UNITED STATES
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 28, 2003
[ ] 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. 000-28258
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 [ ]
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Class Outstanding at October 30, 2003
Common stock, $0.01 par value 4,631,375
1
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Index
Part I. Financial Information Page Number
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4-5
Consolidated Statements of Cash Flows 6
Consolidated Statement of Stockholders' Equity 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
Item 4. Controls and Procedures 15-16
Part II. Other Information 17-18
Signatures 19
Exhibit Index 20
2
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 28, 2003 December 29, 2002
-------------------- -------------------
ASSETS
Cash $ 1,264,946 $ 2,468,809
Inventories 381,456 356,434
Other current assets 541,155 266,228
Receivables from related parties 92,105 105,353
-------------------- -------------------
Total current assets 2,279,662 3,196,824
Property and equipment, net 7,476,747 7,682,892
Goodwill 2,474,407 2,474,407
Other assets 636,964 504,529
-------------------- -------------------
TOTAL ASSETS $ 12,867,780 $ 13,858,652
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,074,315 $ 2,554,854
Accrued expenses 2,539,152 3,033,086
Sales tax payable 168,055 191,853
Current portion of long-term debt 323,184 532,857
-------------------- -------------------
Total current liabilities 5,104,706 6,312,650
Notes and deferred interest payable
to related parties 2,229,174 2,123,335
Long-term debt, less current portion 1,604,014 1,760,054
Deferred rent 1,060,990 1,082,761
-------------------- -------------------
Total liabilities 9,998,884 11,278,800
Minority partner interest 457,237 427,852
-------------------- -------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
authorized 2,000,000 shares; 63,548
and 66,862 shares issued and
outstanding, respectively 635 669
Common stock, $0.01 par value;
authorized 20,000,000 shares;
4,631,375 and 4,454,015 shares issued
and outstanding, respectively 46,313 44,540
Additional paid-in-capital 14,303,152 14,240,576
Retained earnings (deficit) (11,938,441) (12,133,785)
-------------------- -------------------
Total stockholders' equity 2,411,659 2,152,000
-------------------- -------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 12,867,780 $ 13,858,652
==================== ===================
See accompanying notes to consolidated financial statements.
3
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
13 Weeks Ended
----------------------------------------
September 28, 2003 September 29, 2002
------------------- -------------------
REVENUES $ 10,125,143 $ 10,965,891
------------------- -------------------
COST AND EXPENSES:
Cost of revenues 3,319,468 3,751,622
Labor and other related expenses 3,407,219 3,581,715
Other restaurant operating expenses 2,847,323 2,732,188
General and administrative expenses 903,564 966,464
Depreciation and amortization 275,793 279,303
Provision for impairment of goodwill - 51,549
------------------- -------------------
10,753,367 11,362,841
------------------- -------------------
LOSS FROM OPERATIONS (628,224) (396,950)
------------------- -------------------
OTHER INCOME (EXPENSE):
Interest expense (112,668) (130,187)
Interest income 3,072 12,866
Other expense, net (40,727) (52,363)
------------------- -------------------
(150,323) (169,684)
------------------- -------------------
LOSS BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES (778,547) (566,634)
ELIMINATION OF MINORITY PARTNER INTEREST (54,373) (47,060)
------------------- -------------------
LOSS BEFORE PROVISION FOR INCOME TAXES (832,920) (613,694)
BENEFIT FROM INCOME TAXES - 8,338
------------------- -------------------
NET LOSS $ (832,920) $ (605,356)
=================== ===================
NET LOSS PER SHARE OF COMMON STOCK:
Basic $ (0.18) $ (0.14)
=================== ===================
Diluted $ (0.18) $ (0.14)
=================== ===================
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 4,631,375 4,454,015
=================== ===================
Diluted 4,631,375 4,454,015
=================== ===================
See accompanying notes to consolidated financial statements.
