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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual Report pursuant to Section 13 or 15 (d) of the Securities Exchange
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Act of 1934 for the Fiscal Year (52 Weeks) ended December 29, 1996.
________Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the period from______ to ________.
Commission File Number 0-28258
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SHELLS SEAFOOD RESTAURANTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0427966
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
16313 North Dale Mabry Highway, Tampa, Florida 33618
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(Address of principal executive offices) (Zip Code)
(813) 961-0944
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value.
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _x_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in Definitive Proxy or Information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, (based upon the last sales price of the Common Stock reported on the
Nasdaq small-cap market on March 25, 1997 and the assumption for this
computation only that all directors and executive officers are affiliates of the
Registrant) was $15,005,736.
As of March 25, 1997, the number of shares outstanding of the Registrant's
Common Stock, $.01 par value, was 3,297,536.
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DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with solicitations of proxies for the Registrant's 1997
Annual Meeting of Stockholders on May 20, 1997 is incorporated by reference in
Part III, Items 11, 12 and 13 of this Form 10-K.
When used in this discussion, the words "believes", "anticipates",
"expects", and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain
risks and uncertainties which could cause actual results to differ
materially from those projected.
In addition to seasonal fluctuations, the Company's operating results
are affected by a wide variety of other factors that could materially
and adversely affect actual results, including changes in consumer
preferences, tastes and eating habits; increases in food and labor
costs; national, regional and local economic conditions; demographic
trends and traffic patterns; and competition from other restaurants and
food service establishments. As a result of these and other factors,
the Company may experience material fluctuations in future operating
results on a quarterly or annual basis, which could materially and
adversely affect its business, financial condition, operating results,
and stock price. An investment in the Company involves various risks,
including those which are detailed from time-to-time in the Company's
other filings with the Securities and Exchange Commission.
These forward-looking statements speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
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PART I
ITEM 1. BUSINESS
Shells Seafood Restaurants, Inc. (the "Company") was incorporated under the laws
of the State of Florida in April 1993 and was reincorporated under the laws of
the State of Delaware in April 1996. Effective December 1994, Shells, Inc., a
Company incorporated under the laws of the State of Florida in January 1992, was
merged with and into the Company (the "Merger") and became a wholly-owned
subsidiary of the Company. The Merger was accounted for using the purchase
method of accounting and the financial statements presented herein have
disclosed the pro forma effect of the Merger.
The Company completed an initial public offering (the "Offering") of 1,400,000
shares of the Company's common stock, $.01 par value per share ("Common Stock")
and warrants to purchase 700,000 shares of Common Stock on April 29, 1996
raising net proceeds of $5,090,000 for the Company. Concurrent with the
Offering, the Company converted $750,000 of outstanding debt and $159,000 in
minority partner interest into 200,000 shares of Common Stock and warrants to
purchase 100,000 shares of Common Stock, at a price of $4.50 per share and $0.09
per warrant, respectively, which represented the Offering price net of
underwriter's discount. In connection with the conversion of debt, the lender
also was granted an option (the "Lender's Option") to purchase an additional
24,752 shares of Common Stock and warrants to purchase 12,376 shares of Common
Stock, at a price of $4.50 per share and $0.09 per warrant, simultaneously with
and in the same proportion to which the underwriter was exercising its
over-allotment option. The underwriter exercised its over-allotment option
effective May 13, 1996 resulting in the issuance of an additional 210,000 shares
of Common Stock and warrants to purchase 105,000 shares of Common Stock, plus
the issuance of 24,752 shares of Common Stock and warrants to purchase 12,376
shares of Common Stock through the Lender's Option, generating an additional
$1,035,000 in net proceeds to the Company.
Concept and Strategy
As of December 29, 1996, the Company managed and operated 31 full service,
mid-priced, casual dining seafood restaurants in Florida under the name
"Shells." The Company currently owns 27 Shells restaurants and a 51% ownership
interest in the Shells restaurant in Melbourne, Florida (the "Melbourne
Restaurant"). In addition, the Company manages and operates four Shells
restaurants owned by third parties (the "Managed Restaurants"). The Shells
concept is designed to appeal to a broad range of customers, particularly
families and young adults, by serving generous portions of high-quality seafood
and offering friendly and efficient service at an attractive price point. Shells
restaurants feature a wide selection of seafood items, including shrimp,
oysters, clams, scallops, lobster, crab, crawfish and, daily fresh fish
specials, cooked to order in a variety of ways: steamed, sauteed, grilled,
blackened and fried. In addition, Shells restaurants offer a wide selection of
signature pasta dishes, appetizers, salads and desserts. All restaurants offer
full bar service with the exception of one restaurant which offers beer and wine
only. All Shells restaurants are open for dinner and eight restaurant locations
are also open for lunch. Dinner entrees range in price from $4.95 to $16.95,
with an average dinner entree price of $9.00.
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In an effort to increase Shells' name recognition and benefit from customer
loyalty, the Company has developed a prototypical image for its restaurants. The
restaurants are identified by the exterior "Shells" logo sign and a common
interior color scheme and design. Shells restaurants are decorated with a
tropical islands flair, bright colors and cheerful signage, to create a
high-energy, casual atmosphere consistent with the Shells concept. The Company's
commitment to promoting a casual, fun dining experience is underscored by the
design of its menu, which incorporates a variety of nautical caricatures, and by
the colorful "island" shirts worn by the Company's service staff. The Company
believes that the selection and training of its employees results in friendly
and efficient customer service, and contributes to an enjoyable casual dining
experience.
The Company believes that the relatively small number of national and regional
chain restaurants competing in the seafood segment of the restaurant industry
provides the Company with a significant opportunity to capitalize on its
high-energy, casual dining seafood restaurant concept. The Company further
believes that it has benefited and will continue to benefit from the continuing
trend towards increased seafood consumption which, the Company believes, is due
to, among other things, the pleasing taste, high protein and low fat content and
variety of preparation techniques of seafood.
The Company's restaurants average approximately 6,300 square feet in size, and
have an average seating capacity of approximately 210 seats. Average annual
restaurant sales during the year (52 weeks) ended December 29, 1996 for the 17
restaurants open for the full year were approximately $2,188,000. The Company's
food sales and liquor sales accounted for 87% and 13% of revenues, respectively,
for the year (52 weeks) ended December 29, 1996.
Expansion Strategy
The Company currently owns 27 Shells restaurants, owns a 51% ownership interest
in one Shells restaurant and manages four additional Shells restaurants pursuant
to contractual arrangements. The Company opened 10 restaurants during 1996,
including the six restaurants previously owned and operated by Islands Florida
LP, operating as "Islands", which were acquired in November 1996 and converted
and opened as "Shells" restaurants in December 1996. In January 1997, the
Company opened its 32nd restaurant in Ocala, Florida. The acquisition of the six
"Islands" restaurants in 1996 was the first opportunity for the Company to
acquire multiple units for conversion to the Shells concept. This purchase
allowed Shells to quickly expand and obtain better operating efficiencies
throughout the South Florida markets. The Company intends to continue to explore
the acquisition of multiple units as part of its expansion strategy into new
markets. All of the 32 current Shells restaurants are located in Florida.
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The Company plans to open approximately 10 to 12 additional restaurants in 1997
in the Florida and Midwest markets and is in various stages of lease
negotiations for sites. The actual number and location of the new restaurant
openings will depend on the Company's ability to execute satisfactory leases or
locate suitable properties for purchase. When opening restaurants outside of
Florida, the Company anticipates focusing on markets that are large enough to
support several restaurants, thereby providing the Company efficiencies in
advertising, supervision, and distribution of food and other supplies within
that market, and the potential to capture a significant percentage of market
share with several restaurants. Since December 1993, the Company has opened 17
and relocated two Shells restaurants, of which 18 were opened or relocated in
existing markets to increase efficiencies in advertising, supervision and
distribution. To the extent that the Company expands its operations outside
Florida, the Company anticipates making minor adjustments to its menu to
accommodate local preferences. The Company believes that it has a sufficient
number of assistant restaurant managers trained and qualified for promotion to
restaurant manager to allow the Company to transfer experienced restaurant
managers to new locations.
The Company has historically converted and renovated existing restaurants into
Shells restaurants in order to minimize initial capital expeditures. The Company
intends to use its existing cash balances, projected cash flows from operations,
and third party financing to implement its expansion strategy.
Site Selection
The Company believes that its ability to select high-traffic, neighborhood
restaurant sites is critical to its expansion strategy and, as a consequence,
focuses on locations in areas with high levels of traffic which are located in
close proximity to heavily populated residential and/or tourist areas. The
Company considers a variety of factors in its site selection process, including
local market demographics, site visibility and accessibility and proximity to
highways and entertainment and tourist centers. The Company also reviews the
potential competition in each market and attempts to analyze the sales volume of
national chain restaurants operating in the target area. If possible, the
Company prefers to locate its restaurants within close proximity to
high-performing national or regional chain restaurants because the Company
believes that clusters of such restaurants generate increased destination dining
traffic. In addition, the Company evaluates each potential conversion site to
ensure that it has sufficient dining capacity and kitchen facilities to make the
site suitable for conversion. The Company generally seeks to lease properties
with 5,000 to 7,000 square feet total space and seating capacity for 150 to 250
persons. Upon selecting a restaurant location, the Company renovates the
interior and exterior to conform to the prototypical Shells image. Renovations
usually take approximately 60 to 90 days to complete. The Company currently
leases all but two of its sites, which are financed real estate purchases.
The Company will continue to remodel its existing restaurants where necessary on
an ongoing basis. The scope of certain remodeling projects can be extensive from
time-to-time. The Company has historically and to the extent possible, intends
to continue to open new restaurants by leasing and renovating existing
restaurant sites, in order to minimize initial capital expenditures and to
permit a higher return on initial investment. The Company estimates that the
cost of developing and opening additional Shells restaurants in Florida, other
than lease expenses, will average between $400,000 and $500,000. The Company
anticipates that the cost of developing and opening additional Shells
restaurants outside of Florida will average between $400,000 and $600,000 as a
result of increased travel and site selection costs. Annual lease costs for new
restaurants both inside and outside of Florida are expected to range from
$80,000 to $140,000 per restaurant.
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Restaurant Locations
As of March 1997, the Company managed and operated 32 restaurants. The Company's
restaurants are located in the following markets: (i) The Tampa/Sarasota Florida
market consists of seven owned restaurants which are located in Brandon,
Clearwater, Holmes Beach, Redington Shores, St. Petersburg, St. Pete Beach and
Winter Haven, and the four restaurants which are managed by the Company and
owned by third parties which are located in Carrollwood, North Tampa, Sarasota
and South Tampa, (ii) The Orlando Florida market consists of seven owned
restaurants which are located in Altamonte Springs, Daytona Beach, Kissimmee,
New Smyrna Beach, Ocala, Orlando and Winter Park and one restaurant which is
owned by a joint venture, 51% of which is owned by the Company, which is located
in Melbourne, (iii) The South Florida market consists of seven owned restaurants
which are located in Coral Springs, Davie, Ft. Lauderdale, Kendall, Miami (at
the Mall of the Americas), Pembroke Pines and Sunrise, (iv) The West Palm Beach
Florida market consists of three owned restaurants which are located in Delray
Beach, Stuart and West Palm Beach, (v) The Fort Myers Florida market consists of
two owned restaurants which are located in Fort Myers and Port Charlotte, and
(vi) The Jacksonville Florida market consists of one owned restaurant which is
located in Mandarin.
Restaurant Operations
Management and Employees. The Company currently employs six area supervisors.
Each area supervisor is responsible for the management of several restaurants,
including management development, recruiting, training, quality of operations
and unit profitability. The Company anticipates hiring a restaurant supervisor
for every five to six additional restaurants opened. The staff of a typical
dinner-only restaurant consists of one general manager, two assistant managers,
a kitchen manager and approximately 40 other employees. Restaurants which are
also open for lunch generally have 15 to 20 additional employees. Currently,
eight restaurants are open for lunch. Restaurant management participates in a
discretionary quarterly bonus program based upon the financial results of their
particular restaurant. Bonuses typically average between 25% and 40% of salary.
Restaurant Reporting. The Company maintains financial and accounting controls
for each restaurant through a central accounting system. Sales data is collected
daily, and store managers are provided with daily sales and cash information for
their respective restaurants. The Company's financial systems and controls,
including most recently a point-of-sale accounting and cash management system
which has been installed in all restaurants, allow the Company to access each
restaurant's sales, inventory, costs and other financial data on a real-time
basis, enabling both store-level management and senior management to quickly
react to changing sales trends, to effectively manage food, beverage and labor
costs, to minimize theft, and improve the quality and efficiency of accounting
and audit procedures.
Recruitment and Training. The Company believes that achieving customer
satisfaction by providing knowledgeable, friendly, efficient service is critical
to the restaurants' long-term success. The Company attempts to recruit
restaurant managers with significant experience in the restaurant industry.
During a 10-week training program, restaurant managers are taught to promote the
Company's team-oriented atmosphere among restaurant employees, with emphasis on
preparing and serving food in accordance with strict standards and providing
friendly, courteous and attentive service. The restaurant staff is trained on
site by restaurant managers and other staff members. The Company believes that
the quality and training of its restaurant managers and staff results in
friendly, courteous, efficient service which contributes to a casual and
pleasurable dining experience for the customer.
The Company is committed to providing its customers with efficient and friendly
service, keeping table-to-wait staff ratios low and staffing each restaurant
with an experienced management team to help ensure attentive customer service
and a pleasurable dining experience. The Company's commitment is underscored by
its employee training program, which is required for all Company personnel.
Through the use of comment cards, senior management receives valuable customer
feedback and, through prompt responses, demonstrates a continuing interest in
improving customer satisfaction.
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Purchasing. Obtaining a reliable supply of quality seafood at competitive prices
is critical to the Company's success. The Company has formed long-term
relationships with several seafood suppliers and purchases frozen seafood and
certain other supplies used in restaurant operations in bulk. In addition,
Shells' menu has been designed to feature seafood varieties having stable
sources of supply, as well as to provide flexibility to adjust to shortages and
to take advantage of occasional purchasing opportunities. The Company believes
its diverse menu selection reduces the risk and minimizes the effect of the
shortage of any seafood products. The Company has been able to anticipate and
react to fluctuations in food costs through selected menu price adjustments,
purchasing seafood directly from numerous suppliers and promoting certain
alternative menu selections (in response to availability and price of supply).
To date, the Company generally has not experienced any significant delays in
receiving its food and beverage inventories, restaurant supplies or equipment.
In order to facilitate the distribution of seafood to its restaurants and
minimize the risks relating to storing and distributing seafood, the Company has
entered into a distribution agreement with U.S. Foodservice, Inc. (formerly
Rykoff-Sexton) whereby U.S. Foodservice, Inc. ("U.S. Foods") purchases from the
Company at cost and takes ownership of all frozen seafood the Company purchases.
U.S. Foods, at its own expense, stores all such seafood at its cold storage
facilities. The Company does pay U.S. Foods a carrying cost which represents the
interest expense on the average amount U.S. Foods has invested in the Company's
frozen seafood. Upon the Company's direction, U.S. Foods resells the frozen
seafood to the Company at cost, plus handling and delivery fees, and distributes
the frozen seafood directly to the individual Shells restaurants. In addition,
U.S. Foods procures on behalf of the Company many of the supplies, other than
seafood, used by the restaurants and distributes and sells these products to the
individual restaurants at agreed upon mark-ups. The Company believes that if its
relationship with U.S. Foods was terminated, alternate arrangements for
warehousing and procurement of supplies could be made without a material
interruption of the Company's business. Although the Company believes that its
relationships with its suppliers and U.S. Foods are satisfactory and that
alternate sources are readily available, the loss of certain suppliers or of its
relationship with U. S. Foods, or substantial price increases imposed by such
suppliers in the absence of alternative sources of supply in a timely manner,
could have a material adverse effect on the Company.
Quality Control. The Company maintains a continuous inspection program for all
its seafood purchases. Each shipment of frozen seafood is inspected upon receipt
at U.S. Foods distribution center for quality and conformance to the Company's
written specifications prior to delivery to the restaurants. In addition, fresh
fish purchased by the individual restaurants must be purchased from a
Company-approved supplier and is inspected by a restaurant manager at the time
of delivery. The restaurants' employees are educated as to the correct handling
and proper physical characteristics of each product.
The Company's area supervisors, general managers, assistant managers and kitchen
managers are all responsible for properly training hourly employees and ensuring
that the Company's restaurants are operated in accordance with strict health and
quality standards. Compliance with the Company's quality standards is monitored
by on-site visits and formal inspections by the area supervisors. The Company
believes that its inspection procedures and its employee training practices help
the Company to maintain a high standard of quality for the food and service it
provides. The Company believes that it has not experienced any material adverse
effect from contaminated foods. Nevertheless, there can be no assurance that
seafood contamination or consumer perception of inadequate seafood quality, in
the industry in general or as to the Company in particular, will not have a
material adverse effect on the Company's operations and profitability.
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Advertising and Marketing
The Company employs a marketing strategy that seeks continuous visibility and
name recognition through use of billboards, radio and television advertisements.
The Company's strategy of developing a significant number of restaurants in a
market is designed to provide for the Company's cost-effective use of television
and radio advertising and other marketing efforts.
Joint Venture and Third-Party Owned Restaurants
The Shells restaurant system consists of (i) 27 restaurants owned by the
Company; (ii) a restaurant owned by a joint venture in which the Company owns a
majority interest (the "Melbourne Restaurant"); and (iii) four restaurants owned
by third parties and managed by the Company (the "Managed Restaurants"). The
Company anticipates that all future restaurants will be owned, as opposed to
licensed, by the Company.
The Melbourne Restaurant is owned by a joint venture in which the Company has a
51% equity interest and the minority partner, WLH Investments, a corporation
wholly-owned by Wanda L. Hattaway, wife of William E. Hattaway, the Company's
president, has a 49% equity interest. The Company has entered into a Management
and License Agreement with the joint venture whereby the Company receives a
management fee of 6% of the restaurant sales of the Melbourne Restaurant.
Three of the Managed Restaurants are managed and operated by the Company
pursuant to management and license agreements (the "Management Agreements"),
which became effective in July 1993. Pursuant to the Management Agreements, the
Company provides management services and licenses the Company's proprietary
information required to operate these Managed Restaurants to the respective
third-party owner, for a management fee of 4% of that restaurant's sales. The
Company has complete authority to determine the programs and policies affecting
the day-to-day operations of each of these Managed Restaurants. Although the
Management Agreements differ slightly, they generally have an initial term of 30
years and provide that the third-party owners are responsible for funding all
the restaurant expenses, including food and beverage costs, staffing, training,
recruiting, inventories, and working capital. Pursuant to amended option
agreements, entered into in August 1995 (the "Amended Option Agreements"), upon
the Company's market capitalization reaching certain prescribed levels, either
the third-party owner of one of these Managed Restaurants or the Company has the
option to transfer the restaurant assets to the Company in exchange for a
purchase price equal to six times the restaurant's adjusted annual cash flow
less the amount, if any, of the third-party owner's liabilities assumed by the
Company. The purchase price is to be paid in the form of shares of the Company's
Common Stock which contain certain registration rights.
The fourth Managed Restaurant is operated by the Company pursuant to the terms
of an agreement requiring that the restaurant be operated in conformity with the
policies and procedures established by the Company for Shells restaurants. The
restaurant is currently managed by the Company pursuant to an oral agreement,
providing for the Company to receive a management fee of 4% of the restaurant's
sales.
Competition
The restaurant industry is intensely competitive with respect to price, service,
location, food quality and variety, and there are many well-established
competitors with substantially greater financial and other resources than the
Company. Such competitors include national, regional and local full-service
casual dining chains, many of which specialize in or offer seafood products.
Some of the Company's competitors have been in existence for substantially
longer periods than the Company and may be better established in the markets
where the Company's restaurants are or may be located. The Company believes that
the full-service casual dining segment is likely to attract a significant number
of new entrants, some offering seafood products. The Company can also be
expected to face competition from a broad range of other restaurants and food
service establishments, including full-service, quick-service and fast food
restaurants which specialize in a variety of cuisines. While the Company
believes that it offers a broad variety of quality seafood products, there can
be no assurance that consumers will regard the Company's product as
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sufficiently distinguishable from competitive products, that substantially
equivalent food products will not be introduced by the Company's competitors or
that the Company will be able to compete successfully.
The Company has positioned its restaurants to take advantage of a niche in the
casual dining industry. Multi-unit restaurant operators generally avoid the
seafood segment because of the difficult and unique requirements of seafood
procurement; consequently, only a limited number of national and regional
restaurant chains currently emphasize seafood offerings. Shells restaurants are
positioned between most fast food and full service seafood restaurants in terms
of both dining atmosphere and menu pricing. Shells restaurants generally offer
dinner entrees between $4.95 and $16.95, with an average dinner entree price of
$9.00. The Company believes that by emphasizing casual dining, high quality,
large portions, and relatively low prices, Shells restaurants offer an
attractive alternative to existing chain establishments as well as to most local
seafood restaurants.
Government Regulation
The Company is subject to extensive state and local government regulation by
various governmental agencies, including state and local licensing, zoning, land
use, construction and environmental regulations and various regulations relating
to the sale of food and alcoholic beverages, sanitation, disposal of refuse and
waste products, public health, safety and fire standards. The Company's
restaurants are subject to periodic inspections by governmental agencies to
ensure conformity with such regulations. Difficulties or failure in obtaining
required licensing or other regulatory approvals could delay or prevent the
opening of a new restaurant, and the suspension of, or inability to renew a
license at an existing restaurant, any of which would adversely affect the
operations of the Company. Restaurant operating costs are also affected by other
government actions which are beyond the Company's control, including increases
in the minimum hourly wage requirements, workers compensation insurance rates,
health care insurance costs and unemployment and other taxes.
The Company is subject to "dram-shop" statutes, which generally provide a person
injured by an intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person. Florida law currently provides that a vendor of alcoholic beverages may
be held liable in a civil cause of action for injury or damage caused by or
resulting from the intoxication of a minor (under 21 years of age) if the vendor
willfully, knowingly and unlawfully sells or furnishes alcoholic beverages to
the minor and knows that the minor will soon thereafter be driving a motor
vehicle. A vendor can be similarly held liable if it knowingly provides
alcoholic beverages to a person who is in a noticeable state of intoxication,
knows that the person will soon thereafter be driving a motor vehicle and injury
or damage is caused by that person. In addition, significant national attention
is focused on the problem of drunk driving, which could result in the adoption
of additional legislation and increased potential liability of the Company for
damage or injury caused by its customers.
The passage of the Americans with Disabilities Act, which became effective in
July 1992, required the Company to modify certain of its existing restaurants to
meet specified access and use requirements. The Company believes that each of
the restaurants remodeled during the past two years were remodeled to comply
with the Americans with Disabilities Act and the Company believes that all other
existing restaurants comply with such requirements.
Servicemarks and Proprietary Information
The Company has registered the servicemark "Shells" with the Secretary of State
of Florida and the United States Patent and Trademark Office. The Company has
also registered its "jumping fish logo" with the United States Patent and
Trademark Office. The Company believes that its servicemarks have significant
value and are essential to its ability to create demand for and awareness of its
restaurants. There can be no assurance, however, that the Company's servicemarks
do not or will not violate the proprietary rights of others, that they would be
upheld if challenged or that the Company would, in such an event, not be
prevented from using its servicemarks, any of which could have a material
adverse effect on the Company. Although there can be no assurance that the
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Company will have the financial resources necessary to enforce or defend its
servicemarks, the Company intends to oppose vigorously any infringement of its
servicemarks.
The Company also relies on trade secrets and proprietary know-how and employs
various methods to protect its concepts and recipes. However, these methods may
not afford complete protection and there can be no assurance that others will
not independently develop similar know-how or obtain access to the Company's
know-how, concepts and recipes.
Employees
As of December 29, 1996, the Company employed 1,691 persons, of whom 145 were
management or administrative personnel and 1,546 were employed in non-management
restaurant positions. Approximately 800 of these individuals were employed by
the Company on a full-time basis. As of December 29, 1996, 141 persons were
employed on a salaried basis and 1,550 persons were employed on an hourly basis.
The Company considers its employee relations to be good. None of the Company's
employees are covered by a collective bargaining agreement.
Executive Officers and Directors of the Company
For information regarding the Company's executive officers and directors please
see Item 10, such material is deemed incorporated by reference into this Item 1.
ITEM 2. PROPERTIES
The Company leases 6,750 square feet of space in Tampa, Florida for its
executive offices. The lease expires in November 1997, and is terminable by
either party upon four months prior written notice. The annual rent payable
under the lease is approximately $88,000.
All but two of the Company's existing restaurants are operated on leased
properties. In the future, the Company intends to lease most of its properties
but will from time-to-time acquire restaurant locations based on individual site
evaluation. Each of the Company leases provides for a minimum annual rent and
certain of these leases require additional rental payments to the extent sales
volumes exceed specified amounts. Generally, the Company is required to pay the
cost of insurance, taxes and a portion of the landlord's operating costs to
maintain common areas. Restaurant leases have initial terms ranging from 9 to 20
years, with the average term being approximately 14 years, and renewal options
ranging from 10 to 20 years.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is a party to several legal
proceedings, the outcome of which, singly or in the aggregate, is not expected
to be material to the Company's financial position, results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK MATTERS
The Common Stock of the Company is traded in the over-the-counter market and is
quoted on the NASDAQ Small Cap System under the symbol SHLL. The following table
sets forth, since April 23, 1996, the date the Company's Common Stock commenced
trading, the high and low per share price of the Company's Common Stock as
reported by NASDAQ. The Common Stock was issued at $5.00 per share through the
initial public offering dated April 23, 1996.
Common Stock
Fiscal 1996 High Low
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Second Quarter $9.00 $5.00
Third Quarter $8.25 $6.50
Fourth Quarter $9.38 $6.25
The number of stockholders of record of the Company's Common Stock on March 25,
1997 was approximately 175.
The Company's warrants to purchase common stock at a purchase price of $6.00 per
share are quoted on the NASDAQ Small Cap System under the symbol SHLLW. See
note 10 of the Consolidated Financial Statements.
The Company's authorized capital stock consists of 20,000,000 shares of Common
Stock, par value $0.01 per share, and 2,000,000 shares of preferred stock, par
value $0.01 per share (the "Preferred Stock").
Dividend Policy
The Company has never declared or paid any cash dividends on its Common Stock.
The Company anticipates that all future earnings will be retained by the Company
for the development of its business. Accordingly, the Company does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The Company is subject to loan covenants containing certain provisions
restricting the Company's ability to pay dividends.
10
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical and pro forma consolidated
financial data for the Company ("SSRI") and Shells, Inc. The historical
consolidated financial data for the Company is for the years (52 weeks) ended
December 29, 1996, December 31, 1995, January 1, 1995 (historical and Pro
forma), period from April 29, 1993 (date of inception) through January 2, 1994
(SSRI), the year (52 weeks) ended January 2, 1994 (Shells, Inc.), and the year
(52 weeks) ended December 31, 1992 (Shells, Inc). The pro forma consolidated
financial data for the Company for the year (52 weeks) ended January 1, 1995
gives effect to the Merger. This consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Period from
April 29, 1993
(Date of
Inception)
Year (52 Weeks) Ended Through Year Ended Year Ended
December 29, December 31, January 1, January 1, January 1, January 2, January 2, December 31,
1996 1995 1995 1995 1995 1994 1994 1992
Pro Forma (2) SSRI Shells, Inc. SSRI Shells, Inc. Shells, Inc.
Statement of Operations Data:
Revenues
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurant sales $ 39,405 $ 28,269 $ 21,878 $ 5,768 $ 16,110 $ 147 $ 15,090 $ 18,154
Management fees 388 352 327 1,384 400 142 185
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 39,793 28,621 22,205 7,152 16,110 547 15,232 18,339
======== ======== ======== ======== ======== ======== ======== ========
Costs and expenses
Cost of sales 14,017 11,220 9,088 2,292 6,796 62 6,246 7,828
Labor and other related expenses 10,221 7,680 5,830 1,523 4,307 64 4,065 5,137
Other restaurant operating expenses 8,266 6,301 5,002 1,429 4,630 24 3,467 4,291
General and administrative expenses 3,351 2,316 2,243 2,012 231 806 1,192 2,130
Depreciation and amortization 1,274 959 929 456 267 13 278 554
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations 2,664 145 (887) (560) (121) (422) (16) (1,601)
Other income (expense):
Interest expense, net (170) (409) (236) (91) (145) (17) (291) (394)
Other income (expense), net (233) (33) 35 40 (5) 35 550 (210)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before elimination
of minority partner 2,261 (297) (1,088) (611) (271) (404) 243 (2,205)
interest, extraordinary gain
and provision for income taxes
Extraordinary gain -- -- -- -- -- -- 270 --
Elimination of minority partner interest (169) (106) (67) (67) -- -- -- --
Income (loss) before provision
for income taxes 2,092 (403) (1,155) (678) (271) (404) 513 (2,205)
Income taxes (1) (648) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) 1,444 (403) (1,155) (678) (271) (404) 513 (2,205)
Preferred shares accretion (117) (167) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) applicable
to common stock $ 1,327 $ (570) $ (1,155) $ (678) $ (271) $ (404) $ 513 $ (2,205)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year (52 weeks) Ended
----------------------------------
December 29 December 31 January
1996 1995 1995
----------- ----------- -------
Pro forma net income (loss) per share (3) $ 0.31 ($ 0.16)
Pro forma weighted average common
shares outstanding (3) 4,306 3,583
Operating Data:
System-wide sales:
Company-owned restaurants (4) $ 36,850 $ 26,067 $ 19,568
Joint venture restaurant 2,555 2,202 2,310
Licensed restaurants 9,660 8,796 8,156
-------- -------- --------
$ 49,065 $ 37,065 $ 30,034
======== ======== ========
Number of restaurants (at end of period):
Company-owned restaurants (4) 26 16 11
Joint venture restaurant 1 1 1
Licensed restaurants 4 4 4
---------- -------- ----------
31 21 16
========== ======== ==========
Average annual sales per Company-owned and joint
venture restaurant open for full period $ 2,188 $ 1,934 $ 1,882
Increase in Company-owned and joint
venture restaurant same store sales (5) 14.7% 6.6% 24.5%
</TABLE>
<TABLE>
<CAPTION>
January 2, January 2, December 31,
December 29, December 31, January 1, 1994 1994 1992
1996 1995 1995 SSRI Shells, Inc. Shells, Inc.
