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 27, 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.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0427966
- ------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (IRS) EMPLOYER IDENTIFICATION NUMBER
INCORPORATION OR ORGANIZATION)
16313 NORTH DALE MABRY HIGHWAY, SUITE 100, TAMPA, FL 33618
----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(813) 961-0944
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
CLASS OUTSTANDING AT NOVEMBER 9, 1998
----- -------------------------------
COMMON STOCK, $.01 PAR VALUE 4,453,915
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 27, 1998
(UNAUDITED) AND DECEMBER 28, 1997 3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR
THE 13 AND 39 WEEKS ENDED SEPTEMBER 27, 1998
AND SEPTEMBER 28, 1997 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR
THE 39 WEEKS ENDED SEPTEMBER 27, 1998
AND SEPTEMBER 28, 1997 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) 6 -7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-11
PART II - OTHER INFORMATION 12
SIGNATURES 13
2
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<TABLE>
<CAPTION>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 27, 1998 DECEMBER 28, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Cash $ 3,373,322 $ 5,314,771
Inventories 865,243 861,247
Other current assets 2,038,200 1,663,867
Receivables from related parties 117,848 139,948
----------- -----------
Total current assets 6,394,613 7,979,833
Property and equipment, net 21,701,853 14,306,138
Prepaid rent 641,937 324,321
Other assets 560,855 450,155
Goodwill 3,350,740 3,505,387
----------- -----------
TOTAL ASSETS $32,649,998 $26,565,834
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,333,319 $ 3,805,633
Accrued expenses 3,183,795 2,881,404
Sales tax payable 341,295 318,223
Income taxes payable 567,403 275,216
Current portion of long-term debt 738,091 215,235
----------- -----------
Total current liabilities 8,163,903 7,495,711
Deferred rent 1,457,459 1,214,143
Long-term debt, less current portion 4,721,190 1,449,092
----------- -----------
Total liabilities 14,342,552 10,158,946
Minority partner interest 499,804 514,047
Shells, Inc. preferred shares subject to redemption,
$10 par value; authorized 10,000,000 shares -- 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; 4,453,915 and 4,227,062 shares issued and
outstanding, respectively 44,539 42,270
Additional paid-in-capital 14,161,011 12,944,995
Retained earnings 3,602,092 1,533,724
----------- -----------
Total stockholders' equity 17,807,642 14,520,989
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,649,998 $26,565,834
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3
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<TABLE>
<CAPTION>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------------------- --------------------------------------
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997 SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales $19,749,637 $16,501,055 $62,818,597 $49,754,246
Management fees from related parties 94,732 94,753 315,749 310,007
----------- ----------- ----------- -----------
19,844,369 16,595,808 63,134,346 50,064,253
----------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of restaurant sales 7,128,642 5,956,085 21,711,268 17,679,831
Labor and other related expenses 5,753,099 4,492,442 17,507,921 13,183,254
Other restaurant operating expenses 4,283,983 3,378,830 12,348,593 9,813,136
General and administrative expenses 1,647,222 1,138,249 4,642,972 3,564,127
Depreciation 604,422 421,469 1,687,538 1,076,652
Amortization 476,770 513,398 1,475,343 1,288,462
----------- ----------- ----------- -----------
19,894,138 15,900,473 59,373,635 46,605,462
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (49,769) 695,335 3,760,711 3,458,791
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 51,066 100,473 192,235 184,487
Interest expense (139,615) (89,463) (401,637) (268,211)
Other, net 15,123 (2,004) (2,493) (25,837)
----------- ----------- ----------- -----------
(73,426) 9,006 (211,895) (109,561)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES (123,195) 704,341 3,548,816 3,349,230
ELIMINATION OF MINORITY PARTNER INTEREST (30,594) (36,146) (144,804) (143,951)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE BENEFIT
(PROVISION) FOR INCOME TAXES (153,789) 668,195 3,404,012 3,205,279
BENEFIT (PROVISION) FOR INCOME TAXES 55,000 (227,000) (1,225,000) (1,090,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) (98,789) 441,195 2,179,012 2,115,279
PREFERRED SHARES ACCRETION - (18,500) (110,644) (55,500)
----------- ----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ (98,789) $ 422,695 $ 2,068,368 $ 2,059,779
=========== =========== =========== ===========
BASIC NET INCOME (LOSS) PER SHARE