4
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
39 Weeks Ended
---------------------------------------
September 28, 2003 September 29, 2002
------------------ ------------------
REVENUES $ 35,038,465 $ 37,603,390
------------------ ------------------
COST AND EXPENSES:
Cost of revenues 11,469,034 12,666,305
Labor and other related expenses 10,759,888 11,420,600
Other restaurant operating expenses 8,557,059 8,447,451
General and administrative expenses 2,617,318 2,754,098
Depreciation and amortization 799,879 833,709
Provision for impairment of goodwill - 154,647
------------------ ------------------
34,203,178 36,276,810
------------------ ------------------
INCOME FROM OPERATIONS 835,287 1,326,580
------------------ ------------------
OTHER INCOME (EXPENSE):
Interest expense (358,333) (453,965)
Interest income 11,217 28,976
Other expense, net (94,097) (79,645)
------------------ ------------------
(441,213) (504,634)
------------------ ------------------
INCOME BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES 394,074 821,946
ELIMINATION OF MINORITY PARTNER INTEREST (198,730) (168,956)
------------------ ------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 195,344 652,990
BENEFIT FROM INCOME TAXES - 326,715
------------------ ------------------
NET INCOME $ 195,344 $ 979,705
================== ==================
NET INCOME PER SHARE OF COMMON STOCK:
Basic $ 0.04 $ 0.22
================== ==================
Diluted $ 0.02 $ 0.10
================== ==================
AVERAGE WEIGHTED NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 4,559,502 4,454,015
================== ==================
Diluted 11,168,456 10,291,316
================== ==================
See accompanying notes to consolidated financial statements.
5
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
39 Weeks Ended
---------------------------------------------
September 28, 2003 September 29, 2002
---------------------- ----------------------
OPERATING ACTIVITIES:
Net income $ 195,344 $ 979,705
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Loss on disposal of assets 2,874 2,616
Depreciation and amortization 799,879 833,709
Provision for impairment of goodwill - 154,647
Minority partner interest 29,385 3,922
Changes in assets and liabilities:
(Increase) decrease in inventories (25,022) 72,192
Decrease in receivables from related parties 13,248 27,705
Increase in other assets (457,383) (228,227)
Decrease in prepaid rent 17,949 12,036
(Increase) decrease in
income tax refunds receivable (3,300) 889,027
Decrease in deferred tax asset - -
Decrease in accounts payable (480,539) (1,865,319)
Decrease in accrued expenses (283,182) (510,811)
Decrease in sales tax payable (23,798) (22,497)
Decrease in deferred rent (21,771) (130,580)
--------------------- ----------------------
Total adjustments (431,660) (761,580)
---------------------- ----------------------
Net cash (used in) provided by
operating activities (236,316) 218,125
---------------------- ----------------------
INVESTING ACTIVITIES:
Proceeds from the sale of assets 500 1,091,324
Purchase of property and equipment (611,084) (433,383)
---------------------- ----------------------
Net cash (used in) provided by
investing activities (610,584) 657,941
---------------------- ----------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 578,585 2,304,317
Repayment of debt (935,548) (1,621,767)
---------------------- ----------------------
Net cash (used in) provided by
financing activities (356,963) 682,550
---------------------- ----------------------
Net (decrease) increase in cash (1,203,863) 1,558,616
CASH AT BEGINNING OF PERIOD 2,468,809 969,680
---------------------- ----------------------
CASH AT END OF PERIOD $ 1,264,946 $ 2,528,296
====================== ======================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 258,490 $ 391,832
Bonus paid in common stock $ 64,315 $ -
Cash (paid) refunds received for income taxes $ (3,300) $ 1,216,438
Note receivable on sale of assets $ - $ 100,000
See accompanying notes to consolidated financial statements.
