Schlotzsky's, Inc. (Nasdaq:BUNZ) today announced results for the third quarter ended September 30, 2001, including net income of $659,000, or $0.09 per share (diluted), a 358% increase over net income of $144,000, or $0.02 per share in the third quarter of last year.

Revenues for the current quarter were $15.5 million, an increase of 2.5% over the third quarter of 2000. General and administrative (G&A) expenses for the quarter, including severance costs related to a reduction in force, decreased 14.4 % to $4.9 million compared to $5.7 million for the third quarter of 2000.

For the first nine months of 2001, the Company reported net income of $2.0 million, or $0.27 per share (diluted), compared to a net loss of $2.7 million, or a loss of $0.36 per share, for the nine months ended September 30, 2000. Revenue for the first nine months of 2001 increased 6.2% to $46.9 million compared to the same period last year.

For the trailing 12 months ended September 30, 2001, Schlotzsky's recorded revenues of $61.9 million and net income of $2.4 million, or $0.32 per share.

"The results for this quarter are a clear indication that the strategy to improve our overhead structure and to focus on recurring revenue, which we put in place in the last half of 2000, is yielding positive results. The results are evidence that we have a solid base to build on for the future. Even though our system experienced some sales declines in this transition period, mostly due to economic factors, we delivered improved earnings. Our income for the quarter increased more than 350 percent," said John Wooley President and CEO.

Other developments include:

  • Systemwide sales, including both Company-owned and franchised restaurants, were $106.2 million.
  • Systemwide same store sales declined 5.2% from the third quarter of 2000.
  • Recurring revenue from royalties, brand contribution and restaurant sales were approximately 95 percent of Company total revenue.
  • Earnings before interest, taxes, depreciation and amortization (EBITDA) increased to $2.5 million in the third quarter compared to $1.8 million in the comparable quarter last year.
  • Commercial bank debt reduction continued, with $1.4 million paid down in the quarter.
  • The Schlotzsky's®Deli system ended the third quarter with 692 stores systemwide (29 Company-owned and 663 franchised).
  • 173,000 shares of Company common stock have been repurchased through September 30, 2001, including 9,500 shares in the third quarter.

"Schlotzsky's is now ready to focus its efforts on resuming growth in systemwide sales. We believe we have the best store designs and best store operating system that we have had in the history of our Company," said Wooley. Future new restaurants will include both the 3,200 square foot freestanding units and shopping center units located in prime retail shopping areas, as well as Company-owned restaurants. Most new Company-owned units will incorporate such prototype features as coffee bars, pastries, computers with free internet access, and an upgraded decor package.

"We're encouraged that many of the features and operating systems we've developed in our 3200 square foot freestanding restaurants are now working their way into our shopping center design. We believe this design offers franchisees an attractive alternative that can deliver strong value and good returns," said Wooley.

"We have continued to make progress in the retail channel, and we're seeing strong interest in our potato chips and meats," said Wooley. Branded products have now been accepted into several retail chains, including Costco and Wal-Mart Supercenters.

OUTLOOK

Management expects earnings per share for the fourth quarter of 2001 to exceed those of the fourth quarter of 2000, when they were $0.05 per share. For the year 2002, based on the Company's new cost structure, management expects earnings per share to exceed 2001 earnings, even if the economy remains soft.

"Our focus in 2002 will be on growth in systemwide sales using the tools we have developed in our Company-owned restaurants over the past year," concluded Wooley.

Schlotzsky's, Inc., founded in Austin, Texas, in 1971, is a franchisor of quick-service restaurants featuring made-to-order hot sandwiches served on distinctive sourdough bread, along with sourdough crust pizzas, salads and soups. As of September 30, 2001, there were 692 Schlotzsky's® Deli restaurants open and operating in 38 states, the District of Columbia and 10 foreign countries. Visit www.schlotzskys.com or www.cooldeli.com for more information and e-coupons.

