SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__xx__Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended September 29, 2002
__ 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 (IRS)Employer Identification Number
of 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 13, 2002
-------------------------------- ---------------------------------
Common stock, $0.01 par value 4,454,015
Preferred stock, $0.01 par value 66,862
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Index
Part I - Financial Information Page Number
Item 1 - Financial Statements
Consolidated Balance Sheets as of
September 29, 2002 (Unaudited)
and December 30, 2001 3
Consolidated Statements of Income (Unaudited)
for the 13 and 39 weeks ended September 29, 2002
and September 30, 2001 4
Consolidated Statements of Cash Flows (Unaudited)
for the 39 weeks ended September 29, 2002 and
September 30, 2001 5
Notes to Consolidated Financial
Statements - (Unaudited) 6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-10
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 12
Item 4 - Controls and Procedures 12
Part II - Other Information 13
Signatures 14
Certifications 15-16
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 29, 2002 December 30, 2001
-------------------- -------------------
ASSETS
Cash $ 2,528,296 $ 969,680
Inventories 385,418 457,610
Other current assets 436,258 84,465
Receivables from related parties 50,432 78,137
Income tax refund receivable 9,311 898,338
-------------------- -------------------
Total current assets 3,409,715 2,488,230
Property and equipment, net 7,707,857 8,106,500
Property held for sale, net - 1,022,060
Other assets 486,847 549,492
Goodwill 2,525,956 2,680,603
-------------------- -------------------
TOTAL ASSETS $ 14,130,375 $ 14,846,885
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,214,077 $ 4,079,396
Accrued expenses 3,487,015 3,872,266
Sales tax payable 185,416 207,913
Current portion of long-term debt 1,011,747 1,908,379
-------------------- -------------------
Total current liabilities 6,898,255 10,067,954
Deferred rent 1,112,477 1,243,057
Long-term debt, less current portion 3,233,215 1,633,073
-------------------- -------------------
Total liabilities 11,243,947 12,944,084
Minority partner interest 431,564 427,642
-------------------- -------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; authorized
2,000,000 shares; 66,862 shares issued
and outstanding 669 669
Common stock, $0.01 par value; authorized
20,000,000 shares; 4,454,015 shares issued
and outstanding 44,540 44,540
Additional paid-in-capital 14,240,576 14,240,576
Retained earnings (deficit) (11,830,921) (12,810,626)
-------------------- -------------------
Total stockholders' equity 2,454,864 1,475,159
-------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,130,375 $ 14,846,885
==================== ===================
See notes to consolidated financial statements.
3
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
13 Weeks Ended 39 Weeks Ended
------------------------------------------ ------------------------------------------
September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
-------------------- -------------------- -------------------- --------------------
REVENUES $ 10,965,891 $ 11,280,954 $ 37,603,390 $ 47,933,271
-------------------- -------------------- -------------------- --------------------
COST AND EXPENSES:
Cost of revenues 3,751,622 4,075,255 12,666,305 17,904,171
Labor and other related expenses 3,581,715 3,500,093 11,420,600 14,519,213
Other restaurant operating expenses 2,732,188 2,321,061 8,447,451 9,882,289
General and administrative expenses 966,464 926,683 2,754,098 3,698,933
Depreciation and amortization 330,852 409,914 988,356 1,364,374
Provision for impairment of assets - - - 1,582,137
Provision for store closings - - - 1,333,271
-------------------- -------------------- -------------------- --------------------
11,362,841 11,233,006 36,276,810 50,284,388
-------------------- -------------------- -------------------- --------------------
INCOME (LOSS) FROM OPERATIONS (396,950) 47,948 1,326,580 (2,351,117)
-------------------- -------------------- -------------------- --------------------
OTHER INCOME (EXPENSE):
Interest expense (130,187) (96,153) (453,965) (413,959)
Interest income 12,866 136 28,976 1,846
Other expense, net (52,363) (332,138) (79,645) (412,653)
-------------------- -------------------- -------------------- --------------------
(169,684) (428,155) (504,634) (824,766)
-------------------- -------------------- -------------------- --------------------
INCOME (LOSS) BEFORE ELIMINATION OF
MINORITY PARTNER INTEREST AND INCOME TAXES (566,634) (380,207) 821,946 (3,175,883)
ELIMINATION OF MINORITY PARTNER INTEREST (47,060) (54,017) (168,956) (169,626)
-------------------- -------------------- -------------------- --------------------
INCOME (LOSS) BEFORE BENEFIT FROM
INCOME TAXES (613,694) (434,224) 652,990 (3,345,509)
BENEFIT FROM INCOME TAXES 8,338 151,415 326,715 151,415