6
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ADDITIONAL RETAINED
PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS
Shares Amount Shares Amount CAPITAL (DEFICIT) TOTAL
--------- ----------- ---------- ---------- ------------ -------------- ------------
Balance at December 29, 2002 66,862 $ 669 4,454,015 $ 44,540 $ 14,240,576 $ (12,133,785) $ 2,152,000
Net income 195,344 195,344
Preferred stock converted to
common stock (3,314) (34) 16,570 166 (132) -
Common stock issued 160,790 1,607 62,708 64,315
--------- --------- ------------ ---------- -------------- -------------- -------------
Balance at September 28, 2003 63,548 $ 635 4,631,375 $ 46,313 $ 14,303,152 $ (11,938,441) $ 2,411,659
========= ========= ============ ========== ============== ============== =============
See accompanying notes to consolidated financial statements.
7
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 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 accounting principles
generally accepted in the United States of America for complete
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 consolidated financial statements of Shells Seafood
Restaurants, Inc. ("we", "us", "Shells", or 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 29, 2002 filed with the United States
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 condensed consolidated financial
statements to conform with the current year presentation.
NOTE 2. EARNINGS PER SHARE
The following table represents the computation of basic and
diluted earnings per share of common stock as required by
Financial Accounting Standards Board ("FASB") Statement No. 128,
"Earnings Per Share":
For the 13 weeks ended Sept 28, 2003 Sept 29, 2002
-------------------------------
Net loss applicable to common stock $ (832,920) $ (605,356)
===============================
Weighted common shares outstanding 4,631,375 4,454,015
Basic net loss per share of common stock $ (0.18) $ (0.14)
Effect of dilutive securities:
Warrants - -
Stock options - -
-------------------------------
Diluted weighted common shares outstanding 4,631,375 4,454,015
-------------------------------
Diluted net loss per share of common stock $ (0.18) $ (0.14)
===============================
For the 39 weeks ended Sept 28, 2003 Sept 29, 2002
-------------------------------
Net income applicable to common stock $ 195,344 $ 979,705
===============================
Weighted common shares outstanding 4,559,502 4,454,015
Basic net income per share of common stock $ 0.04 $ 0.22
Effect of dilutive securities:
Warrants 6,261,262 5,530,808
Stock options 347,692 306,493
-------------------------------
Diluted weighted common shares outstanding 11,168,456 10,291,316
-------------------------------
Diluted net income per share of common stock $ 0.02 $ 0.10
===============================
8
The loss per share calculations for the 13 weeks ended September
28, 2003 and September 29, 2002 excluded warrants and options to
purchase an aggregate of 11,345,153 and 11,075,039 shares of
common stock, respectively, as they were anti-dilutive.
The earnings per share calculations for the 39 weeks ended
September 28, 2003 and September 29, 2002 excluded warrants and
options to purchase an aggregate of 4,736,199 and 5,444,248
shares of common stock, respectively, as the exercise prices of
these warrants and options were greater than the average market
price of the common shares.
NOTE 3. STOCK COMPENSATION PLANS
Currently, we have four stock-based employee compensation plans.
We account for these plans under the recognition and measurement
principles of Accounting Principles Board Opinion 25, "Accounting
for Stock Issued to Employees," and related interpretations. No
stock-based compensation cost is reflected in net income, as all
options granted under these plans had an exercise price equal to
the fair market value of the underlying common stock on the date
of grant. Had compensation cost for our stock option plans been
determined based on the fair value at the grant dates consistent
with recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," the effect on net
income and earnings per share on a pro forma basis would have
been immaterial.
NOTE 4. COMMON STOCK
On April 28, 2003, we awarded 160,790 shares of common stock to
key management personnel under a management incentive plan
relating to fiscal 2002 performance pursuant to the 2002 Equity
Incentive Plan. Compensation expense of $104,000 was recognized
in fiscal 2002 for this stock award.
NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued Statement No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." The
Statement addresses costs that are a result of exiting an
activity, such as termination benefits, costs to terminate a
contract that is not a capital lease, and costs to consolidate
facilities or relocate employees. Under the Statement, in
general, a company may recognize costs related to a restructuring
only when the liability is incurred. Under previous US GAAP, a
liability for such costs was recognized on the date when a
company committed to an exit plan. The provisions of this
statement are effective for exits and disposal activities that
are initiated after December 31, 2002. The adoption of Statement
No. 146 did not materially affect our consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of
Others." Interpretation No. 45 supersedes Interpretation No.
