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 29, 1998
[ ] 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0427966
------------------------------ --------------------
(State or other jurisdiction of (IRS) Employer
incorporation or organization) Identification Number
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 6, 1998
----- --------------------------
Common stock, $.01 par value 4,256,353
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
Part I - Financial Information Page Number
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 29, 1998 (Unaudited)
and December 28, 1997 3
Consolidated Statements of Income (Unaudited) for the 13 weeks
ended March 29, 1998 and March 30, 1997 4
Consolidated Statements of Cash Flows (Unaudited) for the 13
weeks ended March 29, 1998 and March 30, 1997 5
Notes to Consolidated Financial Statements - (Unaudited) 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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<TABLE>
<CAPTION>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1998 DECEMBER 28, 1997
-------------- -----------------
<S> <C> <C>
ASSETS
Cash $ 4,901,345 $ 5,314,771
Inventories 874,249 861,247
Other current assets 1,896,949 1,663,867
Receivables from related parties 51,018 139,948
----------- -----------
Total current assets 7,723,561 7,979,833
Property and equipment, net 17,536,453 14,306,138
Prepaid rent 311,721 324,321
Other assets 567,190 450,155
Goodwill 3,453,838 3,505,387
----------- -----------
TOTAL ASSETS $29,592,763 $26,565,834
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,647,834 $ 3,805,633
Accrued expenses 3,113,846 2,881,404
Sales tax payable 486,707 318,223
Income taxes payable 906,136 275,216
Current portion of long-term debt 357,531 215,235
----------- -----------
Total current liabilities 7,512,054 7,495,711
Deferred rent 1,262,730 1,214,143
Long-term debt, less current portion 3,066,972 1,449,092
----------- -----------
Total liabilities 11,841,756 10,158,946
Minority partner interest 449,231 514,047
Shells, Inc. preferred shares subject to redemption,
$10 par value; authorized 10,000,000 shares; 148,250
issued and outstanding 1,386,352 1,371,852
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; 4,256,353 and 4,227,062 shares issued and
outstanding, respectively 42,563 42,270
Additional paid-in-capital 13,105,803 12,944,995
Retained earnings 2,767,058 1,533,724
----------- -----------
Total stockholders' equity 15,915,424 14,520,989
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,592,763 $26,565,834
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3
<PAGE>
<TABLE>
<CAPTION>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
13 WEEKS ENDED
MARCH 29, 1998 MARCH 30, 1997
-------------- --------------
<S> <C> <C>
REVENUES:
Restaurant sales $ 21,365,725 $ 16,866,115
Management fees from related parties 112,450 109,913
------------ ------------
21,478,175 16,976,028
------------ ------------
COST AND EXPENSES:
Cost of restaurant sales 7,124,584 6,002,643
Labor and other related expenses 5,860,608 4,391,547
Other restaurant operating expenses 3,961,218 3,255,323
General and administrative expenses 1,527,395 1,117,276
Depreciation 510,363 322,153
Amortization 444,926 364,326
------------ ------------
19,429,094 15,453,268
------------ ------------
INCOME FROM OPERATIONS 2,049,081 1,522,760
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 70,144 38,170
Interest expense (101,736) (90,001)
Other expense, net (9,424) (26,913)
------------ ------------
(41,016) (78,744)
------------ ------------
INCOME BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES 2,008,065 1,444,016
ELIMINATION OF MINORITY PARTNER INTEREST (59,231) (52,083)
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,948,834 1,391,933
PROVISION FOR INCOME TAXES (701,000) (473,000)
------------ ------------
NET INCOME 1,247,834 918,933
PREFERRED SHARES ACCRETION (14,500) (18,500)
------------ ------------
NET INCOME APPLICABLE TO COMMON STOCK $ 1,233,334 $ 900,433
============ ============
NET INCOME PER SHARE OF COMMON STOCK $ 0.29 $ 0.27
============ ============
WEIGHTED COMMON SHARES OUTSTANDING 4,229,480 3,297,536
============ ============
DILUTED NET INCOME PER SHARE OF COMMON STOCK $ 0.25 $ 0.21
============ ============
DILUTED WEIGHTED COMMON SHARES OUTSTANDING 4,943,225 4,317,044
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4
<PAGE>
<TABLE>
<CAPTION>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
13 WEEKS ENDED
MARCH 29, 1998 MARCH 30, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,247,834 $ 918,933
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 510,363 322,153
Amortization 444,926 364,326
Minority partner interest (64,816) (74,727)
Changes in assets and liabilities:
Increase in inventories (13,002) (105,567)
Decrease (increase) in receivables from related parties 88,930 (31,352)
Increase in other assets (743,494) (875,104)
Decrease in prepaid rent 12,600 12,600
(Decrease) increase in accounts payable (1,157,799) 30,884
Increase in accrued expenses 232,442 506,029
Increase in sales tax payable 168,484 221,124
Increase in income taxes payable 630,920 83,000
Increase in deferred rent 48,587 62,286
----------- -----------
Total adjustments 158,141 515,652
----------- -----------
Net cash provided by operating activities 1,405,975 1,434,585
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (3,740,678) (950,970)
----------- -----------
Net cash used in investing activities (3,740,678) (950,970)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from debt financing 1,850,000 --
Repayment of debt (89,824) (50,834)
Proceeds from exercise of warrants to purchase common stock 161,101 --
----------- -----------
Net cash provided by (used in) financing activities 1,921,277 (50,834)
----------- -----------
Net (decrease) increase in cash (413,426) 432,781
CASH AT BEGINNING OF PERIOD 5,314,771 3,033,851
----------- -----------
CASH AT END OF PERIOD $ 4,901,345 $ 3,466,632
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 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 28,
1997 filed with the Securities and Exchange Commission.