-------------------- -------------------- -------------------- --------------------
NET INCOME (LOSS) $ (605,356) $ (282,809) $ 979,705 $ (3,194,094)
==================== ==================== ==================== ====================
BASIC NET INCOME (LOSS) PER SHARE OF
COMMON STOCK $ (0.14) $ (0.06) $ 0.22 $ (0.72)
==================== ==================== ==================== ====================
BASIC WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK OUTSTANDING 4,454,015 4,454,015 4,454,015 4,454,015
==================== ==================== ==================== ====================
DILUTED NET INCOME (LOSS) PER SHARE
OF COMMON STOCK $ (0.14) $ (0.06) $ 0.07 $ (0.72)
==================== ==================== ==================== ====================
DILUTED WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK OUTSTANDING 4,454,015 4,454,015 13,220,328 4,454,015
==================== ==================== ==================== ====================
See notes to consolidated financial statements.
4
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
39 Weeks Ended
-----------------------------------------
September 29, 2002 September 30, 2001
-------------------- --------------------
OPERATING ACTIVITIES:
Net income (loss) $ 979,705 $ (3,194,094)
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities:
Provision for impairment of assets - 1,582,137
Depreciation and amortization 988,355 1,364,374
Loss on sale of assets 2,616 284,128
Minority partner interest 3,922 (18,874)
Changes in assets and liabilities:
Decrease in inventories 72,192 549,907
(Increase) decrease in other assets (200,520) 300,800
Decrease in prepaid rent 12,036 37,800
Decrease in income tax refunds
receivable 889,027 -
Decrease in deferred tax asset - 94,527
(Decrease) increase in accounts
payable (1,865,319) 971,129
Decrease in accrued expenses (510,812) (843,863)
Decrease in sales tax payable (22,497) (149,048)
Decrease in deferred rent (130,580) (534,728)
-------------------- --------------------
Total adjustments (761,580) 3,638,289
-------------------- --------------------
Net cash provided by operating
activities 218,125 444,195
-------------------- --------------------
INVESTING ACTIVITIES:
Proceeds from the sale of assets,net 1,091,324 1,496,646
Purchase of property and equipment (433,383) (534,585)
-------------------- --------------------
Net cash provided by investing
activities 657,941 962,061
-------------------- --------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 2,304,317 227,636
Repayment of debt (1,621,767) (2,299,692)
-------------------- --------------------
Net cash provided by (used in)
financing activities 682,550 (2,072,056)
-------------------- --------------------
Net increase (decrease) in cash 1,558,616 (665,800)
CASH AT BEGINNING OF PERIOD 969,680 1,261,937
-------------------- --------------------
CASH AT END OF PERIOD $ 2,528,296 $ 596,137
==================== ====================
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 391,832 $ 352,138
Cash refunds received for income
taxes $ 1,216,438 $ 234,164
Note receivable on sale of assets $ 100,000 $ -
See notes to consolidated financial statements.
5
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 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 30, 2001 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 condensed consolidated financial
statements to conform with the current year presentation.
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":
13 Weeks Ended 39 Weeks Ended
------------------------------------------ ------------------------------------------
September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
-------------------- -------------------- -------------------- --------------------
Net income(loss) applicable to common stock $ (605,356) $ (282,809) $ 979,705 $ (3,194,094)
==================== ==================== ==================== ====================
Weighted common shares outstanding 4,454,015 4,454,015 4,454,015 4,454,015
Basic net income (loss) per share
of common stock $ (0.14) $ (0.06) $ 0.22 $ (0.72)
Effect of dilutive securities:
Warrants - - 8,330,634 -
Stock options - - 435,679 -
-------------------- -------------------- -------------------- --------------------
Total dilutive securities - - 8,766,313 -
-------------------- -------------------- -------------------- --------------------
Diluted weighted common shares outstanding 4,454,015 4,454,015 13,220,328 4,454,015
-------------------- -------------------- -------------------- --------------------
Diluted net income (loss) per share
of common stock $ (0.14) $ (0.06) $ 0.07 $ (0.72)
==================== ==================== ==================== ====================
The earnings per share calculations excluded warrants and options to
purchase an aggregate of 11,075,039 shares of common stock during the
13 week period ended September 29, 2002, and warrants and options
and to purchase an aggregate of 1,612,758 shares of common stock
during the 13 and 39 week periods ended September 30, 2001, as they
were anti-dilutive.
