EXHIBIT 99.3
200,000 Shares
[SHELLS LOGO APPEARS HERE]
Series A 5% Convertible Preferred Stock
________________
SUPPLEMENT TO
SUBSCRIPTION AGREEMENT
Shells Seafood Restaurants, Inc.
00000 Xxxxx Xxxx Xxxxx Xxxxxxx
Xxxxx 000
Xxxxx, Xxxxxxx 00000
Gentlemen:
This Supplement to Subscription Agreement (this "Supplement")
supplements and amends the provisions of the Subscription Agreement of even date
herewith (the "Subscription Agreement") between the undersigned ("Subscriber")
and Shells Seafood Restaurants, Inc., a Delaware corporation (the "Company"),
relating to the offering of shares of Series A 5% Convertible Preferred Stock,
par value $0.01 per share (the "Series A Preferred Stock"), of the Company. All
capitalized terms used but not otherwise defined in this Supplement shall have
the respective meanings ascribed to such terms in the Subscription Agreement.
Section 1. Supplemental Agreements and Acknowledgments. In connection
with the transactions contemplated by the Subscription Agreement, Subscriber and
the Company each acknowledge and agree as follows:
(a) The total amount of indebtedness owed by the Company to Subscriber
as of the date of this Supplement is $________ (the "Total Indebtedness").
(b) Of the Total Indebtedness, $___________ (the "Satisfied
Indebtedness") shall be deemed fully satisfied upon issuance to Subscriber of
the _____________ shares of Series A Preferred Stock for which Subscriber
subscribed pursuant to the Subscription Agreement; and the Company, its
subsidiaries, and any guarantor shall be released from any and all liability for
the Satisfied Indebtedness.
(c) An amount equal to the difference between the Total Indebtedness
and the Satisfied Indebtedness (the "Deferred Indebtedness") shall be due and
payable by the Company to Subscriber in cash or other immediately available
funds in _______________ equal monthly installments of _________ commencing on
______________, 2002, and continuing on the same day of each month thereafter
until ______________, 2002. The Company may prepay all or any portion of the
Deferred Indebtedness at any time without penalty. Subscriber agrees to forebear
in the exercise of any rights and remedies Subscriber may have with respect to
the Deferred Indebtedness until due and payable in accordance with this Section
1(c) and, without limiting the generality of the foregoing, Subscriber agrees to
take no action to collect the Deferred Indebtedness until due and payable in
accordance with this Section 1(c). Subscriber further
agrees that the Deferred Amount shall not bear interest or be subject to any
finance charges or late fees until due and payable in accordance with this
Section 1(c).
(d) At any time on or after the date on which all or any portion of the
Deferred Indebtedness is due and payable in accordance with Section 1(c),
Subscriber may demand payment in full of any due and unpaid amount of Deferred
Indebtedness and in connection therewith pursue any and all rights and remedies
permitted by law.
Section 2. Other Provisions. All other terms and conditions of the
Subscription Agreement shall remain in full force and effect, except as
supplemented or amended by this Amendment.
IN WITNESS WHEREOF, subject to acceptance by the Company of this
Supplement and the Subscription Agreement, the undersigned agrees to the terms
hereof.
Date:
---------------------- __________________________
(Print Name of Subscriber)
By:
------------------------------------------ --------------------------
(Subscriber's Employer Identification No.) (Signature of Authorized
Representative)
--------------------------
(Print Name of Authorized
Representative)
Address:
-----------------
-----------------
-----------------
ACCEPTANCE OF SUPPLEMENT TO
SUBSCRIPTION AGREEMENT
Shells Seafood Restaurants, Inc., a Delaware corporation, hereby
accepts the terms of this Supplement as of ________________, 2001.
ACCEPTED ON BEHALF OF
SHELLS SEAFOOD RESTAURANTS, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
2
EXHIBIT A
Confidential Offering Memorandum __________
200,000 Shares Memorandum
Number
[LOGO OF SHELLS]
Series A 5% Convertible Preferred Stock
________________
Shells Seafood Restaurants, Inc. ("Shells" or the "Company") is offering (the
"Offering") pursuant to an exemption from registration under the Securities Act
of 1933, as amended (the "Securities Act"), 200,000 shares of Series A 5%
Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred
Stock"), to certain investors that are "accredited investors" as defined in Rule
501(a) under the Securities Act and to which Shells owes trade indebtedness.
Shells will issue one share of Series A Preferred Stock for each $10.00 of trade
indebtedness cancelled by a trade creditor. Shells will not receive any cash
proceeds in connection with the issuance of the Series A Preferred Stock.
Shells does not intend to accept subscriptions for any shares of Series A
Preferred Stock unless subscriptions for at least 50,000 shares are received by
Shells.
Each share of Series A Preferred Stock is convertible by the holder, at any
time commencing October 15, 2002, unless previously redeemed by Shells, into
five shares of the Company's common stock, par value $0.01 per share (the
"Common Stock"). The Series A Preferred Stock has a liquidation preference
equal to $10.00, 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 the
Board of Directors of the Company out of funds legally available for the payment
of dividends. Dividends on the Series A Preferred Stock are not cumulative.
See "Description of Securities - Series A 5% Convertible Preferred Stock."
Prior to this Offering, there has been no public market for the Series A
Preferred Stock, and Shells does not anticipate that such a market will develop
after the completion of this Offering. The Common Stock is traded on the OTC
Bulletin Board under the symbol "SHLL." On ____, 2001, the last reported sale
price of the Common Stock was $0.____ per share. There can be no assurance that
any market for the Common Stock will be sustained or maintained in the future.
By accepting this confidential offering memorandum (the "Offering
Memorandum"), the recipient acknowledges and agrees that it is receiving
confidential information regarding Shells and its business that may not have
been made available to the public. The recipient agrees that it will not
disclose, reproduce, circulate, or otherwise make known to any other person the
information contained herein without the prior written consent of Shells.
This Offering Memorandum was prepared by Shells and is being furnished to
prospective investors only for use in connection with the Offering. Nothing
contained herein is, or should be relied on as, a promise as to the future
performance of the Company. Each investor must rely on its own examination of
Shells and the terms of the Offering, including the merits and risks involved,
in making an investment in the securities offered hereby. Except as otherwise
indicated, this Offering Memorandum speaks as of ____, 2001. Neither the
delivery of this Offering Memorandum nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of Shells after such date.
________________
This Offering Memorandum includes copies of certain reports and other
documents filed by Shells with the Securities and Exchange Commission. These
reports and other documents are an important part of this Offering Memorandum
and contain important historical information regarding Shells and are attached
as Appendices to this Offering Memorandum. Prospective investors should read
these reports and other documents carefully together with the other information
set forth in this Offering Memorandum before deciding to acquire shares of
Series A Preferred Stock.
