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 September 30, 2001
--- Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from __________to __________
Commission File No. 0-28258
SHELLS SEAFOOD RESTAURANTS, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 65-0427966
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS) Employer Identification Number
incorporation or organization)
16313 North Dale Mabry Highway, Suite 100, Tampa, FL
----------------------------------------------------
33618 (Address of principal executive offices) zip code)
(813) 961-0944
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ____
---
Class Outstanding at November 14, 2001
----- --------------------------------
Common stock, $.01 par value 4,454,015
Preferred stock, $.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
September 30, 2001 (Unaudited) and December 31, 2000 3
Consolidated Statements of Income (Unaudited) for the 13 and
39 weeks ended September 30, 2001 and October 29, 2000 4
Consolidated Statements of Cash Flows (Unaudited) for the
39 weeks ended September 30, 2001 and October 29, 2000 5
Notes to Consolidated Financial Statements - (Unaudited) 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
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)
September 30, 2001 December 31, 2000
------------------- -------------------
ASSETS
Cash $ 596,137 $ 1,261,937
Inventories 457,613 1,007,520
Other current assets 340,561 495,506
Receivables from related parties 44,445 196,155
Tax refunds receivable 760,473 638,000
------------- ------------
Total current assets 2,199,229 3,599,118
Property and equipment, net 10,071,357 14,165,527
Prepaid rent 135,322 173,122
Other assets 425,127 418,945
Goodwill 2,732,152 2,886,799
Deferred tax asset, net -- 217,000
------------- ------------
TOTAL ASSETS $ 15,563,187 $ 21,460,511
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 4,406,703 $ 3,445,541
Accrued expenses 4,422,534 5,312,219
Sales tax payable 206,991 356,039
Current portion of long-term debt 1,967,020 1,985,447
------------- ------------
Total current liabilities 11,003,248 11,099,246
Deferred rent 1,249,266 1,783,994
Long-term debt, less current portion 1,660,686 3,714,316
------------- ------------
Total liabilities 13,913,200 16,597,556
Minority partner interest 430,137 449,011
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; authorized
2,000,000 shares; none issued or outstanding -- --
Common stock, $.01 par value; authorized 20,000,000
shares; 4,454,015 shares issued and outstanding 44,540 44,540
Additional paid-in-capital 14,161,010 14,161,010
Retained earnings (deficit) (12,985,700) (9,791,606)
------------ ------------
Total stockholders' equity 1,219,850 4,413,944
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,563,187 $ 21,460,511
============ ============
See Notes to Consolidated Financial Statements.
3
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
13 Weeks Ended 39 weeks ended
-------------------------------------- --------------------------------------
September 30, 2001 October 1, 2000 September 30, 2001 October 1, 2000
------------------ --------------- ------------------ ---------------
REVENUES: $ 11,280,954 $ 22,205,978 $ 47,933,271 $ 72,517,108
------------------ --------------- ------------------ ---------------
COST AND EXPENSES:
Cost of revenues 4,075,255 8,670,028 17,904,171 27,073,553
Labor and other related expenses 3,500,093 7,190,630 14,519,213 21,970,854
Other restaurant operating expenses 2,321,061 5,043,403 9,882,289 15,083,481
General and administrative expenses 926,683 1,698,170 3,698,933 5,341,913
Depreciation and amortization 409,914 702,857 1,364,374 2,060,053
Provision for impairment of assets -- 3,978,000 1,582,137 3,978,000
Provision for store closings -- 983,489 1,333,271 983,489
------------------ --------------- ------------------ ---------------
11,233,006 28,266,577 50,284,388 76,491,343
------------------ --------------- ------------------ ---------------
INCOME (LOSS) FROM OPERATIONS 47,948 (6,060,599) (2,351,117) (3,974,235)
------------------ --------------- ------------------ ---------------
OTHER INCOME (EXPENSE):
