|
Prospectus
Supplement
(To
Prospectus dated October 7, 2005)
|
Filed
Pursuant to Rule 424(b)(3) and 424(c)
Commission
File No. 333-126487
|
27,772,411
Shares
Common
Stock
This
prospectus supplement supplements the prospectus dated October 7, 2005, which
relates to the shares of our common stock that may be sold by the selling
stockholders named therein.
This
prospectus supplement should be read in connection with, and may not be
delivered or utilized without, the prospectus dated October 7, 2005, and
the
prospectus supplements dated November 2, 2005, December 1, 2005, December
2,
2005, March 23, 2006, April 7, 2006, April 27, 2006, May 1, 2006, August
2,
2006, August 3, 2006, August 4, 2006, August 28, 2006, August 29, 2006 and
August 30, 2006. This prospectus supplement is qualified by reference to
the
prospectus and the prospectus supplements, except to the extent that the
information in this prospectus supplement updates or supersedes the information
contained in the prospectus dated October 7, 2005, or the prospectus supplements
dated November 2, 2005, December 1, 2005, December 2, 2005, March 23, 2006,
April 7, 2006, April 27, 2006, May 1, 2006, August 2, 2006, August 3, 2006,
August 4, 2006, August 28, 2006, August 29, 2006 and August 30,
2006.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
supplement is truthful or complete. Any representation to the contrary is
a
criminal offense.
The
date
of this prospectus supplement is April 10, 2007
Explanatory
Note
Attached
to this prospectus supplement are the following documents filed by the Shells
Seafood Restaurants, Inc. (the “Company”) pursuant to Sections 13 or 15(d) of
the Securities Act of 1934, as amended:
|
(i)
|
the
Company’s Current Report on Form 8K, dated September 28,
2006;
|
|
(ii)
|
the
Company’s Current Report on Form 8K, dated October 27,
2006;
|
|
(iii)
|
the
Company’s Current Report on Form 8K, dated October 30,
2006;
|
|
(iv)
|
the
Company’s Amended Quarterly Report on Form 10Q/A for the quarter ended
October 2, 2005;
|
|
(v)
|
the
Company’s Quarterly Report on Form 10Q for the quarter ended October
1,
2006;
|
|
(vi)
|
the
Company’s Current Report on Form 8K, dated December 21,
2006;
|
|
(vii)
|
the
Company’s Current Report on Form 8K, dated December 20, 2006;
|
|
(viii)
|
the
Company’s Current Report on Form 8K, dated March 30, 2007;
and
|
|
(ix)
|
the
Company’s Annual Report on Form 10K for the year ended December 31,
2006.
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
__________________________________________
FORM
8-K
__________________________________________
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date
of
Report (Date of earliest event reported) September
28, 2006
Shells
Seafood Restaurants, Inc.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
0-28258
|
65-0427966
|
||
|
(State
or Other Jurisdiction
of
Incorporation)
|
(Commission
File
Number)
|
(IRS
Employer
Identification
No.)
|
||
|
16313
N. Dale Mabry Hwy, Suite 100, Tampa,
FL
|
33618
|
|||
|
(Address
of Principal Executive
Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (813)
961-0944
Not
Applicable
(Former
Name or Former Address, if Changed Since Last Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2 below):
| [ ] |
Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
|
| [ ] |
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
| [ ] |
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR
240.14d-2(b))
|
| [ ] |
Pre-commencement
communications pursuant to Rule 13e-4 (c) under the Exchange Act
(17 CFR
240.13e-4(c))
|
Item
1.01 Entry into a Material Definitive Agreement.
On
September 28, 2006, Colonial Bank (the “Bank”) agreed to renew the bank credit
facility with Shells Seafood Restaurants, Inc. (the “Company”) in the principal
amount of $500,000. The credit facility is set to mature on October 28, 2006.
The credit facility originated in December 2005 and the full amount was
immediately drawn on to fund remodeling.
The
renewal of the credit facility is filed with this Report as Exhibit 10.1
and is
incorporated by reference into this Item 1.01. The preceding description
of the
terms of the renewal is qualified by reference to Exhibit 10.1 to this
Report.
Item
9.01 Financial Statements and Exhibits.
| (d) |
Exhibits.
|
| Item No. | Description |
|
10.1
|
Renewal
letter on credit facility dated September 28,
2006
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
Date:
October 4, 2006
|
SHELLS
SEAFOOD RESTAURANTS, INC.
|
|
| |
|
|
| By: |
/s/
Warren R. Nelson
|
|
| Name: Warren R. Nelson | ||
|
Title:
Vice
President and Chief Financial
Officer
|
||
Exhibit
Index
| Item No. | Description |
|
10.1
|
Renewal
letter on credit facility dated September 28,
2006
|
EXHIBIT
10.1
September
28, 2006
Mr.
Warren R. Nelson
Shells
Seafood Restaurants, Inc.
16313
N.
Dale Mabry Hwy
Suite
100
Tampa,
FL
33618
| Re: |
Colonial
Bank, NA (the “Bank”)
|
Loan
to
Shells Seafood Restaurants, Inc. (“Shells”)
Dear
Mr.
Nelson:
This
letter will confirm that effective as of September 28, 2006, the Bank has
agreed
to renew Loan Number 8035494726 (the “Loan”) and the repayment of the Promissory
Note in the principal amount of $500,000 (the “Note”) issued thereunder from
September 28, 2006 to October 28, 2006. The Bank acknowledges and agrees
that no
Event of Default has occurred under the Loan or the Note from the date it
was
entered into through the date of hereof. Except as set forth above, all of
the
terms and conditions of the Loan and the Note remain in full force and effect.
Please
call me at 813-314-5285 with any questions.
Sincerely,
COLONIAL
BANK, NA
| By: /s/ David Ogburn |
| Name: J. David Ogburn |
| Title: Sr. Vice President |
An
Affiliate of The Colonial BancGroup, Inc.
400
North
Tampa Street, Suite 2500, Tampa, Florida 33602
Telephone
813/223-3880
www.colonialbank.com
AN
EQUAL
OPPORTUNITY EMPLOYER
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date
of
Report (Date of earliest event reported) October
27, 2006
Shells
Seafood Restaurants, Inc.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
0-28258
|
65-0427966
|
|
(State
or Other Jurisdiction of
Incorporation)
|
(Commission
File
Number)
|
(IRS
Employer Identification
No.)
|
|
16313
N. Dale Mabry Hwy, Suite 100,
Tampa, FL
|
33618
|
|
(Address
of Principal Executive
Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (813)
961-0944
Not
Applicable
(Former
Name or Former Address, if Changed Since Last Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2 below):
o
Written communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule
14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant
to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant
to Rule 13e-4 (c) under the Exchange Act (17 CFR 240.13e-4(c))
Item
1.01 Entry
into a Material Definitive Agreement.
The
information under Item 2.01 of this Current Report on Form 8-K is incorporated
under this Item 1.01 as if set forth herein.
Item
2.01 Completion
of Acquisition or Disposition of Assets.
On
October 27, 2006, Shells Seafood Restaurants, Inc. (the “Company”) completed a
sale and leaseback transaction (the “Sale and Leaseback Transaction”) with FRI
Fish LLC, pursuant to which the Company sold and simultaneously leased
back the
restaurant location at 725 East 3rd
Avenue,
New Smyrna Beach, Florida (the “New Smyrna Location”). In connection with the
Sale and Leaseback Transaction, the Company entered into a Purchase and
Sale
Agreement, dated October 27, 2006, with FRI Fish LLC (the “Purchase and Sale
Agreement”) pursuant to which it sold the New Smyrna Location to FRI Fish LLC
for $1.33 million. In addition, the Company entered into a Land and Building
Lease, dated October 27, 2006, with FRI Fish LLC (the “Lease Agreement”)
pursuant to which FRI Fish LLC agreed to lease the New Smyrna Location
to the
Company for a period of twenty years. FRI Fish LLC
is
affiliated with Drawbridge Global Funds, a beneficial owner of greater
than 5%
of the Company’s common stock. The consideration paid upon the consummation of
the Sale and Leaseback Transaction was determined based on arms’ length
negotiations between FRI Fish LLC and the Company. A copy of the Purchase
and
Sale Agreement and of the Lease Agreement are filed herewith as Exhibits
10.1
and 10.2, respectively.
Item
9.01 Financial
Statements and Exhibits.
| (d) |
Exhibits.
|
| 10.1 |
Purchase
and Sale Agreement, dated October 27, 2006, between the Company
and
FRI Fish, LLC.
|
| 10.2 |
Land
and Building Lease, dated October 27, 2006, between the Company
and
FRI Fish, LLC.
|
2
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
| SHELLS SEAFOOD RESTAURANTS, INC. | ||
| |
|
|
| Date: November 2, 2006 | By: | /s/ Warren R. Nelson |
|
Name:
Warren
R. Nelson
Title:
Vice
President and Chief Financial
Officer
|
||
3
Exhibit
10.1
PURCHASE
AND SALE AGREEMENT
BY
AND BETWEEN
SHELLS
OF NEW SMYRNA BEACH, INC.
AS
SELLER
AND
FRI
FISH, LLC
AS
BUYER
PURCHASE
AND SALE AGREEMENT
This
PURCHASE AND SALE AGREEMENT (“Agreement”)
is
entered into as of October 27, 2006,
by and
between SHELLS OF NEW SMYRNA BEACH, INC. (“Seller”),
and
FRI FISH, LLC, a Delaware limited liability company (“Buyer”).
Buyer
and Seller are from time to time referred to herein individually as a
“Party”,
and
collectively as the “Parties.”
RECITALS:
A. Seller
owns one (1) Shells restaurant real property (the
“Property”)
more
particularly described as
follows:
I. All
of
the “Real
Property”
(“Real
Property”),
collectively described as follows: good and indefeasible title in fee simple
to
the land described on Schedule
1
attached
hereto (collectively, the “Land”),
together with all rights and interests appurtenant thereto, including, without
limitation, Seller’s
right, title, and interest in and to all (A) adjacent streets, alleys,
rights-of-way and any adjacent strips or gores of real estate;
(B) buildings, structures and other improvements located on the
Land
(the
“Improvements”);
(C)
the leasehold interest for the parking area lease (“Parking Area Lease”)
adjoining the Land; and (D) the fixtures located at or in the Land or
Improvements, other than certain movable trade fixtures more particularly
described in the Master Lease Agreement (as defined below); and
II. The
following equipment located at any of the Real Property on the Closing Date
(collectively, the “Personal
Property”):
walk-in coolers/refrigerator, freezers, HVAC equipment and hoods.
B. Seller
desires to sell to Buyer, and Buyer desires to purchase from Seller, the
Property subject to the terms and conditions set forth in this
Agreement.
C. Upon
the
consummation of the transactions contemplated herein, Seller desires to lease
from Buyer, and Buyer desires to lease to Seller, the Property pursuant to
certain Lease Agreement (as defined below). Any capitalized term used herein
but
not defined herein shall have the meaning set forth in the form Lease Agreement
attached hereto as Exhibit
A .
AGREEMENT:
NOW,
THEREFORE, in consideration of the mutual covenants set forth herein, Seller
and
Buyer agree as follows:
1. Conveyance
of Property.
On the
terms and subject to the conditions set forth in this Agreement, at Closing
(as
hereinafter defined), Seller shall sell, convey and assign to Buyer, and
Buyer
shall buy and accept from Seller, the Property.
2. Purchase
Price.
Subject
to the terms of this Agreement, the purchase price (the “Purchase
Price”)
for
the Property shall be $1,333,333.34,
payable
in cash by Buyer to Seller at Closing. The Purchase Price shall be paid to
Landamerica
Title Company, Rambler
Road, Suite 1200, Dallas, TX 75231,
Attn: Nancy Shirar
(the
“Title
Company”)
to be
held in an escrow (the “Escrow”)
at
Title Company on behalf of the Parties and distributed by Title Company at
Closing as designated by closing instructions agreed upon by Buyer, Seller
and
Title Company prior to the Closing Date.
3. Property
Documents.
Not
more than five (5) business days following the date hereof, Seller shall
deliver
to Buyer, the documents set forth in subsections (a) through (n) of this
Section
3 (collectively, the “Property
Documents”),
if
available, or with respect to documents not in Seller’s possession and
referenced as subsections (a), (b), and (c), has engaged directly third parties
(including, without limitation, appraisers,
environmental consultants, Title Company and surveyors),
at
Buyer’s request,
in
connection with the preparation of Property Documents. The scope of any such
engagement with third parties shall be subject to Buyer’s prior written approval
(not to be unreasonably withheld).
(a) Commitment
for title insurance covering the fee estate in the Real Property and leasehold
estate with respect to the Parking Area Lease (“Title
Commitment”)
from
Title Company, setting forth the status of title to the Real Property, showing
all matters of record affecting the Real Property, together with a true,
complete and legible copy of all documents referred to in the Title
Commitment;
(b) Current
ALTA Land Title “As Built” Survey (“Survey”)
for
the Real Property, containing the certification set forth on Exhibit
B,
as the
same may be required to be modified (subject to Buyer’s consent, which shall not
be unreasonably withheld) to conform with requirements of particular
jurisdictions and surveys;
(c) Phase
I
site assessment (to ASTM Guidelines) for the Real Property (the “Site
Assessments”),
dated
no earlier than six (6) months prior to the Closing Date (as defined below);
a
reliance letter in favor of Buyer for the Site Assessment from the person
or
entity that prepared same; and all Phase II and other environmental assessment
and remediation reports in the possession or control of Seller regarding
the
Real Property and a reliance letter in favor of Buyer from the person or
entity
that prepared same;
(d) Evidence
of insurance covering the Property as required pursuant to the Lease
Agreement;
(e) Use
permit and any additional required governmental permits or licenses regarding
the construction, occupancy and operation of the Property;
(f) Certificate
of occupancy regarding the Real Property;
(g) Profit
and loss statements and balance sheets (consolidated and consolidating) for
Seller, and profit and loss statements regarding the Property, each covering
the
trailing twelve (12) month period, and for calendar years ending 2005, 2004
and
2003, and such other financial statements and information as Buyer reasonably
shall have requested regarding Seller and the Property;
(h) Any
engineering reports in Seller’s possession or control regarding the Real
Properties, including without limitation a description of any deferred
maintenance and repairs and an estimate of the cost thereof, and a reliance
letter in favor of Buyer for each such report from the person or entity that
prepared same;
(i) UCC,
litigation and tax lien searches from a commercially recognized search company
regarding the Property and Seller;
(j) Zoning
permits and regulations (if available) and other evidence of proper zoning
(e.g.
zoning letters or zoning reports), as available; and if legal non-conforming
uses exist, evidence that the improvements may be rebuilt to existing
specifications following a casualty or condemnation;
(k) Final
“As
Built” plans and specifications for the Real Property;
(l) Any
and
all studies, data, reports, agreements, licenses, leases, environmental
assessments, surveys, reports, documents, plans, maps, and permits in Seller’s
possession or control concerning the Property (to the extent not already
delivered to Buyer pursuant to subsections (a) - (k), above); and
(m) Such
other information regarding Seller or the Property that Buyer reasonably
may
have requested.
4. Right
of Entry, Inspection.
(a) From
and
including the date hereof through and including the Closing Date, Seller
shall
afford Buyer and its representatives a continuing right to inspect the Property
and the Property Documents and Seller hereby grants to Buyer and Buyer’s agents,
employees and consultants a nonexclusive license to enter upon the Real Property
for the purpose of allowing Buyer to conduct whatever soil and engineering
tests, feasibility studies, surveys and other physical examinations of the
Property Buyer deems appropriate, provided Buyer gives Seller prior notice
of
such intended entry. Buyer will not perform any invasive testing at any of
the
Property without Seller’s prior written consent, which shall not be unreasonably
withheld. Buyer shall at all times use reasonable efforts not to unreasonably
interfere with the conduct of Seller’s business at the Property. Buyer agrees to
provide copies to Seller of all reports, tests, and studies received by Seller
regarding the Real Property.
(b) In
the
event of any damage to the Property caused by Buyer, its agents, engineers,
employees or contractors, Buyer shall pay the cost incurred by Seller to
restore
the Property to the condition existing prior to the performance of such tests,
investigations or studies. Buyer shall protect, defend, indemnify and hold
Seller harmless from any and all liability, claims, losses, costs and expenses
(including, without limitation, reasonable attorneys’ fees and costs) suffered
or incurred by Seller for injury to persons or property caused by Buyer’s
investigations, studies, tests and inspections of the Property.
However,
Buyer shall have no liability for any liability,
claims, losses, costs and expenses
attributable to the acts or omissions of Seller or Seller’s agents, employees,
invitees or licensees or resulting from latent defects or Hazardous Materials
within, on, under or adjacent to the Property.
5. Title
and Other Defects.
(a) Buyer
shall have the right, at any time prior to the Closing Date (as defined in
Section 7 hereof), to deliver written notice to Seller objecting to any
material adverse matters reflected in the Survey or Title Commitment (any
such
writing, a “Title
Notice Letter”).
All
matters set forth in Survey or Title Commitment to which Buyer delivers a
Title
Notice Letter, and all matters which are listed on the Title Commitment as
requirements of Title Company to issue the applicable final title insurance
policy (other than those requirements which relate to documents or other
items
to be provided by Buyer), are referred to herein as “Disapproved
Exceptions.”
All
matters set forth in the Title Commitment or Survey which are not Disapproved
Exceptions are referred to herein as “Permitted
Exceptions.”
Seller, at its sole cost and expense, may elect to cure (to Buyer’s
satisfaction, in its sole discretion) or caused to be removed from the Title
Commitment all Disapproved Exceptions on or before the Closing Date. If Seller
does not cause all Disapproved Exceptions to be removed or cured (to Buyer’s
satisfaction, in its sole discretion) from the Title Commitment on or before
the
Closing Date, Buyer may elect, in its sole discretion, to either (i) purchase
the Property without a reduction in the Purchase Price, or (ii) terminate
this
Agreement.
(b) In
addition Buyer’s right to notify Seller of any Disapproved Exceptions (as
described in subsection 5(a), above), Buyer shall have the right, at any
time
prior to the Closing Date, to deliver written notice to Seller objecting
to any
other material adverse matters regarding the Property, including
without limitation regarding the physical condition, legal or zoning condition,
location or sales volume of the Property. If
Seller
does not cause all such matters to be cured (to Buyer’s satisfaction, in its
reasonable discretion) on or before the Closing Date for the Property,
then
Buyer may elect, in its sole discretion, to either (i)
purchase the Property without a reduction in the Purchase Price; or (ii)
terminate this Agreement.
6. Representations,
Warranties and Additional Covenants.
(a) Seller’s
Representations and Warranties.
Seller
hereby represents and warrants to Buyer that as of the date of this Agreement
and as of the Closing:
(i) Qualification
and Authority.
Shells
of
New Smyrna Beach, Inc., is a Florida corporation duly
organized, validly existing and in good standing under the laws of the state
of
Florida. Seller has the right, power, and authority to execute, deliver,
and
perform this Agreement. This Agreement, when executed and delivered by Seller
and Buyer, shall constitute the valid and binding agreement of Seller, and
shall
be enforceable against Seller in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors’ rights generally and by general equitable principles. All requisite
authorizations, consents, resolutions and actions on the part of Seller have
been obtained, adopted or taken, as applicable, by Seller (and its affiliates
as
and if required) in connection with making and entering into this Agreement
and
the consummation of the purchase and sale provided for herein, and no consents
or approvals are required from any party which is not a party to this Agreement
in order to consummate such purchase and sale. Neither this Agreement nor
the
consummation of any of the transactions contemplated hereby violates or shall
violate any provision of any agreement or document to which Seller is a party
or
to which Seller is bound.
(ii) Bankruptcy.
Neither
Seller nor any entity or person
in
Control of, having Control over, or under common Control with
Seller,
regardless of the number of tiers of ownership, is bankrupt under the Federal
Bankruptcy Code, or has filed for protection or relief under any
applicable
bankruptcy
or
creditor protection statute or has been threatened by creditors with an
involuntary application of any applicable bankruptcy or creditor protection
statute. Seller
is not
entering into the transactions described in
this
Agreement
with an
intent to defraud any creditor or to prefer the rights of one creditor over
any
other. Seller and Buyer have negotiated this Agreement at arms-length and
the
consideration to be paid represents the fair market value for the assets
to be
transferred. As used in this Agreement, “Control”
means
ownership of voting securities sufficient to elect a majority of the board
of
directors of a corporation, or analogous ownership interests of non-corporate
entities.
(iii) Parking
Area Lease.
The
Parking Area Lease is in full force and effect, no rent or additional rent
has
been prepaid under the Parking Area Lease; there are no defaults under the
Parking Area Lease, nor has any act or omission occurred that would be a
default
but for the giving of notice and/or the passage of time; the current term
of the
Parking Area Lease commenced on October 1, 1978 and is scheduled to expire
on
September 30, 2028; the Real Property is free of any right of possession
or
claim of right of possession of any party other than Seller pursuant to the
Parking Area Lease, and to Seller’s knowledge there are no leases or occupancy
agreements currently affecting any portion of any of the Real Property other
than the Parking Area Lease.
(iv) Compliance
With Laws; Zoning.
Except
as set forth in Schedule 6(a)(iv), to Seller’s knowledge, without inquiry, (A)
the
Property is in material compliance with all applicable zoning, subdivision
and
land use laws, regulations and ordinances, all applicable health, fire, and
building codes, and all other laws applicable to the Property, including
without
limitation the Americans with Disabilities Act (but excluding Environmental
Laws, which are discussed below); (B) there are no illegal activities relating
to controlled substances on the Real Property, (C) all required permits,
licenses and certificates for the lawful use and operation of the Property,
including, but not limited to, certificates of occupancy, or the equivalent,
have been obtained and are current and in full force and effect; (D) in the
event that all or any part of the Improvements located on the Real Property
are
destroyed or damaged, said Improvements can be legally reconstructed to their
condition prior to such damage or destruction, and thereafter exist for the
same
use without violating any zoning or other ordinances applicable thereto and
without the necessity of obtaining any variances or special permits, other
than
customary demolition, building and other construction related permits; (E)
the
Real Property, together with the Parking Area Lease, contains enough permanent
parking spaces (both regular spaces and handicap spaces) to satisfy all
requirements imposed by applicable laws with respect to parking; (F) no legal
proceedings are pending or, to the best knowledge of Seller, threatened with
respect to the zoning of the Real Property; and (G) neither the zoning nor
any
other right to construct, use or operate the Real Property is in any way
dependent upon or related to any real estate other than such Real
Property.
(v) Property
Condition; Defects.
Except
as set forth in Schedule 6(a)(v), to Seller’s knowledge, without
inquiry,
(A)
there is no latent or patent structural or other material defect or deficiency
in the Property; (B) city water supply, storm and sanitary sewers, and
electrical, gas and telephone facilities are available to the Real Property
within the boundary lines of such Real Property, are sufficient to meet the
reasonable needs of the Real Property as presently contemplated to be used,
and
no other utility facilities are necessary to meet the reasonable needs of
the
Real Property as presently contemplated; (C) no part of the Real Property
is
within a flood plain and none of the Improvements create encroachment over,
across or upon the Real Property’s boundary lines, rights of way or easements,
and no building or other improvements on adjoining land create such an
encroachment; (D) access to the Real Property for the current and contemplated
uses thereof is provided by means of dedicated, all weather public roads
and
streets which are physically and legally open for use by the public, or by
private easements which are insured parcels under the applicable Title
Commitment or Title Policy; and (E) any liquid or solid waste disposal, septic
or sewer system located at the Real Property is in good and safe condition
and
repair and in compliance with all applicable law.
(vi) Taxes.
All
federal, state and local tax returns and reports of Seller required to be
filed
have been timely filed, and all taxes, assessments, fees and other governmental
charges (including any payments in lieu of taxes) upon Seller and upon its
properties, assets, income and franchises which are due and payable have
been
paid when due and payable, except for those taxes which are being contested
in
good faith by appropriate proceedings and for which adequate reserves have
been
established. There
is
not presently pending (and to the best of Seller’s knowledge, there is not
contemplated) any special assessment against the Property or any part thereof.
No tax liens have been filed and to the best knowledge of Seller, no claims
are
being asserted with respect to any such taxes. The charges, accruals and
reserves on the books of Seller in respect of any taxes or other governmental
charges are in accordance with generally accepted accounting principles,
consistently applied.
(vii) Contractual
Obligations.
To
Seller’s knowledge, Seller is not in default in the performance, observance or
fulfillment of any of the material obligations, covenants or conditions
contained in any material contractual obligation of Seller beyond any applicable
notice and cure period, and no condition exists that, with the giving of
notice
or the lapse of time or both, would constitute such a default.
(viii) Disclosure.
No
financial statements or any other document, certificate or written statement
furnished to Buyer by Seller and, to the best knowledge of Seller, no document
or statement furnished by any third party on behalf of Seller, for use in
connection with this Agreement or the transactions contemplated herein contains
any untrue representation, warranty or statement of a material fact, and
none
omits or will omit to state a material fact necessary in order to make the
statements contained herein or therein not misleading. There is no material
fact
known to Seller that has had or will have a Material Adverse Effect and that
has
not been disclosed in writing to Buyer and Seller. As used herein, “Material
Adverse Effect” means (A) a material adverse effect upon the business,
operations, properties, assets or condition (financial or otherwise) of Seller
with respect to such party taken as a whole, or (B) the material impairment
of
the ability of Seller to perform its material obligations under any of the
Transaction Documents (as defined in Section 7, below) or (C) the material
impairment of Buyer’s rights or remedies under any of the Transaction Documents.
In determining whether any individual event would result in a Material Adverse
Effect, notwithstanding that such event does not of itself have such effect,
a
Material Adverse Effect shall be deemed to have occurred if the cumulative
effect of such event and all other then occurring events and existing conditions
would result in a Material Adverse Effect.
(ix) Suits,
Judgments and Liens.
Except
as expressly set forth on Schedule
6(a)(ix),
(A)
there are no lawsuits,
claims, suits, or
legal,
administrative or other proceedings
or investigations pending or, to the best of Seller’s knowledge, after due and
diligent inquiry, threatened
against or affecting
Seller or the Property (including, without limitation eminent domain or
condemnation proceedings), nor to the best of Seller’s knowledge after due and
diligent inquiry, is there any
basis
for
any of the same, and there are no lawsuits, suits or
legal,
administrative or other
proceedings pending in which Seller is the plaintiff or claimant and which
relate to the Property;
and (B)
there is no action, suit or
legal,
administrative or other proceeding
pending or, to the
best
of Seller’s knowledge, after due and diligent inquiry, threatened which
questions the legality or propriety of the transactions contemplated
by the
Transaction Documents.
(x) Environmental
Laws; Hazardous Materials.
Except
as set forth in Schedule 6(a)(x), to Seller’s knowledge, without inquiry, (A)
the Property is not in violation or is currently under investigation
for any
violation, of any Environmental Laws; (B) the Property has not been subject
to
an unlawful deposit or a deposit that required investigation or remediation
beyond immediate remediation of de minimis spills of any Hazardous Materials;
(C) except in compliance with Environmental Laws, neither Seller nor any
third
party has used, generated, manufactured, stored or disposed in, at, on, under
or
about the Property or transported to or from the Property any Hazardous
Materials; (D) there has been no release, discharge or migration of any
Hazardous Materials from, into, on, under or about the Property in violation
of
Environmental Laws; (E) there is no fact, condition or circumstance governed
by
Environmental Laws that would materially impair, limit or restrict the use
of
the Property for its current intended business purpose or its intended use
as
described in the Lease Agreement; and (F) there is no amount of any mold
at the
Property that would materially impair, limit or restrict the use of any Property
for its current intended business purpose or its intended use as described
in
the Lease Agreement.
(b) Buyer’s
Representations and Warranties - Qualification and Authority.
Buyer
hereby represents and warrants to Seller that as of the date of this Agreement
and as of the Closing, Buyer is a Delaware limited liability company duly
organized, validly existing and in good standing under the laws of all of
the
states where the Real Properties are located. Buyer has the right, power,
and
authority to execute, deliver, and perform this Agreement. This Agreement,
when
executed and delivered by Buyer and Seller, shall constitute the valid and
binding agreement of Buyer, and shall be enforceable against Buyer in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the
enforcement of creditors’ rights generally and by general equitable principles.
All requisite authorizations, consents, resolutions and actions on the part
of
Buyer, have been obtained, adopted or taken, as applicable, by Buyer (and
its
affiliates, as and if required) in connection with making and entering into
this
Agreement and the consummation of the purchase and sale provided for herein,
and
no consents or approvals are required from any party which is not a party
to
this Agreement in order to consummate such purchase and sale. Neither this
Agreement nor the consummation of any of the transactions contemplated hereby
violates or shall violate any provision of any agreement or document to which
Buyer is a party or to which Buyer is bound.
(c) Additional
Covenants of Seller Prior to Closing.
Seller
shall prior to Closing and in addition to the covenants set forth elsewhere
in
this Agreement:
(i) Maintain
insurance coverage for the Improvements, insuring against all risks of physical
loss or damage, subject to standard exclusions, in an amount equal to the
actual
replacement cost of such Improvements;
(ii) Not
permit any encumbrance, charge or lien to be created upon the Property after
the
date of this Agreement unless such encumbrance, charge or lien has been approved
in writing by Buyer, or caused by Buyer or its agents, or unless such monetary
encumbrance, charge or lien will be removed by Seller prior to the
Closing;
(iii) Not
execute or amend any lease after the date of this Agreement without the prior
written consent of Buyer, which consent may be withheld in Buyer’s sole and
absolute discretion;
(iv) Intentionally
omitted;
(v) Maintain
the Property in the manner in which the Property is currently maintained
and if
currently being renovated, complete such renovations in the ordinary course
of
business;
(vi) Promptly
notify Buyer in writing if any of the representations and warranties of Seller
set forth in this Agreement are no longer materially true and
correct;
(vii) Not
sell,
convey, assign, transfer, encumber or otherwise dispose of the Property,
and
shall not, without the prior written consent of Buyer, make any material
modifications or alterations to the Property after the date of this Agreement;
(viii) Comply,
in all material respects, and shall cause all persons using or occupying
the
Property or any part thereof to comply, in all material respects, with all
Environmental Laws applicable to the Property, or the use or occupancy thereof,
or any operations or activities therein or thereon;
(ix) Comply,
in all material respects, fully with all permits, licenses and approvals
required by all applicable Environmental Laws for the use and occupancy of,
and
all operations and activities in, the Property, and keep all such permits,
licenses and approvals in full force and effect until Closing; and
(x) Immediately
after receiving notice that any violation of any Environmental Laws may have
occurred at or about the Property, deliver written notice thereof to Buyer
with
a reasonably detailed description of the event, occurrence or condition in
question.
Buyer
and
Seller acknowledge and agree that none of the foregoing covenants shall survive
either termination of this Agreement or Closing, nor shall the foregoing
covenants limit any obligations of Seller under the Lease Agreement after
Closing.
7. Closing.
As used
herein, “Closing”
shall
be deemed to have occurred when the
Deed
has been delivered by Seller to Buyer for recordation in the Official Records
of
the County where the Real Property is located, title to the Property is conveyed
to Buyer, and possession of the Properties is delivered to Buyer, all in
accordance with the terms of this Agreement. Closing
shall occur on or before October 31, 2006 (“Closing
Date”).
On or
before the Closing Date:
(a) Buyer
shall deliver or cause to be delivered to Seller through Escrow all of the
following:
(i) The
Purchase Price in accordance with Section 2.
(ii) Four
(4)
counterpart originals of a Lease Agreement in the form attached hereto as
Exhibit
A (the
“Lease
Agreement”),
each
duly executed by Buyer.
(iii) Four
(4)
counterpart originals of the Collateral Assignment of Licenses, Permits,
Plans,
Contracts and Warranties in the form attached hereto as Exhibit D (collectively,
the “License Assignment”), each duly executed by Buyer.
(iv) If
applicable, four (4) originals of the Subordination, Non-Disturbance and
Attornment Agreement (Lease Agreement) in the form attached hereto as
Exhibit
F
for the
Lease Agreement (collectively, the “Lease
Subordination Agreements”),
duly
executed by Buyer, and duly notarized.
(v) Four
counterpart originals of the Assignment and Assumption Agreement for the
Parking
Area Lease (“Assignment of Lease”) in the form attached hereto as Exhibit E,
duly executed by Seller, Buyer and the lessor with respect to the Parking
Area
Lease;
(b) Seller
shall deliver or cause to be delivered to Buyer through Escrow all of the
following:
(i) Special
Warranty Deed in the form of Exhibit
H,
or a
substantially equivalent form complying with state-specific recording
requirements (each, a “Deed”;
collectively, the “Deeds”),
conveying to Buyer the Real Property subject only to the Permitted Exceptions,
duly executed by Seller and properly notarized and acknowledged;
(ii) Four
(4)
originals of the Bill of Sale conveying the Personal Property to Buyer, in
the
form of Exhibit I,
(the
“Bill
of Sale”),
each
duly executed by Seller;
(iii) Internal
Revenue Code Section 1445 Certification in the form of Exhibit J,
and any
state-specific withholding certificates reasonably required by Buyer, each
duly
executed by Seller;
(iv) Four
(4)
counterpart originals of the Lease Agreement, duly executed by
Seller.
(v) Four
(4)
counterpart originals of each of the License Assignments, each duly executed
by
Seller.
(vi) An
ALTA
Extended Coverage Owner’s Policy of Title Insurance and an ALTA Extended
Coverage Lender’s Policy of Title Insurance (insuring Buyer’s lender’s mortgage)
for the Property, in the form of the Title Commitment for such Property
previously approved by Buyer hereunder, subject only to the Permitted Exceptions
and in an amount equal to the purchase price of the Property, with such
endorsements as Buyer shall reasonably require, including, but not limited
to,
survey, access and zoning, and without exception for creditors’ rights
(collectively, the “Title
Policies”).
(vii) Evidence
reasonably satisfactory to Buyer and Title Company that Buyer is fully
authorized to have entered into this Agreement, and to consummate the
transactions contemplated herein, including without limitation selling the
Property to Buyer pursuant to the terms of this Agreement, and entering into
the
Lease Agreement.
(viii) The
amount of all fees and expenses of Buyer that Seller is obligated to pay
pursuant to subsection 8(b), to the extent not previously paid.
(ix) If
applicable, four (4) originals of each of the Lease Subordination Agreements,
duly executed by Seller, and duly notarized.
(xi) An
executed Estoppel Certificate in the form of Exhibit
I
with
respect to the Parking Area Lease.
(x) Four
(4)
counterpart originals of the Assignment of Lease.
(c) Seller
shall deliver to Buyer possession of the Property subject to the Lease
Agreement.
As
used
in this Agreement, “Transaction
Documents”
means,
collectively, this Agreement, the Lease Agreement, the Assignment of Lease,
the
License Assignment, the Deed, the Bill of Sale and the Lease Subordination
Agreements.
8. Prorations;
Fees and Costs.
(a) No
proration shall be made of real estate and personal property taxes, utility
charges and maintenance expenses with respect to the Property (the Parties
acknowledging that Seller shall be responsible for all such charges, taxes
and
expenses under the Lease Agreement). Rental payments under the Lease Agreement
shall be prorated as of the Closing Date such that Seller shall prepay a
prorated portion of the rent applicable to the month in which the Closing
occurs, as contemplated by the Lease Agreement.
(b) Seller
shall pay (i) all closing fees and expenses, including without limitation
all
escrow fees, recording costs (including, without limitation mortgage recording
costs) and applicable deed stamp taxes, mortgage taxes, and transfer taxes
for
the Property (including, without limitation, all Personal Property relating
thereto); (ii) all fees and expenses associated with the preparation of all
Property Documents, including without limitation Title Commitment and Site
Assessment; and (iii) all premiums for the Title Policy, all mortgagee title
policies, and all final Surveys.
9. Conditions
to Closing.
(a) Conditions
to Buyer’s Obligations.
The
Closing and Buyer’s obligation to purchase the Property is subject to the
satisfaction of the following conditions or Buyer’s written waiver of such
conditions on or before the Closing Date. Buyer may waive in writing any
or all
of such conditions in its sole and absolute discretion.
(i) Seller
shall have performed all obligations to be performed by Seller prior to Closing
under this Agreement.
(ii) Seller’s
representations and warranties set forth in subsection 6(a) of this
Agreement shall be true and correct in all material respects as of the
Closing.
(iii) Title
Company shall be committed to issue to Buyer, as of the Closing Date, the
Title
Policy.
(iv) Intentionally
omitted.
(v) Without
limiting anything contained in clause 9(a)(ii), no order, stay, injunction
or
restraining order, pending or threatened litigation, law or regulation, or
any
other condition shall exist that in the reasonable determination of Buyer
could
have a Material Adverse Effect.
(b) Conditions
to Seller’s Obligations.
The
Closing and Seller’s obligation to consummate the transactions contemplated by
this Agreement are subject to the satisfaction of the following conditions
or
Seller’s written waiver of such conditions on or before the Closing Date. Seller
may waive in writing any or all of such conditions in its sole and absolute
discretion:
(i) Buyer
shall have performed all obligations to be performed by Buyer prior to Closing
under this Agreement.
(ii) Buyer’s
representations and warranties and covenants set forth in subsection 6(b)
of
this Agreement shall be true and correct in all material respects as of the
Closing.
10. Notices.
Any
notice provided or permitted to be given under this Agreement must be in
writing
and may be served by depositing same in the United States mail, addressed
to the
Party to be notified, postage prepaid and certified, with return receipt
requested, by delivering the same in person to such Party (including express
or
courier service), or by delivering the same by confirmed facsimile. Notice
given
in accordance herewith shall be effective upon the earlier of (a) receipt
at the
address of the addressee, (b) the second day following deposit of same in
the
United States mail as provided for herein, regardless of whether same is
actually received, or (c) the second attempt at delivery, as evidenced by
the
regular records of the person or entity attempting delivery, regardless of
whether the same is actually received. For purposes of notice, the addresses
of
the Parties shall be as follows:
|
If
to Seller:
|
16313
North Dale Mabry Hwy, Ste 100
|
| Tampa, Florida 33618 |
| Attn: Mr. Warren Nelson |
With
a
copy to:
Fowler
White Boggs Banker, P.A.
501
East
Kennedy Boulevard, Ste 1700
Tampa,
Florida 33602
Attn:
Jeffrey C. Shannon, Esq.
|
If
to Buyer:
|
Fortress
Realty Management, LLC
|
| 5221 N O’Connor, Suite 700 |
| Irving Texas 75039 |
Attn:
David Pettijohn
Telephone:
972-532-4340
Facsimile:
972-532-4343
and
a
copy to:
Richard
Wilensky, Esq.
3109
Carlisle, Suite 100
Dallas,
Texas 75204
Telephone:
214-220-2130
Facsimile:
214-220-2131
Either
Party may change its address for notice by giving written notice thereof
to the
other Party in accordance with the provisions of this Section 10.
11. Commissions.
Seller
and Buyer
each (a)
represent to the other Party that such representing Party has dealt with
no
broker or brokers in connection with the negotiation, execution and delivery
of
this Agreement or the sale of the Property contemplated herein, and (b) hereby
indemnifies, defends, protects (with counsel selected by the other Party)
and
holds such other Party wholly free and harmless of, from and against any
and all
claims or demands for any and all brokerage commissions and/or finder’s fees due
or alleged to be due as a result of any agreement or purported agreement
made by
such indemnifying Party.
12. Assigns.
This
Agreement shall inure to the benefit of and be binding on the Parties hereto
and
their respective heirs, legal representatives, successors and assigns. This
Agreement may not be assigned by Seller without the prior written consent
of
Buyer, which Buyer may withhold in its sole and absolute discretion. This
Agreement may be assigned by Buyer without the consent of Seller provided
that
Buyer delivers to Seller written notice of such assignment. Notwithstanding
the
foregoing, upon any assignment of this Agreement by Buyer, Buyer shall not
be
relieved of liability for the performance of any obligation of Buyer contained
in this Agreement unless and until Buyer’s assignee shall have assumed in
writing all of the duties and obligations of Buyer hereunder.
13. Destruction,
Damage or Taking Before Closing.
(a) In
the
event of damage to or destruction of all or any portion of the Property by
fire
or other casualty, Seller shall promptly deliver to Buyer written notice
thereof, which notice shall contain reasonable detail regarding such damage
or
destruction, including without limitation Seller’s reasonable estimate of the
amount required to be expended to repair or restore the damaged or destroyed
Property or portion thereof. If Seller does not cause all damaged or destroyed
Property to be repaired or replaced (to Buyer’s satisfaction, in its sole
discretion) on or before the Closing Date, then
Buyer may elect, in its sole discretion, to either (i) purchase
the Property subject to such damage or destruction without a reduction in
the
Purchase Price but with an assignment of available insurance proceeds, or;
(ii)
terminate this Agreement.
(b) In
the
event of an eminent domain taking or the issuance of a notice of an eminent
domain taking with respect to all or any portion of any Property, Seller
shall
promptly deliver to Buyer written notice thereof, which notice shall contain
reasonable detail regarding such taking (the “Taking
Notice”).
Within ten (10) business days after Buyer’s receipt of the Taking Notice,
Buyer
may
elect, in its sole discretion, to either (i)
purchase the Property subject to such taking without a reduction in the Purchase
Price, but with an assignment of all condemnation awards and proceeds, or;
(ii)
terminate this Agreement.
14. Termination;
Remedies; Seller Indemnity.
(a) Without
limiting anything contained in subsection 8(c), if the Closing does not occur
by
reason of Seller’s default hereunder that is not cured within ten (10) days
after Seller first has knowledge of such default, then Buyer shall be entitled
to pursue its right to specifically enforce this Agreement and to record
a
notice of pendency of action against the Property.
(b) Without
limiting anything contained in subsection 8(c), if the Closing does not occur
by
reason of Buyer’s default hereunder that is not cured within ten (10) days after
Buyer first has knowledge of such default,
then
Seller shall have the right as its sole and exclusive remedy to terminate
this
Agreement by notifying Buyer in writing thereof, in which case Buyer shall
pay
Seller $50,000.00
as
liquidated damages.
(c) In
addition to any and all other obligations of Seller under this Agreement
(including without limitation under any indemnity or similar provision set
forth
herein), and except as otherwise specifically provided in this Agreement
(including, without limitation, in subsection 14(b) hereof), Seller hereby
fully
and forever releases, discharges, acquits, indemnifies, protects, and agrees
to
defend (with counsel selected by Seller and approved by Buyer, such approval
not
to be unreasonably withheld) and hold Buyer, Buyer's members, partners,
trustees, ancillary trustees, officers, directors, shareholders, beneficiaries,
agents, employees, independent contractors and any person or entity
in
Control of, having Control over, or under common Control with Buyer, regardless
of the number of tiers of ownership (collectively, “Buyer’s
Affiliates”),
and
lenders to Buyer and to all Buyer’s Affiliates, wholly free and harmless of,
from and against any and all claims, demands, actions, causes of action,
settlements, obligations, duties, indebtedness, debts, controversies, losses,
remedies, choses in action, liabilities, costs, penalties, fines, damages,
injury, judgments, forfeiture, losses (including without limitation diminution
in the value of the Properties) or expenses (including without limitation
attorneys' fees, consultant fees, testing and investigation fees, expert
fees
and court costs), whether known or unknown, whether liquidated or unliquidated
(collectively, “Claims”),
arising out of this Agreement or any of the other Transaction Documents,
or any
of the transactions contemplated herein or therein; provided, however, that
the
foregoing indemnity shall not be applicable to the extent, and only to the
extent, any such Claims are directly attributable to the gross negligence
or
willful misconduct of Buyer, as determined by a final nonappealable judgment
by
a court of competent jurisdiction.
15. Disclosure.
(a) Buyer
and
Seller shall keep information regarding terms of this Agreement confidential,
except that each Party may disclose the terms this Agreement (i) to its,
and
its affiliates’, officers, directors, employees, accountants, agents, potential
financing sources, legal counsel and such other third parties as
reasonably necessary to effectuate the closing of the transaction contemplated
herein, and (ii) as required by law, administrative agency or court order.
Without limiting the foregoing, neither Party will announce or otherwise
make
public the terms of this transaction without the prior consent of the other
Party, which consent shall not be unreasonably withheld.
(b) Notwithstanding
anything to the contrary set forth herein, except as reasonably necessary
to
comply with applicable securities laws, any of Buyer and Seller, and each
employee, representative or other agent of such Party, may disclose to any
and
all persons, without limitation of any kind, the Tax Treatment and Tax Structure
of the transactions contemplated by this Agreement (collectively, the
“Transaction”)
and
all materials of any kind (including opinions or other tax analyses) that
are
provided to it relating to such Tax Treatment and Tax Structure. As used
in this
subsection, (i) “Tax
Treatment”
means,
and is strictly limited to, the purported or claimed U.S. federal income
tax
treatment of the Transaction, and does not include, without limitation, any
of
the following, in each case to the extent not related to the purported or
claimed U.S. federal income tax treatment of the Transaction: information
relating to the identity of any Party to the Transaction or any of such party’s
employees, representatives, or other agents; the existence and status of
negotiations between the Parties; and financial, business, legal or other
information regarding a Party (or any of its employees, representatives or
other
agents); and (ii) “Tax
Structure”
means,
and is strictly limited to, any fact that may be relevant to understanding
the
purported or claimed U.S. federal income tax treatment of the Transaction,
and
does not include, without limitation, any of the following, in each case
to the
extent not related to any fact that may be relevant to understanding the
purported or claimed U.S. federal income tax treatment of the Transaction:
information relating to the identity of any Party to the Transaction or any
of
such Party’s employees, representatives, or other agents; the existence and
status of negotiations between the Parties; and financial, business, legal
or
other information regarding a Party (or any of its employees, representatives
or
other agents). The authorization of tax disclosure set forth in this subsection
is retroactively effective to the commencement of the first discussions between
the parties regarding the Transaction. The foregoing provisions are meant
to be
interpreted so as to prevent the Transaction from being treated as offered
under
“conditions of confidentiality” within the meaning of the Internal Revenue Code
and the Treasury Regulations thereunder.
16. Further
Assurances.
Both
Seller and Buyer shall cooperate with one another and in a timely manner
execute
any and all additional documents, papers and other assurances, and shall
do any
and all acts reasonably necessary to give effect to the purchase and sale
provided for herein.
17. Severability.
If any
provision of this Agreement is adjudicated by a court having jurisdiction
over a
dispute arising herefrom to be invalid or otherwise unenforceable for any
reason, such invalidity or unenforceability shall not affect the other
provisions hereof and such remaining provisions shall continue in force and
effect to the full extent permitted by law.
18. Applicable
Law; Jurisdiction; Waiver of Jury Trial.
(a) This
Agreement shall be governed and construed in accordance with the laws of
the
State of New York without regard to conflicts of laws principles, and except
in
any action to specifically enforce performance of this Agreement, in which
event
the law of the state of the Real Property with respect to which such specific
performance is requested shall govern.
(b) SELLER
HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED
WITHIN
THE COUNTY OF NEW YORK, STATE OF NEW YORK OR WITHIN THE COUNTY AND STATE
IN
WHICH ANY PROPERTIES IS LOCATED AND IRREVOCABLY AGREES THAT, SUBJECT TO BUYER’S
ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
AGREEMENT SHALL BE LITIGATED IN SUCH COURTS. SELLER ACCEPTS FOR ITSELF AND
IN
CONNECTION WITH THE PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE
JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON
CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY
IN CONNECTION WITH THIS AGREEMENT.
(c) EACH
OF
BUYER AND SELLER, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY,
INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL,
WAIVES, RELINQUISHES AND FOREVER FORGOES THE RIGHT TO A TRIAL BY JURY IN
ANY
ACTION OR PROCEEDING (WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE) BASED
UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO THIS AGREEMENT. SELLER
ACKNOWLEDGES THAT THE PROVISIONS OF THIS SUBSECTION ARE A MATERIAL INDUCEMENT
TO
BUYER’S ENTERING INTO THE AGREEMENT.
19. Whole
Agreement; Modification.
Except
as provided below, this Agreement is the entire agreement between Seller
and
Buyer concerning the sale of the Property and no modification hereof or
subsequent agreement relative to the subject matter hereof shall be binding
on
either Party unless reduced to writing and signed by the Party to be bound.
All
Exhibits and Schedules attached hereto are incorporated herein by this reference
for all purposes.
20. Survival.
The
provisions of Sections 4, 6 (other than subsection 6(c)), 8, 11, 12 and 14
through 27 (inclusive), and subsection 7(b), shall survive Closing and any
termination of this Agreement for a period of six (6) months.
21. Time
of the Essence.
Time is
of the essence in the performance of each and every provision of this Agreement.
In the event that the last day for taking any action or serving notice under
this Agreement falls on a Saturday, Sunday or legal holiday, the time period
shall be extended until the following business day.
22. Counterparts.
This
Agreement may be executed in any number of counterparts, each of which shall
be
deemed an original, but all of which, taken together, shall constitute one
and
the same instrument. A facsimile or photocopy signature on this Agreement
or any
notice delivered hereunder shall have the same legal effect as an original
signature.
23. Attorneys’
Fees.
If any
action or proceeding is instituted to enforce or interpret any provision
of this
Agreement, the prevailing Party shall be entitled to recover its attorneys’ fees
and costs from the losing Party.
24. No
Waiver.
The
waiver by one Party of the performance of any covenant, condition or promise,
or
of the time for performing any act, under this Agreement shall not invalidate
this Agreement nor shall it be considered a waiver by such Party of any other
covenant, condition or promise, or of the time for performing any other act
required, under this Agreement. The exercise of any remedy for which this
Agreement provides shall not be a waiver of any remedy provided by law, and
the
provisions of this Agreement for any remedy shall not exclude any other remedies
unless they are expressly excluded.
25. Date
of Agreement.
All
references in this Agreement to “the date hereof” or similar references shall be
deemed to refer to the first date set forth above.
26. Transaction
Characterization.
The
Parties intend that the conveyance of the Properties to Buyer be an absolute
conveyance in effect as well as form, and the instruments to be delivered
at
Closing (including, without limitation, the Lease Agreement and the other
Transaction Documents) are not intended to serve or operate as a mortgage,
equitable mortgage, deed of trust, security agreement or financing or trust
arrangement of any kind. After the execution and delivery of the Deed, Seller
will have no legal or equitable interest or any other claim or interest in
the
Property other than as set forth in the Transaction Documents. Furthermore,
the
Parties intend for the Lease Agreement to be a true lease and not a transaction
creating a financing lease, capital lease, equitable mortgage, mortgage,
deed of
trust, security interest or other financing arrangement, and the economic
realities of the Lease Agreement are those of a true lease. Notwithstanding
the
existence of the Lease Agreement, neither Party shall contest the validity,
enforceability or characterization of the sale and purchase of the Property
by
Buyer pursuant to this Agreement as an absolute conveyance, and both Parties
shall support the intent expressed herein that the purchase of the Property
by
Buyer provides for an absolute conveyance and does not create a joint venture,
partnership, equitable mortgage, trust, financing device or arrangement,
security interest or the like, if and to the extent that any challenge
occurs.
IN
WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of the
date
first set forth above.
|
BUYER:
FRI FISH, LLC
a Delaware limited liability company
|
||
| |
|
|
| By: | ||
|
Name:________________________________
Title:_________________________________
|
||
|
SELLER:
SHELLS
OF NEW SMYRNA BEACH, INC.,
a
Florida corporation
|
||
| |
|
|
| By: | ||
|
Name:________________________________
Title:_________________________________
|
||
Attachments:
|
Schedule
1 -
|
The
Property
|
|
|
Schedule
6(a)(iii) -
|
Leases
|
|
|
Schedule
6(a)(iv) -
|
Laws
and Zoning
|
|
|
Schedule
6(a)(v) -
|
Property
Condition and Defects
|
|
|
Schedule
6(a)(ix) -
|
Suits
and Judgments
|
|
|
Schedule
6(a)(x) -
|
Environmental
Laws; Hazardous Materials
|
|
|
Exhibit
A -
|
Form
of Master Lease Agreement
|
|
|
Exhibit
B -
|
Form
of Survey Certification
|
|
|
Exhibit
C -
|
Intentionally
Deleted
|
|
|
Exhibit
D -
|
Form
of Assignment of License
|
|
|
Exhibit
E -
|
Form
of Assignment of Lease
|
|
|
Exhibit
F -
|
Form
of Special Warranty Deed
|
|
|
Exhibit
G -
|
Form
of Bill of Sale
|
|
|
Exhibit
H -
|
IRC
Section 1445 Certification
|
|
|
Exhibit
I -
|
Form
of Estoppel Certificate
|
SCHEDULE
1
THE
PROPERTY
725
E.
3rd
Ave.,
New Smyrna Beach, FL 32169
SCHEDULE
6(a)(iii)
LEASES
AND SUBLEASES
SCHEDULE
6(a)(iv)
LAWS
AND ZONING
SCHEDULE
6(a)(v)
PROPERTY
CONDITION AND DEFECTS
SCHEDULE
6(a)(ix)
SUITS
AND JUDGMENTS
SCHEDULE
6(a)(x)
ENVIRONMENTAL
LAWS; HAZARDOUS MATERIALS
EXHIBIT
A
FORM
OF LEASE AGREEMENT
EXHIBIT
B
FORM
OF SURVEY CERTIFICATION
SURVEYOR’S
CERTIFICATION
|
TO:
|
FORTRESS
REALTY INVESTMENTS, LLC;
and Landamerica Title Company.
|
The
undersigned certifies: that (s)he is a duly registered land surveyor of the
state of -________________; that this survey (the “Survey”) was made on the date
shown below of the property (the “Property”) specifically described in
__________________________ Title Insurance Company [Preliminary Title Report]
[Title Commitment] No. ______________ dated ________________ (the [“Report”]
[“Commitment”]); that the Survey was actually made upon the ground and was made
(i) in accordance with “Minimum Standard Detail Requirements for ALTA/ACSM Land
Title Surveys,” adopted by the ALTA, ACSM and NSPS in 1999, and includes Items
1, 2, 3, 4, 6, 7(a), 7(b)(1), 7(c), 8, 9, 10, 11(a), 13, 14, 15 and 16 of
Table
A thereof, and (ii) pursuant to the Accuracy Standards in effect on the date
of
this certification, the Positional Uncertainties resulting from the survey
measurements made on the Survey do not exceed the allowable Positional
Tolerance. The undersigned also certifies that (a) the Survey and the
information, courses and distances shown thereon are correct; (b) the Property
description in the [Report] [Commitment], the land delineated on the Survey,
and
the title lines and lines of actual possession are the same; (c) the size,
location, and type of buildings, structures, and other improvements are shown
on
this Survey and all are within the boundary lines of the Property; (d) all
set
back lines and the distance between the buildings and the Property lines
are
accurately shown thereon; (e) the zoning classification and the data shown
in
the Zoning Information table hereon was obtained by the undersigned from
the
source(s) indicated in the table and, except as identified hereon, there
are no
violations of zoning ordinances or restrictions with reference to the location
of all improvements situated on the Property; (f) except as delineated on
the
Survey, there are no easements, encroachments, uses, restrictions, or rights
of
way (visible, recorded, existing and proposed, including those that may be
shown
on recorded maps referred to, or of which the undersigned has been made aware
of
or are indicated in the [Report] [Commitment]); (g) the easements shown on
the
Survey are clearly delineated and identified with recording information;
(h) any
encroachments shown on the Survey have been measured and are shown thereon;
(i)
the names of all adjacent property owners are shown on the Survey; (j) all
utility services required for the operation of the Property and the buildings,
structures, and improvements located thereon, either enter the Property through
adjoining public streets, or this Survey shows the point of entry and location
of any utilities which pass through or are located on adjoining private land;
(k) this Survey shows the location and direction of all storm drainage systems;
(l) any discharge into streams, rivers, or other conveyance system is shown
on
this Survey; (m) the Property does not lie within any flood hazard areas
in
accordance with the document entitled “Department of Housing and Urban
Development, Federal Insurance Administration - Special Flood Hazard Area
Maps”;
(n) all curb cuts are shown on the Survey; (o) except as shown on this Survey,
all roads, streets, and highways shown thereon are completed and dedicated
and
accepted public ways, based upon information obtained from [insert
map/document or other source, etc.];
and (p)
the Property has access to a dedicated public street.
|
[Name] |
[Date] |
||
|
Registration
No._________________
Within
the state of _______________
Date
of Survey__________________
Date
of Last Revision_____________
|
EXHIBIT
C
INTENTIONALLY
DELETED
EXHIBIT
D
FORM
OF COLLATERAL ASSIGNMENT OF LICENSES, PERMITS, PLANS, CONTRACTS AND
WARRANTIES
THIS
COLLATERAL ASSIGNMENT OF LICENSES, PERMITS, PLANS, CONTRACTS AND WARRANTIES
(this “Assignment”)
is
made and entered into as of the ____ day of October, 2006, by SHELLS OF NEW
SMYRNA BEACH, INC. (“Assignor”),
in
favor of FRI FISH, LLC (“Assignee”);
WITNESSETH:
WHEREAS,
Assignor has this day conveyed to Assignee certain real property situate
in Polk
County, Florida, more particularly described on Exhibit
A
attached
hereto and made a part hereof, together with all improvements thereon (the
“Real
Property”);
and
WHEREAS,
Assignee, as landlord, has this day leased the Real Property to Assignor,
as
tenant, pursuant to a certain Land and Building Lease Agreement (the
“Lease”),
dated
as of the date hereof; and
WHEREAS,
in conjunction with the conveyance and lease of the Real Property, Assignor
has
agreed to assign all of its right, title and interest in and to certain
licenses, permits, plans, contracts and warranties relating to the design,
development, construction, ownership, operation, management and use of the
Real
Property as collateral security for the performance by Assignor of its
obligations as tenant under the Lease.
NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of
which are hereby acknowledged, and intending to be legally bound, the parties
agree as follows:
1. Assignment
of Licenses, Permits, Plans, Contracts and Warranties.
Assignor
does, to the extent permitted by law, hereby transfer, assign and set over
to
Assignee to the extent assignable all of Assignor’s right, title and interest in
and to (i) all general intangibles relating to the design, development,
construction, ownership, operation, management and use of the Real Property,
(ii) all certificates of occupancy, zoning variances, licenses, building,
use or
other permits, approvals, authorizations and consents obtained from and all
materials prepared for filing or filed with any governmental agency in
connection with the design, development, construction, ownership, operation,
management and use of the Real Property, (iii) all architectural drawings,
plans, specifications, soil tests, feasibility studies, appraisals, engineering
reports and similar materials relating to the Real Property, and (iv) all
contract rights (including without limitation rights to indemnification),
payment and performance bonds or warranties or guaranties relating to the
Real
Property (the items described in this 1 being hereinafter referred to as
the
“Licenses,
Permits, Plans, Contracts and Warranties”),
which
assignment shall not be deemed a present assignment but shall become effective
only upon the occurrence and during the continuation of an Event of Default
under the Lease.
2. Representations
and Warranties of Assignor respecting Licenses, Permits, Plans, Contracts
and
Warranties.
Assignor represents and warrants to Assignee that (i) the Licenses, Permits,
Plans, Contracts and Warranties are in full force and effect, (ii) Assignor
has
duly and punctually performed or caused to be performed all and singular
the
terms, covenants and conditions of the Licenses, Permits, Plans, Contracts
and
Warranties to be performed by or on behalf of Assignor, (iii) Assignor has
not
received any notice of default, nor is Assignor aware of any default (or
facts
which, with the passage of time would result in a default) under any of the
Licenses, Permits, Plans, Contracts and Warranties, (iv) Assignor has not
received any notice of non-renewal or revocation of any of the Licenses,
Permits, Plans, Contracts and Warranties and (v) Assignor has not sold,
assigned, transferred, mortgaged or pledged its right, title and interest
in any
of the Licenses, Permits, Plans, Contracts and Warranties.
3. Further
Assurances.
Assignor covenants with Assignee that it will execute or procure any additional
documents necessary to establish the rights of Assignee hereunder and shall,
at
the cost of Assignee, take such action as Assignee shall reasonably request
to
enforce any rights under any of the Licenses, Permits, Plans, Contracts and
Warranties that are, by their terms, not assignable to Assignee.
4. Binding
Effect.
This
Assignment shall be binding upon and inure to the benefit of Assignor, Assignee
and their respective successors and assigns.
IN
WITNESS WHEREOF, Assignor has executed this Assignment as of the date set
forth
above.
| ATTEST: | SHELLS OF NEW SMYRNA BEACH, INC. | ||||
| By: | By: | ||||
|
|
|
||||
| Name: | Name: | ||||
|
|
|
||||
| Its: | Its: | ||||
|
|
|
||||
(CORPORATE
SEAL)
EXHIBIT
E
FORM
OF ASSIGNMENT OF LEASE
EXHIBIT
F
FORM
OF SPECIAL WARRANTY DEED
_______________________________________
(“Grantor”) for and in consideration of the sum of Ten Dollars ($10.00) cash and
other good and valuable considerations to it in hand paid by
_________________________ (“Grantee”), the receipt and sufficiency of which are
hereby acknowledged and confessed, has GRANTED, BARGAINED, SOLD and CONVEYED,
and by these presents does GRANT, BARGAIN, SELL and CONVEY unto Grantee the
land
described in Exhibit
A
attached
hereto and made a part hereof for all purposes, together with all improvements
thereon (“Property”), subject to all subsisting matters of record that affect
the Property (“Permitted Exceptions”).
TO
HAVE
AND TO HOLD the Property, together with all and singular the rights and
appurtenances thereto in anywise belonging unto the said Grantee, its successors
and assigns, forever, subject to the Permitted Exceptions; and Grantor does
hereby bind itself, its successors and assigns, to WARRANT AND FOREVER DEFEND
all and singular the said Property, subject to the Permitted Exceptions,
unto
the said Grantee, its successors and assigns, against every person whomsoever
lawfully claiming or to claim the same or any part thereof, by, through,
or
under Grantor, but not otherwise.
EXECUTED
as of the ______ day of ____________________, 2006.
|
***,
a
***
|
||
| |
|
|
| By: | ||
|
Name:_______________________________
Title:________________________________
|
||
Grantee’s
Mailing Address:
| STATE OF | } |
| } | |
| COUNTY OF | } |
This
instrument was acknowledged before me on___________________,
2006,
by ____________________________, ____________________________
of______________________,
a
______________________________, on behalf of said
_______________________.
|
Notary Public, State of |
Attachments:
Exhibit
A
- Property
Description
EXHIBIT
G
FORM
OF BILL OF SALE
THAT
SHELLS OF NEW SMYRNA BEACH, INC. (“Assignor”), for and in consideration of the
sum of Ten and No/100 Dollars ($10.00) and other good and valuable consideration
to Assignor in hand paid by FRI FISH, LLC (“Assignee”), the receipt and
sufficiency of which are hereby acknowledged and confessed, has GRANTED,
BARGAINED, SOLD, CONVEYED and DELIVERED, and by these presents does GRANT,
BARGAIN, SELL, CONVEY and DELIVER unto the said Assignee all of Assignor’s
interest in the
walk-in coolers/refrigerator, HVAC equipment and hoods located at the Real
Property
described in Exhibit
A
attached
hereto.
EXECUTED
this ___ day of September, 2006.
|
ASSIGNOR:
SHELLS OF NEW SMYRNA BEACH, INC.
|
||
| |
|
|
| By: | ||
|
Name:________________________________
Title:_________________________________
|
||
EXHIBIT
H
IRC
SECTION 1445 CERTIFICATION
|
SUBJECT
PROPERTY:
|
That
certain tract of land (“Land”), situated in Polk County, State of Florida,
described by metes and bounds in Exhibit A
attached hereto.
|
| SELLER: | SHELLS OF NEW SMYRNA BEACH, INC. |
| PURCHASER: | FRI FISH, LLC |
To
inform
Purchaser that the withholding of tax is not required upon the disposition
of a
U. S. real property interest by Seller, the undersigned hereby certifies
the
following:
1. Seller
is
not a foreign corporation, foreign partnership, foreign trust or foreign
estate
(as those terms are defined in the Internal Revenue Code and Income Tax
Regulations);
2. Seller’s
U.S. employer identification number is_________________________,
and
3. Seller’s
office address is 16313
North Dale Mabry Hwy, Ste. 100, Tampa, Florida.
Seller
understands that this certification may be disclosed to the Internal Revenue
Service by Purchaser and that any false statement contained herein could
be
punished by fine, imprisonment, or both.
Under
penalties of perjury, I declare that I have examined this certification and
to
the best of my knowledge and belief, it is true, correct and complete, and
I
further declare that I have authority to sign this document.
[SIGNATURES
ON FOLLOWING PAGE]
EXECUTED
this _______ day of September, 2006.
|
SELLER:
SHELLS
OF NEW SMYRNA BEACH, INC.
|
||
| |
|
|
| By: | ||
|
Name:________________________________
Title:_________________________________
|
||
EXHIBIT
I
FORM
OF ESTOPPEL CERTIFICATE
The
undersigned,__________________,
whose
address is______________________________________represents
and certifies as follows:
1. The
undersigned is (i) the current landlord (“Landlord”) under that certain lease
(“Lease”) dated September
25, 1978
with
Shells
of New Smyrna Beach, Inc.
as
tenant, covering the property described therein (collectively the “Demised
Property”).
2. The
Lease
constitutes the only agreement (either written or oral) the undersigned has
with
respect to the Demised Property and any right of occupancy or use
thereof.
3. The
Lease
is in full force and effect and has not been assigned, subleased, supplemented,
modified or amended except as follows:
First
Amendment to Lease dated December 4, 1979;
Lease
Modification Agreement dated September 12, 1989;
Assignment
of Lessor’s Interest to National Life Insurance Co. dated July 24,
1984;
Assignment
of Lessor’s Interest to Ralph and Rose Sutton dated October 30,
1987;
Assignment
of Lessor’s Interest to Samuel R. Sutton and Robert Sutton, Co-Trustees, dated
December 19, 1992;
Assignment
of Lessee’s Interest to Chitwood Corporation dated December 5,
1979;
Assignment
of Lessee’s Interest to Southeast Bank of New Smyrna dated
12/18/1979;
Assignment
of Lessee’s Interest to James Saks dated November 26, 1989; and
Assignment
of Lessee’s Interest to Shells of New Smyrna Beach, inc. dated May 1,
1999.
4. The
undersigned presently owns the fee interest the Demised Property. Rent payable
under the Lease is current and no amounts are past due or outstanding. No
rent
has been paid by Tenant in advance. No security deposit is being held by
landlord.
5. The
annual Fixed Rent is the sum of Ten
Dollars
(US$10.00).
6. The
present Lease term expires on September
30, 2028
and
there are no options to renew.
7. There
are
no defaults under the Lease by Tenant or any events which with the passage
of
time or giving of notice or both will result in any such default. The
undersigned does not presently have (nor with the passage of time or giving
of
notice or both will have) any offset, charge, lien or claim under the
Lease.
8. The
Tenant occupies and has accepted possession of the Demised Property covered
by
the Lease. All obligations of Landlord and Tenant under the Lease required
to be
performed to date, including any improvements to be constructed by Landlord
(or
its predecessors or successors) or the granting of any free rent, rent credit,
offset, deductions, building allowance or rent reduction have been completed.
9. Landlord
has no personal liability under the Lease (recourse against Landlord being
limited to Landlord’s interest in the Demised Property).
