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 APRIL 1, 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 MAY 16, 2001
----- ---------------------------
COMMON STOCK, $.01 PAR VALUE 4,454,015
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF APRIL 1, 2001 (UNAUDITED)
AND DECEMBER 31, 2000 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS
ENDED APRIL 1, 2001 AND APRIL 2, 2000 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 13
WEEKS ENDED APRIL 1, 2001 AND APRIL 2, 2000 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7-9
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 10
PART II - OTHER INFORMATION 11
SIGNATURES 12
2
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
APRIL 1, 2001 DECEMBER 31, 2000
------------- -----------------
ASSETS
Cash $ 371,373 $ 1,261,937
Inventories 940,848 1,007,520
Other current assets 892,305 495,506
Receivables from related parties 72,616 196,155
Deferred tax asset, net 638,000 638,000
------------ ------------
Total current assets 2,915,142 3,599,118
Property and equipment, net 12,442,912 14,165,527
Prepaid rent 160,522 173,122
Other assets 393,251 435,722
Goodwill 2,835,250 2,886,799
Deferred tax asset, net 85,441 200,223
------------ ------------
TOTAL ASSETS 18,832,518 21,460,511
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,340,212 $ 3,445,541
Accrued expenses 5,826,027 5,312,219
Sales tax payable 520,658 356,039
Current portion of long-term debt 1,969,522 1,985,447
------------ ------------
Total current liabilities 11,656,419 11,099,246
Deferred rent 1,799,965 1,783,994
Long-term debt, less current portion 3,539,491 3,714,316
------------ ------------
Total liabilities 16,995,875 16,597,556
Minority partner interest 442,718 449,011
------------ ------------
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) (12,811,625) (9,791,606)
------------ ------------
Total stockholders' equity 1,393,925 4,413,944
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 18,832,518 21,460,511
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
13 WEEKS ENDED
--------------------------------
APRIL 1, 2001 APRIL 2, 2000
------------- -------------
REVENUES $ 21,654,590 $ 25,850,919
------------ ------------
COST AND EXPENSES:
Cost of revenues 8,143,679 9,261,168
Labor and other related expenses 6,455,549 7,400,011
Other restaurant operating expenses 4,598,244 4,930,126
General and administrative expenses 1,694,154 1,812,437
Depreciation and amortization 536,022 676,549
Provision for impairment of assets 1,582,137 --
Provision for store closings 1,333,271 --
------------ ------------
24,343,056 24,080,291
------------ ------------
INCOME (LOSS) FROM OPERATIONS (2,688,466) 1,770,628
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (186,786) (226,612)
Interest income 1,247 35,497
Other expense, net (65,739) (11,363)
------------ ------------
(251,278) (202,478)
------------ ------------
INCOME (LOSS) BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES (2,939,744) 1,568,150
ELIMINATION OF MINORITY PARTNER INTEREST (78,707) (95,963)
------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (3,018,451) 1,472,187
PROVISION FOR INCOME TAXES -- (486,000)
------------ ------------
NET INCOME (LOSS) $ (3,018,451) $ 986,187
============ ============
BASIC NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ (0.68) $ 0.22
============ ============
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 $ (0.68) $ 0.22
============ ============
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 4,454,015 4,454,083
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
13 WEEKS ENDED
-------------------------------
APRIL 1, 2001 APRIL 2, 2000
------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $(3,018,451) $ 986,187
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Provision for impairment of assets 1,582,137 --
Depreciation and amortization 536,022 676,549
Minority partner interest (6,293) (19,037)
Changes in assets and liabilities:
Decrease (increase) in inventories 66,672 (75,307)
Decrease (increase) in receivables from related parties 123,539 (21,740)
Increase in other assets (359,582) (803,867)
Decrease in prepaid rent 12,600 19,569
Decrease in deferred tax asset 114,782 484,290
(Decrease) increase in accounts payable (105,329) 856,092
Increase in accrued expenses 513,808 256,616
Increase in sales tax payable 164,619 189,455
Increase in deferred rent 15,971 81,002
----------- -----------
Total adjustments 2,658,946 1,643,622
----------- -----------