OF COMMON STOCK $ (0.02) $ 0.10 $ 0.47 $ 0.58
=========== =========== =========== ===========
WEIGHTED COMMON SHARES OUTSTANDING 4,453,915 4,065,124 4,362,847 3,563,251
=========== =========== =========== ===========
DILUTED NET INCOME (LOSS) PER SHARE
OF COMMON STOCK $ (0.02) $ 0.08 $ 0.41 $ 0.44
=========== =========== =========== ===========
DILUTED WEIGHTED COMMON SHARES OUTSTANDING 4,453,915 5,083,107 5,052,377 4,630,814
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4
<PAGE>
<TABLE>
<CAPTION>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
39 WEEKS ENDED
-----------------------------------------
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,179,012 $ 2,115,279
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,687,538 1,076,652
Amortization 1,475,343 1,288,462
Minority partner interest (14,243) (12,862)
Changes in assets and liabilities:
Increase in inventories (3,996) (107,355)
Decrease (increase) in receivables from
related parties 22,100 (44,662)
Increase in other assets (1,805,729) (2,115,821)
(Increase) decrease in prepaid rent (317,616) 37,800
(Decrease) increase in accounts payable (472,314) 306,892
Increase in accrued expenses 302,391 301,992
Increase in sales tax payable 23,072 3,460
Increase in income taxes payable 292,187 42,500
Increase in deferred rent 243,316 226,849
----------- -----------
Total adjustments 1,432,049 1,003,907
----------- -----------
Net cash provided by operating activities 3,611,061 3,119,186
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (9,083,253) (4,608,698)
----------- -----------
Net cash used in investing activities (9,083,253) (4,608,698)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from debt financing 4,203,545 576,050
Repayment of debt (408,591) (1,261,632)
Redemption of preferred shares (1,482,496) (370,624)
Proceeds from the issuance of common stock 1,218,285 5,469,673
----------- -----------
Net cash provided by financing activities 3,530,743 4,413,467
----------- -----------
Net (decrease) increase in cash (1,941,449) 2,923,955
CASH AT BEGINNING OF PERIOD 5,314,771 3,033,851
----------- -----------
CASH AT END OF PERIOD $ 3,373,322 $ 5,957,806
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 424,128 $ 329,049
Cash paid for income taxes $ 932,813 $ 1,047,500
</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. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 27, 1998 DECEMBER 28, 1997
------------------ -----------------
Equipment $ 7,915,265 $ 6,312,696
Leasehold improvements 8,548,401 6,438,300
Furniture and fixtures 4,318,503 2,994,259
Land and buildings 2,859,994 1,478,512
Signage 891,135 752,014
Construction in progress 3,004,798 479,062
----------- -----------
27,538,096 18,454,843
Less: accumulated depreciation
and amortization (5,836,243) (4,148,705)
----------- -----------
$21,701,853 $14,306,138
=========== ===========
3. 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, net of expenses,
of $1,215,000. In accordance with contractual obligations, the proceeds of these
warrant exercises were used by the Company to repurchase all the outstanding
Shells, Inc. Preferred Shares.
6
<PAGE>
4. 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
No. 128, "Earnings Per Share":
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997 SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (98,789) $ 441,195 $2,179,012 $2,115,279
Preferred share accretion - (18,500) (110,644) (55,500)
---------- ---------- ---------- ----------
Net income (loss) applicable to common stock $ (98,789) $ 422,695 $2,068,368 $2,059,779
========== ========== ========== ==========
Weighted common shares outstanding 4,453,915 4,065,124 4,362,847 3,563,251
========== ========== ========== ==========
Basic net income (loss) per share of common stock $ (0.02) $ 0.10 $ 0.47 $ 0.58
========== ========== ========== ==========
Effect of dilutive securities:
Warrants - 863,501 575,904 944,330
Stock options - 154,482 113,626 123,233
---------- ---------- ---------- ----------
Diluted weighted common shares outstanding 4,453,915 5,083,107 5,052,377 4,630,814
========== ========== ========== ==========
Diluted net income (loss) per share of common stock $ (0.02) $ 0.08 $ 0.41 $ 0.44
========== ========== ========== ==========
</TABLE>
Diluted net loss per common share for the 13 weeks ended September 27, 1998
excludes 596,000 common stock equivalents which were antidilutive.
5. 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"). In general, SOP 98-5
requires all start-up costs to be expensed as incurred. SOP 98-5 is required to
be adopted for fiscal years beginning after December 15, 1998, however earlier
adoption is permitted. The effect on the Company's consolidated financial
statements upon adoption of SOP 98-5 is not presently determinable due to the
unknown costs associated with restaurants not open as of September 27, 1998.
