Common
Stock
The
holders of common stock, Series B Convertible Preferred Stock, and warrants
to
purchase shares of common stock of Shells Seafood Restaurants, Inc. listed
in
this prospectus may offer and sell from time to time up to an aggregate of
27,772,411 shares of our common stock under this prospectus for their own
accounts. We will not receive any proceeds from the sale of the shares other
than the exercise price, if any, payable to us upon the exercise of the
warrants.
The
number of shares being registered for resale under this prospectus consists
of
10,813,011 outstanding shares of our common stock, 6,967,300 shares of our
common stock issuable upon the exercise of warrants and 9,992,100 shares
of our
common stock issuable upon the conversion of our Series B Convertible Preferred
Stock. The outstanding shares of common stock being registered for resale
under
this prospectus consist of 8,813,011 shares of common stock we issued upon
exercise of warrants originally issued with our promissory notes sold in
January
2002, and 2,000,000 shares of common stock upon exercise of warrants issued
to
the note holders for their granting us a two-year extension of the maturity
date
of these notes until January 2007. We issued warrants to purchase an aggregate
of 1,971,250 shares of common stock to the investors and the placement agent
in
our December 2004 private placement of debentures to accredited investors.
1,971,250 shares issuable upon exercise of these warrants are being registered
for resale under this prospectus. We sold units consisting of 461,954 shares
of
our Series B Convertible Preferred Stock and warrants to purchase 4,619,540
shares of our common stock in a private transaction in May 2005. In addition,
we
issued a warrant to purchase 37,651 units (consisting of 37,651 shares of
our
Series B Convertible Preferred Stock and warrants to purchase 376,510 shares
of
our common stock) at a purchase price of $15.00 per unit to the placement
agent
in our May 2005 private financing to accredited investors. Each share of
our
Series B Convertible Preferred Stock is initially convertible into 20 shares
of
our common stock, subject to certain adjustments under specified circumstances.
All of the underlying shares of common stock of the units we sold in May
2005
are being registered for resale under this prospectus.
The
selling stockholders (and their donees and pledgees) may offer their common
stock of Shells Seafood Restaurants, Inc. through public or private
transactions, on or off the United States exchanges, at prevailing market
prices, or at privately negotiated prices.
Our
common stock is listed on the OTC bulletin board under the symbol “SHLL.OB.” The
last reported sale price of our common stock on the OTC bulletin board
on October 6, 2005 was $1.08.
Investing
in our common stock involves risks. See “Risk Factors” beginning on page
4.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is October 7, 2005.
___________________
TABLE
OF CONTENTS
Page
|
1
|
Risk
Factors
|
4
|
Regarding
Forward-Looking Statements
|
11
|
Selling
Stockholders
|
13
|
Use
of Proceeds
|
18
|
Dividend
Policy
|
18
|
Price
Range of Common Stock
|
18
|
Equity
Compnesation Plan |
19 |
Dilution
|
21
|
Selected
Historical Financial Information
|
22
|
Supplementary
Financial Information
|
24
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
25
|
Business
|
37
|
Management
|
44
|
Principal
Stockholders
|
51
|
Certain
Relationships and Related Transactions
|
55
|
Description
of Capital Stock
|
57
|
United
States Federal Income Tax Considerations
|
64
|
Plan
of Distribution
|
68
|
Legal
Matters
|
69
|
Experts
|
69
|
Where
You Can Find More Information
|
69
|
Index
to Consolidated Financial Statements
|
F-1
|
___________________
You
should rely only on the information contained in this document or to which
we
have referred you. We have not authorized anyone to provide you with information
that is different from that contained in this prospectus. This document may
only
be used where it is legal to sell these securities. The information in this
prospectus may only be accurate on the date of this prospectus regardless
of the
time of delivery of this prospectus.
Market
and industry data and other statistical information used throughout this
prospectus are based on independent industry publications, government
publications and other published independent sources. Some data are also
based
on our good faith estimates, which are derived from management’s knowledge of
the industry and independent sources. Although we believe that these sources
are
reliable, we have not independently verified the information and cannot
guarantee its accuracy and/or completeness. Similarly, we believe our internal
research is reliable, but it has not been verified by any independent
sources.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus but
might
not contain all of the information that is important to you. Before investing
in
our common stock, you should read the entire prospectus carefully, including
the
“Risk Factors” section and our historical and pro forma consolidated financial
statements and the notes thereto included elsewhere in this
prospectus.
For
purposes of this prospectus, unless the context otherwise requires, all
references herein to “our company,”“Shells,”“we,”“us” and “our” refer to Shells
Seafood Restaurants, Inc.
Our
Company
Shells
Seafood Restaurants, Inc. manages and operates full service, mid-priced,
casual
dining seafood restaurants, designed to appeal to a broad range of customers
by
providing generous portions of high-quality seafood, warm, friendly service,
and
a relaxed atmosphere at reasonable prices. Our restaurants feature a wide
selection of seafood items, including shrimp, oysters, clams, scallops, mussels,
lobster, crab and daily fresh fish specials, cooked to order in a variety
of
ways: steamed, sautéed, grilled, blackened and fried. In addition, our
restaurants offer a wide selection of signature pasta dishes, appetizers,
salads, and desserts and full bar service. All of our 26 restaurants are
open
for dinner and 24 of our restaurants are also open for lunch.
As
of
January 2, 2005, our fiscal year end, we owned 20 Shells restaurants, owned
a
51% ownership interest in one Shells restaurant and managed four additional
Shells restaurants pursuant to contractual arrangements. In March 2005, we
opened a new 11,000 square-foot restaurant in Clearwater Beach, Florida.
All of
our restaurants are located in Florida.
Over
the
past several months, we have dramatically improved many aspects of the guest
dining experience at our restaurants. Beginning with our new menu, we have
strengthened our guest appeal and bolstered our commitment to serving the
highest-quality fresh seafood. We have added bold new flavors and better
variety, from new fish and shellfish items to exciting new salad and dessert
selections. We have increased the size of our shrimp and crab legs, added
new
grill and pasta dishes and refined our plate presentations.
We
continue to work diligently to elevate our service levels and operating
standards. We have revamped our training procedures and rolled out a new
service
system known as “Ship Shape Service,” providing all team members with the
opportunity to graciously serve our guests.
Providing
a more attractive, comfortable and energetic atmosphere for enjoying our
delicious seafood is a key part of our repositioning strategy. Consumer
expectations have risen significantly since Shells opened its first, non-frills
restaurant 20 years ago. We believe that updating and enhancing the appearance
of all Shells restaurants, while strategically opening great-looking new
restaurants, will enhance our business. During 2004, we took a major step
forward to reenergize the appearance and atmosphere of our restaurants. Shells’
contemporary and spirited new look features brighter and warmer colors and
textures, enhanced lighting and décor accents reflecting the spirit of the sea.
The new look initially was tested at three restaurants in 2004, resulting
in
robust sales increases and exceptional guest approval. In the first half
of
2005, we renovated six additional restaurants, giving nine remodeled
restaurants, to-date.
Corporate
Information
We
were
incorporated under the laws of the State of Florida in April 1993 and were
reincorporated under the laws of the State of Delaware in April 1996. Our
principal executive offices are located at 16313 North Dale Mabry Highway,
Tampa, Florida 33618, and our telephone number is (813) 961-0944. Shells,
Inc.,
a company incorporated under the laws of State of Florida, was merged with
and
into our company and became our wholly owned subsidiary effective December
1994.
Our website is located at www.shellsseafood.com. Information contained on
our
website does not constitute a part of this prospectus.
The
Offering
Common
stock offered
|
27,772,411
shares
by selling stockholders
|
Offering
Price
|
Market
price or privately negotiated price
|
Common
stock outstanding
|
15,703,737
shares as of August 28, 2005 (1)
|
Use
of proceeds
|
We
will not receive any proceeds from the sale of the shares offered
by the
selling stockholders. Any proceeds we receive from the selling
stockholders upon their exercise of warrants to purchase the
shares
included in the shares that are being offered by them hereunder
will be
used for general working capital and capital expenditures.
|
OTC
bulletin board symbol
|
“SHLL.OB”
|
Risk
Factors
|
An
investment in our common stock involves a high degree of risk.
You should
carefully consider the risk factors set forth under “Risk Factors”
beginning on page 4 and the other information contained in
this prospectus
prior to making an investment decision regarding our common
stock.
|
____________________
(1) The
number of shares outstanding excludes:
· |
3,255,500
shares of common stock issuable upon the exercise of options
outstanding
under our equity compensation plans, having a weighted average
exercise
price of $0.94 per share;
|
· |
2,603,443
shares of common stock reserved for future grant under our equity
compensation plans;
|
· |
1,971,250
shares of common stock issuable upon the exercise of outstanding
warrants,
at an exercise price of $0.60 per
share;
|
· |
4,619,540
shares of common stock issuable upon the exercise of outstanding
warrants,
at an exercise price of $1.30 per share;
|
· |
9,239,080
shares of common stock issuable upon the conversion of outstanding
Series
B Convertible Preferred Stock;
|
· |
warrants
to purchase 37,651 units issued to the placement agent in our May
2005
private financing at an exercise price of $15.00 per unit (each
unit
consisting of one share of Series B Convertible Preferred Stock
(initially
convertible into 20 shares of common stock) and warrants to purchase
10
shares of common stock at an exercise price of $1.30 per share);
and
|
· |
23,731
shares of our Series A 5% Convertible Preferred Stock.
|
Summary
Financial Information and Other Data
The
following table sets forth our summary financial information and other data.
The
historical statement of operations data for our fiscal years ended December
29,
2002, December 28, 2003 and January 2, 2005 are derived from, and should
be read
in conjunction with, our audited financial statements and related notes
appearing elsewhere in this prospectus. The historical statement of operations
data for the twenty-six weeks ended June 27, 2004 and July 3, 2005 and the
historical balance sheet data as of July 3, 2005 are derived from our unaudited
financial statements. In management’s opinion, these unaudited financial
statements have been prepared on substantially the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
data
for the periods presented. The results of operations for the interim period
are
not necessarily indicative of the operating results for the entire year or
any
future period.
The
information contained in this table should also be read in conjunction with
“Use
of Proceeds,”“Capitalization,”“Selected Historical Financial
Information,”“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and
accompanying notes thereto, all included elsewhere in this
prospectus.
|
|
Year (53 Weeks) Ended
|
|
Year
(52 Weeks) Ended
|
|
Twenty-six
Weeks Ended
|
|
(Dollars
and Shares in Thousands)
|
|
January
2,
2005
|
|
December
28, 2003
|
|
December 29, 2002
|
|
December
30, 2001
|
|
December
31, 2000
|
|
June
27, 2004
|
|
July
3, 2005
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
41,564
|
|
$
|
44,046
|
|
$
|
47,228
|
|
$
|
57,529
|
|
$
|
90,442
|
|
$
|
23,588
|
|
$
|
24,445
|
|
Income
(loss) from operations
|
|
|
43
|
|
|
(207
|
)
|
|
1,108
|
|
|
(3,430
|
)
|
|
(6,125
|
)
|
|
1,190
|
|
|
944
|
|
Interest
expense, net
|
|
|
(1,154
|
)
|
|
(463
|
)
|
|
(534
|
)
|
|
(481
|
)
|
|
(789
|
)
|
|
(205
|
)
|
|
(337
|
)
|
(Loss)
income before elimination of minority partner interest and
income
taxes
|
|
|
(1,078
|
)
|
|
(770
|
)
|
|
571
|
|
|
(3,799
|
)
|
|
(6,769
|
)
|
|
1,042
|
|
|
718
|
|
Net
(loss) income
|
|
$
|
(1,344
|
)
|
$
|
(1,034
|
)
|
$
|
677
|
|
|
(3,019
|
)
|
$
|
(9,332
|
)
|
$
|
903
|
|
$
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of managed restaurants at end of period (1)
|
|
|
25
|
|
|
28
|
|
|
28
|
|
|
29
|
|
|
45
|
|
|
26
|
|
|
26
|
|
Average
annual sales per Company-owned and joint venture restaurant
open for full
period (2)
|
|
$
|
1,896
|
|
$
|
1,828
|
|
$
|
1,924
|
|
$
|
2,047
|
|
$
|
2,071
|
|
|
---
|
|
|
---
|
|
(Decrease)
increase in Company-owned and joint venture restaurant
same store
sales (2)
|
|
|
-1.6
|
%
|
|
-5.1
|
%
|
|
-7.2
|
%
|
|
-13.1
|
%
|
|
-0.4
|
%
|
|
-2.8
|
%
|
|
+6.8
|
%
|
Balance
Sheet Data:
|
|
As
of July 3, 2005
|
|
|
|
|
|
Working
capital (deficiency)
|
|
$
|
(843
|
)
|
Total
assets
|
|
|
16,883
|
|
Short-term
debt
|
|
|
346
|
|
Long-term
debt
|
|
|
1,371
|
|
Minority
partner interest
|
|
|
464
|
|
Stockholders’
equity
|
|
|
9,129
|
|
____________
(1)
|
Includes
restaurants owned by us, one joint venture restaurant in which
we own a
51% equity interest and four licensed restaurants.
|
|
|
(2)
|
Includes
only restaurants open during the full fiscal year shown and open
for the
full prior fiscal year and at least the full six months
prior
thereto. Same store sales are calculated on a comparable calendar
period basis.
|
You
should carefully consider the risks described below before investing in our
common stock. Although the risks described below are all of the risks that
we
believe are material, they are not the only risks relating to our business
and
our common stock. Additional risks and uncertainties not currently known
to us
or that we currently deem to be immaterial may also materially and adversely
affect our business operations. Any of the following risks could materially
adversely affect our business, financial condition or results of operations.
The
trading price of our common stock could decline due to any of these risks
and,
therefore, you may lose all or part of your investment.
Risks
Relating to Our Business
We
have significant capital requirements and may need additional financing in
the
near future.
Historically,
our cash requirements have exceeded our cash flow from operations. This has
been
due to costs associated with developing and opening restaurants as well as
the
operating performance of many of our restaurants. As of January 2, 2005,
our
company had a working capital deficiency of $4,639,000 and a cash balance
of
$2,350,000. In 2004, we incurred a net loss of $1,344,000 and we invested
in
property and equipment of $1,292,000. In 2003, we incurred a net loss of
$1,034,000 and we invested $755,000 in property and equipment. In addition,
we
have only recently experienced some success in reversing the long-term trends
in
declining sales and customer traffic. There are no assurances that these
recent
reversals will continue and 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
May
2005, we sold an aggregate of $6.9 million of our securities in a private
placement, resulting in net proceed to Shells of approximately $5.8 million.
After retiring $2.2 million in loans from debenture holders to the extent
not
converted in the offering, we have used and plan to use the remaining proceeds
to remodel additional Shells restaurants, to open new restaurants and for
working capital purposes. We
estimate that approximately $3.6 million will be required to complete the
remodeling of our existing restaurants. Additional funding may be necessary
to
support our plans for growth.
In
March
2005, our investors provided us with a $1.6 million revolving line of credit,
which originally was scheduled to mature on the earlier of March 31, 2006
or the
closing of a financing providing us not less than $1.6 million of net proceeds.
The maturity date of this credit line has been extended to May 23, 2007.
We
have,
from time-to-time utilized, and to the extent applicable may utilize
sale-leaseback transactions, 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.
We
cannot
be assured that third party financing will be available to us when we need
it or
available on acceptable terms, if at all, in the future. If we cannot obtain
third party financing when we need it, it could materially adversely affect
our
results of operations. Conversely, if we raise additional capital, our existing
stockholders could be substantially diluted.
Our
business plan is contingent on additional future
financing.
Integral
to our business plan, we plan to continue our renovation and remodeling of
existing restaurants. In addition, we will continue to explore restaurant
locations for new growth and relocations. We estimate that $3,600,000 will
be
required to complete the renovation and remodeling of our existing restaurants.
Additional funding may be necessary to support our plans for growth. If we
cannot secure the financing we need and achieve our operating cash flow
requirements, our plans for growth may be adversely affected.
We
may be unable to repay certain of our debts when they
mature.
We
have
two promissory notes outstanding to Colonial Bank, for the financing of two
restaurant locations, Melbourne and Winter Haven. As of July 3, 2005, we
owed
collectively $1,053,000 on the principal balances of these notes. We are
required to meet a financial covenant relating to debt coverage. We were
in
compliance in meeting this loan covenant as of the most recent measurement
period, the fiscal quarter ended July 3, 2005. However, in the past, we were
not
in compliance with meeting the loan covenant for which a covenant waiver
was
provided by the bank. The two bank notes are secured by various of our assets.
Our failure to pay these notes as they mature will allow the holders of these
notes to seize and sell various of our assets to satisfy amounts
owed.
Additionally,
at various times in the past, we were not able to repay our debts when due.
Convertible debentures totaling $2,375,000 matured in April 2005 and we required
an extension of the maturity date for repayment until we were able to obtain
funds from the financing in May 2005. In addition, in August 2004, we extended
the maturity dates on notes totaling $2.0 million from January 31, 2005 to
January 31, 2007. Although these debt obligations were ultimately retired,
our
inability to repay our debts on their originally scheduled maturity dates
may
negatively impact our ability to secure additional financing, if necessary.
Also, we could be materially adversely affected, to the extent we undertake
additional indebtedness and are unable to repay our debts on a timely
basis.
History
of losses.
We
have
experienced operating and net losses during the majority of our recent prior
years. In 2004, we had losses of $1,344,000. In 2003, we had losses of
$1,034,000. Excluding non-recurring items, our losses were $733,000 and $764,000
in 2004 and 2003, respectively.
Our
ability to use net operating loss carryforwards and general business credits
to
reduce future tax payments may be further limited if there are additional
changes in ownership of Shells.
As
of
January 2, 2005, for federal income tax purposes, we had approximately
$8,500,000 of net operating loss carryforwards, or NOLs, available to reduce
taxable income in future years and approximately $2,800,000 of general business
credits to carry forward. We believe that a substantial amount of these NOLs
and
credits are currently subject to an annual limitation under sections 382
and 383
of the Internal Revenue Code of 1986, as amended, as a result of an “ownership
change” in 2002, as defined by the Internal Revenue Code. Our ability to utilize
our NOLs and credits were further limited by sections 382 and 383 as a result
of
our issuance of units consisting of shares of our Series B Convertible Preferred
Stock and warrants to purchase shares of our common stock in May 2005. We
estimate that the limit in the amount of net operating loss and credit
carryforwards that may be used against taxable income is approximately $665,000
per year. Any portion of the $665,000 amount not utilized in any year will
carry
forward to the following year subject to a 15 to 20 year limitation on
carryforward of net operating losses and credits.
Substantial
dilution to our stockholders is possible.
As
of
August 28, 2005, there were 15,703,737 shares of common stock outstanding,
and
warrants, options or other convertible securities outstanding to purchase
an
additional 20,333,555 shares of common stock at an average exercise price
of
$0.56 per share.
During
January 2002, we completed a $2.0 million financing transaction pursuant
to
which, among other things, we issued warrants to purchase 8,908,030 shares
of
our common stock, at an exercise price of $0.16 per share. These warrants
have
been exercised in full, some in accordance with a cashless exercise provision;
whereby 8,813,011 shares
of
common stock were issued to the respective warrant holders.
In
August
2004, we agreed with the holders of the $2.0 million of promissory notes
to an
extension of the term of the notes from their original expiration date of
January 31, 2005 to January 31, 2007. In connection with this extension,
we
issued warrants to purchase 2,000,000 shares of common stock, at an exercise
price of $0.50 per share. These warrants have been exercised in full, whereby
we
issued 2,000,000 shares of common stock.
In
December 2004, we completed a $2,375,000 private placement of convertible
debentures. The debentures matured on April 5, 2005 and were fully repaid
in May
2005. In conjunction with this private placement, we issued warrants to purchase
1,971,250 shares of common stock at $0.60 per share to the debenture holders
and
the placement agent. All of these underlying shares of common stock are part
of
the shares being registered for resale under this prospectus.
In
March
2005, we amended our certificate of incorporation to increase the total number
of authorized shares of our common stock from 20,000,000 shares to 40,000,000
shares. Subsequently, in June 2005, our stockholders approved a further increase
of the total number of authorized shares of our commons stock from 40,000,000
shares to 58,000,000 shares. There are no restrictions on our ability to
issue
additional shares of stock.
In
May
2005, we sold 461,954 units of securities at the selling price of $15.00
per
unit for an aggregate sale price of $6.9 million in a private placement to
some
of the selling stockholders. Each unit consists of (i) one share of our Series
B
Convertible Preferred Stock, initially convertible into 20 shares of the
our
common stock, subject to adjustment under certain circumstances and (ii)
a
warrant to purchase 10 shares of our common stock at an exercise price of
$1.30
per share.
If these
warrants and the Series B Convertible Preferred Stock are fully exercised
or
converted, we would issue 13,858,620 additional shares of common stock. In
addition, we granted JMP
Securities LLC, the placement agent in our May 2005 private financing, warrants
to purchase 37,651 units at a purchase price of $15.00 per unit as a portion
of
their fees. The holders of the Series B Convertible Preferred Stock have
antidilution protection for issuances of common stock by us at prices less
than
the “conversion price” in effect immediately prior to any such issuance. The
initial conversion price is $0.75 per share, and will be subsequently reduced
for future issuances if we sell shares at a price below the conversion price.
All of the underlying shares of common stock of the units we sold in May
2005
are being registered for resale under this prospectus.
There
can
be no assurance that we will not be required to issue additional shares,
warrants or other convertible securities in the future in conjunction with
any
capital raising efforts, including at price (or exercise prices) below the
price
at which shares of our common stock are being traded on the OTC bulletin
board.
Provisions
with Potential Anti-Takeover Effect.
Our
certificate of incorporation provides that we may issue up to 2,000,000 shares
of preferred stock from time-to-time in one or more series. The board of
directors is authorized to determine the rights, preferences, privileges
and
restrictions granted to and imposed upon any wholly unissued series of preferred
stock. The board is authorized to fix the number of shares of any series
of
preferred stock and the designation of any such series, without any vote
or
action by our stockholders. The board may authorize and issue preferred stock
with voting, dividend, liquidation, conversion or other rights that could
adversely affect the voting power or other rights of the holders of our common
stock. In addition, the potential issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control, may discourage
bids for our common stock at a premium over the market price of the common
stock
and may adversely affect the market price of the common stock.
We
have
no present intention to issue any additional shares of our preferred stock.
However, we cannot assure you that we will not do so in the future.
Control
by Management and Certain Individuals.
Frederick
R. Adler, James
Adler, Robert Ellin and
Bruce
Galloway, significant stockholders, together with members of our board of
directors and executive management team, are beneficial owners of record,
in the
aggregate, of approximately 76.6% of our outstanding common stock as of August
28, 2005 and are able to control the business and affairs of our company,
including the election of our directors and decisions regarding any proposed
dissolution, merger or sale of our assets.
We
depend on key personnel.
Our
success is largely dependent upon our executive management and other key
personnel. The loss of the services of one of our executives or other key
personnel could materially adversely affect us. Due to our limited number
of
executive personnel, we may be particularly susceptible to an adverse impact
from the loss of the services of one of our executives. Our success may also
depend on our ability to attract and retain qualified management restaurant
industry personnel.
Operating
results may require the closure of additional
restaurants.
If
we
experience prolonged periods of unfavorable operating results at any existing
restaurants, view the prospects for a restaurant to be less than satisfactory
or
elect not to renew a restaurant lease due to its operating results, we may
elect
to close or relocate restaurants. The lack of success or closing of any of
our
restaurants could have an adverse effect upon our financial condition and
results of operations. We closed 16 restaurants during 2001, of which 14
were
located in the Midwest and two were located in Florida. We closed one restaurant
in 2002 and three restaurants in 2004. We are continuing to monitor the
operations and financial performance of our other existing
restaurants.
Our
operating results fluctuate seasonally because of our geographic
concentration.
We
experience significant fluctuations in our quarter-to-quarter operating results
because of factors including:
· |
the
seasonal nature of our business;
and
|
· |
weather
conditions in Florida, which may be severe from
time-to-time.
|
Our
restaurants are all located in Florida and can be affected by the health
of
Florida’s economy in general, and of the tourism industry in particular, which
can further be affected by anticipated world events, as well as economic
trends.
In addition, while the majority of our restaurants are located primarily
in
residential areas in Florida, many of our restaurants are located in seasonal
tourist areas.
Our
restaurant sales generally increase from January through April and June through
August, the peaks of the Florida tourism season, and generally decrease from
September through mid-December. In addition, because of our
present geographic concentration, adverse publicity relating to our restaurants
or adverse weather conditions could have a more pronounced adverse effect
on our
operating results than if our restaurants were more geographically dispersed.
Adverse weather conditions or a decline in tourism in Florida, or in general
economic conditions, which would likely affect the Florida economy or tourism
industry, particularly during the time of peak sales, could materially adversely
affect our operations and prospects. During the third and fourth quarters
of
2004, we incurred substantial business and property losses as a result of
four
hurricanes that struck Florida. Because of the seasonality of our business,
our
results for any quarter are not necessarily indicative of the results that
may
be achieved for a full year.
The
supply and quality of our seafood may fluctuate.
In
recent
years, the availability of certain types of seafood has fluctuated. This
has
resulted in a corresponding fluctuation in prices. We maintain short-term
contracts with several of our suppliers. In addition, we purchase products
through Performance Food Group in the ordinary course of business. Performance
Food Group distributes and warehouses the majority of our seafood supply
and
procures, distributes and stores other supplies for us. We believe that our
relationships with our suppliers and Performance Food Group are satisfactory
and
that alternative sources are readily available. However, the loss of some
suppliers or of our relationship with Performance Food Group could materially
adversely affect us.
Some
species of seafood have become subject to adverse publicity because of claims
of
contamination by lead, mercury or other chemicals that may exist in the ocean
or
in an aquaculture environment. This can adversely affect both market demand
and
supply for these food products. Customer demand may also be negatively impacted
by reports of medical or other risks resulting from eating seafood. We maintain
a continuous inspection program for our seafood purchases. However, we cannot
assure you that seafood contamination or consumer perception of inadequate
seafood quality, in the industry in general or as to us specifically, will
not
have a material adverse effect on us. Our failure to obtain adequate supplies
of
seafood or problems or difficulties resulting from the contamination of seafood,
in general, or at any of our restaurants in particular, will have a material
adverse effect on our operations and profitability.
Our
expenses for food and other costs fluctuate.
Our
profitability depends on our ability to anticipate and to react to increases
in
food, labor, employee benefits, and similar costs. We have limited control
over
these costs. Specifically, our dependence on frequent deliveries of seafood,
produce, dairy and other products means we are at greater risk of shortages
or
interruptions in supply because of adverse weather or other conditions. This
could adversely affect the availability and cost of these items. Also,
substantial price increases imposed by our suppliers in the absence of
alternative sources of supply in a timely manner, could have a material adverse
effect on us. We have been able to anticipate and react to fluctuations in
food
costs by:
· |
adjusting
selected menu prices;
|
· |
purchasing
seafood directly from numerous suppliers; and
|
· |
promoting
alternative menu selections in response to price and availability
of
supply.
|
However,
we cannot assure you that we will be able to continue to anticipate and respond
to supply and price fluctuations or that we will not be subject to significantly
increased costs. A shortage of available seafood could cause our cost of
sales
to increase. Because of our value oriented pricing structure, this could
materially adversely affect our operations and profitability. In addition,
seafood suppliers and processors are subject to a program of inspection by
the
Food and Drug Administration. This program may increase our seafood costs
because seafood suppliers’ and processors’ costs in complying with this program
may increase.
Recent
wage hike.
In
May
2005, the minimum wage rate in Florida increased by $1.00 per hour. Tipped
employees also receive the $1.00 per hour wage increase under this new law.
Each
year thereafter, the minimum wage will increase according to the U.S. Department
of Labor, Bureau of Labor Statistics cost of living index. Such payroll cost
increases could have a significant adverse effect on our results of operation.
Menu price increases and other actions are required to negate the effect
of
these wage increases. There can be no assurances that such measures being
taken
and expected to be taken by our company will be successful to adequately
offset
these additional payroll costs, or will be accepted without adverse reaction
by
our customers.
We
face risks associated with government regulation.
We
are
subject to extensive state and local government regulation by various agencies,
including:
· |
state
and local licensing, zoning, land use, construction and environmental
regulations;
|
· |
various
regulations relating to the sale of food and alcoholic
beverages;
|
· |
regulations
relating to sanitation, disposal of refuse and waste
products;
|
· |
regulations
relating to public health; and
|
· |
safety
and fire standards.
|
Our
restaurants are inspected periodically by governmental agencies to ensure
conformity with these regulations. The suspension of, or inability to renew
a
license at an existing restaurant would adversely affect our operations.
A
significant percentage of our revenue comes from sales of alcoholic beverages.
State and local regulation of the sale of alcoholic beverages require us
to
obtain a license or permit for each of our restaurants. The failure of a
restaurant to obtain or retain a license to serve liquor would adversely
affect
our operations. In addition, our failure or difficulty in obtaining required
licensing or other regulatory approvals could delay or prevent new restaurant
openings.
Restaurant
operating costs are also affected by other government actions, which are
beyond
our control, including increases in:
· |
the
minimum hourly wage requirements;
|
· |
workers
compensation insurance rates;
|
· |
health
care insurance costs;
|
· |
other
insurance costs, including general liability and property;
and
|
· |
unemployment
and other taxes.
|
Furthermore,
the Americans with Disabilities Act may require us to make certain modifications
to some of our restaurants to meet specified access and use requirements.
These
and other initiatives could adversely affect our results of operations.
We
may have liability for sales of alcoholic beverages.
We
are
also subject to “dram-shop” statutes. These statutes generally provide a person
injured by an intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person. In certain states, statutes also provide that a vendor of alcoholic
beverages may be held liable in a civil cause of action for injury or damage
caused by or resulting from the intoxication of a minor under certain
conditions. In addition, significant national attention is currently focused
on
the problem of drunk driving, which could result in the adoption of additional
legislation. This could increase our potential liability for damage or injury
caused by our customers.
Our
industry is highly competitive.
The
restaurant industry, particularly the full-service casual dining segment,
is
highly competitive. We compete in the areas of:
· |
food
quality, including taste, freshness, healthfulness and nutritional
value;
and
|
We
have
numerous well-established competitors, some of which dominate the industry.
These competitors possess substantially greater financial, marketing, personnel
and other resources than we do. Many of our competitors have achieved
significant brand name and product recognition. They also engage in extensive
advertising and promotional programs, both generally and in response to efforts
by additional competitors to enter new markets, or introduce new products
to
respond to changes in consumer preferences, tastes and eating habits. Our
competitors include national, regional and local full-service casual dining
chains, many of which specialize in or offer seafood products.
We
believe that the full-service casual dining segment is likely to attract
a
significant number of new entrants, some offering seafood products. We also
expect to face competition from a broad range of other restaurants and food
service establishments. These include full-service, quick-service and fast
food
restaurants, which specialize in a variety of menu offerings. In addition,
the
full-service restaurant industry is characterized by the frequent introduction
of new food products, which are accompanied by substantial promotional
campaigns. In recent years, numerous companies in the full-service restaurant
industry have introduced products, including seafood, intended to capitalize
on
growing consumer preference for food products that are, or are perceived
to be,
healthful, nutritious, and low in calories, carbohydrates or fat content.
We
expect that we will be subject to increasing competition from companies whose
products or marketing strategies address these consumer preferences. While
we
believe that we offer a broad variety of quality seafood products, we cannot
assure you that:
· |
consumers
will be able to distinguish our products from competitive
products;
|
· |
substantially
equivalent food products will not be introduced by our competitors;
or
|
· |
we
will be able to compete
successfully.
|
We
may not be able to protect our service marks and proprietary
information.
We
own
two United States registrations for the service marks that we use, including
the
name “Shells.”
We
believe that our service marks have significant value and are essential to
our
ability to create demand for and awareness of our restaurants. We cannot
assure
you, however, that our service marks:
· |
do
not or will not violate the proprietary rights of others;
or
|
· |
would
be upheld if challenged;
|
or
that
we would not be prevented from using our service marks. Any of these occurrences
could materially adversely affect us. In addition, we cannot assure you that
we
will have the financial resources necessary to enforce or defend our service
marks.
We
believe that we own all of our intellectual property and that the management
and
license agreements to which we are a party are enforceable. In the past,
the
enforceability of these management and license agreements has been questioned
by
certain of the licensees. Although we believe the agreements are enforceable,
there can be no assurance that the agreements will not be challenged in the
future, and, if challenged, that the agreements will be determined to be
enforceable and the managed restaurants will be restricted from using the
Shells
service marks independent of us.
We
also
rely on trade secrets and proprietary knowledge. We employ various methods
to
protect our concepts and recipes. However, these methods may not completely
protect us. We cannot assure you that others will not independently develop
similar knowledge or obtain access to our knowledge, concepts and recipes.
Although we generally enter into confidentiality agreements with our executives
and managers, we cannot assure you that these agreements will adequately
protect
our trade secrets.
Our
insurance coverage may not be adequate.
We
maintain insurance, including insurance relating to personal injury, in amounts,
which we currently consider adequate. Nevertheless, a partially or completely
uninsured claim against us, if successful, could materially adversely affect
us.
Liquidation
preference of preferred stock.
On
October 24, 2001, we issued 66,862 shares of Series A 5% Convertible Preferred
Stock, par value $0.01 per share, pursuant to an exemption from registration
under Section 4(6) of the Securities Act of 1933, as amended, in consideration
for the cancellation of $669,000 of trade indebtedness by trade creditors
of our
company. As of August 15, 2005, we had 23,731 shares of Series A Preferred
Stock outstanding.
On
May
24, 2005, we sold an aggregate of $6.9 million of 461,954 units in a private
placement to some of the selling stockholders. Each unit consisted of (i)
one
share of our Series B Convertible Preferred Stock, initially convertible
into 20
shares of our common stock, subject to adjustment under certain circumstances,
and (ii) a warrant to purchase 10 shares of our common stock at an exercise
price of $1.30 per share. In addition, we issued a warrant to purchase 37,651
units (consisting of 37,651 shares of our Series B Convertible Preferred
Stock
and warrants to purchase 376,510 shares of our common stock) at a purchase
price
of $15.00 per unit to the placement agent in our May 2005
financing.
Upon
the
occurrence of a liquidation event, each holder of our preferred stock is
entitled to be paid, prior to any payment being made to holders of our common
stock, an amount in cash equal to (i) in the case of the holders of Series
A 5%
Convertible Preferred Stock, the liquidation value of its shares of Series
A 5%
Convertible Preferred Stock, plus all declared but unpaid dividends on such
shares or (ii) in the case of the holders of Series B Convertible Preferred
Stock, the sum of the liquidation value of its shares of Series B Convertible
Preferred Stock and all declared but unpaid dividends on such shares and
the
amount the holder of the Series B Convertible Preferred Stock would receive
if
all holders of the Series B Convertible Preferred Stock had converted their
shares of Series B Convertible Preferred Stock prior to the liquidation event.
If we are forced to liquidate, we cannot assure you that any assets will
remain
available for distribution to the holders of common stock after distribution
to
the holders of our preferred stock.
Absence
of Dividends.
We
have
never paid cash dividends on our common stock and do not anticipate paying
any
cash dividends in the foreseeable future. In addition, any future financing
agreements may prohibit the payment of cash dividends.
REGARDING
FORWARD-LOOKING STATEMENTS
This
prospectus contains “forward-looking statements” that reflect our current
estimates, expectations and projections about our future results, performance,
prospects and opportunities. Forward-looking statements include, among other
things, the information concerning our possible future results of operations,
business and growth strategies, financing plans, expectations that regulatory
developments or other matters will not have a material adverse effect on
our
business or financial condition, our competitive position and the effects
of
competition, the projected growth of the industry in which we operate, and
statements of management’s goals and objectives, and other similar expressions
concerning matters that are not historical facts. Words such as
“may,”“will,”“should,”“could,”“would,”“predicts,”“potential,”“continue,”“expects,”“anticipates,”“future,”“intends,”“plans,”“believes,”“estimates”
and similar expressions, as well as statements in future tense, identify
forward-looking statements.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
such performance or results will be achieved. Forward-looking information
is
based on information available at the time and/or management’s good faith belief
with respect to future events, and is subject to risks and uncertainties
that
could cause actual performance or results to differ materially from those
expressed in the statements. Important factors that could cause such differences
include, but are not limited to:
· |
general
economic and business conditions;
|
· |
changes
in our business strategy, development plans or cost savings
plans;
|
· |
our
expansion into new markets; and
|
· |
other
factors discussed under the headings “Risk Factors,”“Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations”
and “Business.”
|
In
light
of these risks, uncertainties and assumptions, our actual results of operations
and execution of our business strategy could differ materially from those
expressed in, or implied by, the forward-looking statements, and you should
not
place undue reliance upon them. In addition, past financial and/or operating
performance is not necessarily a reliable indicator of future performance
and
you should not use our historical performance to anticipate results or future
period trends. We can give no assurances that any of the events anticipated
by
the forward-looking statements will occur or, if any of them do, what impact
they will have on our results of operations and financial
condition.
Forward-looking
statements speak only as of the date the statements are made. We assume no
obligation to update forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting forward-looking
information except to the extent required by applicable securities laws.
If we
do update one or more forward-looking statements, no inference should be
drawn
that we will make additional updates with respect thereto or with respect
to
other forward-looking statements.
All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements included
in this prospectus.
SELLING
STOCKHOLDERS
The
following table presents information regarding the selling stockholders.
The
selling stockholders are the investors that provided financing to us or are
those that acted as placement agents in two of our financings. Percentage
of outstanding shares beneficially owned after the offering is based on
32,663,137 shares of common stock outstanding after giving effect to the
9,992,100
shares
of
our common stock to be issued upon conversion of the Series B Convertible
Preferred Stock and 6,967,300 shares of common stock to be issued upon exercise
of the warrants by the selling stockholders.
Selling
Stockholder
|
|
Shares
Beneficially Owned Before
Offering
|
|
Number
of Shares Registered
Herein
|
|
Shares
Beneficially Owned After
Offering
|
|
Percentage
of Outstanding Shares Beneficially Owned After
Offering
|
Gary
A. Gelbfish (1)
(2)
|
|
668,120
|
|
668,120
|
|
0
|
|
0%
|
Richard
Molinsky (1)
(3)
|
|
133,630
|
|
133,630
|
|
0
|
|
0%
|
James
W. Robertson GST Trust
(1) (4)
|
|
63,440
|
|
63,440
|
|
0
|
|
0%
|
Frederick
R. Adler (5)
(6)
*
|
|
3,669,416
|
|
2,464,990
|
|
1,204,426
|
|
3.69%
|
Trinad
Capital, LP
(5) (7)
*
|
|
3,539,648
|
|
3,539,648
|
|
0
|
|
0%
|
Bruce
Galloway, IRA R/O
(5) (8)
*
|
|
2,180,224
|
|
1,899,224
|
|
281,000
|
|
0.86%
|
Lagunitas
Partners, LP (9)
|
|
2,600,010
|
|
2,600,010
|
|
0
|
|
0%
|
Pequot
Scout Fund, LP (9)
|
|
2,467,020
|
|
2,467,020
|
|
0
|
|
0%
|
Drawbridge
Global Macro Master Fund Ltd. (9)
|
|
1,680,000
|
|
1,680,000
|
|
0
|
|
0%
|
Pequot
Mariner Master Fund, LP (9)
|
|
1,532,970
|
|
1,532,970
|
|
0
|
|
0%
|
Gruber
& McBaine International (9)
|
|
800,010
|
|
800,010
|
|
0
|
|
0%
|
Drawbridge
Investment Partners LLC (9)
|
|
320,010
|
|
320,010
|
|
0
|
|
0%
|
Jon
D. and Linda W. Gruber Trust (9)
|
|
300,000
|
|
300,000
|
|
0
|
|
0%
|
J.
