMARC FOOD MANAGEMENT CO., a Texas corporation formerly known as Billy Blues Food Corporation (the "Company"), and the persons listed in Schedule 1 hereto (the "Purchasers"); WITNESSETH: Whereas, the Company and the Purchasers are parties to a Purchase Agreement dated as of December 19, 1994 (the "Purchase Agreement"), pursuant to which the Company issued and the Purchasers purchased 60 investment units (the "Units") each consisting of (a) $50,000 of the Company's 12% Subordinated Notes due March 31, 1996 (the "Notes") and (b) warrants (the "Warrants") evidencing the right to purchase 22,222 shares of Common Stock, $.05 par value (the "Company Common Stock"), of the Company, at $2.25 per share; and Whereas, the Company has requested that the Purchasers agree to extend the maturity date of the Notes until July 31, 1997; and Whereas, the Purchasers are willing to extend the maturity date of the Notes upon the terms and subject to the conditions set forth herein; Now, therefore, in consideration of the foregoing premises, the following mutual agreement, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchasers agree to amend the Purchase Agreement as follows: 1. Definitions. Capitalized terms used herein shall have the meaning assigned to them in the Purchase Agreement unless otherwise defined herein or the context otherwise requires. 2. Amendments to the Purchase Agreement. The Purchase Agreement is hereby amended as follows: (a) Section 1 of the Purchase Agreement is hereby amended by: (i) deleting the words "March 31, 1996" and substituting in place thereof the words "July 31, 1997" and (ii) deleting reference to "$2.25" and substituting in place thereof "$1.00." 2 (b) Section 7 of the Purchase Agreement is hereby amended by inserting the following new Sections 7.11, 7.11, and 7.12 immediately after Section 7.10: 7.11 SECURITY AGREEMENT. The Company shall execute and deliver to the Purchasers a Security Agreement substantially in the form attached hereto as Exhibit D pursuant to which the Company will grant the Purchasers a security interest in 100% of the outstanding securities of Marco's Mexican Restaurants, Inc., a Texas corporation ("Marco's"), and its rights to the name "Marco's" and any variations thereof, the trademark covered by Registration No. 1631944 issued on January 15, 1991, on the mark "Marco's", and all proceeds thereof. 7.12 LIMITATION ON LIENS. The Company will not (and will not permit Marco's to), directly or indirectly, create, incur, assume, or permit to exist any lien, mortgage, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) (collectively, referred to as "Liens") on or with respect to the capital stock of, or any property or asset (including any document or instrument in respect of goods or accounts receivable) of Marco's, now owned or any income or profits therefrom, except for Liens created in the ordinary course of business to secure borrowings incurred in connection with the Company's continued development of its business. 7.13 LIMITATION ON PAYMENT OF DISTRIBUTIONS BY MARCO'S. The Company will not (and will not permit Marco's to) and Marco's will not declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations, or securities on account of any shares of any class of capital stock of Marco's, or purchase, redeem, or otherwise acquire for value (or permit Marco's to do so) any shares of any class of capital stock of Marco's or any warrants, rights, or options to acquire any such shares, now or hereafter outstanding, except that Marco's may declare and make any dividend payment or other distribution payable in common stock of Marco's. 7.14 LIMITATION ON INVESTMENTS, LOANS, ETC. BY MARCO'S. Marco's shall not (and the Company shall not permit Marco's to) make any expenditure or incur any liabilities (contingent or otherwise) (i) for the acquisition of stock or indebtedness of any other Person, (ii) for loans, advances, capital contributions, or transfers of property to any other Person, or (iii) in respect of any guaranties (or other commitments) or obligations of, any other Person, including without limitation the Company, other than intercompany transfers between Marco's and the Company, provided that such transfers are made in the ordinary course of business of Marco's and the Company in accordance with their past practice. 2 3 3. Amendments to the Notes. Each of the Notes is hereby amended by deleting the words "March 31, 1996" wherever they may appear and substituting in place thereof the words "July 31, 1997." 4. Amendments to the Warrants. Each of the Warrants is hereby amended by deleting the number "$2.25" in the first paragraph and substituting in place thereof the number "$1.00." 5. Representations and Warranties. The Company represents and warrants as follows: (a) The execution, delivery and performance of this Amendment and the Purchase Agreement, as modified by this Amendment, and the transactions contemplated hereby and thereby (i) are within the corporate authority of the Company, (ii) have been authorized by all necessary corporate proceedings on the part of the Company, (iii) do not conflict with or result in any material breach or contravention of any provision of law, statute, rule, or regulation to which the Company is subject or any judgment, order, writ, injunction, license, or permit applicable to the Company, and (iv) do not conflict with any provision of the corporate charter or bylaws of the Company or any agreement or other instrument binding upon the Company. (b) The execution, delivery, and performance of this Amendment and the Purchase Agreement, as modified by this Amendment, will result in valid and legally binding obligations of the Company enforceable against it in accordance with the respective terms and provisions hereof and thereof. (c) The execution, delivery, and performance of this Amendment and the Purchase Agreement, as modified by this Amendment, and the consummation by the Company of the transactions contemplated hereby and thereby do not require any approval or consent of, or filing with, any governmental agency or authority. 6. Ratification. Except as expressly amended hereby, the Purchase Agreement, the Notes, and the Warrants are hereby ratified and confirmed in all respects and shall continue in full force and effect. This Amendment and the Purchase Agreement shall hereafter be read and construed together as a single document, and all references to the Purchase Agreement or any agreement or instrument related to the Purchase Agreement shall hereafter refer to the Purchase Agreement as amended by this Amendment. This ratification and amendment is made effective as of March 31, 1996, and the Purchasers agree that, as amended, the Notes are not in default and, if due to timing factors a default in the Notes existed for a temporary period, such default is waived and/or cured by this Amendment. 7. Notation on Notes and Warrants. Promptly following execution of this Amendment and in any event within 30 days thereof, each holder of a Note and/or a Warrant 3 4 agrees to deliver such Note and/or Warrant to the Company so that the amendments effected by this Amendment may be noted thereon. 8. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts taken together shall be deemed to constitute one and the same instrument. 9. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas (without reference to conflict of laws). 10. Execution by Marco's. Marco's has executed this Amendment to evidence its agreement comply with the covenant's contained in Sections 7.13 and 7.14 of the Purchase Agreement. In witness whereof, the Company and the Purchasers have executed this Amendment effective as of the date first above written. WATERMARC FOOD MANAGEMENT CO. By: /s/ ANGELO PITILLO ------------------------------------------ Name: Angelo Pitillo ------------------------------------------ Title: President & Chief Operating Officer ------------------------------------------ MARCO'S MEXICAN RESTAURANTS, INC. By: /s/ GHULAM BOMBAYWALA ------------------------------------------ Name: Ghulam Bombaywala ------------------------------------------ Title: Chief Executive Officer ------------------------------------------ 4 5 ---------------------------------------- Don A. Sanders ---------------------------------------- Ghulam M. Bombaywala ---------------------------------------- Atlantis Software Company Employee Profit Sharing Plan By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- ---------------------------------------- Philip M. Mount ---------------------------------------- John I. Mundy ---------------------------------------- Katherine U. Sanders ---------------------------------------- Ben T. Morris ---------------------------------------- Quinlan Quiros Schnitzer ---------------------------------------- Neil Lande, Custodian for Lynne Lande, Stephen Lande, Sara Lande, and Caroline Lande 5 6 ---------------------------------------- John E. Drury ---------------------------------------- Geroge L. Ball ---------------------------------------- John M. O'Quinn ---------------------------------------- J-All Partnership By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- ---------------------------------------- Nolan Ryan ---------------------------------------- Roger P. Lindstedt ---------------------------------------- Ray C. Childress ---------------------------------------- Kara S. Childress ---------------------------------------- Morton A. Cohn ---------------------------------------- Michael S. Chadwick 6 7 EXHIBIT D SECURITY AGREEMENT SECURITY AGREEMENT dated as of May 20, 1996, among WATERMARC FOOD MANAGEMENT CO., a Texas corporation ("Debtor"), the owner of all of the capital stock of MARCO'S MEXICAN RESTAURANTS, INC., a Texas corporation (the "Company"), and the persons identified on Exhibit A hereto (collectively, "Secured Party"). RECITALS A. Secured Party has loaned $3,000,000 to Debtor pursuant to the Purchase Agreement dated as of December 19, 1994, by and between Debtor and Secured Party (the "Original Purchase Agreement"). B. Secured Party and Debtor have this date entered into a First Amendment to Purchase Agreement (the "First Amendment"), under which, among other things, Secured Party has agreed to waive all defaults, if any, occurring on or before the date of the First Amendment and to extend the maturity date of the Notes (as defined in the Original Purchase Agreement), in consideration for which Debtor has agreed to pledge the capital stock in the Company as security therefor and to grant Secured Party a security interest in all of the Debtor's rights to the name "Marco's" and Trademark No. 1631944 issued on January 15, 1991, on the mark "Marco's" (the Original Purchase Agreement, as amended by the First Amendment, is hereafter referred to as the "Purchase Agreement"). C. Debtor is the record and beneficial owner of the issued and outstanding shares of capital stock issued by the Company described in Schedule I (being hereinafter referred to as the "Pledged Shares"). AGREEMENT In consideration of the premises and the covenants hereinafter contained and for other good and valuable consideration, receipt of which is hereby acknowledged, it is agreed as follows: 1. Definitions. The following terms shall have (unless otherwise provided elsewhere in this Security Agreement) the following respective meanings (such meanings being equally applicable to both the singular and plural form of the terms defined): "Agreement" shall mean this Security Agreement, including all amendments, modifications and supplements and any exhibits or schedules to any of the foregoing, and shall refer to the Agreement as the same may be in effect at the time such reference becomes operative. 8 "Business Day" shall mean any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the State of Texas. "Code" shall mean the Texas Uniform Commercial Code as in effect from time to time. "Collateral" shall mean the Pledged Collateral and the Mark Collateral. "Default" shall mean any event which, with the passage of time or notice or both, would, unless cured or waived, become an Event of Default. "Event of Default" shall have the meaning assigned to it in the Purchase Agreement. "Lien" shall mean any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction). "Loan Documents" shall mean this Agreement, the Purchase Agreement, those other ancillary agreements as to which Secured Party, the Company or the Debtor is a party or a beneficiary, and all other agreements, instruments, documents and certificates, including, without limitation, pledges, powers of attorney, consents, assignments, contracts, notices, and all other written matter whether heretofore, now or hereafter executed by or on behalf of Debtor and delivered to Secured Party, in connection with this Agreement or the transactions contemplated hereby. "Mark Collateral" shall have the meaning assigned to such term on Section 3 hereof. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether Federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Pledged Collateral" shall have the meaning assigned to such term in Section 2 hereof. "Purchase Agreement" shall have the meaning set forth in the recitals. 2 9 "Secured Obligations" shall have the meaning assigned to such term in Section 3 hereof. 2. Pledge. Debtor hereby pledges, assigns, hypothecates, transfers and delivers all the Pledged Shares owned by it and hereby grants to Secured Party a first priority lien on, and security interest in, and agrees to accept any interest in the Pledged Shares that is received by it as Secured Party's agent and to hold the same in trust on behalf of and for the ratable benefit of Secured Party and to deliver the same forthwith to Secured Party in the exact form received, with the endorsement of Debtor when necessary and/or appropriate undated stock powers duly executed in blank, to be held by Secured Party, subject to the terms hereof, all of the following (herein, the "Pledged Collateral"): (a) The Pledged Shares and the certificates representing the Pledged Shares (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital, or issued in connection with any reorganization), options or rights, and all dividends, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares. (b) All additional shares of stock (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital, or issued in connection with any reorganization), options or rights of the issuer of the Pledged Shares from time to time acquired by Debtor in any manner (which shares shall be deemed to be part of the Pledged Shares), and the certificates representing such additional shares, and all dividends, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of, in exchange for, as an addition to, or in substitution of any or all of such shares. 3. Security Interest. Debtor hereby grants to Secured Party a security interest in (and hereby pledges and assigns as applicable) and agrees that Secured Party shall continue to have a security interest in (and a pledge and assignment as applicable) all of Debtor's right, title and interest in the right to use the name "Marco's" and Trademark No. 1631944 issued on January 15, 1991, on the mark "Marco's" and any accessions, additions and attachments thereto and the proceeds and products thereof, including without limitation, all cash, general intangibles, accounts, inventory, equipment, fixtures, notes, drafts, acceptances, securities, instruments, chattel paper, or other property, benefits or rights arising therefrom, or other proceeds of any sale or other disposition of such property (herein the "Mark Collateral"). 4. Security for Obligations. This Agreement secures, and the Collateral is security for, the prompt payment in full when due, whether at stated maturity, by acceleration or otherwise, of the unpaid principal of and interest on any promissory notes issued to evidence loans made and to be made by Secured Party to Debtor pursuant to the Purchase Agreement; and performance of the obligations, whether for principal, premium, interest, fees, costs and expenses, and all obligations of Debtor now or hereafter existing under the Purchase Agreement 3 10 or of Debtor now existing or hereafter arising under this Agreement (collectively, the "Secured Obligations"). 5. Delivery of Pledged Collateral. All certificates representing or evidencing the Pledged Shares shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Secured Party shall have the right, at any time in its discretion and without notice to Debtor, to transfer to or to register in the name of Secured Party or any of its nominees any or all of the Pledged Shares. In addition, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Shares for certificates or instruments of smaller or larger denominations. 6. Representation and Warranties. Debtor represents and warrants to Secured Party that: (a) Debtor is, and at the time of delivery of the Pledged Shares to Secured Party pursuant to Section 4 hereof, the legal holder of record and the sole beneficial owner of the Pledged Shares and has good and marketable title to the Pledged Shares free and clear of any Lien, mortgage, hypothecation, security interest, charge, option or other encumbrance whatsoever, except for the Lien created by this Agreement. (b) All of the Pledged Shares have been duly authorized, validly issued and are fully paid and non-assessable. (c) Debtor has the full power, authority and legal right to pledge, assign, transfer, deliver, deposit and set over the Pledged Collateral pledged by Debtor to Secured Party as provided herein. (d) None of the Pledged Shares has been issued or transferred in violation of the securities registration, securities disclosure or similar laws of any jurisdiction to which such issuance or transfer may be subject. (e) The Pledged Shares constitute one hundred percent (100%) of the issued and outstanding shares of stock of the Company, (f) No consent, approval, authorization or other order of any Person and no consent, authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the pledge by Debtor of the Pledged Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by Debtor or (ii) for the exercise by the Secured Party of the voting or other rights provided for in this Agreement or the remedies in respect of the Pledged Collateral pursuant to this Agreement, except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally. 4 11 (g) Except for the security interest (and pledges and assignments as applicable) granted hereby, Debtor is, and as to any property acquired after the date hereof which is included within the Collateral, Debtor will be, the owner of all such Collateral free and clear from all charges, liens, security interests, adverse claims and encumbrances of any and every nature whatsoever. (h) There is no financing statement or similar filing now on file in any public office covering any part of the Collateral, and Debtor will not execute and there will not be on file in any public office any financing statement or similar filing except the financing statements filed or to be filed in favor of Secured Party. (i) All information furnished to Secured Party concerning Debtor, the Collateral and the Secured Obligations, or otherwise for the purpose of obtaining or maintaining credit, is or will be at the time the same is furnished, accurate and complete in all material respects. (j) The pledge, assignment and delivery of the Collateral pursuant to this Agreement will create a valid first priority lien on and a first priority perfected security interest in the Collateral pledged by Debtor, and the proceeds thereof, subject to no prior pledge, lien, mortgage, hypothecation, security interest, charge, option or encumbrance or to any agreement purporting to grant to any third party a security interest in the property or assets of Debtor which would include the Collateral, securing the payment of the Secured Obligations. (k) This Agreement has been duly authorized, executed and delivered by Debtor and constitutes a legal, valid and binding obligation of Debtor enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, or other similar laws affecting the rights of creditors generally or by the application of general equity principles. The representations and warranties set forth in this Section 5 shall survive the execution and delivery of this Agreement. 7. Covenants. Debtor, with respect to the Pledged Collateral held in his or its name, covenants and agrees that until the Notes are paid in full and the Secured Obligations are satisfied: (a) Without the prior written consent of Secured Party, Debtor agrees that it will not sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Collateral, nor will it create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance with respect to any of the Collateral or any interest therein except for the Lien provided by this Agreement. Without the prior written consent of Secured Party, Debtor agrees that it will not vote to enable and will not otherwise permit the Company to, issue any stock or other securities of any nature in addition to or in exchange or substitution for such Pledged Shares. 5 12 (b) Debtor will, at its expense, promptly execute, acknowledge and deliver all such instruments and take all such action as Secured Party from time to time may request in order to ensure to Secured Party the benefits of the Lien in and to the Collateral intended to be created by this Agreement. (c) Debtor has and will defend the title to the Collateral and the Liens of Secured Party thereon against the claim of any Person and will maintain and preserve such Liens. Debtor covenants and agrees that it will have like title to and right to pledge any other property which at any time hereafter may be pledged to Secured Party as Pledged Collateral hereunder and will likewise defend Secured Party's right thereto and security interest therein. (d) Debtor shall promptly pay when due all taxes, assessments, license fees, registration fees, and governmental charges levied or assessed against Debtor or with respect to the Collateral or any part thereof. (e) Debtor agrees not to suffer or permit any charge, lien, security interest, adverse claim or encumbrance of any and every nature whatsoever against the Collateral or any part thereof, except for the Liens. (f) Except as otherwise provided in this Agreement with respect to inventory, and except in the ordinary course of business with respect to other Collateral, Debtor shall not, without the prior written consent of Secured Party, sell, assign, transfer, lease, charter, encumber, hypothecate or dispose of the Collateral, or any part thereof, or interest therein, or offer to do any of the foregoing. (g) Debtor shall promptly notify Secured Party in writing of any change in the name, identity or structure of Debtor, any charge, lien, security interest, claim or encumbrance asserted against the Collateral, any theft, loss, injury or similar incident involving the Collateral, and any other material matter or litigation adversely affecting Debtor or the Collateral. Debtor shall furnish such other reports, information and data regarding Debtor's financial condition and operations, the Collateral and such other matters as Secured Party may reasonably request from time to time. (h) Debtor agrees to execute and deliver such financing statement or statements, or amendments thereof or supplements thereto, or other documents as Secured Party may from time to time require in order to comply with the Code (or other applicable state law of the jurisdiction where any of the Collateral is located) and to preserve and protect the Secured Party's rights to the Collateral. (i) Secured Party, at its option, whether before or after default, but without any obligation whatsoever to do so, may (a) discharge taxes, claims, charges, liens, security interests, assessments or other encumbrances of any and every nature whatsoever at any time levied, placed upon or asserted against the Collateral, (b) place and pay for insurance on the Collateral, including insurance that only protects Secured Party's interest, (c) pay for the repair, 6 13 improvement, testing, maintenance and preservation of the Collateral, (d) pay any filing, recording, registration, licensing or certification fees or other fees and charges related to the Collateral, or (e) take any other action to preserve and protect the Collateral and Secured Party's rights and remedies under this Agreement as Secured Party may deem necessary or appropriate. Debtor agrees that Secured Party shall have no duty or obligation whatsoever to take any of the foregoing action. Debtor agrees to promptly reimburse Secured Party upon demand for any payment made or any expense incurred by the Secured Party pursuant to this authorization. These payments and expenditures, together with interest thereon from date incurred until paid by Debtor at the maximum contract rate allowed under applicable laws, which Debtor agrees to pay, shall constitute additional Obligations and shall be secured by and entitled to the benefits of this Agreement. (j) Debtor shall do, make, procure, execute and deliver all such additional and further acts, things, deeds, interests and assurances as Secured Party may require from time to time to protect, assure and enforce Secured Party's rights and remedies. 8. Debtor's Rights. As long as no Default or Event of Default under this Agreement, the Notes, the Purchase Agreement or any other agreement executed to evidence and/or secure the Secured Obligations (the "Other Agreements"), shall have occurred and be continuing and until written notice shall be given to Debtor in accordance with Section 9(a) hereof: (a) Debtor shall have the right, from time to time, to vote and give consents, ratifications and waivers with respect to the Pledged Collateral or any part thereof for all purposes not inconsistent with the provisions of this Agreement, the Purchase Agreement, and any Other Agreement; provided, however, that no vote shall be cast, and no consent, ratification, or waiver shall be given or action taken, which would have the effect of materially impairing the position or interest of Secured Party in respect of the Pledged Collateral, be inconsistent with or violate any provision of this Agreement, the Purchase Agreement, or the Other Agreements; (b) (i) Debtor shall be entitled, from time to time, to collect and receive for its own use all cash dividends paid in respect of the Pledged Shares to the extent not in violation of this Agreement, the Purchase Agreement, or the Other Agreements, other than any and all (A) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in redemption of or exchange for, any Pledged Collateral, (B) distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or reorganization of the Company, (C) cash paid, or payable or otherwise distributed in redemption of, or in exchange for, any Pledged Collateral, in addition, until actually paid all rights to such dividends shall remain subject to the Lien created by this Agreement; and 7 14 (ii) all dividends (other than such cash dividends as are permitted to be paid to Debtor in accordance with clause (i) above) and all other distributions in respect of the Pledged Collateral, whenever paid or made, shall be delivered to Secured Party to hold as Pledged Collateral and shall, if received by Debtor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Debtor, and be forthwith delivered to Secured Party as Pledged Collateral as additional Collateral for the Secured Obligations in the form so received (with any necessary endorsement). 9. Defaults and Remedies. Upon the occurrence of an Event of Default and during the continuation of such Event of Default, then or at any time after such declaration (provided that such declaration is not rescinded by the Secured Party), without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon Debtor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived), Secured Party (personally or through an agent) is hereby authorized and empowered subject to the approval of any governmental authority (to the extent such consent or approval of any governmental authority is required), to (a) Transfer and register in its name or in the name of its nominee the whole or any part of the Pledged Collateral, to exercise the voting rights with respect thereto, to collect and receive all cash dividends and other distributions made thereon, and to exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any shares of the Pledged Shares as if it were the absolute owner thereof, including without limitation, the right to exchange at its discretion, any and all of the Pledged Shares upon the merger, consolidation, reorganization, recapitalization or other readjustment of any corporation issuing any of such shares or upon the exercise by any such issuer or Secured Party of any right, privilege or option pertaining to any shares of the Pledged Shares, and in connection therewith, to deposit and deliver any and all of the Pledged Shares with any committee, depositary, transfer agent, registrar other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but Secured Party shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. (b) Collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of Secured Party's offices or elsewhere in one or more sales after ten (10) days' notice of the time and place of any public sale or of the time after which a private sale is to take place (which notice Debtor agrees is commercially reasonable), but without any previous notice or advertisement, the whole or any part of the Collateral and to otherwise act with respect to the Collateral as though Secured Party was the outright owner thereof, Debtor hereby irrevocably constituting and appointing Secured Party as the proxy and attorney-in-fact of Debtor, with full power of substitution to do so; 8 15 provided, however, Secured Party shall not have any duty to exercise any such right or to preserve the same and shall not be liable for any failure to do so or for any delay in doing so. Any sale shall be made either for cash or upon credit or for future delivery without assumption of any credit risk at such price as Secured Party may deem fair, and such terms and conditions as Secured Party may deem advisable and Secured Party may be the purchaser of the whole or any part of the Collateral so sold and hold the same thereafter in its own right free from any claim of Debtor or any right or equity of redemption in Debtor, which right or equity is hereby expressly waived and released. Each sale shall be made to the highest bidder, but Secured Party reserves the right to reject any and all bids at such sale which, in its discretion, it shall deem inadequate. Demands of performance, except as otherwise herein specifically provided for, notices of sale, advertisements and the presence of property at sale are hereby waived and any sale hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. (c) If, at the original time or times appointed for the sale of the whole or any part of the Collateral, the highest bid, if there be but one sale, shall be inadequate to discharge in full all the Secured Obligations, or if the Collateral be offered for sale in lots, if at any of such sales, the highest bid for the lot offered for sale would indicate to Secured Party, in its discretion, the unlikelihood of the proceeds of the sales of the whole of the Collateral being sufficient to discharge all the Secured Obligations, Secured Party may, on one or more occasions and in its discretion, postpone any of said sales by public announcement at the time of sale or the time of previous postponement of sale, and no other notice of such postponement or postponements of sale need be given, any other notice being hereby waived; provided, however, that any sale or sales made after such postponement shall be after ten (10) days' notice to Debtor. (d) In the event of any sales hereunder, Secured Party shall pay over the proceeds of any such collection, recovery, receipt, appropriation, realization or sale in accordance with Section 10 of this Agreement. (e) In addition to the rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to any of the Secured Obligations, Secured Party shall have all the rights and remedies of a secured party under the Code. (f) Debtor agrees that following the occurrence and during the continuance of an Event of Default it will not at any time plead, claim or take the benefit of any appraisal, valuation, stay, extension, moratorium or redemption law now or hereafter in force in order to prevent or delay the enforcement of this Agreement, or the absolute sale of the whole or any part of the Collateral or the possession thereof by any purchaser at any sale hereunder, and Debtor waives the benefit of all such laws to the extent it lawfully may do so. Debtor agrees that it will not interfere with any right, power and remedy of Secured Party provided for in this Agreement or now or hereafter existing at law or in equity or by statute or otherwise, or the exercise or beginning of the exercise by Secured Party of any one or more of such rights, powers or remedies. No failure or delay on the part of Secured Party to exercise any such right, 9 16 power or remedy and no notice or demand which may be given to or made upon Debtor by Secured Party with respect to any such remedies shall operate as a waiver thereof, or limit or impair Secured Party's right to take any action or to exercise any power or remedy hereunder, without notice or demand, or prejudice its rights as against Debtor in any respect. (g) Debtor further agrees that a breach of any of the covenants contained in this Section 9 will cause irreparable injury to Secured Party, that Secured Party has no adequate remedy at law in respect of such breach and, as a consequence, agrees that each and every covenant contained in this Section 9 shall be specifically enforceable against Debtor, and Debtor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that the Secured Obligations are not then due and payable in accordance with the agreements and instruments governing and evidencing such obligations. Debtor further acknowledges the impossibility of ascertaining the amount of damages which would be suffered by Secured Party by reason of a breach of any of such covenants and, consequently, agrees that, if Secured Party shall sue for damages for breach, it shall pay, as liquidated damages and not as a penalty, an amount equal to the value of the Collateral pledged by Debtor on the date Secured Party shall demand compliance with this Section 9. (h) If, at any time when Secured Party shall determine to exercise its right to sell the whole or any part of the Pledged Collateral hereunder, such Pledged Collateral or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under the Securities Act of 1933, as amended (the "Act"), Secured Party may, in its discretion (subject only to applicable requirements of law), sell such Pledged Collateral or part thereof by private sale in such manner and under such circumstances as Secured Party may deem necessary or advisable, but subject to the other requirements of this Section 9, and shall not be required to effect such registration or to cause the same to be effected. Without limiting the generality of the foregoing, in any such event Secured Party in its discretion (x) may, in accordance with applicable securities laws, proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Collateral or part thereof could be or shall have been filed under said Act (or similar statute), (y) may approach and negotiate with a single possible purchaser to effect such sale, and (z) may restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment and not with a view to the distribution or sale of such Pledged Collateral or part thereof. In addition to a private sale as provided above in this Section 9, if any of the Pledged Collateral shall not be freely distributable to the public without registration under the Act (or similar statute) at the time of any proposed sale pursuant to this Section 9, then Secured Party shall not be required to effect such registration or cause the same to be effected but, in its discretion (subject only to applicable requirements of law), may require that any sale hereunder (including a sale at auction) be conducted subject to restrictions (i) as to the financial sophistication and ability of any Person permitted to bid or purchase at any such sale, (ii) as to the content of legends to be placed upon any certificates representing the Pledged Collateral sold in such sale, including restrictions on future transfer thereof, (iii) as to the representations required to be made by each Person bidding or purchasing at such sale relating to that Person's access to financial information about the Debtor and such Person's intentions as to the holding of the Pledged Collateral so sold for 10 17 investment, for its own account, and not with a view to the distribution thereof, and (iv) as to such other matters as Secured Party may, in its discretion, deem necessary or appropriate in order that such sale (notwithstanding any failure so to register) may be effected in compliance with the Code and other laws affecting the enforcement of creditors' rights and the Act and all applicable state securities laws. (i) Debtor recognizes that Secured Party may be unable to effect a public sale of any or all the Pledged Shares by reason of certain prohibitions contained in the Act and applicable state securities laws, but may be compelled to resort to one or more private sales thereof to a restricted group or purchasers who will be obliged to agree, among other things to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Debtor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the Secured Party than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. Secured Party shall be under no obligation to delay a sale of any of the Pledged Shares for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the Act, or under applicable state securities laws, even if the issuer would agree to do so. (j) Debtor further agrees to do or cause to be done all such other acts and things as may be reasonably necessary to make such sale or sales of any portion or all of the Pledged Shares owned by it valid and binding and in compliance with any and all applicable laws, regulations, orders, writs, injunctions, decrees or awards of any and all courts, arbitrators or governmental instrumentalities, domestic or foreign, having jurisdiction over any such sale or sales, all at Debtor's expense. (k) Debtor shall be liable for and agrees to pay the reasonable expenses incurred by Secured Party in enforcing its rights and remedies, in retaking, holding, testing, repairing, improving, selling, leasing or disposing of the Collateral, or like expenses, including, without limitation, attorneys' fees and legal expenses incurred by Secured Party. These expenses, together with interest thereon from the date incurred until paid by Debtor at the maximum contract rate allowed under applicable laws, which Debtor agrees to pay, shall constitute additional Secured Obligations and shall be secured by and entitled to the benefits of this Agreement. (l) The rights and remedies of Secured Party are cumulative and the exercise of any one or more of the rights or remedies shall not be deemed an election of rights or remedies or a waiver of any other right or remedy. Secured Party may remedy any default and may waive any default without waiving the default remedied or without waiving any other prior or subsequent default. 10. Application of Proceeds. Any cash held by Secured Party as Collateral and all cash proceeds received by Secured Party in respect of any sale of, liquidation of, or other realization upon all or any part of the Collateral shall be applied by Secured Party as follows: 11 18 (a) First, to the payment of the costs and expenses of such sale, including (i) reasonable compensation to the Secured Party and its agents and counsel, and (ii) all expenses, liabilities and advances made or incurred by Secured Party in connection therewith including those incurred for care, safekeeping, collection, sale, delivery or otherwise of the Collateral. (b) Next, to the payment of the Secured Obligations in such order as Secured Party may elect. (c) Finally, after payment in full of all Secured Obligations, payment to the Debtor, or its successors or assigns, or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. 11. Waiver. No delay on Secured Party's part in exercising any power of sale, Lien, option or other right hereunder, and no notice or demand which may be given to or made upon Debtor by Secured Party with respect to any power of sale, Lien, option or other right hereunder shall constitute a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege constitute a waiver thereof; or limit or impair Secured Party's right to take any action or to exercise any power of sale, Lien, option, or any other right hereunder, without notice or demand, or prejudice Secured Party's rights as against Debtor in any respect. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. 12. Assignment and Amendment. Secured Party may assign, endorse or transfer any instrument evidencing all or any part of the Secured Obligations as provided in, and in accordance with, the Purchase Agreement, and the holder of such instrument shall be entitled to the benefits of this Agreement. None of the terms or provisions of this Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by Secured Party and Debtor. 13. Termination. Immediately following the payment of all Secured Obligations, Secured Party shall deliver to Debtor the Pledged Collateral pledged by Debtor at the time subject to this Agreement and all instruments of assignment executed in connection therewith, free and clear of the Lien hereof and, except as otherwise provided herein, all of Debtor's obligations hereunder shall at such time terminate. 