2. STOCKHOLDERS' EQUITY
The Company had issued warrants to purchase 230,000 shares of common stock of
the Company which expired April 22, 1998. Warrants to purchase 229,000 shares
were exercised through the expiration date generating proceeds of $1,259,000. In
accordance with contractual obligations, the proceeds of these warrant exercises
will be used by the Company to repurchase outstanding shares of the Shells, Inc,
preferred stock.
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",
<TABLE>
<CAPTION>
(UNAUDITED)
13 WEEKS ENDED
MARCH 29, 1998 MARCH 30, 1997
-------------- --------------
<S> <C> <C>
Net income $ 1,247,834 $ 918,933
Preferred share accretion (14,500) (18,500)
----------- -----------
Net income applicable to common stock $ 1,233,334 $ 900,433
=========== ===========
Weighted common shares outstanding 4,229,480 3,297,536
Net income per share of common stock $ 0.29 $ 0.27
=========== ===========
Effect of dilutive securities:
Warrants 606,560 912,478
Stock options 107,185 107,030
Diluted weighted common shares outstanding 4,943,225 4,317,044
Diluted net income per share of common stock $ 0.25 $ 0.21
----------- -----------
</TABLE>
4. NEW ACCOUNTING PRONOUNCEMENT
In April, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires
such costs to be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. The effect on the Company's consolidated
financial statements upon adoption of SOP 98-5 is not presently determinable.
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.
13 WEEKS ENDED
MARCH 29, 1998 MARCH 30, 1997
-------------- --------------
REVENUES:
Restaurant sales 99.5% 99.4%
Management fees from related parties 0.5 0.6
----- -----
100.0% 100.0%
===== =====
COST AND EXPENSES:
Cost of restaurant sales (1) 33.3% 35.6%
Labor and other related expenses (1) 27.4 26.0
Other restaurant operating expenses (1) 18.5 19.3
----- -----
Total restaurant costs and expenses (1) 79.2 80.9
----- -----
General and administrative expenses 7.1 6.6
Depreciation 2.4 1.9
Amortization 2.1 2.1
INCOME FROM OPERATIONS 9.5 9.0
----- -----
OTHER INCOME (EXPENSE):
Interest income 0.3 0.2
Interest expense -0.5 -0.5
Other expense, net 0.0 -0.2
----- -----
-0.2 -0.5
----- -----
INCOME BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES 9.3 8.5
ELIMINATION OF MINORITY PARTNER INTEREST -0.3 -0.3
----- -----
INCOME BEFORE PROVISION FOR INCOME TAXES 9.0 8.2
PROVISION FOR INCOME TAXES -3.2 -2.8
----- -----
NET INCOME 5.8% 5.4%
===== =====
(1) As a percentage of restaurant sales.
7
<PAGE>
13 WEEKS ENDED MARCH 29, 1998 AND MARCH 30, 1997
REVENUES. Total revenues for the 13 weeks ended March 29, 1998 were $21,478,000
as compared to $16,976,000 for the 13 weeks ended March 30, 1997. The increase
in revenues was due to the opening of eight new restaurants in 1997 subsequent
to the first quarter of 1997 and two new restaurant openings in the first
quarter of 1998, partially offset by a 0.3% decline in same store sales. The
same store sales declined 0.3% due to the impact of adverse weather conditions
affecting Florida restaurants and particularly five coastal locations.
COST OF RESTAURANT SALES. The cost of restaurant sales as a percentage of
restaurant sales decreased to 33.3 % for the first quarter of 1998 from 35.6%
for the first quarter of 1997. This decrease was due to favorable food
procurement costs and to selective menu price increases that were implemented
during the fourth quarter of 1997. 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 27.4% during the first quarter of
1998 as compared to 26.0% for the first quarter of 1997. This increase was
primarily attributable to increased management staffing levels and relocation
costs related to new restaurant expansion as well as anticipated higher hourly
labor costs incurred in the locations outside of Florida.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses as a
percentage of sales improved to 18.5% for the first quarter of 1998 as compared
with 19.3% for the first quarter of 1997. The improvement was primarily due to
lower repair and maintenance expenses attributed to the significant number of
newer and remodeled restaurants.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to 7.1% for the first quarter of 1998 as compared with 6.6% for the
first quarter of 1997. The increase is due to costs associated with personnel
selection, recruiting and training, as well as the third and fourth quarter
additions of personnel in construction, procurement and quality controls to
support the Company's anticipated growth.
