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 June 29, 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. 0-28258
SHELLS SEAFOOD RESTAURANTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0427966
---------------------------------- --------------------------------
(State or other jurisdiction of (IRS) Employer 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
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(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 July 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 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4. Controls and Procedures 16-17
Part II. Other Information 18-19
Signatures 20
Exhibit Index 21
2
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 29, 2003 December 29, 2002
-------------------- --------------------
ASSETS
Cash $ 2,253,446 $ 2,468,809
Inventories 397,244 356,434
Other current assets 921,375 266,228
Receivables from related parties 104,378 105,353
-------------------- --------------------
Total current assets 3,676,443 3,196,824
Property and equipment, net 7,573,221 7,682,892
Goodwill 2,474,407 2,474,407
Other assets 482,087 504,529
-------------------- --------------------
TOTAL ASSETS $ 14,206,158 $ 13,858,652
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,094,756 $ 2,554,854
Accrued expenses 2,668,826 3,033,086
Sales tax payable 237,916 191,853
Current portion of long-term debt 578,253 532,857
-------------------- --------------------
Total current liabilities 5,579,751 6,312,650
Notes and deferred interest payable
to related parties 2,194,333 2,123,335
Long-term debt, less current portion 1,666,627 1,760,054
Deferred rent 1,061,370 1,082,761
-------------------- --------------------
Total liabilities 10,502,081 11,278,800
Minority partner interest 459,499 427,852
-------------------- --------------------
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) (11,105,522) (12,133,785)
-------------------- --------------------
Total stockholders' equity 3,244,578 2,152,000
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 14,206,158 $ 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
---------------------------------------
June 29, 2003 June 30, 2002
------------------ -------------------
REVENUES $ 11,901,337 $ 12,508,630
------------------ -------------------
COST AND EXPENSES:
Cost of revenues 3,926,727 4,244,906
Labor and other related expenses 3,496,061 3,743,467
Other restaurant operating expenses 2,880,211 2,682,438
General and administrative expenses 874,015 962,831
Depreciation and amortization 263,293 279,166
Provision for impairment of goodwill - 51,549
------------------ -------------------
11,440,307 11,964,357
------------------ -------------------
INCOME FROM OPERATIONS 461,030 544,273
------------------ -------------------
OTHER INCOME (EXPENSE):
Interest expense (118,843) (127,936)
Interest income 3,531 10,290
Other expense, net (31,585) (28,082)
------------------ -------------------
(146,897) (145,728)
------------------ -------------------
INCOME BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES 314,133 398,545
ELIMINATION OF MINORITY PARTNER INTEREST ( 69,953) ( 57,532)
------------------ -------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 244,180 341,013
BENEFIT FROM INCOME TAXES - 318,377
------------------ -------------------
NET INCOME $ 244,180 $ 659,390
================== ===================
NET INCOME PER SHARE OF COMMON STOCK:
Basic $ 0.05 $ 0.15
================== ===================
Diluted $ 0.02 $ 0.06
================== ===================
AVERAGE WEIGHTED NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 4,561,797 4,454,015
================== ===================
Diluted 11,466,292 11,194,642
================== ===================
See accompanying notes to consolidated financial statements.
4
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
26 Weeks Ended
---------------------------------------
June 29, 2003 June 30, 2002
------------------ -------------------
REVENUES $ 24,913,322 $ 26,637,499
------------------ -------------------
COST AND EXPENSES:
Cost of revenues 8,149,567 8,914,683
Labor and other related expenses 7,352,669 7,838,885
Other restaurant operating expenses 5,709,736 5,715,263
General and administrative expenses 1,713,754 1,787,634
Depreciation and amortization 524,086 554,406
Provision for impairment of goodwill - 103,098
------------------ -------------------
23,449,812 24,913,969
------------------ -------------------
INCOME FROM OPERATIONS 1,463,510 1,723,530
------------------ -------------------
OTHER INCOME (EXPENSE):
Interest expense (245,665) (323,778)
Interest income 8,145 16,110
Other expense, net (53,370) (27,282)
------------------ -------------------
(290,890) (334,950)
INCOME BEFORE ELIMINATION OF MINORITY
PARTNER INTEREST AND INCOME TAXES 1,172,620 1,388,580
ELIMINATION OF MINORITY PARTNER INTEREST (144,357) (121,896)
------------------ -------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,028,263 1,266,684
BENEFIT FROM INCOME TAXES - 318,377
------------------ -------------------
NET INCOME $ 1,028,263 $ 1,585,061
================== ===================
NET INCOME PER SHARE OF COMMON STOCK:
Basic $ 0.23 $ 0.36
================== ===================
Diluted $ 0.09 $ 0.16
================== ===================
AVERAGE WEIGHTED NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 4,507,906 4,454,015
================== ===================
Diluted 11,413,529 9,789,563
================== ===================
See accompanying notes to consolidated financial statements.