Patterson McBaine (9)
|
|
300,000
|
|
300,000
|
|
0
|
|
0%
|
Craig
Johnson (9)
|
|
200,010
|
|
200,010
|
|
0
|
|
0%
|
Alan
L. and Ruth S. Stein Revocable Trust
(9)
|
|
200,010
|
|
200,010
|
|
0
|
|
0%
|
Harvey
Bibikoff (9)
|
|
100,020
|
|
100,020
|
|
0
|
|
0%
|
Christopher
Condy (9)
|
|
50,010
|
|
50,010
|
|
0
|
|
0%
|
Evan
Azriliant (9)
|
|
50,010
|
|
50,010
|
|
0
|
|
0%
|
JMP
Securities LLC (10)
|
|
1,129,530
|
|
1,129,530
|
|
0
|
|
0%
|
Adam
Weis (1)
(11)
|
|
250,000
|
|
250,000
|
|
0
|
|
0%
|
Sandor
Capital Master Fund, LP (1)
(11)
|
|
150,000
|
|
150,000
|
|
0
|
|
0%
|
Broadlawn
Partners (1)
(11)
|
|
100,000
|
|
100,000
|
|
0
|
|
0%
|
Leonard
S. Goodman/Helen E. (1)
(11)
|
|
50,000
|
|
50,000
|
|
0
|
|
0%
|
Selling
Stockholder
|
|
Shares
Beneficially Owned Before
Offering
|
|
Number
of Shares Registered
Herein
|
|
Shares
Beneficially Owned After
Offering
|
|
Percentage
of Outstanding Shares Beneficially Owned After
Offering
|
John
S. Lemak (1)
(11)
|
|
50,000
|
|
50,000
|
|
0
|
|
0%
|
Gerald
Heller (1)
(11)
|
|
50,000
|
|
50,000
|
|
0
|
|
0%
|
Source
One Corp (1)
(11)
|
|
50,000
|
|
50,000
|
|
0
|
|
0%
|
Brunella
Jacs LLC (1)
(11)
|
|
50,000
|
|
50,000
|
|
0
|
|
0%
|
Commonwealth
Investors LLC
(1) (11)
|
|
37,500
|
|
37,500
|
|
0
|
|
0%
|
Daniel
E. Larson
(1) (11)
|
|
25,000
|
|
25,000
|
|
0
|
|
0%
|
Michael
Lusk (1)
(11)
|
|
25,000
|
|
25,000
|
|
0
|
|
0%
|
Joseph
G. Kump/Jean Kump (1)
(11)
|
|
25,000
|
|
25,000
|
|
0
|
|
0%
|
Garry
Higdem (1)
(11)
|
|
25,000
|
|
25,000
|
|
0
|
|
0%
|
Thomas
J. Banholzer (1)
(11)
|
|
25,000
|
|
25,000
|
|
0
|
|
0%
|
Govin
T. Rajan (1)
(11)
|
|
25,000
|
|
25,000
|
|
0
|
|
0%
|
Simon
Kearney (1)
(11)
|
|
20,000
|
|
20,000
|
|
0
|
|
0%
|
Anasazi
Partners III Offshore, LTD (1)
(11)
|
|
20,000
|
|
20,000
|
|
0
|
|
0%
|
Christopher
P. Baker (1)
(11)
|
|
20,000
|
|
20,000
|
|
0
|
|
0%
|
Anasazi
Partners III, LLC
(1) (11)
|
|
20,000
|
|
20,000
|
|
0
|
|
0%
|
Casimir
Capital LP
(1) (12)
|
|
783,750
|
|
783,750
|
|
0
|
|
0%
|
George
Heaton (5)
(13)
|
|
116,794
|
|
116,794
|
|
0
|
|
0%
|
Thomas
Newkirk (5) (13) |
|
116,794
|
|
116,794
|
|
0
|
|
0%
|
Stephen
Gardner (5) (13) |
|
58,397
|
|
58,397
|
|
0
|
|
0%
|
John
Giordano (5) (13) |
|
58,396
|
|
58,396
|
|
0
|
|
0%
|
Galloway
Capital Management, LLC *
(5) (14)
|
|
387,502
|
|
387,502
|
|
0
|
|
0%
|
Bruce
Galloway C/F Alana M Galloway UGMA/NY (5)
(15)
|
|
31,250
|
|
31,250
|
|
0
|
|
0%
|
Bruce
Galloway C/F Justine P Galloway UGMA/NY (5)
(15)
|
|
31,250
|
|
31,250
|
|
0
|
|
0%
|
Steven
Herman (5)
(15)
|
|
15,625
|
|
15,625
|
|
0
|
|
0%
|
Gary
L. Herman (5)
(15) *
|
|
93,750
|
|
93,750
|
|
0
|
|
0%
|
Gary
L. Herman C/F Edward H Herman UGTMA NY (5)
(15)
|
|
4,688
|
|
4,688
|
|
0
|
|
0%
|
Jacombs
Trading Inc. (5)
(15) *
|
|
93,100
|
|
93,100
|
|
0
|
|
0%
|
Lorraine
Herman (5)
(15)
|
|
10,938
|
|
10,938
|
|
0
|
|
0%
|
Banyon
Investment, LLC * (5)
(16)
|
|
4,454,015
|
|
4,454,015
|
|
0
|
|
0%
|
*
Insider
or an entity owned or associated with our insider(s). See description of
relationships below. See “Management,”“Principal Stockholders” and “Certain
Relationships and Related Transactions” for additional information.
The
following information
contains a description of each selling stockholder’s relationship to us and how
each selling stockholder acquired
the
shares of common stock (or securities convertible into the shares of common
stock) to be sold from time to time pursuant to this prospectus.
(1)
On
December 7, 2004, we sold $2,375,000 principal amount of debentures
and
warrants to purchase an aggregate of 1,187,500 shares of our common stock
at an
exercise price of $0.60 per share. We received net proceeds of $2,010,000
from
the sale. The debentures matured on April 5, 2005, and, to the extent not
converted, were fully repaid in May 2005.
(2)
Consists
of warrants to purchase 125,000 shares of common stock originally issued
by us
in connection with the issuance of debentures in December 2004 described
in (1)
above and 18,104 units purchased in the May 2005 private placement using
the
full principal amount of, and interest accrued on, the debenture purchased
in
December 2004. The 18,104 units consist of 18,104 shares of Series B Convertible
Preferred Stock (initially convertible into 362,080 shares of our common
stock)
and warrants to purchase 181,040 shares of our common stock
at $1.30
per share.
(3)
Consists
of
warrants to purchase 25,000 shares of common stock originally issued by us
in
connection with the issuance of debentures in December 2004 described in
(1)
above and 3,621 units purchased in the May 2005 private placement using the
full
principal amount of, and interest accrued on, the debenture purchased in
December 2004. The 3,621 units consist of 3,621 shares of Series B Convertible
Preferred Stock (initially convertible into 72,420 shares of our common stock)
and warrants to purchase 36,210 shares of common stock at $1.30 per
share.
(4)
Consists
of warrants to purchase 20,000 shares of common stock originally issued by
us in
connection with the issuance of debentures in December 2004 described in
(1)
above and 1,448 units purchased in
the
May 2005 private placement using
a
portion of the principal amount of, and interest accrued on, the debenture
purchased in December 2004. The 1,448 units consist of 1,448 shares of Series
B
Convertible Preferred Stock (initially convertible into 28,960 shares of
our
common stock) and warrants to purchase 14,480 shares of common stock at $1.30
per share.
(5)
In
January 2002, we raised $2.0 million in a private financing transaction,
consisting of secured promissory notes and warrants to purchase Common Stock.
The two original investors in this financing were Shells Investment Partners,
L.L.C. (“SIP”) and Banyon Investment, LLC (“Banyon”). In the financing, we
issued to each of SIP and Banyon a $1.0 million secured promissory note
initially due January 31, 2005 (subsequently extended to January 31, 2007),
and
warrants to purchase 4,454,015 shares of common stock at $0.16 per share.
The
$1.0
million promissory note issued to Banyon was sold to Frederick R. Adler in
April
2004 and Banyon’s right to nominate three individuals to serve on our board of
directors was transferred to Mr. Adler in connection with the sale of the
promissory note.
On
June
23, 2004, SIP sold $400,000 of the $1.0 million note to GCM Shells Seafood
Partners, LLC, a Delaware limited liability company (“GCM”), and $600,0000 of
the $1.0 million note to Trinad Capital, L.P., a Delaware limited partnership
(“Trinad”); and GCM and Trinad acquired the rights of SIP to nominate three
individuals to serve as board members under an Investor Rights Agreement
(now
expired). SIP also transferred warrants to purchase 1,603,445 shares of common
stock to Trinad, warrants to purchase 1,068,964 shares of common stock to
GCM,
warrants to purchase 668,103 shares of common stock to Galloway Capital
Management, LLC and warrants to purchase 668,103 shares of common stock to
Atlantis Equities, Inc. SIP retained the warrants to purchase 445,400 shares
of
common stock. Subsequently, Atlantis Equities, Inc. transferred the warrants
to
purchase 668,103 shares of common stock to Trinad.
In
accordance with the Investor Rights Agreement (now expired), each of GCM,
Trinad
and Banyon nominated individuals (Robert S. Ellin, Jay A. Wolf and Gary L.
Herman in the case of GCM and Trinad, and Philip R. Chapman, Christopher
D.
Illick and Dr. Michael R. Golding in the case of Banyon) to serve as members
of
our board of directors during fiscal 2004.
In
August
2004, the maturity date of the notes was extended for an additional two years
until January 2007, in consideration for which the note holders were issued
warrants to purchase an aggregate of 2,000,000 shares of common stock at
$0.50
per share, in proportion to the value of the respective notes held by these
note
holders.
In
October 2004, GCM sold the note it acquired from SIP, the warrants to purchase
1,068,964 shares of common stock at $0.16 per share, and the warrants to
purchase 400,000 shares of common stock at $0.50 per share to the Bruce
Galloway, IRA R/O.
As
part
of the May 24, 2005 private placement, Frederick R. Adler, Trinad and the
Bruce
Galloway, IRA R/O converted all of the remaining dollar amount of secured
promissory notes then held by them into units of Series B Preferred
Stock.
(6)
The
number of shares registered herein consists
of
1,000,000 shares of common stock acquired upon exercise of warrants at $0.50
per
share issued in connection with the extension of maturity date of the notes
issued in 2002 described in (5) above and 48,833 units purchased in the May
2005
private placement. The 48,833
units consist of 48,833 shares of Series B Convertible Preferred Stock
(initially convertible into 976,660 shares of our common stock) and warrants
to
purchase 488,330 shares of common stock at $1.30 per share. Mr. Adler used
the
remaining principal amount and the interest accrued on the note he acquired
from
Banyon issued by us in January 2002 to purchase the units. Shares beneficially
owned prior to the offering also includes an additional 1,194,326 shares
of
common stock owned by Mr. Adler and 10,100 shares of common stock held by
1520
Partners, Ltd., a limited partnership of which Mr. Adler is the general
partner.
(7)
Consists
of (i) 2,271,548 shares of common stock acquired upon exercise of
warrants
at $0.16
per share transferred
from SIP, (ii) 600,000 shares of common stock acquired at $0.50 per share
upon
exercise of the warrants issued in connection with the extension of maturity
date of the notes issued in 2002 described in (5) above and (iii) 22,270
units
purchased in the May 2005 private placement. The 22,270 units consist of
22,270
shares of Series B Convertible Preferred Stock (initially convertible into
445,400 shares of our common stock) and warrants to purchase 222,700 shares
of
common stock at $1.30 per share. Trinad Capital, LP used the remaining principal
amount and the interest accrued on the note it acquired from SIP issued by
us in
January 2002 to purchase the units. Robert S. Ellin and Jay A. Wolf who are
members of our board are managing members of Trinad Advisors. Trinad Advisors
is
the general partner of Trinad Capital.
(8)
Number of shares registered herein consists of (i)
1,068,964 shares of common stock purchased upon exercise of warrants at $0.16
per share issued in January 2002, (ii)
400,000
shares of common stock purchased upon exercise of warrants at $0.50 per share
issued in connection with the extension of maturity date of the notes issued
in
2002 described in (5) above and (iii) 14,342 units purchased in the May 2005
private placement. The 14,342 units consist of 14,342 shares of Series B
Convertible Preferred Stock (initially convertible into 286,840 of our common
stock) and warrants to purchase 143,420 shares of common stock at $1.30 per
share. Bruce Galloway, IRA R/O used the remaining principal amount and the
interest accrued on the note it acquired from SIP issued by us in January
2002
to purchase the units. Shares beneficially owned includes 281,000 shares
acquired in the open market.
(9)
Consists of shares of common stock issuable upon conversion/exercise of the
units purchased from us in the May 2005 private placement. Each unit consists
of
one share of Series B Convertible Preferred Stock (initially convertible
into 20
shares of our common stock) and warrants to purchase 10 shares of our common
stock at the exercise price of $1.30 per share. Jon Gruber and J. Patterson
McBaine are managers of Gruber McBaine Capital Management which is the general
partner of Lagunitas Partners and Gruber & McBaine International, both of
which are also selling stockholders. Consequently, shares beneficially owned
by
Jon and Linda Gruber and J. Patterson McBaine include shares owned by Lagunitas
Partners and Gruber & McBaine International.
(10)
JMP
Securities LLC acted as the placement agent in the May 2005 private placement
and received warrants to purchase 37,651 units at a purchase price of $15.00
per
unit as a portion of their fees. Each unit consists of one share of Series
B
Convertible Preferred Stock (convertible into 20 shares of our common stock)
and
warrants to purchase 10 shares of our common stock at the exercise price
of
$1.30 per share.
(11)
Consists of warrants to purchase common stock at $0.60 per share, issued
in the
December 2004 financing described in (1) above.
(12)
Casimir Capital LP acted as the placement agent in our December 2004 private
financing and received warrants to purchase 783,750 shares of common stock
at
$0.60 per share, as a portion of their fees.
(13)
SIP
acquired 350,381
shares of common stock upon “cashless exercise” of the warrants retained by SIP
to purchase 445,400 shares of common stock. Simultaneously with the exercise
of
the warrants, SIP transferred 116,794 shares of common stock to George Heaton,
116,794 shares of common stock to Thomas Newkirk, 58,397 shares of
common
stock to Stephen Gardner and 58,396 shares of common stock to John
Giordano.
(14)
Galloway Capital Management acquired warrants to purchase 668,103 shares
of
common stock at $0.16 per share from SIP, and subsequently, transferred warrants
to purchase an aggregate of 280,601 shares of common stock as described in
(15)
below. Consists of 387,502 shares of common stock acquired upon exercise
of the
remaining warrants.
(15)
Galloway Capital Management transferred warrants to purchase an aggregate
of
280,601 shares of common stock as follows: (i) 31,250 shares to Bruce
Galloway C/F Alana M Galloway UGMA/NY,
(ii)
31,250 shares to Bruce
Galloway C/F Justine P Galloway UGMA/NY,
(iii)
15,625 shares to Steven
Herman,
(iv)
93,750 shares to Gary
Herman,
(v)
4,688 shares to Gary Herman C/F Edward H Herman UGTMA NY, (vi) 93,100 shares
to
Jacombs
Trading Inc.
and
(vii) 10,938 shares to Lorraine Herman. Gary L. Herman is a member of our
board
of directors and Bruce Galloway and Gary L. Herman are managing members of
Galloway Capital Management. Bruce Galloway who is a significant stockholder
of
Shells is also the principal owner of Jacombs Trading Inc.
(16)
Consists of 4,454,015 shares of common stock acquired upon exercise of warrants
at $0.16 per share, issued in connection with the $2.0 million private financing
in January 2002.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale by the selling stockholders of our
common
stock. We will receive proceeds of approximately $7.7 million if the selling
stockholders exercise their warrants in full. These proceeds will be used
for
general corporate purposes.
DIVIDEND
POLICY
We
have
not paid any dividends on our common stock and do not intend to pay any
dividends on our common stock in the foreseeable future. We currently intend
to
retain our future earnings, if any, to repay debt or to finance the further
expansion and continued growth of our business. Future dividends, if any,
will
be determined by our board of directors. Dividends on the Series A Preferred
Shares are not cumulative. However, in any given fiscal year, dividends equal
to
5% of the liquidation value of the Series A Preferred Shares must be paid
in
full prior to the payment of any dividends on any shares of our capital stock
ranking junior to the Series A Preferred Shares.
Subject
to the rights of the holders of any shares of any series of preferred stock
ranking prior and superior to the shares of Series B Preferred Stock with
respect to dividends, if our board of directors declares a dividend payable
upon
the outstanding shares of our common stock, our board must declare at the
same
time a dividend upon each outstanding share of the Series B Preferred Stock,
payable at the same time as the dividend paid on our common stock, in an
amount
per share of the Series B Preferred Stock equal to the amount payable on
the
largest number of whole shares of common stock into which each share of the
Series B Preferred Stock is then convertible. If our assets are insufficient
to
pay each of the holders of common stock and Series B Preferred Stock, the
full
amount of dividends to which they are entitled, then the holders of Series
B
Preferred Stock and the holders of common stock will share in such payment
of
dividends on a pro rata basis according to the respective amounts each such
holder would have received had there been sufficient assets for the full
dividend amount.
PRICE
RANGE OF COMMON STOCK
Our
shares are traded on the OTC bulletin board under the symbol
“SHLL.OB.”
The
following table sets forth, for the periods indicated, the high and low sales
prices of our shares as reported by the OTC bulletin board.
|
PRICE
PER
SHARE
|
|
HIGH
|
|
LOW
|
|
|
|
|
During
each fiscal quarter of 2003, 2004 and 2005:
|
|
|
|
First
Quarter 2003
|
$0.75
|
|
$0.35
|
Second
Quarter 2003
|
$0.70
|
|
$0.40
|
Third
Quarter 2003
|
$0.70
|
|
$0.51
|
Fourth
Quarter 2003
|
$0.95
|
|
$0.42
|
|
|
|
|
First
Quarter 2004
|
$0.75
|
|
$0.34
|
Second
Quarter 2004
|
$0.65
|
|
$0.27
|
Third
Quarter 2004
|
$0.80
|
|
$0.47
|
Fourth
Quarter 2004
|
$0.88
|
|
$0.47
|
|
|
|
|
First
Quarter 2005
|
$1.45
|
|
$0.63
|
Second
Quarter 2005
|
$1.30
|
|
$0.75
|
Third
Quarter 2005
|
$1.35
|
|
$0.65
|
Fourth Quarter
2005 (through October 6, 2006)
|
$1.10
|
|
$0.91
|
On
October 6, 2005, the last reported sale price of our shares on the OTC bulletin
board was $1.08 per share.
As
of
August 28, 2005, we had 244 known common stockholders of record. The number
of
record holders is not representative of the number of beneficial holders
of our
shares since many of the shares are held of record by brokers or other
nominees.
EQUITY
COMPENSATION PLANS
Securities
authorized for issuance under equity compensation plans as of January 2,
2005
(our last completed fiscal year end) were as follows:
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants,
and rights
[a]
|
|
Weighted-average
exercise price of outstanding options, warrants and
rights
[b]
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in
column [a])
[c]
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
1,143,500
|
|
$1.00
|
|
1,583,043
(1)
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
9,129,280
|
|
$0.30
|
|
—
|
|
|
|
|
|
|
|
Total
|
|
10,272,780
|
|
|
|
1,583,043
(1)
|
(1) At
our
annual meeting of stockholders held on June 22, 2005, our stockholders approved
an amendment to our 2002 Equity Incentive Plan, which, among other things,
increased the number of shares of common stock available for issuance under
the
plan by 3,150,000 from 1,850,000 to 5,000,000. Number of securities remaining
available for future issuance under equity compensation plans (excluding
securities reflected in column [a]) is now 4,733,043 shares.
Equity
compensation plans not approved by security holders consist of (i) warrants
to
purchase 5,158,030 shares of common stock, issued on January 31, 2002, in
connection with a $2.0 million private financing transaction; warrants were
exercised at $0.16 per share on January 31, 2005, the expiration date, resulting
in the issuance of 4,712,630 shares of common stock, which provided proceeds
of
$754,000 to us; and warrants to purchase 445,400 shares of common stock were
also exercised by a “cashless exercise” on January 31, 2005 resulting in the
issuance of 350,381 shares of common stock; (ii) warrants to purchase 2,000,000
shares of common stock, issued on August 4, 2004, in connection with the
extension of the maturity date of the $2.0 million private financing transaction
to January 31, 2007; all of these warrants were exercised in March and May
2005
at the exercise price of $0.50 per share by certain of our investors, the
proceeds of which were used to pay down the principal amount of the notes
to
these investors; and (iii) warrants to purchase 1,971,250 shares of common
stock, exercisable through December 7, 2010, at $0.60 per share, issued on
December 7, 2004 in connection with the $2,375,000 debenture offering; in
accordance with their terms, the exercise price was subsequently determined
based on the pricing of the May 2005 financing.
The
number of securities and type of plans available for future issuance of stock
options as of January 2, 2005 was:
|
|
Options
and Warrants for Common Shares
|
|
Plan
Name
|
|
Authorized
|
|
Exercised
|
|
Outstanding
|
|
Available
|
|
Stock
Option Plan for Non-Employee Directors
|
|
|
150,000
|
|
|
0
|
|
|
32,000
|
|
|
118,000
|
|
1995
Employee Stock Option Plan
|
|
|
840,000
|
|
|
0
|
|
|
173,750
|
|
|
666,250
|
|
1996
Employee Stock Option Plan
|
|
|
101,000
|
|
|
11,001
|
|
|
31,992
|
|
|
58,007
|
|
2002
Equity Incentive Plan
|
|
|
1,850,000
|
(2)
|
|
203,456
|
|
|
905,758
|
|
|
740,786
|
(2)
|
Total
stock options
|
|
|
2,941,000
|
|
|
214,457
|
|
|
1,143,500
|
|
|
1,583,043
|
(3)
|
(2) See
footnote (1) above. Number of securities remaining available for future issuance
under our 2002 Equity Incentive Plan as of January 2, 2005 was 3,890,786
shares.
(3) See
footnote (1) above.
Stock
options exercised consist of (i) 42,666 shares of common stock issued
from
options exercised in 2004 by employees, (ii) 160,790 shares of common
stock
issued in 2003 to key employees pursuant to our fiscal year 2002 management
bonus plan, and (iii) 11,001 shares of common stock issued from options
exercised by employees in prior years.
DILUTION
The
net
tangible book value of our common stock on July 3, 2005 was a deficit
of
approximately $(0.6) million, or approximately $(0.04) per share. Net tangible
book value per share represents the amount of our total tangible assets,
less
our total liabilities and the aggregate liquidation preference of our preferred
stock outstanding, divided by the total number of shares of our common stock
outstanding. The number of shares of our common stock outstanding may be
increased by shares issued upon conversion of the preferred stock, payment
of
dividends, or exercise of the warrants, and, to the extent the warrants are
exercised for cash, the net tangible book value of our common stock may
increase. If all the warrants (or in the case of JMP Securities, underlying
preferred stock) for which the shares of our common stock that are issuable
upon
exercise of the warrants (or preferred stock) being offered pursuant to this
prospectus were exercised for cash, the net tangible book value of our common
stock would be $7.6 million, or approximately $0.33 per share. Since
we
will not receive any of the proceeds from the sale of common stock sold under
this prospectus, the net tangible book value of our common stock will not
be
increased as a result of such sales, nor will the number of shares outstanding
be affected by such sales. Consequently, subsequent to the exercise of all
the
warrants (and preferred stock) previously referred to, there will be no change
in net tangible book value per share of our common stock as a result of any
sales under this prospectus.
SELECTED
HISTORICAL FINANCIAL INFORMATION
The
following table presents, as of the dates and for the periods indicated,
our
selected historical financial information as discussed below. The historical
statement of operations data for our fiscal years ended December 29, 2002,
December 28, 2003 and January 2, 2005 and the historical balance sheet data
as
of December 28, 2003 and January 2, 2005 are derived from our audited financial
statements included elsewhere in this prospectus. The historical statement
of
operations data for the years ended December 31, 2000 and December 30, 2001
and
the historical balance sheet data as of December 31, 2000, December 30, 2001
and
December 29, 2002 are derived from our audited financial statements that
are not
included herein. The historical statement of operations data for the twenty-six
weeks ended June 27, 2004 and July 3, 2005 and the historical balance sheet
data
as of July 3, 2005 are derived from our unaudited financial statements. In
management's opinion, these unaudited financial statements have been prepared
on
substantially the same basis as the audited financial statements and include
all
adjustments, consisting only of normal recurring adjustments, necessary for
a
fair presentation of the financial data for the periods presented. The results
of operations for the interim period are not necessarily indicative of the
operating results for the entire year or any future period.
The
information contained in this table should also be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and the consolidated financial statements and accompanying notes
thereto included elsewhere in this prospectus.
(In
thousands)
|
|
Year (53 Weeks) Ended
|
|
Year
(52 Weeks) Ended
|
|
Twenty-six
Weeks Ended
|
|
|
|
January
2,
2005
|
|
December
28, 2003
|
|
December 29, 2002
|
|
December
30, 2001
|
|
December
31, 2000
|
|
June
27, 2004
|
|
July
3, 2005
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
sales
|
|
$
|
41,393
|
|
$
|
43,881
|
|
$
|
47,065
|
|
$
|
57,258
|
|
$
|
90,023
|
|
$
|
23,494
|
|
$
|
24,352
|
|
Management
fees (1)
|
|
|
171
|
|
|
165
|
|
|
163
|
|
|
271
|
|
|
419
|
|
|
94
|
|
|
93
|
|
Total
revenues
|
|
|
41,564
|
|
|
44,046
|
|
|
47,228
|
|
|
57,529
|
|
|
90,442
|
|
|
23,588
|
|
|
24,445
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
14,051
|
|
|
14,467
|
|
|
15,778
|
|
|
21,239
|
|
|
33,984
|
|
|
7,841
|
|
|
7,997
|
|
Labor
and other related expenses
|
|
|
12,935
|
|
|
13,845
|
|
|
14,585
|
|
|
17,628
|
|
|
28,028
|
|
|
6,998
|
|
|
7,160
|
|
Other
restaurant operating expenses
|
|
|
10,123
|
|
|
11,117
|
|
|
10,774
|
|
|
12,047
|
|
|
19,635
|
|
|
5,321
|
|
|
5,521
|
|
General
and administrative expenses
|
|
|
3,249
|
|
|
3,387
|
|
|
3,565
|
|
|
4,751
|
|
|
7,212
|
|
|
1,659
|
|
|
1,788
|
|
Depreciation
and amortization
|
|
|
1,058
|
|
|
1,077
|
|
|
1,102
|
|
|
1,702
|
|
|
2,703
|
|
|
579
|
|
|
732
|
|
Pre-opening
expenses
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
303
|
|
Provision
for impairment of assets
|
|
|
105
|
|
|
360
|
|
|
110
|
|
|
2,259
|
|
|
3,978
|
|
|
—
|
|
|
—
|
|
Provision
for impairment of goodwill
|
|
|
—
|
|
|
—
|
|
|
206
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Provision
for store closings
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,333
|
|
|
1,027
|
|
|
—
|
|
|
—
|
|
Income
(loss) from operations
|
|
|
43
|
|
|
(207
|
)
|
|
1,108
|
|
|
(3,430
|
)
|
|
(6,125
|
)
|
|
1,190
|
|
|
944
|
|
Interest
expense, net
|
|
|
(1,154
|
)
|
|
(463
|
)
|
|
(534
|
)
|
|
(481
|
)
|
|
(789
|
)
|
|
(205
|
)
|
|
(337
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
buy-out option
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
600
|
|
Provision
for impairment of assets
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(211
|
)
|
Other
income (expense), net
|
|
|
33
|
|
|
(100
|
)
|
|
(3
|
)
|
|
(476
|
)
|
|
145
|
|
|
(57
|
)
|
|
(278
|
)
|
Gain
on preferred stock conversion
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
588
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(Loss)
income before elimination of minority partner interest and
income
taxes
|
|
|
(1,078
|
)
|
|
(770
|
)
|
|
571
|
|
|
(3,799
|
)
|
|
(6,769
|
)
|
|
1,042
|
|
|
718
|
|
Elimination
of minority partner interest
|
|
|
(266
|
)
|
|
(264
|
)
|
|
(221
|
)
|
|
(221
|
)
|
|
(259
|
)
|
|
(139
|
)
|
|
(149
|
)
|
(Loss)
income before benefit (provision) for income taxes
|
|
|
(1,344
|
)
|
|
(1,034
|
)
|
|
350
|
|
|
(4,020
|
)
|
|
(7,028
|
)
|
|
903
|
|
|
569
|
|
Income
tax benefit (provision) (2)
|
|
|
—
|
|
|
—
|
|
|
327
|
|
|
1,001
|
|
|
(2,304
|
)
|
|
—
|
|
|
—
|
|
Net
(loss) income
|
|
$
|
(1,344
|
)
|
$
|
(1,034
|
)
|
$
|
677
|
|
$
|
(3,019
|
)
|
$
|
(9,332
|
)
|
$
|
903
|
|
$
|
569
|
|
|
|
Fiscal
Years Ended
|
|
Twenty-six
Weeks Ended
|
|
(Dollars
and Shares in Thousands)
|
|
January 2, 2005
|
|
December 28, 2003
|
|
December 29, 2002
|
|
December
30, 2001
|
|
December
31,
2000
|
|
June
27, 2004
|
|
July
3, 2005
|
|
Earnings
per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) income per share
|
|
$
|
(0.26
|
)
|
$
|
(0.23
|
)
|
$
|
0.15
|
|
$
|
(0.68
|
)
|
$
|
(2.10
|
)
|
$
|
0.19
|
|
$
|
0.04
|
|
Diluted
net (loss) income per share
|
|
$
|
(0.26
|
)
|
$
|
(0.23
|
)
|
$
|
0.07
|
|
$
|
(0.68
|
)
|
$
|
(2.10
|
)
|
$
|
0.08
|
|
$
|
0.03
|
|
Shares
Outstanding Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average
|
|
|
5,262
|
|
|
4,577
|
|
|
4,454
|
|
|
4,454
|
|
|
4,454
|
|
|
4,677
|
|
|
13,723
|
|
Diluted
weighted average
|
|
|
5,262
|
|
|
4,577
|
|
|
10,593
|
|
|
4,454
|
|
|
4,454
|
|
|
10,911
|
|
|
18,446
|
|
Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of restaurants (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
restaurants (3)
|
|
|
21
|
|
|
24
|
|
|
24
|
|
|
25
|
|
|
41
|
|
|
22
|
|
|
22
|
|
Licensed
restaurants
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
4
|
|
Total
managed restaurants
|
|
|
25
|
|
|
28
|
|
|
28
|
|
|
29
|
|
|
45
|
|
|
26
|
|
|
26
|
|
Average
annual sales per Company-owned and joint venture restaurant open
for full
period (4)
|
|
$
|
1,896
|
|
$
|
1,828
|
|
$
|
1,924
|
|
$
|
2,047
|
|
$
|
2,071
|
|
|
---
|
|
|
---
|
|
(Decrease)
increase in Company-owned and joint venture restaurant same store
sales
(4)
|
|
|
-1.6
|
%
|
|
-5.1
|
%
|
|
-7.2
|
%
|
|
-13.1
|
%
|
|
-0.4
|
%
|
|
-2.8
|
%
|
|
+6.8
|
%
|
|
|
|
January 2, 2005
|
|
|
December 28, 2003
|
|
|
December 29, 2002
|
|
|
December 30, 2001
|
|
|
December 31, 2000
|
|
|
June
27, 2004
|
|
|
July
3, 2005
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (deficiency)
|
|
$
|
(4,639
|
)
|
$
|
(3,606
|
)
|
$
|
(3,116
|
)
|
$
|
(7,580
|
)
|
$
|
(7,500
|
)
|
$
|
(4,664
|
)
|
$
|
(843
|
)
|
Total
assets
|
|
|
13,519
|
|
|
11,616
|
|
|
13,858
|
|
|
14,847
|
|
|
21,461
|
|
|
11,925
|
|
|
16,883
|
|
Long-term
debt
|
|
|
3,734
|
|
|
3,826
|
|
|
3,883
|
|
|
1,633
|
|
|
5,700
|
|
|
1,640
|
|
|
1,371
|
|
Minority
partner interest
|
|
|
442
|
|
|
466
|
|
|
428
|
|
|
428
|
|
|
449
|
|
|
473
|
|
|
464
|
|
Preferred
stock
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
5
|
|
Stockholders’
equity
|
|
|
502
|
|
|
1,183
|
|
|
2,152
|
|
|
1,475
|
|
|
4,414
|
|
|
2,102
|
|
|
9,129
|
|
(1)
|
Management
fees are derived from the licensed restaurants consisting of 2%
of sales
plus a fixed fee for placement of fully trained managers, if needed.
Sales
for the licensed restaurants for the fiscal years ended January
2, 2005,
December 28, 2003, December 29, 2002, December 30, 2001, December
31, 2000
were $7,883,000, $7,167,000, $8,147,000, $8,935,000 and $10,009,000,
respectively; sales for the twenty-six weeks ended June 27, 2004
and July
3, 2005 were $4,332,000 and $4,544,000, respectively.
|
|
|
(2)
|
The
effective tax rates for fiscal years 2004, 2003, 2002, 2001 and
2000
include the effect of recognizing valuation allowance adjustments
relating
to tax benefits. There was no benefit or provision for income taxes
in
2004 or 2003. Income tax benefit (provision) of 93.3%, 24.9% and
(32.8)%
for the fiscal years ended 2002, 2001 and 2000, respectively, differ
from
the amounts computed by applying the effective federal income tax
rate of
34% as a result of adjusting the valuation allowance, primarily
related to
net operating loss carryforwards from prior years. The valuation
allowance
in 2004 was increased by $210,000, reserving for all tax assets
that were
deemed non-realizable. The valuation allowance in 2003 was increased
by
$596,000, reserving for all tax assets that were deemed non-realizable.
The valuation allowance in 2002 was increased by $1,403,000, reserving
for
all tax assets that were deemed non-realizable The valuation allowance
in
2001 was decreased by $706,000, reserving for all tax assets except
those
subject to recovery through carrybacks resulting from the March
9, 2002
Economic Stimulus Package.
|
|
|
(3)
|
Includes
one joint venture restaurant in which we own a 51% equity interest.
|
|
|
(4)
|
Includes
only restaurants open during the full fiscal year shown and open
for the
full prior fiscal year and at least the full six months
prior
thereto. Same store sales are calculated on a comparable calendar
period basis.
|
SUPPLEMENTARY
FINANCIAL INFORMATION
|
|
|
|
|
QUARTER
ENDED (IN THOUSANDS)
|
|
|
|
|
JUL
3,
2005
|
|
APR
3,
2005
|
|
JAN
2,
2005
|
|
SEP
26,
2004
|
|
JUN
27,
2004
|
|
MAR
28,
2004
|
|
DEC
28,
2003
|
|
SEP
28,
2003
|
|
JUN
29,
2003
|
|
Revenues
|
|
$ |
11,919
|
|
$ |
12,526 |
|
$
|
9,293
|
|
$
|
8,683
|
|
$
|
10,997
|
|
$
|
12,591
|
|
$
|
9,008
|
|
$
|
10,125
|
|
$
|
11,901
|
|
Net
income (loss)
|
|
|
159
|
|
|
410 |
|
|
(1,448
|
)
|
|
(799
|
)
|
|
258
|
|
|
644
|
|
|
(1,229
|
)
|
|
(833
|
)
|
|
244
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.01
|
|
$ |
0.03 |
|
$
|
(0.21
|
)
|
$
|
(0.17
|
)
|
$
|
0.05
|
|
$
|
0.14
|
|
$
|
(0.27
|
)
|
$
|
(0.18
|
)
|
$
|
0.05
|
|
Diluted
|
|
|
0.01
|
|
|
0.03 |
|
|
(0.21
|
)
|
|
(0.17
|
)
|
|
0.02
|
|
|
0.06
|
|
|
(0.27
|
)
|
|
(0.18
|
)
|
|
0.02
|
|
Shares
used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,088
|
|
|
12,357 |
|
|
6,765
|
|
|
4,813
|
|
|
4,721
|
|
|
4,634
|
|
|
4,631
|
|
|
4,631
|
|
|
4,562
|
|
Diluted
|
|
|
20,904
|
|
|
15,441 |
|
|
6,765
|
|
|
4,813
|
|
|
10,713
|
|
|
10,790
|
|
|
4,631
|
|
|
4,631
|
|
|
11,466
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following is a discussion and analysis of our financial condition and results
of
operations for the fiscal years ended December 29, 2002, December 28, 2003
and
January 2, 2005 and for the twenty-six weeks ended June 27, 2004 and July
3,
2005. You should read this discussion and analysis together with our
consolidated financial statements and notes to those consolidated financial
statements included elsewhere in this prospectus. This discussion contains
forward-looking statements that are based on management’s current expectations,
estimates and projections about our business and operations. Our actual results
may differ from those currently anticipated and expressed in such
forward-looking statements as a result of a number of factors, including
those
described under the caption “Risk Factors” and elsewhere in this
prospectus.
Overview
The
changes we have been implementing over the past several months to improve
Shells’ food, service and atmosphere have been well-received by our guests, and
reflected in part by positive sales trends. Over the last two quarters,
restaurant sales increased 6.8% and 7.0%, respectively, in year-to-year
comparisons. This is the first time in a few years that Shells has posted
consecutive quarters of positive comparable restaurant sales gains. Our guest
count trend also improved, with second quarter guest counts on a same store
basis down 1.0% in year-to-year comparisons, a marked improvement from declines
of 4.0% in the fourth quarter of 2004 and 10.5% for fiscal 2004. We believe
that
both sales and customer count trends reflect a growing momentum in positive
customer reaction to the many steps taken to strengthen the Shells brand.
Enhancing
the atmosphere and appeal in our remodeled restaurants, coupled with our
service
and menu improvements has resulted in an incremental 10% aggregate sales
increase at remodeled restaurants above the sales increases reported by
non-remodeled restaurants. The remodeled restaurants incorporate a new,
brighter, more contemporary look. We completed renovations on an additional
six
restaurants during the first quarter of 2005, bringing the total to nine
of our
25 pre-existing restaurants that have received the new interior and exterior
décor and lighting package. In addition, we opened our 26th
restaurant at a large, waterfront location on Clearwater Beach during late
March, the first new opening for our company since 1999. This flagship
restaurant immediately began posting very robust sales.