Balance sheet data:
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficiency) $(1,418) $(4,722) $(3,298) $( 364) $(2,096) $(5,186)
Total assets 18,373 10,438 9,078 2,426 1,294 1,805
Long term debt 1,161 1,706 2,098 1,621 164 332
Minority partner interest 512 574 467 - - -
Redeemable preferred shares 1,668 1,551 1,385 - 1,853 -
Stockholders' equity (deficiency) 7,472 (889) (354) (99) (3,897) (4,310)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
(1) The 31% effective tax rate for 1996 includes the effect of recognizing
tax benefits that were fully reserved prior to 1996. The effect of
recognizing these benefits, primarily related to net operating loss
carryforwards from prior years, is to reduce the effective income tax
rate for the year ended December 29, 1996 to 31%.
(2) Gives effect to the Merger, which is accounted for as a purchase, as if
it occurred at the beginning of the year. All material intercompany
balances and transactions between the entities have been eliminated. The
pro forma data is presented for the year ended January 1, 1995 to allow
for a more appropriate and meaningful comparison to the operating
results of the years ended December 29, 1996 and December 31, 1995.
(3) Pro forma net income (loss) per share is the net income (loss)
applicable to common stock divided by the pro forma weighted average
common shares outstanding. The pro forma weighted average common shares
outstanding is calculated as if all shares issued through December 29,
1996 were outstanding since January 1, 1995, inclusive of the dilutive
effect of common stock equivalents for each period presented.
(4) Includes one Company owned restaurant which until July 14, 1995 was
owned by a joint venture.
(5) Includes only resturants open during the full fiscal year shown and
open for a full prior comparable fiscal year and at least the full six
months prior thereto.
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The first Shells restaurant was opened in 1985 in Tampa, Florida. By 1992, 28
Shells restaurants (the "Original Restaurants") had opened, 21 of which were
located in Florida. The results of operations for each of the Original
Restaurants varied greatly, and several of the Original Restaurants were closed
as a result of lack of profitability.
Shells, Inc. was formed and began operations in January 1992 to act as a holding
company for 14 of the 18 Original Restaurants. Shells, Inc. was unable to
sustain profitable operations, and in February 1993 engaged William E. Hattaway
as its new President. Mr. Hattaway immediately began to reorganize the
restaurants' operations and negotiated the reduction of the outstanding
liabilities of Shells, Inc. In April 1993, Mr. Hattaway and others formed Shells
Seafood Restaurants, Inc. ("SSRI") in order to complete the reorganization of
Shells, Inc., manage the existing restaurants and pursue expansion of the Shells
restaurant chain. SSRI acquired from Shells, Inc. all proprietary information
and intangible assets required to operate the Shells restaurant chain, including
the registered servicemark Shells(TM). SSRI then began managing each of the
restaurants owned by Shells, Inc., as well as four restaurants owned by third
parties which had previously been managed by Shells, Inc.
Based on SSRI's successful reorganization of Shells, Inc. and in order to
facilitate the financing necessary for expansion, SSRI and Shells, Inc.
consummated a merger (the "Merger"), effective December 29, 1994, with Shells,
Inc. becoming a wholly-owned subsidiary of SSRI. Pursuant to the Merger, the
holders of common stock of Shells, Inc. were issued, in the aggregate, (i)
162,684 shares of SSRI Common Stock and (ii) warrants to purchase 229,904 shares
of SSRI Common Stock at $5.50 per share, 110% of the Offering price, in exchange
for all shares of Shells, Inc. common stock.
The Company currently owns 27 Shells restaurants and a 51% ownership interest in
the Melbourne Restaurant. In addition, the Company manages and operates four
Managed Restaurants.
13
<PAGE>
The following table sets forth, for the periods indicated, the percentages which
the items in the Company's Consolidated Statements of Operations bear to total
revenues, or where indicated, restaurant sales.
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995 January 1, 1995
----------------- ----------------- -----------------------
SSRI
Pro forma (1) Historical
Revenues:
<S> <C> <C> <C> <C>
Restaurant sales 99.0% 98.8% 98.5% 80.7%
Management fees from related parties 1.0 1.2 1.5 19.3
----------------- ----------------- -----------------------
100.0% 100.0% 100.0% 100.0%
================= ================= =======================
Costs and expenses:
Cost of restaurant sales (2) 35.6% 39.7% 41.5% 39.7%
Labor and other related expenses (2) 25.9 27.2 26.6 26.4
Other restaurant operating expenses (2) 21.0 22.3 22.9 24.8
----------------- ----------------- -----------------------
Total restaurant costs and expenses (2) 82.5 89.2 91.0 90.9
----------------- ----------------- -----------------------
General and administrative expenses 8.4 8.1 10.1 28.1
Depreciation and amortization 3.2 3.4 4.2 6.4
Income (loss) from operations 6.7 0.5 (4.0) (7.8)
Interest expense, net (0.4) (1.4) (1.1) (1.3)
Other income (expense), net (0.6) (0.1) 0.2 0.6
----------------- ----------------- -----------------------
Income (loss) before elimination of minority
partner interest and income taxes 5.7 (1.0) (4.9) (8.5)
Elimination of minority partner interest (0.5) (0.4) (0.3) (1.0)
----------------- ----------------- -----------------------
Income (loss) before provision for income taxes 5.2 (1.4) (5.2) (9.5)
Provision for income taxes(3) (1.6) - - -
----------------- ----------------- -----------------------
Net income (loss) 3.6% (1.4)% (5.2)% (9.5)%
================= ================= =======================
(1) Gives effect to the Merger, which is accounted for as a purchase, as if it occurred at the beginning of the year. All material
intercompany balances and transactions between the entities have been eliminated. The pro forma data is presented for the year
ended January 1, 1995 to allow for a more appropriate and meaningful comparison to the operating results of the years ended
December 29, 1996 and December 31, 1995.
(2) As a percentage of restaurant sales.
(3) The 31% effective tax rate for 1996 includes the effect of recognizing tax benefits that were fully reserved prior to 1996.
The effect of recognizing these benefits, primarily related to net operating loss carryforwards from prior years, is to reduce
the effective income tax rate for the year ended December 29, 1996 to 31%.
</TABLE>
14
<PAGE>
RESULTS OF OPERATIONS
Historical
Total revenues increased by 39.0% between Fiscal 1995 and Fiscal 1996, and
increased 300.2% between Fiscal 1994 and Fiscal 1995. Most of the year-to-year
increases were attributable to new restaurant openings coupled with increases in
comparable store sales of 14.7% and 6.6% for Fiscal 1996 and Fiscal 1995,
respectively. The significant increase between Fiscal 1994 and Fiscal 1995 was
attributable primarily to the nine Shells, Inc. stores included in the Company's
results of operations subsequent to the Merger, the opening of four new
restaurants and the relocation of one existing restaurant in Fiscal 1995. The
increases in same store sales were attributable to increases in the number of
customers served resulting from expanded advertising and remodeling of certain
restaurants, and to a lesser extent from menu price adjustments. To the extent
that the Company has already recognized significant gains from improved
operating efficiencies, the Company may not experience same-store sales
increases at the same rate in the future.
The Company's revenues consist of restaurant sales of the Company-owned
restaurants and management fees equal to 4% of sales of the Managed Restaurants.
Comparisons of same store sales include only stores which were open during the
entire periods being compared and, due to the time needed for a restaurant to
become established and fully operational, at least six months prior to the
beginning of that period.
Cost of restaurant sales were 35.6% in Fiscal 1996 as compared to 39.7% in
Fiscal 1995. The cost of restaurant sales between Fiscal 1994 and Fiscal 1995
was unchanged at 39.7%. The cost of restaurant sales generally consists of the
cost of food, beverages, freight and paper and plastic goods used in food
preparation and carry-out orders. The improvements realized during Fiscal 1996
resulted primarily from commodity cost savings on food purchases, primarily
shrimp, which was offset slightly by increases in the cost of dairy products.
The availability of certain types of seafood fluctuates from time-to-time,
resulting in corresponding fluctuations in the cost of restaurant sales. While
the Company benefited from a favorable fluctuation in prices during the first
half of Fiscal 1996, the Company may not experience the same favorable price
fluctuations in the future. The Company has been able to anticipate and react to
fluctuations in food costs through purchasing seafood directly from numerous
suppliers, promoting certain alternative menu selections in response to price
and availability of supply and adjusting its menu prices accordingly.
Labor and other related expenses were 25.9% of restaurant sales for Fiscal 1996
as compared to 27.2% in Fiscal 1995. This improvement was attributed to the
efficiencies realized through higher sales volumes, including the 14.7% increase
in same store sales. The labor and other related expenses increased from 26.4%
to 27.2% from Fiscal 1994 to Fiscal 1995, primarily due to increased operations
management personnel in preparation for new restaurant expansion. Labor and
other related expenses generally consist of restaurant hourly and management
payroll, benefits, and taxes.
Other restaurant operating expenses were 21.0% in Fiscal 1996 as compared to
22.3% in Fiscal 1995 and 24.8% in Fiscal 1994. The decreases in these expenses
as a percentage of sales was due to the efficiencies realized through the higher
sales volumes at the stores coupled with increased operational efficiencies.
Other restaurant operating expenses generally consist of advertising,
supervision, operating supplies, repairs and maintenance, rent and other
occupancy costs and utilities.
General and administrative expenses were 8.4% in Fiscal 1996 as compared with
8.1% in Fiscal 1995. The increase was due to an increase in management training
costs and to a lesser extent to management compensation and incentives related
to improved operating performance. The decrease in general and administrative
expenses from 28.1% in Fiscal 1994 as compared with 8.1% in Fiscal 1995 was
attributable to the Merger and the inclusion of restaurant sales of Shells,
Inc., higher unit sales volume and economies of scale gained in connection with
the Merger and the opening of new restaurants. General and administrative
expenses relate to the operations of all Shells restaurants owned by the Company
and management services that the Company provides to the Managed Restaurants.
15
<PAGE>
Net interest expense decreased from $409,000 in Fiscal 1995 to $170,000 in
Fiscal 1996. The reduction was attributable to the decrease in outstanding debt
and the income generated from the investment of short-term securities of funds
primarily obtained from the Offering. The increase in net interest expense from
$91,000 during Fiscal 1994 to $409,000 during Fiscal 1995 was attributed to
borrowings from shareholders in the amounts of $1,000,000 and $750,000 during
1995 as well as interest expense related to the Merger. In connection with the
Offering, the $750,000 of shareholder indebtedness was converted into Common
Stock and warrants and the $1,610,000 of indebtedness was repaid with the
proceeds of the Offering.
As a result of increases in restaurant sales and decreases in restaurant
operating expenses, primarily food and labor costs, as percentages of sales, the
income from operations improved to $2,664,000 in Fiscal 1996 from $145,000 in
Fiscal 1995. A significant improvement was also realized in Fiscal 1995 with a
$705,000 improvement in income from operations to $145,000 as compared with a
$560,000 loss during Fiscal 1994. The net income before taxes improved to
$2,092,000 for Fiscal 1996 as compared with a net loss of $403,000 for Fiscal
1995 and a net loss of $678,000 in Fiscal 1994. The net income for Fiscal 1996
was $1,444,000 reflecting the $648,000 income tax provision. The income tax
provision during Fiscal 1996 was based on an effective rate of 31% which
reflects the valuation allowance adjustment of tax benefits as well as the
current year benefits of net operating loss carryforwards and tax credits that
were previously unrealized. The improvement in operations during Fiscal 1996 and
Fiscal 1995 was due primarily to operating efficiencies and economies of scale
gained from the Merger, same store sales gains, and the opening of additional
restaurants.
Pro Forma
Total revenues in Fiscal 1995 were $28,621,000 as compared to $22,205,000 in
Fiscal 1994, representing an increase of $6,416,000 or 28.9%. The increase was
attributable primarily to opening four new restaurants and relocating one
existing restaurant in 1995. Sales for the eight restaurants which were
continuously operating during both periods and for at least the six months prior
to Fiscal 1994 were $15,585,000 in Fiscal 1995 as compared to $14,627,000 in
Fiscal 1994, representing an increase of $958,000 or 6.6%. The increase in
same-store sales was primarily attributable to an increase in the number of
customers served, resulting from expanded advertising, specifically in the
fourth quarter of Fiscal 1995, remodeling of certain of these restaurants, and,
to a lesser extent, from selected menu price adjustments. To the extent that the
Company has already recognized significant gains from improved operating
efficiencies, the Company may not experience same-store sales increasing at the
same rate in the future.
Cost of restaurant sales in Fiscal 1995 were 39.7% of restaurant sales as
compared to 41.5% of restaurant sales in Fiscal 1994. This percentage decrease
was primarily attributable to the decreased procurement costs of shrimp and
crab, and to a lesser extent, menu offering and price adjustments in December
1994 and August 1995 to compensate for increases in other product costs.
Labor and other related expenses were 27.2% of restaurant sales in Fiscal 1995
as compared to 26.6% of restaurant sales in Fiscal 1994. This percentage
increase was due primarily to increased operations management personnel in
preparation for new restaurant expansion.
Other restaurant operating expenses were 22.3% of restaurant sales in Fiscal
1995 as compared to 22.9% of restaurant sales in Fiscal 1994. This percentage
decrease was primarily due to increased operating efficiencies.
General and administrative expenses for Fiscal 1995 were $2,316,000 as compared
to $2,244,000 in Fiscal 1994, representing an increase of $72,000 or 3.2%. As a
percentage of total revenues these expenses amounted to 8.1% in Fiscal 1995 as
compared to 10.1% in Fiscal 1994. This percentage decline was attributable to a
higher unit sales volume and economies of scale gained in connection with
opening new restaurants.
16
<PAGE>
Net interest expenses in Fiscal 1995 was $409,000 as compared to $236,000 in
Fiscal 1994, representing an increase of $173,000 or 73.3%. This increase
resulted primarily from an increase in the Company's outstanding indebtedness
resulting from borrowings during 1995.
As a result of increased restaurant sales and decreases in cost of sales and
restaurant operating expenses as percentages of sales, income from operations
was $145,000 in Fiscal 1995, compared to a loss of $887,000 during Fiscal 1994.
The resulting net loss in Fiscal 1995 was $403,000, as compared to a net loss of
$1,155,000 for Fiscal 1994. The $752,000 improvement over Fiscal 1994 was due
primarily to operating and advertising efficiencies and economies of scale
gained from the Company's opening of additional restaurants.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flows for the last
three fiscal years (in thousands):
1996 1995 1994
---- ---- ----
Net cash provided by operating activities $ 2,639 $ 996 $ 731
Net cash used in investing activities (5,799) (1,733) (1,291)
Net cash provided by financing activities 5,417 1,041 874
------- ------ -------
Net increase in cash $ 2,257 $ 304 $ 314
======= ====== =======
As of December 29, 1996, the Company's current liabilities of $6,703,000
exceeded its current assets of $5,285,000, resulting in a working capital
deficiency of $1,418,000. As is common in the restaurant industry, the Company
has generally operated with negative working capital as a result of costs
associated with new restaurants and remodeling existing restaurants as well as
the turnover of restaurant inventory relative to more favorable vendor terms in
accounts payable. Additionally, the use of current assets for investment in
leaseholds, land and buildings, and equipment has also contributed to the
deficiency in working capital. At December 31, 1995 and January 1, 1995, the
deficiencies in working capital were due in large part to the Company
refurbishing locations for new restaurants and remodeling existing restaurants
prior to obtaining the long-term financing to pay for such expenditures.
The Company received $6,125,000 in net proceeds from the completion of the
Offering and the exercise of the underwriter's over-allotment option during
1996. During 1995, funding was made available through loans aggregating
$1,000,000 from the MicroCap Fund, Inc. ("MicroCap") and Mr. Frederick R. Adler
and $750,000 from various persons, including Mr. Adler and a partnership
affiliated with Mr. Adler. The Company repaid the $1,310,000 in shareholder
loans plus accrued interest of approximately $300,000 from the proceeds of the
Offering. In addition, upon the consummation of the Offering, the (i) $750,000
of indebtedness borrowed in 1995 and (ii) $159,000 principal amount of
indebtedness owed to WLH Investments were converted into equity.
During Fiscal 1996, the Company's cash increased by $2,257,000. Net cash
provided by operating activities totaled $2,639,000, while cash used in
investing activities was $5,799,000 which related to capital expenditures in
connection with the opening of 10 new restaurants, the remodeling of certain
existing restaurants, and the installation of restaurant point of sale and cash
management systems. The net cash provided by financing activities was
$5,417,000, which primarily consisted of the $6,125,000 in net proceeds from the
Offering and the exercise of the over-allotment option and the $840,000 in net
proceeds from the issuance of debt, less the repayment of $1,310,000 in
shareholder debt. During Fiscal 1995, the Company's cash increased by $304,000.
Net cash provided by operating activities totaled $996,000, while cash used in
investing activities was $1,733,000 which related to capital expenditures in
connection with opening five new restaurants. The net cash provided by financing
activities was $1,041,000, which primarily consisted of the $1,750,000 in loans
less debt repayments.
17
<PAGE>
In connection with the reorganization of Shells, Inc., during Fiscal 1993,
Shells, Inc. issued 185,312 shares of Shells, Inc. preferred shares (the
"Shells, Inc. Preferred Shares"), in exchange for retirement of certain loans
and trade payables totaling $1,853,000. The Shells, Inc. Preferred Shares have a
par value of $10.00 per share and a noncumulative dividend of 5% per annum. The
Shells, Inc. Preferred Shares are redeemable by the Company in whole or in part
at any time upon payment of the par value plus any accrued but unpaid dividends.
In addition, the Company has agreed to allow each holder of Shells, Inc.
Preferred Shares to sell 20% of his or her shares of Shells, Inc. Preferred
Shares to the Company on an annual basis, beginning April 23, 1997, at a price
of $10.00 per share. The Company intends to use cash flow from its operations to
purchase any Shells, Inc. Preferred Shares sold to the Company by the holders of
such shares.
The Company opened 10 new restaurants and remodeled several existing restaurants
during Fiscal 1996 totaling $5,799,000 in capital expenditures. The average cost
of opening each restaurant during Fiscal 1996 was approximately $460,000,
including pre-opening expenses, point of sale installation, inventory and
deposits. In connection with the Company's expansion program, the Company may
hire additional administrative staff which will increase the Company's annual
general and administrative expenses. Other than these hirings, the Company
believes that its management team is well positioned to meet the Company's
expansion plan through Fiscal 1997.
The Company believes that cash flows from operations coupled with the funds
available from third party financing and cash balances at December 29, 1996,
will be sufficient to satisfy its contemplated cash requirements for at least 12
months. Other than the restaurant openings financed from the proceeds of the
Offering, the Company's expansion strategy is dependent upon obtaining third
party financing and achieving projected cash flow from operations. The third
party financing may include, but is not limited to, traditional lending sources
such as bank lines of credit, equipment leasing, and/or restaurant
sale/leaseback arrangements that may be available to the Company. The Company
currently has a $2,000,000 line of credit of which $1,553,000 was available as
of March 25, 1997, to finance the purchase of restaurant sites. Additionally,
the Company has access to a $1,000,000 line of credit to finance restaurant
equipment. The Company is seeking to obtain additional third party financing as
required from time-to-time to fully implement its expansion strategy. In the
event that the Company's plans change or its assumptions prove to be inaccurate
(due to unanticipated expenses or construction or other delays or difficulties
or otherwise), or if the proceeds, Third Party Financing or projected cash flow
otherwise prove to be insufficient to fund operations and fully implement the
Company's expansion strategy, the Company could be required to seek additional
financing from sources not currently anticipated. There can be no assurance that
third party financing will be available to the Company when needed, on
acceptable terms, or at all. The Company has $1,277,000 of principal
indebtedness due in 1997 as well as a maximum of $371,000 of Shells Inc.
Preferred Share repurchases which are expected to be repaid out of the Company's
cash flow from operations.
QUARTERLY FLUCTUATION OF FINANCIAL RESULTS
The restaurant industry in general is seasonal, depending on restaurant location
and the type of food served. The Company has experienced fluctuations in its
quarter to quarter operating results due to various factors, including the
seasonal nature of its business, weather conditions in Florida and the health of
Florida's economy in general and the tourism industry in particular. The
Company's restaurant sales increase from January through April and June through
August, the peaks of the Florida tourism season, and generally decrease from
September through mid-December. Seasonality at the Company's restaurants is
magnified due to their present exclusivity to Florida and, in many cases,
locations are in coastal cities, where sales are significantly dependent on
tourism and its seasonality patterns.
The following table presents, for the last 12 fiscal quarters, the total sales
for the Company-owned restaurants opened during the full fiscal year shown and
open for the full prior comparable fiscal year and at least six full months
prior thereto, and the percentage of yearly sales attributable to each quarter:
18
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1st 2nd 3rd 4th
Year Quarter Quarter Quarter Quarter
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total sales 1996 $6,947 $6,690 $6,003 $5,077
Percent of total sales 28.1% 27.1% 24.3% 20.5%
Total sales 1995 $4,334 $4,182 $3,724 $3,344
Percent of total sales 27.8% 26.8% 23.9% 21.5%
Total sales 1994 $3,878 $3,948 $3,648 $3,153
Percent of total sales (pro forma) 26.5% 27.0% 24.9% 21.6%
</TABLE>
In addition, quarterly results have been, and in the future are likely to be,
substantially affected by the timing of new restaurant openings. Because of the
seasonality of the Company's business and the impact of new restaurant openings,
results for any quarter are not generally indicative of the results that may be
achieved for a full fiscal year on an annualized basis and cannot be used to
indicate financial performance for the entire year.
IMPACT OF INFLATION AND PRICE CHANGES
The Company has not operated in a highly inflationary period and its management
does not believe that inflation has had a material effect on sales or expenses.
As operating expenses increase, the Company expects to recover increased costs
by increasing prices, to the extent permitted by competition. Due to the fact
that the Company's business is somewhat dependent on tourism in Florida, any
significant decrease in tourism due to inflation would likely have a material
adverse effect on revenues and profitability.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 29, 1996 and December 31, 1995 F-3
Consolidated Statements of Operations for the years (52 weeks) ended December 29, 1996,
December 31, 1995 and January 1, 19995. F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for the years (52 weeks)
ended on December 29, 1996, December 31, 1995 and January 1, 1995 F-5
Consolidated Statements of Cash Flows for the years (52 weeks) ended December 29, 1996,
December 31, 1995 and January 1, 1995 F-6
Notes to Consolidated Financial Statements F-8
SHELLS, INC.
Independent Auditors' Report F-22
Consolidated Statement of Operations for the year (52 weeks) ended January 1, 1995 F-23
Consolidated Statement of Cash Flows for the year (52 weeks) ended January 1, 1995 F-24
Notes to Consolidated Financial Statements F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Shells Seafood Restaurants, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheets of Shells Seafood
Restaurants, Inc. and subsidiaries (the "Company") as of December 29, 1996 and
December 31, 1995 and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the years (52 weeks) ended
December 29, 1996, December 31, 1995 and January 1, 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Shells Seafood
Restaurants, Inc. and subsidiaries at December 29, 1996 and December 31, 1995
and the results of their operations and their cash flows for the years (52
weeks) ended December 29, 1996, December 31, 1995 and January 1, 1995 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Tampa, Florida
February 21, 1997
F-2
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
------------------ -----------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 3,033,851 $ 776,779
Inventories 663,563 397,119
Other current assets 1,455,405 885,489
Receivables from related parties 132,048 62,994
----------- ----------
Total current assets 5,284,867 2,122,381
Property and equipment, net 8,655,149 3,577,097
Prepaid rent 374,721 425,120
Other assets 346,707 395,587
Goodwill 3,711,583 3,917,779
----------- ----------
TOTAL ASSETS $18,373,027 $10,437,964
=========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 2,486,943 $ 2,523,173
Accrued expenses 2,159,788 1,803,203
Payable to related parties - 98,927
Sales tax payable 282,966 229,531
Income taxes payable 496,216 -
Current portion of notes payable - stockholders 1,000,000 2,108,214
Current portion of long-term debt 276,765 81,499
----------- ----------
Total current liabilities 6,702,678 6,844,547
Deferred rent 857,830 651,134
Notes payable - stockholders, less current portion - 1,000,000
Long-term debt, less current portion 1,160,513 705,816
----------- ----------
Total liabilities 8,721,021 9,201,497
----------- ----------
Minority partner interest 511,810 574,291
----------- ----------
Shells, Inc. preferred shares subject to redemption,
$10 par value; authorized 10,000,000 shares; 185,312
shares issued and outstanding 1,668,476 1,551,476
----------- ----------
STOCKHOLDERS EQUITY (DEFICIENCY):
Preferred stock, $0.01 par value; authorized
2,000,000 shares; none issued or outstanding - -
Common stock, $.01 par value; authorized 20,000,000
shares; 3,297,536 and 1,462,684 shares issued and outstanding
as of December 29, 1996 and December 31, 1995, respectively 32,975 14,627
Additional paid-in-capital 7,480,548 581,841
Accumulated deficit (41,803) (1,485,768)
----------- ----------
Total stockholders equity (deficiency) 7,471,720 (889,300)
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY) $18,373,027 $10,437,964
=========== ==========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS (52 WEEKS) ENDED DECEMBER 29, 1996, DECEMBER 31, 1995
AND JANUARY 1, 1995
<TABLE>
<CAPTION>
Years (52 weeks) Ended
--------------------------------------------------------
December 29, 1996 December 31, 1995 January 1, 1995
----------------- ------------------ ----------------
REVENUES:
<S> <C> <C> <C>
Restaurant sales $39,405,304 $ 28,268,520 $ 5,768,141
Management fees from related parties 387,519 352,118 1,383,766
------------ ------------ ----------
39,792,823 28,620,640 7,151,907
------------ ------------ ----------
COST AND EXPENSES:
Cost of restaurant sales 14,017,163 11,219,794 2,292,115
Labor and other related expenses 10,220,280 7,679,898 1,522,976
Other restaurant operating expenses 8,266,403 6,300,702 1,428,668
General and administrative expenses 3,350,765 2,316,468 2,012,128
Depreciation and amortization 1,274,117 958,916 456,186
------------ ------------ ----------
37,128,728 28,475,778 7,712,073
------------ ------------ ----------
INCOME (LOSS) FROM OPERATIONS 2,664,095 144,862 (560,166)
------------ ------------ ----------
OTHER INCOME (EXPENSE):
Interest expense (337,347) (419,339) (179,743)
Interest income 167,718 10,797 88,835
Other income (expense), net (233,051) (32,834) 40,224
------------ ------------ ----------
(402,680) (441,376) (50,684)
------------ ------------ ----------
INCOME (LOSS) BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES 2,261,415 (296,514) (610,850)
ELIMINATION OF MINORITY PARTNER INTEREST (169,450) (106,928) (67,363)
------------ ------------ ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 2,091,965 (403,442) (678,213)
PROVISION FOR INCOME TAXES (648,000) - -
------------ ------------ ----------
NET INCOME (LOSS) 1,443,965 (403,442) (678,213)
PREFERRED SHARES ACCRETION (117,000) (166,229) -
------------ ------------ ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 1,326,965 $(569,671) $(678,213)
============ ============ ==========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ 0.41 $ (0.37)
============ ============
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
-- ASSUMING FULL DILUTION $ 0.37 $ (0.37)
============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
FOR THE YEARS (52 WEEKS) ENDED DECEMBER 29, 1996, DECEMBER 31, 1995
AND JANUARY 1, 1995
<TABLE>
<CAPTION>
ADDITIONAL UNAMORTIZED
COMMON STOCK PAID-IN DEFERRED ACCUMULATED
Shares Amount CAPITAL COMPENSATION DEFICIT TOTAL
------ ------ ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 2, 1994 1,300,000 $ 13,000 $ 377,000 $ (84,825) $ (404,113) $ (98,938)
Issuance of common stock in exchange for
Shells, Inc. common stock, pursuant to a
business combination 162,684 1,627 371,070 372,697
Amortization of deferred compensation 50,700 50,700
Net loss (678,213) (678,213)
--------- ------- --------- --------- --------- --------
Balance at January 1, 1995 1,462,684 14,627 748,070 (34,125) (1,082,326) (353,754)
Shells Inc. preferred shares accretion (166,229) (166,229)
Amortization of deferred compensation 34,125 34,125
Net loss (403,442) (403,442)
--------- ------- --------- --------- --------- --------
Balance at December 31, 1995 1,462,684 14,627 581,841 - (1,485,768) (889,300)
Shells Inc. preferred shares accretion (117,000) (117,000)
Issuance of common stock and warrants 1,834,852 18,348 7,015,707 7,034,055
Net income 1,443,965 1,443,965
--------- ------- --------- --------- ---------- ----------
Balance at December 29, 1996 3,297,536 $ 32,975 $ 7,480,548 $ - $ (41,803) $7,471,720
========= ======= ========== ========= ========== ==========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS (52 WEEKS) ENDED DECEMBER 29, 1996, DECEMBER 31, 1995
AND JANUARY 1, 1995
<TABLE>
<CAPTION>
Years (52 weeks) Ended
-------------------------------------------------------------
December 29, 1996 December 31, 1995 January 1, 1995
----------------- ----------------- ---------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 1,443,965 $ (403,442) $ (678,213)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,274,117 958,916 456,186
Amortization of deferred compensation - 34,125 50,700
Minority partner interest 96,519 106,928 67,363
Changes in assets and liabilities:
Decrease (increase) in inventories (266,444) (104,446) 58,835
Decrease (increase) in receivables from related parties (69,054) 136,260 (89,781)
Increase in other assets (868,137) (457,614) (639,477)
Decrease (increase) in prepaid rent 50,399 144,842 (282,703)
(Decrease) increase in accounts payable (36,230) 76,842 1,123,294
Increase in accrued expenses 356,585 340,486 559,116
Decrease in payable to related parties (98,927) (55,004) -
Increase in sales tax payable 53,435 43,836 25,542
Increase in income taxes payable 496,216 - -
Increase in deferred rent 206,696 174,596 80,023
----------- ----------- ---------
Total adjustments 1,195,175 1,399,767 1,409,098
----------- ----------- ---------
Net cash provided by operating activities 2,639,140 996,325 730,885
----------- ----------- ---------
INVESTING ACTIVITIES:
Purchase of investment securities (6,045,000) - -
Sale of investment securities 6,045,000 - -
Funds borrowed by Shells, Inc. on the
revolving line of credit - - (6,029,349)
Repayments from Shells, Inc. on the
revolving line of credit - - 5,392,207
Net cash provided by acquisition of Shells, Inc. - - 251,024
Purchase of property and equipment (5,798,872) (1,733,371) (904,988)
----------- ----------- ---------
Net cash used in investing activities (5,798,872) (1,733,371) (1,291,106)
----------- ----------- ---------
FINANCING ACTIVITIES:
Proceeds from debt financing 839,340 47,571 1,012,477
Repayment of debt (189,377) (756,281) (538,058)
Proceeds from minority partner contribution - - 400,000
Proceeds from borrowings from certain stockholders - 1,750,000 -
Repayment to stockholders (1,358,214) - -
Proceeds from issuance of common stock and warrants 6,125,055 - -
----------- ----------- ---------
Net cash provided by financing activities 5,416,804 1,041,290 874,419
----------- ----------- ---------
Net increase in cash 2,257,072 304,244 314,198
CASH AT BEGINNING OF YEAR 776,779 472,535 158,337
----------- ----------- ---------
CASH AT END OF YEAR $ 3,033,851 $ 776,779 $ 472,535
=========== =========== =========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS (52 WEEKS) ENDED
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest was $611,296, $307,510 and $53,268 for the years (52
weeks) ended December 29, 1996, December 31, 1995 and January 1, 1995,
respectively.