14. Lien Absolute. All rights of Secured Party hereunder, and all obligations of the Debtor hereunder, shall be absolute and unconditional irrespective of: (a) Any lack of validity or enforceability of the Purchase Agreement, any other Loan Document or any other agreement or instrument governing or evidencing any Secured Obligations. 12 19 (b) Any change in the time, manner or place of payment of, or in any other term of, all or any part of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from the Purchase Agreement, any other Loan Document or any other agreement or instrument governing or evidencing any Secured Obligations. (c) Any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Secured Obligations. (d) Any other circumstance which might otherwise constitute a defense available to, or a discharge of, Debtor. 15. Indemnification. Debtor severally agrees to indemnify and hold Secured Party harmless from and against any taxes, liabilities, claims and damages, including reasonable attorney's fees and disbursements, and other expenses incurred or arising by reason of the taking or the failure to take action by Secured Party, in good faith, in respect of any transaction effected under this Agreement or in connection with the Lien provided for herein, including, without limitation, any taxes payable in connection with the delivery or registration of any of the Pledged Collateral as provided herein. Debtor severally agrees to be liable for payment to Secured Party of all Secured Party's out-of-pocket costs and expenses incurred in connection with this Agreement after the date hereof and all reasonable fees, expenses and disbursements, including registration costs under the Act (or similar statute) and the reasonable fees of Secured Party's agents or representatives, incurred in connection with this Agreement and the performance by Secured Party of the provisions of this Agreement and of any transactions effected in connection with this Agreement. The obligations of the Debtor under this Section 15 shall survive the termination of this Agreement. Notwithstanding any other provision of this paragraph, or any other paragraph of this Agreement, if Debtor tenders his Pledged Collateral to Secured Party pursuant to the terms of this Agreement, but is prevented from tendering the Pledged Collateral to Secured Party by virtue of the actions of any Person other than Debtor, or any Person controlled or in common control with Debtor, then Debtor shall only be liable for delivery of good, valid and marketable title to all of the Pledged Collateral immediately upon legally being permitted to do so, and in such case shall not be liable for any costs, arising from Debtor's obligation to indemnify Secured Party as discussed in this Section 15. 16. Reinstatement. This Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against Debtor for liquidation or reorganization, should Debtor become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of Debtor's assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Secured Obligations, whether as a "voidable preference", "fraudulent conveyance", or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the 13 20 Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. 17. Miscellaneous. (a) Secured Party may execute any of its duties hereunder by or through agents or employees and shall be entitled to advice of counsel concerning all matters pertaining to its duties hereunder. (b) Neither Secured Party nor any of its officers, directors, employees, agents or counsel shall be liable for any action lawfully taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or willfull misconduct. (c) This Agreement shall be binding upon Debtor and its successors and assigns, and shall inure to the benefit of, and be enforceable by, Secured Party and its successors and assigns, and shall be governed by, and construed and enforced in accordance with, the internal laws in effect in the State of Texas without giving effect to principles of choice of law, and none of the terms or provisions of this Agreement may be waived, altered, modified or amended except in writing, signed by Secured Party, duly signed for and on behalf of Secured Party and the Debtors and then only to the extent therein set forth. (d) Notwithstanding any provision to the contrary herein, or in any of the documents evidencing the Secured Obligations or otherwise relating thereto, no such provision shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable usury laws. If any such excessive interest is so provided for, then in such event (i) the provisions of this paragraph shall govern and control, (ii) neither Debtor nor its successors or assigns or any other party liable for the payment thereof, shall be obligated to pay the amount of such interest to the extent that is in excess of the maximum amount permitted by law, (iii) any such excess interest that may have been collected shall be, at the option of the holder of the instrument evidencing the Secured Obligations, either applied as a credit against the then unpaid principal amount thereof or refunded to the maker thereof, and (iv) the effective rate of interest shall be automatically reduced to the maximum lawful rate under applicable usury laws as now or hereafter construed by the courts having jurisdiction. (e) Any carbon, photographic or other reproduction of any financing statement signed by Debtor is sufficient as a financing statement for all purposes, including without limitation, filing in any state as may be permitted by the provisions of the Uniform Commercial Code of such state. 18. Severability. If for any reason any provision or provisions hereof are determined to be invalid and contrary to any existing or future law in any jurisdiction, such invalidity in any jurisdiction shall not impair the operation of or effect those portions of this Agreement which are valid in any other jurisdiction. 14 21 19. Notices. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by any other party, or whenever any of the parties desires to give or serve upon any other a communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and either shall be delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to Secured Party, at Sanders Morris Mundy 3100 Texas Commerce Tower Houston, Texas 77002 Attn: Michael S. Chadwick (b) If to Debtor, at Watermarc Food Management Co. 10777 Westheimer, Suite 1030 Houston, Texas 77042-3498 Attention: Joan Payton or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, or three (3) Business Days after the same shall have been deposited in the United States mail. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to the persons designated above to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. 20. Section Titles. The Section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 21. Counterparts. This Agreement may be executed in any number of counterparts, which shall, collectively and separately, constitute one agreement. 22. Further Assurances. Debtor agrees that at any time and from time to time, upon the written request of Secured Party, Debtor will execute and deliver such further documents and do such further acts and things as Secured Party may reasonably request in order to effect the purposes of this Agreement. 15 22 IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed as of the date first written above. WATERMARC FOOD MANAGEMENT CO. By: ------------------------------------- Name: --------------------------------- Title: -------------------------------- 16 23 SCHEDULE I DEBTOR PLEDGED SHARES Watermarc Food Management Co. 47,500 shares of Common Stock, $.01 par value, of Marco's Mexican Restaurants, Inc., a Texas corporation, evidenced by the certificate heretofore delivered to Secured Party. 17 24 EXHIBIT A Secured Parties Don A. Sanders Ghulam M. Bombaywala Atlantis Software Company Employee Profit Sharing Plan Philip M. Mount John I. Mundy Katherine U. Sanders Ben T. Morris Quinlan Quiros Schnitzer Neil Lande, Custodian for Lynne Lande, Stephen Lande, Sara Lande, and Caroline Lande John E. Drury George L. Ball John M. O'Quinn J-All Partnership Nolan Ryan Roger P. Lindstedt Ray C. Childress Kara S. Childress Morton A. Cohn Michael S. Chadwick c/o Sanders Morris Mundy Inc. 3100 Texas Commerce Tower 600 Travis Houston, Texas 77002 18 EX-4.5 6 SECURITY AGREEMENT ($3,000,000 12% SUB. NOTES) 1 SECURITY AGREEMENT SECURITY AGREEMENT dated as of May 20, 1996, among WATERMARC FOOD MANAGEMENT CO., a Texas corporation ("Debtor"), the owner of all of the capital stock of MARCO'S MEXICAN RESTAURANTS, INC., a Texas corporation (the "Company"), and the persons identified on Exhibit A hereto (collectively, "Secured Party"). RECITALS A. Secured Party has loaned $3,000,000 to Debtor pursuant to the Purchase Agreement dated as of December 19, 1994, by and between Debtor and Secured Party (the "Original Purchase Agreement"). B. Secured Party and Debtor have this date entered into a First Amendment to Purchase Agreement (the "First Amendment"), under which, among other things, Secured Party has agreed to waive all defaults, if any, occurring on or before the date of the First Amendment and to extend the maturity date of the Notes (as defined in the Original Purchase Agreement), in consideration for which Debtor has agreed to pledge the capital stock in the Company as security therefor and to grant Secured Party a security interest in all of the Debtor's rights to the name "Marco's" and Trademark No.1631944 issued on January 15, 1991, on the mark "Marco's" (the Original Purchase Agreement, as amended by the First Amendment, is hereafter referred to as the "Purchase Agreement"). C. Debtor is the record and beneficial owner of the issued and outstanding shares of capital stock issued by the Company described in Schedule I (being hereinafter referred to as the "Pledged Shares"). AGREEMENT In consideration of the premises and the covenants hereinafter contained and for other good and valuable consideration, receipt of which is hereby acknowledged, it is agreed as follows: 1. Definitions. The following terms shall have (unless otherwise provided elsewhere in this Security Agreement) the following respective meanings (such meanings being equally applicable to both the singular and plural form of the terms defined): "Agreement" shall mean this Security Agreement, including all amendments, modifications and supplements and any exhibits or schedules to any of the foregoing, and shall refer to the Agreement as the same may be in effect at the time such reference becomes operative. 2 "Business Day" shall mean any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the State of Texas. "Code" shall mean the Texas Uniform Commercial Code as in effect from time to time. "Collateral" shall mean the Pledged Collateral and the Mark Collateral. "Default" shall mean any event which, with the passage of time or notice or both, would, unless cured or waived, become an Event of Default. "Event of Default" shall have the meaning assigned to it in the Purchase Agreement. " Lien" shall mean any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction). "Loan Documents" shall mean this Agreement, the Purchase Agreement, those other ancillary agreements as to which Secured Party, the Company or the Debtor is a party or a beneficiary, and all other agreements, instruments, documents and certificates, including, without limitation, pledges, powers of attorney, consents, assignments, contracts, notices, and all other written matter whether heretofore, now or hereafter executed by or on behalf of Debtor and delivered to Secured Party, in connection with this Agreement or the transactions contemplated hereby. "Mark Collateral" shall have the meaning assigned to such term on Section 3 hereof. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether Federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Pledged Collateral" shall have the meaning assigned to such term in Section 2 hereof. "Purchase Agreement" shall have the meaning set forth in the recitals. 2 3 "Secured Obligations" shall have the meaning assigned to such term in Section 3 hereof. 2. Pledge. Debtor hereby pledges, assigns, hypothecates, transfers and delivers all the Pledged Shares owned by it and hereby grants to Secured Party a first priority lien on, and security interest in, and agrees to accept any interest in the Pledged Shares that is received by it as Secured Party's agent and to hold the same in trust on behalf of and for the ratable benefit of Secured Party and to deliver the same forthwith to Secured Party in the exact form received, with the endorsement of Debtor when necessary and/or appropriate undated stock powers duly executed in blank, to be held by Secured Party, subject to the terms hereof, all of the following (herein, the "Pledged Collateral"): (a) The Pledged Shares and the certificates representing the Pledged Shares (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital, or issued in connection with any reorganization), options or rights, and all dividends, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares. (b) All additional shares of stock (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital, or issued in connection with any reorganization), options or rights of the issuer of the Pledged Shares from time to time acquired by Debtor in any manner (which shares shall be deemed to be part of the Pledged Shares), and the certificates representing such additional shares, and all dividends, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of, in exchange for, as an addition to, or in substitution of any or all of such shares. 3. Security Interest. Debtor hereby grants to Secured Party a security interest in (and hereby pledges and assigns as applicable) and agrees that Secured Party shall continue to have a security interest in (and a pledge and assignment as applicable) all of Debtor's right, title and interest in the right to use the name "Marco's" and Trademark No.1631944 issued on January 15, 1991, on the mark "Marco's" and any accessions, additions and attachments thereto and the proceeds and products thereof, including without limitation, all cash, general intangibles, accounts, inventory, equipment, fixtures, notes, drafts, acceptances, securities, instruments, chattel paper, or other property, benefits or rights arising therefrom, or other proceeds of any sale or other disposition of such property (herein the "Mark Collateral"). 4. Security for Obligations. This Agreement secures, and the Collateral is security for, the prompt payment in full when due, whether at stated maturity, by acceleration or otherwise, of the unpaid principal of and interest on any promissory notes issued to evidence loans made and to be made by Secured Party to Debtor pursuant to the Purchase Agreement; and performance of the obligations, whether for principal, premium, interest, fees, costs and expenses, and all obligations of Debtor now or hereafter existing under the Purchase Agreement 3 4 or of Debtor now existing or hereafter arising under this Agreement (collectively, the "Secured Obligations"). 5. Delivery of Pledged Collateral. All certificates representing or evidencing the Pledged Shares shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Secured Party shall have the right, at any time in its discretion and without notice to Debtor, to transfer to or to register in the name of Secured Party or any of its nominees any or all of the Pledged Shares. In addition, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Shares for certificates or instruments of smaller or larger denominations. 6. Representation and Warranties. Debtor represents and warrants to Secured Party that: (a) Debtor is, and at the time of delivery of the Pledged Shares to Secured Party pursuant to Section 4 hereof, the legal holder of record and the sole beneficial owner of the Pledged Shares and has good and marketable title to the Pledged Shares free and clear of any Lien, mortgage, hypothecation, security interest, charge, option or other encumbrance whatsoever, except for the Lien created by this Agreement. (b) All of the Pledged Shares have been duly authorized, validly issued and are fully paid and non-assessable. (c) Debtor has the full power, authority and legal right to pledge, assign, transfer, deliver, deposit and set over the Pledged Collateral pledged by Debtor to Secured Party as provided herein. (d) None of the Pledged Shares has been issued or transferred in violation of the securities registration, securities disclosure or similar laws of any jurisdiction to which such issuance or transfer may be subject. (e) The Pledged Shares constitute one hundred percent (100%) of the issued and outstanding shares of stock of the Company. (f) No consent, approval, authorization or other order of any Person and no consent, authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the pledge by Debtor of the Pledged Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by Debtor or (ii) for the exercise by the Secured Party of the voting or other rights provided for in this Agreement or the remedies in respect of the Pledged Collateral pursuant to this Agreement, except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally. 4 5 (g) Except for the security interest (and pledges and assignments as applicable) granted hereby, Debtor is, and as to any property acquired after the date hereof which is included within the Collateral, Debtor will be, the owner of all such Collateral free and clear from all charges, liens, security interests, adverse claims and encumbrances of any and every nature whatsoever. (h) There is no financing statement or similar filing now on file in any public office covering any part of the Collateral, and Debtor will not execute and there will not be on file in any public office any financing statement or similar filing except the financing statements filed or to be filed in favor of Secured Party. (i) All information furnished to Secured Party concerning Debtor, the Collateral and the Secured Obligations, or otherwise for the purpose of obtaining or maintaining credit, is or will be at the time the same is furnished, accurate and complete in all material respects. (j) The pledge, assignment and delivery of the Collateral pursuant to this Agreement will create a valid first priority lien on and a first priority perfected security interest in the Collateral pledged by Debtor, and the proceeds thereof, subject to no prior pledge, lien, mortgage, hypothecation, security interest, charge, option or encumbrance or to any agreement purporting to grant to any third party a security interest in the property or assets of Debtor which would include the Collateral, securing the payment of the Secured Obligations. (k) This Agreement has been duly authorized, executed and delivered by Debtor and constitutes a legal, valid and binding obligation of Debtor enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, or other similar laws affecting the rights of creditors generally or by the application of general equity principles. The representations and warranties set forth in this Section 5 shall survive the execution and delivery of this Agreement. 7. Covenants. Debtor, with respect to the Pledged Collateral held in his or its name, covenants and agrees that until the Notes are paid in full and the Secured Obligations are satisfied: (a) Without the prior written consent of Secured Party, Debtor agrees that it will not sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Collateral, nor will it create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance with respect to any of the Collateral or any interest therein except for the Lien provided by this Agreement. Without the prior written consent of Secured Party, Debtor agrees that it will not vote to enable and will not otherwise permit the Company to, issue any stock or other securities of any nature in addition to or in exchange or substitution for such Pledged Shares. 5 6 (b) Debtor will, at its expense, promptly execute, acknowledge and deliver all such instruments and take all such action as Secured Party from time to time may request in order to ensure to Secured Party the benefits of the Lien in and to the Collateral intended to be created by this Agreement. (c) Debtor has and will defend the title to the Collateral and the Liens of Secured Party thereon against the claim of any Person and will maintain and preserve such Liens. Debtor covenants and agrees that it will have like title to and right to pledge any other property which at any time hereafter may be pledged to Secured Party as Pledged Collateral hereunder and will likewise defend Secured Party's right thereto and security interest therein. (d) Debtor shall promptly pay when due all taxes, assessments, license fees, registration fees, and governmental charges levied or assessed against Debtor or with respect to the Collateral or any part thereof. (e) Debtor agrees not to suffer or permit any charge, lien, security interest, adverse claim or encumbrance of any and every nature whatsoever against the Collateral or any part thereof, except for the Liens. (f) Except as otherwise provided in this Agreement with respect to inventory, and except in the ordinary course of business with respect to other Collateral, Debtor shall not, without the prior written consent of Secured Party, sell, assign, transfer, lease, charter, encumber, hypothecate or dispose of the Collateral, or any part thereof, or interest therein, or offer to do any of the foregoing. (g) Debtor shall promptly notify Secured Party in writing of any change in the name, identity or structure of Debtor, any charge, lien, security interest, claim or encumbrance asserted against the Collateral, any theft, loss, injury or similar incident involving the Collateral, and any other material matter or litigation adversely affecting Debtor or the Collateral. Debtor shall furnish such other reports, information and data regarding Debtor's financial condition and operations, the Collateral and such other matters as Secured Party may reasonably request from time to time. (h) Debtor agrees to execute and deliver such financing statement or statements, or amendments thereof or supplements thereto, or other documents as Secured Party may from time to time require in order to comply with the Code (or other applicable state law of the jurisdiction where any of the Collateral is located) and to preserve and protect the Secured Party's rights to the Collateral. (i) Secured Party, at its option, whether before or after default, but without any obligation whatsoever to do so, may (a) discharge taxes, claims, charges, liens, security interests, assessments or other encumbrances of any and every nature whatsoever at any time levied, placed upon or asserted against the Collateral, (b) place and pay for insurance on the Collateral, including insurance that only protects Secured Party's interest, (c) pay for the repair, 6 7 improvement, testing, maintenance and preservation of the Collateral, (d) pay any filing, recording, registration, licensing or certification fees or other fees and charges related to the Collateral, or (e) take any other action to preserve and protect the Collateral and Secured Party's rights and remedies under this Agreement as Secured Party may deem necessary or appropriate. Debtor agrees that Secured Party shall have no duty or obligation whatsoever to take any of the foregoing action. Debtor agrees to promptly reimburse Secured Party upon demand for any payment made or any expense incurred by the Secured Party pursuant to this authorization. These payments and expenditures, together with interest thereon from date incurred until paid by Debtor at the maximum contract rate allowed under applicable laws, which Debtor agrees to pay, shall constitute additional Obligations and shall be secured by and entitled to the benefits of this Agreement. (j) Debtor shall do, make, procure, execute and deliver all such additional and further acts, things, deeds, interests and assurances as Secured Party may require from time to time to protect, assure and enforce Secured Party's rights and remedies. 8. Debtor's Rights. As long as no Default or Event of Default under this Agreement, the Notes, the Purchase Agreement or any other agreement executed to evidence and/or secure the Secured Obligations (the "Other Agreements"), shall have occurred and be continuing and until written notice shall be given to Debtor in accordance with Section 9(a) hereof: (a) Debtor shall have the right, from time to time, to vote and give consents, ratifications and waivers with respect to the Pledged Collateral or any part thereof for all purposes not inconsistent with the provisions of this Agreement, the Purchase Agreement, and any Other Agreement; provided, however, that no vote shall be cast, and no consent, ratification, or waiver shall be given or action taken, which would have the effect of materially impairing the position or interest of Secured Party in respect of the Pledged Collateral, be inconsistent with or violate any provision of this Agreement, the Purchase Agreement, or the Other Agreements; (b) (i) Debtor shall be entitled, from time to time, to collect and receive for its own use all cash dividends paid in respect of the Pledged Shares to the extent not in violation of this Agreement, the Purchase Agreement, or the Other Agreements, other than any and all (A) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in redemption of or exchange for, any Pledged Collateral, (B) distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or reorganization of the Company, (C) cash paid, or payable or otherwise distributed in redemption of, or in exchange for, any Pledged Collateral, in addition, until actually paid all rights to such dividends shall remain subject to the Lien created by this Agreement; and 7 8 (ii) all dividends (other than such cash dividends as are permitted to be paid to Debtor in accordance with clause (i) above) and all other distributions in respect of the Pledged Collateral, whenever paid or made, shall be delivered to Secured Party to hold as Pledged Collateral and shall, if received by Debtor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Debtor, and be forthwith delivered to Secured Party as Pledged Collateral as additional Collateral for the Secured Obligations in the form so received (with any necessary endorsement). 9. Defaults and Remedies. Upon the occurrence of an Event of Default and during the continuation of such Event of Default, then or at any time after such declaration (provided that such declaration is not rescinded by the Secured Party), without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon Debtor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived), Secured Party (personally or through an agent) is hereby authorized and empowered subject to the approval of any governmental authority (to the extent such consent or approval of any governmental authority is required), to (a) Transfer and register in its name or in the name of its nominee the whole or any part of the Pledged Collateral, to exercise the voting rights with respect thereto, to collect and receive all cash dividends and other distributions made thereon, and to exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any shares of the Pledged Shares as if it were the absolute owner thereof, including without limitation, the right to exchange at its discretion, any and all of the Pledged Shares upon the merger, consolidation, reorganization, recapitalization or other readjustment of any corporation issuing any of such shares or upon the exercise by any such issuer or Secured Party of any right, privilege or option pertaining to any shares of the Pledged Shares, and in connection therewith, to deposit and deliver any and all of the Pledged Shares with any committee, depositary, transfer agent, registrar other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but Secured Party shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. (b) Collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of Secured Party's offices or elsewhere in one or more sales after ten (10) days' notice of the time and place of any public sale or of the time after which a private sale is to take place (which notice Debtor agrees is commercially reasonable), but without any previous notice or advertisement, the whole or any part of the Collateral and to otherwise act with respect to the Collateral as though Secured Party was the outright owner thereof, Debtor hereby irrevocably constituting and appointing Secured Party as the proxy and attorney-in-fact of Debtor, with full power of substitution to do so; 8 9 provided, however, Secured Party shall not have any duty to exercise any such right or to preserve the same and shall not be liable for any failure to do so or for any delay in doing so. Any sale shall be made either for cash or upon credit or for future delivery without assumption of any credit risk at such price as Secured Party may deem fair, and such terms and conditions as Secured Party may deem advisable and Secured Party may be the purchaser of the whole or any part of the Collateral so sold and hold the same thereafter in its own right free from any claim of Debtor or any right or equity of redemption in Debtor, which right or equity is hereby expressly waived and released. Each sale shall be made to the highest bidder, but Secured Party reserves the right to reject any and all bids at such sale which, in its discretion, it shall deem inadequate. Demands of performance, except as otherwise herein specifically provided for, notices of sale, advertisements and the presence of property at sale are hereby waived and any sale hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. (c) If, at the original time or times appointed for the sale of the whole or any part of the Collateral, the highest bid, if there be but one sale, shall be inadequate to discharge in full all the Secured Obligations, or if the Collateral be offered for sale in lots, if at any of such sales, the highest bid for the lot offered for sale would indicate to Secured Party, in its discretion, the unlikelihood of the proceeds of the sales of the whole of the Collateral being sufficient to discharge all the Secured Obligations, Secured Party may, on one or more occasions and in its discretion, postpone any of said sales by public announcement at the time of sale or the time of previous postponement of sale, and no other notice of such postponement or postponements of sale need be given, any other notice being hereby waived; provided, however, that any sale or sales made after such postponement shall be after ten (10) days' notice to Debtor. (d) In the event of any sales hereunder, Secured Party shall pay over the proceeds of any such collection, recovery, receipt, appropriation, realization or sale in accordance with Section 10 of this Agreement. (e) In addition to the rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to any of the Secured Obligations, Secured Party shall have all the rights and remedies of a secured party under the Code. (f) Debtor agrees that following the occurrence and during the continuance of an Event of Default it will not at any time plead, claim or take the benefit of any appraisal, valuation, stay, extension, moratorium or redemption law now or hereafter in force in order to prevent or delay the enforcement of this Agreement, or the absolute sale of the whole or any part of the Collateral or the possession thereof by any purchaser at any sale hereunder, and Debtor waives the benefit of all such laws to the extent it lawfully may do so. Debtor agrees that it will not interfere with any right, power and remedy of Secured Party provided for in this Agreement or now or hereafter existing at law or in equity or by statute or otherwise, or the exercise or beginning of the exercise by Secured Party of any one or more of such rights, powers or remedies. No failure or delay on the part of Secured Party to exercise any such right, 9 10 power or remedy and no notice or demand which may be given to or made upon Debtor by Secured Party with respect to any such remedies shall operate as a waiver thereof, or limit or impair Secured Party's right to take any action or to exercise any power or remedy hereunder, without notice or demand, or prejudice its rights as against Debtor in any respect. (g) Debtor further agrees that a breach of any of the covenants contained in this Section 9 will cause irreparable injury to Secured Party, that Secured Party has no adequate remedy at law in respect of such breach and, as a consequence, agrees that each and every covenant contained in this Section 9 shall be specifically enforceable against Debtor, and Debtor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that the Secured Obligations are not then due and payable in accordance with the agreements and instruments governing and evidencing such obligations. Debtor further acknowledges the impossibility of ascertaining the amount of damages which would be suffered by Secured Party by reason of a breach of any of such covenants and, consequently, agrees that, if Secured Party shall sue for damages for breach, it shall pay, as liquidated damages and not as a penalty, an amount equal to the value of the Collateral pledged by Debtor on the date Secured Party shall demand compliance with this Section 9. (h) If, at any time when Secured Party shall determine to exercise its right to sell the whole or any part of the Pledged Collateral hereunder, such Pledged Collateral or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under the Securities Act of 1933, as amended (the "Act"), Secured Party may, in its discretion (subject only to applicable requirements of law), sell such Pledged Collateral or part thereof by private sale in such manner and under such circumstances as Secured Party may deem necessary or advisable, but subject to the other requirements of this Section 9, and shall not be required to effect such registration or to cause the same to be effected. Without limiting the generality of the foregoing, in any such event Secured Party in its discretion (x) may, in accordance with applicable securities laws, proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Collateral or part thereof could be or shall have been filed under said Act (or similar statute), (y) may approach and negotiate with a single possible purchaser to effect such sale, and (z) may restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment and not with a view to the distribution or sale of such Pledged Collateral or part thereof. In addition to a private sale as provided above in this Section 9, if any of the Pledged Collateral shall not be freely distributable to the public without registration under the Act (or similar statute) at the time of any proposed sale pursuant to this Section 9, then Secured Party shall not be required to effect such registration or cause the same to be effected but, in its discretion (subject only to applicable requirements of law), may require that any sale hereunder (including a sale at auction) be conducted subject to restrictions (i) as to the financial sophistication and ability of any Person permitted to bid or purchase at any such sale, (ii) as to the content of legends to be placed upon any certificates representing the Pledged Collateral sold in such sale, including restrictions on future transfer thereof, (iii) as to the representations required to be made by each Person bidding or purchasing at such sale relating to that Person's access to financial information about the Debtor and such Person's intentions as to the holding of the Pledged Collateral so sold for 10 11 investment, for its own account, and not with a view to the distribution thereof, and (iv) as to such other matters as Secured Party may, in its discretion, deem necessary or appropriate in order that such sale (notwithstanding any failure so to register) may be effected in compliance with the Code and other laws affecting the enforcement of creditors' rights and the Act and all applicable state securities laws. (i) Debtor recognizes that Secured Party may be unable to effect a public sale of any or all the Pledged Shares by reason of certain prohibitions contained in the Act and applicable state securities laws, but may be compelled to resort to one or more private sales thereof to a restricted group or purchasers who will be obliged to agree, among other things to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Debtor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the Secured Party than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. Secured Party shall be under no obligation to delay a sale of any of the Pledged Shares for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the Act, or under applicable state securities laws, even if the issuer would agree to do so. (j) Debtor further agrees to do or cause to be done all such other acts and things as may be reasonably necessary to make such sale or sales of any portion or all of the Pledged Shares owned by it valid and binding and in compliance with any and all applicable laws, regulations, orders, writs, injunctions, decrees or awards of any and all courts, arbitrators or governmental instrumentalities, domestic or foreign, having jurisdiction over any such sale or sales, all at Debtor's expense. (k) Debtor shall be liable for and agrees to pay the reasonable expenses incurred by Secured Party in enforcing its rights and remedies, in retaking, holding, testing, repairing, improving, selling, leasing or disposing of the Collateral, or like expenses, including, without limitation, attorneys' fees and legal expenses incurred by Secured Party. These expenses, together with interest thereon from the date incurred until paid by Debtor at the maximum contract rate allowed under applicable laws, which Debtor agrees to pay, shall constitute additional Secured Obligations and shall be secured by and entitled to the benefits of this Agreement. (l) The rights and remedies of Secured Party are cumulative and the exercise of any one or more of the rights or remedies shall not be deemed an election of rights or remedies or a waiver of any other right or remedy. Secured Party may remedy any default and may waive any default without waiving the default remedied or without waiving any other prior or subsequent default. 10. Application of Proceeds. Any cash held by Secured Party as Collateral and all cash proceeds received by Secured Party in respect of any sale of, liquidation of, or other realization upon all or any part of the Collateral shall be applied by Secured Party as follows: 11 12 (a) First, to the payment of the costs and expenses of such sale, including (i) reasonable compensation to the Secured Party and its agents and counsel, and (ii) all expenses, liabilities and advances made or incurred by Secured Party in connection therewith including those incurred for care, safekeeping, collection, sale, delivery or otherwise of the Collateral. (b) Next, to the payment of the Secured Obligations in such order as Secured Party may elect. (c) Finally, after payment in full of all Secured Obligations, payment to the Debtor, or its successors or assigns, or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. 11. Waiver. No delay on Secured Party's part in exercising any power of sale, Lien, option or other right hereunder, and no notice or demand which may be given to or made upon Debtor by Secured Party with respect to any power of sale, Lien, option or other right hereunder shall constitute a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege constitute a waiver thereof; or limit or impair Secured Party's right to take any action or to exercise any power of sale, Lien, option, or any other right hereunder, without notice or demand, or prejudice Secured Party's rights as against Debtor in any respect. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. 12. Assignment and Amendment. Secured Party may assign, endorse or transfer any instrument evidencing all or any part of the Secured Obligations as provided in, and in accordance with, the Purchase Agreement, and the holder of such instrument shall be entitled to the benefits of this Agreement. None of the terms or provisions of this Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by Secured Party and Debtor. 13. Termination. Immediately following the payment of all Secured Obligations, Secured Party shall deliver to Debtor the Pledged Collateral pledged by Debtor at the time subject to this Agreement and all instruments of assignment executed in connection therewith, free and clear of the Lien hereof and, except as otherwise provided herein, all of Debtor's obligations hereunder shall at such time terminate. 14. Lien Absolute. All rights of Secured Party hereunder, and all obligations of the Debtor hereunder, shall be absolute and unconditional irrespective of: (a) Any lack of validity or enforceability of the Purchase Agreement, any other Loan Document or any other agreement or instrument governing or evidencing any Secured Obligations. 12 13 (b) Any change in the time, manner or place of payment of, or in any other term of, all or any part of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from the Purchase Agreement, any other Loan Document or any other agreement or instrument governing or evidencing any Secured Obligations. (c) Any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Secured Obligations. (d) Any other circumstance which might otherwise constitute a defense available to, or a discharge of, Debtor. 