34, "Disclosure of Indirect Guarantees of Indebtedness of
Others," and provides guidance on the recognition and disclosures
to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees. The
initial recognition and measurement provisions of Interpretation
No. 45 are effective for guarantees issued or modified after
December 31, 2002, and are to be applied prospectively. The
disclosure requirements are effective for financial statements
for interim or annual periods ending after December 15, 2002.
The adoption of Interpretation No. 45 did not materially affect
our consolidated financial statements.
9
In November 2002, the FASB's Emerging Issues Task Force (EITF)
discussed Issue No. 02-16, "Accounting by a Reseller for Cash
Consideration Received from a Vendor." Issue No. 02-16 provides
guidance on the recognition of cash consideration received by a
customer from a vendor. The consensus reached by the EITF in
November 2002 is effective for fiscal periods beginning after
December 15, 2002. Income statements for prior periods are
required to be reclassified to comply with the consensus.
Adoption of the consensus reached in November 2002 related to
Issue No. 02-16 did not materially affect our consolidated
financial statements.
In December 2002, we adopted FASB Statement No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure."
Statement No. 148 amends Statement No. 123, "Accounting for
Stock-Based Compensation," and provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. Statement
No. 148 also amends the disclosure requirements of Statement No.
123 to require more prominent and frequent disclosures in
financial statements about the effects of stock-based
compensation. The transition guidance and annual disclosure
provisions of Statement No.148 are effective for financial
statements issued for fiscal years ending after December 15,
2002. The interim disclosure provisions are effective for
financial reports containing financial statements for interim
periods beginning after December 15, 2002. See Note 3 for
disclosure under Statement No. 148.
In January 2003, the FASB issued a pronouncement, Financial
Interpretation Number 46 ("FIN 46"), "Consolidation of Variable
Interest Entities." FIN 46 deals with Off-Balance Sheet Assets,
Liabilities, and Obligations and gives guidance for determining
which entities should consolidate the respective assets and
liabilities associated with the obligations. Corporations must
fully consolidate assets and liabilities covered by FIN 46 in
their financial statements in the first fiscal year or interim
period beginning after December 15, 2003. Full disclosure, as
well as consolidation, if applicable, of any newly created
entities after January 31, 2003 must begin immediately. Adoption
of FIN 46 is not expected to materially impact our consolidated
financial statements.
In April 2003, the FASB issued Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities,"
This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. This Statement is effective for contracts
entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. In addition, all
provisions of this Statement should be applied prospectively.
Adoption of FASB Statement 149 is not expected to materially
impact our consolidated financial statements.
In May 2003, the FASB issued Statement No. 150, " Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This Statement establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
Many of those instruments were previously classified as equity.
This Statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after June
15, 2003. Adoption of FASB Statement 150 is not expected to
materially impact our consolidated financial statements.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain pro forma financial
information. In all instances, management believes that use of
such pro forma information is useful to investors assessing the
financial condition and results of operations of our core
business operations because it excludes results which management
believes are atypical and unlikely to occur with regularity in
the future.
The following table sets forth, for the periods indicated, the
percentages which the items in our Consolidated Statements of
Income bear to total revenues.