________________
The securities offered hereby involve a high degree of risk. See "Risk
Factors" beginning on page 6 of this Offering Memorandum.
________________
These securities have not been registered under the Securities Act or the
securities laws of any state, are being offered and sold in reliance upon
exemptions from the registration requirements of such laws and are subject to
certain restrictions on transferability. The securities offered hereby have not
been approved or disapproved by the Securities and Exchange Commission, any
state securities commission or other regulatory authority, nor have any of the
foregoing authorities passed upon or endorsed the merits of this Offering or the
accuracy or adequacy of this Offering Memorandum. Any representation to the
contrary is unlawful.
________________
The date of this Offering Memorandum is ______, 2001
Confidential Offering Memorandum
This Offering Memorandum is highly confidential and has been prepared by
Shells solely for use in connection with the Offering. This Offering Memorandum
is personal to each prospective investor and does not constitute an offer to any
other person or to the public generally to subscribe for or otherwise acquire
the Series A Preferred Stock. Distribution of this Offering Memorandum to any
person other than the prospective investor and those persons, if any, retained
to advise such prospective investor with respect to an investment in the Series
A Preferred Stock is unauthorized, and any disclosure of any of its contents or
any reproduction or distribution without the prior written consent of Shells is
prohibited.
This Offering Memorandum does not purport to be all-inclusive or to contain
all the information that a prospective investor may desire in evaluating Shells
or the terms of the Offering. Each prospective investor must conduct and rely
on its own examination of Shells and must base their investment decision solely
on their own examination of Shells and the terms of the Offering, including the
merits and risks involved in making an investment in the securities offered
hereby. Each prospective investor, by accepting the delivery of this Offering
Memorandum, agrees to the foregoing and, if the prospective investor does not
acquire shares of Series A Preferred Stock or this Offering is terminated,
agrees to promptly return this Offering Memorandum and all documents or
information furnished by Shells in connection with the Offering to Shells.
This Offering Memorandum does not constitute an offer to sell or a
solicitation of an offer to buy the securities offered hereby in any state or
other jurisdiction to any person if such offer or solicitation is unlawful or
unauthorized.
The securities offered hereby have not been registered under the Securities
Act or the securities or Blue Sky laws of any state, and may not be transferred
or resold without (a) registration under the Securities Act and applicable state
registrations or qualifications, unless, in the opinion of counsel to Shells, an
exemption from registration under applicable federal and state securities laws
is then available and (b) compliance with all other restrictions on transfer
contained in this Offering Memorandum and applicable documentation. The
securities to be issued as contemplated by this Offering Memorandum will be
offered and sold pursuant to exemptions from registration under the Securities
Act and certain state securities laws and certain rules and regulations
promulgated pursuant thereto. Shares of Series A Preferred Stock acquired in
the Offering will constitute "restricted securities" as defined under Rule 144
promulgated under the Securities Act. Prospective investors should be aware
that they might be required to bear the financial risks of this investment for
an indefinite period of time.
No shares of Series A Preferred Stock will be issued to any prospective
investors who cannot demonstrate compliance with the suitability standards
described in this Offering Memorandum. If you are in any doubt as to the
suitability of an investment in the securities of Shells, details of which are
given in this Offering Memorandum, you should consult your investment advisor.
No subscriptions will be accepted from residents of any state unless Shells,
upon consultation with its counsel, is satisfied that the Offering is in
compliance with the laws of such state.
The Offering is being made only to certain investors that are "accredited
investors" as defined in Rule 501(a) under the Securities Act and to which
Shells owes trade indebtedness, subject to execution of a Subscription Agreement
and Supplement to Subscription Agreement) in the forms of Appendix F of this
Offering Memorandum. The Offering is subject to withdrawal, cancellation or
modification without notice. Shells reserves the right to reject any
prospective investment in whole or in part or to allot to any prospective
investor less than the amount of shares of Series A Preferred Stock such
prospective investor desires to acquire.
Certain information contained or incorporated by reference in this Offering
Memorandum has been obtained by Shells or its officers and directors from
sources deemed reliable by Shells. Such information necessarily incorporates
significant assumptions and estimates as well as factual matters. Prospective
investors are urged to request any additional information they may consider
necessary in making an informed investment decision.
Shells will make available to any prospective investor the opportunity to
ask questions of, and receive answers from, Shells or persons acting on behalf
of Shells, concerning the terms and conditions of the Offering, Shells or any
other relevant matters, and to obtain any additional information to the extent
Shells possesses such information. No person other than Xxxxx X. Head,
President and Chief Executive Officer, and Xxxxxx X. Xxxxxx, Executive Vice
President of Finance, has been authorized to give any information or to make any
representation concerning Shells or the Series A Preferred Stock offered hereby.
Any additional information provided by Shells in connection with the Offering,
whether verbal or written, is qualified in its entirety by the information set
forth or incorporated by reference in this Offering Memorandum, including, but
not limited to, the risks set forth in this Offering Memorandum.
Requests for additional information should be directed to:
Xxxxxx X. Xxxxxx, Executive Vice President of Finance
Shells Seafood Restaurants, Inc.
00000 Xxxxx Xxxx Xxxxx Xxxxxxx
Xxxxx 000
Xxxxx, Xxxxxxx 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
________________
Prospective investors are not to construe the contents of this Offering
Memorandum as legal, business or tax advice. Each prospective investor should
consult such prospective investor's own attorney, business advisor and tax
advisor as to legal, business, tax and related matters concerning the investment
described in this Offering Memorandum and its suitability for such prospective
investor.
ii
Jurisdictional Notices and Representations
Florida Residents
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE FLORIDA INVESTOR
PROTECTION ACT IN RELIANCE UPON EXEMPTION PROVISIONS CONTAINED THEREIN.
