<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1997.
REGISTRATION NO. 333-34921
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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SCHLOTZSKY'S, INC.
(Exact name of registrant as specified in its charter)
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<C> <C> <C>
TEXAS 5812 74-2654208
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
JOHN C. WOOLEY
CHAIRMAN OF THE BOARD AND PRESIDENT
200 WEST FOURTH STREET 200 WEST FOURTH STREET
AUSTIN, TEXAS 78701 AUSTIN, TEXAS 78701
(512) 469-7500 (512) 469-7500
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of registrant's telephone number,
principal executive offices) including area code, of agent for service)
</TABLE>
Please address copies of all correspondence to:
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<C> <C>
PHILLIP M. SLINKARD, ESQ. DOUGLASS M. RAYBURN, ESQ.
WILLIAM R. VOLK, ESQ. JOHN W. MARTIN, ESQ.
HUGHES & LUCE, L.L.P. BAKER & BOTTS, L.L.P.
111 CONGRESS AVENUE, SUITE 900 2001 ROSS AVENUE
AUSTIN, TEXAS 78701 DALLAS, TEXAS 75201-2980
(512) 482-6800 (214) 953-6500
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to
security-holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 1997
PRELIMINARY PROSPECTUS
2,200,000 SHARES
SCHLOTZSKY'S, INC.
COMMON STOCK
[SCHLOTZSKY'S, INC. LOGO]
------------------------
Of the 2,200,000 shares of Common Stock offered hereby, 1,500,000 are being
issued and sold by Schlotzsky's, Inc. (the "Company"). The remaining 700,000
shares are being sold by the selling shareholders named herein (the "Selling
Shareholders"). The Company will not receive any of the proceeds from the sale
of shares by the Selling Shareholders. See "Principal and Selling Shareholders."
The Common Stock of the Company is included for quotation in The Nasdaq
Stock Market's National Market (the "Nasdaq National Market") under the symbol
"BUNZ." On September 5, 1997, the last reported price of the Common Stock on the
Nasdaq National Market was $18.25 per share. See "Price Range of Common Stock."
------------------------
SEE "RISK FACTORS" BEGINNING AT PAGE 6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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=======================================================================================================================
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
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Total(3)............................... $ $ $ $
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</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of this offering payable by the Company estimated
to be $400,000.
(3) The Company and certain Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 225,000 additional shares and 105,000
additional shares, respectively, of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
all such shares are purchased, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Shareholders will be $ , $ , $ , and $ ,
respectively. See "Principal and Selling Shareholders" and "Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters
subject to prior sale, when, as, and if received and accepted by them, subject
to their right to reject orders in whole or in part and to certain other
conditions. It is expected that delivery of certificates representing the Common
Stock will be made on or about , 1997.
RAYMOND JAMES & ASSOCIATES, INC.
MORGAN KEEGAN & COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
The date of this Prospectus is September , 1997.
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[GRAPHICS]
Inside front cover
Photographs of sandwiches, pizzas, salad and soups, with a sample Schlotzsky's
Deli menu,
Photograph of Schlotzsky's Deli prototype store exterior and the Schlotzsky's
logo. The trademark "Funny Name. Serious Sandwich(R)."
Inside back cover
Photograph of Schlotzsky's Deli prototype store interior.
Map of the United States showing the number of stores located in each state as
of June 30, 1997.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING (THE "OFFERING") MAY ENGAGE
IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN
THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
Schlotzsky's(R) is a registered trademark owned by the Company. All rights
are fully reserved.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements of the Company and Notes
thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information set forth herein assumes no exercise of the Underwriters'
over-allotment option. See "Underwriting." References in this Prospectus to the
"Company" mean the Company, its predecessors, and its and their subsidiaries,
unless the context otherwise requires.
THE COMPANY
The Company is a franchisor of quick service restaurants that feature
made-to-order sandwiches with distinctive bread that is baked daily at each
location. The Schlotzsky's system currently includes six Company-owned stores
and over 600 franchised stores located in 38 states, the District of Columbia
and 13 foreign countries. System-wide sales were approximately $142.5 million
for 1995, $202.4 million for 1996 and $128.0 million for the first six months of
1997. Average unit volumes were $368,000 in 1995, $410,000 in 1996, $199,000 for
the first six months of 1996 and $221,000 for the first six months of 1997. From
January 1, 1995 to June 30, 1997, the number of stores increased from 353 to
612.
Schlotzsky's stores feature sandwiches made with unique Baked Fresh
Daily(TM) buns. The Schlotzsky's Original sandwich was introduced in 1971 and
continues to be the most popular menu item at Schlotzsky's stores. In 1991, the
Company adopted the Schlotzsky's Deli restaurant concept by significantly
expanding its menu and adding the word "Deli" to its name. The Schlotzsky's Deli
menu offers 15 sandwiches on four types of bread, sourdough crust pizzas,
salads, soups, chips and other side items, fresh baked cookies and other
desserts, and beverages. At most locations, sandwiches range in price from $2.50
to $4.75 ($7.00 for an oversized Original) and eight inch gourmet pizzas are
priced between $3.50 and $4.50.
The Company's objective is to become the leader in the specialty sandwich
segment of the quick service restaurant industry in the United States. In 1991,
with the introduction of the Schlotzsky's Deli restaurant concept, the Company
began implementing a strategy to achieve this objective. The key elements of
this strategy are to:
- Offer an expanded menu of consistent, high quality foods featuring the
Company's proprietary bread recipes, complemented by excellent customer
service;
- Expand the turnkey real estate development program to develop new stores
in high visibility, free-standing locations;
- Utilize area developers to decentralize franchisee recruiting and
support;
- Develop a strong network of motivated owner-operator franchisees; and
- Increase awareness of the Schlotzsky's brand through enhanced marketing
and private label products.
The Company believes that the introduction of the Schlotzsky's Deli
restaurant concept and the turnkey development program ("Turnkey Program") have
enhanced store revenue and that the area developer program has increased the
Company's operating efficiencies. Recently, the Company revised its strategy to
include the acquisition and development of a limited number of Company-owned
stores, principally for concept development.
The Company has 40 area developers trained to assist the Company in
achieving its expansion goals in the United States. Area developers are
independent contractors who have purchased from the Company the exclusive rights
to develop designated geographic markets covering most of the television markets
in the United States. Area developers are not required to own or operate stores,
although many do so pursuant to separate franchise agreements with the Company.
Area developers fulfill the role usually performed by area or district managers
of other restaurant chains by: recruiting and qualifying prospective
franchisees; assisting franchisees in site selection, training, financing,
building and opening stores; providing ongoing operational support; monitoring
product and service quality; and coordinating local advertising activities. By
utilizing its
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area developer network, the Company believes it can effectively support a
growing number of franchised stores while controlling its overhead costs.
Because they receive a portion of the franchise fees and royalties from each
store developed in their territories as compensation, area developers are highly
motivated to develop their markets and monitor operating performance.
Franchisees, with assistance from area developers, typically spend several
months selecting sites and financing and constructing their stores. In selected
markets, the Company is assisting area developers by identifying and acquiring
store sites, arranging for financing, and constructing or renovating stores, so
that franchisees recruited by area developers can be offered "turnkey"
locations. The Turnkey Program was initiated in late 1994 for the purposes of
developing high visibility sites and accelerating the development of selected
markets. As of June 30, 1997, the Company had developed 34 properties under the
Turnkey Program, 30 of which were sold, two of which became Company-owned stores
and two of which were being marketed by the Company. Forty-seven properties were
in various stages of development as of June 30, 1997. The Company intends to
expand this program in the future and plans to use a significant portion of the
proceeds from this offering to fund the Turnkey Program.
The first Schlotzsky's restaurant was opened in Austin, Texas in 1971. In
1981, John C. Wooley, the Chairman of the Board and the President, and Jeffrey
J. Wooley, the Senior Vice President and General Counsel of the Company,
acquired the predecessor of the Company. The Company's principal executive
offices are located at 200 West Fourth Street, Austin, Texas 78701, and its
telephone number is (512) 469-7500.
THE OFFERING
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<S> <C>
Common Stock Offered by the Company......................... 1,500,000 Shares
Common Stock Offered by the Selling Shareholders............ 700,000 Shares
Common Stock Outstanding after the Offering................. 7,060,361 Shares(1)
Use of Proceeds............................................. To acquire and develop stores for
resale under the Turnkey Program,
to acquire and develop a limited
number of Company-owned stores and
to repay debt
Nasdaq Symbol............................................... BUNZ
</TABLE>
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(1) Excludes an aggregate of 688,177 shares of Common Stock issuable upon the
exercise of outstanding options and warrants. See "Management -- 1993
Amended and Restated Stock Option Plan," and "-- Directors Stock Option
Plan," "Certain Transactions -- Transactions with Executive Officers and
Directors" and "Principal and Selling Shareholders."
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SUMMARY OF CONSOLIDATED FINANCIAL AND STORE DATA
(IN THOUSANDS, EXCEPT PER SHARE AND CERTAIN STORE DATA)
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SIX MONTHS ENDED
FISCAL YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- --------------------
1994 1995 1996 1996 1997
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(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues................................. $ 9,303 $ 12,852 $ 20,714 $ 8,991 $ 13,675
Income from operations......................... 2,347 2,623 4,510 1,785 3,131
Income before income taxes and extraordinary
gain......................................... 2,372 2,612 5,097 2,152 3,327
Net income..................................... 1,485 1,633 3,195 1,343 2,050
Net income per share........................... 0.44 0.44 0.57 0.24 0.36
STORE DATA (UNAUDITED):
System-wide sales(1)........................... $ 97,685 $142,500 $202,400 $ 91,392 $127,955
Change in same store sales(2).................. 6.5% 1.7% 3.3% 2.8% 2.8%
Average annual store sales(3).................. $317,000 $368,000 $410,000 $199,000(4) $221,000(4)
Weighted average weekly store sales(3)......... $ 6,276 $ 7,086 $ 7,867 $ 7,671 $ 8,487
Change in average weekly store sales(5)........ 13.9% 12.9% 11.0% 13.3% 10.6%
Number of stores opened during period.......... 85 120 135 61 50
Number of stores closed during period.......... 9 10 25 8 11
Number of stores in operation at end of
period....................................... 353 463 573 516 612
</TABLE>
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AS OF JUNE 30, 1997
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ACTUAL AS ADJUSTED(6)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $11,942 $35,902
Total assets.............................................. 42,251 66,155
Long-term debt, less current maturities................... 3,646 2,135
Stockholders' equity...................................... 34,473 59,942
</TABLE>
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(1) Includes sales for all stores, as reported by franchisees or derived by the
Company from other data reported by franchisees.
(2) Percentage change in same store sales. Same stores are stores which were
open during the entire period indicated and for at least 18 months as of the
end of the corresponding prior period.
(3) In actual dollars (rounded in the case of average annual store sales).
(4) Reflects average six month store sales.
(5) Percentage change in weighted average weekly store sales from previous
fiscal year or period.
(6) Adjusted to give effect to the sale by the Company of 1,500,000 shares of
Common Stock in this offering at an assumed offering price of $18.25 and the
application of the net proceeds therefrom.
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
an investment in the Common Stock offered hereby.
FORWARD LOOKING STATEMENTS
This Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") (and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")). The words "expect," "estimate,"
"anticipate," "predict," "believe," "intend," "plan," "project" and similar
expressions and variations thereof are intended to identify forward-looking
statements. Such statements appear in a number of places in this Prospectus and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things: (i)
trends affecting the Company's financial condition or results of operations;
(ii) the Company's financing plans; (iii) the Company's business and growth
strategies; (iv) the use of the net proceeds to the Company of this offering;
and (v) the declaration and payment of dividends. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors. The accompanying information contained in this
Prospectus including, without limitation, the information set forth under the
headings "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business," as well as information
contained in the Company's filings with the Securities and Exchange Commission
(the "Commission"), identify important factors that could cause such
differences.
RAPID GROWTH STRATEGY
During the first six months of 1997, 50 Schlotzsky's stores were opened,
and the Company expects its franchisees to open 80 to 85 additional stores by
the end of 1997. During 1995 and 1996, the Company's franchisees opened 120 and
135 stores, respectively. This level of store openings is significantly greater
than that experienced by the Company prior to 1995. The Company will rely
primarily upon the Turnkey Program, its area developers, new franchisees and new
geographic markets to maintain this level of expansion. The number of openings
and the performance of new stores will depend on various factors, including: (i)
the availability of suitable sites for new stores; (ii) the ability of area
developers to recruit qualified franchisees; (iii) the ability of franchisees to
negotiate acceptable lease or purchase terms for new locations, obtain capital
required to construct, build-out and operate new stores, meet construction
schedules, and hire and train qualified store personnel; (iv) the establishment
of brand awareness in new markets; and (v) the ability of the Company and its
area developers to manage this anticipated expansion. Not all of these factors
are within the control of the Company, and there can be no assurance that the
Company will be able to maintain or accelerate its growth or that the Company
will be able to manage its expanding operations effectively. See
"Business -- Strategy."
TURNKEY PROGRAM
As of June 30, 1997, the Company had developed 34 stores under the Turnkey
Program. In the future, the Company expects to significantly increase the
percentage of new store openings under the Turnkey Program. The Company has
limited experience in implementing this program and there can be no assurance
that results experienced to date are indicative of future performance under the
program. In addition, the Company may be unable to sell properties acquired
under the Turnkey Program at a profit or at its cost, and the Company could be
required to sell properties at a loss or hold properties indefinitely,
diminishing the capital available to reinvest in the Turnkey Program. See
"-- Credit Risk and Contingencies," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Turnkey Real Estate Development Program."
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RELIANCE ON AREA DEVELOPERS
The Company relies on its area developers to find qualified franchisees.
Area developers are independent contractors of the Company, and are not
employees. Most area development agreements specify a schedule for opening
stores in the territory covered by the agreement. In the past, the Company has
agreed to extend or waive development schedules for certain area developers, and
there can be no assurance that area developers will be able to meet their
contractual development schedules. These schedules form the basis for the
Company's expectations regarding the number and timing of new store openings.
Delays in store openings could adversely affect the future operations of the
Company.
As the Company relies more extensively on its area developers, many of whom
do not have experience operating restaurants, it has less direct involvement in
recruiting franchisees and in monitoring the quality of franchised stores. The
Company provides training and support to area developers, but the quality of
store operations and the ability of area developers to meet development
schedules may be diminished by their lack of experience. It may be difficult for
the Company to enforce its area development agreements or to terminate the area
development rights of area developers who fail to meet development schedules or
other standards and requirements imposed by the Company, limiting the ability of
the Company to develop the territories of such area developers. See
"Business -- Franchising."
Between January 1, 1995 and June 30, 1997, 76 of the 305 new stores opened
were within territories controlled by only two area developers. As of June 30,
1997, these two area developers controlled 12 territories having a total of 187
stores. As these 12 territories mature, system-wide growth will depend upon more
activity in other territories. The Company believes that the concentration of
store openings among a relatively few area developers is due primarily to the
longer tenure of these area developers with the Company and the size of the
territories covered by their agreements.
DEPENDENCE ON FRANCHISING CONCEPT
Because royalties from franchisees' sales are a principal component of the
Company's revenue base, the Company's performance depends upon the ability of
its franchisees to promote and capitalize upon the Schlotzsky's concept and its
reputation for quality and value. The Company believes that the cost to a
franchisee of opening a Schlotzsky's Deli restaurant is higher than the store
opening costs incurred by franchisees of many of the Company's competitors for
franchisees. This necessarily limits the number of persons who are qualified to
be franchisees of the Company. The Company has established criteria for area
developers to use in evaluating prospective franchisees, but there can be no
assurance that area developers will recruit franchisees who have the business
abilities or financial resources necessary to open Schlotzsky's stores on
schedule or that franchisees will conduct operations in a manner consistent with
the Company's concepts and standards. See "Business -- Franchising."
The Company is subject to various state and federal laws relating to the
franchisor-franchisee relationship. The failure by the Company to comply with
these laws could subject the Company to liability to franchisees and to fines or
other penalties imposed by governmental authorities. The Company believes that
the franchising industry is experiencing an increasing trend of franchisees
filing complaints with state and federal governmental authorities and
instituting lawsuits against franchisors claiming that they have engaged in
unlawful or unfair trade practices or violated express or implied agreements
with franchisees. While the Company's experience is consistent with the trends
in the industry, the Company believes that it is in material compliance with
these laws and regulations and its agreements with franchisees, and that its
relations with its franchisees are generally good. See "Business -- Government
Regulation" and "-- Litigation."
IMPORTANCE OF LICENSING FEES
During the past 18 months, the Company's revenue from private label
licensing fees (brand contribution) has increased significantly as the volume of
system sales has increased and franchisees have increased their participation in
the Company's purchasing programs. This revenue is largely dependent upon the
voluntary participation of the franchisees. The Company believes its purchasing
programs provide franchisees with significant cost savings and other advantages.
There can be no assurance that the Company's suppliers will not
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increase prices to franchisees or that franchisees will not negotiate more
favorable terms from other approved suppliers. Some franchisees may also object
to these fees as a source of revenue to the Company. Any of these developments
could result in reduced purchases by franchisees of private label products and
declining private label licensing revenue to the Company. This could have a
material adverse effect on the financial condition and results of operations of
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations."
CREDIT RISK AND CONTINGENCIES
The Company guarantees certain real estate and equipment leases and other
obligations of its franchisees for a limited period of time, although it is not
obligated to do so. The Company enters into limited guarantees with respect to
most of the leases entered into between its franchisees and the buyers of the
sites developed under the Turnkey Program. See "Business -- Turnkey Real Estate
Development Program." At June 30, 1997, the Company was contingently liable for
approximately $13.9 million which is principally comprised of real estate and
equipment leases and other obligations of its franchisees.
The Company charges area developers and master licensees a fee ("developer
fee") for the rights to develop a defined territory. Typically, a portion of the
developer fee has been paid in cash and the balance paid with a promissory note
from the area developer or master licensee. The Company periodically evaluates
the credit risk and obtains annual valuations of these notes from an independent
financial services institution with expertise in valuing instruments of this
sort. As of June 30, 1997, the Company held notes receivable from area
developers and master licensees in an aggregate principal amount of
approximately $4.2 million. At June 30, 1997, the principal balance of these
notes had been reserved and discounted on the financial statements of the
Company by approximately $343,000, reflecting the fair market value of such
notes based upon valuations from the independent financial services institution.
The Company also holds notes receivable from certain franchisees related to the
sale of Company-owned stores. As of June 30, 1997, the outstanding principal
amount of these notes was approximately $466,000. While the Company considers it
unlikely that there will be defaults on a significant amount of the notes, such
defaults could adversely affect the Company's financial condition. Parties
controlled by or related to directors, officers and principal shareholders of
the Company have provided financing to certain area developers and master
licensees and have guaranteed obligations of certain area developers and master
licensees to the Company. See "Certain Transactions -- Master License and Area
Development Agreements" and "Business -- Franchising -- International Master
Licensees."
A wholly owned subsidiary of the Company is the general partner of a
limited partnership that developed a retail shopping center in the Austin area.
The Company and its subsidiary have guaranteed the repayment of a loan for this
project in the principal amount of $1.1 million due in April 2001. The Company
does not exercise control over the partnership and does not consider its
investment in the retail shopping center to represent a separate line of
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
LIMITED OPERATING HISTORY OF PROTOTYPES
Over the past several years, the Company has refined its store prototypes
and currently encourages franchisees to develop larger, free-standing stores
with higher visibility. This has increased the costs to franchisees of opening
and operating stores. The Company and franchisees have a limited history of
operating these larger stores, and results achieved to date may not be
indicative of future results. There can be no assurance that, on a sustained
basis, the Company will be able to attract and retain franchisees qualified to
assume the increased debt and the management responsibility associated with the
larger operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and the Notes thereto.
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GEOGRAPHIC CONCENTRATION
Of the 612 stores in the system at June 30, 1997, 197 were located in
Texas. A downturn in the regional economy or other significant adverse events in
Texas could have a material adverse effect on the Company's financial condition
and results of operations.
CERTAIN FACTORS AFFECTING THE RESTAURANT INDUSTRY
The Company and its franchisees may be affected by risks inherent in the
restaurant industry, including: adverse changes in national, regional or local
economic or market conditions; increased costs of labor (including increases in
the minimum wage); increased costs of food products; management problems;
increases in the number and density of competitors; limited alternative uses for
properties and equipment; changing consumer tastes, habits and spending
priorities; changing demographics; the cost and availability of insurance
coverage; uninsured losses; changes in government regulation; changing traffic
patterns; weather conditions; and local, regional or national health and safety
matters. The Company and its franchisees may be the subject of litigation based
on discrimination, personal injury or other claims, including claims which may
be based upon legislation that imposes liability on restaurants or their
employees for injuries or damages caused by the negligent service of alcoholic
beverages to an intoxicated person or to a minor. The Company can be adversely
affected by publicity resulting from food quality, illness, injury or other
health concerns or operating issues resulting from one restaurant or a limited
number of restaurants in the Schlotzsky's system. None of these factors can be
predicted with any degree of certainty, and any one or more of these factors
could have a material adverse effect on the Company's financial condition and
results of operations.
COMPETITION
The food service industry is intensely competitive with respect to concept,
price, location, food quality and service. There are many well-established
competitors with substantially greater financial and other resources than the
Company. These competitors include a large number of national, regional and
local food service companies, including fast food and quick service restaurants,
casual full-service restaurants, delicatessens, pizza restaurants and other
convenience dining establishments. Some of the Company's competitors have been
in existence longer than the Company and may be better established in markets
where Schlotzsky's stores are or may be located. The Company believes that it
competes for franchisees against franchisors of other restaurants and various
other concepts.
Competition in the food service industry is affected by changes in consumer
taste, economic and real estate conditions, demographic trends, traffic
patterns, the cost and availability of qualified labor, product availability and
local competitive factors. The Company's area developers assist franchisees in
managing or adapting to these factors, but no assurance can be given that some
or all of these factors will not adversely affect some or all of the
franchisees. See "Business -- Competition."
CONTROL BY PRINCIPAL SHAREHOLDERS
Following the completion of this offering, John C. Wooley and Jeffrey J.
Wooley will beneficially own an aggregate of approximately 13.1% of the
outstanding Common Stock (12.5% if the over-allotment option is exercised in
full) and Getov Holding B.V. ("Getov") and Buxtehude Holding B.V. ("Buxtehude"),
entities of which John M. Rosillo, a director of the Company, is the managing
director, will beneficially own an aggregate of 6.8% of the outstanding Common
Stock (5.5% if the over-allotment option is exercised in full). As a result,
these shareholders, if they were to act in concert, would have the ability to
influence the outcome of any issue submitted to a vote of the shareholders.
There are no agreements or understandings among these shareholders regarding the
voting of their shares following the completion of this offering, but to date
they have voted consistently on matters submitted to a vote of the shareholders.
See "Principal and Selling Shareholders."
9
<PAGE> 11
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL
The Company's success is highly dependent upon the efforts of its
management and key personnel, including its Chairman of the Board and President,
John C. Wooley. The Company has employment agreements with John C. Wooley,
Jeffrey J. Wooley, Kelly R. Arnold and Karl D. Martin, each of which includes
certain noncompetition provisions that survive the termination of employment.
The employment agreements with John Wooley and Jeffrey Wooley will expire in
December 1997. The Company also has obtained certain noncompetition agreements
from several other members of management and key personnel who are not subject
to employment agreements. However, there can be no assurance such noncompetition
agreements will be enforceable. The loss of the services of John Wooley or other
management or key personnel could have a material adverse effect on the Company.
The Company does not carry key man life insurance on any of its officers. See
"Management."
GOVERNMENT REGULATION
The restaurant industry is subject to numerous federal, state and local
governmental regulations, including those relating to the preparation and sale
of food and zoning and building requirements. The Company and its area
developers and franchisees are also subject to laws governing their
relationships with employees, including wage and hour laws, and laws and
regulations relating to working and safety conditions and citizenship or
immigration status. The Company's franchise operations are subject to regulation
by the United States Federal Trade Commission and the Company must also comply
with state laws relating to the offer, sale and termination of franchises and
the refusal to renew franchises. The failure to obtain or maintain approvals to
sell franchises could adversely affect the Company. Increases in the minimum
wage rate, employee benefit costs or other costs associated with employees,
could adversely affect the Company's area developers and franchisees and,
therefore, adversely affect the Company. See "Business -- Government
Regulation."
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. See "Dividend
Policy."
POTENTIAL VOLATILITY OF STOCK PRICE
There have been periods of significant volatility in the market price and
trading volume of the Common Stock, which in many cases were unrelated to the
operating performance of, or announcements concerning, the Company. General
market price declines or market volatility in the future could adversely affect
the price of the Common Stock. In addition, the trading price of the Common
Stock has been and is likely to continue to be subject to significant
fluctuations in response to variations in quarterly operating results, the
results of the Turnkey Program, changes in management, competitive factors,
regulatory changes, general trends in the industry, recommendations by
securities industry analysts and other events or factors. This volatility has
been exacerbated by the lack of a significant public float in the Common Stock.
There can be no assurance that an adequate trading market can be maintained for
the Common Stock. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
After the completion of this offering, the Company will have 7,060,361
shares of Common Stock outstanding (7,292,186 if the Underwriters'
over-allotment option is exercised in full). Of those shares, a total of
approximately 5,286,000 (5,623,000 if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act, unless purchased or held by "affiliates"
of the Company, as that term is defined in Rule 144 under the Securities Act.
The Company's executive officers and directors, the Selling Shareholders and
certain other shareholders, who own an aggregate of 2,580,314 shares of Common
Stock (including 700,000 shares to be sold in this offering), and the Company
have agreed with the Underwriters that they will not, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose of (or announce any offer,
10
<PAGE> 12
sale, offer of sale, contract of sale, pledge, grant of any option to purchase
or other sale or disposition) any shares of Common Stock or other capital stock
or any securities convertible into or exercisable or exchangeable for, or any
rights to purchase or acquire any shares of Common Stock or other capital stock
of the Company for a period of 120 days after the date of this Prospectus
without the prior written consent of Raymond James & Associates, Inc., on behalf
of the Underwriters, except for options granted pursuant to the Company's
existing stock option programs. Sales of substantial amounts of Common Stock in
the public market, or the perception that such sales could occur, could
adversely affect the prevailing market price for the Common Stock and could
impair the Company's ability to raise capital through a public offering of
equity securities. See "Shares Eligible for Future Sale" and "Underwriting."
ANTI-TAKEOVER PROVISIONS
The new Texas Business Combination Law, which became effective September 1,
1997, restricts certain transactions between a public corporation and affiliated
shareholders. The statute, which is applicable to the Company, may have the
effect of inhibiting a non-negotiated merger or other business combinations
involving the Company. See "Description of Capital Stock -- Anti-Takeover
Provisions -- Texas Business Combination Law."
The Company's Articles of Incorporation and Bylaws include certain
provisions that may have the effect of discouraging or delaying a change in
control of the Company. Directors are elected for staggered three-year terms,
which has the effect of delaying the ability of shareholders to replace specific
directors or effect a change in a majority of the Board of Directors. All
shareholder action must be effected at a duly called annual or special meeting
of shareholders and shareholders must follow an advance notification procedure
for certain shareholder proposals and nominations of candidates for election to
the Board of Directors. See "Description of Capital Stock -- Anti-Takeover
Provisions -- Articles of Incorporation and Bylaws."
The Board of Directors has the authority, without further action by the
shareholders, to issue up to 1,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
and to issue authorized unissued shares of Common Stock. The issuance of
Preferred Stock or additional shares of Common Stock could adversely affect the
voting power of the purchasers of Common Stock in this offering and could have
the effect of delaying, deferring or preventing a change in control of the
Company. The issuance of Preferred Stock also could adversely affect other
rights of purchasers of Common Stock in this offering, including creation of a
preference upon liquidation or upon the payment of dividends in favor of the
holders of Preferred Stock. See "Description of Capital Stock."
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered by the Company hereby at an assumed offering price of
$18.25 per share will be approximately $25.5 million after deducting
underwriting discounts and estimated offering expenses payable by the Company.
The Company intends to use approximately $6.0 million of the proceeds to acquire
and develop Company-owned stores, approximately $1.5 million to repay bank debt
and other obligations and the balance to acquire and develop stores under the
Turnkey Program.
Of the $1.5 million to be repaid, the Company borrowed $1.1 million in
November 1995 to finance the Company's flagship store in Austin. This loan bears
interest at 9.47% per annum and is due in November 2002.
Pending the use of proceeds described above, the net proceeds will be
invested in short-term, investment grade, interest bearing securities.
The Company will not receive any proceeds from the sale of shares of Common
Stock offered by the Selling Shareholders, including shares which may be sold by
the Selling Shareholders if the over-allotment option is exercised.
12
<PAGE> 14
PRICE RANGE OF COMMON STOCK
The Common Stock is included for quotation in the Nasdaq National Market
under the symbol "BUNZ." The following table sets forth, for the periods
indicated, the high and low closing prices for the Common Stock, as reported by
the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1995
Fourth Quarter (December 15 through 31, 1995)............... $11.25 $10.25
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter............................................... $10.25 $ 8.88
Second Quarter.............................................. 13.25 9.50
Third Quarter............................................... 12.00 9.75
Fourth Quarter.............................................. 11.50 9.25
FISCAL YEAR ENDING DECEMBER 31, 1997
First Quarter............................................... $12.25 $ 9.63
Second Quarter.............................................. 14.25 10.75
Third Quarter (through September 5, 1997)................... 19.13 13.50
</TABLE>
The last reported price of the Common Stock on September 5, 1997, as
reported by the Nasdaq National Market, was $18.25 per share. At August 1, 1997,
shares of Common Stock outstanding were held by approximately 239 shareholders
of record.
