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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR (53 WEEKS) ENDED JANUARY 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________ .
COMMISSION FILE NUMBER 0-28258
SHELLS SEAFOOD RESTAURANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0427966
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
16313 NORTH DALE MABRY HIGHWAY
TAMPA, FLORIDA 33618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(813) 961-0944
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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 National Market on March 19, 1999 and the assumption for this
computation only that all directors and executive officers are affiliates of
the Registrant) was $10,151,440.
As of March 19, 1999, the number of shares outstanding of the Registrant's
Common Stock, $.01 par value, was 4,454,015.
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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
1998 Annual Meeting of Stockholders scheduled to be held on April 28, 1999 is
incorporated by reference in Part III, Items 10, 11, 12 and 13 of this Form
10-K.
When used in this Annual Report on Form 10-K, 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 quarterly and annual
operating results are affected by a wide variety of other factors that
could materially and adversely affect revenues and profitability, including
changes in consumer preferences, tastes and eating habits; increases in
food and labor costs; promotional timings and seasonality; the availability
of qualified labor; national, regional and local economic and weather
conditions; demographic trends and traffic patterns; competition from other
restaurants and food service establishments; and the timing of new
restaurant openings. 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 herein and 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 selected financial data for the year (52
weeks) ended January 1, 1995 where presented herein have disclosed the pro
forma effect of the Merger. The Company completed its initial public offering
(the "Offering") in April 1996.
CONCEPT AND STRATEGY
As of January 3, 1999, the Company owned 44 Shells restaurants, owned a
51% ownership interest in one Shells restaurant (the "Melbourne Restaurant")
and managed four additional Shells restaurants (the "Managed Restaurants")
pursuant to contractual arrangements. Of these 49 Shells restaurants, 32 were
located in Florida, 10 were located in Ohio, four were located in Illinois, two
were located in Indiana and one was located in Kentucky. The Company opened 10
restaurants during Fiscal 1998. In January 1998, the Company closed its Miami,
Florida (Mall of the Americas) location, which was one of the units acquired as
part of a six unit acquisition in Fiscal 1996. 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, 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, desserts and full bar service. All Shells restaurants are
open for dinner and 27 restaurant locations are also open for lunch.
In an effort to increase Shells' name recognition and benefit from
customer loyalty, the Company has 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.
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EXPANSION STRATEGY
In Fiscal 1997, the Company began to focus its expansion efforts in the
Midwest markets. Of the nine new restaurants opened in 1997, seven were opened
in Ohio and Kentucky. In 1998, the Company opened 10 new restaurants, all of
which were opened in the Midwest markets. The decision to expand into the
Midwest markets was made in an attempt to diversify and minimize the seasonal
effect of the Florida market.
The Company has opened one new restaurant in the first quarter of 1999 and
plans to open additional restaurants in Fiscal 1999 in the Florida and Midwest
markets. The actual number and location of the new restaurant openings will
depend on the Company's ability to locate suitable properties and execute
satisfactory lease or purchase terms. When opening restaurants outside of
Florida, the Company anticipates continuing to focus on existing markets
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.
In March 1998, the Company entered into an agreement to acquire up to seven
restaurant locations in the Chicago and central Illinois areas. Upon completion
of the due diligence, the Company was able to convert and open four of these
acquired properties as Shells restaurants in the second half of Fiscal 1998, a
fifth restaurant in February 1999, and determined two were not viable
properties for acquisition. The Company will continue to explore the
acquisition of multiple units as part of its expansion strategy into new
markets; however, there is no certainty that multiple unit acquisitions will
occur.
The Company may from time-to-time make minor adjustments to its menu to
accommodate local preferences in new markets that it serves. In tandem with its
expansion plan, the Company must continually hire management candidates
externally or promote qualified candidates internally who then are required to
complete an extensive 11 week training program. 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. Given current economic
conditions and the availability of labor in certain markets, obtaining
qualified candidates for hire and retention from time-to-time can be difficult.
The Company has historically converted and renovated existing restaurants
into Shells restaurants in order to minimize initial capital expenditures. The
Company intends to use its existing cash balances, projected cash flows from
operations, and from time-to-time, third party financing to implement its
expansion strategy. In order to facilitate its expansion strategy, the company
may from time-to-time develop build-to-suit properties requiring third party
financing.
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
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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. 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, kitchen facilities, and vehicle parking to make the
site suitable for conversion. Upon selecting a restaurant location, the Company
renovates the interior and exterior to conform to the prototypical Shells
image. Of restaurants in operation, the Company currently leases all but four
of its sites, which are financed real estate purchases.
RESTAURANT LOCATIONS
As of March 1999, the Company managed and operated 50 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 Managed Restaurants which are located
in Carrollwood, North Tampa, Sarasota and South Tampa, (ii) the Orlando,
Florida market consists of eight owned restaurants (including the Melbourne
Restaurant) which are located in Altamonte Springs, Daytona Beach, Kissimmee,
New Smyrna Beach, Ocala, Orlando, Winter Park and Melbourne, (iii) the South
Florida market consists of six owned restaurants which are located in Coral
Springs, Davie, Ft. Lauderdale, Kendall, Pembroke Pines and Sunrise, (iv) the
Cincinnati, Ohio market which consists of five owned restaurants including
three in Cincinnati, Ohio proper and one in each of Middletown, Ohio and
Florence, Kentucky, (v) the West Palm Beach, Florida market consists of three
owned restaurants which are located in Delray Beach, Stuart and West Palm
Beach, (vi) the Cleveland, Ohio market which consists of Akron, Lyndhurst and
Mentor, (vii) the Chicago, Illinois market which consists of four owned
restaurants which are located in Carpentersville, Oakbrook Terrace, Streamwood
and Woodridge, (viii) the Fort Myers, Florida market consists of two owned
restaurants which are located in Fort Myers and Port Charlotte, (ix) the
Indianapolis, Indiana market which consists of two owned restaurants, (x) the
Columbus, Ohio market which consists of two owned restaurants, one in each of
Columbus and Reynoldsburg, (xi) the Bloomington, Illinois market which consists
of one owned restaurant, (xii) the Dayton, Ohio market which consists of one
owned restaurant, (xiii) the Jacksonville, Florida market which consists of one
owned restaurant in Mandarin, and (xiv) the Tallahassee, Florida market which
consists of one owned restaurant.
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RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES. The Company currently employs nine 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. The
restaurants which are also open for lunch generally have 15 to 20 additional
employees. Restaurant management participates in a discretionary quarterly
bonus program based upon the financial results of their particular restaurant.
Bonuses typically average between 10% and 25% of salary.
RESTAURANT REPORTING. The Company maintains financial and accounting
controls for each restaurant through a central accounting system. The Company's
financial systems and controls 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 to 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 an 11-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.
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 with 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.
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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. ("U.S.
Foods"), formerly Rykoff-Sexton, whereby U.S. Foods purchases from the Company
at cost and takes ownership of all frozen seafood the Company purchases. U.S.
Foods stores the seafood at its cold storage facilities and the Company pays
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 price 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 significant
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 of its seafood purchases. Each shipment of frozen seafood is inspected
through statistical sampling methods 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.
ADVERTISING AND MARKETING
The Company employs a marketing strategy that seeks continuous visibility
and name recognition through the use of billboards, radio and television
advertisements. The
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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) 45 restaurants owned by the
Company; (ii) the Melbourne Restaurant; and (iii) the four 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, inventory, 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 a third-party owner of a Managed Restaurant or the
Company has the option to transfer that restaurant's 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 have 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.
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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 foodservice 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 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. 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 federal, 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,
which could 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.
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Approximately 11% of the Company's revenue is attributable to the sale of
alcoholic beverages. Alcoholic beverage control regulations require each of the
Company's restaurants to apply to a state authority and, in certain locations,
county or municipal authorities for a license or a permit to sell alcoholic
beverages on the premises. Typically, licenses must be renewed annually and may
be revoked or suspended for cause at any time. Alcoholic beverage control
regulations relate to numerous aspects of daily operations of the Company's
restaurants, including minimum age of patrons and employees, hours of
operation, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. The failure of a restaurant to obtain or
retain liquor or food service licenses would adversely affect the restaurant's
operations.
The Company may be subject in certain states 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. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance
beverage and has never been named as a defendant in a lawsuit involving
"dram-shop" statutes.
The Company's restaurants are also subject to federal and state minimum
wage laws governing such matters as working conditions, overtime and tip
credits. A significant number of the Company's restaurant personnel are paid at
rates related to the federal minimum wage and, accordingly, further increases
in the minimum wage rate could increase the Company's labor costs.
The Americans with Disabilities Act prohibits discrimination in employment
and public accommodations on the basis of disability. Under the Act, which
became effective in 1992, the Company could be required to expend funds to
modify its restaurants to provide service to, or make reasonable accommodations
for the employment of, disabled persons.
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 Company will have the financial resources necessary to enforce or defend
its servicemarks, the Company has, and intends to continue 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
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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 January 3, 1999, the Company employed approximately 2,950 persons,
of whom approximately 250 were management or administrative personnel and 2,700
were employed in non-management restaurant positions. Approximately 1,600 of
these individuals were employed by the Company on a full-time basis. As of
January 3, 1999, approximately 250 persons were employed on a salaried basis
and 2,700 persons were employed in 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 OF THE COMPANY
The Company's executive officers are as follows:
NAME AGE POSITION
- ---- --- --------
William E. Hattaway 55 President and Director
Warren R. Nelson 47 Vice President of Finance, Chief Financial Officer,
Treasurer and Secretary
John R. Ritchey 53 Vice President of Operations
Frank C. Roehl, III 43 Vice President of Marketing
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 a 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
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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 served as an
officer and as a director of Shells, Inc., positions he held from October 1987
to December 1994. From October 1982 through October 1987, Mr. Roehl was
employed by CMA Advertising Agency, the Talmadge, Roehl, and Magee Agency and
the Roehl Group.
RISK FACTORS RELATING TO THE BUSINESS OF THE COMPANY. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY RISKS WE FACE. IN ADDITION TO
THE FOLLOWING RISK FACTORS, WE REFER YOU TO THOSE RISK FACTORS DESCRIBED
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K AND IN VARIOUS OF OUR PUBLICLY
REPORTED DOCUMENTS. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO
US OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL COULD ALSO IMPAIR OUR BUSINESS
OPERATIONS.
KEEP THESE RISK FACTORS IN MIND WHEN YOU READ "FORWARD-LOOKING" STATEMENTS
ELSEWHERE IN THIS FORM 10-K REPORT. THESE ARE STATEMENTS THAT RELATE TO OUR
EXPECTATIONS FOR FUTURE EVENTS AND TIME PERIODS. GENERALLY, THE WORDS
"ANTICIPATE," "EXPECT," "INTEND" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. FUTURE EVENTS AND CIRCUMSTANCES COULD DIFFER SIGNIFICANTLY FROM
THOSE ASSOCIATED WITH THE FORWARD-LOOKING STATEMENTS.
WE HAVE SIGNIFICANT CAPITAL REQUIREMENTS AND MAY NEED ADDITIONAL
FINANCING. Our capital requirements have been and will continue to be
significant. To date, our cash requirements have exceeded our cash flow from
operations. This is mainly due to costs associated with developing and opening
new restaurants. At January 3, 1999, we had a working capital deficiency of
$4,047,000. We rely substantially on our cash flow from operations, equipment
leases and real estate loans to finance our expansion. We believe that
projected cash flow from operations will satisfy our contemplated cash
requirements for at least the next 12 months. This is based on our current
plans and assumptions relating to our operations, including assumptions
regarding the rate of proposed expansion and costs of developing and opening
new restaurants. These plans may change and our assumptions may prove to be
inaccurate.
Our expansion strategy depends on our ability to continue to obtain third
party financing and to achieve projected cash flow from operations. Third party
financing may include
10
<PAGE>
traditional lending sources like bank lines of credit, equipment leases and
restaurant sale/ leaseback arrangements. We may have to seek additional
financing from other sources if:
/bullet/ our expansion plans change;
/bullet/ our projections or assumptions are inaccurate because of
unanticipated expenses of construction or other delays or
difficulties;
/bullet/ third party financing is unavailable in sufficient amounts or at
all; and
/bullet/ projected cash flows are not sufficient to cover costs of
expansion.
We cannot assure you that third party financing will be available to us
when we need it or available on acceptable terms, if at all. If we cannot
obtain third party financing or other financing when we need it, this could
materially and adversely affect our results of operations and our expansion
plans. If we have to raise additional capital through the sale of our equity,
our existing stockholders could be substantially diluted.
WE MAY HAVE AN AGGRESSIVE EXPANSION PLAN. We may pursue a strategy of
aggressive growth by significantly increasing the number of Shells restaurants.
Our proposed expansion is dependent on, among other things:
/bullet/ the availability of third party financing;
/bullet/ achieving projected cash flows from operations;
/bullet/ market acceptance of the Shells concept in new markets;
/bullet/ timely development and construction of restaurants;
/bullet/ securing of required governmental permits and approvals;
/bullet/ the hiring, training and retention of skilled management and
other personnel;
/bullet/ the ability to integrate new restaurants into our operations; and
/bullet/ the general ability to successfully manage growth.
Successfully managing growth includes successfully completing the
installation of a point-of-sale accounting and cash management system,
monitoring restaurants, controlling costs, and maintaining effective quality
controls. We cannot assure you that our proposed expansion will be successful.
We initially may not be able to achieve economies of scale for
advertising, marketing, costs of goods and other expenses in new markets that
we experience in our established markets. Therefore, our per restaurant costs
may initially be higher in new markets than in established markets. We cannot
assure you that we will be successful in opening enough restaurants in any new
market to generate economies of scale.
11
<PAGE>
To date, the operating performance of the Midwest stores has been below
that of the Florida stores. Although we anticipate that operating performance
will improve in the Midwest as advertising efficiency is achieved in the
various markets, we cannot assure you that the Midwest stores will attain the
same levels of profitability as the Florida stores.
In addition, if we experience prolonged periods of unfavorable operating
results at existing or future restaurants, we may have to close or relocate
restaurants. The lack of success or closing of any of our restaurants, or the
unsuccessful operation of a new restaurant, could have an adverse effect upon
our financial condition and results of operations.
OUR OPERATING RESULTS FLUCTUATE SEASONALLY BECAUSE OF OUR GEOGRAPHIC
CONCENTRATION. The majority of our restaurants are located in primarily
residential areas in Florida. We have experienced fluctuations in our
quarter-to-quarter operating results because of factors including:
/bullet/ the seasonal nature of our business;
/bullet/ weather conditions in Florida; and
/bullet/ the health of Florida's economy in general and tourism industry
in particular.
Our restaurant sales generally increase from January through April and
June through August, the peaks of the Florida tourism season, and generally
decrease from September through mid-December. In addition, because of our
present geographic concentration, adverse publicity relating to our restaurants
or adverse weather conditions could have a more pronounced adverse effect on
our operating results than if our restaurants were more geographically
dispersed. Adverse weather conditions or a decline in tourism in Florida, or in
general economic conditions, which would likely affect the Florida economy or
tourism industry, particularly during the time of peak sales, could materially
adversely affect our operations and prospects. Our expansion plans include
expansion into new markets in the Midwest. We believe that operations in the
Midwest will offset some of the seasonal effects on our operating results due
to our concentration in the Florida market. However, we cannot assure you that
our expansion outside of the Florida area will have a positive effect on the
seasonal nature of our operating results. Because of the seasonality of our
business, our results for any quarter are not necessarily indicative of the
results that may be achieved for a full year.
THE SUPPLY AND QUALITY OF OUR SEAFOOD MAY FLUCTUATE. In recent years, the
availability of certain types of seafood has fluctuated. This has resulted in a
corresponding fluctuation in prices. We do not maintain contracts with any of
our suppliers. We generally purchase products based on purchase orders placed
from time-to-time in the ordinary course of business. We also depend on U.S.
Foods. U.S. Foods distributes and warehouses our frozen seafood supply and
procures, distributes and stores other supplies for us. We believe that our
relationships with our suppliers and U.S. Foods are satisfactory and that
alternative sources are readily available. However, the loss of some suppliers
or of our relationship with
12
<PAGE>
U.S. Foods could materially and adversely affect us. Also, substantial price
increases imposed by these suppliers in the absence of alternative sources of
supply in a timely manner, would have a material adverse effect on us.
Some species of seafood have become subject to adverse publicity because
of claims of contamination by lead or other chemicals disposed of in the ocean.
This can adversely affect both market demand and supply for these food
products. Customer demand may also be negatively impacted by reports of medical
or other risks resulting from eating seafood. We maintain a continuous
inspection program for our seafood purchases. We believe that we have not
experienced any adverse effect from contaminated seafood. However, we cannot
assure you that seafood contamination or consumer perception of inadequate
seafood quality, in the industry in general or as to us specifically, will not
have a material adverse effect on us. Our failure to obtain adequate supplies
of seafood or problems or difficulties resulting from the contamination of
seafood, in general or at any of our restaurants in particular, could have a
material adverse effect on our operations and profitability.
OUR EXPENSES FOR FOOD AND OTHER COSTS FLUCTUATE. Our profitability depends
on our ability to anticipate and to react to increases in food, labor, employee
benefits, and similar costs. We have limited control over these costs.
Specifically, our dependence on frequent deliveries of seafood, produce and
other products means we are at greater risk of shortages or interruptions in
supply because of adverse weather or other conditions. This could adversely
affect the availability and cost of these items. We have been able to
anticipate and react to fluctuations in food costs by:
/bullet/ adjusting selected menu prices;
/bullet/ purchasing seafood directly from numerous suppliers; and
/bullet/ promoting alternative menu selections in response to price and
availability of supply.
However, we cannot assure you that we will be able to continue to
anticipate and respond to these supply and price fluctuations or that we will
not be subject to significantly increased costs. A shortage of available
seafood would cause our cost of sales to increase. Because of our low pricing
structure, this could materially adversely affect our operations and
profitability. In addition, seafood suppliers and processors are subject to a
program of inspection by the Food and Drug Administration. This program may
increase our seafood costs because seafood suppliers' and processors' costs in
complying with this program may increase.
OUR INDUSTRY IS HIGHLY COMPETITIVE. The restaurant industry, particularly
the full-service casual dining segment, is highly competitive. We compete in
the areas of:
/bullet/ price;
/bullet/ service;
13
<PAGE>
/bullet/ food quality, including taste, freshness, healthfulness and
nutritional value; and
/bullet/ location.
We have numerous well-established competitors, some of which dominate the
industry. These competitors possess substantially greater financial, marketing,
personnel and other resources than we do. Many of our competitors have achieved
significant national, regional and local brand name and product recognition.
They also engage in extensive advertising and promotional programs, both
generally and in response to efforts by additional competitors to enter new
markets or introduce new products. These competitors include national, regional
and local full-service casual dining chains, many of which specialize in or
offer seafood products.
We believe that the full-service casual dining segment is likely to
attract a significant number of new entrants, some offering seafood products.
We also expect to face competition from a broad range of other restaurants and
food service establishments. These include full-service, quick-service and fast
food restaurants which specialize in a variety of cuisines. In addition, the
full-service restaurant industry is characterized by the frequent introduction
of new food products which are accompanied by substantial promotional
campaigns. In recent years, numerous companies in the full-service restaurant
industry have introduced products, including seafood, intended to capitalize on
growing consumer preference for food products which are, or are perceived to
be, healthful, nutritious, low in calories and low in fat content. You can
expect that we will be subject to increasing competition from companies whose
products or marketing strategies address these consumer preferences. While we
believe that we offer a broad variety of quality seafood products, we cannot
assure you:
/bullet/ that consumers will be able to distinguish our products from
competitive products;
/bullet/ that substantially equivalent food products will not be introduced
by our competitors; or
/bullet/ that we will be able to compete successfully.
MANY FACTORS AFFECT OUR INDUSTRY. We must respond to various factors
affecting the restaurant industry including:
/bullet/ changes in consumer preferences, tastes and eating habits;
/bullet/ demographic trends and traffic patterns;
/bullet/ increases in food and labor costs;
/bullet/ inflation; and
/bullet/ national, regional and local economic conditions.
Recently, a number of full-service restaurant companies have experienced
declining growth rates due to general market saturation. In response to this
situation, some of these
14
<PAGE>
companies have adopted "value pricing" strategies. These strategies could draw
customers away from restaurants that do not engage in discount pricing. They
could also negatively affect the operating margins of competitors which do
attempt to match competitors' price reductions. We believe that our products
are generally lower in price than most competitive full-service and
quick-service offerings. However, continuing or sustained price discounting in
the restaurant industry could adversely affect our results of operations.
WE FACE RISKS ASSOCIATED WITH GOVERNMENT REGULATION. We are subject to
extensive state and local government regulation by various agencies, including:
/bullet/ state and local licensing, zoning, land use, construction and
environmental regulations;
/bullet/ various regulations relating to the sale of food and alcoholic
beverages;
/bullet/ regulations relating to sanitation, disposal of refuse and waste
products;
/bullet/ regulations relating to public health; and
/bullet/ safety and fire standards.
Our restaurants are inspected periodically by governmental agencies to
ensure conformity with these regulations. If we experience difficulty or fail
to obtain required licensing or other regulatory approvals, new restaurant
openings could be delayed or prevented. In addition, the suspension of, or
inability to renew a license at an existing restaurant would adversely affect
our operations. A significant percentage of our revenue comes from the sale of
alcoholic beverages. State and local regulation of the sale of alcoholic
beverages requires us to obtain a license or permit for each of our
restaurants. The failure of a restaurant to obtain or retain a license to serve
liquor would materially adversely affect our operations.
Restaurant operating costs are also affected by other government actions
which are beyond our control, including increases in:
/bullet/ the minimum hourly wage requirements;
/bullet/ workers compensation insurance rates;
/bullet/ health care insurance costs; and
/bullet/ unemployment and other taxes.
Furthermore, the Americans with Disabilities Act may require us to make
certain modifications to certain of our restaurants to meet specified access
and use requirements. These and other initiatives could adversely affect us, as
well as the restaurant industry in general.
WE MAY HAVE LIABILITY FOR SALES OF ALCOHOLIC BEVERAGES. We are also
subject to "dram-shop" statutes. These statutes generally provide a person
injured by an intoxicated person
15
<PAGE>
the right to recover damages from an establishment that wrongfully served
alcoholic beverages to the intoxicated person. In certain states, statutes also
provide 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 if the vendor willfully, knowingly and unlawfully sells
or furnishes alcoholic beverages to the minor and knows that the minor will
soon after that 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 after that be
driving a motor vehicle and injury or damage is caused by such person. In
addition, significant national attention is currently focused on the problem of
drunk driving, which could result in the adoption of additional legislation.
This could increase our potential liability for damage or injury caused by our
customers.
WE MAY NOT BE ABLE TO PROTECT OUR SERVICEMARKS AND PROPRIETARY
INFORMATION. We own three United States registrations for the servicemarks that
we use, including the name "SHELLS." We believe that our servicemarks have
significant value and are essential to our ability to create demand for and
awareness of our restaurants. We cannot assure you, however, that our
servicemarks:
/bullet/ do not or will not violate the proprietary rights of others;
/bullet/ would be upheld if challenged; or
/bullet/ that we would not be prevented from using our servicemarks.
Any of these occurrences could materially adversely affect us. In addition, we
cannot assure you that we will have the financial resources necessary to
enforce or defend our servicemarks.
We also rely on trade secrets and proprietary know-how. We employ various
methods to protect our concepts and recipes. However, these methods may not
completely protect us. We cannot assure you that others will not independently
develop similar know-how or obtain access to our know-how, concepts and
recipes. Although we generally enter into confidentiality and non-competition
agreements with our executives and key management personnel, we cannot assure
you that these agreements will adequately protect our trade secrets.
OUR INSURANCE COVERAGE MAY NOT BE ADEQUATE. We maintain insurance,
including insurance relating to personal injury, in amounts which we currently
consider adequate. Nevertheless, a partially or completely uninsured claim
against us, if successful, could materially adversely affect us.
WE DEPEND ON KEY PERSONNEL. Our success is largely dependent upon William
E. Hattaway, our President and Chief Executive Officer, and other key
personnel. We have entered into a one-year employment agreement with Mr.
Hattaway expiring in August 1999 which is renewed automatically on the
respective anniversary date unless either party
16
<PAGE>
provides notice of intent not to renew. The loss of his services or of the
services of other key personnel could materially adversely affect us. We have
obtained and are the beneficiary of a $1,700,000 key man life insurance policy
on the life of Mr. Hattaway. Our success may also depend on our ability to
attract and retain qualified management restaurant industry personnel,
particularly as we expand into new markets.
CONTROL BY MANAGEMENT. Our executive officers and directors beneficially
own, in the aggregate, approximately 41% of our outstanding common stock. As a
result, such persons, acting together, will be able to exert control over us,
elect all of our directors, cause an increase in our capital stock or cause the
dissolution, merger or sale of our assets, and generally direct our affairs.
WE HAVE NEVER PAID DIVIDENDS. We have never paid cash dividends on our
common stock and do not anticipate paying any cash dividends in the foreseeable
future. In addition, our debt financings prohibit the payment of cash dividends
and any future financing agreements may also prohibit the payment of cash
dividends.
EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF
SHELLS. Our certificate of incorporation provides that we may issue up to
2,000,000 shares of preferred stock from time to time in one or more series.
The Board of Directors is authorized to determine the rights, preferences,
privileges and restrictions granted to and imposed upon any wholly unissued
series of preferred stock. The Board also is authorized to fix the number of
shares of any series of preferred stock and the designation of any such series,
without any vote or action by our stockholders. The board of directors may
authorize and issue preferred stock with voting, dividend, liquidation,
conversion or other rights that could adversely affect the voting power or
other rights of the holders of common stock. In addition, the potential
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control, may discourage bids for our common stock at a
premium over the market price of the common stock and may adversely affect the
market price of the common stock. We have no present intention to issue any
shares of our preferred stock. However, we cannot assure you that we will not
do so in the future.
ITEM 2. PROPERTIES
The Company leases 8,100 square feet of space in Tampa, Florida for its
executive offices. The lease, although renewable, expires in November 1999, and
is terminable by either party upon four months prior written notice. The annual
rent payable under the lease is approximately $117,000.
All but four of the Company's existing restaurants in operation are leased
properties. In the future, the Company intends to lease most of its properties
but may 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
17
<PAGE>
operating costs to maintain common areas. Restaurant leases generally have
initial terms ranging from five to 20 years and renewal options ranging from
five 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, individually 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.
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company is traded on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") National Market under
the symbol "SHLL". Prior to February 1998, the common stock was traded on the
Nasdaq Small Cap System. 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 originally sold to the public at an initial public offering price of
$5.00 per share on April 23, 1996.
COMMON STOCK
-----------------------
HIGH LOW
---------- ----------
Fiscal 1996
- -----------
Second quarter ......... $ 9.00 $ 5.00
Third quarter .......... $ 8.25 $ 6.50
Fourth quarter ......... $ 9.38 $ 6.25
FISCAL 1997
- -----------
First quarter .......... $ 9.37 $ 8.37
Second quarter ......... $ 11.00 $ 7.87
Third quarter .......... $ 14.75 $ 10.12
Fourth quarter ......... $ 14.37 $ 8.87
FISCAL 1998
- -----------
First quarter .......... $ 11.63 $ 7.56
Second quarter ......... $ 11.75 $ 9.63
Third quarter .......... $ 11.50 $ 4.38
Fourth quarter ......... $ 6.00 $ 3.25
The number of stockholders of record of the Company's Common Stock on
March 19, 1999 was approximately 250.
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.
19
<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., a wholly
owned subsidiary of the Company. The historical consolidated financial data for
the Company is for the year (53 weeks) ended January 3, 1999, and the years (52
weeks) ended December 28, 1997, December 29, 1996, December 31, 1995, and
January 1, 1995 (historical and Pro forma). 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. (The amounts are presented in
thousands, except per share and number of restaurants data).
