-----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, HJH1y7q1WwMeHAGsTh9chSoNQV7J4GqxpWC6mRUvQdIhqtV7qPzQrBMkyqvd6mS7 GvIY6GtS2+h2yJBLujNfzg== 0000950129-97-004182.txt : 19971015 0000950129-97-004182.hdr.sgml : 19971015 ACCESSION NUMBER: 0000950129-97-004182 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19970629 FILED AS OF DATE: 19971014 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATERMARC FOOD MANAGEMENT CO CENTRAL INDEX KEY: 0000884131 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 742605598 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20143 FILM NUMBER: 97695151 BUSINESS ADDRESS: STREET 1: C/O BILLY BLUES STREET 2: 11111 WILCREST GREEN, SUITE 350 CITY: HOUSTON STATE: TX ZIP: 77042 BUSINESS PHONE: 7137830500 MAIL ADDRESS: STREET 1: C/O BILLY BLUES STREET 2: 11111 WILCREST GREEN, SUITE 350 CITY: HOUSTON STATE: TX ZIP: 77042 FORMER COMPANY: FORMER CONFORMED NAME: BILLY BLUES FOOD CORP DATE OF NAME CHANGE: 19930328 10-K 1 WATERMARC FOOD MANAGEMENT CO. - DATED 06/29/97 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 29, 1997 Commission File No. 0-20143 WATERMARC FOOD MANAGEMENT CO. (Name of Registrant in Its Charter) TEXAS 74-2605598 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 11111 WILCREST GREEN, SUITE 350 77042 HOUSTON, TEXAS (Zip Code) (Address of Principal Executive Offices) Issuer's Telephone Number, Including Area Code: (713) 783-0500 ------------ Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, $.05 PAR VALUE PER SHARE (Title of Class) 9% CUMULATIVE PREFERRED STOCK, $1.00 PAR VALUE PER SHARE (Title of Class) ------------ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ----- As of October 1, 1997, the aggregate market value of the Common Stock held by non-affiliates of the issuer was approximately $1,706,000 based on the average bid and ask prices of $.22 per share of Common Stock as quoted in the NASDAQ SmallCap Market. As of October 1, 1997, 14,263,230 shares of the issuer's Common Stock and 329,540 shares of the issuer's Preferred Stock were outstanding, respectively. DOCUMENTS INCORPORATED BY REFERENCE No documents, other than certain exhibits, have been incorporated by reference in this report. ================================================================================ 2 ITEM 1. DESCRIPTION OF BUSINESS. GENERAL As of June 29, 1997, Watermarc Food Management Co., a Texas corporation, (the "Company"), owned and operated, both directly and through subsidiaries, full-service restaurants under the names Marco's Mexican Restaurants (the "Marco's Restaurants"), The Original Pasta Co. Restaurants (the "Pasta Co. Restaurants"), Billy Blues Barbecue Bar & Grill (the "Billy Blues Restaurant") and Longhorn Cafe. During the first quarter 1998, the Longhorn Cafe was sold to an unaffiliated party. See "Concepts and Menus". The Company was organized as Billy Blues Food Corporation, a Texas corporation, on June 17, 1991 to develop, own and operate restaurants and to produce and market a uniquely flavored barbecue sauce. In March of 1995, the name was changed to Watermarc Food Management Co. In the fourth quarter of fiscal 1994, the Company acquired twenty one Marco's Restaurants. Two Marco's Restaurants have been subsequently built and one non-performing Marco's Restaurant sold. In the third quarter of fiscal 1994, the Company acquired Chris' & Pitt's Bar-B-Q Sauce, a medium priced barbecue sauce product line. In the third quarter of fiscal 1996, the Company acquired ten Pasta Co. Restaurants. Furthermore, the Company opened three new Pasta Co. restaurants in fiscal 1996 and four new restaurants in fiscal 1997. Unless the context requires otherwise, references to the "Company" refer to Watermarc Food Management Co., its predecessors and subsidiaries. CONCEPTS AND MENUS MARCO'S RESTAURANTS. Marco's Restaurants are full service restaurants that feature high quality, moderately priced Mexican food. The style and decor of Marco's Restaurants are distinctive and colorful and are designed to present a Mexican style motif in a family oriented environment. Marco's Restaurants have a standardized menu with a variety of offerings, including Black Angus beef fajitas, tacos, enchiladas and numerous appetizers. Entrees range in price from $5.49 to $12.99. Marco's Restaurants also offer a full service bar specializing in various flavored margaritas, as well as numerous brands of Mexican and domestic beer and wine. The restaurants are open for lunch and dinner seven days a week. A typical Marco's Restaurant consists of 4,000 to 6,000 square feet for dining and bar facilities, and has a seating capacity for 175 to 300 patrons. The decorative scheme in each restaurant incorporates a centrally located Tortilla Room where tortillas are prepared and served fresh to the customer. The exterior design of the Marco's Restaurants normally conforms to the shopping center in which it is located. The restaurants have varying floor plans and configurations. As of June 29, 1997, the Company had a total of twenty-two Marco's Restaurants in operation in Southeast Texas, including the Houston metropolitan area, College Station, Victoria, and Lake Jackson, Texas. PASTA CO. RESTAURANTS. Pasta Co. Restaurants are distinctive, colorful, Italian-style, family oriented restaurants that feature full-service and offer moderately priced food and beverages. The restaurants include a brick oven for the preparation of pizzas, as well as a cooking area where entrees are produced. Both the oven and the cooking area are visible to customers. The Pasta Co. Restaurants offer a wide variety of appetizers, soups, salads, pasta and other entrees, pizzas, desserts and beverages. The restaurants specialize in generous portions at reasonable prices, with any item on the menu available for $7.99 or less. A children's menu is also available. Beverages sold consist of coffee, tea, sodas, bottled water, espresso, cappuccino, beer and wine. Most menu items are available for take-out. As of June 29, 1997, the Company had a total of seventeen Pasta Co. Restaurants in operation, all of which were located in Southeast Texas. The exterior of each of the locations generally conforms to that of the center of which it is located, with the restaurant's name and logo prominently displayed. In addition, numerous windows make the restaurants more inviting from the outside and lighter and brighter on the inside. Decor items, ingredients and produce displayed on shelves and cases throughout the restaurants give the impression of an open-air Italian marketplace. Typical units are approximately 3,600 to 4,000 square feet each, and most have an outside patio of approximately 400 additional square feet. The units have seating capacities of 160 to 200 persons. The restaurants are open for lunch and dinner seven days a week. BILLY BLUES RESTAURANT AND LONGHORN CAFE. Billy Blues Restaurant and Longhorn Cafe (collectively, the "Barbecue Restaurants") generate an exciting and vibrant "Texas Roadhouse" ambiance enhanced by recorded and -2- 3 live music, Texas artifacts, neon signage and other memorabilia. The Company's Barbecue Restaurants feature Texas-style barbecue, steak and other entrees served in an informal, lively atmosphere intended to appeal to a broad customer base. The Barbecue Restaurants offer a limited, moderately priced menu of freshly prepared foods made with high quality ingredients, with full bar service in a casual atmosphere. As of June 29, 1997, two Barbecue Restaurants, one operated as Billy Blues Restaurant and one as Longhorn Cafe, were in operation in Texas. The Billy Blues Restaurant consists of approximately 8,000 square feet for dining and bar/entertainment facilities. The restaurant has dining and bar seating capacity for 240 customers and features a night club called the "Blues Room" which seats an additional 200 customers. A section of the restaurant is used for the display and retail sale of Billy Blues Barbecue Sauce and novelty items featuring the Billy Blues name and logo, including T-shirts, caps and sweat shirts. The decorative scheme incorporates memorabilia associated with blues music, focusing on legendary blues figures, photographs, musical instruments and framed newspaper and other articles relating to the blues musical culture. The Billy Blues Restaurant serves dinner with full bar service, featuring a moderately priced, limited menu of high quality smoked barbecue and other entrees. Entrees range in price from $7.95 to $16.95. In the Blues Room, full bar service is provided and patrons can enjoy a light snack or an entire meal with cocktails while being entertained by a blues band or recorded blues music. The Longhorn Cafe serves lunch and dinner and features a variety of high quality, moderately priced menu items featuring Black Angus steaks, fresh grilled red fish and homemade stuffed jalapenos with full bar service and also offers several specialty appetizers and homemade desserts. The specialty is chicken fried steak served with cream gravy and french fries. Entrees range in price from $5.95 to $14.95. The decor includes wooden booths and tables with an open layout permitting customers to view the bar and Texas memorabilia. During the first quarter of fiscal 1998, the Longhorn Cafe was sold to an unaffiliated party. FOOD PRODUCTS. The Company also produces and markets two brands of barbecue sauce products and a spice rub, Billy Blues Barbecue Sauce, Chris' & Pitt's Bar-B-Q Sauce and Chris' & Pitt's Spice Rub. Billy Blues Barbecue Sauce is a tangy, coffee-spiked formulation packaged in three different flavors and is available in supermarkets and other retail outlets. Chris' & Pitt's Bar-B-Q Sauce is packaged in six different flavors and is available in supermarkets and other retail outlets located primarily in the State of California. The Company also markets and packages its Chris' & Pitt's Bar-B-Q Sauce products for food service distribution to restaurant chains and commissaries. The Company periodically engages in advertising campaigns to enhance customer awareness of barbecue sauce products in the areas where they are currently available in supermarkets and other retail outlets. -3- 4 The Company currently engages, on an order to order basis, an unaffiliated food processor and packaging company (the "Co-Packer") in Riverside, California for the processing and packaging of its food product lines. Under its production arrangement with the Co-Packer, the Co-Packer procures all ingredients and packaging materials, and performs product preparation and packing at an agreed upon price. The Company engages food brokers to assist in selling its products to regional and national supermarket chains. The Company generally pays its food brokers a 5% commission on the amount they sell. To date, the Company's food brokers have accounted for most of the Company's sales to supermarket chains. To achieve greater market penetration, the Company intends to expand its food broker network. The Company utilizes a distribution warehouse in California and another in Texas for storage of products. The Company pays handling and storage fees based on the actual monthly volume shipped to the warehouse. The Company contracts with independent freight carriers for the delivery of its product lines, or provides special pricing for customers who pick up the product at a storage warehouse. The Company's product lines are distributed to supermarkets either through: (1) direct shipment to a supermarket chain warehouse which then distributes to its individual supermarkets from the warehouse; (2) direct shipment to an independent grocery warehouse, which performs the same function as a supermarket chain warehouse for a fee; or (3) an independent food distributor who picks up the products at the storage warehouse and delivers directly to the supermarkets. A fee is paid to the food distributor based on volume. The Company generally sells its food products pursuant to customer purchase orders and usually fills the orders within approximately ten days of receipt. Because orders are filled shortly after receipt, backlog is not material to the Company's business. Food product revenues, as a percent of total revenues, for the last three fiscal years ended June 29, 1997, June 30, 1996 and July 2, 1995 were 4.9%, 7.2% and 8.1% respectively. Even though the Company believes it has achieved limited consumer awareness and market acceptance of its food products, there can be no assurance that either of the Company's product lines will ever achieve significant consumer acceptance or that supermarket and other retail chains will re-order the Company's food products. GROWTH STRATEGY Historically, the Company's primary growth strategy has been to expand its restaurant and barbecue sauce operations through internal growth and by acquiring businesses with concepts and themes compatible with the Company's operations. This strategy was evidenced by the Company's acquisition in March 1994 of the Chris & Pitts Bar-B-Q Sauce line, in July 1994 of Marco's Mexican Restaurants, Inc. which owned and operated twenty one Marco's Restaurants, and in January 1996 of The Original Pasta Co. which owned and operated ten Pasta Co. Restaurants. In addition, the Company has developed a franchise program to expand the Pasta Co. restaurant concept outside of the Houston, Texas metropolitan area. As of June 29, 1997 the Company had not yet sold any franchises. During the fourth quarter of fiscal 1997, management was reorganized. Previously successful management was engaged to restore the Company to profitability. Ghulam M. Bombaywala, Chairman of the Board and Chief Executive Officer, has been elected President and Chief Operating Officer of the Company. The Company's new growth strategy for fiscal 1998 includes the following: o Controlling food and labor costs. o Outsourcing labor intensive food preparation processes. o Increasing restaurant sales through targeted marketing. o Instituting store management incentives correlating to increased store performance. o Increasing customer satisfaction with intensive employee training. o Remodeling certain Marco's Restaurants. o Franchising Marco's Restaurants and Pasta Co. Restaurants. o Closing or selling non-performing restaurants. o Favorably renegotiating expiring restaurant leases. -4- 5 MARCO'S RESTAURANTS. During fiscal 1997, the Company remodeled three existing restaurants. The restaurants were remodeled after the new prototype which was introduced in the most recently opened units. These units are brighter, more upbeat, more entertaining and are expected to position Marco's Restaurants to be more competitive. The Company plans to continue remodeling Marco's restaurants from available cash flow at a rate of one restaurant every three to four months. Additionally, a training coordinator will be focusing on intensive employee training to better satisfy Marco's customers. In June 1997, the Company sold one Marco's Restaurant location due to poor operating performance. The restaurant continues to be operated as a Marco's Restaurant pursuant to a license agreement. The Company anticipates selling three Marco's Restaurants during fiscal 1998. PASTA CO. RESTAURANTS. During fiscal 1997, four new Pasta Co. Restaurants were opened in Texas. One new Pasta Co. restaurant was opened in the first quarter of fiscal 1998. Growth in the Pasta Co. concept should be achieved by concentrating on increasing customer satisfaction, focusing on controlling food costs and outsourcing labor intensive food preparation processes as a measure to reduce costs and maximize revenue. Outsourcing products will also aid in achieving product consistency from restaurant to restaurant. BARBECUE RESTAURANTS. The Company does not plan to expand its Barbecue Restaurant concepts. As a measure to reduce costs and maximize revenues, the Billy Blues Restaurant no longer serves lunch. It is now open exclusively for dinner and evening entertainment. During the first quarter of fiscal 1998, the Longhorn Cafe was sold to an unaffiliated party. The Company anticipates selling the Billy Blues Restaurant in fiscal 1998. FRANCHISING PROGRAM. To date, no restaurants have been franchised. The Company intends to establish an aggressive franchise program for Marco's Restaurants and Pasta Co. Restaurants during fiscal 1998. Management believes that franchising will provide significant growth for the Company in upcoming years. FOOD PRODUCTS. The Company currently markets two brands of barbecue sauce products and a spice rub. The Company's strategy to increase food product sales includes reinforcing existing markets, including recapturing lost commercial customers, expanding distribution to new market areas (primarily in the Sun Belt states), introducing more aggressive marketing programs, adding methods of distribution and developing new products. PROPOSED ACQUISITIONS. The Company continues to investigate possible acquisition candidates in the restaurant industry, but does not currently have any arrangements, undertakings or commitments with respect to any acquisition. RESTAURANT LOCATIONS AND SITE SELECTION The Company believes that the locations of its restaurants are critical to its long-term success. Senior management devotes significant time and resources to analyzing each respective site. The Company utilizes, and continually enhances, specific site selection criteria which focuses on local demographics such as target population, density and household income levels; specific site characteristics such as visibility, accessibility and traffic volume; proximity to activity centers; parking availability; and potential competition in the area. Currently, all restaurants are located in Texas. The Company periodically reevaluates restaurant sites to ensure that site selection attributes have not deteriorated below minimum standards. In the event site deterioration occurs, the Company makes a concerted effort to improve the restaurant's performance by providing physical, operating and marketing enhancements unique to each restaurant's situation. If efforts to restore the restaurant's performance to acceptable minimum standards are unsuccessful, the Company considers relocation to a proximate, more desirable site, or evaluates closing the restaurant if the Company's criteria, such as return on investment and area demographic data, do not support a relocation. Since inception through June 29, 1997, the Company has closed or sold nine restaurants, including four in fiscal 1997, which were performing below the Company's standards primarily due to declining trade area demographics. In addition, the Board of Directors of the Company in late fiscal 1997 approved a strategic plan targeted to support the Company's long-term growth objectives. The plan focuses on continued -5- 6 development of those restaurant concepts that have the greatest return potential for the Company and its shareholders. In conjunction with this plan, one concept, Pete's Hospitality Co., Inc. and its related restaurants, was sold to the Company's former President (see "Item 13. Certain Relationships and Related Transactions") and the Company anticipates selling its barbecue restaurant concept. These and future closings will be key to a successful reallocation of resources to the stronger performing concepts. The following table provides information with respect to the restaurants which were owned and operated by the Company as of June 29, 1997:
NO. OF APPROXIMATE CONCEPT UNITS SQUARE FOOTAGE ------- ----- -------------- Marco's Mexican Restaurants 22 3,850 - 6,900 The Original Pasta Co. 17 3,600 - 4,200 Billy Blues Bar & Grill 1 8,000 Longhorn Cafe 1 2,500
UNIT ECONOMICS The average initial cash investment (including leasehold improvements, furniture and fixtures, equipment, food and beverage inventory, and other pre- opening expenses) for each Marco's Restaurant and Pasta Co. Restaurant is approximately $350,000 to $500,000 with pre-opening expenses projected to be approximately $50,000 for each future restaurant. All of the Company's restaurants are leased. RESTAURANT MANAGEMENT AND OPERATIONS MANAGEMENT AND EMPLOYEES. The management staff of the Company's restaurants consists of a general manager and assistant managers. Each Marco's Restaurant employs 20 to 30 hourly employees. Each Pasta Co. Restaurant employs approximately 40 to 50 hourly employees. Each Barbecue Restaurant employs approximately 50 to 70 hourly employees. At all of the restaurants, the general manager has the primary responsibility for the day to day operations of the restaurant and is required to comply with Company established operating standards. Many of the hourly employees work part-time. SUPERVISION AND TRAINING. The Company employs general managers with significant experience in the food service industry. Executive management of the Company regularly visits the restaurants to insure that the Company's concept, strategy and standards of quality are being adhered to in all aspects of restaurant operations. The restaurant general manager and designated personnel of the Company are responsible for selecting and training the employees for each restaurant. The training period for new employees lasts approximately five days and is characterized by on the job supervision by an in store trainer. Ongoing employee training remains the responsibility of the restaurant general manager. Written tests and physical observation are used to evaluate each employee's performance. In addition, a training coordinator has been hired to focus on improving customer satisfaction through better employee training for the Marco's Restaurant concept. PURCHASING AND SUPPLIES. Management negotiates directly with suppliers for food and beverage products to insure uniform quality and adequate supplies and to obtain competitive prices. The Company purchases substantially all food and beverage products and novelty items from local or national suppliers. The Company does not anticipate any difficulty in continuing to obtain food and beverage requirements within the localities in which the Company currently operates. ADVERTISING AND PROMOTION. The Company pursues advertising and promotional opportunities within each of its restaurant's geographic locales, relying principally on the direct mailing of coupons, newspaper, and radio. In addition, the Company has instituted an intense, targeted marketing effort focusing on individual locations with poor operating performance. Location specific research and targeted marketing efforts are being implemented. RESTAURANT REPORTING. Each restaurant has a stand-alone point of sales system monitored by its management. The restaurant's staff prepares daily cash and other reports regarding sales, inventory, sales mix, labor cost and -6- 7 the number of customers. Daily reports are forwarded to the Company's corporate offices in Houston, Texas where weekly summaries of all reported data are analyzed by the Company's key management. COMPETITION The restaurant industry is intensely competitive with respect to price, service, location and food quality. There are many well established competitors with substantially greater financial and other resources than the Company. Most of the Company's competitors have been in existence for substantially longer periods than the Company and are more established in the markets where the Company's restaurants are located. The Company's competitors have achieved significant national, regional and local brand name and product recognition and engage in extensive advertising and promotional programs, both generally and in response to efforts by additional competitors to enter new markets or introduce new products. The restaurant business is often characterized by a high failure rate and affected by changes in consumer tastes and discretionary spending, national, regional and local economic conditions, demographic trends, traffic patterns, and the type, number and location of competing restaurants. Any change in these factors could adversely affect the Company's restaurant operations. Multi-unit foodservice operations such as those of the Company can also be substantially affected by adverse publicity resulting from food quality, illness, injury, health concerns, or operating issues stemming from a single restaurant. The Company attempts to manage these factors, but the occurrence of any one of these factors could cause the Company to be adversely affected. TRADEMARKS The mark "Marco's Mexican Restaurants" was registered in the U.S. Patent and Trademark Office on January 15, 1991 and in the State of Texas in 1987. The mark "The Original Pasta Co." was registered in the U.S. Patent and Trademark Office on October 8, 1996. The Billy Blues Barbecue Bar & Grill and Billy Blues Barbecue Sauce logos were registered in the State of Texas in 1991. The Chris' & Pitt's mark and logo were registered prior to the Company's acquisition of the Chris' & Pitt's product line. The mark "Billy Blues" was registered in the U.S. Patent and Trademark Office on November 17, 1992 as a service mark for restaurant and bar services. The mark "Billy Blues" as a trademark for the Company's barbecue sauce was registered in the U.S. Patent and Trademark Office on October 13, 1992. The Company has no reason to believe that there are any conflicting rights which might impair the Company's use of its marks; however, there can be no assurance that such conflicting rights do not exist. The Company believes that these trademarks are valuable to the operation of its restaurants and marketing of its food products. The Company's policy is to pursue registration of its marks whenever possible and to vigorously oppose any infringement of its marks. GOVERNMENT REGULATION RESTAURANT OPERATIONS. The Company is subject to various federal, state and local laws and regulations and administrative policies affecting its business and must comply with provisions regulating health and sanitation, equal employment, minimum wages and licensing for the sale of food and alcoholic beverages. Difficulties or failures in obtaining or maintaining the required licenses or approvals could adversely affect the operations of existing restaurants or delay or prevent the opening of new restaurants. Approximately 15% of the revenues generated by the Marco's Restaurants are attributable to the sale of alcoholic beverages, while approximately 7% of the revenues generated by the Pasta Co. Restaurant and approximately 25% of the revenues generated by the Barbecue Restaurants are the result of the sale of alcoholic beverages. The service of alcoholic beverages is material to the business of the Company. Alcoholic beverage control regulations require each of the Company's restaurants to apply to a state authority and, in certain locations, county or municipal authorities, for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. The Company does not anticipate experiencing any delays or other problems in obtaining or renewing licenses or permits to sell alcoholic beverages; however, the failure to receive or retain, or a delay in obtaining, a liquor license in a particular location could adversely affect the Company's operations in that location. The Company -7- 8 may be subject in certain states to "dram-shop" statutes or common laws, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability insurance. The Company's restaurant operations are also subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits; the Immigration and Naturalization Act, which governs employee citizenship requirements; and the Americans with Disabilities Act, which governs non-discriminating employment practices and reasonable accommodations for disabled persons, both employees and customers. Significant numbers of the Company's food service and preparation personnel are paid at rates related to the federal minimum wage and, accordingly, future increases in the minimum wage or decreases in the allowable tip credit will increase the Company's labor costs. FOOD PRODUCT OPERATIONS. The Company's and the Co-Packer's food processing activities are subject to extensive regulation by the United States Food and Drug Administration, and by other state and local authorities. The Company believes that it is currently in compliance with all governmental laws and regulations and that the Company has all material permits and licenses relating to its food processing operations. The Company has no reason to believe that the Co-Packer is not in substantial compliance with all material governmental laws and regulations and believes that the Co-Packer has all material permits and licenses relating to its food processing operations. Nevertheless, there can be no assurance that the Company or the Co-Packer will continue to be in substantial compliance with current laws and regulations or that the Company or the Co-Packer will be able to comply with any future laws and regulations. Failure by the Company or the Co-Packer to comply with applicable laws and regulations could subject the Company to civil remedies, including fines, injunctions, recalls or seizures which could have a material adverse effect on the Company. Federal, state and local environmental regulations are not expected to have a material effect on the Company's operations, but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors may restrict the Company's site selection for new restaurants. WORKERS' COMPENSATION. The Company has elected to be a non-subscriber under the Texas Workers' Compensation Act. The Company offers, at no cost to the employees, a Voluntary Employee Injury Benefit Plan ("Benefit Plan") which provides certain benefits to employees injured during the course and scope of their employment. The Benefit Plan is funded out of the general assets of the Company. Management believes that the Benefit Plan will decrease the Company's overall net cost in future periods. Management intends to review this election on an annual basis. The Company does not believe it would encounter any impediments if it elected in the future to become a subscriber under the Texas Workers' Compensation Act. The Company does not believe that personal injury claims by current or former employees of the Company, either individually or in the aggregate, will have a material adverse effect on the Company, its properties or business. The Company does not maintain a reserve fund for potential claims, but carries catastrophic loss coverage with a limit of $1,000,000 and a deductible of $150,000 per incident. EMPLOYEES At October 1, 1997, the Company employed 1,840 persons of whom 30 are management and administrative personnel, 130 are restaurant management personnel, with the remainder serving as hourly restaurant employees. The Company intends to increase its management and clerical staff as needed. The Company is not a party to a collective bargaining agreement and considers its relationship with its employees to be satisfactory. ITEM 2. DESCRIPTION OF PROPERTY. As of June 29, 1997, the Company leases all of its Marco's Restaurants, Pasta Co. Restaurants and Barbecue Restaurants. The leases have terms that expire between 1997 and 2012 and have an average remaining term of approximately seven years. The Company obtains real estate and develops its restaurants using three methods: (i) leasing land and constructing the restaurant (a "ground lease"); (ii) leasing the land and building (a -8- 9 "land/building lease"); or (iii) leasing a "shell" where the landlord may or may not contribute to the construction of the improvements (a "shell lease"). The method the Company pursues is determined on an individual site basis, depending on the cost and location of the property and the negotiations between the Company and the owner of the desired property. Of the Company's restaurants, one is a ground lease, four are land/building leases, and thirty- six are shell leases. The leases generally provide for rental rates based upon a stated minimum rental and percentage rent payments based upon a certain sales base. The Company's monthly lease cost for its restaurants ranges from approximately $4,000 to $9,000 per month. Under substantially all of its leases, the Company is required to pay real estate taxes, insurance, and maintenance expenses. The Company's executive office is located in approximately 12,300 square feet of leased space in Houston, Texas. The Company considers that its properties are suitable, adequate, well- maintained and sufficient for the operations contemplated. ITEM 3. LEGAL PROCEEDINGS. During the second quarter of fiscal 1997, a lawsuit filed by John Coleman, a former officer of the Company, for wrongful termination, intentional infliction of emotional distress and breach of employment contract was settled out of court for an immaterial amount payable to Mr. Coleman. The Company does not admit any liability by settling this case. The Company believes that it was in its best interests financially, based on projected defense costs, to settle this case. The Company is not a party to any litigation other than ordinary routine matters which are incidental to the Company's business. The Company believes that no current legal proceedings, individually or in the aggregate, will have a material adverse effect upon the Company or its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders of the Company during the fourth quarter of fiscal 1997. -9- 10 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the NASDAQ SmallCap Market under the symbol of WAMA. The following table sets forth the range of low and high closing bid prices for the Company's Common Stock for the periods indicated as reported by the National Quotation Bureau, Incorporated. These prices represent inter-dealer prices, without adjustment for retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions.
Common Stock Bid Price -------------- Fiscal Year 1996 Low High ---------------- ---- ---- First Quarter . . . . . . . . . . . . . . . . . . . . 1.56 2.50 Second Quarter . . . . . . . . . . . . . . . . . . . . 1.25 2.06 Third Quarter . . . . . . . . . . . . . . . . . . . . .94 1.88 Fourth Quarter . . . . . . . . . . . . . . . . . . . . .69 1.25 Fiscal Year 1997 Low High ---------------- ---- ---- First Quarter . . . . . . . . . . . . . . . . . . . . .50 1.06 Second Quarter . . . . . . . . . . . . . . . . . . . . .47 1.31 Third Quarter . . . . . . . . . . . . . . . . . . . . .28 .75 Fourth Quarter . . . . . . . . . . . . . . . . . . . . .22 .50
On October 1, 1997, the closing bid price for the Company's Common Stock was $.22 per share. As of October 1, 1997, 14,263,230 shares of the Company's Common Stock were outstanding; provided, however, subject to certain conditions, the Company has agreed to issue to Ghulam M. Bombaywala, Chairman of the Board, Chief Executive Officer and a director of the Company, 7,500,000 shares of the Company's Common Stock. (See "Certain Relationships and Related Transactions.") The Company believes that the actual number of security holders of the Company's Common Stock is approximately 2,000 holders, including beneficial owners. The Company has neither paid nor declared any cash dividends on its shares of Common Stock since inception. The Board of Directors intends to retain earnings of the Company to support operations and to finance expansion and does not intend to pay dividends on its shares of Common Stock for the foreseeable future. The payment of cash dividends in the future will depend upon such factors as earnings levels, capital requirements, the Company's financial condition and other factors deemed relevant by the Board of Directors. The Company is required to pay dividends on its Preferred Stock before any dividends can be paid on the Common Stock. With respect to recent sales of unregistered securities and a description thereof, reference is made to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources. Recent amendments adopted to the listing requirements for NASDAQ Small Cap companies may result in the delisting of the Company's Common Stock, Preferred Stock and Warrants from NASDAQ. To remain listed on NASDAQ, the Company's shares must trade at $1.00 or above. The Company plans a substantial reverse stock split in fiscal 1998 to attempt to maintain its NASDAQ listing. There is no assurance that the reverse stock split will have the intended effect of increasing the market price for the Company's Common Stock. In addition, NASDAQ has proposed certain other conditions for continued listing which may not be met by the Company, including a standard for minimum tangible net worth of $2,000,000 which is not met by the Company at this time and which cannot be met by the Company without obtaining substantial equity capital. If the Company is unable to maintain its listings on the NASDAQ Small Cap Market, it will pursue the trading of its shares on the OTC Bulletin Board or otherwise in the non-NASDAQ over-the-counter market in what is commonly referred to as the electronic bulletin board and the "pink sheets". If the Company is unable to maintain its NASDAQ Small Cap listing, shareholders may find it more difficult to dispose of or obtain accurate quotations as to the value of the Company's securities. -10- 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
FISCAL YEAR ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 (in thousands, except per share data) OPERATING DATA: Revenues $49,125 $40,129 $37,652 $37,008 $27,712 Net Income (Loss) (10,913) $49 ($7,037) ($8,360) ($4,483) Net Income (Loss) Per Common Share * ($0.83) ($0.02) ($0.82) ($1.10) ($0.68) BALANCE SHEET DATA (end of period) Total Assets $16,715 $25,865 $17,672 $20,133 $12,916 Long-term Debt $ 4,985 $10,768 $1,709 $1,507 $988
* After giving effect to preferred stock dividends. NOTE: Cash dividends have never been paid on Common Stock. The following lists significant items that may affect the comparability of the above selected financial data: o Early in the third quarter of fiscal 1996, ten Pasta Co. restaurants were acquired (See Item 13. Certain Relationships and Related Transactions".) The Pasta Co. contributed approximately $5 million in revenues in fiscal 1996 and approximately $14 million in revenues in fiscal 1997. o In the fourth quarter of fiscal 1995 and during fiscal 1996 four Billy Blues Restaurants and one Longhorn Cafe Restaurant were closed or sold reducing revenues for 1996 by approximately $2.5 million. o In the fourth quarter of fiscal 1994 the Marco's Restaurants were acquired. Marco's contributed approximately $22 million in revenues in fiscal 1994 and approximately $23 million in revenues in fiscal 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Effective July 1, 1994, the Company exchanged 4,600,000 shares of the Company's Common Stock for all of the issued and outstanding capital stock of Marco's Mexican Restaurants, Inc. ("Marco's"). The merger was accounted for as a pooling-of-interests and, accordingly, the Company's Consolidated Financial Statements have been restated for all periods prior to the merger to combine the financial position and results of operations of Marco's with the Company. For additional information concerning business combinations, see Note 2 to Notes to Consolidated Financial Statements. Additionally, the Company acquired The Original Pasta Co. on January 26, 1996, Pete's Hospitality on August 24, 1993 and the Chris' & Pitt's product line on March 25, 1994. These acquisitions have been accounted for as purchases and, accordingly, the Company's Consolidated Financial Statements include the results of operations of the acquired companies from their respective dates of acquisition. During fiscal 1997 the general economy was upbeat. Southeast Texas also has been rebounding from depressed times. The restaurant industry in general is supported by a positive economy yet the average failure -11- 12 rate in the restaurant business is approximately one in ten in part due to changing customer tastes, trade demographics and fierce competition. During the fiscal year the Company spent approximately $500,000 trying a new marketing strategy using television and radio and temporarily suspended coupon marketing. The Company had previously been successful using direct mail coupons and newspaper coupons. The television and radio marketing was not successful. The Company has returned to coupon marketing and has experienced a small increase in comparative sales during the first quarter of fiscal 1998 compared to the same period in fiscal 1997. The Company believes it is in a favorable position within its market with a strong price to value relationship. The Company continues to be competitive by additionally offering the consumer healthy alternatives and daily dinner/lunch specials at an attractive price. Furthermore, the Company intends to continue its remodeling of its Marco's concept. The Company utilizes a 52-53 week fiscal year which ends on the Sunday closest to June 30. References to 1997, 1996 and 1995 are all 52 week periods ended June 29, 1997, June 30, 1996 and July 2, 1995 respectively. At the end of each fiscal year, the Company had the following restaurants in operation:
Restaurants: 1997 1996 1995 - ----------- ---- ---- ---- Marco's Mexican Restaurants 22 23 22 Pasta Co. Restaurants 17 13 - Billy Blues Restaurant 1 1 3 Longhorn Cafe 1 1 2 Pete's Restaurants 0 2 2 Hotspurs 0 1 1 --- -- -- Total 41 41 30 === === ===
-12- 13 RESULTS OF OPERATIONS The following table sets forth for the periods indicated (i) operating results as a percentage of total revenues and (ii) selected operating data. The Company's revenues are derived from restaurant sales and food product sales to third party retail outlets. Certain costs and expenses relate only to restaurant sales (food and beverage, restaurant labor and other operations) or food products (cost of food products), while other operating costs and expenses relate to both restaurant and food products (general and administrative and depreciation and amortization).
Percentage Change Fiscal Year ------------------- ------------------------------ 1997 vs 1996 vs 1997 1996 1995 1996 1995 ------ ------ ------ ------- ------ Statements of Operations Data: - ----------------------------- Revenues Restaurants 95.1% 92.8% 91.9% 25.5% 7.6% Food products 4.9 7.2 8.1 (17.6) ( 4.9) ------ ------ ------ ------ ------ Total revenues 100.0% 100.0% 100.0% 22.4% 6.6% Costs and expenses: Cost of restaurant food and beverage 25.5 27.3 27.8 14.5 4.6 Cost of restaurant labor 29.2 28.3 30.6 26.2 (1.4) Cost of other operations 36.0 25.5 26.6 72.9 2.0 Cost of food products 4.6 6.6 8.5 (15.5) (17.7) General and administrative 8.9 6.9 8.8 58.6 (17.1) Depreciation and amortization 12.3 5.4 5.5 177.1 5.0 Provision for restaurant closings 2.4 -- 7.6 100.0 (100.0) Loss on sale of Pete's Hospitality 1.5 -- -- 100.0 -- ------ ------ ------ ------ ------ Total Costs and Expenses 120.4% 100.0% 115.4% 47.4% (7.7) Income (loss) from operations (18.8)% 0.0% (15.4)% * 100.5% Interest income .3 .4 .4 (27.2) 6.4 Interest (expense) (2.5) (2.1) (2.2) 43.6 4.6 Loss on conversion of debt to equity -- -- (3.5) -- (100.0) Other net 0.3 1.8 .8 (76.2) 130.54 ------ ------ ------ ------ ------ Other non-operating income (expense) (1.0%) .1% (4.5)% * 101.3 Income tax provision (benefit) -- -- -- Net income (loss) (22.2)% .1% (19.5)% * 100.7% Operating Data: - -------------- Restaurants open at end of period 41 41 30 Change in comparable restaurant revenues (1) (7.4)% (.8)% (6.8)%
- ---------------------- (1) Includes only restaurants open during the entire periods under comparison. * Calculation yields numbers greater than 8,000%. -13- 14 For the fiscal years ended June 29, 1997, June 30, 1996 and July 2, 1995 the Company recorded revenues of $49.1 million, $40.1 million and $37.7 million, respectively. Before extraordinary items and the effect of preferred stock dividends, the Company recorded a net loss of $10.9 million, net income of $49,000 and a net loss of $7.5 million for those same years, respectively. As of June 29, 1997, the Company had total current assets of $1.7 million and total current liabilities of $9.8 million, resulting in a working capital deficit of $8.2 million. As of June 29, 1997, the Company had a bank line of credit of $300,000 and $25,000 was available for use. The Company has funded its operating losses and expansion costs primarily through a combination of public and private offerings of debt and equity. During the fourth quarter of fiscal 1997, the Company reorganized its executive management to strengthen operational capabilities, sold its Pete's Hospitality concept to its former President and sold one Marco's restaurant in Texas City, Texas with a licensing agreement to continue using the "Marco's" name. The ability of the Company to alleviate its working capital deficit, and to obtain the necessary capital resources to fund future costs associated with its operations and to continue as a going concern is dependent upon: (i) its ability to generate sufficient cash flow to meet its obligations on a timely basis; (ii) obtaining additional equity capital or debt financing; and (iii) ultimately to attain profitable operations. However, even if the Company achieves some success with its operational strategy, there can be no assurance that it will be able to generate sufficient revenues to achieve profitable operations or to continue as a going concern. During fiscal 1997, the Company experienced significant operating losses. These losses raise doubt about the Company's ability to continue as a going concern. In an effort to decrease its losses, the Company took the actions listed below: o In June 1997, the Company reorganized its top management in order to attempt to return the Company to profitability. o In June 1997, the Company sold one of its concepts, Pete's Hospitality Co., Inc. ("Pete's"), a wholly owned subsidiary, to a related party in a stock purchase transaction because of poor concept performance. Pete's owned and operated two Pete's BBQ Rib and Steakhouse restaurants and the H.D. Hotspurs Restaurant in the Seattle, Washington area. The Company recorded a loss of approximately $750,000 recorded in other income (loss), net on this transaction in the fourth quarter of fiscal 1997. Pete's Hospitality contributed approximately $5.1 million in revenues in fiscal 1997. o In June 1997, the Company sold fixed assets associated with a Marco's Mexican Restaurant located in Texas City, Texas, with the actual transfer of assets in July 1997 to a former district manager of the Company because the location was performing below the Company's standards primarily due to declining trade area demographics. The Company recorded a loss of approximately $75,000 on this transaction in the fourth quarter of fiscal 1997. The Texas City, Texas location contributed approximately $548,000 in revenues in fiscal 1997. Until the Company is able to obtain profitable operations and cash flow from its core restaurant concepts, the Marco's Restaurants and the Pasta Co. Restaurants, the Company intends to postpone restaurant expansion from new restaurant construction. The Company plans to sell three more of its non- performing Marco's stores and its Billy Blues Restaurant in fiscal 1998. Additionally, the Company plans to proceed with its restaurant franchising program for the Marco's and Pasta Co. Restaurants. The Company will consider material restaurant chain acquisition possibilities if the acquisition(s) (i) could significantly enhance the projected revenues and profitability of the Company on a consolidated basis, (ii) the restaurant concepts are compatible with the Company's core concepts, and (iii) the acquired restaurants are geographically compatible with the Company's existing operations. Any material acquisition by the Company could substantially change the Company's business structure, capitalization and operating performance. As of June 29, 1997 the Company had no agreements or understandings regarding any -14- 15 material restaurant acquisitions. Any acquisition, if unsuccessful, could materially and adversely affect the Company's ability to continue as a going concern. FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 REVENUES. Total revenues increased 22.4% or $9.0 million in fiscal 1997 over fiscal 1996. Revenues increased approximately $9.3 million due to having owned the Pasta Co. Restaurants for a full year in fiscal 1997 versus roughly half of fiscal 1996. This increase includes revenues contributed by four new Pasta Co. Restaurants opened in fiscal 1997, two opened late in the second quarter and two opened late in the fourth quarter. Revenues related to these new stores were approximately $1.8 million. Conversely, comparable restaurant revenues declined 7.4% compared to a decline of .8% in fiscal 1996, due to extremely competitive conditions and a general softness in restaurant sales in the Company's Houston, Texas market. Management anticipates an increase in restaurant revenues in fiscal 1998 due to a new training program and an intense concentration on increasing customer satisfaction. Furthermore, fiscal 1996 contained approximately $390,000 of revenue related to a fair in the State of Washington that was not included in fiscal 1997. The sale of one of the Longhorn Cafes during fiscal 1996 further reduced revenues. The remaining Longhorn Cafe contributed $.9 million in revenues in fiscal 1997. Approximately 20% of restaurant revenues were derived from the sale of alcoholic beverages in fiscal 1997 versus 16% from fiscal 1996. OPERATING COSTS AND EXPENSES. Generally, all restaurant related and administrative costs increased due to an overall increase in revenue by 22.4% and incorporating the Pasta Co. Restaurants operations for a full year versus one-half year in fiscal 1996. Furthermore, these costs increased due to the opening of four new Pasta Co. Restaurants in fiscal 1997. Food and beverage costs increased 14.5% overall due additionally to decreased purchasing leverage brought on by cash flow limitations. Labor costs increased 26.2% overall additionally due to an increase in the minimum wage in October 1996 and increased restaurant staff coverage to meet customers needs. Costs of other restaurant operations increased 72.9% and include remodeling costs for Marco's Restaurants, preopening costs for four Pasta Co. Restaurants, research and development costs for Marco's and Pasta Co. menus, and advertising and marketing for the restaurant concepts. Advertising and marketing increased by approximately $987,000 due to new television and radio promotions undertaken in fiscal 1997. These are not anticipated to be continued in fiscal 1998. The approximately $300,000 spent for remodeling Marco's Restaurants in fiscal 1997 is expected to be reduced in fiscal 1998 due to less intensive remodels. These costs additionally increased due to added training costs for the new Pasta Co. Restaurants. During fiscal 1997 provisions of $1.1 million for the anticipated losses on the sale or closure of the Billy Blues Restaurant and $75,000 for the sale of the Texas City, Texas Marco's location were recorded as provisions for restaurant closings. Management intends to sell or close the Billy Blues Restaurant in fiscal 1998, which contributed $1.9 million in revenues in fiscal 1997. General and administrative costs increased 58.6% or $1.6 million over fiscal 1996 and include corporate salaries and wages, legal fees and settlements, professional fees and all gains and losses on sales and/or closures for all Company concepts. Legal fees included approximately $200,000 for settlement of various claims. Additional expenses include costs to develop and market the Company's franchise program. Corporate salaries for fiscal 1997 include $120,000 of deferred salary and bonus for Ghulam Bombaywala, Chairman of the Board and Chief Executive Officer. No salary or bonus was taken by Mr. Bombaywala in the previous two years. A loss of approximately $750,000 was recorded on the sale of Pete's Hospitality concept sold in June 1997. In the fourth quarter of fiscal 1997, the Company made a decision to sell the remaining Billy Blues Restaurant. Accordingly, the assets were deemed to be impaired and written down to their estimated fair value. An impairment expense of $1.1 million was recognized during 1997. Additionally, the Company sold one Marco's Restaurant in the fourth quarter for a loss of approximately $75,000. In 1997, an impairment expense was recorded to reflect the loss on sale. In the fourth quarter of fiscal 1997, the Company deemed the intangible assets associated with Chris' & Pitt's Barbeque Sauce to be impaired. Management estimated the fair value and, accordingly, an impairment expense of approximately $3.45 million was recorded during 1997 and is included in depreciation and amortization expense. NON-OPERATING INCOME (EXPENSE) Interest expense increased 43.6% primarily due to interest on debt related to the acquisition of Pasta Co. in January 1996. INCOME TAX The Company had no income tax provision nor benefit in 1997 or 1996. MANAGEMENT'S PLANS Management's plans to return to profitability include the following: o Controlling food costs by improving vendor relations and renegotiating contracts. o Reducing labor costs by outsourcing certain labor intensive food preparation processes. -15- 16 o Increasing revenues from the sale of food products by reinforcing existing markets, expanding distribution to new market areas, introducing more aggressive marketing programs, adding methods of distribution and developing new products. o Reducing operating expenses through improved cost controls. o Reducing general and administrative expenses. o Increasing revenues in existing restaurants by remodeling certain Marco's Restaurants and by improving marketing programs and customer service. o Franchising new restaurants. o Selling or closing its Billy Blues Restaurant. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 REVENUES. Total revenues increased 6.6% to $40,129,000 in fiscal 1996 over fiscal 1995. Revenues attributable to the Pasta Co. Restaurants were approximately $5,100,000. Remaining revenues decreased by approximately $2,500,000 due to the closing or sale of four Billy Blues Restaurants and the sale of one Longhorn Cafe Restaurant partially offset by the opening of two Marco's Restaurants during 1995 and one in 1996. Comparable restaurant revenues declined by .8% for fiscal 1996 compared to a decline of 6.8% in fiscal 1995. Approximately 16% of restaurant revenues were derived from the sale of alcoholic beverages for fiscal 1996 and 1995. Revenues from food products declined by approximately $150,000 due to the fact that during fiscal 1996, the Company discontinued service to certain accounts which had proved to be unprofitable. OPERATING COSTS AND EXPENSES. Restaurant related operating costs generally increased principally attributable to the 7.6% increase in restaurant revenues. Food and beverage costs increased 4.6% in fiscal 1996 compared to fiscal 1995. As a percentage of restaurant revenues, food and beverage costs declined to 29.4% in 1996 from 30.3% in 1995. The decrease was due to operational efficiencies implemented by management, new buying programs and the introduction of new menu items with lower cost percentages. Labor and other restaurant operations include all other unit-level operating expenses, comprised principally of labor and benefits, operating supplies, rent, utilities, repair and maintenance, pre-opening expenses, advertising and other costs. A substantial portion of these expenses are fixed or indirectly variable. Labor costs declined as a percentage of restaurant revenues to 30.5% in 1996 from 33.3% in 1995 and other restaurant operations costs declined to 27.5% in 1996 from 29.0% in 1995, due to disproportionally higher expenses associated with the Billy Blues Restaurants which were closed or sold. The cost of food products declined in proportion to the decrease in food product revenues in fiscal 1996. Costs declined additionally due to operational efficiencies implemented in 1996. Food products selling, marketing and distribution costs, included in the cost of food products, also declined due to reductions in promotions and allowances granted to customers as well as efficiencies gained in distribution expenses such as warehousing and freight. General and administrative expenses decreased by approximately $570,000 to $2,753,000 in 1996 from $3,321,000 in 1995 due to cost reductions implemented by management in fiscal 1995, which included the elimination of personnel and a consolidation of corporate offices. Depreciation and amortization increased to $2.2 million in 1996 from $2.1 million in 1995. Of this amount, approximately $457,000 was associated with The Original Pasta Co. The remaining decline of approximately $350,000 was due to the closure or sale of Billy Blues Restaurants and to assets becoming fully depreciated or amortized. -16- 17 NON-OPERATING INCOME (EXPENSE). In 1995, the Company recorded a provision for restaurant closings of approximately $2.9 million as a result of management's decision to either close or sell its interest in four Billy Blues Restaurants. The provision included the write-down of assets to net realizable value as well as estimated amounts for lease and other obligations associated with the restaurants. The Company utilized substantially all of the provision by the end of fiscal 1996. Interest income of approximately $167,000 in fiscal 1996 and $157,000 in fiscal 1995 resulted primarily from a note receivable from Mr. Bombaywala. Interest expense increased to $850,000 in 1996 from $813,000 in 1995 due to $257,000 in interest associated with notes associated with The Original Pasta Co., offset by a decrease of $220,000 of interest on other debt due to principal reductions made on such debt. In May of 1995, the Company offered its Debentureholders the right to convert the principal and accrued interest owed on their Debentures into Common Stock at a modified conversion rate of $2.3125 of Debenture principal and interest for one share of Common Stock, as opposed to the stated conversion rate of $5.00 per share. The Debentureholders, who were owed an aggregate of approximately $2.5 million, agreed to the conversion and were issued an aggregate of 1,093,904 shares of Common Stock. The Company recorded a loss on conversion of approximately $1.3 million, which is equal to the market value of the shares actually issued less the market value of the shares which would have been issued had the conversion been at the stated conversion rate. Other income, net, increased by $399,000 from 1995 to 1996 due to a gain of approximately $150,000 on the sale of a Longhorn Cafe restaurant, with the balance of the increase due primarily to consulting fees charged Pasta Co. prior to its acquisition. A note payable for the purchase of the Chris' & Pitt's product line was paid off at a discount from the face amount of the note plus accrued interest. The amount of the discount is reported as a gain on extinguishment of debt in fiscal 1995. The Company had no income tax provision nor benefit in 1995 or 1996. LIQUIDITY AND CAPITAL RESOURCES The following table presents a summary of the Company's cash flows for the last three fiscal years:
(In Thousands) 1997 1996 1995 ------ ------ ------- Net cash provided by (used in) operating activities $ 386 $ 1,346 ($1,341) Net cash used in investing activities (606) (1,617) (613) Net cash provided by (used in) financing activities 21 (1,368) 3,524 ------ ------ ------- Net increase (decrease) in cash and cash equivalents ($199) ($1,639) $ 1,570 ====== ====== =======
The Company continues to experience substantial losses from operations and, as of June 29, 1997, has an accumulated deficit of $30.3 million. During 1997, net cash provided by operating activities of $385,783 was primarily due to adding back of non-cash deductions from depreciation and amortization of $6,035,811, provision for restaurant closings of $1,175,434, and increase in accounts payable and accrued liabilities of $2,027,007. Net cash of $606,131 used in investing activities was primarily due to cash outflow for purchases of restaurant property and equipment in excess of proceeds from the sale of property and equipment. Net cash provided by financing activities totaling $20,724 was due to proceeds from borrowings in excess of repayments of borrowings, and purchase of treasury stock. During 1996, net cash flow from operating activities totaled $1,346,354 primarily due to depreciation and amortization added back to net income, offset by a reduction in accrued liabilities. Investing activities utilized $1,616,660 of cash, principally resulting from purchases of property and equipment. Financing activities utilized $1,368,257 of cash, primarily due to net payments on borrowings. In March of 1996, the Company received proceeds from a $1.2 million bank loan, of which approximately $860,000 was used to pay off an existing loan. For fiscal 1995, operating activities utilized $1,340,986 of cash, primarily due to a net loss less non-cash expenses. Investing activities utilized $612,575 in cash due to purchases of property and equipment of approximately $1.4 million offset by a $756,000 collection on a note receivable. Financing activities provided $3,523,580 in cash primarily due to the issuance of common stock and an increase in net borrowings. In June 1995, the Company received proceeds from a $1.0 million loan from an unaffiliated foreign corporation and approximately $1.1 million from a private placement of Common Stock. -17- 18 In the fourth quarter of fiscal 1997 (June 1997) the Company offered a private placement of $4 Million of 11% Convertible Subordinated Notes due June 30, 2002 (the "Convertible Subordinated Notes") pursuant to exemptions from registration under the Securities Act of 1933, as amended (the "Act") and the rules and regulations promulgated thereunder, including, without limitation, Section 4(2) and Regulation D. The Convertible Subordinated Notes are being offered directly by the Company to qualified accredited investors. The Company has not retained a broker or underwriter to assist with the offering although it may elect to do so in the future on terms to be negotiated. Holders of the Convertible Subordinated Notes received warrants (the "Convertible Subordinated Note Warrants") to purchase shares of Common Stock at a purchase price of $1.50 per share until June 30, 2002. Interest on the Convertible Subordinated Notes is payable quarterly beginning September 30, 1997. The Convertible Subordinated Notes are currently unsecured and may be subordinated to certain defined senior indebtedness. As of September 1997, $700,000 principal amount of the Convertible Subordinated Notes has been subscribed. The proceeds of the offering were used to repay a portion of the $3 million principal amount of 12% Subordinated Notes originally due July 31, 1997. The balance of the Subordinated Notes was extended to July 10, 1998. Ghulam M. Bombaywala, Chairman of the Board, Chief Executive Officer and a director of the Company, converted the $500,000 principal amount of 12% Subordinated Notes owed to him into the 11% Convertible Subordinated Notes, pursuant to a Subordinated Note Conversion Agreement dated June 1, 1997 (the "Conversion Agreement"). Pursuant to the Conversion Agreement, Mr. Bombaywala canceled the $500,000 principal amount of 12% Subordinated Notes owed him by the Company and received an 11% Convertible Subordinated Note of equal principal amount with the same terms and conditions as the Convertible Subordinated Notes being offered by the Company to prospective investors. Additionally, in September 1997, the Company guaranteed a promissory note with United Central Bank for $850,000 due September 2002. The proceeds of the note were used to repay a portion of the $3 million principal amount of 12% Subordinated Notes originally due July 31, 1997. In April 1997, the Company secured a $300,000 (at prime + 2%) unsecured line of credit with MetroBank in Houston, Texas maturing in April 1998. These funds were used to supplement working capital needs. As of June 29, 1997 approximately $25,000 was available. Also, in April 1997, the Company secured a $300,000 note (at prime) with United Central Bank in Houston, Texas maturing April 2004, for the purpose of financing equipment and leasehold improvements for a Pasta Co. Restaurant. In February 1997, the Company secured a $250,000 note (at prime +1%) with Langham Creek National Bank in Houston, Texas for the purpose of financing equipment and leasehold improvements for a Pasta Co. Restaurant. The Company frequently has not been able to make timely payments to its trade and other creditors. The Company has renegotiated new terms with most of its suppliers and vendors, which include more favorable pricing, extended payment terms and discounts. If the Company is unable to comply with these terms, its suppliers and vendors may suspend deliveries and the Company's ability to continue to operate could be materially affected. The Company is currently seeking sources of working capital financing sufficient to fund its ongoing trade obligations. -18- 19 FISCAL 1998 CAPITAL REQUIREMENTS. The Company has a working capital deficit of approximately $8.2 million at June 29, 1997. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or capital, refinance its debt and to ultimately attain profitable operations. Management's plans include the following: o Decreasing food and labor cost while increasing revenues. o Increasing revenues in existing restaurants by remodeling certain Marco's Mexican Restaurants and by improving marketing programs and customer service. o Increasing revenues from the sale of food products by reinforcing existing markets, expanding distribution to new market areas, introducing more aggressive marketing programs, adding methods of distribution and developing new products. o Franchising new restaurants. o Obtaining additional equity capital or debt financing. The material capital commitments of the Company for fiscal 1998 are as follows: o Reduction of the Company's working capital deficit, including payments on notes, accounts payable and accrued liabilities. o Accumulation of funds for the payment of the principal balance of $1.25 million owed on the $3 Million 12% Subordinated Notes originally due July 31, 1997 but extended to July 10, 1998. o Remodeling Marco's Restaurants. In the first quarter of fiscal 1998, the Company opened one new Pasta Co. Restaurant. Pasta Co. Restaurants require an initial capital investment of approximately $400,000. Of this amount, the Company financed approximately half of the investment using the acquired assets as collateral. The Company financed the balance through cash flow from operations. There are no further plans to open new restaurants during fiscal 1998. The Company expects to achieve positive cash flow from operations in fiscal 1998, principally from its Marco's and Pasta Co. Restaurants, if it can increase its restaurant sales and reduce its labor and operating costs. During the first quarter of fiscal 1998, the Company sold its Longhorn Cafe Restaurant. The Company also plans to supplement cash flow from operations by selling its last barbecue restaurant, Billy Blues. However, cash generated from operations may not be sufficient to meet all of the Company's fiscal 1998 capital commitments set forth above. Without debt refinancing or additional debt or equity financing in the short-term, the Company will not be able to (i) reduce its current working capital deficit, (ii) repay the $1.25 million balance of the 12% Subordinated Notes due July 10, 1998, or (iii) continue its remodeling efforts on the Marco's restaurants. There is no assurance that the Company will be able to refinance its debt or obtain additional debt or equity financing in the short term or long-term. For fiscal 1997 the Company had negative cash flow from operations of $1,641,224 (after subtracting the increase in accounts payable of $2,027,007). The Company did not have sufficient cash flow during fiscal 1997 to satisfy its direct operating expenses and pay its substantial indebtedness and reduce its accounts payable and short-term liabilities. In order to meet its liabilities and obligations, the Company was required to obtain additional debt financing and borrowings as discussed above, renegotiate and extend the terms of various borrowings and renegotiate and extend the amounts and the timing of payments to various vendors. The Company may experience further losses or negative cash flow from operations in fiscal 1998. Continued losses raise doubt about the Company's ability to continue as a going concern. The financial statements do not reflect any adjustments that might result from the outcome of this uncertainty. If the substantial losses continue, the value of the Company's long-lived assets may become impaired resulting in further write-downs to such assets to their estimated fair value. The inability of the Company to obtain substantial additional financing and achieve profitable operations has resulted in the curtailment of the Company's expansion activities which may continue indefinitely. Cash generated from operations will not be sufficient to allow the Company to timely meet its obligations and continue remodeling the Marco's Restaurants and continue restaurant expansion. Without obtaining profitable operations and positive cash flow from operations the Company may have to curtail its operations, sell core assets or seek further financing on terms which may prove unfavorable to the Company and its shareholders. NEW ACCOUNTING STANDARDS. In May 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which changes the manner in which earnings per share are calculated and presented. The pronouncement is effective for annual and interim periods ending after December 15, 1997. -19- 20 FORWARD-LOOKING INFORMATION. Information in this Annual Report and Form 10-K contains forward-looking statements and information relating to the Company that are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to the Company's management. When used in this Annual Report and Form 10-K, words such as "anticipate," "believe," "estimate," "expect," "intend," and similar expressions, as they relate to the Company or the Company's management, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, and are subject to certain risks, uncertainties, and assumptions relating to the operations and results of operations of the Company, competitive factors and pricing pressures, shifts in consumer demand, the costs of products and services, general economic conditions, and the acts of third parties, as well as other factors described in this Annual Report and Form 10-K, and, from time to time, in the Company's periodic earnings releases and reports filed with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected, or intended, or the like. ITEM 8. FINANCIAL STATEMENTS. The financial information required by this Item is found beginning at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. As previously reported in a Form 8-K filing dated August 20, 1997, the Company changed its principal independent accountant. (See "Item 10. Directors and Executive Officers of the Registrant -- Committees and Fees"). -20- 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the names, ages, titles and dates of employment of the members of the Board of Directors and the executive officers of the Company.