Net cash (used in) provided by operating activities (359,505) 2,629,809
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (340,310) (244,542)
----------- -----------
Net cash used in investing activities (340,310) (244,542)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from debt financing 227,636 245,432
Repayment of debt (418,385) (260,539)
----------- -----------
Net cash used in financing activities (190,749) (15,107)
----------- -----------
Net (decrease) increase in cash (890,564) 2,370,160
CASH AT BEGINNING OF PERIOD 1,261,937 2,940,919
----------- -----------
CASH AT END OF PERIOD $ 371,373 $ 5,311,079
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 188,786 $ 224,451
Cash (refunds received) paid for income taxes $ (114,781) $ 1,710
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. 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
------------------------------
APRIL 1, 2001 APRIL 2, 2000
------------- -------------
Net income (loss) applicable to common stock $(3,018,451) $ 986,187
=========== ===========
Weighted common shares outstanding 4,454,015 4,454,015
Basic net income (loss) per share of common stock $ (0.68) $ 0.22
Effect of dilutive securities:
Warrants -- --
Stock options -- 68
----------- -----------
Diluted weighted common shares outstanding 4,454,015 4,454,083
----------- -----------
Diluted net income per share of common stock $ (0.68) $ 0.22
=========== ===========
The earnings per share calculations excluded 1,411,425 options and warrants and
1,400,125 options and warrants during the first quarter of 2001 and 2000,
respectively, as the exercise price of the options and warrants were greater
than the average market price of the common shares.
3. 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, will be effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is
not expected to materially affect the Company's consolidated financial
statements.
6
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
------------------------------
APRIL 1, 2001 APRIL 2, 2000
------------- -------------
REVENUES 100.0% 100.0%
COST AND EXPENSES:
Cost of revenues 37.6% 35.8%
Labor and other related expenses 29.8% 28.6%
Other restaurant operating expenses 21.2% 19.1%
----- -----
Total restaurant costs and expenses 88.6% 83.5%
----- -----
General and administrative expenses 7.8% 7.0%
Depreciation and amortization 2.5% 2.6%
Provision for impairment of assets 7.3% 0.0%
Provision for store closings 6.2% 0.0%
----- -----
Income (loss) from operations (12.4)% 6.8%
----- -----
Interest expense, net (0.9)% (0.7)%
Other expense, net (0.3)% 0.0%
Elimination of minority partner interest (0.4)% (0.4)%
----- -----
Income (loss) before provision for taxes (14.0)% 5.7%
Provision for income taxes 0.0% (1.9)%
----- -----
Net income (loss) (14.0)% 3.8%
===== =====
7
13 WEEKS ENDED APRIL 1, 2001 AND APRIL 2, 2000
REVENUES. Total revenues for the first quarter of 2001 were $21,655,000 as
compared to $25,851,000 for the first quarter of 2000. The $4,196,000, or 16.2%
decrease in revenues was due to the closing of four restaurants in the fourth
quarter of 2000 and an additional six restaurants in the first quarter of 2001,
and by a 5.4% 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 increased to
37.6% for the first quarter of 2001 from 35.8% for the first quarter of 2000.
This increase primarily was due to rising shrimp costs coupled with menu changes
and resulting shifts in customer preferences. The Company is continually
anticipating 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 increased to 29.8% during the first quarter of 2001 as
compared to 28.6% for the first quarter of 2000. This increase was primarily
attributable to labor inefficiencies in the Company's Midwest restaurants and
general increases in hourly wage rates. Also included is a one-time nonrecurring
charge 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 21.2% for the first quarter of 2001 as
compared with 19.1% for the first quarter of 2000. The increase primarily was
due to increased advertising costs mostly in the Florida markets and an increase
in utility costs associated with fuel prices.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a
percentage of revenues increased to 7.8% for the first quarter of 2001 as
compared with 7.0% for the first quarter of 2000. The increase was due to
increased salaries and wages and related travel costs resulting from the hiring
of an additional director of operations for the Florida market in fiscal 2000.