7
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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.
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------------------- --------------------------------------
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997 SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales 99.5% 99.4% 99.5% 99.4%
Management fees from related parties 0.5% 0.6% 0.5% 0.6%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
COST AND EXPENSES:
Cost of restaurant sales (1) 36.1% 36.1% 34.6% 35.5%
Labor and other related expenses (1) 29.1% 27.2% 27.9% 26.5%
Other restaurant operating expenses (1) 21.7% 20.5% 19.7% 19.7%
------ ------ ------ ------
Total restaurant costs and expenses (1) 86.9% 83.8% 82.2% 81.7%
------ ------ ------ ------
General and administrative expenses 8.3% 6.9% 7.4% 7.1%
Depreciation 3.0% 2.5% 2.7% 2.2%
Amortization 2.4% 3.1% 2.3% 2.6%
INCOME (LOSS) FROM OPERATIONS -0.3% 4.2% 6.0% 6.9%
------ ------ ------ ------
OTHER INCOME (EXPENSE):
Interest income 0.3% 0.6% 0.3% 0.4%
Interest expense -0.7% -0.5% -0.6% -0.5%
Other expense, net 0.1% 0.0% 0.0% -0.1%
------ ------ ------ ------
-0.3% 0.1% -0.3% -0.2%
------ ------ ------ ------
INCOME (LOSS) BEFORE ELIMINATION
OF MINORITY PARTNER INTEREST
AND INCOME TAXES -0.6% 4.3% 5.7% 6.7%
ELIMINATION OF MINORITY PARTNER INTEREST -0.2% -0.2% -0.2% -0.3%
------ ------ ------ ------
INCOME (LOSS) BEFORE BENEFIT (PROVISION)
FOR INCOME TAXES -0.8% 4.1% 5.5% 6.4%
BENEFIT (PROVISION) FOR INCOME TAXES 0.3% -1.4% -1.9% -2.2%
------ ------ ------ ------
NET INCOME (LOSS) -0.5% 2.7% 3.6% 4.2%
====== ====== ====== ======
<FN>
(1) As a percentage of restaurant sales.
</FN>
</TABLE>
8
<PAGE>
13 WEEKS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
REVENUES. Total revenues for the 13 weeks ended September 27, 1998 were
$19,844,000 as compared to $16,596,000 for the 13 weeks ended September 28,
1997. The $3,248,000 or 19.6% increase in revenues primarily was due to the
opening of three new restaurants during the fourth quarter of 1997 and the
opening of five new restaurants during the first nine months of 1998, partially
offset by a decrease of 2.1% in same store sales for the 13 weeks ended
September 27, 1998 from the comparable period in 1997.
COST OF RESTAURANT SALES. The cost of restaurant sales as a percentage of
restaurant sales was unchanged at 36.1% for the third quarter of 1998 as
compared with the same period in 1997.
LABOR AND OTHER RELATED EXPENSES. Labor and other related expenses, as a
percentage of restaurant sales, increased to 29.1% during the third quarter of
1998 as compared to 27.2% for the third quarter of 1997. This increase was
attributed to higher labor costs in the Midwest restaurants, increased expenses
resulting from a fuller complement of managers in the restaurants, and
management relocation expenses.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses as a
percentage of restaurant sales increased to 21.7% for the third quarter of 1998
as compared with 20.5% for the third quarter of 1997. The increase was primarily
attributed to higher advertising costs during the quarter in selected markets,
and to a lesser extent, higher costs as a percentage of sales due to the
decrease in unit sales volumes.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a
percentage of revenues increased to 8.3% for the third quarter of 1998 as
compared with 6.9% for the third quarter of 1997. The increase primarily is
attributed to higher salaries and related expenses for management and other
personnel awaiting assignment to new restaurants. The opening of several of the
Midwest restaurants were delayed due to unanticipated legal complications
involved in the acquisition of the properties.
DEPRECIATION. Depreciation as a percentage of revenues increased to 3.0% for the
third quarter of 1998 from 2.5% in the third quarter of 1997. The increase was
primarily due to remodeling and upgrading of equipment undertaken over the past
year as well as generally higher build-out costs associated with the new Midwest
restaurants.