Interest expense (96,153) (256,835) (413,959) (745,347)
Interest income 136 70,433 1,846 171,382
Other (expense) income, net (332,138) (5,477) (412,653) 189,008
------------------ --------------- ------------------ ---------------
(428,155) (191,879) (824,766) (384,957)
------------------ --------------- ------------------ ---------------
LOSS BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES (380,207) (6,252,478) (3,175,883) (4,359,192)
ELIMINATION OF MINORITY PARTNER INTEREST (54,017) (53,042) (169,626) (220,835)
------------------ --------------- ------------------ ---------------
LOSS BEFORE PROVISION FOR INCOME TAXES (434,224) (6,305,520) (3,345,509) (4,580,027)
BENEFIT (PROVISION) FOR INCOME TAXES 151,415 (1,734,000) 151,415 (2,304,000)
------------------ --------------- ------------------ ---------------
NET LOSS $ (282,809) $ (8,039,520) $ (3,194,094) $ (6,884,027)
================== =============== ================== ===============
BASIC NET LOSS PER SHARE OF COMMON STOCK $ (0.06) $ (1.81) $ (0.72) $ (1.55)
================== =============== ================== ===============
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 4,454,015 4,454,015 4,454,015 4,454,015
================== =============== ================== ===============
DILUTED NET LOSS PER SHARE OF COMMON STOCK $ (0.06) $ (1.81) $ (0.72) $ (1.55)
================== =============== ================== ===============
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 4,454,015 4,454,015 4,454,015 4,454,015
================== =============== ================== ===============
See Notes to Consolidated Financial Statements.
4
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
39 Weeks Ended
------------------------------------------
September 30, 2001 October 1, 2000
-------------------- ------------------
Cash flows from operating activities:
Net loss $(3,194,094) $(6,884,027)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Minority partner interest (18,874) (129,165)
Depreciation and amortization 1,364,374 2,060,053
Loss (gain) on sale of assets 284,128 (204,178)
Provision for impairment of assets 1,582,137 3,978,085
Change in assets and liabilities:
Decrease (increase) in inventories 549,907 (41,193)
Decrease in other assets 300,800 533,150
Decrease in prepaid rent 37,800 58,707
Increase (decrease) in accounts payable 971,129 (1,246,368)
(Decrease) increase in accrued expenses (843,863) 1,350,029
(Decrease) in sales tax payable (149,048) (59,140)
Decrease in deferred tax asset 94,527 2,204,290
(Decrease) increase in deferred rent (534,728) 202,600
----------- -----------
Total adjustments 3,638,289 8,706,870
----------- -----------
Net cash provided by operating activities 444,195 1,822,843
Cash flows from investing activities:
Net proceeds from sale of assets 1,496,646 242,319
Purchase of property and equipment (534,585) (1,122,630)
----------- -----------
Net cash provided by (used in) investing activities 962,061 (880,311)
----------- -----------
Cash flows from financing activities:
Proceeds from debt financing 227,636 245,532
Repayments of debt (2,299,692) (900,793)
----------- -----------
Net cash (used in) financing activities (2,072,056) (655,261)
----------- -----------
Net (decrease) increase in cash and cash equivalents (665,800) 287,271
Cash, beginning of period 1,261,937 2,940,919
----------- -----------
Cash, end of period $ 596,137 $ 3,228,190
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest 352,138 675,794
(Refunds received) cash paid for income taxes (234,164) 99,710
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 31, 2000 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. PROVISION FOR IMPAIRMENT OF ASSETS
In accordance with SFAS No. 121, the Company identified certain long-lived
assets as impaired. The impairment was recognized when the future undiscounted
cash flows of certain assets were estimated to be less than the assets' related
carrying value. As such, the carrying values were written down to the Company's
estimates of fair value based on the best information available making whatever
estimates, judgments, and projections were deemed necessary.