Term of Office Name Age Position Since - ---- --- -------- ----- Ghulam Bombaywala 41 Chairman of the Board, 1994 Chief Executive Officer and Director Thomas J. Buckley(3) 50 Former Chief Financial 1994 Officer & Secretary Michael S. Chadwick(1) 45 Director 1994 Nico B. Letschert(2) 42 Director 1994 Philip M. Mount 39 Director 1994 Sarosh J. Collector(1)(2) 49 Director 1995
- ----------------- (1) Member of the Audit Committee of the Board of Directors. (2) Member of the Compensation Committee of the Board of Directors. (3) Thomas J. Buckley resigned effective July 1, 1997 and as of the date of this filing has not been replaced. GHULAM BOMBAYWALA was elected as a director of the Company on August 5, 1994. Effective September 21, 1994, Mr. Bombaywala was elected Chairman of the Board of Directors and Chief Executive Officer of the Company. Since 1984, Mr. Bombaywala has served as sole director of Marco's. Mr. Bombaywala also served as President and Chairman of the Board of Directors of the publicly traded Two Pesos, Inc. from April 1990 to June 1993 when it was sold to Taco Cabana, Inc. Mr. Bombaywala is also a shareholder and President of James Coney Island restaurants serving hot dogs and chili. Mr. Bombaywala serves on the Board of Directors of the Sam Houston Area Boy Scouts of America, the National Conference of Christians and Jews, and the United Way of Texas Gulf Coast. THOMAS J. BUCKLEY was elected Chief Financial Officer and Secretary of the Company in December 1994. From May 1990 to January 1994, Mr. Buckley was Vice President - Finance and Franchising of Western Sizzlin, Inc. ("WSI"), a restaurant franchising and operating company. From 1986 to 1989, Mr. Buckley was President of SDO, Inc., a regional franchising company. From 1980 to 1985, Mr. Buckley was Executive Vice President and a director of the publicly traded USACafes, franchisor and operator of Bonanza Restaurants. Mr. Buckley has over 15 years experience in the restaurant industry and extensive experience in franchising. Mr. Buckley received a B.S. degree in accounting from the University of New Orleans. MICHAEL S. CHADWICK has served as a director of the Company since August 1994. Mr. Chadwick serves on the Audit Committee of the Board of Directors. Mr. Chadwick is Senior Vice President and a Managing Director of the Corporate Finance Department of Sanders Morris Mundy Inc., a Houston-based financial services and investment banking firm. From 1988 to August 1994, Mr. Chadwick served as President and Co-Owner of Chadwick, Chambers & Associates, Inc., an investment and merchant banking firm specializing in corporate finance services. From 1984 to 1988, Mr. Chadwick served as Vice President, Corporate Finance at Lovett Mitchell Webb & Garrison, Inc., a Houston-based investment banking firm. Mr. Chadwick has been engaged in investment banking since 1978. Mr. Chadwick presently serves on the Board of Directors of Blue Dolphin Energy Company and Brazos Sportswear, Inc., both publicly traded corporations, and Moody-Price, Inc., a privately held concern. Mr. Chadwick received an M.B.A. in finance from Southern Methodist University and a B.A. degree in economics from the University of Texas. -21- 22 NICO B. LETSCHERT was elected to the Board of Directors in September 1994 and serves as a member of the Compensation Committee of the Board of Directors. Mr. Letschert is the CEO of Noesis Capital Corp., a Florida-based investment banking and money management firm. From 1984 until July 1995, Mr. Letschert was President of Noble Investment Co. of Palm Beach. A native of The Netherlands, Mr. Letschert began his career on the Amsterdam Stock Exchange before relocating to the U.S. and becoming involved with venture capital and corporate finance. Mr. Letschert received his degree from the Dutch Institute for Banking and Finance and is a Certified Financial Planner. He also serves on the Board of Directors of the following publicly traded corporations: Celerity Solutions, Inc., Futuremedia PLC and PSI Industries, Inc. PHILIP M. MOUNT has been a director of the Company since August 5, 1994 and is a partner with the law firm of Kelly, Sutter, Mount & Kendrick. Mr. Mount has engaged in the practice of law in Houston, Texas since 1983. Mr. Mount's principal areas of practice are corporate finance and securities. Mr. Mount received his B.B.A. with honors from the University of Texas at Austin in 1980 and a J.D. from the University of Houston College of Law in 1983. From August 1990 until its acquisition in 1993, Mr. Mount served as a director and a member of the Compensation and Executive Committees of Two Pesos, Inc., a publicly traded Houston, Texas based restaurant company. SAROSH J. COLLECTOR has been a director of the Company since March 17, 1995 and currently serves as a member of the Audit and Compensation Committees of the Board of Directors. Mr. Collector is a certified public accountant and has served as President of the accounting firm of Collector, Dart & Moore P.C. since 1987. From 1986 to 1987, Mr. Collector was a manager with the accounting firm of Spicer & Oppenheim, and from 1981 to 1986 served as a partner with the accounting firm of Malow Cohen & Co. Mr. Collector's principal areas of practice are taxation, business consulting and business valuation. Mr. Collector also served as a director of Two Pesos, Inc., a publicly traded corporation, from April 1990 to August 1993. COMMITTEES AND FEES The Board of Directors of the Company has established an Audit Committee and a Compensation Committee. The purpose of the Audit Committee is to review and make recommendations to the Board of Directors with respect to the engagement of the Company's independent public accountants, reviewing with such accountants the plans for and the results and scope of the auditing engagement and certain other matters relating to the services provided to the Company, including the independence of such accountants. The Audit Committee held no meetings during fiscal 1997. Furthermore, the Audit Committee met in August 1997 and approved a change of principal independent accountants for the fiscal year 1997 audited financial statements. Mann, Frankfort, Stein & Lipp, P.C. was engaged as the Company's principal independent accountant to replace Coopers & Lybrand L.L.P. who resigned on August 20, 1997. (See Form 8-K and Form 8-K Amendment No. 1 dated August 20, 1997 and filed on August 27, 1997 and September 9, 1997, respectively, which are attached hereto as exhibits and incorporated herein by reference.) The Compensation Committee reviews on behalf of, and makes recommendations to, the Board of Directors with respect to compensation of executive officers and key employees of the Company and administers the Company's 1994 Stock Compensation Plan (the "Stock Compensation Plan"). All actions undertaken by the Compensation Committee during the last fiscal year were effected by unanimous consent in lieu of holding scheduled or special meetings. Each director who is not an employee of the Company is entitled to be paid $250 for each meeting of the Board of Directors attended (exclusive of telephonic meetings) and $250 for each meeting of a Committee of the Board of Directors attended (exclusive of committee meetings occurring on the same day as Board Meetings), and are reimbursed for expenses incurred in attending such meetings. Directors who are employees of the Company are not paid any additional compensation for attendance at Board of Directors or Committee meetings. During fiscal 1997 the Directors chose to forego any compensation for attending meetings. During fiscal 1997, the Board of Directors held its annual meeting on December 13, 1996, conducted meetings in September 1996, April and May of 1997, and approved actions undertaken by management of the Company. -22- 23 SECTION 16(A) - BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership of the Company's securities with the Securities and Exchange Commission (the "Commission"). Based solely on its review of the copies of such report forms received by it with respect to fiscal year 1997, or written representations from certain reporting persons, the Company believes that filing requirements applicable to its directors, officers and persons who own more than 10% of a registered class of the Company's equity securities have not been timely complied with in accordance with Section 16(a) of the Exchange Act as follows. Sarosh J. Collector, a director of the Company, failed to timely file a Form 4 in August of 1996. Angelo Pitillo, a former executive officer and director of the Company failed to timely file Form 4 in August 1996, January 1997, and July 1997 for one transaction each. Thomas Buckley, a former executive officer of the Company failed to timely file Form 4 in August 1996, January 1997 and July 1997 for a total of six transactions (two each). In addition, all directors and executive officers of the Company (except Ghulam Bombaywala, who was not required to file a Form 5) each failed to timely file Form 5 - Annual Changes in Beneficial Ownership of Securities for fiscal 1997. All late reports were filed in September and October of 1997. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION INFORMATION The following table sets forth certain information regarding all cash compensation paid or to be paid by the Company or any of its subsidiaries, as well as other compensation paid or accrued, during the Company's fiscal year ended June 29, 1997, to the Company's Chief Executive officer and to those other executive officers who received salary and bonus compensation in excess of $100,000 during the fiscal year (the "named executive officers"). SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards Payouts ---------------------------------- -------------------------- ------- Restricted Securities Other Annual Stock Underlying LTIP All Other Compensation(2) Award(s) Options/SARs(3) Payouts Compensation Name and Principal Position Year Salary($) Bonus($) ($) ($) (#) ($) ($) - --------------------------- ---- --------- -------- -------------- ---------- -------------- ------- ------------ GhulamBombaywala,Chairman of 1997 $60,000(1) $60,000(1) $-0- $-0- -0- -0- $-0- the Board and Chief Executive 1996 -0- -0- -0- -0- -0- -0- -0- Officer 1995 -0- -0- -0- -0- -0- -0- -0- Angelo Pitillo, former President 1997 $150,000 $-0- $-0- $-0- 80,000 -0- $-0- and Chief Operating Officer(4) 1996 $150,000 $-0- $-0- $-0- -0- -0- $-0- 1995 121,154 -0- -0- -0- 250,000 -0- -0-
(1) Includes salary or bonus amounts earned but deferred at the officer's election. (2) Excludes certain incidental perquisites, the total of which did not exceed the lesser of $50,000 or 10% of cash compensation for any named individual. (3) Incentive stock options to acquire shares of Common Stock pursuant to the Company's Stock Compensation Plan. (4) Mr. Pitillo resigned June 1997 and has not been replaced as of the date of this filing, and has a consulting agreement and severance beginning in fiscal 1998 of $4,167 per month for twelve months along with 180,000 common stock warrants exercisable at $.50 per warrant until expiration on June 30, 1999. -23- 24 OPTION GRANTS DURING FISCAL YEAR 1997 The following table provides information related to options to acquire shares of Common Stock granted to the Chief Executive Officer and the other named executive officers of the Company referenced in the Summary Compensation Table, above, during fiscal year 1997. The Company does not have any outstanding Stock Appreciation Rights ("SARs"). OPTION/SAR GRANTS IN LAST FISCAL YEAR Individual Grants
Potential Realizable value at assumed annual rates of stock price appreciation for option term Number of Securities % of Total Options/ Exercise or ------------------------ Underlying Options/ SARs Granted to Base Price Expiration Name SARs Granted(#) (1) Employees in Fiscal Year ($/Sh)(2) Date 5%($) 10%($) ------------------- ------------------------ ---------- ---------- ----- ------ Ghulam Bombaywala -0- -0-% N/A N/A N/A N/A Angelo Pitillo 80,000 40% $.50 08/01 $ -0- $ -0-
- --------------------- (1) Incentive stock options to acquire shares of Common Stock granted pursuant to the Company's Stock Compensation Plan. Options issued to Mr. Pitillo vest at 100% commencing six months from the date of the original grant (August 1996), are nontransferable and are subject to termination under certain conditions upon cessation of employment. At his termination date, June 25, 1997, these options, along with all other options granted to Mr. Pitillo, were canceled and Mr. Pitillo was granted 180,000 Common Stock warrants exercisable at $.50 per warrant until expiration on June 30, 1999. (2) The exercise price per share of each option granted in 1997 was equal to or greater than 100% of the fair market value of the Common Stock on the date of grant pursuant to the requirements of the Stock Compensation Plan. -24- 25 OPTION EXERCISES AND FISCAL 1997 YEAR END HOLDINGS The following table sets forth information with respect to options exercised by named executive officers of the Company referenced in the Summary Compensation Table, above, during fiscal year 1997 and the number and value of options held at fiscal year end. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs Options/SARs at FY-End(#) At FY-End($)(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- -0- -0- $ -0- $ -0-
- --------------- (1) The closing bid price for the Company's Common Stock as reported by NASDAQ SmallCap Market on June 29, 1997 was $0.25 per share. The indicated value is calculated on the basis of the difference between the option exercise price per share and $0.25, multiplied by the number of shares of Common Stock underlying each option. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Company is comprised of two persons selected by the Board of Directors. Throughout fiscal 1997, Nico B. Letschert and Sarosh J. Collector served on the Compensation Committee. Nico B. Letschert was the President of Noble Investment Co. of Palm Beach ("Noble") and is the Chief Executive Officer of Noesis Capital Corp. ("Noesis"). Sarosh J. Collector is a certified public accountant and President of the Houston based accounting firm of Collector, Dart & Moore, P.C. Through May 1997, Philip M. Mount served on the Compensation Committee. Mr. Mount is a shareholder of Kelly, Sutter, Mount & Kendrick, P.C. ("KSMK"), a Houston based law firm. In May 1997, Mr. Mount resigned from the Compensation Committee. During fiscal 1995, 1996, and 1997 KSMK rendered legal services as counsel to the Company. In June of 1995, the Company issued 100,000 shares of Common Stock to KSMK as partial payment for outstanding invoices. In February, 1996, the Company issued an additional 100,000 shares of Common Stock to KSMK as payment for legal services. Mr. Mount disclaims any beneficial ownership in the shares issued to KSMK. During fiscal 1997, KSMK returned the shares in exchange for cash of $1.50 per share and the agreement of the Company to pay the balance owed to KSMK in monthly installments in the ordinary course of business. In December 1994, in connection with the offering of the Company's $3 million 12% Subordinated Notes, Sanders Morris Mundy, Inc. ("SMM") received approximately $250,000 as a placement fee. Also in connection with the offering, the Company entered into an eighteen month advisory agreement with SMM calling for payments of $10,000 per month and issued warrants to purchase 150,000 shares of common stock at an exercise price of $2.50 per share which expire on December 31, 1999. Mr. Chadwick, Senior Vice President and a Managing Director of Corporate Finance of SMM, and a director of the Company, was assigned 45,000 of the warrants by SMM. In July of 1997, the payment terms of the Subordinated Notes were extended, the advisory agreement was extended through December 1997 at a rate of $5,000 per month and the exercise price of the warrants was reduced to $.25 per share. EMPLOYMENT CONTRACTS Effective July 1, 1994, the Company entered into an employment agreement with Ghulam Bombaywala, Chairman of the Board, Chief Executive Officer and a director of the Company (the "Bombaywala Agreement"). Under the terms of the Bombaywala Agreement, Mr. Bombaywala is entitled to receive an annual salary of $60,000 plus annual cost of living increases. In addition, Mr. Bombaywala is entitled to receive a bonus in an amount based on such factors as the Board of Directors of the Company may elect to consider. Mr. Bombaywala has elected to defer any salary or bonus due and owing to him under this agreement for fiscal 1997 for an -25- 26 indefinite period of time. The Bombaywala Agreement also provides for health, medical and life insurance benefits and allows participation in the Company's employee benefit plans. The Bombaywala Agreement expired April 30, 1997, however, the Board of Directors approved a one year extension during the second quarter of fiscal 1998. The Bombaywala Agreement contains provisions for employment on a full time basis, as well as payments upon termination and payment of bonuses. The non-competition provisions of the Bombaywala Agreement provide that upon termination, Mr. Bombaywala will not engage or participate in a barbecue or Mexican restaurant business within a radius of ten miles of any existing or proposed barbecue or Mexican restaurant owned, licensed, managed or operated by the Company for a period of twelve months beginning on the date of termination of the Bombaywala Agreement. REPORT ON EXECUTIVE COMPENSATION The Compensation Committee, currently consisting of Messrs. Collector and Letschert, determines the compensation of the Company's executive officer, Mr. Bombaywala (C.E.O.). Mr. Bombaywala decided to forego a salary or bonus in fiscal 1995 and fiscal 1996 due to the fact that the Company has been and is in the process of a "turnaround." For fiscal 1997, Mr. Bombaywala deferred a salary of $60,000 per year and a bonus of $60,000 for an indefinite period of time. Mr. Bombaywala owns 6,558,889 shares of the Company's Common Stock or approximately 43.8% of the outstanding shares. Included in this calculation is the following: Mr. Bombaywala received warrants with the right to purchase 222,222 shares of the Company's common stock at a price of $1.00 per share issued in connection with the issue of the 12% Subordinated Notes in December 1994. When Mr. Bombaywala converted his 12% Subordinated Note to the 11% Convertible Subordinated Note he received warrants with the right to purchase 50,000 shares of the Company's Common Stock at $1.50 per share. As incentive to Mr. Bombaywala for converting his note, his 222,222 warrants were not canceled. (See "Liquidity and Capital Resources"). Not included in the above calculation is the following: Mr. Bombaywala received 7,500,000 common stock rights at a value of $.50 per share in connection with the Conversion and Offset Agreement in May 1997. (See "Item 13. Certain Relationships and Related Transactions".) The Compensation Committee believes that Mr. Bombaywala is very motivated due to his stock ownership and commitment to the Company to represent the interests of all stockholders and maximize the performance of the Company. The Compensation Committee agreed with Mr. Bombaywala's decision to forego any salary or bonus during fiscal 1995 and 1996. The compensation which would have been payable to Mr. Bombaywala through April 1997 was determined by the Bombaywala Agreement, which was negotiated between the Company and Mr. Bombaywala when Marco's was acquired in fiscal 1994. The Compensation Committee plans to use the Company's Common Stock to retain and provide incentive to the Company's key employees. The Board of Directors believes that significant stock ownership is a major factor in aligning the interests of management and shareholders. -26- 27 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of October 1, 1997, by (i) each person who beneficially owns 5% or more of the Common Stock, (ii) each Director and named executive officer of the Company, and (iii) all officers and Directors of the Company as a group. Unless otherwise noted, the persons and entities named below have sole voting and investment power with respect to such shares.
Shares Beneficially Owned ------------------------- Name of Beneficial Owner Number Percent - ------------------------ ------ ------- Ghulam Bombaywala(1) 6,558,889 43.8% Thomas J. Buckley 12,584 * Michael S. Chadwick(2)(6) 124,444 * Nico B. Letschert(3)(6) 311,554 2.1% Philip M. Mount(4)(6) 37,222 * Sarosh J. Collector(5)(6) 24,000 * All Officers and Directors as a Group (5 Persons) (7) 7,051,109 47.1%
- ----------------------- * Indicates ownership of less than or equal to one percent of the outstanding Common Stock of the Company. (1) Mr. Bombaywala's address is 11111 Wilcrest Green, Suite 350, Houston, Texas 77042. Includes warrants to purchase 222,222 shares of Common Stock issued in connection with the Company's Subordinated Notes. Includes warrants to purchase 50,000 shares of Common Stock issued in connection with the Company's 11% Convertible Subordinated Notes. It does not include 7,500,000 shares rights of Common Stock issued in connection with the Company's Conversion and Offset Agreement. These rights are exercisable only with Board of Directors approval and possible authorization of new common shares. (2) Mr. Chadwick's address is 3100 Texas Commerce Tower, Houston, Texas 77002. Includes warrants to purchase 89,444 shares of Common Stock issued in connection with the Company's Subordinated Notes. (3) Includes 97,000 Series A Warrants, which may be converted into 97,000 shares of Common Stock upon payment of the $6.50 exercise price. Includes warrants to purchase 45,000 shares of Preferred Stock, which Preferred Stock is convertible into 56,250 shares of Common Stock. Includes warrants to purchase 45,000 shares of Common Stock originally issued to Noble under the terms of the 1993 Regulation S offering and subsequently assigned to Mr. Letschert. Includes 21,000 shares of Common Stock issuable to Mr. Letschert upon the conversion of $105,000 in Debenture principle, at a conversion ratio of one share of Common Stock for each $5.00 in principle converted. Mr. Letschert may acquire Debentures in the principal amount of $105,000 upon the exercise of warrants originally granted to Noble as placement agent for the Company's offering of Debentures and subsequently assigned to Mr. Letschert. Includes warrants to purchase 71,250 shares of Common Stock at $3 per share. Also includes 10,000 Series A Warrants which entitle Mr. Letschert to acquire 10,000 shares of Common Stock upon the payment of the exercise price of $6.50 per share. Mr. Letschert's address is 1801 Clint Moore Road, Suite 100, Boca Raton, Florida 33487. (4) Mr. Mount's address is 1600 Smith, Suite 3700, Houston, Texas 77002. Includes warrants to purchase 22,222 shares of Common Stock issued in connection with the Company's Subordinated Notes. (5) Mr. Collector's address is 3000 Richmond Avenue, Suite 270, Houston, Texas 77002. (6) Includes options to purchase 15,000 shares of Common Stock granted under the Company's Outside Director's Stock Option Plan. (7) Does not include former Chief Financial Officer (resigned July 1997) Tom Buckley's 12,584 shares or former President (resigned June 1997) Angelo Pitillo's 12,382 shares owned. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Late in the fourth quarter of fiscal 1997 the Company sold Pete's Hospitality Co., Inc., ("Pete's") a wholly-owned subsidiary, pursuant to a Stock Purchase Agreement, to Angelo Pitillo, former President, Chief Operating Officer and director of the Company. Mr. Pitillo acquired all of the issued and outstanding shares of Pete's in exchange for a promissory note payable to the Company in the principal amount of $300,000 (the "Pete's Note"). The Pete's Note accrues interest at the rate of 10% per annum over approximately five years. The Pete's Note is secured by assets of Pete's. The Company recorded a loss of approximately $750,000 on the transaction. -27- 28 In August 1996, the Company sold for $350,000 previously mortgaged real property located at the Victoria, Texas Marco's Restaurant location to the Bombaywala Family Trust ("The Trust"). The Trust is administered by M.U. Bombaywala, Trustee, for the purpose of his grandchildren's education. The real property and certain assets are now being leased by the Company from the Trust. The Trust also owns the real property on which one of the Company's Pasta Co. Restaurants is located, having purchased it from an unaffiliated third party. The Trust leases this property to the Company. The Company believes that both leases are at rates comparable to those which could be attained from unrelated third parties. In April 1997, the Company agreed to sell equipment associated with three new restaurants to Mr. Bombaywala and lease the assets back. The three restaurants were opened in the second and fourth quarters of fiscal 1997. The Company believes that the selling price of $750,000 and the lease rate are comparable to those which could be attained from an unrelated third party. There was no gain or loss to the Company on this transaction. On July 31, 1994, Ghulam Bombaywala, Chairman of the Board and Chief Executive Officer of the Company, executed a promissory note in the principal amount of $2,175,310 made payable to Marco's (the "Bombaywala Note"). The Bombaywala Note accrues interest at the rate 6% per annum until maturity, with accrued interest being payable annually on the 1st day of July of each year for which a principal balance is due and owing. The principal balance of the Bombaywala Note is due as follows: $200,000 on July 31, 1996, 1997 and 1998, with all remaining principal and interest due and owing under the Bombaywala Note to be paid in full on July 31, 1999. The Bombaywala Note is secured by the securities more particularly set forth in that certain Pledge and Security Agreement entered into by and between Marco's and Mr. Bombaywala on July 31, 1994. In September of 1995, the Company's Board of Directors voted to defer the interest payment due July 1, 1995 until December 31, 1995. During fiscal 1997, the principal amount due under the Bombaywala Note was reduced by $819,202 pursuant to a Conversion and Offset Agreement further described below. During 1997, the Company earned interest of $123,877 on the note receivable from Mr. Bombaywala and was charged interest of $123,757 on various notes payable to him. The interest receivable and payable, together with interest receivable at June 30, 1996 of $94,974 were offset with a remaining receivable from Mr. Bombaywala of $95,093 outstanding at June 29, 1997. On June 17, 1992, the Company loaned William J. Gallagher, a former officer and director of the Company, $53,000 evidenced by an unsecured promissory note providing for interest at prime. The note was renewed on June 17, 1993, whereby the principal balance due under the note was increased to $124,000 to include additional advances made by the Company during fiscal 1993. The principal balance of the note accrues interest at the rate of 6% per annum, with accrued interest being due and payable annually on July 1. The entire principal balance is due and payable on July 1, 1999. The note is an unsecured debt obligation of Mr. Gallagher to the Company. The interest payments Due July 1, 1995, 1996 and 1997 had not been made by Mr. Gallagher as of October 1, 1997. On June 30, 1994, John H. Coleman, III, a former officer and director of the Company, executed a promissory note in the principal amount of $31,291 for the purpose of evidencing a debt obligation resulting from advances made by the Company to Mr. Coleman during fiscal 1994. The principal amount of the note accrues interest at the rate of 6% per annum and is due and payable on the first day of July for each year the principal balance remains outstanding. The principal balance of the note is due and payable in full on July 1, 1999. The note is an unsecured debt obligation of Mr. Coleman to the Company. The interest payments due July 1, 1995 and 1996 were not made by Mr. Coleman. Mr. Coleman was also the plaintiff in a lawsuit against the Company (see Item 3 "Legal Proceedings".) As part of the settlement of this lawsuit, this note was canceled. Mr. Bombaywala has an ownership interest in and participates in the management of other businesses, including the Houston-based James Coney Island restaurant chain. PASTA CO. ACQUISITION On September 7, 1995, the Board of Directors of the Company approved the acquisition of all of the issued and outstanding shares (the "Shares") of Pasta Co. from Mr. Bombaywala, the sole stockholder and director of Pasta Co. On September 14, 1995, the Company, Mr. Bombaywala, and Pasta Co. entered into an Agreement and Plan of Merger (the "Merger Agreement") which provided for the merger of Pasta Co. with and -28- 29 into the Company as the surviving corporation (the "Merger"). The principal assets of Pasta Co. consisted of its ownership of ten (10) restaurants in Houston, Texas. In consideration for the Shares, Mr. Bombaywala received 1,666,667 shares of the Company's Common Stock (the "Merger Shares") and two promissory notes in the aggregate principal amount of $3,750,000 (the "Notes"). The Merger Shares were valued at $1.78 per share which was the market value of the Common Stock on the date of the Merger. The total consideration paid to Mr. Bombaywala was $2,966,667; however, as provided below, a portion of the Merger Shares was subject to future release and earn out. In addition, the Company assumed approximately $3.6 million of liabilities and indebtedness of Pasta Co. outstanding as of January 26, 1996. Although not required by law, the Board of Directors of the Company elected to submit the Merger to its independent shareholders for approval at its Annual Meeting of Shareholders which was held January 9, 1996. Mr. Bombaywala, who then owned 4,620,000 shares of the Company's Common Stock, or 41.6%, excluding the Merger Shares, did not vote on the Merger at the Annual Meeting. The Merger was approved, and the effective date of the Merger (the "Effective Date") was January 26, 1996. As of the Escrow Closing Date, the Company was granted the right to manage Pasta Co. and received a management fee of three percent (3%) of the gross revenues of Pasta Co. through the Effective Date. Such fees amounted to approximately $137,000. The Merger Shares are restricted securities but have demand and incidental registration rights. A total of 350,000 Merger Shares were subject to a Development Escrow Agreement which provided for the earnout and release of such shares based upon (i) the opening of five additional Pasta Co. Restaurants on or before December 31, 1996 at an average cost not to exceed $400,000 per restaurant, or (ii) the share price for the Company's Common Stock exceeding $5.00 per share for any ten consecutive business days on or before June 30, 1996 or $7.00 per share on or before June 30, 1997. The Company completed the opening of the five additional Pasta Co. Restaurants before December 31, 1996 and, therefore, the Merger Shares have been released to Mr. Bombaywala. The Notes consisted of (i) a promissory note from Pasta Co. in the principal amount of $2,750,000, bearing interest at 10% per annum, and due and payable on September 15, 2002, subject to certain mandatory prepayment provisions, and (ii) a promissory note from Pasta Co. in the principal amount of $1,000,000 bearing interest at 10% per annum, the principal amount of which, subject to certain mandatory prepayment provisions, was due and payable in two equal annual installments on December 31, 1996 and December 31, 1997. Quarterly payments of interest were due and payable on the Notes on the 15th day of December, March, June and September of each year the Notes were outstanding. Commencing September 15, 2000, the outstanding principal on the $2,750,000 Note was to be amortized and paid in quarterly installments over the remaining two year term. The Notes required mandatory prepayment in the amount of and to the extent of (i) fifty percent of the proceeds from any public offering received by the Company, and (ii) proceeds from private financings in excess of $1,000,000 received by the Company. Mr. Bombaywala agreed to defer or offset any and all principal and interest until July of 1997. The Company incurred $392,337 in interest expense on two notes aggregating $3,750,000. In connection with the Conversion and Offset Agreement, Mr. Bombaywala forgave such interest which has been recorded as a contribution to capital. On the Effective Date, a promissory note of Pasta Co. to Mr. Bombaywala in the principal amount of $1,260,000 was paid by the Company. Payment was made as follows: $150,000 in cash, transfer of ownership of land and building valued at $515,000 and a note to Mr. Bombaywala in the amount of $595,000. Mr. Bombaywala received an additional note from the Company in the amount of $224,202 for other obligations of Pasta Co. arising prior to the Effective Date (the $595,000 note and the $224,202 note are collectively referred to as "Additional Pasta Co. Notes") . The Notes were secured by a guarantee of the Company, a pledge by the Company of all issued and outstanding shares of Pasta Co. and a security interest in all of the assets relating to the first ten restaurants opened by Pasta Co. The lien of Mr. Bombaywala was junior to any prior liens granted by Pasta Co. on or before the Effective Date. On May 15, 1997 Mr. Bombaywala and the Company entered into a Conversion and Offset Agreement whereby the $3,750,000 of debt evidenced by the Notes was converted to 7,500,000 Common Stock Rights (the -29- 30 "Rights"). Each of the Rights shall automatically convert to one share of the Company's Common Stock at a later date, without further action or consideration by Mr. Bombaywala, assuming the Company has a sufficient number of shares authorized and freely issuable. In exchange for the Rights, Mr. Bombaywala forgave the Notes. A value of $.50 per share was determined by the Board of Directors in connection with the conversion. The Company intends to proceed with an amendment to its Articles of Incorporation to increase its authorized Common Stock to a sufficient level to enable it to issue all of the shares. However, there can be no assurance that such amendment will be adopted. The Company also agreed with Mr. Bombaywala to offset the $819,202 in Additional Notes payable to Mr. Bombaywala in connection with the acquisition of Pasta Co. against the Bombaywala Note receivable from Mr. Bombaywala in connection with the Marco's merger. In May of 1995, the Company began factoring accounts receivable through Catalyst Financial Co., ("Catalyst") paying factoring fees of approximately $19,000 in fiscal 1995 and $75,000 in fiscal 1996. The Company believes that the fees paid were comparable to those that would be charged by a competing factoring company. Mr. Bombaywala is a principal of Catalyst. The Company acquired 240,000 shares (the "CluckCorp Shares") of the outstanding common stock $0.1 par value of CluckCorp International, Inc., a Texas corporation ("CluckCorp") on June 30, 1994 upon the conversion of, and as partial payment for, a promissory note of CluckCorp owed to the Company in the principal amount of $800,000 (the "CluckCorp Note") issued in June 1993 and in exchange for certain other advances owed to the Company. The CluckCorp Note has a maturity date of June 30, 1998, and was payable, at the option of CluckCorp, in whole or in part, in cash or with Common Stock of CluckCorp. During 1994 CluckCorp repaid a portion of the CluckCorp Note in cash and the remaining portion of the CluckCorp Note and certain advances were paid with the CluckCorp Shares. The Company subsequently sold the CluckCorp Shares to JEB Investment Corporation, a Texas corporation ("JEB") in exchange for a $1,800,000 recourse promissory note executed by JEB as maker (the "JEB Note") bearing interest at 9% per annum, payable annually, with a final maturity date of June 30, 1996. The JEB Note was secured by the CluckCorp Shares pursuant to a Pledge Agreement. JEB defaulted on the payments required under the JEB Note. In May 1997, JEB and the Company executed an agreement whereby JEB relinquished all right, title and interest in the CluckCorp Shares to the Company pursuant to the Company's foreclosure rights in consideration for the Company relinquishing all of its rights under the JEB Note. The Company is currently selling the CluckCorp Shares in public and private transactions. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents Filed as Part of this Report. (1) The Consolidated Financial Statements listed in the Index to the Consolidated Financial Statements on page F-1 are filed as part of this report and are incorporated by reference. (2) No financial statement schedules are filed as part of this report. (3) The Exhibits filed as part of this report are listed on the Exhibit Index appearing on page E-1 which is incorporated herein by reference. (b) Reports on Form 8-K During the fourth quarter of fiscal 1997, the Company filed Form 8-K, dated May 15, 1997, reporting under "Item 5. Other Events," the Conversion and Offset Agreement whereby the Company converted $3,750,000 of debt owed to Mr. Bombaywala as a result of the acquisition of The Original Pasta Co. into 7,500,000 Common Stock Rights, and offset $819,202 in additional notes payable to, against notes receivable from, Mr. Bombaywala. Furthermore, the Company filed Form 8-K, Amendment No. 1, dated May 15, 1997, reporting under "Items 1 and 5. Changes In Control of Registrant; Other Events", a change in control of the Company should Mr. Bombaywala be issued the 7,500,000 shares of Common Stock. No financial statements were included in either Form 8-K. (c) Exhibits Required by Item 601 of Regulation S-K The Exhibits required by Item 601 of Regulation S-K and listed in the Exhibit Index on page E-1 are filed as part of this report. (d) Financial Statement Schedules None. [This space is intentionally left blank.] -30- 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WATERMARC FOOD MANAGEMENT CO. (Registrant) Date: October 13, 1997 By: /s/ Ghulam Bombaywala ---------------------------------------- Ghulam Bombaywala, Chairman of the Board, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ Ghulam Bombaywala Chairman of the Board, Chief Executive - --------------------------- Officer and Director (Principal October 13, 1997 Ghulam Bombaywala Executive Officer and acting as Principal Financial and Accounting Officer) (1) /s/ Philip M. Mount - --------------------------- Philip M. Mount Director October 13, 1997 /s/ Michael S. Chadwick - --------------------------- Michael S. Chadwick Director October 13, 1997 /s/ Nico B. Letschert - --------------------------- Nico B. Letschert Director October 13, 1997 /s/ Sarosh J. Collector - --------------------------- Sarosh J. Collector Director October 13, 1997
(1) The principal financial and accounting officer resigned in July 1997 and has not been replaced as of the date of this filing. Mr. Bombaywala is signing as these positions. -31- 32 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES INDEX TO AUDITED FINANCIAL STATEMENTS Reports of Independent Accountants . . . . . . . . . . . . F-2; F-3 Consolidated Balance Sheets . . . . . . . . . . . . . . . F-4 Consolidated Statements of Operations . . . . . . . . . . F-5 Consolidated Statements of Stockholders' Equity . . . . . F-6 Consolidated Statements of Cash Flows . . . . . . . . . . F-7 Notes to Consolidated Financial Statements . . . . . . . . F-8
F - 1 33 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Watermarc Food Management Co. We have audited the consolidated balance sheet of Watermarc Food Management Co. and subsidiaries (the "Company") as of June 29, 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for the fiscal year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Watermarc Food Management Co. and subsidiaries as of June 29, 1997 and the consolidated results of their operations and their cash flows for the fiscal year then ended, in conformity with generally accepted accounting principles. MANN, FRANKFORT, STEIN & LIPP, P.C. Houston, Texas October 9, 1997 F - 2 34 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Watermarc Food Management Co. We have audited the consolidated balance sheet of Watermarc Food Management Co. and subsidiaries (the "Company") as of June 30, 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for the fiscal years ended June 30, 1996 and July 2, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Watermarc Food Management Co. and subsidiaries as of June 30, 1996 and the consolidated results of their operations and their cash flows for the fiscal years ended June 30, 1996 and July 2, 1995, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Houston, Texas September 27, 1996 F-3 35 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES Consolidated Balance Sheets
ASSETS June 29, 1997 June 30, 1996 ------------ ------------ Current assets: Cash and cash equivalents $ 263,542 $ 463,166 Accounts receivable, trade 540,406 397,744 Accounts receivable from affiliates 299,518 252,440 Inventories 483,302 715,538 Prepaid expenses and other current assets 73,217 105,779 ------------ ------------ Total current assets 1,659,985 1,934,667 Property and equipment, net 6,050,631 9,328,526 Notes and other receivables from affiliate 1,679,374 2,217,784 Intangible assets, net 7,213,457 12,200,047 Other assets 111,381 183,686 ------------ ------------ 16,714,828 $ 25,864,710 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 4,780,931 $ 3,186,690 Accrued liabilities 2,263,821 1,831,055 Current portion of long-term debt 2,787,814 1,401,825 ------------ ------------ Total current liabilities 9,832,566 6,419,570 Long-term debt, less current portion 4,484,539 5,698,692 Notes payable to stockholder 500,000 5,069,202 Deferred rent 577,976 435,949 Commitments and contingencies Stockholders' equity: Preferred stock, $1 par value, 5,000,000 shares authorized, 329,540 329,540 329,540 issued and outstanding as of June 29, 1997 and June 30, 1996; stated at $10 liquidation preference Common stock, $.05 par value, 20,000,000 shares authorized, 713,161 671,682 14,263,230 issued and outstanding as of June 29, 1997, and 13,433,658 issued and outstanding as of June 30, 1996 Additional paid-in capital 30,740,131 26,640,385 Accumulated deficit (30,313,085) (19,400,310) ------------ ------------ 1,469,747 8,241,297 Less treasury stock, cost method (150,000) -- ------------ ------------ Total stockholders' equity 1,319,747 8,241,297 ------------ ------------ $ 16,714,828 $ 25,864,710 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F - 4 36 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES Consolidated Statements of Operations
52 Weeks Ended -------------------------------------------- June 29, 1997 June 30, 1996 July 2, 1995 ------------ ------------ ------------ Revenue: Restaurants $ 46,734,262 $ 37,227,201 $ 34,600,265 Food products 2,391,099 2,902,242 3,051,392 ------------ ------------ ------------ Total revenues: 49,125,361 40,129,443 37,651,657 Costs and expenses: Cost of restaurant revenues: Cost of food and beverage 12,539,192 10,956,113 10,471,159 Labor and benefits 14,326,414 11,348,823 11,507,171 Other restaurant operations 17,678,805 10,222,633 10,025,239 Cost of food product revenues 2,235,076 2,643,594 3,210,388 General and administrative 4,364,147 2,752,539 3,321,296 Depreciation and amortization 6,035,811 2,178,218 2,071,972 Provision for restaurant closings 1,175,434 -- 2,856,105 Loss on sale of Pete's Hospitality 751,614 -- -- ------------ ------------ ------------ Total costs and expenses 59,106,493 40,101,920 43,463,330 ------------ ------------ ------------ Income (loss) from operations (9,981,132) 27,523 (5,811,673) Non-operating income (expenses): Interest income 121,260 166,566 156,550 Interest expense (1,220,666) (850,224) (813,153) Loss on conversion of debt to equity -- -- (1,329,775) Other, net 167,763 704,831 305,731 ------------ ------------ ------------ Total non-operating income (expenses) (931,643) 21,173 (1,680,647) ------------ ------------ ------------ Income (loss) before income taxes and extraordinary item (10,912,775) 48,696 (7,492,320) Income tax provision (benefit) -- -- -- ------------ ------------ ------------ Income (loss) before extraordinary item (10,912,775) 48,696 (7,492,320) Extraordinary item - gain on extinguishment of debt -- -- 455,579 ------------ ------------ ------------ Net income (loss) (10,912,775) 48,696 (7,036,741) Preferred stock dividends 296,586 296,586 294,680 ============ ============ ============ Net income (loss) less preferred stock dividends $(11,209,361) $ (247,890) $ (7,331,421) ============ ============ ============ Loss per common share before extraordinary item $ (0.83) $ (0.02) $ (0.87) Extraordinary item per common share -- -- 0.05 ------------ ------------ ------------ Net loss per common share $ (0.83) $ (0.02) $ (0.82) ============ ============ ============ Weighted average common and common equivalent shares 13,451,487 12,040,163 8,921,543 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F - 5 37 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity
Preferred Stock Common Stock Treasury Stock Shares Amount Shares Amount Shares Amount ------------ ------------ ------------ ------------ ------------ ------------ Balance, July 3, 1994 330,340 $ 330,340 8,425,815 $ 421,291 -- $ -- Conversion of debentures -- -- 1,093,904 54,695 -- -- Issuance of common stock -- -- 1,458,156 72,907 -- -- Conversion of preferred stock (800) (800) 1,000 50 -- -- Preferred stock dividends: Cash -- -- -- -- -- -- Common stock -- -- 133,151 6,658 -- -- Issuance of warrants -- -- -- -- -- -- Net loss -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Balance, July 2, 1995 329,540 329,540 11,112,026 555,601 -- -- Issuance of common stock -- -- 2,003,667 100,183 -- -- Preferred stock dividends: Cash -- -- -- -- -- -- Common stock -- -- 317,965 15,898 -- -- Net income -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Balance, June 30, 1996 329,540 329,540 13,433,658 671,682 -- -- Conversion of stockholder's debt -- -- -- -- -- -- Conversion of interest on on stockholder's debt -- -- -- -- -- -- Repurchase of common stock -- -- -- -- 100,000 (150,000) Preferred stock dividends: Cash -- -- -- -- -- -- Common stock -- -- 829,572 41,479 -- -- Net loss -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Balance, June 29, 1997 329,540 $ 329,540 14,263,230 $ 713,161 100,000 $ (150,000) ============ ============ ============ ============ ============ ============ Additional Accumulated Total Paid-In Earnings Stockholders' Capital (Deficit) Equity ------------ ------------ ------------ Balance, July 3, 1994 $ 16,503,549 $(12,412,265) $ 4,842,915 Conversion of debentures 2,474,958 -- 2,529,653 Issuance of common stock 4,448,591 -- 4,521,498 Conversion of preferred stock 750 -- -- Preferred stock dividends: Cash (4,295) -- (4,295) Common stock (6,658) -- -- Issuance of warrants 25,750 -- 25,750 Net loss -- (7,036,741) (7,036,741) ------------ ------------ ------------ Balance, July 2, 1995 23,442,645 (19,449,006) 4,878,780 Issuance of common stock 3,214,388 -- 3,314,571 Preferred stock dividends: Cash (750) -- (750) Common stock (15,898) -- -- Net income -- 48,696 48,696 ------------ ------------ ------------ Balance, June 30, 1996 26,640,385 (19,400,310) 8,241,297 Conversion of stockholder's debt 3,750,000 -- 3,750,000 Conversion of interest on on stockholder's debt 392,337 -- 392,337 Repurchase of common stock -- -- (150,000) Preferred stock dividends: Cash (1,112) -- (1,112) Common stock (41,479) -- -- Net loss -- (10,912,775) (10,912,775) ------------ ------------ ------------ Balance, June 29, 1997 $ 30,740,131 ($30,313,085) $ 1,319,747 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F - 6 38 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES Consolidated Statements of Cash Flows
Year Ended Year Ended Year Ended June 29, 1997 June 30, 1996 July 2, 1995 ------------ ------------ ------------ Operating activities: Net income (loss) $(10,912,775) $ 48,696 $ (7,036,741) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 6,035,811 2,178,217 2,071,972 Provision for restaurant closings 1,175,434 -- 2,856,105 Loss on conversion of debt to equity -- -- 1,329,775 (Gain)/loss on disposal of assets 726,399 (163,175) -- Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable, trade (142,662) (292,209) 312,140 Accounts receivable from affiliates (47,078) 37,542 (245,469) Inventories 232,236 (192,446) 177,089 Prepaid expenses and other current assets 32,562 255,759 (66,995) Accounts payable and accrued liabilities 2,027,007 (673,405) (325,571) Other assets 1,116,822 (6,031) (331,377) Noncurrent liabilities 142,027 153,406 (81,914) ------------ ------------ ------------ Net cash provided by (used in) operating activities 385,783 1,346,354 (1,340,986) ------------ ------------ ------------ Investing activities: Purchases of property and equipment (1,535,684) (1,642,333) (1,438,320) Proceeds from sale of assets 1,210,345 197,027 -- Collection of note receivable -- 60,391 756,000 Investments in receivables from affiliates (280,792) -- -- Collection of receivables from affiliates -- -- 69,745 Cost of acquisitions, net of cash acquired -- (231,745) -- ------------ ------------ ------------ Net cash used in investing activities (606,131) (1,616,660) (612,575) ------------ ------------ ------------ Financing activities: Net proceeds from issuance of common stock -- -- 2,166,295 Repayment of affiliate borrowings -- (150,000) (519,507) Proceeds from other borrowings and warrants 1,591,572 1,221,790 4,986,550 Repayment of other borrowings (1,419,736) (2,439,297) (3,105,463) Cash dividends (1,112) (750) (4,295) Purchase of treasury stock (150,000) ------------ ------------ ------------ Net cash provided by financing activities 20,724 (1,368,257) 3,523,580 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (199,624) (1,638,563) 1,570,019 Cash and cash equivalents, beginning of period 463,166 2,101,729 531,710 ------------ ------------ ------------ Cash and cash equivalents, end of period $ 263,542 $ 463,166 $ 2,101,729 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F - 7 39 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION Watermarc Food Management Co. (the "Company"), owns and operates 41 restaurants, primarily in the Houston Metropolitan area, under the names "Marco's Mexican Restaurants" ("Marco's Restaurants"); "The Original Pasta Co." ("Pasta Co."); "Billy Blues Barbecue Bar & Grill" ("Billy Blues"); and "Longhorn Cafe". The Company also produces and markets two brands of barbecue sauce and a spice rub, "Billy Blues Barbecue Sauce", "Chris' & Pitt's Bar-B-Que Sauce" and "Chris' & Pitt's Spice Rub". They are marketed to supermarkets, other retail stores and food service outlets. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. BASIS OF PRESENTATION The accompanying financial statements have been prepared assuming the Company will be able to continue as a going concern. The Company has a working capital deficit of approximately $8.2 million at June 29, 1997 and experienced significant losses in fiscal 1997 which raise doubts about the Company's ability to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or capital and to refinance its debt and ultimately attain profitable operations. Management's plans include the following: # Increasing revenues in existing restaurants by remodeling certain Marco's Restaurants and by improving marketing programs and customer service at Marco's and Pasta Co. # Increasing revenues from the sale of food products by reinforcing existing markets, expanding distribution to new market areas, introducing more aggressive marketing programs, adding methods of distribution and developing new products. # Franchising new restaurants. # Maintaining cost controls while increasing revenues. # Obtaining additional equity capital or debt financing. FISCAL YEAR The Company utilizes a 52-53 week fiscal year which ends on the Sunday closest to June 30. References to 1997, 1996 and 1995 are all 52 week periods ended June 29, 1997, June 30, 1996 and July 2, 1995, respectively. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company places substantially all of its cash and cash equivalents with nationally recognized financial institutions and money market mutual funds. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and consist primarily of restaurant food, beverages, supplies, and food products (primarily barbecue sauce) held for sale. F - 8 40 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONT'D: PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Leasehold improvements are amortized on a straight-line basis over the lesser of the life of the lease (ranging from approximately ten to fifteen years) or the estimated useful lives of the improvements. Building, furniture, fixtures and equipment are depreciated using straight-line and accelerated methods over the estimated useful life of the assets, which range from five to thirty years. Major additions which extend service lives are charged to the property accounts as incurred, whereas minor amounts are expensed. Disposals are removed at cost less accumulated depreciation with the resulting gain or loss reflected in current operations. ORGANIZATION COSTS Organization costs are included in other assets and are being amortized on a straight-line basis over five years. INTANGIBLE ASSETS Intangible assets are associated with the purchase of Pasta Co., Pete's Hospitality Co., Inc. and Chris' and Pitt's Barbeque Sauce. These assets are being amortized using the straight-line method over the expected period to be benefited (fifteen years for The Pasta Co.). The Company's management periodically assesses the recorded balances of its intangible assets in light of historic and projected operating trends and profitability and general economic conditions. Management's assessment includes projecting cash flows from each intangible asset over the estimated remaining life. Should this undiscounted amount not equal the unamortized balance related to the asset, an impairment would be indicated and the asset would be written down to fair value. In the fourth quarter of fiscal 1997, management deemed the intangible assets associated with Chris' and Pitt's Barbeque Sauce to be impaired and charged off $3.45 million to reduce the assets to an estimated fair value of $250,000. Also, in the fourth quarter of fiscal 1997, the Company sold Pete's Hospitality Co., Inc. to a related party and wrote off its goodwill. PREOPENING COSTS Certain expenses incurred in connection with the opening of a restaurant (principally the costs of food products and staff training) are accumulated and then expensed at the date of opening. INCOME TAXES Income taxes are provided using the liability method. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years, of temporary differences between the tax basis of the assets and the liabilities and their financial statement amounts. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. REVENUE RECOGNITION Revenues from food product sales are recognized when the order is shipped and ownership passes to the buyer. NET LOSS PER COMMON SHARE Net loss per common share is based on the weighted average number of common shares outstanding during the periods, adjusted for dividends on preferred stock and interest expense, where applicable, plus common equivalent shares, reflected under the treasury stock method, unless the effects of common equivalent shares were antidilutive. Fully diluted loss per share is not presented as it is antidilutive. F - 9 41 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONT'D: IMPACT OF NEW ACCOUNTING STANDARDS In May 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which changes the manner in which earnings per share are calculated and presented. The pronouncement is effective for annual and interim periods ending after December 15, 1997. MANAGEMENT'S ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimated. 2. BUSINESS COMBINATIONS: THE ORIGINAL PASTA CO. Effective January 26, 1996, the Company acquired all of the outstanding common stock of The Pasta Co. from the Company's largest shareholder. The purchase price was $6,716,667, consisting of $3,750,000 of notes and the issuance of 1,666,667 shares of the Company's common stock valued at $2,966,667. The acquisition has been accounted for as a purchase and, accordingly, the assets and liabilities of Pasta Co. have been recorded at their fair value at the date of acquisition. The excess of the purchase price including related acquisition costs of approximately $280,000, over the fair values of the net identifiable assets acquired less liabilities assumed, is reported as goodwill and is being amortized over 15 years. The statement of operations includes the results of Pasta Co. from the date of acquisition. The following table summarizes the unaudited pro forma results of operations of the Company as if the acquisition had occurred at the beginning of each period presented:
1996 1995 ----------- ----------- Revenues $46,086,307 $44,960,944 Net loss (679,509) (8,201,187) Net loss per common share (.08) (0.95)
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 =============
F - 10 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS: Additional information regarding certain balance sheet accounts at June 29, 1997 and June 30, 1996 is as follows:
1997 1996 ------------ ------------ Inventories: Food products $ 225,319 $ 399,946 Restaurant food, beverage and other 257,983 315,592 ------------ ------------ $ 483,302 $ 715,538 ============ ============ Property and Equipment: Land $ -- $ 50,000 Building and leasehold improvements 6,982,563 7,770,515 Furniture, fixtures and equipment 8,781,908 9,828,449 Transportation equipment 61,246 178,293 ------------ ------------ 15,825,717 17,827,257 Less accumulated depreciation and amortization (9,775,086) (8,498,731) ------------ ------------ $ 6,050,631 $ 9,328,526 ============ ============ Intangible Assets: License agreement $ 4,398,528 $ 4,401,572 Goodwill 7,626,255 8,458,728 Favorable lease -- 209,000 ------------ ------------ 12,024,783 13,069,300 Less accumulated amortization (4,811,326) (869,253) ------------ ------------ $ 7,213,457 $ 12,200,047 ============ ============ Other assets: Debt issue costs $ -- $ 77,178 Organizational costs -- 2,024 Other 111,381 104,484 ------------ ------------ $ 111,381 $ 183,686 ============ ============ Accrued liabilities: Payroll and related costs $ 911,861 $ 487,820 Taxes, other than payroll and income taxes 831,332 409,093 Rent -- 457,673 Interest 104,162 139,182 Other 416,466 337,287 ------------ ------------ $ 2,263,821 $ 1,831,055 ============ ============
F - 11 43 4. LONG-TERM DEBT: At June 29, 1997 and June 30, 1996, long-term debt consisted of the following:
1997 1996 ----------- ----------- Note payable to bank, due in monthly installments with interest at prime plus 1%, maturing in May 1999, collateralized by certain property and equipment $ 383,333 $ 583,333 Mortgage note payable, due in monthly installments with interest at 10%, collateralized by certain land and building -- 254,125 Notes payable to banks and trade vendors, due in monthly installments with interest ranging from 0% to 12.0%, maturing at various dates through 1999, collateralized by certain property and equipment 965,610 840,057 Notes payable to banks, due in monthly installments with interest rates ranging from 8.5% to 9.5%, maturing at various dates through January 1998, collateralized by certain vehicles 13,103 26,483 Subordinated notes, interest at 12% payable quarterly, principal due in July 1997, collateralized by all of the outstanding stock of Marco's Mexican Restaurants, Inc. (See Subsequent Events.) 2,500,000 2,500,000 Note payable to an unaffiliated foreign investor, interest at 10% payable quarterly, principal due in June 1999, collateralized by certain property and equipment 1,000,000 1,000,000 Note payable to bank, due in monthly principal installments with interest payable monthly at 10%, maturing in August 2000, 415,176 519,878 collateralized by certain property and equipment Note payable to bank, due in monthly principal installments with interest payable quarterly at 10% maturing March 2001, collateralized by certain property and equipment 974,832 1,148,644 9% convertible subordinated debentures due March 1999, collateralized by inventories and accounts receivable, licenses, trademarks and equipment 217,000 217,000 Note payable to bank, due in monthly principal installments with interest payable monthly at the bank's prime rate, maturing in April 2004, collateralized by real property and guaranteed by stockholder 295,099 -- Note payable to bank, due in monthly principal installments with interest payable monthly at the bank's prime plus 1% maturing in February 2002, guaranteed by stockholder 233,333 -- Note payable to bank, due in monthly principal installments with interest payable monthly at the bank's prime plus 2% maturing in April 1998, guaranteed by stockholder 274,867 -- Capital lease obligations -- 10,997 ----------- ----------- 7,272,353 7,100,517 Less current portion (2,787,814) (1,401,825) ----------- ----------- $ 4,484,539 $ 5,698,692 =========== ===========
F - 12 44 4. LONG-TERM DEBT CONT'D: In March 1994, the Company issued $2,691,000 of 9% Convertible Subordinated Debentures which are due on March 16, 1999. Interest is payable semi-annually on March 15 and September 15. The debentures are convertible at any time prior to maturity at the option of the holder, unless previously redeemed, into shares of common stock at a conversion price of $5.00 of principal into one share of common stock. The debentures are redeemable at the option of the Company, in whole or in part, at any time, at prices ranging from 105% of the principal amount in 1994 to 100% of the principal amount in 1999. The debentures are also subject to mandatory conversion at the option of the Company if at any time the closing bid price of the Company's common stock exceeds $12 per share for twenty consecutive days. The debentures are collateralized by a second lien on the inventories, licensing, trademarks and other intangibles related to the Chris' and Pitt's product line and by a continuing security interest in various restaurant equipment. In May of 1995, the Company offered the debentureholders the right to convert (until June 30, 1995) the principal and accrued interest owed on their debentures into common stock at a modified conversion rate of $2.3125 of debenture principal and interest for one share of common stock. The Company recorded a $1.3 million charge in 1995 pursuant to "sweetened" conversion terms. Debentureholders owed an aggregate of $2,474,000 in principal agreed to the conversion. There is currently outstanding $217,000 of debentures held by debentureholders who elected not to convert at the modified conversion rate. In connection with the subordinated debenture issuance, the Company incurred debt issue costs of approximately $438,000 which were capitalized and amortized using a method which approximates the interest method. Unamortized debt issue costs associated with debentures which were converted to stock were charged to paid-in-capital. Annual maturities of long-term debt, as of June 29, 1997 are: $2,787,814 in 1998; $3,296,031 in 1999; $674,268 in 2000; $338,189 in 2001; $81,611 in 2002; and $94,440 thereafter. The carrying amounts of notes payable approximate fair value. 5. NOTES PAYABLE TO STOCKHOLDER: At June 29, 1997 and June 30, 1996, notes payable to stockholder consisted of the following (see "Note 11 - Related Party Transactions"):
1997 1996 ----------- ----------- Note associated with the acquisition of Pasta Co. with principal and interest at 10% due in July 1997, collateralized by assets related to $ -- $ 595,000 Pasta Co. In May 1997, the Company and the Stockholder agreed to offset their debts between them. (See Related Party Transactions.) Note associated with the acquisition of Pasta Co. with interest at 10% due quarterly with principal due in quarterly payments beginning September 15, 2000 and ending September 15, 2002, collateralized by -- 2,750,000 assets related to Pasta Co. In May 1997, the Company and the Stockholder agreed to convert this note to common stock rights.(See Related Party Transactions.) Note associated with the acquisition of Pasta Co. with interest at 10% due quarterly with principal payments due on July 15 and December 31, 1997 at $500,000 each, collateralized by assets related to Pasta Co. In May 1997, the Company and the Stockholder agreed to convert this note -- 1,000,000 to common stock rights. (See Related Party Transactions.) Note associated with the acquisition of Pasta Co. with principal and interest at 6% due July 1997, collateralized by assets related to Pasta -- 224,202 Co. In May 1997, the Company and the Stockholder agreed to offset their debts between them. (See Related Party Transactions.) Subordinated note, interest at 11% (12% in 1996) payable quarterly, principal due in June 2002. (See Subsequent Events.) 500,000 500,000 ----------- ----------- $ 500,000 $ 5,069,202 =========== ===========
F - 13 45 5. PAYABLE TO STOCKHOLDER CONT'D: The Company and its subsidiaries' various loan agreements contain certain restrictive financial and other covenants. Additionally, some existing loan covenants contain provisions which limit the amount of funds available for transfer from certain subsidiaries to the parent corporation without the consent of the lender. At June 29, 1997, the Company had no significant credit facilities available. 6. LEASE OBLIGATIONS: The Company leases restaurant facilities and certain equipment and leasehold improvements under operating lease agreements having terms expiring at various dates through 2012. The leases have renewal clauses of 5 to 10 years, at the option of the Company, and have provisions for contingent rentals based upon a percentage of revenues in excess of a minimum amount. Rental expense under operating lease agreements was approximately $2,507,000, $2,599,000 and $2,774,000 in 1995, 1996 and 1997 respectively. Future minimum lease payments, excluding contingent rentals, at June 29, 1997, were as follows:
FISCAL YEAR OPERATING 1998 $ 3,584,000 1999 3,146,000 2000 3,367,000 2001 2,573,000 2002 2,435,000 Thereafter 8,061,000 ------------ Total future minimum lease payments $ 23,166,000 ============