15. Indemnification. Debtor severally agrees to indemnify and hold Secured Party harmless from and against any taxes, liabilities, claims and damages, including reasonable attorney's fees and disbursements, and other expenses incurred or arising by reason of the taking or the failure to take action by Secured Party, in good faith, in respect of any transaction effected under this Agreement or in connection with the Lien provided for herein, including, without limitation, any taxes payable in connection with the delivery or registration of any of the Pledged Collateral as provided herein. Debtor severally agrees to be liable for payment to Secured Party of all Secured Party's out-of-pocket costs and expenses incurred in connection with this Agreement after the date hereof and all reasonable fees, expenses and disbursements, including registration costs under the Act (or similar statute) and the reasonable fees of Secured Party's agents or representatives, incurred in connection with this Agreement and the performance by Secured Party of the provisions of this Agreement and of any transactions effected in connection with this Agreement. The obligations of the Debtor under this Section 15 shall survive the termination of this Agreement. Notwithstanding any other provision of this paragraph, or any other paragraph of this Agreement, if Debtor tenders his Pledged Collateral to Secured Party pursuant to the terms of this Agreement, but is prevented from tendering the Pledged Collateral to Secured Party by virtue of the actions of any Person other than Debtor, or any Person controlled or in common control with Debtor, then Debtor shall only be liable for delivery of good, valid and marketable title to all of the Pledged Collateral immediately upon legally being permitted to do so, and in such case shall not be liable for any costs, arising from Debtor's obligation to indemnify Secured Party as discussed in this Section 15. 16. Reinstatement. This Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against Debtor for liquidation or reorganization, should Debtor become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of Debtor's assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Secured Obligations, whether as a "voidable preference", "fraudulent conveyance", or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the 13 14 Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. 17. Miscellaneous. (a) Secured Party may execute any of its duties hereunder by or through agents or employees and shall be entitled to advice of counsel concerning all matters pertaining to its duties hereunder. (b) Neither Secured Party nor any of its officers, directors, employees, agents or counsel shall be liable for any action lawfully taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or willful misconduct. (c) This Agreement shall be binding upon Debtor and its successors and assigns, and shall inure to the benefit of, and be enforceable by, Secured Party and its successors and assigns, and shall be governed by, and construed and enforced in accordance with, the internal laws in effect in the State of Texas without giving effect to principles of choice of law, and none of the terms or provisions of this Agreement may be waived, altered, modified or amended except in writing, signed by Secured Party, duly signed for and on behalf of Secured Party and the Debtors and then only to the extent therein set forth. (d) Notwithstanding any provision to the contrary herein, or in any of the documents evidencing the Secured Obligations or otherwise relating thereto, no such provision shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable usury laws. If any such excessive interest is so provided for, then in such event (i) the provisions of this paragraph shall govern and control, (ii) neither Debtor nor its successors or assigns or any other party liable for the payment thereof, shall be obligated to pay the amount of such interest to the extent that is in excess of the maximum amount permitted by law, (iii) any such excess interest that may have been collected shall be, at the option of the holder of the instrument evidencing the Secured Obligations, either applied as a credit against the then unpaid principal amount thereof or refunded to the maker thereof, and (iv) the effective rate of interest shall be automatically reduced to the maximum lawful rate under applicable usury laws as now or hereafter construed by the courts having jurisdiction. (e) Any carbon, photographic or other reproduction of any financing statement signed by Debtor is sufficient as a financing statement for all purposes, including without limitation, filing in any state as may be permitted by the provisions of the Uniform Commercial Code of such state. 18. Severability. If for any reason any provision or provisions hereof are determined to be invalid and contrary to any existing or future law in any jurisdiction, such invalidity in any jurisdiction shall not impair the operation of or effect those portions of this Agreement which are valid in any other jurisdiction. 14 15 19. Notices. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by any other party, or whenever any of the parties desires to give or serve upon any other a communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and either shall be delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to Secured Party, at Sanders Morris Mundy 3100 Texas Commerce Tower Houston, Texas 77002 Attn: Michael S. Chadwick (b) If to Debtor, at Watermarc Food Management Co. 10777 Westheimer, Suite 1030 Houston, Texas 77042-3498 Attention: Joan Payton or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, or three (3) Business Days after the same shall have been deposited in the United States mail. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to the persons designated above to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. 20. Section Titles. The Section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 21. Counterparts. This Agreement may be executed in any number of counterparts, which shall, collectively and separately, constitute one agreement. 22. Further Assurances. Debtor agrees that at any time and from time to time, upon the written request of Secured Party, Debtor will execute and deliver such further documents and do such further acts and things as Secured Party may reasonably request in order to effect the purposes of this Agreement. 15 16 IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed as of the date first written above. WATERMARC FOOD MANAGEMENT CO. By: /s/ ANGELO PITILLO --------------------------------------- Name: Angelo Pitillo ------------------------------------- Title: President & Chief Operating Officer ------------------------------------ 16 17 SCHEDULE I DEBTOR PLEDGED SHARES Watermarc Food Management Co. 48,500 shares of Common Stock, $.01 par value, of Marco's Mexican Restaurants, Inc., a Texas corporation, evidenced by the certificate heretofore delivered to Secured Party. 17 18 EXHIBIT A Secured Parties Don A. Sanders Ghulam M. Bombaywala Atlantis Software Company Employee Profit Sharing Plan Philip M. Mount John I. Mundy Katherine U. Sanders Ben T. Morris Quinlan Quiros Schnitzer Neil Lande, Custodian for Lynne Lande, Stephen Lande, Sara Lande, and Caroline Lande John E. Drury George L. Ball John M. O'Quinn J-All Partnership Nolan Ryan Roger P. Lindstedt Ray C. Childress Kara S. Childress Morton A. Cohn Michael S. Chadwick c/o Sanders Morris Mundy Inc. 3100 Texas Commerce Tower 600 Travis Houston, Texas 77002 18 EX-4.6 7 1ST AMEND. TO FINANCIAL ADVISORY AGMT. 1 FIRST AMENDMENT TO FINANCIAL ADVISORY AGREEMENT First Amendment to Financial Advisory Agreement dated as of March 31, 1996 (the "Amendment"), among WATERMARC FOOD MANAGEMENT CO., a Texas corporation formerly known as Billy Blues Food Corporation (the "Company"), and SANDERS MORRIS MUNDY INC., a Texas corporation (the "Advisor"); WITNESSETH: Whereas, the Company and the Advisor are parties to a Financial Advisor Agreement dated as of January 1, 1995 (the "Advisory Agreement"), pursuant to which the Company has retained the Advisor to provide certain advice and consulting services to the Company; and Whereas, the Company and the Advisor wish to extend the term of and amend the Advisory Agreement in certain respects; Now, therefore, in consideration of the foregoing premises, the following mutual agreement, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company and the Advisor agree to amend the Advisory Agreement as follows: 1. Definitions. Capitalized terms used herein shall have the meaning assigned to them in the Advisory Agreement unless otherwise defined herein or the context otherwise requires. 2. Amendments to the Advisory Agreement. The Advisory Agreement is hereby amended as follows: (a) Section 2.1 of the Advisory Agreement is hereby amended by adding the following sentence: Commencing July 1, 1996, the monthly financial advisory fee shall be reduced to $5,000 per 30-day period. (b) Section 2.3 of the Advisory Agreement is hereby amended by deleting reference to "$2.50" and substituting in place thereof "$1.00" (c) Section 6 of the Advisory Agreement is hereby amended by deleting all references to "eighteen months" in the first and second sentence and substituting in place thereof "36 months." (d) The Advisory Agreement is hereby amended by inserting the following new Section 13 immediately after Section 12: 2 13. ADDITIONAL AGREEMENTS BY THE COMPANY. (a) Nomination of Director. So long as any of the 12% Subordinated Notes due July 31, 1997 remain outstanding, the Advisor shall have the right to nominate one individual to serve on the Board of Directors of the Company. It is agreed that Michael S. Chadwick shall be deemed the nominee of the Advisor until the first to occur of (i) his resignation as a director of the Company or (ii) the termination of his employment with the Advisor. Ghulam M. Bombaywala agrees to vote, whether at an annual meeting of shareholders, by unanimous consent in lieu thereof, or otherwise, all shares of the capital stock of the Company that he may now or hereafter beneficially own, directly or indirectly, in favor of the election as a director of the Company the person designated by the Advisor. If the Advisor so requests, Mr. Bombaywala shall vote all shares of capital stock of the Company that he may at the time beneficially own, directly or indirectly, in favor of (i) the removal of a director previously designated by the Advisor and (ii) the election of a replacement designated by the Advisor. If Mr. Bombaywala votes in favor of the removal of a director designated by the Advisor other than as requested by the Advisor, he shall simultaneously vote all shares of capital stock of the Company that he may at the time beneficially own, directly or indirectly, in favor of the election of a replacement designated by the Advisor. (b) Financial Information. The Company agrees to provide to the Advisor promptly upon their issuance copies of the Company's monthly, quarterly, and annual financial statements and an annual budget with periodic updates. 3. Amendments to the Advisor's Warrants. Each of the Advisor's Warrants is hereby amended by deleting the number "$2.50" in the first paragraph and substituting in place thereof the number "$1.00." 4. Representations and Warranties. The Company represents and warrants as follows: (a) The execution, delivery and performance of this Amendment and the Advisory Agreement, as modified by this Amendment, and the transactions contemplated hereby and thereby (i) are within the corporate authority of the Company, (ii) have been authorized by all necessary corporate proceedings on the part of the Company, (iii) do not conflict with or result in any material breach or contravention of any provision of law, statute, rule, or regulation to which the Company is subject or any judgment, order, writ, injunction, license, or permit applicable to the Company, and (iv) do not conflict with any provision of the corporate charter or bylaws of the Company or any agreement or other instrument binding upon the Company. (b) The execution, delivery, and performance of this Amendment and the Advisory Agreement, as modified by this Amendment, will result in valid and 2 3 legally binding obligations of the Company enforceable against it in accordance with the respective terms and provisions hereof and thereof. (c) The execution, delivery, and performance of this Amendment and the Advisory Agreement, as modified by this Amendment, and the consummation by the Company of the transactions contemplated hereby and thereby do not require any approval or consent of, or filing with, any governmental agency or authority. 5. Ratification. Except as expressly amended hereby, the Advisory Agreement and the Advisor's Warrants are hereby ratified and confirmed in all respects and shall continue in full force and effect. This Amendment and the Advisory Agreement shall hereafter be read and construed together as a single document, and all references to the Advisory Agreement or any agreement or instrument related to the Advisory Agreement shall hereafter refer to the Advisory Agreement as amended by this Amendment. 6. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts taken together shall be deemed to constitute one and the same instrument. 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas (without reference to conflict of laws). In Witness Whereof, the Company and the Advisor have executed this Amendment as of the date first above written. WATERMARC FOOD MANAGEMENT CO. By: /s/ ANGELO PITILLO --------------------------------------- Name: Angelo Pitillo ---------------------------------- Title: President & Chief Operating --------------------------------- Officer --------------------------------- SANDERS MORRIS MUNDY By: /s/ MICHAEL S. CHADWICK --------------------------------------- Name: /s/ Michael S. Chadwick ------------------------------------- Title: Sr. VP ------------------------------------ /s/ GHULAM M. BOMBAYWALA ------------------------------------------ Ghulam M. Bombaywala 3 EX-4.7 8 FORM OF AMEND. TO 12% SUB. NOTES 1 AMENDMENT TO WARRANT TO PURCHASE COMMON STOCK OF WATERMARC FOOD MANAGEMENT CO. (FORMERLY BILLY BLUES FOOD CORPORATION) Pursuant to the terms of the First Amendment to Purchase Agreement dated as of March 31, 1996, among Watermarc Food Management Co., a Texas corporation formerly known as Billy Blues Food Corporation (the "Company") and the holders of the Warrants to Purchase Common Stock of the Company expiring on December 31, 1999 (the "Warrants") the initial Exercise Price (as defined in the Warrants) shall be $1.00. EX-10.1 9 1994 STOCK COMPENSATION PLAN 1 ================================================================================ * * * * * 1994 STOCK COMPENSATION PLAN OF BILLY BLUES FOOD CORPORATION (A TEXAS CORPORATION) * * * * * ================================================================================ 2 TABLE OF CONTENTS * * * 1994 STOCK COMPENSATION PLAN OF BILLY BLUES FOOD CORPORATION ================================================================================
SECTION SUBJECT PAGE 1. Purpose of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Stock Subject to the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. Administration of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (b) Changes in Law Applicable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4. Types of Awards Under the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5. Persons to Options Shall Be Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (a) Nonqualified Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (b) Incentive Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6. Factors to Be Considered in Granting Options . . . . . . . . . . . . . . . . . . . . . . . . 6 7. Time of Granting Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8. Terms and Conditions of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (a) Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (b) Type of Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (c) Option Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (1) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (2) Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (3) Cessation of Service as Director or Advisor . . . . . . . . . . . . . . . . . . 7 (4) Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (5) Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (6) Acceleration and Exercise Upon Change of Control . . . . . . . . . . . . . . . . 9
(i) 3 (d) Option Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (1) Nonqualified Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (2) Incentive Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (3) Determination of Fair Market Value . . . . . . . . . . . . . . . . . . . . . . 12 (e) Exercise of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (f) Nontransferability of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (g) Limitations on 10% Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (h) Limits on Vesting of Incentive Options . . . . . . . . . . . . . . . . . . . . . . . 14 (i) Compliance with Securities Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (j) Additional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 9. Medium and Time of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 10. Alternate Stock Appreciation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (a) Award of Alternate Stock Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (b) Alternate Stock Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (c) Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (d) Amount of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (e) Form of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (f) Termination of SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (g) Effect of Exercise of SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (h) Effect of Exercise of Related Option . . . . . . . . . . . . . . . . . . . . . . . . 20 (i) Nontransferability of SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 11. Reload Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (a) Authorization of Reload Options . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (b) Reload Option Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (c) Reload Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (d) Term and Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (e) Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (f) Applicability of Other Sections . . . . . . . . . . . . . . . . . . . . . . . . . . 22 12. Rights as a Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 13. Optionee's Agreement to Serve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 14. Adjustments on Changes in Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 23 (a) Changes in Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (b) Reorganization, Dissolution or Liquidation . . . . . . . . . . . . . . . . . . . . . 24 (c) Change in Par Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (d) Notice of Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (e) Effect Upon Holder of Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (f) Right of Company to Make Adjustments . . . . . . . . . . . . . . . . . . . . . . . . 26 15. Investment Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 16. No Obligation to Exercise Option or SAR . . . . . . . . . . . . . . . . . . . . . . . . . 27
(ii) 4 17. Modification, Extension, and Renewal of Options . . . . . . . . . . . . . . . . . . . . . 27 18. Effective Date of the Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 19. Termination of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 20. Amendment of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 21. Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 22. Indemnification of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 23. Application of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 24. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(iii) 5 1994 STOCK COMPENSATION PLAN OF BILLY BLUES FOOD CORPORATION 1. Purpose of Plan. This 1994 Stock Compensation Plan ("Plan") is intended to encourage ownership of the common stock of Billy Blues Food Corporation ("Company") by certain officers, directors, employees and advisors of the Company or any Subsidiary or Subsidiaries of the Company (as hereinafter defined) in order to provide additional incentive for such persons to promote the success and the business of the Company or its Subsidiaries and to encourage them to remain in the employ of the Company or its Subsidiaries by providing such persons an opportunity to benefit from any appreciation of the common stock of the Company through the issuance of stock options and related stock appreciation rights to such persons in accordance with the terms of the Plan. It is further intended that options granted pursuant to this Plan shall constitute either incentive stock options ("Incentive Options") within the meaning of Section 422 (formerly Section 422A) of the Internal Revenue Code of 1986, as amended ("Code"), or options which do not constitute Incentive Options ("Nonqualified Options") as determined by the Committee (as hereinafter defined) at the time of issuance of such options. Incentive Options, Nonqualified Options and Reload Options (as defined in Section 11 hereof) are herein sometimes referred to collectively as "Options". As used herein, the term Subsidiary or Subsidiaries shall mean any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 1994 STOCK COMPENSATION PLAN - Page 1 6 2. Stock Subject to the Plan. Subject to adjustment as provided in Section 14 hereof, there will be reserved for the use upon the exercise of Options to be granted from time to time under the Plan, an aggregate of 250,000 shares of the common stock, $.05 par value, of the Company ("Common Stock"), which shares in whole or in part shall be authorized, but unissued, shares of the Common Stock or issued shares of Common Stock which shall have been reacquired by the Company as determined from time to time by the Board of Directors of the Company ("Board of Directors"). To determine the number of shares of Common Stock available at any time for the granting of Options under the Plan, there shall be deducted from the total number of reserved shares of Common Stock, the number of shares of Common Stock in respect of which Options have been granted pursuant to the Plan which remain outstanding or which have been exercised. If and to the extent that any Option to purchase reserved shares shall not be exercised by the optionee for any reason or if such Option to purchase shall terminate as provided herein, such shares which have not been so purchased hereunder shall again become available for the purposes of the Plan unless the Plan shall have been terminated, but such unpurchased shares shall not be deemed to increase the aggregate number of shares specified above to be reserved for purposes of the Plan (subject to adjustment as provided in Section 14 hereof). 3. Administration of the Plan. (a) General. The Plan shall be administered by a Compensation Committee ("Committee") appointed by the Board of Directors, which Committee shall consist of not less than two (2) members of the Board of Directors who are not eligible to participate in the Plan, and have not, for a period of at least one (1) year prior thereto been eligible to participate in the Plan, except that if at any time there shall be less than two (2) directors who are qualified to serve on the Committee, then the Plan shall be administered by the full Board of Directors. All references in this Plan to the Committee shall be deemed to refer 1994 STOCK COMPENSATION PLAN - Page 2 7 instead to the full Board of Directors at any time there is not a committee of two (2) members qualified to act hereunder. The Board of Directors may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Committee. If the Board of Directors does not designate a Chairman of the Committee, the Committee shall select one of its members as its Chairman. The Committee shall hold its meetings at such times and places as it shall deem advisable. A majority of its members shall constitute a quorum. Any action of the Committee shall be taken by a majority vote of its members at a meeting at which a quorum is present. Notwithstanding the preceding, any action of the Committee may be taken without a meeting by a written consent signed by all of the members, and any action so taken shall be deemed fully as effective as if it had been taken by a vote of the members present in person at the meeting duly called and held. The Committee may appoint a Secretary, shall keep minutes of its meetings, and shall make such rules and regulations for the conduct of its business as it shall deem advisable. The Committee shall have the sole authority and power, subject to the express provisions and limitations of the Plan, to construe the Plan and option agreements granted hereunder, and to adopt, prescribe, amend, and rescind rules and regulations relating to the Plan, and to make all determinations necessary or advisable for administering the Plan, including, but not limited to, (i) who shall be granted Options under the Plan, (ii) the term of each Option, (iii) the number of shares covered by such Option, (iv) whether the Option shall constitute an Incentive Option or a Nonqualified Option or a Reload Option, (v) the exercise price for the purchase of the shares of the Common Stock covered by the Option, (vi) the period during which the Option may be exercised, (vii) whether the right to purchase the number of shares covered by the Option shall be fully vested on issuance of 1994 STOCK COMPENSATION PLAN - Page 3 8 the Option so that such shares may be purchased in full at one time or whether the right to purchase such shares shall become vested over a period of time so that such shares may only be purchased in installments, and (viii) the time or times at which Options shall be granted. The Committee's determinations under the Plan, including the above enumerated determinations, need not be uniform and may be made by it selectively among the persons who receive, or are eligible to receive, Options under the Plan, whether or not such persons are similarly situated. The interpretation by the Committee of any provision of the Plan or of any option agreement entered into hereunder with respect to any Incentive Option shall be in accordance with Section 422 of the Code and the regulations issued thereunder, as such section or regulations may be amended from time to time, in order that the rights granted hereunder and under said option agreements shall constitute "Incentive Stock Options" within the meaning of such section. The interpretation and construction by the Committee of any provision of the Plan or of any Option granted hereunder shall be final and conclusive, unless otherwise determined by the Board of Directors. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. Upon issuing an Option under the Plan, the Committee shall report to the Board of Directors the name of the person granted the Option, whether the Option is an Incentive Option or a Nonqualified Option, the number of shares of Common Stock covered by the Option, and the terms and conditions of such Option. (b) Changes in Law Applicable. If the laws relating to Incentive Options or Nonqualified Options are changed, altered or amended during the term of the Plan, the Board of Directors shall have full authority and power to alter or amend the Plan with 1994 STOCK COMPENSATION PLAN - Page 4 9 respect to Incentive Options or Nonqualified Options, respectively, to conform to such changes in the law without the necessity of obtaining further shareholder approval, unless the changes require such approval. 4. Types of Awards Under the Plan. Awards under the Plan may be in the form of either Options, alternate stock appreciation rights (as described in Section 10 hereof), or a combination thereof. 5. Persons to Whom Options Shall be Granted. (a) Nonqualified Options. Nonqualified Options shall be granted only to officers, directors (other than "Outside Directors" of the Company or a Subsidiary [as hereinafter defined]), employees and advisors of the Company or a Subsidiary who, in the judgment of the Committee, are responsible for or contribute to the management or success of the Company or a Subsidiary and who, at the time of the granting of the Nonqualified Options, are either officers, directors (other than Outside Directors), employees or advisors of the Company or a Subsidiary. As used herein, the term "Outside Director" shall mean any director of the Company or a Subsidiary who is not an employee of the Company or a Subsidiary. (b) Incentive Options. Incentive Options shall be granted only to employees of the Company or a Subsidiary who, in the judgment of the Committee, are responsible for or contribute to the management or success of the Company or a Subsidiary and who, at the time of the granting of the Incentive Option are either an employee of the Company or a Subsidiary. Subject to the provisions of Section 8(g) hereof, no individual shall be granted an Incentive Option who, immediately before such Incentive Option was granted, would own more than ten percent (10%) of the total combined voting power or value of all classes of stock of the Company ("10% Shareholder"). 1994 STOCK COMPENSATION PLAN - Page 5 10 6. Factors to Be Considered in Granting Options. In making any determination as to persons to whom Options shall be granted and as to the number of shares to be covered by such Options, the Committee shall take into account the duties and responsibilities of the respective officers, directors, employees, or advisors, their current and potential contributions to the success of the Company or a Subsidiary, and such other factors as the Committee shall deem relevant in connection with accomplishing the purpose of the Plan. 7. Time of Granting Options. Neither anything contained in the Plan or in any resolution adopted or to be adopted by the Board of Directors or the Shareholders of the Company or a Subsidiary nor any action taken by the Committee shall constitute the granting of any Option. The granting of an Option shall be effected only when a written Option Agreement acceptable in form and substance to the Committee, subject to the terms and conditions hereof including those set forth in Section 8 hereof, shall have been duly executed and delivered by or on behalf of the Company and the person to whom such Option shall be granted. No person shall have any rights under the Plan until such time, if any, as a written Option Agreement shall have been duly executed and delivered as set forth in this Section 7. 8. Terms and Conditions of Options. All Options granted pursuant to this Plan must be granted within ten (10) years from the date the Plan is adopted by the Board of Directors of the Company. Each Option Agreement governing an Option granted hereunder shall be subject to at least the following terms and conditions, and shall contain such other terms and conditions, not inconsistent therewith, that the Committee shall deem appropriate: (a) Number of Shares. Each Option shall state the number of shares of Common Stock which it represents. (b) Type of Option. Each Option shall state whether it is intended to be an Incentive Option or a Nonqualified Option. 1994 STOCK COMPENSATION PLAN - Page 6 11 (c) Option Period. (1) General. Each Option shall state the date upon which it is granted. Each Option shall be exercisable in whole or in part during such period as is provided under the terms of the Option subject to any vesting period set forth in the Option, but in no event shall an Option be exercisable either in whole or in part after the expiration of ten (10) years from the date of grant; provided, however, if an Incentive Option is granted to a 10% Shareholder, such Incentive Option shall not be exercisable more than five (5) years from the date of grant thereof. (2) Termination of Employment. Except as otherwise provided in case of Disability (as hereinafter defined), death or Change of Control (as hereinafter defined), no Option shall be exercisable after an optionee who is an employee of the Company or a Subsidiary ceases to be employed by the Company or a Subsidiary as an employee; provided, however, that the Committee shall have the right in its sole discretion, but not the obligation, to extend the exercise period for not more than three (3) months following the date of termination of such optionee's employment; provided further, however, that no Option shall be exercisable after the expiration of ten (10) years from the date it is granted and provided further, no Incentive Option granted to a 10% Shareholder shall be exercisable after the expiration of five (5) years from the date it is granted. (3) Cessation of Service as Director or Advisor. Except as otherwise provided in case of Disability, death or Change of Control, no Option shall be exercisable after an optionee who was a director or advisor of the Company or a Subsidiary ceases to be a director or advisor of the Company or a Subsidiary; provided, however, that the Committee shall have the right in its sole discretion, 1994 STOCK COMPENSATION PLAN - Page 7 12 but not the obligation, to extend the exercise period for not more than three (3) months following the date such optionee ceases to be a director or advisor of the Company or a Subsidiary; provided further, however, that no Option shall be exercisable after the expiration of ten (10) years from the date it is granted. (4) Disability. If an optionee's employment is terminated by reason of the permanent and total Disability (as hereinafter defined) of such optionee or if an optionee who is a director or advisor of the Company or a Subsidiary ceases to serve as a director or advisor by reason of the permanent and total Disability of such optionee, the Committee shall have the right in its sole discretion, but not the obligation, to extend the exercise period for not more than one (1) year following the date of termination of the optionee's employment or the date such optionee ceases to be a director or advisor of the Company or a Subsidiary, as the case may be, subject to the condition that no Option shall be exercisable after the expiration of ten (10) years from the date it is granted and subject to the further condition that no Incentive Option granted to a 10% Shareholder shall be exercisable after the expiration of five (5) years from the date it is granted. For purposes of this Plan, the term "Disability" shall mean the inability of the optionee to fulfill such optionee's obligations to the Company or a Subsidiary by reason of any physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months as determined by a physician acceptable to the Committee in its sole discretion. (5) Death. If an optionee dies while in the employ of the Company or a Subsidiary, or while serving as a director or advisor of the Company or a Subsidiary, and shall not have fully exercised Options granted pursuant to the Plan, 1994 STOCK COMPENSATION PLAN - Page 8 13 such Options may be exercised in whole or in part at any time within one (1) year after the optionee's death, by the executors or administrators of the optionee's estate or by any person or persons who shall have acquired the Options directly from the optionee by bequest or inheritance, but only to the extent that the optionee was entitled to exercise such Option at the date of such optionee's death, subject to the condition that no Option shall be exercisable after the expiration of ten (10) years from the date it is granted and subject to the further condition that no Incentive Option granted to a 10% Shareholder shall be exercisable after the expiration of five (5) years from the date it is granted. (6) Acceleration and Exercise Upon Change of Control. Notwithstanding the preceding provisions of this Section 8(c), if any Option granted under the Plan provides for either (a) an incremental vesting period whereby such Option may only be exercised in installments as such incremental vesting period is satisfied or (b) a delayed vesting period whereby such Option may only be exercised after the lapse of a specified period of time, such as after the expiration of one (1) year, such vesting period shall be accelerated upon the occurrence of a Change of Control (as hereinafter defined) of the Company, or a threatened Change of Control of the Company as determined by the Committee, so that such Option shall thereupon become exercisable immediately in part or its entirety by the holder thereof, as such holder shall elect. For the purposes of this Plan, a "Change of Control" shall be deemed to have occurred if. (i) Any "person", including a "group" as determined in accordance with Section 13(d)(3) of the Securities Exchange Act of 1934 ("Exchange Act") and the Rules and Regulations promulgated thereunder, 1994 STOCK COMPENSATION PLAN - Page 9 14 is or becomes, through one or a series of related transactions or through one or more intermediaries, the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities, other than a person who is such a beneficial owner on the effective date of the Plan and any affiliate of such person; (ii) As a result of, or in connection with, any tender offer or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions ("Transaction"), the persons who were Directors of the Company before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company; (iii) Following the effective date of the Plan, the Company is merged or consolidated with another corporation and as a result of such merger or consolidation less than 40% of the outstanding voting securities of the surviving or resulting corporation shall then be owned in the aggregate by the former stockholders of the Company, other than (x) any party to such merger or consolidation, or (y) any affiliates of any such party; (iv) A tender offer or exchange offer is made and consummated for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or 1994 STOCK COMPENSATION PLAN - Page 10 15 (v) The Company transfers more than 50% of its assets, or the last of a series of transfers result in the transfer of more than 50% of the assets of the Company, to another corporation that is not a wholly-owned corporation of the Company. For purposes of this subsection 8(c)(6)(v), the determination of what constitutes more than 50% of the assets of the Company shall be determined based on the sum of the values attributed to (i) the Company's real property as determined by an independent appraisal thereof, and (ii) the net book value of all other assets of the Company, each taken as of the date of the Transaction involved. In addition, upon a Change of Control, any Options previously granted under the Plan to the extent not already exercised may be exercised in whole or in part either immediately or at any time during the term of the Option as such holder shall elect. (d) Option Prices. (1) Nonqualified Options. The purchase price or prices of the shares of the Common Stock which shall be offered to any person under the Plan and covered by a Nonqualified Option shall be the price determined by the Committee at the time of granting of the Nonqualified Option, which price may be less than, equal to or higher than one hundred percent (100%) of the fair market value of the Common Stock at the time of granting the Nonqualified Option. (2) Incentive Options. The purchase price or prices of the shares of the Common Stock which shall be offered to any person under the Plan and covered by an Incentive Option shall be one hundred percent (100%) of the fair market value of the Common Stock at the time of granting the Incentive Option or such 1994 STOCK COMPENSATION PLAN - Page 11 16 higher purchase price as may be determined by the Committee at the time of granting the Incentive Option; provided, however, if an Incentive Option is granted to a 10% Shareholder, the purchase price of the shares of the Common Stock of the Company covered by such Incentive Option may not be less than one hundred ten percent (110%) of the fair market value of such shares on the day the Incentive Option is granted. (3) Determination of Fair Market Value. During such time as the Common Stock of the Company is not listed upon an established stock exchange, the fair market value per share shall be deemed to be the closing sales price of the Common Stock on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") on the day the Option is granted, as reported by NASDAQ, if the Common Stock is so quoted, and if not so quoted, the mean between dealer "bid" and "ask," prices of the Common Stock in the New York over-the-counter market on the day the Option is granted, as reported by the National Association of Securities Dealers, Inc. If the Common Stock is listed upon an established stock exchange or exchanges, such fair market value shall be deemed to be the highest closing price of the Common Stock on such stock exchange or exchanges on the day the Option is granted or, if no sale of the Common Stock of the Company shall have been made on established stock exchange on such day, on the next preceding day on which there was a sale of such stock. If there is no market price for the Common Stock, then the Board of Directors and the Committee may, after taking all relevant facts into consideration, determine the fair market value of the Common Stock. 