DEPRECIATION. Depreciation increased to 2.4% for the first quarter of 1998 from
1.9% in the first quarter of 1997. The increase was primarily due to remodeling
and upgrading of equipment undertaken over the past year.
AMORTIZATION EXPENSE. Amortization was unchanged at 2.1% for the first quarter
of 1998 and 1997. The amortization expense could increase during Fiscal 1998 due
to the combination of generally higher pre-opening costs in markets outside of
Florida as well as the American Institute of Certified Public Accountants
Statement of Position 98-5, "Reporting the Costs of Start-up Activities" ("SOP
98-5"). SOP 98-5 requires start-up costs to be expensed as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998; however, earlier
implementation is encouraged and is currently being evaluated by the Company.
PROVISION FOR INCOME TAXES. A provision for income taxes of $701,000 was
recognized for the first quarter of 1998 as compared to $473,000 during the same
quarter in 1997. The increase was primarily attributable to higher income before
taxes and, to a lesser extent , an increase in the effective tax rate being
utilized by the Company to 36% in Fiscal 1998 from 34% in Fiscal 1997.
INCOME FROM OPERATIONS AND NET INCOME. As a result of the factors discussed
above, the Company's income from operations increased $526,000 or 35% to
$2,049,000 for the first quarter of 1998 from $1,523,000 for the first quarter
of 1997. The Company's net income increased 36% to $1,248,000 for the first
quarter of 1998 from $919,000 for the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 29, 1998, the Company's current assets of $7,724,000 exceeded its
current liabilities of $7,512,000, resulting in working capital of $212,000.
Historically, the Company has generally operated with minimal or negative
working capital as a result of the investing of current assets into non-current
property and equipment as well as the turnover of restaurant inventory relative
to more favorable vendor terms in accounts payable.
Cash provided by operating activities for the first quarter of 1998 was
$1,406,000 as compared with $1,435,000 for the first quarter of 1997. The net
decrease of $29,000 was primarily attributable to a decrease in accounts payable
offset by increases in income tax payable, net income and depreciation and
amortization.
8
<PAGE>
The cash used in investing activities was $3,741,000 for the first quarter of
1998 as compared with $951,000 for the first quarter of 1997. The increase of
$2,790,000 was due to the Company opening two new restaurants during the first
quarter and also incurring costs on a third restaurant which opened in April,
1998. The restaurant which opened in April, 1998 was a purchased site at a cost
of $1,200,000. The cash used in investing activities during the first quarter of
1997 included the cost of opening one new restaurant as well as the construction
costs incurred on another restaurant which opened subsequent to the first
quarter of 1997.
The cash provided by financing activities was $1,921,000 for the first quarter
of 1998 as compared with cash used in financing activities of $51,000 for the
first quarter of 1997. The increase in cash provided of $1,972,000 was primarily
due to borrowings to support restaurant openings, including, $1,000,000 related
to the mortgage financing of the restaurant which opened in April, 1998 . The
Company also received $161,000 in proceeds from the exercise of warrants to
purchase shares of its common stock through March 29, 1998. Subsequent to March
29, 1998, the Company received approximately $1,100,000 in additional proceeds
from the exercise of warrants to purchase common stock.
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. Seasonality at the
Company's restaurants is magnified due to its present concentration in Florida
and, in many cases, locations are in coastal cities, where sales are
significantly dependent on tourism, weather and 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 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
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)
/s/ WILLIAM E. HATTAWAY
- ---------------------------- -----------------------------------
Date May 11, 1998 William E. Hattaway
President and Chief Executive Officer
/s/ WARREN R. NELSON
- ---------------------------- -----------------------------------
Date May 11, 1998 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> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 4,901,345
<SECURITIES> 0
<RECEIVABLES> 51,018
<ALLOWANCES> 0
<INVENTORY> 874,249
<CURRENT-ASSETS> 7,723,561
<PP&E> 22,195,521
<DEPRECIATION> (4,659,068)
<TOTAL-ASSETS> 29,592,763
<CURRENT-LIABILITIES> 7,512,054
<BONDS> 0
0
1,386,352
<COMMON> 42,563
<OTHER-SE> 15,872,861
<TOTAL-LIABILITY-AND-EQUITY> 29,592,763
<SALES> 21,365,725
<TOTAL-REVENUES> 21,478,175
<CGS> 7,124,584
<TOTAL-COSTS> 19,429,094
<OTHER-EXPENSES> (68,655)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (31,592)
<INCOME-PRETAX> 1,948,834
<INCOME-TAX> (701,000)
<INCOME-CONTINUING> 1,247,834
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,247,834
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.25
</TABLE>