In
May
2005, we sold an aggregate of $6.9 million of securities in a private placement
to accredited investors, including $1.3 million and $348,000 from conversions
of
then outstanding related party debt and debentures, respectively. We realized
approximately $5.8 million in net proceeds from this financing. After retiring
$2.2 million in loans from debenture holders to the extent not converted
in the
offering, we plan to use the remaining proceeds of the financing to remodel
additional Shells restaurants and to open new restaurants. Additionally,
our
existing $1.6 million revolving line of credit previously scheduled to expire
with the financing has been extended to May 23, 2007. We are also seeking
to
raise additional capital through the financing of new restaurant equipment
and
through sale leaseback transactions for two of our company-owned restaurant
properties. There are no assurances we will be able to secure such financing
at
terms acceptable to us, or at all.
We
continue to focus on elevating our service and restaurant execution levels
to
improve the dining experience for guests, and have bolstered our training
and
recruiting efforts with additional resources. We recognize a direct correlation
between strong hiring and training practices and restaurant performance,
and
expect to continue to increase our investment in these areas to ensure we
are
attracting and developing effective restaurant managers and employees. We
have
also transitioned to a new guest satisfaction feedback system to better measure
all aspects of the Shells dining experience and provide more actionable
information.
We
launched new advertising in the first quarter of 2005, focusing on Shells’ image
and brand attributes of freshness, quality, variety and value. This marketing
approach has been well received and marks a significant departure from
traditional Shells advertising focusing on price and limited-time promotional
offerings. We also recently changed advertising agencies, which has allowed
us
to improve both creative efforts and media buying efficiencies.
We
believe our restaurants are better positioned to
capitalize on continuing increases in seafood consumption and favorable
publicity about the health benefits associated with eating seafood. As our
guests become more knowledgeable about quality differences and positive
nutritional aspects of seafood, they are appreciating the improvements we
have
made. Understanding that consumer expectations are constantly rising, we
continue to work on enhancing many aspect of the Shells
experience.
Results
of Operations
The
following table sets forth, for the periods indicated, the percentages that
the
items in our Consolidated Statements of Operations bear to total revenues,
or
where indicated, restaurant sales.
|
|
|
Fiscal
Years Ended
|
|
|
Twenty-six
Weeks Ended
|
|
|
|
|
January 2,
2005
|
|
|
December 28,
2003
|
|
|
December 29,
2002
|
|
|
June
27, 2004
|
|
|
July
3,
2005
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
sales
|
|
|
99.6
|
%
|
|
99.6
|
%
|
|
99.7
|
%
|
|
99.6
|
%
|
|
99.6
|
|
Management
fees
|
|
|
0.4
|
%
|
|
0.4
|
%
|
|
0.3
|
%
|
|
0.4
|
|
|
0.4
|
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
Cost
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales (1)
|
|
|
33.9
|
%
|
|
33.0
|
%
|
|
33.5
|
%
|
|
33.2
|
|
|
32.7
|
|
Labor
and other related expenses (1)
|
|
|
31.2
|
%
|
|
31.6
|
%
|
|
31.0
|
%
|
|
29.7
|
|
|
29.3
|
|
Other
restaurant operating expenses (1)
|
|
|
24.5
|
%
|
|
25.3
|
%
|
|
22.9
|
%
|
|
22.6
|
|
|
22.6
|
|
Total
restaurant costs and expenses (1)
|
|
|
89.6
|
%
|
|
89.9
|
%
|
|
87.4
|
%
|
|
85.5
|
|
|
84.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
7.8
|
%
|
|
7.7
|
%
|
|
7.5
|
%
|
|
7.0
|
|
|
7.3
|
|
Depreciation
and amortization
|
|
|
2.5
|
%
|
|
2.4
|
%
|
|
2.3
|
%
|
|
2.5
|
|
|
3.0
|
|
Pre-opening
expenses
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
|
|
1.2
|
|
Provision
for impairment of assets
|
|
|
0.3
|
%
|
|
0.8
|
%
|
|
0.2
|
%
|
|
0.0
|
|
|
0.0
|
|
Provision
for impairment of goodwill
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.4
|
%
|
|
0.0
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
0.1
|
%
|
|
-0.5
|
%
|
|
2.3
|
%
|
|
5.0
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
-2.8
|
%
|
|
-1.1
|
%
|
|
-1.1
|
%
|
|
-0.9
|
|
|
-1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
buy-out option
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
|
|
2.5
|
|
Provision
for impairment of assets
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
|
|
-0.9
|
|
Other
income (expense), net
|
|
|
0.1
|
%
|
|
-0.2
|
%
|
|
0.0
|
%
|
|
0.2
|
|
|
-1.1
|
|
Elimination
of minority partner interest
|
|
|
-0.6
|
%
|
|
-0.6
|
%
|
|
-0.5
|
%
|
|
-0.6
|
|
|
-0.6
|
|
(Loss)
income before benefit for income taxes
|
|
|
-3.2
|
%
|
|
-2.4
|
%
|
|
0.7
|
%
|
|
3.7
|
|
|
2.4
|
|
Income
tax benefit
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.7
|
%
|
|
0.0
|
|
|
0.0
|
|
Net
(loss) income
|
|
|
-3.2
|
%
|
|
-2.4
|
%
|
|
1.4
|
%
|
|
3.7
|
|
|
2.4
|
|
——————
(1)
As a
percentage of restaurant sales.
26 weeks
ended July 3, 2005 and June 27, 2004
Revenues.
Total revenues for the 26 weeks ended July 3, 2005 were $24,445,000
as
compared to $23,588,000 for the 26 weeks ended June 27, 2004. The $857,000,
or
3.6%, increase primarily was due to an increase in same store sales of 6.8%,
which reflected an increase in check average from menu price increases
implemented during the second quarter of 2005 to compensate for the Florida
minimum wage increase, partially offset by slightly declining guest counts
compared to last year. In addition, we opened a new restaurant at the end
of the
first quarter of 2005. We closed two units during the first half of
2004.
Cost
of revenues.
The
cost of revenues as a percentage of revenues decreased to 32.7% for the 26
weeks
ended July 3, 2005 from 33.2% for the comparable period in 2004. This
improvement in cost of revenues as a percentage of revenues primarily related
to
menu price increases implemented to compensate for the Florida minimum wage
increase. Additionally, last year’s cost of revenues was negatively impacted by
elevated chicken and dairy procurement costs.
Labor
and other related expenses.
Labor
and other related expenses decreased to 29.3% as a percentage of revenues
for
the 26 weeks ended July 3, 2005 as compared to 29.7% for the same period
in
2004. We benefited from second quarter non-recurring reductions in benefits
and
taxes relating to workers compensation insurance reserve reductions and
corresponding refunds of $344,000 and $161,000 in 2005 and 2004, respectively,
of which $330,000 and $142,000 were allocated to restaurant labor costs.
Exclusive of the non-recurring items, labor and other related expenses
as a
percentage of revenues was 30.6% and 30.3% for the 26 weeks of 2005 and
2004,
respectively. This increase over prior year primarily was related to the
Florida
minimum wage increase which became effective in May 2005 and our investment
in
training to elevate guest service levels.
Other
restaurant operating expenses.
Other
restaurant operating expenses were 22.6% as a percentage of revenues for
each of
the 26 weeks ended July 3, 2005 and June 27, 2004. As a percentage of revenues,
occupancy expense declined in the first quarter and increased
in the
second quarter when compared to last year due to the timing of the opening
of a
restaurant this year and the closings of restaurants last year.
As a
percentage of revenues, utilities expense increased for the
26 week
period of 2005 compared to the prior year, which was offset
by reductions in non-food supplies and contract services
when
comparing the same periods.
General
and administrative expenses.
General
and administrative expenses were $1,788,000, or 7.3% as a percentage of
revenues, for the 26 weeks ended July 3, 2005 compared to $1,659,000, or
7.0% as
a percentage of revenues, for the same period in 2004. This increase in
dollar
expenditures was primarily due to increases in manager training and recruiting
costs in the first six months of 2005. A non-recurring charge of $39,000
for
severance pay occurred in 2004. Exclusive of this non-recurring item, general
and administrative expenses were 6.9% as a percentage of revenues for the
first
six months of 2004.
Depreciation
and amortization.
Depreciation and amortization expenses as a percentage of revenues was
3.0% for
the 26 weeks ended July 3, 2005 compared to 2.5% for the prior year. The
increase relates to additional depreciation for remodeling expenditures
incurred
in 2004 and the first quarter of 2005.
Pre-opening
expenses.
Pre-opening expenses of $303,000 for the 26 weeks ended July 3, 2005 related
to
the new restaurant which opened on March 22, 2005 at Clearwater Beach,
Florida.
There were no restaurant openings in 2004.
Lease
buy-out option. In
January 2005, we entered into an agreement with our landlord in St. Pete
Beach,
Florida, whereby on February 22, 2005, the landlord paid $600,000 to Shells
for
an option to buy-out the lease. Commencing February 22, 2006, the landlord
can
provide notice of lease termination to Shells. Thereafter, we have 60 days
to
wind down business and vacate the premises.
Provision
for impairment of assets. The
provision for impairment of assets of $211,000 occurred on February 22,
2005 due
to a valuation adjustment for the St. Pete Beach location for an expected
shortened lease period relating to the lease buy-out option. There was
no
provision in the first six months of 2004.
Interest
expense, net.
Net
interest expense was $337,000 in the 26 week period ended July 3, 2005
compared
to $207,000 in the same period of 2004. The increase primarily related
to
interest expense, at 12% per annum, and late payment penalties on the $2,375,000
aggregate principal amount of debentures, which we issued in December 2004
and
repaid on May 25, 2005.
Other
expense, net. Other
expense was $278,000 for the 26 weeks ended July 3, 2005 compared to other
income of $57,000 for the comparable period in 2004. The increase over
the prior
year primarily was due to a loss on disposal of assets of $162,000 relating
to
the write-down of fixed assets replaced during remodeling, and financing
costs
of $80,000 paid by us for a $1.6 million line-of-credit. Exclusive of these
non-recurring items, other expense was $36,000 for the 26 weeks ended July
3,
2005. Non-recurring income of $89,000 was recognized in 2004 relating to
gain on
the sale of a restaurant location. Exclusive of this non-recurring item,
other
expense was $32,000 for the 26 weeks ended June 27, 2004.
Income
from operations and net income.
As a
result of the factors discussed above, our income from operations was $944,000
for the 26 weeks ended July 3, 2005 compared to $1,190,000 for the same
period
in 2004. Exclusive of non-recurring items noted above, our income from
operations was $903,000 and $1,068,000 for the 26 weeks ended July 3, 2005
and
June 27, 2004, respectively. We had net income for the 26 weeks ended July
3,
2005 of $569,000 compared to $903,000 in the same period in 2004. Exclusive
of
non-recurring items, our net income was $381,000 and $692,000 for the 26
weeks
ended July 3, 2005 and June 27, 2004, respectively.
Fiscal
Year 2004 versus Fiscal Year 2003
Revenues. Total
revenues for the 53-week fiscal year 2004 were $41,564,000 as compared to
$44,046,000 for the 52-week fiscal year 2003. The $2,482,000 or 5.6% decrease
in
revenues was primarily due to a reduction in the number of restaurants open
for
operation in 2004. We operated 25 restaurants as of the end of 2004 compared
to
28 restaurants at the end of 2003. However, revenues in 2004 contained an
additional operating week compared to 2003, as our fiscal year is the 52
or 53
weeks ending the Sunday nearest to December 31st. Our revenues consisted
of
restaurant sales of our company-owned restaurants and management and licensing
fees on sales at the managed restaurants. Our food sales and liquor sales
accounted for 88% and 12% of revenues, respectively, for 2004 compared to
89%
and 11%, respectively, for 2003. Liquor sales, relative to food sales, increased
year-to-year as a result of a new beverage program initiated in the first
quarter of 2004. Same store sales in 2004 decreased 1.6% when compared to
2003.
The decline in same store sales was the result of a 10.5% decline in customer
traffic, offset in part by a 10.0% increase in average customer check. In
2004,
we incurred estimated sales losses of $930,000 due to hurricane-related business
interruption. Adjusting for estimated hurricane-related sales losses, same
store
sales would have increased by 0.2% above the prior year. Comparisons of same
store sales include only stores, which were operating during the equivalent
calendar 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 restaurant sales as a percentage of restaurant sales increased to 33.9%
for
2004 from 33.0% for 2003. This increase primarily was due to a 0.6% of sales
increase in commodity costs and 0.4% increase relating to menu mix changes
including promotional items which affected customer preferences. Fiscal year
2004 and 2003 cost of sales included a non-recurring inventory write down
of
$22,000 and $36,000, respectively. Exclusive of these non-recurring items,
cost
of restaurant sales was 33.9% and 32.9% of restaurant sales for 2004 and
2003,
respectively. The cost of restaurant sales generally consists of the cost
of
food, beverages, freight, and paper and plastic goods used in food preparation
and carry-out orders.
Labor
and other related expenses.
Labor
and
other related expenses as a percentage of restaurant sales decreased to 31.2%
in
2004 as compared to 31.6% for 2003. This decrease was mostly due to a reduction
in workers’ compensation insurance costs of 0.2% of sales and a reduction in key
hourly labor of 0.2% of sales. Fiscal year 2004 and 2003 included a
non-recurring reduction in expenses of $161,000 and $196,000, respectively,
relating to a refund and corresponding reserve adjustment for prior years
workers’ compensation experience. Exclusive
of these non-recurring items, labor and other related expenses was 31.6%
and
32.0% of restaurant sales for 2004 and 2003, respectively. Labor and other
related expenses generally consist of restaurant hourly and management payroll,
benefits, taxes and workers’ compensation insurance.
Other
restaurant operating expenses. Other
restaurant operating expenses as a percentage of restaurant sales decreased
to
24.5% for 2004 as compared with 25.3% for 2003. This decrease was primarily
due
to a 0.9% decrease in restaurant repairs and maintenance costs, partially
offset
by a loss of sales leverage caused by lower unit sales volumes. Other restaurant
operating expenses generally consist of advertising, costs associated with
area
directors, supplies, repairs and maintenance, rent and other occupancy costs
and
utilities.
General
and administrative expenses.
General
and administrative expenses were $3,249,000 or 7.8% of revenues and $3,387,000
or 7.7% of revenues in 2004 and 2003, respectively. The $138,000 expense
reduction was mostly due to a general downsizing in corporate office staff,
which occurred in June 2004. Non-recurring expense in 2004 and 2003 each
included a one-time charge for severance expense of $39,000 and $70,000,
respectively. Exclusive of these non-recurring charges, general and
administrative expense was 7.7% and 7.5% of revenues in 2004 and 2003,
respectively. General and administrative expenses relate to the operations
of
all Shells restaurants owned by us and management services that we provide
to
the managed restaurants.
Depreciation
and amortization. Depreciation
and amortization expenses as a percentage of revenues were 2.5% for 2004
and
2.4% for 2003. The 0.1% of revenues increase was mostly due to increasing
the
fixed asset basis as a result of restaurant remodeling and hurricane-related
reconstruction.
Provision
for impairment of assets.
The
provision for impaired assets was $105,000 or 0.3% of revenues for 2004 as
compared to $360,000 or 0.8% of revenues for 2003. In 2004 and 2003, we recorded
a pre-tax charge relating to the write-down of impaired assets to their
estimated fair value in accordance with Financial Accounting Standards Board
Statement No. 144. The asset impairment charge in 2004 related to one restaurant
compared to three restaurants in 2003. The respective write-downs were
necessitated by the then current period operating losses and the projected
cash
flows of the restaurants, many of which were negative.
Provision
for impairment of goodwill.
Goodwill
was evaluated for impairment in each of 2004 and 2003 in accordance with
FASB
Statement No. 142. As a result of the evaluation, we did not recognize goodwill
impairment in either year.
Interest
expense.
Net
interest expense was $1,154,000 in 2004 compared to $463,000 in 2003. In
2004,
we recorded one-time charges of $446,000 in the third quarter, relating to
warrants to purchase 2,000,000 shares of common stock issued in connection
with
the extension of the maturity dates on the $2.0 million promissory notes;
and
$265,000 in the fourth quarter, relating to warrants to purchase 1,187,500
shares of common stock issued to debenture holders in conjunction with the
$2,375,000 financing transaction. Exclusive of these non-recurring charges,
net
interest expense was $443,000 in 2004. The $20,000 decrease in net interest
expense in 2004 from 2003, excluding the non-recurring charges, was generally
due to the pay down of outstanding debt, partially offset by a $9,000 reduction
in interest income resulting from lower balances of cash in 2004 compared
to
2003.
Other
expense, net. Other
income in 2004 was $33,000, compared to other expense of $100,000 in 2003.
In
2004, we recognized non-recurring gains for hurricane-related insurance
settlements of $597,000 and the disposition of assets of $89,000. In 2004,
we
also recognized non-recurring charges for financing costs of $539,000 relating
to the $2,375,000 financing transaction and a loss on the disposal of assets
of
$41,000 relating to our restaurant renovations. Exclusive of these non-recurring
items, other expense in 2004 was $73,000.
Provision
for income taxes.
No
benefit or provision for income taxes was recognized in either 2004 or 2003.
Income
(or loss) from operations and net income (or loss). As
a
result of the factors discussed above, the income from operations for 2004
was
$43,000 compared to a loss from operations for 2003 of $207,000. Exclusive
of
non-recurring items, our income from operations was $48,000 for 2004 compared
to
$63,000 for 2003. Net loss for 2004 was $1,344,000 compared to $1,034,000
for
2003. Exclusive of non-recurring items, the net loss in 2004 was $733,000
compared to $764,000 for 2003.
Fiscal
Year 2003 versus Fiscal Year 2002
Revenues. Total
revenues for 2003 were $44,046,000 as compared to $47,228,000 for 2002. The
$3,182,000 or 6.7% decrease in revenues was primarily due to a 5.1% decrease
in
same store sales and, to a lesser extent, due to operating one less restaurant
during and after the third quarter of 2002. The decline in same store sales
was
the result of a decline in customer traffic, offset in part by an increase
in
average customer check. Our food sales and liquor sales accounted for 89%
and
11% of revenues, respectively, for the fiscal year ended December 28,
2003.
Cost
of revenues.
The
cost
of restaurant sales as a percentage of restaurant sales decreased to 33.0%
for
2003 from 33.5% for 2002. This decrease primarily was due to favorable food
costs and lower distribution costs, partially offset by a non-recurring
write-down of inventory of $36,000. Exclusive of the non-recurring item,
cost of
restaurant sales was 32.9% for 2003.
Labor
and other related expenses.
Labor
and
other related expenses as a percentage of restaurant sales increased to 31.6%
during 2003 as compared to 31.0% for 2002. This percentage increase was due
to a
loss of sales leverage caused by lower unit sales volumes, along with increases
in health insurance and workers’ compensation insurance; partially offset by a
non-recurring reduction in expenses of $196,000 relating to a reserve adjustment
for prior years workers’ compensation experience. Exclusive of the non-recurring
item, labor and other related expenses was 32.0% of restaurant sales for
2003.
Other
restaurant operating expenses. Other
restaurant operating expenses as a percentage of restaurant sales increased
to
25.3% for 2003 as compared with 22.9% for 2002. This percentage increase
was
primarily due to a loss of sales leverage caused by lower unit sales volumes,
along with increases in restaurant maintenance; utilities, particularly
electricity and gas; insurance and real estate taxes.
General
and administrative expenses.
General
and administrative expenses were $3,387,000 or 7.7% of revenues and $3,565,000
or 7.5% of revenues in 2003 and 2002, respectively. Non-recurring expense
in
2003 included a one-time charge for severance expense of $70,000. Exclusive
of
the non-recurring charge, general and administrative expense was 7.5% in
2003.
Depreciation
and amortization. Depreciation
and amortization expenses as a percentage of revenues were 2.4% for 2003
and
2.3% for 2002.
Provision
for impairment of assets.
The
provision for impaired assets was $360,000 or 0.8% of revenues for 2003 as
compared to $110,000 or 0.2% of revenues for 2002. In 2003 and 2002, we recorded
a pre-tax charge relating to the write-down of impaired assets to their
estimated fair value in accordance with Financial Accounting Standards Board
Statement No. 144. The asset impairment charge in 2003 related to three
restaurants, two of which were previously not written down and a third that
was
partially written down in 2002. The asset impairment charge in 2002 related
to
three restaurants that were previously not written down.
Provision
for impairment of goodwill.
Goodwill
was evaluated for impairment in 2003 and 2002 in accordance with FASB Statement
No. 142 which we adopted in 2002. As a result of the evaluation we did not
recognize goodwill impairment in 2003. The provision for impairment of goodwill
was $206,000 or 0.4% of revenues in 2002.
Interest
expense.
Net
interest expense was $463,000 in 2003 compared to $534,000 in 2002. We recorded
a one-time charge of $106,000 in the first quarter of 2002 relating to the
previously reported $2.0 million financing transaction. Exclusive of this
non-recurring charge, net interest expense was $428,000 in 2002. The increase
in
net interest expense in 2003 over 2002, excluding the non-recurring charge
was
primarily due to a $23,000 reduction in interest income, resulting from lower
balances of cash in 2003 compared to 2002.
Other
expense, net. Other
expense in 2003 was $100,000, compared to $3,000 in 2002. The increase primarily
related to a net change in the reserve adjustment for gift
certificates.
Provision
for income taxes.
A
benefit
from income taxes of $327,000 was recognized in 2002. No benefit or provision
was recognized in 2003. The benefit in 2002 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.
Income
(or loss) from operations and net income (or loss). As
a
result of the factors discussed above, loss from operations for 2003 was
$207,000 compared to income from operations for 2002 of $1,108,000. Exclusive
of
non-recurring items, our income from operations was $63,000 for 2003 compared
to
$1,218,000 for 2002. Our net loss for 2003 was $1,034,000 compared to net
income
of $677,000 for 2002. Exclusive of non-recurring items, net loss in 2003
was
$764,000 compared to net income in 2002 of $575,000.
Liquidity
and Capital Resources
In
May of
2005, we completed an aggregate financing of $6.9 million through a private
placement of securities to accredited investors. Under the terms of the
transaction, we issued 461,954 units with each unit consisting of (i) one
share
of Series B Convertible Preferred Stock, initially convertible into 20 shares
of
common stock, and (ii) a warrant to purchase 10 shares of common stock at
an
exercise price of $1.30 per share. The purchase price was $15.00 per unit.
We
realized net proceeds of approximately $5.8 million from the financing. Of
the
total proceeds from securities issued, $1,282,000 represented related party
debt
and $348,000 represented existing convertible debentures, all of which converted
into the securities issued in the transaction. As a condition to the
transaction, our existing $1.6 million revolving line of credit previously
scheduled to expire on the closing of the transaction, was extended to May
23,
2007. We used a portion of the net proceeds from the private placement to
retire
the remaining $2,232,000 of loans and accrued interest from debenture holders
and $8,000 of related party accrued interest. The remainder of the net proceeds
from the offering, together with the $1,600,000 line of credit and proceeds
from
an anticipated sale/leaseback financing, is anticipated to be used to complete
the remodeling of our existing restaurants, and, to the extent funds are
available, acquire and build out new restaurant locations. We anticipate
investing approximately $3.6 million in remodeling our existing restaurants.
Additionally, in conjunction with the private placement, $500,000 principal
amount of related party debt was used to exercise warrants to purchase 1,000,000
shares of our common stock. We believe, based on our current outlook, that
our
current cash position and cash flows from operations will be adequate to
satisfy
our contemplated cash requirements over the next twelve
months.
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, to help support our cash flow needs. We also
may
utilize as a form of financing, sale/leaseback options on two owned restaurant
properties. 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.
The
following table presents a summary of our cash flows for the last three
fiscal
years and second quarters ended June 27, 2004 and July 3, 2005 (in thousands):
|
|
Fiscal
Years
Ended
|
|
26 Weeks
Ended
|
|
|
|
January
2, 2005
|
|
December
28, 2003
|
|
December
29, 2002
|
|
June
27, 2004
|
|
July
3, 2005
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
161,833
|
|
$
|
(263,693
|
)
|
$
|
665,187
|
|
$
|
867,615
|
|
$
|
752,772
|
|
Net
cash (used in) provided by investing activities
|
|
|
(1,291,804
|
)
|
|
(754,778
|
)
|
|
324,552
|
|
|
(379,175
|
)
|
|
(2,558,185
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
2,755,551
|
|
|
(726,399
|
)
|
|
509,390
|
|
|
(159,260
|
)
|
|
2,261,095
|
|
Net
increase (decrease) in cash
|
|
$
|
1,625,580
|
|
$
|
(1,744,870
|
)
|
$
|
1,499,129
|
|
$
|
329,180
|
|
$
|
455,682
|
|
As
of
July 3, 2005, our current liabilities of $5,088,000 exceeded current assets
of
$4,245,000, resulting in a working capital deficiency of $843,000. In
comparison, the January 2, 2005 working capital deficiency was $4,639,000.
The
favorable decrease in the working capital deficiency primarily related
to the
repayment of the convertible debentures and reduction in accounts payable,
along
with increases in cash and other current assets, all primarily as a result
of
the equity financing in May 2005. Our operating leverage has improved.
We may
still encounter operating pressures from declining sales, increasing food,
labor
or other operating costs or additional restaurant disposition or pre-opening
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 26 weeks ended July 3, 2005 was
$753,000 compared to $868,000 for the comparable period in 2004. The net
decrease of $115,000 compared to the same period in 2004 primarily related
to
unfavorable variances in net income, prepaid advertising, prepaid rent
and
prepaid workers compensation insurance.
The
cash
used in investing activities was $2,558,000 for the 26 weeks ended July
3, 2005
compared to $379,000 for the same period in 2004. The net increase in cash
used
in investing activities of $2,179,000 was due to $2,690,000 in additional
capital expenditures over the prior year, partially offset by $511,000
in
additional proceeds on the sale of assets over the prior year. The additional
capital expenditures related primarily to the acquisition and remodeling
of our
new Clearwater Beach restaurant, while proceeds of $600,000 received in
2005
related to the lease buy-out option compared to $89,000 in proceeds on
the sale
of assets in 2004.
The
cash
provided by financing activities was $2,261,000 for the 26 weeks ended
July 3,
2005 compared to cash used in financing activities of $159,000 for the
comparable period in 2004. The net increase of $2,420,000 over the prior
year
primarily related to an increase in net proceeds from the issuance of stock
of
$4,905,000 over the prior year, partially offset by an increase in repayments
of
debt of $2,534,000 over the prior year.
As
of
January 2, 2005, our current liabilities of $7,992,000 exceeded our current
assets of $3,353,000, resulting in a working capital deficiency of $4,639,000.
In comparison, as of December 28, 2003, our working capital deficiency was
$3,606,000. Our operating leverage decreased mostly due to the deployment
of
interim financing toward restaurant remodeling and reconstruction from
hurricane-related property losses.
During
2004, our cash position increased by $1,626,000, from $724,000 as of December
28, 2003 to $2,350,000 as of January 2, 2005. The increase in cash was almost
exclusively provided by financing activities of $2,756,000, representing
proceeds from the issuance of debt of $2,832,000 and common stock of $618,000,
partially offset by $404,000 in debt repayment and $290,000 in distribution
to
minority partner. The net cash used in investing activities was $1,292,000,
generally reflecting capital expenditures related to restaurant remodeling
and
hurricane-related reconstruction. Net cash provided by operating activities
totaled $162,000.
In
connection with the $2.0 million financing dated January 31, 2002, we issued
warrants to purchase an aggregate of 8,908,030 shares of our common stock,
at an
exercise price of $0.16 per share. These warrants were exercised from November
2004 through January 31, 2005, resulting in net proceeds to us of $600,000
in
2004 and $754,000 in 2005.
On
August
4, 2004, the $2.0 million aggregate principal amount of secured promissory
notes
set to mature on January 31, 2005 were extended to be due on January 31,
2007,
under the same terms as the original notes. As an inducement to extend the
maturity date of the notes, warrants to purchase 2,000,000 shares of common
stock at an exercise price of $0.50 per share were issued to the note holders
in
proportion to the value of their respective notes. Warrants to purchase
1,000,000 shares of common stock were exercised in March 2005 by certain
of our
investors, and the proceeds of $500,000 were used to pay down the principal
amount of the notes to these investors. Additionally, in March 2005, the
$1.0
million note then held by Frederick R. Adler was modified to allow Shells
to
defer entirely the monthly interest payment on $500,000 of principal amount
of
the note until the maturity date of January 31, 2007, resulting in the deferral
of $72,000 of cash payments until the maturity date.
On
December 7, 2004, we sold $2,375,000 principal amount of debentures and warrants
to purchase 1,187,500 shares of our common stock. We received net proceeds
of
$2,010,000 from the sale. The debentures bore interest at 12%, and matured
on
the earlier of: (i) April 5, 2005, (ii) the closing of an additional round
of
financing of no less than $1.5 million, or (iii) upon the occurrence of an
event
of default. In the event that we, on or prior to the maturity date, consummated
the sale of shares of capital stock (other than a sale of capital stock to
our
officers, directors, employees or consultants in connection with their provision
of services to us) resulting in net proceeds to us of at least $250,000,
then
the outstanding principal amount of the debentures and all accrued and unpaid
interest, at the sole option of the holder of the debenture, converted in
whole
or in part, into shares of the common stock sold in such future financing.
The
warrants are exercisable until December 7, 2007. The warrants provided for
an
exercise price equal to 80% of the price per share or unit in our next round
of
equity financing resulting in net proceeds to us of at least $250,000, provided
that the exercise price could not exceed $0.80 per share or be less than
$0.45
per share. In the event that such financing was not completed on or before
September 4, 2005, the warrants would automatically be assigned an exercise
price equal to 65% of the closing price of our common stock on September
4,
2005, but in no event greater than $0.80 or less than $0.45 per share. Based
on
the closing of our May 2005 financing, these warrants have an exercise price
of
$0.60 per share. The exercise price of the warrants and the number of underlying
shares of common stock is subject to adjustment under certain circumstances.
As
compensation for their services as placement agent in the debenture offering
and
future consulting services to us, the placement agent received cash fees
and
warrants with terms substantially identical to those received by the investors.
During
the first quarter of 2005, our principal shareholders and Board members provided
us with a $1.6 million revolving line of credit. It was expected that this
credit facility, coupled with then existing cash, to the extent available,
would
be used to pay back the debenture notes, interest and penalties if the financing
were ultimately not completed.
In
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 loans, which bear interest at the bank’s base rate, are for
terms of five years with required monthly principal payments based on a 15
year
amortization schedule, and a balloon payment at the end of the five years.
The
principal balances owed on these two notes as of April 3, 2005 were $520,000
and
$556,000, respectively. Relative to these two promissory notes, we are required
to meet a financial covenant relating to debt coverage. We were in compliance
in
meeting this loan covenant as of January 2, 2005 and April 3, 2005. However,
in
the past, we were not in compliance with meeting the loan covenant for which
a
covenant waiver was provided by the bank.
On
September 29, 2005, we completed a sale and simultaneous leaseback of our
restaurant location in Winter Haven, Florida with Fortress Realty Investment,
LLC at a sale price of approximately $1.67 million. We used $547,000 of the
net
proceeds from the sale and leaseback transaction to pay off the note from
Colonial Bank financing the Winter Haven location.
We
are
seeking to raise additional capital through financing of new restaurant
equipment and through sale leaseback transactions for two of our company-owned
restaurant properties. There are no assurances we will be able to secure
such
financing at all or at terms acceptable to us or at all.
The
remaining proceeds available from the private placement financing, coupled
with
the revolving line of credit, cash flow from operations and, if available,
equipment and sale leaseback financing will be used to continue restaurant
remodels (estimated to cost approximately $3.6 million) and for acquisitions
of
new restaurants. 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.
Contractual
Obligations
As
of
January 2, 2005, our contractual obligations were:
|
|
Payments
due by period
|
|
|
|
Total
|
|
<
1 yr
|
|
1
- 3 yrs
|
|
3
- 5 yrs
|
|
>
5 yrs
|
|
Long-term
debt (1)
|
|
$
|
2,010,609
|
|
$
|
515,761
|
|
$
|
1,254,504
|
|
$
|
240,344
|
|
$
|
—
|
|
Capital
lease obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating
lease obligations (2)
|
|
|
15,086,000
|
|
|
1,968,000
|
|
|
3,475,000
|
|
|
3,112,000
|
|
|
6,531,000
|
|
Purchase
obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
debt obligations reflected on our balance sheet under GAAP
(3)
|
|
|
4,634,242
|
|
|
2,395,301
|
|
|
2,238,941
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
21,730,851
|
|
$
|
4,879,062
|
|
$
|
6,968,445
|
|
$
|
3,352,344
|
|
$
|
6,531,000
|
|
——————
Note
1 -
consists of long-term debt as reported in footnote 6 of the financial
statements.
Note
2 -
consists of operating leases primarily for real estate.
Note
3 -
consists of convertible debentures and interest payable of $2,395,301 due
in May
2005 and related party debt and deferred interest payable of $2,238,941 due
in
January 2007.
Inflation
We
have
not operated in a highly inflationary period and management does not believe
that inflation has had a material effect on sales or expenses. As expenses
increase, we expect to recover increased costs by increasing prices, to the
extent permitted by competition, or by modifying our menu and promoting other
less cost sensitive products. Many food products purchased by us are affected
by
commodity pricing and are, therefore, subject to unpredictable price volatility.
Extreme changes in commodity prices and/or long-term changes could affect
us
adversely. From time-to-time, competitive circumstances could limit menu
price
flexibility, and in those cases margins would be negatively impacted by
increased commodity prices. Due to the fact that our business is somewhat
dependent on tourism in Florida, any significant decrease in tourism due
to
inflation would likely have a material adverse effect on revenues and
profitability.
In
May
2005, the minimum wage rate in Florida increased by $1.00 per hour. Tipped
employees also receive the $1.00 per hour wage increase under this new law.
Each
year thereafter, the minimum wage will increase according to the U.S. Department
of Labor, Bureau of Labor Statistics cost of living index. Such payroll cost
increases could have a significant adverse affect to our company. Menu price
increases and other actions are required to negate the effect of these wage
increases. There can be no assurances that such measures being taken and
expected to be taken by our company will be successful to adequately offset
these additional payroll costs, or will be accepted without adverse reaction
by
our customers.
Recent
Accounting Pronouncements
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 issued a pronouncement, Financial Interpretation
Number 46R (“FIN 46R”), “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. We must fully consolidate
assets and liabilities covered by FIN 46R in our financial statements in
the
first fiscal year or interim period beginning after March 15, 2004. Full
disclosure, as well as consolidation, if applicable, of any newly created
agreements after January 31, 2003 must begin immediately. Adoption of FIN
46R
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 post-retirement plans. The
required information is to be provided separately for pension plans and for
other post-retirement benefit plans. Adoption of revised FASB Statement No.
132
did not materially impact our consolidated financial statements.
In
November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs” which
amended ARB No. 43, Chapter 4. The amendments made by FASB Statement No.
151
will improve financial reporting by clarifying that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity of
the
production facilities. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years beginning after
November 23, 2004. The provisions of FASB Statement No. 151 are to be applied
prospectively. Adoption of FASB Statement No. 151 is not expected to materially
impact our consolidated financial statements.
In
December 2004, the FASB issued Statement No. 153, “Exchanges of
Non-monetary Assets” which amended APB Opinion No. 29, “Accounting for
Non-monetary Transactions.” The amendments made by FASB Statement No. 153 are
based on the principle that exchanges of non-monetary assets should be measured
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for non-monetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of non-monetary
assets that do not have commercial substance. Previously, Opinion 29 required
that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive
asset should be based on the recorded amount of the asset relinquished. The
Statement is effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application is permitted for
non-monetary asset exchanges occurring in fiscal periods beginning after
the
date of issuance. The provisions of this Statement are to be applied
prospectively. Adoption of FASB Statement No. 153 is not expected to materially
impact our consolidated financial statements.
In
December 2004, the FASB revised Statement No. 123, “Accounting for
Stock-Based Compensation.” This Statement supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity’s equity instruments or that may be settled by the issuance of those
equity instruments. Revised Statement No. 123 focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based
payment transactions. This Statement does not change the accounting guidance
for
share-based payment transactions with parties other than employees provided
in
Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in
Conjunction with Selling, Goods or Services,” nor address the accounting for
employee share ownership plans, which are subject to AICPA Statement
of
Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.”
Revised Statement No. 123 will become effective for Shells as of the first
quarter of fiscal 2006, being the first interim or annual reporting period
of
the first fiscal year beginning on or after June 15, 2005.
On
June
22, 2005, the Compensation Committee and the our board of directors approved
the
acceleration of vesting of certain unvested and “out-of-the-money” stock options
with exercise prices equal to or greater than $0.85 per share previously
awarded
to its employees, including its executive officers, and its directors under
the
Plan that were originally scheduled to vest during 2006. The acceleration
of
vesting is effective for stock options outstanding as of June 22, 2005. Options
to purchase approximately 295,000 shares of common stock or 18.5% of our
outstanding unvested options (of which options to purchase approximately
233,000
shares or 14.6% of the Corporation’s outstanding unvested options are held by
the Corporation’s executive officers and directors) were subject to the
acceleration. The weighted average exercise price of the options subject
to the
acceleration is $1.10.
The
purpose of the acceleration is to enable us to avoid recognizing compensation
expense associated with these options in future periods in its consolidated
statements of income, upon adoption of FASB Statement No. 123 R (Share-Based
Payment) in December 2005. The pre-tax charge which we expect to avoid in
2006
amounts to approximately $87,000 based on the original vesting periods. We
also
believe that because many of the options to be accelerated have exercise
prices
in excess of the current market value of our common stock, these options
have
limited economic value and are not fully achieving their original objective
of
incentive compensation and employee retention.
On
both
June 13 and June 22, 2005, each of Philip R. Chapman, Robert S. Ellin, Gary
L.
Herman, Michael R. Golding, Christopher D. Illick and Jay A. Wolf, our
non-employee directors, was awarded an option to purchase 20,000 shares of
our
common stock at exercise prices of $0.76 and $0.85 per share, respectively.
The
June 13, 2005 awards were made subject to stockholder approval of the Amendment.
In general, these options will vest on a monthly basis with respect to 1/12th
increments during each of the first six months following the date of grant
and
with respect to all remaining shares on December 31, 2005.
On
June
13, 2005, each of Leslie Christon, Warren Nelson and Guy Kathman, our executive
officers, was awarded, subject to stockholder approval of the Amendment,
an
option to purchase 450,000, 125,000 and 125,000 shares of our common stock,
respectively, at an exercise price of $0.76 per share. In general, these
options
will vest on an annual basis with respect to 1/3 during each of the three
years
following the date of grant, except that those increments that would have
otherwise vested on the first anniversary in 2006 based on the foregoing
schedule will instead vest on December 31, 2005. In addition, options to
purchase an aggregate of 173,000 shares of our common stock were awarded,
subject to stockholder approval of the Amendment, to 37 of our non-executive
officer employees on the same terms.
