Schlotzsky's, Inc.

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International Guild of Hospitality & Restaurant Managers

Business Summary
NASD: BUNZ

Schlotzsky's, Inc. is a franchisor of quick service restaurants that feature made-to-order sandwiches with unique sourdough buns. At December 31, 1999, the Schlotzsky's Deli system included 23 Company-owned stores and 736 franchised stores located in 37 states, the District of Columbia and 13 foreign countries. In addition, the Company had granted territorial rights to Area Developers located in all 50 states and to Master Licensees in 49 foreign countries.

Expanded Business Summary

Financial Summary

BUNZ franchises quick service restaurants that feature made-to-order sandwiches. The Company also operates a Turnkey Development Program to assist franchisees in obtaining store sites. For the fiscal year ended 12/31/00, revenues rose 15% to $59.2 million. Net loss before accounting change totalled $2.3 million vs. an income of $4.3 million. Results reflect an increase in restaurant revenues, offset by higher Turnkey development costs.

Recent Earnings Announcement
For the 3 months ended 03/31/2001, revenues were 15,300; after tax earnings were 592. (Preliminary; reported in thousands of dollars.)

Expanded Business Summary

Schlotzsky's, Inc. is a franchisor and operator of quick-service restaurants that feature made-to-order sandwiches with sourdough buns. Schlotzsky's operates through a network, as of December 31, 2000, of 711 franchised and Company-owned restaurants. Schlotzsky's Deli restaurants offer a menu of foods featuring Schlotzsky's proprietary breads. Its bread is baked fresh every day for every restaurant, and its menu includes 15 sandwiches on four types of buns, 10 sourdough crust pizzas, chips, salads, soups and other side items, fresh-baked cookies and other desserts and beverages.

Schlotzsky's operates through two business segments. Restaurant Operations includes restaurants operated by the Company for the purposes of product development, concept refinement, product and process testing, training, building brand awareness and restaurants held for sale. Franchise Operations encompasses franchising of restaurants, assisting franchisees in the development of restaurants and the licensing of Schlotzsky's Deli-branded products for sale to the franchise system and retailers. Until its termination in 2000, a third segment, Turnkey Development, developed new restaurants for franchisees. The Company had implemented its Turnkey Program in 1995 as a means of accelerating the development of high-visibility restaurants and evaluating restaurant sites by providing a variety of services, from securing the site, to development and construction of the restaurant.

As of December 31, 2000, the Schlotzsky's Deli system included 29 Company-owned restaurants and 682 franchised restaurants located in 38 states, the District of Columbia and 10 foreign countries. Of the Company-owned restaurants, there were 13 restaurants that Schlotzsky's intended to own and operate on a long-term basis. The other 16 restaurants were being operated as held-for-sale until they get re-franchised.

The Schlotzsky's Original sandwich, which was introduced in 1971, is a variation of the muffaletta sandwich, made with three meats (lean ham, Genoa salami and cotto salami), three cheeses (mozzarella, cheddar and parmesan), garlic butter, mustard, marinated black olives, onion, lettuce and tomato on a toasted sourdough bun. At most locations, as of December 2000, sandwiches ranged in price from $3.19 to $5.39 ($7.49 for an oversized Original), and eight-inch gourmet pizzas are generally priced between $3.69 and $4.99.

The Company encourages franchisees to develop freestanding restaurants with high visibility and easy access. These freestanding restaurants approximate 3,200 square feet and generally include drive-thrus. The Company is also interested in having its franchisees develop end-caps in shopping center locations.

Schlotzsky's has 26 area developers trained to assist the Company in maintaining its system of franchised restaurants in the United States. The Company, since mid-1998, contracted with several area developers to reduce their portion of franchise fees and royalties to focus their efforts on franchise services rather than franchise sales. As a result, restaurant opening schedules for these area developers were eliminated and certain service requirements were reduced. Depending on whether their agreements were revised, area developers may provide a range of services, including recruiting and qualifying franchisees; assisting franchisees in site selection, obtaining financing, constructing and opening restaurants; training franchisees and their employees; providing ongoing operational support; monitoring product and service quality, and helping coordinate local advertising.

The Schlotzsky's Deli system consists primarily of franchised restaurants, owned and managed by entrepreneurial franchisees. The Company has sought franchisees that are committed to providing on-site supervision of restaurant operations. As the Schlotzsky's Deli concept has developed, in addition to owner-operator franchisees, the Company also seeks experienced multi-unit operators that will operate several restaurants in a market. As of December 31, 2000, out of approximately 440 franchisees with operating restaurants, nine franchisees had more than five restaurants each and, in the aggregate, accounted for approximately 9.1% of the franchised restaurants in the system.

The Company has also developed a line of Schlotzsky's Deli branded products to increase brand awareness. Schlotzsky's Deli branded products are used by franchisees in preparing foods, and many of them are displayed at restaurants as part of the standard decor package. Some branded products are sold by franchisees for home consumption. In 1999, Schlotzsky's Deli potato chips became available for retail purchase outside of the restaurant system, and a new line of Schlotzsky's Deli meats, cheeses and condiments were test-marketed in grocery chains in selected markets.

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