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 March 28, 2004
__ 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
---------------------------------------------------
(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 May 5, 2004
Common stock, $0.01 par value 4,671,375
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 (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) 5
Consolidated Statement of
Stockholders' Equity (Unaudited) 6
Notes to Consolidated Financial
Statements (Unaudited) 7-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Item 4. Controls and ProcedureS 14
Part II. Other Information 15-16
Signatures 17
2
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 28, 2004 December 28, 2003
---------------- -------------------
ASSETS
Cash $ 1,478,452 $ 723,939
Inventories 452,017 382,549
Other current assets 399,101 265,891
Receivables from related parties 101,774 110,147
---------------- -------------------
Total current assets 2,431,344 1,482,526
Property and equipment, net 6,832,900 6,996,095
Prepaid rent 71,672 75,577
Other assets 572,651 587,612
Goodwill 2,474,407 2,474,407
---------------- -------------------
TOTAL ASSETS $ 12,382,974 $ 11,616,217
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,309,196 $ 2,390,685
Accrued expenses 2,327,074 2,295,290
Sales tax payable 294,353 168,385
Notes and deferred interest payable
to related parties 2,299,367 -
Current portion of long-term debt 273,658 234,247
---------------- -------------------
Total current liabilities 7,503,648 5,088,607
Deferred rent 1,033,808 1,053,531
Long-term debt, less current portion 1,531,854 1,558,245
Notes and deferred interest payable
to related parties - 2,267,416
---------------- -------------------
Total liabilities 10,069,310 9,967,799
Minority partner interest 478,032 465,836
---------------- -------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
authorized 2,000,000 shares;
63,548 shares issued and outstanding 635 635
Common stock, $.01 par value;
authorized 20,000,000 shares;
4,651,375 and 4,631,375 shares issued
and outstanding 46,514 46,314
Additional paid-in-capital 14,311,351 14,303,151
Accumulated deficit (12,522,868) (13,167,518)
---------------- -------------------
Total stockholders' equity 1,835,632 1,182,582
---------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 12,382,974 $ 11,616,217
================ ===================
See accompanying notes to consolidated financial statements.
3
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
13 Weeks Ended
-------------------------------------
March 28, 2004 March 30, 2003
------------------ ------------------
REVENUES $ 12,591,372 $ 13,011,985
------------------ ------------------
COST AND EXPENSES:
Cost of revenues 4,110,668 4,222,839
Labor and other related expenses 3,747,965 3,856,608
Other restaurant operating expenses 2,811,454 2,829,525
General and administrative expenses 793,394 839,739
Depreciation and amortization 296,193 260,793
------------------ ------------------
11,759,674 12,009,504
------------------ ------------------
INCOME FROM OPERATIONS 831,698 1,002,481
------------------ ------------------
OTHER INCOME (EXPENSE):
Interest expense (102,198) (126,822)
Interest income 1,305 4,614
Other expense, net (17,325) (21,785)
------------------ ------------------
(118,218) (143,993)
------------------ ------------------
INCOME BEFORE ELIMINATION OF
MINORITY PARTNER INTEREST AND
INCOME TAXES 713,480 858,488
ELIMINATION OF MINORITY PARTNER
INTEREST (68,830) (74,404)
------------------ ------------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 644,650 784,084
PROVISION FOR INCOME TAXES - -
------------------ ------------------
NET INCOME $ 644,650 $ 784,084
================== ==================
NET INCOME PER SHARE OF COMMON STOCK:
Basic $ 0.14 $ 0.18
================== ==================
Diluted $ 0.06 $ 0.07
================== ==================
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 4,634,012 4,468,764
================== ==================
Diluted 10,790,341 11,790,878
================== ==================
See accompanying notes to consolidated financial statements.