WHEN SALES ARE MADE TO FIVE OR MORE PERSONS IN FLORIDA, EACH FLORIDA
INVESTOR WILL HAVE THE RIGHT TO WITHDRAW ITS SUBSCRIPTION AND HAVE ANY PAYMENTS
MADE AND PURCHASE DOCUMENTS SUBMITTED RETURNED WITHOUT INCURRING ANY LIABILITY
TO THE COMPANY OR ANY OTHER PERSON WITHIN THREE (3) BUSINESS DAYS AFTER IT HAS
DELIVERED AN EXECUTED SUBSCRIPTION AGREEMENT (AND THE SUPPLEMENT THERETO) AND
TENDERED THE CONSIDERATION NECESSARY FOR THE PURCHASE OF SHARES TO THE COMPANY,
OR WITHIN THREE (3) BUSINESS DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE IS
COMMUNICATED TO SUCH INVESTOR, WHICHEVER OCCURS LATER. TO ACCOMPLISH THIS
WITHDRAWAL, IT IS SUFFICIENT FOR THE INVESTOR TO SEND A LETTER OR TELEGRAM TO
THE COMPANY INDICATING ITS INTENTION TO WITHDRAW. THE LETTER OR TELEGRAM SHOULD
BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED THIRD BUSINESS
DAY. IF THE INVESTOR SENDS A LETTER, IT IS PRUDENT TO SEND IT BY CERTIFIED
MAIL, RETURN RECEIPT REQUESTED, TO ENSURE THAT IT IS RECEIVED AND ALSO TO
EVIDENCE THE TIME WHEN IT WAS MAILED. SHOULD THE INVESTOR MAKE THE REQUEST
VERBALLY, IT SHOULD ASK FOR WRITTEN CONFIRMATION THAT THE REQUEST HAS BEEN
RECEIVED.
iii
Forward-Looking Statements
This Offering Memorandum and the information incorporated herein by
reference contain "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The use of the words "believe," "expect,"
"anticipate," "intend," "plans," "estimate," "assume," "projects," "should,"
"could," "may," and other similar expressions, or the negations thereof,
generally identify forward-looking statements. Forward-looking statements
include, for example, statements relating to business strategy and prospects,
industry trends and changes, future capital expenditures, sources and
availability of capital, governmental regulations and their effects on Shells
and its competition.
In addition, the Company's quarterly and annual operating results are
affected by a wide variety of other factors that could materially and adversely
affect revenues and profitability, including changes in consumer preferences,
tastes and eating habits; increases in food and labor costs; promotional timings
and seasonality; the availability of qualified labor; national, regional and
local economic and weather conditions; demographic trends and traffic patterns;
competition from other restaurants and food service establishments; and the
timing of and costs related to new restaurant openings or the closing of
existing restaurants. As a result of these and other factors, the Company may
experience material fluctuations in future operating results on a quarterly or
annual basis, which could materially and adversely affect its business,
financial condition, operating results, and stock price. An investment in the
Company involves various risks, including those which are detailed herein and
from time-to-time in the Company's other filings with the Securities and
Exchange Commission.
These forward-looking statements speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Each prospective investor should exercise caution in interpreting and
relying on forward-looking statements since these statements involve known and
unknown risks, uncertainties and other factors which are, in some cases, beyond
the Company's control and could materially affect the Company's actual results,
performance or achievements. Some of the factors that could cause the Company's
actual results, performance or achievements to differ materially from those
expressed or implied by forward-looking statements include, but are not limited
to, the matters discussed under the caption "Risk Factors."
The Company cautions you that, while forward-looking statements
reflect the Company's good faith beliefs, these statements are not guarantees of
future performance. In addition, the Company disclaims any obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
iv
Additional Information
Shells is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files publicly available reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any document the Company files at the SEC's Public
Reference Room at 000 Xxxxx Xxxxxx, X.X., Xxxxxxxxxx, X.X. Our SEC filings are
also available to the public from the SEC's Internet site at xxxx://xxx.xxx.xxx.
The other information on the SEC's web site is not part of this Offering
Memorandum.
Such reports and other documents contain important information
concerning Shells, and this Offering Memorandum should be read in conjunction
with such reports and other documents. The following documents or portions of
documents filed by Shells (File No. 000-28258) with the SEC are incorporated by
reference herein and are attached as Appendices of this Offering Memorandum:
. Annual Report on Form 10-K for the fiscal year ended December 31,
2000, as amended by Amendments No. 1 and No. 2 thereto (see
Appendix B)
. Quarterly Report on Form 10-Q for the quarterly period ended April
1, 2001 (see Appendix C)
. Quarterly Report on Form 10-Q for the quarterly period ended July
1, 2001 (see Appendix D)
. Proxy Statement dated April 19, 2000 (see Appendix E)
In addition, all reports and other documents filed by Shells under the
Exchange Act subsequent to the date of this Offering Memorandum and prior to the
consummation of the Offering shall be deemed to be incorporated by reference
herein. Any statement contained in a document incorporated by reference herein
or attached as an Appendix of this Offering Memorandum shall be deemed to be
modified or superseded for purposes of this Offering Memorandum to the extent
that a statement contained herein or in any subsequently filed document which is
also incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Offering Memorandum.
v
Table of Contents
Business........................................... 1
Risk Factors....................................... 6
Description of Securities.......................... 8
Reasons for the Offering and Plan of Distribution.. 11
Appendices:
A Certificate of Designation Relating to the Series A Preferred Stock
B Annual Report on Form 10-K for the fiscal year ended December 31, 2000,
as amended by Amendments No. 1 and No. 2 thereto*
C Quarterly Report on Form 10-Q for the quarterly period ended April 1,
2001*
D Quarterly Report on Form 10-Q for the quarterly period ended July 1,
2001*
E Proxy Statement dated April 19, 2000
F Forms of Subscription Agreement and Supplement to Subscription Agreement
--------------
* The documents filed with the Securities and Exchange Commission as
exhibits to these reports are identified in the exhibit index to such
reports, and, upon written request of a prospective investor, Shells
will provide a copy of such exhibits. Requests for copies should be
directed to Xxxxxx X. Xxxxxx, Executive Vice President of Finance,
Shells Seafood Restaurants, Inc., 00000 Xxxxx Xxxx Xxxxx Xxxxxxx, Xxxxx
000, Xxxxx, Xxxxxxx 00000, Facsimile: (000) 000-0000.
vi
Business
This Offering Memorandum includes copies of certain reports and other
documents filed by Shells with the Securities and Exchange Commission. These
reports and other documents are attached as Appendices B, C, D and E to this
Offering Memorandum (the "Incorporated Reports"). The Incorporated Reports
contain more complete information regarding Shells, its business and results of
operations and financial condition. Prospective investors should read the
Incorporated Reports, together with the other information in this Offering
Memorandum, before deciding to acquire shares of Series A Preferred Stock.
The Company's fiscal year is the 52 or 53 weeks ending the Sunday
nearest to December 31. The fiscal year ending December 30, 2001 ("fiscal
2001") consists of 52 weeks. The fiscal years ended December 31, 2000 ("fiscal
2000"), January 2, 2000 ("fiscal 1999"), January 3, 1999 ("fiscal 1998"), and
December 28, 1997 ("fiscal 1997") consisted of 52, 52, 53, and 52 weeks,
respectively.