10. The
undersigned is aware that third parties intend to rely upon this Certificate
and
the statements set forth herein and that the statements and facts set forth
above shall be binding on the undersigned
11. The
undersigned and the persons executing this Certificate on behalf of the
undersigned have the power and authority to execute and deliver this
Certificate.
| “LANDLORD” | ||
| |
|
|
| By: | ||
|
Name:________________________________
Title:_________________________________
|
||
Exhibit
10.2
LAND
AND BUILDING LEASE
between
FRI
FISH,
LLC
as
LANDLORD
and
SHELLS
OF
NEW SMYRNA BEACH, INC.
as
TENANT
October
27, 2006
INDEX
TO LAND AND BUILDING LEASE
Article
RECITALS
|
I.
|
Demise
of Premises
|
4
|
|
II.
|
Term
|
5
|
|
III.
|
Rent
|
6
|
|
IV.
|
Use
|
9
|
|
V.
|
Acceptance
of Demised Premises
|
9
|
|
VI.
|
Alterations
|
9
|
|
VII.
|
Repairs
and Maintenance
|
10
|
|
VIII.
|
Compliance
with Law
|
11
|
|
IX.
|
Utilities
|
12
|
|
X.
|
Indemnity
|
12
|
|
XI.
|
Insurance
|
14
|
|
XII.
|
Damage
or Destruction
|
16
|
|
XIII.
|
Eminent
Domain
|
17
|
|
XIV.
|
Covenants
of Landlord
|
19
|
|
XV.
|
Insolvency
|
20
|
|
XVI.
|
Default
|
20
|
|
XVII.
|
Unavoidable
Delays, Force Majeure
|
25
|
|
XVIII.
|
No
Waiver
|
25
|
|
XIX.
|
Notices
|
25
|
|
XX.
|
Access
|
26
|
|
XXI.
|
Signs
|
26
|
|
XXII.
|
Improvements
and Fixtures
|
27
|
|
XXIII.
|
End
of Term
|
27
|
|
XXIV.
|
Holding
Over
|
28
|
|
XXV.
|
Assignment
and Subletting
|
29
|
|
XXVI.
|
Landlord's
Loan
|
30
|
|
XXVII.
|
Maintenance
of Outside Areas
|
32
|
|
XXVIII.
|
Certificates
|
33
|
|
XXIX.
|
Relationship
of Parties
|
34
|
|
XXX.
|
Recording
|
34
|
|
XXXI.
|
Captions
and Section Numbers
|
34
|
|
XXXII.
|
Applicable
Law
|
34
|
|
XXXIII.
|
Entire
Agreement
|
34
|
|
XXXIV.
|
Landlord's
Liability
|
35
|
|
XXXV.
|
Attorney's
Fees
|
35
|
|
XXXVI.
|
Intentionally
Deleted
|
35
|
|
XXXVII.
|
Environmental
|
35
|
|
XXXVIII.
|
Addenda
|
39
|
|
XXXIX.
|
Counterparts
|
39
|
2
|
Exhibit
A
|
Location/Legal
Description/Address of the Real Property
|
|
Exhibit
B
|
Tenant’s
Personal Property List
|
|
Exhibit
C
|
Tenant's
Estoppel Certificate
|
|
Exhibit
D
|
Memorandum
of Lease
|
|
Exhibit
E
|
Intentionally
Deleted
|
|
Exhibit
F
|
Subordination,
Nondisturbance and Attornment Agreement
|
|
Exhibit
G
|
Intentionally
Deleted
|
|
Exhibit
H
|
Intentionally
Deleted
|
3
LAND
AND BUILDING LEASE
THIS
LAND
AND BUILDING LEASE (the "Lease") is made and entered into as of October 27,
2006
(the “Effective Date”), between FRI
FISH, LLC
("Landlord") and
SHELLS OF NEW SMYRNA BEACH, INC.
(“Tenant”).
RECITALS
A. Landlord
is the owner of the tract
of
real property (the “Real Property”), and lessee of an adjacent parking lot
parcel (“Leased Property”) (the Real Property and Leased Property are
collectively referred to as the “Property”). The Property is more particularly
described in Exhibit A attached hereto.
B. Tenant
desires to lease from Landlord the Property so that Tenant may, in accordance
with and subject to the terms, conditions, and restrictions of the Lease,
operate a Shells family dining restaurant at the Real Property. The buildings
and all improvements to or on the Real Property, including but not limited
to
all site work, landscaping, fixtures, utilities, and other improvements,
is
referred to as the "Building". Certain personal property located at the Demised
Premises, and moveable trade fixtures (as defined in Section 22.02) are owned
by
Tenant and are described on Exhibit B attached hereto and are not included
in
the definition of Building or Real Property leased to Tenant pursuant to
this
Lease.
C. The
Property and the Building shall be referred to as the "Demised
Premises."
D. Tenant
desires to lease the Demised Premises from Landlord on the terms and conditions
hereinafter set forth.
NOW,
THEREFORE, in consideration of the lease of the Demised Premises and the
rents,
covenants and conditions herein set forth, Landlord and Tenant do hereby
covenant, promise and agree as follows:
ARTICLE
I
DEMISE
OF PREMISES
Landlord
does hereby lease unto Tenant, and Tenant does hereby hire from Landlord,
for
the term hereinafter provided in Section 2.01, the Demised Premises for the
use
thereof by Tenant, Tenant's employees, concessionaires, licensees, agents,
customers and invitees, which use shall be exclusive except as otherwise
provided in Section 3.06 or elsewhere herein.
4
ARTICLE
II
TERM
Section
2.01
(a) The
"Commencement Date" of this Lease shall be upon the Effective Date. The Lease
shall continue for a period of twenty (20) years following the Effective
Date
(the
“Original Lease Term”). The “Lease Term”, as such term is used herein, shall
mean the Original Lease Term as
extended (or as may be extended) pursuant to Section 2.02 below.
(b) This
Lease shall be deemed to be in full force and effect upon the Effective Date.
Tenant shall be deemed in possession of the Demised Premises upon the Effective
Date.
Section
2.02
(a) Tenant
shall have the option to extend the term of this Lease for up to four
(4)
separate option periods upon and
subject to the terms set forth below in this Section
2.02. The first option period shall commence at the expiration of the Original
Lease Term and each subsequent option period shall commence at the expiration
of
the previous option period. The option periods are sometimes referred to
herein
collectively as the “Option Periods” and individually as an “Option Period.”
Each Option Period shall continue for a period of five (5) years from the
commencement date
of
such Option Period. Except as otherwise expressly provided herein, all of
the
terms and conditions of this Lease applicable to the Original Lease Term
shall
continue to apply during each Option Period. To validly extend the Lease
Term
for each Option Period, Tenant (a)
must
and shall deliver to Landlord written notice of Tenant’s election to so extend
not later than 180 days prior to the commencement
of such Option Period and (b) shall not be in default, beyond the expiration
of
any applicable cure period under any material term or condition of this Lease
as
of the date of such notice or the commencement of such Option Period.
Without
limiting anything contained in Article XXXIII hereof, time is of the essence
in
the performance of each
provision of this
Section
2.02.
(b) Notwithstanding
the foregoing to the contrary, the Lease Term with respect to the Leased
Property only shall expire on the date (if earlier than the date otherwise
provided herein) one day prior to the date of expiration of the lease with
respect to the Leased Property (“Parking Area Lease”). Provided that Tenant
delivers Landlord prompt written notice of its election to extend the term
of
the Parking Area Lease within the time periods required under such Parking
Area
Lease, Landlord will exercise any renewal options to extend the term of such
Parking Area Lease. In the event Tenant elects not to extend the term of
the
Parking Area Lease or fails to do so within the time periods required under
such
Parking Area Lease, then Landlord shall have the right (but not the obligation)
to extend the term of the Parking Area Lease. The expiration or termination
of
the Parking Area Lease during the Lease Term shall have no effect on this
Lease,
other than with respect to any default by Tenant pursuant to Section
3.05(e).
5
ARTICLE
III
RENT
Section
3.01
Tenant
shall pay to Landlord, from and after the Commencement Date and thereafter
throughout the Lease Term, the sums set forth in this Lease as "Rent" without
prior demand therefor and without offset, deduction, or abatement except
as may
be otherwise expressly provided herein. Notwithstanding the foregoing, any
amounts due by Tenant to Landlord hereunder for which no due date is expressly
specified herein (e.g., the first day of each month) shall be due within
ten
(10) days following the giving to Tenant by Landlord of written notice of
such
amounts due, except if some other period of time following written notice
or
demand is otherwise expressly provided below, then such other period shall
apply. As used herein, “Rent” shall be deemed to include not only Fixed Rent but
also all additional sums payable or owed by Tenant under this Lease,
including without limitation as set forth in Section 3.07
("Additional Rent”). Except as otherwise expressly provided herein, in the event
of nonpayment by Tenant of any Rent, Landlord shall have the same rights
and
remedies in respect thereof regardless of whether such Rent constitutes Fixed
Rent or Additional Rent. All payments of Rent to be paid to Landlord shall
be
paid to Landlord (at its election) in one of the following manners: (1) via
electronic deposit into an account designated by Landlord, (2) by mail at
the
Landlord's office indicated in Article XIX or (3) by mail to any other place
designated by Landlord upon at least thirty (30) days' prior written notice
to
Tenant. If the Effective
Date (and
the
Commencement Date)
shall
not be the first day of a calendar month, then the rent for such month shall
be
prorated based upon a Three Hundred Sixty-Five (365) day year.
Section
3.02
Intentionally left blank.
Section
3.03 Fixed
Rent:
The
"Fixed Rent" for the Demised Premises for each month of the Lease Term prior
to
the first anniversary of the Commencement Date shall be $10,277.78.
On the
first anniversary of the Commencement Date, and thereafter, on each anniversary
of such date throughout the Lease Term, the monthly Fixed Rent shall increase
by
two percent (2%) over the Fixed Rent charged in the immediately preceding
month
of the Lease Term, and such increase shall apply for the ensuing year. Tenant
shall pay to Landlord Fixed Rent in advance, without demand therefor, on
the
first day of each calendar month commencing with the Commencement
Date.
Section
3.04
Intentionally left blank.
Section
3.05 Additional
Rent.
(a) Tenant
shall pay to Landlord, as Additional Rent, all "Real Estate Taxes" (as
hereinafter defined) assessed against, or allocable or attributable to each
of
the Demised Premises whether accruing prior to or after the Effective Date.
Real
Estate Taxes for the last year of the Lease Term shall be prorated. As used
herein, the term "Real Estate Taxes" means all taxes and general and special
assessments and other impositions in lieu thereof, as a supplement thereto
and
any other tax which is measured by the value of real property and assessed
on a
uniform basis against the owners of real property, including excise taxes
described in Section 3.05 (d) and any substitution in whole or in part of
any of
the foregoing due to a future change in the method of taxation. Nothing
contained in this Lease, however, shall require the Tenant to pay any estate,
inheritance, corporate, franchise or income tax of Landlord, nor shall any
of
same be deemed Real Estate Taxes, unless same shall be specifically imposed
in
substitution for, or in lieu of, Real Estate Taxes, and then only to the
extent
same are limited to the Demised Premises as if it were the only property
owned
by Landlord. If by law, any general or special assessment or like charge
may be
paid in installments without any penalty or interest whatsoever, then such
assessment shall be paid in such installments and Tenant shall only be liable
for the portion thereof that is allocable or attributable to the Lease Term
or
any portion thereof.
6
(b) Tenant
shall pay the Real Estate Taxes on or before five (5) business days prior
to the
earlier of (i) the delinquency thereof, or (ii) the date that any penalty
or
interest would accrue on any unpaid installment. Landlord shall have the
tax
bill for the Demised Premises sent directly to Tenant, and Tenant shall pay
the
tax bill directly to the collecting authority, and in such event Tenant shall
provide Landlord a copy of the paid receipt for each installment of Real
Estate
Taxes so paid. If Tenant fails to pay the Real Estate Taxes when due hereunder,
then Tenant shall, in addition to all other remedies available to Landlord,
reimburse Landlord for any and all penalties or interest, or portion thereof,
incurred by Landlord as a result of such nonpayment or late payment by Tenant.
(c) Tenant
shall have the right to seek an abatement of Real Estate Taxes or a reduction
in
the valuation of the Demised Premises and/or contest the applicability of
any
Real Estate Taxes to the Demised Premises or the improvements thereon; provided,
however, Tenant shall have paid timely all amounts pursuant to Section 3.05(b)
above. In any instance where any such action or such proceeding is being
undertaken by Tenant, Landlord shall reasonably cooperate with Tenant, at
no
cost or expense to Landlord, and execute any and all documents approved by
Landlord required in connection therewith. Tenant shall be entitled
to
any
refund (after the deduction therefrom of all reasonable expenses incurred
by
Landlord in connection therewith) of any Real Estate Taxes and penalties
or
interest thereon received by Tenant or Landlord, whether or not such refund
was
a result of proceedings instituted by Tenant, which have been paid by Tenant
or
paid by Landlord for the benefit of Tenant and repaid to Landlord by
Tenant.
(d) Tenant
shall pay to Landlord, with each payment of Rent due hereunder, all taxes
imposed upon Landlord with respect to rental or other payments in the nature
of
a gross receipts tax, sales tax, privilege tax or the like, excluding federal
or
state net income taxes, whether imposed by a federal, state or local taxing
authority, which when added to such rental or other payment shall yield to
Landlord after deduction of all such tax payable by Landlord with respect
to all
such payments a net amount which Landlord would have realized from such payment
had no such tax been imposed.
(e) Without
limiting anything contained in subsection 3.03(a), Tenant shall pay, as
Additional Rent all Parking Area Lease Rent (hereinafter defined). Tenant
shall
be responsible for directly paying to the Parking Area Lease landlord the
Parking Area Lease Rent, and shall indemnify Landlord from any liability,
cost
or expense incurred in connection with the Parking Area Lease. Tenant shall
promptly send to Landlord any notices that Tenant receives from the Parking
Area
Lease landlord. “Parking Area Lease Rent” shall mean, (i) all Parking Area Lease
Rent and (ii) all Parking Area Lease Additional Rent. The term Parking Area
Lease Rent refers to the amounts required to be paid under the Parking Area
Lease as “base rent” or “fixed rent”; “Parking Area Lease Additional Rent” shall
mean any monetary obligations of Landlord under the Parking Area Lease, other
than the Parking Area Lease Base Rent, but including any indemnity obligations
of the “tenant” thereunder.
7
Section
3.06 Matters
of Record:
Tenant
hereby accepts the Demised Premises in the condition as of the date of
possession hereunder, subject to all applicable zoning, municipal, county,
and
state laws, ordinances, and regulations, including private easements and
restrictions
(whether
or not evidence thereof is recorded in the public records),
governing and regulating the use of the Demised Premises, and accepts this
Lease
subject thereto and to all matters disclosed thereby, and by any exhibits
attached hereto (“Diligence Matters”). Tenant acknowledges that neither Landlord
nor Landlord’s agent has made any representation or warranty as to the
suitability of the Leased Property for the conduct of the Tenant’s
business.
Section
3.07 Additional
Charges:
Tenant
and Landlord agree that the rent accruing under this Lease shall be net to
Landlord and that all taxes, costs, promotional fees, common area maintenance
fees, expenses and charges of every kind and nature, including attorneys’ fees
incurred by Landlord in enforcing the provisions of this lease, whether or
not
any legal proceedings are commenced ("Additional Charges") arising in connection
with or relating to the Demised Premises (excluding, however, (1) taxes other
than Real Estate Taxes for which Landlord is responsible under Section 3.05(a)
and (2) any payments for interest or principal under any fee mortgage relating
to the Demised Premises) which may arise or become due at any time during
the
Lease Term, shall be paid by Tenant. Tenant hereby indemnifies, defends,
protects, and saves Landlord wholly harmless from and against any and all
Additional Charges. As used herein, the term “Additional Rent” shall include,
without limitation, all of the following: (1) any and all Additional Charges
for
which Tenant is responsible hereunder, or which Tenant otherwise assumes
or
agrees to pay; (2) all interest and penalties that may accrue on such Additional
Charges if Tenant fails to pay them timely within any applicable cure periods;
(3) all other damages, costs and expenses (including, without limitation,
reasonable attorneys' fees and other legal and court costs) which Landlord
may
suffer or incur in enforcing this Lease; and (4) any and all other sums which
may become due by reason of Tenant's default or failure to comply with its
obligations under this Lease.
Section
3.08 Late
Charge:
Without
limiting anything contained in Article XVI of this Lease and in
addition
to all other remedies set forth in this Lease, any payment of Fixed Rent
due to
Landlord not received by Landlord within ten (10) days after such payment
is due
hereunder, and any payment of Additional Rent due to Landlord not received
by
Landlord when due hereunder, shall be deemed delinquent and cause Tenant
to
incur a late charge of three percent (3%) on each delinquent payment, due
and
payable immediately with the delinquent Fixed Rent or delinquent Additional
Rent, as the case may be.
8
Section
3.09 Character
of Demised Premises:
From the
Commencement Date and thereafter throughout the Lease Term, Tenant shall
conduct
its business in a first class and reputable manner consistent with Tenant’s
prior operating practices with respect to the Demised Premises. Tenant shall
open and operate a Shells family dining restaurant at the Demised Premises
continuously during all hours which is customary for similarly situated Shells
restaurants, subject to temporary closing due to casualty, condemnation,
remodeling or other force majeure condition. The character of the occupancy
of
the Demised Premises is an additional consideration and inducement for the
granting of this Lease.
ARTICLE
IV
USE
Tenant
may use the Demised Premises to operate a Shells family dining restaurant,
including beer, wine and liquor sales, and such other incidental uses related
thereto in Tenant’s discretion. Tenant may use the Demised Premises only for the
uses expressly permitted under this Section, and for no other use without
the
prior written consent of Landlord, which approval shall not be unreasonably
withheld, delayed or conditioned. Notwithstanding any other provision of
this
Article, Tenant shall not use, or suffer or permit any person or entity to
use
the Demised Premises or any portion thereof for any purpose in violation
of any
applicable law, ordinance or regulation.
ARTICLE
V
ACCEPTANCE
OF DEMISED PREMISES
Tenant
acknowledges that it has owned the Demised Premises prior to execution of
this
Lease and has had the opportunity to perform all tests, studies and inspections
that it desires, and that Tenant is accepting the Demised Premises subject
to
all Diligence Matters and in its AS IS condition existing on the date Tenant
executes this Lease.
ARTICLE
VI
ALTERATIONS
Tenant
shall have no right to make changes, alterations or additions (collectively,
"Alterations") to the Building which will require changes to the foundation,
roof, exterior walls or utility systems at the Building without prior written
consent of Landlord, which Landlord agrees it will not withhold unreasonably;
provided, however, in no event shall any Alterations be made which, after
completion, would: (i) reduce the value of the Building as it existed prior
to
the time that said Alterations are made; or (ii) adversely affect the structural
integrity of the Building. Any and all Alterations made by Tenant shall be
at
Tenant's sole cost and expense. Prior
to
the commencement of construction, Tenant shall deliver promptly to Landlord
detailed cost estimates for any proposed Alterations, as well as all available
drawings, plans and other information regarding such Alterations
(such
estimates, drawings, plans and other information are collectively referred
to
herein as the “Alteration Information”). Landlord’s review and/or approval of
any Alteration Information shall in no event constitute any representation
or
warranty of Landlord regarding (x) the compliance of any Alteration Information
with any governmental or legal requirements, (y) the presence or absence
of any
defects in any Alteration Information, or (z) the safety or quality of any
of
the Alterations constructed in accordance with any plans or other Alteration
Information. Landlord’s review and/or approval of any of the Alteration
Information shall not preclude recovery by Landlord against Tenant based
upon
the Alterations, the Alteration Information, or any defects therein.
In
making any and all Alterations, Tenant also shall comply with all of the
following conditions:
9
(a) No
Alterations shall be undertaken until Tenant shall have (i) procured and
paid
for, so far as the same may be required, all necessary permits and
authorizations of all governmental authorities having jurisdiction over such
Alterations, and (ii) delivered to Landlord at least fifteen (15) days prior
to
commencing any such Alterations written evidence reasonably acceptable to
Landlord of all such permits and authorizations. Landlord shall, to the extent
necessary (but at no cost, expense, or risk of loss to Landlord), join in
the
application for such permits or authorizations whenever necessary, promptly
upon
written request of Tenant.
(b) Any
and
all structural Alterations of the Building shall be performed under the
supervision of an architect and/or structural engineer.
(c) Tenant
shall notify Landlord at least fifteen (15) days prior to commencing any
Alterations so as to permit, and Tenant shall permit, Landlord access to
the
Demised Premises in order to post and keep posted thereon such notice(s)
as may
be provided or required by applicable law to disclaim responsibility for
any
construction on the Demised Premises.
(d) Any
and
all Alterations shall be conducted and completed promptly (subject to the
terms
of Article XVII), in a good and workmanlike manner, and in compliance with
all
applicable laws, municipal ordinances, building codes and permits, and
requirements of all governmental authorities having jurisdiction over the
Demised Premises, and of the local Board of Fire Underwriters, if any; and,
within thirty (30) days after completion of any and all Alterations, Tenant
shall obtain and, upon Landlord’s request, deliver to Landlord a copy of the
amended certificate of occupancy for the Demised Premises, if required under
applicable law or by governmental authority. Any and all Alterations shall
be
made and conducted so as not to disrupt Tenant's business; provided however
that
major alterations which require closing of the business on a temporary basis
may
be made so long as otherwise in compliance with the provisions of this
Lease.
(e) The
cost
of any and all Alterations shall be promptly paid by Tenant so that the Demised
Premises at all times shall be free of any and all liens for labor and/or
materials supplied for any Alterations.
ARTICLE
VII
REPAIRS
AND MAINTENANCE
Tenant,
at its sole cost and expense, shall maintain the Demised Premises and each
part
thereof, structural and non-structural, in good order and condition and,
subject
to the terms and conditions of Article VI, if and as applicable, shall make
any
necessary Repairs thereto, interior and exterior, whether extraordinary,
foreseen or unforeseen. When used in this Article VII, the term "Repairs"
shall
include all such replacements, renewals, alterations, additions and betterments
necessary for Tenant to properly maintain the Demised Premises in good order
and
condition and in compliance with all applicable laws. The necessity for,
and
adequacy of, any and all Repairs to the Demised Premises required or conducted
pursuant to this Article VII shall be measured by and meet, at a minimum,
all of
the following standards: (1) at least equal in quality and class to the
condition of the Demised Premises prior to the need for such Repairs; (2)
at
least equal in quality and class to the condition of buildings and related
facilities of similar construction and class in the general geographic area
of
the Demised Premises are generally maintained; (3) subject to the terms and
conditions of Article VI, avoidance of any and all structural damage or injury
to the Building or persons therein; (4) any and all maintenance, service,
operation and repair standards and requirements set forth by Tenant
for its (or
its
subsidiaries’ or affiliates’) restaurants;
(5) any and all repairs, replacements or upgrades necessary to ensure compliance
with the
rules
and regulations of all governmental agencies, including
all
Environmental
Laws
(as
defined below);
and (6)
no mold which inhibits or impairs the intended use of the Demised Premises
shall
be permitted to remain unabated at the Demised Premises. Landlord shall have
no
duty whatsoever to maintain, replace, upgrade, or repair any portion of the
Demised Premises. If Tenant fails or neglects to make all necessary Repairs
or
fulfill its other obligations as set forth above, then Landlord or its agents
may enter the Demised Premises for the purpose of making such Repairs or
fulfilling those obligations. All costs and expenses incurred as a consequence
of Landlord's action shall be paid by Tenant to Landlord as Additional Rent
within fifteen (15) days after Landlord delivers to Tenant copies of invoices
for such Repairs or other obligations. These invoices shall be prima facie
evidence of the payment of the charges to be paid by Landlord. Except in
the
case of emergency, Landlord shall refrain from taking any such action unless
Tenant has not commenced and diligently pursued making such repairs or
fulfilling such obligations within thirty (30) days after Landlord delivers
written notice of the proposed actions to be taken by Landlord.
10
ARTICLE
VIII
COMPLIANCE
WITH LAW
Tenant
shall, throughout the Lease Term, at its sole cost and expense, comply, in
all
material respects, with all laws and regulations of federal, state, municipal
and local governments, departments, commissions and boards pursuant to law,
or
directives or orders issued pursuant thereto, including without limitation
all
Environmental Laws and the Americans With Disabilities Act, with respect
to,
regarding, or pertaining to the Demised Premises. Notwithstanding the foregoing,
Tenant may, subject to the terms and conditions of this Section, contest
or
appeal such requirements or orders. To the extent any such contest or appeal
by
Tenant suspends any and all obligations on the part of Tenant, Landlord,
or the
Demised Premises to comply with such requirements or orders, and suspends
any
and all applicability of such requirements or orders to the Demised Premises,
Tenant shall not be required to comply with any such laws, regulations, orders,
requirements or rules. In no event shall any such appeals, contests or
proceedings pursued by Tenant subject Landlord to criminal liability or any
civil liability. Upon final resolution of any such appeal, proceeding or
contest
pursued by Tenant, Tenant shall comply with the judgment, finding or order
of
the governmental authority so resolving such appeal, proceeding or contest,
and
shall be liable in full for any and all fines, penalties, charges or costs
of
any type whatsoever which accrue during the pendency of any contest or appeal.
11
ARTICLE
IX
UTILITIES
Without
limiting any of Tenant’s obligations set forth in Article III, Tenant shall be
solely responsible for, and shall pay the cost of all utility services provided
to the Demised Premises throughout the Lease Term.
ARTICLE
X
DISCLAIMER
AND INDEMNITY
Section
10.01 As
used
in this Lease, (x) “Landlord Parties” means, collectively, Landlord, Landlord’s
Affiliates and Landlord’s Lender; (y) “Landlord’s Affiliates” means Landlord’s
members, partners, officers, directors, shareholders, employees, or any person
or entity that directly or indirectly through one or more intermediaries
controls, is controlled by, or is under common control with Landlord, (for
purposes of this definition, the term “control,” “controlled by” or “under
common control with” means the power, direct or indirect, to direct or cause the
direction of the management and policies of Landlord, whether through the
ownership of voting stock, by contract, as trustee or executor, or otherwise);
and (z) “Landlord’s Lender” means any persons or entities providing financing to
Landlord or Landlord’s Affiliates. To the extent not prohibited by law, none of
the Landlord Parties
shall
be
(and
Tenant hereby agrees that they shall not
be)
liable,
under any circumstances (except only Landlord (and not any other Landlord
Parties)
in the
event of, and then only to the extent directly attributable to, Landlord’s gross
negligence or willful misconduct),
for
any loss, injury, death or damage to person or property (including but not
limited to the business or any loss of income or profit therefrom) of Tenant,
Tenant's members, officers, directors, shareholders, agents, employees,
contractors, customers, invitees or any other person in or about the Demised
Premises, whether the same are caused by (1) fire, explosion, falling plaster,
steam, dampness, electricity, gas, water, rain or (2) breakage, leakage or
other
defects of sprinklers, wires, appliances, plumbing fixtures, water or gas
pipes,
roof, air conditioning, lighting fixtures, street improvements, or subsurface
improvements or (3) theft, acts of God, acts of the public enemy, riot, strike,
insurrection, war, court order, requisition or order of governmental body
or
authority, or (4) any act or omission of any other occupant of the Demised
Premises or any other party, or (5) operations in construction of any private,
public or quasi-public work, or (6) any other cause, including damage or
injury
which arises from the condition of the Demised Premises, from occupants of
adjacent property, from the public, or from any other sources or places,
and
regardless of whether the cause of such damage or injury or the means of
repairing the same are inaccessible to Tenant, or which may arise through
repair, alteration or maintenance of any part of the Demised Premises or
failure
to make any such repair, from any condition or defect in, on or about the
Demised Premises including any “Environmental Conditions” (as defined in Article
XXXVII) or the presence of any mold or any Hazardous Materials (as defined
in
Article XXXVII), or from any other condition or cause whatsoever.
12
Section
10.02
Tenant
hereby fully and forever releases, discharges, acquits, and
agrees
to
indemnify, protect,
defend
(with counsel selected by Tenant and approved by Landlord, such approval
not to
be unreasonably withheld) and hold the Demised Premises,
and
each
of
the
Landlord
Parties
wholly
free and harmless of, from and against any and all claims, demands, actions,
causes of action, settlements, obligations, duties, indebtedness, debts,
controversies, losses, remedies, choses in action, liabilities, costs,
penalties, fines, damages, injury, judgments, forfeiture, losses (including
without limitation diminution in the value of the Demised Premises) or expenses
(including without limitation reasonable attorneys' fees, consultant fees,
testing and investigation fees, expert fees and court costs), whether known
or
unknown, whether liquidated or unliquidated: (a) arising out of or in any
way
related to or resulting directly or indirectly from: (i) the use, occupancy
or
activities of Tenant, its agents, employees, contractors or invitees in or
about
the Demised Premises, (ii) any failure on the part of Tenant to comply with
any
applicable law, including without limitation all Environmental Laws;
(iii)
any default or breach by Tenant in the performance of any obligation of Tenant
under this Lease; (iv) any other loss, injury or damage described in Section
10.01 above caused (whether
by action or omission)
by
Tenant, its agents, employees, contractors or invitees; and (v) in connection
with mold at the Demised Premises; and (b) whether heretofore now existing
or
hereafter arising out of or in any way related to or resulting directly or
indirectly from the presence or “Release” (as defined in Article XXXVII) at, on,
under to or from the Demised Premises of any Hazardous
Material; provided, however, that the foregoing indemnity shall not be
applicable to the extent any such claims are directly attributable to the
gross
negligence or willful misconduct of such
Landlord
Party.
All of
the personal or any other property of Tenant kept or stored at, on or about
the
Demised Premises shall be kept or stored at the risk of Tenant.
Section
10.03
Tenant
hereby fully and forever releases, discharges, acquits, and
agrees to indemnify, protect, defend
(with counsel selected by Tenant and approved by Landlord, such approval
not to
be unreasonably withheld) and hold the Demised Premises, and all
Landlord
Parties
wholly
free and harmless of, from and against any and all claims, demands, actions,
causes of action, settlements, obligations, duties, indebtedness, debts,
controversies, losses, remedies, choses in action, liabilities, costs,
penalties, fines, damages, injury, judgments, forfeiture, losses (including
without limitation diminution in the value of the Demised Premises) or expenses
(including without limitation reasonable attorneys' fees, consultant fees,
testing and investigation fees, expert fees and court costs), whether known
or
unknown, hereafter arising, whether liquidated or unliquidated, arising out
of
or in any way related to or resulting directly or indirectly from work or
labor
performed, materials or supplies furnished to or at the request of Tenant
or in
connection with obligations incurred by or performance of any work done for
the
account of Tenant in, on or about the Demised Premises.
Section
10.04
Landlord
and Tenant each (a) represent to the other party that such representing party
has dealt with no broker or brokers in connection with the negotiation,
execution and delivery of this Lease and (b) hereby agrees
to
indemnify, defend,
protect
(with
counsel selected by the other party) and hold
such
other party wholly free and harmless of, from and against any and all claims
or
demands for any and all brokerage commissions and/or finder's fees due or
alleged to be due as a result of any agreement or purported agreement made
by
such indemnifying party.
13
Section
10.05
The
provisions of this Article
X shall
survive the expiration or sooner termination of this Lease. Tenant hereby
waives
the provisions of any applicable laws restricting the release of claims which
the releasing parties do not know or suspect to exist at the time of release,
which, if known, would have materially affected Tenant's decision to agree
to
this release. In this regard, Tenant hereby agrees, represents, and warrants
to
Landlord that Tenant realizes and acknowledges that factual matters now unknown
to Tenant may hereafter give rise to causes of action, claims, demands, debts,
controversies, damages, costs, losses and expenses which are presently unknown,
unanticipated and unsuspected, and Tenant further agrees, represents and
warrants that the release provided hereunder has been negotiated and agreed
upon
in light of that realization and that Tenant nevertheless hereby intends
to
release, discharge and acquit the parties set forth herein above from any
such
unknown causes of action, claims, demands, debts, controversies, damages,
costs,
losses and expenses which are in any manner set forth in or related to this
Lease, the Demised Premises and all dealings in connection
therewith.
ARTICLE
XI
INSURANCE
Section
11.01
(a) Liability
Insurance.
Throughout the Lease Term, Tenant shall, at its sole expense, provide and
cause
to be maintained comprehensive general public liability insurance with an
insurance company licensed to do business in each state in which the Demised
Premises is located and which is approved by Landlord (which approval shall
not
be unreasonably withheld), against claims for bodily injury, death or property
damage occurring on, in or about each of the Demised Premises, such insurance
to
afford a minimum coverage protection of not less than Two Million Dollars
($2,000,000) combined single limit (per occurrence) for injury to, or death
of,
persons and loss of, or damage to, property. Such coverage shall include
a
contractual obligation endorsement covering Tenant's duties and obligations
under Article X above. Landlord may require increases in coverage from Tenant
from time to time as required by any lender of Landlord.
(b) Property
Insurance.
Throughout the Lease Term, Tenant shall maintain property insurance against
loss
or damage by fire and such other risks to the Building (including, but not
limited to, Tenant's inventory, equipment and/or trade fixtures), as are
included in so-called "all-risks extended coverage" endorsements, in an amount
equal to the full replacement cost thereof in a stipulated amount, with change
of condition, exclusive of the cost of foundations, excavations and footings,
with a replacement cost endorsement without any deduction being made for
depreciation. Said
policy shall contain coverage for loss of rents insurance which will cover
the
Fixed Rent and Additional Rent for a period of up to one (1) year.
14
(c) In
addition to the other insurance required under this Section 11.01, for so
long
as Tenant shall serve liquor or other alcoholic beverages in or from the
Leased
Premises, Tenant agrees to maintain minimum limits of coverage of at least
Two
Million Dollars ($2,000,000) under an umbrella policy covering excess “liquor
law” liability (sometimes also known as “Dram Shop”
insurance) which shall insure Tenant and Landlord, and all of those claiming
by,
through or under Landlord, against any and all claims, demands or actions
for
personal bodily injury to, or death of, one person or multiple persons in
one or
more accidents, and for damages to property, so that at all times Landlord
will
be fully protected against claims that may arise by reason of or in connection
with the sale, dispensing and consumption of liquor and alcoholic beverages
in,
on, at, from or about the Leased Premises.
Section
11.02
All
insurance provided for in this Article shall be effected under policies issued
by insurers with at least an A rating by A.M. Best's Insurance Guide. No
insurance policy may have a deductible amount exceeding $25,000.00 ($50,000.00
with respect to wind damage) per occurrence. Tenant shall provide to Landlord,
beginning on the Effective Date and continuing annually thereafter with
certificates (or other evidence reasonably requested by Landlord) from all
applicable insurance carriers evidencing the payment of premiums or accompanied
by other evidence of such payment (e.g., receipts, canceled checks) reasonably
satisfactory to Landlord.
Section
11.03
The
policies of insurance required under this Article XI shall name Tenant as
the
named insured and Landlord Parties
(as defined in Section 10.01 above) as
additional named insureds as their interests may appear, with primary coverage
in favor of all additional named insureds (and with provisions that any other
insurance carried by any additional insured or Landlord shall be
non-contributing and that naming Landlord and other
Landlord
Parties
as additional insureds shall not negate any right Landlord or other
Landlord
Parties
would have had as claimants under the policy if not so named). All insurance
policies required under this Article XI also shall provide that the beneficial
interest of Landlord in such policies shall be fully transferable. All policies
referred to in Section 11.01(b) above shall provide that the proceeds of
all
such policies shall be made payable to the account of both Landlord and Tenant
to be disbursed in accordance with the provisions of, and for the purposes
set
forth in, Article XII hereof.
Section
11.04
Any
insurance provided for in this Article may be effected by a blanket policy
or
policies of insurance, or under so-called "all-risk" or "multi-peril" insurance
policies, provided that the amount of the total insurance available with
respect
to the Demised Premises shall provide coverage and indemnity at least equivalent
to separate policies in the amounts herein required, and provided further
that
in other respects, any such policy or policies shall comply with the provisions
of this Article. Any increased coverage provided by individual or blanket
policies shall be satisfactory, provided the aggregate liability limits covering
the Demised Premises under such policies shall otherwise comply with the
provisions of this Article.
Section
11.05
Every
insurance policy carried by either party with respect to the Demised Premises
shall (if it can be so written) include provisions waiving the insurer's
subrogation rights against the other party to the extent such rights can
be
waived by the insured prior to the occurrence of damage or loss. Subject
to the
above, each party hereby waives any rights of recovery against the other
party
for any direct damage or consequential loss covered by said policies against
which such party is protected by insurance whether or not such damage or
loss
shall have been caused by any acts or omissions of the other party, but such
waiver shall operate only to the extent such waiving party is so protected
by
such insurance coverage.
15
Section
11.06
Each
insurance policy required to be carried by Tenant hereunder shall include
a
provision requiring the insurance carrier insuring such policy to provide
Landlord with not less than thirty (30) days’ prior written notice of any
threatened or actual lapse, cancellation, reduction, or other material change
in
such policy’s coverage or its terms. If any insurance policy required to be and
in fact carried by Tenant and covering the Demised Premises or any part thereof
is cancelled or is threatened by the insurer to be cancelled (other than
in the
case of the lapse of the policy at the end of its stated term), or if the
coverage thereunder is reduced in any way by the insurer for any reason,
and if
Tenant fails to remedy the condition giving rise to cancellation, threatened
cancellation, or reduction of coverage within 48 hours after notice thereof
by
Landlord, Landlord may, in addition to all other rights and remedies available
to Landlord, enter the Demised Premises and remedy the condition giving rise
to
such cancellation, threatened cancellation or reduction, and Tenant shall
forthwith pay the cost thereof to Landlord (which cost may be collected by
Landlord as Additional Rent) and Landlord shall not be liable for any damage
or
injury caused to any property of Tenant or of others located on the Demised
Premises as a result of any such entry. In the event Tenant fails to procure
or
maintain any policy of insurance required under Article XI, Landlord may,
at its
option, purchase such insurance and charge Tenant all costs and expenses
incurred in procuring and maintaining such insurance as Additional
Rent.
ARTICLE
XII
DAMAGE
OR DESTRUCTION
Section
12.01
Subject
to the provisions of Section 12.04 and Section 12.05 below, if at any time
during the Lease Term, the Demised Premises or any part thereof shall be
damaged
or destroyed by fire or other casualty of any kind or nature, Tenant shall
proceed within ninety (90) days after the first date of such damage or
destruction with commercially reasonable due diligence to repair, replace
or
rebuild the Demised Premises as nearly as possible to its condition and
character immediately prior to such damage with such variations and Alterations
requested by Tenant as may be permitted under (and subject to the provisions
of
)
Article
VI (the "Restoration Work").
Section
12.02
All
property and casualty insurance proceeds payable to Landlord or Tenant (except
(i) insurance proceeds payable to Tenant on account of Tenant's trade fixtures
or inventory and business interruption insurance carried by Tenant and (ii)
insurance proceeds payable from comprehensive general public liability, or
any
other liability insurance) at any time as a result of casualty to the Demised
Premises shall be paid jointly to Landlord and Tenant for purposes of payment
for the cost of the Restoration Work, except as may be otherwise expressly
set
forth herein, and advanced from time to time for such purposes as the work
progresses upon certified request of Tenant's architect. Landlord and Tenant
shall cooperate in order to obtain the largest possible insurance award lawfully
obtainable and shall execute any and all consents and other instruments and
take
all other actions necessary or desirable in order to effectuate same and
to
cause such proceeds to be paid as hereinbefore provided. The proceeds of
any
such insurance in the case of loss shall, to the extent necessary, be used
first
for the Restoration Work with the balance, if any, payable to Tenant. If
insurance proceeds as a result of a casualty to the Demised Premises are
insufficient to complete the Restoration Work necessary by reason of such
casualty, then Tenant shall supply promptly the balance of the amount necessary
to complete the Restoration Work. If Tenant so supplies such balance, then
the
funds so supplied by Tenant shall first be used in their entirety for the
Restoration Work, and only after all such funds have been fully expended
shall
the insurance proceeds collected by reason of such casualty be used and
expended.
16
Section
12.03
Except
as provided for in Section 12.04, this Lease shall not be affected in any
manner
by reason of the total or partial destruction to the Demised Premises or
any
part thereof, or any reason whatsoever, and Tenant, notwithstanding any law
or
statute, present or future, waives all rights to quit or surrender any Demised
Premises or any part thereof. Fixed Rent and Additional Rent required to
be paid
by Tenant hereunder shall not abate as a result of any casualty.
Section
12.04
(a) Notwithstanding
Section 12.01 above, if the Building is destroyed or damaged in excess of
Twenty-Five percent (25%) of the replacement cost thereof (the Demised Premises
at which the Building is located is hereafter referred to as the “Casualty
Property”), exclusive of foundation and footings, by fire or other insured
casualty at any time during the last two (2) years of the Lease Term, then
Tenant shall have the right, at its election, to terminate this Lease by
giving
Landlord written notice of termination within sixty (60) days after the date
on
which such damage or destruction occurs. Such termination shall be effective
on
the last day of the month following the month in which Tenant gives Landlord
notice of its election to so terminate. In such event, Landlord shall be
entitled to all insurance proceeds payable pursuant to the policy carried
by
Tenant pursuant to Section 11.01(b) above, except amounts payable with respect
to Tenant's inventory, equipment and/or trade fixtures or moveable trade
fixtures.
(b) In
the
event of the termination of the Lease, Tenant shall pay to Landlord, prior
to
such termination date, an amount equal to the Fixed Rent and any then accrued
Additional Rent payable under this Lease to the date of such termination.
With
respect to any amounts of Additional Rent which are payable by Tenant in
the
event of such termination, but which are not then ascertainable, Tenant shall
pay to Landlord an amount equal to such Additional Rent as and when the same
is
determined. This Section 12.04 shall survive expiration or termination of
the
Lease.
ARTICLE
XIII
EMINENT
DOMAIN
Section
13.01
If more
than fifty percent (50%) of the Demised Premises, fifty percent (50%) of
the
existing access to or from the Demised Premises, or fifty percent (50%) of
the
parking available at the Demised Premises shall be taken for any public or
quasi-public use under any statute or by right of eminent domain, or by purchase
in lieu thereof and such taking makes the Demised Premises unusable for the
purposes set forth in Article IV, then this Lease shall terminate as of the
date
that possession has been so taken (the "Vesting Date").
17
Section
13.02
(a) In
the
event of a taking of less than or equal to fifty percent (50%) of the Demised
Premises, Tenant may elect to terminate this Lease and not restore such Demised
Premises if, by reason of the taking, the taking shall result in a diminution
in
value of more than 20% of the Demised Premises and as a result of such taking
Tenant’s business at the Demised Premises has been materially and adversely
affected. Tenant’s business at the Demised Premises will be deemed materially
adversely affected only if there
is
(i)
a
taking of a portion of the Building located at the Premises making
reconfiguration uneconomical, (ii) a taking of access to the Demised Premises
in
which an alternative access provides significantly reduced traffic counts
(iii)
a taking of a significant number of parking spaces where alternative parking
spaces are not available, or (iv) a
taking
that
would
preclude use of the Property for its current use under applicable zoning
or
other use regulations.
(b) In
the
event Tenant elects by reason of any of the foregoing events described in
this
Article XIII to terminate the Lease as to a Demised Premises (“Condemned
Property”), Tenant shall give written notice to Landlord of its intention to so
terminate within ninety (90) days after formal notice of the proposed taking
is
given to Tenant, and this Lease shall terminate as of the last day of the
calendar month following the month in which such notice is given. In the
event
the condemning authority revokes or terminates its condemnation proceeding,
Landlord, prior to the date set for termination of this Lease, may, by notice
to
Tenant, elect to rescind such termination. In the event of such termination,
however, Tenant shall pay to Landlord, prior to such termination date, an
amount
equal to the Fixed Rent and any then accrued Additional Rent payable under
this
Lease to the date of such termination, and neither party shall have any further
rights or liabilities under this Lease (except
for rights and liabilities that explicitly survive termination or expiration
of
the Lease as set forth herein).
With
respect to any items of Additional Rent which are payable by Tenant in the
event
of such termination, but which are not then ascertainable, Tenant shall pay
to
Landlord an amount equal to such Additional Rent as and when the same is
determined. The covenants and agreements with respect to the adjustment and
payment of items of Additional Rent shall survive the termination of this
Lease.
Section
13.03
In the
event of a taking resulting in the termination of this Lease with respect
to a
Condemned Property pursuant to the provisions of Sections 13.01 or 13.02,
the
parties hereto agree to cooperate in applying for and in prosecuting any
claim
for such taking and further agree that the aggregate net award shall be
distributed as follows:
(a) Landlord
shall be entitled to the entire award for the Condemned Property.
(b) Tenant
shall be entitled to any award that may be made for the taking of, or injury
to
or on account of, any cost or loss Tenant may sustain in the removal of its
merchandise, fixtures, moveable trade fixtures and equipment and furnishings,
and so long as it does not diminish the amount of the award otherwise available
to Landlord for the Condemned Property, the award for loss of business and
goodwill.
18
Section
13.04
(a) In
case
of a taking of less than or equal to fifty percent (50%) of the Demised
Premises, and if this Lease is not terminated as provided in Section 13.02
above, Tenant shall proceed with diligence (subject to reasonable time periods
for purposes of adjustment of any award and unavoidable delays) to repair
or
reconstruct the affected Building to a complete architectural unit (all such
repair, reconstruction and work being referred to in this Article as
"Reconstruction Work"). Landlord shall reimburse Tenant for the cost of the
Reconstruction Work up to and not exceeding the net compensation amount realized
by Landlord as a result of such taking (i.e., the gross amount of the
compensation received by Landlord from the taking authority less all reasonable
costs and expenses incurred by Landlord in pursuing, prosecuting, and/or
recovering its claim to such award).
All
Reconstruction Work shall be performed pursuant to (and subject to) the
requirements for Alterations set forth in Article VI.
(b) In
case
of a taking of less than substantially all of the Demised Premises, and if
this
Lease is not terminated as provided in Section 13.02 above, the monthly Fixed
Rent payable hereunder shall, from and after the date of such taking, be
reduced
by an amount equal to the product of (i) 1/12 multiplied by (ii) 7% multiplied
by (iii) the net condemnation proceeds retained by Landlord after the
application of any such proceeds to the repair, restoration or replacement
necessitated by the condemnation taking.
(c) Tenant
shall be entitled to claim, prove and receive in any condemnation proceeding
such awards as may be allowed for loss of business and goodwill, provided
such
award shall not diminish the amount of the award otherwise available to Landlord
for the Demised Premises hereunder.
(d) Any
compensation for a temporary taking shall be payable to Tenant without
participation by Landlord, except to the proportionate extent such temporary
taking extends beyond the end of the Lease Term, and there shall be no abatement
of Rent as a result thereof.
ARTICLE
XIV
COVENANTS
OF LANDLORD AND TENANT
Section
14.01
Landlord
and Tenant represent, warrant and covenant to the other as follows:
(a) Landlord
currently has, and as of the Effective Date will continue to have, the right
and
lawful authority to enter into this Lease and perform Landlord's obligations
hereunder.
19
(b) Tenant
has the right and lawful authority to enter into this Lease and perform Tenant's
obligations hereunder.
(c) From
and
after the Effective Date until the termination of the Lease Term, and provided
Tenant is not in default beyond expiration of all applicable cure periods
under
this Lease, Tenant
shall have quiet enjoyment of the Demised Premises as against any adverse
claim
of Landlord or any party claiming under Landlord subject, however, to the
terms
of the Lease, the Diligence Matters and any agreement between Tenant and
any
such party claiming under Landlord.
ARTICLE
XV
INSOLVENCY
Section
15.01
If at
any time during the Lease Term, (1) proceedings in bankruptcy shall be
instituted (voluntarily or involuntarily) by or against Tenant which result
in
an adjudication of bankruptcy, or (2) if Tenant shall file, or any creditor
or
other person shall file against Tenant,
any
petition in bankruptcy (i.e., seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief) under
the
Bankruptcy Act of the United States of America (or under any other present
or
future statute, law or regulation), and such filing is not vacated or withdrawn
within sixty (60) days thereafter, or (3) if a trustee or receiver shall
be
appointed to take possession of the Demised Premises, or of all or substantially
all of the business or assets of Tenant,
and
such appointment is not vacated or withdrawn and possession restored to
Tenant,
within
thirty (30) days thereafter, or (4) if a general assignment or arrangement
is
made by Tenant for the benefit of creditors, or (5) if any sheriff, marshal,
constable or other duly-constituted public official takes possession of the
Demised Premises, or of all or substantially all of the business or assets
of
Tenant by authority of any attachment, execution, or other judicial seizure
proceedings, and if such attachment or other seizure remains undismissed
or
undischarged for a period of thirty (30) days after the levy thereof, or
(6) if
Tenant shall
admit in writing Tenant’s inability to pay its debts as they become due; the
filing by Tenant of an answer admitting or failing timely to contest a material
allegation of a petition filed against Tenant in any such proceeding; or,
if
within sixty (60) days after the commencement of any proceeding against
Tenant seeking
any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceeding shall not have been dismissed, then an Event
of
Default under this Lease shall have occurred on the part of Tenant and Landlord
may, at its option in any of such events, on thirty (30) days notice to Tenant,
if such action is not vacated or withdrawn, immediately recapture and take
possession of the Demised Premises and terminate this Lease pursuant to process
of law.
ARTICLE
XVI
DEFAULT
Section
16.01 Events
Of Default.
The
occurrence of any of the following shall constitute an event of default (“Event
of Default”) on the part of Tenant:
20
(a) Nonpayment
Of Rent.
Failure
to pay any installment of Fixed Rent or Additional Rent due and payable
hereunder within
five (5) business days after written notice to Tenant.
(b) Insolvency.
The
occurrence of any event described in Article XV above. In the event that
under
applicable law the trustee in bankruptcy or Tenant has the right to affirm
this
Lease and continue to perform the obligations of Tenant hereunder, such trustee
or Tenant shall, within such time period as may be permitted by the bankruptcy
court having jurisdiction, cure all defaults of Tenant hereunder outstanding
as
of the date of the affirmance of this Lease and provide to Landlord such
adequate assurances as may be necessary to ensure Landlord of the continued
performance of Tenant's obligations under this Lease.
(c) Cross-Default.
A
default by Tenant after applicable notice and cure period, in connection
with
its lease from Landlord of the real property situated in Ocala, Florida (“Ocala
Lease”) but only so long as Landlord is the landlord under this Lease and the
Ocala Lease. Conversely, so long as Landlord is the landlord under the Lease
and
the Ocala Lease, a default under this Lease, after applicable notice and
cure
period, will also constitute a default under the Ocala Lease.
(d) Intentionally
Deleted.
(e) Environmental.
Tenant's violations of any Environmental Laws or the Release of any Hazardous
Materials, or the failure to abate the presence of mold which would inhibit
or
impair the intended use of the Demised Premises, such failure continuing
for a
period of thirty (30) days after written notice of such failure, or such
longer
period as is reasonably necessary to remedy such default, provided that Tenant
commences an appropriate response action for such violation or Release within
such thirty (30) day period and continuously and diligently pursues such
remedy
at all times until complete.
(f) Delivery
of Documents.
The
failure by Tenant to deliver any of the documents required pursuant to Section
3.03(b), 26.01 or 36.01 within the time periods required pursuant to such
sections.
(g) Reserved.
(h) Other
Obligations.
The
failure by Tenant to timely perform any obligation, agreement or covenant
under
this Lease, other than those matters specified in Sections 16.01(a)-(f) above,
and such failure continuing for a period of thirty (30) days after written
notice of such failure is delivered to Tenant (or such longer period, up
to but
not exceeding an additional ninety (90) days, as is reasonably necessary
to
remedy such default, provided that Tenant commences the remedy within such
thirty (30) day period and continuously and diligently pursues such remedy
at
all times during the additional ninety (90) day period.)
21
Section
16.02 Remedies
Upon Default.
If an
Event of Default by Tenant occurs, then, in addition to any other remedies
available to Landlord at law or in equity or elsewhere hereunder, Landlord
shall
have the following remedies:
(a) Termination.
Landlord shall have the right, with or without notice or demand, immediately
upon expiration of any applicable grace period specified herein, to terminate
this Lease, and at any time thereafter recover possession of all or any portion
of the Demised Premises or any part thereof and expel and remove therefrom
Tenant and any other person occupying the same by any lawful means, and
repossess and enjoy all or any portion of the Demised Premises without prejudice
to any of the remedies that Landlord may have under this Lease. If Landlord
elects to terminate the Lease, Landlord shall also have the right to reenter
the
Demised Premises and take possession of and remove all equipment and fixtures
of
Tenant, if any, in such Demised Premises, and to operate the restaurant at
the
Demised Premises. In connection with any such repossession, Tenant (and any
affiliate of Tenant holding a liquor license with respect to the Demised
Premises) shall provide reasonable cooperation in transferring its
liquor license to Landlord, or in assisting Landlord in obtaining a liquor
license. Tenant (and Tenant’s affiliate) agree upon Landlord’s written request,
to grant a security interest to Landlord in the liquor license at the Demised
Premises to secure Tenant’s obligations hereunder, provided that the grant of
such security interest does not violate any state or local law or ordinance.
Upon any assignment or foreclosure of Tenant’s liquor license, Tenant’s
liability to Landlord on account of any default under this Lease shall be
reduced by the fair market value of the liquor license so transferred to
Landlord. If Landlord elects to terminate this Lease and Tenant's right to
possession, or if Tenant's right to possession is otherwise terminated by
operation of law, Landlord may recover as damages from Tenant the following:
(i)
all Rent then due under the Lease; (ii) the Rent due for the remainder of
the
Lease Term (discounted by the discount rate of the Federal Reserve Bank of
San
Francisco plus one percent (1%)),
not to exceed, in any event 6%;
(iii)
the cost of reletting the Demised Premises; and (iv) any other costs and
expenses that Landlord may reasonably incur in connection with the Event
of
Default. Landlord shall use commercially
reasonable efforts to mitigate Tenant’s damages for any such default; provided,
however, that Landlord’s efforts to mitigate shall not waive Landlord's right to
recover damages which are calculated consistent with Landlord’s duty to
mitigate.
(b) Continuation
After Default.
If
Landlord does not elect to terminate this Lease, then this Lease shall continue
in effect, and Landlord may enforce all of its rights and remedies under
this
Lease, including, without limitation, the right to recover Rent as it becomes
due, and Landlord, without terminating this Lease, may exercise all of the
rights and remedies of a landlord under New York law. Landlord shall not
be
deemed to have terminated this Lease except by an express statement in writing.
Acts of maintenance or preservation, efforts to relet the Demised Premises,
or
the appointment of a receiver upon application of Landlord to protect Landlord's
interest under this Lease shall not constitute an election to terminate Tenant's
right to possession unless such election is expressly stated in writing by
Landlord. Notwithstanding any such reletting without such termination, Landlord
may at any time thereafter elect to terminate Tenant's right to possession
and
this Lease. If Landlord elects to relet the Demised Premises for the account
of
Tenant, the rent received by Landlord from such reletting shall be applied
as
follows: first, to the payment of any and all costs of such reletting
(including, without limitation, reasonable attorneys’
fees,
brokers' fees, alterations and repairs to any of the Demised Premises, and
tenant improvement costs); second, to the payment of any and all indebtedness
other than Rent due hereunder from Tenant to Landlord; third, to the payment
of
any and all Rent
due
and unpaid hereunder; and the balance, if any, shall be held by Landlord
and
applied in payment of future Rent as it becomes due. If the rent received
from
the reletting is less than the sum of the costs of reletting, other indebtedness
due by Tenant, and the Rent due by Tenant, then Tenant shall pay the deficiency
to Landlord promptly upon demand by Landlord. Such deficiency shall be
calculated and paid monthly.
22
Section
16.03 Indemnification.
Nothing
in this Section shall be deemed to affect Tenant's obligation to
indemnify,
defend,
protect and hold harmless
Landlord
and the
other Landlord Parties
under
Article
X
of this Lease, and such obligation shall survive the termination or expiration
of this Lease.
Section
16.04 Waiver
of Notice/ Performance by Landlord.
Notwithstanding any provision herein, (a) if Tenant is required to comply
with
any governmental requirement, Tenant shall not be entitled to notice of default
from Landlord and right to cure beyond the period within which such compliance
may be required by applicable law or government agency; or (b) if in Landlord's
reasonable determination the continuance of any default by Tenant for the
full
period of notice provided for herein will constitute a threat of injury or
harm
to persons or property, Landlord may, with or without notice, elect to perform
those acts with respect to which Tenant is in default for the account and
at the
expense of Tenant. If by reason of such governmental requirement or default
by
Tenant, Landlord is compelled or elects to pay any sum of money, (including
without limitation reasonable attorneys' fees, consultant fees, testing and
investigation fees, expert fees and court costs), such sums so paid by Landlord,
plus an administrative charge of ten percent (10%) of such sums, shall be
due as
Additional Rent from Tenant within ten (10) days of written demand therefor
from
Landlord.
Section
16.05 Interest.
Tenant
hereby acknowledges that late payment by Tenant to Landlord of Fixed Rent
and
any Additional Rent will cause Landlord to incur costs not contemplated by
this
Lease, the exact amount of which will be extremely difficult to ascertain.
Such
costs include, but are not limited to, processing and accounting charges
and
late charges which may be imposed on Landlord by the terms of any mortgage
or
trust deed covering the Demised Premises. Accordingly, any sum due by Tenant
to
Landlord under this Lease which is not paid when due shall bear interest
at the
lesser of the prime rate announced from time to time by Wells Fargo Bank,
N.A.,
plus five percent (5%) per annum or the maximum rate allowed under New York
law,
not to exceed, in any event 15%, from the date such sum becomes due and payable
by Tenant hereunder until paid, unless otherwise expressly provided in this
Lease.
The
foregoing shall be in addition to, and not in lieu of, any other rights,
remedies and charges as a result of any such late payment by Tenant set forth
in
this Lease, including without limitation any late charge imposed on any such
amount as set forth in Section 3.08.
Section
16.06 Tenant’s
Subleases.
If
Landlord elects to terminate this Lease on account of any Event of
Default,
then
Landlord may: (i) terminate any sublease by a subtenant and any license,
concession, or other consensual arrangement for possession entered into by
Tenant and affecting any of the Demised Premises which are not the subject
of a
nondisturbance agreement executed by Landlord; or (ii) choose to succeed
to
Tenant’s interest in such arrangement. No payment by a subtenant with respect to
a sublease shall entitle such subtenant to possession of any Property after
termination of this Lease and Landlord’s election to terminate the sublease by
the subtenant. If Landlord elects to succeed to Tenant’s interest in such
arrangement, then Tenant shall, as of the Effective Date of notice given
by
Landlord to Tenant of such election, have no further right to, or interest
in,
any rent or other consideration receivable under that arrangement.
23
Section
16.07 Form
of Payment After Default.
If
Tenant fails to pay any amount due to Landlord under this Lease within five
(5)
business days after written notice of such failure is given to Tenant by
Landlord, or if Tenant attempts to pay any such amount by drawing a check
on an
account with insufficient funds, then Landlord shall have the right to require
that any and all subsequent amounts paid by Tenant to Landlord under this
Lease
(to cure a default or otherwise) be paid in the form of cash, money order,
cashier’s or certified check drawn on an institution acceptable to Landlord, or
any other form approved by Landlord in its sole and absolute discretion,
notwithstanding that Landlord may have previously accepted payments from
Tenant
in a different form.
Section
16.08 Acceptance
of Rent Without Waiving Rights.
No
payment by Tenant shall be deemed to be other than on account of the earliest
sum due from Tenant hereunder, nor shall any endorsement or statement by
Tenant
on any check or any letter accompanying such payment be deemed an accord
and
satisfaction of any amount in dispute between Tenant and Landlord or otherwise.
Landlord may accept any and all of Tenant’s payments without waiving any right
or remedy under this Lease, including but not limited to the right to commence
and pursue an action to enforce rights and remedies under a previously served
notice of default, without giving Tenant any further notice or
demand.
Section
16.09 Waiver
by Tenant.
Tenant
hereby waives all claims for damages that may be caused by Landlord's lawful
reentering and taking possession of the Demised Premises in accordance with
the
provisions of this Lease or removing and storing the property of Tenant as
herein provided.
Section
16.10 Remedies
Cumulative.
All
rights, privileges, elections, and remedies of Landlord are cumulative and
not
alternative with all other rights and remedies hereunder, at law or in equity
to
the fullest extent permitted by law. The exercise of one or more rights or
remedies by Landlord shall not impair Landlord's rights to exercise any other
right or remedy to the fullest extent permitted by law.
Section
16.11 Default
by Landlord.
Landlord shall not be in default unless Landlord fails to perform obligations
required of Landlord within a reasonable time, but in no event later than
ten
(10) days after written notice by Tenant to Landlord and to the holder of
any
first mortgage, deed of trust, deed to secure debt or security deed granted
by
Landlord against any portion of the Demised Property whose name and address
shall have been furnished to Tenant in writing, specifying Landlord’s failure to
perform such obligation; provided, however, that, if the nature of Landlord’s
obligation is such that more than ten (10) days are required for performance,
then Landlord shall not be in default if Landlord commences performance within
such ten (10) day period and thereafter diligently prosecutes the same to
completion. Tenant agrees that the mortgagee, beneficiary or trustee under
any
such first mortgage, deed of trust, deed to secure debt or security deed
shall
have the right to cure such default on behalf of Landlord within ten (10)
calendar days after receipt of such notice, and Tenant further agrees not
to
invoke any of its remedies under this Lease until such ten (10) calendar
day
period has elapsed.
24
ARTICLE
XVII
UNAVOIDABLE
DELAYS, FORCE MAJEURE
If
either
party shall be prevented or delayed from punctually performing any obligation
or
satisfying any condition under this Lease by any strike, lockout, labor dispute,
inability to obtain labor, materials or reasonable substitutes thereof, Acts
of
God, present or future governmental restrictions, regulations or control,
insurrection, sabotage, fire or other casualty, final determination of insurance
and condemnation claims, or any other condition beyond the control of the
party,
exclusive of financial inability of a party, then the time to perform such
obligation or satisfy such condition shall be extended by the delay caused
by
such event, but only for a reasonable period of time not to exceed, in any
event, 180 days. The provisions of this Article shall in no event, however,
operate to delay the Commencement Date or to excuse Tenant from the prompt
payment of Fixed Rent
or
Additional Rent.
ARTICLE
XVIII
NO
WAIVER
The
failure of Landlord or Tenant to insist upon strict performance of any of
the
terms and conditions hereof shall not be deemed a waiver of any rights or
remedies that party or any other such party may have, and shall not be deemed
a
waiver of any subsequent breach or default in any of such terms, covenants
or
conditions.
ARTICLE
XIX
NOTICES
Whenever
it is provided herein that notice, demand, request or other communication
shall
or may be given to either of the parties by the other, it shall be in writing
and, any law or statute to the contrary notwithstanding, shall not be effective
for any purpose unless same shall be given or served as follows:
(a) If
given
or served by Landlord, (1) by hand delivery to Tenant, (2) by mailing same
to
Tenant by registered or certified mail, postage prepaid, return receipt
requested, or (3) by delivery by overnight courier such as Federal Express,
all
delivered and addressed to Tenant at the following address:
16313
North Dale Mabry Hwy, Ste 100
Tampa,
FL
33618
Attn:
Mr.
Warren Nelson
25
(b) If
given
or served by Tenant, (1) by hand delivery to Landlord, (2) by mailing same
to
Landlord by U.S. registered or certified mail, postage prepaid, return receipt
requested, or (3) by delivery by overnight courier such as Federal Express,
all
delivered and addressed to Landlord at the following address:
|
Fortress
Realty Management, LLC
|
5221
N
O’Connor, Suite 700
Irving,
Texas 75039
Attn:
David Pettijohn
(c) All
notices, demands, requests or other communications hereunder shall be deemed
to
have been given or served: (1) if hand delivered, on the date received (or
the
date delivery is refused) by the recipient party; (2) if delivered by registered
or certified mail, three (3) days after the date of posting as marked on
the
U.S. postage receipt; and (3) if by Federal Express or similar overnight
courier
service, on the date of receipt (or the date delivery is refused) by the
recipient party.
(d) Either
Landlord or Tenant may at any time during the Lease Term designate one
additional party to whom copies of notices must be sent.
(e) Either
Landlord or Tenant may from time to time change its address for receiving
notices under this Lease by providing written notice to the other party in
accordance with this Article XIX.
ARTICLE
XX
ACCESS
Section
20.01
Landlord
and its designees shall have the right on Twenty-Four (24) hours' prior written
notice (except in the event of an emergency, where no prior notice shall
be
required) to Tenant to enter upon the Demised Premises at reasonable hours
accompanied by an employee of Tenant to inspect such Demised Premises or,
during
the period commencing one hundred eighty (180) days prior to the end of the
Lease Term, for the purpose of exhibiting same to prospective tenants.
Landlord's right to enter and inspect the Demised Premises shall include
the
right to take samples of Environmental Media (as defined in Article XXXVII)
as
necessary to confirm the presence or absence of Hazardous Materials. Such
entry
and/or inspection shall not unreasonably interfere with Tenant's ability
to
conduct its business operations from the Demised Premises.
ARTICLE
XXI
SIGNS
No
sign
shall be installed on the Demised Premises until all governmental approvals
and
permits required therefore are first obtained and all fees pertaining thereto
have been paid by Tenant. In no event shall Tenant permit the installation
of
billboards or similar signs pertaining to or advertising businesses, trade
names
or activities other than Tenant's operation of a restaurant.
26
ARTICLE
XXII
IMPROVEMENTS
AND FIXTURES
Section
22.01
Any and
all portions of the Building, all other improvements on the Real Property
at the
Commencement Date and all fixtures on the Demised Premises at the Commencement
Date shall be the property of Landlord. In the event that Tenant installs
or
erects fixtures or improvements to the Demised Premises after the Commencement
Date, such fixtures or improvements (except those referenced in Section 22.02
which can be removed without damage to the Demised Premises) shall at the
expiration or earlier termination of the Lease, become the property of Landlord
and remain upon and be surrendered with the Demised Premises. Notwithstanding
the foregoing provisions, Tenant shall be liable for all property taxes,
assessments, and similar charges assessed against or allocable to any fixtures
or equipment at the Demised Premises (irrespective of whether such fixtures
are
owned by Landlord or Tenant) and which are attributable to any period of
time
during the Lease Term.
Section
22.02
Moveable
trade fixtures (except the Landlord’s Equipment, as defined in Section 22.03),
furnished or installed by Tenant on the Demised Premises, shall be and remain
the property of Tenant and may be removed by Tenant or others entitled to
remove
same at any time during the Lease Term provided that Tenant is not in
default
of this Lease, provided that such removal shall in no way affect Tenant’s
covenants with respect to the operation of the Demised Premises pursuant
to
Section 3.09. Tenant shall repair all damage to the Demised Premises caused
by
removal of any such trade fixtures by Tenant or its subtenants, licensees
or
mortgagees. Upon default
of this Lease by Tenant, Landlord shall have the option to purchase any or
all
of such trade fixtures, and equipment for $1.00, which option is assignable
by
Landlord.
Section
22.03
During
the Lease Term, Tenant shall be entitled to use Landlord’s equipment
(“Landlord’s Equipment”) in Tenant’s operations at the Demised Premises.
Landlord’s Equipment shall include the following items located at each Demised
Premises on the Commencement Date: walk-in coolers/refrigerators, freezers,
HVAC
equipment and hoods. Tenant shall keep the Landlord’s Equipment in good working
order and repair (normal wear and tear, casualty and condemnation excepted),
shall not remove Landlord’s Equipment from the Demised Premises and shall not
permit any lien or other encumbrance to attach to Landlord’s Equipment. Tenant
shall keep the equipment insured and shall be responsible for any casualty
or
other loss to Landlord’s Equipment or occasioned by Landlord’s Equipment. Tenant
may, from time to time, retire or replace Landlord’s Equipment with new items of
equipment purchased by Tenant, in which event such replaced items of Equipment
shall become Landlord’s Equipment.
ARTICLE
XXIII
END
OF
TERM
Upon
the
expiration or earlier termination of the Lease Term, Tenant shall peaceably
and
quietly quit and surrender the Demised Premises, and all Alterations which
are
then part of the Demised Premises, broom clean and in good order and condition,
subject to reasonable wear and tear and except as provided in Articles XII
and
XIII. Tenant shall, within thirty (30) days prior to the end of the Lease
Term,
transfer to Landlord all plans, drawings,
other
Alteration Information,
and
technical descriptions of the Property, and shall assign to Landlord all
assignable permits, licenses, authorizations and warranties with respect
to the
Property (in each case to the extent not previously transferred or assigned
to
Landlord). This Article XXIII shall survive the expiration or termination
of the
Lease.