The earnings per share calculations excluded warrants and options to
purchase an aggregate of 2,308,726 shares of common stock during the
39 weeks ended September 29, 2002, as the exercise prices of these
warrants and options were greater than the average market price of the
common shares.
3. NEW ACCOUNTING PRONOUNCEMENT
In July 2001, the FASB issued Statement No. 141, "Accounting for Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible
Assets." These Statements modify accounting for business combinations after
June 30, 2001. The Statements require that goodwill existing at the date
of adoption be reviewed for possible impairment and that impairment tests
be periodically repeated, with impaired assets written-down to fair value.
Additionally, existing goodwill and intangible assets must be assessed and
classified consistent with the Statements' criteria. Intangible assets
with estimated useful lives will continue to be amortized over those periods.
Amortization of goodwill and intangible assets with indeterminate lives
will cease. The adoption of Statement No. 142 is not expected to materially
affect our consolidated financial statements.
6
In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This Statement requires capitalizing any retirement
costs as part of the total cost of the related long-lived asset and
subsequently allocating the total expense to future periods using a
systematic and rational method. Adoption of this Statement is required
for fiscal years beginning after June 15, 2002. The adoption of Statement
No. 143 is not expected to materially affect our consolidated financial
statements.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes
Statement No. 121 but retains many of its fundamental provisions.
Additionally, this Statement expands the scope of discontinued operations
to include more disposal transactions. The provisions of this Statement
are effective for financial statements issued for fiscal years beginning
after December 15, 2001. The adoption of Statement No. 144 did not and
is not expected to materially affect our consolidated financial statements.
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 is not expected to materially affect our consolidated
financial statements.
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, a company may recognize costs related to a restructuring
only when the liability is incurrred. 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 is not
expected to materially affect our consolidated financial statements.
7
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 Income bear to
total revenues.
13 Weeks Ended 39 Weeks Ended
------------------------------------------ -----------------------------------------
September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
-------------------- -------------------- -------------------- --------------------
REVENUES 100.0% 100.0% 100.0% 100.0%
-------------------- -------------------- -------------------- --------------------
COST AND EXPENSES:
Cost of revenues 34.2% 36.1% 33.7% 37.4%
Labor and other related expenses 32.7% 31.0% 30.4% 30.3%
Other restaurant operating expenses 24.9% 20.6% 22.5% 20.6%
-------------------- -------------------- -------------------- --------------------
Total restaurant costs and expenses 91.8% 87.7% 86.5% 88.3%
-------------------- -------------------- -------------------- --------------------
General and administrative expenses 8.8% 8.2% 7.3% 7.7%
Depreciation and amortization 3.0% 3.6% 2.6% 2.8%
Provision for impairment of assets 0.0% 0.0% 0.0% 3.3%
Provision for store closings 0.0% 0.0% 0.0% 2.8%
-------------------- -------------------- -------------------- --------------------
Income (loss) from operations -3.6% 0.4% 3.5% -4.9%
-------------------- -------------------- -------------------- --------------------
Interest expense, net -1.1% -0.9% -1.1% -0.9%
Other expense, net -0.5% -2.9% -0.2% -0.9%
Elimination of minority partner interest -0.4% -0.5% -0.4% -0.4%
-------------------- -------------------- -------------------- --------------------
Income (loss) before benefit from taxes -5.6% -3.8% 1.7% -7.0%
Benefit from income taxes 0.1% 1.3% 0.9% 0.3%
-------------------- -------------------- -------------------- --------------------
Net income (loss) -5.5% -2.5% 2.6% -6.7%
-------------------- -------------------- -------------------- --------------------
8
13 weeks ended September 29, 2002 and September 30, 2001
Revenues. Total revenues for the third quarter of 2002 were $10,966,000
as compared to $11,281,000 for the third quarter of 2001, a $315,000,
or 2.8% decrease. Same store sales for the third quarter of 2002 were
1.2% below the comparable period in 2001 due to a decline in check average
partially offset by an increase in customer counts. The Company discontinued
operations in one restaurant in each of the third quarters of 2002 and 2001.