1994 STOCK COMPENSATION PLAN - Page 12 17 (e) Exercise of Options. To the extent that a holder of an Option has a current right to exercise, the Option may be exercised from time to time by written notice to the Company at its principal place of business. Such notice shall state the election to exercise the Option, the number of whole shares in respect of which it is being exercised, shall be signed by the person or persons so exercising the Option, and shall contain any investment representation required by Section 8(i) hereof. Such notice shall be accompanied by payment of the full purchase price of such shares and by the Option Agreement evidencing the Option. In addition, if the Option shall be exercised, pursuant to Section 8(c)(4) or Section 8(c)(5) hereof, by any person or persons other than the optionee, such notice shall also be accompanied by appropriate proof of the right of such person or persons to exercise the Option. The Company shall deliver a certificate or certificates representing such shares as soon as practicable after the aforesaid notice and payment of such shares shall be received. The certificate or certificates for the shares as to which the Option shall have been so exercised shall be registered in the name of the person or persons so exercising the Option. In the event the Option shall not be exercised in full, the Secretary of the Company shall endorse or cause to be endorsed on the Option the number of shares which has been exercised thereunder and the number of shares that remain exercisable under the Option and return such Option Agreement to the holder thereof. (f) Nontransferability of Options. An Option granted pursuant to the Plan shall be exercisable only by the optionee or the optionee's court appointed guardian as set forth in Section 8(c)(4) hereof during the optionee's lifetime and shall not be assignable or transferable by the optionee otherwise than by Will or the 1994 STOCK COMPENSATION PLAN - Page 13 18 laws of descent and distribution. An Option granted pursuant to the Plan shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise other than by Will or the laws of descent and distribution) and shall not be subject to execution, attachment, or similar process. Any attempted transfer, assignment, pledge, hypothecation, or other disposition of any Option or of any rights granted thereunder contrary to the foregoing provisions of this Section 8(f), or the levy of any attachment or similar process upon an Option or such rights, shall be null and void. (g) Limitations on 10% Shareholders. No Incentive Option may be granted under the Plan to any 10% Shareholder unless (i) such Incentive Option is granted at an option price not less than one hundred ten percent (110%) of the fair market value of the shares on the day the Incentive Option is granted and (ii) such Incentive Option expires on a date not later than five (5) years from the date the Incentive Option is granted. (h) Limits on Vesting of Incentive Options. An individual may be granted one or more Incentive Options, provided that the aggregate fair market value (as determined at the time such Incentive Option is granted) of the stock with respect to which Incentive Options are exercisable for the first time by such individual during any calendar year shall not exceed $100,000. To the extent the $100,000 limitation in the preceding sentence is exceeded, such option shall be treated as an option which is not an Incentive Option. (i) Compliance with Securities Laws. The Plan and the grant and exercise of the rights to purchase shares hereunder, and the Company's obligations to sell and deliver shares upon the exercise of rights to purchase shares, shall be 1994 STOCK COMPENSATION PLAN - Page 14 19 subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may, in the opinion of counsel for the Company, be required, and shall also be subject to all applicable rules and regulations of any stock exchange upon which the Common Stock of the Company may then be listed. At the time of exercise of any Option, the Company may require the optionee to execute any documents or take any action which may be then necessary to comply with the Securities Act of 1933, as amended ("Securities Act"), and the rules and regulations promulgated thereunder, or any other applicable federal or state laws regulating the sale and issuance of securities, and the Company may, if it deems necessary, include provisions in the stock option agreements to assure such compliance. The Company may, from time to time, change its requirements with respect to enforcing compliance with federal and state securities laws, including the request for and enforcement of letters of investment intent, such requirements to be determined by the Company in its judgment as necessary to assure compliance with said laws. Such changes may be made with respect to any particular Option or stock issued upon exercise thereof. Without limiting the generality of the foregoing, if the Common Stock issuable upon exercise of an Option granted under the Plan is not registered under the Securities Act, the Company at the time of exercise will require that the registered owner execute and deliver an investment representation agreement to the Company in form acceptable to the Company and its counsel, and the Company will place a legend on the certificate evidencing such Common Stock restricting the transfer thereof, which legend shall be substantially as follows: 1994 STOCK COMPENSATION PLAN - Page 15 20 THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL EITHER (i) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AND ITS COUNSEL THAT REGISTRATION UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR TRANSFER. (j) Additional Provisions. The option Agreements authorized under the Plan shall contain such other provisions as the Committee shall deem advisable, including, without limitation, restrictions upon the exercise of the Option. Any such Option Agreement with respect to an Incentive Option shall contain such limitations and restrictions upon the exercise of the Incentive Option as shall be necessary in order that the option will be an "Incentive Stock Option" as defined in Section 422 of the Code. 9. Medium and Time of Payment. The purchase price of the shares of the Common Stock as to which the Option shall be exercised shall be paid in full either (i) in cash at the time of exercise of the Option, (ii) by tendering to the Company shares of the Company's Common Stock having a fair market value (as of the date of receipt of such shares by the Company) equal to the purchase price for the number of shares of Common Stock purchased, or (iii) partly in cash and partly in shares of the Company's Common Stock valued at fair market value as of the date of receipt of such shares by the Company. Cash payment for the shares of the Common Stock purchased upon exercise of the Option shall be in the form of either a cashier's check, certified 1994 STOCK COMPENSATION PLAN - Page 16 21 check or money order. Personal checks may be submitted, but will not be considered as payment for the shares of the Common Stock purchased and no certificate for such shares will be issued until the personal check clears in normal banking channels. If a personal check is not paid upon presentment by the Company, then the attempted exercise of the Option will be null and void. In the event the optionee tenders shares of the Company's Common Stock in full or partial payment for the shares being purchased pursuant to the Option, the shares of Common Stock so tendered shall be accompanied by fully executed stock powers endorsed in favor of the Company with the signature on such stock power being guaranteed. If an optionee tenders shares, such optionee assumes sole and full responsibility for the tax consequences, if any, to such optionee arising therefrom, including the possible application of Code Section 424(c), or its successor Code section, which negates any nonrecognition of income rule with respect to such transferred shares, if such transferred shares have not been held for the minimum statutory holding period to receive preferential tax treatment. 10. Alternate Stock Appreciation Rights. (a) Award of Alternate Stock Rights. Concurrently with or subsequent to the award of any Option to purchase one or more shares of Common Stock, the Committee may in its sole discretion, subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, award to the optionee with respect to each share of Common Stock covered by an Option ("Related Option"), a related alternate stock appreciation right ("SAR"), permitting the optionee to be paid the appreciation on the Related Option in lieu of exercising the Related Option. A SAR granted with respect to an Incentive Option must be granted together with the Related Option. A SAR granted with respect to a Nonqualified Option may be granted together with or subsequent to the grant of such Related Option. 1994 STOCK COMPENSATION PLAN - Page 17 22 (b) Alternate Stock Rights Agreement. Each SAR shall be on such terms and conditions not inconsistent with this Plan as the Committee may determine and shall be evidenced by a written agreement executed by the Company and the optionee receiving the Related Option. (c) Exercise. An SAR may be exercised only if and to the extent that its Related Option is eligible to be exercised on the date of exercise of the SAR. To the extent that a holder of a SAR has a current right to exercise, the SAR may be exercised from time to time by written notice to the Company at its principal place of business. Such notice shall state the election to exercise the SAR, the number of shares in respect of which it is being exercised, shall be signed by the person so exercising the SAR and shall be accompanied by the agreement evidencing the SAR and the Related Option. In the event the SAR shall not be exercised in full, the Secretary of the Company shall endorse or cause to be endorsed on the SAR and the Related Option the number of shares which have been exercised thereunder and the number of shares that remain exercisable under the SAR and the Related Option and return such SAR and Related Option to the holder thereof. (d) Amount of Payment. The amount of payment to which an optionee shall be entitled upon the exercise of each SAR shall be equal to 100% of the amount, if any, by which the fair market value of a share of Common Stock on the exercise date exceeds the fair market value of a share of Common Stock on the date the Option related to said SAR was granted or became effective, as the case may be; provided, however, the Company may, in its sole discretion, withhold from such cash payment any amount necessary to satisfy the Company's obligation for withholding taxes with respect to such payment. For this purpose, the fair market value of a share of Common Stock shall be determined as set forth in Section 8(d) hereof. 1994 STOCK COMPENSATION PLAN - Page 18 23 (e) Form of Payment. The amount payable by the Company to an optionee upon exercise of a SAR may be paid in shares of Common Stock, cash or a combination thereof. The number of shares of Common Stock to be paid to an optionee upon such optionee's exercise of SAR shall be determined by dividing the amount of payment determined pursuant to Section 10(d) hereof by the fair market value of a share of Common Stock on the exercise date of such SAR. For purposes of this Plan, the exercise date of a SAR shall be the date the Company receives written notification from the optionee of the exercise of the SAR in accordance with the provisions of Section 10(c) hereof. As soon as practicable after exercise, the Company shall either deliver to the optionee the amount of cash due such optionee or a certificate or certificates for such shares of Common Stock. All such shares shall be issued with the rights and restrictions specified herein. (f) Termination of SAR. Except as otherwise provided in case of Disability (as defined in Section 8(c)(4) hereof) or death, no SAR shall be exercisable after an optionee ceases to be an employee, director or advisor of the Company or Subsidiary; provided, however, that the Committee shall have the right in its sole discretion, but not the obligation, to extend the exercise period for not more than three (3) months following the date such optionee ceases to be an employee, director or advisor of the Company or a Subsidiary; provided further, that the Committee may not extend the period during which an optionee may exercise a SAR for a period greater than the period during which an optionee may exercise the Related Option. If an optionee's position as an employee, director or advisor of the Company is terminated due to the Disability or death of such optionee, the Committee shall have the right, in its sole discretion, but not the obligation, to extend the exercise period applicable to the SAR for a period not to exceed the period 1994 STOCK COMPENSATION PLAN - Page 19 24 in which the optionee may exercise the Option related to said SAR as set forth in Sections 8(c)(4) and 8(c)(5) hereof, respectively. (g) Effect of Exercise of SAR. The exercise of any SAR shall cancel and terminate the right to purchase an equal number of shares covered by the Related Option. (h) Effect of Exercise of Related Option. Upon the exercise or termination of any Related Option, the SAR with respect to such Related Option shall terminate to the extent of the number of shares of Common Stock as to which the Related Option was exercised or terminated. (i) Nontransferability of SAR. A SAR granted pursuant to this Plan shall be exercisable only by the optionee or the optionee's court appointed guardian as set forth in Section 8(c)(4) hereof during the optionee's lifetime and, subject to the provisions of Section 10(f) hereof, shall not be assignable or transferable by the optionee. A SAR granted pursuant to the Plan shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment, or similar process. Any attempted transfer, assignment, pledge, hypothecation, or other disposition of any SAR or of any rights granted thereunder contrary to the foregoing provisions of this Section 10(i), or the levy of any attachment or similar process upon a SAR or such rights, shall be null and void. 11. Reload Options. (a) Authorization of Reload Options. Concurrently with the award of Nonqualified Options and/or the award of Incentive Options to any participant in the Plan, the Committee may authorize reload options ("Reload Options") to purchase for cash or shares that number of shares of Common Stock equal to the sum of: 1994 STOCK COMPENSATION PLAN - Page 20 25 (1) The number of shares of Common Stock used to exercise the underlying Nonqualifying Option or Incentive Option; and (2) To the extent authorized by the Committee, the number of shares of Common Stock used to satisfy any tax withholding requirement incident to the exercise of the underlying Nonqualifying Option or Incentive Options. The grant of a Reload Option will become effective upon the exercise of the underlying Nonqualifying Option, Incentive Option or Reload Option through the use of shares of Common Stock held by the optionee for at least 12 months. Notwithstanding the fact that the underlying option may be an Incentive Option, a Reload Option is not intended to qualify as an "incentive stock option" under Section 422 of the Code. (b) Reload Option Amendment. Each Option Agreement shall state whether the Committee has authorized Reload Options with respect to the underlying Nonqualifying Option and/or Incentive Option. Upon the exercise of an underlying Option or Incentive Option, the Reload Option will be evidenced by an amendment to the underlying Option Agreement. (c) Reload Option Price. The option price per share of Common Stock deliverable upon the exercise of a Reload Option shall be the fair market value of a share of Common Stock on the date the grant of the Reload Option becomes effective. (d) Term and Exercise. Each Reload Option is fully exercisable six months from the effective date of grant. The term of each Reload Option shall be equal to the remaining option term of the underlying Nonqualifying Option and/or Incentive Option. (e) Termination of Employment. No additional Reload Options shall be granted to optionees when Nonqualifying Options, Incentive Option and/or Reload Options are 1994 STOCK COMPENSATION PLAN - Page 21 26 exercised pursuant to the terms of this Plan following termination of the optionee's employment. (f) Applicability of Other Sections. To the extent not inconsistent with the foregoing provisions of this Section, the other Sections of this Plan pertaining to Options, including Sections 5, 8, and 9, are incorporated herein by this reference thereto as through fully set forth herein. 12. Rights as a Shareholder. The holder of an Option or a SAR shall have no rights as a shareholder with respect to the shares covered by the Option or SAR until the due exercise of the Option, Related Option, or SAR and the date of issuance of one or more stock certificates to such holder for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 14 hereof. 13. Optionee's Agreement to Serve. Each employee receiving an Option shall, as one of the terms of the Option Agreement agree that such employee will remain in the employ of the Company or Subsidiary for a period of at least one (1) year from the date on which the Option shall be granted to such employee; and that such employee will, during such employment, devote such employee's entire time, energy, and skill to the service of the Company or a Subsidiary as may be required by the management thereof, subject to vacations, sick leaves, and military absences. Such employment, subject to the provisions of any written contract between the Company or a Subsidiary and such employee, shall be at the pleasure of the Board of Directors of the Company or a Subsidiary, and at such compensation as the Company or a Subsidiary shall reasonably determine. Any termination of such employee's employment during the period which the employee has agreed pursuant to the foregoing provisions of this Section 13 to remain in 1994 STOCK COMPENSATION PLAN - Page 22 27 employment that is either for cause or voluntary on the part of the employee shall be deemed a violation by the employee of such employee's agreement. In the event of such violation, any Option or Options held by such employee, to the extent not theretofore exercised, shall forthwith terminate, unless otherwise determined by the Committee. Notwithstanding the preceding, neither the action of the Company in establishing the Plan nor any action taken by the Company, a Subsidiary or the Committee under the provisions hereof shall be construed as granting the optionee the right to be retained in the employ of the Company or a Subsidiary, or to limit or restrict the right of the Company or a Subsidiary, as applicable, to terminate the employment of any employee of the Company or a Subsidiary, with or without cause. 14. Adjustments on Changes in Capitalization. (a) Changes in Capitalization. Subject to any required action by the Shareholders of the Company, the number of shares of Common Stock covered by the Plan, the number of shares of Common Stock covered by each outstanding Option, and the exercise price per share thereof specified in each such Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from a subdivision or consolidation of shares or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of such shares effected without receipt of consideration by the Company after the date the Option is granted, so that upon exercise of the Option, the optionee shall receive the same number of shares the optionee would have received had the optionee been the holder of all shares subject to such optionee's outstanding Option immediately before the effective date of such change in the number of issued shares of the Common Stock of the Company. 1994 STOCK COMPENSATION PLAN - Page 23 28 (b) Reorganization, Dissolution or Liquidation. Subject to any required action by the Shareholders of the Company, if the Company shall be the surviving corporation in any merger or consolidation, each outstanding Option shall pertain to and apply to the securities to which a holder of the number of shares of Common Stock subject to the Option would have been entitled. A dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation, shall cause each outstanding Option to terminate as of a date to be fixed by the Committee (which date shall be as of or prior to the effective date of any such dissolution or liquidation or merger or consolidation); provided, that not less than thirty (30) days written notice of the date so fixed as such termination date shall be given to each optionee, and each optionee shall, in such event, have the right, during the said period of thirty (30) days preceding such termination date, to exercise such optionee's Option in whole or in part in the manner herein set forth. (c) Change in Par Value. In the event of a change in the Common Stock of the Company as presently constituted, which change is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any change shall be deemed to be the Common Stock within the meaning of the Plan. (d) Notice of Adjustments. To the extent that the adjustments set forth in the foregoing paragraphs of this Section 14 relate to stock or securities of the Company, such adjustments, if any, shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive, provided that each Incentive Option granted pursuant to this Plan shall not be adjusted in a manner that causes the Incentive Option to fail to continue to qualify as an "Incentive Stock Option" within the meaning of Section 422 of 1994 STOCK COMPENSATION PLAN - Page 24 29 the Code. The Company shall give timely notice of any adjustments made to each holder of an Option under this Plan and such adjustments shall be effective and binding on the optionee. (e) Effect Upon Holder of Option. Except as hereinbefore expressly provided in this Section 14, the holder of an Option shall have no rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class by reason of any dissolution, liquidation, merger, reorganization, or consolidation, or spin-off of assets or stock of another corporation, and any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to the Option. Without limiting the generality of the foregoing, no adjustment shall be made with respect to the number or price of shares subject to any Option granted hereunder upon the occurrence of any of the following events: (1) The grant or exercise of any other options which may be granted or exercised under any qualified or nonqualified stock option plan or under any other employee benefit plan of the Company whether or not such options were outstanding on the date of grant of the Option or thereafter granted; (2) The sale of any shares of Common Stock in the Company's initial or any subsequent public offering, including, without limitation, shares sold upon the exercise of any overallotment option granted to the underwriter in connection with such offering; 1994 STOCK COMPENSATION PLAN - Page 25 30 (3) The issuance, sale or exercise of any warrants to purchase shares of Common Stock whether or not such warrants were outstanding on the date of grant of the Option or thereafter issued; (4) The issuance or sale of rights, promissory notes or other securities convertible into shares of Common Stock in accordance with the terms of such securities ("Convertible Securities") whether or not such Convertible Securities were outstanding on the date of grant of the Option or were thereafter issued or sold; (5) The issuance or sale of Common Stock upon conversion or exchange of any Convertible Securities, whether or not any adjustment in the purchase price was made or required to be made upon the issuance or sale of such Convertible Securities and whether or not such Convertible Securities were outstanding on the date of grant of the Option or were thereafter issued or sold; or (6) Upon any amendment to or change in the terms of any rights or warrants to subscribe for or purchase, or options for the purchase of, Common Stock or Convertible Securities or in the terms of any Convertible Securities, including, but not limited to, any extension of any expiration date of any such right, warrant or option, any change in any exercise or purchase price provided for in any such right, warrant or option, any extension of any date through which any Convertible Securities are convertible into or exchangeable for Common Stock or any change in the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock. (f) Right of Company to Make Adjustments. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make 1994 STOCK COMPENSATION PLAN - Page 26 31 adjustments, reclassification, reorganizations, or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 15. Investment Purpose. Each Option under the Plan shall be granted on the condition that the purchase of the shares of stock thereunder shall be for investment purposes, and not with a view to resale or distribution; provided, however, that in the event the shares of stock subject to such Option are registered under the Securities Act or in the event a resale of such shares of stock without such registration would otherwise be permissible, such condition shall be inoperative if in the opinion of counsel for the Company such condition is not required under the Securities Act or any other applicable law, regulation, or rule of any governmental agency. 16. No Obligation to Exercise Option or SAR. The granting of an Option or SAR shall impose no obligation upon the optionee to exercise such Option or SAR. 17. Modification, Extension, and Renewal of Options. Subject to the terms and conditions and within the limitations of the Plan, the Committee and the Board of Directors may modify, extend or renew outstanding Options granted under the Plan, or accept the surrender of outstanding Options (to the extent not theretofore exercised). Neither the Committee nor the Board of Directors shall, however, modify any outstanding Options so as to specify a lower price or accept the surrender of outstanding Options and authorize the granting of new Options in substitution therefor specifying a lower price. Notwithstanding the foregoing, however, no modification of an Option shall, without the consent of the optionee, alter or impair any rights or obligations under any Option theretofore granted under the Plan. 18. Effective Date of the Plan. The Plan shall become effective on the date of execution hereof, which date is the date the Board of Directors approved and adopted the Plan ("Effective Date"); provided, however, if the Shareholders of the Company shall not have approved the Plan 1994 STOCK COMPENSATION PLAN - Page 27 32 by the requisite vote of the Shareholders, within twelve (12) months after the Effective Date, then the Plan shall terminate and all Options theretofore granted under the Plan shall terminate and be null and void. 19. Termination of the Plan. This Plan shall terminate as of the expiration of ten (10) years from the Effective Date. Options may be granted under this Plan at any time and from time to time prior to its termination. Any Option outstanding under the Plan at the time of its termination shall remain in effect until the Option shall have been exercised or shall have expired. 20. Amendment of the Plan. The Plan may be terminated at any time by the Board of Directors of the Company. The Board of Directors may at any time and from time to time without obtaining the approval of the Shareholders of the Company or a Subsidiary, modify or amend the Plan (including such form of Option Agreement as hereinabove mentioned) in such respects as it shall deem advisable in order that the Incentive Options granted under the Plan shall be "Incentive Stock Options" as defined in Section 422 of the Code or to conform to any change in the law, or in any other respect which shall not change: (a) the maximum number of shares for which Options may be granted under the Plan, except as provided in Section 14 hereof, or (b) the option prices other than to change the manner of determining the fair market value of the Common Stock for the purpose of Section 8(d) hereof to conform with any then applicable provisions of the Code or regulations thereunder; or (c) the periods during which Options may be granted or exercised; or (d) the provisions relating to the determination of persons to whom Options shall be granted and the number of shares to be covered by such Options; or (e) the provisions relating to adjustments to be made upon changes in capitalization. The termination or any modification or amendment of the Plan shall not, without the consent of the person to whom any Option shall theretofore have been granted, affect that person's rights under an Option theretofore granted to such person. With the consent of the person to whom such Option was granted, an outstanding Option may be 1994 STOCK COMPENSATION PLAN - Page 28 33 modified or amended by the Committee in such manner as it may deem appropriate and consistent with the requirements of this Plan applicable to the grant of a new Option on the date of modification or amendment. 21. Withholding. Whenever an optionee shall recognize compensation income as a result of the exercise of any Option or SAR granted under the Plan, the optionee shall remit in cash to the Company or Subsidiary the minimum amount of federal income and employment tax withholding which the Company or Subsidiary is required to remit to the Internal Revenue Service in accordance with the then current provisions of the Code. The full amount of such withholding shall be paid by the optionee simultaneously with the award or exercise of an Option or SAR, as applicable. 22. Indemnification of Committee. In addition to such other rights of indemnification as they may have as Directors or as members of the Committee, the members of the Committee shall be indemnified by the Company against the reasonable expenses, including attorneys' fees actually and necessarily incurred in connection with the defense of any action, suit or proceedings, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member is liable for negligence or misconduct in the performance of his duties; provided that within sixty (60) days after institution of any such action, suit or proceeding a Committee member shall in writing offer the Company the opportunity, at its own expense, to pursue and defend the same. 1994 STOCK COMPENSATION PLAN - Page 29 34 23. Application of Funds. The proceeds received by the Company from the sale of Common Stock pursuant to Options granted hereunder will be used for general corporate purposes. 24. Governing Law. This Plan shall be governed and construed in accordance with the laws of the state of incorporation of the Company. EXECUTED this 12th day of January, 1994. BILLY BLUES FOOD CORPORATION By: /s/ WILLIAM J. GALLAGHER ------------------------------------ William J. Gallagher, President ATTEST: /s/ PENELOPE S. GALLAGHER - - ---------------------------------- Penelope S. Gallagher, Secretary 1994 STOCK COMPENSATION PLAN - Page 30 EX-10.2 10 1ST AMEND. TO 1994 STOCK COMPENSATION PLAN 1 EXHIBIT 10.2 2 EXHIBIT B FIRST AMENDMENT TO THE 1994 STOCK COMPENSATION PLAN OF BILLY BLUES FOOD CORPORATION WHEREAS, on March 18, 1994, the Shareholders of the Billy Blues Food Corporation (the "Company") approved and adopted the 1994 Stock Compensation Plan (the "1994 Plan") which authorized the reservation of 250,000 shares of the Company's common stock, $.05 par value ("Common Stock"), for issuance to eligible participants under the 1994 Plan; WHEREAS, on December 16, 1994, the Board of Directors of the Company authorized the amendment of the 1994 Plan in order to (i) increase the number of shares reserved for issuance under the 1994 Plan from 250,000 to 500,000 shares, (ii) authorize Outside Directors, those directors not also serving as employees of the Company, to be eligible to receive nonqualified stock options under the 1994 Plan, and (iii) authorize the issuance of "Restricted Stock", as hereinafter defined, to eligible participants under the 1994 Plan; WHEREAS, Section 20 of the current 1994 Plan requires the approval of the shareholders of the Company to change the number of shares of Common Stock eligible for issuance under the 1994 Plan and to modify the provisions related to the determination of persons eligible to participate under the 1994 Plan; WHEREAS, although not required, the Company has sought approval of its shareholders to the proposed amendment authorizing the issuance of "Restricted Stock" to eligible participants under the 1994 Plan; and WHEREAS, on March 17, 1995, the shareholders of the Company ratified the proposal to amend the 1994 Plan in order to incorporate each of the foregoing amendments into the 1994 Plan: NOW, THEREFORE, for and in consideration of the above stated premises, the 1994 Plan is hereby amended by this "First Amendment" thereto as follows: 1. Amendments of the 1994 Plan. (a) Section 2 of the 1994 Plan is hereby amended to read in its entirety as follows: 2. Stock Subject to the Plan. Subject to adjustment as provided in Section 14 hereof, there will be reserved for the use upon the exercise of Options to be granted from time to time under the Plan, an aggregate of five hundred thousand (500,000) shares of the common stock, $.05 par value, of the Company ("Common Stock"), which shares in whole or in part shall be authorized, but unissued, shares of the Common Stock or issued shares of Common Stock which shall have been reacquired by the Company as determined from time to time by the Board of Directors of the Company ("Board of Directors"). To determine the number of shares of Common Stock available at any time for the granting of Options under the Plan, there shall be deducted from the total number of reserved shares of Common Stock, the number of shares of Common Stock in respect of which Options have been granted pursuant to the Plan which remain outstanding or which have been exercised. If and to the extent that any Option to purchase reserved shares shall not be exercised by the optionee for any reason or if such Option to purchase shall terminate as provided herein, such shares which have not been so purchased hereunder shall again become available for the purposes of the Plan unless the FIRST AMENDMENT TO THE 1994 STOCK COMPENSATION PLAN - Page 1 3 Plan shall have been terminated, but such unpurchased shares shall not be deemed to increase the aggregate number of shares specified above to be reserved for purposes of the Plan (subject to adjustment as provided in Section 14 hereof). (b) Section 5(a) of the 1994 Plan is hereby amended to read in its entirety as follows: 5. Persons to Whom Options Shall be Granted. (a) Nonqualified Options. Nonqualified Options shall be granted only to officers, directors (including "Outside Directors" of the Company or a Subsidiary [as hereinafter defined]), employees and advisors of the Company or a Subsidiary who, in the judgment of the Committee, are responsible for or contribute to the management or success of the Company or a Subsidiary and who, at the time of the granting of the Nonqualified Options, are either officers, directors (including Outside Directors), employees or advisors of the Company or a Subsidiary. As used herein, the term "Outside Director" shall mean any director of the Company or a Subsidiary who is not an employee of the Company or a Subsidiary. (c) Section 18 of the 1994 Plan is hereby added to read in its entirety as follows: 18. Outside Director Options. Nonqualified options for 5,000 shares shall automatically be granted pursuant to the Plan and without any action of the Board of Directors to each person who hereafter becomes or is re-elected as an Outside Director of the Company, to be effective as of, and deemed granted on, the date of commencement of such director's term. Each such option shall be for a term of five (5) years from the date of grant and shall be exercisable at the closing sales price of the Common Stock on the date of the grant as quoted on any stock exchange or national quotation system. The provisions of sub-paragraphs (3), (4) and (5) of Section 8(c) of the Plan shall not be applicable to any option granted to an Outside Director under this Section. Furthermore, the Board of Directors may organize a committee comprised of non-Outside Directors to review the feasibility of and to grant options to purchase additional shares of Common Stock to the Outside Directors. (d) Section 19 of the 1994 Plan is hereby added to read in its entirety as follows: 19. Restricted Stock. (a) Grant of Restricted Stock. Subject to the provisions of Sections 2 and 21, the Committee, at any time and from time to time, may grant shares of Restricted Stock FIRST AMENDMENT TO THE 1994 STOCK COMPENSATION PLAN - Page 2 4 under the Plan to such participants and in such amounts as it shall determine. Each grant of Restricted Stock shall be in writing. (b) Transferability. Except as provided in Section 19 hereof, the shares of Restricted Stock granted hereunder may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated for such period of time as shall be determined by the Committee and shall be specified in the Restricted Stock grant, or upon earlier satisfaction of other conditions as specified by the Committee in its sole discretion and set forth in the Restricted Stock grant. (c) Other Restrictions. The Committee may impose such other restrictions on any shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, restrictions under applicable federal or state securities laws, and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. (d) Certificate Legend. In addition to any legends placed on certificates pursuant to Subsection 19(c) hereof, each certificate representing shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of shares of stock represented by this certificate, whether voluntary, involuntary or by operation of law, is subject to certain restrictions on transfer set forth in the 1994 Stock Compensation Plan of _________________, rules of administration adopted pursuant to such Plan and a Restricted Stock grant dated ______________. A copy of the Plan, such rules and such Restricted Stock grant may be obtained from the Secretary of _____________________. (e) Removal of Restrictions. Except as otherwise provided in Section 19 hereof, shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the participant after the last day of the Period of Restriction. Once the shares are released from the restrictions, the participant shall be entitled to have the legend required by Subsection 19(d) removed from the participant's stock certificate. (f) Voting Rights. During the Period of Restriction, participants holding shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those shares. FIRST AMENDMENT TO THE 1994 STOCK COMPENSATION PLAN - Page 3 5 (g) Dividends and Other Distributions. During the Period of Restriction, participants holding shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other distributions paid with respect to those shares while they are so held. If any such dividends or distributions are paid in shares of Common Stock, the shares shall be subject to the same restrictions on transferability as the shares of Restricted Stock with respect to which they were paid. (h) Termination of Employment Due to Retirement. The Committee may provide in its Restricted Stock grant that in the event a participant terminated his or her employment with the Company because of retirement, any remaining Period of Restriction applicable to the Restricted Stock pursuant to Subsection 19(b) hereof shall automatically terminate and, except as otherwise provided in Subsection 19(c), the shares of Restricted Stock granted does not automatically terminate such restrictions and a participant terminates his or her employment with the Company because of retirement, the Committee may, in its sole discretion, waive the restrictions remaining on any or all shares of Restricted Stock pursuant to Subsection 19(b) hereof and/or add such new restrictions to those shares of Restricted Stock as it deems appropriate. (i) Termination of Employment Due to Death or Disability. The Committee may provide in its Restricted Stock grant that in the event a participant terminates his or her employment with the Company because of death or total and permanent disability during the Period of Restriction, the restrictions applicable to the shares of Restricted Stock pursuant to Subsection 19(b) hereof shall terminate automatically with respect to all of the shares or that number of shares (rounded to the nearest whole number) equal to the total number of shares of Restricted Stock granted to such participant multiplied by the number of full months which had elapsed since the date of grant divided by the maximum number of full months of the Period of Restriction. All remaining shares shall be forfeited and returned to the Company; provided, however, that the Committee may, in its sole discretion, waive the restrictions remaining on any or all such remaining shares. (j) Termination of Employment for Reasons Other than Death, Disability or Retirement. In the event that a participant terminates his or her employment with the Company for any reason other than those set forth in Subsections 19(i) and (j) hereof during the Period of Restriction, then any shares of Restricted Stock still subject to restrictions at the date of such termination shall automatically be forfeited and returned to the Company; provided, however, FIRST AMENDMENT TO THE 1994 STOCK COMPENSATION PLAN - Page 4 6 that, in the event of an involuntary termination of employment of a participant by the Company, the Committee may, in its sole discretion, waive the automatic forfeiture of any or all such shares and/or may add such new restrictions to such shares of Restricted Stock as it deems appropriate. (k) Nontransferability of Restricted Stock. No shares of Restricted Stock granted under the Plan may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution until the termination of the applicable Period of Restriction. All rights with respect to Restricted Stock granted to a participant under the Plan shall be exercisable during the participant's lifetime only by such participant. 2. Cross References. Sections 18 through 24 of the 1994 Plan are hereby renumbered as Sections 20 through 26, with all cross references to these Sections in the 1994 Plan being modified hereby. 