4
SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
----------------------------------
13 Weeks Ended
----------------------------------
March 28, 2004 March 30, 2003
---------------- ----------------
OPERATING ACTIVITIES:
Net income $ 644,650 $ 784,084
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 296,193 260,793
Loss on sale of assets - 2,352
Minority partner interest 12,196 18,328
Changes in current assets and liabilities (86,091) (787,335)
Changes in other assets:
Decrease (increase) in other assets 3,168 (11,384)
Decrease in prepaid rent 3,905 10,138
Changes in other liabilities:
Increase in accrued interest to
related parties - 29,142
Decrease in deferred rent (19,723) (14,297)
---------------- ----------------
Total adjustments 209,648 (492,263)
---------------- ----------------
Net cash provided by operating
activities 854,298 291,821
---------------- ----------------
INVESTING ACTIVITIES:
Purchase of property and equipment (121,205) (198,719)
---------------- ----------------
Net cash used in investing
activities (121,205) (198,719)
FINANCING ACTIVITIES:
Proceeds from debt financing 124,281 506,585
Repayment of debt (111,261) (296,298)
Proceeds from issuance of stock 8,400 -
---------------- ----------------
Net cash provided by financing
activities 21,420 210,287
---------------- ----------------
Net increase in cash 754,513 303,389
CASH AT BEGINNING OF PERIOD 723,939 2,468,809
---------------- ----------------
CASH AT END OF PERIOD $ 1,478,452 $ 2,772,198
================ ================
Cash flows (outflows) from changes in
current assets and liabilities:
Inventories $ (69,468) $ (58,998)
Receivables from related parties 8,373 33,510
Other current assets (133,210) (515,590)
Accounts payable (81,489) (193,386)
Accrued expenses 31,784 (190,175)
Sales tax payable 125,968 137,304
Increase in accrued interest to
related parties 31,951 -
---------------- ----------------
Change in current assets and liabilities $ (86,091) $ (787,335)
================ ================
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 69,046 $ 97,678
See accompanying notes to consolidated financial statements.
5
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 28, 2003 63,548 $ 635 4,631,375 $ 46,314 $14,303,151 $(13,167,518) $1,182,582
Net income 644,650 644,650
Stock options converted
to common stock 20,000 200 8,200 8,400
--------- -------- --------- --------- ------------ ------------ -----------
Balance at
March 28, 2004 63,548 $ 635 4,651,375 $ 46,514 $ 14,311,351 $(12,522,868) $1,835,632
========= ======== ========= ========= ============ ============= ===========
See accompanying notes to consolidated financial statements.
6
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 28, 2003 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.
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":
---------------------------------
13 Weeks Ended
---------------------------------
March 28, 2004 March 30, 2003
---------------------------------
Net income applicable to common stock $ 644,650 $ 784,084
=================================
Weighted common shares outstanding 4,634,012 4,468,764
Basic net income per share of
common stock $ 0.14 $ 0.18
Effect of dilutive securities:
Warrants 6,057,460 6,715,284
Stock options 98,869 606,830
---------------------------------
Diluted weighted common shares
outstanding 10,790,341 11,790,878
---------------------------------
Diluted net income per share of
common stock $ 0.06 $ 0.07
=================================
The earnings per share calculation excluded 584,558 and 770,423
options during the first quarter of 2004 and 2003, respectively, as
the exercise prices of the options were greater than the average
market price of the common shares.
NOTE 3. STOCK COMPENSATION PLANS
At March 28, 2004, 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.
7
NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued a pronouncement, Financial
Interpretation Number 46 ("FIN 46"), "Consolidation of Variable
Interest Entities." This FIN 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 did not 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 did not 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 No. 150 did not materially impact our consolidated financial
statements.