The Company recorded a provision of $1,582,000 in the first quarter of 2001 and
$3,978,000 in the third quarter of 2000 for the write-down of certain impaired
assets in accordance with SFAS No. 121. The write-downs related to 19
restaurants of which 14 were in the Midwest markets. The write-downs were
necessitated in consideration of current period operating losses as well as the
projected cash flows of the restaurants. The Company closed 16 of these
units between October 2000 and April 2001. One additional unit was closed in
July 2001.
3. 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 39 Weeks Ended
--------------------------------------- ------------------------------------
September 30, 2001 October 1, 2000 September 30, 2001 October 1, 2000
--------------------- --------------- ------------------ ---------------
Net loss $ (282,809) $ (8,039,520) $ (3,194,094) $ (6,884,027)
--------------------- --------------- ------------------ ---------------
Weighted common shares outstanding 4,454,015 4,454,015 4,454,015 4,454,015
Basic net loss per share of common stock $ (0.06) $ (1.81) $ (0.72) $ (1.55)
===================== =============== ================== ===============
Effect of dilutive securities:
Warrants -- -- -- --
Stock options -- -- -- --
--------------------- --------------- ------------------ ---------------
Diluted weighted common shares outstanding 4,454,015 4,454,015 4,454,015 4,454,015
--------------------- --------------- ------------------ ---------------
Diluted net loss per share of common stock $ (0.06) $ (1.81) $ (0.72) $ (1.55)
===================== =============== ================== ===============
6
The earnings per share calculations excluded options and warrants to purchase an
aggregate of 1,043,258 and 1,607,486 shares of common stock during the 13 weeks
ended September 30, 2001 and October 1, 2000, respectively, and options and
warrants to purchase an aggregate of 1,043,258 and 1,607,486 shares of common
stock during the 39 weeks ended September 30, 2001 and October 1, 2000,
respectively, as the exercise price of the options and warrants were greater
than the average market price of the common shares.
4. NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative (that is gains and
losses) depends upon the intended use of the derivative and the resulting
designation. SFAS No. 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 has not
and is not expected to materially affect the Company's 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 idicated, the percentages which
the items in the Company's Consolidated Statements of Income bear to total
revenues.
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Percentages to total revenue
13 Weeks Ended 39 Weeks Ended
----------------------------------------- ---------------------------------------
September 30, 2001 October 1, 2000 September 30, 2001 October 1, 2000
------------------- ------------------ -------------------- ----------------
REVENUES
Restaurant sales 99.6% 99.5% 99.5% 99.6%
Management fess 0.4% 0.5% 0.5% 0.4%
------------------- ------------------ -------------------- ----------------
Total revenues 100.0% 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Cost of revenues 36.1% 39.0% 37.4% 37.3%
Labor and other related expenses 31.0% 32.4% 30.3% 30.3%
Other restaurant operating expenses 20.6% 22.7% 20.6% 20.8%
General and administrative expenses 8.2% 7.6% 7.7% 7.4%
Depreciation and amortization 3.6% 3.2% 2.8% 2.8%
Provision for impairment of assets - 17.9% 3.3% 5.5%
Provision for store closings - 4.4% 2.8% 1.4%
------------------- ------------------ -------------------- ----------------
INCOME (LOSS) FROM OPERATIONS 0.4% -27.3% -4.9% -5.5%
OTHER INCOME (EXPENSE):
Interest expense -0.9% -1.2% -0.9% -1.0%
Interest income 0.0% 0.3% 0.0% 0.2%
Other (expense) income , net -2.9% 0.0% -0.9% 0.3%
------------------- ------------------ -------------------- ----------------
LOSS BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES -3.4% -28.2% -6.6% -6.0%
ELIMINATION OF MINORITY PARTNER INTEREST -0.5% -0.2% -0.4% -0.3%
------------------- ------------------ -------------------- ----------------
LOSS BEFORE PROVISION FOR INCOME TAXES -3.8% -28.4% -7.0% -6.3%
BENEFIT (PROVISION) FOR INCOME TAXES 1.3% -7.8% 0.3% -3.2%
------------------- ------------------ -------------------- ----------------
NET LOSS -2.5% -36.2% -6.7% -9.5%
=================== ================== ==================== ================
8
13 weeks ended September 30, 2001 and October 1, 2000
Revenues. Total revenues for the third quarter of 2001 were $11,281,000 as
compared to $22,206,000 for the third quarter of 2000, a $10,925,000, or 49.2%
decrease. The Company operated 29 restaurants as of the third quarter ended
September 30, 2001 versus 47 restaurants at the comparable period ended in 2000.