Overview
The Company currently owns 24 Shells restaurants, owns a 51% ownership
interest in one Shells restaurant (the "Melbourne Restaurant"), and manages four
additional Shells restaurants (the "Managed Restaurants") pursuant to
contractual arrangements. These 29 restaurants are all located in Florida. In
addition, three Shells restaurants located in Indiana and Ohio (the "Licensed
Restaurants") are owned and operated by an unaffiliated third party pursuant to
contractual arrangements. The Company anticipates that the Licensed Restaurants
will be operated as a concept other than Shells by April 2002 (subject to the
licensee's option to extend for an additional six months).
The Shells concept is designed to appeal to a broad range of
customers, particularly families and young adults, by serving generous portions
of high-quality seafood and offering friendly and efficient service at an
attractive price point. Shells restaurants feature a wide selection of seafood
items, including shrimp, oysters, clams, scallops, lobster, crab, crawfish, and
daily fresh fish specials, cooked to order in a variety of ways: steamed,
sauteed, grilled, blackened and fried. In addition, Shells restaurants offer a
wide selection of signature pasta dishes, appetizers, salads, desserts and full
bar service. All Shells restaurants are open for dinner, and 19 of the
restaurants owned or managed by the Company are also open for lunch.
In an effort to increase Shells' name recognition and benefit from
customer loyalty, the Company has a prototypical image for its restaurants. The
restaurants are identified by the exterior "Shells" logo sign and a common
interior color scheme and design. Shells restaurants are decorated with a
tropical flair, bright colors and cheerful signage to create a high-energy,
casual atmosphere consistent with the Shells concept. The Company's commitment
to promoting a casual, fun dining experience is underscored by the design of its
menu and by the colorful "island" shirts worn by the Company's service staff.
The address of the Company's principal executive office is 00000 Xxxxx
Xxxx Xxxxx Xxxxxxx, Xxxxx 000, Xxxxx, Xxxxxxx 00000. The Company's telephone
number is (000) 000-0000, and the Company's web site address is
xxxx://xxx.xxxxxxxxxxxxx.xxx. Information on the Company's web site is not a
part of this Offering Memorandum.
Restaurant Locations
The 29 restaurants owned or managed by the Company are located in
the following markets:
Market Locations
-------------------------- ---------------------------------------------------
Tampa/Sarasota, Florida . Xxxxxxx . Sarasota (1)
. Carrollwood (1) . St. Petersburg
. Clearwater . St. Petersburg Beach
. Xxxxxx Beach . South Tampa (1)
. North Tampa (1) . Winter Haven
. Redington Shores
Orlando, Florida . Altamonte Springs . New Smyrna Beach
. Daytona Beach . Ocala
. Kissimmee . Orlando
. Melbourne (2) . Winter Park
South Florida . Coral Springs . Xxxxxxx
. Davie . Pembroke Pines
. Ft. Lauderdale . Sunrise
West Palm Beach, Florida . Stuart
. Xxxx Xxxx Xxxxx
Xxxx Xxxxx, Xxxxxxx . Fort Xxxxx
. Port Charlotte
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(1) Managed Restaurant.
(2) The Company owns a 51% interest in the Melbourne Restaurant.
Concept Development and Expansion
Initially, Shells was a Florida-focused concept that offered big portions of
fresh, quality seafood served in a simple, straightforward manner. Key elements
of the Company's original concept included providing customers an attractive
price/value relationship by serving generous portions of high-quality seafood,
chicken and pasta at relatively low prices; designing Shells restaurants to be
casual and fun by employing bright colors and tropical designs; strategically
positioning the restaurants to take advantage of a niche in the casual dining
industry (between Captain D's and Red Lobster) that was not served by other
major restaurant chains; and locating restaurants in visible sites close to
significant traffic generators.
The Company continued to expand the Shells concept in Florida and, in fiscal
1997, the Company began to focus its expansion efforts outside Florida to the
midwestern United States. The Company eventually developed 18 restaurants in
Ohio, Illinois, Indiana, and northern Kentucky. The decision to expand into the
Midwest markets was made in an attempt to diversify geographically and minimize
the
2
seasonal effect of the Florida market. In order to support its expansion
into the Midwest, the Company relocated a significant number of its management
personnel from the Florida market to the Midwest markets.
The Company believes its decision to relocate management personnel to the
Midwest adversely affected operations in both Florida and the Midwest markets
because its management depth in Florida was depleted and the personnel relocated
to the Midwest were provided insufficient support and infrastructure. At about
the same time, price points in Florida began to escalate steadily, compromising
the price/value relationship historically offered by the Shells restaurants, as
a result of management's decision to position the Shells concept toward the
middle of the casual dining industry.
As a result of these factors, by the end of fiscal 1998, system-wide sales
began to suffer and unit-level economics began to deteriorate rapidly.
Management undertook a number of initiatives in an attempt to stimulate sales
and to re-position the concept. These initiatives included special promotions,
menu changes, increasing menu prices, and opening almost all Shells restaurants
for lunch. Many of the initiatives were continued into fiscal 2000 without
meaningful success. Management decided to close four underperforming
restaurants during the last two quarters of fiscal 2000, including two in
Illinois and one in each of Ohio and Florida. In the first quarter of fiscal
2001, the Company closed six additional restaurants, including three in
Illinois, two in Ohio, and one in Florida.
Recent Developments
Operational Matters
In April 2001, Xxxxx X. Head was hired as the Company's President and Chief
Executive Officer. The Company undertook an internal analysis of its operations
and determined that the original Shells concept was fundamentally solid and that
corrective action should be taken to return the concept to its original
positioning - as a "Florida Seafood Joint." During April 2001, a turnaround
plan was developed to streamline the Company's operations and to reduce the
Company's general and administrative expenses. Actions taken during the second
quarter of fiscal 2001 include the following:
. Further Midwest Closures. In the second quarter of fiscal 2001, the Company
discontinued its Midwest operations by closing six additional restaurants,
including one in Indiana and five in Ohio. The Company also entered into a
license agreement for one Indiana and two Ohio restaurants with an
unaffiliated third party to operate these units as "Shells" restaurants.
The Company anticipates that these three licensed restaurants will be
operated as a concept other than Shells by April 2002 (subject to the
licensee's option to extend for an additional six months). The Company also
closed its Delray Beach, Florida restaurant in July 2001.
. Expense Reductions. General and administrative expenses were reduced by an
annualized amount of $1.6 million, resulting in the elimination of 15
corporate staff positions.
. Other Management Changes. Xxxx X. Xxxxxxx, the Company's Vice President of
Operations from 1993 to 1998, was rehired. In addition, two director of
operations positions were eliminated and three area directors were replaced
with intense, hands-on operators who intimately know the Shells concept.