<TABLE>
<CAPTION>
YEAR (52 WEEKS) ENDED
YEAR (53 WEEKS) --------------------------------------------
ENDED
JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31,
1999 1997 1996 1995
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Statment of Operations Data:
Revenues
Restaurant sales ................ $ 83,734 $ 64,914 $ 39,405 $ 28,269
Management fees ................. 415 398 388 352
-------- -------- -------- --------
Total revenues .................. 84,149 65,312 39,793 28,621
-------- -------- -------- --------
Costs and expenses
Cost of sales ................... 29,342 22,967 14,017 11,220
Labor and other related
expenses ....................... 23,749 17,674 10,221 7,680
Other restaurant operating
expenses ....................... 17,317 13,432 8,266 6,301
General and
administrative expenses ........ 6,210 4,940 3,351 2,316
Depreciation and amortization ... 2,702 1,788 927 664
Pre-opening expenses ............ 2,306 1,646 347 295
Provision for impairment
of assets ....................... 620 -- -- --
-------- -------- -------- --------
Income (loss) from operations .... 1,903 2,865 2,664 145
Other income (expense):
Interest expense, net ........... (341) (148) (170) (409)
Other income (expense), net ..... (18) (44) (233) (33)
-------- -------- -------- --------
Income (loss) before elimination
of minority partner interest,
and benefit (provision) for
income taxes .................... 1,544 2,673 2,261 (297)
Elimination of minority
partner interest ................ (179) (174) (169) (106)
-------- -------- -------- --------
Income (loss) before benefit
(provision) for income taxes .... 1,365 2,499 2,092 (403)
Income tax benefit (provision) (1) 158 (849) (648) --
Cumulative effect of change in
accounting for pre-opening
costs, net of income tax benefit (692) -- -- --
-------- -------- -------- --------
Net income (loss) ................ 831 1,650 1,444 (403)
Preferred shares accretion ....... (111) (74) (117) (167)
-------- -------- -------- --------
Net income (loss) applicable to
common stock ..................... $ 720 $ 1,576 $ 1,327 $ (570)
======== ======== ======== ========
<CAPTION>
YEAR (52 WEEKS) ENDED
------------------------------------------
JANUARY 1, JANUARY 1, JANUARY 1,
1995 1995 1995
PRO FORMA(2) SSRI SHELLS, INC.
-------------- ------------ -------------
<S> <C> <C> <C>
Statment of Operations Data:
Revenues
Restaurant sales ..................... $ 21,878 $5,768 $16,110
Management fees ...................... 327 1,384 --
-------- ------ -------
Total revenues ....................... 22,205 7,152 16,110
-------- ------ -------
Costs and expenses
Cost of sales ........................ 9,088 2,292 6,796
Labor and other related
expenses ............................ 5,830 1,523 4,307
Other restaurant operating
expenses ............................ 5,002 1,429 4,630
General and
administrative expenses ............. 2,243 2,012 231
Depreciation and amortization ........ 507 112 189
Pre-opening expenses ................. 422 344 78
Provision for impairment
of assets ............................ -- -- --
-------- ------ -------
Income (loss) from operations ......... (887) (560) (121)
Other income (expense):
Interest expense, net ................ (236) (91) (145)
Other income (expense), net .......... 35 40 (5)
-------- ------ --------
Income (loss) before elimination
of minority partner interest,
and benefit (provision) for
income taxes ......................... (1,088) (611) (271)
Elimination of minority
partner interest ..................... (67) (67) --
-------- ------ --------
Income (loss) before benefit
(provision) for income taxes ......... (1,155) (678) (271)
Income tax benefit (provision) (1)..... -- -- --
Cumulative effect of change in
accounting for pre-opening
costs, net of income tax benefit...... -- -- --
-------- ------ --------
Net income (loss) ..................... (1,155) (678) (271)
Preferred shares accretion ............ -- -- --
-------- ------ --------
Net income (loss) applicable to
common stock .......................... $ (1,155) $ (678) $ (271)
======== ====== ========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
------------ -------------- -----------
<S> <C> <C> <C>
Basic net income per share ....................... $ 0.16 $ 0.42 $ 0.49
Diluted net income per share ..................... $ 0.15 $ 0.33 $ 0.40
Operating Data:
System-wide sales:
Company-owned restaurants(3) .................... $83,734 $64,914 $39,405
Licensed restaurants ............................ 10,385 9,947 9,660
------- ------- -------
$94,119 $74,861 $49,065
======= ======= =======
Number of restaurants (at end of period):
Company-owned restaurants(3) .................... 45 36 27
Licensed restaurants ............................ 4 4 4
------- ------- -------
49 40 31
------- ------- -------
Average annual sales per Company-owned and
joint venture restaurant open for full period(4) $ 2,156 $ 2,110 $ 2,188
Increase in Company-owned and joint
venture restaurant same store sales(4) ......... 2.5% 2.5% 14.7%
</TABLE>
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1,
1999 1997 1996 1995 1995
------------ -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital (deficiency) .............. $ (4,047) $ 484 $ (1,418) $ (4,722) $ (3,298)
Total assets .............................. 34,895 26,566 18,373 10,438 9,078
Long-term debt ............................ 5,189 1,449 1,161 1,706 2,098
Minority partner interest ................. 519 514 512 574 467
Redeemable preferred shares ............... -- 1,372 1,668 1,551 1,385
Stockholders' equity (deficiency) ......... 16,460 14,521 7,472 (889) (354)
<FN>
- ----------------
(1) The effective tax rates for 1998, 1997 and 1996 include 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 fiscal years 1998, 1997 and 1996 to 36%, 34% and 31%,
respectively. The effective tax rate for fiscal 1998 was also affected by
a $650,000 benefit related to the reduction in the tax asset valuation
allowance.
(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 all
subsequent years presented.
(3) Includes one joint venture restaurant in which the Company has a 51% equity
interest.
(4) Includes only restaurants open during the full fiscal year shown and open
for a full comparable fiscal year and at least the full six months prior
thereto.
</FN>
</TABLE>
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As of January 3, 1999, the Company owned 44 Shells restaurants and a 51%
ownership interest in the Melbourne Restaurant. In addition, the Company
managed and operated four Managed Restaurants. The Company's restaurants
average approximately 6,600 square feet in size and have an average seating
capacity of approximately 220 seats. Average annual restaurant sales during the
year (53 weeks) ended January 3, 1999 for the 35 restaurants open for the full
year were approximately $2,156,000. The Company's food sales and liquor sales
accounted for 89% and 11% of revenues, respectively, for the year (53 weeks)
ended January 3, 1999.
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. The Company's fiscal year
is the 52 or 53 weeks ending the Sunday nearest to December 31.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
------------ -------------- -------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales .................................... 99.5% 99.4% 99.0%
Management fees from related parties ................ 0.5 0.6 1.0
------ ------ ------
100.0 100.0 100.0
------ ------ ------
COST AND EXPENSES:
Cost of restaurant sales(1) ......................... 35.0 35.4 35.6
Labor and other related expenses(1) ................. 28.4 27.2 25.9
Other restaurant operating expenses(1) .............. 20.7 20.7 21.0
------ ------ ------
Total restaurant costs and expenses(1) .............. 84.1 83.3 82.5
------ ------ ------
General and administrative expenses ................. 7.4 7.6 8.4
Depreciation and amortization ....................... 3.2 2.7 2.3
Pre-opening expenses ................................ 2.7 2.5 0.9
Provision for impaired assets ....................... 0.7 0.0 0.0
Income from operations .............................. 2.3 4.4 6.7
Interest expense, net ............................... -0.4 -0.2 -0.4
Other expense, net .................................. -0.1 -0.1 -0.6
Elimination of minority partner interest ............ -0.2 -0.3 -0.5
------ ------ ------
Income before benefit (provision) for taxes ......... 1.6 3.8 5.2
Benefit (provision) for income taxes ................ 0.2 -1.3 -1.6
Cumulative effect of a change in accounting
principle, net of income tax benefit ................ -0.8 0.0 0.0
------ ------ ------
Net income ........................................... 1.0% 2.5% 3.6%
====== ====== ======
<FN>
- ----------------
(1) As a percentage of restaurant sales.
</FN>
</TABLE>
22
<PAGE>
RESULTS OF OPERATIONS
FISCAL 1998 VERSUS FISCAL 1997
Total revenues increased by 29.0% between Fiscal 1997 and Fiscal 1998.
Most of the year-to-year increase was attributable to new restaurant openings,
53 weeks included in Fiscal 1998 versus 52 weeks in Fiscal 1997, as well as a
2.5% increase in same store sales. The Company opened 10 restaurants during
Fiscal 1998, five of which opened in the fourth quarter, and closed one
restaurant in January 1998. The increase in same store sales was due to
selected menu price adjustments in the beginning of Fiscal 1998 which were
offset by slight decreases in customer traffic.
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 35.0% of restaurant sales in Fiscal 1998 as
compared with 35.4% in Fiscal 1997. The availability of certain types of
seafood fluctuates from time-to-time, resulting in corresponding fluctuations
in the cost of restaurant sales. The slight improvement over Fiscal 1997 is
attributed to selected menu price adjustments which occurred during January
1998, the implementation of software in the restaurants which allowed
management to identify and react to product usage variances, and the Company's
ability to anticipate and react to fluctuations in food costs, in particular,
increases in its dairy costs, and to offer or promote alternative inventory
items or menu selections in response to such fluctuations. 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.
Labor and other related expenses were 28.4% of restaurant sales for Fiscal
1998 as compared to 27.2% in Fiscal 1997. This increase is primarily
attributable to higher wage rates outside of the state of Florida as well as
increased staffing at the manager levels to meet planned expansion. The Company
had four restaurant locations (formerly Chi Chi's) which were expected to open
in the third quarter of Fiscal 1998 which did not open until the fourth quarter
due to unanticipated legal complications involved in the completion of the
acquisitions. As a result, the Company paid additional salaries and related
expenses in the third quarter for management and other personnel awaiting
assignment to these new restaurants without receipt of offsetting revenues from
those stores. Labor and other related expenses generally consist of restaurant
hourly and management payroll, benefits and taxes.
Other restaurant operating expenses remained unchanged at 20.7% of
restaurant sales in both Fiscal 1998 and Fiscal 1997. Other restaurant
operating expenses actually increased slightly during Fiscal 1998 when
considering Fiscal 1997 included a $197,000
23
<PAGE>
one-time charge related to the closure of a restaurant. The increase in Fiscal
1998 reflected increases in advertising expenses as a percentage of sales due
to increased advertising in selected markets. The increase in advertising
expenses was offset in part by a reduction in excise taxes as the Company
continued its expansion outside the state of Florida. 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 7.4% of revenues in Fiscal 1998
as compared with 7.6% in Fiscal 1997. The 0.2% decrease in general and
administrative expenses as a percentage of revenues was attributable to the
economies of scale gained through the increase in chain-wide restaurant sales.
The efficiencies were partially offset by increased costs of management
training and recruiting. 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.
Depreciation and amortization expense was 3.2% of revenues for Fiscal 1998
as compared with 2.7% for Fiscal 1997. The increases are due to the higher
investment levels for the units outside the state of Florida as well as the
renovations occurring at several of the existing units.
Pre-opening expenses were 2.7% of revenues for Fiscal 1998 as compared
with 2.5% for Fiscal 1997. The 2.7% in Fiscal 1998 is exclusive of the one-time
charge of $692,000, net of income tax benefit, related to the Company's early
adoption of a new accounting standard which requires that pre-opening and other
start-up costs be expensed as incurred rather than capitalized. The increases
for Fiscal 1998 exclusive of the one-time charge were attributed to the ten
units that were opened in Fiscal 1998 as compared with nine units opened during
Fiscal 1997.
Provision for impaired assets was $620,000 or 0.7% of revenues for Fiscal
1998. In the fourth quarter, the Company recorded the pre-tax charge relating
to the write-down of impaired assets to their estimated fair value in
accordance with Statement of Financial Accounting Standards No. 121. The
write-down is related to one restaurant. Although at the current time the
Company intends to continue operating this restaurant, it has not, nor is it
projected to, contribute positively to the Company's cash flow in the
foreseeable future.
Income from operations decreased $962,000 from $2,865,000 in Fiscal 1997
to $1,903,000 in Fiscal 1998. This decline was attributable to the provision
for impaired assets as well as the increase in pre-opening expenses recognized
during Fiscal 1998. The income from operations as a percentage of restaurant
sales decreased by 2.1%, from 4.4% of revenues in Fiscal 1997 to 2.3% of
revenues in Fiscal 1998, primarily due to the increased labor and related
expenses as well as the provision for impaired assets.
Net interest expense increased $193,000 from $148,000 in Fiscal 1997 to
$341,000 in Fiscal 1998. The increase was attributable to the $5,054,000 in new
borrowings during 1998 resulting from the purchase of two restaurant properties
as well as the financing related to new restaurant equipment.
24
<PAGE>
The income tax expense (benefit) improved from an expense of 1.3% of
revenues to a benefit of 0.2% of revenues in Fiscal 1998. The fluctuation was
attributed to the reduction in the valuation allowance related to the deferred
tax asset, thereby providing a $650,000 benefit during Fiscal 1998 to offset
the provision for income taxes. The Company carried the valuation allowance
until Fiscal 1998 due to the uncertainty of its taxable income upon multiple
state expansion.
The cumulative effect of a change in accounting principle resulted in the
Company recognizing a $1,081,000 pre-tax charge, $692,000 net of income tax
benefits, relating to the write-off of pre-opening costs. This change resulted
from the early adoption of a new accounting standard, Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities," which requires that
pre-opening and other start-up costs be expensed as incurred rather than
capitalized. The adoption has been made effective as of the beginning of the
Company's 1998 fiscal year. As a result of the adoption, the Company will begin
reporting pre-opening costs as incurred, which in turn will result in lower
future amortization expense. Since the Company has amortized pre-opening costs
over a one-year period following the opening of its restaurants, the impact of
the accounting change is not expected to materially affect the Company's future
net operating results, although the quarterly fluctuations may be magnified
based upon the timing of restaurant openings.
The net income decreased $819,000 to $831,000 for Fiscal 1998 as compared
with $1,650,000 for Fiscal 1997.
FISCAL 1997 VERSUS FISCAL 1996
Total revenues increased by 64.1% between Fiscal 1996 and Fiscal 1997.
Most of the year-to-year increase was attributable to new restaurant openings
coupled with increases in same store sales of 2.5% for Fiscal 1997. The Company
opened nine restaurants during Fiscal 1997 as compared with 10 new restaurants
during Fiscal 1996, nine of which opened during the fourth quarter of Fiscal
1996. 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.
Cost of restaurant sales were 35.4% of restaurant sales in Fiscal 1997 as
compared with 35.6% in Fiscal 1996. The slight improvement over Fiscal 1996 is
attributed to the Company having 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 27.2% of restaurant sales for Fiscal
1997 as compared to 25.9% in Fiscal 1996. This increase was primarily
attributed to higher wage rates outside of the state of Florida as well as
increased staffing at the manager levels to meet planned expansion.
Other restaurant operating expenses were 20.7% of restaurant sales in
Fiscal 1997 as compared to 21.0% in Fiscal 1996. The decreases in these
expenses as a percentage of
25
<PAGE>
sales was due to the efficiencies realized through the higher sales volumes at
the stores coupled with increased operational efficiencies. For Fiscal 1997,
other restaurant operating expenses also included a $197,000 one-time charge
related to the closure of a restaurant. There were also decreases in
advertising production costs in Fiscal 1997 as a percentage of sales.
General and administrative expenses were 7.6% of revenues in Fiscal 1997
as compared with 8.4% in Fiscal 1996. The 0.8% decrease in general and
administrative expenses as a percentage of revenues was attributable to the
economies of scale gained through the increase in chain-wide restaurant sales.
The efficiencies were partially offset by increased management training and
recruiting costs, increased staffing to facilitate expansion, and increased
travel related to site selection evaluations for out of state locations.
Depreciation and goodwill amortization expense was 2.7% of revenues for
Fiscal 1997 as compared with 2.3% for Fiscal 1996. The increase was due to the
higher investment levels for the units outside the state of Florida as well as
the renovations occurring at several of the existing units.
Pre-opening expenses were 2.5% of revenues for Fiscal 1997 as compared
with 0.9% for Fiscal 1996. The increases for Fiscal 1997 were attributed to the
nine units that were opened in the fourth quarter of Fiscal 1996 as well as the
nine units opened during Fiscal 1997, compounded by the higher pre-opening
costs being incurred in new markets outside of Florida.
Net interest expense decreased slightly from $170,000 in Fiscal 1996 to
$148,000 in Fiscal 1997. The reduction was attributable to the increase in
interest income generated from $5,474,000 in net proceeds received from the
exercise of warrants, as well as the increase in cash flow generated from
operations.
Income from operations improved $201,000 from $2,664,000 in Fiscal 1996 to
$2,865,000 in Fiscal 1997. This improvement was due to the higher sales levels
chain-wide. The income from operations as a percentage of restaurant sales
decreased by 2.3%, from 6.7% of revenues in Fiscal 1996 to 4.4% of revenues in
Fiscal 1997, primarily due to the increased depreciation and amortization
expenses. The net income before taxes improved $407,000 to $2,499,000 for
Fiscal 1997 as compared with $2,092,000 for Fiscal 1996. The net income for
Fiscal 1997 was $1,650,000 as compared with $1,444,000 for Fiscal 1996
reflecting income tax provisions of $849,000 and $648,000, respectively. The
income tax provisions were based on effective tax rates of 34% and 31% for
Fiscal 1997 and Fiscal 1996, respectively, which reflects the valuation
allowance adjustment of tax benefits as well as the 1997 benefits of net
operating loss carryforwards and tax credits that were previously unrealized.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flows for the
last three fiscal years (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net cash provided by operating activities .......... $ 6,285 $ 5,184 $ 2,639
Net cash used in investing activities .............. (11,050) (7,233) (5,799)
Net cash provided by financing activities .......... 4,173 4,330 5,417
--------- -------- --------
Net (decrease) increase in cash .................... $ (592) $ 2,281 $ 2,257
========= ======== ========
</TABLE>
As of January 3, 1999, the Company's current liabilities of $11,153,000
exceeded its current assets of $7,106,000, resulting in a working capital
deficiency of $4,047,000. With the exception of 1997, consistent with industry
practice, 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. The use of current assets for
investment in leasehold improvements, land and buildings, and equipment has
also contributed to a deficiency in working capital.
The Company received $1,218,000 and $5,474,000 in net proceeds from the
exercise of warrants and options to purchase common stock during 1998 and 1997,
respectively. During 1996, the Company received $6,125,000 in net proceeds from
the completion of the Company's initial public offering (the "Offering") and
the exercise of the underwriter's over-allotment option. During 1996, 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, (i) $750,000 of indebtedness borrowed in 1995
and (ii) $159,000 principal amount of indebtedness owed to WLH Investments were
converted into equity.
There were warrants and options to purchase an aggregate of 226,953 shares
of the Company's common stock exercised during 1998, generating net proceeds to
the Company of $1,218,000. The proceeds from the exercise of these warrants was
required to be used to retire outstanding Shells, Inc. Preferred Shares. The
Company used the warrant proceeds as well as other funds to retire all
outstanding preferred shares during 1998 for an aggregate redemption price of
$1,482,000. The Company redeemed $371,000 in preferred shares during 1997.
On June 16, 1997, the Company gave notice to the holders of all of its
outstanding publicly registered Common Stock Purchase Warrants (the "Public
Warrants") that the Company would redeem the Public Warrants on July 16, 1997
(the "Redemption Date"), at a redemption price of $0.10 per Public Warrant. In
addition, simultaneous with the delivery of notice to the holders of the Public
Warrants, the Company gave notice of redemption to holders of warrants to
purchase an additional 112,376 shares of Common Stock at an exercise price of
$6.00 per share (the "Private Warrants" and together with the Public
27
<PAGE>
Warrants, the "Warrants"). The Warrants were exercisable at any time up to and
including 5:00 p.m., Eastern Standard Time, on July 16, 1997 (the "Exercise
Termination Time"), and were also redeemable at a redemption price of $0.10 per
Warrant. There were 917,276 warrants exercised during 1997, which represented
all but 100 of the warrants subject to redemption.
During Fiscal 1998, the Company's cash position decreased by $592,000. Net
cash provided by operating activities totaled $6,285,000, while cash used in
investing activities was $11,050,000 which related to capital expenditures in
connection with the opening of 10 new restaurants, the remodeling of certain
existing restaurants, and the investment of $300,000 in software and accounting
systems. The net cash provided by financing activities was $4,173,000, which
primarily consisted of the $5,054,000 in borrowings, $1,218,000 in net proceeds
from the exercise of warrants and options to purchase Common Stock, less net
repayments of debt ($616,000) and the retirement of preferred shares
($1,482,000).
During Fiscal 1997, the Company's cash position increased by $2,281,000.
Net cash provided by operating activities totaled $5,184,000, while cash used
in investing activities was $7,233,000, which related to capital expenditures
in connection with the opening of nine new restaurants and the remodeling of
certain existing restaurants. The net cash provided by financing activities was
$4,330,000, which primarily consisted of $5,474,000 in proceeds from the
issuance of common stock, $704,000 in borrowings, less the repayment of debt
($1,477,000), and the retirement of preferred shares ($371,000).
The Company believes that cash flows from operations coupled with the
funds available from anticipated third party financing and cash balances at
January 3, 1999, will be sufficient to satisfy its contemplated cash
requirements for at least 12 months. The Company's expansion strategy is
dependent upon achieving projected cash flow from operations and to a lesser
extent, obtaining third party financing. 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 from time-to-time may utilize third party financing as
necessary to facilitate expansion. 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), projected cash flow
or third party financing 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 or
reduce its expansion plans. 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 $912,000 of principal indebtedness due in 1999 which is
expected to be repaid out of the Company's cash flow from operations.
28
<PAGE>
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 its high concentration of
restaurants in Florida. Business in Florida is influenced by seasonality due to
various factors which include but are not limited to weather conditions in
Florida relative to other areas of the U.S. and the health of Florida's economy
in general and the tourism industry in particular. The Company's restaurant
sales are generally highest from January through April and June through August,
the peaks of the Florida tourism season, and generally lower from September
through mid-December. In many cases, locations are in coastal cities, where
sales are significantly dependent on tourism and its seasonality patterns. It
is anticipated that implementation of the Company's expansion program into the
Midwest markets will, over time, reduce some of the existing seasonal
fluctuations.
In addition, quarterly results have been, and in the future are likely to
be, substantially affected by the timing of new restaurant openings both in and
outside of Florida. 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.
YEAR 2000 ISSUE
The Year 2000 compliance software issues will affect the Company as well
as most other companies. Historically, certain computer programs and certain
microprocessors were designed using two digits rather than four to define the
applicable year. As a result, software programs may recognize a date using the
two digits "00" as 1900 rather than the year 2000. Computer programs that do
not recognize the proper date could generate erroneous data or cause systems to
fail. The Company has established a Year 2000 task force to analyze the
Company's Year 2000 compliance. The Year 2000 project covers both the store
level systems as well as the corporate systems. The various phases of the
project include identification of systems, assessment of Year 2000 exposure,
validation, implementation, and contingency planning. Based on its assessment
of its major information technology systems, the Company expects that all
necessary modifications and / or replacements will be completed in a timely
manner to insure that each of its systems are Year 2000 compliant.
The Company has incurred approximately $35,000 of Year 2000 project
expenses through January 3, 1999. Future expenses are expected to approximate
$25,000 as the Company's current hardware systems and software, with minor
modifications, have been represented by their vendors to be either Year 2000
compliant or have a Year 2000 compliant upgrade available at no charge.
The Company's Year 2000 project also considers the readiness of
significant vendors. The Company believes that if certain vendors were not Year
2000 compliant, then alternate
29
<PAGE>
arrangements could be made that would alleviate any material impact on
operations. The contingency plans for material systems such as general ledger,
payroll, fixed assets, and cash management systems involve manual workarounds
and extra staffing. The contingency plans for distribution or vendor related
issues entail alternative suppliers and distributors.
The Company is in the process of identifying and contacting its critical
suppliers and service providers to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000
issues. To the extent that responses to Year 2000 readiness are unsatisfactory,
the Company intends to change suppliers to those who have demonstrated Year
2000 readiness. The Company can give no assurances that the responses it
receives will be accurate, or if changes are necessary, that the Company will
be successful in finding such compliant suppliers and service providers. The
Company currently has formal information concerning the Year 2000 status of
most of its major suppliers and service providers. The Company will continue to
contact and assess Year 2000 readiness of its suppliers and vendors.
Achieving Year 2000 compliance is dependent on many factors, some of which
are not completely within the Company's control. There can be no assurance that
the Company will be able to identify all aspects of its business that are
subject to Year 2000 problems of suppliers that affect the Company's business.
There can also be no assurance that the Company's software vendors are correct
in their assertions that the software is year 2000 compliant, or that the
Company's estimate of the costs of systems preparation for Year 2000 compliance
will prove ultimately to be accurate. Should either the Company's internal
systems or internal systems of one or more significant suppliers fails to
achieve Year 2000 compliance, or the Company's estimate of the costs of
becoming Year 2000 compliant prove to be materially inaccurate, the Company's
business and results of operations could be adversely affected.
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 expenses increase, the Company expects to recover increased
costs by increasing prices, to the extent permitted by competition or by
modifying its menu and promoting other less cost sensitive products. 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.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, Acounting
for Derivative Instruments and Hedging Activities, establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative
30
<PAGE>
(that is gains and losses) depends upon the intended use of the derivative and
the resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company has not evaluated the
effect, if any, that the adoption of SFAS No. 133 will have on the Company's
consolidated financial statements.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
AND
SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report ................................................ 33
Consolidated Balance Sheets as of January 3, 1999 and December 28, 1997 ..... 34
Consolidated Statements of Operations for the year (53 weeks) ended
January 3, 1999 and the years (52 weeks) ended December 28, 1997 and
December 29, 1996 ......................................................... 35
Consolidated Statements of Stockholders' Equity (Deficiency) for the the year
(53 weeks) ended January 3, 1999 and the years (52 weeks) ended
December 28, 1997 and December 29, 1996 ................................... 36
Consolidated Statements of Cash Flows for the year (53 weeks) ended
January 3, 1999 and the years (52 weeks) ended December 28, 1997 and
December 29, 1996 ......................................................... 37
Notes to Consolidated Financial Statements .................................. 38
</TABLE>
32
<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 January 3,
1999 and December 28, 1997 and the related consolidated statements of
operations, stockholders' equity (deficiency) and cash flows for the year (53
weeks) ended January 3, 1999 and the years (52 weeks) ended December 28, 1997
and December 29, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at January 3, 1999 and December 28, 1997 and the results of its operations and
its cash flows for the year (53 weeks) ended January 3, 1999 and the years (52
weeks) ended December 28, 1997 and December 29, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 15 to the consolidated financial statements, the
Company changed its method of accounting for pre-opening costs in 1998.
DELOITTE & TOUCHE LLP
Tampa, Florida
February 19, 1999
33
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
----------------- ------------------
<S> <C> <C>
ASSETS
Cash .................................................. $ 4,723,121 $ 5,314,771
Inventories ........................................... 954,066 861,247
Other current assets .................................. 1,282,641 1,663,867
Receivables from related parties ...................... 35,261 139,948
Deferred tax asset, net ............................... 110,551 --
----------- -----------
Total current assets ............................... 7,105,640 7,979,833
Property and equipment, net ........................... 22,240,255 14,306,138
Prepaid rent .......................................... 622,368 324,321
Other assets .......................................... 690,571 450,155
Goodwill .............................................. 3,299,191 3,505,387
Deferred tax asset, net ............................... 937,449 --
----------- -----------
TOTAL ASSETS ....................................... $34,895,474 $26,565,834
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ...................................... $ 6,318,544 $ 3,805,633
Accrued expenses ...................................... 3,432,332 2,881,404
Sales tax payable ..................................... 489,688 318,223
Income taxes payable .................................. -- 275,216
Current portion of long-term debt ..................... 912,333 215,235
----------- -----------
Total current liabilities .......................... 11,152,897 7,495,711
Deferred rent ......................................... 1,574,092 1,214,143
Long-term debt, less current portion .................. 5,189,481 1,449,092
----------- -----------
Total liabilities .................................. 17,916,470 10,158,946
Minority partner interest ............................. 519,257 514,047
----------- -----------
Shells, Inc. preferred shares subject to redemption,
$10 par value; authorized 10,000,000 shares;
148,249 shares issued and outstanding at
December 28, 1997 .................................... -- 1,371,852
----------- -----------
STOCKHOLDERS' EQUITY:
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; 4,454,015 and 4,227,062 shares
issued and outstanding, respectively ................. 44,540 42,270
Additional paid-in-capital ............................ 14,161,010 12,944,995
Retained earnings ..................................... 2,254,197 1,533,724
----------- -----------
Total stockholders' equity ......................... 16,459,747 14,520,989
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $34,895,474 $26,565,834
=========== ===========
</TABLE>
See notes to Consolidated Financial Statements.