7. CONTINGENCIES: Effective July 1, 1992, the Company voluntarily discontinued its workers' compensation coverage in the State of Texas. The Company anticipates that the ultimate expense of representing itself in the settlement of claims will be less than the cost of insurance. The Company intends to vigorously defend and pursue all unreasonable claims. Management does not believe that any existing claims will have a material adverse impact on the financial position, results of operations, or cash flows of the Company. At June 29, 1997, the Company has accrued for all anticipated settlements. 8. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS: Supplemental disclosure of cash flow information is as follows:
1997 1996 1995 -------- -------- -------- Interest paid $585,000 $624,855 $608,074 Income taxes paid -- -- --
F - 14 46 8. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS CONT'D: Supplemental disclosure of noncash investing and financing activities:
1997 1996 1995 ---------- ---------- ---------- Restaurant development rights received in satisfaction of note receivable $ -- $ -- $ 150,000 Conversion of preferred stock to common stock -- -- 800 Conversion of subordinated debt to equity, net of issuance cost -- -- 2,171,912 Issuance of warrants in lieu of payment of brokers fees -- -- 25,752 Issuance of common stock in lieu of payment of liabilities -- 347,904 1,418,761 Issuance of common stock for preferred stock dividend 41,479 15,898 6,658 Issuance of debt in payment of liabilities -- 548,680 -- Conversion of stockholder's debt and interest to equity 4,142,337 -- -- Note receivable from sale of Pete's Hospitality 300,000 -- -- Offset of stockholder debt and interest against receivables 819,202 -- -- Assumption of debt by buyer upon sale of Pete's Hospitality 79,491 -- --
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 ===========
9. INCOME TAXES: The significant components of the Company's deferred tax assets and liabilities, as of June 29, 1997 and June 30, 1996, were as follows:
1997 1996 ----------- ----------- Deferred tax assets: Intangible assets $ 1,020,000 $ -- Accrued liabilities 196,000 275,723 Net operating loss 8,262,000 6,117,025 Property and equipment 442,000 44,044 ----------- ----------- Total deferred tax assets 9,920,000 6,436,792 ----------- ----------- Deferred tax liabilities: Deductible intangible assets -- 421,350 ----------- ----------- Total deferred tax liabilities -- 421,350 ----------- ----------- Net deferred tax assets before valuation allowance 9,920,000 6,015,442 Valuation allowance (9,920,000) (6,015,442) ----------- ----------- Net deferred tax asset $ -- $ -- =========== ===========
F - 15 47 9. INCOME TAXES CONT'D: The reconciliation of the provision for income taxes to the income tax expense resulting from the application of the federal statutory tax rates to pretax income is as follows:
1997 1996 1995 ----------- ----------- ----------- Tax provision (benefit) at statutory rate ($ 3,710,344) $ 16,557 $(2,392,492) Amortization of goodwill 37,590 69,382 -- Loss on conversion of debt to equity -- -- 452,124 Merger transaction expenses -- -- -- Change in valuation allowance 3,904,558 (103,797) 1,695,325 Other 231,804 17,858 245,043 ----------- ----------- ----------- Total provision (benefit) for income taxes $ -- $ -- $ -- =========== =========== ===========
As of June 29, 1997, the Company had consolidated net operating loss carryforwards (NOL's) of approximately $24.3 million which expire in varying amounts through the fiscal years 2006 through 2011. Due to the merger with Marco's Restaurants in 1994, the consolidated pre-acquisition NOL's of approximately $11 million are not available to offset any future taxable income that may be generated by Marco's Restaurants. In addition, the utilization of pre-acquisition NOL's is further limited due to a greater than 50% change in ownership. 10. STOCKHOLDERS' EQUITY: ISSUANCES OF COMMON STOCK FISCAL YEAR 1997: In December 1996, the Company issued 236,607 shares of common stock as payment of a dividend to preferred shareholders. In June 1997, the Company declared 592,965 shares of common stock as payment of a dividend to preferred shareholders. FISCAL YEAR 1996: In December 1995, the Company issued 225,000 shares of common stock valued at approximately $180,000 in partial satisfaction of a settlement of a lawsuit. In January 1996, the Company issued 112,598 shares of common stock as payment of a dividend to preferred shareholders. In January 1996, the Company issued 1,666,667 shares of common stock valued at $2,966,667 in connection with the acquisition of Pasta Co. In February 1996, the Company issued 100,000 shares of common stock as payment of legal fees of $150,000. In February of 1996, the Company issued 12,000 shares of common stock valued at $18,000 in settlement of a lawsuit. In June 1996, the Company issued 205,367 shares of common stock as payment of a dividend to preferred shareholders. F - 16 48 FISCAL YEAR 1995: In July 1994, the Company issued 40,000 shares of common stock valued at $260,000 in satisfaction of a commission in connection with the merger with Marco's Restaurants, of which 20,000 shares were issued to a director of the Company. In August 1994, the Company issued 53,516 shares of common stock valued at approximately $241,000 in satisfaction of construction liabilities related to a Billy Blues restaurant in Dallas, Texas. In September 1994, the Company received net proceeds of approximately $1.0 million from a private placement of 375,438 shares of common stock. In September 1994, the Company issued 16,435 shares of common stock in lieu of cash equivalent interest payments of $47,250 related to its subordinated debentures. In November 1994, the Company issued 33,493 shares of common stock valued at $70,000 in satisfaction of construction liabilities related to a Billy Blues restaurant in Dallas, Texas. In December 1994, the Company issued 69,132 shares of common stock as payment of a dividend to preferred stockholders. In February 1995, a preferred stockholder converted 800 shares of preferred stock into 1,000 shares of common stock. In March 1995, the Company issued 16,435 shares of common stock in lieu of cash equivalent interest payments of $47,250 related to its subordinated debentures. In June 1995, the Company issued 153,477 shares of common stock in satisfaction of trade payables of approximately $321,000. In June 1995, the Company issued 39,750 shares of common stock in satisfaction of approximately $80,000 in construction liabilities related to its Billy Blues restaurant in Denver, Colorado. In June 1995, the Company issued 13,000 shares of common stock in satisfaction of a liability of approximately $40,000 related to a consulting agreement. In June 1995, the Company issued 68,800 shares of common stock in satisfaction of an employment contract settlement of $172,000. In June 1995, the Company issued 26,312 shares of common stock in satisfaction of notes payable of $50,000. In June 1995, the Company issued 64,019 shares of common stock as payment of a dividend to preferred stockholders. In June 1995, the Company issued 1,093,904 shares of common stock for the conversion of approximately $2.5 million of subordinated principal and accrued interest on debentures. In June 1995, the Company issued 621,500 shares of common stock in a private placement and received net proceeds of approximately $1.2 million. PREFERRED STOCK In February 1993, the Company issued 450,000 shares of 9% Cumulative Convertible Preferred Stock ("Preferred Stock") with a face amount of $10 per share. Dividends are cumulative and are payable in semi-annual installments, on June 30 and December 31, at a rate of $.90 per share per annum. Dividends may be paid in either cash or an equivalent value of common stock. The Preferred Stock has no voting rights and has a liquidation preference of $10 per share plus accumulated and unpaid dividends. F - 17 49 10. STOCKHOLDERS' EQUITY CONT'D: Holders of the shares of Preferred Stock have the right, at the holder's option, to convert any or all such shares into common stock at any time. If at any time the closing sale price of the Company's common stock exceeds $10 per share, the Company may convert the Preferred Stock to common stock. The Preferred Stock is convertible at a rate of one share of common stock for each $8 in face value of Preferred Stock converted. The Preferred Stock is redeemable at the Company's option at $12 per share. At the close of the Company's public offering of its Preferred Stock, the Company issued, to the underwriter, warrants to purchase 45,000 shares of preferred stock at an exercise price of $12 per share extended until January 1998. None of these warrants have been exercised. COMMON STOCK WARRANTS AND STOCK OPTION PLANS The Company has the following common stock warrants and option plans: o SERIES A WARRANTS - The Company has 875,500 Series A Warrants outstanding at June 29, 1997. Each warrant entitles the holder to purchase one share of common stock at a price of $6.50 per share, subject to certain adjustments, until the warrants expire. The expiration date has been extended to May 15, 1998. The Company has the right to redeem the warrants at $.01 per warrant, upon written notice, if the daily common stock closing price exceeds $7.80 per share during any twenty consecutive business days. o OTHER WARRANTS - In connection with the issuance of $3 million in subordinated notes, the Company issued 1,333,320 warrants, each of which evidence the right to purchase a share of the Company's common stock at a purchase price of $2.25 per share until December 31, 1999. In connection with an agreement to extend the repayment date of the notes, the purchase price was reduced to $ .25 per share. Also, in connection with the subordinated notes, the Company issued warrants to purchase 150,000 shares of common stock to the placement agent at an exercise price of $2.50 per share, which expire on December 31, 1999. In connection with an agreement to extend the repayment date of the notes, said purchase price was reduced to $ .25 per share. In connection with the subordinated note conversion of Mr. Bombaywala from the 12% Subordinated Note to the 11% Subordinated Note in June 1997, 50,000 warrants to purchase common stock at $1.50 per share were issued to Mr. Bombaywala. In connection with a borrowing of $1 million from an unaffiliated foreign corporation, the Company issued warrants to purchase 75,000 shares of common stock to said corporation at a purchase price of $3 per share until May 31, 1997. The Company extended the expiration date to January 1998. In January 1996, the Company issued additional warrants to this corporation to purchase (1) 50,000 shares of common stock at $3.00 per share exercisable until January 1, 1999 and (2) 50,000 shares of common stock at $4.00 per share exercisable until January 1, 2001. In connection with the issuance of common stock in a private offering, the Company issued warrants to purchase 71,250 shares of common stock to the placement agent at a purchase price of $3 per share until May 31, 1997. The Company extended the expiration date to January 1998. In June 1997, the Company issued warrants to the former President of the Company to purchase 180,000 shares of common stock exercisable at $.50 until June 30, 1999. o STOCK OPTION PLAN - The Company has a Stock Compensation Plan under which either incentive stock options or non-qualified stock options may be issued to officers, key employees and non-employee directors of the Company. All options granted under the plan have been at fair market value or greater on the date of grant and expire five years from the date of grant. The Company has reserved a total of 1,000,000 shares of common stock for the plans and an additional 589,500 options were available for grant at June 29, 1997. The Company has elected to follow Accounting Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use by the Company in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options either exceeds or equals the market price of the underlying stock on the date of grant, no compensation expense has been recognized. The existing stock option valuation models were developed for use in estimating the fair value of traded options which have no vestings restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value based accounting method of that Statement. In the opinion of the management, the pro forma net income and earnings per share under the fair value based accounting method were not materially different than those accounted for using the intrinsic value based accounting method prescribed by APB 25. F - 18 50 A summary of stock option activities during 1997, 1996 and 1995 is as follows:
NUMBER OF OPTION PRICE SHARES PER SHARE Options outstanding at July 3, 1994 457,000 4.63 to 5.09 Granted 747,000 2.00 to 2.88 Canceled (687,000) 4.63 to 5.09 --------- ------- ---- Options outstanding at July 2, 1995 517,000 2.00 to 4.63 Granted 134,500 1.00 Canceled (40,000) 2.00 to 4.63 --------- ------- ---- Options outstanding at June 30, 1996 611,500 1.00 to 2.88 Granted 180,000 .25 to .50 Canceled (381,000) 1.00 to 4.63 --------- ------- ---- Options outstanding at June 29, 1997 410,500 .25 to 1.00 ========= ------- ---- Exercisable at June 29, 1997 188,700 .25 to 1.00 ========= ------- ====
11. RELATED PARTY TRANSACTIONS On September 7, 1995, the Board of Directors of the Company approved the acquisition of all of the issued and outstanding shares (the "Shares") of Pasta Co. from Mr. Bombaywala, the sole stockholder and director of Pasta Co. On September 14, 1995, the Company, Mr. Bombaywala, Pasta Co. and the Company, entered into an Agreement and Plan of Merger (the "Merger Agreement") which provided for the merger of Pasta Co. with and into the Company as the surviving corporation (the "Merger"). The principal assets of Pasta Co. consisted of its ownership of ten (10) restaurants in Houston, Texas. In consideration for the Shares, Mr. Bombaywala received 1,666,667 shares of the Company's Common Stock (the "Merger Shares") and two promissory notes in the aggregate principal amount of $3,750,000 (the "Notes"). The Merger Shares were valued at $1.78 per share which was the market value of the Common Stock on the date of the Merger. The total consideration paid to Mr. Bombaywala was $2,966,667; however, as provided below, a portion of the Merger Shares was subject to future release and earn out. In addition, the Company assumed approximately $3.6 million of liabilities and indebtedness of Pasta Co. outstanding as of January 26, 1996, including amounts due to Mr. Bombaywala as noted below. Although not required by law, the Board of Directors of the Company elected to submit the Merger to its independent shareholders for approval at its Annual Meeting of Shareholders which was held January 9, 1996. Mr. Bombaywala, who then owned 4,620,000 shares of the Company's Common Stock, or 41.6%, excluding the Merger Shares, did not vote on the Merger at the Annual Meeting. The Merger was approved, and the effective date of the Merger (the "Effective Date") was January 26, 1996. As of the Escrow Closing Date, the Company was granted the right to manage Pasta Co. and received a management fee of three percent (3%) of the gross revenues of Pasta Co. through the Effective Date. Such fees amounted to approximately $137,000. The Merger Shares are restricted securities but have demand and incidental registration rights. A total of 350,000 Merger Shares were subject to a Development Escrow Agreement which provided for the earnout and release of such shares based upon (i) the opening of five additional Pasta Co. restaurants on or before December 31, 1996 at an average cost not to exceed $400,000 per restaurant, or (ii) the share price for the Company's Common Stock exceeding $5.00 per share for any ten consecutive business days on or before June 30, 1996 or $7.00 per share on or before June 30, 1997. The Company completed the opening of the five additional Pasta Co. Restaurants before December 31, 1996 and, therefore, the Merger Shares have been released to Mr. Bombaywala. On the Effective Date, a promissory note of Pasta Co. to Mr. Bombaywala in the principal amount of $1,260,000 was paid by the Company. Payment was made as follows: $150,000 in cash, transfer of ownership of land and building valued at $515,000 and a note to Mr. Bombaywala in the amount of $595,000. Management is of the opinion that the value represented its fair value at the time of transfer. Mr. Bombaywala received an additional note from the Company in the amount of $224,202 for other obligations of Pasta Co. arising prior to the Effective Date. These notes payable, totaling $819,202, were offset against notes receivable from Mr. Bombaywala. (See below.) F - 19 51 11. RELATED PARTY TRANSACTIONS CONT'D: At June 30, 1996, the Company had a noncurrent, 6% note receivable from Ghulam Bombaywala ("Mr. Bombaywala"), the majority shareholder, officer and a director of the Company in the amount of $2,175,310, payable in three annual principal installments of $200,000 each beginning July 31, 1996, and a final payment of the remaining principal and interest on July 31, 1999. The note is collateralized by certain assets of the shareholder. Accrued interest of $170,844 as of July 2, 1995 was due July 31, 1995. In September of 1995, the Board of Directors voted to modify the terms of the note by deferring payment of the interest due until December 31, 1995. In May 1996, the Company and Mr. Bombaywala agreed to offset interest due from Mr. Bombaywala under the note against interest due to Mr. Bombaywala under notes associated with the purchase of Pasta Co. At June 30, 1996, $206,388 of interest payable to Mr. Bombaywala was offset against interest receivable from Mr. Bombaywala. The remaining balance of interest receivable at June 30, 1996 was $94,974. Such amount, along with amounts accruing in the future will be offset against interest payable to Mr. Bombaywala. During 1997, the Company earned interest of $123,877 on the note receivable from Mr. Bombaywala and was charged interest of $123,757 on various notes payable to him. The interest receivable and payable, together with interest receivable at June 30, 1996 of $94,974 were offset with a remaining receivable from Mr. Bombaywala of $95,093 outstanding at June 29, 1997. Additionally, the Company incurred $392,337 in interest expense on two notes aggregating $3,750,000. In connection with the Conversion and Offset Agreement, Mr. Bombaywala forgave such interest which has been recorded as a contribution to capital. On May 15, 1997 Mr. Bombaywala and the Company entered into a Conversion and Offset Agreement whereby the parties to the notes agreed to convert the $3,750,000 of debt evidenced by the Notes to 7,500,000 Common Stock Rights (the "Rights"). Each of the Rights shall automatically convert to one share of the Company's Common Stock at a later date without further action or consideration by Mr. Bombaywala, assuming the Company has a sufficient number of shares authorized and freely issuable. In exchange for the Rights, Mr. Bombaywala forgave the Notes. A value of $.50 per share was determined by the Board of Directors in connection with the conversion. The Company intends to proceed with an amendment to its Articles of Incorporation to increase its authorized Common Stock to a sufficient level to enable it to issue all of the shares. However, there can be no assurance that such amendment will be adopted. The Company also agreed with Mr. Bombaywala to offset $819,202 in additional notes payable to, against notes receivable from, Mr. Bombaywala. During 1997, the Company sold the stock of Pete's Hospitality Co., Inc. to its former president for a 10% note receivable of $300,000 payable over approximately five years. The Company recorded a loss on disposal of approximately $750,000 during 1997. In April 1997, the Company agreed to sell equipment associated with three new restaurants to Mr. Bombaywala and lease the assets back. The three restaurants were opened in the second and fourth quarters of fiscal 1997. The Company believes that the selling price of $750,000 and the lease rate are comparable to those which could be attained from an unrelated third party. There was no gain or loss to the Company on this transaction. During fiscal 1997, 100,000 shares of common stock were returned to the Company from a Director of the Company in exchange for cash of $1.50 per share and the agreement of the Company to pay the balance owed to the Director's law firm in monthly installments in the ordinary course of business. In December 1994, Mr. Bombaywala purchased $500,000 principal amount of the Company's subordinated notes and received 222,222 warrants to purchase a like number of shares of common stock. Mr. Bombaywala is also obligated to purchase the remaining $2.5 million of the Subordinated Notes if they have not been paid in full at maturity. In June 1997, Mr. Bombaywala converted this 12% subordinated debt to 11% subordinated debt, due June 2002. Mr. Bombaywala has also guaranteed other obligations of the Company, including notes payable and leases associated with Marco's and Pasta Co. restaurants. In August 1996, the Company sold for $350,000 previously mortgaged real property located at the Victoria, Texas Marco's Restaurant location to the Bombaywala Family Trust ("The Trust"). The Trust is administered by M.U. Bombaywala, Trustee, for the purpose of his grandchildrens' education. The real property and certain assets are now being leased by the Company from the Trust. The Trust also owns the real property on which one of the Company's Pasta Co. Restaurants is located, having purchased it from an unaffiliated third party. The Trust leases this property to the Company. The Company believes that both leases are at rates comparable to those which could be attained from unrelated third parties. In May of 1995, the Company began factoring accounts receivable through Catalyst Financial Co., ("Catalyst") paying factoring fees of approximately $19,000 in fiscal 1995 and $75,000 in fiscal 1996. The Company believes that the fees paid were comparable to those that would be charged by a competing factoring company. Mr. Bombaywala is a principal of Catalyst. F - 20 52 11. RELATED PARTY TRANSACTIONS CONT'D: In connection with the private offering of the Subordinated Notes, the Company entered into an 18-month Financial Advisory Agreement (the "Advisory Agreement") with Sanders Morris Mundy Inc. ("SMM"), the placement agency in the offering. As placement agent, SMM received a 10% commission on the sale of the Subordinated Notes, excluding the $500,000 of Subordinated Notes purchased by Mr. Bombaywala. Under the terms of the Advisory Agreement, the Company also agreed to pay SMM a monthly fee of $10,000 in consideration for assistance in the Company's acquisition efforts and capital raising endeavors. Furthermore, pursuant to the Advisory Agreement, the Company also issued to SMM warrants to purchase 150,000 shares of Common Stock at an exercise price of $2.50 per share (the "SMM Advisory Warrants"), which expire on December 31, 1999. SMM subsequently transferred 45,000 of the SMM Advisory Warrants to Mr. Chadwick, Senior Vice President and a Managing Director of SMM and a director of the Company. In July 1997, in connection with an extension on the payment terms of the Subordinated Notes, the exercise price of the warrants was reduced to $.25 per share and the Advisory Agreement was extended until December 31, 1997. In September of 1995, the Company entered into an eight month financial advisory agreement with Noesis Capital Corp. ("Noesis"), in order to obtain assistance in identifying sources of financing, developing its acquisition program and with shareholder relations. Under the terms of the agreement, the Company paid $60,000 to Noesis during fiscal 1996. Nico B. Letschert is President of Noesis and a director of the Company. 12. SUBSEQUENT EVENTS: In the fourth quarter of fiscal 1997 (June 1997) the Company offered a private placement of $4 Million of 11% Convertible Subordinated Notes due June 30, 2002 (the "Convertible Subordinated Notes") pursuant to exemptions from registration under the Securities Act of 1933, as amended (the "Act") and the rules and regulations promulgated thereunder, including, without limitation, Section 4(2) and Regulation D. The Convertible Subordinated Notes are being offered directly by the Company to qualified accredited investors. The Company has not retained a broker or underwriter to assist with the offering although it may elect to do so in the future on terms to be negotiated. Holders of the Convertible Subordinated Notes received warrants (the "Convertible Subordinated Note Warrants") to purchase shares of Common Stock at a purchase price of $1.50 per share until June 30, 2002. Interest on the Convertible Subordinated Notes is payable quarterly beginning September 30, 1997. The Convertible Subordinated Notes are currently unsecured and may be subordinated to certain defined senior indebtedness. As of September 30, 1997, $700,000 principal amount of the Convertible Subordinated Notes has been subscribed. The proceeds of the offering were used to repay a portion of the $3 million principal amount of 12% Subordinated Notes originally due July 31, 1997. The balance of the Subordinated Notes was extended to July 10, 1998. Ghulam M. Bombaywala, Chairman of the Board, Chief Executive Officer and a director of the Company, converted the $500,000 principal amount of 12% Subordinated Notes owed to him into the 11% Convertible Subordinated Notes, pursuant to a Subordinated Note Conversion Agreement dated June 1, 1997 (the "Conversion Agreement"). Pursuant to the Conversion Agreement, Mr. Bombaywala canceled the $500,000 principal amount of 12% Subordinated Notes owed him by the Company and received an 11% Convertible Subordinated Note of equal principal amount with the same terms and conditions as the Convertible Subordinated Notes being offered by the Company to prospective investors. Additionally, in September 1997, the Company guaranteed a promissory note with United Central Bank for $850,000 due September 2002. The proceeds of the note were used to repay a portion of the $3 million principal amount of 12% Subordinated Notes originally due July 31, 1997. The Company acquired 240,000 shares (the "CluckCorp Shares") of the out- standing common stock, $0.1 par value of CluckCorp International, Inc., a Texas corporation ("CluckCorp") on June 30, 1994 upon the conversion of and as partial payment for, a promissory note of CluckCorp owed to the Company in the principal amount of $800,000 (the "CluckCorp Note") issued in June 1993 and in exchange for certain other advances owed to the Company. The CluckCorp Note has a maturity date of June 30, 1998, and was payable, at the option of CluckCorp, in whole or in part, in cash or with Common Stock of CluckCorp. During 1994 CluckCorp repaid a portion of the CluckCorp Note in cash and the remaining portion of the CluckCorp Note and certain advances were paid with the CluckCorp Shares. The Company subsequently sold the CluckCorp Shares to JEB Investment Corporation, a Texas corporation ("JEB") in exchange for a $1,800,000 recourse promissory note executed by JEB as maker (the "JEB Note") bearing interest at 9% per annum, payable annually, with a final maturity date of June 30, 1996. The JEB Note was secured by the CluckCorp Shares pursuant to a Pledge Agreement. JEB defaulted on the payments required under the JEB Note. In May 1997, JEB and the Company executed an agreement whereby JEB relinquished all right, title and interest in the CluckCorp Shares to the Company pursuant to the Company's foreclosure rights in consideration for the Company relinquishing all of its rights under the JEB Note. The Company is currently selling the CluckCorp Shares in public and private transactions. F - 21 53 13. IMPAIRMENT OF ASSETS: Property and Equipment. In the fourth quarter of fiscal 1997, the Company made a decision to sell the remaining Billy Blues Restaurant. Accordingly, the assets were deemed to be impaired and written down to their estimated fair value. An impairment expense of $1.1 million was recognized during 1997. Additionally, the Company sold one Marco's Restaurant in the fourth quarter for a loss of approximately $75,000. In 1997, an impairment expense was recorded to reflect the loss on sale. Intangible Assets. In the fourth quarter of fiscal 1997, the Company deemed the intangible assets associated with Chris' & Pitt's Barbeque Sauce to be impaired. Management estimated the fair value and, accordingly, an impairment expense of approximately $3.45 million was recorded during 1997 and is included in depreciation and amortization expense. 14. EMPLOYEE BENEFIT PLANS: An incentive savings plan has been established which is a qualified profit sharing plan under Section 401(k) of the Internal Revenue Code. Contributions to the incentive savings plan are determined by the board of directors. Employees may also make contributions to the incentive savings plan based upon a percentage of qualified compensation in accordance with the Internal Revenue Service rules and regulations. No contributions were made to this plan by the Company during 1997, 1996 or 1995. F - 22 54 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 2.1 Stock Purchase Agreement dated June 29, 1997 between Watermarc Food Management Co. (the "Company") and Angelo Pitillo 4.1 Amendment No. 3 to Warrant Agreement covering Series A Warrants 4.2 Notice of Extension of Warrant Expiration Date to May 15, 1998 4.3 Second Amendment to Purchase Agreement dated effective as of July 31, 1997, among the Company and the Purchasers relating to $3,000,000 12% Subordinated Notes due July 31, 1997 4.4 Second Amendment to Financial Advisory Agreement dated July 31, 1997 between the Company and Sanders Morris Mundy, Inc. 4.5 Conversion and Offset Agreement dated May 15, 1997 between The Original Pasta Co., Marco's Mexican Restaurants, Inc., the Company and Ghulam M. Bombaywala 4.6 Subordinated Note Conversion Agreement dated June 1, 1997 between the Company and Ghulam M. Bombaywala 4.7 Specimen of Purchase Agreement for 11% Convertible Subordinated Notes due June 30, 2002 4.8 Form of 11% Convertible Subordinated Promissory Note due June 30, 2002 4.9 Form of Warrant to Purchase Common Stock of the Company expiring on June 30, 2002 issued to purchasers of 11% Subordinated Notes 10.1 License Agreement dated June 29, 1997 between Marco's Mexican Restaurants, Inc. and Mohammed S. and Rubina S. Akhtar licensing the use of the name Marco's in the operation of a restaurant 10.2 $300,000 promissory note from the Company to MetroBank dated April 11, 1997 10.3 $300,000 promissory note from the Company to United Central Bank dated April 7, 1997 10.4 $250,000 promissory note from the Company to Langham Creek National Bank dated February 14, 1997 11.1 Statement regarding computation of per share earnings 21.1 Subsidiaries of the Registrant 27.0 Financial Data Schedule 99.1 Form 8-K dated August 20, 1997 99.2 Form 8-K Amendment No. 1 dated August 20, 1997
EX-2.1 2 STOCK PURCHASE AGREEMENT - ANGELO PITILLO 1 EXHIBIT 2.1 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement is made effective as of June 29, 1997 (referred to as effective date), between Watermarc Food Management Co., a corporation organized under the laws of the State of Texas, with offices at 11111 Wilcrest Green, Suite 350, City of Houston, County of Harris, State of Texas, referred to as Seller, and Angelo Pitillo, with an address of 62 Legend Lane, City of Houston, County of Harris, State of Texas, referred to as Buyer. RECITALS A. Seller is the owner of all of the issued and outstanding shares of common stock, called the Shares, of Pete's Hospitality Co., Inc., a corporation organized under the laws of the State of Washington and having its principal office at 1020 S. 344th Street, Suite 210, City of Federal Way, State of Washington, called Company. B. Buyer desires to acquire the Shares from Seller upon the terms and conditions set forth in this Agreement, and Seller desires to sell the Shares to Buyer upon those terms and conditions. C. Buyer desires to pay for the Shares with, and Seller desire to accept as payment, a promissory note, called the Note. For the reasons set forth above, and in consideration of the mutual covenants contained in this Agreement, the Parties agree as follows: Section I Sale and Purchase Subject to the terms and conditions set forth in this Agreement, Seller shall sell the Shares of Company to Buyer, and Buyer shall purchase the Shares of Company from Seller. 2 Section II Consideration The consideration for the total issued and outstanding Shares of the Company stocks shall be the sum of Three Hundred Thousand Dollars ($300,000.00) to be paid to Seller by Buyer in accordance with the terms of the Note to be executed contemporaneously with this Agreement and attached hereto as Exhibit A and incorporated herein by reference. Seller shall have a continuing security interest in all inventory, equipment, furniture, and fixtures now owned or later acquired by Buyer as collateral security for Buyer's payment obligations contained this Agreement and the Note, as more fully set forth in the Security Agreement attached hereto as Exhibit B and incorporated herein by reference. Buyer agrees to execute any financing statements as Seller may reasonably require to perfect Seller's security interests. If Buyer defaults in any installment of Buyer's payment obligation, or assigns, pledges, or otherwise disposes of Buyer's stock without the prior written consent of Seller, then Seller shall have the option to declare the remaining balance at once due and payable. Seller shall also be entitled to recover reasonable attorneys' fees incurred in the collection of the balance due. Section III Representations and Warranties of Seller Seller represents and warrants to Buyer that: (1) Company is a corporation duly organized and validly existing and in good standing under the laws of the State of Washington, and has all of the corporate powers necessary to engage in the business in which it is currently engaged. (2) The authorized capital stock of Company consists of 59,726 shares of common stock, having a par value of $.50 per share, of which all 59,726 shares of common stock are issued and outstanding. (3) Company has good and marketable title to all of its property and assets. In some instances, the property and assets are subject to mortgages, pledges, liens, conditional sales agreements, leases, encumbrances, or charges. (4) Seller has full and valid title to the Shares to be delivered by Seller, and there will be no existing impediment to the sale and transfer of the Shares to Buyer. Upon delivery to Buyer, the Shares shall be free and clear of all liens, charges, and encumbrances whatsoever, and the Shares shall be legally 3 issued, fully paid, and nonassessable Shares of Company. The Shares of Company delivered to Buyer shall constitute all of the issued and outstanding shares of Company. (5) Seller has the full right, power, legal capacity, and authority to enter into this Agreement and to sell and to deliver to Buyer the Shares to be sold and delivered under this Agreement. Section IV Representations and Warranties of Buyer Buyer represents and warrants to Seller that: (1) Buyer is acquiring the Shares solely for its own account as an investment and not with a view to any distribution or resale thereof within the meaning of such terms under the Securities Act of 1933, as amended. Buyer will not effect any disposition of the Shares in violation of United States Federal or state securities or similar laws or in a manner which would subject Seller or any of its affiliates to any liability or sanction under any such securities or similar laws. (2) Buyer acknowledges receipt of the original corporate books and records of Company. Section V Conditions Precedent to Seller's Obligations Seller's obligation to perform and complete the transactions provided for in this Agreement shall be subject to the Buyer performing all acts required of Buyer. Seller's obligations shall be further subject to the material accuracy of the representations and warranties of Buyer contained in this Agreement. Section VI Conditions Precedent to Buyer's Obligations Buyer's obligation to perform and complete the transactions provided for in this Agreement shall be subject to the Seller performing all acts required of it. Buyer's obligation shall be further subject to the material accuracy and correctness of the representations and warranties of Seller contained in this Agreement. 4 Section VII Indemnity By Buyer Buyer shall defend, indemnify and hold harmless Seller, and its directors, officers and employees, against any and all loss, liability, and expense, including attorney's fees, resulting from or arising out of any obligations, including, but not limited to, taxes levied, imposed, or assessed by any governmental authority, with respect to the income and operations of Company for all periods prior to and after June 29, 1997. Buyer shall be entitled to the benefit of any refunds and credits for taxes for those periods. Buyer shall further indemnify Seller against any liability,claim or loss resulting from Buyer's breach of or failure to perform, after the effective date, any duty or obligation of Seller under any contract, lease, loan agreement, or other agreement relating to Company or its assets or properties to which Seller is a party or by which Seller is otherwise bound at the effective date. Section VIII Expenses of Sale Buyer and Seller shall bear their own counsel fees and other costs and expenses relating to the sale. Section IX No Brokerage Fees Buyer and Seller each represent that neither of them has employed any broker or entered into any agreement for the payment of any fees, compensation, or expenses to any person, firm, or corporation in connection with this transaction. Each shall indemnify the other against any fees, compensation, or expenses that may be suffered, particularly any claim for a finder's fee. Section X Notices Any notice, report, or demand required or permitted by any provision of this Agreement shall be deemed to have been sufficiently given or served for all purposes if it is sent by certified mail, postage and charges prepaid, as follows: (1) If to Seller, to Ghulam M. Bombaywala, Watermarc Food Management Co., 11111 Wilcrest Green, Suite 350, Houston, Texas 77042, or to any other address or addresses as may be designated by Seller. 5 (2) If to Buyer, to Angelo Pitillo, 62 Legend Lane, Houston, Texas 77024, or to any other address or addresses as may be designated by Buyer. Section XI Binding Effect This Agreement shall inure to the benefit of and be binding upon Buyer and Seller and their respective heirs, executors, administrators, successors, and assigns. This Agreement shall not be assignable by Buyer without the express written consent of Seller. All representations and warranties shall survive the closing of this transaction. The liability of Seller arising out of or in connection with breach of the covenants, warranties, or representations made in this Agreement shall be limited to the amount of consideration that Seller shall receive, and further, that the liabilities shall exist only for a period of one year from the effective date. Section XII Entire Agreement This Agreement and all other agreements and instruments referred to herein set forth and constitute the entire understanding and agreement among the parties hereto pertaining to the subject matter hereof. Section XIII Waiver No waiver by any party of any term or provision contained in this Agreement shall be effective unless it is in writing and signed by the party or parties against whom such waiver is sought to be enforced. Neither the failure nor any delay on the part of any party to this Agreement in exercising any right, power or remedy hereunder shall operate as a waiver thereof, or of any other right, power or remedy; nor shall any single or partial exercise of any right, power or remedy preclude any further or other exercise thereof, or the exercise of any other right, power or remedy. Section XIV Severability Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or 6 unenforceability of such provisions in any other jurisdiction. Section XV Governing Law This Agreement shall be deemed to be a contract made under the laws of the State of Texas and for all purposes shall be governed, construed, interpreted and enforced in accordance with the laws of the State of Texas, without regard to the principles of conflicts of laws. Section XVI Counterparts This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be an original, but all counterparts shall constitute one and the same instrument. In witness whereof, Parties have executed this Agreement at Houston, Texas on the 29th day of June, 1997. SELLER Watermarc Food Management Co. By: /s/ GHULAM M. BOMBAYWALA -------------------------------- Ghulam M. Bombaywala Chief Executive Officer BUYER /s/ ANGELO PITILLO ----------------------------------- Angelo Pitillo 7 EXHIBIT A PROMISSORY NOTE $300,000.00 July 1, 1997 FOR VALUE RECEIVED, PETE'S HOSPITALITY CO., INC. (hereinafter referred to as "Borrower") promises to pay to the order of WATERMARC FOOD MANAGEMENT CO. (together with its successors and assigns hereinafter referred to as "Lender") at Houston, Texas or such other place as the holder hereof may from time to time appoint in writing, in lawful money of the United States of America, the principal sum of Three Hundred Thousand Dollars ($300,000.00), together with interest on the principal balance from time to time unpaid at the fixed rate of ten percent (10%) per annum, until maturity. Interest shall be compounded monthly. This Note is payable as follows: interest only for the first six (6) months beginning on August 1, 1997 due and payable on the first day of each successive month, followed by sixty (60) equal monthly installments in the amount of $6325.00, inclusive of principal and interest, beginning on February 1, 1998 and due and payable on the first day of each successive month until the Note has been fully paid. If any payment of principal or interest hereunder shall become due on a day on which banks in the City of Houston generally are not open for business, such payment shall be made on the next following day on which banks in the City of Houston generally are open for business and such extension of time shall be included in computing interest in connection with such payment. Any installments of principal and interest that become past due shall bear interest from the time when due until paid at the lower of the (i) maximum rate permitted by applicable state or federal law, or (ii) eighteen percent (18%) per annum. Upon the occurrence and during the continuance of a default by Borrower in its obligations hereunder, Lender shall have all of the rights and remedies provided in this Note, as well as those rights and remedies provided by any other applicable law, rule or regulation. Borrower, and its successors or assigns, waive presentment for payment, demand, protest, and notice of demand, protest, and nonpayment, and consent to any and all renewals, extensions or modifications that might be made by Lender as to the time of payment of this Note from time to time, and further agree that any security for this Note or any portion thereof may, from time to time, be modified or released in whole or in part without affecting the liability of any party liable for the payment of this Note. This Note is hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity of the indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to be paid to Lender for the use, forbearance or detention of the money advanced or to be advanced hereunder exceed the highest lawful rate permissible under applicable law. If, from any 1 8 circumstances whatsoever, fulfillment of any provision hereof or of any other consideration received or agreement evidencing or securing the indebtedness, at the time payment of such consideration or performance of such provision occurs, shall involve the payment of interest in excess of that authorized by law, the obligation to be fulfilled shall be reduced to the limit so authorized by law, and if, from any circumstances whatsoever, Lender shall ever receive as interest an amount that would exceed the highest lawful rate applicable to Borrower, such amount that would be excessive interest shall be applied to the reduction of the unpaid principal balance of the indebtedness evidenced hereby and not to the payment of interest, and if the principal amount of this Note is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds the maximum rate permissible under applicable law, Lender and Borrower shall, to the maximum extent permitted under applicable law, (i) characterize any nonprincipal payments as an expense, fee or premium rather than as interest; (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of this Note so that the interest rate is uniform throughout the entire term; provided that, if this Note is paid and performed in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence hereof exceeds the highest lawful rate permissible under applicable law, Lender shall refund to Borrower the amount of such excess or credit the amount of such excess against the principal amount of this Note and, in such event, Lender shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of the highest lawful rate permissible under applicable law. Borrower may prepay this Note in any amount at any time prior to maturity without premium or penalty, and interest shall immediately cease on any amount so prepaid. Any prepayment will be applied first toward the payment of accrued interest and next to the principal installment(s) last maturing on this Note; that is, in the inverse order of maturity and without reducing the amount or time of payment of the remaining obligatory installments. The entire unpaid principal balance of, and all accrued interest on, this Note plus any other sums payable pursuant to this Note or pursuant to any other instrument or document evidencing or securing the indebtedness represented by this Note shall immediately become due and payable at the option of the holder hereof upon the occurrence of any one or more of the following events ("Events of Default"): (a) Failure by Borrower to pay any installment of principal, interest or principal and interest as and when same becomes due and payable in accordance with the terms of this Note; (b) Failure by Borrower or any other party to observe or perform any covenant, obligation, term or condition to be observed or performed by them pursuant to, or default or an "Event of Default" shall otherwise occur under, the Security Agreement (as hereinafter defined) and/or any other instrument or document evidencing or securing the indebtedness represented by this Note or related hereto, and the continuance of such failure for a period of thirty (30) days following written notice thereof to Borrower, but if the curing of such failure cannot by its nature be reasonably 2 9 cured within such 30-day period, Borrower shall have such longer period of time as is reasonably necessary in the circumstances to cure such failure provided that Borrower (i) actually commences the cure within such 30-day period, (ii) thereafter pursues the completion of the cure with due diligence and (iii) in all events completes the cure within ninety (90) days following Borrower's receipt of the aforesaid written notice; (c) Any representation or warranty made by Borrower or any other party liable, in whole or in part, for the payment of this Note, whether as borrower, endorser, guarantor, surety or otherwise, herein, or by Borrower or any other party in any other instrument or document modifying, renewing, extending, evidencing, securing or pertaining to this Note, is or proves to have been false, misleading or erroneous in any material respect; (d) The insolvency of Borrower or any other party liable, in whole or in part, for the payment of this Note, whether as borrower, endorser, guarantor, surety or otherwise; (e) The appointment of a trustee or receiver for the assets, or any portion thereof, of Borrower or for any material portion of the property or assets of any other party liable, in whole or in part, for the payment of this Note, whether as borrower, endorser, guarantor, surety or otherwise; (f) The entry in bankruptcy of an order for relief for or against Borrower or any other party liable, in whole or in part, for the payment of this Note, whether as borrower, endorser, guarantor, surety or otherwise; (g) The admission of Borrower or any other party liable, in whole or in part, for the payment of this Note, whether as borrower, endorser, guarantor, surety or otherwise, in writing of any such parties' inability to pay said parties' debts as they become due; or (h) If Borrower or any other party liable, in whole or in part, for the payment of this Note, whether as borrower, endorser, guarantor, surety or otherwise, should suffer a material and adverse change in the financial condition of such party. In the event any one or more of the Events of Default specified above shall have occurred, the holder of this Note may proceed to protect and enforce its rights either by suit in equity and/or by action at law, nonjudicial foreclosure or by other appropriate proceedings. All rights and remedies of Lender, or any other subsequent holder of this Note, shall be cumulative and concurrent and may be pursued singularly, successively or together, at the sole discretion of Lender, and may be exercised as often as the occasion therefor shall arise. If this Note is placed in the hands of an attorney for collection, or if collected through judicial or bankruptcy proceedings, Borrower shall pay, in addition to the other sums referred to herein, a reasonable sum as a collection or attorneys' fee and all other reasonable costs incurred by the holder of this Note in collection of the unpaid sums due hereunder. This Note is secured by a Security Agreement of even date executed by Borrower in favor 3 10 of Lender, covering all of Borrower's right, title and interest in and to that certain personal property and collateral (collectively, the "Collateral") as more particularly described in the Security Agreement. Borrower agrees to execute any document necessary for Lender to secure its financial interest in the Collateral securing this Note. The form and essential validity of this Note shall be governed by the laws of the State of Texas. If any provision of this Note is prohibited by, or is unlawful or unenforceable under, any applicable law of any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such prohibition without invalidating the remaining provisions hereof. Time is of the essence with respect to all of Borrower's obligations a nd agreements under this Note. All notices, demands or other communications required or permitted hereunder or given in regard to this Note shall be in writing, and shall be deemed to have been served, given and received (a) if hand delivered, when delivered in person to the address set forth hereinafter for the party to whom notice is given, or (b) if mailed, whether or not actually received, when deposited in a regularly maintained receptacle for the United States mail, certified mail, return receipt requested, postage prepaid, properly addressed to the party to whom notice is given at the address hereafter specified; provided, however, that notice of any sale or other disposition of the Collateral covered by the Security Agreement shall be given in the manner prescribed by the Security Agreement. Any party may change its address for notices hereunder to such other address within the continental United States as such party has provided to the other party by ten (10) days' advance written notice given in the manner herein provided. Until changed in the foregoing manner, the parties' respective addresses for notices hereunder are as follows: If to Borrower: Angelo Pitillo Pete's Hospitality Co., Inc. 1020 S. 344th Street, Suite 210 Federal Way, Washington 98003 If to Lender: Ghulam M. Bombaywala Watermarc Food Management Co. 11111 Wilcrest Green, Suite 350 Houston, Texas 77042 This Note and all of the covenants, promises and agreements contained herein shall be binding upon and shall inure to the benefit of Lender's and Borrower's respective heirs, legal representatives, successors and assigns. Nothing herein shall permit any assignment of this Note by 4 11 Borrower, other than to an affiliate or successor in interest; provided, however, that in no event will any assignment relieve Borrower of any obligation or liability under this Note or the Security Agreement. THIS WRITTEN NOTE, THE SECURITY AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Lender makes the following disclosure to Borrower: THIS NOTE IS PAYABLE IN FULL AT THE END OF SIXTY SIX (66) MONTHS. YOU MUST REPAY THE ENTIRE PRINCIPAL BALANCE OF THE NOTE AND UNPAID INTEREST THEN DUE. THE NOTEHOLDER IS UNDER NO OBLIGATION TO REFINANCE THE LOAN AT THAT TIME. YOU WILL THEREFORE BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS YOU MAY OWN, OR YOU WILL HAVE TO FIND A LENDER WILLING TO LEND THE MONEY AT PREVAILING MARKET RATES WHICH MAY BE CONSIDERABLY HIGHER OR LOWER THAN THE INTEREST RATE ON THIS NOTE. IF YOU REFINANCE THIS LOAN AT MATURITY, YOU MAY HAVE TO PAY SOME OR ALL CLOSING COSTS NORMALLY ASSOCIATED WITH A NEW LOAN EVEN IF YOU OBTAIN REFINANCING FROM THE NOTEHOLDER. IN WITNESS WHEREOF, Borrower has executed this Note on the date first hereinabove written. PETE'S HOSPITALITY CO., INC. By: ----------------------------- Angelo Pitillo President 5 12 SECURITY AGREEMENT EXHIBIT B THIS SECURITY AGREEMENT (this "Security Agreement") is executed and delivered this lst day of July, 1997, by PETE'S HOSPITALITY CO., INC. (hereinafter referred to as "Debtor"), to and in favor of WATERMARC FOOD MANAGEMENT CO., a Texas corporation ("Secured Party"). WITNESSETH: A. Of even date herewith, Debtor has executed a certain Promissory Note (the "Note") in the stated principal amount of $300,000.00, payable to the order of Secured Party. B. In order to secure the Secured Obligations (as hereinafter defined), Debtor desires to execute and deliver to and in favor of Secured Party this Security Agreement. NOW, THEREFORE, for and in consideration of the premises, the sum of Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, Debtor hereby grants to Secured Party a security interest in and to the Collateral (as defined and described hereinbelow) to secure the Secured Obligations, upon the terms and conditions set forth herein. ARTICLE I SECURED OBLIGATIONS AND COLLATERAL 1.01. Secured Obligations. The security interest herein granted and created shall secure, all and singular, the following: (a) The payment (in accordance with the terms of the Note) of all principal, interest and other sums due under or in regard to the Note and all documents and instruments given as security for, or executed in connection with, the Note (the Note and all such other documents and instruments being sometimes collectively herein called the "Loan Documents"); (b) All other notes or instruments in substitution for the Note, or any portion thereof, or in renewal or extension thereof, in whole or in part; (c) All indebtedness incurred or arising pursuant to the provisions of this Security Agreement and/or any of the other Loan Documents; and 1 13 (d) The performance by Debtor of its obligations under this Security Agreement and the other Loan Documents. The indebtedness and obligations referred to in subparagraphs (a) through (d) above are herein sometimes collectively referred to as the "Secured Obligations." 1.02. Collateral. As used herein, the term "Collateral" shall mean and refer to all of the following: (a) Fixtures. All fixtures now or hereafter attached to or installed in, upon or on those certain properties and businesses of Pete's Hospitality Co., Inc. situated in the State of Washington, more particularly described on Exhibit "A" attached hereto and incorporated herein by reference, or any improvements thereon, which in some fashion are deemed to be fixtures to the land or the improvements under the laws of the State of Texas. (b) Inventory. All of Debtor's inventory located at the properties and businesses of Pete's Hospitality Co., Inc. described on Exhibit "A", whether now owned or hereafter acquired, including all goods which are held for sale or which are to be furnished under contract for services, or which have been so furnished or which are raw materials, work in process or materials used or consumed in Debtor's business. (c) Equipment. All of Debtor's equipment, whether now owned or hereafter acquired located at the properties and businesses of Pete's Hospitality Co., Inc. described on Exhibit "A". (d) Other Personal Property: General Intangibles. All other personal property now owned or hereafter at any time acquired by Debtor located at the properties and businesses of Pete's Hospitality Co., Inc. described on Exhibit "A", which are held for sale or lease, or are furnished or to be furnished under contracts of service, or is held as raw materials, work in process or materials used or consumed or to be used or consumed in Debtor's business, and all general intangibles. (e) Proceeds; Replacements; Substitutions. All proceeds of (unless substitute collateral is provided pursuant to and in accordance with Section 2.13 herein) products of, replacements for, additions to, increases of, repairs to, improvements to, substitutions for, excessions of, and property necessary for the operation of, any of the foregoing, including, without limitation, insurance payable as a result of loss or damage to the foregoing property and any proceeds thereunder, refunds of unearned premiums of any such insurance policy and claims against third parties. 2 14 (f) Books and Records. All books and records related to any of the foregoing, including, without limitation, any and all books of account, customer lists and other records relating in any way to the accounts and/or inventory. 1.03. Certain Definitions. As used herein, unless the context shall otherwise require, the terms "equipment," "fixtures," "general intangibles," "goods," "inventory" and "proceeds" shall have the same meanings given such terms in the Uniform Commercial Code as presently in effect in the State of Texas, Texas Business and Commerce Code, Chapters 1-9 (the "Code"). ARTICLE H COVENANTS So long as the Secured Obligations, or any portion thereof, remain unpaid or unsatisfied, Debtor (and each person or party comprising Debtor) covenants and agrees with Secured Party as follows: 2.01. Payment and Performance of Secured Obligations. Debtor shall make prompt payment, as the same becomes due, of all indebtedness comprising the Secured Obligations, and shall punctually and fully perform the other obligations comprising the Secured Obligations, in accordance with the terms and provisions of the agreements and instruments evidencing the Secured Obligations. 2.02. Costs and Expenses. Debtor shall pay all expenses and reimburse Secured Party for any expenditures, including, without limitation, reasonable attorneys' fees and legal expenses, in connection with Secured Party's exercise of any of Secured Party's rights and remedies under Article IV hereof, or otherwise, or Secured Party's protection of the Collateral and Secured Party's security interest therein, and such amounts shall bear interest at the lesser of (a) eighteen percent (18%) per annum or (b) the maximum rate of interest permitted by applicable law (the "Maximum Lawful Rate"), computed from the date of payment by Secured Party until repaid by Debtor, and shall become part of the Secured Obligations. 2.03. Financing Statements. Debtor shall sign and execute, alone or with Secured Party or any other necessary party, any financing statement, continuation statement or other document, or procure any document, and pay all connected costs necessary to protect the security interest under this Security Agreement against the rights or interests of third persons. 2.04. Prohibition on Assignment. Notwithstanding the security interest in proceeds granted herein, without the prior written consent of Secured Party, Debtor shall not, except as otherwise specifically permitted pursuant to the terms of this Security Agreement, assign this Security Agreement or the Collateral except to an affiliate or successor in interest. Notwithstanding the above, in no event will any assignment act to relieve Debtor of any obligation or liability under this Security Agreement or the Note. 3 15 2.05. No Waivers, Pledges or Other Actions. Debtor shall not waive, release or relinquish any rights, privileges or benefits that Debtor, or any person or party comprising Debtor, may have with respect to the Collateral, pledge or assign the Collateral to any party whatsoever other than Secured Party, or encumber the Collateral, or take any other action of any kind or character whatsoever that would be adverse to the Collateral or to the rights and security interests of Secured Party under this Security Agreement. 2.06. Assignment of Rights and Interests. Debtor hereby directly and absolutely assigns and transfers to Secured Party all of Debtor's right, title, interest, benefit and privilege, but not Debtor's obligations, responsibilities or liabilities, in or with respect to the Collateral, and such assignment and transfer shall be effective until such time as all the events described in Section 5.01 hereof have occurred, at which time this assignment and transfer shall terminate. Debtor hereby agrees to indemnify, hold harmless and defend Secured Party from and against any and all liabilities, costs, claims, causes of action and expenses that may at any time arise out of or be connection with Debtor, the Collateral, this Security Agreement, the Loan Documents and/or the Secured Obligations. 2.07. Insecurity. If Secured Party shall at any time be of the opinion that the Collateral is not sufficient or has declined or may decline in value, or should Secured Party deem payment or performance of the Secured Obligations to be insecure, then Secured Party shall have the right to call for additional collateral satisfactory to Secured Party, and Debtor promises to furnish such additional collateral within five (5) days after such request. Debtor shall, at its expense, do, make, procure, execute and deliver all acts, things, writings and assurances as Secured Party may at any time require to protect, assure or enforce its interests, rights and remedies created by, provided in or emanating from this Security Agreement. 2.08. Change of Location. Debtor will notify Secured Party on or before the date of any change in location of the Collateral. Debtor will give Secured Party prior written notice of (a) the opening or closing of Debtor's business in which the Collateral is located or (b) any change in the location of Debtor's principal place of business or of Debtor's business address. 2.09. Payment of Taxes. Debtor agrees to pay prior to delinquency all taxes, charges, liens and assessments against the Collateral, and upon the failure of Debtor to do so, Secured Party at its option (but without any obligation to do so) may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. Any such payment by Secured Party shall become part of the Secured Obligations secured hereunder and shall be paid to Secured Party by Debtor immediately upon demand, with interest thereon at the lesser of (a) eighteen percent (18%) per annum or (b) the Maximum Lawful Rate. 2.10. Records. Debtor shall keep accurate and complete records of the Collateral (including proceeds). These records shall reflect complete and accurate stock records of inventory and all facts pertaining to Debtor's warranties, representations and agreements under this Security Agreement. Secured Party may at any time have access to, examine, audit, make extracts from, and inspect without hindrance or delay the Collateral and Debtor's records and files relating to the 4 16 Collateral. Debtor will transmit to Secured Party promptly all information which in any way relates to or affects (a) the filing of any financing statements or other public notes or recordings or the delivery and possession of items of Collateral for the purpose of perfecting a security interest in Collateral or (b) the business, affairs or financial condition of Debtor in a material or adverse manner. Any balance sheets or financial statements requested by Secured Party pursuant to this Section 2.10 shall conform to generally accepted accounting principles consistently applied. 2.11. Insurance. Debtor shall maintain, with financially sound and reputable insurers, insurance satisfactory in all respects to Secured Party covering all insurable risks to the Collateral, including standard extended coverage, in an amount at least equal to the value of the Collateral. The policies evidencing any such insurance shall contain a standard mortgagee's endorsement providing for payment of any loss to Secured Party, and such policies shall further provide for thirty (30) days' written minimum cancellation notice to Secured Party. Debtor shall furnish evidence satisfactory to Secured Party of compliance with these insurance provisions. 2.12. Claims by Others. Debtor will promptly notify Secured Party in writing of any claim, proceeding or litigation affecting the Collateral, whether or not the claim is covered by insurance, and of any suit or administrative proceeding which may materially or adversely affect Debtor's business, assets, operations or condition, financial or otherwise. ARTICLE III REPRESENTATIONS AND WARRANTIES Debtor hereby represents and warrants to Secured Party as follows: 3.01. Authority of Debtor. Debtor (and/or each person or party comprising Debtor or executing this Security Agreement) has good right, title and authority to pledge and assign to Secured Party all of Debtor's right, privilege and interest in and to the Collateral without the joinder of any other party, with the result being that, following Debtor's execution hereof, this Security Agreement shall be valid and binding against Debtor with respect to the Collateral in accordance with the terms and provisions hereof. 