<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 March 30, 1997
___ 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 14, 1997
----- ---------------------------
Common stock, $.01 par value 3,310,986
1
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Index
Part I - Financial Statements Page Number
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 30, 1997 and
December 29, 1996 3
Consolidated Statements of Income for the 13 weeks
ended March 30, 1997 and March 31, 1996 4
Consolidated Statements of Cash Flows for the 13 weeks
ended March 30, 1997 and March 31, 1996 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Part II - Other Information 10
Signatures 11
2
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SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 30, 1997 December 29, 1996
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 3,466,632 $ 3,033,851
Inventories 769,130 663,563
Other current assets 1,970,783 1,455,405
Receivables from related parties 163,400 132,048
------------ ------------
Total current assets 6,369,945 5,284,867
Property and equipment, net 9,283,966 8,655,149
Prepaid rent 362,121 374,721
Other assets 393,656 346,707
Goodwill 3,660,034 3,711,583
------------ ------------
TOTAL ASSETS $ 20,069,722 $ 18,373,027
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,517,827 $ 2,486,943
Accrued expenses 2,665,817 2,159,788
Sales tax payable 504,090 282,966
Income taxes payable 579,216 496,216
Current portion of notes payable - stockholders 1,000,000 1,000,000
Current portion of long-term debt 249,991 276,765
------------ ------------
Total current liabilities 7,516,941 6,702,678
Deferred rent 920,116 857,830
Long-term debt, less current portion 1,136,453 1,160,513
------------ ------------
Total liabilities 9,573,510 8,721,021
------------ ------------
Minority partner interest 437,083 511,810
------------ ------------
Shells, Inc. preferred shares subject to redemption,
$10 par value; authorized 10,000,000 shares; 185,312
issued and outstanding 1,686,976 1,668,476
------------ ------------
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; 3,297,536 shares issued and outstanding
as of March 30, 1997 and December 29, 1996 32,975 32,975
Additional paid-in-capital 7,480,548 7,480,548
Retained earnings (deficit) 858,630 (41,803)
------------ ------------
Total stockholders' equity 8,372,153 7,471,720
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,069,722 $ 18,373,027
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
13 WEEKS ENDED MARCH 30, 1997 AND MARCH 31, 1996
<TABLE>
<CAPTION>
March 30, 1997 March 31, 1996
---------------- --------------
<S> <C> <C>
REVENUES:
Restaurant sales $ 16,866,115 $ 10,506,323
Management fees from related parties 109,913 106,694
---------------- --------------
16,976,028 10,613,017
---------------- --------------
COST AND EXPENSES:
Cost of restaurant sales 6,002,643 3,667,244
Labor and other related expenses 4,391,547 2,527,878
Other restaurant operating expenses 3,255,323 2,109,996
General and administrative expenses 1,117,276 812,528
Depreciation and amortization 686,479 292,148
---------------- --------------
15,453,268 9,409,794
---------------- --------------
INCOME FROM OPERATIONS 1,522,760 1,203,223
---------------- --------------
OTHER INCOME (EXPENSE):
Interest income 38,170 -
Interest expense (90,001) (118,138)
Other expense, net (26,913) (148,483)
---------------- --------------
(78,744) (266,621)
---------------- --------------
INCOME BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES 1,444,016 936,602
ELIMINATION OF MINORITY PARTNER INTEREST (52,083) (55,402)
---------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,391,933 881,200
PROVISION FOR INCOME TAXES (473,000) (273,000)
---------------- --------------
NET INCOME 918,933 608,200
PREFERRED SHARES ACCRETION (18,500) (29,250)
---------------- --------------
NET INCOME APPLICABLE TO COMMON STOCK $ 900,433 578,950
================ ==============
NET INCOME PER SHARE OF COMMON STOCK $ 0.21 0.34
================ ==============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 4,317,044 1,686,511
================ ==============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
13 WEEKS ENDED MARCH 30, 1997 AND MARCH 31, 1996
<TABLE>
<CAPTION>
March 30, 1997 March 31, 1996
------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 918,933 $ 608,200
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 686,479 292,148
Minority partner interest (74,727) 41,914
Changes in assets and liabilities:
Increase in inventories (105,567) (7,677)
(Increase) decrease in receivables from related parties (31,352) 35,939
Increase in other assets (875,104) (553,878)
Decrease in prepaid rent 12,600 12,600
Increase (decrease) in accounts payable 30,884 (797,791)
Increase in accrued expenses 506,029 948,284
Decrease in payable to related parties -- (1,572)
Increase in sales tax payable 221,124 110,257
Increase in income taxes payable 83,000 273,000
Increase in deferred rent 62,286 35,480
---------- ----------
Total adjustments 515,652 388,704
---------- ----------
Net cash provided by operating activities 1,434,585 996,904
---------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment (950,970) (225,655)
---------- ----------
Net cash used in investing activities (950,970) (225,655)
---------- ----------
FINANCING ACTIVITIES:
Repayment of debt (50,834) (27,274)
---------- ----------
Net cash used in financing activities (50,834) (27,274)
---------- ----------
Net increase in cash 432,781 743,975
CASH AT BEGINNING OF PERIOD 3,033,851 778,779
---------- ----------
CASH AT END OF PERIOD $3,466,632 $1,520,754
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
<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 Form 10-K
filed with the Securities and Exchange Commission.