DIVIDEND POLICY
The Company has never paid and has no current plans to pay cash dividends
on its Common Stock. The Company currently intends to retain earnings for use in
the operation and expansion of the Company's business and does not anticipate
paying cash dividends in the foreseeable future. The declaration and payment of
future dividends will be at the sole discretion of the Board of Directors and
will depend on the Company's profitability, financial condition, capital needs,
future prospects and other factors deemed relevant by the Board of Directors.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1997 and as adjusted to give effect to the sale by the Company of 1,500,000
shares of Common Stock and the application of the estimated net proceeds
therefrom. See "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current maturities..................... $ 3,646 $ 2,135
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized; none issued or outstanding................. -- --
Common stock, no par value, 30,000,000 shares authorized,
5,548,672 issued and outstanding; 7,048,672 issued and
outstanding as adjusted(1)............................. 44 59
Additional paid-in capital................................ 26,563 52,018
Retained earnings......................................... 7,865 7,865
------- -------
Total stockholders' equity........................ 34,472 59,942
------- -------
Total capitalization.............................. $38,118 $62,077
======= =======
</TABLE>
- ---------------
(1) Excludes an aggregate of 687,803 shares of Common Stock issuable upon the
exercise of outstanding options and warrants. See "Management -- 1993
Amended and Restated Stock Option Plan" and "-- Directors Stock Option
Plan."
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected consolidated financial data for the
Company for the periods and the dates indicated. The historical consolidated
financial data as of and for the years ended December 31, 1994, 1995 and 1996
have been derived from the audited consolidated financial statements of the
Company and its predecessor entities, included elsewhere herein. The balance
sheet data and statement of operations data as of and for the years ended
December 31, 1992 and 1993 have been derived from the Company's audited
financial statements not included or incorporated herein. The historical
consolidated financial data as of and for the six months ended June 30, 1996 and
1997 are derived from unaudited consolidated financial statements of the Company
and, in the opinion of management, contain all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation. The results for the
six months ended June 30, 1997 are not necessarily indicative of the results
that may be achieved for the full year. The selected financial data should be
read in conjunction with, and are qualified in their entirety by, the
Consolidated Financial Statements of the Company and related Notes and other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Royalties............................................. $ 2,334 $ 2,969 $ 4,657 $ 7,425 $10,747 $ 4,921 $ 6,883
Franchise fees........................................ 330 621 1,019 1,494 1,775 822 593
Developer fees........................................ 1,768 2,170 2,793 2,666 1,993 1,011 125
Restaurant sales...................................... 780 623 428 505 3,610 1,375 2,762
Brand contribution.................................... -- -- 150 397 1,295 360 1,342
Turnkey development................................... -- -- -- 41 726 120 1,448
Other fees and revenue................................ 75 141 256 324 568 382 522
------- ------- ------- ------- ------- ------- -------
Total revenues.................................. 5,287 6,524 9,303 12,852 20,714 8,991 13,675
Expenses:
Service costs:
Royalties........................................... 72 372 1,122 2,405 3,791 1,673 2,508
Franchise fees...................................... 93 338 661 767 959 448 313
Restaurant operations:
Cost of sales....................................... 255 202 188 189 1,183 462 841
Labor costs......................................... 256 214 154 408 1,424 607 1,088
Operating expenses.................................. 552 380 260 251 1,040 340 851
General and administrative............................ 3,555 3,679 4,199 5,751 7,028 3,283 4,429
Depreciation and amortization......................... 371 268 372 458 779 393 514
------- ------- ------- ------- ------- ------- -------
Total expenses.................................. 5,154 5,453 6,956 10,229 16,204 7,206 10,544
------- ------- ------- ------- ------- ------- -------
Income from operations................................ 133 1,071 2,347 2,623 4,510 1,785 3,131
Other:
Interest income (expense)............................. (219) (240) (201) (149) 455 271 196
Other income(expense)................................. (1,085) 232 226 138 132 96 --
------- ------- ------- ------- ------- ------- -------
Total other income (expense).................... (1,304) (8) 25 (11) 587 367 196
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and extraordinary
gain.................................................. (1,171) 1,063 2,372 2,612 5,097 2,152 3,327
Provision for federal and state income taxes............ -- 56 927 1,017 1,902 809 1,277
Gain on extinguishment of debt, net of tax.............. -- -- 40 38 -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................... $(1,171) $ 1,007 $ 1,485 $ 1,633 $ 3,195 $ 1,343 $ 2,050
======= ======= ======= ======= ======= ======= =======
Net income per share(2)................................. $ 0.26 $ 0.44 $ 0.44 $ 0.57 $ 0.24 $ 0.36
======= ======= ======= ======= ======= =======
CONSOLIDATED BALANCE SHEET DATA:
Working capital(3).................................... $(2,373) $(2,397) $ 1,909 $18,750 $13,795 $18,614 $11,942
Total assets.......................................... 5,600 12,364 16,481 36,708 40,979 37,142 42,251
Long-term debt, less current maturities(4)............ -- 6,240 10,452 3,029 3,129 3,153 3,646
Stockholders' equity(3)............................... 284 584 1,614 28,974 32,312 30,481 34,473
</TABLE>
- ---------------
(1) Effective January 1, 1993, Schlotzsky's Franchising Limited Partnership,
Schlotzsky's San Antonio, Ltd. ("SSAL"), Schlotzsky's Houston, Ltd. ("SHL"),
Schlotzsky's, Inc. and Schlotzsky's Restaurant Management Corporation
("SRMC") merged resulting in three new corporations: Schlotzsky's, Inc. (the
parent corporation); Schlotzsky's Restaurants, Inc. (a wholly owned
subsidiary of Schlotzsky's, Inc.); and Schlotzsky's Real Estate, Inc. (a
wholly owned subsidiary of Schlotzsky's, Inc.). Prior to the merger, SRMC
was the general partner in SSAL and SHL.
(2) The Company was organized as a limited partnership in 1992. Accordingly, net
income per share is not applicable for that year.
(3) For 1992, stockholders' equity reflects partners' capital in the predecessor
entities.
(4) For 1993 and 1994, long-term debt includes $5,000,000 and $8,000,000,
respectively for redeemable preferred stock.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives its revenue from several sources: royalties, franchise
fees, developer fees (consisting of area developer and master licensee fees),
Company-owned restaurant sales, turnkey development fees, brand contribution
(private label licensing fees), and other franchise-related activities. Between
1991 and 1994, developer fees and franchise fees grew to represent a significant
portion of total revenue as the Company sold development rights for most of the
television markets in the United States and certain international territories.
Franchise fees, turnkey development fees and brand contribution increased during
this period as the rate at which stores opened increased. Since the Company has
sold developer rights for virtually all of the United States, developer fees
derived from these non-recurring transactions have declined as a percentage of
total revenue, while franchise fees and royalties based on franchise store sales
have increased.
Royalties are based on a percentage of franchisees' net sales and are
recognized by the Company in the same period that the franchise store sales
occur. Generally, royalties are earned at the rate of 6% of sales for stores
opened after the 1991 year end, and 4% of sales for stores opened before that
time. Royalties are paid by means of weekly automatic drafts by the Company on
franchisee bank accounts for 6% royalty stores. As of June 30, 1997, 133
franchised stores were paying royalties on a monthly basis at the rate of 4%.
This number of stores will decline as older franchise agreements expire (the
majority of which will expire after 1998). A portion of the royalties received
by the Company are paid to its area developers as royalty service costs for
providing on-going services to franchisees in their territories. As more stores
open under 6% franchise agreements, the Company expects that royalty service
costs will approach 40% of royalties. See "Business -- Franchising -- Area
Developers." Royalties have increased since 1992 due not only to the growth in
the number of stores, but also to increases in average weekly sales. The
increase in average weekly sales is due primarily to the conversion of older
franchise stores to the Schlotzsky's Deli restaurant concept, as well as the
selection of more free-standing locations for newer stores, which have better
visibility and generally experience higher sales than the smaller "in-line"
stores located in strip shopping centers which are characteristic of stores
opened prior to 1992.
Franchise fees are nonrefundable payments received by the Company from
franchisees and are typically recognized into revenue as stores open. The
franchise fee for a franchisee's initial store is currently $20,000. The
franchise fee for each additional store committed to and opened by a franchisee
is $10,000. Expenses associated with franchise fees are shown as franchise fee
service costs and include the portion of the franchise fee paid to area
developers. The Company generally pays area developers approximately one-half of
the franchise fees collected from franchisees in their development areas,
although the Company agreed to pay some area developers up to 100% of certain
franchise fees as an inducement to develop their territories more quickly. As
the number of stores covered by these enhanced arrangements begins to diminish,
the Company expects that franchise fee service costs will decrease as a
percentage of franchise fees to approximately 50%.
Restaurant sales are reported from Company-owned stores, and declined
between 1991 and 1994 as a result of the Company's strategy adopted in 1991 to
develop only franchised stores. The number of Company-owned stores declined from
22 to two stores between 1990 and 1994. Restaurant sales increased significantly
in 1996 because the Company's flagship restaurant in Austin, Texas was in
operation the entire year and because two additional stores were acquired from
franchisees during 1996. Currently, Company stores are operated primarily for
product development, concept refinement and training franchisees. Management
does not believe that the operating cost of sales for Company-owned stores is
indicative of costs for franchised stores on a system-wide basis. Restaurant
sales should increase as the Company opens a limited number of additional
Company-owned stores. See "Business -- Strategy -- Company-Owned Stores."
The Company charges developers a nonrefundable fee for the exclusive rights
to develop a defined territory for a specified term. Typically, a portion of the
developer fee is paid in cash and the balance is paid with a promissory note.
See "Business -- Franchising -- Area Developers" and "-- International Master
Licensees." When the Company has fulfilled substantially all of its contractual
responsibilities and obligations,
16
<PAGE> 18
such as training, providing manuals, and, in the case of master licensees,
reasonable efforts to obtain trademark registration, the Company recognizes as
revenue the cash portion of the fee and the value of the promissory note, as
determined by an independent third party valuation. These fees have declined in
the last two years as most of the remaining domestic territories have been sold
and fees from the licensing of international territories, which are not
aggressively marketed by management, are sporadic.
Revenue is also generated from brand contribution (private label licensing
fees) and the Turnkey Program. The Company has licensed manufacturers to produce
Schlotzsky's private label products and began receiving licensing fees from
sales of private label foods to franchisees in late 1994. This revenue has
increased significantly to $1,295,000 for 1996 and $1,342,000 for the first six
months of 1997. The Company believes that private label licensing fees will
increase as system-wide sales grow. See "Business -- Purchasing; Private
Labeling" and "Risk Factors -- Importance of Licensing Fees."
Under the Turnkey Program, the Company works independently or with an area
developer to identify superior store sites within a territory. The Company will
purchase or lease a selected site, design and construct a Schlotzsky's Deli
restaurant on the site and sell, lease or sublease the completed store to a
franchisee. Where the Company does not sell the property to a franchisee, the
Company sells the improved property, or, in the case of a leased property,
assigns the lease and any sublease, to an investor. The Company charges the
franchisee $20,000 per site for managing the construction of the store. This
construction management fee is recognized when the store is opened. Upon sale of
the store, the Company realizes a gain (or loss) on the sale in the period in
which the sale occurs. The Company believes that the Turnkey Program enhances
the Company's ability to recruit qualified franchisees by developing high
profile sites and achieving critical mass for advertising purposes more quickly
in selected markets.
17
<PAGE> 19
The following table sets forth the percentage relationship to total revenue
of the listed items included in the Company's consolidated statements of
operations, except as otherwise indicated, and selected store data.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Royalties..................................... 50.1% 57.8% 51.9% 54.8% 50.3%
Franchise fees................................ 11.0 11.6 8.6 9.1 4.3
Developer fees................................ 30.0 20.7 9.6 11.3 1.0
Restaurant sales.............................. 4.6 4.0 17.4 15.3 20.2
Brand contribution............................ 1.6 3.1 6.3 4.0 9.8
Turnkey development........................... -- 0.3 3.5 1.3 10.6
Other fees and revenue........................ 2.7 2.5 2.7 4.2 3.8
-------- -------- -------- -------- --------
Total revenues......................... 100.0 100.0 100.0 100.0 100.0
Expenses:
Service costs:
Royalties(1)................................ 24.1 32.4 35.3 34.0 36.4
Franchise fees(2)........................... 64.9 51.3 54.0 54.5 52.7
Restaurant operations:
Cost of sales(3)............................ 43.9 37.3 32.8 33.6 30.4
Labor costs(3).............................. 35.9 80.8 39.5 44.1 39.4
Operating expenses(3)....................... 60.7 49.7 28.8 24.7 30.8
General and administrative...................... 45.1 44.8 33.9 36.5 32.4
Depreciation and amortization................... 4.0 3.6 3.8 4.4 3.8
Total expenses......................... 74.7 79.6 78.2 80.2 77.1
-------- -------- -------- -------- --------
Income from operations.......................... 25.3 20.4 21.8 19.8 22.9
-------- -------- -------- -------- --------
Other:
Interest income (expense)..................... (2.2) (1.2) 2.2 3.0 1.5
Other income.................................. 2.4 1.1 0.6 1.1 --
-------- -------- -------- -------- --------
Total other income (expense)........... 0.2 (0.1) 2.8 4.1 1.5
-------- -------- -------- -------- --------
Income before income taxes and extraordinary
gain.......................................... 25.5 20.3 24.6 23.9 24.4
Provision for federal and state income
taxes......................................... 10.0 7.9 9.2 9.0 9.5
Gain on extinguishment of debt, net of tax...... 0.5 0.3 -- -- --
-------- -------- -------- -------- --------
Net income............................. 16.0% 12.7% 15.4% 14.9% 14.9%
======== ======== ======== ======== ========
STORE DATA:
System-wide sales(4)............................ $ 97,685 $142,500 $202,400 $ 91,392 $127,955
Change in same store sales(5)................... 6.5% 1.7% 3.3% 2.8% 2.8%
Average annual store sales(6)................... $317,000 $368,000 $410,000 $199,000(7) $221,000(7)
Weighted average weekly store sales(6).......... $ 6,276 $ 7,086 $ 7,867 $ 7,671 $ 8,487
Change in average weekly store sales(8)......... 13.9% 12.9% 11.0% 13.3% 10.6%
Number of stores opened during the
period........................................ 85 120 135 61 50
Number of stores closed during the
period........................................ 9 10 25 8 11
Number of stores in operation at end of
period........................................ 353 463 573 516 612
</TABLE>
- ---------------
(1) Expressed as a percentage of royalties.
(2) Expressed as a percentage of franchise fees.
(3) Expressed as a percentage of restaurant sales.
(4) In thousands. Includes sales for all stores, as reported by franchisees or
derived by the Company from other data reported by franchisees.
(5) Same store sales are based upon stores which were open for the entire period
indicated and for at least 18 months as of the end of the corresponding
prior period.
(6) In actual dollars (rounded in the case of average annual store sales).
(7) Reflects average six-month store sales.
(8) Percentage change in weighted average weekly store sales from previous
fiscal year.
18
<PAGE> 20
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenue. Total revenue increased 52.1% from $8,991,000 to $13,675,000.
Royalties increased 39.9% from $4,921,000 to $6,883,000. This increase was
due to the addition of 124 restaurants opened during the period from July 1,
1996 to June 30, 1997. Also driving the increase was the growing influence of
larger freestanding stores with higher visibility, a 10.6% increase in average
weekly sales and a 2.8% increase in same store sales.
Franchise fees decreased 27.9% from $822,000 to $593,000. This decrease was
a result of nine fewer domestic openings during the six-month period ended June
30, 1997, as compared to the six months ended June 30, 1996. The fewer number of
openings is the result of the Company's increasing emphasis on superior site
selection for larger freestanding stores with higher visibility.
Developer fees decreased 87.6% from $1,011,000 to $125,000. This decrease
was primarily a result of the sale of development areas in 1997 which were
significantly smaller, and therefore generated lower fees than those areas sold
during the same period in 1996.
Restaurant sales increased 100.9% from $1,375,000 to $2,762,000. This
increase was attributable to a 28.5% increase in sales volume at the Company's
flagship store and the opening of two Company-owned stores in 1997. In the
future, it is contemplated that the Company will market to franchisees certain
of its Company-owned stores.
Private label licensing fees increased 272.9% from $360,000 to $1,342,000.
The increase was the result of more favorable terms with certain major suppliers
than terms in place in the prior year, as well as the increasing volume of
system sales and greater franchisee participation in the Company's purchasing
programs.
Turnkey development revenue increased from $120,000 to $1,448,000. Revenue
in the six months ended June 30, 1997 included $253,000 of rental revenue from
sites completed and under lease. Fifteen sites developed under the Turnkey
Program were sold during the six months ended June 30, 1997, and the gain on
these sales comprises the balance of turnkey revenue generated during this
period.
Other fees and revenues increased 36.7% from $382,000 to $522,000. This
change was primarily due to the increased level of supplier contributions to the
Company's annual convention held in July 1997.
The following table reflects the growth of the franchise system for the six
months ended June 30, 1997 and June 30, 1996, which has been principally
responsible for the increased revenue as discussed above.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1996 1997
----- -----
<S> <C> <C>
Stores opened
Domestic
Freestanding.................................... 32 36
End cap......................................... 16 7
Other........................................... 8 4
-- --
Total domestic openings.................... 56 47
International...................................... 5 3
-- --
Total openings............................. 61 50
Stores closed........................................ 8 11
-- --
Net store growth........................... 53 39
== ==
</TABLE>
Costs and Expenses. Royalty service costs increased 49.9% from $1,673,000
to $2,508,000. This increase was a direct result of the increase in royalty
revenue for the six months ended June 30, 1997, as compared to
19
<PAGE> 21
the same period in the prior year. Royalty service costs as a percentage of
royalties grew from 34.0% to 36.4%. This increase reflects the growing
percentage of restaurants serviced by the area developer system.
Restaurant cost of sales, which consists of food, beverage and paper costs,
increased 82.0% from $462,000 to $841,000, but as a percentage of restaurant
sales decreased from 33.5% to 30.4%. Also, restaurant labor costs increased
79.2% from $607,000 to $1,088,000, but as a percentage of restaurant sales
decreased from 44.1% to 39.4% for the same period in 1996. These percentage
decreases were primarily due to the improving operational efficiencies attained
in the various Company-owned stores. Restaurant operating expenses have
increased 150.3% from $340,000 to $851,000, and as a percentage of restaurant
sales increased from 24.7% to 30.8% for the six months ended June 30, 1997, as
compared to the same corresponding period in 1996. The increase in operating
expenses is due to the additional facility costs for the additional stores the
Company operates.
General and administrative expenses increased 34.9% from $3,283,000 to
$4,429,000, but as a percentage of total revenue decreased from 36.5% to 32.4%.
The dollar increase is principally the result of additional personnel at the
corporate office and the expensing of certain turnkey predevelopment costs
related to prospective sites which management has determined are no longer
desirable locations for development. The percentage decrease is the result of
revenue increasing at a greater rate than these expenses for the six months
ended June 30, 1997.
Depreciation and amortization increased 30.8% from $393,000 to $514,000,
but as a percentage of total revenues decreased from 4.4% to 3.8%. The dollar
increase was principally due to amortization of goodwill and other intangibles
acquired in late 1996 and depreciation related to the additional stores the
Company was operating in the more recent period.
Other. Net interest income decreased 27.7% from $271,000 to $196,000. This
decrease was a result of a lower level of funds invested during the more recent
period.
Income Tax Expense. Income tax expense reflects a combined federal and
state effective tax rate of 38.4% for the six months ended June 30, 1997, which
is slightly higher than the effective combined tax rate for the comparable
period in 1996. Based on projections of taxable income, the Company anticipates
that its effective combined rate for federal and state taxes will be
approximately 38% for 1997.
FISCAL YEAR 1996 COMPARED TO 1995
Revenue. Total revenue increased 61.2% from $12,852,000 to $20,714,000.
Royalties and franchise fees increased 44.7% and 18.8% respectively, from
$7,425,000 to $10,747,000 and $1,494,000 to $1,775,000. These increases were
primarily due to the increased number of stores opened during the period as well
as the stronger sales volume of the newer stores. There were 135 store openings
in 1996 compared to 120 openings in 1995. Also, average annualized volumes for
stores opened in 1995 was $480,000 compared to $591,000 for stores opened in
1996.
Developer income decreased 25.2% from $2,666,000 to $1,993,000 and
decreased as a percentage of revenue from 20.7% to 9.6%. This trend reflects the
Company's transition from one-time nonrecurring transactions to a revenue stream
driven principally by royalties and franchise fees.
During 1996, four territorial agreements were executed for 12 foreign
territories. In addition, six area developer agreements were executed for
domestic territories where the prior area development agreement had been
terminated due to failure to comply with the terms of the agreement or where the
Company bought back the development rights and subsequently resold the rights to
new area developers.
Restaurant sales increased from $505,000 to $3,610,000. Fiscal year 1996
was the first full year of operations for the Company's flagship store in
Austin, Texas which opened in late 1995, and the Company operated two stores
purchased from franchisees during the second quarter of 1996. It is the
Company's intention to re-market the stores acquired from franchisees once
operations and profitability are improved at those stores.
20
<PAGE> 22
Private label licensing fees increased 226.1% from $397,000 to $1,295,000
because of an increase in the volume of these products purchased by franchisees
and the re-negotiated terms of two contracts from major suppliers.
Turnkey development fees rose from $41,000 to $726,000 in 1996 (of which
$364,000 was rental revenue for periods of operations prior to the sales of the
sites). The completion of sixteen Turnkey sites and the sale of ten of these
sites accounted for the increase in the more recent year.
Other fees and revenues increased 75.3% from $324,000 to $568,000 due
primarily to an increase in the overhead recovery from the Company's national
advertising fund and other nonrecurring miscellaneous fees.
Costs and Expenses. Royalty service costs increased 57.6% from $2,405,000
to $3,791,000. This increase was a result of the growth in royalty revenue and
the increasing percentage of Schlotzsky's restaurants under the area developer
program for the twelve months ended December 31, 1996, as compared to the same
period in the prior year. Likewise, royalty service costs as a percentage of
royalties increased from 32.4% to 35.3%.
Franchise fee service costs increased 25.0% from $767,000 to $959,000. This
increase was a result of the number of stores opened during the period.
Restaurant cost of sales, which consists of food, beverage and paper costs,
increased from $189,000 to $1,183,000. This increase reflects the impact of
full-year operations at the Company's flagship store which opened in Austin,
Texas in November 1995, and the operation of two stores acquired from
franchisees in the second quarter of 1996. The Company expects these costs to
increase only slightly in 1997 as expenses level off at the Company's flagship
store, subject to opportunities to acquire, operate and improve other franchisee
stores that are not performing well. It is contemplated that the Company would
re-market such stores after improvements are made.
Restaurant labor cost and operating expenses also reflect the impact of
full-year operations at the Company's flagship store and the addition of the two
former franchisee stores now being operated by the Company. Labor costs
increased from $408,000 to $1,424,000. Additionally, store operating expenses
grew 314.2% from $251,000 to $1,040,000 for the twelve months ended December 31,
1996. Due to the training and product development performed at the Company's
flagship store, the Company does not anticipate these costs to be indicative of
those of a franchised store.
General and administrative expenses increased 22.2% from $5,751,000 to
$7,028,000. This increase was primarily due to the addition of staff at the
corporate office, the strengthening of reserves for certain receivables, and
other administrative costs. In addition, a one-time expense related to the
exercise of certain stock options by a former employee was incurred in the
second quarter of 1996.
Depreciation and amortization increased 70.1% from $458,000 to $779,000.
The increase was primarily due to first time depreciation of improvements and
equipment at the Company's flagship store and the two additional stores acquired
from franchisees during the second quarter of 1996. Amortization of pre-opening
costs for the Company's flagship store and the royalty value related to
remarketing the two newly acquired stores were the primary factors contributing
to an increase in amortization expense.
Other. A portion of the proceeds from the Company's initial public offering
was used to retire debt, with a portion invested in short-term liquid
securities. As a result, net interest income was $455,000 for 1996, a $604,000
improvement from the net interest expense incurred during 1995.
Income Tax Expense. Income tax expense for the year reflects a combined
federal and state effective tax rate of 37.3% in 1996 compared to the prior
year's rate of 38.9%.
FISCAL YEAR 1995 COMPARED TO 1994
Revenue. Total revenue increased 38.1% from $9,303,000 to $12,852,000.
Royalties and franchise fees increased 59.4% and 46.6% respectively, from
$4,657,000 and $1,019,000 to $7,425,000 and $1,494,000 largely due to an
increase in stores open at period end from 353 to 463. In addition, royalties
increased because of higher volumes experienced at new stores.
21
<PAGE> 23
Developer income decreased 4.5% from $2,793,000 to $2,666,000 and decreased
as a percentage of revenue from 30% to 21%, reflecting the decreasing
contribution of transactional revenue, primarily as the result of growing
royalty revenue.
During 1995, 11 master license agreements were executed for 25 foreign
territories and two area development agreements were executed. The developer
receivables were discounted by an aggregate of approximately $190,000 reflecting
a third party's valuation of certain notes and obligations not yet performed by
the Company. As the Company's duties and obligations were completed during 1996,
the Company recognized these developer fees.
Restaurant sales increased 18.0% from $428,000 to $505,000. The change was
due to the opening of the Company's flagship store in Austin, Texas in November
of 1995.
Private label licensing fees increased 164.7% from $150,000 to $397,000.
The private label licensing program was initiated at the end of 1994 and this
change is reflective of the effect of the program for a full year in 1995.
Turnkey development fees of $41,000 were generated in 1995 as this program
began. No such fees were generated in 1994. Other fees and revenue increased
26.6% from $256,000 to $324,000 primarily from an increase in the overhead
recovery from the Company's national advertising fund.
Costs and Expenses. Royalty service costs increased $1,283,000 during 1995
compared to 1994 because of the increased royalty base. This represented an
increase as a percentage of royalties from 24.1% to 32.4%, reflecting an
increasing proportion of new store openings in area developer territories.
Franchise fee service costs increased 16.4% from $661,000 to $767,000 because of
fees paid to area developers for stores opened in their territories, but
declined from 64.9% to 51.3% as a percentage of franchise fees. This reduction
reflected a return to more typical arrangements with area developers compared to
the 1994 period when several stores were opened in territories where area
developers received 100% of a limited number of the initial franchise fees paid
in their territories.
Restaurant cost of sales increased only 0.5% from $188,000 to $189,000.
This increase reflects the operational impact of the Company's flagship store in
Austin, Texas, which opened in November 1995, but was offset somewhat by the
disposition of a Company-owned store in Houston, Texas that was operated during
most of 1994.
Restaurant labor cost and operating expenses also reflect the impact of
operations at the Company's flagship store. Labor costs increased 164.9% from
$154,000 to $408,000 primarily because of operations at the Company's flagship
store where much of the staff was added several months prior to opening.
Restaurant operating expenses decreased 3.5% from $260,000 to $251,000 for 1995.
General and administrative expenses increased 37.0% from $4,199,000 to
$5,751,000, reflecting increased executive and managerial staff expense and
increased costs associated with new financial and information systems and
franchisee and area developer manuals, as well as opening costs for the
Company's flagship store in Austin, Texas. Because costs associated with
developer fees are substantially lower than costs associated with royalties and
franchise fees and because there were significantly more developer fees in 1994
compared to 1995, operating income margins were lower for 1995.
Other. Interest expense decreased because outstanding indebtedness in 1994
was repaid with the proceeds of the private placement of Class B Preferred
Stock. Other income was not material for either period. The Company expects
interest expense to continue to be a small percentage of revenue as the proceeds
of the Company's initial public offering were used to repay $6,027,000 of
outstanding indebtedness.
Income Tax Expense. Federal income tax expense together with the Texas
franchise tax increased 9.7% from $927,000 to $1,017,000 due to higher earnings.
The effective tax rate was 38.9% for 1995 and 39.1% for 1994.
Extraordinary Items. In 1995 and 1994, the Company retired certain debt
before it became due resulting in recognition of income.
22
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $660,000 for the six months
ended June 30, 1997. Royalties from the addition of new stores, increased
private label licensing fees and significant growth in Turnkey Program
development fees during the six month period resulted in net income of
$2,050,000 which was offset by increased working capital requirements. Net cash
of $966,000 was provided by investing activities primarily because proceeds from
the sale of Turnkey projects in the first six months of 1997 exceeded funds used
to purchase new sites for development by $5,982,000. During the first six months
of 1997, the Company also used $4,449,000 to reacquire the development rights to
two domestic territories and to invest additional funds toward the completion of
two Company-owned stores, two future sites for additional Company stores and the
construction of its new corporate offices. During the first six months of 1997,
financing activities provided cash of $337,000.