Concurrent with the initial public offering, 200,000 shares of the Company's
Common Stock and 100,000 warrants were issued upon the conversion of $750,000 of
related party debt and $159,000 of minority partner interest.
Cash paid for income taxes was $151,784 during the year (52 weeks) ended
December 29, 1996. No income taxes were paid prior to 1996.
For the year (52 weeks) ended January 1, 1995, $273,054 of prepaid insurance was
paid for through the issuance of notes.
During the period from April 29, 1993 (date of inception) through January 2,
1994 and the year (52 weeks) ended January 1, 1995, $520,000 and $540,000 in
non-interest bearing notes were issued by the Company for the rights to lease
two restaurants. A discount of $57,081, $56,198 and $31,508 was recognized as
interest expense for the years (52 weeks) ended December 29, 1996, December 31,
1995 and January 1, 1995, respectively. These balances, less discounts of
$251,672 and $308,753, were recorded as prepaid rent and are being amortized
over the life of the leases at December 29, 1996 and December 31, 1995,
respectively.
The Company acquired Shells, Inc. during 1994. The net cash provided by the
acquisition of Shells, Inc. was as follows:
Cost in excess of net assets acquired from Shells, Inc. $(4,123,980)
Issuance of common stock in exchange for Shells, Inc.
common stock 372,697
Working capital deficiency, excluding cash 3,039,865
Property and equipment (1,149,627)
Other assets (75,487)
Long-term debt 405,794
Deferred rent 396,515
Preferred shares 1,385,247
------------
Net cash provided by acquisition of Shells, Inc. $ 251,024
============
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- Shells Seafood Restaurants, Inc. and
subsidiaries (the "Company") currently manages and operates 32 full service,
casual dining seafood restaurants in Florida under the name "Shells". The
Company managed and operated 31 restaurants at December 29, 1996. The Company
was incorporated on April 29, 1993 and began operations in August 1993.
In August 1993, the Company purchased from Shells, Inc. the
servicemarks "Shells" and "Shells Seafood, ShellFish and Whatnot," as well as
all other intangible and tangible assets necessary to operate a restaurant chain
under the name "Shells". As part of the purchase, the Company entered into a
management and license agreement with Shells, Inc. whereby the Company became
the exclusive manager of the Shells restaurants owned by Shells, Inc. While
neither the Company nor Shells, Inc. controlled the other entity, certain
officers, directors and stockholders of the Company were also officers,
directors or stockholders of Shells, Inc. The Company and Shells, Inc.
determined that it would be to the advantage of both parties and their
respective stockholders that Shells, Inc. be merged into the Company. To that
end, the Company acquired Shells, Inc. effective December 29, 1994 (See Note 2).
Principles of Consolidation -- The consolidated financial statements
include the accounts and operations of the Company and its wholly-owned
subsidiaries as well as a joint venture partnership in which the Company is a
general partner owning a 51% interest in the partnership. All material
intercompany balances and transactions between the consolidated entities have
been eliminated in consolidation.
Fiscal Year -- The Company's Fiscal year is the 52 or 53 weeks ending
the Sunday nearest to December 31.
Certain Significant Risks and Uncertainties -- 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 date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimated.
Inventories -- Inventories consist of food (primarily seafood),
beverages and supplies and are recorded at the lower of cost or market. Cost is
determined using the first-in, first out (FIFO) method. The Company utilizes a
third party to hold and distribute certain products. The inventory is not
recorded by the Company nor is the risk of ownership transferred to the Company
until its individual restaurants receive the product.
Property and Equipment -- Property and equipment are stated at cost and
are depreciated using the straight-line method over the estimated useful lives
of the assets. Leasehold improvements and buildings are depreciated over the
shorter of the lease term or the estimated useful life and range from five to 30
years. Useful lives for equipment, furniture and fixtures, and signs range from
five to 10 years.
Construction in Progress -- The Company capitalizes all direct costs
incurred in the construction of its restaurants. Upon opening, these costs are
depreciated or amortized and charged to expense based upon their proper
classification. The amount of interest capitalized is insignificant to the
presentation of the consolidated financial statements in all periods presented.
Income Taxes -- The Company at its inception, April 29, 1993, adopted
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes". Under SFAS 109, the Company uses the asset and liability
method which recognizes the amount of current and deferred taxes payable or
F-8
<PAGE>
refundable at the date of the financial statements as a result of all events
that have been recognized in the financial statements and as measured by the
provisions of enacted tax laws.
Goodwill -- The excess of the Company's cost over the fair value of the
net assets resulting from the acquisition of Shells, Inc. is being amortized on
the straight-line basis over 20 years. The use of a 20 year estimated life was
based on the upper and lower limits considering among other factors the lease
terms of restaurants acquired and the cash flow projections of the restaurants.
At each balance sheet date, the Company evaluates the realizability of goodwill
based upon expectations of nondiscounted cash flows and operating income. The
Company believes that no material impairment of goodwill exists at December 29,
1996.
Intangible Assets --Servicemarks are recorded at cost and are being
amortized on the straight-line basis over 40 years. At each balance sheet date,
the Company evaluates the carrying value of intangible assets based upon
expectations of nondiscounted cash flows and operating income. The Company
believes that no material impairment of intangible assets exists at December
29,1996.
Preopening Costs -- Preopening costs, consisting of direct costs
associated with the opening of restaurants, are amortized over the 12-month
period following the restaurant opening date.
Net income (loss) Per Common Share --Net income (loss) per common share
is computed by dividing net income (loss) applicable to common stock by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. The primary and fully dilutive earnings per share
calculations for 1996 differ based on the dilutive effect of common stock
equivalents using the ending market price ($8.75) at December 29, 1996 for fully
diluted earnings per share and the average market price ($6.74) for primary
earnings per share. The weighted average shares of common stock outstanding was
1,556,000 for 1995 and 3,608,000 and 3,276,000 for fully diluted and primary
earnings per share for 1996, respectively.
2. BUSINESS COMBINATION
On December 29, 1994, the Company consummated a merger agreement with
Shells, Inc. (the "Merger"). The stockholders of Shells, Inc. received 162,684
shares of the Company's common stock valued at $2.29 based on an independent
appraisal (see Note 10) and warrants to purchase 229,904 shares of the Company's
common stock in exchange for all shares of Shells, Inc. common stock thereby
making Shells, Inc. a controlled subsidiary of the Company. Each share of
Shells, Inc. common stock was converted into 0.0181 shares of the Company's
common stock and a warrant to acquire 0.0256 shares of the Company's common
stock.
The acquisition was accounted for using the purchase method of
accounting; accordingly, the cost of the acquisition, totaling $424,238, was
allocated to assets and liabilities based upon their fair value on the date of
acquisition. The excess of the cost over the fair value of net assets acquired
in the amount of $4,123,980 has been recorded as goodwill and is being amortized
on the straight-line basis over 20 years. The results of Shells, Inc.
operations, from the date of the Merger to January 1, 1995, was not significant.
F-9
<PAGE>
The allocation of the excess of cost over fair value of assets acquired to
assets and liabilities of the Company is as follows:
<TABLE>
<CAPTION>
<S> <C>
Issuance of common stock in exchange for Shells, Inc. common stock $ 372,697
Transaction costs 51,541
-----------------
Total cost of acquisition 424,238
Fair value of net liabilities acquired from Shells, Inc. at December 29,1994 2,314,495
Shells, Inc. preferred shares assumed by the Company 1,385,247
=================
Excess of cost over fair value of net assets acquired $ 4,123,980
=================
</TABLE>
The following presents the unaudited pro forma consolidated statement of
operations of the Company for the year (52 weeks) ended January 1, 1995 as if
the Merger had occurred on January 3, 1994:
<TABLE>
<CAPTION>
<S> <C>
REVENUES:
Restaurant sales $ 21,877,749
Management fees from related parties 326,750
----------------
22,204,499
COSTS AND EXPENSES:
Cost of revenues 9,087,647
Labor and other related expenses 5,829,855
Other restaurant operating expenses 5,001,265
General and administrative expenses 2,243,614
Depreciation and amortization 929,589
----------------
23,091,970
LOSS FROM OPERATIONS (887,471)
OTHER INCOME (EXPENSE):
Interest expense, net (235,555)
Other 34,898
----------------
(200,657)
LOSS BEFORE ELIMINATION OF MINORITY PARTNER INTEREST (1,088,128)
MINORITY PARTNER INTEREST (67,363)
================
NET LOSS $ (1,155,491)
================
</TABLE>
The above amounts are based upon certain assumptions and estimates which the
Company believes are reasonable, and do not reflect any benefit from economies
of scale which might be achieved from combined operations. The pro forma results
do not necessarily represent results which would have occurred if the merger had
taken place on the basis assumed above. The pro forma per share data has been
omitted as it is deemed not relevant.
F-10
<PAGE>
3. OTHER CURRENT ASSETS
Other current assets consist of the following:
December 29, 1996 December 31, 1995
Preopening costs, net $1,050,898 $235,946
Organizational costs - 316,129
Prepaid expenses 259,721 131,344
Accounts receivable 131,400 179,451
Other current assets 13,386 22,619
---------- --------
$1,455,405 $885,489
========== ========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 29, 1996 December 31, 1995
Equipment $4,273,529 $2,501,502
Leasehold improvements 3,318,428 2,109,749
Furniture and fixtures 1,803,848 670,855
Land and buildings 1,422,871 -
Signs 357,665 209,992
Construction in progress 19,500 -
---------- ----------
11,195,841 5,492,098
(2,540,692) (1,915,001)
---------- ----------
$8,655,149 $3,577,097
========== ==========
5. ACCURED EXPENSES
Accured expenses consist of the following:
December 29, 1996 December 31, 1995
Accured payroll $ 956,536 $ 760,930
Accured interest 56,211 330,161
Accured rent 86,629 157,891
Unearned revenue 378,615 172,302
Other 681,797 381,919
---------- ----------
$2,159,788 $1,803,203
========== ==========
F-11
<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
<S> <C> <C>
Payable to stockholders:
9% senior secured note, payable to stockholders. $ - $ 1,310,000
Loans payable to stockholders, interest at the prime rate plus 2% (10.25% at
December 29, 1996) payable monthly collateralized by all assets of the
Company. (See Notes 12 and 13) 1,000,000 1,000,000
Loans payable to the Company's Chairman and an entity associated with the
Company's Chairman, with interest at the rate of 12%, collateralized
by all assets of the Company. (See Notes 12 and 13) - 750,000
Various notes with stockholders, principal and interest payable through
1996. Interest rates ranging up to 15%. - 48,214
Payable to others:
$500,000 non-interest bearing note, principal payable in variable annual
installments with a balloon payment due in the amount of $116,000
in 2002, net of imputed interest of $94,081 and $118,306, repectively,
at 9%, collateralized by a leasehold interest in certain property
and fixed assets of the Company. 255,919 289,694
$540,000 non-interest bearing note, principal payable in variable monthly
installments through December 2004, net of imputed interest of $157,591
and $190,447, respectively, at 11%, collateralized by a leashold interest
in certain property and fixed assets of the Company. 294,141 295,577
12% secured note, principal due in 2003, interest payable monthly,
collateralized by certain property and fixed assets of the Company. 150,000 150,000
$2,000,000 line of credit with a bank secured by real property owned by
the Company. Interest is payable monthly based on 1 month LIBOR rate
plus 2.25%. Principal is payable monthly based on a twelve year amortization
with unpaid principal due November, 2001. THe interest rate at December 29,
1996 was 7.89% 447,500 -
$453,000 promissory note with a bank secured by real property owned by the
Company. Interest is payable monthly based on the prime rate plus 1%.
Principal is payable $2,520 monthly with all unpaid principal due September,
2001. The interest rate at December 29, 1996 was 9.25% 268,905 -
Finance agreements, principal and interest due monthly through September
1998, interest rates ranging from 7.40%-7.90%. 20,813 42,933
$20,000 non-interest bearing note, principal payable monthly in installments
of $417. Imputed interest at December 31, 1995 was $881. - 9,111
------------ ------------
2,437,278 3,895,529
Less current portion (1,276,765) (2,189,713)
------------ ------------
$ 1,160,513 $ 1,705,816
============ ============
</TABLE>
The annual maturities of long-term debt as of December 29, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $1,276,765
1998 107,401
1999 110,962
2000 118,468
2001 558,335
Thereafter 265,347
==========
$2,437,278
==========
</TABLE>
The carrying amount of long-term debt at December 29, 1996 approximates fair
value.
F-12
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
Prior to January 1, 1995, the Company agreed to pay $520,000 and
$540,000 over ten-year periods as inducements to obtain leases for certain
restaurant sites. The $520,000 and $540,000, net of interest imputed at 9% and
11%, respectively, have been recorded as prepaid rent and are being amortized
over the terms of the leases.
With the exception of two sites, the Company conducts all of its
operations and maintains its administrative offices in leased facilities.
Certain leases provide for the Company to pay for common area maintenance
charges, insurance, and its proportionate share of real estate taxes. In
addition, certain leases have escalation clauses and/or require additional rent
based upon a percentage of the restaurant's sales in excess of stipulated
amounts. Total rent expense under these leases was $1,710,000, $1,545,000 and
$349,000 for the years (52 weeks) ended December 29, 1996, December 31, 1995 and
January 1, 1995, respectively, and includes contingent rent of $140,000, $81,000
and $62,000 for the years (52 weeks) ended December 29, 1996, December 31, 1995
and January 1, 1995. The approximate future minimum rental payments under such
operating leases as of December 29, 1996 are as follows:
1997 $ 2,228,000
1998 2,003,000
1999 1,922,000
2000 1,838,000
2001 1,294,000
Thereafter 6,801,000
-----------
$16,086,000
===========
These leases expire at various dates through the year 2015 but contain
renewal options for additional periods.
The Company has entered into employment agreements with four officers
that expire through the year 1998. These agreements include salaries ranging
from $99,000 to $170,000 per year for each of the officers. The employment
agreement for the President is effective through August 31, 1998 whereas the
other employment agreements are renewed automatically on the respective
anniversary dates, unless either party provides notice of intent not to renew.
During 1996, the Company entered into an agreement to purchase the
leasehold interest in six sites, as well as the leasehold improvements, fixtures
and equipment, from Islands Florida, LP, a Delaware limited partnership, in
exchange for $500,000 plus an aggregate amount equal to 1% of the gross sales
("royalty") of each of the restaurants opened and operated by the Company at
each of the six sites through the end of the initial terms of the respective
leases. The base terms expire at various dates between 2003 and 2015. These
restaurants were opened during December 1996 and the royalty expense related to
Fiscal 1996 was approximately $4,000.
The Company is subject to legal proceedings, claims and liabilities
which arise in the ordinary course of business. In the opinion of management,
the amount of the ultimate liability with respect to these actions will not
materially affect the Company's financial position, results of operations or
cash flows.
8. MINORITY INTEREST
The Company has a 51% equity interest in a joint venture (the "Joint
Venture") which owns and operates the Shells restaurant located in Melbourne,
Florida. The Company entered into the Joint Venture with WLH Investments, Inc.
("WLH Investments"), a corporation owned by the wife of the Company's
F-13
<PAGE>
President, on March 1, 1994. The Company has a 51% equity interest and WLH
Investments has the remaining 49%. As a condition of the Joint Venture, WLH
Investments contributed $400,000 in capital on March 1, 1994. The profits of the
Joint Venture are allocated as follows: (i) 100% of the first $60,000 annually
is allocated to WLH Investments, (ii) 100% of the next $60,000 is allocated to
the Company, (iii) any excess over the $120,000 is allocated 51% to the Company
and 49% to WLH Investments. All losses are allocated in accordance with the
ownership percentages.
The Joint Venture had profits of $342,000, $212,000 and $126,000 during
the years (52 weeks) ended December 29, 1996, December 31, 1995 and January 1,
1995, respectively.
The Joint Venture agreement effective March 1994, as amended March
1995, contains a purchase option for the Company to purchase the WLH Investments
interest in the Joint Venture, or conversely, for WLH Investments to put their
interest in the Joint Venture to the Company, for a purchase price of $750,000
payable by the issuance of the Company's common stock having a value of
$750,000. The option is exercisable at any time following the date the Company's
Common Stock equals or exceeds $20 per share for a period of 20 consecutive
trading days.
During 1996, the minority partner agreed to convert $159,000 of amounts
owed to them for 34,984 shares of the Company's Common Stock and warrants to
purchase 17,492 shares of the Company's Common Stock. The conversion of the
$159,000 from the minority partner represents the payment of undistributed
earnings and does not affect the minority partner ownership interest.
9. REDEEMABLE PREFERRED SHARES
Shells, Inc. currently has issued and outstanding 185,312 shares of 5%
non-cumulative preferred shares. Pursuant to the Merger (see Note 2), the
Company has agreed to allow each holder of Shells, Inc. Preferred Shares to put
20% of his or her Shells, Inc. Preferred Shares to the Company on an annual
basis, beginning on April 23, 1997. The put price is $10.00 per share of Shells,
Inc. Preferred Shares plus annual dividends. There were no dividends payable
during Fiscal 1996 as the subsidiary, Shells, Inc. had an accumulated deficit of
$1,840,640 as of December 29, 1996. The Company has also agreed that it will use
the initial proceeds, if any, received from the exercise of the Shells, Inc.
Warrants to redeem the Shells, Inc. Preferred Shares, at a redemption price of
$10.00 per share.
The carrying amount of Shells, Inc. Preferred Shares was recorded at
its estimated fair market value and is periodically accreted using the interest
method, so that the carrying amount will equal the total redemption value as of
the anticipated redemption dates. The carrying amount will be further
periodically increased by amounts representing dividends not currently declared
or paid, but which will be payable under the redemption features for which
payment is not solely within the control of the Company. Additional increases in
the carrying value will be affected by charges against retained earnings or in
the absence of retained earnings by charges against additional paid-in capital.
Each increase in the carrying amount of preferred shares subject to redemption
will be treated in the calculation of earnings per share in the same manner as
preferred share dividends. The maximum annual redemption payment by the Company
will be $370,624 for five years plus accrued dividends at 5%, commencing one
year from the date of the Offering. Shells, Inc. Preferred Shares accretion for
the years (52 weeks) ended December 29, 1996 and December 31, 1995 was $117,000
and $166,000, respectively.
The estimated annual accretions, from the adjusted fair market value,
plus accrued dividends payable at 5% as of December 29, 1996 are as follows:
Accretion 5% Dividend Total
------------ ------------ -----------
1997 $74,000 $79,000 $153,000
1998 58,000 60,000 118,000
1999 39,000 42,000 81,000
2000 14,000 28,000 42,000
------------ ------------ -----------
$185,000 $209,000 $394,000
============ ============ ===========
F-14
<PAGE>
10. STOCKHOLDERS' EQUITY
The Company completed an initial public offering (the "Offering") of
1,400,000 shares of the Company's Common Stock and warrants to purchase 700,000
shares of the Company's Common Stock on April 29, 1996 raising net proceeds of
$5,090,000 for the Company. Concurrent with the Offering, the Company converted
$750,000 of outstanding debt and $159,000 in minority partner interest into
200,000 shares of Common Stock and warrants to purchase 100,000 shares of the
Company's Common Stock, at $4.50 per share and $0.09 per warrant, respectively,
which represented the Offering price net of underwriter's discount. In
connection with the conversion of debt, the lender was granted an option (the
"Lender's Option") to purchase an additional 24,752 shares and 12,376 warrants
at $4.50 per share and $0.09 per warrant simultaneously with and in the same
proportion to which the underwriter exercises its over-allotment option. The
underwriter exercised its over-allotment option effective May 13, 1996 resulting
in the issuance of an additional 210,000 shares of common stock and warrants to
purchase 105,000 shares of the Company's Common Stock, plus the issuance of
24,752 shares and warrants to purchase 12,376 shares of the Company's Common
Stock through the Lender's Option, generating an additional $1,035,000 in net
proceeds for the Company. Upon completion of the Offering, the Company repaid a
$1,310,000 principal amount loan plus accrued and unpaid interest of $307,000 to
a stockholder. The effect of these transactions was to increase the pro forma
weighted average number of shares outstanding to 4,306,000 and 3,583,000 for the
years (52 weeks) ended December 29, 1996 and December 31, 1995, respectively.
The pro forma weighted average number of shares assumes the additional shares
were outstanding for the entire period. The pro forma earnings per share
reflecting the increased pro forma weighted average numner of shares outstanding
were $0.31 for the year (52 weeks) ended December 29, 1996 and a net loss per
share of $0.16 for the year (52 weeks) ended December 31, 1995.
On September 11, 1995, the Company's Board of Directors approved the
1996 Employee Stock Option Plan which provides for the issuance of options to
purchase a total of 101,000 shares of the Company's common stock at an exercise
price per share equal to the price on the date of grant. The Company has granted
options to purchase the entire 101,000 shares of common stock. Options for
24,000 shares are presently exercisable.
On September 11, 1995, the Company's Board of Directors approved the
1995 Employee Stock Option Plan which provides for the issuance of options to
purchase a total of 240,000 shares of the Company's common stock. The Company
intends to issue options under this plan to officers of the Company in
accordance with their employment agreements. The Company has issued to the
officers options to purchase 159,960 shares of the Company's common stock at
$5.00 per share.
The stockholders of Shells, Inc., pursuant to the Merger (see Note 2),
were granted warrants to purchase 229,904 shares of the Company's common stock
at $5.50 per share. The warrants are exercisable until April 23, 1998. Each
warrant is redeemable by the Company at a price of $0.10 at any time prior to
its expiration, but only after the 20th consecutive trading day on which the
Company's common stock maintains a closing bid price at least equal to $9.00 per
common share, and always subject to the right of the holders to exercise his or
her purchase rights thereunder within a period of 30 days following the
furnishing by the Company of its notice of redemption. Not withstanding the
above, these warrants will not be redeemable unless the shares underlying these
warrants are both registered for sale with the Securities and Exchange
Commission and released from any "lock up" that may be imposed upon the
transferability of the shares.
In September 1993, 338,000 shares of common stock were issued to
officers of the Company in exchange for future services. The Company recorded
deferred compensation of $101,400 related to the issuance of such shares. The
shares vested at various times through 1995 and the deferred compensation
associated with such shares, based on fair value, has been amortized over the
vesting period. Compensation expense of $34,125 and $50,700, was recorded for
the years (52 weeks) ended December 31, 1995 and January 1, 1995, respectively.
F-15
<PAGE>
Prior to the effective date of the Offering, the Company reincorporated
under the laws of the State of Delaware. The Company's Common Stock, at a par
value of $0.001 with 50,000,000 shares authorized for issuance under the laws of
the State of Florida, was converted into shares of the Company's Common Stock
registered under the laws of the State of Delaware, at a par value of $0.01 with
20,000,000 shares authorized, on a share-for- share basis. At December 29, 1996,
3,297,536 shares of the Company's Common Stock are issued and outstanding. In
addition, the Company's preferred shares, at a par value of $0.01 with
10,000,000 shares authorized for issuance under the laws of the State of
Florida, were converted into shares of the Company's Preferred Stock registered
under the laws of the State of Delaware, at a par value of $0.01 with 2,000,000
shares authorized, on a share-for-share basis. At December 29,1996, no shares of
the Company's $0.01 par Preferred Stock are issued or outstanding. The
accompanying balance sheet gives retroactive effect to the recapitalization.
11. INCOME TAXES
The components of the provision for income taxes for the year ended
December 29, 1996 are as follows:
Current Deferred Total
Federal $537,000 $ $537,000
State 111,000 - 111,000
-------- --------- --------
Total $648,000 $ - $648,000
======== ========= ========
There were no income taxes due and payable prior to Fiscal 1996.
The Company's effective tax rate differs from the federal statutory
rate for the year ended December 29, 1996 as follows:
Statutory rate 34.0%
Increase (decrease) in taxes due to:
State income tax, net of Federal benefit 3.6%
FICA tip credits (5.3%)
Goodwill amortization 3.3%
Valuation allowance adjustment (3.0%)
Tax exempt interest (1.6%)
-----
Effective tax rate 31.0%
-----
As of December 29, 1996, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $2,096,000 which
expire between 2006 and 2009. The Company also has approximately $261,000 of
general business credit carryforwards which expire by 2010. The Company had an
ownership change in both 1994 and 1996 as defined by Internal Revenue Code
Section 382, which limits the amount of net operating loss and credit
carryforwards that may be used against taxable income to approximately $25,000
per year. Any portion of the $25,000 amount not utilized in any year will carry
forward to the following year subject to the 15 year limitation on carryforward
of net operating losses and credits. All of the Company's net operating loss
carryforwards and credits are subject to the annual limitation. For financial
reporting purposes, a valuation allowance of $1,495,000 as of December 29, 1996
has been recognized to offset a portion of the deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
F-16
<PAGE>
<TABLE>
<CAPTION>
December 29, 1996
----------------------------------------------------
Current Deferred Total
<S> <C> <C> <C>
Preopening costs and other assets $ - $ (203,000) $ (203,000)
Accrued liabilities 289,000 360,000 649,000
Net operating loss carryforwards - 788,000 788,000
General business credits - 261,000 261,000
----------------------------------------------------
289,000 1,206,000 1,495,000
Less valuation allowance (1,495,000)
------------------
$ -
==================
December 31, 1995
----------------------------------------------------
Current Deferred Total
Preopening costs and other assets $ 75,000 $ - $ 75,000
Accrued liabilities 109,000 241,000 350,000
Net operating loss carryforwards 388,000 525,000 913,000
General business credits - 219,000 219,000
----------------------------------------------------
572,000 985,000 1,557,000
Less valuation allowance (1,557,000)
------------------
$ -
==================
</TABLE>
12. RELATED PARTY TRANSACTIONS
Effective August 19, 1993, as amended May 3, 1994, the Company extended
to Shells, Inc. a line of credit in the amount of $750,000. The loan agreement
provided for interest at the prime rate of interest announced by Barnett Bank of
Tampa plus 3%. The agreement also provided that the Company may, in its sole and
absolute discretion, allow the outstanding balance of the line to exceed
$750,000. As of January 1, 1995, as a result of the Merger, this line of credit
has been eliminated.
In August 1993, the Company entered into an agreement with a former
officer and director of the Company for consulting services at the rate of
$5,000 per month for which $60,000 was expensed for the year (52 weeks) ended
January 1, 1995. This agreement was terminated in 1994 with an additional
$40,000 settlement recorded as an expense for the year (52 weeks) ended January
1, 1995.
F-17
<PAGE>
In September 1993, pursuant to a note and stock purchase agreement,
$1,310,000 (the "1993 Loan") was borrowed from a stockholder, The MicroCap Fund,
Inc. ("MicroCap"), at an interest rate of 9%, principal and interest due October
30, 1995, which was subsequently extended to the earlier of May 15, 1996 or at
the consummation of the Offering. In consideration for granting this extension,
the Company issued to MicroCap warrants to purchase 75,000 shares of the
Company's Common Stock at an exercise price of $3.75 per share. This loan was
repaid with proceeds from the Offering.
In September 1993, the Company issued and sold 662,000 shares of common
stock at a price of $0.30 per share to a partnership affiliated with a former
director. Subsequent to such sale, an entity affiliated with the Company's
Chairman became the general partner of the partnership. This partnership was
dissolved during 1996. Pursuant to the liquidation of the partnership, the
shares were distributed to the partners of the partnership and the general
partner was granted the right to vote all shares until May 23, 1997.
In March 1994, a wholly-owned subsidiary of the Company entered into a
Joint Venture with WLH Investments, a corporation owned by the wife of the
Company's President. The Joint Venture entered into a management and license
agreement whereby the Joint Venture would pay the Company a management and
license fee of 6% of the restaurant's gross sales. The Joint Venture paid the
Company $154,000, $139,000 and $133,000 in management and license fees for the
years (52 weeks) ended December 29, 1996, December 31, 1995 and January 1, 1995,
respectively.
In December 1994, $1,000,000 in loans were made available from
stockholders; $500,000 from the MicroCap, and $500,000 from Frederick R. Adler,
the Company's Chairman, (the "1994 Loans"). The loans bear interest at the prime
rate (8.25% at December 29, 1996) plus 2% with interest payable monthly and
principal due June 30, 1995, which was subsequently extended to the earlier of
May 15, 1996 or at the consummation of the Offering. In consideration for
granting this extension, MicroCap and Mr. Adler each were issued warrants to
purchase 175,000 shares of the Company's common stock at a purchase price of
$3.15 per share. The funds on these loans were obtained on January 12, 1995 by
the Company. During 1996, this $500,000 note payable to MicroCap was sold to Mr.
Adler. Until these loans are repaid, Mr. Adler has the ability to appoint a
designee to the Board of Directors.