In December 2003, the FASB revised Statement No. 132 Employers'
Disclosures about Pensions and Other Postretirement Benefits which
amended FASB Statements No. 87, 88, and 106. Statement No. 132
requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans
and other defined benefit postretirement plans. The required
information should be provided separately for pension plans and for
other postretirement benefit plans. Adoption of revised FASB
Statement No. 132 did not materially impact our consolidated financial
statements.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Traditionally, the first part of our fiscal year is our strongest
selling season, and lays the foundation for that year's financial
results. During the first quarter of Fiscal 2004, we implemented
a new food menu mid-way through the quarter and began
rolling out a new beverage menu in the latter part of the quarter.
In addition, we initiated a marketing promotion supported by
television and radio in select markets, and point of purchase
materials in all restaurants. During the first quarter of
Fiscal 2003, we were negatively impacted by several external
factors, including the outbreak of war in Iraq, which led some
consumers to forgo restaurant dining in favor of televised war
updates, and renewed terrorism fears that hurt Florida tourism
and the State's economy. Although our same store sales for
the first quarter of Fiscal 2004 declined by 1.4% from
the comparable period last year, we believe our initiatives to
stimulate sales brought improvement to the Company as the relative
change in first quarter same store sales improved over each of the
four quarters of Fiscal 2003. We believe sales trends continue to
reflect customer perceptions of our restaurants' physical environment,
which in general require updating. We consider same store sales and
cash flow from operations to be among the most significant drivers in
our business.
Growth in cash flow is fundamental to our ability to modernize our
restaurants, which in turn, provides a more compelling dining
experience for our customers. Our 2004 business plan provides for
renovations and remodeling at several of our restaurants, to the
extent funding is available. We tested new decor and paint colors at
two restaurants during the first quarter of 2004. Additionally,
during the first quarter, we began a significant remodeling program at
one of our highest volume restaurants. The remodel and grand
reopening of this restaurant will be completed in May 2004.
In January 2004, we closed an under-performing restaurant which was
sold in the second quarter of 2004 at a net gain of $89,000.
Additionally, a second under-performing store was closed in May 2004.
The closure of both units will effectively reduce our overall sales
going forward, but we expect will favorably affect our net income and
cash flow from operations.
On January 31, 2005, two notes totaling $2,000,000 will mature, for
which payment will be due in full, along with deferred interest
through the due date of $420,000. The notes are held by entities
owned by several of the Company's directors or persons associated with
them. We anticipate that we will either restructure this debt or we
will obtain alternative outside financing to replace these
obligations.
There are no assurances that the implementation of our strategies will
result in sales and customer traffic gains which are required to meet
our contemplated cash flow requirements. In addition, there are no
assurances that financing options will be available to us or that our
business plan will not be significantly hampered by our cash position.
9
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
----------------------------------
March 28, 2004 March 30, 2003
---------------- ----------------
REVENUES 100.0% 100.0%
COST AND EXPENSES:
Cost of revenues 32.6% 32.5%
Labor and other related expenses 29.8% 29.6%
Other restaurant operating expenses 22.3% 21.7%
---------------- ----------------
Total restaurant costs and expenses 84.7% 83.8%
---------------- ----------------
General and administrative expenses 6.3% 6.5%
Depreciation and amortization 2.4% 2.0%
---------------- ----------------
Income from operations 6.6% 7.7%
---------------- ----------------
Interest expense, net -0.8% -0.9%
Other expense, net -0.1% -0.2%
Elimination of minority partner interest -0.5% -0.6%
---------------- ----------------
Income before provision for taxes 5.2% 6.0%
Provision for income taxes 0.0% 0.0%
---------------- ----------------
Net income 5.2% 6.0%
================ ================
RESULTS OF OPERATIONS
13 weeks ended March 28, 2004 and March 30, 2003
Revenues. Total revenues for the first quarter of 2004 were
$12,591,000 as compared to $13,012,000 for the first quarter of 2003.
The $421,000, or 3.2% decrease in revenues primarily was due to the
closing of one restaurant during the first quarter of 2004, and to a
lesser extent a 1.4% decrease in comparable store sales. 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
increased to 32.6% for the first quarter of 2004 from 32.5% for the
first quarter of 2003. This increase primarily was due to shifts in
entree selections among our customers to slightly lower margin items
resulting from the implementation of our new menu. 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.