3.02 Lien Priority. The security interests herein granted are first and prior security interests in and to all of the Collateral. 3.03. Compliance With Laws. Debtor is in compliance with all necessary governmental requirements, laws, regulations, orders, injunctions, judgments, decrees and writs, and Debtor possesses adequate assets, capital, licenses, patents, patent applications, copyrights, trademarks and/or trade names for the conduct of Debtor's business and the use of the Collateral and the enforcement of Debtor's rights with respect thereto (including, without limitation, any requirements for qualification to do business in any jurisdiction). 5 17 3.04. Accurate Information. All information supplied and statements made by Debtor to Secured Party in any financial, credit or accounting statement or application for credit prior to, contemporaneously with or subsequent to the execution of this Security Agreement are and shall continue to be true, correct, complete, valid and genuine. 3.05. No Violation of Other Agreements. Debtor's execution and delivery of this Security Agreement will not and does not violate or contravene the terms of any contract or agreement to which Debtor, or any person or party comprising Debtor, is a party. 3.06. No Litigation. There is no pending or threatened litigation, arbitration, or other action or proceeding which would materially and adversely affect any aspect of Debtor's business or the Collateral. Debtor is not subject to any labor dispute, and no labor contract to which Debtor is a party is scheduled to expire during the term of this Security Agreement. 3.07. Adequate Records. Debtor shall at all times keep adequate records concerning the Collateral and permit representatives of Secured Party at any reasonable time to inspect such records. 3.08. Communications. Debtor shall, at its expense, promptly deliver to Secured Party a copy of each notice or other communication received by it in respect of the Collateral and shall at all times keep Secured Party apprised of all matters respecting the Collateral. 3.09. No Counterclaim. No set-off or counterclaim to any money due or to become due to Debtor by virtue of the Collateral, or any part thereof or any interest therein, exists as of the date of this Security Agreement, and no agreement has been made with any person or party pursuant to which any deduction or discount therefrom may be claimed. 3.10. Material Facts. Debtor knows of no fact or circumstance that Debtor has not disclosed in writing to Secured Party that could materially and adversely affect the properties, business or financial condition of Debtor (including, without limitation, the ability of Debtor to pay any indebtedness owed to Secured Party) or the value of the Collateral as security for the payment and performance of the Secured Obligations. ARTICLE IV EVENTS OF DEFAULT: REMEDIES 4.01. Events of Default. The term "Event of Default," as used in this Security Agreement, shall mean the occurrence of any one or more of the following events: (a) An Event of Default occurs under the Note; or 6 18 (b) The occurrence of any event or condition which is, in Secured Party's sole opinion, materially adverse to the Collateral, or the loss, theft, substantial damage, destruction, sale or encumbrance of, to or on any of the Collateral or any other collateral for the Secured Obligations, or - the making of any levy, seizure or attachment thereof or thereon. 4.02. Certain Remedies. Upon the occurrence of an Event of Default and during the continuation thereof, Secured Party may, at its option, without any notice or demand to Debtor, Debtor hereby expressly waiving same, (a) exercise the sole right, power and authority to act for and on behalf of Debtor and/or all persons or parties comprising Debtor (but without any liability or obligation whatsoever) with respect to the Collateral, in place of Debtor and to the exclusion of Debtor, or designate any other party to act as such, and Debtor hereby waives and relinquishes any and all benefits and rights (but not obligations) that Debtor may have with respect to the Collateral from and after such date, (b) declare all indebtedness comprising Secured Obligations to be immediately due and payable, (c) collect and/or continue to collect all amounts which may become distributable or payable to Debtor with respect to the Collateral and apply all amounts collected in reduction of the unpaid balance of the indebtedness comprising the Secured Obligations, and/or (d) advance and pay such sum or sums as may be required to cure or attempt to cure any such Event of Default, and all such sums so advanced and paid by Secured Party to cure or attempt to cure such Event of Default, together with interest on the sums so advanced at the lesser of (i) eighteen percent (18%) per annum or (ii) the Maximum Lawful Rate, computed from the date of such advance until repaid by Debtor, shall be secured hereby and paid by Debtor to Secured Party on demand at Secured Party's address described below. Debtor hereby covenants and agrees to pay to Secured Party, as aforesaid, any and all sums that may, under the provisions of this section, be due to Secured Party. 4.03. Take Possession of Collateral. Upon the occurrence of an Event of Default and during the continuation thereof, Secured Party may take possession of the Collateral or, at Secured Party's request, Debtor shall, at Debtor's sole cost and expense, assemble the Collateral and make it available at a location to be specified by Secured Party which is reasonably convenient to Debtor and Secured Party. Secured Party may, at its option, render any equipment unusable that may be included in the Collateral, or, at Secured Party's request, Debtor will render it unusable. In any event, the risk of accidental loss or damage to, or diminution in value of, the Collateral shall be on Debtor, and Secured Party shall have no liability whatsoever for failure to obtain or maintain insurance, nor to determine whether any insurance ever in force is adequate as to the amount or as to the risk insured. In addition to the foregoing, Secured Party may seize all books and records of Debtor pertaining to the Collateral. Secured Party shall have the authority to enter upon any real property or improvements thereon in order to seize any such books or records, or any Collateral located thereon, and remove the same therefrom without liability. 4.04. Sale of Collateral. Upon the occurrence of an Event of Default and during the continuation thereof, Secured Party shall have and may exercise all of the rights and remedies of a secured party under the Code. Reasonable notification of the time and place of any public sale of the Collateral, or reasonable notification of the time after which any private sale or other 7 19 intended disposition of the Collateral is to be made, shall be sent to Debtor and any other person entitled to notice under the Code. Notice given not less than five (5) calendar days prior to the taking of the action to which the notice relates is reasonable notification for purposes of this section. Secured Party shall be entitled to apply the proceeds of any sale or other disposition of the Collateral in the following order: first, to the payment of all of Secured Party's reasonable expenses including attorneys' fees and other legal expenses, incurred in holding and preparing the Collateral, or any part thereof, for sale(s) or other disposition, and in actually selling or disposing of the same; and next, toward payment of the Secured Obligations. Secured Party shall account to Debtor for any surplus. If the proceeds of any sale are not sufficient to pay any and all such sums due to Secured Party, Debtor shall remain liable for any deficiency. In the event any of the Collateral is in the form of cash, it will be applied to reduce the unpaid Secured Obligations and shall not be sold. If only part of the Collateral is sold or disposed of such that the Secured Obligations remain outstanding, in whole or in part, Secured Party's rights and remedies hereunder shall not be exhausted, waived or modified, and Secured Parry is specifically empowered to make one or more successive sales or dispositions until all of the Collateral shall be sold or disposed of and all of the Secured Obligations have been paid and satisfied. In the event that Secured Party elects not to sell or dispose of the Collateral, or any portion thereof, it retains its rights to lease or otherwise dispose of or utilize the Collateral, or any part or parts thereof, in any manner authorized or permitted by law, and to apply the proceeds of the same towards payment of the Secured Obligations. 4.05. Appointment of Agents. Secured Party may appoint any party as agent to perform any act or acts necessary or incident to any sale or other disposition by Secured Party of the Collateral. Additionally, any sale or other disposition hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. 4.06. Cumulative Rights. In addition to the above, Secured Party shall have and may exercise any and all other rights conferred by law or under this Security Agreement or the other Loan Documents and may resort to any remedy existing at law or in equity for the collection and satisfaction of the Secured Obligations and for the enforcement of the covenants and agreements contained herein, and the resort to any remedy shall not prevent the concurrent or subsequent employment of any other appropriate remedy or remedies. 4.07. No Waiver. The rights granted hereunder are cumulative of any and all other security now or hereafter held by Secured Party for payment and performance of the Secured Obligations and Secured Party may resort to any security now or hereafter existing for the payment and performance of the Secured Obligations in such portions and in such order as may seem best to Secured Party in Secured Party's sole and uncontrolled discretion. No failure on the part of Secured Party to exercise and no delay in exercising any right, power or remedy hereunder or otherwise shall operate as a waiver thereof, nor shall any single or partial exercise by Secured Party of any right, power or remedy hereunder or otherwise preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 8 20 ARTICLE V MISCELLANEOUS 5.01. Release of Collateral. When (a) the Note has been paid in full and (b) all obligations and liabilities comprising the Secured Obligations shall have been performed and discharged in full, the security interest evidenced hereby and provided for herein shall terminate and shall be released at the expense of Debtor and the Collateral shall become free and clear of such security interest. 5.02. Secured Party's Consent to Modifications, Etc.. Secured Party may remedy any default in any reasonable manner without waiving the default remedied and may waive any default without waiving any prior or subsequent default. No modification or waiver of any provision of this Security Agreement nor consent to any departure by Debtor therefrom shall in any event be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instances, for the purpose for which given and to the extent therein specified. No notice to or demand on Debtor in any case shall of itself entitle Debtor to any other or further notice or demand in similar or other circumstances. 5.03. Financing Statement Sufficiency. A carbon, photographic or other reproduction of this Security Agreement or of any other reproduction of this Security Agreement shall be sufficient as a financing statement. 5.04. Assignment of Rights. Secured Party may assign this Security Agreement, in whole or in part, and the assignee shall be entitled to the rights and remedies of Secured Party hereunder (to the extent so assigned). 5.05. Partial Invalidity. A determination that any provision of this Security Agreement is unenforceable or invalid shall not affect the validity or enforceability of any other provision. 5.06. Binding Effect. The terms and provisions of this Security Agreement shall inure to the benefit of and be binding upon the respective heirs, legal and personal representatives, successors and assigns of Debtor and Secured Party. 5.07. Governing Law. The laws governing this Security Agreement and the security interest herein granted shall be those of the State of Texas and those of the United States applicable to transactions in Texas. 5.08. Construction. In construing this Security Agreement, words in any gender shall be deemed to include the other genders; words in the singular tense shall be deemed to include the plural, and vice versa. 9 21 5.09. Notices. For purposes hereof, the addresses of the parties to which notices are to be sent are as provided in the Note. Except as may be otherwise provided herein, all notices shall be deemed given as is provided in the Note. 5.10. Time of Essence. Time is of the essence of this Security Agreement. 5.11. Further Assurances. Debtor agrees to do such further acts and things, and to execute and deliver such additional pledges, conveyances, assignments, agreements and instruments, as Secured Party may at any time reasonably request in connection with the administration or enforcement of this Security Agreement or related to the Collateral, or any part thereof, or in order to better assure and confirm unto Secured Party its rights, powers and remedies under this Security Agreement. 5.12. Headings. The section and paragraph headings contained in this Security Agreement have been inserted for convenience of reference only and shall not affect the meaning or construction of any of the provisions of this Security Agreement. IN WITNESS WHEREOF, this Security Agreement has been executed and delivered as of the date first above written. DEBTOR: PETE'S HOSPITALITY CO., INC. By: -------------------------------- Angelo Pitillo President SECURED PARTY: WATERMARC FOOD MANAGEMENT CO. By: -------------------------------- Ghulam M. Bombaywala Chief Executive Officer 10 22 STATE OF TEXAS ) COUNTY OF HARRIS ) This instrument was acknowledged before me on 1997, by Angelo Pitillo, as President, of Pete's Hospitality Co., Inc., a Washington corporation: on behalf of said corporation. ----------------------------- Notary Public, State of Texas THE STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on 1997, by Ghulam M. Bombaywala, as Chief Executive Officer, of Watermarc Food Management Co., a Texas corporation, on behalf of said corporation. ----------------------------- Notary Public, State of Texas Exhibits: "A" - Legal Description of and/or Address of properties and businesses of Pete's Hospitality Co., Inc. where Collateral is located 11 23 EXHIBIT "A" LEGAL DESCRIPTION OF AND/OR ADDRESS OF THE PROPERTIES AND BUSINESSES OF PETE'S HOSPITALITY CO., INC. WHERE COLLATERAL IS LOCATED Pete's Barbecue Restaurant located at 1602 S. Mildred Street, Tacoma, Washington 98465 Pete's Barbecue Restaurant located at 1314 E. 72nd Avenue, Tacoma, Washington 98404 H. D. Hotspurs located at 315 S. Washington, Kent, Washington 98031 EX-4.1 3 AMEND. 3 TO WARRANT AGREEMENT - SERIES A WARRANTS 1 EXHIBIT 4.1 AMENDMENT NO. 3 TO WARRANT AGREEMENT THIS AMENDMENT NO. 3 TO WARRANT AGREEMENT (the "Agreement") is dated April 15, 1997, by and between Watermarc Food Management Co., formerly known as Billy Blues Food Corporation, a Texas corporation with its principal offices in Houston, Texas (the "Company"), and North American Transfer Co., as warrant agent (the "Warrant Agent"). WITNESSETH: WHEREAS, the parties hereto previously entered into that certain Warrant Agreement dated May 15, 1992 (the "Original Agreement"), a copy of which is attached hereto as Exhibit A, for the purpose of setting forth the terms and conditions of the issuance, registration, transfer, exchange and redemption of the Company's Series A Redeemable Common Stock Purchase Warrants (the "Series A Warrants"); WHEREAS, all capitalized terms used herein shall have the same meaning assigned them in the Original Agreement unless otherwise set forth herein. Furthermore, this Agreement confirms and ratifies all terms and conditions set forth in the Original Agreement except as expressly modified herein; and WHEREAS, the parties hereto desire to amend the Original Agreement for the purpose of extending the Warrant Expiration Date from May 15, 1997 to May 15, 1998; NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties hereto agree as follows: 1. Amendment and Restatement of Section 1(i) of the Original Agreement. Section 1(i) of the Original Agreement is hereby amended and restated in its entirety as follows for the purpose of extending the Warrant Expiration Date from May 15, 1997 to May 16, 1998: 1(i) "Warrant Expiration Date" shall mean 5:00 p.m. (New York time) on May 15, 1998, with respect to the Series A Warrants, or the redemption date as defined in Section 8, whichever is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company may, at its election, extend the Warrant Expiration Date with respect to the Series A Warrants. 2. Current Prospectus. The Company agrees to monitor the market price of its common stock, par value $.05 per share (the "Common Stock") and will undertake to file a posteffective amendment to its registration statement dated July 26, 1995, Registration No. 33-93450 AMENDMENT NO. 3 TO WARRANT AGREEMENT - Page 1 2 (the "Registration Statement"), at such time as the exercise of the Series A Warrants appears more likely. Furthermore, the Company will not, without the opinion of counsel to the Company, issue any of its Common Stock pursuant to the exercise of any of the Series A Warrants unless there is a post-effective amendment to the Registration Statement in effect containing a current prospectus meeting the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended. 3. Miscellaneous. (a) This Agreement shall be binding upon and inure to the benefit of the Company and the Warrant Agent and their respective successors and assigns, and the holders from time to time to Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. (b) This Agreement shall be governed and construed in accordance with the laws of the State of New York; provided, however, that the Series A Warrants shall be governed by and construed in accordance with the laws of the State of Texas, without reference to principles of conflict of laws. (c) If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be effected thereby. IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 3 to Warrant Agreement as of the date first above set forth. COMPANY: WATERMARC FOOD MANAGEMENT CO. By: ANGELO PITILLO --------------------------- Name: Angelo Pitillo Title: President and Chief Operating Officer WARRANT AGENT: NORTH AMERICAN TRANSFER CO. By: MILDRED ROSTOLDER --------------------------- Name: Mildred Rostolder Title: Principal EX-4.2 4 NOTICE OF EXTENSION OF WARRANT EXPIRATION 1 EXHIBIT 4.2 NOTICE OF EXTENSION OF WARRANT EXPIRATION DATE NOTICE is hereby given that Watermarc Food Management Co., formerly known as Billy Blues Food Corporation, (the "Company") has extended the expiration date of its Series A Redeemable Common Stock Purchase Warrants (the "Series A Warrants") from 5:00 p.m. (Eastern time) on May 15, 1997 to 5:00 p.m. (Eastern time) on May 15, 1998. The extension was effected pursuant to an amendment of the Warrant Agreement, dated May 15, 1992, between the Company and North American Transfer Co., as Warrant Agent for the holders of the Series A Warrants. The Company will monitor the market price of its common stock, par value $.05 per share (the "Common Stock") and, if necessary, file a post-effective amendment to its Registration Statement dated July 26, 1995, No. 33-93450 (the "Registration Statement") at such time as the exercise of the Series A Warrants appears more likely. The Company will not, without the opinion of counsel to the Company, issue any shares of its Common Stock pursuant to the exercise of any of the outstanding Series A Warrants unless a post-effective amendment to the Registration Statement is in effect, which Registration Statement shall contain a current prospectus meeting the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended. Any comments or questions regarding the extension of the expiration date for the Company's Series A Warrants should be addressed to Mr. Angelo Pitillo, President, Watermarc Food Management Co., 11111 Wilcrest Green, Suite 350, Houston, TX 77042, (713) 783-0500. PLEASE ATTACH THIS NOTICE TO THE CERTIFICATE EVIDENCING THE SERIES A WARRANTS CURRENTLY HELD BY YOU EX-4.3 5 2ND AMEND. TO PURCHASE AGREEMENT DATED 7/31/97 1 EXHIBIT 4.3 SECOND AMENDMENT TO PURCHASE AGREEMENT Second Amendment to Purchase Agreement dated effective as of July 31, 1997 (the "Amendment"), among WATERMARC FOOD MANAGEMENT CO., a Texas corporation formerly known as Billy Blues Food Corporation (the "Company"), and the persons listed in Schedule 1 hereto (the "Purchasers"); WITNESSETH: Whereas, the Company and the Purchasers are parties to a Purchase Agreement dated as of December 19, 1994, as amended by the First Amendment to Purchase Agreement dated as of March 31, 1996, (such Purchase Agreement, as amended, being referred to herein as the "Purchase Agreement"), pursuant to which the Company issued and the Purchasers purchased (a) the Company's 12% Subordinated Notes due March 31, 1996, in the aggregate principal amount of $3,000,000 (the "Notes") and (b) warrants (the "Warrants") evidencing the right to purchase an aggregate of 1,333,320 shares of Common Stock, $.05 par value (the "Company Common Stock"), of the Company, at $2.25 per share; and Whereas, the Company has paid $1,250,000 in principal amount on the Notes and has paid accrued interest on the Notes through August 31, 1997, and $500,000 in aggregate principal amount of the Notes has been converted to other debt; and Whereas, the Company has requested that the Purchasers agree to extend the maturity date of the remaining Notes until July 10, 1998; and Whereas, the Purchasers are willing to extend the maturity date of the Notes upon the terms and subject to the conditions set forth herein; Now, therefore, in consideration of the foregoing premises, the following mutual agreement, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchasers agree to amend the Purchase Agreement as follows: 1. Definitions. Capitalized terms used herein shall have the meaning assigned to them in the Purchase Agreement unless otherwise defined herein or the context otherwise requires. 2. Amendments to the Purchase Agreement. The Purchase Agreement is hereby amended as follows: (a) Section 1 of the Purchase Agreement is hereby amended by: 2 (i) deleting the words "July 31, 1997" and substituting in place thereof the words "July 10, 1998," (ii) deleting reference to "$1.00" and substituting in place thereof "$0.25," and (iii) deleting the third sentence in its entirety and substituting in place there of the following sentence: Each Note issued hereunder will be dated the date purchased by you hereunder, will mature on July 10, 1998, and will bear interest on its unpaid balance at the rate of 12% per annum, payable monthly on the last day of each month, commencing on September 30, 1997, and will have the other terms and provisions provided herein and in the form of Note attached hereto as Exhibit A. (b) Section 7 of the Purchase Agreement is hereby amended by inserting the following new Sections 7.15 and 7.16 immediately after Section 7.14: 7.15 ADDITIONAL SECURITY AGREEMENT. Ghulam M. Bombaywala shall execute and deliver to the Purchasers a Security Agreement substantially in the form attached hereto as Exhibit E pursuant to which he will grant the Purchasers a security interest in 100% of the outstanding securities of Michelangelo's, Inc., a Texas corporation. 7.16 GUARANTY OF GHULAM M. BOMBAYWALA. Ghulam M. Bombaywala shall unconditionally and irrevocably guarantee the full punctual payment when due, whether at stated maturity, by acceleration, or otherwise, of all obligations of the Company to the Purchasers under this Purchase Agreement and the Notes now or hereafter existing whether for principal, interest, fees, expenses or otherwise. 3. Amendments to the Notes. Each of the Notes is hereby amended by deleting the words "July 31, 1997" wherever they may appear and substituting in place thereof the words "July 10,1998." 4. Amendments to the Warrants. Each of the Warrants is hereby amended by deleting the number "$1.00" in the first paragraph and substituting in place thereof the number "$0.25" and by deleting the words "December 31, 1999" in the introduction and first paragraph and substituting in place thereof the words "August 31, 2002." 2 3 5. Representations and Warranties. The Company represents and warrants as follows: (a) The execution, delivery and performance of this Amendment and the Purchase Agreement, as modified by this Amendment, and the transactions contemplated hereby and thereby (i) are within the corporate authority of the Company, (ii) have been authorized by all necessary corporate proceedings on the part of the Company, (iii) do not conflict with or result in any material breach or contravention of any provision of law, statute, rule, or regulation to which the Company is subject or any judgment, order, writ, injunction, license, or permit applicable to the Company, and (iv) do not conflict with any provision of the corporate charter or bylaws of the Company or any agreement or other instrument binding upon the Company. (b) The execution, delivery, and performance of this Amendment and the Purchase Agreement, as modified by this Amendment, will result in valid and legally binding obligations of the Company enforceable against it in accordance with the respective terms and provisions hereof and thereof, (c) The execution, delivery, and performance of this Amendment and the Purchase Agreement, as modified by this Amendment, and the consummation by the Company of the transactions contemplated hereby and thereby do not require any approval or consent of, or filing with, any governmental agency or authority. 6. Ratification. Except as expressly amended hereby, the Purchase Agreement, the Notes, and the Warrants are hereby ratified and confirmed in all respects and shall continue in full force and effect. This Amendment and the Purchase Agreement shall hereafter be read and construed together as a single document, and all references to the Purchase Agreement or any agreement or instrument related to the Purchase Agreement shall hereafter refer to the Purchase Agreement as amended by this Amendment. This ratification and amendment is made effective as of July 31, 1997, and the Purchasers agree that, as amended, the Notes are not in default and, if due to timing factors a default in the Notes existed for a temporary period, such default is waived and/or cured by this Amendment. 7. Notation on Notes and Warrants. Promptly following execution of this Amendment and in any event within 30 days thereof, each holder of a Note and/or a Warrant agrees to deliver such Note and/or Warrant to the Company so that the amendments effected by this Amendment may be noted thereon. 8. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts taken together shall be deemed to constitute one and the same instrument. 3 4 9. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas (without reference to conflict of laws). 10. Execution by Marco's. Marco's has executed this Amendment to evidence its agreement to comply with the covenant's contained in Sections 7.13 and 7.14 of the Purchase Agreement. 11. Execution by Ghulam M. Bombaywala. Mr. Bombaywala has executed this Amendment to evidence his agreement to comply with the covenants contained in Section 7.15 of the Purchase Agreement and his agreement that the Put Option Agreement dated as of December 19, 1994, between Mr. Bombaywala and the Purchasers is hereby ratified and confirmed in all respects and shall continue in full force and effect. In witness whereof, the Company and the Purchasers have executed this Amendment effective as of the date first above written. WATERMARC FOOD MANAGEMENT CO. By: ----------------------------------- Name: Title: MARCO'S MEXICAN RESTAURANTS, INC. By: ----------------------------------- Name: Title: --------------------------------------- GHULAM M. BOMBAYWALA 4 5 --------------------------------------- Don A. Sanders Atlantis Software Company Employee Profit Sharing Plan By: ----------------------------------- Name: ----------------------------- Title: ----------------------------- --------------------------------------- Philip M. Mount --------------------------------------- John I. Mundy --------------------------------------- Katherine U. Sanders --------------------------------------- Ben T. Morris --------------------------------------- Neil Lande, Custodian for Lynne Lande, Stephen Lande, Sara Lande, and Caroline Lande --------------------------------------- John E. Drury --------------------------------------- George L. Ball 5 6 --------------------------------------- John M. O'Quinn --------------------------------------- Nolan Ryan --------------------------------------- Roger P. Lindstedt --------------------------------------- Ray C. Childress --------------------------------------- Kara S. Childress --------------------------------------- Morton A. Cohn --------------------------------------- Michael S. Chadwick 6 7 EXHIBIT A Secured Parties Don A. Sanders Atlantis Software Company Employee Profit Sharing Plan Philip M. Mount John I. Mundy Katherine U. Sanders Ben T. Morris Neil Lande, Custodian for Lynne Lande, Stephen Lande, Sara Lande, and Caroline Lande John E. Drury George L. Ball John M. O'Quinn Nolan Ryan Roger P. Lindstedt Ray C. Childress Kara S. Childress Morton A. Cohn Michael S. Chadwick c/o Sanders Morris Mundy Inc. 3100 Texas Commerce Tower 600 Travis Houston, Texas 77002 7 8 EXHIBIT E SECURITY AGREEMENT SECURITY AGREEMENT dated as of July 31, 1997, among GHULAM M. BOMBAYWALA, a resident of the State of Texas ("Debtor"), and the persons identified on Exhibit A hereto (collectively, "Secured Party"). RECITALS A. Secured Party has loaned $1,250,000 to Watermarc Food Management Co., a Texas corporation (the "Company") pursuant to the Purchase Agreement dated as of December 19, 1994, by and between the Company and Secured Party (such Purchase Agreement, as amended by the First Amendment to Purchase Agreement, being referred to herein as the "Original Purchase Agreement") and the Company's 12% Subordinated Notes due July 31, 1997 (the "Notes"). B. Debtor and Secured Party are parties to a Put Option Agreement dated as of December 19, 1994, pursuant to which Debtor agreed to purchase the Notes under certain conditions. C. Secured Party and Debtor have this date entered into a Second Amendment to Purchase Agreement (the "Second Amendment"), under which, among other things, Secured Party has agreed to waive all defaults, if any, occurring on or before the date of the Second Amendment and to extend the maturity date of the Notes (as defined in the Original Purchase Agreement), in consideration for which DEBTOR has agreed to pledge the capital stock of Michelangelo's, Inc., a Texas corporation ("Michelangelo's") as security therefor (the Original Purchase Agreement, as amended by the First Amendment, is hereafter referred to as the "Purchase Agreement"). A. Debtor is the record and beneficial owner of the issued and outstanding shares of Capital stock issued by Michelangelo's described in Schedule I (being hereinafter referred to as the "Pledged Shares"). AGREEMENT In consideration of the premises and the covenants hereinafter contained and for other good and valuable consideration, receipt of which is hereby acknowledged, it is agreed as follows: 1. Definitions. The following terms shall have (unless otherwise provided elsewhere in this Security Agreement) the following respective meanings (such meanings being equally applicable to both the singular and plural form of the terms defined): "Agreement" shall mean this Security Agreement, including all amendments, modifications and supplements and any exhibits or schedules to any of the foregoing, and shall refer to the Agreement as the same may be in effect at the time such reference becomes operative. 9 "Business Day" shall mean any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the State of Texas. "Code" shall mean the Texas Uniform Commercial Code as in effect from time to time. "Collateral" shall mean the Pledged Collateral. "Default" shall mean any event which, with the passage of time or notice or both, would, unless cured or waived, become an Event of Default. "Event of Default" shall have the meaning assigned to it in the Purchase Agreement. "Lien" shall mean any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction). "Loan Documents" shall mean this Agreement, the Purchase Agreement, those other ancillary agreements as to which Secured Party, the Company or the Debtor is a party or a beneficiary, and all other agreements, instruments, documents and certificates, including, without limitation, pledges, powers of attorney, consents, assignments, contracts, notices, and all other written matter whether heretofore, now or hereafter executed by or on behalf of Debtor and delivered to Secured Party, in connection with this Agreement or the transactions contemplated hereby. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether Federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Pledged Collateral" shall have the meaning assigned to such term in Section 2 hereof. "Purchase Agreement" shall have the meaning set forth in the recitals. "Secured Obligations" shall have the meaning assigned to such term in Section 3 hereof. 2. Pledge. Debtor hereby pledges, assigns, hypothecates, transfers and delivers all the Pledged Shares owned by it and hereby grants to Secured Party a lien on, and security interest in, and agrees to accept any interest in the Pledged Shares that is received by it as Secured Party's agent and to hold the same in trust on behalf of and for the ratable benefit of Secured Party and 2 10 to deliver the same forthwith to Secured Party in the exact form received, with the endorsement of Debtor when necessary and/or appropriate undated stock powers duly executed in blank, to be held by Secured Party, subject to the terms hereof, all of the following (herein, the "Pledged Collateral"): (a) The Pledged Shares and the certificates representing the Pledged Shares (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital, or issued in connection with any reorganization), options or rights, and all dividends, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares. (b) All additional shares of stock (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital, or issued in connection with any reorganization), options or rights of the issuer of the Pledged Shares from time to time acquired by Debtor in any manner (which shares shall be deemed to be part of the Pledged Shares), and the certificates representing such additional shares, and all dividends, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of, in exchange for, as an addition to, or in substitution of any or all of such shares. 3. Security for Obligations. This Agreement secures, and the Collateral is security for, the prompt payment in full when due, whether at stated maturity, by acceleration or otherwise, of the unpaid principal of and interest on any promissory notes issued to evidence loans made and to be made by Secured Party to Debtor pursuant to the Purchase Agreement; and performance of the obligations, whether for principal, premium, interest, fees, costs and expenses, and all obligations of Debtor now or hereafter existing under the Purchase Agreement or of Debtor now existing or hereafter arising under this Agreement (collectively, the "Secured Obligations"). 4. Delivery of Pledged Collateral. All certificates representing or evidencing the Pledged Shares shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Secured Party shall have the right, at any time in its discretion and without notice to Debtor, to transfer to or to register in the name of Secured Party or any of its nominees any or all of the Pledged Shares. In addition, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Shares for certificates or instruments of smaller or larger denominations. 5. Representations and Warranties. Debtor represents and warrants to Secured Party that: (a) Debtor is, and at the time of delivery of the Pledged Shares to Secured Party pursuant to Section 4 hereof, the legal holder of record and the sole beneficial owner of the Pledged Shares and has good and marketable title to the Pledged Shares free and clear 3 11 of any Lien, mortgage, hypothecation, security interest, charge, option or other encumbrance whatsoever, except for the Lien created by this Agreement. (b) All of the Pledged Shares have been duly authorized, validly issued and are fully paid and non-assessable. (c) Debtor has the full power, authority and legal right to pledge, assign, transfer, deliver, deposit and set over the Pledged Collateral pledged by Debtor to Secured Party as provided herein. (d) None of the Pledged Shares has been issued or transferred in violation of the securities registration, securities disclosure or similar laws of any jurisdiction to which such issuance or transfer may be subject. (e) The Michelangelo's Pledged Shares constitute one hundred percent (100%) of the issued and outstanding shares of stock of Michelangelo's. (f) No consent, approval, authorization or other order of any Person and no consent, authorization, approval, or other action by, and no notice to or filing with any governmental authority or regulatory body is required either (i) for the pledge by Debtor of the Pledged Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by Debtor or (ii) for the exercise by the Secured Party of the voting or other rights provided for in this Agreement or the remedies in respect of the Pledged Collateral pursuant to this Agreement, except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally. (g) Except for the security interest (and pledges and assignments as applicable) granted hereby and as disclosed in paragraph (a) above, Debtor is, and as to any property acquired after the date hereof which is included within the Collateral, Debtor will be, the owner of all such Collateral free and clear from all charges, Liens, security interests, adverse claims and encumbrances of any and every nature whatsoever. (h) There is no financing statement or similar filing now on file in any public office covering any part of the Collateral, and Debtor will not execute and there will not be on file in any public office any financing statement or similar filing except the financing statements filed or to be filed in favor of Secured Party. (i) All information furnished to Secured Party concerning Debtor, the Collateral and the Secured Obligations, or otherwise for the purpose of obtaining or maintaining credit, is or will be at the time the same is furnished, accurate and complete in all material respects. (j) The pledge, assignment and delivery of the Collateral pursuant to this Agreement will create a valid first priority lien on and a first priority perfected security 4 12 interest in the Michelangelo's Pledged Shares pledged by Debtor, and the proceeds thereof, subject to no prior pledge, lien, mortgage, hypothecation, security interest, charge, option or encumbrance or to any agreement purporting to grant to any third party a security interest in the property or assets of Debtor which would include the Collateral, securing the payment of the Secured Obligations. (k) This Agreement has been duly authorized, executed and delivered by Debtor and constitutes a legal, valid and binding obligation of Debtor enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, or other similar laws affecting the rights of creditors generally or by the application of general equity principles. The representations and warranties set forth in this Section 5 shall survive the execution and delivery of this Agreement. 6. Covenants. Debtor, with respect to the Pledged Collateral held in his or its name, covenants and agrees that until the Notes are paid in full and the Secured Obligations are satisfied: (a) Without the prior written consent of Secured Party, Debtor agrees that it will not sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Collateral, nor will it create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance with respect to any of the Collateral or any interest therein except for the Lien provided by this Agreement. Without the prior written consent of Secured Party, Debtor agrees that it will not vote to enable and will not otherwise permit the Company to, issue any stock or other securities of any nature in addition to or in exchange or substitution for such Pledged Shares. (b) Debtor will, at its expense, promptly execute, acknowledge and deliver all such instruments and take all such action as Secured Party from time to time may request in order to ensure to Secured Party the benefits of the Lien in and to the Collateral intended to be created by this Agreement. (c) Debtor has and will defend the title to the Collateral and the Liens of Secured Party thereon against the claim of any Person and will maintain and preserve such Liens. Debtor covenants and agrees that it will have like title to and right to pledge any other property which at any time hereafter may be pledged to Secured Party as Pledged Collateral hereunder and will likewise defend Secured Party's right thereto and security interest therein. (d) Debtor shall promptly pay when due all taxes, assessments, license fees, registration fees, and governmental charges levied or assessed against Debtor or with respect to the Collateral or any part thereof. 5 13 (e) Debtor agrees not to suffer or permit any charge, lien, security interest, adverse claim or encumbrance of any and every nature whatsoever against the Collateral or any part thereof, except for the Liens. (f) Except as otherwise provided in this Agreement with respect to inventory, and except in the ordinary course of business with respect to other Collateral, Debtor shall not, without the prior written consent of Secured Party, sell, assign, transfer, lease, charter, encumber, hypothecate or dispose of the Collateral, or any part thereof, or interest therein, or offer to do any of the foregoing. (g) Debtor shall promptly notify Secured Party in writing of any change in the name, identity or structure of Debtor, any charge, lien, security interest, claim or encumbrance asserted against the Collateral, any theft, loss, injury or similar incident involving the Collateral, and any other material matter or litigation adversely affecting Debtor or the Collateral. Debtor shall furnish such other reports, information and data regarding Debtor's financial condition and operations, the Collateral and such other matters as Secured Party may reasonably request from time to time. (h) Debtor agrees to execute and deliver such financing statement or statements, or amendments thereof or supplements thereto, or other documents as Secured Party may from time to time require in order to comply with the Code (or other applicable state law of the jurisdiction where any of the Collateral is located) and to preserve and protect the Secured Party's rights to the Collateral. (i) Secured Party, at its option, whether before or after default, but without any obligation whatsoever to do so, may (a) discharge taxes, claims, charges, liens, security interests, assessments or other encumbrances of any and every nature whatsoever at any time levied, placed upon or asserted against the Collateral, (b) place and pay for insurance on the Collateral, including insurance that only protects Secured Party's interest, (c) pay for the repair, improvement, testing, maintenance and preservation of the Collateral, (d) pay any filing, recording, registration, licensing or certification fees or other fees and charges related to the Collateral, or (e) take any other action to preserve and protect the Collateral and Secured Party's rights and remedies under this Agreement as Secured Party may deem necessary or appropriate. Debtor agrees that Secured Party shall have no duty or obligation whatsoever to take any of the foregoing action. Debtor agrees to promptly reimburse Secured Party upon demand for any payment made or any expense incurred by the Secured Party pursuant to this authorization. These payments and expenditures, together with interest thereon from date incurred until paid by Debtor at the maximum contract rate allowed under applicable laws, which Debtor agrees to pay, shall constitute additional Obligations and shall be secured by and entitled to the benefits of this Agreement. 6 14 (j) Debtor shall do, make, procure, execute and deliver all such additional and further acts, things, deeds, interests and assurances as Secured Party may require from time to time to protect, assure and enforce Secured Party's rights and remedies. 7. Debtor's Right. As long as no Default or Event of Default under this Agreement, the Notes, the Purchase Agreement or any other agreement executed to evidence and/or secure the Secured Obligations (the "Other Agreements"), shall have occurred and be continuing and until written notice shall be given to Debtor in accordance with Section 8(a) hereof: (a) Debtor shall have the right, from time to time, to vote and give consents, ratifications and waivers with respect to the Pledged Collateral or any part thereof for all purposes not inconsistent with the provisions of this Agreement, the Purchase Agreement, and any Other Agreement; provided, however, that no vote shall be cast, and no consent, ratification, or waiver shall be given or action taken, which would have the effect of materially impairing the position or interest of Secured Party in respect of the Pledged Collateral, be inconsistent with or violate any provision of this Agreement, the Purchase Agreement, or the Other Agreements; (b) (i) Debtor shall be entitled, from time to time, to collect and receive for its own use all cash dividends paid in respect of the Pledged Shares to the extent not in violation of this Agreement, the Purchase Agreement, or the Other Agreements, other than any and all (A) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in redemption of or exchange for, any Pledged Collateral, (B) distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or reorganization of the Company, (C) cash paid, or payable or otherwise distributed in redemption of, or in exchange for, any Pledged Collateral, in addition, until actually paid all rights to such dividends shall remain subject to the Lien created by this Agreement; and (ii) all dividends (other than such cash dividends as are permitted to be paid to Debtor in accordance with clause (i) above) and all other distributions in respect of the Pledged Collateral, whenever paid or made, shall be delivered to Secured Party to hold as Pledged Collateral and shall, if received by Debtor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Debtor, and be forthwith delivered to Secured Party as Pledged Collateral as additional Collateral for the Secured Obligations in the form so received (with any necessary endorsement). 8. Defaults and Remedies. Upon the occurrence of an Event of Default and during the continuation of such Event of Default, then or at any time after such declaration (provided that such declaration is not rescinded by the Secured Party), without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon Debtor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived), Secured Party (personally or through 7 15 an agent) is hereby authorized and empowered subject to the approval of any governmental authority (to the extent such consent or approval of any governmental authority is required), to (a) Transfer and register in its name or in the name of its nominee the whole or any part of the Pledged Collateral, to exercise the voting rights with respect thereto, to collect and receive all cash dividends and other distributions made thereon, and to exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any shares of the Pledged Shares as if it were the absolute owner thereof, including without limitation, the right to exchange at its discretion, any and all of the Pledged Shares upon the merger, consolidation, reorganization, recapitalization or other readjustment of any corporation issuing any of such shares or upon the exercise by any such issuer or Secured Party of any right, privilege or option pertaining to any shares of the Pledged Shares, and in connection therewith, to deposit and deliver any and all of the Pledged Shares with any committee, depositary, transfer agent, registrar other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but Secured Party shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. (b) Collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of Secured Party's offices or elsewhere in one or more sales after ten (10) days' notice of the time and place of any public sale or of the time after which a private sale is to take place (which notice Debtor agrees is commercially reasonable), but without any previous notice or advertisement, the whole or any part of the Collateral and to otherwise act with respect to the Collateral as though Secured Party was the outright owner thereof, Debtor hereby irrevocably constituting and appointing Secured Party as the proxy and attorney-in-fact of Debtor, with full power of substitution to do so; provided, however, Secured Party shall not have any duty to exercise any such right or to preserve the same and shall not be liable for any failure to do so or for any delay in doing so. Any sale shall be made either for cash or upon credit or for future delivery without assumption of any credit risk at such price as Secured Party may deem fair, and such terms and conditions as Secured Party may deem advisable and Secured Party may be the purchaser of the whole or any part of the Collateral so sold and hold the same thereafter in its own right free from any claim of Debtor or any right or equity of redemption in Debtor, which right or equity is hereby expressly waived and released. Each sale shall be made to the highest bidder, but Secured Party reserves the right to reject any and all bids at such sale which, in its discretion, it shall deem inadequate. Demands of performance, except as otherwise herein specifically provided for, notices of sale, advertisements and the presence of property at sale are hereby waived and any sale hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. 8 16 (c) If, at the original time or times appointed for the sale of the whole or any part of the Collateral, the highest bid, if there be but one sale, shall be inadequate to discharge in full all the Secured Obligations, or if the Collateral be offered for sale in lots, if at any of such sales, the highest bid for the lot offered for sale would indicate to Secured Party, in its discretion, the unlikelihood of the proceeds of the sales of the whole of the Collateral being sufficient to discharge all the Secured Obligations, Secured Party may, on one or more occasions and in its discretion, postpone any of said sales by public announcement at the time of sale or the time of previous postponement of sale, and no other notice of such postponement or postponements of sale need be given, any other notice being hereby waived; provided, however, that any sale or sales made after such postponement shall be after ten (10) days' notice to Debtor. (d) In the event of any sales hereunder, Secured Party shall pay over the proceeds of any such collection, recovery, receipt, appropriation, realization or sale in accordance with Section 9 of this Agreement. (e) In addition to the rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to any of the Secured Obligations, Secured Party shall have all the rights and remedies of a secured party under the Code. (f) Debtor agrees that following the occurrence and during the continuance of an Event of Default it will not at any time plead, claim or take the benefit of any appraisal, valuation, stay, extension, moratorium or redemption law now or hereafter in force in order to prevent or delay the enforcement of this Agreement, or the absolute sale of the whole or any part of the Collateral or the possession thereof by any purchaser at any sale hereunder, and Debtor waives the benefit of all such laws to the extent it lawfully may do so. Debtor agrees that it will not interfere with any right, power and remedy of Secured Party provided for in this Agreement or now or hereafter existing at law or in equity or by statute or otherwise, or the exercise or beginning of the exercise by Secured Party of any one or more of such rights, powers or remedies. No failure or delay on the part of Secured Party to exercise any such right, power or remedy and no notice or demand which may be given to or made upon Debtor by Secured Party with respect to any such remedies shall operate as a waiver thereof, or limit or impair Secured Party's right to take any action or to exercise any power or remedy hereunder, without notice or demand, or prejudice its rights as against Debtor in any respect. (g) Debtor further agrees that a breach of any of the covenants contained in this Section 8 will cause irreparable injury to Secured Party, that Secured Party has no adequate remedy at law in respect of such breach and, as a consequence, agrees that each and every covenant contained in this Section 8 shall be specifically enforceable against Debtor, and Debtor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that the Secured Obligations are not then due and payable in accordance with the agreements and instruments governing and 9 17 evidencing such obligations. Debtor further acknowledges the impossibility of ascertaining the amount of damages which would be suffered by Secured Party by reason of a breach of any of such covenants and, consequently, agrees that, if Secured Party shall sue for damages for breach, it shall pay, as liquidated damages and not as a penalty, an amount equal to the value of the Collateral pledged by Debtor on the date Secured Party shall demand compliance with this Section 8. (h) Debtor recognizes that Secured Party may be unable to effect a public sale of any or all the Pledged Shares by reason of certain prohibitions contained in the Act and applicable state securities laws, but may be compelled to resort to one or more private sales thereof to a restricted group or purchasers who will be obliged to agree, among other things to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Debtor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the Secured Party than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. Secured Party shall be under no obligation to delay a sale of any of the Pledged Shares for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the Act, or under applicable state securities laws, even if the issuer would agree to do so. (i) Debtor further agrees to do or cause to be done all such other acts and things as may be reasonably necessary to make such sale or sales of any portion or all of the Pledged Shares owned by it valid and binding and in compliance with any and all applicable laws, regulations, orders, writs, injunctions, decrees or awards of any and all courts, arbitrators or governmental instrumentalities, domestic or foreign, having jurisdiction over any such sale or sales, all at Debtor's expense. (j) Debtor shall be liable for and agrees to pay the reasonable expenses incurred by Secured Party in enforcing its rights and remedies, in retaking, holding, testing, repairing, improving, selling, leasing or disposing of the Collateral, or like expenses, including, without limitation, attorneys' fees and legal expenses incurred by Secured Party. These expenses, together with interest thereon from the date incurred until paid by Debtor at the maximum contract rate allowed under applicable laws, which Debtor agrees to pay, shall constitute additional Secured Obligations and shall be secured by and entitled to the benefits of this Agreement. (k) The rights and remedies of Secured Party are cumulative and the exercise of any one or more of the rights or remedies shall not be deemed an election of rights or remedies or a waiver of any other right or remedy. Secured Party may remedy any default and may waive any default without waiving,the default remedied or without waiving any other prior or subsequent default. 10 18 9. Application of Proceeds. Any cash held by Secured Party as Collateral and all cash proceeds received by Secured Party in respect of any sale of, liquidation of, or other realization upon all or any part of the Collateral shall be applied by Secured Party as follows: (a) First, to the payment of the costs and expenses of such sale, including (i) reasonable compensation to the Secured Party and its agents and counsel, and (ii) all expenses, liabilities and advances made or incurred by Secured Party in connection therewith including those incurred for care, safekeeping, collection, sale, delivery or otherwise of the Collateral. (b) Next, to the payment of the Secured Obligations in such order as Secured Party may elect. (c) Finally, after payment in full of all Secured Obligations, payment to the Debtor, or its successors or assigns, or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. 10. Waiver. No delay on Secured Party's part in exercising any power of sale, Lien, option or other right hereunder, and no notice or demand which may be given to or made upon Debtor by Secured Party with respect to any power of sale, Lien, option or other right hereunder shall constitute a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege constitute a waiver thereof; or limit or impair Secured Party's right to take any action or to exercise any power of sale, Lien, option, or any other right hereunder, without notice or demand, or prejudice Secured Party's rights as against Debtor in any respect. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. 11. Assignment and Amendment. Secured Party may assign, endorse or transfer any instrument evidencing all or any part of the Secured Obligations as provided in, and in accordance with, the Purchase Agreement, and the holder of such instrument shall be entitled to the benefits of this Agreement. None of the terms or provisions of this Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by Secured Party and Debtor. 12. Termination. Immediately following the payment of all Secured Obligations, Secured Party shall deliver to Debtor the Pledged Collateral pledged by Debtor at the time subject to this Agreement and all instruments of assignment executed in connection therewith, free and clear of the Lien hereof and, except as otherwise provided herein, all of Debtor's obligations hereunder shall at such time terminate. 13. Lien Absolute. All rights of Secured Party hereunder, and all obligations of the Debtor hereunder, shall be absolute and unconditional irrespective of: 11 19 (a) Any lack of validity or enforceability of the Purchase Agreement, any other Loan Document or any other agreement or instrument governing or evidencing any Secured Obligations. (b) Any change in the time, manner or place of payment of, or in any other term of, all or any part of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from the Purchase Agreement, any other Loan Document or any other agreement or instrument governing or evidencing any Secured Obligations. (c) Any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Secured Obligations. (d) Any other circumstance which might otherwise constitute a defense available to, or a discharge of, Debtor. 14. Indemnification. Debtor severally agrees to indemnify and hold Secured Party harmless from and against any taxes, liabilities, claims and damages, including reasonable attorney's fees and disbursements, and other expenses incurred or arising by reason of the taking or the failure to take action by Secured Party, in good faith, in respect of any transaction effected under this Agreement or in connection with the Lien provided for herein, including, without limitation, any taxes payable in connection with the delivery or registration of any of the Pledged Collateral as provided herein. Debtor severally agrees to be liable for payment to Secured Party of all Secured Party's out-of-pocket costs and expenses incurred in connection with this Agreement after the date hereof and all reasonable fees, expenses and disbursements, including registration costs under the Act (or similar statute) and the reasonable fees of Secured Party's agents or representatives, incurred in connection with this Agreement and the performance by Secured Party of the provisions of this Agreement and of any transactions effected in connection with this Agreement. The obligations of the Debtor under this Section 14 shall survive the termination of this Agreement. Notwithstanding any other provision of this paragraph, or any other paragraph of this Agreement, if Debtor tenders his Pledged Collateral to Secured Party pursuant to the terms of this Agreement, but is prevented from tendering the Pledged Collateral to Secured Party by virtue of the actions of any Person other than Debtor, or any Person controlled or in common control with Debtor, then Debtor shall only be liable for delivery of good, valid and marketable title to all of the Pledged Collateral immediately upon legally being permitted to do so, and in such case shall not be liable for any costs, arising from Debtor's obligation to indemnify Secured Party as discussed in this Section 14. 15. Reinstatement. This Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against Debtor for liquidation or reorganization, should Debtor become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of Debtor's assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in 12 20 amount, or must otherwise be restored or returned by any obligee of the Secured Obligations, whether as a "voidable preference", "fraudulent conveyance", or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. 16. Miscellaneous. (a) Secured Party may execute any of its duties hereunder by or through agents or employees and shall be entitled to advice of counsel concerning all matters pertaining to its duties hereunder. (b) Neither Secured Party nor any of its officers, directors, employees, agents or counsel shall be liable for any action lawfully taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or willful misconduct. (c) This Agreement shall be binding upon Debtor and its successors and assigns, and shall inure to the benefit of, and be enforceable by, Secured Party and its successors and assigns, and shall be governed by, and construed and enforced in accordance with, the internal laws in effect in the State of Texas without giving effect to principles of choice of law, and none of the terms or provisions of this Agreement may be waived, altered, modified or amended except in writing, signed by Secured Party, duly signed for and on behalf of Secured Party and the Debtors and then only to the extent therein set forth. (d) Notwithstanding any provision to the contrary herein, or in any of the documents evidencing the Secured Obligations or otherwise relating thereto, no such provision shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable usury laws. If any such excessive interest is so provided for, then in such event (i) the provisions of this paragraph shall govern and control, (ii) neither Debtor nor its successors or assigns or any other party liable for the payment thereof, shall be obligated to pay the amount of such interest to the extent that is in excess of the maximum amount permitted by law, (iii) any such excess interest that may have been collected shall be, at the option of the holder of the instrument evidencing the Secured Obligations, either applied as a credit against the then unpaid principal amount thereof or refunded to the maker thereof, and (iv) the effective rate of interest shall be automatically reduced to the maximum lawful rate under applicable usury laws as now or hereafter construed by the courts having jurisdiction. (e) Any carbon, photographic or,other reproduction of any financing statement signed by Debtor is sufficient as a financing statement for all purposes, including without limitation, filing in any state as may be permitted by the provisions of the Uniform Commercial Code of such state. 13 21 17. Severability. If for any reason any provision or provisions hereof are determined to be invalid and contrary to any existing or future law in any jurisdiction, such invalidity in any jurisdiction shall not impair the operation of or effect those portions of this Agreement which are valid in any other jurisdiction. 18. Notices. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by any other party, or whenever any of the parties desires to give or serve upon any other a communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and either shall be delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to Secured Party, at Sanders Morris Mundy 3100 Texas Commerce Tower Houston, Texas 77002 Attn: Michael S. Chadwick (b) If to Debtor, at Ghulam M. Bombaywala Watermarc Food Management Co. 11111 Wilcrest Green, Suite 350 Houston, Texas 77042 or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, or three (3) Business Days after the same shall have been deposited in the United States mail. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to the persons designated above to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. 19. Section Titles. The Section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 20. Counterparts. This Agreement may be executed in any number of counterparts, which shall, collectively and separately, constitute one agreement. 14 22 21. Further Assurances. Debtor agrees that at any time and from time to time, upon the written request of Secured Party, Debtor will execute and deliver such further documents and do such further acts and things as Secured Party may reasonably request in order to effect the purposes of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed as of the date first written above. --------------------------------------- Ghulam M. Bombaywala 15 23 SCHEDULE I
DEBTOR PLEDGED SHARES - ------ -------------- Ghulam M. Bombaywala 750 shares of Common Stock, $1,00 par value, of Michelangelo's, Inc., Texas corporation, evidenced by the certificate heretofore delivered to Secured Party.
