<PAGE>
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 29, 1996
Commission File No. 0-28258
SHELLS SEAFOOD RESTAURANTS, INC.
-----------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-3372414
- ------------------------------- ------------------------------------
(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 13, 1996
----- --------------------------------
Common stock $.01 par value 3,297,536
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Index
Part I - Financial Information Page Number
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 29, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the 13 weeks
and 39 weeks ended September 29, 1996 and October 1, 1995 4
Consolidated Statements of Stockholders' Equity (Deficiency)
for the 39 weeks ended September 29, 1996 and October 1, 1995 5
Consolidated Statements of Cash Flows for the 39 weeks ended
September 29, 1996 and October 1, 1995 6
Notes to Consolidated Financial Statements 7-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Part II - Other Information 14
Signatures 15
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 29, 1996 December 31, 1995
---------------------- ----------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 582,342 $ 776,779
Short-term investment securities 5,005,000 --
Inventories 384,225 397,119
Other current assets 679,567 885,489
Receivables from related parties 120,764 62,994
------------ ------------
Total current assets 6,771,898 2,122,381
Property and equipment, net
5,434,938 3,577,097
Prepaid rent 387,321 425,120
Other assets 599,830 395,587
Goodwill 3,763,132 3,917,779
------------ ------------
TOTAL ASSETS $ 16,957,119 $ 10,437,964
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
CURRENT LIABILITIES:
Accounts payable $ 1,473,743 $ 2,523,173
Accrued expenses 2,358,262 1,803,203
Payable to related parties -- 98,927
Sales tax payable 217,261 229,531
Income taxes payable 467,216 --
Current portion of notes payable - stockholders 4,303 2,108,214
Current portion of long-term debt 209,161 81,499
------------ ------------
Total current liabilities 4,729,946 6,844,547
Deferred rent 801,759 651,134
Notes payable - stockholders, less current portion 1,000,000 1,000,000
Long-term debt, less current portion 827,753 705,816
------------ ------------
Total liabilities 7,359,458 9,201,497
------------ ------------
Minority partner interest 521,183 574,291
------------ ------------
Shells, Inc. preferred shares subject to redemption,
$10 par value; authorized 10,000,000 shares; 185,312
issued and outstanding 1,639,226 1,551,476
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
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; 3,297,536 and 1,462,684 shares issued and outstanding
as of September 29, 1996 and December 31, 1995, respectively 32,975 14,627
Additional paid-in-capital 7,509,798 581,841
Accumulated deficit (105,521) (1,485,768)
------------ ------------
Total stockholders' equity (deficiency) 7,437,252 (889,300)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 16,957,119 $ 10,437,964
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 13 WEEKS AND 39 WEEKS ENDED SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
(Unaudited)
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
September 29, 1996 October 1, 1995 September 29, 1996 October 1, 1995
------------------ --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales $ 9,536,148 $ 6,909,552 $ 30,318,741 $ 21,703,076
Management fees from related parties 94,182 80,266 304,502 268,796
------------ ------------ ------------ ------------
9,630,330 6,989,818 30,623,243 21,971,872
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of restaurant sales 3,436,731 2,730,938 10,720,749 8,724,813
Labor and other related expenses 2,570,044 1,881,693 7,687,648 5,760,337
Other restaurant operating expenses 2,072,032 1,613,868 6,256,629 4,738,637
General and administrative expenses 805,556 604,891 2,518,962 1,682,600
Depreciation and amortization 289,819 233,563 849,553 693,807
------------ ------------ ------------ ------------
9,174,182 7,064,953 28,033,541 21,600,194
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 456,148 (75,135) 2,589,702 371,678
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income (expense), net 1,327 (93,953) (133,492) (286,072)