10
Labor and other related expenses. Labor and other related expenses as
a percentage of revenues increased to 29.8% during the first quarter
of 2004 as compared to 29.6% for the first quarter of 2003. This
increase was primarily due to increases in labor used in restaurant
cleaning, formerly performed by outside cleaning services and
increases in benefits and taxes including unemployment taxes and
health insurance premiums. The increase in unemployment taxes is
related to rate increases beginning in 2004 assessed by the State of
Florida against all employers.
Other restaurant operating expenses. Other restaurant operating
expenses of $2,811,000 for the first quarter of 2004 decreased by
$18,000 compared to the first quarter of 2003 due to the shift away
from using outside cleaning services, offset in part by an increase in
advertising expenditures. However, as a result of a reduction in
operating leverage caused by lower sales volumes, other restaurant
operating expenses, as a percentage of revenues, increased to 22.3%
for the first quarter of 2004 as compared with 21.7% for the first
quarter of 2003
General and administrative expenses. General and administrative
expenses of $793,000 or 6.3% of revenues for the first quarter of 2004
decreased from $840,000 or 6.5% of revenues for the first quarter of
2003, primarily due to decreases in consulting fees and recruiting
costs.
Depreciation and amortization. Depreciation and amortization expense
increased to $296,000 or 2.4% of revenues for the first quarter of
2004 from $261,000 or 2.0% of revenues in the first quarter of 2003.
The increase as a percentage of revenues primarily relates to the
acceleration of depreciation expense for a restaurant with a lease
expiring in June 2004.
Interest expense. Interest expense was $102,000 in the first quarter
of 2004 compared to $127,000 in the first quarter of 2003. The
decrease was primarily related to smaller loan balances outstanding.
Provision for income taxes. No provision for income taxes was
recognized for the first quarter of 2004 or 2003.
Income from operations and net income. As a result of the factors
discussed above, the Company had income from operations of $832,000
for the first quarter of 2004 compared to $1,002,000 for the first
quarter of 2003. The Company had net income of $645,000 for the first
quarter of 2004 compared to $784,000 for the first quarter of 2003.
13 weeks ended March 30, 2003 and March 31, 2002
Revenues. Total revenues for the first quarter of 2003 were
$13,012,000 as compared to $14,129,000 for the first quarter of 2002.
The $1,117,000, or 7.9% decrease in revenues was primarily due to a
5.7% decrease in comparable store sales, and to a lesser extent the
closing of one restaurant during the third quarter of 2002.
Cost of revenues. The cost of revenues as a percentage of revenues
decreased to 32.5% for the first quarter of 2003 from 33.1% for the
first quarter of 2002. This decrease primarily was due to favorable
food costs, operational improvements and lower distribution costs.
Labor and other related expenses. Labor and other related expenses as
a percentage of revenues increased to 29.6% during the first quarter
of 2003 as compared to 29.0% for the first quarter of 2002. This
increase was primarily due to a reduction in operating leverage caused
by lower sales volumes and increases in health insurance costs.
Other restaurant operating expenses. Other restaurant operating
expenses as a percentage of revenues increased to 21.7% for the first
quarter of 2003 as compared with 21.5% for the first quarter of 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.
11
General and administrative expenses. General and administrative
expenses of $840,000 or 6.5% of revenues for the first quarter of 2003
increased from $825,000 or 5.8% of revenues for the first quarter of
2002, primarily due to increases in consulting fees.
Depreciation and amortization. Depreciation and amortization expense
as a percentage of revenues increased to 2.0% for the first quarter of
2003 from 1.9% in the first quarter of 2002. The percentage increase
primarily was due to the reduction in operating leverage caused by
lower sales volume.