---------------------------- ----------------------------
13 Weeks Ended 39 Weeks Ended
---------------------------- ----------------------------
September 28 September 29 September 28 September 29
2003 2002 2003 2002
------------- ------------- ------------- -------------
REVENUES 100.0% 100.0% 100.0% 100.0%
------------- ------------- ------------- -------------
COST AND EXPENSES:
Cost of revenues 32.8% 34.2% 32.7% 33.7%
Labor and other related expenses 33.7% 32.7% 30.7% 30.4%
Other restaurant operating expenses 28.1% 24.9% 24.4% 22.5%
------------- ------------- ------------- -------------
94.6% 91.8% 87.8% 86.6%
------------- ------------- ------------- -------------
General and administrative expenses 8.9% 8.8% 7.5% 7.3%
Depreciation and amortization 2.7% 2.5% 2.3% 2.2%
Provision for impairment of goodwill 0.0% 0.5% 0.0% 0.4%
------------- ------------- ------------- -------------
Income (loss) from operations -6.2% -3.6% 2.4% 3.5%
------------- ------------- ------------- -------------
Interest expense, net -1.1% -1.1% -1.0% -1.1%
Other expense, net -0.4% -0.5% -0.3% -0.2%
Elimination of minority partner interest -0.5% -0.4% -0.6% -0.4%
------------- ------------- ------------- -------------
Income (loss) before provision for taxes -8.2% -5.6% 0.5% 1.8%
Benefit from income taxes 0.0% 0.1% 0.0% 0.9%
------------- ------------- ------------- -------------
Net income (loss) -8.2% -5.5% 0.5% 2.7%
============= ============= ============= =============
11
RESULTS OF OPERATIONS
13 weeks ended September 28, 2003 and September 29, 2002
Revenues. Total revenues for the third quarter of 2003 were
$10,125,000 as compared to $10,966,000 for the third quarter of
2002. The $841,000, or 7.7%, decrease in revenues was primarily
due to a 6.0% decrease in comparable store sales, and to a lesser
extent the closing of one restaurant during the third quarter of
2002. Comparisons of same store sales include only stores that
were open during the entire periods being compared and, due to
the time needed for a restaurant to become established and fully
operational, at least six months prior to the beginning of that
period.
Cost of revenues. The cost of revenues as a percentage of
revenues decreased to 32.8% for the third quarter of 2003 from
34.2% for the third quarter of 2002. This decrease primarily was
due to favorable food costs and operational improvements. We
continually attempt to anticipate and react to fluctuations in
food costs by purchasing seafood directly from numerous
suppliers, promoting certain alternative menu selections in
response to price and availability of supply and adjusting our
menu prices accordingly to help control the cost of revenues.
Labor and other related expenses. Labor and other related
expenses as a percentage of revenues increased to 33.7% during
the third quarter of 2003 as compared to 32.7% for the third
quarter of 2002. This increase was primarily due to the loss of
sales leverage in addition to increases in workers' compensation
insurance.
Other restaurant operating expenses. Other restaurant operating
expenses were $2,847,000 or 28.1% of revenues for the third
quarter of 2003 as compared with $2,732,000 or 24.9% of revenues
for the third quarter of 2002. The increase primarily was due to
increases in restaurant maintenance costs, insurance, natural gas
and electricity along with a reduction in operating leverage
caused by lower sales volumes.
General and administrative expenses. General and administrative
expenses of $904,000 or 8.9% of revenues for the third quarter of
2003 increased from $966,000 or 8.8% of revenues for the third
quarter of 2002, primarily due to decreases in administrative
salaries partially offset by increases in consulting fees.
Excluding non-recurring severance pay of $70,000 in the third
quarter 2003, general and administrative expenses were $834,000
or 8.2% of revenues.
Depreciation and amortization. Depreciation and amortization
expense was $276,000 or 2.7% of revenues and $279,000 or 2.5% of
revenues for the third quarters of 2003 and 2002, respectively.
Provision for impairment of goodwill. There was no provision
for impairment of goodwill in the third quarter of 2003. The
provision for impairment of goodwill was $52,000 or 0.5% of
revenues during the third quarter of 2002. Goodwill was
evaluated for impairment and written down in accordance with FASB
Statement No. 142 which we adopted in 2002.
Interest expense, net. Interest expense was $110,000 in the
third quarter of 2003 compared to $117,000 in the third quarter
of 2002. The decrease was related to the reduction of loan
balances outstanding.
Benefit from income taxes. No benefit or provision for income
taxes was recognized for the third quarter of 2003 based on
annual projected taxable income for 2003, as adjusted for net
operating loss carry forwards. A tax benefit of $8,000 was
recognized in the third quarter of 2002 relating to tax refunds.
