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 OCTOBER 3, 1999
[ ] 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 16, 1999
----- --------------------------------
COMMON STOCK, $.01 PAR VALUE 4,454,015
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 3, 1999 (UNAUDITED)
AND JANUARY 3, 1999 3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE 13
AND 39 WEEKS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 39
WEEKS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) 6-7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-12
PART II - OTHER INFORMATION 13
SIGNATURES 14
2
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 3, 1999 JANUARY 3, 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 3,250,060 $ 4,723,121
Inventories 942,361 954,066
Other current assets 1,312,142 1,282,641
Receivables from related parties 116,485 35,261
Deferred tax asset, net 94,551 110,551
----------- -----------
Total current assets 5,715,599 7,105,640
Property and equipment, net 22,716,870 22,240,255
Prepaid rent 563,662 622,368
Other assets 384,828 690,571
Goodwill 3,144,544 3,299,191
Deferred tax asset, net 937,449 937,449
----------- -----------
TOTAL ASSETS $33,462,952 $34,895,474
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,378,179 $ 6,318,544
Accrued expenses 3,620,496 3,432,332
Sales tax payable 477,634 489,688
Income taxes payable 23,790 --
Current portion of long-term debt 883,777 912,333
----------- -----------
Total current liabilities 8,383,876 11,152,897
Deferred rent 1,772,631 1,574,092
Long-term debt, less current portion 5,221,723 5,189,481
----------- -----------
Total liabilities 15,378,230 17,916,470
Minority partner interest 515,889 519,257
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; authorized
2,000,000 shares; none issued or outstanding -- --
Common stock, $.01 par value; authorized 20,000,000
shares; 4,454,015 shares issued and outstanding 44,540 44,540
Additional paid-in-capital 14,161,010 14,161,010
Retained earnings 3,363,283 2,254,197
----------- -----------
Total stockholders' equity 17,568,833 16,459,747
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,462,952 $34,895,474
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------------ -----------------------------------
OCTOBER 3, 1999 SEPTEMBER 27, 1998 OCTOBER 3, 1999 SEPTEMBER 27, 1998
--------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
REVENUES: $ 22,809,170 $ 19,844,369 $ 74,822,088 $ 63,134,346
COST AND EXPENSES:
Cost of revenues 8,503,258 7,128,642 26,836,809 21,711,268
Labor and other related expenses 6,644,948 5,753,099 21,464,202 17,507,921
Other restaurant operating expenses 5,085,268 4,283,983 15,909,397 12,348,593
General and administrative expenses 1,816,696 1,647,222 5,427,898 4,642,972
Depreciation and amortization 857,122 655,971 2,437,322 1,842,185
Pre-opening expenses -- -- 214,864 914,807
------------ ------------ ------------ ------------
22,907,292 19,468,917 72,290,492 58,967,746
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (98,122) 375,452 2,531,596 4,166,600
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (221,372) (139,615) (698,892) (401,637)
Interest income 34,327 51,066 109,362 192,235
Other expense, net 20,063 15,123 (33,091) (2,493)
------------ ------------ ------------ ------------
(166,982) (73,426) (622,621) (211,895)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES (265,104) 302,026 1,908,975 3,954,705
ELIMINATION OF MINORITY PARTNER INTEREST (39,024) (30,594) (160,889) (144,804)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE BENEFIT (PROVISION)
FOR INCOME TAXES (304,128) 271,432 1,748,086 3,809,901
BENEFIT (PROVISION) FOR INCOME TAXES 109,000 (98,000) (639,000) (1,372,000)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE THE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE (195,128) 173,432 1,109,086 2,437,901
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAX BENEFIT -- -- -- (692,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) (195,128) 173,432 1,109,086 1,745,901
PREFERRED SHARES ACCRETION -- -- -- (110,644)
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (195,128) $ 173,432 $ 1,109,086 $ 1,635,257
============ ============ ============ ============
BASIC NET INCOME (LOSS) PER SHARE OF COMMON STOCK
BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ (0.04) $ 0.04 $ 0.25 $ 0.53
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- -- -- (0.16)
------------ ------------ ------------ ------------
BASIC NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ (0.04) $ 0.04 $ 0.25 $ 0.37
============ ============ ============ ============
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 4,454,015 4,453,915 4,454,015 4,362,847
============ ============ ============ ============