Provision for impairment of goodwill. There was no provision for
impairment of goodwill in the first quarter of 2003. The provision
for impairment of goodwill was $52,000 or 0.4% of revenues during the
first 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. Interest expense was $127,000 in the first quarter
of 2003 compared to $196,000 in the first quarter of 2002. 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 $2,000,000 financing transaction. Exclusive of
the non-recurring charge, interest expense was $127,000 for the first
quarter of 2003 compared to $90,000 for the first quarter 2002. The
increase was primarily related to larger loan balances outstanding.
Provision for income taxes. No provision for income taxes was
recognized for the first quarter of 2003 or 2002.
Income from operations and net income. As a result of the factors
discussed above, the Company had income from operations of $1,002,000
for the first quarter of 2003 compared to $1,179,000 for the first
quarter of 2002. The Company had net income of $784,000 for the first
quarter of 2003 compared to $926,000 for the first quarter of 2002.
Exclusive of nonrecurring charges of $106,000, net income for the
first quarter of 2002 was $1,032,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has suffered from recurring losses from operations, has an
accumulated deficit and has secured promissory notes due January 31,
2005. We anticipate requiring additional financing to satisfy the
January 31, 2005 principal payment of $2,000,000 and interest payment
of $420,000 due at maturity. Sufficient liquidity to make the
scheduled debt reduction under the promissory note, and other debt
obligations, is dependent primarily on the realization of cash flow
from operations, obtaining alternative financing sources, or
liquidation of assets. There are no assurances that these financing
options will be available to us.
As of March 28, 2004, the Company's current liabilities of $7,504,000
exceeded its current assets of $2,431,000, resulting in a working
capital deficiency of $5,073,000. In comparison, the December 28,
2003 working capital deficiency was $3,606,000. The increase in the
working capital deficiency primarily related to the reclassification
of the $2,000,000 debt maturing January 31, 2005, as current debt.
Our operating leverage has decreased. We may still encounter
operating pressures from declining sales, increasing food, labor or
other operating costs or additional restaurant disposition costs.
Historically, we have generally operated with minimal or marginally
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 13 weeks ended March 28,
2004 was $854,000 compared to $292,000 for the comparable period in
2003. The net increase of $562,000 compared to the same period in
2003 primarily relates to favorable variances in other current assets
associated with a reduction in prepaid insurance, accrued expenses
relating to payroll and bonuses, and the timing of payments for
accounts payable, partially offset by a decrease in net income.
12
The cash used in investing activities was $121,000 for the 13 weeks
ended March 28, 2004 compared to $199,000 for the same period in 2003;
or a net decrease of $77,000 due to a reduction in expenditures for
capital improvements.
The cash provided by financing activities was $21,000 for the 13 weeks
ended March 28, 2004 compared to $210,000 for the comparable period in
2003. The net decrease of $189,000 primarily related to a change in
how we acquire and finance insurance, partially offset by a reduction
in required debt payments and proceeds from the exercise of common
stock options. In 2004, the annual premium for general liability and
property insurance is being paid ratably throughout the year, as
compared to 2003 when the annual premium was financed as a lump sum at
the beginning of the year.
During October 2002, we refinanced through Colonial Bank two of our
restaurant locations, Melbourne and Winter Haven, with notes of
$635,000 and $667,000, respectively. The principal balances owed on
these two notes as of March 28, 2004 were $567,000 and $601,000,
respectively. Relative to these two promissory notes, we are
required to meet a financial covenant relating to debt coverage. As
of March 28, 2004, we were not in compliance in meeting this loan
covenant. We received a loan covenant waiver from Colonial Bank,
which is to be applied through the first quarter of Fiscal 2004.
There can be no assurances that Colonial Bank will continue to provide
us with a waiver to the extent we do not meet our financial covenants.