12
Income from operations and net income. As a result of the
factors discussed above, Shells had a loss from operations of
$628,000 for the third quarter of 2003 compared to a loss from
operations of $397,000 for the third quarter of 2002. Shells had
a net loss of $833,000 for the third quarter of 2003 compared to
$605,000 for the third quarter of 2002. Exclusive of a
nonrecurring charge of $70,000 relating to severance pay, the net
loss was $763,000 in the third quarter of 2003.
39 weeks ended September 28, 2003 and September 29, 2002
Revenues. Total revenues for the 39 weeks ended September 28,
2003 were $35,038,000 as compared to $37,603,000 for the 39 weeks
ended September 29, 2002. The $2,565,000, or 6.8%, decrease
primarily was due to a reduction in same store sales of 4.6%.
Cost of revenues. The cost of revenues as a percentage of
revenues decreased to 32.7% for the 39 weeks ended September 28,
2003 from 33.7% for the comparable period in 2002. This decrease
primarily related to favorable food costs and operational
improvements partially offset by a non-recurring write-down of
inventory of $36,000 in 2003. Exclusive of the non-recurring
item, cost of revenues was 32.6% for the 39 weeks ended September
28, 2003.
Labor and other related expenses. Labor and other related
expenses increased to 30.7% as a percentage of revenues for the
39 weeks ended September 28, 2003 as compared to 30.4% for the
same period in 2002. This increase was primarily attributable to
the loss of sales leverage, partially offset by a 2003 non-
recurring decrease in benefits and taxes relating to a reduction
in the workers compensation insurance reserve (and refund) of
$197,000, of which $182,000 was allocated to restaurant labor
costs. Exclusive of the non-recurring item, labor and other
related expenses was 31.2% for the 39 weeks ended September 28,
2003.
Other restaurant operating expenses. Other restaurant operating
expenses were $8,557,000 or 24.4% of revenues for the 39 weeks
ended September 28, 2003 compared with $8,447,000 or 22.5% for
the same period in 2002. The increase primarily was due to a
reduction in operating leverage caused by lower sales volumes and
increases in restaurant maintenance costs, insurance, natural gas
and electricity costs.
General and administrative expenses. General and administrative
expenses increased to 7.5% as a percentage of revenues for the 39
weeks ended September 28, 2003 as compared with 7.3% for the same
period in 2002. Excluding non-recurring severance pay of $70,000
in fiscal 2003, general and administrative expenses were 7.3% of
revenues for the 39 weeks ended September 28, 2003.
Depreciation and amortization. Depreciation and amortization
expense was $800,000 or 2.3% of revenues and $834,000 or 2.2% of
revenues for the 39 weeks ended September 28, 2003 and September
29, 2002, respectively.
Provision for impairment of goodwill. There was no provision
for impairment of goodwill in the 39 weeks ended September 28,
2003. The provision for impairment of goodwill was $155,000 or
0.4% of revenues during the 39 weeks ended September 29, 2002.
Goodwill was evaluated for impairment and written down in
accordance with FASB Statement No. 142 which we adopted in 2002.
13
Interest expense, net. Interest expense was $347,000 in the 39
weeks ended September 28, 2003 compared to $425,000 in the same
period of 2002. This decrease related primarily to a non-
recurring charge of $106,000 in the 39 weeks ended September 29,
2002 relating to the issuance of warrants on January 31, 2002 as
part of the previously reported $2,000,000 financing transaction,
partially offset by lower loan balances outstanding. Exclusive
of the non-recurring charge, net interest expense was $319,000
for the 39 weeks ended September 29, 2002.
Benefit from income taxes. No benefit or provision for income
taxes was recognized for the 39 weeks ended September 28, 2003
compared to a tax benefit of $327,000 in the same period in 2002,
relating to the applicable portion of a refund of $1,176,000 from
prior years, resulting from the Economic Stimulus Package signed
into law in March 2002. The refund was received in July 2002.