Other income (expense) 13,285 (4,650) (298,140) 4,286
------------ ------------ ------------ ------------
14,612 (98,603) (431,632) (281,786)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES 470,760 (173,738) 2,158,070 89,892
ELIMINATION OF MINORITY PARTNER INTEREST (46,397) (17,998) (158,823) (73,428)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 424,363 (191,736) 1,999,247 16,464
PROVISION FOR INCOME TAXES (131,000) -- (619,000) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) 293,363 (191,736) 1,380,247 16,464
PREFERRED SHARES ACCRETION (29,250) (41,556) (87,750) (124,668)
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 264,113 $ (233,292) $ 1,292,497 $ (108,204)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ 0.07 $ (0.14) $ 0.42 $ (0.07)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 3,955,102 1,611,198 3,106,822 1,525,637
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
FOR THE 39 WEEKS ENDED SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
(Unaudited)
<TABLE>
<CAPTION>
ADDITIONAL UNAMORTIZED ACCUMULATED
COMMON STOCK PAID-IN DEFERRED DEFICIT TOTAL
Shares Amount CAPITAL COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,462,684 $ 14,627 $ 581,841 $ -- $(1,485,768) $ (889,300)
Shells Inc. preferred shares accretion (87,750) (87,750)
Issuance of common stock and warrants 1,834,852 18,348 7,015,707 7,034,055
Net income 1,380,247 1,380,247
--------- ----------- ----------- ---------- ----------- -----------
Balance at September 29, 1996 3,297,536 $ 32,975 $ 7,509,798 $ -- $ (105,521) $ 7,437,252
========= =========== =========== ========== =========== ===========
Balance at January 1, 1995 1,462,684 $ 14,627 $ 748,070 $ (34,125) $(1,082,326) $ (353,754)
Shells Inc. preferred shares accretion (124,668) (124,668)
Amortization of deferred compensation 34,125 34,125
Net income 16,464 16,464
--------- ----------- ----------- ---------- ----------- -----------
Balance at October 1, 1995 1,462,684 $ 14,627 $ 623,402 $ -- $(1,065,862) $ (427,833)
========= =========== =========== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 39 WEEKS ENDED SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended
September 29, 1996 October 1, 1995
------------------ ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,380,247 $ 16,464
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 849,553 693,807
Amortization of deferred compensation -- 34,125
Minority partner interest 105,892 73,428
Changes in assets and liabilities:
Decrease (increase) in inventories 12,894 (22,454)
Decrease (increase) in receivables from related parties (57,770) 125,239
Increase in other current assets and other assets (216,810) (276,583)
Decrease in prepaid rent 37,799 137,967
Decrease in accounts payable (1,049,430) (307,262)
Increase (decrease) in accrued expenses 555,059 (163,298)
Decrease in payable to related parties (98,927) --
Increase (decrease) in sales tax payable (12,270) 30,138
Increase in income taxes payable 467,216 --
Increase in deferred rent 150,625 138,257
----------- ----------
Total adjustments 743,831 463,364
----------- ----------
Net cash provided by operating activities 2,124,078 479,828
----------- ----------
INVESTING ACTIVITIES:
Purchase of investment securities (6,045,000) --
Sale of investment securities 1,040,000 --
Purchase of property and equipment (2,334,258) (913,860)
----------- ----------
Net cash used in investing activities (7,339,258) (913,860)
----------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 389,340 1,050,000
Repayment of debt (1) (1,493,652) (588,466)
Proceeds from issuance of common stock and warrants 6,125,055 --
----------- ----------
Net cash provided by financing activities 5,020,743 461,534
----------- ----------
Net increase (decrease) in cash (194,437) 27,502
CASH AT BEGINNING OF PERIOD 776,779 472,535
----------- ----------
CASH AT END OF PERIOD $ 582,342 $ 500,037
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 519,881 $ 192,806
Cash paid for income taxes $ 151,784 $ --
</TABLE>
(1) In conjunction with the initial public offering, 200,000 shares of common
stock and 100,000 warrants were issued upon the conversion of $750,000 of
related party debt and $159,000 of minority partner interest.