34
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales ................................ $83,733,831 $64,914,358 $39,405,304
Management fees from related parties ............ 415,383 398,106 387,519
----------- ----------- -----------
84,149,214 65,312,464 39,792,823
----------- ----------- -----------
COST AND EXPENSES:
Cost of restaurant sales ........................ 29,341,688 22,967,259 14,017,163
Labor and other related expenses ................ 23,749,450 17,673,808 10,220,280
Other restaurant operating expenses ............. 17,317,281 13,431,530 8,266,403
General and administrative expenses ............. 6,210,113 4,940,173 3,350,765
Depreciation and amortization ................... 2,701,969 1,788,358 927,017
Pre-opening expenses ............................ 2,305,944 1,646,271 347,100
Provision for impaired assets ................... 620,000 -- --
----------- ----------- -----------
82,246,445 62,447,399 37,128,728
----------- ----------- -----------
INCOME FROM OPERATIONS ........................... 1,902,769 2,865,065 2,664,095
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ................................ (550,267) (364,645) (337,347)
Interest income ................................. 209,583 216,654 167,718
Other expense, net .............................. (17,711) (44,500) (233,051)
----------- ----------- -----------
(358,395) (192,491) (402,680)
----------- ----------- -----------
INCOME BEFORE ELIMINATION OF MINORITY PARTNER
INTEREST AND INCOME TAXES ...................... 1,544,374 2,672,574 2,261,415
ELIMINATION OF MINORITY PARTNER INTEREST ......... (179,257) (174,047) (169,450)
----------- ----------- -----------
INCOME BEFORE BENEFIT (PROVISION) FOR
INCOME TAXES ................................... 1,365,117 2,498,527 2,091,965
BENEFIT (PROVISION) FOR INCOME TAXES ............. 158,000 (849,000) (648,000)
----------- ----------- -----------
INCOME BEFORE THE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE ................. 1,523,117 1,649,527 1,443,965
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAX BENEFIT ........... (692,000) -- --
----------- ----------- -----------
NET INCOME ....................................... 831,117 1,649,527 1,443,965
PREFERRED SHARES ACCRETION ....................... (110,644) (74,000) (117,000)
----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK ............ $ 720,473 $ 1,575,527 $ 1,326,965
=========== =========== ===========
BASIC NET INCOME PER SHARE OF COMMON STOCK
BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE .............................. $ 0.32 $ 0.42 $ 0.49
CUMULATIVE EFFECT OF ACCOUNTING CHANGE .......... (0.16) -- --
----------- ----------- -----------
BASIC NET INCOME PER SHARE OF COMMON STOCK ...... $ 0.16 $ 0.42 $ 0.49
=========== =========== ===========
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING .................... 4,447,881 3,726,949 2,729,417
=========== =========== ===========
DILUTED NET INCOME PER SHARE OF COMMON STOCK
BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE .............................. $ 0.29 $ 0.33 $ 0.40
CUMULATIVE EFFECT OF ACCOUNTING CHANGE .......... (0.14) -- --
----------- ----------- -----------
DILUTED NET INCOME PER SHARE OF COMMON STOCK ..... $ 0.15 $ 0.33 $ 0.40
=========== =========== ===========
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING ....................... 4,958,052 4,750,620 3,312,651
=========== =========== ===========
</TABLE>
See notes to Consolidated Financial Statements.
35
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
---------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ---------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ................ 1,462,684 $14,627 $ 581,841 $ (1,485,768) $ (889,300)
Net income ................................. 1,443,965 1,443,965
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
--------- ------- ----------- ------------ -----------
Balance at December 29, 1996 ................ 3,297,536 32,975 7,480,548 (41,803) 7,471,720
Net income ................................. 1,649,527 1,649,527
Shells Inc. preferred shares accretion ..... (74,000) (74,000)
Issuance of common stock ................... 929,526 9,295 5,464,447 5,473,742
--------- ------- ----------- ----------- -----------
Balance at December 28, 1997 ................ 4,227,062 42,270 12,944,995 1,533,724 14,520,989
Net income ................................. 831,117 831,117
Shells Inc. preferred shares accretion ..... (110,644) (110,644)
Issuance of common stock ................... 226,953 2,270 1,216,015 1,218,285
--------- ------- ----------- ------------ -----------
Balance at January 3, 1999 .................. 4,454,015 $44,540 $14,161,010 $ 2,254,197 $16,459,747
========= ======= =========== ============ ===========
</TABLE>
See notes to Consolidated Financial Statements.
36
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------------
JANUARY 3, 1999 DECEMBER 28, 1997 DECEMBER 29, 1996
----------------- ------------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................ $ 831,117 $ 1,649,527 $ 1,443,965
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................... 2,495,773 1,788,358 927,017
Pre-opening expenses ............................. 2,512,140 1,646,271 347,100
Loss on impairment of assets ..................... 620,000 -- --
Cumulative effect of accounting change ........... 692,000 -- --
Minority partner interest ........................ 5,210 2,237 96,519
Changes in assets and liabilities:
Increase in inventories ......................... (92,819) (197,684) (266,444)
Decrease (increase) in receivables from
related parties .............................. 104,687 (7,900) (69,054)
Increase in other assets ........................ (2,857,134) (1,958,181) (868,137)
Increase in deferred tax assets ................. (1,048,000) -- --
(Increase) decrease in prepaid rent ............. (298,047) 50,400 50,399
Increase (decrease) in accounts
payable ...................................... 2,512,911 1,318,690 (36,230)
Increase in accrued expenses .................... 550,928 721,616 356,585
Decrease in payable to related parties .......... -- -- (98,927)
Increase in sales tax payable ................... 171,465 35,257 53,435
(Decrease) increase in income taxes
payable ...................................... (275,216) (221,000) 496,216
Increase in deferred rent ....................... 359,949 356,313 206,696
------------- ------------ ------------
Total adjustments .............................. 5,453,847 3,534,377 1,195,175
------------- ------------ ------------
Net cash provided by operating
activities .................................. 6,284,964 5,183,904 2,639,140
------------- ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment ................ (11,049,890) (7,233,151) (5,798,872)
------------- ------------ ------------
Net cash used in investing activities ............. (11,049,890) (7,233,151) (5,798,872)
------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from debt financing ...................... 5,053,545 703,884 839,340
Repayment of debt ................................. (616,058) (1,476,835) (1,547,591)
Redemption of preferred shares .................... (1,482,496) (370,624) --
Proceeds from the issuance of
common stock and warrants........................ 1,218,285 5,473,742 6,125,055
------------- ------------ ------------
Net cash provided by financing activities ......... 4,173,276 4,330,167 5,416,804
------------- ------------ ------------
Net (decrease) increase in cash ................... (591,650) 2,280,920 2,257,072
CASH AT BEGINNING OF PERIOD ........................ 5,314,771 3,033,851 776,779
------------- ------------ ------------
CASH AT END OF PERIOD .............................. $ 4,723,121 $ 5,314,771 $ 3,033,851
============= ============ ============
</TABLE>
See notes to Consolidated Financial Statements.
37
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- As of January 3, 1999 Shells Seafood Restaurants,
Inc. and subsidiaries (the "Company") managed and operated 49 full service,
casual dining seafood restaurants in Florida, Illinois, Indiana, Kentucky, and
Ohio under the name "Shells". 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". The Company subsequently acquired Shells, Inc. effective
December 29, 1994.
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% equity interest. 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. The Fiscal years ended January 3, 1999, December
28, 1997 and December 29, 1996 were 53, 52 and 52 weeks, respectively.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the 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.
Pre-opening costs -- Pre-opening costs, consisting of direct costs
associated with the opening of restaurants, were amortized over the 12-month
period following the restaurant opening date prior to Fiscal 1998. Effective
Fiscal 1998, pre-opening costs are expensed as incurred (See Note 15).
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
38
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 on their proper
classification. The amount of interest capitalized is insignificant in all
periods presented.
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.
Impairment of Long-Lived Assets -- Property and equipment, goodwill and
other intangible assets are reviewed annually or whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable by comparing the carrying values to the estimated future
undiscounted cash flows. A deficiency in the cash flows relative to the
carrying amounts is an indication of the need for a write-down due to
impairment. The impairment write-down would be the difference between the
carrying amounts and the fair value of those assets. A loss due to impairment
would be recognized by a charge to earnings. (See Note 14)
Income Taxes -- The Company uses the asset and liability method which
recognizes the amount of current and deferred income 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.
Net income per share of common stock -- Earnings per common share are
computed in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share", which requires companies to present
basic earnings per share and diluted earnings per share. The basic net income
per share of common stock is computed by dividing net income applicable to
common stock by the weighted average number of shares of common stock
outstanding. Diluted net income per share of common stock is computed by
dividing net income applicable to common stock by the weighted average number
of shares of common stock and common stock equivalents outstanding.
Statement of Cash Flows -- non-cash investing and financing activities --
During Fiscal 1996, concurrent with the initial public offering, there were
200,000 shares of common stock and 100,000 warrants issued upon the conversion
of $750,000 of related party debt and
39
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
$159,000 of minority partner interest. Additionally, the Company recognized
discounts of $48,586, $53,094 and $57,081 as interest expense for the fiscal
years ended January 3, 1999, December 28, 1997 and December 29, 1996,
respectively, related to non-interest bearing notes.
Fair Value of Financial Instruments -- The estimated fair value of amounts
reported in the consolidated financial statements have been determined by using
available market information and appropriate valuation methodologies. The
carrying value of all current assets and current liabilities approximates fair
value because of their short-term nature. The carrying value of long-term debt
approximates fair value based upon quoted market information as available. As
judgement is involved, the estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange.
Comprehensive Income -- The Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" in the first quarter of 1998. SFAS No.
130 requires disclosure of comprehensive income including per share amounts in
addition to the existing statements of earnings. Comprehensive income is
defined as the change in equity during a period, from transactions and other
events, excluding charges resulting from investments by owners (e.g.
supplemental stock offerings) and distributions to owners (e.g. dividends). For
each of the years presented, there are no items requiring separate disclosure
in accordance with this statement.
Operating Segments -- The Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" in the
first quarter of 1998. SFAS No. 131 requires disclosure of certain information
about operating segments and about products and services, geographic areas in
which the Company operates, and their major customers. The Company has
evaluated the effect of this statement and has determined that currently they
operate within one segment, as defined in this statement.
Accounting for Derivative Instruments and Hedging Activities -- SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is gains and losses) depends upon the intended use of the derivative and
the resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company has not evaluated the
effect, if any, that the adoption of SFAS No. 133 will have on the Company's
consolidated financial statements.
Reclassifications -- Certain reclassifications of prior year balances have
been made to conform to the current presentation.
40
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. OTHER CURRENT ASSETS
Other current assets consist of the following:
JANUARY 3, DECEMBER 28,
1999 1997
------------ -------------
Accounts receivable ............ $ 660,566 $ 170,707
Prepaid expenses ............... 616,643 400,344
Other current assets ........... 5,432 11,640
Pre-opening costs, net ......... -- 1,081,176
---------- ----------
$1,282,641 $1,663,867
========== ==========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1999 1997
--------------- ---------------
<S> <C> <C>
Leasehold improvements ................................. $ 9,415,479 $ 6,438,300
Equipment .............................................. 8,329,204 6,312,696
Furniture and fixtures ................................. 5,341,091 2,994,259
Land and buildings ..................................... 4,228,492 1,478,512
Signage ................................................ 1,003,951 752,014
Construction in progress ............................... 520,829 479,062
----------- -----------
28,839,046 18,454,843
Less accumulated depreciation and amortization ......... (6,598,791) (4,148,705)
----------- -----------
$22,240,255 $14,306,138
=========== ===========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
JANUARY 3, DECEMBER 28,
1999 1997
------------ -------------
Accrued payroll ........... $1,195,863 $ 958,376
Accrued insurance ......... 930,459 718,833
Unearned revenue .......... 630,865 524,242
Other ..................... 675,145 679,953
---------- ----------
$3,432,332 $2,881,404
========== ==========
41
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1999 1997
------------ -------------
<S> <C> <C>
Finance agreements, collateralized by equipment, principal and
interest due monthly through April 2002, interest rates ranging
from 6.8% - 11.0% .................................................... $2,330,988 $343,031
$1,000,000 promissory note with a bank collateralized by real
property owned by the Company. Interest is payable monthly
based on the Wall Street Journal published prime rate minus
0.50%. Principal is payable monthly based on a 15 year
amortization with unpaid principal due January, 2001. The
interest rate was 7.25% at January 3, 1999 ........................... 970,000 --
$915,000 promissory note with a bank collateralized by real
property owned by the Company. Interest is payable monthly
based on the Wall Street Journal published prime rate minus
0.50%. Principal is payable monthly based on a 15 year
amortization with unpaid principal due July, 2001. The interest
rate was 7.25% at January 3, 1999 .................................... 901,000 --
$850,000 promissory note with a bank collateralized by equipment
owned by the Company. Interest is payable monthly based on the
Wall Street Journal published prime rate minus 0.50%. Principal
payments of $14,167 payable monthly through January 2003.
The interest rate was 7.25% at January 3, 1999 ....................... 694,167 --
$447,500 promissory note with a bank collateralized by real
property owned by the Company. Interest is payable monthly
based on the one month LIBOR rate plus 2.25%. Principal is
payable monthly based on a twelve year amortization with unpaid
principal due November, 2001. The interest rates were 7.87%
and 8.22%, respectively .............................................. 385,000 415,000
$453,000 promissory note with a bank collateralized 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 in September, 2001. The
interest rates were 8.75% and 9.50%, respectively .................... 382,695 410,415
$540,000 non-interest bearing note, principal payable in variable
monthly installments through December 2004, net of imputed
interest of $97,375 and $126,403, respectively, at 11%,
collateralized by a leasehold interest in certain property and fixed
assets of the Company ................................................ 249,119 276,186
</TABLE>
42
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT--(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1999 1997
-------------- -------------
<S> <C> <C>
$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 $52,617 and
$72,175, respectively, at 9%, collateralized by a leasehold interest
in certain property and fixed assets of the Company ................. 188,845 219,695
-------- -------
6,101,814 1,664,327
Less current portion ................................................. (912,333) (215,235)
--------- ---------
$5,189,481 $1,449,092
========== ==========
</TABLE>
The annual maturities of debt as of January 3, 1999 are as follows:
1999 ........... $ 912,333
2000 ........... 835,647
2001 ........... 3,109,274
2002 ........... 889,762
2003 ........... 354,798
----------
$6,101,814
==========
6. 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. These amounts, 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 four 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 $3,916,000, $3,112,000 and
43
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
$1,710,000 for the fiscal years ended January 3, 1999, December 28, 1997, and
December 29, 1996, respectively, and includes contingent rent of $431,000,
$365,000 and $140,000 for the fiscal years ended January 3, 1999, December 28,
1997, and December 29, 1996, respectively. The approximate future minimum
rental payments under such operating leases as of January 3, 1999 are as
follows:
1999 ......................... $ 3,791,000
2000 ......................... 3,588,000
2001 ......................... 3,171,000
2002 ......................... 3,186,000
2003 ......................... 2,676,000
Thereafter ................... 9,805,000
-----------
$26,217,000
===========
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
include salaries ranging from $121,000 to $195,000 per year for each of the
officers. The employment agreements are annual and 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, in general, an aggregate amount
equal to 1% of the gross sales, as defined ("royalty"), of each of the
restaurants opened and continued to be 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 these
restaurants was $116,000, $126,000 and $4,000 for the fiscal years ended
January 3, 1999, December 28, 1997 and December 29, 1996, respectively. During
1998, the Company paid a $12,000 royalty settlement related to the Miami
restaurant which was closed in January, 1998.
The Company is subject to legal proceedings, claims and liabilities which
arose 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.
44
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. MINORITY PARTNER INTEREST
The Company has a 51% equity interest in a joint venture partnership (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 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,
as defined in the Joint Venture agreement, 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 $358,000, $350,000 and $342,000 during
the fiscal years ended January 3, 1999, December 28, 1997, and December 29,
1996, respectively. The Joint Venture paid the Company $157,000, $150,000 and
$154,000 in management and license fees for the fiscal years ended January 3,
1999, December 28, 1997, and December 29, 1996, respectively.
The Joint Venture agreement, which was 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 Fiscal 1996, the minority partner agreed to convert $159,000 of
amounts owed to it 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. The
minority partner exercised the warrants to purchase 17,492 shares of the
Company's common stock during Fiscal 1997.
8. REDEEMABLE PREFERRED SHARES
Shells, Inc. had 148,250 outstanding shares of 5% non-cumulative preferred
shares ("Shells, Inc. Preferred Shares") as of December 28, 1997. The Company
had agreed that it would use the proceeds received from the exercise of the
Shells, Inc. Warrants (Note 9) to redeem the Shells, Inc. Preferred Shares, at
a redemption price of $10.00 per share. The Company redeemed all issued and
outstanding Shells Inc. Preferred Shares during Fiscal 1998.
45
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. REDEEMABLE PREFERRED SHARES--(CONTINUED)
The carrying amount of Shells, Inc. Preferred Shares was recorded at its
estimated fair market value and was periodically accreted using the interest
method, so that the carrying amount would equal the total redemption value as
of the anticipated redemption dates. Each increase in the carrying amount of
preferred shares subject to redemption was treated in the calculation of
earnings per share in the same manner as preferred share dividends. Shells,
Inc. Preferred Shares accretion during the fiscal years ended January 3, 1999,
December 28, 1997, and December 29, 1996 were $111,000 $74,000, and $117,000,
respectively.
9. STOCKHOLDERS' EQUITY
The stockholders of Shells, Inc. were granted warrants (the "Shells, Inc.
Warrants") to purchase 229,904 shares of the Company's common stock at $5.50
per share pursuant to the merger into Shells Seafood Restaurants, Inc. dated
December 29, 1994. Warrants to purchase approximately 226,000 shares were
exercised generating proceeds, net of expenses, of approximately $1,215,000
during Fiscal 1998. The warrants were exercisable until April 22, 1998.
On June 16, 1997, the Company gave notice to the holders of all of its
outstanding publicly registered Common Stock Purchase Warrants (the "Public
Warrants") that the Company would redeem the Public Warrants on July 16, 1997
(the "Redemption Date"), at a redemption price of $0.10 per Public Warrant. In
addition, simultaneous with the delivery of notice to the holders of the Public
Warrants, the Company gave notice of redemption to holders of warrants to
purchase an additional 112,376 shares of Common Stock at an exercise price of
$6.00 per share (the "Private Warrants" and together with the Public Warrants,
the "Warrants"). Warrants to purchase approximately 917,000 shares were
exercised generating proceeds, net of expenses, of $5,427,000 during Fiscal
1997. The Warrants were exercisable until July 16, 1997.
46
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
The components of the provision (benefit) for income taxes for the years
ended January 3, 1999, December 28, 1997 and December 29, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Federal
Current .............................. $ 571,000 $678,000 $537,000
Deferrred ............................ (124,000) -- --
---------- -------- --------
447,000 678,000 537,000
---------- -------- --------
State
Current .............................. 149,000 171,000 111,000
Deferrred ............................ (104,000) -- --
---------- -------- --------
45,000 171,000 111,000
---------- -------- --------
Tax asset valuation allowance ......... (650,000) -- --
---------- -------- --------
$ (158,000) $849,000 $648,000
========== ======== ========
</TABLE>
The Company's effective tax rate is composed of the following for the
years ended January 3, 1999, December 28, 1997 and December 29, 1996,
respectively:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
------------ -------------- -------------
<S> <C> <C> <C>
Federal statutory rate ........................... 34.0% 34.0% 34.0%
State income tax, net of federal benefit ......... 2.2 4.5 3.6
FICA tip credits ................................. (14.7) (7.7) (5.3)
Goodwill amortization ............................ 5.1 2.8 3.3
Valuation allowance adjustment ................... (47.6) (5.3) (3.0)
Provision for asset impairment ................... 15.4 -- --
Other ............................................ ( 6.0) 5.7 (1.6)
----- ---- ----
(11.6)% 34.0% 31.0%
===== ==== ====
</TABLE>
As of January 3, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $1,902,000 which expire
between Fiscal 2006 and Fiscal 2009. The Company also had approximately
$395,000 of general business credit carryforwards which expire by 2013. The
Company had an ownership change in both Fiscal 1994 and Fiscal 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
47
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
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 approximately $71,000 of credits
are subject to the annual limitation. For financial reporting purposes, a
valuation allowance of $827,000 as of January 3, 1999 has been recognized to
offset the deferred tax assets.
During Fiscal 1998, the deferred tax asset valuation allowance was reduced
by $650,000, based primarily upon estimates of future taxable income. Although
realization is not assured, management believes that the net deferred tax asset
represents management's best estimate, based upon the weight of available
evidence as prescribed in SFAS No. 109, of the amount which is more likely than
not to be realized. If such evidence were to change, based upon near-term
operating results and longer-term projections, the amount of the valuation
allowance recorded against the gross deferred tax asset may be increased or
decreased. Also, if certain substantial changes in the Company's ownership
should occur, there could be a further limitation on the amount of loss
carryforwards or tax credits which could be utilized.
Deferred income taxes reflect the net income 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 income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
JANUARY 3, 1999
-------------------------------------------
CURRENT NON-CURRENT TOTAL
---------- ------------- --------------
<S> <C> <C> <C>
Pre-opening costs and other assets ......... $ -- $ 68,000 $ 68,000
Accrued liabilities ........................ 415,000 248,000 663,000
Net operating loss carryforwards ........... -- 749,000 749,000
General business credits ................... 395,000 -- 395,000
------- --------- ----------
810,000 1,065,000 1,875,000
Valuation allowance ........................ (827,000)
----------
$1,048,000
==========
</TABLE>
48
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 28, 1997
-------------------------------------------
CURRENT NON-CURRENT TOTAL
---------- ------------- --------------
<S> <C> <C> <C>
Pre-opening costs and other assets ......... $ -- $ (582,000) $ (582,000)
Accrued liabilities ........................ 404,000 497,000 901,000
Net operating loss carryforwards ........... -- 752,000 752,000
General business credits ................... -- 290,000 290,000
------- ---------- ----------
404,000 957,000 1,361,000
Valuation allowance ........................ (1,361,000)
----------
$ --
==========
<CAPTION>
DECEMBER 29, 1996
-------------------------------------------
CURRENT NON-CURRENT TOTAL
---------- ------------- --------------
<S> <C> <C> <C>
Pre-opening 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
Valuation allowance ........................ (1,495,000)
----------
$ --
==========
</TABLE>
11. RELATED PARTY TRANSACTIONS
On October 16, 1995, a $750,000 loan (the "1995 Loan") was provided to the
Company, consisting of $650,000 from various persons including 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 and per warrant, net of underwriters
discount. In connection with the Debt Conversion, the 1995 Lenders were granted
an option (the "Adler option") which gave the 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
49
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS--(CONTINUED)
concurrently with the Offering, and the Adler option was exercised concurrently
with the underwriter's over-allotment option. The warrants to purchase common
stock related to both the Debt Conversion and the Adler option were exercised
during Fiscal 1997.
Effective February 1, 1996, the 1995 Loan and a $1,000,000 loan which
originated in Fiscal 1993 were extended from February 29, 1996 to May 15, 1996
and effective with the consummation of the Offering, the two $500,000 loans
originated in 1994 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 warrants to purchase 150,000 shares of
common stock at a price of $3.50 per share. The Company recognized $112,500 in
compensatory expense during Fiscal 1996 related to the issuance of these
warrants.
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 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 under these agreements were approximately $415,000,
$398,000 and $388,000 for each of the fiscal years ended January 3, 1999,
December 28, 1997, and December 29, 1996, 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 by either party upon the Company averaging a market capitalization,
as defined, of $100,000,000 for 20 consecutive trading dates.
12. STOCK COMPENSATION PLAN
On September 11, 1995, the Company's Board of Directors approved two
employee stock option plans. The options generally vest over three years, one
third annually on the
50
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCK COMPENSATION PLAN--(CONTINUED)
anniversary date of the grant and, under both plans, have a maximum term of ten
years. The weighted average remaining contractual life for the options
outstanding at January 3, 1999 for both plans is approximately seven years. The
1995 Employee Stock Option Plan provided for the issuance of options to
purchase a total of 240,000 shares which, effective May 20, 1997, was increased
to 340,000 shares. The 1996 Employee Stock Option Plan provided for the
issuance of options to purchase a total of 101,000 shares.
As of January 3, 1999, options to purchase 326,126 shares had been granted
with 165,751 exercisable. There were 10,333 shares purchased through the
exercise of these options through 1998. The exercise prices of the outstanding
options ranged from $5.00 to $5.75. Effective November 3, 1998, 62,000 options
were reissued at the market price on that date, $5.75, for certain option
holders who were previously issued options at market prices above $5.75.
On May 20, 1997, the stockholders approved the Stock Option Plan for
Non-employee Directors. The plan authorized a total of 100,000 shares to be
reserved for issuance under this director's compensation plan. The Company
granted options to purchase 35,000 and 10,000 during Fiscal 1998 and Fiscal
1997, respectively, at the market price on the date of grant, 12,000 of which
were exercisable as of January 3, 1999. Certain of the 35,000 options granted
in 1998, as well as the repricing of certain of the 45,000 options granted, are
contingent upon stockholder approval of the issuance.
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 SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and net income per share applicable to
common stock on a pro forma basis would have been as follows for Fiscal 1998,
Fiscal 1997 and Fiscal 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------- --------------- -------------
<S> <C> <C> <C>
Net income applicable to common stock .......... $ 580,851 $ 1,530,540 $ 945,542
Basic net income per share ..................... $ 0.14 $ 0.41 $ 0.35
Diluted net income per share ................... $ 0.13 $ 0.32 $ 0.29
</TABLE>
51
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCK COMPENSATION PLAN--(CONTINUED)
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 44%, 54% and 35% for Fiscal 1998,
Fiscal 1997 and Fiscal 1996, respectively; (iii) a risk-free interest rate of
5.3%, 5.5% and 6.4% for Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively;
(iv) an estimated option life of three and a half years. The results reported
above may vary depending on the assumptions applied within the model.
Option activity is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF OPTION AVERAGE
SHARES PRICE PRICE
----------- ---------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1995 ......... 159,960 $ 5.00 $ 5.00
Granted ................................. 101,000 5.00-5.75 5.15
Exercised ............................... -- -- --
Cancelled ............................... (2,000) 5.00 5.00
-------
Outstanding at December 29, 1996 ......... 258,960 5.00-5.75 5.05
Granted ................................. 45,000 5.75-9.50 7.76
Exercised ............................... (9,332) 5.00-6.63 5.06
Cancelled ............................... (1,667) 5.00 5.00
-------
Outstanding at December 28, 1997 ......... 292,961 5.00-9.50 5.41
Granted ................................. 87,500 3.50-11.00 5.81
Exercised ............................... (1,001) 5.00 5.00
Cancelled ............................... (18,667) 5.00-11.25 8.04
-------
Outstanding at January 3, 1999 ........... 360,793 $ 5.00-$11.00 $ 5.50
=======
</TABLE>
52
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. EARNINGS PER SHARE
The following table represents the computation of basic and diluted
earnings per share of common stock as required by SFAS No. 128:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
------------ -------------- -------------
<S> <C> <C> <C>
Net Income ...................................... $ 831,117 $1,649,527 $1,443,965
Preferred shares accretion ...................... (110,644) (74,000) (117,000)
---------- ---------- ----------
Net income applicable to common stock ........... $ 720,473 $1,575,527 $1,326,965
========== ========== ==========
Weighted common shares outstanding .............. 4,447,881 3,726,949 2,729,417
Basic net income per share of common stock ...... $ 0.16 $ 0.42 $ 0.49
Effect of dilutive securities:
Warrants ........................................ 481,428 897,103 529,631
Stock options ................................... 28,743 126,568 53,603
---------- ---------- ----------
Diluted weighted common shares outstanding ...... 4,958,052 4,750,620 3,312,651
---------- ---------- ----------
Diluted net income per share of common stock..... $ 0.15 $ 0.33 $ 0.40
========== ========== ==========
</TABLE>
Diluted earnings per common share excludes anti-dilutive stock options and
warrants of 90,000, 15,500, and 61,000 during 1998, 1997 and 1996,
respectively.
14. PROVISION FOR IMPAIRMENT OF ASSETS
In the fourth quarter of 1998, the Company recorded a provision of
$620,000 for the write-down of certain impaired assets related to one
restaurant.
In accordance with SFAS No. 121, the Company identified certain long-lived
assets as impaired. The impairment was recognized when the future undiscounted
cash flows of certain assets were estimated to be less than the assets' related
carrying value. As such, the carrying values were written down to the Company's
estimates of fair value based on the best information available making whatever
estimates, judgments, and projections were deemed necessary.
15. ADOPTION OF STATEMENT OF POSITION 98-5, "REPORTING ON THE COSTS OF START-UP
ACTIVITIES"
The Company chose early adoption of a new accounting standard, Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities," which
requires that pre-opening and other start-up costs be expensed as incurred
rather than capitalized. The adoption has been made effective as of the
beginning of the Company's current fiscal year.
53
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. ADOPTION OF STATEMENT OF POSITION 98-5, "REPORTING ON THE COSTS OF START-UP
ACTIVITIES--(CONTINUED)"
As a result of the adoption, the Company has begun to report pre-opening costs
as incurred and not through amortization expense over the subsequent 12 month
period as was done historically. The cumulative effect of the change in
accounting which totaled $692,000 net of income tax benefits or $0.14 per share
diluted, was recorded as a one-time charge in the Company's results of
operations.
16. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan which meets the requirements
of Section 401(k) of the Internal Revenue Code. All salaried employees of the
Company with more than 90 days of service who are at least 21 years of age are
eligible to participate in the plan. The plan allows for a discretionary
matching contribution from the Company. The Company, which pays the plan
expenses, has not contributed any discretionary contributions to date.