Net cash provided by operating activities in 1996 was $3,216,000. Net cash
used in investing activities was $9,630,000 in 1996 primarily as a result of (i)
the cost of purchasing new sites for development under the Turnkey Program
exceeding proceeds from the sale of Turnkey projects by $5,384,000, and (ii)
re-acquisition of several domestic development territories. The acquisition of
these territories along with the purchase of two stores from franchisees, was a
cash use of approximately $1,912,000. The Company also invested $1,664,000 in
the development of Company-owned stores. Additionally, the Company invested
$300,000 to acquire a preferred equity interest in a master licensee. In 1996,
financing activities used net cash of $292,000. The Company retired debt of
approximately $915,000 during the period. In connection with the purchase of two
stores and rights to several territories, the Company issued $584,000 of notes
payable and long-term debt.
At June 30, 1997, the Company had approximately $3,839,000 of debt
outstanding. During 1996, the Company borrowed approximately $584,000 in
connection with the re-acquisition of certain domestic development rights
described above. Notes payable were issued to the area developers whose
development rights were re-acquired. The interest rates on the notes range from
8.5% to 9.0% and all mature prior to the end of 1998. During the first six
months of 1997, the Company borrowed an additional $679,000 primarily in
connection with the re-acquisition of certain domestic development rights. These
notes bear interest at rates ranging from 9.0% to 10.6% and all mature by the
end of 2002. The Company currently has a loan secured by the fixtures and
equipment at its flagship store with an outstanding balance at June 30, 1997 of
approximately $987,000. The note bears interest at 9.47% and is due in November
2002. The Company expects to repay this loan with the proceeds of this offering.
The Company also has a loan with a balance of approximately $425,000 at June 30,
1997 which is secured by the Company headquarters. This note bears interest at
9.25% and matures in March 2002. The Company expects to repay this loan with the
proceeds of this offering. The Company guarantees certain real estate leases,
equipment leases and other obligations. At June 30, 1997, these contingent
liabilities totaled approximately $13,857,000. Included in this amount is a
construction loan for a limited partnership in which the Company and its
subsidiary, Schlotzsky's Real Estate, Inc., own a combined 40% interest in
capital and profits. The loan, for which the Company is liable for the full
amount, had a balance of $1,128,000 at June 30, 1997, bears interest at prime
plus 1.25% and matures April 2001. Monthly payments are being made by the
limited partnership.
The Company plans to develop additional Company-owned stores in the next 18
months in the Austin market and certain selected other markets in Texas. Funds
of approximately $6,000,000, which will be funded from the proceeds of this
offering, are estimated to be required for the development of Company-owned
stores. Two stores are currently in development and are expected to open in the
fourth quarter of 1997. In addition, the Company is currently finishing out its
new Company headquarters which should be completed in the fourth quarter of
1997. The cash requirement is expected to be approximately $1,300,000. The
Company has a financing commitment available from a financial institution which
provides funding of up to $3,000,000 for the development of additional
Company-owned stores and the completion of its new corporate offices.
The Company continues to expand and refine its Turnkey Program and expects
that it will have 40 to 60 sites at various stages of development at any given
time. The Company has used the net proceeds from its initial public offering and
the proceeds from sites it has sold to finance the development activity of the
Turnkey
23
<PAGE> 25
Program. With the anticipated growth in the Turnkey Program, the capital
required to finance the Turnkey Program will increase significantly. During the
first six months of 1997, the Company developed 16 sites under the Turnkey
Program, of which 15 were sold and the remaining store is operating as a
Company-owned store. Forty-seven properties were in various stages of
development at June 30, 1997. The tables below provide a summary of the Turnkey
Program development activity since its inception and a summary of the status of
the Turnkey Program inventory at June 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF SITES
------------------------
1997
1995 1996 (6 MONTHS)
---- ---- ----------
<S> <C> <C> <C>
TURNKEY PROGRAM DEVELOPMENT ACTIVITY:
Sites in process at beginning of
period........................... -- 27 35
Sites beginning development during
the period....................... 32 19 30
Sites completed as Company-owned
stores........................... -- (1) (1)
Sites sold.......................... (5) (10) (15)
-- --- ---
Sites in process at end of period... 27 35 49
== === ===
</TABLE>
<TABLE>
<CAPTION>
INVESTED AT ESTIMATES TO
JUNE 30, 1997 COMPLETE
------------- ------------
<S> <C> <C> <C> <C> <C>
STATUS OF TURNKEY PROGRAM INVENTORY:
Open (receiving rent and
royalties)....................... 2 8 2 $1,056,000 --
Investment sites (under
construction).................... 9 9 7 2,448,000 $ 3,000,000
Predevelopment sites
(preacquisition)................. 11 13 36 150,000 35,000,000
Other............................... 5 5 4 1,410,000 --
-- --- --- ---------- -----------
Total....................... 27 35 49 $5,064,000 $38,000,000
== === === ========== ===========
</TABLE>
Estimates above are based upon information from third parties and
management's assessment of conditions in existence at the time of this filing.
There can be no assurance that conditions (such as general or regional economic
conditions) will not change significantly requiring greater investment of
resources or a longer period of time to satisfactorily complete construction or
market the properties.
The Company currently has lines of credit available from two financial
institutions to finance Turnkey Program capital requirements. One line of credit
provides up to $5,000,000 in financing at an interest rate of prime plus 0.5%
per annum and expires February 1998. The other line of credit can be drawn upon
to fund up to $12,000,000, bears interest at the prime rate and expires April
2000. As of June 30, 1997, the Company had not drawn upon either line of credit.
While the credit facilities will remain available, the Company intends to use a
significant portion of the net proceeds from this offering to fund the expansion
of the Turnkey Program. The Company believes that the net proceeds from this
offering, its current credit facilities and proceeds from sites sold in the
Turnkey Program will be adequate to finance the Turnkey Program for the
foreseeable future.
The Company believes that cash flow from operations, together with the
proceeds of the Turnkey Program, collections from notes receivable and
borrowings under existing credit facilities described above and the net proceeds
from this offering will be sufficient to meet the Company's anticipated cash
needs for the foreseeable future. To the extent that the net proceeds from the
Turnkey Program, credit facilities, the net proceeds of this offering and cash
flow from operations are insufficient to finance the Company's future expansion
plans, the Company intends to seek additional funds for this purpose from future
debt financings or additional offerings of equity securities, although there can
be no assurance of the availability of such funds on acceptable terms in the
future.
New Accounting Standards. In February 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 128 "Earnings per Share" and No. 129
"Disclosure of Information About Capital Structure." SFAS No. 128 specifies the
computation, presentation and disclosure requirements for earnings
24
<PAGE> 26
per share and is designed to improve earnings per share information by
simplifying the existing computational guidelines and revising the previous
disclosure requirements. SFAS No. 129 consolidates the existing disclosure
requirements to disclose certain information about an entity's capital
structure. Both statements are effective for periods ending after December 15,
1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Restated Information," which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997.
Management does not believe the implementation of these recent accounting
pronouncements will have a material effect on its consolidated financial
statements.
QUARTERLY COMPARISONS
Since the adoption of the Schlotzsky's Deli restaurant concept in 1991, the
Company has experienced growth in royalties and franchise fees. Store openings
typically mark the recognition of franchise fees and the beginning of the
royalty stream to the Company. Accordingly, a large increase in store openings
has a significant impact on the amount and timing of revenue. The timing of
store openings can also affect the same store sales and other period-to-period
comparisons. Store openings increased from 85 in 1994 to 120 in 1995 and 135 in
1996. At January 1, 1995, the initial franchise fee was increased from $15,000
to $17,500 and was further increased to $20,000 effective July 1, 1995. The net
profitability from developer fees is substantially higher than that derived from
royalties and franchise fees because of the relatively lower costs associated
with developer fees. Therefore, quarters in which the Company derived a high
percentage of total revenue from developer fees reflect substantially higher
margins. While developer fees have been a significant portion of revenue in past
quarters, it is anticipated that they will not be material in the future because
most of the attractive developer territories in the United States have been
sold. Moreover, the Company anticipates that royalty and other revenue will
continue to increase so that developer fees will decline as a percentage of
total revenue, resulting in more normalized margins. Also, the Company believes
turnkey and licensing fees will continue to increase as a percentage of revenue.
Management believes that the Company experiences only moderate seasonality.
The Company attempts to make store sales less seasonal by offering a variety of
products which tend to sell better during various seasons.
25
<PAGE> 27
The following table presents unaudited quarterly results of operations for
the 1995 and 1996 fiscal years, and for the first six months of 1997 (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------------- --------------------------------- ---------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST 2ND
REVENUES: ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Royalties.................. $1,476 $1,858 $1,961 $2,130 $2,245 $2,675 $2,875 $2,953 $3,278 $3,606
Franchise fees............. 368 390 228 508 348 475 400 553 353 240
Developer fees............. 287 324 260 1,795 595 416 325 657 -- 125
Restaurant sales........... 76 80 77 273 566 810 1,061 1,173 1,323 1,439
Brand contribution......... 7 145 65 180 121 238 511 424 535 807
Turnkey development........ -- 12 18 12 39 80 143 463 685 762
Other fees and revenue..... 90 154 38 40 168 214 123 63 161 362
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues......... 2,304 2,963 2,647 4,938 4,082 4,908 5,438 6,286 6,335 7,341
Costs and expenses......... 2,063 2,567 2,533 3,066 3,261 3,945 4,240 4,758 4,969 5,575
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from operations..... 241 396 114 1,872 821 963 1,198 1,528 1,366 1,766
Net income................. $ 178 $ 244 $ 58 $1,152 $ 629 $ 714 $ 798 $1,053 $ 889 $1,161
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings (loss) per
share(1)................. $ 0.02 $ 0.04 ($0.03) $ 0.39 $ 0.11 $ 0.13 $ 0.14 $ 0.19 $ 0.16 $ 0.20
Store openings............. 29 27 25 39 28 33 31 43 29 21
</TABLE>
- ---------------
(1) Earnings (loss) per share in 1995 were impacted by dividends on redeemable
preferred stock outstanding during 1995.
IMPACT OF INFLATION
The Company believes that inflation did not have a material impact on its
operations for the periods reported. Significant increases in labor, employee
benefits, food costs and other operating expenses could have a material adverse
effect on franchisees' store operations.
26
<PAGE> 28
BUSINESS
The Company is a franchisor of quick service restaurants that feature
made-to-order sandwiches with distinctive bread that is baked daily at each
location. The Schlotzsky's system currently includes six Company-owned stores
and over 600 franchised stores located in 38 states, the District of Columbia
and 13 foreign countries. System-wide sales were approximately $142.5 million
for 1995, $202.4 million for 1996 and $128.0 million for the first six months of
1997. Average unit volumes were $368,000 in 1995, $410,000 in 1996, $199,000 for
the first six months of 1996 and $221,000 for the first six months of 1997. From
January 1, 1995 to June 30, 1997, the number of stores increased from 353 to
612.
STRATEGY
John C. Wooley and Jeffrey J. Wooley acquired the Company in 1981. They
were attracted to the Company by the unique characteristics of The Schlotzsky's
Original sandwich, the only sandwich sold at Schlotzsky's restaurants at that
time, and the strong brand loyalty that had developed for this sandwich in the
Company's markets. From 1981 to 1991, management tested different strategies to
expand the Company's business, including the development of Company-owned stores
and expanded store menus.
In 1991, the Company began implementing a strategy to achieve its objective
of becoming a leader in the specialty sandwich segment of the restaurant
industry in the United States. The key elements of this strategy are to: offer
an expanded menu of consistent, high quality foods featuring the Company's
proprietary bread recipes, complemented by excellent customer service; expand
the Turnkey Program to develop new stores in high visibility, free-standing
locations; utilize area developers to decentralize franchisee recruiting and
support; develop a strong network of motivated owner-operator franchisees; and
increase awareness of the Schlotzsky's brand through enhanced marketing and
private label products. Recently, the Company revised its strategy to include
the acquisition and development of a limited number of Company-owned stores,
principally for concept development.
Menu of Distinctive, High Quality Products. Schlotzsky's Deli restaurants
offer an expanded menu of consistent, high quality foods featuring the Company's
proprietary bread recipes, complemented by excellent customer service. The menu
features made-to-order sandwiches with bread that is baked fresh from scratch
every day in each restaurant. 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. The Schlotzsky's Original
sandwich continues to be the most popular item on the Schlotzsky's menu.
Schlotzsky's Deli restaurants now offer an expanded menu with 15 sandwiches on
four types of bread, ten sourdough crust pizzas, five salads, soups, chips and
other side items, fresh baked cookies and other desserts, and beverages. At most
locations, sandwiches range in price from $2.50 to $4.75 ($7.00 for an oversized
Original), and eight-inch gourmet pizzas are priced between $3.50 and $4.50.
Turnkey Program; High Visibility Stores. The Company and its area
developers encourage franchisees to develop free-standing stores with high
visibility and easy access. The Company believes the location of a store is as
critical to its success as the efforts of the franchisee, and trains area
developers to assist franchisees in identifying and acquiring superior store
locations. The Company implemented its Turnkey Program as a means of
accelerating the development of high visibility stores and capitalizing on the
Company's experience in evaluating store sites. The Turnkey Program also
enhances the quality and consistency of the free-standing stores developed by
the Company because of its experience building prototype stores and its
purchasing power with suppliers and contractors.
Area Developers. The Company has 40 area developers trained to assist the
Company in achieving its expansion goals in the United States. Area developers
provide the following services: they recruit and qualify franchisees; they
assist franchisees in site selection, training, financing, building and opening
stores; they provide ongoing operational support; they monitor product and
service quality; and they coordinate local advertising. Prior to 1991, these
functions were performed by Company personnel. By utilizing its area developer
network, the Company believes that it can effectively support a growing number
of franchised stores while controlling its overhead costs. Area developers
receive a portion of franchise fees and royalties from each
27
<PAGE> 29
store in their territories and are highly motivated to develop their markets and
monitor operating performance. Area developers must meet specific store opening
schedules under their agreements with the Company in order to maintain their
development rights.
Motivated Owner-Operator Franchisees. The Company is developing a strong
network of owner-operator franchisees. The Company believes that a motivated
owner-operator is an essential key to the success of a store. The Schlotzsky's
system consists almost exclusively of franchised stores, owned and managed by
entrepreneurial franchisees. The Company seeks franchisees who are committed to
providing on-site supervision of store operations and prefers to limit
franchisees to three locations in relatively close proximity. As of June 30,
1997, out of 424 franchisees with stores, ten franchisees have more than five
stores each and, in the aggregate, account for approximately 11.4% of the stores
in the system.
Increased Brand Awareness. The Company seeks to increase awareness of the
Schlotzsky's brand through enhanced marketing and private label products. The
Company is directing its franchising efforts to establish a sufficient number of
stores in larger markets to allow expanded cooperative advertising through
newspaper, radio and television. The Company has developed a complete line of
private label products to increase Schlotzsky's brand awareness. Private label
products are used by franchisees in preparing foods and are displayed at stores
as part of the standard decor package. Some private label products are sold by
franchisees for home consumption.
Company-Owned Stores. The Company's flagship store in Austin, Texas opened
in 1995, and a store in New York City (Manhattan) was acquired by the Company
from a franchisee in 1996. The Company operates these stores primarily for
product development, concept refinement and prototype testing and training and
to build brand awareness. The Company is also developing two additional stores
in Austin and a store in Houston, Texas for these purposes, and may acquire or
develop a limited number of other Company-owned stores in the future. A portion
of the proceeds of this offering will be used to develop or acquire these
Company-owned stores.
EXPANSION
At June 30, 1997, the Schlotzsky's system consisted of 612 stores in 38
states, the District of Columbia, and thirteen foreign countries. At December
31, 1995 and 1996, the system included 463 and 573 stores, respectively.
STORE LOCATIONS AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
NUMBER OF
LOCATION STORES
-------- ---------
<S> <C>
UNITED STATES:
Texas............................................. 197
Arizona........................................... 30
California........................................ 27
Georgia........................................... 27
Florida........................................... 26
Michigan.......................................... 25
Illinois.......................................... 20
Tennessee......................................... 19
Indiana........................................... 18
Oklahoma.......................................... 18
Colorado.......................................... 14
New Mexico........................................ 14
South Carolina.................................... 14
Alabama........................................... 13
Wisconsin......................................... 13
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
NUMBER OF
LOCATION STORES
-------- ---------
<S> <C>
Nebraska.......................................... 11
North Carolina.................................... 11
Missouri.......................................... 9
Arkansas.......................................... 8
Kansas............................................ 8
Louisiana......................................... 8
Ohio.............................................. 8
Minnesota......................................... 7
Virginia.......................................... 7
Nevada............................................ 6
Utah.............................................. 6
Oregon............................................ 4
Washington........................................ 4
Iowa.............................................. 3
West Virginia..................................... 3
Hawaii............................................ 2
Idaho............................................. 2
Mississippi....................................... 2
New York.......................................... 2
North Dakota...................................... 2
Pennsylvania...................................... 2
South Dakota...................................... 2
Connecticut....................................... 1
District of Columbia.............................. 1
---
Total U.S......................................... 594
---
INTERNATIONAL:
Argentina......................................... 3
Japan............................................. 3
Turkey............................................ 2
Australia......................................... 1
Canada............................................ 1
Germany........................................... 1
Guatemala......................................... 1
Korea............................................. 1
Lebanon........................................... 1
Mexico............................................ 1
Saudi Arabia...................................... 1
Sweden............................................ 1
United Kingdom.................................... 1
---
Total International............................... 18
---
Total Stores...................................... 612
===
</TABLE>
TURNKEY REAL ESTATE DEVELOPMENT PROGRAM
The Company instituted the Turnkey Program to further assist franchisees in
obtaining superior sites and to achieve more rapid penetration in those selected
major markets where the Company believes there is strong demand by franchisees
for good locations. Under the Turnkey Program, the Company works independently
or with an area developer to identify superior store sites within a territory.
The Company will purchase or lease a selected site, design and construct a
Schlotzsky's Deli restaurant on the site and sell, lease or sublease the
completed store to a franchisee. Where the Company does not sell the property to
a franchisee, the Company sells the improved property, or, in the case of a
leased property, assigns the lease and any sublease, to an
29
<PAGE> 31
investor. The Company anticipates that the total investment in each acquired
free-standing location will be approximately $500,000 to $800,000 (less for
leased locations). The Company charges the franchisee $20,000 per site for
managing the construction of the store. This construction management fee is
recognized when the store is opened. Upon sale of the store, the Company
realizes a gain (or loss) on the sale in the period in which the sale occurs.
The Company believes that the Turnkey Program enhances the Company's ability to
recruit qualified franchisees by developing high profile sites and achieving
critical mass for advertising purposes more quickly in selected markets.
MENU
The Schlotzsky's Deli menu provides customers with popular food items which
the Company believes are fresher, more flavorful and of greater variety than
those offered by competitors. The key menu groups are made-to-order sandwiches
and pizzas, salads, soups, cookies and other desserts, and beverages. Sandwiches
and pizzas are made with delicatessen-style meats, chicken and specialty
cheeses, all of which are purchased ready for use from approved suppliers. The
Company's distinctive sandwich buns and pizza crusts are baked daily from
scratch, rather than with pre-mixed or frozen dough, to ensure the highest
quality and freshness.
FRANCHISING
The Company has adopted a strategy of franchising, rather than owning
stores. The Company believes that franchisees who own and operate stores are
more highly motivated and manage stores more efficiently than typical
manager-employees. Moreover, franchising allows the Company to expand the number
of stores and penetrate markets more quickly and with less capital than
developing Company-owned stores. Area developers play a key role in the
Company's franchising program by recruiting qualified franchisees and providing
a high level of support to franchised stores.
Area Developers. The Company's 40 area developers recruit and qualify
franchisees according to criteria developed by the Company. Once a franchisee is
approved by the Company, the area developer assists the franchisee in site
selection, training, store design and layout, construction and financing. The
area developer provides store opening assistance, monitors store performance and
compliance with product and service quality standards established by the Company
and coordinates cooperative advertising within his territory. The Company
generally pays area developers 50% of all franchise fees paid by franchisees in
their territories, although some area developers have received up to 100% of
certain franchise fees as an inducement to develop their territories more
quickly. In addition, the Company also pays area developers approximately 42% of
the royalties received under franchise agreements providing for 6% royalties and
12.5% to 25% of royalties received under franchise agreements providing for 4%
royalties, in each case with respect to franchisees in their territories. Area
developers are not required to own or operate stores, although some of the
Company's area developers are also franchisees under separate franchise
agreements. Area developers are granted exclusive rights to one or more
television markets in the United States, typically for a term of 50 years. Each
area developer pays the Company a nonrefundable fee for the exclusive
development rights for a market. The Company typically receives 25% to 50% of
the area developer fee when the area development agreement is signed with the
balance payable with interest over an 18 to 36-month period under a promissory
note from the area developer.
Area development agreements are nonassignable without the prior written
consent of the Company, and consents have been granted from time to time. The
Company retains rights of first refusal with respect to any proposed sale by the
area developer. Area developers are not permitted to compete with the Company.
Area developers typically commit to a store opening schedule for each territory.
If an area developer fails to meet its obligations, the Company can terminate or
repurchase its territory for resale, although the Company has agreed to extend
or waive these store opening schedules for certain area developers.
Franchisees. The Company believes the involvement of owners in daily store
operations is critical to the success of a franchise. The Company prefers
franchisees who will operate no more than three stores, located within a single
market. Franchisees are selected on the basis of various factors, including
business background, experience and financial resources. Because the cost of
building and equipping a Schlotzsky's Deli restaurant
30
<PAGE> 32
is somewhat higher than for some other specialty sandwich franchise operations,
the Company's franchisees must have substantial cash resources or a relatively
high net worth to obtain financing to build and equip stores. While area
developers identify and recruit potential franchisees, all franchisees must be
approved by the Company.
Franchise Agreements. The Company enters into a unit development agreement
with each franchisee granting the franchisee the right to develop a specific
number of stores within a territory over a defined period of time. Once a site
for a store has been selected by the franchisee and accepted by the Company, a
unit franchise agreement for that store is signed. Under the Company's current
standard franchise agreement, the franchisee is required to pay a franchise fee
of $20,000 for the franchisee's first store and $10,000 for any additional
store. The franchise fee for the initial store and a partial payment on each
additional store is payable at the time of signing the unit development
agreement. The current standard franchise agreement provides for a term of 20
years (with one ten-year renewal option) and payment of a royalty of 6% of
sales. As of June 30, 1997, 133 stores operated under franchise agreements
entered into prior to 1991 were paying a royalty of 4% of sales.
The Company has the right to terminate any franchise agreement for certain
specific reasons, including a franchisee's failure to make payments when due or
failure to adhere to the Company's policies and standards. Many state franchise
laws, however, limit the ability of a franchisor to terminate or refuse to renew
a franchise. See "-- Government Regulation."
Franchisee Training and Support. Each franchisee is required to have a
principal operator approved by the Company who satisfactorily completes the
Company's training program and who devotes full business time and efforts to the
operation of the franchisee's stores. Franchisees may also enroll each store
manager in the Company's training program. The Company provides training at
operating Schlotzsky's Deli restaurants in various locations. In November 1995,
the Company opened its new flagship Schlotzsky's Deli restaurant in Austin,
Texas, which includes training facilities. Most franchisee training is being
conducted at that location. Franchisees are required to pass a minimum skills
test before they can begin operating their first store. An on-site training crew
is provided by the Company or an area developer for three days before and two
days after the opening of a franchisee's first store. Company management and
area developers maintain ongoing communication with franchisees, exchanging
operating and marketing information.
Franchise Operations. All franchisees are required to operate their stores
in compliance with the Company's policies, standards and specifications,
including matters such as menu items, ingredients, materials, supplies,
services, fixtures, furnishings, decor and signs. Food preparation is
standardized and is limited to baking bread, slicing pre-cooked meats, cheese
and produce, melting cheese and heating sandwiches. Because they usually operate
no more than three stores, franchisees are expected to be actively involved in
monitoring operations at each store. Each franchisee has full discretion to
determine the prices to be charged to its customers. Franchise stores are
periodically inspected by area developers and the Company's field service
representatives. Area developers are responsible for monitoring and enforcing
the Company's standards and specifications as set forth in the franchise
agreement and the Company's manuals on a continuous basis.
Reporting. Most Schlotzsky's Deli restaurant franchisees are required to
report weekly sales and other data to the Company. Other franchisees are
required to report monthly. Generally, 6% royalties are payable weekly by
automatic bank drafts and 4% royalties are payable monthly by check. The Company
is currently evaluating point-of-sale software for use by franchisees to record
and report sales and other operating information and anticipates that new
franchisees may be required to use this point-of-sale software beginning in
1998. Although the Company has the right to audit franchisees, it relies
primarily on voluntary compliance by franchisees to accurately report sales and
remit royalties.
International Master Licensees. In addition to the Company's expansion in
the United States, the Company has granted nonassignable rights to develop
stores in international markets to master licensees. A master licensee is
typically licensed for 50 years to use the Schlotzsky's trademarks in designated
foreign territories and may grant area development rights and franchises in
those territories. Unlike area developers, master licensees contract directly
with franchisees, and the Company delegates the selection of franchisees
31
<PAGE> 33
and approval of sites to the master licensees. When a master license is granted,
the master licensee pays the Company a negotiated, nonrefundable license fee. In
some instances, the Company will negotiate a territorial agreement pursuant to
which a foreign territory is reserved and the principal economic terms of the
master license agreement are agreed upon in return for a nonrefundable fee to be
applied toward the master license fee. The Company normally receives 15% to 35%
of the master license fee in cash when the master license or territorial
agreement is signed, with the balance payable with interest over a term of up to
48 months under a promissory note from the master licensee. Typically, the
Company also receives one-third to one-half of any sublicense and franchise fees
and one-third of any royalties received by the master licensee. All amounts
payable to the Company by the master licensees must be paid in U.S. dollars. As
of June 30, 1997, the Company had executed master licenses or territorial
agreements covering 46 foreign countries. As with area developers, if master
licensees fail to meet their obligations, the Company can terminate their rights
or repurchase their territories for resale. Master licensees are subject to
various laws and regulations regarding franchising and licensing in their
territories and are responsible for complying with these laws and regulations.
SITE SELECTION
The Company trains area developers to assist franchisees in selecting their
sites and developing their stores. Each franchisee is responsible for selecting
store locations acceptable to the Company. Site selection criteria are based on
accessibility and visibility of the site and selected demographic factors,
including population, residential and commercial density, income, age and
traffic patterns. The Company prefers that franchisees select sites for
free-standing or end-cap stores to maximize store visibility and sales
potential. As the table below indicates, the mix of store sites has changed
since the Company adopted a new strategy in 1991 focusing on higher visibility
stores.
<TABLE>
<CAPTION>
STORES OPENED BETWEEN
AS OF AS OF JANUARY 1, 1992
STORE SITE DECEMBER 31, 1991 JUNE 30, 1997 AND JUNE 30, 1997
---------- ----------------- ------------- ---------------------
<S> <C> <C> <C>
Free-Standing...................... 24% 43% 51%
End-Cap............................ 31 29 26
In-Line............................ 28 14 8
Other.............................. 17 14 15
--- --- ---
Total.............................. 100% 100% 100%
=== === ===
</TABLE>
The Company has developed a series of prototype store designs and
specifications for free-standing and end-cap stores which its area developers
make available for use by franchisees. These specifications may be adapted to
existing restaurants and other retail spaces.
UNIT ECONOMICS
The Company believes that the Schlotzsky's Deli restaurant concept offers
attractive unit economics. The cost to a franchisee of developing and opening a
prototype Schlotzsky's Deli restaurant (excluding restaurants like the Company's
flagship store) in leased space has recently ranged from approximately $300,000
to $600,000, including leasehold improvements, equipment, fixtures and initial
working capital. During the twelve months ended June 30, 1997, the average store
revenue for Schlotzsky's Deli restaurants (excluding non-Deli restaurant format
stores) that were open for the entire period was approximately $427,000,
although store revenue varies significantly depending upon the type, size and
location of the store. The Company believes that food and paper costs for the
Schlotzsky's Deli menu items are relatively low as a percentage of gross store
sales as compared to many quick service restaurant concepts.
FINANCING
The Company typically does not, and is not obligated to, provide financing
to franchisees for the costs of developing and opening stores. Both the Company
and area developers assist franchisees in obtaining financing by identifying
third party financing sources. Certain financial institutions have designed
equipment leasing programs specifically for Schlotzsky's franchisees and have
developed guidelines for sale and leaseback
32
<PAGE> 34
financing for Schlotzsky's stores. The Company has also identified Small
Business Administration lenders which have made loans to Schlotzsky's
franchisees. These lenders are not committed to provide any financing to
franchisees and there can be no assurance that franchisees will be able to
finance their costs of opening stores on suitable terms.
Although it is not obligated to do so, the Company from time to time agrees
to guarantee its franchisees' obligations to equipment and real property lessors
or subordinates all or a portion of its royalties to the obligations of
franchisees on such leases. As of June 30, 1997, the Company had guaranteed an
aggregate of approximately $13.9 million which is principally comprised of real
estate and equipment leases and other obligations of its franchisees.
PURCHASING; PRIVATE LABELING
Franchisees are required to purchase equipment, furniture, smallwares,
merchandising displays and food from suppliers approved by the Company.
Approximately 80% of overall purchases of goods used in daily operations by the
Company's franchised stores are from International Multifoods Corporation, which
provides volume discounts to franchisees based upon system-wide purchases. The
Company believes that comparable goods are available at competitive prices from
numerous other suppliers.