See notes to consolidated financial statements
6
<PAGE>
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 financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the initial
public offering prospectus dated April 23, 1996 which is part of the Company's
registration statement on Form S-1, as amended (Registration Number 333-1600).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Initial Public Offering - The Company has raised capital through an initial
public offering (the "Offering") effective April 23, 1996. On May 13, 1996, the
Company obtained additional capital as the underwriter's over-allotment option
and the Lender's Option (See Note 6 - PUBLIC OFFERING) were exercised . A
portion of these proceeds were used to partially repay outstanding indebtedness
and to partially finance the Company's proposed expansion, complete the
remodeling of existing restaurants and purchase and install point-of-sale
accounting systems. The Company believes that the proceeds of the Offering
together with projected cash flow from operations, will be sufficient to satisfy
its contemplated cash requirements for at least 12 months from the Offering. The
Company's expansion strategy, however, is significantly dependent upon obtaining
third party financing ("Third Party Financing") and/or achieving projected cash
flow from operations. Third Party Financing may include, but is not limited to,
traditional lending sources such as bank lines of credit, equipment leasing,
and/or restaurant sales/leaseback arrangements that may be available to the
Company. The Company has obtained a $2,000,000 line of credit from a bank for
which to finance new restaurant real estate transactions. The Company is in the
process of securing lease financing from various lending sources for its
restaurant equipment and point-of-sale accounting systems. In the event the
Company's plans change or its assumptions prove to be inaccurate (due to
unanticipated expenses or construction or other delays or otherwise) or, if
Third Party Financing or projected cash flows prove to be insufficient to fund
operations and fully implement the Company's expansion strategy, the Company
could be required to seek additional financing from sources not currently
anticipated.
Going Concern from Fiscal 1995 Financial Statements - The Company's annual
consolidated financial statements as of and for the year ended December 31, 1995
were prepared assuming that the Company would continue as a going concern which
contemplated the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company had incurred net losses for the
period from April 29, 1993 (date of inception) through January 2, 1994 and the
years (52 weeks) ended January 1, 1995 and December 31, 1995. Additionally, the
Company had a deficiency in working capital of $4,722,000 and a total
stockholders' deficiency of $889,000 at December 31, 1995. These factors among
others raised substantial doubt about the Company's ability to continue as a
going concern for a reasonable period of time. The consolidated financial
statements as of and for the year ended December 31, 1995 did not include any
adjustments that might result from the outcome of this uncertainty. During the
39 weeks ended September 29, 1996, the Company successfully completed its
Offering and the underwriter's over-allotment option and the Lender's Option
were exercised as discussed above. In addition, net income for the 39 weeks
ended September 29, 1996 was $1,380,000. As a result, cash and investment
securities have improved to a combined $5,587,000, with working capital of
$2,042,000 and stockholders' equity of $7,437,000 as of September 29, 1996.
<PAGE>
3. INVESTMENT SECURITIES
The Company has invested available funds in variable rate demand notes. The
notes are fully secured by letters of credit from the financial institution
through which they were purchased. The notes can be put to the financial
institution upon seven days notice.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 29, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Equipment $ 3,013,635 $ 2,501,502
Leasehold improvements 2,730,659 2,109,749
Furniture and fixtures 1,136,175 670,855
Land and buildings 386,479 -
Signs 302,285 209,992
Construction in progress 253,271 -
----------- ------------
7,822,504 5,492,098
Accumulated depreciation and amortization (2,387,566) (1,915,001)
----------- -----------
$5,434,938 $3,577,097
========== ==========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
September 29, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Accrued payroll $997,355 $ 760,930
Other 696,779 261,321
Accrued rent 301,489 157,891
Workman's compensation 181,911 120,598
Unearned revenue 112,350 172,302
Accrued interest 68,378 330,161
---------- ----------
$2,358,262 $1,803,203
========== ==========
</TABLE>
6. PUBLIC OFFERING
The Company completed an initial public offering of 1,400,000 shares of common
stock and 700,000 warrants on April 29, 1996 raising net proceeds of $5,090,000.