. Streamlined Menu. Pending the development of a new menu for the remainder
of 2001 (which is expected to be introduced in October 2001), a streamlined
menu was introduced
3
to address kitchen operations issues, product availability problems, and
food and labor cost issues.
. Advertising. Television and radio advertising were suspended for at least
the next two quarters, pending the development of the new menu and related
products and promotions.
. Lunch Service. Lunch service was discontinued at four Shells restaurant
locations. The Company anticipates discontinuing lunch service at six
additional locations during the remainder of fiscal 2001.
Financial Matters
For the 26 weeks ended July 1, 2001, Shells incurred a net loss of $2.9
million, as compared to earning net income of $1.2 million for the comparable
period of fiscal 2000. The results for the 26 weeks ended July 1, 2001,
included non-recurring charges of $3.2 million, of which $1.6 million related to
the write-down of impaired assets (primarily related to closures of the Midwest
restaurants) to their fair value. Other non-recurring items included a
provision for restaurant closing expenses of $1.3 million related to the Midwest
restaurants and a one-time accrual for severance arrangements of $252,000. As
of July 1, 2001, Shells had a working capital deficiency of $9.4 million, an
increase of $1.9 million from its working capital deficiency of $7.5 million as
of December 31, 2000.
As an integral part of the turnaround plan developed in April 2001, Shells is
currently negotiating modified payment terms with many of its creditors and key
vendors. Through this plan, it is contemplated that a substantial portion of it
current liabilities will be deferred until a future date and/or be exchanged for
shares of Series A Preferred Stock. The primary purpose of this Offering is to
reduce the Company's current indebtedness by up to $2,000,000 through the
issuance of the shares of Series A Preferred Stock offered hereby. In addition,
Shells anticipates requiring additional outside financing during the third and
fourth quarter of fiscal 2001. There can be no assurance that any such
financing, or the anticipated restructuring of indebtedness, will be available
on terms acceptable to the Company, or at all. Any failure of the Company to
successfully negotiate such debt restructuring and obtain the necessary funding
may have a material adverse effect on the Company's ability to continue its
operations. Shells does not intend to accept subscriptions for any shares of
Series A Preferred Stock unless subscriptions for at least 50,000 shares are
received by Shells. There can be no assurance, however, that Shells will
receive subscriptions for all 200,000 shares of Series A Preferred Stock offered
hereby. The risks associated with an investment in shares of Series A Preferred
Stock will increase to the extent that Shells receives and accepts subscriptions
for less than all 200,000 shares of Series A Preferred Stock offered hereby. In
addition, there can be no assurance that the Company's turnaround plan will be
successful even if Shells receives and accepts subscriptions for all 200,000
shares of Series A Preferred Stock offered hereby.
Key Objectives and Strategies
Shells' key objectives for the remainder of 2001 and 2002 are to revive the
Shells concept by returning the concept to its original positioning - as a
"Florida Seafood Joint" - offering customers an attractive price/value
relationship by serving generous portions of high-quality seafood, chicken and
pasta at relatively low prices in a spirited atmosphere and to restore the unit-
level and organizational financial performance that the Company delivered during
1995 through 1998 by increasing sales, reducing expenses, and thereby increasing
overall margins.
In order to accomplish these objectives, Shells intends to implement the
following strategies:
4
. Concept Positioning. The Shells concept will be returned to its original
positioning as a "Florida Seafood Joint." The Company will emphasize its
seafood expertise, the exceptional quality of its food, that it uses an
abundance of fresh ingredients, and that signature dishes are featured
throughout the menu. In addition, the Company intends to introduce colorful
new employee uniforms and music selections to be played at the restaurants,
and to bring back the irreverent signage for which the Company was known.
. Menu Development. The Company will re-engineer its menu to reflect the
Shells concept during its most successful years. Among other things, the
menu will feature "Shells Classics" and "Fresh Seafood and Whatnot"
sections and will emphasize a pasta section. The Company believes the menu
changes will allow it to offer a more consistent product, emphasize the
price/value positioning, and improve margins. The Company also intends to
develop and enhance weeknight promotions, such as "Shrimply Mondays" and
"Lobster Tuesdays," and to re-engineer its happy hour promotions.
. Operations/People. Shells intends to create an environment where its
employees can excel and advance, re-establishing Shells as a great place to
work. The Company is developing new training programs for virtually all its
employees, including a "Seafood Expert Certification Process" that will
coincide with the introduction of the new menu. In 2002 the Company expects
to develop and implement a bonus program that will align the interest of
all management at both the supervisory and unit levels.
. Financial Performance. From a financial perspective, the Company's guiding
focus is to prove that the Shells concept can produce solid and consistent
unit-level economics. Among other things, the Company has initiated weekly
inventory reporting, daily reporting of key sales measures, and quarterly
"bottom-up" restaurant budgeting processes.
. Communications. The Company expects to significantly improve its internal
communications by holding weekly in-store management meetings attended by
area directors and monthly general manager meetings attended by the
Company's President and Vice President of Operations. Shells also intends
to send a weekly newsletter to all restaurants continually updating the
revival of the Shells concept and to conduct semi-annual reviews of all
operations personnel.
. Marketing. Shells spent nearly $4.0 million dollars on electronic
marketing, print media, and guest surveys during fiscal 2000. The Company's
strategy for the remainder of fiscal 2000 is to eliminate television and
radio media and to focus upon the development and implementation of a
"Community Marketing Plan" under the leadership of Shells' director of
marketing and its area directors.
5
Risk Factors
Prospective investors should consider the risks and uncertainties
described below and all other information contained and incorporated by
reference in this Offering Memorandum before deciding to acquire shares of
Series A Preferred Stock. The risks and uncertainties described below are not
the only risks Shells faces. Additional risks and uncertainties not presently
known to Shells or that Shells currently believes are immaterial could also
impair Shells' future business operations and financial condition.
Risks Relating to Shells
History of Losses
For fiscal 2000 Shells incurred a loss from operations of $6.1 million, an
increase of $2.9 million from the loss from operations of $3.2 million that
Shells incurred for fiscal 1999. For the 26 weeks ended July 1, 2001, Shells
incurred a loss from operations of $2.4 million as compared to earning income
from operations of $2.1 million for the comparable period of fiscal 2000. For
fiscal 2000 Shells incurred a net loss of $9.3 million as compared with a net
loss of $2.7 million for fiscal 1999. For the 26 weeks ended July 1, 2001,
Shells incurred a net loss of $2.9 million as compared to earning net income of
$1.1 million for the comparable period of fiscal 2000. The results for the 26
weeks ended July 1, 2001, included non-recurring charges of $3.2 million, of
which $1.6 million related to the write-down of impaired assets (primarily
related to closures of the Midwest restaurants) to their fair value. Other non-
recurring items included a provision for restaurant closing expenses of $1.3
million related to the Midwest restaurants and a one-time accrual for severance
arrangements of $252,000.