The Company has licensed certain manufacturers to sell Schlotzsky's private
label meats, cheeses, potato chips and other products. The Company receives
licensing fees from these manufacturers based on their sales of private label
products to franchisees. While franchisees are not required to purchase private
label products, other than the Company's proprietary flour mixes, the Company
believes that most franchisees prefer them because they are of equal or superior
quality compared to other brand name products and generally are less expensive
than the supplies available from other approved sources. In addition, some
private label products can be sold separately at stores for home consumption,
enhancing brand awareness and providing franchisees with additional sales and
profit opportunities.
MARKETING
Franchised stores contribute 1% of gross sales to Schlotzsky's N.A.M.F.,
Inc. ("NAMF"), a non-profit corporation administered by the Company. In
addition, franchisees are required by the terms of their franchise agreements to
spend at least 3% of gross sales on local advertising. To take advantage of
critical mass in certain television markets, franchisees are encouraged to form
cooperatives where local advertising funds can be pooled to maximize the
benefits of advertising for members. NAMF funds are used to develop and produce
radio and television commercials and print advertising for use in local markets,
in-store graphics and displays, and promotions. NAMF has developed advertising
campaigns for use by franchisees centered around different slogans, such as
FUNNY NAME. SERIOUS SANDWICH.(TM); ACCEPT NO SUBSTITUTESKY'S(R); BEST BUNS IN
TOWN(TM); and ORIGINAL TASTE EVERY DAY(TM). NAMF's field marketing
representatives coordinate advertising campaigns and promotions for area
developers and franchisees.
COMPETITION
The food service industry is intensely competitive with respect to concept,
price, location, food quality and service. There are many well established
competitors with substantially greater financial and other resources than the
Company. Such competitors include a large number of national, regional and local
food service companies, including fast food and quick-service restaurants,
casual full-service restaurants, delicatessens, pizza restaurants and other
convenience dining establishments. Some of the Company's competitors have been
in existence longer than the Company and are better established in markets where
Schlotzsky's stores are or may be located. The Company believes that it competes
for franchisees with franchisors of other restaurants and various concepts.
Schlotzsky's stores compete primarily on the basis of distinctive, high
quality food and convenience, rather than price. The Company believes that
Schlotzsky's stores provide the quick service and convenience of fast food
restaurants while offering more distinctive, higher quality products. Pricing is
designed so that customers perceive good value (high quality food at reasonable
prices), even though Schlotzsky's menu prices are typically higher than certain
competitors' prices.
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<PAGE> 35
Competition in the food service business is affected by changes in consumer
taste, economic and real estate conditions, demographic trends, traffic
patterns, the cost and availability of qualified labor, product availability and
local competitive factors. The Company's area developers attempt to assist
franchisees in managing or adapting to these factors, but no assurance can be
given that some or all of these factors will not adversely affect some or all of
the franchisees.
TRADEMARKS, SERVICE MARKS AND TRADE SECRETS
The Company owns a number of trademarks and service marks registered with
the United States Patent and Trademark Office. The Company has also registered
or made application to register trademarks in foreign countries where master
licenses have been granted. The flour and bread making recipes and techniques
currently used in Schlotzsky's stores are based on a modification of the
Company's original recipe developed jointly by the Company and Pillsbury
Company. The recipes and techniques are protected by the Company and its
suppliers as trade secrets. The Company has not sought patent protection for
these recipes, and it is possible that competitors could develop flour recipes
and baking procedures that duplicate or closely resemble the Company's. The
Company considers its trademarks, service marks and trade secrets to be critical
to the business and actively defends and enforces them.
GOVERNMENT REGULATION
The Company must comply with regulations adopted by the Federal Trade
Commission (the "FTC") and with several state laws that regulate the offer and
sale of franchises. The Company also must comply with a number of state laws
that regulate certain substantive aspects of the franchisor-franchisee
relationship. The FTC's Trade Regulation Rule on Franchising (the "FTC Rule")
requires that the Company furnish prospective franchisees with a franchise
offering circular containing information prescribed by the FTC Rule.
State laws that regulate the franchisor-franchisee relationship presently
exist in a substantial number of states. Those laws regulate the franchise
relationship, for example, by requiring the franchisor to deal with its
franchisees in good faith, by prohibiting interference with the right of free
association among franchisees, by regulating discrimination among franchisees
with regard to charges, royalties or fees, and by restricting the development of
other restaurants within certain proscribed distances from existing franchised
restaurants. Those laws also restrict a franchisor's rights with regard to the
termination of a franchise agreement (for example, by requiring "good cause" to
exist as a basis for the termination), by requiring the franchisor to give
advance notice to the franchisee of the termination and give the franchisee an
opportunity to cure any default, and by requiring the franchisor to repurchase
the franchisee's inventory or provide other compensation. To date, those laws
have not precluded the Company from seeking franchisees in any given area and
have not had a material adverse effect on the Company's operations.
Each Schlotzsky's store must comply with regulations adopted by federal
agencies and with licensing and other regulations enforced by state and local
health, sanitation, safety, fire and other departments. Difficulties or failures
in obtaining the required licenses or approvals can delay and sometimes prevent
the opening of a new store.
Schlotzsky's stores must comply with federal and state environmental
regulations, such as those promulgated under the Federal Water Pollution Act,
Federal Clean Water Act of 1977 and the Federal Resource and Conservation
Recovery Act of 1976, but the Company believes that those regulations have not
had a material effect on their operations. More stringent and varied
requirements of local governmental bodies with respect to zoning, land use, and
environmental factors can delay and sometimes prevent development of new stores
in particular locations.
The Company and its franchisees must comply with the Fair Labor Standards
Act and various state laws governing various matters, such as minimum wages,
overtime and other working conditions. Significant numbers of the food service
personnel in Schlotzsky's stores receive compensation at rates related to the
federal minimum wage and, accordingly, increases in the minimum wage increase
labor costs at those locations.
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<PAGE> 36
The Company and its franchisees also must comply with the provisions of the
Americans with Disabilities Act, which requires that employers provide
reasonable accommodation for employees with disabilities and that restaurants be
accessible to customers with disabilities.
PROPERTIES
The Company's corporate headquarters in Austin, Texas, are currently
located in approximately 11,000 square feet of office space owned by the Company
and approximately 8,300 square feet of additional space occupied under a lease
expiring in October 1997. In March 1997, the Company entered into a lease with a
limited liability company owned by John Wooley and Jeffrey Wooley for a new
corporate headquarters facility in Austin. This lease will expire in 2007. The
new facility will consist of approximately 41,000 square feet of office and
storage space. The Company expects to occupy this new facility by the end of
1997. See "Certain Transactions -- Real Estate Transactions." The current
corporate headquarters facility owned by the Company will continue to be used by
the Company after the new facility is occupied.
The Company leases approximately 10,000 square feet of space for the
flagship Schlotzsky's Deli restaurant and training facility in Austin and
approximately 7,100 square feet for a new store to be opened in Austin. The
Company has a ground lease for an additional store in Austin. The Company owns a
store in Bastrop, Texas occupying approximately 3200 square feet. The Company
leases approximately 3,000 square feet each for two stores which recently opened
in Houston and has plans for an additional new store in Houston. The Company
also owns approximately 3,200 square feet for a store in North Lake, Illinois
and leases approximately 1,800 square feet for its store in New York City. It is
contemplated that the Bastrop, Texas store, one of the Houston stores and the
North Lake, Illinois store will be sold, and that the other store in Houston
will be closed when the store currently in the planning stages for Houston is
opened.
As of June 30, 1997, the Company had 47 store sites in various stages of
development under the Turnkey Program. In addition, construction was completed
on two other stores and these stores are operating and under lease. Seven of the
sites in development are in various stages of construction and 36 sites remain
in the pre-development stage. The Company also owns four sites, which it
contemplates remarketing. It is contemplated that stores developed under the
Turnkey Program will be sold as they are completed. See "Business -- Turnkey
Real Estate Development Program."
Schlotzsky's Real Estate, Inc., a wholly-owned subsidiary of the Company,
is the general partner and the Company is a limited partner of a limited
partnership which owns a 17,600 square foot shopping center in suburban Austin.
Schlotzsky's Real Estate, Inc. and the Company have a combined 40% interest in
the capital and profits of this limited partnership. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
EMPLOYEES
As of June 30, 1997, the Company employed 125 persons. None of the
Company's employees is covered by a collective bargaining agreement or is
represented by any labor union. The Company believes its relationship with its
employees is good.
LITIGATION
The State of New Mexico Taxation and Revenue Department has assessed the
Company $131,000 for gross receipts taxes, penalties and interest for the years
1987 through 1993. The assessment imposes gross receipts taxes on franchise fees
and royalties received by the Company from New Mexico franchisees and NAMF
contributions by those franchisees. The Company filed a protest with the New
Mexico Taxation and Revenue Department claiming that the assessment violates the
Commerce Clause of the United States Constitution because the Company does not
have any physical presence in or substantial nexus with New Mexico. The Company
has reserved a liability for taxes and attorneys' fees in respect of this
assessment. See the Consolidated Financial Statements of the Company and related
Notes included elsewhere in this Prospectus. If other state taxing authorities
attempt to impose taxes on receipts derived by the Company from
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<PAGE> 37
franchisees in those states, the Company's financial condition and results of
operations could be materially adversely affected.
The Company is subject to routine litigation in the ordinary course of
business, including contract, franchisee, area developer and employment-related
litigation. In the course of enforcing its rights under existing and former
franchise agreements and area developer agreements, the Company is subject to
complaints and letters threatening litigation concerning the interpretation and
application of these agreements, for example, in cases of administration of the
NAMF advertising funds, default or termination of franchisees or area
developers, requirements or payments relating to products used in the stores
(such as private label licensing), and the Turnkey Program. The Company
endeavors to treat its franchisees and area developers reasonably and fairly and
in compliance with applicable contractual provisions with due regard for the
protection of the Company's trademarks, service marks and goodwill. None of
these routine matters, individually or in the aggregate, are believed by the
Company to be material to its business or financial condition.
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<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
John C. Wooley(1)(2)..................... 49 Chairman of the Board and President
Darrell W. Kolinek....................... 46 Senior Vice President, Franchise Services
Jeffrey J. Wooley(1)..................... 51 Senior Vice President, Secretary, General
Counsel and Director
Monica Gill.............................. 33 Chief Financial Officer
Floor Mouthaan(3)........................ 51 Director
John M. Rosillo(2)....................... 44 Director
Raymond A. Rodriguez(3).................. 39 Director
John L. Hill, Jr.(2)..................... 73 Director
Azie Taylor Morton(2).................... 61 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee
(3) Member of the Audit Committee.
Officers are elected by and serve at the discretion of the Board of
Directors.
The directors of the Company are divided into three classes, designated as
Class A, Class B and Class C. Raymond A. Rodriguez is currently the only Class A
director and will stand for election at the 1999 annual shareholders meeting.
John M. Rosillo, Floor Mouthaan and John L. Hill, Jr. are currently Class B
directors and will stand for election at the 2000 annual shareholders meeting.
John C. Wooley, Jeffrey J. Wooley and Azie Taylor Morton are currently Class C
directors and will stand for election at the 1998 annual shareholders meeting.
There are currently two available positions on the Board of Directors that have
not been filled.
John C. Wooley has served as Chairman of the Board and President of the
Company since 1981. From 1974 to 1981 he participated in various real estate
development and investment activities. Mr. Wooley earned a BBA in accounting in
1970 and a JD in 1974, both from the University of Texas at Austin. John C.
Wooley and Jeffrey J. Wooley are brothers.
Darrell W. Kolinek joined the Company in May 1980 as operations supervisor.
He was a franchise consultant from December 1987 to December 1990 when he became
Director of Franchise Services. Mr. Kolinek was appointed Vice President of
Franchise Services in January 1995 and was promoted to Senior Vice President of
Franchise Services in July 1995. He attended Southwest Texas State University.
Jeffrey J. Wooley has served as a director, Vice President and Secretary of
the Company since 1981, and was promoted to Senior Vice President in December
1995. Mr. Wooley also serves as General Counsel of the Company. Prior to 1981,
Mr. Wooley was engaged in the private practice of law in Colorado and Texas. He
received a BA degree from Rice University in 1968 and a JD from The University
of Texas at Austin in 1972. Jeffrey J. Wooley and John C. Wooley are brothers.
Monica Gill joined the Company in 1994. She served as controller until June
1997, when she assumed the position of acting Chief Financial Officer, and was
formally appointed to that position in August 1997. Prior to joining the
Company, she was employed by Hines Interests, a real estate development company
in Houston, Texas. Ms. Gill is a certified public accountant and holds a BA
degree in Business Administration from Stephen F. Austin State University.
Floor Mouthaan has been the managing partner of Greenfield, the managing
general partner of NethCorp Investments VI B.V. ("NethCorp," formerly known as
BeneVent-Noro Venture B.V.), since April 1995.
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<PAGE> 39
Mr. Mouthaan was the chief executive officer of Noro (Nederland) B.V., an
international venture capital fund located in Zeist, The Netherlands, from July
1988 to March 1995.
John M. Rosillo has been the President of Grupo Rosillo, a family-owned
enterprise based in The Netherlands that is engaged in various activities,
including insurance, real estate, portfolio investments and venture capital
funding, for more than five years. Grupo Rosillo includes Getov and Buxtehude,
each a shareholder of the Company.
Raymond A. Rodriguez has been President of RAR Service Group, Inc., a
financial services firm located in Glenview, Illinois, since June 1985. Mr.
Rodriguez is an officer and principal shareholder of Barmar Enterprises, Inc.,
an area developer for the Company in the Chicago, Illinois area since June,
1992, and has owned a Schlotzsky's Deli restaurant in Chicago, Illinois since
February 1993 and another in Glenview, Illinois since June 1995.
John L. Hill, Jr. has been a name partner in the Houston-based law firm of
Liddell, Sapp, Zivley, Hill & LaBoon L.L.P. since 1988. Mr. Hill has served as
the Secretary of State of the State of Texas, Attorney General of Texas and
Chief Justice of the Supreme Court of Texas.
Azie Taylor Morton has been the president of Exeter Capital Asset
Management Company, an Austin-based money management firm, since January 1993.
From 1989 to December 1992, Ms. Morton was the Director of Resource Coordination
for Reading is Fundamental, a non-profit organization based in Washington, D.C.
that makes reading materials available for children. Ms. Morton has served as
Treasurer of the United States and Commissioner of the Virginia Department of
Labor and Industry.
The Board of Directors has standing Executive, Compensation and Audit
Committees. The Audit Committee annually recommends to the Board the appointment
of independent certified accountants as auditors for the Company, reviews the
scope and fees of the annual audit and any special audit and reviews the results
with the auditors, reviews accounting practices and policies of the Company with
the auditors, reviews the adequacy of the accounting and financial controls of
the Company and submits recommendations to the Board regarding oversight and
compliance with accounting principles and legal requirements. The Compensation
Committee reviews and makes recommendations to the Board regarding salaries and
benefits of executive officers and employees of the Company and administers the
1993 Amended and Restated Stock Option Plan. The Executive Committee has
authority to take any action which can be taken by the Board, except actions
reserved to other committees or which may be taken only by the full Board under
law or the Company's bylaws.
CERTAIN OTHER OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding certain other
officers and key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kelly R. Arnold.................. 46 Vice President, Turnkey Development
Karl D. Martin................... 54 Vice President, Concept Development
Vice President,
J. Gilbert McCoy................. 51 Purchasing/Distribution
</TABLE>
Kelly R. Arnold joined the Company in March 1986. Mr. Arnold became
Regional Franchise Manager for the Eastern Region in May 1990 and was promoted
to Director of Franchise Sales in March 1991. In January 1995, Mr. Arnold was
elected Vice President, Turnkey Development.
Karl D. Martin was elected Vice President, Concept Development of the
Company in January 1995. From December 1993 until January 1995, he served as
sales manager. From September 1991 to November 1993, he was a principal of Deli
Marketing, Inc., which contracted with the Company with respect to the
implementation of its area developer program. From 1989 to September 1991, Mr.
Martin was a vice president of Marketing and Financial Management, Inc., a
provider of consulting services to franchise restaurants and other operations,
in Canoga Park, California. From 1968 to 1989, Mr. Martin held management
positions for various franchise restaurant operations, including Rax
Restaurants, Shakey's and El Torito.
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<PAGE> 40
J. Gilbert McCoy was elected Vice President, Purchasing/Distribution in
January 1995. From September 1984 until December 1994, Mr. McCoy was with Mr.
Gatti's, Inc., a national pizza restaurant operator and franchisor, most
recently as vice president of purchasing, research and development, and quality
assurance. He is one of 15 certified food purchasing managers (CFPM) certified
by the National Restaurant Association.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation paid by the Company for services rendered during the fiscal years
ended December 31, 1994, 1995 and 1996 to the Company's chief executive officer
and each other executive officer as of the end of the fiscal year ended December
31, 1996 who received compensation in excess of $100,000 for such fiscal year
(collectively, the "named executive officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------ ------------
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#) COMPENSATION
------------------ ---- -------- ------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John C. Wooley, 1996 $130,000 $ -- $ -- -- $ --
Chairman of the Board 1995 120,000 -- -- 46,875
and President 1994 128,750 -- 25,089 -- --
Bishop J. Allen, (2) 1996 120,000 -- -- -- --
Executive Vice President, 1995 120,000 -- -- 31,250 --
Concept Development 1994 120,000 -- -- -- --
Charles E. Harvey, Jr., (2) 1996 120,000 -- -- -- --
Executive Vice President
and Chief Financial Officer
Jeffrey J. Wooley, 1996 110,000 -- -- -- --
Senior Vice President, 1995 100,000 -- -- 31,250 --
Secretary and General
Counsel
</TABLE>
- ---------------
(1) Includes commissions earned in 1993 but paid in 1994.
(2) The employment of Bishop J. Allen and Charles E. Harvey, Jr. terminated in
1997.
INFORMATION REGARDING STOCK OPTIONS
There were no stock options granted in 1996 to the executive officers
included in the Summary Compensation Table. The Company has not granted any
stock appreciation rights.
Set forth in the following table is summary information regarding the
number of all unexercised options as of the end of 1996 for each of the
executive officers included in the Summary Compensation Table:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ----------------------------- ----------------------------
<S> <C> <C>
John C. Wooley...................... 46,875/0 0/0
Bishop J. Allen..................... 12,500/18,750 25$,000/$37,500
Charles E. Harvey, Jr............... 10,000/20,000 0/0
Jeffrey J. Wooley................... 31,250/0 0/0
</TABLE>
- ---------------
(1) The closing price per share of the Common Stock on December 31, 1996 was
$10.00.
No executive officer of the Company exercised options in fiscal 1996.
39
<PAGE> 41
1993 AMENDED AND RESTATED STOCK OPTION PLAN
The following is a summary of certain major provisions of the 1993 Stock
Option Plan, as amended at the 1997 annual meeting of shareholders (the "Amended
Plan").
General. Under the Amended Plan, options covering shares of Common Stock
are granted to employees and directors of, and consultants to, the Company. The
options are intended to qualify either as incentive stock options ("ISOs")
pursuant to Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or will constitute nonqualified stock options ("NQSOs"). Options may be
granted at any time prior to December 23, 2003. Up to 800,000 shares of Common
Stock (subject to adjustment to prevent dilution) are available for issuance
under the Amended Plan. Options to purchase 709,634 shares of Common Stock have
been granted pursuant to the Amended Plan and have not expired, of which 50,363
have been exercised. The Company intends to grant up to 60,000 options on the
effective date of this offering at an exercise price equal to the Price to
Public set forth on the cover page of this Prospectus.
Administration. The Amended Plan may be administered by the Board of
Directors, or the Board of Directors may delegate its authority to a committee
(either, the "Administrator"). The Board of Directors has currently delegated
its authority to the Compensation Committee. The Amended Plan provides that the
Administrator has full and final authority to select the employees, directors
and consultants to whom awards are granted, the number of shares of Common Stock
with respect to each option awarded, the exercise price or prices of each
option, the vesting and exercise periods of each option, whether an option may
be exercised as to less than all of the Common Stock subject to the option, and
such other terms and conditions of each option, if any, that are not
inconsistent with the provisions of the Amended Plan. In general, the
Administrator is authorized to construe, interpret and administer the Amended
Plan and the provisions of the options granted thereunder, prescribe and amend
rules for the operation of the Amended Plan and make all other determinations
necessary or advisable for its implementation and administration.
Eligibility. Eligibility to participate in the Amended Plan is limited to
employees and directors of, and consultants to, the Company and its subsidiaries
as determined by the Administrator. Because of the discretion possessed by the
Administrator with respect to employees, directors and consultants, there is no
practical way to indicate the number of persons who may be selected to
participate in the Amended Plan, the number of options that may be granted to
them or the number of shares of Common Stock subject to each option.
Notwithstanding the foregoing, the maximum number of shares of Common Stock that
can be granted to any individual executive officer of the Company in any fiscal
year is 250,000 shares.
Terms of Options and Limitations on Right to Exercise. Under the Amended
Plan, the exercise price of options will not be less than 50% of the fair market
value of the Common Stock on the date of grant; provided that, as to options
granted to executive officers and all ISOs, the exercise price will not be less
than fair market value of the Common Stock on the date of grant (and not less
than 110% of the fair market value in the case of an ISO granted to an optionee
owning 10% of the Common Stock of the Company). Options granted to employees,
directors or consultants shall not be exercisable after the expiration of ten
years from the date of grant (or five years in the case of ISOs granted to an
optionee owning 10% of the Common Stock of the Company) or such earlier date
determined by the Administrator.
The Amended Plan permits the exercise of options by payment of the exercise
price in cash or, at the discretion of the Administrator, by delivery of shares
of Common Stock having a fair market value as of the date of exercise equal to
the exercise price, any other valid consideration under applicable law, or a
combination of each, in an amount equal to the aggregate exercise price for the
shares subject to the option or portion thereof being exercised.
No option is assignable or transferable by an optionee except by will, by
the laws of descent and distribution or, if the option is not an ISO, pursuant
to a qualified domestic relations order. Neither the optionee nor the optionee's
legal representatives, legatees, transferees or distributees will be deemed to
be a holder of any shares of Common Stock subject to an option until the option
has been validly exercised and the purchase price of the shares paid. An option
may not be exercised except (i) by the optionee, (ii) by a person
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<PAGE> 42
who has obtained the optionee's rights under the option by will or under the
laws of descent and distribution, (iii) by a permitted transfer as contemplated
by the Amended Plan or (iv) by a spouse incident to a divorce.
Termination of Employment. Except as the Administrator may otherwise
determine, in the event the holder of an option ceases to be an employee or
director of, or consultant to, the Company or any of its subsidiaries for any
reason, no further installments of the option will become exercisable and the
option will terminate three months after the date of termination, or immediately
in the event of a termination for cause. In the event of death or disability of
an optionee while in the employ or while serving as a director of or consultant
to the Company or any of its subsidiaries, such option will be exercisable to
the extent exercisable on the date of death or disability within two years, in
the case of death, or one year, in the case of disability, after the date of
death or disability, but in no case later than the expiration date of such
option.
Dilution or Other Adjustments. Under certain circumstances, the
Administrator will make adjustments with respect to the options, or any
provisions of the Amended Plan, as it deems appropriate to prevent dilution or
enlargement of option rights.
Amendment and Termination. The Administrator may amend, abandon, suspend,
or terminate the Amended Plan or any portion thereof at any time, provided,
however, no amendment that requires shareholder approval in order for the
Amended Plan to continue to comply with Section 162(m) of the Code or any other
applicable law, rule or regulation (including, without limitation, the Code, the
Exchange Act or any self-regulatory organization such as a national securities
exchange) will be made unless such amendment has received the requisite approval
of shareholders. In addition, no amendment may be made that adversely affects
any of the rights of an optionee under any option therefore granted, without
such optionee's consent. The Amended Plan is scheduled to expire on December 23,
2003.
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of, or consultants to, the
Company receive a retainer of $1,000 per month and $500 for each meeting of the
Board of Directors or one of its committees attended. Directors' expenses for
attending meetings currently are not reimbursed by the Company.
DIRECTORS STOCK OPTION PLAN
Effective July 1995, the Company adopted a stock option plan (the
"Directors Stock Option Plan") pursuant to which options to purchase 10,000
shares of Common Stock are automatically granted to each of up to three
non-employee directors appointed or elected to the Board of Directors for the
first time after July 1995. The options are granted at an exercise price based
upon trading prices during a specified period prior to the date of grant. All
options granted are nonqualified stock options under the Code. In February 1996,
John L. Hill, Jr. and Azie Taylor Morton received options to purchase Common
Stock under the Directors Stock Option Plan for the exercise price of $10.2375
and $10.25, respectively.
Options granted under the Directors Stock Option Plan vest over two years,
with one-third vesting on the date of grant and one-third vesting on each of the
first and second anniversary of the date of grant, and expire ten years after
the date of grant. The Directors Stock Option Plan is administered by the Board
or a committee consisting of at least two directors who are not eligible to
receive options under the Directors Stock Option Plan, but option grants and
terms are nondiscretionary. The exercise price for these options may be paid in
cash or by shares of Common Stock at their fair market value at the time of
exercise.
EMPLOYMENT AGREEMENTS
Effective December 21, 1995, the closing of the Company's initial public
offering, the Company entered into employment agreements with John Wooley and
Jeffrey Wooley. The employment agreements contain the following provisions: (i)
two-year terms, with the terms extended for up to an additional two years if the
personal guarantees of John Wooley and Jeffrey Wooley relating to certain
obligations of the Company to various lenders are not released by the end of the
initial two year term; (ii) annual base salaries which increased to $150,000 for
John Wooley and $120,000 for Jeffrey Wooley for 1997, with annual upward
41
<PAGE> 43
adjustments thereafter; and (iii) the grant of stock options for 46,875 shares
to John Wooley and 31,250 shares to Jeffrey Wooley, in each case at an exercise
price of $12.80 per share. In addition, John Wooley and Jeffrey Wooley are bound
by contractual confidentiality and noncompete provisions which extend 18 months
beyond the termination of their employment with the Company for any reason.
Following the application of the proceeds of this offering, the liabilities
guaranteed by John Wooley and Jeffrey Wooley referenced in their employment
agreements will be fully paid.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John C. Wooley and Jeffrey J. Wooley serve as directors of Austin CBD 29,
Inc., Austin CBD 19, Inc. and Austin CBD, Inc. These entities were owned or
controlled by the family of John Rosillo, a member of the Compensation
Committee, until January 1996, when the assets of each entity were acquired by
entities owned by John Wooley and Jeffrey Wooley. John C. Wooley serves on the
Compensation Committee, but abstains from any matter relating to his
compensation. Except as set forth above, there are no Compensation Committee
interlocks.
INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATIONS ON LIABILITY FOR MONETARY
DAMAGES
The Company's Bylaws provide that the Company will indemnify its directors,
officers, employees and other agents in connection with any suit or other legal
proceeding, if such person is successful on the merits of such proceeding or
such person acted in good faith in the matter that is the subject of the suit.
The Bylaws permit the Company to advance expenses to an indemnified party in
shareholder derivative actions or other actions against an undertaking by the
indemnified party to repay such advances if it is ultimately determined that he
or she is not entitled to indemnification. The Company's Bylaws allow the
Company to purchase and maintain liability, indemnification or other similar
insurance. Such insurance is currently in place. In addition, the Company has
entered into indemnification agreements with each of its directors and executive
officers providing indemnification to the fullest extent permitted by applicable
law.
The Company's Articles of Incorporation also provide that its directors
shall not be liable for monetary damages caused by an act or omission occurring
in their capacity as directors. This provision does not eliminate the duty of
care, and, in appropriate circumstances, equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Texas law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to a director and for payment of
dividends or acts or omissions for which a director is made expressly liable by
applicable statute. The limitations on liability provided for in the Company's
Articles of Incorporation do not restrict the availability of non-monetary
remedies and do not affect a director's responsibilities under any other law,
such as the federal securities laws or state or federal environmental laws. The
Company believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as executive officers and directors.
42
<PAGE> 44
CERTAIN TRANSACTIONS
STOCK PURCHASE AGREEMENTS
Effective June 29, 1993, Getov, Noro-Moseley Partners II, L.P.
("Noro-Moseley") and NethCorp purchased a total of 3,000,000 shares of Class A
Preferred Stock, no par value, for $5.0 million or approximately $1.67 per
share, in cash. The proceeds from the sale of these shares were applied to
redeem previously outstanding preferred stock. Contemporaneously with the
purchase of the Class A Preferred Stock, the parties entered into a shareholders
agreement (the "Shareholders Agreement") containing rights of first refusal with
respect to proposed stock sales in favor of all of the then-existing
shareholders of the Company. The Company also entered into an agreement with
Getov, Noro-Moseley and NethCorp providing for certain amendments to the
Company's Articles of Incorporation and granting Noro-Moseley and NethCorp a put
option until March 31, 1994 to sell their Class A Preferred Stock back to the
Company or, failing the Company's ability to repurchase the stock, to John C.
Wooley, Jeffrey J. Wooley, John Rosillo and Getov, at cost plus 10% per annum
for the period of time it was owned by Noro-Moseley and NethCorp (the "Purchase
Commitment"). In October 1993, the Company entered into a Preferred Stock
Repurchase Agreement implementing the foregoing provisions, amended the
Shareholders Agreement to add rights of co-sale in favor of preferred
shareholders and amended the Articles of Incorporation. In March 1994 and again
in April 1994, the Purchase Commitment was extended. In May 1994, Noro-Moseley
and NethCorp agreed to terminate the Purchase Commitment, relieving the Company
and the other parties of the obligation to purchase their shares of Class A
Preferred Stock.