The Company operated 28 restaurants as of the third quarter ended September
29, 2002 versus 29 restaurants at the comparable period ended in 2001.
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 34.2% for the third quarter of 2002
from 36.1% for the third quarter of 2001. This decrease was due
primarily to lowered protein costs, mostly in shrimp,
greater focus on in-store cost control, and the continued
favorable affect of the fourth quarter 2001 implementation of
a new menu, which has better promoted more favorable margin
items. The Company is continually attempting 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 its menu prices
accordingly to help control the cost of revenues, both in
absolute dollars and as a percentage of revenues.
Labor and other related expenses. Labor and other related
expenses as a percentage of revenues increased to 32.7%
during the third quarter of 2002 as compared to 31.0% for the
third quarter of 2001. This increase was primarily
attributable to an increase in hourly training and management
staffing levels.
Other restaurant operating expenses. Other restaurant
operating expenses as a percentage of revenues increased to
24.9% for the third quarter of 2002 as compared with 20.6% for
the third quarter of 2001. The increase primarily was
due to increased media advertising and local store marketing
costs. In addition, the Company increased its
expenditures in restaurant maintenance.
General and administrative expenses. General and administrative
expenses were $966,000 or 8.8% of revenues for
the third quarter of 2002 as compared with $927,000 or 8.2% of
revenues for the third quarter of 2001. The increase
was primarily due to a third quarter of 2002 increase in
restaurant manager recruiting and training along with increased
expenditures relating to the Company's strategic initiatives and
marketing plan development.
Depreciation and amortization. Depreciation and amortization
expense as a percentage of revenues were 3.0% and
3.6% for the third quarter of 2002 and 2001, respectively.
Other expense, net. The other expense was $52,000 for the 13
weeks ended September 29, 2002 compared to
$332,000 for the same period in 2001 which included a book loss
of $283,000 realized upon the disposition of a
restaurant site in Delray Beach, Florida.
Other income (expense). The other expense was $170,000 for the 13
weeks ended September 29, 2002 compared to $428,000 for the same
period in 2001, which included a book loss of $283,000 realized upon
the disposition of a restaurant site in Delray Beach, Florida.
Benefit from income taxes. A benefit from income taxes was
recognized for the third quarter of 2002 of $8,000
compared to $151,000 for the same quarter in 2001 relating to
tax refunds.
Income (loss) from operations and net income (loss). As a
result of the factors discussed above, loss from operations
was $397,000 for the third quarter of 2002 compared to income
from operations of $48,000 for the third quarter of
2001. Net loss was $605,000 for the third quarter of 2002
compared to $283,000 for the third quarter of 2001.
Exclusive of non-recurring items, the net loss was $151,000 for
the third quarter of 2001. Non-recurring items for the
third quarter 2001 included a book loss of $283,000 from the
sale of the Delray Beach, Florida unit and an increase to
the deferred tax asset of $151,000.
9
39 weeks ended September 29, 2002 and September 30, 2001
Revenues. Total revenues for the 39 weeks ended September 29,
2002 were $37,603,000 as compared to $47,933,000
for the 39 weeks ended September 30, 2001. The $10,330,000 or
21.6% decrease primarily was due to the
discontinuation of operations in 16 restaurants, 14 of which
were Midwest units, during the 39 weeks ended
September 30, 2001. Same store sales decreased 9.5% compared to
the same period in 2001 due to declines in both
check average and customer counts.
Cost of revenues. The cost of revenues as a percentage of
revenues decreased to 33.7% for the 39 weeks ended
September 29, 2002 from 37.4% for the same period in 2001. This
decrease primarily was due to lower protein costs
and the effect of the new menu, which generated improvements in
margins.
