-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CJDouvidmkdGULCkAxTkBF2xkfJHh04bIP/oBuL3iBeAv054v24R+J/NGWOo62qE T/h9EPUoOebaYGEP64/ufw== 0000919607-97-000086.txt : 19970402 0000919607-97-000086.hdr.sgml : 19970402 ACCESSION NUMBER: 0000919607-97-000086 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAMILY STEAK HOUSES OF FLORIDA INC CENTRAL INDEX KEY: 0000784539 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 592597349 STATE OF INCORPORATION: FL FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14311 FILM NUMBER: 97572388 BUSINESS ADDRESS: STREET 1: 2113 FLORIDA BLVD STREET 2: STE A CITY: NEPTUNE BEACH STATE: FL ZIP: 32266 BUSINESS PHONE: 9042494197 MAIL ADDRESS: STREET 2: 2113 FLORIDA BLVD STE A CITY: NEPTUNE BEACH STATE: FL ZIP: 32266 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- 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 (FEE REQUIRED) For the fiscal year ended January 1, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File No. 0-14311 FAMILY STEAK HOUSES OF FLORIDA, INC. (exact name of registrant as specified in its charter) Florida No. 59-2597349 (State of Incorporation) (I.R.S. Employer Identification) 2113 Florida Boulevard Neptune Beach, Florida 32266 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (904) 249-4197 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value (Title of Class) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (X) NO__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES__ NO (X) As of March 7, 1997, 10,954,960 shares of Common Stock of the registrant were outstanding. The aggregate market value of such voting Common Stock (based upon the closing sale price of the registrant's Common Stock on the NASDAQ National Market System on March 7, 1997, as reported in The Wall Street Journal) held by non-affiliates of the registrant was approximately $10,758,319. Documents Incorporated by Reference Portions of the registrant's 1996 Annual Report to Shareholders are incorporated by reference into Part II. Portions of the Proxy Statement for the registrant's 1997 Annual Meeting of Shareholders are incorporated by reference into Part III. PART I ITEM 1. BUSINESS General Family Steak Houses of Florida, Inc. ("Family" or the "Company"), is the sole franchisee of Ryan's Family Steak House restaurants ("Ryan's restaurants") in the State of Florida. The Company's first Ryan's restaurant was opened in Jacksonville, Florida, in May 1982. As of January 1, 1997, the Company operated 25 Ryan's restaurants in Florida, including nine in north Florida and sixteen in central and west Florida. A Ryan's restaurant is a family-oriented restaurant serving high-quality, reasonably-priced food in a casual atmosphere with server-assisted service. Ryan's restaurants serve lunch and dinner seven days a week and offer a variety of charbroiled entrees, including various cuts of beef, chicken, and seafood. Most of the restaurants serve a brunch on weekends only. Each restaurant features a diverse selection of items from either a series of "scatter bars" or a 65-foot, self-service, all-you-can-eat Mega Bartm, and a separate fresh bakery and dessert bar. In addition to traditional salad bar items, the scatter bars or Mega Barstm offer hot meats, pre-made salads, soups, baked potatoes with toppings, cheeses and a variety of vegetables. The Company believes that its operating strategy of selling top-quality meals at reasonable prices, at food costs to the Company which are higher than the industry average, creates a perception of value to its customers. The Company operates its Ryan's restaurants under a Franchise Agreement with Ryan's Family Steak Houses, Inc., ("Ryan's", or the "Franchisor") which grants the Company the right to operate Ryan's Family Steak House restaurants throughout North and Central Florida. Company History The Company was formed by the combination, effective February 1986, of six limited partnerships, each of which owned and operated a Ryan's restaurant franchise. In April 1986, the Company issued 4,266,000 shares of its common stock in exchange for the assets and liabilities of the predecessor partnerships and 1,134,000 shares of its common stock to Eddie L. Ervin, Jr., in consideration for Mr. Ervin assigning to the Company all of his rights under the Franchise Agreement, as defined below. The Company completed its initial public offering of 4,500,000 shares of its common stock in 1986 resulting in net proceeds to the Company of approximately $4,145,000. 2 Franchise Agreement The Company operates its Ryan's restaurants under a Franchise Agreement between the Company and the Franchisor dated as of September 16, 1987, which Franchise Agreement amended and consolidated all previous franchise agreements (as amended, the "Franchise Agreement"). The Franchise Agreement extends through December 31, 2010 and provides for two additional ten-year renewal options. The renewal options are subject to certain conditions, including the condition that the Company has fully and faithfully performed its obligations under the Franchise Agreement during its original term. Under the terms of the Franchise Agreement, the Company has the right to use the registered mark "Ryan's Family Steak House" and the right to use the Franchisor's techniques in the operation of Ryan's Family Steak House restaurants. In 1996, the Company and the Franchisor amended the Franchise Agreement. The amended agreement requires the Company to pay a royalty fee of 3.0% through December 2001 and 4.0% thereafter on the gross receipts of each Ryan's Family Steak House restaurant. Total royalty fee expenses were $1,138,600, $1,263,200, and $1,561,100 for the years ended January 1, 1997, January 3, 1996 and December 28, 1994, respectively. The Franchise Agreement requires the Company to operate a minimum number of Ryan's restaurants on December 31 of each year. Failure to operate the minimum number could result in the loss of exclusivity rights to the Ryan's concept in the Company's Florida territory. The following schedule outlines the number of Ryan's restaurants required to be operated by the Company on December 31 of each year under the Franchise Agreement: Number of Restaurants Required to End of Fiscal Year be in Operation - ------------------ --------------- 1997 25 1998 26 1999 27 2000 28 2001 and subsequent years Increases by one each year 3 Prior to July 1994, the Company held exclusive franchise rights to build Ryan's restaurants in the State of Florida, with the exception of Panama City, Florida and Escambia County, Florida, where the Franchisor has the right to operate Ryan's restaurants. In July 1994 the Company relinquished the franchise rights to most counties in northwest Florida and south Florida in exchange for forgiveness of $500,000 in past due royalty fees. The Company has the right to repurchase the exclusive franchise rights to these counties for $500,000 at any time prior to June 30, 1998. In addition, the Franchisor agreed not to develop any Ryan's restaurants in the south Florida territory prior to June 30, 1996. Ryan's has not developed any restaurants in Florida as of March 13, 1997. In July 1994, the Company executed and delivered a note to the Franchisor for payment of $800,000 in past due royalty fees. (See Note 5 to the Consolidated Financial Statements in the Company's 1996 Annual Report to Shareholders). The Franchise Agreement contains provisions relating to the operation of the Company's Ryan's restaurants. Upon the Company's failure to comply with such provisions, the Franchisor may terminate the Franchise Agreement if such default is not cured within 30 days of notice from the Franchisor. Termination of the Franchise Agreement would result in the loss of the Company's right to use the "Ryan's Family Steak House" name and concept and could result in the sale of the physical assets of the Company to the Franchisor pursuant to a right of first refusal. Termination of the Company's rights under the Franchise Agreement may result in the disruption, and possibly the discontinuance, of the Company's operations. The Company believes that it has operated and maintained each of its Ryan's Family Steak House restaurants in accordance with the operational procedures and standards set forth in the Franchise Agreement, as amended. Operations of Ryan's Restaurants Format. As of March 5, 1997, 24 of the Company's Ryan's Restaurants are located in free-standing buildings which vary in size from 7,500 to 12,000 square feet. One of the Company's Ryan's restaurants is located in a mall. Each restaurant is constructed of brick or stucco walls, interior and exterior, with exposed woodwork. The interior of each Ryan's restaurant contains a dining room, a customer ordering area, and a kitchen. The dining rooms seat a total of between 270 and 500 persons and highlight centrally located, illuminated scatter bars or Mega Bars[tm] and a fresh bakery bar. Each Ryan's restaurant has parking for approximately 100 to 175 cars on lots of overall size of approximately 50,000 to 70,000 square feet. The Ryan's restaurants operate seven days a week. Typical hours of operation are from 11:00 a.m. to 9:00 p.m., Sunday through Thursday, and from 11:00 a.m. to 10:00 p.m., Friday and Saturday. Restaurants that open for brunch open at 8:00 a.m. Saturday and Sunday. In a Ryan's restaurant, the customer enters the restaurant, orders from the menu, and then enters the dining room. Beverages are brought to the table by servers. Entrees are cooked to order. The customer ordering the salad bar is given unlimited access to the scatter bars or Mega Barstm and the bakery dessert bar. Customers receive table service of the entree and beverage refills. For the year ended January 1, 1997, the average weekly customer count per restaurant was approximately 5,200 and the average cost of a meal, with beverage, was approximately $5.90. 4 Restaurant Management and Supervision. The Company manages the Ryan's restaurants pursuant to a standardized operating and control system together with comprehensive recruiting and training of personnel to maintain food and service quality. In each Ryan's restaurant, the management group consists of a general manager, a manager and one to three assistant managers, depending on sales volume. The Company requires at least two members of the management group on duty during all peak serving periods. Management- level personnel usually begin employment at the manager trainee or assistant manager level, depending on prior restaurant management experience. All new management-level personnel must complete the Company's six-week training period prior to being placed in a management position. Each restaurant management group reports to a supervisor. Presently, the supervisors each oversee the operations of six to seven restaurants. The supervisors report directly to the Vice President of Operations. Communication and support from all departments in the Company are designed to assist the supervisors in responding promptly to local problems and opportunities. All restaurant managers and supervisors participate in incentive programs based upon the profitability of their restaurants and upon the achievement of certain pre-set goals. The Company believes these incentive programs enable it to operate more efficiently and to attract qualified managers. Purchasing, Quality and Cost Control. The Company has a centralized purchase control program which is designed to ensure uniform product quality in all restaurants. The program also helps to maintain reduced food, beverage, and supply costs. The Company purchases approximately 90% of the products used by the Company's restaurants through the centralized purchase control program. USDA choice grain-fed beef, the Company's primary commodity, is closely monitored by the Company for advantageous purchasing and quality control. The Company purchases beef through various producers and brokers both on a contract basis and on a spot basis. Beef and other products are generally delivered directly to the restaurants three times weekly, except for fresh produce, which is delivered three to five times per week. The Company believes that satisfactory sources of supply are available for all the items it regularly uses. 5 The Franchise Agreement requires that all suppliers to Ryan's restaurants are subject to approval by the Franchisor. Through its relationship with the Franchisor, the Company has obtained favorable pricing on the purchase of food products from several suppliers. In June 1995, the Company renewed its agreement with Kraft Foodservice, Inc. to serve as its primary supplier. Kraft was subsequently purchased by Alliant Foodservice, Inc. The Alliant agreement has a five-year term and is cancellable at any time with 60 days notice. The Company maintains centralized financial and accounting controls for its restaurants. On a daily basis, restaurant managers forward customer counts, sales information and supplier invoices to Company headquarters. On a weekly basis, restaurant managers forward summarized sales reports and payroll data. Physical inventories of all food and supply items are taken weekly, and meat is inventoried daily. Development General. The Company operated 25 Ryan's restaurants as of March 5, 1997. Site Location and Construction. The Company considers the specific location of a restaurant to be important to its long-term success. The site selection process focuses on a variety of factors, including trade area demographics (such as population density and household income level), an evaluation of site characteristics (such as visibility, accessibility, and traffic volume), and an analysis of the potential competition. In addition, site selection is influenced by the general proximity of a site to other Ryan's restaurants in order to improve the efficiency of the Company's field supervisors and potential marketing programs. The Company generally locates its restaurants near or adjacent to residential areas in an effort to capitalize on repeat business from such areas as opposed to transient business. 6 The Company constructs its Ryan's restaurants using its contracting subsidiary. Management believes that by performing site selection and restaurant construction internally, the Company can maintain better control of site selection, real estate cost and construction performance. While the Company has not required performance and payment bonds, it undertakes to closely supervise and monitor all construction and confirm payment of subcontractors and suppliers. New Ryan's restaurants generally are completed within three months of the date on which construction is commenced. Management of New Restaurants. When a new Ryan's restaurant is opened, the principal restaurant management positions are staffed with personnel who have prior experience in a management position at another of the Company's restaurants and who have undergone special training. Prior to opening, all staff personnel at the new location undergo one week of intensive training conducted by a training team. Such training includes preopening drills in which test meals are served to the invited public. Both the staff at the new location and personnel experienced in store openings at other locations participate in the training and drills. Joint Venture In December 1994, the Company formed a new subsidiary, Family Steak JV, Inc. which acquired a 50% ownership in a Florida limited liability company, Cross Creek Barbeque, L.C. ("Cross Creek"), for the purpose of opening a new restaurant. The Company contributed certain furnishings, fixtures, and equipment owned by its Wrangler's Roadhouse, Inc. subsidiary ("Wrangler's") to Cross Creek and the other 50% owner of Cross Creek contributed the cash necessary to remodel and open the new Cross Creek restaurant. As a result of unsatisfactory operational performance, the Company sold its interest in the Cross Creek restaurant in July 1995. Wrangler's leased the land and building to Cross Creek until May 1996, when it sold them at a gain of approximately $5,000. Proprietary Trade Marks The name "Ryan's Family Steak House," along with all ancillary signs, building design and other symbols used in conjunction with the name, and the name "Mega Bar", are the primary trademarks and service marks of the Franchisor. Such marks are registered in the United States. All of these registrations and the goodwill associated with the Franchisor's trademarks are of material importance to the Company's business and are licensed to the Company under the Franchise Agreement. 7 Competition The food service business in Florida is highly competitive and is often affected by changes in the taste and eating habits of the public, economic conditions affecting spending habits, local demographics, traffic patterns and local and national economic conditions. The principal bases of competition in the industry are the quality and price of the food products offered. Location, speed of service and attractiveness of the facilities are also important factors. The Company's restaurants are in competition with restaurants operated or franchised by national, regional and local restaurant companies offering a similar menu, many of which have greater resources than the Company. The Company also is in competition with specialty food outlets and other vendors of food. The amount of new competition near Company restaurants increased significantly in 1996, and is expected to continue to increase in 1997. The increased competition had a significant negative impact on sales in 1996. Management has developed a plan to attempt to reduce the negative impact on sales from new competition in 1997, but there can be no assurance that sales trends will improve. In addition, the Franchisor has the right to operate restaurants in several other west Florida and south Florida counties. Employees As of January 1, 1997, the Company employed approximately 1,400 persons, of whom approximately 50% are considered by management as part-time employees. No labor unions currently represent any of the Company's employees. The Company has not experienced any work stoppages attributable to labor disputes and considers employee relations to be good. Executive Officers The following persons were executive officers of the Company effective January 1, 1997: Lewis E. Christman, Jr., age 77, has been President and Chief Executive Officer of the Company since April 1994. Mr. Christman was hired as a consultant to oversee and direct the Company's purchasing program in January 1994 and has been a Director of the Company since May 1993. In addition, Mr. Christman serves as President of each of the Company's subsidiaries. Mr. Christman has been a partner in East Coast Marketing since 1990. From 1979 to 1989, Mr. Christman served as Chairman of the Board of Neptune Marketing, Inc., a food brokerage company. 8 Edward B. Alexander, age 38, has been Vice President of Finance since December 1996, and was Secretary and Treasurer of the Company from November 1990 to December 1996. In addition, Mr. Alexander was appointed to the Board of Directors in May 1996, and serves as Secretary of each of the Company's subsidiaries. Mr. Alexander served as controller of the Company from January 1989 to April 1990. From April 1985 until December 1988, Mr. Alexander was employed as controller for Mac Papers, Inc., a wholesale paper products distributor. Prior to April 1985, Mr. Alexander served as a senior accountant for the accounting firm of Touche Ross & Co. Michael J. Walters, age 34, has been Secretary of the Company since December 1996. Mr. Walters has served as Controller of the Company since September 1990. From May 1987 to September 1990, Mr. Walters was employed as an accountant for the accounting firm of Deloitte & Touche. Government Regulation The Company is subject to the Fair Labor Standards Act which governs such matters as minimum wage requirements, overtime and other working conditions. A large number of the Company's restaurant personnel are paid at or slightly above the federal minimum wage level and, accordingly, any change in such minimum wage will affect the Company's labor costs. The Company is also subject to the Equal Employment Opportunity Act and a variety of federal and state statutes and regulations. The Company's restaurants are constructed to meet local and state building requirements and are operated in accordance with state and local regulations relating to the preparation and service of food. The Company believes that it is in substantial compliance with all applicable federal, state and local statutues, regulations and ordinances and that compliance has had no material effect on the Company's capital expenditures, earnings or competitive position, and such compliance is not expected to have a material adverse effect upon the Company's operations. The Company, however, cannot predict the impact of possible future legislation or regulation on its operations. Sources and Availability of Raw Materials The Company procures its food and other products from a variety of suppliers, and follows a policy of obtaining its food and products from several major suppliers under competitive terms. A substantial portion of the beef used by the Company is obtained from one supplier, although the Company believes comparable beef meeting its specifications is available in adequate quantities from other suppliers. To ensure against interruption in the flow of food supplies due to unforeseen or catastrophic events, to take advantage of favorable purchasing opportunities, and to insure that meat received by the Company is properly aged, the Company maintains a two to six week supply of beef. 9 Working Capital Requirements Substantially all of the Company's revenues are derived from cash sales. Inventories are purchased on credit and are converted rapidly to cash. The Company does not maintain significant receivables and inventories. Therefore, with the exception of debt service, working capital requirements for continuing operations are not significant. In December 1996, the Company entered into a Loan Agreement with FFCA Mortgage Corporation ("FFCA"). The Loan Agreement governs eighteen Promissory Notes payable to FFCA. Each note is secured by a mortgage on a Company restaurant property with a total outstanding principal balance of $15,360,000 as of January 1, 1997. The Promissory Notes provide for a term of twenty years and an interest rate equal to the thirty-day LIBOR rate plus 3.75%, adjusted monthly. The Loan Agreement provides for various covenants, including the maintenance of prescribed debt service coverages. The Company used the proceeds of the Promissory Notes to retire its notes with Cerberus Partners, L.P. and its loan with the Daiwa Bank Limited and SouthTrust Bank of Alabama, N.A. The Company realized a discount on the retirement of the Cerberus notes, which was partially offset by unamortized debt issuance costs. The resulting gain of $348,500 net of income taxes, has been accounted for as an extraordinary item. In addition, the Company retired Warrants for 1,050,000 shares of the Company's common stock previously held by Cerberus. Cerberus continues to hold Warrants to purchase 700,000 shares of the Company's common stock at an exercise price of $.40 per share. Also in December 1996, the Company entered into a separate loan agreement with FFCA under which it may borrow up to an additional $4,640,000 in 1997. This additional financing would be evidenced by four additional Promissory Notes secured by mortgage on four Company restaurant properties. The terms and interest rate of this loan agreement are identical to the loan agreement described above. 10 Seasonality The Company's operations are subject to some seasonal fluctuations. Revenues per restaurant generally increase from January through April and decline from September through December. Research The Company relies primarily on the Franchisor to maintain ongoing research programs relating to the development of new products and evaluation of marketing activities. Although research and development activities are important to the Company, no expenditures for research and development have been incurred by the Company. Customers No material part of the Company's business is dependent upon a single customer or a few customers. Information as to Classes of Similar Products or Services The Company operates in only one industry segment. All significant revenues and pre-tax earnings relate to retail sales of food to the general public through restaurants owned and operated by the Company. The Company has no operations outside the continental United States. ITEM 2. PROPERTIES Location Date Opened -------- ----------- Jacksonville May 1982 Jacksonville May 1983 Jacksonville November 1983 Orange Park May 1984 Jacksonville May 1985 Jacksonville July 1985 Ocala September 1986 Neptune Beach November 1986 Lakeland February 1987 Lakeland March 1987 Winter Haven August 1987 Apopka September 1987 Gainesville December 1987 Hudson February 1988 New Port Richey May 1988 Tampa June 1988 Tallahassee August 1988 Daytona Beach September 1988 Tampa November 1988 Orlando January 1989 Orlando February 1989 Clearwater August 1989 Melbourne November 1989 Lake City March 1991 Brooksville January 1997 11 As of March 5, 1997, the Company operated 25 Ryan's restaurants. The specific rate at which the Company is able to open new restaurants will be determined by its ability to locate suitable sites on satisfactory terms, raise the necessary capital, secure appropriate governmental permits and approvals and recruit and train management personnel. As of January 1, 1997, the Company owned the real property on which 22 of its restaurants were located. Eighteen of these properties were subject to mortgages securing the FFCA Notes. The Company leases the real property on which three of its restaurants are located. Those restaurants are located in Jacksonville, Florida, Clearwater, Florida and Brooksville, Florida. The executive offices of the Company, consisting of approximately 3,500 square feet, are leased at a monthly rental rate of $2,680, plus sales tax, from Barbara Smith, the wife of the late William Stanley Smith, Jr., a former officer and director of the Company. The Company paid $34,254 in rental payments to Mr. and Mrs. Smith in fiscal year 1996. The Company currently leases 2,800 square feet of mixed warehouse and office space from Eddie L. Ervin, Jr., a former officer and director of the Company. The aggregate monthly payment due is approximately $1,495, plus sales tax. The Company paid $20,065 in rental payments to Mr. Ervin in fiscal year 1996. ITEM 3. LEGAL PROCEEDINGS The Company is subject to various pending legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of legal counsel, the ultimate disposition of these claims and litigation will not have material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information contained under the caption "Common Stock Data" in the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information contained under the caption "Five-Year Financial Summary" in the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company and the Report of Independent Certified Public Accountants as contained in the Company's 1996 Annual Report to Shareholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors contained under the caption "Election of Directors" in the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission prior to May 1, 1997, is incorporated herein by reference. Securities and Exchange Commission Rules under Section 16(a) of the Securities Exchange Act of 1934 require the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the National Association of Securities Dealers and to furnish the Company with copies of all Section 16(a) forms they file. 13 Based solely on its review of the copies of such forms received by it or written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that, during the 1996 fiscal year, all filing requirements applicable to its officers, directors, and greater-than-10% beneficial owners were complied with on a timely basis, except as set forth under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for the 1996 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission prior to May 1, 1997, which is incorporated herein by reference. The information regarding executive officers is set forth in Item 1 of this report under the caption "Executive Officers." ITEM 11. EXECUTIVE COMPENSATION The information contained under the caption "Executive Pay" in the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission prior to May 1, 1997, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the 1996 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission prior to May 1, 1997, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the caption "Election of Directors - Certain Relationships and Related Transactions" in the Company's Proxy Statement for the 1996 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission prior to May 1, 1997, is incorporated herein by reference. 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)1. The financial statements listed below are filed with this report on Form 10-K or are incorporated herein by reference from the Company's 1996 Annual Report to Shareholders. With the exception of the pages listed below, the 1996 Annual Report to Shareholders is not deemed "filed" as a part of this report on Form 10-K. Page Reference --------- Form 1996 10-K Annual Report ---- ------------- Consent of Independent Certified Public Accountants F-1 Independent Auditors' Report 24 Consolidated Statements of Operations 10 Consolidated Balance Sheets 11 Consolidated Statements of Share- holders' Equity 12 Consolidated Statements of Cash Flows 13 Notes to Consolidated Financial Statements 14 (a)2. No financial statement schedules have been included since the required information is not applicable or the information required is included in the financial statements or the notes thereto. (a)3. The following exhibits are filed as part of this report on Form 10-K, and this list comprises the Exhibit Index. No. Exhibit --- ---------------------------------------------------------------------- 3.01 Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.01 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 3.02 Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 3.02 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 15 3.03 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.03 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 3.04 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.04 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 3.05 Amended and Restated Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 4 to the Company's Form 8-A, filed with the Commission on March 19, 1997, is incorporated herein by reference.) 3.06 Shareholder Rights Agreement, dated March 19, 1997, by and between Family Steak Houses of Florida, Inc. and Chase Mellon Shareholder Services, LLC (Exhibit 1 to the Company's Form 8- A, filed with the Commission on March 19, 1997, is incorporated herein by reference.) 3.07 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3 to the Company's Form 8-A, is incorporated herein by reference.) 4.01 Specimen Stock Certificate for shares of the Company's Common Stock (Exhibit 4.01 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 10.01 Amended Franchise Agreement between Family Steak Houses of Florida, Inc. and Ryan's Family Steak Houses, Inc., dated September 16, 1987. (Exhibit 10.01 to the Company's Registration Statement on Form S-1, filed with the Commission on October 2, 1987, Registration No. 33-17620, is incorporated herein by reference.) 10.02 Lease regarding the restaurant located at 3549 Blanding Boulevard, Jacksonville, Florida (Exhibit 10.03 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 10.03 Lease, dated May 18, 1989, between the Company and Stoneybrook Associates, Ltd., for a restaurant located in Clearwater, Florida. (Exhibit 10.25 to the Company's Registration Statement on Form S-1, filed with the Commission on September 29, 1989, Registration No. 33-17620, is incorporated herein by reference.) 16 10.04 Amended and Restated Warrant to Purchase Shares of Common Stock, void after October 1, 2003, which represents warrants issued to The Phoenix Insurance Company, The Travelers Indemnity Company, and The Travelers Insurance Company, (subsequently transferred to Cerberus Partners, L.P.) (Exhibit 10.07 to the Company's Annual Report on Form 10-K, filed with the Commission on March 28, 1995, is incorporated herein by reference). 10.05 Warrant to Purchase Shares of Common Stock, void after October 1, 2003, which represents warrants issued to The Phoenix Insurance Company, The Travelers Indemnity Company, and The Travelers Insurance Company. (subsequently transferred to Cerberus Partners, L.P.) (Exhibit 10.08 to the Company's Annual Report on Form 10-K, filed with the Commission on March 28, 1995, is incorporated herein by reference). 10.06 Lease dated March 1, 1994 between the Company and Eddie L. Ervin, Jr., for corporate office and warehouse space in Neptune Beach, Florida. (Exhibit 10.15 to the Company's Annual Report on Form 10-K, filed with the Commission on March 28, 1995, is incorporated herein by reference). 10.07 Lease dated March 1, 1994 between the Company and William Stanley Smith, Jr., for executive offices in Neptune Beach, Florida. (Exhibit 10.16 to the Company's Annual Report on Form 10-K, filed with the Commission on March 28, 1995, is incorporated herein by reference). 10.08 Amendment of Franchise Agreement between Ryan's Family Steak Houses, Inc. and the Company dated July 11, 1994. (Exhibit 10.17 to the Company's Annual Report on Form 10-K, filed with the Commission on March 28, 1995, is incorporated herein by reference). 10.09 Agreement between the Company and Kraft Foodservice, Inc., as the Company's primary food product distribution. (Exhibit 10.06 to the Company's Annual Report on Form 10-Q, filed with the Commission on August 9, 1995, is incorporated herein by reference). 10.10 Employment agreement between the Company and Edward B. Alexander, dated as of October 1, 1996. (Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q, filed with the Commission on November 18, 1996, is incorporated herein by reference). 17 10.11 Lease Agreement between the Company and CNL American Properties Fund, Inc., dated as of September 18, 1996. (Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q, filed with the Commission on November 18, 1996 is hereby incorporated by reference). 10.12 Construction Addendum between the Company and CNL American Properties Fund, Inc., dated as of September 18, 1996. (Exhibit 10.03 to the Company's Quarterly Report on Form 10-Q, filed with the Commission on November 18, 1996 is hereby incorporated by reference). 10.13 Rent Addendum to Lease Agreement between the Company and CNL American Properties Fund, Inc., dated as of September 18, 1996. (Exhibit 10.04 to the Company's Quarterly Report on Form 10-Q, filed with the Commission on November 18, 1996 is hereby incorporated by reference). 10.14 Amendment of Franchise Agreement between the Company and Ryan's Family Steak Houses, Inc. dated October 3, 1996. 10.15 Employment agreement between the Company and Lewis E. Christman, Jr., dated as of December 30, 1996. (Exhibit 2 to the Company's Schedule 14D-9, filed with the Commission on March 19, 1997 is hereby incorporated by reference.) 10.16 Consulting agreement between the Company and Robert J. Martin, dated as of January 8, 1997. (Exhibit 4 to the Company's Schedule 14D-9, filed with the Commission on March 19, 1997 is hereby incorporated by reference.) 10.17 $15.36m Loan Agreement, between the Company and FFCA Mortgage Corporation, dated December 18, 1996. 10.18 $4.64m Loan Agreement, between the Company and FFCA Mortgage Corporation, dated December 18, 1996. 10.19 Form of Promissory Note between the Company and FFCA Mortgage Corporation, dated December 18, 1996. 