Effective July 20, 1994, Getov, Noro-Moseley and NethCorp, and other
investors entered into a Preferred Stock Purchase Agreement pursuant to which
Noro-Moseley and NethCorp acquired 120,000 shares each and Getov acquired for
cash 400,000 shares of newly created Class B Preferred Stock, no par value, out
of a total 1,200,000 shares sold for a purchase price $3.0 million, or $2.50 per
share. Contemporaneously with the purchase of Class B Preferred Stock, the
Shareholders Agreement was amended to exclude certain transfers by the common
shareholders from the rights of first refusal and co-sale provisions for one
year, to expand the size of the Board of Directors to nine directors and to
elect four nominees designated by the holders of Class A and Class B Preferred
Stock and five nominees designated by the holders of Common Stock. If an Event
of Noncompliance (as defined in the Articles of Incorporation) occurred, the
holders of Preferred Stock would be entitled to designate a majority of the
members of the Board of Directors. In addition, a registration rights agreement
was entered into granting "piggy-back" registration rights to all of the holders
of outstanding stock of the Company at that time (excluding 50% of the shares of
Common Stock held by John Wooley and Jeffrey Wooley, individually).
All of the issued and outstanding Class A and Class B Preferred Stock were
automatically converted into Common Stock upon the closing of the initial public
offering. The Shareholders Agreement was terminated upon the closing of the
initial public offering pursuant to its terms. The registration rights agreement
survived the closing of the initial public offering.
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
John Wooley and Jeffrey Wooley have personally guaranteed obligations of
the Company to various lenders and equipment lessors. The Company has agreed to
indemnify each of them against liabilities, costs and expenses they may incur
under such guarantees. The approximate total amount of these obligations was
$2.9 million at June 30, 1997. It is anticipated that the proceeds of this
offering will be used to repay approximately $1.5 million of these guaranteed
obligations. See "Use of Proceeds." John Wooley has also pledged a personal life
insurance policy to secure certain Company indebtedness.
The Company entered into employment agreements in December 1995 with John
Wooley and Jeffrey Wooley containing provisions concerning their salaries, stock
options and an extension of the term of employment if certain guarantees they
granted in favor of the Company are not released by the end of 1997. See
"Management -- Employment Agreements." The Company also agreed to purchase from
John Wooley for cash at face value a loan receivable in a maximum principal
amount of $150,000 (face amount of $117,000
43
<PAGE> 45
at June 30, 1997) owed to him by an investor in an entity which has leased
retail space from Bee Cave/Westbank, Ltd., a limited partnership in whose
capital and profits the Company owns a 40% interest. The foregoing agreements
became effective upon completion of the initial public offering. See "-- Real
Estate Transactions" and "Business -- Properties."
In January 1993, John Wooley and Jeffrey Wooley signed promissory notes to
the Company for $320,000 and $77,000, respectively, to evidence obligations owed
to predecessor entities. These notes have been restructured several times, most
recently in January 1996. The restructured notes have a five year term from
January 1996, with quarterly payments of interest and principal and an interest
rate of 7.5%. The largest aggregate amounts of such indebtedness, including
accrued interest, from January 1, 1996 through June 30, 1997 were the
outstanding balances on June 30, 1997 of approximately $106,000 for John Wooley
and $163,000 for Jeffrey Wooley. The restructured terms of these notes were
ratified by the Board of Directors in January 1996. During 1995, additional
loans were made to John Wooley and Jeffrey Wooley in the amounts of $131,000 and
$6,000, respectively. These additional loans were unsecured, provided for
interest at 9% per annum, were due on June 30, 1995 and were fully repaid as of
that date.
During 1994, the Company and John Wooley were named defendants in a lawsuit
by a former employee of the Company. The Company advanced approximately $101,000
for the payment of legal fees incurred by Mr. Wooley during 1994 and the first
six months of 1995. While the Board initially determined that it was appropriate
for the Company to pay or advance these expenses on Mr. Wooley's behalf in
accordance with the provisions of the Company's Bylaws regarding indemnification
of officers and directors, in August 1995, Mr. Wooley elected to reimburse the
Company for these expenses. The Company advanced the legal fees and other
expenses incurred by Mr. Wooley after June 30, 1995 in accordance with the
Company's Bylaws. Because the lawsuit has been dismissed, Mr. Wooley will not be
held liable for any damages or other losses in connection with this lawsuit. See
"Management -- Indemnification of Directors and Officers; Limitations on
Liability for Monetary Damages."
In June 1992, Barmar Enterprises, Inc. ("Barmar"), a corporation controlled
by Raymond Rodriguez, a director of the Company, became an area developer in
territories in the Chicago area, and in March 1993, Fairfax Restaurant Group,
Inc., of which Mr. Rodriguez is a principal shareholder, was granted a franchise
pursuant to the Barmar area development agreement. In June 1995, Mr. Rodriguez
and two other individuals were jointly granted a franchise for an additional
store, also in the Chicago area. During fiscal 1996, the Company paid Barmar
approximately $111,000 as its share of franchise fees and royalties under its
area development agreement with the Company. Each franchisee with an operating
store in which Mr. Rodriguez holds an interest paid the Company approximately
$24,000 in royalties. The Company believes that the terms of the area
development agreement with Barmar and the franchise agreements with these
franchisees are as favorable to the Company as those with other area developers
or franchisees.
In March 1995, EuroAmerican Development, B.V. became the master licensee of
the Company for Belgium, The Netherlands and Luxembourg. In July 1996, NethCorp
assumed control of EuroAmerican Development under terms not disclosed to the
Company. Greenfield Capital Partners B.V. ("Greenfield") is the managing general
partner of NethCorp, and Floor Mouthaan, a director of the Company, is the
managing director of Greenfield. The Company was not involved in the
negotiations between EuroAmerican Development and NethCorp. The Company recorded
no developer fee revenue in fiscal 1996 from NethCorp under this master license
agreement. The master licensee arrangement with EuroAmerican Development, B.V.
was approved by the disinterested members of the Board of Directors of the
Company.
In July 1995, the Company borrowed $750,000 from NethCorp to finance
acquisitions under the Turnkey Program. This unsecured loan is payable in four
quarterly installments commencing March 31, 1996 and bore interest at a rate of
13% per annum until January 1, 1996. In addition, the Company agreed to grant
warrants to NethCorp to purchase 5,468 shares of Common Stock, exercisable upon
grant at $12.80 per share and expiring December 31, 2000. This loan was repaid
with a portion of the proceeds of the initial public offering.
In December 1995, the Company entered into a master license agreement with
Buxtehude, a principal shareholder of the Company, of which John M. Rosillo, a
director of the Company, is managing director.
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<PAGE> 46
Pursuant to the terms of the agreement, Buxtehude paid the Company $150,000 in
cash and $350,000 by promissory note. The Company recorded developer revenue
totaling $500,000 in fiscal 1996 from Buxtehude under this master license
agreement. This transaction was approved by the disinterested members of the
Board of Directors of the Company.
In connection with the master license agreement with Buxtehude, the Company
received a $350,000 promissory note. The note bears interest at 9% and is
repayable in three installments of $75,000 on December 31, 1996, $100,000 on
December 31, 1997 and $175,000 on December 31, 1998. The largest aggregate
amount of such indebtedness since January 1, 1996 was $350,000. As of June 30,
1997, the principal balance of this obligation, including accrued interest, was
$275,000.
REAL ESTATE TRANSACTIONS
In June 1993, the Company exercised an option to acquire a parking lot near
its headquarters in Austin, Texas from a corporation owned by John Wooley and
Jeffrey Wooley. As consideration for the purchase, the Company cancelled
$159,000 of indebtedness and took the property subject to $583,000 in
outstanding debt under a nonrecourse note in the amount of $650,000 held by the
previous owner of the property. This note, together with the cancellation of
indebtedness, less principal reductions recognized from rental income on the
property, represents the total consideration paid for this property by the
corporation owned by John Wooley and Jeffrey Wooley. This transaction did not
result in any gain to the corporation owned by John Wooley and Jeffrey Wooley.
On December 31, 1993, the Company sold the parking lot to the predecessor of
Austin CBD 29, Inc. ("CBD 29") for $900,000, representing a gain to the Company
of approximately $159,000. The Company received a promissory note from CBD 29 in
the amount of $302,000 and CBD 29 took the property subject to the nonrecourse
note in the then-outstanding principal amount of $576,000 and accrued taxes and
interest in the aggregate amount of $22,000. The $302,000 note, of which
$205,000 was repaid in 1995, bears interest at the rate of 9% per annum. The
maturity of this note has been extended from its original maturity date of
December 31, 1995 until December 31, 1997. During 1994 and 1995, the Company
made unsecured loans to CBD 29 aggregating $166,000 to allow it to pay property
taxes and miscellaneous expenses. These additional loans bore interest at a rate
of 9% per annum and have been fully repaid. Until January 1996, CBD 29 was
controlled by Buxtehude. See "Principal and Selling Shareholders." John Wooley
and Jeffrey Wooley were also officers and directors of CBD 29, but did not own
an equity interest in CBD 29.
Effective January 1, 1996, most of the assets and liabilities of CBD 29
were transferred to and assumed by Third & Colorado 29, L.L.C. ("T&C 29"), a
limited liability company owned by John Wooley and Jeffrey Wooley. In connection
with that transfer T&C 29 assumed a lease with the Company, under which the
Company leased approximately 4,500 square feet of office space in Austin, Texas
for expansion of the Company's headquarters, for annual net rental at a rate of
$10.00 per square foot and a term of ten years. Effective January 15, 1996, the
Company was released from its obligations under this lease and T&C 29 granted
the Company an option to lease the space for 60 days thereafter. The Company did
not exercise the option. The transfer from CBD 29 to T&C 29 was ratified by the
disinterested members of the Board of Directors in January 1996.
On December 31, 1993, the Company sold a tract of land in Austin, Texas to
WTM Development, Inc. ("WTM"), of which John Wooley and Jeffrey Wooley are
principal shareholders, for a promissory note in the amount of $350,000 secured
by the property, bearing interest at the rate of 9% per annum and maturing on
December 31, 1995. In 1994 and 1995, the Company made unsecured loans
aggregating $161,000 to WTM to allow WTM to meet obligations related to the
development of the property. These loans bore interest at the rate of 9% per
annum and were payable on demand. Effective December 13, 1995, the amounts owed
to the Company by WTM were restructured to provide for payments of interest only
until maturity in five years, for a reduced rate of interest of 8% per annum,
and for a commitment to make additional advances of up to $35,000. The largest
aggregate amount of such indebtedness since January 1, 1996, and the principal
balance of this obligation, including accrued interest, as of June 30, 1997, was
$550,000.
In connection with the transfer and assumption of the assets and
liabilities of CBD 29 discussed above, T&C 29 assumed the repayment of a
promissory note payable to the Company, issued to the Company in
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<PAGE> 47
connection with the sale by the Company of a parking lot near the Company's
headquarters to CBD 29. The note is secured by the property, bears interest at
the rate of 9% per annum and has a scheduled maturity of December 31, 1995 which
was extended until December 31, 1997. When the note was assumed by T&C 29,
pursuant to the arrangement with John Wooley and Jeffrey Wooley discussed above,
the note was extended for one year. The largest aggregate amount of such
indebtedness since January 1, 1996 was $129,000. The principal balance of this
obligation, including accrued interest, as of June 30, 1997 was $131,000.
The Company and its subsidiary, Schlotzsky's Real Estate, Inc., own a
combined 40% interest in the capital and profits of Bee Cave/Westbank, Ltd. See
"Business -- Properties." In 1995, John Wooley made an unsecured loan of
approximately $110,000 to an investor in an entity which leased retail space
from Bee Cave/Westbank, Ltd. In August 1995, the Company acquired this note
receivable from Mr. Wooley at face value in conjunction with, and effective upon
completion of, the initial public offering. See "-- Transactions with Executive
Officers and Directors."
The Company and Third & Colorado 19, L.L.C. ("T&C 19"), a limited liability
company owned by John Wooley and Jeffrey Wooley, entered into a lease agreement
effective March 21, 1997, under which the Company will lease from T&C 19
approximately 29,410 square feet of office space, and 11,948 square feet of
storage space, in Austin, Texas for the Company's corporate headquarters. Under
the terms of the lease, the Company will pay annual net rental of $12.95 per
square foot for the office space and up to $2.50 per square foot for the storage
space, for a term of ten years after completion of the build-out of the leased
space. This transaction was approved by the disinterested members of the Board
of Directors of the Company.
MASTER LICENSE AND AREA DEVELOPMENT AGREEMENTS
In December 1994, the Company entered into a territorial agreement with
Bonner Carrington Corporation pursuant to which Bonner Carrington paid the
Company $22,000 in cash and $128,000 by a promissory note for the right to
obtain a master license for Germany. A master license agreement was entered into
by the Company and Bonner Carrington in March 1995. At that time, the master
license fee was increased by $100,000, which was added to the principal amount
of the note. The modified note bears interest at 8% per annum, is payable in
three installments and matures in December 1997. As of June 30, 1997, the
outstanding principal balance on this note was $178,000. The cash was paid to
the Company from the proceeds of one or more loans made to Bonner Carrington by
CBD 29 or its affiliates. Prior to September 1997, the Bonner Carrington note to
the Company was guaranteed by CBD 29 and CBD 29 or its affiliates may have had
the right to acquire the master license for Germany and certain other
territories held by Bonner Carrington if Bonner Carrington defaulted on its note
to the Company. The Company consented to the collateral assignment of the master
license by Bonner Carrington to CBD 29, but this collateral assignment was
terminated when the CBD 29 guaranty, which was assumed by T&C 29, was terminated
in September 1997. Bonner Carrington manages properties owned by CBD 29 and its
affiliates, including office space leased by the Company in Austin, Texas. See
"-- Real Estate Transactions." In 1996, the Company made a minority investment
in an affiliate of Bonner Carrington which has several master license agreements
in effect. See Notes to Consolidated Financial Statements of the Company
included elsewhere in this Prospectus.
In December 1994, the Company granted a master license for Ontario, Canada
and other Canadian provinces to TexFran Associates, Ltd. ("TexFran"), for
$25,000 in cash and a $200,000 promissory note. The note bears interest at 6%
per annum and is due in December 1998. The cash paid to the Company by TexFran
was loaned to TexFran by CBD 29 or its affiliates and the TexFran note to the
Company was guaranteed by CBD 29. As of June 30, 1997, the outstanding principal
balance on this note was $172,500. CBD 29 had a right of first refusal to
acquire the master license for Ontario, Canada and the other Canadian provinces
held by TexFran if TexFran wanted to sell or relinquish the rights. TexFran also
had a put option to sell its master license to CBD 29. John Wooley and Jeffrey
Wooley personally guaranteed CBD 29's obligations under this put option. The
Company consented to the right of first refusal and the put option of the master
license to CBD 29 which were transferred to T&C 29. This right of first refusal
and the guaranty of the TexFran note were terminated in September 1997. TexFran
is also the area developer for territories in the Los Angeles area. The area
development agreement between TexFran and the Company for the Los Angeles
territories initially provided for TexFran to receive 100% of all franchise fees
paid by franchisees for up to 20 stores opened in the
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<PAGE> 48
territories. In December 1994, the Company agreed to eliminate the store opening
schedule under this area development agreement with TexFran and to extend the
term of the agreement from 50 years to 99 years in exchange for TexFran's
agreement to allow the Company to retain 50% of the franchise fees paid by
franchisees for stores opened in the territory after March 1995. In a separate
agreement with TexFran, CBD 29 agreed to pay TexFran an amount equal to 50% of
the franchise fees paid by franchisees for up to 13 stores opened in the
territory, for a total of $98,000, and TexFran granted to CBD 29 a right of
first refusal to acquire the area development rights held by TexFran for the Los
Angeles territories. The Company consented to the transfer of these area
developer rights to CBD 29 pursuant to this right of first refusal. The Company
reacquired the Los Angeles territories in 1997. The Company believes that the
terms of the area development agreement with TexFran were no less favorable to
the Company than could have been obtained from an unaffiliated third party and
that the terms of the master license agreement are as favorable as those with
other master licensees of the Company.
In December 1994, CBD 29 guaranteed a promissory note to the Company in the
amount of $70,000 from the area developer for Albany, New York. The note bore
interest at a rate of 8% per annum, and was paid in May 1997. CBD 29 obtained
the right to acquire the area development rights for Albany, New York if the
area developer defaults on its promissory note to the Company. The area
developer received a put option to sell its area developer rights to CBD 29.
John Wooley and Jeffrey Wooley personally guaranteed CBD 29's obligations under
this put option. The Company consented to the collateral assignment and the put
option of the area development rights to CBD 29. In September 1995, the area
developer and CBD 29 waived any further rights and obligations as against each
other pursuant to these arrangements. The Company reacquired this territory in
1996. The Company believes that the terms of the area development agreement for
Albany, New York were as favorable to the Company as those with other area
developers of the Company.
In June 1995, CBD 29 loaned $50,000 to the area developer for Omaha,
Nebraska. As a result, CBD 29 obtained a security interest in the rights of the
area developer to receive a portion of the royalties paid by certain franchisees
and might have had the right to acquire these rights in the event of a default
by the area developer under the loan. In September 1997, T&C 29, as successor in
interest to the rights from CBD 29, agreed with the Company that it would not
seek to execute upon any security interest in these rights. The Company believes
that the terms of the area development agreement for Omaha, Nebraska are as
favorable to the Company as those with other area developers of the Company.
In June 1995, the Company agreed to grant options to acquire master
licenses for territories in Indonesia to Benchmark Land Development Corp.
("Benchmark"). Benchmark agreed to pay the Company $200,000 for the Jakarta
master license, of which $100,000 was paid in cash and $100,000 was to be paid
by a 9% promissory note of Benchmark due October 1995. John Wooley and Jeffrey
Wooley are officers and directors of, but not equity investors in, Benchmark,
and John M. Rosillo, a director and the managing director of Getov and
Buxtehude, is the managing director of a principal shareholder of Benchmark. In
August 1995, the Company and Benchmark agreed to rescind this transaction. The
$100,000 promissory note of Benchmark to the Company was not executed and the
Company returned the $100,000 cash payment received from Benchmark, without
interest.
APPROVAL OF DISINTERESTED DIRECTORS
The foregoing transactions were entered into between related parties and,
except as otherwise noted, were not the result of arms-length negotiations.
Accordingly, certain of the terms of these transactions may be more or less
favorable to the Company than might have been obtained from unaffiliated third
parties. Since the date of the Company's initial public offering, it has not
entered, and in the future will not enter, into any transactions in which the
directors, executive officers or principal shareholders of the Company and their
affiliates have a material interest unless such transactions are approved by a
majority of the disinterested members of the Board of Directors and are on terms
that are no less favorable to the Company than those that the Company could
obtain from unaffiliated third parties.
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<PAGE> 49
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of August 20, 1997, as adjusted to reflect the
sale of the Common Stock being offered hereby (without giving effect to the
exercise of the Underwriters' over-allotment option), by (i) each person who is
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each of the Company's directors, (iii) each of
the named executive officers, (iv) all directors and executive officers of the
Company as a group, and (v) each Selling Shareholder. Except as otherwise
indicated, the persons named in the table have sole voting and investment power
with respect to the shares of Common Stock shown as beneficially owned by them.
Beneficial ownership as reported in the table has been determined in accordance
with Rule 13d-3 promulgated under the Exchange Act and represents the number of
shares of Common Stock for which a person, directly or indirectly, through any
contract, management, understanding, relationship or otherwise, has or shares
voting power, including the power to vote or direct the voting of such shares,
or investment power, including the power to dispose or to direct the disposition
of such shares, and includes shares which may be acquired within 60 days after
August 20, 1997.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES OWNED
BEFORE THE OFFERING AFTER THE OFFERING
NAME AND ADDRESS -------------------------- SHARES TO -------------------
OF BENEFICIAL OWNER(1) NUMBER PERCENT BE SOLD NUMBER PERCENT
---------------------- ----------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Buxtehude Holding B.V.(2)................. 616,981 11.1% 289,824 327,157 4.7%
Getov Holding B.V.(3)..................... 377,092 6.8% 227,468 149,624 2.1%
Greenfield Capital Partners B.V........... 412,441(4) 7.4% -- 412,441 5.8%
NethCorp Investments VI B.V............... 362,441(5) 6.5% -- 362,441 5.1%
John C. Wooley............................ 828,362(6) 14.8% 87,500 740,862 10.4%
Jeffrey J. Wooley......................... 230,526(7) 4.1% 37,500 193,026 2.7%
Bishop J. Allen........................... 20,813(8) * -- 20,813 *
Charles E. Harvey, Jr. ................... 10,300(9) * -- 10,300 *
Raymond A. Rodriguez...................... 34,208 * 12,208 22,000 *
Floor Mouthaan............................ 412,441(10) 7.4% -- 412,441 5.8%
John M. Rosillo........................... 994,073(11) 17.9% 517,292 476,781 6.8%
John L. Hill, Jr. ........................ 6,667(12) * -- 6,667 *
Azie Taylor Morton........................ 6,667(12) * -- 6,667 *
Marybeth Zindrick......................... 56,640 1.0% 14,000 42,640 *
George and Maureen Miz.................... 51,641 * 10,000 41,641 *
Larry and Elizabeth Johnson(13)........... 45,318 * 10,000 35,318 *
Walter Ronemous(14)....................... 6,250 * 6,250 -- --
Richard Sutliff(14)....................... 4,000 * 4,000 -- --
Lawrence Kaplan........................... 1,250 * 1,250 -- --
All executive officers and directors as a
group (ten persons)..................... 2,413,853(15) 42.4% 654,500 1,759,353 24.5%
700,000
=======
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the address for all officers and directors of
the Company is 200 West Fourth Street, Austin, Texas 78701.
(2) The business address for Buxtehude is Leidseplein, 29, 1017 PS, Amsterdam,
The Netherlands.
(3) The business address for Getov is Leidseplein, 29, 1017 PS, Amsterdam, The
Netherlands.
(4) Includes 300,155 shares held by NethCorp, for which Greenfield is the
managing general partner, and 50,000 shares held by CapCorp Investments
N.V. ("CapCorp"), an affiliate of Greenfield. The business address for
Greenfield is Janskerkhof -- 12 3512, B.L. Utrecht, The Netherlands.
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<PAGE> 50
(5) Includes 5,468 shares purchasable within 60 days after August 20, 1997
pursuant to warrants obtained from the Company. The business address for
NethCorp is Janskerkhof -- 12 3512, B.L. Utrecht, The Netherlands.
(6) Includes 46,875 shares purchasable from the Company within 60 days after
August 20, 1997 pursuant to options granted by the Company. Also includes
1,142 shares held by a trust (the "Wooley Trust") for the benefit of John
Wooley and Jeffrey Wooley, for which John Wooley is a trustee. Also
includes 1,200 shares held by John Wooley's wife, as to which John Wooley
disclaims beneficial ownership. Bishop J. Allen holds currently exercisable
options to purchase 7,813 shares held by John Wooley, Jeffrey Wooley or the
Wooley Trust.
(7) Includes 31,250 shares purchasable from the Company within 60 days after
August 20, 1997 pursuant to options granted. Also includes 1,142 shares
held by the Wooley Trust, for which Jeffrey Wooley is a trustee.
(8) Includes 7,813 shares purchasable within 60 days after August 20, 1997
pursuant to options granted, as described in footnote (6), and 12,500
shares purchasable from the Company within 60 days after August 20, 1997
pursuant to options granted.
(9) Includes 10,000 shares purchasable from the Company within 60 days after
August 20, 1997 pursuant to options granted.
(10) Includes 5,468 shares that are purchasable by NethCorp within 60 days after
August 20, 1997 pursuant to a warrant granted, as described in footnote
(5), 300,155 shares held by NethCorp, and 50,000 shares held by CapCorp.
Mr. Mouthaan is the managing director of Greenfield, which is the managing
general partner of NethCorp and an affiliate of CapCorp. Mr. Mouthaan
disclaims beneficial ownership of all such shares. The business address for
Mr. Mouthaan is Janskerkhof -- 12 3512, B.L. Utrecht, The Netherlands.
(11) Includes 616,981 shares held directly by Buxtehude. Also includes 377,092
shares held directly by Getov. Mr. Rosillo controls both Buxtehude and
Getov. Mr. Rosillo disclaims beneficial ownership of all such shares. The
business address for Mr. Rosillo is Leidseplein, 29, 1017 PS, Amsterdam,
The Netherlands.
(12) Includes 6,667 shares purchasable from the Company within 60 days after
August 20, 1997 pursuant to options granted.
(13) An area developer and franchisee of the Company, or a principal investor
therein.
(14) A franchisee of the Company, or a principal investor therein.
(15) Shares deemed to be beneficially owned by more than one officer or director
have only been counted once in determining total shares beneficially owned
by the officers and directors as a group. Includes 124,866 shares
purchasable from the Company within 60 days after August 20, 1997 pursuant
to options granted.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, no par value, and 1,000,000 shares of Preferred Stock, no par
value.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders, voting with the holders of
Preferred Stock as a single class, except where class voting is required by the
Texas Business Corporation Act. Cumulative voting in the election of directors
is not permitted and the holders of a majority of the combined number of
outstanding shares of Common Stock and Preferred Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
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<PAGE> 51
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding Preferred
Stock. Upon a liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding Preferred Stock. The holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares offered by the Company in
this offering, will be, when issued and paid for, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors may issue Preferred Stock in one or more series and
may designate the dividend rate, voting rights and other rights, preferences and
restrictions of each series without further shareholder approval. There is no
Preferred Stock outstanding and the Company currently has no plans to issue any
Preferred Stock. It is not possible to predict the effect of the issuance of
Preferred Stock upon the rights of holders of Common Stock unless and until the
Board of Directors determines the specific rights of the holders of a series of
Preferred Stock. However, such effects might include, among other things,
restricting dividends on Common Stock, diluting the voting power of Common
Stock, impairing the liquidation rights of Common Stock and delaying or
preventing a change in control of the Company without further action by the
shareholders.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws,
the Amended Plan, the indemnification agreements with directors and officers of
the Company and the Texas Business Combination Law may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider to be in that shareholder's best
interest, including attempts that might result in a premium over the market
price for the shares held by shareholders.
Articles of Incorporation and Bylaws. Pursuant to the Company's Articles of
Incorporation, the Company's Board of Directors may issue additional shares of
Common Stock or establish one or more series of preferred stock having the
number of shares, designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations that the Board of
Directors fixes without shareholder approval. Any additional issuance of Common
Stock or designation of rights, preferences, privileges and limitations with
respect to preferred stock could have the effect of impeding or discouraging the
acquisition of control of the Company by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of the Company's
management. Specifically, if, in the due exercise of its fiduciary obligations,
the Board of Directors were to determine that a takeover proposal was not in the
Company's best interest, shares could be issued by the Board of Directors
without shareholder approval in one or more transactions that might prevent or
render more difficult or costly the completion of the takeover transactions by
diluting the voting or other rights of the proposed acquiror or insurgent
shareholder group, by putting a substantial voting lock in institutional or
other hands that might undertake to support the position of the incumbent Board
of Directors, by effecting an acquisition that might complicate or preclude the
takeover, or otherwise.
The Company's Articles of Incorporation and Bylaws provide that special
meetings of shareholders generally can be called only by the president or board
of directors and provide for an advance notice procedure for the nomination,
other than by or at the direction of the board of directors or a committee of
the board of directors, of candidates for election as directors as well as for
other shareholder proposals to be considered at annual meetings of shareholders.
In general, notice of intent to nominate a director or raise business at such
meetings must be received by the Company not less than 30 nor more than 60 days
before the meeting, and must contain certain information concerning the person
to be nominated or the matters to be brought before the meeting and concerning
the shareholder submitting the proposal.
The Company's Bylaws provide that the Board of Directors shall be divided
into three classes of three directors each, with each class elected for the
three-year terms expiring in successive years. The effect of these
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<PAGE> 52
provisions may be to delay or prevent a tender offer or takeover attempt that a
shareholder might consider to be in his best interest, including attempts that
might result in a premium over the market price for the shares held by the
stockholders. Cumulative voting in the election of directors is specifically
denied.
Stock Option Plan. Awards granted pursuant to the Amended Plan may provide
that, under certain circumstances, upon a change in control of the Company, all
outstanding stock options become immediately vested and exercisable in full and
the restriction period on any restricted stock award will be accelerated and the
restrictions shall expire. See "Management -- 1993 Amended and Restated Stock
Option Plan." All options that have been granted under the Amended Plan contain
such a provision.
Indemnification Agreements. The Company has entered into indemnification
agreements with all of its directors and executive officers, which, among other
things, indemnify directors of the Company against liability arising from
shareholder claims of a breach of duty by a director if a director votes against
a transaction that would result in a change in control of the Company.