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the selected quarterly financial data for the
periods indicated (in thousands except per share data). The quarterly data has
been restated to reflect the early adoption of a new accounting standard,
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires that pre-opening and other start-up costs be expensed as
incurred rather than capitalized. The adoption has been
54
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
made effective as of the beginning of the Company's 1998 fiscal year. The
quarterly results for Fiscal 1998 reflect the restatement of previously issued
quarterly results to reflect the change in accounting standard:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
MARCH 29, 1998 JUNE 28, 1998 SEPTEMBER 27, 1998 JANUARY 3, 1999
---------------- --------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Revenues .............................. $21,478 $ 21,812 $ 19,844 $ 21,015
Income (loss) from operations ......... 2,109 1,682 375 (2,263)
Income (loss) before benefit
(provision) for income taxes ......... 2,009 1,530 271 (2,445)
Cumulative effect of change in
accounting for pre-opening
costs, net of income tax
benefit .............................. (692) -- -- --
Net income (loss) ..................... 594 979 173 (915)
Net income (loss) applicable to
common stock ......................... 579 883 173 (915)
Basic net income (loss)
per share ............................ $ 0.14 $ 0.20 $ 0.04 $ (0.21)
Diluted net income (loss)
per share ............................ $ 0.12 $ 0.17 $ 0.03 $ (0.21)
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 30, 1997 JUNE 29, 1997 SEPTEMBER 28, 1997 DECEMBER 28, 1997
---------------- --------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Revenues ............................... $ 16,976 $ 16,492 $ 16,596 $15,248
Income (loss) from operations .......... 1,523 1,241 695 (594)
Income (loss) before benefit
(provision) for income taxes ......... 1,392 1,145 669 (707)
Net income (loss) ...................... 919 755 442 (466)
Net income (loss) applicable to
common stock ......................... 900 737 423 (484)
Basic net income (loss)
per share ............................ $ 0.27 $ 0.22 $ 0.10 $ (0.11)
Diluted net income (loss)
per share ............................ $ 0.21 $ 0.17 $ 0.08 $ (0.11)
</TABLE>
The total of quarterly earnings per share do not equal the annual amount
as earnings per share is calculated independently for each quarter. The fourth
quarters of 1998 and 1997 reflect basic earnings per share, as the diluted
calculation was anti-dilutive.
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Proposal -- Election of Directors" in the Company's
Proxy Statement for the Annual Meeting of Stockholders is incorporated herein
by reference.
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 RELATIONSHIPS AND RELATED 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a) Financial Statements
(1) and (2) See "Index to 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, 10.6 and 10.7 are management
contracts, compensatory plans or arrangements.
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. 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 Form of Warrant Agreement between Shells Seafood Restaurant, Inc. and Continental Stock
Transfer & Trust Company and Paragon Capital Corporation.*
4.2 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 1996 Stock Option Plan for Non-Employee Directors*
10.8 Agreement for Purchase and Sale of Assets, dated May 14, 1993, between Shells Seafood
Restaurants, Inc. and Shells, Inc.*
10.9 Agreement for Assignment of Servicemarks, dated August 19, 1993, between Shells Seafood
Restaurants, Inc. and Shells, Inc.*
10.10 Agreement and Plan of Merger, dated November 16, 1994, by and among Shells Seafood
Restaurants, Inc., Shells Seafood Acquisition, Inc. and Shells, Inc.*
10.11 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.*
10.12 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.*
10.13 Registration Rights Agreement, effective as of December 29, 1994, by and among Frederick
R. Adler, The MicroCap Fund, Inc. and Shells Seafood Restaurants, Inc.*
10.14 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.*
10.15 Note and Warrant Purchase Agreement among Shells Seafood Restaurants, Inc., and
Frederick R. Adler, as nominee, dated as of September 19, 1995.*
10.16 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.*
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<S> <C>
10.17 Distributor Agreement, dated February 17, 1997, between U.S. Foodservice and Shells
Seafood Restaurants, Inc.*
10.18 Joint Venture Agreement, dated March 1, 1994, between Shells of Melbourne, Inc. and WLH
Investments, Inc.*
10.19 First Amendment to Joint Venture Agreement, effective as of March 31, 1995 between Shells
of Melbourne, Inc. and WLH Investments, Inc.*
10.20 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.*
10.21 Management and License Agreement, dated March 1, 1994, between Shells of Melbourne
Joint Venture and Shells Seafood Restaurants, Inc.*
10.22 Management and License Agreement dated July 29, 1993, between Shells of Carrollwood
Village, Inc. and Shells Seafood Restaurants, Inc., as amended.*
10.23 Management and License Agreement, dated July 28, 1993, between Shells of North Tampa,
Inc. and Shells Seafood Restaurants, Inc., as amended.*
10.24 Management and License Agreement, dated July 29, 1993, between Shells of Sarasota
South, Inc. and Shells Seafood Restaurants, Inc., as amended.*
10.25 Amended Option Agreement dated August 10, 1995 between Shells Seafood Restaurants,
Inc. and Shells of Carrollwood Village, Inc.*
10.26 Amended Option Agreement, dated August 11, 1995 between Shells Seafood Restaurants,
Inc. and Shells of North Tampa, Inc.*
10.27 Amended Option Agreement, dated August 16, 1995 by and between Shells Seafood
Restaurants, Inc. and Shells of Sarasota South, Inc.*
10.28 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.*
10.29 Asset Purchase Agreement, dated September 30, 1994 between Shells of St. Petersburg
Beach, Inc. and the Bleckley Corporation.*
10.30 Assignment Agreement, dated September 30, 1994 between Shells of St. Pete Beach, Inc.
and the Bleckley Corporation.*
10.31 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.*
10.32 Continuing and Unconditional Guaranty by Shells Seafood Restaurants, Inc. for the benefit of
the Bleckley Corporation.*
10.33 Security Agreement, dated September 30, 1995 between Shells of St. Pete Beach, Inc. and
the Bleckley Corporation.*
10.34 Assignment Agreement, dated November 1, 1993 between Shells of Countryside Square,
Inc. and Clearwater Food Service, Inc.*
10.35 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.*
10.36 Form of Directors Indemnification Agreement.*
10.37 Form of Amended and Restated Common Stock Warrant Agreement, effective as of
February 1, 1996.*
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<S> <C>
10.38 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.**
10.39 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.**
10.40 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**
10.41 Equipment lease agreement between Captec and Shells Seafood Restaurants, Inc. **
10.42 Loan agreement, dated January 15, 1998, between Shells Seafood Restaurants, Inc. and
Manufacturers Bank of Florida, in the initial principal amount of $850,000.**
10.43 Loan agreement, dated February 3, 1998, between Shells Seafood Restaurants, Inc. and
Manufacturers Bank of Florida, in the initial principal amount of $1,000,000.**
10.44 Purchase and Sale agreement, dated October 22, 1997, between Shells Seafood
Restaurants, Inc. and Vicorp Restaurants, Inc.
10.45 First amendment to the Purchase and Sale agreement, dated October 22, 1997, between
Shells Seafood Restaurants, Inc. and Vicorp Restaurants, Inc.
10.46 Second amendment to the Purchase and Sale agreement, dated October 22, 1997, between
Shells Seafood Restaurants, Inc. and Vicorp Restaurants, Inc.
10.47 Asset Purchase and Sale agreement between Shells Seafood Restaurants, Inc. and Chi-
Chi's, Inc. dated March 12, 1998
10.48 First amendment to the Asset Purchase and Sale agreement between Shells Seafood
Restaurants, Inc. and Chi-Chi's, Inc.
10.49 Second amendment to the Asset Purchase and Sale agreement between Shells Seafood
Restaurants, Inc. and Chi-Chi's, Inc.
10.50 Third amendment to the Asset Purchase and Sale agreement between Shells Seafood
Restaurants, Inc. and Chi-Chi's, Inc.
10.51 Promissory Note, dated July 1, 1998, between Shells Seafood Restaurants, Inc. and
Manufacturers Bank of Florida, in the initial principal amount of $915,000.
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).
** Previously filed with the Securities and Exchange Commission as Exhibits to,
and incorporated herein by reference from the Company's Form 10-K.
(b) Reports on Form 8-K
None.
(c) Exhibits
59
<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
Dated: March 19, 1999
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.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<S> <C> <C>
/s/ WILLIAM E. HATTAWAY President and Director March 19, 1999
- ---------------------------------
William E. Hattaway
/s/ WARREN R. NELSON Vice President of Finance, March 19, 1999
- --------------------------------- Chief Financial Officer,
Warren R. Nelson Treasurer and Secretary
/s/ FREDERICK R. ADLER Chairman of the Board March 19, 1999
- ---------------------------------
Frederick R. Adler
/s/ PHILIP R. CHAPMAN Director March 19, 1999
- ---------------------------------
Philip R. Chapman
/s/ CHRISTOPHER D. ILLICK Director March 19, 1999
- ---------------------------------
Christopher D. Illick
/s/ RICHARD A. MANDELL Director March 19, 1999
- ---------------------------------
Richard A. Mandell
/s/ KAMAL MUSTAFA Director March 19, 1999
- ---------------------------------
Kamal Mustafa
/s/ JAY S. NICKSE Director March 19, 1999
- ---------------------------------
Jay S. Nickse
/s/ EDWIN F. RUSSO Director March 19, 1999
- ---------------------------------
Edwin F. Russo
</TABLE>
60
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.44 Purchase and Sale agreement, dated October 22, 1997, between Shells Seafood
Restaurants, Inc. and Vicorp Restaurants, Inc.
10.45 First amendment to the Purchase and Sale agreement, dated October 22, 1997, between
Shells Seafood Restaurants, Inc. and Vicorp Restaurants, Inc.
10.46 Second amendment to the Purchase and Sale agreement, dated October 22, 1997, between
Shells Seafood Restaurants, Inc. and Vicorp Restaurants, Inc.
10.47 Asset Purchase and Sale agreement between Shells Seafood Restaurants, Inc. and Chi-
Chi's, Inc. dated March 12, 1998
10.48 First amendment to the Asset Purchase and Sale agreement between Shells Seafood
Restaurants, Inc. and Chi-Chi's, Inc.
11 Computation of Per Share Earnings.
27 Financial Data Schedule.
</TABLE>
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "CONTRACT") is made by and between VICORP
RESTAURANTS, INC., a Colorado corporation ("SELLER") and SHELLS SEAFOOD
RESTAURANTS, INC., a Delaware corporation ("BUYER"). In consideration of the
agreements herein contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Buyer
hereby agree as follows:
ARTICLE I
PROPERTY
1.1 PROPERTY TO BE CONVEYED. Subject to terms and provisions of this
Contract, Seller agrees to sell and convey to Buyer, and Buyer agrees to
purchase from Seller, all the following described property (collectively, the
"PROPERTY"), subject to the Permitted Exceptions (as defined in Section 3.4 of
this Contract):
(a) That certain tract of land (the "LAND") located at 3802 East 82nd
Street, Indianapolis, Indiana, described on EXHIBIT "A" attached hereto, the
Land to be conveyed pursuant to a general warranty deed (the "DEED");
(b) Any and all buildings and improvements (collectively, the
"IMPROVEMENTS") upon the Land (such Land, Building and Improvements together
being known as the "PREMISES");
(c) All of Seller's interest in titles, interests, privileges, licenses
and easements and other rights appurtenant to the Land;
(d) All furniture, fixtures, equipment, or other personal property set
forth on EXHIBIT "B" attached hereto (collectively, the "FF&E").
ARTICLE 2
PRICE
2.1 PURCHASE PRICE. The purchase price (the "PURCHASE PRICE") for the
property shall be One Million Two Hundred Thousand Dollars ($1,200,000.00)
2.2 DEPOSIT.
(a) Within three (3) business days after the Effective Date, Buyer
shall deliver to Lawyers Title Insurance Corporation, 140 East Washington
Street, Indianapolis, Indiana 46204-3689 ("ESCROW AGENT"), an earnest money
deposit (collectively, together with all interest accrued thereon, the
"DEPOSIT") in the amount of Ten Thousand Dollars ($10,000.00). If the
transaction contemplated hereunder is consummated, the Deposit shall be credited
to the Purchase Price payable by Buyer.
1
<PAGE>
(b) The Deposit shall be deposited with a national banking institution
in an interest-bearing escrow account with interest payable at the regular rate
payable by the bank on such deposits. The interest shall become a part of the
Deposit and shall be paid to the party entitled to the Deposit. The party
entitled to the Deposit shall pay any income tax due on the interest. The
parties hereto shall furnish Escrow Agent with their respective tax
identification numbers.
2.3 BALANCE AT CLOSING. Subject to pro-rations and/or credits provided for
in this Contract, Buyer shall pay to Seller the Purchase Price, less the Deposit
credited thereto by wire transfer at Closing (as hereinafter defined).
ARTICLE 3
TITLE, SURVEY AND SITE AUDIT
3.1 TITLE INSURANCE. Not later than thirty (30) days after the Effective
Date, Seller, at its sole expense, shall cause Lawyers Title Insurance
Corporation ("TITLE COMPANY") to provide to Buyer a current standard form title
insurance commitment (the "TITLE COMMITMENT"), and showing, as the policy
amount, the Purchase Price. Seller shall cause the Title Company to furnish to
Buyer true and legible copies of all documents and instruments referred to as
exceptions to title in the Title Commitment at such time as the Title Commitment
is delivered.
3.2 SURVEY. Not later than thirty (30) days after the Effective Date,
Seller, at Seller's cost, shall provide to Buyer a current, correct, certified
ALTA survey (the "SURVEY") of the Land prepared by a registered surveyor
("SURVEYOR"), which shall: (a) be certified to Seller, Buyer and Title Company;
(b) include a description of the Land; (c) certify as to the acreage of the
Land; (d) depict the boundaries of the Land and the locations and dimensions of
all Improvements; and (e) show (labeled with recording information), to the
extent they can be located, all recorded easements or other restrictions or
encumbrances affecting the Land or listed in the Title Commitment. The Survey
must be satisfactory to the Title Company so as to permit it to delete any
standard survey exception contained in the Title Commitment and Title Policy.
3.3 REVIEW OF TITLE AND SURVEY MATTERS. Buyer shall have sixty (60) days
after the Effective Date to review the Title Commitment, the Survey, and all
attendant documents and materials and shall notify Seller of any objections
Buyer has to any matters shown or referred to therein. If Buyer fails to notify
Seller in writing of its objection to the Title Commitment or the Survey, within
said sixty (60) day period, Buyer shall be deemed to have waived its right to
object thereto and same shall be deemed a "PERMITTED EXCEPTION"; provided,
however, in no event shall any lien, lease, encumbrance, exception, easement,
restriction, defect or other matter which does not appear on the Title
Commitment or the Survey or arises after the effective date thereof, be deemed a
Permitted Exception unless consented to by Buyer. Seller shall have the right to
cure any matter shown by the Title Commitment and the Survey to which Buyer
timely objects within thirty (30) days after Buyer provides written notice of
such
2
<PAGE>
objections or such longer period as may be granted by Buyer in its sole
discretion. If Seller is unable or unwilling to cure any such objections to the
Title Commitment or the Survey within the allotted thirty (30) day time period,
Buyer may, at its option, (i) waive the objection(s), in which case all such
objections shall be deemed Permitted Exceptions, and proceed to close the
transaction contemplated hereunder or (ii) terminate this Contract by written
notice to Seller within three (3) days after the expiration of the allotted
thirty (30) day time period as set forth above and thereupon, have returned to
it by Escrow Agent the Deposit, and thereafter, neither party shall have any
further rights or obligations hereunder.
ARTICLE 4
CONTINGENCIES
4.1 INSPECTION PERIOD. For and in consideration of Ten Dollars ($10.00)
(the "INDEPENDENT CONSIDERATION") which is part of the Deposit and other good
and valuable consideration, the sufficiency of which is hereby acknowledged:
(a) Buyer shall have the right to investigate all aspects of the
Property, to assist Buyer in Buyer's investigation of the Property, Seller
shall, within five (5) business days after the Effective Date, furnish to Buyer
(by mail or overnight courier), copies of the following items with respect to
the Property in Seller's possession: (a) Seller's prior title insurance policy;
(b) Seller's prior survey(s); (c) ad valorem real property tax bills for two (2)
years; (d) any existing plans and specifications for the Improvements; (e) all
development plans, "DRI's," zoning or the land use information or documentation;
(f) site plans; and (g) engineering reports, hazardous waste assessments,
environmental reports, soil tests, substrata studies, geotechnical reports, or
any other similar reports. All of the foregoing items to be furnished by Seller
shall collectively be referred to as the "PROPERTY DOCUMENTS".
(b) Except as provided in Article 3, Buyer shall have seventy-five (75)
days (the "INSPECTION PERIOD") from the Effective Date to investigate the
Property.
(c) During the Inspection Period, Buyer and Buyer's agents (including,
without limitation, contractors, inspectors, and engineers) shall have the right
to enter the Property to perform inspections and tests, provided reasonable
notice is given to Seller and reasonable precautions are taken to protect the
Property. Seller agrees to cooperate in connection with the foregoing and agrees
that Buyer and Buyer's agents shall be provided promptly, upon request, such
access as shall be reasonably necessary to examine the Property.
(d) If for any reason whatsoever, during the Inspection Period, Buyer
elects not to proceed with the transaction contemplated herein, Buyer may
declare this Contract terminated by notifying Seller and Escrow Agent of such
election and Escrow Agent shall return the Deposit to Buyer, and both Seller and
Buyer will be relieved of any further obligation hereunder. Failure to so notify
Seller and Escrow Agent within said time period shall be deemed a waiver by
Buyer of any right to terminate this Contract under this Section.
3
<PAGE>
(e) Buyer shall restore any damage caused by its investigation and
Buyer shall indemnify and hold Seller harmless from all claims, and from any
loss, costs, or expenses incurred by Seller and which relate to or are caused by
Buyer or its agents in conjunction with its inspection of the Premises or any
harm caused to third parties.
4.2 PERMITS AND APPROVALS. Within thirty (30) days after the Effective
Date, Buyer shall apply for and proceed with due diligence to obtain the
permit(s) (including, without limitation, building and utility permits,
operating permits and alcoholic beverage licenses) and approval(s)
(collectively, the "PERMITS AND APPROVALS") required to remodel the Improvements
and to operate a full-service restaurant at the Premises, and Seller shall
cooperate with Buyer in doing so. Buyer shall provide notice ("PERMIT NOTICE")
to Seller of its receipt of such Permits and Approvals within ten (10) business
days of Buyer's receipt of all such Permits and Approvals. In the event Buyer
fails to obtain such required Permits and Approvals or to waive such contingency
on or prior to the expiration of the Inspection Period, Seller shall have
returned to Buyer by Escrow Agent the Deposit, and thereafter, neither party
shall have any other rights or obligations hereunder, except as set forth under
Section 4.1(e) which shall survive the termination of this Contract; provided,
however, that Buyer shall have diligently pursued such Permits and Approvals
during the Inspection Period.
4.3 FINANCING. Within twenty (20)days after the Effective Date, Buyer shall
apply for and proceed with due diligence to obtain financing for Buyer's
purchase contemplated herein in the amount of seventy-five percent (75%) of the
aggregate of the Purchase Price and Buyer's estimated cost of Buyer's planned
improvements on the Land and upon terms and conditions, including, without
limitation, market rates, acceptable to Buyer in Buyer's sole discretion. Buyer
shall provide notice to Seller of its receipt of a commitment for such financing
within ten (10) business days of Buyer's receipt thereof. If Buyer fails to
obtain such financing during the Inspection Period, Buyer may declare this
Contract terminated by notifying Seller and Escrow Agent of such election, and
Escrow Agent shall return the Deposit to Buyer immediately thereafter, and both
Buyer and Seller will be relieved of any further obligation hereunder. Failure
to so notify Seller within the Inspection Period shall be deemed waiver by Buyer
of any right to terminate this Contract under this Section.
4.4 BOARD APPROVAL. As soon as practicable after the Effective Date, Buyer
shall pursue approval by its Board of this Contract and the purchase
contemplated herein. If Buyer fails to obtain such approval prior to the
expiration of the Inspection Period, Buyer may declare this Contract terminated
by notifying Seller and Escrow Agent of such election, and Escrow Agent shall
return the Deposit to Buyer immediately thereafter, and both Buyer and Seller
will be relieved of any further obligation hereunder. Failure to so notify
Seller and Escrow Agent within said time period shall be deemed a waiver by
Buyer of any right to terminate this contract under this section.
4
<PAGE>
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents-
and warrants that as of the Effective Date and the Closing Date:
(a) Seller has granted no persons or entities the right to occupy or
use the Premises other than Seller;
(b) Seller owns the Premises in fee simple, and Seller has the full
authority to execute, deliver, and perform this Contract and to convey title to
the Property to Buyer on the Closing Date.
(c) Seller has received no written notice of any: (i) violations of
law, municipal ordinances, or current zoning existing at the Premises; and
(ii) changes of or to building, fire, water, use, health, environmental or other
statutes, ordinances, regulations, orders, or requirements, whether federal,
state, county, municipal, or otherwise, which are pending or have been proposed
which directly or indirectly affect the Premises.
(d) Seller has received no written notice of any eminent domain or
condemnation proceeding currently pending against the Premises or any part
thereof or any threat of any such proceeding.
5.2 REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and
warrants as of the Effective Date and the Closing Date:
Buyer is a corporation duly authorized, existing and in good standing
under the laws of Delaware. Except as stated in this Purchase and Sale
Agreement, the execution and delivery of this Agreement and the consummation of
this transaction by Buyer have been duly authorized, and no further corporate
authorization is necessary on the part of Buyer.
ARTICLE 6
CLOSING
6.1 TIME AND PLACE OF CLOSING. The closing (the "CLOSING") contemplated by
this Contract shall take place at the Title Company's offices in Indianapolis,
Indiana. The Closing shall occur on a date (the "CLOSING DATE") within fifteen
(15) days after the expiration of the Inspection Period.
6.2 SELLER'S OBLIGATIONS AT CLOSING. At Closing, Seller shall do or deliver
the following:
(a) execute and deliver to the agent for the Title Company, for
recording, and delivery to Buyer, the Deed conveying to Buyer the Land subject
only to the Permitted Exceptions;
5
<PAGE>
(b) execute and deliver to Buyer a bill of sale in form and substance
reasonably acceptable to Buyer transferring all of the FF&E to Buyer;
(c) such evidence of authority and capacity of Seller and its
representatives to consummate the transaction contemplated hereunder and other
documentation and affidavits as the Title Company may reasonably require
including, without limitation, a Certificate of Non Foreign Status as required
by Section 1445 of the Internal Revenue Code of 1986, as amended (the "CODE"),
if necessary, a 1099-S report as required by Section 6045 of the Code, and an
Owner's Closing Affidavit;
(d) an endorsement to or "mark-up" of the Title Commitment updating the
effective date to the Closing Date, deleting the "gap" (risk for matters
appearing of record between the effective date and the recording of the deed);
(e) possession of the Property;
(f) execute such other reasonable documents as may be required to be
executed and/or provided to complete the transaction contemplated hereunder.
6.3 BUYER'S OBLIGATIONS AT CLOSING. At Closing, Buyer shall do the
following:
(a) deliver to the agent for the Title Company, for the disbursement to
Seller, the portion of the Purchase Price payable at Closing by wire transfer;
and
(b) execute and/or provide such other reasonable documents as may be
required to be executed and/or provided to complete the transaction contemplated
hereunder.
6.4 CLOSING COSTS.
(a) At Closing, Seller shall pay, or provide proof of payment, of the
following costs and expenses:
(i) the transfer of taxes or documentary stamps required on the
Deed;
(ii) the premium payable for the standard form Title Policy; and
(iii) the cost of the Survey.
(b) Buyer shall pay, or provide proof of payment, of the recording fees
in connection with the Deed, any endorsements to the standard form Title Policy,
and any costs associated with the elimination of the "gap" referred to in
paragraph 6.2(d).
6.5 PRORATIONS. City, state, and county ad valorem taxes for the calendar
year of Closing shall be prorated between Buyer and Seller at Closing based on
the ad valorem tax bill
6
<PAGE>
for the Property (without discount), for such year; if these taxes are not known
at the time of Closing, the proration shall be based upon the prior year's
taxes and shall be prorated between Seller and Buyer as of midnight of the day
immediately preceding the Closing Date; prorations favoring Buyer shall reduce
the cash payable by Buyer at the Closing, and prorations favoring Seller shall
increase the cash payable by Buyer at the Closing.
6.6 SPECIAL ASSESSMENT LIENS. Certified, confirmed, and ratified special
assessment liens as of the Closing Date are to be paid by Seller. Pending liens
as of the Closing Date shall be assumed by Buyer. If the improvement has been
substantially completed as of the Execution Date, such pending lien shall be
considered as certified, confirmed, or ratified; and Seller shall, at Closing,
be charged an amount equal to the last estimate of assessment for the
improvement by the public body.
6.7 FURTHER ASSURANCE. In addition to the obligations required to be
performed hereunder by Seller and Buyer at Closing, Seller and Buyer each agree
that they will, both prior to and after Closing, perform such other acts and
will execute such other reasonable documents as the other may reasonably request
in order to effectuate the consummation of the transaction contemplated herein
in accordance with normal practices and to vest title to the Premises in Buyer.
ARTICLE 7
RISK OF LOSS
7.1 RISK OF LOSS BY CASUALTY. The risk of loss or damage to the Premises by
fire or other casualty prior to the Closing shall be on Seller. If such loss or
damage does occur prior to Closing, Seller shall promptly notify Buyer.
Thereafter, Buyer may, within fifteen (15) days after receipt of such notice, at
Buyer's option, notify Seller of termination of the Contract in which case
Escrow Agent shall return the Deposit to Buyer and this Contract shall
thereafter be null and void. If Buyer does not so terminate this Contract, Buyer
shall be entitled to receive all insurance proceeds resulting therefrom (not
exceeding, however, the total purchase price) which are payable (less any
amounts Seller may have paid in repairing or restoring the Property), and Seller
shall at Closing pay to Buyer any "deductible" amounts under the policy.
7.2 RISK OF LOSS BY CONDEMNATION. The risk of condemnation of the Property
prior to the Closing shall be on Seller. If such condemnation does occur prior
to Closing, Seller shall promptly notify Buyer; Buyer may, within fifteen (15)
days after receipt of such notice, at Buyer's option, notify Seller of
termination of this Contract, in which case the Escrow Agent shall return the
Deposit to Buyer; and this Contract shall thereafter be null and void. If Buyer
does not so terminate this Contract, Buyer shall be entitled to receive all
condemnation proceeds (not exceeding, however, the Purchase Price) resulting
therefrom.
7
<PAGE>
ARTICLE 5
DEFAULTS
8.1 DEFAULT BY SELLER. If Seller fails to perform any of Seller's
obligations hereunder, Buyer shall have the right to either: (a) declare this
Contract terminated and receive the return of the Deposit; or (b) sue for
damages, specific performance, or both.
8.2 DEFAULT BY BUYER. If Buyer fails to perform Buyer's obligations
hereunder, Seller may elect to either (a) treat this contract as terminated and
receive the Deposit as Seller's sole exclusive remedy; or (b) Seller may elect
to treat this contract as being in fUll force and effect and Seller shall have
the right to specific performance.
ARTICLE 9
ESCROW AGENT'S RESPONSIBILITIES
9.1 HOW DEPOSIT HELD. Escrow Agent, by its joinder in this Contract, agrees
to hold the Deposit, when received and to disburse the same only in accordance
with the terms and conditions of this Contract. When Closing occurs, Escrow
Agent shall deliver the Deposit to the title agent handling the disbursement of
the closing funds. In the event either party requests Escrow Agent to disburse
the Deposit to that party, Escrow Agent shall be entitled to refuse to do so
unless the other party agrees to the disbursement in writing. In the absence of
written agreement of both Buyer and Seller as to the disbursement of the
Deposit, Escrow Agent may continue to hold such funds until the parties agree to
disbursement thereof or until a judgment of a court of competent jurisdiction
determines the rights of the parties to the Deposit. If Escrow Agent is in doubt
as to its duties or liabilities under the provisions of the Contract, Escrow
Agent may interplead the funds into the Court of general jurisdiction of the
County where the Property is located, whereupon after notifying all parties
concerned with such action, all liability on part of Escrow Agent shall
terminate. Escrow Agent shall not be liable to either party for breach of its
duties hereunder except in the case of gross negligence or willful malfeasance
by Escrow Agent.
9.2 INDEMNITY OF ESCROW AGENT. Buyer and Seller hereby each agree, jointly
and severally, to indemnify and hold Escrow Agent harmless against any and all
losses, claims, damages, liabilities, and expenses, including without
limitation, costs of reasonable legal fees incurred by Escrow Agent in
connection with any litigation arising from this Contract, except for matters
arising out of the gross negligence or willful malfeasance of Escrow Agent.
ARTICLE 10
MISCELLANEOUS
10.1 ASSIGNMENT. Buyer may not assign Buyer's rights under this Contract
without Seller's consent. Seller may not assign or otherwise transfer its rights
under this Contract nor its title to the Property without Buyer's consent.