Concurrent with the Offering, the Company converted $750,000 of outstanding debt
and $159,000 in minority partner interest into 200,000 shares of common stock
and 100,000 warrants at $4.50 per share and $0.09 per warrant, respectively,
which represented the initial public offering price net of underwriter's
discount. In connection with the conversion of debt, the lender was also granted
an option (the "Lender's Option") to purchase an additional 24,752 shares and
12,376 warrants at $4.50 per share and $0.09 per warrant simultaneously with and
in the same proportion to which the underwriter exercises its over-allotment
option. The underwriter exercised its over-allotment option effective May 13,
1996 resulting in the issuance of an additional 210,000 shares of common stock
and 105,000 warrants, plus the issuance of 24,752 shares of common stock and
12,376 warrants through the Lender's Option generated, in the aggregate, an
additional $1,035,000 in net proceeds. Upon completion of the Offering, the
Company repaid a $1,310,000 principal amount loan plus accrued and unpaid
interest thereon of $307,000 to a stockholder.
<PAGE>
The effect of these transactions was to increase the pro forma weighted average
number of shares outstanding to 3,955,000 and 3,960,000 for the 13 and 39 weeks
ending September 29, 1996, respectively, and to increase the pro forma weighted
average number of shares to 3,495,000 and 3,610,000 for the 13 and 39 weeks
ended October 1, 1995, respectively. The pro forma weighted average number of
shares assumes the additional shares were outstanding for the entire period. The
pro forma earnings per share reflecting the increased pro forma weighted average
number of shares outstanding were $0.07 and $0.33 for the 13 and 39 weeks ended
September 29, 1996, respectively, as compared with losses per share of ($0.07)
and ($0.03) for the 13 and 39 weeks ended October 1, 1995, respectively.
7. RECAPITALIZATION
Prior to the effective date of the Offering of the Company's common stock, the
Company was reincorporated under the laws of the State of Delaware. The
Company's common stock, at a par value of $0.001 with 50,000,000 shares
authorized, were converted into shares of the Company's common stock registered
under the laws of the State of Delaware, at a par value of $0.01 with 20,000,000
shares authorized, on a share-for-share basis. At September 29, 1996, 3,297,536
shares of the Company's common stock were issued and outstanding. In addition,
the certificate of incorporation authorizes 2,000,000 shares of preferred stock,
$0.01 par value per share, none of which were issued or outstanding at September
29, 1996.
The accompanying balance sheet gives retroactive effect to the recapitalization.
<PAGE>
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 Operations bear to
total revenues, or where indicated, restaurant sales. The subsequent table sets
forth, for the periods indicated, certain operating data:
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
September 29, 1996 October 1, 1995 September 29, 1996 October 1, 1995
------------------ --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales 99.0% 98.9% 99.0% 98.8%
Management fees from related parties 1.0% 1.1% 1.0% 1.2%
--------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0%
========= ========= ========= =========
Costs and expenses:
Cost of restaurant sales(1) 36.0% 39.5% 35.4% 40.2%
Labor and other related expenses(1) 27.0% 27.2% 25.4% 26.5%
Other restaurant operating expenses (1) 21.7% 23.4% 20.7% 21.9%
--------- --------- --------- ---------
Total restaurant costs and expenses (1) 84.7% 90.1% 81.5% 88.6%
--------- --------- --------- ---------
General and administrative expenses 8.4% 8.7% 8.2% 7.7%
Depreciation and amortization 3.0% 3.3% 2.8% 3.2%
Income from operations 4.7% -1.1% 8.5% 1.7%
Interest income (expense), net 0.0% -1.3% -0.4% -1.3%
Other income (expense) 0.1% -0.1% -1.0% 0.0%
--------- --------- --------- ---------
Income before elimination of minority
partner interest and income taxes 4.9% -2.5% 7.0% 0.4%
Elimination of minority partner interest -0.5% -0.2% -0.5% -0.3%
--------- --------- --------- ---------
Income before provision for income taxes 4.4% -2.7% 6.5% 0.1%
Provision for income taxes -1.4% 0.0% -2.0% 0.0%
--------- --------- --------- ---------
Net income 3.0% -2.7% 4.5% 0.1%
========= ========= ========= =========
Operating Data:
Number of restaurants at end of period:
Company-owned restaurants (2) 17 14
Joint venture restaurant 1 1
Licensed restaurants 4 4
--------- ---------
22 19
========= =========
</TABLE>
(1) As a percentage of restaurant sales
(2) Includes one Company-owned restaurant which until July 14, 1995 was owned
by a joint venture.