Texas Business Combination Law. The Texas Business Combination Law
restricts certain transactions between a publicly held corporation organized
under Texas law, or its majority-owned subsidiaries, and any person holding 20%
or more of the corporation's outstanding voting stock, together with the
affiliates or associates of such person (an "Affiliated Shareholder"). The Texas
Business Combination Law prevents, for a period of three years following the
date that a person becomes an Affiliated Shareholder, the following types of
transactions, whether in one transaction or a series of transactions, between
the corporation and the Affiliated Shareholder (unless certain conditions,
described below, are met): (a) mergers, share exchanges or conversions, (b)
sales, leases, exchanges, mortgages, pledges, transfers or other dispositions of
assets of the corporation or any subsidiary with an aggregate market value equal
to 10% or more of (i) the aggregate market value of the consolidated assets,
(ii) the aggregate market value of the outstanding stock of the corporation, or
(iii) the consolidated net income of the corporation, (c) issuances or transfers
by the corporation to an Affiliated Shareholder of any stock of the corporation
except by the exercise of warrants or rights, or a share dividend paid, pro rata
to all shareholders of the corporation after the Affiliated Shareholder's
acquisition date, (d) adoptions of any plan or proposal for the liquidation or
dissolution of the corporation pursuant to any agreement, arrangement or
understanding with an Affiliated Shareholder, (e) reclassifications of
securities, recapitalizations of the corporation, mergers with a subsidiary or
pursuant to which the assets and liabilities of the corporation are allocated
among two or more entities, or any other transactions, whether or not involving
an Affiliated Shareholder, proposed by, or pursuant to an agreement, arrangement
or understanding with an Affiliated Shareholder, that have the effect of
increasing the proportionate share of the stock of any class or series of the
corporation which is owned by the Affiliated Shareholder, and (f) receipt by the
Affiliated Shareholder of the benefit (except proportionately as a shareholder)
of loans, advances, guarantees, pledges or other financial assistance or a tax
credit or other tax advantage provided by the corporation.
The three-year ban does not apply if either the proposed transaction or the
transaction by which the Affiliated Shareholder became an Affiliated Shareholder
is approved by the board of directors of the corporation prior to the date such
shareholder becomes an Affiliated Shareholder. Business combinations are also
permitted within the three-year period if approved, at an annual or special
meeting of shareholders called for that purpose not less than six months after
the date such Affiliated Shareholder becomes an Affiliated Shareholder, by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock not owned by the Affiliated Shareholder.
The Texas Business Combination Law does not apply to any transaction (a)
with an Affiliated Shareholder who becomes an Affiliated Shareholder
inadvertently, if such Affiliated Shareholder, as soon as practicable, divests
itself of a sufficient number of shares of voting stock to no longer be an
Affiliated Shareholder and, but for the inadvertent acquisition, such Affiliated
Shareholder was not an Affiliated Shareholder at any time during the preceding
three year period, (b) with an Affiliated Shareholder who was an Affiliated
Shareholder on December 31, 1996 and remains an Affiliated Shareholder
continuously thereafter until the announcement date of such transaction, (c)
with an Affiliated Shareholder who becomes an Affiliated Shareholder through a
transfer of shares of the corporation by will or intestate succession and who
remains an Affiliated Shareholder continuously thereafter until the announcement
date of such
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<PAGE> 53
transaction, or (d) with a wholly owned subsidiary organized under Texas law, if
such subsidiary is not affiliated with an Affiliated Shareholder other than
through such Affiliated Shareholder's ownership of voting stock of the
corporation. In addition, the Texas Business Combination Law does not apply to
any Texas corporation (i) the original articles of incorporation or bylaws of
which expressly elect not to be governed by the Texas Business Combination Law;
(ii) that, prior to December 31, 1997, adopts an amendment to its articles of
incorporation or bylaws making such an election, (iii) that, after December 31,
1997, adopts an amendment to its articles of incorporation or bylaws making such
an election that is approved by the affirmative vote of the holders of at least
66 2/3% of the outstanding voting stock, provided that any such amendment will
take effect 18 months after the date of the vote and would not apply to
transactions with an Affiliated Shareholder whose share acquisition date was on
or prior to the date of such vote. The Company does not currently contemplate
adopting such a charter or bylaw amendment and therefore will be covered by the
Texas Business Combination Law for the foreseeable future.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Harris
Trust & Savings Bank of New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Following this offering, the Company will have 7,060,361 shares of Common
Stock outstanding. The 2,200,000 shares of Common Stock sold in this offering as
well as the 2,250,000 shares sold in the initial public offering will be freely
tradeable in the public market without restriction under the Securities Act,
except that any shares held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, may generally be sold only in
compliance with the applicable provisions of Rule 144. Approximately 50,000
shares acquired pursuant to the exercise of options were covered by an effective
registration statement.
All other outstanding shares will have been issued and sold by the Company
in private transactions ("Restricted Shares") and may not be sold unless
registered under the Securities Act or an exemption therefrom is available, such
as Rule 144, Rule 144A or Rule 701. An aggregate of approximately 880,000
Restricted Shares of Common Stock are freely tradeable pursuant to Rule 144,
subject to the lock-up agreements discussed below.
All of the officers, directors and selling shareholders have agreed not to
sell any shares of Common Stock (other than the shares offered by the Selling
Shareholders in this offering) without the prior consent of Raymond James &
Associates, Inc. for a period of 120 days following the date of this Prospectus.
Following the expiration of such 120-day period, 1,880,314 shares will be
eligible for resale in the public market subject, where applicable, to the
volume limitations and other requirements of Rule 144. The shares subject to the
lock-up agreements include all outstanding shares that would otherwise be
eligible for resale in the public market pursuant to Rule 144 beginning 90 days
after the date of this Prospectus.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock (70,604 shares immediately after
this offering) or the average weekly trading volume in Common Stock during the
four calendar weeks preceding the date on which notice of such sale is filed
with the Securities and Exchange Commission. Sales under Rule 144 are also
subject to certain provisions relating to the manner and notice of sale and
availability of current public information about the Company. Affiliates may
sell shares which are not Restricted Shares in accordance with volume
limitations and other restrictions, but without regard to the one-year holding
period. A person who is not an affiliate of the Company at any time during the
90 days preceding a sale and who beneficially owns shares that were not acquired
from the Company or an affiliate of the Company within the past two years may
sell such shares under Rule 144 without regard to volume limitations, manner of
sale and notice provisions or the availability of current public information
concerning the Company. Rule 144A under the Securities Act permits the
52
<PAGE> 54
immediate sale by the current holders of restricted securities of all or a
portion of their shares to certain "qualified institutional buyers" as defined
in Rule 144A.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Securities Act may be
relied upon for the resale of securities originally issued by the Company prior
to the closing of this offering to its employees, directors, officers,
consultants or advisers under written compensatory benefit plans or contracts
relating to the compensation of such persons. Securities issued in reliance on
Rule 701 are Restricted Shares and beginning 90 days after the date of this
Prospectus may be sold by non-affiliates subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
the two-year holding period, subject to the lock-up agreements discussed above.
The Company has registered all shares reserved for issuance under the
Amended Plan and the Directors Stock Option Plan. All shares purchased in the
future under these plans will be available for resale in the public market
without restriction, except that affiliates must comply with the provisions of
Rule 144 other than the holding period requirement.
Pursuant to a registration rights agreement, certain of the Company's
shareholders were granted certain incidental or "piggy-back" registration rights
which allow them to include shares of Common Stock held by them in registrations
effected by the Company, subject to certain limitations. The Company has agreed
to pay the expenses of such registrations other than underwriting discounts,
commissions and brokerage fees. The Company and the shareholders who are parties
to the registration rights agreement have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
UNDERWRITING
The Underwriters named below, through their representatives, Raymond James
& Associates, Inc., Morgan Keegan & Company, Inc. and Rauscher Pierce Refsnes,
Inc. (the "Representatives"), have severally agreed, by and among the Company
and the Selling Shareholders and the Underwriters, to purchase from the Company
and the Selling Shareholders the number of shares of Common Stock set forth
below opposite their respective names, at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Raymond James & Associates, Inc. ...........................
Morgan Keegan & Company, Inc. ..............................
Rauscher Pierce Refsnes, Inc. ..............................
---------
Total............................................. 2,200,000
=========
</TABLE>
53
<PAGE> 55
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain conditions. The Underwriters are obligated to take and pay for
all shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any of such shares are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers, including the Underwriters, at
such price less a concession not in excess of $0. per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $0. per
share to certain other dealers. After the public offering, the public offering
price and other selling terms may be changed by the Underwriters. The
Representatives have informed the Company and the Selling Shareholders that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Certain of the Underwriters and the selling group members that currently
act as market makers for the Common Stock may engage in "passive market making"
in the Common Stock on the Nasdaq National Market in accordance with Rule 103 of
Regulation M under the Exchange Act. Rule 103 permits, upon satisfaction of
certain conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distribution to engage in limited market making activity when Rule 101 would
otherwise prohibit such activity. Rule 103 prohibits underwriters and selling
group members engaged in passive market making generally from entering a bid or
effecting a purchase at a price that exceeds the highest bid for those
securities displayed on the Nasdaq National Market by a market maker that is not
participating in the distribution of the Common Stock. Each underwriter or
selling group member engaged in passive market making is subject to a daily net
purchase limitation equal to 30% of such entity's average daily trading volume
during the two full consecutive calendar months immediately preceding the date
of the filing of the Registration Statement of which this Prospectus forms a
part.
The Company and the Selling Shareholders have granted to the Underwriters
an option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to an aggregate of 330,000 additional shares of Common Stock at
the public offering price, less the underwriting discounts and commissions set
forth on the cover page of this Prospectus. Of the shares subject to such
option, 231,825 will be sold by the Company and 98,175 will be sold by certain
Selling Shareholders. See "Principal and Selling Shareholders." To the extent
that the Underwriters exercise such option, each of the Underwriters will have a
firm commitment to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the above table
bears to the total shown, and the Company and the Selling Shareholders will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the shares of Common Stock offered hereby. If
purchased, the Underwriters will sell such additional shares on the same terms
as those on which the shares are being offered.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain civil
liabilities in connection with this offering, including liabilities under the
Securities Act.
The Company, its officers and directors, and the Selling Shareholders, have
agreed that for a period of 120 days from the date of this Prospectus they will
not, except with the prior written consent of Raymond James & Associates, Inc.,
sell, contract to sell or otherwise dispose of any shares of Common Stock. This
restriction does not apply to certain issuances of Common Stock by the Company
pursuant to its stock option plans.
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement which is on file as an exhibit to the Registration
Statement of which this Prospectus is a part.
54
<PAGE> 56
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby are being passed upon for the Company by Hughes & Luce, L.L.P., Austin,
Texas, and for the Underwriters by Baker & Botts, L.L.P., Dallas, Texas.
EXPERTS
The consolidated balance sheets as of December 31, 1995 and 1996 and the
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996, included in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Reports, registration statements, proxy statements, and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's Regional Offices: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of
such materials can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
The Commission maintains a Web site that contains reports, proxy statements,
information statements and other information regarding the Company. The
Commission's Web site address is http://www.sec.gov.
The Company furnishes its shareholders with annual reports containing
audited financial statements and such other periodic reports as it determines to
furnish or as may be required by law.
The Company has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. As used herein, the term "Registration Statement" means
the initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in said Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto.
Statements herein concerning the contents of any contract or other document are
not necessarily complete and in each instance reference is made to such contract
or other document filed with the Commission as an exhibit to the Registration
Statement, or otherwise, each such statement being qualified by and subject to
such reference in all respects.
55
<PAGE> 57
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1995, 1996 and
June 30, 1997 (unaudited).............................. F-3
Consolidated Statements of Income for the years ended
December 31, 1994, 1995, 1996 and for the six-month
unaudited periods ended June 30, 1996 and 1997......... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995, 1996 and for the
six-month unaudited period ended June 30, 1997......... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995, 1996 and for the six-month
unaudited periods ended June 30, 1996 and 1997......... F-6
Notes to Consolidated Financial Statements................ F-7
Financial Statement Schedule:
Report of Independent Accountants......................... F-28
Schedule II -- Valuation and Qualifying Accounts.......... F-29
</TABLE>
All other schedules are omitted as the required information is not
applicable or the information is presented in the consolidated financial
statements, related notes or other schedules.
F-1
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Schlotzsky's, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Schlotzsky's, Inc. and Subsidiaries as of December 31, 1995 and 1996 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Schlotzsky's, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Austin, Texas
February 28, 1997
F-2
<PAGE> 59
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -----------
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents............................... $12,344,682 $ 5,638,958 $ 7,601,588
Restricted certificates of deposit...................... 78,983 18,000 18,000
Royalties receivable.................................... 304,649 580,470 801,363
Other receivables....................................... 597,536 1,573,483 2,374,683
Prepaid expenses and other assets....................... 292,880 247,762 468,042
Real estate development, current portion................ 5,717,049 8,458,301 2,421,093
Notes receivable, current portion....................... 2,325,965 557,332 991,806
Notes receivable from related parties, current
portion............................................... 221,402 595,000 183,130
----------- ----------- -----------
Total current assets.......................... 21,883,146 17,669,306 14,859,705
----------- ----------- -----------
Property, equipment and leasehold improvements, net..... 4,139,619 5,440,882 7,463,004
Real estate development, less current portion........... -- 2,642,773 2,642,773
Notes receivable, less current portion.................. 1,474,311 2,656,502 2,694,581
Notes receivable from related parties, less current
portion............................................... 867,687 2,180,456 2,044,299
Investments and advances................................ 882,715 1,265,862 1,471,246
Deferred federal income tax asset....................... 531,870 607,448 582,023
Intangible assets, net.................................. 6,929,019 8,515,883 10,493,713
----------- ----------- -----------
Total assets.................................. $36,708,367 $40,979,112 $42,251,344
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt.................... $ 913,915 $ 482,205 $ 193,048
Accounts payable........................................ 589,532 1,540,527 334,955
Accrued liabilities..................................... 1,010,331 1,851,257 2,261,190
Federal income taxes payable............................ 619,382 -- 127,767
----------- ----------- -----------
Total current liabilities..................... 3,133,160 3,873,989 2,916,960
----------- ----------- -----------
Deferred revenue, net................................... 1,572,325 1,663,765 1,216,075
Long-term debt, less current maturities................. 3,028,517 3,129,337 3,645,659
----------- ----------- -----------
Total liabilities............................. 7,734,002 8,667,091 7,778,694
----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Class C -- no par value
Authorized -- 1,000,000 shares; issued -- none... -- -- --
Common stock, no par value, 30,000,000 shares
authorized, 5,509,998, 5,539,922 and 5,548,672
issued and outstanding at December 31, 1995 and
1996 and June 30, 1997, respectively............... 43,958 44,257 44,345
Additional paid-in capital............................ 26,238,964 26,493,165 26,563,078
Retained earnings..................................... 2,691,443 5,774,599 7,865,227
----------- ----------- -----------
Total stockholders' equity.................... 28,974,365 32,312,021 34,472,650
----------- ----------- -----------
Total liabilities and stockholders' equity.... $36,708,367 $40,979,112 $42,251,344
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-3
<PAGE> 60
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- --------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Royalties............................ $4,657,010 $ 7,424,810 $10,747,238 $4,920,512 $ 6,883,307
Franchise fees....................... 1,019,000 1,493,750 1,775,000 822,500 592,500
Developer fees....................... 2,792,524 2,665,562 1,992,750 1,010,750 125,000
Restaurant sales..................... 428,484 505,765 3,610,199 1,375,945 2,762,290
Brand contribution................... 150,000 397,064 1,294,982 359,797 1,341,823
Turnkey development.................. -- 41,006 725,913 119,791 1,447,768
Other fees and revenue............... 255,905 323,708 568,250 381,750 522,379
---------- ----------- ----------- ---------- -----------
Total revenues............... 9,302,923 12,851,665 20,714,332 8,991,045 13,675,067
Expenses:
Service costs:
Royalties......................... 1,121,934 2,405,299 3,791,384 1,673,165 2,507,957
Franchise fees.................... 660,875 766,625 958,500 448,250 312,500
Restaurant operations:
Cost of sales..................... 188,341 188,751 1,183,361 461,606 840,875
Labor costs....................... 153,705 408,575 1,424,434 606,897 1,088,381
Operating expenses................ 260,213 250,962 1,039,591 339,693 850,543
General and administrative........... 4,199,023 5,751,154 7,027,258 3,282,541 4,429,352
Depreciation and amortization........ 371,702 457,938 779,284 393,909 513,940
---------- ----------- ----------- ---------- -----------
Total expenses............... 6,955,793 10,229,304 16,203,812 7,206,061 10,543,548
---------- ----------- ----------- ---------- -----------
Income from operations................. 2,347,130 2,622,361 4,510,520 1,784,984 3,131,519
Other:
Interest income (expense), net....... (201,097) (149,151) 454,670 270,888 195,517
Other income......................... 225,664 137,976 132,075 96,468 --
---------- ----------- ----------- ---------- -----------
Income before income taxes and
extraordinary gain................... 2,371,697 2,611,186 5,097,265 2,152,340 3,327,036
Provision for federal and state income
taxes................................ 927,160 1,016,596 1,902,290 808,897 1,276,646
---------- ----------- ----------- ---------- -----------
Income before extraordinary item....... 1,444,537 1,594,590 3,194,975 1,343,443 2,050,390
Gain on extinguishment of debt, net of
applicable income taxes of $20,676
and $18,271 at December 31, 1994 and
1995, respectively................... 40,137 38,307 -- -- --
---------- ----------- ----------- ---------- -----------
Net income................... 1,484,674 1,632,897 3,194,975 1,343,443 2,050,390
Redeemable preferred stock dividends... (455,000) (544,274) -- -- --
---------- ----------- ----------- ---------- -----------
Net income available to
common stockholders........ $1,029,674 $ 1,088,623 $ 3,194,975 $1,343,443 $ 2,050,390
========== =========== =========== ========== ===========
Income per common share-primary:
Income before extraordinary item..... $ 0.42 $ 0.42 $ 0.57 $ 0.24 $ 0.36
Extraordinary item................... 0.02 0.02 -- -- --
---------- ----------- ----------- ---------- -----------
Income per common share.............. $ 0.44 $ 0.44 $ 0.57 $ 0.24 $ 0.36
========== =========== =========== ========== ===========
Weighted average shares
outstanding....................... 2,341,218 2,451,898 5,639,225 5,669,226 5,700,591
========== =========== =========== ========== ===========
Income per common share -- fully
diluted:
Income before extraordinary item..... $ 0.41 $ 0.41 $ 0.57 $ 0.24 $ 0.36
Extraordinary item................... 0.01 0.01 -- -- --
---------- ----------- ----------- ---------- -----------
Income per common share.............. $ 0.42 $ 0.42 $ 0.57 $ 0.24 $ 0.36
========== =========== =========== ========== ===========
Weighted average shares
outstanding....................... 3,290,410 3,440,643 5,639,225 5,679,872 5,700,591
========== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-4
<PAGE> 61
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL TOTAL
SHARES PAID-IN RETAINED STOCKHOLDERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS EQUITY
----------- ------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994......... 2,187,500 $10,733 $ -- $ 573,146 $ 583,879
Redeemable preferred stock
dividends...................... -- -- -- (455,000) (455,000)
Net income....................... -- -- -- 1,484,674 1,484,674
---------- ------- ----------- ---------- -----------
Balance, December 31, 1994....... 2,187,500 10,733 -- 1,602,820 1,613,553
Redeemable preferred stock
dividends...................... -- -- -- (544,274) (544,274)
Public sale of stock............. 1,850,000 18,500 17,575,264 -- 17,593,764
Conversion of redeemable
preferred stock................ 1,354,167 13,542 7,964,883 -- 7,978,425
Conversion of redeemable
preferred stock dividends...... 118,331 1,183 698,817 -- 700,000
Net income....................... -- -- -- 1,632,897 1,632,897
---------- ------- ----------- ---------- -----------
Balance, December 31, 1995....... 5,509,998 43,958 26,238,964 2,691,443 28,974,365
Options exercised................ 29,924 299 254,201 (111,819) 142,681
Net income -- -- -- 3,194,975 3,194,975
---------- ------- ----------- ---------- -----------
Balance, December 31, 1996....... 5,539,922 44,257 26,493,165 5,774,599 32,312,021
Options exercised................ 8,750 88 69,913 40,238 110,239
Net income....................... -- -- -- 2,050,390 2,050,390
---------- ------- ----------- ---------- -----------
Balance, June 30, 1997
(unaudited).................... 5,548,672 44,345 $26,563,078 $7,865,227 $34,472,650
========== ======= =========== ========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-5
<PAGE> 62
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 1,484,674 $ 1,632,897 $ 3,194,975 $ 1,343,443 $ 2,050,390
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............. 371,702 457,938 779,284 393,909 513,939
Bad debt expense.......................... -- -- 187,774 -- --
Gain on extinguishment of debt, net of
tax..................................... (40,137) (38,307) -- -- --
Financed fees............................. (1,790,823) (1,803,581) (1,860,796) (1,033,063) (102,032)
Payments received on financed fees........ 500,373 670,002 829,590 343,325 529,539
Non-recurring expense relating to the
issuance of stock to a non-employee..... -- -- 103,791 103,791 --
Changes in assets and liabilities:
Accounts receivable..................... (386,305) (32,830) (1,251,768) (445,503) (1,022,092)
Prepaid expenses and other assets....... (187,468) 70,711 45,118 (28,750) (220,280)
Deferred revenue........................ 113,970 491,270 91,440 (133,643) (447,690)
Deferred federal income tax asset....... (49,039) (183,694) (75,578) (17,595) 25,455
Accounts payable........................ (161,622) 205,723 950,995 (213,986) (1,205,572)
Accrued liabilities..................... 138,503 541,654 221,544 (71,555) 537,700
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................ (6,172) 2,011,783 3,216,369 240,373 659,357
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Expenditures for property and equipment..... (270,022) (1,905,795) (1,664,363) (404,774) (2,275,200)
Acquisition of minority interest and
intangible assets......................... (412,983) (1,181,369) (2,227,297) (1,118,628) (2,173,570)
Redemption of restricted certificates of
deposit................................... 277,435 13,582 60,983 -- --
Purchase of restricted certificates of
deposit................................... (170,000) -- -- -- --
Issuance of notes receivable................ (169,228) (590,790) (603,121) (525,409) (1,229,638)
Collections on notes receivable............. 340,432 158,361 235,933 191,406 886,785
Acquisition of investments.................. -- (66,788) (83,147) 236,108 (205,384)
Advances to limited partnership,
stockholders and affiliates............... (794,527) (258,818) (45,014) (23,885) (18,970)
Distributions and collections from limited
partnership, stockholders and
affiliates................................ 530,034 469,748 79,958 4,958 --
Purchase of real estate held for sale....... (1,088,474) (5,597,727) (8,725,306) (5,759,579) (8,293,914)
Proceeds from sale of real estate........... -- 824,079 3,341,281 2,512,670 14,275,761
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities................ (1,757,333) (8,135,517) (9,630,093) (4,887,133) 965,870
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Sale of stock............................... -- 18,925,500 -- -- --
Stock issue costs........................... -- (1,331,736) (51,180) -- --
Options exercised........................... -- -- 90,070 59,376 110,239
Proceeds from issuance of notes payable and
long-term debt............................ 2,251,197 7,012,174 583,774 169,043 679,360
Principal payments on notes payable and
long-term debt............................ (2,406,823) (7,065,992) (914,664) (819,342) (452,196)
Proceeds from issuance of redeemable
preferred stock........................... 3,000,000 -- -- -- --
Cash dividends on redeemable preferred
stock..................................... (262,500) (124,274) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities................ 2,581,874 17,415,672 (292,000) (590,923) 337,403
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................. 818,369 11,291,938 (6,705,724) (5,237,683) 1,962,630
Cash and cash equivalents at beginning of
year........................................ 234,375 1,052,744 12,344,682 12,344,682 5,638,958
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year...... $ 1,052,744 $12,344,682 $ 5,638,958 $ 7,106,999 $ 7,601,588
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-6
<PAGE> 63
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Information
The consolidated financial statements and following notes, insofar as they
are applicable to the six-month periods ended June 30, 1996 and 1997, and
transactions subsequent to February 28, 1997, the date of Report of Independent
Accountants, are not covered by the Report of Independent Accountants. In the
opinion of management, all adjustments, consisting of only normal recurring
adjustments considered necessary for a fair presentation of the unaudited
consolidated results of operations and cash flows for the six-month period ended
June 30, 1997 have been included, on the same basis as the audited consolidated
financial statements.
Business
Schlotzsky's, Inc. and Subsidiaries (the "Company") is a franchisor of
quick service restaurants ("Schlotzsky's" or "Schlotzsky's Deli") that feature
made-to-order sandwiches, which had 612 stores located in 38 states, the
District of Columbia, Argentina, Australia, Canada, Germany, Guatemala, Korea,
Japan, Lebanon, Mexico, Saudi Arabia, Sweden, Turkey and the United Kingdom.
Approximately 32% of franchised stores are located in Texas. In addition, the
Company had granted territorial rights to Area Developers located in all 50
states and to Master Licensees in 46 foreign countries for a fee which is
typically payable in cash and promissory notes receivable generally
collateralized by the related territorial rights.
The Company also operates a Turnkey Real Estate Development Program (the
"Turnkey Program") to further assist franchisees in obtaining store sites.
Organization
The Company's organization includes Schlotzsky's, Inc. (the parent
corporation) and its wholly-owned subsidiaries Schlotzsky's Restaurant, Inc.,
Schlotzsky's Real Estate, Inc., Schlotzsky's Equipment Corporation, Schlotzsky's
Brands, Inc. and DFW Restaurant Transfer Corp.
During 1996, an additional corporation, 56th and 6th, Inc. was formed in
connection with the purchase of a restaurant located in New York. This
corporation is wholly-owned by Schlotzsky's Restaurant, Inc. Also in 1996,
Schlotzsky's Restaurant, Inc. purchased the remaining interest in 218 Beverage
Corporation and is now the sole shareholder. The purpose of this entity is to
allow for the sale of adult beverages in the Company-owned restaurants.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Schlotzsky's, Inc., a Texas corporation, and its wholly-owned subsidiaries. All
significant intercompany balances and transactions are eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents include unrestricted highly liquid investments purchased
with an original maturity date of three months or less. At December 31, 1995 and
1996 and June 30, 1997 cash equivalents totaling
F-7
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SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $11,553,000, $1,962,000 and $5,073,000, respectively, consisted
primarily of money market accounts and overnight repurchase agreements.
Notes Receivable
The Company obtains annual valuations of all Area Developer and Master
Licensee promissory notes receivable from an independent financial services
institution. For the year ended December 31, 1995, no valuation allowance was
necessary as the cost basis of each instrument approximated fair value. For the
year ended December 31, 1996, a valuation allowance of approximately $188,000
was established to adjust the cost basis to estimated fair value.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost, net of
accumulated depreciation and amortization. Expenditures for normal maintenance
of property and equipment are charged against income as incurred. Expenditures
which significantly extend the useful lives of the assets are capitalized. The
costs of assets retired or otherwise disposed of and the related accumulated
depreciation and amortization balances are removed from the accounts and any
resulting gain or loss is included in income. Depreciation and amortization is
calculated using straight-line and accelerated methods over the estimated useful
lives of the assets, or lease term for leasehold improvements, if less.
Investments and Advances
Investments are stated at the lower of cost or market. Limited partnership
investments are accounted for under the equity method, and accordingly, the
Company's investment is adjusted for allocated profits, losses and
distributions.
Real Estate Development
Under the Turnkey Program, following the identification of a site by the
Company and an Area Developer, the Company typically purchases or leases the
site, designs and constructs a Schlotzsky's Deli Restaurant on the site which is
then leased or subleased to a franchisee. The Company will typically sell the
improved property and assign its lease to a third-party investor, or in the case
of a leased property, assign the lease and sublease to an investor.
Real estate development in process is stated at the lower of cost or
estimated net realizable value. Land, site development, building and equipment
costs, including capitalized carrying costs (primarily interest incurred and
property taxes) are accumulated by specific development. Construction costs
incurred in connection with the development of properties are capitalized to
individual projects. Generally, interest incurred and property taxes are
capitalized until the related properties are ready for sale; thereafter, such
costs are charged to expense as incurred.
F-8
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SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Turnkey development revenue consists of the following:
<TABLE>
<CAPTION>
FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
1996 1997
----------------- -------------
(UNAUDITED)
<S> <C> <C>
Proceeds from sales to investors and franchisees............ $ 6,638,150 $ 12,077,301
Management fees............................................. 174,979 100,000
----------- ------------
Gross development revenue......................... 6,813,129 12,177,301
Development costs........................................... (6,455,618) (10,984,228)
----------- ------------
Gain on sale of turnkey projects.................. 357,511 1,193,073
Rental income............................................... 368,402 254,695
----------- ------------
Total turnkey development revenue................. $ 725,913 $ 1,447,768
=========== ============
</TABLE>
The following table reflects system performance of the Turnkey Program
since its inception in 1995.
TURNKEY PROGRAM DEVELOPMENT
<TABLE>
<CAPTION>
NUMBER OF UNITS
-------------------------
1997
1995 1996 (6 MONTHS)
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Sites in process at beginning of period................. 0 27 35
Sites beginning development during the period........... 32 19 30
Sites completed as Company-owned stores................. 0 (1) (1)
Sites sold.............................................. (5) (10) (15)
-- --- ---
Sites in process at end of period....................... 27 35 49
== === ===
</TABLE>
<TABLE>
<CAPTION>
INVESTED AT
JUNE 30, 1997
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Open (receiving rent & royalties)....................... 2 8 2 $1,056,000
Investment Sites (under construction)................... 9 9 7 2,448,000
Predevelopment Sites (prequalification)................. 11 13 36 150,000
Other................................................... 5 5 4 1,410,000
-- -- -- ----------
27 35 49 $5,064,000
== == == ==========
</TABLE>
Turnkey Program properties which management expects to complete and sell
within the next year are classified as current assets.