3. Ratification of Plan. Except as modified hereby, the 1994 Plan is hereby approved, ratified and confirmed in all respects. Executed and effective this 17th day of March, 1995. WATERMARC FOOD MANAGEMENT CO. By: ------------------------------------------ Ghulam Bombaywala, Chief Executive Officer ATTEST: By: --------------------------------- Thomas J. Buckley, Secretary FIRST AMENDMENT TO THE 1994 STOCK COMPENSATION PLAN - Page 5 EX-10.3 11 2ND AMEND. TO 1994 STOCK COMPENSATION PLAN 1 EXHIBIT C SECOND AMENDMENT TO THE 1994 STOCK COMPENSATION PLAN OF WATERMARC FOOD MANAGEMENT CO. WHEREAS, on March 18, 1994, the Shareholders of Watermarc Food Management Co. (the "Company"), approved and adopted the 1994 Stock Compensation Plan (the "1994 Plan") which authorized the reservation of 250,000 shares of the Company's common stock, $.05 par value ("Common Stock"), for issuance to eligible participants under the 1994 Plan; WHEREAS, on December 16, 1994, the Board of Directors of the Company authorized the amendment of the 1994 Plan in order to (i) increase the number of shares reserved for issuance under the 1994 Plan from 250,000 to 500,000 shares, (ii) authorize "Outside Directors", those directors not also serving as employees of the Company, to be eligible to receive nonqualified stock options under the 1994 Plan, and (iii) authorize the issuance of "Restricted Stock" to eligible participants under the 1994 Plan which amendments were approved by the Shareholders of the Company at the Company's Annual Meeting of Shareholders held March 17, 1995; WHEREAS, Section 22 of the 1994 Plan, among other things, requires the approval of the Shareholders of the Company to change the number of shares of Common Stock eligible for issuance under the 1994 Plan and to modify the provisions related to the determination of persons eligible to participate under the 1994 Plan; WHEREAS, on January 27, 1992, the Company adopted the 1992 Stock Compensation Plan (the "1992 Plan") pursuant to which a total of 240,000 shares of Common Stock were authorized and reserved for issuance to officers, directors, employees and advisors of the Company or any subsidiary of the company pursuant to the grant of nonqualified options, incentive stock options and stock appreciation rights; WHEREAS, the terms and provisions of the 1994 Plan and the 1992 Plan are substantially similar; WHEREAS, the Board of Directors of the Company proposes to consolidate the Company's 1992 and 1994 Plans by eliminating the 1992 Plan and increasing the number of shares of Common Stock available for issuance under the Company's 1994 Plan by the number of shares which are available under the 1992 Plan (240,000), plus an additional 260,000 shares, for a total of 1,000,000 shares available for issuance under the 1994 Plan; WHEREAS, subject to the approval of the Company's Shareholders of this Second Amendment to the Company's 1994 Plan, such amendment is hereby ratified, confirmed and approved as of _______________, 1995; NOW, THEREFORE, for and in consideration of the premises, the 1994 Plan is hereby amended by this "Second Amendment" thereto as follows: 1. Amendments to the 1994 Plan. (a) Section 1 of the 1994 Plan is hereby amended to read in its entirety as follows: 1. Purpose of Plan. This 1994 Stock Compensation Plan ("Plan") is intended to encourage ownership of the common stock of Watermarc Food Management Co. ("Company") by certain officers, directors, employees and advisors of the Company or any Subsidiary or Subsidiaries of the Company (as hereinafter defined) in order to provide additional incentive for such persons to promote the success and the business of the Company or its Subsidiaries and to encourage them to remain in the employ of the Company or its Subsidiaries by providing such persons an opportunity to benefit from any appreciation of the common stock of the Company through the issuance of stock options, restricted stock and related stock appreciation rights to such persons in accordance with the terms of the Plan. It is further intended that options granted pursuant to this 2 Plan shall constitute either incentive stock options ("Incentive Options") within the meaning of Section 422 (formerly Section 422A) of the Internal Revenue Code of 1986, as amended ("Code"), or options which do not constitute Incentive Options ("Nonqualified Options") as determined by the Committee (as hereinafter defined) at the time of issuance of such options. Incentive Options, Nonqualified Options and Reload Options (as defined in Section 11 hereof) are herein sometimes referred to collectively as "Options". The term "Options(s)" also includes Restricted Stock (as defined in Section 19 hereof) unless the context in which such term is used is inconsistent with the definition of Restricted Stock. As used herein, the term Subsidiary or Subsidiaries shall mean any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (b) Section 2 of the 1994 Plan is hereby amended to read in its entirety as follows: 2. Stock Subject to the Plan. Subject to adjustment as provided in Section 14 hereof, there will be reserved for use upon the exercise of Options and the issuance of Restricted Stock granted from time to time under the Plan, an aggregate of one million (1,000,000) shares of the common stock, $.05 par value, of the Company ("Common Stock"), which shares in whole or in part shall be authorized, but unissued, shares of the Common Stock or issued shares of Common Stock which shall have been reacquired by the Company as determined from time to time by the Board of Directors of the Company ("Board of Directors"). To determine the number of shares of Common Stock available at any time for the granting of Options or Restricted Stock under the Plan, there shall be deducted from the total number of reserved shares of Common Stock, the number of shares of Common Stock in respect of which Options have been granted pursuant to the Plan which remain outstanding or which have been exercised and the number of shares of Restricted Stock which have been issued and remain outstanding, whether or not any vesting schedule or other conditions thereto have been met. If and to the extent that any Option to purchase reserved shares shall not be exercised by the optionee for any reason or if such Option to purchase shall terminate as provided herein, or if shares of Restricted Stock have been issued which are subject to vesting or other requirements and such requirements have not been met or satisfied, such shares which have not been so purchased or which have not met the vesting or other requirements associated therewith hereunder shall again become available for the purposes of the Plan unless the Plan shall have been terminated, but such unpurchased or unvested shares shall not be deemed to increase the aggregate number of shares specified above to be reserved for purposes of the Plan (subject to adjustment as provided in Section 14 hereof). (c) Section 17 of the 1994 Plan is hereby amended to read in its entirety as follows: 17. Modification, Extension, and Renewal of Options. Subject to the terms and conditions and within the limitation of the Plan, the Committee and the Board of Directors may modify, extend or renew outstanding Options granted under the Plan, or accept the surrender of outstanding Options (to the extent not theretofore exercised). The Committee or the Board of Directors may amend the terms of any Options or other award theretofore granted prospectively or retroactively, and may also substitute new Options for previously granted Options including previously granted Options having higher option prices. Notwithstanding the foregoing, however, no modification of an Option shall, without the consent of the optionee or holder, alter or impair any rights or obligations under any Option theretofore granted under the Plan. 2. Ratification of Plan. Except as modified hereby, the 1994 Plan is hereby approved, ratified and confirmed in all respects. 3 Executed and effective this ______ day of ________________, 1995. WATERMARC FOOD MANAGEMENT CO. --------------------------------------- Ghulam Bombaywala, Chief Executive Officer ATTEST: By: -------------------------------- Thomas J. Buckley, Secretary EX-10.4 12 LICENCE AGREEMENT DATED 02/21/96 1 LICENSE AGREEMENT This License Agreement is entered into on this 21st day of February, 1996 by and between BEVO'S ENTERPRISES, a Limited Liability Company, (hereinafter referred to as "Licensor") and WATERMARC FOOD MANAGEMENT CO., a Texas Corporation, (hereinafter referred to as "Licensee"). RECITALS WHEREAS, Licensor is the owner of the trademarks, service marks, tradenames, names, and any variant thereof, related to the Long Horn Cafes. Longhorn Cafes, Longhorn Saloon and Cafe, Longhorn Cafe Uptown and Longhorn Cafe Downtown (hereinafter referred to as the "Longhorn Names"): WHEREAS, Licensor desires to grant to Licensee a license to use the Longhorn Names at Licensee's restaurant located at 509 Louisiana Street, Houston, Texas: NOW, THEREFORE, in consideration of the mutual promises and representations of the parties, and for other good and valuable consideration, the receipt of which is hereby acknowledged, Licensor and Licensee agree as follows: Article I GRANT OF LICENSE Licensor grants to Licensee to use the Longhorn Names, and all recipes, processes, and products associated with or used in the business conducted under the Longhorn Names, in the operation of Licensee's restaurant located at 509 Louisiana Street, Houston, Texas (hereinafter referred to as "Longhorn Cafe - Downtown"). This license shall include the right to use the Longhorn Names in advertisements, signs, and displays associated with the operation of Licensee's Longhorn Cafe - Downtown. Article II FEE Licensee shall pay to Licensor the sum of ONE DOLLAR ($1.00) per year, payable in advance, for the initial term of this License. Article III TERM The initial term of this License shall be fifteen (15) years from the date of this License Agreement. The term of this License may be extended at the option of Licensee for an additional period of ten (10) years, at the same fee of ONE DOLLAR ($1.00) per year, by giving Licensor ninety (90) days written notice prior to the expiration of the initial term. - 1 - 2 ARTICLE IV LICENSOR'S REPRESENTATION AND WARRANTS Licensor warrants that no other licenses to sue the Longhorn Names will be granted by Licensor within a one-half (1/2) mile radius of the Longhorn Cafe - Downtown. However, Licensor shall be permitted to relocate its restaurant currently known as the Longhorn Cafe - Uptown and currently located at 1200 McKinney, Houston, Texas, to a different location no closer than one-quarter (1/4) mile radius from the Longhorn Cafe - Downtown, during the terms of this License Agreement. ARTICLE V ASSIGNMENT Licensee shall be permitted to assign its rights under this License Agreement to a parent, subsidiary or affiliated company, successor in interest, or purchaser of the restaurant located at 509 Louisiana, Houston, Texas without the consent of Licensor. However, Licensee shall provide written notice to Licensor of any such assignment. Should Licensee sell its restaurant located at 509 Louisiana Street, Houston, Texas to any purchaser other than BEVO'S ENTERPRISES, any assignment of this License Agreement to said purchaser shall contain a provision that said purchaser/assignee shall not use the Longhorn Names at any location other than 509 Louisiana Street, Houston, Texas or engage in any expansion, licensing or promotion of the Longhorn Names. ARTICLE VI GOVERNING LAW This License Agreement shall be interpreted and governed by the laws of the State of Texas. EXECUTED at Houston, Texas on the date first above written. WATERMARC FOOD MANAGEMENT CO. By: /s/ ANGELO PITILLO ------------------------------------- ANGELO PITILLO President and Chief Operating Officer BEVO'S ENTERPRISES By: /s/ SANTIAGO TRUJILLO ------------------------------------- SANTIAGO TRUJILLO President -2- EX-10.5 13 $2,750,000 PROMISSORY NOTE FROM PASTA ACQ. 1 PROMISSORY NOTE $2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 PASTA ACQUISITION CO., a Texas corporation (hereinafter called "Maker"), for value received, promises and agrees to pay in installments and as herein provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend County, Texas, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 or at such other address as Payee shall designate, in lawful currency of the United States of America, the principal sum of TWO MILLION SEVEN HUNDRED FIFTY THOUSAND DOLLARS ($2,750,000.00), together with interest thereon from and after the date hereof at the rate of ten percent (10%) per annum until maturity. All past due principal and interest shall bear interest until paid at twelve percent (12%) per annum (but in no event to exceed the maximum rate of nonusurious interest allowed by law). All sums paid hereon shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. INTEREST AND PRINCIPAL ON THIS NOTE is payable as follows: interest on the outstanding principal hereof shall be payable quarterly on the 15th day of December, March, June and September of each year in which any principal remains outstanding hereunder; provided, however, commencing September 15, 2000, on each quarterly interest payment date, Maker shall make quarterly payments of principal in amount sufficient to amortize and pay all then remaining principal in pro rata quarterly installments by September 15, 2002. Notwithstanding anything herein to the contrary, this Note shall not accrue or bear interest during the "Pre Effective Period" as such term is defined in the Merger agreement (as herein after defined). IT IS ESPECIALLY agreed between the parties hereto that time is of the essence with respect to the payment of this Note and, if an "Event of Default" (as defined below) occurs, the owner and holder of this Note may, at its option, declare all sums owing hereon at once due and payable. If default is made in the payment of this Note at maturity (regardless of how its maturity may be brought about) and the same is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in bankruptcy, probate, receivership, reorganization, arrangement, or other judicial proceedings for the establishment or collection of any amount called for hereunder, or any amount payable or to be payable hereunder is collected through any such proceedings, Maker agrees and is also to pay to the owner and holder of this Note all reasonable attorney's or collection fees incurred. IT IS the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under any applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary in any agreement entered into in connection with or as security for this Note, it is agreed as follow: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this Note or under any of the other aforesaid agreements or otherwise in connection with this Note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be credited on this Note by the holder hereof (or, -------- Page 1 of 5 INITIALS 2 $2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 if this Note shall have been paid in full, refunded to Maker); (ii) in the event that maturity of the Note is accelerated by reason of an election by the holder hereof resulting from any default hereunder or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this Note or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore prepaid, shall be credited on this Note (or if this Note shall have been paid in full, refunded to Maker); and (iii) it is further agreed, without limitation of the foregoing, that all calculations of the rate of interest contracted for, charged, or received on this Note that are made for the purpose of determining whether such rate exceeds the maximum amount of interest allowed by applicable law, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading throughout the full stated term of this Note so that such rate of interest on account of this Note, as so calculated, is uniform throughout the term thereof; and (iv) that the Maker and Payee agree that for the purposes of this paragraph, the applicable interest ceiling is the Highest Lawful Rate under the laws of any jurisdiction which may be held to apply to this Note. EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the following events: 1. Maker's failure to pay principal of, or interest on, this Note as and when due and payable or the failure of Maker or the Guarantor, as defined below, to pay when due any installment or payment of principal or interest owed by Maker or Guarantor to Payee under the Notes as defined in Section 2.02 of the Merger Agreement; 2. Maker or Guarantor fails to perform or observe any material term, covenant or agreement contained in the Guaranty Agreement or the Security Documents referred to below; 3. Maker, Guarantor or any of their material subsidiaries shall individually or collectively: (a) make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or for a substantial part of its assets; (b) commence any proceeding under any bankruptcy, reorganization, rearrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; (c) have had any such petition or application filed or any such proceeding commenced against it in which an order for relief is entered or an adjudication or appointment is made, and which remains undismissed for a period of thirty (30) days or more; (d) take any board or shareholder action approving any such petition, application, proceeding, or order for relief or the appointment of a custodian. -------- Page 2 of 5 INITIALS 3 $2,750,000 HOUSTON, TEXAS SEPTEMBER 14, 1995 receiver or trustee for all or any substantial part of its properties; or (e) suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; or 4. The Guaranty Agreement or Security Documents shall at any time after execution and delivery thereof and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Guarantor or Maker or if Guarantor or Maker shall deny that it or they have any liability or obligation under, or shall fail to perform their respective obligations under, the Guaranty Agreement or Security Agreements. IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note, Payee or any owner and holder of this Note agrees to provide Maker and the Guarantor hereof thirty (30) days prior written notice specifying such default and providing Maker an opportunity to cure such default within such period prior to any acceleration of this Note; provided, however, no notice shall be required upon the occurrence of the Events of Default set forth in clauses (a), (b) or (d) of number subparagraph 3 of this Note above and sixty (60) days prior written notice shall be provided upon the occurrence of the Events of Default set forth in numbered subparagraphs 2 and 4 above. Following such written notice, if required, and the failure of Maker to cure such default in every respect all indebtedness represented by this Note shall be immediately due and payable without further action or notice by Payee or any holder hereof to Maker. If Maker cures such default after receiving notice thereof, Maker shall provide written notice to Payee or the owner and holder hereof stating the steps taken to cure such default and stating that the default is cured within the specified notice period. MAKER reserves the option of prepaying the principal of this Note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. Maker shall be required to prepay the Note to the extent and in the circumstances set forth in Section 2.02 of the Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The Original Pasta Company dated effective as of September 14, 1995 (the "Merger Agreement"). Payment of this Note is subordinated in the circumstances set forth in Section 2.02 of the Merger Agreement. THIS NOTE is entitled to the benefits of and the security afforded by (i) that certain Security Agreement between Maker and Payee dated September 14, 1995; (ii) Pledge and Security Agreement dated September 14, 1995 between Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995; (iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee dated September 14, 1995; and (iv) any other agreements, instruments or filings intended to provide security for this Note as provided for in Section 2.02 of the Merger Agreement (collectively, the "Security Documents"). -------- Page 3 of 5 INITIALS 4 $2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the Maker or Guarantor or any other person or party with respect to this Note, the Merger Agreement or the Security Documents or with respect to any other matter, thing, event or occurrence, whether past, present or arising in the future, the Maker waives all rights of set off, offset and the right to interpose make any legal claims or counterclaims, the effect of which would be to delay, reduce, deny, limit or offset its obligations under this Note. IF THE EVENT OF ANY CONFLICT between the terms and provisions of this Note, the Security Documents or the Merger Agreement or any other agreement relating hereto or thereto, the terms and provisions of this Note shall control. EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any endorsers or guarantors of this Note severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment, bringing of suit, and diligence in taking any action to collect any sums owing under Note or in proceeding against any of the rights and properties securing payment of this Note, and indulgences of every kind. Maker and any endorsers or guarantors of this Note agree that, from time to time, both before and after the maturity date of this Note and without notice, Payee may renew the indebtedness evidenced by this Note, extend the time for any payments on the Note, consent to the substitution of security, accept additional security, or release any existing security for this Note and accept partial payments of this Note without in any manner effecting the liability of maker or any endorser or guarantor under or with respect to this Note, even though Maker or such endorser or guarantor is not a party to any agreement regarding such actions. NEITHER THE Payee's acceptance of partial or delinquent performance or payment nor any forbearance, failure or delay by Payee or any holder hereof in exercising any right, power or remedy shall be deemed a waiver of any obligation of the Maker or any endorser, guarantor or other party liable for payment of this Note or of any right, power or remedy of the Payee or any holder hereof or preclude any other or further exercise thereof; and no single or partial exercise of any right, power or remedy shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated orally, but only by an agreement in writing, signed by the Maker and Payee or any holder hereof. If any term or provision of this Note shall be held invalid, illegal or unenforceability, the validity of all other terms and provisions shall in no way be effected thereby. Any waiver or forbearance must be in writing to be effective against the Payee or any holder hereof and shall only be applicable in the specific instance for which it is given. THIS NOTE has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and of the United States of America. -------- Page 4 or 5 INITIALS 5 $2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 PASTA ACQUISITION CO. By: /s/ ANGELO PITILLO ___________________________ Angelo Pitillo, President -------- Page 5 of 5 INITIALS EX-10.6 14 $1,000,000 PROMISSORY NOTE FROM PASTA ACQ. 1 PROMISSORY NOTE $1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 PASTA ACQUISITION CO., a Texas corporation (hereinafter called "Maker"), for value received, promises and agrees to pay in installments and as herein provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend County, Texas, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 or at such other address as Payee shall designate, in lawful currency of the United States of America, the principal sum of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00), together with interest thereon from and after the date hereof at the rate of ten percent (10%) per annum until maturity. All past due principal and interest shall bear interest until paid at twelve percent (12%) per annum (but in no event to exceed the maximum rate of nonusurious interest allowed by law). All sums paid hereon shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. INTEREST AND PRINCIPAL ON THIS NOTE is payable as follows: interest on the outstanding principal hereof shall be payable quarterly on the 15th day of December, March, June and September of each year in which any principal remains outstanding hereunder; $500,000.00 of the principal hereof is due December 31, 1996 and all remaining principal and any interest remaining unpaid on this Note is due and payable on December 31, 1997. Notwithstanding anything to the contrary, this Note shall not accrue or bear interest during the "Pre Effective Period" as such term is defined in the Merger Agreement (as hereinafter defined). IT IS ESPECIALLY agreed between the parties hereto that time is of the essence with respect to the payment of this Note and, if an "Event of Default" (as defined below) occurs, the owner and holder of this Note may, at its option, declare all sums owing hereon at once due and payable. If default is made in the payment of this Note at maturity (regardless of how its maturity may be brought about) and the same is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in bankruptcy, probate, receivership, reorganization, arrangement, or other judicial proceedings for the establishment or collection of any amount called for hereunder, or any amount payable or to be payable hereunder is collected through any such proceedings, Maker agrees and is also to pay to the owner and holder of this Note all reasonable attorney's or collection fees incurred. IT IS the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under any applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary in any agreement entered into in connection with or as security for this Note, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this Note or under any of the other aforesaid agreements or otherwise in connection with this Note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be credited on this Note by the holder hereof (or, if this Note shall have been paid in full, refunded to Maker); (ii) in the event that maturity of the Note is accelerated by reason of an election by the holder hereof resulting from any default ________ Page 1 of 5 INITIALS 2 $1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 hereunder or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this Note or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore prepaid, shall be credited on this Note (or if this Note shall have been paid in full, refunded to Maker); and (iii) it is further agreed, without limitation of the foregoing, that all calculations of the rate of interest contracted for, charged, or received on this Note that are made for the purpose of determining whether such rate exceeds the maximum amount of interest allowed by applicable law, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading throughout the full stated term of this Note so that such rate of interest on account of this Note, as so calculated, is uniform throughout the term thereof; and (iv) that the Maker and Payee agree that for the purposes of this paragraph, the applicable interest ceiling is the Highest Lawful Rate under the laws of any jurisdiction which may be held to apply to this Note. EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the following events: 1. Maker's failure to pay the principal of, or interest on, this Note as and when due and payable or the failure of Maker or the Guarantor, as defined below, to pay when due any installment or payment of principal or interest owed by Maker or Guarantor to Payee under the Notes as defined in Section 2.02 of the Merger Agreement; 2. Maker or Guarantor fails to perform or observe any material term, covenant or agreement contained in the Guaranty Agreement or the Security Documents referred to below; 3. Maker, Guarantor or any of their material subsidiaries shall individually or collectively: (a) make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or for a substantial part of its assets; (b) commence any proceeding under any bankruptcy, reorganization, rearrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; (c) have had any such petition or application filed or any such proceeding commenced against it in which an order for relief is entered or an adjudication or appointment is made, and which remains undismissed for a period of thirty (30) days or more; (d) take any board or shareholder action approving any such petition, application, proceeding, or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its properties; or (e) ________ Page 2 of 5 INITIALS 3 $1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; or 4. The Guaranty Agreement or Security Documents shall at any time after execution and delivery thereof and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Guarantor or Maker or if Guarantor or Maker shall deny that it or they have any liability or obligation under, or shall fail to perform their respective obligations under, the Guaranty Agreement or Security Agreements. IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note, Payee or any owner and holder of this Note agrees to provide Maker and the Guarantor hereof thirty (30) days prior written notice specifying such default and providing Maker an opportunity to cure such default within such period prior to any acceleration of this Note; provided, however, no notice shall be required upon the occurrence of the Events of Default set forth in clauses (a), (b) or (d) of numbered subparagraph 3 of this Note above and sixty (60) days prior written notice shall be provided upon the occurrence of the Events of Default set forth in numbered subparagraphs 2 and 4 above. Following such written notice, if required, and the failure of Maker to cure such default in every respect all indebtedness represented by this Note shall be immediately due and payable without further action or notice by Payee or any holder hereof to Maker. If Maker cures such default after receiving notice thereof, Maker shall provide written notice to Payee or the owner and holder hereof stating the steps taken to cure such default and stating that the default is cured within the specified notice period. MAKER reserves the option of prepaying the principal of this Note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. Maker shall be required to prepay the Note to the extent and in the circumstances set forth in Section 2.02 of the Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The Original Pasta Company dated effective as of September 14, 1995 (the "Merger Agreement"). Payment of this Note is subordinated in the circumstances set forth in Section 2.02 of the Merger Agreement. THIS NOTE is entitled to the benefits of and the security afforded by (i) that certain Security Agreement between Maker and Payee dated September 14, 1995; (ii) the Pledge and Security Agreement dated September 14, 1995 between Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995; (iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee dated September 14, 1995; and (iv) any other agreements, instruments or filings intended to provide security for this Note as provided for in Section 2.02 of the Merger Agreement (collectively the "Security Documents"). -------- Page 3 of 5 INITIALS 4 $1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the Maker or Guarantor or any other person or party with respect to this Note, the Merger Agreement or the Security Documents or with respect to any other matter, thing, event or occurrence, whether past, present or arising in the future, the Maker waives all rights of set off, offset and the right to interpose make any legal claims or counterclaims, the effect of which would be to delay, reduce, deny, limit or offset its obligations under this Note. IN THE EVENT OF ANY CONFLICT between the terms and provisions of this Note, the Security Documents or the Merger Agreement or any other agreement relating hereto or thereto, the terms and provisions of this Note shall control. EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any endorsers or guarantors of this Note severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment, bringing of suit, and diligence in taking any action to collect any sums owing under this Note or in proceeding against any of the rights and properties securing payment of this Note, and indulgences of every kind. Maker and any endorsers or guarantors of this Note agree that, from time to time, both before and after the maturity date of this Note and without notice, Payee may renew the indebtedness evidenced by this Note, extend the time for any payments on the Note, consent to the substitution of security, accept additional security, or release any existing security for this Note and accept partial payments of this Note without in any manner effecting the liability of Maker or any endorser or guarantor under or with respect to this Note, even though Maker or such endorser or guarantor is not a party to any agreement regarding such actions. NEITHER THE Payee's acceptance of partial or delinquent performance or payment nor any forebearance, failure or delay by Payee or any holder hereof in exercising any right, power or remedy shall be deemed a waiver of any obligation of the Maker or any endorser, guarantor or other party liable for payment of this Note or of any right, power or remedy of the Payee or any holder hereof or preclude any other or further exercise thereof; and no single or partial exercise of any right, power or remedy shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated orally, but only by an agreement in writing, signed by the Maker and Payee or any holder hereof. If any term or provision of this Note shall be held invalid, illegal or unenforceability, the validity of all other terms and provisions shall in no way be effected thereby. Any waiver or forbearance must be in writing to be effective against the Payee or any holder hereof and shall only be applicable in the specific instance for which it is given. -------- Page 4 of 5 INITIALS 5 $1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 THIS NOTE has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and of the United States of America. PASTA ACQUISITION CO. By: /s/ ANGELO PITILLO ___________________________ Angelo Pitillo, President ________ Page 5 of 5 INITIALS EX-10.7 15 $595,000 PROMISSORY NOTE FROM PASTA ACQ. 1 PROMISSORY NOTE $595,000.00 HOUSTON, TEXAS JANUARY 26, 1996 PASTA ACQUISITION CO., a Texas corporation (hereinafter called "Maker"), for value received, promises and agrees to pay in installments and as herein provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend County, Texas, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 or at such other address as Payee shall designate, in lawful currency of the United States of America, the principal sum of FIVE HUNDRED NINETY FIVE THOUSAND AND NO/100 DOLLARS ($595,000.00), together with interest thereon from and after the date hereof at the rate of ten percent (10%) per annum until maturity. All past due principal and interest shall bear interest until paid at twelve percent (12%) per annum (but in no event to exceed the maximum rate of nonusurious interest allowed by law). All sums paid hereon shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. INTEREST AND PRINCIPAL ON THIS NOTE is payable one (1) year from the date hereof. IT IS ESPECIALLY agreed between the parties hereto that time is of the essence with respect to the payment of this Note and, if an "Event of Default" (as defined below) occurs, the owner and holder of this Note may, at its option, declare all sums owing hereon at once due and payable. If default is made in the payment of this Note at maturity (regardless of how its maturity may be brought about) and the same is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in bankruptcy, probate, receivership, reorganization, arrangement, or other judicial proceedings for the establishment or collection of any amount called for hereunder, or any amount payable or to be payable hereunder is collected through any such proceedings, Maker agrees and is also to pay to the owner and holder of this Note all reasonable attorney's or collection fees incurred. IT IS the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under any applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary in any agreement entered into in connection with or as security for this Note, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this Note or under any of the other aforesaid agreements or otherwise in connection with this Note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be credited on this Note by the holder hereof (or, if this Note shall have been paid in full, refunded to Maker); (ii) in the event that maturity of the Note is accelerated by reason of an election by the holder hereof resulting from any default hereunder or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this Note or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore prepaid, shall be credited on this Note (or if this Note ---------- Page 1 of 5 INITIALS 2 $595,000.00 HOUSTON, TEXAS JANUARY 26, 1996 shall have been paid in full, refunded to Maker); and (iii) it is further agreed, without limitation of the foregoing, that all calculations of the rate of interest contracted for, charged, or received on this Note that are made for the purpose of determining whether such rate exceeds the maximum amount of interest allowed by applicable law, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading throughout the full stated term of this Note so that such rate of interest on account of this Note, as so calculated, is uniform throughout the term thereof, and (iv) that the Maker and Payee agree that for the purposes of this paragraph, the applicable interest ceiling is the Highest Lawful Rate under the laws of any jurisdiction which may be held to apply to this Note. EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the following events: 1. Maker's failure to pay the principal of, or interest on, this Note as and when due and payable or the failure of Maker or the Guarantor, as defined below, to pay when due any installment or payment of principal or interest owed by Maker or Guarantor to Payee under the Notes as defined in Section 2.02 of the Merger Agreement; 2. Maker or Guarantor fails to perform or observe any material term, covenant or agreement contained in the Guaranty Agreement or the Security Documents referred to below; 3. Maker, Guarantor or any of their material subsidiaries shall individually or collectively: (a) make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or for a substantial part of its assets; (b) commence any proceeding under any bankruptcy, reorganization, rearrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; (c) have had any such petition or application filed or any such proceeding commenced against it in which an order for relief is entered or an adjudication or appointment is made, and which remains undismissed for a period of thirty (30) days or more; (d) take any board or shareholder action approving any such petition, application, proceeding, or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its properties; or (e) suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; or ________ Page 2 of 5 INITIALS 3 $595,000.00 HOUSTON, TEXAS JANUARY 26, 1996 4. The Guaranty Agreement or security Documents shall at any time after execution and delivery thereof and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Guarantor or Maker or if Guarantor or Maker shall deny that it or they have any liability or obligation under, or shall fail to perform their respective obligations under the Guaranty Agreement or Security Agreements. IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note, Payee or any owner and holder of this Note agrees to provide Maker and the Guarantor hereof thirty (30) days prior written notice specifying such default and providing Maker an opportunity to cure such default within such period prior to any acceleration of this Note; provided, however, no notice shall be required upon the occurrence of the Events of Default set forth in clauses (a), (b) or (d) of numbered subparagraph 3 of this Note above and sixty (60) days prior written notice shall be provided upon the occurrence of the Events of Default set forth in numbered subparagraphs 2 and 4 above. Following such written notice, if required, and the failure of Maker to cure such default in every respect, all indebtedness represented by this Note shall be immediately due and payable without further action or notice by the Payee or any holder hereof to Maker. If Maker cures such default after receiving notice thereof, Maker shall provide written notice to Payee or the owner and holder hereof stating the steps taken to cure such default and stating that the default is cured within the specified notice period. MAKER reserves the option of prepaying the principal of this Note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. Maker shall be required to prepay the Note to the extent and in the circumstances set forth in Section 2.02 of the Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The Original Pasta Co. dated effective as of September 14, 1995 (the "Merger Agreement"). Payment of this Note is subordinated in the circumstances set forth in Section 2.02 of the Merger Agreement. THIS NOTE is entitled to the benefits of and the security afforded by (I) that certain Security Agreement between Maker and Payee dated September 14, 1995; (ii) the Pledge and Security Agreement dated September 14, 1995 between Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995; (iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee dated September 14, 1995; and (iv) any other agreements, instruments or filings intended to provide security for this Note as provided for in Section 2.02 of the Merger Agreement (collectively the "Security Documents"). IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the Maker or Guarantor or any other person or party with respect to this Note, the Merger Agreement or the Security Documents or with respect to any other matter, thing, event or occurrence, whether past, present or arising in the future, the Maker waives all rights of set off, offset and the right to interpose Page 3 of 5 4 $595,000.00 HOUSTON, TEXAS JANUARY 26, 1996 any legal claims or counterclaims, the effect of which would be to delay, reduce, deny, limit or offset its obligations under this Note. IN THE EVENT OF ANY CONFLICT between the terms and provisions of this Note, the Security Documents or the Merger Agreement or any other agreement relating hereto or thereto, the terms and provisions of this Note shall control. EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any endorsers or guarantors of this Note severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment, bringing of suit, and diligence in taking any action to collect any sums owing under this Note, and indulgences of every kind. Maker and any endorsers or guarantors of this Note Agree that, from time to time, both before and after the maturity date of this Note and without notice, Payee may renew the indebtedness evidenced by this Note, extend the time for any payments on the Note, consent to the substitution of security, accept additional security, or release any existing security for this Note and accept partial payments of this Note without in any manner effecting the liability of Maker or any endorser or guarantor under or with respect to this Note, even though Maker or such endorser or guarantor is not a party to any agreement regarding such actions. NEITHER THE Payee's acceptance of partial or delinquent performance or payments nor any forebearance, failure or delay by Payee or any holder hereof in exercising any right, power or remedy shall be deemed a waiver of any obligation of the Maker or any endorser, guarantor or other party liable for payment of this Note or of any right, power or remedy of the Payee or any holder hereof or preclude any other or further exercise thereof, and no single or partial exercise of any right, power or remedy shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated orally, but only by an agreement in writing, signed by the Maker and Payee or any holder hereof. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions shall in no way be effected thereby. Any waiver or forbearance must be in writing to be effective against the Payee or any holder hereof and shall only be applicable in the specific instance for which it is given. -------- Page 4 of 5 INITIALS 5 $595,000.00 HOUSTON, TEXAS JANUARY 26, 1996 THIS NOTE has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and of the United States of America. PASTA ACQUISITION CO. By: /s/ THOMAS BUCKLEY --------------------------------- Thomas Buckley, Treasurer -------- Page 5 of 5 INITIALS EX-10.8 16 $224,202 PROMISSORY NOTE FROM PASTA ACQ. 1 PROMISSORY NOTE $224,202.00 HOUSTON, TEXAS January 26, 1995 PASTA ACQUISITION CO., a Texas corporation (hereinafter called "Maker"), for value received, promises and agrees to pay in installments and as herein provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend County, Texas, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 or at such other address as Payee shall designate, in lawful currency of the United States of America, the principal sum of TWO HUNDRED TWENTY FOUR THOUSAND TWO HUNDRED TWO AND NO/100 DOLLARS ($224,202.00), together with interest thereon from and after the date hereof at the rate of six percent (6%) per annum until maturity. All past due principal and interest shall bear interest until paid at twelve percent (12%) per annum (but in no event to exceed the maximum rate of nonusurious interest allowed by law). All sums paid hereon shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. INTEREST AND PRINCIPAL ON THIS NOTE is payable one (1) year from the date hereof. IT IS ESPECIALLY agreed between the parties hereto that time is of the essence with respect to the payment of this Note and, if an "Event of Default" (as defined below) occurs, the owner and holder of this Note may, at its option, declare all sums owing hereon at once due and payable. If default is made in the payment of this Note at maturity (regardless of how its maturity may be brought about) and the same is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in bankruptcy, probate, receivership, reorganization, arrangement, or other judicial proceedings for the establishment or collection of any amount called for hereunder, or any amount payable or to be payable hereunder is collected through any such proceedings, Maker agrees and is also to pay to the owner and holder of this Note all reasonable attorney's or collection fees incurred. IT IS the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under any applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary in any agreement entered into in connection with or as security for this Note, it is agreed as follow: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this Note or under any of the other aforesaid agreements or otherwise in connection with this Note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be credited on this Note by the holder hereof (or, if this Note shall have been paid in full, refunded to Maker); (ii) in the event that maturity of the Note is accelerated by reason of an election by the holder hereof resulting from any default hereunder or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this Note or otherwise shall be canceled automatically as of the date of such -------- Page 1 of 5 INITIALS 2 $224,202.00 HOUSTON, TEXAS JANUARY 26, 1996 acceleration or prepayment and, if theretofore prepaid, shall be credited on this Note (or if this Note shall have been paid in full, refunded to Maker); and (iii) it is further agreed, without limitation of the foregoing, that all calculations of the rate of interest contracted for, charged, or received on this Note that are made for the purpose of determining whether such rate exceeds the maximum amount of interest allowed by applicable law, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading throughout the full stated term of this Note so that such rate of interest on account of this Note, as so calculated, is uniform throughout the term thereof; and (iv) that the Maker and Payee agree that for the purposes of this paragraph, the applicable interest ceiling is the Highest Lawful Rate under the laws of any jurisdiction which may be held to apply to this Note. EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the following events: 1. Maker's failure to pay principal of, or interest on, this Note as and when due and payable or the failure of Maker or the Guarantor, as defined below, to pay when due any installment or payment of principal or interest owed by Maker or Guarantor to Payee under the Notes as defined in Section 2.02 of the Merger Agreement; 2. Maker or Guarantor fails to perform or observe any material term, covenant or agreement contained in the Guaranty Agreement or the Security Documents referred to below; 3. Maker, Guarantor or any of their material subsidiaries shall individually or collectively: (a) make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or for a substantial part of its assets; (b) commence any proceeding under any bankruptcy, reorganization, rearrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; (c) have had any such petition or application filed or any such proceeding commenced against it in which an order for relief is entered or an adjudication or appointment is made, and which remains undismissed for a period of thirty (30) days or more; or (d) take any board or shareholder action approving any such petition, application, proceeding, or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its properties; or (e) suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; or Page 2 of 5 3 $224,202.00 HOUSTON, TEXAS JANUARY 26, 1996 4. The Guaranty Agreement or Security Documents shall at any time after execution and delivery thereof and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Guarantor or Maker or if Guarantor or Maker shall deny that it or they have any liability or obligation under, or shall fail to perform their respective obligations under the Guaranty Agreement or Security Agreements. IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note, Payee or any owner and holder of this Note agrees to provide Maker and the Guarantor hereof thirty (30) days prior written notice specifying such default and providing Maker an opportunity to cure such default within such period prior to any acceleration of this Note; provided, however, no notice shall be required upon the occurrence of the Events of Default set forth in clauses (a), (b) or (d) of number subparagraph 3 of this Note above and sixty (60) days prior written notice shall be provided upon the occurrence of the Events of Default set forth in numbered subparagraphs 2 and 4 above. Following such written notice, if required, and the failure of Maker to cure such default in every respect, all indebtedness represented by this Note shall be immediately due and payable without further action or notice by Payee or any holder hereof to Maker. If Maker cures such default after receiving notice thereof, Maker shall provide written notice to Payee or the owner and holder hereof stating the steps taken to cure such default and stating that the default is cured within the specified notice period. MAKER reserves the option of prepaying the principal of this Note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. Maker shall be required to prepay the Note to the extent and in the circumstances set forth in Section 2.02 of the Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The Original Pasta Company dated effective as of September 14, 1995 (the "Merger Agreement"). Payment of this Note is subordinated in the circumstances set forth in Section 2.02 of the Merger Agreement. THIS NOTE is entitled to the benefits of and the security afforded by (I) that certain Security Agreement between Maker and Payee dated September 14, 1995; (ii) Pledge and Security Agreement dated September 14, 1995 between Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995; (iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee dated September 14, 1995; and (iv) any other agreements, instruments or filings intended to provide security for this Note as provided for in Section 2.02 of the Merger Agreement (collectively, the "Security Documents"). IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the Maker or Guarantor or any other person or party with respect to this Note, the Merger Agreement or the Security Documents or with respect to any other matter, thing, event or occurrence, whether past, present or arising in the future, the Maker waives all rights of set off, offset and the right to interpose Page 3 of 5 4 $224,202.00 HOUSTON, TEXAS JANUARY 26, 1996 any legal claims or counterclaims, the effect of which would be to delay, reduce, deny, limit or offset its obligations under this Note. IF THE EVENT OF ANY CONFLICT between the terms and provisions of this Note, the Security Documents or the Merger Agreement or any other agreement relating hereto or thereto, the terms and provisions of this Note shall control. EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any endorsers or guarantors of this Note severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment, bringing of suit, and diligence in taking any action to collect any sums owing under Note or in proceeding against any of the rights and properties securing payment of this Note, and indulgences of every kind. Maker and any endorsers or guarantors of this Note agree that, from time to time, both before and after the maturity date of this Note and without notice, Payee may renew the indebtedness evidenced by this Note, extend the time for any payments on the Note, consent to the substitution of security, accept additional security, or release any existing security for this Note and accept partial payments of this Note without in any manner effecting the liability of maker or any endorser or guarantor under or with respect to this Note, even though Maker or such endorser or guarantor is not a party to any agreement regarding such actions. NEITHER THE Payee's acceptance of partial or delinquent performance or payment nor any forbearance, failure or delay by Payee or any holder hereof in exercising any right, power or remedy shall be deemed a waiver of any obligation of the Maker or any endorser, guarantor or other party liable for payment of this Note or of any right, power or remedy of the Payee or any holder hereof or preclude any other or further exercise thereof; and no single or partial exercise of any right, power or remedy shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated orally, but only by an agreement in writing, signed by the Maker and Payee or any holder hereof. If any term or provision of this Note shall be held invalid, illegal or unenforceability, the validity of all other terms and provisions shall in no way be effected thereby. Any waiver or forbearance must be in writing to be effective against the Payee or any holder hereof and shall only be applicable in the specific instance for which it is given. Page 4 of 5 5 $224,202.00 HOUSTON, TEXAS JANUARY 26, 1996 THIS NOTE has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and of the United States of America. PASTA ACQUISITION CO. By: /s/ THOMAS BUCKLEY --------------------------- Thomas Buckley, Treasurer Page 5 of 5 EX-10.9 17 $1,200,000 PROMISSORY NOTE FROM COMPANY 1 PROMISSORY NOTE
- - --------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $1,200,000.00 03-15-1996 03-15-2001 7201135970 510 3102 43 - - --------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - - ---------------------------------------------------------------------------------------------------------
Borrower: PASTA ACQUISITION CO. AND WATERMARC FOOD Lender: Metrobank, N.A. MANAGEMENT CO. (TIN: ) Galleria Branch 10777 WESTHEIMER #1030 5065 Westheimer, Suite #1111 HOUSTON, TEXAS 77042 Houston, TX 77056 =========================================================================================================
Principal Amount: $1,200,000.00 Initial Rate: 9.750% Date of Note: March 15, 1996
PROMISE TO PAY. PASTA ACQUISITION CO. AND WATERMARC FOOD MANAGEMENT CO. ("Borrower") promises to pay to Metrobank, N.A. ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million Two Hundred Thousand & 00/100 Dollars ($1,200,000.00), together with interest on the unpaid principal balance from March 15, 1996, until maturity. PAYMENT. Subject to any payment changes resulting from changes in the Index, Borrower will pay this loan on demand, or if no demand is made, in 59 payments of $25,437.10 each payment and an irregular last payment estimated at $25,436.61. Borrower's first payment is due April 15, 1996, and all subsequent payments are due on the same day of each month after that. Borrower's final payment will be due on March 15, 2001, and will be for all principal and all accrued interest not yet paid. Payments include principal and interest. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding, unless such calculation would result in a usurious rate, in which case interest shall be calculated on a per diem basis of a year of 365 or 366 days, as the case may be. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and takes charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent Index which is the PRIME RATE AS PUBLISHED IN THE WALL STREET JOURNAL (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each DAY. The Index currently is 8.250% per annum. The Interest rate to be applied prior to maturity to the unpaid principal balance of this Note will be at a rate of 1.500 percentage points over the Index, adjusted if necessary for the minimum or maximum rate limitations described below, resulting in an initial rate of 9.750% per annum. Notwithstanding any other provisions of this Note, the variable interest rate or rates provided for in this Note will be subject to the following minimum and maximum rates. NOTICE: Under no circumstances will the interest rate on this Note be less than 8.500% per annum or more than the maximum rate allowed by applicable law. For purposes of this Note, the "maximum rate allowed by applicable law" means the greater of (a) the maximum rate of interest permitted under federal or other law applicable to the indebtedness evidenced by this Note, or (b) the "Indicated Rate Ceiling" as referred to in Article 5069-1.04(a)(1) V.T.C.S. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (a) increase Borrower's payments to ensure Borrower's loan will pay off by its original final maturity date, (b) increase Borrower's payments to cover accruing interest, (c) increase the number of Borrower's payments at the same amount and increase Borrower's final payment. PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal due and may result in Borrower making fewer payments. POST MATURITY RATE. The Post Maturity Rate on this Note is the maximum rate allowed by applicable law. Borrower will pay interest on all sums due after final maturity, whether by acceleration or otherwise, at that rate, with the exception of any amounts added to the principal balance of this Note based on Lender's payment of insurance premiums, which will continue to accrue interest at the pre-maturity rate. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (i) Lender in good faith deems itself insecure. LENDER'S RIGHTS. Upon default, Lender may declare the entire indebtedness, including the unpaid principal balance on this Note, all accrued unpaid interest, and all other amounts, costs and expenses for which Borrower is responsible under this Note or any other agreement with Lender pertaining to this loan, immediately due, without notice, and then Borrower will pay that amount. Lender may hire an attorney to help collect this Note is Borrower does not pay, and Borrower will pay Lender's reasonable attorneys' fees. Borrower also will pay Lender all other amounts actually incurred by Lender as court costs, lawful fees for filing, recording, or releasing to any public office any instrument securing this loan; the reasonable cost actually expended for repossessing, storing, preparing for sale, and selling any security; and fees for noting a lien on or transferring a certificate of title to any motor vehicle offered as security for this loan, or premiums or identifiable charges received in connection with the sale of authorized insurance. This Note has been delivered to Lender and accepted by Lender in the State of Texas. If there is a lawsuit, and if the transaction evidenced by this Note occurred in HARRIS County, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts in HARRIS County, the State of Texas. This Note shall be governed by and construed in accordance with the laws of the State of Texas and applicable Federal laws. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender at Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. GENERAL PROVISIONS:. THIS NOTE IS SUBJECT TO THE ARBITRATION PROGRAM ENTERED INTO BETWEEN BORROWER AND LENDER. 2 03-15-1996 PROMISSORY NOTE Page 2 Loan No 7201135970 (Continued) ================================================================================ GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Note on its demand. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. In particular, this section means (among other things) that Borrower does not agree or intend to pay, and Lender does not agree or intend to contract for, charge, collect, take, reserve or receive (collectively referred to herein as "charge or collect"), any amount in the nature of interest or in the nature of a fee for this loan, which would in any way or event (including demand, prepayment, or acceleration) cause Lender to charge or collect more for this loan than the maximum Lender would be permitted to charge or collect by federal law or the law of the State of Texas (as applicable). Any such excess interest or unauthorized fee shall, instead of anything stated to the contrary, be applied first to reduce the principal balance of this loan, and when the principal has been paid in full, be refunded to Borrower. The right to accelerate maturity of sum due under this Note does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and Lender does not intend to charge or collect any unearned interest in the event of acceleration. All sums paid or agreed to be paid to Lender for the use, forbearance or detention of sums due hereunder shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the loan evidenced by this Note until payment in full so that the rate or amount of interest on account of the loan evidenced hereby does not exceed the applicable usury ceiling. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest, notice of dishonor, notice of intent to accelerate the maturity of this Note, and notice of acceleration of the maturity of this Note. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: PASTA ACQUISITION CO. AND WATERMARC FOOD MANAGEMENT CO. By: ____________________________________ _____________ ________________, ____ By: ____________________________________ _____________ ________________, ____ ================================================================================ Variable Rate Installment. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.20b(c) 1996 CFI ProServices, Inc., All rights reserved. [TX-D20 E3.21 F3.21 P3.21 PA135970.LN] EX-10.10 18 SECURITY AGREEMENT DATED 09/14/95 1 EXHIBIT F Security Agreement THIS Security Agreement (the "Security Agreement" or "Agreement") is entered into as of September 14, 1995 by and among THE ORIGINAL PASTA CO., a Texas corporation ("TOPC") and PASTA ACQUISITION CO., a Texas corporation ("PAC"), whose business addresses are 10777 Westheimer, Suite 1030, Houston, Texas 77041. (collectively PAC and TOPC are hereinafter referred to as the "Obligor" or the "Obligors") and GHULAM M. BOMBAYWALA, an individual residing in Fort Bend County, Texas with a business address of 10777 Westheimer, Suite 1030, Houston, Texas 77042, ("Secured Party"), WITNESSETH: WHEREAS, WATERMARC FOOD MANAGEMENT CO., a Texas corporation ("WAMA") is the owner of all of the issued and outstanding equity securities of PAC (the "Securities"); WHEREAS, of even date herewith, WAMA, the Obligors and Secured Party have executed an Agreement and Plan of Merger (the "Merger Agreement") whereby TOPC Will be merged with and into PAC (the "Merger") and Secured Party, as the sole shareholder of TOPC, will receive (i) common stock of WAMA, and (ii) two promissory notes of PAC referred to in Section 2.02 of the Merger Agreement in the aggregate principal amount of $3,750,000.00 (the "Notes"); WHEREAS, the Notes are to be secured by (i) certain restaurant assets of TOPC to be acquired by PAC in the Merger pursuant to this Security Agreement, (ii) the unconditional, irrevocable and absolute guarantee of WAMA of the Notes pursuant to the Guaranty Agreement as of the date hereof between WAMA and Secured Party and (iii) the Security Agreement-Pledge between WAMA and Secured Party whereby WAMA is pledging the Securities as collateral for its Guaranty Agreement; WHEREAS, the parties to the Merger Agreement agreed to execute and deliver the Merger Agreement, the Notes, the Security Documents (as defined in Section 2.02 of the Merger Agreement) and certain other consideration to be delivered by each of the parties thereto into escrow, with such consideration and documents to be released on and as of the "Effective Date" as defined in the Merger Agreement; and WHEREAS, since the restaurant assets will be transferred by operation of law on the Effective Date of the Merger from TOPC to PAC, both TOPC and PAC are executing this Security Agreement in favor of Secured Party., NOW, THEREFORE, in order to comply with the terms and conditions of the Merger Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Obligors hereby agree with the Secured Party as follows: 2 SECTION 1. SECTION 1.01 TERMS DEFINED ABOVE. As used in this Security Agreement, the terms "Effective Date", "Merger", "Merger Agreement", "PAC", "Obligors", "Secured Party", "Securities", "Security Agreement", and "TOPC" will have the meanings indicated above. SECTION 1.02 SECURITY DOCUMENTS. As used in this Security Agreement, the term "Security Documents" will mean the Merger Agreement, the Notes, the Security Agreement-Pledge, this Security Agreement, the Guaranty Agreement and any other documents, instruments or agreements representing obligations of PAC and/or WAMA to Secured Party or intended to provide security to Secured Party in connection with the Merger and the Merger Agreement. SECTION 1.03 ASSIGNMENT AND GRANT OF SECURITY. The Obligors hereby assign and grant to the Secured Party a security interest in all of its right, title and interest in and to the following, whether now owned or hereafter acquired (the "Collateral"): (1) All assets of TOPC constituting equipment located at or used in connection with the operation of the ten (10) existing restaurants of TOPC at the first 10 locations listed in Schedule 4.13 to the Merger Agreement (collectively referred as "TOPC Restaurants") and all fixtures constituting a part of the TOPC Restaurants and all parts thereof and all accessions thereto (any and all such equipment, fixtures, parts, and accessions being the "Equipment"); (2) All assets of TOPC constituting inventory or supplies of the TOPC Restaurants now owned or hereafter acquired by Obligor and used in connection with the TOPC Restaurants (any and all such inventory and supplies being the "Inventory"); (3) All other assets, rights or interests of TOPC relating to, located on or used in connection with the operation of the TOPC Restaurants, whether tangible or intangible, now owned or hereinafter acquired, real or personal, including, but not limited to accounts, receivables, contract rights, chattel paper, licenses, cash, bank accounts, instruments, permits, deposits, conditional sales contracts and interests or rights under any real property or personal property leases; and (4) All proceeds of any and all of the foregoing Collateral (including, without limitation, proceeds which constitute property of the types described in clauses (1)-(3) of this Section 1.03), and, to the extent not otherwise included, all payments under insurance (whether or not the Secured Party is the loss payee thereof), or any indemnity, warranty, or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. Notwithstanding anything in this Section 1.03 to the contrary, the Obligor is not granting Secured Party a security interest in the name, concept, trademark, service mark, logo, tradedress, design or proprietary recipes or products relating to the operation of the TOPC Restaurants under the name and concept "The Original Pasta Company" as it currently 3 conducted or as it later develops which assets (the "Excluded Assets") are subject to a Service Mark License Agreement of even date herewith between Secured Party and PAC. SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures the payment of all obligations of Obligor under the Notes and the Security Documents (collectively the "Obligations"). SECTION 3. PERFORMANCE OF AGREEMENTS. Anything herein to the contrary notwithstanding, (1) Obligor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed; (2) the exercise by Secured Party of any rights hereunder shall not release Obligor from any of its duties or obligations under the contracts and agreements included in the Collateral; and (3) the Secured Party shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Secured Party be obligated to perform any of the obligations or duties of Obligor thereunder or to take any action to collect or enforce any claim for payment or performance. SECTION 4. REPRESENTATIONS AND WARRANTIES. To the extent the representations and warranties below address facts (pertaining to any of the Collateral or TOPC) existing prior to the Effective Date, such representations and warranties are made in reliance on the representations and warranties of the Secured Party in the Merger Agreement. Subject to the foregoing, Obligor represents and warrants as follows: (1) All of the Equipment and Inventory are located at the locations of the TOPC Restaurants listed in Schedule 4.13 to the Merger Agreement. (2) Obligor is the legal and beneficial owner of the Collateral. (3) Obligor has exclusive possession and control of the Equipment and Inventory. (4) Subject to the consents described in Section 3.03 of the Merger Agreement, this Agreement creates a valid security interest in the Collateral, securing the payment of the Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest shall have been duly taken by the Effective Date. 4 (5) Obligors are corporations duly incorporated, validly existing, and in good standing under the laws of the jurisdiction of Texas, and have the corporate power and authority to own their assets and to transact their business as currently conducted. (6) The execution and performance by Obligors of this Agreement has been duly authorized by all necessary corporate action and does not and will not (a) subject to obtaining the consents referred to in Section 3.03 of the Merger Agreement, require any consent or approval of any third party; (b) contravene such corporation's charter or bylaws; (c) violate any provision of any law, rule, or regulation; or (d) subject to obtaining the consents referred to in Section 3.03 of the Merger Agreement, result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease, or instrument to which such corporation is a party or by which it or its properties may be bound or affected. (7) This Agreement is the legal, valid, and binding obligation of Obligors enforceable in accordance with its respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, and other similar laws affecting creditors' rights generally or equitable principles. (8) Except for the consents set forth in Section 3.03 of the Merger Agreement and those contemplated by this Agreement, no consent of any other person or entity and no authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body is required (a) for the grant by Obligors of the security interest granted hereby or for the execution, delivery, or performance of this Agreement by Obligors; (b) for the perfection or maintenance of the security interest created hereby; or (c) for the exercise by the Secured Party of the rights provided for in this Agreement or the remedies in respect of the Collateral pursuant to this Agreement. (9) As of the Effective Date, there shall be no conditions precedent to the effectiveness of this Agreement that have not been satisfied or waived. SECTION 5. FURTHER ASSURANCES. (1) Obligors agrees that from time to time, at its expense, Obligors will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Secured Party may reasonably request, in order to perfect and protect any assignment or security interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Obligors will execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Secured Party may request, in order to perfect and preserve the assignment and security interest granted or purported to be granted hereby. 5 (2) Obligors hereby authorize the Secured Party to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of Obligors where permitted by law, including the real property record filings referred in subparagraph (4) below. A photocopy or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (3) Obligors will furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail. (4) With respect to the interests of Obligor as lessee under the real estate leases (the "Leases") for the TOPC Restaurants and the security interest therein granted to Secured Party hereby, upon any Event of Default with respect to the Obligations (as "Event of Default" is defined in the Notes) all of Obligor's interest in such Leases shall without further action be assigned to Secured Party and Obligor's interests are assigned hereby. As Secured Party may reasonably request to perfect its security interest in and to receive an effective and valid assignment of the Leases or to perfect its security interest in and to the other Collateral, Obligor shall assist Secured Party in obtaining from the Lessors of the Leases such consents, waivers and assignments as are necessary to perfect and obtain the security interests and assignments granted hereunder. Obligors authorize Secured Party to file this Agreement in such form as is required by law on its behalf and on behalf of Obligor in the real property records where the property subject to the Leases is located. SECTION 6. AS TO EQUIPMENT AND INVENTORY. (1) Obligors shall keep the Equipment and Inventory (other than Inventory sold in the ordinary course of business) at the existing locations for the TOPC Restaurants. (2) Obligors shall cause the Equipment to be maintained and preserved in the same condition, repair, and working order as when new, ordinary wear and tear excepted, and in accordance with any manufacturer's manual, and shall forthwith, or in the case of any loss or damage to any of the Equipment as quickly as practicable after the occurrence thereof, make or cause to be made all repairs, replacements, and other improvements in connection therewith which are necessary or desirable to such end. Obligors shall promptly furnish to the Secured Party a statement respecting any loss or damage to any of the Equipment. (3) Obligors shall pay promptly when due all property and other taxes, assessments, and governmental charges or levies imposed upon, and all claims (including claims for labor, materials, and supplies) against, the Equipment and Inventory. 6 SECTION 7. INSURANCE. Obligor shall, at its own expense, maintain insurance with respect to the Collateral in such amounts, against such risks, in such form and with such insurers, as shall be satisfactory to the Secured Party from time to time. SECTION 8. TRANSFERS AND OTHER LIENS. Obligors shall not without Secured Party's consent which may be withheld in his sole discretion, (a) sell, assign (by operation of law or otherwise), or otherwise dispose of, any of the Collateral, except Inventory and Equipment in the ordinary course of business, or (b) create or permit to exist any lien upon or with respect to any of the Collateral, except for the security interests under this Agreement and the security interests disclosed in the Merger Agreement or permitted thereby. Notwithstanding the foregoing, Obligors shall have the right, without the prior written consent of the Secured Party, to grant a junior security interest and lien in and to the Collateral to any person or entity in connection with financing which is directly related to the Additional Restaurants as disclosed in Section 3.02 of the Merger Agreement. Secured Party shall also subordinate his lien and security interest hereunder in favor of any bank or institution providing financing for the Additional Restaurants as provided in Section 3.02 of the Merger Agreement. SECTION 9. PERFORMANCE BY SECURED PARTY. If Obligor fails to perform any agreement contained herein, the Secured Party may himself perform, or cause performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be payable by Obligors hereunder. Obligors hereby irrevocably appoint Secured Party as its attorney-in-fact, with full authority in the place and stead of Obligors and in the name of Obligors or otherwise, from time to time in Secured Party's discretion, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (1) To obtain and adjust insurance required to protect the Collateral; (2) To ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in connection with the Collateral; 7 (3) To receive, endorse, and collect any draft or other instruments, documents and chattel paper, in connection therewith; (4) To file any claims or take any action or institute any proceedings which the Secured Party may deem reasonably necessary for the collection of any of the Collateral or otherwise to enforce compliance with the terms and conditions of any agreement constituting part of the Collateral; and (5) To file any additional filings relating to the security interest and assignments granted hereby including those referred to in Section 5 hereof and to enter into any agreements, consents and waivers as required with the owners of the real property represented by the Leases on behalf of Obligor. The powers conferred on the Secured Party hereunder are solely to protect his interests in the Collateral and shall not impose any duty upon him to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by him hereunder, the Secured Party shall have no duty as to any Collateral. SECTION 10. REMEDIES. If any Event of Default (as defined in the Notes) shall have occurred and shall not be cured as provided for in such Notes: (1) The Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of Texas at that time (the "Code") (whether or not the code applies to the affected Collateral). Notice of sale shall be at least thirty (30) days notice to Obligors of the time and place of any public sale or the time after which any private sale is to be made. The parties agree that thirty (30) days' notice shall constitute reasonable notification. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (2) All cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as Collateral, and/or then or any time thereafter be applied in whole or in part by the Secured Party against, all or any part of the Obligations in such order as the Secured Party shall elect. Any surplus of such cash proceeds held by the Secured Party and remaining after payment in full of all the Obligations shall be paid over to Obligors or to whomsoever may be lawfully entitled to received such surplus. 8 (3) The Secured Party may exercise any and all rights and remedies of Obligors under or in connection with the any agreements constituting a part of or otherwise in respect of the Collateral, including, without limitation, any and all rights of Obligors to demand or otherwise require payment of any amount under, or performance of any provision of, any agreement constituting part of the Collateral. Secured Party or his agents shall have the right to take possession of and operate the TOPC Restaurants and to collect and receive the proceeds from such operations. (4) All payments received by Obligors under or in connection with any agreement or otherwise in respect of the Collateral shall be received in trust for the benefit of the Secured Party, shall be segregated from other funds of Obligors and shall be forthwith paid over to the Secured Party in the same form as so received (with any necessary endorsement). SECTION 11. MISCELLANEOUS. (1) Indemnity. Obligors agree to indemnify the Secured Party from and against any and all claims, losses, and liabilities (including reasonable attorneys' fees) growing out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses, or liabilities resulting from the Secured Party's gross negligence or willful misconduct. (2) Expenses. Obligor will upon demand pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of their counsel and of any experts and agents, which the Secured Party may incur in connection with (a) the administration of this Agreement; (b) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral; (c) the exercise or enforcement of any of the rights of the Secured Party hereunder; or (d) the failure by Obligors to perform or observe any of the provisions hereof. (3) Modification of Obligations. As of the Effective Date and thereafter, all rights of the Secured Party and the assignment, and security interest hereunder, and all obligations of Obligors hereunder, shall be absolute and unconditional, irrespective of (i) any change in the time, manner, or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Merger Agreement, or the Security Documents or any other agreement relating thereto, (ii) any taking, exchange, release, or nonperfection of any other collateral, or any taking, release, or amendment or waiver of or consent to departure from any guaranty; for all or any of the Obligations, or (iii) any change, restructuring, or termination of the corporation structure or existence of Obligors or any of its subsidiaries. (4) Amendments; Etc. No amendment, modification, termination, or waiver of any provision of this Agreement, and no consent to any departure by Obligors herefrom, shall in 9 any event be effective unless the same shall be in writing and signed by the Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (5) Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, and facsimile transmissions) and mailed or transmitted or delivered, if to Obligors, at its address, at 10777 Westheimer, Suite 1030, Houston, Texas 77042, Attention: President, and if to the Secured Party, at his address or, as to either party, at such other address as shall be designated by such party in a written notice to the other party. All such notices and other communications shall be effective when received. (6) Continuing Security Interest; Assignments. This Agreement shall create a continuing security interest in the Collateral and shall (1) remain in full force and effect until the payment in full of the Obligations and all other amounts payable under this Agreement, (2) be binding upon Obligor, its successors and assigns; and (3) inure to the benefit of, and be enforceable by, the Secured Party and his personal representatives, successors, transferees, and assigns. Without limiting the generality of the foregoing clause (3), the Secured Party may assign or otherwise transfer all or any portion of his rights and obligations under the Notes to any other person or entity, and such other person or entity shall thereupon become vested with all the benefits in respect thereof granted to the assigning party herein or otherwise. (7) Governing Law; Terms. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of Texas. IN WITNESS WHEREOF, Obligors and Secured Party have executed this Agreement as of the date first above written. PASTA ACQUISITION CO. By: -------------------------------- Name: Angelo Pitillo, President THE ORIGINAL PASTA CO. By: ------------------------------ ----------------------------------- GHULAM M. BOMBAYWALA, President GHULAM M. BOMBAYWALA, Individually and as Secured Party EX-10.11 19 SECURITY AGREEMENT PLEDGE DATED 09/14/95 1 EXHIBIT G SECURITY AGREEMENT (Pledge) by WATERMARC FOOD MANAGEMENT CO. to GHULAM M. BOMBAYWALA as Payee under the Notes dated September 14, 1995 and as Secured Party hereunder 2 Security Agreement - Pledge THIS Security Agreement-Pledge (this "Security Agreement") is entered into as of September 14, 1995 by and between WATERMARC FOOD MANAGEMENT CO., a Texas corporation, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 ("Guarantor") and GHULAM M. BOMBAYWALA, an individual residing in Fort Bend County, Texas with a business address of 10777 Westheimer, Suite 1030, Houston, Texas 77042, ("Secured Party"). WITNESSETH: WHEREAS, the Guarantor is the owner of all of the issued and outstanding equity securities of Pasta Acquisition Co. ("PAC"), a Texas corporation (the "Securities"); WHEREAS, of even date herewith, Guarantor and Secured Party have executed an Agreement and Plan of Merger (the "Merger Agreement") whereby The Original Pasta Co., a Texas corporation ("TOPC") will be merged with and into PAC (the "Merger") and Secured Party, as the sole shareholder of TOPC will receive common stock of Guarantor and two promissory notes in the aggregate principal amount of $3,750,000.00 (the "Notes"); WHEREAS, the Notes are to be secured by (i) certain restaurant assets of TOPC to be acquired by PAC in the Merger pursuant to a "Restaurant Assets Security Agreement" dated as of the date hereof by and between TOPC, PAC and Secured Party, (ii) the unconditional, irrevocable and absolute guarantee of the Guarantor (the "Guarantee") pursuant to the Guaranty Agreement as of the date hereof between Guarantor and Secured Party, and (iii) this Security Agreement; and WHEREAS, the parties to the Merger Agreement agreed to execute and deliver the Merger Agreement, the Notes, the Security Documents and the consideration to be delivered by each of the parties thereto into escrow, with such consideration to be released on the "Effective Date" of the Merger as defined in the Merger Agreement. NOW, THEREFORE, in order to comply with the terms and conditions of the Merger Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby agrees with the Secured Party as follows: ARTICLE I DEFINITIONS 1.01 Terms Defined Above. As used in this Security Agreement, the terms "Guarantor", "Secured Party", "Securities", and "Security Agreement" will have the meanings indicated above. 3 1.02 Security Documents. As used in this Security Agreement, the term "Security Documents" will mean the Merger Agreement, the Notes, the Security Agreement, the Restaurant Assets Security Agreement, the Guaranty Agreement and any other documents, instruments or agreements representing obligations of PAC and/or Guarantor to Secured Party or intended to provide security to Secured Party in connection with the Merger and the transactions contemplated by the Merger Agreement and the foregoing agreements. 1.03 Terms Defined in Security Agreement. As used in this Security Agreement, terms defined in the Security Documents will have the meanings assigned to such terms in the Security Documents, unless herein expressly provided to the contrary. 1.04 Additional Defined Terms. (a) "Collateral" will mean (i) the Securities and the certificates representing the Securities, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Securities; and (ii) all additional shares of stock or securities, including debt obligations, preferred stock or any other equity or debt securities of PAC from time to time acquired by Guarantor in any manner while this Security Agreement remains in effect, whether by way of stock dividend, additional capital contribution or in any other manner and the certificates representing such additional shares or securities, and all dividends, cash, instruments or other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares or securities (the term "Securities" as used herein shall also include the additional debt and equity securities described in this Section 1.04(a)(ii)). (b) "Obligations" will mean all present and future loans, advances, liabilities, obligations, covenants, duties, and indebtedness of Guarantor or PAC to the Secured Party under the Security Documents; and any and all renewals, extensions for any period, rearrangements or enlargements of any of the foregoing, whether evidenced by any note or other instrument or agreement, whether arising by an extension of credit, letter of credit, overdraft, endorsement, loan, guaranty, indemnification or otherwise, whether direct or indirect, including without limitation any of the foregoing acquired by assignment or participation, absolute or contingent, due or to become due. The Obligations shall also include all interest, charges, customary out-of-pocket expenses, reasonable attorneys' or other fees and any other sums incurred by the Secured Party in connection with the execution, administration or enforcement of the Secured Party's rights and remedies under the Security Documents or under any other agreement with Guarantor 4 ARTICLE 2 SECURITY INTEREST 2.01 Grant of Security Interest in Collateral. Guarantor, for value received, the receipt and sufficiency of which are hereby acknowledged, and to induce the Secured Party to enter into the Security Documents and to accept debt obligations of PAC, hereby pledges to the Secured Party and hereby grants to the Secured Party a first lien on and security interest in the Collateral. 2.02 Indebtedness Secured. The security interest created in Section 2.01 is granted to the Secured Party to secure the Obligations. 2.03 Delivery of Securities. All certificates or instruments representing or evidencing the Securities shall be delivered to and held by and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Secured Party and Secured Party shall at all times have actual possession of the Securities and shall be deemed to have possession of any of the Collateral in transit to Secured Party. 2.04 Power of Attorney. The Guarantor hereby irrevocably constitutes and appoints the Secured Party and any authorized officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Guarantor and in the name of Guarantor or in its own name, from time to time in the Secured Party's discretion, for the purpose of carrying out the terms of this Security Agreement, and without notice to Guarantor, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement, including, without limitation, as necessary to do the following: (a) upon the occurrence and continuance of any Event of Default, to transfer to or register in the name of the Secured Party, or any of its nominees, any or all of the Collateral; (b) to exchange the certificates or instruments representing or evidencing the Collateral for certificates or instruments of smaller or larger denominations; (c) (i) to receive payment of any and all moneys, claims and other amounts due and to become due at any time in respect of or arising out of any Collateral, (ii) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral, (iii) to defend any suit, action or proceeding brought against Guarantor with respect to any Collateral, (iv) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as the Secured Party may deem appropriate, and (v) to 5 complete any blanks contained in any instruments of transfer or assignment appended to or delivered with the certificates representing the Securities; and (d) to exchange any of the Collateral for other property upon reorganization, recapitalization or other readjustment, and in connection therewith to deposit any of the Collateral with any committee or depository upon such terms as the Secured Party may determine, and, subsequent to any Event of Default, to exercise voting rights as to any of the Collateral, all without notice and without liability except to account for property actually received by the Secured Party. The Guarantor hereby ratifies all that said attorney shall lawfully do or cause to be done within the scope of the power of attorney granted hereunder. This power of attorney is a power coupled with an interest and shall be irrevocable. The powers conferred on the Secured Party hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon him to exercise any such powers. The Secured Party shall be accountable only for amounts that he actually receives as a result of the exercise of such powers, and neither he nor any of his employees or agents shall be responsible to Guarantor for any act or failure to act, except for gross negligence or willful misconduct. ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.01 Valid Issuance. The Guarantor represents, warrants and agrees that the Securities have been duly authorized, validly issued and are validly outstanding, fully paid and nonassessable, and were not issues in violation of the preemptive rights of any person or of any agreement by which Guarantor or any issuer of such Collateral is bound. 3.02 No Material Misstatements. No information, exhibit or report furnished by Guarantor or any subsidiary to the Secured Party in connection with the negotiation of the Security Documents contained or contains any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements obtained herein or therein not misleading. 3.03 Ownership and Liens. The Guarantor represents, warrants and agrees that Guarantor owns (and at the time of transfer or delivery of the Collateral to Secured Party, owned or will own) good and indefeasible title to the Collateral free and clear of any other security interests, liens, adverse claims or options (other than, with respect to encumbrances permitted by the Security Documents). 3.04 Status of Securities Generally. The Guarantor represents, warrants and agrees that the Securities were properly issued, drawn, made and/or accepted and are genuine; the Securities have not been materially altered; all signatures on the Securities are genuine or authorized; the 6 Guarantor's transfer of the Securities to Secured Party for the purposes herein stated, is effective; and Guarantor knows of no fact that might impair the validity of the Securities. ARTICLE 4 COVENANTS AND AGREEMENTS 4.01 Taxes. The Guarantor covenants and agrees that Guarantor will pay, prior to delinquency, all taxes, charges, liens and assessments against the Collateral and, upon the failure of Guarantor to do so, the Secured Party at its option may, but will not be obligated to, pay any of them and shall be the sole judge of the legality or validity thereof and of the amount necessary to discharge the same. 4.02 Delivery of Collateral. The Guarantor covenants and agrees that if Guarantor receives any dividend or distribution, whether in cash, Securities or other property, declared and paid with respect to the Securities, Guarantor will immediately deliver the same to the Secured Party to be held as additional Collateral and/or apply them to the Obligations at the election of the Secured Party. So long as the Obligations are outstanding, Guarantor shall not vote for, approve or acquiesce in the issuance of additional Securities of PAC to any person or party other than Guarantor, except for commercial bank loans, which are not owned or held by Guarantor and delivered to Secured Party hereunder. 4.03 Further Assurances. The Guarantor covenants and agrees that Guarantor will sign, execute, deliver and file, alone or with the Secured Party, any financing statement, security agreements or other documents or procure any document as may be requested by the Secured Party from time to time to confirm, perfect and preserve the security interest created hereby, and in addition, the Guarantor hereby authorizes the Secured Party to execute and deliver on behalf of Guarantor and to file such financing statements without the signature of Guarantor. The Guarantor will do all such additional and further acts, things, deeds, give such assurances and execute such instruments as the Secured Party reasonably requires to vest more completely in and assure to the Secured Party his rights under this Security Agreement. 4.04 Filing Reproductions. The Guarantor covenants and agrees that, at the option of the Secured Party, a carbon, photographic or other reproduction of this Security Agreement or of a financial statement covering the Collateral shall be sufficient as a financing statement and may be filed as a financing statement. 4.05 Prohibited Liens and Filings. The Guarantor covenants and agrees that Guarantor will not pledge, mortgage, or otherwise encumber, create or suffer a security interest to exist in any of the Collateral (other than in favor of the Secured Party and liens and other encumbrances permitted by the Security Documents) or sell, assign or otherwise transfer any of the Collateral, to or in favor of anyone other than the Secured Party, for the benefit of the Secured Party, and Guarantor will not file or permit to be filed any financing statement or other 7 security instrument with respect to the Collateral other than in favor of the Secured Party or other than liens or other encumbrances permitted by the Security Documents. ARTICLE 5 RIGHTS AND REMEDIES 5.01 Voting Rights and Dividends. (a) So long as no Event of Default shall have occurred and be continuing: (i) The Guarantor will be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Security Agreement. (ii) The Secured Party shall execute and deliver (or cause to be executed and delivered) to Guarantor all such proxies and other instruments as Guarantor may reasonably request for the purposes of enabling Guarantor to exercise the voting and other rights which it is entitled to exercise pursuant to subsection (i). (b) Upon the occurrence and during the continuance of an Event of Default all rights of Guarantor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Subsection 5.01(a)(i) shall cease and Secured Party shall be entitled to vote the Securities. 5.02 Default Events. "Event of Default" shall have the meaning ascribed to such term in the Notes or other Security Documents. Upon the occurrence of an Event of Default, all of the Obligations shall immediately become due and payable irrespective of any agreed maturity or period of grace and/or any obligation of the Secured Party for further financial accommodation shall terminate. 5.03 Default Remedies. If all or any part of the Obligation shall become due and payable as specified in Section 5.02, the Secured Party may then, or at any time thereafter, apply, set-off, collect, sell in one or more sales, or otherwise dispose of, any or all of the Collateral, in its then condition or following any commercial reasonable preparation or processing, in such order as the Secured Party may elect, and any such sale may be made either at public or private sale at its place of business or elsewhere, or at any brokers' board or securities exchange, either for cash or upon credit or for future delivery, at such price as the Secured Party may deem fair, and the Secured Party may be the purchaser of any or all Collateral so sold and may hold the same thereafter in its own right free from any claim of Guarantor or right of redemption. No such purchase or holding by the Secured Party shall be deemed a retention by the Secured Party in satisfaction of the Obligations. All demands, notices and advertisements, and the presentment of property at sale are hereby waived. If, notwithstanding the foregoing provisions, any applicable provision of the Uniform Commercial Code or other law requires the Secured Party 8 to give reasonable notice of any such sale or disposition or other action, five days' prior written notice shall constitute reasonable notice. The Secured Party may require Guarantor to assemble the Collateral, to the extent not in the possession of the Secured Party, and make it available to the Secured Party at a place designated by the Secured Party that is reasonably convenient to the Secured Party. Any sale hereunder may be conducted by an auctioneer or any officer or agent of the Secured Party. In connection with the sale of Collateral which is stock or other investment securities, in the absence of registration of the Securities under the Securities act of 1933, as amended (the "Act"), and any applicable state securities laws, by Guarantor or, at the election of the Secured Party, the Secured Party must limit prospective purchasers to the extent deemed necessary or advisable by the Secured Party to render such sale exempt from the registration requirements of the Act, and any applicable state securities laws, and no sale so made in good faith by the Secured Party shall be deemed not to be "commercially reasonable" because so made. 5.04 Proceeds. Prior to all or any part of the Obligations becoming due and payable as specified in Section 5.02, all cash sums paid to and received by the Secured Party on account of the Collateral shall be promptly applied by the Secured Party on the Obligations, whether or not such Obligations shall have by their terms matured, such application to be made to principal or interest as the Secured Party may determine; provided, however, the Secured Party need not apply or give credit for any item included in such sums until the Secured Party has received final payment thereof. After all or any part of the Obligations becomes due and payable as specified in Section 5.02, the proceeds of any sale or other disposition of the Collateral and all sums received or collected by the Secured Party for or on account of the Collateral shall be applied by the Secured Party in the manner set forth in Section 9.504 of the Texas Uniform Commercial Code - Secured Transactions. 5.05 Secured Party's Duties. The Secured Party shall be under no duty whatsoever to make or give any presentment, demand for performance, notice of nonperformance, protest, notice of protest, notice of dishonor, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against prior parties. The Secured Party shall not be liable for failure to collect or realize upon any or all of the Obligations or Collateral, or for any delay in so doing, nor shall the Secured Party be under any duty to take any action whatsoever with regard thereto. The Secured Party shall use reasonable care in the custody and preservation of any Collateral in its possession. The Secured Party shall have no duty to comply with any recording, filing, or other legal requirements necessary to establish or maintain the validity, priority or enforceability of, or the Secured Party's rights in or to, any of the Collateral. 5.06 Secured Party's Actions. The Guarantor waives any right to require the Secured Party to proceed against any Person, exhaust any collateral or pursue any other remedy in the Secured Party's power; waives any and all notice of acceptance of this Security Agreement or of creation, modification renewal or extension for any period of any of the Obligations from time to time; and waives any defense arising by reason of any disability or other defense of Guarantor or any other party liable on the Obligations, or by reason of the cessation from any 9 cause whatsoever of the liability of Guarantor, or any other party liable on the Obligations. All dealings between Guarantor and the Secured Party shall conclusively be presumed to have been had or consummated in reliance upon this Security Agreement. Until all Obligations shall have been paid in full, Guarantor shall have no right to subrogation, and Guarantor waives any right to enforce any remedy that the Secured Party now has or may hereafter have against Guarantor, or any other party liable on the Obligations and, except as otherwise expressly provided in this Security Agreement, waives any benefit of and right to participate in any Collateral or security whatsoever now or hereafter held by the Secured Party. ARTICLE 6 MISCELLANEOUS 6.01 Transfer of Indebtedness and Collateral. Subject to the limitations of the Security Documents, the Secured Party may transfer any or all of the Obligations, and upon any such transfer such Secured Party may transfer any and all of the Collateral and shall be fully discharged thereafter form all liability, if any, with respect to the Collateral so transferred, and the transferee shall be vested with all rights, powers and remedies of such Secured Party hereunder with respect to the Collateral so transferred; but with respect to any Collateral not so transferred, the Secured Party shall retain all rights, powers and remedies hereby given. The Secured Party may at any time deliver any or all of the Collateral to Guarantor, whose receipt shall be a complete and full acquittance for the Collateral so delivered, and the Secured Party shall thereafter be discharged from any liability therefor. 6.02 Cumulative Security. The execution and delivery of this Security Agreement in no manner shall impair or affect any other security by (endorsement or otherwise) for the payment of the Obligations. No security taken hereafter as security for payment of the Obligations shall impair in any manner or affect this Security Agreement. All such present and future additional security is to be considered as cumulative security. 6.03 Continuing Agreement. This is a continuing agreement and the conveyance hereunder shall remain in full force and effect, and all the rights, powers and remedies of the Secured Party hereunder shall continue to exist until the Obligations shall be paid in full as the same become due and payable, and until the Secured Party, upon request of Guarantor, has executed a written termination statement, and reassigned to Guarantor, without recourse, representation or warranty of any kind, the Collateral and all rights and Liens conveyed hereby and returned possession of the Collateral to Guarantor. This Security Agreement shall continue irrespective of the fact that the liability of any other party liable for the Obligations may have ceased, and notwithstanding the death or incapacity of Guarantor or any other person liable for the Obligations, or any other event or proceeding affecting Guarantor and/or any other person liable for the Obligations. 6.04 Cumulative Rights. The rights, powers and remedies of the Secured Party hereunder shall be in addition to all rights, powers and remedies given by statute or rule of law 10 and are cumulative. The exercise of any one or more of the rights, powers and remedies provided herein shall not be construed as a waiver of any other rights, powers and remedies of the Secured Party. Furthermore, regardless of whether or not the Uniform Commercial Code is in effect in the jurisdiction where such rights, powers and remedies are asserted, the Secured Party shall have the rights, powers and remedies of a secured party under the Texas Uniform Commercial Code, as amended. 6.05 Exercise of Rights. Time shall be of the essence for the performance of any act under this Security Agreement by Guarantor or any other party liable for the Obligations, but neither the Secured Party's acceptance of partial or delinquent payments nor any forbearance, failure or delay by the Secured Party in exercising any right, power or remedy shall be deemed a waiver of any obligation of Guarantor or any other party liable for the Obligations or of any right, power or remedy of the Secured Party or preclude any other or further exercise thereof; and no single or partial exercise of any right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. 6.06 Remedy and Waiver. The Secured Party may remedy any default and may waive any default without waiving the default remedied or waiving any prior or subsequent default, subject only to the requirements of the Security Documents in this regard. 6.07 Non-Judicial Remedies. The Secured Party may enforce his rights hereunder without prior judicial process or judicial hearing, and Guarantor expressly waives, renounces and knowingly relinquishes any and all legal rights which might otherwise require the Secured Party to enforce his rights by judicial process. In so providing for non-judicial remedies, Guarantor recognizes and concedes that such remedies are consistent with the usage of the trade, are responsive to commercial necessity, and are the result of bargain at arm's length. Nothing herein is intended to prevent the Secured Party or Guarantor from resorting to judicial process at such party's option. 6.08 Guarantor. The term "the Guarantor", as used throughout this Security Agreement, shall (regardless of use of the singular form) mean Guarantor individually and/or collectively and shall, subject to the limitations of the Security Documents, include the respective successors, legal representatives, heirs and assigns of Guarantor. 6.09 Preservation of Liability. Neither this Security Agreement nor the exercise by the Secured Party of (or the failure to so exercise) any right, power or remedy conferred herein or by law shall be construed as relieving any person liable on the Obligations from full liability on the Obligations and for any deficiency thereon. 6.10 Notices. Any notice or demand to Guarantor under this Security Agreement or in connection with this Security Agreement may be driven and shall conclusively be deemed and considered to have been given and received if in compliance with the applicable provisions of the Security Documents. 11 6.11 Construction. This Security Agreement shall be governed by the laws of the State of Texas in all respects, including matters of construction, validity, enforcement and performance. 6.12 Amendment and Waiver. This Security Agreement may not be amended (or may any of its terms be waived) except in writing duly signed by an authorized officer of the Secured Party and by Guarantor. 6.13 Terms Defined in Uniform Commercial Code. Except as the context may otherwise require, any term used herein that is defined in the Texas Uniform Commercial Code shall have the meaning given therein. 6.14 Invalidity. In the event that any one or more of the provisions contained in this Security Agreement shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision of this Security Agreement, or any other instrument executed in connection herewith. 6.15 Successors and Assigns. The covenants, representations, warranties and agreements herein set forth shall be binding upon Guarantor and its successors and assigns as permitted pursuant to the Security Documents and shall inure to the benefit of the Secured Party and his successors and assigns. 6.16 Counterparts. This Security Agreement may be executed in two or more counterparts, and it will not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart will be deemed an original, but all of which together will constitute one and the said instrument. IN WITNESS WHEREOF, this Security Agreement is executed as of the date first hereinabove written. Guarantor: WATERMARC FOOD MANAGEMENT CO. ------------------------------ By: Angelo Pitillo Its: President Secured Party: ------------------------------ GHULAM M. BOMBAYWALA 12 SCHEDULE I Attached to and forming a part of that certain Security Agreement (Pledge) dated to be effective as of September 14, 1995 by WATERMARC FOOD MANAGEMENT CO., as the Guarantor to GHULAM M. BOMBAYWALA as Secured Party.
Stock Number Stock Class of Certificate Par of Issuer Stock No(s). Value Shares ----- ----- ------ ----- ------ Pasta Common 1 $.01 100 Acquisition Co.
EX-10.12 20 GUARANTY AGREEMENT PLEDGE DATED 09/14/95 1 EXHIBIT H GUARANTY AGREEMENT THIS GUARANTY AGREEMENT is entered into on September 14, 1995 by Watermarc Food Management Co., a Texas corporation, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 ("Guarantor"), in favor of Ghulam M. Bombaywala, a resident of Fort Bend County, Texas whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 (together with any successor holders of the hereinafter defined Notes, the "Holder"). For purposes of the application of certain provisions hereof, the "Borrower" (as defined below) is joined as a party to this Guaranty Agreement. WITNESSETH: WHEREAS, Guarantor owns all of the issued and outstanding securities of Pasta Acquisition Co., a Texas corporation ("Borrower"); WHEREAS, Borrower was organized by Guarantor to acquire The Original Pasta Co., a Texas,Corporation ("TOPC") pursuant to a Plan and Agreement of Merger dated September 14, 1995 (hereinafter the "Merger" and "Merger Agreement"); WHEREAS, the Holder is the sole shareholder of TOPC and pursuant to the Merger will receive (i) common stock of Guarantor, and (ii) two promissory notes in the aggregate principal amount of $3,750,000.00 (the "Notes") from Borrower, which Notes are described in Section 1.02 of the Merger Agreement; WHEREAS, the Notes are secured by (i) a lien on certain restaurant assets being acquired by Borrower from TOPC in the Merger pursuant to a "Restaurant Assets Security Agreement" between Borrower, TOPC and Secured Party; (ii) this Guaranty Agreement; and (iii) a "Security Agreement-Pledge" between Guarantor and Secured Party and such other instruments, documents and agreements defined as the "Security Documents" pursuant to Section 2.02 of the Merger Agreement (the "Security Documents"); and WHEREAS, the Holder has made it a condition precedent to the Merger Agreement that Guarantor guarantee payment of the Notes and the related indebtedness and obligations set forth in the Security Documents. NOW, THEREFORE to induce the Holder to accept Notes of Borrower in connection with and as consideration in the Merger and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby agrees as follows: 2 ARTICLE 1 THE INDEBTEDNESS SECTION 1.1 THE INDEBTEDNESS. As used in this Guaranty Agreement, the "Indebtedness" shall mean the Notes, including without limitation all principal and all interest thereon, together with all amounts that Borrower may from time to time become obligated to pay or reimburse to the Holder pursuant to the Security Documents, including all attorneys' fees and costs incurred by the Holder in enforcing the Holder's rights under the Notes or Security Documents. ARTICLE 2 THE GUARANTY SECTION 2.1 INDEBTEDNESS GUARANTEED. Guarantor hereby unconditionally and irrevocably guarantees the prompt payment when due, whether at maturity or otherwise, of all of the Indebtedness. If Borrower fails to make any payment of any part of the Indebtedness when due after the expiration of any notice and cure period provided in the Notes or Security Documents, if any, then said failure shall constitute a default hereunder. SECTION 2.2 NATURE OF GUARANTY. This is an irrevocable. absolute, complete, and continuing guaranty of payment and performance and not a guaranty of collection, and shall not be affected by the release or discharge of Borrower from, or impairment or modification of, its obligations with respect to any Indebtedness in any bankruptcy, receivership, or other insolvency proceeding or otherwise. The fact that the Indebtedness may be rearranged, reduced, extended for any period, and/or renewed from time to time, or paid in full without notice to Guarantor shall not release, discharge, or reduce the obligation of Guarantor with respect to the Indebtedness and Guarantor shall remain fully bound hereunder. It is the intention of the Holder and Guarantor that Guarantor's obligations hereunder shall not be discharged at any time prior to the occurrence of payment in full of the Indebtedness. This Guaranty Agreement may be enforced by the Holder and any subsequent holder of the Indebtedness, and shall not be discharged by the assignment or negotiation of all or part of the Indebtedness. This Guaranty Agreement may not be revoked by Guarantor and shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Indebtedness is rescinded or must otherwise be returned by the Holder under the insolvency, bankruptcy, reorganization, receivership, or other debtor relief proceeding involving Borrower, or after any attempted revocation by Guarantor, as if though such payment had not been made. Except as specifically provided in Section 2.10 hereof, Guarantor hereby expressly waives presentment, demand, notice of non-payment, protest, notice of protest and dishonor, notice of intent to accelerate, notice of acceleration, and any other notice whatsoever on any and all forms of such Indebtedness, and also notice of acceptance of this Guaranty Agreement, acceptance on the part of the Holder being conclusively presumed by its request for this Guaranty Agreement and delivery of the same to the Holder. -2- 3 SECTION 2.3 THE HOLDER'S RIGHTS. Guarantor authorizes the Holder, without notice or demand and without affecting Guarantor's liability hereunder: to take and hold security for the payment of this Guaranty Agreement and/or any of the Indebtedness from Borrower or any other persons or entities, including Guarantor, and exchange, enforce, waive, and release any such security; to apply such security and direct the order or manner of sale thereof as the Holder may determine; to obtain a guaranty of the Indebtedness from any one or more persons and at any time or times; and to enforce, waive, rearrange, modify, limit or release any of such other persons from their obligations under such guaranties. Guarantor hereby acknowledges and agrees that the obligations of all persons to pay and satisfy the Indebtedness pursuant to their respective guaranties (including Guarantor's obligations under this Guaranty Agreement) shall be joint and several. Guarantor acknowledges and agrees that the Holder shall have complete discretion regarding whether, when and how to exercise the foregoing rights. SECTION 2.4 GUARANTOR'S WAIVERS. Guarantor waives any right to require the Holder to (and it shall not be necessary for the Holder, in order to enforce such payment by Guarantor to first) (a) proceed against Borrower or any other person liable on the Indebtedness, (b) proceed against or exhaust any security given to secure the Indebtedness, (c) have Borrower joined with Guarantor in any suit arising out of this Guaranty Agreement and/or any of the Indebtedness, (d) enforce its rights against any other guarantor of the Indebtedness, or (e) pursue or exhaust any other remedy in the Holder's power whatsoever. The Holder shall not be required to mitigate damages or take any action to reduce, collect or enforce the Indebtedness. Guarantor waives any defense or right arising by reason of any disability, lack of corporate authority or power, impairment of recourse or of collateral under Section 3.606 of the Texas Uniform Commercial Code or otherwise, or other defense of Borrower or any other guarantor of any of the Indebtedness, and shall remain liable hereon regardless of whether Borrower or any other guarantor be found not liable thereon for any reason. Guarantor shall have no right of subrogation until such time as all of the Indebtedness has been paid in full. SECTION 2.5 MATURITY OF INDEBTEDNESS: PAYMENT. If the maturity of any Indebtedness is accelerated by bankruptcy or otherwise, then such maturity shall also be deemed accelerated for the purpose of this Guaranty Agreement without demand or notice to Guarantor. Guarantor shall, forthwith upon notice from the Holder of the failure of Borrower to pay any Indebtedness at maturity, pay to the Holder the amount due and unpaid by Borrower and Guaranteed hereby. The failure of the Holder to give this notice shall not in any way release Guarantor hereunder. SECTION 2.6 THE HOLDER'S EXPENSES. If Guarantor fails to pay the Indebtedness after notice from the Holder of Borrower's failure to pay any Indebtedness at maturity, and if the Holder obtains the services of an attorney for collection of amounts owing by Guarantor hereunder, or if suit is filed to enforce this Guaranty Agreement, the Notes or the Security Documents, or if proceedings are had in any bankruptcy, probate, receivership, or other judicial proceedings for the establishment or collection of any amount owing by Guarantor hereunder, or if any amount owing by Guarantor -3- 4 hereunder is collected through such proceedings, then Guarantor shall pay to the Holder all court costs and the Holder's reasonable attorney's fees. SECTION 2.7 PRIMARY LIABILITY. The liability of the Guarantor for the payment of the Indebtedness shall be primary and not secondary. SECTION 2.8 EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING GUARANTOR'S OBLIGATIONS. Guarantor hereby consents and agrees to each of the following, and agrees that Guarantor's obligations under this Guaranty Agreement shall not be released, diminished, impaired, reduced or adversely affected by any of the following, and waives any rights (including, without limitation, rights to notice) which Guarantor might otherwise have as a result of or in connection with any of the following: (a) MODIFICATIONS, ETC. Any renewal, extension, modification, alteration or rearrangement of all or any part of the Indebtedness, or of the Note, or of any Security Documents, or any contract or understanding between Borrower and the Holder or between the Holder and Guarantor, or any other parties, pertaining to the Indebtedness or any other matter; (b) ADJUSTMENT, ETC. Any adjustment, indulgence, forbearance. or compromise that might be granted or given by the Holder to Borrower, Guarantor or any other person; (c) CONDITION OF BORROWER OR GUARANTOR. The insolvency, bankruptcy, arrangement, adjustment, composition, liquidation, disability, dissolution or lack of power of Borrower or any other party at any time liable for the payment of all or part of the Indebtedness, or any dissolution of Borrower or Guarantor; or any sale, lease or transfer of any or all of the assets of Borrower or Guarantor, or any changes in the shareholders or members of Borrower or Guarantor or any reorganization of Borrower or Guarantor; (d) INVALIDITY OF INDEBTEDNESS. The invalidity or unenforceability of all or any part of the Indebtedness, or any document or agreement executed in connection with the Indebtedness, for any reason whatsoever, including without limitation the fact that the Indebtedness, or any part thereof, exceeds the amount permitted by law, the act of creating the Indebtedness or any part thereof is ultra vires, the officers or representatives executing the documents or otherwise creating the Indebtedness acted in excess of their authority, the Indebtedness violates applicable usury laws, Borrower or any other person, including Guarantor, has valid defenses, claims, or offsets (whether at law, in equity, or by agreement) which render the Indebtedness wholly or partially uncollectible from Borrower or any other person, including Guarantor, the creation, performance, or repayment of the -4- 5 Indebtedness (or the execution, delivery and performance of any document or instrument representing part of the Indebtedness, or executed in connection with the Indebtedness, or given to secure the repayment of the Indebtedness) is illegal, uncollectible, legally impossible, or unenforceable, or any Security Document or other documents or instruments pertaining to the Indebtedness have been forged or otherwise are irregular or not genuine or authentic; (e) RELEASE OF OBLIGORS. Any full or partial release of the liability of Borrower on the Indebtedness or any part thereof, or of any co-guarantors, or any other person or entity now or hereafter liable, whether directly or indirectly, jointly, severally, or jointly and severally, to pay, perform, guarantee or assure the payment of the Indebtedness or any part thereof, it being recognized, acknowledged and agreed by Guarantor that Guarantor may be required to pay the Indebtedness in full without assistance or support of any other party, and Guarantor has not been induced to enter into this Guaranty Agreement on the basis of a contemplation, belief, understanding or agreement that other parties will be liable to perform the Indebtedness, or that the Holder will look to other parties to perform the Indebtedness; (f) OTHER SECURITY. The taking or accepting by the Holder of any other security, collateral, guaranty, or other assurance of payment for all or any part of the Indebtedness from any person, including Borrower or the Guarantor; (g) RELEASE OF COLLATERAL. Any release, surrender, exchange, subordination, deterioration, waste, loss, or impairment (including without limitation negligent, willful, unreasonable, or unjustifiable impairment) of any collateral at any time securing payment of the Indebtedness; (h) CARE AND DILIGENCE. The failure of the Holder the Holder or any other person to exercise diligence or reasonable care in, or the negligence of the Holder regarding, the preservation, protection, enforcement, sale, or other handling or treatment of all or any part of such collateral, including without limitation the failure of the Holder to foreclose on any collateral mortgaged or pledged under the Security Documents or the delay by the Holder in instituting or prosecuting any right or remedy under the Security Documents, including without limitation the right to foreclose on collateral by nonjudicial foreclosure sale or otherwise; (i) STATUS OF LIENS. The fact that any collateral, security interest, or lien contemplated or intended to be given, created, or granted as security for the repayment of the Indebtedness has not been properly perfected or created, or proves to be unenforceable or subordinate to any other security interest or lien, it being recognized and agreed by Guarantor that Guarantor -5- 6 is not entering into this Guaranty Agreement