On October 16, 1995, a $750,000 loan (the "1995 Loan") was provided to
the Company, consisting of $650,000 from the Company's Chairman and an entity
associated with the Company's Chairman and $100,000 from an unrelated third
party, (the "1995 Lenders"). This loan bore interest at 12% and was payable on
the earlier of March 30, 1996 or at the time of the Offering. In addition, the
loan agreement provided for the granting of warrants to purchase 200,000 shares
of the Company's common stock at an exercise price of $3.50 per share. In
connection with the Offering, the 1995 Lenders agreed to convert the $750,000
owed to them into 165,016 shares of the Company's Common Stock and warrants to
purchase 82,508 shares of the Company's Common Stock (the "Debt Conversion").
The amounts owed were converted into stock and warrants at $4.50 per share and
$0.09 per warrant which represents the Offering price per share common stock and
warrant, net of underwriters discount. In connection with the Debt Conversion,
the 1995 Lenders were granted an option (the "Adler option") which gave the
F-18
<PAGE>
1995 Lenders the right to purchase an aggregate of up to 24,752 unregistered
shares of Common Stock and warrants to purchase up to 12,376 shares of the
Company's Common Stock at a purchase price of $4.50 per share and $0.09 per
warrant, respectively, simultaneously with and in the same proportion to which
the underwriter exercised its over-allotment option. The Debt Conversion was
completed concurrently with the Offering, and the Adler option was exercised
concurrently with the underwriter's over-allotment option.
Effective February 1, 1996, the 1993 Loan and 1995 Loan were extended
from February 29, 1996 to May 15, 1996 and effective with the consummation of
the Offering the 1994 Loans were extended from May 15, 1996, to a date 18 months
following the consummation of the Offering (October 23, 1997). As consideration
for these extensions, the Company issued to each of MicroCap and Mr. Adler
warrants to purchase 75,000 shares of common stock at a price of $3.50 per
share. The Company recognized $112,500 in compensatory expense during 1996
related to the issuance of these warrants.
During July 1996, MicroCap sold to Mr. Adler their entire equity
position in the Company, consisting of 300,000 shares of the Company's Common
Stock, warrants to purchase 75,000 shares of the Company's Common Stock at $3.75
per share, warrants to purchase 75,000 shares of the Company's Common Stock at
$3.50 per share, warrants to purchase 75,000 shares of the Company's Common
Stock at $3.15 per share, and a $500,000 note payable from the Company for an
aggregate purchase price of $2,700,000.
The minority partner agreed to convert $159,000 of amounts owed to it
for 34,984 shares of the Company's Common Stock and 17,492 warrants. The
conversion of the $159,000 from the minority partner represents the payment of
undistributed earnings and does not effect the minority partner ownership
interest. The amounts owed were converted into common stock and warrants at
$4.50 per share and $0.09 per warrant which represents the Offering price net
of underwriters discount. The conversion was effected concurrently with the
Offering.
The Company leases a restaurant from a stockholder and former officer.
The lease expires in 2001 and contains renewal options for six additional
five-year periods. The rent is based on a monthly charge plus 7% of gross sales
over $2,000,000 annually. Lease payments for each of the years (52 weeks) ended
December 29, 1996, December 31, 1995 and January 1, 1995 were $139,992.
Shells of Casselberry, a subsidiary of the Company, was a partner in a
partnership which owned and operated Shells of Winter Park. Shells of Winter
Park leased its location from the limited partner in a partnership between
Shells of Casselberry and another party. This partnership was dissolved
effective July 14, 1995 whereby the Company owns 100% of Shells of Winter Park.
The use of Shells, Inc. rights and servicemarks was given to a family
member of a former officer for a single subsidiary of the Company. The
subsidiary is required to pay a consulting, management, licensing and
servicemark fee equal to 1.5% of gross sales for a single restaurant of the
Company. The expense for the years (52 weeks) ended December 29, 1996, December
31, 1995 and January 1, 1995 were $41,000, $34,000 and $47,000, respectively.
In August 1993, a licensee agreement was signed between the Company and
Shells, Inc. which provided for a management fee of 6% of gross sales.
Management fees paid by Shells, Inc. to the Company for the year (52 weeks)
ended January 1, 1995 were $1,057,016.
The Company manages three restaurants pursuant to a management and
license agreement which became effective July 1993. These entities are deemed to
be related parties based on the Company's ability to influence the management
and operating policies of the managed restaurants. The Company provides
management services and licenses the Company's proprietary information required
to operate the restaurant for a management fee of 4% of restaurant sales. The
management agreements outline the respective owners ("licensees") responsibility
for funding all restaurant expenses, including food and beverage costs,
staffing, training, recruiting, inventories and working capital. A fourth
restaurant is operated by the Company, for a management fee of 4%, pursuant to
F-19
<PAGE>
an oral agreement requiring the restaurant to be operated in conformance with
the policies and procedures established by the Company for Shells restaurants.
The management fees paid during the years (52 weeks) ended December 29, 1996,
December 31, 1995 and January 1, 1995 were $388,000, $352,000 and $327,000,
respectively.
The Company has also entered into option agreements with three of the
licensees, effective July 1993 which were amended in August 1995, documenting
the terms by which the Company can acquire the restaurants assets in exchange
for a purchase price of six times the restaurants cash flow, less any
liabilities assumed. The purchase price is to be paid in the form of shares of
the Company's Common Stock at the prevailing market price. The option is
exercisable upon the attainment of certain prescribed market capitalization
levels.
13. STOCK COMPENSATION PLAN
As of December 29, 1996, the Company has two stock option plans (see
Note 10). Under both plans, the exercise price of each option equals the market
price on the date of grant and an option's maximum term is 10 years. The options
generally vest over three years, one third annually on the anniversary date of
the grant. As of December 29, 1996, options to purchase 260,960 shares of the
Company's Common Stock had been granted to employees of the Company at prices
ranging from $5.00 to $8.25 per share, which represents the estimated value at
the date of each grant. The weighted average option price is $5.20.
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans; accordingly,
no compensation cost has been recognized for the Company's stock option plans.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates for awards under those plans consistent
with the Financial Accounting Standards Statement No. 123, "Accounting for
Stock-Based Compensation", the Company's net income and earnings per share on a
pro forma basis would have been as follows for Fiscal 1996:
As reported Pro forma
Net income: $ 1,443,965 $1,062,542
Earnings per share (primary): $ 0.41 $ 0.29
Earnings per share (fully diluted) $ 0.37 $ 0.26
The fair value of each option grant is estimated using the
Black-Scholes option-pricing model with the following assumptions used for
grants: ( i) no dividend yield; (ii) expected volatility of 35%; (iii) a
risk-free interest rate of 6.4%; (iv) an estimated option life of five years for
the Company officer's and three and a half years for non-officers. The results
reported above may vary depending on the assumptions applied within the model.
There were no options granted prior to the Offering.
F-20
<PAGE>
14. Selected Quarterly Financial Data (Unaudited)
The following table presents the selected quarterly financial data for the
periods indicated (in thousands except per share data)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------
1996 March 31, 1996 June 30, 1996 September 29, 1996 December 29, 1996
---- -------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues $ 10,613 $ 10,380 $ 9,630 $ 9,170
Income from operations 1,203 929 455 77
Minority partner interest (56) (57) (46) (10)
Income before provision for income taxes 881 694 424 93
Net Income 608 479 293 64
Net Income applicable to common stock 579 450 264 34
Net income per share $ 0.34 $ 0.13 $ 0.07 $ 0.01
Pro forma net income per share $ 0.18 $ 0.11 $ 0.07 $ 0.01
1995 April 2, 1995 July 2, 1995 October 1, 1995 December 31, 1995
---- ------------- ------------ --------------- -----------------
Revenues 7,184 $ 7,798 $ 6,990 $ 6,649
Income (loss) from operations 276 171 (76) (226)
Minority partner interest (30) (26) (18) (32)
Income (loss) before provision for income taxes 149 59 (192) (419)
Net Income (loss) 149 59 (192) (419)
Net Income (loss) applicable to common stock 107 17 (234) (460)
Net income (loss) per share $ 0.07 $ 0.01 $ (0.14) $ (0.28)
Pro forma net income (loss) per share $ 0.04 $ 0.01 $ (0.07) $ (0.13)
</TABLE>
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Shells, Inc.
Tampa, Florida
We have audited the accompanying consolidated statements of operations and cash
flows of Shells, Inc. and subsidiaries (the "Company") for the year (52 weeks)
ended January 1, 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 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 of the consolidated statements of operations and of
cash flows provides a reasonable basis for our opinion.
In our opinion, such consolidated statements of operations and cash flows
present fairly, in all material respects, the results of operations and of cash
flows of the Company, for the year (52 weeks) ended January 1, 1995 in
conformity with generally accepted accounting principles.
The accompanying consolidated statements of operations and cash flows have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company's
recurring losses from operations raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The consolidated statements of operations and cash
flows do not include any adjustments that might result from the outcome of this
uncertainty.
DELOITTE & TOUCHE LLP
Tampa, Florida
February 23, 1996
F-22
<PAGE>
SHELLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR (52 WEEKS) ENDED JANUARY 1, 1995
REVENUES:
Restaurant sales $ 16,109,608
------------------
COST AND EXPENSES:
Cost of revenues 6,795,532
Labor and other related expenses 4,306,879
Other restaurant operating expenses 4,629,613
General and administrative expenses 231,486
Depreciation and amortization 267,202
------------------
16,230,712
------------------
LOSS FROM OPERATIONS (121,104)
------------------
OTHER INCOME (EXPENSE):
Interest expense, net (144,647)
Other expense, net (5,326)
------------------
(149,973)
------------------
------------------
NET LOSS $ (271,077)
==================
See notes to consolidated financial statements
F-23
<PAGE>
SHELLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR (52 WEEKS) ENDED JANUARY 1, 1995
OPERATING ACTIVITIES:
Net loss $ (271,077)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 267,202
Changes in assets and liabilities:
Increase in inventories (41,318)
Increase in other current assets and other assets (49,639)
Decrease in accounts payable 291,160
Decrease in accrued expenses (165,450)
Decrease in payable to related parties (44,839)
Decrease in sales tax payable (78,377)
Increase in deferred rent 101,229
----------------
Total adjustments 279,968
----------------
Net cash provided by operating activities 8,891
----------------
INVESTING ACTIVITIES:
Purchase of property and equipment (822,273)
----------------
Net cash used in investing activities (822,273)
----------------
FINANCING ACTIVITIES:
Funds borrowed from Shells Seafood 6,029,349
Restaurants, Inc. on a revolving line of credit
Payments to Shells Seafood Restaurants, Inc. (5,392,207)
on a revolving line of credit
Proceeds from issuance of debt 356,769
Repayment of debt (158,664)
----------------
Net cash provided by financing activities 835,247
----------------
Net increase in cash 21,865
CASH AT BEGINNING OF PERIOD 278,993
----------------
CASH AT END OF PERIOD $ 300,858
================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 198,788
At January 1, 1995, $143,375 of borrowings under the line of credit from a
related party pertain to insurance prepaid on behalf of Shells, Inc. by the
related party.
See notes to consolidated financial statements.
F-24
<PAGE>
SHELLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR (52 WEEKS) ENDED JANUARY 1, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- Shells, Inc. was incorporated on August 26,
1991 and, on January 1, 1992, it commenced operations and issued 7,284,032
shares of its common stock in exchange for all of the outstanding stock of 13
separate corporations which operated 14 Shells restaurants. The combination was
treated as a reorganization of entities under common control and was accounted
for as if it were a pooling of interest. The corporations were combined using
the historical cost basis of their respective assets and liabilities.
On December 29, 1994, Shells, Inc. consummated a merger agreement (the
"Merger") with Shells Seafood Restaurants, Inc. ("SSRI"). The stockholders of
Shells, Inc. received 162,684 shares of SSRI common stock and warrants to
purchase 229,904 shares of SSRI, in exchange for all shares of Shells, Inc.
common stock, thereby making Shells, Inc. a controlled subsidiary of SSRI. Each
share of Shells, Inc. common stock was converted into .0181 shares of SSRI
common stock and a warrant to acquire .0256 shares of SSRI common stock. The
acquisition was accounted for using the purchase method. The results of Shells,
Inc. operations from the date of the Merger to January 1, 1995 were not
significant.
As of January 1, 1995, Shells, Inc. owned 10 subsidiaries which were
operating nine full-service, casual dining seafood restaurants in Florida.
Going Concern -- The accompanying consolidated financial statements
have been prepared assuming that Shells, Inc. will continue as a going concern.
As shown in the accompanying consolidated financial statements, Shells, Inc.
incurred a net loss for the year (52 weeks) ended January 1, 1995. This factor
among others raises substantial doubt about Shells, Inc. ability to continue as
a going concern. On December 29, 1994, Shells, Inc. was acquired as described
above.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Shells, Inc. and all subsidiaries. All material
intercompany balances and transactions between the consolidated entities have
been eliminated in consolidation.
Fiscal Year -- The Fiscal year of Shells, Inc. is the 52 weeks ending
on the Sunday nearest to December 31.
Income Taxes -- Shells, Inc. has adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". Under
SFAS 109, Shells, Inc. uses the asset and liability method which recognizes the
amount of current and deferred taxes payable or refundable at the date of the
financial statements as a result of all events that have been recognized in the
financial statements and as measured by the provisions of enacted tax laws.
F-25
<PAGE>
2. OPERATING LEASES
Shells, Inc. conducts its operations in leased facilities. Certain
leases provide for Shells, Inc. to pay for common area maintenance charges,
insurance, and its proportionate share of real estate taxes. In addition,
certain leases have escalation clauses and/or require additional rent based upon
a percentage of the restaurant's sales in excess of stipulated amounts. Rent
expense was $1,098,811 for the year (52 weeks) ended January 1, 1995. The
approximate future minimum rental payments under such operating leases as of
January 1, 1995 are as follows:
1995 $ 750,000
1996 700,000
1997 585,000
1998 526,000
1999 434,000
Thereafter 1,522,000
----------
$4,517,000
==========
3. RELATED PARTY TRANSACTIONS
Effective August 19, 1993, as amended May 3, 1994, SSRI, the company
responsible for the Management of Shells, Inc. extended to Shells, Inc. a line
of credit in the amount of $750,000. The loan agreement provided for interest at
the prime rate of interest as determined by Barnett Bank of Tampa plus 3%. The
agreement also provided that SSRI may, in its sole and absolute discretion,
allow the outstanding balance of the line to exceed $750,000. As of January 1,
1995, as a result of the Merger, this line of credit has been eliminated.
Shells, Inc. leases a restaurant from a stockholder and former officer.
The lease expires in 2001 and contains renewal options for six additional
five-year periods. The rent is based on a monthly charge plus 7% of gross sales
over $2,000,000 annually. Lease payments for the year (52 weeks) ended January
1, 1995 were $139,992.
Shells of Casselberry, a subsidiary of the Company, was a partner in a
partnership which owned and operated Shells of Winter Park. Shells of Winter
Park leased its location from the limited partner in a partnership between
Shells of Casselberry and another party. This partnership was dissolved
effective July 14, 1995 whereby the Company owns 100% of Shells of Winter Park.
The use of the Company's rights and servicemarks were given by Shells,
Inc. to a family member of a former officer for a single subsidiary of Shells,
Inc. The subsidiary is required to pay a consulting, management, licensing and
servicemark fee equal to 1.5% of gross sales for a single restaurant of Shells,
Inc. The expense for the year (52 weeks) ended January 1, 1995 was $47,299.
In August 1993, a license agreement was signed with SSRI, which
provided for a management fee of 6% of gross sales. Management fees paid to SSRI
for the year (52 weeks) ended January 1, 1995 were $1,057,016. In addition to
providing management services, SSRI contracted for advertising and provided
seafood broker services to Shells, Inc. Approximately $609,000 in charges were
incurred related to these services for the year (52 weeks) ended January 1,
1995.
F-26
<PAGE>
4. INCOME TAXES
As of January 1, 1995, Shells, Inc. has net operating loss
carryforwards for federal income tax purposes of approximately $2,000,000 which
expire between 2006 and 2009. Shells, Inc. also has approximately $65,000 of
general business credit carryforwards which expire in 2009. Shells, Inc. had an
ownership change in 1994 as defined by Internal Revenue Code Section 382, which
limits the amount of net operating loss and credit carryforwards that may be
used against taxable income to approximately $25,000 per year. Any portion of
the $25,000 amount not utilized in any year will carry forward to the following
year subject to the 15 year limitation on carryforward of net operating losses
and credits. For financial reporting purposes, a valuation allowance of $987,000
as of January 1, 1995, has been recognized to offset the deferred tax assets.
5. DEFERRED COMPENSATION
On February 28, 1993, the Board of Directors of Shells, Inc. approved a
compensation package for the President. The compensation package included giving
the President, at no cost, 15% (1,540,360 shares) of the outstanding stock of
Shells, Inc. with such shares to vest ratably over the succeeding three years.
No shares were actually issued until May 9, 1994, at which time three stock
certificates were issued to the President, each representing the number of
shares which vest in 1994, 1995 and 1996. Pursuant to the terms of the Merger,
these shares were converted to SSRI common stock and warrants.
Shells, Inc. engaged an investment banker to determine the fair value
of its common stock. The investment banker determined that the common stock had
a fair value of $0.00. Therefore, Shells, Inc. did not record any expense in
connection with this transaction.
F-27
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
Name Age Position
-------------------- ------- ----------------------------------------
William E. Hattaway 53 President and Director
Warren R. Nelson 45 Vice President of Finance,
Chief Financial Officer,
Treasurer and Secretary
John R. Ritchey 49 Vice President of Operations
Frank C. Roehl, III 40 Vice President of Marketing
Frederick R. Adler 70 Chairman of the Board
John P. Collins 41 Director
Robert V. Gisselbeck 73 Director
Kamal Mustafa 48 Director
Jay S. Nickse 37 Director
Edwin F. Russo 70 Director
William E. Hattaway has served as President and as a director of the Company
since its inception in April 1993. Mr. Hattaway also serves as President, Chief
Executive Officer and as a director of Shells, Inc., positions he has held since
February 1993. From December 1989 through January 1993, Mr. Hattaway was a
principal in Todays Food Service Concepts, a developer of a three-location
restaurant chain in Orlando, Florida called Outlaws Steakhouse. From April 1987
through December 1989, Mr. Hattaway was Executive Vice President of General
Mills' Restaurant Group and President of General Mills' International Restaurant
Operations. Mr. Hattaway served as Chairman and Chief Executive Officer of Red
Lobster from March 1986 to April 1987. From January 1979 through March 1986 he
served as President of Red Lobster which he joined in January 1974 as Seafood
Buyer.
Warren R. Nelson currently serves as Vice President of Finance, Chief Financial
Officer, Treasurer, and Secretary of the Company, positions he has held since
June 1993. From June 1983 to May 1993, Mr. Nelson was employed by the Eckerd
Corporation, a national drug store chain, where he held the positions of
Assistant Controller, Subsidiary Controller and Manager of Planning and
Analysis. From March 1977 to June 1983, Mr. Nelson was employed by Red Lobster
where his responsibilities included strategic planning, acquisitions, corporate
development, procurement/distribution/operations analysis, and controller for
seafood purchasing and processing operations of a subsidiary of Red Lobster.
John R. Ritchey currently serves as Vice President of Operations of the Company,
a position he has held since October 1993. From May 1990 through September 1993,
Mr. Ritchey was a principal in Todays Food Service Concepts. From November 1986
to May 1990, Mr. Ritchey owned and operated a sports fishing center located in
Welaka, Florida. From 1972 through January 1986, Mr. Ritchey was employed by Red
Lobster, where he held positions of Vice President of Corporate Development,
Divisional Vice President of Operations and Regional Vice President of the
Chicago Division.
Frank C. Roehl, III currently serves as Vice President of Marketing of the
Company, a position he has held since April 1993. Mr. Roehl also serves as an
officer and as a director of Shells, Inc., positions he has held since October
1987. From October 1982 through October 1987, Mr. Roehl was employed by C.M.A.
Advertising Agency, the Talmadge, Roehl, and Magee Agency and the Roehl Group.
21
<PAGE>
Frederick R. Adler currently serves as Chairman of the Company's Board of
Directors, a position he has held since October 1994. Mr. Adler is Managing
Director of Adler & Company, a venture capital management firm he organized in
1968, and a general partner of its related investment funds. Since January 1,
1996, Mr. Adler has been of counsel to the law firm of Fulbright & Jaworski
L.L.P. Prior thereto and commencing January 1991, Mr. Adler was a retiring
senior partner of the law firm of Fulbright & Jaworski L.L.P. and prior thereto
was a senior partner in the firm. Mr. Adler is also Chairman of the Executive
Committee and a director of Data General Corporation, a computer company, a
director of Global Pharmaceutical Corp., a manufacturer of generic
pharmaceuticals; Prime Cellular Inc., an internet software company; USA
Detergents, Inc., a manufacturer of laundry and household cleaning products; and
of various private companies.
John P. Collins currently serves as a director of the Company, a position he has
held since December 1994 when the Company completed the Merger with Shells, Inc.
Mr. Collins served as Chairman of the Board of Directors of Shells, Inc. from
April 1992 through the effective date of the Merger. Mr. Collins is currently
Vice President of Knightsbridge Management, L.L.C., a New York based manager of
Knightsbridge Capital Fund I, L.P. a merchant banking partnership specializing
in the acquisition of insurance related businesses, Mr. Collins is also
currently Vice President of PennCorp Financial Group, a public insurance holding
company. From April 1990 to December 1993, Mr. Collins was employed as Vice
President and Chief Financial Officer of De Ster U.S. Holding Corporation, a
Dutch owned plastics manufacturer. From June 1989 to April 1990, Mr. Collins
served as the controller of Home Depot, Inc., a national chain of home
improvement supply stores. From June 1980 to June 1989, Mr. Collins practiced as
a certified public accountant with the Atlanta office of KPMG Peat Marwick LLP,
where he became a senior manager.
Robert V. Gisselbeck currently serves as a director of the Company, a position
he has held since October 1994. Mr. Gisselbeck is currently a principal of
Gisselbeck and Associates, a real estate investment firm located in Naples,
Florida, which Mr. Gisselbeck formed in 1970. Mr. Gisselbeck is a director of
Apache Corporation, an oil and gas exploration company.
Kamal Mustafa currently serves as a director of the Company, a position he has
held since August 1994. Mr. Mustafa is currently the Chairman of the Board and
General Partner of BlueStone Capital Partners, an investment banking and
securities brokerage firm. Mr. Mustafa was President, Chief Executive Officer,
Portfolio Manager and a director of MicroCap, a publicly traded business
development company, from April 1994 to July 1996, and from January 1993 to
August 1993 was Managing Director of MicroCap. Since October 1991, Mr. Mustafa
has been Managing Director and sole stockholder of Hamilton Capital Partners,
Inc., a private investment consulting firm. From March 1990 to December 1991,
Mr. Mustafa was a financial consultant to Metromedia, Inc., a company in the
communications industry. From March 1988 to April 1990, Mr. Mustafa was
Executive Vice President, Managing Director and a director of Kluge and Company,
a leveraged buyout fund. From 1986 to March 1988, Mr. Mustafa was a Managing
Director, Mergers and Acquisitions and a Managing Director, Merchant Banking at
Paine Webber, Inc. From 1977 to 1986, Mr. Mustafa was a Managing Director
responsible for all Merchant Banking origination for Citibank in North America.
Jay S. Nickse currently serves as a director of the Company, a position he has
held since June 1995. Since July 1993, Mr. Nickse has been the Vice President
and Chief Financial Officer of Venad Administrative Services, Inc., a
corporation which provides administrative services for a number of venture
funds, including funds in which Frederick R. Adler is a partner. From September
1990 through July 1993, Mr. Nickse was a senior manager in the audit and
business advisory group at Price Waterhouse.
Edwin F. Russo currently serves as a director of the Company, a position he has
held since October 1994. Mr. Russo is currently a consultant to Medical
Industries of America (formerly known as Heartland of America), a position he
has held since June, 1996. He served as director of Heartland of America since
May 1995. From July 1994 to July 1995, Mr. Russo served in an of
counsel capacity to the Palm Beach, Florida law firm of Edwards & Angell. From
April 1991 to June 1994, Mr. Russo served in an of counsel capacity to the
Miami, Florida law firm of Fine Jacobson Schwartz Nash & Block. From 1986 to
1991, Mr. Russo was a partner in the Miami, Florida law firm of Blackwell,
Walker, Fascell and Hoehl.
22
<PAGE>
Each director of the Company is elected for a term of one year which expires at
the annual meeting of the Company's stockholders or at such other time as his
successor is duly elected and qualified. Each executive officer is appointed by
the Board of Directors and serves at the pleasure of the Board, subject to the
terms of employment agreements between the Company and each of the executive
officers. To date, directors have not been compensated for their services on the
Board of Directors.
The Company has been advised by George Heaton, a person who may be deemed a
promoter of the Company, that in 1988, a lawsuit was filed in Minnesota federal
district court against various parties including George Heaton claiming, among
other claims, that Mr. Heaton had violated federal and state securities laws.
Mr. Heaton was an officer, director and control person of each of Southbridge
Development Co. ("Southbridge"), Camelot Associates, Inc. ("Camelot") and
Florestra Associates, Inc. ("Florestra") in 1985 when these companies sold
various condominiums to three separate limited partnerships (the
"Partnerships"). The Partnerships, structured as "tax shelters," sold limited
partnership units therein to various investors (the "Limited Partners"). The
Partnerships subsequently went out of business and the Limited Partners lost
their investment in the Partnerships. The Limited Partners filed a lawsuit
against the promoter of the Partnerships, the accountants and attorneys of the
Partnerships, the appraiser of the condominiums purchased by the Partnerships,
the banks that loaned money to the Partnerships in order to purchase the
condominiums, Southbridge, Camelot, Florestra and George Heaton, as well as
other parties. A default judgment was entered against Mr. Heaton and Mr. Heaton
subsequently settled the judgment.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's Proxy Statement
for the Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Beneficial Ownership of Common Stock" in the Company's
Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 13. CERTAIN TRANSACTIONS
The section entitled "Executive Compensation - Compensation Committee Interlocks
and Insider Participation" and "Certain Transactions" in the Company's Proxy
Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
(1) and (2) See "Index to Consolidated Financial Statements" at Item 8 of this
annual report on Form 10-K.
(3) Exhibits
Exhibits Nos. 10.1, 10.2, 10.3, 10.4, 10.5 and 10.6 are management
contracts, compensatory plans or arrangements.
<TABLE>
<CAPTION>
Exhibits Description
- -------- -----------
<S> <C>
3.1 Certificate of Incorporation*
Agreement and Plan of Merger, dated March 31, 1996, by and between Shells Seafood
Restaurants, Inc., a Delaware Corporation, and Shells Seafood Restaurant, Inc., a Florida
Corporation.*
3.2 By-laws.*
3.3 Specimen Common Stock Certificate.*
4.1 Specimen Warrant Certificate.*
4.2 Form of Warrant Agreement between Shells Seafood Restaurant, Inc. and Continental Stock
Transfer & Trust Company and Paragon Capital Corporation.*
4.3 Form of Warrant Agreement between Shells Seafood Restaurants, Inc. and Paragon Capital
Corporation.*
10.1 Employment Agreement, dated September 1, 1995, between William E. Hattaway and Shells
Seafood Restaurants, Inc.*
10.2 Employment Agreement, dated September 2, 1993, between Frank C. Roehl, III and Shells
Seafood Restaurants, Inc.*
10.3 Employment Agreement, dated October 11, 1993, between John R. Ritchey and Shells Seafood
Restaurants, Inc.*
10.4 Employment Agreement, dated May 18, 1993, between Warren R. Nelson and Shells Seafood
Restaurants, Inc.*
10.5 1996 Employee Stock Option Plan.*
10.6 1995 Employee Stock Option Plan.*
10.7 Agreement for Purchase and Sale of Assets, dated May 14, 1993, between Shells Seafood
Restaurants, Inc. and Shells, Inc.*
10.8 Agreement for Assignment of Servicemarks, dated August 19, 1993, between Shells Seafood
Restaurants, Inc. and Shells, Inc.*
10.9 Agreement and Plan of Merger, dated November 16, 1994, by and among Shells Seafood
Restaurants, Inc., Shells Seafood Acquisition, Inc. and Shells, Inc.*
10.10 First Amendment of Agreement and Plan of Merger, dated December 13, 1995, by and among
Shells Seafood Restaurants, Inc., Shells Seafood Acquisition, Inc. and Shells, Inc.*
10.11 Warrant Agreement, dated as of December 29, 1994, relating to warrants to purchase 230,000
shares of Common Stock, adopted by the Board of Directors of Shells Seafood Restaurants,
Inc.*
10.12 Note and Stock Purchase Agreement, dated September 20, 1993, between Commonwealth
Associates Growth Fund, Inc. and Shells Seafood Restaurants, Inc.*
10.13 Intentionally omitted
10.14 Intentionally omitted
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.15 Shareholders Agreement, dated September 20, 1993, by and among Cotton Foods, Inc., William
E. Hattaway, Commonwealth Associates Growth Fund, Inc. and Shells Seafood Restaurants,
Inc.*
10.16 Note and Warrant Purchase Agreement, dated December 29, 1994, between Shells Seafood
Restaurants, Inc. and Frederick R. Adler and The MicroCap Fund, Inc.*
10.17 Promissory Note in the initial principal amount of $500,000, dated December 29, 1994, by
Shells Seafood Restaurants, Inc. for the benefit of Frederick R. Adler.*
10.18 Promissory Note in the initial principal amount of $500,000, dated December 29, 1994, by
Shells Seafood Restaurants, Inc. for the benefit of The MicroCap Fund, Inc.*
10.19 Security Agreement, dated as of December 29, 1994, between The MicroCap Fund, Inc. and
Shells Seafood Restaurants, Inc. *
10.20 First Amendment to Note and Stock Purchase Agreement and Shareholders Agreement, effective
as of December 29, 1994, by and among Food Properties, Ltd., (as successor in interest to
Cotton Foods, Inc.), William E. Hattaway, The MicroCap Fund, Inc. (formerly known as
Commonwealth Associates Growth Fund, Inc.), and Shells Seafood Restaurants, Inc.*
10.21 Registration Rights Agreement, effective as of December 29, 1994, by and among Frederick
R. Adler, The MicroCap Fund, Inc. and Shells Seafood Restaurants, Inc.*
10.22 Warrant Agreement, dated December 29, 1994, relating to Warrants to
purchase 20,000 shares of Class A Preferred Stock, adopted by the
Board of Directors of Shells Seafood Restaurants, Inc.*
10.23 Note and Warrant Purchase Agreement among Shells Seafood Restaurants, Inc., and Frederick
R. Adler, as nominee, dated as of September 19, 1995.*
10.24 Warrant Agreement, dated as of September 19, 1995, relating to
Warrants to purchase 200,000 shares of Common Stock, adopted by the
Board of Directors, of Shell Seafood Restaurants, Inc.*
10.25 Security Agreement, dated as of September 19, 1995 by and among Shells Seafood
Restaurants, Inc. and Frederick R. Adler, as nominee and James Monroe.*
10.26 Promissory Note in the initial principal amount of $650,000, dated September 19, 1995, by
Shells Seafood Restaurant, Inc. for the benefit of Frederick R. Adler, as nominee.*
10.27 Promissory Note in the initial principal amount of $100,000, dated September 19, 1995, by
Shells Seafood Restaurant, Inc. for the benefit of James Monroe.*
10.28 Registration Rights Agreement, dated as of September 19, 1995 by and
among Shells Seafood Restaurants, Inc., Frederick R. Adler, as
nominee, James Monroe, and any person or entity in whose name
certain warrants are originally registered.*
10.29 Form of Extension Agreement, effective February 1, 1996, by and among Frederick R. Adler,
The MicroCap Fund, Inc. James Monroe and Shells Seafood Restaurants, Inc.