5
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
26 Weeks Ended
----------------------------------------
June 29, 2003 June 30, 2002
------------------- -------------------
OPERATING ACTIVITIES:
Net income $ 1,028,263 $ 1,585,061
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Loss on disposal of assets 2,352 2,616
Depreciation and amortization 524,086 554,405
Provision for impairment of goodwill - 103,098
Minority partner interest 31,647 12,937
Changes in assets and liabilities:
Increase in inventories (40,810) (45,874)
Decrease in receivables from related parties 975 30,013
Increase in other assets (667,031) (249,849)
Decrease in prepaid rent 14,044 25,200
Decrease in income tax refunds receivable (3,300) (279,073)
Decrease in deferred tax asset - -
Decrease in accounts payable (460,098) (1,639,773)
Decrease in accrued expenses (228,952) (264,984)
Increase in sales tax payable 46,063 46,121
Decrease in deferred rent (21,391) (14,127)
------------------- -------------------
Total adjustments (802,415) (1,719,290)
------------------- -------------------
Net cash provided by (used in) operating activities 225,848 (134,229)
------------------- -------------------
INVESTING ACTIVITIES:
Proceeds from the sale of assets - 1,091,324
Purchase of property and equipment (393,180) (252,151)
------------------- -------------------
Net cash (used in) provided by investing activities (393,180) 839,173
------------------- -------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 578,585 2,304,317
Repayment of debt (626,616) (1,351,399)
------------------- -------------------
Net cash (used in) provided by financing activities (48,031) 952,918
------------------- -------------------
Net (decrease) increase in cash (215,363) 1,657,862
CASH AT BEGINNING OF PERIOD 2,468,809 969,680
------------------- -------------------
CASH AT END OF PERIOD $ 2,253,446 $ 2,627,542
=================== ===================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 179,964 $ 289,692
Bonus paid in common stock $ 64,315 $ -
Cash paid (refunds received) for income taxes $ 3,300 $ (40,000)
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 (Unaudited)
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 1,028,263 1,028,263
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
June 29, 2003 63,548 $ 635 4,631,375 $ 46,313 $ 14,303,152 $(11,105,522) $ 3,244,578
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. (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 June 29, 2003 June 30, 2002
----------------------------------------
Net income applicable to common stock $ 244,180 $ 659,390
========================================
Weighted common shares outstanding 4,561,797 4,454,015
Basic net income per share of common stock $ 0.05 $ 0.15
Effect of dilutive securities:
Warrants 6,450,642 6,344,568
Stock options 453,853 396,059
----------------------------------------
Diluted weighted common shares outstanding 11,466,292 11,194,642
----------------------------------------
Diluted net income per share of common stock $ 0.02 $ 0.06
========================================
For the 26 weeks ended June 29, 2003 June 30, 2002
----------------------------------------
Net income applicable to common stock $ 1,028,263 $ 1,585,061
========================================
Weighted common shares outstanding 4,507,906 4,454,015
Basic net income per share of common stock $ 0.23 $ 0.36
Effect of dilutive securities:
Warrants 6,450,642 5,110,959
Stock options 454,981 224,589
----------------------------------------
Diluted weighted common shares outstanding 11,413,529 9,789,563
----------------------------------------
Diluted net income per share of common stock $ 0.09 $ 0.16
8
The earnings per share calculations excluded warrants and options
to purchase an aggregate of 545,588 and 310,827 shares of common
stock during the 13 weeks ended June 29, 2003 and June 30, 2002,
respectively, and warrants and options to purchase an aggregate
of 541,172 and 2,193,248 shares of common stock during the 26
weeks ended June 29, 2003 and June 30, 2002, respectively, as the
exercise price of the 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 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, the Company 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 by the Company for this stock award.
NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." The Statement updates,
clarifies and simplifies existing accounting pronouncements.
Statement No. 145 rescinds Statement No. 4, which required all
gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of
related income tax effect. As a result, the criteria in Opinion
30 will now be used to classify those gains and losses. Statement
No. 64 amended Statement No. 4, and is no longer necessary
because Statement No. 4 has been rescinded. Statement No. 44 was
issued to establish accounting requirements for the effects of
transition to the provisions of the Motor Carrier Act of 1980.