in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectabilty, or value of any of the collateral for the Indebtedness; (j) SURETYSHIP DEFENSES. Any and all suretyship defenses of material alteration of any agreement between Borrower and the Holder or the Holder and any other party, including Guarantor; (k) PREFERENCE. Any payment by Borrower to the Holder is held to constitute a preference under bankruptcy laws, or for any reason the Holder is required to refund such payment or pay such amount to Borrower or any other person; or (l) OTHER ACTS TAKEN OR OMITTED. Any other action taken or omitted to be taken with respect to any Security Documents, the Indebtedness, or the security and collateral therefor, whether or not such action or omission prejudices Guarantor or increases the likelihood that Guarantor will be required to pay the Indebtedness pursuant to the terms hereof. it being the unambiguous and unequivocal intention of Guarantor that Guarantor shall be obligated to pay the Indebtedness when due, notwithstanding any occurrence, circumstance, action or omission whatsoever, whether contemplated or not contemplated, and whether or not otherwise or particularly described herein, except for the full and final payment and satisfaction of the Indebtedness. SECTION 2.9 RELATIONSHIP OF PARTIES GUARANTOR ACKNOWLEDGES THAT THE HOLDER IS A PRINCIPAL STOCKHOLDER AND A DIRECTOR OF GUARANTOR AND IS ITS CHIEF EXECUTIVE OFFICER. THE HOLDER MAY ALSO FROM TIME TO TIME SERVE AS AN OFFICER OR DIRECTOR OF BORROWER. NOTWITHSTANDING THE FOREGOING, GUARANTOR AND BORROWER ACKNOWLEDGE AND AGREE THAT THE HOLDER MAY EXERCISE AND ENFORCE HIS RIGHTS UNDER THE NOTES, THE SECURITY DOCUMENTS AND THIS GUARANTY AGREEMENT ACCORDING TO THE TERMS AND PROVISIONS THEREOF AND HEREOF. BORROWER AND GUARANTOR EXPRESSLY ACKNOWLEDGE THAT THEY WERE REPRESENTED AND ADVISED BY SEPARATE, INDEPENDENT LEGAL COUNSEL AS TO THE MERGER, THE MERGER AGREEMENT, THE NOTES, THE SECURITY DOCUMENTS AND ANY RELATED DOCUMENTS, INCLUDING THE RELATIVE LEGAL RIGHTS OF THE PARTIES IN THE TRANSACTIONS REPRESENTED THEREBY AND HEREBY. SECTION 2.10 NO DUTY TO MITIGATE. Without limiting any other provision in this Guaranty Agreement, the Holder shall have no duty to mitigate the amounts payable by Guarantor to the Holder hereunder. The Holder agrees to comply with the notice and cure provisions contained in the Notes and Security Documents and any notices required thereunder to be given by the Holder to Borrower or Guarantor shall be given. -6- 7 ARTICLE 3 REPRESENTATIONS AND WARRANTIES SECTION 3.1 BY GUARANTOR. In order to induce the Holder to accept the Notes, Guarantor represents and warrants to the Holder (which representations and warranties will survive the creation of the Indebtedness and any extension of credit thereunder) that: (a) Benefit to Guarantor. Guarantor's guaranty pursuant to this Guaranty Agreement reasonably has benefitted or may be expected to benefit, directly or indirectly, Guarantor, including the acquisition by Borrower of TOPC. (b) FAMILIARITY AND RELIANCE. Guarantor is familiar with, and has independently reviewed books and records regarding, the financial condition of Borrower and is familiar with the value of any and all collateral intended to be created as security for the payment of the Notes and other Indebtedness; however, Guarantor is not relying on such financial condition or the collateral as an inducement to enter into this Guaranty Agreement. (c) NO REPRESENTATION. Neither the Holder nor any other person, corporation, or entity has made any representation, warranty, or statement to Guarantor with regard to Borrower or its financial condition in order to induce Guarantor to execute this Guaranty Agreement. ARTICLE 4 MISCELLANEOUS SECTION 4.1 SUCCESSORS AND ASSIGNS. This Guaranty Agreement is for and shall inure to the benefit of the successors and assigns of the Holder and is and shall be fully binding upon the legal representatives, successors, and assigns of Guarantor. SECTION 4.2 NOTICES. All notices provided for are permitted to be given or served by depositing the same in the United States mail, addressed to the person to be notified. postage prepaid, and registered or certified with return receipt requested, or by Federal Express or other overnight delivery, or by facsimile machine, or by delivering such notice by courier or by hand to such person and shall be effective when received by the intended recipient. For purposes of this Guaranty Agreement, Guarantor's address shall be the address set forth on the first page of this Guaranty Agreement or any other mailing address of which Guarantor notifies the Holder in writing. SECTION 4.3 GOVERNING LAW. This Guaranty Agreement is a contract made under and shall be construed in accordance with and governed by the laws of the State of Texas. -7- 8 SECTION 4.4 EXERCISE OF RIGHTS. The rights, powers and remedies of the Holder hereunder shall be in addition to all rights, powers and remedies given by statute or rule of law and are cumulative. Time shall be of the essence for the performance of any act under this Guaranty Agreement by the Guarantor. Neither the Holder's acceptance of partial or delinquent performance by Borrower or Guarantor nor any forbearance, failure, or delay by the Holder in exercising any right, power or remedy shall be deemed a waiver of any obligation of the Borrower or Guarantor or any other party liable for the Indebtedness or of any right, power or remedy of the Holder or preclude any other or further exercise thereof; and no single or partial exercise of any right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. SECTION 4.5 NON-JUDICIAL REMEDIES. Holder may enforce his rights hereunder without prior judicial process or judicial hearing, and the Borrower and Guarantor expressly waive, renounce and knowingly relinquish any and all legal rights which might otherwise require the Holder to enforce his rights by judicial process. In so providing for non-judicial remedies, the Borrower and Guarantor recognize and concede that such remedies are consistent with the usage of the trade, are responsive to commercial necessity, and are the result of bargain at arm's length. Nothing herein is intended to prevent the Holder or the Borrower or Guarantor from resorting to judicial process at such party's option. SECTION 4.6 BORROWER. The terms "Borrower" and "Guarantor", as used throughout this Agreement shall, subject to the limitations of the Security Documents, include the respective successors, legal representatives, heirs and assigns of the Borrower and Guarantor. SECTION 4.7 AMENDMENT AND WAIVER. This Guaranty Agreement may not be amended (or may any of its terms be waived) except in writing duly signed by the Holder and the Guarantor. SECTION 4.8 INVALIDITY. In the event that any one or more of the provisions contained in this Guaranty Agreement shall. for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision of this Guaranty Agreement, or any other instrument executed in connection herewith. -8- 9 IN WITNESS WHEREOF, the undersigned has executed this Guaranty Agreement as of the date first above written. HOLDER GUARANTOR: WATERMARC FOOD MANAGEMENT CO. - - ------------------------------ ------------------------------ GHULAM M. BOMBAYWALA By: ANGELO PITILLO, President BORROWER: PASTA ACQUISITION CO. ------------------------------ By: ANGELO PITILLO, President -9- EX-10.13 21 SERVICE MARK LICENSE AGREEMENT 1 EXHIBIT I SERVICE MARK LICENSE AGREEMENT This agreement (the "License Agreement") is entered into by and between Pasta Acquisition Co. ("Licensor") a Texas corporation, and Ghulam M. Bombaywala, a Texas citizen and resident ("Licensee"), as of September 14, 1995. WHEREAS, Licensor is a wholly owned subsidiary of Watermarc Food Management Co., and WHEREAS, Licensor is acquiring by merger The Original Pasta Co., ("TOPC"), a Texas corporation, thus acquiring the rights in and to the patents, trademarks, trade names, assumed names and copyrights; and WHEREAS, TOPC has applied to the United States Patent. and Trademark Office for the issuance of service mark and trademark on The Original Pasta Co. logos, signage and likeness thereof, collectively referred to as the "Service Mark". As of the effective date of said merger, Licensor will have the exclusive right, except for the rights granted under the Non-Exclusive Trademark License Agreement, attached hereto as Exhibit "A", to use the Service Mark and to issue licenses and sublicenses for the use of the Service Mark. Attached hereto as Exhibit "B" is a true and correct copy of the documents evidencing TOPC's application for and rights in and to the Service Mark. The term Service Mark as used herein includes the name, logo, signage and likeness of the Service Mark as reflected in the applications and 2 the tradedress, goodwill and style of doing business, including, menus, recipes, tradesecrets and know-how associated with the ownership and operation of the restaurants under the name and style of the existing Original Pasta Company restaurants, as the same may be amended or changed in the future; WHEREAS, Licensee desires to obtain a license from Licensor to use the Service Mark in connection with its restaurant business; WHEREAS, Licensor and Licensee are parties to that certain Agreement and Plan of Merger by and among Watermarc Food Management Co. ("WAMA"), TOPC, Licensee, and Licensor (the "Merger Agreement"); and WHEREAS, Licensor is willing to grant a license to Licensee, but only upon and after the occurrence of certain events of default as described in the Notes or the Security Documents (as defined in and attached to the Agreement and Plan of Merger). NOW, THEREFORE, in consideration of the covenants and promises of the parties hereto, the parties hereto agree as follows: 1. This License Agreement and the rights of Licensee hereunder commence only upon the occurrence and continuation of an event of default pursuant to the terms of the Notes or the Security Documents as those documents are defined and described in the Merger Agreement, after any opportunity to cure such defaults provided for in the Notes or Security Documents has expired. -2- 3 2. Subject to paragraph 1 above, Licensor hereby grants to Licensee for a period of twenty-five (25) years, the non-exclusive right to use the Service Mark in connection with the operation, ownership, advertising, promotion and development of Licensee's restaurant business as now or hereafter conducted, but in no event shall Licensee use such Service Mark in connection with a restaurant which is within five (5) miles of a then existing operating restaurant owned and/or operated and/or licensed and/or franchised by Licensor which uses the Service Mark. The Service Mark shall not be used in any illegal manner or contrary to any laws regarding unfair competition or in any manner which would impair the Service Mark's validity or in violation of any reasonable rules promulgated by Licensor for use by all of its licensees or franchisees. Licensor shall not grant any license to any person or entity to use the Service Mark which would limit licensees ability to use the Service Mark except as to the five (5) mile restriction above. 3. Licensee hereby waives and assigns to Licensor any ownership right, title or interest, if any, which Licensee has or may acquire in and to the Service Mark as a result of its use by Licensee, together with the goodwill of the Service Mark and of the business with which the Service Mark is or may be used unless express provision to the contrary is otherwise made herein. -3- 4 4. Licensee shall pay to Licensor the sum of one dollar per month as consideration for the use of the Service Mark after such use commences. Upon full payment of the Notes due to Licensee by Licensor, this License Agreement shall automatically terminate any and all right, title, and interest of Licensee in and to the Service Mark shall automatically, and without need of action on the part of either party, revert to Licensor, except as to any restaurants opened by Licensee or for which Licensee has incurred costs. As to any restaurants opened or for which costs have been incurred, the license hereunder shall continue and shall not terminate on payment of the Notes. Licensor and Licensee agree to execute any and all documents, if any, reasonably required to carry out the foregoing transfer of the Service Mark upon full payment of the Notes owed to Licensee by Licensor. 5. Licensee will not in any way dispute or impugn the validity of the Service Mark, the ownership of the Service Mark and the exclusive rights of Licensor under the Service Mark which are licensed hereunder. 6. Licensee shall not use or permit the use of the Service Mark in combination with any other service mark, word, symbol, letter or design, or in its corporate or business name except as authorized in writing by Licensor. -4- 5 7. Licensee shall not during the term of this License Agreement, or thereafter, adopt or use any word, corporate name, trade name or service mark which is or tends to be similar to or likely to be confusing with the Service Mark, or any design, label or advertising material used by Licensor, without the prior written approval of Licensor. 8. All labels, advertising and other promotional materials in which the Service Mark is to be used by Licensee shall be submitted to Licensor and approved, in writing, by Licensor prior to such use. Licensor agrees that such approval shall not be unreasonably withheld or delayed by Licensor. 9. Licensee agrees to notify Licensor, in writing, of any conflicting use of or any applications or registrations for the Service Mark or any acts of infringement or acts of unfair competition involving the Service Mark, promptly after such matters are brought to its attention, or it has knowledge thereof. 10. Licensor shall have the right to appoint an agent to establish quality standards, conduct quality and account audits, and verify on Licensor's behalf, Licensee's compliance with the terms and conditions of this License Agreement. Licensor and its agent shall jointly and severally have the right to inspect any premises upon which the Service Mark is used to determine whether Licensee meets Licensor's quality standards with respect to such use. -5- 6 11. Licensee warrants, represents, and covenants that the menu items to be sold at any restaurant where the Service Mark is being or will be used is wholesome and fit for human consumption and Licensee agrees to defend and hold Licensor harmless for any claims of injury or damage resulting from or arising out of the business conducted at such restaurants, including but not limited to, the consumption of any food and beverage products sold by Licensee on or about its restaurant premises. Licensee shall maintain a comprehensive general liability insurance policy and a liquor liability endorsement in amounts and with a company reasonably satisfactory to Licensor and shall name Licensor as an additional named insured thereunder. Licensee shall provide Licensor with a certificate of such insurance and such certificate shall provide that at least thirty (30) days' notice in writing shall be given to Licensor if such policy shall be cancelled or not renewed. 12. Licensor shall not be obligated to pursue any proceedings to prevent infringement of the Service Mark or any unfair competition proceedings or opposition proceedings. Licensor shall have no obligation to defend the Service Mark but may, in its sole discretion, recommend such defense where it considers such defense to be appropriate. Licensee agrees to cooperate with and assist Licensor in all such matters. Licensor shall have no obligation or liability to Licensee in the event any third party asserts a claim of service mark infringement or -6- 7 unfair competition against Licensee by reason of its use of the Service Mark which results in the Service Mark being invalidated, cancelled or modified, unless such claim arises out of any act or agreement of Licensor. 13. Licensee shall not have any right to further sublicense the right to use the Service Mark, and Licensee agrees that it will not authorize the Service Mark to be used by any other person, firm, or corporation, without Licensor's prior written consent; provided, however, Licensee shall have the right to assign or sublicense its rights hereunder to any corporation, partnership, limited partnership, limited liability company or other entity in which Licensee is an owner or affiliate, or in which Licensee retains the right to control the use of the Service Mark. 14. This License Agreement and Licensee's rights to the Service Mark shall [INTENTIONALLY LEFT BLANK] terminate upon the final payment of indebtedness owed to Licensor by Licensee, except as provided herein. This License Agreement and Licensee's rights to the Service Mark may also be terminated by Licensor upon failure, after sixty (60) days written notice, to cure any material default by Licensee hereunder. A material default is any event or action by Licensee that could or would materially affect the title, validity, quality or goodwill associated with the Service Mark. Any dispute regarding the definition of or substance of a material default shall be submitted to binding arbitration. -7- 8 15. Immediately upon the termination of this License Agreement for any reason whatsoever, any rights granted by or accruing under this License Agreement shall revert to Licensor without assignment or other act on the part of Licensee, unless such act is required by law to re-vest such rights in Licensor, in which latter event Licensee agrees and undertakes that it will do, or cause to be done, whatever may be necessary to make such reversion effective. Also, upon termination of this License Agreement for any reason whatsoever, Licensee agrees that except as herein otherwise provided, it will immediately cease and desist from all use of the Service Mark. 16. This License Agreement and everything herein contained shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto, but shall not be assigned, transferred, conveyed or encumbered by Licensee, except upon prior written authorization and consent of Licensor, or as otherwise provided herein. 17. The waiver by either party hereto of any breach by the other party of any term or condition hereof shall not be deemed a waiver of any subsequent breach of such term or condition or any other term or condition. No provision of this License Agreement shall be deemed to have been waived or modified unless such waiver or modification is evidenced by a written instrument which is signed by the party hereto against whom such waiver or modification is sought to be enforced. -8- 9 18. This License Agreement contains the entire understanding between the parties relating to the subject matter hereof and none of the provisions of this License Agreement or exhibits hereto may be altered, modified, or amended in any way except by an instrument in writing signed by all of the parties hereto. 19. Any notice required or desired to be given hereunder shall be in writing and shall be either personally served, or delivered by United States mail, certified or registered, postage prepaid, addressed as follows: If to Licensor: Pasta Acquisition Co. c/o Watermarc Food Management Co. 10777 Westheimer, Suite 1030 Houston, Texas 77042 Attn: Angelo Pitillo, President Copy to: Bennett G. Fisher Horan & Devlin, P.C. 1300 Post Oak Blvd., Suite 2200 Houston, Texas 77056 If to Licensee: Ghulam M. Bombaywala 10777 Westheimer, Suite 1030 Houston, Texas 77042 Copy to: Kelly, Sutter, Mount & Kendrick, P.C. 1600 Smith Street, Suite 3700 Houston, Texas 77002 Attn: Philip M. Mount or at such other address as may be designated by notice in writing to the other party. Any notice hereunder by mail shall be deemed to have been given on the date the same is received. -9- 10 20. This License Agreement is made and entered into in Houston, Harris County, Texas and shall be governed by the laws of the State of Texas. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound have caused this License Agreement to be executed in multiple originals as of the day here first above written. Licensor: Licensee: Pasta Acquisition Co. By: -------------------------- -------------------------- Angelo Pitillo, President Ghulam M. Bombaywala -10- 11 NON-COMPETE AND LICENSE AGREEMENT THIS NON-COMPETE AND LICENSE AGREEMENT (the "Agreement") is made and entered into to be effective as of the 17th day of September, 1993 by and between THE ORIGINAL PASTA CO., a Texas corporation ("Company") and JAMES HILLYER ("Hillyer"). W I T N E S S E T H: WHEREAS, by Letter Agreement dated of even date herewith (the "Letter Agreement"), the Company has agreed to purchase certain assets owned by Tomato One, Inc. and used by such corporation in the operation of a restaurant known as "The Original Pasta Co."; WHEREAS, Hillyer is the President and a shareholder of Tomato One, Inc. and, as such, is a party to the Letter Agreement; and WHEREAS, in order to induce the Company to enter into the Letter Agreement, Hillyer agreed to execute this Agreement containing certain non-compete provisions and, in order to induce Hillyer to agree to convey the assets of the restaurant described above, the Company agreed to grant the license according to the provisions described herein. NOW THEREFORE, for and in consideration of the foregoing premises and agreements and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. CONSIDERATION. Both parties acknowledge that this Agreement is being entered into pursuant to the terms of the Letter Agreement and in order to induce each party hereto to execute the Letter Agreement, that irrevocable harm and damage will be done to the Company in the event that Hillyer competes with the Company in the areas described herein. 2. TERMS OF COVENANT NOT TO COMPETE. The provisions of this Agreement shall be effective from September 17, 1993 and shall continue until September 17, 1998. During such period of time, Hillyer agrees that he shall not engage in the activities described below within a five (5) mile radius of any Italian restaurant owned or operated by the Company. Hillyer agrees that he shall not engage, directly or indirectly, in the operation, ownership or management, individually or in any capacity whatsoever, of any Italian restaurant which would compete with any Italian restaurant owned by the Company within the geographic area described above. Hillyer agrees that the time period and geographic area set forth above are reasonable and acceptable to both parties hereto and are necessary to protect the Company's legitimate business interests, given Hillyer's unique skills and that irrevocable harm and damage will be done to the Company in the event that Hillyer competes with the Company in the areas described herein. It is expressly recognized and agreed that the restrained activities set forth herein restrain Hillyer's 12 5. ENTIRE AGREEMENT. This Agreement and the Letter Agreement set forth the entire agreement between the parties as to the matters covered herein and supersedes and replaces any prior understanding, agreement or statements (written or oral). This Agreement shall not be amended or modified without the written consent of both parties hereto. 6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Texas. IN WITNESS WHEREOF, the undersigned have executed this Agreement to be effective as of the 17th day of September, 1993. THE ORIGINAL PASTA CO. By: /s/ GHULAM M. BOMBAYWALA ------------------------------ Ghulam M. Bombaywala, President /s/ JAMES HILLYER --------------------------------- James Hillyer -3- 13 Page 01 of 01 FILING RECEIPT FOR TRADEMARK APPLICATION 05/10/95 Receipt on the DATE OF FILING of the application for registration and filing fees is acknowledged for the mark identified below. The DATE OF FILING is contingent upon the collection of any payment made by check or draft. Your application will be considered in which it was received and you will be notified as to the examination thereof. Correspondence should be expected from the Patent and Trademark Offices in approximately 06 months. When inquiring about this application, include the SERIAL NUMBER, DATE OF FILING, OWNER NAME AND MARK. TMPRE Mark A. Oathout ATTORNEY 5615 Kirby Drive, Suite 508 REFERENCE NUMBER Houston, TX 77005 ORIG001 *************************************************************************** * * * PLEASE REVIEW THE ACCURACY OF THE FILING RECEIPT DATA. * * * * A request for correction of any information on this filing receipt * * should be submitted within 30 days to the following address. * * ASSISTANT COMMISSIONER FOR TRADEMARKS, 2900 Crystal Drive, * * Arlington, Va. 22202-3513. The correspondence should be marked to * * the attention of the Office of Program Control. The Patent and * * Trademark Office will review the request and make corrections * * when appropriate. * * * *************************************************************************** SERIAL NUMBER: 74/634115 DATE OF FILING: 02/14/1995 MARK: THE ORIGINAL PASTA CO. MARK TYPE(S): SERVICE MARK DRAWING TYPE: WORDS, LETTERS, OR NUMBERS AND DESIGN SECTION 1(A): YES SECTION 1(B): NO SECTION 44: NO - - -------------------------------------------------------------------------------- ATTORNEY: Mark A. Oathout OWNER NAME: ORIGINAL PASTA CO., INC., THE OWNER ADDRESS: 10777 Westheimer, Suite 1030 Houston TEXAS 77042 ENTITY: CORPORATION CITIZENSHIP/DOMICILE: TEXAS - - -------------------------------------------------------------------------------- INTERNATIONAL CLASS DATE OF FIRST USE DATE OF FIRST USE IN COMMERCE 042 04/00/1994 04/00/1994 ONLY THOSE DATES OF USE AND CLASSES FILED UNDER SECTION 1(A) ARE LISTED - - -------------------------------------------------------------------------------- GOODS/SERVICES BY INTERNATIONAL CLASS 042--restaurant and beverage services ALL OF THE GOODS/SERVICES IN EACH CLASS ARE LISTED - - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION MAY BE PRESENT IN THE PTD RECORDS 14 TRADEMARK MAILROOM Mark A. Oathout REC'D 5615 Kirby Drive FEB 14 1995 Suite 508 23 Houston, TX 77005 US PATENT & TRADEMARK OFFICE Identification of Paper or fee: Check N: 472; $1570.00 - - ------------------------------- TM APPLICATIONS ENCLOSED & LISTED BELOW: - - ------------------------------------------- (Nature of Document, I.D. Number, PTO Date) TM THE ORIGINAL PASTA CO. & design/Class 042 - $245 74634115 TM THE ORIGINAL PASTA CO. & design/Class 030 - $245 74634112 TM MARCO'S MEXICAN RESTAURANT & design/Class 042 - $245 74634111 TM TOTALLY BUENO! & design/Class 042 - $245 74634113 TM TOTALLY BUENO! & design/Class 030 - $245 74634114 TM AMENDMENT OF REGISTRATION N:1631944 - $100 TM WATERMARC/Class 035 - $245 74634116 15 [ATTACHED CHECK] Identification of Paper or fee: Check N: 472; $1570.00 - - ------------------------------- TM APPLICATIONS LISTED BELOW: - - ------------------------------------------- (Nature of Document, I.D. Number, PTO Date) TM THE ORIGINAL PASTA CO. & design/Class 042 - $245 TM THE ORIGINAL PASTA CO. & design/Class 030 - $245 TM MARCO'S MEXICAN RESTAURANT & design/Class 042 - $245 TM TOTALLY BUENO! & design/Class 042 - $245 TM TOTALLY BUENO! & design/Class 030 - $245 TM AMENDMENT OF REGISTRATION N:1631944 - $100 TM WATERMARC/Class 035 - $245 16 IN THE UNITED STATES PATENT AND TRADEMARK OFFICE MARK: THE ORIGINAL PASTA CO. ) TRADEMARK/SERVICE MARK APPLICATION, & design ) PRINCIPAL REGISTER WITH DECLARATION ) ) INTERNATIONAL CLASS NO.: 042 ) ) Attorney Docket No. ORIG001 TO THE ASSISTANT SECRETARY AND COMMISSIONER OF PATENTS AND TRADEMARKS: Applicant Name: THE ORIGINAL PASTA CO., INC. Applicant Business Address: 10777 Westheimer, Suite 1030 Houston, Texas 77042 Applicant Entity: Corporation-State of Incorporation: Texas Goods and/or Services: ================================================================================ Applicant requests registration of the above-identified trademark/ service mark shown in the accompanying drawing in the United States Patent and Trademark Office on the Principal Register established by the Act of July 5, 1946 (15 U.S.C. 1051 et.seq., as amended) for the following goods/services. restaurant and beverage services ================================================================================ BASIS FOR APPLICATION: Applicant has adopted and is using the mark shown in the accompanying drawing in commerce on or in connection with the above-identified goods/ services (15 U.S.C. 1051(a), as amended.) Three specimens showing the mark as used in commerce are submitted with this application. Date of first use of the mark anywhere: at least as early as April 1994 Date of first use of the mark in commerce at least as early as which the U.S. Congress may regulate: April 1994. Type of Commerce: Interstate Manner or mode of use of mark on or in connection with the goods/services: The mark is used in advertising and used other ways customary in the industry. 1 17 DECLARATION The undersigned being hereby warned that willful false statements and the like are punishable by fine or imprisonment, or both (18 U.S.C. 1001) and may jeopardize the validity of the application or document or any registration resulting therefrom, declares that declarant is properly authorized to execute this application on behalf of the applicant; that the applicant is believed to be the owner of the mark sought to be registered; that the mark is in use in interstate commerce; that no other entity, to the best of declarant's knowledge and belief, has the right to use such mark in commerce, either in the identical form or in such near resemblance as to be likely, when applied to the goods or services of such other entity, to cause confusion, or to cause mistake, or to deceive; that the specimens or facsimiles show the mark as used on or in connection with the goods or services; that the facts set forth in the application are true; and that all statements made of declarant's own knowledge are true and that all statements made on information and belief are believed to be true. THE ORIGINAL PASTA CO., INC. By: /s/ GHULAM BOMBAYWALA ---------------------------------------------------- Ghulam Bombaywala, President and Chief Executive Officer Date: /s/ Feb 9 '95 -------------------------------------------------- Mark A. Oathout 5615 Kirby Drive, Suite 508 Houston, Texas 77005 (713) 522-6565 ATTORNEY FOR APPLICANT 2 18 IN THE UNITED STATES PATENT AND TRADEMARK OFFICE IN RE APPLICATION OF: ) INTERNATIONAL CLASS NO.: 042 THE ORIGINAL PASTA CO., INC. ) ) SERIAL NO.: ) ) FILED: ) ) MARK: THE ORIGINAL PASTA CO. ) & design ) ) Attorney Docket No.: ORIG001 POWER OF ATTORNEY ----------------- Commissioner of Patents and Trademarks: Washington, D.C. 20281 Sir: The Original Pasta Co., Inc., owner of record of all right, title and interest in and to the above-identified trademark and trademark application, does hereby appoint Mark A. Oathout, Registration No. 33,747 as my attorney in the above-identified trademark application, with full power to prosecute the application and transact all business in the Patent and Trademark Office in connection therewith. Please address all further communications as follows: Mark A. Oathout 5615 Kirby Drive, Suite 508 Houston, Texas 77005 (713) 522-6565 THE ORIGINAL PASTA CO., INC. By: GHULAM BOMBAYWALA -------------------------------------------------- Ghulam Bombaywala, President and Chief Executive Officer Date: Feb 9 95 ------------------------------------------------ 3 19 APPLICANT: THE ORIGINAL PASTA CO., INC. P.O. ADDRESS: 10777 Westheimer, Suite 1030, Houston, Texas 77042 DATE OF FIRST USE: At least as early as April 1994. DATE OF FIRST USE IN COMMERCE: at least as early as April 1994. GOODS/SERVICES: restaurant and beverage services. THE ORIGINAL PASTA CO. Attorney Docket No.: ORIG001 Attorney: MARK A. OATHOUT 5615 Kirby Drive, Suite 508 Houston, Texas 77005 (713) 522-6565 4 20 Page 01 of 01 FILING RECEIPT FOR TRADEMARK APPLICATION 05/10/95 Receipt on the DATE OF FILING of the application for registration and filing fees is acknowledged for the mark identified below. The DATE OF FILING is contingent upon the collection of any payment made by check or draft. Your application will be considered in the order in which it was received and you will be notified as to the examination thereof. Correspondence should be expected from the Patent and Trademark Offices in approximately 06 months. When inquiring about this application, include the SERIAL NUMBER, DATE OF FILING, OWNER NAME AND MARK. TMPRE Mark A. Oathout ATTORNEY 5615 Kirby Drive, Suite 508 REFERENCE NUMBER Houston, TX 77005 ORIG002 *************************************************************************** * * * PLEASE REVIEW THE ACCURACY OF THE FILING RECEIPT DATA. * * * * A request for correction of any information on this filing receipt * * should be submitted within 30 days to the following address. * * ASSISTANT COMMISSIONER FOR TRADEMARKS. 2900 Crystal Drive, * * Arlington, Va. 22202-3513. The correspondence should be marked to * * the attention of the Office of Program Control. The Patent and * * Trademark Office will review the request and make corrections * * when appropriate. * * * *************************************************************************** SERIAL NUMBER: 74/634112 DATE OF FILING: 02/14/1995 MARK: THE ORIGINAL PASTA CO. MARK TYPE(S): TRADEMARK DRAWING TYPE: WORDS, LETTERS, OR NUMBERS AND DESIGN SECTION 1(A): NO SECTION 1(B): YES SECTION 44: NO - - -------------------------------------------------------------------------------- ATTORNEY: Mark A. Oathout OWNER NAME: ORIGINAL PASTA CO., INC., THE OWNER ADDRESS: 10777 Westheimer, Suite 1030 Houston TEXAS 77042 ENTITY: CORPORATION CITIZENSHIP/DOMICILE: TEXAS - - -------------------------------------------------------------------------------- INTERNATIONAL CLASS DATE OF FIRST USE DATE OF FIRST USE IN COMMERCE ONLY THOSE DATES OF USE AND CLASSES FILED UNDER SECTION 1(A) ARE LISTED - - -------------------------------------------------------------------------------- GOODS/SERVICES BY INTERNATIONAL CLASS 030--food 032--beverage products ALL OF THE GOODS/SERVICES IN EACH CLASS ARE LISTED - - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION MAY BE PRESENT IN THE PTD RECORDS 21 [ATTACHED CHECK] Identification of Paper or fee: Check N: 472; $1570.00 - - ------------------------------- TM APPLICATIONS LISTED BELOW: - - -------------------------------------------- (Nature of Document. I.D. Number, PTO Date) TM THE ORIGINAL PASTA CO. & design/Class 042 - $245 TM THE ORIGINAL PASTA CO. & design/Class 030 - $245 TM MARCO'S MEXICAN RESTAURANT & design/Class 042 - $245 TM TOTALLY BUENO! & design/Class 042 - $245 TM TOTALLY BUENO! & design/Class 030 - $245 TM AMENDMENT OF REGISTRATION N:1631944 - $100 TM WATERMARC/Class 035 - $245 22 IN THE UNITED STATES PATENT AND TRADEMARK OFFICE MARK: THE ORIGINAL PASTA CO. ) TRADEMARK/SERVICE MARK APPLICATION, & design ) PRINCIPAL REGISTER WITH DECLARATION ) ) INTERNATIONAL CLASS NO.: 030 ) ) Attorney Docket No. ORIG002 TO THE ASSISTANT SECRETARY AND COMMISSIONER OF PATENTS AND TRADEMARKS: Applicant's Name: THE ORIGINAL PASTA CO., INC. Applicant's Business Address: 10777 Westheimer, Suite 1030 Houston, Texas 77042 Applicant Entity: Corporation-State of Incorporation: Texas Goods and/or Services: ================================================================================ Applicant requests registration of the trademark/service mark shown in the accompanying drawing in the United States Patent and Trademark Office on the Principal Register established by the Act of July 5, 1946 (15 U.S.C. 1051 et. seq., as amended) for the following goods/services. food and beverage products ================================================================================ BASIS FOR APPLICATION: Applicant has a bona fide intention to use the mark shown in the accompanying drawing in commerce on or in connection with the above-identified goods/services. (15 U.S.C. 1051(b), as amended.) Intended manner or mode of use of mark on or in connection with the goods/ services: applied to commercial packaging and to be used other ways customary in the industry. 1 23 DECLARATION The undersigned being hereby warned that willful false statements and the like are punishable by fine or imprisonment, or both (18 U.S.C. 1001) and may jeopardize the validity of the application or document or any registration resulting therefrom, declares that declarant is properly authorized to execute this application on behalf of the applicant; that the applicant is believed to be the owner of the mark sought to be registered; or, if the application is being filed under 15 U.S.C. 1051(b), that the applicant is believed to be entitled to use such mark in commerce; that the applicant has a bona fide intention to use the mark in commerce on or in connection with the specified goods or services; that no other entity, to the best of declarant's knowledge and belief, has the right to use such mark in commerce, either in the identical form or in such near resemblance as to be likely, when applied to the goods or services of such other entity, to cause confusion, or to cause mistake, or to deceive; that the facts set forth in the application are true; and that all statements made of declarant's own knowledge are true and that all statements made on information and belief are believed to be true. THE ORIGINAL PASTA CO., INC. By: /s/ GHULAM BOMBAYWALA ---------------------------------------------------- Ghulam Bombaywala, President and Chief Executive Officer Date: /s/ Feb 9 '95 -------------------------------------------------- Mark A. Oathout 5615 Kirby Drive, # 508 Houston, Texas 77005 (713) 522-6565 ATTORNEY FOR APPLICANT 2 24 IN THE UNITED STATES PATENT AND TRADEMARK OFFICE IN RE APPLICATION OF: ) INTERNATIONAL CLASS NO.: 030 THE ORIGINAL PASTA CO., INC. ) ) SERIAL NO.: ) ) FILED: ) ) MARK: THE ORIGINAL PASTA CO. ) & design ) ) Attorney Docket No.: ORIG002 POWER OF ATTORNEY ----------------- Commissioner of Patents and Trademarks: Washington, D.C. 20231 Sir: The Original Pasta Co., Inc., owner of record of all right, title and interest in and to the above-identified trademark and trademark application, does hereby appoint Mark A. Oathout, Registration No. 33,747 as my attorney in the above-identified trademark application, with full power to prosecute the application and transact all business in the Patent and Trademark Office in connection therewith. Please address all further communications as follows: Mark A. Oathout 5615 Kirby Drive, Suite 508 Houston, Texas 77005 (713) 522-6565 THE ORIGINAL PASTA CO., INC. Date: Feb 9 95 By: GHULAM BOMBAYWALA -------- --------------------------------------------- Ghulam Bombaywala, President and Chief Executive Officer 3 25 APPLICANT: THE ORIGINAL PASTA CO., INC. P.O. ADDRESS: 10777 Westheimer, Suite 1030, Houston, Texas 77042 GOODS/SERVICES: food and beverage products THE ORIGINAL PASTA CO. ATTORNEY DOCKET NO.: ORIG002 ATTORNEY: MARK A. OATHOUT 5615 Kirby Drive, #508 Houston, Texas 77005 (713) 522-6565 4 EX-11.1 22 STMT REGARDING COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 2 Exhibit 11.1 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED JUNE 30, 1996 JULY 2, 1995 JULY 3, 1994 -------------- -------------- -------------- Computation of primary earnings (loss) per common and common equivalent shares: Net loss applicable to common stock ($247,890) ($7,331,421) ($8,660,572) ============== ============== ============== Weighted average number of common shares outstanding 12,040,163 8,921,543 7,894,816 ============== ============== ============== Primary loss per common share ($0.02) ($0.82) ($1.10) ============== ============== ============== Computation of earnings (loss) per common share assuming full dilution (A): Net loss applicable to common stock ($247,890) ($7,331,421) ($8,660,572) Dividends on preferred stock 296,586 294,680 300,591 Interest on 9% convertible subordinated debentures 19,530 222,660 66,000 -------------- -------------- -------------- Income (loss) assuming full dilution $ 68,226 $ (6,814,081) $ (8,293,981) ============== ============== ============== Weighted average number of shares outstanding 12,040,163 10,003,426 7,894,816 Common shares issuable from stock option plans and from warrants 3,121,633 2,814,320 1,624,900 Less shares assumed repurchased with proceeds (6,098,472) (3,620,946) (1,107,472) Shares assumed issued upon conversion of preferred stock 411,925 411,925 450,414 Shares assumed issued upon conversion of 9% subordinated debentures 43,400 43,400 134,550 -------------- -------------- -------------- Common shares outstanding assuming full dilution 9,518,649 9,652,125 8,997,208 ============== ============== ============== Earnings (loss) per common and common equivalent share assuming full dilution $ 0.01 ($0.71) ($0.92) ============== ============== ==============
(A) This calculation is submitted in accordance with the Securities and Exchange Act of 1934, Release No. 9083, although it is contrary to paragraph 40 of APB Opinion No. 15 because it produced an anti-dilutive result. EX-21.1 23 LIST OF SUBSIDIARIES 1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT BILLY BLUES FOOD CORPORATION OF COLORADO, A COLORADO CORPORATION BILLY BLUES FOOD CORPORATION OF ARIZONA, AN ARIZONA CORPORATION BILLY BLUES HOLDING, S.A., A SWISS CORPORATION J II Z, INC., A TEXAS CORPORATION LCU, INC., A TEXAS CORPORATION MARCO'S MEXICAN RESTAURANTS, INC., A TEXAS CORPORATION PETE'S HOSPITALITY CO., INC., A WASHINGTON CORPORATION THE ORIGINAL PASTA CO., A TEXAS CORPORATION EX-27 24 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) CONSOLIDATED FINANCIAL STATEMENTS IN FORM 10-K. YEAR JUN-30-1996 JUL-03-1995 JUN-30-1996 463,166 0 650,184 0 715,538 1,934,667 17,827,257 8,498,731 25,864,710 6,419,570 0 671,682 0 329,540 7,240,075 25,864,710 40,129,443 40,129,443 12,473,652 40,101,920 0 0 850,224 48,696 0 48,696 0 0 0 48,696 (.02) .01
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