Labor and other related expenses. Labor and other related
expenses decreased to 30.4% as a percentage of revenues
for the 39 weeks ended September 29, 2002 as compared to 30.3%
for the same period in 2001. Also included in
2001, was a one-time nonrecurring charge of $102,000 for
severance pay relating to the discontinuation of the
Midwest operations.
Other restaurant operating expenses. Other restaurant operating
expenses increased to 22.5% as a percentage of
revenues for the 39 weeks ended September 29, 2002 as compared
with 20.6% for the same period in 2001. The
increase was primarily related to an increase in media
advertising and local store marketing costs.
General and administrative expenses. General and administrative
expenses were $2,754,000 or 7.3% of revenues for
the 39 weeks ended September 29, 2002 compared with $3,699,000
or 7.7% of revenues for the same period in 2001.
The decrease was primarily attributable to the reorganization
and downsizing of administrative and supervisory staff in
the first quarter of 2001 which included a one-time nonrecurring
charge of $150,000 for severance pay.
Depreciation and amortization. Depreciation and amortization
expenses as a percentage of revenues were 2.6% for the
39 weeks ended September 29, 2002 and 2.8% for the same period
in 2001.
Provision for impairment of assets. The Company recorded a
$1,582,000 charge in the 39 weeks ended September
30, 2001 relating to the write-down of impaired assets to their
estimated fair value in accordance with FASB Statement
No. 121. The asset impairment charge related to the
discontinuation of Midwest operations as well as reserving for
certain under-performing Florida units.
Provision for store closings. The Company recorded a one-time
charge of $1,333,000 relating to store closing costs
primarily from the Midwest restaurant closures during the 39
weeks ended September 30, 2001. Store closing costs
consisted primarily of real estate lease obligations incurred or
anticipated to complete lease terminations or continuing
costs while new tenants were located.
Interest expenses, net. The Company recorded a non-recurring
charge of $106,000 in the first quarter of 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
$319,000 for the 39 weeks ending September 29, 2002
compared to $412,000 in the comparable period in 2001. The
reduction was primarily related to debt repayments
associated with store closures in 2001 and related property
dispositions through 2002.
Other income (expense). The other expense was $505,000 for the 39
weeks ended September 29, 2002 compared to $825,000 for the same
period in 2001, which included a book loss of $283,000 realized upon
the disposition of a restaurant site in Delray Beach, Florida.
Benefit from income taxes. A benefit from income taxes of $327,000 was
recognized in the 39 weeks ended September 29, 2002 compared to a benefit
of $151,000 for the same period in 2001. The increase related to a
refund application to recover tax payments 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.
10
Income (loss) from operations and net income (loss). As a result
of the factors discussed above, the Company's income from operations
was $1,327,000 for the 39 weeks ended September 29, 2002 compared to a
loss from operations of $2,351,000 for the 39 weeks ended September 30, 2001.
Exclusive of the provisions for impairment of assets and store closings,
the Company's income from operations was $564,000 for the 39 weeks ended
September 30, 2001. The Company's net income for the 39 weeks ended
September 29, 2002 was $980,000 compared to a net loss of $3,194,000 in
the same period in 2001. Exclusive of non-recurring items, the Company's
net income was $768,000 for the 39 weeks ended September 29, 2002 and
$105,000 for the 39 weeks ended September 30, 2001. Non-recurring items
for the 39 weeks ended September 29, 2002 included $106,000 related to
imputed interest expense and a tax benefit of $318,000. Non-recurring
items for the 39 weeks ended September 30, 2001 included $1,582,000
related to the write-down of impaired assets, $1,333,000 related to
expenses on restaurant closures, severance pay of $252,000, a book loss
of $283,000 from the sale of the Delray Beach, Florida unit and an
increase to the deferred tax asset of $151,000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 29, 2002, the Company's current liabilities of
$6,898,000 exceeded its current assets of $3,410,000,
resulting in a working capital deficiency of $3,488,000. In
comparison, the December 30, 2001 working capital
deficiency was $7,580,000. The improvement in the working
capital deficiency was primarily related to the cash
received from the previously reported $2,000,000 financing
transaction, completed in the first quarter of 2002, and
favorable operating results in the first and second quarters of
2002. In addition, as a result of the Economic Stimulus
Package signed into law in March 2002, the Company recognized an
income tax benefit in the second quarter of 2002.