INTEREST INCOME AND INTEREST EXPENSE. Interest income declined $50,000 during
the third quarter of 1998 as compared with the same period in 1997 as a result
of lower average cash balances. Interest expense increased during the third
quarter of 1998 as compared with 1997 due to $4,204,000 in new borrowings during
1998.
PROVISION (BENEFIT) FOR INCOME TAXES. An income tax benefit of $55,000 was
recognized for the third quarter of 1998 as compared with income tax expense of
$227,000 for the third quarter of 1997.
INCOME (LOSS) FROM OPERATIONS AND NET INCOME (LOSS). As a result of the factors
discussed above, the Company recognized a loss from operations of $50,000 for
the third quarter of 1998 as compared with income from operations of $695,000
for the third quarter of 1997. The Company incurred a net loss of $99,000 as
compared with net income of $423,000 for the third quarter of 1997.
39 WEEKS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
REVENUES. Total revenues for the 39 weeks ended September 27, 1998 were
$63,134,000 as compared to $50,064,000 for the 39 weeks ended September 28,
1997. The 26.1% increase in revenues primarily was due to the opening of three
new restaurants in the fourth quarter of fiscal 1997 and the opening of five new
restaurants during 1998 and, to a lesser extent, a 1.5% increase in same store
sales and selective menu price increases.
COST OF RESTAURANT SALES. The cost of restaurant sales as a percentage of
restaurant sales decreased to 34.6% for the 39 weeks ended September 27, 1998
from 35.5% for same period in 1997. This decrease was due to favorable food
9
<PAGE>
procurement costs on selective items and to selective menu price increases that
were implemented during the fourth quarter of 1997, partially offset by certain
menu promotions as well as increases in the cost of dairy products.
LABOR AND OTHER RELATED EXPENSES. Labor and other related expenses, as a
percentage of restaurant sales, increased to 27.9% during the 39 weeks ended
September 27, 1998 as compared to 26.5% for the same period in 1997. This
increase was primarily attributed to higher labor costs in the new Midwest
markets, increased expenses resulting from a fuller complement of managers in
the restaurants, and management relocation expenses.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses as a
percentage of restaurant sales were unchanged at 19.7% for the 39 weeks ended
September 27, 1998 as compared with the same period in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a
percentage of revenues increased to 7.4% for the 39 weeks ended September 27,
1998 as compared with 7.1% for the same period in 1997. The increase is
attributed to higher salaries and related expenses for management and other
personnel awaiting assignment to new restaurants as well as increases in
management training and recruiting expenses.
DEPRECIATION. Depreciation as a percentage of revenues increased to 2.7% for the
39 weeks ended September 27, 1998 as compared with 2.2% for the same period in
1997. The increase was primarily due to remodeling and upgrading of equipment
undertaken over the past year coupled with generally higher build-out costs
associated with the new Midwest restaurants.
INTEREST INCOME AND INTEREST EXPENSE. Interest income increased $8,000 during
the 39 weeks ended September 27, 1998 as compared with the same period in 1997
as a result of higher average cash balances during the first six months of 1998
as compared with 1997. Interest expense increased during the 39 weeks ended
September 27, 1998 as compared with the same period in 1997 due to $4,204,000 in
new borrowings during 1998.
PROVISION FOR INCOME TAXES. A provision for income taxes of $1,225,000 was
recognized for the 39 weeks ended September 27, 1998 as compared to $1,090,000
during the same period in 1997. The increase was attributed to higher income
before taxes and as well as 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 8.7% to $3,761,000 for the
39 weeks ended September 27, 1998 from $3,459,000 for the same period in 1997.
The net income increased to $2,179,000 for the 39 weeks ended September 27, 1998
from $2,115,000 for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 27, 1998, the Company's current liabilities of $8,164,000
exceeded its current assets of $6,395,000, resulting in a working capital
deficiency of $1,769,000. 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 39 weeks ended September 27, 1998
was $3,611,000 as compared with $3,119,000 for the same period in 1997. The net
increase of $492,000 was primarily attributed to an increase in depreciation and
amortization, offset by significant increases in other assets and significant
decreases in accounts payable.
The cash used in investing activities was $9,083,000 for the 39 weeks ended
September 27, 1998 as compared with $4,609,000 for the same period in 1997. The
increase of $4,474,000 was due to the Company opening five new restaurants
during 1998 including the purchase of one property at a cost of $1,200,000, as
well as construction in progress costs on four restaurants which opened in
October and November of 1998. The cash used in investing activities during the
same period in 1997 included the cost of opening six new restaurants and one
remodeling.