18 10.20 Form of Mortgage between the Company and FFCA Mortgage Corporation, dated December 18, 1996 (Exhibit 5 to the Company's Schedule 14D-9, filed with the Commission on March 19, 1997 is hereby incorporated by reference.) 10.21 Form of Environmental Agreement between the Company and FFCA Mortgage Corporation, dated March 18, 1996. 13.01 1996 Annual Report to Shareholders. 21.01 Family Rustic Investments, Inc., a Florida corporation, Steak House Construction Corporation, a Florida corporation, Wrangler's Roadhouse, Inc., a Florida corporation and Steak House Realty Corporation, a Florida corporation, are wholly owned subsidiaries of the Company. 23.0l Consent of Independent Certified Public Accountants - Deloitte & Touche LLP. 27.00 Financial data schedules (electronic filing only). (b) None. (c) See (a)3. above for a list of all exhibits filed herewith and the Exhibit Index. (d) None. 19 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' CONSENT We consent to the incorporation by reference in this Annual Report of Family Steak Houses of Florida, Inc. on Form 10-K of our report dated February 27, 1997, appearing in the 1996 Annual Report to Shareholders of Family Steak Houses of Florida, Inc. We additionally consent to the incorporation by reference in Registration Statement No. 33-11684 pertaining to the 1986 Employee Incentive Stock Option Plan of Family Steak Houses of Florida, Inc. on Form S-8 of our report dated February 27, 1997 appearing in and incorporated by reference in this Annual Report on Form 10-K of Family Steak Houses of Florida, Inc. for the year ended January 1, 1997. We further consent to the incorporation by reference in Registration Statement No. 33-12556 pertaining to the 1986 Stock Option Plan for Non-Employee Directors of Family Steak Houses of Florida, Inc. on Form S-8 of our report dated February 27, 1997 appearing in and incorporated by reference in this Annual Report on Form 10-K of Family Steak Houses of Florida, Inc. for the year ended January 1, 1997. We further consent to the incorporation by reference in Registration Statement No. 33-62101 pertaining to the 1996 Long Term Incentive Plan of Family Steak Houses of Florida, Inc. on Form S-8 of our report dated February 27, 1997 appearing in and incorporated by reference in this Annual Report on Form 10-K of Family Steak Houses of Florida, Inc. for the year ended January 1, 1997. Deloitte & Touche LLP Jacksonville, Florida March 25, 1997 F-1 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. FAMILY STEAK HOUSES OF FLORIDA, INC. Date: March 26, 1997 BY: /s/ Lewis E. Christman, Jr. --------------------------- Lewis E. Christman, Jr., President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the date indicated. Signature Title Date - --------- ----- ---- /s/ Lewis E. Christman, Jr. President (Principal March 26, 1997 Lewis E. Christman, Jr. Executive Officer and Director) /s/ Edward B. Alexander Vice President and Director March 26, 1997 Edward B. Alexander (Principal Financial and Accounting Officer) /s/ Robert J. Martin Director March 26, 1997 Robert J. Martin /s/ Michael J. Walters Controller March 26, 1997 Michael J. Walters /s/ Joseph M. Glickstein, Jr. Director March 26, 1997 Joseph M. Glickstein, Jr. /s/ Richard M. Gray Director March 26, 1997 Richard M. Gray EX-10 2 EXHIBIT 10.14 EXHIBIT 10.14 AMENDMENT NO. 2 This Amendment is made as of the 3rd day of October, 1996, to that certain Agreement between Ryan's Properties, Inc. and Family Steak Houses of Florida, Inc., dated July 11, 1994, and amended on October 17, 1995 (as amended to date, the "Agreement"): The second sentence of Section 5 entitled "Royalty Fees" shall be deleted and replaced with the following: The three percent (3%) rate will remain in effect through December 31, 2001, at which time the rate will change to four percent (4%). In all other respects the Agreement shall remain unchanged. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on their behalf by a person thereunto duly authorized, as of the date first above written. RYAN'S PROPERTIES, INC. /s/ CHARLES D. WAY --------------- By: Charles D. Way Title: President and Chief Executive Officer FAMILY STEAK HOUSES OF FLORIDA, INC. /s/ LEWIS E. CHRISTMAN, JR. ----------------------- By: Lewis E. Christman, Jr. Title: President and Chief Executive Officer EX-10 3 EXHIBIT 10.17 Exhibit 10.17 $15.36m Loan Agreement ================================================================================ LOAN AGREEMENT THIS LOAN AGREEMENT (this "Agreement") is made as of , 1996, by and between FFCA MORTGAGE CORPORATION, a Delaware corporation ("FFCA"), whose address is 17207 North Perimeter Drive, Scottsdale, Arizona 85255, and FAMILY STEAK HOUSES OF FLORIDA, INC., a Florida corporation ("Debtor"), whose address is 2113 Florida Boulevard, Neptune Beach, Florida 32266. PRELIMINARY STATEMENT: Unless otherwise expressly provided herein, all defined terms used in this Agreement shall have the meanings set forth in Section 1. Debtor has requested from FFCA, and applied for, the Loans to provide refinancing for the Premises, and for no other purpose whatsoever. Each Loan will be evidenced by a Note and secured by a first priority security interest in the corresponding Premises pursuant to a Mortgage. FFCA has committed to make the Loans pursuant to the terms and conditions of the Commitment, this Agreement and the other Loan Documents. AGREEMENT: In consideration of the mutual covenants and provisions of this Agreement, the parties agree as follows: 1. Definitions. The following terms shall have the following meanings for all purposes of this Agreement: "Closing" shall have the meaning set forth in Section 4. "Closing Date" means the date specified as the closing date in Section 4. "Code" means the United States Bankruptcy Code, 11 U.S.C. Sec. 101 et seq., as amended. "Commitment" means that certain Commitment Letter dated September 27, 1996 between FFCA and Debtor, and any amendments or supplements thereto. "Counsel" means legal counsel to Debtor, licensed in the state(s) in which (i) the Premises are located, (ii) Debtor is incorporated or formed and (iii) Debtor maintains principal places of business, as selected by Debtor as the case may be, and approved by FFCA. "Environmental Condition" means any condition with respect to soil, surface waters, groundwaters, land, stream sediments, surface or subsurface strata, ambient air and any environmental medium comprising or surrounding the Premises, whether or not yet discovered, which could or does result in any damage, loss, cost, expense, claim, demand, order or liability to or against Debtor or FFCA by any third party (including, without limitation, any government entity), including, without limitation, any condition resulting from the operation of Debtor's business and/or the operation of the business of any other property owner or operator in the vicinity of the Premises and/or any activity or operation formerly conducted by any person or entity on or off the Premises. "Environmental Indemnity Agreements" means that certain Environmental Indemnity Agreement to be executed by Debtor for the benefit of FFCA for each of the Premises substantially in the form of Exhibit E attached to this Agreement. "Environmental Laws" means any present and future federal, state and local laws, statutes, ordinances, rules, regulations and the like, as well as common law, relating to protection of human health or the environment, relating to Hazardous Materials, relating to liability for or costs of Remediation or prevention of Releases or relating to liability for or costs of other actual or threatened danger to human health or the environment. "Environmental Laws" includes, but is not limited to, the following statutes, as amended, any successor thereto, and any regulations promulgated pursuant thereto, and any state or local statutes, ordinances, rules, regulations and the like addressing similar issues: the Comprehensive Environmental Response, Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Hazardous Materials Transportation Act; the Resource Conservation and Recovery Act (including but not limited to Subtitle I relating to underground storage tanks); the Solid Waste Disposal Act; the Clean Water Act; the Clean Air Act; the Toxic Substances Control Act; the Safe Drinking Water Act; the Occupational Safety and Health Act; the Federal Water Pollution Control Act; the Federal Insecticide, Fungicide and Rodenticide Act; the Endangered Species Act; the National Environmental Policy Act; and the River and Harbors Appropriation Act. "Environmental Laws" also includes, but is not limited to, any present and future federal, state and local laws, statutes, ordinances, rules, regulations and the like, as well as common law: conditioning transfer of property upon a negative declaration or other approval of a governmental authority of the environmental condition of the property; requiring notification or disclosure of Releases or other environmental condition of the Premises to any governmental authority or other person or entity, whether or not in connection with transfer of title to or interest in property; imposing conditions or requirements in connection with permits or other authorization for lawful activity; relating to nuisance, trespass or other causes of action related to the Premises; and relating to wrongful death, personal injury, or property or other damage in connection with any physical condition or use of the Premises. "Event of Default" has the meaning set forth in Section 10. -2- "Fee" means an underwriting, site assessment, valuation, processing and commitment fee equal to 1.5% of the sum of the aggregate Loan Amounts for all of the Premises, which Fee shall be payable as set forth in Section 3. "Franchisor" means Ryan's Properties, Inc., a Delaware corporation, and its successors. "Hazardous Materials" means (a) any toxic substance or hazardous waste, substance or related material, or any pollutant or contaminant; (b) radon gas, asbestos in any form which is or could become friable, urea formaldehyde foam insulation, transformers or other equipment which contains dielectric fluid containing levels of polychlorinated biphenyls in excess of federal, state or local safety guidelines, whichever are more stringent, or any petroleum product; (c) any substance, gas, material or chemical which is or may be defined as or included in the definition of "hazardous substances," "toxic substances," "hazardous materials," hazardous wastes" or words of similar import under any Environmental Laws; and (d) any other chemical, material, gas or substance the exposure to or release of which is or may be prohibited, limited or regulated by any governmental or quasi-governmental entity or authority that asserts or may assert jurisdiction over the Premises or the operations or activity at the Premises, or any chemical, material, gas or substance that does or may pose a hazard to the health and/or safety of the occupants of the Premises or the owners and/or occupants of property adjacent to or surrounding the Premises. "Loan" or "Loans" means, as the context requires, the loan for each of the Premises described in Section 2 and in the amount set forth in Exhibit A. Each Loan will be evidenced by a Note and secured by a Mortgage. "Loan Amount" or "Loan Amounts" means, as the context requires, with respect to each of the Premises, the loan amounts individually and in the aggregate described in Section 2 and as set forth on the attached Exhibit A. "Loan Documents" means, collectively, this Agreement, the Notes, the Mortgages, the Environmental Indemnity Agreements, the UCC-1 Financing Statements, the Commitment and all other documents executed in connection therewith or contemplated thereby. "Mortgage" means the mortgage, assignment of rents and leases, security agreement and fixture filing to be executed for each of the Premises substantially in the form of Exhibit C attached to this Agreement. "Note" or "Notes" means, as the context requires, the promissory notes evidencing the Loan substantially in the form attached hereto as Exhibit B. A Note will be executed by Seller for each of the Premises in the principal amount set forth in Exhibit A. "Permitted Exceptions" means those exceptions to title approved in writing by FFCA pursuant to Section 9. -3- "Premises" means the parcels of real estate described in Exhibit A attached hereto, all rights, privileges and appurtenances associated therewith, and all buildings, fixtures and other improvements now or hereafter located thereon (whether or not affixed to such real estate). "Release" means any presence, release, deposit, discharge, emission, leaking, spilling, seeping, migrating, injecting, pumping, pouring, emptying, escaping, dumping, disposing or other movement of Hazardous Materials. "Remediation" means any response, remedial, removal, or corrective action, any activity to cleanup, detoxify, decontaminate, contain or otherwise remediate any Hazardous Material, any actions to prevent, cure or mitigate any Release, any action to comply with any Environmental Laws or with any permits issued pursuant thereto, any inspection, investigation, study, monitoring, assessment, audit, sampling and testing, laboratory or other analysis, or any evaluation relating to any Hazardous Materials. "Reports" means the phase I environmental reports (and phase II environmental reports if the same are recommended by such phase I reports regarding any of the Premises) to be prepared as contemplated by Section 9.E. hereof regarding each of the Premises, which Reports shall be satisfactory in form and substance to FFCA in its sole discretion. "Threatened Release" means a substantial likelihood of a Release which requires action to prevent or mitigate damage to the soil, surface waters, groundwaters, land, stream sediments, surface or subsurface strata, ambient air or any other environmental medium comprising or surrounding the Premises which may result from such Release. "Title Company" means the title insurance company described in Section 4. "UCC-1 Financing Statements" means such UCC-1 Financing Statements as FFCA shall require to be executed and delivered by Debtor with respect to the Premises. 2. Transaction. On the terms and subject to the conditions set forth in the Loan Documents, FFCA agrees to make the Loans to Debtor. The aggregate Loan Amount shall be $15,360,000, allocated among the Premises as set forth on the attached Exhibit A. The Loans will be evidenced by the Notes and secured by the Mortgages. Debtor shall repay the outstanding principal amount of the Loans together with interest thereon in the manner and in accordance with the terms and conditions of the Notes and the other Loan Documents. The Notes will mature on the twentieth anniversary of this Agreement. The Loans shall be advanced at the Closing in cash or its equivalent subject to any prorations and adjustments required by this Agreement. 3. Underwriting, Site Assessment, Valuation, Processing and Commitment Fee. Debtor paid FFCA a portion of the Fee in connection with the Loans for the Premises and four other Premises subject to that certain loan agreement by and -4- between Debtor and FFCA of even date herewith in the amount of $150,000 pursuant to the Commitment, and such portion was deemed fully earned when received. Although the Fee was deemed fully earned when received by FFCA, the portion of the Fee paid pursuant to the Commitment shall be refundable in full and the Commitment shall expire (i) if FFCA's in-house site review and valuation department does not approve all of the Premises and the Loan Amounts, or (ii) if FFCA disapproves of the Loan Amounts and Debtor and FFCA are unable to agree upon alternative Loan Amounts. The remainder of the Fee shall be paid at the Closing and shall be deemed nonrefundable and fully earned upon the Closing. The Fee shall be applied by FFCA in payment of (i) the Phase I environmental reports to be delivered pursuant to Section 9.E, (ii) the customary fees and expenses of FFCA's attorneys and (iii) FFCA's in house site inspection costs and fees. The balance of the Fee remaining after payment of such fees, expenses and costs constitutes FFCA's underwriting, site assessment, valuation, processing and commitment fee. In the event the transaction set forth in this Agreement fails to close for any reason, FFCA shall retain a portion of the Fee received by FFCA in an amount equal to FFCA's reasonable out-of-pocket costs and expenses incurred in connection with the transaction contemplated herein and shall refund the amount of the Fee remaining after payment of such costs and expenses to Debtor. 4. Closing. (a) The Loan shall be closed (the "Closing") within 30 days following the satisfaction of all of the terms and conditions contained in this Agreement, but in no event shall the date of the Closing be extended beyond December 15, 1996 (the "Closing Date"), unless such extension shall be approved by FFCA in its sole discretion. (b) FFCA has ordered a title insurance commitment for each of the Premises from Lawyers Title Insurance Corporation or an alternative title company approved by FFCA ("Title Company"). Prior to the Closing Date, the parties hereto shall deposit with Title Company all documents and moneys necessary to comply with their obligations under this Agreement. Title Company shall not cause the transaction to close unless and until it has received written instructions from FFCA to do so. Except for the fees, expenses and costs to be paid from the Fee by FFCA pursuant to Section 3, all costs of such transaction (the "Costs") shall be borne by Debtor, including, without limitation, the cost of title insurance, the attorneys' fees of Debtor, attorneys' fees and expenses of FFCA (but only to the extent FFCA's reasonable attorneys' fees and/or expenses exceed the customary fees and/or expenses due to extended document negotiations and/or revisions and/or extraordinary closing issues), the cost of the surveys, stamp taxes, transfer fees, escrow and recording fees and site inspection fees for the Premises. Debtor may apply a portion of the Loan Amount toward the payment of the Costs. All real and personal property and other applicable taxes and assessments and other charges relating to the Premises which are due and payable on or prior to the Closing Date as well as taxes and assessments due and payable subsequent to the Closing Date but which Title Company requires to be paid at Closing as a condition to the issuance of the title insurance policy described in Section 9.C, shall be paid by Debtor at or prior to the Closing, and all other taxes and assessments shall be paid by Debtor. The closing documents shall be dated as of the Closing Date. -5- Debtor and FFCA hereby employ Title Company to act as escrow agent in connection with this transaction. Debtor and FFCA will deliver to Title Company all documents, pay to Title Company all sums and do or cause to be done all other things necessary or required by this Agreement, in the reasonable judgment of Title Company, to enable Title Company to comply herewith and to enable any title insurance policy provided for herein to be issued. Title Company is authorized to pay, from any funds held by it for FFCA's or Debtor's respective credit all amounts necessary to procure the delivery of such documents and to pay, on behalf of FFCA and Debtor, all charges and obligations payable by them, respectively. Debtor will pay all charges payable by it to Title Company. Title Company is authorized, in the event any conflicting demand is made upon it concerning these instructions or the escrow, at its election, to hold any documents and/or funds deposited hereunder until an action shall be brought in a court of competent jurisdiction to determine the rights of Debtor and FFCA or to interplead such documents and/or funds in an action brought in any such court. Deposit by Title Company of such documents and funds, after deducting therefrom its charges and its expenses and attorneys' fees incurred in connection with any such court action, shall relieve Title Company of all further liability and responsibility for such documents and funds. Title Company's receipt of this Agreement and opening of an escrow pursuant to this Agreement shall be deemed to constitute conclusive evidence of Title Company's agreement to be bound by the terms and conditions of this Agreement pertaining to Title Company. Disbursement of any funds shall be made by check, certified check or wire transfer, as directed by FFCA. Title Company shall be under no obligation to disburse any funds represented by check or draft, and no check or draft shall be payment to Title Company in compliance with any of the requirements hereof, until it is advised by the bank in which such check or draft is deposited that such check or draft has been honored. Title Company is authorized to act upon any statement furnished by the holder or payee, or a collection agent for the holder or payee, of any lien on or charge or assessment in connection with the Premises, concerning the amount of such charge or assessment or the amount secured by such lien, without liability or responsibility for the accuracy of such statement. The employment of Title Company as escrow agent shall not affect any rights of subrogation under the terms of any title insurance policy issued pursuant to the provisions thereof. 5. Representations and Warranties of FFCA. The representations and warranties of FFCA contained in this Section are being made to induce Debtor to enter into this Agreement and consummate the transactions contemplated herein, and Debtor has relied, and will continue to rely, upon such representations and warranties from and after the execution of this Agreement and the Closing. FFCA represents and warrants to Debtor as follows: A. Organization of FFCA. FFCA has been duly formed, is validly existing and has taken all necessary action to authorize the execution, delivery and performance by FFCA of this Agreement. B. Authority of FFCA. The person who has executed this Agreement on behalf of FFCA is duly authorized so to do. -6- C. Enforceability. Upon execution by FFCA, this Agreement shall constitute the legal, valid and binding obligation of FFCA, enforceable against FFCA in accordance with its terms. All representations and warranties of FFCA made in this Agreement shall be and will remain true and complete as of the Closing Date as if made and restated in full as of such date, and shall survive the Closing. 6. Representations and Warranties of Debtor. The representations and warranties of Debtor contained in this Section are being made to induce FFCA to enter into this Agreement and consummate the transactions contemplated herein, and FFCA has relied, and will continue to rely, upon such representations and warranties from and after the execution of this Agreement and the Closing. Debtor represents and warrants to FFCA as follows: A. Information and Financial Statements. Debtor has delivered to FFCA financial statements (either audited financial statements or, if Debtor does not have audited financial statements, certified financial statements) and certain other information concerning itself, which financial statements and other information are true, correct and complete in all material respects; and no material adverse change has occurred with respect to any such financial statements and other information provided to FFCA since the date such financial statements and other information were prepared or delivered to FFCA. Debtor understands that FFCA is relying upon such financial statements and information and Debtor represents that such reliance is reasonable. All such financial statements were prepared in accordance with generally accepted accounting principles consistently applied and accurately reflect as of the date of this Agreement and the Closing Date, the financial condition of each individual or entity to which they pertain. B. Organization and Authority of Debtor. (1) Debtor is duly organized or formed, validly existing and in good standing under the laws of its state of incorporation or formation, and qualified as a foreign corporation, partnership or limited liability company to do business in any jurisdiction where such qualification is required. All necessary corporate, partnership or limited liability company action has been taken to authorize the execution, delivery and performance of this Agreement and of the other documents, instruments and agreements provided for herein. (2) The persons who have executed this Agreement on behalf of Debtor are duly authorized so to do. C. Enforceability of Documents. Upon execution by Debtor respectively, this Agreement and the other documents, instruments and agreements to be executed in connection with this Agreement, shall constitute the legal, valid and binding obligations of Debtor, respectively, enforceable against Debtor in accordance with their respective terms. -7- D. Litigation. Except as set forth on Exhibit F (the "Litigation"), there are no suits, actions, proceedings or investigations pending or threatened against or involving Debtor or the Premises before any court, arbitrator, or administrative or governmental body. If any or all of the Litigation is resolved unfavorably to Debtor, such resolution will not result in any material adverse change in the contemplated business, condition or worth or operations of Debtor or the Premises. E. Absence of Breaches or Defaults. Debtor is not, and the authorization, execution, delivery and performance of this Agreement and the documents, instruments and agreements provided for herein will not result, in any breach or default under any other document, instrument or agreement to which Debtor are a party or by which Debtor, the Premises or any of the property of Debtor is subject or bound. The authorization, execution, delivery and performance of this Agreement and the documents, instruments and agreements provided for herein will not violate any applicable law, statute, regulation, rule, ordinance, code, rule or order. F. Utilities. At the Closing Date, the Premises will be served by ample public utilities to permit full utilization of the Premises for their intended purpose and all utility connection fees and use charges will have been paid in full. G. Intended Use and Zoning; Compliance With Laws. Debtor intends to use the Premises solely for the operation of Franchisor restaurants, and related ingress, egress and parking, and for no other purposes. Such intended use will not violate any zoning or other governmental requirement applicable to the Premises. The Premises substantially comply with all applicable statutes, regulations, rules, ordinances, codes, licenses, permits, orders and approvals of any governmental agencies, departments, commissions, bureaus, boards or instrumentalities of the United States, the states in which the Premises are located and all political subdivisions thereof, including, without limitation, all health, building, fire, safety and other codes, ordinances and requirements, all applicable standards of the National Board of Fire Underwriters and the Americans With Disabilities Act of 1990. H. Area Development; Wetlands. No condemnation or eminent domain proceedings affecting the Premises have been commenced or, to the best of Debtor's knowledge, are contemplated. To the best of Debtor's knowledge, the areas where the Premises are located have not been declared blighted by any governmental authority. The Premises and/or the real property bordering the Premises is not designated by any applicable federal, state and/or local governmental authority as a wetlands. I. Licenses and Permits; Access. Prior to the Closing Date, Debtor shall have all required licenses and permits, both governmental and private, to use and operate the Premises in the intended manner. There are adequate rights of access to public roads and ways available to the Premises to permit full utilization of the Premises for their intended purposes and all such public roads and ways have been completed and dedicated to public use. -8- J. Condition of Premises. As of the Closing Date, the Premises, including the equipment located thereon, will be of good workmanship and materials, fully equipped and operational, in good condition and repair, free from structural defects, clean, orderly and sanitary, safe, well-lit, landscaped, decorated, attractive and well-maintained. K. Environmental. Debtor is fully familiar with the present use of the Premises, and, after due inquiry, Debtor has become generally familiar with the prior uses of the Premises. Except as set forth in the Reports, no Hazardous Materials have been used, handled, manufactured, generated, produced, stored, treated, processed, transferred or disposed of at or on the Premises, except in compliance with all applicable Environmental Laws, and no Release or Threatened Release has occurred at or on the Premises. The activities, operations and business undertaken on, at or about the Premises, including, but not limited to, any past or ongoing alterations or improvements at the Premises, are and have been at all times, in compliance with all Environmental Laws. No further action is required to remedy any Environmental Condition or violation of, or to be in full compliance with, any Environmental Laws, and no lien has been imposed on the Premises in any federal, state or local governmental or quasi-governmental entity in connection with any Environmental Condition, the violation or threatened violation of any Environmental Laws or the presence of any Hazardous Materials on or off the Premises. There is no pending or threatened litigation or proceeding before any court, administrative agency or governmental body in which any person or entity alleges the violation or threatened violation of any Environmental Laws or the presence, Release, Threatened Release or placement on or at the Premises of any Hazardous Materials, or of any facts which would give rise to any such action, nor has Debtor (a) received any notice (and Debtor has no actual or constructive knowledge) that any governmental or quasi-governmental authority or any employee or agent thereof has determined, threatens to determine or requires an investigation to determine that there has been a violation of any Environmental Laws at, on or in connection with the Premises or that there exists a presence, Release, Threatened Release or placement of any Hazardous Materials on or at the Premises, or the use, handling, manufacturing, generation, production, storage, treatment, processing, transportation or disposal of any Hazardous Materials at or on the Premises; (b) received any notice under the citizen suit provision of any Environmental Law in connection with the Premises or any facilities, operations or activities conducted thereon, or any business conducted in connection therewith; or (c) received any request for inspection, request for information, notice, demand, administrative inquiry or any formal or informal complaint or claim with respect to or in connection with the violation or threatened violation of any Environmental Laws or existence of Hazardous Materials relating to the Premises or any facilities, operations or activities conducted thereon or any business conducted in connection therewith. -9- L. Title to Premises; First Priority Lien. Title to the Premises is vested in Debtor, free and clear of all liens, encumbrances, charges and security interests of any nature whatsoever, except the Permitted Exceptions. Upon Closing, FFCA shall have a first priority lien on the Premises pursuant to the Mortgages and the UCC-1 Financing Statements. M. No Other Agreements and Options. Neither Debtor nor the Premises are subject to any commitment, obligation, or agreement, including, without limitation, any right of first refusal, option to purchase or lease granted to a third party, which could or would prevent or hinder FFCA in making the Loans or prevent or hinder Debtor from fulfilling its obligations under this Agreement or the other Loan Documents. N. No Mechanics' Liens. There are no outstanding accounts payable, mechanics' liens, or rights to claim a mechanics' lien in favor of any materialman, laborer, or any other person or entity in connection with labor or materials furnished to or performed on any portion of the Premises; no work has been performed or is in progress nor have materials been supplied to the Premises or agreements entered into for work to be performed or materials to be supplied to the Premises prior to the date hereof, which will not have been fully paid for on or before the Closing Date or which might provide the basis for the filing of such liens against the Premises or any portion thereof; Debtor shall be responsible for any and all claims for mechanics' liens and accounts payable that have arisen or may subsequently arise due to agreements entered into for and/or any work performed on, or materials supplied to the Premises prior to the Closing Date; and Debtor shall and does hereby agree to defend, indemnify and forever hold FFCA and FFCA's designees harmless from and against any and all such mechanics' lien claims, accounts payable or other commitments relating to the Premises. O. No Reliance. Debtor acknowledges that FFCA is not affiliated with, and has no business relationship with, Franchisor, other than landlord/tenant and/or creditor/debtor relationships unrelated to the transaction set forth in this Agreement, and that FFCA did not prepare or assist in the preparation of any of the projected financial information used by Debtor in analyzing the economic viability and feasibility of the transaction contemplated by this Agreement. Furthermore, Debtor acknowledges that it has not relied upon, nor may it hereafter rely upon, the analysis undertaken by FFCA in determining the amount of the Loans, and such analysis will not be made available to Debtor. P. Franchisor Provisions. Prior to the Closing Date, Debtor will have entered into franchise, license and/or area development agreements with Franchisor for the conduct of business at the Premises. Such franchise, license and/or area development agreements will be in full force and effect, will permit Debtor to operate the Premises as Franchisor restaurants, and will have terms which will not expire before the scheduled maturity date of the Notes. -10- All representations and warranties of Debtor made in this Agreement shall be and will remain true and complete as of and subsequent to the Closing Date as if made and restated in full as of such time and shall survive the Closing. 