SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
_x__ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Quarterly Period Ended March
31, 2002
____ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Transition Period from
__________to __________
Commission File No. 0-28258
SHELLS SEAFOOD RESTAURANTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 65-0427966
-------------------------------- -----------------------------------
(State or other jurisdiction (IRS) Employer Identification Number
of incorporation or organization)
16313 North Dale Mabry Highway, Suite 100, Tampa, FL 33618
------------------------------------------------------------
(Address of principal executive offices) (zip code)
(813) 961-0944
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes x No ____
Class Outstanding at May 13, 2002
Common stock, $0.01 par value 4,454,015
Preferred stock, $0.01 par value 66,862
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Index
Part I - Financial Information Page Number
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2002
(Unaudited) and December 30, 2001 3
Consolidated Statements of Income (Unaudited) for
the 13 weeks ended March 31, 2002
and April 1, 2001 4
Consolidated Statements of Cash Flows (Unaudited)
for the 13 weeks ended March 31, 2002
and April 1, 2001 5
Notes to Consolidated Financial Statements-(Unaudited) 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 11
Part II - Other Information 12
Signatures 13
2
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2002 December 30, 2001
-------------------- ----------------------
ASSETS
Cash $ 3,331,314 $ 969,680
Inventories 535,390 457,610
Other current assets 474,367 84,465
Receivables from related parties 59,985 78,137
Income tax refund receivable 858,338 898,338
-------------------- ----------------------
Total current assets 5,259,394 2,488,230
Property and equipment, net 7,950,763 8,106,500
Property held for sale, net 1,022,060 1,022,060
Other assets 493,168 549,492
Goodwill 2,629,054 2,680,603
-------------------- ----------------------
TOTAL ASSETS $ 17,354,439 $ 14,846,885
==================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,325,961 $ 4,079,396
Accrued expenses 3,986,399 3,872,266
Sales tax payable 373,410 207,913
Current portion of long-term debt 2,113,500 1,908,379
-------------------- ----------------------
Total current liabilities 9,799,270 10,067,954
Deferred rent 1,236,160 1,243,057
Long-term debt, less current portion 3,477,913 1,633,073
-------------------- ----------------------
Total liabilities 14,513,343 12,944,084
Minority partner interest 440,266 427,642
-------------------- ----------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
authorized 2,000,000 shares;
66,862 shares issued and outstanding 669 669
Common stock, $0.01 par value;
authorized 20,000,000 shares;
4,454,015 shares issued and
outstanding 44,540 44,540
Additional paid-in-capital 14,240,576 14,240,576
Retained earnings (deficit) (11,884,955) (12,810,626)
-------------------- ----------------------
Total stockholders' equity 2,400,830 1,475,159
-------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 17,354,439 $ 14,846,885
==================== ======================
See Notes to Consolidated Financial Statements.
3
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
13 Weeks Ended
----------------------------------------
March 31, 2002 April 1, 2001
------------------- ------------------
REVENUES $ 14,128,869 $ 21,654,590
------------------- ------------------
COST AND EXPENSES:
Cost of revenues 4,669,777 8,143,679
Labor and other related expenses 4,095,418 6,455,549
Other restaurant operating expenses 3,032,825 4,598,244
General and administrative expenses 824,803 1,694,154
Depreciation and amortization 326,789 536,022
Provision for impairment of assets - 1,582,137
Provision for store closings - 1,333,271
------------------- ------------------
12,949,612 24,343,056
------------------- ------------------
INCOME (LOSS) FROM OPERATIONS 1,179,257 (2,688,466)
------------------- ------------------
OTHER INCOME (EXPENSE):
Interest expense (195,842) (186,786)
Interest income 5,820 1,247
Other expense, net 800 (65,739)
------------------- ------------------
(189,222) (251,278)
------------------- ------------------
INCOME (LOSS) BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES 990,035 (2,939,744)
ELIMINATION OF MINORITY PARTNER INTEREST (64,364) (78,707)
------------------- ------------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 925,671 (3,018,451)
PROVISION FOR INCOME TAXES - -
------------------- ------------------
NET INCOME (LOSS) $ 925,671 $ (3,018,451)
=================== ==================
BASIC NET INCOME (LOSS) PER SHARE
OF COMMON STOCK $ 0.21 $ (0.68)
=================== ==================
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 4,454,015 4,454,015
=================== ==================
DILUTED NET INCOME (LOSS) PER SHARE OF
COMMON STOCK $ 0.11 $ (0.68)
=================== ==================
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING 8,451,979 4,454,015
=================== ==================
See Notes to Consolidated Financial Statements.