Income from operations and net income. As a result of the
factors discussed above, Shells income from operations was
$835,000 for the 39 weeks ended September 28, 2003 compared to
$1,327,000 for the same period in 2002. Exclusive of non-
recurring items, our income from operations was $745,000 for the
39 weeks ended September 28, 2003. Non-recurring items consisted
of a benefit of $197,000 from workers compensation reserve
adjustments partially offset by an inventory write-down of
$36,000 and severance pay of $70,000 for the 39 weeks ended
September 28, 2003. The Company's net income for the 39 weeks
ended September 28, 2003 was $195,000 compared to $980,000 in the
same period in 2002. Exclusive of non-recurring items, our net
income was $105,000 for the 39 weeks ended September 28, 2003
compared to $768,000 for the comparable period in 2002. Non-
recurring items for the 39 weeks ended September 29, 2002
consisted of $318,000 in income tax benefits, offset by $106,000
in imputed interest expense.
LIQUIDITY AND CAPITAL RESOURCES
As of September 28, 2003, our current liabilities of $5,105,000
exceeded our current assets of $2,280,000, resulting in a working
capital deficiency of $2,825,000. In comparison, the December
29, 2002 working capital deficiency was $3,116,000. The
improvement in the working capital deficiency was primarily
related to an increase in other assets consisting of prepaid
insurance of $269,000 coupled with reductions in accounts payable
of $481,000, accrued expenses of $494,000, and current portion of
long-term debt of $210,000, offset in part by a reduction in cash
of $1,204,000.
Shells was negatively impacted in fiscal 2002, and to a lesser
extent in fiscal 2003, by the ongoing costs of divestiture of its
Midwest locations. Such divestiture costs had an adverse affect
on our cash position. Historically, Shells has generally
operated with minimal or negative working capital as a result of
the investment 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.
Due to the seasonality of our business and depressed cash flow
from operations, we are in a guarded cash position over the near
term periods. Management has taken steps to improve cash flow
from operations, including increased emphasis on local store
marketing efforts and less reliance on expensive broadcast
media, as well as our 2003 holiday season initiatives. Our holiday
initiatives include a new line of party platters for off premise
consumption in addition to the promotion of a new gift card program
which replaces paper certificates. Cash flow requirements over the
next 18 months will likely require additional financing, as the
note holder debt will become due on January 31, 2005. There can
be no assurance that any such financing will be available to
Shells on terms acceptable to us, or at all. The failure of
Shells to successfully obtain additional funding may impact
our ability to continue our operations.
14
Cash used in operating activities for the 39 weeks ended
September 28, 2003 was $236,000 compared to cash provided by
operating activities of $218,000 for the comparable period in
2002. The net decrease of $454,000 was primarily related to a
reduction in net income, other assets and accrued expenses,
partially offset by a reduction in accounts payable.
The cash used in investing activities was $611,000 for the 39
weeks ended September 28, 2003 compared to cash provided by
investing activities of $658,000 for the comparable period in
2002. We had a net increase of $178,000 in expenditures for
capital improvements for 2003 compared to 2002. In 2002, we
received proceeds from the sale of a Midwest property of
$1,091,000.
The cash used in financing activities was $357,000 for the 39
weeks ended September 28, 2003 compared to cash provided by
financing activities of $683,000 for the comparable period in
2002. In 2002, we completed a $2 million private financing
transaction, consisting of secured promissory notes and warrants
to purchase shares of our Common Stock. Also, in 2002, we
repayed existing debt of $893,000 relating to the sale of the
Midwest property.
SEASONALITY
The restaurant industry in general is seasonal, depending on
restaurant location and the type of food served. We experience
fluctuations in our quarter-to-quarter operating results due
primarily to our high concentration of restaurants in Florida.
Business in Florida is influenced by seasonality due to various
factors that include but are not limited to weather conditions in
Florida relative to other areas of the U.S., the health of
Florida's economy and the effect of world events in general and
on the tourism industry in particular. Our 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.