27
ARTICLE
XXIV
HOLDING
OVER
If
Tenant
holds over in possession after the expiration of the Lease Term, then such
holding over shall not be deemed to extend the Lease Term or renew this Lease,
but rather the tenancy thereafter shall continue as a tenancy at sufferance
pursuant to the terms and conditions herein contained, at One Hundred Fifty
percent (150%) of the Fixed Rent; and Tenant shall be responsible for the
consequences of any unauthorized holdover and shall indemnify, defend, protect
(with counsel selected by Landlord) and hold Landlord
Parties
wholly
free and harmless of, from and against any and all damages, losses, costs,
expenses and claims arising therefrom, including attorneys fees and
costs.
28
ARTICLE
XXV
ASSIGNMENT
AND SUBLETTING
Section
25.01
This
Lease shall be fully assignable by the Landlord or its assigns, subject to
the
terms of Article XXXIV.
Section
25.02
(a)
Neither Tenant, nor Tenant's successors or assigns, shall assign in whole
or in
part, by operation of law or otherwise, or sublet the Demised Premises, in
whole
or in part, or permit the Demised Premises or any portion of it to be used
or
occupied by others, or enter into a management contract or other arrangement
whereby the Demised Premises shall be managed or operated by anyone other
than
the owner of the Tenant's leasehold estate, without the prior written consent
of
Landlord in each instance. Provided Tenant remains liable for all its
obligations under this Lease, Landlord shall not unreasonably withhold consent
to an assignment of this Lease to an individual, partnership or corporation
if
such individual, partnership or corporation has,
in the
opinion of Landlord, a
record
of timely payment of obligations and compliance with applicable laws and
is a
commercially and financially sound individual, partnership, or corporation.
Tenant may assign or sublease the Demised Premises without the consent of
Landlord if such assignment or sublease is to a partnership of which Tenant
is a
general partner or a corporation of which Tenant is the majority shareholder
or
to the parent
corporation of Tenant or
an
affiliate under common control of the parent corporation of Tenant or in
the
event of Tenants’ merger or consolidation with another entity; provided further
that no such assignment or sublease shall relieve Tenant of any liability
hereunder, and Tenant shall not transfer its interest as a general partner
(or
as a majority shareholder as the case may be) without the prior written consent
of Landlord in each instance, which consent shall not be unreasonably
withheld.
(b)
Tenant shall submit current financial statements of any proposed assignee
or
sublessee together with Tenant's request for Landlord's approval of any proposed
assignment or sublease, except if (i) the proposed assignee or sublessee
is a
partnership of which Tenant is a general partner, or is a corporation or
limited
liability company of which Tenant is a major shareholder, parent company
or an
affiliate under common control, and (ii) the financial statements of such
proposed assignee or sublessee are consolidated with Tenant. Tenant shall
reimburse Landlord for all costs and expenses actually paid by Landlord in
connection with any requested assignment or sublease in an amount not to
exceed
Two Thousand Five Hundred Dollars ($2,500.00). Such amount shall increase
by
three percent (3%) on each anniversary of the Effective Date of this
Lease.
(c)
If
this Lease is assigned or transferred, or if all or any part of the Demised
Premises is sublet or occupied by any party other than Tenant, Landlord may
collect rent from the assignee, transferee, subtenant or occupant, and apply
the
net amount collected to the Rent reserved in this Lease, but no such assignment,
subletting, occupancy or collection shall be deemed a waiver of any covenant
or
condition of this Lease, or the acceptance of the assignee, transferee,
subtenant or occupant as tenant, or a release of Tenant from the performance
or
further performance by Tenant of its obligations under this Lease. Without
limiting the generality of the forgoing, Tenant expressly acknowledges and
agrees that in the event of an assignment of this Lease, Tenant shall remain
joint and severally liable with the assignee for all of the obligations under
this Lease, and in all other cases of any transfer of Tenant's interest under
this Lease, Tenant shall remain primarily liable for such obligations, unless
released by
Landlord in writing pursuant to Section 25.03. Subject to the foregoing,
the
consent by Landlord to an assignment, transfer, management contract or
subletting shall not in any way be construed to relieve Tenant from obtaining
the express written consent of Landlord in each instance to any subsequent
similar action that Tenant may intend to take.
29
Section
25.03
Notwithstanding anything contained in Section 25.02 to the contrary, Tenant
shall have the right to sublease the Demised Premises in the ordinary course
of
Tenant’s business with Landlord’s consent, which shall not be unreasonably
withheld, and provided that Tenant delivers to Landlord copies of such sublease
agreements contemporaneous with their effectiveness, and Tenant remains
primarily liable for all obligations under this Lease.
Section
25.04
An
assignment made with Landlord's consent or as otherwise permitted hereunder
shall not be effective until Tenant delivers to Landlord an executed counterpart
of such assignment containing an agreement, in recordable form, executed
by the
assignor and the proposed assignee, in which the assignee assumes the
performance of the obligations of the assignor under this Lease throughout
the
Lease Term.
Section
25.05
This
Lease shall be binding upon, enforceable by, and inure to the benefit of
the
parties hereto and their respective heirs, successors, representatives and
assigns.
ARTICLE
XXVI
LANDLORD'S
LOAN; TENANT’S LOAN
Section
26.01
This
Lease shall be subject and subordinate to all ground leases and the lien
of all
mortgages and deeds of trust which now or hereafter affect Landlord’s interest
in the Demised Premises, and all amendments thereto, all without the necessity
of Tenant's executing further instruments to effect subordination. The interest
in the Demised Premises of any such future ground lessee or lienholder shall
have priority over the interest of Tenant in this Lease and in the Demised
Premises provided that such ground lessee or lienholder executes a
non-disturbance and attornment agreement in the form of the Subordination,
Nondisturbance and Attornment Agreement attached as Exhibit F hereto. Tenant
shall execute and deliver to Landlord on the Commencement Date a Subordination,
Nondisturbance and Attornment Agreement in the form of Exhibit
F,
and
shall upon ten (10) days’ written notice from Landlord, execute additional
subordination, nondisturbance and attornment agreements and obtain from any
subtenant at the Demised Premises, subordination, nondisturbance and attornment
agreements substantially in the form of Exhibit
F.
Section
26.02
In the
event of a foreclosure proceeding, the exercise of the power of sale under
any
mortgage or deed of trust or the termination of a ground lease, Tenant shall,
if
requested, attorn to the purchaser thereupon and recognize such purchaser
as
Landlord under this Lease; provided, however, Tenant's obligation to attorn
to
such purchaser shall be conditioned upon such purchaser’s written agreement not
to disturb Tenant's interest in this Lease, except that such purchaser shall
be
entitled to enforce all rights
and
remedies
of
Landlord hereunder.
30
Section
26.03
Books
and Records. Tenant shall keep accurate books and records of account sufficient
sufficient
to permit the preparation of financial statements in accordance with generally
accepted accounting principles as in effect in the United States of America
from
time to time (“GAAP”). Landlord and its duly authorized representatives shall
have the right to examine, copy and audit Tenant’s records and books of account
at all reasonable times during regular business hours. Tenant shall provide,
or
cause to be provided, to Landlord, in addition to any other financial statements
required under this Lease, the following financial statements and information,
all of which must be prepared in a form acceptable to Landlord:
(i) promptly
and in any event within forty-five (45) days after the end of each of the
first
three (3) calendar quarters, and ninety (90) days after year-end, statements
of
financial position of Tenant as of the end of each such quarter or year-end,
as
applicable, including a balance sheet and statement of profits and losses,
expenses and retained earnings, changes in financial position and cash flows,
which statements shall be duly certified by an officer of Tenant to fairly
represent the financial condition of Tenant, as of the date thereof, prepared
by
Tenant in accordance with GAAP, and, with respect to the year-end statement
only, accompanied by a statement of a nationally recognized accounting firm
acceptable to Landlord in its sole discretion that such financial statements
present fairly, in all material respects, the financial condition of Tenant
as
of the end of the calendar year being reported on and that the results of
the
operations and cash flows for such year were prepared, and are being reported
on, in conformity with GAAP;
and
(ii) Property
level profit and loss statements on a monthly basis, delivered to Landlord
on or
before the twentieth (20th)
day of
the end of the following month, and containing year-to-date information;
and
(iii) such
other information with respect to the Demised Property or Tenant that may
be
reasonably requested from time to time by Landlord, within a reasonable time
after the applicable request, provided that such information is collected
by
Tenant in the ordinary course of its business and that Tenant shall not incur
additional costs in delivering same to Landlord.
If
Tenant is publically traded on a national securities exchange, financial
information reported by Tenant to the Securities and Exchange Commission
will
satisfy the requirements of Section 26.03(i) hereof.
Section
26.04
Provided
that Tenant and Landlord
shall
secure any required consent from Landlord’s Lender, Tenant shall have the right
to encumber or hypothecate Tenant's interest in the leasehold estate created
by
this Lease but only with a leasehold deed of trust,
mortgage,
assignment
of leases,
assignment, security agreement
and/or
other
security document
securing
a loan from a lender approved by Landlord
(collectively, a "Leasehold Mortgage").
All
proceeds from such Leasehold Mortgage shall remain the property of
Tenant.
31
Section
26.05
Landlord
shall not be obligated to subordinate any or all of Landlord's right, title
or
interest in and to the Demised Premises and this Lease to the lien of any
Leasehold Mortgage.
Section
26.06
A
Leasehold Mortgage shall encumber only Tenant's leasehold interest in the
Demised Premises, and shall not encumber Landlord's right title or interest
in
the Demised Premises. Landlord shall have no liability whatsoever for the
payment of the note or any obligation secured by any Leasehold Mortgage or
any
other provisions of such note or the Leasehold Mortgage or related obligations.
Should there be any conflict between the provisions of this Lease and of
any
Leasehold Mortgage, the provisions of this Lease shall control. No Leasehold
Mortgage will be for a term longer than the Term of this Lease, as and if
extended as provided herein. Either prior to or concurrently with the
recordation of the Leasehold Mortgage, Tenant shall cause a fully conformed
copy
thereof and of the note secured thereby to be delivered to Landlord, together
with a written notice containing the name and post office address of the
Lender
(as defined herein).
Section
26.07
If
Landlord declares a default under this Lease, Landlord shall notify any Lender
who has given Landlord a prior written request for such notice of such default
by sending a copy of the default notice required under this Lease to the
Lender.
Section
26.08
Immediately upon the recording of the Leasehold Mortgage, Tenant, at Tenant's
expense, shall cause to be recorded in the office of the County Recorder
of each
county in which the Demised Premises is located, a written request duly executed
and acknowledged by Landlord for a copy of any notice of default and of any
notice of sale under the Leasehold Mortgage, as provided by the law in which
the
Demised Premises are located.
Section
26.9
If title
to Landlord's estate and to Tenant's estate are acquired by the same person
or
entity, other than as a result of termination of this Lease, no merger shall
occur if the effect of such merger would impair the lien of any Leasehold
Mortgage.
ARTICLE
XXVII
MAINTENANCE
OF OUTSIDE AREAS
Section
27.01
The term
"Outside Areas" shall refer to all areas outside of the Buildings including
all
sidewalks, driveways, landscaping, trash enclosures, and trash compacting
and
loading areas on the Demised Premises.
Section
27.02
Tenant
shall be responsible for maintaining the Outside Areas in a neat and clean
condition, and shall ensure that debris from the operation of each
restaurant
on the
Demised Premises
are
cleaned on a regular basis.
32
ARTICLE
XXVIII
CERTIFICATES
Section
28.01
(a) Tenant
shall, at
its
sole cost and expense,
at any
time and from time to time, within ten (10) days after delivery of written
request by Landlord, deliver a written instrument to Landlord or any other
person, firm or corporation specified by Landlord, duly executed and
acknowledged, certifying that:
|
(i)
|
This
Lease is unmodified and in full force and effect, or if there has
been any
modification, that the Lease is in full force and effect as modified
and
stating any such modification;
|
|
(ii)
|
Whether
or not there are then existing, to the knowledge of the executing
officer,
any defenses against the enforcement of any of the agreements,
terms,
covenants or conditions of this Lease upon the part of Tenant to
be
performed or complied with, and, if so, specifying same (including,
without limitation, whether Tenant knows or does not know of any
default
by Landlord in Landlord’s performance of all agreements, terms, covenants
and conditions to be performed by Landlord, and if such default
does
exist, specifying same); and
|
|
(iii)
|
The
amounts and dates to which the Fixed Rent, and Additional Rent
have been
paid, the amounts of any and all outstanding balances of such items,
if
any, known to Tenant.
|
|
(iv)
|
Such
other truthful information reasonably requested by
Landlord.
|
(b) Tenant's
failure to so deliver said certificate shall
constitute an Event of Default at
the
sole
option of Landlord
and shall be conclusive as to the truthfulness of the items stated in Landlord's
request. Delivery of a completed Estoppel Certificate in substantially the
form
as set forth on Exhibit C attached hereto (“Estoppel Certificate”) shall satisfy
this requirement.
Section
28.02
Landlord
shall, at
its
sole cost and expense, at any time and from time to time, within ten (10)
days
after request by Tenant deliver to Tenant or any entity indicated by Tenant
a
written instrument, certifying whether or not its Lease is in full force
and
effect; whether it has been modified (and if so setting forth such
modification); whether Tenant has fully made all payments then and theretofore
due under this Lease, and whether Landlord knows or does not know, as the
case
may be, of any default by Tenant in the performance by Tenant of all agreements,
terms, covenants and conditions on Tenant's part to be performed and if it
does
know of any failures or defaults, specifying same and setting forth such
other
truthful information as may be reasonably requested by Tenant. Delivery of
a
completed Estoppel Certificate similar (except for the parties) to the form
set
forth on Exhibit C attached
hereto shall satisfy this requirement.
33
ARTICLE
XXIX
RELATIONSHIP
OF PARTIES
Nothing
contained in this Lease shall be construed to create the relationship of
principal and agent, partnership, joint venture or any other relationship
between the parties hereto other than the relationship of Landlord and Tenant.
Except as otherwise expressly provided herein, this Lease shall not in any
way
impose any liability upon the members, stockholders, officers, directors
or
trustees of Landlord if Landlord should be a limited liability company,
corporate entity, or trust, or upon the stockholders, officers, directors
or
trustees of Tenant if Tenant should be a corporate entity or trust. If
more
than one person or entity is named as the Tenant hereunder, the obligations
under this Lease of all such persons and entities as Tenant shall be joint
and
several.
ARTICLE
XXX
RECORDING
Neither
Landlord nor Tenant shall record this Lease; however, upon the request of
either
party hereto, the other party shall join in the execution of a memorandum
of
lease for the purposes of recordation in the form attached hereto as Exhibit
D
and by
this reference incorporated herein (the "Memorandum"). The Memorandum shall
describe the parties, the Demised Premises, the term of this Lease, any special
provisions other than those pertaining to Rent and shall incorporate this
Lease
by reference. Tenant shall pay all costs charged or collected by the County
Recorders to record the Memoranda.
ARTICLE
XXXI
CAPTIONS
AND SECTION NUMBERS
The
captions, section numbers, and index appearing in this Lease are inserted
only
as a matter of convenience and in no way define, limit, construe or describe
the
scope or intent of such sections or articles nor in any way affect this
Lease.
ARTICLE
XXXII
APPLICABLE
LAW
This
Lease shall be governed by, and construed in accordance with the laws of
the
State of New York. If any provision of this Lease or the application thereof
to
any person or circumstances shall, to any extent, be invalid or unenforceable,
the remainder of this Lease shall not be affected thereby, and each provision
of
the Lease shall be valid and enforceable to the fullest extent permitted
by the
law.
ARTICLE
XXXIII
ENTIRE
AGREEMENT
This
Lease and the Exhibits attached hereto, all of which form a part hereof,
set
forth all the covenants, promises, agreements, conditions and understandings
between Landlord and Tenant concerning the Demised Premises, and there are
no
covenants, promises, agreements, conditions or understandings heretofore
made,
either oral or written, between them other than as herein set forth. No
modification, amendment, change or addition to this Lease shall be binding
upon
Landlord or Tenant unless reduced to writing and signed by each party. Time
is
of the essence of this Lease.
34
ARTICLE
XXXIV
LANDLORD'S
LIABILITY
The
obligations of Landlord under this Lease are not personal obligations of
the
individual members, partners, directors, officers, shareholders, agents or
employees of Landlord; Tenant shall look solely to the Demised Premises for
satisfaction of any liability of Landlord and shall not look to other assets
of
Landlord nor seek recourse against the assets of the individual members,
partners, directors, officers, shareholders, agents or employees of Landlord.
Whenever Landlord transfers its interest, Landlord shall be automatically
released from further performance under this Lease and from all further
liabilities and expenses hereunder, provided the transferee of Landlord's
interest assumes all liabilities and obligations of Landlord hereunder from
the
date of such transfer.
ARTICLE
XXXV
ATTORNEYS'
FEES
If
any
legal action should be commenced in any court regarding any dispute arising
between the parties hereto, or their successors and assigns, concerning any
provision of this Lease or the rights and duties of any person in relation
thereto, then the prevailing party therein shall be entitled to collect its
reasonable expenses, attorneys' fee and court costs, including the same on
appeal. As used herein, the term “prevailing party” means the party who, in
light of the claims, causes of action, and defenses asserted, is afforded
greater relief.
ARTICLE
XXXVI
INTENTIONALLY
DELETED
ARTICLE
XXXVII
ENVIRONMENTAL
Section
37.01
(a) For
the
purpose of this Lease, the following definitions pertaining to environmental
matters shall apply:
“Environmental
Conditions” means the conditions of “Environmental Media” (as defined below),
and the conditions of any part of the Demised Premises, including but not
limited to building materials, which affect or may affect Environmental
Media.
"Environmental
Laws" shall mean any federal, state or local law, statute, ordinance, permit
condition or regulation pertaining to public health, occupational health
and
safety, natural resources or environmental protection, including, without
limitation: (1) the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S. C. ࿙ 9601 et
seq.
as
amended (“CERCLA”), the Solid Waste Disposal Act, 42 U.S.C. ࿙ 6901 et
seq.
as
amended (“RCRA”), the Federal Water Pollution Control Act of 1972, as amended by
the Clean Water Act of 1977, as amended, 33 U.S.C. 1251 et
seq.;
the
Toxic Substances Control Act of 1976, as amended, 15 U.S.C. 2601 et
seq.;
the
Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. 11001
et
seq.;
the
Clean Air Act of 1966, as amended by the Clean Air Act Amendments of 1990,
42
USC 7401 et
seq.;
the
National Environmental Policy Act of 1970, as amended, 42 USC 4321 et
seq.;
the
Rivers and Harbors Act of 1899, as amended, 33 USC 401 et
seq.;
the
Mine Safety and Health Act of 1977, as amended, 30 U.S.C. Section 801
et
seq.
the
Endangered Species Act of 1973, as amended, 16 U.S.C. 1531, et
seq.;
the
Occupational Safety and Health Act of 1970, as amended 29 U.S.C. 651,
et
seq.;
the
Safe Drinking Water Act of 1974, as amended, 42 U.S.C. 300(f) et
seq.,
the
Hazardous Materials Transportation Act, 49 U.S.C. Sections 1801 et
seq.
as
amended, and all regulations, published governmental policies, and
administrative or judicial orders promulgated under said laws; (2)
all
state or local laws which implement the foregoing federal laws or which pertain
to public health and safety, occupational health and safety, natural resources
or environmental protection: all as amended from time to time, and all
regulations, published governmental policies, and administrative or judicial
orders promulgated under the foregoing laws; (3)
all
federal and state common law, including but not limited to the common law
of
public or private nuisance, trespass, negligence or strict liability, where
such
common law pertains to public health and safety, occupational health and
safety,
natural resources, environmental protection, or the use and enjoyment of
property, and all judicial orders promulgated under said laws; and (4)
all
comparable local laws and comparable laws of other jurisdictions.
35
“Environmental
Media” means soil, fill material, or other geologic materials at all depths,
groundwater at all depths, surface water including storm water and sewerage,
indoor and outdoor air, and all living organisms, including without limitation
all animals and plants, whether such Environmental Media are located on or
off
the Demised Premises.
"Hazardous
Materials" means any ignitable, reactive, explosive, corrosive, carcinogenic,
mutagenic, toxic or radioactive material, whether virgin material, secondary
material, by-product, waste or recycled material, defined, regulated or
designated as a contaminant, pollutant, hazardous or toxic substance, material,
waste, contaminant or pollutant under any Environmental Laws or any other
federal, state or local law, statute, regulation, ordinance, or governmental
policy presently in effect or as amended or promulgated in the future, and
shall
specifically include, without limitation: (a) those materials included within
the definitions of "hazardous substances," “extremely hazardous substances,”
"hazardous materials," "toxic substances" “toxic pollutants,” “hazardous air
pollutants” “toxic air contaminants,” "solid waste," “hazardous waste,”
“pollutants,” contaminants” or similar categories under any Environmental Laws;
(b) those materials which create liability under common law theories of public
or private nuisance, negligence, trespass or strict liability; and (c)
specifically including, without limitation, any material, waste or substance
which contains: (i) petroleum or petroleum derivatives byproducts, including
crude oil and any fraction thereof and waste oil; (ii) asbestos; (iii)
polychlorinated biphenyls; (iv) formaldehyde; and (v) radon.
36
“Release”
means any active or passive spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping or disposing
into
any Environmental Media. For the purposes of this Lease, “Release” also includes
any threatened Release.
“Remedial
Activities” means any investigation, work plan preparation removal, repair,
cleanup, abatement, remediation, monitored natural attenuation, natural resource
damage assessment and restoration, closure, post-closure, detoxification
or
remedial activity of any kind whatsoever necessary to address Environmental
Conditions.
“Use”
means the receipt, handling, generation, storage, treatment, recycling,
transfer, transportation, introduction, or incorporation into, on, about,
under
or from the Demised Premises.
(b)
Tenant acknowledges that it owned and operated the Demised Premises prior
to
selling the Demised Premises to Landlord and that Landlord makes no warranties
or representations of any kind, or in any manner or in any form whatsoever,
as
to the status of Environmental Conditions or Hazardous Materials at the Demised
Premises. Landlord has granted Tenant the absolute right to inquire with
regard
to the Environmental Conditions of the Demised Premises, including the right
to
inquire and obtain from Landlord or Landlord's predecessor copies of any
and all
existing environmental assessments. Landlord agrees to furnish Tenant with
all
copies of non-legally privileged environmental reports covering the Demised
Premises, if any, which are in the possession of Landlord. Tenant will conduct
at its own expense any and all investigations regarding Environmental Conditions
of the Demised Premises and will satisfy itself as to the absence or existence
of Hazardous Materials contamination of the Demised Premises. Tenant's entry
into this Lease shall be made at its sole risk.
Section
37.02
From and
after the Effective Date, Tenant shall not be entitled to the Use of any
Hazardous Materials at the Demised Premises, unless performed in full compliance
with all Environmental Laws and any other applicable local, state and federal
statutes, orders, ordinances, rules and regulations. Tenant shall be prohibited
from conducting or allowing the Release of Hazardous Materials onto, on,
about,
under or from the Demised Premises, the exception being sewer or other permitted
discharges or Releases,
in full
compliance with all Environmental Laws and any other applicable laws. From
and
after the date of this Lease, Tenant covenants to, and shall, undertake all
Remedial Activities necessary to address any Use or Release of Hazardous
Materials after the date of this Lease, by Tenant or its agents, employees,
representatives, invitees, licensees, subtenants, customers or contractors
("Other Parties"), or otherwise adversely affecting the Demised Premises
at
Tenant's sole cost and expense, and shall give immediate written notice of
same
to Landlord. If any Remedial Activities are required to be performed at any
location other than the Demised Premises, Tenant shall use its best efforts
to
obtain any required access agreements from third parties.
37
Section
37.03
In
addition to any other obligation herein, Tenant shall defend, indemnify and
hold
Landlord Parties
free and
harmless from any and all claims, losses, liabilities and other obligations
of
any kind whatsoever that may be made against or incurred by Landlord
Parties in
connection with (i) the violation of any Environmental Law, or (ii) Hazardous
Materials or Environmental Conditions at or from the Demised Premises whether
heretofore now existing or hereafter arising, and whether in connection with
or
as a result of Tenant's operations at the Demised Premises,
including without limitation any and all costs and fees of attorneys or experts
incurred by Landlord in defending against same; provided, however, that the
foregoing indemnity shall not be applicable to the extent any such claims
are
directly attributed to the gross negligence, or willful misconduct of Landlord.
This and any other right of Landlord may be assigned to its successors in
interest under the terms of this Lease.
Section
37.04
Within
fifteen (15) days after notification to Tenant, Tenant shall inform Landlord
in
writing of (i) any and all enforcement actions, initiation of Remedial
Activities where no Remedial Activities are currently being conducted upon
receipt of such notification, or other governmental or regulatory actions
(excluding routine actions such as permit renewals) instituted, completed
or
threatened pursuant to any Environmental Laws affecting the Demised Premises;
(ii) all claims made or threatened by any third person against Tenant or
the
Demised Premises relating in any way whatsoever to Hazardous Materials or
Environmental Conditions (the matters set forth in clauses (i) and (ii) are
hereinafter referred to as “Environmental Claims"); (iii) Tenant's knowledge of
any material Release of Hazardous Materials at, on, in, under to or from
the
Demised Premises or on, in or under any adjoining property. Tenant shall
also
supply to Landlord within three (3) business days after Tenant first receives
or
sends the same, copies of all claims, reports, complaints, notices, warnings,
asserted violations or other communications relating in any way to the matters
described in this Section.
Section
37.05
In
addition to any other obligations herein, Tenant shall be solely responsible
for
and shall indemnify and hold harmless all
Landlord
Parties from
and
against any and all private or governmental claims, lawsuits, administrative
proceedings, judgments, penalties, fines, proceedings, loss, damage, cost,
expense or liability directly or indirectly arising out of or associated
in any
manner whatsoever with Tenant's Use or the presence of Hazardous Materials
(which may have occurred at any time including prior to the term hereof)
or
Release of Hazardous Materials at, on, under, about or from the Demised Premises
during the term hereof, including any extensions. Tenant's indemnity and
release
includes, without limitation: (i) the costs associated with Remedial Activities,
including all necessary plans and reports, incurred by the U.S. Environmental
Protection Agency, or any other federal, state or local governmental agency
or
entity or by any other person, incurred pursuant to the CERCLA, RCRA, or
any
other applicable Environmental Laws; (ii) any oversight charges, fines, damages
or penalties arising from the presence or Release of Hazardous Materials,
and
any related Remedial Activities, incurred pursuant to the provisions of CERCLA,
RCRA, or any other applicable Environmental Laws; (iii) any liability to
third
parties arising out of the presence or Release of Hazardous Materials for
personal injury, bodily injury, or property damage arising under any statutory
or common law theory, including damages assessed for the maintenance of a
public
or private nuisance, the costs of Remedial Activities, or for the carrying
on of
an abnormally dangerous activity; (iv) all direct or indirect compensatory,
consequential, or punitive damages arising out of any claim based on the
presence or Release of Hazardous Materials or damage or threatened damage
to
Environmental Conditions; (v) any and all reasonable costs, fees and expenses
of
attorneys, consultants and experts incurred or sustained in making any
investigation on account of any claim, in prosecuting or defending any action
brought in connection therewith, in obtaining or seeking to obtain a release
therefrom, or in enforcing any of the agreements herein contained; and (vi)
Rent
during any period of Remedial Activities equal to the Base Rent then in effect,
or if the Lease has terminated, the Base Monthly Rent which was in effect
on the
Termination Date; provided, however, that the foregoing indemnity shall not
be
applicable to the extent any such claims are directly attributable to the
gross
negligence or willful misconduct of Landlord The foregoing indemnity shall
apply
to Tenant's Use of Hazardous Materials irrespective of whether any of Tenant's
activities were or will be undertaken in accordance with Environmental Laws
or
other applicable laws, regulations, codes and ordinances. This indemnity
is
intended to be operable under 42 U.S. C.࿙ 9607(e)(1). Tenant specifically agrees
that it shall not sue or seek contribution from any indemnitee or any successors
or assigns thereof in any matter relating to any Hazardous Material liability
except as a result of the gross negligence of Landlord or other
Landlord
Parties
on the Demised Premises. All costs and expenses related to this paragraph
incurred by Landlord shall be repaid by Tenant to Landlord as Additional
Rent.
This indemnity shall survive termination of the Lease.
38
ARTICLE
XXXVIII
ADDENDA
Section
38.01
The
following exhibits have been agreed to by the parties and attached hereto
or
initialed by the parties prior to the execution hereof, it being the intention
of the parties that they shall become a binding part of this Lease as if
fully
set forth herein.
Exhibit
A
Location/Legal
Description/Address of the Real Property
Exhibit
B
Tenant’s
Personal Property List
Exhibit
C Tenant's
Estoppel Certificate
Exhibit
D
Memorandum
of Lease
Exhibit
E
Intentionally
Deleted
Exhibit
F Subordination,
Nondisturbance and Attornment Agreement
Exhibit
G Intentionally
Deleted
Exhibit
H Intentionally
Deleted
ARTICLE
XXXIX
COUNTERPARTS
Section
39.01
This
Lease may be executed in counterparts and shall be binding on all the parties
hereto as if one document had been signed. The delivery of an executed copy
of
this Lease by facsimile transmission shall have the same force and effect
as the
delivery of the original, signed copy of this Lease.
39
[SIGNATURES
ON FOLLOWING PAGE]
40
IN
WITNESS WHEREOF, the parties have executed this Lease to be effective as
of the
date first above written.
|
LANDLORD:
FRI FISH, LLC
|
||
| |
|
|
| By: | ||
|
Witness |
Name:_________________________________
Title:__________________________________
|
|
|
Witness
|
||
|
TENANT:
SHELLS OF NEW SMYRNA BEACH,
INC
|
||
| |
|
|
| By: | ||
|
Witness |
Name:_________________________________
Title:__________________________________
|
|
|
Witness |
||
41
EXHIBIT
A
LOCATION/LEGAL
DESCRIPTION/ADDRESS OF REAL PROPERTY
Physical
Address:
725
E/
3rd
Ave.,
New Smyrna Beach, FL
42
EXHIBIT
B
TENANT’S
PERSONAL PROPERTY LIST
43
EXHIBIT
C
TENANT'S
ESTOPPEL CERTIFICATE
The
undersigned,_______________,
whose
address is 16313
North Dale Mabry Hwy., Ste 100, Tampa, FL 33618
represents and certifies as follows:
1. The
undersigned is (i) the tenant (“Tenant”) under that certain lease (“Lease”)
dated _______________
with
_____________________
as
Landlord, covering the property described therein (collectively the “Demised
Property”).
2. The
Lease
constitutes the only agreement (either written or oral) the undersigned has
with
respect to the Demised Property and any right of occupancy or use
thereof.
3. The
Lease
is in full force and effect and has not been assigned, subleased, supplemented,
modified or amended except as follows:
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
4. The
undersigned presently occupies the Demised Property and is paying rent on
a
current basis. No rent has been paid by Tenant in advance except for the
monthly
rental that became due on _______________, and a security deposit in the
sum of
US$0.00 now
held
by Landlord in accordance with the terms of the Lease.
5. The
monthly Fixed Rent is the sum of_________________________Dollars
(US$_____________).
6. The
present Lease term expires on ________________
and
there are no options to renew except: four
(5) five-year options.
7. There
are
no defaults under the Lease by Landlord or any events which with the passage
of
time or giving of notice or both will result in any such default. The
undersigned does not presently have (nor with the passage of time or giving
of
notice or both will have) any offset, charge, lien, claim, termination right
or
defense under the Lease.
8. The
undersigned occupies and has accepted possession of the Demised Property
covered
by the Lease. All obligations of Landlord under the Lease required to be
performed to date, including any improvements to be constructed by Landlord
(or
its predecessors or successors) or the granting of any free rent, rent credit,
offset, deductions, building allowance or rent reduction have been completed
to
the satisfaction of the undersigned.
44
9. Landlord
has no personal liability under the Lease (recourse against Landlord being
limited to Landlord’s interest in the Demised Property).
10. The
undersigned is aware that third parties intend to rely upon this Certificate
and
the statements set forth herein and that the statements and facts set forth
above shall be binding on the undersigned
11. The
undersigned and the persons executing this Certificate on behalf of the
undersigned have the power and authority to execute and deliver this
Certificate.
12. Tenant
has no right of first refusal, or option to purchase, with respect to all
or any
portion of any Demised Property; and
13. No
deposits or prepayments of rent have been made in connection with the Lease,
except as follows:_________________________
|
“TENANT”
Shells
of New Smyrna Beach, Inc.
|
||
| |
|
|
| By: | ||
|
Name:_________________________________
Title:__________________________________
|
||
45
EXHIBIT
D
MEMORANDUM
OF LEASE
(Above
space reserved for recorder and recording information)
This
instrument prepared by and after
recording return to:
MEMORANDUM
OF LEASE
This
Memorandum of Lease is made and entered into as of October 27, 2006 by and
between FRI FISH, LLC (“Landlord”) and Shells
of
New Smyrna Beach, Inc. (“Tenant”),
who agree as follows:
1. Terms
and Premises. Pursuant
to a certain Land and Building Lease (the "Lease") dated October 27, 2006
entered into between Landlord and Tenant,
Landlord
has leased to Tenant and Tenant has leased from Landlord a leasehold estate
for
years in and to Landlord's reversionary fee simple interest in that certain
real
property, together with all the improvements thereon and appurtenances thereunto
belonging (the “Premises”), more particularly described on Exhibit “A” which is
attached hereto and incorporated herein, commonly known as:
-
commencing on October 27, 2006 and expiring on October 26, 2026. Tenant has
FOUR
(4) five-year options to extend the term of the Lease, all as more particularly
set forth in the Lease.
2. Subordination
Provisions. Tenant’s rights under the Lease shall at all times be subject
and subordinate to any fee mortgages and/or trust deeds now or hereafter
filed
against the Premises and to the rights of any Fee Mortgagee thereunder or
as
otherwise set forth in Section 26.01 of the Lease.
3. Purpose
of Memorandum of Lease. This Memorandum of Lease is executed and recorded to
give public notice of the Lease between the parties and all terms and conditions
of the Lease are incorporated by reference into this Memorandum and this
Memorandum of Lease does not modify the provisions of the Lease. If there
are
any conflicts between the Lease and this Memorandum of Lease, the provisions
of
the Lease shall prevail. The
rights and obligations set forth herein shall be binding upon and inure to
the
benefit of the parties hereto and their respective successors and assigns.
Any
term not defined herein shall have the meaning as set forth in the
Lease.
46
[SIGNATURES
AND ACKNOWLEDGMENTS ON NEXT PAGE]
47
|
LANDLORD:
FRI
FISH, LLC
|
TENANT:
SHELLS
OF NEW SMYRNA BEACH, INC.
|
|||
| By: | By: | |||
|
|
|
|||
| Date: | Date: | |||
|
|
|
|||
|
Signed,
sealed, and delivered this _____ day
of ______________, _______ in the presence of:
|
Signed,
sealed, and delivered this _____day
of _____________, _________ in the presence of:
|
|||
|
Witness |
Witness |
|||
|
Witness |
Witness |
|||
|
Notary Public, County of _____________, State of __________________ |
Notary Public, County of _____________, State of __________________ |
|||
| My commission expires:_________________ | My commission expires:_________________ | |||
|
(Notary
Seal)
|
(Notary
Seal)
|
|||
48
EXHIBIT
E
INTENTIONALLY
DELETED
49
EXHIBIT
F
SUBORDINATION,
NONDISTURBANCE AND ATTORNMENT AGREEMENT
|
RECORDING
REQUESTED BY
AND
WHEN RECORDED MAIL TO:
________________________
________________________
________________________
________________________
Attn: _______________________
Loan
No. _______________________
|
SUBORDINATION
AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT,
ATTORNMENT
AND NON-DISTURBANCE AGREEMENT
(Lease
To Deed of Trust)
| NOTICE: |
THIS
SUBORDINATION AGREEMENT RESULTS IN YOUR SECURITY INTEREST IN THE
PROPERTY
BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE LIEN OF SOME
OTHER OR
LATER SECURITY INSTRUMENT.
|
THIS
SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT, ATTORNMENT AND
NON-DISTURBANCE AGREEMENT ("Agreement") is made DATE OF DOCUMENTS by and
between
BORROWER NAME, a general partnership ("Owner", or “Lessor”), NAME OF LESSEE HERE
("Lessee") and _______________ ("Lender").
RECITALS
|
A.
|
Pursuant
to the terms and provisions of a lease dated ____________, 2006
("Lease"),
Owner, as "Lessor", granted to Lessee a leasehold estate in and
to a
portion of the property described on Exhibit A
attached hereto and incorporated herein by this reference (which
property,
together with all improvements now or hereafter located on the
property,
is defined as the "Property").
|
50
|
B.
|
Owner
has executed, or proposes to execute, a deed of trust with absolute
assignment of leases and rents, security agreement and fixture
filing
("Deed of Trust") securing, among other things, a promissory note
("Note")
in the principal sum of LOAN AMOUNT AND NO/100THS DOLLARS ($LOAN
AMOUNT
NOS.), dated DATE OF DOCUMENTS, in favor of Lender, which Note
is payable
with interest and upon the terms and conditions described therein
("Loan"). The Deed of Trust is to be recorded concurrently
herewith.
|
|
C.
|
As
a condition to making the Loan secured by the Deed of Trust, Lender
requires that the Deed of Trust be unconditionally and at all times
remain
a lien on the Property, prior and superior to all the rights of
Lessee
under the Lease and that the Lessee specifically and unconditionally
subordinate the Lease to the lien of the Deed of Trust, in each
case, in
accordance with the terms and provisions of this
Agreement.
|
|
E.
|
Owner
and Lessee have agreed to the subordination, attornment and other
agreements herein in favor of
Lender.
|
NOW
THEREFORE, for valuable consideration and to induce Lender to make the Loan,
Owner and Lessee hereby agree for the benefit of Lender as follows:
1. SUBORDINATION.
Owner
and Lessee hereby agree that:
1.1 Prior
Lien.
The
Deed
of Trust securing the Note in favor of Lender, and any modifications, renewals
or extensions thereof, shall unconditionally be and at all times remain a
lien
on the Property prior and superior to the Lease;
1.2 Subordination.
Lender
would not make the Loan without this agreement to subordinate; and
1.3 Whole
Agreement.
This
Agreement shall be the whole agreement and only agreement with regard to
the
subordination of the Lease to the lien of the Deed of Trust and shall supersede
and cancel, but only insofar as would affect the priority between the Deed
of
Trust and the Lease, any prior agreements as to such subordination, including,
without limitation, those provisions, if any, contained in the Lease which
provide for the subordination of the Lease to a deed or deeds of trust or
to a
mortgage or mortgages.
AND
FURTHER, Lessee individually declares, agrees and acknowledges for the benefit
of Lender, that:
1.4 Use
of Proceeds.
Lender,
in making disbursements pursuant to the Note, the Deed of Trust or any loan
agreements with respect to the Property, is under no obligation or duty to,
nor
has Lender represented that it will, see to the application of such proceeds
by
the person or persons to whom Lender disburses such proceeds, and any
application or use of such proceeds for purposes other than those provided
for
in such agreement or agreements shall not defeat this agreement to subordinate
in whole or in part;
51
1.5 Subordination.
Lessee
intentionally and unconditionally subordinates all of Lessee's right, title
and
interest in and to the Property to the lien of the Deed of Trust, in accordance
with the terms and provisions of this Agreement, and understands that in
reliance upon, and in consideration of, this waiver, relinquishment and
subordination, specific loans and advances are being and will be made by
Lender
and, as part and parcel thereof, specific monetary and other obligations
are
being and will be entered into which would not be made or entered into but
for
said reliance upon this waiver, relinquishment and subordination.
2. ASSIGNMENT. LESSEE
ACKNOWLEDGES AND CONSENTS TO THE ASSIGNMENT OF THE LEASE BY LESSOR IN FAVOR
OF
LENDER.
3. ESTOPPEL. LESSEE
ACKNOWLEDGES AND REPRESENTS THAT:
3.1 Lease
Effective.
The
Lease
has been duly executed and delivered by Lessee and, subject to the terms
and
conditions thereof, the Lease is in full force and effect, the obligations
of
Lessee thereunder are valid and binding and there have been no modifications
or
additions to the Lease, written or oral;
3.2 No
Default.
To the
best of Lessee's knowledge, as of the date hereof: (i) there exists no
breach, default, or event or condition which, with the giving of notice or
the
passage of time or both, would constitute a breach or default under the Lease;
and (ii) there are no existing claims, defenses or offsets against rental
due or to become due under the Lease;
3.3 Entire
Agreement.
The
Lease, together with the Purchase and Sale Agreement referred to therein,
constitutes the entire agreement between Lessor and Lessee with respect to
the
Property, and Lessee claims no rights with respect to the Property other
than as
set forth in the Lease or the Purchase and Sale Agreement;
3.4 No
Right of First Refusal or Option to Purchase:
Neither
the Lease nor the Purchase and Sale Agreement grants to Lessee any right
of
first refusal, or option to purchase, with respect to all or any portion
of the
Property; and
3.5 No
Prepaid Rent.
No
deposits or prepayments of rent have been made in connection with the Lease,
except as follows: (if none, state "None")
____________________________________.
4. ADDITIONAL
AGREEMENTS. Lessee
covenants and agrees that, during all such times as Lender is the Beneficiary
under the Deed of Trust:
4.1 Notice
of Default.
Lessee
will notify Lender in writing concurrently with any notice given to Lessor
of
any default by Lessor under the Lease, and Lessee agrees that Lender has
the
right (but not the obligation) to cure any breach or default specified in
such
notice within the time periods set forth below and Lessee will not declare
a
default of the Lease, as to Lender, if Lender cures such default within fifteen
(15) days from and after the expiration of the time period provided in the
Lease
for the cure thereof by Lessor; provided,
however,
that if
such default cannot with diligence be cured by Lender with-in such fifteen
(15)
day period, the commencement of action by Lender within such fifteen (15)
day
period to remedy the same shall be deemed sufficient so long as Lender pursues
such cure with diligence;
52
4.2 Assignment
of Rents.
Upon
receipt by Lessee of written notice from Lender that Lender has elected to
terminate the license granted to Lessor to collect rents, as provided in
the
Deed of Trust, and directing the payment of rents by Lessee to Lender, Lessee
shall comply with such direction to pay and shall not be required to determine
whether Lessor is in default under the Loan and/or the Deed of
Trust.
4.3 Certain
Actions Not Binding on Lender.
Lender
shall not be bound by any modification, amendment, termination or cancellation
of the Lease (in whole or in part) that was effected without Lender's prior
written consent.
5. ATTORNMENT. IN
THE
EVENT OF A FORECLOSURE UNDER THE DEED OF TRUST, LESSEE AGREES FOR THE BENEFIT
OF
LENDER (INCLUDING FOR THIS PURPOSE ANY TRANSFEREE OF LENDER OR ANY TRANSFEREE
OF
LESSOR'S TITLE IN AND TO THE PROPERTY BY LENDER'S EXERCISE OF THE REMEDY
OF SALE
BY FORECLOSURE UNDER THE DEED OF TRUST), UPON THE RECEIPT BY LESSEE OF WRITTEN
NOTICE OF SUCH FORECLOSURE, AS FOLLOWS:
5.1 Payment
of Rent.
Lessee
shall pay to Lender all rental payments required to be made by Lessee pursuant
to the terms of the Lease for the duration of the term of the
Lease;
5.2 Continuation
of Performance.
Lessee
shall be bound to Lender in accordance with all of the provisions of the
Lease
for the balance of the term thereof; provided that the Lease shall be deemed
not
to include any modification, amendment, termination or cancellation of the
Lease
(in whole or in part) that was effected without Lender's prior written consent;
and Lessee hereby attorns to Lender as its landlord, and Lender hereby accepts
such attornment, such attornment to be effective and self-operative without
the
execution of any further instrument immediately upon Lender succeeding to
Lessor's interest in the Lease and giving written notice thereof to
Lessee;
5.3 No
Offset.
Lender
shall not be liable for, nor subject to, any offsets or defenses which Lessee
may have by reason of any act or omission of Lessor under the Lease with
respect
to the period preceding the effectiveness of the attornment provided for
herein,
nor for the return of any sums which Lessee may have paid to Lessor under
the
Lease (a) as and for security deposits, rentals paid more than one (1) month
before the time when they became due under the lease, or otherwise, except
to
the extent that such sums are actually delivered by Lessor to Lender and
applied
to amounts due in respect of the Loan (or held by Lender as collateral
therefor); and, for purposes of determining the rentals due under the Lease,
any
amount paid in respect of rentals paid more than one (1) month before the
time
such amount became due under the Lease and not delivered by Lessor to Lender
and
applied to amounts due in respect of the Loan (or held by Lender as collateral
therefor) shall be treated as if they had not been paid; or (b) any payment
made
by Lessee to Lessor in consideration of any modification, termination or
cancellation of the Lease (in whole or in part) without Lender's prior written
consent.
53
5.4 Subsequent
Transfer.
If
Lender, by succeeding to the interest of Lessor under the Lease, should become
obligated to perform the covenants of Lessor thereunder, then, upon any further
transfer of Lessor's interest by Lender, all of such obligations shall terminate
as to Lender.
6. NON-DISTURBANCE.
IN
THE
EVENT OF A FORECLOSURE UNDER THE DEED OF TRUST, SO LONG AS THERE SHALL THEN
EXIST NO “EVENT OF DEFAULT” ON THE PART OF LESSEE UNDER (AND AS DEFINED IN) THE
LEASE, LENDER AGREES FOR ITSELF AND ITS SUCCESSORS AND ASSIGNS THAT THE
LEASEHOLD INTEREST OF LESSEE UNDER THE LEASE SHALL NOT BE EXTINGUISHED OR
TERMINATED BY REASON OF SUCH FORECLOSURE, BUT RATHER THE LEASE SHALL CONTINUE
IN
FULL FORCE AND EFFECT IN ACCORDANCE WITH THE TERMS THEREOF EXCEPT AS MODIFIED
OR
LIMITED BY THIS AGREEMENT (INCLUDING, WITHOUT LIMITATION, THE PROVISIONS
OF
SECTIONS 4.3 AND 5.2 HEREOF),
AND
LENDER SHALL RECOGNIZE AND ACCEPT LESSEE AS TENANT UNDER THE LEASE SUBJECT
TO
THE TERMS AND PROVISIONS OF THE LEASE EXCEPT AS MODIFIED OR LIMITED BY THIS
AGREEMENT.
7. MISCELLANEOUS.
7.1 Heirs,
Successors, Assigns and Transferees.
The
covenants herein shall be binding upon, and inure to the benefit of, the
heirs,
successors and assigns of the parties hereto; and
7.2 Notices.
All
notices or other communications required or permitted to be given pursuant
to
the provisions hereof shall be deemed served upon delivery or, if mailed,
upon
the first to occur of receipt or the expiration of three (3) days after deposit
in United States Postal Service, certified mail, postage prepaid and addressed
to the address of Lessee or Lender appearing below:
|
"OWNER"
|
"LENDER"
|
|
BORROWER
NAME, a general partnership
STREET
ADDRESS
CITY,
STATE ZIP
|
________________
________________
________________
________________
|
|
Attn:
________________
Loan
No. _____________
|
|
|
"LESSEE"
|
|
|
NAME
OF LESSEE HERE
LESSEE'S
ADDRESS (STACKED) HERE
|
54
provided,
however, any party shall have the right to change its address for notice
hereunder by the giving of written notice thereof to the other party in the
manner set forth in this Agreement; and
7.3 Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
be
deemed an original and all of which together shall constitute and be construed
as one and the same instrument; and
7.4 Remedies
Cumulative.
All
rights of Lender herein to collect rents on behalf of Lessor under the Lease
are
cumulative and shall be in addition to any and all other rights and remedies
provided by law and by other agreements between Lender and Lessor or others;
and
7.5 Paragraph
Headings.
Paragraph
headings in this Agreement are for convenience only and are not to be construed
as part of this Agreement or in any way limiting or applying the provisions
hereof.
7.6 Lender’s
Consent.
If the
Lease is being entered into by Owner after the making of the Loan, Lender
hereby
consents to Owner’s entry into the Lease.
7.7 Owner’s
Consent.
By its
execution and delivery of this Agreement, Owner consents to, and authorizes
Lessee to comply with, each of the provisions hereof.
INCORPORATION.
Exhibit A
is
attached hereto and incorporated herein by this reference.
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day
and year first above written.
| NOTICE: |
THIS
SUBORDINATION AGREEMENT CONTAINS A PROVISION WHICH ALLOWS THE PERSON
OBLIGATED ON YOUR REAL PROPERTY SECURITY TO OBTAIN A LOAN A PORTION
OF
WHICH MAY BE EXPENDED FOR OTHER PURPOSES THAN IMPROVEMENT OF THE
LAND.
|
IT
IS RECOMMENDED THAT, PRIOR TO THE EXECUTION OF THIS AGREE-MENT, THE PARTIES
CONSULT WITH THEIR ATTORNEYS WITH RESPECT HERETO.
|
"OWNER"
BORROWER
NAME,
a
general partnership
|
||
| |
|
|
| By: | ||
|
Its:____________________________________ |
||
55
|
"LENDER"
|
||
| |
|
|
| By: | ||
|
Signee's Name
Its: Signee's
Title
|
||
|
"LESSEE"
NAME
OF LESSEE HERE
LESSEE
SIGNATURE BLOCK HERE
|
||
(ALL
SIGNATURES MUST BE ACKNOWLEDGED)
56
DESCRIPTION
OF PROPERTY
EXHIBIT A
to
Subordination Agreement; Acknowledgment of Lease Assignment, Attornment and
Non-Disturbance Agreement dated as of DATE OF DOCUMENTS, executed by BORROWER
NAME, a general partnership as "Owner", NAME OF LESSEE HERE, as "Lessee",
and
___________________________, as "Lender".
All
that
certain real property located in the County of PROPERTY COUNTY, State of
____________, described as follows:
APN
STATE
OF __________________
COUNTY
OF ____________________ SS.
On
this
______ day of ____________________, 20__, before me,_______________a
Notary
Public in and for the State of _______________, personally
appeared ______________________personally
known to me (or proved on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS
my hand and official seal
Signature_____________________________________
My
commission expires__________________________
57
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
__________________________________________
FORM
8-K
__________________________________________
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date
of
Report (Date of earliest event reported) October
30, 2006
Shells
Seafood Restaurants, Inc.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
0-28258
|
65-0427966
|
|
(State
or Other Jurisdiction
of
Incorporation)
|
(Commission
File
Number)
|
(IRS
Employer
Identification
No.)
|
|
16313
N. Dale Mabry Hwy, Suite 100, Tampa, FL
|
33618
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code:
(813)
961-0944
Not
Applicable
(Former
Name or Former Address, if Changed Since Last Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2 below):
[
] Written communications pursuant to Rule 425 under the
Securities Act (17 CFR 230.425)
[
] Soliciting material pursuant to Rule 14a-12
under the Exchange Act (17 CFR 240.14a-12)
[
] Pre-commencement communications pursuant to Rule
14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[
] Pre-commencement communications pursuant to Rule 13e-4
(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item
1.01 Entry into a Material Definitive Agreement.
On
October 30, 2006, Shells Seafood Restaurants, Inc. (the “Company”) repaid in
full the bank credit facility with Colonial Bank (the “Bank”) in the principal
amount of $500,000, with proceeds from a financing transaction on the Company’s
New Smyrna restaurant location. The repayment was completed within the
terms of
the agreement, as amended. The credit facility which originated in December
2005, bore interest at the bank’s base rate plus 1%. The interest rate was 9.25%
on October 30, 2006.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
Date:
November 2, 2006
|
SHELLS
SEAFOOD RESTAURANTS, INC.
|
|||
|
|
|
By:
|
/s/
Warren R.
Nelson
|
|
|
|
|
Name:
|
Warren
R. Nelson
|
|
|
|
|
Title:
|
Vice
President and Chief Financial Officer
|
|
|
|
|
|
||
2
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q/A
| x |
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
Quarterly Period Ended October 2, 2005
| o |
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the Transition Period from __________to __________
Commission
File No. 0-28258
|
SHELLS
SEAFOOD RESTAURANTS,
INC.
|
|
(Exact
name of registrant as specified in its
charter)
|
|
DELAWARE
|
65-0427966
|
|
|
(State
or other jurisdiction of
|
(IRS)
Employer Identification Number
|
|
|
incorporation
or organization)
|
|
16313
North Dale Mabry Highway, Suite 100, Tampa, FL 33618
|
|
(Address
of principal executive offices) (zip code)
|
|
(813)
961-0944
|
|
(Registrant’s
telephone number, including area
code)
|
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 o
Indicate
by check mark whether the Registrant is an accelerated filer (as defined
in Rule
12b-2 of the Act). Yes o
No x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
|
Class
|
Outstanding
at November 14, 2005
|
||
|
Common
stock, $0.01 par value
|
16,134,817
|
||
FORWARD
LOOKING STATEMENTS
When
used
in this Quarterly Report on Form 10-Q/A, the words "believes", "anticipates",
"expects", and similar expressions are intended to identify forward-looking
statements. These statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those
projected.
In
addition to seasonal fluctuations, our quarterly and annual operating results
are affected by a wide variety of other factors that could materially and
adversely affect our 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; changes in travel and tourism tendencies, particularly
in
light of world events; competition from other restaurants and food service
establishments; cash balances available for operating activities; and the
timing, costs and charges relating to restaurant openings, closings and
remodelings. As a result of these and other factors, we may experience material
fluctuations in future operating results on a quarterly or annual basis,
which
could materially and adversely affect our business, financial condition,
operating results, and stock price. An investment in our company involves
various risks, including those which are detailed in this document and from
time-to-time in our other filings with the Securities and Exchange
Commission.
Any
forward-looking statements included in this Quarterly Report speak only as
of
the date of this document. We are not undertaking any 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 of this document
or to reflect the occurrence of unanticipated events.
EXPLANATORY
NOTE
Shells
Seafood Restaurants, Inc. (“Shells”,”we”,”us”,”our,” or “Company”) is restating
our previously issued consolidated financial statements for the third quarter
of
fiscal 2005 (“Restatement”), because we discovered the need for an adjustment to
our accounting for the issuance of the Series B Preferred Stock and warrants
in
the May 2005 private placement. The adjustment was recorded as a non-cash
implied dividend consisting of a warrant valuation and a beneficial conversion
feature reflecting a non-detachable in-the-money conversion feature of
the
Series B Preferred Stock. This adjustment was identified in connection
with
internal procedures relative to the fiscal 2005 year-end audit. Further
information on the adjustment can be found in Note 6, “Restatement of Financial
Statements,” to the accompanying financial statements.
This
Amendment No. 1 on Form 10−Q/A (this “Form 10−Q/A”) to the Company’s Quarterly
Report on Form 10−Q for the quarterly period ended October 2, 2005, initially
filed with the Securities and Exchange Commission (the “SEC”) on November 16,
2005 (the “Original Filing”), is being filed to amend the Original Filing to
reflect restatements of the Company’s consolidated balance sheet as of October2,
2005, the consolidated statements of operations for the nine month period
ended
October 2, 2005, the consolidated statement of stockholders’ equity for the nine
month period ended October 2, 2005 and the notes related thereto. For a
more
detailed description of the Restatement, see Note 6, “Restatement of Financial
Statements,” to the accompanying consolidated financial statements and the
section entitled “Restatement” in Management’s Discussion and Analysis of
Financial Condition and Results of Operations contained in this Form 10−Q/A.
Prior
to
the filing of this Form 10−Q/A, we filed Amendment No. 1 on Form 10−Q/A for the
quarter ended July 3, 2005 to reflect restatement of the Company’s consolidated
balance sheet as of July 3, 2005, the consolidated statements of operations
for
the second quarter and six months ended July 3, 2005, and the consolidated
statement of stockholders’ equity for the six month period ended July 3, 2005,
and the notes related thereto.
For
the
convenience of the reader, this Form 10−Q/A sets forth the Original Filing in
its entirety. However, this Form 10−Q/A amends and restates only Items 1, 2, and
4 of Part I of the Original Filing, in each case, solely as a result of,
and to
reflect, the Restatement, and no other information in the Original Filing
is
amended hereby. The foregoing items have not been updated to reflect other
events occurring after the Original Filing or to modify or update those
disclosures affected by subsequent events. This Form 10−Q/A continues to speak
as of the filing date of the Original Filing for the quarterly period ended
October 2, 2005. In addition, pursuant to the rules of the SEC, Item 6
of Part
II of the Original Filing has been amended to contain currently dated
certifications from the Company’s Chief Executive Officer and Chief Financial
Officer, as required by Sections 302 and 906 of the Sarbanes−Oxley Act of 2002.
The certifications of the Company’s Chief Executive Officer and Chief Financial
Officer are attached to this Form 10−Q/A as Exhibits 31.1, 31.2, and
32.1.
SHELLS
SEAFOOD RESTAURANTS, INC.
AND
SUBSIDIARIES
|
Page
Number
|
||
|
4
|
||
|
5-6
|
||
|
7-8
|
||
|
9
|
||
|
10-14
|
||
|
15-20
|
||
|
21
|
||
|
21
|
||
|
22
|
||
|
23
|
CONSOLIDATED
BALANCE SHEETS
|
(Unaudited,
As Restated, see Note 6) |
|||||||
|
October
2, 2005
|
January
2, 2005
|
||||||
|
ASSETS
|
|||||||
|
Cash
|
$
|
2,377,588
|
$
|
2,349,519
|
|||
|
Inventories
|
463,241
|
396,823
|
|||||
|
Other
current assets
|
479,830
|
497,178
|
|||||
|
Receivables
from related parties
|
93,217
|
109,477
|
|||||
|
Total
current assets
|
3,413,876
|
3,352,997
|
|||||
|
Property
and equipment, net
|
9,427,113
|
7,095,922
|
|||||
|
Goodwill
|
2,474,407
|
2,474,407
|
|||||
|
Other
assets
|
794,027
|
535,376
|
|||||
|
Prepaid
rent
|
352,512
|
59,956
|
|||||
|
TOTAL
ASSETS
|
$
|
16,461,935
|
$
|
13,518,658
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Accounts
payable
|
$
|
2,279,938
|
$
|
2,311,584
|
|||
|
Accrued
expenses
|
2,026,636
|
2,567,026
|
|||||
|
Sales
tax payable
|
212,916
|
202,666
|
|||||
|
Convertible
debentures and interest payable
|
–
|
2,395,301
|
|||||
|
Current
portion of long-term debt
|
174,889
|
515,764
|
|||||
|
Total
current liabilities
|
4,694,379
|
7,992,341
|
|||||
|
Notes
and deferred interest payable to related parties
|
–
|
2,238,941
|
|||||
|
Long-term
debt, less current portion
|
1,029,983
|
1,494,845
|
|||||
|
Deferred
rent
|
822,185
|
849,287
|
|||||
|
Total
liabilities
|
6,546,547
|
12,575,414
|
|||||
|
Minority
partner interest
|
459,848
|
441,618
|
|||||
|
STOCKHOLDERS’
EQUITY:
|
|||||||
|
Preferred
stock, $0.01 par value; authorized 2,000,000 shares;
|
|||||||
|
Series
A - 23,731 and 35,275 shares issued and outstanding
|
237
|
353
|
|||||
|
Series
B - 461,954 shares issued and outstanding
|
4,620
|
–
|
|||||
|
Common
stock, $0.01 par value; authorized 58,000,000 and
|
|||||||
|
20,000,000
shares, respectively; 15,763,737 and 8,565,406 shares
|
|||||||
|
issued
and outstanding, respectively
|
157,637
|
85,654
|
|||||
|
Additional
paid-in-capital
|
25,122,062
|
14,926,627
|
|||||
|
Accumulated
deficit
|
(15,829,016
|
)
|
(14,511,008
|
)
|
|||
|
Total
stockholders’ equity
|
9,455,540
|
501,626
|
|||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
16,461,935
|
$
|
13,518,658
|
|||
See
accompanying notes to consolidated financial statements.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
|
13
Weeks Ended
|
|||||||
|
October
2, 2005
|
September
26, 2004
|
||||||
|
REVENUES
|
$
|
10,240,800
|
$
|
8,682,534
|
|||
|
COST
AND EXPENSES:
|
|||||||
|
Cost
of revenues
|
3,434,535
|
2,957,369
|
|||||
|
Labor
and other related expenses
|
3,350,762
|
2,902,216
|
|||||
|
Other
restaurant operating expenses
|
2,884,210
|
2,440,345
|
|||||
|
General
and administrative expenses
|
1,070,455
|
770,571
|
|||||
|
Depreciation
and amortization
|
408,164
|
271,793
|
|||||
|
11,148,126
|
9,342,294
|
||||||
|
LOSS
FROM OPERATIONS
|
(907,326
|
)
|
(659,760
|
)
|
|||
|
OTHER
INCOME (EXPENSE):
|
|||||||
|
Interest
expense
|
(35,829
|
)
|
(552,481
|
)
|
|||
|
Interest
income
|
5,948
|
107
|
|||||
|
Other
income, net
|
837,800
|
464,636
|
|||||
|
807,919
|
(87,738
|
)
|
|||||
|
LOSS
BEFORE ELIMINATION OF MINIORITY PARTNER INTEREST
|
(99,407
|
)
|
(747,498
|
)
|
|||
|
ELIMINATION
OF MINORITY PARTNER INTEREST
|
(52,500
|
)
|
(51,006
|
)
|
|||
|
NET
LOSS APPLICABLE TO COMMON STOCK
|
$
|
(151,907
|
)
|
$
|
(798,504
|
)
|
|
|
NET
LOSS PER SHARE OF COMMON STOCK:
|
|||||||
|
Basic
|
$
|
(0.01
|
)
|
$
|
(0.17
|
)
|
|
|
Diluted
|
$
|
(0.01
|
)
|
$
|
(0.17
|
)
|
|
|
AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING:
|
|||||||
|
Basic
|
15,700,814
|
4,812,740
|
|||||
|
Diluted
|
15,700,814
|
4,812,740
|
|||||
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
|
39
Weeks Ended
|
|||||||
|
October
2, 2005
As
Restated,
see
Note 6
|
September
26, 2004
|
||||||
|
REVENUES
|
$
|
34,685,873
|
$
|
32,270,804
|
|||
|
COST
AND EXPENSES:
|
|||||||
|
Cost
of revenues
|
11,431,721
|
10,798,148
|
|||||
|
Labor
and other related expenses
|
10,511,226
|
9,900,136
|
|||||
|
Other
restaurant operating expenses
|
8,404,977
|
7,761,611
|
|||||
|
General
and administrative expenses
|
2,858,605
|
2,430,128
|
|||||
|
Depreciation
and amortization
|
1,139,731
|
850,579
|
|||||
|
Pre-opening
expenses
|
303,206
|
–
|
|||||
|
34,649,466
|
31,740,602
|
||||||
|
INCOME
FROM OPERATIONS
|
36,407
|
530,202
|
|||||
|
OTHER
INCOME (EXPENSE):
|
|||||||
|
Lease
buy-out option
|
600,000
|
–
|
|||||
|
Provision
for impairment of assets
|
(211,000
|
)
|
–
|
||||
|
Interest
expense
|
(380,090
|
)
|
(759,605
|
)
|
|||
|
Interest
income
|
13,431
|
2,301
|
|||||
|
Other
income, net
|
560,171
|
521,956
|
|||||
|
582,512
|
(235,348
|
)
|
|||||
|
INCOME
BEFORE ELIMINATION OF MINORITY PARTNER INTEREST
|
618,919
|
294,854
|
|||||
|
ELIMINATION
OF MINORITY PARTNER INTEREST
|
(201,758
|
)
|
(190,558
|
)
|
|||
|
NET
INCOME BEFORE PREFERRED STOCK DIVIDEND
|
417,161
|
104,296
|
|||||
|
Deemed
dividend associated with warrants and beneficial conversion
feature of preferred stock
|
(1,735,169 |
)
|
–
|
||||
|
NET
(LOSS) INCOME APPLICABLE TO COMON STOCK
|
$
|
(1,318,008
|
)
|
$
|
104,296
|
||
|
NET
(LOSS) INCOME PER SHARE OF COMMON STOCK:
|
|||||||
|
Basic
|
$
|
(0.09
|
)
|
$
|
0.02
|
||
|
Diluted
|
$
|
(0.09
|
)
|
$
|
0.01
|
||
|
AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING:
|
|||||||
|
Basic
|
14,381,962
|
4,722,503
|
|||||
|
Diluted
|
14,381,962
|
11,378,113
|
|||||
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
|
39
Weeks Ended
|
|||||||
|
OPERATING
ACTIVITIES:
|
October
2, 2005
|
September
26, 2004
|
|||||
|
Net
income before preferred stock dividend
|
$
|
417,161
|
$
|
104,296
|
|||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||
|
Depreciation
and amortization
|
1,139,729
|
850,579
|
|||||
|
Interest
expense on warrants issued
|
–
|
446,000
|
|||||
|
Insurance
proceeds net of hurricane-related expenses
|
–
|
(497,242
|
)
|
||||
|
Gain
on disposal of assets
|
(695,376
|
)
|
(98,023
|
)
|
|||
|
Loss
on sale of assets applied against reserves
|
–
|
24,776
|
|||||
|
Lease
buy-out option
|
(600,000
|
)
|
–
|
||||
|
Provision
for impairment of assets
|
211,000
|
–
|
|||||
|
Minority
partner net income allocation
|
201,758
|
190,558
|
|||||
|
Changes
in current assets and liabilities
|
587,552
|
(579,224
|
)
|
||||
|
Changes
in assets and liabilities:
|
|||||||
|
(Increase)
decrease in prepaid rent
|
(315,556
|
)
|
11,716
|
||||
|
(Increase)
decrease in other assets
|
(277,289
|
)
|
18,319
|
||||
|
Increase
in accrued interest to related parties
|
–
|
115,003
|
|||||
|
Decrease
in deferred rent
|
(27,102
|
)
|
(60,005
|
)
|
|||
|
Total
adjustments
|
224,716
|
422,457
|
|||||
|
Net
cash provided by operating activities
|
641,877
|
526,753
|
|||||
|
INVESTING
ACTIVITIES:
|
|||||||
|
Proceeds
from sale of lease buy-out option
|
600,000
|
–
|
|||||
|
Proceeds
from sale of assets
|
1,643,859
|
88,776
|
|||||
|
Purchase
of property and equipment
|
(4,588,765
|
)
|
(600,148
|
)
|
|||
|
Net
cash used in investing activities
|
(2,344,906
|
)
|
(511,372
|
)
|
|||
|
FINANCING
ACTIVITIES:
|
|||||||
|
Proceeds
from debt financing
|
533,545
|
162,292
|
|||||
|
Repayment
of debt
|
(3,579,054
|
)
|
(312,734
|
)
|
|||
|
Proceeds
from issuance of stock
|
4,960,135
|
16,800
|
|||||
|
Distributions
to minority partner
|
(183,528
|
)
|
(220,336
|
)
|
|||
|
Net
cash provided by (used in) financing activities
|
1,731,098
|
(353,978
|
)
|
||||
|
Net
increase (decrease) in cash
|
28,069
|
(338,597
|
)
|
||||
|
CASH
AT BEGINNING OF PERIOD
|
2,349,519
|
723,939
|
|||||
|
CASH
AT END OF PERIOD
|
$
|
2,377,588
|
$
|
385,342
|
|||
See
accompanying notes to consolidated financial statements.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited) (continued)
|
39
Weeks Ended
|
|||||||
|
October
2, 2005
|
September
26, 2004
|
||||||
|
Cash
flows (outflows) from changes in current assets and
liabilities:
|
|||||||
|
Inventories
|
$
|
(66,418
|
)
|
$
|
(23,575
|
)
|
|
|
Receivables
from related parties
|
16,260
|
7,871
|
|||||
|
Other
current assets
|
17,348
|
6,043
|
|||||
|
Accounts
payable
|
(31,646
|
)
|
(387,482
|
)
|
|||
|
Accrued
expenses
|
641,758
|
(131,841
|
)
|
||||
|
Sales
tax payable
|
10,250
|
(50,240
|
)
|
||||
|
Increase
in accrued interest to related parties
|
–
|
–
|
|||||
|
Change
in current assets and liabilities
|
$
|
587,552
|
$
|
(579,224
|
)
|
||
|
Supplemental
disclosure of cash flow information:
|
|||||||
|
Cash
paid for interest
|
$
|
309,777
|
$
|
197,552
|
|||
|
Cash
from hurricane-related insurance recoveries
|
$
|
357,198
|
$
|
–
|
|||
|
Financing
costs, line of credit
|
$
|
80,000
|
$
|
–
|
|||
|
Cash
paid for income taxes
|
$
|
–
|
$
|
634
|
|||
| · |
Warrant
valuation reserves of $440,000 were applied to Paid in Capital
in
September 2005 upon the registration of the underlying common stock
with
the Securities and Exchange Commission.
|
| · |
Deemed
dividend of $1,735,169 for warrants and beneficial conversion
features of
preferred stock recorded relative to the May 2005 private financing
transaction.
|
| · |
Warrant
valuation reserves of $284,364 and $223,000 relating to the exercise
of
warrants were applied to Paid in Capital in the first and second
quarters
of 2005, respectively.
|
| · |
Principal
on related party debt of $500,000 was used by the noteholders to
acquire
common stock in conjunction with the exercise of warrants in each
of March
and May 2005.
|
| · |
Principal
and accrued interest of $347,588 was used by the debenture holders
to
acquire Series B Preferred Stock in May
2005.
|
| · |
Principal
and accrued interest on related party debt of $1,281,666 was used
by the
noteholders to acquire Series B Preferred Stock in May
2005.
|
| · |
Asset
impairment charges of $158,335 were applied to reduce the basis
of fixed
assets damaged by a fire in September
2004.
|
| · |
Accrued
interest to related parties of $165,315 was refinanced through
a second
mortgage in June 2004 and classified as long-term
debt.
|
| · |
Insurance
reserves of $96,000 have been applied to asset impairment charges
in June
2004.
|
| · |
Loss
on sale of assets applied against reserves of $24,776 reduced net
book
value of property and equipment by $19,062 and deferred rent by
$5,714 in
June 2004.
|
| · |
Deferred
rent of $114,602 was applied to gain on sale of restaurant in April
2004.
|
| · |
Asset
impairment charges of $110,000 were applied against gain on sale
of
restaurant in April 2004.
|
See
accompanying notes to consolidated financial statements.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
|
PREFERRED
STOCK
|
ADDITIONAL
|
|||||||||||||||||||||||||||
|
Series
A
|
Series
B
|
COMMON
STOCK
|
PAID-IN
|
ACCUMULATED
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
CAPITAL
|
DEFICIT
|
TOTAL
|
||||||||||||||||||||
|
Balance
at January 2, 2005
|
35,275
|
$
|
353
|
8,565,406
|
$
|
85,654
|
$
|
14,926,627
|
$
|
(14,511,008
|
)
|
$
|
501,626
|
|||||||||||||||
|
Net
income before preferred stock dividend
|
417,161
|
417,161
|
||||||||||||||||||||||||||
|
Preferred
stock issued in private placement financing, net of issuance
costs of
$1,137,672
|
461,954
|
$
|
4,620
|
5,787,018
|
5,791,638
|
|||||||||||||||||||||||
| Issuance costs, private placement financing |
(123,872
|
)
|
(123,872
|
)
|
||||||||||||||||||||||||
| Series B Preferred Stock warrant issued to placement agent for private placement financing | 123,872 | 123,872 | ||||||||||||||||||||||||||
| Deemed dividend for warrants and beneficial conversion feature of preferred stock | 1,735,169 | (1,735,169 |
)
|
–
|
||||||||||||||||||||||||
|
Preferred
stock converted
|
(11,544
|
)
|
(116
|
)
|
57,720
|
577
|
(461
|
)
|
–
|
|||||||||||||||||||
|
Warrants
exercised
|
7,123,011
|
71,230
|
1,718,789
|
1,790,019
|
||||||||||||||||||||||||
|
Warrant
valuation reserve
|
||||||||||||||||||||||||||||
|
(See
Note 5)
|
947,364
|
947,364
|
||||||||||||||||||||||||||
|
Stock
options exercised
|
17,600
|
176
|
7,556
|
7,732
|
||||||||||||||||||||||||
|
Balance
at October 2, 2005 as restated, see Note 6
|
23,731
|
$
|
237
|
461,954
|
$
|
4,620
|
15,763,737
|
$
|
157,637
|
$
|
25,122,062
|
$
|
(15,829,016
|
)
|
$
|
9,455,540
|
||||||||||||
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTE
1. BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with the instructions for Form 10-Q and, therefore, these statements
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all material adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included.