4
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
13 Weeks Ended
-----------------------------------------
March 31, 2002 April 1, 2001
------------------- ------------------
OPERATING ACTIVITIES:
Net income (loss) $ 925,671 $ (3,018,451)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Provision for impairment of assets - 1,582,137
Depreciation and amortization 326,789 536,022
Minority partner interest 12,624 (6,293)
Changes in assets and liabilities:
(Increase) decrease in inventories (77,780) 66,672
(Increase) decrease in receivables from
related parties (18,152) 123,539
Increase in other assets (316,914) (359,582)
Decrease in prepaid rent 12,600 12,600
Decrease in income tax refunds receivable 40,000 -
Decrease in deferred tax asset - 114,782
Decrease in accounts payable (753,435) (105,329)
Increase in accrued expenses 114,133 513,808
Increase in sales tax payable 165,497 164,619
(Decrease) increase in deferred rent (6,897) 15,971
------------------- ------------------
Total adjustments (501,535) 2,658,946
------------------- ------------------
Net cash provided by (used in) operating
activities 424,136 (359,505)
------------------- ------------------
INVESTING ACTIVITIES:
Proceeds from the sale of assets - -
Purchase of property and equipment (112,463) (340,310)
------------------- ------------------
Net cash used in investing activities (112,463) (340,310)
------------------- ------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 2,304,317 227,636
Repayment of debt (254,356) (418,385)
------------------- ------------------
Net cash provided by (used in)
financing activities 2,049,961 (190,749)
------------------- ------------------
Net increase (decrease) in cash 2,361,634 (890,564)
CASH AT BEGINNING OF PERIOD 969,680 1,261,937
------------------- ------------------
CASH AT END OF PERIOD $ 3,331,314 $ 371,373
=================== ==================
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 88,637 $ 188,786
Cash refunds received for income taxes $ (40,000) $ (114,781)
Note receivable on sale of assets $ 100,000 $ -
See Notes to Consolidated Financial Statements.
5
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and,
therefore, these statements do not include all of the information and
footnotes required by generally accepted accounting principles for
annual financial statements. In the opinion of management, all
material adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The consolidated financial statements of Shells Seafood Restaurants,
Inc. (the "Company") should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the
Form 10-K for the year ended December 30, 2001 filed with the
Securities and Exchange Commission. Company management believes that
the disclosures are sufficient for interim financial reporting
purposes. Certain prior year amounts have been reclassified in the
accompanying condensed consolidated financial statements to conform
with the current year presentation.
2. EARNINGS PER SHARE
The following table represents the computation of basic and diluted
earnings per share of common stock as required by Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share":
13 Weeks Ended
March 31, 2002 April 1, 2001
----------------------------------
Net income (loss)applicable to
common stock $ 925,671 $ (3,018,451)
==================================
Weighted common shares outstanding 4,454,015 4,454,015
Basic net income (loss) per share
of common stock $ 0.21 $ (0.68)
Effect of dilutive securities:
Warrants 3,915,618 -
Stock options 82,346 -
----------------------------------
Diluted weighted common shares
outstanding 8,451,979 4,454,015
----------------------------------
Diluted net income (loss) per share
of common stock $ 0.11 $ (0.68)
==================================
The earnings per share calculation excluded 630,894 options and
warrants during the first quarter of 2002 as the exercise price of the
options and warrants were greater than the average market price of the
common shares. The earnings per share calculation for the first
quarter of 2001 excluded all the outstanding options and warrants of
1,411,425 as the Company incurred a net loss.