In addition, quarterly results have been, and in the future could
be, affected by the timing and conditions under which restaurants
are closed. Because of the seasonality of our business and the
impact of restaurant closures and openings, if applicable,
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates on
debt and changes in commodity prices. Our exposure to interest
rate risk relates to the $1,213,000 as of September 28, 2003 in
outstanding debt with banks that is based on variable rates.
Borrowings under these loan agreements bear interest at the rate
equal to the applicable bank's base rate.
Item 4. Controls and Procedures
Shells maintains "disclosure controls and procedures," as such
term is defined under Securities Exchange Act Rule 13a-15(e),
15
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive
Officer/President and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives
and our management necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible controls
and procedures. We have carried out an evaluation, as of the end
of the period covered by this report, under the supervision and
with the participation of our management, including our Chief
Executive Officer/President and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based upon their evaluation and subject
to the foregoing, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective in ensuring that material information relating to
Shells is made known to the Chief Executive Officer and Chief
Financial Officer by others within our company during the period
in which this report was being prepared.
There were no changes in our internal controls over financial
reporting that occurred during our most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 29, 2001, a lawsuit was filed in the Court of Common
Pleas of Clermont County, Ohio by Cin-Beech, LLC, the landlord of
a closed restaurant located in Cincinnati. This restaurant was
closed in April 2001. In July 2001, we entered into a lease
termination agreement with the landlord. Pursuant to the lease
termination agreement, we paid $50,000 in termination fees and
$39,000 for rents and real estate taxes owed; and were obligated
to pay an additional $50,000 within 30 days in exchange for a
simultaneous written release from the landlord. The landlord
refused to provide the written release as required and,
therefore, Shells did not pay the additional $50,000 for which it
was prepared to pay. The landlord has since demanded $236,000,
which was later reduced to $150,000. The landlord sold the
property in October 2002 to an unrelated third party. By court
order, the parties reached a settlement arrangement in an August
2003 mediation whereby we will pay the landlord $107,000 to
terminate the lease and dismiss the lawsuit. We expect to
finalize the settlement during the fourth quarter of 2003.
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
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Leslie J. Christon, President/Chief
Executive Officer of Shells Seafood Restaurants, Inc.,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, in connection with Shells Seafood Restaurants
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 28, 2003.
31.2 Certification of Warren R. Nelson, Executive Vice
President/Chief Financial Officer of Shells Seafood
Restaurants, Inc., pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, in connection with Shells
Seafood Restaurants Inc.'s Quarterly Report on Form 10-
Q for the quarter ended September 28, 2003.
32.1 Certifications by Leslie J. Christon and Warren R.
Nelson, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, in connection with Shells Seafood Restaurants,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 28, 2003.
(b) Reports on Form 8-K filed during the current quarter ended
September 28, 2003.
Shells filed a current report on Form 8-K, Item 5, regarding
a press release on July 1, 2003 announcing that Leslie J.
Christon joined Shells as President and Chief Executive
Officer.
Shells filed a current report on Form 8-K, Item 12, regarding
a press release on July 25, 2003 announcing operating results
for the quarter ended June 29, 2003.
Shells filed a current report on Form 8-K, Item 5, regarding
a press release on September 19, 2003 announcing that Guy C.
Kathman joined Shells as Vice President of Operations.
18
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/ Leslie J. Christon
November 12, 2003 President and Chief Executive Officer
(On behalf of the registrant.)
/s/ Warren R. Nelson
November 12, 2003 Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
19
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
31.1 Certification of Leslie J. Christon, President and
Chief Executive Officer of Shells Seafood Restaurants,
Inc., pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, in connection with Shells Seafood Restaurants
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 28, 2003.
31.2 Certification of Warren R. Nelson, Executive Vice
President and Chief Financial Officer of Shells Seafood
Restaurants, Inc., pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, in connection with Shells
Seafood Restaurants Inc.'s Quarterly Report on Form 10-
Q for the quarter ended September 28, 2003.
32.1 Certifications by Leslie J. Christon and Warren R.
Nelson, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, in connection with Shells Seafood Restaurants,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 28, 2003.
20