The
consolidated financial statements of Shells Seafood Restaurants, Inc. (the
“Company”) should be read in conjunction with the audited consolidated financial
statements and notes thereto contained in the Form 10-K for the year ended
January 2, 2005 filed with the Securities and Exchange Commission.
Company
management believes that
the
disclosures are sufficient for interim financial reporting purposes. Certain
prior year amounts have been reclassified in the accompanying condensed
consolidated financial statements to conform with the current year
presentation.
NOTE
2. EARNINGS
PER SHARE
The
following table represents the computation of basic and diluted earnings
per
share of common stock as required by Financial Accounting Standards Board
(“FASB”) Statement No. 128, “Earnings Per Share”:
|
13
Weeks Ended
|
October
2, 2005
|
September
26, 2004
|
|||||
|
Net
loss applicable to common stock
|
$
|
(151,907
|
)
|
$
|
(798,504
|
)
|
|
|
Weighted
common shares outstanding
|
15,700,814
|
4,812,740
|
|||||
|
Basic
net loss per share of common stock
|
$
|
(0.01
|
)
|
$
|
(0.17
|
)
|
|
|
Effect
of dilutive securities:
|
|||||||
|
Preferred
stock
|
–
|
–
|
|||||
|
Warrants
|
–
|
–
|
|||||
|
Stock
options
|
–
|
–
|
|||||
|
Diluted
weighted common shares outstanding
|
15,700,814
|
4,812,740
|
|||||
|
Diluted
net loss per share of common stock
|
$
|
(0.01
|
)
|
$
|
(0.17
|
)
|
|
|
39
Weeks Ended
|
October
2, 2005
As Restated, see Note 6 |
September
26, 2004
|
|||||
|
Net
(loss) income applicable to common stock
|
$
|
(1,318,008
|
)
|
$
|
104,296
|
||
|
Weighted
common shares outstanding
|
14,381,962
|
4,722,503
|
|||||
|
Basic
net (loss) income per share of common stock
|
$
|
(0.09
|
)
|
$
|
0.02
|
||
|
Effect
of dilutive securities:
|
|||||||
|
Preferred
stock
|
–
|
253,530
|
|||||
|
Warrants
|
–
|
6,274,995
|
|||||
|
Stock
options
|
–
|
127,085
|
|||||
|
Diluted
weighted common shares outstanding
|
14,381,962
|
11,378,113
|
|||||
|
Diluted
net (loss) income per share of common stock
|
$
|
(0.09
|
)
|
$
|
0.01
|
||
The
loss
per share calculations for the 13 weeks ended October 2, 2005 and September
26,
2004, and the 39 weeks ended October 2, 2005 excluded warrants, options and
other dilutive securities to purchase an aggregate of 20,290,793, 11,587,560
and
12,936,878 shares of common stock, respectively, as they were anti-dilutive.
The
earnings per share calculation for the 39 weeks ended September 26, 2004
excluded warrants and options to purchase an aggregate of 568,845 shares of
common stock, as the exercise prices of these warrants and options were
greater than the average market price of the common shares.
NOTE
3. STOCK
COMPENSATION PLANS
At
October 2, 2005, we had four stock-based employee compensation plans, one
of
which expired in accordance with its terms on September 10, 2005, upon its
tenth
anniversary. We account for these plans under the recognition and measurement
principles of Accounting Principles Board Opinion 25, “Accounting for Stock
Issued to Employees,” and related interpretations. No stock-based
compensation cost
is
reflected in net income, as all options granted under these plans had an
exercise price equal to the market value of the underlying
common stock on the date of grant.
On
June
22, 2005, the Compensation Committee and the Board of Directors of the Company
approved the acceleration of vesting of certain unvested and “out-of-the-money”
stock options with exercise prices equal to or greater than $0.85 per share
(the
then market value) previously awarded to its employees, including its executive
officers, and its directors under the Plan that were originally scheduled
to
vest during 2006. The acceleration of vesting is effective for stock options
outstanding as of June 22, 2005. Options to purchase approximately 295,000
shares of common stock or 18.5% of the Company’s outstanding unvested options
(of which options to purchase approximately 233,000 shares or 14.6% of the
Company’s outstanding unvested options are held by the Company’s executive
officers and directors) were subject to the acceleration. The weighted average
exercise price of the options subject to the acceleration was
$1.10.
The
purpose of the acceleration was to enable the Company to avoid recognition
of
compensation expense associated with those options in future periods in its
consolidated statements of income, upon adoption of FASB Statement No. 123-R
(Share-Based Payment) in December 2005. The pre-tax charge which the Company
expects to avoid in 2006 is approximately $87,000 based on the original vesting
periods. The Company also believes that because many of the options that
were
accelerated had exercise prices in excess of the market value of the Company’s
common stock on the date that the determination was made to accelerate the
options, those options had limited economic value and were not fully achieving
their original objective of incentive compensation and employee
retention.
Based
on
the vesting schedules of stock options outstanding as of October 2, 2005,
net of
the effect of the acceleration of vesting discussed previously, adoption
of
revised FASB Statement No. 123-R is expected to result in the recognition
of
compensation expense of approximately $37,000 in fiscal 2006, $206,000 in
fiscal
2007 and $198,000 in fiscal 2008. The fair value was estimated using the
Black-Scholes option-pricing model. Using this model, fair value is calculated
based on assumptions with respect to (i) expected volatility of the Company’s
common stock price, (ii) the periods of time over which employees and directors
are expected to hold their options prior to exercise (expected term), (iii)
expected dividend yield on the Company’s common stock, and (iv) risk-free
interest rates, which are based on quoted U.S. Treasury rates for securities
with maturities approximating the options’ expected term. Expected volatility
has been estimated based on the change in the Company’s stock price over the
past 12 months. Expected term is based on the Company’s limited historical
exercise experience with option grants with similar exercise prices. The
expected dividend yield is zero as the Company has never paid dividends and
does
not currently anticipate paying any in the foreseeable future. The following
table summarizes the weighted average values of the assumptions used in
computing the fair value of option grants:
|
|
Quarter
Ended (Unaudited)
|
||||||||||||
|
Assumptions
used in computing fair value of option grants:
|
January
2, 2005
|
April
3, 2005
|
July
3, 2005
|
October
2, 2005
|
|||||||||
|
Volatility
|
44.4
|
%
|
71.7
|
%
|
57.0
|
%
|
39.0
|
%
|
|||||
|
Weighted-average
estimated life
|
5
years
|
5
years
|
3.5
years
|
3.5
years
|
|||||||||
|
Weighted-average
risk-free interest rate
|
3.41
|
%
|
3.69
|
%
|
4.01
|
%
|
4.00
|
%
|
|||||
|
Dividend
yield
|
0
|
0
|
0
|
0
|
|||||||||
NOTE
4. NEW
ACCOUNTING PRONOUNCEMENTS
In
November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs”, which
amended Accounting Research Bulletin No. 43, Chapter 4. The amendments made
by
FASB Statement No. 151 will alter financial reporting by clarifying that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and by
requiring the allocation of fixed production overheads to inventory based
on the
normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. The provisions of FASB Statement
No.
151 are to be applied prospectively. Adoption of FASB Statement No. 151 is
not
expected to materially impact our consolidated financial
statements.
In
December 2004, the FASB revised Statement No. 123, “Accounting for Stock-Based
Compensation.” This Statement supersedes APB Opinion No. 25, “Accounting for
Stock Issued to Employees,” and its related implementation guidance. This
Statement establishes standards for the accounting for transactions in which
an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods
or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity instruments. Revised
Statement No. 123 focuses primarily on accounting for transactions in which
an
entity obtains employee services in share-based payment transactions. This
Statement does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in Statement 123
as
originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction
with
Selling, Goods or Services,” nor address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6,
“Employers’ Accounting for Employee Stock Ownership Plans.” Revised Statement
No. 123 is effective for the Company as of the first quarter of 2006. Adoption
of revised FASB Statement No. 123 is discussed in Note 3.
In
December 2004, the FASB issued Statement No. 153, “Exchanges of Non-monetary
Assets” which amended APB Opinion No. 29, “Accounting for Non-monetary
Transactions.” The amendments made by FASB Statement No. 153 are based on the
principle that exchanges of non-monetary assets should be measured based
on the
fair value of the assets exchanged. The Statement is effective for non-monetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for non-monetary asset exchanges occurring
in
fiscal periods beginning after the date of issuance. The provisions of this
Statement are to be applied prospectively. Adoption of FASB Statement No.
153 is
not expected to materially impact our consolidated financial
statements.
In
March
2005, the FASB issued Interpretation 47, “Accounting for Conditional Asset
Retirement Obligations—an interpretation of FASB Statement No. 143” clarifying
that the term conditional asset retirement obligation as used in FASB Statement
No. 143, Accounting for Asset Retirement Obligations, refers to a legal
obligation to perform an asset retirement activity in which the timing and
(or)
method of settlement are conditional on a future event that may or may not
be
within the control of the entity. Clarifications found in Interpretation
47 are
not expected to materially impact our consolidated financial
statements.
In
May
2005, the FASB issued Statement No. 154, “Accounting Changes and Error
Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This
Statement replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement
No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and
changes the requirements for the accounting for and reporting of a change
in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. FASB Statement No. 154 becomes effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. We are not aware of any accounting changes or error corrections
required in our historical financial statements.
NOTE
5. ACCRUED
EXPENSES
Accrued
expenses consist of the following:
|
(Unaudited)
|
|||||||
|
October
2, 2005
|
January
2, 2005
|
||||||
|
Accrued
payroll
|
$
|
976,342
|
$
|
776,652
|
|||
|
Accrued
insurance
|
8,171
|
26,382
|
|||||
|
Restaurant
closing expenses
|
187,792
|
216,677
|
|||||
|
Warrant
valuation reserve
|
–
|
947,364
|
|||||
|
Accrued
property taxes
|
407,453
|
12,560
|
|||||
|
Other
|
332,842
|
335,893
|
|||||
|
Unearned
gift card revenue
|
114,036
|
251,498
|
|||||
|
$
|
2,026,636
|
$
|
2,567,026
|
||||
The
warrant valuation reserve consists of the following:
|
(Unaudited)
|
|||||||
|
Date
and description
|
October
2, 2005
|
January
2, 2005
|
|||||
|
January
2002 at inception of $2,000,000 financing
|
$
|
–
|
$
|
61,364
|
|||
|
August
2004 for the extension of maturity date of above
|
–
|
446,000
|
|||||
|
December
2004 at inception of debentures
|
–
|
440,000
|
|||||
|
|
$ | – |
$
|
947,364
|
|||
The
warrant valuation reserve related to warrants issued as inducements to creditors
in various financing transactions. In each case, the warrants were valued
by an
independent valuation expert. The reserves were transferred to Paid In Capital
upon the earlier of the exercise of the warrants or the registration of the
underlying common stock in accordance with Emerging Issues Task Force Issue
00-19 (“EITF-0019”), “Accounting for Derivative Financial Instruments to, and
Potentially Settled in a Company’s Own Stock.” Such registration of our common
stock became effective with the Securities and Exchange Commission on September
13, 2005. The warrants and related calculations are discussed
below.
In
January 2002, due to the Company’s then financial condition, the Company was not
able to borrow money at rates it could afford and raised $2,000,000 in a
private
financing transaction, consisting of secured promissory notes and warrants
to
purchase common stock. As part of the then financing transaction, the Company
was able to negotiate the deferral of approximately one-half of the interest
payable on this outstanding indebtedness until the maturity of the loans.
Warrants issued to purchase 8,908,030 shares of common stock were independently
valued at $105,977, or $0.0119 per share. In November 2004, investors exercised
3,750,000 warrants and the reserve was reduced by $44,613, leaving a balance
at
fiscal year end 2004 of $61,364. The remaining warrants were exercised on
January 31, 2005 and the remaining reserve was applied to Paid In
Capital.
In
August
2004, the maturity date of the $2,000,000 loans was extended for two years
until
January 2007 in exchange for warrants. Warrants were issued to purchase
2,000,000 shares of common stock and were independently valued at $446,000,
or
$0.223 per warrant. On March 9, 2005, investors exercised 1,000,000 warrants
and
the reserve was reduced by 50%. The remaining warrants were exercised in
May
2005 in a transaction that was completed in conjunction with our private
placement financing and the remaining reserve of $223,000 was applied to
Paid In
Capital.
In
December 2004, as part of the then $2,375,000 financing, the purchasers of
the
convertible debentures were issued warrants as an inducement for the loans.
Warrants to purchase 1,971,250 shares of common stock were valued at $440,000,
or $0.223 per share based on an independent valuation completed in August
2004.
Since this valuation was five months old, the Company considered other factors
to support its use, specifically: (i) the stock price was $0.60 on both of
August 4, 2004 and December 6, 2004, (ii) a Black-Scholes calculation indicated
that a valuation between $0.20 and $0.25 per share was appropriate, and (iii)
the August 4 valuation fell within an acceptable range of a min-max calculation
based on the proposed future range of the exercise price of the warrants.
On
September 13, 2005, the warrant valuation reserve was transferred to Paid
in
Capital upon the registration of the underlying common stock with the Securities
and Exchange Commission. The $440,000 warrant valuation was allocated to
interest expense and financing costs based upon the number of warrants issued
to
investors and the placement agent, respectively. Warrants issued to investors
to
purchase 1,187,500 shares of common stock were valued at $265,000 and charged
to
interest expense at the commitment date due to the short-term (4-months)
nature
of the debentures. Warrants to purchase 783,750 shares of common stock were
issued to the placement agent, valued at $175,000 and charged to financing
costs.
NOTE
6. RESTATEMENT OF FINANCIAL STATEMENTS
We
are
restating our consolidated financial statements for the first nine months
of
fiscal 2005 to reflect an adjustment to our accounting for the issuance
of the
Series B Preferred Stock and warrants in the May 2005 private placement,
which
is more fully described in Note 7. In addition, certain disclosures in
Note 2 to
the consolidated financial statements contained in this report have been
restated to reflect the corrections.
The
impact of the corrections on the Consolidated Statements of Operations
and
Consolidated Statement of Stockholders’ Equity is shown in the accompanying
tables. The $1,735,000 “Deemed dividend associated with warrants and beneficial
conversion feature of preferred stock” adjustment to the statement of operations
for the nine months ended October 2, 2005 is also reflected in the Stockholders’
Equity section of the Balance Sheet as of October 2, 2005 as an adjustment
to
Additional Paid-in-Capital and Accumulated Deficit.
Consolidated
Statements of Operations (Dollars in Thousands)
(Unaudited)
|
13
Weeks Ended October 2, 2005
|
39
Weeks Ended October 2, 2005
|
||||||||||||||||||
|
As
Previously Reported
|
Adjustment
|
As
Restated
|
As
Previously Reported
|
Adjustment
|
As
Restated
|
||||||||||||||
|
NET
INCOME (LOSS) BEFORE PREFERRED STOCK DIVIDEND
|
$
|
(152
|
)
|
-
|
$
|
(152
|
)
|
$
|
417
|
-
|
$
|
417
|
|||||||
|
Deemed
dividend associated with warrants and beneficial conversion feature
of
preferred stock
|
-
|
-
|
-
|
-
|
(1,735
|
)
|
(1,735
|
)
|
|||||||||||
|
NET
INCOME (LOSS) APPLICABLE TO COMMON STOCK
|
$
|
(152
|
)
|
$
|
-
|
$
|
(152
|
)
|
$
|
417
|
$
|
(1,735
|
)
|
$
|
(1,318
|
)
|
|||
|
NET
INCOME (LOSS) PER SHARE OF COMMON STOCK:
|
|||||||||||||||||||
|
Basic
|
$
|
(0.01
|
)
|
$
|
-
|
$
|
(0.01
|
)
|
$
|
0.03
|
$
|
(0.12
|
)
|
$
|
(0.09
|
)
|
|||
|
Diluted
|
$
|
(0.01
|
)
|
$
|
-
|
$
|
(0.01
|
)
|
$
|
0.02
|
$
|
(0.11
|
)
|
$
|
(0.09
|
)
|
|||
Consolidated
Balance Sheets (Dollars in Thousands) (Unaudited)
|
October
2, 2005
|
||||||||||
|
As
Previously Reported
|
Adjustment
|
As
Restated
|
||||||||
|
Stockholders'
Equity:
|
||||||||||
|
Additional
paid-in-capital
|
$
|
23,387
|
$
|
1,735
|
$
|
25,122
|
||||
|
Accumulated
deficit
|
(14,094
|
)
|
(1,735
|
)
|
(15,829
|
)
|
||||
|
Total
stockholders' equity
|
9,455
|
-
|
9,455
|
|||||||
NOTE
7. SERIES B CONVERTIBLE PREFERRED STOCK
In
May
2005, we issued 461,954 units of securities in a private placement offering
to
accredited investors generating gross proceeds of $6,929,000. Each unit
consisted of one share of Series B Convertible Preferred Stock, par value
$0.01
per share (the “Series B Preferred Stock”), which is initially convertible into
20 shares of our common stock, subject to certain specified adjustments
under
certain circumstances, and a warrant to purchase 10 shares of our common
stock
at an exercise price of $1.30 per share.
A
non-cash implied dividend of $1,735,000 was recorded in conjunction with
the
private placement offering, consisting of a warrant valuation and a beneficial
conversion feature. The beneficial conversion feature reflects a non-detachable
in-the-money conversion feature of the Series B Preferred Stock as defined
by
the Emerging Issues Task Force Consensus No. EITF 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Features.”
The
warrant to purchase 37,651 units (consisting of 37,651 shares of Series
B
Preferred Stock and warrants to purchase 376,510 shares of common stock)
issued
to the placement agent was valued at $124,000. The value was based upon
the per
unit fair market value of the securities issued to the investors in the
transaction less the cash exercise price.
The
Series B Preferred Stock votes together with our common stock on an
“as-converted” basis as a single class on all actions to be taken by our
stockholders. Without the consent of a majority of the outstanding Series
B
Preferred Stock, we cannot alter or change adversely the powers, preferences
or
rights given to the Series B Preferred Stock, authorize or create any class
of
stock ranking as to a distribution of assets upon a liquidation event senior
to
or pari passu with the Series B Preferred Stock, issue any additional shares
of
the Series A Preferred Stock, or alter or change the powers, preferences
or
rights given to the Series A Preferred Stock. Upon
any
dissolution, liquidation, merger, consolidation, reorganization or other
series
of transactions, under certain conditions, the holders of Series B Preferred
Stock are entitled to be paid out of our assets legally available for
distribution to our stockholders, before any payment is made to the holders
of
our common stock. If
dividends are declared payable on our common stock, then dividends shall
be
declared for the Series B Preferred Stock. All shares of Series B Preferred
Stock issued and outstanding on May 23, 2015 will automatically be converted
at
that time into shares of our common stock, based on the conversion price
then in
effect.
GENERAL
Comparable
restaurant sales rose 10% at Shells during the third quarter of fiscal 2005,
the
fourth consecutive quarterly increase. The increase in same store sales was
due
to greatly improved sales trends attained by the company’s remodeled stores and
significantly favorable sales comparisons to the 2004 quarter, which were
negatively impacted by several lost operating days and revenues due to the
Florida hurricanes; partially offset by unfavorable sales trends from the
company’s non-remodeled restaurants. Revenues for the quarter were also higher,
up 17.9%
to
$10,241,000 from $8,682,000 in the comparable period in 2004, primarily due
to
the same store sales increase.
We
incurred a net loss for the quarter of $152,000,
compared to a $799,000 net loss for the third quarter of 2004. Exclusive
of
non-recurring income of $858,000 and $51,000, respectively, the net losses
for
the third quarters of 2005 and 2004 were $1,010,000 and $850,000,
respectively.
The
third
quarter loss was due to a combination of softening sales late in the quarter
and
higher expenses for depreciation, occupancy, utilities and administrative
labor
relating to expansion and training. Our operating performance was indirectly
impacted by the Hurricane Katrina disaster in September with increased energy
costs leading to higher food prices for some items and consumer anxiety leading
to a weakening of sales.
Certain
investment expenses tied to the company’s ongoing remodeling program and new
restaurant development efforts were also reflected in the operating results.
These expenses include hiring restaurant managers for new restaurants yet
to
open, increasing home office resources to support anticipated new growth,
and
additional training to ensure proper service and execution levels. Continuing
to invest in recruiting, hiring and properly training the most qualified
people
continues to be a vital part of our ongoing turnaround and growth strategy.
To
retain current guests and attract new ones requires relentless focus on guest
service and operating standards.
To
address escalating cost pressures, we have reengineered some of our promotional
strategies, adjusted pricing on certain items and implemented various action
steps to tighten operating costs. We are taking these measures while focusing
on
our efforts not to sacrifice any component of guest satisfaction at our
restaurants.
Despite
the challenges we faced in the third quarter, sales at our remodeled restaurants
continue to be very strong and our guests continue to embrace the changes
we
have made to improve the Shells concept. We completed the remodeling of three
additional restaurants during the third quarter of 2005. During the fourth
quarter of 2005, we plan to complete an additional six remodelings for a
total
of 19 restaurants remodeled by 2005 year-end with our contemporary new
look.
In
addition, we recently signed two new restaurant leases, to relocate an existing
restaurant in Stuart, Florida, to a more preferable location and to open
a new
restaurant in St. Petersburg, Florida. We believe we are well-positioned
to
execute our growth plan while favorably managing the increased operating
pressures we face.
RESTATEMENT
We
are
restating our consolidated financial statements for the first nine months
of
fiscal 2005 for an adjustment to our accounting for the issuance of the
Series B
Preferred Stock and warrants in the May 2005 private placement. The adjustment
was recorded as a non-cash implied dividend consisting of a warrant valuation
and a beneficial conversion feature reflecting a non-detachable in-the-money
conversion feature of the Series B Preferred Stock. This adjustment was
identified in connection with internal procedures relative to the fiscal
2005
year-end audit. The corrections are the result of our failure to properly
identify the accounting treatment for the warrants and conversion feature
of the
preferred stock during the quarter when the transaction occurred.
The
restated financial statements do not affect our business outlook for future
fiscal periods, nor impact our cash position or future cash flows from
operations. The impact of the adjustment on the consolidated balance sheet,
consolidated financial statements of operations, and consolidated statement
of
stockholders’ equity is shown in note 6 to our consolidated financial statements
included in this Form 10−Q/A.
PERCENTAGES TO TOTAL
REVENUES
The
following table sets forth, for the periods indicated, the percentages which
the
items in our Company’s Consolidated Statements of Income bear to total
revenues.
|
13
Weeks Ended
|
39
Weeks Ended
|
||||||||||||
|
October
2, 2005
|
September
26, 2004
|
October
2, 2005
|
September
26, 2004
|
||||||||||
|
Restated
|
|||||||||||||
|
REVENUES
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||
|
COST
AND EXPENSES:
|
|||||||||||||
|
Cost
of revenues
|
33.5
|
%
|
34.1
|
%
|
33.0
|
%
|
33.5
|
%
|
|||||
|
Labor
and other related expenses
|
32.7
|
%
|
33.4
|
%
|
30.3
|
%
|
30.7
|
%
|
|||||
|
Other
restaurant operating expenses
|
28.2
|
%
|
28.1
|
%
|
24.2
|
%
|
24.1
|
%
|
|||||
|
Total
restaurant costs and expenses
|
94.4
|
%
|
95.6
|
%
|
87.5
|
%
|
88.3
|
%
|
|||||
|
General
and administrative expenses
|
10.5
|
%
|
8.9
|
%
|
8.2
|
%
|
7.5
|
%
|
|||||
|
Depreciation
and amortization
|
4.0
|
%
|
3.1
|
%
|
3.3
|
%
|
2.6
|
%
|
|||||
|
Pre-opening
expenses
|
0.0
|
%
|
0.0
|
%
|
0.9
|
%
|
0.0
|
%
|
|||||
|
(Loss)
income from operations
|
-8.9
|
%
|
-7.6
|
%
|
0.1
|
%
|
1.6
|
%
|
|||||
|
Lease
buy-out option
|
0.0
|
%
|
0.0
|
%
|
1.7
|
%
|
0.0
|
%
|
|||||
|
Provision
for impairment of assets
|
0.0
|
%
|
0.0
|
%
|
-0.6
|
%
|
0.0
|
%
|
|||||
|
Interest
expense, net
|
-0.3
|
%
|
-6.4
|
%
|
-1.1
|
%
|
-2.3
|
%
|
|||||
|
Other
income, net
|
8.2
|
%
|
5.4
|
%
|
1.6
|
%
|
1.6
|
%
|
|||||
|
Elimination
of minority partner interest
|
-0.5
|
%
|
-0.6
|
%
|
-0.6
|
%
|
-0.6
|
%
|
|||||
|
(Loss)
income before preferred stock dividend
|
-1.5
|
%
|
-9.2
|
%
|
1.1
|
%
|
0.3
|
%
|
|||||
|
Deemed
dividend associated with warrants and beneficial conversion feature
of
preferred stock
|
0.0
|
%
|
0.0
|
%
|
-5.0
|
%
|
0.0
|
%
|
|||||
|
Net
(loss) income applicable to common stock
|
-1.5
|
%
|
-9.2
|
%
|
-3.9
|
%
|
0.3
|
%
|
|||||
RESULTS
OF OPERATIONS
13
weeks ended October 2, 2005 and September 26, 2004
Revenues.
Total
revenues for the third quarter of 2005 were $10,241,000 as compared to
$8,683,000 for the third quarter of 2004. The $1,558,000, or 17.9%, increase
in
revenues was primarily due to a 10.0% increase in comparable store sales
and the
addition of one restaurant, giving 26 restaurants as of quarter ended October
2,
2005. The increase in same store sales was due to greatly improved sales
trends
attained by the company’s remodeled stores and significantly favorable sales
comparisons to the 2004 quarter, which were negatively impacted by lost
operating days and revenues due to the Florida hurricanes; partially offset
by
unfavorable sales trends from the company’s non-remodeled restaurants. Adjusting
for the estimated hurricane-related sales loss, same store sales for the
third
quarter of 2005 increased 0.8% from the comparable period in 2004. Comparisons
of same store sales include only stores that 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 revenues. The
cost
of revenues as a percentage of revenues decreased to 33.5% for the third
quarter
of 2005 compared to 34.1% for the third quarter of 2004. This improvement
in
cost of revenues as a percentage of revenues primarily related to menu price
increases implemented during the second quarter of 2005 to compensate for
the
Florida minimum wage increase and higher costs in 2004 relating to elevated
chicken and dairy procurement costs. We are continually attempting to anticipate
and reacting to fluctuations in food costs by purchasing seafood directly
from
numerous suppliers, promoting certain alternative menu selections in response
to
price and availability of supply and adjusting our menu prices accordingly
to
help control the cost of revenues.
Labor
and other related expenses.
Labor
and other related expenses as a percentage of revenues decreased to 32.7%
during
the third quarter of 2005 as compared to 33.4% for the third quarter of 2004.
This decrease was primarily due to a reduction in kitchen and management
wages
as a percent of revenues due to increased sales leverage, offset in part
by
increases in server wages as a percent of revenues as affected by our enhanced
service standards and the Florida minimum wage increase in May
2005.
Other
restaurant operating expenses. Other
restaurant operating expenses as a percentage of revenues increased to 28.2%
for
the third quarter of 2005 compared to 28.1% for the third quarter of 2004.
The
increase primarily was due to increased occupancy costs mostly related to
the
new restaurant and utilities expenses from significantly higher electricity
and
gas costs.
General
and administrative expenses.
General
and administrative expenses were $1,070,000, or 10.5% of revenues, and $771,000,
or 8.9% of revenues, for the third quarters of 2005 and 2004, respectively.
The
increase over the prior year is primarily related to salaries and wages relating
to expansion and growth initiatives, including recruiting and
training.
Depreciation
and amortization.
Depreciation and amortization expense was $408,000, or 4.0% of revenues,
and
$272,000, or 3.1% of revenues, for the third quarters of 2005 and 2004,
respectively. The increase over prior year related to increases in depreciation
of remodeled restaurants.
Interest
expense, net.
Interest expense, net, was $30,000 in the third quarter of 2005 compared
to
$552,000 in the third quarter of 2004. Interest expense, net, in the third
quarter of 2004 included a non-recurring charge of $446,000 related to warrants
issued in connection with an agreement by investors to extend the maturity
dates
of two then outstanding $1,000,000 promissory notes. Exclusive of this
non-recurring item, interest expense was $106,000 in the third quarter of
2004.
The decrease over the prior year primarily related to the May 2005 retirement
of
the two $1,000,000 promissory notes which were converted into common and
preferred stock.
Other
income, net.
Other
income, net, was $838,000 in the third quarter of 2005 compared to $465,000
in
the third quarter of 2004. During the third quarter of 2005, we completed
a
sale/leaseback transaction of our Winter Haven restaurant, providing net
cash
proceeds of $933,000. The book gain on the sale/leaseback transaction, net
of
remodeling-related fixed asset disposals, was $858,000. During the third
quarter
of 2004, we recognized a $497,000 gain from hurricane-related insurance proceeds
in excess of related expenses and losses from disposal of damaged assets,
which
were applied against assets that were previously impaired or had been fully
depreciated. Exclusive of these non-recurring items, other expense, net,
for the
third quarters of 2005 and 2004 was $20,000 and $32,000,
respectively.
Loss
from operations and net loss applicable to common stock.
As a
result of the factors discussed above, we had a loss from operations of $907,000
for the third quarter of 2005 compared to a loss from operations of $660,000
for
the third quarter of 2004. We had a net loss applicable to common stock of
$152,000 for the third quarter of 2005 compared to $799,000 for the third
quarter of 2004. Exclusive of non-recurring items in the third quarter of
2005
and 2004, the net loss was $1,010,000 and $850,000, respectively.
39
weeks ended October 2, 2005 and September 26, 2004
Revenues.
Total
revenues for the 39 weeks ended October 2, 2005 were $34,686,000 as compared
to
$32,271,000 for the 39 weeks ended September 26, 2004. The $2,415,000, or
7.5%,
increase primarily was due to an increase in same store sales of 7.7% reflecting
an increase in check average from menu price increases implemented during
the
second quarter of 2005 to compensate for the Florida minimum wage increase,
partially offset by slightly declining guest counts compared to last year.
In
2005, we opened a new restaurant at the end of the first quarter. In 2004,
we
closed three restaurants, one in each of the first three quarters. Adjusting
for the estimated hurricane-related sales loss, same store sales for the
39 week
period of 2005 increased 5.0% from the comparable period in 2004.
Cost
of revenues.
The
cost of revenues as a percentage of revenues decreased to 33.0% for the 39
weeks
ended October 2, 2005 from 33.5% for the comparable period in 2004. This
improvement in cost of revenues as a percentage of revenues primarily related
to
menu price increases implemented to compensate for the Florida minimum wage
increase. Additionally, cost of revenues in 2004 was negatively impacted
by
elevated chicken and dairy procurement costs.
Labor
and other related expenses.
Labor
and other related expenses were 30.3% as a percentage of revenues for the
39
weeks ended October 2, 2005 compared to 30.7% for the 39 weeks ended September
26, 2004. We benefited from second quarter non-recurring reductions in benefits
and taxes relating to workers compensation insurance reserve reductions and
corresponding refunds of $344,000 and $161,000 in 2005 and 2004, respectively,
of which $330,000 and $142,000 were allocated to restaurant labor costs.
Exclusive of the non-recurring items, labor and other related expenses as
a
percentage of revenues was 31.3% and 31.1% for the 39 weeks of 2005 and 2004,
respectively. This increase over prior year primarily was related to the
Florida
minimum wage increase which became effective in May 2005 and our investment
in
training to elevate guest service levels.
Other
restaurant operating expenses. Other
restaurant operating expenses were 24.2% and 24.1% of revenues for the 39
weeks
ended October 2, 2005 and September 26, 2004, respectively.
General
and administrative expenses.
General
and administrative expenses were $2,859,000, or 8.2% of revenues, and
$2,430,000, or 7.5% of revenues, for the 39 weeks ended October 2, 2005 and
September 26, 2004, respectively. Excluding non-recurring severance pay of
$39,000 in fiscal 2004, general and administrative expenses were 7.4% of
revenues for the 39 weeks ended September 26, 2004. The increase over the
prior
year was primarily related to salaries and wages relating to expansion and
growth initiatives, including recruiting and training.
Depreciation
and amortization.
Depreciation and amortization expense was $1,140,000, or 3.3% of revenues,
and
$851,000, or 2.6% of revenues, for the 39 weeks ended October 2, 2005 and
September 26, 2004, respectively. The increase related to additional
depreciation for remodeling expenditures incurred in 2004 and 2005.
Pre-opening
expenses.
Pre-opening expenses of $303,000 for the 39 weeks ended October 2, 2005 related
to the new restaurant which opened on March 22, 2005 at Clearwater Beach,
Florida. There were no restaurant openings in 2004.
Lease
buy-out option. In
January 2005, we entered into an agreement with our landlord in St. Pete
Beach,
Florida, whereby on February 22, 2005, the landlord paid $600,000 to Shells
for
an option to buy-out the lease. Commencing February 22, 2006, the landlord
can
provide notice of lease termination to Shells. Thereafter, we have 60 days
to
wind down business and vacate the premises.
Provision
for impairment of assets. The
provision for impairment of assets of $211,000 occurred on February 22, 2005
due
to a valuation adjustment for the St. Pete Beach location for an expected
shortened lease period relating to the lease buy-out option discussed above.
There was no provision in the 39 weeks ended September 26, 2004.
Interest
expense, net.
Interest expense, net, was $367,000 in the 39 weeks ended October 2, 2005
compared to $757,000 in the same period of 2004. Exclusive of a non-recurring
charge, net interest expense was $311,000 for the 39 weeks ended September
26,
2004. A non-recurring charge of $446,000 in 2004 related to warrants issued
in
connection with an agreement by investors to extend the maturity dates of
two
then outstanding $1,000,000 promissory notes. The increase over prior year
primarily related to interest expense, at 12% per annum, and late payment
penalties on the $2,375,000 aggregate principal amount of debentures, which
we
issued in December 2004 and repaid on May 25, 2005, partially offset by a
reduction in interest expense relating to the retirement of the two $1,000,000
promissory notes in May 2005.
Other
income, net.
Other
income, net, was $560,000 in the 39 weeks ended October 2, 2005 compared
to
$522,000 in the same period of 2004. Exclusive of non-recurring items, other
expense was $56,000 and $64,000 for the 39 weeks ended October 2, 2005 and
September 26, 2004, respectively. During 2005, non-recurring items included
an
$891,000 gain on a sale/leaseback transaction, partially offset by losses
on
disposal of assets of $195,000 relating to the write-down of fixed assets
replaced during remodeling, and financing costs of $80,000 paid by us for
a $1.6
million line-of-credit availability. During 2004, non-recurring income included
a $497,000 gain from hurricane-related insurance proceeds in excess of related
expenses and losses from the disposal of damaged assets, which were applied
against assets that were previously impaired or had been fully depreciated,
and
a gain of $89,000 relating to the sale of a restaurant location.
Deemed
dividend associated with warrants and beneficial conversion feature of
preferred
stock. The
deemed dividend associated with warrants and beneficial conversion feature
of
preferred stock of $1,735,000 related to the May 2005 private placement
financing transaction when we issued Series B Convertible Preferred Stock
and
warrants to purchase common stock. The beneficial conversion feature reflects
a
non-detachable in-the-money conversion feature of the Series B Preferred
Stock.
This one-time implied preferred stock dividend was recorded through retained
earnings.
Income
from operations and net (loss) income applicable to common
stock.
As a
result of the factors discussed above, our income from operations was $36,000
for the 39 weeks ended October 2, 2005 compared to $530,000 for the same
period
in 2004. Exclusive of non-recurring items, our loss from operations was $5,000
for the 39 weeks ended October 2, 2005 compared to income from operations
of
$408,000 for the same period in 2004. Our net loss applicable to common stock
for the 39 weeks ended October 2, 2005 was $1,318,000 compared to net income
applicable to common stock of $104,000 in the same period in 2004. Exclusive
of
non-recurring items, our net loss was $628,000 and $158,000 for the 39 weeks
ended October 2, 2005 and September 26, 2004, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
On
September 29, 2005, we completed a sale and simultaneous leaseback of our
restaurant in Winter Haven, Florida with Fortress Realty Investment, LLC
at a
sale price of $1,667,000. We used $547,000 of the proceeds from the sale
leaseback transaction to retire two notes on the Winter Haven property. We
are
seeking additional capital through financing new restaurant equipment and
through an additional sale leaseback transaction contemplated for a company
owned restaurant property.
We
remodeled three restaurants in the third quarter of 2005. We anticipate
completing an additional six remodels in the fourth quarter for a total of
19 of
our 21 company owned restaurants remodeled by the end of 2005. We anticipate
that the total investment by the company to remodel these 19 restaurants
will be
approximately $3.6 million, of which approximately $2.3 million has been
invested to date.
Additionally,
we signed two restaurant leases in October 2005, one for a new restaurant
location in St. Petersburg, Florida and another in Stuart, Florida to relocate
an existing restaurant to a preferable location. The relocation of the Stuart,
Florida restaurant was completed on November 15, 2005. The St. Petersburg,
Florida restaurant is scheduled to open in December 2005. As of October 28,
2005, we have drawn $800,000 of the $1,600,000 line of credit availability,
to
assist in the financing of these two acquisitions. We also closed an under
performing restaurant in Port Charlotte, Florida in November 2005.
We
believe, based on our current outlook, that our current cash position and
cash
flows from operations will be adequate to satisfy our contemplated cash
requirements over the next twelve months.
We
have,
from time-to-time utilized, and to the extent applicable may utilize real
estate
mortgage and restaurant equipment financing with various banks or financing
institutions as necessary, to help support our cash flow needs. We also may
utilize as a form of financing, a sale/leaseback option on one owned restaurant
property. In the event that our plans change, assumptions prove to be
inaccurate, or due to unanticipated expenses, and in the event projected
cash
flow or third party financing otherwise prove to be insufficient to fund
operations, we could be required to seek additional financing from sources
not
currently anticipated. There can be no assurance that third party financing
will
be available to us when needed, on acceptable terms, or at all.
As
of
October 2, 2005, our current liabilities of $4,694,000 exceeded current assets
of $3,414,000, resulting in a working capital deficiency of $1,280,000. In
comparison, the January 2, 2005 working capital deficiency was $4,639,000.
The
favorable decrease in the working capital deficiency primarily related to
the
repayment of the convertible debentures in May 2005 with the proceeds from
the
equity financing, along with a reduction in accrued expenses. The reduction
in
accrued expenses was due to the retirement of the warrant valuation reserve,
partially offset by an increase in accrued property taxes. Our operating
leverage has improved. We may still encounter operating pressures from declining
sales, increasing food, labor or other operating costs or additional restaurant
disposition or pre-opening costs. Historically, we have generally operated
with
minimal or marginally negative working capital as a result of the investment
of
current assets into non-current property and equipment, as well as the turnover
of restaurant inventory relative to more favorable vendor terms in accounts
payable.
Cash
provided by operating activities for the 39 weeks ended October 2, 2005 was
$642,000 compared to $527,000 for the comparable period in 2004. The net
increase of $115,000 compared to the same period in 2004 primarily related
to
favorable variances in net income before preferred stock dividend, accrued
expenses and accounts payable, partially offset by unfavorable increases
in
prepaid rent and prepaid construction deposits.
The
cash
used in investing activities was $2,345,000 for the 39 weeks ended October
2,
2005 compared to $511,000 for the same period in 2004. The net increase in
cash
used in investing activities of $1,834,000 was due to $3,989,000 in additional
capital expenditures over the prior year, partially offset by $2,155,000
in
additional proceeds on the sale of assets and lease options over the prior
year.
The additional capital expenditures related to the acquisition and remodeling
of
our new Clearwater Beach restaurant, along with the remodeling of 10 existing
restaurants. Proceeds on the sales of assets of $1,644,000 in the first three
quarters of 2005 related to the sale leaseback of the Winter Haven location
and
proceeds of $600,000 related to the lease buy-out option, compared to $89,000
in
proceeds on the sale of assets in the 2004 comparable period.
The
cash
provided by financing activities was $1,731,000 for the 39 weeks ended October
2, 2005 compared to cash used in financing activities of $354,000 for the
comparable period in 2004. The net increase of $2,085,000 over the prior
year
primarily related to an increase in net proceeds from the issuance of stock
of
$4,943,000 over the prior year, partially offset by an increase in repayments
of
debt of $3,266,000 over the prior year.
QUARTERLY
FLUCTUATION OF FINANCIAL RESULTS
The
restaurant industry in general is seasonal, depending on restaurant location
and
the type of food served. In addition, we have experienced fluctuations in
our
quarter-to-quarter operating results due, in large measure, to our full
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 and the effect of world events in general and the tourism
industry in particular. Our 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. Many of our restaurant
locations are in coastal cities, where sales are significantly dependent
on
tourism and its seasonality patterns.
In
addition, quarterly results have been substantially affected by the timing
of
restaurant closings or openings. Because of the seasonality of our business
and
the impact of restaurant closings, 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.
We
are
exposed to market risk from changes in interest rates on debt and changes
in
commodity prices. Our exposure to interest rate risk relates to the $497,000
in
outstanding debt with banks that is based on variable rates. Borrowings under
the loan agreements bear interest at the rate equal to the applicable bank’s
base rate.
We
maintain "disclosure controls and procedures," as such term is defined
under
Securities Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in
the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how
well
designed and operated, can provide only reasonable assurance of achieving
the
desired control objectives and our management necessarily was required
to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. As required by SEC Rule 13a-15(b), we have carried out
an
evaluation, as of the end of the period covered by this report, under the
supervision and with the participation of our management, including our
Chief
Executive Officer and Chief Financial Officer, of the effectiveness of
the
design and operation of our disclosure controls and procedures.
As
previously disclosed in a Current Report on Form 8−K which we filed on April 3,
2006 and as described in our Explanatory Note to this Form 10−Q/A and note 6 to
our accompanying consolidated financial statements included herein, in
connection with internal procedures relative to the fiscal 2005 year end
audit,
we identified the need for an adjustment to our accounting for the issuance
of
the Series B Preferred Stock and warrants in the May 2005 private placement.
The
errors are the result of our failure to properly identify the accounting
treatment for the warrants and conversion feature of the preferred stock
during
the quarter when the transaction occurred. Based on the impact of the
aforementioned accounting adjustment, we determined to restate our interim
financial statements for the quarters ended July 3, 2005 and October 2,
2005.
During
the period from April to May 2006, we changed our policy for conducting
accounting research to coincide with the quarter in which any complex or
one-time transaction occurs rather than waiting until year-end audit procedures
are completed.
Item
1.
Legal Proceedings
On
April
20, 2005, we received a notice from the Equal Employment Opportunity Commission
(EEOC) that an employee in a Tampa Shells restaurant had filed a charge of
discrimination with the EEOC. Specifically, this employee claimed age
discrimination in violation of the Age Discrimination in Employment Act of
1964.
On October 3, 2005, the EEOC issued a determination in the form of a Dismissal
and Notice of Rights indicating that based upon its investigation, the EEOC
was
unable to conclude that the information obtained established violations of
the
statutes.
In
the
ordinary course of business, Shells is and may be a party to various legal
proceedings, the outcome of which, singly or in the aggregate, is not expected
to be material to our financial position, results of operations or cash
flows.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
During
the third quarter of 2005, investors converted 11,544 shares of our Series
A
Preferred Stock into 57,720 shares of our common stock. Shells did not receive
any cash for these conversions. This issuance of shares of our common stock
upon
conversion of our Series A Preferred Stock was made in reliance on the exemption
provided by section 3(a)(9) and section 4(2) of the Securities Act of
1933.
Item
3. Defaults
Upon Senior Securities
None
Item
4. Submission
of Matters to a Vote of Security Holders
None
Item
5. Other
Information
Registration
of our common stock with the Securities and Exchange Commission became effective
on September 13, 2005 relating to the registration statement filed on July
8,
2005 for 27,772,411 shares, as amended.
Item
6. Exhibits
| 31.1 |
Certification
of Chief Executive Officer under Rule 13a-14(a) as of November
3,
2006
|
| 31.2 |
Certification
of Chief Financial Officer under Rule 13a-14(a) as of November
3,
2006
|
| 32.1 |
Certification
of Chief Executive Officer and Chief Financial Officer under Section
906
as of November 3, 2006
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| SHELLS SEAFOOD RESTAURANTS, INC. | ||
| |
|
|
| November 3, 2006 | By: | /s/ Leslie J. Christon |
|
|
||
|
President
and Chief Executive Officer
|
||
| November 3, 2006 | By: | /s/ Warren R. Nelson |
|
|
||
|
Executive
Vice President and Chief Financial
Officer
|
||
-23-
EXHIBIT
31.1
Certification
of Chief Executive Officer
I,
Leslie
J. Christon, certify that:
1. I
have
reviewed this quarterly report on Form 10-Q/A of Shells Seafood Restaurants,
Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant's other certifying officer and I are responsible for establishing
and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed
such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b)
designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) evaluated
the
effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d) disclosed
in
this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect the
registrant’s internal control over financial reporting; and
5. The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) all
significant deficiencies and material weaknesses in the design or operation
of
internal controls over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) any
fraud,
whether or not material, that involves management or other employees who have
a
significant role in the registrant's internal control over financial
reporting.
/s/
Leslie J. Christon
President
and Chief Executive Officer
November
3, 2006
EXHIBIT
31.2
Certification
of Chief Financial Officer
I,
Warren
R. Nelson, certify that:
1. I
have
reviewed this quarterly report on Form 10-Q/A of Shells Seafood Restaurants,
Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant's other certifying officer and I are responsible for establishing
and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed
such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b)
designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) evaluated
the
effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d) disclosed
in
this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect the
registrant’s internal control over financial reporting; and
5. The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) all
significant deficiencies and material weaknesses in the design or operation
of
internal controls over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) any
fraud,
whether or not material, that involves management or other employees who have
a
significant role in the registrant's internal control over financial
reporting.
/s/
Warren R. Nelson
Executive
Vice President and Chief Financial Officer
November
3, 2006
EXHIBIT
32.1
Certification
of Chief Executive Officer and Chief Financial Officer
pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002
Securities
and Exchange Commission
Washington,
DC
The
undersigned Chief Executive Officer and Chief Financial Officer of Shells
Seafood Restaurants, Inc. do hereby certify pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the
Quarterly Report of Shells Seafood Restaurants, Inc. on Form 10-Q/A, as filed
on
the date hereof, for the quarter ended October 2, 2005 fully complies with
the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934
and the information contained in such Quarterly Report on Form 10-Q/A fairly
presents, in all material respects, the financial condition and results of
operations of Shells Seafood Restaurants, Inc.
A
signed
original of this written statement required by Section 906 has been provided
to
Shells Seafood Restaurants, Inc. and will be retained by Shells Seafood
Restaurants, Inc. and furnished to the Securities and Exchange Commission or
its
staff upon request.
/s/
Leslie J. Christon
President
and Chief Executive Officer
November
3, 2006
/s/
Warren R. Nelson
Executive
Vice President and Chief Financial Officer
November
3, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
| x |
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
Quarterly Period Ended October 1, 2006
| o |
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
Transition Period from __________to __________
Commission
File No. 0-28258
SHELLS
SEAFOOD RESTAURANTS, INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
65-0427966
|
|
|
(State
or other jurisdiction of
|
(IRS)
Employer Identification Number
|
|
|
incorporation
or organization)
|
16313
North Dale Mabry Highway, Suite 100, Tampa, FL 33618
(Address
of principal executive offices) (zip code)
(813)
961-0944
(Registrant’s
telephone number, including area code)
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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check
one):
Large
Accelerated Filer o
Accelerated Filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
|
Class
|
Outstanding
at November 10, 2006
|
|
|
Common
stock, $0.01 par value
|
17,577,522
|
FORWARD
LOOKING STATEMENTS
When
used
in this Quarterly Report on Form 10-Q, the words "believes", "anticipates",
"expects", and similar expressions are intended to identify forward-looking
statements. These statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those
projected.
In
addition to seasonal fluctuations, our quarterly and annual operating results
are affected by a wide variety of other factors that could materially and
adversely affect our revenues and profitability, including changes in consumer
preferences, tastes and eating habits; increases in food, labor and other
operating costs; promotional timings and seasonality; the availability of food
acceptable to our quality standards at acceptable prices; the availability
of
qualified labor; national, regional and local economic and weather conditions;
demographic trends and traffic patterns; changes in travel and tourism
tendencies, particularly in light of world events; competition from other
restaurants and food service establishments; availability of third party
financing to fund capital or operating activities; and the timing, costs and
charges relating to restaurant openings, closings and remodelings, including
closings in which we are the sublessor. As a result of these and other factors,
we may experience fluctuations in future operating results on a quarterly or
annual basis, which could materially and adversely affect our business,
financial condition, operating results, and stock price. An investment in our
company involves various risks, including those which are detailed in this
document, and from time-to-time in our other filings with the Securities and
Exchange Commission.
Any
forward-looking statements included in this Quarterly Report speak only as
of
the date of this document. We are not undertaking any 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 of this document
or to reflect the occurrence of unanticipated events.
SHELLS
SEAFOOD RESTAURANTS, INC.
AND
SUBSIDIARIES
|
Part
I.
|
Page
Number
|
|
|
Item
1.
|
|
|
|
4
|
||
|
5-6
|
||
|
7
|
||
|
8-9
|
||
|
10-13
|
||
|
Item
2.
|
14-20
|
|
|
Item
3.
|
21
|
|
|
Item
4.
|
21
|
|
|
Part
II.
|
22
|
|
|
Item
1.
|
||
|
Item
1A.
|
||
|
Item
6.
|
|
|
|
23
|
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
|
(Unaudited)
|
|||||||
|
October
1, 2006
|
January
1, 2006
|
||||||
|
ASSETS
|
|||||||
|
Cash
|
$
|
590,062
|
$
|
1,360,740
|
|||
|
Inventories
|
490,124
|
498,975
|
|||||
|
Other
current assets
|
610,063
|
365,227
|
|||||
|
Receivables
from related parties
|
39,281
|
114,485
|
|||||
|
Total
current assets
|
1,729,530
|
2,339,427
|
|||||
|
Property
and equipment, net
|
11,800,232
|
11,733,861
|
|||||
|
Goodwill
|
2,474,407
|
2,474,407
|
|||||
|
Other
assets
|
500,969
|
547,395
|
|||||
|
Prepaid
rent
|
321,100
|
343,242
|
|||||
|
TOTAL
ASSETS
|
$
|
16,826,238
|
$
|
17,438,332
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Accounts
payable
|
$
|
2,833,427
|
$
|
3,982,153
|
|||
|
Accrued
expenses
|
2,346,056
|
2,175,380
|
|||||
|
Sales
tax payable
|
220,077
|
245,673
|
|||||
|
Notes
and deferred interest payable to related parties
|
1,502,510
|
—
|
|||||
|
Current
portion of long-term debt
|
875,143
|
777,823
|
|||||
|
Total
current liabilities
|
7,777,213
|
7,181,029
|
|||||
|
Notes
and deferred interest payable to related parties
|
—
|
808,702
|
|||||
|
Long-term
debt, less current portion
|
937,985
|
1,001,081
|
|||||
|
Deferred
rent
|
992,712
|
784,976
|
|||||
|
Total
liabilities
|
9,707,910
|
9,775,788
|
|||||
|
Minority
partner interest
|
501,413
|
472,131
|
|||||
|
STOCKHOLDERS’
EQUITY:
|
|||||||
|
Preferred
stock, $0.01 par value; authorized 2,000,000 shares;
|
|||||||
|
Series
A - 22,694 and 23,731 shares issued and outstanding
|
227
|
237
|
|||||
|
Series
B - 373,849 and 443,850 shares issued and outstanding
|
3,739
|
4,439
|
|||||
|
Common
stock, $0.01 par value; authorized 58,000,000 shares;
|
|||||||
|
17,577,522
and 16,134,817 shares issued and outstanding
|
175,775
|
161,348
|
|||||
|
Additional
paid-in-capital
|
25,244,543
|
25,122,312
|
|||||
|
Accumulated
deficit
|
(18,807,369
|
)
|
(18,097,923
|
)
|
|||
|
Total
stockholders’ equity
|
6,616,915
|
7,190,413
|
|||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
16,826,238
|
$
|
17,438,332
|
|||
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
(Unaudited)
|
13
Week Period Ended
|
|||||||
|
October
1, 2006
|
October
2, 2005
|
||||||
|
REVENUES
|
$
|
10,529,214
|
$
|
10,240,800
|
|||
|
RESTAURANT
OPERATING COSTS:
|
|||||||
|
Food
and beverage
|
3,397,604
|
3,434,535
|
|||||
|
Labor
|
3,354,299
|
3,350,762
|
|||||
|
Other
|
3,124,978
|
2,884,210
|
|||||
|
Depreciation
and amortization
|
577,563
|
408,164
|
|||||
|
Total
restaurant operating costs
|
10,454,444
|
10,077,671
|
|||||
|
RESTAURANT
OPERATING INCOME
|
74,770
|
163,129
|
|||||
|
General
and administrative expenses
|
880,795
|
1,070,455
|
|||||
|
LOSS
FROM OPERATIONS
|
(806,025
|
)
|
(907,326
|
)
|
|||
|
OTHER
(EXPENSE) INCOME:
|
|||||||
|
Interest
expense, net
|
(96,577
|
)
|
(29,881
|
)
|
|||
|
Other
(expense) income , net
|
(10,878
|
)
|
837,800
|
||||
|
Total
other (expense) income
|
(107,455
|
)
|
807,919
|
||||
|
LOSS
BEFORE ELIMINATION OF MINORITY
|
|||||||
|
PARTNER
INTEREST
|
(913,480
|
)
|
(99,407
|
)
|
|||
|
ELIMINATION
OF MINORITY PARTNER INTEREST
|
(48,057
|
)
|
(52,500
|
)
|
|||
|
NET
LOSS APPLICABLE TO COMMON STOCK
|
$
|
(961,537
|
)
|
$
|
(151,907
|
)
|
|
|
NET
LOSS PER SHARE OF COMMON STOCK:
|
|||||||
|
Basic
and diluted
|
$
|
(0.06
|
)
|
$
|
(0.01
|
)
|
|
|
AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING:
|
|||||||
|
Basic
and diluted
|
16,673,723
|
15,700,814
|
|||||
See
accompanying notes to consolidated financial statements.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(continued)
|
39
Week Period Ended
|
|||||||
|
October
1, 2006
|
October
2, 2005
|
||||||
|
REVENUES
|
$
|
38,169,947
|
$
|
34,685,873
|
|||
|
RESTAURANT
OPERATING COSTS:
|
|||||||
|
Food
and beverage
|
12,248,567
|
11,431,721
|
|||||
|
Labor
|
11,606,154
|
10,511,226
|
|||||
|
Other
|
9,976,063
|
8,404,977
|
|||||
|
Depreciation
and amortization
|
1,642,826
|
1,139,731
|
|||||
|
Pre-opening
expenses
|
—
|
303,206
|
|||||
|
Total
restaurant operating costs
|
35,473,610
|
31,790,861
|
|||||
|
RESTAURANT
OPERATING INCOME
|
2,696,337
|
2,895,012
|
|||||
|
General
and administrative expenses
|
3,035,627
|
2,858,605
|
|||||
|
(LOSS)
INCOME FROM OPERATIONS
|
(339,290
|
)
|
36,407
|
||||
|
OTHER
(EXPENSE) INCOME:
|
|||||||
|
Lease
buy-out
|
212,198
|
600,000
|
|||||
|
Provision
for impairment of assets due to lease buy-out
|
—
|
(211,000
|
)
|
||||
|
Interest
expense, net
|
(234,847
|
)
|
(366,659
|
)
|
|||
|
Other
(expense) income, net
|
(157,756
|
)
|
560,171
|
||||
|
Total
other (expense) income, net
|
(180,405
|
)
|
582,512
|
||||
|
(LOSS)
INCOME BEFORE ELIMINATION OF MINORITY
|
|||||||
|
PARTNER
INTEREST
|
(519,695
|
)
|
618,919
|
||||
|
ELIMINATION
OF MINORITY PARTNER INTEREST
|
(189,751
|
)
|
(201,758
|
)
|
|||
|
NET
(LOSS) INCOME BEFORE PREFERRED STOCK DIVIDEND
|
(709,446
|
)
|
417,161
|
||||
|
Deemed
dividend associated with warrants
|
|||||||
|
and
beneficial conversion feature of preferred stock
|
—
|
(1,735,169
|
)
|
||||
|
NET
LOSS APPLICABLE TO COMMON STOCK
|
$
|
(709,446
|
)
|
$
|
(1,318,008
|
)
|
|
|
NET
LOSS PER SHARE OF COMMON STOCK:
|
|||||||
|
Basic
and diluted
|
$
|
(0.04
|
)
|
$
|
(0.09
|
)
|
|
|
AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING:
|
|||||||
|
Basic
and diluted
|
16,359,683
|
14,381,962
|
|||||
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
(Unaudited)
|
PREFERRED
STOCK
|
ADDITIONAL
|
|||||||||||||||||||||||||||
|
Series
A
|
Series
B
|
COMMON
STOCK
|
PAID-IN
|
ACCUMULATED
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
CAPITAL
|
DEFICIT
|
TOTAL
|
||||||||||||||||||||
|
Balance
at January 1, 2006
|
23,731
|
$
|
237
|
443,850
|
$
|
4,439
|
16,134,817
|
$
|
161,348
|
$
|
25,122,312
|
$
|
(18,097,923
|
)
|
$
|
7,190,413
|
||||||||||||
|
Net
loss
|
(709,446
|
)
|
(709,446
|
)
|
||||||||||||||||||||||||
|
Stock
option expense
|
113,448
|
113,448
|
||||||||||||||||||||||||||
|
Warrant
exercised
|
37,500
|
375
|
22,125
|
22,500
|
||||||||||||||||||||||||
|
Preferred
stock converted
|
(1,037
|
)
|
$
|
(10
|
)
|
(70,001
|
)
|
(700
|
)
|
1,405,205
|
14,052
|
(13,342
|
)
|
—
|
||||||||||||||
|
Balance
at October 1, 2006
|
22,694
|
$
|
227
|
373,849
|
$
|
3,739
|
17,577,522
|
$
|
175,775
|
$
|
25,244,543
|
$
|
(18,807,369
|
)
|
$
|
6,616,915
|
||||||||||||
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
(Unaudited)
|
39
Week Period Ended
|
|||||||
|
OPERATING
ACTIVITIES:
|
October
1, 2006
|
October
2, 2005
|
|||||
|
Net
(loss) income before preferred stock dividend
|
$
|
(709,446
|
)
|
$
|
417,161
|
||
|
Adjustments
to reconcile net (loss) income
|
|||||||
|
before
preferred stock dividend to
|
|||||||
|
net
cash provided by operating activities:
|
|||||||
|
Depreciation
and amortization
|
1,648,450
|
1,139,729
|
|||||
|
Stock
option expense
|
113,448
|
—
|
|||||
|
Minority
partner net income allocation
|
189,751
|
201,758
|
|||||
|
Loss
(gain) on disposal of assets
|
10,359
|
(695,376
|
)
|
||||
|
Lease
buy-out option
|
(212,198
|
)
|
(600,000
|
)
|
|||
|
Provision
for impairment of assets
|
—
|
211,000
|
|||||
|
Changes
in current assets and liabilities
|
(1,110,619
|
)
|
587,552
|
||||
|
Changes
in assets and liabilities:
|
|||||||
|
Decrease
(increase) in prepaid rent
|
22,142
|
(315,556
|
)
|
||||
|
Decrease
(increase) in other assets
|
37,887
|
(277,289
|
)
|
||||
|
Increase
(decrease) in deferred rent
|
84,049
|
(27,102
|
)
|
||||
|
Total
adjustments
|
783,269
|
224,716
|
|||||
|
Net
cash provided by operating activities
|
73,823
|
641,877
|
|||||
|
INVESTING
ACTIVITIES:
|
|||||||
|
Proceeds
from sale of lease buy-out
|
212,198
|
600,000
|
|||||
|
Proceeds
from sale of assets
|
—
|
1,643,859
|
|||||
|
Purchase
of property and equipment
|
(1,716,641
|
)
|
(4,588,765
|
)
|
|||
|
Net
cash used in investing activities
|
(1,504,443
|
)
|
(2,344,906
|
)
|
|||
|
FINANCING
ACTIVITIES:
|
|||||||
|
Proceeds
from debt financing
|
1,606,481
|
533,545
|
|||||
|
Repayment
of debt
|
(808,570
|
)
|
(3,579,054
|
)
|
|||
|
Proceeds
from issuance of stock
|
22,500
|
4,960,135
|
|||||
|
Distributions
to minority partner
|
(160,469
|
)
|
(183,528
|
)
|
|||
|
Net
cash provided by financing activities
|
659,942
|
1,731,098
|
|||||
|
Net
(decrease) increase in cash
|
(770,678
|
)
|
28,069
|
||||
|
CASH
AT BEGINNING OF PERIOD
|
1,360,740
|
2,349,519
|
|||||
|
CASH
AT END OF PERIOD
|
$
|
590,062
|
$
|
2,377,588
|
|||
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
(Unaudited)
(continued)
|
39
Week Period Ended
|
|||||||
|
October
1, 2006
|
October
2, 2005
|
||||||
|
Cash
(outflows) flows from changes in current assets and
liabilities:
|
|||||||
|
Inventories
|
$
|
8,851
|
$
|
(66,418
|
)
|
||
|
Receivables
from related parties
|
75,204
|
16,260
|
|||||
|
Other
current assets
|
(244,836
|
)
|
17,348
|
||||
|
Accounts
payable
|
(1,148,726
|
)
|
(31,646
|
)
|
|||
|
Accrued
expenses
|
170,676
|
641,758
|
|||||
|
Sales
tax payable
|
(25,596
|
)
|
10,250
|
||||
|
Increase
in accrued interest to related parties
|
53,808
|
—
|
|||||
|
Change
in current assets and liabilities
|
$
|
(1,110,619
|
)
|
$
|
587,552
|
||
|
Supplemental
disclosure of cash flow information:
|
|||||||
|
Cash
paid for interest
|
$
|
183,445
|
$
|
309,777
|
|||
|
Cash
from hurricane-related insurance recoveries
|
$
|
49,336
|
$
|
357,198
|
|||
|
Financing
costs, line of credit
|
$
|
—
|
$
|
80,000
|
|||
Non-cash
operating, investing and financing activities:
|
·
|
Accrued
bonuses were reduced by $1,406, $2,109 and $2,109 with a corresponding
reduction in depreciation expense for the first, second and third
quarters
of 2006, respectively.
|
|
·
|
A
capitalized lease obligation of $123,687 was reclassified to deferred
rent
in conjunction with the Ocala lease buy-out in April
2006.
|
|
·
|
Warrant
valuation reserves of $440,000 were applied to Paid in Capital in
September 2005 upon the registration of the underlying common stock
with
the Securities and Exchange
Commission.
|
|
·
|
Warrant
valuation reserves of $284,364 and $223,000 related to the exercise
of
warrants were applied to Paid in Capital in the first and second
quarters
of 2005, respectively.
|
|
·
|
In
each of March and May 2005, principal on related party debt of $500,000
($1,000,000 aggregate) was used by the noteholders to acquire common
stock
in conjunction with the exercise of
warrants.
|
|
·
|
Principal
and accrued interest of $347,588 was used by the debenture holders
to
acquire Series B Preferred Stock in May
2005.
|
|
·
|
Principal
and accrued interest on related party debt of $1,281,666 was used
by the
noteholders to acquire Series B Preferred Stock in May
2005.
|
|
·
|
Deemed
dividend of $1,735,169 for warrants and the beneficial conversion
feature
of Series B Preferred Stock was recorded relative to the May 2005
private
financing transaction.
|
|
·
|
An
issuance cost of $123,872 was recorded for a warrant issued to the
placement agent in the May 2005 private financing
transaction.
|
See
accompanying notes to consolidated financial statements.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTE
1. BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with the instructions for Form 10-Q and, therefore, these statements
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for audited
financial statements. Company
management believes that
all
disclosures contained herein are sufficient for interim financial reporting
purposes and that all material adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included.