8
<PAGE>
10.2 NOTICES. Any notice which either party may or is required to give
hereunder shall be given in writing to the other party, each at the address set
forth below, or as such other address as may be designated in writing by the
parties from time to time by (i) certified or registered mail, return receipt
requested, postage prepaid; (ii) overnight delivery, delivery fees prepaid; or
(iii) facsimile with a hard copy to follow via first-class mail, postage
prepaid. Rejection or their refusal to accept, or the inability to deliver
because of a changed address of which no notice was give shall be deemed to be
receipt of the notice as of the date of such rejection, refusal, or inability to
deliver:
To Buyer: 16313 North Dale Mabry Highway
Suite 100
Tampa, Florida 33618
Attn: Mr. Dan Parz
Telephone: 813/961-0944
Telecopy: 813/961-6865
With a copy to: Fowler, White, Gillen, Boggs, Villareal &
Banker, P.A.
501 East Kennedy Boulevard, Suite 1700
Tampa, Florida 33602
Attn: Jeffrey C. Shannon, Esq.
Telephone: 813/228-7411
Telecopy: 813/229-8313
To Seller: VICORP Restaurants, Inc.
Attn: Kenneth H. Card
400 W. 48th Avenue
Denver, Colorado 80216
Telephone: 303/296-2121
Telecopy: 303/642-2668
Stanley Ereckson, Jr.: VICORP Restaurants, Inc.
Attn: Stanley Ereckson, Jr.
400 W. 48th Avenue
Denver, Colorado 80216
Telephone: 303/296-2278
Telecopy: 303/672-2668
To Escrow Agent: Lawyers Title Insurance Corporation
140 East Washington Street
Indianapolis, Indiana 46204-3689
Telephone: 317/633-2933
Telecopy: 317/633-6276
10.3 ENTIRE AGREEMENT. This Contract constitutes the entire understanding
among the parties with respect to the transaction contemplated herein, and all
prior or
9
<PAGE>
contemporaneous agreements and representations, oral or written, are merged into
this Contract. No provision of this Contract may be waived or modified except by
writing signed by the party against which the enforcement of such waiver or
modification is sought, and then only to the extent set forth in the writing.
10.4 APPLICABLE LAW. This Contract shall be governed by the laws of the
State of Indiana. Both parties hereto agree to submit to the jurisdiction of the
courts of the State of Indiana.
10.5 ATTORNEYS' FEES AND COSTS. In the event of any litigation arising out
of this Contract, the prevailing party shall be entitled to recover its costs
and reasonable attorneys' fees.
10.6 BROKERS. Seller and Buyer warrant each to the other that they have not
dealt with any real estate broker or salesperson with regard to the transaction
other than Joann M. Serdar of B.A. Carter Company and Bryan Chandler of Olympia
Partners, Ltd. (collectively, "BROKERS"). Seller shall be responsible for paying
Brokers pursuant to a separate agreement between them. Buyer agrees to indemnify
and hold Seller harmless from any commission claimed by any other broker or
third party arising by virtue of this transaction as the result of Buyer's acts.
Seller agrees to indemnify and hold Buyer harmless from any commission claimed
by any other broker or third party arising by virtue of this transaction as the
result of Seller's acts.
10.7 HEADINGS. Article, section and paragraph headings are for convenience
only and shall not control or affect the meaning of the paragraph.
10.8 BINDING EFFECT. This Contract shall be binding upon and shall inure to
the benefit of the parties hereto and their heirs, personal representatives,
successors, and assigns (subject, however, to the restrictions set forth above
on assignment).
10.9 INTERPRETATION. Whenever the context hereof shall so require, the
singular shall include the plural, the male gender shall include the female
gender and neuter, and vice versa.
10.10 SEVERABILITY. If any provision of this Contract is invalid or
unenforceable, such invalidity or unenforceability shall not affect any of the
provisions hereof.
10.11 TIME OF ESSENCE. Time is of the essence. Should any period of time
specified herein end on a Saturday, Sunday, or legal holiday, the period of time
shall automatically be extended to 5:00 p.m. of the next full business day.
10.12 EFFECTIVE DATE. The effective date (the "EFFECTIVE DATE") of this
Contract shall be the date on which the last of Seller and Buyer shall sign the
same.
10.13 FINAL DATE FOR EXECUTION. This Contract shall be null and void if not
executed by Seller on or before ten (10) business days after the date executed
by Buyer.
10
<PAGE>
IN W1TNESS WHEREOF, the parties hereto have executed this Contract.
Signed, sealed, and delivered in
the presence of:
VICORP RESTAURANTS, INC.
a Colorado corporation
- -------------------
By: /s/ CHARLES R. FREDERICKSON
----------------------------------
/s/ ILLEGIBLE Name: Charles R. Frederickson
- ------------------- ---------------------------------
Title: Chairman
--------------------------------
(CORPORATE SEAL)
Executed on: OCTOBER 22, 1997
---------------
"SELLER"
SHELLS SEAFOOD RESTAURANTS, INC.
a Delaware corporation
/s/ TRACY DELATORE
- -------------------
By: /s/ W.E. HATTAWAY
----------------------------------
/s/ ILLEGIBLE Name: W.E. Hattaway
- ------------------- --------------------------------
Title: President
-------------------------------
(CORPORATE SEAL)
Executed on: OCTOBER 17, 1997
----------
"BUYER"
11
EXHIBIT 10.45
FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT
THIS FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT (the "First Amendment")
is made as of this 23RD day of December, 1997, by and between VICORP
RESTAURANTS, INC., a Colorado corporation ("Seller"), and SHELLS SEAFOOD
RESTAURANTS, INC., a Delaware corporation ("Buyer").
BACKGROUND
Seller and Buyer entered into that certain Purchase and Sale Agreement,
(the "Contract") dated October 22, 1997 for the purchase and sale of certain
property (the "Property") as described therein. Seller and Buyer desire to
extend certain of Buyer's contingency periods contained in the Contract.
AGREEMENT
NOW, THEREFORE, for and in consideration of the sum of Ten and no/100ths
Dollars ($10.00) and other good and valuable considerations, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. PERMITS AND APPROVALS. Anything to the contrary contained in the
Contract notwithstanding, Seller and Buyer agree that the deadline by which
Buyer shall obtain, or waive the contingency for, Buyer's receipt of the
required Permits and Approvals as set forth in Section 4.2 of the Contract,
shall be and is hereby extended until on or before February 15,1998.
2. FINANCING. Anything to the contrary contained in the Contract
notwithstanding, Seller and Buyer agree that the deadline by which Buyer shall
obtain, or waive the contingency for Buyer's receipt of, its financing as set
forth in Section 4.3 of the Contract shall be and is hereby extended until on or
before February 15,1998.
3. Except as modified herein, all other terms, conditions and covenants
of the Contract shall remain the same and in full force and effect.
(SIGNATURES ON FOLLOWING PAGE)
PAGE 1 of 2
<PAGE>
IN WITNESS WHEREOF, this instrument has been duly executed as of the day
and year first above written.
Signed, sealed and delivered
In the presence of:
"SELLER"
VICORP RESTAURANTS, INC., a
Colorado corporation
/s/ STANLEY ERECKSON, JR. By: /s/ CHARLES R. FREDERICKSON
- ------------------------ ------------------------------------
Signature Signature
Stanley Ereckson, Jr. CHARLES R. FREDERICKSON
- ------------------------ ------------------------------------
Name Printed Name Printed
Title: Chairman
/s/ KENNETH H. CARD ------------------------------
- ------------------------
Signature
Kenneth H. Card
- ------------------------
Name Printed
"BUYER"
SHELLS SEAFOOD RESTAURANTS, INC., a
Delaware corporation
/s/ DANIEL J. PARZ By: /s/ W. E. HATTAWAY
- ------------------------- ------------------------------------
Signature Signature
Daniel J. Parz W. E. Hattaway
- ------------------------- ------------------------------------
Name Printed Name Printed
Title: President
/s/ MAE SMITH ------------------------------
- -------------------------
Signature
Mae Smith
- -------------------------
Name Printed
Page 2 of 2
SECOND AMENDMENT TO
PURCHASE AND SALE AGREEMENT
THIS SECOND AMENDMENT TO PURCHASE AND SALE AGREEMENT (the "SECOND
AMENDMENT") is made as of this 18TH day of February, 1998, by and between VICORP
RESTAURANTS, INC., A Colorado corporation ("SELLER"), and SHELLS SEAFOOD
RESTAURANTS, INC., a Delaware corporation ("BUYER").
BACKGROUND
Seller and Buyer entered into that certain Purchase and Sale Agreement
dated October 22, 1997 for the purchase and sale of certain property (the
"PROPERTY") as described therein; thereafter amended by that certain First
Amendment to Purchase and Sale Agreement dated December 23, 1997 (collectively,
the "CONTRACT"). Seller and Buyer desire to extend the Closing Date stated in
the Contract.
AGREEMENT
NOW, THEREFORE, for and in consideration of the sum of Ten and No/lOOths
Dollars ($10.00) and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. PERMITS AND APPROVALS. Anything to the contrary contained in the
Contract notwithstanding, Seller and Buyer agree that the deadline by which
Buyer shall obtain, or waive the contingency for, Buyer's receipt of the
required Permits and Approvals as set forth in Section 4.2 of the Contract
shall be and as hereby extended until on or before February 23, 1998.
2. FINANCING. Anything to the contrary contained in the Contract
notwithstanding, Seller and Buyer agree that the deadline by which Buyer shall
obtain, or waive the contingency for Buyer's receipt of, its financing as set
forth in Section 4.3 of the Contract shall be and is hereby extended until on or
before February 23, 1998.
3. TIME AND PLACE OF CLOSING. Anything to the contrary contained in
the Contract notwithstanding, Seller and Buyer agree that the Closing Date shall
be on or before February 25, 1998.
4. OTHER MODIFICATIONS. Except as modified herein, all other terms,
conditions and covenants of the Contract shall remain the same and in full
force and effect.
(SIGNATURES ON FOLLOWING PAGE]
<PAGE>
IN WITNESS WHEREOF, this instrument has been duly executed as of the day
and year first above-written.
Signed, sealed and delivered
in the presence of:
VICORP RESTAURANTS, INC., a Colorado
corporation
/s/ STANLEY ERECKSON, JR.
- ---------------------------------
Print Name: Stanley Ereckson, Jr. By: /s/ KENNETH H. CARD
----------------------- ---------------------------------
Name: Kenneth H. Card
/s/ GARY F. BURKE ------------------------------
- --------------------------------- Title: VICE PRESIDENT/REAL ESTATE
Print Name: Gary F. Burke "SELLER"
----------------------
SHELLS RESTAURANTS, INC., a Delaware
corporation
/s/ MAE SMITH
- ---------------------------------
Print Name: Mae Smith By: /s/ WARREN R. NELSON
---------------------- --------------------------------
Name: Warren R. Nelson
/s/ PATTY MEW ------------------------------
- --------------------------------- Title: Vice President, CFO
Print Name: Patty Mew -----------------------------
----------------------
"BUYER"
2
EXHIBIT 10.47
ASSET PURCHASE AND SALE OF AGREEMENT
AND ESCROW INSTRUCTIONS ("Agreement")
CHI-CHI's, INC.,
a Delaware corporation,
formerly known as Chi-Chi's USA, Inc.
"Seller"
SHELLS SEAFOOD RESTAURANTS, INC.,
a Delaware corporation
"Buyer"
<PAGE>
TABLE OF CONTENTS PAGE
----------------- ----
1. PURCHASE AND SALE OF FEE PROPERTIES AND SUBLEASE OF
PREMISES..........................................................2
1.1 Purchase and Sale of Assets ................................. 2
1.2 No Transfer of Trade Name.....................................3
1.3 Subleases.................................................... 3
2. OPENING OF ESCROW; CLOSING DATE...................................3
2.1 Opening of Escrow.............................................3
2.2 Closing Dates.................................................3
3. PAYMENT OF PURCHASE PRICE.........................................4
3.1 Amount of Purchase Price......................................4
3.2 Deposit.......................................................4
3.3 Balance of Purchase Price.....................................5
3.4 Allocation of Purchase Price..................................5
4. DELIVERY OF FUNDS AND DOCUMENTS BY SELLER AND BUYER...............6
4.1 Buyer.........................................................6
4.2 Seller........................................................6
5. TITLE MATTERS.....................................................8
5.1 Approval of Title.............................................8
5.2 Title Policies................................................9
6. INSPECTION AND REVIEW PERIOD......................................9
6.1 Inspection Date...............................................9
6.2 Scope of Inspection...........................................9
6.3 Review of Documents..........................................10
6.4 Entry for Inspection.........................................10
6.5 Approval of Due Diligence Matters ...........................11
6.6 Confidentiality..............................................11
6.7 Liens........................................................11
6.8 Indemnity....................................................12
6.9 Approval of Licenses and Permits.............................12
6.10 Buyer's Objection and Cure Procedure........................12
7. CONDITIONS PRECEDENT TO CLOSE OF ESCROW..........................13
7.1 Conditions to Buyer's Obligations............................13
7.2 Conditions to Seller's Obligations...........................14
7.3 Woodridge Premises Contingency...............................16
7.4 Springfield Property Contingency.............................16
7.5 Covenant of Seller and Buyer.................................18
7.6 Waiver......................................................18
7.7 Failure of Conditions .......................................18
8. REPRESENTATIONS, WARRANTIES AND DISCLOSURES......................18
-i-
<PAGE>
PAGE
----
8.1 Representations and Warranties by Buyer......................18
8.2 Representations and Warranties by Seller.....................19
8.3 "AS-IS" Acceptance of Fee Properties and Premises; Buyer's
Disclaimer...................................................21
8.4 Indemnification..............................................22
8.5 Buyer's Release of Seller....................................22
8.6 Survival.....................................................23
9. ESCROW PROVISIONS................................................23
9.1 Supplemental Escrow Instructions..............................23
9.2 General Escrow Provisions....................................23
9.3 Prorations...................................................23
9.4 Payment of Costs.............................................24
9.5 Payment of Sales Taxes.......................................25
9.6 Cancellation of Escrow.......................................25
9.7 Information Report...........................................25
10. BROKERAGE COMMISSIONS............................................26
11. DAMAGE, DESTRUCTION AND CONDEMNATION.............................26
11.1 Risk of Physical Loss.......................................26
11.2 Condemnation................................................27
12. POSSESSION; DEFAULT..............................................28
12.1 Possession..................................................28
12.2 Utilities...................................................28
12.3 LIQUIDATED DAMAGES..........................................28
12.4 Seller's Default............................................28
13. MISCELLANEOUS....................................................29
13.1 Assignment..................................................29
13.2 Successors and Assigns......................................29
13.3 Time of Essence.............................................29
13.4 Time Period Computations ...................................29
13.5 Attorneys' Fees.............................................29
13.6 Interpretation; Governing Law...............................29
13.7 No Waiver...................................................29
13.8 Modifications...............................................30
13.9 Severability................................................30
13.10 Headings...................................................30
13.11 Merger of Prior Agreements and Understandings..............30
13.12 Execution in Counterpart ..................................30
13.13 Survival...................................................30
13.14 Notices....................................................30
13.15 No Response to Request for Consent ........................31
13.16 Exhibits...................................................31
-ii-
<PAGE>
SCHEDULE OF EXHIBITS AND SCHEDULES
I. EXHIBITS
EXHIBIT "A-1" LEGAL DESCRIPTION OF DEERFIELD PROPERTY
EXHIBIT "A-2" LEGAL DESCRIPTION OF BLOOMINGTON PROPERTY
EXHIBIT "A-3" LEGAL DESCRIPTION OF SPRINGFIELD PROPERTY
EXHIBIT "B-1" DESCRIPTION OF STREAMWOOD PREMISES
EXHIBIT "B-2" DESCRIPTION OF OAKBROOK TERRACE PREMISES
EXHIBIT "B-3" DESCRIPTION OF WOODRIDGE PREMISES
EXHIBIT "B-4" DESCRIPTION OF CARPENTERSVILLE PREMISES
EXHIBIT "C-1" LEASE AND RELATED DOCUMENTS STREAMWOOD PREMISES
EXHIBIT "C-2" LEASE AND RELATED DOCUMENTS STREAMWOOD PREMISES
EXHIBIT "C-3" LEASE AGREEMENTS AND RELATED DOCUMENTS WOODRIDGE PREMISES
EXHIBIT "C-4" LEASE AGREEMENTS AND RELATED DOCUMENTS CARPENTERSVILLE
PREMISES
EXHIBIT "D" FORM SUBLEASE AGREEMENT
EXHIBIT "E" ASSIGNMENT OF CONTRACTS
EXHIBIT "F" DEED
EXHIBIT "G" BILL OF SALE
EXHIBIT "H-1" LANDLORD CONSENT
EXHIBIT "H-2" LANDLORD CONSENT
EXHIBIT "H-3" LANDLORD CONSENT
EXHIBIT "H-4" LANDLORD CONSENT
EXHIBIT "I" NON-FOREIGN AFFIDAVIT
-iii-
<PAGE>
II. SCHEDULES
SCHEDULE 1.1A PERSONAL PROPERTY INVENTORY: DEERFIELD PROPERTY
SCHEDULE 1.lB PERSONAL PROPERTY INVENTORY: BLOOMINGTON PROPERTY
SCHEDULE 1.lC PERSONAL PROPERTY INVENTORY: SPRINGFIELD PROPERTY
SCHEDULE 1.1D PERSONAL PROPERTY INVENTORY: STREAMWOOD PREMISES
SCHEDULE 1.1E PERSONAL PROPERTY INVENTORY: OAKBROOK TERRACE PREMISES
SCHEDULE 1.lF PERSONAL PROPERTY INVENTORY: WOODRIDGE PREMISES
SCHEDULE 1.1G PERSONAL PROPERTY INVENTORY: CARPENTERSVILLE PREMISES
SCHEDULE 1.1(b)(iii) LEASED EQUIPMENT
SCHEDULE 2.2 CLOSING SCHEDULE
SCHEDULE 3.4A ALLOCATION OF PURCHASE PRICE: DEERFIELD PROPERTY
SCHEDULE 3.4B ALLOCATION OF PURCHASE PRICE: BLOOMINGTON PROPERTY
SCHEDULE 3.4C ALLOCATION OF PURCHASE PRICE: SPRINGFIELD PROPERTY
SCHEDULE 3.4D ALLOCATION OF PURCHASE PRICE: OAKBROOK TERRACE PREMISES
SCHEDULE 6.9 GOVERNMENTAL PERMITS
SCHEDULE 8.2(f) CONDEMNATION PROCEEDINGS
SCHEDULE 8.2(g) CONTRACTS TO SURVIVE ESCROW
-iv-
<PAGE>
ASSET PURCHASE AND SALE AGREEMENT AND ESCROW INSTRUCTIONS
Escrow No. 8306056-M19
Date of Opening
of Escrow: March 12, 1998
To: Chicago Title Company, National Accounts
("Escrow Holder")
16969 Von Karman Avenue, Suite 200
Irvine, California 92606
Attention: Lorri Beasley, Escrow Officer
THIS ASSET PURCHASE AND SALE OF AGREEMENT AND ESCROW INSTRUCTIONS
("Agreement") is made this 12th day of March, 1998, by and between CHI-CHI's,
INC., a Delaware corporation, formerly known as Chi-Chi's USA, Inc. ("Seller"),
and SHELLS SEAFOOD RESTAURANTS, INC., a Delaware corporation ("Buyer").
RECITALS:
A. Seller is the owner of fee title to that certain real property located
in the City of Deerfield, County of Lake, State of Illinois, more particuLarly
described on EXHIBIT "A-1" attached hereto ("Deerfield Property"); and that
certain real property located in the City of Bloomington, County of McLean,
State of Illinois, more particularly described on EXHIBIT "A-2" attached hereto
("Bloomington Property").
B. Seller is the lessee of the real property and improvements located in
the City of Springfield, County of Sangamon, State of Illinois, more
particularly described on EXHIBIT "A-3" attached hereto ("Springfield
Property"). Seller is currently in negotiations with the fee owner of the
Springfield Property for the termination of the lease with respect to the
Springfield Property ("Springfield Lease") and for the acquisition of fee title
to the Springfield Property.
C. The Deerfield Property, the Bloomington Property and the Springfield
Property, together with all improvements, buildings, structures and fixtures
constructed on each such property shall be collectively referred to herein as
the "Fee Properties".
D. Seller is the lessee of: (i) the real property and improvements commonly
known as 948 South Barrington Road, Streamwood, Illinois, more particularly
described on EXHIBIT "B-1" attached hereto (the "Streamwood Premises"); (ii) the
real property and improvements commonly known as 17 West 744 22nd Street,
Oakbrook Terrace, Illinois, more particularly described on EXHIBIT "B-2"
attached hereto ("Oakbrook Terrace Premises"); (iii) the real property and
improvements commonly known as 1001 75th Street, Woodridge, Illinois, more
particularly described on EXHIBIT "B-3" attached hereto ("Woodridge Premises");
and (iv) the real property and improvements commonly known as 113 South Western
Avenue,
<PAGE>
Carpentersville, Illinois, more particularly described on EXHIBIT "B-4" attached
hereto ("Carpentersville Premises"). The Streamwood Premises, the Oakbrook
Terrace Premises, the Woodridge Premises and the Carpentersville Premises shall
be collectively referred to herein as "the Premises."
E. Seller's leasehold interest in the Streamwood Premises exists as a
result of the lease and related documents listed on EXHIBIT "C-1" attached
hereto (the "Streamwood Lease"); Seller's leasehold interest in the Oakbrook
Terrace Premises exists as a result of the lease and related documents listed on
EXHIBIT "C-2" attached hereto (the "Oakbrook Terrace Lease"); Seller's leasehold
interest in the Woodridge Premises exists as a result of the lease and related
documents listed on EXHIBIT "C-3" attached hereto (the "Woodridge Lease"); and
Seller's leasehold interest in the Carpentersville Premises exists as a result
of the lease and related documents listed on EXHIBIT "C-4" attached hereto (the
"Carpentersville Lease"). All of the above-referenced documents listed in
EXHIBITS "C-1", "C-2", "C-3" AND "C-4" are hereinafter collectively referred to
as the "Leases" or "the Lease Documents".
F. Seller currently operates restaurants on the Fee Properties and the
Premises (collectively, the "Restaurants") under the trade name "Chi-Chi's" (the
"Trade Name"). Seller's right to use and operate the Restaurants as "Chi-Chi's"
is not being transferred to Buyer and Buyer shall acquire no right or interest
in such Trade Name.
G. Seller desires to (i) sell the Fee Properties to Buyer; (ii) sublease
the Premises to Buyer (iii) sell the Personal Property (as defined herein) to
Buyer; and (iv) transfer operation of the Restaurants to Buyer, and Buyer has
agreed to the same upon the terms and conditions contained herein.
NOW, THEREFORE, the parties hereto agree as follows:
TERMS AND CONDITIONS
1. PURCHASE AND SALE OF FEE PROPERTIES AND SUBLEASE OF PREMISES.
1.1 PURCHASE AND SALE OF ASSETS. Subject to all of the terms, conditions
and provisions of this Agreement, and for the consideration herein set forth,
Seller hereby agrees to sell and Buyer hereby agrees to purchase the following
(collectively, the "Assets"):
(a) Seller's fee ownership interest in and to the Fee Properties,
together with all buildings, improvements, equipment and fixtures located
thereon, and all right, title and interest of Seller in and to any
easements, rights of way and other appurtenances thereto pertaining to or
benefiting such Properties, including, without limitation, all air rights,
subsurface rights, water rights, wells and appurtenant development rights,
and all tangible personal property used in the operation, maintenance or
repair of any such Properties.
(b) All furniture, personal property, machinery, apparatus and
equipment and currently located on the Fee Properties and the Premises
(collectively, the "Personal
-2-
<PAGE>
Property"). Personal Property shall be delivered in the same condition
existing on the date of this Agreement, reasonable wear and tear excepted.
The Personal Property does not include: (i) any personal property or
equipment marked or identified with Seller's logo or trademark (provided
that with respect to signage, Seller shall remove only the actual signs and
shall not remove sign poles or monuments); (ii) all pots, pans, tableware,
glasses and kitchen utensils located in the Premises ("Smallwares"); (iii)
any equipment, furniture or fixtures, currently being leased by Seller, as
identified on Schedule 1.1(b)(iii) hereto, and Buyer shall acquire no
right, title, or interest in such leased equipment under this Agreement; or
(iv) any point of sale equipment. An inventory of the Personal Property and
leased equipment shall be approved by Buyer and Seller and attached hereto
as SCHEDULE 1.1 and SCHEDULE 1.1(b)(iii) respectively within thirty (30)
days from the date of this Agreement.
(c) All licenses, certificates of occupancy, approvals,
qualifications, consents, authorizations and permits owned or held by, or
granted to, Seller, involved in the operating of each Fee Property and the
Premises as restaurants, other than those which by law or pursuant to their
terms are not assignable or otherwise transferable to Buyer.
1.2 NO TRANSFER OF TRADE NAME. The "Chi-Chi's" Trade Name shall not be sold
or transferred to Buyer pursuant to this Agreement and Buyer shall acquire no
right, title or interest therein.
1.3 SUBLEASES. Buyer and Seller shall enter into separate subleases in the
form attached hereto as EXHIBIT "D" for the Streamwood Premises, the Oakbrook
Terrace Premises, the Woodridge Premises and the Carpentersville Premises
(collectively, the "Subleases") effective upon the Close of Escrow for each such
Premises.
2. OPENING OF ESCROW: CLOSING DATE.
2.1 OPENING OF ESCROW. Within two (2) business days after the execution of
this Agreement by Buyer and Seller, the parties shall open an escrow ("Escrow")
with the Escrow Holder by causing an executed copy of this Agreement to be
deposited with Escrow Holder. Escrow shall be deemed open on the date that a
fully executed copy of this Agreement is delivered to Escrow Holder ("Opening of
Escrow").
2.2 CLOSING DATES. After satisfaction or waiver of all conditions set forth
in Sections 7.1 and 7.2 below, the parties agree that the Close of Escrow shall
occur in a series of four (4) separate Closings. Each Closing shall transfer two
(2) of the Restaurants at a time, in the order specified on the SCHEDULE 2.2
attached hereto and incorporated by reference ("Closing Schedule"). The first
Closing shall occur not later than ten (10) business days following
satisfaction, deemed satisfaction or written waiver of the conditions set forth
in Sections 7.1 and 7.2 (the "Contingency Satisfaction Date"), and each
subsequent Closing shall Occur at successive thirty (30) day intervals
thereafter, as more particularly set forth on the Closing Schedule (the date
for each respective Closing, as set forth on the Closing Schedule may be
referred to as a "Closing Date"); provided, however, that in the event any
particular Closing would occur on a weekend or Federal or Illinois State
holiday, such Closing shall occur on the
-3-
<PAGE>
next succeeding business day. In the event that the Woodridge Premises is not
part of this transaction as set forth in Section 7.3 below and/or the
Springfield Property is not part of this transaction as set forth in Section 7.4
below, the Closing Schedule shall be modified in accordance with the mutual
agreement between the parties, but in no event shall there be more than thirty
(30) days between any Closing, nor shall any Closing involve less than two (2)
of the Restaurants, except for the final Closing. Notwithstanding the foregoing,
the Closing Date for the Springfield Property may be extended as provided in
Section 7.4 below. Buyer shall have the right, upon thirty (30) days' prior
written notice to Seller, to accelerate the Closing Schedule on any of the Fee
Properties or Premises (with the exception of the Springfield Property which
shall be governed by Section 7.4 below), and to Close Escrow with respect to
more than two (2) Fee Properties or Premises at any particular Closing. The
terms "Close of Escrow", and/or the "Closing" are used herein to mean the time
the Deed is recorded in the applicable County Recorder's Office in the State of
Illinois with respect to the Fee Properties and the date of delivery of
documents through Escrow and delivery of possession of the Premises to Buyer
with respect to the Subleases. Upon the Contingency Satisfaction Date, Buyer and
Seller shall be obligated to proceed with each of the remaining Closings for
each of the remaining Restaurants without contingency, except with respect to
the contingency set forth in Section 7.3 relating to the Woodridge Premises and
with respect to the contingency set forth in Section 7.4 relating to the
Springfield Property. If the first Closing shall not have occurred on or before
July 24, 1998 (the "Outside Closing Date"), the Escrow and this Agreement shall
terminate without prejudice to the rights of either party with respect to any
breach or default by the other party under this Agreement.
3. PAYMENT OF PURCHASE PRICE.
3.1 AMOUNT OF PURCHASE PRICE. The total consideration which Seller agrees
to accept and Buyer agrees to deliver for the purchase of the Assets and
execution of the Subleases is the sum of THREE MILLION ONE HUNDRED THOUSAND
DOLLARS ($3,100,000.00) (the "Purchase Price"), subject to adjustment in
accordance with Section 7.4 below. Notwithstanding the foregoing, if Buyer shall
elect to Close for some, but not all, of the Fee Properties and/or the Premises
in accordance with a specific right of election set forth in this Agreement, the
Purchase Price shall be reduced by that portion of the Purchase Price allocated
to the Fee Property and/or the Premises for which Buyer has elected not to
Close.