A federal income tax refund of $1,176,000 for taxes paid in
fiscal years 1996 and 1997 was received in July 2002.
The Company continues to be negatively impacted by the ongoing
costs of divestiture of its Midwest locations.
Such divestiture costs had and, in the near term, will continue to
have 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.
Cash provided by operating activities for the 39 weeks ended
September 29, 2002 was $218,000 compared to
$444,000 for the comparable period in 2001. The net decrease of
$226,000 was primarily due to the settlement and
payment of outstanding 2001 accounts payable and accrued
expenses during 2002, offset in part by a net decrease of
$889,000 in income tax refunds receivable.
The cash provided by investing activities was $658,000 for the
39 weeks ended September 29, 2002 compared to
$962,000 for the same period in 2001; or a net decrease of
$304,000 due to a reduction in proceeds on the sale of
assets, which was partially offset by a decrease in expenditures
for capital improvements.
The cash provided by financing activities was $683,000 for the
39 weeks ending September 29, 2002 compared to
cash used in financing activities of $2,072,000 for the
comparable period in 2001. The net increase of $2,755,000 was
primarily due to the $2,000,000 financing transaction completed
in January 2002 along with a reduction in repayments
of debt related to the disposition of the Midwest restaurants in
2001.
The Company has existing indebtedness with Colonial Bank
(previously known as Manufacturers Bank of Florida)
consisting of two notes with a total principal balance, as of
September 29, 2002, of $651,000. The loans, which were
used to finance the purchase of a restaurant location and
certain equipment, are subject to compliance by the Company
with specified financial covenants. The Company was not in
compliance with certain of these covenants, but received
the appropriate covenant waivers as of September 29,2002.
Effective October 1, 2002, the Company renegotiated the
loans and associated financial covenants. Subsequently, the
Company is in compliance with the related financial
covenants.
The Company had existing indebtedness with SunTrust Bank
consisting of one note with a total principal balance, as
of September 29, 2002, of $284,000. The loan, which was used to
finance the purchase of a restaurant location,
matured on August 4, 2002. The loan was repaid subsequent to
September 29, 2002 and refinanced by Colonial
Bank.
11
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 both in and outside of Florida. 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
The Company is exposed to market risk from changes in interest
rates on debt and changes in commodity prices. The
Company's exposure to interest rate risk relates to its $949,000
in outstanding debt with banks that is based on variable
rates. Borrowings under the loan agreements bear interest at
rates ranging from 50 basis points under the prime-lending
rate to 100 basis points over the prime-lending rate.
Item 4. - Controls and Procedures
During the 90-day period prior to the filing date of this
report, management, including the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon,
and as of the date of that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective, in
all material respects, to ensure that information required to be
disclosed in the reports the Company files and
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported as and when
required.
There have been no significant changes in the Corporation's
internal controls or in other factors known to us that could
significantly affect internal controls subsequent to the date of
such evaluation, including any corrective sections with
regard to significant deficiencies and material weaknesses.
12
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
The Company has existing indebtedness with Colonial Bank (previously
known as Manufacturers Bank of Florida), consisting of two notes with a
total principal balance, as of September 29, 2002, of $651,000. The loans,
which were used to finance the purchase of a restaurant location and certain
equipment, are subject to compliance by the Company with specified financial
covenants. The Company was not in compliance with certain of these covenants
as of September 29, 2002, but received the appropriate covenant waivers.
The Company renegotiated these loans effective October 1, 2002 with
modifications to the debt covenants. The Company is in compliance with
the modified debt covenants.
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
None
13
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/ David W. Head November 13, 2002
President and Chief Executive Officer
/s/ Warren R. Nelson November 13, 2002
Executive Vice President and Chief Financial Officer
14
CERTIFICATIONS
I, David W. Head, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Shells Seafood Restaurants, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial infOrmation included in this quarterly
report, fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ David W. Head
David W. Head
President, and Chief Executive Officer
15
CERTIFICATIONS
I, Warren R. Nelson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Shells Seafood Restaurants, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly
report, fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Warren R. Nelson
Warren R. Nelson
Chief Financial Officer
16