DILUTED NET INCOME (LOSS) PER SHARE OF COMMON STOCK
BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ (0.04) $ 0.03 $ 0.24 $ 0.46
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- -- -- (0.14)
------------ ------------ ------------ ------------
DILUTED NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ (0.04) $ 0.03 $ 0.24 $ 0.32
============ ============ ============ ============
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 4,454,015 5,049,453 4,552,925 5,052,377
============ ============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
39 WEEKS ENDED
-----------------------------------
OCTOBER 3, 1999 SEPTEMBER 27, 1998
--------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,109,086 $ 1,745,901
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,437,322 1,842,185
Cumulative effect of accounting change -- 692,000
Minority partner interest (3,368) (14,243)
Changes in assets and liabilities:
Decrease (increase) in inventories 11,705 (3,996)
(Increase) decrease in receivables from related parties (81,224) 22,100
Decrease (increase) in other assets 276,242 (501,042)
Decrease (increase) in prepaid rent 58,706 (317,616)
Decrease in deferred tax asset 16,000 --
Decrease in accounts payable (2,940,365) (472,314)
Increase in accrued expenses 188,164 302,391
(Decrease) increase in sales tax payable (12,054) 23,072
Increase in income taxes payable 23,790 49,307
Increase in deferred rent 198,539 243,316
----------- -----------
Total adjustments 173,457 1,865,160
----------- -----------
Net cash provided by operating activities 1,282,543 3,611,061
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (2,759,290) (9,083,253)
----------- -----------
Net cash used in investing activities (2,759,290) (9,083,253)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from debt financing 655,000 4,203,545
Repayment of debt (651,314) (408,591)
Redemption of preferred shares -- (1,482,496)
Proceeds from the exercise of warrants to purchase common stock -- 1,218,285
----------- -----------
Net cash provided by financing activities 3,686 3,530,743
----------- -----------
Net decrease in cash (1,473,061) (1,941,449)
CASH AT BEGINNING OF PERIOD 4,723,121 5,314,771
----------- -----------
CASH AT END OF PERIOD $ 3,250,060 $ 3,373,322
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 611,615 $ 424,128
Cash paid for income taxes $ 599,210 $ 932,813
</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 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 January 3, 1999
filed with the Securities and Exchange Commission. Company management believes
that the disclosures are sufficient for interim financial reporting purposes.
Certain prior year amounts have been reclassified in the accompanying
consolidated financial statements to conform with the current year presentation.
2. PRE-OPENING COSTS
In 1998, the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants (AICPA) issued Statement of Position 98-5 ("SOP
98-5") entitled "Reporting on the Costs of Start-up Activities." The SOP 98-5
requires companies to expense as incurred all start-up and pre-opening costs
that are not otherwise capitalizable as long lived assets. This new accounting
standard is effective for fiscal years beginning after December 15, 1998 with
early adoption encouraged. The Company elected early adoption of the accounting
standard retroactive to the beginning of fiscal 1998. The cumulative effect of
this change in accounting principle, recognized in fiscal 1998, was $692,000,
net of income taxes.
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>
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------------- ------------------------------------
OCTOBER 3, 1999 SEPTEMBER 27, 1998 OCTOBER 3, 1999 SEPTEMBER 27, 1998
--------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (195,128) $ 173,432 $ 1,109,086 $ 1,745,901
Preferred share accretion -- -- -- (110,644)
----------- ----------- ----------- -----------
Net income (loss) applicable to common stock $ (195,128) $ 173,432 $ 1,109,086 $ 1,635,257
=========== =========== =========== ===========
Weighted common shares outstanding 4,454,015 4,453,915 4,454,015 4,362,847
Basic net income (loss) per share of common stock $ (0.04) $ 0.04 $ 0.25 $ 0.37
Effect of dilutive securities:
Warrants -- 497,992 96,104 575,904
Stock options -- 97,546 2,806 113,626
----------- ----------- ----------- -----------
Diluted weighted common shares outstanding 4,454,015 5,049,453 4,552,925 5,052,377
----------- ----------- ----------- -----------
Diluted net income (loss) per share of common stock $ (0.04) $ 0.03 $ 0.24 $ 0.32
=========== =========== =========== ===========
</TABLE>
The earnings per share calculation for the 13 week period ended October 3, 1999
excludes 23,922 common stock equivalents which were anti-dilutive.