10.30 Distributor Agreement, dated January, 1995, between Rykoff Sexton and Shells Seafood
Restaurants, Inc.*
10.31 Joint Venture Agreement, dated March 1, 1994, between Shells of Melbourne, Inc. and WLH
Investments, Inc.*
10.32 First Amendment to Joint Venture Agreement, effective as of March 31, 1995 between Shells
of Melbourne, Inc. and WLH Investments, Inc.*
10.33 Promissory Note in the initial principal amount of $400,000, dated March 8, 1994, by
Shells Seafood Restaurants, Inc. for the benefit of WLH Investments, Inc.*
10.34 Management and License Agreement, dated March 1, 1994, between Shells of Melbourne Joint
Venture and Shells Seafood Restaurants, Inc.*
10.35 Consulting Agreement, dated September 1, 1993, between Jupiter Marine, Inc. and Shells
Seafood Restaurants, Inc.*
10.36 Termination Agreement, dated December 29, 1994, between Jupiter Marine, Inc. and Shells
Seafood Restaurants, Inc.*
10.37 Management and License Agreement dated July 29, 1993, between Shells of Carrollwood
Village, Inc. and Shells Seafood Restaurants, Inc., as amended.*
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.38 Management and License Agreement, dated July 28, 1993, between Shells of North Tampa, Inc.
and Shells Seafood Restaurants, Inc., as amended.*
10.39 Management and License Agreement, dated July 29, 1993, between Shells of Sarasota South,
Inc. and Shells Seafood Restaurants, Inc., as amended.*
10.40 Amended Option Agreement dated August 10, 1995 between Shells Seafood Restaurants, Inc.
and Shells of Carrollwood Village, Inc.*
10.41 Amended Option Agreement, dated August 11, 1995 between Shells Seafood Restaurants, Inc.
and Shells of North Tampa, Inc.*
10.42 Amended Option Agreement, dated August 16, 1995 by and between Shells Seafood Restaurants,
Inc. and Shells of Sarasota South, Inc.*
10.43 Agreement for Consulting and Management Services and Licensing of
Service Marks, dated October 4, 1989 by and between Ursula Collaud
and Shells of Daytona Beach, Inc., as amended by the Stipulation of
Settlement dated December 2, 1994.*
10.44 Asset Purchase Agreement, dated September 30, 1994 between Shells of St. Pete Beach, Inc.
and the Bleckley Corporation.*
10.45 Assignment Agreement, dated September 30, 1994 between Shells of St. Pete Beach, Inc. and
the Bleckley Corporation.*
10.46 Promissory Note in the initial principal amount of $540,000, dated September 30, 1994 by
Shells of St. Pete Beach, Inc. for the benefit of the Bleckley Corporation.*
10.47 Continuing and Unconditional Guaranty by Shells Seafood Restaurants, Inc. for the benefit
of the Bleckley Corporation.*
10.48 Security Agreement, dated September 30, 1995 between Shells of St. Pete Beach, Inc. and
the Bleckley Corporation.*
10.49 Loan and Security Agreement, dated December 22, 1993 between Shells of Altamonte Springs,
Inc. and Altavest Inc.*
10.50 Promissory Note in the initial principal amount of $150,000, dated December 22, 1993 by
Shells of Altamonte Springs, Inc. for the benefit of Altavest, Inc.*
10.51 Assignment Agreement, dated November 1, 1993 between Shells of Countryside Square, Inc.
and Clearwater Food Service, Inc.*
10.52 Promissory Note in the initial principal amount of $500,000, dated November 1, 1993 by
Shells of Countryside Square, Inc. for the benefit of Clearwater Food Service, Inc.*
10.53 Form of Directors Indemnification Agreement.*
10.54 Form of Extension Agreement, effective March 30, 1996 by and among Frederick R. Adler, The
MicroCap Fund, Inc., Longview Partners, L.P. and Shells Seafood Restaurants, Inc.*
10.55 Form of Amended and Restated Common Stock Warrant Agreement, effective as of February 1,
1996.*
10.56 Promissory Note in the principal amount of $453,000, dated September 4, 1996 by Shells
Seafood Restaurants, Inc. for the benefit of Huntington National Bank of Florida.
10.57 Line of Credit for $2,000,000 dated July 18, 1996 by Shells Seafood Restaurants, Inc. for
the benefit of First Union National Bank of Florida.
10.58 Agreement for the purchase and sale of leases, leasehold improvements, restaurant assets,
assigned contracts and restaurant licenses by Shells Seafood Restaurants, Inc. for the
benefit of Islands Florida LP
11 Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.*
27 Financial Data Schedule
</TABLE>
* Previously filed with the Securities and Exchange Commission as Exhibits to,
and incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 333-1600).
26
<PAGE>
(b) Reports on form 8-K
None
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedule
See "Index to Consolidated Financial Statements and Supplementary
Data" at Item 8 of this Annual Report on Form 10-K. Schedules not
included herein are omitted because they are not applicable or the
required information appears in the Consolidated Financial Statements
or notes thereto.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SHELLS SEAFOOD RESTAURANTS, INC.
By /s/ William E. Hattaway
-------------------------------
William E. Hattaway, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
had been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ William E. Hattaway
- ------------------------
William E. Hattaway President and Director March 25, 1997
/s/ Warren R. Nelson
- ------------------------
Warren R. Nelson Vice President of Finance, March 25, 1997
Chief Financial Officer,
Treasurer and Secretary
/s/ Frederick R. Adler
- ------------------------
Frederick R. Adler Chairman of the Board March 25, 1997
/s/ John P. Collins
- ------------------------
John P. Collins Director March 25, 1997
/s/ Robert V. Gisselbeck
- ------------------------
Robert V. Gisselbeck Director March 25, 1997
/s/ Kamal Mustafa
- ------------------------
Kamal Mustafa Director March 25, 1997
/s/ Jay S. Nickse
- ------------------------
Jay S. Nickse Director March 25, 1997
/s/ Edwin F. Russo
- ------------------------
Edwin F. Russo Director March 25, 1997
<PAGE>
PROMISSORY NOTE
LOAN NUMBER HUNTINGTON BANK
$453,000.00 September 4, 1996
FOR VALUE RECEIVED, the undersigned promises to pay to the order of The
Huntington National Bank of Florida at 253 North Orlando Avenue, Maitland,
Florida 32751, or such other place as the holder may designate in writing, the
principal sum of Four Hundred Fifty-Three Thousand and No/l00 Dollars
(US$453,000.00) together with interest from August 29, 1996, at an adjustable
rate equal to one (1%) above the Chase Manhattan Bank of New York "Prime Rate"
as such rate is published in the Wall Street Journal or similar business
publication, provided however that at no time during the term of this note shall
the interest rate exceed a rate equivalent to ten and one-half (10.50%) per cent
per annum as long as the maker is not in default, on the unpaid balance as
follows:
Principal is due and payable in 59 monthly payments of $2,520.00
commencing on October 4, 1996 and $2,520.00 on the 4th day of each
month thereafter. Accrued interest is also due and payable in 59
monthly payments commencing on the 4th day of October, 1996 and on the
4th day of each month. The maturity date of this note shall be
September 4, 2001, at which time all remaining principal, accrued
interest and any other costs and expenses shall be due and payable:
With the right of prepayment of all or any part of the principal balance at
any time without penalty;
Each maker and endorser waives the right of exemption under the
Constitution and Laws of Florida and each maker and endorser waives demand,
protest and notice of maturity, non-payment or protest and all requirements
necessary to hold them liable as makers and endorsers.
It is further agreed that each maker and endorser, jointly and
severally, shall and will pay all costs of collection, including a reasonable
attorney's fee, in the event of failure to pay the principal of this note or any
interest thereon or installment thereof when due.
It is further agreed by each maker and endorser, jointly and
severally, hereby waive the right, which such party may have, to a trial by jury
in respect to any litigation arising from this Note or any other agreement
executed in conjunction with this Loan. Borrower and Bank each acknowledge that
this paragraph had either been brought to the attention of each party's
legal counsel or that each party had the opportunity to do so.
It is further agreed by each maker and endorser, jointly and severally,
that this note and each installment thereof shall bear interest at the highest
interest rate allowable by law from date of maturity until paid; and further,
that after the occurrence of any Event of Default, as defined herein, the rate
of interest, at Bank's option shall immediately be increased to the highest rate
allowable by law whether or not Bank accelerates the maturity and interest shall
accrue thereafter at said rate until all obligations under this note are paid in
full. Bank shall, within 10 days following the effective date of such interest
rate increase, notify Borrower of the fact that the interest rate has been
increased pursuant to this provision.
Borrower shall be in default upon the occurrence of any of the
following events, circumstances or conditions (Events of Default):
A. Failure by any party obligated on this Note or any other obligations
Borrower has with Bank to make payment when due; or
B. A default or breach by Borrower of any co-Signed, endorser, surety,
or guarantor under any of the terms of this Note, or other loan agreement, any
security agreement, mortgage, deed to secure debt, deed of trust, trust deed, or
any other documents or instruments evidencing, guaranteeing, securing or
otherwise relating to this Note or any other obligations Borrower has with Bank;
or
<PAGE>
C. The making or furnishing of any verbal or written representation,
statement or warranty to Bank which is or becomes false or incorrect in any
material respect by or on behalf of Borrower, or any co-signer, endorser, surety
or guarantor of this Note or any other obligations Borrower has with Bank; or
D. Failure to obtain or maintain the insurance coverage required by
Bank, or insurance as is customary and proper for any collateral securing the
repayment of this note; or
E. The death, dissolution or insolvency of, the appointment of a
receiver by or on behalf of, the assignment for the benefit of creditors by or
on behalf of, the voluntary or involuntary termination of existence by, or the
commencement of any proceeding under any present or future federal or state
insolvency, bankruptcy, reorganization, composition or debtor relief law by or
against Borrower, or any Co-signed, endorser, surety or guarantor of this Note
or any other obligations Borrower has with Bank; or
F. After thirty (30) days prior notice, the failure to pay or provide
proof of payment of any tax, assessment, rent, insurance premium, escrow or
escrow deficiency on or before its due date; or
On or after the occurrence of an event of Default, at the option of
Bank, all or any part of the Principal and accrued interest on this Note, the
Loan and all other obligations which Borrower owes Bank shall become immediately
due and payable without notice or demand. Bank may exercise all rights and
remedied provided by law, equity, this Note, and mortgage, deed of trust or
similar instrument and any other security, loan, guaranty or surety agreements
pertaining to this Note and all other obligations of Borrower to Bank. Bank is
entitled to all rights and remedies provided by law or equity whether or not
expressly stated in this Note. By choosing any remedy, Bank does not waive its
right to an immediate use of any other remedy in the event of default continues
or occurs again.
If Bank has not received the full amount of any monthly payment by the
end of 10 calendar days after the date it is due, a late charge shall be
assessed in the amount of 5% of such overdue payment of principal and interest,
or $5.00, whichever is greater, said late charge payable contemporaneously with
the payment of such overdue principal and interest.
On or after an Event of Default, Bank may recover from Borrower and all
guarantors or any of them, all fees and expenses in collecting, enforcing and
protecting liabilities and reasonable expenses in realizing on any security
incurred by Bank, plus expenses of collecting and enforcing this Note. Such fees
and expenses shall include, but are not limited to, filing fees, publication
expenses, deposition fees, stenographer fees, witness fees and any other court
costs. Any such fees and expenses shall be added to the Principal of this Note
and shall accrue interest at the same rate as provided in this Note.
Upon default of this Note, Bank may recover from Borrower and all
guarantors or any of them, reasonable attorney's fees incurred by Bank. Such
reasonable attorneys' fees shall include, without limitation, paralegal fees.
Any such reasonable attorneys' fees shall be added to the principal amount of
this Note and construed to mean 10% of the total of the unpaid balance at the
time of default plus all accrued interest or such larger amount as may be
reasonable and just, incurred in all legal actions, including those incurred in
appellate proceedings. Such recovery will be in the extent not prohibited by
law.
Until this Note is paid in full, Borrower shall furnish Bank copies of
all annual and quarterly reports (forms 10Q and 10K) as filed with the
Securities and Exchange Commission no later than the dates for such filings.
This Note is secured by a Mortgage and Security Agreement of even date.
Shell Seafood Restaurants, Inc.
By: /s/ William E. Hattaway
-------------------------
William E. Hattaway, President
<PAGE>
Exhibit 10.57
First Union National Bank
of Florida
Post Office Box 1825
Tampa, Florida 33601-1825
813 276-6000
[LOGO]
July 18, 1996
Mr. William E. Hattaway, President
Mr. Warren R. Nelson, Chief Financial Officer
SHELLS SEAFOOD RESTAURANTS INC AND SUBSIDIARIES
16313 NORTH DALE MABRY SUITE 100
TAMPA, FL 33618
Re: Loan Commitment to: SHELLS SEAFOOD RESTAURANTS INC AND SUBSIDIARIES
Dear Warren and Bill:
FIRST UNION NATIONAL BANK OF FLORIDA ("First Union") is pleased to offer you a
commitment to lend on the following terms and conditions:
BORROWER: SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
LOAN: $2,000,000.00 Line of Credit to finance the purchase of
restaurant properties. Term loans under the Line to be the
lesser of (i) 75% of First Union approved MAI appraised
value, or (ii) $450,000. Line expires on March 31, 1997.
INTEREST RATE: 1-Month-LIBOR plus 2.25% (225 basis points). The
1-Month-LIBOR shall be determined in accordance with First
Union's adjusted 1-Month-LIBOR formula which is the
equivalent of 1-Month-LIBOR rates published daily in the
Wall Street Journal. Comparable spread fixed rates are
available based on market rates on the date of closing.
REPAYMENT: Repayable in monthly payments of either (i) principal plus
interest based on a fifteen year amortization, or (ii)
principal and interest based on a twelve year amortization.
Term loans shall have a five year balloon.
FEES: Borrower shall pay a draw fee of one-half percent at each
term loan closing.
COLLATERAL: A first mortgage on the real property with an assignment of
all rents and leases. An MAI appraiser shall appraise the
Mortgaged Premises using appraisal methods and final
valuation acceptable to First Union. First Union shall
select and engage the appraiser. The appraisal must be in
compliance with the Appraisal Standards for Federally
Regulated Transactions, as required by the Federal Financial
Institution Reform, Recovery, and Enforcement Act of 1989
("FIRREA") and related or subsequent regulations. Appraisals
will be delivered to First Union at least seven days prior
to closings. Borrower may be required to provide an
environmental assessment or audit report, acceptable to
First Union, attesting to the satisfactory environmental
condition of the collateral and certifying that Borrower is
complying with all applicable environmental laws.
<PAGE>
BORROWER
FINANCIAL
STATEMENTS: Borrower will annually provide 10K's and audited financial
statements reflecting its operations, including, without
limitation, a balance sheet, profit and loss statement and
statement of cash flows, with supporting schedules.
Borrower will provide unaudited management quarterly
financial statements, including, without limitation, a
balance sheet, profit and loss statement, and statement of
cash flows, with supporting schedules, and a copy of 10Q's
and management's quarterly memorandum, if any, to Borrower's
Board of Directors (subject to confidentiality of First
Union).
COVENANTS: The covenants described on the Covenants Schedule to this
letter will be required.
DOCUMENTS: The loan will be evidenced by documents prepared by and
acceptable to First Union.
COSTS: Borrower shall pay all reasonable costs, expenses and fees
including, without limitation, appraisal, survey, insurance,
enviromental assessment, attorneys' fees, and recording
fees associated with this transaction whether or not the
transaction closes.
The preceding terms and conditions are not exhaustive, and this commitment is
subject to certain other terms and closing conditions customarily required by
First Union for similar transactions. First Union may be referred to as "Bank"
in this commitment letter and other related documents. This commitment will
expire unless it is closed on or before August 5, 1996. This commitment letter
shall not survive closing.
Borrower represents and agrees that all financial statements and other
information delivered to First Union are correct and complete. No material,
adverse change may occur in, nor any adverse circumstance be discovered as to,
the business or financial condition of the Borrower prior to closing. First
Union's obligations under this commitment are conditioned on the fulfillment to
First Union's sole satisfaction of each term and condition referenced by this
commitment.
This commitment supersedes all prior commitments and proposals with respect to
this transaction, whether written or oral, including any previous Term Sheets
made by First Union or anyone acting with its authorization. No modification
shall be valid unless made in writing and signed by an authorized officer of
First Union. This commitment is not assignable, and no party other than Borrower
shall be entitled to rely on this commitment.
Please indicate your acceptance of this offer and the terms and conditions
contained herein by signing below and returning one executed copy of this
commitment letter to the undersigned. This offer of commitment shall expire
unless the acceptance is received by the undersigned on or before August 5,
1996.
Thank you for allowing First Union to be of service. Please do not hesitate to
give me a call if I can be of further assistance.
Sincerely,
FIRST UNION NATIONAL BANK OF FLORIDA
By: /s/ Joseph Chillura
----------------------------------
Joseph Chillura
Vice President
<PAGE>
ACCEPTANCE OF LOAN COMMITMENT
The above commitment is agreed to and accepted on the terms and conditions
provided in this letter.
SHELLS SEAFOOD RESTAURANTS INC AND SUBSIDIARIES
/s/ William E. Hattaway
- ----------------------------------------------
By: William E. Hattaway, President
SHELLS SEAFOOD RESTAURANTS INC AND SUBSIDIARIES
/s/ Warren R. Nelson
- -----------------------------------------------
By: Warren R. Nelson, Chief Financial Officer
In the event First Union's document preparation staff needs to obtain additional
information for the closing of this transaction, please provide in the space
below the name and telephone number of the appropriate contact at your company:
Name: Warren Nelson or Steve Murman
-----------------------------------------
Telephone Number: 813 961-0944
-----------------------------
<PAGE>
COVENANT SCHEDULE
Attached to Commitment Letter to SHELLS SEAFOOD RESTAURANTS INC AND SUBSIDIARIES
dated July 18, 1996:
FINANCIAL COVENANTS.
Current Ratio. Borrower shall at all times maintain a Current Ratio of not less
than .55 to 1.00. "Current Ratio" shall mean the ratio of current assets to
current liabilities.
Total Liabilities to Effective Tangible Net Worth Ratio. Borrower shall at all
times beginning the fiscal quarter immediately following the closing date of the
loan maintain total liabilities, including debt fully subordinated to the loan,
to Tangible Net Worth Ratio of not more than 2.25 to 1.00. For purposes of this
computation, "Total Liabilities" shall mean all liabilities, including
capitalized leases and all reserves for deferred taxes and other deferred sums
appearing on the liabilities side of a balance sheet, in accordance with
generally accepted accounting principles applied on a consistent basis.
"Effective Tangible Net Worth" shall mean total assets minus total liabilities.
For purposes of this computation, the aggregate amount of any intangible assets
of Borrower including without limitation, goodwill, franchises, licenses,
patents, trademarks, trade names, copyrights, service marks, and brand names,
shall be subtracted from total assets, and total liabilities shall exclude any
debt fully subordinated to the loan.
Debt to Cash Flow Ratio. Borrower shall for each fiscal year maintain a Debt to
Cash Flow Ratio of not more than 2.00 to 1.00. "Debt Cash Flow" shall mean the
sum of all Funded Debt over the sum of net profit, interest, taxes,
depreciation and amortization. "Funded Debt" shall mean, as applied to any
person, the sum of all indebtedness for borrowed money (including, without
limitation, capital lease obligations and un-reimbursed drawings under letters
of credit) or evidenced by a note, bond, debenture or similar instrument of that
person.
Dividends. Except for dividends applicable to Shells, Inc preferred shares,
Borrower shall not, during any fiscal year, declare or pay cash dividends.
FINANCIAL REPORTS.
Reports and Proxies. Borrower shall deliver to First Union, promptly, a copy of
all financial statements, reports, notices, and proxy statements, sent by
Borrower to all its stockholders, and all regular or periodic reports required
to be filed by Borrower with any governmental agency or authority.
AFFIRMATIVE COVENANTS.
Deposit Ralationship. Borrower will maintain its primary depository account with
First Union.
Cash Management Relationship. Borrower will maintain its cash management account
with First Union.
NEGATIVE COVENANTS.
Change in Fiscal Year. Borrower shall not change its fiscal year without the
consent of First Union (not to be unreasonably withheld).
Guarantees. Borrower shall not guarantee or otherwise become responsible for
obligations of any other person, except in the cases of restaurant joint
ventures.
<PAGE>
Exhibit 10.58
AGREEMENT FOR PURCHASE AND SALE
AGREEMENT made as of the 18th day of October, 1996 by and
between ISLANDS FLORIDA LP, a Delaware limited partnership, having an office at
101 North Acacia Avenue, Solana Beach, California 92075 ("Seller"), and SHELLS
SEAFOOD RESTAURANTS, INC., a Delaware corporation, having an office at 16313
North Dale Mabry Highway, Suite 100, Tampa, Florida 33618 ("Purchaser").
WITNESSETH THAT PURCHASER AND SELLER HAVE AGREED AS FOLLOWS:
ARTICLE 1
AGREEMENT FOR PURCHASE AND SALE
1.1 Seller agrees to sell, transfer, convey, assign and
deliver to Purchaser, effective at each Closing (as hereinafter defined) on each
Closing Date (as hereinafter defined) and Purchaser agrees to acquire and accept
from Seller, in return for the consideration set forth in Article 2 hereof, all
right, title and interest of Seller in and to the following Leases, Leasehold
Improvements, Restaurant Assets, Restaurant Assets Leases, Assigned Contracts
and Restaurant Licenses (collectively, the "Assets") sold, transferred,
conveyed, assigned and delivered at such Closing:
(a) the real property leases described on Exhibit 1
hereto (individually, a "Lease", and collectively, the "Leases") affecting any
of the properties listed on Exhibit 2 hereto (individually, a "Property" and
collectively, the "Properties");
(b) all leasehold improvements to the Properties
(individually, a "Leasehold Improvement", and collectively, the "Leasehold
Improvements");
(c) all building fixtures and equipment owned by
Seller, including but not limited to plumbing, electrical, lighting fixtures and
paddle fans, heating, ventilation and air conditioning, irrigation, antenna and
cable systems; computer hardware (subject to the provisions of Section 1.2
hereof); all restaurant fixtures and equipment owned by Seller, including but
not limited to exhaust hoods and fire protection systems, refrigerated coolers
and freezers, ice machines, stoves, ovens, microwave ovens, fryers, steamers,
grills dish ring, sinks, prep tables, racks, tables, chairs, booths, cash
stands, stools, bar, back bar, server stations and other furniture; all
smallwares owned by Seller (subject to the provisions of Section 1.2 hereof)
including, but not limited to, plates, glasses, cups, baskets, flatware,
cookware and utensils; all signs and decor items owned by Seller (subject to the
<PAGE>
provisions of Section 1.2 hereof); and all other tangible assets of Seller
attached or appurtenant to or used in connection with any of the restaurants
which are owned or operated by Seller and located at any of the Properties,
subject to the provisions of Section 1.2 hereof, free from all liens and
encumbrances (collectively, the "Restaurant Assets");
(d) those (and only those) leases or rental
agreements listed on Schedule 1.1(d) to be provided hereto by Purchaser (as
provided in Section 3.3 hereto) covering certain of the Restaurant Assets
(collectively, the "Restaurant Assets Leases");
(e) those (and only those) agreements and contracts,
written or oral, listed on Schedule 1.1(e) to be provided hereto by Purchaser
(as provided in Section 3.4 hereto), entered into in connection with the
conduct, ownership or operation of an "Islands" restaurant operated by Seller at
a Property, including those (and only those) service contracts approved and
designated by Purchaser to remain in effect and all transferable guarantees and
warranties relating to the Restaurant Assets (the "Assigned Contracts"); and
(f) all licenses, permits, certificates of occupancy,
approvals, qualifications, consents and other authorizations owned or held by,
or granted to, Seller, necessary or useful for the lawful conduct, ownership and
operation of the Properties as restaurants, including without limitation those
listed on Schedule 1.1(f) to be provided hereto by Seller (as provided in
Section 17.1(o) hereto), other than those licenses, permits, certificates of
occupancy, approvals, qualifications, consents and other authorizations which by
law are not transferable (collectively, the "Restaurant Licenses").
1.2 No leased or loaned equipment set forth on Schedule 1.2
hereto (including all computer hardware at the Property located in Ft.
Lauderdale), accounts receivables, food and beverage inventories, cash,
deposits, trademarks, service marks, sign faces (but not sign poles, cans or
other similar items which are included in Section 1.1(c) above) or other
proprietary items containing the "Islands" name, marks or logos are intended to
be, or are being, sold, assigned or transferred hereunder. In addition, Seller
shall have the right to retain any computer systems and equipment, smallwares
and nonproprietary decor items located at any of the Properties to the extent
Purchaser does not intend to utilize such items in connection with its
operations.
1.3 Upon the terms and subject to the conditions contained
herein, effective on each Closing Date, Purchaser shall assume all obligations
and liabilities accruing, arising solely out of, or relating solely to events or
occurrences happening after the applicable Closing Date under the Leases,
Restaurant Assets Leases and Assigned Contracts assigned to Purchaser at such
Closing, but not including any obligation or liability for any breach or any
other events or occurrences happening, in whole or in part, prior to such
Closing Date under any such Leases, Restaurant
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<PAGE>
Assets Leases or Assigned Contracts. Except as specifically otherwise provided
herein, Purchaser shall assume no other obligations and liabilities of Seller.
1.4 At each Closing, Seller shall deliver to Purchaser such
bills of sale, endorsements, assignments and other instruments of sale,
conveyance, transfer and assignment, reasonably satisfactory in form and
substance to Purchaser and its counsel, as may be reasonably requested by
Purchaser, in order to convey to Purchaser good and marketable title to the
Assets, free and clear of all claims, charges, equities, liens, security
interests and encumbrances except for the Permitted Encumbrances (as defined in
Article 6 below).
1.5 At each Closing, Purchaser shall deliver to Seller such
assumption agreements evidencing the assumption of the liabilities and
obligations of Seller described in Section 1.3 hereof, reasonably satisfactory
in form and substance to Seller and its counsel, as may be reasonably requested
by Seller.
ARTICLE 2
PURCHASE PRICE
2.1 The purchase price for the Assets is FIVE HUNDRED THOUSAND
AND NO/100 dollars ($500,000.00) (the "Initial Payment", which term shall
include any reduction to such amount pursuant to the provisions of Section 2.2
hereof), plus an aggregate amount equal to one percent (1%) of the gross sales
of each of the restaurants opened and operated by Purchaser at a Property
(individually, a "Restaurant", and collectively, the "Restaurants") during the
term of such Restaurant's operation through the end of the initial term (as set
forth on Exhibit 1 hereto) of the applicable Lease for such Restaurant (the
"Additional Payments"). The Initial Payment and the Additional Payments are
hereinafter referred to collectively as the "Purchase Price". For purposes of
this Agreement, the term "gross sales" shall include the actual sales price
(whether wholly or partly for cash or on credit, including check or charge) of
all sales and services made or performed in, upon, or from the Properties by
Purchaser or any operator of the Restaurant on behalf of Purchaser or any
subtenant, licensee or concessionaire of Purchaser, whether for cash or credit,
including without limitation take-out, delivery and other sales where orders
originate in, at or from the Properties, pursuant to mail, telephone, facsimile
and/or other electronic or other devices, but excepting therefrom: (i) any
rebates and refunds to customers on transactions otherwise included in gross
sales; (ii) proceeds from vending machines located at the Properties provided
exclusively for employee use or any proceeds from pay telephones located at the
Properties; (iii) discounted portion of meals sold or given to employees at the
Properties or the discounted portion of any promotional or complimentary meals
served at the Properties; (iv) interest, service and other sales carrying
charges (including, but not limited to, credit card service charges) paid by
customers for the extension of credit on "in-house" accounts maintained by the
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<PAGE>
Restaurants; (v) gift certificates or vouchers until redeemed at the Properties;
(vi) bulk sales, exchanges or transfers of merchandise by the Restaurants with
any other store or outlet owned or operated by Purchaser where such exchange is
made solely for the convenient operation of Purchaser's business and not for the
purpose of consummating a sale made in, at or from the Properties; (vii) any
federal, state, municipal or other sales, "value-added," retail, excise or
similar taxes paid or incurred by Purchaser, in connection with sales or
services made or performed in, upon or from the Restaurants, whether such taxes
are collected from customers or absorbed by Purchaser; (viii) tips or
gratuities; (ix) proceeds of insurance policies received by Purchaser with
respect to any Property and/or Restaurant; provided that, in the event Purchaser
shall receive insurance proceeds compensating Purchaser for loss of sales, then
the amount of such compensating proceeds shall be included in gross sales; (x)
condemnation awards; (xi) amounts received by Purchaser in connection with sales
or transfers of Purchaser' trade fixtures and equipment, leasehold estate,
franchise agreements, and/or goodwill relating to the Properties; (xii) amounts
credited or paid for the return of a Restaurant's food or beverage items to
shippers or suppliers; (xiii) credit card chargebacks for uncollected accounts,
unless and until actually collected; and (xiv) sales of promotional items such
as hats, t-shirts and other items sold at the Properties which Purchaser
provides for advertising purposes or for which Purchaser sells at cost or does
not receive consideration.