<PAGE>
13 WEEKS ENDED SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
Revenues. Total revenues for the 13 weeks ended September 29, 1996 were
$9,630,000 as compared to $6,990,000 for the 13 weeks ended October 1, 1995. The
increase was due to a 18.8% increase in same store sales during the 13 weeks
ended September 29, 1996 over the comparable period in 1995, the opening of two
new restaurants during the fourth quarter of 1995, and the opening of one
restaurant in June 1996. The increase in same store sales was primarily due to
an increase in the number of customers served, resulting from expanded
advertising which began in the fourth quarter of 1995, remodeling of certain of
these restaurants, and, to a lesser extent, from selected menu price
adjustments. To the extent that the Company has already recognized significant
gains from improved operating efficiencies, the Company may not experience same
store sales increases at the same rate in the future.
Cost of restaurant sales. The cost of restaurant sales as a percentage of
restaurant sales improved to 36.0% for the third quarter of 1996 as compared to
39.5% for the third quarter in 1995. This improvement resulted primarily from
commodity cost savings on food purchases, primarily shrimp, which was offset in
part by cost increases in dairy products. The availability of certain types of
seafood fluctuates from time to time, resulting in corresponding fluctuations in
prices. While the Company has benefited from a favorable fluctuation in prices
during the 13 weeks ended September 29, 1996, the Company may not experience the
same prices in the future. The Company has been able to anticipate and react to
fluctuations in food costs through 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.
Labor and other related expenses. Labor and other related expenses as a
percentage of restaurant sales improved to 27.0% during the third quarter of
1996 as compared to 27.2% for the third quarter in 1995. This improvement was
due to efficiencies realized through higher sales volume, offset in part by
increased restaurant management costs attributed to staffing and training for
planned expansion.
Other restaurant operating expenses. Other restaurant operating expenses as a
percentage of restaurant sales improved to 21.7% during the third quarter of
1996 as compared to 23.4% for the third quarter in 1995. This improvement was
due to efficiencies realized through higher sales volume as a portion of the
other restaurant operating expenses are not variable in relation to sales.
General and administrative expenses. General and administrative expenses as a
percentage of revenues decreased to 8.4% during the third quarter of 1996 as
compared to 8.7% for the third quarter in 1995 due to the efficiencies realized
through higher sales volumes.
Interest income (expense). Net interest income was $1,000 for the third quarter
of 1996 as compared with net interest expense of $94,000 for the same period in
1995. This change was attributable to the decrease in outstanding debt and the
investments in short-term securities of funds primarily obtained from the
initial public offering.
Provision for income taxes. A provision for income taxes of $131,000 was
recognized for the third quarter of 1996 based on an effective rate of 31%. The
1996 effective rate is based on federal statutory rates and state income tax
rates coupled with the utilization of the available net operating loss
carryforward. There was no income tax provision for the second quarter in 1995
as the net operating loss carryforward offset taxable income.
Income (loss) from operations and net income (loss). As a result of the increase
in revenues and the decrease in food and labor costs as a percentage of
restaurant sales, the income from operations increased $531,000 to $456,000 for
the third quarter of 1996 as compared to a loss of $75,000 for the third quarter
in 1995. Net income improved $485,000 to $293,000 for the third quarter of 1996
as compared to a loss of $192,000 for the third quarter of 1995. The net income
for the third quarter of 1996 included a provision for income taxes of $131,000.
<PAGE>
39 WEEKS ENDED SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
Revenues. Total revenues for the 39 weeks ended September 29, 1996 were
$30,623,000 as compared to $21,972,000 for the 39 weeks ended October 1, 1995.