2. OTHER CURRENT ASSETS
Other current assets consist of the following:
March 30, 1997 December 29, 1996
-------------- -----------------
Preopening costs $ 947,016 $1,050,898
Prepaid expenses 280,466 259,721
Accounts receivable 743,301 131,400
Other current assets - 13,386
----------- ----------
$ 1,970,783 $1,455,405
=========== ==========
3. 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 additional shares and 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
Lender's Option was exercised simultaneously with the underwriter's
over-allotment option effective May 13, 1996 resulting in 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.
The effect of these transactions was to increase the pro forma weighted average
number of shares outstanding to 4,317,000 and 3,287,000 for the 13 weeks ended
March 30, 1997 and March 31, 1996, 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 was $0.21 and $0.18 for the 13
weeks ended March 30, 1997 and March 31, 1996, respectively.
6
<PAGE>
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, or where indicated, restaurant sales.
<TABLE>
<CAPTION>
13 Weeks Ended
March 30, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
REVENUES:
Restaurant sales 99.4% 99.0%
Management fees from related parties 0.6% 1.0%
----- -----
100.0% 100.0%
----- -----
COST AND EXPENSES:
Cost of restaurant sales (1) 35.6% 34.9%
Labor and other related expenses (1) 26.0% 24.1%
Other restaurant operating expenses (1) 19.3% 20.1%
----- -----
Total restaurant costs and expenses (1) 80.9% 79.1%
----- -----
General and administrative expenses 6.6% 7.7%
Depreciation and amortization 4.0% 2.8%
INCOME FROM OPERATIONS 9.0% 11.3%
----- -----
OTHER INCOME (EXPENSE):
Interest income 0.2% 0.0%
Interest expense -0.5% -1.1%
Other expense, net -0.2% -1.4%
----- -----
-0.5% -2.5%
----- -----
INCOME BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES 8.5% 8.8%
ELIMINATION OF MINORITY PARTNER INTEREST -0.3% -0.5%
----- -----
INCOME BEFORE PROVISION FOR INCOME TAXES 8.2% 8.3%
PROVISION FOR INCOME TAXES -2.8% -2.6%
===== =====
NET INCOME 5.4% 5.7%
===== =====
(1) As a percentage of restaurant sales.
</TABLE>
7
<PAGE>
13 weeks ended March 30, 1997 and March 31, 1996
Revenues. Total revenues for the13 weeks ended March 30, 1997 were $16,976,000
as compared to $10,613,000 for the 13 weeks ended March 31, 1996. The increase
in revenues was due to the opening of ten new restaurants during 1996 subsequent
to the first quarter of 1996, one new restaurant opening in the first quarter of
1997, and a 4.5% increase in same store sales during the 13 weeks ended March
30, 1997 over the comparable period in 1996. The increase in same store sales
was primarily attributable to an increase in the number of customers served,
resulting from expanded advertising in certain markets due to efficiencies
realized through new restaurant openings, and from the 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 increased to 35.6% for the first quarter of 1997 from 34.9% for
the first quarter of 1996. This increase was attributed to commodity cost
increases on food purchases, primarily shrimp, versus the comparable period
in1996. The availability of certain types of seafood fluctuates from time to
time, resulting in corresponding fluctuations in prices. While the Company
benefited from a favorable fluctuation in prices during the first and second
quarters of 1996, the Company has not experienced such comparable low prices
since that time. 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, increased to 26.0% during the first quarter of
1997 as compared to 24.1% for the first quarter of 1996. This increase was
primarily attributable to initial higher hourly labor costs incurred mostly in
January, 1997 associated with the opening of six new restaurants in late
December, 1996. The Company expects to incur higher hourly labor costs as it
expands into the Midwest markets.
Other restaurant operating expenses. The other restaurant operating expenses as
a percentage of sales improved to 19.3% for the first quarter of 1997 as
compared with 20.1% for the first quarter of 1996. The improvement was
attributed to efficiencies realized through higher sales volumes as well as
through lower occupancy costs related to two restaurants that were purchased and
opened subsequent to March 31, 1996.
General and administrative expenses. The general and administrative expenses
decreased to 6.6% for the first quarter of 1997 as compared with 7.7% for the
first quarter of 1996. The improvement is due to efficiencies gained as general
and administrative expenses increased at a lower rate than revenues.