Because the transition has been completed, Statement No. 44 is no
longer necessary. Statement No.145 also amends Statement No. 13
to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback transactions. This amendment
is consistent with the FASB's goal of requiring similar
accounting treatment for transactions that have similar economic
effects. Statement No. 145 also makes technical corrections to
existing pronouncements. The adoption of Statement No. 145 did
not materially affect our consolidated financial statements.
9
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.
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, the Company 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 June 15, 2003. Full disclosure, as well as
consolidation, if applicable, of any newly created agreements
after January 31, 2003 must begin immediately. Adoption of FIN
46 is not expected to materially impact our consolidated
financial statements.
10
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.
11
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
the Company's 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 the Company's Consolidated
Statements of Income bear to total revenues.
-------------------------------- ----------------------------------
13 Weeks Ended 26 Weeks Ended
-------------------------------- ----------------------------------
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
--------------- ---------------- ----------------- ----------------
REVENUES 100.0% 100.0% 100.0% 100.0%
--------------- ---------------- ----------------- ----------------
COST AND EXPENSES:
Cost of revenues 33.0% 33.9% 32.7% 33.5%
Labor and other related expenses 29.4% 29.9% 29.5% 29.4%
Other restaurant operating expenses 24.2% 21.4% 22.9% 21.5%
--------------- ---------------- ----------------- ----------------
86.6% 85.3% 85.1% 84.4%
--------------- ---------------- ----------------- ----------------
General and administrative expenses 7.3% 7.7% 6.9% 6.7%
Depreciation and amortization 2.2% 2.2% 2.1% 2.1%
Provision for impairment of goodwill 0.0% 0.4% 0.0% 0.4%
--------------- ---------------- ----------------- ----------------
Income from operations 3.9% 4.4% 5.9% 6.5%
--------------- ---------------- ----------------- ----------------
Interest expense, net -1.0% -0.9% -1.0% -1.2%
Other expense, net -0.3% -0.2% -0.2% -0.1%
Elimination of minority partner interest -0.6% -0.5% -0.6% -0.5%
--------------- ---------------- ----------------- ----------------
Income before provision for taxes 2.1% 2.7% 4.1% 4.8%
Benefit from income taxes 0.0% 2.5% 0.0% 1.2%
--------------- ---------------- ----------------- ----------------
Net income 2.1% 5.3% 4.1% 6.0%
=============== ================ ================= ================
12
RESULTS OF OPERATIONS
13 weeks ended June 29, 2003 and June 30, 2002
Revenues. Total revenues for the second quarter of 2003 were
$11,901,000 as compared to $12,509,000 for the second quarter of
2002. The $608,000, or 4.9% decrease in revenues was primarily
due to a 2.3% 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 which
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 33.0% for the second quarter of 2003 from
33.9% for the second quarter of 2002. This decrease primarily
was due to favorable food costs, operational improvements and
lower distribution costs partially offset by a non-recurring
write-down of inventory of $36,000 in the second quarter of 2003.
Exclusive of the non-recurring item, cost of revenues was 32.7%
for the second quarter of 2003. The Company is continually
attempting to anticipate and reacting 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 its 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 decreased to 29.4% during
the second quarter of 2003 as compared to 29.9% for the second
quarter of 2002. This decrease was primarily due to a second
quarter 2003 non-recurring reduction 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 as a percentage of revenues was 30.9% for the second
quarter of 2003.
Other restaurant operating expenses. Other restaurant operating
expenses as a percentage of revenues increased to 24.2% for the
second quarter of 2003 as compared with 21.4% for the second
quarter of 2002. The increase primarily was due to increases
in general liability and property insurance costs, natural gas,
electricity and contract services along with a reduction
in operating leverage caused by lower sales volumes.
General and administrative expenses. General and administrative
expenses of $874,000 or 7.3% of revenues for the second quarter
of 2003 decreased from $963,000 or 7.7% of revenues for the
second quarter of 2002, primarily due to decreases in
administrative salaries partially offset by increases in
consulting fees.
Depreciation and amortization. Depreciation and amortization
expense as a percentage of revenues was 2.2% for the second
quarter of 2003 and 2002.
Provision for impairment of goodwill. There was no provision
for impairment of goodwill in the second quarter of 2003. The
provision for impairment of goodwill was $52,000 or 0.4% of
revenues during the second quarter of 2002; goodwill was
evaluated for impairment and written down in accordance with FASB
Statement No. 142 which the Company adopted in 2002.
Interest expense, net. Interest expense was $115,000 in the
second quarter of 2003 compared to $118,000 in the second quarter
of 2002. The decrease was primarily related to the reduction of
loan balances outstanding.