7. Covenants. Debtor covenants to FFCA from and after the Closing Date as follows: A. Inspections. Debtor shall, at all reasonable times, (i) provide FFCA and FFCA's officers, employees, agents, advisors, attorneys, accountants, architects, and engineers with access to the Premises, all drawings, plans, and specifications for the Premises in possession of Debtor, all engineering reports relating to the Premises in the possession of Debtor, the files and correspondence relating to the Premises, and the financial books and records, including lists of delinquencies, relating to the ownership, operation, and maintenance of the Premises, and (ii) allow such persons to make such inspections, tests, copies, and verifications as FFCA considers necessary. B. Fixed Charge Coverage Ratio. Until such time as all of Debtor's obligations under the Notes and the other Loan Documents are paid, satisfied and discharged in full, on each December 31 (or such other date on which Debtor's fiscal year ends) while the Notes are outstanding: (i) Debtor shall maintain an aggregate Fixed Charge Coverage Ratio calculated for all of the Premises of at least 1.15:1; and (ii) No more than six of the Premises shall have a Fixed Charge Coverage Ratio calculated for each of the Premises below 1.0:1. For purposes of this Section, the term "Fixed Charge Coverage Ratio" shall mean with respect to all of the Premises in the aggregate or individually, as applicable, and the twelve month period of time immediately preceding the date of determination, the ratio calculated for such period of time of (a) the sum of Net Income, Depreciation and Amortization, Interest Expense and Operating Lease Expenses, less a corporate overhead allocation in an amount equal to 3% of Gross Sales, to (b) the sum of the FFCA Payments and the Equipment Payment Amount. For purposes of this Section, the following terms shall be defined as set forth below: "Capital Lease" shall mean any lease of any property (whether real, personal or mixed) by Debtor with respect to the applicable Premises which lease would, in conformity with generally accepted accounting principles consistently applied, be required to be accounted for as a capital lease on the balance sheet of Debtor. -11- "Debt" shall mean with respect to Debtor, the applicable Premises and the period of determination (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, indentures, notes or similar instruments, (iii) obligations to pay the deferred purchase price of property or services, (iv) obligations under leases which shall have been or should be, in accordance with generally accepted accounting principles consistently applied, recorded as "Capital Leases", and (v) obligations under direct or indirect guarantees in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (iv) above. "Depreciation and Amortization" shall mean the depreciation and amortization accruing during any period of determination with respect to the applicable Premises as determined in accordance with generally accepted accounting principles consistently applied. "Equipment Payment Amount" shall mean for any period of determination the sum of all amounts payable during such period of determination under all (i) leases for equipment located at the applicable Premises, and (ii) all loans secured by equipment located at the applicable Premises. "FFCA Payments" shall mean for any period of determination, the sum of all amounts payable under the applicable Note(s). "Gross Sales" shall mean the sales or other income arising from all business conducted on the applicable Premises during the period of determination, less sales tax and any amounts received from not-for-profit sales of all non-food items approved for use in connection with promotional campaigns, if any, by Franchisor. "Interest Expense" shall mean for any period of determination, the sum of all interest accrued or which should be accrued in respect of all Debt of Debtor allocable to the applicable Premises, as the case may be, and all business operations thereon during such period (including interest attributable to Capital Leases), as determined in accordance with generally accepted accounting principles consistently applied. "Net Income" shall mean with respect to Debtor and with respect to the period of determination, the net income or net loss of Debtor adjusted for nonrecurring gains and losses allocable to the applicable Premises as the case may be, and to such period (before provision or benefit for income taxes or charges equivalent to income taxes allocable to such period, as determined in accordance with generally accepted accounting principles consistently applied but before provision for corporate overhead expense allocable to the applicable Premises and to such period). -12- "Operating Lease Expense" shall mean the expenses incurred by Debtor under any operating leases with respect to of the applicable Premises and/or the business operations thereon during the period of determination in accordance with generally accepted accounting principles consistently applied. C. Net Worth. At all times while the obligations of Debtor to FFCA pursuant to the Loan Documents are outstanding, Debtor shall maintain a net worth of at least $2,000,000, as determined in accordance with generally accepted accounting principles consistently applied. 8. Transaction Characterization. This Agreement is a contract to extend a financial accommodation (as such term is used in the Code) for the benefit of Debtor. It is the intent of the parties hereto that the business relationship created by this Agreement, the Notes, the Mortgages and the other Loan Documents is solely that of creditor and debtor and has been entered into by both parties in reliance upon the economic and legal bargains contained in the Loan Documents. None of the agreements contained in the Loan Documents is intended, nor shall the same be deemed or construed, to create a partnership between Debtor and FFCA, to make them joint venturers, to make Debtor an agent, legal representative, partner, subsidiary or employee of FFCA, nor to make FFCA in any way responsible for the debts, obligations or losses of Debtor. 9. Conditions of Closing. The obligation of FFCA to consummate the transaction contemplated by this Agreement is subject to the fulfillment or waiver of each of the following conditions: A. Title. Title to the Premises shall be vested in Debtor, free of all liens, encumbrances, restrictions, encroachments and easements, except as otherwise specifically provided herein or agreed to in writing by FFCA ("Permitted Exceptions"), and the liens created by the Mortgages and the UCC-1 Financing Statements. Upon Closing, FFCA will obtain a valid and perfected first priority lien upon and security interest in the Premises. B. Condition of Premises. FFCA shall have inspected and approved the Premises, the Premises and the equipment located thereon shall be in good condition and repair and of good workmanship and materials, and the Premises shall be fully equipped and operational, clean, orderly, sanitary, safe, well-lit, landscaped, decorated, attractive and with a suitable layout, physical plant, traffic pattern and location, all as determined by FFCA in its sole discretion. C. Evidence of Title. FFCA shall have received for each of the Premises a preliminary title report and irrevocable commitment to insure title by means of a mortgagee's, ALTA extended coverage policy of title insurance (or its equivalent, in the event such form is not issued in the jurisdiction where the Premises is located) issued by Title Company showing good and marketable title in the Premises in Debtor, committing to insure FFCA's first priority lien upon and security interest in the Premises subject only to Permitted Exceptions and containing such endorsements as FFCA may require. -13- D. Survey. FFCA shall have received a current ALTA survey of each of the Premises, the form and substance of which shall be satisfactory to FFCA in its sole discretion. Debtor shall have provided FFCA with evidence satisfactory to FFCA that the location of the Premises is not within the 100-year flood plain or identified as a special flood hazard area as defined by the Federal Insurance Administration. E. Environmental. FFCA shall have received the Reports for each of the Premises, the form, substance and conclusions of which shall be satisfactory to FFCA in its sole discretion. F. Compliance With Representations, Warranties and Covenants. All obligations of Debtor under this Agreement shall have been fully performed and complied with, and no event shall have occurred or condition shall exist which would, upon the Closing Date, or, upon the giving of notice and/or passage of time, constitute a breach or default hereunder or under the Loan Documents, the franchise, license and/or area development agreements with Franchisor for the Premises or any other agreement between or among FFCA, Debtor or Franchisor pertaining to the subject matter hereof, and no event shall have occurred or condition shall exist or information shall have been disclosed by Debtor or discovered by FFCA which has had or would have a material adverse effect on the Premises, Debtor or FFCA's willingness to consummate the transaction contemplated by this Agreement, as determined by FFCA in its sole and absolute discretion. G. Proof of Insurance. Debtor shall have delivered to FFCA copies of insurance policies, showing that all insurance required by the Loan Documents and providing coverage and limits satisfactory to FFCA are in full force and effect. H. Opinion of Counsel to Debtor. Debtor shall have caused Counsel to prepare and deliver an opinion substantially in the form attached as Exhibit D. I. Availability of Funds. FFCA presently has sufficient funds to discharge its obligations under this Agreement. In the event that the transaction contemplated by this Agreement does not close on or before the Closing Date, FFCA does not warrant that it will thereafter have sufficient funds to consummate the transaction contemplated by this Agreement. J. Franchise Agreement. FFCA shall have received a certificate from Franchisor in form and substance acceptable to FFCA that the franchise, license and/or area development agreements between Debtor and Franchisor with respect to the Premises are valid, binding and in full force and effect, with terms that will not expire before the scheduled maturity date of the Notes, and no events have occurred which could constitute a default under the Loan Documents, and Franchisor waives all rights of first refusal set forth in such agreement as to FFCA and its successors and assigns. -14- K. Closing Documents. At or prior to the Closing Date, FFCA and/or Debtor, as may be appropriate, shall execute and deliver or cause to be executed and delivered to Title Company or FFCA, as may be appropriate, all documents required to be delivered by this Agreement, and such other documents, payments, instruments and certificates, as FFCA may require in form acceptable to FFCA, including, without limitation, the following: (1) Notes; (2) Mortgages; (3) Franchisor's Certificates; (4) Proof of Insurance; (5) Opinion of Counsel to Debtor; (6) UCC-1 Financing Statements; and (7) Environmental Indemnity Agreements. Upon fulfillment or waiver of all of the above conditions, FFCA shall deposit funds necessary to close this transaction with the Title Company and this transaction shall close in accordance with the terms and conditions of this Agreement. 10. Default and Remedies. A. Each of the following shall be deemed an event of default by Debtor (an "Event of Default"): (1) If any material representation or warranty of Debtor is false in any material respect when made or becomes false in any material respect prior to the Closing Date, or, in the event any such representation or warranty is continuing after the Closing, if any such representation or warranty becomes false in any respect at any time, or if Debtor renders any false statement or account; (2) If any principal, interest or other monetary sum due under the Notes, the Mortgages or any other Loan Document is not paid within five days after the date when due; (3) If Debtor fails to observe or perform any of the other material covenants, conditions, or obligations of this Agreement or any other Loan Document within the applicable grace or cure period; (4) If Debtor becomes insolvent within the meaning of the Code, files or notifies FFCA that it intends to file a petition under the Code, initiates a proceeding under any similar law or statute relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts (collectively, an "Action"), becomes the subject of either a petition under the Code or an Action, or is not generally paying its debts as the same become due; -15- (5) If there is a breach or default under any other agreement or instrument, including, without limitation, promissory notes and guaranties, between, among or by (1) Debtor, any general or limited partnership organized in accordance with the laws of any state of the United States or its territories of which Debtor, or any partner, officer, director or shareholder of Debtor is a holder of a general or limited partnership interest, or any corporation or other entity affiliated with Debtor or by any partner, officer, director or shareholder of Debtor and, or for the benefit of, (2) FFCA or any corporation, partnership, joint venture, limited liability company, association or other form of entity affiliated with FFCA; or (6) If any event occurs or condition exists which does or would upon the Closing Date constitute a material breach or default under any of the Loan Documents or any other agreement between Debtor and FFCA pertaining to the subject matter hereof. B. If any Event of Default occurs pursuant to subsection A(2) above, FFCA shall not be entitled to exercise its remedies set forth in subsection E below unless and until FFCA shall have given Debtor notice thereof and a period of five days from the delivery of such notice shall have elapsed without such Event of Default being cured. C. If any event occurs pursuant to subsection A(3) subsequent to the Closing and does not involve a breach of the Fixed Charge Coverage Ratio or the payment of any monetary sum, is not willful or intentional, does not place any rights or property of FFCA in immediate jeopardy, and is within the reasonable power of Debtor to promptly cure after receipt of notice thereof, all as determined by FFCA in its reasonable discretion, then such event shall not constitute an Event of Default hereunder, unless otherwise expressly provided herein, unless and until FFCA shall have given Debtor notice thereof and a period of 30 days shall have elapsed, during which period Debtor may correct or cure such event, upon failure of which an Event of Default shall be deemed to have occurred hereunder without further notice or demand of any kind. If such nonmonetary event cannot reasonably be cured within such 30-day period, as determined by FFCA in its reasonable discretion, and Debtor is diligently pursuing a cure of such event, then Debtor shall have a reasonable period to cure such event, which shall not exceed 90 days after receiving notice of the event from FFCA. If Debtor shall fail to correct or cure such event within such 90-day period, an Event of Default shall be deemed to have occurred hereunder without further notice or demand of any kind. D. If Debtor breaches either of the Fixed Charge Coverage Ratio requirements of Section 7.B., such breach shall not constitute an Event of Default if Debtor, within 30 days from the delivery of a notice from FFCA to Debtor of such failure, pays to FFCA the applicable FCCR Amount (as defined below), which payments shall be made without prepayment premium or penalty). Promptly after Debtor's payment of the FCCR Amount, Debtor and FFCA agree to execute an amendment to the applicable Note(s) in form and substance acceptable to FFCA reducing the principal amount payable to FFCA under such Note(s) and reamortizing the principal amount of such Note(s) over the then remaining term of such Note(s). Debtor shall be responsible for the payment of FFCA's reasonable out-of-pocket attorneys' fees incurred in connection with the preparation of such amendments. -16- For purposes of this section, FCCR Amount shall have the following meanings: (i) With respect to a breach of Section 7.B(i), that sum or those sums of money which, when subtracted from the outstanding principal balance of such of the Notes as selected by Debtor, and assuming the reamortization of the adjusted principal amount of such Notes over the then-remaining term of such Notes, will result in an aggregate Fixed Charge Coverage Ratio calculated for all of the Premises of at least 1.15:1; and (ii) With respect to a breach of Section 7.B(ii), that sum or those sums of money which, when subtracted from the outstanding principal amount of the Note(s) corresponding to one or more of the Premises which has or have a Fixed Charge Coverage Ratio which is below 1.0:1, and assuming the reamortization of the adjusted principal amount of such Note(s) over the then remaining term of such Note(s), will result in no more than six of the Premises then having a Fixed Charge Coverage Ratio below 1.0:1. Debtor shall be responsible for determining which of the Note(s) corresponding to Premises with a Fixed Charge Coverage Ratio below 1.0:1 for which the FCCR Amount shall be paid. E. Upon the occurrence of an Event of Default, subject to the limitation set forth in subsection B, FFCA shall be entitled to exercise, at its option, concurrently, successively or in any combination, all remedies set forth in the Loan Documents and otherwise available at law or in equity, including without limitation any one or more of the following (provided, however, the remedies set forth in the following subitems (1) and (2) shall only be applicable to any such breach or default occurring prior to the Closing): (1) To terminate this Agreement by giving written notice to Debtor, in which case neither party shall have any further obligation or liability, except such liabilities as Debtor may have for such breach or default; (2) To proceed with the Closing and direct Title Company to apply such portion of the Loans as FFCA may deem necessary to cure any such breach or default; (3) To bring an action for damages against Debtor; (4) To bring an action to require Debtor specifically to perform its obligations hereunder; and/or (5) To recover from Debtor all sums loaned and/or advanced by FFCA to Debtor pursuant to the Loan Documents and all expenses, including attorneys' fees, paid or incurred by FFCA as a result of such Event of Default. -17- 11. Assignments. A. FFCA may assign in whole or in part its rights under this Agreement, including, without limitation, any Transfer, Participation and/or Securitization (all as defined in Section 13.P). In the event of any unconditional assignment of FFCA's entire right and interest hereunder, FFCA shall automatically be relieved, from and after the date of such assignment, of liability for the performance of any obligation of FFCA contained herein. B. Debtor shall not, without the prior written consent of FFCA, which consent shall not be unreasonably withheld, sell, assign, transfer, mortgage, convey, encumber or grant any easements or other rights or interests of any kind in the Premises, any of Debtor's rights under this Agreement or any interest in Debtor, whether voluntarily, involuntarily or by operation of law or otherwise, including, without limitation, by merger, consolidation, dissolution or otherwise, except, subsequent to the Closing, as expressly permitted by the Mortgage. 12. Indemnity. Except for the gross negligence or willful misconduct of FFCA, Debtor shall indemnify, hold harmless and defend FFCA and its directors, officers, shareholders, employees, successors, assigns, agents, contractors, subcontractors, experts, licensees, affiliates, lessees, lenders, mortgagees, trustees and invitees, as applicable (collectively, the "Indemnified Parties"), from and against any and all losses, costs, claims, liabilities, damages and expenses, including, without limitation, reasonable attorneys' fees, arising as the result of an Environmental Condition and/or a breach of any of the representations, warranties, covenants, agreements or obligations of Debtor set forth in this Agreement. Without limiting the generality of the foregoing, such indemnity shall include, without limitation, any engineering, governmental inspection and reasonable attorneys' fees and expenses that the Indemnified Parties may incur by reason of any representation set forth in this Agreement being false, or by reason of any investigation or claim of any governmental agency in connection therewith. 13. Miscellaneous Provisions. A. Notices. All notices, consents, approvals or other instruments required or permitted to be given by either party pursuant to this Agreement shall be in writing and given by (i) hand delivery, (ii) facsimile, (iii) express overnight delivery service or (iv) certified or registered mail, return receipt requested, and shall be deemed to have been delivered upon (a) receipt, if hand delivered, (b) transmission, if delivered by facsimile, (c) the next business day, if delivered by express overnight delivery service, or (d) the third business day following the day of deposit of such notice with the United States Postal Service, if sent by certified or registered mail, return receipt requested; provided, however, if a notice is deposited with the United States Postal Service pursuant to this item (d), such notice shall also be sent in accordance with at least one of the other methods set forth in this Section 13(A). Notices shall be provided to the parties and addresses (or facsimile numbers, as applicable) specified below: -18- If to Debtor: Family Steak Houses of Florida, Inc. 2113 Florida Boulevard Neptune Beach, FL 32266 Attention: Edward B. Alexander Telephone: (904) 249-4197 Telecopy: (904) 249-1466 If to FFCA: Dennis L. Ruben, Esq. Senior Vice President and General Counsel FFCA Mortgage Corporation 17207 North Perimeter Drive Scottsdale, AZ 85255 Telephone: (602) 585-4500 Telecopy: (602) 585-2226 B. Real Estate Commission. FFCA and Debtor represent and warrant to each other that they have dealt with no real estate or mortgage broker, agent, finder or other intermediary in connection with the transactions contemplated by this Agreement. FFCA and Debtor shall indemnify and hold each other harmless from and against any costs, claims or expenses, including attorneys' fees, arising out of the breach of their respective representations and warranties contained within this Section. C. Waiver and Amendment. No provisions of this Agreement shall be deemed waived or amended except by a written instrument unambiguously setting forth the matter waived or amended and signed by the party against which enforcement of such waiver or amendment is sought. Waiver of any matter shall not be deemed a waiver of the same or any other matter on any future occasion. D. Captions. Captions are used throughout this Agreement for convenience of reference only and shall not be considered in any manner in the construction or interpretation hereof. E. FFCA's Liability. Notwithstanding anything to the contrary provided in this Agreement, it is specifically understood and agreed, such agreement being a primary consideration for the execution of this Agreement by FFCA, that (i) there shall be absolutely no personal liability on the part of any shareholder, director, officer or employee of FFCA, with respect to any of the terms, covenants and conditions of this Agreement or the other Loan Documents, (ii) Debtor waives all claims, demands and causes of action against FFCA's officers, directors, employees and agents in the event of any breach by FFCA of any of the terms, covenants and conditions of this Agreement or the other Loan Documents to be performed by FFCA and (iii) Debtor shall look solely to the assets of FFCA for the satisfaction of each and every remedy of Debtor in the event of any breach by FFCA of any of the terms, covenants and conditions of this Agreement or the other Loan Documents to be performed by FFCA, such exculpation of liability to be absolute and without any exception whatsoever. -19- F. Severability. The provisions of this Agreement shall be deemed severable. If any part of this Agreement shall be held unenforceable, the remainder shall remain in full force and effect, and such unenforceable provision shall be reformed by such court so as to give maximum legal effect to the intention of the parties as expressed therein. G. Construction Generally. This is an agreement between parties who are experienced in sophisticated and complex matters similar to the transaction contemplated by this Agreement and is entered into by both parties in reliance upon the economic and legal bargains contained herein and shall be interpreted and construed in a fair and impartial manner without regard to such factors as the party which prepared the instrument, the relative bargaining powers of the parties or the domicile of any party. Debtor and FFCA were each represented by legal counsel competent in advising them of their obligations and liabilities hereunder. H. Other Documents. Each of the parties agrees to sign such other and further documents as may be appropriate to carry out the intentions expressed in this Agreement. I. Attorneys' Fees. In the event of any judicial or other adversarial proceeding between the parties concerning this Agreement, the prevailing party shall be entitled to recover its attorneys' fees and other costs in addition to any other relief to which it may be entitled. References in this Agreement to the attorneys' fees and/or costs of FFCA shall mean both the fees and costs of independent outside counsel retained by FFCA with respect to this transaction and the fees and costs of FFCA's in-house counsel incurred in connection with this transaction. J. Entire Agreement. This Agreement and the other Loan Documents, together with any other certificates, instruments or agreements to be delivered in connection therewith, constitute the entire agreement between the parties with respect to the subject matter hereof, and there are no other representations, warranties or agreements, written or oral, between Debtor and FFCA with respect to the subject matter of this Agreement. Notwithstanding anything in this Agreement to the contrary, upon the execution and delivery of this Agreement by Debtor and FFCA, the Commitment shall be deemed null and void and of no further force and effect and the terms and conditions of this Agreement shall control notwithstanding that such terms may be inconsistent with or vary from those set forth in the Commitment. K. Forum Selection; Jurisdiction; Venue; Choice of Law. Debtor acknowledges that this Agreement was substantially negotiated in the State of Arizona, the Agreement was signed by FFCA in the State of Arizona and delivered by Debtor in the State of Arizona, all payments under the Notes -20- will be delivered in the State of Arizona and there are substantial contacts between the parties and the transactions contemplated herein and the State of Arizona. For purposes of any action or proceeding arising out of this Agreement, the parties hereto hereby expressly submit to the jurisdiction of all federal and state courts located in the State of Arizona and Debtor consents that it may be served with any process or paper by registered mail or by personal service within or without the State of Arizona in accordance with applicable law. Furthermore, Debtor waives and agrees not to assert in any such action, suit or proceeding that it is not personally subject to the jurisdiction of such courts, that the action, suit or proceeding is brought in an inconvenient forum or that venue of the action, suit or proceeding is improper. It is the intent of the parties hereto that all provisions of this Agreement shall be governed by and construed under the laws of the State of Arizona. To the extent that a court of competent jurisdiction finds Arizona law inapplicable with respect to any provisions hereof, then, as to those provisions only, the laws of the state where the Premises are located shall be deemed to apply. Nothing in this Section shall limit or restrict the right of FFCA to commence any proceeding in the federal or state courts located in the state in which the Premises are located to the extent FFCA deems such proceeding necessary or advisable to exercise remedies available under this Agreement or the other Loan Documents. L. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original. M. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Debtor and FFCA and their respective successors and permitted assigns, including, without limitation, any United States trustee, any debtor in possession or any trustee appointed from a private panel. N. Survival. Except for the conditions of Closing set forth in Sections 2 and 9, which shall be satisfied or waived as of the Closing Date, all representations, warranties, agreements, obligations and indemnities of Debtor and FFCA set forth in this Agreement shall survive the Closing. O. Waiver of Jury Trial and Punitive, Consequential, Special and Indirect Damages. DEBTOR AND FFCA HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE, DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES FROM FFCA WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY DEBTOR AGAINST FFCA OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY DEBTOR OF ANY RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES HAS BEEN NEGOTIATED BY THE PARTIES HERETO AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. -21- P. Transfers, Participations and Securitization. A material inducement to FFCA's willingness to complete the transactions contemplated by the Loan Documents is Debtor's agreement that FFCA may, at any time, sell, transfer or assign the Notes, Mortgages and the other Loan Documents, and any or all servicing rights with respect thereto (each, a "Transfer"), or grant participations therein (each, a "Participation"), or complete an asset securitization vehicle selected by FFCA, in accordance with all requirements which may be imposed by the investors or the rating agencies involved in such securitized financing transaction, as selected by FFCA, or which may be imposed by applicable securities, tax or other laws or regulations, including, without limitation, laws relating to FFCA's status as a real estate investment trust (each, a "Securitization"). Debtor agrees to cooperate in good faith with FFCA in connection with any Transfer, Participation and/or Securitization, including, without limitation, (i) providing such documents, financial and other data, and other information and materials (the "Disclosures") which would typically be required with respect to Debtor by a purchaser, transferee, assignee, servicer, participant, investor or rating agency involved with respect to such Transfer, Participation and/or the Securitization, as applicable; provided, however, Debtor shall not be required to make Disclosures of any confidential information or any information which has not previously been made public unless required by applicable federal or state securities laws; and (ii) amending the terms of the transactions evidenced by the Loan Documents to the extent necessary so as to satisfy the requirements of purchasers, transferees, assignees, servicers, participants, investors or selected rating agencies involved in any such Transfers, Participations or Securitization, so long as such amendments would not have a material adverse effect upon Debtor or the transactions contemplated hereunder. Debtor consents to FFCA providing the Disclosures, as well as any other information which FFCA may now have or hereafter acquire with respect to the Premises or the financial condition of Debtor, to each purchaser, transferee, assignee, servicer, participant, investor or rating agency involved with respect to each Transfer, Participation and/or Securitization, as applicable. FFCA and Debtor shall each pay their own reasonable attorneys fees and reasonable other out-of-pocket expenses incurred in connection with the performance of their respective obligations under this Section. -22- IN WITNESS WHEREOF, Debtor and FFCA have entered into this Agreement as of the date first above written. FFCA: Witness /s/PAULA J. MASIULEWICZ FFCA MORTGAGE CORPORATION, -------------------- a Delaware corporation Paula J. Masiulewicz Witness /s/ANN L. HALPERN By /s/ROB ROACH -------------- ------------ Ann L. Halpern Rob Roach Its SVP DEBTOR: Witness /s/EDWARD B. ALEXANDER FAMILY STEAK HOUSES OF FLORIDA, INC., ------------------- a Florida corporation Edward B. Alexander Witness /s/J. MICHAEL HUGHES By /s/LEWIS E. CHRISTMAN, JR. ----------------- ----------------------- J. Michael Hughes Lewis E. Christman, Jr. Its President & CEO -23- STATE OF ARIZONA ] ] SS. COUNTY OF MARICOPA ] I HEREBY CERTIFY that on this day, before me, an officer duly authorized in the State aforesaid and in the County aforesaid to take acknowledgements, the foregoing instrument was acknowledged before me by Rob Roach, the Senior Vice President of FFCA Mortgage Corporation, a Delaware corporation, freely and voluntarily under authority duly vested in him by said corporation and that the seal affixed thereto is the true corporate seal of said corporation. He is personally known to me or has produced as identification. WITNESS my hand and official seal in the County and State last aforesaid this 6th day of December, 1996. /s/MARGARET J. CRAFT ----------------- Margaret J. Craft Notary Public Typed, printed or stamped name of Notary Public My Commission Expires: July 14, 1999 -24- STATE OF FLORIDA ] ] SS. COUNTY OF DUVAL ] I HEREBY CERTIFY that on this day, before me, an officer duly authorized in the State aforesaid and in the County aforesaid to take acknowledgements, the foregoing instrument was acknowledged before me by Lewis E. Christman, the President and CEO of Family Steak Houses of Florida, Inc., a Florida corporation, freely and voluntarily under authority duly vested in him by said corporation and that the seal affixed thereto is the true corporate seal of said corporation. He is personally known to me or has produced as identification. ---------------- WITNESS my hand and official seal in the County and State last aforesaid this 4th day of December, 1996. /s/STEPHANIE GRIFFITH ----------------- Stephanie Griffith Notary Public Typed, printed or stamped name of Notary Public My Commission Expires: August 24, 2000 -25- EX-10 4 EXHIBIT 10.18 Exhibit 10.18 $4.64m Loan Agreement ================================================================================ LOAN AGREEMENT THIS LOAN AGREEMENT (this "Agreement") is made as of , 1996, by and between FFCA MORTGAGE CORPORATION, a Delaware corporation ("FFCA"), whose address is 17207 North Perimeter Drive, Scottsdale, Arizona 85255, and FAMILY STEAK HOUSES OF FLORIDA, INC., a Florida corporation ("Debtor"), whose address is 2113 Florida Boulevard, Neptune Beach, Florida 32266. PRELIMINARY STATEMENT: Unless otherwise expressly provided herein, all defined terms used in this Agreement shall have the meanings set forth in Section 1. Debtor has requested from FFCA, and applied for, the Loans to provide refinancing for the Premises, and for no other purpose whatsoever. Each Loan will be evidenced by a Note and secured by a first priority security interest in the corresponding Premises pursuant to a Mortgage. FFCA has committed to make the Loans pursuant to the terms and conditions of the Commitment, this Agreement and the other Loan Documents. AGREEMENT: In consideration of the mutual covenants and provisions of this Agreement, the parties agree as follows: 1. Definitions. The following terms shall have the following meanings for all purposes of this Agreement: "Closing" means the consummation of each Loan. "Closing Date" means, with respect to each Premises, the date FFCA makes the Loan for such Premises. "Code" means the United States Bankruptcy Code, 11 U.S.C. Sec. 101 et seq., as amended. "Commitment" means that certain Commitment Letter dated September 27, 1996 between FFCA and Debtor, and any amendments or supplements thereto. "Counsel" means legal counsel to Debtor, licensed in the state(s) in which (i) the Premises are located, (ii) Debtor is incorporated or formed and (iii) Debtor maintains principal places of business, as selected by Debtor as the case may be, and approved by FFCA. "Environmental Condition" means any condition with respect to soil, surface waters, groundwaters, land, stream sediments, surface or subsurface strata, ambient air and any environmental medium comprising or surrounding the Premises, whether or not yet discovered, which could or does result in any damage, loss, cost, expense, claim, demand, order or liability to or against Debtor or FFCA by any third party (including, without limitation, any government entity), including, without limitation, any condition resulting from the operation of Debtor's business and/or the operation of the business of any other property owner or operator in the vicinity of the Premises and/or any activity or operation formerly conducted by any person or entity on or off the Premises. "Environmental Indemnity Agreements" means