3.2 DEPOSIT. Concurrently with the Opening of Escrow, Buyer shall deposit
the sum of FIFTY THOUSAND DOLLARS ($50,000.00) with the Escrow Holder by wire
transfer or cashier's check. Unless Buyer shall have terminated this Agreement
by delivery of written notice to Seller and Escrow Holder pursuant to a right of
termination in Buyer's favor set forth in this Agreement, Buyer shall deposit
the additional sum of ONE HUNDRED THOUSAND DOLLARS ($100,000.00) with Escrow
Holder in immediately available funds on or before the date which is sixty (60)
days from the date of this Agreement. In the event that Seller has terminated
this Agreement with respect to the Deerfield Property and the Bloomington
Property pursuant to the provisions of Section 7.2(h) below, Buyer shall not be
required to deposit the additional ONE HUNDRED THOUSAND DOLLARS ($100,000.00)
as provided in the immediately preceding sentence. In the event that Seller
has terminated this Agreement with respect to either the Deerfield Property or
Bloomington Property, but not both, pursuant to the
-4-
<PAGE>
provisions of Section 7.2(h) below, Buyer shall deposit the additional sum of
FIFTY THOUSAND DOLLARS ($50,000.00) with Escrow Holder in immediately available
funds on or before the date which is sixty (60) days from the date of this
Agreement in lieu of Buyer's deposit of the additional One Hundred Thousand
Dollars ($100,000.00). The foregoing amounts held by Escrow Holder are
hereinafter referred to as the "Deposit." Deposit shall be held in an interest
bearing account, with interest being added to the Deposit. The Deposit shall
either: (i) be applied to the Purchase Price at Closing as provided below; (ii)
be retained by Seller as liquidated damages in accordance with Section 12.3
pursuant to the provisions thereof; or (iii) be returned to Buyer in the event
that Escrow has expired and/or been terminated as to all of the Fee Properties
and Premises as provided in this Agreement and the Deposit is not retained by
Seller pursuant to clause (ii) above. Provided that the entire One Hundred Fifty
Thousand Dollar ($150,000.00) Deposit has been made, Fifty Thousand Dollars
($50,000.00) of the Deposit shall be applied to the Purchase Price payable in
connection with the first Closing. The second Fifty Thousand Dollars
($50,000.00) of the Deposit shall be applied to the Purchase Price payable in
connection with the second Closing. The remaining Fifty Thousand Dollars
($50,000.00) of the Deposit shall remain in Escrow until the Closing of the last
of the Fee Properties and/or Premises to be transferred to Buyer pursuant hereto
and shall be applied to the Purchase Price allocable thereto; provided, however,
that in the event that the final Closing has not occurred by the expiration of
the Seller's Extension of the Springfield Closing Date as provided in Section
7.4 below, the remaining Deposit shall be returned to Buyer, provided further
that such return shall not otherwise affect the validity and continued
effectiveness of this Agreement with respect to the Springfield Property. In the
event that only One Hundred Thousand Dollars ($100,000.00) of the Deposit is
made pursuant to the provisions of this Section, Fifty Thousand Dollars
($50,000.00) of the Deposit shall be applied to the Purchase Price payable in
connection with the Closing of the Oakbrook Terrace Premises, and the remaining
Fifty Thousand Dollars ($50,000.00) of the Deposit will remain in Escrow until
the Closing of the last of the Fee Properties and/or Premises as provided above.
In the event that only Fifty Thousand Dollars ($50,000.00) of the Deposit is
made pursuant to the provisions of this Section, such Deposit shall remain in
Escrow until the Closing of the last of the Fee Properties and/or Premises as
provided above. All interest on funds held in Escrow (including funds remaining
after each Closing as set forth in the Closing Schedule) shall accrue in favor
of Buyer. Escrow Holder shall invest such funds in accordance with the
directions of Buyer; provided such investment is reasonably acceptable to Escrow
Holder.
3.3 BALANCE OF PURCHASE PRICE. On or before the Closing Date for each
respective Fee Property and/or Premises, Buyer shall deliver to Escrow an amount
equal to the total Purchase Price allocable to the Fee Properties and/or
Premises for such respective Closing as set forth on SCHEDULE 2.2, plus an
amount estimated to be sufficient funds to pay for Buyer's share of prorations
and closing costs. As used in this Agreement, "Good Funds" means immediately
available funds including cash or wire transfer of funds. Upon each Closing for
the Restaurants set forth in the Closing Schedule, Escrow Holder shall disburse
to Seller that Portion of the Purchase Price allocated to each Fee Property
and/or Premises as provided in the Allocation of Purchase Price (as defined in
Section 3.4 below) subject to adjustment for closing Costs and prorations for
the applicable Closing.
3.4 ALLOCATION OF PURCHASE PRICE. Attached hereto as SCHEDULES 3.4A, 3.4B,
3.4C AND 3.4D is the form Allocation of the Purchase Price for the sale or
sublease of each Restaurant
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as such may be required by Section 1060 of the Internal Revenue Code of 1986 and
the treasury regulations promulgated thereunder. Buyer and Seller shall agree on
the allocation of the Purchase Price for each of the Fee Properties and the
Premises and shall complete the Allocation of Purchase Price for each such Fee
Property and Premises and attach the completed form to this Agreement and
deliver the completed forms of Allocation of Purchase Price to Escrow Holder on
or before the expiration of the Inspection Period. Each party shall prepare IRS
Form 8594 reflecting the allocation of the Purchase Price with respect to the
purchase of each of the Fee Properties and the Premises, and shall deliver
copies thereof to Escrow Holder on or before the applicable Closing as provided
in the Closing Schedule.
4. DELIVERY OF FUNDS AND DOCUMENTS BY SELLER AND BUYER.
4.1 BUYER. Buyer agrees that on or :before the business day preceding the
first Closing as described in the Closing Schedule, Buyer will deposit with
Escrow Holder all additional documents (executed and acknowledged, if
appropriate) which are necessary for Escrow Holder and/or Buyer as applicable,
to comply with the terms of this Agreement, including without limitation, the
following:
(a) Two (2) originals of a completed IRS Form 8594.
(b) Four (4) fully executed originals of the Subleases for each of the
four (4) Premises.
(c) With respect to the Closing for the Woodridge Premises, on or
before the business day preceding the Woodridge Premises Closing, four (4)
fully executed counterpart originals of any lease amendment documents with
respect to the Woodridge Lease which are to be executed and delivered
through Escrow pursuant to Section 7.3 below (the "Woodridge Lease
Amendment").
(d) Any and all additional instruments, or other documents from Buyer
(executed and acknowledged if appropriate) expressly or implicitly required
by this Agreement.
(e) Three (3) fully executed counterpart originals of an Assignment of
Contracts, Permits, Licenses, Warranties and Guaranties in the form
attached hereto as EXHIBIT "E" (the "Assignment of Contracts") with respect
to each of the Fee Properties and the Premises.
(f) Three (3) fully executed counterpart originals of a Memorandum of
Sublease with respect to each of the Subleases in recordable form
reasonably acceptable to Seller and Buyer (the "Memorandum of Subleases").
4.2 SELLER. Seller agrees that on or before the business day preceding the
first Closing as set forth in the Closing Schedule, Seller will deposit with
Escrow Holder such funds and other items and instruments (executed and
acknowledged, if appropriate) which are necessary
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in order for the Escrow Holder to comply with the terms of this Agreement,
including without limitation, the following:
(a) One (1) original grant deed for each of the Fee Properties
conveying fee title thereto to Buyer in the form attached hereto as
EXHIBIT "F" ("Deeds").
(b) Four (4) fully executed originals of the Subleases for each of the
four (4) Premises.
(c) An original fully executed Bill of Sale (the "Bill of Sale")
conveying the Personal Property for each of the Fee Properties and the
Premises in the form of EXHIBIT "G" attached hereto.
(d) Four (4) fully executed Landlord Consents for each of the
Subleases (the "Landlord Consents") in the general form attached hereto as
EXHIBITS "H-1", "H-2", "H-3" AND "H-4", subject to reasonable modification
by the landlord under each of the Leases; provided, however, such Landlord
Consents shall in any event contain a consent to each of the Subleases and
shall not increase the burdens imposed upon Buyer nor shall it modify the
terms of the Leases or the Subleases without the prior written consent of
Buyer. Seller agrees to use its reasonable commercial efforts to procure
all of the Landlord Consents; provided, however, Seller shall not be
obligated to pay any fee or charge to the Landlord under the Leases in
connection with obtaining such documents, except that Seller shall pay any
fee or charge specifically provided in the Leases required for the review
of the proposed Subleases.
(e) With respect to the Closing for the Woodridge Premises, on or
before the business day preceding the Woodridge Premises Closing, four (4)
fully executed counterpart originals of the Woodridge Lease Amendment, if
applicable.
(f) A Non-Foreign Affidavit in the form attached hereto as EXHIBIT "I"
with respect to each of the Fee Properties.
(g) Three (3) fully executed counterpart originals of the Assignment
of Contracts with respect to each of the Fee Properties and the Premises.
(h) Three (3) fully executed counterpart originals of the Memorandum
of Subleases for each of the Subleases. Seller shall use its commercially
reasonable efforts to obtain and deliver a recordable Memorandum of Lease
with respect to any of the Leases for which a Memorandum of Lease does not
currently exist of record; provided, however, Seller shall not be required
to pay any fee or charge with respect to obtaining such Memorandum of
Lease. Seller's failure to obtain a Memorandum of Lease shall not
constitute a condition to the Buyer's obligations under this Agreement.
(i) Any and all additional instruments or documents from the Seller
(executed and acknowledged if appropriate) expressed or implicitly required
by this Agreement or otherwise necessary to complete the transactions
contemplated hereby.
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5. TITLE MATTERS.
5.1 APPROVAL OF TITLE.
(a) As soon as possible following execution of this Agreement, Seller
shall cause Chicago Title Company (National Accounts) (the "Title
Company"), to deliver to Buyer preliminary title reports describing the
state of title of each of the Fee Properties and the Premises, together
with copies of all documents listed as exceptions therein (the "Preliminary
Title Reports"). Buyer shall review the Preliminary Title Reports and
notify Seller in writing ("Buyer's Title Notice") of Buyer's approval of
all matters contained in the Preliminary Title Reports or of any objections
Buyer may have to title exceptions or other matters ("Disapproved
Exceptions") contained in the Preliminary Title Reports within the later
of: (i) twenty (20) days after Buyer's receipt of the Preliminary Title
Reports; (ii) twenty (20) days after the date of this Agreement; or (iii)
only with respect to any survey exceptions, five (5) business days after
Buyer's receipt of surveys if Buyer elects to obtain surveys, provided that
such extension shall not exceed sixty (60) days from the date of this
Agreement. If Buyer fails to deliver Buyer's Title Notice within said
twenty (20) day period (or such extended period for survey exceptions),
Buyer shall be conclusively deemed to have approved the Preliminary Title
Reports and all matters shown therein.
(b) In the event Buyer delivers Buyer's Title Notice within said
period, Seller shall have a period of ten (10) days after receipt of
Buyer's Title Notice in which to notify Buyer of Seller's election to
either (i) agree to attempt to remove the Disapproved Exceptions prior to
the Close of Escrow; or (ii) decline to remove any such Disapproved
Exceptions ("Seller's Notice"). Seller's failure to deliver Seller's Notice
within said ten (10) day period shall be deemed Seller's election to
decline to remove the Disapproved Exceptions. Notwithstanding anything to
the contrary contained herein, subject to Seller's contingency set forth in
Section 7.2(h) below, Seller shall remove any Disapproved Exceptions
consisting of monetary liens and encumbrances such as mortgages, deeds of
trust, judgment liens and mechanic's liens; provided, however, that with
respect to the Premises, Seller shall only be obligated to remove such
liens and encumbrances with respect to Seller's leasehold estate, and not
the Landlord's fee interest. If Seller notifies Buyer of its election to
decline to remove the Disapproved Exceptions, or if Seller is deemed to
have elected to decline to remove the Disapproved Exceptions, Buyer may
elect either to (i) terminate this Agreement and the Escrow with respect to
the disapproved Fee Property and/or Premises, in which event this Agreement
shall continue for all other Fee Properties and Premises with an
appropriate adjustment to the Purchase Price, if, any; or (ii) to accept
title to the Fee Properties and/or Premises subject to the Disapproved
Exception(s). Buyer shall exercise such election by delivery of written
notice to Seller and Escrow Holder within ten (10) days following the date
Seller declines or is deemed to have declined to remove such Disapproved
Exception(s). If Buyer fails to deliver said written notice of termination
of this Agreement and the Escrow with respect to the Fee properties and/or
Premises in question within said ten (10) day period, Buyer's disapproval
of the Disapproved Exception(s) shall be deemed waived and Buyer shall
deemed to have agreed to accept title to each of the Fee Properties subject
to the Disapproved Exception(s).
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(c) Upon the issuance of any amendment or supplement to the
Preliminary Title Reports which add additional exceptions, the foregoing
right of review and approval shall also apply to said amendment or
supplement, provided, however, that Buyer's initial period of review and
approval or disapproval of any such additional exceptions shall be limited
to ten (10) days following receipt of notice of such additional exceptions.
The provisions of this subparagraph 5.1(c) providing for additional review
periods based upon amended or supplemental preliminary title reports shall
not apply to any exception relating to any survey obtained by Buyer, and
Buyer's review rights with respect to any such survey exception shall be
governed by the provisions of Section 5.1(a) above.
5.2 TITLE POLICIES. When Escrow Holder holds for Buyer each of the Deeds in
favor of Buyer executed and acknowledged by Seller covering each of the Fee
Properties and the Subleases covering each of the Premises, Escrow Holder shall
cause to be issued and delivered to Buyer as of the Close of Escrow for each
respective Fee Property an ALTA standard coverage owner's policy of title
insurance issued by Title Company, and for each of the Premises for which a
recorded memorandum of lease exists or is delivered by a landlord under a Lease,
an ALTA standard leasehold policy of title insurance issued by Title Company
("Buyer's Title Policies"), or, upon Buyer's request therefor, an ALTA extended
coverage owner's policy of title insurance (provided that Buyer shall be
responsible for the cost of, and for obtaining any ALTA survey required with
respect to an ALTA extended coverage policy). Buyer's Title Policies for the Fee
Properties shall have liability in the amount of the Purchase Price allocable to
each Fee Property and Buyer's Title Policies for the Premises shall have
liability in the amount of One Hundred Fifty Thousand Dollars ($150,000.00) for
each of the Streamwood Premises, Woodridge Premises and Carpentersville Premises
and Two Hundred Fifty Thousand Dollars ($250,000.00) for the Oakbrook Terrace
Premises. Buyer's Title Policies shall cover each of the Fee Properties, and
where applicable, the Premises and shall show title vested in Buyer free of
encumbrances and other title exceptions, except:
(a) All non-delinquent general and special real property taxes and
assessments for the current fiscal year;
(b) Those easements, encumbrances, covenants, conditions,
restrictions, reservations, rights-of-way and other matters of record shown
on the Preliminary Title Reports and approved, or deemed approved, by Buyer
pursuant to Section 5.1;
(c) Any exceptions created or consented to by Buyer, including without
limitation, any exceptions arising by reason of Buyer's possession of or
entry on any of the Fee Properties.
6. INSPECTION AND REVIEW PERIOD.
6.1 INSPECTION DATE. The "Inspection Date" shall mean the date which is
sixty (60) days following the date of this Agreement.
6.2 SCOPE OF INSPECTION. Buyer shall have the right to make an analysis of
the Fee Properties, the Premises and the Personal Property, consisting of such
engineering, feasibility
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studies, soils tests, environmental studies and any other physical
investigations as Buyer may desire to permit Buyer to determine the suitability
of the Fee Properties, the Premises and the Personal Property for Buyer's
contemplated uses and to conduct such other review and investigation which Buyer
deems appropriate to satisfy itself to acquire the Fee Properties, the Personal
Property and Sublease the Premises.
6.3 REVIEW OF DOCUMENTS. Upon the execution of this Agreement, Buyer
acknowledges receipt of the Lease Documents. Seller shall make available to
Buyer within five (5) days from the execution of this Agreement, copies of all
contracts which relate to the Fee Properties, the Premises and the Personal
Property (together with any amendments or modifications thereto), and all
reports in Seller's possession respecting the physical condition of the Fee
Properties and the Premises, if any, any of the licenses or permits described in
Section 1.1(c) above which Seller has in its possession and any other
information in Seller's possession or control reasonably requested by Buyer
relating to the Fee Properties, the Premises or the Personal Property.
6.4 ENTRY FOR INSPECTION.
(a) Subject to the conditions hereafter stated, Seller grants to
Buyer, its agents and employees a limited license to enter upon any portion
of the Fee Properties and the Premises for the purpose of conducting
engineering surveys, soil tests, investigations or other studies reasonably
necessary to evaluate the condition of the Fee Properties, the Premises and
the Personal Property, which studies, surveys, investigations and tests
shall be done at Buyer's sole cost and expense. Buyer shall not conduct any
invasive or destructive testing or investigation of any of the Fee
Properties or the Premises without first obtaining Seller's prior written
consent, which shall not be unreasonably withheld.
(b) Buyer may engage an environmental consultant to conduct an
examination of the Fee Properties and the Premises to obtain information
about hazardous materials contained thereon and to conduct any testing or
examination required by a customary and reasonable Phase I and II
environmental review, taking into account the nature, use and history of
the Fee Properties and the Premises, subject to the foregoing limitations
on destructive or invasive testing.
(c) Buyer shall inform Seller in writing not less than twenty-four
(24) hours prior to its intended inspection of any of the Fee Properties or
the Premises, and shall coordinate any such entry for inspection with
Seller. Seller shall have the right to have its representative present
during any inspection. Buyer acknowledges that until the Close of Escrow,
each of the Restaurants shall continue to operate and Buyer agrees to
coordinate its investigation and inspection efforts so as to not
unreasonably interfere with the operation of the Restaurants by Seller. The
limited license granted herein shall be co-extensive with the term of this
Agreement. Further, as a condition to any such entry, Buyer shall (i)
conduct all studies by Buyer or its agents in a diligent, expeditious and
safe manner and not allow any dangerous or hazardous conditions to occur on
the Fee Properties by its agents or the Premises during or after such
investigation; (iii) comply with all applicable laws and governmental
regulations; (iv) keep the Fee Properties and
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the Premises free and clear of all materialmen's liens, lis pendens and
other liens arising out of the Buyers or its agents entry and work
performed under this paragraph; (v) maintain or assure maintenance of
workers' compensation insurance (or state approved self-insurance) on all
persons entering the Fee Properties or the Premises in the amounts required
by the State of Illinois; and (vi) return the Fee Property and the Premises
to their original condition following Buyer's entry.
6.5 APPROVAL OF DUE DILIGENCE MATTERS. Buyer shall notify Seller in writing
("Buyer's Inspection Notice") on or before the Inspection Date of Buyer's
approval or disapproval of each item delivered to or available for review by
Buyer pursuant to this Section 6 and of Buyer's approval or disapproval of the
condition of the Fee Properties, the Premises and the Personal Property and
Buyer's investigations with respect thereto (excluding title matters which are
to be approved or disapproved pursuant to Section 5.1 above) (collectively, the
"Inspection Items"). Buyer's failure to deliver Buyer's Inspection Notice on or
before expiration of the Inspection Date shall be conclusively deemed Buyer's
approval of the condition of the Fee Properties, the Premises and the Personal
Property in their "AS-IS" and "WHERE-IS" condition, without representation or
warranty from Seller or its agents or employees.
6.6 CONFIDENTIALITY. This Agreement, the terms hereof, and any and all
information made available to Buyer under this Agreement or discovered by Buyer
during its investigation of the Fee Properties, the Premises and the Personal
Property shall be treated as confidential by Buyer and such information shall
not be disclosed without the prior written consent of Seller prior to the
consummation of all transactions contemplated by this Agreement, or in the event
this Agreement is terminated, the confidentiality provisions contained herein
shall survive such termination and continue indefinitely; provided, however,
that Buyer may disclose said information to the extent it is relevant and
necessary in the particular circumstances: (i) to any attorney, accountant,
engineer or consultant providing services to Buyer in the normal and ordinary
course of business; (ii) to a court or any other official body if said
confidential information is subpoenaed by that court or official body; (iii) to
the landlord of the Woodridge Lease in connection with its negotiations for an
extension of such Lease; (iv) to public officials in connection with the
application for liquor licenses and other licenses and permits necessary for the
operation of a Shells restaurant; and (v) on the business day next succeeding
the full execution of this Agreement, Buyer may issue a press release announcing
the transactions contemplated by this Agreement which has been reviewed and
approved by both Seller and Buyer. Buyer may issue subsequent press releases
with respect to the transactions contemplated by this Agreement during the
pendency of this Agreement, provided such press releases have been reviewed and
approved by both Seller and Buyer, with such approval not to be unreasonably
withheld or delayed. Additionally, if this Agreement terminates for any reason
whatsoever, Buyer shall return to Seller all written information delivered to
Buyer pursuant hereto, and all copies of such information made by Buyer, within
ten (10) days after termination hereof. The provisions of this Section 6.6 shall
survive any termination of this Agreement.
6.7 Liens. Buyer shall promptly pay and/or discharge all demands for
payment relating to Buyer's entry on and investigation of the Fee Properties and
the Premises and take all other steps to avoid the assertion of claims or lien
against the Fee Properties and the Premises. In the event a claim or lien is
recorded by reason of Buyer's entry on the Fee Properties or the Premises,
Buyer, within twenty (20) days of such recordation, shall either (i)
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record or deliver a surety bond sufficient to release such claim or lien in
accordance with applicable law; or (ii) provide Seller with such other assurance
as Seller may reasonably require for the payment of the claim or lien.
6.8 INDEMNITY. Buyer hereby agrees to indemnify, and hold Seller free and
harmless from and against any and all losses, damages (whether general, punitive
or otherwise), liabilities, claims, causes of action (whether legal, equitable
or administrative), judgments, court costs and legal or other expenses
(including attorneys' fees and costs incurred in the defense thereof) which
Seller may suffer or incur as a consequence of Buyer's exercise of the license
granted pursuant to Section 6.4 above or any act or omission by Buyer, any
contractor, subcontractor or material supplier, engineer, architect or other
person or entity acting by or under Buyer (except Seller and its agents) with
respect to the Fee Properties or the Premises, excepting to the extent such
claims arise out of the negligence or misconduct of Seller. Buyer's duty to
indemnify Seller pursuant to this Section 6.8 shall survive the termination of
this Agreement and the Close of Escrow.
6.9 APPROVAL OF LICENSES AND PERMITS. Buyer shall further have the right to
make an examination of the existence or availability of all licenses, permits
and authorizations which affect the Fee Properties, the Premises, the Personal
Property or which Buyer in its sole discretion determines are necessary or.
desirable to the operation of a Shells' Restaurant, including without limitation
those transferable licenses and permits as set forth on SCHEDULE 6.9 attached
hereto, if any (collectively, "Governmental Permits"). Buyer shall notify Seller
in writing within ninety (90) days following the Opening of Escrow ("Permit
Contingency Date") in the event Buyer is unable to obtain reasonable
satisfaction that the transfer of the Governmental Permits shall take place (the
"Permit Objection Notice"). Buyer shall promptly apply for all Governmental
Permits necessary for the operation of a Shells Seafood Restaurant with respect
to each of the Fee Properties and the Premises and Buyer shall use its
commercially reasonable efforts to diligently pursue obtaining all Governmental
Permits. If Buyer fails to deliver the Permit Objection Notice to Seller on or
before the expiration of the Permit Contingency Period, this contingency shall
conclusively be deemed to be waived by Buyer. Seller shall, at no direct
out-of-pocket cost to itself, cooperate with Buyer in its efforts to transfer or
obtain any Governmental Permits.
6.10 BUYER'S OBJECTION AND CURE PROCEDURE. In the event that Buyer delivers
the Buyer's Inspection Notice on or before the Inspection Date and/or the Permit
Objection Notice on or before Permit Contingency Date, Seller shall have a
period of ten (10) days after receipt of such notices in which to notify Buyer
of Seller's election to either: (i) agree to attempt to cure such objection
prior to the Close of Escrow for the applicable Fee Property and/or Premises
(provided, however, with respect to the Springfield Property such cure shall
occur not later than thirty (30) days prior to the scheduled Closing Date for
the Springfield Property); or (ii) decline to remove such objection. Seller's
failure to deliver such notice within said ten (10) day period shall be deemed
Seller's election to decline to cure the objection or objections. In the event
Seller notifies Buyer of its election to decline to remove any objection set
forth in a Buyer's inspection Notice or Permit Objection Notice or Seller is
deemed to have elected to decline to cure such objections, Buyer may elect
either to (a) terminate this Agreement and the Escrow with respect to the
disapproved Fee Property and/or Premises, in which event this Agreement shall
continue for all other Fee Properties and Premises with an appropriate
adjustment to the
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Purchase Price, if any; or (b) accept title to the Fee Properties and/or
Premises subject to the objectionable matters. Buyer shall exercise such
election by delivery of written notice to Seller and Escrow Holder within ten
(10) days following the date Seller declines or is deemed to have declined to
cure such objections. If Buyer fails to deliver said written notice of
termination of this Agreement and the Escrow with respect to the Fee Properties
and/or Premises in question, within said ten (10) day period, Buyer's
disapproval set forth in the Buyer's Inspection Notice and/or the Permit
Objection Notice shall be deemed waived and Buyer shall be deemed to have agreed
to accept the Fee Properties and the Premises subject to such objections.
7. CONDITIONS PRECEDENT TO CLOSE OF ESCROW.
7.1 CONDITIONS TO BUYER'S OBLIGATIONS. Buyer's obligation to consummate the
transactions contemplated herein shall be conditioned upon the fulfillment of
the following conditions precedent, all of which shall be satisfied or waived in
writing pursuant to this Section 7 prior to the first Closing Date as set forth
in the Closing Schedule unless sooner noted:
(a) All of Seller's covenants pursuant to this Agreement which by
their terms are to be fulfilled by the first Closing Date shall have been
fulfilled and all of Seller's representations and warranties set forth in
Section 8.2 are true and correct on each Closing Date.
(b) On or before expiration of the Permit Contingency Date, Buyer
shall be satisfied, or deemed satisfied pursuant to Sections 6.9 and 6.10
above, that all Governmental Permits are available to Buyer.
(c) Buyer shall be satisfied that it will obtain financing from a
lender or lenders for a loan or loans in an amount or amounts and on terms
acceptable to Buyer within ninety (90) calendar days after the date of this
Agreement ("Financing Contingency Date"). Buyer shall use its commercially
reasonable efforts to obtain the financing by the Financing Contingency
Date. Buyer shall notify Seller in writing on or before the Financing
Contingency Date of Buyer's approval or disapproval of the financing
contingency. Buyer's failure to deliver such notice on or before the
Financing Contingency Date shall be conclusively deemed Buyer's waiver of
this financing contingency. Buyer's disapproval of the financing
contingency shall entitle Buyer to terminate this Agreement in accordance
with Section 9.6; provided however, that such termination must be with
respect to all, and not part, of the Fee Properties and Premises.
(d) Seller's delivery to Escrow of an original Bill of Sale conveying
the Personal Property with respect to each of the Fee Properties and the
Premises to Buyer and three (3) executed original counterparts of the
Assignment of Contracts for each of the Fee Properties and the Premises.
(e) Seller's delivery to Escrow of the Deeds for each of the Fee
Properties, appropriately executed by Seller.
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(f) Seller's delivery to Escrow of four (4) appropriately executed
originals of the Subleases and Memorandums of Sublease for each of the
Premises.
(g) The delivery of an executed original of each of the Landlord
Consents for each of the Subleases. The Landlord Consents attached hereto
as EXHIBITS "H-1" through "H-4" contain provisions highlighted in bold
type. Buyer and Seller hereby acknowledge and agree that Seller will use
its reasonably commercial efforts to obtain the Landlord Consents in
substantially the form attached as EXHIBITS "H-1" through "H-4", however,
obtaining the agreement of the landlords under the Leases to the provisions
highlighted in bold type in EXHIBITS "H-1" through "H-4" shall NOT be a
condition to Buyer's obligations under this Agreement. In the event that
any landlord under any of the Leases declines to agree to any of the
provisions highlighted in bold type in the Landlord Consents, but will
agree to a Landlord Consent containing, in all material respects, the
non-highlighted provisions of the attached Landlord Consents, this
condition shall be deemed satisfied.
(h) Buyer has approved or deemed to have approved the condition to
title of the Fee Properties on or before the date provided in Section
5.1(a) above.