13
Benefit from income taxes. No benefit or provision for income
taxes was recognized for the second quarter of 2003 based on
annual projected taxable income for 2003, as adjusted for net
operating loss carry forwards. A tax benefit of $318,000 was
recognized in the second quarter of 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, the Company had income from operations
of $461,000 for the second quarter of 2003 compared to $544,000
for the second quarter of 2002. Exclusive of non-recurring
items, income from operations was $300,000 for the second quarter
of 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. The Company had net
income of $244,000 for the second quarter of 2003 compared to
$659,000 for the second quarter of 2002. Exclusive of
nonrecurring charges, net income was $83,000 in the second
quarter of 2003 and $341,000 for the second quarter of 2002. The
non-recurring charge for the second quarter of 2002 related to
$318,000 in income tax benefits.
26 weeks ended June 29, 2003 and June 30, 2002
Revenues. Total revenues for the 26 weeks ended June 29, 2003
were $24,913,000 as compared to $26,637,000 for the 26 weeks
ended June 30, 2002. The $1,724,000 or 6.5% decrease primarily
was due to a reduction in same store sales of 4.0% in addition to
the closing of one unit in August of 2002.
Cost of revenues. The cost of revenues as a percentage of
revenues decreased to 32.7% for the 26 weeks ended June 29, 2003
from 33.5% for the comparable period in 2002. This decrease
primarily relates to favorable food costs, operational
improvements and lower distribution costs 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 26 weeks ended June 29, 2003.
Labor and other related expenses. Labor and other related
expenses increased to 29.5% as a percentage of revenues for the
26 weeks ended June 29, 2003 as compared to 29.4% for the same
period in 2002. This increase was primarily attributable to an
increase in management labor 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 30.2% for the 26 weeks ending June 29, 2003.
Other restaurant operating expenses. Other restaurant operating
expenses increased to 22.9% as a percentage of revenues for the
26 weeks ended June 29, 2003 as compared with 21.5% 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
general liability and property insurance costs, natural gas, and
electricity costs.
General and administrative expenses. General and administrative
expenses increased to 6.9% as a percentage of revenues for the 26
weeks ended June 29, 2003 as compared with 6.7% for the same
period in 2002. This increase was primarily attributable to
increases in consulting fees partially offset by reductions in
administrative salaries.
14
Depreciation and amortization. Depreciation and amortization
expenses as a percentage of revenues was 2.1% for the 26 weeks
ended June 29, 2003 and June 30, 2002.
Provision for impairment of goodwill. There was no provision
for impairment of goodwill in the 26 weeks ending June 29, 2003.
The provision for impairment of goodwill was $103,000 or 0.4% of
revenues during the 26 weeks ended June 30, 2002; goodwill was
evaluated for impairment and written down in accordance with FASB
Statement No. 142 which the Company adopted in 2002.
Interest expense, net. Interest expense was $238,000 in the 26
weeks ending June 29, 2003 compared to $308,000 in the same
period of 2002. The Company recorded a non-recurring charge of
$106,000 in the 26 weeks ending June 30, 2002 relating to the
issuance of warrants on January 31, 2002 as part of the
previously reported $2,000,000 financing transaction. Exclusive
of the non-recurring charge, net interest expense was $202,000
for the 26 weeks ending June 30, 2002.
Benefit from income taxes. No benefit or provision for income
taxes was recognized for the 26 weeks ending June 29, 2003
compared to a tax benefit of $318,000 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, the Company's income from operations was
$1,464,000 for the 26 weeks ended June 29, 2003 compared to
$1,724,000 for the same period in 2002. Exclusive of non-
recurring items, the Company's income from operations was
$1,303,000 for the 26 weeks ended June 29, 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 for the 26 weeks ended June 29, 2003. The
Company's net income for the 26 weeks ended June 29, 2003 was
$1,028,000 compared to $1,585,000 in the same period in 2002.
Exclusive of non-recurring items, the Company's net income was
$867,000 for the 26 weeks ended June 29, 2003 compared to
$1,373,000 for the comparable period in 2002. Non-recurring
items for the 26 weeks ended June 30, 2002 consisted of
$318,000 in income tax benefits, offset by $106,000 in imputed
interest expense.
LIQUIDITY AND CAPITAL RESOURCES
As of June 29, 2003, the Company's current liabilities of
$5,580,000 exceeded its current assets of $3,676,000, resulting
in a working capital deficiency of $1,904,000. 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 $329,000 and the receivable for the $197,000
insurance refund, coupled with reductions in accounts payable of
$460,000 and accrued expenses of $229,000.
The Company was negatively impacted in fiscal 2002 by the ongoing
costs of divestiture of its Midwest locations. Such divestiture
costs had an adverse affect on the Company's cash position.