The
consolidated financial statements of Shells Seafood Restaurants, Inc. (the
“Company”) should be read in conjunction with the audited consolidated financial
statements and notes thereto contained in the Form 10-K for the year ended
January 1, 2006 filed with the Securities and Exchange Commission. Certain
prior year amounts have been reclassified in the accompanying condensed
consolidated financial statements to conform to the current year
presentation.
NOTE
2. INCOME
TAXES
There
were no provisions for income taxes for the thirteen and thirty-nine weeks
ended
October 1, 2006 and October 2, 2005 due to the anticipated utilization of net
operating loss and general business credit carryforwards.
As
of
January 1, 2006, the end of our most recently completed fiscal year, we had
net
operating loss carryforwards for federal income tax purposes of approximately
$10,246,000 which expire between 2006 and 2020. We also had approximately
$3,205,000 of general business credits to carry forward, which expire by 2025.
We had an ownership change in 2002 and 2005 as defined by Internal Revenue
Code
Section 382, which limits a portion of the amount of net operating loss and
credit carryforwards that may be used against taxable income in any fiscal
year.
This limitation is approximately $75,000 per year for net operating losses
incurred prior to the 2002 ownership change, and $665,000 per year for net
operating losses incurred prior to the 2005 ownership change. Any portion of
the
annual limitation amount not utilized in any year will carry forward to the
following year subject to a 15 to 20 year limitation. Approximately $7,100,000
of our net operating loss carryforwards and approximately $3,082,000 of credits
are subject to the annual limitation. Assuming maximum utilization in future
years, we expect that approximately $3,200,000 in net operating loss
carryforwards and $2,700,000 in credits will expire without benefit to
us.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
3. EARNINGS
PER SHARE
The
following table represents the computation of basic and diluted earnings per
share of common stock as required by Financial Accounting Standards Board
(“FASB”) Statement No. 128, “Earnings Per Share”:
|
13
Week Period Ended
|
October
1, 2006
|
October
2, 2005
|
|||||
|
Net
loss applicable to common stock
|
$
|
(961,537
|
)
|
$
|
(151,907
|
)
|
|
|
Weighted
common shares outstanding
|
16,673,723
|
15,700,814
|
|||||
|
Basic
net loss per share of common stock
|
$
|
(0.06
|
)
|
$
|
(0.01
|
)
|
|
|
Effect
of dilutive securities:
|
|||||||
|
Preferred
stock
|
—
|
—
|
|||||
|
Warrants
|
—
|
—
|
|||||
|
Stock
options
|
—
|
—
|
|||||
|
Diluted
weighted common shares outstanding
|
16,673,723
|
15,700,814
|
|||||
|
Diluted
net loss per share of common stock
|
$
|
(0.06
|
)
|
$
|
(0.01
|
)
|
|
|
39
Week Period Ended
|
October
1, 2006
|
October
2, 2005
|
|||||
|
Net
loss applicable to common stock
|
$
|
(709,446
|
)
|
$
|
(1,318,008
|
)
|
|
|
Weighted
common shares outstanding
|
16,359,683
|
14,381,962
|
|||||
|
Basic
net loss per share of common stock
|
$
|
(0.04
|
)
|
$
|
(0.09
|
)
|
|
|
Effect
of dilutive securities:
|
|||||||
|
Preferred
stock
|
—
|
—
|
|||||
|
Warrants
|
—
|
—
|
|||||
|
Stock
options
|
—
|
—
|
|||||
|
Diluted
weighted common shares outstanding
|
16,359,683
|
14,381,962
|
|||||
|
Diluted
net loss per share of common stock
|
$
|
(0.04
|
)
|
$
|
(0.09
|
)
|
Diluted
net loss per common share excludes anti-dilutive stock options, warrants and
preferred stock of 20,520,000, 20,291,000, 20,801,000
and 12,937,000 for the thirteen weeks ended October 1, 2006 and October 2,
2005,
and the thirty-nine weeks ended October 1, 2006 and October 2, 2005,
respectively.
NOTE
4. STOCK
COMPENSATION PLANS
During
November 2005, we entered into a Stock Option Agreement with Leslie J. Christon,
President and Chief Executive Officer, concurrent with her amended and restated
employment agreement. The Stock Option Agreement granted options to purchase
903,528 shares of common stock at an exercise price of $0.85, the market value
of our common stock on the date of the grant. The options vested as to 353,844
shares on December 31, 2005, and vest as to 274,842 on each of July 1, 2007
and
July 1, 2008. Additionally, at the same time, Mrs. Christon was awarded a stock
option to purchase 158,007 shares of common stock from the stock compensation
plans described below at an exercise price of $0.85 per share, with vesting
ratably in July 2007 and July 2008.
As
of
October 1, 2006, we had two stock-based employee compensation plans, as two
plans had previously expired. As of January 1, 2006, we accounted for the two
remaining plans under the recognition and
measurement
principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related Interpretations. No stock-based employee compensation cost was reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
During
the first quarter of fiscal 2006, we adopted the fair value recognition
provisions of FASB Statement No. 123R, Share-Based
Payment,
effective as of the beginning of the fiscal year. Under the modified prospective
method of adoption selected by us, stock-based employee compensation cost
recognized in 2006 is the same as that which would have been recognized had
the
fair value recognition provisions of Statement 123R been applied to all awards
granted after October 1, 1995, as summarized in the table below.
|
13
Week Period Ended
|
39
Week Period Ended
|
||||||||||||
|
October
1, 2006
|
October
2, 2005
|
October
1, 2006
|
October
2, 2005
|
||||||||||
|
Net
loss applicable to common stock, as reported
|
$
|
(961,537
|
)
|
$
|
(151,907
|
)
|
$
|
(709,446
|
)
|
$
|
(1,318,008
|
)
|
|
|
Add:
Stock-based employee compensation expense included in reported
net loss
applicable to common stock, net of related tax effects
|
16,410
|
—
|
113,448
|
—
|
|||||||||
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
(16,410
|
)
|
(125,737
|
)
|
(113,448
|
)
|
(377,211
|
)
|
|||||
|
Pro
forma net loss applicable to common stock
|
$
|
(961,537
|
)
|
$
|
(277,644
|
)
|
$
|
(709,446
|
)
|
$
|
(1,695,219
|
)
|
|
|
Net
loss per share of common stock:
|
|||||||||||||
|
Basic
and diluted—as reported
|
$
|
(0.06
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
(0.09
|
)
|
|
|
Basic
and diluted—pro forma
|
$
|
(0.06
|
)
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
(0.12
|
)
|
|
Stock option grants were valued based upon the Black Scholes option-pricing model. The calculation of a grant date fair-value included the following assumptions:
|
Assumptions
used in computing
|
Quarter
Ended
|
||||||||||||
|
fair
value of option grants:
|
October
1, 2006
|
July
2, 2006
|
April
2, 2006
|
January
1, 2006
|
|||||||||
|
Volatility
|
24.2
|
%
|
20.3
|
%
|
25.9
|
%
|
34.8
|
%
|
|||||
|
Weighted-average
estimated life
|
3.5
years
|
3.5
years
|
3.5
years
|
3.5
years
|
|||||||||
|
Weighted-average
risk-free interest rate
|
5.00
|
%
|
4.87
|
%
|
4.46
|
%
|
4.23
|
%
|
|||||
|
Dividend
yield
|
0
|
0
|
0
|
0
|
|||||||||
NOTE
5. NEW
ACCOUNTING PRONOUNCEMENTS
In
March
2005, the Financial Accounting Standards Board’s (FASB) issued Interpretation
47, “Accounting for Conditional Asset Retirement Obligations—an interpretation
of FASB Statement No. 143” clarifying that the term conditional asset retirement
obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement
Obligations”, refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional
on a
future event that may or may not be within the control of the entity.
Clarifications found in Interpretation 47 had no material impact on our
consolidated financial statements.
In
May
2005, the FASB issued Statement No. 154, “Accounting Changes and Error
Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This
Statement replaces APB Opinion No. 20,
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
“Accounting
Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim
Financial Statements,” and changes the requirements for the accounting for and
reporting of a change in accounting principle. This Statement applies to all
voluntary changes in accounting principle. FASB Statement No. 154 became
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Adoption of FASB Statement No. 154
had
no
material impact on our consolidated financial statements.
In
February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid
Financial Instruments − an amendment of FASB Statements No. 133 and 140.” The
purpose of SFAS 155 is to simplify the accounting for certain hybrid financial
instruments by permitting fair value re−measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. SFAS 155 is effective for all financial instruments acquired or
issued after the beginning of an entity’s first fiscal year that begins after
September 15, 2006. Adoption of SFAS 155 on January 1, 2007 is not expected
to
have a material impact on our consolidated financial statements.
In
March
2006, the FASB issued SFAS 156, “Accounting for Servicing Financial Assets - an
amendment of FASB Statement No. 140.” SFAS 156 requires separate recognition of
a servicing asset and a servicing liability each time an entity undertakes
an
obligation to service a financial asset by entering into a servicing contract.
This statement also requires that servicing assets and liabilities be initially
recorded at fair value and subsequently be adjusted to the fair value at the
end
of each reporting period. SFAS 156 is effective for an entity’s first fiscal
year that begins after September 15, 2006. Adoption of SFAS 156 on January
1,
2007 is not expected to have a material impact on our consolidated financial
statements.
In
March
2006, the FASB’s Emerging Issues Task Force (EITF) issued Issue 06−3, “How Sales
Taxes Collected From Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement “ (EITF 06−3). A consensus was reached that
entities may adopt a policy of presenting sales taxes in the income statement
on
either a gross or net basis. If taxes are significant, an entity should disclose
its policy of presenting taxes and the amounts of taxes. The guidance is
effective for periods beginning after December 15, 2006. We present Company
sales net of sales taxes. We believe we currently satisfy the requirements
of
EITF 06−3 for recording these sales taxes in our consolidated financial
statements.
In
June
2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income
Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in accordance with FASB Statement No. 109, “Accounting for Income
Taxes.” This Interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This Interpretation
also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This Interpretation
is effective for fiscal years beginning after December 15, 2006. Clarifications
found in FIN 48 are not expected to have a material impact on our consolidated
financial statements.
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for fiscal
years beginning after November 15, 2007. Definitions found in SFAS 157 are
not
expected to have a material impact on our consolidated financial
statements.
GENERAL
Shells
positive sales trend continued during the third quarter of fiscal 2006,
reflecting the impact of a new menu introduced during the quarter, a favorable
mix of restaurants in operation compared to a year earlier, and ongoing customer
acceptance of the revitalized Shells dining experience. Comparable restaurant
sales increased 1.5%, marking the eighth consecutive quarter of year-to-year
increases. Revenues increased 2.8% to $10,529,000 during the third quarter
compared to the prior year. Shells had 25 restaurants in operation as of the
end
of the third quarter of 2006 compared to 26 as of the end of the same period
last year.
The
improvement in sales benefited from an increase in check average mostly due
to a
stronger menu mix from a reengineered menu introduced in the middle of the
third
quarter of 2006. This gain was partially offset by a decline in guest traffic
during the quarter. Although it has been a challenging time across much of
the
casual dining segment, we believe Shells continues to experience positive
consumer acceptance of the enhancements implemented over the past several
quarters. These changes include a new menu introduction, service improvements
and the remodeling of our company-owned restaurants. During 2005 we opened
two
new restaurants, relocated a restaurant to a stronger site, closed an
underperforming restaurant, and terminated operations at a licensed
location.
Marketing
efforts continue to focus on attracting new guests and letting former guests
know about the changes that have revitalized the dining experience at Shells.
During the third quarter of 2006, we believe a continued emphasis on radio
advertising, DJ endorsements and local marketing also contributed to our sales
improvements. Guests experiencing the new Shells continue to give us high marks,
as mystery shopper scores continue to improve.
The
new
menu, combined with continually improving execution from restaurant operations
have lowered controllable costs as a percentage of sales, with food and beverage
and labor costs 2.2% lower than in the comparable quarter last year.
The
new
menu, introduced during the third quarter of 2006, was specially engineered
to
improve check average and margins, while reducing food and labor costs. This
new
menu, which has received positive guest acceptance, retains Shells core
favorites while permanently adding several highly profitable and popular items
from recent promotions. The menu also spotlights new wine and beverage
offerings.
Higher
expenses in several areas, including utilities, insurance and occupancy costs,
continued to adversely affect our operating results, increasing a net 1.5%,
as a
percentage of sales, above the comparable period last year. Consistently
high-energy prices and sharp increases in insurance rates in the wake of last
years’ Florida hurricanes were significant factors contributing to these
increases. These areas of cost increases have affected both residential and
commercial properties throughout Florida, and such trends are expected to
moderately continue into the future. During the third quarter of 2006, we were
able to mitigate the effect of spiraling energy costs through a successful
implementation of an energy conservation program throughout our restaurants.
Depreciation expense also rose 1.5% as a percentage of sales, mostly reflecting
our investment in the remodeled, new and relocated restaurants.
While
the
strategies implemented to refresh the Shells brand are gaining recognition
with
consumers, driving sales gains to the bottom line continues to be very
challenging. Given expectations that pressures on several areas of cost will
continue, we are working diligently to overcome these cost challenges and
improve unit economics, without diminishing the quality of the dining experience
we deliver.
The
following table sets forth, for the periods indicated, the percentages that
the
items in our Consolidated Statements of Operations represent of total revenues
or, where indicated, restaurant sales.
|
13
Weeks Ended
|
39
Weeks Ended
|
||||||||||||
|
October
1, 2006
|
October
2, 2005
|
October
1, 2006
|
October
2, 2005
|
||||||||||
|
Revenues:
|
|||||||||||||
|
Restaurant
sales
|
99.6
|
%
|
99.6
|
%
|
99.7
|
%
|
99.6
|
%
|
|||||
|
Management
fees
|
0.4
|
%
|
0.4
|
%
|
0.3
|
%
|
0.4
|
%
|
|||||
|
Total
revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||
|
Restaurant
operating costs:
|
|||||||||||||
|
Food
and beverage (1)
|
32.4
|
%
|
33.7
|
%
|
32.2
|
%
|
33.1
|
%
|
|||||
|
Labor
and other related expenses (1)
|
32.0
|
%
|
32.9
|
%
|
30.5
|
%
|
30.4
|
%
|
|||||
|
Other
restaurant operating expenses (1)
|
29.8
|
%
|
28.3
|
%
|
26.2
|
%
|
24.3
|
%
|
|||||
|
Depreciation
and amortization
|
5.5
|
%
|
4.0
|
%
|
4.3
|
%
|
3.3
|
%
|
|||||
|
Pre-opening
expenses
|
—
|
—
|
—
|
0.9
|
%
|
||||||||
|
Total
restaurant operating costs (1)
|
99.7
|
%
|
98.9
|
%
|
93.2
|
%
|
92.0
|
%
|
|||||
|
Restaurant
operating income (1)
|
0.7
|
%
|
1.6
|
%
|
7.1
|
%
|
8.4
|
%
|
|||||
|
General
and administrative expenses
|
8.4
|
%
|
10.4
|
%
|
8.0
|
%
|
8.2
|
%
|
|||||
|
(Loss)
income from operations
|
-7.7
|
%
|
-8.8
|
%
|
-0.9
|
%
|
0.2
|
%
|
|||||
|
Lease
buy-out option
|
—
|
—
|
0.6
|
%
|
1.7
|
%
|
|||||||
|
Provision
for impairment of assets
|
—
|
—
|
—
|
-0.6
|
%
|
||||||||
|
Interest
expense, net
|
-0.9
|
%
|
-0.3
|
%
|
-0.6
|
%
|
-1.1
|
%
|
|||||
|
Other
income (expense), net
|
-0.1
|
%
|
8.2
|
%
|
-0.4
|
%
|
1.6
|
%
|
|||||
|
Elimination
of minority partner interest
|
-0.5
|
%
|
-0.5
|
%
|
-0.5
|
%
|
-0.6
|
%
|
|||||
|
Net
(loss) income
|
-9.2
|
%
|
-1.4
|
%
|
-1.8
|
%
|
1.2
|
%
|
|||||
|
Deemed
dividend associated with warrants
|
|||||||||||||
|
and
beneficial conversion feature of preferred stock
|
—
|
—
|
—
|
-5.0
|
%
|
||||||||
|
Net
loss attributable to common stock
|
-9.2
|
%
|
-1.4
|
%
|
-1.8
|
%
|
-3.8
|
%
|
|||||
| (1) |
as
a percentage of restaurant sales
|
RESULTS
OF OPERATIONS
13
weeks ended October 1, 2006 and October 2, 2005
Revenues.
Total
revenues for the third quarter of 2006 were $10,529,000 as compared to
$10,241,000 for the third quarter of 2005. The $288,000, or 2.8%, increase
in
revenues was primarily a result of a 1.5% increase in same store sales, which
mostly related to changes in menu mix resulting from a new menu rolled out
during the third quarter of 2006, and to a lesser extent, menu price increases
implemented to offset the Florida minimum wage hikes in January 2006. We also
benefited from a stronger mix of restaurants in operation in the third quarter
of 2006 versus the same period last year, having opened two new restaurants,
relocated one restaurant, closed an underperforming restaurant and terminated
the operations of a licensed restaurant in 2005. As of the end of the third
quarter of 2006, we had 25 restaurants in operation compared to 26 units a
year-ago. Comparisons of same store sales include only those stores that 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.
Food
and beverage.
Food
and beverage costs as a percentage of restaurant sales decreased to 32.4% for
the third quarter of 2006 from 33.7% for the third quarter of 2005. This 1.3%
decrease primarily related to the third quarter of 2006 menu changes, menu
price
increases from the beginning of 2006, an increase in the percentage of sales
attributable to comparatively higher margin liquor sales and gains derived
from
better operational controls over food and beverage costs. We are continually
attempting to anticipate and react to fluctuations in food costs by 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 to help control the cost of restaurant
sales.
Labor.
Labor
and other related costs as a percentage of restaurant sales decreased to 32.0%
during the third quarter of 2006 as compared to 32.9% for the third quarter of
2005. This improvement of 0.9% as a percentage of sales primarily related to
a
decrease in restaurant labor (0.5%) due to improved operational efficiencies,
a
reduction in restaurant management labor (0.2%) and reductions in unemployment
taxes (0.2%).
Other.
Other
restaurant operating costs of $3,125,000 for the third quarter of 2006 increased
to 29.8% of restaurant sales, compared to 28.3% in the third quarter of 2005.
This 1.5% increase was primarily due to increased utilities, insurance and
occupancy costs, partially offset by a decrease in advertising
costs.
Depreciation
and amortization.
Depreciation and amortization expense increased to $578,000, or 5.5% of
restaurant sales, for the third quarter of 2006 from $408,000, or 4.0% of
restaurant sales, in the third quarter of 2005. The increase was due to
additional restaurant remodels, and new and relocated restaurants subsequent
to
the third quarter of 2005.
Pre-opening
expenses.
There
were no pre-opening expenses in the third quarter of 2006 or 2005.
Total
restaurant operating costs.
Total
restaurant operating costs for the third quarter of 2006 were 99.7% of
restaurant sales compared to 98.9% in the third quarter of 2005, primarily
related to higher costs for utilities, insurance, occupancy and depreciation
as
discussed above.
General
and administrative expenses.
General
and administrative expenses of $881,000, or 8.4% of revenues, for the third
quarter of 2006 decreased from $1,070,000, or 10.4% of revenues, for the third
quarter of 2005. This 2.0% decrease was primarily due to decreases in accrued
bonuses and manager training costs.
Lease
buy-out. There
was
no lease buy-out income in the third quarter of 2006 or 2005.
Interest
expense, net.
Interest expense, net was $97,000 in the third quarter of 2006 compared to
$30,000 in the third quarter of 2005. The increase in interest expense, net
was
primarily related to interest on additional amounts borrowed as compared with
the third quarter of 2005.
Other(
expense) income, net. Other
expense, net was $11,000 for the third quarter of 2006 compared to other income
of $838,000 for the third quarter of 2005. Exclusive of non-recurring items,
other expense, net for the third quarter of 2005 was $20,000. During the third
quarter of 2005, we completed a sale-leaseback transaction and recognized a
book
gain, net of remodeling-related fixed asset disposals, of $858,000.
Loss
from operations and net loss applicable to common stock.
As a
result of the factors discussed above, we had a loss from operations of $806,000
for the third quarter of 2006 compared to a loss from operations of $907,000
for
the third quarter of 2005. We had a net loss applicable to common stock of
$962,000 for the third quarter of 2006 compared to a net loss applicable to
common stock of $152,000 for the third quarter of 2005. Exclusive of $858,000
net non-recurring income, we had a net loss applicable to common stock of
$1,010,000 for the third quarter of 2005.
39
weeks ended October 1, 2006 and October 2, 2005
Revenues.
Total
revenues for the 39 weeks ended October 1, 2006 were $38,170,000 as compared
to
$34,686,000 for the 39 weeks ended October 2, 2005. The $3,484,000, or 10.0%,
increase in revenues was primarily a result of a 5.9% increase in same store
sales, which related to a stronger mix of restaurants in operation in 2006
versus the same period last year, menu price increases implemented to offset
the
Florida minimum wage hikes in January 2006, and changes in menu mix resulting
from a new menu rolled out during the third quarter of 2006..
Food
and beverage.
Food
and beverage costs as a percentage of restaurant sales decreased to 32.2% for
the 39 weeks ended October 1, 2006 from 33.1% for the comparable period in
2005.
This 0.9% decrease primarily related to the third quarter of 2006 menu changes,
menu price increases from the beginning of 2006, an increase in the percentage
of sales attributable to comparatively higher margin liquor sales and gains
derived from better operational controls over food and beverage costs.
Labor.
Labor
and other related costs as a percentage of restaurant sales increased to 30.5%
during the 39 weeks ended October 1, 2006 as compared to 30.4% for the
comparable period in 2005. This 0.1% increase primarily related to a $197,000
reduction in income recognized for workers’ compensation reserve adjustments in
2006 compared to the prior year. Exclusive of non-recurring income from worker’s
compensation reserve adjustments of $132,000 and $329,000 in the second quarters
of 2006 and 2005, labor costs were 30.9% and 31.4%, respectively. The
improvement of 0.5% as a percentage of sales primarily related to a reduction
in
workers’ compensation insurance premiums and unemployment taxes (0.2%) and a
decrease in restaurant labor expense due to improved operational efficiencies
(0.2%).
Other.
Other
restaurant operating costs of $9,976,000 for the 39 weeks ended October 1,
2006
increased by $1,571,000, or 1.9% of restaurant sales, compared to the comparable
period in 2005, primarily due to increased utilities, insurance and occupancy
costs partially offset by a decrease in advertising costs.
Depreciation
and amortization.
Depreciation and amortization expense increased to $1,643,000, or 4.3% of
restaurant sales, for the 39 weeks ended October 1, 2006 from $1,140,000, or
3.3% of restaurant sales, in the comparable period in 2005. The 1.0% increase
was due to additional restaurant remodels and new and relocated restaurants,
subsequent to the third quarter of 2005.
Pre-opening
expenses.
There
were no pre-opening expenses in the 39 weeks ended October 1, 2006 compared
to
$303,000, or 0.9% of restaurant sales, in the comparable period in 2005, related
to the restaurant which opened on March 22, 2005 at Clearwater Beach, Florida.
Pre-opening expenses represent start-up costs incurred prior to
opening
for business and include occupancy expenses, training labor, advertising and
classified ads, utilities and supplies.
Total
restaurant operating costs.
Total
restaurant operating costs for the 39 weeks ended October 1, 2006 were 93.2%
of
restaurant sales compared to 92.0% in the comparable period in 2005, primarily
related to higher costs for utilities, insurance, occupancy and depreciation
as
discussed above, partially offset by a favorable variance in pre-opening
expenses over the prior year.
General
and administrative expenses.
General
and administrative expenses of $3,036,000, or 8.0% of revenues, for the 39
weeks
ended October 1, 2006 increased from $2,859,000, or 8.2% of revenues, for the
comparable period in 2005, primarily due to increases in stock option expense
(0.3%) and legal and professional expenses (0.2%), generally offset by decreases
in manager training wages (0.5%).
Lease
buy-out. In
April
2006, we recognized $212,000 net cash proceeds in a non-recurring transaction
related to the negotiation of an option embedded in the Ocala restaurant lease
agreement to a new landlord. In January 2005, we entered into an agreement
with
our landlord in St. Pete Beach, Florida, whereby the landlord paid $600,000
to
us for an option to buy-out the lease upon 60 days notice to us. To-date, no
termination notice has been received from the landlord.
Provision
for impairment of assets due to lease buy-out. The
provision for impairment of assets of $211,000 for the 39 weeks ended October
2,
2005 was due to a valuation adjustment for the St. Pete Beach location, related
to the expected shortened lease period as a result of the lease buy-out
described above. There was no provision in the comparable period in
2006.
Interest
expense, net.
Interest expense, net was $235,000 in the 39 weeks ended October 1, 2006
compared to $367,000 in the comparable period in 2005. The decrease in interest
expense, net was primarily related to the retirement of debt in May 2005 in
conjunction with our then private financing transaction, partially offset by
interest on the line of credit with related parties and the bank credit
facility.
Other
expense, net. Other
expense, net was $158,000 for the 39 weeks ended October 1, 2006 compared to
other income of $560,000 for the comparable period in 2005. Exclusive of
non-recurring items, other expense was $96,000 for the 39 weeks ended October
1,
2006 compared to $56,000 for the comparable period in 2005. Non-recurring
expenses in 2006 consisted of a loss on disposal of assets of $39,000 from
the
write-down of fixed assets replaced during remodeling, and a $23,000 lease
termination fee. Non-recurring items during 2005 included a book gain, net
of
remodeling-related fixed asset disposals, of $858,000 on a sale-leaseback
transaction, partially offset by other expenses of a loss on disposal of assets
of $162,000 from the write-down of fixed assets replaced during remodeling,
and
financing costs of $80,000 paid by us for the related party
line-of-credit.
Deemed
dividend associated with warrants and beneficial conversion feature of preferred
stock. The
deemed dividend associated with warrants and beneficial conversion feature
of
our preferred stock of $1,735,000 related to the May 2005 private placement
financing transaction when we issued Series B Convertible Preferred Stock and
warrants to purchase common stock. This one-time implied preferred stock
dividend was recorded through accumulated deficit.
(Loss)
income from operations and net loss applicable to common stock.
As a
result of the factors discussed above, we had a loss from operations of $339,000
for the 39 weeks ended October 1, 2006 compared to income from operations of
$36,000 for the comparable period in 2005. Exclusive of non-recurring income
affecting labor of $132,000 and $329,000 in the first 39 weeks of 2006 and
2005,
we had a loss from operations of $471,000 and $293,000, respectively. We had
a
net loss applicable to common stock of $709,000 for the 39 weeks ended October
1, 2006 compared to $1,318,000 for the comparable period in 2005. Exclusive
of
net non-recurring income of $302,000, we had a net loss applicable to common
stock of $1,011,000 for the 39 weeks
ended
October 1, 2006. Exclusive of net non-recurring expenses of $386,000 and
pre-opening expenses of $303,000, we had net loss applicable to common stock
of
$629,000 for the 39 weeks ended October 2, 2005.
LIQUIDITY
AND CAPITAL RESOURCES
In
March
2005, persons associated with our Company extended to us a $1,600,000 revolving
line of credit, for which we have subsequently borrowed $1,440,000. In June
2006, we utilized $640,000 of the revolving line of credit to fund remaining
remodeling costs and working capital requirements. In October 2005, we utilized
$800,000 of the line of credit to fund the acquisition and opening costs of
a
restaurant relocation and a new restaurant. Amounts drawn under this line of
credit bear interest at the rate of 15% per annum, payable 8% monthly in arrears
and 7% deferred until the maturity date of May 23, 2007. It is not expected
that
we will be able to borrow the remaining $160,000 under the credit
line.
In
April
2006, we recognized $212,000 in net cash proceeds related to the negotiation
of
an option embedded in the Ocala restaurant lease agreement to a new landlord,
FRI Fish, LLC.
.
In
October 2006, we completed a sale-leaseback transaction of our New Smyrna Beach
property with gross proceeds of $1,333,000. After transaction costs and
retirement of a note on the property, we recognized net proceeds of $885,000.
These funds were used to repay our $500,000 bank credit line, which was due
in
October 2006, with the remaining proceeds available for working capital needs.
This bank credit line was fully drawn in December 2005 to assist in the funding
of our restaurant remodels.
We
believe that our cash balance along with our operating forecast, coupled with
the recently completed sale leaseback transaction, will be sufficient to satisfy
our cash requirements through the end of the 2006 fiscal year. We are currently
seeking additional third party financing to provide for working capital
contingencies, repay or refinance the revolving line of credit prior to its
May
2007 maturity, and support additional new restaurant growth. There can be no
assurances that the implementation of our strategies will result in sales and
customer traffic gains, which are required to meet our contemplated cash flow
requirements.
In
the
event that our plans change, our assumptions prove to be inaccurate, and in
the
event projected cash flow or third party financing otherwise prove to be
insufficient to fund operations or repay debt, we could be required to seek
additional financing from sources not currently anticipated. There can be no
assurances that third party financing will be available to us when needed,
on
acceptable terms, or at all.
As
of
October 1, 2006, our current liabilities of $7,777,000 exceeded our current
assets of $1,729,000, resulting in a working capital deficiency of $6,048,000.
In comparison, the January 1, 2006 working capital deficiency was $4,842,000.
The $1,206,000 increase in the deficiency is primarily the result of a decrease
in cash of $771,000 and increases in notes and deferred interest payable to
related parties of $1,503,000 and in accrued expenses of $171,000, partially
offset by a reduction in accounts payable of $1,149,000, and an increase in
other current assets of $245,000 related to increases in insurance premium
prepayments. The net change in working capital is generally affected by our
2006
year-to-date investment in property and equipment of $1,717,000, mostly related
to our restaurant-remodeling program. We may still encounter operating pressures
from increasing food, labor or other operating costs, as well as from a
reduction in sales and capital expenditure needs. Historically, we have
generally operated with minimal or marginally negative working capital as a
result of the investment of current assets into non-current property and
equipment, as well as the turnover of restaurant inventory relative to more
favorable vendor terms in accounts payable.
Net
cash
provided by operating activities for the 39 weeks ended October 1, 2006 was
$74,000 compared to $642,000 for the comparable period in 2005. The net decrease
of $568,000 primarily related to an increase in payments on accounts payable
over the prior year, a decrease in net (loss) income before preferred
stock
dividend,
and an increase in other current assets, partially offset by increases in
non-cash depreciation and stock option expense over the prior year, and a
decrease in prepaid rent.
Net
cash
used in investing activities was $1,504,000 for the 39 weeks ended October
1,
2006 compared to $2,345,000 for the same period in 2005, primarily due to a
$2,872,000 reduction in capital expenditures, partially offset by a $1,644,000
reduction in proceeds from the sale of assets, and a $388,000 net reduction
from
proceeds on the sale of leases.
Net
cash
provided by financing activities was $660,000 for the 39 weeks ended October
1,
2006 compared to $1,731,000 for the same period in 2005. The decrease of
$1,071,000 primarily related to a net reduction in proceeds from the issuance
of
stock of $4,938,000 compared to the same period in 2005, partially offset by
a
reduction in the repayment of debt of $2,770,000 and an increase in proceeds
from debt financing of $1,073,000.
QUARTERLY
FLUCTUATION OF FINANCIAL RESULTS
The
restaurant industry in general is seasonal, depending on restaurant location
and
the type of food served. In addition, we have experienced fluctuations in our
quarter-to-quarter operating results due, in large measure, to our full
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 and the effect of world events in general and the tourism
industry in particular. In addition, in recent years, our operating results
have
been significantly affected by hurricanes. Our 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.
Many of our restaurant locations are in coastal cities, where sales are
significantly dependent on tourism and its seasonality patterns.
In
addition, quarterly results have been substantially affected by the timing
of
restaurant closings or openings. Because of the seasonality of our business
and
the impact of restaurant closings, 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.
We
are
exposed to market risk from changes in interest rates on debt and changes in
commodity prices. Our exposure to interest rate risk relates to $446,000 in
an
outstanding mortgage loan with our bank (taking into account the $500,000 debt
repayment in October 2006) that is based on variable rates. Borrowings under
the
loan agreement bears interest at the rate equal to the applicable bank’s base
rate, or at the bank’s base rate plus a specified margin.
We
maintain "disclosure controls and procedures," as defined under Securities
Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosures. In designing and
evaluating the disclosure controls and procedures, our management recognized
that any controls and procedures, no matter how well designed and operated,
can
provide only reasonable assurance of achieving the desired control objectives
and our management necessarily was required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures. As required
by SEC Rule 13a-15(b), we have carried out an evaluation, as of the end of
the
period covered by this report, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon their evaluation and subject to the
foregoing, our management with the participation of the Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective (as such term is defined under Securities Exchange
Act
Rule 13a-15(e)) as of the end of the period covered by this report.
There
were no changes in our internal controls over financial reporting that occurred
during our most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
On
August
1, 2006, we were advised by our subtenant, Famous Dave’s RIBS-U, Inc., that they
discontinued operations of the restaurant located in Streamwood, Illinois and
have ceased remitting rent payments in accordance with the sublease. The
subtenant has requested discussions on settlement for a lease termination.
Such
restaurant closure is a condition of default under the sublease as well as
the
master lease between Shells and the ultimate landlord, 948 Barrington Road
Partnership. The financial implications to Shells are undetermined at this
time.
We intend to pursue our rights against Famous Dave’s, as appropriate to protect
our interest.
On
August
25, 2006, we received a notice of default from Spring Hill Mall, LLC, the
primary landlord, relating to a restaurant lease in Carpentersville, Illinois.
Under this lease, Shells is a sub-tenant to Chi-Chi’s, Inc., who filed
bankruptcy in 2003 and subsequently rejected the lease. Since 2000, we have
been
further subleasing this property to Famous Dave’s RIBS-U, Inc. Under such terms,
we partially subsidize lease payments. We have been negotiating with Spring
Hill
Mall for a buyout of our obligations under the various subleases.
In
the
ordinary course of business, Shells is and may be a party to various legal
proceedings, the outcomes of which, singly or in the aggregate, are not
currently expected to be material to our financial position, results of
operations or cash flows.
In
addition to the other information set forth in this quarterly report, you should
carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in
the Company’s Annual Report on Form 10-K for the year ended January 1, 2006,
which could materially affect our business, financial position or results of
operations, and as supplemented below. There are no material changes from the
risk factors set forth in Part 1, Item 1A, “Risk Factors,” of the Company’s
Annual Report on Form 10-K and below are not the only risks facing the Company.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also adversely affect our business,
financial position or results of operations.
We
may have financial exposure relating to closed
restaurants.
Relative
to our exiting from the Midwest market several years ago, we have been
subleasing two Midwest restaurant properties to Famous Dave’s RIBS-U, Inc.
These leases each terminate in 2010. Recently, the subtenant defaulted
under one lease, and it is our intent to negotiate a buyout of the second lease.
Subject to legal recourse, we may have exposure in excess of amounts previously
reserved for these leases.
| 31.1 |
Certification
of Chief Executive Officer under Rule
13a-14(a)
|
| 31.2 |
Certification
of Chief Financial Officer under Rule
13a-14(a)
|
| 32.1 |
Certification
of Chief Executive Officer and Chief Financial Officer under Section
906
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SHELLS
SEAFOOD RESTAURANTS, INC.
(Registrant)
/s/
Leslie J. Christon
President
and Chief Executive Officer
November
15, 2006
/s/
Warren R. Nelson
Executive
Vice President and Chief Financial Officer
November
15, 2006
-23-
EXHIBIT
31.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
I,
Leslie
J. Christon, certify that:
1. I
have
reviewed this report on Form 10-Q of Shells Seafood Restaurants,
Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information
included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for,
the
periods presented in this report;
4. The
registrant's other certifying officer and I are responsible for establishing
and
maintaining disclosure controls and procedures (as defined in Exchange
Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed
such
disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during
the
period in which this report is being prepared;
(b) evaluated
the
effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered
by this
report based on such evaluation; and
(c) disclosed
in
this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant's other certifying officer and I have disclosed, based on our
most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board
of
directors (or persons performing the equivalent functions):
(a) all
significant deficiencies and material weaknesses in the design or operation
of
internal controls over financial reporting, which are reasonably likely
to
adversely affect the registrant's ability to record, process, summarize
and
report financial information; and
(b) any
fraud,
whether or not material, that involves management or other employees who
have a
significant role in the registrant's internal control over financial
reporting.
/s/
Leslie J. Christon
President
and Chief Executive Officer
November
15, 2006
EXHIBIT
31.2
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
I,
Warren
R. Nelson, certify that:
1. I
have
reviewed this report on Form 10-Q of Shells Seafood Restaurants,
Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant's other certifying officer and I are responsible for establishing
and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed
such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) evaluated
the
effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(c) disclosed
in
this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) all
significant deficiencies and material weaknesses in the design or operation
of
internal controls over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) any
fraud,
whether or not material, that involves management or other employees who have
a
significant role in the registrant's internal control over financial
reporting.
/s/
Warren R. Nelson
Executive
Vice President and Chief Financial Officer
November
15, 2006
EXHIBIT
32.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
Securities
and Exchange Commission
Washington,
DC
The
undersigned Chief Executive Officer and Chief Financial Officer of Shells
Seafood Restaurants, Inc. do hereby certify pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the
Quarterly Report of Shells Seafood Restaurants, Inc. on Form 10-Q for the
quarter ended October 1, 2006 fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and the information
contained in such Quarterly Report on Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of Shells Seafood
Restaurants, Inc.
A
signed
original of this written statement required by Section 906 has been provided
to
Shells Seafood Restaurants, Inc. and will be retained by Shells Seafood
Restaurants, Inc. and furnished to the Securities and Exchange Commission or
its
staff upon request.
/s/
Leslie J. Christon
President
and Chief Executive Officer
November
15, 2006
/s/
Warren R. Nelson
Executive
Vice President and Chief Financial Officer
November
15, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
__________________________________________
FORM
8-K
__________________________________________
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date
of
Report (Date of earliest event reported) December
21, 2006
Shells
Seafood Restaurants, Inc.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
0-28258
|
65-0427966
|
|
(State
or Other Jurisdiction
of
Incorporation)
|
(Commission
File
Number)
|
(IRS
Employer
Identification
No.)
|
|
16313
N. Dale Mabry Hwy, Suite 100, Tampa,
FL
|
33618
|
|
|
(Address
of Principal Executive
Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code:
(813) 961-0944
Not
Applicable
(Former
Name or Former Address, if Changed Since Last Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2 below):
[
] Written communications pursuant to Rule 425 under the Securities
Act (17 CFR 230.425)
[
] Soliciting material pursuant to Rule 14a-12 under the
Exchange Act (17 CFR 240.14a-12)
[
] Pre-commencement communications pursuant to Rule 14d-2(b) under
the Exchange Act (17 CFR 240.14d-2(b))
[
] Pre-commencement communications pursuant to Rule 13e-4 (c) under
the Exchange Act (17 CFR 240.13e-4(c))
ITEM
5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS.
On
December 18, 2007, John Hoffner provided notice to the Company that he will
be
resigning from his positions as Audit Committee Chair and as a member of the
Board of Directors, effective January 1, 2007. Mr. Hoffner's resignation is
not a result of any disagreement with the Company's management, operations,
policies or practices.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
SHELLS
SEAFOOD RESTAURANTS, INC.
|
|||||
|
Date
: December 21, 2006
|
|||||
|
|
|
By:
/s/
Warren R.
Nelson
|
|
||
|
|
|
Name: Warren
R. Nelson
|
|||
|
|
|
Title: Vice
President and Chief Financial
Officer
|
|||
2
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
__________________________________________
FORM
8-K
__________________________________________
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date
of
Report (Date of earliest event reported) December
20, 2006
Shells
Seafood Restaurants, Inc.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
0-28258
|
65-0427966
|
||
|
(State
or Other Jurisdiction
of
Incorporation)
|
(Commission
File
Number)
|
(IRS
Employer
Identification
No.)
|
||
|
16313
N. Dale Mabry Hwy, Suite 100, Tampa,
FL
|
33618
|
|||
|
(Address
of Principal Executive
Offices)
|
(Zip
Code)
|
|||
Registrant’s
telephone number, including area code: (813)
961-0944
|
Not
Applicable
|
|
(Former
Name or Former Address, if Changed Since
Last Report)
|
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2 below):
[
]
Written communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
[
]
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[
]
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act
(17 CFR 240.14d-2(b))
[
]
Pre-commencement communications pursuant to Rule 13e-4 (c) under the Exchange
Act (17 CFR 240.13e-4(c))
Item
1.01 Entry Into A Material Definitive Agreement.
On
December 20, 2006 Shells Seafood Restaurants, Inc. (the “Registrant”) entered
into Amendment No.1 (the “License Agreement Amendment”) to the License
Agreement, dated August 5, 2005 (the “License Agreement”), with Deborah Christen
Corporation (“DCC”). Pursuant to the License Agreement, DCC agreed to grant the
Registrant a license to use the service marks, “Shells” and “Shells Seafood,
Shellfish & Whatnot”, in a certain trade area known as the Carrollwood Trade
Area . Under the License Agreement, the Registrant had until December 31,
2006
to open a Shells Seafood Restaurant in the Limited Carrollwood Trade Area,
subject to certain monthly license fees beginning on April 1, 2006. The License
Agreement Amendment removed the December 31, 2006 deadline for the opening
of a
Shells Seafood Restaurant in the Carrollwood Trade Area. The Registrant will
continue to pay predetermined license fees to DCC until such time as a Shells
Seafood Restaurant has been opened in the Carrollwood Trade Area (see Exhibit
D
to the License Agreement Amendment), or the option period expires per written
notice from the Registrant. The License Agreement Amendment is filed with
this
Report as Exhibit 10.1 and is incorporated by reference into this Item 1.01.
The
preceding description of the terms of the License Agreement Amendment is
qualified in its entirety by reference to Exhibit 10.1 to this
Report.
Item
9.01 Financial Statements and Exhibits.
(d)
Exhibits.
| Item No. | Description |
| 10.1 |
Amendment
No. 1, dated December 20, 2006, by and between Shells Seafood Restaurants,
Inc. and Deborah Christen
Corporation.
|
2
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
| SHELLS SEAFOOD RESTAURANTS, INC. | ||
| |
|
|
|
Date
: December 21, 2006
|
By: |
/s/
Warren R Nelson
|
|
Name:
Warren
R Nelson
|
||
|
Title:
CFO
and Executive Vice President
|
||
3
Exhibit
Index
| Item No. | Description |
| 10.1 |
Amendment
No. 1, dated December 20, 2006, by and between Shells Seafood Restaurants,
Inc. and Deborah Christen
Corporation.
|
4
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
__________________________________________
FORM
8-K
__________________________________________
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date
of
Report (Date of earliest event reported) March
30, 2007
|
Shells
Seafood Restaurants, Inc.
|
|
(Exact
Name of Registrant as Specified in its
Charter)
|
|
Delaware
|
0-28258
|
65-0427966
|
||
|
(State
or Other Jurisdiction
of
Incorporation)
|
(Commission
File
Number)
|
(IRS
Employer
Identification
No.)
|
|
16313
N. Dale Mabry Hwy, Suite 100, Tampa, FL
|
33618
|
||
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
|
Registrant’s
telephone number, including area code:
|
(813) 961-0944
|
|
Not
Applicable
|
|
(Former
Name or Former Address, if Changed Since
Last Report)
|
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2 below):
| o |
Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
|
| o |
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
| o |
communications
pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
|
| o |
Pre-commencement
communications pursuant to Rule 13e-4 (c) under the Exchange Act
(17 CFR
240.13e-4(c))
|
Item
1.01 Entry Into A Material Definitive Agreement.
On
March
30, 2007, Shells Seafood Restaurants, Inc. (the “Company”) entered into
Amendment No. 2 (“Amendment No. 2”) to that certain Loan and Security Agreement,
by and among the Company and each of Fredrick R. Adler, Trinad Capital, L.P.
and
Bruce Galloway, IRA, R/O (collectively, the “Lenders”), dated March 9, 2005, as
amended by Amendment No. 1, dated May 23, 2005, for an extension of a line
of
credit for $1,440,000. The maturity date of the line of credit was extended
from
May 23, 2007 to May 23, 2008, at a fee of 7% of the $1,440,000 borrowed, or
$101,000. The extension fee of $101,000 was paid through the issuance to the
Lenders of an aggregate of 224,000 shares of our common stock, based on the
closing price on March 30, 2007 of $0.45 per share. Amendment No. 2 filed with
this Report as Exhibit 10.1 is incorporated by reference into this Item 1.01.
The preceding description of the terms of the Amendment No 2 are qualified
by
reference to Exhibit 10.1 to this Report.
Item
3.02 Unregistered Sales of Equity Securities.
The
discussion under Item 1.01 of this Report is incorporated under this Item 3.02
as if set forth herein.
Item
9.01 Financial Statements and Exhibits.
(d) Exhibits.
|
Item
No.
|
Description
|
|
10.1
|
Amendment
No.2 to the Loan and Security Agreement, dated March 30,
2007.
|
2
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
| SHELLS SEAFOOD RESTAURANTS, INC. | ||
| |
|
|
|
Date:
April 2, 2007
|
By: |
/s/
Leslie J. Christon
|
|
Name:
Leslie J. Christon
|
||
|
Title:
President
and Chief Executive Officer
|
||
3
Exhibit
Index
|
Item
No.
|
Description
|
|
10.1
|
Amendment
No.2 to the Loan and Security Agreement, dated March 30,
2007.
|
4
AMENDMENT
NO. 2 TO LOAN AND SECURITY AGREEMENT
This
Amendment No. 2 (“Amendment
No. 2”)
to
that certain Loan and Security Agreement dated as of March 9, 2005, as amended
by Amendment No. 1, dated May 23, 2005 (as amended, the “Agreement”)
is
made as of March 30, 2007, by and among Shells Seafood Restaurants, Inc., a
Delaware corporation (the “Company”),
and
the Lenders (as defined in the Agreement) parties thereto. Capitalized terms
not
herein defined shall have the meaning given to them in the
Agreement.
WHEREAS,
the Agreement expires, subject to certain exceptions set forth therein, on
May
23, 2007 (the “Maturity
Date”);
WHEREAS,
the parties to the Agreement desire to provide for the extension of the
Agreement for an additional one (1) year such that it expires on May 23, 2008;
WHEREAS,
as consideration for the extension the Agreement the Company desires to pay
the
Lenders an aggregate $100,800 in shares of the Company’s unregistered common
stock based upon the fair market value of the Shares on the date hereof;
and
WHEREAS,
the parties have renegotiated the commitment amount of Bruce Galloway, IRA
R/O
to reduce such amount from $320,000 to $160,000 and desire to amend the
Agreement to reflect such renegotiation.
NOW,
THEREFORE, in consideration of the premises and other good and valuable
consideration, the parties hereby agree as follows:
1. Amendment
to Section 1.
Section
1 of the Agreement is hereby amended and restated in its entirety as
follows:
1.
AMOUNT.
The
Lenders agree, on the terms and conditions of this Agreement, to make loans
(hereinafter called individually a “Loan” and, collectively, “the Loans”) to the
Company in an aggregate principal amount at any one time outstanding up to
but
not exceeding One Million Four Hundred Forty Thousand Dollars ($1,440,000);
provided, however that each Loan request by the Company to the Lenders, in
the
aggregate, shall be in increments of $200,000, and each individual Lender is
committing to make Loans only up to the aggregate principal amount set forth
opposite such Lenders’ name on Exhibit A hereto. The obligation of a Lender to
make loans up to but not exceeding such aggregate principal amount at any one
time outstanding is hereinafter called its “commitment.” Within such limits, the
Company may borrow, repay, and reborrow funds under this revolving credit line,
at any time or from time to time from the date hereof to and including May
23,
2008 (the “Maturity Date”), subject to earlier termination of the commitment of
the Lenders in accordance herewith. All Loans shall be made by, and repayments
(if any) made to, each of the Lenders, in proportion to the percentage interest
set forth opposite such Lenders’ name on Exhibit A hereto; and shall be repaid,
to the extent then still outstanding, on the Maturity Date (subject to earlier
repayment as provided
in Section 4 below).
2. Consideration.
On the
date hereof the Company shall, as consideration for the extension of the
Agreement, pay the Lenders an aggregate of $100,800 in shares of the Company’s
unregistered common stock (the “Shares”)
based
upon the fair market value of the Shares on the date hereof. Each Lender shall
receive that number of Shares as is set forth opposite such Lenders’ name on
Exhibit B hereto.
3. Lender
Representations.
Each
Lender hereby represents and warrants to the Company, severally and not jointly,
that:
(i) The
Lender is an accredited investor as defined in Rule 501(a) of Regulation D
promulgated under the Securities Act of 1933, as amended (the “Securities
Act”).
(ii) The
Lender understands that the Shares have not been, and will not be, registered
under the Securities Act, and are being offered by reason of a specific
exemption from the registration provisions of the Securities Act which depends
upon, among other things, the bona fide nature of the investment intent and
the
accuracy of the Lender’s representations as expressed herein. The Lender
understands that the Shares are “restricted securities” under applicable U.S.
federal and state securities laws and that, pursuant to these laws, the Lender
must hold the Shares
indefinitely unless they are registered with the SEC and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available. Each Lender is aware of the provisions of Rule 144
promulgated under the Securities Act which permits limited resale of securities
purchased in a private placement subject to the satisfaction of certain
conditions including, among other things, the availability of certain current
public information about the Company and compliance with applicable requirements
regarding the holding period, the amount of securities to be sold and the manner
of sale. The Lender acknowledges that the Company has no obligation to register
or qualify the Shares for resale.
(iii) The
Lender understands that the Shares and any securities issued in respect of
or
exchange for the Shares, shall bear the following legend:
“THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH
A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH
TRANSFER MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT
SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.”
(iv) This
Amendment No. 2 is made with the Lender in reliance upon the Lender’s
representation to the Company, which by the Lender’s execution of this Amendment
No. 2, the Lender hereby confirms, that the Shares to be acquired by the Lender
will be acquired for investment for the Lender’s own account, not as a nominee
or agent, and not with a view to the resale or distribution of any part thereof,
and that the Lender has no present intention of selling, granting any
participation in, or otherwise distributing the same.
(v) Neither
the Lender, nor any of its officers, directors, employees, agents, stockholders
or partners has either directly or indirectly, including through a broker or
finder (a) engaged in any general solicitation, or (b) published any
advertisement in connection with the offer and sale of the Shares.
4. Entire
Agreement.
This
Amendment No. 2, together with the provisions of the Agreement not amended
hereby, constitute the entire agreement between the parties hereto with respect
to the subject matter hereof and supersede all other prior agreements, whether
written or oral, between the parties hereto.
5. Counterparts.
This
Amendment No. 2 may be executed in one or more counterparts, each of which
shall
be deemed an original and all of which together shall constitute one and the
same document.
IN
WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 2
to
be executed as of the date first above written.
SHELLS
SEAFOOD RESTAURANTS, INC.
By: ____________________________
Name: Warren
R.
Nelson
Title: Chief
Financial Officer
Frederick
R. Adler
By: _____________________________
Frederick
R. Adler
Trinad
Capital, LP
By: _____________________________
Name:
Title:
Bruce
Galloway, IRA, R/O
By: _____________________________
Name:
Title:
EXHIBIT
A
|
Lender
|
%
Interest of Loans Made
|
Aggregate
$ Commitment
|
|
Fredrick
R. Adler
c/o
Adler & Co.
750
Lexington Avenue
New
York, NY 10022
|
56%
|
$800,000
|
|
Trinad
Capital, LP
2121
Avenue of the Stars Suite 2550
Los
Angeles, CA 90067
|
33%
|
$480,000
|
|
Bruce
Galloway, IRA R/O
c/o
Galloway Capital Management, LLC
720
Fifth Avenue, 10th
Fl
New
York, NY 10019
|
11%
|
$160,000
|
EXHIBIT
B
|
Lender
|
Number
of Shares
|
|
Fredrick
R. Adler
c/o
Adler & Co.
750
Lexington Avenue
New
York, NY 10022
|
124,444
|
|
Trinad
Capital, LP
2121
Avenue of the Stars, St. 2550
Los
Angeles, CA 90067
|
74,667
|
|
Bruce
Galloway, IRA R/O
c/o
Galloway Capital Management, LLC
720
Fifth Avenue, 10th
floor
New
York, NY 10019
|
24,889
|
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 ended: December
31, 2006
|
|
|
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
No.)
|
|
|
16313
North Dale Mabry Highway, Suite 100,
Tampa,
Florida
|
33618
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(813)
961-0944
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
|
[
|
Title
of each class
|
Name
of each exchange on which registered
|
]
|
|
|
[
|
Common
Stock, $0.01 par value per share
|
OTC
Bulletin Board
|
]
|
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.01 par value per share.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
[
] No
[
X
]
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Exchange Act.
Yes
[
] No
[X
]
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 the 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. [ ]
1
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer [ ] Accelerated
Filer [ ] Non-accelerated
Filer [ X
]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[
] No
[
X
]
As
of
June 30, 2006 (the last business day of the registrant’s most recently completed
second fiscal quarter), the aggregate market value of the registrant’s common
stock held by non-affiliates of the registrant (which for these purposes
excludes directors, executive officers, and ten-percent holders of stock)
was
$3,357,000 based on the closing sale price as reported on the Over-the-Counter
Bulletin Board.
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
Class
|
Outstanding
at March 27, 2007
|
|||
|
Common
Stock, $0.01 par value per share
|
18,613,968
shares
|
DOCUMENTS
INCORPORATED BY REFERENCE
|
Document
|
Parts
Into Which Incorporated
|
|
|
Annual
Report to Stockholders for the Fiscal Year Ended December 31, 2006
(Annual
Report)
|
Parts
I, II, and IV
|
|
|
Proxy
Statement for the Annual Meeting of Stockholders scheduled to be
filed
with the SEC within 120 days after the end of the fiscal year ended
December 31, 2006 (Proxy
Statement)
|
Part
III
|
FORWARD
LOOKING STATEMENTS
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. These statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those
projected.
In
addition to seasonal fluctuations, our 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, labor and other
operating costs; the availability of food acceptable to our quality standards
at
acceptable prices; the availability of qualified labor; national, regional
and
local economic and weather conditions; promotional timings and seasonality;
demographic trends and traffic patterns; changes in travel and tourism
tendencies, particularly in light of world events; competition from other
restaurants and food service establishments; availability of third party
financing to fund capital or operating activities, if required; and the timing,
costs and charges relating to restaurant openings, closings and remodelings.
As
a result of these and other factors, we may experience material fluctuations
in
future operating results on a quarterly or annual basis, which could materially
and adversely affect our business, financial condition and stock price.
Furthermore, this document and other documents filed by us with the Securities
and Exchange Commission (“SEC”) contain certain forward-looking statements with
respect to our business and the industry in which we operate. These
forward-looking statements are subject to certain risks and uncertainties,
including those mentioned above, which may cause results to differ significantly
from these forward-looking statements. We undertake no obligation to update
these forward looking statements on a regular basis. An investment in our
company involves various risks, including those mentioned above and those
that
are detailed from time-to-time in our SEC filings.
Any
forward-looking statements included in this Annual Report reflect our beliefs
only as of the date of this document. We do not undertake any 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
of this document or to reflect the occurrence of unanticipated
events.
2
SHELLS
SEAFOOD RESTAURANTS, INC.
INDEX
TO ANNUAL REPORT ON FORM 10-K
For
the Year Ended December 31, 2006
TABLE
OF CONTENTS
|
Page
No.
|
|
|
PART
I
|
|
|
Item
1. Business
|
4
|
|
Item
1A. Risk Factors
|
12
|
|
Item
1B. Unresolved Staff Comments
|
19
|
|
Item
2. Properties
|
20
|
|
Item
3. Legal Proceedings
|
20
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
20
|
|
PART
II
|
|
|
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
|
21
|
|
Item
6. Selected Financial Data
|
24
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operation
|
26
|
|
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
|
36
|
|
Item
8. Financial Statements and Supplementary Data
|
37
|
|
Item
9. Changes in and Disagreements With Accountants on Accounting
and
Financial Disclosure
|
38
|
|
Item
9A. Controls and Procedures
|
38
|
|
Item
9B. Other Information
|
38
|
|
PART
III
|
|
|
Item
10. Directors, Executive Officers and Corporate Governance
|
39
|
|
Item
11. Executive Compensation
|
39
|
|
Item
12. Security Ownership of Certain Beneficial Owners and Management
and
Related Stockholder Matters
|
39
|
|
Item
13. Certain Relationships and Related Transactions, and Director
Independence
|
39
|
|
Item
14. Principal Accounting Fees and Services
|
39
|
|
PART
IV
|
|
|
Item
15. Exhibits, Financial Statement Schedules
|
40
|
|
Signatures
|
44
|
3
PART
I
ITEM
1. BUSINESS
Shells
Seafood Restaurants, Inc. 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, was merged with and
into
our company and became our wholly-owned subsidiary.
Concept
and Strategy
Shells
is
a full-service, casual dining seafood concept designed to appeal to a broad
range of customers by providing generous portions of high-quality seafood
at
reasonable prices, warm, friendly service, and a relaxed, appealing atmosphere.
Shells restaurants feature a wide selection of seafood items, including shrimp,
oysters, clams, scallops, crawfish, mussels, lobster, crab and daily fresh
fish
specials, cooked to order in a variety of ways: steamed, sautéed, grilled,
blackened and fried. In addition, our restaurants offer a wide selection
of
signature pasta dishes, appetizers, salads, and desserts and full bar service.
All Shells restaurants are open for lunch and dinner.
As
of
December 31, 2006, our fiscal year end, we owned 21 Shells restaurants, owned
a
51% ownership interest in one Shells restaurant and managed three additional
licensee-owned Shells restaurants pursuant to contractual arrangements. All
of
our restaurants are located in Florida.
We
believe that the seafood segment of the restaurant industry in which Shells
operates has greater growth opportunities than other, more crowded casual
dining
segments. While there have been additional competitors entering this market
in
recent years, the number of regional and national chains serving this market
is
still relatively small. We believe that seafood consumption will continue
to
increase given that seafood’s healthful aspects are regularly touted by
scientific studies and subsequent media coverage.
The
original Shells model of serving low-price seafood in a no-frills atmosphere
began to face difficulties in the late ‘90s with heightened consumer demands for
flavor, quality, variety and atmosphere. New competitors entered the market
to
meet these demands and Shells did not keep pace. In addition, our company
finances were weakened by a difficult Midwest expansion and the physical
condition of several restaurants began to deteriorate.
Since
late 2003, we have worked to update and strategically reposition the Shells
concept by elevating the freshness, quality and variety of our food, improving
our service levels and significantly enhancing our atmosphere through remodeling
our restaurants. We have implemented a two-tier pricing strategy that expands
our ability to profitably build check average and sales. We have maintained
the
price to value relationship, which Shells is known for, primarily through
our
seafood pastas, but have also expanded the appeal of our menu at higher price
points. We have re-engineered our product sourcing, menu offerings and seasonal
promotions to allow us to also deliver fresher, higher-quality seafood
combinations and premiere menu items, such as lobster, at competitive prices.
We
leverage the quality, freshness and variety attributes through our marketing
efforts.
Enhancing
our ability to execute these concept improvements, we recruited new operations
talent into our company and continuously focus on maintaining high operating
standards throughout our restaurants.
4
As
measured by steadily increasing guest satisfaction ratings, our guests continue
to embrace the changes we have implemented. During 2005, a steady erosion
of
sales that had been taking place for several years had reversed, and by the
beginning of 2006 most of our company-owned restaurants had been remodeled
with
a brighter, more contemporary new look. Sales trends continued to improve
through the first three quarters of 2006, but turned negative in the fourth
quarter. Generating sales and traffic increases is critical to our future
success. We regularly evaluate and modify our marketing strategies to better
ensure effectiveness.
We
are
continuing to execute our turnaround strategy in a very challenging business
environment. We believe significant opportunities exist to both improve sales
and profits, and to opportunistically expand our brand further within
Florida.
Restaurant
Locations
Our
managed and operated restaurants are located in the following Florida markets
and cities/neighborhoods:
|
Tampa/Sarasota
|
Orlando
|
South
Florida
|
||
|
Brandon
|
Daytona
Beach
|
Coral
Springs
|
||
|
Clearwater
Beach
|
Kissimmee
|
Davie
|
||
|
Holmes
Beach
|
New
Smyrna Beach
|
Kendall
|
||
|
Redington
Shores
|
Ocala
|
Pembroke
Pines
|
||
|
St.
Pete Beach
|
Orlando
|
Sunrise
|
||
|
St.
Petersburg
|
Winter
Park
|
|||
|
Winter
Haven
|
Melbourne
|
|||
|
North
Tampa
|
||||
|
Sarasota
|
||||
|
South
Tampa
|
||||
|
West
Palm Beach
|
Fort
Myers
|
|||
|
Stuart
|
Fort
Myers
|
|||
|
West
Palm Beach
|
We
closed
one under-performing Florida restaurant in 2002, and an additional three
Florida
restaurants in 2004. During 2005, we closed one under-performing restaurant,
relocated one restaurant to a more preferable site, and opened two new
locations. Also, during 2005, we agreed with one licensee restaurant to
terminate its management and license agreement, and took over the licensing
rights to this strategic market within Tampa. We continuously review the
performance of each restaurant’s unit economics and location, and regularly
evaluate new real estate sites in Florida for potential expansion or relocation.
5
Restaurant
Operations
Management
and Employees.
We
currently employ four area directors. Each area director is responsible for
the
management of several restaurants, including management development, recruiting,
training, quality of operations and unit profitability. The staff of a typical
restaurant consists of one general manager, two or three assistant managers
and
approximately 60 other employees. Restaurant management and area directors
participate in a bonus program based upon the financial results of their
particular restaurant or restaurants.
Recruitment
and Training.
We
believe that attaining continuously high service standards will better allow
us
to achieve long-term and sustainable success. We make substantial investments
in
the training and development of our managers, recognizing the direct
relationship between this and strong restaurant-level performance. We generally
recruit managers with significant experience in the full-service sector of
the
restaurant industry.
During
their training, managers are taught all aspects of the quality of our products
and service. We focus on food safety and food handling procedures, hospitality,
our operating standards, and cost management methods. In addition we provide
week-long workshops for our managers with additional training in employee
relations, guest satisfaction, operating systems and career
development.
Our
recruiting efforts focus on identifying and hiring individuals with a strong
service and teamwork orientation. Our restaurant staffs are trained in each
location by certified trainers in both the front and back of the house. We
work
diligently to retain our managers and employees, recognizing that greater
tenure
has positive benefits on the service we provide to guests, as well as managing
quality and costs effectively.
Restaurant
Reporting.
We
maintain financial and accounting controls for each restaurant through a
central
accounting system. Our financial systems and controls allow us 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. Store level management performs weekly
inventories and manages weekly operating results versus budget.
Purchasing.
Obtaining a reliable supply of quality ingredients with a primary focus on
seafood at competitive prices is critical to our success. We have formed
long-term relationships with several suppliers, manufacturers and harvesters
of
seafood. We purchase in bulk both fresh and frozen seafood and certain
other supplies used in restaurant operations. 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. We believe our diverse menu selection
helps
minimize the effects of shortages of most seafood products. We generally
have
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.
6
Performance
Food Group of Florida has been our primary distributor since October 2002.
Performance Food Group purchases and takes delivery of the products that we
contract for purchase, according to our specifications and subject to our
quality assurance inspections. Based on purchase orders initiated by our
restaurants, Performance Food Group then sells the food products to us on a
cost plus basis, and distributes the food products directly to our
restaurants. From time-to-time, at our direction to facilitate a forward
purchase opportunity, Performance Food Group acquires inventory in excess
of normal recurring restaurant delivery and re-supply, which approximates
30
days supply. We pay interest on inventory holdings above 60-day supply
levels, at a fixed interest rate of 7.8% per annum. In addition,
Performance Food Group procures, on our behalf, many of our operating
supplies, and distributes and sells these products to the individual restaurants
at agreed upon price mark-ups.
Quality
Control. We
maintain a continuous quality assurance inspection program for all of our
seafood and protein purchases. Each shipment of frozen seafood or other protein
is inspected through statistical sampling methods upon receipt at Performance
Food Group’s distribution center for quality and conformity to our written
specifications, prior to delivery to the restaurants. Fresh fish and
produce are also inspected on a random basis by our quality control inspector.
Randomly, we also inspect the facilities and vehicles in which these products
are processed, stored, or shipped to our restaurants. In addition, fresh
fish purchased by our individual restaurants must be purchased from one of
our approved suppliers and is inspected by a restaurant manager at the time
of
delivery. As part of our training program, restaurant employees are educated
as
to the correct handling and proper physical characteristics of each
product.
Our
area
directors, general managers and assistant managers are all responsible for
properly training hourly employees and for ensuring that Shells restaurants
are
operated in accordance with strict health, quality and food safety standards.
Compliance with our quality standards is monitored by on-site visits and
formal
inspections by the area directors. We believe that our inspection procedures
and
employee training practices help to maintain high standards of quality and
safety of the food and service we provide.
Advertising
and Marketing
Our
marketing efforts leverage the use of billboard, newspaper, radio and television
advertising to raise awareness of the Shells brand and to inform new and
existing customers about our promotions. The fact that our restaurants are
generally clustered in particular media markets helps us obtain cost-effective
advertising. We also stage in-store promotions and various local marketing
efforts to help our restaurants partner with their communities.
Across
most major markets, our broad scale marketing initiatives included network
television, radio, outdoor signage, newspaper, concentrated internet and
direct
mail campaigns. In February 2006, focus groups were conducted in all major
markets to determine the guests’ perception of the brand in the communities.
Using the information gathered during the focus groups, our marketing focus
shifted from broadcast and cable television to a strong direct mail campaign
coupled with broadcast television in the Tampa market. Our media in the third
quarter of 2006 focused primarily on radio endorsements in the Tampa and
Orlando
markets. The medium of radio allowed us to incorporate promotion driven events
to the restaurants with live broadcasts, remote broadcasts and disk jockey
appearances. We continued our local store marketing program, providing all
of
our restaurants with resources to take advantage of an array of sales-building
initiatives.
In
May
2006, we entered into a monthly retainer with Dunn and Company, our current
advertising agency. Dunn and Company is responsible for all creative and
media
buying services for Shells and works on various elements of the business
including in store point-of-purchase promotions, creative services and media
buying.
