Schlotzsky’s, Inc. announced August 14 that the company has terminated its Turnkey restaurant development program, which had engaged in developing and financing restaurants on a speculative basis for sale to franchisees. As a result of this change in strategy, the company took one-time non-cash charges and write-downs of $5,340,000 on a pre-tax basis related to its Turnkey program in the second quarter 2000. In addition, due to credit policy changes, other write-downs and reserves of $1,497,000 on a pre-tax basis were also recorded in the second quarter.

“This is an important strategic change that will allow our core business lines to demonstrate the strength of their earnings capacity. Clearly, Wall Street has been uncomfortable with the capital commitment and financial risks which the program undertook in assisting our franchisees. Further, its nonrecurring nature made our operating results and balance sheet difficult for analysts and investors to follow. We believe canceling the program is part of addressing those concerns and is an important step to

As a result of the one-time charges and write-offs, the loss for the quarter was $4,004,000 compared to a net profit of $924,000 for the second quarter last year. Earnings per share for the quarter was a loss of $0.54 per share as compared to income of $0.12 per share for the second quarter last year.

At the same time, revenue for the quarter was a record high of $13,100,000, which was a 9.9% increase over the second quarter of 1999.

Each of the company’s three core recurring revenue lines also were at record highs for the quarter. Royalty revenue for second quarter was $5,902,000, an increase of 6.2% over the second quarter of 1999. company-owned restaurant sales were $4,689,000 for the second quarter, an increase of 22.1% over the same period last year. Brand contribution (private label licensing fees) were $1,845,000 for second quarter, representing a 15.2% increase over 1999.

“With the termination of the Turnkey program, we expect to sell nonessential real estate. This should be positive for future earnings and should increase our liquidity,” said Wooley.

Total systemwide sales for the second quarter (which includes the entire system of franchised and company-owned restaurants) were $110 million, a 7.4% increase over the second quarter of 1999. Total systemwide sales for the trailing twelve months ending June 30, 2000 was $420 million. Systemwide sales have grown at a compound average rate of over 27% per year since the company’s initial public offering in 1995.

For the second quarter of 2000, same store sales comparisons increased 4.1% over the comparable period of 1999. This represents the 22nd consecutive calendar quarter of positive same store sales by the Schlotzsky’s® Deli restaurant system. Restaurant average weekly sales for the second quarter of 2000 for the entire chain were $11,699 per week, which was an 8.2% increase over the second quarter of 1999. Restaurant average weekly sales have increased 63% since the company went public in December 1995.

The company-owned restaurants in Austin averaged over $30,000 per week for the second quarter of 2000, outperforming the system average by 159%. The company re-acquired certain restaurants and development rights for the Austin market in April 1999. “Our management team sees an important opportunity in teaching our franchisees the operating principles and unit economics we have established in Austin,” said Wooley. “Over the past four years we have established a national brand and a national television presence. Now, our clear focus is on increasing our returns from our brand and the significant base of franchised and company-owned restaurants that we already have in place.”

The results for the second quarter will be discussed by the company’s management on a conference telephone call at 8:30 a.m. central time on Tuesday, August 15, 2000. Interested investors may listen to the conference call live by calling 1-800-834-5966 and requesting reservation number 16066663, or may listen to the conference call later by Internet by logging onto and clicking the “Investor Relations” button.

Schlotzsky’s, Inc., founded in Austin in 1971, is a brand licensor and franchisor of quick-service deli restaurants featuring sandwiches served on distinctive sourdough bread, along with pizzas, salads, soups, and deli items. As of June 30, 2000 there are 745 Schlotzsky’s® Deli restaurants operating in 37 states and D.C. and 12 foreign countries.

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