This news release contains "forward-looking statements," as defined under the federal securities laws. Forward-looking statements include those regarding the business prospects and projected earnings of the Company and the projected sales of the Schlotzsky's® Deli system. Forward-looking statements reflect the Company's expectations based on current information. The Company undertakes no obligation to update any forward-looking statements. Shareholders and prospective investors are cautioned that actual future results may be materially different because of various risks and uncertainties, including but not limited to: national and local economic conditions; success of the Company's continuing cost control efforts; appeal of restaurant models to, and results for, existing and prospective franchisees; restaurant openings and closings by franchisees; and other factors identified in the Company's Form 10-K under the heading "Risk Factors."

                  SCHLOTZSKY'S, INC. AND SUBSIDIARIES
              CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                              (Unaudited)

                     Three Months Ended         Nine Months Ended
                  ----------------------------------------------------
                   Sept. 30,    Sept. 30,    Sept. 30,    Sept. 30,
                     2001         2000         2001          2000
                  --------------------------------------------------
Revenues
 Royalties        $ 5,471,449  $ 5,723,246  $16,639,449  $17,147,441
 Franchise fees       132,500      150,000      317,500      420,850
 Developer fees       208,901      120,923      378,950      622,765
 Restaurant sales   7,320,478    6,623,139   22,384,680   18,603,091
 Brand contribution 1,884,192    1,988,057    5,580,338    5,436,507
 Other fees and
  revenue             489,305      526,319    1,616,832    1,966,926
                  --------------------------------------------------
     Total
      revenues     15,506,825   15,131,684   46,917,749   44,197,580
                  --------------------------------------------------
Expenses
 Service costs:
  Royalties         1,162,233    1,370,912    3,646,464    4,035,155
  Franchise fees       56,250       56,667      133,750      185,833
                  --------------------------------------------------
                    1,218,483    1,427,579    3,780,214    4,220,988
                  --------------------------------------------------

 Restaurant operations:
  Cost of sales     2,060,403    1,905,064    6,254,081    5,318,991
  Labor cost        3,056,962    2,861,058    9,404,125    7,712,873
  Operating
   expenses         1,725,348    1,475,704    5,078,803    4,071,041
                  --------------------------------------------------
                    6,842,713    6,241,826   20,737,009   17,102,905
                  --------------------------------------------------

 Equity loss on
  investment           32,628           --       87,080           --
                  --------------------------------------------------
 General and
  administrative    4,873,360    5,692,439   14,563,112   22,910,400
                  --------------------------------------------------
 Depreciation and
  amortization      1,072,062      883,622    3,109,830    2,754,372
                  --------------------------------------------------
     Total
      expenses     14,039,246   14,245,466   42,277,245   46,988,665
                  --------------------------------------------------

     Income (loss)
      from
      operations    1,467,579      886,218    4,640,504   (2,791,085)
Other
  Interest income     251,471      448,946      781,737    1,893,041
  Interest expense   (665,512)  (1,117,091)  (2,158,246)  (2,729,439)
                  --------------------------------------------------
     Income (loss)
      before
      income taxes  1,053,538      218,073    3,263,995   (3,627,483)

Provision (credit)
 for income taxes     395,000       74,145    1,263,000     (955,400)
                  --------------------------------------------------

     Net income
     (loss)       $   658,538  $   143,928  $ 2,000,995  $(2,672,083)
                  ==================================================


Earnings per
 common share
 - basic and
 diluted          $      0.09  $      0.02  $      0.27  $     (0.36)
                  ==================================================


                         OTHER OPERATING DATA

Restaurants Open
 - Beginning
 of Period                702          724          711          743
                  --------------------------------------------------
Openings During
 Period - New               6            9           15           24
   Reopenings               3            8           14           22
                  --------------------------------------------------
     Total Openings         9           17           29           46
Closings During
 Period                   (19)         (19)         (48)         (67)
                  --------------------------------------------------
Restaurants Open
 - End of Period          692          722          692          722
                  ==================================================

Systemwide Sales $106,165,000 $111,443,000 $323,119,000 $326,003,000
Increase (decrease)
 in Systemwide Sales    (4.7%)        6.1%        (0.9%)        8.7%
Increase (decrease)
 in Same Store Sales    (5.2%)        4.5%        (1.3%)        4.8%
Average Weekly Sales  $11,695      $11,900      $11,772      $11,530
Increase (decrease)
 in Average Weekly
 Sales                  (1.7%)        7.8%         2.1%         8.7%