6
<PAGE>
4. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for the Company for
periods beginning in fiscal year 2000. The Company believes that the adoption of
the provisions of SFAS No. 133 will not have a material effect on its financial
statements, based on current activities.
7
<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.
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
----------------------------------- -----------------------------------
OCTOBER 3, 1999 SEPTEMBER 27, 1998 OCTOBER 3, 1999 SEPTEMBER 27, 1998
--------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
REVENUES: 100.0% 100.0% 100.0% 100.0%
COST AND EXPENSES:
Cost of revenues 37.3% 35.9% 35.9% 34.4%
Labor and other related expenses 29.1% 29.0% 28.7% 27.7%
Other restaurant operating expenses 22.3% 21.6% 21.3% 19.6%
General and administrative expenses 8.0% 8.3% 7.3% 7.4%
Depreciation and amortization 3.8% 3.3% 3.3% 2.9%
Pre-opening expenses 0.0% 0.0% 0.3% 1.4%
--------- --------- --------- ---------
Income (loss) from operations -0.5% 1.9% 3.4% 6.6%
Interest expense, net -0.9% -0.5% -0.8% -0.4%
Other expense, net 0.2% 0.1% 0.0% 0.0%
Elimination of minority partner interest -0.2% -0.2% -0.2% -0.2%
--------- --------- --------- ---------
Income (loss) before benefit (provision) for taxes -1.4% 1.3% 2.4% 6.0%
Benefit (provision) for income taxes 0.5% -0.5% -0.9% -2.2%
Cumulative effect of a change in accounting
principle, net of income tax benefit 0.0% 0.0% 0.0% -1.1%
--------- --------- --------- ---------
Net income (loss) -0.9% 0.8% 1.5% 2.7%
--------- --------- --------- ---------
</TABLE>
8
<PAGE>
13 WEEKS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
REVENUES. Total revenues for the 13 weeks ended October 3, 1999 were $22,809,000
as compared to $19,844,000 for the 13 weeks ended September 27, 1998. The
$2,965,000, or 14.9% increase in revenues primarily was due to the opening of
six new restaurants subsequent to the third quarter of 1998, a 5.9% increase in
same store sales, and selective menu price increases. The increases were
partially offset by the closing of one restaurant in September and a decrease in
average unit sales in many of the Midwest restaurants.
COST OF REVENUES. The cost of revenues increased to 37.3% for the third quarter
of 1999 from 35.9% for the third quarter of 1998. This increase was due to the
chainwide implementation of free bread service, the effect of combination
platters that were added to the menu in January 1999 to enhance value, and an
increase in purchase costs related to mahi and crab products.
LABOR AND OTHER RELATED EXPENSES. Labor and other related expenses increased to
29.1% during the third quarter of 1999 as compared to 29.0% for the third
quarter of 1998. This increase was primarily attributable to higher hourly wage
rates and management salaries.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses
increased to 22.3% for the third quarter of 1999 as compared with 21.6% for the
third quarter of 1998. The increase was due to increased advertising expenses in
certain markets where the Company had not achieved media efficiencies as well as
higher operating expenses as a percentage of sales in the Midwest restaurants
due to lower unit sales volumes.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a
percentage of revenues decreased to 8.0% for the third quarter of 1999 as
compared with 8.3% for the third quarter of 1998. The decrease was due to
economies of scale gained through higher revenues, offsetting certain increased
salaries and wages related to the addition of two area supervisors in the
Midwest.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
to 3.8% for the third quarter of 1999 from 3.3% in the third quarter of 1998.
The increase was primarily due to new restaurant development in the fourth
quarter of 1998 including the depreciation of higher capitalized build-out costs
of the Midwest restaurants as well as renovations of existing restaurants.
INTEREST EXPENSES, NET. The net interest expense increased to $187,000 from
$89,000 for the third quarter of 1998. The increase was due to mortgage
financing of two properties acquired in 1998 and one in 1999, finance charges
relating to equipment from 1998 new restaurant openings and finance charges
relating to the Company's forward purchases of inventory holdings by U.S.
Foodservice. The interest income was lower during 1999 as compared with 1998 due
to the higher average cash balance during 1998 resulting from income from
operations and the proceeds from the exercise of warrants to purchase common
stock.