Intangible Assets
Intangible assets consist primarily of the Company's original franchise
rights, royalty values, developer and franchise rights related to the Company's
reacquiring of franchises and developer rights. Intangible assets are amortized
over their estimated useful lives ranging from 4 to 40 years.
At each balance sheet date, the Company evaluates the propriety of the
carrying amount of its intangible assets, as well as the amortization period for
each intangible. If an indicator of impairment is present, the Company compares
the projected undiscounted operating income for the related business with the
unamortized balance of the related intangible asset. If an imminent loss exists,
management estimates the fair value of the intangible asset based on future
operating cash flows for the next 10 years, discounted at the Company's primary
borrowing rate. The excess of the unamortized balance of the intangible asset
over the fair value, as
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SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined, is charged to impairment loss. At this time, the Company believes
that no impairment of its intangibles has occurred and that no reduction of the
carrying amounts or estimated useful lives is warranted.
Revenue Recognition
Royalties:
Royalties are paid to the Company by franchisees at 4% to 6% of gross
franchise sales. Royalties are recognized in the period the related gross
franchise sales are earned.
Franchise Fees:
Nonrefundable proceeds from the awarding of a franchise are recognized
as revenue when the Company has performed substantially all services for
the franchisee as stipulated in the franchise agreement, typically at store
opening. Franchise fees collected but not yet recognized are recorded, net
of deferred direct incremental expenses, as deferred revenue in the
accompanying consolidated financial statements.
Developer Fees:
The Company will convey rights to certain persons, under agreements
("Area Developer Agreements") to act as an area developer within a specific
development area for a specified term. Developers within the United States
("Area Developers") locate prospective new franchisees, perform site
selection duties and service the franchisees subsequent to the store
opening. The Company charges the Area Developers a nonrefundable fee for
the rights conveyed. The Company typically collects a portion of the fee in
cash at closing of the Area Developer Agreements, and extends terms on the
remainder typically not exceeding three years.
International developers ("Master Licensees") have the exclusive right
to develop and license the development and operation of Schlotzsky's
restaurants using the Company's system and trademarks within the
development area. The rights to develop, operate and sublicense the
development and operation of Schlotzsky's restaurants in the foreign
territory are granted pursuant to the terms and conditions of a Master
License Agreement.
The Company has also entered into Master Development Agreements or
Territorial Agreements (collectively the "Territorial Agreements") which,
for a nonrefundable reservation fee, grants the right to negotiate
exclusive territorial rights to develop Schlotzsky's restaurants in the
territory, subject to and in accordance with terms and conditions of a
Master License Agreement; however, the right to develop, operate and
sublicense the development and operation of Schlotzsky's restaurants in the
territory is not granted until the execution of the Master License
Agreement. The Territorial Agreement specifies the desired economic terms
and basic form of the Master License Agreement. The Company requires the
Master Licensee to obtain clauses, covenants and agreements to comply with
and conform to the business practices or laws of the respective territory.
The cost of conforming the contract of the Master License Agreement is the
responsibility of Master Licensee. If the Company cannot reasonably satisfy
itself of the enforceability of such clauses, covenants and agreements
within the territory, the Company will not be obligated to grant a Master
License Agreement and any rights granted under the Territorial Agreements
will terminate immediately upon notice by the Company.
The Company ordinarily collects approximately 15% to 35% of cash at
closing of either a Territorial Agreement or Master License Agreement, with
the remainder financed typically over a term not exceeding four years,
depending on the creditworthiness of the maker and guarantor of the note.
With respect to Area Developers and Master Licensees, the Company
recognizes as revenue the nonrefundable fees received in cash and the fair
value of the financed portion as established by an
F-10
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SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
independent third party, net of an appropriate discount for any interest
free financed portion, and any incentive fees due, upon fulfillment of
substantially all of its contractual responsibilities and obligations to
the Area Developers and Master Licensees. For Area Developers, this
includes providing manuals and sales offering materials, which typically
coincides with the execution of the Area Developer Agreement and the
receipt of cash and a promissory note. With respect to Master Licensees,
the Company's duties to the Master Licensees include providing manuals,
initial training if requested, and reasonable efforts to obtain
registration of the Company's trademarks in the applicable foreign
territories. Completion of the Company's duties typically coincides with
the execution of a Territorial Agreement or Master License Agreement and
the receipt of cash and a promissory note.
Area Developers and Master Licensees are required to meet certain
performance requirements under their agreements which include minimum store
opening schedules, performance standards and compliance with the terms of
their notes to the Company, if any. Failure to meet these requirements
could result in the Company terminating their agreements.
In general, the Area Developers and Master Licensees then receive a
fee for recruitment and development, including advertising, soliciting,
qualifying and closing sales as well as consultation and advice in
establishment, construction, financing and opening of restaurants in their
territory. Area Developers, in general, receive a fee equal to one-half of
franchise fee paid by franchisees to the Company. Master Licensees collect
the initial sublicense and developer fees and then remit a portion of these
fees back to the Company. The Company expects to receive approximately
one-third to one-half of these fees from the Master Licensee.
In addition, Area Developers and Master Licensees receive a portion of
the ongoing royalties from the franchised restaurants for providing service
and support to the franchisees in their development area. Area Developers
typically receive 2.5% out of the 6% ongoing royalties and Master Licensees
typically retain two-thirds of ongoing royalties, remitting one-third to
the Company.
Royalty Service Costs
In accordance with the Area Development Agreements, the Company typically
pays Area Developers 2.5% out of the 6% royalties received from franchisees.
Royalty service costs are recognized in the period the related royalties are
recognized.
Franchise Fee Development Costs
In accordance with the Area Development Agreements, the Company pays Area
Developers approximately one-half of the initial franchise fees collected from
franchise sales in a specified development area. These costs are recognized as
expenses when the Company has performed substantially all services for the
franchisee as stipulated in the franchise agreement, typically at store opening.
Franchise fee development costs paid, but not yet recognized, are recorded as a
reduction of gross deferred revenue in the accompanying consolidated financial
statements.
Income Taxes
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
under which deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax expenses or
credits are based on the changes in the asset or liability from period to
period.
F-11
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SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments as defined by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," include cash and cash
equivalents, restricted certificates of deposit, receivables, notes receivable,
accounts payable, accrued liabilities and debt. All financial instruments are
accounted for on a historical cost basis which approximates fair value at
December 31, 1995 and 1996 and June 30, 1997, except for notes receivable from
Area Developers and Master Licensees which are valued at the lower of appraised
value or cost.
Earnings Per Share
The computation of primary earnings per common share is based upon the
weighted average number of common shares outstanding during the period plus the
effect of common shares contingently issuable, primarily from stock options and
warrants, in periods in which they have a dilutive effect.
The fully diluted earnings per share computation reflects the effect of
common shares contingently issuable upon the exercise of stock options and
warrants in periods in which such exercise would cause dilution, and for
convertible securities assumed converted to common stock in periods which such
conversion would cause dilution.
In computing income per common share -- fully diluted, earnings available
to common stockholders was net of redeemable preferred dividends totaling
$105,000 and $340,261 at December 31, 1994 and 1995, respectively. See note on
"Stockholders' Equity."
New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128 "Earnings per Share" and No. 129 "Disclosure of Information About
Capital Structure." SFAS No. 128 specifies the computation, presentation and
disclosure requirements for earnings per share and is designed to improve
earnings per share information by simplifying the existing computational
guidelines and revising the previous disclosure requirements. SFAS No. 129
consolidates the existing disclosure requirements to disclose certain
information about an entity's capital structure. Both statements are effective
for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Restated Information," which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997.
Management does not believe the implementation of these recent accounting
pronouncements will have a material effect on its consolidated financial
statements.
F-12
<PAGE> 69
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes receivable from Area Developers (under Area
Development Agreements) and Master Licensees (under
Master License and Territorial Agreements) bearing
interest ranging from 7.5% to 10% per annum and where no
interest is stated, imputed interest at 9% per annum,
due through 1998........................................ $ 3,279,748 $2,313,918 $2,471,821
Notes receivable from franchisees related to the sale of
Company owned stores, bearing interest at 8% per annum,
collateralized by the stores with monthly principal and
interest installments ranging from $1,723 to $2,428 due
through December 2000................................... 273,716 257,106 247,785
Notes receivable from franchisees bearing interest ranging
from 8.75% to 9.5% per annum, collateralized by
franchisees' property and equipment with payments due
through August 1999..................................... -- 454,772 465,633
Notes receivable from certain parties secured by real
estate.................................................. -- -- 245,000
Notes receivable from various parties bearing interest
ranging from 8% to 10% per annum, collateralized by an
interest in a limited partnership and certain other
equity instruments with payments due through June
2000.................................................... 143,043 178,275 186,071
Other..................................................... 103,769 9,763 70,077
----------- ---------- ----------
3,800,276 3,213,834 3,686,387
Current portion........................................... (2,325,965) (557,332) (991,806)
----------- ---------- ----------
Notes receivable, less current portion.................... $ 1,474,311 $2,656,502 $2,694,581
=========== ========== ==========
</TABLE>
During 1995, notes receivable from Area Developers and Master Licensees
totaling approximately $1,122,000 were extended beyond their original terms,
including approximately $462,000 which was due in 1995 and was extended beyond
December 31, 1995.
During 1996, notes receivable from Area Developers and Master Licensees
totaling approximately $255,000 were extended beyond their original terms,
including approximately $230,000 which was due in 1996 and was extended beyond
December 31, 1996.
For the six-month period ended June 30, 1997, a note receivable from a
Master Licensee totaling approximately $225,000 was extended beyond its original
terms, including approximately $125,000 which was due during this period and was
extended beyond June 30, 1997.
F-13
<PAGE> 70
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable from related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note receivable from Master Licensee, an organization of
which a member of the Company's Board of Directors is
Managing Director, bearing interest at 9% per annum due
through December 1998.................................. $ 350,000 $ 275,000 $ 275,000
Notes receivable from certain stockholders of the
Company, bearing interest at 7.5% per annum, principal
and accrued interest due quarterly through 2001........ 242,577 237,618 237,618
Notes receivable from related entities controlled by
stockholders of the Company, bearing interest at 9% per
annum, principal and accrued interest due annually
through 2001 collateralized by real estate............. 496,512 541,527 560,496
Note receivable from Master Licensee, an organization of
which a member of the Company's management is a
shareholder, bearing interest at 8% per annum due
through December 2006.................................. -- 875,000 455,000
Notes receivable from Master Licensee, an organization of
which the Company is a preferred shareholder, bearing
interest at 9% per annum, principal due ratably
beginning December 31, 1998 through December 31, 2007.
(see note on "Related Party Transactions")............. -- 846,311 699,315
---------- ---------- ----------
1,089,089 2,775,456 2,227,429
Current portion.......................................... (221,402) (595,000) (183,130)
---------- ---------- ----------
Notes receivable, less current portion................... $ 867,687 $2,180,456 $2,044,299
========== ========== ==========
</TABLE>
During 1996, notes receivable from Master Licensees, certain stockholders
and entities controlled by certain stockholders totaling approximately
$1,625,000 were extended beyond their original terms, including approximately
$540,000, which was due in 1996 and was extended beyond December 31, 1996.
From time to time, the Company makes advances to certain stockholders,
related partnerships and affiliates (see notes on "Investments and Advances" and
"Related Party Transactions").
F-14
<PAGE> 71
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DEPRECIABLE DECEMBER 31,
DEPRECIATION LIFE ----------------------- JUNE 30,
METHOD (YEARS) 1995 1996 1997
------------- ------------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Building....................... Straight Line 32 $ 720,741 $ 720,741 $ 720,741
Furniture, fixtures and
equipment.................... Straight Line 5 to 7 1,036,628 1,684,840 2,596,655
Leasehold improvements......... Straight Line 25 to 32 2,677,839 3,452,202 4,403,782
---------- ---------- -----------
4,435,208 5,857,783 7,721,178
Accumulated depreciation and amortization..................... (445,589) (808,612) (1,061,690)
---------- ---------- -----------
3,989,619 5,049,171 6,659,488
Land.......................................................... 150,000 391,711 803,516
---------- ---------- -----------
Property, equipment and leasehold improvements, net........... $4,139,619 $5,440,882 $ 7,463,004
========== ========== ===========
</TABLE>
Depreciation and amortization of property, equipment and leasehold
improvements totaled approximately $154,000, $169,000, $363,000, $217,000 and
$253,000 for the years ended December 31, 1994, 1995 and 1996 and the six-month
periods ended June 30, 1996 and 1997, respectively.
5. INVESTMENTS AND ADVANCES
Investments and advances consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Limited partnership:
Investment........................................ $180,598 $ 191,744 $ 200,254
Advances.......................................... 439,046 511,047 511,047
-------- ---------- ----------
619,644 702,791 711,301
Building art........................................ 263,071 263,071 263,071
Investment in Master Licensee....................... -- 300,000 496,874
-------- ---------- ----------
Investments and advances............................ $882,715 $1,265,862 $1,471,246
======== ========== ==========
</TABLE>
Limited Partnership
The Company owns a 40% general and limited partnership interest in an
entity engaged in the acquisition, development and construction of certain
commercial real estate. The partnership has the following assets, liabilities
and partners' capital:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Assets............................................. $2,280,697 $2,359,498 $2,346,337
Liabilities........................................ 1,648,515 1,699,445 1,665,007
Partners' Capital.................................. 632,182 660,053 681,330
</TABLE>
The partnership's net profits, losses and distributions are allocated based
upon methods set forth in the partnership agreement. The Company is allocated
25% of distributions and like amount of net profits until the
F-15
<PAGE> 72
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other limited partner has received an aggregate amount equal to its aggregate
contribution. Thereafter, remaining net profits and all losses are allocated 40%
to the Company.
The Company is the guarantor of all partnership indebtedness which consist
of borrowings under a $1,150,000 bank line of credit with an original maturity
date of December 31, 1995 with approximately $1,146,000, $1,139,000 and
$1,128,000 outstanding at December 31, 1995 and 1996 and June 30, 1997,
respectively. Principal and interest of $10,665 is due monthly until April 2001
whereupon all outstanding principal and interest is due. The line of credit
bears interest at 1.25% above the bank's prime rate until maturity and after.
The indebtedness is collateralized by project real estate, and related leases
and rents. The partnership has entered into leases for approximately 60% of the
17,600 square feet of its retail shopping center for a term of 10 years at
approximately $15.00 per square foot per annum which began in September 1995.
The partnership completed the development of this project in February 1996.
Investment in Master Licensee
In November 1996, the Company paid $300,000 to a Master Licensee and also
agreed to serve as guarantor of additional financing not to exceed $400,000. At
December 31, 1996 and June 30, 1997, the outstanding balance on the additional
financing guaranteed by the Company was $300,000 and $400,000, respectively. See
note on "Related Party Transactions."
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
AMORTIZATION DECEMBER 31,
PERIOD ------------------------- JUNE 30,
(YEARS) 1995 1996 1997
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Original franchise rights......... 40 $ 5,688,892 $ 5,688,892 $ 5,688,892
Royalty value..................... 20 1,359,576 1,359,576 1,359,576
Developer and franchise rights
acquired........................ 20 to 40 505,420 1,915,630 4,102,574
Goodwill.......................... 20 254,950 635,082 571,030
Debt issue costs.................. 5 to 25 107,328 107,328 110,468
Organization costs................ 4 to 10 29,021 29,021 29,021
Other intangible assets........... up to 5 124,029 260,980 308,518
----------- ----------- -----------
8,069,216 9,996,509 12,170,079
Less accumulated
amortization............ (1,140,197) (1,480,626) (1,676,366)
----------- ----------- -----------
Intangible assets,
net................... $ 6,929,019 $ 8,515,883 $10,493,713
=========== =========== ===========
</TABLE>
In 1995, the Company reacquired franchises and franchise rights in Omaha,
Nebraska, Albuquerque, New Mexico and Houston, Texas. The franchises acquired in
Albuquerque and two of the four franchises acquired in Omaha, were upgraded to
specification then resold with noncompete areas reduced from a three mile to
3/4 mile radius and royalties increased from 4% to 6% of gross revenues. The
excess of reacquisition and upgrade costs over franchise sale proceeds are
reported as royalty value, amortized into income over the 20 year term of the
related franchises. The franchise acquired in Houston was resold in December
1995.
In 1996, the Company reacquired franchises and developer and franchise
rights in New York and Texas. The purchase price of the New York franchise of
$250,000 exceeded the fair value of the identifiable assets acquired by
approximately $150,000. The purchase price of the Texas franchise of $350,000
exceeded the fair value of the identifiable assets acquired by approximately
$230,000. The franchise acquisitions were accounted
F-16
<PAGE> 73
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for using the purchase method of accounting and the resulting goodwill is being
amortized on a straight-line basis over 20 years. The developer rights acquired
under these transactions totaled approximately $986,000 and are being amortized
on a straight-line basis over 40 years.
For the six-month period ended June 30, 1997, the Company reacquired the
developer rights in various parts of Southern California and Connecticut. The
purchase price of these developer rights was $775,000 and $200,000,
respectively. Also, the Company reacquired franchise rights in Austin, Texas for
approximately $951,000. These rights are being amortized on a straight-line
basis over 40 years.
Amortization of intangible assets totaled approximately $217,000, $285,000,
$340,000, $157,000 and $200,000 for the years ended December 31, 1994, 1995 and
1996 and the six-month periods ended June 30, 1996 and 1997, respectively.
7. DEFERRED REVENUE
Franchise and developer fees collected but not yet recognized into income
less related direct incremental costs paid but not yet charged to expense are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred franchise and developer fees......... $ 3,282,500 $ 2,992,500 $ 2,570,000
Deferred direct incremental costs:
Deferred franchise fee development service
costs.................................... (1,660,875) (1,547,125) (1,313,125)
Deferred commissions........................ (26,500) (21,750) (14,250)
Other deferred costs........................ (22,800) (23,850) (26,550)
Deferred revenue -- real estate development... -- 263,990 --
----------- ----------- -----------
$ 1,572,325 $ 1,663,765 $ 1,216,075
=========== =========== ===========
</TABLE>
8. NOTES PAYABLE
In February 1997, the Company secured a line of credit of up to $5,000,000
to provide financing for the Turnkey Program. As of June 30, 1997, the Company
has not drawn against this line of credit.
In June 1997, the Company secured two additional lines of credit of
$15,000,000 from a financial institution. As of June 30, 1997, neither of the
new lines had been drawn upon.
F-17
<PAGE> 74
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996 JUNE 30, 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Capitalized lease, bearing an effective interest rate
of 11.24%, collateralized by real property; monthly
principal and interest installments of $12,615
through 2020........................................ $1,260,780 $1,250,583 $1,244,086
Note payable to a financial institution bearing
interest at 9.47% per annum through 2000. From 2000
through maturity, the note will bear interest at the
lesser of a certain bank's prime lending rate plus
1.75%, or a mutually agreed upon rate. Payments are
due in periodic principal and interest installments
through December 2002, at which time all remaining
principal and interest is due. The note is
collateralized by equipment and assignment of
royalties from certain franchisees.................. 1,094,345 1,024,696 986,771
Note payable to a financial institution bearing
interest at 10.6% per annum through July 2002.
Payments of principal and interest are due monthly.
The note is collateralized by equipment, furniture
and fixtures of a Company-owned restaurant.......... -- -- 154,361
Note payable to a bank, bearing interest at 9.25%,
collateralized by certain real property currently
used as Company headquarters. Monthly installments
of $2,778 plus interest are due through March 2002,
at which time all remaining principal and interest
is due.............................................. 474,998 441,663 424,994
Various notes payable to individuals and corporations,
bearing interest at 6% to 9% per annum, due in
periodic principal and interest installments through
1999, and collateralized by equipment and assignment
of royalties from certain franchisees............... 352,341 694,600 989,003
Note payable to a trust convertible into a maximum
100,000 shares common stock, bearing interest at a
certain bank's prime lending rate plus 1.5% (10% at
December 31, 1995) per annum, due in periodic
principal and interest installments with all unpaid
principal and interest due September 1998;
collateralized by royalties from certain
franchisees......................................... 650,000 -- --
Note payable to a financing institution bearing
interest at 12% per annum, due in monthly principal
and interest installments of $1,435 through December
1996................................................ 99,000 -- --
Note payable to a limited partnership, bearing
interest at 9%. One payment of principal and
interest totaling $240,168 due January 1998......... -- 200,000 39,492
Other................................................. 10,968 -- --
---------- ---------- ----------
3,942,432 3,611,542 3,838,707
Current maturities............................. (913,915) (482,205) (193,048)
---------- ---------- ----------
Long-term debt, less current maturities..... $3,028,517 $3,129,337 $3,645,659
========== ========== ==========
</TABLE>
F-18
<PAGE> 75
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate annual maturities of long-term debt at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C> <C>
1997..................................................... $ 482,205
1998..................................................... 250,789
1999..................................................... 533,382
2000..................................................... 176,741
2001..................................................... 164,878
Thereafter............................................... 2,003,547
----------
$3,611,542
==========
</TABLE>
Interest expense, net of amounts capitalized, totaled approximately
$389,000, $435,000, $331,000, $163,000 and $161,000 for the years ended December
31, 1994, 1995 and 1996 and the six-month periods ended June 30, 1996 and June
30, 1997, respectively.
10. INCOME TAXES
The provision for federal and state income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
-------- ---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal:
Current provision................. $866,498 $1,136,317 $1,886,719 $795,020 $1,130,653
Deferred provision (benefit)...... (49,039) (183,694) (75,578) (17,595) 25,455
-------- ---------- ---------- -------- ----------
Total federal............. 817,459 952,623 1,811,141 777,425 1,156,108
-------- ---------- ---------- -------- ----------
State -- current provision.......... 109,701 63,973 91,149 31,472 120,538
-------- ---------- ---------- -------- ----------
Provision for federal and state
income taxes before extraordinary
item.............................. 927,160 1,016,596 1,902,290 808,897 1,276,646
-------- ---------- ---------- -------- ----------
Tax provision of extraordinary
item.............................. 20,676 18,271 -- -- --
-------- ---------- ---------- -------- ----------
Total provision for income taxes.... $947,836 $1,034,867 $1,902,290 $808,897 $1,276,646
======== ========== ========== ======== ==========
</TABLE>
The differences between the income tax expense from continuing operations
and the amount that would result if the statutory rates were applied to the
pretax financial income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
-------- ---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expense at statutory rate of 34%........ $827,053 $ 908,342 $1,733,070 $731,796 $1,131,192
Nondeductible items, including
amortization.......................... 52,755 66,540 86,915 45,629 65,899
State income taxes, net................. 68,028 42,222 60,158 31,472 79,555
Other................................... -- 17,763 22,147 -- --
-------- ---------- ---------- -------- ----------
$947,836 $1,034,867 $1,902,290 $808,897 $1,276,646
======== ========== ========== ======== ==========
</TABLE>
F-19
<PAGE> 76
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ JUNE 30,
1994 1995 1996 1997
-------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Assets:
Non-current:
Deferred revenue................................. $344,815 $534,590 $475,924 $412,190
Accrued liabilities.............................. -- -- 145,451 145,451
Other............................................ 24,382 12,910 27,711 24,382
-------- -------- -------- --------
Gross deferred tax assets........................ 369,197 547,500 649,086 582,023
-------- -------- -------- --------
Liabilities:
Current:
Deferred costs................................... -- 15,630 -- --
Property, equipment and intangibles.............. -- -- 41,638 --
Non-current:
Installment sale................................. 21,021 -- -- --
-------- -------- -------- --------
Gross deferred tax liabilities...................... 21,021 15,630 41,638 --
-------- -------- -------- --------
Net deferred asset.......................... $348,176 $531,870 $607,448 $582,023
======== ======== ======== ========
</TABLE>
11. STOCKHOLDERS' EQUITY
Redeemable Preferred Stock
The Preferred Stock was convertible to Common Stock, at the holder's
option, any time prior to redemption, and was also subject to automatic
conversion on similar terms upon the registration and sale of at least
$5,000,000 of the Company's common stock or upon a two thirds vote of preferred
stockholders. During December 1995, all of the Company's outstanding shares of
preferred stock were converted in connection with the sale in a public offering
of 1,850,000 shares of the Company's Common Stock (See note on "Stockholders'
Equity") at a conversion price of $5.34 and $7.20 for Class A and B,
respectively. Additionally, the Company's amended Articles of Incorporation
provide that subsequent to the conversion, the shares of Class A and Class B
Preferred Stock shall be canceled and shall not again be issuable by the
Company.
Common Stock
In December 1995, the Company sold in a public offering 1,850,000 shares of
its Common Stock (the "Offering") which generated net proceeds of approximately
$17.6 million. A portion of the proceeds were used to repay debt incurred in
connection with the Company's Turnkey Program and other debt owed to banks,
corporations and individuals. The Company used the remaining proceeds to finance
and refinance the purchase of real estate and the construction of stores under
the Turnkey Program and for other working capital needs. As previously
discussed, the Company's amended Articles of Incorporation states that the
outstanding shares of Class A and Class B Preferred Stock were converted to
common stock in connection with the Company's public offering and as a result,
these preferred shares have been canceled.
Warrants
During 1994, the Company issued a warrant to purchase 23,438 shares of
common stock at an initial exercise price of $9.60 per share. The warrant
expires in 2001.
F-20
<PAGE> 77
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the Company issued a warrant to purchase 5,468 shares of
common stock at an initial exercise price of $12.80. The warrant expires in
2000.
12. STOCK-BASED COMPENSATION PLANS
The Company sponsors the "Schlotzsky's Employee Compensation and Stock
Options Plan" (the "Plan"), which is a stock-based incentive compensation plan,
as described below. The Company applies Accounting Principles Board ("APB")
Opinion No. 25 and related Interpretations in accounting for the Plan. In 1995,
the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation" which, if
adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plan. Adoption of the cost recognition provisions of
SFAS No. 123 is optional and the Company has decided not to elect these
provisions of SFAS No. 123. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS No. 123 in 1995 are required by
SFAS No. 123 and are presented below.
The Employee Compensation and Stock Options Plan
Under the Plan, the Company is authorized to issue 650,000 shares of Common
Stock pursuant to "Awards" granted in the form of incentive stock options
(qualified under Section 422 of the Internal Revenue Code of 1986, as amended)
and non-qualified stock options. Awards may be granted to key employees of the
Company. In April 1997, the Company amended the Plan to provide for an
additional 150,000 shares of Common Stock to be authorized for issuance under
its provisions.
According to the Plan, Awards may be granted with respect to a maximum of
800,000 shares of Common Stock. In 1994, the Company granted a total of 14,844
Awards in the form of incentive stock options under the Plan. In 1995, the
Company granted a total of 313,814 Awards in the form of incentive stock options
under the Plan. In 1996, the Company granted a total of 82,850 Awards in the
form of incentive stock options under the Plan. Under the Plan, the options
granted on December 12, 1994, vest based on tenure, from the hire date to
December 31, 1993. The vesting is as follows: the formula is 5% of total options
per year of tenure vesting on June 6, 1994 for those with five years of tenure
or more, and the remaining options vest over a five-year period, 20% per year,
beginning on the first anniversary of the date of grant. All other options vest
over a five-year period, 20% per year, beginning on the first anniversary of the
hire date.
F-21
<PAGE> 78
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1994, 1995 and 1996 and the changes during the years ended on those dates are
presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
WEIGHTED AVERAGE
EXERCISE PRICES
SHARES PER SHARE
------- ----------------
<S> <C> <C>
BALANCE, JANUARY 1, 1994................................... 350,945 $ 7.33
Granted.................................................. 14,844 $ 8.00
Exercised................................................ -- --
Forfeited................................................ (53,125) $ 8.00
Expired.................................................. -- --
-------
BALANCE, DECEMBER 31, 1994................................. 312,664 $ 7.03
-------
Granted.................................................. 313,814 $10.39
Exercised................................................ -- --
Forfeited................................................ (4,688) $11.20
Expired.................................................. -- --
-------
BALANCE, DECEMBER 31, 1995................................. 621,790 $ 8.70
-------
Granted.................................................. 82,850 $10.50
Exercised................................................ (29,924) $ 6.75
Forfeited................................................ (78,444) $ 8.05
Expired.................................................. -- --
-------
BALANCE, DECEMBER 31, 1996................................. 596,272 $ 9.13
=======
Exercisable at December 31, 1994........................... 166,019 $ 6.59
Exercisable at December 31, 1995........................... 298,211 $ 8.43
Exercisable at December 31, 1996........................... 339,981 $ 8.75
Weighted-average fair value of options granted during
1995..................................................... $ 2.73
Weighted-average fair value of options granted during
1996..................................................... $ 4.96
</TABLE>
The fair value of each stock option granted in 1995 and 1996 when the
Company was public is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: no
dividend yield; risk-free interest rate of 6.37%; the expected lives of the
options are six years; and volatility of 37.01%. The fair value of each stock
option granted before the Company became publicly traded was determined using
the following assumptions: no dividend yield; risk-free rates are from 5.83% to
7.81%; and the expected lives of the options are six years. In determining the
"minimum value," SFAS No. 123 does not require the volatility of the Company's
common stock underlying the options to be calculated or considered because the
Company was not publicly-traded when the 1995 options were granted.