The Company discontinued its Midwest operations in April 2001, closing six
restaurants and licensing to an unaffiliated third party the right to continue
to operate the remaining three restaurants as Shells units. Same store sales for
the third quarter of 2001 were 20.0% below the comparable period in 2000. The
decrease in same store sales was mostly due to a reduction in customer traffic
which was affected by a lack of advertising during the third quarter of 2001
compared to heavy advertising in the third quarter of 2000. Additionally,
customer traffic was adversely affected by a worsening of the general economy
and a decline in Florida tourism partially attributable to the events of
September 11th. 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
36.1% for the third quarter of 2001 from 39.0% for the third quarter of 2000.
This decrease was due primarily to lowered protein costs (shrimp and crab). The
Company is continually attempting to anticipate and react to fluctuations in
food costs by purchasing seafood directly from numerous suppliers, promoting
certain alternative menu selections in response to price and availability of
supply and adjusting its menu prices accordingly to help control the cost of
revenues, both in absolute dollars and as a percentage of revenues.
Labor and other related expenses. Labor and other related expenses as a
percentage of revenues decreased to 31.0% during the third quarter of 2001 as
compared to 32.4% for the third quarter of 2000. This decrease was primarily
related to a reduction in hourly labor costs partially offset by an increase in
management labor costs.
Other restaurant operating expenses. Other restaurant operating expenses as a
percentage of revenues decreased to 20.6% for the third quarter of 2001 as
compared with 22.7% for the third quarter of 2000. The decrease primarily was
due to decreased media advertising costs, partially offset by an increase in
utility costs caused by higher electricity and gas rates.
General and administrative expenses. General and administrative expenses as a
percentage of revenues increased to 8.2% for the third quarter of 2001 as
compared with 7.6% for the third quarter of 2000. The percentage increase was
related to the decreased sales volume.
Depreciation and amortization. Depreciation and amortization expense as a
percentage of revenues were 3.6% and 3.2% for the third quarters of 2001 and
2000, respectively.
Other income (expense), net. Other expense of $332,000 for the 13 weeks
ended September 30, 2001 compared with $5,000 for the same period in 2000 was
primarily attributable to the $283,000 book loss realized upon the disposition
of a restaurant site in Delray Beach.
Benefit (provision) for income taxes. A tax benefit of $151,000 was recognized
for the third quarter of 2001 related to an anticipated tax refund as compared
to a provision of $1,734,000 during the same quarter in 2000. The $1,734,000 was
attributed to a reduction in the valuation of certain tax assets.
Income (loss) from operations and net loss. As a result of the factors discussed
above, income from operations was $48,000 for the third quarter of 2001 compared
to a loss of $6,061,000 for the third quarter of 2000. Net loss was $283,000 for
the third quarter of 2001 compared to $8,040,000 for the third quarter of 2000.
Exclusive of non-recurring items, net loss was $151,000 for the third quarter of
2001 and $1,345,000 for the third quarter of 2000. Non-recurring items for the
third quarter of 2001 included a book loss of $283,000 from the sale of the
Delray Beach, Florida unit and an increase to the deferred tax asset of $151,000
(adjusting income tax refunds receivable to $760,000). Non-recurring items for
the third quarter of 2000 included $3,978,000 related to the write-down of
9
impaired assets, a $1,734,000 increase in the valuation allowance related to the
deferred tax asset and $983,000 in property related expenses on restaurant
closures.