Management is undertaking steps to mitigate or eliminate the factors that have
adversely affected the Company's results of operations. Nonetheless, the
Company does not expect to earn a net profit for fiscal 2001. There can be no
assurance that the steps undertaken by the Company will be effective, that the
Company will become profitable in fiscal 2002 or thereafter, or that the Company
can maintain profitability if attained.
Working Capital Deficiency
As is common in the restaurant industry, the Company has generally operated
with negative working capital as a result of costs associated with new
restaurants and remodeling existing restaurants, as well as the turnover of
restaurant inventory, relative to more favorable vendor terms in accounts
payable. The costs associated with the restaurant closures and the other non-
recurring expenses discussed above have also contributed to the dramatic
increase in the Company's working capital deficiency. As of July 1, 2001,
Shells had a working capital deficiency of $9.4 million, an increase of $6.1
million from its working capital deficiency of $3.3 million as of July 2, 2000.
As an integral part of the turnaround plan developed in April 2001, Shells is
currently negotiating modified payment terms with many of its creditors and key
vendors. Through this plan, it is contemplated that a substantial portion of it
current liabilities will be deferred until a future date and/or be exchanged for
shares of Series A Preferred Stock. The primary purpose of this Offering is to
reduce the Company's current indebtedness by up to $2,000,000 through the
issuance of the shares of Series A Preferred Stock offered hereby. In addition,
Shells anticipates requiring additional outside financing during the third and
fourth quarter of fiscal 2001. There can be no assurance that any such
financing, or the anticipated restructuring of indebtedness, will be available
on terms acceptable to the Company, or at all. Any failure of the Company to
successfully negotiate such debt restructuring and obtain the necessary funding
may have a material adverse effect on the Company's ability to continue its
operations.
6
Shells does not intend to accept subscriptions for any shares of Series A
Preferred Stock unless subscriptions for at least 50,000 shares are received by
Shells. There can be no assurance, however, that Shells will receive
subscriptions for all 200,000 shares of Series A Preferred Stock offered hereby.
The risks associated with an investment in shares of Series A Preferred Stock
will increase to the extent that Shells receives and accepts subscriptions for
less than all 200,000 shares of Series A Preferred Stock offered hereby. In
addition, there can be no assurance that the Company's turnaround plan will be
successful even if Shells receives and accepts subscriptions for all 200,000
shares of Series A Preferred Stock offered hereby.
Other Factors
Shells also faces other risks and uncertainties, including those described in
the Incorporated Reports. Prospective investors should consider the risks and
uncertainties described in the Incorporated Reports before deciding to acquire
shares of Series A Preferred Stock. In particular, prospective investors should
consider the risks and uncertainties described under "Part I - Item 1. Business
- Risk Factors Relating to the Business of the Company" in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, as amended by
Amendments No. 1 and No. 2 thereto (attached hereto as Appendix B).
Risks Relating to the Offering
Offer and Sale of Securities Not Registered
The offer and sale of the shares of Series A Preferred Stock offered hereby
(and the shares of Common Stock issuable upon conversion of the Series A
Preferred Stock) have not been registered under the Securities Act or the
securities or Blue Sky laws of any state, and may not be transferred or resold
without (a) registration under the Securities Act and applicable state
registrations or qualifications, unless in the opinion of counsel to Shells an
exemption from registration under applicable federal and state securities laws
is then available and (b) compliance with all other restrictions on transfer
contained in this Offering Memorandum and applicable documentation. The
securities to be issued as contemplated by this Offering Memorandum will be
offered and sold pursuant to exemptions from registration provided by Section
4(2) of the Securities Act and Regulation D promulgated under the Securities Act
and certain state securities laws and certain rules and regulations promulgated
pursuant thereto. Shares of Series A Preferred Stock acquired in the Offering
will constitute "restricted securities" as defined under Rule 144 promulgated
under the Securities Act. Accordingly, prospective investors should be aware
that they might be required to bear the financial risks of this investment for
an indefinite period of time.
No Guarantee of Dividends
Dividends on the Series A Preferred Stock are payable annually, when, as and
if declared by the Board of Directors of the Company out of funds legally
available for the payment of dividends. Dividends on the Series A Preferred
Stock are not cumulative. As a result, the payment of any dividends on the
Series A Preferred Stock is effectively within the discretion of the Board of
Directors, and there can be no assurance that dividends will be paid on the
Series A Preferred Stock. See "Description of Securities - Series A 5%
Convertible Preferred Stock."
Provisions with Potential Anti-Takeover Effect
The Company's Certificate of Incorporation provides that up to 2,000,000
shares of preferred stock may be issued by the Company from time to time in one
or more series. The Board of Directors is
7
authorized to determine the rights, preferences, privileges and restrictions
granted to and imposed upon any wholly unissued series of preferred stock and 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 the Company's stockholders. The
Board of Directors may authorize and issue preferred stock with voting,
dividend, liquidation, conversion or other rights that could adversely affect
the voting power or other rights of the holders of Common Stock or the Series A
Preferred Stock. In addition, the potential issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of the
Common Stock. Although the Company has no present intention to issue any shares
of its preferred stock, other than the 200,000 shares of Series A Preferred
Stock to be issued in connection with this Offering, there can be no assurance
that the Company will not do so in the future.
Limitation of Liability of Directors
As authorized by the Delaware General Corporation Law (the "DGCL"), the
Company's Certificate of Incorporation provides that no director of the Company
shall be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases or (iv) for any
transaction from which the director derived an improper personal benefit. The
effect of the provision in the Certificate of Incorporation is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the situations
described in clauses (i) through (iv) above. This provision does not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. In addition, the Certificate of Incorporation provides
that if the DGCL is amended to authorize the further elimination or limitation
of the liability of a director, then the liability of the directors shall be
eliminated or limited to the fullest extent permitted by the DGCL as so amended.
These provisions will not alter any liability of directors under federal
securities laws. In addition, the Company has entered into indemnification
agreements with its current directors and executive officers. These provisions
and agreements may have the practical effect in certain cases of eliminating the
ability of stockholders to collect monetary damages from directors.
Description of Securities
General
The Company's authorized capital stock consists of 20,000,000 shares of Common
Stock, of which there were 4,454,015 shares issued and outstanding as of August
15, 2001, and 2,000,000 shares of "blank check" preferred stock, issuable in
series with rights and preferences as designated by the Board of Directors, of
which there were no shares issued and outstanding as of the date of this
Offering Memorandum.