Effective January 31, 2002, we raised $2,000,000 in a private
financing transaction, consisting of secured promissory notes and
warrants to purchase shares of our Common Stock. The two investors in
this financing were Shells Investment Partners, L.L.C. and Banyon
Investment, LLC. Shells Investment Partners is an entity comprised of
members previously unaffiliated with our company. Banyon is an entity
associated with Philip R. Chapman, Chairman of the Board, and certain
family members of Frederick R. Adler, a greater than 10% stockholder.
The proceeds of the financing are being used for working capital.
6
In connection with the financing, we issued to each of Shells
Investment Partners and Banyon (i) a $1,000,000 secured promissory
note due January 31, 2005 which bears interest at 15% per annum, of
which 8% is payable monthly in arrears and 7% is deferred and payable
when the principal is paid in full and (ii) a warrant to purchase
4,454,015 shares of our Common Stock, at an exercise price of $0.16
per share. The warrants are exercisable from January 31, 2003 to
January 31, 2005.
3. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities".
This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in
the balance sheet and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is
gains and losses) depends upon the intended use of the derivative and
the resulting designation. Statement No. 133, as amended, was
effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The adoption of Statement No. 133 does not materially
affect our consolidated financial statements.
In July 2001, the FASB issued Statement No. 141, "Accounting for
Business Combinations," and Statement No. 142, "Goodwill and Other
Intangible Assets." These Statements modify accounting for business
combinations after June 30, 2001. The Statements require that
goodwill existing at the date of adoption be reviewed for possible
impairment and that impairment tests be periodically repeated, with
impaired assets written-down to fair value. Additionally, existing
goodwill and intangible assets must be assessed and classified
consistent with the Statements' criteria. Intangible assets with
estimated useful lives will continue to be amortized over those
periods. Amortization of goodwill and intangible assets with
indeterminate lives will cease. The adoption of Statement No. 142 is
not expected to materially affect our consolidated financial
statements.
In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This Statement requires capitalizing any
retirement costs as part of the total cost of the related long-lived
asset and subsequently allocating the total expense to future periods
using a systematic and rational method. Adoption of this Statement is
required for fiscal years beginning after June 15, 2002. The adoption
of Statement No. 143 is not expected to materially affect our
consolidated financial statements.
In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." This Statement
supersedes Statement No. 121 but retains many of its fundamental
provisions. Additionally, this Statement expands the scope of
discontinued operations to include more disposal transactions. The
provisions of this Statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001. The
adoption of Statement No. 144 is not expected to materially affect our
consolidated financial statements.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages which the items in the Company's Consolidated Statements
of Income bear to total revenues.
13 Weeks Ended
-----------------------------------------
March 31, 2002 April 1, 2001
-------------------- ------------------
REVENUES 100.0% 100.0%
-------------------- ------------------
COST AND EXPENSES:
Cost of revenues 33.1% 37.6%
Labor and other related expenses 29.0% 29.8%
Other restaurant operating expenses 21.5% 21.2%
-------------------- ------------------
Total restaurant costs and expenses 83.6% 88.6%
-------------------- ------------------
General and administrative expenses 5.8% 7.8%
Depreciation and amortization 2.3% 2.5%
Provision for impairment of assets 0.0% 7.3%
Provision for store closings 0.0% 6.2%
-------------------- ------------------
Income (loss) from operations 8.3% -12.4%
-------------------- ------------------
Interest expense, net -1.3% -0.9%
Other expense, net 0.0% -0.3%
Elimination of minority partner interest -0.5% -0.4%
-------------------- ------------------
Income (loss) before provision for taxes 6.5% -14.0%
Provision for income taxes 0.0% 0.0%
-------------------- ------------------
Net income (loss) 6.5% -14.0%
==================== ==================
8
13 weeks ended March 31, 2002 and April 1, 2001
Revenues. Total revenues for the first quarter of 2002 were
$14,129,000 as compared to $21,655,000 for the first quarter of 2001.
The $7,526,000, or 34.8% decrease in revenues was due to the closing
of six restaurants in the first quarter of 2001 and an additional 10
restaurants in the second and third quarters of 2001, and by a 14.2%
decrease in comparable store sales. Comparisons of same store sales
include only stores, which were open during the entire periods being
compared and, due to the time needed for a restaurant to become
established and fully operational, at least six months prior to the
beginning of that period.