that certain Environmental Indemnity Agreement to be executed by Debtor for the benefit of FFCA for each of the Premises substantially in the form of Exhibit E attached to this Agreement. "Environmental Laws" means any present and future federal, state and local laws, statutes, ordinances, rules, regulations and the like, as well as common law, relating to protection of human health or the environment, relating to Hazardous Materials, relating to liability for or costs of Remediation or prevention of Releases or relating to liability for or costs of other actual or threatened danger to human health or the environment. "Environmental Laws" includes, but is not limited to, the following statutes, as amended, any successor thereto, and any regulations promulgated pursuant thereto, and any state or local statutes, ordinances, rules, regulations and the like addressing similar issues: the Comprehensive Environmental Response, Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Hazardous Materials Transportation Act; the Resource Conservation and Recovery Act (including but not limited to Subtitle I relating to underground storage tanks); the Solid Waste Disposal Act; the Clean Water Act; the Clean Air Act; the Toxic Substances Control Act; the Safe Drinking Water Act; the Occupational Safety and Health Act; the Federal Water Pollution Control Act; the Federal Insecticide, Fungicide and Rodenticide Act; the Endangered Species Act; the National Environmental Policy Act; and the River and Harbors Appropriation Act. "Environmental Laws" also includes, but is not limited to, any present and future federal, state and local laws, statutes, ordinances, rules, regulations and the like, as well as common law: conditioning transfer of property upon a negative declaration or other approval of a governmental authority of the environmental condition of the property; requiring notification or disclosure of Releases or other environmental condition of the Premises to any governmental authority or other person or entity, whether or not in connection with transfer of title to or interest in property; imposing conditions or requirements in connection with permits or other authorization for lawful activity; relating to nuisance, trespass or other causes of action related to the Premises; and relating to wrongful death, personal injury, or property or other damage in connection with any physical condition or use of the Premises. "Event of Default" has the meaning set forth in Section 10. "Fee" means an underwriting, site assessment, valuation, processing and commitment fee equal to 1.5% of the Loan Amounts for each of the Premises, which Fee shall be payable as set forth in Section 3. -2- "Franchisor" means Ryan's Properties, Inc., a Delaware corporation, and its successors. "Hazardous Materials" means (a) any toxic substance or hazardous waste, substance or related material, or any pollutant or contaminant; (b) radon gas, asbestos in any form which is or could become friable, urea formaldehyde foam insulation, transformers or other equipment which contains dielectric fluid containing levels of polychlorinated biphenyls in excess of federal, state or local safety guidelines, whichever are more stringent, or any petroleum product; (c) any substance, gas, material or chemical which is or may be defined as or included in the definition of "hazardous substances," "toxic substances," "hazardous materials," hazardous wastes" or words of similar import under any Environmental Laws; and (d) any other chemical, material, gas or substance the exposure to or release of which is or may be prohibited, limited or regulated by any governmental or quasi-governmental entity or authority that asserts or may assert jurisdiction over the Premises or the operations or activity at the Premises, or any chemical, material, gas or substance that does or may pose a hazard to the health and/or safety of the occupants of the Premises or the owners and/or occupants of property adjacent to or surrounding the Premises. "Loan" or "Loans" means, as the context requires, the loan for each of the Premises described in Section 2 and in the amount not to exceed that set forth in Exhibit A. Each Loan will be evidenced by a Note and secured by a Mortgage. "Loan Amount" or "Loan Amounts" means, as the context requires, the maximum loan amount set forth on the attached Exhibit A for each of the Premises. "Loan Documents" means, collectively, this Agreement, the Notes, the Mortgages, the Environmental Indemnity Agreements, the UCC-1 Financing Statements, the Commitment and all other documents executed in connection therewith or contemplated thereby. "Mortgage" means the mortgage, assignment of rents and leases, security agreement and fixture filing to be executed for each of the Premises substantially in the form of Exhibit C attached to this Agreement. "Note" or "Notes" means, as the context requires, the promissory notes evidencing the Loan substantially in the form attached hereto as Exhibit B. A Note will be executed by Seller for each of the Premises in the principal amount set forth in Exhibit A. "Notice" has the meaning set forth in Section 2. "Permitted Exceptions" means those exceptions to title approved in writing by FFCA pursuant to Section 9. "Premises" means the parcels of real estate described in Exhibit A attached hereto, all rights, privileges and appurtenances associated therewith, and all buildings, fixtures and other improvements now or hereafter located thereon (whether or not affixed to such real estate). -3- "Release" means any presence, release, deposit, discharge, emission, leaking, spilling, seeping, migrating, injecting, pumping, pouring, emptying, escaping, dumping, disposing or other movement of Hazardous Materials. "Remediation" means any response, remedial, removal, or corrective action, any activity to cleanup, detoxify, decontaminate, contain or otherwise remediate any Hazardous Material, any actions to prevent, cure or mitigate any Release, any action to comply with any Environmental Laws or with any permits issued pursuant thereto, any inspection, investigation, study, monitoring, assessment, audit, sampling and testing, laboratory or other analysis, or any evaluation relating to any Hazardous Materials. "Reports" means the phase I environmental reports (and phase II environmental reports if the same are recommended by such phase I reports regarding any of the Premises) to be prepared as contemplated by Section 9.E. hereof regarding each of the Premises, which Reports shall be satisfactory in form and substance to FFCA in its sole discretion. "Threatened Release" means a substantial likelihood of a Release which requires action to prevent or mitigate damage to the soil, surface waters, groundwaters, land, stream sediments, surface or subsurface strata, ambient air or any other environmental medium comprising or surrounding the Premises which may result from such Release. "Title Company" means the title insurance company described in Section 4. "UCC-1 Financing Statements" means such UCC-1 Financing Statements as FFCA shall require to be executed and delivered by Debtor with respect to the Premises. 2. Transaction. On the terms and subject to the conditions set forth in the Loan Documents, FFCA agrees to make the Loans to Debtor. The maximum Loan Amount for each of the Premises is set forth on the attached Exhibit A. Each Loan will be evidenced by a Note and secured by a Mortgage. Debtor shall repay the outstanding principal amount of the Loans together with interest thereon in the manner and in accordance with the terms and conditions of the Notes and the other Loan Documents. The Notes will mature on the twentieth anniversary thereof. The Loans shall be advanced at the Closing in cash or its equivalent subject to any prorations and adjustments required by this Agreement. Debtor shall deliver a notice to FFCA when it desires FFCA to make a Loan at least 45 days prior to the date Debtor desires to receive the Loan Amount (each, a "Notice"). Debtor shall indicate in each Notice the Loan Amount that Debtor desires to borrow for each Premises. Each Loan Amount shall be advanced in a single funding. FFCA shall not be obligated to fund any Loan for a Premises for which Debtor has not delivered a Notice to FFCA prior to October 20, 1997, nor shall FFCA be obligated to fund any Loan for which Debtor has delivered a Notice to FFCA prior to October 20, 1997 but Debtor does not satisfy the conditions precedent set forth in this Agreement for the funding of such Loan prior to December 5, 1997. -4- 3. Underwriting, Site Assessment, Valuation, Processing and Commitment Fee. Debtor paid FFCA a portion of the Fee in connection with the Loans for the Premises and eighteen other Premises subject to that certain loan agreement by and between Debtor and FFCA of even date herewith in the amount of $150,000 pursuant to the Commitment and such portion was deemed fully earned when received. Debtor shall pay FFCA the remaining portion of the Fee at the time of the Closing of each Loan. The Fee shall be deemed fully earned upon such Closing. The Fee for each Loan shall be applied by FFCA in payment of (i) the Phase I environmental report to be delivered pursuant to Section 9.E for the corresponding Premises, (ii) the customary fees and expenses of FFCA's attorneys for such Loan, and (iii) FFCA's in house site inspection costs and fees incurred with respect to such Loan. The balance of the Fee remaining after payment of such fees, expenses and costs constitutes FFCA's underwriting, site assessment, valuation, processing and commitment fee for such Loan. 4. Closing. FFCA will order a title insurance commitment for each of the Premises from Lawyers Title Insurance Corporation or an alternative title company approved by FFCA ("Title Company"). Prior to each Closing Date, the parties hereto shall deposit with Title Company all documents and moneys necessary to comply with their obligations under this Agreement. Title Company shall not cause each Loan to close unless and until it has received written instructions from FFCA to do so. Except for the fees, expenses and costs to be paid from the Fee by FFCA pursuant to Section 3, all costs of each Loan (the "Costs") shall be borne by Debtor, including, without limitation, the cost of title insurance, the attorneys' fees of Debtor, attorneys' fees and expenses of FFCA (but only to the extent FFCA's reasonable attorneys' fees and/or expenses exceed the customary fees and/or expenses due to extended document negotiations and/or revisions and/or extraordinary closing issues), the cost of the surveys, stamp taxes, transfer fees, escrow and recording fees and site inspection fees for the Premises. Debtor may apply a portion of each Loan Amount toward the payment of the corresponding Costs. All real and personal property and other applicable taxes and assessments and other charges relating to the Premises which are due and payable on or prior to the Closing Date as well as taxes and assessments due and payable subsequent to the Closing Date but which Title Company requires to be paid at Closing as a condition to the issuance of the title insurance policy described in Section 9.C, shall be paid by Debtor at or prior to the Closing, and all other taxes and assessments shall be paid by Debtor. The closing documents shall be dated as of the Closing Date. Debtor and FFCA hereby employ Title Company to act as escrow agent in connection with this transaction. Debtor and FFCA will deliver to Title Company all documents, pay to Title Company all sums and do or cause to be done all other things necessary or required by this Agreement, in the reasonable judgment of Title Company, to enable Title Company to comply herewith and to enable any title insurance policy provided for herein to be issued. Title Company is authorized to pay, from any funds held by it for FFCA's or Debtor's respective credit all amounts necessary to procure the delivery of such documents and to pay, on behalf of FFCA and Debtor, all charges and obligations payable by them, respectively. Debtor will pay all charges payable by it to Title Company. Title Company is authorized, in the event any conflicting demand is made upon it concerning these instructions or the escrow, at its election, to hold any documents and/or funds deposited hereunder until an action shall be brought in a court of competent jurisdiction to determine the rights of Debtor and FFCA or to interplead such documents and/or funds in an action brought in any such court. -5- Deposit by Title Company of such documents and funds, after deducting therefrom its charges and its expenses and attorneys' fees incurred in connection with any such court action, shall relieve Title Company of all further liability and responsibility for such documents and funds. Title Company's receipt of this Agreement and opening of an escrow pursuant to this Agreement shall be deemed to constitute conclusive evidence of Title Company's agreement to be bound by the terms and conditions of this Agreement pertaining to Title Company. Disbursement of any funds shall be made by check, certified check or wire transfer, as directed by FFCA. Title Company shall be under no obligation to disburse any funds represented by check or draft, and no check or draft shall be payment to Title Company in compliance with any of the requirements hereof, until it is advised by the bank in which such check or draft is deposited that such check or draft has been honored. Title Company is authorized to act upon any statement furnished by the holder or payee, or a collection agent for the holder or payee, of any lien on or charge or assessment in connection with the Premises, concerning the amount of such charge or assessment or the amount secured by such lien, without liability or responsibility for the accuracy of such statement. The employment of Title Company as escrow agent shall not affect any rights of subrogation under the terms of any title insurance policy issued pursuant to the provisions thereof. 5. Representations and Warranties of FFCA. The representations and warranties of FFCA contained in this Section are being made to induce Debtor to enter into this Agreement and consummate the transactions contemplated herein, and Debtor has relied, and will continue to rely, upon such representations and warranties from and after the execution of this Agreement and each Closing. FFCA represents and warrants to Debtor as follows as of the date of this Agreement and each Closing Date: A. Organization of FFCA. FFCA has been duly formed, is validly existing and has taken all necessary action to authorize the execution, delivery and performance by FFCA of this Agreement. B. Authority of FFCA. The person who has executed this Agreement on behalf of FFCA is duly authorized so to do. C. Enforceability. Upon execution by FFCA, this Agreement shall constitute the legal, valid and binding obligation of FFCA, enforceable against FFCA in accordance with its terms. All representations and warranties of FFCA made in this Agreement shall be and will remain true and complete as of each Closing Date as if made and restated in full as of such date, and shall survive each Closing. 6. Representations and Warranties of Debtor. The representations and warranties of Debtor contained in this Section are being made to induce FFCA to enter into this Agreement and consummate the transactions contemplated herein, and FFCA has relied, and will continue to rely, upon such representations and warranties from and after the execution of this Agreement and each Closing. Debtor represents and warrants to FFCA as follows as of the date of this Agreement and each Closing Date: -6- A. Information and Financial Statements. Debtor has delivered to FFCA financial statements (either audited financial statements or, if Debtor does not have audited financial statements, certified financial statements) and certain other information concerning itself, which financial statements and other information are true, correct and complete in all material respects; and no material adverse change has occurred with respect to any such financial statements and other information provided to FFCA since the date such financial statements and other information were prepared or delivered to FFCA. Debtor understands that FFCA is relying upon such financial statements and information and Debtor represents that such reliance is reasonable. All such financial statements were prepared in accordance with generally accepted accounting principles consistently applied and accurately reflect as of the date of this Agreement and the Closing Date, the financial condition of each individual or entity to which they pertain. B. Organization and Authority of Debtor. (1) Debtor is duly organized or formed, validly existing and in good standing under the laws of its state of incorporation or formation, and qualified as a foreign corporation, partnership or limited liability company to do business in any jurisdiction where such qualification is required. All necessary corporate, partnership or limited liability company action has been taken to authorize the execution, delivery and performance of this Agreement and of the other documents, instruments and agreements provided for herein. (2) The persons who have executed this Agreement on behalf of Debtor are duly authorized so to do. C. Enforceability of Documents. Upon execution by Debtor respectively, this Agreement and the other documents, instruments and agreements to be executed in connection with this Agreement, shall constitute the legal, valid and binding obligations of Debtor, respectively, enforceable against Debtor in accordance with their respective terms. D. Litigation. Except as set forth on Exhibit F (the "Litigation"), there are no suits, actions, proceedings or investigations pending or threatened against or involving Debtor or the Premises before any court, arbitrator, or administrative or governmental body. If any or all of the Litigation is resolved unfavorably to Debtor, such resolution will not result in any material adverse change in the contemplated business, condition or worth or operations of Debtor or the Premises. E. Absence of Breaches or Defaults. Debtor is not, and the authorization, execution, delivery and performance of this Agreement and the documents, instruments and agreements provided for herein will not result, in any breach or default under any other document, instrument or agreement to which Debtor are a party or by which Debtor, the Premises or any of the property of Debtor is subject or bound. The authorization, execution, delivery and performance of this Agreement and the documents, instruments and agreements provided for herein will not violate any applicable law, statute, regulation, rule, ordinance, code, rule or order. -7- F. Utilities. The Premises are served by ample public utilities to permit full utilization of the Premises for their intended purpose and all utility connection fees and use charges will have been paid in full. G. Intended Use and Zoning; Compliance With Laws. Debtor intends to use the Premises solely for the operation of Franchisor restaurants, and related ingress, egress and parking, and for no other purposes. Such intended use will not violate any zoning or other governmental requirement applicable to the Premises. The Premises substantially comply with all applicable statutes, regulations, rules, ordinances, codes, licenses, permits, orders and approvals of any governmental agencies, departments, commissions, bureaus, boards or instrumentalities of the United States, the states in which the Premises are located and all political subdivisions thereof, including, without limitation, all health, building, fire, safety and other codes, ordinances and requirements, all applicable standards of the National Board of Fire Underwriters and the Americans With Disabilities Act of 1990. H. Area Development; Wetlands. No condemnation or eminent domain proceedings affecting the Premises have been commenced or, to the best of Debtor's knowledge, are contemplated. To the best of Debtor's knowledge, the areas where the Premises are located have not been declared blighted by any governmental authority. The Premises and/or the real property bordering the Premises is not designated by any applicable federal, state and/or local governmental authority as a wetlands. I. Licenses and Permits; Access. Debtor has all required licenses and permits, both governmental and private, to use and operate the Premises in the intended manner. There are adequate rights of access to public roads and ways available to the Premises to permit full utilization of the Premises for their intended purposes and all such public roads and ways have been completed and dedicated to public use. J. Condition of Premises. The Premises, including the equipment located thereon, is of good workmanship and materials, fully equipped and operational, in good condition and repair, free from structural defects, clean, orderly and sanitary, safe, well-lit, landscaped, decorated, attractive and well-maintained. K. Environmental. Debtor is fully familiar with the present use of the Premises, and, after due inquiry, Debtor has become generally familiar with the prior uses of the Premises. Except as set forth in the Reports, no Hazardous Materials have been used, handled, manufactured, generated, produced, stored, treated, processed, transferred or disposed of at or on the Premises, except in compliance with all applicable Environmental Laws, and no Release or Threatened Release has occurred at or on the Premises. The activities, operations and business undertaken on, at or about the Premises, including, but not limited to, any past or ongoing alterations or improvements at the Premises, are and have been at all times, in compliance with all Environmental Laws. No further action is required to remedy any Environmental Condition or violation of, or to be in full compliance with, any Environmental Laws, and no lien has been imposed on the Premises in any federal, state or local governmental or quasi-governmental entity in connection with any Environmental Condition, the violation or threatened violation of any Environmental Laws or the presence of any Hazardous Materials on or off the Premises. -8- There is no pending or threatened litigation or proceeding before any court, administrative agency or governmental body in which any person or entity alleges the violation or threatened violation of any Environmental Laws or the presence, Release, Threatened Release or placement on or at the Premises of any Hazardous Materials, or of any facts which would give rise to any such action, nor has Debtor (a) received any notice (and Debtor has no actual or constructive knowledge) that any governmental or quasi-governmental authority or any employee or agent thereof has determined, threatens to determine or requires an investigation to determine that there has been a violation of any Environmental Laws at, on or in connection with the Premises or that there exists a presence, Release, Threatened Release or placement of any Hazardous Materials on or at the Premises, or the use, handling, manufacturing, generation, production, storage, treatment, processing, transportation or disposal of any Hazardous Materials at or on the Premises; (b) received any notice under the citizen suit provision of any Environmental Law in connection with the Premises or any facilities, operations or activities conducted thereon, or any business conducted in connection therewith; or (c) received any request for inspection, request for information, notice, demand, administrative inquiry or any formal or informal complaint or claim with respect to or in connection with the violation or threatened violation of any Environmental Laws or existence of Hazardous Materials relating to the Premises or any facilities, operations or activities conducted thereon or any business conducted in connection therewith. L. Title to Premises; First Priority Lien. Title to the Premises is vested in Debtor, free and clear of all liens, encumbrances, charges and security interests of any nature whatsoever, except the Permitted Exceptions. Upon each Closing, FFCA shall have a first priority lien on the Premises which is the subject of such Closing pursuant to the corresponding Mortgage and the UCC-1 Financing Statements. M. No Other Agreements and Options. Neither Debtor nor the Premises are subject to any commitment, obligation, or agreement, including, without limitation, any right of first refusal, option to purchase or lease granted to a third party, which could or would prevent or hinder FFCA in making the Loans or prevent or hinder Debtor from fulfilling its obligations under this Agreement or the other Loan Documents. -9- N. No Mechanics' Liens. There are no outstanding accounts payable, mechanics' liens, or rights to claim a mechanics' lien in favor of any materialman, laborer, or any other person or entity in connection with labor or materials furnished to or performed on any portion of the Premises; no work has been performed or is in progress nor have materials been supplied to the Premises or agreements entered into for work to be performed or materials to be supplied to the Premises prior to the date hereof, which will not have been fully paid for on or before each Closing Date or which might provide the basis for the filing of such liens against the Premises or any portion thereof; Debtor shall be responsible for any and all claims for mechanics' liens and accounts payable that have arisen or may subsequently arise due to agreements entered into for and/or any work performed on, or materials supplied to the Premises prior to each Closing Date; and Debtor shall and does hereby agree to defend, indemnify and forever hold FFCA and FFCA's designees harmless from and against any and all such mechanics' lien claims, accounts payable or other commitments relating to the Premises. O. No Reliance. Debtor acknowledges that FFCA is not affiliated with, and has no business relationship with, Franchisor, other than landlord/tenant and/or creditor/debtor relationships unrelated to the transaction set forth in this Agreement, and that FFCA did not prepare or assist in the preparation of any of the projected financial information used by Debtor in analyzing the economic viability and feasibility of the transaction contemplated by this Agreement. Furthermore, Debtor acknowledges that it has not relied upon, nor may it hereafter rely upon, the analysis undertaken by FFCA in determining the amount of the Loans, and such analysis will not be made available to Debtor. P. Franchisor Provisions. Debtor has entered into franchise, license and/or area development agreements with Franchisor for the conduct of business at the Premises. Such franchise, license and/or area development agreements are in full force and effect, permit Debtor to operate the Premises as Franchisor restaurants, and have terms which will not expire before the scheduled maturity date of the Notes. All representations and warranties of Debtor made in this Agreement shall be and will remain true and complete as of and subsequent to each Closing Date as if made and restated in full as of such time and shall survive each Closing. 7. Covenants. Debtor covenants to FFCA as follows from and after the date of this Agreement with respect to the following subsection A and from and after the Closing of the first Loan with respect to each of the following subsections B and C: A. Inspections. Debtor shall, at all reasonable times, (i) provide FFCA and FFCA's officers, employees, agents, advisors, attorneys, accountants, architects, and engineers with access to the Premises, all drawings, plans, and specifications for the Premises in possession of Debtor, all engineering reports relating to the Premises in the possession of Debtor, the files and correspondence relating to the Premises, and the financial books and records, including lists of delinquencies, relating to the ownership, operation, and maintenance of the Premises, and (ii) allow such persons to make such inspections, tests, copies, and verifications as FFCA considers necessary. -10- B. Fixed Charge Coverage Ratio. Until such time as all of Debtor's obligations under the outstanding Notes and the other Loan Documents are paid, satisfied and discharged in full, on each December 31 (or such other date on which Debtor's fiscal year ends) while such Notes are outstanding: (i) Debtor shall maintain an aggregate Fixed Charge Coverage Ratio calculated for all of the Premises for which Closings have occurred of at least 1.15:1; and (ii) If Closings for at least three Loans have occurred, no more than one of the corresponding Premises shall have a Fixed Charge Coverage Ratio calculated for each such Premises below 1.0:1. If Closings for at least four of the Loans have occurred, no more than two of the corresponding Premises shall have a Fixed Charge Coverage Ratio calculated for each such Premises below 1.0:1. For purposes of this Section, the term "Fixed Charge Coverage Ratio" shall mean with respect to all of the Premises for which Closings have occurred in the aggregate or individually, as applicable, and the twelve month period of time immediately preceding the date of determination, the ratio calculated for such period of time of (a) the sum of Net Income, Depreciation and Amortization, Interest Expense and Operating Lease Expenses, less a corporate overhead allocation in an amount equal to 3% of Gross Sales, to (b) the sum of the FFCA Payments and the Equipment Payment Amount. For purposes of this Section, the following terms shall be defined as set forth below: "Capital Lease" shall mean any lease of any property (whether real, personal or mixed) by Debtor with respect to the applicable Premises which lease would, in conformity with generally accepted accounting principles consistently applied, be required to be accounted for as a capital lease on the balance sheet of Debtor. "Debt" shall mean with respect to Debtor, the applicable Premises and the period of determination (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, indentures, notes or similar instruments, (iii) obligations to pay the deferred purchase price of property or services, (iv) obligations under leases which shall have been or should be, in accordance with generally accepted accounting principles consistently applied, recorded as "Capital Leases", and (v) obligations under direct or indirect guarantees in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (iv) above. "Depreciation and Amortization" shall mean the depreciation and amortization accruing during any period of determination with respect to the applicable Premises as determined in accordance with generally accepted accounting principles consistently applied. -11- "Equipment Payment Amount" shall mean for any period of determination the sum of all amounts payable during such period of determination under all (i) leases for equipment located at the applicable Premises, and (ii) all loans secured by equipment located at the applicable Premises. "FFCA Payments" shall mean for any period of determination, the sum of all amounts payable under the applicable Note(s). "Gross Sales" shall mean the sales or other income arising from all business conducted on the applicable Premises during the period of determination, less sales tax and any amounts received from not-for-profit sales of all non-food items approved for use in connection with promotional campaigns, if any, by Franchisor. "Interest Expense" shall mean for any period of determination, the sum of all interest accrued or which should be accrued in respect of all Debt of Debtor allocable to the applicable Premises, as the case may be, and all business operations thereon during such period (including interest attributable to Capital Leases), as determined in accordance with generally accepted accounting principles consistently applied. "Net Income" shall mean with respect to Debtor and with respect to the period of determination, the net income or net loss of Debtor adjusted for nonrecurring gains and losses allocable to the applicable Premises as the case may be, and to such period (before provision or benefit for income taxes or charges equivalent to income taxes allocable to such period, as determined in accordance with generally accepted accounting principles consistently applied but before provision for corporate overhead expense allocable to the applicable Premises and to such period). "Operating Lease Expense" shall mean the expenses incurred by Debtor under any operating leases with respect to of the applicable Premises and/or the business operations thereon during the period of determination in accordance with generally accepted accounting principles consistently applied. C. Net Worth. At all times while the obligations of Debtor to FFCA pursuant to the Loan Documents are outstanding, Debtor shall maintain a net worth of at least $2,000,000, as determined in accordance with generally accepted accounting principles consistently applied. -12- 8. Transaction Characterization. This Agreement is a contract to extend a financial accommodation (as such term is used in the Code) for the benefit of Debtor. It is the intent of the parties hereto that the business relationship created by this Agreement, the Notes, the Mortgages and the other Loan Documents is solely that of creditor and debtor and has been entered into by both parties in reliance upon the economic and legal bargains contained in the Loan Documents. None of the agreements contained in the Loan Documents is intended, nor shall the same be deemed or construed, to create a partnership between Debtor and FFCA, to make them joint venturers, to make Debtor an agent, legal representative, partner, subsidiary or employee of FFCA, nor to make FFCA in any way responsible for the debts, obligations or losses of Debtor. 