Common Stock
Each holder of Common Stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and a majority vote is
required for all actions to be taken by stockholders. In the event of a
liquidation, dissolution or winding-up of the Company, the holders of
8
Common Stock are entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all debts and liabilities of the
Company and the liquidation preference of any outstanding preferred stock. The
Common Stock has no preemptive rights, no cumulative voting rights and no
redemption, sinking fund or conversion provisions.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Board of Directors out of funds legally available therefor,
subject to the dividend and liquidation rights of any preferred stock that may
be issued and outstanding and subject to any dividend restrictions imposed by
the Company's creditors. No dividend or other distribution (including
redemptions or repurchases of shares of capital stock) may be made if, after
giving effect to such distribution, the Company would not be able to pay its
debts as they become due in the usual course of business, or the Company's total
assets would be less than the minimum of its total liabilities plus the amount
that would be needed at the time of a liquidation to satisfy the preferential
rights of any holder of preferred stock.
The Company has never declared or paid any dividend with respect to the Common
Stock and does not expect to pay dividends in the foreseeable future. If the
Company realizes net profits in the future, its foreseeable policy will be to
retain such earnings for the operation and expansion of its business.
Series A 5% Convertible Preferred Stock
The Board of Directors of the Company has designated 200,000 shares of the
Company's preferred stock as Series A Preferred Stock, the designations, rights,
powers, preferences, qualifications and limitations of which are set forth in a
Certificate of Designation that was filed as an amendment to the Company's
Certificate of Incorporation with the Secretary of State of the State of
Delaware on ________, 2001. A copy of the Certificate of Designation, as filed
with the Secretary of State of the State of Delaware, is set forth as Appendix A
of this Offering Memorandum.
The following is a summary of the terms of the Series A Preferred Stock. This
summary is not intended to be complete and is subject to, and qualified in its
entirety by, reference to the Certificate of Designation.
Dividends
The holders of the Series A Preferred Stock are entitled to receive if,
when and as declared by the Board of Directors out of funds legally available
therefor, dividends, payable in cash, at the rate of 5% per annum of the
Liquidation Value of the Series A Preferred Stock. The Liquidation Value is
equal to $10.00 per share. The dividend is payable annually on December 31 of
each year, commencing December 31, 2001. Dividends shall be paid to the holders
of record as of a date, not more than thirty (30) days prior to the dividend
payment date, as may be fixed by the Board of Directors. Dividends accrue from
the first day of the annual period in which such dividend may be payable, except
with respect to the first annual dividend which shall accrue from the date of
issuance of the Series A Preferred Stock. Dividends on the Series A Preferred
Shares shall not be cumulative; provided, however, that during any fiscal year
of the Company, dividends equal to 5% of the Liquidation Value of the Series A
Preferred Stock shall have been paid in full by the Company prior to the payment
of any dividends on any shares of capital stock of the Company ranking junior to
the Series A Preferred Stock. The above notwithstanding, for the Company's
fiscal year ending December 30, 2001, no dividends shall be payable on any
shares of capital stock of the Company ranking junior to the Series A Preferred
Stock until a dividend equal to seventy-six three hundred sixty-fourth's of 5%
of the Liquidation Value of the Series A Preferred Shares shall have been paid
in full.
9
Conversion Rights
Each outstanding share of Series A Preferred Stock will be convertible, at
the option of the holder, at any time commencing on October 15, 2002. Each
share of Series A Preferred Stock is convertible into five shares of Common
Stock (a "Conversion Price" of $2.00 per share). The Conversion Price will be
adjusted to reflect stock dividends, stock splits, combinations or
reclassifications on or of the Common Stock. The Company will notify holders of
Series A Preferred Stock of such adjustments. A holder of Series A Preferred
Stock who wishes to convert same into Common Stock must surrender the
certificate therefor to the Company agent with a conversion notice appropriately
completed and signed. The Company will, as soon as practicable thereafter,
issue a certificate for the appropriate number of shares of Common Stock.
Conversion will be deemed to have been made upon the surrender of the
certificate for the shares of Series A Preferred Stock to be converted. If the
conversion would result in the issuance of a fractional share of Common Stock,
the Company will, in lieu of issuing a fractional share, round up to the nearest
whole share.
Voting Rights
Except as set forth in the following paragraph, the holders of the Series A
Preferred Stock will have no right to vote at any regular or special meeting of
the stockholders of the Company, and will have no voice in the management of the
Company. Upon conversion of the Series A Preferred Stock, the Common Stock into
which such shares are converted shall possess the voting rights of any other
shares of Common Stock.
So long as shares of Series A Preferred stock remain outstanding, the Company
shall not, without the affirmative vote of the holders of at least a majority of
the then outstanding shares of Series A Preferred Stock voting together as a
separate class, amend the terms of the Certificate of Designation relating to
the Series A Preferred Stock. The holders of the outstanding shares of Series A
Preferred Stock shall be entitled to vote as a separate class upon a proposed
amendment of the Certificate of Incorporation if the amendment would alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely.
Redemption
The Series A Preferred Stock is redeemable upon notice by the Company at any
time, in whole or in part, for a redemption price of $10.00 per share. Notice
of intention to redeem shares of Series A Preferred Stock will be given to
holders of the Series A Preferred Stock by mailing notice thereof to such
holders of record. Such notice will be deemed to have been given on the date of
mailing. In the case of redemption in whole, or in part, notice will be given
not less than thirty (30) days prior to the redemption date. In the event of a
partial redemption, the Company will provide the holder of the Series A
Preferred Shares a new certificate evidencing any shares of Series A Preferred
Stock that have not been redeemed. There is no sinking fund requirement for
redemption of the Series A Preferred Stock.
Liquidation Preference
The holders of shares of Series A Preferred Stock will be entitled to receive,
in the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, out of or to the extent of the net assets of
the Company legally available for such distribution, before any distributions
are made with respect to any Common Stock or any stock ranking junior to the
Series A Preferred Stock, $10.00 per share, plus any declared but unpaid
dividends (the "Liquidation Preference"). After payment of the full amount of
the Liquidation Preference, the holders of shares of Series A Preferred Stock
will not be entitled to any further participation in any distribution of assets
by the Company.
10
Upon any such liquidation, dissolution or winding up, such preferential
amounts with respect to the Series A Preferred Stock and any class or series
ranking on a parity with the Series A Preferred Stock if not paid in full shall
be distributed pro rata in accordance with the aggregate preferential amounts of
the Series A Preferred Stock and such other classes or series of stock, if any.
Restrictions and Limitations
Shares of Series A Preferred Stock acquired by the Company by reason of
purchase, conversion, redemption or otherwise shall be retired and shall become
authorized but unissued shares of preferred stock, which may be reissued as part
of a new series of preferred stock created under the Company's Certificate of
Incorporation.