Cost of revenues. The cost of revenues as a percentage of revenues
decreased to 33.1% for the first quarter of 2002 from 37.6% for the
first quarter of 2001. This decrease primarily was due to operations
improvements and lower shrimp and crab costs. The Company is
continually attempting to anticipate and reacting to fluctuations in
food costs by purchasing seafood directly from numerous suppliers,
promoting certain alternative menu selections in response to price and
availability of supply and adjusting its menu prices accordingly to
help control the cost of revenues.
Labor and other related expenses. Labor and other related expenses as
a percentage of revenues decreased to 29.0% during the first quarter
of 2002 as compared to 29.8% for the first quarter of 2001. This
decrease was due to a decrease in employee turnover and a one-time
nonrecurring charge in the first quarter of 2001 of $102,000 for
severance pay primarily related to store closings in the Midwest.
Other restaurant operating expenses. Other restaurant operating
expenses as a percentage of revenues increased to 21.5% for the first
quarter of 2002 as compared with 21.2% for the first quarter of 2001.
The increase primarily was due to operating inefficiencies related to
lower sales volumes.
General and administrative expenses. General and administrative
expenses of $825,000 or 5.8% of revenues for the first quarter of 2002
decreased from $1,694,000 or 7.8% of revenues for the first quarter of
2001. The decrease relates to the downsizing of administrative and
supervisory staff in the second quarter of 2001 associated with the
discontinuance of the Midwest operations along with a one-time
nonrecurring charge of $150,000 for severance pay in the first quarter
of 2001.
Depreciation and amortization. Depreciation and amortization expense
as a percentage of revenues decreased to 2.3% for the first quarter of
2002 from 2.5% in the first quarter of 2001. The decrease primarily
was due to the reduced basis of property and equipment resulting from
the recognition of asset impairments in the first and fourth quarters
of 2001.
Provision for impairment of assets. The Company recorded a
$1,582,000 charge in the first quarter 2001 relating to the write-down
of impaired assets to the estimated fair value in accordance with
Financial Accounting Standards Board Statement No. 121. The asset
impairment charge related to 14 restaurants, 13 restaurants in the
Midwest and one restaurant in Florida. The Company closed most of
these under-performing units in the first seven months of 2001.
Provision for store closings. The Company recorded a one-time charge
in the first quarter of 2001 of $1,333,000 relating to store closing
costs primarily related to restaurants in the Midwest. The Midwest
restaurants were closed during the first and second quarters of 2001
due to poor operating results. Store closing costs consisted
primarily of real estate lease obligations incurred or anticipated to
complete lease terminations or continuing costs while new tenants were
located.
Interest expense. The Company recorded a non-recurring charge of
$106,000 in the first quarter of 2002 relating to the issuance of
warrants on January 31, 2002 as part of the $2,000,000 financing
transaction. Exclusive of the non-recurring charge, interest expense
was $90,000 for the first quarter 2002 compared to $187,000 in the
first quarter of 2001. The reduction was primarily related to debt
repayments associated with stores closed in 2001.
9
Provision for income taxes. No provision for income taxes was
recognized for the first quarter of 2002 or 2001.
Income (loss) from operations and net income (loss). As a result of
the factors discussed above, the Company had income from operations of
$1,179,000 for the first quarter of 2002 compared to a loss from
operations of $2,688,000 for the first quarter of 2001. The Company
had net income of $926,000 for the first quarter of 2002 compared to a
net loss of $3,018,000 for the first quarter of 2001. Exclusive of
nonrecurring charges of $106,000 and $3,167,000, first quarter 2002
and 2001 net income was $1,032,000 and $149,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, the Company's current liabilities of $9,799,000
exceeded its current assets of $5,259,000, resulting in a working
capital deficiency of $4,540,000. In comparison, the December 30,
2001 working capital deficiency was $7,580,000. The improvement in
the working capital deficiency is primarily related to the cash
received from the $2,000,000 financing transaction and favorable
operating results in the first quarter of 2002. The Company continues
to be negatively impacted by the closure and ongoing divestiture of
its Midwest locations. Such divestiture has had and, in the near
term, will continue to have an adverse affect on the Company's cash
position. Historically, the Company has generally operated with
minimal or negative working capital as a result of the investing of
current assets into non-current property and equipment as well as the
turnover of restaurant inventory relative to more favorable vendor
terms in accounts payable.