7
Joint
Venture and Third-Party Owned Restaurants
The
Shells restaurant system currently consists of (i) 21 restaurants that are
wholly owned by us; (ii) one restaurant, in Melbourne, Florida, in which
we have
a 51% ownership interest, and (iii) three restaurants that we manage and
operate, but do not own. The remaining 49% interest in the Melbourne restaurant
is indirectly owned by Wanda L. Hattaway, wife of William E. Hattaway, a
former
director and president of our company. In addition to the equity interest
in
this restaurant, we receive a management and licensing fee of 6% of the
restaurant sales of the Melbourne restaurant.
Two
of
the managed restaurants are managed and operated by us pursuant to agreements,
originally entered into in July 1993. Pursuant to these agreements, we provide
management services and license proprietary information required to operate
these restaurants in return for a percentage of each restaurant's sales.
The
agreements, as amended in October 2001, provide for a 4% management fee until
such time as sales return to near 1999 levels, and then increasing to a 6%
fee.
Of the total management fee received, 2% of sales is placed in escrow and
disbursed to a third party to satisfy each managed restaurant’s requirement to
make third party royalty payments. The management agreements generally grant
us
authority to determine the programs and policies affecting the day-to-day
operations of each of these managed restaurants, have a remaining term of
approximately 18 years, and provide that the third-party owners are responsible
for funding all restaurant expenses, including food and beverage costs,
staffing, training, recruiting, inventory, working capital, and capital
investment.
We
operate the third managed restaurant pursuant to an oral agreement requiring
that the restaurant is operated in conformity with the policies and procedures
established by us for Shells restaurants. Consistent with the amended management
agreement for our managed restaurants, beginning in October 2001, we receive
a
net management fee of 2% of the restaurant's sales.
In
the
past, the enforceability of these management and license agreements has been
questioned by certain of the licensees. Although we believe the agreements
are
enforceable, there can be no assurance that the agreements will not be
challenged in the future, and, if challenged, that the agreements will be
determined to be enforceable.
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. These
competitors include national, regional and local full-service casual dining
chains, some of which specialize in or offer seafood products. We also face
competition from a broad range of other restaurants and foodservice
establishments, including full-service and quick service restaurants, which
specialize in a variety of cuisines. Some of our competitors have been in
existence for substantially longer periods than we have, and may be better
established in the markets where we have our restaurants. In addition, we
believe that the full-service casual dining segment is likely to attract
a
significant number of new entrants, some offering seafood products. We believe
Shells is competitively positioned within the industry due to our relative
value
proposition and points of differentiation, as discussed previously.
Government
Regulation
We
are
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. Our restaurants
are
subject to periodic inspections by governmental agencies to ensure conformity
with these 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 could adversely affect our operations. Restaurant operating
costs are also affected by other government actions beyond our control,
including annual increases in minimum hourly wage requirements, such as those
that were implemented in Florida beginning in 2005. Other measures largely
beyond our control that can impact operating costs include workers compensation
and property insurance rates, health care insurance costs and unemployment
and
other taxes.
8
Approximately
13% of our revenue is attributable to the sale of alcoholic beverages. Alcoholic
beverage control regulations require each of our 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 our 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.
We
are
also subject to "dram-shop" statutes, which generally provide a person injured
by an intoxicated person the right to recover damages from an establishment
that
wrongfully served alcoholic beverages to the intoxicated person. We carry
liquor
liability insurance coverage as part of our existing comprehensive general
liability insurance.
Our
restaurants are subject to federal and state minimum wage laws governing
such
matters as working conditions, overtime and tip credits. A significant number
of
our restaurant personnel are paid at rates related to the state minimum wage
which exceeds the federal rate and, accordingly, further increases in Florida’s
minimum wage rate could increase our labor costs.
The
Americans with Disabilities Act prohibits discrimination in employment and
public accommodations on the basis of disability. Under the Act, including
in
situations where we elect to acquire or purchase a restaurant, we could be
required to expend funds to modify our restaurants to better provide service
to,
or make reasonable accommodations for the employment of, disabled
persons.
Service
Marks and Proprietary Information
We
have
registered the service mark "Shells" with the Secretary of the State of Florida
and the “Shells” service mark and “jumping fish” logo with the United States
Patent and Trademark Office. We believe that our service marks have significant
value and are essential to our ability to create demand for, and brand awareness
of, our restaurants. There can be no assurance, however, that our service
marks
do not or will not violate the proprietary rights of others, that they would
be
upheld if challenged or that we would not be prevented, in such an event,
from
using our service marks, any of which could have a material adverse affect
on
us. Although there can be no assurance that we will have the financial resources
necessary to enforce or defend our service marks, we have vigorously opposed,
and intend to continue to oppose vigorously, any infringement of our service
marks.
We
also
rely on trade secrets and proprietary knowledge and employ various methods
to
protect our concepts and recipes. These methods may not afford complete
protection, and there can be no assurance that others will not independently
develop similar knowledge or obtain access to our knowledge, concepts and
recipes.
9
Employees
As
of
December 31, 2006, we employed approximately 1,100 persons, of whom
approximately 120 were management or administrative personnel employed on
a
salaried basis and 980 were employed in non-management restaurant positions
on
an hourly basis. Approximately 600 employees are employed on a full-time
basis.
We consider our employee relations to be good. No employees are covered by
a
collective bargaining agreement.
Our
Executive Officers
Our
executive officers are:
|
Name
|
Age
|
Position
|
|
Leslie
J. Christon
|
52
|
President
and Chief Executive Officer
|
|
Guy
C. Kathman
|
50
|
Vice
President of Operations
|
|
Warren
R. Nelson
|
55
|
Executive
Vice-President of Finance, Chief Financial Officer, Treasurer
and
Secretary
|
|
Christopher
R. Ward, Sr.
|
45
|
Vice-President
of Purchasing
|
Leslie
J. Christon
has been
our President and Chief Executive Officer since joining Shells in July 2003.
From 2002 to 2003, Mrs. Christon was self-employed as a management consultant
in
the restaurant industry. From 2000 to 2002, Mrs. Christon was employed by
Sutton
Place Gourmet, Inc. as its President and Chief Operating Officer. From 1996
to
2000, Mrs. Christon was employed by Brinker International, On the Border
Restaurants, as its President.
Guy
C. Kathman
has been
our Vice-President of Operations since joining Shells in September 2003.
From
2001 to 2003, Mr. Kathman was employed by Posados Café as a General Manager.
From 1997 to 2001, Mr. Kathman was employed by Brinker International, On
the
Border Restaurants, as a Regional Director of Operations.
Warren
R. Nelson
currently serves as our Executive Vice-President of Finance, Chief Financial
Officer, Treasurer, and Secretary, positions he has held since June 1993.
Mr.
Nelson is also Treasurer and a member of the Board of Trustees for a non-profit,
the Florida Chapter of the ALS Association.
Christopher
R. Ward
has
served as our Vice-President of Purchasing since September 2004 and as an
executive officer since August 2005. From 2003 to 2004, Mr. Ward managed
supply
chain management for Gate Gourmet, an airline catering company. From 2001
to
2003, Mr. Ward was Director of Purchasing for Buffets, Inc. From 1997 to
2001,
Mr. Ward was Vice President of Purchasing for Peasant Restaurants.
10
Our
board
of directors has adopted a Code of Business Conduct and Ethics that applies
to
our board members, as well as our principal executive officer and principal
financial officer, and our other officers and employees. This Code of Business
Conduct and Ethics is available on our web site, at www.shellsseafood.com.
We
intend to satisfy the amendment and waiver disclosure requirements under
applicable securities regulations by posting any amendments of, or waivers
to,
the Code of Business Conduct and Ethics on our web site. A copy of our Code
of
Business Conduct and Ethics will be sent without charge upon request in writing
addressed to us at: 16313 N. Dale Mabry Hwy, Suite 100, Tampa, Florida 33618,
c/o Secretary.
11
Item
1A. Risk Factors
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. Further 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. 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 continuing capital requirements and a history of
losses.
Historically, our cash requirements have exceeded our cash flow from operations.
This has been due to costs associated with developing and opening restaurants,
as well as the operating performance of certain restaurants. We have experienced
operating and net losses during the majority of our recent prior years. As
of
December 31, 2006, our company had a working capital deficiency of $4,446,000
and a cash balance of $734,000. In 2006, we incurred a net loss of $3,002,000,
and we invested $1,774,000 in property and equipment. As of January 1, 2006,
our
company had a working capital deficiency of $4,842,000 and a cash balance
of
$1,361,000. In 2005, we incurred a net loss, before preferred stock dividend,
of
$1,852,000, and we invested $7,762,000 in property and equipment for our
new
remodel program. In 2004, we incurred a net loss of $1,344,000, and we invested
$1,525,000 in property and equipment. In addition, in the fourth quarter
of
2006, we experienced declining sales and customer traffic. There are no
assurances that our strategies will reverse the recent trend in sales and
customer traffic declines as necessary to meet our contemplated cash flow
requirements. There can be no assurances that further losses will not be
experienced in the future.
Operating
expenses may increase.
Annually, since 2005, we have incurred increases in labor costs due to the
Florida minimum wage rate increase. Utilities and insurance expenses increased
mostly as a result of the hurricanes in 2004 and 2005, and these expense
categories are continuing to be elevated. Due to significantly increasing
real
estate market values throughout Florida, we also are incurring significant
increases in real estate taxes. In addition, certain of our leases are coming
up
for renewal or expiring over the next several years. Increases in rent expense
will likely occur as a result of renewing current leases or negotiating new
lease terms. There can be no assurances that any future increases in menu
pricing or guest traffic will be adequate to compensate for these and any
other
operating cost increases.
We
may be unable to repay certain of our debts when they
mature.
Our
investors have funded $1,440,000 on a line of credit, which matures on May
23, 2008. There are no assurances our investors will continue to extend the
maturity date on this note or that adequate financing options will be available
to our company when necessary or at terms that are acceptable.
We
have a
promissory note outstanding through Colonial Bank, for the financing of our
joint venture restaurant, located in Melbourne, Florida. As of December 31,
2006, we owed $438,000 on the principal balance of this note, which matures
in
September 2007. We are currently negotiating with our joint venture partner
to
remodel this restaurant, the cost of which is intended to be included in
a
refinancing of the property with Colonial Bank. There are no assurances the
bank
will refinance the property under terms contemplated, or at all.
12
The
note
relating to the restaurant property and the $1,440,000 line of credit held
by
entities owned or associated with investors are secured by certain of our
assets. Any failure to pay these debts as they mature would allow holders
of
these debts to seize and sell such assets to satisfy amounts owed.
Our
ability to use net operating loss carryforwards and general business credits
to
reduce future tax payments may be further limited if there are additional
changes in ownership of Shells.
As
of
December 31, 2006, for federal income tax purposes, we had approximately
$10,769,000 of net operating loss carryforwards, or NOLs, available to reduce
taxable income in future years and approximately $3,593,000 of general business
credits to carry forward. We believe that a substantial amount of these NOLs
and
credits are currently subject to an annual limitation under sections 382
and 383
of the Internal Revenue Code of 1986, as amended, as a result of ownership
changes in 2002 and our sale of additional equity in 2005 to persons previously
unassociated with our company. We
estimate the limit to NOLs and credit carryforwards that may be used against
taxable income to be approximately $75,000 per year for NOLs occurring prior
to
the 2002 ownership change, and $665,000 per year for NOLs occurring prior
to the
2005 ownership change. Any portion of the annual limitation amounts not utilized
in any year will carry forward to the following year, subject to a 15 to
20 year
limitation. Any additional sale of equity may result in further restricting
our
ability to utilize NOLs or credit carryforwards.
Substantial
dilution to our stockholders is possible.
As
of
March 27, 2007, there were outstanding 18,614,000 shares of common stock,
and
warrants, options or other convertible securities outstanding to purchase
an
additional 19,062,000 shares of common stock, including options and warrants
representing 12,006,000 shares of common stock at an average exercise price
of
$1.00 per share.
Since
fiscal 2002, we raised $11.3 million through issuing securities, including
warrants and preferred stock convertible into 27,867,000 shares of our
common stock. As of March 27, 2007, 13,793,000 shares of our common stock
have
been issued relating to these warrants and preferred stock, and outstanding
warrants and preferred stock remain convertible into 14,074,000 shares of
common
stock. Many of these securities have anti-dilution protection provisions,
which
will become operative upon our issuance of additional securities at below
specified dollar amounts.
In
March
2005, we amended our certificate of incorporation to increase the total number
of authorized shares of our common stock from 20,000,000 shares to 40,000,000
shares. Subsequently, in June 2005, our stockholders approved a further increase
of the total number of authorized shares of our common stock from 40,000,000
shares to 58,000,000 shares. We
may
require additional financing in 2007. Certain forms of capital raising may
result in substantial additional dilution to our existing
stockholders.
Control
is concentrated among a few individuals.
Frederick R. Adler, James Adler, Bruce Galloway and Trinad Capital, significant
stockholders, together with members of our board of directors and executive
management team, are beneficial owners of record, in the aggregate, of
approximately 56.6%
of
our outstanding voting shares, consisting of Common Stock and Series B
Convertible Preferred Stock, as of March 27, 2007 and are able to control
the
business and affairs of our company, including the election of our directors
and
decisions regarding any proposed dissolution, merger or sale of our assets.
We
depend on key personnel.
Our
success is largely dependent upon our executive management and other key
personnel. The loss of the services of one of our executives or other key
personnel could materially adversely affect us. Our success may also depend
on
our ability to attract and retain qualified management restaurant industry
personnel.
13
Operating
results may require the closure of additional
restaurants.
If we
experience prolonged periods of unfavorable operating results at any existing
restaurants, view the prospects for a restaurant to be less than satisfactory,
or do not renew a restaurant lease due to its operating results, we may elect
to
close or relocate restaurants. The lack of success or closing of any of our
restaurants could have an adverse effect upon our financial condition and
results of operations. We closed 16 restaurants during 2001, of which 14
were
located in the Midwest and two were located in Florida. We closed one restaurant
in 2002, three restaurants in 2004 and one restaurant in 2005. Additionally,
we
relocated one restaurant in 2005 to a higher volume location and opened two
new
restaurants. We continually monitor the operations and financial performance
with respect to certain of our other existing restaurants. We did not open,
close, or relocate any restaurants in 2006.
Our
operating results fluctuate seasonally because of our geographic concentration
in Florida.
We
experience significant fluctuations in our quarter-to-quarter operating results
because of factors including the seasonal nature of our business and weather
conditions in Florida, which may be severe periodically and may include damaging
hurricanes.
Our
restaurants are all located in Florida and can be affected by the health
of
Florida’s economy in general, and of the tourism industry in particular, which
can further be affected by anticipated world events, as well as economic
trends.
In addition, while the majority of our restaurants are located primarily
in
residential areas in Florida, many of our restaurants are located in seasonal
tourist areas.
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 affect 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. 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.
Future
hurricanes may be a risk to us. In
recent
years, the effects of hurricanes on the local economies in Florida and other
states in the Gulf of Mexico region have been significant. During the third
and
fourth quarters of 2004 and the fourth quarter of 2005, we incurred substantial
business and property losses as a result of several hurricanes that struck
Florida. Property damage or interruption of operations from any future
hurricanes may have a material adverse effect on our business and
profitability.
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 maintain both long
and
short-term contracts with the majority of our suppliers. We contract products
direct with the manufacturer, where appropriate. In addition, we have an
agreement with Performance Food Group to warehouse and distribute, on a cost
plus agreement, the majority of our seafood supplies and to procure, distribute
and store other supplies for us. We believe that our relationships with our
suppliers and Performance Food Group are satisfactory and that alternative
sources are readily available. However, the loss of some suppliers or of
our
relationship with Performance Food Group could materially adversely affect
us.
14
Some
species of seafood have become subject to adverse publicity because of claims
of
contamination by lead, mercury or other chemicals that may exist in the ocean
or
in an aquaculture environment. 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 particular types
of
seafood. We maintain a continuous quality assurance inspection program for
all
of our seafood and protein purchases. 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
affect on us. Our failure to obtain adequate supplies of seafood, which meet
our
quality specifications at acceptable prices or problems or difficulties
resulting from the contamination of seafood, in general, or at any of our
restaurants in particular, will have a material adverse effect on our operations
and profitability.
Food
borne illness may occur in the market place, or to us
specifically. Even
though we maintain a strict quality assurance inspection program, we cannot
assure you that these procedures will successfully detect food contamination.
We
can also not assure you that a food borne illness occurring anywhere else
in the
market place will not have a material adverse affect on our business and
profitability. Historically, seafood may be particularly susceptible to these
kinds of food-borne illnesses.
Our
expenses for food commodity costs fluctuate. Our
profitability depends, in part, on our ability to anticipate and to react
to
increases in food costs. We have limited control over some of these costs.
Specifically, our dependence on frequent deliveries of seafood, produce,
dairy
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. Also, substantial price
increases imposed by our suppliers in the absence of alternative sources
of
supply in a timely manner, could have a material adverse affect on
us.
We
have
been able to anticipate and react to fluctuations in food costs by:
| • |
adjusting
selected menu prices;
|
| • |
purchasing
seafood directly from numerous suppliers; and
|
| • |
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 supply and price fluctuations, or that we will not be subject to
significantly increased costs. A shortage of available seafood at prices
that
are acceptable to us could cause our cost of sales to increase. Because of
our
value oriented 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.
Government tariffs may also be applied to certain imported products. These
programs may increase our seafood costs and / or decrease availability as
seafood suppliers’ and processors’ delivered costs in complying with these
programs 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:
| • |
price;
|
| • |
service;
|
| • |
food
quality, including taste, freshness, healthfulness and nutritional
value;
|
| • |
location;
and
|
| • |
atmosphere.
|
15
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 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.
Our
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
casual food restaurants, which specialize in a variety of menu offerings.
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 prefer-ence for food products that are, or
are
perceived to be, healthy, nutritious, and low in calories, carbohydrates
or fat
content. We 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 that:
| • |
consumers
will be able to distinguish our products from competitive
products;
|
| • |
substantially
equivalent food products will not be introduced by our competitors;
or
|
| • |
we
will be able to compete
successfully.
|
Many
factors affect our industry.
We must
respond to various factors affecting the restaurant industry,
including:
| • |
changes
in con-sumer preferences, tastes and eating habits;
|
| • |
demographic
trends and traffic patterns;
|
| • |
increases
in food and labor costs;
|
| • |
inflation;
and
|
| • |
national,
regional and local economic conditions and the affect of world
events, in
general, and the tourism industry in
particular:
|
Our
insurance coverage may not be adequate.
We
maintain insurance, including insurance relating to personal injury, in amounts
we currently consider adequate. Nevertheless, a partially or completely
uninsured claim against us, if successful, could materially adversely affect
us.
Additionally, the insurance market in Florida, particularly property and
business interruption, has sustained significant losses during the last two
hurricane seasons. Adequate insurance coverage is becoming more difficult
to
acquire and the costs associated with such coverage may become economically
prohibitive. If we are unable to obtain adequate insurance coverage, or if
we do
not have sufficient cash or financing available to pay the insurance premiums,
it could cause us to be uninsured for certain perils which could materially
affect us.
16
We
face risks associated with government regulation.
We are
subject to extensive state and local government regulation by various agencies,
including:
| • |
state
and local licensing, zoning, land use, construction and environmental
regulations;
|
| • |
various
regulations relating to the sale of food and alcoholic
beverages;
|
| • |
regulations
relating to sanitation, disposal of refuse and waste
products;
|
| • |
regulations
relating to public health; and
|
| • |
safety
and fire standards.
|
Our
restaurants are inspected periodically by governmental agencies to ensure
conformity with these regulations. The suspension of, or inability to renew
a
license at an existing restaurant would adversely affect our operations.
A
significant percentage of our revenue and operating income comes from sales
of
alcoholic beverages. State and local regulation of the sale of alcoholic
beverages require 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
could
materially adversely affect our operations. In addition, our failure or
difficulty in obtaining required licensing or other regulatory approvals
could
delay or prevent new restaurant openings.
Restaurant
operating costs are also affected by other government actions, which are
beyond
our control, including increases in:
| • |
minimum
hourly wage requirements;
|
| • |
workers
compensation insurance rates;
|
| • |
health
care insurance costs;
|
| • |
other
insurance costs, including general liability and property;
and
|
| • |
unemployment
and other taxes.
|
In
May
2005, the minimum wage rate in Florida increased by $1.00 per hour. Tipped
employees also received the $1.00 per hour wage increase under this new law.
In
January 2006 and 2007, the minimum wage rate in Florida increased another
$0.25
and $0.27 per hour, respectively, with tipped employees also receiving the
full
wage increase. At the beginning of each year, the minimum wage will increase
according to the U.S. Department of Labor, Bureau of Labor Statistics cost
of
living index. Such payroll cost increases can have a significantly adverse
affect on our company. Menu price increases and other actions have been and
are
required to negate the affect of these wage increases. There can be no
assurances that such measures expected to be taken by our company will be
successful to adequately offset these additional payroll costs, or will be
accepted without adverse reaction by our customers.
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 our results of operations.
17
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 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 under certain
conditions. 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 service marks and proprietary
information.
We own
two United States registrations for the service marks that we use, including
the
name “Shells.”
We
believe that our service marks 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 service marks:
| • |
do
not or will not violate the proprietary rights of
others;
|
| • |
would
be upheld if challenged; or
|
| • |
that
we would not be prevented from using our service
marks.
|
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 service marks. We believe that we own all of our intellectual
property and that the management and license agreements to which we are a
party
are enforceable. In the past, the enforceability of these management and
license
agreements has been questioned by certain of the licensees. Although we believe
the agreements are enforceable, there can be no assurance that the agreements
will not be challenged in the future, and, if challenged, that the agreements
will be determined to be enforceable and the managed restaurants will be
restricted from using the Shells service marks independent of us.
We
also
rely on trade secrets and proprietary knowledge. 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 knowledge or obtain access to our knowledge, concepts and recipes.
Although we generally enter into confidentiality agreements with our executives
and managers, we cannot assure you that these agreements will adequately
protect
our trade secrets.
Absence
of Dividends.
We have
never paid cash dividends on our common or preferred 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.
Provisions
with Potential Anti-Takeover Effect.
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 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 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 our 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.
18
On
October 24, 2001, we issued 66,862 shares of Series A 5% Convertible Preferred
Stock, par value $0.01 per share, pursuant to an exemption from registration
under Section 4(6) of the Securities Act of 1933, as amended, in consideration
for the cancellation of $669,000 of trade indebtedness by trade creditors
of our
company. As of March
27,
2007, we had 22,694 shares of Series A Preferred Stock outstanding.
On
May
24, 2005, we issued 461,954 units in a private placement. Each unit consisted
of
(i) one share of our Series B Convertible Preferred Stock convertible into
20
shares of our common stock, subject to adjustment under certain circumstances,
and (ii) a warrant to purchase 10 shares of our common stock at an exercise
price of $1.30 per share. In addition, we issued a warrant to purchase 37,651
units (consisting of 37,651 shares of our Series B Convertible Preferred
Stock
and warrants to purchase 376,510 shares of our common stock) at a purchase
price
of $15.00 per unit to the placement agent in our May 2005 financing.
As of
March 27, 2007, we had 322,551 shares of Series B Preferred Stock outstanding.
The Series B Convertible Preferred Stock contains voting and anti-dilutive
rights. The Series B Preferred Stock votes together with our common stock
on an
“as-converted” basis as a single class on all actions to be taken by our
stockholders. Without the consent of a majority of the outstanding Series
B
Preferred Stock, we cannot alter or change adversely the powers, preferences
or
rights given to the Series B Preferred Stock, authorize or create any class
of
stock ranking as to a distribution of assets upon a liquidation event senior
to
or pari passu with the Series B Preferred Stock, issue any additional shares
of
the Series A Preferred Stock, or alter or change the powers, preferences
or
rights given to the Series A Preferred Stock. Upon any dissolution, liquidation,
merger, consolidation, reorganization or other series of transactions, under
certain conditions, the holders of Series B Preferred Stock are entitled
to be
paid out of our assets legally available for distribution to our stockholders,
before any payment is made to the holders of our common stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None
19
ITEM
2. PROPERTIES
We
lease
6,300 square feet of space in Tampa, Florida for our executive offices. The
annual rent payable under the lease, which expires October 31, 2007, is
approximately $99,000. We expect to renew this lease.
All
but
one of our existing restaurants in operation are leased properties. In the
future, we intend to lease most of our properties but may from time-to-time
acquire restaurant locations based on individual site evaluations. Each of
our
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, we are required to pay the cost of insurance, taxes and a portion
of
the landlord's operating costs to maintain common areas. Restaurant leases
have
initial terms averaging 12 years and renewal options averaging 16 years,
and
rents averaging $18.00 per square foot.
ITEM
3. LEGAL PROCEEDINGS
On
March
6, 2006, we received a summons in a civil case from the United States District
Court that an employee in a South Florida Shells restaurant had filed a charge
alleging racial discrimination in violation of the Civil Rights Act. In January
2007, this case was fully settled through mediation.
On
August
1, 2006, we were advised by our subtenant, Famous Dave’s RIBS-U, Inc., that they
discontinued operations of the restaurant located in Streamwood, Illinois
and
have ceased remitting rent payments required by the sublease. The subtenant
has
requested discussions on settlement for a lease termination. Such restaurant
closure is a condition of default under the sublease as well as the master
lease
between Shells and the ultimate landlord, 948 Barrington Road Partnership.
In
February 2007, the parties under the lease and sublease agreed to allow the
landlord a period of six months to market the property to find a suitable
tenant. This agreement also contained a lease buy-out provision between the
landlord and Famous Dave’s. If a tenant is secured or the buy-out provision is
exercised, Famous Dave’s and Shells thereafter would be released of their
obligations under the respective leases. Otherwise, the financial implications
to Shells are undetermined at this time. If necessary, we intend to pursue
our
rights against Famous Dave’s, as appropriate to protect our interest.
On
March
13, 2007, we received a summons from the circuit court in Kane County, Illinois,
naming the Spring Hill Mall, L.L.C., the primary landlord, as defendant.
The
suit relates to a restaurant lease in Carpentersville, Illinois. Under this
lease, Shells is a sub-tenant to Chi-Chi’s, Inc., who filed bankruptcy in 2003
and subsequently rejected the lease. Since 2000, we have been further subleasing
this property to Famous Dave’s RIBS-U, Inc. Under such terms, we partially
subsidize lease payments. We have been negotiating with Spring Hill Mall
for a
buyout of our obligations under the various subleases. Under the suit, Spring
Hill Mall is seeking payment of rent, occupancy, and related charges totaling
$147,000 with the addition of interest and fees related to the suit. We shall
continue to seek a financial settlement to include a full release from any
leasehold obligations.
In
the
ordinary course of business, Shells is and may be a party to various legal
proceedings, the outcomes of which, singly or in the aggregate, are not expected
to be material to our financial position, results of operations or cash
flows.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
PART
II
ITEM
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on the over-the-counter bulletin board under the symbol
“SHLL”. The following table sets forth the closing high and low price per share
of our common stock as reported by the OTC bulletin board, for the periods
presented.
These
over-the-counter market quotations reflect inter-dealer prices, without retail
markup, mark-down or commission and may not necessarily represent actual
individual transactions.
|
Fiscal
2005
|
High
|
Low
|
|||||
|
First
quarter
|
$
|
1.40
|
$
|
0.71
|
|||
|
Second
quarter
|
$
|
1.30
|
$
|
0.75
|
|||
|
Third
quarter
|
$
|
1.25
|
$
|
0.67
|
|||
|
Fourth
quarter
|
$
|
1.08
|
$
|
0.75
|
|||
|
Fiscal
2006
|
|||||||
|
First
quarter
|
$
|
1.01
|
$
|
0.86
|
|||
|
Second
quarter
|
$
|
0.90
|
$
|
0.70
|
|||
|
Third
quarter
|
$
|
0.82
|
$
|
0.58
|
|||
|
Fourth
quarter
|
$
|
0.75
|
$
|
0.51
|
|||
The
number of stockholders of record of our common stock on March 27, 2007 was
approximately 250 and as of that date, our stock price was $0.54.
Our
authorized capital stock consists of 58,000,000 shares of common stock, par
value $0.01 per share, and 2,000,000 shares of preferred stock, par value
$0.01
per share.
Dividend
Policy
We
have
never declared or paid any cash dividends on our common or preferred stock.
All
future earnings are expected to be retained by us for the development of
our
business. Accordingly, we do not anticipate paying cash dividends on the
common
or preferred stock in the foreseeable future.
During
fiscal 2005, we recorded a non-cash charge of $1,735,000 to recognize as
a
deemed dividend the warrants and beneficial conversion feature of our Series
B
Convertible Preferred Stock issued in May 2005.
21
Equity
Compensation Plans
Securities
authorized for issuance under equity compensation plans as of December 31,
2006
were as follows:
|
Number
of securities to be issued upon exercise of outstanding options,
warrants,
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
[a])
|
||||||||
|
Plan
category
|
[a]
|
[b]
|
[c]
|
|||||||
|
Equity
compensation plans approved by security holders (1)
|
9,228,835
|
$
|
1.09
|
701,692
|
||||||
|
Equity
compensation plans not approved by security holders (2)
|
2,777,278
|
$
|
0.68
|
-
|
||||||
|
Total
|
12,006,113
|
701,692
|
||||||||
|
(1)
|
Consists
of (i) stock options issued under the Stock Option Plan for Non-Employee
Directors, 1995 Employee Stock Option Plan, 1996 Employee Stock
Option
Plan and the 2002 Equity Incentive Plan, (ii) warrants to purchase
4,619,540 shares of common stock, exercisable through May 24, 2010,
issued
on May 24, 2005 in connection with the Series B Preferred Stock
offering,
at an exercise price of $1.30 per share, and (iii) warrants to
purchase
1,129,530 shares of common stock granted to the placement agent
in our May
2005 private financing as a portion of their fees in the form of
a warrant
to purchase 37,651 units (consisting of 37,651 shares of our Series
B
Convertible Preferred Stock and warrants to purchase 376,510 shares
of our
common stock) at a purchase price of $15.00 per unit.
|
|
|
(2)
|
Consists
of (i) a stock option grant to purchase 903,528 shares of common
stock
pursuant to a Stock Option Agreement dated November 14, 2005 by
and
between Leslie J. Christon, President and Chief Executive Officer,
and the
Company, and (ii) warrants to purchase 1,873,750 shares of common
stock,
exercisable through December 7, 2007, issued on December 7, 2004
in
connection with the $2,375,000 debenture offering at an exercise
price of
$0.60 per share.
|
The
number of securities and type of plans available for future issuance of stock
options as of December 31, 2006 was:
|
|
Options
for Common Shares:
|
|||||||||||||||
|
Plan
Name
|
Authorized
|
Exercised
|
Outstanding
|
Expired
|
Available
|
|||||||||||
|
Stock
Option Plan for Non-Employee Directors
|
150,000
|
0
|
32,000
|
0
|
118,000
|
|||||||||||
|
1995
Employee Stock Option Plan
|
840,000
|
11,000
|
105,500
|
723,500
|
0
|
|||||||||||
|
1996
Employee Stock Option Plan
|
101,000
|
11,001
|
58,007
|
31,992
|
0
|
|||||||||||
|
2002
Equity Incentive Plan
|
4,096,472
|
228,522
|
3,284,258
|
0
|
583,692
|
|||||||||||
|
Total
stock options
|
5,187,472
|
250,523
|
3,479,765
|
755,492
|
701,692
|
|||||||||||
Our
board
of directors decreased the authorized shares under our 2002 Equity Incentive
Plan by 903,528 shares effective November 14, 2005 concurrent with the stock
option to purchase 903,528 shares granted outside the Plan to Leslie J.
Christon, President and Chief Executive Officer.
Stock
options exercised consist of (i) 9,466 shares of common stock issued from
options exercised in 2006 by employees, (ii) 26,600 shares of common stock
issued from options exercised in 2005 by employees, (iii) 42,666 shares of
common stock issued from options exercised in 2004 by employees, (iv) 160,790
shares of common stock issued in 2003 to key employees pursuant to our fiscal
year 2002 management bonus plan, and (v) 11,001 shares of common stock issued
from options exercised by employees prior to 2001.
22
The
1995
Employee Stock Option Plan expired in September 2005 on its tenth anniversary
as
provided in the plan document. Options to purchase 105,500 shares of common
stock remain outstanding under this plan, and expire on the tenth anniversary
of
their issuance, if not previously exercised; the last of which options expire
in
May 2011.
The
1996
Employee Stock Option Plan expired in 2006 on its tenth anniversary as provided
in the plan document. Options to purchase 58,007 shares of common stock remain
outstanding under this plan, and expire on July 1, 2012, if not previously
exercised.
STOCK
PRICE PERFORMANCE
The
following Stock Price Performance Graph shall not be deemed incorporated
by
reference into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934, except to the extent Shells specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
The
following graph compares cumulative total return of our common stock with
the
cumulative total return of (i) the Russell 2000 Index and (ii) the Nations
Restaurant News Stock Index (the “Peer Index”). The graph assumes (a) $100 was
invested on December 31, 2001 (the first day of our fiscal 2002) in each
of our
common stock, the stocks comprising the Russell 2000 Index and the stocks
comprising the Peer Index, and (b) the reinvestment of dividends, if any.
COMPARISON
OF CUMULATIVE TOTAL RETURN AMONG
SHELLS
SEAFOOD RESTAURANTS, INC., RUSSELL 2000 INDEX,
AND
NATIONS RESTAURANT NEWS STOCK INDEX
23
ITEM
6. SELECTED FINANCIAL DATA
The
following table sets forth selected historical consolidated financial data
for
Shells. 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
earnings per share, number of restaurants data, and percentage
information).
|
Year
(52 Weeks) Ended
|
Year
(53 Weeks) Ended
|
Year
(52 Weeks) Ended
|
||||||||||||||
|
December
31,
|
January
1,
|
January
2,
|
December
28,
|
December
29,
|
||||||||||||
|
2006
|
2006
|
2005
|
2003
|
2002
|
||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||
|
REVENUES
|
||||||||||||||||
|
Restaurant
sales
|
$
|
47,673
|
$
|
44,335
|
$
|
41,393
|
$
|
43,881
|
$
|
47,065
|
||||||
|
Management
fees
|
156
|
152
|
171
|
165
|
163
|
|||||||||||
|
Total
revenues
|
47,829
|
44,487
|
41,564
|
44,046
|
47,228
|
|||||||||||
|
RESTAURANT
OPERATING COSTS:
|
||||||||||||||||
|
Food
and beverage
|
15,363
|
14,671
|
14,051
|
14,467
|
15,778
|
|||||||||||
|
Labor
|
14,722
|
13,757
|
12,935
|
13,845
|
14,585
|
|||||||||||
|
Other
|
12,948
|
11,374
|
10,123
|
11,117
|
10,774
|
|||||||||||
|
Depreciation
and amortization
|
2,199
|
1,499
|
1,058
|
1,077
|
1,102
|
|||||||||||
|
Pre-opening
expenses
|
-
|
758
|
-
|
-
|
-
|
|||||||||||
|
Provision
for impairment of assets
|
1,242
|
-
|
105
|
360
|
110
|
|||||||||||
|
Provision
for impairment of goodwill
|
-
|
-
|
-
|
-
|
206
|
|||||||||||
|
Total
restaurant operating costs
|
46,474
|
42,059
|
38,272
|
40,866
|
42,555
|
|||||||||||
|
RESTAURANT
OPERATING INCOME
|
1,355
|
2,428
|
3,292
|
3,180
|
4,673
|
|||||||||||
|
General
and administrative expenses
|
3,821
|
4,015
|
3,249
|
3,387
|
3,565
|
|||||||||||
|
(LOSS)
INCOME FROM OPERATIONS
|
(2,466
|
)
|
(1,587
|
)
|
43
|
(207
|
)
|
1,108
|
||||||||
|
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
|
Lease
buy-out
|
212
|
600
|
-
|
-
|
-
|
|||||||||||
|
Provision
for impairment of assets due to lease buy-out
|
-
|
(211
|
)
|
-
|
-
|
-
|
||||||||||
|
Interest
expense, net
|
(332
|
)
|
(413
|
)
|
(1,154
|
)
|
(463
|
)
|
(534
|
)
|
||||||
|
Other
(expense) income, net
|
(173
|
)
|
30
|
33
|
(100
|
)
|
(3
|
)
|
||||||||
|
Total
other (expense) income, net
|
(293
|
)
|
6
|
(1,121
|
)
|
(563
|
)
|
(537
|
)
|
|||||||
|
(LOSS)
INCOME BEFORE ELIMINATION OF
|
||||||||||||||||
|
MINORITY
PARTNER INTEREST AND INCOME TAXES
|
(2,759
|
)
|
(1,581
|
)
|
(1,078
|
)
|
(770
|
)
|
571
|
|||||||
|
ELIMINATION
OF MINORITY PARTNER INTEREST
|
(243
|
)
|
(271
|
)
|
(266
|
)
|
(264
|
)
|
(221
|
)
|
||||||
|
(LOSS)
INCOME BEFORE INCOME TAX BENEFIT
|
(3,002
|
)
|
(1,852
|
)
|
(1,344
|
)
|
(1,034
|
)
|
350
|
|||||||
|
Income
tax benefit (1)
|
-
|
-
|
-
|
-
|
327
|
|||||||||||
|
NET
(LOSS) INCOME BEFORE
|
||||||||||||||||
|
PREFERRED
STOCK DIVIDEND
|
(3,002
|
)
|
(1,852
|
)
|
(1,344
|
)
|
(1,034
|
)
|
677
|
|||||||
|
Deemed
dividend associated with warrants
|
||||||||||||||||
|
and
beneficial conversion feature of preferred stock
|
-
|
(1,735
|
)
|
-
|
-
|
-
|
||||||||||
|
NET
LOSS (INCOME) APPLICABLE TO COMMON STOCK
|
$
|
(3,002
|
)
|
$
|
(3,587
|
)
|
$
|
(1,344
|
)
|
$
|
(1,034
|
)
|
$
|
677
|
||
24
|
Fiscal
Years Ended
|
||||||||||
|
December
31,
|
January
1,
|
January
2,
|
||||||||
|
2006
|
2006
|
2005
|
|
|||||||
|
Earnings
per Share Data:
|
||||||||||
|
Basic
and diluted net loss per share
|
$
|
(0.18
|
)
|
$
|
(0.24
|
)
|
$
|
(0.26
|
)
|
|
|
Shares
Outstanding Data:
|
||||||||||
|
Basic
and diluted weighted average
|
16,665
|
14,796
|
5,262
|
|||||||
|
Operating
Data:
|
||||||||||
|
Number
of restaurants (at end of period):
|
||||||||||
|
Company-owned
restaurants (2)
|
22
|
22
|
21
|
|||||||
|
Licensed
restaurants
|
3
|
3
|
4
|
|||||||
|
25
|
25
|
25
|
||||||||
|
Average
annual sales per Company-owned and
|
||||||||||
|
joint
venture restaurant open for full period (3)
|
$
|
2,167
|
$
|
1,998
|
$
|
1,896
|
||||
|
Increase
(decrease) in Company-owned and joint
|
||||||||||
|
venture
restaurant same store sales (3)
|
3.8
|
%
|
7.0
|
%
|
-1.6
|
%
|
||||
|
December
31,
|
January
1,
|
January
2,
|
December
28,
|
December
29,
|
||||||||||||
|
2006
|
2006
|
2005
|
2003
|
2002
|
||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Working
capital (deficiency)
|
$
|
(4,446
|
)
|
$
|
(4,842
|
)
|
$
|
(4,639
|
)
|
$
|
(3,606
|
)
|
$
|
(3,116
|
)
|
|
|
Total
assets
|
13,837
|
17,438
|
13,519
|
11,616
|
13,858
|
|||||||||||
|
Long-term
debt, less current portion
|
172
|
1,001
|
2,239
|
1,558
|
1,760
|
|||||||||||
|
Long-term
debt, related party, less current portion
|
1,527
|
809
|
1,495
|
2,267
|
2,123
|
|||||||||||
|
Minority
partner interest
|
522
|
472
|
442
|
466
|
428
|
|||||||||||
|
Preferred
stock
|
4
|
5
|
-
|
1
|
1
|
|||||||||||
|
Stockholders'
equity
|
4,339
|
7,190
|
502
|
1,183
|
2,152
|
|||||||||||
|
(1)
|
The
effective tax rates for fiscal years 2006, 2005, 2004, 2003 and
2002
include the effects of recognizing valuation allowance adjustments
relating to tax benefits. There was no benefit or provision for
income
taxes in 2006, 2005, 2004 or 2003. Income tax benefit of 93.3%
for the
fiscal year ended 2002, differ from the amounts computed by applying
the
effective federal income tax rate of 34% as a result of adjusting
the
valuation allowance, primarily related to net operating loss carryforwards
from prior years. The valuation allowance in 2006, 2005, 2004,
2003 and
2002 was increased by $2,821, $252, $210, $596, and $1,403, respectively
in each such year reserving for all tax assets that were deemed
non-realizable.
|
|
|
(2)
|
Includes
one joint venture restaurant in which we own a 51% equity interest.
Two
locations were opened, one was relocated and one was closed in
2005, and
three additional locations were closed in 2004.
|
|
|
(3)
|
Includes
only restaurants open during the full fiscal year reported and
also open
for a full comparable fiscal year and at least the full six months
prior
thereto. Sales data for closed stores is included through the end
of the
month prior to closing. Sales data is temporarily excluded if a
store is
closed for at least 30 days. Same store sales are calculated on
a
comparable calendar period basis for the periods
compared.
|
25
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
General
During
fiscal year 2006, Shells experienced a more challenging operating environment
in
Florida, the state where all of our restaurants are located. Several cost
areas,
most notably insurance, utilities and property taxes, increased sharply,
negatively impacting our profitability. Another increase in the state minimum
wage also pushed labor costs higher for the second consecutive
year.
Annual
sales were stronger during 2006, despite a soft fourth quarter, and guest
acceptance of the revitalized Shells continued to improve, reflecting the
changes we’ve made to enhance our menu, service and atmosphere. Guest
satisfaction ratings have steadily improved during every quarter over the
past
two years. But the higher costs of doing business more than offset our sales
gains.
We
implemented several strategies aimed at improving profitability during the
year,
including engineering a new menu. Since its introduction last fall, the new
menu
has successfully increased check average and helped to reduce food costs
as a
percent of sales.
We
continued to focus on controlling internal expenses despite the various cost
hikes, and Shells operating cash flow, as adjusted for non-recurring items,
improved during 2006. Both food and labor costs were lower as a percentage
of
sales compared to the prior year. An energy management program was also put
in
place at all restaurants to help offset the rising energy prices.
We
experienced an improvement in sales through the first three fiscal quarters
of
2006. The sales trend turned negative in the fourth quarter of 2006. We believe
this recent negative trend is partly due to the slowing growth rates of both
tourism and the state economy, with many casual dining restaurants throughout
Florida also experiencing a sales slowdown.
Our
key
challenge is to build customer traffic, attracting new and lapsed guests
to
experience the major concept enhancements that have been made over the past
two
years. We continue to fine-tune our marketing strategies to accomplish this,
while regularly adding new and exciting menu items aimed at increasing frequency
of existing guest visits.
Our
management remains committed to our turnaround strategy launched three years
ago. We will continue to aggressively address both our top and bottom line
pressures. And despite the many challenges facing our company, we are encouraged
by the guest acceptance of the work completed to update and broaden the appeal
of the Shells concept, as well as the instilling of higher operating standards.
However,
there are no assurances that our strategies will drive improvements in sales
and
customer traffic needed to meet anticipated cash flow requirements and restore
profitability. It is also uncertain whether future financing options, which
may
be needed to execute our strategies, will be available, on terms that would
be
acceptable, or at all.
26
The
following table sets forth, for the periods indicated, the percentages that
the
items in our Consolidated Statements of Operations bear to total revenues
or,
where indicated, restaurant sales.
|
Fiscal
Years Ended
|
||||||||||
|
December
31,
|
January
1,
|
January
2,
|
||||||||
|
2006
|
2006
|
2005
|
||||||||
|
REVENUES
|
||||||||||
|
Restaurant
sales
|
99.7
|
%
|
99.7
|
%
|
99.6
|
%
|
||||
|
Management
fees
|
0.3
|
%
|
0.3
|
%
|
0.4
|
%
|
||||
|
Total
revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
RESTAURANT
OPERATING COSTS
|
||||||||||
|
Cost
of sales (1)
|
32.2
|
%
|
33.1
|
%
|
33.9
|
%
|
||||
|
Labor
and other related expenses (1)
|
30.9
|
%
|
31.0
|
%
|
31.2
|
%
|
||||
|
Other
restaurant operating expenses(1)
|
27.2
|
%
|
25.7
|
%
|
24.5
|
%
|
||||
|
Total
restaurant costs (1)
|
90.3
|
%
|
89.8
|
%
|
89.6
|
%
|
||||
|
General
and administrative expenses
|
8.0
|
%
|
9.0
|
%
|
7.8
|
%
|
||||
|
Depreciation
and amortization
|
4.6
|
%
|
3.4
|
%
|
2.5
|
%
|
||||
|
Pre-opening
expenses
|
0.0
|
%
|
1.7
|
%
|
0.0
|
%
|
||||
|
Provision
for impairment of assets
|
2.6
|
%
|
0.0
|
%
|
0.3
|
%
|
||||
|
RESTAURANT
OPERATING (LOSS) INCOME
|
-5.2
|
%
|
-3.6
|
%
|
0.1
|
%
|
||||
|
Interest
expense, net
|
-0.7
|
%
|
-0.9
|
%
|
-2.8
|
%
|
||||
|
Other
(expense) income, net
|
0.1
|
%
|
0.9
|
%
|
0.1
|
%
|
||||
|
Elimination
of minority partner interest
|
-0.5
|
%
|
-0.6
|
%
|
-0.6
|
%
|
||||
|
Net
loss
|
-6.3
|
%
|
-4.2
|
%
|
-3.2
|
%
|
||||
|
Deemed
dividend associated with warrants and beneficial
|
||||||||||
|
conversion
feature of preferred stock
|
0.0
|
%
|
-3.9
|
%
|
0.0
|
%
|
||||
|
Net
loss applicable to common stock
|
-6.3
|
%
|
-8.1
|
%
|
-3.2
|
%
|
||||
|
(1)
as a percentage of restaurant sales
|
||||||||||
Results
of Operations
Fiscal
Year 2006 versus Fiscal Year 2005
Total
revenues for the fiscal year 2006 were $47,829,000 as compared to $44,487,000
for fiscal year 2005. The $3,342,000 or 7.5% increase in revenues was primarily
due to a 3.8% increase in comparable store sales and the net additional weeks
of
operations in 2006 of two restaurants opened and one restaurant closed in
2005,
partially offset by one fewer restaurant under management in fiscal 2005.
Our
revenues consisted of restaurant sales of our company-owned restaurants and
management and licensing fees on sales at the managed restaurants. The increase
in same store sales was the result of a 6.7% increase in average customer
check,
which was affected by menu price increases and changes in menu mix. Customer
traffic declined by 2.7% in 2006 compared to 2005, which was affected by
unfavorable trends in the fourth quarter. Our food sales and liquor sales
accounted for 87% and 13% of revenues for 2006 and 88% and 12%, we believe,
due
in part, in 2005 due to the increased emphasis and additional menu items
in the
wine and liquor categories. In 2005, we incurred estimated sales losses of
$204,000, due to hurricane-related business interruption. Adjusting for
estimated hurricane-related sales losses in 2005, same store sales in 2006
would
have increased by 3.3% over the prior year. Typically, comparisons of same
store
sales 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. Sales data for closed stores is included through the end of the
month
prior to closing. Sales data is temporarily excluded if a store is closed
for at
least 30 days. Same store sales are calculated on a comparable calendar period
basis.
27
The
cost
of restaurant sales as a percentage of restaurant sales decreased to 32.2%
for
2006 from 33.1% for 2005. This 0.9% improvement in cost of sales as a percentage
of sales primarily related to higher menu pricing implemented to offset the
effect of the Florida minimum wage increases, an increase in liquor sales
as a
percentage of total sales, and gains derived from better operational controls
over food and beverage costs. 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 as a percentage of restaurant sales decreased to 30.9%
in
2006 as compared to 31.0% in 2005. We benefited from non-recurring reductions
in
benefits and taxes relating to workers compensation insurance reserve
reductions, and corresponding refunds from prior years’ experiences of $107,000
and $344,000 in 2006 and 2005, respectively, of which $96,000 and $330,000
were
allocated to restaurant labor costs. Exclusive of the non-recurring items,
labor
and other related expenses as a percentage of revenues were 31.1% and 31.8%
for
2006 and 2005, respectively. This improvement of 0.7% as a percentage of
sales
primarily related to a reduction in workers’ compensation insurance premiums and
unemployment taxes and a decrease in restaurant labor expense due to improved
operational efficiencies, offset partially by minimum wage increases. Labor
and
other related expenses generally consist of restaurant hourly and management
payroll, benefits, taxes and workers’ compensation insurance.
Other
restaurant operating expenses were $12,948,000, or 27.2% of restaurant sales
for
2006, as compared with $11,375,000, or 25.7% of restaurant sales for 2005.
This
unfavorable variance of 1.5% as a percentage of sales was primarily due to
increased utilities, insurance and occupancy costs, as affected by property
taxes, partially offset by a decrease in advertising costs.
Other
restaurant operating expenses generally consist of advertising, costs associated
with area directors, non-food supplies, repairs and maintenance, rent and
other
occupancy costs, insurance and utilities.
General
and administrative expenses were $3,821,000 or 8.0% of revenues and $4,015,000
or 9.0% of revenues in 2006 and 2005, respectively. The decrease over the
prior
year is primarily related to decreases in manager training expenses, legal
expenses, and recruiting, partially offset by increases in stock option expense.
General and administrative expenses relate to the operations of all Shells
restaurants owned by us and management services that we provide to the managed
restaurants.
Depreciation
and amortization expense was $2,199,000 or 4.6% as a percentage of revenues,
for
2006 and $1,499,000, or 3.4% as a percentage of revenues, for 2005. The 1.2%
increase was due to additional restaurant remodels and new and relocated
restaurants, subsequent to the third quarter of 2005.
There
were no pre-opening expenses in 2006 compared to $758,000, or 1.7% of revenues
in 2005, related to new locations in Clearwater Beach and St. Petersburg
and the
relocation of our Stuart restaurant to a higher volume site. Pre-opening
expenses relate to the costs incurred prior to opening a new restaurant location
primarily for training, advertising, occupancy and legal costs.
28
In
2006,
we recorded a provision in operating expenses for the impairment of assets
totaling $1,242,000 or 2.6% of revenues relating to the write-down of assets
at
one restaurant to their estimated fair value in accordance with Financial
Accounting Standards Board Statement No. 144. The write-down was necessitated
by
the then current period operating losses and the projected deficiency of
cash
flow of the restaurant. There was no provision recorded in operating expenses
in
2005 relating to the impairment of assets.
In
April
2006, we recognized $212,000 of net cash proceeds in a non-recurring transaction
related to the sale of an option embedded in the Ocala restaurant lease
agreement to a new landlord. In January 2005, we entered into an agreement
with
our landlord in St. Pete Beach, Florida, whereby the landlord paid $600,000
to
us for an option to buy-out the lease upon 60 days notice to us. To-date,
no
termination notice has been received from the landlord. We recorded a pre-tax
charge of $211,000 relating to the write-down of impaired assets to their
estimated fair value in accordance with Financial Accounting Standards Board
Statement No. 144 relating to the expected shortened lease period as potentially
affected by the lease buy-out option.
Net
interest expense was $332,000 in 2006 compared to $413,000 in 2005. The $81,000
decrease in net interest expense in 2006 from 2005 was generally due to the
retirement of debt in May 2005 in conjunction with our then private financing
transaction and the retirement of debt in October 2006 in conjunction with
the
completion of a sale-leaseback of a restaurant property, partially offset
by
additions in interest on the line of credit with related parties and the
bank
credit facility.
Other
expense, net, in 2006 was $173,000, compared to other income, net, in 2005
of
$30,000. In 2006, exclusive of non-recurring items, other expense was $111,000
in 2006 and $13,000 in 2005. In 2006, we recognized a loss on disposal of
assets
of $39,000 from the write-down of fixed assets replaced during remodeling
and
$23,000 related to the settlement of lease obligations on a closed location.
In
2005, we recognized a non-recurring gain of $793,000 on a property sale,
partially offset by non-recurring expenses of (i) $472,000 in losses on disposal
of assets primarily related to restaurant remodeling, (ii) $100,000 lease
termination fee for the early termination of a lease in Stuart, Florida,
(iii)
$98,000 in hurricane-related expenses, net of insurance recoveries, and (iv)
$80,000 in financing costs related to a line of credit fee paid to our
investors.
As
a
result of the factors discussed above, the loss from operations for 2006
was
$2,466,000 as compared to a loss from operations of $1,587,000 for 2005.
Exclusive of non-recurring items, our loss from operations was $1,320,000
for
2006 compared to $1,168,000 for 2005. Net loss for 2006 was $3,002,000 compared
to $1,852,000 for 2005. Exclusive of non-recurring items, the net loss in
2006
was $2,017,000 compared to $1,865,000 for 2005.
The
deemed dividend in 2005 associated with warrants and beneficial conversion
feature of our Series B Convertible Preferred Stock of $1,735,000 related
to the
May 2005 private placement financing transaction when we issued Series B
Convertible Preferred Stock and warrants to purchase common stock. This one-time
implied preferred stock dividend was recorded through retained
earnings.
Fiscal
Year 2005 versus Fiscal Year 2004
29
Total
revenues for the fiscal year 2005 were $44,487,000 as compared to $41,564,000
for fiscal year 2004. The $2,923,000 or 7.0% increase in revenues was primarily
due to a 7.0% increase in comparable store sales and the net addition of
one
company-owned restaurant during fiscal year 2005, partially offset by one
fewer
restaurant under management in fiscal 2005. Our revenues consisted of restaurant
sales of our company-owned restaurants and management and licensing fees
on
sales at the managed restaurants. The increase in same store sales was the
result of a 7.5% increase in average customer check, which was affected by
menu
price increases and menu mix. Customer traffic declined by 0.4% in 2005 compared
to 2004, although this trend has improved over each of the four fiscal quarters
of 2005. Our food sales and liquor sales accounted for 88% and 12% of revenues
for each of 2005 and 2004, respectively. In 2005 and 2004, we incurred estimated
sales losses of $204,000 and $930,000, respectively, due to hurricane-related
business interruption. Adjusting for estimated hurricane-related sales losses
in
fiscal 2005 and 2004, same store sales would have increased by 5.5% over
the
prior year.
The
cost
of restaurant sales as a percentage of restaurant sales decreased to 33.1%
for
2005 from 33.9% for 2004. This improvement in cost of sales as a percentage
of
sales primarily related to improvements in operations execution and menu
price
increases implemented to compensate for the Florida minimum wage increase
which
occurred in the second quarter of 2005. Additionally, cost of revenues in
2004
was negatively impacted by elevated commodity prices, primarily chicken and
dairy. Fiscal year 2005 and 2004 cost of sales included a non-recurring
inventory write down of $4,000 and $22,000, respectively.
Labor
and
other related expenses as a percentage of restaurant sales decreased to 31.0%
in
2005 as compared to 31.2% for 2004. We benefited from second quarter
non-recurring reductions in benefits and taxes relating to workers compensation
insurance reserve reductions, and corresponding refunds from prior years’
experience of $344,000 and $161,000 in 2005 and 2004, respectively, of which
$330,000 and $142,000 were allocated to restaurant labor costs. Exclusive
of the
non-recurring items, labor and other related expenses as a percentage of
revenues were 31.8% and 31.6% for 2005 and 2004, respectively. This increase
over prior year primarily was related to our investment in training to elevate
guest service levels, offset in part by the effect of an increase in revenue
base. A second quarter menu price increase generally offset the effect of
the
increase in the Florida minimum wage rate.
Other
restaurant operating expenses were $11,374,000, or 25.7% of restaurant sales
for
2005, as compared with $10,123,000, or 24.5% of restaurant sales for 2004.
The
increase primarily was due to increased advertising costs in the fourth quarter
of 2005, occupancy costs related to our new restaurant and utilities expenses
from significantly higher electricity and gas costs.
General
and administrative expenses were $4,015,000 or 9.0% of revenues and $3,249,000
or 7.8% of revenues in 2005 and 2004, respectively. Non-recurring expense
in
2004 included a one-time charge for severance expense of $39,000. The increase
over the prior year is primarily related to salaries and wages relating to
expansion and growth initiatives, including recruiting and associated salaries
and wages.
Depreciation
and amortization expense was $1,499,000, or 3.4% as a percentage of revenues,
for 2005 and $1,058,000, or 2.5% as a percentage of revenues, for 2004. The
increase over prior year related to increases in depreciation of remodeled
restaurants and new and relocated restaurants.
Pre-opening
expenses were $758,000, or 1.7% of revenues, in 2005. There were no pre-opening
expenses in 2004. Pre-opening expenses relate to the costs incurred prior
to
opening a new restaurant location primarily for training, advertising, occupancy
and legal costs. During 2005, we opened new locations in Clearwater Beach
and
St. Petersburg and relocated our Stuart restaurant to a higher volume site.
30
There
was
no provision recorded in operating expenses in 2005 relating to the impairment
of assets, as compared to a provision for impaired assets of $105,000 or
0.3% of
revenues for 2004. In 2004, we recorded a pre-tax charge relating to the
write-down of impaired assets at one restaurant to their estimated fair value
in
accordance with Financial Accounting Standards Board Statement No. 144. The
2004
write-down was necessitated by the then-current period operating losses and
the
projected negative cash flow of the restaurant.
In
January 2005, we entered into an agreement with our landlord in St. Pete
Beach,
Florida. On February 22, 2005 the landlord paid us $600,000 for an option
to
buy-out the lease. Commencing February 22, 2006, the landlord can provide
notice
of lease termination to Shells. Thereafter, we have 60 days to wind down
business and vacate the premises. To date, the landlord has not exercised
this
option. We recorded a provision for asset impairment of $211,000 due to the
St.
Pete Beach lease buy-out. There was no corresponding provision in prior
years.
Net
interest expense was $413,000 in 2005 compared to $1,154,000 in 2004. In
2004,
we recorded one-time charges of $446,000 in the third quarter, relating to
warrants to purchase 2,000,000 shares of common stock issued in connection
with
the extension of the maturity dates on the then-outstanding $2,000,000
promissory notes; and $265,000 in the fourth quarter, relating to warrants
to
purchase 1,187,500 shares of common stock issued to debenture holders in
conjunction with the then-outstanding $2,375,000 financing transaction.
Exclusive of these non-recurring charges, net interest expense was $443,000
in
2004. The $30,000 decrease in net interest expense in 2005 from 2004, excluding
the non-recurring charges, was generally due to (i) a reduction in interest
expense related to the retirement of the two $1,000,000 promissory notes
in May
2005, and (ii) an increase in interest income of $17,000 due to higher cash
balances in 2005 compared to 2004, partially offset by (iii) an increase
in
interest expense, at 12% per annum, and late payment penalties on the $2,375,000
aggregate principal amount of debentures, which we issued in December 2004
and
repaid on May 25, 2005.
Other
income in 2005 was $30,000, compared to $33,000 in 2004. In 2005, we recognized
a non-recurring gain of $793,000 on a property sale, partially offset by
non-recurring expenses of (i) $472,000 in losses on disposal of assets primarily
related to restaurant remodelings, (ii) $100,000 lease termination fee for
the
early termination of a lease in Stuart, Florida, (iii) $98,000 in
hurricane-related expenses, net of insurance recoveries, and (iv) $80,000
in
financing costs related to a line of credit fee paid to our investors. In
2004,
we recognized non-recurring gains for hurricane-related insurance settlements
of
$597,000 and the disposition of assets of $89,000. In 2004, we also recognized
non-recurring charges for financing costs of $539,000 related to the
then-outstanding $2,375,000 financing transaction and a loss on the disposal
of
assets of $41,000 related to restaurant remodelings. Exclusive of these
non-recurring items, other expense was $13,000 in 2005 compared to $139,000
in
2004.
As
a
result of the factors discussed above, the loss from operations for 2005
was
$1,587,000 compared to income from operations for 2004 of $43,000. Exclusive
of
non-recurring items, our loss from operations was $1,168,000 for 2005 compared
to $57,000 for 2004. Net loss for 2005 was $1,852,000 compared to $1,344,000
for
2004. Exclusive of non-recurring items, the net loss in 2005 was $1,865,000
compared to $733,000 for 2004.
The
deemed dividend associated with warrants and beneficial conversion feature
of
our Series B Convertible Preferred Stock of $1,735,000 related to the May
2005
private placement financing transaction when we issued Series B Convertible
Preferred Stock and warrants to purchase common stock. This one-time implied
preferred stock dividend was recorded through retained earnings.
31
In
2006,
we again incurred a significant loss from operations mostly due to external
cost
pressures caused by significant increases in utility rates, insurance and
property taxes. In addition, depreciation has increased significantly compared
to 2005 as a result of investment spending relating to restaurant remodeling
and
the opening of new restaurants, which mostly occurred in 2005 and through
the
first quarter of 2006. We now have the new renovated look in all of the 21
restaurants which we fully own and operate. To date, our one joint venture
and
three licensed restaurants have not been remodeled.
Capital
expenditures in 2006 totaled $1,774,000, of which $1,029,000 related to
restaurant remodels. In 2006, we received proceeds from the sale of assets
totaling $1,495,000, which mostly related to the sale-leaseback of the New
Smyrna Beach property in the third quarter of 2006 and the sale of a lease
option on the Ocala property in the second quarter of 2006.
We
recorded a provision of $1,242,000 for an impairment of assets in the fourth
quarter of 2006. In 2005, we incurred $758,000 in pre-opening expenses relating
to new restaurants. Although we experienced a 3.0% same store sales decline
in
the fourth quarter of 2006, we attained an annual 2006 same store sales increase
of 3.8%.
In
March
2005, our investors provided us a $1,600,000 revolving line of credit, which
was
originally due to mature on the earlier of March 31, 2006 or the closing
of a
financing providing us not less than $1,600,000 of net proceeds. The investors
received a fee of $80,000 for extending the credit line. Amounts drawn under
the
line of credit bear interest at the rate of 15% per annum, payable 8% monthly
in
arrears and 7% deferred until the maturity date. Upon completion of the
financing in May 2005 described below, the maturity date was extended to
May 23,
2007. In October 2005, we utilized $800,000 of the line of credit to fund
the
acquisition and opening costs of two new restaurant locations. In June 2006,
we
utilized an additional $640,000 of the revolving line of credit to fund
remaining remodeling costs and working capital requirements. It is not expected
that we will be able to borrow the remaining $160,000 under the credit line.
On
March 30, 2007, the maturity date was further extended to May 23, 2008, and
we
paid an extension fee of $101,000 with shares of our common stock.
In
December 2005, we secured a six-month, $500,000 bank credit facility for
which
the full amount was immediately drawn on to fund remodeling. In April 2006,
we
recognized $212,000 in net cash proceeds related to the sale of an option
embedded in the lease agreement of our restaurant property in Ocala, Florida.
In
October 2006, we completed a sale and simultaneous leaseback of our restaurant
property in New Smyrna Beach, Florida in which we received net cash proceeds
of
$885,000. We also simultaneously retired the $500,000 bank credit facility,
which had at that time been extended in anticipation of the New Smyrna
transaction being completed. We anticipate refinancing our Melbourne, Florida
joint venture restaurant property to fund its remodel and provide a source
of
additional working capital.
The
following table presents a summary of our cash flows for the last three fiscal
years (in thousands):
|
2006
|
2005
|
2004
|
||||||||
|
Net
cash provided by (used in) operating activities
|
$
|
38
|
$
|
1,477
|
$
|
162
|
||||
|
Net
cash used in investing activities
|
(278
|
)
|
(5,518
|
)
|
(1,292
|
)
|
||||
|
Net
cash provided by (used in) financing activities
|
(387
|
)
|
3,052
|
2,756
|
||||||
|
Net
(decrease) increase in cash
|
$
|
(627
|
)
|
$
|
(989
|
)
|
$
|
1,626
|
||
32
As
of
December 31, 2006, our current liabilities of $6,141,000 exceeded our current
assets of $1,695,000, resulting in a working capital deficiency of $4,446,000.
In comparison, as of January 1, 2006, our working capital deficiency was
$4,842,000. Our operating leverage marginally improved, primarily due to
a
decreases in accounts payable of $734,000, and accrued expenses of $132,000,
and
the current portion of long term debt of $154,000, partially offset by a
decrease in cash of $627,000 from the prior year. We may encounter operating
pressures from declining sales, increasing food, labor or other operating
costs
or additional restaurant restoration or disposition costs. Historically,
we have
generally operated with negative working capital as a result of investing
current assets into non-current property and equipment, as well as the turnover
of restaurant inventory relative to more favorable vendor terms in accounts
payable.
Our
year-end cash position decreased by $627,000, from $1,361,000 as of January
1,
2006 to $734,000 as of December 31, 2006. The decrease in cash related to
cash
used in investing activities of $278,000, representing purchases of property
and
equipment of $1,774,000, partially offset by proceeds from the sale of assets
of
$1,495,000. Cash used in financing activities of $387,000 reflected $2,107,000
in debt repayment and $193,000 in minority partner distributions, partially
offset by proceeds from the issuance of debt of $1,887,000 and proceeds from
the
issuance of stock of $27,000. Net cash provided by operating activities was
$38,000 compared to $1,477,000 in 2005, generally reflecting decreases in
accounts payable and accrued expenses.
In
connection with the $2,000,000 financing dated January 31, 2002, we issued
to
each of Shells Investment Partners (subsequently Trinad Capital, LP and Bruce
Galloway, IRA R/O) and Banyon (subsequently Frederick R. Adler) (i) a $1,000,000
secured promissory note due January 31, 2005 (extended to January 31, 2007)
which accrued interest at 15% per annum, of which 8% was payable monthly
in
arrears and 7% was deferred and paid when the principal was paid in full,
and
(ii) a warrant to purchase 4,454,015 shares of our common stock, at an exercise
price of $0.16 per share. These warrants to purchase an aggregate of 8,908,030
shares of our common stock were exercised from November 2004 through January
31,
2005, resulting in net proceeds to us of $600,000 in 2004 and $754,000 in
2005.
On
August
4, 2004, the $2,000,000 aggregate principal amount of secured promissory
notes
set to mature on January 31, 2005 were extended to be due on January 31,
2007,
under the same terms as the original notes. As an inducement to extend the
maturity date of the notes, warrants to purchase 2,000,000 shares of common
stock at an exercise price of $0.50 per share were issued to the note holders
in
proportion to the value of their respective notes. In March and May of 2005,
the
warrants were exercised and the $1,000,000 in aggregate proceeds was used
to pay
down the principal balance of the promissory notes. On May 23, 2005, the
remaining $1,000,000 principal amount of debt plus $281,666 of deferred
interest, were converted into our Series B Convertible Preferred Stock. Deferred
interest of $7,574 was paid in cash to one investor.
On
December 7, 2004, we completed a financing to include $2,375,000 principal
amount of debentures and warrants to purchase 1,187,500 shares of our common
stock. We received net proceeds of $2,010,000 from the financing. We paid
interest at 12% and late payment penalties through May 23, 2005 when the
debentures were retired by repayment in cash or conversion into our Series
B
Preferred Stock. Repayments in cash consisted of principal of $2,055,000,
plus
interest and penalties of $177,000. Debentures converted into our Series
B
Preferred Stock consisted of $320,000 principal plus interest and penalties
of
$28,000. The warrants are exercisable until December 7, 2007 at an exercise
price of $0.60 per share. The exercise price of the warrants and the number
of
underlying shares of common stock is subject to adjustment under certain
circumstances. As compensation for their services as placement agent in the
debenture offering and future consulting services to us, the placement agent
received cash fees and warrants with terms substantially identical to those
received by the investors.