2.2 The Initial Payment shall be allocated in its entirety
among the Properties in accordance with Schedule 2.2 hereto. On the Initial
Closing Date, Purchaser shall pay to Seller that portion of the Initial Payment
attributable to the Properties as to which Assets are being sold to Purchaser on
the Initial Closing Date (in accordance with Schedule 2.2 hereof) and to
Purchaser's counsel, in escrow pursuant to an escrow agreement in the form
attached hereto as Exhibit 3 (the "Escrow Agreement") the remaining portion of
the Initial Payment; provided, however, if at the Initial Closing Date it is
apparent that the conditions to closing set forth in Article 4 hereof with
respect to one or more of the Properties and corresponding Assets are incapable
of being satisfied with respect to such Property (the "Non-Closing Properties"),
and Purchaser nonetheless elects to close with respect to some or all of the
other Properties, then the Initial Payment shall be reduced by the amount
allocated in Schedule 2.2 hereto to the Non-Closing Properties. The Initial
Payment shall be paid by wire transfer (to the extent suitable instructions are
delivered to Purchaser not less than two (2) business days prior to the Initial
Closing Date) or by certified check. The Additional Payments shall be computed
by Purchaser and paid to Seller on a quarterly basis, within thirty (30) days of
the end of each fiscal quarter of Purchaser, commencing with the fiscal quarter
ending March 30, 1997 (the first such payment to include any amounts owed based
on gross sales, if any, of the Restaurants during the fiscal quarter ending
December 29, 1996). Purchaser shall deliver, together with the Additional
Payment, a gross sales report, certified by Purchaser's chief financial officer
or other executive officer with suitable knowledge, with respect to sales from
the Restaurants during the fiscal quarter as to which the Additional Payment is
being made.
-4-
<PAGE>
2.3 Upon execution of this Agreement, Purchaser shall deliver
the sum of Seventy Five Thousand Dollars ($75,000.00) by check to Purchaser's
counsel, in escrow pursuant to the Escrow Agreement, representing the contract
deposit amount (the "Contract Deposit Amount").
2.4 Seller and Purchaser shall file all information and tax
returns (and any amendments thereto) in a manner consistent with Schedule 2.2
hereto. If, contrary to the intent of the parties hereto as expressed in
Schedule 2.2, any taxing authority makes or proposes an allocation different
from that contained in Schedule 2.2, Seller and Purchaser shall cooperate with
each other in good faith to contest such taxing authority's allocation (or
proposed allocation); provided, however, that, after consultation with the party
adversely affected by such allocation (or proposed allocation), another party
hereto may file such protective claims or returns as may reasonably be required
to protect its interests. Purchaser shall pay all sales, transfer or stamp taxes
or similar charges in connection with this transaction.
2.5 Notwithstanding any other provision hereof, including the
provisions of Section 2.1 hereof, the computation of the Additional Payment and
the payment thereof is subject to the following: (a) Purchaser shall not be
under any obligation to pay Seller the Additional Payment with respect to a
closed Restaurant if Purchaser closes such Restaurant due to poor operating
performance and surrenders all of its interest in such Lease to the landlord
under the Lease; (b) if any Restaurant is sold to a third party, including, but
not limited to, any licensee or franchisee, who continues to operate the
Restaurant as a "Shells" restaurant, Seller shall be entitled to continue to
receive, and Purchaser shall be obligated either to pay or to contractually bind
such third party to pay Seller the Additional Payment with respect to such sold
"Shells" restaurant; and (c) if Purchaser sells any Restaurant to a third party
who does not continue to operate such Restaurant as a "Shells" restaurant on
such Property, or if any sold Restaurant referred to in subsection (b) above
ceases to be operated as a "Shells" restaurant, Seller shall be entitled to
receive and Purchaser (or such contractually bound third party) shall be
obligated to pay to Seller, in lieu of any Additional Payment otherwise required
hereunder to be paid to Seller in connection with such Restaurant and Property,
an amount equal to the aggregate amount of the Additional Payments attributable
to such Restaurant for the four fiscal quarters ended immediately preceding the
occurrence of such event or, if such event occurs within thirty days of the end
of a fiscal quarter, the four fiscal quarters ended with the fiscal quarter
second preceding the fiscal quarter in which such event occurred; provided,
however, if there are less than four fiscal quarters (calculated as provided in
the first part of this sentence) preceding the occurrence of such event, then
the amount of Additional Payment calculated pursuant to the first part of this
sentence shall be proportionately annualized for a full fiscal year. The
Additional Payment owed pursuant to the application of subsection (c) of this
Section 2.5, if any, shall be payable in its entirety on the date such sale is
consummated or the date upon which such Restaurant ceases to operate as a
"Shells" restaurant, as applicable.
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<PAGE>
ARTICLE 3
DUE DILIGENCE PERIOD
3.1 Purchaser intends to continue its physical inspection of
the Properties and the Assets for a period of up to six (6) weeks after the
execution of this Agreement ("Due Diligence Period"). Purchaser shall use
commercially reasonable efforts to complete such inspection and due diligence as
promptly as practicable. Seller shall assist Purchaser with such inspection and
shall provide Purchaser with all documentation referenced in those certain due
diligence letters dated September 12, 1996 and September 13, 1996 for each of
the Properties and Assets to the extent in its or its counsel's possession.
Seller has the right to cure any deficiency with respect to any of the
Properties or Assets within thirty (30) days after the expiration of the Due
Diligence Period (the "Cure Period"). Purchaser shall have the right to
terminate this Agreement or elect not to purchase a Property or Properties if,
in Purchaser's reasonable discretion, notwithstanding any information contained
in the Disclosure Schedule attached hereto under Sections 17.1(ae) or 17.1(af)),
Purchaser's due diligence with respect to any matter addressed in any of the
representations and warranties set forth in Section 17.1 hereof, or Title
Defects under Article 7 hereof (limited to the remedies set forth in Article 7)
proves to be unsatisfactory in any material respect; provided, however, that
subject to the provisions of Articles 9, 10 and 12 hereof, Purchaser may only
exercise such right by giving Seller written notice of such termination on or
before the last day of the Due Diligence Period or at the expiration of the Cure
Period, as applicable.
3.2 If Purchaser exercises its right to terminate this
Agreement pursuant to this Article, Purchaser shall be entitled to, at its
option, (1) the return of all monies paid, if any, on account of the Purchase
Price (including moneys placed in escrow as provided herein), in the event no
Properties are purchased hereunder, and upon receipt of any such monies, this
Agreement shall be deemed to be canceled and neither party shall have any
further claim, agreement, or obligation to the other party or (2) a reduction in
the Purchase Price, in the event less than all of the Properties are purchased
hereunder, based on the amount allocated on Schedule 2.2 hereto for any of the
Properties that Purchaser has rightfully elected not to purchase.
3.3 Within seven days of receipt of the documents listed on
Schedule 17.1(am) hereto, as provided in Section 17.1(am) hereto, Purchaser
shall prepare and deliver to Seller a copy of Schedule 1.1(d) hereto. In the
event no such Schedule 1.1(d) is delivered to Seller as provided herein,
Schedule 1.1(d) shall be deemed to read "none."
3.4 Within seven days of receipt of the documents listed on
Schedule 17.1(t) hereto, as provided in Section 17.1(t) hereto, Purchaser shall
prepare and deliver to Seller a copy of Schedule 1.1(e) hereto. In the event no
such Schedule
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1.1(e) is delivered to Seller as provided herein, Schedule 1.1(e) shall be
deemed to read "none."
ARTICLE 4
CONDITIONS PRECEDENT
TO OBLIGATION OF PURCHASER
Subject to the terms and conditions of Section 12.2(b) hereof,
the obligation of Purchaser under this Agreement to purchase the Assets sold at
each Closing shall be subject to the satisfaction, at or prior to each Closing,
of all of the following conditions, to the reasonable satisfaction of Purchaser
(any of which may be waived in writing in whole or in part by Purchaser):
4.1 All representations and warranties of Seller contained in
this Agreement (including the Schedules and Exhibits hereto), and all written
information required to be delivered to Purchaser by Seller on or prior to each
Closing Date pursuant to this Agreement, shall be true in all material respects
on and as of each Closing Date with the same force and effect as though such
representations and warranties were made, and such written information was
delivered, on and as of each Closing Date.
4.2 Seller shall have performed, satisfied and complied with,
in all material respects, all agreements, covenants and conditions required by
this Agreement, including the documents described in Articles 9 and 10 hereof,
to be performed, satisfied and complied with by Seller prior to or on each
Closing Date.
4.3 On each Closing Date, no injunction or order shall be in
effect prohibiting this transaction or which would make the consummation of this
transaction unlawful and no action or proceeding shall have been instituted and
remain pending before a court, governmental body or regulatory authority to
restrain or prohibit this transaction. No adverse decision shall have been made
by any such court, governmental body or regulatory authority, and no Federal,
state or local statute, rule or regulation shall have been enacted the effect of
which would be to prohibit, impair or delay this transaction or restrict or
impair in any material respect the ability of Purchaser to own the Assets or to
use the Assets and the Properties in the operation of the Restaurants.
4.4 There shall have been no material changes in the zoning
laws and regulations applicable to the Properties which would materially affect
the ability of or cost to Purchaser to open or operate the Restaurants at such
Properties.
4.5 On or before the Initial Closing Date, Purchaser shall
have received an assignment, assumption and consent agreement from Seller,
executed by Purchaser, Seller and the applicable landlord, assigning to
Purchaser (and, in the
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case of the landlord, consenting to such assignment and, in the case of
Purchaser, assuming the obligations as tenant under the applicable Lease) all of
Seller's right, title and interest in and to each of the Leases, substantially
in the form of Exhibit 4.5 hereto (each an "Assignment of Lease").
4.6 On or before the Initial Closing Date, Seller shall have
obtained, with respect to all Leases, an estoppel certificate, in the form
attached hereto as Exhibit 4.6 (the "Estoppel Certificates"), from each landlord
under a Lease, none of which Estoppel Certificates shall have been revoked or
altered in any respect from the date it was given by the respective landlord.
4.7 On each Closing Date, Purchaser shall have obtained all
permits, approvals, licenses, qualifications, registrations, consents and other
authorizations necessary for its operation, use and occupancy of the applicable
Property as a "Shells" restaurant and the operation and use of the related
Assets for their intended purposes, including, but not limited to, all building
and use permits, licenses (including liquor licenses), and other authorization
required under any applicable local, state or federal laws, orders, rules,
regulations and/or requirements (collectively, the "Permits"). Notwithstanding
the foregoing, if any particular Permit with respect to any Restaurant at a
Property has not been obtained by the applicable Closing Date, but, in
Purchaser's reasonable discretion, such Permit is obtainable in due course
without unreasonable delay, Purchaser may not refuse to close with respect to
such Property solely as a result of the failure to have obtained such Permit.
4.8 Purchaser shall have obtained a recent Phase 1
environmental study (the "Environmental Study") with respect to each Property,
the results of which shall be reasonably acceptable to Purchaser.
4.9 On or before the Initial Closing Date, Seller shall have
obtained from each lender who has a security interest in the Assets, a release
of the Assets from their security interest therein, in a form reasonable
acceptable to Purchaser and Seller (the "Lenders' Releases").
4.10 On or before each Closing Date, Purchaser shall have
received an Assumption Agreement (as defined in Section 5.4 hereof), executed by
Seller, with respect to the Restaurant Assets Leases and Assigned Contracts
relating to the Properties and corresponding Assets to which the Closing
relates.
4.11 Seller shall deliver its leasehold interest in and to
each of the Leases to be assigned at each Closing as provided in Article 7
hereof.
4.12 On or before the Initial Closing Date, Purchaser shall
have received the written authorization from Scheer-Tanaka-Dennehy Architects to
modify the construction plans referred to in Section 17.1(al) hereof and the
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Disclosure Schedule hereto and to use such plans in such other manner as
Purchaser reasonably deems necessary to file for and obtain the Permits.
4.13 On or before the Initial Closing Date, Seller shall
deliver the consent of Pembroke Lakes Mall, Ltd. with respect to the plans and
specifications submitted by Purchaser in connection with the use of the Property
located in Pembroke Pines, Florida as a "Shells" restaurant.
4.14 All proceedings to be taken by Seller in connection with
this Agreement and all certificates, instruments and other documents required to
effect the transaction contemplated by this Agreement shall be reasonably
satisfactory in form and substance to Purchaser and its counsel.
ARTICLE 5
CONDITIONS PRECEDENT
TO OBLIGATION OF SELLER
The obligation of Seller under this Agreement to sell,
transfer and assign the Assets at each Closing shall be subject to the
satisfaction, at or prior to each Closing, of all of the following conditions,
to the reasonable satisfaction of Seller (any of which may be waived in writing
in whole or in part by Seller):
5.1 All representations and warranties of Purchaser contained
in this Agreement (including the Schedules and Exhibits hereto, if applicable),
and all written information required to be delivered to Seller by Purchaser on
or prior to each Closing Date pursuant to this Agreement, shall be true in all
material respects on and as of each Closing Date, with the same force and effect
as though such representations and warranties were made, and such written
information was delivered, on and as of the Closing Date.
5.2 Purchaser shall have performed, satisfied and complied
with, in all material respects, all agreements, covenants and conditions
required by this Agreement to be performed, satisfied and complied with by
Purchaser prior to or on each Closing Date.
5.3 On or before each Closing Date, Seller shall have received
an Assignment of Lease, executed by Purchaser and the applicable landlord, with
respect to each of the Leases being assigned as of such Closing Date.
5.4 On or before each Closing Date, Seller shall have received
an assignment and assumption agreement from Purchaser, executed by Purchaser,
pursuant to which Purchaser shall assume all Seller's obligations under, and
Seller shall transfer all of the rights and benefits accruing to Seller under,
the Restaurant Assets Leases and Assigned Contracts relating to the Properties
and corresponding
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Assets to which the Closing relates, substantially in the form of Exhibit 5.4
hereto (each an "Assumption Agreement").
5.5 On each Closing Date, no injunction or order shall be in
effect prohibiting this transaction or which would make the consummation of such
transaction unlawful and no action or proceeding shall have been instituted and
remain pending before a court, governmental body or regulatory authority to
restrain or prohibit the transaction. No adverse decision shall have been made
by any such court, governmental body or regulatory authority, and no federal,
state or local statute, rule or regulation shall have been enacted the effect of
which would be to prohibit, impair or delay this transaction.
5.6 All proceedings to be taken by Purchaser in connection
with the transaction contemplated by this Agreement and all certificates,
instruments and other documents required to effect the transaction shall be
reasonably satisfactory in form and substance to Seller and its counsel.
5.7 On or before the Initial Closing Date, Seller shall have
obtained a Lenders' Release from each lender who has a security interest in the
Assets.
ARTICLE 6
PERMITTED ENCUMBRANCES TO TITLE
6.1 The sale, transfer and assignment of the Assets shall be
subject to each and all of the following (collectively, the "Permitted
Encumbrances"):
(a) Liens securing payment of all ad valorem,
intangible and other real and personal property taxes, school taxes, and water
and sewer charges against any of the Properties or the personal property covered
by this Agreement for the tax year in which each Closing Date occurs;
(b) State of facts which an accurate survey or
inspection of each of the Properties would disclose, provided that such state of
facts do not prohibit the current or proposed use of any of the Assets or
Properties;
(c) Zoning ordinances and regulations and building
restrictions and regulations affecting the Property on each Closing Date,
provided that the same are not violated by any existing structure on any of the
Properties and further provided that they do not prohibit the existing or
proposed use of any of the Assets or Properties; and
(d) Such other exceptions to title as shall be
reasonably approved by Purchaser.
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6.2 If at the time of each Closing the Assets or Properties
assigned or any part thereof shall be or shall have been affected by an
assessment or assessments obligated to be paid by Seller, and which are or may
become payable in annual installments of which the first installment is then due
or has been paid, then for the purpose of this Agreement all the unpaid
installments of any such assessment, including those which are to become due and
payable after such Closing, shall be prorated between Seller and Purchaser as of
the applicable Closing Date and adjusted accordingly at that time. The terms and
provisions of this Section 6.2 shall survive the applicable Closing.
ARTICLE 7
CONDITION OF TITLE, TITLE INSURANCE
7.1 Purchaser, if it so elects and at Purchaser's cost, may
obtain from a title insurance company selected by Purchaser (the "Title
Company"), a preliminary title report or commitment (the "Title Commitment") to
issue a leasehold policy of title insurance (the "Title Policy"), agreeing to
insure Purchaser's leasehold interest to each of the Properties in the amount of
$1,000,000.00 in the aggregate (as allocated per Property in accordance with
Schedule 2.2), subject only to the Permitted Encumbrances. Within ten (10) days
of Purchaser's receipt of the Title Commitment and the documents of record
reflected therein, Purchaser or its counsel shall give written notice (the
"Objection Notice") to the attorneys for Seller of any exceptions to title which
are not Permitted Encumbrances (the "Objections").
7.2 If Seller gives Purchaser notice (the "Response Notice")
that Seller is unable to cure the Objections and therefore unable to convey its
leasehold interest to a Property as required by this Agreement, Purchaser may,
in addition to any other remedies available to Purchaser, elect, by written
notice given to Seller within fifteen (15) days after the Response Notice is
given, to terminate this Agreement or to elect to consummate the purchase of
such Properties which are not encumbered by such title defects and to receive a
credit for the Properties not purchased in the amount allocated for such
Properties as set forth in Schedule 2.2. Seller shall give the Response Notice
within ten (10) days of receipt of the Objection Notice.
7.3 The existence of liens or encumbrances other than the
Permitted Encumbrances or those which are permitted by this Agreement shall be
deemed to be Permitted Encumbrances if the Title Company will insure Purchaser's
leasehold interest clear of the matter or will insure against the enforcement of
such matter out of each of the Properties, on the condition that Purchaser's
counsel shall agree to accept title with such insurance.
7.4 The Title Commitment and Title Policy shall be obtained at
Purchaser's expense.
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7.5 Notwithstanding anything to the contrary contained herein,
Seller shall cure all Title Defects (as defined below) at or prior to the
Initial Closing, if the same can be cured by the payment of a sum of money not
in excess of $100,000 in the aggregate for all of the Properties. "Title Defect"
is defined as any lien or encumbrance recorded against any of the Leases or
Properties which would render title to any such Lease or Assets related to a
Property to be unmarketable by Purchaser. Purchase shall deliver notice of a
Title Defect, if any, as part of any Objections included in an Objection Notice
as contemplated under Section 7.1 hereof. If Seller has not cured any and all
Title Defects by the Initial Closing Date, Seller shall deposit (or, at Seller's
option, direct Purchaser to pay from the proceeds of the Initial Payment) with
the Title Company an amount necessary to cure any Title Defects, up to $100,000,
and provide the Title Company with such affidavits or indemnities that are
requested by the Title Company to cure the remaining Title Defects.
ARTICLE 8
THE INITIAL CLOSING AND THE CLOSINGS
8.1 The initial closing (the "Initial Closing") shall occur on
or before December 2, 1996 (the "Initial Closing Date"). If the conditions under
Articles 4 and 5 are satisfied prior to the Initial Closing Date, both Purchaser
and Seller agree to use their reasonable good faith efforts respectively to
consummate the Initial Closing five (5) business days after such conditions have
been satisfied. To the extent not all Properties or Assets are sold, assigned,
transferred or delivered at the Initial Closing, such remaining Properties and
all Assets associated therewith shall be sold, assigned, transferred and
delivered to Purchaser (each, a "Subsequent Closing", and, together with the
Initial Closing, a "Closing") in accordance with Section 12.2(b) hereof. The
Initial Closing and each Subsequent Closing shall occur at the offices of Leslie
Robert Evans, P.A., 375 South County Road, Suite 218, Palm Beach, Florida 33480.
8.2 At the Initial Closing and each Closing, upon Purchaser's
delivery of all required documents and instruments and its payment of the
allocated portion of the Initial Payment and other amounts required herein,
Purchaser and Seller shall prepare and sign a closing statement reflecting the
adjustments and payments made and agreements in connection therewith (the
"Closing Statement"). Purchaser may, if it so elects, deliver a copy of each
Closing Statement and all of the aforesaid documents to the Title Company which
shall do the following:
(a) Record the Assignment of Lease.
(b) Pay all recording costs and transfer fees and
taxes, intangible taxes and all filing fees reflected on each Closing Statement.
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ARTICLE 9
DOCUMENTS REQUIRED ON INITIAL CLOSING DATE
9.1 At or prior to the Initial Closing, Seller shall execute
and/or deliver the following to Purchaser:
(a) Copies of all Restaurant Licenses, together with
such necessary forms as may be required to transfer the same;
(b) An Estoppel Certificate from each landlord of
each Lease;
(c) An Assignment of Lease from Seller and each
Landlord of each Lease;
(d) A Lender's Release from each applicable lender;
(e) A copy of all necessary consents required by the
partnership agreement of Seller authorizing the execution, delivery and
performance by Seller of this Agreement and each document to be executed and
delivered by Seller in connection with this Agreement, and designating one or
more partners to execute documents in Seller's name, together with a copy of the
resolutions of the general partner of Seller to such effect, and containing an
incumbency certificate for each person executing documents on behalf of Seller
with specimen signatures for each such person; and
(f) Such documents as may be necessary or appropriate
in order to evidence the authority of Seller to enter into and carry out the
terms of this Agreement.
9.2 At or prior to the Initial Closing, Purchaser shall
execute and/or deliver the following to Seller:
(a) Payment to Seller on the Initial Closing Date, of
that portion of the Initial Payment attributable to the Properties as to which
Assets are being sold to Purchaser on the Initial Closing Date (in accordance
with Schedule 2.2 hereof), and the remaining portion of the Initial Payment
shall be delivered to Purchaser's counsel, with evidence of the receipt thereof
being delivered to Seller, to be held pursuant to the term of the Escrow
Agreement; and
(b) A copy of the resolutions of the Board of
Directors of Purchaser authorizing the execution, delivery and performance by
Purchaser of this Agreement and each document to be executed and delivered by
Purchaser in connection with this Agreement, and the documents and instruments
required by this Agreement and designating one or more officers to execute
documents in Purchaser's name in connection herewith, certified as correct and
complete by the
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secretary of Purchaser together with an incumbency certificate for each person
executing documents on behalf of Purchaser with specimen signatures for each
such officer.
ARTICLE 10
DOCUMENTS REQUIRED ON CLOSING DATE
10.1 At or prior to each Closing, Seller shall execute and/or
deliver the following to Purchaser (with respect to the Property and
corresponding Assets to which such Closing relates):
(a) Bill of Sale pursuant to which Seller assigns and
conveys to Purchaser all applicable personal property covered by this Agreement,
with any applicable sales tax to be paid by Purchaser;
(b) Assumption Agreement;
(c) All applicable costs and fees required to be paid
by Seller pursuant to this Agreement;
(d) All original instruments and/or operational data
and/or information which may be reasonably necessary for the operation of each
Restaurant. The obligation of Seller as set forth in this subparagraph 10.1(d)
shall survive each Closing;
(e) A non disturbance and attornment agreement with
respect to each mortgage or deed of trust encumbering the Property located in
Davie, Florida (notwithstanding anything to the contrary in Article 12 hereof,
if such non disturbance and attornment agreement(s) is not delivered with
respect to the Property located in Davie, Florida, Purchaser may, in its sole
discretion, (i) elect to close on such Property or (ii) elect not to purchase
such Property in which case Purchaser shall receive back the allocated portion
of the Initial Payment, with respect to such Property (and the Assets associated
therewith) not sold, transferred, conveyed, assigned or delivered in the amount
allocated for such Property as set forth in Schedule 2.2); and
(f) Such other documents and instruments as may be
required in this Agreement or by the Title Company in order to consummate the
transactions described in this Agreement.
10.2 At or prior to each Closing, Purchaser shall execute
and/or deliver the following to Seller (with respect to the Property and
corresponding Assets to which such Closing relates):
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(a) Payment of the allocated portion of the Initial
Payment;
(b) The acceptance by Purchaser of the Assignment of
Lease;
(c) The acceptance by Purchaser of Assumption
Agreement; and
(d) Such other documents and instruments as may be
required in this Agreement or by the Title Company in order to consummate the
transactions described in this Agreement.
ARTICLE 11
APPORTIONMENTS AND ADJUSTMENTS
11.1 Seller shall be responsible for and shall pay all accrued
expenses including, but not limited to, all accounts payable and accrued
liabilities, of the Assets to be sold on such Closing Date accruing up to 11:59
P.M. on each such Closing Date and shall be entitled to receive and retain all
revenue from the Assets to be sold on such Closing Date accruing up to and
including each such Closing Date. Purchaser shall be responsible for and shall
pay all accrued expenses, including, but not limited to, all accounts payable
and accrued liabilities, of the Assets to be purchased on such Closing Date
accruing after each such Closing Date, and shall be entitled to receive and
retain all revenue from the Assets purchased on such Closing Date accruing after
each such Closing Date.
11.2 Subject to Section 11.4 hereof, on each Closing Date, the
following adjustments and apportionments shall be made in cash in accordance
with Section 11.1 as follows:
(a) Rents, utilities, CAM charges and similar items,
real estate taxes, ad valorem taxes, school taxes, assessments and personal
property, intangible and use taxes (excluding any sales, transfer and stamp
taxes, if any, which shall be paid by Purchaser, other than sales taxes which
may be owed by Seller relating to its historical operations and business
activities);
(b) Charges under service and maintenance contracts
affecting the Assets to be sold on such Closing Date which Purchaser has agreed
to assume on each such Closing Date; and
(c) Water and sewer charges on the basis of the
period for which assessed; provided that if a final bill is not available at
each such Closing, a reasonable estimate will be made based on prior bills and
an amount reasonably estimated to be adequate to pay such charges through each
such Closing Date shall be escrowed with the Title Company pending receipt of
final bills.
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11.3 The parties hereto agree that (i) Purchaser shall not
assume, pay, discharge, become liable for or perform when due, and Seller shall
not cause Purchaser so to assume, pay, discharge, become liable for or perform,
any liabilities (contingent or otherwise), debts, contracts, commitments and
other obligations of Seller of any nature whatsoever to the extent such
liabilities remain unpaid as of each such Closing Date and (ii) Seller shall not
assume, pay, discharge, become liable for or perform when due, and Purchaser
shall not cause Seller so to assume, pay, discharge, become liable for or
perform, any liabilities (contingent or otherwise), debts, contracts,
commitments and other obligations of Purchaser of any nature whatsoever to the
extent such liabilities are incurred by Purchaser after each such Closing Date.
11.4 The parties hereto agree to perform a post-closing
settlement, in accordance with Section 11.1, within thirty (30) days after each
Closing Date, with respect to any accrued expenses referenced in Section 11.2
not adjusted or apportioned on each Closing Date.
11.5 The parties hereto agree to each pay fifty percent (50%)
of the costs of the Environmental Study with respect to each Property; provided,
however, that Seller shall not be required to pay more than $1,000 per Property
in connection with such costs.
11.6 The parties hereto agree to each pay fifty percent (50%)
of any and all rent costs and other occupancy costs (including, without
limitation, property taxes, CAM charges and utilities) with respect to each
Lease which is not acquired by Purchaser at the Initial Closing, other than all
such rent and other occupancy costs for the Non-Closing Properties (which shall
continue to be paid for by Seller), during the period between the Initial
Closing Date and, the earlier of (i) the Subsequent Closing with respect to such
Property (and its associated Assets) or (ii) the election by Purchaser in
accordance with the provisions of this Agreement not to close with respect to
such Property; provided, however, that Purchaser shall be responsible for 100%
of such rent and other occupancy costs after the Closing Deadline (as defined in
Section 12.2 hereof) unless Purchaser has elected not to close with respect to
any such Property (and its associated Assets) in accordance with the provisions
of this Agreement.
11.7 The provisions of this Article 11 shall survive each
Closing.
ARTICLE 12
REMEDIES
12.1 In the event the sale of the Assets contemplated by this
Agreement is not consummated, in whole or in part, as a result of Purchaser's
failure to satisfy any of the conditions of Sections 5.1, 9.2 or 10.2(a), (b) or
(c), any
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of the covenants contained in Sections 11.6 and 17.2 hereof, Seller's sole
remedy shall be to terminate the Agreement and retain the Contract Deposit
Amount as liquidated damages; provided, however, that Seller may only retain the
Contract Deposit Amount if Purchaser failed to satisfy any such conditions or
covenants in any material respect (assuming for purposes of this sentence only
that there are no materiality exceptions or qualifications in any such
referenced sections) and such failure was intentional or as a result of
Purchaser's gross negligence. In no event shall Seller retain the Contract
Deposit Amount if Purchaser elects to exercise its termination rights under this
Agreement, including, but not limited to, pursuant to Article 3, 7 or 13 hereof,
provided that Purchaser has otherwise complied with all obligations required to
be complied with by Purchaser under this Agreement prior to such election.
12.2 (a) If the sale contemplated by this Agreement is not
consummated, in whole or in part, as a result of the failure of Seller to
satisfy, perform or comply with any of the conditions, covenants or obligations
set forth herein on its part to be satisfied, performed or complied with,
Purchaser shall be entitled to elect either, subject to the provision of Section
12.2(b) hereof, (i) to terminate this Agreement and receive back all monies
deposited as the Contract Deposit Amount if no Properties or Assets were sold,
transferred, conveyed, assigned or delivered, (ii) to enforce specific
performance of Seller's obligations under this Agreement; provided, however,
that Seller shall not be required to expend any money other than the amounts
provided in Articles 7 and 8, or take any action other than delivery of the
items provided in Articles 9 and 10, in connection with such specific
performance or (iii) to receive back all monies paid on account of the Purchase
Price, including the allocated portion of the Initial Payment, with respect to
each Property or Assets not sold, transferred, conveyed, assigned or delivered.