Depreciation and amortization. Depreciation and amortization increased to 4.0%
for the first quarter of 1997 from 2.8% in the first quarter of 1996. The
increase was primarily due to pre-opening amortization of 1.8% during the first
quarter of 1997 as compared to 0.8% during the first quarter of 1996
attributable to the increase in the number of store openings.
Interest expense, net. The decrease in net interest expense to $52,000 in the
first quarter of 1997 as compared to $118,000 in the first quarter of 1996
resulted from lower average outstanding balances of debt in 1997. The Company
repaid indebtedness from the proceeds of the public offering in the second
quarter of 1996 and converted $750,000 of indebtedness into common stock and
warrants concurrently with the public offering.
8
<PAGE>
Other expenses. The other expenses decreased to $27,000 for the first quarter of
1997 as compared with $148,000 for the first quarter of 1996. The decrease was
primarily attributable to the non-recurring compensatory expense related to
stock warrants issued during the first quarter of 1996.
Provision for income taxes. A provision for income taxes of $473,000 was
recognized for the first quarter of 1997 as compared to $273,000 during the same
quarter in 1996. The increase in the provision for income taxes was attributed
to higher income before taxes as well as to an increase in the effective tax
rate being utilized by the Company to 34% in Fiscal 1997 from 31% in Fiscal
1996. The effective tax rates are based on federal statutory rates and state
income tax rates coupled with the timing of the recognition of tax assets and
the utilization of the available net operating loss carryforward. This tax
provision is based on current tax law and is subject to change.
Income from operations and net income. The income from operations increased
$320,000 or 27% to $1,523,000 for the first quarter of 1997 from $1,203,000 for
the first quarter of 1996. The net income increased 51% to $919,000 for the
first quarter of 1997 from $608,000 for the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 30, 1997, the Company's current liabilities of $7,517,000 exceeded
its current assets of $6,370,000, resulting in a working capital deficiency of
$1,147,000. As is customary in the restaurant industry, the Company has
generally operated with negative working capital as a result of the investing of
current assets into non-current property and equipment as well as the turnover
of restaurant inventory relative to more favorable vendor terms in accounts
payable.
Cash provided by operating activities for the first quarter of 1997 was
$1,435,000 as compared with $997,000 for the first quarter of 1996. The increase
of $438,000 is primarily attributable to improved operating results for the
first quarter of 1997 over the comparable period in 1996, as reflected in the
$311,000 increase in quarterly net income.
The cash used in investing activities was $951,000 for the first quarter of 1997
as compared with $226,000 for the first quarter of 1996. The increase of
$725,000 was attributable to the Company engaging in one remodeling, one
restaurant opening during the first quarter of 1997 and construction costs
incurred on another restaurant which opened subsequent to the first quarter of
1997 as compared to only one remodeling during the first quarter of 1996.
SEASONALITY
The restaurant industry in general is seasonal depending on the location and
type of food served. The Company has experienced fluctuations in its quarter to
quarter operating results due to various factors, including the seasonal nature
of its business, weather conditions in Florida and the health of Florida's
economy in general and the tourism industry in particular. The Company's
restaurant sales increase from January through April and June through August,
the peaks of the Florida tourism season and generally decrease from September
through mid December. Seasonality at the Company's restaurants is magnified due
to their present exclusivity to Florida and, in many cases, locations are in
coastal cities, where sales are significantly dependent on tourism and its
seasonality patterns. Because of the seasonality of the Company's business and
the impact of new restaurant openings, 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.
9
<PAGE>
Part II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
During the 13 week period ended March 30, 1997, there were no matters
submitted to a vote of the stockholders.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
None
10
<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)
May 14, 1997 /s/ William E. Hattaway
- ---------------------------- ------------------------------------------
Date William E. Hattaway
President and Chief Executive Officer
May 14, 1997 /s/ Warren R. Nelson
- ---------------------------- ------------------------------------------
Date Warren R. Nelson
Vice President and Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the consolidated statements of income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 3,466,632
<SECURITIES> 0
<RECEIVABLES> 163,400
<ALLOWANCES> 0
<INVENTORY> 769,130
<CURRENT-ASSETS> 6,369,945
<PP&E> 12,151,473
<DEPRECIATION> (2,867,507)
<TOTAL-ASSETS> 20,069,722
<CURRENT-LIABILITIES> 7,516,941
<BONDS> 0
0
1,686,976
<COMMON> 32,975
<OTHER-SE> 8,339,178
<TOTAL-LIABILITY-AND-EQUITY> 20,069,722
<SALES> 16,866,115
<TOTAL-REVENUES> 16,976,028
<CGS> 6,002,643
<TOTAL-COSTS> 15,453,268
<OTHER-EXPENSES> (78,996)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (51,831)
<INCOME-PRETAX> 1,391,933
<INCOME-TAX> (473,000)
<INCOME-CONTINUING> 918,933
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 918,933
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