BENEFIT (PROVISION) FOR INCOME TAXES. A benefit from income taxes of $109,000
was recognized for the third quarter of 1999 as compared to a provision of
$98,000 during the third quarter of 1998. The fluctuation was directly
attributable to the fluctuation in operating results as the effective rate was
36% for both periods.
INCOME FROM OPERATIONS AND NET INCOME. As a result of the factors discussed
above, the Company incurred a loss from operations of $98,000 as compared with
income from operations of $375,000 for the third quarter of 1999. The Company's
net loss was $195,000 for the third quarter of 1999 as compared with net income
of $173,000 for the third quarter of 1998.
9
<PAGE>
39 WEEKS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
REVENUES. Total revenues for the 39 weeks ended October 3, 1999 were $74,822,000
as compared to $63,134,000 for the 39 weeks ended September 27, 1998. The
$11,688,000 or 18.5% increase in revenues primarily was due to the opening of 10
new restaurants during 1998, five of which were opened subsequent to September
27, 1998, the opening of one new restaurant in 1999 and, to a lesser extent, a
4.5% increase in same store sales and selective menu price increases.
COST OF REVENUES. The cost of revenues increased to 35.9% for the 39 weeks ended
October 3, 1999 from 34.4% for same period in 1998. This increase was due to the
addition of free bread service, the effect of combination platters that were
added to the menu in January 1999 to enhance value, and an increase in purchase
costs related to mahi and crab products.
LABOR AND OTHER RELATED EXPENSES. Labor and other related expenses increased to
28.7% during the 39 weeks ended October 3, 1999 as compared to 27.7% for the
same period in 1998. This increase was primarily attributable to labor
inefficiencies in the Company's Midwest restaurants caused by lower unit sales
volumes as compared to its Florida restaurants, coupled with higher hourly wage
rates and management salaries.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses as a
percentage of restaurant sales increased to 21.3% for the 39 weeks ended October
3, 1999 as compared with 19.6% for the same period in 1998. The increase was due
to increased advertising expenses in certain markets where the Company has not
achieved media efficiencies as well as higher operating expenses as a percentage
of sales in the Midwest restaurants due to lower unit sales volumes.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a
percentage of revenues decreased slightly to 7.3% for the 39 weeks ended October
3, 1999 as compared with 7.4% for the same period in 1998. The decrease was due
to economies of scale gained through higher revenues, offsetting certain
increased salaries and wages related to the addition of two area supervisors in
the Midwest.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses as a
percentage of revenues increased to 3.3% for the 39 weeks ended October 3,1999
as compared with 2.9% for the same period in 1998. The increase was primarily
due to new restaurant development in 1998 including the depreciation of higher
capitalized build-out costs of the Midwest restaurants as well as renovations of
existing restaurants.
PRE-OPENING EXPENSES. Pre-opening expenses decreased from 1.4% of revenues in
1998 to 0.3% in 1999. This decrease was attributed to five restaurant openings
during the 39 weeks ended September 27, 1998 as compared with one restaurant
opening during 1999.
INTEREST EXPENSES, NET. The net interest expense increased $381,000 to $590,000
from $209,000 for the 39 weeks ended September 27, 1998. The increase was due to
mortgage financing of two properties acquired in 1998 and one in 1999, finance
charges relating to equipment from 1998 new restaurant openings and finance
charges relating to the Company's forward purchases of inventory holdings by
U.S. Foodservice. The interest income was lower during 1999 compared with 1998
due to higher average cash balance during 1998 resulting from income from
operations and the proceeds from the exercise of warrants to purchase common
stock.
PROVISION FOR INCOME TAXES. A provision for income taxes of $639,000 was
recognized for the 39 weeks ended October 3, 1999 as compared to $1,372,000
during the same period in 1998. The decrease was directly attributable to lower
income before taxes as the effective rate was 36% for both periods.
INCOME FROM OPERATIONS AND NET INCOME. As a result of the factors discussed
above, the Company's income from operations decreased $1,635,000 to $2,532,000
for the 39 weeks ended October 3, 1999 from $4,167,000 for the 39 weeks ended
September 27, 1998. This decrease was $2,335,000, excluding the effect of
pre-opening expenses. The Company's net income decreased to $1,109,000 for the
39 weeks ended October 3, 1999 from $1,635,000 for the first three quarters in
1998.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of October 3, 1999, the Company's current liabilities of $8,384,000 exceeded
its current assets of $5,716,000, resulting in a working capital deficiency of
$2,668,000. 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.