16 EX-4.4 6 2ND AMEND. TO FINANCIAL ADVISORY AGREEMENT 1 EXHIBIT 4.4 SECOND AMENDMENT TO FINANCIAL ADVISORY AGREEMENT Second Amendment to Financial Advisory Agreement dated as of July 31, 1997 (the "Amendment"), among WATERMARC FOOD MANAGEMENT CO., a Texas corporation formerly known as Billy Blues Food Corporation (the "Company"), and SANDERS MORRIS MUNDY INC., a Texas corporation (the "Advisor"); WITNESSETH: Whereas, the Company and the Advisor are parties to a Financial Advisory Agreement dated as of January 1, 1995, as amended by the First Amendment to Financial Advisory Agreement dated as of March 31, 1996 (as so amended, the "Advisory Agreement") pursuant to which the Company has retained the Advisor to provide certain advice and consulting services to the Company; and Whereas, the Company and the Advisor wish to extend the term of and amend the Advisory Agreement in certain respects; Now, therefore, in consideration of the foregoing premises, the following mutual agreement, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company and the Advisor agree to amend the Advisory Agreement as follows: 1. Definitions. Capitalized terms used herein shall have the meaning assigned to them in the Advisory Agreement unless otherwise defined herein or the context otherwise requires. 2. Amendments to the Advisory Agreement. The Advisory Agreement is hereby amended as follows: (a) Section 2.3 of the Advisory Agreement is hereby amended by deleting reference to "$1.00" and substituting in place thereof "$0.25" and deleting the reference to "a term of five years" in the second sentence and substituting in place thereof "a term expiring on August 31, 2002." 3. Amendments to the Advisor's Warranty. Each of the Advisor's Warrants is hereby amended by deleting the number "$1.00" in the first paragraph and substituting in place thereof the number "$0.25" and by deleting the date "December 31, 1999" in Section 1.a. and substituting in place thereof the date "August 31, 2002." 2 4. Representations and Warranties. The Company represents and warrants as follows: (a) The execution, delivery and performance of this Amendment and the Advisory Agreement, as modified by this Amendment, and the transactions contemplated hereby and thereby (i) are within the corporate authority of the Company, (ii) have been authorized by all necessary corporate proceedings on the part of the Company, (iii) do not conflict with or result in any material breach or contravention of any provision of law, statute, rule, or regulation to which the Company is subject or any judgment, order, writ, injunction, license, or permit applicable to the Company, and (iv) do not conflict with any provision of the corporate charter or bylaws of the Company or any agreement or other instrument binding upon the Company. (b) The execution, delivery, and performance of this Amendment and the Advisory Agreement, as modified by this Amendment, will result in valid and legally binding obligations of the Company enforceable against it in accordance with the respective terms and provisions hereof and thereof. (c) The execution, delivery, and performance of this Amendment and the Advisory Agreement, as modified by this Amendment, and the consummation by the Company of the transactions contemplated hereby and thereby do not require any approval or consent of, or filing with, any governmental agency or authority. 5. Payment of Fees. The Company covenants and agrees that the balance of the non-refundable financial advisory fees due under the Advisory Agreement in the amount of $75,000 shall be paid in full on or before December 31, 1997. 6. Ratification. Except as expressly amended hereby, the Advisory Agreement and the Advisor's Warrants are hereby ratified and confirmed in all respects and shall continue in full force and effect. This Amendment and the Advisory Agreement shall hereafter be read and construed together as a single document, and all references to the Advisory Agreement or any agreement or instrument related to the Advisory Agreement shall hereafter refer to the Advisory Agreement as amended by this Amendment. 7. Termination. The Company and the Advisor agree that the term of the Advisory Agreement shall end on December 31, 1997, in accordance with the provisions of Section 6 of the Advisory Agreement. 8. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts taken together shall be deemed to constitute one and the same instrument. 2 3 9. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas (without reference to conflict of laws). In Witness Whereof, the Company and the Advisor have executed this Amendment as of the date first above written. WATERMARC FOOD MANAGEMENT CO. By: ----------------------------------- Name: Title: SANDERS MORRIS MUNDY By: ----------------------------------- Name: Title: --------------------------------------- Ghulam M. Bombaywala 3 EX-4.5 7 CONVERSION AND OFFSET AGREEMENT DATED 5/15/97 1 EXHIBIT 4.5 CONVERSION AND OFFSET AGREEMENT This Agreement is made effective as of the 15th day of May, 1997, by and between The Original Pasta Co., a Texas corporation f/k/a Pasta Acquisition Co. ("Pasta Co."), Marco's Mexican Restaurants, Inc., a Texas corporation ("Marco's"), both wholly owned subsidiaries of Watermarc Food Management Co., Watermarc Food Management Co., a Texas corporation ("Watermarc"), and Ghulam M. Bombaywala, (hereafter jointly referred to as "the Parties"). WHEREAS, on the 14th day of September 1995, Pasta Co. executed a note in the principal amount of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000.00) in favor of Ghulam M. Bombaywala; and WHEREAS, on the 14th day of September 1995, Pasta Co. executed a note in the principal amount of One Million Dollars ($1,000,000.00) in favor of Ghulam M. Bombaywala (both notes hereafter jointly referred to as the "Notes"); and WHEREAS, the Notes were guaranteed by Watermarc pursuant to a Guaranty Agreement dated September 14, 1995, in favor of Mr. Bombaywala; and WHEREAS, the Parties wish to convert the Notes payable by Pasta Co. to Mr. Bombaywala in the total principal amount of Three Million Seven Hundred Fifty Thousand Dollars ($3,750,000.00) for Seven Million Five Hundred Thousand (7,500,000) shares (the "Shares") of the common stock of Watermarc, $.05 par value (the "Common Stock") and/or the right to receive the Shares at a later date as hereinafter described in Section 2 hereof (the "Rights"); and WHEREAS, on the 26th day of January 1996, Pasta Co. executed notes in the principal amounts of Two Hundred Twenty Four Thousand Two Hundred Two Dollars ($224,202.00) and Five Hundred Ninety Five Thousand Dollars ($595,000.00) in favor of Ghulam M. Bombaywala (hereafter jointly referred to as the "Exchange Notes"); and WHEREAS, on the 31st day of July 1994, Ghulam M. Bombaywala executed a note in the principal amount of Two Million One Hundred Seventy Five Thousand Three Hundred Ten Dollars and Forty Cents ($2,175,310.40) in favor of Marco's (the "Marco's Note"); and WHEREAS, the Parties wish to offset the Exchange Notes so that the collective principal amount of Eight Hundred Nineteen Thousand Two Hundred Two Dollars ($819,202.00) due to Mr. Bombaywala shall be offset against the Marco's Note due to Marco's; and 2 NOW, THEREFORE, for and in consideration of the premises hereunder, the Parties agree as follows: 1. Ghulam M. Bombaywala forgives and forever discharges the following Notes owed to him by Pasta Co. in the total principal sum of Three Million Seven Hundred Fifty Thousand Dollars ($3,750,000.00), together with all interest, accrued and unaccrued, and forever releases and discharges Watermarc from its corporate guarantee of such obligations: That certain Promissory Note dated September 14, 1995 by and between Pasta Acquisition Co., as Maker, and Ghulam M. Bombaywala, as Payee, in the amount of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000.00) attached hereto as Exhibit A; and That certain Promissory Note dated September 14, 1995 by and between Pasta Acquisition Co., as Maker, and Ghulam M. Bombaywala, as Payee, in the amount of One Million Dollars ($1,000,000.00) attached hereto as Exhibit B; and 2. Mr. Bombaywala shall have the right to receive Seven Million Five Hundred Thousand (7,500,000) Shares of Watermarc's Common Stock based upon a value of Fifty Cents ($.50) per share (hereinafter referred to as "Rights"). The Parties acknowledge and agree that the Shares cannot be issued immediately due to insufficient authorized shares of Common Stock of Watermarc and Watermarc's obligation to reserve shares of Common Stock for future issuances pursuant to outstanding obligations, including those related to its outstanding Series A Warrants, its 9% Cumulative Convertible Preferred Stock and other warrant or option agreements. In addition, Watermarc desires to retain a portion of its authorized but unissued Common Stock for general corporate purposes. Accordingly, the Parties agree that Watermarc may issue some portion of the Shares prior to the shareholder's meeting (the "Meeting") referred to below as determined by the Board of Directors of Watermarc in its sole discretion. All Shares not approved and issued by the Board of Directors prior to the Meeting shall be issued if and only if Watermarc receives shareholder approval at the Meeting of an increase in Watermarc's authorized shares of Common Stock or a reverse stock split (which would have the effect of increasing Watermarc's authorized but unissued shares of Common Stock), which Watermarc shall diligently seek at the next annual or other Meeting of shareholders. 3 3. The Rights of Mr. Bombaywala to receive the Shares (or any unissued portion of the Shares) shall be proportionately adjusted to reflect any share combinations, divisions, stock splits, reverse stock splits, stock dividends or other increases or decreases in Common Stock that proportionately affect all holders of the Common Stock and he shall have, with respect to the Rights, the right to receive a proportionate share of any consideration or securities as a result of any exchange, reclassification, reorganization, merger, business combination or other transaction on the same basis as any holders of the outstanding shares of Common Stock. 4. Ghulam M. Bombaywala forgives and forever discharges the Exchange Notes owed to him by Pasta Co. in the total principal sum of Eight Hundred Nineteen Thousand Two Hundred Two Dollars ($819,202.00), together with all interest, accrued and unaccrued, specifically: That certain Promissory Note dated January 26, 1996, by and between Pasta Acquisition Co., as Maker, and Ghulam M. Bombaywala, as Payee, in the amount of Two Hundred Twenty Four Thousand Two Hundred Two Dollars ($224,202.00) attached hereto as Exhibit C; and That certain Promissory Note dated January 26, 1996, by and between Pasta Acquisition Co., as Maker, and Ghulam M. Bombaywala, as Payee, in the amount of Five Hundred Ninety Five Thousand Dollars ($595,000.00) attached hereto as Exhibit D. 5. Watermarc and Marco's agree that the principal amount due under the Marco's Note, attached hereto as Exhibit E, shall be reduced by the sum of Eight Hundred Nineteen Thousand Two Hundred Two Dollars ($819,202.00). 6. This Agreement shall be construed according to and be governed by the laws of the State of Texas. The Parties agree that venue for any litigation arising out of this Agreement shall lie in Houston, Harris County, Texas. 7. This Agreement contains the entire agreement of the Parties with respect to the matters covered by its terms. No other agreement, statement, or promise made by any party, or to any employee, officer, or agent of any party, that is not contained in this Agreement shall be of any force or effect. 4 This Agreement is executed by the Parties on the day and year first above written. /s/ GHULAM M. BOMBAYWALA ----------------------------------- Ghulam M. Bombaywala, Individually Watermarc Food Management Co. /s/ ANGELO PITILLO ------------------------------------ By: Angelo Pitillo President and Chief Operating Officer The Original Pasta Co. /s/ ANGELO PITILLO ------------------------------------ By: Angelo Pitillo President Marco's Mexican Restaurants, Inc. /s/ ANGELO PITILLO -------------------------------------- By: Angelo Pitillo President 5 EXHIBIT A PROMISSORY NOTE $2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 PASTA ACQUISITION CO., a Texas corporation (hereinafter called "Maker"), for value received, promises and agrees to pay in installments and as herein provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend County, Texas, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 or at such other address as Payee shall designate, in lawful currency of the United States of America, the principal sum of TWO MILLION SEVEN HUNDRED FIFTY THOUSAND DOLLARS ($2,750,000.00), together with interest thereon from and after the date hereof at the rate of ten percent (10%) per annum until maturity. All past due principal and interest shall bear interest until paid at twelve percent (12%) per annum (but in no event to exceed the maximum rate of nonusurious interest allowed by law). All sums paid hereon shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. INTEREST AND PRINCIPAL ON THIS NOTE is payable as follows: interest on the outstanding principal hereof shall be payable quarterly on the 15th day of December, March, June and September of each year in which any principal remains outstanding hereunder; provided, however, commencing September 15, 2000, on each quarterly interest payment date, Maker shall make quarterly payments of principal in amount sufficient to amortize and pay all then remaining principal in pro rata quarterly installments by September 15, 2002. Notwithstanding anything herein to the contrary, this Note shall not accrue or bear interest during the "Pre Effective Period" as such term is defined in the Merger agreement (as herein after defined). IT IS ESPECIALLY agreed between the parties hereto that time is of the essence with respect to the payment of this Note and, if an "Event of Default" (as defined below) occurs, the owner and holder of this Note may, at its option, declare all sums owing hereon at once due and payable. If default is made in the payment of this Note at maturity (regardless of how its maturity may be brought about) and the same is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in bankruptcy, probate, receivership, reorganization, arrangement, or other judicial proceedings for the establishment or collection of any amount called for hereunder, or any amount payable or to be payable hereunder is collected through any such proceedings, Maker agrees and is also to pay to the owner and holder of this Note all reasonable attorney's or collection fees incurred. IT IS the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under any applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary in any agreement entered into in connection with or as security for this Note, it is agreed as follow: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this Note or under any of the other aforesaid agreements or otherwise in connection with this Note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be credited on this Note by the holder hereof (or, -------- Page 1 of 5 INITIALS 6 $2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 if this Note shall have been paid in full, refunded to Maker); (ii) in the event that maturity of the Note is accelerated by reason of an election by the holder hereof resulting from any default hereunder or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this Note or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore prepaid, shall be credited on this Note (or if this Note shall have been paid in full, refunded to Maker); and (iii) it is further agreed, without limitation of the foregoing, that all calculations of the rate of interest contracted for, charged, or received on this Note that are made for the purpose of determining whether such rate exceeds the maximum amount of interest allowed by applicable law, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading throughout the full stated term of this Note so that such rate of interest on account of this Note, as so calculated, is uniform throughout the term thereof; and (iv) that the Maker and Payee agree that for the purposes of this paragraph, the applicable interest ceiling is the Highest Lawful Rate under the laws of any jurisdiction which may be held to apply to this Note. EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the following events: 1. Maker's failure to pay principal of, or interest on, this Note as and when due and payable or the failure of Maker or the Guarantor, as defined below, to pay when due any installment or payment of principal or interest owed by Maker or Guarantor to Payee under the Notes as defined in Section 2.02 of the Merger Agreement; 2. Maker or Guarantor fails to perform or observe any material term, covenant or agreement contained in the Guaranty Agreement or the Security Documents referred to below; 3. Maker, Guarantor or any of their material subsidiaries shall individually or collectively: (a) make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or for a substantial part of its assets; (b) commence any proceeding under any bankruptcy, reorganization, rearrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; (c) have had any such petition or application filed or any such proceeding commenced against it in which an order for relief is entered or an adjudication or appointment is made, and which remains undismissed for a period of thirty (30) days or more; (d) take any board or shareholder action approving any such petition, application, proceeding, or order for relief or the appointment of a custodian. -------- Page 2 of 5 INITIALS 7 $2,750,000 HOUSTON, TEXAS SEPTEMBER 14, 1995 receiver or trustee for all or any substantial part of its properties; or (e) suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; or 4. The Guaranty Agreement or Security Documents shall at any time after execution and delivery thereof and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Guarantor or Maker or if Guarantor or Maker shall deny that it or they have any liability or obligation under, or shall fail to perform their respective obligations under, the Guaranty Agreement or Security Agreements. IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note, Payee or any owner and holder of this Note agrees to provide Maker and the Guarantor hereof thirty (30) days prior written notice specifying such default and providing Maker an opportunity to cure such default within such period prior to any acceleration of this Note; provided, however, no notice shall be required upon the occurrence of the Events of Default set forth in clauses (a), (b) or (d) of number subparagraph 3 of this Note above and sixty (60) days prior written notice shall be provided upon the occurrence of the Events of Default set forth in numbered subparagraphs 2 and 4 above. Following such written notice, if required, and the failure of Maker to cure such default in every respect all indebtedness represented by this Note shall be immediately due and payable without further action or notice by Payee or any holder hereof to Maker. If Maker cures such default after receiving notice thereof, Maker shall provide written notice to Payee or the owner and holder hereof stating the steps taken to cure such default and stating that the default is cured within the specified notice period. MAKER reserves the option of prepaying the principal of this Note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. Maker shall be required to prepay the Note to the extent and in the circumstances set forth in Section 2.02 of the Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The Original Pasta Company dated effective as of September 14, 1995 (the "Merger Agreement"). Payment of this Note is subordinated in the circumstances set forth in Section 2.02 of the Merger Agreement. THIS NOTE is entitled to the benefits of and the security afforded by (i) that certain Security Agreement between Maker and Payee dated September 14, 1995; (ii) Pledge and Security Agreement dated September 14, 1995 between Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995; (iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee dated September 14, 1995; and (iv) any other agreements, instruments or filings intended to provide security for this Note as provided for in Section 2.02 of the Merger Agreement (collectively, the "Security Documents"). -------- Page 3 of 5 INITIALS 8 $2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the Maker or Guarantor or any other person or party with respect to this Note, the Merger Agreement or the Security Documents or with respect to any other matter, thing, event or occurrence, whether past, present or arising in the future, the Maker waives all rights of set off, offset and the right to interpose make any legal claims or counterclaims, the effect of which would be to delay, reduce, deny, limit or offset its obligations under this Note. IF THE EVENT OF ANY CONFLICT between the terms and provisions of this Note, the Security Documents or the Merger Agreement or any other agreement relating hereto or thereto, the terms and provisions of this Note shall control. EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any endorsers or guarantors of this Note severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment, bringing of suit, and diligence in taking any action to collect any sums owing under Note or in proceeding against any of the rights and properties securing payment of this Note, and indulgences of every kind. Maker and any endorsers or guarantors of this Note agree that, from time to time, both before and after the maturity date of this Note and without notice, Payee may renew the indebtedness evidenced by this Note, extend the time for any payments on the Note, consent to the substitution of security, accept additional security, or release any existing security for this Note and accept partial payments of this Note without in any manner effecting the liability of maker or any endorser or guarantor under or with respect to this Note, even though Maker or such endorser or guarantor is not a party to any agreement regarding such actions. NEITHER THE Payee's acceptance of partial or delinquent performance or payment nor any forbearance, failure or delay by Payee or any holder hereof in exercising any right, power or remedy shall be deemed a waiver of any obligation of the Maker or any endorser, guarantor or other party liable for payment of this Note or of any right, power or remedy of the Payee or any holder hereof or preclude any other or further exercise thereof; and no single or partial exercise of any right, power or remedy shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated orally, but only by an agreement in writing, signed by the Maker and Payee or any holder hereof. If any term or provision of this Note shall be held invalid, illegal or unenforceability, the validity of all other terms and provisions shall in no way be effected thereby. Any waiver or forbearance must be in writing to be effective against the Payee or any holder hereof and shall only be applicable in the specific instance for which it is given. THIS NOTE has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and of the United States of America. -------- Page 4 of 5 INITIALS 9 $2,750,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 PASTA ACQUISITION CO. By: /s/ ANGELO PITILLO ___________________________ Angelo Pitillo, President -------- Page 5 of 5 INITIALS 10 EXHIBIT B PROMISSORY NOTE $1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 PASTA ACQUISITION CO., a Texas corporation (hereinafter called "Maker"), for value received, promises and agrees to pay in installments and as herein provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend County, Texas, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 or at such other address as Payee shall designate, in lawful currency of the United States of America, the principal sum of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00), together with interest thereon from and after the date hereof at the rate of ten percent (10%) per annum until maturity. All past due principal and interest shall bear interest until paid at twelve percent (12%) per annum (but in no event to exceed the maximum rate of nonusurious interest allowed by law). All sums paid hereon shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. INTEREST AND PRINCIPAL ON THIS NOTE is payable as follows: interest on the outstanding principal hereof shall be payable quarterly on the 15th day of December, March, June and September of each year in which any principal remains outstanding hereunder; $500,000.00 of the principal hereof is due December 31, 1996 and all remaining principal and any interest remaining unpaid on this Note is due and payable on December 31, 1997. Notwithstanding anything to the contrary, this Note shall not accrue or bear interest during the "Pre Effective Period" as such term is defined in the Merger Agreement (as hereinafter defined). IT IS ESPECIALLY agreed between the parties hereto that time is of the essence with respect to the payment of this Note and, if an "Event of Default" (as defined below) occurs, the owner and holder of this Note may, at its option, declare all sums owing hereon at once due and payable. If default is made in the payment of this Note at maturity (regardless of how its maturity may be brought about) and the same is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in bankruptcy, probate, receivership, reorganization, arrangement, or other judicial proceedings for the establishment or collection of any amount called for hereunder, or any amount payable or to be payable hereunder is collected through any such proceedings, Maker agrees and is also to pay to the owner and holder of this Note all reasonable attorney's or collection fees incurred. IT IS the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under any applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary in any agreement entered into in connection with or as security for this Note, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this Note or under any of the other aforesaid agreements or otherwise in connection with this Note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be credited on this Note by the holder hereof (or, if this Note shall have been paid in full, refunded to Maker); (ii) in the event that maturity of the Note is accelerated by reason of an election by the holder hereof resulting from any default ________ Page 1 of 5 INITIALS 11 $1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 hereunder or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this Note or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore prepaid, shall be credited on this Note (or if this Note shall have been paid in full, refunded to Maker); and (iii) it is further agreed, without limitation of the foregoing, that all calculations of the rate of interest contracted for, charged, or received on this Note that are made for the purpose of determining whether such rate exceeds the maximum amount of interest allowed by applicable law, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading throughout the full stated term of this Note so that such rate of interest on account of this Note, as so calculated, is uniform throughout the term thereof; and (iv) that the Maker and Payee agree that for the purposes of this paragraph, the applicable interest ceiling is the Highest Lawful Rate under the laws of any jurisdiction which may be held to apply to this Note. EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the following events: 1. Maker's failure to pay the principal of, or interest on, this Note as and when due and payable or the failure of Maker or the Guarantor, as defined below, to pay when due any installment or payment of principal or interest owed by Maker or Guarantor to Payee under the Notes as defined in Section 2.02 of the Merger Agreement; 2. Maker or Guarantor fails to perform or observe any material term, covenant or agreement contained in the Guaranty Agreement or the Security Documents referred to below; 3. Maker, Guarantor or any of their material subsidiaries shall individually or collectively: (a) make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or for a substantial part of its assets; (b) commence any proceeding under any bankruptcy, reorganization, rearrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; (c) have had any such petition or application filed or any such proceeding commenced against it in which an order for relief is entered or an adjudication or appointment is made, and which remains undismissed for a period of thirty (30) days or more; (d) take any board or shareholder action approving any such petition, application, proceeding, or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its properties; or (e) ________ Page 2 of 5 INITIALS 12 $1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; or 4. The Guaranty Agreement or Security Documents shall at any time after execution and delivery thereof and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Guarantor or Maker or if Guarantor or Maker shall deny that it or they have any liability or obligation under, or shall fail to perform their respective obligations under, the Guaranty Agreement or Security Agreements. IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note, Payee or any owner and holder of this Note agrees to provide Maker and the Guarantor hereof thirty (30) days prior written notice specifying such default and providing Maker an opportunity to cure such default within such period prior to any acceleration of this Note; provided, however, no notice shall be required upon the occurrence of the Events of Default set forth in clauses (a), (b) or (d) of numbered subparagraph 3 of this Note above and sixty (60) days prior written notice shall be provided upon the occurrence of the Events of Default set forth in numbered subparagraphs 2 and 4 above. Following such written notice, if required, and the failure of Maker to cure such default in every respect all indebtedness represented by this Note shall be immediately due and payable without further action or notice by Payee or any holder hereof to Maker. If Maker cures such default after receiving notice thereof, Maker shall provide written notice to Payee or the owner and holder hereof stating the steps taken to cure such default and stating that the default is cured within the specified notice period. MAKER reserves the option of prepaying the principal of this Note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. Maker shall be required to prepay the Note to the extent and in the circumstances set forth in Section 2.02 of the Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The Original Pasta Company dated effective as of September 14, 1995 (the "Merger Agreement"). Payment of this Note is subordinated in the circumstances set forth in Section 2.02 of the Merger Agreement. THIS NOTE is entitled to the benefits of and the security afforded by (i) that certain Security Agreement between Maker and Payee dated September 14, 1995; (ii) the Pledge and Security Agreement dated September 14, 1995 between Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995; (iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee dated September 14, 1995; and (iv) any other agreements, instruments or filings intended to provide security for this Note as provided for in Section 2.02 of the Merger Agreement (collectively the "Security Documents"). -------- Page 3 of 5 INITIALS 13 $1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the Maker or Guarantor or any other person or party with respect to this Note, the Merger Agreement or the Security Documents or with respect to any other matter, thing, event or occurrence, whether past, present or arising in the future, the Maker waives all rights of set off, offset and the right to interpose make any legal claims or counterclaims, the effect of which would be to delay, reduce, deny, limit or offset its obligations under this Note. IN THE EVENT OF ANY CONFLICT between the terms and provisions of this Note, the Security Documents or the Merger Agreement or any other agreement relating hereto or thereto, the terms and provisions of this Note shall control. EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any endorsers or guarantors of this Note severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment, bringing of suit, and diligence in taking any action to collect any sums owing under this Note or in proceeding against any of the rights and properties securing payment of this Note, and indulgences of every kind. Maker and any endorsers or guarantors of this Note agree that, from time to time, both before and after the maturity date of this Note and without notice, Payee may renew the indebtedness evidenced by this Note, extend the time for any payments on the Note, consent to the substitution of security, accept additional security, or release any existing security for this Note and accept partial payments of this Note without in any manner effecting the liability of Maker or any endorser or guarantor under or with respect to this Note, even though Maker or such endorser or guarantor is not a party to any agreement regarding such actions. NEITHER THE Payee's acceptance of partial or delinquent performance or payment nor any forebearance, failure or delay by Payee or any holder hereof in exercising any right, power or remedy shall be deemed a waiver of any obligation of the Maker or any endorser, guarantor or other party liable for payment of this Note or of any right, power or remedy of the Payee or any holder hereof or preclude any other or further exercise thereof; and no single or partial exercise of any right, power or remedy shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated orally, but only by an agreement in writing, signed by the Maker and Payee or any holder hereof. If any term or provision of this Note shall be held invalid, illegal or unenforceability, the validity of all other terms and provisions shall in no way be effected thereby. Any waiver or forbearance must be in writing to be effective against the Payee or any holder hereof and shall only be applicable in the specific instance for which it is given. -------- Page 4 of 5 INITIALS 14 $1,000,000.00 HOUSTON, TEXAS SEPTEMBER 14, 1995 THIS NOTE has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and of the United States of America. PASTA ACQUISITION CO. By: /s/ ANGELO PITILLO ___________________________ Angelo Pitillo, President ________ Page 5 of 5 INITIALS 15 EXHIBIT C PROMISSORY NOTE $224,202.00 HOUSTON, TEXAS January 26, 1995 PASTA ACQUISITION CO., a Texas corporation (hereinafter called "Maker"), for value received, promises and agrees to pay in installments and as herein provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend County, Texas, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 or at such other address as Payee shall designate, in lawful currency of the United States of America, the principal sum of TWO HUNDRED TWENTY FOUR THOUSAND TWO HUNDRED TWO AND NO/100 DOLLARS ($224,202.00), together with interest thereon from and after the date hereof at the rate of six percent (6%) per annum until maturity. All past due principal and interest shall bear interest until paid at twelve percent (12%) per annum (but in no event to exceed the maximum rate of nonusurious interest allowed by law). All sums paid hereon shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. INTEREST AND PRINCIPAL ON THIS NOTE is payable one (1) year from the date hereof. IT IS ESPECIALLY agreed between the parties hereto that time is of the essence with respect to the payment of this Note and, if an "Event of Default" (as defined below) occurs, the owner and holder of this Note may, at its option, declare all sums owing hereon at once due and payable. If default is made in the payment of this Note at maturity (regardless of how its maturity may be brought about) and the same is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in bankruptcy, probate, receivership, reorganization, arrangement, or other judicial proceedings for the establishment or collection of any amount called for hereunder, or any amount payable or to be payable hereunder is collected through any such proceedings, Maker agrees and is also to pay to the owner and holder of this Note all reasonable attorney's or collection fees incurred. IT IS the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under any applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary in any agreement entered into in connection with or as security for this Note, it is agreed as follow: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this Note or under any of the other aforesaid agreements or otherwise in connection with this Note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be credited on this Note by the holder hereof (or, if this Note shall have been paid in full, refunded to Maker); (ii) in the event that maturity of the Note is accelerated by reason of an election by the holder hereof resulting from any default hereunder or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this Note or otherwise shall be canceled automatically as of the date of such -------- Page 1 of 5 INITIALS 16 $224,202.00 HOUSTON, TEXAS JANUARY 26, 1996 acceleration or prepayment and, if theretofore prepaid, shall be credited on this Note (or if this Note shall have been paid in full, refunded to Maker); and (iii) it is further agreed, without limitation of the foregoing, that all calculations of the rate of interest contracted for, charged, or received on this Note that are made for the purpose of determining whether such rate exceeds the maximum amount of interest allowed by applicable law, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading throughout the full stated term of this Note so that such rate of interest on account of this Note, as so calculated, is uniform throughout the term thereof; and (iv) that the Maker and Payee agree that for the purposes of this paragraph, the applicable interest ceiling is the Highest Lawful Rate under the laws of any jurisdiction which may be held to apply to this Note. EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the following events: 1. Maker's failure to pay principal of, or interest on, this Note as and when due and payable or the failure of Maker or the Guarantor, as defined below, to pay when due any installment or payment of principal or interest owed by Maker or Guarantor to Payee under the Notes as defined in Section 2.02 of the Merger Agreement; 2. Maker or Guarantor fails to perform or observe any material term, covenant or agreement contained in the Guaranty Agreement or the Security Documents referred to below; 3. Maker, Guarantor or any of their material subsidiaries shall individually or collectively: (a) make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or for a substantial part of its assets; (b) commence any proceeding under any bankruptcy, reorganization, rearrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; (c) have had any such petition or application filed or any such proceeding commenced against it in which an order for relief is entered or an adjudication or appointment is made, and which remains undismissed for a period of thirty (30) days or more; or (d) take any board or shareholder action approving any such petition, application, proceeding, or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its properties; or (e) suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; or Page 2 of 5 17 $224,202.00 HOUSTON, TEXAS JANUARY 26, 1996 4. The Guaranty Agreement or Security Documents shall at any time after execution and delivery thereof and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Guarantor or Maker or if Guarantor or Maker shall deny that it or they have any liability or obligation under, or shall fail to perform their respective obligations under the Guaranty Agreement or Security Agreements. IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note, Payee or any owner and holder of this Note agrees to provide Maker and the Guarantor hereof thirty (30) days prior written notice specifying such default and providing Maker an opportunity to cure such default within such period prior to any acceleration of this Note; provided, however, no notice shall be required upon the occurrence of the Events of Default set forth in clauses (a), (b) or (d) of number subparagraph 3 of this Note above and sixty (60) days prior written notice shall be provided upon the occurrence of the Events of Default set forth in numbered subparagraphs 2 and 4 above. Following such written notice, if required, and the failure of Maker to cure such default in every respect, all indebtedness represented by this Note shall be immediately due and payable without further action or notice by Payee or any holder hereof to Maker. If Maker cures such default after receiving notice thereof, Maker shall provide written notice to Payee or the owner and holder hereof stating the steps taken to cure such default and stating that the default is cured within the specified notice period. MAKER reserves the option of prepaying the principal of this Note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. Maker shall be required to prepay the Note to the extent and in the circumstances set forth in Section 2.02 of the Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The Original Pasta Company dated effective as of September 14, 1995 (the "Merger Agreement"). Payment of this Note is subordinated in the circumstances set forth in Section 2.02 of the Merger Agreement. THIS NOTE is entitled to the benefits of and the security afforded by (I) that certain Security Agreement between Maker and Payee dated September 14, 1995; (ii) Pledge and Security Agreement dated September 14, 1995 between Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995; (iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee dated September 14, 1995; and (iv) any other agreements, instruments or filings intended to provide security for this Note as provided for in Section 2.02 of the Merger Agreement (collectively, the "Security Documents"). IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the Maker or Guarantor or any other person or party with respect to this Note, the Merger Agreement or the Security Documents or with respect to any other matter, thing, event or occurrence, whether past, present or arising in the future, the Maker waives all rights of set off, offset and the right to interpose Page 3 of 5 18 $224,202.00 HOUSTON, TEXAS JANUARY 26, 1996 any legal claims or counterclaims, the effect of which would be to delay, reduce, deny, limit or offset its obligations under this Note. IF THE EVENT OF ANY CONFLICT between the terms and provisions of this Note, the Security Documents or the Merger Agreement or any other agreement relating hereto or thereto, the terms and provisions of this Note shall control. EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any endorsers or guarantors of this Note severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment, bringing of suit, and diligence in taking any action to collect any sums owing under Note or in proceeding against any of the rights and properties securing payment of this Note, and indulgences of every kind. Maker and any endorsers or guarantors of this Note agree that, from time to time, both before and after the maturity date of this Note and without notice, Payee may renew the indebtedness evidenced by this Note, extend the time for any payments on the Note, consent to the substitution of security, accept additional security, or release any existing security for this Note and accept partial payments of this Note without in any manner effecting the liability of maker or any endorser or guarantor under or with respect to this Note, even though Maker or such endorser or guarantor is not a party to any agreement regarding such actions. NEITHER THE Payee's acceptance of partial or delinquent performance or payment nor any forbearance, failure or delay by Payee or any holder hereof in exercising any right, power or remedy shall be deemed a waiver of any obligation of the Maker or any endorser, guarantor or other party liable for payment of this Note or of any right, power or remedy of the Payee or any holder hereof or preclude any other or further exercise thereof; and no single or partial exercise of any right, power or remedy shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated orally, but only by an agreement in writing, signed by the Maker and Payee or any holder hereof. If any term or provision of this Note shall be held invalid, illegal or unenforceability, the validity of all other terms and provisions shall in no way be effected thereby. Any waiver or forbearance must be in writing to be effective against the Payee or any holder hereof and shall only be applicable in the specific instance for which it is given. Page 4 of 5 19 $224,202.00 HOUSTON, TEXAS JANUARY 26, 1996 THIS NOTE has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and of the United States of America. PASTA ACQUISITION CO. By: /s/ THOMAS BUCKLEY --------------------------- Thomas Buckley, Treasurer Page 5 of 5 20 EXHIBIT D PROMISSORY NOTE $595,000.00 HOUSTON, TEXAS JANUARY 26, 1996 PASTA ACQUISITION CO., a Texas corporation (hereinafter called "Maker"), for value received, promises and agrees to pay in installments and as herein provided unto the order of GHULAM M. BOMBAYWALA, a resident of Fort Bend County, Texas, whose business address is 10777 Westheimer, Suite 1030, Houston, Texas 77042 or at such other address as Payee shall designate, in lawful currency of the United States of America, the principal sum of FIVE HUNDRED NINETY FIVE THOUSAND AND NO/100 DOLLARS ($595,000.00), together with interest thereon from and after the date hereof at the rate of ten percent (10%) per annum until maturity. All past due principal and interest shall bear interest until paid at twelve percent (12%) per annum (but in no event to exceed the maximum rate of nonusurious interest allowed by law). All sums paid hereon shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. INTEREST AND PRINCIPAL ON THIS NOTE is payable one (1) year from the date hereof. IT IS ESPECIALLY agreed between the parties hereto that time is of the essence with respect to the payment of this Note and, if an "Event of Default" (as defined below) occurs, the owner and holder of this Note may, at its option, declare all sums owing hereon at once due and payable. If default is made in the payment of this Note at maturity (regardless of how its maturity may be brought about) and the same is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in bankruptcy, probate, receivership, reorganization, arrangement, or other judicial proceedings for the establishment or collection of any amount called for hereunder, or any amount payable or to be payable hereunder is collected through any such proceedings, Maker agrees and is also to pay to the owner and holder of this Note all reasonable attorney's or collection fees incurred. IT IS the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under any applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary in any agreement entered into in connection with or as security for this Note, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this Note or under any of the other aforesaid agreements or otherwise in connection with this Note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be credited on this Note by the holder hereof (or, if this Note shall have been paid in full, refunded to Maker); (ii) in the event that maturity of the Note is accelerated by reason of an election by the holder hereof resulting from any default hereunder or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this Note or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore prepaid, shall be credited on this Note (or if this Note ---------- Page 1 of 5 INITIALS 21 $595,000.00 HOUSTON, TEXAS JANUARY 26, 1996 shall have been paid in full, refunded to Maker); and (iii) it is further agreed, without limitation of the foregoing, that all calculations of the rate of interest contracted for, charged, or received on this Note that are made for the purpose of determining whether such rate exceeds the maximum amount of interest allowed by applicable law, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading throughout the full stated term of this Note so that such rate of interest on account of this Note, as so calculated, is uniform throughout the term thereof, and (iv) that the Maker and Payee agree that for the purposes of this paragraph, the applicable interest ceiling is the Highest Lawful Rate under the laws of any jurisdiction which may be held to apply to this Note. EVENT OF DEFAULT OR DEFAULT shall mean the occurrence of any of the following events: 1. Maker's failure to pay the principal of, or interest on, this Note as and when due and payable or the failure of Maker or the Guarantor, as defined below, to pay when due any installment or payment of principal or interest owed by Maker or Guarantor to Payee under the Notes as defined in Section 2.02 of the Merger Agreement; 2. Maker or Guarantor fails to perform or observe any material term, covenant or agreement contained in the Guaranty Agreement or the Security Documents referred to below; 3. Maker, Guarantor or any of their material subsidiaries shall individually or collectively: (a) make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or for a substantial part of its assets; (b) commence any proceeding under any bankruptcy, reorganization, rearrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; (c) have had any such petition or application filed or any such proceeding commenced against it in which an order for relief is entered or an adjudication or appointment is made, and which remains undismissed for a period of thirty (30) days or more; (d) take any board or shareholder action approving any such petition, application, proceeding, or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its properties; or (e) suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; or ________ Page 2 of 5 INITIALS 22 $595,000.00 HOUSTON, TEXAS JANUARY 26, 1996 4. The Guaranty Agreement or security Documents shall at any time after execution and delivery thereof and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Guarantor or Maker or if Guarantor or Maker shall deny that it or they have any liability or obligation under, or shall fail to perform their respective obligations under the Guaranty Agreement or Security Agreements. IF ANY EVENT OF DEFAULT shall occur and be continuing under this Note, Payee or any owner and holder of this Note agrees to provide Maker and the Guarantor hereof thirty (30) days prior written notice specifying such default and providing Maker an opportunity to cure such default within such period prior to any acceleration of this Note; provided, however, no notice shall be required upon the occurrence of the Events of Default set forth in clauses (a), (b) or (d) of numbered subparagraph 3 of this Note above and sixty (60) days prior written notice shall be provided upon the occurrence of the Events of Default set forth in numbered subparagraphs 2 and 4 above. Following such written notice, if required, and the failure of Maker to cure such default in every respect, all indebtedness represented by this Note shall be immediately due and payable without further action or notice by the Payee or any holder hereof to Maker. If Maker cures such default after receiving notice thereof, Maker shall provide written notice to Payee or the owner and holder hereof stating the steps taken to cure such default and stating that the default is cured within the specified notice period. MAKER reserves the option of prepaying the principal of this Note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. Maker shall be required to prepay the Note to the extent and in the circumstances set forth in Section 2.02 of the Plan and Agreement of Merger by and among Maker, Guarantor, Payee and The Original Pasta Co. dated effective as of September 14, 1995 (the "Merger Agreement"). Payment of this Note is subordinated in the circumstances set forth in Section 2.02 of the Merger Agreement. THIS NOTE is entitled to the benefits of and the security afforded by (I) that certain Security Agreement between Maker and Payee dated September 14, 1995; (ii) the Pledge and Security Agreement dated September 14, 1995 between Watermarc Food Management Co. ("Guarantor") and Payee dated September 14, 1995; (iii) the Guaranty Agreement executed by the Guarantor in favor of the Payee dated September 14, 1995; and (iv) any other agreements, instruments or filings intended to provide security for this Note as provided for in Section 2.02 of the Merger Agreement (collectively the "Security Documents"). IN THE EVENT OF ANY DISPUTE or litigation between the Payee and the Maker or Guarantor or any other person or party with respect to this Note, the Merger Agreement or the Security Documents or with respect to any other matter, thing, event or occurrence, whether past, present or arising in the future, the Maker waives all rights of set off, offset and the right to interpose Page 3 of 5 23 $595,000.00 HOUSTON, TEXAS JANUARY 26, 1996 any legal claims or counterclaims, the effect of which would be to delay, reduce, deny, limit or offset its obligations under this Note. IN THE EVENT OF ANY CONFLICT between the terms and provisions of this Note, the Security Documents or the Merger Agreement or any other agreement relating hereto or thereto, the terms and provisions of this Note shall control. EXCEPT AS EXPRESSLY SET FORTH TO THE CONTRARY HEREIN, Maker and any endorsers or guarantors of this Note severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment, bringing of suit, and diligence in taking any action to collect any sums owing under this Note, and indulgences of every kind. Maker and any endorsers or guarantors of this Note Agree that, from time to time, both before and after the maturity date of this Note and without notice, Payee may renew the indebtedness evidenced by this Note, extend the time for any payments on the Note, consent to the substitution of security, accept additional security, or release any existing security for this Note and accept partial payments of this Note without in any manner effecting the liability of Maker or any endorser or guarantor under or with respect to this Note, even though Maker or such endorser or guarantor is not a party to any agreement regarding such actions. NEITHER THE Payee's acceptance of partial or delinquent performance or payments nor any forebearance, failure or delay by Payee or any holder hereof in exercising any right, power or remedy shall be deemed a waiver of any obligation of the Maker or any endorser, guarantor or other party liable for payment of this Note or of any right, power or remedy of the Payee or any holder hereof or preclude any other or further exercise thereof, and no single or partial exercise of any right, power or remedy shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. THE PROVISIONS OF THIS NOTE may not be changed, modified or terminated orally, but only by an agreement in writing, signed by the Maker and Payee or any holder hereof. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions shall in no way be effected thereby. Any waiver or forbearance must be in writing to be effective against the Payee or any holder hereof and shall only be applicable in the specific instance for which it is given. -------- Page 4 of 5 INITIALS 24 $595,000.00 HOUSTON, TEXAS JANUARY 26, 1996 THIS NOTE has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and of the United States of America. PASTA ACQUISITION CO. By: /s/ THOMAS BUCKLEY --------------------------------- Thomas Buckley, Treasurer -------- Page 5 of 5 INITIALS 25 Exhibit E PROMISSORY NOTE $2,175,310.40 HOUSTON, TEXAS JULY 31, 1994 GHULAM M. BOMBAYWALA, a resident of Harris county, Texas (hereinafter called "Maker") for value received, promises and agrees to pay in installments and as herein provided unto the order of MARCO'S MEXICAN RESTAURANTS, INC., a Texas corporation (hereinafter called "Payee") at its offices in Houston, Harris County, Texas, or at such other location in Harris County, Texas as Payee shall designate, in lawful money of the United States of America, the principal sum of TWO MILLION ONE HUNDRED SEVENTY-FIVE THOUSAND THREE HUNDRED TEN AND 40/100 DOLLARS ($2,175,310.40), together with interest thereon from and after the date hereof at the rate of six percent (6%) per annum until maturity, payable as it accrues on the maturity date of each of the hereinafter mentioned installments, on the then unpaid principal amount hereof. All past due principal and interest shall bear interest until paid at the highest rate allowed by law (but in no event to exceed the maximum rate of nonusurious interest allowed by law). All sums paid hereon shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. INTEREST ON THIS NOTE shall be due and payable annually on July 1 of each year beginning July 31, 1995. Principal payments of $200,000 each shall be due on July 1, 1996, 1997 and 1998 and all remaining principal and interest shall be due on July 31, 1999. Notwithstanding the foregoing, mandatory prepayments of principal shall be payable within thirty (30) days of receipt by Maker of proceeds from the sale of all shares of Billy Blues Food Corporation by him, but only to the extent Maker has previously sold and received cash proceeds from the sale of 2,000,000 shares of Billy Blues Food Corporation which may be retained by him and not applied to prepayment of this Note. IF default is made in the payment of any installment of principal or interest hereof, as and when the same is or becomes due, or if default occurs under any instrument securing the payment hereof or executed in connection herewith, the owner and holder of this note may, at its option, with thirty (30) days written notice, declare all sums owing hereon at once due and payable. If default is made in the payment of this note at maturity (regardless of how its maturity may be brought about) and the same is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in bankruptcy, probate, receivership, reorganization, arrangement, or other judicial proceedings for the establishment or collection of any amount called for hereunder, or any amount payable or to be payable hereunder is collected through any such proceedings, Maker agrees and is also to pay to the owner and holder of this note a reasonable amount as attorney's or collection fees. IT IS the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary in any agreement entered into in connection with or ----------- INITIALS Page 1 of 2 26 $2,175,310.40 HOUSTON, TEXAS JULY 31, 1994 as security for this note, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this note or under any of the other aforesaid agreements or otherwise in connection with this note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be credited on this note by the holder hereof (or, if this note shall have been paid in full, refunded to Maker); (ii) in the event that maturity of the note is accelerated by reason of an election by the holder hereof resulting from any default hereunder or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this note or otherwise shall be cancelled automatically as of the date of such acceleration or prepayment and, if theretofore prepaid, shall be credited on this note (or if this note shall have been paid in full, refunded to Maker) and (iii) it is further agreed, without limitation of the foregoing, that all calculations of the rate of interest contracted for, charged, or received on this note that are made for the purpose of determining whether such rate exceeds the maximum amount of interest allowed by applicable law, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading throughout the full stated term of this note so that such rate of interest on account of this note, as so calculated, is uniform throughout the term thereof; and (iv) that the Maker and Payee agree that for the purposes of this paragraph, the applicable interest ceiling is the Highest Lawful Rate. MAKER reserves the option of prepaying the principal of this note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. THIS NOTE is entitled to the benefits and security afforded by a Pledge Agreement executed by Maker to Payee of even date herewith. NOTWITHSTANDING ANYTHING in this Agreement to the contrary, Maker shall have no personal liability on this Note and the sole and exclusive recourse of any owner or holder of this Note for nonpayment hereof is to exercise its rights with respect to the collateral set forth in the above-referenced Pledge Agreement. THIS NOTE has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and the United States of America. By: /s/ GHULAM M. BOMBAYWALA ---------------------------------- GHULAM M. BOMBAYWALA -------- Page 2 of 2 INITIALS EX-4.6 8 SUBORDINATED NOTE CONVERSION AGMT. - 6/1/97 1 EXHIBIT 4.6 SUBORDINATED NOTE CONVERSION AGREEMENT This Agreement is made effective as of the lst day of June, 1997, by and between Watermarc Food Management Co., a Texas corporation f/k/a Billy Blues Food Corporation ("Watermarc"), and Ghulam M. Bombaywala, (hereafter jointly referred to as the "Parties"). WHEREAS, on the 19th day of December 1994, Ghulam M. Bombaywala purchased Five Hundred Thousand Dollars ($500,000.00) principal amount of Watermarc's 12% Subordinated Notes (hereafter referred to as the "Subordinated Note"); and WHEREAS, the Parties wish to convert the Subordinated Note payable by Watermarc to Mr. Bombaywala in the total principal amount of Five Hundred Thousand Dollars ($500,000.00) into an 11% Subordinated Note of equal principal amount due June 30, 2002; and NOW, THEREFORE, for and in consideration of the premises hereunder, the Parties agree as follows: 1. In exchange for the consideration provided for in Section 2 below, Ghulam M. Bombaywala forgives and forever discharges the Subordinated Note owed to him by Watermarc and due on July 31, 1997 in the total principal sum of Five Hundred Thousand Dollars ($500,000.00), together with all interest, accrued and unaccrued effective June 1, 1997. 2. Mr. Bombaywala shall receive a promissory note from Watermarc in the principal amount of Five Hundred Thousand Dollars ($500,000.00) constituting a part of Watermarc's 11% Convertible Subordinated Notes and Warrants being offered to prospective investors pursuant to Watermarc's Confidential Private Placement Memorandum dated June 1, 1997. 3. This Agreement shall be construed according to and be governed by the laws of the State of Texas. The Parties agree that venue for any litigation arising out of this Agreement shall lie in Houston, Harris County, Texas. 4. This Agreement contains the entire agreement of the Parties with respect to the matters covered by its terms. No other agreement, statement, or promise made by any party, or to any employee, officer, or agent of any party, that is not contained in this Agreement shall be of any force or effect. This Agreement is executed by the Parties on the day and year first above written. Watermarc Food Management Co. /s/ GHULAM M. BOMBAYWALA - --------------------------------- Ghulam M. Bombaywala Individually /s/ ANGELO PITILLO -------------------------------- By: Angelo Pitillo President and Chief Operating Officer EX-4.7 9 SPECIMEN OF PURCHASE AGREEMENT - 11% CONV. 1 EXHIBIT 4.7 WATERMARC FOOD MANAGEMENT CO. 11111 WILCREST GREEN, SUITE 350 HOUSTON, TEXAS 77042 Purchase Agreement 11% Convertible Subordinated Notes Due June 30, 2002 (the "Notes") Warrants to Purchase Common Stock (the "Warrants") (collectively the "Securities") To: The Purchasers of the above Securities listed in Schedule 1 hereto: Gentlemen: WATERMARC FOOD MANAGEMENT CO., A TEXAS CORPORATION (THE "COMPANY"), IS OFFERING (THE "OFFERING") THE SECURITIES PURSUANT TO ITS CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED JUNE 1, 1997 (THE "MEMORANDUM") OF WHICH THIS PURCHASE AGREEMENT IS A PART. THE MEMORANDUM SHOULD BE REVIEWED CAREFULLY BY ALL PURCHASERS AS IT CONTAINS FURTHER TERMS, CONDITIONS AND DISCLOSURES RELATING TO THE SECURITIES IN ADDITION TO THOSE CONTAINED HEREIN WHICH TERMS, CONDITIONS AND DISCLOSURES ARE INCORPORATED HEREIN BY REFERENCE AND CONSTITUTE A PART OF THIS PURCHASE AGREEMENT AND MODIFY AND SUPPLEMENT THIS PURCHASE AGREEMENT IN CERTAIN RESPECTS. THE COMPANY HEREBY AGREES WITH YOU AS FOLLOWS: 1. AUTHORIZATION OF NOTES AND WARRANTS. The Company will authorize the issuance and sale of up to $4,000,000 aggregate principal amount of its 11% Convertible Subordinated Notes due June 30, 2002 (the "Notes"). The Company will accept subscriptions to purchase a minimum of $25,000 of the Notes. Each Note issued hereunder will mature on June 30, 2002 (the "Maturity Date"), will bear interest on its unpaid principal balance at the rate of 11% per annum, with accrued and unpaid interest being payable quarterly on March 31, June 30, September 30, and December 31 each year, commencing on September 30, 1997. The principal balance of the Notes shall be payable based upon an equal quarterly amortization of unpaid principal due and owing as of June 30, 1999 which amount will be payable quarterly commencing on September 30, 1999 through the Maturity Date. The Notes will have the other terms and provisions as provided herein and in the form of Note attached hereto as Exhibit 1. For each $25,000 Note, the Company will issue warrants (the "Warrants") evidencing the right to purchase 2,500 shares of Common Stock, $.05 par value (the "Common Stock), of the Company, at $1.50 per share, such number of shares and the purchase price being subject to adjustment as provided in the Warrant. The Warrants will be in the form of the Warrant attached hereto as Exhibit 2. Certain capitalized terms used in this Agreement are defined in Section 14. 1 2 2. PURCHASE AND SALE OF NOTES AND WARRANTS. The Company will issue and sell to you and, subject to the terms and conditions of this Purchase Agreement (including the Form of Note, Form of Warrant and the Memorandum, collectively the "Agreement"), you will purchase from the Company, the principal amount of Notes and number of Warrants, specified opposite your name in the Schedule of Purchasers, in each case at the purchase price of 100% of the principal amount thereof. 3. DELIVERY OF NOTES. All subscriptions for the Notes and Warrants will be accepted when received and the purchases will be deemed final and closed upon receipt and acceptance by the Company of an executed copy of this Agreement and Subscription Agreement, a copy of which was provided with the Company's Memorandum, along with payment of the applicable purchase price. The Company will deliver to you the Note or Notes to be purchased by you, subject to the provisions of this Section 3, in the form of one Note (or such greater number of Notes as you may request) and a Warrant in the form of a single Warrant (or such greater number of Warrants as you may request) to purchase the number of shares of the Company's Common Stock equal to 2,500 multiplied by the number of Notes you purchase, dated the date of issuance and registered in your name (or in the name of your nominee as indicated on the Schedule of Purchasers or otherwise made known in writing by you to the Company prior to the issuance thereof), against prior or, where applicable, simultaneous delivery by you to the Company, or its order, of immediately available funds in the amount of the purchase price therefor. The receipt and acceptance by the Company of subscriptions for Notes and Warrants and the issuance thereof are individually and collectively referred to as "subscription closings" or "closings", whether one or more. The closing, as necessary, will take place as subscriptions are received at any time or times prior to September 30, 1997, unless the Offering is extended by the Company at its sole discretion (the "Expiration Date"). 4. REPRESENTATIONS AND WARRANTS. The Company represents and warrants to you that: 4.1 ORGANIZATION, QUALIFICATIONS, STANDING, CAPITAL STOCK, SUBSIDIARIES, ETC. The Company and its material Subsidiaries are corporations duly organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation, have the corporate power to own their respective properties and to carry on their respective businesses as the same are now being conducted and are duly qualified to do business and are in good standing in each jurisdiction in which the character of the respective properties owned by them or the nature of their respective businesses makes such qualification necessary. The authorized capital stock of the Company consists of (a) 20,000,000 shares of common stock, $0.05 par value (the "Common Stock"), of which 13,670,847 shares were issued and outstanding at March 30, 1997, and (b) 5,000,000 shares of Preferred Stock, $1.00 par value, of which 329,540 shares of 9% Cumulative Convertible Preferred Stock were issued and outstanding at March 30, 1997. All of such outstanding shares have been validly issued, are fully paid and nonassessable. The Company has reserved approximately 3.4 million shares of such Common Stock for issuance pursuant to previously outstanding options, warrants, and convertible securities and has not reserved any shares of Common Stock for the conversion of the Notes and/or the exercise of the Warrants (collectively "Derivative Securities"). Except as stated in this Section 4.1 or as described in the Memorandum, the Company has not reserved any additional shares for issuance (except as expressly required by this Agreement). Except as noted above, there are not outstanding, nor is the Company subject to any formal agreement, arrangement, or understanding under which there may become outstanding, any option, warrant or other right to purchase or subscribe to, any Derivative Securities as of March 30, 1997. The Company has not reserved any shares of Common Stock underlying the Rights of Mr. Bombaywala to receive 7,500,000 shares of the Company's Common Stock as described in the Memorandum. The Company currently has an insufficient number of authorized shares of Common Stock for issuance as a result of the Rights and the Derivative Securities. 2 3 4.2 FINANCIAL STATEMENTS, SUBSEQUENT CHANGES, ETC. The Memorandum includes a number of reports filed by the Company with the Securities and Exchange Commission (the "Commission") pursuant to the Securities and Exchange Act of 1934, as amended (the "Exchange Act") including, but not limited to: A-1 The Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (the "Form 10-K"); A-2 The Company's Current Reports on Form 8-K, dated May 15, 1997, as amended May 30, 1997; A-3 The Company's Quarterly Reports on Form 10-Q, for the quarter ended September 29, 1996; A-4 The Company's Quarterly Reports on Form 10-Q, for the quarter ended December 29, 1996; A-5 The Company's Quarterly Reports on Form 10-Q, for the quarter ended March 30, 1997; and A-6 Proxy Statement for the Annual Meeting of Shareholders of the Company held on December 13, 1996; The foregoing reports are collectively referred to as the "SEC Reports." The SEC Reports, copies of which have been furnished to you as exhibits to and part of the Memorandum, contain consolidated balance sheets and statements of operations, stockholder's equity and cash flow, including the notes thereto which have been audited through June 30, 1996 (the "Audited Financial Statements") and are unaudited for the three, six and nine month periods ended September 29, 1996, December 29, 1996, and March 30, 1997, respectively (the "Unaudited Financial Statements") (collectively the "Financial Statements"). Subject to the assumptions and qualifications contained therein, and the additional financial disclosures and risk factors contained in the Memorandum, all of the Financial Statements fairly present the financial condition of the Company and its consolidated Subsidiaries at the respective dates of said balance sheets and the results of operations of the Company and its consolidated Subsidiaries for the respective periods covered thereby. To the best knowledge of the Company, such Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as otherwise noted therein). To the best knowledge of the Company, there were no material liabilities, direct or indirect, fixed or contingent, of the Company and its consolidated Subsidiaries (on a consolidated basis) as of the respective dates of such balance sheets which are not reflected therein or in the notes thereto or in the Memorandum. 4.3 OTHER INFORMATION AS TO THE COMPANY. The Memorandum, together with the Exhibits thereto and the documents incorporated by reference therein (collectively the "Memorandum"), does not contain any misstatement of a material fact or omit to state any material fact necessary to be stated therein or necessary in order to make the statements therein not misleading; provided, however, that with respect to all projections and estimates furnished to you or statements or assumptions regarding future events, plans, contingencies, trends, circumstances, intentions, proposals or other forward looking statements (the "Forward Looking Statements"), the Company represents and warrants only that the same were based, to the best of its knowledge, upon reasonable assumptions and that nothing has occurred or, to the best of the Company's knowledge, may occur, which has caused or may cause any Forward Looking Statement to be or to become inaccurate in any material adverse respect as of the date hereof or if anything has so occurred, the Company may furnish to you a revised statement. In the event the Company has furnished to you information which corrects information previously furnished, the information last furnished is deemed to govern for purposes of this Section 4.3. The Company has no obligation to update the Memorandum or any Forward Looking Statement during the Offering or before or after any subscription. 