Based
on
the vesting schedules of those stock options outstanding as of August 28,
2005,
net of the effect of the acceleration of vesting discussed previously, adoption
of revised FASB Statement No. 123 is expected to result in the recognition
of
compensation expense of approximately $160,000 in fiscal 2006, $210,000 in
fiscal 2007 and $85,000 in fiscal 2008.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
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 $1,076,000
and $1,053,000 in outstanding debt with banks that is based on variable rates
as
of April 3, 2005 and July 3, 2005, respectively. Borrowings under the loan
agreements bear interest at the rate equal to the applicable bank’s base rate.
BUSINESS
General
We
operate a chain of full-service, mid-priced, casual dining seafood restaurants
under the name “Shells.” Our restaurant system currently includes 26
restaurants, of which 21 are owned by us, one is
owned by
a joint venture in which we hold a 51% ownership interest and the remaining
four
are owned by third parties and managed by us pursuant to contractual
arrangements.
Concept
and Strategy
We
believe that the relatively small number of national and regional chain
restaurants competing in the seafood segment of the restaurant industry,
as
compared to other restaurant segments, provides us with a significant
opportunity to capitalize on our casual dining seafood restaurant concept.
We
believe that we have benefited and will continue to benefit from the continuing
trend towards increased seafood consumption, which we believe is due to,
among
other things, the pleasing taste, high protein and low fat content and variety
of preparation techniques of seafood.
We
are a
full-service, neighborhood concept, designed to appeal to a broad range of
customers by providing generous portions of high-quality seafood, warm, friendly
service, and a relaxed atmosphere at reasonable prices. Shells restaurants
feature a wide selection of seafood items, including shrimp, oysters, clams,
scallops, mussels, lobster, crab and daily fresh fish specials, cooked to
order
in a variety of ways: steamed, sautéed, grilled, blackened and fried. In
addition, our restaurants offer a wide selection of signature pasta dishes,
appetizers, salads, and desserts and full bar service. All our restaurants
are
open for dinner and 24 restaurant locations are also open for lunch.
Fiscal
year 2004 marked a turning point in the evolution of the Shells concept.
Beginning in late 2003, our senior executive team led by then new President
& CEO Leslie J. Christon began to strategically reposition the concept by
leveraging the freshness, quality and variety of Shells food as a competitive
advantage. This challenging effort to successfully improve Shells’ concept
appeal and reverse unfavorable long-term sales trends remained our focus
throughout 2004.
We
revamped the menu, improved the quality of ingredients purchased, broadened
customer appeal by adding more variety, and adjusted pricing. The new menu
still
maintains a very strong emphasis on value through a two-tier pricing strategy,
offering exceptionally high-quality, fresh seafood at reasonable prices
alongside lower-priced favorites. To support the brand’s quality and freshness
positioning, we worked hard to elevate levels of service and overall operational
execution, recruiting new operations talent into our company and enforcing
higher standards. We also addressed the critical need to improve Shells’
atmosphere and facilities, successfully developing a prototypical remodel
package that dramatically improves Shells’ appearance, comfort and consumer
appeal.
Our
efforts to significantly update the Shells concept generally have been embraced
by customers. As a result, our comparable restaurant sales turned consistently
positive beginning in the latter portion of the third quarter of 2004.
Comparable restaurant sales have remained at strong levels through the balance
of 2004 and into the first half of 2005.
Restaurant
Locations
Our
managed and operated restaurants are located in the following Florida markets
and cities/neighborhoods:
Tampa/Sarasota
|
|
Orlando
|
|
South
Florida
|
Brandon
|
|
Daytona
Beach
|
|
Coral
Springs
|
Clearwater
Beach
|
|
Kissimmee
|
|
Davie
|
Holmes
Beach
|
|
New
Smyrna Beach
|
|
Kendall
|
Redington
Shores
|
|
Ocala
|
|
Pembroke
Pines
|
St.
Pete Beach
|
|
Orlando
|
|
Sunrise
|
Winter
Haven
|
|
Winter
Park
|
|
|
Carrollwood
*
|
|
Melbourne
**
|
|
|
North
Tampa *
|
|
|
|
|
Sarasota
*
|
|
|
|
|
South
Tampa *
|
|
|
|
|
|
|
|
|
|
West
Palm Beach
|
|
Fort
Myers
|
|
|
Stuart
|
|
Fort
Myers
|
|
|
West
Palm Beach
|
|
Port
Charlotte
|
|
|
|
*
|
We
manage and operate the restaurant at these locations and do not
own
them.
|
|
|
|
|
**
|
We
own 51% equity interest in the restaurant at this
location.
|
From
1997
to 1999, in an attempt to diversify and minimize the seasonal effect of the
Florida market, we opened 18 restaurants in various Midwest markets. We
sustained operating losses in these Midwest markets and discontinued operations
at our remaining 12 Midwest restaurants in April 2001. We closed one
under-performing Florida restaurant in 2002, and an additional three Florida
restaurants in 2004. We, continuously review the performance, unit economics
and
location of each of our restaurants, and regularly evaluate new real estate
sites in Florida for potential expansion or relocation.
Restaurant
Operations
Management
and Employees. We
currently employ five area directors. Each area director is responsible for
the
management of several restaurants, including management development, recruiting,
training, quality of operations and unit profitability. The staff of a typical
dinner-only restaurant consists of one general manager, two or three assistant
managers and approximately 45 other employees. The restaurants that are also
open for lunch generally have 15 to 20 additional part-time employees.
Restaurant management and area directors participate in a bonus program based
upon the financial results of their particular restaurant or restaurants.
Restaurant
Reporting. We
maintain financial and accounting controls for each restaurant through a
central
accounting system. Our financial systems and controls allow us to access
each
restaurant’s sales, inventory costs and other financial data on a daily basis,
enabling both store-level management and senior management to quickly react
to
changing sales trends, to effectively manage food, beverage and labor costs,
to
minimize theft, and to improve the quality and efficiency of accounting and
audit procedures. Store level management performs weekly inventories and
manages
weekly operating results versus budget.
Recruitment
and Training. We
believe that achieving customer satisfaction by providing knowledgeable,
friendly, efficient service is critical to a restaurants’ long-term success. We
typically recruit restaurant managers with significant experience in the
restaurant industry. During an 8 week training program, our restaurant managers
are taught to promote our team-oriented atmosphere among restaurant employees
with emphasis on preparing and serving food in accordance with strict standards
and providing friendly, courteous and attentive service. The restaurant staff,
through our Team Trainer program, is trained on site by restaurant managers
and
other staff members. During 2002 and 2003, we reduced restaurant management
turnover. In 2004 and to a lesser extent to-date in 2005, restaurant management
turnover increased as part of an effort to improve the level of quality in
our
managers. Other than our recent efforts to raise manager quality levels,
we
strive to reduce turnover levels.
Purchasing. Obtaining
a reliable supply of quality seafood at competitive prices is critical to
our
success. We have formed long-term relationships with several seafood suppliers
and purchase both fresh and frozen seafood and certain other
supplies
used in restaurant operations in bulk. In addition, Shells’ menu has been
designed to feature seafood varieties with stable sources of supply, as well
as
to provide flexibility to adjust to shortages and to take advantage of
occasional purchasing opportunities. We believe our diverse menu selection
minimizes the effect of the shortage of any seafood products. We generally
have
been able to anticipate and react to fluctuations in food costs through selected
menu price adjustments, purchasing seafood directly from numerous suppliers
and
promoting certain alternative menu selections in response to availability
and
price of supply.
Performance
Food Group of Florida, our primary distributor since October 2002,
distributes our food products, comprising seafood
and other commodities that make up our menu ingredients, to
our
restaurants. Performance Food Group purchases and takes delivery of the products
that we recommend for purchase according to our specifications and subject
to
our inspections. Based on purchase orders initiated by our restaurants,
Performance Food Group then sells the food products to us on a cost plus
basis,
and distributes the food products directly to the restaurants. From
time-to-time, at our direction to facilitate a forward purchase opportunity,
Performance Food Group acquires inventory in excess of normal recurring
restaurant delivery and re-supply, which approximates 30 days supply. We
pay
interest on inventory holdings above 30-day supply levels, at an interest
rate
of 7.8% per annum. In addition, Performance Food Group procures, on our behalf,
many operating supplies, other than food products, used by our restaurants
and distributes and sells these products to the individual restaurants at
agreed
upon price mark-ups.
Quality
Control. We
maintain a continuous inspection program for all of our seafood purchases.
Each
shipment of frozen seafood is inspected through statistical sampling methods
upon receipt at Performance Food Group’s distribution center for quality and
conformity to our written specifications, prior to delivery to the restaurants.
Fresh fish are also inspected on a random basis by our quality control
inspector. In addition, fresh fish purchased by our individual restaurants
must be purchased from one of our approved suppliers and is inspected by
a
restaurant manager at the time of delivery. As part of our training program,
restaurant employees are educated as to the correct handling and proper physical
characteristics of each product.
Our
area
directors, general managers and assistant managers are all responsible for
properly training hourly employees and ensuring that Shells restaurants are
operated in accordance with strict health and quality standards. Compliance
with
our quality standards is monitored by on-site visits and formal inspections
by
the area directors. We believe that our inspection procedures and employee
training practices help to maintain a high standard of quality for the food
and
service we provide.
Advertising
and Marketing
Our
marketing efforts leverage the use of billboard, newspaper, radio and television
advertising to raise awareness of the Shells brand and to inform new and
existing customers about food-focused promotions. The fact that our restaurants
are generally clustered in particular media markets helps us obtain cost
effective advertising. We also stage in-store promotions and various local
marketing efforts to help our restaurants partner with their communities.
Across
most major markets, our broad scale marketing initiatives included network
television, radio, outdoor, newspaper, concentrated internet and direct mail
campaigns. The advertising messages were designed to heighten brand awareness
and drive trial through food-focused brand positioning, while spotlighting
freshness, quality and variety. In 2005, we introduced a focused local store
marketing program, providing all of our restaurants with the resources to
take
advantage of an array of sales building initiatives.
In
December 2004, we entered into a consulting agreement with Lawrence
Wolf,
principal of the Wolf Group. Mr. Wolf, as a consultant, assists our
company
in providing marketing services; including guidance toward building our creative
strategy around the “Shells” brand positioning and providing support in
coordinating our media production.
Disclosure
Controls
Consolidated
subsidiaries are managed through a centralized executive office in Tampa,
Florida. Material information is discussed at various weekly and monthly
meetings with officers and directors. An open door policy is observed by
corporate officers to facilitate communication.
Joint
Venture and Third-Party Owned Restaurants
The
Shells restaurant system currently consists of (i) 21 restaurants that are
wholly owned by us; (ii) one restaurant, in Melbourne, Florida, in
which we
have an interest of 51%; and (iii) four restaurants that we manage
and
operate, but do not own. The remaining 49% interest in the Melbourne restaurant
is indirectly owned by Wanda L. Hattaway, wife of William E. Hattaway, a
former
director and president of our company. In addition to the equity interest
in
this restaurant, we receive a management and licensing fee of 6% of the
restaurant sales of the Melbourne restaurant.
Three
of
the managed restaurants are managed and operated by us pursuant to management
and license agreements, originally entered into in July 1993. Pursuant to
these
agreements, we provide management services and license proprietary information
required to operate these restaurants for a percentage of that restaurant’s
sales. The agreements, as amended in October 2001, provide for a 4% management
fee until such time as sales return near to 1999 levels, and then returning
to a
6% fee. Of the total management fee received, 2% of sales is placed in escrow
and disbursed to a third party to satisfy each managed restaurants’ requirement
to make third party royalty payments. The management agreements grant us
authority to determine the programs and policies affecting the day-to-day
operations of each of these managed restaurants. Although the management
agreements differ slightly, they generally have a remaining term of 18 years
and
provide that the third-party owners are responsible for funding all the
restaurant expenses, including food and beverage costs, staffing, training,
recruiting, inventory, and working capital.
We
operate the fourth managed restaurant pursuant to an oral agreement requiring
that the restaurant is operated in conformity with the policies and procedures
established by us for Shells restaurants. In accordance with the amended
management agreements for our managed restaurants, beginning in October
2001, we
receive a management fee of 2% of the restaurant’s sales.
On
August
9, 2005, we entered into an agreement with Deborah Christen Corporation.
Pursuant to this agreement, effective upon the occurrence of specific conditions
precedent, Deborah Christen Corporation agreed to grant us a license
to use
the service marks “Shells” and “Shells Seafood, Shellfish & Whatnot” in a
certain trade area known as the Carrollwood Trade Area. Currently, Shells
of
Carrollwood Village, Inc., a sublicensee of the service marks and other
proprietary information, operates a “Shells” restaurant in the Carrollwood Trade
Area under a management agreement with us. Our agreement with Deborah
Christen Corporation will become effective upon the earlier to occur of
either
(a) the execution of an agreement by Shells of Carrollwood Village to abandon
or
terminate the sublicense agreement which granted it the sublicense for
the use
of the services marks in the Carrollwood Trade Area and the management
agreement
with us for the operation of the “Shells” restaurant, or (b) default by Shells
of Carrollwood Village under the terms of the sublicense agreement and
the
expiration of any cure period available under the sublicense agreement.
Under
our agreement with Deborah Christen Corporation, we have until December
31, 2006
to open a “Shells” restaurant in the limited Carrollwood Trade Area, subject to
certain monthly license fees beginning on April 1, 2006. Further, we agreed
to
pay Deborah Christen Corporation a license fee in the amount of two percent
(2%)
of the gross receipts of each “Shells” restaurant operated or sublicensed by us
within the Carrollwood Trade Area.
In
the
past, the enforceability of these management and license agreements has been
questioned by certain of the licensees. Although we believe the agreements
are
enforceable, there can be no assurance that the agreements will not be
challenged in the future, and, if challenged, that the agreements will be
determined to be enforceable.
Competition
The
restaurant industry is intensely competitive with respect to price, service,
location, food quality and variety, and there are many well-established
competitors with substantially greater financial and other resources than
us.
These competitors include national, regional and local full-service casual
dining chains, many of which specialize in or offer seafood products. We
also
face competition from a broad range of other restaurants and foodservice
establishments, including full-service, quick service and fast food restaurants,
which specialize in a variety of cuisines. Some of our competitors have been
in
existence for substantially longer periods than we have, and may be better
established in the markets where we have our restaurants. In addition, we
believe that the full-service casual dining segment is likely to attract
a
significant number of new entrants, some offering seafood products.
Government
Regulation
We
are
subject to extensive federal, state and local government regulation by various
governmental agencies, including state and local licensing, zoning, land
use,
construction and environmental regulations and various regulations relating
to
the sale of food and alcoholic beverages, sanitation, disposal of refuse
and
waste products, public health, safety and fire standards. Our restaurants
are
subject to periodic inspections by governmental agencies to ensure conformity
with these regulations. Difficulties or failure in obtaining required licensing
or other regulatory approvals could delay or prevent the opening of a new
restaurant, and the suspension of, or inability to renew, a license at an
existing restaurant could adversely affect our operations. Restaurant operating
costs are also affected by other government actions, beyond our control,
including increases in the minimum hourly wage requirements, workers
compensation insurance rates, health care insurance costs and unemployment
and
other taxes.
Approximately
12% of our revenue is attributable to the sale of alcoholic beverages. Alcoholic
beverage control regulations require each of our restaurants to apply to
a state
authority and, in certain locations, county or municipal authorities for
a
license or a permit to sell alcoholic beverages on the premises. Typically,
licenses must be renewed annually and may be revoked or suspended for cause
at
any time. Alcoholic beverage control regulations relate to numerous aspects
of
daily operations of our restaurants, including minimum age of patrons and
employees, hours of operation, wholesale purchasing, inventory control and
handling, storage and dispensing of alcoholic beverages. The failure of a
restaurant to obtain or retain liquor or food service licenses would adversely
affect the restaurant’s operations.
We
are
also subject to “dram-shop” statutes, which generally provide a person injured
by an intoxicated person the right to recover damages from an establishment
that
wrongfully served alcoholic beverages to the intoxicated person. We carry
liquor
liability coverage as part of our existing comprehensive general liability
insurance.
Our
restaurants are subject to federal and state minimum wage laws governing
such
matters as working conditions, overtime and tip credits. A significant number
of
our restaurant personnel are paid at rates related to the federal minimum
wage
and, accordingly, further increases in the minimum wage rate could increase
our
labor costs.
In
May
2005, the minimum wage rate in Florida increased by $1.00 per hour. Tipped
employees also receive the $1.00 per hour wage increase under this new law.
Each
year thereafter, the minimum wage will increase according to the U.S. Department
of Labor, Bureau of Labor Statistics cost of living index. Such payroll cost
increases could have a significant adverse affect to our company. Menu price
increases and other actions are required to negate the effect of these wage
increases. There can be no assurances that such measures being taken and
expected to be taken by our company will be successful to adequately offset
these additional payroll costs, or will be accepted without adverse reaction
by
our customers.
The
Americans with Disabilities Act prohibits discrimination in employment and
public accommodations on the basis of disability. Under the Act, including
in
situations where we elect to remodel a restaurant, or acquire or purchase
a
restaurant, we could be required to expend funds to modify our restaurants
to
better provide service to, or make reasonable accommodations for the employment
of, disabled persons.
Service
Marks and Proprietary Information
We
have
registered the service mark “Shells” with the Secretary of the State of Florida
and the “Shells” service mark and “jumping fish” logo with the United States
Patent and Trademark Office. We believe that our service marks have significant
value and are essential to our ability to create demand for, and awareness
of,
our restaurants. There can be no assurance, however, that our service marks
do
not or will not violate the proprietary rights of others, that they would
be
upheld if challenged or that we would not be prevented, in such an event,
from
using our service marks, any of which could have a material adverse effect
on
us. Although there can be no assurance that we will have the financial resources
necessary to enforce or defend our service marks, we have vigorously opposed,
and intend to continue to oppose vigorously, any infringement of our service
marks.
We
also
rely on trade secrets and proprietary knowledge and employ various methods
to
protect our concepts and recipes. These methods may not afford complete
protection and there can be no assurance that others will not independently
develop similar knowledge or obtain access to our knowledge, concepts and
recipes.
Employees
As
of
August 28, 2005, we employed approximately 1,170 persons, of whom approximately
140 were management or administrative personnel employed on a salaried basis
and
1,030 were employed in non-management restaurant positions on an hourly basis.
Approximately 600 employees are employed on a full-time basis. We consider
our
employee relations to be good. No employees are covered by a collective
bargaining agreement.
Seasonality
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.
Legal
Proceedings
On
April
20, 2005, we received a notice from the Equal Employment Opportunity Commission
(EEOC) that an employee in a Tampa Shells restaurant had filed a charge of
discrimination with the EEOC. Specifically, this employee claimed age
discrimination in violation of the Age Discrimination in Employment Act of
1964.
Based on our investigation to date, we believe the charge is without merit
and
intend to vigorously defend our position.
On
April
28, 2005, we received notification from a law firm representing three holders
of
our debentures, each in the principal amount of $40,000. The notification
demands payment of the debentures in full plus accrued interest and penalties
owed thereon. The notification states that the holders have authorized the
law
firm to commence legal action against us unless the amounts owed under the
debentures are repaid in full within 10 days of the date of the letter. Payment
of the debentures, accrued interest, penalties and claimants’ legal costs were
paid in full on May 24, 2005.
On
June
22, 2005, we received notification from a law firm representing a former
employee of an alleged violation of the Family Medical Leave Act. Based on
our
investigation to date, we believe the charge is without merit and intend
to
vigorously defend our position.
In
the
ordinary course of business, Shells 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 our financial position, results of operations or cash
flows.
Properties
We
lease
6,800 square feet of space in Tampa, Florida for our executive offices. The
annual rent payable under the lease, which expires October 31, 2007, is
approximately $99,000.
All
but
two of our existing restaurants in operation are leased properties. In the
future, we intend to lease most of our properties but may from time-to-time
acquire restaurant locations based on individual site evaluation. Each of
our
leases provides for a minimum annual rent and certain of these leases require
additional rental payments to the extent sales volumes exceed specified amounts.
Generally, we are required to pay the cost of insurance, taxes and a portion
of
the landlord’s operating costs to maintain common areas. Restaurant leases have
initial terms averaging 13 years and renewal options averaging 16 years,
and
rents averaging $15.00 per square foot.
MANAGEMENT
The
following table sets forth certain information with respect to our executive
officers and the members of our board of directors:
Name
|
|
Age
|
|
Position
|
Leslie
J. Christon
|
|
51
|
|
President
and Chief Executive Officer, Director
|
Guy
C. Kathman
|
|
48
|
|
Vice
President of Operations
|
Warren
R. Nelson
|
|
53
|
|
Executive
Vice President of Finance, Chief Financial Officer, Treasurer
and
Secretary
|
|
|
44
|
|
Vice
President of Purchasing
|
Philip
R. Chapman
|
|
45
|
|
Chairman
of the Board
|
John
F. Hoffner
|
|
|
|
Director
|
Michael
R. Golding
|
|
72
|
|
Director
|
Gary
L. Herman
|
|
40
|
|
Director
|
Christopher
D. Illick
|
|
67
|
|
Director
|
Jay
A. Wolf
|
|
32
|
|
Director
|
Our
directors hold office until the earlier of their death, resignation, removal
or
disqualification or until their successors have been elected and qualified.
Officers serve at the discretion of the board of directors.
Leslie
J. Christon
has been
our President and Chief Executive Officer since joining Shells in July 2003.
From 2002 to 2003, Mrs. Christon was self-employed as a management consultant
in
the restaurant industry. From 2000 to 2002, Mrs. Christon was employed by
Sutton
Place Gourmet, Inc. as its President and Chief Operating Officer. From 1996
to
2000, Mrs. Christon was employed by Brinker International, On the Border
Restaurants, as its President.
Guy
C. Kathman
has been
our Vice-President of Operations since joining Shells in September 2003.
From
2001 to 2003, Mr. Kathman was employed by Posados Café as a General Manager.
From 1997 to 2001, Mr. Kathman was employed by Brinker International, On
the
Border Restaurants, as a Regional Director.
Warren
R. Nelson
currently serves as our Executive Vice-President of Finance, Chief Financial
Officer, Treasurer, and Secretary, positions he has held since June 1993.
Christopher
R. Ward
has
served as our Vice-President of Purchasing since September 2004 and was
appointed as an executive officer in August 2005. From 2003 to 2004, Mr.
Ward
managed supply chain management for airline caterer Gate Gourmet. From
2001 to
2003, Mr. Ward was Director of Purchasing for Buffets, Inc., parent of
the Old
Country Buffet and Hometown Buffet chains. From 1997 to 2001, Mr. Ward
was Vice
President of Purchasing for Peasant Restaurants group, responsible for
Quincy’s
Steakhouse, Mick’s and Peasant restaurants.
Philip
R. Chapman
has
served on the Board of Directors beginning May 1997 and as Chairman since
April
2002. Since 1993, Mr. Chapman has been President of Adler & Company, a
corporation which provides administrative services for financial and venture
capital investing, including certain entities controlled by Frederick R.
Adler,
a greater than 10% stockholder. Mr. Chapman is a director of Regeneration
Technologies, Inc., a company which produces allografts for surgical use,
and of
various private companies. He is also a General Partner in Euro-America
II,
L.P., a private venture capital fund, and a managing partner of Zenith
Asset
Management, a private hedge fund. Mr. Chapman is the son-in-law of Frederick
R.
Adler.
John
F. Hoffner has served on the Board of Directors since July 2005. From
August 2001 to January 2005, Mr. Hoffner served as executive vice president
and
chief financial officer of Jack in the Box Inc., a publicly traded restaurant
chain. He is currently serving as vice president of financial strategy
for
Jack in the Box. Prior to joining Jack in the Box, Mr. Hoffner held senior
financial and administrative leadership positions in several companies,
including Cost Plus World Market and Federated Department Stores.
Michael
R. Golding
has
served on the Board of Directors since 2002 and also as a professor of surgery
at the State University of New York Health Science Center in Brooklyn, New
York
since 1963, where he is currently an Emeritus Clinical Professor of Surgery.
From 1977 to 1989, Dr. Golding served as Director of Surgery at Lutheran
Medical
Center in Brooklyn, New York. From 1984 to 1989, Dr. Golding was President
of
the Tri-Boro Association of Directors of Surgery. Dr. Golding is a Fellow
of the
American College of Surgeons, a Fellow of the American College of Chest
Physicians, and a Fellow of the American College of Angiology. Dr. Golding
is a
Member of the Board of Directors of the United Hospital Fund. Dr. Golding
also
serves on the boards of numerous professional entities and private
companies.
Gary
L. Herman
has
served on the Board of Directors since 2004 and also as the Chairman and
Secretary of Digital Creative Development Corporation, an investment holding
company, since 2001. He has been the Secretary and a member of the Board
of
Directors of DataMetrics Corporation, a military defense company, since 2000.
In
addition, Mr. Herman has been a member of Galloway Capital Management, LLC,
an
affiliate of a greater than 10% stockholder of our company, since 2002. Mr.
Herman also has been a member of the Board of Directors of NYC Industrial
Development Agency since 1997. From 1997 to 2002, Mr. Herman served as an
Associate Managing Director of Burnham Securities, Inc.
Christopher
D. Illick
has
served on the Board of Directors since 1998 and also as the President of
iQ
Venture Partners, Inc., an investment bank, since 2001 and a General Partner
of
Illick Brothers, a real estate and management concern, since 1965. From 1997
to
2001, Mr. Illick was a senior officer of the investment bank of Brean Murray
& Co., Inc. Mr. Illick is a member of the Board of Directors of Analytical
Surveys, Inc., a public company which provides data and technical services
for
the geographic information systems market.
Jay
A. Wolf
has
served on the Board of Directors since June 2004 and as Audit Committee Chairman
since 2004. Since 2004, Mr. Wolf has served as a Managing Director of Trinad
Capital, LP. From 1999 to 2003, Mr. Wolf served as Vice President of Corporate
Development for Wolf Group Integrated Communications Ltd., where he was
responsible for the company’s acquisition program. From 1996 to 1999, Mr. Wolf
was employed by Canadian Corporate Funding, Ltd., a Toronto-based merchant
bank
in the senior debt department and, subsequently by Trillium Growth Capital,
the
firm’s venture capital fund. Mr. Wolf currently sits on the Board of Amalgamated
Technologies Inc., a public company with limited operations.
Board
of Directors and Committees of the Board
The
Board
of Directors has standing Executive, Audit, and Stock Option and Compensation
Committees and a Nominating Committee.
The
Executive Committee possesses all the powers and authority of the Board in
the
management of the business and affairs of our company, except for certain
powers
which are specifically reserved by Delaware law to the entire Board or the
stockholders. Messrs. Chapman and Herman are the current members of the
Executive Committee.
The
Audit
Committee’s responsibilities, which include reviewing our internal accounting
procedures and consulting with and reviewing the services provided by the
independent auditors, are described in the Audit Committee Charter. Messrs.
Illick, Hoffner and Dr. Golding are the current members of the Audit Committee
and are independent directors as that term is defined by Rule 4200(a)(15)
of the
Nasdaq Listing Standards. Messrs. Illick and Hoffner are audit committee
financial experts, as that term is defined in Item 401(h)(2) of Regulation
S-K.
The
Stock
Option and Compensation Committee is charged with reviewing compensation
policies and practices, recommending compensation for executives and key
employees and administering our stock option plans. Messrs. Chapman
and Wolf are the current members of the Stock Option and Compensation
Committee.
The
Nominating Committee assists the Board in its selection of individuals (i)
as
nominees for election to the Board of Directors and (ii) to fill any vacancies
or newly created directorships on the Board. The members of the Nominating
Committee are Messrs. Herman and Illick and Dr. Golding. Mr. Illick and Dr.
Golding are independent directors as that term is defined by Rule 4200(a)(15)
of
the Nasdaq Listing Standards. Mr. Herman may not be an independent director
pursuant to that definition. In evaluating candidates, the Nominating Committee
will consider the following criteria: personal integrity, sound business
judgment, business and professional skills and experience, independence,
potential conflicts of interest, the extent to which a candidate would fill
a
present need, and concern for the long term interests of stockholders. In
any
particular situation, the Nominating Committee may focus on persons possessing
a
particular background, experience or qualifications which the Committee believes
would be important to enhance the effectiveness of the Board. The evaluation
process for stockholder recommendations is the same as for candidates
recommended from any other source. The Nominating Committee does not have
a
charter.
Executive
Compensation
The
following table shows all the cash compensation, as well as other compensation,
we paid during the fiscal years indicated to (i) our Chief Executive Officer
and
(ii) each other executive officer whose total annual salary and bonus exceeded
$100,000 for our fiscal year 2004.
SUMMARY
COMPENSATION TABLE
|
|
|
|
Annual
Compensation
|
|
Long-Term Compensation
|
|
Name
and Principal Position
|
|
Fiscal
Year
|
|
Salary
|
|
Bonus
|
|
Other
|
|
Awards
|
|
Options
|
|
Leslie
J. Christon,
|
|
|
2004
|
|
$
|
285,577
|
|
$
|
1,164
|
|
|
8,120
|
|
|
—
|
|
|
—
|
|
Chief
Executive Officer and President 1
|
|
|
2003
|
|
|
121,635
|
|
|
—
|
|
|
31,403
|
|
|
—
|
|
|
297,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren
R. Nelson,
|
|
|
2004
|
|
|
162,000
|
|
|
1,164
|
|
|
530
|
|
|
—
|
|
|
—
|
|
Executive
Vice President of Finance,
|
|
|
2003
|
|
|
155,769
|
|
|
36,334
|
|
|
605
|
|
|
—
|
|
|
—
|
|
Chief
Financial Officer, Secretary and Treasurer
|
|
|
2002
|
|
|
142,225
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
157,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guy
C. Kathman,
|
|
|
2004
|
|
|
124,615
|
|
|
1,164
|
|
|
12,768
|
|
|
—
|
|
|
—
|
|
Vice
President of Operations
|
|
|
2003
|
|
|
27,692
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
____________
(1) Mrs.
Christon joined Shells in July 2003. Compensation for 2003 reflects payments
made pursuant to her employment agreement for the portion of 2003 during
which
she was employed by us. The amount of other compensation for 2004 consisted
of:
(i) $7,500 paid by Shells for Mrs. Christon’s automobile allowance, and (ii)
$620 paid by Shells for life insurance premiums. The amount of other
compensation for 2003 consisted of: (i) $1,403 paid by Shells for Mrs.
Christon’s automobile allowance, and (ii) $30,000 paid by Shells for relocation
costs of Mrs. Christon.
(2) Mr.
Nelson’s other compensation consists of $530 and $605 for 2004 and 2003,
respectively, paid by Shells for life insurance premiums. The fiscal 2003
bonus
consisted of $18,167 in cash and $18,167 in common stock grants, which after
adjusting for payroll tax withholdings, comprised 28,318 shares of unrestricted
common stock at $0.40 per share, issued and paid pursuant to the 2002 management
incentive plan relating to 2002 results.
(3) Mr.
Kathman joined Shells in September 2003. Compensation for 2003 reflects payments
made for the portion of 2003 during which he was employed by us. The amount
of
other compensation for 2004 consisted of: (i) $12,451 paid by Shells for
relocation costs of Mr. Kathman, and (ii) $317 paid by Shells for life insurance
premiums.
AGGREGATED
OPTION EXERCISES IN LAST FISCAL
YEAR
AND FISCAL YEAR END OPTION VALUES
The
following table sets forth information with respect to (i) options exercised
during fiscal 2004 by the persons named in the Summary Compensation Table
and
(ii) unexercised options held by these individuals at January 2, 2005 (our
fiscal year end).
|
Shares
Acquired
on
Exercise (#)
|
Value
Realized
|
Number
of Securities
Underlying
Unexercised
Option
Held
at
Fiscal Year End
|
Value
of Unexercised,
In-the-Money
Option at
Fiscal
Year End 1
|
Name
|
|
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
|
|
|
|
|
|
|
|
Leslie
J. Christon
|
—
|
—
|
|
148,687
|
148,687
|
$31,224
|
$31,224
|
Warren
R. Nelson
|
—
|
—
|
|
173,783
|
63,193
|
47,054
|
25,909
|
Guy
C. Kathman
|
—
|
—
|
|
16,667
|
33,333
|
3,167
|
6,333
|
____________
(1) Based
on
the closing market price of our common stock of $0.83 on Friday, December
31,
2004, the last day of fiscal 2004 on which our common stock was traded.
Employment
Agreements
On
July
1, 2003, we entered into a two-year employment agreement with Leslie J.
Christon, pursuant to which she serves as our President and Chief Executive
Officer. The employment agreement provided for an annual base salary of $275,000
during fiscal 2004, along with discretionary bonuses, as determined by the
Stock
Option Committee of the Board. In fiscal 2003, pursuant to her employment
agreement, Mrs. Christon was granted an option to purchase 297,374 shares
of
common stock. The option vests annually over two years. Mrs. Christon's
employment agreement automatically renews for consecutive one-year terms
unless
either she or Shells gives notice to the other of an intention not to
renew.
We
currently do not have employment agreements with Messrs. Nelson and Kathman.
However, Mr. Nelson has a letter agreement with the Board stating that in
the
event Mr. Nelson’s employment is terminated without cause, Mr. Nelson will be
entitled to receive severance payments for a period of 12 months following
the
termination in an amount equal to his then current salary as of such
date.
Stock
Option Plans
Currently,
Shells has three stock option plans for employees, consisting of the 1996
Employee Stock Option Plan (the “1996 Plan”), the 1995 Employee Stock Option
Plan (the “1995 Plan”), and the 2002 Equity Incentive Plan (the “2002 Plan”).
The stock option plans authorize us to issue incentive stock options (“ISOs”),
as defined in Section 422 of the Internal Revenue Code, and stock options
that
do not conform to the requirements of that Code section (“Non-ISOs”). The
exercise price of each ISO may not be less than 100% of the fair market value
of
our common stock at the time of grant, except that in the case of a grant
to an
employee who owns (within the meaning of Section 422 of the Code) 10% or
more of
our outstanding stock, the exercise price cannot be less than 110% of such
fair
market value. The exercise price of each Non-ISO may not be less than the
par
value of our common stock. Options may not be exercised on or after the tenth
anniversary (fifth anniversary in the case of an ISO granted to a 10%
stockholder and seventh anniversary for those stock options granted on or
after
June 22, 2005), of the date of grant. Options may not be transferred during
the
lifetime of an optionholder.
The
1996
Plan, the 1995 Plan, and the 2002 Plan are administered by the Stock Option
Committee. Subject to the provisions of the stock option plans, the Stock
Option
Committee has the authority to determine the individuals to whom the stock
options are to be granted, the number of shares to be covered by each option,
the option price, the type of option, the option period, the restrictions,
if
any, on the exercise of the option, the terms for the payment of the option
price and other terms and conditions. Payment by optionholders upon exercise
of
an option may be made (as determined by the Stock Option Committee) in cash
or
other such form of payment acceptable to the Stock Option Committee, including
shares of our common stock.
The
2002
Plan also provides for grants of restricted stock units, the value of which
is
tied to shares of our common stock, and other equity based awards related
to
common stock, including unrestricted shares of common stock, stock appreciation
rights and dividend equivalents. Awards of restricted stock, restricted stock
units and other types of equity based awards may be made in such amounts,
and
subject to such terms and conditions, as the Stock Option Committee may
determine.
On
June
22, 2005, the compensation committee and our board of directors approved
the
acceleration of vesting of certain unvested and “out-of-the-money” stock options
with exercise prices equal to or greater than $0.85 per share (the market
value)
previously awarded to our employees, including our executive officers and
directors under the 2002 Plan that were originally scheduled to vest during
2006. The acceleration of vesting is effective for stock options outstanding
as
of June 22, 2005. Options to purchase approximately 295,000 shares of common
stock or 18.5% of our outstanding unvested options (of which options to purchase
approximately 233,000 shares or 14.6% of our outstanding unvested options
are
held by our executive officers and directors) were subject to the acceleration.
The weighted average exercise price of the options subject to the acceleration
is $1.10.
The
purpose of the acceleration is to enable us to avoid recognizing compensation
expense associated with these options in future periods in its consolidated
statements of income, upon adoption of FASB Statement No. 123 R (Share-Based
Payment) in December 2005. The pre-tax charge which we expect to avoid in
2006
amounts to approximately $87,000 based on the original vesting periods. We
also
believes that because many of the options to be accelerated have exercise
prices
in excess of the current market value of our common stock, these options
have
limited economic value and are not fully achieving their original objective
of
incentive compensation and employee retention at this time.
Compensation
of Directors
On
May
20, 1997, the stockholders approved our stock option plan for non-employee
directors. This plan, as amended, authorized a total of 150,000 shares to
be
reserved for issuance under this director’s compensation plan. We granted
options to purchase 20,000 shares of common stock during each of 2001 and
2000,
at the market price on the date of grant. We did not grant any options under
this plan during 2004, 2003 or 2002. As of January 2, 2005, options to purchase
32,000 shares granted pursuant to this plan were outstanding and
exercisable.
Prior
to
2002, we had a policy of compensating directors, both generally and for their
attendance at meetings of the board of directors. In February 2002, as part
of
our cash conservation program, we revised this policy to eliminate all cash
compensation for attendance at board meetings. Additionally, we eliminated
the
automatic annual stock option awards to non-employee directors pursuant to
the
Shells Seafood Restaurants, Inc. Stock Option Plan for Non-employee Directors.
In February 2005, we granted an option to purchase 20,000 shares of Common
Stock
to each of our non-employee directors. These options vest monthly over the
twelve month period from the date of grant. Additionally, we adopted a policy
of
awarding our non-employee directors an option to purchase 20,000 shares of
common stock pursuant to our 2002 Equity Incentive Plan upon their election
or
re-election to our board. Options granted under our 2002 Equity Incentive
Plan
generally vest in one-third increments on the first, second and third
anniversaries of the date of grant, subject to the terms of the 2002 Equity
Incentive Plan and the discretion of the Stock Option and Compensation Committee
which administers the 2002 Equity Incentive Plan. We compensate directors
for
reasonable expenses incurred in connection with attendance at meetings.
On
July
5, 2005, our board of directors approved compensation to our non-salaried
board
members for services rendered in connection with their duties as board members
at an annual amount of $10,000 per non-salaried member, to be retroactively
applied to the date of our annual meeting date, June 22, 2005, payable ratably
by fiscal quarter with the first payment to be prorated and paid upon the
completion of the first full fiscal quarter. Additionally, on July 5, 2005
concurrent with the nomination of John F. Hoffner to the Board of Directors
with
the intent of his chairing the Audit Committee, our board approved compensation
for the Audit Chairperson with (i) an additional monetary compensation of
$10,000, payable ratably by fiscal quarter with the first payment to be
prorated, and (ii) an additional option to acquire 30,000 shares of Common
Stock
in accordance with the 2002 Employee Incentive Plan. Mr. Hoffner joined the
board on July 28, 2005. The annual option grant occurs concurrently upon
election or appointment to the board at the prevailing market value on date
of
issuance with vesting ratably each month over 12 months.