Notwithstanding the foregoing, in the event the sale contemplated by this
Agreement is not consummated, in whole or in part, as a result of the failure to
satisfy any of the conditions of Sections 4.1, 9.1(a), (c) (with respect to
Seller only) or (e), or 10.1(a)-(d), or any of the covenants contained in
Section 17.1 hereof, in addition to the remedies provided in subsection (i) and
(iii) above (but not (ii) above), Seller shall be obligated to pay and shall
immediately deliver to Purchaser the sum of $75,000 as liquidated damages;
provided, however, that Seller shall only be obligated to pay such amount if
Seller failed to satisfy any such conditions or covenants in any material
respect (assuming for purposes of this sentence only that there are no
materiality exceptions or qualifications in any such referenced sections) and
such failure was intentional or as a result of Seller's gross negligence.
(b) Notwithstanding the provisions of Section 12.2(a)
hereof, in the event the requirements referenced under Section 4.7 hereof are
not satisfied at or prior to the Initial Closing Date, and Seller has otherwise
satisfied, performed and complied with, or Purchaser has waived, all of the
conditions, covenants and obligations set forth herein to be satisfied,
performed or complied with by Seller at or prior to the Initial Closing Date,
Purchaser may elect to (i) waive such requirements and close on all of the
Properties or (ii) close on each Property under
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which all requirements have been met and are satisfied, or (iii) terminate this
Agreement on the Initial Closing Date if (x) three (3) or more of the Properties
do not have all necessary permits, licenses and other authorization as required
under Section 4.7 or (y) two (2) or more of the Properties located in West Palm
Beach, Coral Springs or Pembroke Pines do not have all necessary permits,
licenses and other authorizations as required under Section 4.7 hereof and, in
the case of both subsection (x) and (y), Purchaser has determined, in its
reasonable discretion, that all such permits, licenses or other authorizations
may not be obtained within a period of time reasonably acceptable to Purchaser.
In the event (ii) occurs, the closing for each remaining Property shall be five
(5) business days after the closing requirements under Section 4.7 hereof are
satisfied with respect to each Property (each a "Closing Date"), or waived by
Purchaser as the case may be. In no event shall any Closing occur later than six
(6) weeks after the Initial Closing (the "Closing Deadline"), except as set
forth herein. If the Closing has not occurred for a Property by the Closing
Deadline, Purchaser may elect (i) not to purchase such Property or (ii) waive
the requirements referenced under Section 4.7 and close on such Property within
five (5) days after the Closing Deadline. If Purchaser elects not to purchase a
Property under the terms of this Article 12.2, Purchaser shall receive back the
allocated portion of the Initial Payment, with respect to each Property (and the
Assets associated therewith) not sold, transferred, conveyed, assigned or
delivered in the amount allocated for such Property as set forth in Schedule
2.2.
12.3 If Seller shall dispute in writing the calculation of the
Additional Payment paid by Purchaser, and such dispute is not resolved between
Purchaser and Seller within sixty (60) days after the date the payment was
rendered, Seller may, during the thirty (30) days next following the expiration
of the sixty (60) days, refer the calculation of such disputed payment to an
independent certified public accountant for a determination. During such sixty
and thirty day periods, Purchaser shall afford Seller and such independent
certified accountant, respectively, reasonable access to such books and records
of Purchaser as are reasonably necessary with respect to the computation of the
Additional Payment, during normal business hours, provided that such
investigation shall be conducted in such a manner as not to interfere
unreasonably with the operations of the business of Purchaser. If it shall be
determined that the amount of the Additional Payment paid by Purchaser was
erroneous and Purchaser paid (i) a lesser amount than the independent certified
public accountant's calculation of the Additional Payment, then Seller's sole
remedy shall be to collect and Purchaser shall be required to pay to Seller, an
amount equal to the difference between the amount of the Additional Payment
previously paid by Purchaser and the amount of the Additional Payment as
calculated by the independent certified public accountant or (ii) a greater
amount than the independent certified public accountant's calculation of the
Additional Payment, the Purchaser shall be entitled to offset such overage
against future Additional Payments which may be owed to Seller. The costs for
the accountant's review and determination will be borne by Purchaser if it is
determined that Purchaser's original calculation of the Additional Payment was
in error by being
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understated by more than ten (10%) percent, otherwise such costs will be borne
by Seller.
12.4 The prevailing party in any litigation shall also be
entitled to recover against the other party its costs and expenses, including
reasonable attorneys' fees and court costs, incurred by such prevailing party in
enforcing any of the its remedies hereunder.
12.5 Notwithstanding anything to the contrary contained
herein, in no event shall Seller, or any other person or entity affiliated or
associated with Seller, or any successor-in-interest or assign of Seller, or any
such person, have any right or claim for the return of any Properties or Assets
(including, without limitation, any of the Leases), or the rescission of this
Agreement.
ARTICLE 13
DAMAGE, DESTRUCTION OR CONDEMNATION
13.1 Seller agrees to maintain its present policies of fire
insurance covering the Properties and Restaurant Assets in full force and effect
from the date of this Agreement through and including each Closing Date for the
applicable Property and related Restaurant Assets.
13.2 (a) If on or before each Closing Date either (a) all or a
substantial part of a particular Property which Lease therefore has not been
assigned is damaged or destroyed by fire or the elements or by any other cause,
or (b) a substantial part of any particular Property or related Assets is taken
by condemnation or other power of eminent domain, Purchaser may, by written
notice given to Seller within ten (10) days after Purchaser shall have notice of
the occurrence or the taking (but in no event after the applicable Closing
Date), elect to not purchase any such Assets relating to the Property, and
purchase the Assets with respect to the remaining Properties with a credit for
the Assets relating to the Property not purchased in the amount allocated
therefor as set forth in Schedule 2.2. If more than one (1) Property is
substantially damaged or taken by condemnation or other power of eminent domain
prior to the Initial Closing, Purchaser may elect to terminate this Agreement.
(b) If one (1) or more of the Properties located in West Palm
Beach, Coral Springs or Pembroke Pines is substantially damaged or destroyed by
fire or the elements or by any other cause, Purchaser may elect to require
Seller to assign to Purchaser any insurance or other proceeds received or
receivable by Seller in connection with such damage or destruction, but only in
the event Purchaser elects to purchase the Assets relating to such damaged or
destroyed Property pursuant to the terms and subject to the conditions of this
Agreement.
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ARTICLE 14
BROKER
14.1 Purchaser and Seller mutually represent and warrant to
each other that neither they nor any entity related to them have dealt with any
broker, finder or other person or entity who would be entitled to a commission
or other brokerage fee in connection with the transactions described in this
Agreement. Purchaser and Seller each agree to indemnify, defend and hold the
other harmless of and from and against any loss, costs, damage or expense
(including reasonable attorneys' fees and court costs) arising out of (i) any
inaccuracy in the representation and warranty contained in the immediately
preceding sentence or (ii) the claims of any broker or finder (or anyone
claiming to be a broker or finder) other than the entities identified in the
immediately preceding sentence regarding any services claimed to have been
rendered to the indemnifying party in connection with the transactions
contemplated by this Agreement.
14.2 Notwithstanding any other provision of this Agreement to
the contrary, the provisions of this Article shall survive the Closing and any
prior termination of this Agreement for any reason whatsoever.
ARTICLE 15
NOTICES
Any notice given or required to be given pursuant to any
provision of this Agreement shall be in writing and shall either be personally
delivered, sent by facsimile or sent by a reputable commercial courier service
guaranteeing overnight delivery, and shall be deemed to have been given upon
receipt if personally delivered or sent by facsimile, or, upon delivery to such
courier, with delivery charges prepaid, if sent by such a courier, in either
case addressed as follows:
Purchaser: Shells Seafood Restaurants, Inc.
16313 North Dale Mabry Highway
Suite 100
Tampa, Florida 33618
Attention: William E. Hattaway
with a copy to: Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Sheldon G. Nussbaum, Esq.
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Seller: Islands Florida LP
101 North Acacia Avenue
Solana Beach, California 92075
Attention: Glen Freter
with a copy to: Allen, Matkins, Leck, Gamble & Mallory LLP
18400 Von Karman, Fourth Floor
Irvine, California 92612
Attention: Leslie Fischer, Esq.
Either party may, by giving notice to the other in the manner
set forth above, change the address to which notices shall be sent to it,
provided that any such change of address shall be effective three (3) business
days after it is given. If a reputable commercial courier service guaranteeing
overnight delivery shall not service the area to which notice is required to be
given, notice to such area shall be by registered or certified mail, return
receipt requested, and shall be deemed given one day after the same is deposited
in an official U.S. mail depository, with all postage and other charges prepaid,
enclosed in a properly addressed and sealed wrapper. The attorney for each party
to this Agreement may give notices on behalf of his or her client with the same
force and effect as if such notice was given directly by such party.
ARTICLE 16
PERMITTED ASSIGNMENT
Purchaser may assign its interest under this Agreement,
without Seller's consent, to any affiliate of Purchaser. Seller may assign its
interest to Additional Payments, without Purchaser's consent, to any affiliate
of Seller; provided, however that such Additional Payments shall continue to be
subject to Purchaser's right of offset set forth in Section 18.2 of this
Agreement, and provided further that any such assignee shall execute an
agreement, reasonably acceptable to Purchaser, to such effect.
ARTICLE 17
REPRESENTATIONS, WARRANTIES AND COVENANTS
Seller and Purchaser hereby make the following
representations, warranties and covenants to each other (except as set forth in
the Disclosure Schedule attached hereto), which representations, warranties and
covenants are true and accurate in every respect as of the date hereof and shall
be true and accurate as of each Closing Date:
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17.1 Of Seller:
(a) Organization and Qualification. Seller is a
limited partnership duly organized, validly existing and in good standing under
the laws of the State of Delaware, with power and authority necessary to own,
lease and operate the Assets and to lease and operate the Properties and to
enter into and perform this Agreement, the Assignment of Leases and all
necessary documentation contemplated by this transaction;
(b) Due Authorization. (i) Seller has all requisite
power and authority to execute and deliver this Agreement, the Assignment of
Leases and each other document contemplated hereby to be executed by Seller, and
to perform fully its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby or thereby. The execution and delivery by
Seller of this Agreement, the Assignment of Leases and the other documents
contemplated hereby, and the performance by Seller of its obligations hereunder
and thereunder have been duly and validly authorized by all necessary action on
the part of Seller. This Agreement has been duly executed and delivered by
Seller and this Agreement is, and the Assignment of Leases and each other
agreement contemplated hereby to which Seller will be a party will be, upon
execution and delivery thereof by Seller, a legal, valid and binding obligation
of Seller, enforceable against it in accordance with its terms (except as the
enforceability thereof may be limited by any applicable bankruptcy, insolvency
or other laws affecting creditors' rights generally or by general principles of
equity, regardless of whether such enforceability is considered in equity or at
law);
(ii) Seller has the right to sell, convey,
assign, transfer and deliver the Assets to Purchaser, and the instruments of
transfer, conveyance and assignment to be executed and delivered by Seller to
Purchaser at each Closing will be valid and binding obligations of Seller,
enforceable in accordance with their respective terms, sufficient to transfer,
convey and assign to Purchaser all right, title and interest of Seller in and to
the Assets, and sufficient to vest in Purchaser the full right, power and
authority to own and operate the Assets as presently owned and operated by
Seller and as contemplated to be operated by Purchaser;
(c) Leasehold Interests to and Condition of
Properties and Assets. Seller has, and upon payment therefor Purchaser will
have, valid and subsisting leasehold interests in or valid licenses to use, the
Properties and Assets, free and clear of any liens, charges, options, security
interests or other encumbrances of any nature, options to purchase or lease,
easements, restrictions, covenants, conditions, or imperfections of title,
whether existing or proposed, except the Permitted Encumbrances;
(d) Other Agreements. Except as otherwise set forth
in this Agreement, Seller shall not enter into any agreement or perform any act
which
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might interfere with or be inconsistent with the successful completion of the
transactions contemplated by this Agreement;
(e) No Defaults. Neither the execution, delivery or
performance of this Agreement or any other agreement contemplated hereby, the
fulfillment of and compliance with the respective terms and provisions hereof or
thereof, nor the consummation of the transactions contemplated hereby or
thereby, will: (i) conflict with, or result in a breach of, any of the terms,
conditions or provisions of, or constitute any default under, any agreement or
instrument to which Seller is a party or any of Seller's properties are subject;
(ii) terminate, modify or give any third party the right to terminate or modify
the provisions or terms of any Assigned Contracts or Restaurant Assets Leases
(it being understood and agreed that any such termination or modification
resulting from the discontinuance by Seller of any or all restaurants operating
at the Properties, as provided in Section 17.1(ah) hereof, shall not constitute
a violation of this subsection (ii)); (iii) require Seller to obtain any
authorization, consent, approval or waiver from, or to make any filing with any
governmental authority or instrumentality or to obtain the approval or consent
of any other person, except as otherwise specifically provided herein; or (iv)
constitute a violation of any applicable law, statute, regulation, ordinance,
rule, judgment, decree, writ or order; except, in the case of each of clauses
(i), (ii) and (iii) above, for such violations, conflicts, breaches or defaults,
or the failure to obtain such approvals, consents, authorizations or waivers or
to make such filings, which, in the aggregate, would not have a material adverse
effect on the Assets or on the ability of Seller to consummate the transactions
contemplated hereby;
(f) No Litigation. There are no actions, suits,
claims, arbitrations, proceedings, orders, judgments or investigations pending
or, to the best knowledge of Seller, threatened against or affecting Seller or
any of the Assets or which question the validity of this Agreement or any action
taken or to be taken under any of the provisions of this Agreement, at law or in
equity, or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality;
(g) Assessments. Seller has received no notice and
has no knowledge of any pending improvements, liens or special assessments to be
made against any of the Properties or Assets by any governmental authority;
(h) Condemnation. There is no exercise of eminent
domain or condemnation pending, or to the best of Seller's knowledge,
threatened, against or affecting any of the Properties or Assets (or any part
thereof), nor does Seller know or have reasonable grounds to know of any basis
for any of same;
(i) Tax Reduction Proceedings. There are no pending
ad valorem tax reduction proceedings affecting any of the Assets;
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<PAGE>
(j) Leases. The schedule attached hereto as Exhibit 1
and made a part hereof is a complete and accurate list of all the Leases, the
dates thereof and of any amendments thereto. The Leases are the only real
property leases to which Seller is a party with respect to any of the
Properties. The copies of all the Leases as executed which have been delivered
to Purchaser (and to be assigned at each Closing), are true, complete and
correct and Seller is not in default thereunder, nor is there in existence any
condition or fact which with notice or lapse of time, or both, would constitute
a default thereunder; to Seller's best knowledge, the landlord is not in default
of any Lease. To the best knowledge of Seller, no Leases are in effect in which
landlord has made any covenant or representation which prohibits Purchaser from
operating any restaurant in its intended manner, including specializing in
seafood cuisine and similar types of food;
(k) Assignment. Seller shall use its reasonable good
faith efforts to obtain the Estoppel Certificate and Assignment of Lease with
respect to each Lease from each landlord thereof. Purchaser agrees to cooperate
with such efforts as provided in Section 17.2(g) hereof;
(l) Zoning. The Properties are properly zoned for use
as and for retail restaurants and similar businesses;
(m) Compliance with Law. The ownership, use and
operation of the Assets and the use by Seller of the Properties has been
conducted, and is now being conducted, in compliance in all material respects
with all applicable statutes, rules, regulations, ordinances, orders,
injunctions, judgments, decrees and restrictions of any governmental authority
or agency having jurisdiction over the Assets and the Properties (including,
without limitation, applicable statutes, rules, regulations, orders and
restrictions relating to zoning, land use, safety, health, environment,
Hazardous Materials, employment and employment practices and access by the
handicapped, consumer protection, anti-competitive practices and improper
payments) (collectively, "Laws"), and all covenants, conditions, restrictions,
easements, restrictive covenant, right of way and similar matters affecting any
of the Properties or Assets, except where the failure to comply would not result
in (i) the imposition of any fine, penalty or similar obligation or (ii) the
suspension, revocation, impairment or forfeiture of any material permit. Seller
and, to Seller's best knowledge, its partners have not received any notice from
any governmental authority, and to Seller's best knowledge, none is threatened,
alleging that Seller has violated, or not complied with, any of the above;
(n) Permits. To the best of Seller's knowledge,
except where the failure to obtain any of the following would not have a
material adverse effect on the Assets, all permits, approvals, qualifications,
registrations, consents, other authorizations and licenses necessary for the
operation and occupancy of the Properties and the Assets by Seller, including,
but not limited to, all building and use permits, all other permits, licenses
and other authorization required under any applicable local, state or federal
environmental laws, orders, rules, regulations
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and/or requirements have been obtained on all operations to date and shall be
maintained through each Closing Date with respect to the applicable Assets and,
to the best of Seller's knowledge, no notice, notification, demand, request for
information, citation, summons or order has been issued, no complaint has been
filed, no penalty has been assessed and no investigation or review is pending or
threatened by any governmental authority with respect to any alleged failure by
Seller to have any permit, license or authorization required in connection with
the use, maintenance and operation of the Properties or Assets, or with respect
to any generation, treatment, storage, recycling, transportation, release or
disposal of any "Hazardous Material" (as hereinafter defined);
(o) Restaurant Licenses. Within seven days of the
date hereof, Seller shall prepare and deliver to Purchaser a copy of Schedule
1.1(f) hereto. In the event no such Schedule 1.1(f) is delivered to Purchaser as
provided herein, Schedule 1.1(f) shall be deemed to read "none." Such Schedule
1.1(f), as delivered to Purchaser, is a complete and accurate list of all
Restaurant Licenses owned or held by, or granted to, Seller. All such Restaurant
Licenses are in full force and effect without default. With respect to any
restaurant licenses which by law are not transferable, Seller will cooperate
fully with Purchaser in Purchaser's application for all such restaurant licenses
for operation of the Properties as Restaurants including, but not limited to,
all liquor license applications, provided, however, that Purchaser will be
responsible for obtaining any and all such restaurant licenses not being
transferred pursuant to Section 1.1(f);
(p) Certificate of Occupancy. Final certificates of
occupancy have been issued for each of the Properties and Leasehold
Improvements, including all retail and restaurant portions thereof, and have not
been amended, revoked or canceled;
(q) Access. Seller has no knowledge or notice of any
fact or condition existing which would result or could result in the termination
or reduction of the current access from any of the Properties to existing roads
or to sewer or other utility services presently serving the Properties;
(r) Utilities. All utilities, including, but not
limited to, water, sewer, electricity, gas (natural or bottled) and telephone
facilities, which are necessary to operate a restaurant at each of the
Properties are available at each of the Properties;
(s) No Bankruptcy. There are no attachments,
executions, assignments for the benefit of creditors or voluntary or involuntary
proceedings in bankruptcy pending, contemplated or, to the best knowledge of
Seller, threatened against Seller or any of its affiliates;
(t) Service, Maintenance Agreements, etc. To the best
knowledge of Seller, there are no contracts, oral or written, with any company
or
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employee nor any service contract, maintenance contract, nor any union or other
contract or agreement with respect to any of the Properties or Assets which is
not listed in Schedule 17.1(t). Seller shall deliver to Purchaser, within five
days of the date hereof, true and complete copies of all documents listed on
Schedule 17.1(t), to the extent not previously provided to Purchaser or its
counsel. Except as indicated in Schedule 17.1(t), all such agreements listed in
Schedule 1.1(e) hereof are in full force and effect without default. Seller
shall terminate any and all agreements which are not being assigned herein as
indicated on Schedule 1.1(e). Seller will not enter into any new such agreement
or modify or extend any agreement prior to each Closing without the prior
written approval of the Purchaser, which shall not be unreasonably withheld;
(u) No Lease of Space. Seller has not and will not,
hereafter and prior to each Closing Date, sublease any space in or relating to
the Properties or the Assets which is now or may become vacant without the prior
written approval of Purchaser which shall not be unreasonably withheld;
(v) Seller to Maintain Premises. Seller shall
maintain the physical condition of the Properties and all of the Assets in the
same condition as of the date hereof through each Closing Date with respect to
such Property and related Assets, reasonable wear and tear excepted, including,
without limitation, all plumbing, electrical, heating, ventilation and air
conditioning, refrigerated coolers and freezers, fire protection systems and ice
machines, and will make any ordinary repairs and continue maintenance of all
such Properties and Assets from the date hereof until each Closing with respect
thereto, all in the same manner as it would in the normal course of operations
and to avoid damage to or diminution of value to any of the Assets. Seller shall
remove all perishable items from any or all restaurants operating at any or all
of the Properties as soon as possible, but in any event prior to such items
perishing and prior to each Closing for the applicable property;
(w) Insurance Requirements. Schedule 17.1(w) annexed
hereto and by this reference made a part hereof lists all the insurance policies
relating to the Assets which are presently in full force and effect and such
policies, or appropriate replacements thereof, shall be kept in effect by Seller
to each Closing Date for the applicable Assets. Seller shall not modify or
reduce the coverage of any insurance policies listed in Schedule 17.1(w). There
are no outstanding requirements by the landlord of any of the Properties, or any
insurance company, insurance rating board, fire underwriting board or
governmental agency requiring or recommending any repairs or work of any
material nature to be done at any of the Properties or any material equipment to
be installed thereon;
(x) Employees. None of the persons employed by Seller
are represented by any union, nor is any union activity ongoing or, to the best
knowledge of Seller, contemplated to be taken by or on behalf of any such
persons;
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(y) Termination of Employees. Prior to any Closing
Date, Seller or its affiliate may terminate any employees at any or all of the
restaurants which are discontinued pursuant to Section 17.1(ah) hereof;
provided, however, Purchaser shall have a reasonable opportunity to interview
any and all such employees prior to such termination;
(z) ERISA and Employee Matters. (1) With respect to
any unded employee pension plan within the meaning of Section 3(2) of ERISA, (i)
there has been no accumulated funding deficiency within the meaning of Section
302(a)(2) of ERISA or Section 412 of the Code which has resulted or could result
in the imposition of a lien upon any of the Assets; and (ii) no event has
occurred and no circumstance exists under which Seller has incurred or may
incur, directly or indirectly, any liability under the provisions of Title IV of
ERISA which may become a liability of Purchaser or result in a lien upon any of
the Assets.
(2) Purchaser does not and will not assume the
sponsorship of, the responsibility for contributions to, or any liability in
connection with any employee benefit plan within the meaning of Section 3(3) of
ERISA or any other compensatory plan program, arrangement or agreement covering
one or more current or former employees of Seller or dependents or beneficiaries
thereof. Without limiting the foregoing, Seller shall be liable for any
continuation coverage (including any penalties, excise taxes or interest
resulting from the failure to provide continuation coverage) required by Section
4980B of the Code due to qualifying events which occur on or before each Closing
Date.
(3) There have been no audits of the equal
employment opportunity practices of Seller in respect of the operation of each
of the restaurants located at the Properties and, to Seller's knowledge, no
basis for such claim exists. There is no unfair labor practice charge or
complaint against Seller or any of its affiliates in respect of the operation of
each of the restaurants located at the Properties pending before the National
Labor Relations Board and none has occurred since January 1, 1990. No
representation question exists respecting the employees, nor is any grievance
procedure or arbitration proceeding pending under any collective bargaining
agreement and no claim therefor has been asserted. Neither Seller nor any of its
affiliates has received written notice from any union or employees setting forth
demands for representation, elections or for present or future changes in wages,
terms of employment or working conditions.
(aa) No Violations. To the best of Seller's
knowledge, there are no outstanding notes or notices of violations of law or
governmental ordinances, orders or requirement issued by any governmental
department, agency, bureau or instrumentality affecting any of the Properties or
Assets or any part of either thereof;
(ab) Vendors. All vendors, suppliers and other
contractors or persons supplying goods and/or services to or for the Assets or
any of the Properties
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or restaurants located thereon, have and/or will be paid in full on or prior to
the applicable Closing Date or within thirty (30) days thereafter;
(ac) No Landmark. To the best knowledge of Seller,
none of the Properties is designated as a landmark under any applicable federal,
state or local laws, statutes, ordinances, regulations or orders;
(ad) No Unpaid Bills. As of each Closing Date, there
are no unpaid bills for work, labor, service or materials furnished to the
applicable Property upon the request or order of Seller, which may be made the
basis of a lien;
(ae) No Defective Condition. Seller has no knowledge
of any material defective condition, structural or otherwise, in the buildings
or other Leasehold Improvements on any of the Properties; to Seller's best
knowledge all heating, electrical, plumbing, air conditioning, and other
mechanical and electrical systems are in good condition and working order and
are adequate in quantity and quality for the operation of the Assets and the
restaurant as operated thereon by Seller, and the roof is free from leaks and in
sound structural condition;
(af) Environmental Matters. Capitalized terms used in
this Section 17.1(af) which have not previously been defined in this Agreement
are defined within this Section.
(1) To the best knowledge of Seller, Seller is in
compliance with all applicable Environmental Laws (which compliance includes,
but is not limited to, the possession of all permits and other governmental
authorizations required under applicable Environmental Laws, and compliance with
the terms and conditions thereof). Seller has not received any communication
(written or oral) from any governmental authority that alleges that Seller is
not in such compliance and, to the best knowledge of Seller, there are no past
or present actions, activities, circumstances, conditions, events or incidents
that may prevent or interfere with such compliance in the future.
(2) There is no Environmental Claim pending or, to
the best knowledge of Seller, threatened against Seller, or any other person or
entity, whose liability for any Environmental Claim, Seller has or may have
retained or assumed either contractually or by operation of law.
(3) To the best knowledge of Seller, there are no
past or present actions, activities, circumstances, conditions, events or
incidents (including, without limitation, the Release, emission, discharge,
presence or disposal of any Hazardous Material) which could form the basis of
any Environmental Claim against Seller, or any other person or entity, whose
liability for any Environmental Claim, Seller has or may have retained or
assumed either contractually or by operation of law.
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(4) To the best knowledge of Seller, neither Seller
nor any owner of nor predecessor in interest to any of the Properties has
Released, placed, stored, buried or dumped Hazardous Materials or any other
wastes produced by, or resulting from, any business, commercial or industrial
activities, operations or processes, on, beneath or adjacent to the real
property leased pursuant to the Leases, other than general office supplies or
cleaning solvents used in the ordinary course of business (which general office
supplies, cleaning solvents and other Hazardous Materials, to the best knowledge
of Seller, were and are stored or disposed of in accordance with applicable laws
and regulations and in a manner such that, to the best knowledge of Seller,
there has been no Release of any such substances into the indoor or outdoor
environment), and there has been no Cleanup at any of the Properties.
(5) "Cleanup" shall mean all actions required to: (a)
cleanup, remove, treat or remediate Hazardous Materials in the indoor
environment; (b) prevent the Release of Hazardous Materials so that they do not
migrate, endanger or threaten to endanger public health or welfare of the indoor
or outdoor environment; (c) perform pre-remedial studies and investigations and
post-remedial monitoring and care; or (d) respond to any government requests for
information or documents in any way relating to cleanup, removal, treatment or
remediation or potential cleanup, removal, treatment or remediation or Hazardous
Materials in the indoor or outdoor environment.
(6) "Environmental Claim" shall mean any claim,
action, cause of action, investigation or notice (written or oral) by any person
or entity alleging potential liability (including, without limitation, potential
liability for investigatory costs, Cleanup costs, governmental response costs,
natural resources damages, property damages, personal injuries, or penalties)
arising out of, based on or resulting from (A) the presence, or Release into the
indoor or outdoor environment, of any Hazardous Materials at any location,
whether or not owned or operated by Seller or (B) circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law.
(7) "Environmental Laws" shall mean all federal,
state, local and foreign laws and regulations relating to pollution or
protection of the environment, including without limitation, laws relating to
Releases or threatened Releases of Hazardous Materials into the indoor or
outdoor environment (including, without limitation, ambient air, surface water,
ground water, land surface or subsurface strata) or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, Release,
disposal, transport or handling of Hazardous Materials and all laws and
regulations with regard to record keeping, notification, disclosure and
reporting requirements respecting Hazardous Materials.
(8) "Hazardous Materials" shall mean all substances
defined as Hazardous Substances, Oils, Pollutants or Contaminants in the
National Oil and
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Hazardous Substances Pollution Contingency Plan, 40 C.F.R. ss. 300.5, or defined
as such by, or regulated as such under, any Environmental Law.
(9) "Release" shall mean any release, spill,
emission, discharge, leaking, pumping, injection, deposit, disposal, discharge,
dispersal, leaching or migration into the indoor or outdoor environment
(including, without limitation, ambient air, surface water, groundwater and
surface or subsurface strata) or into or out of any property, including the
movement of Hazardous Materials through or in the air, soil, surface water,
groundwater or property.
(ag) Further Assurances. Seller from time to time
after each Closing Date, at Purchaser's request, will execute, acknowledge and
deliver to Purchaser such other instruments of conveyance and transfer and will
take such other actions and execute and deliver such other documents,
certifications and further assurances, all at Purchaser's expense, as Purchaser
may reasonably require in order to vest more effectively in Purchaser, or to put
Purchaser more fully in possession of, any of the Assets, including the Leases;
(ah) Operation of Restaurants. Seller, in Seller's
sole discretion, may discontinue the operation of any or all restaurants
operating at any or all of the Properties at any time; provided, however, that
Seller shall coordinate with Purchaser such discontinuance of operations in a
manner that allows Purchaser a reasonable opportunity to interview restaurant
management and employees pursuant to Section 17.1(y) hereof and which preserves
and protects the Properties and Assets as provided in Section 17.1(v) hereof.