39 weeks ended September 30, 2001 and October 1, 2000
Revenues. Total revenues for the 39 weeks ended September 30, 2001 were
$47,933,000 as compared to $72,517,000 for the 39 weeks ended October 1, 2000.
The $24,584,000 or 33.9% decrease primarily was due to the discontinuation of
operations in 17 Midwest units and the closure of three Florida restaurants
between October 2000 and July 2001. Same store sales decreased 11.0% compared to
the same period in 2000.
Cost of revenues. The cost of revenues as a percentage of revenues increased
from 37.3% to 37.4% for the 39 weeks ended September 30, 2001 as compared to the
same period in 2000. Prior to the third quarter of 2001, the Company experienced
higher protein costs (shrimp and crab) compared to the same period in 2000.
Labor and other related expenses. Labor and other related expenses was 30.3% as
a percentage of revenues for the 39 weeks ended September 30, 2001 and October
1, 2000. A one-time nonrecurring charge of $102,000 for severance pay primarily
related to store closings in the Midwest is included in the 39 weeks ended
September 30, 2001.
Other restaurant operating expenses. Other restaurant operating expenses
decreased to 20.6% as a percentage of revenues for the 39 weeks ended September
30, 2001 as compared with 20.8% for the same period in 2000. The decrease was
primarily related to the reduction in media advertising costs, partially offset
by an increase in utility costs.
General and administrative expenses. General and administrative expenses
increased to 7.7% as a percentage of revenues for the 39 weeks ended September
30, 2001 as compared with 7.4% for the same period in 2000. This increase was
primarily attributable to inefficiencies resulting from lower sales volumes and
a one-time nonrecurring charge of $150,000 for severance pay related to
reorganization and downsizing of administrative personnel.
Depreciation and amortization. Depreciation and amortization expenses as a
percentage of revenues were 2.8% for the 39 weeks ended September 30, 2001 and
October 1, 2000.
Provision for impairment of assets. The Company recorded a $1,582,000 charge in
the 39 weeks ended September 30, 2001 compared to $3,978,000 in the same period
in 2000. The charge related to the write-down of impaired assets to their
estimated fair value in accordance with Statement of Financial Accounting
Standards No. 121. The asset impairment charge related to the closure or
licensing of 14 restaurants, 13 restaurants in the Midwest and one restaurant in
Florida. Eleven of the 14 restaurants had incurred previous write-downs in the
third quarter of 2000. The Company discontinued operations at most of these
under-performing units, including closing six units during each of the first and
second quarters of 2001 and licensing an additional three units to others during
the second quarter of 2001.
Provision for store closings. The Company recorded a one-time charge of
$1,333,000 and $983,000 for the 39 weeks ending September 30, 2001 and October
1, 2000, respectively, relating to store closing costs primarily related to
restaurants in the Midwest. Store closing costs consist primarily of real estate
lease obligations incurred or anticipated to complete lease terminations or
continuing costs while new tenants are located.
Interest expenses, net. The net interest expense decreased to $412,000 from
$574,000 during the 39 weeks ended September 30, 2001 as compared with the same
period in 2000. The decrease was due to the retirement of debt associated with
the sale of closed units.
Other income (expense), net. Other expense of $413,000 for the 39 weeks ended
September 30, 2001 as compared with other income of $189,000 for the same period
in 2000 is primarily attributable to the disposition of two restaurants. In
2001, a loss of $283,000 was recognized on the sale of a restaurant site in
Delray Beach. In 2000, a
10
$238,000 gain was recognized upon the disposition of a leasehold interest in the
Company's Western Hills restaurant; the restaurant was closed during September
1999 with the corresponding leasehold interest being transferred during the
second quarter of 2000.