Board
Compensation Committee Report on Executive Compensation
Shells
manages and operates full service, mid-priced, casual dining seafood
restaurants. One of our central goals is to ensure that our remuneration
policy
enables us to attract, retain and reward capable employees who can contribute,
both short and longer-term, to our success. Equity participation and a strong
alignment to stockholders’ interests are key elements of our compensation
philosophy.
Our
executive compensation program consists of three parts: base salary, bonus
and
stock options. In awarding salary increases and bonuses, we considered whether
the compensation package as a whole adequately compensated each executive
for
Shells’ performance during fiscal 2004 and that executive’s contribution to this
performance.
Base
salary represents the fixed component of the executive compensation program.
Our
practice generally is to maintain base salaries at approximately competitive
industry averages. Determinations of base salary levels are established on
an
annual review of marketplace competitiveness with similar restaurant companies.
Periodic increases in base salary relate to individual contributions to our
overall performance and relative marketplace competitiveness.
Bonuses
represent the variable component of the executive compensation program that
is
tied to our performance and individual achievement. To the extent deemed
appropriate, our policy is to grant bonuses as a portion of the compensation
paid to Shells’ management personnel. In determining bonuses, we consider
factors such as our performance during the year and the individual’s
contribution to that performance. During fiscal 2002, we adopted an executive
and management bonus program specifying criteria relating to the Company’s
financial performance as well as individual contributions to
Shells.
We
believe that an important goal of the executive compensation program should
be
to provide executives and key employees—who have significant responsibility for
the management, growth and future success of Shells—with an opportunity to
increase their ownership in Shells and the potential for financial gain from
increases in our stock price. This approach ensures that the interests of
the
stockholders, executives and employees will be closely aligned. Therefore,
executive officers and other key employees of Shells are granted stock options
which give them a right to purchase shares of common stock at a specified
price
in the future. The grant of options is based primarily on an employee’s
potential contribution to Shells’ growth and financial results. In determining
the size of option grants, we also consider the number of options owned by
such
officer, the number and exercise price of options previously granted and
currently outstanding, and the aggregate size of the current option grants.
Options generally are granted at the prevailing market value of the common
stock
and will only have value if our stock price increases. Generally, grants
of
options vest over time, and the individual must be employed by Shells for
the
options to vest.
On
July
1, 2003, Shells entered into a two-year employment agreement with Leslie
J.
Christon, pursuant to which she serves as President and Chief Executive Officer.
The employment agreement provided for an annual base compensation of $275,000
during fiscal 2004 and supplemental discretionary bonuses, as determined
by the
Stock Option Committee. In determining Mrs. Christon’s compensation, we
considered the pay practices of other companies in the restaurant industry
as
well as her potential contribution to our future performance.
|
Stock
Option and Compensation Committee
|
|
|
|
Philip
R. Chapman, Chairman
|
|
Robert
Ellin
|
Compensation
Committee Interlocks and Insider Participation
In
fiscal
2004, Messrs. Chapman and Ellin served on our Stock Option and Compensation
Committee. In January 2002, we raised $2.0 million in the financing transaction
described earlier in this prospectus. In accordance with the terms of an
Investors Rights Agreement entered into in connection with this financing,
each
of the investment entities which participated in the financing transaction,
SIP
and Banyon, was entitled to nominate three of the seven members who were
to be
elected to our board of directors. On June 23, 2004, SIP sold to GCM and
Trinad
the $1.0 million promissory note issued to SIP, and GCM and Trinad acquired
the
rights of SIP to nominate the three individuals to serve as board members
under
the Investor Rights Agreement. The $1.0 million promissory note issued to
Banyon
was sold to Frederick R. Adler, one of our principal stockholders, in April
2004. Banyon’s right to nominate three individuals to serve on our board of
directors was transferred to Mr. Adler in connection with the sale of the
promissory note.
Jay
A.
Wolf and Gary L. Herman were nominated by GCM and Trinad, and elected, to
serve
as our board members. Messrs. Wolf and Herman are affiliated with GCM and
Trinad. Philip R. Chapman, who was nominated to serve on the Board of Directors
by Banyon, is a co-managing member of Banyon, and the son-in-law of Mr. Adler.
In accordance with the terms of the Investor Rights Agreement, the right
to
nominate individuals for election to our Board terminated upon the repayment
in
full of the $2.0 million aggregate principal amount of the promissory notes
in
connection with the May 2005 financing described earlier in this
prospectus.
In
fiscal
2004, Leslie J. Christon participated in deliberations of the Stock Option
and
Compensation Committee regarding executive compensation. However, Mrs. Christon
did not participate in deliberations concerning her own
compensation.
OUR
STOCK PRICE PERFORMANCE
The
following graph compares cumulative total return of our common stock with
the
cumulative total return of (i) the Russell 2000 Index and (ii) the Nations
Restaurant News Stock Index (the “Peer Index”). The graph assumes (a) $100 was
invested on January 3, 2000 (the first day of our fiscal 2000) in each of
our
Common Stock, the stocks comprising the Russell 2000 Index and the stocks
comprising the Peer Index, and (b) the reinvestment of dividends, if
any.
COMPARISON
OF CUMULATIVE TOTAL RETURN AMONG
SHELLS
SEAFOOD RESTAURANTS, INC., RUSSELL 2000 INDEX,
AND
NATIONS RESTAURANT NEWS STOCK INDEX
The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of August 28, 2005 and as adjusted
to
reflect the sale of the common stock being registered for resale under
this
prospectus by:
· |
each
person known by us to be a beneficial owner of more than 5.0%
of our
outstanding common stock;
|
· |
each
of our named executive officers;
and
|
· |
all
directors and executive officers as a
group.
|
The
amounts and percentage of common stock beneficially owned are reported
on the
basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed
to be a
“beneficial owner” of a security if that person has or shares “voting power,”
which includes the power to vote or to direct the voting of such security,
or
“investment power,” which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial
owner
of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Under these rules, more than one person may be
deemed
a beneficial owner of the same securities and a person may be deemed a
beneficial owner of securities as to which he has no economic interest.
The
number of shares of common stock outstanding used in calculating the percentage
for each listed person includes the shares of common stock underlying options
or
warrants held by such person that are, or within 60 days after the date
of this
prospectus will become, exercisable, but excludes shares of common stock
underlying options or warrants held by any other person (whether or not
excisable within 60 days).
The
amounts and percentage of common stock beneficially owned after the offering
are
calculated based on (i) 32,663,137 shares of common stock outstanding assuming
the issuance of 9,992,100 shares of common stock upon the conversion of
our
Series B Convertible Preferred Stock and the issuance of 6,967,300 shares
of
common stock upon the exercise of warrants and (ii) the assumption that
all of
the shares being registered for resale under this prospectus have been
sold.
|
|
Prior
to This Offering
|
|
|
Name
and Address of Beneficial Owner
|
|
Beneficial
Ownership
Amount
|
|
Percent
of Class
|
|
Beneficial
Ownership
Amount
|
|
Percent
of Class
|
|
|
|
|
|
|
|
|
|
Philip
R. Chapman
750
Lexington Avenue, 18th Floor
New
York, NY 10022 (1)
|
|
4,546,682
|
|
28.84%
|
|
92,667
|
|
*
|
|
|
|
|
|
|
|
|
|
Leslie
J. Christon (2)
|
|
312,374
|
|
1.95%
|
|
312,374
|
|
*
|
|
|
|
|
|
|
|
|
|
Michael
R. Golding
439
Newman Springs Road
Lincroft,
NJ 07738 (3)
|
|
36,667
|
|
*
|
|
36,667
|
|
*
|
|
|
|
|
|
|
|
|
|
Gary
L. Herman
Galloway
Capital Management, LLC
1325
Avenue of Americas, 26th
floor
New
York, NY 10019 (4)
|
|
512,607
|
|
3.26%
|
|
31,355
|
|
*
|
|
|
|
|
|
|
|
|
|
John F. Hoffner
1271
Dejarnet Place
Greensboro,
GA 30642 (5)
|
|
12,500
|
|
*
|
|
12,500
|
|
*
|
Christopher
D. Illick
154
Mercer Street
Princeton,
NJ 08540 (6)
|
|
85,270
|
|
*
|
|
85,270
|
|
*
|
|
|
|
|
|
|
|
|
|
Jay
A. Wolf
c/o
Trinad Capital, L.P.
2121
Avenue of the Stars, Suite 1650
Los
Angeles, CA 90067 (7)
|
|
26,667
|
|
*
|
|
26,667
|
|
*
|
|
|
|
|
|
|
|
|
|
Guy
C. Kathman (8)
|
|
33,333
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Warren
R. Nelson (9)
|
|
257,482
|
|
1.62%
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Christopher
R. Ward, Sr. (10) |
|
13,333
|
|
*
|
|
13,333
|
|
*
|
|
|
|
|
|
|
|
|
|
James
Adler
c/o
VENAD
Administrative Services, Inc.
750
Lexington Ave., 18th
floor
New
York, NY 10022
(11)
|
|
4,454,015
|
|
28.36%
|
|
0
|
|
*
|
|
|
|
|
|
|
|
|
|
Banyon
Investment, LLC
750
Lexington Avenue, 18th
Floor
New
York, NY 10022
|
|
4,454,015
|
|
28.36%
|
|
0
|
|
*
|
|
|
|
|
|
|
|
|
|
Robert
S. Ellin
c/o
Trinad Capital, L.P.
2121
Avenue of the Stars, Suite 1650
Los
Angeles, CA 90067 (12)
|
|
3,556,315
|
|
21.70%
|
|
16,667
|
|
*
|
|
|
|
|
|
|
|
|
|
Trinad
Advisors GP, LLC
153
East 53rd
Street, 48th
floor
New
York, NY 10022 (13)
|
|
3,539,648
|
|
21.62%
|
|
0
|
|
*
|
|
|
|
|
|
|
|
|
|
Trinad
Capital, L.P.
153
East 53rd
Street, 48th
floor
New
York, NY 10022 (13)
|
|
3,539,648
|
|
21.62%
|
|
0
|
|
*
|
|
|
|
|
|
|
|
|
|
Frederick
R. Adler
1520
South Ocean Blvd.
Palm
Beach, FL 33480 (14)
|
|
3,669,416
|
|
21.37%
|
|
1,204,426
|
|
3.69%
|
|
|
|
|
|
|
|
|
|
Bruce
Galloway
Galloway
Capital Management LLC
1325
Avenue of Americas, 26th
floor
New
York, NY 10019 (15)
|
|
2,724,826
|
|
16.89%
|
|
281,000
|
|
*
|
|
|
|
|
|
|
|
|
|
Lagunitas
Partners, LP
50
Osgood Place, PH
San
Francisco, CA 94133 (16)
|
|
2,600,010
|
|
14.20%
|
|
0
|
|
*
|
|
|
|
|
|
|
|
|
|
Pequot
Scout Fund, LP
c/o
Pequot Capital Management, Inc.
500
Nyala Farm Road
Westport,
CT 06880 (17)
|
|
2,467,020
|
|
13.58%
|
|
0
|
|
*
|
|
|
|
|
|
|
|
|
|
Drawbridge
Global Macro Master Fund LTD
1251
Avenue of Americas
New
York, NY 10020 (18)
|
|
1,680,000
|
|
9.66%
|
|
0
|
|
*
|
|
|
|
|
|
|
|
|
|
Pequot
Mariner Master Fund, LP
c/o
Pequot Capital Management, Inc.
500
Nyala Farm Road
Westport,
CT 06880 (19)
|
|
1,532,970
|
|
8.89%
|
|
0
|
|
*
|
|
|
|
|
|
|
|
|
|
JMP
Securities LLC
600
Montgomery Street, Suite 1100
San
Francisco, CA 94111 (20)
|
|
1,129,530
|
|
6.71%
|
|
0
|
|
*
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (10 persons)
(21)
|
|
5,836,915
|
|
35.4%
|
|
901,648
|
|
2.70%
|
(1)
|
Includes
(i) 4,454,015 shares of our common stock owned by Banyon Investment,
LLC,
and (ii) 62,667 shares of our common stock which may be acquired
through
the exercise of options held by Mr. Chapman. Does not include
options to
purchase 33,333 shares of our common stock which are not exercisable
within 60 days of August 28, 2005. Mr. Chapman and James Adler
are
co-managing members of Banyon Investment, LLC and share
voting and
investment powers.
|
(2)
|
Includes
297,374 shares of our common stock which may be acquired through
the
exercise of options. Does not include options to purchase 900,000
shares of our common stock which are not exercisable within 60
days
of August 28, 2005.
|
(3)
|
Consists
of 36,667 shares of our common stock which may be acquired through
the
exercise of options. Does not include options to purchase 33,333
shares of
our common stock which are not exercisable within 60 days of
August 28,
2005.
|
(4)
|
Includes:
(i) 387,502 shares of our common stock owned by Galloway Capital
Management, LLC; (ii) 26,667 shares of our common stock which
may be
acquired through the exercise of options; and (iii) 4,688 shares
of our
common stock owned by a trust for the benefit of Mr. Herman’s children.
Does not include options to purchase 33,333 shares of our common
stock
which are not exercisable within 60 days of August 28, 2005.
Mr. Herman is
a managing member of Galloway Capital Management, LLC and GCM
Shells
Seafood Partners, LLC, and the trustee of the aforementioned
trust.
|
(5)
|
Consists
of 12,500 shares of our common stock which may be acquired
through the
exercise of options. Does not include options to purchase 37,500
shares of
our common stock which are not exercisable within 60 days of
August 28,
2005.
|
(6)
|
Consists
of 85,270 shares of our common stock which may be acquired through
the
exercise of options. Does not include options to purchase 8,730
shares of
our common stock which are not exercisable within 60 days of
August 28,
2005.
|
(7)
|
Consists
of 26,667 shares of our common stock which may be acquired through
the
exercise of options. Does not include options to purchase 33,333
shares of
our common stock which are not exercisable within 60 days of
August 28,
2005.
|
(8)
|
Consists
of 33,333 shares of our common stock which may be acquired through
the
exercise of options. Does not include options to purchase 266,667
shares
of our common stock which are not exercisable within 60 days
of August 28,
2005.
|
(9)
|
Includes
192,214 shares of our common stock which may be acquired through
the
exercise of options. Does not include options to purchase 294,762
shares
of our common stock which are not exercisable within 60 days
of August 28,
2005.
|
(10)
|
Consists
of 13,333 shares of our common stock which may be acquired
through the
exercise of options. Does not include options to purchase 116,667
shares
of our common stock which are not exercisable within 60 days
of August 28,
2005.
|
(11)
|
Consists
of 4,454,015 shares of our common stock owned by Banyon Investment,
LLC.
James Adler recently replaced Catherine R. Adler as a managing
director of
Banyon Investment, LLC. As a result, James Alder and Philip Chapman
are
co-managing members of Banyon Investment, LLC and share voting
and
investment powers. Does not include any shares held by Frederick
R. Adler.
James Adler is an adult son of Frederick R.
Adler.
|
(12)
|
Consists
of: (i) 2,871,548 shares of our common stock owned by Trinad
Capital, LP,
(ii) 22,270 units purchased by Trinad Capital, LP in our
May 2005 private
financing which consists of 22,270 shares of our Series B
Convertible
Preferred Stock (initially convertible into 445,400 shares
of our common
stock) and warrants to purchase 222,700 shares of our common
stock, and
(iii) 16,667 shares of our common stock which may be acquired
through the
exercise of options. Mr. Ellin is a managing member
of Trinad
Advisors GP, LLC which is the general partner of Trinad Capital,
LP.
|
(13)
|
Consists
of 2,871,548 shares of our common stock owned by Trinad Capital,
LP, and
22,270 units purchased in our May 2005 private financing which
consists of
22,270 shares of our Series B Convertible Preferred Stock (initially
convertible into 445,400 shares of our common stock) and warrants
to
purchase 222,700 shares of our common stock. Trinad Advisors
GP, LLC is
the general partner of Trinad Capital,
LP.
|
(14)
|
Includes
48,833 units purchased in our May 2005 private financing and
10,100 shares
of our common stock held by 1520 Partners LP. The 48,833 units
consists of
48,833 shares of our Series B Convertible Preferred Stock (initially
convertible into 976,660 shares of our common stock) and warrants
to
purchase 488,330 shares of our common stock.
|
(15)
|
Consists
of: (i) 387,502 shares of our common stock owned by Galloway
Capital
Management, LLC; (ii) 2,180,224 shares of our common stock owned
by the
Bruce Galloway, IRA R/O; (iii) 93,100 shares of our common stock
owned by
Jacombs Trading, Inc.; and (iv) 64,000 shares of our common stock
owned by
a trust for the benefit of Mr. Galloway’s children. Mr. Galloway is a
managing member of Galloway Capital Management, LLC and GCM Shells
Seafood
Partners, LLC, the beneficiary and manager of the Bruce Galloway,
IRA R/O,
a majority shareholder of Jacombs Trading, Inc., and trustee
of the
aforementioned trust.
|
(16)
|
Consists
of 86,667 units purchased in our May 2005 private financing.
The 86,667
units consist of 86,667 shares of our Series B Convertible Preferred
Stock
(initially convertible into 1,733,340 shares of our common stock)
and
warrants to purchase 866,670 shares of our common
stock.
|
(17)
|
Consists
of 82,234 units purchased in our May 2005 private financing.
The 82,234
units consist of 82,234 shares of our Series B Convertible Preferred
Stock
(initially convertible into 1,644,680 shares of our common stock)
and
warrants to purchase 822,340 shares of our common
stock.
|
(18)
|
Consists
of 56,000 units purchased in our May 2005 private financing.
The 56,000
units consist of 56,000 shares of our Series B Convertible Preferred
Stock
(initially convertible into 1,120,000 shares of our common stock)
and
warrants to purchase 560,000 shares of our common
stock.
|
(19)
|
Consists
of 51,099 units purchased in our May 2005 private financing.
The 51,099
units consist of 51,099 shares of our Series B Convertible Preferred
Stock
(initially convertible into 1,021,980 shares of our common stock)
and
warrants to purchase 510,990 shares of our common
stock.
|
(20)
|
JMP
Securities LLC acted as the placement agent in our May 2005 private
financing and received warrants to purchase 37,651 units as a
portion of
their fees. The 37,651 units consist of 37,651 shares of our
Series B
Convertible Preferred Stock (initially convertible into 753,020
shares of
our common stock) and warrants to purchase 376,510 shares of
our common
stock.
|
(21)
|
Includes
786,692 shares of our common stock which may be acquired through
the
exercise of options. Does not include options to purchase an
aggregate of
1,757,658 shares of our common stock which are not exercisable
within 60
days of August 28, 2005.
|
Certain
information in the table and its footnotes is derived from filings made
with the
Securities and Exchange Commission or supplemental information received
from
various of the entities named in this table.
____________________
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
information set forth below briefly describes certain transactions between
Shells and certain parties who or which may be deemed to be affiliated
with
us.
In
January 2002, we raised $2.0 million in the financing transaction described
earlier in this prospectus. In accordance with the terms of an Investors
Rights
Agreement entered into in connection with this financing, each of the investment
entities which participated in the financing transaction, SIP and Banyon,
was
entitled to nominate three of the seven members who were to be elected
to our
board of directors. On June 23, 2004, SIP sold to GCM and Trinad the $1.0
million promissory note issued to SIP, and GCM and Trinad acquired the
rights of
SIP to nominate the three individuals to serve as board members under the
Investor Rights Agreement. The $1.0 million promissory note issued to Banyon
was
sold to Frederick R. Adler, one of our principal stockholders, in April
2004.
Banyon’s right to nominate three individuals to serve on our board of directors
was transferred to Mr. Adler in connection with the sale of the promissory
note.
Jay
A.
Wolf and Gary L. Herman, the individuals nominated by GCM and Trinad to
serve as
Board members, are members of GCM and Trinad. Philip R. Chapman, our Chairman
of
the Board, and James Adler, the adult son of Frederick R. Adler, are co-managing
members of Banyon. Certain other family members of Frederick R. Adler also
are
members of Banyon. The financing transaction was approved by a special
committee
of the Board, comprised of the then disinterested members of the Board.
Although
we believe that the transaction was on terms no less favorable than would
have
been available from unaffiliated third parties in arm’s length transactions,
there can be no assurance that this is the case. In accordance with the
Investor
Rights Agreement (now expired), each of GCM, Trinad and Banyon nominated
individuals (Messrs. Ellin, Herman and Wolf in the case of GCM and Trinad,
and
Messrs. Chapman and Illick and Dr. Golding in the case of Banyon) to serve
as
members of our Board of Directors during fiscal 2004.
In
August
2004, we agreed with the holders of the $2.0 million of promissory notes
to an
extension of the term of the notes from their original maturity date of
January
31, 2005 to January 31, 2007. In connection with this extension, we issued
warrants to purchase 400,000, 600,000 and 1,000,000 shares of our common
stock,
respectively, to GCM, Trinad and Frederick R. Adler.
In
October 2004, GCM sold the principal amount of its note and the related
warrants
to the Bruce Galloway, IRA R/O. GCM retained the deferred interest on the
note
and the right to nominate individuals to serve on our Board of Directors
pursuant to the Investor Rights Agreement.
On
December 28, 2004, we entered into a consulting agreement with Lawrence
Wolf,
the father of Jay A. Wolf, a member of our Board of Directors. The consulting
agreement has a one year term, and under it, Mr. Lawrence Wolf is to assist
Shells in providing marketing services, including guidance toward building
our
creative strategy around the “Shells” brand positioning and providing support in
coordinating our media production. As compensation, Mr. Lawrence Wolf received
options, pursuant to our 2002 Equity Incentive Plan, to purchase 130,000
shares
of our common stock at an exercise price of $0.83, the market price of
the
common stock on the date of grant. The options fully vest on the first
anniversary of the grant date.
In
March
2005, Trinad, Bruce Galloway and Frederick R. Adler provided us with a
$1.6
million revolving line of credit, which was to mature on the earlier of
March
31, 2006 or the closing of a financing providing us not less than $1.6
million
of net proceeds. Trinad, Bruce Galloway and Frederick R. Adler are each
security
holders who beneficially own more than five percent of our common stock.
The
percentage interests of Trinad, Bruce Galloway and Frederick R. Adler in
the
transaction are 30%, 20% and 50%, respectively. Amounts drawn under the
line of
credit bear interest at the rate of 15% per annum, payable 8% monthly in
arrears
and 7% deferred until the maturity date. These investors received a fee
of
$80,000, in the aggregate, for extending the credit line to Shells, paid
to each
investor pro rata in accordance with each investor’s percentage interest. In May
2005, Trinad, Bruce Galloway and Frederick R. Adler agreed to extend the
maturity date under the line of credit to May 23, 2007 for no additional
consideration.
On
May
24, 2005, we raised approximately $6.9 million in a private offering of
our
securities to accredited investors. The securities sold in the offering
were
units. Each unit consisted of a share of Series B Convertible Preferred
Stock
(initially convertible into 20 shares of our common stock, subject to certain
specified adjustments, if applicable) and a warrant to purchase ten (10)
shares
of our common stock at an exercise price of $1.30 per share. As part of
this
transaction, Frederick R. Adler used $500,000 principal amount of his note
to
exercise the warrants to purchase 1,000,000 shares of common stock, issued
to
him in August 2004; and Frederick R. Adler, Trinad and the Bruce Galloway,
IRA
R/O converted all the remaining secured promissory notes (originally issued
by
us to the investors in the January 2002 financing) held by them into units
being
sold in the offering. Upon the repayment of the notes, the Investor Rights
Agreement terminated and the rights of Frederick R. Adler, Trinad and GCM
to
nominate individuals for election to our board of directors ceased to exist.
DESCRIPTION
OF CAPITAL STOCK
Our
authorized capital stock consists of 60 million shares, consisting of 58
million
shares of common stock, $.01 par value, and 2 million shares of preferred
stock,
$.01 par value.
As
of
August 28, 2005, there were:
· |
15,703,737
shares of our common stock outstanding, which are held of record
by 244
stockholders;
|
· |
23,731
shares of Series A 5% Preferred Stock outstanding, convertible
into
176,375 shares of our common stock which are held of record by
17
stockholders; and
|
· |
461,954
shares of Series B Convertible Preferred Stock outstanding, convertible
into 9,239,080 shares of common stock, which are held of record
by 19
stockholders.
|
32,663,137
shares of common stock and 23,731 shares of Series A Preferred Stock will
be
issued and outstanding after giving effect to (i) the issuance of 6,590,790
shares of common stock upon the exercise of the common stock warrants held
by
the selling stockholders, (ii) the conversion of 461,954 shares of Series
B
Convertible Preferred Stock into 9,239,080 shares of common stock, and
(iii) the
issuance 376,510 shares of common stock upon the exercise of warrants and
753,020 shares of common stock upon the conversion of 37,651 shares of
Series B
Convertible Preferred Stock, which are issuable upon the exercise of the
unit
warrant issued to the placement agent in our May 2005 financing.
The
following description summarizes information about our capital stock. This
information does not purport to be complete and is subject to, and qualified
in
its entirety by reference to, the terms of our certificate of incorporation
and
bylaws, which are included as exhibits to the registration statement of
which
this prospectus forms a part, and the provisions of applicable Delaware
law, the
state in which we are incorporated.
Common
Stock
Holders
of common stock are entitled to one vote in respect of each share of common
stock held on each matter voted upon by the stockholders. Holders of common
stock have no preemptive rights to purchase or subscribe for any unissued
stock
of any class or series or any additional shares of any class or series
to be
issued by reason of any increase of our authorized capital stock.
Holders
of common stock are entitled to receive any dividends that may be declared
from
time to time by our board of directors, subject to any preferential dividend
rights of outstanding preferred stock, requirements with respect to the
setting
aside of sums as sinking funds or redemption or purchase accounts, and
any other
conditions which may be fixed by our board of directors. In the event of
our
liquidation, distribution or sale of assets, dissolution or winding up,
holders
of common stock will be entitled to receive proportionately (inclusive
of
applicable preferred stock, on an as converted basis) any of our assets
remaining, tangible and intangible, after distribution in full of the
preferential amount to be distributed to the holders of any outstanding
preferred stock.
Holders
of common stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of common stock are, and the shares of common
stock offered by the selling stockholders in this offering, when issued,
will
be, validly issued, fully paid and non-assessable. The rights and privileges
of
holders of common stock are subject to any series of preferred stock that
we may
issue in the future, as described below.
Preferred
Stock
Our
board
of directors has the authority, without further action by stockholders,
to issue
up to 2 million shares of preferred stock from time to time in one or more
series. No holder of any of the shares of any series of preferred stock
has any
preemptive right to purchase or subscribe for any unissued stock of any
class or
series or any additional shares of any class or series to be issued by
reason of
any increase in our authorized capital stock. Subject to the foregoing
limitation on preemptive rights, our board of directors has the authority
to fix
the designation, powers, preferences and relative, participating, optional
and
other rights and the qualifications, limitations and restrictions of such
series, any or all of which may be greater than the rights of holders of
common
stock.
The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or adversely affect
the
rights and powers, including voting rights, of the holders of common stock.
It
may also have the effect of delaying, deferring or preventing a change
in
control of our company.
Series
A 5% Convertible Preferred Stock
On
October 24, 2001, we issued 66,862 shares of Series A 5% Convertible
Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”)
in consideration for the cancellation of $669,000 of trade indebtedness
by our
trade creditors. The shares were issued exclusively to “accredited investors” as
defined in Rule 501(a) under the Securities Act. We did not receive any
cash
proceeds in connection with the issuance of the Series A Preferred
Stock.
Each
share of Series A Preferred Stock is convertible by the holder into
five
shares of our common stock (subject to adjustments for stock dividends,
combinations or subdivisions of common stock, reclassification and
reorganization). The Series A Preferred Stock has a liquidation
preference
equal to $10.00 per share, plus any declared but unpaid dividends. Dividends
on
the Series A Preferred Stock, payable in cash at the rate of 5%
of the
liquidation value ($10.00) per annum, are payable annually, when, as and
if
declared by our board of directors out of funds legally available for the
payment of dividends. Dividends on the Series A Preferred Stock
are not
cumulative. To date, no dividends have been declared or paid on the Series
A
Preferred Stock.
Except
in
regards to voting upon a proposed amendment of the Certificate of Incorporation
that would adversely alter or change the powers, preferences or special
rights
of the Series A Preferred Stock, the holders of the Series A Preferred
Stock
have no right to vote at any regular or special meeting of the stockholders.
The
Series A Preferred Stock are redeemable upon notice by Shells at any time,
in
whole or in part, for a redemption price of $10.00 per share. There is
no
sinking fund requirement for redemption of the Series A Preferred
Stock.
During
July and August 2005, investors converted 11,544 shares of Series A Preferred
Stock into 57,720 shares of our common stock. During May 2004, investors
converted 28,273 shares of Series A Preferred Stock into 141,365 shares
of our
common stock. During January 2003, investors converted 3,314 shares
of
Series A Preferred Stock into 16,570 shares of our common stock.
Series
B Convertible Preferred Stock
In
May
2005, we issued 461,954 units of securities in
a
private offering of our securities to accredited investors. Each unit consisted
of one
shares of Series B Convertible Preferred Stock, par value $0.01 per share
(the
“Series B Preferred Stock”),
which
is initially convertible into 20 shares of our common stock, subject to
certain
specified adjustments under certain circumstances (as described below),
and a
warrant to purchase 10 shares of our common stock at an exercise price
of $1.30
per share.
Holders
of Series B Preferred Stock have the right, at the holder’s option at any time
and from time to time, to convert any share of Series B Preferred Stock
into
such number of fully paid and nonassessable shares of common stock as is
obtained by dividing (i) $15.00 (adjusted appropriately in the event the
shares
of Series B Preferred Stock are subdivided into a greater number, whether
by
stock split, stock dividend, reclassification or otherwise, or combined
into a
lesser number, whether by reverse stock split, reclassification or otherwise)
plus all declared and unpaid dividends on the shares by (ii) the conversion
price of $0.75 per share or, in case an adjustment of such conversion price
has
taken place, then the conversion price as last adjusted and in effect at
the
date any shares of Series B Preferred Stock are surrendered for
conversion.
Each
share of Series B Preferred Stock that is issued and outstanding at 5:00
P.M.
New York City time on May 23, 2015 will automatically be converted into
the
number of shares of our common stock into which such shares of Series B
Preferred Stock are then convertible as set forth above without any further
action by any holder of such shares and whether or not the certificate(s)
representing such shares are surrendered to us or our transfer
agent.
Except
as
may be otherwise provided in the Certificate of Designations of Series
B
Preferred Stock or otherwise required by applicable law, the Series B Preferred
Stock votes together with our common stock as a single class on all actions
to
be taken by our stockholders. For so long as any of the shares of Series
B
Preferred Stock are outstanding, we cannot, without the affirmative vote
of the
holders of at least a majority of the shares of Series B Preferred Stock
then
outstanding: (i) alter or change adversely the powers, preferences or rights
given to the Series B Preferred Stock or alter or amend the Certificate
of
Designations of Series B Preferred Stock; (ii) authorize or create any
class of
stock ranking as to a distribution of assets upon a liquidation event senior
to
or pari passu with the Series B Preferred Stock; or (iii) issue any additional
shares of the Series A Preferred Stock, or alter or change the powers,
preferences or rights given to the Series A Preferred Stock.
Upon
any
dissolution, liquidation or winding-up, whether voluntary or involuntary,
or
unless otherwise agreed in writing by holders of at least a majority of
the
outstanding Series B Preferred Stock, any merger, consolidation, reorganization
or other similar transaction or series of transactions of ours or any of
our
subsidiaries into or with any other entity, or a sale, conveyance, mortgage,
transfer, license, pledge, lease or other disposition of all or substantially
all of our assets or any of our subsidiaries, or any other transaction,
in all
instances in which the holders of the outstanding voting securities of
Shells
immediately prior to such transaction hold less than 50% of the voting
securities of the surviving entity immediately following such transaction,
the
holders of Series B Preferred Stock are entitled to be paid out of the
assets of
Shells legally available for distribution to our stockholders, before any
payment is made to the holders of our common stock.
If
our
board of directors shall declare a dividend payable upon the then outstanding
shares of our common stock, our board of directors shall declare at the
same
time a dividend upon each outstanding share of Series B Preferred Stock,
payable
at the same time as the dividend paid on our common stock, in an amount
per
share of the Series B Preferred Stock equal to the amount payable on the
largest
number of whole shares of our common stock into which each share of the
Series B
Preferred Stock is then convertible pursuant to our Certificate of Designations
of Series B Convertible Preferred Stock.
We
have
agreed to use reasonable best efforts to prepare and file with the SEC,
within
45 days after the closing of the May 2005 financing, a registration statement
to
enable the resale of the shares of common stock issuable upon the conversion
of
the Series B Preferred Stock. See “Registration Rights” below for additional
information.
Warrants
In
connection with the 2002 financing, we issued to each of SIP and Banyon
warrants
to purchase 4,454,015 shares of common stock at an exercise price of $0.16
per
share. Any warrants then still outstanding automatically converted into
shares
of common stock on January 31, 2005 pursuant to a mandatory cashless exercise
provision in the warrant agreements. SIP transferred warrants to purchase
an
aggregate of 4,008,615 shares of common stock to Galloway Capital Management,
LLC, GCM, Trinad and Atlantis Equities, Inc. SIP retained warrants to purchase
445,400 shares of common stock. The transferred warrants were exercised
at $0.16
per share, resulting in the issuance of 4,008,615 shares of common stock.
The
warrants retained by SIP to purchase 445,400 shares of common stock were
exercised by a “cashless exercise” on January 31, 2005 resulting in the issuance
of 350,381 shares of common stock. Banyon exercised its warrants to purchase
4,454,015 shares of common stock.
We
issued
to GCM, Trinad and Frederick R. Adler in the aggregate warrants to purchase
2,000,000 shares of common stock, on August 4, 2004, in connection with
the
extension of the maturity date of the $2.0 million private financing transaction
to January 31, 2007. Warrants to purchase 600,000 shares of common stock
at the
exercise price of $0.50 were exercised by Trinad and warrants to purchase
400,000 shares of common at the exercise price of $0.50 were exercised
by The
Bruce Galloway, IRA R/O (transferred from GCM in October 2004). Warrants
to
purchase 1,000,000 shares were also exercised at the exercise price of
$0.50 per
share by Frederick
R. Adler. The
proceeds of the warrant exercises were used to pay down the principal amount
of
the note held by each of these entities.
In
December 2004, we sold $2,375,000 principal amount of debentures and warrants
to
purchase an aggregate of 1,187,500 shares of our common stock. The debentures
matured on April 5, 2005, and, to the extent not converted into units in
our May
2005 financing, were fully repaid in May 2005. The
warrants
issued in connection with the $2,375,000 debenture offering are exercisable
through December 7, 2010, at an exercise price of $0.60 per share. The
number
and kind of securities purchasable upon the exercise of these warrants,
and the
exercise price are subject to adjustment from time to time upon the occurrence
of certain events, such as the payment of dividends or the making of a
distribution to holders of outstanding common stock by us, the subdivision
of
outstanding shares of common stock into a greater number of shares or
combination of outstanding shares of common stock into a smaller number
of
shares of common stock, or our issuance of any shares of capital stock
in a
reclassification of common stock. In order to prevent dilution of the exercise
rights of these warrants, the exercise price is subject to adjustment from
time
to time, with certain exception, whenever we issue or transfer any shares
of our
common stock or issue rights, warrants, options or securities or debt
convertible, exercisable, or exchangeable for shares of our common stock
for a
consideration per share less than the exercise price of the
warrants.
In
May
2005, we issued 461,954 units of securities in
a
private offering of our securities to accredited investors. The 461,954
units
consist of 461,954 shares of our Series B Preferred Stock and warrants
to
purchase 4,619,540 shares of our common stock at an exercise price of $1.30
per
share. These warrants are exercisable immediately through May 27, 2010.
The
number and kind of securities purchasable upon the exercise of these warrants
and the exercise price are subject to adjustment from time to time upon
the
happening of any of the following events. In case we (i) pay a dividend
in
shares of our common stock or make a distribution in shares of our common
stock
to holders of our outstanding common stock, (ii) subdivide our outstanding
shares of common stock into a greater number of shares, (iii) combine
our
outstanding shares of common stock into a smaller number of shares of common
stock, or (iv) issue any shares of our capital stock in a reclassification
of our common stock, then the number of shares purchasable upon exercise
of
these warrants immediately prior to the exercise will be adjusted so that
the
holder of the warrants will be entitled to receive the kind and number
of shares
or other securities of Shells which it would have owned or would have been
entitled to receive had the warrants been exercised in advance of the triggering
event. Upon each adjustment of the kind and number of shares or other securities
of Shells which are purchasable under these warrants, the holder of these
warrants will be entitled to purchase the number of shares or other securities
resulting from the adjustment at an exercise price per share or other security
obtained by multiplying the exercise price in effect immediately prior
to the
adjustment by the number of shares purchasable pursuant to the warrants
immediately prior to the adjustment and dividing by the number of shares
or
other securities of Shells purchasable under the warrants resulting from
the
adjustment.
In
addition to the 461,954 units of securities sold in our May 2005 private
financing, we granted to JMP Securities LLC, the placement agent in the
financing, warrants to purchase 37,651 units at a purchase price of $15.00
per
unit. The Series B Preferred Stock issuable upon exercise of these warrants
to
purchase units have the same adjustment, anti-dilution, conversion and
registration rights and obligations as the Series B Preferred Stock issued
to
our other investors in our May 2005 private financing. The adjustment rights
of
the warrants to purchase common stock are the same as the adjustment rights
of
the warrants to purchase common stock issued to our investors in our May
2005
private offering.
Registration
Rights
We
have
agreed to use reasonable best efforts to prepare and file with the SEC,
within
45 days after the closing of the May 2005 financing, a registration statement
to
enable the resale of the shares of common stock issuable upon the conversion
of
the Series B Preferred Stock issued in our May 2005 financing, shares of
common
stock issued or issuable upon exercise of the warrants issued in the financing
and all shares of common stock issued or issuable in respect of the shares
referred to above by virtue of any stock split, stock dividend, recapitalization
or similar event by the investors on a delayed or continuous basis under
Rule
415 of the Securities Act. If the registration statement is not filed with
the
SEC within 45 days after the closing of the May 2005 financing, we are
required
to pay to the investors liquidated damages in the amount of 1.0% of the
total
purchase price of the units purchased by the investor in the May 2005 financing,
and an additional 1.0% of the total purchase price of the units purchased
by the
investor for each full 30-day period, or partial portion of the 30-day
period,
that the registration statement has not been filed with the SEC. In addition,
if
the failure to become effective is primarily due to our fault, we will
be
required to pay to the investor liquidated damages in the amount of (i)
1.0% of
the total purchase price of the units purchased by the investor in the
event the
registration statement has not been declared effective by the SEC within
90 days
after the filing of the registration statement, and (ii) an additional
1.0% of
the total purchase price of the units purchased by the investor for each
30-day
period, or partial portion of the 30-day period, in the event the registration
statement has not been declared effective by the SEC within 120 days after
the
filing of the registration statement, until the registration statement
has been
declared effective by the SEC. In connection with the placement agent warrants
to purchase units issued to JMP Securities LLC, the underlying shares of
common
stock issuable upon the conversion of the Series B Preferred Stock and
the
shares of common stock issuable upon the exercise of the warrants to purchase
common stock (both, to the extent the warrants to purchase units are exercised)
have all of the rights of registration granted to the common stock issuable
upon
conversion of the Series B Preferred Stock or exercise of the warrants
issued in
our May 2005 financing described above.