The increase was due to the opening of four new restaurants and the relocation
of one existing restaurant during 1995, the opening of one restaurant in June
1996 as well as a 17.1% increase in same store sales during the 39 weeks ended
September 29, 1996 over the comparable period in 1995. The increase in same
store sales was primarily due to an increase in the number of customers served,
resulting from expanded advertising which began in the fourth quarter of 1995,
remodeling of certain of these restaurants, and to a lesser extent, from
selected menu price adjustments. To the extent that the Company has already
recognized significant gains from improved operating efficiencies, the Company
may not experience same store sales increases at the same rate in the future.
Cost of restaurant sales. The cost of restaurant sales as a percentage of
restaurant sales improved to 35.4% through the 39 weeks ended September 29, 1996
as compared to 40.2% for the 39 weeks ended October 1, 1995. This improvement
resulted primarily from commodity cost savings on food purchases, primarily
shrimp, offset slightly by third quarter cost increases in dairy products. The
availability of certain types of seafood fluctuates from time to time, resulting
in corresponding fluctuations in prices. While the Company has benefited from a
favorable fluctuation in prices during the 39 weeks ended September 29, 1996,
the Company may not experience the same prices in the future. The Company has
been able to anticipate and react to fluctuations in food costs through
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.
Labor and other related expenses. Labor and other related expenses as a
percentage of restaurant sales improved to 25.4% for the 39 weeks ended
September 29, 1996 as compared to 26.5% for the 39 weeks ended October 1, 1995.
This net improvement was due to the combination of efficiencies realized through
higher sales volume, the continuing implementation of operations management
procedures and controls, offset in part by slightly higher restaurant management
costs in the third quarter attributed to staffing and training for planned
expansion.
Other restaurant operating expenses. Other restaurant operating expenses as a
percentage of restaurant sales improved to 20.7% during the 39 weeks ended
September 29, 1996 as compared to 21.9% for the same period in 1995. This
improvement was due to efficiencies realized through higher sales volume as a
portion of the other restaurant operating expenses are not variable in relation
to sales.
General and administrative expenses. General and administrative expenses as a
percentage of revenues increased to 8.2% for the 39 weeks ended September 29,
1996 as compared to 7.7% for the 39 weeks ended October 1, 1995 due to the
accrual for management compensation and incentives related to improved operating
performance.
Interest income (expense). Net interest expense was $133,000 for the 39 weeks
ended September 29, 1996 as compared with net interest expense of $286,000 for
the same period in 1995. This change was attributable to the decrease in
outstanding debt and the investments in short-term securities of funds primarily
obtained from the initial public offering.
Other income (expenses). Other expenses were $298,000 for the 39 weeks ended
September 29, 1996 as compared to other income of $4,000 for the 39 weeks ended
October 1, 1995. The increase was primarily attributed to an accrual for a
pending arbitration and non-recurring compensatory expense related to stock
warrants issued during the first half of 1996.
Provision for income taxes. A provision for income taxes of $619,000 was
recognized for 1996 based on an effective rate of 31%. The 1996 effective rate
is based on federal statutory rates and state income tax rates coupled with the
utilization of the available net operating loss carryforward. There was no
income tax provision for the 39 weeks ended October 1, 1995 as the net operating
loss carryforward offset taxable income.
Income from operations and net income. As a result of the increase in revenues
and the decrease in food and labor costs as a percentage of restaurant sales,
the income from operations increased $2,218,000 to $2,590,000 for the 39 weeks
ended September 29, 1996 as compared to $372,000 for the 39 weeks ended October
1,1995. Net income increased $1,364,000 to $1,380,000 for the 39 weeks ended
September 29, 1996 as compared to $16,000 for the same period in 1995. The net
income for the 39 weeks ended September 29, 1996 included a provision for income
taxes of $619,000. <PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 29, 1996, the Company's working capital was $2,042,000 as
compared with a working capital deficiency of $4,722,000 at December 31, 1995.