Benefit (provision) for income taxes. A tax benefit of $151,000 was recognized
for the 39 weeks ended September 30, 2001 as compared to a provision of
$2,304,000 during the same period in 2000. The $151,000 relates to an increase
for an anticipated tax refund. The $2,304,000 was primarily attributed to a
$1,734,000 valuation allowance adjustment to certain tax assets.
Income (loss) from operations and net loss. As a result of the factors discussed
above, the Company's loss from operations was $2,351,000 for the 39 weeks ended
September 30, 2001 compared to $3,974,000 for the same period in 2000. Exclusive
of non-recurring items, the Company's income from operations was $816,000 for
the 39 weeks ended September 30, 2001 compared to $987,000 for the same period
in 2000. The Company's net loss for the 39 weeks ended September 30, 2001 was
$3,194,000 compared to $6,884,000 in the same period in 2000. Exclusive of
non-recurring items, the Company's net income was $105,000 for the 39 weeks
ended September 30, 2001 compared to a net loss of $427,000 for the same period
in 2000. Non-recurring items for the 39 weeks ended 2001 included $1,582,000
related to the write-down of impaired assets, $1,333,000 related to expenses on
restaurant closures, severance pay of $252,000, a book loss of $283,000 from the
sale of the Delray Beach, Florida unit and an increase to the deferred tax asset
of $151,000 (adjusting income tax refunds receivable to $760,000). Non-recurring
items for the 39 weeks ended 2000 included $3,978,000 related to the write-down
of impaired assets, a $1,734,000 increase in the valuation allowance related to
the deferred tax asset, $983,000 in property related expenses on restaurant
closures and a $238,000 pre-tax gain on the disposition of a leasehold interest
in a Midwest restaurant.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company's current liabilities of $11,003,000
exceeded its current assets of $2,199,000, resulting in a working capital
deficiency of $8,804,000. A decrease in revenues resulting from fewer
restaurants in operation and a decrease in comparable store sales, coupled by
increased operating costs and costs incurred to discontinue operations in 15
restaurants during the first and second quarters of 2001, negatively affected
cash. 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 marginally
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.
The Company continues negotiations of modified payment terms with many of its
creditors and key vendors as an integral process in its turnaround plan. Through
this plan, it is contemplated that a substantial portion of these liabilities
will be deferred until a future date. In addition, in October 2001, the Company
converted $669,000 of trade payables into shares of Shells' Preferred Stock
under this plan. The Company anticipates receipt of certain federal and state
tax refunds totaling $760,000 during the fourth quarter of 2001. The Company is
actively engaged in discussions concerning additional outside financing required
during the fourth quarter of 2001. There can be no assurance that any such
financing, or restructuring of indebtedness, will be available to the Company on
terms acceptable to the Company, or at all. The failure of the Company to
successfully negotiate such debt restructuring and obtain the necessary funding
may impact on the Company's ability to continue its operations. In addition, it
is anticipated that to the extent the Company is successful in its efforts to
obtain additional outside financing, the Company's existing shareholders will
experience significant dilution.
Cash provided by operating activities for the 39 weeks ended 2001 was $444,000
as compared to 1,823,000 for the same period in 2000. The net decrease of
$1,379,000 primarily was attributable to less favorable store operating results
in addition to costs incurred to close the Midwest restaurants.
11
Cash provided by investing activities increased $1,842,000 for the 39 weeks
ended September 30, 2001 compared to the same period in 2000, due to an increase
in net proceeds from the sale of assets of $1,254,000 mostly related to the sale
of real estate in the Midwest and Florida and a reduction in capital
expenditures of $588,000.
Cash used in financing activities increased $1,417,000 for the 39 weeks ended
September 30, 2001 compared to the same period last year. The increase was
primarily due to debt repayments associated with the sale of restaurant
properties then owned by the Company in the Midwest and Florida.
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 $1,881,000 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. There is also one loan that is based on 225 basis points over the
30 day London Interbank Offered Rate, which was 2.64% on September 30, 2001.