33
In
May
2005, we completed an aggregate financing of $6.9 million through a private
placement of securities to accredited investors. Under the terms of the
transaction, we issued 461,954 units, with each unit consisting of (i) one
share
of Series B Convertible Preferred Stock, initially convertible into 20 shares
of
common stock, and (ii) a warrant to purchase 10 shares of common stock at
an
exercise price of $1.30 per share. The purchase price was $15.00 per unit.
We
realized net proceeds of approximately $5.8 million from this financing.
Of the
total proceeds from securities issued, $1,282,000 represented cancellation
or
conversion of related party debt and $348,000 represented the conversion
of
existing convertible debentures, all of which converted into the securities
issued in the transaction. We used a portion of the net proceeds from the
May
2005 private placement to retire the remaining $2,232,000 of loans and accrued
interest from debenture holders from the December 2004 financing, as well
as
$8,000 of related party accrued interest. Additionally, in conjunction with
the
private placement, $500,000 principal amount of related party debt was used
to
exercise warrants to purchase 1,000,000 shares of our common stock.
In
September 2005, we completed a sale of our restaurant in Winter Haven, Florida
at a sale price of $1,667,000. The net proceeds of $981,000 from this sale
were
used to fund our restaurant remodels, as well as new and relocated restaurants.
In addition, during the first quarter of 2005, we received $600,000 relating
to
a landlord option to buy out a restaurant.
In
October 2002, we refinanced through Colonial Bank two of our restaurant
locations, Melbourne and Winter Haven, with notes of $635,000 and $667,000,
respectively. In September 2005, we completed a sale and leaseback transaction
of the Winter Haven location, providing net cash proceeds of $981,000, after
repayment of the bank note mortgage and a second secured note. The Melbourne
loan, which bears interest at the bank's base rate, is for a term of five
years
with required monthly principal payments based on a 15 year amortization
schedule, and a balloon payment in September 2007. The principal balance
owed on
this note as of December 31, 2006 was $438,000. We anticipate the refinancing
of
this note to fund this restaurant’s remodel and to provide additional working
capital.
We
believe based on our current outlook, that our cash balance along with our
operating forecast, coupled with the extension of the maturity date for the
revolving line of credit and a portion of the proceeds from the contemplated
refinancing of the Melbourne property, will be sufficient to satisfy our
contemplated cash requirements through the end of 2007. There are no assurances
that the implementation of our strategies will result in sales and customer
traffic gains, which are required to meet our contemplated cash flow
requirements. It is also uncertain whether future financing options, which
may
be needed to execute our strategies, will be available, on terms that would
be
acceptable, or at all.
34
Contractual
Obligations
As
of
December 31, 2006, our contractual obligations were:
|
Payments
due by period
|
||||||||||||||||
|
Total
|
<
1 yr
|
1
-
3 yrs
|
4
-
5 yrs
|
>
5yrs
|
||||||||||||
|
Long-term
debt (1)
|
$
|
795,373
|
$
|
623,526
|
$
|
171,847
|
$
|
-
|
$
|
-
|
||||||
|
Capital
lease obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Operating
lease obligations (2)
|
25,302,067
|
2,683,025
|
7,552,906
|
6,073,797
|
8,992,339
|
|||||||||||
|
Purchase
obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Other
debt obligations reflected on the company's balance sheet under
GAAP
(3)
|
1,527,453
|
1,527,453
|
-
|
-
|
-
|
|||||||||||
|
Total
|
$
|
27,624,893
|
$
|
4,834,004
|
$
|
7,724,753
|
$
|
6,073,797
|
$
|
8,992,339
|
||||||
|
(1)
|
Consists
of long-term debt as reported in Note 7 of the Notes to Consolidated
Financial Statements.
|
|
|
(2)
|
Consists
of operating leases primarily for real estate.
|
|
|
(3)
|
Consists
of related party debt due in 2007.
|
Quarterly
Fluctuation of Financial Results
The
restaurant industry in general is seasonal, depending on restaurant location
and
the type of food served. We have experienced fluctuations in our
quarter-to-quarter operating results due, in large measure, to our 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., the health of Florida's economy
and
the effect of world events in general, and the tourism industry in particular.
Our 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. Many of our restaurant locations are
in
coastal cities, where sales are significantly dependent on tourism and its
seasonality patterns.
In
addition, quarterly results have been substantially affected by the timing
of
restaurant closings or openings or remodelings. Because of the seasonality
of
our business and the impact of restaurant closings, openings or remodelings,
results for any quarter are not generally indicative of the results that
may be
achieved for a full fiscal year on an annualized basis and cannot be used
to
indicate financial performance for the entire year.
Impact
of Inflation and Price Changes
We
have
not operated in a highly inflationary period, and management does not believe
that inflation has had a material affect on sales or expenses. As expenses
increase, such as annual increases in the minimum wage rate in Florida and
other
expense categories, including recent significant increases in utilities,
occupancy costs, and insurance, we expect to recover increased costs by
increasing prices, to the extent permitted by competition, or by operating
our
business more efficiently and modifying our menu and promoting other less
cost
sensitive products. Many food products purchased by us are affected by commodity
pricing and are, therefore, subject to unpredictable price volatility. Extreme
changes in commodity prices and/or long-term changes, including operating
expenses, could affect us adversely. From time-to-time, competitive
circumstances could limit menu price flexibility, and in those cases margins
would be negatively impacted by increased commodity prices.
35
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
are
exposed to market risk from changes in interest rates on debt and changes
in
commodity prices. Our exposure to interest rate risk relates to $438,000
in
outstanding debt at December 31, 2006 owed to our bank based on a variable
rate.
Borrowings under the loan agreement bears interest at the rate equal to the
applicable bank’s base rate.
36
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO
CONSOLIDATED FINANCIAL STATEMENTS
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets
|
F-2
|
|
Consolidated
Statements of Operations
|
F-3
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-4
|
|
Consolidated
Statements of Cash Flows
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
37
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
Shells
Seafood Restaurants, Inc. and Subsidiaries
Tampa,
Florida
We
have
audited the accompanying consolidated balance sheets of Shells Seafood
Restaurants, Inc. and Subsidiaries (the "company") as of December 31, 2006
and
January 1, 2006 and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal years ended December 31,
2006
(52 weeks), January 1, 2006 (52 weeks) and January 2, 2005 (53 weeks). These
consolidated financial statements are the responsibility of 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of the company as of December
31, 2006 and January 1, 2006 and the results of its operations and cash flows
for the fiscal years ended December 31, 2006 (52 weeks), January 1, 2006
(52
weeks) and January 2, 2005 (53 weeks) in conformity with accounting principles
generally accepted in the United States of America.
Kirkland,
Russ, Murphy & Tapp P.A.
Clearwater,
Florida
March
30,
2007
F-1
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
December
31,
|
January
1,
|
||||||
|
2006
|
2006
|
||||||
|
ASSETS
|
|||||||
|
Cash
|
$
|
734,122
|
$
|
1,360,740
|
|||
|
Inventories
|
543,183
|
498,975
|
|||||
|
Other
current assets
|
383,598
|
365,227
|
|||||
|
Receivables
from related parties, net
|
34,305
|
114,485
|
|||||
|
Total
current assets
|
1,695,208
|
2,339,427
|
|||||
|
Property
and equipment, net
|
9,170,821
|
11,733,861
|
|||||
|
Goodwill
|
2,474,407
|
2,474,407
|
|||||
|
Other
assets
|
481,641
|
547,395
|
|||||
|
Prepaid
rent
|
14,629
|
343,242
|
|||||
|
TOTAL
ASSETS
|
$
|
13,836,706
|
$
|
17,438,332
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Accounts
payable
|
$
|
3,248,031
|
$
|
3,982,153
|
|||
|
Accrued
expenses
|
2,043,678
|
2,175,380
|
|||||
|
Sales
tax payable
|
225,639
|
245,673
|
|||||
|
Current
portion of long-term debt
|
623,526
|
777,823
|
|||||
|
Total
current liabilities
|
6,140,874
|
7,181,029
|
|||||
|
Notes
and deferred interest payable to related parties
|
1,527,453
|
808,702
|
|||||
|
Long-term
debt, less current portion
|
171,847
|
1,001,081
|
|||||
|
Deferred
rent
|
1,135,873
|
784,976
|
|||||
|
Total
liabilities
|
8,976,047
|
9,775,788
|
|||||
|
Minority
partner interest
|
521,876
|
472,131
|
|||||
|
STOCKHOLDERS’
EQUITY:
|
|||||||
|
Preferred
stock, $0.01 par value; authorized 2,000,000 shares;
|
|||||||
|
Series
A - 22,694 and 23,731 shares issued and outstanding
|
227
|
237
|
|||||
|
Series
B - 373,849 and 443,850 shares issued and outstanding
|
3,738
|
4,439
|
|||||
|
Common
stock, $0.01 par value; authorized 58,000,000 shares;
|
|||||||
|
17,586,988
and 16,134,817 shares issued and outstanding, respectively
|
175,870
|
161,348
|
|||||
|
Additional
paid-in-capital
|
25,259,714
|
25,122,312
|
|||||
|
Accumulated
deficit
|
(21,100,766
|
)
|
(18,097,923
|
)
|
|||
|
Total
stockholders’ equity
|
4,338,783
|
7,190,413
|
|||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
13,836,706
|
$
|
17,438,332
|
|||
See
notes to consolidated financial statements and report of independent registered
public accounting firm.
F-2
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Fiscal
Years Ended
|
||||||||||
|
December
31,
|
January
1,
|
January
2,
|
||||||||
|
2006
|
2006
|
2005
|
||||||||
|
REVENUES
|
$
|
47,829,608
|
$
|
44,487,348
|
$
|
41,564,138
|
||||
|
RESTAURANT
OPERATING COSTS:
|
||||||||||
|
Food
and beverage
|
15,363,255
|
14,670,554
|
14,050,690
|
|||||||
|
Labor
|
14,722,437
|
13,756,895
|
12,935,204
|
|||||||
|
Other
|
12,948,385
|
11,374,609
|
10,123,584
|
|||||||
|
Depreciation
and amortization
|
2,199,499
|
1,498,656
|
1,057,841
|
|||||||
|
Pre-opening
expenses
|
-
|
758,168
|
-
|
|||||||
|
Provision
for impairment of assets
|
1,242,000
|
-
|
105,000
|
|||||||
|
Total
restaurant operating costs
|
46,475,576
|
42,058,882
|
38,272,319
|
|||||||
|
RESTAURANT
OPERATING INCOME
|
1,354,032
|
2,428,466
|
3,291,819
|
|||||||
|
General
and administrative expenses
|
3,821,155
|
4,014,675
|
3,248,657
|
|||||||
|
(LOSS)
INCOME FROM OPERATIONS
|
(2,467,123
|
)
|
(1,586,209
|
)
|
43,162
|
|||||
|
OTHER
(EXPENSE) INCOME:
|
||||||||||
|
Lease
buy-out
|
212,198
|
600,000
|
-
|
|||||||
|
Provision
for impairment of assets due to lease buy-out
|
-
|
(211,000
|
)
|
-
|
||||||
|
Interest
expense, net
|
(331,814
|
)
|
(413,012
|
)
|
(1,153,340
|
)
|
||||
|
Other
(expense) income, net
|
(173,114
|
)
|
29,587
|
32,641
|
||||||
|
Total
other (expense) income, net
|
(292,730
|
)
|
5,575
|
(1,120,699
|
)
|
|||||
|
LOSS
BEFORE ELIMINATION OF MINORITY
|
||||||||||
|
PARTNER
INTEREST
|
(2,759,853
|
)
|
(1,580,634
|
)
|
(1,077,537
|
)
|
||||
|
ELIMINATION
OF MINORITY PARTNER INTEREST
|
(242,990
|
)
|
(271,112
|
)
|
(265,953
|
)
|
||||
|
NET
LOSS BEFORE PREFERRED STOCK DIVIDEND
|
(3,002,843
|
)
|
(1,851,746
|
)
|
(1,343,490
|
)
|
||||
|
Deemed
dividend associated with warrants and
|
||||||||||
|
beneficial
conversion feature of preferred stock
|
||||||||||
|
(See
Note 12, Series B Convertible Preferred Stock)
|
-
|
(1,735,169
|
)
|
-
|
||||||
|
NET
LOSS APPLICABLE TO COMMON STOCK
|
$
|
(3,002,843
|
)
|
$
|
(3,586,915
|
)
|
$
|
(1,343,490
|
)
|
|
|
NET
LOSS PER SHARE OF COMMON STOCK:
|
||||||||||
|
Basic
and diluted
|
$
|
(0.18
|
)
|
$
|
(0.24
|
)
|
$
|
(0.26
|
)
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OF
|
||||||||||
|
COMMON
STOCK OUTSTANDING:
|
||||||||||
|
Basic
and diluted
|
16,665,209
|
14,796,278
|
5,261,981
|
|||||||
See
notes to consolidated financial statements and report of independent registered
public accounting firm
F-3
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
PREFERRED
STOCK
|
ADDITIONAL
|
|||||||||||||||||||||||||||
|
Series
A
|
Series
B
|
COMMON
STOCK
|
PAID-IN
|
ACCUMULATED
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
CAPITAL
|
DEFICIT
|
TOTAL
|
||||||||||||||||||||
|
Balance
at December 28, 2003
|
63,548
|
$
|
635
|
-
|
-
|
4,631,375
|
$
|
46,314
|
$
|
14,303,151
|
$
|
(13,167,518
|
)
|
$
|
1,182,582
|
|||||||||||||
|
Net
loss
|
(1,343,490
|
)
|
(1,343,490
|
)
|
||||||||||||||||||||||||
|
Preferred
stock converted
|
(28,273
|
)
|
(282
|
)
|
141,365
|
1,413
|
(1,131
|
)
|
-
|
|||||||||||||||||||
|
Warrants
exercised
|
3,750,000
|
37,500
|
562,500
|
600,000
|
||||||||||||||||||||||||
|
Warrant
valuation reserve
|
||||||||||||||||||||||||||||
|
(See
Note 6)
|
44,613
|
44,613
|
||||||||||||||||||||||||||
|
Stock
options exercised
|
42,666
|
427
|
17,494
|
17,921
|
||||||||||||||||||||||||
|
Balance
at January 2, 2005
|
35,275
|
353
|
-
|
-
|
8,565,406
|
85,654
|
14,926,627
|
(14,511,008
|
)
|
501,626
|
||||||||||||||||||
|
Net
loss before preferred stock dividend
|
(1,851,746
|
)
|
(1,851,746
|
)
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Preferred
stock issued in private
placement financing, net of issuance costs of $1,137,672 |
461,954
|
4,620
|
5,787,018
|
5,791,638
|
||||||||||||||||||||||||
|
Issuance
costs, private placement financing
|
(123,872
|
)
|
(123,872
|
)
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Series
B Preferred Stock warrant
issued to placement agent for private placement financing |
123,872
|
123,872
|
||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Deemed
dividend for warrants and
beneficial conversion feature of preferred stock (See Note 12) |
1,735,169
|
(1,735,169
|
)
|
-
|
||||||||||||||||||||||||
|
Preferred
stock converted
|
(11,544
|
)
|
(116
|
) |
(18,104
|
)
|
(181
|
)
|
419,800
|
4,198
|
(3,901
|
)
|
-
|
|||||||||||||||
|
Warrants
exercised
|
7,123,011
|
71,230
|
2,226,153
|
2,297,383
|
||||||||||||||||||||||||
|
Warrant
valuation reserve
|
440,000
|
440,000
|
||||||||||||||||||||||||||
|
Stock
options exercised
|
26,600
|
266
|
11,246
|
11,512
|
||||||||||||||||||||||||
|
Balance
at January 1, 2006
|
23,731
|
237
|
443,850
|
4,439
|
16,134,817
|
161,348
|
25,122,312
|
(18,097,923
|
)
|
7,190,413
|
||||||||||||||||||
|
Net
loss
|
(3,002,843
|
)
|
(3,002,843
|
)
|
||||||||||||||||||||||||
|
Stock
option expense under SFAS 123R
|
124,677
|
124,677
|
||||||||||||||||||||||||||
|
Preferred
stock converted
|
(1,037
|
)
|
(10
|
) |
(70,001
|
)
|
(701
|
)
|
1,405,205
|
14,052
|
(13,341
|
)
|
-
|
|||||||||||||||
|
Warrants
exercised
|
37,500
|
|
375
|
|
22,125
|
22,500
|
||||||||||||||||||||||
|
Stock
options exercised
|
9,466
|
95
|
3,941
|
4,036
|
||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
22,694
|
$
|
227
|
373,849
|
$
|
3,738
|
17,586,988
|
$
|
175,870
|
$
|
25,259,714
|
$
|
(21,100,766
|
)
|
$
|
4,338,783
|
||||||||||||
See
notes to consolidated financial statements and report of independent registered
public accounting firm.
F-4
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Fiscal
Years Ended
|
|||||||||||||
|
December
31,
|
January
1,
|
January
2,
|
|||||||||||
|
OPERATING
ACTIVITIES:
|
|
2006
|
2006
|
2005
|
|||||||||
|
Net
loss
|
$
|
(3,002,843
|
)
|
$
|
(1,851,746
|
)
|
$
|
(1,343,490
|
)
|
||||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|||||||||||||
|
Depreciation
and amortization
|
2,199,499
|
1,498,656
|
1,057,841
|
||||||||||
|
Stock
option expense
|
124,677
|
-
|
-
|
||||||||||
|
Interest
expense on warrants issued
|
-
|
-
|
711,000
|
||||||||||
|
Financing
costs on warrants issued
|
-
|
-
|
175,000
|
||||||||||
|
Lease
buy-out option
|
(212,198
|
)
|
(600,000
|
)
|
-
|
||||||||
|
Provision
for impairment of assets
|
1,242,000
|
211,000
|
201,000
|
||||||||||
|
Gain
from hurricane-related insurance recoveries
|
-
|
-
|
(499,795
|
)
|
|||||||||
|
Gain
on sale of restaurant
|
-
|
(792,969
|
)
|
-
|
|||||||||
|
Loss
(gain) on disposal of fixed assets
|
10,359
|
472,318
|
(48,204
|
)
|
|||||||||
|
Loss
on sale of assets applied against reserves
|
-
|
-
|
63,554
|
||||||||||
|
Minority
partner interest
|
242,990
|
271,112
|
265,962
|
||||||||||
|
Changes
in operating assets and liabilities:
|
|||||||||||||
|
Change
in current assets and liabilities
|
(860,524
|
)
|
2,767,808
|
(483,201
|
)
|
||||||||
|
Changes
in other assets and liabilities:
|
|||||||||||||
|
Decrease
(increase) in prepaid rent
|
28,161
|
(306,286
|
)
|
15,621
|
|||||||||
|
Decrease
(increase) in other assets
|
55,710
|
(16,869
|
)
|
5,070
|
|||||||||
|
Increase
(decrease) in accrued interest to related parties
|
78,751
|
(230,239
|
)
|
136,840
|
|||||||||
|
Increase
(decrease) in deferred rent
|
131,913
|
54,964
|
(95,356
|
)
|
|||||||||
|
Total
adjustments
|
3,041,338
|
3,329,495
|
1,505,332
|
||||||||||
|
Net
cash provided by operating activities
|
38,495
|
1,477,749
|
161,842
|
||||||||||
|
INVESTING
ACTIVITIES:
|
|||||||||||||
|
Proceeds
from sale of assets
|
1,494,987
|
2,243,859
|
92,776
|
||||||||||
|
Proceeds
from hurricane-related insurance recoveries
|
-
|
-
|
139,935
|
||||||||||
|
Purchase
of property and equipment
|
(1,773,547
|
)
|
(7,762,226
|
)
|
(1,524,515
|
)
|
|||||||
|
Net
cash used in investing activities
|
(278,560
|
)
|
(5,518,367
|
)
|
(1,291,804
|
)
|
|||||||
|
FINANCING
ACTIVITIES:
|
|||||||||||||
|
Proceeds
from the issuance of stock
|
26,536
|
4,963,916
|
617,920
|
||||||||||
|
Proceeds
from debt financing
|
1,886,742
|
1,951,750
|
2,832,298
|
||||||||||
|
Repayment
of debt
|
(2,106,586
|
)
|
(3,623,227
|
)
|
(404,496
|
)
|
|||||||
|
Minority
partner distributions
|
(193,245
|
)
|
(240,600
|
)
|
(290,180
|
)
|
|||||||
|
Net
cash (used in) provided by financing activities
|
(386,553
|
)
|
3,051,839
|
2,755,542
|
|||||||||
|
Net
(decrease) increase in cash
|
(626,618
|
)
|
(988,779
|
)
|
1,625,580
|
||||||||
|
CASH
AT BEGINNING OF PERIOD
|
1,360,740
|
2,349,519
|
723,939
|
||||||||||
|
CASH
AT END OF PERIOD
|
$
|
734,122
|
$
|
1,360,740
|
$
|
2,349,519
|
|||||||
See
notes to consolidated financial statements and report of independent registered
public accounting firm.
F-5
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(continued)
|
Fiscal
Years Ended
|
|||||||||||||
|
December
31,
|
January
1,
|
January
2,
|
|||||||||||
|
2006
|
2006
|
2005
|
|||||||||||
|
Cash
(outflows) flows from changes in current assets and
liabilities:
|
|||||||||||||
|
Inventories
|
$
|
(44,208
|
)
|
$
|
(102,152
|
)
|
$
|
(14,274
|
)
|
||||
|
Receivables
from related parties
|
80,180
|
(5,008
|
)
|
670
|
|||||||||
|
Other
current assets
|
(18,371
|
)
|
131,951
|
128,573
|
|||||||||
|
Accounts
payable
|
(734,122
|
)
|
1,670,569
|
(79,101
|
)
|
||||||||
|
Accrued
expenses
|
(123,969
|
)
|
1,029,441
|
(553,350
|
)
|
||||||||
|
Sales
tax payable
|
(20,034
|
)
|
43,007
|
34,281
|
|||||||||
|
Change
in current assets and liabilities
|
$
|
(860,524
|
)
|
$
|
2,767,808
|
$
|
(483,201
|
)
|
|||||
|
Supplemental
disclosure of cash flow information:
|
|||||||||||||
|
Cash
paid for interest
|
$
|
258,165
|
$
|
399,916
|
$
|
309,006
|
|||||||
|
Hurricane-related
insurance recoveries
|
$
|
49,336
|
$
|
375,283
|
$
|
-
|
|||||||
|
Financing
costs, line of credit
|
$
|
-
|
$
|
80,000
|
$
|
-
|
|||||||
|
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
$
|
634
|
|||||||
|
Cash
received from the 2002 sales of assets
|
$
|
-
|
$
|
-
|
$
|
100,000
|
|||||||
Non-cash
operating, investing and financing activities:
| · |
During
October 2006, gain on the sale-leaseback of our New Smyrna Beach
location
of $95,297 was deferred and will be amortized over the 20-year
lease life
of the property.
|
| · |
A
capitalized lease obligation of $123,687 was reclassified to deferred
rent
in conjunction with the Ocala lease buy-out in April 2006 and will
be
amortized over the 20-year lease life of the
property.
|
| · |
Accrued
expense of $7,733 was reduced with a corresponding reduction in
operating
expense during 2006.
|
| · |
Deferred
rent of $119,275 was reduced to offset the loss on disposal of
two
restaurants in November 2005.
|
| · |
Warrant
valuation reserves of $440,000 were applied to Paid in Capital
in
September 2005 upon the registration of the underlying common stock
with
the Securities and Exchange
Commission.
|
| · |
Warrant
valuation reserves of $284,364 and $223,000 relating to the exercise
of
warrants were applied to Paid in Capital in the first and second
quarters
of 2005, respectively.
|
| · |
Principal
on related party debt of $500,000 ($1,000,000 aggregate) was used
by the
noteholders to acquire common stock in conjunction with the exercise
of
warrants in each of March and May
2005.
|
| · |
Principal
and accrued interest of $347,588 was used by the debenture holders
to
acquire Series B Preferred Stock in May
2005.
|
| · |
Principal
and accrued interest on related party debt of $1,281,666 was used
by the
noteholders to acquire Series B Preferred Stock in May
2005.
|
| · |
Deemed
dividend of $1,735,169 for warrants and the beneficial conversion
feature
of Series B Preferred Stock was recorded relative to the May 2005
private
financing transaction.
|
| · |
An
issuance cost of $123,872 was recorded for a warrant issued
to the
placement agent in the May 2005 private financing
transaction.
|
See
notes to consolidated financial statements and report of independent registered
public accounting firm.
F-6
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(continued)
Non-cash
operating, investing and financing activities (continued):
| · |
Accounts
receivable of $359,860, as of January 2, 2005, for hurricane-related
insurance recoveries was applied to reduce the $499,795 gain from
hurricane-related insurance recoveries, resulting in $139,935 proceeds
from hurricane-related insurance
recoveries.
|
| · |
Accrued
interest to related parties of $165,315 was refinanced through
a second
mortgage in June 2004 and classified as long-term
debt.
|
| · |
Provision
for impairment of assets of $201,000 consists of a $96,000 charge,
which
was applied to accrued expenses in June 2004, and $105,000 which
was
expensed in fiscal year 2004.
|
| · |
Loss
on sale of assets applied against reserves totaled $63,554 consisting
of
(i) $24,776, which reduced net book value of property and equipment
by
$19,062 and deferred rent by $5,714 in June 2004; and (ii) $38,778,
which
reduced net book value of property and equipment in December
2004.
|
| · |
Asset
impairment charges of $158,335 were applied to reduce the basis
of fixed
assets damaged by a fire in September
2004.
|
| · |
During
2004, we relieved $383,695 of the FAS 144 allowance for impaired
assets
relating to disposed restaurants.
|
| · |
Deferred
rent of $114,602 was applied to gain on sale of restaurant in April
2004.
|
| · |
Asset
impairment charges of $110,000 were applied against gain on sale
of
restaurant in April 2004.
|
| · |
Warrant
valuation reserves of $44,613 relating to warrants exercised in
November
2004 was applied to paid in
capital.
|
See
notes to consolidated financial statements and report of independent registered
public accounting firm.
F-7
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial
Statements
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
- At
December 31, 2006, Shells Seafood Restaurants, Inc. and subsidiaries managed
and
operated 25 full-service, casual dining seafood restaurants in Florida under
the
name "Shells".
Shells
was incorporated on April 29, 1993 and began operations in August 1993 when
it
purchased from Shells, Inc. the service mark "Shells”, as well as all other
intangible and tangible assets necessary to operate a restaurant chain under
the
name "Shells". Shells subsequently acquired Shells, Inc. effective December
29,
1994.
Principles
of Consolidation
-- The
consolidated financial statements include the accounts and operations of
Shells
and its wholly owned subsidiaries as well as a joint venture partnership
in
which Shells is a general partner owning a 51% equity interest. All material
intercompany balances and transactions between the entities have been eliminated
in consolidation.
Fiscal
Year
-- Our
fiscal year is the 52 or 53 weeks ending the Sunday nearest to December 31.
Our
fiscal year ended December 31, 2006 (“fiscal year 2006”) was 52 weeks, January
1, 2006 (“fiscal year 2005”) was 52 weeks and fiscal year ended January 2, 2005
(“fiscal year 2004”) was 53 weeks.
Use
of Estimates
-- The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 consolidated 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. We utilize a third party to hold and distribute
certain
products. Such inventory is not recorded by us, nor is the risk of ownership
transferred to us until its individual restaurants receive product.
Property
and Equipment
--
Property and equipment are stated at cost less the provision for impairment
and
are depreciated using the straight-line method over the estimated useful
lives
of the assets. Buildings are depreciated over their estimated useful life
of 30
years. Leasehold improvements are depreciated over the shorter of the lease
term
or the estimated useful life and range from two to 20 years. Useful lives
for
equipment, furniture and fixtures, and signs range from three to 10
years.
F-8
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Leases
--
We recognize
rent expense for our leased restaurants on a straight-line basis over the
expected lease term, including cancelable option periods as described below.
Within the provisions of certain of our leases, there are rent holidays and/or
escalations in payments over the base lease term, as well as renewal periods.
The effects of the holidays and escalations have been reflected in rent expense
on a straight-line basis over the expected lease term, which includes cancelable
option periods when it is deemed to be reasonably assured that we would incur
an
economic penalty for not exercising the option. The lease term commences
on the
date when we have the right to control the use of the leased property, which
is
typically before rent payments are due under the terms of the lease. Many
of our
leases have renewal periods totaling five to 20 years, exercisable at our
option
and require payment of property taxes, insurance and maintenance costs in
addition to the rent payments. The consolidated financial statements reflect
the
same lease term for amortizing leasehold improvements as we use to determine
capital versus operating lease classifications and in calculating straight-line
rent expense for each restaurant. Percentage rent expense is generally based
upon sales levels and is accrued at the point in time we determine that it
is
probable that such sales levels will be achieved. Our judgments related to
the
probable term for each restaurant affect the classification and accounting
for
leases as capital versus operating, the rent holidays and escalation in payments
that are included in the calculation of straight-line rent and the term over
which leasehold improvements for each restaurant facility are amortized.
These
judgments may produce materially different amounts of depreciation, amortization
and rent expense than would be reported if different assumed lease terms
were
used.
Goodwill
-- The
excess of the cost over the fair value of the net assets resulting from the
acquisition of Shells, Inc. was recognized as goodwill. During 2002, we adopted
Financial Accounting Standards Board (“FASB”) Statement No. 142, whereby
goodwill is evaluated periodically for possible impairment and written down
to
fair value, if impaired.
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 the assets estimated
future undiscounted cash flows. See Note 16 for additional
information.
Income
Taxes
-- We
use 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. See Note
13
for additional information.
Stock-Based
Compensation and Other Equity Instruments --
Prior
to fiscal year 2006, we followed Accounting Principles Board (“APB”) Opinion No.
25, “Accounting for Stock Issued to Employees,” and related interpretations, in
accounting for our stock-based compensation plans, rather than the alternative
fair value accounting method provided for under SFAS No. 123, “Accounting for
Stock-Based Compensation,” as amended. Accordingly, prior to 2006, we did not
record stock-based compensation expense for stock options issued to employees
in
fixed amounts with exercise prices at least equal to the fair value of the
underlying common stock on the date of grant.
F-9
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
following table illustrates the effect on net income and earnings per share
if
we had applied the fair value recognition provisions using the modified
prospective method of FASB Statement No. 123, Accounting
for Stock-Based Compensation,
to
stock-based employee compensation.
|
Fiscal
Years Ended
|
|||||||
|
January
1,
|
January
2,
|
||||||
|
2006
|
2005
|
||||||
|
Net
loss applicable to common stock, as reported
|
$
|
(3,586,915
|
)
|
$
|
(1,343,490
|
)
|
|
|
Add:
Stock-based employee compensation expense
|
|||||||
|
included
in reported net loss applicable to common
|
|||||||
|
stock,
net of related tax effects
|
-
|
-
|
|||||
|
Deduct:
Total stock-based employee compensation
|
|||||||
|
expense
determined under fair value based method
|
|||||||
|
for
all awards, net of related tax effects
|
(502,948
|
)
|
(95,580
|
)
|
|||
|
Pro
forma net loss applicable to common stock
|
(4,089,863
|
)
|
(1,439,070
|
)
|
|||
|
Net
loss per share of common stock:
|
|||||||
|
Basic
and diluted—as reported
|
$
|
(0.24
|
)
|
$
|
(0.26
|
)
|
|
|
Basic
and diluted—pro forma
|
$
|
(0.28
|
)
|
$
|
(0.27
|
)
|
|
Effective
at the beginning of our fiscal year 2006, we adopted the fair value model
for
recognizing compensation expense for employee stock options in accordance
with
SFAS No. 123R, “Share-Based Payment,” which has the effect of reducing our
reported net income and net income per share.
We
account for transactions in which services are received in exchange for equity
instruments issued based on the fair value of such services received from
non-employees or of the equity instruments issued, whichever is more reliably
measured, in accordance with SFAS No. 123R and Emerging Issues Task Force
(“EITF”) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling, Goods
or
Services.” We account for transactions in which we issue convertible securities
in accordance with EITF Issues No. 98-05, “Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios” and EITF Issues No. 00-27, “Application of Issue No. 98-05 to Certain
Convertible Instruments.”
Net
Income (Loss) per Share of Common Stock
-- Net
income (loss) per common share is computed in accordance with FASB No. 128
“Earnings Per Share”, which requires companies to present basic earnings per
share and diluted earnings per share. Basic net income (loss) per share of
common stock is computed by dividing net income (loss) 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. Diluted net loss per common
share is computed by dividing net loss by the weighted average common shares
outstanding excluding common stock equivalents, as they would be anti-dilutive.
F-10
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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 judgment is involved, the estimates
are not necessarily indicative of the amounts that could be realized in a
current market exchange.
New
Accounting Pronouncements
-- In
March 2005, the Financial Accounting Standards Board’s (FASB) issued
Interpretation 47, “Accounting for Conditional Asset Retirement Obligations—an
interpretation of FASB Statement No. 143” clarifying that the term conditional
asset retirement obligation as used in FASB Statement No. 143, “Accounting for
Asset Retirement Obligations”, refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of
the
entity. Clarifications found in Interpretation 47 had no material impact
on our
consolidated financial statements.
In
May
2005, the FASB issued Statement No. 154, “Accounting Changes and Error
Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This
Statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement
No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and
changes the requirements for the accounting for and reporting of a change
in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. FASB Statement No. 154 became effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. Adoption of FASB Statement No. 154 had no material impact on our
consolidated financial statements.
In
February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid
Financial Instruments − an amendment of FASB Statements No. 133 and 140.” The
purpose of SFAS 155 is to simplify the accounting for certain hybrid financial
instruments by permitting fair value re−measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. SFAS 155 is effective for all financial instruments acquired
or
issued after the beginning of an entity’s first fiscal year that begins after
September 15, 2006. Adoption of SFAS 155 on January 1, 2007 is not expected
to
have a material impact on our consolidated financial statements.
In
March
2006, the FASB issued SFAS 156, “Accounting for Servicing Financial Assets - an
amendment of FASB Statement No. 140.” SFAS 156 requires separate recognition of
a servicing asset and a servicing liability each time an entity undertakes
an
obligation to service a financial asset by entering into a servicing contract.
This statement also requires that servicing assets and liabilities be initially
recorded at fair value and subsequently be adjusted to the fair value at
the end
of each reporting period. SFAS 156 is effective for an entity’s first fiscal
year that begins after September 15, 2006. Adoption of SFAS 156 on January
1,
2007 is not expected to have a material impact on our consolidated financial
statements.
F-11
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
In
March
2006, the FASB’s Emerging Issues Task Force (EITF) issued Issue 06−3, “How Sales
Taxes Collected From Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement “ (EITF 06−3). A consensus was reached that
entities may adopt a policy of presenting sales taxes in the income statement
on
either a gross or net basis. If taxes are significant, an entity should disclose
its policy of presenting taxes and the amounts of taxes. The guidance is
effective for periods beginning after December 15, 2006. We present Company
sales net of sales taxes. We believe we currently satisfy the requirements
of
EITF 06−3 for recording these sales taxes in our consolidated financial
statements.
In
June
2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income
Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in accordance with FASB Statement No. 109, “Accounting for Income
Taxes.” This Interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This Interpretation
also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This Interpretation
is effective for fiscal years beginning after December 15, 2006. Clarifications
found in FIN 48 are not expected to have a material impact on our consolidated
financial statements.
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures
about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application
of this
Statement will change current practice. This Statement is effective for fiscal
years beginning after November 15, 2007. Definitions found in SFAS 157 are
not
expected to have a material impact on our consolidated financial statements.
In
June
2006, the EITF reached a consensus on EITF Issue No. 06-4, “Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements” (“EITF 06-4”), which requires the
application of the provisions of SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” to endorsement split-dollar life
insurance arrangements. This would require recognition of a liability for
the
discounted future benefit obligation owed to an insured employee by the
insurance carrier. EITF 06-4 is effective for fiscal years beginning after
December 15, 2007. Adoption of EITF 06-4 is not expected to have a material
impact on our consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB 108”). SAB 108 requires companies to
evaluate the materiality of identified unadjusted errors on each financial
statement and related financial statement disclosure using both the rollover
approach and the iron curtain approach, as those terms are defined in SAB
108.
The rollover approach quantifies misstatements based on the impact of the
misstatement, whereas the iron curtain approach quantifies misstatements
based
on the effects of correcting the misstatement existing in the balance sheet
at
the end of the current year, irrespective of the reversing effect of prior
year
misstatements on the income statement. Financial statements would require
adjustment when either approach results in quantifying a misstatement that
is
material. Correcting prior year financial statements for immaterial errors
would
not require previously filed reports to be amended. If a company determines
that
an adjustment to prior year financial statements is required upon adoption
of
SAB 108 and does not elect to restate its previous financial statements,
then it
must recognize the cumulative effect of applying SAB 108 in fiscal 2006
beginning balances of the affected assets and liabilities with a corresponding
adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108
is
effective for the first fiscal year ending after November 15, 2006. The adoption
of SAB 108 did not have a material impact on our consolidated financial
statements.
F-12
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Reclassifications
--
Certain reclassifications of prior year balances have been made to conform
to
the current presentation.
NOTE
2. LIQUIDITY
Our
company’s working capital deficit decreased to $4,446,000 in 2006 from
$4,842,000 in 2005 and our cash position at December 31, 2006 decreased to
$734,000 from $1,361,000 on January 1, 2006. Capital expenditures in 2006
totaled $1,774,000, of which $1,029,000 related to restaurant remodels. In
2006,
we received proceeds from the sale of assets totaling $1,495,000, which mostly
related to the sale-leaseback of the New Smyrna Beach property in the third
quarter of 2006 and the sale of an option on the Ocala property in the second
quarter of 2006.
In
March
2005, our investors provided us a $1,600,000 revolving line of credit, which
was
originally due to mature on the earlier of March 31, 2006 or the closing
of a
financing providing us not less than $1,600,000 of net proceeds. The investors
received a fee of $80,000 for extending the credit line. Amounts drawn under
the
line of credit bear interest at the rate of 15% per annum, payable 8% monthly
in
arrears and 7% deferred until the maturity date. Upon completion of the $6.9
million financing in May 2005, the maturity date was extended to May 23,
2007.
In October 2005, we utilized $800,000 of the line of credit to fund the
acquisition and opening costs of two new restaurant locations. In
June
2006, we utilized an additional $640,000 of the revolving line of credit
to fund
remaining remodeling costs and working capital requirements. It is not expected
that we will be able to borrow the remaining $160,000 under the credit line.
On
March 30, 2007, the maturity date was further extended to May 23, 2008, and
we paid an extension fee of $101,000 with shares of our common
stock.
In
December 2005, we secured a six-month, $500,000 bank credit facility for
which
the full amount was immediately drawn on to fund remodeling. In April 2006,
we
recognized $212,000 in net cash proceeds related to the negotiation of an
option
embedded in the lease agreement of our restaurant property in Ocala, Florida,
to
a new landlord FRI Fish, LLC. In October 2006, we completed a sale and
simultaneous leaseback of our restaurant property in New Smyrna Beach, Florida
in which we received net cash proceeds of $885,000. We also simultaneously
retired the $500,000 bank credit facility, which had at that time been extended
in anticipation of the New Smyrna transaction being completed.
In
October 2002, we refinanced through Colonial Bank our Melbourne restaurant
location with a note of $635,000. The loan, which bears interest at the bank's
base rate, is for a term of five years with required monthly principal payments
based on a 15 year amortization schedule, and a balloon payment in September
2007. The principal balance owed on this note as of December 31, 2006 was
$438,000. We anticipate the refinancing of this note prior to its
maturity.
NOTE
3. CASH AND OTHER CURRENT ASSETS
F-13
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Concentrations:
| (a) |
Credit
Risk - Cash
balances are maintained in a financial institution located in Florida.
Occasionally, deposits exceed amounts insured by the Federal Deposit
Insurance Corporation.
|
| (b) |
Supplies
-
We acquire a significant amount of our food products utilized in
the
preparation of our menu items from a limited number of sources.
During the
fiscal years ended December 31, 2006, January 1, 2006 and January
2, 2005,
approximately 43%, 42% and 36%, respectively, of related purchases
were
made from 10 suppliers.
|
| (c) |
Allowance
for Doubtful Accounts
-
We estimate the allowance for uncollectible accounts based on the
aging of
the receivables due from related parties. Those receivables that
are
deemed uncollectible are charged against the allowance for doubtful
accounts.
|
Other
current assets consist of the following:
|
December
31,
|
January
1,
|
||||||
|
|
2006
|
2006
|
|||||
|
Prepaid
expenses
|
$
|
359,103
|
$
|
271,486
|
|||
|
Insurance
proceeds receivable
|
-
|
40,000
|
|||||
|
Other
current assets
|
24,495
|
53,741
|
|||||
|
$
|
383,598
|
$
|
365,227
|
||||
NOTE
4. PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
December
31,
|
January
1,
|
||||||
|
2006
|
2006
|
||||||
|
Leasehold
improvements
|
$
|
7,818,971
|
$
|
7,855,516
|
|||
|
Equipment
|
3,884,837
|
3,904,680
|
|||||
|
Furniture
and fixtures
|
4,797,285
|
4,692,974
|
|||||
|
Land
and buildings
|
826,338
|
1,750,114
|
|||||
|
Signage
|
640,143
|
582,759
|
|||||
|
Automobiles
|
257,775
|
214,288
|
|||||
|
18,225,349
|
19,000,331
|
||||||
|
Less
accumulated depreciation
|
|||||||
|
and
amortization
|
(9,054,528
|
)
|
(7,266,470
|
)
|
|||
|
$
|
9,170,821
|
$
|
11,733,861
|
||||
Depreciation
expense was $2,190,000 in fiscal 2006 compared to $1,478,000 in fiscal 2005.
During 2006 and 2005, disposals of fixed assets relating to restaurant
remodeling and the sale-leaseback transactions resulted in the retirement
of
$409,000 and $2,276,000, respectively, in accumulated depreciation.
F-14
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
During
the fourth quarter of 2006, an asset write-down of $942,000 was recorded
to
reduce property and equipment relating to the Clearwater Beach, Florida
location. The asset impairment was necessitated by changes in our estimates
and
a reduction in the estimated lease life due to unfavorable economic conditions
of the location.
NOTE
5. GOODWILL, PREPAID RENT AND OTHER ASSETS
Goodwill
relating to the 1994 merger of Shells, Inc. is evaluated annually for
impairment. The evaluation compares the forecasted future cash flow of those
restaurant locations acquired in the merger with the carrying value of the
asset. As a result of the evaluation, there was no reduction to the carrying
value of goodwill in 2006 or 2005; however, changes in factors and circumstances
could result in an impairment of goodwill in the future.
Prepaid
rent consists of the excess of purchase price over the fair value of assets
acquired concurrent with a real estate operating lease for a restaurant
location. During February 2005, we agreed to acquire for $843,000 the leasehold
rights and personal property of a restaurant located in Clearwater Beach,
Florida from Gold Coast Restaurants, Inc. (d/b/a Leverock's), out of bankruptcy
proceedings. The prepaid rent was calculated at $338,000 and was to be amortized
over the then estimated 16 year remaining life of the lease including all
options to renew, leaving an unamortized balance as of January 1, 2006 of
$322,000. During the fourth quarter of 2006, we determined that an asset
impairment was necessitated by changes in our estimates and a reduction in
the
estimated lease life due to unfavorable economic conditions of the location.
Accordingly, an asset write-down of $300,000 was recorded to reduce prepaid
rent.
Other
assets consist of certificates of deposit held by our bank as collateral
for
letters of credit for utility deposits, unamortized service marks and loan
costs, as well as utility and other vendor deposits.
NOTE
6. ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
December
31,
|
January
1,
|
||||||
|
2006
|
2006
|
||||||
|
Accrued
payroll
|
$
|
837,085
|
$
|
922,964
|
|||
|
Unearned
gift card revenue
|
333,558
|
261,151
|
|||||
|
Other
|
276,362
|
339,354
|
|||||
|
Public
reporting costs
|
234,013
|
199,345
|
|||||
|
Workers
compensation
|
167,989
|
-
|
|||||
|
Restaurant
closing expenses
|
107,933
|
168,671
|
|||||
|
Property
taxes
|
86,739
|
184,556
|
|||||
|
Construction
|
-
|
99,339
|
|||||
|
$
|
2,043,679
|
$
|
2,175,380
|
||||
F-15
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE 7. LONG-TERM DEBT
Long-term
debt consists of the following:
|
December
31,
|
January
1,
|
|||||||||
|
|
2006
|
2006
|
||||||||
|
Line
of credit with Colonial Bank to finance remodeling construction
costs,
interest was payable monthly at bank base rate plus 1%; interest rate was 9.25% at October 1, 2006; principal paid in full October 2006. |
$
|
-
|
$
|
500,000
|
||||||
|
$635,000
promissory note with Colonial Bank collateralized by real
property owned
by the 51% owned joint venture. Interest is payable monthly based on the bank's base rate. Principal is payable $3,900 monthly, with all unpaid principal due in September 2007. The interest rate was 8.25% at January 1, 2006. |
438,271
|
485,071
|
||||||||
|
$655,000
promissory note collateralized by real property owned by
Shells. Payments were $8,000 monthly with unpaid principal originally due on June 2009. The interest rate was fixed at 10.0%. |
-
|
371,518
|
||||||||
|
Finance
agreement, collateralized by automobiles, principal and interest
due
|
||||||||||
|
monthly
at $3,538 through August 2010, at 6.75% fixed interest
rate.
|
138,117
|
169,147
|
||||||||
|
Finance
agreement, collateralized by insurance policy, principal and
interest
due
monthly thru February 2007, at 5.45% fixed interest rate. |
113,181
|
5,207
|
||||||||
|
Finance
agreement, collateralized by computer equipment principal and
interest
due monthly at $2,569 through June 2009, at 9.3% fixed interest rate. |
65,954
|
-
|
||||||||
|
Finance
agreement, collateralized by automobile, principal and interest
due
|
||||||||||
|
monthly
at $818 through February 2010, at 8% fixed interest rate.
|
27,322
|
-
|
||||||||
|
Tenant
improvement allowance, collateralized by leasehold improvements
and
equipment, was payable monthly at $2,988 through July 2010. Interest imputed at 10.5%. |
-
|
130,938
|
||||||||
|
Promissory
note for early termination of lease, was payable monthly at
$10,370
principal and interest through October 2006, at 8.0% fixed interest rate. |
-
|
100,000
|
||||||||
|
Capitalized
lease agreement, collateralized by equipment, payable monthly
at
$517
principal and interest through March 2009. |
12,528
|
17,023
|
||||||||
|
795,373
|
1,778,904
|
|||||||||
|
Less
current portion
|
(623,526
|
)
|
(777,823
|
)
|
||||||
|
$
|
171,847
|
$
|
1,001,081
|
|||||||
The
annual maturities of debt as of December 31, 2006 are as follows:
|
2007
|
$
|
623,526
|
|
|
2008
|
78,517
|
||
|
2009
|
62,525
|
||
|
2010
|
30,805
|
||
|
$
|
795,373
|
The
promissory note provided by Colonial Bank no longer requires us to meet a
financial covenant, relating to debt coverage as the mortgage note that
contained this provision was paid in September 2005.
NOTE
8. RELATED PARTY DEBT AND RELATED PARTY TRANSACTIONS
Related
Party Debt
F-16
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
In
March
2005, Trinad Capital, L.P. (“Trinad”), Bruce Galloway and Frederick R. Adler
provided us with a $1.6 million revolving line of credit, which was to mature
on
the earlier of March 31, 2006 or the closing of an aggregate amount of financing
providing us not less than $1.6 million of net proceeds. Trinad Master Fund,
Ltd., an affiliate of Trinad, Mr. Galloway and Mr. Adler are each security
holders who beneficially own more than five percent of our common stock.
Amounts
drawn under the line of credit bear interest at the rate of 15% per annum,
payable 8% monthly in arrears and 7% deferred until the maturity date. These
investors received a fee of $80,000, in the aggregate, for extending the
credit
line to us, paid to each investor pro rata in accordance with each investor’s
percentage interest (50% for Adler, 30% for Trinad and 20% for Galloway).
In May
2005, these investors agreed to extend the maturity date under the line of
credit to May 23, 2007 for no additional consideration. As of December 31,
2006,
we have drawn $1,440,000 of the $1,600,000 line of credit availability, to
assist in the financing of two restaurant acquisitions in the fourth quarter
of
2005 and to fund remaining remodeling costs and working capital requirements.
It
is not expected that we will be able to borrow the remaining $160,000 under
the
credit line. On March 30, 2007, the maturity date was further extended to
May
23, 2008 and we paid an extension fee of $101,000 wtih shares of our common
stock.
In
March
2005, Trinad and Galloway exercised warrants to purchase an aggregate of
1,000,000 shares of our common stock at $0.50 per share. The
aggregate proceeds of $500,000 were used to pay down the principal amount
of
their respective notes.
In
May
2005, we raised approximately $6.9 million in a private offering of our
securities to accredited investors. The securities sold in the offering were
units, each unit consisting of a share of our Series B Convertible Preferred
Stock (initially convertible into 20 shares of our common stock, subject
to
certain specified adjustments, if applicable) and a warrant to purchase 10
shares of our common stock at an exercise price of $1.30 per share. As part
of
this transaction, Mr. Adler used $500,000 principal amount of his note to
exercise the warrants to purchase 1,000,000 shares of common stock, issued
to
him in August 2004; and Mr. Adler, Trinad and the Bruce Galloway, IRA R/O
converted the remaining $1,000,000 aggregate amount of secured promissory
notes
held by them into units being sold in the offering. During October 2005,
Trinad
Capital, L.P. transferred all of its shares to an affiliate, Trinad Capital
Master Fund, Ltd.
Notes
and
deferred interest payable to these related parties were:
|
December
31,
|
January
1,
|
||||||
|
2006
|
2006
|
||||||
|
Line
of credit due May 23, 2007 bearing interest at 15%, of which
8%
|
|||||||
|
is
payable monthly in arrears and 7% is deferred and payable when
the
|
|||||||
|
principal
is paid in full, owned by:
|
|||||||
|
Frederick
R. Adler
|
$
|
800,000
|
$
|
400,000
|
|||
|
Bruce
Galloway, IRA R/O
|
160,000
|
160,000
|
|||||
|
Trinad
Capital, L.P.
|
480,000
|
240,000
|
|||||
|
Aggregate
deferred interest to be payable on May 23, 2007
|
87,453
|
8,702
|
|||||
|
$
|
1,527,453
|
$
|
808,702
|
||||
The
deferred interest due at maturity, May 23, 2007, will be $125,000 on the
$1,440,000 borrowing.
Related
Party Transactions
F-17
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
We
manage
two restaurants pursuant to a management and license agreement, which became
effective July 1993. The management and license agreement of an additional
restaurant was terminated in October 2005. These entities are deemed to be
related parties based on our ability to influence the management and operating
policies of the managed restaurants. We provide management services and license
our proprietary information required to operate the restaurant for a management
fee originally set at 6% of restaurant sales. Of the total management fee
received, 2% of sales is placed in escrow and disbursed to satisfy each managed
restaurant’s requirement to make third party royalty payments. The management
agreements were amended in October 2001, reducing the management fee to 4%
of
restaurant sales until such time that cash flow for three consecutive months
is
at least 80% of the cash flow for the same respective periods in 1999. The
management fee then becomes 5% of sales. The management fee increases to,
and is
maintained at, 6% of sales when cash flow for three consecutive months is
at
least 90% of cash flow for the same respective periods in 1999. The management
agreements outline the respective owners’ ("licensees") responsibility for
funding all restaurant expenses, including food and beverage costs, staffing,
training, recruiting, inventories, working capital and capital expenditures.
A
third restaurant is operated by us, pursuant to an oral agreement requiring
the
restaurant to be operated in conformance with the policies and procedures
established by management for Shells restaurants. Our management fee for
the
restaurant was originally set at 4% of the restaurant’s sales (exclusive of any
escrowed royalty fees), and later was modified to 2% in October 2001. The
aggregate management fees earned under these agreements was approximately
$156,000, $152,000 and $172,000 for fiscal 2006, 2005 and 2004,
respectively.
On
August
9, 2005, we entered into an agreement with Deborah Christen Corporation.
Pursuant to this agreement, effective upon the occurrence of specific conditions
precedent, including the execution of an agreement by Shells of Carrollwood
Village, Inc. to abandon or terminate the sublicense agreement which granted
it
the use of the service marks in the trade area known as the Carrollwood Trade
Area, and the management agreement with us for the operation of the “Shells”
restaurant, Deborah Christen Corporation (“DCC”) agreed to grant us a
license to use the service marks in the Carrollwood Trade Area.
On
October 21, 2005, we entered into a termination agreement with Shells of
Carrollwood Village, Inc., whereby they agreed to terminate (a) the management
and license agreement in the Carrollwood Trade Area, and (b) the agreement
pursuant to which we granted them an option to transfer all of its assets
to us
in exchange for shares of our common stock upon the occurrence of specified
events. The restaurant previously managed by us under this terminated license
agreement closed on October 31, 2005. Upon the closing of the restaurant,
the agreement we entered into with Deborah Christen Corporation on August
9,
2005 became effective. Under this agreement, we had until December 31, 2006
to
open a “Shells” restaurant in the Carrollwood Trade Area, subject to certain
monthly license fees beginning on April 1, 2006. Further, we agreed to pay
DCC a
license fee in the amount of two percent (2%) of the gross receipts of each
“Shells” restaurant operated or sublicensed by us within the Carrollwood Trade
Area. On December 20, 2006, we entered into an amendment to this agreement
with
DCC removing the December 31, 2006 deadline for the opening of a Shells Seafood
Restaurant in the Carrollwood Trade Area. We will continue to pay predetermined
license fees to DCC until such time as a Shells Seafood Restaurant has been
opened in the Carrollwood Trade Area, or the option period expires per written
notice from us. The aggregate license fees paid under this agreement was
approximately $24,000 for fiscal 2006.
Effective
July 1993, we entered into option agreements with three of our licensees,
one of
which terminated in October 2005. These agreements, further amended in August
1995 and October 2001, documented the terms by which we can acquire the
restaurant’s 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 our common stock at the prevailing market price.
The option is exercisable by either party upon Shells averaging a market
capitalization, as defined, of $100,000,000 for 20 consecutive trading dates.
The option has not been exercisable through December 31, 2006.
F-18
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
On
December 28, 2004, we entered into a consulting agreement with Mr. Lawrence
Wolf, the father of Jay Wolf, who is a member of our board of directors.
The
consulting agreement had a one year term, where Mr. Lawrence Wolf was to
assist
us in providing marketing services; including guidance toward building our
creative strategy around the “Shells” brand positioning and providing support in
coordinating our media production. As compensation, Mr. Lawrence Wolf received
options, under our 2002 Equity Incentive Plan to purchase 130,000 shares
of
common stock at an exercise price of $0.83, the market price on the date
of
grant. The options became fully vested on the first anniversary of the grant
date. The one-year contract with Mr. Lawrence Wolf was renewed in December
2005,
and an additional stock option grant to purchase 130,000 shares of common
stock
was awarded at an exercise price of $0.90 per share, the market price on
the
grant date, with a one-year vesting period. The one-year contract was not
renewed in December 2006.
On
September 29, 2005, we sold a certain property to Fortress Realty Investments,
LLC at a sale price of approximately $1.67 million which was considered a
fair
value purchase amount. Concurrently, we leased a Shells Seafood Restaurant
location at 1561 3rd Street in Winter Haven, Florida. The minimum lease term
is
20 years with a straight-line annual rent of $182,000. Subsequently, Fortress
Realty Investments, LLC sold the Winter Haven property and assigned its interest
as lessor to a third party. On April 27, 2006, we completed a lease buy-out
transaction with Fortress Realty Investments, LLC, pursuant to which we
transferred our interest in an option embedded in the lease agreement.
Concurrently, we leased a Shells Seafood Restaurant location at 1561 3rd
Street
in Ocala, Florida. The minimum lease term is 20 years with a straight-line
annual rent of $178,000. Subsequently, Fortress Realty Investments, LLC sold
the
Ocala property and assigned its interest as lessor to a third party. On October
27, 2006, we completed a sale and leaseback transaction with Fortress Realty
Investments, LLC, pursuant to which we sold and simultaneously leased back
a
Shells Seafood Restaurant location at 725 East 3rd
Avenue,
New Smyrna Beach, Florida at a sale price of approximately $1.33 million
which
was considered a fair value purchase amount. The minimum lease term is 20
years
with a straight-line annual rent of $145,000. Fortress Realty Investments
is
related to Drawbridge Global Macro Fund, L.P. which, after converting their
shares of our Series B Preferred Stock, owns 1,333,340 shares of our common
stock along with warrants to purchase 666,670 shares of our common stock.
Drawbridge is considered a greater than 5% owner of our stock.
NOTE
9. COMMITMENTS AND CONTINGENCIES
With
the
exception of one operating restaurant, we conduct all of our operations and
maintain administrative offices in leased facilities. Certain leases provide
for
us to pay for common area maintenance charges, insurance, and a 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 all leases was
$3,925,000, $3,257,000 and $2,712,000 for fiscal 2006, 2005 and 2004,
respectively, which included contingent rent of $71,000, $97,000 and $108,000,
respectively. The approximate future minimum aggregate rental payments under
such operating leases as of December 31, 2006 are as follows:
|
2007
|
$
|
2,683,025
|
|
|
2008
|
|
2,539,778
|
|
|
2009
|
2,530,103
|
||
|
2010
|
2,483,025
|
||
|
2011
|
2,199,419
|
||
|
Thereafter
|
12,866,717
|
||
|
$
|
25,302,066
|
F-19
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
These
leases expire at various dates through the year 2026 and generally have renewal
options for additional periods.
During
November 2005, we entered into an amended and restated employment agreement
with
Leslie J. Christon, President and Chief Executive Officer. The amended and
restated employment agreement extended the term of her employment with us
through June 30, 2007, subject to automatic successive one year extensions
thereof, unless either party delivers prior written notice of non-extension.
Pursuant to the amended and restated employment agreement, Mrs. Christon
is
entitled to receive an annual base salary of $300,000 and a target bonus
potential up to 100% of her base salary. Mrs. Christon also received options
to
purchase an additional 1,061,535 shares of the our common stock (which vest
in
one-third installments on December 31, 2005, July 1, 2007 and July 1, 2008,
subject to her continued employment with Shells), inclusive of a grant of
903,528 options under a Stock Option Agreement dated November 14, 2005 by
and
between Mrs. Christon and us. The remaining options to purchase 158,007 shares
of our common stock were granted under our existing stock option plans. Based
on
the vesting schedule of the options, we expect to recognize compensation
expense
of approximately $105,000 in each of 2007 and 2008 as a result of the adoption
of FASB Statement No. 123-R, “Share-Based Payment.” In addition, pursuant to her
employment agreement, Mrs. Christon is entitled to (i) severance pay equal
to
one year’s then effective base salary and (ii) other immediate vesting of any of
the unvested 1,061,535 stock options, if she is terminated without cause
or she
terminates her employment due to a significant diminution in her job
responsibilities or title within 6 months following a Change in Control (as
defined in the Amended and Restated Employment Agreement) of our Company.
Effective
March 13, 2006, we entered into an agreement with each of Guy C. Kathman,
our
Vice-President of Operations, Warren R. Nelson, our Chief Financial Officer,
and
Christopher R. Ward, Sr., our Vice-President of Purchasing, to provide them
with
severance and other considerations to be paid upon a Change in Control of
our
Company (as defined in their respective agreements). Mr. Nelson is also a
party
to a letter agreement from the Board of Directors clarifying his severance
arrangement if he is terminated without cause.
We
are
subject to legal proceedings, claims and liabilities that arose in the ordinary
course of business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect our financial
position, results of operations or cash flows.
F-20
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
10. MINORITY PARTNER INTEREST
We
have a
51% equity interest in a joint venture partnership that owns and operates
the
Shells restaurant located in Melbourne, Florida. We entered into the joint
venture partnership in March 1994 with WLH Investments, Inc., a corporation
owned by the wife of our then President, who was a Director of Shells until
February 2002. As a condition of the partnership, WLH Investments contributed
$400,000 in capital. Profits of the partnership 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 us and (iii) any excess over the $120,000
is
allocated 51% to us and 49% to WLH Investments. All losses are allocated
in
accordance with the ownership percentages.
Our
share
of the partnership profits was $251,000, $280,000 and $296,000 during fiscal
2006, 2005 and 2004, respectively. In addition, the partnership paid us
$180,000, $190,000 and $181,000 in fiscal 2006, 2005 and 2004, respectively,
for
management and license fees. The joint venture and management agreement outline
the respective joint venture partner’s responsibility for funding all restaurant
expenses, including food and beverage costs, staffing, training, recruiting,
inventories, working capital, capital expenditures and principal and interest
payments on loans and mortgages. The joint venture’s cash balance at fiscal year
end was $94,000, $176,000, and $130,000 for 2006, 2005, and 2004,
respectively.
The
joint
venture agreement, which was amended March 1995, contains a purchase option
for
us to purchase the WLH Investments interest or conversely, for WLH Investments
to put their interest in the partnership to us, for a purchase price of
$750,000, payable by the issuance of our common stock having a value of
$750,000. The option is exercisable at any time following the date our common
stock equals or exceeds $20 per share for a period of 20 consecutive trading
days. The option has not been exercisable through December 31,
2006.
NOTE
11. STOCKHOLDERS' EQUITY AND CONVERTIBLE DEBENTURES
On
December 7, 2004, we sold $2,375,000 principal amount of debentures and warrants
to purchase 1,187,500 shares of our common stock. We received net proceeds
of
$2,010,000 from the sale. We paid interest at 12% and late payment penalties
through May 23, 2005 when the debentures were retired by repayment in cash
or
conversion into our Series B Preferred Stock. Repayments in cash consisted
of
principal of $2,055,000 plus interest and penalties of $177,198. Debentures
converted into our Series B Preferred Stock consisted of $320,000 principal
plus
interest and penalties of $27,588. The warrants are exercisable until December
7, 2007 at an exercise price of $0.60 per share. The exercise price of the
warrants and the number of underlying shares of common stock are subject
to
adjustment under certain circumstances. As compensation for their services
as
placement agent in the debenture offering and future consulting services
to us,
the placement agent received cash fees and warrants with terms substantially
identical to those received by the investors. As of December 31, 2006, there
were 1,873,750 warrants outstanding to purchase shares of our common
stock.
On
May
24, 2005, in connection with the Series B Preferred Stock offering, we issued
warrants to purchase common stock at an exercise price of $1.30 per share
exercisable through May 24, 2010. As of December 31, 2006, there were 4,619,540
warrants outstanding to purchase shares of our common stock. Additionally,
warrants to purchase 1,129,530 shares of common stock were granted to the
placement agent as a portion of their fees in the form of a warrant to purchase
37,651 units (consisting of 37,651 shares of our Series B Convertible Preferred
Stock and warrants to purchase 376,510 shares of our common stock) at a purchase
price of $15.00 per unit. As of December 31, 2006, none of these warrants
have
been exercised.
F-21
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
To
date,
no dividends have been declared or paid on our common stock. In addition,
our
debt financings prohibit the payment of cash dividends and any future financing
agreements may also prohibit the payment of cash dividends.
NOTE
12. CONVERTIBLE PREFERRED STOCK
Series
A Convertible Preferred Stock -- On
October 24, 2001, we issued 66,862 shares of Series A 5% Convertible
Preferred Stock, par value $0.01 per share (the "Series A Preferred
Stock"), pursuant to an exemption from registration under Section 4(6) of
the
Securities Act of 1933, as amended, in consideration for the cancellation
of
$669,000 of trade indebtedness to our trade creditors. The shares were issued
exclusively to "accredited investors" as defined in Rule 501(a) under the
Securities Act. We did not receive any cash proceeds in connection with the
issuance of the Series A Preferred Stock.
Each
share of Series A Preferred Stock is convertible by the holder into five
shares of our common stock. The Series A Preferred Stock has a liquidation
preference equal to $10.00 per share, plus any declared but unpaid dividends.
Dividends on the Series A Preferred Stock, payable in cash at the rate of
5% of the Liquidation Value ($10.00) per annum, are payable annually, when,
as
and if declared by our board of directors out of funds legally available
for the
payment of dividends. Dividends on the Series A Preferred Stock are not
cumulative. To date, no dividends have been declared or paid on the Series
A
Preferred Stock.
During
fiscal 2006, 2005 and 2004, investors converted an aggregate of 1,037, 11,544
and 28,273 shares, respectively, of Series A Preferred Stock into 5,185,
57,720
and 141,365 shares, respectively, of our common stock.
Series
B Convertible Preferred Stock -- In
May
2005, we issued 461,954 units of securities in a private placement offering
to
accredited investors generating gross proceeds of $6,929,000. Each unit
consisted of one share of Series B Convertible Preferred Stock, par value
$0.01
per share (the “Series B Preferred Stock”), which is initially convertible into
20 shares of our common stock, subject to certain specified adjustments under
certain circumstances, and a warrant to purchase 10 shares of our common
stock
at an exercise price of $1.30 per share.
A
non-cash implied dividend of $1,735,000 was recorded in conjunction with
the
private placement offering, consisting of a warrant valuation and a beneficial
conversion feature. The beneficial conversion feature reflects a non-detachable
in-the-money conversion feature of the Series B Preferred Stock as defined
by
the Emerging Issues Task Force Consensus No. EITF 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Features.”
The
warrant to purchase 37,651 units (consisting of 37,651 shares of Series B
Preferred Stock and warrants to purchase 376,510 shares of common stock)
issued
to the placement agent was valued at $124,000. The value was based upon the
per
unit fair market value of the securities issued to the investors in the
transaction less the cash exercise price.
F-22
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
Series B Preferred Stock votes together with our common stock on an
“as-converted” basis as a single class on all actions to be taken by our
stockholders. Without the consent of a majority of the outstanding Series
B
Preferred Stock, we cannot alter or change adversely the powers, preferences
or
rights given to the Series B Preferred Stock, authorize or create any class
of
stock ranking as to a distribution of assets upon a liquidation event senior
to
or pari passu with the Series B Preferred Stock, issue any additional shares
of
the Series A Preferred Stock, or alter or change the powers, preferences
or
rights given to the Series A Preferred Stock. Upon
any
dissolution, liquidation, merger, consolidation, reorganization or other
series
of transactions, under certain conditions, the holders of Series B Preferred
Stock are entitled to be paid out of our assets legally available for
distribution to our stockholders, before any payment is made to the holders
of
our common stock. If
dividends are declared payable on our common stock, then dividends shall
be
declared for the Series B Preferred Stock. All shares of Series B Preferred
Stock issued and outstanding on May 23, 2015 will automatically be converted
at
that time into shares of our common stock, based on the conversion price
then in
effect.
During
fiscal 2006 and 2005, investors converted 70,001 and 18,104 shares,
respectively, of Series B Preferred Stock into 1,400,020 and 362,080 shares,
respectively, of our common stock.
NOTE
13. INCOME TAXES
There
were no provisions for income taxes for the years ended December 31, 2006,
January 1, 2006 and January 2, 2005.
Our
effective tax rate is composed of the following for the years ended December
31,
2006, January 1, 2006 and January 2, 2005, respectively:
|
Fiscal
Years Ended
|
||||||||||
|
December
31,
|
January
1,
|
January
2,
|
||||||||
|
2006
|
2006
|
2005
|
||||||||
|
Federal
statutory rate
|
(35.0
|
)%
|
(34.0
|
)%
|
(34.0
|
)%
|
||||
|
State
income tax, net of federal benefit
|
(3.6
|
)
|
(2.8
|
)
|
(0.4
|
)
|
||||
|
FICA
tip credits
|
(4.7
|
)
|
(6.6
|
)
|
(15.8
|
)
|
||||
|
Warrant
grants
|
-
|
-
|
22.4
|
|||||||
|
Valuation
allowance and other adjustment
|
43.3
|
43.4
|
15.6
|
|||||||
|
Revalue
certain deferred tax assets
|
-
|
-
|
8.4
|
|||||||
|
Other
|
0.0
|
-
|
3.8
|
|||||||
|
Effective
income tax benefit
|
-
|
%
|
-
|
%
|
-
|
%
|
||||
As
of
December 31, 2006, we had net operating loss carryforwards for federal income
tax purposes of approximately $10,769,000 which expire between 2007 and 2021.