The cash provided by operating activities for the 39 weeks ended October 3, 1999
was $1,283,000 as compared with $3,611,000 for the same period in 1998. The net
decrease of $2,328,000 was primarily attributable to decreases in accounts
payable offset by decreases in other assets, primarily receivables from U.S.
Foodservice.
The cash used in investing activities decreased to $2,759,000 for the 39 weeks
ended October 3, 1999 as compared with $9,083,000 for the same period in 1998.
The decrease of $6,324,000 was due to the Company opening one new restaurant
during 1999 as compared with costs associated with five restaurant openings
during the 39 weeks ended September 27, 1998. The total for the 39 weeks ended
October 3, 1999 includes $855,000 for the purchase of a previously leased
restaurant site.
The cash provided by financing activities was $4,000 for the 39 weeks ended
October 3, 1999 as compared with $3,531,000 for the same period in 1998. The
decrease in cash provided was due to reduced borrowings related to real estate
and equipment financings during 1999. The 39 weeks ended September 27, 1998
included $1,218,000 in cash provided by the exercise of warrants to purchase
common stock which was offset by the Company's $1,482,000 redemption of all of
its outstanding preferred shares.
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 $50,000 of Year 2000 project expenses
through October 3, 1999. Future expenses are expected to approximate $10,000 as
the Company's current hardware systems and software, with minor modifications,
have been represented by their vendors to be either Year 2000 compliant or have
a Year 2000 compliant upgrade available at no charge.
The Company has identified and contacted its critical suppliers and service
providers to determine the extent to which the Company is vulnerable to those
third parties' failure to remedy their own Year 2000 issues. To the extent that
responses to Year 2000 readiness are unsatisfactory, the Company intends to
change suppliers to those who have demonstrated Year 2000 readiness. The Company
can give no assurances that the responses it receives will be accurate, or if
changes are necessary, that the Company will be successful in finding such
compliant suppliers and
11
<PAGE>
service providers. The Company currently has formal information concerning the
Year 2000 status of most of its major suppliers and service providers. The
Company continues to contact and assess Year 2000 readiness of its most critical
suppliers and vendors.
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 restaurant location
and the type of food served. The Company has experienced fluctuations in its
quarter-to-quarter operating results due to its high concentration of
restaurants in Florida. Business in Florida is influenced by seasonality due to
various factors which include but are not limited to weather conditions in
Florida relative to other areas of the U.S. and the health of Florida's economy
in general and the tourism industry in particular. The Company's restaurant
sales are generally highest from January through April and June through August,
the peaks of the Florida tourism season, and generally lower from September
through mid-December. In many cases, locations are in coastal cities, where
sales are significantly dependent on tourism and its seasonality patterns. It is
anticipated that the Company's expansion into the Midwest markets will, over
time, reduce some of the existing seasonal fluctuations.
In addition, quarterly results have been, and in the future are likely to be,
substantially affected by the timing of new restaurant openings both in and
outside of Florida. 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.
12
<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 27. Financial Data Schedule
13
<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 16, 1999 William E. Hattaway
President and Chief Executive Officer
/s/ WARREN R. NELSON
- ---------------------------- ---------------------------------------------
Date November 16, 1999 Warren R. Nelson
Vice President and Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> OCT-03-1999
<CASH> 3,250,060
<SECURITIES> 0
<RECEIVABLES> 116,485
<ALLOWANCES> 0
<INVENTORY> 942,361
<CURRENT-ASSETS> 5,715,599
<PP&E> 31,541,682
<DEPRECIATION> (8,824,812)
<TOTAL-ASSETS> 33,462,952
<CURRENT-LIABILITIES> 8,383,876
<BONDS> 0
0
0
<COMMON> 44,540
<OTHER-SE> 14,161,010
<TOTAL-LIABILITY-AND-EQUITY> 33,462,952
<SALES> 74,506,849
<TOTAL-REVENUES> 74,822,088
<CGS> 26,836,809
<TOTAL-COSTS> 72,290,492
<OTHER-EXPENSES> (193,980)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (589,530)
<INCOME-PRETAX> 1,748,086
<INCOME-TAX> (639,000)
<INCOME-CONTINUING> 1,109,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,109,086
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.24
</TABLE>