(i) The Title Company is irrevocably committed issued to by Buyer the
Buyer's Title Policies as required by Section 5.2 of this Agreement.
(j) Escrow Holder holds and will deliver to Buyer the instruments and
funds, if any, accruing to Buyer pursuant to this Agreement (including
without limitation, all other documents Seller is to deposit into Escrow
pursuant to Section 4.2).
(k) Buyer has obtained the consent of its board of directors to this
Agreement on or before a date which is seven (7) days from the date of this
Agreement. Buyer's failure to deliver written notice terminating this
Agreement by reason of its failure to obtain board of directors approval by
such date shall be conclusively deemed Buyer's waiver and satisfaction of
this Condition.
7.2 CONDITIONS TO SELLER'S OBLIGATIONS. Seller's obligation to consummate
the transactions contemplated herein shall be conditioned upon the fulfillment
of the following conditions precedent, all of which shall be satisfied or waived
in writing pursuant to this Section 7 prior to the first Closing Date as set
forth in the Closing Schedule unless sooner noted:
(a) All covenants of Buyer pursuant to this Agreement which by their
terms are to be fulfilled by the first Closing Date as set forth in the
Closing Schedule shall have been fulfilled, and all Buyer's representations
and warranties set forth in Section 8.1 are true and correct on each
Closing Date.
(b) Buyer's delivery to Escrow of four (4) appropriately executed
originals of each of the Subleases for the Premises.
(c) Seller's receipt of each of each of the Landlord Consents for the
Subleases executed by the landlord under the Leases.
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(d) Buyer's delivery to Escrow of three (3) executed original
counterparts of the Assignment of Contracts for each of the Fee Properties
and the Premises.
(e) Seller's receipt of Buyer's Certificates of Insurance for the
Premises as required by the Subleases.
(f) Seller's receipt of a loan commitment in favor of Buyer issued by
a lender in an amount and on terms acceptable to Buyer for a loan for the
acquisition of the Fee Properties and demonstrating that Buyer will have
the financial ability to close the transactions contemplated by this
Agreement (the "Loan Commitment"). Seller shall have received the Loan
Commitment on or before the date which is sixty (60) calendar days from
the date of this Agreement.
(g) Buyer's delivery to Escrow of any additional instruments or
documents required herein, and as when required under Section 3.3 above,
Good Funds which, when taken together with the Deposit, if applicable,
total the Purchase Price plus Buyer's share of closing costs and prorations
and amounts, if any, otherwise provided herein to be paid or allocated to
Seller, subject to adjustment as provided in this Agreement.
(h) Seller shall have obtained the commitment of any party holding any
lien with respect to the Fee Properties and/or the Premises to release such
lien under terms and conditions satisfactory to Seller in its sole
discretion, or Seller shall be satisfied, in its sole discretion, that it
shall be able to obtain a release of any such lien under terms and
conditions satisfactory to the Seller, on or before the date which is
thirty (30) days from the date of this Agreement ("Seller's Lien
Contingency Date"). Seller shall use its commercially reasonable efforts to
satisfy this contingency by the Seller's Lien Contingency Date. In the
event that Seller has not delivered written notice to Buyer terminating
this Agreement with respect to any particular Fee Property and/or Premises
by Seller's Lien Contingency Date, then this contingency shall be
conclusively deemed waived as to such Fee Property and/or Premises. In the
event Seller delivers notice that this contingency has not been satisfied
on or before the Seller's Lien Contingency Date, Buyer may extend this
contingency for thirty (30) day increments, not to exceed the Outside
Closing Date. In the event that this contingency is not satisfied with any
one of the Fee Properties or Premises and therefore this Agreement is
terminated as to such Fee Property and/or Premises, Seller shall pay to
Buyer, the sum of Five Thousand Dollars ($5,000.00) as reimbursement for
costs and expenses incurred by Buyer with respect to its investigation of
the respective Fee Property and/or Premises. In the event that this
Agreement is terminated as to any individual Fee Property and/or Premises
pursuant to this Section, this Agreement shall remain in full force and
effect with respect to all other Fee Properties and/or Premises.
(i) Seller has obtained the consent of its board of directors to this
Agreement on or before a date which is seven (7) days from the date of this
Agreement. Seller's failure to deliver written notice terminating this
Agreement by reason of its failure to obtain board of directors' approval
by such date shall be conclusively deemed Seller's waiver and satisfaction
of this condition.
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(j) Escrow Holder holds and will deliver to Seller the instruments and
funds accruing to Seller pursuant to this Agreement (including without
limitation, all other documents Buyer is to deposit into Escrow pursuant to
Section 4.1).
7.3 WOODRIDGE PREMISES CONTINGENCY. Within ten (10) days following the date
of this Agreement, Buyer shall enter into negotiations with LaSalle National
Trust, N.A., as Trustee (the "Woodridge Landlord") for purposes of amending the
terms of the Woodridge Lease. Buyer shall use its reasonable efforts to
negotiate an extension of the current term of the Woodridge Lease which expires
on December 31, 2001, on terms and conditions reasonably satisfactory to Buyer
(the "Woodridge Lease Amendment"). Buyer may also attempt to negotiate a reduced
rental rate under the Woodridge Lease for the Lease term prior to December 31,
2001 together with such other amendments Buyer may desire, which shall be
subject to the written approval of Seller, which shall not be unreasonably
withheld or delayed. In the event that the Woodridge Landlord agrees to extend
the term of the Woodridge Lease upon terms and rent satisfactory to Buyer in its
sole discretion, Buyer shall either negotiate an assignment of the Woodridge
Lease to Buyer with a full release in favor of Seller and its affiliates
(including a release of any guaranty), or the Woodridge Landlord must consent to
an extension whereby Seller and any guarantor is released from liability after
December 31, 2001. In the event that Buyer negotiates an assignment of the
Woodridge Lease, all references in this Agreement to a sublease for the
Woodridge Premises shall be deemed changed to an Assignment of the Woodridge
Lease in form reasonably acceptable to Seller and Buyer. Seller shall approve or
disapprove of the terms of any Woodridge Lease Amendment within ten (10) days
after receipt of Buyer's written notice of the renegotiated terms. In the event
that Seller fails to deliver written notice to Buyer disapproving the terms of
the Woodridge Lease Amendment within such ten (10) day period, Seller shall be
deemed to have approved the terms of the proposed Woodridge Lease Amendment.
Buyer shall approve or disapprove this contingency within ninety (90) days
following the Opening of Escrow ("Woodridge Lease Approval Date"). Buyer's
failure to deliver such notice on or before the Woodridge Lease Approval Date
shall be conclusively deemed Buyer's waiver of this contingency. If Buyer
notifies Seller on or before expiration of the Woodridge Lease Approval Date
that Buyer has failed to reach agreement with the Woodridge Landlord on a
Woodridge Lease Amendment, Buyer may elect to either accept a sublease of the
Woodridge Premises without an extension of the original term of the Woodridge
Lease, or terminate this Agreement as to the Woodridge Premises only. In the
event Buyer timely notifies Seller of its election to terminate this Agreement
as to the Woodridge Premises, all references to the Woodridge Premises shall be
eliminated from this Agreement, Seller shall have no obligation to sublease the
Woodridge Premises to Buyer and Buyer shall have no obligation to sublease the
Woodridge Premises from Seller, and this Agreement shall continue in full force
and effect with respect to each of the other Premises and the Fee Properties. In
the event Buyer elects not to accept the Woodridge Premises pursuant to the
Provisions of this Section, there shall be no adjustment to the Purchase Price
as no part of the Purchase Price has been allocated to the Woodridge Premises.
7.4 SPRINGFIELD PROPERTY CONTINGENCY. Seller is a party to pending
litigation with C-C Restaurant, Ltd. -9 (the Fee Owner of the Springfield
Property and the landlord under the Springfield Lease), which litigation was
filed in the County of Jefferson, State of Kentucky, Case No. 96CI01756 (the
"Springfield Litigation"). The subject matter of the Springfield Litigation
involves the Springfield Property and the Springfield Lease, as well as other
properties
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currently being leased by Seller from the landlord under the Springfield Lease.
It is Seller's desire, either through the Springfield Litigation or through
negotiations with the landlord under the Springfield Lease, to obtain fee title
to the Springfield Property. Seller's obligation to sell the Springfield
Property to Buyer, and Buyer's obligation to purchase the Springfield Property
from Seller, is contingent upon Seller obtaining fee title to the Springfield
Property on or before the Closing Date for the Springfield Property as set forth
on the Closing Schedule (the "Springfield Closing Date"). Notwithstanding the
foregoing, the Seller shall, at its sole and absolute discretion, have the right
to extend the Escrow with respect to the Springfield Property for an additional
sixty (60) days from and after the Springfield Closing Date (the "Seller's
Extension"). In the event that Seller elects to exercise Seller's Extension and
Seller obtains fee title to the Springfield Property at any time within the
Seller's Extension period, the Close of Escrow for the sale of the Springfield
Property shall occur on or before ten (10) business days from the date that
Seller notifies Buyer that Seller has obtained fee title to the Springfield
Property. In the event that Seller has elected the Seller's Extension and Seller
does not obtain fee title to the Springfield Property within the Seller's
Extension period, Buyer shall have the right to further extend the Escrow with
respect to the Springfield Property for a period of one (1) year from the end of
the Seller's Extension period by delivery of written notice to Seller and Escrow
Holder on or before the expiration of the Seller's Extension (the "Buyer's
Extension"). Buyer may terminate the Buyer's Extension period and the Escrow
with respect to the Springfield Property at any time during the Buyer's
Extension period by delivery of sixty (60) days prior written notice to Seller
and Escrow Holder (the "Buyer's Termination Notice"). In the event that Buyer
delivers Buyer's Termination Notice, the Escrow with respect to the Springfield
Property shall terminate upon the date which is sixty (60) days from the
delivery of the Buyer's Termination Notice unless Seller notifies Buyer within
such sixty (60) day period that Seller has, or will prior to the termination of
the Escrow with respect to the Springfield Property, obtain the right to fee
title to the Springfield Property, in which event the Escrow shall close as
provided below. In the event that Seller acquires the right to fee title to the
Springfield Property any time within the Buyer's Extension period, the Close of
Escrow for the sale of the Springfield Property shall occur on or before ten
(10) business days from the date that Seller acquires the fee interest, or the
right to obtain the fee interest, in the Springfield Property. Seller shall
either actually obtain the fee interest in the Springfield Property or it
elects, acquire the right to obtain fee interest in the Springfield Property so
long as Seller causes fee interest in the Springfield Property to be deeded to
Buyer upon the Close of Escrow as provided above. In the event that Seller does
not acquire the fee interest in the Springfield Property, or the right to
acquire the fee interest, within the Buyer's Extension period, this Agreement
shall terminate as to the Springfield Property and neither Seller nor Buyer
shall have any further responsibility or obligation to the other with respect
thereto. In the event the contingency set forth in this Section 7.4 for the
acquisition of fee title to the Springfield Property by Seller does not occur
for any reason, this Agreement shall nonetheless continue in full force and
effect with respect to each of the other Fee Properties and the Premises
pursuant to each of the terms and conditions set forth in this Agreement, and
the Purchase Price shall be reduced by the amount allocated to the Springfield
Property as set forth on SCHEDULE 3.4C.
In the event that the Close of Escrow for the sale of the Springfield
Property does not occur by reason of Seller's failure to obtain fee title to the
Springfield Property, provided that Buyer has not terminated this Agreement with
respect to the Springfield Property pursuant to Section 9.6 below, or Seller has
not terminated this Agreement because of a breach
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or default of Buyer hereunder, then Seller shall pay to Buyer the sum of TEN
THOUSAND DOLLARS ($l0,000.00) as reimbursement for costs and expenses incurred
by Buyer with respect to its investigation of the Springfield Property. In the
event that the contingency set forth in this Section 7.4 for the acquisition by
Seller of the fee interest in the Springfield Property is satisfied prior to the
expiration of the Seller's Extension period, or Buyer's Extension of the Escrow
for the Springfield Property, then Seller shall have no obligation to pay any
amount to Buyer with respect to the Springfield Property.
Seller hereby agrees to indemnify, defend and hold Buyer harmless from and
against any and all damages, claims, liabilities or obligations including,
without limitation, attorneys' fees and costs incurred in the defense thereof,
arising from or out of the Springfield Litigation.
7.5 COVENANT OF SELLER AND BUYER. Buyer and Seller agree to cooperate with
one another, at no cost or expense to the cooperating party, in satisfying the
conditions to Close of Escrow. Buyer shall be responsible for proceeding with
diligence and in good faith to satisfy the conditions to Buyer's performance set
forth in Section 7.1 to the extent they are within Buyer's control, and Seller
shall be responsible for proceeding with diligence and in good faith to satisfy
the conditions to Seller's performance set forth in Section 7.2 to the extent
they are within Seller's control.
7.6 WAIVER. Either party may at any time or times, at its election, waive
any of the conditions for its benefit set forth in this Section 7 but any such
waiver shall be effective only if contained in a writing signed by the waiving
party and delivered to the other party.
7.7 FAILURE OF CONDITIONS. In the event that any conditions benefitting a
particular party set forth in this Section 7 are not satisfied or waived prior
to the expiration of the applicable period for satisfaction or waiver, said
benefitted party may, in addition to asserting or claiming any other right or
remedy said party may have at law or in equity for the other party's breach or
default hereunder, terminate this Agreement pursuant to Section 9.6 below.
8. REPRESENTATIONS, WARRANTIES AND DISCLOSURES.
8.1 REPRESENTATIONS AND WARRANTIES BY BUYER. Buyer hereby makes the
following representations, warranties and covenants to and for the benefit of
Seller, each of which shall survive the Closing and continue indefinitely:
(a) Buyer is duly formed, validly existing and in good standing under
the laws of the State of Delaware. Buyer is, or will be as of the first
Closing Date, qualified to do business in the State of Illinois. The person
or persons executing this Agreement and all exhibits hereto on behalf of
Buyer have the requisite authority to bind Buyer. The execution, delivery
and performance by Buyer of this Agreement constitutes a valid and binding
obligation of Buyer, enforceable against Buyer in accordance with its
terms.
(b) The Subleases, when issued under this Agreement, will be duly and
validly executed and delivered by Buyer and will be the legally valid and
binding
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obligation of Buyer, enforceable in accordance with its terms, assuming the
Subleases are a binding and enforceable obligation of the Seller, as the
landlord thereunder.
(c) Buyer has received no notice of any pending or threatened
investigation, litigation or legal proceeding that may have a material
adverse effect upon the assets, business operations or condition (financial
or otherwise) of Buyer or which might impair Buyer's ability to perform any
or all of its obligations under this Agreement and the Sublease, nor is
Buyer subject to any order, judgment or decree that may have such an
effect.
(d) Buyer shall indemnify, defend and hold harmless Seller, and its
successors and assigns, against any and all claims, losses, expenses
(including reasonable attorneys' fees), liabilities or damages of any
nature whatsoever, whether accrued, contingent or non-contingent which are
not expressly assumed by Seller as of the Closing Date, resulting from or
arising out of any act or omission of Buyer with respect to any of the
Personal Property for all periods subsequent to the Closing.
8.2 REPRESENTATIONS AND WARRANTIES BY SELLER. Seller hereby makes the
following representations and warranties to and for the benefit of Buyer, each
of which shall survive the Closing and continue indefinitely:
(a) Seller is duly formed, validly existing and in good standing under
the laws of the State of Delaware. Seller is duly qualified to do business
in the State of Illinois. The person or persons executing this Agreement
and all Exhibits hereto on behalf of Seller have the requisite authority to
bind Seller. The execution, delivery and performance by Seller of this
Agreement constitutes a valid and binding obligation of Seller, enforceable
against Seller in accordance with its terms.
(b) Subject to obtaining the Landlord Consents to the Subleases as
required by the Leases and obtaining fee title to the Springfield Property,
Seller has the authority to enter into this Agreement, the Deeds and the
Subleases and such other documents contemplated by this Agreement and to
convey the Personal Property to Buyer.
(c) This Agreement, the Deeds and the Subleases will be, upon their
execution and delivery by the parties, valid and binding obligations of
Seller enforceable in accordance with their terms, assuming the Subleases
are binding and enforceable obligations of Buyer as the subtenant
thereunder.
(d) To Seller's actual knowledge, the Lease Documents for each of the
Premises contain all of the agreements with the landlords under the Leases
relating to the respective Premises. Each of the Leases are valid and
binding obligations of Seller, enforceable in accordance with their terms,
assuming that such Leases are binding and enforceable obligations of the
landlord under the Leases. To the actual knowledge of Seller, the Leases
are in full force and effect and Seller has no actual knowledge of any
breach or default by the landlords under the Leases. Seller has received no
notice from any landlord under the Leases, and Seller has no actual
knowledge that, Seller is in
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breach or default of its obligations under the Leases. Rent has been paid
under the Leases through February 1, 1998.
(e) Except for the litigation involving the Springfield Property,
Seller has received no notice of any pending or threatened investigation,
lien, violation, suit, proceeding, citation, order, decree, judgment,
litigation or legal proceeding that may have a material adverse effect upon
the Fee Properties, the Premises, the Leases, and/or the Personal Property,
or which might impair Seller's ability to perform any or all of its
obligations under this Agreement and the Subleases, nor is Seller subject
to any order, judgment or decree that may have such an effect.
(f) Except as disclosed on Schedule 8.2(t) attached hereto, Seller has
received no notice of any pending or threatened condemnation proceeding
with regard to all or any portion of the Fee Properties or the Premises.
(g) There are no contracts, oral or written, with any company or
employee nor any service contract, maintenance contract, nor any union or
other contract or agreement with respect to any of the Fee Properties or
Premises which will survive the Close of Escrow with respect to the Fee
Property and/or Premises in question, except as listed on Schedule 8.2(g)
attached hereto. Seller will not enter into any new agreement with
respect to the Fee Properties or Premises or modify or extend any such
agreement which will survive the Closing without the prior written approval
of Buyer, which shall not be unreasonably withheld or delayed.
(h) Seller has no actual knowledge of, and has received no notice
from, any governmental authority that the existing improvements located on
the Fee Properties or the Premises and the present operation thereof
violate any statute, rule or ordinance of any governmental body.
(i) Seller shall make no material changes or alterations to the Fee
Properties or the Premises after the date of this Agreement other than
maintenance and repairs made in the ordinary course of business, without
the prior written approval of Buyer which shall not be unreasonable
withheld or delayed. As used herein, a material change or alteration shall
be any change or alteration which costs in excess of Five thousand
($5,000.00).
(j) Seller has received no notice from any governmental entity that
there has been a release, discharge or disposal of Hazardous Materials (as
defined below) in violation of any applicable federal, state or local
statute, ordinance or regulation on the Fee Properties or the Premises.
Seller has no actual knowledge of any release or discharge of Hazardous
Materials on any of the Fee Properties or Premises in violation of any
Environmental Laws, and Seller has not caused any release, discharge or
contamination of Hazardous Materials on the Fee Properties or Premises in
violation of any applicable Environmental Law during its period of
ownership and/or occupancy of the Fee Properties and/or Premises.
Notwithstanding the foregoing, Seller hereby discloses to Buyer that
building materials used in the improvements located on the Fee
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Properties and/or Premises may contain asbestos and Buyer agrees to
investigate all such conditions during its due diligence investigation of
each Fee Properties and the Premises.
As used in this Agreement, the following terms shall have the meanings
set forth below:
"Environmental Laws" means all laws, rules, regulations, statutes,
ordinances, decrees or orders of any governmental entity relating to (a) the
control of any potential pollutant or protection of the air, water or land, (b)
solid, gaseous or liquid waste generation, handling, treatment, storage,
disposal or transportation, and (c) exposure to hazardous, toxic or other
substances alleged to be harmful, and includes without limitation final and
binding requirements related to the foregoing imposed by (i) the terms and
conditions of any license, permit, approval or other authorization by any
governmental entity, and (ii) applicable judicial, administrative or other
regulatory decrees, judgments and orders of any governmental entity. The term
"Environmental Laws" shall include, but not be limited to the following statutes
and the regulations promulgated thereunder, as currently in effect or as
subsequently amended; the Clean Air Act, 42 U.S.C. SS. 7401 et seq., the Clean
Water Act, 33 U.S.C. SS. 1251, et seq., the Resource Conservation Recovery Act,
42 U.S.C. SS. 6901 et seq., the Superfund Amendments and Reauthorization Act, 42
U.S.C. SS. 11011 et seq., the Toxic Substances Control Act, 15 U.S.C. SS. 2601
et seq., the Water Pollution Control Act, 33 U.S.C. SS. 1251, et seq., the Safe
Drinking Water Act, 42 U.S.C. SS. 300f et seq., the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. SS. 9601 et
seq., and any similar state, federal or local statute or ordinance.
"Hazardous Materials" means any (a) toxic or hazardous materials or
substances regulated by any governmental entity; (b) radioactive materials; (c)
petroleum wastes and spills or releases of petroleum products in violation of
applicable laws; and (e) any other chemical, pollutant, contaminant, substance
or waste that is regulated by any governmental entity under any Environmental
Law.
8.3 "AS-IS" ACCEPTANCE OF FEE PROPERTIES AND PREMISES: BUYER'S DISCLAIMER.
BUYER COVENANTS AND AGREES THAT EXCEPT AS OTHERWISE SET FORTH IN THIS AGREEMENT,
IT IS RELYING UPON ITS OWN INSPECTIONS, EXAMINATIONS, STUDIES AND INQUIRIES WITH
RESPECT TO THE FEE PROPERTIES, THE PREMISES AND THE PERSONAL PROPERTY AND HAS
NOT RELIED UPON ANY REPRESENTATION, WARRANTY OR STATEMENT OF SELLER, OR ITS
AGENTS OR EMPLOYEES (EXCEPT REPRESENTATIONS AND COVENANTS MADE BY SELLER WHICH
SHALL SURVIVE IN ACCORDANCE WITH TERMS OF THIS AGREEMENT) OTHER THAN AS
CONTAINED HEREIN. BUYER SHALL, UPON THE CLOSE OF ESCROW, BE DEEMED TO HAVE
DISCLAIMED AND WAIVED ANY AND ALL OBJECTIONS TO THE PHYSICAL CHARACTERISTICS AND
CONDITIONS OF THE FEE PROPERTIES, THE PREMISES AND THE PERSONAL PROPERTY,
INCLUDING, WITHOUT LIMITATION, THE CONDITION OF TITLE THERETO WHETHER OR NOT
SUCH CONDITIONS WOULD BE DISCLOSED BY A REASONABLE AND DILIGENT INSPECTION.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER SELLER NOR ANY OF ITS
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR REPRESENTATIVES HAS MADE ANY
REPRESENTATIONS, WARRANTIES, OR
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AGREEMENTS TO OR WITH BUYER AS TO ANY MATTERS CONCERNING THE FEE PROPERTIES, THE
PREMISES OR THE PERSONAL PROPERTY, THE PRESENT USE THEREOF, THE EXISTENCE OF
HAZARDOUS MATERIALS THEREON, OR THE SUITABILITY OF THE FEE PROPERTIES, THE
PREMISES OR THE PERSONAL PROPERTY FOR BUYER'S INTENDED OR CONTEMPLATED USE. THE
FOREGOING DISCLAIMERS AND WAIVERS INCLUDE, WITHOUT LIMITATION, TOPOGRAPHY,
CLIMATE, AIR, WATER RIGHTS, UTILITIES, PRESENT AND FUTURE ZONING, GOVERNMENTAL
RESTRICTIONS, SOIL, SUBSOIL, ENVIRONMENTAL CONTAMINATION, THE PURPOSE TO WHICH
THE FEE PROPERTIES, THE PREMISES OR THE PERSONAL PROPERTY ARE SUITED, DRAINAGE,
ACCESS TO PUBLIC ROADS, PROPOSED ROUTES OR ROADS OR EXTENSIONS THEREOF OR THE
AVAILABILITY OF GOVERNMENTAL PERMITS OR APPROVALS OF ANY KIND. EXCEPT WITH
RESPECT TO SELLER'S REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS AGREEMENT,
BUYER AGREES THAT SELLER SHALL HAVE NO RESPONSIBILITY FOR ANY PATENT OR LATENT
DEFECT OR PHYSICAL CONDITION OF THE FEE PROPERTIES, THE PREMISES OR THE PERSONAL
PROPERTY, WHETHER OR NOT KNOWN OR DISCOVERED, AND BUYER ACCEPTS ALL SUCH
RESPONSIBILITY. EXCEPT AS OTHERWISE PROVIDED HEREIN, THE PREMISES ARE BEING
SUBLEASED, AND THE FEE PROPERTIES AND PERSONAL PROPERTY ARE BEING SOLD AND
TRANSFERRED "AS-IS," "WHERE-IS," "WITH ALL FAULTS" WITHOUT FURTHER
REPRESENTATION OR WARRANTY EXPRESSED OR IMPLIED BY SELLER, BY OPERATION OF LAW,
OR OTHERWISE. SELLER EXPRESSLY DISCLAIMS, WHICH BUYER HEREBY ACKNOWLEDGES AND
ACCEPTS, ANY IMPLIED WARRANTY OF CONDITION, HABITABILITY, MERCHANTABILITY, OR
FITNESS FOR A PARTICULAR PURPOSE OR USE.
8.4 INDEMNIFICATION. Each party hereto shall indemnify the other party
against and hold such party harmless from any and all loss, damage, liability or
expense, including court costs and reasonable attorneys' fees, which the
non-breaching party may reasonably incur or sustain either prior to or following
the last Closing Date as set forth in the Closing Schedule by reason of, or in
connection with, any breach of the other party's representations and/or
warranties contained in this Agreement or in another writing delivered pursuant
to this Agreement.
8.5 BUYER'S RELEASE OF SELLER. Except for any representation or warranty of
Seller set forth in this Agreement, Buyer, from and after the Close of Escrow,
accepts and hereby waives, releases, remises, acquits and forever discharges
Seller, its directors, officers, shareholders, employees, and agents, and their
respective heirs, successors, personal representatives and assigns, of and from
any and all environmental claims, environmental cleanup liability and
environmental compliance costs, and from any and all actions, suits, legal or
administrative orders or proceedings, demands, actual damages, punitive damages,
loss, costs, liabilities and expenses, which concern or in any way relate to the
physical or environmental conditions of the Fee Properties and the Premises, the
existence of any Hazardous Material thereon, or the release or threatened
release of Hazardous Materials therefrom, whether existing prior to, at or after
the Close of Escrow. It is the intention of the parties pursuant to this release
that any and all responsibilities and obligations of Seller, and any and all
rights, claims, rights of action, causes of action, demands or legal rights of
any kind of Buyer, its successors, assigns or any affiliated
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entity of Buyer, arising by virtue of the physical or environmental condition of
the Fee Properties and the Premises, the existence of any Hazardous Materials
thereon, or any release or threatened release of Hazardous Material therefrom,
whether existing prior to, at or after the Close of Escrow, are by this release
provision declared null and void and of no present or future force and effect as
to the parties.
8.6 SURVIVAL. Notwithstanding any other provision of this Agreement,
Buyer's release and indemnification as set forth in the provisions of this
Section 8, as well as all provisions of this Section 8 shall survive the Close
of Escrow and shall continue permanently.
9. ESCROW PROVISIONS.
9.1 SUPPLEMENTAL ESCROW INSTRUCTIONS. This Agreement shall also constitute
the escrow instructions of the parties. If Escrow Holder requires additional
general instructions or supplemental instructions related to compliance with
bulk transfer requirements, Seller and Buyer agree that such Escrow Holder's
instructions may be added hereto so long as such instructions do not conflict
with or substantially change this Agreement or its intent. As soon as possible
after the opening of the Escrow, Escrow Holder shall deliver any additional
escrow instructions (the "Escrow Instructions") to both Buyer and Seller for
review and comment. Buyer and Seller shall use their commercially reasonable
efforts to agree upon and execute the Escrow Instructions, provided that failure
to do so shall not affect this Agreement or the Escrow which shall nevertheless
close pursuant to the provisions hereof. The Escrow Instructions may, among
other things, provide for: (i) accounting for all necessary sales tax; and (ii)
bulk sales compliance procedures to the extent applicable. By accepting this
Escrow and these escrow instructions, Escrow Holder agrees that in the event of
any conflict or inconsistency between this Agreement and Escrow Holder's Escrow
Instructions, the terms and provisions of the Agreement shall control and
prevail.
9.2 GENERAL ESCROW PROVISIONS. Escrow Holder shall deliver the Title Policy
to the Buyer and instruct the appropriate County Recorder to mail each of the
Deeds for the Fee Properties and Memorandum of Subleases for each of the
Premises to Buyer at the address set forth in Section 13.14 after recordation.
Escrow Holder shall deliver any Memorandum of Lease delivered through Escrow to
Seller at the address set forth in Section 13.14 after recordation. All funds
received in this Escrow shall be deposited in one or more general escrow
accounts of the Escrow Holder with any bank doing business in the state in which
the Escrow Holder resides, and may be disbursed to any other general escrow
account or accounts. All disbursements shall be made by Escrow Holder's check.