9. Conditions of Each Closing. The obligation of FFCA to consummate each of the Closings is subject to the fulfillment or waiver of each of the following conditions with respect to the corresponding Premises and Loan: A. Title. Title to the Premises shall be vested in Debtor, free of all liens, encumbrances, restrictions, encroachments and easements, except as otherwise specifically provided herein or agreed to in writing by FFCA ("Permitted Exceptions"), and the liens created by the Mortgages and the UCC-1 Financing Statements. Upon Closing, FFCA will obtain a valid and perfected first priority lien upon and security interest in the Premises. B. Condition of Premises. FFCA shall have inspected and approved the Premises, the Premises and the equipment located thereon shall be in good condition and repair and of good workmanship and materials, and the Premises shall be fully equipped and operational, clean, orderly, sanitary, safe, well-lit, landscaped, decorated, attractive and with a suitable layout, physical plant, traffic pattern and location, all as determined by FFCA in its sole discretion. C. Evidence of Title. FFCA shall have received for the Premises a preliminary title report and irrevocable commitment to insure title by means of a mortgagee's, ALTA extended coverage policy of title insurance (or its equivalent, in the event such form is not issued in the jurisdiction where the Premises is located) issued by Title Company showing good and marketable title in the Premises in Debtor, committing to insure FFCA's first priority lien upon and security interest in the Premises subject only to Permitted Exceptions and containing such endorsements as FFCA may require. D. Survey. FFCA shall have received a current ALTA survey of the Premises, the form and substance of which shall be satisfactory to FFCA in its sole discretion. Debtor shall have provided FFCA with evidence satisfactory to FFCA that the location of the Premises is not within the 100-year flood plain or identified as a special flood hazard area as defined by the Federal Insurance Administration. E. Environmental. FFCA shall have received the Reports for the Premises, the form, substance and conclusions of which shall be satisfactory to FFCA in its sole discretion. -13- F. Compliance With Representations, Warranties and Covenants. All obligations of Debtor under this Agreement shall have been fully performed and complied with, and no event shall have occurred or condition shall exist which would, upon the Closing Date, or, upon the giving of notice and/or passage of time, constitute a breach or default hereunder or under the Loan Documents, the franchise, license and/or area development agreements with Franchisor for the Premises or any other agreement between or among FFCA, Debtor or Franchisor pertaining to the subject matter hereof, and no event shall have occurred or condition shall exist or information shall have been disclosed by Debtor or discovered by FFCA which has had or would have a material adverse effect on the Premises, Debtor or FFCA's willingness to consummate the transaction contemplated by this Agreement, as determined by FFCA in its sole and absolute discretion. G. Proof of Insurance. Debtor shall have delivered to FFCA copies of insurance policies, showing that all insurance required by the Loan Documents and providing coverage and limits satisfactory to FFCA are in full force and effect. H. Opinion of Counsel to Debtor. Debtor shall have caused Counsel to prepare and deliver an opinion substantially in the form attached as Exhibit D. I. Availability of Funds. FFCA presently has sufficient funds to discharge its obligations under this Agreement. In the event that the transaction contemplated by this Agreement does not close on or before the Closing Date, FFCA does not warrant that it will thereafter have sufficient funds to consummate the transaction contemplated by this Agreement. J. Franchise Agreement. FFCA shall have received a certificate from Franchisor in form and substance acceptable to FFCA that the franchise, license and/or area development agreement(s)s between Debtor and Franchisor with respect to the Premises are valid, binding and in full force and effect, with terms that will not expire before the scheduled maturity date of the corresponding Note(s), and no events have occurred which could constitute a default under the Loan Documents, and Franchisor waives all rights of first refusal set forth in such agreement as to FFCA and its successors and assigns. K. Closing Documents. At or prior to the Closing Date, FFCA and/or Debtor, as may be appropriate, shall execute and deliver or cause to be executed and delivered to Title Company or FFCA, as may be appropriate, all documents required to be delivered by this Agreement, and such other documents, payments, instruments and certificates, as FFCA may require in form acceptable to FFCA, including, without limitation, the following: (1) Notes; (2) Mortgages; (3) Franchisor's Certificates; (4) Proof of Insurance; (5) Opinion of Counsel to Debtor; (6) UCC-1 Financing Statements; and (7) Environmental Indemnity Agreements. -14- Upon fulfillment or waiver of all of the above conditions, FFCA shall deposit funds necessary to close this transaction with the Title Company and this transaction shall close in accordance with the terms and conditions of this Agreement. 10. Default and Remedies. A. Each of the following shall be deemed an event of default by Debtor (an "Event of Default"): (1) If any material representation or warranty of Debtor is false in any material respect when made or becomes false in any material respect prior to each Closing Date, or, in the event any such representation or warranty is continuing after any Closing, if any such representation or warranty becomes false in any respect at any time, or if Debtor renders any false statement or account; (2) If any principal, interest or other monetary sum due under any of the Notes, the Mortgages or any other Loan Document is not paid within five days after the date when due; (3) If Debtor fails to observe or perform any of the other material covenants, conditions, or obligations of this Agreement or any other Loan Document within the applicable grace or cure period; (4) If Debtor becomes insolvent within the meaning of the Code, files or notifies FFCA that it intends to file a petition under the Code, initiates a proceeding under any similar law or statute relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts (collectively, an "Action"), becomes the subject of either a petition under the Code or an Action, or is not generally paying its debts as the same become due; (5) If there is a breach or default under any other agreement or instrument, including, without limitation, promissory notes and guaranties, between, among or by (1) Debtor, any general or limited partnership organized in accordance with the laws of any state of the United States or its territories of which Debtor, or any partner, officer, director or shareholder of Debtor is a holder of a general or limited partnership interest, or any corporation or other entity affiliated with Debtor or by any partner, officer, director or shareholder of Debtor and, or for the benefit of, (2) FFCA or any corporation, partnership, joint venture, limited liability company, association or other form of entity affiliated with FFCA; or (6) If any event occurs or condition exists which does or would upon each Closing Date constitute a material breach or default under any of the Loan Documents or any other agreement between Debtor and FFCA pertaining to the subject matter hereof. -15- B. If any Event of Default occurs pursuant to subsection A(2) above, FFCA shall not be entitled to exercise its remedies set forth in subsection E below unless and until FFCA shall have given Debtor notice thereof and a period of five days from the delivery of such notice shall have elapsed without such Event of Default being cured. C. If any event occurs pursuant to subsection A(3) subsequent to the Closing and does not involve a breach of the Fixed Charge Coverage Ratio or the payment of any monetary sum, is not willful or intentional, does not place any rights or property of FFCA in immediate jeopardy, and is within the reasonable power of Debtor to promptly cure after receipt of notice thereof, all as determined by FFCA in its reasonable discretion, then such event shall not constitute an Event of Default hereunder, unless otherwise expressly provided herein, unless and until FFCA shall have given Debtor notice thereof and a period of 30 days shall have elapsed, during which period Debtor may correct or cure such event, upon failure of which an Event of Default shall be deemed to have occurred hereunder without further notice or demand of any kind. If such nonmonetary event cannot reasonably be cured within such 30-day period, as determined by FFCA in its reasonable discretion, and Debtor is diligently pursuing a cure of such event, then Debtor shall have a reasonable period to cure such event, which shall not exceed 90 days after receiving notice of the event from FFCA. If Debtor shall fail to correct or cure such event within such 90-day period, an Event of Default shall be deemed to have occurred hereunder without further notice or demand of any kind. D. If Debtor breaches either of the Fixed Charge Coverage Ratio requirements of Section 7.B., such breach shall not constitute an Event of Default if Debtor, within 30 days from the delivery of a notice from FFCA to Debtor of such failure, pays to FFCA the applicable FCCR Amount (as defined below), which payments shall be made without prepayment premium or penalty). Promptly after Debtor's payment of the FCCR Amount, Debtor and FFCA agree to execute an amendment to the applicable Note(s) in form and substance acceptable to FFCA reducing the principal amount payable to FFCA under such Note(s) and reamortizing the principal amount of such Note(s) over the then remaining term of such Note(s). Debtor shall be responsible for the payment of FFCA's reasonable out-of-pocket attorneys' fees incurred in connection with the preparation of such amendments. For purposes of this section, FCCR Amount shall have the following meanings: (i) With respect to a breach of Section 7.B(i), that sum or those sums of money which, when subtracted from the outstanding principal balance of such of the Notes as selected by Debtor, and assuming the reamortization of the adjusted principal amount of such Notes over the then-remaining term of such Notes, will result in an aggregate Fixed Charge Coverage Ratio calculated for all of the Premises of at least 1.15:1; and (ii) With respect to a breach of Section 7.B(ii), that sum or those sums of money which, when subtracted from the outstanding principal amount of the Note(s) corresponding to one or more of the Premises which has or have a Fixed Charge Coverage Ratio which is below 1.0:1, and assuming the reamortization of the adjusted principal amount of such Note(s) over the then remaining term of such Note(s), will result in no more than six of the Premises then having a Fixed Charge Coverage Ratio below 1.0:1. Debtor shall be responsible for determining which of the Note(s) corresponding to Premises with a Fixed Charge Coverage Ratio below 1.0:1 for which the FCCR Amount shall be paid. -16- E. Upon the occurrence of an Event of Default, subject to the limitation set forth in subsection B, FFCA shall be entitled to exercise, at its option, concurrently, successively or in any combination, all remedies set forth in the Loan Documents and otherwise available at law or in equity, including without limitation any one or more of the following (provided, however, the remedies set forth in the following subitems (1) and (2) shall only be applicable to any such breach or default occurring prior to each Closing, as applicable): (1) To terminate this Agreement by giving written notice to Debtor, in which case neither party shall have any further obligation or liability, except such liabilities as Debtor may have for such breach or default; (2) To proceed with the Closing and direct Title Company to apply such portion of the Loans as FFCA may deem necessary to cure any such breach or default; (3) To bring an action for damages against Debtor; (4) To bring an action to require Debtor specifically to perform its obligations hereunder; and/or (5) To recover from Debtor all sums loaned and/or advanced by FFCA to Debtor pursuant to the Loan Documents and all expenses, including attorneys' fees, paid or incurred by FFCA as a result of such Event of Default. 11. Assignments. A. FFCA may assign in whole or in part its rights under this Agreement, including, without limitation, any Transfer, Participation and/or Securitization (all as defined in Section 13.P). In the event of any unconditional assignment of FFCA's entire right and interest hereunder, FFCA shall automatically be relieved, from and after the date of such assignment, of liability for the performance of any obligation of FFCA contained herein. B. Debtor shall not, without the prior written consent of FFCA, which consent shall not be unreasonably withheld, sell, assign, transfer, mortgage, convey, encumber or grant any easements or other rights or interests of any kind in the Premises, any of Debtor's rights under this Agreement or any interest in Debtor, whether voluntarily, involuntarily or by operation of law or otherwise, including, without limitation, by merger, consolidation, dissolution or otherwise, except, subsequent to each Closing, as expressly permitted by the applicable Mortgage. -17- 12. Indemnity. Except for the gross negligence or willful misconduct of FFCA, Debtor shall indemnify, hold harmless and defend FFCA and its directors, officers, shareholders, employees, successors, assigns, agents, contractors, subcontractors, experts, licensees, affiliates, lessees, lenders, mortgagees, trustees and invitees, as applicable (collectively, the "Indemnified Parties"), from and against any and all losses, costs, claims, liabilities, damages and expenses, including, without limitation, reasonable attorneys' fees, arising as the result of an Environmental Condition and/or a breach of any of the representations, warranties, covenants, agreements or obligations of Debtor set forth in this Agreement. Without limiting the generality of the foregoing, such indemnity shall include, without limitation, any engineering, governmental inspection and reasonable attorneys' fees and expenses that the Indemnified Parties may incur by reason of any representation set forth in this Agreement being false, or by reason of any investigation or claim of any governmental agency in connection therewith. 13. Miscellaneous Provisions. A. Notices. All notices, consents, approvals or other instruments required or permitted to be given by either party pursuant to this Agreement shall be in writing and given by (i) hand delivery, (ii) facsimile, (iii) express overnight delivery service or (iv) certified or registered mail, return receipt requested, and shall be deemed to have been delivered upon (a) receipt, if hand delivered, (b) transmission, if delivered by facsimile, (c) the next business day, if delivered by express overnight delivery service, or (d) the third business day following the day of deposit of such notice with the United States Postal Service, if sent by certified or registered mail, return receipt requested; provided, however, if a notice is deposited with the United States Postal Service pursuant to this item (d), such notice shall also be sent in accordance with at least one of the other methods set forth in this Section 13(A). Notices shall be provided to the parties and addresses (or facsimile numbers, as applicable) specified below: If to Debtor: Family Steak Houses of Florida, Inc. 2113 Florida Boulevard Neptune Beach, FL 32266 Attention: Edward B. Alexander Telephone: (904) 249-4197 Telecopy: (904) 249-1466 If to FFCA: Dennis L. Ruben, Esq. Senior Vice President and General Counsel FFCA Mortgage Corporation 17207 North Perimeter Drive Scottsdale, AZ 85255 Telephone: (602) 585-4500 Telecopy: (602) 585-2226 -18- B. Real Estate Commission. FFCA and Debtor represent and warrant to each other that they have dealt with no real estate or mortgage broker, agent, finder or other intermediary in connection with the transactions contemplated by this Agreement. FFCA and Debtor shall indemnify and hold each other harmless from and against any costs, claims or expenses, including attorneys' fees, arising out of the breach of their respective representations and warranties contained within this Section. C. Waiver and Amendment. No provisions of this Agreement shall be deemed waived or amended except by a written instrument unambiguously setting forth the matter waived or amended and signed by the party against which enforcement of such waiver or amendment is sought. Waiver of any matter shall not be deemed a waiver of the same or any other matter on any future occasion. D. Captions. Captions are used throughout this Agreement for convenience of reference only and shall not be considered in any manner in the construction or interpretation hereof. E. FFCA's Liability. Notwithstanding anything to the contrary provided in this Agreement, it is specifically understood and agreed, such agreement being a primary consideration for the execution of this Agreement by FFCA, that (i) there shall be absolutely no personal liability on the part of any shareholder, director, officer or employee of FFCA, with respect to any of the terms, covenants and conditions of this Agreement or the other Loan Documents, (ii) Debtor waives all claims, demands and causes of action against FFCA's officers, directors, employees and agents in the event of any breach by FFCA of any of the terms, covenants and conditions of this Agreement or the other Loan Documents to be performed by FFCA and (iii) Debtor shall look solely to the assets of FFCA for the satisfaction of each and every remedy of Debtor in the event of any breach by FFCA of any of the terms, covenants and conditions of this Agreement or the other Loan Documents to be performed by FFCA, such exculpation of liability to be absolute and without any exception whatsoever. F. Severability. The provisions of this Agreement shall be deemed severable. If any part of this Agreement shall be held unenforceable, the remainder shall remain in full force and effect, and such unenforceable provision shall be reformed by such court so as to give maximum legal effect to the intention of the parties as expressed therein. G. Construction Generally. This is an agreement between parties who are experienced in sophisticated and complex matters similar to the transaction contemplated by this Agreement and is entered into by both parties in reliance upon the economic and legal bargains contained herein and shall be interpreted and construed in a fair and impartial manner without regard to such factors as the party which prepared the instrument, the relative bargaining powers of the parties or the domicile of any party. Debtor and FFCA were each represented by legal counsel competent in advising them of their obligations and liabilities hereunder. H. Other Documents. Each of the parties agrees to sign such other and further documents as may be appropriate to carry out the intentions expressed in this Agreement. -19- I. Attorneys' Fees. In the event of any judicial or other adversarial proceeding between the parties concerning this Agreement, the prevailing party shall be entitled to recover its attorneys' fees and other costs in addition to any other relief to which it may be entitled. References in this Agreement to the attorneys' fees and/or costs of FFCA shall mean both the fees and costs of independent outside counsel retained by FFCA with respect to this transaction and the fees and costs of FFCA's in-house counsel incurred in connection with this transaction. J. Entire Agreement. This Agreement and the other Loan Documents, together with any other certificates, instruments or agreements to be delivered in connection therewith, constitute the entire agreement between the parties with respect to the subject matter hereof, and there are no other representations, warranties or agreements, written or oral, between Debtor and FFCA with respect to the subject matter of this Agreement. Notwithstanding anything in this Agreement to the contrary, upon the execution and delivery of this Agreement by Debtor and FFCA, the Commitment shall be deemed null and void and of no further force and effect and the terms and conditions of this Agreement shall control notwithstanding that such terms may be inconsistent with or vary from those set forth in the Commitment. K. Forum Selection; Jurisdiction; Venue; Choice of Law. Debtor acknowledges that this Agreement was substantially negotiated in the State of Arizona, the Agreement was signed by FFCA in the State of Arizona and delivered by Debtor in the State of Arizona, all payments under the Notes will be delivered in the State of Arizona and there are substantial contacts between the parties and the transactions contemplated herein and the State of Arizona. For purposes of any action or proceeding arising out of this Agreement, the parties hereto hereby expressly submit to the jurisdiction of all federal and state courts located in the State of Arizona and Debtor consents that it may be served with any process or paper by registered mail or by personal service within or without the State of Arizona in accordance with applicable law. Furthermore, Debtor waives and agrees not to assert in any such action, suit or proceeding that it is not personally subject to the jurisdiction of such courts, that the action, suit or proceeding is brought in an inconvenient forum or that venue of the action, suit or proceeding is improper. It is the intent of the parties hereto that all provisions of this Agreement shall be governed by and construed under the laws of the State of Arizona. To the extent that a court of competent jurisdiction finds Arizona law inapplicable with respect to any provisions hereof, then, as to those provisions only, the laws of the state where the Premises are located shall be deemed to apply. Nothing in this Section shall limit or restrict the right of FFCA to commence any proceeding in the federal or state courts located in the state in which the Premises are located to the extent FFCA deems such proceeding necessary or advisable to exercise remedies available under this Agreement or the other Loan Documents. L. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original. -20- M. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Debtor and FFCA and their respective successors and permitted assigns, including, without limitation, any United States trustee, any debtor in possession or any trustee appointed from a private panel. N. Survival. Except for the conditions of each Closing set forth in Sections 2 and 9, which shall be satisfied or waived as of the applicable Closing Date, all representations, warranties, agreements, obligations and indemnities of Debtor and FFCA set forth in this Agreement shall survive each Closing. O. Waiver of Jury Trial and Punitive, Consequential, Special and Indirect Damages. DEBTOR AND FFCA HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE, DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES FROM FFCA WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY DEBTOR AGAINST FFCA OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY DEBTOR OF ANY RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES HAS BEEN NEGOTIATED BY THE PARTIES HERETO AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. P. Transfers, Participations and Securitization. A material inducement to FFCA's willingness to complete the transactions contemplated by the Loan Documents is Debtor's agreement that FFCA may, at any time, sell, transfer or assign the Notes, Mortgages and the other Loan Documents, and any or all servicing rights with respect thereto (each, a "Transfer"), or grant participations therein (each, a "Participation"), or complete an asset securitization vehicle selected by FFCA, in accordance with all requirements which may be imposed by the investors or the rating agencies involved in such securitized financing transaction, as selected by FFCA, or which may be imposed by applicable securities, tax or other laws or regulations, including, without limitation, laws relating to FFCA's status as a real estate investment trust (each, a "Securitization"). -21- Debtor agrees to cooperate in good faith with FFCA in connection with any Transfer, Participation and/or Securitization, including, without limitation, (i) providing such documents, financial and other data, and other information and materials (the "Disclosures") which would typically be required with respect to Debtor by a purchaser, transferee, assignee, servicer, participant, investor or rating agency involved with respect to such Transfer, Participation and/or the Securitization, as applicable; provided, however, Debtor shall not be required to make Disclosures of any confidential information or any information which has not previously been made public unless required by applicable federal or state securities laws; and (ii) amending the terms of the transactions evidenced by the Loan Documents to the extent necessary so as to satisfy the requirements of purchasers, transferees, assignees, servicers, participants, investors or selected rating agencies involved in any such Transfers, Participations or Securitization, so long as such amendments would not have a material adverse effect upon Debtor or the transactions contemplated hereunder. Debtor consents to FFCA providing the Disclosures, as well as any other information which FFCA may now have or hereafter acquire with respect to the Premises or the financial condition of Debtor, to each purchaser, transferee, assignee, servicer, participant, investor or rating agency involved with respect to each Transfer, Participation and/or Securitization, as applicable. FFCA and Debtor shall each pay their own reasonable attorneys fees and reasonable other out-of-pocket expenses incurred in connection with the performance of their respective obligations under this Section. -22- IN WITNESS WHEREOF, Debtor and FFCA have entered into this Agreement as of the date first above written. FFCA: Witness /s/PAULA J. MASIULEWICZ FFCA MORTGAGE CORPORATION, -------------------- a Delaware corporation Paula J. Masiulewicz Witness /s/ANN L. HALPERN By /s/ROB ROACH -------------- ------------ Ann L. Halpern Rob Roach Its SVP DEBTOR: Witness /s/EDWARD B. ALEXANDER FAMILY STEAK HOUSES OF FLORIDA, INC., ------------------- a Florida corporation Edward B. Alexander Witness /s/J. MICHAEL HUGHES By /s/LEWIS E. CHRISTMAN, JR. ----------------- ----------------------- J. Michael Hughes Lewis E. Christman, Jr. Its President & CEO -23- STATE OF ARIZONA ] ] SS. COUNTY OF MARICOPA ] I HEREBY CERTIFY that on this day, before me, an officer duly authorized in the State aforesaid and in the County aforesaid to take acknowledgements, the foregoing instrument was acknowledged before me by Rob Roach, the Senior Vice President of FFCA Mortgage Corporation, a Delaware corporation, freely and voluntarily under authority duly vested in him by said corporation and that the seal affixed thereto is the true corporate seal of said corporation. He is personally known to me or has produced as identification. WITNESS my hand and official seal in the County and State last aforesaid this 6th day of December, 1996. /s/MARGARET J. CRAFT ----------------- Margaret J. Craft Notary Public Typed, printed or stamped name of Notary Public My Commission Expires: July 14, 1999 -24- STATE OF FLORIDA ] ] SS. COUNTY OF DUVAL ] I HEREBY CERTIFY that on this day, before me, an officer duly authorized in the State aforesaid and in the County aforesaid to take acknowledgements, the foregoing instrument was acknowledged before me by Lewis E. Christman, the President and CEO of Family Steak Houses of Florida, Inc., a Florida corporation, freely and voluntarily under authority duly vested in him by said corporation and that the seal affixed thereto is the true corporate seal of said corporation. He is personally known to me or has produced as identification. ---------------- WITNESS my hand and official seal in the County and State last aforesaid this 4th day of December, 1996. /s/STEPHANIE GRIFFITH ----------------- Stephanie Griffith Notary Public Typed, printed or stamped name of Notary Public My Commission Expires: August 24, 2000 -25- TOTAL LOAN AMOUNT FOR ALL PREMISES $4,640,000.00 EX-10 5 EXHIBIT 10.19 Exhibit 10.19 Form of Promissory Note ================================================================================ PROMISSORY NOTE Dated as of , 1996 $** Scottsdale, Arizona FAMILY STEAK HOUSES OF FLORIDA, INC., a Florida corporation ("Debtor"), for value received, hereby promises to pay to FFCA MORTGAGE CORPORATION, a Delaware corporation ("FFCA"), whose address is 17207 North Perimeter Drive, Scottsdale, Arizona 85255, or order, on or before **, as herein provided, the principal sum of ** ($**), plus accrued interest thereon, as herein provided. Initially capitalized terms which are not otherwise defined in this Note shall have the following meanings: "Applicable Margin" means an annual percentage equal to 3.75%. "Adjustable Rate" means an annual interest rate equal to the sum of the Adjustable Rate Basis plus the Applicable Margin. "Adjustable Rate Basis" means, for any Interest Period, the annual interest rate (rounded upward to the nearest 1/16th of one percent) determined by FFCA, at approximately 9:00 a.m., Central time, on the Adjustable Rate Reset Date, to be the offered quotations that appear on the Reuter's Screen LIBO page for dollar deposits in the London interbank market for a length of time approximately equal to the Interest Period. If at least two such offered quotations appear on the Reuter's Screen LIBO page, the Adjustable Rate Basis shall be the arithmetic mean (rounded upward to the nearest 1/16th of one percent) of all such offered quotations, as determined by FFCA. If the Reuter's Screen LIBO page is not available or has been discontinued, the Adjustable Rate Basis shall be the rate per annum that FFCA determines to be the arithmetic mean (rounded as aforesaid) of the per annum rates of interest at which deposits in dollars in an amount approximately equal to the principal amount of and for a length of time approximately equal to the Interest Period, are offered in immediately available funds in the London interbank market at 11:00 a.m., London time, on the Adjustable Rate Reset Date. Notwithstanding the provisions of the foregoing three sentences, if the annual interest rate charged to FFCA under its then existing LIBOR based credit facility (the "FFCA Credit Facility") is determined by a methodology other than as described in such sentences, the Adjustable Rate Basis shall be determined in accordance with the methodology for determining the annual interest rate under the FFCA Credit Facility. "Adjustable Rate Reset Date" means the fifteenth day of each calendar month, or the next succeeding Business Day if such day is not a Business Day, prior to the next Interest Period. "Business Day" means any day on which FFCA is open for business in the State of Arizona, other than a Saturday, Sunday or a legal holiday. "Interest Period" means (i) initially, the period beginning on the date of this Note and ending on the last day of the calendar month in which such date occurs, and (ii) thereafter, the period beginning on the first day of the calendar month and ending on the last day of such calendar month. "Maturity Date" means the first day of . "Payment Period" means the period beginning on the first day of January and ending on the last day of December of the same calendar year. "Payment Reset Calculation" means the level monthly payment calculated by the full amortization of the outstanding principal amount of this Note on the Payment Reset Date at the Adjustable Rate as determined on each December 15th prior to the next Payment Period over the remaining originally scheduled term of this Note. "Payment Reset Date" means the first day of January of each calendar year or the next succeeding Business Day if such day is not a Business Day. Debtor shall pay interest on the outstanding principal amount of this Note at the Adjustable Rate, on the basis of a 360-day year for the actual number of days elapsed, in arrears. Debtor shall pay consecutive level monthly installments on the first day of each calendar month during the term of this Note prior to the Maturity Date. The initial level monthly payments for the first Payment Period shall be equal to $** until the first Payment Reset Date, at which time, and on each succeeding Payment Reset Date thereafter, the level monthly payment to be paid by Debtor shall be adjusted for the next succeeding Payment Period based on the Payment Reset Calculation. All outstanding principal and unpaid accrued interest shall be paid on the Maturity Date. Each payment of principal and interest hereunder shall be applied first toward any past due payments under this Note (including payment of all costs (as herein defined)), then to accrued interest at the Adjustable Rate and the balance, after payment of such accrued interest, if any, shall be applied to the unpaid principal balance of this Note; provided, however, each payment hereunder while a default under this Note has occurred and is continuing shall be applied as FFCA in its sole discretion may determine. After application of any monthly payment in the above manner, in the event that the outstanding principal amount of this Note exceeds 110% of the original principal balance of this Note, Debtor shall prepay, without premium or penalty, on the first day of the next succeeding calendar month after each such occurrence, a principal amount equal to the difference between the outstanding principal balance of this Note and the original principal balance of this Note (the "Negative Amortization Amount"). -2- FFCA shall notify Debtor in writing on or before the twenty-fifth day of each calendar month during the term of this Note of FFCA's determination of the Negative Amortization Amount, if any, payable on the first day of the next succeeding calendar month. FFCA shall also notify Debtor in writing on or before the twenty-fifth day of each December during the term of this Note of FFCA's determination of the level monthly payment to be paid by Debtor based on the Payment Reset Calculation for the next Payment Period. Debtor may prepay the Note in whole, but not in part, on the fifteenth day of any month, without a prepayment premium or penalty, provided Debtor provides FFCA with at least thirty days advance notice of Debtor's intention to prepay this Note. Upon execution of this Note, Debtor shall establish arrangements whereby all payments of principal and interest hereunder are transferred by wire or other means directly from Debtor's bank account to such account as FFCA may designate or as FFCA may otherwise designate. If any installment or payment due under this Note remains unpaid for five (5) days after written notice thereof to Debtor, or upon the occurrence of an event of default under (i) the mortgage, assignment of rents and leases, security agreement and fixture filing encumbering the real property legally described on the attached Exhibit A (the "Premises"), dated as of even date herewith executed by Debtor for the benefit of FFCA (the "Mortgage"), (ii) any of the other Loan Documents (as defined in the Mortgage), or (iii) any other document further securing this Note, then, in any of such events, time being of the essence hereof, FFCA may declare the entire unpaid principal balance of this Note, accrued interest, if any, and all other sums due under this Note, the Mortgage, the other Loan Documents and any other document further securing this Note, due and payable at once without written notice to Debtor. All past-due principal and/or interest shall bear interest at the lesser of the highest rate for which the undersigned may legally contract, or the applicable Adjustable Rate plus 5% per annum, whichever is less (the "Default Rate"), and such Default Rate shall continue to apply following a judgment in favor of FFCA under this Note. If Debtor fails to make any payment or installment due under this Note within five days of its due date, Debtor shall pay to FFCA in addition to any other sum due FFCA under this Note or any other Loan Document a late charge equal to 10% of such past-due payment or installment. All payments of principal and interest due hereunder shall be made (i) without deduction of any present and future taxes, levies, imposts, deductions, charges or withholdings, which amounts shall be paid by Debtor, and (ii) without any other right of abatement, reduction, setoff, defense, counterclaim, interruption, deferment or recoupment for any reason whatsoever. Debtor will pay the amounts necessary such that the gross amount of the principal and interest received by FFCA is not less than that required by this Note. -3- No delay or omission on the part of FFCA in exercising any remedy, right or option under this Note shall operate as a waiver of such remedy, right or option. In any event, a waiver on any one occasion shall not be construed as a waiver or bar to any such remedy, right or option on a future occasion. Debtor hereby waives presentment, demand for payment, notice of dishonor, notice of protest, and protest, and all other notices or demands in connection with delivery, acceptance, performance, default or endorsement of this Note. All notices, consents, approvals or other instruments required or permitted to be given by either party pursuant to this Note shall be in writing and given by (i) hand delivery, (ii) facsimile, (iii) express overnight delivery service or (iv) certified or registered mail, return receipt requested, and shall be deemed to have been delivered upon (a) receipt, if hand delivered, (b) transmission, if delivered by facsimile, (c) the next business day, if delivered by express overnight delivery service, or (d) the third business day following the day of deposit of such notice with the United States Postal Service, if sent by certified or registered mail, return receipt requested. Notices shall be provided to the parties and addresses (or facsimile numbers, as applicable) specified below: If to Debtor: Family Steak Houses of Florida, Inc. 2113 Florida Boulevard Neptune Beach, FL 32266 Attention: Edward B. Alexander Telephone: (904) 249-4197 Telecopy: (904) 249-1466 If to FFCA: Dennis L. Ruben, Esq. Senior Vice President and General Counsel FFCA Mortgage Corporation 17207 North Perimeter Drive Scottsdale, AZ 85255 Telephone: (602) 585-4500 Telecopy: (602) 585-2226 or to such other address or such other person as either party may from time to time hereafter specify to the other party in a notice delivered in the manner provided above. Should any indebtedness represented by this Note be collected at law or in equity, or in bankruptcy or other proceedings, or should this Note be placed in the hands of attorneys for collection after default, Debtor shall pay, in addition to the principal and interest due and payable hereon, all costs of collecting or attempting to collect this Note (the "Costs"), including reasonable attorneys' fees and expenses of FFCA (including those fees and expenses incurred in connection with any appeal and those of FFCA's in-house counsel) whether or not a judicial action is commenced by FFCA. -4- This Note may not be amended or modified except by a written agreement duly executed by Debtor and FFCA. Notwithstanding anything to the contrary contained in any of the Loan Documents, the obligations of Debtor to FFCA under this Note and any other Loan Documents are subject to the limitation that payments of interest and late charges to FFCA shall not be required to the extent that receipt of any such payment by FFCA would be contrary to provisions of applicable law limiting the maximum rate of interest that may be charged or collected by FFCA. The portion of any such payment received by FFCA that is in excess of the maximum interest permitted by such provisions of law shall be credited to the principal balance of this Note or if such excess portion exceeds the outstanding principal balance of this Note, then such excess portion shall be refunded to Debtor. All interest paid or agreed to be paid to FFCA shall, to the extent permitted by applicable law, be amortized, prorated, allocated and/or spread throughout the full term of this Note (including, without limitation, the period of any renewal or extension thereof) so that interest for such full term shall not exceed the maximum amount permitted by applicable law. It is the intent of the parties hereto that the business relationship created by this Note and the other Loan Documents is solely that of creditor and debtor and has been entered into by both parties in reliance upon the economic and legal bargains contained in the Loan Documents. None of the agreements contained in the Loan Documents, is intended, nor shall the same be deemed or construed, to create a partnership between FFCA and Debtor, to make them joint venturers, to make Debtor an agent, legal representative, partner, subsidiary or employee of FFCA, nor to make FFCA in any way responsible for the debts, obligations or losses of Debtor. Debtor acknowledges that FFCA (or any partner of FFCA) and Franchisor (as defined in the Mortgage) are not affiliates, agents, partners or joint venturers, nor do they have any other legal, representative or fiduciary relationship. FFCA, by accepting this Note, and Debtor acknowledge and warrant to each other that each has been represented by independent counsel and Debtor has executed this Note after being fully advised by said counsel as to its effect and significance. This Note shall be interpreted and construed in a fair and impartial manner without regard to such factors as the party which prepared the instrument, the relative bargaining powers of the parties or the domicile of any party. Debtor acknowledges that this Note was substantially negotiated in the State of Arizona, the executed Note was delivered in the State of Arizona, all payments under this Note will be delivered in the State of Arizona and there are substantial contacts between the parties and the transactions contemplated herein and the State of Arizona. For purposes of any action or proceeding arising out of this Note, the parties hereto expressly submit to the jurisdiction of all federal and state courts located in the State of Arizona. Debtor consents that it may be served with any process or paper by registered mail or by personal service within or without the State of Arizona in accordance with applicable law. Furthermore, Debtor waives and agrees not to assert in any such action, suit or proceeding that it is not personally subject to the jurisdiction of such courts, that the action, suit or proceeding is brought in an inconvenient forum or that venue of the action, suit or proceeding is improper. It is the intent of Debtor and FFCA that all provisions of this Note shall be governed by and construed under the laws of the State of Arizona. Nothing contained in this paragraph shall limit or restrict the right of FFCA to commence any proceeding in the federal or state courts located in the state in which the Premises is located to the extent FFCA deems such proceeding necessary or advisable to exercise remedies available under the Loan Documents. -5- FFCA, BY ACCEPTING THIS NOTE, AND DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS NOTE, THE RELATIONSHIP OF FFCA AND DEBTOR, DEBTOR'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE, DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES FROM FFCA WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY DEBTOR AGAINST FFCA OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS NOTE OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY DEBTOR OF ANY RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES HAS BEEN NEGOTIATED BY THE PARTIES HERETO AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. This obligation shall bind Debtor and its successors and assigns, and the benefits hereof shall inure to FFCA and its successors and assigns. FFCA may assign its rights under this Note as set forth in Section 13.P of the Loan Agreement dated as of the date of this Note between FFCA and Debtor. -6- IN WITNESS WHEREOF, Debtor has executed and delivered this Note effective as of the date first set forth above. FAMILY STEAK HOUSES OF FLORIDA, INC., a Florida corporation By Name Title EXHIBIT A PREMISES EXHIBIT C MORTGAGE RETURN TO: Lawyers Title Insurance Corporation 40 East Mitchell Drive Suite 100 Phoenix, Arizona 85012 Attention: Sheila Layne THIS INSTRUMENT PREPARED BY: Kutak Rock Sixteenth Floor 3300 North Central Avenue Phoenix, Arizona 85012 EX-10 6 EXHIBIT 10.21 EXHIBIT 10.21 Form of Environmental Agreement ================================================================================ ENVIRONMENTAL INDEMNITY AGREEMENT THIS ENVIRONMENTAL INDEMNITY AGREEMENT, dated as of , 1996 (the "Agreement"), is made by FAMILY STEAK HOUSES OF FLORIDA, INC., a Florida corporation, whose address is 2113 Florida Boulevard, Neptune Beach, Florida 32266 ("Debtor"), in favor of FFCA MORTGAGE CORPORATION, a Delaware corporation, whose address is 17207 North Perimeter Drive, Scottsdale, Arizona 85255 ("FFCA"). PRELIMINARY STATEMENT This Agreement is executed and delivered by Debtor to FFCA pursuant to that certain Loan Agreement dated as of the date of this Agreement between Debtor and FFCA (the "Loan Agreement"). AGREEMENT 1. Definitions. The following terms shall have the following meanings for all purposes of this Agreement: "De Minimis Amounts" shall mean, with respect to any given level of hazardous substance or solid waste, that level or quantity of hazardous substance or solid waste in any form or combination of forms which does not constitute a violation of any Environmental Laws and is customarily employed in, or associated with, similar businesses located in the county in which the Premises is located. "Environmental Laws" means any present and future federal, state and local laws, statutes, ordinances, rules, regulations and the like, as well as common law, relating to protection of human health or the environment, relating to Hazardous Materials, relating to liability for or costs of Remediation or prevention of Releases or relating to liability for or costs of other actual or threatened danger to human health or the environment. "Environmental Laws" includes, but is not limited to, the following statutes, as amended, any successor thereto, and any regulations promulgated pursuant thereto, and any state or local statutes, ordinances, rules, regulations and the like addressing similar issues: the Comprehensive Environmental Response, Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Hazardous Materials Transportation Act; the Resource Conservation and Recovery Act (including but not limited to Subtitle I relating to underground storage tanks); the Solid Waste Disposal Act; the Clean Water Act; the Clean Air Act; the Toxic Substances Control Act; the Safe Drinking Water Act; the Occupational Safety and Health Act; the Federal Water Pollution Control Act; the Federal Insecticide, Fungicide and Rodenticide Act; the Endangered Species Act; the National Environmental Policy Act; and the River and Harbors Appropriation Act. "Environmental Laws" also includes, but is not limited to, any present and future federal, state and local laws, statutes, ordinances, rules, regulations and the like, as well as common law: conditioning transfer of property upon a negative declaration or other approval of a governmental authority of the environmental condition of the property; requiring notification or disclosure of Releases or other environmental condition of the Premises to any governmental authority or other person or entity, whether or not in connection with transfer of title to or interest in property; imposing conditions or requirements in connection with permits or other authorization for lawful activity; relating to nuisance, trespass or other causes of action related to the Premises; and relating to wrongful death, personal injury, or property or other damage in connection with any physical condition or use of the Premises. "Hazardous Materials" means (a) any toxic substance or hazardous waste, substance or related material, or any pollutant or contaminant; (b) radon gas, asbestos in any form which is or could become friable, urea formaldehyde foam insulation, transformers or other equipment which contains dielectric fluid containing levels of polychlorinated biphenyls in excess of federal, state or local safety guidelines, whichever are more stringent, or any petroleum product; (c) any substance, gas, material or chemical which is or may be defined as or included in the definition of "hazardous substances," "toxic substances," "hazardous materials," hazardous wastes" or words of similar import under any Environmental Laws; and (d) any other chemical, material, gas or substance the exposure to or release of which is or may be prohibited, limited or regulated by any governmental or quasi-governmental entity or authority that asserts or may assert jurisdiction over the Premises or the operations or activity at the Premises, or any chemical, material, gas or substance that does or may pose a hazard to the health and/or safety of the occupants of the Premises or the owners and/or occupants of property adjacent to or surrounding the Premises. "Indemnified Parties" means FFCA and any person or entity who is or will have been involved in the origination of the loan evidenced by the Loan Agreement with respect to the Premises (the "Loan"), any person or entity who is or will have been involved in the servicing of the Loan, any person or entity in whose name the encumbrance created by the Mortgage (as defined in the Loan Agreement) is or will have been recorded, persons and entities who may hold or acquire or will have held a full or partial interest in the Loan (including, but not limited to, investors or prospective investors in the securities contemplated by Section 5.18 of the Mortgage, as well as custodians, trustees and other fiduciaries who hold or have held a full or partial interest in the Loan for the benefit of third parties), as well as the respective directors, officers, shareholders, partners, members, employees, agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries, participants, successors and assigns of any and all of the foregoing (including but not limited to any other person or entity who holds or acquires or will have held a participation or other full or partial interest in the Loan or the Premises, whether during the term of the Loan or as a part of or following a foreclosure of the Loan and including, but not limited to, any successors by merger, consolidation or acquisition of all or a substantial portion of FFCA's assets and business). "Losses" means any and all claims, suits, liabilities (including, without limitation, strict liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses, diminutions in value, fines, penalties, charges, fees, expenses, judgments, awards, amounts paid in settlement and damages of whatever kind or nature (including, without limitation, attorneys' fees and other costs of defense). -2- "Premises" means the parcel or parcels of real property described on the attached Exhibit A, including all buildings, improvements, structures and fixtures located thereon, and certain items of machinery, appliances and other equipment located thereon or therein or utilized in connection therewith. "Release" means any presence, release, deposit, discharge, emission, leaking, spilling, seeping, migrating, injecting, pumping, pouring, emptying, escaping, dumping, disposing or other movement of Hazardous Materials. "Remediation" means any response, remedial, removal, or corrective action, any activity to cleanup, detoxify, decontaminate, contain or otherwise remediate any Hazardous Material, any actions to prevent, cure or mitigate any Release, any action to comply with any Environmental Laws or with any permits issued pursuant thereto, any inspection, investigation, study, monitoring, assessment, audit, sampling and testing, laboratory or other analysis, or any evaluation relating to any Hazardous Materials. "Reports" means the phase I and phase II environmental reports to be prepared regarding each of the Premises, which Reports shall be satisfactory in form and substance to FFCA in its sole discretion. 2. Representations and Warranties. Debtor represents and warrants to FFCA, which representations and warranties shall survive the execution and delivery of this Agreement, as follows: (a) Except as set forth in the Reports, the Premises and Debtor are not in violation of or subject to any existing, pending or threatened investigation or inquiry by any governmental authority or to any remedial obligations under any Environmental Laws, and this representation and warranty would continue to be true and correct following disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the Premises. If any such investigation or inquiry is subsequently initiated, Debtor will promptly notify FFCA. (b) Debtor has not obtained and is not required to obtain any permits, licenses or similar authorizations to construct, occupy, operate or use any buildings, improvements, fixtures and equipment forming a part of the Premises by reason of any Environmental Laws. (c) Debtor has taken all reasonable steps to determine and has determined to its reasonable satisfaction that: -3- (i) no Hazardous Materials have been disposed of or otherwise Released on or about the Premises; (ii) the Premises does not contain Hazardous Materials or underground storage tanks; (iii) there is no threat of any Release migrating to the Premises; (iv) there is no past or present non-compliance with Environmental Laws, or with permits issued pursuant thereto, in connection with the Premises; (v) Debtor does not know of, and has not received, any written or oral notice or other communication from any person or entity (including but not limited to a governmental entity) relating to Hazardous Materials or Remediation thereof, of possible liability of any person or entity pursuant to any Environmental Law, other environmental conditions in connection with the Premises, or any actual or potential administrative or judicial proceedings in connection with any of the foregoing; and (vi) Debtor has truthfully and fully provided to FFCA, in writing, any and all information relating to conditions in, on, under or from the Premises that is known to Debtor and that is contained in Debtor's files and records, including but not limited to any reports relating to Hazardous Materials in, on, under or from the Premises and/or to the environmental condition of the Premises. 3. Covenants. Debtor covenants to FFCA from and after the execution and delivery of this Agreement as follows: (a) all uses and operations on or of the Premises, whether by Debtor or any other person or entity, shall be in compliance with all Environmental Laws and permits issued pursuant thereto; (b) there shall be no Releases in, on, under or from the Premises; (c) there shall be no Hazardous Materials in, on, or under the Premises, except in De Minimis Amounts; (d) Debtor shall keep the Premises free and clear of all liens and other encumbrances imposed pursuant to any Environmental Law, whether due to any act or omission of Debtor or any other person or entity (the "Environmental Liens"); (e) Debtor shall, at its sole cost and expense, fully and expeditiously cooperate in all activities pursuant to Section 4 below, including but not limited to providing all relevant information and making knowledgeable persons available for interviews; -4- (f) Debtor shall, at its sole cost and expense, perform any environmental site assessment or other investigation of environmental conditions in connection with the Premises, pursuant to any reasonable written request of FFCA (including but not limited to sampling, testing and analysis of soil, water, air, building materials and other materials and substances whether solid, liquid or gas), and share with FFCA the reports and other results thereof, and FFCA and other Indemnified Parties shall be entitled to rely on such reports and other results thereof, (provided, however, Debtor shall not be obligated and FFCA shall not request that Debtor be obligated to perform a Phase II environmental study of the Premises unless such study is recommended in a Phase I environmental report prepared in connection with the Premises); (g) Debtor shall, at its sole cost and expense, comply with all reasonable written requests of FFCA to (1) reasonably effectuate Remediation of any condition (including but not limited to a Release) in, on, under or from the Premises; (2) comply with any Environmental Law; (3) comply with any directive from any governmental authority; and (4) take any other reasonable action necessary or appropriate for protection of human health or the environment; (h) Debtor shall not do or allow any tenant or other user of the Premises to do any act that materially increases the dangers to human health or the environment, poses an unreasonable risk of harm to any person or entity (whether on or off the Premises), impairs or may impair the value of the Premises, is contrary to any requirement of any insurer, constitutes a public or private nuisance, constitutes waste, or violates any covenant, condition, agreement or easement applicable to the Premises; and (i) Debtor shall immediately notify FFCA in writing of (A) any presence of Releases or threatened Releases in, on, under, from or migrating towards the Premises; (B) any non-compliance with any Environmental Laws related in any way to the Premises; (C) any actual or potential Environmental Lien; (D) any required or proposed Remediation of environmental conditions relating to the Premises; and (E) any written or oral notice or other communication which Debtor becomes aware from any source whatsoever (including but not limited to a governmental entity) relating in any way to Hazardous Materials or Remediation thereof, possible liability of any person or entity pursuant to any Environmental Law, other environmental conditions in connection with the Premises, or any actual or potential administrative or judicial proceedings in connection with anything referred to in this Agreement. 4. Actions by FFCA. FFCA and any other person or entity designated by FFCA, including but not limited to any receiver, any representative of a governmental entity, and any environmental consultant, shall have the right, but not the obligation, to enter upon the Premises at all reasonable times to assess any and all aspects of the environmental condition of the Premises and its use, including but not limited to conducting any environmental assessment or audit (the scope of which shall be determined in FFCA's sole and absolute discretion) and taking samples of soil, groundwater or other water, air, or building materials, and conducting other invasive testing. Debtor shall cooperate with and provide access to FFCA and any such person or entity designated by FFCA. -5- 5. Indemnification. Debtor shall, at its sole cost and expense, protect, defend, indemnify, release and hold harmless the Indemnified Parties from and against any and all Losses (excluding Losses arising out of FFCA's gross negligence or wilful misconduct) and costs of Remediation (whether or not performed voluntarily), engineers' fees, environmental consultants' fees, and costs of investigation (including but not limited to sampling, testing, and analysis of soil, water, air, building materials and other materials and substances whether solid, liquid or gas) imposed upon or incurred by or asserted against any Indemnified Parties, and directly or indirectly arising out of or in any way relating to any one or more of the following: (i) any presence of any Hazardous Materials in, on, above, or under the Premises; (ii) any past, present or threatened Release in, on, above, under or from the Premises; (iii) any activity by Debtor, any person or entity affiliated with Debtor or any tenant or other user of the Premises in connection with any actual, proposed or threatened use, treatment, storage, holding, existence, disposition or other Release, generation, production, manufacturing, processing, refining, control, management, abatement, removal, handling, transfer or transportation to or from the Premises of any Hazardous Materials at any time located in, under, on or above the Premises; (iv) any activity by Debtor, any person or entity affiliated with Debtor or any tenant or other user of the Premises in connection with any actual or proposed Remediation of any Hazardous Materials at any time located in, under, on or above the Premises, whether or not such Remediation is voluntary or pursuant to court or administrative order, including but not limited to any removal, remedial or corrective action; (v) any past, present or threatened non compliance or violations of any Environmental Laws (or permits issued pursuant to any Environmental Law) in connection with the Premises or operations thereon, including but not limited to any failure by Debtor, any person or entity affiliated with Debtor or any tenant or other user of the Premises to comply with any order of any governmental authority in connection with any Environmental Laws; (vi) the imposition, recording or filing or the threatened imposition, recording or filing of any Environmental Lien encumbering the Premises; (vii) any administrative processes or proceedings or judicial proceedings in any way connected with any matter addressed in this Section; (viii) any past, present or threatened injury to, destruction of or loss of natural resources in any way connected with the Premises, including but not limited to costs to investigate and assess such injury, destruction or loss; (ix) any acts of Debtor or other users of the Premises in arranging for disposal or treatment, or arranging with a transporter for transport for disposal or treatment, of Hazardous Materials owned or possessed by such Debtor or other users, at any facility or incineration vessel owned or operated by another person or entity and containing such or similar Hazardous Materials; (x) any acts of Debtor or other users of the Premises, in accepting any Hazardous Materials for transport to disposal or treatment facilities, incineration vessels or sites selected by Debtor or such other users, from which there is a Release, or a threatened Release of any Hazardous Material which causes the incurrence of costs for Remediation; (xi) any personal injury, wrongful death, or property damage arising under any statutory or common law or tort law theory, including but not limited to damages assessed for the maintenance of a private or public nuisance or for the conducting of an abnormally dangerous activity on or near the Premises; and (xii) any misrepresentation or inaccuracy in any representation or warranty or material breach or failure to perform any covenants or other obligations pursuant to this Agreement. -6- 6. Release. Debtor fully and completely releases, waives and covenants not to assert any claims, liabilities, actions, defenses, challenges, contests or other opposition against FFCA, however characterized, known or unknown, foreseen or unforeseen, now existing or arising in the future, relating to this Agreement and any Hazardous Materials, Releases and/or Remediation on, at or affecting the Premises. 7. Independent Obligations; Conflict. The obligations of Debtor and the rights and remedies of FFCA set forth in this Agreement are independent from those of Debtor pursuant to the Loan Agreement, the Mortgage, the Note (as defined in the Loan Agreement) and the other Loan Documents (as defined in the Loan Agreement), and shall survive the termination, expiration and/or release of the Loan Agreement, the Note, the Mortgage and the other Loan Documents and/or the judicial or nonjudicial foreclosure of the Mortgage by FFCA or the delivery of a deed-in-lieu of foreclosure by Debtor to FFCA. In the event any of the terms and provisions of this Agreement are in conflict with the terms and conditions of any other Loan Document, the terms and conditions of this Agreement shall control as to such conflict. 8. Forum Selection; Jurisdiction; Venue; Choice of Law. Debtor acknowledges that this Agreement was substantially negotiated in the State of Arizona and delivered by Debtor in the State of Arizona and there are substantial contacts between the parties and the transactions contemplated herein and the State of Arizona. For purposes of any action or proceeding arising out of this Agreement, the parties hereto hereby expressly submit to the jurisdiction of all federal and state courts located in the State of Arizona and Debtor consents that it may be served with any process or paper by registered mail or by personal service within or without the State of Arizona in accordance with applicable law. Furthermore, Debtor waives and agrees not to assert in any such action, suit or proceeding that it is not personally subject to the jurisdiction of such courts, that the action, suit or proceeding is brought in an inconvenient forum or that venue of the action, suit or proceeding is improper. It is the intent of the parties hereto that all provisions of this Agreement shall be governed by and construed under the laws of the State of Arizona. To the extent that a court of competent jurisdiction finds Arizona law inapplicable with respect to any provisions hereof, then, as to those provisions only, the law of the state where the Premises is located shall be deemed to apply. Nothing in this Section shall limit or restrict the right of FFCA to commence any proceeding in the federal or state courts located in the state where the Premises is located to the extent FFCA deems such proceeding necessary or advisable to exercise remedies available under this Agreement. 9. Binding Effect. This Agreement shall be binding upon and inure to the benefit of FFCA and Debtor and their respective successors and permitted assigns, including, without limitation, any United States trustee, any debtor-in-possession or any trustee appointed from a private panel; provided, however, Debtor's right to assign this Agreement shall be limited as set forth in the Loan Agreement. -7- 10. Severability. The provisions of this Agreement shall be deemed severable. If any part of this Agreement shall be held unenforceable, the remainder shall remain in full force and effect, and such unenforceable provision shall be reformed by such court so as to give maximum legal effect to the intention of the parties as expressed therein. 11. Waiver of Jury Trial and Punitive, Consequential, Special and Indirect Damages. FFCA, BY ACCEPTING THIS AGREEMENT, AND DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, THE RELATIONSHIP OF FFCA AND DEBTOR, DEBTOR'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE, DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES FROM FFCA WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY DEBTOR AGAINST FFCA OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY DEBTOR OF ANY RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES HAS BEEN NEGOTIATED BY THE PARTIES HERETO AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. 12. Time of the Essence. Time is of the essence in the performance of each and every obligation under this Agreement. 13. Notices. All notices, demands, designations, certificates, requests, offers, consents, approvals, appointments and other instruments given pursuant to this Agreement (collectively called "Notices") shall be in writing and given by (i) hand delivery, (ii) facsimile, (iii) express overnight delivery service or (iv) certified or registered mail, return receipt requested and shall be deemed to have been delivered upon (a) receipt, if hand delivered, (b) transmission, if delivered by facsimile, (c) the next business day, if delivered by express overnight delivery service, or (d) the third business day following the day of deposit of such notice with the United States Postal Service, if sent by certified or registered mail, return receipt requested. Notices shall be provided to the parties and addresses (or facsimile numbers, as applicable) specified below: -8- If to Debtor: Family Steak Houses of Florida, Inc. 2113 Florida Boulevard Neptune Beach, Florida 32266 Attention: Edward B. Alexander Telephone: (904) 249-4197 Telecopy: (904) 249-1466 If to FFCA: Dennis L. Ruben, Esq. Senior Vice President and General Counsel FFCA Mortgage Corporation 17207 North Perimeter Drive Scottsdale, AZ 85255 Telephone: (602) 585-4500 Telecopy: (602) 585-2226 or to such other address or such other person as either party may from time to time hereafter specify to the other party in a notice delivered in the manner provided above. Whenever in this Agreement the giving of Notice is required, the giving thereof may be waived in writing at any time by the person or persons entitled to receive such Notice. 14. Amendments; Waivers. This Agreement may not be modified except by an instrument in writing executed by Debtor and FFCA and no requirement hereof may be waived at any time except by a writing signed by the party against whom such waiver is sought to be enforced, nor shall any waiver be deemed a waiver of any subsequent breach or default. 15. Headings. The headings appearing in this Agreement have been inserted for convenient reference only and shall not modify, define, limit or expand the express provisions of this Agreement. -9- IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the day and year first above written. DEBTOR FAMILY STEAK HOUSES OF FLORIDA, INC., a Florida corporation By WITNESS Printed Name Title Printed Name WITNESS Printed Name STATE OF ] ] SS. COUNTY OF ] I HEREBY CERTIFY that on this day, before me, an officer duly authorized in the State aforesaid and in the County aforesaid to take acknowledgements, the foregoing instrument was acknowledged before me by , the of Family Steak Houses of Florida, Inc., a Florida corporation, freely and voluntarily under authority duly vested in him by said corporation and that the seal affixed thereto is the true corporate seal of said corporation. He is personally known to me or has produced as identification. WITNESS my hand and official seal in the County and State last aforesaid this day of , 1996. Notary Public Typed, printed or stamped name of Notary Public My Commission Expires: EXHIBIT A LEGAL DESCRIPTION EXHIBIT F LITIGATION EX-13 7 EXHIBIT 13.01 ANNUAL REPORT
FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Five Year Financial Summary - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 (**) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ Selected Income Statement Data: (in thousands, except per share data) Sales $ 37,978 $ 42,105 $ 44,849 $ 48,525 $ 49,693 Cost and expenses: Food and beverage 15,089 16,591 18,174 19,534 20,153 Payroll and benefits 10,538 11,412 12,097 13,372 13,303 Depreciation and amortization 1,663 1,720 1,961 2,560 2,544 Other operating expenses 6,046 6,417 6,412 7,055 6,607 General and administrative expenses 2,128 2,348 2,899 2,159 1,903 Franchise fees 1,139 1,263 1,561 2,207 2,406 (Income) costs from closed restaurants-- (303) 1,392 2,557 -- Loss on disposition of equipment 57 198 86 21 -- -------- -------- -------- -------- -------- 36,660 39,646 44,582 49,465 46,916 Earnings (loss) from operations 1,318 2,459 267 (940) 2,777 Interest and other income 465 536 123 79 69 Gain on sale of property held for resale -- 31 -- -- -- Gain on sale of restaurant -- 159 -- -- -- Write-down of property held for resale -- -- (465) (91) -- Interest expense (1,516) (1,694) (1,980) (2,110) (2,380) -------- -------- -------- -------- -------- Earnings (loss) before income taxes, effect of accounting change and extraordinary item 267 1,491 (2,055) (3,062) 466 Provision (benefit) for income taxes 53 147 (274) (978) 175 -------- -------- -------- -------- -------- Earnings (loss) before accounting change and extraordinary item 214 1,344 (1,781) (2,084) 291 Cumulative effect of accounting change -- -- -- -- 90 -------- -------- -------- -------- -------- Net earnings (loss) before extraordinary item 214 $ 1,344 $ (1,781) $ (2,084) $ 381 Extraordinary item - gain on early extinguishment of debt, net of income taxes of $ 88,700 348 -- -- -- -- -------- -------- -------- -------- -------- Net earnings (loss) 562 1,344 (1,781) (2,084) 381 ======== ======== ======== ======== ======== Per common and equivalent share: Earnings (loss) before accounting change and extraordinary item $ 0.02 $ 0.11 $ (0.17) $ (0.19) $ 0.03 Cumulative effect of accounting chang -- -- -- -- 0.01 Extraordinary item - gain on early extinguishment of debt 0.03 -- -- -- -- -------- -------- -------- -------- -------- Net earnings (loss) $ 0.05 $ 0.11 $ (0.17) $ (0.19) $ 0.04 ======== ======== ======== ======== ======== Weighted average common shares and equivalents 11,838 11,831 10,773 10,952 10,704 ======== ======== ======== ======== ======== Selected Balance Sheet Data: Land and net property and equipment $ 26,349 $ 26,837 $ 26,896 $ 29,505 $ 32,045 Total assets 32,803 31,260 32,809 35,095 37,523 Long-term debt 15,107 14,420 16,305 14 16,335 Current portion of long-term debt 334 1,580 851 17,269 2,809 Shareholders' equity 11,998 11,460 9,993 11,743 13,800 Selected Operating Data: Current ratio 0.9 0.4 0.6 0.1 0.3 Working capital (deficit) $ (617) $ (3,285) $ (2,673) $(20,089) $ (4,633) Cash provided by operating activities 1,645 2,135 3,096 3,979 3,284 Property and equipment additions 1,768 2,600 1,796 1,558 648 ** Fifty-three week period.