Seller expressly represents and warrants that if any or all restaurants
operating at any or all of the Properties are discontinued prior to the
applicable Closing, Seller has elected to discontinue operating such restaurant
independently of this transaction, and has not relied upon, in any manner, the
consummation of this transaction in such determination. Purchaser shall not be
liable, in any manner, for Seller's election to discontinue the operation of any
such restaurant if this transaction is not consummated in whole or in part;
(ai) Access to Records. At all reasonable times from
and after the date hereof until each Closing Date, Seller shall afford Purchaser
and its accountants, counsel, financial advisor and other representatives
reasonable access during normal business hours to the Properties, employees and
officers of Seller and to all books, accounts, financial and other records and
contracts of every kind of Seller; provided, however, that no investigation
pursuant to this Section shall affect any representation or warranty given by
Seller to Purchaser hereunder and provided, further, that any such
investigations shall be conducted in such a manner as not to interfere
unreasonably with the operations of the business of Seller. Seller shall also
furnish to Purchaser as promptly as practicable all such financial and operating
data and other information concerning Seller's restaurant business, properties
and personnel as Purchaser may reasonably request. Before each Closing Date,
Seller will make available the general partner and other appropriate persons
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associated with Seller to discuss with representatives of Purchaser, as
reasonably requested by Purchaser, the condition, operations, business and
prospects of Seller (insofar as they relate to the Properties and the operation
of the restaurants thereon by Seller) and the Assets;
(aj) Third Party Inquiries. Seller shall not, nor
shall Seller authorize or permit any partner or any officer, director or
employee of any partner of Seller, or any person affiliated with Seller, or any
attorney, accountant or other representative retained by, Seller to, directly or
indirectly, (a) entertain, encourage, solicit or initiate any inquiries or the
making of any proposal that may reasonably be expected to lead to any
Acquisition Proposal (as hereinafter defined); (b) enter into any agreement with
respect to an Acquisition Proposal; or (c) participate in any way in discussions
or negotiations, or provide third parties with any information, relating to any
such inquiry or proposal. Seller shall immediately advise Purchaser of any such
inquiries or proposals and deliver a copy of such inquiry or proposal (if any)
to Purchaser. As used herein, "Acquisition Proposal" shall mean any offer or
proposal for, or any indication of interest in, any sale, assignment or
assumption of any of the Properties and Assets (except sales of assets in the
ordinary course of business) during the period from the date of that certain
letter of intent through the earlier of (i) the Initial Closing Date or (ii)
November 30, 1996;
(ak) Continuance of Business. Subject to the
provisions of Section 17.1(ah) hereof, Seller shall use its commercially
reasonable efforts to carry on its business, keep available the services of its
partners, officers and employees and preserve its goodwill and relationships
with those of its customers, suppliers, licensors, licensees and others having
business relationships with it that are material to its business in
substantially the same manner as it has prior to the date hereof. If Seller
becomes aware of a material deterioration or facts which are likely to result in
a material deterioration in the relationship with any material customer,
supplier, licensor, licensee or others having business relationships with
Seller, it will promptly bring such information to the attention of Purchaser in
writing;
(al) Plans and Specifications. Seller hereby
represents that it has delivered to Purchaser, for Purchaser's use, copies of
any and all architectural/engineering plans and specifications in Seller's
possession to be used by Purchaser to obtain any government approvals, permits,
licenses or any other authorization required under any applicable local, state
or federal environmental laws, orders, rules, regulations and/or requirements to
operate the Restaurants. Purchaser is hereby authorized to use any and all such
plans and specifications (but without liability on the part of Seller for any
error contained in or omission with respect to any such plans and
specifications);
(am) Restaurant Assets Leases. The schedule attached
hereto as Schedule 17.1(am) and made a part hereof is a complete and accurate
list of all material leases or rental agreements covering any of the Restaurant
Assets. Seller shall deliver to Purchaser, within 5 days of the date hereof,
true and complete copies
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of all documents listed on Schedule 17.1(am), to the extent not previously
provided to Purchaser or its counsel. Except as indicated in Schedule 17.1(am),
all Restaurant Assets Leases are in full force and effect without default;
(an) Access to Information; Confidentiality. Seller
will hold, and shall cause its counsel, independent certified public
accountants, appraisers and investment bankers and other financing sources to
hold in confidence any confidential data or information made available to Seller
by Purchaser in connection with this Agreement using the same standard of care
to protect such confidential data or information as is used to protect its own
confidential information. If this transaction is not consummated, Seller agrees
that it shall return or cause to be returned to Purchaser all written materials
and all copies thereof that were supplied to it by Purchaser and that contain
any such confidential data or information and shall use all reasonable efforts,
including instructing its employees and others who have had access to such
information, to keep such information confidential and not to use any such
information; and
(ao) Mortgages, Deeds of Trust, etc.. To the best of
Seller's knowledge, there exists no mortgages or deeds of trust encumbering the
Property located in Pembroke Pines, Florida.
17.2 Of Purchaser:
(a) Organization. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, with full corporate power and authority to own or lease its properties
and carry on its business as presently conducted. Purchaser is licensed or
qualified to transact business and is in good standing in the State of Florida;
(b) Authority. Purchaser has all requisite power and
authority to execute and deliver this Agreement, the Assignment of Leases and
each other document contemplated hereby to be executed by Purchaser, and to
perform fully its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby or thereby. The execution and delivery by
Purchaser of this Agreement, the Assignment of Leases and the other documents
contemplated hereby, and the performance by Purchaser of its obligations
hereunder and thereunder have been duly and validly authorized by all necessary
action on the part of Purchaser. This Agreement has been duly executed and
delivered by Purchaser and this Agreement is, and the Assignment of Leases and
each other agreement contemplated hereby to which Purchaser will be a party will
be, upon execution and delivery thereof by Purchaser, a legal, valid and binding
obligation of Purchaser, enforceable against it in accordance with its terms
(except as the enforceability thereof may be limited by any applicable
bankruptcy, insolvency or other laws affecting creditors' rights generally or by
general principles of equity, regardless of whether such enforceability is
considered in equity or at law);
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(c) No Defaults. Neither the execution, delivery or
performance of this Agreement or any other agreement contemplated hereby, the
fulfillment of and compliance with the respective terms and provisions hereof or
thereof, nor the consummation of the transactions contemplated hereby or
thereby, will: (i) conflict with, or result in a breach of, any of the terms,
conditions or provisions of, or constitute any default under, any agreement or
instrument to which Purchaser is a party or is subject; (ii) require Purchaser
to obtain any authorization, consent, approval or waiver from, or to make any
filing with any governmental authority or instrumentality or to obtain the
approval or consent of any other person, except as otherwise specifically
provided herein, or as may be necessary to operate any of the Restaurants; or
(iii) constitute a violation of any applicable law, statute, regulation,
ordinance, rule, judgment, decree, writ or order;
(d) No Litigation. There are no actions, suits,
claims, arbitrations, proceedings, orders, judgments or investigations pending
or, to the knowledge of Purchaser, threatened against or affecting or which
question the validity of this Agreement or any action taken or to be taken under
any of the provisions of this Agreement, at law or in equity, or before or by
any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality;
(e) Access to Information; Confidentiality. Purchaser
will hold, and shall cause its counsel, independent certified public
accountants, appraisers and investment bankers and other financing sources to
hold in confidence any confidential data or information made available to
Purchaser by Seller in connection with this Agreement using the same standard of
care to protect such confidential data or information as is used to protect its
own confidential information. If this transaction is not consummated, Purchaser
agrees that it shall return or cause to be returned to Seller all written
materials and all copies thereof that were supplied to it by Seller and that
contain any such confidential data or information and shall use all reasonable
efforts, including instructing its employees and others who have had access to
such information, to keep such information confidential and not to use any such
information;
(f) Permits. Purchaser hereby covenants to use
reasonable good faith efforts to obtain all permits, licenses, approvals,
qualifications, registrations, consents and other authorizations necessary for
the operation and occupancy of the Properties as Restaurants and the operation
of the Assets;
(g) Assignments. Purchaser agrees to reasonably
cooperate with Seller's efforts in obtaining the Assignment of Lease and
Estoppel Certificate with respect to each Lease from each landlord thereof,
including executing the Assignment of Lease as soon as practicable after
requested by Seller, but in no event later than the Initial Closing Date in
order to obtain the landlord's signature thereto (but which shall not be binding
on Purchaser unless and until a Closing with respect to such Lease and related
Assets occurs); and
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(h) Purchaser agrees that it shall be Purchaser's
sole responsibility to complete and file any documents and other materials
necessary to transfer any of the Restaurant Licenses; provided, however, Seller
agrees to reasonably cooperate with Purchaser's efforts in having such
Restaurant Licenses transferred, to the extent required to effect such transfer.
Purchaser further agrees to pay all transfer, filing or similar fees or charges
required to be paid in connection with the transfer to Purchaser of any
Restaurant Licenses.
ARTICLE 18
INDEMNIFICATION
Section 18.1 Survival of Representations and Warranties. All
representations and warranties contained in this Agreement shall survive each
Closing to which they relate and shall remain in full force and effect until
eighteen (18) months after each such Closing Date, regardless of any
investigation made by Purchaser or Seller or on their behalf, except as to any
matters with respect to which a bona fide written claim shall have been made or
an action at law or in equity shall have commenced before such date, in which
event survival shall continue (but only with respect to, and to the extent of,
such claim) until the final resolution of such claim or action, including all
applicable periods for appeal; provided, however, that the representations and
warranties relating to (i) title to the Assets (other than the Leases and
Leasehold Improvements) shall survive indefinitely and (ii) ERISA shall survive
for the periods equal to the applicable statute of limitation relating thereto.
Section 18.2 Seller's Indemnity. Subject to Section 18.1
hereof, upon Purchaser assuming the obligations of the tenant under each of the
Leases, Seller shall indemnify and hold harmless Purchaser and its affiliates,
successors and assigns against and in respect of:
(a) any damage, loss, cost, expense or liability
(including settlement costs and reasonable attorneys' fees) resulting to
Purchaser solely in connection with the Assets acquired by Purchaser at such
Closing from any false, misleading or inaccurate representation, breach of
warranty or nonfulfillment of any agreement, covenant or condition on the part
of Seller under this Agreement or from any misrepresentation in or any omission
from any schedule or other instrument furnished to Purchaser by Seller
hereunder;
(b) from and after each Closing Date, any liability,
obligation or commitment of Seller not specifically assumed by Purchaser
pursuant to this Agreement or any other agreement contemplated hereby to be
executed by Purchaser;
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(c) any liability, obligation or commitment of any
nature (absolute, accrued, contingent or otherwise) of Seller or relating to the
Assets or the operation of the "Islands" restaurants prior to the applicable
Closing Date which arises out of transactions entered into by Seller or out of
acts or omissions to act of Seller occurring, prior to each such Closing Date;
and
(d) all claims, actions, suits, proceedings, demands,
assessments, judgments, costs and expenses incident to any of the foregoing.
This indemnity agreement in this Section 18.2 shall not
foreclose any other rights or remedies Purchaser may have based on any action
for fraud. Notwithstanding anything to the contrary contained herein (other than
as set forth in the immediately preceding sentence), (i) Purchaser shall not be
entitled to indemnification from Seller until the aggregate amount of losses
suffered by Purchaser and for which indemnification is available hereunder
exceeds $25,000.00, whereupon Purchaser shall be entitled to claim
indemnification for all losses suffered by Purchaser for which indemnification
is available hereunder (including such $25,000 "basket") and (ii) Purchaser
hereby agrees that any claim which Purchaser may have for indemnification
hereunder shall be satisfied solely from any amounts owed by Purchaser to Seller
hereunder (as Additional Payments or otherwise), and any amounts of the Initial
Payment and the Additional Payments previously paid to Seller which are then
held by Seller; provided, however, that Seller shall be under no obligation to
retain any amount of the Initial Payments or Additional Payments after the
receipt thereof. In connection with the foregoing, Purchaser shall be entitled
to offset any amounts owed by Purchaser to Seller (or any assignee of Seller,
whether through assignment, dissolution liquidation or restructuring of the
partnership interests of Seller) under this Agreement (as Additional Payments or
otherwise) in satisfaction of any amounts as to which Seller is obligated to
indemnify Purchaser pursuant to the terms of this Agreement. In the event Seller
dissolves, liquidates or restructures its partnership interest in any manner,
the obligations of Seller, its successors and assigns and its beneficial
interest holders, pursuant to this Section 18.2, and the right of offset
provided herein, shall remain in full force and effect in accordance with this
Article 18.
18.3 Purchaser's Indemnity. Subject to Section 18.1 hereof,
upon Purchaser assuming the obligations of the tenant under each of the Leases,
Purchaser shall indemnify and hold harmless Seller and its affiliates,
successors and assigns at all times after each Closing Date, against and in
respect of:
(a) any damage, loss, cost, expense or liability
(including settlement costs and reasonable attorneys' fees) resulting to Seller
from any false, misleading or inaccurate representation, breach of warranty or
nonfulfillment of any agreement, covenant or condition on the part of Purchaser
under this Agreement or from any misrepresentation in or any omission from any
schedule or other instrument furnished to Seller hereunder;
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(b) from and after each Closing Date, any liability,
obligation or commitment of Seller specifically assumed by Purchaser pursuant to
this Agreement and each other agreement contemplated hereby to be executed by
Purchaser;
(c) any liability, obligation or commitment of any
nature (absolute, accrued, contingent or otherwise) of Purchaser or relating to
the Assets or the operation of the Restaurants which arises solely out of
transactions entered into by Purchaser or solely out of acts or omissions to act
of Purchaser occurring, from and after each Closing Date;
(d) any payments made from or after each Closing Date
by either Seller or any of its affiliates (including Chart House Enterprises
Inc.) as a guarantor of any Lease to a lessor, which relate solely to
obligations incurred under a Lease after the applicable Closing Date; and
(e) all claims, actions, suits, proceedings, demands,
assessments, judgments, costs and expenses incident to any of the foregoing.
This indemnity agreement in this Section 18.3 shall not
foreclose any other rights or remedies Seller may have based on any action for
fraud. Purchaser acknowledges that Seller's affiliates (including Chart House
Enterprises, Inc), successors and assigns are third party beneficiaries to the
provisions set forth in this Section 18.3.
18.4 Limitations. Neither Seller nor Purchaser shall be
entitled to make any claim for indemnification under Section 18.2 or 18.3 hereof
with respect the breach of any representation and warranty contained herein
after the date on which such representation and warranty ceases to survive
pursuant to Section 18.1 hereof, unless such breach constitutes fraud, in which
case a claim can be made at any time.
ARTICLE 19
MISCELLANEOUS
19.1 This Agreement is binding upon and shall inure to the
benefit of the parties hereto, their respective heirs, successors, legal
representatives and permitted assigns.
19.2 Wherever under the terms and provisions of this Agreement
the time for performance falls upon a Saturday, Sunday or legal holiday, such
time for performance shall be extended to the second business day thereafter.
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19.3 This Agreement may be executed in one or more
counterparts, all of which when taken together shall constitute one and the same
agreement, and shall become effective when one or more counterparts have been
executed by each of the parties hereto and delivered to each of the other
parties hereto.
19.4 The captions at the beginning of the several paragraphs,
Sections and Articles are for convenience in locating the context, but are not
part of the context. Unless otherwise specifically set forth in this Agreement
to the contrary, all references to Exhibits and Schedules contained in this
Agreement refer to the Exhibits and Schedules which are attached to this
Agreement all of which Exhibits and Schedules are incorporated in, and made a
part of, this Agreement by reference. Unless otherwise specifically set forth in
this Agreement to the contrary, all references to Articles, Sections, paragraphs
and clauses refer to portions of this Agreement.
19.5 If any term or provision of this Agreement shall be held
to be illegal, invalid, unenforceable or inoperative as a matter of law, the
remaining terms and provisions of this Agreement shall not be affected thereby,
but each such remaining term and provision shall be valid and shall remain in
full force and effect.
19.6 This Agreement and the other writings referred to in, or
delivered pursuant to, this Agreement, embody the entire understanding and
contract between the parties hereto with respect to the Assets including the
Properties and supersede any and all prior agreements and understandings between
the parties hereto, whether written or oral, formal or informal, with respect to
the subject matter of this Agreement. This Agreement has been entered into after
full investigation by each party and its professional advisors, and neither
party is relying upon any statement, representation or warranty made by or on
behalf of the other which is not expressly set forth in this Agreement.
19.7 No extensions, changes, waivers, modifications or
amendments to or of this Agreement, of any kind whatsoever, shall be made or
claimed by Seller or Purchaser, and no notices of any extension, change, waiver,
modification or amendment made or claimed by Seller or Purchaser shall have any
force or effect whatsoever, unless the same is contained in a writing and is
fully executed by the party against whom such matter is asserted.
19.8 This Agreement shall be governed and interpreted in
accordance with the laws of the State of Florida.
19.9 Each party hereto shall pay all charges specified to be
paid by them pursuant to the provisions of this Agreement and their own
attorney's fees in connection with the drafting, negotiation and execution of
this Agreement (including the Exhibits and Schedules hereto) the due diligence
process and the closing of the transactions contemplated hereby, including their
attendance at each Closing.
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19.10 Each of the parties hereto will cooperate with the other
and execute and deliver to the other such other instruments and documents and
take such other actions as may be reasonably requested from time to time by the
other party hereto as necessary to carry out, evidence and confirm the intended
purposes of this Agreement.
19.11 Neither party shall make any public disclosure (except
for disclosure to their respective attorneys, financial advisors and other
agents in their respective capacities during the period from the date of that
certain letter of intent to each Closing Date, which such disclosure shall be in
a manner to maintain a reasonable level of confidentiality) or publicity release
pertaining to the existence of that certain letter of intent dated September 9,
1996 and confirmed September 10, 1996 or of the terms of this Agreement without
the consent of the other party, unless required or deemed advisable to maintain
compliance with and to prevent violations of applicable law as determined upon
advice of legal counsel.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names by their respective duly authorized
representatives on the day and year first above written.
SELLER: ISLANDS FLORIDA LP
By: ISLANDS FL HOLDINGS LP
Its: Sole General Partner
By: LARKSPUR PARTNERS, INC.
Its: Sole General Partner
By: /s/Douglas E. Kollus
-----------------------------------
Name: Douglas E. Kollus
Title: Chief Operating Officer
PURCHASER: SHELLS SEAFOOD RESTAURANTS, INC.
By: /s/William E. Hattaway
---------------------------------------
Name: William E. Hattaway
Title: President
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EXHIBIT 2
PROPERTIES
Coral Springs
2561 University Drive
Coral Springs, FL 33065
Davie
2000 S. University Drive
Davie, FL 33324
Ft. Lauderdale
6500 North Federal Highway
Fort Lauderdale, FL 33308
Mall of the Americas
7705 W. Flagler Street
Miami, FL 33144
Pembroke Pines
11825 Pines Blvd.
Pembroke Pines, FL 33026
West Palm Beach
2015 Okeechobee Blvd.
West Palm Beach, FL 33409
<PAGE>
EXHIBIT 3
FORM OF ESCROW AGREEMENT
[to be negotiated in good faith by Purchaser and Seller]
<PAGE>
EXHIBIT 4.5
FORM OF ASSIGNMENT AND ASSUMPTION OF LEASE
<PAGE>
EXHIBIT 4.5
ASSIGNMENT AND ASSUMPTION OF LEASE
THIS AGREEMENT, made and entered into this ____ day of __________,
1996, among ISLANDS FLORIDA LP ("Tenant"), a Delaware limited partnership
("Landlord") and SHELLS SEAFOOD RESTAURANTS, INC. ("Assignee"), and CHART HOUSE
ENTERPRISES, INC., a Delaware corporation ("Guarantor").
W I T N E S S E T H
WHEREAS, Landlord and Tenant have entered into a written lease dated as
of_________________________ (the "Lease") of certain premises located
at______________________________ (the "Premises"); [Add other recitals as
necessary to describe amendments and assignments.]
WHEREAS, Guarantor executed a Guaranty of Lease dated _______________;
WHEREAS, Tenant has entered into a certain Agreement for Purchase and
Sale dated October 18, 1996 (the "Agreement") whereby Tenant agreed to sell,
transfer, convey, assign and deliver to Assignee, and Assignee agreed to acquire
and accept from Tenant all right, title and interest of the Assets (as defined
in the Agreement) of Tenant including the Lease in connection with the Premises;
WHEREAS, Tenant proposes to assign the Lease to Assignee;
WHEREAS, an Islands restaurant is currently located at the Premises,
and Assignee proposes to convert the Premises to a Shells restaurant;
NOW, THEREFORE, in consideration of the foregoing and the provisions
hereinafter stated, and for other valuable consideration, IT IS AGREED as
follows:
(a) Tenant hereby assigns and transfers the Lease and its interest in
the Premises to Assignee as of the Effective Date (as defined below), provided
that such assignment shall not relieve Tenant of any liability or obligation
under the Lease incurred prior to the Effective Date, nor relieve Guarantor of
its obligations under the Guaranty.
(b) Assignee hereby accepts the above assignment and covenants to
assume and to comply with all of the terms, covenants and conditions of the
Lease to be performed by the Tenant.
(c) Landlord hereby consents to Tenant's assignment and transfer of the
Lease and all of Tenant's interest under the Lease to Assignee in accordance
with paragraphs (1) and (2) hereof and the conversion of the Premises to a
Shells restaurant.
<PAGE>
(d) This Assignment and Assumption of Lease shall not be deemed to be
delivered to Tenant and Landlord, or binding upon Assignee, until the Closing of
the purchase of the Assets located at the Premises (the "Effective Date").
Tenant will provide written notice advising Landlord of the Effective Date
within ten (10) days after the Closing.
(e) Except as modified herein, the Lease shall remain in full force and
effect according to its terms and is hereby ratified and affirmed.
IN WITNESS WHEREOF, Tenant, Landlord [,] [and] Assignee [and Guarantor]
have executed this Agreement as of the date first above written.
"Tenant": ISLANDS FLORIDA LP, a Florida limited
partnership
By:
By:______________________________________
Name:
Title:
"Landlord": [LANDLORD]
By:______________________________________
Name:
Title:
"Assignee": SHELLS SEAFOOD RESTAURANTS, INC.,
a Delaware corporation
By:______________________________________
Name:
Title:
"Guarantor": CHART HOUSE ENTERPRISES, INC.,
a Delaware corporation
By:______________________________________
Name:
Title:
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<PAGE>
EXHIBIT 4.6
FORM OF ESTOPPEL CERTIFICATE
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<PAGE>
EXHIBIT 4.6
ESTOPPEL CERTIFICATE
THIS ESTOPPEL CERTIFICATE is executed as of the date set forth
below, by ________________________________, as the "Landlord", for the benefit
of ISLANDS FLORIDA LP, a Delaware limited partnership, as the "Tenant", and
SHELLS SEAFOOD RESTAURANTS, INC., a Delaware corporation, as the "Assignee",
with respect to that certain lease for real property described below:
Re: Lease dated ____________________, as amended, between
______________________________, as Landlord, and
Islands Florida LP, as Tenant
(the "Lease") ______________________________________
[address]
Landlord hereby certifies to Tenant and Assignee as follows:
(f) The undersigned is the Landlord under the above-referenced
lease (the "Lease") covering the above-referenced premises (the "Premises").
(g) Islands Florida LP, a Delaware limited partnership, is the
current tenant under the Lease.
(h) The Lease is now in full force and effect and Tenant is
not in default of any of its obligations thereunder; that all rent sums due from
Tenant under the Lease to date have been duly paid through the last day of the
current month; and that Landlord has not served upon Tenant any notice of any
default under the Lease which has not been cured and rescinded.
(i) No claim, controversy, dispute, quarrel, or disagreement
exists between Landlord and Tenant.
(j) The current minimum monthly rent under the lease is
$__________.
(k) Tenant has fully and satisfactorily performed all work
which it is required to perform for Landlord under the Lease and pursuant to all
plans and specifications approved by the Landlord and all required contributions
by Tenant to the Landlord on account of Landlord's improvements have been
received.
(l) No person other than Tenant is in physical possession of
or has any right of occupancy with respect to all or any part of the space
demised to the Tenant under the Lease pursuant to any sublease or assignment
thereof consented to, by or on behalf of Landlord.
(m) Landlord has no defense, set off or counterclaim against
the Tenant arising out of any other transaction between Tenant and Landlord or
under the Lease.
<PAGE>
(n) Landlord is not in default under and is in full compliance
with all of the terms and conditions of any mortgages or deeds of trust or other
documents encumbering the Premises.
(o) Landlord acknowledges that Assignee intends to use the
Premises as a seafood restaurant, and that such use shall not violate the Lease
or any other leases whereby Landlord is a party.
(p) Landlord acknowledges that Tenant and Assignee are relying
upon the representation of Landlord set forth herein in order to execute the
Assignment and Assumption of Lease.
Dated this _____ day of LANDLORD:
________________, 1996
By:______________________________
Name:
Title:
-3-
<PAGE>
EXHIBIT 5.4
ASSUMPTION AGREEMENT
-4-
<PAGE>
EXHIBIT 5.4
ASSUMPTION AGREEMENT
THIS AGREEMENT, made and entered into this ____ day of __________,
1996, among ISLANDS FLORIDA LP ("Assignor"), and SHELLS SEAFOOD RESTAURANTS,
INC. ("Assignee"). Capitalized terms used herein and not otherwise defined
herein shall have the meaning given to such terms in the Agreement (as defined
below).
W I T N E S S E T H
WHEREAS, Assignor and Assignee have entered into a certain Agreement
for Purchase and Sale dated October ___, 1996 (the "Agreement") whereby Assignor
agreed to transfer, convey, assign and deliver to Assignee, and Assignee agreed
to acquire and accept from Assignor all right, title and interest of the Assets
of Assignor, including the Restaurant Assets Leases, Assigned Contracts and
Restaurant Licenses, each as more particularly described in Sections 1.1(d), (e)
and (f) of the Agreement and listed in Schedules 1.1(d), (e) and (f) to the
Agreement; and
WHEREAS, as of the date hereof, Assignor proposes to assign all of
those particular Restaurant Assets Leases as set forth on Exhibit A attached
hereto, Assigned Contracts as set forth on Exhibit B attached hereto and
Restaurant Licenses as set forth on Exhibit C attached hereto;
NOW, THEREFORE, in consideration of the foregoing and the provisions
hereinafter stated, and for other valuable consideration, IT IS AGREED as
follows:
(q) Assignor hereby assigns and transfers to Assignee all of the
Assignor's right, title and interest in and to, and all benefits accruing to
Assignor under all of the Restaurant Assets Leases as set forth in Exhibit A
attached hereto, the Assigned Contracts as set forth in Exhibit B attached
hereto and the Restaurant Licenses as set forth on Exhibit C attached hereto as
of the date hereof;
(r) Assignee hereby accepts the above assignment and assumes all
obligations and liabilities accruing, arising solely out of, or relating solely
to events or occurrences happening from and after the execution and delivery to
Assignor of this Assumption Agreement with respect to such Restaurant Assets
Leases, Assigned Contracts and Restaurant Licenses assigned to Purchaser on the
date hereof, but not including any obligation or liability for any breach or any
other events or occurrences happening, in whole or in part, prior to the date
hereof under any such Restaurant Assets Leases, Assigned Contracts or Restaurant
Licenses, all in accordance with Section 1.3 of the Agreement;
(s) This Assumption Agreement shall not be deemed to be delivered to
Seller and Landlord, or binding upon Assignee, until the Closing of the Property
to which the Restaurant Assets Leases, Assigned Contracts and Restaurant
Licenses assigned herein relates;
-5-
<PAGE>
(t) Except as modified herein,the Restaurant Assets Leases, Assigned
Contracts and Restaurant Licenses shall remain in full force and effect
according to their terms and are hereby ratified and affirmed.
IN WITNESS WHEREOF, Assignor and Assignee have executed this Agreement
as of the date first above written.
ISLANDS FLORIDA LP
By: ISLANDS FL HOLDINGS LP
Its' Sole General Partner
By: LARKSPUR PARTNERS, INC.
Its' Sole General Partner
By:_______________________________
Name:
Title:
SHELLS SEAFOOD RESTAURANTS, INC.
By:_______________________________
Name:
Title:
-6-
<PAGE>
EXHIBIT 11
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
YEAR (52 WEEKS) ENDED DECEMBER 29, 1996
<TABLE>
<CAPTION>
Primary Fully Diluted
------- -------------
<S> <C> <C>
Net income $1,443,965 $1,443,965
Preferred share accretion (117,000) (117,000)
========== ==========
Net income for the computation of per share earnings $1,326,965 $1,326,965
========== ==========
Net income per share of common stock $ 0.41 $ 0.37
========== ==========
Weighted average common stock issued and outstanding 2,722,885 2,722,885
Options and warrants granted:
Number of Exercise Price
Date Exercisable Shares Per Share
December 15, 1994 101,000 $5.00 to $8.25 * 14,206 24,425
December 29, 1994 229,904 $5.50 * 42,297 85,393
June 30, 1995 350,000 $3.25 * 186,424 224,000
June 30, 1995 75,000 $3.75 * 33,272 42,957
September 11, 1995 159,960 $5.00 * 41,295 68,555
September 19, 1995 200,000 $3.50 * 96,142 130,000
February 1, 1996 150,000 $3.50 * 55,416 77,142
April 23, 1996 799,900 $6.00 * 60,318 172,662
May 13, 1996 117,376 $6.00 * 8,851 28,356
May 13, 1996 210,000 $6.00 * 14,980 44,876
========== =========
3,276,086 3,607,927
========== =========
Weighted average common stock and common stock equivalents outstanding
</TABLE>
* Earnings per common share is computed by dividing net income by the weighted
average number of shares of common stock and dilutive options and warrants
using the treasury stock method.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 3,033,851
<SECURITIES> 0
<RECEIVABLES> 132,048
<ALLOWANCES> 0
<INVENTORY> 663,563
<CURRENT-ASSETS> 5,284,867
<PP&E> 11,195,841
<DEPRECIATION> (2,540,692)
<TOTAL-ASSETS> 18,373,027
<CURRENT-LIABILITIES> 6,702,678
<BONDS> 0
0
1,668,476
<COMMON> 32,975
<OTHER-SE> 7,438,745
<TOTAL-LIABILITY-AND-EQUITY> 18,373,027
<SALES> 39,405,304
<TOTAL-REVENUES> 39,792,823
<CGS> 14,017,163
<TOTAL-COSTS> 37,128,728
<OTHER-EXPENSES> (402,501)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (169,629)
<INCOME-PRETAX> 2,091,965
<INCOME-TAX> (648,000)
<INCOME-CONTINUING> 1,443,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,443,965
<EPS-PRIMARY> $0.41
<EPS-DILUTED> $0.37
</TABLE>