In
regards to the warrants issued to investors in our December 2004 financing,
we
have agreed to notify all holders of the warrants issued in writing at
least
thirty (30) days before the filing of any registration statement under
the
Securities Act for purposes of effectuating a public offering of our securities
and to use our best efforts to afford each holder an opportunity to include
in
such registration statement all or any part of the warrant shares issued
or
issuable upon exercise of the warrant issued in the December 2004 financing
then
held by such holder.
In
regards to the warrants issued to GCM, Trinad and Frederick R. Adler in
connection with the August 2004 extension of the maturity date of promissory
notes issued in our 2002 financing, we have agreed that, with certain
exceptions, at any time after January 1, 2003 and after receipt of a written
request from the holders of at least 50 % of the shares of common stock
issued
or issuable upon the exercise of the warrants stating that registration
of the
shares of common stock held by them issued or issuable upon the exercise
of the
warrants is desired, we will, after giving notice, use our reasonable best
efforts to prepare, file and cause a registration statement to be effective
under the Securities Act and remain effective for six months or a shorter
period
of time if all shares involved are sold. In addition to this “demand
registration right”, we have agreed that in the event that we propose to file a
registration statement under the Securities Act with respect to any equity
securities, we will give written notice of such to all of the warrant holders
at
least twenty (20) days before the anticipated filing. The notice will offer
to
the warrant holders the opportunity to include in such registration statement
such number of shares of common stock issuable upon exercise of these warrants
as the warrant holders may request.
In
our
2002 financing, we have agreed that, in regards to the warrants issued,
with
certain exceptions, at any time after January 1, 2003 and after receipt
of a
written request from the holders of at least 50 % of the shares of common
stock
issued or issuable upon the exercise of the warrants stating that registration
of the shares of common stock held by them issued or issuable upon the
exercise
of the warrants is desired, we will, after giving notice, use our reasonable
best efforts to prepare, file and cause a registration statement to be
effective
under the Securities Act and remain effective for six months or a shorter
period
of time if all shares involved are sold. In addition to this “demand
registration right,” we have agreed that in the event that we propose to file a
registration statement under the Securities Act with respect to any equity
securities, we will give written notice of such to all of the warrant holders
at
least twenty (20) days before the anticipated filing. The notice will offer
to
the warrant holders the opportunity to include in such registration statement
such number of shares of common stock issuable upon exercise of these warrants
as the warrant holders may request.
Anti-Takeover
Effects of Delaware Laws and our Certificate of Incorporation and
Bylaws
Our
certificate of incorporation and the Delaware General Corporation Law (the
“DGCL”) contain provisions that may delay or prevent an attempt by a third party
to acquire control of us. These provisions include the requirements of
Section
203 of the DGCL. In general, Section 203 prohibits, for a period of three
years,
designated types of business combinations, including mergers, between us
and any
third party that owns 15% or more of our common stock. This provision does
not
apply if:
· |
our
board of directors approves of the transaction before the third
party
acquires 15% of our stock;
|
· |
the
third party acquires at least 85% of our stock at the time its
ownership
goes past the 15% level; or
|
· |
our
board of directors and two-thirds of the shares of our common
stock not
held by the third party vote in favor of the
transaction.
|
Our
certificate of incorporation also authorizes us to issue, from time to
time in
one or more series, shares of preferred stock with terms fixed by the board
of
directors, subject to the limitation that no holder of any of the shares
of any
class or series of stock shall have any preemptive right to purchase or
subscribe for any unissued stock of any class or series or any additional
shares
of any class or series to be issued by reason of an increase of our authorized
capital stock. Stockholder approval is not necessary to issue preferred
stock in
this manner. Issuance of these shares of preferred stock could have the
effect
of making it more difficult for a person or group to acquire control of
us.
These
provisions may prevent our stockholders from receiving the benefit from
any
premium to the market price of our common stock offered by a bidder in
a
takeover context. Even in the absence of a takeover attempt, the existence
of
these provisions may adversely affect the prevailing market price of our
common
stock if they are viewed as discouraging takeover attempts in the
future.
Indemnification
of Officers and Directors
The
DGCL
authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages and
breaches of directors’ fiduciary duties. Our certificate of incorporation
provides that, to the fullest extent permitted by the DGCL, as it now exists
or
as it may be amended in the future, a director will not be personally liable
to
us or our stockholders for monetary damages for the breach of any fiduciary
duty
as a director, except for liability:
· |
for
any breach of the director’s duty of loyalty to us or our
stockholders;
|
· |
for
acts or omissions not in good faith or that involve intentional
misconduct
or a knowing violation of law;
|
· |
under
Section 174 of the DGCL, as it now exists or as it may be amended
in the
future; or
|
· |
for
any transaction from which the director derived an improper personal
benefit.
|
Our
bylaws provide that we will indemnify any person who:
· |
was
or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal,
administrative or investigative (other than an action by or in
our right)
by reason of the fact that he or she is or was a director, officer,
employee or agent of ours, or is or was serving at our request
as a
director, officer, employee or agent of another corporation,
partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys’ fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him or her in connection
with such
action, suit or proceeding if he or she acted in good faith and
in a
manner he or she reasonably believed to be in or not opposed
to our best
interests, and, with respect to any criminal action or proceeding,
had no
reasonable cause to believe his or her conduct was unlawful;
and
|
· |
was
or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in our right to procure
a
judgment in our favor by reason of the fact that he or she is
or was a
director, officer, employee or agent of ours, or is or was serving
at our
request as a director, officer, employee or agent of another
corporation,
partnership, joint venture, trust or other enterprise against
expenses
(including attorneys’ fees) actually and reasonably incurred by him or her
in connection with the defense or settlement of such action or
suit if he
or she acted in good faith and in a manner he or she reasonably
believed
to be in or not opposed to our best interests and except that
we will not
indemnify any such person in respect of any claim, issue or matter
as to
which he or she shall have been adjudged to be liable to us unless
and
only to the extent that the Delaware Court of Chancery or the
court in
which such action or suit was brought determines upon application
that,
despite the adjudication of liability but in view of all the
circumstances
of the case, he or she is fairly and reasonably entitled to indemnity
for
such expenses which the Court of Chancery or such other court
deems
proper.
|
The
DGCL
further provides that to the extent a director or officer of a corporation
has
been successful in the defense of any action, suit or proceeding, by reason
of
the fact that he is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
or in
the defense of any claim, issue or matter therein, he shall be indemnified
against expenses actually and reasonably incurred by him in connection
therewith; that indemnification provided for by this section of the DGCL
shall
not be deemed exclusive of any other rights to which the indemnified party
may
be entitled; and that the corporation may purchase and maintain insurance
on
behalf of a director or officer of the corporation against any liability
asserted against him or incurred by him in any such capacity or arising
out of
his status as such whether or not the corporation would have the power
to
indemnify him against such liabilities under the DGCL.
We
carry
directors’ and officers’ insurance providing indemnification to our directors,
officers and certain employees for some liabilities. We believe that the
indemnification provisions of our certificate of incorporation and bylaws
and
this insurance coverage are useful to attract and retain qualified directors
and
executive officers.
There
is
no currently pending material litigation or proceeding involving any of
our
directors, officers or employees for which indemnification is
sought.
Listing
Our
common stock is listed on the OTC bulletin board under the symbol
“SHLL.OB.”
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Continental Stock
Transfer
& Trust Company.
UNITED
STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The
following is a summary of certain material United States federal income
tax
considerations related to the ownership and disposition of our common stock
that
may be relevant to you if you acquire our common stock pursuant to this
offering. This summary is based on the Internal Revenue Code of 1986, as
amended
(the “Code”), existing and proposed Treasury regulations promulgated under the
Code and administrative and judicial interpretations of the Code, all as
of the
date of this prospectus and all of which are subject to change, possibly
with
retroactive effect. The Internal Revenue Service is referred to as “IRS” in this
summary.
This
summary discusses only the tax consequences to the investors who purchase
our
common stock pursuant to this offering and does not discuss the tax consequences
applicable to subsequent purchasers of our common stock. This summary deals
only
with common stock held as capital assets within the meaning of Section
1221 of
the Code. It does not discuss all of the tax considerations that may be
relevant
to holders of our common stock in light of their particular circumstances
or to
holders of common stock subject to special rules, such as financial
institutions, regulated investment companies, holders subject to the alternative
minimum tax, insurance companies, pension funds, tax-exempt organizations,
partnerships or other pass-through entities, dealers in securities or
currencies, traders who elect to mark to market their securities or persons
holding the common stock as part of a hedging or constructive sale transaction,
“straddle,” conversion transaction, or other integrated transaction, or holders
of the common stock whose functional currency is not the United States
dollar or
persons who acquired our common stock in compensatory transactions. In
addition,
this summary does not discuss any United States tax consequences to a Non-U.S.
Holder (as defined below) that is a controlled foreign corporation, passive
foreign investment company, foreign personal holding company, corporation
that
accumulates earnings to avoid U.S. federal income tax, or a U.S. expatriate.
This summary does not address any state, local or non-United States tax
considerations, or tax considerations under other federal tax laws (such
as
estate and gift tax laws).
We
have
not requested a ruling from the IRS on the tax consequences of owning our
common
stock. As a result, the IRS could disagree with portions of this discussion.
Persons considering the purchase of our common stock should consult with
their
own tax advisors about the application of the United States federal income
tax
laws to their particular situations, as well as any tax considerations
under
other United States federal tax laws, and the laws of any state, local
or
foreign jurisdiction.
As
used
in this prospectus, the term “U.S. Holder” means a beneficial owner of common
stock that is, for United States federal income tax purposes:
· |
a
citizen or individual resident of the United
States;
|
· |
a
corporation, partnership or other entity treated as a corporation,
created
in or under the laws of the United States or of any political
subdivision
thereof;
|
· |
an
estate the income of which is subject to United States federal
income
taxation regardless of its source;
or
|
· |
a
trust if a court within the United States is able to exercise
primary
supervision over the administration of the trust and one or more
U.S.
persons have the authority to control all substantial decisions
of the
trust, or a trust that has a valid election in effect under applicable
United States Treasury Regulations to be treated as a U.S.
person.
|
As
used
in this prospectus, the term “Non-U.S. Holder” means a beneficial owner of
common stock that is an individual, corporation, trust or estate that is
not a
U.S. Holder.
If
an
entity treated as a partnership for U.S. federal income tax purposes holds
shares of common stock, the tax treatment of a partner will generally depend
on
the status of the partner and upon the activity of the partnership. If
you are a
partner of a partnership holding shares of common stock, we suggest you
consult
your own tax advisor.
U.S.
Holders
Distributions
to U.S. Holders
If
distributions are paid on the shares of our common stock (other than
distributions in liquidation and distributions in redemption of our common
stock), these distributions generally will constitute dividends for U.S.
federal
income tax purposes to the extent paid from our current or accumulated
earnings
and profits, as determined under U.S. federal income tax principles, and
will
constitute a tax-free return of capital that is applied against your tax
basis
in the common stock to the extent these distributions exceed those earnings
and
profits. Distributions in excess of our current and accumulated earnings
and
profits and your tax basis in the common stock will be treated as a gain
from
the sale or exchange of the common stock, the treatment of which is discussed
below. For the tax years 2004 through 2008, non-corporate U.S. Holders
are
subject to a maximum tax rate on dividends equal to 15%, which corresponds
to
the maximum tax rate for long-term capital gains; however, certain holding
period requirements and other limitations may apply. Under current law
for tax
years beginning after December 31, 2008, dividends will be taxed at the
same
rate as other items of ordinary income. U.S. Holders that are corporations
may
be eligible for a dividend-received deduction in respect of a dividend
distribution by us.
Gain
on Disposition of Common Stock by U.S. Holders
A
U.S.
Holder will recognize gain or loss on the sale, exchange or other taxable
disposition of our common stock to the extent of the difference between
the
amount realized on such sale, exchange or other disposition and the holder’s
adjusted tax basis in such shares. Such gain or loss generally will constitute
capital gain or loss, and will be long-term capital gain or loss, if the
holder
has held such shares for more than one year at the time of sale or disposition.
Non-corporate U.S. Holders are subject to a maximum tax rate of 15% on
long-term
capital gain (increased to 20% for years after 2008). The deductibility
of
capital losses by a U.S. Holder is subject to limitations.
Non-U.S.
Holders
Distributions
to Non-U.S. Holders
Dividends
paid to a Non-U.S. Holder that are not effectively connected with the conduct
of
a U.S. trade or business of the Non-U.S. Holder generally will be subject
to
U.S. federal withholding tax at a 30% rate or, if an income tax treaty
applies
and certain certification requirements described below are satisfied, a
lower
rate specified by the treaty. A Non-U.S. Holder who wishes to claim the
benefits
of an applicable income tax treaty will be required to provide the appropriate
IRS Form W-8 certifying its entitlement to benefits under an income tax
treaty.
Non-U.S. Holders should consult their tax advisors regarding their entitlement
to benefits under a relevant tax treaty.
Withholding
generally is imposed on the gross amount of a distribution, regardless
of
whether we have sufficient earnings and profits to cause the distribution
to be
a dividend for U.S. federal income tax purposes. However, we may elect
to
withhold on less than the gross amount of the distribution if we determine
that
the distribution is not paid out of our current or accumulated earnings
and
profits, based on our reasonable estimates.
A
Non-U.S. Holder eligible for a reduced rate of U.S. federal withholding
tax
under a tax treaty may obtain a refund of any excess amounts withheld by
filing
an appropriate claim for a refund together with the required information
with
the IRS.
Dividends
that are effectively connected with a Non-U.S. Holder’s conduct of a trade or
business within the United States and, if a tax treaty applies, attributable
to
a Non-U.S. Holder’s U.S. permanent establishment, are exempt from U.S. federal
withholding tax if the Non-U.S. Holder furnishes to us or our paying agent
the
appropriate IRS form and other applicable requirements are met. However,
dividends exempt from U.S. federal withholding tax because they are “effectively
connected” or attributable to a U.S. permanent establishment under an applicable
tax treaty are subject to U.S. federal income tax on a net income basis
at the
regular graduated U.S. federal income tax rates. Any such effectively connected
dividends received by a foreign corporation may, under certain circumstances,
be
subject to an additional “branch profits tax” at a 30% rate or a lower rate
specified by an applicable tax treaty.
Gain
on Disposition of Common Stock by Non-U.S. Holders
Subject
to the discussion below concerning backup withholding, a Non-U.S. Holder
generally will not be subject to U.S. federal income tax with respect to
gain
recognized on a sale or other disposition of our common stock unless one
of the
following applies:
· |
The
gain is effectively connected with a Non-U.S. Holder’s conduct of a trade
or business within the United States and, if a tax treaty applies,
the
gain is attributable to a Non-U.S. Holder’s U.S. permanent establishment.
In such case, the Non-U.S. Holder will, unless an applicable
tax treaty
provides otherwise, generally be taxed on its net gain derived
from the
sale at regular graduated U.S. federal income tax rates, and
in the case
of a foreign corporation, may also be subject to the branch profits
tax
described above;
|
· |
A
Non-U.S. Holder who is an individual holds our common stock as
a capital
asset, is present in the United States for 183 or more days in
the taxable
year of the sale or other disposition, and certain other conditions
are
met. In such a case, the Non-U.S. Holder will be subject to a
flat 30% tax
on the gain derived from the sale, which may be offset by certain
U.S.
capital losses; or
|
· |
We
are or have been a “United States real property holding corporation” (a
“USRPHC”) for United States federal income tax purposes at any time during
the shorter of the five-year period ending on the date of the
sale or
other disposition and the period such Non-U.S. Holder held our
common
stock (the shorter period hereinafter referred to as the “lookback
period”); provided that if our common stock is regularly traded on an
established securities market, this rule will generally not cause
any gain
to be taxable unless the Non-U.S. Holder owned more than 5% of
our common
stock at some time during the lookback period. We do not believe
that we
are a USRPHC and do not expect to become one in the future. However,
we
could become a USRPHC as a result of future changes in assets
or
operations.
|
Information
Reporting and Backup Withholding Tax
The
amount of dividends paid to each U.S. Holder will be reported annually
to the
IRS and to each U.S. Holder. A U.S. Holder may be subject to backup withholding
(currently at a rate of 28%) with respect to dividends on, and the proceeds
from
the sale or redemption of, common stock, unless such holder (a) is an entity
that is exempt from withholding (including, among others, corporations
and
certain tax-exempt organizations) and when required, demonstrates this
fact, or
(b) provides the payor with its correct taxpayer identification number,
which,
for an individual, is ordinarily his or her social security number, and
otherwise complies with applicable requirements of the backup withholding
rules.
Generally,
we must report annually to the IRS and to each Non-U.S. Holder the amount
of
dividends paid to, and the tax withheld with respect to, each Non-U.S.
Holder.
These reporting requirements apply regardless of whether withholding was
reduced
or eliminated by an applicable tax treaty. Copies of this information also
may
be available under the provisions of a specific tax treaty or agreement
with the
tax authorities in the country in which the Non-U.S. Holder resides or
is
established.
In
general, backup withholding will not apply to dividends paid to a Non-U.S.
Holder and to proceeds from the disposition of our common stock paid to
a
Non-U.S. Holder if the holder has provided the required certification that
it is
a Non-U.S. Holder and neither we nor our paying agents have actual knowledge
or
reason to know that the holder is a United States person.
Under
United States Treasury Regulations, the payment of proceeds from the disposition
of our common stock by a Non-U.S. Holder made to or through a foreign office
of
a broker to its customer generally are not subject to information reporting
or
backup withholding. However, if the broker is a U.S. person, a controlled
foreign corporation for U.S. federal income tax purposes, a foreign person
50%
or more of whose gross income from certain periods is effectively connected
with
a United States trade or business, or a foreign partnership with significant
United States ownership, then information reporting (but not backup withholding)
will be required, unless the broker has in its records documentary evidence
that
the beneficial owner of the payment is not a U.S. person or is otherwise
entitled to an exemption, and other applicable certification requirements
are
met (and the broker has no actual knowledge to the contrary). Information
reporting and backup withholding generally will apply to proceeds of a
disposition of our common stock effected at a United States office of any
United
States or foreign broker, unless the broker has in its records documentary
evidence that the beneficial owner of the payment is not a U.S. person
or is
otherwise entitled to an exemption, and other applicable certification
requirements are met.
Backup
withholding does not represent an additional income tax. Any amounts withheld
from a payment to a holder under the backup withholding rules will be allowed
as
a credit against the holder’s United States federal income tax liability and may
entitle the holder to a refund, provided that the required information
or
returns are timely furnished by the holder to the IRS.
The
foregoing discussion of certain U.S. federal income tax considerations
is for
general information only and is not tax advice. Accordingly, each prospective
investor should consult with his own tax adviser regarding U.S. federal,
state,
local and non-U.S. income and other tax consequences of the acquisition,
holding
and disposing of our common stock.
PLAN
OF DISTRIBUTION
The
selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their
shares
of our common stock on any stock exchange, market or trading facility on
which
the shares are traded or in private transactions. These sales may be at
fixed or
negotiated prices. The selling stockholders may use any one or more of
the
following methods when selling shares:
· |
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
· |
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal
to
facilitate the transaction;
|
· |
purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account;
|
· |
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
· |
privately
negotiated transactions;
|
· |
settlement
of short sales entered into after the date of this
prospectus;
|
· |
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
· |
a
combination of any such methods of
sale;
|
· |
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or
|
· |
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers
to
participate in sales. Broker-dealers may receive commissions or discounts
from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. Each
selling stockholder does not expect these commissions and discounts relating
to
its sales of shares to exceed what is customary in the types of transactions
involved.
In
connection with the sale of our common stock or interests therein, the
selling
stockholders may enter into hedging transactions with broker-dealers or
other
financial institutions, which may in turn engage in short sales of the
common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver
these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or create one or more derivative
securities which require the delivery to such broker-dealer or other financial
institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved
in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale
of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling stockholder has informed
us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
We
are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
selling stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act, may
be
sold under Rule 144 rather than under this prospectus. Each selling stockholder
has advised us that they have not entered into any agreements, understandings
or
arrangements with any underwriter or broker-dealer regarding the sale of
the
resale shares. There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the selling
stockholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on
which the
shares may be resold by the selling stockholders without registration and
without regard to any volume limitations by reason of Rule 144(e) under
the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities
Act
or any other rule of similar effect. The resale shares will be sold only
through
registered or licensed brokers or dealers if required under applicable
state
securities laws. In addition, the resale shares may be sold without registration
under state securities laws by reason of Section
18(b)(4)(A) of the Securities Act, subject only to limited notice filings
and
fees in certain states.
Under
applicable rules and regulations under the Securities Exchange Act of 1934,
as
amended, any person engaged in the distribution of the resale shares may
not
simultaneously engage in market making activities with respect to our common
stock for a period of two business days prior to the commencement of the
distribution. In addition, the selling stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases
and
sales of shares of our common stock by the selling stockholders or any
other
person. We will make copies of this prospectus available to the selling
stockholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale.
LEGAL
MATTERS
The
validity of the shares of common stock offered by this prospectus will
be passed
upon for us by Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
The
consolidated financial statements of Shells Seafood Restaurants, Inc.,
and
subsidiaries at December 28, 2003 and January 2, 2005, and for each of
the
fiscal years ended December 29, 2002, December 28, 2003 and January 2,
2005,
appearing in this prospectus and registration statement have been audited
by
Kirkland, Russ, Murphy & Tapp P.A., independent registered public accounting
firm, as set forth in their report thereon appearing elsewhere herein,
and are
included in reliance upon such report given on the authority of such firm
as
experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC a registration statement on Form S-1 under the Securities
Act
to register the shares offered by this prospectus. The term “registration
statement” means the original registration statement and any and all amendments
thereto, including the schedules and exhibits to the original registration
statement or any amendment. This prospectus is part of that registration
statement. This prospectus does not contain all of the information set
forth in
the registration statement or the exhibits to the registration statement.
For
further information with respect to us and the shares we are offering pursuant
to this prospectus, you should refer to the registration statement and
its
exhibits. Statements contained in this prospectus as to the contents of
any
contract, agreement or other document referred to are not necessarily complete,
and you should refer to the copy of that contract or other documents filed
as an
exhibit to the registration statement. You may read or obtain a copy of
the
registration statement at the SEC’s public reference room at 100
F
Street, N.E., Room 1580, Washington, D.C. 20549.
You may
obtain information on the operation of the public reference room and their
copy
charges by calling the SEC at 1-800-SEC-0330. The SEC maintains a website
that
contains registration statements, reports, proxy information statements
and
other information regarding registrants that file electronically with the
SEC.
The address of the website is http://www.sec.gov.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations
|
F-4
|
Consolidated
Statements of Stockholders’ Equity
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-8
|
To
the
Board of Directors and Stockholders of
Shells
Seafood Restaurants, Inc. and Subsidiaries
Tampa,
Florida
We
have
audited the accompanying consolidated balance sheets of Shells Seafood
Restaurants, Inc. and Subsidiaries (the “Company”) as of January 2, 2005 and
December 28, 2003 and the related consolidated statements of
operations,
stockholders’ equity and cash flows for the fiscal years ended January 2, 2005
(53 weeks), December 28, 2003 (52 weeks) and December 29,
2002 (52
weeks). These consolidated financial statements are the responsibility
of the
company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with auditing standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audit to obtain reasonable assurance about whether
the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the
overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the company
at
January 2, 2005 and December 28, 2003 and the results of its
operations and
cash flows for the fiscal years ended January 2, 2005 (53 weeks),
December 28, 2003 (52 weeks) and December 29, 2002 (52
weeks) in
conformity with accounting principles generally accepted in the United
States of
America.
KIRKLAND
,
RUSS
,
MURPHY
&
TAPP
P.A.
Clearwater,
Florida
February
4, 2005, except as to Note 19, which date is March 10, 2005
CONSOLIDATED
BALANCE SHEETS
|
|
|
January
2, 2005
|
|
|
December
28, 2003
|
|
|
July
3, 2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Cash
|
|
$
|
2,349,519
|
|
$
|
723,939
|
|
$
|
2,805,201
|
|
Inventories
|
|
|
396,823
|
|
|
382,549
|
|
|
457,348
|
|
Other
current assets
|
|
|
497,178
|
|
|
265,891
|
|
|
876,126
|
|
Receivables
from related parties
|
|
|
109,477
|
|
|
110,147
|
|
|
106,651
|
|
Total
current assets
|
|
|
3,352,997
|
|
|
1,482,526
|
|
|
4,245,326
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
7,095,922
|
|
|
6,996,095
|
|
|
9,180,236
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,474,407
|
|
|
2,474,407
|
|
|
2,474,407
|
|
Other
assets
|
|
|
535,376
|
|
|
587,612
|
|
|
621,523
|
|
Prepaid
rent
|
|
|
59,956
|
|
|
75,577
|
|
|
361,781
|
|
TOTAL
ASSETS
|
|
$
|
13,518,658
|
|
$
|
11,616,217
|
|
$
|
16,883,273
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,311,584
|
|
$
|
2,390,685
|
|
$
|
1,786,615
|
|
Accrued
expenses
|
|
|
2,567,026
|
|
|
2,295,290
|
|
|
2,678,988
|
|
Sales
tax payable
|
|
|
202,666
|
|
|
168,385
|
|
|
276,570
|
|
Convertible
debentures and interest payable
|
|
|
2,395,301
|
|
|
-
|
|
|
-
|
|
Current
portion of long-term debt
|
|
|
515,764
|
|
|
234,247
|
|
|
345,785
|
|
Total
current liabilities
|
|
|
7,992,341
|
|
|
5,088,607
|
|
|
5,087,958
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
and deferred interest payable to related parties
|
|
|
2,238,941
|
|
|
2,267,416
|
|
|
-
|
|
Long-term
debt, less current portion
|
|
|
1,494,845
|
|
|
1,558,245
|
|
|
1,370,504
|
|
Deferred
rent
|
|
|
849,287
|
|
|
1,053,531
|
|
|
831,436
|
|
Total
liabilities
|
|
|
12,575,414
|
|
|
9,967,799
|
|
|
7,289,898
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
partner interest
|
|
|
441,618
|
|
|
465,836
|
|
|
463,919
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; authorized 2,000,000 shares:
|
|
|
|
|
|
|
|
|
|
|
Series
A - 35,275 and 63,548 shares issued and outstanding;
|
|
|
353
|
|
|
635
|
|
|
353
|
|
Series
B - 461,954 shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
|
4,620
|
|
Common
stock, $0.01 par value; authorized 20,000,000 and
20,000,000 and
58,000,000 shares, respectively; 8,565,406 and 4,631,375
and
15,641,417 shares issued and outstanding, respectively
|
|
|
85,654
|
|
|
46,314
|
|
|
156,414
|
|
Additional
paid-in-capital
|
|
|
14,926,627
|
|
|
14,303,151
|
|
|
22,910,009
|
|
Accumulated
deficit
|
|
|
(14,511,008
|
)
|
|
(13,167,518
|
)
|
|
(13,941,940
|
)
|
Total
stockholders’ equity
|
|
|
501,626
|
|
|
1,182,582
|
|
|
9,129,456
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
13,518,658
|
|
$
|
11,616,217
|
|
$
|
16,883,273
|
|
See
accompanying notes to consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Fiscal
Years Ended
|
|
26
Weeks Ended (Unaudited)
|
|
|
|
January
2, 2005
|
|
December
28, 2003
|
|
December
29, 2002
|
|
June
27, 2004
|
|
July
3, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
41,564,138
|
|
$
|
44,046,055
|
|
$
|
47,227,747
|
|
$
|
23,588,270
|
|
$
|
24,445,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
14,050,690
|
|
|
14,466,578
|
|
|
15,777,572
|
|
|
7,840,779
|
|
|
7,997,186
|
|
Labor
and other related expenses
|
|
|
12,935,204
|
|
|
13,845,271
|
|
|
14,585,378
|
|
|
6,997,919
|
|
|
7,160,464
|
|
Other
restaurant operating expenses
|
|
|
10,123,584
|
|
|
11,117,396
|
|
|
10,773,494
|
|
|
5,321,266
|
|
|
5,520,767
|
|
General
and administrative expenses
|
|
|
3,248,657
|
|
|
3,387,470
|
|
|
3,564,828
|
|
|
1,659,557
|
|
|
1,788,152
|
|
Depreciation
and amortization
|
|
|
1,057,841
|
|
|
1,076,511
|
|
|
1,102,221
|
|
|
578,786
|
|
|
731,565
|
|
Pre-opening
expenses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
303,206
|
|
Provision
for impairment of assets
|
|
|
105,000
|
|
|
360,000
|
|
|
110,000
|
|
|
-
|
|
|
-
|
|
Provision
for impairment of goodwill
|
|
|
-
|
|
|
-
|
|
|
206,196
|
|
|
-
|
|
|
-
|
|
|
|
|
41,520,976
|
|
|
44,253,226
|
|
|
46,119,689
|
|
|
22,398,307
|
|
|
23,501,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
43,162
|
|
|
(207,171
|
)
|
|
1,108,058
|
|
|
1,189,963
|
|
|
943,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
buy-out option
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
600,000
|
|
Provision
for impairment of assets
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(211,000
|
)
|
Interest
expense, net
|
|
|
(1,153,340
|
)
|
|
(462,246
|
)
|
|
(533,870
|
)
|
|
(204,930
|
)
|
|
(336,778
|
)
|
Other
(expense) income, net
|
|
|
32,641
|
|
|
(100,352
|
)
|
|
(2,743
|
)
|
|
57,320
|
|
|
(277,629
|
)
|
|
|
|
(1,120,699
|
)
|
|
(562,598
|
)
|
|
(536,613
|
)
|
|
(147,610
|
)
|
|
(225,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
INCOME BEFORE ELIMINATION OF
MINORITY
PARTNER INTEREST AND
INCOME
TAXES
|
|
|
(1,077,537
|
)
|
|
(769,769
|
)
|
|
571,445
|
|
|
1,042,353
|
|
|
718,326
|
|
ELIMINATION
OF MINORITY PARTNER INTEREST
|
|
|
(265,953
|
)
|
|
(263,964
|
)
|
|
(221,319
|
)
|
|
(139,552
|
)
|
|
(149,258
|
)
|
(LOSS)
INCOME BEFORE BENEFIT FOR INCOME
TAXES
|
|
|
(1,343,490
|
)
|
|
(1,033,733
|
)
|
|
350,126
|
|
|
902,801
|
|
|
569,068
|
|
BENEFIT
FOR INCOME TAXES
|
|
|
-
|
|
|
-
|
|
|
326,715
|
|
|
-
|
|
|
-
|
|
NET
(LOSS) INCOME
|
|
$
|
(1,343,490
|
)
|
$
|
(1,033,733
|
)
|
$
|
676,841
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME PER SHARE OF COMMON
STOCK:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.26
|
)
|
$
|
(0.23
|
)
|
$
|
0.15
|
|
$
|
0.19
|
|
$
|
0.04
|
|
Diluted
|
|
$
|
(0.26
|
)
|
$
|
(0.23
|
)
|
$
|
0.07
|
|
$
|
0.08
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,261,981
|
|
|
4,577,470
|
|
|
4,454,015
|
|
|
4,677,384
|
|
|
13,722,536
|
|
|
|
|
5,261,981
|
|
|
4,577,470
|
|
|
10,593,498
|
|
|
10,911,221
|
|
|
18,445,886
|
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
PREFERRED
STOCK
|
|
|
|
|
|
ADDITIONAL
|
|
|
|
|
|
|
|
SERIES
A
|
|
SERIES
B
|
|
COMMON
STOCK
|
|
PAID-IN
|
|
ACCUMULATED
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
CAPITAL
|
|
DEFICIT
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 30, 2001
|
|
|
66,862
|
|
$
|
669
|
|
|
|
|
|
|
|
|
4,454,015
|
|
$
|
44,540
|
|
$
|
14,240,576
|
|
$
|
(12,810,626
|
)
|
$
|
1,475,159
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
676,841
|
|
|
676,841
|
|
Balance
at December 29, 2002
|
|
|
66,862
|
|
|
669
|
|
|
|
|
|
|
|
|
4,454,015
|
|
|
44,540
|
|
|
14,240,576
|
|
|
(12,133,785
|
)
|
|
2,152,000
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,033,733
|
)
|
|
(1,033,733
|
)
|
Conversion
of preferred to common
|
|
|
(3,314
|
)
|
|
(34
|
)
|
|
|
|
|
|
|
|
16,570
|
|
|
166
|
|
|
(132
|
)
|
|
|
|
|
-
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,790
|
|
|
1,608
|
|
|
62,707
|
|
|
|
|
|
64,315
|
|
Balance
at December 28, 2003
|
|
|
63,548
|
|
|
635
|
|
|
|
|
|
|
|
|
4,631,375
|
|
|
46,314
|
|
|
14,303,151
|
|
|
(13,167,518
|
)
|
|
1,182,582
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,343,490
|
)
|
|
(1,343,490
|
)
|
Conversion
of preferred to common
|
|
|
(28,273
|
)
|
|
(282
|
)
|
|
|
|
|
|
|
|
141,365
|
|
|
1,413
|
|
|
(1,131
|
)
|
|
|
|
|
-
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,792,666
|
|
|
37,927
|
|
|
624,607
|
|
|
|
|
|
662,534
|
|
Balance
at January 2, 2005
|
|
|
35,275
|
|
|
353
|
|
|
|
|
|
|
|
|
8,565,406
|
|
|
85,654
|
|
|
14,926,627
|
|
|
(14,511,008
|
)
|
|
501,626
|
|
Net
income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
569,068
|
|
|
|
|
Issuance
of common stock (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,063,011
|
|
|
70,630
|
|
|
2,190,754
|
|
|
|
|
|
2,261,384
|
|
Stock
options exercised (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,000
|
|
|
130
|
|
|
5,610
|
|
|
|
|
|
5,740
|
|
Issuance
of preferred stock (Unaudited)
|
|
|
|
|
|
|
|
|
461,954
|
|
$
|
4,620
|
|
|
|
|
|
|
|
|
5,787,018
|
|
|
|
|
|
5,791,638
|
|
Balance
at July 3, 2005 (Unaudited)
|
|
|
35,275
|
|
$
|
353
|
|
|
461,954
|
|
$
|
4,620
|
|
|
15,641,417
|
|
$
|
156,414
|
|
$
|
22,910,009
|
|
$
|
(13,941,940
|
)
|
$
|
9,129,456
|
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Fiscal
Years Ended
|
|
26
Weeks Ended (Unaudited)
|
|
OPERATING
ACTIVITIES:
|
|
January
2, 2005
|
|
December
28, 2003
|
|
December
29, 2002
|
|
June
27, 2004
|
|
July
3, 2005
|
|
Net
(loss) income
|
|
$
|
(1,343,490
|
)
|
$
|
(1,033,733
|
)
|
$
|
676,841
|
|
$
|
902,801
|
|
$
|
569,068
|
|
Adjustments
to reconcile net (loss) income
to
net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,057,841
|
|
|
1,076,511
|
|
|
1,102,765
|
|
|
578,786
|
|
|
731,565
|
|
Lease
buy-out option
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(600,000
|
|
Provision
for impairment of assets
|
|
|
201,000
|
|
|
360,000
|
|
|
110,000
|
|
|
-
|
|
|
211,000
|
|
Provision
for impairment of goodwill
|
|
|
-
|
|
|
-
|
|
|
206,196
|
|
|
-
|
|
|
-
|
|
Interest
expense on warrants issued
|
|
|
711,000
|
|
|
-
|
|
|
105,977
|
|
|
-
|
|
|
-
|
|
Financing
costs on warrants issued
|
|
|
175,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gain
from hurricane-related insurance
recoveries
|
|
|
(499,795
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(Gain)
loss on disposal or sale of assets
|
|
|
(48,204
|
)
|
|
2,874
|
|
|
6,956
|
|
|
(89,161
|
)
|
|
162,424
|
|
Loss
on sale of assets applied against
reserves
|
|
|
63,554
|
|
|
49,356
|
|
|
144,153
|
|
|
24,776
|
|
|
-
|
|
Minority
partner net income allocation
|
|
|
265,953
|
|
|
263,964
|
|
|
221,319
|
|
|
139,561
|
|
|
149,258
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in current assets and
liabilities
|
|
|
(483,201
|
)
|
|
(891,690
|
)
|
|
(1,865,482
|
)
|
|
(658,456
|
)
|
|
(33,602
|
)
|
Changes
in other assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in prepaid rent
|
|
|
15,621
|
|
|
21,854
|
|
|
25,291
|
|
|
7,811
|
|
|
(324,825
|
)
|
Decrease
(increase) in other assets
|
|
|
5,070
|
|
|
(227,680
|
)
|
|
(31,868
|
)
|
|
10,986
|
|
|
(94,265
|
)
|
Increase
in accrued interest to related
parties
|
|
|
136,840
|
|
|
144,081
|
|
|
123,335
|
|
|
-
|
|
|
-
|
|
Decrease
in deferred rent
|
|
|
(95,356
|
)
|
|
(29,230
|
)
|
|
(160,296
|
)
|
|
(49,489
|
)
|
|
(17,851
|
)
|
Total
adjustments
|
|
|
1,505,323
|
|
|
770,040
|
|
|
(11,654
|
)
|
|
(35,186
|
)
|
|
183,704
|
|
Net
cash provided by (used in) operating
activities
|
|
|
161,833
|
|
|
(263,693
|
)
|
|
665,187
|
|
|
867,615
|
|
|
752,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of lease buy-out option
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
600,000
|
|
Proceeds
from hurricane-related insurance
recoveries
|
|
|
139,935
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Proceeds
from sale of assets
|
|
|
92,776
|
|
|
500
|
|
|
1,091,324
|
|
|
88,776
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(1,524,515
|
)
|
|
(755,278
|
)
|
|
(766,772
|
)
|
|
(467,951
|
)
|
|
(3,158,185
|
)
|
Net
cash (used in) provided by investing
activities
|
|
|
(1,291,804
|
)
|
|
(754,778
|
)
|
|
324,552
|
|
|
(379,175
|
)
|
|
(2,558,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from debt financing
|
|
|
2,832,298
|
|
|
578,585
|
|
|
3,043,817
|
|
|
162,298
|
|
|
206,518
|
|
Repayment
of debt
|
|
|
(404,496
|
)
|
|
(1,079,004
|
)
|
|
(2,313,318
|
)
|
|
(206,135
|
)
|
|
(2,740,610
|
)
|
Proceeds
from the issuance of stock
|
|
|
617,920
|
|
|
-
|
|
|
-
|
|
|
16,800
|
|
|
4,922,144
|
|
Distributions
to minority partner
|
|
|
(290,171
|
)
|
|
(225,980
|
)
|
|
(221,109
|
)
|
|
(132,223
|
)
|
|
(126,957
|
)
|
Net
cash provided by (used in) financing
activities
|
|
|
2,755,551
|
|
|
(726,399
|
)
|
|
509,390
|
|
|
(159,260
|
)
|
|
2,261,095
|
|
Net
increase (decrease) in cash
|
|
|
1,625,580
|
|
|
(1,744,870
|
)
|
|
1,499,129
|
|
|
329,180
|
|
|
455,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AT BEGINNING OF PERIOD
|
|
|
723,939
|
|
|
2,468,809
|
|
|
969,680
|
|
|
723,939
|
|
|
2,349,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
2,349,519
|
|
$
|
723,939
|
|
$
|
2,468,809
|
|
$
|
1,053,119
|
|
$
|
2,805,201
|
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
|
|
Fiscal
Years Ended
|
|
26 Weeks
Ended (Unaudited)
|
|
|
|
January
2, 2005
|
|
December
28, 2003
|
|
December
29, 2002
|
|
June
27, 2004
|
|
July
3, 2005
|
|
Cash
(outflows) flows from changes in current assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
(14,274
|
)
|
$
|
(26,115
|
)
|
$
|
101,176
|
|
$
|
(20,228
|
)
|
$
|
(60,525
|
)
|
Receivables
from related parties
|
|
|
670
|
|
|
(4,794
|
)
|
|
(27,216
|
)
|
|
22,548
|
|
|
2,826
|
|
Tax
refunds receivable
|
|
|
-
|
|
|
-
|
|
|
898,338
|
|
|
-
|
|
|
-
|
|
Other
current assets
|
|
|
128,573
|
|
|
337
|
|
|
(81,763
|
)
|
|
(341,380
|
)
|
|
(378,948
|
)
|
Accounts
payable
|
|
|
(79,101
|
)
|
|
(164,169
|
)
|
|
(1,524,542
|
)
|
|
(582,979
|
)
|
|
(524,969
|
) |
Accrued
expenses
|
|
|
(553,350
|
)
|
|
(673,481
|
)
|
|
(1,215,415
|
)
|
|
153,535
|
|
|
854,110
|
|
Sales
tax payable
|
|
|
34,281
|
|
|
(23,468
|
)
|
|
(16,060
|
)
|
|
29,613
|
|
|
73,904
|
|
Increase
in accrued interest to related parties
|
|
|
- |
|
|
- |
|
|
- |
|
|
80,435 |
|
|
- |
|
Change
in current assets and liabilities
|
|
$
|
(483,201
|
)
|
$
|
(891,690
|
)
|
$
|
(1,865,482
|
)
|
$
|
(658,456
|
)
|
$
|
(33,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
309,006
|
|
$
|
338,883
|
|
$
|
445,793
|
|
$
|
122,336
|
|
$
|
273,947
|
|
Cash
from hurricane-related insurance recoveries
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
357,198
|
|
Financing
costs, line of credit
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
80,000
|
|
Cash
paid (received) for income taxes, net
|
|
$
|
634
|
|
$
|
3,300
|
|
$
|
(1,216,438
|
)
|
$
|
634
|
|
$
|
-
|
|
Cash
received in 2004 from the sale of assets in 2002
|
|
$
|
100,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Non-cash
operating and investing activities:
Warrant
valuation reserves of $284,364 and $223,000 relating to the exercise of
warrants
were applied to Paid in Capital in the first and second quarters of 2005,
respectively.