12
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities and Use of Proceeds
On October 24, 2001, the Company issued 66,862 shares of Series A 5%
Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred
Stock"), pursuant to an exemption from registration under Section 4(6) of the
Securities Act of 1933, as amended, in consideration for the cancellation of
$668,620 of trade indebtedness by trade creditors of the Company. The shares
were issued exclusively to "accredited investors" as defined in Rule 501(a)
under the Securities Act. Shells did not receive any cash proceeds in connection
with the issuance of the Series A Preferred Stock. The shares were offered
exclusively by the Company through its Executive Officers, Directors and regular
employees. No commissions or other compensation were paid, directly or
indirectly, to any such persons for their efforts in offering the Series A
Preferred Stock. The Company did not engage any underwriter or broker/dealer to
sell shares in the offering.
Each share of Series A Preferred Stock is convertible by the holder, at
any time commencing October 24, 2002, unless previously redeemed by Shells, into
five shares of the Company's common stock, par value $0.01 per share. The Series
A Preferred Stock has a liquidation preference equal to $10.00, plus any
declared but unpaid dividends. Dividends on the Series A Preferred Stock,
payable in cash at the rate of 5% of the Liquidation Value ($10.00) per annum,
are payable annually, when, as and if declared by the Board of Directors of the
Company out of funds legally available for the payment of dividends. Dividends
on the Series A Preferred Stock are not cumulative.
Item 3 - Defaults Upon Senior Securities
The Company has existing indebtedness with Manufacturers Bank of Florida,
consisting of three notes with a total principal balance, as of September 30,
2001 of $1,571,000. 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 December 12, 2001. The Company expects to reduce the
outstanding indebtedness owed to the bank with the proceeds from any sale of the
financed property.
Item 4 - Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on October 23, 2001,
the stockholders voted (i) to amend the Company's 1995 Employee Stock Option
Plan to increase the number of shares that can be issued thereunder from 540,000
to 840,000 shares, and (ii) to amend the Non-employee Director Stock Option Plan
to increase the number of shares that can be issued thereunder from 100,000 to
150,000. The adoption of the amendment to the 1995 Employee Stock Option Plan
was approved by the vote of 1,854,935 shares for, 386,308 shares against, 9,900
shares abstaining and 1,321,099 shares representing broker non-votes. The
adoption of the amendment to the Non-employee Director Stock Option Plan was
approved by the vote of 1,865,130 shares for, 376,728 shares against, 9,285
shares abstaining and 1,321,099 shares representing broker non-votes.
In addition, at the Annual Meeting of Stockholders held on October 23,
2001, the following directors were nominated and elected by the votes indicated:
13
Philip R. Chapman: 3,304,373 For, 267,869 Against or Withheld, 0 Abstaining
William E. Hattaway: 3,275,719 For, 296,523 Against or Withheld, 0 Abstaining
David W. Head: 3,306,397 For, 265,845 Against or Withheld, 0 Abstaining
Christopher D. Illick: 3,306,373 For, 265,869 Against or Withheld, 0 Abstaining
Richard A. Mandell: 3,306,397 For, 265,845 Against or Withheld, 0 Abstaining
Jay S. Nickse: 3,306,373 For, 265,869 Against or Withheld, 0 Abstaining
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
Exhibit 99.1 Certificate of Designation of Series A
5% Convertible Preferred Stock of
Shells Seafood Restaurants, Inc.
Exhibit 99.2 200,000 Shares Series A 5%
Convertible Preferred Stock
Subscription Agreement.
Exhibit 99.3 200,000 Shares Series A 5%
Convertible Preferred Stock
Supplement to Subscription Agreement.
Reports on Form 8-K
None
14
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 November 14, 2001 David W. Head
President and Chief Executive Officer
_________________________ /s/ Warren R. Nelson
----------------------------------------------------
Date November 14, 2001 Warren R. Nelson
Executive Vice President and Chief Financial Officer
15