We have, from time-to-time utilized, and to the extent applicable may
utilize real estate mortgage and restaurant equipment financing with
various banks or financing institutions as necessary. In the event
that our plans change, assumptions prove to be inaccurate, or due to
unanticipated expenses, and in the event projected cash flow or third
party financing otherwise prove to be insufficient to fund operations,
we could be required to seek additional financing from sources not
currently anticipated. There can be no assurance that third party
financing will be available to us when needed, on acceptable terms, or
at all.
QUARTERLY FLUCTUATION OF FINANCIAL RESULTS
The restaurant industry in general is seasonal, depending on
restaurant location and the type of food served. We have experienced
fluctuations in our quarter-to-quarter operating results due, in large
measure, to our full concentration of restaurants in Florida.
Business in Florida is influenced by seasonality due to various
factors, which include but are not limited to weather conditions in
Florida relative to other areas of the U.S. and the health of
Florida's economy and the effect of world events in general and 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. Many of our restaurant locations are in coastal
cities, where sales are significantly dependent on tourism and its
seasonality patterns.
In addition, quarterly results have been substantially affected by the
timing of restaurant closings or openings. Because of the seasonality
of our business and the impact of restaurant closings, 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 $1,168,000 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.
13
Item 4. Controls and Procedures
We maintain "disclosure controls and procedures," as such term is
defined under Securities Exchange Act Rule 13a-15(e), 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 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. As required by SEC Rule 13a-15(b), 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 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.
14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 21, 2002 we brought legal action against The Lark Group
LLC, Best Que LLC, and Michael Sloane, II, in the United States
District Court, Middle District of Florida, Tampa Division, relating
to their purchase of assets and leasehold rights for two Midwest
locations. Our complaint sought relief for breaches of contract
against each of the defendants. Defendants consented to a final
judgment in the amount of $188,201, which was filed with the Court on
January 22, 2003. We are continuing to take steps to vigorously
pursue collection of this judgment.
In the ordinary course of business, the Company is and may be a
party to various legal proceedings, the outcome of which, singly or in
the aggregate, is not expected to be material to the Company's
financial position, results of operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds
During March 2004, a former employee acquired 20,000 shares of
Common Stock by exercising stock options, resulting in net proceeds to
the Company of $8,400. The proceeds were used for working capital
requirements.
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 May 5,
2004, the following directors were elected by the votes indicated:
Philip R. Chapman: 4,235,592 For, 14,400 Against or Withheld, 0 Abstaining
J. Stephen Gardner: 4,235,592 For, 14,400 Against or Withheld, 0 Abstaining
John N. Giordano: 4,235,592 For, 14,400 Against or Withheld,0 Abstaining
Michael R. Golding: 4,235,092 For, 14,900 Against or Withheld,0 Abstaining
Christopher D. Illick: 4,235,592 For, 14,400 Against or Withheld, 0 Abstaining
Thomas R. Newkirk: 4,235,592 For, 14,400 Against or Withheld, 0 Abstaining
Item 5. Other Information
None
11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer under Rule 13a-14(a)
31.2 Certification of Chief Financial Officer under Rule 13a-14(a)
32.1 Certification of Chief Executive Officer and Chief Financial
Officer under Section 906
(b) Current reports on Form 8-K filed during the fiscal quarter
ended March 28, 2004:
The Company filed a current report on Form 8-K, Item 12, regarding
a press release on January 30, 2004 announcing annual operating
results for the year ended December 28, 2003.
The Company filed a current report on Form 8-K, Items 1 and 7, on
April 27, 2004 announcing that Frederick R. Adler purchased a
$1,000,000 promissory note issued by the Company to Banyon
Investments, LLC on January 31, 2002.
The Company filed a current report on Form 8-K, Item 12, regarding
a press release on April 30, 2004 announcing operating results for
the quarter ended March 28, 2004.
16
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 May 12, 2004
Leslie J.Christon
President and Chief Executive Officer
/s/ Warren R. Nelson May 12, 2004
Warren R. Nelson
Executive Vice President and Chief Financial Officer
17