Principal
on related party debt of $500,000 was used by the noteholders to acquire
common
stock in conjunction with the exercise of warrants in each of March and
May
2005.
Principal
and accrued interest of $347,588 was used by the debenture holders to acquire
Series B Preferred Stock in May 2005.
Principal
and accrued interest on related party debt of $1,281,666 was used by the
noteholders to acquire Series B Preferred Stock in May 2005.
Accounts
receivable of $359,860, as of January 2, 2005, for hurricane-related insurance
recoveries was applied to reduce the $499,795 gain from hurricane-related
insurance recoveries, resulting in $139,935 proceeds from hurricane-related
insurance recoveries.
Accrued
interest to related parties of $165,315 was refinanced through a second
mortgage
on the Winter Haven property in June 2004 and classified as long-term debt.
Provision
for impairment of assets of $201,000 consists of a $96,000 charge, which
was
applied to accrued expenses in June 2004, and $105,000 which was expensed
in
fiscal year 2004.
Loss
on
sale of assets applied against reserves totaled $63,554 consisting of (i)
$24,776 reduced net book value of property and equipment by $19,062 and
deferred
rent by $5,714 in June 2004; and (ii) $38,778 reduced net book value of
property
and equipment in December 2004.
Asset
impairment charges of $158,335 were applied to reduce the basis of fixed
assets
damaged by a fire in September 2004.
During
2004, Shells relieved $383,695 of the FAS 144 allowance for impaired assets
relating to disposed restaurants.
Deferred
rent of $114,602 was applied to gain on sale of restaurant in April 2004.
Asset
impairment charges of $110,000 were applied against gain on sale of restaurant
in April 2004.
Warrant
valuation reserves of $44,613 relating to warrants exercised in November
2004
was applied to paid in capital.
Bonuses
of $64,315 were paid in common stock during 2003.
Losses
on
disposals of assets of $49,356 were applied against reserves in 2003.
During
2002, Shells relieved $3,789,595 of the FAS 144 Allowance relating to disposed
restaurants.
Gains,
net of losses, on disposals of assets of $144,153 were applied against
reserves
for store closings in 2002.
Notes
receivable of $100,000 were received on the sale of assets during 2002.
Shells
transferred $43,794 from other assets into property and equipment for assets
placed in service during 2002.
Property
held for sale of $1,022,060 on December 30, 2001 was sold during 2002.
See
accompanying notes to consolidated financial statements.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation -
At
January 2, 2005, Shells Seafood Restaurants, Inc. and subsidiaries
owned
and operated 21 full-service, casual dining seafood restaurants in Florida
under
the name “Shells”. At July 3, 2005, we owned and operated 22 full-service
restaurants. Additionally, we managed four licensee restaurants as of January
2,
2005 and July 3, 2005.
Shells
was incorporated on April 29, 1993 and began operations in August 1993
when it
purchased from Shells, Inc. the service mark “Shells” as well as all other
intangible and tangible assets necessary to operate a restaurant chain
under the
name “Shells”. Shells subsequently acquired Shells, Inc. effective
December 29, 1994.
Principles
of Consolidation -
The
consolidated financial statements include the accounts and operations of
Shells
and its wholly owned subsidiaries as well as a joint venture partnership
in
which Shells is a general partner owning a 51% equity interest. All material
intercompany balances and transactions between the consolidated entities
have
been eliminated in consolidation.
Fiscal
Year -
Our
fiscal year is the 52 or 53 weeks ending the Sunday nearest to December 31.
Our fiscal year ended January 2, 2005 (“fiscal year 2004”) was 53 weeks,
and each of the fiscal years ended December 28, 2003 (“fiscal year 2003”)
and December 29, 2002 (“fiscal year 2002”) were 52 weeks.
Unaudited
Interim Consolidated Financial Information
- The
accompanying interim consolidated financial statements of the Company as
of July
3, 2005, and for the six months ended July 3, 2005 and June 27, 2004, are
unaudited. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the SEC relating to interim financial statements. In the opinion of
management, all adjustments (consisting of normal and recurring adjustments)
necessary for the fair statement of the financial position and the results
of
operations and cash flows have been included in such unaudited consolidated
financial statements. The results of operations for the six months ended
July 3,
2005 are not necessarily indicative of the results to be expected for any
future
interim period or for the fiscal year ending January 1, 2006.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Use
of Estimates -
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual
results could differ from those estimated.
Inventories
-
Inventories consist of food (primarily seafood), beverages and supplies
and are
recorded at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) method. Shells utilizes a third party to hold and distribute
certain products. The inventory is not recorded by Shells nor is the risk
of
ownership transferred to Shells until its individual restaurants receive
the
product.
Property
and Equipment -
Property and equipment are stated at cost less the provision for impairment
and
are depreciated using the straight-line method over the estimated useful
lives
of the assets. Leasehold improvements and buildings are depreciated over
the
shorter of the lease term or the estimated useful life and range from five
to 30
years. Useful lives for equipment, furniture and fixtures, and signs range
from
three to 10 years.
Goodwill
-
The
excess of the cost over the fair value of the net assets resulting from
the
acquisition of Shells, Inc. was recognized as goodwill. Prior to 2002,
goodwill
was amortized on the straight-line basis over 20 years; the use of a 20-year
estimated life was based on the upper and lower limits considering among
other
factors the lease terms of restaurants acquired and the cash flow projections
of
the restaurants. During 2002, we adopted Financial Accounting Standards
Board
(“FASB”) Statement No. 142 whereby goodwill is evaluated periodically for
possible impairment and written-down to fair value if impaired.
Impairment
of Long-lived Assets -
Property and equipment, goodwill and other intangible assets are reviewed
annually or whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable by the estimated future
undiscounted cash flows. The impairment write-down is the difference between
the
carrying amounts and the fair value of those assets. If the total of future
undiscounted cash flows is less than the carrying amount of goodwill or
property
and equipment, the carrying amount is written down to the fair value, and
a loss
resulting from value impairment is recognized by a charge to earnings.
The
undiscounted cash flow for each restaurant is calculated through the end
of the
real estate rental period, plus extensions, if applicable, by estimating
future
cash flows based on actual historical results of operations and the 2005
budget
for each restaurant.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Income
Taxes -
Shells
uses the asset and liability method which recognizes the amount of current
and
deferred income taxes payable or refundable at the date of the financial
statements as a result of all events that have been recognized in the financial
statements and as measured by the provisions of enacted tax laws. On March
9,
2002, the Economic Stimulus Package was signed into law. This program allows
for, among other initiatives, the lengthening of the carry back period
allowed
for net operating losses from two years to five years. Shells recognized
an
estimate of the income tax benefit and receivable in 2001 and an additional
income tax benefit was recognized in 2002 when the refund was received,
relating
to the recovery of taxes paid in 1996 and 1997.
Net
income (loss) per share of common stock -
Net
income (loss) per common share is computed in accordance with FASB No.
128
“Earnings Per Share”, which requires companies to present basic earnings per
share and diluted earnings per share. The basic net income (loss) per share
of
common stock is computed by dividing net income (loss) applicable to common
stock by the weighted average number of shares of common stock outstanding.
Diluted net income per share of common stock is computed by dividing net
income
applicable to common stock by the weighted average number of shares of
common
stock and common stock equivalents outstanding. The diluted net loss per
common
share is computed by dividing net loss by the weighted average common shares
outstanding excluding common stock equivalents that are anti-dilutive.
Fair
Value of Financial Instruments -
The
estimated fair value of amounts reported in the consolidated financial
statements have been determined by using available market information and
appropriate valuation methodologies. The carrying value of all current
assets
and current liabilities approximates fair value because of their short-term
nature. The carrying value of long-term debt approximates fair value based
upon
quoted market information as available. As judgment is involved, the estimates
are not necessarily indicative of the amounts that could be realized in
a
current market exchange.
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 have a material
affect
on our consolidated financial statements.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to 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 incurred. Under previous accounting
principles generally accepted in the United States of America, 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. Based on our actual
results for
2004 and our business plan for 2005, the adoption of Statement No. 146
did not
have a material affect on our consolidated financial statements during
2004 and
is not expected to have a material affect on our consolidated financial
statements in 2005.
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
have a
material affect on 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 have a material affect on our consolidated
financial statements.
In
December 2002, we adopted FASB Statement No. 148, “Accounting for
Stock-Based Compensation-Transition and Disclosure.” Statement No. 148 amends
Statement No. 123, “Accounting for Stock-Based Compensation,” and provides
alternative methods of transition for a voluntary change to the fair value
based
method of accounting for stock-based employee compensation. Statement No.
148
also amends the disclosure requirements of Statement No. 123 to require
more
prominent and frequent disclosures in financial statements about the effects
of
stock-based compensation. The transition guidance and annual disclosure
provisions of Statement No. 148 are effective for financial statements
issued
for fiscal years ending after December 15, 2002. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. See Note
14 for
required disclosures under Statement No. 148.
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 No. 149 did not have a material
affect
on our consolidated financial statements.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to 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
have a
material affect on our consolidated financial statements.
In
December 2003, the FASB issued a pronouncement, Financial Interpretation
No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities.” FIN 46R
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 46R in their financial
statements in the first fiscal year or interim period beginning after March
15,
2004. Full disclosure, as well as consolidation, if applicable, of any
newly
created entities after January 31, 2003 must begin immediately.
Adoption of
FIN 46R did not have a material affect on 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 is to be provided separately for pension plans and
for
other postretirement benefit plans. Adoption of revised FASB Statement
No. 132
did not have a material affect on our consolidated financial statements.
In
November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs” which
amended ARB No. 43, Chapter 4. The amendments made by FASB Statement No.
151
will improve financial reporting by clarifying that abnormal amounts of
idle
facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity
of the
production facilities. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Earlier application
is
permitted for inventory costs incurred during fiscal years beginning after
November 23, 2004. The provisions of FASB Statement No. 151 are to be applied
prospectively. Adoption of FASB Statement No. 151 is not expected to materially
impact our consolidated financial statements.
In
December 2004, the FASB issued Statement No. 153, “Exchanges of
Non-monetary Assets” which amended APB Opinion No. 29, “Accounting for
Non-monetary Transactions.” The amendments made by FASB Statement No. 153 are
based on the principle that exchanges of non-monetary assets should be
measured
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for non-monetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of non-monetary
assets that do not have commercial substance. Previously, Opinion 29 required
that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive
asset should be based on the recorded amount of the asset relinquished.
The
Statement is effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application is permitted
for
non-monetary asset exchanges occurring in fiscal periods beginning after
the
date of issuance. The provisions of this Statement are to be applied
prospectively. Adoption of FASB Statement No. 153 is not expected to materially
impact our consolidated financial statements.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
In
December 2004, the FASB revised Statement No. 123, “Accounting for
Stock-Based Compensation.” This Statement supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity’s equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment
transactions. This Statement does not change the accounting guidance for
share-based payment transactions with parties other than employees provided
in
Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in
Conjunction with Selling, Goods or Services.” This Statement does not address
the accounting for employee share ownership plans, which are subject to
AICPA
Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership
Plans.” Revised Statement No. 123 will become effective for Shells as of the
first quarter of our fiscal 2006, being the first interim or annual
reporting period of the first fiscal year beginning on or after June 15,
2005.
See Note 19 for information about our adoption of revised FASB Statement
No.
123.
In
March
2005, the FASB issued Interpretation 47, “Accounting for Conditional Asset
Retirement Obligations—an interpretation of FASB Statement No. 143” clarifying
that the term conditional asset retirement obligation as used in FASB Statement
No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal
obligation to perform an asset retirement activity in which the timing
and (or)
method of settlement are conditional on a future event that may or may
not be
within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing
and
(or) method of settlement. Accordingly, an entity is required to recognize
a
liability for the fair value of a conditional asset retirement obligation
if the
fair value of the liability can be reasonably estimated. The fair value
of a
liability for the conditional asset retirement obligation should be recognized
when incurred—generally upon acquisition, construction, or development and (or)
through the normal operation of the asset. Uncertainty about the timing
and (or)
method of settlement of a conditional asset retirement obligation should
be
factored into the measurement of the liability when sufficient information
exists. Statement 143 acknowledges that in some cases, sufficient information
may not be available to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation also clarifies when an entity
would
have sufficient information to reasonably estimate the fair value of an
asset
retirement obligation. Clarifications found in Interpretation 47 are not
expected to materially impact our consolidated financial
statements.
In
May
2005, the FASB issued Statement No. 154, “Accounting Changes and Error
Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This
Statement replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement
No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and
changes the requirements for the accounting for and reporting of a change
in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. Opinion 20
previously required that most voluntary changes in accounting principle
be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This Statement requires
retrospective application to prior periods’ financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. This Statement
carries forward without change the guidance contained in Opinion 20 for
reporting the correction of an error in previously issued financial statements
and a change in accounting estimate. This Statement also carries forward
the
guidance in Opinion 20 requiring justification of a change in accounting
principle on the basis of preferability. FASB Statement No. 154 becomes
effective for accounting changes and corrections of errors made in fiscal
years
beginning after December 15, 2005. We are not aware of any accounting changes
or
error corrections required in our historical financial statements.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Reclassifications
-
Certain
reclassifications of prior year balances have been made to conform to the
current presentation.
NOTE
2. LIQUIDITY
In
May of
2005, we completed an aggregate financing of $6.9 million through a
private
placement of securities to accredited investors. Under the terms of
the
transaction, we issued 461,954 units with each unit consisting of (i)
one share
of Series B Convertible Preferred Stock, initially convertible into
20 shares of
common stock, and (ii) a warrant to purchase 10 shares of common stock
at an
exercise price of $1.30 per share. The purchase price was $15.00 per
unit. We
realized net proceeds of approximately $5.8 million from the financing.
Of the
total proceeds from securities issued, $1,282,000 represented related
party debt
and $348,000 represented existing convertible debentures, all of which
converted
into the securities issued in the transaction. As a condition to the
transaction, our existing $1.6 million revolving line of credit previously
scheduled to expire on the closing of the transaction, was extended
to May 23,
2007. We used a portion of the net proceeds from the private placement
to retire
the remaining $2,232,000 of loans and accrued interest from debenture
holders
and $8,000 of related party accrued interest. The remainder of the
net proceeds
from the offering, together with the $1,600,000 line of credit and
proceeds from
an anticipated sale/leaseback financing, is anticipated to be used
to complete
the remodeling of our existing restaurants, and, to the extent funds
are
available, acquire and build out new restaurant locations. We anticipate
investing approximately $3.6 million in remodeling our existing restaurants.
Additionally, in conjunction with the private placement, $500,000 principal
amount of related party debt was used to exercise warrants to purchase
1,000,000
shares of our common stock. We believe, based on our current outlook,
that our
current cash position and cash flows from operations will be adequate
to satisfy
our contemplated cash requirements over the next twelve months.
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. We have, also available as a form of financing,
sale/leaseback options on two owned restaurant properties. 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.
As
of
July 3, 2005, our current liabilities of $5,088,000 exceeded current
assets of
$4,245,000, resulting in a working capital deficiency of $843,000. In
comparison, the January 2, 2005 working capital deficiency was $4,639,000.
The
favorable decrease in the working capital deficiency primarily related
to the
repayment of the convertible debentures and reduction in accounts payable,
along
with increases in cash and other current assets. Our operating leverage
has
improved. We may still encounter operating pressures from declining sales,
increasing food, labor or other operating costs or additional restaurant
disposition or pre-opening 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.
Our
company’s working capital deficit increased from $3,606,000 in 2003 to
$4,639,000 in 2004, however, our cash position at January 2, 2005 improved
to
$2,349,000 from $724,000 at December 28, 2003. In August 2004, the maturity
dates on the $2,000,000 principal amount promissory notes were extended
from
January 31, 2005 to January 31, 2007. Shells obtained cash
infusions
of $600,000 in November 2004 from the exercise and conversion of noteholder
warrants to shares of our common stock. Shells also obtained a $500,000
interim
line of credit from our bank to assist in the hurricane-related reconstruction
of our restaurants of which $295,000 was utilized and subsequently repaid
from
insurance proceeds.
In
December 2004, Shells raised additional funds, which are being utilized
for
the remodeling of several restaurants, through an offering of $2,375,000
in
convertible debentures. The debentures were due to mature on April 5, 2005.
Such
maturity was extended until May 5, 2005. On May 24, 2005, the debentures
were
repaid in full, to the extent not converted into our financing transaction.
In
January and February 2005, the remaining warrants issued as part
of the
$2,000,000 financing in January 2002 were exercised, whereby warrant
holders acquired 4,712,630 shares of common stock for $754,000 in proceeds
to
Shells. Additionally, Shells Investment Partners converted their retained
warrants into common stock under the cashless exercise provisions of the
warrant
agreement, resulting in the issuance of 350,381 shares of common stock.
In
March
2005, our investors provided us with a $1,600,000 revolving line of credit,
which matures on the earlier of March 31, 2006 or the closing of a financing
providing us not less than $1,600,000 of net proceeds. Amounts drawn under
the
line of credit bear interest at the rate of 15% per annum, payable 8% monthly
in
arrears and 7% deferred until the maturity date. The investors received
a fee of
$80,000 for extending the credit line to Shells.
In
March
2005, warrants to purchase a total of 1,000,000 shares of common stock,
which
were issued on August 4, 2004 pursuant to the extension of the $2,000,000
related-party financing, were exercised at $0.50 per share by Trinad Capital,
L.P. and Bruce Galloway, IRA R/O. The proceeds of $500,000 were used to
pay down
the principal amount of the notes to these investors. Additionally, in
March
2005, the $1,000,000 note held by Frederick R. Adler was modified to allow
Shells to defer entirely the monthly interest payment on $500,000 of principal
amount of the note until the maturity date of January 31, 2007, resulting
in the
deferral of $72,000 of cash payments until the maturity date. The remaining
principal balance of $1,500,000 matures on January 31, 2007 along with
deferred
interest payable at maturity of $535,000.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
See
Note
19, Subsequent Events, for additional information about our
liquidity.
NOTE
3. OTHER CURRENT ASSETS, OTHER ASSETS AND PREPAID RENT
Other
current assets consist of the following:
|
|
January
2, 2005
|
|
December
28, 2003
|
|
July
3, 2005
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Prepaid
expenses
|
|
$
|
97,176
|
|
$
|
139,893
|
|
$
|
858,144
|
|
Insurance
proceeds receivable
|
|
|
359,860
|
|
|
-
|
|
|
6,002
|
|
Note
receivable
|
|
|
-
|
|
|
100,000
|
|
|
-
|
|
Other
current assets
|
|
|
40,142
|
|
|
25,998
|
|
|
11,980
|
|
|
|
$
|
497,178
|
|
$
|
265,891
|
|
$
|
876,126
|
|
Prepaid
expenses consist of prepaid costs for advertising, insurance, sales tax
and
licenses and permits.
Other
assets consist of the following:
|
|
|
January
2, 2005
|
|
|
December
28, 2003
|
|
|
July
3, 2005
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Certificates
of Deposit
|
|
$
|
218,327
|
|
$
|
217,098
|
|
$
|
218,327
|
|
Deposits
|
|
|
139,355
|
|
|
146,288
|
|
|
233,620
|
|
Service
marks, net
|
|
|
147,126
|
|
|
152,265
|
|
|
144,557
|
|
Other
|
|
|
30,567
|
|
|
71,961
|
|
|
25,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
535,375
|
|
$
|
587,612
|
|
$
|
621,523
|
|
Certificates
of deposit are held as collateral for letters of credit for various utility
deposits.
Prepaid
rent consists of:
|
|
January
2, 2005
|
|
December
28, 2003
|
|
July
3, 2005
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Prepaid
Rent
|
|
$
|
59,956
|
|
$
|
75,577
|
|
$
|
361,781
|
|
In
February 2005, we agreed to acquire for $843,000 the leasehold rights and
personal property of a restaurant located in Clearwater Beach, Florida
from Gold
Coast Restaurants, Inc. (d/b/a Leverock’s). The purchase price exceeded the net
book value of the fixed assets by $338,000 and will be amortized as prepaid
rent
on the straight-line basis over the remaining life of the lease.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
4. PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
|
January
2, 2005
|
|
December
28, 2003
|
|
July
3, 2005
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Leasehold
improvements
|
|
$
|
5,694,911
|
|
$
|
4,632,847
|
|
$
|
6,871,475
|
|
Equipment
|
|
|
3,321,306
|
|
|
5,292,188
|
|
|
3,806,122
|
|
Furniture
and fixtures
|
|
|
3,150,959
|
|
|
2,995,371
|
|
|
3,666,207
|
|
Land
and buildings
|
|
|
2,541,397
|
|
|
2,291,546
|
|
|
2,541,397
|
|
Signage
|
|
|
451,832
|
|
|
488,715
|
|
|
553,647
|
|
|
|
|
15,160,405
|
|
|
15,700,667
|
|
|
17,438,848
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
and
amortization
|
|
|
(8,064,483
|
)
|
|
(8,704,572
|
)
|
|
(8,258,612
|
)
|
|
|
$
|
7,095,922
|
|
$
|
6,996,095
|
|
$
|
9,180,236
|
|
See
Note
16 for discussion of “Provision for Impairment of Assets.”
Accrued
expenses consist of the following:
|
|
January
2, 2005
|
|
December
28, 2003
|
|
July
3, 2005
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Accrued
payroll
|
|
$
|
776,652
|
|
$
|
801,548
|
|
$
|
1,077,312
|
|
Accrued
insurance
|
|
|
26,382
|
|
|
237,098
|
|
|
237
|
|
Restaurant
closing expenses
|
|
|
216,677
|
|
|
396,537
|
|
|
208,571
|
|
Warrant
valuation reserve
|
|
|
947,364
|
|
|
105,977
|
|
|
440,000
|
|
Other
|
|
|
348,453
|
|
|
473,982
|
|
|
|
|
Unearned
gift card revenue
|
|
|
251,498
|
|
|
280,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,567,026
|
|
$
|
2,295,290
|
|
$
|
|
|
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
warrant valuation reserve consists of the
following:
Date
and description
|
|
|
January
2, 2005
|
|
|
December
28, 2003
|
|
|
July
3, 2005
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
January
2002 at inception of $2,000,000 financing
|
|
$
|
61,364
|
|
$
|
105,977
|
|
$
|
-
|
|
August
2004 for the extension of maturity date of above
|
|
|
446,000
|
|
|
-
|
|
|
-
|
|
December
2004 at inception of debentures
|
|
|
440,000
|
|
|
-
|
|
|
440,000
|
|
|
|
$
|
947,364
|
|
$
|
105,977
|
|
$
|
440,000
|
|
The
warrant valuation reserve relates to warrants issued as inducement to creditors
in various financing transactions. In each case, the warrants were valued
by an
independent valuation expert. The reserves were and will be relieved to
Paid In
Capital when the warrants are exercised or
upon
the registration of the underlying common stock in accordance with Emerging
Issues Task Force Issue 00-19 (“EITF-0019”), “Accounting for Derivative
Financial Instruments to, and Potentially Settled in. a Company’s Own Stock.” We
believe that such registration of our common stock will be completed with
the
Securities and Exchange Commission in the third quarter of 2005. The
warrants and related calculations are discussed below.
In
January 2002, due to the Company’s then financial condition, the Company was not
able to borrow money at rates it could afford and raised $2,000,000 in
a private
financing transaction, consisting of secured promissory notes and warrants
to
purchase common stock. As part of the then financing transaction, the Company
was able to negotiate the deferral of approximately one-half of the interest
payable on this outstanding indebtedness until the maturity of the loans.
Warrants issued to purchase 8,908,030 shares of common stock were independently
valued at $105,977, or $0.0119 per share. In November 2004, investors exercised
3,750,000 warrants and the reserve was reduced by $44,613, leaving a balance
at
fiscal year end 2004 of $61,364. The remaining warrants were exercised
on
January 31, 2005 and the remaining reserve was applied to Paid In
Capital.
In
August
2004, the maturity date of the $2,000,000 loans was extended for two
years
until January 2007 in exchange for warrants. Warrants were issued to purchase
2,000,000 shares of common stock and were independently valued at $446,000,
or
$0.223 per warrant. On March 9, 2005, investors exercised 1,000,000 warrants
and
the reserve was reduced by 50%. The remaining warrant valuation reserve
of
$223,000 was applied to Paid In Capital upon the exercise of warrants in
May
2005 in a transaction that was completed in conjunction with our private
placement financing.
In
December 2004, as part of the then $2,375,000 financing, the purchasers
of the
convertible debentures were issued warrants as an inducement for the loans.
Warrants to purchase 1,971,250 shares of common stock were valued at $440,000,
or $0.223 per share based on an independent valuation completed in August
2004.
Since this valuation was five months old, the Company considered other
factors
to support its use, specifically: (i) the stock price was $0.60 on both
of
August 4, 2004 and December 6, 2004, (ii) a Black-Scholes calculation indicated
that a valuation between $0.20 and $0.25 per share was appropriate, and
(iii)
the August 4 valuation fell within an acceptable range of a min-max calculation
based on the proposed future range of the exercise price of the warrants.
The
$440,000 warrant valuation was allocated to interest expense and financing
costs
based upon the number of warrants issued to investors and the placement
agent,
respectively. Warrants issued to investors to purchase 1,187,500 shares
of
common stock were valued at $265,000 and charged to interest expense at
the
commitment date due to the short-term (4-months) nature of the debentures.
Warrants to purchase 783,750 shares of common stock were issued to the
placement
agent, valued at $175,000 and charged to financing costs.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Long-term
debt consists of the following:
|
|
January
2, 2005
|
|
December
28, 2003
|
|
July
3, 2005
|
|
|
|
|
|
|
|
(Unaudited)
|
|
$667,500
promissory note with a bank collateralized by real property
owned
by
|
|
|
|
|
|
|
|
Shells.
Interest is payable monthly based on the Colonial Bank
Base Rate.
Principal
is payable $3,709 monthly with all unpaid principal
due in September
2007. The interest rate was 5.25% at January 2, 2005
and 6.0% at July
3, 2005.
|
|
$
|
567,357
|
|
$
|
611,865
|
|
$
|
545,103
|
|
|
|
|
|
|
|
|
|
|
|
|
$635,000
promissory note with a bank collateralized by real property
owned by
|
|
|
|
|
|
|
|
|
|
|
the
51% owned joint venture. Interest is payable monthly based
on the Colonial
Bank
Base Rate. Principal is payable $3,900 monthly with all unpaid
principal
due in September 2007. The interest rate was 5.25% at January
2, 2005
and 6.0% at
July
3, 2005.
|
|
|
531,871
|
|
|
578,671
|
|
|
508,471
|
|
|
|
|
|
|
|
|
|
|
|
|
$655,000
promissory note collateralized by real property owned by
|
|
|
|
|
|
|
|
|
|
|
Shells.
Payments are $8,000 monthly with unpaid principal due
|
|
|
|
|
|
|
|
|
|
|
June
2009. The interest rate is fixed at 10.0%.
|
|
|
425,518
|
|
|
483,934
|
|
|
398,518
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of credit with bank to finance construction from fire loss,
interest
payable
|
|
|
|
|
|
|
|
|
|
|
monthly
at bank base rate plus 1%; interest rate was 6.25% at January
2, 2005;
principal paid in full on March 1, 2005.
|
|
|
295,000
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$165,315
promissory note collateralized by real estate owned by
|
|
|
|
|
|
|
|
|
|
|
Shells.
Payable at $6,888 monthly starting June 2005 through June
2007.
|
|
|
165,315
|
|
|
-
|
|
|
151,398
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
lease agreement, collateralized by equipment, payable monthly
at
$2,132
|
|
|
|
|
|
|
|
|
|
|
through
November 2005.
|
|
|
21,083
|
|
|
40,850
|
|
|
11,483
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
agreements, collateralized by insurance policies, principal
and interest
due
|
|
|
|
|
|
|
|
|
|
|
monthly
through October 2005, at 6.45% fixed interest rate.
|
|
|
-
|
|
|
-
|
|
|
101,316
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
agreement, collateralized by insurance policy, principal
and interest
due
|
|
|
|
|
|
|
|
|
|
|
monthly
through January 2005, at 5.0% fixed interest rate.
|
|
|
4,465
|
|
|
8,137
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$540,000
non-interest bearing note, principal was payable in variable
monthly
|
|
|
|
|
|
|
|
|
|
|
installments
through December 2004. The balance was net of imputed
|
|
|
|
|
|
|
|
|
|
|
interest
of $3,927 at December 28, 2003 at 11%. The note was
collateralized
|
|
|
|
|
|
|
|
|
|
|
by
a leasehold interest in certain property and fixed assets
of
Shells.
|
|
|
-
|
|
|
57,436
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
agreements were collateralized by equipment, principal and
interest was
paid
|
|
|
|
|
|
|
|
|
|
|
monthly
through January 2004, interest rates ranged from 6.8% -
8.0%
|
|
|
-
|
|
|
11,599
|
|
|
-
|
|
|
|
|
2,010,609
|
|
|
1,792,492
|
|
|
1,716,289
|
|
Less
current portion
|
|
|
(515,764
|
)
|
|
(234,247
|
)
|
|
(345,785
|
)
|
|
|
$
|
1,494,845
|
|
$
|
1,558,245
|
|
$
|
1,370,504
|
|
2005
|
|
$
|
515,764
|
|
2006
|
|
|
235,485
|
|
2007
|
|
|
1,019,019
|
|
2008
|
|
|
75,080
|
|
2009
|
|
|
165,261
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
2,010,609
|
|
Relative
to the two promissory notes provided by Colonial Bank, we are required
to meet a
financial covenant relating to debt coverage. We were in compliance in
meeting
this loan covenant as of January 2 and July 3, 2005. However, in
the past,
we were not in compliance with meeting the loan covenant for which a covenant
waiver was provided by the bank.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
7. RELATED PARTY DEBT
On
January 31, 2002, we raised $2,000,000 in a private financing transaction,
consisting of secured promissory notes and warrants to purchase shares
of our
common stock. The two investors in this financing were Shells Investment
Partners, LLC (“SIP”) and Banyon Investment, LLC, each for $1,000,000 principal
amount. At the time of the financing transaction, Shells Investment Partners
was
an entity comprised of members previously unaffiliated with our company.
Banyon
is an entity associated with Philip R. Chapman, Chairman of the Board,
and
certain family members of Frederick R. Adler, a greater than 10% stockholder.
The proceeds of the financing were used for working capital.
In
April
2004, Banyon Investment, LLC sold its interest in the $1,000,000 promissory
note
to Frederick R. Adler. In June 2004, SIP sold to GCM Shells Seafood Partners,
LLC (“GCM”) and Trinad Capital, L.P. (“Trinad”) the $1,000,000 promissory note
issued to SIP. GCM and Trinad purchased the note in the amount of $400,000
and
$600,000, respectively. We refinanced deferred interest of $165,315 on
the
$1,000,000 note, previously scheduled to be payable to SIP in full on
January 31, 2005, through a note which calls for 24 equal monthly
payments
beginning June 1, 2005. This deferred interest note is secured by a second
mortgage on certain real estate owned by us. In September 2004, GCM sold
its
interest in the $400,000 note to Bruce Galloway, IRA R/O.
Notes
and
deferred interest payable to these related parties were:
|
|
|
January
2, 2005
|
|
|
December
28, 2003
|
|
|
July
3, 2005
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Secured
promissory notes due January 31, 2007 bearing interest at 15%, of
which 8% is payable monthly in arrears and 7% is deferred and payable
when
the principal is paid in full, owned by:
|
|
|
|
|
|
|
|
|
|
|
Frederick
R. Adler
|
|
$
|
1,000,000
|
|
$
|
-
|
|
$
|
-
|
|
Bruce
Galloway, IRA R/O
|
|
|
400,000
|
|
|
-
|
|
|
-
|
|
Trinad
Capital, L.P.
|
|
|
600,000
|
|
|
-
|
|
|
-
|
|
Banyon
Investment, LLC
|
|
|
-
|
|
|
1,000,000
|
|
|
-
|
|
Shells
Investment Partners, LLC
|
|
|
-
|
|
|
1,000,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
deferred interest due on January 31, 2007
|
|
|
238,941
|
|
|
267,416
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,238,941
|
|
$
|
2,267,416
|
|
$
|
-
|
|
The
deferred interest to be due at maturity, January 31, 2007, is $535,000.
See
Note
19, Subsequent Events, for discussion of pay off of the principal amount
of the
loans.
NOTE
8. COMMITMENTS AND CONTINGENCIES
Prior
to
January 1, 1995, Shells agreed to pay $540,000 over a 10 year period
as
inducement to obtain a lease for a certain restaurant site. This amount,
net of
interest imputed at 11% was recorded as prepaid rent and was amortized
over the
term of the lease. The $540,000 note expired in December 2004.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
With
the
exception of three operating restaurants, Shells conducts all of its operations
and maintains its administrative offices in leased facilities. Certain
leases
provide for Shells to pay for common area maintenance charges, insurance,
and
its proportionate share of real estate taxes. In addition, certain leases
have
escalation clauses and/or require additional rent based upon a percentage
of the
restaurant’s sales in excess of stipulated amounts. Total rent expense under all
leases was $2,712,000, $2,571,000 and $2,568,000, for 2004, 2003 and 2002,
respectively, which included contingent rent of $108,000, $143,000 and
$100,000,
respectively. The approximate future minimum aggregate rental payments
under
such operating leases as of January 2, 2005 are as follows:
2005
|
|
$
|
1,968,000
|
|
2006
|
|
|
1,842,000
|
|
2007
|
|
|
1,633,000
|
|
2008
|
|
|
1,566,000
|
|
2009
|
|
|
1,546,000
|
|
Thereafter
|
|
|
6,531,000
|
|
|
|
$
|
15,086,000
|
|
These
leases expire at various dates through the year 2016 and generally have
renewal
options for additional periods.
During
2003, Shells entered into an employment agreement with Leslie J. Christon,
President and Chief Executive Officer, that included a salary of $275,000
per
year. The term of the employment agreement is two years, and thereafter
renews
automatically for successive one-year periods unless either party provides
notice of intent not to renew. The agreement also provided for the grant
of
employee options to purchase 297,374 shares of common stock, which vest
over a
two year period on an annual basis.
Warren
R.
Nelson, our Chief Financial Officer, holds a letter agreement from the
board of
directors clarifying his severance arrangement, if applicable.
During
1996, Shells entered into an agreement to purchase the leasehold interest
in six
sites, as well as the leasehold improvements, fixtures and equipment, from
Islands Florida, LP, a Delaware limited partnership, in exchange for $500,000
plus, in general, an aggregate amount equal to 1% of the gross sales, as
defined
(“royalty”), of each of the restaurants opened and continuing to be operated by
Shells at each of the six sites through the end of the initial terms of
the
respective leases. Of the six sites originally leased, four sites continue
to be
leased. The base terms expire at various dates through 2015 one of which
expired
in 2003. The royalty expense related to these restaurants was $56,000,
$95,000
and $99,000 for 2004, 2003 and 2002, respectively. During 2004, this agreement
was terminated through a $100,000 settlement, paid in installment payments
throughout the year.
Shells
is
subject to legal proceedings, claims and liabilities that arose in the
ordinary
course of business. In the opinion of management, the amount of the ultimate
liability with respect to these actions will not materially affect our
financial
position, results of operations or cash flows.