3 4 4.4 Due Authorization and Compliance with Other Instruments. This Agreement is, and the Notes when executed and delivered will be, valid and legally binding obligations of the Company and the Notes will be entitled to the benefits of this Agreement. The shares of Common Stock issuable upon exercise of the Warrants or conversion of the Notes hereunder have been duly authorized and when issued will be validly issued, fully paid and nonassessable. The shares of Common Stock issuable upon the exercise of the Warrants or the conversion of the Notes have been authorized, are not subject to any preemptive or similar rights on the part of holders of shares of capital stock of the Company, and upon such exercise or conversion, will be validly issued, fully paid and nonassessable. The Company does not have sufficient authorized shares of Common Stock at this time for issuance upon exercise of the Warrants and/or conversion of the Notes. 4.5 Offering of the Securities. Neither the Company nor anyone authorized to act on its behalf has or will directly or indirectly sell or offer the Securities or any part thereof or any similar securities to, or solicit any offer to buy any thereof from, any Person so as to bring the issue and sale of the Notes within the provisions of Section 5 of the Securities Act. 5. REDEMPTION OF NOTES. 5.1 Optional. The Company at its option may redeem, without penalty, all or any portion of the outstanding principal of the Notes at any time, such redemption to be accompanied by payment of all interest accrued and unpaid on the principal being redeemed with each holder of the Notes being entitled to a premium equal to 3% of the outstanding principal balance of the Notes redeemed prior to June 30, 1998, which premium will be reduced by 1% for each year that the Notes remain outstanding until June 30, 2000 when no premium will be paid if the Notes are redeemed subsequent to such date. The right of the Company to redeem the Notes pursuant to this Section 5.1 shall also be subject to the Company having fully complied with the procedures set forth in Section 5.2 below. 5.2 Notice of Redemption, Etc. Notice of redemption shall be mailed to the holders of the Notes not less than twenty (20) nor more than sixty (60) days prior to the date fixed for redemption at its last address as it appears upon the records of the Company. If the Notes are redeemed in part, the Company shall, without charge to the holder or holders hereof, either (1) execute and deliver to the holder or holders a like Note for the unredeemed balance of the principal amount thereof, or (2) make note thereon of the principal amount called for redemption and redeemed, upon surrender of the Notes at the office of the Company. Following the date fixed for redemption, interest shall be payable only on the portion of the Notes not called for redemption. 6. CONDITIONS PRECEDENT 6.1 Purchase Obligations. Your obligation to purchase from the Company the principal amount of Notes specified opposite your name in the Schedule of Purchasers shall be subject to the following conditions precedent: (a) Representations and Defaults. The representations and warranties made by the Company herein shall be true on and as of the date the Note is issued with the same effects as if they had been made on and as of said date (except as to any changes resulting from transactions expressly reflected herein or contemplated hereby including the Memorandum) and no Event of Default as defined in Section 11 hereof, nor any condition or event which, after notice or lapse of time, or both, would constitute such an Event of Default, shall exist. (b) Documents. All proceedings to be taken in connection with the transactions contemplated by this Agreement to be consummated by the Company prior to acceptance of a subscription to purchase the Notes, and all documents incident thereto, shall be delivered to you (including the Note and Warrant) within ten (10) business days from acceptance of your subscription. 4 5 (c) No Material Adverse Change. As of the date of this Agreement, no change has occurred in the business or financial condition of the Company or any of its Subsidiaries that would have a Material Adverse Change in the sole discretion of the Company and excluding all events and risk factors described in the Memorandum. 7. COVENANTS OF THE COMPANY. The Company covenants and agrees that, so long as any of the Notes are outstanding it will comply with the following provisions, subject to the provisions of Section 16 hereof: 7.1 Use of Proceeds. The proceeds (net of costs directly related to the preparation and negotiation of this Agreement and the offering and sale of the Notes) derived from the sale of the Notes will be used (I) to repay the Company's Subordinated Notes due on July 31, 1997 (the "July Subordinated Notes") and, subject to payment of the Subordinated Notes, (ii) to fund capital improvements to the Company's Marco's Mexican Restaurants and for general working capital purposes. 7.2 Payment of Principal and Interest. The Company will make all payments of principal of and interest on the Notes at the time the same shall become due thereunder or hereunder. 7.3 Notice of Default. The Company will promptly notify you upon the occurrence of any Event of Default hereunder (or the occurrence of any event or existence of any condition which with notice or lapse of time, or both, might become an Event of Default) or any event of default under any instrument evidencing or pursuant to which there shall be issued any indebtedness of the Company or Subsidiary for borrowed money. 7.4 Covenant to Provide Security. The Company hereby grants the holders of the Notes a security interest in all of the outstanding common stock (the "Marco's Stock") of Marco's Mexican Restaurants, Inc., a Texas corporation and a wholly-owned subsidiary of the Company ("Marco's"). The Marco's Stock is currently subject to a security agreement and pledge in favor of the holders of the Company's 12% Subordinated Notes due July 31, 1997, in the principal amount of $3,000,000. Prior to payment of the July Subordinated Notes in full the holders thereof shall have a prior, perfected security interest and lien on the Marco's Stock and the lien granted hereunder is subject to the rights of the holders of the July Subordinated Notes. Upon payment of the July Subordinated Notes (if the Offering is completed as described in the Memorandum), the Company will execute and deliver a definitive pledge and security agreement (the "Pledge Agreement") providing for the delivery, possession and pledge of the Marco's Stock as security for the Notes with and to an independent third party who shall serve as the agent and representative of the holders of the Notes pursuant to the Pledge Agreement (the "Agent") and the Agent shall have the right, responsibilities and duties provided for therein and herein with respect to the Marco's Stock and the enforcement of the rights of the holders of the Notes under this Purchase Agreement, the Notes and the Pledge Agreement and shall hold, protect and preserve the security interest in the Marco's Stock granted herein and therein. The holders of the Notes hereby agree and appoint the Agent as their agent, representative, attorney and designee to act on their behalf pursuant to the terms of the Note, this Purchase Agreement and the Pledge Agreement, and hereby grant to such Agent the power of attorney to enforce all rights of the holders of the Notes with respect to the Marco's Stock and their security interest therein. The Pledge Agreement shall contain customary and standard terms and conditions utilized in commercial pledge and security agreements. The Agent shall be obligated to protect and defend the rights of the holders of the Notes with respect to the Marco's Stock and may take and is hereby authorized by the Company and the holders of the Notes to take any and all actions on behalf of, and as attorney for, the holders of the Notes, and the Agent is authorized to execute any and all documents, agreements, instruments, certificates and filings to protect the rights of the holders of the Notes, subject to the right of the holders of 51% of the principal amount of the Notes (excluding any principal amount held by Mr. Bombaywala) to modify the Pledge Agreement, change or terminate the Agent or direct the Agent to take or not to take any action. 5 6 8. PAYMENT, REGISTRATION AND TRANSFER OF NOTES. The Company will promptly and punctually pay the interest on the Notes held by you without any presentment thereof and without any notation of such payment being made thereon; and the Company will pay all amounts payable to you in respect of principal and interest on the Notes to you or your nominees at the address specified in schedule 1, or at such other place as you may from time to time designate in writing. The Company agrees to maintain an office (or to appoint an agent having an office) in Houston, Texas, or such other city as the Company may designate by notice in writing to you, at which Notes may be surrendered for transfer and reissuance, for exchange, replacement, conversion or cancellation. The Company shall keep or cause to be kept, at the office or agency so maintained, a register or registers in which the Company or its agent shall register the names and addresses of the holders of the Notes and shall transfer registered Notes in accordance with this Agreement. Upon surrender for transfer of any registered Note duly assigned by the registered holder (or its duly authorized attorney) to the transferee(s) thereof and subject to satisfaction of the requirements set forth in Section 13.4 hereof, the Company shall execute and deliver a new registered Note (or Notes in appropriately subdivided denominations of principal), dated the most recent date to which interest shall have been paid on the surrendered Note, in an equal principal amount with notation of payments of principal made thereon, or in a principal amount equal to the original principal amount as reduced by payments of principal theretofore made on the Note surrendered, in the name of, and payable to the order of, the transferee(s) thereof. No service charge shall be assessed for any transfer, registration, reissuance, exchange, conversion, or notation of payment hereunder. 9. SUBORDINATION OF NOTES. The Company covenants and agrees and each holder of any Note, by acceptance thereof, likewise covenants and agrees that the payment of the principal of and interest on the Notes shall be subordinated in accordance with the provisions of this Section 9, and each Person holding any Notes, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound hereby. 9.1 Subordination to Senior Indebtedness. The indebtedness evidenced by, and payment of the principal of and interest on, the Notes shall be subordinated and subject in right of payment to the extent and in the manner set forth in this Section 9 to the prior payment in full of all Senior Indebtedness. 9.2 No Payment of Notes in Certain Events. No part of the Notes shall have any claim to the assets of the company on a parity with or prior to the claim of the Senior Indebtedness which includes the July Subordinated Notes. In the event and during the continuation of a Senior Indebtedness Default, no payment of principal or interest shall be made on the Notes unless and until such Senior Indebtedness Default shall have been waived or remedied, nor shall any such payment be made if after giving effect, as if paid, to such payment, any Senior Indebtedness Default would exist; provided, that with respect to a Senior Indebtedness Default other than a default in the payment of principal (including mandatory prepayments) or of sinking fund installments, if any, with respect to, fees in respect of or interest on, Senior Indebtedness, nothing in this Section 9.2 shall prevent any regularly scheduled payment of principal or interest for a period longer than the longer of (i) 90 days of (ii) any period during which a Senior Indebtedness Default so exists or has been declared due and payable in its entirety and such acceleration has not been rescinded or annulled or such Senior Indebtedness has not been paid in full. 9.3 Priority of Payment of Senior Indebtedness in Certain Events. Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property, or securities, to creditors, upon any dissolution or winding up or total or partial liquidation or reorganization of the company, whether voluntary or involuntary, assignment for the benefit of creditors, or in bankruptcy, insolvency, receivership, reorganization or other proceedings, all Senior Indebtedness shall first be paid in full or provision for the payment thereof (subject to the power of a court of competent jurisdiction to make other equitable provision), shall be made before the holders of the Notes shall be entitled to retain any assets so paid or distributed in respect thereof (for principal or interest); and upon any such dissolution or winding up or liquidation or reorganization, any payment or distribution of assets of the Company of any kind or character, whether in cash, property, or securities, to which the holders of the Notes would be entitled, except for these provisions, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent, or other Person making such payment or distribution, or by the holders of the Notes if received by them, directly to the holders of Senior Indebtedness (pro rata to each 6 7 holder on the basis of the respective amounts of Senior Indebtedness held by such holder) or their representatives, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the holders of the Notes. 9.4 Payments Due Holders of Senior Indebtedness. In the event that any payment or distribution of assets of the Company of any kind or character, whether in cash, property, or securities, which, by virtue of the provisions of Sections 9.2 or 9.3 should not be paid to the holders of the Notes, shall nevertheless be received by the holders of the Notes before all Senior Indebtedness is paid in full, or provision made for such payment, in accordance with its terms, such payment or distribution shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any of such Senior Indebtedness may have been issued, as their respective interests may appear, or to a bank or trust Company having a combined capital and surplus of not less than $10,000,000 which is in good standing and has its principal office in the State of Texas, to be held in escrow, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all such Senior Indebtedness in full in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of such Indebtedness. 9.5 Notice of Acceleration. The holders of the Notes agree to give the holders of Senior Indebtedness notice in writing 20 days prior to declaring the unpaid principal amount of the Notes immediately due and payable pursuant to the provisions of Section 11. 9.6 Enforcement, Subrogation, Etc. The foregoing subordination provisions shall be for the benefit of the present and future holders of the Senior Indebtedness and may be enforced directly by such holders against the holders of the Notes. Upon any payment or distribution of assets of the Company referred to in Section 9.3, the holder of a Note shall be entitled to rely upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, the Company, any agent or other Person making such payment or distribution, delivered to the holder of a Note for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertaining thereto or to the provisions of this Section 9. Subject to the payment in full of all Senior Indebtedness, the holders of the Notes together and pro rata with the holders of any other indebtedness of the Company (which is subordinate in right of payment to the payment of other indebtedness of the Company, but is not subordinate in right of payment to the Notes and by its terms grants the right of subrogation to the holders thereof) shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Company made on the Senior Indebtedness until the principal of and interest on the Notes shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property, or securities to which the holders of the Notes would be entitled except for these provisions shall, as between the Company, its creditors, other than the holders of Senior Indebtedness, and the holders of the Notes, be deemed to be a payment by the Company to or on account of Senior Indebtedness, it being understood that these provisions are intended solely for the purpose of defining the relative rights of the holders of the Notes, on the one hand, and the holders of Senior Indebtedness, on the other hand. 9.7 Obligations Unimpaired. Nothing contained in this Section 9 is intended to or shall impair as between the Company, its creditors, other than the holders of Senior Indebtedness, and the holders of the Notes, the obligation of the Company, which shall be absolute and unconditional, to pay to the holders of the Notes the principal of and premium, if any, and interest on the Notes, as and when the same will become due and payable in accordance with the terms thereof, or to affect the relative rights of the holders of the Notes and creditors of the Company other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the holder of any Note from exercising all remedies otherwise permitted by applicable law upon default, subject to the rights, if any, under this Section 9 of the holders of Senior Indebtedness in respect of any required notice of the exercise of any such remedy or right, or 7 8 property, or securities of the Company received upon the exercise of any such remedy. Each holder of the Notes by his acceptance thereof shall be deemed to acknowledge and agree that the subordination provisions of this Section 9 are, and are intended to be, an inducement and a consideration to each holder of any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance of the Notes, to acquire and continue to hold, such Senior Indebtedness, and each holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Indebtedness. 10. SUBSTITUTION OF NOTES. Upon receipt by the Company of satisfactory evidence of the loss, theft, destruction, or mutilation of any Note, and of satisfactory indemnity (which, in the case of any original purchaser of the Notes, shall be a contractual obligation of such purchaser) and upon surrender, at the office or agency maintained in accordance with Section 8 hereof, and cancellation of any Note, if mutilated, the Company will execute and deliver a new Note of like tenor, in lieu of such Note, dated the most recent date to which interest on such Note shall have been paid. 11. EVENTS OF DEFAULT. If any one or more of the following events (herein called "Events of Default") shall occur and be continuing: (a) except and subject to the provisions of Section 9.2, default shall be made in the payment of principal of any of the Notes when due and payable, either at maturity or at a date fixed for prepayment or by acceleration or otherwise; (b) except and subject to the provisions of Section 9.2, default shall be made in the payment of interest on the Notes when the same becomes due and payable and the default continues for a period of 10 days; (c) default shall be made in the due performance of observance of any other material covenant, agreement, or provision herein to be performed or observed by the Company or a breach shall exist in any material representation or warranty herein contained, and such default or breach is material and shall have continued for a period of 30 days after written notice thereof to the Company from any holder or holders of Notes aggregating not less than 51% of the aggregate principal amount of the Notes then outstanding; provided, however, that if any such default or breach shall be such that it cannot be cured or corrected within such 30-day period, such period shall be extended for such additional period of time (not exceeding 30 days) as shall be necessary to effect such cure or correction if curative or corrective action is instituted within said 30-day period and thereafter diligently pursued; (d) the Company or any material Subsidiary shall (i) apply for or consent to the appointment of a receiver, trustee, or liquidator of the Company or such Subsidiary or any of its assets, (ii) make a general assignment for the benefit of creditors, (iii) be adjudicated a bankrupt or insolvent or (iv) file a voluntary petition in bankruptcy, or a petition or answer seeking reorganization or an arrangement with creditors to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, moratorium, dissolution, liquidation, or debtor relief law, or any chapter of any such law, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law or chapter, or corporate action shall be taken by the Company or such material Subsidiary for the purpose of effecting any of the foregoing; or an order, judgment, or decree shall be entered, without the application, approval, or consent of the Company, by any court of competent jurisdiction, approving a petition seeking liquidation or reorganization of the Company or such material Subsidiary or of all or a substantial part of the assets of the Company or such material Subsidiary; 8 9 (e) default shall occur with respect to any other indebtedness for borrowed money of the Company or any Subsidiary or under any agreement under which such indebtedness may be issued by the Company or any material Subsidiary and such default shall continue for more than the period of grace, if any, therein specified, if the aggregate amount of all such indebtedness for which such default shall have occurred exceeds $2,000,000 and, if not already matured in accordance with its terms, such default shall result in acceleration of the maturity of such indebtedness; provided, however, that if such default shall be remedied or cured by the Company or a Subsidiary, or waived by the holders of such indebtedness, then the Event of Default hereunder by reason thereof shall be deemed likewise to have been thereupon remedied, cured, or waived without further action upon the part of and holders of the Notes; or (f) final judgment for the payment in excess of $1,000,000 shall be rendered against the Company or any material Subsidiary and the same shall remain undischarged for a period of 90 days during which execution shall not be effectively stayed by appeal, posting of a bond, or agreement of the parties thereto; then and in each and every such case the holders of Notes aggregating not less than 51% of the aggregate principal amount of the Notes then outstanding may by notice in writing to the Company declare the unpaid principal of the Notes, with accrued interest and the premium chargeable thereon as though payment hereunder were a redemption under Section 5.1, to be forthwith due and payable and thereupon such principal, premium, if any, and interest shall be due and payable without presentment, protest, or further demand or notice of any kind, all of which are hereby expressly waived. This Section 11, however, is subject to the condition that, if at any time after the principal of the Notes shall have become so due and payable, and before any judgment or decree for the payment of the monies so due, or any thereof, shall be entered and if all arrears of interest upon the Notes and all other sums payable under the Notes (except the principal of and premium on the Notes which solely by reason of such declaration shall have become payable) shall have been duly paid, then and in every such case the holders of Notes aggregating not less than 51% of the aggregate principal amount of the Notes then outstanding may, by written notice to the Company, either temporarily suspend or permanently rescind and annul such declaration and its consequences; but no such suspension or rescission and annulment shall extend to or affect any prior, concurrent, or subsequent default or Event of Default (other than the ones identified by the holders of the Notes declaring them due as the ones upon which such declaration was based) or impair any right consequent thereon. Notwithstanding anything to the contrary herein, if default shall be made in the payment of any principal of, or interest on, any Note when and as the same shall become due and payable, either at maturity or at a date scheduled for redemption (but not merely by virtue of any acceleration pursuant to the foregoing provisions of this Section 11), the holder of such Note may by notice in writing to the Company declare the unpaid principal of such Note, with accrued interest, to be forthwith due and payable and thereupon such principal and interest shall be due and payable without presentment, protest, or further demand or notice of any kind, all of which are hereby expressly waived. If any holder of a Note shall demand payment thereof or take any other action (of which the Company has actual knowledge) in respect of an Event of Default, the Company will forthwith give written notice thereof, specifying such action and the nature of such event, to each holder of record of the Notes then outstanding. The Company will also give prompt written notice to each holder of record of the Notes at the time outstanding of any written notice of suspension, rescission, or annulment given to it as aforesaid. The Company covenants, that if default be made in any payment of principal of or interest on any Note, it will pay to the holder thereof such further amount as shall be sufficient to cover the cost and expense of collection, including, without limitation, court costs and reasonable compensation to the attorneys and counsel of the holder for all services rendered in connection therewith. 9 10 No course of dealing between the Company and any holder of a Note or any delay on the part of the holder of a Note in exercising any rights thereunder or hereunder shall operate as a waiver of any rights of any such holder. 12. CONVERSION OF NOTES. 12.1 Voluntary Conversion. The holders of the Notes will be entitled at any time prior to the close of business on the Maturity Date, subject to redemption of the Notes by the Company, to convert the entire principal amount and accrued interest due and owing thereunder into shares of the Common Stock at the conversion price of $1.50 of principal and accrued interest for one share of Common Stock. 12.2 Fractional Shares. In lieu of issuing any fraction of a share upon the conversion of the Notes, the Company shall pay to the holder thereof, for any fraction of a share otherwise issuable upon conversion, cash equal to the same fraction of the closing bid price (or last sales prices) of the Common Stock as quoted on the Nasdaq Small Cap Market (or any over-the-counter market or exchange) on the trading day preceding the date of conversion. 12.3 Adjustment of Conversion Price. The conversion price is subject to adjustment if the Company at any time pays to the holders of its Common Stock a dividend in Common Stock and the number of shares of Common Stock issuable upon the conversion of the Notes shall be proportionately increased, effective as of the close of business on the Record Date for determination of the holders of the Common Stock entitled to the dividend. If the Company at any time subdivides or combines in a larger or smaller number of shares its outstanding shares of Common Stock, then the number of shares of Common Stock issuable upon the conversion of the Notes shall be proportionately increased in the case of a subdivision and decreased in the case of a combination, effective in either case at the close of business on the date that the subdivision or combination becomes effective. In the Case of any reclassification of the Common Stock, any consolidation of the Company with, or merger of the Company into any other entity, any merger of any entity into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock), any sales or transfer of all or substantially all of the assets of the Company or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or other property, then provision shall be made such that the holders of the Notes shall have the right thereafter, during the period that the shares shall be convertible, to convert the shares only into the kind and amount of securities, cash and other property receivable upon such reclassification, consolidation, merger, sale, transfer or share exchange by a holder of the number of shares of Common Stock into which the Notes might be converted immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. 12.4 Mandatory Conversion. The Notes are subject to mandatory conversion, either in whole or in part, at the option of the Company, upon 30 days written notice, if at any time the closing bid price or last sales price, as the case may be, of the Common Stock as quoted on the Nasdaq Small Cap Market (or any exchange or over-the-counter market) for a period of twenty (20) consecutive trading days ending within fifteen (15) days of the date on which notice of conversion is given exceeds $4.50 per share. Upon a mandatory conversion of the Notes by the Company, such Notes shall be converted into shares of Common Stock at the conversion ratio of $1.50 of principal and accrued interest for one share of Common Stock. All of the provisions with respect to conversion rights generally, including but not limited to the adjustment of the conversion rate in certain events, shall be applicable hereto in the event the Company exercises its option to cause a mandatory conversion of the Notes. 10 11 13. SECURITIES ACT. 13.1 Investment Intent, Etc. Each of you and each other Person who has been designated by you as a registered holder to whom Notes will be initially issued, by acceptance of such Notes, represent and in making this sale it is specifically understood and agreed that you and each such other Person are acquiring the Notes to be purchased for your, or such Person's, own account, or for the account of one or more trusts which you, or such Person, manage, and not with a view to or for sale in connection with any distribution thereof, provided that the disposition of your, or such Person's property shall at all times be and remain within your, or such Person's, control. 13.2 Restrictions on Transferability. The Notes shall not be transferable except upon the conditions specified in this Section 13, which conditions are intended to ensure compliance with the provisions of the Securities Act in respect to the transfer of any Note. 13.3 Restrictive Legends. Each Note shall (unless otherwise permitted by the provisions of Section 13.4 hereof) be stamped or otherwise imprinted with a legend in substantially the following form: "This Note has not been registered under the Securities Act of 1933, as amended, and is transferable only upon the conditions specified in the Purchase Agreement referred to herein." Each certificate of Common Stock issued upon conversion of the Notes pursuant to Section 12 hereof and each certificate for Common Stock issued to a subsequent transferee shall (unless otherwise permitted by the provisions of Section 13.4 hereof) be stamped or otherwise imprinted with a legend in substantially the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933 or any state securities act. The shares have been acquired for investment and may not be sold, transferred, pledged or hypothecated unless (i) they shall have been registered under the Securities Act of 1933 and any applicable state securities act, or (ii) the corporation shall have been furnished with an opinion of counsel, satisfactory to counsel for the corporation, that registration is not required under any such acts." 13.4 Notice of Proposed Transfers. (a) Except as otherwise provided in paragraph (b) of this Section 13.4 prior to any transfer or attempted transfer of any Restricted Note or Restricted Common Stock, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer and shall be accompanied by an opinion of counsel for such holder satisfactory to the Company, to the effect that such transfer may be affected without registration of such Restricted Note or Restricted Common Stock, as the case may be, under the Securities Act. If such notice is accompanied by such an opinion, such holder shall be entitled to transfer such security in conformity with the terms of such notice, and if the opinion of counsel so specifies, the securities issued upon such transfer shall not bear the restrictive legend set forth in section 13.3. (b) The procedures set forth in paragraph (a) of this Section 13.4 shall not apply to any transfer by you (or a transferee pursuant to this paragraph (b) of any Restricted Note or Restricted Common Stock to any of your Subsidiaries or Affiliates; provided, however, that at the time of such transfer the transferee shall execute and deliver to the Company an "Investment Letter" containing substantially the representations provided in Section 13.1 hereof with respect to the Notes or Common Stock which are the subject of such transfer and its agreement to be 11 12 bound by the provisions of this Section 13. Notes or Common Stock issued upon such transfer shall bear the appropriate restrictive legend set forth in Section 13.3 hereof. 13.5 Required Registration. The Company shall use its best efforts to effect, upon demand made by the holders of at least 51% of the number of shares of Common Stock issued or issuable upon conversion of the Notes issued in the Offering or upon exercise of the Warrants, the registration under the Securities Act of all shares of Restricted Common Stock issued or issuable upon such conversion or exercise and held by you and/or any other holder or holders of shares of Restricted Common Stock (the holders of Restricted Common Stock are sometimes referred to herein, as the "Eligible Holders") on a form appropriate for the registration of the Restricted Common Stock in accordance with the intended method of disposition of the Eligible Holders; provided, however, that (i) if the Company is engaged in negotiations in respect of a merger, acquisition, combination or other business opportunity or has filed, or proposes to file, a registration statement under the Securities Act covering shares of Common Stock or other securities for sale by the Company and in the good faith judgment of the Board of Directors of the Company such transaction would be adversely affected by such registration, the Company shall be entitled to postpone the filing but, in no event for a period not to exceed 180 days and (ii) at the time demand is made, the conversion price or exercise price is equal to or less than the average of the closing bid price (or the last sales price) of a share of Common Stock as quoted on the Nasdaq SmallCap Market or any exchange or over-the-counter market in which trading in the Common Stock is then reported for any period of ten (10) conservative trading days during the 90 days preceding the date demand is made. 13.6 Incidental Registration. If the Company at any time proposes to register any of its Common Stock under the Securities Act (on a form available for the registration of Restricted Common Stock by the holders thereof other than a registration on Form S-8, or any successor or similar forms or a shelf registration under Rule 415 for the sole purpose of registering shares to be issued in connection with acquisitions), it will at each such time give written notice to the Eligible Holders of its intention so to do and, upon written request given by the Eligible Holders within 30 days after receipt of any such notice (which request shall state the intended method of disposition of such securities by such Eligible Holder), the Company will use its best efforts to cause all or any Restricted Common Stock held by such Eligible Holder or which such Eligible Holder is then entitled to acquire to be registered so as to permit the sale or other disposition (in accordance with the intended methods thereof), as aforesaid by such Eligible Holder, provided, however, that the Company may at any time withdraw or cease proceeding with any such registration if it shall at the same time withdraw or cease proceeding with the registration of such other securities originally proposed to be registered. If an offering pursuant to this Section 13.6 is to be made through underwriters, the managing underwriter may, if in its reasonable opinion marketing factors so require, limit (pro rata according to the market value of securities proposed to be registered by each Eligible Holder) the number of (or eliminate entirely from the offering all of the) securities which Eligible Holders may register pursuant to this Section 13.6. 13.7 Registration Procedures. If and whenever the Company is required by the provisions of Section 13.5 or 13.6 to use its best efforts to effect the registration of any of its securities under the Securities Act, the Company will, as promptly as possible: (a) prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become effective and, in the case of a registration required by Section 13.5, to remain effective for a period of two years after the effective date of registration, or such shorter period that terminates on the earlier or (i) a date specified by a majority of the Eligible Holders (by number of shares) of the securities covered by the registration statement or (ii) the date all the securities covered by the statement have been sold or withdrawn, but in no case prior to the 90-day period referred to in Rule 174 under the Securities Act; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary 12 13 to keep such registration statement effective and to comply with the requirements of the Securities Act, and the rules and regulations promulgated by the Commission thereunder relating to the sale or other disposition of the securities covered by such registration statement; (c) furnish to each Eligible Holder selling securities in such offering such numbers of copies of a prospectus, including a preliminary prospectus, complying with the requirements of the Securities Act, and such other documents as such Eligible Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Eligible Holder; and (d) use its best efforts to register or qualify the securities covered by such registration statement under the securities or blue sky laws of such states as each Eligible Holder selling securities in such offering shall request, and do any and all such other acts and things as may be necessary or advisable to enable such Eligible Holder to consummate the public sale or other disposition in such jurisdictions of the securities owned by you; provided, however, that the Company shall not be obligated to register or qualify such securities in any jurisdiction in which such registration or qualification would require the Company to qualify as a foreign corporation or file any general consent to service of process where it is not so qualified or has not theretofore so consented. 13.8 Expenses; Conditions Precedent. Except as provided below in this Section 13.8, all expenses incurred by the Company or any holder of Restricted Common Stock in connection with action taken by the Company to comply with this Section 13, including, without limitation, all registration and filing fees, printing expenses, accounting fees, fees and disbursements of counsel and other experts, premiums for liability insurance obtained in connection with a registration statement filed to effect such compliance, the expenses (including counsel fees) of complying with securities or blue sky laws, and the fees and disbursements of a single counsel retained by the Eligible Holders of more than 75% of the securities being offered, shall be paid by the Company. The Company shall not be obligated in any way in connection with any registration pursuant to this Section 13 for any underwriting discounts or commissions payable by any Eligible Holder to any underwriter of securities to be sold by such Eligible Holder. It shall be a condition precedent to the obligation of the Company to take any action under Section 13.5 that the Company shall receive an undertaking satisfactory to it from each Eligible Holder of securities registered or to be registered as herein provided to pay all expenses required to be borne by such Eligible Holder and to furnish or cause to be furnished to the Company specifically for use in preparation of the registration statement and prospectus written information concerning the securities held by such Eligible Holder and also concerning any underwriter of such securities and the intended method of disposition thereof as the Company shall reasonably request and as may be required in connection with the action to be taken by the Company hereunder. 13.9 Company Indemnification. In the event of any registration of any securities under the Securities Act pursuant to this Section 13, the Company will indemnify and hold harmless each offering Eligible Holder, each underwriter of such securities and each other Person, if any, who controls such Eligible Holder, or such underwriter within the meaning of the Securities Act, against any losses, claims, damages, or liabilities, joint or several, to which such Eligible Holder, such underwriter or such controlling Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or restatement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse such Eligible Holder, such underwriter and each such controlling Person for any legal and any other expenses reasonably incurred by such Eligible Holder, such underwriter, or such controlling Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent 13 14 that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or an untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, or said prospectus or said amendment or supplement in reliance upon and in conformity written information furnished to the Company through an instrument duly executed by such Eligible Holder or such underwriter specifically for use in the preparation thereof. 13.10 Your Indemnification. In the event of any registration of any securities under the Securities Act pursuant to this Section 13, such Eligible Holder will (or will furnish the written undertaking of such other controlling Person or Persons as shall be acceptable to the Company to) indemnify and hold harmless the Company and each other Person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages, or liabilities, joint or several, to which the Company or such controlling Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, or said prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Eligible Holder or any underwriter of such Eligible Holder's securities specifically for use in the preparation thereof, and such Eligible Holder will (or will furnish the written undertaking of such other Person or Persons as shall be acceptable to the Company to) reimburse the Company and each such controlling Person for any legal and any other expenses reasonably incurred by the Company or such controlling Person in connection with investigation or defending any such loss, claim, damage, or liability or action. 13.11 Conduct of Litigation; Procedure. If an action is brought against any Person entitled to indemnification under Section 13.9 or 13.10 above (the "Indemnitee"), the Indemnitee shall promptly notify the Person or Persons obligated to indemnify the Indemnitee (whether one or more, the "Indemnitor") of such action and the Indemnitor shall assume the defense of such action, including the employment of counsel, reasonably satisfactory to Indemnitee, and the payment of all court costs and other expenses. The Indemnitee shall have the right to employ its own counsel in any such action, but the fees and expenses of such counsel shall be at the Indemnitee's expense unless the Indemnitee shall have reasonably concluded that there may be defenses available to it which are different from or additional to those available to the Indemnitor (in which case the Indemnitor shall not have the right to direct the defense of such action on behalf of Indemnitee), in any of which events such fees and expenses shall be borne by the Indemnitor. Notwithstanding anything to the contrary in this Section 13.11, the Indemnitor shall not be liable for any settlement of any claim or action effected without its written consent. The Company covenants and agrees that it will not settle any action against it involving possible claims against an Indemnitee without also using its best efforts to settle the action against such Indemnitee. 13.12 Termination of Restrictions. The restrictions imposed by this Section 13 upon the transferability of the Restricted Notes and the Restricted Common Stock, shall cease and terminate as to any particular Restricted Note or share of Restricted Common Stock when such Note or share shall have been effectively registered under the Securities Act and disposed of by the Holder thereof in accordance with the method of disposition described in the registration statement or when opinions of counsel shall have been given pursuant to Section 13.4 hereof to the effect that the legend set forth in Section 13.3 hereof is not required. Whenever the restrictions imposed by this Section 13 shall terminate, as hereinabove provided, the holder of any Restricted Note or Restricted Common Stock as to which such restrictions shall have terminated shall be entitled to receive from the Company, without expense, a new 14 15 Note or stock certificate not bearing the restrictive legend set forth in Section 13.3 hereof and not containing any other reference to the restrictions imposed by this Section 13. 13.13 Transfer of Your Rights. Your rights under this Section 13 shall inure to the benefit of all Persons who shall at any time be the holders of Restricted Notes or Restricted Common Stock originally purchased by you hereunder, pro rata in accordance with their respective interests and each such holder, by such holder's acceptance of such Restricted Note or Restricted Common Stock, as the case may be, agrees to be and shall be deemed to be bound by all of your covenants set forth in this Section 13, to the extent that such covenants are applicable to such holder's Restricted Notes or Restricted Common Stock. 14. DEFINITIONS. "AFFILIATES" of any Person shall mean any Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. Each director, executive officer, and holder of 5% or more of and class of the outstanding voting securities of the Company shall be deemed to be an "Affiliate" of the Company. "BUSINESS DAY" shall mean any day that the NASDAQ system (or other exchange or market on which the Company's securities are traded) is open for trading. "COMMISSION" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "ELIGIBLE HOLDER" shall have the meaning given such term in Section 13.5 hereof. "EVENT OF DEFAULT" shall have the meaning given such term in Section 11 hereof. "FORM 10-K" shall mean the Company's Annual Report Pursuant to Section 12 or Section 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 1996. "FORM 10-Q" shall mean the Company's Quarterly Report Pursuant to Section 12 or 15(d) of the Securities Exchange Act of 1934 for the fiscal quarters ended September 29, 1996, December 29, 1996 and March 31, 1997, respectively. "MATERIAL ADVERSE CHANGE" shall mean any single circumstance or event (or series of circumstances or events) having a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" shall mean any material adverse effect on the financial condition or business operations of the Company and any of its Subsidiaries on a consolidated basis, excluding, however, all Forward Looking Statements and the specific and general risk factors disclosed in the Memorandum and the occurrence, results of consequences with respect thereto. "NASDAQ" shall mean the National Association of Securities Dealers Automatic Quotation system. "PERSON" shall mean and include an individual, a partnership, a corporation, a trust, a joint venture, an unincorporated organization, a government or any department or agency thereof, and any other entity. "RESTRICTED NOTE" shall mean any Note bearing the restrictive legend set forth in Section 13.3 hereof. 15 16 "RESTRICTED COMMON STOCK" shall mean shares of Common Stock on conversion of the Notes or exercise of the Warrants issued pursuant to this Agreement and evidenced by a certificate bearing the restrictive legend set forth in Section 13.3 hereof. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "SENIOR INDEBTEDNESS" shall mean the principal of (and premium, if any), unpaid interest on, and any fees, expenses or other amounts or reimbursement obligations on letters of credit in respect of, the following, whether presently outstanding or hereafter incurred (a) all indebtedness (including indebtedness of others guaranteed by the Company), whether outstanding on the date hereof or thereafter created, incurred, assumed or guaranteed, of the Company which is borrowed from and owed to any bank, insurance company, savings and loan association, commercial finance company, commercial institution or pension or profit sharing trust which makes loans or investments as a part of its regular business, (b) the Company's 5-Year 9% Convertible Subordinated Debentures due March 31, 1999, (c) the Company's 12% Subordinated Notes due July 31, 1997, and (d) renewals, extensions, modifications and refunding of any such indebtedness. Notwithstanding anything to the contrary in this Agreement. "Senior Indebtedness" shall not include (A) any indebtedness of the types referred to in clauses (a) through (d) in the preceding sentence if the terms of the instrument provide that such indebtedness is not senior in right of payment to the payment of principal of and interest on the Notes, (B) any indebtedness of the Company which, by its terms or the terms of the instrument creating or evidencing it, is subordinate in right of payment to or pari passu with the Notes, (C) any indebtedness of the Company to any Affiliate, and (D) any account payable created or assumed by the Company in the ordinary course of business in connection with the obtaining of materials or services or any obligation of the Company to any Affiliate. The exclusion of any indebtedness from the definition of Senior Indebtedness is not intended and shall not be deemed to limit the ability of the Company to grant any holder or guarantor, which holder or guarantor may be an Affiliate, of indebtedness of the Company a lien on or security interest in any assets of the Company to secure the obligation or indebtedness of the Company to such person. Notwithstanding anything to the contrary herein, it is intended that the Notes be secured by 100% of the outstanding stock (the "Marco's Stock") of Marco's Mexican Restaurants, Inc., a Texas corporation and wholly-owned subsidiary of the Company ("Marco's"), subject to such stock being released as security on the full payment of the July Subordinated Notes as described in the Memorandum. The holders of the Notes shall be entitled to the security afforded by a pledge of the Marco's Stock and the receipt by the holders of the Notes of such security and the sale thereof upon an Event of Default which results in the payment or satisfaction of whole or in part of the Notes shall not be subject to the payment or preferential rights of holders of any Senior Indebtedness and the Notes are not subordinated to the extent of the right of the holders to receive the benefits of the Marco's Stock as collateral. "SENIOR INDEBTEDNESS DEFAULT" shall mean a default in payment of the principal of or sinking fund installments, if any, due with respect to, fees in respect of or interest on, any Senior Indebtedness, or any default, or any event which, with notice or lapse of time or both, would constitute a default, in any other agreement, term or condition contained in any agreement under which any Senior Indebtedness is issued. "SUBSIDIARY" shall mean any Person of which at the time of determination the Company and/or one or more Subsidiaries owns or controls directly or indirectly more than 50% of the shares of voting stock. 15. WAIVERS: MODIFICATIONS OF AGREEMENT. Any provision in this Agreement to the contrary notwithstanding, changes in or additions to this Agreement or the Notes may be made, and compliance with any covenant or condition herein set forth may be omitted, if the Company (a) shall obtain from the holders of record of Notes aggregating not less than 51% of the aggregate principal amount of the Notes at the time outstanding (excluding the principal amount of the Notes owned by Ghulam M. Bombaywala) their consent thereto in writing and (b) shall deliver copies of such consent in writing to any such holders of record who did not execute the same; such consent, without limiting the foregoing, shall be effective to reduce the principal of or rate of interest payable on, or to postpone any date fixed for the payment of principal of or any installment of interest on, the Notes held by all holders, to increase the percentage specified in Section 11 hereof of the principal amount of 16 17 the Notes the holders of which may, in accordance with the provisions of such Section 11, accelerate the maturity of the Notes upon an Event of Default or to reduce the percentage of the principal amount of the Notes (or Restricted Common Stock) the consent of the holders of which shall be required under this Section 15. 16. SURVIVAL OF COVENANTS, ETC. All covenants, agreements, representations, and warranties made herein and in the Notes and in any certificate delivered pursuant hereto shall survive any investigation made by you and the execution and delivery to you of the Notes to be purchased by you and your payment therefor. 17. BROKERS; ISSUANCE TAXES. The Company will hold you free and harmless from any claim, demand, liability for, or expense in connection with, any brokers' or finders' fees or commissions claimed by any Person assertedly acting on behalf of the Company in connection with this Agreement or the transactions contemplated herein and taxes (excluding federal income taxes), if any, payable upon, or on account of, issuance of the Notes. 18. GOVERNING LAW. This Agreement and the Notes are being delivered in the State of Texas and shall be governed by and construed according to the laws of the State of Texas. 19. NOTICES. Any notice, consent, request, or other communication required or permitted hereunder shall be in writing and shall be deemed given when either (a) personally delivered to the intended recipient or (b) sent and delivered, by certified or registered mail, return receipt requested, addressed to the intended recipient as follows: if to the Company, to: Watermarc Food Management Co. 11111 Wilcrest Green, Suite 350 Houston, Texas 77042; Attention: Chief Financial Officer if to any of you, to the address given for such of you on Schedule 1 hereto; if to any other holder of a Note to the address of such holder given to the Company in accordance with Section 8; and if to any other holder of Restricted Common Stock, to the address of such holder as set forth in the stock transfer records of the Company. Any Person (other than the Company) may change the address to which notice is to be sent pursuant to the preceding sentence by giving notice of such new address to the Company in accordance with this Section 19. The Company may change the address to which notice is to be sent hereunder by giving notice of such change, in accordance with this Section 19, to each Person against whom such change shall be effective. Any notice mailed as aforesaid shall, unless otherwise provided herein, be deemed given on the fifth day after deposited in the United States mail in accordance with the first sentence of this Section 19. 20. PARTIES IN INTEREST. All of the terms and provisions of this Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 21. BUSINESS DAYS. Should any installment of the principal of or interest on any Note become due and payable upon a day other than a day on which national banks located in Houston, Texas, are open for the conduct of banking business, the maturity thereof shall be extended to the next succeeding day upon which such banks are open for the conduct of banking business and, in the case of an installment of principal, interest shall be payable thereon at the rate per annum specified in such Note during such extension. 22. HEADINGS. The headings of the various sections and subsections hereof have been inserted for convenience of reference only and shall not be deemed to in any way modify any of the terms or provisions hereof. 23. COUNTERPARTS. This Agreement may be signed by each party hereto upon a separate copy, in which event all of said copies shall constitute a single counterpart of this Agreement. This Agreement may be 17 18 executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. If the foregoing is in accordance with your understanding, please sign the form of confirmation and acceptance on the enclosed counterpart of this Agreement and return the same to the Company, whereupon this Agreement shall be a binding agreement between you and the Company. EXECUTED this ________ day of _____________, 1997. WATERMARC FOOD MANAGEMENT CO. By: -------------------------------- Ghulam M. Bombaywala, Chairman of the Board and Chief Executive Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written. - ------------------------------------- (Signature) - ------------------------------------- (Print Name) 18 19 SCHEDULE 1 SCHEDULE OF PURCHASERS
PRINCIPAL AMOUNT OF NUMBER OF NAME ADDRESS NOTES WARRANTS - ----------------------- -------------------- --------- ---------
19 EX-4.8 10 FORM OF 11% CONV. SUBORDINATED PROMISSORY NOTE 1 EXHIBIT 4.8 FORM OF 11% CONVERTIBLE SUBORDINATED PROMISSORY NOTE THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND IS TRANSFERABLE ONLY UPON CONDITIONS SPECIFIED IN THE PURCHASE AGREEMENT REFERRED TO HEREIN. WATERMARC FOOD MANAGEMENT CO. 11% Convertible Subordinated Note Due June 30, 2002 Watermarc Food Management Co., a Texas corporation (the "Company), for value received, promises to pay to __________________ or registered assigns, the principal amount of $__________________ as provided herein, and to pay interest on outstanding principal at the rate of 11% per annum quarterly on March 31, June 30, September 30 and December 31 of each year any principal amount hereof remains outstanding (each an "Interest Payment Date") commencing an September 30, 1997. The principal balance of this Note shall be paid based on a three (3) year equal quarterly amortization of unpaid principal due and owing as of June 30, 1999, which amount will be payable quarterly on the Interest Payment Dates commencing on September 30, 1999, with the final payment of all outstanding principal and interest due and payable on June 30, 2002. Payment of principal and interest shall be made at the offices of the Company in lawful money of the United States of America, and shall be mailed to the registered owner or owners hereof at the address appearing on the books of the Company. 1. Series. This Note is one of a duly authorized issue of notes of the Company designated as its 11% Convertible Subordinated Notes due June 30, 2002 (the "Notes") and shall be issued in minimum demonstrations of $25,000, all of like date, tenor and maturity, except variations necessary to express the amount and payee of each Note, and is issued pursuant to that certain Purchase Agreement (the "Purchase Agreement"), between the Company and the Purchasers of the Notes. The terms of this Note include those stated in the Purchase Agreement Reference is hereby made to the Purchase Agreement and all supplements thereto for a complete statement of the respective rights, limitations of rights and immunities thereunder of the Company and the holders of the Notes, respectively. 2. Equal Rank. All Notes of this issue rank equally and ratably without priority over one another. 3. Conversion. The holder or holders of this Note may convert, at any time prior to the maturity hereof, the entire principal amount of and the accrued interest on this Note into Common Stock of the Company at the conversion rate of $1.50 of principal and accrued interest for one share of Common Stock; provided that if the Company has called this Note for redemption, the right to convert shall terminate at the close of business on the fifth business day prior to the date fixed as the date for the redemption. If this Note is not called for redemption and is converted between a record date for the payment of interest and the next succeeding Interest Payment Date, the interest payable on such succeeding Interest Payment Date shall be paid to the holder hereof at the close of business on such record date despite such conversion, unless earlier converted into shares of Common Stock in accordance herewith. To convert this Note, the holder or holders must surrender the same at the office of the Company, accompanied by a written notice of conversion and by a written instrument of transfer in a form satisfactory to the Company, properly completed and executed by the registered holder or holders hereof or a duly authorized attorney. 1 2 4. FRACTIONAL SHARES. In lieu of issuing any fraction of a share upon conversion of this Note, the Company, shall pay to the holder hereof, for any fraction of a share otherwise issuable upon the conversion, cash equal to the same fraction at the then closing bid or last sale price of the company's Common Stock as quoted on the Nasdaq Small Cap Market, an exchange or otherwise on any over-the-counter market on the trading day preceding such conversion. 5. ADJUSTMENTS TO CONVERSION. If the Company at any time pays to the holders of its Common Stock a dividend in Common Stock, the number of shares of Common Stock issuable upon the conversion of this Note shall be proportionally increased, effective at the close of business on the record date for determination of the holders of the Common Stock entitled to the dividend. If the Company at any time subdivides or combines in a larger or smaller number of shares its outstanding shares of Common Shares, then the number of shares of Common Stock issuable upon the conversion of this Note shall be proportionally increased in the case of a subdivision and decreased in the case of a combination, effective in either case at the close of business on the date that the subdivision or combination becomes effective. In case of any reclassification of the Common Stock, any consolidation of the Company with, or merger of the Company into, any other entity, any merger of any entity into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock), any sales or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or other property, then provisions shall be made such that the holders of this Note shall have the right thereafter, during the period that this note shall be convertible, to convert this Note only into the kind and amount of securities, cash and other property receivable upon such reclassification, consolidation, merger, sale, transfer or share exchange by a holder of the number of shares of Common Stock into which this Note might be converted immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. 6. SUBORDINATION. The rights of holders of the Notes to receive payment of any principal or interest thereon is subject and subordinate to the prior payment of the principal of, (and premium, if any) and the interest on, the Company's Senior Indebtedness, as defined in the Purchase Agreement. Upon any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, sale of all or substantially all of the assets, dissolution, liquidation, or any other marshalling of the assets and liabilities of the Company, or if the Notes are declared due and payable upon the occurrence of an Event of Default, as described below, then no amount shall be paid by the Company with respect to principal and interest thereon unless and until the principal of, and interest on, all Senior Indebtedness then outstanding is paid in full. 7. SECURITY. It is intended that this Note be secured by the Common Stock of Marco's Mexican Restaurants, Inc., as provided in, and subject to, the terms and conditions set forth in the Memorandum and the Purchase Agreement. 8. DEFAULT. If any of the events described in Section 11 of the Purchase Agreement occur (an "Event of Default"), the entire unpaid principal amount of, and accrued and unpaid interest on, this Note shall immediately be due and payable. 9. MANDATORY CONVERSION AT OPTION OF COMPANY. The Note is subject to mandatory conversion at the option of the Company, upon thirty (30) days written notice, if at any time the closing bid or last sales price of the Common Stock as quoted on the Nasdaq Small Cap Market, an exchange or otherwise on any over-the-counter market for a period of twenty (20) consecutive trading days ending within fifteen (15) days of the date on which notice of conversion is given exceeds $4.50 per share. Upon a mandatory conversion of the Note by the Company, the Note shall be converted to Common Stock of the 2 3 Company at the conversion ratio of $1.50 of principal and accrued interest for one share of Common Stock. All other provisions with respect to conversion rights generally, including but not limited to the adjustment of the conversion rate in certain events, shall be applicable hereto in the event the Company exercises its option to cause a mandatory conversion of the Note. If the Note is mandatorily converted between a record date for the payment of interest and the next succeeding Interest Payment Date, interest payable on such succeeding Payment Date shall be paid to the holders thereof at the close of business on such record date despite conversion. Holders of the Note will be entitled to the same rights applicable at the time of conversion to other holders of Common Stock. 10. Redemption This Note maybe redeemed at anytime prior to maturity, as a whole at any time or in part from time to time at the office of the Company, upon the notice referred to below, at the following redemption prices (expressed in percentages of the principal amount of this Note) together with accrued interest to the date of redemption: If Redeemed During 12 Percentage of Month Period Beginning Principal Amount June 30, 1997 ............................................ 103 June 30, 1998 ............................................ 102 June 30, 1999 ............................................ 101 June 30, 2000 ............................................ 100 June 30, 2001 ............................................ 100 11. Notice of Redemption, Etc. Notice of redemption shall be mailed to the holders of this Note not less than twenty (20) nor more than sixty (60) days prior to the date fixed for redemption at their last address as it appears upon the records of the Company. If this Note is redeemed in part, the Company shall, without charge to the holder or holders hereof, either (1) execute and deliver to the holder or holders a like note for the unredeemed balance of the principal amount hereof, or (2) make note hereon of the principal amount called for redemption and redeemed, upon offender of this Note at the office of the Company. Following the date fixed for redemption, interest shall be payable only on the portion of this Note not called for redemption. 12. Exchange. The holder of this Note may, at any time on or before the date of its maturity or the date fixed for its redemption, by surrendering this Note to the Company at its office, exchange this Note and/or any other of the Notes for another note or notes of a like principal amount and of like tenor, date and maturity in denominations of $5,000 or any multiple of that amount. 13. Registered Owner. The Company may treat the person or persons whose name or names appear hereon as the absolute owner or owners of this Note for the purpose of receiving payment of, or on account of, the principal and interest due on this Note for all other purposes, and it shall not be affected by any notice to the contrary. 14. Registration Rights. The shares of Common Stock issuable on conversion of the principal and accrued but unpaid interest due and owing hereunder shall have certain registration rights more particularly set forth in the applicable provisions of the Purchase Agreement. 15. Company Obligation. The holder or holders of this Note shall not have any recourse for the payment in whole or of any part of the principal or interest on this Note against any incorporator, or present or future shareholder of the Company by virtue of any law, or by the enforcement of any assessment, or otherwise, or against any officer, director, employee or attorney of the Company by reason 3 4 of any matter arising prior to or after the delivery of this Note, or against any present or future officer, director, employee or attorney of the Company. The holder or holders of this Note, by the acceptance hereof and as a part of the consideration for this Note, expressly agree that the Notes are obligations solely of the Company and expressly release all claims and waive all liability against the foregoing persons in connection with this Note. IN WITNESS WHEREOF, the Company has signed and sealed this Note this ___ day of ___, 1997. WATERMARC FOOD MANAGEMENT CO. By: ------------------------------------ Ghulam M. Bombaywala, Chairman of the Board and Chief Executive Officer 4 EX-4.9 11 FORM OF WARRANT TO PURCHASE COMMON STOCK 1 EXHIBIT 4.9 FORM OF WARRANT THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES ACT OF ANY STATE (COLLECTIVELY, THE "ACTS"). NEITHER THIS WARRANT NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT HERETO UNDER ALL THE APPLICABLE ACTS, OR AN OPINION OF COUNSEL SATISFACTORY TO WATERMARC FOOD MANAGEMENT CO. TO THE EFFECT THAT SUCH REGISTRATIONS ARE NOT REQUIRED. THIS WARRANT IS SUBJECT TO OTHER LIMITATIONS ON TRANSFER. WARRANT to Purchase Common Stock of WATERMARC FOOD MANAGEMENT CO. Expiring on June 30, 2002 THIS IS TO CERTIFY THAT, for value received ______________, or permitted assigns, is entitled to purchase, from the date hereof, from WATERMARC FOOD MANAGEMENT CO., a Texas corporation (the "Company"), at the place where the Warrant Office designated pursuant to Section 2.1 is located, at a purchase price per share of $1.50 (the "Exercise Price"), _________________ shares of duly authorized, validly issued, fully paid and nonaccessable shares of Common Stock, $.05 par value, of the Company (the "Common Stock"), and is entitled also to exercise the other appurtenant rights, powers and privileges hereinafter set forth. The number of shares of the Common Stock purchasable hereunder are subject to adjustment in accordance with Article III hereof. This Warrant shall expire at 5:00 p.m., C.S.T. June 30, 2002. Certain Terms used in this Warrant are defined in Article IV. ARTICLE I Exercise of Warrant 1.1 Method of Exercise. This Warrant may be exercised as a whole or in part from the date hereof until June 30, 2002. To exercise this Warrant, the holder hereof or permitted assignees of all rights of the registered owner hereof shall deliver to the Company, at the Warrant Office designated in Section 2.1, (a) a written notice in the form of the Subscription Notice attached as an exhibit hereto, stating therein the election of such holder or such permitted assignees of the holder to exercise this Warrant in the manner provided in the Subscription Notice, (b) payment in full of the Exercise Price (in the manner described below) for all Warrant Shares purchased hereunder, and (c) this Warrant. This Warrant shall be deemed to be exercised on the date of receipt by the Company of the Subscription Notice, accompanied by payment for the Warrant Shares and surrender of this Warrant, as aforesaid, and such date is referred to herein as the "Exercise Date". Upon such exercise (subject as aforesaid), the Company shall issue and deliver to such holder a certificate for the full number of the Warrant Shares. 1.2 Fractional Shares. Instead of any fractional shares of Common Stock which would otherwise be issuable upon exercise of this Warrant no shares will be issued for less than one-half a share and the Company shall issue a certificate for the next higher number of whole shares of Common Stock for any fraction of a share which is one-half or greater. 1 2 ARTICLE II Warrant Office: Transfer 2.1 Warrant Office The Company shall maintain an office for certain. purposes specified herein (the "Warrant Office"), which office shall initially be the Company's office at 11111 Wilcrest Green, Suite 350, Houston, Texas 77042 and may subsequently be such other office of the Company or of any transfer agent of the Common Stock in the continental United States as to which written notice has previously been given to the holder of this Warrant. The Company shall maintain, at the Warrant Office, a register for the Warrant, in which the Company shall record the name and address of the person in whose mine this Warrant has been issued, as well as the name and address of each permitted assignee of the rights of the registered owner hereof. 