Other Preferred Stock
As of the date hereof, there are no shares of preferred stock outstanding and
no shares of preferred stock designated for issuance, other than the Series A
Preferred Stock. The Company's Certificate of Incorporation authorizes the
issuance of "blank check" preferred stock in one or more classes or series with
such designations, rights, preferences and restrictions as may be determined
from time to time by the Board of Directors. Accordingly, the Board of
Directors may, without prior stockholder approval, issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the relative voting power or other rights of the holders of the Preferred
Stock or the Common Stock. Preferred stock could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention of
issuing any shares of preferred stock, other than the Series A Preferred Stock
offered hereby, there can be no assurance that it will not do so in the future.
If the Company issues other preferred stock, such issuance may have a dilutive
effect upon the common stockholders, and the purchasers of the Series A
Preferred Stock offered hereby.
Reasons for the Offering and
Plan of Distribution
Reasons for the Offering
Shells is offering the Series A Preferred Stock to certain investors that are
"accredited investors" as defined in Rule 501(a) under the Securities Act and to
which Shells owes trade indebtedness. Shells will issue one share of Series A
Preferred Stock for each $10.00 of trade indebtedness cancelled by a trade
creditor. Shells will not receive any cash proceeds in connection with the
issuance of the Series A Preferred Stock.
As noted elsewhere in this Offering Memorandum, the Company has generally
operated with negative working capital as a result of costs associated with new
restaurants and remodeling existing restaurants, as well as the turnover of
restaurant inventory, relative to more favorable vendor terms in accounts
payable. The costs associated with the restaurant closures and other non-
recurring expenses has also contributed to the dramatic increase in the
Company's working capital deficiency. As of July 1, 2001, Shells had a working
capital deficiency of $9.4 million, an increase of $6.1 million from its working
capital deficiency of $3.3 million as of July 2, 2000. As an integral part of
the turnaround plan developed in April 2001, Shells is currently negotiating
modified payment terms with many of its creditors and key vendors. Through this
plan, it is contemplated that a substantial portion of its current
11
liabilities will be deferred until a future date and/or be exchanged for shares
of Series A Preferred Stock. The primary purpose of this Offering is to reduce
the Company's current indebtedness by up to $2,000,000 through the issuance of
the shares of Series A Preferred Stock offered hereby. Shells reserves the right
to enter into arrangements with certain creditors and key vendors that are not
identical to the arrangements entered into with other creditors and key vendors
including, without limitation, deferral terms and the proportion of the amount
of indebtedness restructured relative to the amount of Series A Preferred Stock
exchanged.
Suitability Standards
The Offering is limited to persons that are "accredited investors" as defined
in Rule 501(a) under the Securities Act and to which Shells owes trade
indebtedness. Under Rule 501(a) under the Securities Act and as used in this
Offering Memorandum, "accredited investor" means an investor that meets one of
the following descriptions:
(a) Any bank as defined in Section 3(a)(2) of the Securities Act, or any
savings and loan association or other institution specified in Section
3(a)(5)(A) of the Securities Act whether acting in its individual or
fiduciary capacity; any broker or dealer registered pursuant to
Section 15 of the Securities Exchange Act of 1934; any insurance
company as defined in Section 2(13) of the Securities Act; any
investment company registered under the Investment Company Act of 1940
(the "1940 Act") or a business development company as defined in
Section 2(a)(48) of the 1940 Act; any small business investment
company licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Company Act of
1958; any plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan
has total assets in excess of $5,000,000; any employee benefit plan
within the meaning of Title I of the Employee Retirement Income
Security Act of 1974, if the investment decision is made by a plan
fiduciary, as defined in section 3(21) of such Act, which is either a
bank, a savings and loan association, insurance company, or registered
investment adviser or if the employee benefit plan has total assets in
excess of $5,000,000 or, if a self-directed plan, with investment
decisions made solely by persons that are accredited investors;
(b) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(c) Any organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000;
(d) Any director, executive officer, or general partner of the Company;
(e) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(f) Any natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the
current year;
12
(g) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person; or
(h) Any entity in which all of the equity owners are accredited investors.
A corporation, partnership or other entity shall be treated as a single
investor unless that entity was organized for the specific purpose of acquiring
the shares of Series A Preferred Stock in which case each beneficial owner of
equity in that entity shall be considered a separate investor and accordingly
will be required to be an accredited investor. Shells may, in its sole
discretion, elect to issue shares of Series A Preferred Stock to trade creditors
that are not "accredited investors" if Shells determines that such issuances can
be made in compliance with the Securities Act and any applicable state
securities or Blue Sky laws.
Method of Offering
The shares of Series A Preferred Stock offered hereby will be offered
exclusively by Shells through its executive officers, directors and regular
employees. No commissions or other compensation will be paid, directly or
indirectly, to any such persons for their efforts in offering the Series A
Preferred Stock. Shells will not engage any underwriter or broker/dealer to
sell shares of Series A Preferred Stock in this Offering.
Terms of the Offering
The Offering will terminate upon the earliest to occur of (a) the issuance
of all of the shares of Series A Preferred Stock, (b) September 30, 2001, unless
the Offering is extended by the Company in its sole discretion to a date not
later than October 31, 2001, or (iii) any earlier date as determined by the
Company in its sole discretion. Shells does not intend to accept subscriptions
for any shares of Series A Preferred Stock unless subscriptions for at least
50,000 shares are received by Shells.
In order to acquire shares of Series A Preferred Stock, each subscriber
must complete and execute a Subscription Agreement and Supplement to
Subscription Agreement in the forms of Appendix F of this Offering Memorandum.
Subscriptions for shares of Series A Preferred Stock must be accompanied by any
written evidence of the trade indebtedness to be cancelled. Upon acceptance of
such subscription, the Company will issue to the investor a stock certificate
representing the shares of Series A Preferred Stock dated as of such date of
acceptance. For administrative convenience the Company may accept subscriptions
as of the first day of certain months during the Offering. The Subscription
Agreement and Supplement to Subscription Agreement and any written evidence of
the trade indebtedness to be cancelled may be hand delivered or delivered by
mail or overnight delivery service to the Company at its business address
located at the following address:
Shells Seafood Restaurants, Inc.
00000 Xxxxx Xxxx Xxxxx Xxxxxxx
Xxxxx 000
Xxxxx, Xxxxxxx 00000
The Company reserves the right to reject any subscription in whole or in
part, at any time. Any trade indebtedness to be cancelled in connection with
the issuance of shares of Series A Preferred Stock shall be deemed cancelled on
the date of issuance of such shares.
13
