Shells Seafood Restaurants Same Store Sales Increase 8.3%

Key metrics -

Second quarter of 2006 compared to the second quarter of 2005 were:

-- Revenues increased 9.5% to $13.1 million.

-- Comparable restaurant sales increased 8.3%, for seventh consecutive quarterly increase.

-- Restaurant operating cash flow of $1.4 million, as adjusted for a non-recurring item, increased $0.1 million.

-- Net loss of $9,000, compared to $1.6 million. Excluding non-recurring items, net loss of $0.3 million, compared to $0.2 million.

-- Net loss per share of $0.00, compared to $0.10. Excluding non-recurring items, net loss per share of $0.02, compared to $0.01.

First 26-weeks of 2006 compared to the first 26-weeks of 2005 were:

-- Revenues increased 13.1% to $27.6 million.

-- Comparable restaurant sales increased 7.6%.

-- Restaurant operating cash flow of $3.6 million, as adjusted for a non-recurring item, increased $0.1 million.

-- Net income of $0.3 million, compared to a net loss of $1.2 million. Excluding non-recurring items, net loss of $0.1 million, compared to net income of $0.4 million.

-- Net income per diluted share of $0.01, compared to a net loss per share of $0.08. Excluding non-recurring items, net loss per share of $0.00, compared to net income of $0.02 per share diluted.

"The strong sales momentum we achieved in the second quarter is a testament to the great efforts of our restaurant teams, as well as the favorable guest acceptance of the investments we've made to enhance our food, service and atmosphere," said Leslie Christon, Shells President & CEO. "Driving these sales gains to the bottom line, however, continues to be challenging, due to higher expenses in several areas, particularly utilities, insurance, and occupancy costs. We're aggressively addressing these cost pressures and are introducing a new menu during the third quarter designed to improve check average and margins. In addition to Shells core favorites, the new menu features several labor-efficient items that have sold well and generated high yields during promotions."

Second Quarter 2006 Results

Revenues for the second quarter of 2006 increased 9.5% to $13.1 million from $11.9 million in the second quarter of 2005, mostly due to an 8.3% increase in same store sales. The Company also benefited from a stronger mix of operating restaurants in the second quarter of 2006 versus the same period last year, having opened two new restaurants, relocated one restaurant, closed an underperforming restaurant and terminated the operations of a licensed restaurant. As of the end of the second quarter of each of 2006 and 2005, the Company had 25 restaurants in operation.

Restaurant operating costs, consisting of food and beverage costs, labor and other operating costs, were $12.1 million, or 92.9% of sales, in the second quarter of 2006, compared to $10.6 million, or 89.5% of sales, in the second quarter of 2005. The 3.4% increase in restaurant operating costs as a percentage of sales was a result of the following:

-- Food and beverage costs decreased 0.6% as a percentage of sales compared to the prior year, due to higher menu pricing implemented to offset the effect of the Florida minimum wage increases, an improvement in liquor mix, and gains derived from better operational controls over food and beverage costs.

-- Labor costs increased 0.5% as a percentage of sales compared to the prior year. Taxes and benefits increased 1.2% as a percentage of sales mostly due to a $0.2 million reduction in income recognized for workers' compensation reserve adjustments in 2006 compared to the prior year. As a partial offset, restaurant labor decreased 0.7% as a percentage of sales due to improved operational efficiencies.

-- Other operating costs were negatively affected by increased utilities, insurance and occupancy costs, resulting in a 2.3% increase as a percentage of sales, compared to the prior year.

-- Depreciation expense increased $0.2 million, or 1.2% as a percentage of sales, due to additional restaurant remodels as well as new and relocated restaurants.

After adding back depreciation, amortization and pre-opening expenses to restaurant operating income, restaurant operating cash flow for the second quarter of 2006 was $1.5 million, or $0.1 below the comparable period of 2005. Adjusting for the non-recurring income which affected labor costs, restaurant operating cash flow was $1.4 million, or $0.1 above the comparable period of 2005. Restaurant operating cash flow for the first 26-weeks of 2006 was $3.7 million, or $0.1 million below the comparable period in 2005. Adjusting for the non-recurring income which affected labor costs, restaurant operating cash flow was $3.6 million, or $0.1 million above the comparable period in 2005.

General & administrative expenses were $1.0 million, or 7.5% of revenues, in the second quarter of 2006 compared to $0.9 million, or 7.4% of revenues, in the second quarter of 2005. The unfavorable variance reflects incremental legal and professional expenses and stock option expense.

Loss from operations for the second quarter of 2006 was $8,000, or $0.4 million below the comparable period of 2005. Income from operations for the first 26-weeks of 2006 was $0.5 million, or $0.5 million below the comparable period in 2005.

Net interest expense in the second quarter of 2006 was $0.1 million, or 0.5% of revenues, compared to net interest expense in the prior year of $0.2 million, or 1.4% of revenues.

As adjusted for non-recurring items as summarized in the ensuing financial tables, the net loss for the second quarter of 2006 was $0.3 million, or $0.02 per share based upon 16.2 million common shares outstanding, compared to a net loss in the second quarter of 2005 of $0.2 million, or $0.01 per share based upon 15.1 million common shares outstanding. For the first 26-weeks of 2006, the as adjusted net loss was $0.1 million, or $0.00 per share based upon 16.2 million common shares outstanding, compared to an as adjusted net income of $0.4 million, or $0.02 per diluted share based on 18.4 million diluted shares outstanding.

About the Company

The Company manages and operates 25 full-service, neighborhood seafood restaurants in Florida under the name "Shells". Shells restaurants feature a wide selection of seafood items, including shrimp, oysters, clams, mussels, scallops, lobster, crab and daily fresh fish specials, cooked to order in a variety of ways: steamed, sauteed, grilled, blackened and fried. Shells restaurants also offer a wide selection of signature pasta dishes, appetizers, salads, desserts and full bar service.



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