The cash provided by financing activities was $3,531,000 through September 27,
1998 as compared with $4,413,000 for the same period in 1997. The decrease in
cash provided by financing activities related to the expenditure of
10
<PAGE>
$1,482,000 during fiscal 1998 to retire of all the outstanding preferred shares,
as compared to an expenditure of $371,000 during fiscal 1997 to retire preferred
shares; $3,795,000 in net borrowings in fiscal 1998 as compared with $686,000 in
net repayments in fiscal 1997; and $1,218,000 generated from the exercise of
warrants to purchase common stock during fiscal 1998 as compared with $5,470,000
during the same period in 1997.
YEAR 2000 ISSUE
The Year 2000 compliance software issues will affect the Company as well as most
other companies. Historically, certain computer programs and certain
microprocessors were designed using two digits rather than four to define the
applicable year. As a result, software programs may recognize a date using the
two digits "00" as 1900 rather than the year 2000. Computer programs that do not
recognize the proper date could generate erroneous data or cause systems to
fail. The Company has established a Year 2000 task force to analyze the
Company's Year 2000 compliance. The Year 2000 project covers both the store
level systems as well as the corporate systems. The various phases of the
project include identification of systems, assessment of Year 2000 exposure,
validation, implementation, and contingency planning. Based on its assessment of
its major information technology systems, the Company expects that all necessary
modifications and / or replacements will be completed in a timely manner to
insure that each of its systems are Year 2000 compliant.
The Company's Year 2000 project also considers the readiness of significant
vendors. The Company believes that if certain vendors were not Year 2000
compliant, then alternate arrangements could be made that would alleviate any
material impact on operations. The contingency plans for material systems such
as general ledger, payroll, fixed assets, and cash management systems involve
manual workarounds and extra staffing. The contingency plans for distribution or
vendor related issues entail alternative suppliers and distributors.
The Company has incurred approximately $35,000 of Year 2000 project expenses
through September 27, 1998. Future expenses are not expected to be material as
the Company's current hardware systems and software have been represented by
their vendors to be either Year 2000 compliant or have a Year 2000 compliant
upgrade available at no charge.
Achieving Year 2000 compliance is dependent on many factors, some of which are
not completely within the Company's control. There can be no assurance that the
Company will be able to identify all aspects of its business that are subject to
Year 2000 problems of suppliers that affect the Company's business. There can
also be no assurance that the Company's software vendors are correct in their
assertions that the software is year 2000 compliant, or that the Company's
estimate of the costs of systems preparation for Year 2000 compliance will prove
ultimately to be accurate. Should either the Company's internal systems or
internal systems of one or more significant suppliers fails to achieve Year 2000
compliance, or the Company's estimate of the costs of becoming Year 2000
compliant prove to be materially inaccurate, the Company's business and results
of operations could be adversely affected.
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, local and regional weather conditions and the health of the
economy in Florida and the Midwest as well as the tourism industry. Seasonality
at the Company's restaurants is magnified due to its concentration in Florida
and, in many cases, coastal city locations, 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.
11
<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
Exhibit 10.53 Asset Purchase and sale agreement between Shells Seafood
Restaurants, Inc. and Chi-Chi's
Exhibit 27 Financial Data Schedule
12
<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 November 9, 1998 ------------------------------------------
William E. Hattaway
President and Chief Executive Officer
- ---------------------------- /s/ WARREN R. NELSON
Date November 9, 1998 ------------------------------------------
Warren R. Nelson
Vice President and Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<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> YEAR
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 3,373,322
<SECURITIES> 0
<RECEIVABLES> 117,848
<ALLOWANCES> 0
<INVENTORY> 865,243
<CURRENT-ASSETS> 6,394,613
<PP&E> 27,538,096
<DEPRECIATION> (5,836,243)
<TOTAL-ASSETS> 32,649,998
<CURRENT-LIABILITIES> 8,163,903
<BONDS> 0
0
0
<COMMON> 44,539
<OTHER-SE> 17,763,103
<TOTAL-LIABILITY-AND-EQUITY> 32,649,998
<SALES> 62,818,597
<TOTAL-REVENUES> 63,134,346
<CGS> 21,711,268
<TOTAL-COSTS> 59,373,635
<OTHER-EXPENSES> (147,297)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (209,402)
<INCOME-PRETAX> 3,404,012
<INCOME-TAX> (1,225,000)
<INCOME-CONTINUING> 2,179,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,179,012
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.41
</TABLE>