4
FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Shown for the years indicated are (i) items in the statements of operations as a percent of total sales, (ii) operating expense items in the statements of operations as a percent of sales and (iii) the number of restaurants open at the end of each year. - -------------------------------------------------------------------------------------------------------- Percentage Change Versus Prior Year ------------- 1996 1995 vs vs 1996 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------------- Sales $37,977,600 $42,105,400 $44,848,800 (9.8)% (6.1)% - -------------------------------------------------------------------------------------------------------- Net Change In Percentage 1996 1995 Percent of Sales vs vs 1996 1995 1994 1995 1994 - ------------------------------------------------------------------------------------------------- Cost and expenses: Operating expenses 87.8% 85.8% 86.2% 2.0 (0.4) General and administrative expenses 5.6 5.6 6.5 0.0 (0.9) Franchise fees 3.0 3.0 3.5 0.0 (0.5) Closed restaurant costs -- (0.7) 3.1 0.7 (3.8) Loss on disposition of property and equipment 0.1 0.5 0.2 (0.4) 0.3 ---- ---- ---- --- ---- 96.5 94.2 99.5 2.3 (5.3) ---- ---- ---- --- ---- Earnings from operations 3.5 5.8 0.5 (2.3) 5.3 Interest and other income 1.2 1.4 0.3 (0.2) 1.1 Gain on sale of restaurant -- 0.4 -- (0.4) 0.4 Write-down of property held for resale -- -- (1.0) 0.0 1.0 Interest expense (4.0) (4.0) (4.4) 0.0 0.4 ---- ---- ---- --- ---- Earnings (loss) before income taxes and extraordinary item 0.7 3.6 (4.6) (2.9) 8.2 Provision (benefit) for income taxes 0.1 0.4 (0.6) (0.3) 1.0 ---- ---- ---- --- ---- Net earnings (loss) before extraordinary item 0.6 3.2 (4.0) (2.6) 7.2 Extraordinary item - gain on early extinguishment of debt, net of income taxes of $88,700 0.9 -- -- 0.9 -- ---- ---- ---- --- ---- Net earnings (loss) 1.5% 3.2% (4.0)% (1.7)% 7.2% ==== ==== ==== === ==== Operating expenses: Food and beverage 39.7% 39.4% 40.5% 0.3% (1.1)% Payroll and benefits 27.8 27.1 27.0 0.7 0.1 Depreciation and amortization 4.4 4.1 4.4 0.3 (0.3) Other operating expenses 15.9 15.2 14.3 0.7 0.9 ---- ---- ---- --- ---- 87.8% 85.8% 86.2% 2.0% (0.4)% ==== ==== ==== === ==== Restaurants open at end of year 24 24 24 ==== ==== ====
5 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS 1996 Compared to 1995 For the year ended January 1, 1997, total sales decreased 9.8% compared to 1995, due to declines in same-store sales and one less week in fiscal year 1996 compared to 1995. The sales decline in 1996 compared to 1995 consisted of the following components: - -------------------------------------------------------------------------------- % Change from 1995 1996 1995 Change Total Sales - -------------------------------------------------------------------------------- Same-Store Sales $37,977,600 $41,361,900 $(3,384,300) (8.0%) Extra Week Sales* - 0 - 743,500 (743,500) (1.8%) ----------- ----------- ----------- ---- Total Sales $37,977,600 $42,105,400 $(4,127,800) (9.8%) =========== =========== =========== ==== - -------------------- * 1995 was a 53-week period, 1996 was a 52-week period. Management believes that the decrease in comparable store sales is primarily due to the effects of increasing competition, including several new or remodeled restaurants opened by competitors in areas close to Company restaurants. Management plans to attempt to improve sales trends by focusing on improved restaurant operations, remodeling several restaurants and increasing marketing expenditures. The operating expenses of the Company's restaurants include food and beverage, payroll and benefits, depreciation and amortization, repairs, maintenance, utilities, supplies, advertising, insurance, property taxes, rents and licenses. The Company's food, beverage, payroll and benefit costs are believed to be higher than the industry average as a percentage of sales as a result of the Company's philosophy of providing customers with high value of food and service for every dollar a customer spends. In total, food and beverage, payroll and benefits, depreciation and amortization and other operating expenses as a percentage of sales increased to 87.8% from 85.8% in 1995, primarily due to the decline in comparable store sales. Food and beverage costs as a percentage of sales increased to 39.7% in 1996 from 39.4% in 1995, primarily due to higher produce and dairy product costs. Payroll and benefits as a percentage of sales increased from 27.1% in 1995 to 27.7% in 1996, primarily due to the decline in comparable store sales. Other operating expenses as a percentage of sales increased from 15.2% in 1995 to 15.9% in 1996, primarily due to higher repair and maintenance costs and the decline in comparable store sales. Depreciation and amortization increased as a percentage of sales in 1996 compared to 1995, as a result of the decline in comparable store sales. General and administrative expenses as a percentage of sales were 5.6% in 1996 and 1995. Franchise fees were 3.0% of sales in 1996 and 1995 in accordance with the Company's amended Franchise Agreement with Ryan's Family Steak Houses, Inc. (the "Franchisor"). (See note 3 to the financial statements). In 1995, the Company recognized $303,200 in income from the favorable settlement of two closed restaurant leases. The remaining lease costs at the time of store closure were included in closed restaurant costs in 1993. No such events occurred in 1996. During the first week of fiscal 1995, the Company closed and sold a restaurant located in Jacksonville, Florida. The Company received approximately 20% of the purchase price in cash and recorded a mortgage receivable for the balance of the sale. The Company recognized a gain on the sale of approximately $152,000 in 1995. Total gains on sales of property were $159,000 in 1995. There were no significant sales of real estate in 1996. 6 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Interest expense decreased from $1,693,800 during 1995 to $1,516,300 in 1996. The decrease was due primarily to lower outstanding principal balances, resulting from principal payments made throughout the last twelve months. The effective income tax rates for the year ended January 1, 1997 and January 3, 1996 were 20.1% and 9.9%, respectively. Certain deferred tax assets were utilized in both years, resulting in lower than statutory effective rates for 1996 and 1995. In December 1996, the Company realized a gain on early extinguishment of debt of $348,500, net of income taxes. The gain was accounted for as an extraordinary item (see Note 5 to the financial statements). Net earnings for 1996 were $562,200, compared to $1,344,200 in 1995. Earnings per share were $.05 for 1996, compared to $.11 in 1995. 1995 Compared to 1994 For the year ended January 3, 1996, total sales decreased 6.1% compared to 1994, due to declines in same-store sales and lost revenues from closed restaurants. The sales decline in 1995 compared to 1994 consisted of the following components: - -------------------------------------------------------------------------------- % Change from 1994 1995 1994 Change Total Sales - -------------------------------------------------------------------------------- Closed Restaurants $0 $2,310,500 $(2,310,500) (5.2%) Same-Store Sales 41,361,900 42,538,300 (1,176,400) (2.6%) Extra Week Sales* 743,500 0 743,500 1.7% ---------- ---------- ---------- ---- Total Sales $42,105,400 $44,848,800 $(2,743,400) (6.1%) =========== =========== =========== ==== - -------------------- * 1995 was a 53-week period, 1994 was a 52-week period. Food and beverage costs as a percentage of sales decreased to 39.4% in 1995 from 40.5% in 1994, primarily due to lower beef costs and sales price increases implemented in 1994 and 1995. Payroll and benefits as a percentage of sales increased from 27.0% in 1994 to 27.1% in 1995, primarily due to increases in compensation to restaurant managers. Other operating expenses as a percentage of sales increased from 14.3% in 1994 to 15.2% in 1995, primarily due to higher advertising costs and the decline in same-store sales. Depreciation and amortization decreased as a percentage of sales in 1995 compared to 1994, as a result of certain assets becoming fully depreciated or amortized. General and administrative expenses as a percentage of sales decreased to 5.6% in 1995 from 6.5% in 1994, primarily due to professional services expenses incurred in 1994 associated with the Company's debt restructuring negotiations. Franchise fees decreased beginning in 1994 in accordance with the Company's amended Franchise Agreement with the Franchisor. (See note 3 to the financial statements). In April 1994, the Company closed a restaurant in Ft. Pierce, Florida resulting in pre-tax charges to 1994 earnings totaling $986,000. The charge consisted of a write-down in value of the property as determined by appraisal and other costs associated with closing the restaurant. Also in 1994, the Company closed its Wrangler's Roadhouse location, resulting in write-downs of property and equipment totaling $355,000. Total closed restaurant costs in 1994 were $1,392,400. In 1995 the Company recognized $303,200 in income from the favorable settlement of two closed restaurant leases. The remaining lease costs at the time of store closure were included in closed restaurant costs in 1993. 7 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- During the first week of fiscal 1995, the Company closed and sold a restaurant located in Jacksonville, Florida. The Company received approximately 20% of the purchase price in cash and recorded a mortgage receivable for the balance of the sale. The Company recognized a gain on this sale of approximately $152,000 in 1995. Total gains on sales of property were $159,000 in 1995. Interest and other income increased due to the recognition of interest income in 1995 from two mortgages and due to income from toy vending machines installed in Company restaurants in 1995. Interest expense decreased from $1,980,100 during 1994 to $1,693,800 in 1995. The decrease was due primarily to lower outstanding principal balances, resulting from principal payments made throughout the last twelve months, and due to a lower interest rate on the Company's obligations to Cerberus Partners, L.P. (notes formerly held by The Travelers Insurance Company). The effective income tax rates for the year ended January 3, 1996 and December 28, 1994 were 9.9% and (13.3%), respectively. The 1994 benefit was less than the statutory tax rate due to the uncertainty of realization of certain deferred tax assets at that time. Certain of these assets were utilized in 1995, resulting in the reduced effective rate for 1995. Net earnings for 1995 were $1,344,200, compared to a net loss of $1,785,900 in 1994. Earnings per share were $.11 for 1995, compared to a loss per share of $.17 in 1994. LIQUIDITY AND CAPITAL RESOURCES Substantially all of the Company's revenues are derived from cash sales. Inventories are purchased on credit and are converted rapidly to cash. Therefore, the Company does not carry significant receivables or inventories and, other than the repayment of debt, working capital requirements for continuing operations are not significant. At January 1, 1997, the Company had a working capital deficit of $616,800 compared to a working capital deficit of $3,284,900 at January 3, 1996. The decrease in the working capital deficit in 1996 was primarily due to a reduction in the current portion of long-term debt and cash provided by the new loan agreement described below. Cash provided by operating activities decreased to $1,645,000 from $2,135,300 in 1995, primarily due to lower earnings in 1996. Cash provided by operating activities decreased from $3,095,800 in 1994 to $2,135,300 in 1995 due to reductions in accrued liabilities in 1995 as a result of timing differences in payments. The Company spent approximately $1,356,000 in 1996, $2,600,000 in 1995 and $1,656,000 in 1994 for new restaurant construction, restaurant remodeling and equipment. Capital expenditures for 1997 and 1998, based on present costs and plans for capital improvements, are estimated to be $4,100,000 and $3,100,000 respectively. The Company projects that proceeds from the Company's financing agreements (described below), sales leaseback financing and cash generated from operations will be sufficient to fund these improvements. In December 1996, the Company entered into a Loan Agreement with FFCA Mortgage Corporation ("FFCA"). The Loan Agreement governs eighteen Promissory Notes payable to FFCA totalling $15,360,000 at January 1, 1997. Each Note is secured by a mortgage on a Company restaurant property. The Promissory Notes provide for a term of twenty years and an interest rate equal to the thirty-day LIBOR rate plus 3.75%, adjusted monthly. The Loan Agreement provides for various covenants, including the maintenance of prescribed debt service coverages. The Company used the proceeds of the FFCA loan to retire its notes with Cerberus Partners, L.P., ("Cerberus") and its loans with The Daiwa Bank Limited and SouthTrust Bank of Alabama, N.A. The Company realized a discount on the retirement of the Cerberus notes, which was partially offset by unamortized debt issuance costs. The resulting gain of $348,500, net of income taxes, has been accounted for as an extraordinary item. In addition, the Company retired Warrants for 1,050,000 shares of the Company's common stock previously held by Cerberus. Cerberus continues to hold Warrants to purchase 700,000 shares of the Company's common stock at an exercise price of $.40 per share. 8 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Also in December 1996, the Company entered into a separate loan agreement with FFCA under which it may borrow up to an additional $4,640,000 in 1997. This additional financing would be evidenced by four additional Promissory Notes secured by mortgages on four Company restaurant properties. The term and interest rate of this loan agreement are identical to the loan agreement described above. IMPACT OF INFLATION Costs of food, beverage, and labor are the expenses most affected by inflation in the Company's business. Although inflation has not had a significant impact on the Company in the past, there can be no assurance that it will not in the future. A significant portion of the Company's employees are paid by the federally established statutory minimum wage. On August 8, 1996, President Clinton signed into law a bill which raised the federally mandated minimum wage by $.50 per hour on October 1, 1996, and by an additional $.40 per hour on September 1, 1997. The Company raised sales prices approximately 3.0% in order to offset the effect of higher payroll and benefit costs. Sales prices were increased approximately 2.5% in 1995 and 4.0% in 1994. 9 FAMILY STEAK HOUSES OF FLORIDA, INC. - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------------------------------------------- For The Years Ended ---------------------------------------------------- January 1, January 3, December 28, 1997 1996 1994 - --------------------------------------------------------------------------------------------------------------------- Sales $37,977,600 $42,105,400 $44,848,800 Cost and expenses: Food and beverage 15,089,500 16,591,300 18,173,900 Payroll and benefits 10,537,500 11,411,700 12,096,500 Depreciation and amortization 1,662,500 1,719,900 1,961,300 Other operating expenses 6,046,000 6,417,100 6,412,300 General and administrative expenses 2,127,600 2,348,200 2,898,600 Franchise fees 1,138,600 1,263,200 1,561,100 (Income) costs from closed restaurants -- (303,200) 1,392,400 Loss on disposition of equipment 57,400 197,800 86,200 ---------- ---------- ---------- 36,659,100 39,646,000 44,582,300 ---------- ---------- ---------- Earnings from operations 1,318,500 2,459,400 266,500 Interest and other income 465,100 535,600 123,300 Gain on sale of restaurant -- 158,600 -- Gain on sale of property held for resale -- 31,500 -- Write-down of property held for resale -- -- (465,000) Interest expense (1,516,300) (1,693,800) (1,980,100) ---------- ---------- ---------- Earnings (loss) before income taxes and extraordinary item 267,300 1,491,300 (2,055,300) Provision (benefit) for income taxes 53,600 147,100 (274,400) ---------- ---------- ---------- Net earnings (loss) before extraordinary item 213,700 1,344,200 (1,780,900) Extraordinary item - gain on early extinguishment of debt, net of income taxes of $88,700 348,500 -- -- ---------- ---------- ---------- Net earnings (loss) $ 562,200 $ 1,344,200 $ (1,780,900) ========== ========== ============ Per common share and equivalents: Net earnings (loss) before extraordinary item $ 0.02 $ 0.11 $ (0.17) Extraordinary item - gain on early extinguishment of debt 0.03 -- -- ---------- ---------- ---------- Net earnings (loss) $ 0.05 $ 0.11 $ (0.17) ========== ========== ========== Weighted average common shares and equivalents 11,838,000 11,831,000 10,773,000 ========== ========== ========== See accompanying notes to consolidated financial statements.
10 FAMILY STEAK HOUSES OF FLORIDA, INC. - --------------------------------------------------------------------------------
Consolidated Balance Sheets - ---------------------------------------------------------------------------------------------------- January 1, January 3, 1997 1996 - ---------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,750,800 $ 711,400 Investments 1,093,100 600,300 Receivables 566,100 73,900 Current portion of mortgages receivable 120,600 155,700 Inventories 202,300 247,400 Prepaids and other current assets 247,200 256,600 ------------ ------------ Total current assets 3,980,100 2,045,300 Mortgages receivable 1,089,100 1,262,700 Property and equipment: Land 9,089,200 9,342,200 Buildings and improvements 19,676,500 18,774,500 Equipment 12,240,400 11,940,900 ------------ ------------ 41,006,100 40,057,600 Accumulated depreciation (14,656,200) (13,220,900) ------------ ------------ Net property and equipment 26,349,900 26,836,700 Property held for resale 552,800 552,800 Other assets, principally deferred charges, net of accumulated amortization 831,600 562,200 ------------ ------------ $ 32,803,500 $ 31,259,700 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,183,000 $ 1,250,700 Accounts payable - construction 411,800 -- Accrued liabilities 2,582,100 2,494,100 Income taxes payable 84,800 5,400 Current portion of long-term debt 332,700 1,580,000 Current portion of obligation under capital lease 2,500 -- ------------ ------------ Total current liabilities 4,596,900 5,330,200 Long-term debt 15,107,200 14,420,400 Obligation under capital lease 1,058,600 -- Deferred revenue 43,100 49,400 ------------ ------------ Total liabilities 20,805,800 19,800,000 Commitments and contingencies (Note 10) Shareholders' equity: Preferred stock of $.01 par; authorized 10,000,000 shares; none issued -- -- Common stock of $.01 par; authorized 20,000,000 shares; outstanding 10,920,700 in 1996 and 10,845,000 shares in 1995 109,200 108,500 Additional paid-in capital 8,098,400 8,123,300 Retained earnings 3,790,100 3,227,900 ------------ ------------ Total shareholders' equity 11,997,700 11,459,700 ------------ ------------ $ 32,803,500 $ 31,259,700 ============ ============ See accompanying notes to consolidated financial statements.
11 FAMILY STEAK HOUSES OF FLORIDA, INC. - --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity For the Years ended January 1, 1997, January 3, 1996 and December 28, 1994 - ------------------------------------------------------------------------------------------------------------------- Additional Common Stock Paid-in Retained Shares Amount Capital Earnings Total - ------------------------------------------------------------------------------------------------------------------- Balance, December 29, 1993 10,632,800 $ 106,300 $ 7,972,300 $ 3,664,600 $11,743,200 Net loss (1,780,900) (1,780,900) Issuance of common stock under Incentive Stock Option Plan 92,400 1,000 1,000 Directors' fees in the form of stock options 30,000 30,000 ---------- ----------- ----------- ----------- ----------- Balance, December 28, 1994 10,725,200 107,300 8,002,300 1,883,700 9,993,300 Net earnings 1,344,200 1,344,200 Issuance of common stock under Incentive Stock Option Plan 119,800 1,200 1,200 Issuance of warrants 81,000 81,000 Directors' fees in the form of stock options 40,000 40,000 ---------- ----------- ----------- ----------- ----------- Balance, January 3, 1996 10,845,000 108,500 8,123,300 3,227,900 11,459,700 Net earnings 562,200 562,200 Issuance of common stock under Incentive Stock Option Plan 75,700 700 18,100 18,800 Retirement of warrants (63,000) (63,000) Directors' fees in the form of stock options 20,000 20,000 ---------- ----------- ----------- ----------- ----------- Balance, January 1, 1997 10,920,700 $ 109,200 $ 8,098,400 $ 3,790,100 $11,997,700 ========== =========== =========== =========== =========== See accompanying notes to consolidated financial statements
12 FAMILY STEAK HOUSES OF FLORIDA, INC. - --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------------------------------------------- For the Years Ended January 1, January 3, December 28, 1997 1996 1994 - -------------------------------------------------------------------------------------------------------------------- Operating activities: Net earnings (loss) $ 562,200 $ 1,344,200 $ (1,780,900) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 1,662,500 1,719,900 1,961,300 Directors' fees in the form of stock options 20,000 40,000 30,000 Amortization of loan discount 51,000 74,700 132,000 Amortization of loan fees 89,800 85,400 96,600 Gain on early extinguishment of debt (437,200) -- -- Loss on disposition of property and equipment 57,400 197,800 86,200 Closed restaurant costs -- (303,200) 1,392,400 Write-down of property held for resale -- -- 465,000 Gain on sale of restaurant -- (158,600) -- Gain on sale of property held for resale -- (31,500) -- Loss from joint venture -- 5,400 -- Decrease (increase) in: Receivables (16,100) 27,800 80,800 Inventories 45,100 63,100 (12,300) Income taxes receivable -- 332,200 (6,300) Prepaids and other current assets 9,400 218,900 (196,500) Other assets (492,500) (275,900) (43,100) Increase (decrease) in: Accounts payable (67,700) (212,200) (109,400) Accrued liabilities 88,000 (794,000) 1,091,500 Income taxes payable 79,400 5,400 -- Deferred revenue (6,300) (5,800) 25,000 Other non-current liabilities -- (198,300) (116,500) ------------ ------------ ------------ Net cash provided by operating activities 1,645,000 2,135,300 3,095,800 ------------ ------------ ------------ Investing activities: Proceeds from sale of property and equipment 548,600 107,900 114,100 Principal receipts on notes receivable 208,700 84,400 -- Purchase of investments (492,800) -- (405,700) Capital expenditures (1,356,400) (2,599,600) (1,655,800) Proceeds from sale of property held for resale -- 518,000 -- Proceeds from sale of investments -- 110,400 -- ------------ ------------ ------------ Net cash used by investing activities (1,091,900) (1,778,900) (1,947,400) ------------ ------------ ------------ Financing activities: Payments on long-term debt (15,414,500) (1,249,300) (1,059,500) Retirement of warrants (63,000) -- -- Proceeds from the issuance on long-term debt 15,360,000 -- -- Proceeds from capital lease 585,000 -- -- Proceeds from the issuance of common stock 18,800 1,200 1,000 ------------ ------------ ------------ Net cash provided (used) by financing activities 486,300 (1,248,100) (1,058,500) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,039,400 (891,700) 89,900 Cash and cash equivalents - beginning of year 711,400 1,603,100 1,513,200 ------------ ------------ ------------ Cash and cash equivalents - end of year $ 1,750,800 $ 711,400 $ 1,603,100 Supplemental disclosures of cash flow information: Cash paid during the year for income taxes $ 63,000 $ 139,200 $ -- ============ ============ ============ Cash paid during the year for interest $ 1,386,600 $ 1,670,800 $ 1,482,900 ============ ============ ============ Non-cash transactions: Notes receivable as partial proceeds $ -- $ 932,800 $ 570,000 Interest forgiven in lieu of loan closing costs incur -- 251,600 -- Warrants issued in connection with loan restructure -- 81,000 -- Accrued interest reclassed to long-term debt -- 100,000 -- Equipment and other current assets contributed to investment in JV -- -- 100,000 Franchise rights exchanged in lieu of franchise fees -- -- 500,000 Note payable issued in lieu of franchise fees -- -- 800,000 ------------ ------------ ------------ $ -- $ 1,365,400 $ 1,970,000 ============ ============ ============ See accompanying notes to consolidated financial statements.