2.2 Ownership of Warrant. The Company may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer as provided in this Article II. 2.3 Restrictions on Exercise and Transfer of Warrants. The Company agrees to maintain at the Warrant Office books for the registration and transfer of this Warrant. Subject to the restrictions on transfer of Warrants in this Section 2.3, the Company, from time to time, shall register the transfer of this Warrant in such books upon surrender of this Warrant at the Warrant Office properly endorsed or accompanied by appropriate instruments of transfer and written instructions for transfer satisfactory to the Company. Upon any such transfer, a new Warrant shall be issued to the transferee and the surrendered Warrant shall be canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses and charges payable in connection with the transfer of Warrants pursuant to this Section 2.3. (a) Restrictions in General. Notwithstanding any provisions contained in this Warrant to the contrary, this Warrant shall not be exercisable or transferable and the related shares of Common Stock issuable upon exercise of this Warrant (the "Warrant Shares") shall not be transferable except upon the conditions specified in this Section 2.3, which conditions are intended, among other things, to insure compliance with the provisions of the Securities Act in respect of the exercise or transfer of this Warrant or transfer of such Warrant Shares. The registered holder of this Warrant agrees that it will neither (i) transfer this Warrant prior to delivery to the Company of the opinion of counsel referred to in, and to the effect described in, clause (1) of Section 2.3(b), or until registration hereof under the Securities Act and any applicable state securities or blue sky laws, (ii) exercise this Warrant prior to delivery to the Company of the opinion of counsel referred to in, and to the effect described in, clause (1) of Section 2.3(b), or until registration of the related Warrant Shares under the Securities Act and any applicable state securities or blue sky laws have become effective, nor (iii) transfer such Warrant Shares prior to delivery to the Company of the opinion of counsel referred to in, and to the effect described in clause (1) of Section 2.3(b), or until registration of such Warrant Shares under the Securities Act and any applicable state securities or blue sky laws have become effective. (b) Statement of Intention to Exercise; Opinion of Counsel. The registered holder of this Warrant, by its acceptance hereof, agrees that prior to any exercise or transfer of this Warrant or any transfer of the related Warrant Shares, said holder will deliver to the Company a statement setting forth either said holder's intention with respect to the retention or disposition of any Warrant Shares, or the intention of said holder's prospective transferee with respect to its retention or disposition of this Warrant or of said Warrant Shares (whichever is involved in such transfer), in either such case, together with a signed copy of the opinion of said holder's counsel, or such other counsel as shall be acceptable to the Company, as to the necessity or non-necessity for registration under the Securities Act and any applicable state securities or blue sky laws in connection with such exercise or such transfer. The following provisions shall then apply: 2 3 (1) If, in the opinion of said holder's counsel, concurred in by counsel to the Company, the proposed exercise or transfer of this Warrant or the proposed transfer of such Warrant Shares may be effected without registration under the Securities Act and any applicable state securities or blue sky laws of this Warrant or such Warrant Shares, as the case may be, then the registered holder of this Warrant shall be entitled to exercise or transfer this Warrant or to transfer such Warrant Shares in accordance with the statement of intention delivered by said holder to the Company. (2) If, in the opinion of said counsel, concurred in by counsel to the Company, either the proposed exercise or transfer of this Warrant or the proposed transfer of such Warrant Shares may not be effected without registration under the Securities Act and any applicable state securities or blue sky laws of this Warrant or such Warrant Shares, as the case may be, the registered holder of this Warrant shall not be entitled to exercise or transfer this Warrant or to transfer such Warrant Shares, as the case may be, until such registration is effected. 2.4 Registration Rights. The registered holder of this Warrant shall be entitled to all of the rights and benefits of a purchaser under the Purchase Agreement dated __________, 1997 (the "Purchase Agreement"), among the Company and the purchasers of the Company's 11% Subordinated Notes due June 30, 2002 (the "Notes") and the Warrants (as defined in the Purchase Agreement). The Warrant Shares shall be considered Restricted Stock under the Purchase Agreement. The terms of the Purchase Agreement are hereby incorporated herein for all purposes and shall be considered a part of this Agreement as if they had been fully set forth herein. The holder acknowledges that the Warrant is being issued in connection with the purchase by the holder of the Notes referred to in the Purchase Agreement entered into pursuant to, and which constitutes part of, the Company's offering of Notes and Warrants pursuant to the Company's Confidential Private Placement Memorandum dated June 1, 1997 (the "Memorandum"). The terms, conditions, restrictions, risk factors and other information contained in the Memorandum are incorporated by reference into and constitute a part of the Purchase Agreement, the Notes and this Warrant. 2.5 Acknowledgement of Rights. The Company will, at the time of the exercise of this Warrant in accordance with the terms hereof, upon the request of the registered holder hereof, acknowledge in writing its continuing obligation to afford to such holder any rights (including without limitation, any right to registration of the Warrant Shares) to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant, provided that if the holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 2.6 Expenses of Delivery of Warrants. The Company shall pay all expenses, taxes (other than transfer taxes) and other charges payable in connection with the preparation, issuance and delivery of Warrants and related Warrant Shares hereunder. 2.7 Compliance with Securities Laws. The holder hereof understands and agrees that the following restrictions and limitations shall be applicable to all Warrant Shares and resales or other transfers of such Shares pursuant to the Securities Act. (a) The holder hereof agrees that the Warrant Shares shall not be sold or otherwise transferred unless the Warrant Shares are registered under the Securities Act and state securities laws or are exempt therefrom. (b) A legend in substantially the following form has been or will be placed on the certificate(s) evidencing the Warrant Shares: "The shares represented by this certificate have not been registered under the Securities Act of 1933 or any state securities act. The shares have been acquired for investment and may not be sold, transferred, pledged or hypothecated unless (i) they shall have been registered under the Securities Act of 1933 and any applicable state securities act, or (ii) the corporation shall have been furnished with an 3 4 opinion of counsel, satisfactory to counsel for the corporation, that registration is not required under any of such acts." (c) Stop transfer instructions have been or will be imposed with respect to the Warrant Shares so as to restrict resale or other transfer thereof, subject to this Section 2.7. ARTICLE III Warrant Adjustment Provisions 3.1 Adjustment of Warrant Shares. The Number of Warrant shares purchasable upon exercise of this Warrant may be adjusted from time to time as set forth below. (a) If the Company at any time pays to the holders of its Common Stock a dividend in Common Stock, the number of Warrant Shares issuable upon the exercise of this Warrant shall be proportionally increased, effective at the close of business on the record date for determination of the holders of the Common Stock entitled to the dividend. (b) If the Company at any time subdivides or combines in a larger or smaller number of shares its outstanding shares of Common Stock, then the number of shares of Common Stock issuable upon the exercise of this Warrant shall be proportionally increased in the case of a subdivision and decreased in the case of combination, effective in either case at the close of business on the date that the subdivision or combination becomes effective. (c) In case of any reclassification of the Common Stock, any consolidation of the Company with, or merger of the Company into, any other entity, any merger of any entity into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock), any sales or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or other property, then provisions shall be made such that the holders of this Warrant shall have the right thereafter, during the period that this Warrant shall be exercisable, to exercise this Warrant and receive the kind and amount of securities, cash and other property receivable upon such reclassification, consolidation, merger, sale, transfer or share exchange by a holder of the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. In addition to the adjustments provided for above to the number of Warrant Shares purchasable hereunder upon exercise of the Warrant in certain circumstances, the Company may, in its sole discretion, provide for further adjustments to the number of Warrant Shares purchasable hereunder and/or the Exercise Price thereof based on additional or other facts and circumstances where the Company determines that such an adjustment would be fair and equitable to the holders of the Warrants. 3.2 Costs. The Company shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of shares of Common Stock of the Company upon exercise of this Warrant; provided, however that the Company shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of this Warrant in respect of which such shares are being issued. 3.3 Reservations of Shares. Subject to an increase in the Company's authorized or available shares of Common Stock for future issuance, the Company shall reserve at all times so long as this Warrant remains outstanding, free from preemptive rights, out of its treasury Common Stock or its authorized but unissued shares 4 5 of Common Stock, or both, solely for the purpose of effecting the exercise of this Warrant, sufficient shares of Common Stock to provide for the exercise hereof 3.4 Valid Issuance. All shares of Common Stock which may be issued upon exercise of this Warrant will upon issuance by the Company be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof attributable to any act or omission by the Company, and the Company shall take no action which will cause a contrary result (including without limitation, any action which would cause the Exercise Price to be less than the par value, if any, of the Common Stock). ARTICLE IV Terms Defined As used in this Warrant, unless the context otherwise requires, the following terms have the respective meanings set forth below or in the Section indicated: Board of Directors - the Board of Directors of the Company. Common Stock - The Company's authorized Common Stock, par value $.05 per share. Company - Watermarc Food Management Co., a Texas corporation, and any other corporation assuming or required to assume the obligations undertaken in connection with this Warrant Person - any individual, corporation, partnership, trust, organization, association or other entity or individual. Securities Act - the Securities Act of 1933 and the rules and regulations thereunder, all as the same shall be in effect at the time. Warrant - this Warrant and any successor or replacement Warrant delivered in accordance with Section 2.3 or 6.8. Warrant Office - Section 2.1. Warrant Shares - shall mean the shares of Common Stock purchased or purchasable by the registered holder of this Warrant or the permitted assignees of such holder upon exercise thereof pursuant to Article I hereof. 5 6 ARTICLE V Covenant of the Company The Company covenants and agrees that this Warrant shall be binding upon any corporation succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. ARTICLE VI Miscellaneous 6.1 Entire Agreement. This Warrant, the Purchase Agreement and the Memorandum collectively contain and describe the entire agreement between the holder hereof and the Company with respect to the shares which he can purchase upon exercise hereof and the related transactions and supersedes all prior arrangements or understanding with respect thereto. 6.2 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of Texas. 6.3 Waiver and Amendment. Any term or provision of this Warrant may be waived at any time by the party which is entitled to the benefits thereof and any term or provision of this Warrant may be amended or supplemented at any time by agreement of the holder hereof and the Company, except that any waiver of any term or condition, or any amendment or supplementation, of this Warrant must be in writing. A waiver of any breach or failure to enforce any of the term or conditions of this Warrant shall not in any way affect, limit or waive a party's rights hereunder at any time to enforce strict compliance thereafter with every term or condition of this Warrant. 6.4 Illegality. In the event that any one or more of the provisions contained in this Warrant shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in any other respect and the remaining provisions of this Warrant shall not, at the election of the party for whom the benefit of the provisions exists, be in any way impaired. 6.5 Copy of Warrant. A copy of this Warrant shall be filed among the records of the Company. 6.6 Notice. Any notice or other document required or permitted to be given or delivered to the holder hereof shall be delivered at, or sent by certified or registered mail to such holder at, the last address shown on the books of the Company maintained at the Warrant Office for the registration of this Warrant or at any more recent address of which the holder hereof shall have notified the Company in writing. Any notice or other document required or permitted to be given or delivered to the Company, other than such notice or documents required to be delivered to the Warrant Office, shall be delivered at, or sent by certified or registered mail to, the office of the Company at 11111 Wilcrest Green Suite 350, Houston, Texas 77042 or such other address within the continental United States of America as shall have been furnished by the Company to the holders of this Warrant 6.7 Limitation of Liability. Not Stockholders. No provision of this Warrant shall be construed as conferring upon the holder hereof the right to vote, consent, receive dividends or receive notices (other than as herein expressly provided) in respect of meetings of stockholders for the election of directors of the Company or any other right whatsoever as a stockholder of the Company. No provision hereof, in the absence of affirmative action by the holder hereof to purchase shares of Common Stock and no enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the purchase price of any shares of Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 6 7 6.8 Exchange, Loss, Destruction, etc. of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of this Warrant, and in the case of any such loss, theft or destruction upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company, or in the event of such mutilation upon surrender and cancellation of this Warrant, the Company will make and deliver a new Warrant of like tenor, in lieu of such lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the provisions of this Section 6.8 in lieu of any Warrant alleged to be lost, destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an original contractual obligation on the part of the Company. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses and charges payable in connection with the preparation execution and delivery of Warrants pursuant to this Section 6.8. 6.9 Headings. The Article and Section and other headings herein are for convenience only and are not a part of this Warrant and shall not affect the interpretation thereof. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name. Dated: , 1997 ----------------- WATERMARC FOOD MANAGEMENT CO. BY: ----------------------------------- Ghulam M. Bombaywala Chairman of the Board and Chief Executive Officer 7 8 SUBSCRIPTION NOTICE The undersigned, the holder of the foregoing Warrant, hereby elects to exercise purchase rights represented by said Warrant for, and to purchase thereunder ______________________ shares of the Common Stock covered by said Warrant and (Choose one option) [ ] (i) herewith makes payments in full therefore pursuant to Section 1.1 of such Warrant, or [ ] (ii) elects the Conversion Right as set forth in Section 1.3 of the Warrant and requests (a) that certificates for such shares (and any securities or other property issuable upon such exercise) be issued in the name of, and delivered to, _______________________ and (b) if such shares shall not include all of the shares issuable as provided in said Warrant, that a new Warrant of like tenor and date for the balance of the shares issuable thereunder be delivered to the undersigned. --------------------- Dated: , 19 ---------------------- -- ASSIGNMENT For value received, ______________________, hereby sells, assigns and transfers unto _____________________________ the within Warrant, together with all right, title and interest therein and does hereby irrevocably constitute and appoint _______________________ attorney, to transfer said Warrant on the books of the Company, with full power of substitution. --------------------- Dated: , 19 ---------------------- -- 8 EX-10.1 12 LICENSE AGREEMENT DATED 6/29/97 1 EXHIBIT 10.1 MARCO'S MEXICAN RESTAURANTS, INC. LICENSE AGREEMENT THIS AGREEMENT is made and entered into this 29th day of June, 1997, by and between MARCO'S MEXICAN RESTAURANTS, INC., a corporation incorporated under the laws of the State of Texas, whose principal place of business is 11111 Wilcrest Green, Suite 350, Houston, Texas 77042 (hereinafter referred to as the "Licensor") and Mohammed S. Akhtar and Rubina S. Akhtar, with an address of 335 E. San Augustine, #94, Deer Park, Texas 77536 (hereinafter referred to as the "Licensees"). WITNESSETH: WHEREAS, the Licensor holds the exclusive rights to a proprietary system, which has been developed through significant expenditures of time, skill, effort and money (hereinafter the "System") relating to the establishment, development and operation of a MARCO'S MEXICAN RESTAURANT (hereinafter the "Licensed Business" and signifying both licensed and company-managed outlets) which offers Mexican-style dishes and bar service in a full service casual dining restaurant environment; WHEREAS, the System features a distinctive exterior and interior design, decor, color scheme, fixtures and furnishings for the Licensed Business restaurant, as well as uniform standards, specifications, methods, policies and procedures for the restaurant operations, inventory and management control, training and assistance, and advertising and promotional programs, all of which may be changed, improved upon, and further developed from time to time; WHEREAS, the Licensor, through its dedicated operations, marketing methods, and merchandising policies, has developed the reputation, public image and good will of its System and established a firm foundation for its restaurant operations consisting of the highest standards of training, management, supervision, appearance, services and quality of products; WHEREAS, the System is identified by means of certain trade names, service marks, trade marks, logos, emblems and indicia of origin, including the mark MARCO'S MEXICAN RESTAURANTS and logo, and such other trade names, service marks, and trademarks as are now, and may hereafter be designated for use in connection with the System (the "Proprietary Marks") which Proprietary Marks are owned by the Licensor; WHEREAS, the Licensor continues to develop, expand, use, control and add to the Proprietary Marks and the System for the benefit of and exclusive use by the Licensor in order to identify for the public the source of the products and services marketed thereunder and to represent the System's high standards of quality and service; WHEREAS, the Licensees desire to operate a Licensed Business under the System and the Proprietary Marks and to obtain a license from the Licensor for that purpose; WHEREAS, the Licensees hereby acknowledge that they have read this Agreement and understand and accept the terms, conditions and covenants contained in this Agreement as being reasonably necessary to maintain the Licensor's high standards of quality and service and the Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 1 2 uniformity of those standards at all facilities which operate pursuant to the System and thereby to protect and preserve the goodwill of the Proprietary Marks; and WHEREAS, the Licensees understand and acknowledge the importance of the Licensor's uniformly high standards of quality and service and the necessity of operating the Licensed Business granted hereunder in strict conformity with the Licensor's quality control standards and specifications. NOW, THEREFORE, the parties, for and in consideration of the sum of one dollar ($1.00) and the promises, undertakings and commitments of each party to the other set forth herein, hereby mutually agree as follows: I. GRANT OF LICENSE A. GRANT. The Licensor hereby grants to the Licensees and Licensees accept, upon the terms and conditions herein contained, the nonexclusive and personal license, right and authority to operate a Licensed Business only at the specific location located at 3402 Palmer Highway, Texas City, Galveston County, Texas 77590 (the "Site") in strict conformity with the Licensor's quality control standards and specifications which are a material part of the System, which may be changed, improved and further developed from time to time. The Licensees hereby accept such license and agree to perform all of its obligations in connection therewith as set forth herein. The Licensees shall pay to the Licensor the sum of Five Dollars ($5.00) for the term of this License. B. The Licensor reserves the right to: 1. Establish or grant licenses or franchises for restaurants providing products or services under marks other than the Proprietary Marks; 2. Offer and sell food products, under the Proprietary Marks or any other marks, through grocery stores, convenience stores or other retail locations, or through mail order or catalogues; 3. Offer or sell food products under the Proprietary Marks at special events; 4. Offer or sell any products or services, under the Proprietary Marks or any other marks, through any other channel of distribution; and 5. Establish company-owned Licensed Businesses or license or franchise other Licensees or franchisees to establish Marco's Mexican Restaurants at any other site or location that the Licensor deems appropriate. C. RESERVATION OF CERTAIN RIGHTS. Subject to Section I.B. hereinabove, the Licensor reserves the right to establish Licensed or Franchised Businesses at any site the Licensor deems appropriate. The Licensor also reserves the right to sell related products and services in other channels of distribution. The Licensor reserves the right to offer, grant and support licenses or franchises in similar and other lines of business. The Licensor makes no representation or warranty to the Licensees that there will be any right to participate in such licenses or franchises. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 2 3 II. TERM AND RENEWAL A. INITIAL TERM. Except as otherwise provided herein, the term of this Agreement shall commence on June 29, 1997 and terminate on June 29, 1998, provided, however, that if the Licensees lease their business premises and in the event that the lease agreement for the Licensees' business premises is terminated prior to the expiration of the term of this Agreement, then the Licensor may, at its option, terminate this Agreement. Notwithstanding the foregoing or anything in this Agreement to the contrary, this Agreement shall terminate if the Licensees do not maintain ownership of the restaurant and/or the assets located at the Site. B. RENEWAL. Upon expiration, this License may be extended in the sole discretion of the Licensor upon terms and conditions to be determined by the Licensor, which shall include the payment of royalties by the Licensees to the Licensor. III. DUTY OF LICENSOR To provide the Licensees with written specifications for the operation of the Licensed Business (the "Manuals"). The Manuals are confidential and remain the property of the Licensor. The Licensor may modify the Manuals from time to time. IV. DUTIES OF LICENSEES A. COMPLIANCE WITH SYSTEM. The Licensees understand and acknowledge that every detail of the appearance and operation of the Licensed Business in compliance with the System is critical to the Licensor, the Licensees and other Licensees in order to: 1. Develop and maintain high and uniform operating standards; 2. Increase the demand for the products and services sold by Licensees, and 3. Protect the Proprietary Marks and the System, and the Licensor's trade secrets, reputation and goodwill. B. LEASEHOLD IMPROVEMENT REQUIREMENTS. Before commencing any construction or improvements of the Licensed Business in compliance with the System is critical to the Licensor, the Licensees, and other Licensees in order to: 1. The Licensees shall have received the Licensor's prior written approval of the 2. The proposed improvements must be in compliance with all applicable local and state laws, regulations and ordinances including all zoning, signage and parking requirements; 3. The Licensees shall be responsible for all reasonable expenses pertaining to the Licensor's review and approval of the proposed improvements, the Licensor's monitoring and review of the construction and the final inspection of the improvements; Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 3 4 4. The Licensees shall employ a qualified general contractor or such other qualified person as the Licensor may approve in its absolute and sole discretion for the purposes of supervising the construction and ensuring the completion of all construction or leaseholder improvements. The Licensees shall submit to the Licensor a statement identifying the general contractor and describing the general contractor's qualifications and financial responsibility; and 5. The Licensees shall obtain all liquor and business licenses, permits and certifications required for lawful construction of improvements and ongoing operation of the Licensed Business (including, without limitation, zoning, access, variances, health and safety, and fire requirements) and shall certify in writing to the Licensor that all such licenses, permits and certifications have been obtained. 6. The Licensees shall completely construct any improvements at and equip, at Licensees's expense, the Licensed Site in accordance with Licensor's standards and specifications. Licensor and its agents shall have the right to inspect the construction at all reasonable times. Licensees shall promptly notify Licensor of the date of completion of construction and thereafter the Licensor may conduct a final inspection of the restaurant and its premises. C. SUPERVISION REQUIREMENTS. The Licensed Business shall at all times be under the direct on-premises supervision of the Licensees or an operating manager ("Operating Manager") designated by Licensees and approved by Licensor. D. TRAINING. The Licensees shall cause their employees, which shall include the Licensees, their Operating Manager and any person subsequently acting as the manager of the Licensed Business to attend and complete, to the Licensor's satisfaction, such special programs or periodic training as the Licensor may require in writing from time to time. The Licensees shall pay all reasonable expenses incurred by the Licensor and/or its employees in connection with such programs and training and shall be responsible for all expenses of their employees associated therewith, including meals, lodging, travel and wages. E. OPERATION OF THE LICENSED BUSINESS. The Licensees shall use the Licensed Business solely for the operation of the Licensed Business that is licensed hereunder in strict accordance with the Licensor's specifications; shall keep the Licensed Business open and in normal operation for such minimum hours and days as the Licensor may from time to time prescribe; and shall refrain at all times from using or permitting the use of the premises of the Licensed Business for any other purpose or activity other than as contemplated by this Agreement without first obtaining the written consent of the Licensor. F. MAINTENANCE. The Licensees shall continuously maintain the Licensed Business in the highest degree of sanitation, repair and condition as the Licensor may reasonably require, and in connection therewith shall make such additions, alterations, repairs and replacements thereto (but not without the Licensor's prior written consent) as may be required for that purpose, including without limitation, such periodic redecorating, replacement of inventory and replacement of obsolete signs, fixtures or materials as the Licensor may reasonably direct, or as otherwise required under the lease for the Licensed Business. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 4 5 G. HEALTH AND SAFETY STANDARDS. The Licensees shall meet and maintain the highest safety standards and ratings applicable to the operation and management of the Licensed Business and its personnel as the Licensor may reasonably require. H. WORKING CAPITAL. The Licensees shall meet and maintain sufficient levels of working capital for use in connection with the management and operation of the Licensed Business as the Licensor may reasonably require. I. REFURBISHMENT. At the Licensor's request, the Licensees shall refurbish the Licensed Business, at their expense, to conform to the then current Licensed Business design and decor, trade dress, color scheme and presentation of trademarks and service marks consistent with the design concepts then in effect for new Licensed Businesses licensed to operate under the System, including, without limitation, such structural changes, remodeling, redecoration and other modifications to existing improvements as deemed necessary by the Licensor. J. COMPLIANCE WITH UNIFORM STANDARDS. The Licensees shall operate the Licensed Business in conformity with such uniform methods, standards and specifications as the Licensor may from time to time prescribe to ensure that the highest degree of product quality and service is uniformly maintained. The Licensees shall conduct their business in a manner which reflects favorably at all times on the System and the Proprietary Marks. The Licensees shall at no time engage in deceptive, misleading or unethical practices or conduct any other act which may have a negative impact on the reputation and goodwill of the Licensor or any other Licensees or franchisees operating under the System. Pursuant to this ongoing responsibility, the Licensees agree; 1. To maintain in sufficient supply as the Licensor may require and use at all times only such products and supplies as conform to the Licensor's standards and specifications, and to refrain from deviating therefrom without the Licensor's prior written consent; 2. To sell or offer for sale only such products and services as meet the Licensor's uniform standards of quality and quantity which have been expressly approved for sale in writing by the Licensor in accordance with the Licensor's methods and techniques; to sell or offer for sale all approved items; to refrain from any deviation from the Licensor's standards and specifications for serving or selling such products or services; and to discontinue selling and offering for sale any such products or services as the Licensor may, in its sole discretion, disapprove in writing at any time; 3. To lease or purchase and install at the Licensees' expense all fixtures, furnishings, signs and equipment as the Licensor may reasonably specify from time to time, and to refrain from installing or permitting to be installed on or about the Licensed Business without the Licensor's prior written consent any fixtures, furnishings, signs, cards, promotional literature, equipment or other items not previously specifically approved as meeting the Licensor's standards and conforming to the Licensor's specifications; 4. To purchase and maintain any and all signs for use at the Licensed Business, whether for interior or exterior use, in conformity with the Licensor's quality control standards and specifications; Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 5 6 5. To employ such minimum number of employees as may be prescribed by the Licensor and to comply with all applicable federal, state and local laws, rules and regulations with respect to such employees; 6. To maintain a competent, conscientious staff; and 7. To maintain all licenses and permits in good standing. K. PURCHASE AND LEASE OF PRODUCTS, EQUIPMENT AND SUPPLIES. Licensees shall lease or purchase all products, initial inventory, equipment, supplies and other materials required for the operation of the Licensed Business solely from approved suppliers who shall have proved, to the continuing reasonable satisfaction of the Licensor, the ability to meet the Licensor's then current standards and specifications for such products and related items. Such approved suppliers must meet all of the Licensor's specifications and standards as to content, quality, appearance, warranty, performance and serviceability and must adequately demonstrate their capacity and facilities to supply the Licensees's needs for an effective and efficient operation of the Licensed Business as well as all Licensed Businesses operating under the Licensor's System. L. INSPECTION OF PREMISES. The Licensees shall permit the Licensor or its agents or representatives to enter upon the premises of the Licensed Business at any time for purposes of conducting inspections, taking photographs and interviewing employees and customers. The Licensees shall cooperate fully with the Licensor's agents or representatives in such inspections by rendering such assistance as they may reasonably request. Upon notice from the Licensor or its agents or representatives, and without limiting the Licensor's other rights under this Agreement, the Licensees shall take such steps as may be necessary to immediately and diligently correct any deficiencies detected during such inspections, including, without limitation, immediately ceasing and preventing the further use of any products, equipment, inventory, advertising materials, supplies or other items that do not conform to the Licensor's then current specifications, standards or requirements. In the event the Licensees fails or refuses to correct such deficiencies, the Licensor shall have the right to enter upon the premises of the Licensed Business, without being guilty of trespass or any other tort, for the purpose of making or causing to be made such corrections as may be required, at the sole expense of the Licensees. M. PROPRIETARY METHODS. The Licensees acknowledge and agree that the Licensor has developed certain products, services, operational systems and management techniques and may continue to develop additional products and proprietary methods and techniques for use in the operation of the Licensed Business which are all highly confidential and which are trade secrets of the Licensor. Because of the importance of quality control, uniformity of product and the significance of such proprietary products in the System, it is to the mutual benefit of the parties that the Licensor closely control the dissemination of this proprietary information. Accordingly, the Licensees agrees that in the event such information and techniques become a part of the System, the Licensees shall comply and strictly follow these techniques in the operation of its business and shall purchase from an approved source designated by the Licensor any supplies or materials necessary to protect and implement such techniques. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 6 7 N. DEVELOPMENT OF THE MARKET. The Licensees shall at all times use its best efforts to promote and increase the sales and consumer recognition of the products and services offered at the Licensed Business pursuant to the System, to effect the widest and best possible distribution of the Licensor's products and services from the Licensed Business and to devote its best efforts in controlling the Licensed Business, its managers, assistants and employees O. DISPLAY OF PROPRIETARY MARKS AND LOGOS. The Licensees shall display the Licensor's Proprietary Marks and logos at the Licensed Business, on uniforms and otherwise in the manner prescribed by the Licensor. The color, design and location of said displays shall be specified by the Licensor and may be changed from time to time in the sole discretion of the Licensor. The Licensees shall not display any signs or posters at the premises or elsewhere without the prior written consent of the Licensor, P. OTHER REQUIREMENTS. The Licensees shall comply with all other requirements set forth in this Agreement or as the Licensor may designate from time to time. V. PROPRIETARY MARKS A. GRANT OF LICENSE. The Licensor hereby grants the Licensees the right and license to use the Proprietary Marks only in connection with the operation of its Licensed Business and the provision of services and products to its customers. The Licensor represents with respect to the Proprietary Marks that: (1) the Licensor has, to the best of the Licensor's knowledge, all right, title and interest in and to the Proprietary Marks in the United States; (2) the Licensor has taken all steps which it deems reasonably necessary to preserve and protect the ownership and validity of such Proprietary Marks in the United States; and (3) the Licensor will use and license the Licensees and other Licensees to use the Proprietary Marks only in accordance with the System and the operating standards and quality control specifications attendant thereto which underlie the goodwill associated with and symbolized by the Proprietary Marks. B. CONDITIONS FOR USE. With respect to the Licensees' use of the Proprietary Marks pursuant to the license granted under this Agreement, the Licensees agree that: 1. The Licensees shall use only the Proprietary Marks designated by the Licensor and shall use them only in the manner required or authorized and permitted by the Licensor. 2. The Licensees shall use the Proprietary Marks only in connection with the right and license to operate the Licensed Business granted hereunder. 3. During the term of this Agreement and any renewal hereof, the Licensees shall identify themselves as licensees and not the owner of the Proprietary Marks and shall make any necessary filings under state law to reflect such status, In addition, the Licensees shall identify themselves as licensees of the Proprietary Marks on all invoices, order forms, receipts, business stationary and contracts, as well as at the Licensed Business on any sign required by the Licensor which shall be conspicuously displayed to customers. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 7 8 4. The Licensees' right to use the Proprietary Marks is limited to such uses as are authorized under this Agreement, and any unauthorized use thereof shall constitute an infringement of the Licensor's rights and grounds for termination of this Agreement. 5. The Licensees shall not use the Proprietary Marks to incur or secure any obligation or indebtedness. 6. The Licensees shall not use the Proprietary Marks as part of business or other legal name. 7. The Licensees shall comply with the Licensor's instructions in filing and maintaining the requisite trade name or fictitious name registrations, and shall execute any documents deemed necessary by the Licensor or its counsel to obtain protection for the Proprietary Marks or to maintain their continued validity and enforceability. 8. In the event that the Licensees becomes aware of any infringement of the Proprietary Marks or if the Licensees' use of the Proprietary Marks is challenged by a third party, then the Licensees are obligated to immediately notify the Licensor, and the Licensor will have the sole discretion to take such action as it deems appropriate. If the Licensor determines that no action to protect the Proprietary Marks is necessary, than the Licensees may take any action they deem necessary to protect their own interest, at their own expense. If it becomes advisable at any time in the sole discretion of the Licensor to modify or discontinue the use of any name or mark and/or use one or more additional or substitute names or marks, the Licensees shall modify or discontinue the use of any such name or mark, and use such additional or substitute name or mark, and shall be responsible for the tangible costs (such as replacing signs and materials) of complying with this obligation. In the event that litigation alleging that the Proprietary Marks infringe a third party's rights is instituted or threatened against the Licensees, the Licensees shall promptly notify the Licensor and shall cooperate fully in defending or settling such litigation. C. ACKNOWLEDGEMENTS. The Licensees expressly understand and acknowledge that: 1. The Licensor is the exclusive owner of all right, title and interest in and to the Proprietary Marks and the goodwill associated with and symbolized by them; 2. The Proprietary Marks are valid and serve to identify the System and those who are licensed to operate a Licensed Business in accordance with the System; 3. The Licensees' use of the Proprietary marks pursuant to this Agreement does not give the Licensees any ownership interest or other interest in or to the Proprietary Marks, except the nonexclusive license granted herein; 4. Any and all goodwill arising from the Licensees' use of the Proprietary Marks and/or the System shall inure solely and exclusively to the Licensor's benefit, and upon expiration or termination of this Agreement no monetary amount shall be assigned as attributable to any goodwill associated with the Licensees' use of the System or the Proprietary Marks; Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 8 9 5. The license and rights to use the Proprietary Marks granted hereunder to the Licensees are nonexclusive, and the Licensor thus may: (a) itself use, and grant franchises and licenses to others to use, the Proprietary Marks and the System, (b) establish, develop, license and franchise other systems, different from the System licensed to the Licensees herein, without offering or providing the Licensees any rights in, to or under such other systems; and (c) modify or change, in whole or in part, any aspect of the Proprietary Marks or the System, so long as the Licensees' rights thereto are in no way materially harmed thereby; 6. The Licensor reserves the right to substitute different trade names, trademarks and service marks for use in identifying the System, the Licensed Business and other Licensed or Franchised Businesses operating thereunder, all of which shall become Proprietary Marks; 7. The Licensor shall have no liability to the Licensees for any senior users that may claim rights to the Proprietary Marks; and 8. The Licensees shall not register or attempt to register the Proprietary Marks in the Licensees' name or that of any other person, firm, entity or corporation. VI. CONFIDENTIAL MANUALS A. COMPLIANCE. In order to protect the reputation and goodwill of the Licensor and to maintain uniform standards of operation in connection with the Proprietary Marks, the Licensees shall conduct its business in strict compliance with the operational systems, procedures, policies, methods and requirements prescribed in the Licensor's Manuals and any supplemental bulletins, notices, revisions, modifications or amendments thereto, all of which shall be deemed a part thereof. B. USE. The Licensees agree to immediately adopt and use the programs, services, methods, standards, materials, policies and procedures set forth in the Manuals, as they may be modified by the Licensor from time to time. The Licensees acknowledge that the Licensor is the owner or licensee of all proprietary rights in and to the System, and the Manuals, and any changes or supplements thereto C. CONFIDENTIALITY. The Licensees shall at all times treat the Manuals, any other manuals created for or approved for use in the operation of the Licensed Business and all of the information contained therein as proprietary and confidential, and shall use all reasonable efforts to maintain such information as confidential. The Manuals must remain on the premises of the Licensed Business at all times. D. TRADE SECRETS. The Licensees acknowledge, know and agree that designated portions of the Manuals are "trade secrets" owned and treated as such by the Licensor. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 9 10 E. ACCESS. The trade secrets must be accorded maximum security consistent with the Licensees' need to make frequent reference thereto. The Licensees shall strictly limit access to the Manuals to employees who have a demonstrable and valid need to know the information contained therein in order to perform their duties. The Licensees shall strictly follow any provisions in the Manuals regarding the care, storage and use of the Manuals and all related proprietary information. F. DUPLICATION. The Licensees shall not at any time, without the Licensor's prior written consent, copy, duplicate, record or otherwise reproduce in any manner any part of the Manuals, updates, supplements or related materials, in whole or in part, or otherwise make the same available to any unauthorized person. G. LICENSOR'S PROPERTY. The Manuals shall at all times remain the sole property of the Licensor. Upon the expiration or termination of this Agreement for any reason, the Licensees shall return to the Licensor the Manuals and all supplements thereto. H. UPDATES OR REVISIONS. The Licensor retains the right to prescribe additions to, deletions from or revisions to the Manuals, which shall become binding upon the Licensees upon being mailed or otherwise delivered to the Licensees, as if originally set forth therein. The Manuals, and any such additions, deletions or revisions thereto, shall not alter the Licensees' rights and obligations hereunder. I. MASTER SET. The Licensees shall at all times insure that their set of the Manuals is kept current and up-to-date, and in the event of any dispute as to the contents of the Manuals, the terms contained in the master set of the Manuals maintained by the Licensor at the Licensor's headquarters shall be controlling. J. REPLACEMENT FEE. If The Manuals are lost, stolen or destroyed, the Licensees shall pay the costs to replace each volume of the Manuals. VII. CONFIDENTIAL INFORMATION A. CONFIDENTIAL RELATIONSHIP. The parties expressly understand and agree that the relationship established between the Licensor and the Licensees by this Agreement is one of confidence and trust, and that as a result, the Licensor will be disclosing and transmitting to the Licensees certain trade secrets and other confidential and proprietary information concerning various aspects of the Licensees' operation of the Licensed Business, its methods of operation, techniques and all proprietary systems, procedures and materials relevant thereto pursuant to the System and this Agreement. B. OBLIGATIONS OF LICENSEES. In order to preserve and protect the trade secrets and the confidential and proprietary information (the "Confidential Information") which are disclosed to the Licensees during the term of this Agreement, the Licensees agree that: 1. The Licensees shall treat and maintain the Confidential Information as confidential both during the term of this Agreement and thereafter; Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 10 11 2. The Licensees shall use the Confidential Information only for its operation of the Licensed Business under this Agreement; 3. The Licensees shall disclose the Confidential Information only as necessary to their employees or agents who have a demonstrable and valid need to know the Confidential Information and not to anyone else; 4. The Licensees shall restrict disclosure of the Confidential Information to only those of their employees or agents who are directly connected with the performance of work requiring knowledge thereof and shall disclose only so much of the Confidential Information as is required to enable those employees or agents to carry out their assigned duties; 5. The Licensees shall advise their employees or agents of the confidential nature of such information and the requirements of nondisclosure thereof; and 6. The Licensor and the Licensees shall conduct a review to determine which employees will have access to the Confidential Information and to the Manuals. The Licensees shall not disclose any Confidential Information or provide access to the Manuals to such employee or agent until that person executes a nondisclosure agreement in a form prescribed by the Licensor, acknowledging the confidential and proprietary nature of the Confidential Information and agreeing not to disclose such information during the course of employment or thereafter. The Licensor shall be designated a third-party beneficiary of such nondisclosure agreements with the right to enforce its provisions independently of the Licensees. C. CONFIDENTIAL INFORMATION DEFINED. Any and all information, knowledge, know-how, systems, programs and other methods and techniques which the Licensor designates as confidential shall be deemed Confidential Information for purposes of this Agreement, except information which the Licensees can demonstrate had become a part of the public domain through publication or communication by others or which, after disclosure to the Licensees by the Licensor, becomes a part of the public domain through publication or communication by others. It is understood and agreed that information, improvements to the System or techniques prepared, compiled or developed by the Licensees, its employees or agents during the term of this Agreement and relating to the Licensed Business, whether developed separately or in conjunction with the Licensor, shall be considered as part of the Confidential Information. The Licensees hereby grant to the Licensor an irrevocable, worldwide, exclusive, royalty-free license, with the right to sub-license such information, improvement or technique. D. PROTECTION OF INFORMATION. The Licensees acknowledge that they have knowledge of confidential matters, trade secrets, management and training techniques, operational, accounting, quality control procedures, programs and other methods developed by the Licensor through and in its System which, for purposes of this Agreement are owned by the Licensor and which are necessary and essential to the operation of the Licensed Business, without which information the Licensees could not efficiently, effectively and profitably operate the same. The Licensees further acknowledges that the unique and novel combination of "know how" and methods developed by the Licensor and licensed to the Licensees by the Licensor for the operation of the Licensed Business are peculiar to the Licensor. The Licensees shall take all steps necessary, at their own expense, to protect the Confidential Information and shall not divulge the same either during or upon the termination of this Agreement without the prior written consent of the Licensor. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 11 12 E. REMEDIES. The Licensees acknowledge that in addition to any remedies available to the Licensor under Section XII hereunder, the Licensees agree to pay all court costs and reasonable attorneys' fees incurred by the Licensor in obtaining specific performance of, a temporary restraining order and/or an injunction against violation of the requirements of this Section VII. F. COMMUNICATION WITH CUSTOMERS. In order to maintain the high standards of quality control throughout the System, the Licensor reserves the right to use test customers from time to time, without prior notification to the Licensees, in order to determine whether the Licensed Business is maintaining high standards of quality, integrity, safety, appearance and customer service. VIII. ACCOUNTING, INSPECTIONS AND RECORDS A. MAINTENANCE OF BOOKS AND RECORDS. The Licensees shall maintain during the term of this Agreement and shall preserve for not less than seven (7) years from the date of preparation full, complete and accurate books, records and accounts in accordance with the System and in the form and manner prescribed by the Licensor in the Manuals or otherwise in writing from time to time. B. FINANCIAL AND RELATED REPORTING. During the term of this Agreement, the Licensees shall, at the Licensees' expense, submit to the Licensor an annual financial statement which shall include an income statement and balance sheet prepared in accordance with generally accepted accounting principles and copies of federal and state tax returns for the Licensees within ninety (90) days of the completion of the fiscal year of the Licensees. Each annual financial statement and tax return shall be compiled by an independent certified public accounting firm and signed by the Licensees attesting that the statement is true and correct. The Licensor also reserves the right to require the Licensees to submit to the Licensor certified financial statements for any period or periods of any fiscal year, which shall be certified by the Licensees' accounting firm and attested to by the Licensees. In addition, Licensees shall submit exact copies of the Licensees' invoices for goods purchased from suppliers and copies of the Licensees' operating reports to its landlord, immediately following the Licensor's request for such information. C. OTHER SUBMISSIONS. The Licensees shall also submit to the Licensor, for review and auditing, such other forms and reports, including annual accounting of local advertising expenditures and any and all other information and data, as the Licensor may reasonably designate, in the form and at the times and places reasonably required by the Licensor, upon request and as specified from time to time in the Manuals or otherwise in writing, at any time during the term of this Agreement. D. INSPECTION. The Licensor or its designated agents shall have the right at all reasonable times to examine and copy, at its expense, the books, records, receipts and tax returns of the Licensees. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 12 13 IX. ADVERTISING Recognizing the value of advertising, and the importance of the standardization of advertising programs to the furtherance and protection of the Proprietary marks, goodwill and public image of the System, the parties agree as follows: SUBMISSION AND APPROVAL OF PROMOTIONAL AND MARKETING MATERIALS. All promotional and marketing materials to be used by the Licensees in any medium shall be presented in a dignified manner and shall conform to such standards and requirements as the Licensor may specify from time to time in the Manuals or otherwise. The Licensees shall submit to the Licensor for its prior written approval, samples of all promotional and marketing material in whatever form that the Licensees desire to use at least ten (10) days before their intended use. The Licensor shall approve, disapprove, or revise such materials. The Licensees shall comply with all revisions to said promotional and marketing materials which the Licensor may require prior to approving said promotional and marketing materials. The Licensees shall not use any advertising or promotional plans or materials which have not been approved in writing by the Licensor, and the Licensees shall cease to use any plans or materials promptly upon notice by the Licensor. Failure by the Licensees to obtain the prior written approval of the Licensor for all proposed advertising shall be deemed a default of this agreement in accordance with Section XII.A hereof. X. INSURANCE A. PROCUREMENT. The Licensees shall maintain in full force and effect during the terms of this agreement, at the Licensees' expense, an insurance policy or policies protecting the Licensees and the Licensor, and their officers, directors, partners and employees, against any loss, liability, personal injury, death, property damage or expense whatsoever from fire, lightning, theft, vandalism, malicious mischief and the perils included in the extended coverage endorsement, arising or occurring upon or in connection with the Licensed Business or the leasehold improvements to the Licensed Business, or by reason of the operation or occupancy of the Licensed Business, as well as such other insurance applicable to such other special risks, if any, as the Licensor may reasonably require for its own and the Licensees' protection. B. MINIMUM COVERAGE. Such policy or policies shall be written by an insurance company satisfactory to the Licensor in accordance with the standards and specifications set forth in the Manuals or otherwise in writing, and shall include, at a minimum (except as additional coverage and higher policy limits may reasonably be specified from time to time by the Licensor in the Manuals or otherwise in writing) the following: 1. Comprehensive general liability insurance, including contractual liability, broad form property damage, personal injury, advertising injury, product liability, completed operations and independent contractors coverage, and fire damage coverage in the amount of at least One Million Dollars ($1,000,000), or such higher amount as required by the lease, combined single limit, and naming the Licensor and any landlord as an additional insured in each such policy or policies; Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 13 14 2. Worker's compensation and employer's liability insurance as well as such other insurance as may be required by statute or rule of the state in which the Licensed Business is located and operated; 3. Fire, vandalism and extended coverage insurance with primary and excess limits of not less than the full replacement value of the Licensed Business and its furniture, fixtures and equipment; and C. CONSTRUCTION COVERAGE. In connection with any leasehold improvements, renovation, refurbishment or remodeling of the premises of the Licensed Business, the Licensees shall cause the general contractor to maintain with a reputable insurer comprehensive general liability insurance (with comprehensive automobile liability coverage for both owned and non-owned vehicles, builder's risk, product liability and independent contractors coverage) in at least the amount of One Million Dollars ($1,000,000) with the Licensor named as an additional insured, and worker's compensation and employees liability insurance as required by state law. Copies of the Certificates of Insurance for such coverage shall be provided to the Licensor. D. CERTIFICATES. The Licensees shall submit to the Licensor, original or duplicate copies of all policies and policy amendments. The evidence of insurance shall include a statement by the insurer that the policy or policies will not be canceled or materially altered without at least thirty (30) days prior written notice to the Licensor. E. INDEPENDENCE OF COVERAGE REQUIREMENTS. The Licensees' obligation to obtain and maintain the foregoing policy or policies in the amounts specified shall not be limited in any way by reason of any insurance which may be maintained by the Licensor, and the Licensees' performance of that obligation shall not relieve them of liability under the indemnity provision set forth in Section XVII of this Agreement. F. FAILURE TO PROCURE. Should the Licensees for any reason fail to procure or maintain the insurance required by this Agreement, as revised from time to time for all Licensees by the Manuals or otherwise in writing, the Licensor shall have the right and authority (without, however, any obligation) to immediately procure such insurance and to charge the same to the Licensees, which charges, together with a reasonable fee for the Licensor's expenses in so acting, including all attorneys' fees, shall be payable by the Licensees immediately upon notice. G. THIRD PARTIES. The Licensees shall ensure that all third parties with which the Licensees conduct business, are properly insured. XI. TRANSFER OF INTEREST: OPERATION BY LICENSOR A. TRANSFER BY LICENSOR. The Licensor shall have the right to assign this Agreement, and all of its rights and privileges hereunder, to any person, firm, corporation or other entity provided that, with respect to any assignment resulting in the subsequent performance by the assignee of the functions of the Licensor, (i) the assignee shall, at the time of such assignment, be capable of performing the obligations of the Licensor hereunder, and (ii) the assignee shall expressly assume and agree to perform such obligations. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 14 15 Specifically, and without limitation to the foregoing, the Licensees expressly affirm and agree that the Licensor may sell its assets, its rights to the Proprietary Marks and the System outright to a third party; may engage in a private placement of some or all of its securities; may merge, acquire other corporations, or be acquired by another corporation; may undertake a refinancing, recapitalization, leveraged buy-out or other economic or financial restructuring; and, with regard to any or all of the above sales, assignments and dispositions, the Licensees expressly and specifically waive any claims, demands or damages arising from or related to the loss of said Proprietary Marks (or any variation thereof) and/or the loss of association with or identification of "Marco's Mexican Restaurants" as the Licensor hereunder. Nothing contained in this Agreement shall require the Licensor to remain in the restaurant business or to offer the same products and services, whether or not bearing the Licensor's Proprietary Marks, in the event that the Licensor exercises its rights hereunder to assign its rights in this Agreement. B. TRANSFER BY LICENSEES. The License granted hereunder is personal to Licensees and is nontransferable and nonassignable. Notwithstanding the foregoing, Licensees shall have the right to transfer this Agreement to an affiliated corporation or entity in which Licensees have a controlling voting and ownership interest with the written consent of the Licensor. Such corporation or entity must enter into an agreement acknowledging the terms, conditions and restrictions contained in this Agreement, including the limitations on transfer of the License. Any corporation or entity not 100% beneficially owned by Licensees shall be subject to standard licensing fees and royalties which the Licensor receives or may receive in the future from licensees using the System. Licensees, except as specifically provided above for affiliated entities, shall have no right to license, sublicense, franchise or otherwise grant any person or entity any rights with respect to the use of the System. Neither Licensees nor any permitted transferee shall encumber or grant any lien with respect to his or their rights arising under, or interest in, this Agreement and the License. Any purported assignment or transfer, by operation of law or otherwise, not having the written consent of the Licensor shall be null and void and shall constitute a material breach of this Agreement, for which the Licensor may then terminate this Agreement without opportunity to cure pursuant to Section XII.A. of this Agreement. C. NON-WAIVER OF CLAIMS. The Licensor's consent to a transfer of any interest in the Licensed Business shall not constitute a waiver of any claims it may have against the transferring party, and it will not be deemed a waiver of the Licensor's right to demand exact compliance with any of the terms of this Agreement, or any other agreement to which the Licensor and the transferee are parties, by the transferee. D. OPERATION OF THE LICENSED BUSINESS BY LICENSOR. In order to prevent any interruption of the business of the Licensed Business and any injury to the goodwill and reputation thereof which would cause harm to the Licensed Business and thereby depreciate the value thereof, the Licensees hereby authorize the Licensor, and the Licensor shall have the right, but not the obligation, to operate said Licensed Business for so long as the Licensor deems necessary and practical, and without waiver of any other rights or remedies the Licensor may have under this Agreement, in the event that: (i) any of the Licensees' principals, shareholders or partners is absent or incapacitated by reason of illness or death and that the Licensees are not, therefore, in the sole judgment of the Licensor, able to do the business licensed hereunder, or (ii) Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 15 16 any allegation or claim is made against the Licensed Business, the Licensees or any principals, directors, shareholders, partners or employees of the Licensees, involving or relating to misrepresentations or any fraudulent or deceptive practice. If, as herein provided, the Licensor elects to temporarily operate the Licensed Business on behalf of the Licensees, the Licensees hereby agrees to indemnify and hold the Licensor harmless from any and all claims arising from the acts and omissions of the Licensor and its representatives. XII. DEFAULT AND TERMINATION A. DEFAULT WITH NO OPPORTUNITY TO CURE. The Licensees shall be deemed to be in default and the Licensor may, at its option, terminate this Agreement and all rights granted hereunder, without affording the Licensees any opportunity to cure the default, effective immediately upon receipt of notice from the Licensor to the Licensees, upon the occurrence of any of The following events: 1. If the Licensees become insolvent or makes a general assignment for the benefit of creditors, or if a petition in bankruptcy is filed by the Licensees or such a petition is filed against and consented to by the Licensees, or if the Licensees are adjudicated bankrupt, or if a bill in equity or other proceeding for the appointment of a receiver of the Licensees or other custodian for the Licensees' business or assets is filed and consented to by the Licensees, or if a receiver or other custodian (permanent or temporary) of the Licensees' business or assets is appointed by any court of competent jurisdiction, or if proceedings for a conference with a committee of creditors under any state, federal or foreign law should be instituted by or against the Licensees, or if a final judgment remains unsatisfied or of record for thirty (30) days or longer (unless supersedeas bond is filed), or if execution is levied against the Licensees' operating location or property, or suit to foreclose any lien or mortgage against the premises or equipment is instituted against the Licensees and not dismissed within thirty (30) days, or if any substantial real or personal property of the Licensed Business shall be sold after levy thereupon by any sheriff, shall or constable; 2. If the Licensees cease to do business at the Licensed Business for two (2) or more consecutive days, excluding holidays, or lose the right to possession of the premises upon which the Licensed Business is located or otherwise forfeit the right to do or transact business in the jurisdiction where the Licensed Business is located; 3. If the Licensees have made any material misrepresentation or omission in this Agreement or any other agreement to which the Licensees and the Licensor are parties; 4. If the Licensees (or the principal shareholder or general partner of a corporation or partnership Licensees) engage in the use and/or abuse of drugs; 5. If the Licensees, by act or omission, permit a continued violation in connection with the operation of the Licensed Business of any law, ordinance, rule or regulation of a governmental agency, in the absence of a good faith dispute over its application or legality and without promptly resorting to an appropriate administrative or judicial forum for relief therefrom; Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 16 17 6. If the Licensees fail to obtain and maintain all required licenses under state and local law; 7. If the Licensees misuse or make any unauthorized use of the Proprietary Marks, engage in any business or market any service or products under a name or mark which is confusingly similar to the Proprietary Marks, or otherwise materially impair the goodwill associated therewith or the Licensor's rights therein; 8. If a threat or danger to public safety results from the construction, maintenance or operation of the Licensed Business; 9. If the Licensees are convicted of a crime of moral turpitude or similar felony or are convicted of any other crime or offense that the Licensor reasonably believes is likely to have an adverse effect on the System, the Proprietary Marks, the goodwill associated therewith or the Licensor's interest therein; 10. If a judgment or a consent decree against the Licensees, or any of their officers, directors, shareholders or partners is entered in any case or proceeding involving allegations of fraud, racketeering, unfair, improper or deceptive trade practices or similar claim which is likely to have an adverse effect on the System, or the Proprietary Marks, the goodwill associated therewith or the Licensor's interest therein; 11. If the Licensees purport to transfer any rights or obligations under this Agreement to any third party without the Licensor's prior written consent, contrary to any of the terms of Section XI of this Agreement; 12. If the Licensees fail to comply with any of the covenants contained in Section XIV hereof; 13. If, contrary to Sections VI and VII hereof, the Licensees disclose or divulge the contents of the Manuals or any other trade secrets or Confidential Information provided to the Licensees by the Licensor; 14. If the Licensees knowingly maintain false books or records or submit any false statements, applications or reports to the Licensor or any assignee of the Licensor; 15. If the Licensees willfully and repeatedly engage in a course of conduct which constitutes a misrepresentation or a deceptive or unlawful act or practice in connection with their sale of the services and products offered at the Licensed Business; 16. If the Licensees fail to strictly comply with the product and quality control standards and specifications, fail to utilize suppliers approved by the Licensor or otherwise fail to meet any other significant specifications or guidelines set forth in the Manuals; 17. If any other license or franchise agreement issued to the Licensees by the Licensor is terminated for any reason; 18. If the Licensees receive three (3) or more notices of default under Section XII.B. hereof during the term of this Agreement whether or not such defaults are cured after notice; Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 17 18 19. If the Licensees willfully engage in any illegal, immoral or unethical acts or any act in violation of the mission and values of the Licensor; 20. If the Licensees default under their sublease agreement for the premises on which the Licensed Business is located or under any other agreement to which the Licensees and the Licensor, or any parent or subsidiary corporation or any other affiliated entity of the Licensor, are parties and fail to cure said default within the grace period (if any) provided for in such agreement; or B. DEFAULT WITH THIRTY (30) DAY OPPORTUNITY TO CURE. Except as provided in Section XII.A. of this Agreement, the Licensees shall have thirty (30) days after receiving from the Licensor a written notice of default within which to remedy any default described in this Section XII.B. and provide evidence thereof to the Licensor. If any such default is not cured within that time, or such longer period as applicable law may require, this Agreement, at Licensor's option, shall terminate without further notice to the Licensees effective immediately upon the expiration of the thirty (30) day period or such longer period as applicable law may require. The Licensees shall be in default hereunder for any failure to comply substantially with any of the requirements imposed by this Agreement, as it may from time to time reasonably be supplemented by updates to the Manuals, or for any failure to carry out the terms of this Agreement in good faith. Such defaults shall include, without limitation, the occurrence of any of the following events: 1. If the Licensees fail to maintain any of the standards or procedures prescribed by the Licensor in this Agreement, the Manuals, any other license or franchise agreement between the Licensor and the Licensees, or any other written agreements between the parties or otherwise; 2. If the Licensees fail to comply with their duties set forth in Section IV of this Agreement or fail to perform any obligation owing to the Licensor or to observe any covenant or agreement made by the Licensees, whether such obligation, covenant or agreement is set forth in this Agreement or in any other agreement with the Licensor including any other license or franchise agreement by and between the Licensor and the Licensees or any entity related to the Licensor; 3. If the Licensees fail to adequately promote the Licensed Business as provided in the Manuals or otherwise in writing; 4. If the Licensees fail to maintain and submit to the Licensor all reports required pursuant to Section VIII hereof; 5. If the Licensees fail to maintain the Licensor's quality control standards with respect to its use of signage and other uses of the Proprietary Marks; 6. If the Licensees, its Operating Manager or employees fail to attend and successfully complete any mandatory training program unless attendance is excused or waived, in writing, by the Licensor; Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 18 19 7. If the Licensees fail to obtain the prior written approval of the Licensor of any and all advertising, marketing or promotional plans and materials in whatever form used by the Licensees in connection with its promotion of the Licensed Business or otherwise fail to comply with Licensor's policies and procedures with respect to advertising, marketing or promotion; or 8. If the Licensees fail, refuse or neglect to pay promptly any monies owing to the Licensor or its subsidiaries or affiliates or suppliers when due. C. NO RIGHT OR REMEDY. No right or remedy herein conferred upon or reserved to the Licensor is exclusive of any other right or remedy provided or permitted by law or equity. D. DEFAULT AND TERMINATION. The events of default and grounds for termination described in this Section XII shall be in addition to any other grounds for termination contained elsewhere in this Agreement or otherwise. E. RIGHT TO PURCHASE. In the event of termination of this Agreement for any reason, including a default under this Section XII, the Licensor shall have the right and option, but not the obligation, to purchase the Licensees' interest in the tangible assets of the Licensed Business as set forth in Paragraph XIII.K below. In the event that the Licensor elects to purchase the Licensees' interest in said assets, the Licensees shall also execute an assignment of the lease for the premises of the Licensed Business. XIII. OBLIGATIONS UPON TERMINATION Upon termination or expiration of this Agreement, all rights granted hereunder to the Licensees shall forthwith terminate, and Licensees shall observe and perform the following: A. CESSATION OF OPERATION. The Licensees shall immediately cease to operate the Licensed Business and shall not thereafter, directly or indirectly, represent to the public or hold themselves out as a Licensees of the Licensor. B. CESSATION OF USE OF PROPRIETARY MARKS. The Licensees shall immediately and permanently cease to use, in any manner whatsoever, any equipment, format, confidential methods, customer data base, programs, literature, procedures and techniques associated with the System, the name MARCO'S MEXICAN RESTAURANTS and any Proprietary Marks and distinctive trade dress, forms, slogans, uniforms, signs, symbols or devices associated with the System. In particular, the Licensees shall cease to use, without limitation, all signs, fixtures, furniture, equipment, advertising materials or promotional displays, uniforms, stationery, forms and any other articles which display the Proprietary Marks associated with the System. C. CANCELLATION OF NAME. The Licensees shall take such action as may be necessary to cancel any assumed name or equivalent registration which contains the Proprietary Marks or any other trademark, trade name or service mark of the Licensor, and the Licensees shall furnish the Licensor with evidence satisfactory to the Licensor of compliance with this obligation within ten (10) days after termination or expiration of this Agreement. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 19 20 D. OPTIONAL ASSIGNMENT OF LEASE. The Licensees shall, at the Licensor's option pursuant to Section XII.E. above, assign to the Licensor any interest which the Licensees has in any lease or sublease for the premises of the Licensed Business. In the event the Licensor elects to exercise its option to acquire such lease or sublease, the Licensor shall pay for any furniture, equipment, supplies and signs acquired by the Licensor as a result of such assignment, at the Licensees' cost or fair market value (whichever is less), less any sums of money owed by the Licensees to the Licensor and less any sums of money necessary to upgrade and renovate the premises to meet the Licensor's then current standards for its Licensed Business and less any sums necessary to acquire clear title to the lease or sublease interest. In the event that the Licensor and the Licensees are unable to agree on the fair market value of said items, an independent appraiser shall be appointed by the Licensor to determine the fair market value of said items. The determination of said appraiser shall be final and binding upon the parties. The costs and expenses associated with the appointment of an independent appraiser shall be paid by the Licensees. In the event that the Licensor does not elect to exercise its option to acquire such lease or sublease, the Licensees shall make such modifications or alterations to the premises of the Licensed Business immediately upon termination or expiration of this Agreement as may be necessary to distinguish the appearance of said premises from that of other Licensed Businesses under the System, and shall make such specific additional changes thereto as the Licensor may reasonably request for that purpose. In the event the Licensees fail or refuse to comply with the requirements of this Section XIII, the Licensor shall have the right to enter upon the premises of the Licensed Business without being guilty of trespass or any other tort for the purpose of making or causing to be made such changes as may be required, at the expense of the Licensees, which expense the Licensees agree to pay upon demand. E. LICENSOR'S RIGHT TO CONTINUE OPERATIONS. In the event this Agreement is terminated, the Licensor may, at its option, immediately enter the premises of the Licensed Business and continue to provide services to customers of the Licensed Business and apply receipts therefrom to debts owed to the Licensor by the Licensees. The Licensor shall have no other obligations to the Licensees in connection with the Licensor's operation of the Licensed Business following said termination. F. NON-USAGE OF MARKS. The Licensees agree, in the event they continue to operate or subsequently begin to operate any other business, not to use any reproduction, counterfeit, copy or colorable imitation of the Proprietary Marks or trade dress, either in connection with such other business or the promotion thereof, which is likely to cause confusion, mistake or deception, or which is likely to dilute the Licensor's exclusive rights in and to the Proprietary Marks or trade dress, and agree not to utilize any designation of origin or description or representation which falsely suggests or represents an association or connection with the Licensor so as to constitute unfair competition. G. PROMPT PAYMENT UPON DEFAULT. The Licensees shall promptly pay all sums owing to the Licensor and its subsidiaries, affiliates and suppliers. In the event of termination for any default of the Licensees, such sums shall include all damages, costs and expenses, including reasonable attorneys' fees, incurred by the Licensor as a result of the default, which obligation shall give rise to and remain, until paid in full, a lien in favor of the Licensor against any and all of the personal property, machinery, furniture, fixtures, equipment and inventory owned by the Licensees and on the premises of the Licensed Business at the time of default. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 20 21 H. PAYMENT OF COSTS. The Licensees shall pay to the Licensor all damages, costs and expenses, including reasonable attorneys' fees, incurred by the Licensor subsequent to the termination or expiration of this Agreement in obtaining injunctive or other relief for the enforcement of any provision of this Section XIII or any other obligation under this Agreement. I. RETURN OF MATERIALS. The Licensees shall immediately turn over to the Licensor all copies of all materials in the Licensees' possession including the Manuals, all records, files, instructions, correspondence, customer database, brochures, agreements, disclosure statements and any and all other materials relating to the operation of the Licensed Business in tile Licensees' possession, and all copies thereof (all of which are acknowledged to be the Licensor's property), and shall retain no copy or record of any of the foregoing, excepting only the Licensees' copy of this Agreement, any correspondence between the parties and any other documents which the Licensees reasonably needs for compliance with any provision of law. In addition to the foregoing, the Licensees shall deliver to the Licensor a complete list, including names, addresses, and phone numbers, of all persons employed by the Licensees during the three (3) years immediately preceding termination. All costs of delivering all materials required by this Section XIII.I. shall be borne by the Licensees. The Licensees shall retain all business records, including employment files, for at least six (6) years (or such longer period as may be required by law) after the date of the termination of this Agreement and must keep the Licensor advised of the location of these records. The Licensor shall be permitted to inspect such records at any time during normal business hours. J. ASSIGNMENT OF TELEPHONE LISTINGS. The Licensees shall promptly notify the appropriate telephone company and all telephone directory listing agencies of the termination or expiration of its right to use any telephone number and any regular, classified or other telephone directory listings associated with any Proprietary Marks and authorize the transfer of same to or at the direction of the Licensor. The Licensees agree to execute updated letters of direction to any telephone companies and telephone directory listing agencies directing termination and/or transfer of the Licensees' right to use any telephone number associated with the Proprietary Marks, which the Licensor may hold until termination or expiration hereof. The Licensees acknowledge that as between the Licensor and the Licensees, the Licensor has the sole right to and interest in all telephone numbers and directory listings associated with any Proprietary Marks. The Licensees authorize the Licensor, and hereby appoint the Licensor and any officer of the Licensor as its attorney in fact, to direct the appropriate telephone company and all listing agencies to transfer all such listings to the Licensor upon termination of this Agreement. K. OPTION TO PURCHASE. The Licensor shall have the right, but not the obligation, to purchase any or all of the tangible assets of the Licensed Business, including the signs, advertising materials, promotional displays, supplies, forms, inventory, software, furniture or other items bearing the Proprietary Marks, at the Licensees' cost or fair market value, whichever is less. If the parties cannot agree on fair market value within a reasonable time, an independent appraiser shall be designated by the Licensor, and the appraiser's determination shall be final and binding. The Licensor's election to purchase provided for herein must be exercised by written notice to the Licensees within thirty (30) days after termination or expiration of this Agreement. If the Licensor elects to exercise any option to purchase provided herein it shall have the right to set off all amounts due from the Licensees under this Agreement and the cost of the appraisal, if any, against any payment therefor. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 21 22 L. COVENANT OF FURTHER ASSURANCES. The Licensees shall execute any legal document that may be necessary to effectuate the termination hereunder and shall furnish to the Licensor, within thirty (30) days after the effective date of termination, written evidence satisfactory to the Licensor of the Licensees' compliance with the foregoing obligations. M. COMPLIANCE WITH COVENANTS. The Licensees shall comply with all applicable covenants contained in Section XIV of this Agreement. N. NO FURTHER INTEREST. Other than as specifically set forth above, the Licensees shall have no interest in the Licensed Business upon termination or expiration of this Agreement. XIV. COVENANTS A. BEST EFFORTS. The Licensees covenant that during the term of this Agreement, and subject to the post-termination provisions contained herein, and except as otherwise approved in writing by the Licensor, the Licensees will devote their full time, energy and best efforts to the efficient and effective management and operation of the Licensed Business. B. NON-SOLICITATION AND NON-COMPETITION. The Licensees have heretofore specifically acknowledged that pursuant to this Agreement, the Licensees shall receive valuable specialized training and confidential and other information regarding the business, promotional, sales, marketing and operational methods and techniques of the Licensor and the System. The Licensees covenant that during the term of this Agreement and subject to the post-termination provisions contained herein, and except as otherwise approved in writing by the Licensor, the Licensees shall not, either directly or indirectly, for themselves or through, on behalf of or in conjunction with any person, persons, partners or corporation: 1. Divert or attempt to divert any business or customer of the Licensed Business to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with the Proprietary Marks and the System; 2. Employ or seek to employ any person who is at that time employed by the Licensor or by any other Licensees, Franchisee or multi-unit operator of the Licensor, or otherwise directly or indirectly induce such person to leave his or her employment; 3. Own, maintain, engage in, be employed by, advise, assist, invest in, franchise, make loans to or have any interest in any business which is the same as or substantially similar to the Licensed Business; or 4. Sell, or offer for sale, products or services offered by, or similar to those offered by, the Licensed Business in any venue other than through, and on the premises of, the Licensed Business. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 22 23 C. RESTRICTIVE COVENANTS. The Licensees covenant that, except as otherwise approved in writing by the Licensor, for a continuous uninterrupted period commencing upon the expiration or termination of this Agreement, regardless of the cause for termination, and continuing for two (2) years thereafter, the Licensees will not either directly or indirectly, for themselves or through, on behalf of or in conjunction with any person, persons, partnership or corporation, own, maintain, engage in, be employed by, advise, assist, invest in, franchise, make loans to or have any interest in any business which is the same as or substantially similar to the Licensed Business and which is located within a radius of ten (10) miles of the Site or the location of any Licensor-owned or operated or other licensees-operated Licensed Business or franchisee-operated Franchise Business for the System which is in existence on the date of expiration or termination of this Agreement. If the period of time or the area specified above, should be adjudged unreasonable in any proceeding, then the period of time will be reduced by such number of months or the area will be reduced by the elimination of such portion thereof, or both, so that such restrictions may be enforced in such area and for such time as is adjudged to be reasonable. D. NO UNDUE HARDSHIP. The Licensees acknowledge and agree that the covenants not to compete set forth in this Agreement are fair and reasonable and will not impose any undue hardship on the Licensees, or the Licensees' shareholders or partners, if the Licensees are a corporation or partnership, since the Licensees, its shareholders or partners have other considerable skills, experience and education which afford the Licensees, its shareholders or partners the opportunity to derive income from other endeavors E. INDEPENDENCE OF COVENANTS. The parties agree that each of the covenants in this Agreement shall be construed as independent of any other covenant or provision of this Agreement. If any or all portions of the covenants in this Section XIV is held unreasonable or unenforceable by a court or agency having valid jurisdiction in an unappealed final decision to which the Licensor is a party, the Licensees expressly agree to be bound by any lesser covenant subsumed within the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Agreement. F. MISSION. The Licensees agree to support the Licensor's mission and to conduct the Licensed Business in accordance with the Licensor's operating policies and stated principles. G. MODIFICATION OF COVENANTS. The Licensees understand and acknowledge that the Licensor shall have the right, in its sole discretion, to reduce the scope of any covenant set forth in this Section XIV or any portion thereof, without the Licensees' consent, effective immediately upon receipt by the Licensees of written notice thereof, and the Licensees agree that they shall forthwith comply with any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Section XXII hereof. H. ENFORCEMENT OF COVENANTS. The Licensees expressly agree that the existence of any claims they may have against the Licensor, whether or not arising from this Agreement, shall not constitute a defense to the enforcement by the Licensor of the covenants in this Agreement. The Licensees agree to pay all costs and expenses (including reasonable attorneys' fees) incurred by the Licensor in connection with the enforcement of the covenants set forth in this Agreement. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 23 24 I. INJUNCTIVE RELIEF. The Licensees acknowledge that their violation of the covenants not to compete contained in this Agreement would result in immediate and irreparable injury to the Licensor for which no adequate remedy at law will be available. Accordingly, the Licensees hereby consent to the entry of an injunction prohibiting any conduct by the Licensees in violation of the terms of the covenants not to compete set forth in this Agreement. The Licensees expressly agree that it may be presumed conclusively that any violation of the terms of said covenants not to compete was accomplished by and through the Licensees' unlawful utilization of the Licensor's confidential information, know-how, methods and procedures. J. WRITTEN AGREEMENTS. At the Licensor's request, the Licensees shall require and obtain execution of covenants similar to those set forth in this Section XIV (including covenants applicable upon the termination of a person's relationship with Licensees) from the Licensees' officers, directors, shareholders, and employees. All covenants required by this Section XIV.K. shall be in forms satisfactory to Licensor, including, without limitation, specific identification of Licensor as a third party beneficiary of such covenants with the independent right to enforce them. Failure by Licensees to obtain execution of a covenant required by this Section XIV.K. shall constitute a default under Section XII.B hereof. XV. CHANGES AND MODIFICATIONS The Licensor may modify this Agreement only upon the execution of a written agreement by the Licensor and the Licensees. The Licensor reserves and shall have the sole right to make changes in the Manuals, the System and the Proprietary Marks at any time and without prior notice to Licensees. Licensees shall promptly alter any signs, products, business materials or related items, at their sole cost and expense, upon written receipt of written notice of such change or modification in order to conform with the Licensor's revised specifications. In the event that any improvement or addition to the Manuals, the System or the Proprietary Marks is developed by the Licensees, then the Licensee agrees to grant to the Licensor an irrevocable, world-wide, exclusive, royalty-free license, with the right to sublicense such improvement or addition. The Licensees understand and agree that due to changes in competitive circumstances, presently unforeseen changes in the needs of customers, and/or presently unforeseen technological innovations, the Licensor's System MUST NOT remain static, in order that it best serve the interests of Licensor, Licensees and the System. Accordingly, Licensees expressly understand and agree that Licensor may from time to time change the components of the System, including altering the programs, services, methods, standards, forms, policies and procedures of that System; adding to, deleting from or modifying those programs, products and services which the Licensed Business is authorized to offer; and changing, improving or modifying the Proprietary Marks. Subject to the other provisions of this Agreement, Licensees expressly agree to abide by any such modifications, changes, additions, deletions and alterations. XVI. TAXES AND INDEBTEDNESS A. PAYMENT. The Licensees shall promptly pay, when due, all taxes levied or assessed by any federal, state or local tax authority and any and all other indebtedness incurred by the Licensees in the operation of the Licensed Business. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 24 25 B. DISPUTE. In the event of any bona fide dispute as to liability for taxes assessed or other indebtedness, the Licensees may contest the validity or the amount of the tax or indebtedness in accordance with procedures of the taxing authority or applicable law; provided, however, in no event shall the Licensees permit a tax sale or seizure by levy of execution or similar writ or warrant, or attachment by a creditor, to occur against the premises of the Licensed Business or any improvements thereon. C. COMPLIANCE WITH FEDERAL, STATE AND LOCAL LAWS. The Licensees shall comply with all federal, state, and local laws, rules and regulations, and shall timely obtain any and all permits, certificates, licenses and bonds necessary for the full and proper operation and management of the Licensed Business, including, without limitation, a license to do business and provide services, fictitious name registration and sales tax permits. Copies of all subsequent inspection reports, warnings, certificates and ratings, issued by any governmental entity during the term of this Agreement in connection with the conduct of the Licensed Business which indicate Licensees' failure to meet or maintain the highest governmental standards or less than full compliance by Licensees with any applicable law, rule or regulation, shall be forwarded to Licensor by Licensees within three (3) days of Licensees' receipt thereof. D. DUTY TO NOTIFY. The Licensees shall notify the Licensor in writing within three (3) days of the commencement of any action, suit or proceeding, and of the issuance of any order, writ, injunction, award or decree of any court, agency or other governmental instrumentality, which may adversely affect the operation or financial condition of the Licensed Business. Additionally, any and all consumer related complaints shall be answered by the Licensees within fifteen (IS) days after receipt thereof or such shorter period of time as may be provided in said complaint. A copy of said answer shall be forwarded to the Licensor within three (3) days of the date that said answer is forwarded to the complainant. XVII. INDEPENDENT CONTRACTOR AND INDEMNIFICATION A. INDEPENDENT CONTRACTOR. 1. It is understood and agreed by the parties hereto that this Agreement does not create a fiduciary relationship between them, that the Licensees shall be independent contractors, and that nothing in this Agreement is intended to make either party an agent, legal representative, subsidiary, joint venturer, partner, employee or servant of the other for any purpose whatsoever. 2. During the term of this Agreement and any extensions hereof, the Licensees shall hold themselves out to the public as independent contractors operating the Licensed Business pursuant to a license from the Licensor and as authorized users of the System and the Proprietary marks which are owned by the Licensor. The Licensees agree to take such affirmative action as may be necessary to do so, including exhibiting to customers a sign provided by Licensor in a conspicuous place on the premises of the Licensed Business. 3. The Licensor shall not have the power to hire or fire the Licensees' employees, and except as herein expressly provided, the Licensor may not control or have access to the Licensees' funds or the expenditures thereof, or in any other way exercise dominion or control over the Licensed Business. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 25 26 B. NO LIABILITY. IT IS UNDERSTOOD AND AGREED THAT NOTHING IN THIS AGREEMENT AUTHORIZES THE LICENSEES TO MAKE ANY CONTRACT, AGREEMENT, WARRANTY OR REPRESENTATION ON THE LICENSOR'S BEHALF, OR TO INCUR ANY DEBT OR OTHER OBLIGATION IN THE LICENSOR'S NAME, AND THAT THE LICENSOR SHALL IN NO EVENT ASSUME LIABILITY FOR OR BE DEEMED LIABLE HEREUNDER AS A RESULT OF ANY SUCH ACTION OR BY REASON OF ANY ACT OR OMISSION OF THE LICENSEES IN THE LICENSEES' CONDUCT OF THE LICENSED BUSINESS OR ANY CLAIM OR JUDGMENT ARISING THEREFROM AGAINST THE LICENSOR. THE LICENSEES AGREE AT ALL TIMES TO DEFEND AT THEIR OWN COST, AND TO INDEMNIFY AND HOLD HARMLESS TO THE FULLEST EXTENT PERMITTED BY LAW, THE LICENSOR, ITS CORPORATE PARENT, THE CORPORATE SUBSIDIARIES, AFFILIATES, SUCCESSORS, ASSIGNS AND DESIGNEES OF EITHER ENTITY, AND THE RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, SHAREHOLDERS, DESIGNEES, AND REPRESENTATIVES OF EACH (LICENSOR AND ALL OTHER HEREINAFTER REFERRED TO COLLECTIVELY AS "INDEMNITEES") FROM ALL LOSSES AND EXPENSES INCURRED IN CONNECTION WITH ANY ACTION, SUIT, PROCEEDING, CLAIM, DEMAND, INVESTIGATION, OR FORMAL OR INFORMAL INQUIRY (REGARDLESS OF WHETHER SAME IS REDUCED TO JUDGMENT) OR ANY SETTLEMENT THEREOF WHICH ARISES OUT OF OR IS BASED UPON ANY OF THE FOLLOWING: THE LICENSEES' ALLEGED INFRINGEMENT OR ANY OTHER VIOLATION OR ANY OTHER ALLEGED VIOLATION OF ANY PATENT, TRADEMARK OR COPYRIGHT OR OTHER PROPRIETARY RIGHT OWNED OR CONTROLLED BY THIRD PARTIES; THE LICENSEES' ALLEGED VIOLATION OR BREACH OF ANY CONTRACT, FEDERAL, STATE OR LOCAL LAW, REGULATION, RULING, STANDARD OR DIRECTIVE OF ANY INDUSTRY STANDARD; LIBEL, SLANDER OR ANY OTHER FORM OF DEFAMATION BY THE LICENSEES; THE LICENSEES' ALLEGED VIOLATION OR BREACH OF ANY WARRANTY, REPRESENTATION, AGREEMENT OR OBLIGATION IN THIS AGREEMENT; ANY ACTS, ERRORS OR OMISSIONS OF THE LICENSEES OR ANY OF THEIR AGENTS, SERVANTS, EMPLOYEES, CONTRACTORS, OWNERS, PARTNERS, PROPRIETORS, AFFILIATES, OR REPRESENTATIVES; LATENT OR OTHER DEFECTS IN THE LICENSED BUSINESS, WHETHER OR NOT DISCOVERABLE BY THE LICENSOR OR THE LICENSEES; THE INACCURACY, LACK OF AUTHENTICITY OR NONDISCLOSURE OF ANY INFORMATION BY ANY CUSTOMER OF THE LICENSED BUSINESS; ANY SERVICES OR PRODUCTS PROVIDED BY THE LICENSEES AT, FROM OR RELATED TO THE OPERATION AT THE LICENSED BUSINESS; ANY SERVICES OR PRODUCTS PROVIDED BY ANY AFFILIATED OR NONAFFILIATED PARTICIPATING ENTITY; ANY ACTION BY ANY CUSTOMER OF THE LICENSED BUSINESS; AND, ANY DAMAGE TO THE PROPERTY OF THE LICENSEES OR THE LICENSOR, THEIR AGENTS OR EMPLOYEES, OR ANY THIRD PERSON, FIRM OR CORPORATION, WHETHER OR NOT SUCH LOSSES, CLAIMS, COSTS, EXPENSES, DAMAGES, OR LIABILITIES WERE ACTUALLY OR ALLEGEDLY CAUSED WHOLLY OR IN PART THROUGH THE ACTIVE OR PASSIVE NEGLIGENCE OF THE LICENSOR OR ANY OF ITS AGENTS OR EMPLOYEES, OR RESULTED FROM ANY STRICT LIABILITY IMPOSED ON THE LICENSOR OR ANY OF ITS AGENTS OR EMPLOYEES. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 26 27 C. IDENTIFICATION. The Licensees shall conspicuously identify themselves and the Licensed Business and in all dealings with their clients, contractors, suppliers, public officials and others, as an independent Licensees of the Licensor, and shall place such notice of independent ownership on all forms, business cards, stationery, advertising, signs and other materials and in such fashion as the Licensor may, in its sole and exclusive discretion, specify and require from time to time, in its Manuals (as same may be amended from time to time) or otherwise. D. NO FALSE REPRESENTATIONS. Except as otherwise expressly authorized by this Agreement, neither party hereto will make any express or implied agreements, warranties, guarantees or representations or incur any debt in the name of or on behalf of the other party, or represent that the relationship between the Licensor and the Licensees is other than that of Licensor and Licensees. The Licensor does not assume any liability, and will not be deemed liable, for any agreements, representations, or warranties made by the Licensees which are not expressly authorized under this Agreement, nor will the Licensor be obligated for any damages to any person or property which directly or indirectly arise from or relate to the operation of the Licensed Business XVIII. APPROVALS AND WAIVERS A. WRITTEN CONSENT. Whenever this Agreement requires the prior approval or consent of the Licensor, the Licensees shall make a timely written request to Licensor therefor and such approval or consent shall be obtained in writing. B. NO WAIVER. No failure of the Licensor to exercise any power or right reserved to it by this Agreement, or to insist upon strict compliance by the Licensees with any obligation or condition hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of the Licensor's right to demand exact compliance with any of the terms herein. Waiver by the Licensor of any particular default by the Licensees shall not affect or impair the Licensor's rights with respect to any subsequent default of the same, similar or different nature, nor shall any delay, forbearance or omission of the Licensor to exercise any power or right arising out of any breach or default by the Licensees of any of the terms, provisions or covenants hereof affect or impair the Licensor's right to exercise the same, nor shall such constitute a waiver by the Licensor of any right hereunder or the right to declare any subsequent breach or default and to terminate this License Agreement prior to the expiration of its term. Subsequent acceptance by the Licensor of any payments due to it hereunder shall not be deemed to be a waiver by the Licensor of any preceding breach by the Licensees of any terms, covenants or conditions of this Agreement. C. WAIVER TO JURY TRIAL. The Licensees hereby waive any right to a jury trial with respect to this Agreement and/or any matters arising hereunder. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 27 28 XIX. NOTICES Any and all notices required or permitted under this Agreement shall be in writing and shall be personally delivered or mailed by certified mail, return receipt requested, or dispatched by overnight delivery envelope, to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other party: Notices to Licensor: Marco's Mexican Restaurants, Inc. Attention: Legal Department 11111 Wilcrest Green, Suite 350 Houston, Texas 77042 Notices to Licensees: Mohammed S. and Rubinas S. Akhtar 335 E. San Augustine, #94 Deer Park, Texas 77536 Any notice sent by certified mail shall be deemed to have been given at the date and time of mailing. XX. RELEASE OF PRIOR CLAIMS By executing this Agreement, the Licensees, individually and on behalf of the Licensees' heirs, legal representatives, successors and assigns, and each assignee of this Agreement by accepting assignment of the same, hereby forever releases and discharges the Licensor and its officers, directors, employees, agents and servants, including the Licensor's parent, subsidiary and affiliated corporations, their respective officers, directors, employees, agents and servants, from any and all claims relating to or arising under any license agreement or any other agreement between the parties executed prior to the date of this Agreement including any and all claims, whether presently known or unknown, suspected or unsuspected, arising under the franchise, securities or antitrust laws of the United States or of any state or territory thereof XXI. DISCLOSURE STATEMENT AND DISCLAIMER ACKNOWLEDGEMENT. The Licensees acknowledge and accept the following: THE SUCCESS OF THE LICENSEES IN OPERATING A LICENSED BUSINESS IS SPECULATIVE AND WILL DEPEND ON MANY FACTORS INCLUDING, TO A LARGE EXTENT, THE LICENSEES' INDEPENDENT BUSINESS ABILITY. THIS OFFERING IS NOT A SECURITY AS THAT TERM IS DEFINED UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS. THE OBLIGATION TO TRAIN, MANAGE, PAY, RECRUIT AND SUPERVISE EMPLOYEES OF THE LICENSED BUSINESS RESTS SOLELY WITH THE LICENSEES. THE LICENSEES HAVE NOT RELIED ON ANY WARRANTY OR REPRESENTATION, EXPRESSED OR IMPLIED, AS TO THE POTENTIAL SUCCESS OR PROJECTED INCOME OF THE BUSINESS VENTURE CONTEMPLATED HEREBY. NO REPRESENTATIONS OR PROMISES HAVE BEEN MADE BY THE LICENSOR TO INDUCE THE LICENSEES TO ENTER INTO THIS AGREEMENT EXCEPT AS Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 28 29 SPECIFICALLY INCLUDED HEREIN. THE LICENSOR HAS NOT MADE ANY REPRESENTATION, WARRANTY OR GUARANTY, EXPRESS OR IMPLIED, AS TO THE POTENTIAL REVENUES, PROFITS OR SERVICES OF THE BUSINESS VENTURE TO THE LICENSEES AND CANNOT, EXCEPT UNDER THE TERMS OF THIS AGREEMENT, EXERCISE CONTROL OVER THE LICENSEES' BUSINESS. THE LICENSEES ACKNOWLEDGE AND AGREE THAT THEY HAVE NO KNOWLEDGE OF ANY REPRESENTATION MADE BY THE LICENSOR OR ITS REPRESENTATIVES OF ANY INFORMATION THAT IS CONTRARY TO THE TERMS CONTAINED HEREIN. [PLEASE INITIAL TO ACKNOWLEDGE THAT YOU HAVE READ AND UNDERSTAND THIS PARAGRAPH XXI.] XXII. ENTIRE AGREEMENT This Agreement, the documents referred to herein and the attachments hereto, if any, constitute the entire, full and complete Agreement between the parties hereto concerning the subject matter hereof, and supersede all prior agreements with no other representations having induced the Licensees to execute this Agreement. No amendment, change or variance from this Agreement shall be binding on the parties hereto unless mutually agreed to by the parties and executed by themselves or their authorized officers or agents in writing. XXIII. SEVERABILITY AND CONSTRUCTION A. SEVERABILITY. Except as expressly provided to the contrary herein, each section, part, term and/or provision of this Agreement shall be considered severable, and if, for any reason, any section, part, term and/or provision herein is determined to be invalid and contrary to, or in conflict with, any existing or future law or regulation by a court or agency having valid jurisdiction, such shall not impair the operation of, or have any other effect upon, such other portions, sections, parts, terms and/or provisions of this Agreement as may remain otherwise intelligible, and the latter shall continue to be given full force and effect and bind the parties hereto, and said invalid sections, parts, terms and/or provisions shall be deemed not to be a part of this Agreement; provided, however, that if the Licensor determines that such finding of invalidity or illegality adversely affects the basic consideration of this Agreement, the Licensor, at its option, may terminate this Agreement. B. COVENANTS. The Licensees expressly agree to be bound by any promise or covenant imposing the maximum duty permitted by law which is subsumed within the terms of any provision hereof, as though it were separately articulated in and made a part of this Agreement, that may result from striking from any of the provisions hereof any portion or portions which a court may hold to be unreasonable and unenforceable in a final decision to which the Licensor is a party, or from reducing the scope of any promise or covenant to the extent required to comply with such a court order. C. CAUTIONS. All captions in this Agreement are intended solely for the convenience of the parties, and none of the captions shall be deemed to affect the meaning or construction of any provision hereof. Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 29 30 D. REFERENCES. All references herein to the masculine, neuter or singular shall be construed to include the masculine, feminine, neuter or plural, where applicable, and all acknowledgements, promises, covenants, agreements and obligations herein made or undertaken by the Licensees shall be deemed jointly and severally undertaken by all of the parties executing this Agreement in his individual capacity on behalf of the Licensees. This Agreement may be executed in one or more originals, each of which shall be deemed an original. E. DEFINITION OF LICENSEES. As used in this Agreement, the term "Licensees" shall include all persons who succeed to the interest of the original Licensees by transfer or operation of law and shall be deemed to include not only the individuals or entity defined as the "Licensees" in the introductory paragraph of this Agreement. F. FORCE MAJEURE. If, as a result of hurricane, tornado, typhoon, flooding, lightning, blizzard and other unusually severe weather, earthquake, avalanche, volcanic eruption, fire, riot. insurrection, war, explosion, unavoidable calamity or other act of God (a "Force Majeure"), compliance by any party with the terms of this Agreement is rendered impossible or would otherwise create an undue hardship upon any party, all parties shall be excused from their respective obligations hereunder for the duration of the Force Majeure and for a reasonable recovery period thereafter, but otherwise this Agreement shall continue in full force and effect, XXIV. APPLICABLE LAW A. GOVERNING LAW. This Agreement takes effect upon its acceptance and execution by the Licensor. This Agreement shall be interpreted and construed under the laws of the State of Texas except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Section 105 1 et seq.). B. JURISDICTION AND VENUE. Except as otherwise expressly provided by applicable state law or regulation, the parties agree that any action brought by either party against the other shall be brought in Harris County, Texas and the parties do hereby waive all questions of personal jurisdiction or venue for the purpose of carrying out this provision. C. REMEDY. No right or remedy conferred upon or reserved by the Licensor or the Licensees by this Agreement is intended and it shall not be deemed to be exclusive of any other right or remedy provided or permitted herein, by law or at equity, but each right or remedy shall be cumulative of every other right or remedy. D. INJUNCTIVE RELIEF. Nothing herein contained shall bar the Licensor's right to obtain injunctive relief against threatened conduct that will cause it loss or damage under the usual equity rules, including the applicable rules for obtaining restraining orders and preliminary injunctions Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 30 31 XXV. MEDIATION Except as specifically otherwise provided in this Agreement, the parties agree that any and all disputes between them and any claim by either party that cannot be amicably settled shall first be submitted to mediation. The parties shall select a mutually acceptable independent mediator who is experienced in license and restaurant business matters to preside over the mediation. Except as otherwise expressly provided by applicable state law or regulation, the mediator shall hear the dispute in Houston, Texas or at such other location as may be designated by the Licensor. Each party shall bear all of its own fees, costs and attorneys' fees. The decision of the mediator shall be non-binding and any unsatisfied party may pursue litigation after mediation. The Licensees know, understand and agree that it is the intent of the parties that any mediation between the Licensor and the Licensees shall be of the Licensees' individual claims and that the claims subject to mediation shall not be mediated on a classwide basis. Notwithstanding any provision contained in this Section XXV, the Licensor may, at its sole option, institute an action or actions for temporary, preliminary, or permanent injunctive relief or seeking any other equitable relief against the Licensees in addition to any other rights and remedies provided herein. In no event shall the Licensees be entitled to make, the Licensees shall not make, and the Licensees hereby waive, any claim for money damages by way of set-off, counterclaim, defense or otherwise based upon any claim or assertion by the Licensees that the Licensor has unreasonably withheld or unreasonably delayed any consent or approval to a proposed act by the Licensees under any of the terms of this License Agreement. The Licensees' sole remedy for any such claim shall be an action or proceeding to enforce any such provisions, for specific performance or declaratory judgment. . XXVI. ACKNOWLEDGMENTS The Licensees acknowledge that they have conducted an independent investigation of all aspects relating to the Licensed Business and recognizes that the business venture contemplated by this Agreement involves business risks and that its success will be largely dependent upon the skills and ability of the Licensees as independent business persons or organization. The Licensees acknowledge that they have received, read and understand this Agreement, the attachments hereto and agreements relating thereto, and that the Licensor has accorded the Licensees ample time and opportunity to consult with advisors of the Licensees' own choosing about the potential benefits and risks of entering into this Agreement. The Licensees understand and accept the terms, conditions and covenants contained in this Agreement as being reasonably necessary to maintain the Licensor's high standards of quality and service and the uniformity of those standards at all MARCO'S MEXICAN restaurants and thereby to protect and preserve the goodwill of the Proprietary Marks. The Licensor expressly disclaims the making of, and the Licensees acknowledge that they have not received or relied upon, any guaranty, express or implied, as to the revenue, profits or success of the business venture contemplated by this Agreement or the extent to which the Licensor will continue to develop and expand the network of MARCO'S MEXICAN restaurants. The Licensees acknowledge and agree that the Licensor's directors, officers, employees and agents act only in a representative, and not in a personal, capacity in connection with any of their dealings with the Licensees. The Licensees further acknowledge that they have not received or relied on any Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 31 32 representations about the license, the Licensed Business, the Licensor or its licensing program or policies made by the Licensor or its directors, officers, employees or agents that are contrary to the terms herein. [PLEASE INITIAL TO ACKNOWLEDGE THAT YOU HAVE READ AND UNDERSTAND THIS PARAGRAPH XXVI] IN WITNESS WHEREOF, the parties hereto have duly executed, sealed and delivered this Agreement on the day and year first above written, LICENSOR: MARCO'S MEXICAN RESTAURANTS, INC. By: /s/ GHULAM M. BOMBAYWALA ----------------------------------------- GHULAM M. BOMBAYWALA Title: President and Chief Operating Officer LICENSEES: By: /s/ MOHAMMED S. AKHTAR ----------------------------------------- MOHAMMED S. AKHTAR By: /s/ RUBINA S. AKHTAR ----------------------------------------- Rubina S. Akhtar Marco's Mexican Restaurants, Inc. LA [ ] Please initial after reading this page. 32 EX-10.2 13 $300,000 PROMISSORY NOTE - METROBANK 1 EXHIBIT 10.2
- -------------------------------------------------------------------------------------------------- WATERMARC FOOD MANAGEMENT METROBANK, N.A. GALLERIA ACCOUNT #: LDG-43 11111 WILCREST GREEN STE 350 BRANCH Loan Number 7201212570 HOUSTON, TX 77042 5065 WESTHEIMER, STE. #1111 Date April 11, 1997 HOUSTON, TX 77056 Maturity Date April 11, 1998 Loan Amount $300,000.00 BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS Renewal Of _________________ "I" Includes each borrower above, "You" means the lender, its SSN/TIN: 76-2660869 joint and severally. successors and assigns. - ---------------------------------------------------------------------------------------------------
For value received, I promise to pay to you, or your order, at your address listed above the PRINCIPAL sum of THREE HUNDRED THOUSAND AND NO/100 Dollars $300,000.00 / / SINGLE ADVANCE: I will receive all of this principal sum on _____________. No additional advances are contemplated under this note. /X/ MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of principal I can borrow under this note. On _____________ I will receive the amount of $_____________ and future principal advances are contemplated. CONDITIONS: The conditions for future advances are **EACH ADVANCE TO BE REPAID WITHIN 30 DAYS FROM DATE OF ADVANCE OR AT MATURITY, WHICHEVER COMES FIRST. ANY ADVANCE OUTSTANDING BEYOND 30 DAYS WILL REQUIRE ADDED COLLATERAL. /X/ Open End Credit: You and I agree that I may borrow up to the maximum amount of principal more than one time. This feature is subject to all other conditions and expires on APRIL 11, 1998. / / Closed End Credit: You and I agree that I may borrow up to the maximum only one time (and subject to all other conditions). INTEREST: I agree to pay interest on the outstanding principal balance from APRIL 11, 1997 at the rate of 10.500% per year until FIRST CHANGE DATE. /X/ VARIABLE RATE: This rate may then change as stated below. * QUARTERLY /X/ INDEX RATE: This future rate will be 2.000% OVER the following index rate: PRIME RATE AS PUBLISHED IN THE WALL STREET JOURNAL. /X/ CEILING RATE: The interest rate ceiling for this note is the * ceiling rate announced by the Credit Commissioner from time to time. /X/ FREQUENCY AND TIMING: The rate on this note may change as often as DAILY. A change in the interest rate will take effect ON THE SAME DAY. / / LIMITATIONS: During the term of this loan, the applicable annual interest rate will not be more than ________% or less than _______%. The rate may not change more than ________% each _____________. EFFECT OF VARIABLE RATE: A change in the interest rate will have the following effect on the payments: /X/ The amount of each scheduled payment will change. /X/ The amount of the final payment will change. / / _____________________________________________________________________ ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis. POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note owing after maturity, and until paid in full, as stated below: /X/ on the same fixed or variable rate basis in effect before maturity (as indicated above). / / at a rate equal to __________________________________________________ / / LATE CHARGE: If a payment is made more than _________ days after it is due, I agree to pay a late charge of _____________________________________ __________________________________________________________________________ /X/ ADDITIONAL CHARGES: In addition to interest, I agree to pay the following charges which / / are /X/ are not included in the principal amount above: 1.0% ($3,000) LOAN FEE. PAYMENTS: I agree to pay this note as follows: /X/ INTEREST: I agree to pay accrued interest ON DEMAND, BUT IF NO DEMAND IS MADE THEN ON THE 11TH DAY OF EACH MONTH BEGINNING MAY 11, 1997 /X/ PRINCIPAL: I agree to pay the principal ON DEMAND, BUT IF NO DEMAND IS MADE THEN ON APRIL 11, 1998 / / INSTALLMENTS: I agree to pay this note in ____________ payments. The first payment will be in the amount of $__________ and will be due _____________. A payment of $____________ will be due ______________ thereafter. The final payment of the entire unpaid balance of principal and interest will be due __________________________. ADDITIONAL TERMS: ** REPAYMENT TERMS: ACCRUED INTEREST PAYABLE MONTHLY. EACH PRINCIPAL ADVANCE TO BE REPAID WITHIN 30 DAYS FROM THE DATE OF ADVANCE OR AT MATURITY, WHICHEVER COMES FIRST. ** GENERAL PROVISION: THIS NOTE IS SUBJECT TO THE ARBITRATION PROGRAM ENTERED INTO BETWEEN BORROWER AND LENDER. - ----------------------------------------------------------------------------- /X/ SECURITY: This note is separately secured by (describe separate document by type and date): LINE OF CREDIT AGREEMENT; GUARANTY AGREEMENT; ARBITRATION AGREEMENT; ALL DATED APRIL 11, 1997 (If this section is for your internal use. Failure to list a separate security document does not mean the agreement will not secure this note.) - ------------------------------------------------------------------------------ ------------------------------------------------------------------ THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. ------------------------------------------------------------------ Signature for Lender X - --------------------------------------- LALITA DAS GUPTA, BANKING OFFICER - --------------------------------------- PURPOSE: The purpose of this loan is BUSINESS: PROVIDE WORKING CAPITAL. SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE 2). I have received a copy on today's date. WATERMARC FOOD MANAGEMENT CO. BY: /s/ TOM BUCKLEY, CFO - ---------------------------------- TOM BUCKLEY, CFO - ---------------------------------- UNIVERSAL NOTE EX-10.3 14 $300,000 PROMISSORY NOTE - UNITED CENTRAL BANK 1 EXHIBIT 10.3 PROMISSORY NOTE $300,000.00 Houston, Texas April 7, 1997 FOR VALUE RECEIVED, the undersigned, Watermarc Food Management Co., a Texas corporation ("Maker") hereby promises to pay to the order of United Central Bank ("Payee"), at its offices at 8585 South Gessner, Houston, Texas 77074-9826, as provided herein, in lawful money of the United States of America, the principal sum of Three Hundred Thousand and No/100 Dollars $300,000.00, or so much thereof as shall be advanced and outstanding hereunder, together with interest on the outstanding principal balance hereof, at a varying rate per annum which shall from day to day prior to maturity be equal to the lessor of (a) the maximum rate permitted by applicable law as the same exists from day to day during the term hereof ("Maximum Rate"), including, as to Article 5069-1.04. Vernon's Texas Civil Statutes (and as the same may be incorporated by reference in other Texas statutes), but otherwise without limitation, that rate based upon the "indicated rate ceiling", calculated on a 365 day or 366 day year, as applicable or (b) the sum of the Base Rate (hereinafter defined) in effect from day to day, based on a 360 day year and the actual number of days elapsed, unless such calculation would result in a usurious rate, in which case interest shall be calculated on a per annum basis of a year of 365 or 366 days, as the case may be, each such change in the rate of interest, charged hereunder to become effective, without notice to Maker, on the effective date of each change in the Base Rate; provided however, if any time the rate of interest specified in clause (b) preceding shall exceed the Maximum Rate, thereby causing the interest rate hereon to be limited to the Maximum Rate, then any subsequent reduction in the Base Rate will not reduce the rate of interest hereon below the Maximum Rate until the total amount of interest accrued hereon equals the amount of interest which would have accrued hereon if the rate specified in clause (b) preceding had at all times been in effect. The Note is payable as follows: Payments of principal and accrued interest, in the amount of $5,004.02 each, shall be due and payable in consecutive monthly installments beginning one month from the date hereof and continuing regularly monthly thereafter until the date which is eighty four (84) months from the date hereof, at which time the entire balance of this Note, being principal and accrued interest shall be due and payable in full. Interest will be calculated on the unpaid principal to the date of each installment paid. Payments will be credited first to the accrued interest and then to the reduction of principal. Payee has the right to raise or lower the monthly payment so as to maintain the principal balance within the stated maturity. All past due principal and interest shall bear interest at the Maximum Rate. As used herein, the term "Base Rate" means at the time of determination thereof the prime commercial lending rate per annum as quoted by United Central Bank at its principal office in Houston, Texas as in effect from time to time, with the understanding that the Base Rate may be one of several base rates and serves as a basis upon which effective rates are from time to time calculated for loans by making reference thereto and may not be the lowest of the base rates of United Central Bank. In the event that any payment, installment or amount due hereunder continues unpaid for more than ten (10) days following the date such payment is due, including Saturdays, Sundays and holidays, Maker agrees to pay Holder a late charge in the amount of five percent (5%) of such past due payment, installment or amount due; however, nothing in this paragraph shall be construed to allow Holder to charge or collect interest in excess of the Maximum Rate. Such late charge shall be due and payable upon demand, however, only one late charge shall be paid for each late payment, installment or amount due. [ILLEGIBLE] --------------- INITIALED FOR IDENTIFICATION page 1 of 3 pages 2 In the event that more than twenty (20%) percent of the outstanding principal balance of this Note is prepaid, either voluntarily or through an acceleration of the maturity date of the Note due to an event of default hereunder or under the Deed of Trust, or any other document or instrument securing this Note at any time prior to the first anniversary hereof. Maker shall pay to Payee a prepayment penalty equal to three percent (3.00%) of the amount of the prepayment; or should such prepayment be made following the first anniversary hereof, but prior to the second anniversary hereof, Maker shall pay to Payee a prepayment penalty equal to two percent (2.00%) of the amount of the prepayment or should such prepayment be made following the second anniversary hereof, but prior to the third anniversary hereof, Maker shall pay to Payee a prepayment penalty equal to one percent (1.00%) of the amount of the prepayment. Notwithstanding anything to the contrary contained herein, no provisions of this Note shall require the payment or permit the collection of interest in excess of the Maximum Rate. If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided, in this Note or otherwise in connection with this loan transaction, the provisions of this paragraph shall govern and prevail, and neither Maker nor the sureties, guarantors, successors or assigns of Maker shall be obligated to pay the excess amount of such interest, or any other excess sum paid for the use, forbearance or detention of sums loaned pursuant hereto. If for any reason interest in excess of the Maximum Rate shall be deemed charged, required or permitted by any court of competent jurisdiction, any such excess shall be applied as a payment and reduction of the principal of indebtedness evidenced by this Note; and, if the principal amount hereof has been paid in full, any remaining excess shall forthwith be paid to Maker. If default be made in the payment of principal or interest under this Note, or upon the occurrence of any other Event of Default, as such term is defined in the Deed of Trust (as hereinafter defined), the holder hereof may, at its option, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without additional notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, and the holder hereof shall have the right to foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, and offset against this Note any sum or sums owed by the holder hereof to Maker. Failure of the holder hereof to exercise this option shall not constitute a waiver of the right to exercise the same upon the occurrence of a subsequent Event of Default. If the holder hereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder hereunder, or if this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Maker agrees to pay all reasonable collection costs and fees incurred by the holder, including reasonable attorney's fees. THIS NOTE IS PERFORMABLE IN HOUSTON, HARRIS COUNTY, TEXAS, AND MAKER AND EACH SURETY, GUARANTOR, ENDORSER AND OTHER PARTY EVER LIABLE FOR PAYMENT OF ANY SUMS OF MONEY PAYABLE ON THIS NOTE, JOINTLY AND SEVERALLY WAIVE THE RIGHT TO BE SUED HEREON ELSEWHERE. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. MAKER AND EACH SUCH OTHER PARTY HEREBY IRREVOCABLY (I) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (II) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN SUCH COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF PAYEE TO BRING ANY ACTION OR PROCEEDING AGAINST MAKER OR ANY OTHER PARTY LIABLE HEREUNDER OR WITH RESPECT TO ANY COLLATERAL IN ANY STATE OR FEDERAL COURT IN ANY OTHER JURISDICTION. ANY ACTION OR PROCEEDING BY MAKER OR ANY OTHER PARTY LIABLE HEREUNDER AGAINST PAYEE SHALL BE BROUGHT ONLY IN A COURT LOCATED IN HARRIS COUNTY, TEXAS. [ILLEGIBLE] -------------- INITIALED FOR IDENTIFICATION page 2 of 3 pages 3 Maker and surety, guarantor, endorser and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive presentment and demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration or intent to accelerate, notice of intent to demand, diligence in collecting, and grace, and consent aid all extensions notice for and period or periods of time and partial payments, before or after maturity, without prejudice to the holder. The holder shall similarly have the right to deal in any way, any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release part or all of the collateral securing this Note, or grant any other indulgence or forbearance whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. This Note is entitled to the benefit of, among other documents, a valid and perfected first lien security interest in and to certain real property described in the Deed of Trust securing same being executed by GMB Consulting, Inc., a Texas corporation for the benefit of Payee; Security Agreement executed by The Original Pasta Co., a Texas corporation; UCC-1 Financing Statement(s); Guaranty Agreement(s) executed by The Original Pasta Co., a Texas corporation, Ghulam Bombaywala and Shaheen S. Bombaywala, each of the foregoing being executed of even date herewith. THIS NOTE AND THE OTHER LOAN DOCUMENTS EXECUTED CONTEMPORANEOUSLY WITH THIS NOTE REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. MAKER: WATERMARC FOOD MANAGEMENT CO., A TEXAS CORPORATION By: /s/ THOMAS J. BUCKLEY ------------------------------------------- Thomas J. Buckley, Chief Financial Officer and Secretary page 3 of 3 pages EX-10.4 15 $250,000 PROMISSORY NOTE - LANGHAM CREEK NAT. BANK 1 EXHIBIT 10.4 --------------------------------- LANGHAM CREEK BORROWER VARIABLE RATE NATIONAL BANK WATERMARC FOOD MANAGEMENT CO. COMMERCIAL Post Office Box 840439 PROMISSORY Houston, Texas 77254-0439 ADDRESS NOTE (713) 859-2225 "LENDER" 11111 WILCREST GREEN STE. 350 HOUSTON, TX 77042 PHONE NUMBER IDENTIFICATION NO. 281-783-0500 74-2605598 - -------------------------------------------------------------------------------- LENDER INTEREST PRINCIPAL FUNDING MATURITY CUSTOMER LOAN INITIALS RATE AMOUNT DATE DATE NUMBER NUMBER MDO VARIABLE $250,000.00 02/14/97 02/14/02 11505883 - -------------------------------------------------------------------------------- PROMISE TO PAY For value received, Borrower promises to pay to the order of Lender indicated above the principal amount of TWO HUNDRED FIFTY THOUSAND AND NO/100 Dollars ($250,000.00) plus interest on the unpaid principal balance at the rate and in the manner described below. All amounts received by Lender shall be applied first to expenses, then to accrued unpaid interest, and then to outstanding principal, or in any other manner as determined by Lender, in Lender's discretion, as permitted by law. INTEREST RATE: The Note has a variable interest rate feature. Interest on the Note may change from time to time if the Index Rate identified below changes. Interest shall be computed on the basis of 360 days and the actual number of days per year (and in any event, 365 or 366 days per year during periods when the Maximum Lawful Rate, which is certified on the reverse, is in effect) and the actual number of days elapsed. Interest on this Note shall be calculated at the variable rate of ONE AND NO/1000 percent (1.000%) per annum over the Index Rate provided that such rate shall not exceed the Maximum Lawful Rate. The Initial Index Rate is NINE AND 250/1000 percent (9.250%) per annum. Therefore, the Initial Interest rate on the Note shall be TEN AND 250/1000 percent (10.250%) per annum. Any change in the interest rate resulting from a change in the Index Rate will be effective on THE SAME DAY AS THE RATE CHANGES. INDEX RATE: The Index Rate for this Note shall be: Lender's Base or Reference Rate, which Lender may increase or decrease at any time in Lender's discretion and which may not necessarily reflect the rate Lender charges to its other customers. If the index becomes unavailable during the term of the loan, Lender may substitute another index which is similar. MINIMUM RATE/MAXIMUM RATE: The minimum interest rate on this Note shall be THREE AND NO/1000 percent (3.000%) per annum. The maximum interest rate on this Note shall not exceed EIGHTEEN AND NO/1000 percent (18.000%) per annum or the Maximum Lawful Rate, whichever is less. DEFAULT RATE: In the event of a default under this Note, the Lender may, in its discretion determine that all amounts owing to Lender shall bear interest as follows: 18.00, or the Maximum Lawful Rate, whichever is less. PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to the following schedule: ON DEMAND, BUT IF NO DEMAND IS MADE, THEN 59 PAYMENTS OF PRINCIPAL IN THE AMOUNT OF $4,166.67 PLUS ACCRUED INTEREST BEGINNING MARCH 14, 1997 AND CONTINUING AT MONTHLY TIME INTERVALS THEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE PLUS ACCRUED INTEREST IS DUE AND PAYABLE ON FEBRUARY 14, 2002. All payments will be made to Lender at its address in the county described above and in lawful currency of the United States of America. RENEWAL: If checked [ ] this Note is given in renewal of, but not in novation or discharge of, Loan Number ______________. SECURITY: To secure the payment and performance of obligations incurred under this Note. Borrower grants Lender a security interest in, and pledges and assigns to Lender all of Borrower's rights, title, and interest in all monies, instruments, and savings, checking, and other deposit accounts of Borrower's, (excluding IRA, Keogh, and trust accounts and deposits subject to tax penalties as assigned), that are now of in the future in Lender's custody or control. Upon default, and to the extent permitted by applicable law, Lender may exercise its security interest in all such property which shall be in addition to and cumulative of Lender's right of common law setoff. [X] If checked, the obligations under this Note are also secured by a lien and/or security interest in the property described in the documents executed in connection with this Note as well as any other property designated as security for this Note now or in the future. PREPAYMENT: This Note may be prepaid in part or in full on or before its maturity date. If this Note contains more than one installment, all prepayments shall be applied as determined by Lender and as permitted by law. - -------------------------------------------------------------------------------- BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE SIDE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE. THIS NOTE AND RELATED DOCUMENTS HAVE BEEN SIGNED IN THE COUNTY OF LENDER'S ADDRESS UNLESS OTHERWISE SPECIFIED: Harris NOTE DATE: FEBRUARY 14, 1997 BORROWER: WATERMARC FOOD MANAGEMENT CO. BORROWER: /s/ GHULAM M. BOMBAYWALA - --------------------------------------- -------------------------------------- GHULAM M. BOMBAYWALA CHAIRMAN AND CEO BORROWER: BORROWER: - --------------------------------------- -------------------------------------- BORROWER: BORROWER: - --------------------------------------- -------------------------------------- BORROWER: BORROWER: - --------------------------------------- -------------------------------------- EX-11.1 16 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES EXHIBIT 11.1 COMPUTATION OF EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES
52 Weeks Ended ------------------------------------------------- June 29, 1997 June 30, 1996 July 2, 1995 ------------- ------------- ------------ Computation of primary earnings (loss) per common and common equivalent shares: Net loss applicable to common stock $(11,209,361) $ (247,890) $ (7,331,421) ============ ============ ============ Weighted average number of common shares outstanding 13,451,487 12,040,163 8,921,543 ============ ============ ============ Primary loss per common share $ (0.83) $ (0.02) $ (0.82) ============ ============ ============ Computation of earnings (loss) per common share assuming full dilution (A): Net loss applicable to common stock $(11,209,361) $ (247,890) $ (7,331,421) Dividends on preferred stock 296,586 296,586 294,680 Interest on 9% convertible subordinated debentures 19,530 19,530 222,660 ------------ ------------ ------------ Income (loss) assuming full dilution $(10,893,245) $ 68,226 $ (6,814,081) ============ ============ ============ Weighted average number of shares outstanding 13,451,487 12,040,163 10,003,426 Common shares issuable from stock option plans and from warrants 2,998,903 3,121,633 2,814,320 Less shares assumed repurchased with proceeds (14,299,639) (6,098,472) (3,620,946) Shares assumed issued upon conversion of preferred stock 411,925 411,925 411,925 Shares assumed issued upon conversion of 9% subordinated debentures 43,400 43,400 43,400 ------------ ------------ ------------ Common shares outstanding assuming full dilution 2,606,076 9,518,649 9,652,125 ============ ============ ============ Earnings (loss) per common and common equivalent share assuming full dilution $ (4.18) $ 0.01 $ (0.71) ============ ============ ============
(A) This calculation is submitted in accordance with the Securities and Exchange Act of 1934, Release No. 9083, although it is contrary to paragraph 40 of APB Opinion No. 15 because it produced an anti-dilutive result for years ended June 30, 1996 and July 2, 1995. EX-21.1 17 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT BILLY BLUES FOOD CORPORATION OF ARIZONA, AN ARIZONA CORPORATION BILLY BLUES HOLDING, S.A., A SWISS CORPORATION J II Z, INC., A TEXAS CORPORATION LCU, INC., A TEXAS CORPORATION MARCO'S MEXICAN RESTAURANTS, INC., A TEXAS CORPORATION THE ORIGINAL PASTA CO., A TEXAS CORPORATION EX-27 18 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS IN FORM 10-K. YEAR JUN-29-1997 JUL-01-1996 JUN-29-1997 263,542 0 839,924 0 483,302 1,659,985 15,825,717 9,775,086 16,714,828 9,832,566 0 0 329,540 713,161 427,046 16,714,828 49,125,361 49,125,361 14,774,268 59,106,493 0 0 1,220,666 (10,912,775) 0 (10,912,775) 0 0 0 (10,912,775) (0.83) (4.18)
EX-99.1 19 WATERMARC FOOD MANAGEMENT CO. - 8-K DATED 8/20/97 1 EXHIBIT 99.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) August 20, 1997 ------------------------------- WATERMARC FOOD MANAGEMENT CO. - ------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) TEXAS - ------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 0-20143 74-2605598 - ------------------------------------- --------------------------------------- (Commission File Number) (I.R.S. Employer Identification No.) 11111 Wilcrest Green, Suite 350, Houston, Texas 77042 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (713) 783-0500 - ------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Not Applicable - ------------------------------------------------------------------------------- (Former name or Former Address, if Changed Since Last Report) 2 INFORMATION INCLUDED IN REPORT ON 8-K ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT. On August 20, 1997, Coopers & Lybrand L.L.P. resigned as Registrant's principal independent accountant (hereafter referred to as "former principal accountant"). The former principal accountant's report dated September 27, 1996 on the Registrant's financial statements for the fiscal years ended June 30, 1996 and July 2, 1995 was unqualified. The decision to change accountants was approved by the Audit Committee of Registrant's Board of Directors. During Registrant's two most recent fiscal years preceding the former principal accountant's resignation, there were no disagreements with the former principal accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. On August 26, 1997, Registrant engaged Mann Frankfort Stein & Lipp, P.C. as its new principal accountant to audit Registrant's financial statements for the fiscal year ended June 29, 1997. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. The former principal accountant's letter addressed to the Securities and Exchange Commission regarding this report is attached hereto as Exhibit 16. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Watermarc Food Management Co. ------------------------------------------ (Registrant) Date August 27, 1997 By /s/ ------------------------ ---------------------------------------- (Signature) By Ghulam M. Bombaywala ----------------------------------------- Title Chief Executive Officer -------------------------------------- 3 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 16 Letter regarding change of certifying accountant 4 EXHIBIT 16 [COOPERS & LYBRAND L.L.P. LETTERHEAD] August 25, 1997 Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Gentlemen: We have read the statements (copy attached) made by Watermarc Food Management Co. (the "Company"), which we understand will be filed with the Commission, pursuant to Item 4 of Form 8-K, as part of the Company's Form 8-K report dated August 20, 1997. We agree with the statements concerning our Firm in such Form 8-K. Very truly yours, /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND Attachment 5 INFORMATION INCLUDED IN REPORT ON 8-K ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT. On August 20, 1997, Coopers & Lybrand L.L.P. resigned as Registrant's principal independent accountant (hereafter referred to as "former principal accountant"). The former principal accountant's report dated September 27, 1996 on the Registrant's financial statements for the fiscal years ended June 30, 1996 and July 2, 1995 was unqualified. The decision to change accountants was approved by the Audit Committee of Registrant's Board of Directors. During Registrant's two most recent fiscal years preceding the former principal accountant's resignation, there were no disagreements with the former principal accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. On August 26, 1997, Registrant engaged Mann Frankfort Stein & Lipp, P.C. as its new principal accountant to audit Registrant's financial statements for the fiscal year ended June 29, 1997. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. The former principal accountant's letter addressed to the Securities and Exchange Commission regarding this report is attached hereto as Exhibit 16. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Watermarc Food Management Co. ------------------------------------------ (Registrant) Date August 27, 1997 By /s/ ------------------------ ---------------------------------------- (Signature) By Ghulam M. Bombaywala ----------------------------------------- Title Chief Executive Officer -------------------------------------- EX-99.2 20 WATERMARC FOOD MANAGEMENT CO.- 8-K/A DATED 8/20/97 1 EXHIBIT 99.2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) August 20, 1997 ------------------------------- WATERMARC FOOD MANAGEMENT CO. - ------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) TEXAS - ------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 0-20143 74-2605598 - ------------------------------------- --------------------------------------- (Commission File Number) (I.R.S. Employer Identification No.) 11111 Wilcrest Green, Suite 350, Houston, Texas 77042 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (713) 783-0500 - ------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Not Applicable - ------------------------------------------------------------------------------- (Former name or Former Address, if Changed Since Last Report) 2 INFORMATION INCLUDED IN REPORT ON 8-K ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT. On August 20, 1997, Coopers & Lybrand L.L.P. resigned as Registrant's principal independent accountant (hereafter referred to as "former principal accountant"). The former principal accountant's report dated September 27, 1996 on the Registrant's financial statements for the fiscal years ended June 30, 1996 and July 2, 1995 was unqualified. The decision to change accountants was approved by the Audit Committee of Registrant's Board of Directors. During Registrant's fiscal years ended July 2, 1995 and June 30, 1996 and the subsequent interim period through August 20, 1997 preceding the former principal accountant's August 20, 1997 resignation, there were no disagreements or reportable events with the former principal accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. On August 26, 1997, Registrant engaged Mann Frankfort Stein & Lipp, P.C. as its new principal accountant to audit Registrant's financial statements for the fiscal year ended June 29, 1997. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. The former principal accountant's letter addressed to the Securities and Exchange Commission regarding this amended report is attached hereto as Exhibit 16. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Watermarc Food Management Co. ------------------------------------------ (Registrant) Date September 9, 1997 By /s/ ------------------------ ---------------------------------------- (Signature) By Ghulam M. Bombaywala ----------------------------------------- Title Chief Executive Officer -------------------------------------- 3 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 16 Letter regarding change of certifying accountant 4 EXHIBIT 16 [COOPERS & LYBRAND LETTERHEAD] September 9, 1997 Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Gentlemen: We have read the statements (copy attached) made by Watermarc Food Management Co. (the "Company"), which we understand will be filed with the Commission, pursuant to Item 4 of Form 8-K, as part of the Company's Form 8-K Amendment No. 1 report dated September 9, 1997. We agree with the statements concerning our Firm in such Form 8-K Amendment No. 1. Very truly yours, /s/ COOPERS & LYBRAND L.L.P. Attachment 5 INFORMATION INCLUDED IN REPORT ON 8-K ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT. On August 20, 1997, Coopers & Lybrand L.L.P. resigned as Registrant's principal independent accountant (hereafter referred to as "former principal accountant"). The former principal accountant's report dated September 27, 1996 on the Registrant's financial statements for the fiscal years ended June 30, 1996 and July 2, 1995 was unqualified. The decision to change accountants was approved by the Audit Committee of Registrant's Board of Directors. During Registrant's fiscal years ended July 2, 1995 and June 30, 1996 and the subsequent interim period through August 20, 1997 preceding the former principal accountant's August 20, 1997 resignation, there were no disagreements or reportable events with the former principal accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. On August 26, 1997, Registrant engaged Mann Frankfort Stein & Lipp, P.C. as its new principal accountant to audit Registrant's financial statements for the fiscal year ended June 29, 1997. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. The former principal accountant's letter addressed to the Securities and Exchange Commission regarding this amended report is attached hereto as Exhibit 16. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Watermarc Food Management Co. ------------------------------------------ (Registrant) Date September 9, 1997 By /s/ ------------------------ ---------------------------------------- (Signature) By Ghulam M. Bombaywala ----------------------------------------- Title Chief Executive Officer -------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----