Cash provided by operating activities for the first quarter of 2002
was $424,000 as compared to cash used by operating activities of
$360,000 for the first quarter of 2001. The net increase of $784,000
primarily was attributable to more favorable store operating results
in first quarter 2002 versus 2001 which included nonrecurring costs to
close the Midwest restaurants.
The cash used in investing activities decreased to $112,000 for the
first quarter of 2002 from $340,000 for the first quarter of 2001,
representing a net decrease of $228,000 due to a reduction in
expenditures for capital improvements.
The cash provided by financing activities was $2,050,000 for the first
quarter of 2002 compared to cash used in financing activities of
$191,000 for the first quarter of 2001. The net increase of
$2,241,000 was primarily due to the $2,000,000 financing transaction
in January 2002.
In March 2002, the Economic Stimulus Package was signed into law.
This program allows for, among other initiatives, the lengthening of
the carry back period allowed for net operating losses from two years
to five years. An income tax refund of approximately $850,000 is
expected in fiscal 2002, relating to taxes paid in fiscal years 1996
and 1997.
The Company has existing indebtedness with Colonial Bank (previously
known as Manufacturers Bank of Florida) consisting of three notes with
a total principal balance, as of March 30, 2002, of $1,537,000. The
loans, which were used to finance the purchase of certain restaurant
locations and equipment, are subject to compliance by the Company with
specified financial covenants. The Company is not currently in
compliance with certain of these covenants, and has received a
covenant waiver from the bank until September 4, 2002. The Company
expects to reduce the outstanding indebtedness owed to the bank with
the proceeds from any sale of the financed properties.
10
SEASONALITY
The restaurant industry in general is seasonal, depending on
restaurant location and the type of food served. The Company has
experienced fluctuations in its quarter-to-quarter operating results
due primarily to its high concentration of restaurants in Florida.
Business in Florida is influenced by seasonality due to various
factors which include but are not limited to weather conditions in
Florida relative to other areas of the U.S., the health of Florida's
economy and the effect of world events in general and the tourism
industry in particular. The Company's restaurant sales are generally
highest from January through April and June through August, the peaks
of the Florida tourism season, and generally lower from September
through mid-December. In many cases, locations are in coastal cities,
where sales are significantly dependent on tourism and its seasonality
patterns.
In addition, quarterly results have been, and in the future could be,
affected by the timing and conditions under which restaurants are
closed both in and outside of Florida. Because of the seasonality of
the Company's business and the impact of restaurant closures and
openings, if applicable, results for any quarter are not generally
indicative of the results that may be achieved for a full fiscal year
on an annualized basis and cannot be used to indicate financial
performance for the entire year.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates
on debt and changes in commodity prices. The Company's exposure to
interest rate risk relates to its $1,836,000 in outstanding debt with
banks that is based on variable rates. Borrowings under the loan
agreements bear interest at rates ranging from 50 basis points under
the prime lending rate to 100 basis points over the prime lending
rate.
11
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
The Company has existing indebtedness with Colonial Bank
(previously known as Manufacturers Bank of Florida) consisting of
three notes with a total principal balance, as of March 30, 2002, of
$1,537,000. The loans, which were used to finance the purchase of
certain restaurant locations and equipment, are subject to compliance
by the Company with specified financial covenants. The Company is not
currently in compliance with certain of these covenants, and has
received a covenant waiver from the bank until September 4, 2002. The
Company expects to reduce the outstanding indebtedness owed to the
bank with the proceeds from any sale of the financed properties.
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
The Company filed a current report on Form 8-K, Item 1, regarding
a change of control related to the $2,000,000 financing transaction
and issuance of warrants.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SHELLS SEAFOOD RESTAURANTS, INC.
(Registrant)
/s/ David W.Head
Date May 13, 2002 David W. Head
President and
Chief Executive Officer
/s/ Warren R. Nelson
Date May 13, 2002 Warren R. Nelson
Executive Vice President and
Chief Financial Officer
13