13 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies Organization The Company was organized under the laws of the State of Florida in September 1985 and is the sole franchisee of Ryan's Family Steak House restaurants in the State of Florida. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Steak House Construction, Family Rustic Investments, Steak House Realty Corporation, and Wrangler's Roadhouse, Inc. All significant intercompany transactions and balances have been eliminated. Fiscal Year The fiscal year consists of a fifty-two or fifty-three week period ending on the Wednesday nearest to December 31. Fiscal year 1995 consisted of fifty-three weeks. Fiscal years 1996 and 1994 consisted of fifty-two weeks. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company has a cash management program which provides for the investment of excess cash balances in short-term investments. These investments are stated at cost which approximates market value and consist of money market instruments. Investments Investments represent certificates of deposit or bankers' acceptances with maturities of less than one year. These investments are pledged with various entities to support the Company's workers' compensation liability, and certain utilities bonds. Interest rates on the certificates vary from 4.64% to 5.35%. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of ingredients and supplies. Property and Equipment Property and equipment are stated at cost. Maintenance, repairs and betterments which do not enhance the value of or increase the life of the assets are charged to costs and expenses as incurred. Depreciation is provided for financial reporting purposes principally on the straight-line method over the following estimated lives: buildings - 25 years, land improvements - 25 years and equipment - 5-8 years. Leasehold improvements are amortized over the life of the related lease. 14 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Property Held For Resale Property held for resale consists of property parcels held for sale. These parcels are stated at the lower of cost or estimated net realizable value. Deferred Charges Certain costs incidental to the opening of a restaurant, consisting primarily of employee training costs, are capitalized for each store opened and are amortized over one year. Other deferred charges and related amortization periods are as follows: financing costs - term of the related loan, and initial franchise rights - 40 years. Earnings Per Share Earnings per share are computed based on the weighted average number of common and common equivalent shares outstanding. Common equivalent shares are represented by shares under option and outstanding warrants. Income Taxes Deferred income taxes are provided for temporary differences between financial reporting basis and tax basis of the Company's assets and liabilities using presently enacted income tax rates. New Accounting Standards Effective January 4, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121) which requires that long-lived assets and certain intangibles to be held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121 did not have a material impact on the Company. Effective January 4, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 establishes a fair value based method of accounting for stock-based employee compensation plans; however, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company has elected to continue to account for its employee stock compensation plans under APB Opinion No. 25 with pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting defined in SFAS No. 123 has been applied. Reclassifications Certain items in the prior year financial statements have been reclassified to conform to the 1996 presentation. 15 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- NOTE 2. CLOSED RESTAURANT COSTS In April 1994, the Company closed a restaurant in Ft. Pierce, Florida and recorded a restaurant closing reserve. The April 1994 restaurant closing resulted in pre-tax charges to 1994 earnings totaling $986,000, reflecting a reduction in market value of the property as determined by appraisal, in addition to costs associated with closing the restaurant. Also in 1994, the Company closed its Wrangler's Roadhouse location, resulting in write-downs of property and equipment totaling $355,000. Total closed restaurant costs in 1994 were $1,392,400. In 1995, the Company recognized $303,200 income from favorable settlements of two closed restaurant leases. These closed restaurant costs had been recorded in 1993, when the decision to close the respective restaurants was made. The decisions to close certain restaurants were made as a result of poor operating performance. Closed restaurant costs include loss on the sale of a closed restaurant property, losses on leasehold improvements and equipment, provisions for future obligations on restaurant leases and other costs of closure. NOTE 3. FRANCHISE AGREEMENT In October 1996, the Company amended its Franchise Agreement with Ryan's Family Steak Houses, Inc. The amended agreement requires the Company to pay a monthly royalty fee of 3.0% through December 2001, and 4.0% thereafter of the gross receipts of each Ryan's Family Steak House restaurant. Total royalty fee expenses were $1,138,600, $1,263,200 and $1,561,100 for the years ended January 1, 1997, January 3, 1996 and December 28, 1994. The Franchise Agreement requires the Company to operate a minimum number of Ryan's restaurants on December 31 of each year. Failure to operate the minimum number could result in the loss of exclusive franchise rights to the Ryan's concept in Florida. The following schedule outlines the number of Ryan's restaurants required to be operated by the Company as of December 31 each year under the amended franchise agreement: - -------------------------------------------------------------------------------- Number of Restaurants Required to End of Fiscal Year be in Operation - -------------------------------------------------------------------------------- 1997 25 1998 26 1999 27 2000 28 2001 and subsequent years Increases by one each year Prior to July 1994 the Company held exclusive franchise rights to build Ryan's restaurants in the State of Florida, with the exception of Panama City, Florida and Escambia County, Florida, where the Franchisor has the right to operate Ryan's restaurants. Under the Franchise Agreement, as amended in July 1994, the Company relinquished the franchise rights to most counties in northwest Florida and south Florida to the Franchisor for $500,000 in forgiveness of past due royalty fees. The Company has the right to repurchase the exclusive franchise rights to those counties for $500,000 at any time prior to June 30, 1998. In conjunction with the execution of the July 1994 amendment to the Franchise Agreement, the Company executed and delivered a note to the Franchisor for payment of $800,000 in past due royalty fees. (See Note 5.) 16 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Note 4. ACCRUED LIABILITIES Accrued liabilities is summarized as follows: - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Payroll and payroll taxes $ 561,500 $ 457,800 Workers' compensation claims 1,427,000 1,247,700 Property taxes 9,300 211,500 Other 584,300 577,100 ---------- ---------- $2,582,100 $2,494,100 ========== ========== The Company self-insures workers' compensation losses up to certain limits. The estimated liability for workers' compensation claims represents an estimate for the ultimate cost of uninsured losses which are unpaid as of the balance sheet date. These estimates are continually reviewed and adjustments to the Company's estimated claim liabilities, if any, are reflected in current operations.
Note 5. LONG-TERM DEBT Long-term debt is summarized as follows: - -------------------------------------------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Secured notes payable to FFCA Mortgage Corporation, monthly principal and interest payments totaling $141,900 beginning February 1997, interest at thirty day LIBOR rate +3.75% (9.375% at January 1,1997) $15,360,000 $ -- Secured 9.0% Senior Notes payable to Cerberus Partners, L.P. (payable to The Travelers Insurance Company and certain of its affiliates prior to August 1995), interest payable monthly, principal payments of $65,000, paid in full in December 1996. -- 11,478,000 Secured bank term loan, monthly principal payments of $67,100 through March 1995, then $41,250 beginning April 1995 with interest at prime plus .50%, paid in full in December 1996 -- 4,163,000 Unsecured note payable to Franchisor, monthly principal payments of $25,000 beginning August 1994 through March 1997, interest at 6.0% 75,000 350,000 Other 4,900 9,400 ----------- ----------- 15,439,900 16,000,400 Less current portion: (332,700) (1,580,000) ----------- ----------- $15,107,200 $14,420,400 =========== ===========
17 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Total maturities of long-term debt are as follow: 1997 $ 332,700 1998 279,300 1999 307,400 2000 338,900 2001 412,000 Thereafter 13,769,600 ---------- $15,439,900 =========== In December 1996, the Company entered into a Loan Agreement with FFCA Mortgage Corporation ("FFCA"). The Loan Agreement governs eighteen Promissory Notes payable to FFCA totalling $15,360,000 at January 1, 1997. Each Note is secured by a mortgage on a Company restaurant property. The Promissory Notes provide for a term of twenty years and an interest rate equal to the thirty-day LIBOR rate plus 3.75%, adjusted monthly. The Loan Agreement provides for various covenants, including the maintenance of prescribed debt service coverages. The Company used the proceeds of the FFCA Loan to retire its notes with Cerberus Partners, L.P., ("Cerberus") and its loans with The Daiwa Bank Limited and SouthTrust Bank of Alabama, N.A. The Company realized a discount on the retirement of the Cerberus notes, which was partially offset by unamortized debt issuance costs. The resulting gain of $348,500 net of income taxes, has been accounted for as an extraordinary item. In addition, the Company retired Warrants for 1,050,000 shares of the Company's common stock previously held by Cerberus. Cerberus continues to hold Warrants to purchase 700,000 shares of the Company's common stock at an exercise price of $.40 per share. Also in December 1996, the Company entered into a separate loan agreement with FFCA under which it may borrow up to an additional $4,640,000 in 1997. This additional financing would be evidenced by four additional Promissory Notes secured by mortgages on four Company restaurant properties. The terms and interest rate of this loan agreement are identical to the loan agreement described above. NOTE 6. INCOME TAXES The provision (benefit) for income taxes is comprised of the following: - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Current: Federal $142,300 $147,100 $(274,400) State -- -- -- -------- ------- -------- $142,300 147,100 (274,400) Deferred -- -- -- -------- ------- -------- Provision (benefit) for income taxes $142,300 $147,100 $(274,400) ======== ======== ========= 18 FAMILY STEAK HOUSES OF FLORIDA, INC. - --------------------------------------------------------------------------------
Income taxes for the years ended January 1, 1997, January 3, 1996 and December 28, 1994 differ from the amount computed by applying the federal statutory corporate rate to earnings before income taxes. The differences are reconciled as follows: - ------------------------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------------------ Tax provision (benefit) at statutory rate $ 245,500 $ 522,000 $(719,400) Increase (decrease) in taxes due to: Effect of graduated tax rates (7,000) (14,900) 20,600 State tax net of federal benefit 38,600 53,700 (74,000) Change in deferred tax asset valuation allowance (109,400) (426,000) 530,100 Other (25,400) 12,300 (31,700) --------- --------- --------- Provision (benefit) for income taxes $ 142,300 $ 147,100 $(274,400) ========= ========= =========
The components of deferred taxes at January 1, 1997 and January 3, 1996 are summarized below: - ---------------------------------------------------------------------------------------- January 1, January 3, 1997 1996 - ---------------------------------------------------------------------------------------- Deferred tax assets: Capital loss not currently deductible $ 46,100 $ 46,100 Excess tax over book basis- Property held for re-sale 164,700 164,700 Federal and state tax credits 375,100 471,900 Accruals not currently deductible 547,900 476,200 Unearned revenue, previously taxed 22,500 30,500 State net operating loss -- 14,300 --------- ------- Total deferred tax asset 1,156,300 1,189,400 Valuation Allowance (141,800) (251,200) --------- ------- 1,014,500 938,200 --------- ------- Deferred tax liability: Excess of tax over book depreciation and amortization 1,014,500 938,200 Net deferred taxes $ 0 $ 0 ========= =======
At January 1, 1997, the Company's federal and state tax credit was comprised of alternative minimum tax credits of $375,100, which have no expiration date. NOTE 7. CAPITAL STOCK, OPTIONS AND WARRANTS The Company has a stock option plan for non-employee directors pursuant to which up to an aggregate of 540,000 shares of the common stock are authorized to be granted. All options expire five years after the date of grant or one year after completion of term as a director. The Company also had an employee incentive stock option plan pursuant to which up to an aggregate of 900,000 shares of the common stock were authorized to be granted. All options expire ten years after the date of grant or 90 days after termination of employment. This plan expired as of November 30, 1995. All options outstanding under this plan as of November 30, 1995 remain exercisable pursuant to terms of the plan. In 1995 the Company's shareholders approved a new employee incentive stock option plan pursuant to which an additional 1,000,000 shares of common stock are authorized to be granted. All options expire ten years after the date of grant or 90 days after termination of employment. 19 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- If compensation cost for stock option grants had been determined based on the fair value at the grant dates for 1996 and 1995 consistent with the method prescribed by SFAS No. 123, the Company's net earnings and earnings per share would have been adjusted to the pro forma amounts indicated below: - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Net Earnings As reported $562,200 $1,344,200 Pro forma 490,262 1,256,435 Earnings per share As reported $ .05 $ .11 Pro forma .04 .11 Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weight-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 0 and 0 percent, expected volatility of 134 and 128 percent, risk-free interest rates of 6.5 and 5.6 percent, and expected lives of 10 and 10 years.
The following table summarizes the changes in the total number of stock option shares outstanding during the two years ended January 1, 1997. - --------------------------------------------------------------------------------------------------------- 1996 1995 - --------------------------------------------------------------------------------------------------------- Options Weighted Average Options Weighted Average Exercise Price Exercise Price Options outstanding at beginning of year 1,310,200 $ .62 510,446 $ .81 Options granted 139,432 .53 1,075,552 .50 Options exercised (75,682) .25 (119,852) .01 Options forfeited (404,750) .71 (155,946) .71 Options outstanding at end of year 969,200 .60 1,310,200 .62 ----------- ---------- Options exercisable at end of year 449,050 .70 472,850 .71 =========== ========== Weighted average fair value of options granted during the year $ 36,16 $ 326,761 Common shares reserved for future grants at end of year 766,447 -- 747,947 --
The following table summarizes information about fixed stock options outstanding at January 1, 1997: Year Exercise Options Options Weighted Average Granted Price $ Outstanding Exercisable Remaining Life ------- ------- ----------- ----------- -------------- 1987 $5.75 1,500 1,500 0.1 1988 3.63 5,500 5,500 1.1 1989 2.88 15,000 15,000 2.5 1991 0.81 59,000 59,000 4.3 1992 1.13 20,000 20,000 5.1 1993 0.63 38,000 28,500 6.3 1994 0.25 92,000 46,000 8.0 1995 1.07 25,000 25,000 8.0 1995 0.40 412,500 206,250 8.7 1995 0.75 169,200 42,300 8.7 1996 0.56 131,500 0 10.0 ------- ------- 969,200 449,050 ======= ======= Remaining non-exercisable options as of January 1, 1997 become exercisable as follows: 1997 210,800 1998 201,300 1999 75,175 2000 32,875 ------- 520,150 ======= 20 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Cerberus Partners, L.P., hold detachable warrants to purchase 700,000 shares of the Company's common stock at $.40 per share at any time prior to October 1, 2003. The estimated fair value of the warrants retired as of December 18, 1996 (the date of the retirement of the Cerberus Notes) of $63,000 was recorded as a decrease to additional paid-in capital and included in the gain from early retirement of debt. The Company's Board of Directors is authorized to set the various rights and preferences for the Company's Preferred Stock, including voting, conversion, dividend and liquidation rights and preferences, at the time shares of Preferred Stock are issued. As of January 1, 1997 there were no shares of Preferred Stock issued. RIGHTS PLAN On March 18, 1997, Family Steak Houses of Florida, Inc. ("FSH") entered into a Rights Agreement (the "Rights Agreement") with ChaseMellon Shareholder Services, LLC and declared a dividend of rights to purchase Junior Participating Preferred Stock of the Company ("Rights") to shareholders of record as of March 19, 1997. Each Right will initially entitle the registered holder to purchase from FSH a unit consisting of one one-hundredth of a share (a "Unit") of Junior Participating Preferred Stock of the Company ("Preferred Stock") at $5.00 per Unit, subject to adjustment (the "Purchase Price"). The description and terms of the Rights are contained in the Rights Agreement. As long as the Rights are attached to the common stock of FSH ("FSH Common Stock") and in certain other circumstances specified in the Rights Agreement, one Right (as such number may be adjusted pursuant to the provisions of the Rights Agreement) shall be deemed to be delivered with each share of FSH Common Stock issued or transferred by FSH in the future. The Rights will be exercisable and will trade separately from the FSH Common Stock upon the tenth business day after (i) the date of public announcement that a person or group have become the beneficial owners of 15% or more of the outstanding shares of FSH Common Stock (an "Acquiring Person"), or (ii) such later date determined by the Board of Directors after the first public announcement of a tender or exchange offer, which, upon consummation, would result in a person or a group being the beneficial owner of 15% or more of the outstanding shares of common stock, or (iii) after a majority of the Board who are not officers of FSH have determined that a person is an Adverse Person (as defined in the Rights Agreement). If (i) a person becomes the beneficial owner of 15% or more of the then outstanding shares of FSH Common Stock or voting power (except pursuant to certain business combinations or an offer for all outstanding shares of FSH Common Stock and all other voting securities which the independent and disinterested directors of FSH determine to be fair to and otherwise in the best interests of FSH and its shareholders) or (ii) any person is determined to be an Adverse Person, then each holder of a Right (with the exception of an Adverse or Acquiring Person) will thereafter have the right to receive, upon exercise, FSH Common Stock having a value equal to no less than two times the exercise price of the Right, which is $5.00, subject to adjustment. FSH may redeem each Right for $0.001 at any time before the earliest of (i) ten business days after a person or group becomes an Acquiring Person, (ii) ten business days after the Board's determination that a person is an Adverse Person, or (iii) March 17, 2007. NOTE 8. PROFIT SHARING AND RETIREMENT PLAN Employees of the Company participate in a profit sharing and retirement plan covering substantially all full-time employees at least twenty-one years of age and with more than one year of service. The plan was established in August 1991. Contributions are made to the plan at the discretion of the Company's Board of Directors. No contributions have been made since the inception of the plan. The profit sharing plan includes a 40l(K) feature by which employees can defer, by payroll deduction only, l% to l5% of their annual compensation not to exceed $9,500 in 1996. 21 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- The plan provides for a Company matching contribution of $.25 per dollar of the first 6% of employee deferral. The Company's matching contribution was $32,050 in 1996, $43,173 in 1995 and $38,400 in 1994. Employees vest in Company contributions based on the following schedule: - -------------------------------------------------------------------------------- Years of Service Vesting Percentage - -------------------------------------------------------------------------------- Less than 3 0% 3 20% 4 40% 5 60% 6 80% 7 l00% NOTE 9. INVESTMENT IN JOINT VENTURES In December 1994, the Company formed a new subsidiary, Family Steak JV, Inc. which acquired a 50% ownership in a limited liability company, Cross Creek Barbeque, L.C. ("Cross Creek"), for the purpose of opening a new restaurant. The Company contributed the equipment to Cross Creek and the other 50% owner of Cross Creek contributed the cash necessary to remodel and open the new Cross Creek restaurant. As a result of unsatisfactory operating performance, the Company sold its interest in the Cross Creek restaurant in July 1995. A Company subsidiary leased the land and building to Cross Creek until May 1996, when it sold them at a gain of approximately $5,000. NOTE 10. COMMITMENTS AND CONTINGENCIES Lease Obligations At January 1, 1997, the Company is committed under the terms and conditions of real and personal property operating leases for minimum rentals aggregating $2,294,000 plus insurance, common area expenses and taxes. The Company has various renewal options on these leases covering periods of five to twenty years. In September 1996, the Company entered into a twenty year lease agreement with two five year renewal options for a restaurant building. The total costs of the assets covered by the lease amount to $1,087,400 at January 1, 1997. Interest is computed at an annual rate of 10.65%. Future minimum lease obligations are under noncancelable capital lease and operating leases consist of the following as of January 1, 1997: - -------------------------------------------------------------------------------- Capital Operating Lease Leases - -------------------------------------------------------------------------------- 1997 $115,400 $ 268,600 1998 115,400 259,500 1999 115,400 209,900 2000 115,400 162,300 2001 115,400 113,100 Future years 2,180,600 1,280,600 --------- --------- Total minimum lease payments $2,757,600 $2,294,000 ========== Amounts representing interest (1,696,500) ---------- Present value of net minimum payments 1,061,100 Current portion (2,500) ---------- Long-term capitalized lease obligations $1,058,600 ========== 22 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Rental expense for operating leases for the years ended January 1, 1997, January 3, 1996 and December 28, 1994 was approximately $380,500, $419,200 and $447,100 respectively. Contingent rental payments, for the years ended January 1, 1997, January 3, 1996 and December 28, 1994 were approximately $0, $5,500 and $7,000 respectively. Legal Matters The Company, in the normal course of business, is subjected to claims and litigation with respect to store operations. In the opinion of management, based on the advice of legal counsel the ultimate disposition of these claims and litigation will not have a material effect on the financial position or results of operations of the Company. NOTE 11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In 1995, the Company adopted Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107"). This statement addresses disclosure of estimated fair values of certain financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents - For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Investments - The Company's investments consist of certificates of deposit and bankers' acceptances for which the carrying amount is a reasonable estimate of fair value. Mortgage Receivables - The fair value of mortgage receivables is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The Company believes the carrying amount is a reasonable estimate of fair value. Debt - Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt instruments. The Company believes the carrying amount is a reasonable estimate of such fair value. NOTE 12. SUBSEQUENT EVENTS (UNAUDITED) On March 6, 1997 the Company received notification of an unsolicited tender offer from Bisco Industries, Inc. to purchase up to 2,600,000 shares of the Company's outstanding common stock at $.90 per share. On March 19, 1997 the Company's Board of Directors and management completed their evaluation of the offer and determined the offer inadequate and not in the best interest of the shareholders. 23 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Family Steak Houses of Florida, Inc. We have audited the accompanying consolidated balance sheets of Family Steak Houses of Florida, Inc. and subsidiaries as of January 1, 1997 and January 3, 1996 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended January 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Family Steak Houses of Florida, Inc. and subsidiaries as of January 1, 1997 and January 3, 1996, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 1997 in conformity with generally accepted accounting principles. As discussed in Note 1 to the Consolidated Financial Statements, in 1996 the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and No. 123, "Accounting for Stock-Based Compensation". Deloitte & Touche LLP Jacksonville, Florida February 27, 1997 24 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- COMPANY'S REPORT ON FINANCIAL STATEMENTS Family Steak Houses of Florida, Inc. has prepared and is responsible for the accompanying consolidated financial statements and related consolidated financial information included in this report. These consolidated financial statements were prepared in accordance with generally accepted accounting principles and are appropriate in the circumstances. These consolidated financial statements necessarily include amounts determined using management's best judgements and estimates. Family Steak Houses of Florida, Inc. maintains accounting and other control systems which the Company believes provides reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the Company, although there are inherent limitations in all internal control structure elements, as well as cost/benefit considerations. Family Steak Houses of Florida, Inc.'s independent certified public accountants, Deloitte & Touche LLP, have audited the accompanying consolidated financial statements for 1996. The objective of their audit, performed in accordance with generally accepted auditing standards, is to express an opinion on the fairness, in all material respects, of the Company's consolidated financial position, results of its operations and its cash flows in accordance with generally accepted accounting principles. They consider the internal control structure to the extent considered necessary to determine the audit procedures required for the purpose of expressing their opinion on the consolidated financial statements. 25 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Corporate Listing Family Steak Houses of Florida, Inc. Corporate Officer and Directors Lewis E. Christman, Jr. (photo) President, Chief Executive Officer, Director Edward B. Alexander (photo) Chief Financial Officer and Director Michael J. Walters (photo) Corporate Secretary Robert Martin (photo) Director Consultant to the Company Joseph M. Glickstein, Jr. (photo) Director Partner, Glickstein & Glickstein Richard M. Gray (photo) Director Partner, Gray & Kelley 26 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Independent Certified Public Accountants Deloitte & Touche LLP Suite 2801, Independent Square One Independent Drive Jacksonville, FL 32202-5034 General Counsel Mahoney Adams & Criser, P.A. 3400 Barnett Center 50 North Laura Street P.O. Box 4099 Jacksonville, FL 32201 Transfer Agent/Rights Agent Chase Mellon Shareholder Services Four Station Square Third Floor Pittsburg, PA 15219-1173 Executive Office Family Steak Houses of Florida, Inc. 2113 Florida Boulevard Neptune Beach, FL 32266 Form 10-K A copy of the Company's Annual Report on Form 10-K for fiscal 1996, as filed with the Securities and Exchange Commission, may be obtained by writing to: Corporate Secretary Family Steak Houses of Florida, Inc. 2113 Florida Boulevard Neptune Beach, FL 32266 Annual Meeting The annual meeting will be held at: Sea Turtle Inn One Ocean Boulevard Atlantic Beach, FL 32233 Tuesday, June 17 at 10:00 a.m. 27 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Common Stock Data The Company's common stock is traded on the NASDAQ National Market System under the trading symbol "RYFL". As of March 5, 1997, there were approximately 2,703 shareholders of record, not including individuals holding shares in street names. The closing sale price for the Company's stock on March 5, 1997 was $.88. The Company has never paid cash dividends on its common stock and is not allowed to pay dividends under its loan agreements. Management of the Company presently intends to retain all available funds for expansion of the business. The quarterly high and low closing prices of the Company's common stock are as shown below: Market Price of Common Stock ---------------------------- 1996 1995 Quarter High Low High Low ------- ---- --- ---- --- First 31/32 5/8 15/16 9/32 Second 29/32 9/16 15/16 9/16 Third 3/4 17/32 1 11/16 Fourth 23/32 7/16 1 3/16 5/8 28 EX-27 8 EXHIBIT 27 - FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from the company's 1996 10-K and is qualified in its entirety by reference to such financial statements. YEAR JAN-01-1997 JAN-01-1997 1,750,800 1,093,100 686,700 0 202,300 3,980,100 41,006,100 (14,656,200) 32,803,500 4,596,900 0 0 0 109,200 11,888,500 32,803,500 37,977,600 37,977,600 15,089,500 36,659,100 0 0 (1,516,300) 267,300 53,600 213,700 0 348,500 0 562,200 .05 .05 Represents investments in certificates of deposits with maturities of less than one year.
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