Also included is a one-time nonrecurring charge of $150,000 for severance pay
related to reorganization and downsizing of administrative and supervisory
staff.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense as a
percentage of revenues decreased to 2.5% for the first quarter of 2001 from 2.6%
in the first quarter of 2000. The decrease primarily was due to the reduced
basis of property and equipment resulting from the recognition of asset
impairments in the third quarter of 2000.
PROVISION FOR IMPAIRMENT OF ASSETS. The Company recorded a $1,582,000 charge
relating 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 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 subsequently decided to
close most of these under-performing units in which six units were closed during
the first quarter of 2001 and additional six units were closed during the second
quarter of 2001. The Company is presently in negotiations with an unaffiliated
entity to continue to operate the three remaining Midwest units as Shells
restaurants under a licensing arrangement.
PROVISION FOR STORE CLOSINGS. The Company recorded a one-time charge 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 consist
primarily of real estate lease obligations incurred or anticipated to complete
lease terminations or continuing costs while new tenants are located.
8
PROVISION FOR INCOME TAXES. A provision for income taxes of $0 was recognized
for the first quarter of 2001 as compared to $486,000 during the same quarter in
2000. The decrease related to the net loss before the provision for income taxes
incurred for the first quarter 2001.
INCOME (LOSS) FROM OPERATIONS AND NET INCOME (LOSS). As a result of the factors
discussed above, the Company incurred a loss from operations of $2,688,000 for
the first quarter of 2001 as compared to income from operations of $1,771,000
for the first quarter of 2000. The Company incurred a net loss of $3,018,000 for
the first quarter of 2001 compared to net income of $986,000 for the first
quarter of 2000. Exclusive of nonrecurring charges of $3,167,000, first quarter
2001 net income was $149,000.
LIQUIDITY AND CAPITAL RESOURCES
As of April 1, 2001, the Company's current liabilities of $11,656,000 exceeded
its current assets of $2,915,000, resulting in a working capital deficiency of
$8,741,000. 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 close six restaurants during the first quarter of 2001,
negatively affected cash. 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.
The Company continues to be negatively impacted by its Midwest locations. The
Company is implementing its plan to divest itself of the Midwest restaurants.
Such divestiture has had and, in the near term, will continue to have an adverse
affect on the Company's cash position and operating results. The Company
anticipates requiring additional outside financing during the second and third
quarters of 2001. There can be no assurance that any such financing will be
available to the Company on terms acceptable to the Company, or at all. In
addition, in view of the closure of several restaurants and restructuring of the
Company, as well as the present inability to supply adequate security for any
borrowing, the Company's line of credit is not available to be drawn upon.
Cash used by operating activities for the first quarter of 2001 was $360,000 as
compared to cash provided by operating activities of $2,630,000 for the first
quarter of 2000. The net decrease of $2,989,000 primarily was attributable to
less favorable store operating results in first quarter 2001 in addition to
costs incurred to close six restaurants.
The cash used in investing activities increased to $340,000 for the first
quarter of 2001 compared to $245,000 for the first quarter of 2000. The increase
of $95,000 was due to the completion of remodeling of six Florida restaurants
started in fourth quarter.
The cash used in financing activities was $191,000 for the first quarter of 2001
compared to $15,000 in the first quarter of 2000. The increase in cash used in
financing activities primarily was due to debt repayments associated with stores
closed in 2001 and 2000.
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. and the health of Florida's economy
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.
9
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 $3,220,000 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. There is also one loan that is based on 225 basis
points over the 30 day London Interbank Offered Rate.
10
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
None
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
None
11
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 16, 2001 David W. Head
President and Chief Executive Officer
/s/ WARREN R. NELSON
------------------------------------------
Date May 16, 2001 Warren R. Nelson
Executive Vice President and
Chief Financial Officer
12