9.3 PRORATIONS. All prorations of payments and liabilities in connection
with the Closing shall be accomplished through Escrow and shall be made on a per
diem basis as of the date of Closing, based upon a thirty (30) day month and a
three hundred sixty day (360) year (unless otherwise provided), including,
without limitation, the following:
(a) Fixed rent payable under each of the Subleases for the first month
thereunder. Should the Closing Date as provided in the Closing Schedule
relating to each of the Subleases be a day other that the first day of a
calendar month, then the fixed rent
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for such partial month shall be prorated from and including the applicable
Closing Date through the last day of that month.
(b) With respect to each of the Premises, prorated property taxes
payable in accordance with Section 5.4 of the Subleases. Should the Closing
Date as provided in the Closing Schedule relating to each of the Subleases
be a day other that the first day of a calendar month, then the estimated
real property taxes for such partial month shall be prorated for the period
from and including the applicable Closing Date through the last day of that
month.
(c) With respect to the sale of the Fee Properties, all non-delinquent
general and special real property taxes shall be prorated to the Close of
Escrow for each of the Fee Properties in accordance with the Closing
Schedule.
(d) Personal property taxes.
(e) If arrangements cannot be made for separate billing, any
apportionable utility charges in connection with the Fee Properties and the
Premises and other charges which are properly apportionable in accordance
with the terms of this Agreement as reasonably agreed to between Buyer and
Seller;
(f) Prepaid deposits, including, but without limitation, utility
deposits if assumed by Buyer, prepaid rent and similar items;
(g) Any other expenses of the Fee Properties or the Premises shall be
prorated to the appropriate Closing Date as set forth on the Closing
Schedule.
(h) The parties shall use all commercially reasonable efforts to
complete adjustments to the prorations to account for variations between
actual costs and estimates, within a period of sixty (60) days after the
applicable Closing (as set forth on the Closing Schedule) if possible. Any
party who is obligated to pay net amounts based on said final proration
shall reimburse the other party said amount within five (5) business days
after completion of the final proration.
(i) The provisions of this Section 9.3 shall survive Close of Escrow.
If either party fails to pay its pro rata share of taxes or other expenses
by the times herein provided, interest shall accrue on all unpaid amounts
from when owing until paid at ten percent (10%) per annum.
9.4 PAYMENT OF COSTS. Seller shall pay (i) one-half (1/2) of the Escrow
fee, (ii) all title insurance premiums for that portion of the premium for the
Title Policies which would be incurred for an ALTA standard coverage form
policy, (iii) the full charge for drawing the Deeds and (iv) any transfer taxes.
Buyer shall pay (i) one-half (1/2) of the Escrow fee, (ii) all charges for
recording the Deeds, (iii) all costs associated with any permits associated with
the Restaurants or Buyer's proposed use; (iv) all costs associated with any
survey procedure by Buyer; (v) the title insurance premium for any title
insurance coverage required by any lender and for that portion of the premium
for the Title Policies which is attributable to the additional
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<PAGE>
cost of obtaining any additional coverage or endorsements requested by Buyer,
including the difference between ALTA standard coverage and ALTA extended
coverage. Seller and Buyer shall each be responsible for their respective
attorneys' fees and costs. All other costs of Escrow not otherwise specifically
allocated by this Agreement shall be apportioned between the parties in a manner
consistent with the custom and usage of Escrow Holder.
9.5 PAYMENT OF SALES TAXES. In the event any sales taxes shall be imposed
upon this transaction, said sales taxes shall be borne solely by Buyer and Buyer
shall pay and remit such sales taxes through Escrow. Without limitation on the
foregoing, Buyer shall reimburse Seller upon demand for any sales tax liability
imposed by the state or local government upon Seller after Closing as determined
by the state or local government in connection with the transfers contemplated
under this Agreement.
9.6 CANCELLATION OF ESCROW. This Agreement may be terminated with respect
to a given Fee Property and/or Premises, by Buyer if any of the conditions to
its obligations as referenced in Sections 7.1 and 7.3 shall not have been
satisfied or waived within the prescribed time limits, or by Seller if any of
the conditions to its obligations as referenced in Section 7.2 shall not have
been satisfied or waived within the prescribed time limits, or by either Seller
or Buyer if the condition to the respective obligations as referenced in Section
7.4 shall not have been satisfied or waived within the prescribed time limits.
Upon any termination of this Agreement, the Escrow shall be cancelled, all
instruments shall be returned to the respective parties who delivered the same,
and provided that such termination is not caused by the breach or default by any
party, neither party shall have any further obligation to complete the purchase
and sale of the Fee Properties or the Personal Property, or Sublease the
Premises contemplated by this Agreement, except as otherwise set forth in this
Agreement. Without limiting the foregoing, in the event termination of this
Agreement is not caused by the breach or default of Buyer, Buyer shall be
entitled to a return of the Deposit including all interest. Cancellation of
Escrow, as provided herein, shall be without prejudice to whatever legal rights
Buyer or Seller may have against each other arising from the Escrow or this
Agreement.
In the event either party timely and properly elects to terminate this
Agreement as provided herein, all escrow and cancellation charges shall be paid
one-half (1/2) by Buyer and one-half (1/2) by Seller, and all instruments,
documents and funds delivered by one party to the Escrow Holder or any other
party shall be returned to the party making delivery. In the event that this
Agreement is terminated as a result of the breach hereof by either party, all
escrow cancellation fees shall be paid by the party breaching this Agreement,
and in the event that Seller is the defaulting party, the Deposit, to the extent
then made, shall be returned to Buyer with the interest earned thereon. In the
event that Buyer is the defaulting party hereunder, the Deposit shall be handled
pursuant to Section 12.3 below.
9.7 INFORMATION REPORT. The "Reporting Person" within the meaning of
Treasury Section 1.6045-4(e)(5) with respect to the transactions contemplated by
this Agreement shall be Escrow Holder. The name and address of Escrow Holder is
set forth on the first page of this Agreement. It is agreed that Escrow Holder
is an eligible person under Section 6045-4(e)(5)(ii) of said Regulations. Escrow
Holder hereby agrees to be responsible for complying with the reporting and
other requirements of Internal Revenue Code Section 6045(e) and the income tax
regulations promulgated thereunder. Pursuant to said regulations, the
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address for the transferor and transferee are as set forth for Seller and Buyer
respectively in Section 13.14 below, and the identifying information regarding
the real estate transferred is the legal description for the Fee Properties as
set forth on EXHIBITS "A-1" "A-2", "A-3", "A-4" and "A-5" attached hereto.
Escrow Holder agrees to file the form required by said regulations between the
end of the calendar year in which the Close of Escrow occurs and February 28 of
the following calendar year. Buyer and Seller agree (i) to cooperate with Escrow
Holder and with each other in completing any report and/or other information
required to be delivered to the Internal Revenue Service pursuant to Internal
Revenue Code Section 6045(e) regarding the real estate sales transaction
contemplated by this Agreement, including without limitation, Internal Revenue
Service Form 1099-S as such may be hereafter modified or amended by the Internal
Revenue Service, or as may be required pursuant to any regulation now or
hereafter promulgated by the Treasury Department with respect thereto; (ii) that
Buyer and Seller, their respective employees and attorneys, and Escrow Holder
and its employees may disclose to the Internal Revenue Service, this Agreement
or the transaction contemplated herein as such party reasonably deems to be
required to be disclosed to the Internal Revenue Service by such party pursuant
to Internal Revenue Code Section 6045(e); (iii) that neither Buyer nor Seller
shall seek to hold any such party liable for the disclosure to the Internal
Revenue Service of any such information; and (iv) to retain this Agreement for
at least four (4) years following the close of the calendar year in which the
Close of Escrow occurs.
10. BROKERAGE COMMISSIONS. Each party represents and warrants to the other
that other than Seller's retention of MidAmerica Real Estate Company and Barr
Real Estate, Inc. ("Brokers") it has retained no brokers or finders to represent
its interests in connection with this transaction. Seller shall be responsible
for the payment of any commission to Brokers pursuant to a separate agreement
with Brokers. Each party agrees to indemnify and hold the other harmless from
and against all liabilities, costs, damages and expenses, including, without
limitation, reasonable attorneys' fees, resulting from any claims or fees or
commissions based upon agreements by it, if any, to pay any additional broker's
commission and/or finder's fee.
11. DAMAGE, DESTRUCTION AND CONDEMNATION.
11.1 RISK OF PHYSICAL LOSS. Risk of physical loss to the Personal Property
and the Fee Properties shall be borne by Seller prior to the Close of Escrow and
by Buyer thereafter. In the event that a fire, flood, earthquake or other
casualty results in damage to (i) all or any substantial part of the Personal
Property; (ii) all or a substantial part of the Premises; or (iii) the Fee
Properties, resulting in estimated cost to repair which exceeds FIFTY THOUSAND
DOLLARS ($50,000.00) for any one Fee Property or Premises, as applicable, Buyer
shall have the option to terminate this Agreement with respect to the affected
Fee Property or Premises, provided notice of such termination is delivered to
Seller within twenty (20) days: following the date Buyer is notified by Seller
of the occurrence and nature of such casualty. If Buyer fats to terminate this
Agreement pursuant to the foregoing sentence within said twenty (20) day period,
Buyer shall be obligated to comply with the terms of this Agreement, in which
case Seller shall assign to Buyer the interest of Seller in all insurance
proceeds relating to such damage. Seller shall consult with Buyer regarding any
proposed settlement with the insurer and Buyer shall have the reasonable right
of approval thereof. Seller shall hold such proceeds until the Close of
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<PAGE>
Escrow. In the event this Agreement is terminated for any reason with respect to
an affected Fee Property or Premises, Buyer shall have no right to these
insurance proceeds. In the event Buyer delivers a notice of its intent to
terminate this Agreement with respect to an affected Fee Property or Premises,
Seller shall have the right to notify Buyer within thirty (30) days of receipt
of such notice that it intends to repair such damage or destruction ("Seller's
Repair Notice"), in which case this Agreement shall continue in full force and
effect with respect to such affected Fee Property or Premises and the Close of
Escrow shall be extended through the date which is ten (10) business days from
the completion of such repair; provided, however, that such extension may not be
extended greater than three (3) months from the date Seller delivers such
notice. In the event Seller is unable to deliver the Fee Property or Premises
with the completed repair of the damage or destruction within such three (3)
month period, this Agreement shall terminate with respect to the applicable Fee
Property or Premises and neither party shall have any further liability
hereunder with respect thereto. In the event that this Agreement terminates with
respect to any affected Fee Property or Premises pursuant to this Section, this
Agreement shall remain in full force and effect with respect to the balance of
the Fee Properties and/or Premises, with an appropriate adjustment to the
Purchase Price, if any. In the event that Seller delivers Seller's Repair Notice
and during any applicable three (3) month extension period as provided above,
Buyer's Loan Commitment expires, Buyer shall have a contingency with respect to
the Fee Property which is the subject of such Seller's Repair Notice to obtain
an extension of such Loan Commitment or a new financing commitment for such Fee
Property for a period of thirty (30) days from the expiration of such Loan
Commitment. Buyer shall use its commercially reasonable efforts to obtain such
replacement financing. In the event Buyer is unable to obtain satisfaction that
it will be able to obtain replacement financing for the applicable Fee Property,
Buyer may terminate this Agreement with respect to the Fee Property in question
pursuant to the provisions of Section 9.6. In the event that Buyer fails to
deliver written notice of such termination with respect to the Fee Property in
question pursuant to Section 9.6 within such thirty (30) day period, Buyer's
contingency shall be deemed satisfied and waived.
11.2 CONDEMNATION. In the event that, prior to the Close of Escrow, any
governmental entity shall commence any actions of eminent domain or similar type
proceedings (all of which are herein called "condemnation") to take an aggregate
of ten percent (10%) or more of the Fee Properties or the Premises, Buyer shall
have the option to terminate this Agreement with respect to the affected Fee
Property or Premises, provided notice of such termination is delivered to Seller
within twenty (20) days following the notice to Buyer describing such taking. If
Buyer fails to terminate this Agreement pursuant to the foregoing sentence
within said twenty (20) day period, Buyer shall be obligated to comply with the
terms of this Agreement, in which case Buyer shall be entitled to at the
proceeds of such taking. Seller shall consult with Buyer regarding any proposed
settlement with the condemnor and Buyer shall have the reasonable right of
approval thereof. Seller shall hold such proceeds until the Close of Escrow. In
the event this Agreement is terminated with respect to any affected Fee Property
or Premises under this Section for any reason, Buyer shall have no right to
these condemnation proceeds. In the event that this Agreement is terminated with
respect to any affected Fee Property or Premises pursuant to this Section, this
Agreement shall remain in full force and effect with respect to all other Fee
Properties and the Premises with an appropriated adjustment to the Purchase
Price, if any.
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<PAGE>
12. POSSESSION: DEFAULT.
12.1 POSSESSION. Possession of the Fee Properties and the Premises shall be
delivered to Buyer as of Close of Escrow for each Fee Property and Premises,
subject to the rights of the landlords under the Leases of the Premises.
12.2 UTILITIES. Buyer and Seller shall cause all utilities which are in the
name of Seller to be transferred to the name of Buyer as of the Close of Escrow
for the applicable Fee properties or the Premises as set forth in the Closing
Schedule or as soon thereafter as practicable.
12.3 LIQUIDATED DAMAGES. IF BUYER SHOULD DEFAULT FOR ANY REASON WHATSOEVER
UNDER THIS AGREEMENT; PROVIDED THAT BUYER'S PERFORMANCE HEREUNDER HAS NOT BEEN
EXCUSED BY A PRIOR DEFAULT OF SELLER HEREUNDER, THEN AND IN SUCH EVENT, SELLER
SHALL BE RELEASED FROM ITS OBLIGATIONS UNDER THIS AGREEMENT, INCLUDING THE
OBLIGATION TO SUBLEASE THE PREMISES, SELL THE FEE PROPERTIES, AND SELL TILE
PERSONAL PROPERTY, AND BUYER SHALL PAY ALL ESCROW CANCELLATION CHARGES AND
ESCROW HOLDER SHALL RELEASE TO SELLER THE DEPOSIT WITH THE INTEREST EARNED
THEREON AS LIQUIDATED DAMAGES. IN THE EVENT ONE OR MORE OF THE FEE PROPERTIES
AND/OR THE PREMISES HAVE ALREADY BEEN CONVEYED TO BUYER AT THE TIME OF THE
BREACH OF DEFAULT BY BUYER UNDER THIS SECTION, THE PROVISIONS OF THIS SECTION
SHALL NONETHELESS BE EFFECTIVE AND SELLER SHALL BE RELEASED FROM ITS OBLIGATIONS
HEREUNDER AND THE DEPOSIT SHALL BE RELEASED BY ESCROW HOLDER AS LIQUIDATED
DAMAGES FOR THE FAILURE OF BUYER TO COMPLETE THE TRANSACTIONS CONTEMPLATED BY
THIS AGREEMENT. THE PARTIES AGREE THAT THE FOREGOING SUM IS A REASONABLE SUM
CONSIDERING ALL CIRCUMSTANCES THAT EXIST ON THE DATE OF THIS AGREEMENT,
INCLUDING: (1) THE RELATIONSHIP OF THE FOREGOING SUM TO THE RANGE OF HARM TO
SELLER THAT COULD REASONABLY BE ANTICIPATED; AND (2) THE ANTICIPATION THAT PROOF
OF ACTUAL DAMAGES WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO DETERMINE.
SELLER AND BUYER HAVE BOTH PLACED THEIR INITIALS IN THE SPACES BELOW TO INDICATE
THAT THEY HAVE READ, UNDERSTAND AND AGREE TO THIS LIQUIDATED DAMAGES PROVISION.
SELLER'S INITIALS ______________
BUYER'S INITIALS _______________
12.4 SELLER'S DEFAULT. In the event Seller defaults under this Agreement,
Buyer may pursue any right or remedy it may have under applicable law, or in
equity, including, without limitation, specific performance or a suit for
damages.
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<PAGE>
13. MISCELLANEOUS.
13.1 ASSIGNMENT. Neither Buyer nor Seller may assign this Agreement, or any
part hereof, without the prior written consent of the other party which may be
withheld in each party's sole discretion.
13.2 SUCCESSORS AND ASSIGNS. Subject to the limitations of Section 13.1,
this Agreement shall be binding upon the parties hereto and their respective
heirs, representatives, transferees, successors and assigns.
13.3 TIME OF ESSENCE. Time is of the essence in this Agreement and with
respect to each covenant and condition hereof. Buyer and Seller each
specifically agrees to strictly comply and perform its obligations herein in the
time and manner specified and waives any and at rights to claim such compliance
by mere substantial compliance with the terms of this Agreement.
13.4 TIME PERIOD COMPUTATIONS. All periods of time referred to in this
Agreement shall include all Saturdays, Sundays and Illinois state or national
holidays unless the reference is to business days, in which event such weekends
and holidays shall be excluded in the computation of time and provide that if
the last date to perform any act or give any notice with respect to this
Agreement shall fall on a Saturday, Sunday or Illinois state or national
holiday, such act or notice shall be deemed to have been timely performed or
given on the next succeeding day which is not a Saturday, Sunday or Illinois
state or national holiday.
13.5 ATTORNEYS' FEES. In the event of any action or proceeding between
Buyer and Seller seeking enforcement or interpretation of any of the terms and
conditions of the Escrow, this Agreement or the documents incorporated herein,
the prevailing party in such action or proceeding shall be awarded, in addition
to damages, injunctive or other relief, its reasonable costs and expenses,
including but not limited to reasonable attorneys' fees and costs including
expert witness, consultant, photocopying, facsimile, messenger, postage and
other costs, whether incurred at trial or during any appeal.
13.6 INTERPRETATION: GOVERNING LAW. This Agreement shall be construed
according to its fair meaning and as if prepared by both parties hereto. This
Agreement shall be construed in accordance with the laws of the State of
Illinois in effect at the time of the execution of this Agreement. Titles and
captions are for convenience only and shall not constitute a portion of this
Agreement. As used in this Agreement, masculine, feminine or neuter gender and
the singular or plural number shall each be deemed to include the others
wherever and whenever the context so dictates.
13.7 NO WAIVER. No delay or omission by either party hereto in exercising
any right or power accruing upon the compliance or failure of performance by the
other party hereto under the provisions of this Agreement shall impair any such
right or power or be construed to be a waiver thereof. A waiver by either party
hereto of a breach of any of the covenants, conditions or agreements hereof to
be performed by the other party shall not be construed as a waiver of any
succeeding breach of the same or other covenants, agreements, restrictions or
conditions hereof
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<PAGE>
13.8 MODIFICATIONS. Any alteration, change or modification of or to this
Agreement, in order to become effective, shall be made by written instrument or
endorsement thereon and in each such instance executed on behalf of each party
hereto.
13.9 SEVERABILITY, If any term, provision, condition or covenant of this
Agreement or the application thereof to any party or circumstances shall, to any
extent, be held invalid or unenforceable, the remainder of this instrument, or
the application of such term, provision, condition or covenant to persons or
circumstances other than those as to whom or which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision of
this Agreement shall be valid and enforceable to the fullest extent permitted by
law.
13.10 HEADINGS. Headings at the beginning of each numbered Section of this
Agreement are solely for the convenience of the parties and are not a part of
this Agreement.
13.11 MERGER OF PRIOR AGREEMENTS AND UNDERSTANDINGS. This Agreement, and
other documents incorporated herein by reference contain the entire
understanding between the parties relating to the transaction contemplated
hereby and all prior or contemporaneous agreements, understandings,
representations and statements, oral or written, are merged herein and shall be
of no further force or effect.
13.12 EXECUTION IN COUNTERPART. This Agreement and any modifications,
amendments or supplements thereto may be executed in several counterparts, and
all so executed shall constitute one agreement binding on all parties hereto,
notwithstanding that all parties are not signatories to the original or the same
counterpart.
13.13 SURVIVAL. This Agreement and all covenants, representations and
warranties contained herein shall survive the Closing and this Agreement shall
remain a binding contract between the parties hereto.
13.14 NOTICES. All notices under this Agreement shall be effective upon:
(i) personal delivery to Buyer or Seller, as the case may be; or (ii) actual
receipt if delivered by facsimile transmission so long as the original notice is
deposited in overnight mail (Express Mail) or overnight courier service (e.g.,
Airborne, Federal Express, etc.); (iii) the next business day after deposit with
a reputable overnight courier service; or (iv) three (3) business days after
deposit in the United States mail, registered, certified, postage fully prepaid
and addressed to the respective parties as follows:
To the Seller: Chi-Chi's, Inc.
c/o Family Restaurants, Inc.
18831 Von Karman, Suite 400
Irvine, California 92612
Attn: Michael E. Malanga
Fax: (714) 724-9914
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<PAGE>
With a copy to: Family Restaurants, Inc.
18831 Von Karman Avenue
Irvine, California 92612
Attn: Todd E. Doyle, Esq.
General Counsel
Fax: (714) 757-8076
With a copy to: Rutan & Tucker
611 Anton Boulevard, Suite 1400
Costa Mesa, California 92626
Attn: F. Kevin Brazil, Esq.
Fax: (714) 546-9035
To the Buyer: Shells Seafood Restaurants, Inc.
16313 North Dale Mabry, Suite 100
Tampa, Florida 33618
Attn: Mr. Dan Parz
Fax: (813) 960-9059
With a copy to: Fulbright & Jaworski LLP
666 Fifth Avenue, 31st Floor
New York, New York 10103-3198
Attn: Sheldon G. Nussbaum, Esq.
Fax: (212) 752-5958
13.15 NO RESPONSE TO REQUEST FOR CONSENT. Anywhere in this Agreement where
either party is obligated to not unreasonably withhold any consent required
hereunder, such consent shall also not be unreasonably delayed.
13.16 EXHIBITS. EXHIBITS "A-1" through "I" inclusive, and SCHEDULES 1.1A,
1.1B, 1.1C, 1.1D, 1.1E, 1.1F, 1.1G, 1.1B(iii), 2.2, 3.4A, 3.4B, 3.4C, 3.4D, 6.9,
8.2F and 8.2G attached hereto, are incorporated herein by this reference.
IN WITNESS WHEREOF, the parties hereto have executed this Asset Purchase
And Sale Agreement And Escrow Instructions as of the date set forth above.
CHI-CHI's, INC.,
a Delaware corporation
By /s/ ILLEGIBLE
--------------------
Its: Vice President
"Seller"
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SHELLS SEAFOOD RESTAURANTS, INC.,
a Delaware corporation
By: /s/ W.E. HATTAWAY
---------------------
Its: President 3-2-98
-----------------
By: /s/ ILLEGIBLE
----------------------
Its: Secretary 3-12-98
------------------
"Buyer"
-32-
EXHIBIT 10.48
FIRST AMENDMENT
THIS FIRST AMENDMENT TO ASSET PURCHASE AND SALE OF AGREEMENT AND ESCROW
INSTRUCTIONS ("Amendment") is made as of this 9th day of June, 1998, by and
between CHI-CHI's, INC., a Delaware corporation , formerly known as Chi-Chi's
USA, Inc. ("Seller") and SHELLS SEAFOOD RESTAURANTS, INC., a Delaware
corporation ("Buyer").
RECITALS
A. Buyer and Seller are parties to that certain Asset Purchase and Sale of
Agreement and Escrow Instructions dated March 12, 1998, ("Original Agreement"),
involving the purchase and/or lease of certain real property and personal
property located in the State of Illinois and most particularly described in the
Original Agreement in connection with Seller's transfer of the operation of
certain restaurants to Buyer.
B. The Original Agreement, as amended by this Amendment, shall hereinafter
be referred to as the "Agreement."
C. All capitalized terms not otherwise defined in this Amendment shall have
the same meaning as in the Original Agreement.
D. Buyer and Seller hereby mutually desire to amend the terms of the
Original Agreement as more particularly provided herein.
NOW, THEREFORE, in consideration of the mutual covenants, promises and
undertakings set forth herein, Buyer and Seller hereby agree as follows:
1. TERMINATION OF AGREEMENT WITH RESPECT TO THE DEEARFIELD PROPERTY.
Pursuant to Buyer's Notice dated May 28, 1998, Buyer has disapproved the
Deerfield property and has terminated the Original Agreement with respect to the
Deerfield Property. Buyer and Seller acknowledge that pursuant to Section 3.1 of
the Original Agreement, the Purchase Price shall be reduced by One Million
Dollars ($1,000,000.00), the amount allocated to the Deerfield Property in
Schedule 3.4A to the Original Agreement to the sum of Two Million One Hundred
Thousands Dollars ($2,100,000.00). In accordance with Article 6 of the Original
Agreement, the Agreement shall continue in full force and effect for all other
Fee Properties and Premises.
2. CLOSING SCHEDULE.. Section 2.2 of the Original Agreement shall be
amended such that the number of Restaurants being transferred at a time and the
specified order is as follows:
First Closing: Bloomington Property, Oakbrook Terrace Premises, and
Carpentersville Premises
Second Closing: Streamwood Premises
-1-
<PAGE>
Third Closing: Woodridge Premises and Springfield Property.
3. CREDIT TO PURCHASE PRICE FOR BLOOMINGTON PROPERTY AND SPRINGFIELD
PROPERTY. Buyer has objected to the physical condition of the Bloomington
Property and Springfield Property pursuant to Buyer's Notice dated May 28, 1998.
In consideration of Buyer's acceptance of the Bloomington property and
Springfield Property in their current conditions, an amount equal to Twelve
Thousand Five Hundred Dollars ($12,500.00) shall be credited by Seller to the
Purchase Price allocated to each of the Bloomington Property and the Springfield
Property in Schedule 3.4B and Scheule 3.4C, respectively for an aggregate credit
of Twenty-Five Thousand Dollars ($25,000.00). Such credit shall be given at the
time and in the event the Closing for such Fee Property occurs in accordance
with the terms of the Agreement. Buyer and Seller acknowledge that the "AS-IS"
provisions contained in Section 8.3 of the Original Agreement continue in full
force and effect and that Buyer shall accept such Properties despite the
objections raised in Buyer's Notice dated May 28, 1998.
4. WOODRIDGE PREMISES CONTINGENCY. The Woodridge Premises contingency and
related Woodridge Lease Approval Date contained in Section 7.3 of the Original
Agreement shall be extended to August 10, 1998.
5. FULL FORCE AND EFFECT. Except as specifically set forth in this
Amendment, the Original Agreement remains unmodified and in full force and
effect.
6. COUNTERPARTS. This Amendment may be executed in counterparts which, when
taken together, shall constitute one executed document as though all signatures
appeared on one copy.
IN WITNESS WHEREOF, THIS FIRST AMENDMENT TO ASSET PURCHASE AND SALE OF
AGREEMENT AND ESCROW INSTRUCTIONS was executed as of the date first above
written.
CHI-CHI's INC. SHELLS SEAFOOD RESTAURANTS,
A Delaware corporation INC., a Delaware corporation
By: /s/ ILLEGIBLE By: /s/ WE HATTAWAY
------------------------------ -------------------------
Its: Vice President Its: President
-------------------------- -----------------------
-2-
EXHIBIT 11
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
YEAR (53 WEEKS) ENDED JANUARY 3, 1999
Net income $ 831,117
Preferred share accretion (110,644)
===========
Net income for the computation of per share earnings $ 720,473
===========
Basic net income per share of common stock $ 0.16
===========
Diluted net income per share of common stock $ 0.15
===========
Weighted average common stock issued and outstanding 4,447,881
Options and warrants granted:
Number of Exercise Price
Date Exercisable Shares Per Share
April 23, 1996 360,793 $5.00 to $5.75 28,743
June 30, 1995 350,000 $ 3.15 215,774
June 30, 1995 75,000 $ 3.75 40,759
September 19, 1995 200,000 $ 3.50 114,777
February 1, 1996 150,000 $ 3.50 72,386
May 13, 1996 210,000 $ 6.00 37,732
---------
4,958,052
=========
* Diluted net income 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 contians 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> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JAN-03-1999
<CASH> 4,723,121
<SECURITIES> 0
<RECEIVABLES> 35,261
<ALLOWANCES> 0
<INVENTORY> 954,066
<CURRENT-ASSETS> 7,105,640
<PP&E> 28,839,046
<DEPRECIATION> (6,598,791)
<TOTAL-ASSETS> 34,895,474
<CURRENT-LIABILITIES> 11,152,897
<BONDS> 0
0
0
<COMMON> 44,539
<OTHER-SE> 16,415,208
<TOTAL-LIABILITY-AND-EQUITY> 34,895,474
<SALES> 83,733,831
<TOTAL-REVENUES> 84,149,214
<CGS> 29,341,688
<TOTAL-COSTS> 82,246,445
<OTHER-EXPENSES> (196,968)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (340,684)
<INCOME-PRETAX> 1,365,117
<INCOME-TAX> 158,000
<INCOME-CONTINUING> 1,523,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (692,000)
<NET-INCOME> 831,117
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