Historically, the Company 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.
15
Cash provided by operating activities for the 26 weeks ended June
29, 2003 was $226,000 compared to cash used in operating
activities of $134,000 for the comparable period in 2002.
The net improvement of $360,000 was primarily related to
reductions in accounts payable and accrued expenses,
partially offset by a reduction in net income and increases
in accounts receivable and prepaid expenses.
The cash used in investing activities was $393,000 for the 26
weeks ended June 29, 2003 compared to cash provided by investing
activities of $839,000 for the comparable period in 2002. We had
a net increase of $141,000 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 $48,000 for the 26
weeks ended June 29, 2003 compared to cash provided by financing
activities of $953,000 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. The Company has
experienced fluctuations in its quarter-to-quarter operating
results due primarily 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., the
health of Florida's economy and the effect of world events in
general and on 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.
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 the Company's 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 $1,240,000 in outstanding debt with
banks that is based on variable rates. Borrowings under the loan
agreements bear interest at the rate equal to the applicable
bank's base rate.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on
Form 10-Q, the Company's management, including its President and
Chief Executive Officer and Executive Vice President and Chief
Financial Officer, carried out an evaluation, of the
effectiveness of the design and operation of the Company's
16
disclosure controls and procedures pursuant to Exchange Act Rule
13a-15 or 15d-15. Based upon that evaluation, the Company's
President and Chief Executive Officer and Executive Vice
President and Chief Financial Officer concluded that, as of the
end of the period covered by this report, the Company's
disclosure controls and procedures are effective in alerting them
to material information, on a timely basis, required to be
included in the Company's periodic SEC filings. There have been
no changes in the Company's internal control over financial
reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
17
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, the Company 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. We believe
the demand for additional damages is inappropriate and we intend
to vigorously defend our position. The court has ordered the
parties to attempt settlement through mediation, which process
will begin in late August 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
At the Company's Annual Meeting of Stockholders held on June
3, 2003, the following directors were elected by the votes indicated:
Philip R. Chapman: 3,573,847 For, 3,000 Against or Withheld, 0 Abstaining
J. Stephen Gardner: 3,574,197 For,2,650 Against or Withheld, 0 Abstaining
John N. Giordano: 3,574,197 For, 2,650 Against or Withheld, 0 Abstaining
Michael R. Golding: 3,574,197 For, 3,150 Against or Withheld, 0 Abstaining
David W. Head: 3,008,471 For, 568,376 Against or Withheld, 0 Abstaining
Christopher D. Illick: 3,574,197 For, 2,650 Against or Withheld, 0 Abstaining
Thomas R. Newkirk: 3,574,197 For, 2,650 Against or Withheld, 0 Abstaining
Item 5. Other Information
Effective July 7, 2003, casual dining veteran Leslie
Christon joined the company as CEO and President. Christon is
the former President and COO of Sutton Place Gourmet, Inc., the
food market and restaurant owner of Hay Day Markets, Balducci's
and Sutton Place Gourmet. Before that she served as President
of On the Border Restaurants, a Brinker International casual
dining chain, from 1996-2000. Before heading On the Border
Restaurants, Christon served as Senior Vice President of
Operations for Red Lobster Restaurants, where she oversaw 127
restaurants with revenues of more than $400 million for two
years. Previously she headed operations at Dallas-based El
Chico, a 100-unit Mexican restaurant chain. Christon, no
relation to Shells' founder John Christen, got her start in the
restaurant business with Steak & Ale Restaurants, holding a
variety of management positions at that company during the '70s
and early '80s.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.56 Employment Agreement, dated July 1, 2003,
between Leslie J. Christon and Shells Seafood
Restaurants, Inc.
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 June 29, 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 June 29, 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 June 29, 2003.
(b) Reports on Form 8-K filed during the current quarter
The Company filed a current report on Form 8-K, Item 5,
regarding a press release on June 2, 2003 announcing that CEO
and President David Head has voluntarily resigned to take
another position.
The Company filed a current report on Form 8-K, Item 5,
regarding a press release on July 1, 2003 announcing that
casual dining veteran Leslie Christon will join the company
as President and CEO effective July 7, 2003.
The Company 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.
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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
Date: August 13, 2003 President and Chief Executive Officer
(On behalf of the registrant.)
/s/ Warren R. Nelson
Date: August 13, 2003 Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
10.56 Employment Agreement, dated July 1, 2003,
between Leslie J. Christon and Shells Seafood
Restaurants, Inc.
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 June 29, 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 June 29, 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 June 29, 2003.
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