The working capital deficiency was eliminated upon the Company's initial public
offering completed April 29, 1996. As is customary in the restaurant industry,
the Company historically operated with negative working capital as a result of
pre-opening expenses associated with new restaurants, the turnover of restaurant
inventory relative to more favorable vendor terms in accounts payable, and the
Company refurbishing locations for new restaurants and remodeling existing
restaurants prior to obtaining the long-term financing to pay for such
expenditures.
Cash provided by operating activities through three quarters of 1996 was
$2,124,000 as compared with $480,000 for the same period in 1995. The increase
of $1,644,000 was primarily attributable to improved operating results for the
39 weeks ended September 29, 1996 as reflected in year-to-date net income and
the increase in income taxes payable.
Cash used in investing activities was $7,339,000 for the 39 weeks ended
September 29, 1996 as compared with $914,000 for the same period in 1995. The
increase of $6,425,000 was attributable to the net purchase of $5,005,000 in
investment securities with the proceeds from the Company's initial public
offering of common stock and warrants pending the use of these proceeds, as well
as a $1,420,000 increase in remodeling costs of existing restaurants and the
construction costs of new restaurants. The use of funds for capital improvements
during the 39 weeks ended September 29, 1996 related to the opening of three new
restaurants, the remodeling of three existing restaurants and the installation
of point-of-sale accounting systems into most of the existing restaurants as
compared with 1995 which related to the opening of two new restaurants and the
relocation of one restaurant.
Through its initial public offering, completed on April 29, 1996, the Company
raised net proceeds of $5,090,000. The Company repaid a $1,310,000 principal
amount loan plus accrued and unpaid interest thereon of $307,000 to a
stockholder. Effective May 13, 1996, the underwriter also exercised its
over-allotment option purchasing 210,000 shares of common stock and 105,000
warrants which, coupled with the exercise of the option granted to the lending
stockholder for 24,752 shares of common stock and 12,376 warrants generated, in
the aggregate, an additional $1,035,000 in net proceeds.
Cash provided by financing activities was $5,021,000 for the 39 weeks ended
September 29, 1996 as compared to $462,000 for the same period in 1995. The
source of funds during 1996 included the proceeds from the common stock and
warrant offering less debt repayments totaling $1,494,000 as compared with 1995
which related to $1,050,000 in bridge loans from stockholders, less the
scheduled repayment of existing debt.
SEASONALITY
The restaurant industry in general is seasonal depending on the location and
type of food served. Seasonality at the Company's restaurants is magnified due
to its present exclusivity to Florida and, in many cases, locations which are in
coastal communities, where sales are partially dependent on tourism and its
seasonality patterns. Historically, the largest sales volumes of the Company's
restaurants occur during the first and second quarters of the fiscal year, the
peak tourist seasons in Florida.
<PAGE>
Part II - OTHER INFORMATION
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
<PAGE>
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)
November 13, 1996 /s/ William E. Hattaway
- ------------------------ ------------------------------------------
Date William E. Hattaway
President and Chief Executive Officer
November 13, 1996 /s/ Warren R. Nelson
- ------------------------ ------------------------------------------
Date Warren R. Nelson
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the consolidated statements of operations and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 582,342
<SECURITIES> 5,005,000
<RECEIVABLES> 120,764
<ALLOWANCES> 0
<INVENTORY> 384,225
<CURRENT-ASSETS> 6,771,898
<PP&E> 7,822,504
<DEPRECIATION> (2,387,566)
<TOTAL-ASSETS> 16,957,119
<CURRENT-LIABILITIES> 4,729,946
<BONDS> 0
0
1,639,226
<COMMON> 32,975
<OTHER-SE> 7,404,277
<TOTAL-LIABILITY-AND-EQUITY> 16,957,119
<SALES> 30,318,741
<TOTAL-REVENUES> 30,623,243
<CGS> 10,720,749
<TOTAL-COSTS> 28,033,541
<OTHER-EXPENSES> (298,140)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (133,492)
<INCOME-PRETAX> 1,999,247
<INCOME-TAX> (619,000)
<INCOME-CONTINUING> 1,380,247
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,380,247
<EPS-PRIMARY> $0.42
<EPS-DILUTED> $0.42
</TABLE>