We
also had approximately $3,593,000 of general business credits to carry forward,
which expire by 2026. We had an ownership change in 2002 and 2005 as defined
by
Internal Revenue Code Section 382, which limits a portion of the amount of
net
operating loss and credit carryforwards that may be used against taxable
income.
This limitation is approximately $75,000 per year for net operating losses
incurred prior to the 2002 ownership change, and $665,000 per year for net
operating losses incurred prior to the 2005 ownership change. Any portion
of the
annual limitation amount not utilized in any year will carry forward to the
following year subject to a 15 to 20 year limitation. Approximately $7,200,000
of our net operating loss carryforwards and approximately $3,082,000 of credits
are subject to the annual limitation. Assuming maximum utilization in future
years, we expect that approximately $3,300,000 in net operating loss
carryforwards and approximately $2,700,000 in credits will expire without
benefit to us.
F-23
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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 our
deferred income tax assets and liabilities are as follows:
|
December
31, 2006
|
||||||||||
|
Current
|
Non-current
|
Total
|
||||||||
|
Basis
difference in fixed assets and other assets
|
$
|
8,000
|
$
|
1,410,000
|
$
|
1,418,000
|
||||
|
Prepaids
|
-
|
122,000
|
122,000
|
|||||||
|
Accrued
liabilities
|
276,000
|
404,000
|
680,000
|
|||||||
|
Net
operating loss carryforwards
|
-
|
4,373,000
|
4,373,000
|
|||||||
|
General
business credits
|
-
|
3,593,000
|
3,593,000
|
|||||||
|
284,000
|
9,902,000
|
10,186,000
|
||||||||
|
Valuation
allowance
|
(10,186,000
|
)
|
||||||||
|
Net
deferred tax assets
|
-
|
|||||||||
|
Involuntary
conversion proceeds and service marks
|
-
|
|||||||||
|
|
$
|
- | ||||||||
|
|
January
1, 2006
|
|||||||||
|
|
Current
|
Non-current
|
Total
|
|||||||
|
Basis
difference in fixed assets and other assets
|
$
|
-
|
$
|
529,000
|
$
|
529,000
|
||||
|
Accrued
liabilities
|
298,000
|
(294,000
|
)
|
4,000
|
||||||
|
Net
operating loss carryforwards
|
-
|
3,839,000
|
3,839,000
|
|||||||
|
General
business credits
|
-
|
3,205,000
|
3,205,000
|
|||||||
|
298,000
|
7,279,000
|
7,577,000
|
||||||||
|
Valuation
allowance
|
(7,365,000
|
)
|
||||||||
|
Net
deferred tax assets
|
212,000
|
|||||||||
|
Involuntary
conversion proceeds and service marks
|
(212,000
|
)
|
||||||||
|
|
$
|
- | ||||||||
|
|
January
2, 2005
|
|||||||||
|
|
Current
|
Non-current
|
Total
|
|||||||
|
Basis
difference in fixed assets and other assets
|
$
|
-
|
$
|
544,000
|
$
|
544,000
|
||||
|
Accrued
liabilities
|
411,000
|
323,000
|
734,000
|
|||||||
|
Net
operating loss carryforwards
|
-
|
3,214,000
|
3,214,000
|
|||||||
|
General
business credits
|
-
|
2,848,000
|
2,848,000
|
|||||||
|
411,000
|
6,929,000
|
7,340,000
|
||||||||
|
Valuation
allowance
|
(7,113,000
|
)
|
||||||||
|
Net
deferred tax assets
|
227,000
|
|||||||||
|
Involuntary
conversion proceeds and service marks
|
(227,000
|
)
|
||||||||
|
|
$
|
- | ||||||||
NOTE
14. STOCK-BASED COMPENSATION PLANS
Stock
Option Plans --
At
December 31, 2006, we had two stock-based employee compensation plans that
are
more fully described below.
On
September 11, 1995, our board of directors approved two employee stock option
plans that have now both expired. The 1995 Employee Stock Option Plan, as
amended, originally provided for the issuance of options to purchase up to
a
total of 840,000 shares. The 1996 Employee Stock Option Plan provided for
the
issuance of options to purchase a total of 101,000 shares. There were no
options
awarded under these plans during 2006. As of December 31, 2006, options to
purchase an aggregate of 163,507 shares were outstanding under the plans
of
which 105,500 were fully exercisable and 58,007 shares vest in future
years.
F-24
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
On
May
20, 1997, our stockholders approved the Stock Option Plan for Non-employee
Directors. The plan, as amended, authorized a total of 150,000 shares to
be
reserved for issuance under the plan. There was no activity in this Plan
during
2006. As of December 31, 2006, options to purchase 32,000 shares were
outstanding and exercisable. The plan will expire on May 20, 2007.
On
May
21, 2002, our stockholders approved the 2002 Equity Incentive Plan allowing
for
grants of options to purchase up to 1,850,000 shares of common stock. On
June
22, 2005, our stockholders approved an amendment to increase the authorized
grants to 5,000,000 shares of common stock. During November 2005, our board
of
directors reduced the number of shares available for issuance under the plan
by
903,528, to a total of authorized grants of 4,096,472 shares under the plan.
The
options generally vest over three years, one third annually on the anniversary
date of the grant and have a maximum term of 10 years, except for those grants
issued beginning in 2005, which have a maximum term of 7 years. During 2006,
options for 197,000 shares of common stock were granted under this plan at
prices ranging between $0.55 and $0.93 per share, the fair market value on
the
date of the grant, of which 150,000 options were granted to directors and
officers. As of December 31, 2006, options to purchase 3,284,258 shares were
outstanding of which 1,820,235 were exercisable.
On
June
22, 2005, the compensation committee and the board of directors approved
the
immediate acceleration of vesting of certain unvested and “out-of-the-money”
stock options with exercise prices equal to or greater than $0.85 per share
previously awarded to its employees, including its executive officers, and
its
directors under the 2002 Plan that were originally scheduled to vest during
2006. The acceleration of vesting was effective for stock options outstanding
as
of June 22, 2005. Options to purchase approximately 295,000 shares of common
stock, or 18.5% of our outstanding unvested options (of which options to
purchase approximately 233,000 shares, or 14.6% of our outstanding unvested
options were held by our executive officers and directors) were subject to
the
acceleration. The weighted average exercise price of the options subject
to the
acceleration was $1.10.
The
purpose of the acceleration was to enable us to avoid recognizing compensation
expense associated with these options in future periods in our consolidated
statements of income, upon adoption of FASB Statement No. 123 R (Share-Based
Payment) in January 2006. The pre-tax charge that we avoided in 2006 was
approximately $87,000, based on the original vesting periods. We also believe
that because many of the options to be accelerated have exercise prices in
excess of the current market value of our common stock, these options have
limited economic value and are not fully achieving their original objective
of
incentivizing compensation and employee retention.
During
November 2005, we entered into a Stock Option Agreement with Leslie J. Christon,
President and Chief Executive Officer, concurrent with her amended and restated
employment agreement. The Stock Option Agreement granted options to purchase
903,528 shares of common stock at an exercise price of $0.85, the market
value
of our common stock on the date of the grant. The options vested as to 353,844
shares on December 31, 2005, and vest as to 274,842 on each of July 1, 2007
and
July 1, 2008. Additionally, Mrs. Christon was awarded a stock option to purchase
158,007 shares of common stock from the stock compensation plans described
above
at an exercise price of $0.85 per share with vesting ratably in July 2007
and
July 2008.
F-25
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Transactions
during 2006 were as follows:
|
Weighted
|
|||||||||||||
|
Weighted
|
Average
|
||||||||||||
|
Average
|
Remaining
|
Aggregate
|
|||||||||||
|
Number
of
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||
|
Options
|
Price
|
Life
(Years)
|
Value
|
||||||||||
|
Outstanding
at January 1, 2006
|
4,356,876
|
$
|
0.88
|
||||||||||
|
Granted
|
197,000
|
0.75
|
|||||||||||
|
Exercised
|
(9,466
|
)
|
0.43
|
||||||||||
|
Forfeited
|
(161,117
|
)
|
1.34
|
||||||||||
|
Outstanding
at December 31, 2006
|
4,383,293
|
$
|
0.86
|
5.4
|
$
|
120,975
|
|||||||
|
Exercisable
at December 31, 2006
|
2,311,579
|
$
|
0.84
|
5.3
|
$
|
117,211
|
|||||||
The
total
intrinsic value (market value on date of exercise less exercise price) of
options exercised during the fiscal years 2006, 2005 and 2004 was approximately
$3,000, $16,000 and $6,000, respectively. The aggregate intrinsic value of
options outstanding as of December 31, 2006, disclosed in the table above,
represents the closing stock price on the last trading day of the year less
the
exercise price, multiplied by the number of in-the-money stock options
outstanding. There
was
no excess cash tax benefit for the year ended December 31, 2006.
Stock-Based
Compensation -
Expense
related to stock options issued to eligible employees under the Plans is
recognized using a straight-line vesting schedule over the vesting period.
Stock
options generally vest over a period of 1 to 3 years and have contractual
terms
to exercise of 7 to 10 years. Stock option awards are valued based upon the
Black-Scholes option-pricing model using the following assumptions:
|
Assumptions
used in computing
|
Quarter
Ended
|
|||||||
|
fair
value of option grants:
|
December
31, 2006
|
October
1, 2006
|
July
2, 2006
|
April
2, 2006
|
||||
|
Volatility
|
30.0%
|
24.2%
|
20.3%
|
25.9%
|
||||
|
Weighted-average
estimated life
|
3.5
years
|
3.5
years
|
3.5
years
|
3.5
years
|
||||
|
Weighted-average
risk-free interest rate
|
4.68%
|
5.00%
|
4.87%
|
4.46%
|
||||
|
Dividend
yield
|
0
|
0
|
0
|
0
|
||||
At
December 31, 2006, there was $614,000 of unrecognized, pre-tax compensation
expense related to stock options that will be recognized over a weighted-average
period of two years. The weighted average grant date fair value of stock
options
granted during 2006, 2005 and 2004 was $0.75, $0.89 and $0.77 per share,
respectively. See Note 20, Subsequent Events for additional information on
option grants.
F-26
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
15. EARNINGS (LOSS) PER SHARE
The
following table represents the computation of basic and diluted earnings
(loss)
per share of common stock as required by FASB Statement No. 128:
|
Fiscal
Years Ended
|
||||||||||
|
December
31,
|
January
1,
|
January
2,
|
||||||||
|
2006
|
2006
|
2005
|
||||||||
|
Net
loss attributable to common shareholders
|
$
|
(3,002,843
|
)
|
$
|
(3,586,915
|
)
|
$
|
(1,343,490
|
)
|
|
|
Weighted
common shares outstanding
|
16,665,209
|
14,796,278
|
5,261,981
|
|||||||
|
Basic
net loss per share of common stock
|
$
|
(0.18
|
)
|
$
|
(0.24
|
)
|
$
|
(0.26
|
)
|
|
|
Effect
of dilutive securities:
|
||||||||||
|
Preferred
stock
|
-
|
-
|
-
|
|||||||
|
Warrants
|
-
|
-
|
-
|
|||||||
|
Stock
options
|
-
|
-
|
-
|
|||||||
|
Diluted
weighted common shares outstanding
|
16,665,209
|
14,796,278
|
5,261,981
|
|||||||
|
Diluted
net loss per share of common stock
|
$
|
(0.18
|
)
|
$
|
(0.24
|
)
|
$
|
(0.26
|
)
|
|
Diluted
net loss per common share excludes anti-dilutive stock options and warrants
of
12,034,000, 7,831,000 and 6,352,000 for fiscal 2006, 2005 and 2004,
respectively; additionally, the anti-dilutive effect of preferred stock of
8,491,000, 5,884,000 and 233,150 has been excluded for fiscal 2006, 2005
and
2004, respectively.
NOTE
16. PROVISION FOR IMPAIRMENT OF ASSETS
In
accordance with FASB Statement No. 144, which superseded FASB Statement No.
121,
we identified certain long-lived assets as impaired. 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 our estimates of fair value based on the best information
available.
We
recognized write-downs of $1,242,000 (of which $300,000 reduced prepaid rent),
$211,000 and $201,000 (of which $96,000 was applied against reserves) during
fiscal 2006, 2005 and 2004, respectively. We have seven operating restaurants
that have been previously written-down for impairment through December 31,
2006.
The write-down in 2006 related to one Florida restaurant with operating losses
that had not previously been written down. The write-down in 2005 related
to one
Florida restaurant that was subject to a lease buy-out modification when
we
entered into an agreement with our landlord in St. Pete Beach, whereby on
February 22, 2005, the landlord paid $600,000 to us for an option to buy-out
the
lease prior to its scheduled termination date. The write-down in 2004 related
to
restaurant level operating losses at one Florida restaurant that had not
previously been written down. The fiscal 2006 and 2004 write-downs were
necessitated by the then current period operating losses, as well as the
projected undiscounted cash flows of the restaurants.
F-27
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
17. DEFINED CONTRIBUTION PLAN
We
have a
defined contribution plan which meets the requirements of Section 401(k)
of the
Internal Revenue Code. All of our salaried employees with more than 90 days
of
service, who are at least 21 years of age, and who are not considered highly
compensated, are eligible to participate in the plan. The plan allows for
a
discretionary matching contribution from us. Shells, which pays the plan
expenses, has contributed $12,000 in discretionary contributions to
date.
NOTE
18. ADVERTISING AND MARKETING
We
have
incurred the following costs for television, radio, billboards and local
store
marketing:
|
Fiscal
Years Ended
|
||||||||||
|
December
31,
|
January
1,
|
January
2,
|
||||||||
|
2006
|
2006
|
2005
|
||||||||
|
Advertising
and marketing expenses
|
$
|
1,351,000
|
$
|
1,770,000
|
$
|
1,467,000
|
||||
|
As
a percentage of revenues
|
2.8
|
%
|
4.0
|
%
|
3.5
|
%
|
||||
NOTE
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following tables present selected quarterly financial data for fiscal
2006 and 2005,
(in
thousands, except per share data):
|
Fiscal
Year 2006
|
|||||||||||||
|
|
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
|||||||||
|
Revenues
|
$
|
14,587
|
$
|
13,054
|
$
|
10,529
|
$
|
9,659
|
|||||
|
Income
(loss) from operations
|
475
|
(9
|
)
|
(806
|
)
|
(2,126
|
)
|
||||||
|
Net
income (loss) attributable to common stock
|
261
|
(9
|
)
|
(962
|
)
|
(2,292
|
)
|
||||||
|
Basic
earnings (loss) per share
|
$
|
0.02
|
$
|
(0.00
|
)
|
$
|
(0.06
|
)
|
$
|
(0.13
|
)
|
||
|
Diluted
earnings (loss) per share
|
$
|
0.01
|
$
|
(0.00
|
)
|
$
|
(0.06
|
)
|
$
|
(0.13
|
)
|
||
|
Net
income (loss) excluding non-recurring items (1)
|
284
|
(334
|
)
|
(962
|
)
|
(1,049
|
)
|
||||||
|
Diluted
earnings (loss) per share excluding non-recurring items
|
$
|
0.01
|
$
|
(0.02
|
)
|
$
|
(0.06
|
)
|
$
|
(0.06
|
)
|
||
|
Fiscal
Year 2005
|
|||||||||||||
|
|
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
|||||||||
|
Revenues
|
$
|
12,526
|
$
|
11,919
|
$
|
10,241
|
$
|
9,801
|
|||||
|
Income
(loss) from operations
|
528
|
416
|
(907
|
)
|
(1,623
|
)
|
|||||||
|
Net
income (loss) attributable to common stock
|
410
|
(1,576
|
)
|
(152
|
)
|
(2,269
|
)
|
||||||
|
Basic
earnings (loss) per share
|
$
|
0.03
|
$
|
(0.10
|
)
|
$
|
(0.01
|
)
|
$
|
(0.14
|
)
|
||
|
Diluted
earnings (loss) per share
|
$
|
0.03
|
$
|
(0.10
|
)
|
$
|
(0.01
|
)
|
$
|
(0.14
|
)
|
||
|
Net
income (loss) excluding non-recurring items (2)
|
563
|
(182
|
)
|
(1,010
|
)
|
(1,237
|
)
|
||||||
|
Diluted
earnings (loss) per share excluding non-recurring items
|
$
|
0.04
|
$
|
(0.01
|
)
|
$
|
(0.06
|
)
|
$
|
(0.08
|
)
|
||
|
(1)
|
One-time
non-recurring charges (income) were $23,000, ($325,000) and $1,242,000
in
the first, second and fourth quarters, respectively.
|
|
|
(2)
|
One-time
non-recurring charges (income) were $153,000, $1,394,000, ($858,000)
and
$1,032,000 in the first, second, third and fourth quarters,
respectively.
|
F-28
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
20. SUBSEQUENT EVENTS
In
January 2007, we granted options to purchase 490,817 shares of our common
stock
to key employees, including 308,992 options issued to executive officers,
with
an exercise price of $0.70 per share. The options vest ratably over three
years
and have a term of seven years. The estimated cost of these stock option
awards
to be recognized in our consolidated financial statements is $126,000. The
cost
will be expensed $42,000 annually in each of fiscal years 2008, 2009 and
2010.
In
March
2005, our investors provided us a $1,600,000 revolving line of credit, which
was
originally due to mature on the earlier of March 31, 2006 or the closing
of a
financing providing us not less than $1,600,000 of net proceeds. Upon completion
of our financing in May 2005, the maturity date was extended to May
23, 2007. On March 30, 2007, the total amount of the line of credit was
reduced to $1,440,000, and the maturity date was further extended to May
23,
2008 at a fee of 7% of the $1,440,000 borrowed, or $101,000, payable through
the
issuance of 224,000 shares of our common stock, based on the closing stock
price
on that date of $0.45 per share
F-29
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
We
maintain "disclosure controls and procedures," as such term is defined under
Securities Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in
the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how
well
designed and operated, can provide only reasonable assurance of achieving
the
desired control objectives, and our management necessarily was required to
apply
its judgment in evaluating the cost-benefit relationship of such controls
and
procedures. As required by SEC Rule 13a-15(b), we have carried out an
evaluation, as of the end of the period covered by this report, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based upon
their
evaluation and subject to the foregoing, the Chief Executive Officer and
Chief
Financial Officer concluded that our disclosure controls and procedures were
effective in ensuring that material information relating to Shells is made
known
to the Chief Executive Officer and Chief Financial Officer by others within
our
company during the period in which this report was being prepared.
There
were no changes in our internal controls over financial reporting that occurred
during our most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM
9B. OTHER INFORMATION
None.
38
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNACE
The
information required by this item concerning our executive officers, is set
forth under the headings “Our Executive Officers” in Part I of this Annual
Report on Form 10-K.
The
information required by this item is incorporated
by reference to the Proxy Statement for our 2007 Annual Meeting of Stockholders
to be filed with the SEC within 120 days after the end of the fiscal year
ended
December 31, 2006.
ITEM
11. EXECUTIVE COMPENSATION
The
information required by this item is incorporated by reference to the Proxy
Statement for our 2007 Annual Meeting of Stockholders to be filed with
the SEC
within 120 days after the end of the fiscal year ended December 31,
2006.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information required by this item is incorporated by reference to the Proxy
Statement for our 2007 Annual Meeting of Stockholders to be filed with
the SEC
within 120 days after the end of the fiscal year ended December 31,
2006.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information required by this item is incorporated by reference to the Proxy
Statement for our 2007 Annual Meeting of Stockholders to be filed with
the SEC
within 120 days after the end of the fiscal year ended December 31,
2006.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
information required by this item is incorporated by reference to the Proxy
Statement for our 2007 Annual Meeting of Stockholders to be filed with
the SEC
within 120 days after the end of the fiscal year ended December 31,
2006.
39
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
(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, 10.4, 10.5, 10.17, 10.22, 10.23,
10.24, 10.30,
10.31, 10.34, 10.35, 10.36, 10.37, 10.38 and 10.39 are management
contracts, compensatory plans or
arrangements.
|
|
Number
|
Description
|
|
|
3.1
|
Certificate
of Incorporation. (1)
|
|
|
3.2
|
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. (1)
|
|
|
3.3
|
By-laws.
(1)
|
|
|
3.4
|
Certificate
of Designations of Series A Convertible Preferred Stock.
(2)
|
|
|
3.5
|
Certificate
of Designations of Series B Convertible Preferred Stock.
(6)
|
|
|
3.6
|
Certificate
of Amendment, dated March 17, 2005. (8)
|
|
|
3.7
|
Certificate
of Amendment, dated July 7, 2005. (8)
|
|
|
4.1
|
Specimen
common stock certificate. (1)
|
|
|
4.2
|
Specimen
Series B Convertible Preferred stock certificate. (8)
|
|
|
10.1
|
1996
Employee Stock Option Plan. (1)
|
|
|
10.2
|
1995
Employee Stock Option Plan. (1)
|
|
|
10.3
|
Agreement
for Purchase and Sale of Assets, dated May 14, 1993, between Shells
Seafood Restaurants, Inc. and Shells, Inc. (1)
|
|
|
10.4
|
1996
Stock Option Plan for Non-Employee Directors. (2)
|
|
|
10.5
|
2002
Equity Incentive Plan, as amended. (7)
|
|
|
10.6
|
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. (1)
|
|
|
10.7
|
Joint
Venture Agreement, dated March 1, 1994, between Shells of Melbourne,
Inc.
and WLH Investments, Inc. (1)
|
|
|
10.8
|
First
Amendment to Joint Venture Agreement, effective as of March 31,
1995
between Shells of Melbourne, Inc. and WLH Investments, Inc.
(1)
|
|
|
10.9
|
Management
and License Agreement, dated March 1, 1994, between Shells of Melbourne
Joint Venture and Shells Seafood Restaurants, Inc (1)
|
|
|
10.10
|
Management
and License Agreement, dated July 28, 1993, between Shells of North
Tampa,
Inc. and Shells Seafood Restaurants, Inc., as amended.
(1)
|
|
|
10.11
|
Management
and License Agreement, dated July 29, 1993, between Shells of Sarasota
South, Inc. and Shells Seafood Restaurants, Inc., as amended.
(1)
|
|
|
10.12
|
Amended
Option Agreement, dated August 11, 1995 between Shells Seafood
Restaurants, Inc. and Shells of North Tampa, Inc. (1)
|
|
|
10.13
|
Amended
Option Agreement, dated August 16, 1995 by and between Shells Seafood
Restaurants, Inc. and Shells of Sarasota South, Inc.
(1)
|
|
|
10.14
|
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. (1)
|
|
|
10.15
|
Form
of Directors Indemnification Agreement.
(1)
|
40
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
Number
|
Description
|
|
10.16
|
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.
(2)
|
|
|
10.17
|
Letter
from board of directors, dated January 19, 2000, clarifying severance
arrangement for Warren R. Nelson. (2)
|
|
|
10.18
|
Second
Amendment to Management and License Agreement, dated October
4, 2001,
between Shells Seafood Restaurants, Inc. and Shells of Sarasota
South,
Inc. (2)
|
|
|
10.19
|
Second
Amendment to Management and License Agreement, dated October
4, 2001,
between Shells Seafood Restaurants, Inc. and Shells of North
Tampa, Inc.
(2)
|
|
|
10.20
|
Loan
agreement, dated October 25, 2002, between Shells of Melbourne,
Joint
Venture and Colonial Bank (previously known as Manufacturers
Bank of
Florida), in the renewal principal amount of $635,506.
(2)
|
|
|
10.21
|
Distribution
Agreement, dated October 20, 2005, between Shells Seafood Restaurants,
Inc. and Performance Food Group, LLC. (3)
|
|
|
10.22
|
Amendment
to the Non-Employee Director Stock Option Plan, as approved October
23,
2001. (2)
|
|
|
10.23
|
Amendment
to the 1995 Employee Stock Option Plan, as approved October 23,
2001.
(2)
|
|
|
10.24
|
Employment
Agreement, dated July 1, 2003, between Leslie J. Christon and
Shells
Seafood Restaurants, Inc. (4)
|
|
|
10.25
|
Form
of Stock Purchase Warrant, dated December 7, 2004, in the aggregate
of
1,971,250 warrants to purchase shares of common stock.
(5)
|
|
|
10.26
|
Form
of Securities Purchase Agreement dated May 24, 2005, by and among
Shells
Seafood Restaurants, Inc. and the investor parties thereto.
(6)
|
|
|
10.27
|
Form
of Stock Purchase Warrant, issued in connection with May 24,
2005
financing. (6)
|
|
|
10.28
|
Form
of Placement Agent Warrant issued to JMP Securities LLC.
(6)
|
|
|
10.29
|
Amendment
No. 1 to Loan and Security Agreement, dated as of May 23, 2005.
(6)
|
|
|
10.30
|
Form
of Stock Option Agreement for Non-Employee Directors Pursuant
to the
Shells Seafood Restaurants, Inc. 2002 Equity Incentive Plan.
(7)
|
|
|
10.31
|
Form
of Stock Option Agreement for Employees Pursuant to the Shells
Seafood
Restaurants, Inc. 2002 Equity Incentive Plan. (7)
|
|
|
10.32
|
Agreement,
dated August 5, 2005, by and between Shells Seafood Restaurants,
Inc. and
Deborah Christen Corporation regarding the Carrollwood trade
area.
(9)
|
|
|
10.33
|
Amendment
No. 1, dated December 20, 2006, by and between Shells Seafood
Restaurants,
Inc. and Deborah Christen Corporation. (14)
|
|
|
10.34
|
Amended
and Restated Employment Agreement, effective as of July 1, 2005,
by and
between Shells Seafood Restaurants, Inc. and Leslie J. Christon.
(10)
|
|
|
10.35
|
Stock
Option Agreement, dated November 14, 2005, by and between Shells
Seafood
Restaurants, Inc. and Leslie J. Christon. (10)
|
|
|
10.36
|
Amendment
to the 2002 Equity Incentive Plan, dated November 14, 2005.
(10)
|
|
|
10.37
|
Agreement,
dated March 13, 2006, by and between Shells Seafood Restaurants
and
Warrant Nelson. (11)
|
|
|
10.38
|
Agreement,
dated March 13, 2006, by and between Shells Seafood Restaurants
and Guy
Kathman. (11)
|
41
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
Number
|
Description
|
|
10.39
|
Agreement,
dated March 13, 2006, by and between Shells Seafood Restaurants
and Chris
Ward. (11)
|
|
|
10.40
|
Purchase
and Sale Agreement, dated April 17, 2006, between the Shells
Seafood
Restaurants and FRI Fish, LLC for the Ocala, Florida location.
(12)
|
|
|
10.41
|
Land
and Building Lease, dated April 17, 2006, between the Shells
Seafood
Restaurants and FRI Fish, LLC for the Ocala, Florida location.
(12)
|
|
|
10.42
|
Purchase
and Sale Agreement, dated October 27, 2006, between the Shells
Seafood
Restaurants and FRI Fish, LLC for the New Smyrna Beach, Florida
location.
(13)
|
|
|
10.43
|
Land
and Building Lease, dated October 27, 2006, between the Shells
Seafood
Restaurants and FRI Fish, LLC for the New Smyrna Beach, Florida
location.
(13)
|
|
|
10.45
|
Renewal Letter
on Credit Facility, dated September 28, 2006.
(15)
|
|
|
10.46
|
Promissory
Note, dated December 28, 2005, between Shells Seafood Restaurants,
Inc.
and Colonial Bank, N.A (16)
|
|
| 10.47 |
Business
Loan Agreement, dated December 28, 2005, between Shells Seafood
Restaurants,
Inc. and Colonial Bank, N.A (16)
|
|
|
10.48
|
Commercial
Security Agreement,
dated December 28, 2005, between Shells Seafood Restaurants,
Inc. and
Colonial Bank, N.A (16)
|
|
|
10.49
|
Extension
Letter, dated July 7, 2006, between Shells Seafood Restaurants, Inc.
and Colonial Bank, N.A (16)
|
|
|
10.50
|
Amendment
No. 2 to the Loan and Security Agreement, dated March 30, 2007.
(17)
|
|
|
14
|
Code
of Business Conduct and Ethics. (2)
|
|
|
21.1
|
Subsidiaries
of the Registrant. (8)
|
|
_______________
|
|
|
(1)
|
Included
as an exhibit to our Registration Statement on Form S-1 and incorporated
herein by reference (File No. 333-1600).
|
|
(2)
|
Included
as an exhibit to our Annual Report on Form 10-K or 10-K/A for
the fiscal
year ended December 28, 2003 and incorporated herein by
reference.
|
|
(3)
|
Included
as an exhibit to our Annual Report on Form 10-K or 10-K/A for
the fiscal
year ended January 1, 2006 and incorporated herein by
reference.
|
|
(4)
|
Included
as an exhibit to our Quarterly Report on Form 10-Q for the quarter
ended
June 29, 2003 and incorporated herein by reference.
|
|
(5)
|
Included
as an exhibit to our Current Report on Form 8-K dated December
9, 2004 and
incorporated herein by reference.
|
|
(6)
|
Included
as an exhibit to our Current Report on Form 8-K dated May 23,
2005 and
incorporated herein by reference.
|
|
(7)
|
Included
as an exhibit to our Current Report on Form 8-K dated May 28,
2005 and
incorporated herein by reference.
|
|
(8)
|
Included
as an exhibit to our Registration Statement on Form S-1 dated
July 8, 2005
and incorporated herein by reference.
|
|
(9)
|
Included
as an exhibit to our Current Report on Form 8-K dated August
9, 2005 and
incorporated herein by reference.
|
|
(10)
|
Included
as an exhibit to our Current Report on Form 8-K dated November
14, 2005
and incorporated herein by reference.
|
|
(11)
|
Included
as an exhibit to our Current Report on Form 8-K dated March 13,
2006 and
incorporated herein by reference.
|
|
(12)
|
Included
as an exhibit to our Current Report on Form 8-K dated April 21,
2006 and
incorporated herein by reference.
|
|
(13)
|
Included
as an exhibit to our Current Report on Form 8-K dated November
2, 2006 and
incorporated herein by reference.
|
|
(14)
|
Included
as an exhibit to our Current Report on Form 8-K dated December
21, 2006
and incorporated herein by reference.
|
|
(15)
|
Included
as an exhibit to our Current Report on Form 8-K dated September
28, 2006
and incorporated herein by reference.
|
|
(16)
|
Included
as an exhibit to our Current Report on Form 8-K dated July 7,
2006 and
incorporated herein by reference.
|
|
(17)
|
Included
as an exhibit to our Current Report on Form 8-K dated April 2,
2007 and
incorporated herein by
reference.
|
42
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
(b)
|
Exhibits (currently being filed or not previously filed) | |
| 31.1 | Certification of Chief Executive Officer under Rule 13a-14(a) | |
| 31.2 | Certification of Chief Financial Officer under Rule 13a-14(a) | |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer under Section 906 | |
| 99.1 | Insider Trading Compliance Policy, adopted February 5, 2007 | |
| 99.2 | Audit Committee Charter, adopted December 22, 2006 |
|
(c)
|
Financial Statements | |
All
financial statement schedules are omitted because they are inapplicable,
not
required or the information is indicated elsewhere in the consolidated financial
statements or the notes thereto.
43
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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.
|
Date:
March 30, 2007
|
SHELLS
SEAFOOD RESTAURANTS, INC.
|
|
|
|
|
|
|
|
By:
/s/ Warren R. Nelson
|
|
|
|
Warren
R. Nelson
Executive
Vice President of Finance,
Chief
Financial Officer, Treasurer and Secretary
(Principal
Financial Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report had
been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Leslie
J. Christon
|
President,
Chief Executive Officer and Director
(Principal
Executive Officer)
|
April
2, 2007
|
||
|
Leslie
J. Christon
|
||||
|
/s/
Warren
R. Nelson
|
|
Executive
Vice President of Finance,
Chief
Financial Officer, Treasurer and Secretary (Principal Financial
Officer)
|
April
2, 2007
|
|
|
Warren
R. Nelson
|
|
|||
|
|
|
|||
|
/s/
Philip
R. Chapman
|
|
Chairman
of the Board
|
April
2, 2007
|
|
|
Philip
R. Chapman
|
|
|||
|
|
|
|||
|
/s/
Michael
R. Golding
|
Director
|
April
2, 2007
|
||
|
Michael
R. Golding
|
||||
|
/s/
Gary
L. Herman
|
|
Director
|
April
2, 2007
|
|
|
Gary
L. Herman
|
|
|||
|
|
|
|||
|
/s/
Christopher
D. Illick
|
|
Director
|
April
2, 2007
|
|
|
Christopher
D. Illick
|
|
|||
|
|
|
|||
|
/s/
Jay
A. Wolf
|
|
Director
|
April
2, 2007
|
|
|
Jay
A. Wolf
|
|
|||
|
|
|
44
AMENDMENT
NO. 2 TO LOAN AND SECURITY AGREEMENT
This
Amendment No. 2 (“Amendment
No. 2”)
to
that certain Loan and Security Agreement dated as of March 9, 2005, as amended
by Amendment No. 1, dated May 23, 2005 (as amended, the “Agreement”)
is
made as of March 30, 2007, by and among Shells Seafood Restaurants, Inc., a
Delaware corporation (the “Company”),
and
the Lenders (as defined in the Agreement) parties thereto. Capitalized terms
not
herein defined shall have the meaning given to them in the
Agreement.
WHEREAS,
the Agreement expires, subject to certain exceptions set forth therein, on
May
23, 2007 (the “Maturity
Date”);
WHEREAS,
the parties to the Agreement desire to provide for the extension of the
Agreement for an additional one (1) year such that it expires on May 23, 2008;
WHEREAS,
as consideration for the extension the Agreement the Company desires to pay
the
Lenders an aggregate $100,800 in shares of the Company’s unregistered common
stock based upon the fair market value of the Shares on the date hereof;
and
WHEREAS,
the parties have renegotiated the commitment amount of Bruce Galloway, IRA
R/O
to reduce such amount from $320,000 to $160,000 and desire to amend the
Agreement to reflect such renegotiation.
NOW,
THEREFORE, in consideration of the premises and other good and valuable
consideration, the parties hereby agree as follows:
1. Amendment
to Section 1.
Section
1 of the Agreement is hereby amended and restated in its entirety as
follows:
1.
AMOUNT.
The
Lenders agree, on the terms and conditions of this Agreement, to make loans
(hereinafter called individually a “Loan” and, collectively, “the Loans”) to the
Company in an aggregate principal amount at any one time outstanding up to
but
not exceeding One Million Four Hundred Forty Thousand Dollars ($1,440,000);
provided, however that each Loan request by the Company to the Lenders, in
the
aggregate, shall be in increments of $200,000, and each individual Lender is
committing to make Loans only up to the aggregate principal amount set forth
opposite such Lenders’ name on Exhibit A hereto. The obligation of a Lender to
make loans up to but not exceeding such aggregate principal amount at any one
time outstanding is hereinafter called its “commitment.” Within such limits, the
Company may borrow, repay, and reborrow funds under this revolving credit line,
at any time or from time to time from the date hereof to and including May
23,
2008 (the “Maturity Date”), subject to earlier termination of the commitment of
the Lenders in accordance herewith. All Loans shall be made by, and repayments
(if any) made to, each of the Lenders, in proportion to the percentage interest
set forth opposite such Lenders’ name on Exhibit A hereto; and shall be repaid,
to the extent then still outstanding, on the Maturity Date (subject to earlier
repayment as provided
in Section 4 below).
2. Consideration.
On the
date hereof the Company shall, as consideration for the extension of the
Agreement, pay the Lenders an aggregate of $100,800 in shares of the Company’s
unregistered common stock (the “Shares”)
based
upon the fair market value of the Shares on the date hereof. Each Lender shall
receive that number of Shares as is set forth opposite such Lenders’ name on
Exhibit B hereto.
3. Lender
Representations.
Each
Lender hereby represents and warrants to the Company, severally and not jointly,
that:
(i) The
Lender is an accredited investor as defined in Rule 501(a) of Regulation D
promulgated under the Securities Act of 1933, as amended (the “Securities
Act”).
(ii) The
Lender understands that the Shares have not been, and will not be, registered
under the Securities Act, and are being offered by reason of a specific
exemption from the registration provisions of the Securities Act which depends
upon, among other things, the bona fide nature of the investment intent and
the
accuracy of the Lender’s representations as expressed herein. The Lender
understands that the Shares are “restricted securities” under applicable U.S.
federal and state securities laws and that, pursuant to these laws, the Lender
must hold the Shares
indefinitely unless they are registered with the SEC and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available. Each Lender is aware of the provisions of Rule 144
promulgated under the Securities Act which permits limited resale of securities
purchased in a private placement subject to the satisfaction of certain
conditions including, among other things, the availability of certain current
public information about the Company and compliance with applicable requirements
regarding the holding period, the amount of securities to be sold and the manner
of sale. The Lender acknowledges that the Company has no obligation to register
or qualify the Shares for resale.
(iii) The
Lender understands that the Shares and any securities issued in respect of
or
exchange for the Shares, shall bear the following legend:
“THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH
A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH
TRANSFER MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT
SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.”
(iv) This
Amendment No. 2 is made with the Lender in reliance upon the Lender’s
representation to the Company, which by the Lender’s execution of this Amendment
No. 2, the Lender hereby confirms, that the Shares to be acquired by the Lender
will be acquired for investment for the Lender’s own account, not as a nominee
or agent, and not with a view to the resale or distribution of any part thereof,
and that the Lender has no present intention of selling, granting any
participation in, or otherwise distributing the same.
(v) Neither
the Lender, nor any of its officers, directors, employees, agents, stockholders
or partners has either directly or indirectly, including through a broker or
finder (a) engaged in any general solicitation, or (b) published any
advertisement in connection with the offer and sale of the Shares.
4. Entire
Agreement.
This
Amendment No. 2, together with the provisions of the Agreement not amended
hereby, constitute the entire agreement between the parties hereto with respect
to the subject matter hereof and supersede all other prior agreements, whether
written or oral, between the parties hereto.
5. Counterparts.
This
Amendment No. 2 may be executed in one or more counterparts, each of which
shall
be deemed an original and all of which together shall constitute one and the
same document.
IN
WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 2
to
be executed as of the date first above written.
| SHELLS SEAFOOD RESTAURANTS, INC. | ||
| |
|
|
| By: | /s/ Warren R. Nelson | |
|
Name:
Warren
R. Nelson
Title: Chief
Financial Officer
|
||
| Frederick R. Adler | ||
| |
|
|
| By: | /s/ Frederick R. Adler | |
|
Frederick
R. Adler
|
||
| Trinad Capital, LP | ||
| |
|
|
| By: | /s/ Jay Wolf | |
|
Name:
Jay Wolf
Title:
Partner
|
||
| Bruce Galloway, IRA, R/O | ||
| |
|
|
| By: | /s/ Bruce Galloway | |
|
Name:
Bruce
Galloway
|
||
EXHIBIT
A
|
Lender
|
%
Interest of Loans Made
|
Aggregate
$ Commitment
|
|
Fredrick
R. Adler
c/o
Adler & Co.
750
Lexington Avenue
New
York, NY 10022
|
56%
|
$800,000
|
|
Trinad
Capital, LP
2121
Avenue of the Stars Suite 2550
Los
Angeles, CA 90067
|
33%
|
$480,000
|
|
Bruce
Galloway, IRA R/O
c/o
Galloway Capital Management, LLC
720
Fifth Avenue, 10th
Fl
New
York, NY 10019
|
11%
|
$160,000
|
EXHIBIT
B
|
Lender
|
Number
of Shares
|
|
Fredrick
R. Adler
c/o
Adler & Co.
750
Lexington Avenue
New
York, NY 10022
|
124,444
|
|
Trinad
Capital, LP
2121
Avenue of the Stars, St. 2550
Los
Angeles, CA 90067
|
74,667
|
|
Bruce
Galloway, IRA R/O
c/o
Galloway Capital Management, LLC
720
Fifth Avenue, 10th
floor
New
York, NY 10019
|
24,889
|
Exhibit
31.1
CERTIFICATION
I,
Leslie
J. Christon, certify that:
1.
I
have
reviewed this annual report on Form 10-K of Shells Seafood Restaurants,
Inc.;
2.
Based
on
my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not
misleading with respect to the period covered by this annual
report;
3.
Based
on
my knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report.
4.
The
registrant's other certifying officer and I are responsible for establishing
and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
and
(b)
evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this annual report based on such evaluation;
and
(c) disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the
registrant’s internal control over financial reporting; and
5.
The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a)
all
significant deficiencies and material weaknesses in the design or operation
of
internal controls over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b)
any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant's internal control over financial
reporting.
| Date: April 2, 2007 | ||
| By: | /s/ Leslie J. Christon | |
|
Leslie
J. Christon
President
and Chief Executive Officer
|
||
Exhibit
31.2
CERTIFICATION
I,
Warren
R. Nelson, certify that:
1.
I
have
reviewed this annual report on Form 10-K of Shells Seafood Restaurants,
Inc.;
2.
Based
on
my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not
misleading with respect to the period covered by this annual
report;
3.
Based
on
my knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report.
4.
The
registrant's other certifying officer and I are responsible for establishing
and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
and
(b)
evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this annual report based on such evaluation;
and
(c) disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected,
or
is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a)
all
significant deficiencies and material weaknesses in the design or operation
of
internal controls over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b)
any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant's internal control over financial
reporting.
| Date: April 2, 2007 | ||
| By: | /s/ Warren R. Nelson | |
|
Warren
R. Nelson
Executive
Vice President and Chief Financial Officer
|
||
Exhibit
32.1
Certification
of Chief Executive Officer and Chief Financial Officer
pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002
Securities
and Exchange Commission
Washington,
DC
The
undersigned Chief Executive Officer and Chief Financial Officer of Shells
Seafood Restaurants, Inc. do hereby certify pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the
Annual Report of Shells Seafood Restaurants, Inc. on Form 10-K for the fiscal
year ended December 31, 2006 fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and the information
contained in such Annual Report on Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of Shells Seafood
Restaurants, Inc.
A
signed
original of this written statement required by Section 906 has been provided
to
Shells Seafood Restaurants, Inc. and will be retained by Shells Seafood
Restaurants, Inc. and furnished to the Securities and Exchange Commission or
its
staff upon request.
| /s/ Leslie J. Christon | ||
|
|
||
|
President
and Chief Executive Officer
April
2, 2007
|
| /s/ Warren R. Nelson | ||
|
|
||
|
Executive
Vice President and Chief Financial Officer
April
2, 2007
|
Shells
Seafood Restaurants, Inc.
Insider
Trading Compliance Policy
This
Policy
generally concerns
the handling of material, non-public information relating to Shells Seafood
Restaurants, Inc. (“Shells”, the “Company”, or “we”) or other companies with
which we may transact business and with the buying and selling of stock and
other securities of Shells and such other companies.
Background
As
we all
know, law enforcement officials have been vigorously pursuing violations of
insider trading laws, which in general prohibit the purchase or sale of a
company’s securities while in possession of material information that has not
been publicly disclosed. Congress has encouraged such prosecutions by adopting
laws, which, among other things, dramatically increase the penalties for insider
trading and expose the Company and possibly other “controlling persons” to
liability for violations by Company personnel. If companies like ours do not
take active steps to adopt preventive policies and procedures covering stock
trading by company personnel, the consequences could be severe.
We
have
all worked hard to establish Shells’ reputation for integrity and ethical
conduct. Compliance with this Policy Statement is intended to help to avoid
situations, which could tarnish this important corporate asset. In this regard,
even the appearance of an improper transaction can be damaging, and must be
avoided to preserve our reputation.
Remember,
if your securities transactions become the subject of scrutiny, they will be
viewed after-the-fact with the benefit of hindsight. As a result, before
engaging in any transaction, you should carefully consider how regulators and
others might view your transaction in hindsight.
|
I.
|
Employee
Groups
|
For
the
purposes of this Policy, each Shells Employee, Officer and member of the Board
of Directors (“Director(s)”) will be categorized into one of two groups.
Different restrictions contained in this Policy apply to each group. The
Company’s
compliance officer (“CO”), currently our Chief
Financial Officer
will
notify each Employee, Officer and Director of the group into which he or she
is
placed initially and if at any time he or she is placed into a different
group.
You
should read this entire Policy. However, for your convenience, the following
is
a summary of the restrictions that apply to each group under this
Policy:
Group
One
- The
vast majority of our Employees are in Group One. Members of Group One are
required to comply with the restrictions on (1) trading in securities while
in
possession of material, nonpublic information (“insider trading”), as described
in Section II, and (2) disclosing material nonpublic information to others
(“tipping”), as described in Section III.
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Group
Two
-
Generally,
members
of management, including our
Officers
and Directors,
Employees in our accounting department, and certain
other
Employees with regular access to material, nonpublic information are in Group
Two. In addition to the general prohibitions against insider trading and
tipping, members of Group Two may only purchase or sell Shells securities during
the trading windows described in Section IV and are required to pre-clear most
transactions with the CO,
as
described in Section V.
In
addition,
any
Employee, Officer or Director of Shells may be temporarily prohibited from
buying or selling Shells securities during special blackout periods. These
special blackout periods are described in Section IV.
|
II.
|
Insider
Trading Prohibited
|
General
Rule.
No
Shells Employee, Officer or Director may purchase or sell Shells securities
while he or she is in possession of material, nonpublic information. This
restriction does not apply to certain “Permitted Transfers,” which are discussed
in Section VI of this Policy.
Employees,
Officers and Directors.
This
Policy applies to all Employees, Officers and Directors of Shells and its
subsidiaries. Each provision of this Policy that applies to an Employee, Officer
and Director also
generally
applies
to:
|
·
|
Members
of their immediate families with whom they share a
household;
|
|
·
|
Other
persons with whom they share a
household;
|
|
·
|
Persons
who principally rely on the Employee, Officer or Director for their
financial support; and
|
|
·
|
Any
person or entity over which they have control or influence with respect
to
a transaction in securities (i.e., a trustee of a trust, an executor
of an
estate).
|
Likewise,
when we refer to “you” in this Policy, we also mean each of the people listed
above with respect to you. Because the people listed above are covered by this
Policy, you will be responsible for their transactions in Shells securities
and
they should not purchase or sell Shells securities without your
clearance.
If this statement is unclear relative to your personal situation, you should
discuss such with the CO.
Material,
Nonpublic Information.
Material.
Whether
information is considered “material” will depend upon the specific facts and
circumstances involved in each situation. Generally, however,
information
is
considered “material” if:
|
·
|
A
reasonable investor would consider it important in making a decision
on
whether to buy, sell or hold the
security;
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·
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A
reasonable investor would view the information as significantly altering
the total mix of information in the marketplace about the issuer
of the
security; or
|
|
·
|
The
information could reasonably be expected to have a substantial effect
on
the price of the security.
|
Nonpublic.
Information is nonpublic until it has been “publicly disclosed”, meaning that it
is:
|
·
|
Published
in such a way as to provide broad, non-exclusionary distribution
of the
information to the public;
|
|
·
|
For
a sufficient period of time to be reflected in the price of the related
securities.
|
Examples
of public disclosure include Shells issuance of a press release or the filing
of
an appropriate report with the SEC. Information is generally considered to
be
“nonpublic” until the expiration of a period of three full trading days after
the information is released to the general public. However, this period varies
depending on the type of information released and the market’s expectations
relating to the subject matter of the release.
Examples
of material, nonpublic information might include information about upcoming
earnings or losses, negotiation of a joint venture, merger or acquisition,
news
of a significant purchase or sale of assets, changes in dividend policies,
the
declaration of a stock split, the offering of additional securities
or
another financing event, financial liquidity problems,
changes
in top management, significant business or accounting developments, the
gain
or loss of a substantial supplier or franchisee,
or
plans for expansion or closure of restaurants.
Information may be material whether it is favorable or unfavorable to the
Company.
Other
Companies.
While
this Policy prohibits trading in Shells securities while you are in possession
of material, nonpublic information about Shells, it also prohibits trading
in
securities of any other company about which you learn material, nonpublic
information in the course of performing your duties for Shells. For example,
you
may be involved in a transaction in which Shells expects to acquire or be
acquired by another company, or enter into a joint venture or other relationship
with that company. This Policy prohibits you from trading in the securities
of
that company while aware of this information, as long as it remains nonpublic.
In
addition, please remember that the Shells Code of Ethics prohibits you from
engaging in outside interests that represent a conflict of interest with your
obligations to Shells.
Securities. This
Policy prohibits certain transactions in the “securities” of Shells. Although it
is usually the case that the information you gain will be material with respect
to Shells common stock, any securities Shells issues, such as debt securities
or
preferred stock, are also subject to this Policy. This Policy also applies
to
stock options and other derivatives related to Shells securities, as discussed
below.
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Long
Term Investments.
We
encourage Shells stock ownership amongst our Employees, Officers and
Directors.
Furthermore, we expect your investment in Shells to be long-term in nature,
aligning your interests with the long-term success, growth and profitability
of
Shells. We expect our Employees, Officers and Directors not to engage in
speculative transactions that are designed to results in profit based on
short-term fluctuations in the price of our securities. When purchasing Shells
securities, we strongly encourage you to do so with the expectation of owning
those securities for an extended period of time - at a minimum, for six months.
We recognize, of course, that your personal circumstances may change due to
unforeseen events, in which case you may be forced to more quickly liquidate
Shells securities that you purchased with the original intent of holding as
a
long-term investment.
Short
Sales; Derivative Securities.
Our
Employees, Officers and Directors are prohibited from selling Shells stock
short
(in the form of derivatives). Derivatives are securities whose value varies
in
relation to the price of Shells securities. For example, derivative securities
would include exchange-traded put or call options, as well as individually
arranged derivative transactions. Our Employees, Officers and Directors are
generally prohibited from purchasing or selling derivative securities. However,
at
various times and after pre-clearance with the CO, you
may
enter into long-term forward sales and other long-term transactions that are
used to hedge your existing ownership positions in Shells securities. If you
have any questions as to whether a particular hedging or derivative transaction
is permitted under this Policy, you should contact the CO.
In
addition, any restrictions under this Policy that apply to you when purchasing
or selling Shells securities also apply to you when entering into a permitted
hedging transaction.
Private
Transactions; Pledged Stock.
Purchases or sales of securities can result in liability whether executed in
the
public markets or in a private transaction. In addition, you should be aware
that sales forced because you have borrowed money and pledged securities as
security for a loan generally
will not have
special
exemption from insider trading laws or this Policy. Accordingly, you should
be
careful when utilizing a margin loan in a brokerage account or otherwise using
your Shells securities as collateral for a loan.
Under
margin arrangements, a broker is entitled to sell shares, which you have
deposited as collateral for loans, if the value of your securities falls below
the brokerage firm’s margin requirements. Even though you did not initiate the
sale or control its timing, because it is still a sale for your benefit, you
may
be subject to liability under insider trading laws if the sale is made at a
time
when you are in possession of material, nonpublic information. Accordingly,
such
a sale must be made in compliance with the restrictions under this Policy that
apply to you, such as trading windows or pre-clearance requirements. As a
result, if you use Shells securities to secure a margin loan, you may be forced
to take actions (for instance, depositing additional money or selling other
securities) to satisfy margin requirements in order to avoid your broker selling
your Shells securities at a time that would result in a violation of insider
trading laws or this Policy. Similar cautions apply to a bank or other loan
for
which you have pledged stock as collateral.
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|
III.
|
Unauthorized
Disclosure of Material, Nonpublic Information
Prohibited
|
General
Rule.
No
Employee, Officer or Director may disclose material, nonpublic information
about
Shells or any company with which Shells transacts business to anyone outside
Shells unless authorized to do so.
Tipping.
Under
the federal securities laws, you can be held responsible not only for your
own
insider trading, but also for trading performed by anyone to whom you disclose
material, nonpublic information. Even if those to whom you disclose such
information do not trade while aware of the information, you can be responsible
for the trades of persons who received material, nonpublic information
indirectly from you if you are the ultimate source of their
information.
Discussing
or Recommending Shells Securities.
We
recognize that Employee enthusiasm for Shells and its business prospects is
a
vital element of our success. You should, however, use extreme caution when
discussing Shells securities with anyone outside Shells or recommending the
purchase, sale or holding of Shells securities. Making recommendations of that
type can easily result in accidental disclosure of material, nonpublic
information or be viewed as “tipping”. Likewise, recommendations can also result
in embarrassing situations for you or the Company, if you make a recommendation
at a time when there is a pending announcement of material, nonpublic
information by the Company; even if you are unaware of that
information.
Authorization
to Disclose Material, Nonpublic Information.
We
authorize only certain Employees, Officers and Directors to make disclosures
of
material, nonpublic information. Unless you are authorized to do so by the
President or the CO,
you
should refrain from discussing material, nonpublic information with anyone
not
subject to this Policy.
This
includes discussions with family members and friends, or on an internet “chat
room” or similar internet-based forum.
Even in
discussions with others subject to this Policy, you should consider the
consequences of disclosing material, nonpublic information to them. For example,
by doing so, you would preclude those persons from trading in Shells securities
until the information is publicly disclosed. Accordingly, you should restrict
the dissemination of material, nonpublic information to those Employees,
Officers, and Directors having a need to know in order to serve Shells
interests.
Regulation
FD (Fair Disclosure).
The
Securities and Exchange Commission has enacted rules banning selective
disclosure. Generally, the regulation provides that when a public company (such
as Shells) discloses material, nonpublic information, it must provide broad,
non-exclusionary public access to the information. Violations of this regulation
can result in SEC enforcement actions, resulting in injunctions and severe
monetary penalties. Regulation FD applies largely to Officers, Directors and
investor relation’s consultants who are designated the responsibility of
communicating with securities market professionals and shareholders. Remember
that no other Shells Employees, Officers or Directors are authorized to
communicate with securities market professionals or shareholders.
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Non-Disclosure
Agreements.
Employees, Officers and Directors involved in transactions or other negotiations
that require disclosure of material, nonpublic information with parties outside
Shells should have those to whom such information is being disclosed sign an
appropriate
non-disclosure
agreement, which
specifies restrictions relative to trading of Shells stock by parties in receipt
of the information. You
should confer with the CO
whenever
a non-disclosure agreement is needed.
|
IV.
|
Trading
Windows.
|
Standard
Trading Windows.
Members
of Group Two may only purchase or sell Shells’ securities:
|
·
|
During
the designated trading windows described below,
and
|
|
·
|
When
the individual is not in possession of material, nonpublic
information.
|
Outside
of the trading windows, members of Group Two may not transfer, purchase or
sell
Shells securities, even if they are not personally aware of any material,
nonpublic information. However, members of Group Two may engage in Permitted
Transactions (described in Section VI below) outside of the trading
windows.
The
trading window generally will open three full trading days after Shells
quarterly release of earnings and will close beginning the third fiscal month
of
each quarter.
For
example, if quarterly earnings are released after the close of trading on a
Monday, the following Friday becomes the first trading day that the window
is
open, providing the market is open for trading on Tuesday, Wednesday and
Thursday of that week.
However,
you should not expect that the window will open on any particular date or remain
open for any minimum period of time. Significant corporate developments
may
require changes to the schedule.
Do
not
confuse the applicability of the trading windows with the broader prohibition
on
trading when you are in possession of material, nonpublic information described
in Section II. Regardless of whether the trading window is open or closed,
you
may not trade in Shells securities if you possess material, nonpublic
information about Shells.
Special
Blackouts.
We
reserve the right to impose a trading blackout from time to time on all or
any
group of our Employees, Officers, or Directors when, in the judgment of our
Board of Directors or Officers, a blackout is warranted. During a special
blackout, you will not be permitted to purchase or sell Shells securities and
you may or may not be allowed to execute Permitted Transactions. A special
blackout may also prohibit you from trading in the securities of other
companies. If the Company imposes a blackout to which you are subject, we will
notify you when the blackout begins and when it ends and the securities and
transactions to which it applies.
|
V.
|
Pre-Clearance
of Transactions
|
General.
At any
time, even during a standard trading window, before purchasing or selling Shells
securities, members of Group Two must obtain clearance of the transaction from
the CO.
This
clearance must be obtained before
you
place the order for, or otherwise initiate, any transaction in Shells
securities.
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Our
pre-clearance is designed to help prevent inadvertent violations and avoid
even
the appearance of an improper transaction (which could result, for example,
where an officer engages in a trade while unaware of a pending major
development), as well as to help ensure compliance with federal securities
laws
reporting requirements. Thus, no transactions in Company stock will be approved
(i) during quarterly “quiet periods,” i.e., the period from the first day of the
last month of a fiscal quarter until after the third full trading day after
the
Company has issued an earnings press release for that fiscal quarter and has
announced the opening of the trading window, and (ii) unless satisfactory
arrangements can be made in order to assure the CO that the required federal
securities reporting obligations relating to the transaction will be met on
a
timely basis.
Do
not
confuse pre-clearance of transactions with the broader prohibition on trading
when you are in possession of material, nonpublic information described in
Section II. Regardless of whether you have received pre-clearance for a
transaction or whether a trading window applicable to you is open or closed,
you
may not trade in Shells securities if you are in actual possession of material,
nonpublic information about Shells.
Permitted
Transactions.
Members
of Group Two are required to receive pre-clearance prior to exercising any
stock
options or making any gifts of Shells securities. Pre-clearance is not required
prior to entering into any other Permitted Transaction.
|
VI.
|
Permitted
Transactions
|
The
following are “Permitted Transactions”:
|
·
|
Acceptance
or receipt of a stock option, shares of restricted stock or similar
grants
of securities under the Company’s 2002 Equity Incentive Plan or
other applicable equity based benefit plans in effect (including
elections
to acquire stock options in lieu of other compensation) or the
cancellation or forfeiture of options or restricted shares pursuant
to
Shells’ plans;
|
|
·
|
Election
to participate in, cease participation in or purchase securities
under a
Shells employee stock purchase plan, if such a plan is in
effect;
|
|
·
|
Vesting
of stock options or shares of restricted stock and any related stock
withholding;
|
|
·
|
Exercise
of stock options issued under Shells stock option plans in a
stock-for-stock exercise, payment of the exercise price in shares
of stock
and any related stock withholding transactions, but (1)
not the sale of any stock acquired in the option exercise, and (2)
not the
use of proceeds from the sale of any such shares to exercise additional
options;
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·
|
Transferring
shares to an entity that does not involve a change in the beneficial
ownership of the shares, for example, to an inter vivos trust of
which you
are the sole beneficiary during your
lifetime;
|
|
·
|
Making
payroll contributions to a Shells 401 (k) plan, deferred compensation
plan
or any similar plan, but not
intra-plan transfers involving any Shells securities nor a change
in
“investment direction” under such plan to increase or decrease your
percentage investment contribution allocated to Shells
securities;
|
|
·
|
Execution
of a transaction pursuant to a contract, instruction, or plan described
in
Exchange Act Rule 10b5- (c) (1) (i) (A) (called a “Trading Plan”), as
discussed below; or
|
|
·
|
Any
other transaction designated by the Board of Directors or any Board
Committee or Officer, with reference to this Policy, as a Permitted
Transaction.
|
Pre-Disclosure
of Undisclosed Material, Nonpublic Information.
You
may
not enter into any Permitted Transaction unless you have disclosed any material,
nonpublic information that you are aware of to Shells’ CO
or
designee. If you are a member of Group Two, the information must also be
disclosed to the CO
and the
CO
must
disclose any such information to the President and Audit Committee Chairperson
before any transaction listed qualifies as a Permitted Transaction. This ensures
that Shells is fully aware of any material information affecting any security
before you enter into a transaction involving Shells securities.
Employee
Benefit Plan Transactions.
Included in the definition of Permitted Transaction are most of the ongoing
transactions you might enter into under Shells 2002 Equity Incentive Plan or
any
other benefit based plans in effect. For example, although your ongoing
participation in a plan may involve the regular purchase of Shells common stock,
either directly pursuant to an investment election or indirectly through an
employer matching contribution, those purchases are Permitted transactions.
Please
note, however, that the movement of balances in those plans into or out of
Shells securities or change in your investment direction under those plans
are
not
Permitted Transactions.
This
means that you may not make such transfers or elections while you are in
possession of material, nonpublic information and that such transfers or
elections must be made in compliance with any other restrictions under this
Policy that apply to you (for instance, such transfers or elections could only
be made using an open trading window with pre-clearance if you are in Group
Two.)
Transactions
in employee stock options are also considered Permitted Transaction if there
is
no related sale to a person other than Shells. Please
note, however, that a sale of stock following or in connection with an option
exercise is not a transaction with Shells and is, therefore, not a Permitted
Transaction.
Thus,
you may engage in a cash exercise of an option as long as you retain the stock
you buy in the exercise. You can also engage in stock-for-stock exercised or
elect stock withholding without violation the Policy. However, it would not
be a
Permitted Transaction for you to exercise a stock option, sell the resulting
shares or then use the proceeds from that sale to pay for the exercise of
additional stock options in a same day sale. Although exercises of Shells stock
options are Permitted Transaction, members of Group Two must pre-clear all
stock
options exercises.
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Transaction
in Which There is No Change in Beneficial Ownership.
Certain
transactions involve merely a change in the form in which you own securities.
For example, you may transfer shares of stock to a trust if you are the only
beneficiary of the trust during your lifetime. Likewise, changing the form
of
ownership to include a member of your immediate household as a joint owner
is a
Permitted Transaction since members of your household are considered the same
as
you for purposes of this Policy.
Gifts
of Shells Securities.
Depending
on the particular situation involved,
bona
fide gifts of Shells securities, whether to charitable institutions or to
friends and family members, may
be
Permitted Transactions. However,
if you believe that the recipient will sell the stock either immediately or
shortly after receiving it (within six months), then the gift is
likely
not
a
Permitted Transaction and the normal restrictions would be
applicable.
This
policy is designed to avoid the embarrassment of having one of our Employees
make of a gift of stock that ends up being sold into the market at a time when
the Employee could not sell the stock directly.
Trading
Plans.
The SEC
has enacted rules that provide an affirmative defense against violations of
the
insider trading laws if you enter into a contract, provide instructions, or
adopt a written plan for a transaction in securities when you are not in
possession of material, nonpublic information, even if it turns out that you
had
such information when the transaction was actually completed. The contract,
instructions or plan must:
|
·
|
Specify
the amount, price and date of the
transaction;
|
|
·
|
Specify
an objective method for determining the amount, price and date of
the
transaction; or
|
|
·
|
Place
the discretion for determining amount, price and the date of the
transaction in another unaffiliated
person
who is not, at the time of the transaction, in possession of material,
nonpublic information.
|
You
may
not exercise discretion or influence over the amount, price, and date of the
transaction after entering into the arrangement. In this Policy, we refer to
these arrangements as “Trading Plans.” The rules regarding Trading Plans are
extremely complex and must be complied with completely to be effective. You
should consult with your own legal advisor before proceeding with entering
into
any Trading Plan.
Any
restrictions under this Policy that apply to you when purchasing or selling
Shells securities also apply to you when establishing a Trading Plan. Therefore,
you may not establish a Trading Plan when you are in possession of material,
nonpublic information about Shells and to the extent trading windows and special
blackout periods apply to you. Those restrictions must be complied with in
connection with establishing a Trading Plan. In addition, members of Group
Two
are required to receive pre-clearance before entering into any Trading Plan.
Once a Trading Plan for a member of Group Two has been pre-cleared by the
CO,
transactions executed pursuant to that Trading Plan do not require approval.
Members of Group One are not required to pre-clear Trading Plans, but they
are
required to provide a copy of any Trading Plan,
which
they enter into to the CO.
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In
establishing any Trading Plan, you should carefully consider the timing of
your
transactions under the Trading Plan. Even though transactions executed in
accordance with a Trading Plan are exempt from the insider trading rules, the
trades may nonetheless occur at times shortly before Shells announces material
news, and the media may not understand the nuances of trading pursuant to a
Trading Plan.
Once
a
trading plan is established, however, no transactions can be made in the
Company’s stock under that plan for at least two weeks. You also may not
terminate or modify the trading directions or terms of your trading plan at
any
time during a Company blackout period (whether or not you have actual knowledge
of material nonpublic information at that time). In the event you modify or
terminate and then reestablish (with the same or alternate trading instructions)
a trading plan, no transactions can be effected under the new plan for at least
six months from the date that the original plan was modified or
terminated.
| VII |
Information
Required Following All Transactions by Directors and Officers.
|
To
facilitate the reporting of all transactions in the Company’s stock to the
Securities and Exchange Commission, it is essential that the following
information be communicated to our CO, currently Warren Nelson, immediately
following the transaction:
Date
of
transaction.
Type
of
transaction - purchase, sale, gift, change of beneficial ownership,
etc.
Shares
acquired or disposed.
Price
of
shares acquired or disposed.
Beneficial
ownership (direct or indirect).
Whether
the transaction was effected pursuant to a Rule 10b5-1 trading
plan.
The
newly
enacted Sarbanes-Oxley Act of 2002 requires that a Form 4 (which reports changes
in beneficial ownership for directors, executive officers and certain other
persons) must be filed by that reporting person with the SEC within two business
days following a change of ownership in shares of the Company’s stock (including
as a result of a purchase or sale or option exercise or grant). As a result,
it
is imperative that you and your broker, if applicable, provide the CO with
the
necessary information on the same day as the transaction occurs.
| VIII |
The
Consequences
|
The
consequences of insider trading violations can be staggering:
For
individuals who trade on inside information (or tip information to
others):
| - |
A
civil penalty of up to three times the profit gained or loss
avoided;
|
| - |
A
criminal fine (no matter how small the profit) of up to $1 million;
and
|
| - | A jail term of up to ten years. |
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For
a
company (as well as possibly any supervisory person) that fails to take
appropriate steps to prevent illegal trading:
| - |
A
civil penalty of the greater of $1 million or three times the
profit;
gained
or loss avoided as a result of the employee’s violation;
and
|
| - |
A
criminal penalty of up to $2.5
million.
|
In
addition, if an employee violates or fails to comply with the Company’s insider
trading policy or procedures, sanctions, including dismissal for cause, may
be
imposed by the Company. Needless to say, any of the above consequences, even
an
SEC investigation that does not result in prosecution, can tarnish one’s
reputation and irreparably damage a career.
| XI. |
Administration
of this Policy.
|
Administration
by the CO.
The
day-to-day administration, including communications of this Policy, will be
carried out by the CO.
If you
have any questions concerning the interpretation of this Policy, you should
direct your questions to the CO,
currently
Warren
Nelson at (813) 961-0944. If a trade of Shells securities involves the
CO,
then
the Audit Committee Chairperson must provide pre-approval.
Reporting
Violations.
If you
become aware of any violation of this Policy, you should report it
immediately to an Officer, or if it involves an Officer, then report should
be
directed to the Audit Committee Chairperson.
Exemptions.
An
individual subject to the trading windows or special blackout periods described
in this Section IV may request the CO
to grant
him or her a hardship exemption from those restrictions if he or she is not
otherwise prohibited from trading under Section II. However, we anticipate
that
exemptions will be given very rarely and only in extreme circumstances. Such
exemptions are to be reviewed by the Audit Committee.
Amendment
of the Policy.
The
Company reserves the right to amend this Policy from time to time, subject
to
approval by the Shells Board of Directors. If we do so, we will communicate
to
you through normal communication channels the substance of any such changes.
Remember,
the ultimate responsibility for complying with this Policy and applicable laws
and regulations rests with you. You should use your best judgment and consult
with your legal and financial advisors, as needed.
Post-Termination
Transactions.
This
Policy Statement continues to apply, as appropriate, to your transactions in
Company securities even after the termination of your employment or service
with
the Company. If you are in possession of material nonpublic information when
your employment or service with the Company terminates, you may not trade in
Company securities until that information has become public or is no longer
material.
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I
have
read and fully understand this Policy.
Signed:
_________________________________________
Name
_________________________________________
Position
____________________
Date
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