NOTE
9. MINORITY PARTNER INTEREST
Shells
has a 51% equity interest in a joint venture partnership that owns and
operates
the Shells restaurant located in Melbourne, Florida. Shells entered into
the
joint venture partnership in March 1994 with WLH Investments, Inc., a
corporation owned by the wife of our then President, who was a Director
of
Shells until February 2002. We have a 51% equity interest and WLH Investments
has the remaining 49%. As a condition of the joint venture partnership,
WLH
Investments contributed $400,000 in capital on March 1, 1994. The profits,
as
defined in the joint venture agreement, of the joint venture partnership
are
allocated as follows: (i) 100% of the first $60,000 annually is allocated
to WLH
Investments, (ii) 100% of the next $60,000 is allocated to Shells, if available,
and (iii) any excess over the $120,000 is allocated 51% to Shells and 49%
to WLH
Investments. All losses are allocated in accordance with the ownership
percentages.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Our
share
of the joint venture partnership profits was $296,000 (inclusive of a $10,000
prior period adjustment), $272,000 and $235,000 during 2004, 2003 and 2002,
respectively. In addition, the joint venture partnership paid us $181,000,
$177,000 and $180,000 in 2004, 2003 and 2002, respectively, for management
and
license fees. The WLH Investments’ share of the joint venture partnership
profits was $266,000, $264,000 and $221,000 in 2004, 2003 and 2002,
respectively. The joint venture agreement and management agreement outline
the
respective joint venture partner’s responsibility for funding all restaurant
expenses, including food and beverage costs, staffing, training, recruiting,
inventories, working capital, capital expenditures and principal and interest
payments on loans and mortgages. The joint ventures cash balance was $130,000
as
of January 2, 2005.
The
joint
venture agreement, which was effective March 1994, as amended March 1995,
contains a purchase option for Shells to purchase the WLH Investments interest
in the joint venture partnership, or conversely, for WLH Investments to
put
their interest in the joint venture partnership to Shells, for a purchase
price
of $750,000 payable by the issuance of our common stock having a value
of
$750,000. The option is exercisable at any time following the date our
common
stock equals or exceeds $20 per share for a period of 20 consecutive trading
days. The option has not been exercisable through January 2, 2005.
NOTE
10. STOCKHOLDERS’ EQUITY AND CONVERTIBLE DEBENTURES
In
connection with the $2,000,000 financing dated January 31, 2002,
we issued
to each of Shells Investment Partners and Banyon (i) a $1,000,000
secured
promissory note due January 31, 2005 (extended to January 31,
2007)
which bears interest at 15% per annum, of which 8% is payable monthly in
arrears
and 7% is deferred and payable when the principal is paid in full and
(ii) a warrant to purchase 4,454,015 shares of our common stock,
at an
exercise price of $0.16 per share. The warrants were exercisable through
January 31, 2005.
On
April
12, 2004, Banyon sold their interest in the $1,000,000 note to Frederick
R.
Adler, a more than 10% shareholder. On June 23, 2004, Shells Investment
Partners
sold their interest in the $1,000,000 secured promissory note along with
90% of
their warrants to Trinad Capital, LP ($600,000) and GCM Shells Seafood
Partners,
LLC ($400,000). Subsequently, on September 30, 2004, GCM Shells Seafood
Partners
sold their interest in their $400,000 note to Bruce Galloway, IRA R/O.
On
August
4, 2004, our $2,000,000 aggregate principal amount of secured promissory
notes
set to mature on January 31, 2005 were extended to be due on
January 31, 2007, under the same terms as the original notes. As
an
inducement to extend the maturity date of the notes, warrants to purchase
2,000,000 shares of our common stock at an exercise price of $0.50 per
share
were issued to the note holders in proportion to the value of their respective
notes. These newly issued warrants were to be exercisable from January 31,
2005 through January 31, 2007. We recognized a one-time, non-cash
charge of
$446,000 relating to this transaction.
In
November 2004, a portion of the warrants issued as part of the $2,000,000
January 2002 financing were exercised, resulting in the issuance
of
3,750,000 shares of common stock.
On
December 7, 2004, we sold $2,375,000 principal amount of debentures
and
warrants to purchase 1,187,500 shares of our common stock. We received
net
proceeds of $2,010,000 from the sale. The debentures bear interest at 12%,
and
mature on the earlier of: (i) April 5, 2005, (ii) the closing of an additional
round of financing of no less than $1,500,000, or (iii) upon the occurrence
of
an event of default. In the event that we, on or prior to the maturity
date,
consummate the sale of shares of capital stock (other than a sale of capital
stock to our officers, directors, employees or consultants in connection
with
their provision of services to us) resulting in net proceeds to us of at
least
$250,000, then the outstanding principal amount of the debentures and all
accrued and unpaid interest, at the sole option of the holder of the debenture,
will convert in whole or in part, into shares of the common stock sold
in such
future financing. The warrants are exercisable until December 7,
2007. The
warrants have an exercise price equal to 80% of the price per share or
unit in
our next round of equity financing resulting in net proceeds to us of at
least
$250,000, provided that the exercise price cannot exceed $0.80 per share
or be
less than $0.45 per share. In the event that such financing is not completed
on
or before September 4, 2005, the warrants will automatically be assigned
an
exercise price equal to 65% of the closing price of our common stock on
September 4, 2005, but in no event greater than $0.80 or less than $0.45
per
share. The exercise price of the warrants and the number of underlying
shares of
common stock is subject to adjustment under certain circumstances. As
compensation for their services as placement agent in the debenture offering
and
future consulting services to us, the placement agent received cash fees
and
warrants with terms substantially identical to those received by the investors.
In
February 2005, we mailed notice to stockholders of record on February 7,
2005 an
Information Statement advising that our board of directors and the holders
of a
majority of our outstanding shares of common stock have delivered written
consents authorizing an amendment to our certificate of incorporation that
will
increase the number of authorized shares of our common stock, $0.01 par
value
per share, from 20,000,000 shares to 40,000,000 shares. This increase to
our
capitalization became effective in March 2005. One
of
the effects of the amendment to our certificate of incorporation may be
to
enable the board to render more difficult or to discourage an attempt to
obtain
control of our company, since the issuance of these additional shares of
common
stock could be used to dilute the stock ownership of persons seeking to
obtain
control or otherwise increase the cost of obtaining control of our
company.
To
date,
no dividends have been declared or paid on our common stock. In addition,
our
debt financings prohibit the payment of cash dividends and any future financing
agreements may also prohibit the payment of cash dividends.
See
Note
19, Subsequent Events, for additional information concerning transactions
affecting stockholders equity and convertible debentures.
NOTE
11. SERIES A CONVERTIBLE PREFERRED STOCK
On
October 24, 2001, Shells issued 66,862 shares of Series A 5% Convertible
Preferred Stock, par value $0.01 per share (the “Series A Preferred
Stock”), pursuant to an exemption from registration under Section 4(6) of the
Securities Act of 1933, as amended, in consideration for the cancellation
of
$669,000 of trade indebtedness by trade creditors of Shells. The shares
were
issued exclusively to “accredited investors” as defined in Rule 501(a) under the
Securities Act. Shells did not receive any cash proceeds in connection
with the
issuance of the Series A Preferred Stock.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Each
share of Series A Preferred Stock is convertible by the holder into
five
shares of our common stock. The Series A Preferred Stock has a liquidation
preference equal to $10.00 per share, plus any declared but unpaid dividends.
Dividends on the Series A Preferred Stock, payable in cash at the
rate of
5% of the Liquidation Value ($10.00) per annum, are payable annually, when,
as
and if declared by the board of directors of Shells out of funds legally
available for the payment of dividends. Dividends on the Series A
Preferred
Stock are not cumulative. To date, no dividends have been declared or paid
on
the Series A Preferred Stock.
During
May 2004, investors converted 28,273 shares of Series A Preferred Stock
into
141,365 shares of our common stock. During January 2003, investors
converted 3,314 shares of Series A Preferred Stock into 16,570 shares of
our
common stock.
See
Note
19, Subsequent Events, for information about our Series B Convertible Preferred
Stock issued in May 2005.
NOTE
12. INCOME TAXES
The
components of the provision (benefit) for income taxes for the years ended
January 2, 2005, December 28, 2003 and December 29,
2002 are as
follows:
|
|
Fiscal
Years Ended
|
|
|
|
January
2,
2005
|
|
December
28,
2003
|
|
December
29,
2002
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
—
|
|
|
(326,715
|
)
|
Deferred
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
(326,715
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax
asset valuation allowance
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income
tax benefit
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(326,715
|
)
|
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Our
effective tax rate is composed of the following for the years ended
January 2, 2005, December 28, 2003 and December 29,
2002,
respectively:
|
|
Fiscal
Years Ended
|
|
|
|
January 2,
2005
|
|
December 28,
2003
|
|
December 29,
2002
|
|
Federal
statutory rate
|
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
|
34.0
|
%
|
State
income tax, net of federal benefit
|
|
|
(0.4
|
)
|
|
(3.5
|
)
|
|
3.5
|
|
FICA
tip credits
|
|
|
(15.8
|
)
|
|
(19.3
|
)
|
|
(64.3
|
)
|
Warrant
grants
|
|
|
22.4
|
|
|
—
|
|
|
—
|
|
Valuation
allowance and other adjustment
|
|
|
15.6
|
|
|
56.8
|
|
|
(125.4
|
)
|
Revalue
certain deferred tax assets
|
|
|
8.4
|
|
|
—
|
|
|
—
|
|
Other
|
|
|
3.8
|
|
|
—
|
|
|
—
|
|
Goodwill
impairment write-down
|
|
|
—
|
|
|
—
|
|
|
58.9
|
|
Effective
income tax benefit
|
|
|
—
|
%
|
|
—
|
%
|
|
(93.3
|
)%
|
As
of
January 2, 2005, we have net operating loss carryforwards for federal
income tax purposes of approximately $8,500,000 which expire between 2006
and
2023. We also have approximately $2,800,000 of general business credits
to carry
forward, which expire by 2023. We had an ownership change in 2002 as defined
by
Internal Revenue Code Section 382, which limits a portion of the amount
of net
operating loss and credit carryforwards that may be used against taxable
income
to approximately $75,000 per year. Any portion of the $75,000 amount not
utilized in any year will carry forward to the following year subject to
a 15 to
20 year limitation on carryforward of net operating losses and credits.
Approximately $5,900,000 of our net operating loss carryforwards and
approximately $2,000,000 of credits are subject to the annual limitation.
Assuming maximum utilization in future years, we expect that approximately
$4,500,000 in net operating loss carryforwards and $2,000,000 in credits
will
expire without benefit to us.
See
Note
19, Subsequent Events, for change of ownership event and discussion of
loss
limitations.
Deferred
income taxes reflect the net income tax effects of temporary differences
between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
our
deferred income tax assets and liabilities are as follows:
|
|
January
2,
2005
|
|
|
|
Current
|
|
Non-current
|
|
Total
|
|
Basis
difference in fixed assets and other assets
|
|
$
|
—
|
|
$
|
544,000
|
|
$
|
544,000
|
|
Accrued
liabilities
|
|
|
411,000
|
|
|
323,000
|
|
|
734,000
|
|
Net
operating loss carryforwards
|
|
|
—
|
|
|
3,214,000
|
|
|
3,214,000
|
|
General
business credits
|
|
|
—
|
|
|
2,848,000
|
|
|
2,848,000
|
|
|
|
|
411,000
|
|
|
6,929,000
|
|
|
7,340,000
|
|
Valuation
allowance
|
|
|
|
|
|
|
|
|
(7,113,000
|
)
|
Net
deferred tax assets
|
|
|
|
|
|
|
|
|
227,000
|
|
Involuntary
conversion proceeds and service marks
|
|
|
|
|
|
|
|
|
(227,000
|
)
|
|
|
|
|
|
|
|
|
$
|
—
|
|
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
December
28, 2003
|
|
|
|
Current
|
|
Non-current
|
|
Total
|
|
Basis
difference in fixed assets and other assets
|
|
$
|
—
|
|
$
|
617,000
|
|
$
|
617,000
|
|
Accrued
liabilities
|
|
|
481,000
|
|
|
400,000
|
|
|
881,000
|
|
Net
operating loss carryforwards
|
|
|
—
|
|
|
2,871,000
|
|
|
2,871,000
|
|
General
business credits
|
|
|
—
|
|
|
2,534,000
|
|
|
2,534,000
|
|
|
|
|
481,000
|
|
|
6,422,000
|
|
|
6,903,000
|
|
Valuation
allowance
|
|
|
|
|
|
|
|
|
(6,903,000
|
)
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
December
29, 2002
|
|
|
|
|
Current
|
|
|
Non-current
|
|
|
Total
|
|
Basis
difference in fixed assets and other assets
|
|
$
|
—
|
|
$
|
728,000
|
|
$
|
728,000
|
|
Accrued
liabilities
|
|
|
690,000
|
|
|
411,000
|
|
|
1,101,000
|
|
Net
operating loss carryforwards
|
|
|
—
|
|
|
2,460,000
|
|
|
2,460,000
|
|
General
business credits
|
|
|
—
|
|
|
2,018,000
|
|
|
2,018,000
|
|
|
|
|
690,000
|
|
|
5,617,000
|
|
|
6,307,000
|
|
Valuation
allowance
|
|
|
|
|
|
|
|
|
(6,307,000
|
)
|
|
|
|
|
|
|
|
|
$
|
— |
|
NOTE
13. RELATED PARTY TRANSACTIONS
Shells
manages three restaurants pursuant to a management and license agreement,
which
became effective July 1993. These entities are deemed to be related parties
based on our ability to influence the management and operating policies
of the
managed restaurants. Shells provides management services and licenses our
proprietary information required to operate the restaurant for a management
fee
originally set at 6% of restaurant sales. Of the total management fee received,
2% of sales is placed in escrow and disbursed to satisfy each managed
restaurants requirement to make third party royalty payments. The management
agreements were amended in October 2001, reducing the management fee to
4% of
restaurant sales until such time that cash flow for three consecutive months
is at least 80% of the cash flow for the same respective periods
in 1999.
The management fee then becomes 5% of sales. The management fee increases
to,
and is maintained at, 6% of sales when cash flow for three consecutive
months is
at least 90% of cash flow for the same respective periods in 1999. The
management agreements outline the respective owners’ (“licensees”)
responsibility for funding all restaurant expenses, including food and
beverage
costs, staffing, training, recruiting, inventories, working capital and
capital
expenditures. A fourth restaurant is operated by Shells, pursuant to an
oral
agreement requiring the restaurant to be operated in conformance with the
policies and procedures established by management for Shells restaurants.
Our
management fee was originally set at 4% of the restaurant’s sales, and
later was modified to 2% in October 2001. The aggregate management fees
earned
under these agreements was approximately $172,000, $165,000 and $163,000
for
2004, 2003 and 2002, respectively.
Shells
also has entered into option agreements with three of the licensees, effective
July 1993, which were amended in August 1995 and October 2001, documenting
the
terms by which, Shells can acquire the restaurant’s assets in exchange for a
purchase price of six times the restaurants cash flow, less any liabilities
assumed. The purchase price is to be paid in the form of shares of our
common
stock at the prevailing market price. The option is exercisable by either
party
upon Shells averaging a market capitalization, as defined, of $100,000,000
for
20 consecutive trading dates. The option has not been exercisable through
January 2, 2005.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Effective
January 31, 2002, Shells raised $2,000,000 in a private financing
transaction, consisting of secured promissory notes and warrants to purchase
shares of our common stock. The two investors in the financing were Shells
Investment Partners, LLC and Banyon Investment, LLC. Shells Investment
Partners
is an entity comprised of members previously unaffiliated with Shells.
Banyon is
an entity associated with Philip R. Chapman, Chairman of our board of directors,
and certain family members of Frederick R. Adler. The proceeds of the financing
were used for working capital requirements. During 2004, Banyon sold their
interest in the note to Frederick R. Adler and Shells Investment Partners
sold
their interest in their note along with 90% of their warrants to Trinad
Capital,
LP ($600,000) and GCM Shells Seafood Partners, LLC ($400,000). GCM has
sold
their interest in the note to the Bruce Galloway, IRA R/O. See Note 7 -
Related
Party Debt.
In
connection with this financing, we issued to each of Shells Investment
Partners
and Banyon a $1,000,000 secured promissory note due January 31,
2005
(extended to January 31, 2007) which bears interest at 15% per annum,
of
which 8% is payable monthly in arrears and 7% is deferred and payable when
the
principal is paid in full, and a warrant to purchase 4,454,015 shares of
our
common stock, at an exercise price of $0.16 per share. The warrants were
exercisable through January 31, 2005. During November 2004, warrant
holders
exercised warrants and acquired 3,750,000 shares of common stock for $600,000
in
proceeds to Shells.
Furthermore,
as part of this financing, we entered into an Investor Rights Agreement,
with
the two investor groups and certain other stockholders. Pursuant to this
agreement, the composition of our board of directors is fixed at seven
members
and each of Banyon and Shells Investment Partners (now Trinad Capital and
GCM
Shells Seafood Partners) are entitled to nominate three individuals to
serve on
our board. Additionally, each of these investor groups and Frederick R.
Adler
and Philip R. Chapman, among others, have agreed to vote their shares,
to cause
these slated nominees to be elected to our board of directors.
Banyon
initially appointed Philip R. Chapman, Richard A. Mandell and Christopher
D.
Illick, all of whom were then serving as directors of our company, as Banyon’s
nominees for election to the board. Shells Investment Partners initially
nominated Thomas R. Newkirk, J. Stephen Gardner and John N. Giordano as
its
nominees for election to the board. Messrs. Newkirk, Gardner and Giordano
were
appointed directors of our company, to fill the vacancies existing on the
board.
Mr. Mandell resigned from the board on March 12, 2002. Effective
April 2,
2002, Michael R. Golding filled the vacancy on the board as Banyon’s nominee. On
June 23, 2004, the three members from Shells Investment Partners resigned
from
the board when their interests were acquired by Trinad Capital and GCM
Shells
Seafood Partners. Trinad and GCM appointed Jay A. Wolf, Robert S. Ellin
and Gary
L. Herman as its nominees, all of whom were appointed directors to fill
the
vacancies on the board.
On
December 28, 2004, we entered into a consulting agreement with Lawrence
Wolf, the father of Jay Wolf who is a member of our board of directors.
The
consulting agreement has a one year term, where Mr. Lawrence Wolf
is to
assist Shells in providing marketing services; including guidance toward
building our creative strategy around the “Shells” brand positioning and
providing support in coordinating our media production. As compensation,
Mr. Lawrence Wolf received options, pursuant to our 2002 Equity
Incentive
Plan, to purchase 130,000 shares of common stock at an exercise price of
$0.83,
the market price on the date of grant. The options fully vest on the first
anniversary of the grant date.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
See
Note
19, Subsequent Events, for discussion of termination of the Investor Rights
Agreement and additional information concerning related party
transactions.
NOTE
14. STOCK COMPENSATION PLAN
At
January 2, 2005, we have four stock-based employee compensation
plans,
which are described more fully below. 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.
Stock-based compensation costs are not 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 (loss) and earnings per
share on a pro forma basis would have been immaterial.
On
September 11, 1995, our board of directors approved two employee stock
option
plans. The options generally vest over three years, one third annually
on the
anniversary date of the grant and, under both plans, have a maximum term
of 10
years. The 1995 Employee Stock Option Plan, as amended, provides for the
issuance of options to purchase up to a total of 840,000 shares. The 1996
Employee Stock Option Plan provides for the issuance of options to purchase
a
total of 101,000 shares. As of January 2, 2005, options to purchase
an
aggregate of 205,742 shares were outstanding under the plans of which all
were
exercisable. There were 11,001 shares purchased through the exercise of
these
options through 2004. The exercise prices of the outstanding options range
from
$0.45 to $5.75. The weighted average remaining contractual life for the
options
outstanding at January 2, 2005 for both plans is approximately five
years.
On
May
20, 1997, the stockholders approved the Stock Option Plan for Non-employee
Directors. The plan, as amended, authorized a total of 150,000 shares to
be
reserved for issuance under this director’s compensation plan. Shells did not
grant any options under this plan during 2004, 2003 or 2002. Shells granted
options to purchase 20,000 shares during each of 2001 and 2000, at the
market
price on the date of grant. As of January 2, 2005, options to purchase
32,000 shares were outstanding and exercisable.
On
May
21, 2002, the stockholders approved the 2002 Equity Incentive Plan allowing
for
grants of options to purchase up to 1,850,000 shares of common stock (See
Note
19, Subsequent Events, for amendment to authorized shares). The options
generally vest over three years, one third annually on the anniversary
date of
the grant and have a maximum term of 10 years. As of January 2,
2005,
options to purchase 905,758 shares were outstanding, 620,286 of which were
exercisable. The weighted average remaining contractual life for the options
outstanding at January 2, 2005 is approximately seven years. During
2004,
201,900 options were granted at prices ranging between $0.36 and $0.83
per
share, the fair market value on the date of the grant. During April 2003,
officers and corporate management were issued 160,790 shares of common
stock at
$0.40 per share, pursuant to a 2002 management bonus plan.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Option
activity is summarized below:
|
|
|
|
|
|
Weighted
|
|
|
|
Number
of
|
|
Option
|
|
Average
|
|
|
|
Shares
|
|
Price
|
|
Price
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 30, 2001
|
|
|
864,025
|
|
$
|
0.20
- $11.00
|
|
$
|
1.36
|
|
Granted
|
|
|
1,332,484
|
|
|
0.35
- 0.65
|
|
|
0.42
|
|
Cancelled
|
|
|
(163,300
|
)
|
|
0.22
- 9.50
|
|
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 29, 2002
|
|
|
2,033,209
|
|
|
0.20
- 9.50
|
|
|
0.73
|
|
Granted
|
|
|
571,704
|
|
|
0.37
- 0.90
|
|
|
0.55
|
|
Exercised
|
|
|
(160,790
|
)
|
|
0.40
|
|
|
0.40
|
|
Cancelled
|
|
|
(1,235,056
|
)
|
|
0.37
- 5.75
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 28, 2003
|
|
|
1,209,067
|
|
|
0.20
- 9.50
|
|
|
0.95
|
|
Granted
|
|
|
201,900
|
|
|
0.36
- 0.83
|
|
|
0.77
|
|
Exercised
|
|
|
(42,666
|
)
|
|
0.42
|
|
|
0.42
|
|
Cancelled
|
|
|
(224,801
|
)
|
|
0.20
- 5.75
|
|
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 2, 2005
|
|
|
1,143,500
|
|
|
0.24
- 9.50
|
|
$
|
1.00
|
|
Granted
(unaudited)
|
|
|
2,106,000
|
|
|
0.75
- 1.12
|
|
|
0.91
|
|
Exercised
(unaudited)
|
|
|
(13,000
|
)
|
|
0.42
- 0.50
|
|
|
0.44
|
|
Cancelled
(unaudited)
|
|
|
(35,400
|
)
|
|
0.42
- 6.75
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 3, 2005 (unaudited)
|
|
|
3,201,100
|
|
$
|
0.24
- $9.50
|
|
$
|
0.94
|
|
See
Note
19, Subsequent Events, for further information concerning stock compensation
plans and activity.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
following table represents the computation of basic and diluted earnings
(loss)
per share of common stock as required by FASB Statement No. 128:
|
|
Fiscal
Years Ended
|
|
26 Weeks
Ended (unaudited)
|
|
|
|
January
2,
|
|
December
28,
|
|
December
29,
|
|
June
27,
|
|
July
3,
|
|
|
|
2005
|
|
2003
|
|
2002
|
|
2004
|
|
2005
|
|
Net
(loss) income
|
|
$
|
(1,343,490
|
)
|
$
|
(1,033,733
|
)
|
$
|
676,841
|
|
$
|
902,801
|
|
$
|
569,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
common shares outstanding
|
|
|
5,261,981
|
|
|
4,577,470
|
|
|
4,454,015
|
|
|
4,677,384
|
|
|
13,722,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) income per share of common stock
|
|
$
|
(0.26
|
)
|
$
|
(0.23
|
)
|
$
|
0.15
|
|
$
|
0.19
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
- |
|
|
- |
|
|
334,310 |
|
|
292,885 |
|
|
2,206,941 |
|
Warrants
|
|
|
-
|
|
|
-
|
|
|
5,575,916
|
|
|
5,875,509
|
|
|
2,052,339
|
|
Stock
options
|
|
|
-
|
|
|
-
|
|
|
229,257
|
|
|
65,443
|
|
|
464,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted common shares outstanding
|
|
|
5,261,981
|
|
|
4,577,470
|
|
|
10,593,498
|
|
|
10,911,221
|
|
|
18,445,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net (loss) income per share of common stock
|
|
$
|
(0.26
|
)
|
$
|
(0.23
|
)
|
$
|
0.07
|
|
$
|
0.08
|
|
$
|
0.03
|
|
The
earnings per share calculation for 2002 and the 26 weeks of 2005 and 2004
excluded 322,426, 1,744,254 and 621,177, respectively, as the exercise
prices of
the options were greater than the average market price of the common shares.
Diluted net loss per common share excludes anti-dilutive stock options
and
warrants of 6,538,000 and 7,227,000 during 2004 and 2003, respectively.
See
Note
19, Subsequent Events, for information about common stock issued in 2005.
NOTE
16. PROVISION FOR IMPAIRMENT OF ASSETS
In
accordance with FASB Statement No. 144, which superseded FASB Statement
No. 121,
Shells identified certain long-lived assets as impaired. The impairment
was
recognized when the future undiscounted cash flows of certain assets were
estimated to be less than the assets’ related carrying value. As such, the
carrying values were written down to our estimates of fair value based
on the
best information available making whatever estimates, judgments and projections
were deemed necessary.
Shells
recognized write-downs of $201,000 (of which $96,000 was applied against
reserves), $360,000 and $110,000 during 2004, 2003 and 2002, respectively.
We
have seven restaurants that are deemed to be impaired as of January 2,
2005. The write-down in 2004 related to one Florida restaurant which had
not
previously been written down. The write-down in 2003 related to three Florida
restaurants, two of which have not previously been written down. The write-down
in 2002 related to three Florida restaurants, which were not previously
written
down. The write-downs were necessitated by the current period operating
losses
as well as the projected cash flows of the restaurants.
In
January 2005, we entered into an agreement with our landlord in
St. Pete
Beach, Florida, whereby on February 22, 2005, the landlord paid $600,000
to
Shells for an option to buy-out the lease. Any time after 12 months beyond
the
payment date, the landlord can provide notice of lease termination to Shells.
Thereafter, we have 60 days to wind down business and vacate the premises.
Accordingly, an impairment of $211,000 was recognized for the expected
shortening of the lease life.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
17. DEFINED CONTRIBUTION PLAN
Shells
has a defined contribution plan which meets the requirements of Section
401(k)
of the Internal Revenue Code. All salaried employees of Shells with more
than 90
days of service who are at least 21 years of age, and who are not considered
highly compensated, are eligible to participate in the plan. The plan allows
for
a discretionary matching contribution from Shells. Shells, which pays the
plan
expenses, has contributed $12,000 in discretionary contributions to date.
NOTE
18. ADVERTISING AND MARKETING
Shells
has incurred the following costs for television, radio, billboards and
local
store marketing:
|
|
Fiscal
Years Ended
|
|
26 Weeks
Ended (Unaudited)
|
|
|
|
January
2,
|
|
December
28,
|
|
December
29,
|
|
June
27,
|
|
July
3,
|
|
|
|
2005
|
|
2003
|
|
2002
|
|
2004
|
|
2005
|
|
Advertising
and marketing expenses
|
|
$
|
1,467,000
|
|
$
|
1,501,000
|
|
$
|
1,545,000
|
|
$
|
812,233
|
|
$
|
863,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenues
|
|
|
3.5
|
%
|
|
3.4
|
%
|
|
3.3
|
%
|
|
3.4
|
%
|
|
3.5
|
%
|
Dated
as of March 10, 2005:
In
January and February 2005, the remaining warrants issued as part
of the
$2,000,000 financing in January 2002 were exercised, whereby warrant
holders acquired 4,712,630 shares of common stock for $754,000 in proceeds
to
Shells. Additionally, Shells Investment Partners converted their retained
warrants into common stock under the cashless exercise provisions of the
warrant
agreement, resulting in the issuance of 350,381 shares of common stock.
In
January 2005, we entered into an agreement with our landlord in
St. Pete
Beach, Florida, whereby on February 22, 2005, the landlord paid $600,000
to
Shells for an option to buy-out the lease. Any time after 12 months beyond
the
payment date, the landlord can provide notice of lease termination to Shells.
Thereafter, we have 60 days to wind down business and vacate the premises.
In
February 2005, we agreed to acquire for $843,000 the leasehold rights and
personal property of a restaurant located in Clearwater Beach, Florida
from Gold
Coast Restaurants, Inc. (d/b/a Leverock’s), out of bankruptcy proceedings. We
expect the restaurant to reopen as a “Shells” in March 2005, once remodeling and
staff training are completed.
In
February 2005, we mailed notice to stockholders of record on February 7,
2005 an
Information Statement advising that our board of directors and the holders
of a
majority of our outstanding shares of common stock have delivered written
consents authorizing an amendment to our certificate of incorporation that
will
increase the number of authorized shares of our common stock, $0.01 par
value
per share, from 20,000,000 shares to 40,000,000 shares. This increase to
our
capitalization is expected to become effective in March 2005.
In
March
2005, our investors provided us with a $1,600,000 revolving line of credit,
which matures on the earlier of March 31, 2006 or the closing of a financing
providing us not less than $1,600,000 of net proceeds. Amounts drawn under
the
line of credit bear interest at the rate of 15% per annum, payable 8% monthly
in
arrears and 7% deferred until the maturity date. The investors received
a fee of
$80,000 for extending the credit line to Shells.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
In
March
2005, warrants to purchase a total of 1,000,000 shares of common stock,
which
were issued on August 4, 2004 pursuant to the extension of the $2,000,000
related-party financing, were exercised at $0.50 per share by Trinad Capital,
L.P. and Bruce Galloway, IRA R/O. The proceeds of $500,000 were used to
pay down
the principal amount of the notes to these investors. Additionally, in
March
2005, the $1,000,000 note held by Frederick R. Adler was modified to allow
Shells to defer entirely the monthly interest payment on $500,000 of principal
amount of the note until the maturity date of January 31, 2007, resulting
in the
deferral of $72,000 of cash payments until the maturity date. The remaining
principal balance of $1,500,000 matures on January 31, 2007 along with
deferred
interest payable at maturity of $535,000.
As
of
March 10, 2005, we contemplate that an additional round of financing would
be
sought by us in the first half of 2005. In addition to repaying the debentures
(as discussed in Note 10, Stockholders' Equity and Convertible Debentures),
we
anticipated that the contemplated additional round of financing would be
utilized to complete our restaurant remodeling and position our company
for
growth. There could be no assurance that this contemplated financing would
be
available to us when needed, on acceptable terms, or at all. (See discussion
below about our May 24, 2005 private placement financing.)
Dated
as of July 7, 2005 (Unaudited):
On
May
24, 2005, we sold an aggregate of $6.9 million in a private placement to
the
selling stockholders consisting of 461,954 units. Each unit consisted of
(i) one
share of our Series B Convertible Preferred Stock convertible into 20 shares
of
our common stock, subject to adjustment under certain circumstances, and
(ii) a
warrant to purchase 10 shares of our common stock at an exercise price
of $1.30
per share. In addition, we issued a warrant to purchase 37,651 units (consisting
of 37,651 shares of our Series B Convertible Preferred Stock and warrants
to
purchase 376,510 shares of our common stock) at a purchase price of $15.00
per
unit to the placement agent in our May 2005 financing. We realized net
proceeds
of approximately $5.8 million from the financing. Of the total proceeds
from
securities issued, $1,282,000 represented related party debt and $348,000
represented existing convertible debentures, both of which converted into
the
securities issued in the transaction. To the extent not converted into
this
private placement, we used the proceeds from the private placement to retire
$2,232,000 of loans and accrued interest from debenture holders and $8,000
of
related party accrued interest. As a condition to the transaction, our
existing
$1,600,000 revolving line of credit previously scheduled to expire on the
closing of the transaction, was extended to May 23, 2007. Additionally,
as part
of this transaction, $500,000 principal amount of related party debt was
used to
exercise warrants to purchase 1,000,000 shares of common stock.
On
May
24, 2005, we believe that a change of ownership event occurred due to the
private placement financing discussed above. Accordingly, for federal income
tax
purposes, the limit to the amount of net operating loss and credit carryforwards
that may be used against taxable income approximates an aggregate of $665,000
per year.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
Investors Rights Agreement, entered into in connection with the $2.0 million
financing of January 2002, entitled each of the investment entities of
Banyon
and SIP (for which SIP subsequently sold its rights to GCM and Trinad)
to
nominate three of the seven members who were to be elected to our board
of
directors. In accordance with the terms of the Investor Rights Agreement,
the
right to nominate individuals for election to our Board terminated upon
the
repayment in full of the $2.0 million aggregate principal amount of the
promissory notes in connection with the May 2005 financing. On June 1,
2005, the
Nominating Committee, consisting of Gary L. Herman, Christopher D. Illick
and
Michael R. Golding, proposed and the Board of Directors approved that the
present board members stand for re-election. On
June
22, 2005, at the Company’s Annual Meeting of Stockholders, the present
directors were re-elected.
On
June
22, 2005, our stockholders approved certain amendments to the 2002 Equity
Incentive Plan, including an amendment to increase the number of shares
of
common stock issuable under the Plan from 1,850,000 to
5,000,000. Additionally,
on June 22, 2005, our stockholders approved an increase in the authorized
shares of our common stock, $0.01 par value per share, from 40,000,000
shares to
58,000,000. An increase in the capitalization of our common stock was previously
announced in March 2005 from 20,000,000 shares to 40,000,000
shares.
On
June
22, 2005, the Compensation Committee and the Board of Directors of the
Company
approved the acceleration of vesting of certain unvested and “out-of-the-money”
stock options with exercise prices equal to or greater than $0.85 per share
(the
market value) previously awarded to its employees, including its executive
officers, and its directors under the Plan that were originally scheduled
to
vest during 2006. The acceleration of vesting is effective for stock options
outstanding as of June 22, 2005. Options to purchase approximately 295,000
shares of common stock or 18.5% of the Company’s outstanding unvested options
(of which options to purchase approximately 233,000 shares or 14.6% of
the
Corporation’s outstanding unvested options are held by the Corporation’s
executive officers and directors) were subject to the acceleration. The
weighted
average exercise price of the options subject to the acceleration is
$1.10.
The
purpose of the acceleration is to enable the Company to avoid recognizing
compensation expense associated with these options in future periods in
its
consolidated statements of income, upon adoption of FASB Statement No.
123 R
(Share-Based Payment) in December 2005. The pre-tax charge which the Company
expects to avoid in 2006 amounts to approximately $87,000 based on the
original
vesting periods. The Company also believes that because many of the options
to
be accelerated have exercise prices in excess of the current market value
of the
Company’s common stock, these options have limited economic value and are not
fully achieving their original objective of incentive compensation and
employee
retention.
SHELLS
SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Based
on
the vesting schedules of those stock options outstanding as of July 3,
2005, net
of the effect of the acceleration of vesting discussed previously; adoption
of
revised FASB Statement No. 123 is expected to result in the recognition
of
compensation expense of approximately $160,000 in fiscal 2006, $210,000
in
fiscal 2007 and $85,000 in fiscal 2008. The fair value was estimated using
the
Black-Scholes option-pricing model. Using this model, fair value is calculated
based on assumptions with respect to (i) expected volatility of the Company’s
common stock price, (ii) the periods of time over which employees and directors
are expected to hold their options prior to exercise (expected term), (iii)
expected dividend yield on the Company’s common stock, and (iv) risk-free
interest rates, which are based on quoted U.S. Treasury rates for securities
with maturities approximating the options’ expected term. Expected volatility
has been estimated based on the change in the Company’s stock price over the
past 12 months. Expected term is based on the Company’s limited historical
exercise experience with option grants with similar exercise prices. The
expected dividend yield is zero as the Company has never paid dividends
and does
not currently anticipate paying any in the foreseeable future. The following
table summarizes the weighted average values of the assumptions used in
computing the fair value of option grants:
|
|
(Unaudited)
|
Volatility
|
|
50%
|
Weighted-average
estimated life
|
|
5 years
|
Weighted-average
risk-free interest rate
|
|
4.5%
|
Dividend
yield
|
|
0
|
On
July
5, 2005, our board approved compensation to its non-salaried board members
for
services rendered in connection with their duties as board members at the
annual
amount of $10,000 per non-salaried member, to be retroactively applied
to the
date of the Company’s annual meeting date, June 22, 2005, payable ratably by
fiscal quarter with the first payment to be prorated and paid upon the
completion of the first full fiscal quarter.
Dated
as of August 28, 2005 (Unaudited):
On
July
28, 2005 concurrent with the nomination of John F. Hoffner to the Board
of
Directors with the intent of his chairing the Audit Committee, our board
approved compensation for the Audit Chairperson with (i) an additional
monetary
compensation of $10,000, payable ratably by fiscal quarter with the first
payment to be prorated, and (ii) an additional option to acquire 30,000
shares
of Common Stock in accordance with the 2002 Employee Incentive Plan.
The annual
option grant occurs concurrently upon election or appointment to the
board at
the prevailing market value on date of issuance with vesting ratably
each month
over 12 months.
During
July and August 2005, investors converted 11,544 shares of Series A Preferred
Stock into 57,720 shares of our common stock.
On
August
9, 2005, we entered into an agreement with Deborah Christen Corporation.
Pursuant to this agreement, effective upon the occurrence of specific
conditions
precedent, Deborah Christen Corporation agreed to grant us a license
to use the
service marks “Shells” and “Shells Seafood, Shellfish & Whatnot” in a
certain trade area known as the Carrollwood Trade Area. Currently, Shells
of
Carrollwood Village, Inc., a sublicensee of the service marks and other
proprietary information, operates a “Shells” restaurant in the Carrollwood Trade
Area under a management agreement with us. The license agreement will
become
effective upon the earlier to occur of either (a) the execution of an
agreement
by Shells of Carrollwood Village, Inc. to abandon or terminate the sublicense
agreement which granted it the sublicense for the use of the services
marks in
the Carrollwood Trade Area and the management agreement with us for the
operation of the “Shells” restaurant, or (b) default by Shells of Carrollwood
Village, Inc. under the terms of the sublicense agreement and the expiration
of
any cure period available thereunder. Under the license agreement, we
have until
December 31, 2006 to open a “Shells” restaurant in the limited Carrollwood Trade
Area, subject to certain monthly license fees beginning on April 1, 2006.
Further, we agreed to pay Deborah Christen Corporation a license fee
in the
amount of two percent (2%) of the gross receipts of each “Shells” restaurant
operated or sublicensed by us within the Carrollwood Trade Area.
On
August 25, 2005, our board of directors appointed
Christopher R. Ward as an executive officer of the company. Mr. Ward
has served
as our Vice-President of Purchasing since September 2004.