The Company granted 77,000 stock options during the six month period ended
June 30, 1997, and 8,750 options were exercised, 5,625 forfeited and none
expired. At June 30, 1997, 364,851 stock options were exercisable and the
weighted-average fair value of the options granted during the six-month period
ended June 30, 1997 was $11.04.
F-22
<PAGE> 79
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 CONTRACT LIFE PRICE 1996 PRICE
- --------------------------- -------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$5.60 to $10.00............ 335,142 3.27 $ 7.36 231,194 $ 7.07
$10.01 to $12.80........... 261,130 5.94 11.41 108,787 11.08
------- ---- ------ ------- ------
$5.60 to $12.80............ 596,272 4.44 $ 9.13 339,981 $ 8.75
</TABLE>
Pro Forma Net Income and Net Income Per Common Share
During 1995 and 1996, the Company did not incur any compensation costs for
the Plan under APB No. 25. Had the compensation cost for the Company's Plan been
determined consistent with SFAS No. 123, the Company's net income and net income
per common share for 1995 and 1996 would approximate the pro forma amounts
below:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
SFAS No. 123 charge, net of applicable
income taxes of $120,126 and $65,414
for 1995 and 1996, respectively....... $ -- $ 188,681 $ -- $ 109,959
APB No. 25 charge....................... -- -- -- --
Net income.............................. $1,632,897 $1,444,216 $3,194,975 $3,085,016
Net income per common
share -- primary...................... $ 0.44 $ 0.37 $ 0.57 $ 0.55
Net income per common share -- fully
diluted............................... $ 0.42 $ 0.36 $ 0.57 $ 0.55
</TABLE>
During the six month period ended June 30, 1997, the Company did not incur
any compensation costs for the Plan under APB No. 25 and, if the Company had
fully adopted SFAS No. 123 during this period, the compensation costs that would
have been incurred would not have been significant.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995 and the Company anticipates making awards in the future under its Plan. As
the Company's options typically vest over five years, the full impact of the pro
forma disclosure requirements will not be reflected until 2000.
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the years ended December 31, 1994, 1995 and 1996, and the
six-month periods ended June 30, 1996 and 1997, for interest amounted to
approximately $361,000, $435,000, $313,000, $157,000 and $172,000, respectively,
net of approximately $8,500 and $250,000, capitalized in 1994 and 1995.
Cash paid for taxes totaled approximately $668,000, $1,145,000, $2,614,000,
$750,000 and $1,000,000 for the years ended December 31, 1994, 1995 and 1996,
and the six-month periods ended June 30, 1996 and 1997, respectively.
During 1994, the Company had the following noncash activity, in addition to
transactions described in other notes:
Notes receivable totaling approximately $1,791,000 were issued for
nonrefundable Area Developer, Master Licensee and other fees.
F-23
<PAGE> 80
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note receivable for $300,000 was issued in the sale of certain
restaurants resulting in a gain of $57,000.
Mandatory redeemable preferred stock dividends totaling $280,000 at
December 31, 1994 are accrued but not yet paid.
During 1995, the Company had the following noncash activity:
Notes receivable totaling approximately $1,800,000 were issued for
nonrefundable Area Developer, Master Licensee, Territorial and other fees.
Mandatory redeemable preferred stock, totaling approximately
$7,978,000 net of issue costs was converted to common stock.
Mandatory redeemable preferred stock dividends totaling $700,000 were
converted to common stock.
During 1996, the Company had the following noncash activity:
Notes receivable totaling approximately $1,785,000 were issued for
nonrefundable Area Developer, Master Licensee, Territorial and other fees.
For the six-month period ended June 30, 1997, the Company had the following
noncash activity:
Notes receivable totaling approximately $102,000 were issued for
nonrefundable Area Developer, Master Licensee, Territorial and other fees.
14. RELATED PARTY TRANSACTIONS
Franchises contribute 1% of gross sales to Schlotzsky's N.A.M.F., Inc.
("NAMF") to be used solely for the production of programs and materials for
marketing and advertising. The Company charges NAMF an amount equal to certain
cost allocations and salaries for administering NAMF. Advances to NAMF totaled
approximately $130,000, $87,000 and $333,000 at December 31, 1995 and 1996 and
June 30, 1997, respectively, and are included in other receivables in the
accompanying consolidated balance sheets.
One or more principal stockholders of the Company is guarantor of the
Company's notes payable and long-term debt, totaling approximately $2,078,000,
$2,983,000 and $2,884,000 at December 31, 1995 and 1996 and June 30, 1997,
respectively.
A member of the Company's Board of Directors controls a corporation that is
an Area Developer to which during 1994 the Company paid approximately $47,000 in
connection with its share of franchise fees and royalties under an Area
Developer agreement. During 1994, the Company received approximately $20,000 in
royalties in connection with this agreement.
In December 1994, the Company entered into Territorial and Master License
Agreements with Master Licensees pursuant to which the Master Licensees paid the
Company $47,000 in cash and $328,000 by promissory notes for the right to obtain
a master license for the respective territories. The cash was paid to the
Company from the proceeds of one or more loans made to the Master Licensees by
Austin CBD 29, Inc. ("CBD 29"), a corporation controlled by a stockholder of the
Company, or its affiliates. The promissory notes to the Company are guaranteed
by the parent of CBD 29 which has the right to acquire the master licenses for
the territories in the event that the Master Licensees default on the promissory
notes. Further, one of these Master Licensees has the right to elect to sell its
master license to CBD 29 and certain stockholders of the Company have guaranteed
CBD 29's obligations under this put option.
Also in December 1994, CBD 29 guaranteed a $70,000 promissory note from an
area developer. CBD 29 has the right to acquire the area developer rights for
the area in the event that the area developer defaults on
F-24
<PAGE> 81
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the promissory note. Further, the area developer has the right to elect to sell
its area developer rights to CBD 29 and certain stockholders of the Company have
guaranteed CBD 29's obligations under this put option. In September 1995, the
Area Developer and CBD 29 agreed to waive any further rights and obligations in
connection with this put option and the related guarantee.
In 1995, the Company entered into a Master License Agreement with Buxtehude
Holdings, B.V., an organization of which a member of the Company's Board of
Directors is managing director. Pursuant to the terms of the agreement,
Buxtehude paid the Company $150,000 in cash and $350,000 by promissory note. The
Company recorded developer revenue totaling $500,000 in 1995 in connection with
this transaction.
In 1995, the Company entered into an Area Developer Agreement pursuant to
which the Area Developer paid the Company $50,000 in cash and $100,000 by
promissory note. The cash was paid to the Company from one or more loans made to
the Area Developer by CBD 29 or its affiliates. Further, CBD 29 or its
affiliates could obtain a security interest in the rights of the Area Developer
to receive a portion of the royalties paid by certain franchisees and could
acquire these rights in the event of default by the Area Developer.
Also in 1995, the Company entered into Master License Agreements pursuant
to which the Master Licensees paid the Company $75,000 in cash and $190,000 by
promissory note. The cash paid to the Company from one or more loans made to the
Master Licensee by an organization who is a significant stockholder of the
Company. In addition, one of the members of the Company's Board of Directors is
the managing director of the organization providing the funding to the Master
Licensee.
Effective January 1, 1996, the majority of assets and liabilities of CBD 29
were transferred and assumed by Third & Colorado 29, L.L.C., and an entity owned
by two stockholders of the Company.
In 1996, the Company entered into a Territorial Agreement pursuant to which
Sino-Caribbean Development, Inc. ("Sino") paid $150,000 in cash and $600,000 by
a promissory note for the right to obtain a master license for certain
territories in the Pacific Rim. In addition, Sino agreed to assume a promissory
note in the amount of $275,000 in exchange for territorial rights under an
existing Master License Agreement. The outstanding balance on the combined notes
was $875,000 at December 31, 1996. Sino is an organization of which an officer
of the Company held 60% of its outstanding common stock at December 31, 1996.
Subsequent to year-end, Sino made note payments of $420,000 to the Company, and
in an unrelated transaction, Sino issued shares of its convertible preferred
stock of which upon conversion, will effectively reduce the officer's interest
in the organization to less than 40%.
During 1996, the Company paid $300,000 to Bonner Carrington Corporation
European Market ("BCCE") and agreed to serve as guarantor for additional
financing not to exceed $400,000. In return, the Company received: (i) preferred
stock representing 7.5% of the total outstanding shares of BCCE; (ii) an option
to buy additional preferred stock representing an additional 10% of the total
outstanding shares of BCCE; and (iii) options to purchase BCCE and its
respective territories at predetermined prices effective during the period
covering December 1999 through December 2011. In a separate transaction in June
1996, the Company entered into a Master License Agreement pursuant to which BCCE
paid the Company $25,000 in cash and $75,000 by promissory note.
The Company and Third & Colorado 19, L.L.C. ("T&C 19"), a limited liability
company owned by two stockholders of the Company, entered into a lease agreement
effective March 21, 1997, under which the Company will lease from T&C 19
approximately 29,410 square feet of office space and 11,948 square feet of
storage space, in Austin, Texas for the Company's corporate headquarters. Under
the terms of the lease, the Company will pay annual net rental of $12.95 per
square foot for the office space and up to $2.50 per square foot for the storage
space for a term of 10 years after completion of the build-out of the leased
space.
F-25
<PAGE> 82
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office facilities and certain equipment for its stores.
Rent expense for the years ended December 31, 1994, 1995 and 1996 and the
six-month periods ended June 30, 1996 and 1997, consisted of approximately
$139,000, $73,000, $118,000, $59,000 and $227,000, respectively. Future minimum
rental payments under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997.................................................. $ 674,419
1998.................................................. 688,788
1999.................................................. 694,288
2000.................................................. 663,117
2001.................................................. 681,503
Thereafter............................................ 3,340,450
----------
$6,742,565
==========
</TABLE>
Workers' Compensation
The Company has elected not to provide workers' compensation insurance to
its employees under the Texas Workers' Compensation Act. This election is called
"non-subscription." Non-subscription may result in potentially large liabilities
through adverse judgments, punitive damages and multiple catastrophe claims. The
measurement of these potential liabilities is complicated by the uncertainty of
legal outcomes. No significant workers' compensation claims were reported during
the years ended December 31, 1994, 1995 and 1996 and the six-month period ended
June 30, 1997 and management does not anticipate any material losses for
workers' compensation claims incurred as of June 30, 1997.
Guarantor on Franchise Operating Leases and Debt Obligations
The Company, and in some cases certain stockholders are guarantors of
certain franchisee operating leases and debt obligations with future minimum
payments as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997................................................. $ 4,898,891
1998................................................. 2,151,918
1999................................................. 1,184,368
2000................................................. 565,859
2001................................................. 408,676
Thereafter........................................... 871,470
-----------
$10,081,182
===========
</TABLE>
Guarantor on Franchise Credit Facility
The Company has entered into two credit facilities which provide up to
$15,000,000 and $5,000,000, under each program, in financing to Company
franchisees, whose obligations under which are guaranteed by the Company. At
June 30, 1997, obligations totaling approximately $1,892,000 are outstanding
under these facilities. These amounts are included in the future minimum payment
schedule above.
F-26
<PAGE> 83
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
The Company is a defendant in various lawsuits arising in the ordinary
course of business. Management is of the opinion that all such matters are
without merit or are of such kind, or involve such amounts, as would not have a
significant effect on the financial position, results of operations or cash
flows of the Company if disposed unfavorably. The Company's federal, state and
local tax assessments are periodically subject to review by regulatory agencies.
Management is of the opinion that where such liabilities are estimable, they do
not involve amounts, which significantly exceed existing provisions.
16. CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, notes receivable
from Area Developers and Master Licensees and notes receivable from affiliates.
The Company places its cash and cash equivalents with high credit quality
financial institutions. At December 31, 1995 and 1996 and June 30, 1997, the
Company had amounts on deposit in excess of the Federal Deposit Insurance
Corporation limitations totaling approximately $12,259,000, $4,713,000 and
$5,752,000, respectively. The Company has not incurred losses related to these
deposits and investments.
The Company grants notes receivable to individuals and licensees who have,
in the opinion of the Company, adequate reserves to repay the notes independent
of the franchise rights. Although the Company has extended terms on certain of
the notes receivable they have not experienced significant credit losses to
date.
17. SUBSEQUENT EVENT
The Company intends to make a public offering of up to 2,200,000 shares of
its Common Stock. Of the 2,200,000 shares of Common Stock to be offered,
1,500,000 will be issued and sold by the Company. The remaining 700,000 shares
are to be sold by selling shareholders. The Company will not receive any of the
proceeds from the sale of shares by the selling shareholders.
F-27
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Schlotzsky's, Inc. and Subsidiaries
In connection with our audits of the consolidated financial statements of
Schlotzsky's, Inc. and Subsidiaries as of December 31, 1995 and 1996, and for
each of three years in the period ended December 31, 1996, which consolidated
financial statements are included in the Prospectus, we have also audited the
financial statement schedule included herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Austin, Texas
February 28, 1997
F-28
<PAGE> 85
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
FOR THE SIX-MONTH UNAUDITED PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E.
------ --------- ----------------------- --------- ----------
ADDITIONS
BALANCE -----------------------
AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTION PERIOD
----------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Reserve for Notes Receivable:
June 30, 1997 (unaudited)
Reserve................................... $(342,774) $ -- $ -- $ -- $(342,774)
========= ========= ========= ==== =========
December 31, 1996
Reserve................................... $(155,000) (187,774) $ -- $ -- $(342,774)
========= ========= ========= ==== =========
December 31, 1995
Reserve................................... $ -- $ -- $(155,000)(A) $ -- $(155,000)
========= ========= ========= ==== =========
December 31, 1994
Reserve................................... $(270,000) $ -- $(270,000)(A) $ -- $ --
========= ========= ========= ==== =========
Deferred Interest Income -- Notes Receivable:
June 30, 1997 (unaudited)
Deferred interest income.................. $ -- $ -- $ -- $ -- $ --
========= ========= ========= ==== =========
December 31, 1996
Deferred interest income.................. $ (35,235) $ -- $ 35,235(B) $ -- $ --
========= ========= ========= ==== =========
December 31, 1995
Deferred interest income.................. $(106,153) $ -- $ 70,918(B) $ -- $ (35,235)
========= ========= ========= ==== =========
December 31, 1994
Deferred interest income.................. $ (72,437) $ -- $ (33,716)(B) $ -- $(106,153)
========= ========= ========= ==== =========
</TABLE>
- ---------------
(A) Reserve for notes receivable was charged directly to developer fee revenue.
(B) Deferred interest income was charged to interest income.
F-29
<PAGE> 86
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 12
Price Range of Common Stock............ 13
Dividend Policy........................ 13
Capitalization......................... 14
Selected Consolidated Financial Data... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Business............................... 27
Management............................. 37
Certain Transactions................... 43
Principal and Selling Shareholders..... 48
Description of Capital Stock........... 49
Shares Eligible For Future Sale........ 52
Underwriting........................... 53
Legal Matters.......................... 55
Experts................................ 55
Available Information.................. 55
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
======================================================
======================================================
2,200,000 SHARES
SCHLOTZSKY'S, INC.
COMMON STOCK
[SCHLOTZSKY'S, INC. LOGO]
-------------------------
PROSPECTUS
-------------------------
RAYMOND JAMES & ASSOCIATES, INC.
MORGAN KEEGAN & COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
, 1997
======================================================
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following sets forth expenses and costs (other than underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the securities offered hereby:
<TABLE>
<S> <C>
Commission registration fee................................. $ 13,608
NASD filing fee............................................. 4,991
Nasdaq Stock Market listing fee............................. 17,500
Accounting fees and expenses................................ 100,000
Legal fees and expenses..................................... 75,000
Blue sky fees and expenses (including fees and expenses of
counsel).................................................. 5,000
Printing and engraving fees and expenses.................... 100,000
Fees of transfer agent and registrar........................ 5,000
Miscellaneous............................................... 78,901
--------
Total............................................. $400,000
========
</TABLE>
All of the foregoing, except the Commission registration fee, the NASD
filing fee and the Nasdaq Stock Market listing fee, are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Articles 2.02(A)(16) and 2.02-1 of the
Texas Business Corporation Act (the "TBCA") to indemnify its directors and
officers to the extent provided for in such statute. The Registrant's Articles
of Incorporation and Bylaws allow indemnification of directors and officers to
the full extent permitted by said provisions of the TBCA.
The TBCA provides in part that a corporation may indemnify a director or
officer or other person who was, is, or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a director,
officer, employee or agent of the corporation, if it is determined that (i) such
person conducted himself in good faith; (ii) reasonably believed, in the case of
conduct in his official capacity as a director or officer of the corporation,
that his conduct was in the corporation's best interests, and, in all other
cases, that his conduct was at least not opposed to the corporation's best
interest; and (iii) in the case of any criminal proceeding, had no reasonable
cause to believe that his conduct was unlawful.
A corporation may indemnify a person under the TBCA against judgments,
penalties (including excise and similar taxes), fines, settlements, and
reasonable expenses actually incurred by the person in connection with the
proceeding. If the person is found liable to the corporation or is found liable
on the basis that personal benefit was improperly received by the person, the
indemnification is limited to reasonable expenses actually incurred by the
person in connection with the proceeding, and shall not be made in respect of
any proceeding in which the person shall have been found liable for willful or
intentional misconduct in the performance of his duty to the corporation.
A corporation may also pay or reimburse expenses incurred by a person in
connection with his appearance as a witness or other participation in a
proceeding at a time when he is not a named defendant or respondent in the
proceeding.
Reference is also made to the Articles of Incorporation, which limit or
eliminate a director's liability for monetary damages to the Registrant or its
shareholders for acts or omissions in the director's capacity as a director,
except that the articles of incorporation do not eliminate the liability of a
director for (i) a breach of the director's duty of loyalty to the Registrant or
its shareholders, (ii) an act or omission not in good faith that constitutes a
breach of duty of the director to the Registrant or an act or omission that
involves intentional misconduct or a knowing violation of the law, (iii) a
transaction from which a director received an improper
II-1
<PAGE> 88
benefit, whether or not the benefit resulted from an action taken within the
scope of the director's office, or (iv) an act or omission for which the
liability of a director is expressly provided for by an applicable statute. The
Registrant's Bylaws further provide that the Registrant may indemnify its
officers and directors to the fullest extent permitted by law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Registrant has sold the following
securities which were not registered under the Securities Act:
(1) Between December 23, 1993 and January 25, 1995, the Company
granted incentive stock options to purchase an aggregate of 446,875 shares
of Common Stock to employees of the Company pursuant to the Company's 1993
Stock Option Plan.
(2) In November, 1994, the Company granted options to purchase 4,688
shares of Common Stock to a consultant to the Company at an exercise price
of $8.00 per share. Between October 28, 1996 and May 30, 1997, options to
purchase 59,634 shares of Common Stock were granted to employees of the
Company.
The securities referred to in the transaction described in paragraph (1)
above were issued in reliance on the exemption from registration provided by
Rule 701 under the Securities Act.
The securities described in paragraph (2) were issued in reliance on the
exemption from registration under Section 4(2) of the Securities Act as
transactions not involving a public offering. All such securities were subject
to restrictions on transfer and appropriate restrictive legends were affixed to
the certificates or instruments issued in each transaction. All recipients were
furnished with, or had adequate access to, information regarding the Registrant,
and none of the recipients paid consideration for their options all of which
were granted at fair market value.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
<C> <S>
1.1* -- Underwriting Agreement.
3.1 -- Articles of Incorporation of the Registrant, as
amended.(1)
3.2 -- Bylaws of the Registrant, as amended.(1)
4.1 -- Specimen stock certificate evidencing the Common
Stock.(1)
5.1* -- Opinion of Hughes & Luce, L.L.P.
10.1 -- Form of Unit Franchise Agreement entered into by the
Registrant and franchisees.(1)
10.2 -- Form of Unit Development Agreement entered into by the
Registrant and franchisees.(1)
10.3 -- Form of Area Developer Agreement entered into by the
Registrant and area developers.(1)
10.4 -- Form of Master License Agreement entered into by the
Registrant and area developers.(1)
10.5(a) -- Form of Territorial Agreement entered into by the
Registrant and master licensees.(1)
10.5(b) -- Form of Master Development Agreement entered into by the
Registrant and master licensees.(1)
10.6 -- Preferred Stock Repurchase Agreement, dated October 1993,
among the Company, John C. Wooley, Jeffrey J. Wooley, and
the purchasers of Class A Preferred Stock.(1)
</TABLE>
II-2
<PAGE> 89
<TABLE>
<CAPTION>
<C> <S>
10.7 -- Preferred Stock Purchase Agreement, dated July 20, 1994,
among the Registrant and the purchasers.(1)
10.8 -- Registration Rights Agreement, dated July 20, 1994, by
and between the Registrant and the shareholders named
therein.(1)
10.9 -- Second Amended Agreement among Shareholders, dated July
20, 1994, by and among the Registrant and the
Shareholders described therein.(1)
10.10 -- Loan/Compromise and Settlement Agreement, dated April 7,
1994, between the Federal Deposit Insurance Corporation,
as Receiver of Bank of the Hills, Austin, Texas, and the
Registrant.(1)
10.11 -- Promissory Note, dated May 18, 1993, of the Registrant to
First State Bank, Austin, Texas in the original principal
amount of $381,249.99.(1)
10.12(a) -- Promissory Note, dated April 15, 1993, of the Registrant
to Janet P. Newberger and Lester Baum, as trustees of the
1992 Newberger Family Trust, in the original principal
amount of $750,000.(1)
10.12(b) -- Promissory Note, dated March 31, 1994, by and between the
Registrant and Janet P. Newberger and Lester Baum,
co-trustees of the 1992 Newberger Family Trust.(1)
10.12(c) -- Second Modification Agreement, dated effective December
31, 1994, by and between the Registrant and Janet P.
Newberger and Lester Baum, as trustees of the 1992
Newberger Family Trust.(1)
10.12(d) -- Promissory Note, dated September 6, 1995, of the
Registrant to JanMor Corporation, in the original
principal amount of $400,000.(1)
10.13 -- Promissory Note, dated February 1, 1995, of the
Registrant to Liberty National Bank, Austin, Texas in the
original principal amount $220,000, Security Agreement,
dated February 1, 1995 and Guarantee, dated February 1,
1995, by and between John C. Wooley and Liberty National
Bank.(1)
10.14 -- Real Estate Lien Note and Deed of Trust, Security
Agreement and Financing Statement, dated March 31, 1995,
of the Registrant to Texas Bank, N.A. in the original
principal amount of $500,000.(1)
10.15 -- Promissory Note, dated April 14, 1995, between the
Registrant and First State Bank in the original principal
amount of $2,000,000.(1)
10.16 -- Promissory Note and Security Agreement, dated July 15,
1993, of the Registrant to R. M. Wilkin, Inc. in the
original principal amount of $450,000.(1)
10.17 -- Commitment Letter, dated July 7, 1995, by and between
AT&T Commercial Finance Corporation and the Registrant in
an amount not to exceed $1,100,000.(1)
10.18 -- Term Sheet, dated July 19, 1995 by and between
BeneVent-Noro and the Registrant.(1)
10.19 -- Promissory Note, dated December 1, 1994, by and between
Bee Cave/Westbank, Ltd. and Liberty National Bank in the
original principal amount of $1,150,000.(1)
10.20 -- Loan Commitment, dated July 18, 1995, by and between
Manns Capital Corporation and Bee Cave/Westbank, Ltd.,
and Letter Amendment to Permanent Loan Commitment, dated
July 28, 1995.(1)
10.21 -- Promissory Note, dated August 18, 1995, by and between
the Registrant and First State Bank in the original
principal amount of $850,000.(1)
10.22 -- Operating Lease for 218 South Lamar, dated May 27, 1994,
by and between William C. Pfluger, et al. and
Schlotzsky's Restaurants, Inc.(1)
10.23 -- Lease Agreement, September 8, 1995, by and between the
Registrant and Austin CBD 29, Inc.(1)
</TABLE>
II-3
<PAGE> 90
<TABLE>
<CAPTION>
<C> <S>
10.24 -- Deed of Trust and Real Estate Lien Note, dated December
31, 1993, by and between Schlotzsky's Real Estate, Inc.
and Austin CBD Block 29, Ltd.(1)
10.25(a) -- Franchise Financing Program Procedures for Qualified
Franchisees, dated April 15, 1994, by and between Captec
Financial Group, Inc. and the Registrant.(1)
10.25(b) -- Ultimate Net Loss Agreement, dated April 15, 1994, by and
between the Registrant and Captec Financial Group,
Inc.(1)
10.25(c) -- Amendment to Ultimate Net Loss Agreement, dated March 30,
1995.(1)
10.26(a) -- Franchise finance letter of understanding, dated February
21, 1994, by and between Stephens Franchisee Finance and
the Registrant.(1)
10.26(b) -- Franchisee Financing Agreement, dated September 1, 1994,
between the Registrant and Stephens Diversified Leasing,
Inc.(1)
10.27 -- Agreement, dated July 1, 1994, by and among Thomas
Development Corporation, Micardo, Inc. and the
Registrant.(1)
10.28 -- Earnest Money Contract, dated May 20, 1994, among
Schlotzsky's Real Estate, Inc., William C. Pfluger, et
al., Schlotzsky's Restaurants, Inc., the Registrant and
John C. Wooley.(1)
10.29 -- Unsecured Promissory Note, dated June 29, 1993, from John
C. Wooley payable to the Registrant in the original
principal amount of $280,000.(1)
10.30 -- Unsecured Promissory Note, dated June 29, 1993, from
Jeffrey J. Wooley payable to the Registrant in the
original principal amount of $150,000.(1)
10.31 -- Unsecured Promissory Note, dated January 1, 1993, from
John C. Wooley payable to the Registrant in the original
principal amount of $319,712.45.(1)
10.32 -- Unsecured Promissory Note, dated January 1, 1993, from
Jeffrey J. Wooley payable to the Registrant in the
original principal amount of $76,540.93.(1)
10.33 -- Unsecured Promissory Note, dated February 6, 1995, from
John C. Wooley payable to the Registrant in the original
principal amount of $131,000.(1)
10.34 -- Unsecured Promissory Note, dated February 6, 1995, from
Jeffrey J. Wooley payable to the Registrant in the
original principal amount of $6,000.(1)
10.35* -- Schlotzsky's, Inc. 1993 Third Amended and Restated Stock
Option Plan of the Registrant.
10.36(a)* -- Employment Agreement, dated as of December 21, 1995, by
and between the Registrant and John C. Wooley.
10.36(b)* -- Employment Agreement, dated as of December 21, 1995, by
and between the Registrant and Jeffrey J. Wooley.
10.36(c) -- Employment Agreement, dated January 1, 1994, by and
between the Registrant and Kelly R. Arnold.(1)
10.36(d) -- Employment Agreement, dated January 1, 1994, by and
between the Registrant and Karl D. Martin.(1)
10.37(a) -- Indemnity Agreement, dated June 30, 1993, by and between
the Registrant and John C. Wooley.(1)
10.37(b) -- Indemnity Agreement, dated June 30, 1993, by and between
the Registrant and Jeffrey J. Wooley.(1)
10.38 -- Form of Indemnification Agreement for Directors and
Officers of the Registrant.(1)
10.39 -- Schlotzsky's 1995 Nonemployee Directors Stock Option
Plan, and form of Stock Option Agreement.(1)
</TABLE>
II-4
<PAGE> 91
<TABLE>
<CAPTION>
<C> <S>
10.40 -- Warrant Certificate, dated March 31, 1994, of the
Registrant to William C. Pfluger for 75,000 warrants.(1)
10.41 -- Confidentiality Agreement, dated December 8, 1989, by and
between Bunge Foods Corporation and Schlotzsky's
Franchising Limited Partnership.(1)
10.42 -- Real Estate Lien Note dated December 31, 1993, from CBD
Block 29, Ltd. to Schlotzsky's Real Estate, Inc. in the
original principal amount of $302,209.12.(1)
10.43 -- Promissory Note, dated October 4, 1995, from the
Registrant to First State Bank, Austin, Texas in the
original principal amount of $576,000.(1)
10.44 -- Promissory Note dated October 25, 1995, from the
Registrant to United Bank & Trust in the original
principal amount of $500,000.(1)
10.45 -- Promissory Note dated November 1995 from Registrant and
Schlotzsky's Restaurants, Inc. to AT&T Commercial Finance
Corporation in the original principal amount of
$1,100,000.(1)
10.46 -- Promissory Note dated November 17, 1995 from Registrant
to Comerica Bank -- Texas in the original principal
amount of $245,000.(1)
22.1* -- List of subsidiaries of the Registrant.
24.1 -- Consent of Hughes & Luce, L.L.P. (included in their
opinion filed as Exhibit 5.1).
24.2* -- Consent of Coopers & Lybrand L.L.P.
25.1 -- Power of Attorney (contained on the signature page of
this Registration Statement).
</TABLE>
- ---------------
* Filed herewith.
(1) Previously filed as an Exhibit to the Registrant's Registration Statement on
Form S-1 (File No. 33-98004) filed with the Securities and Exchange
Commission on October 12, 1995, as amended, and incorporated herein by
reference.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Securities Act or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
the Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
II-5
<PAGE> 92
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered herein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
In the event that the Underwriters do not exercise their option to purchase
330,000 additional shares of Common Stock to cover over-allotments, if any, or
in the event that such options are partially exercised, the Registrant hereby
undertakes to file a post-effective amendment to the Registration Statement
deregistering all such shares as to which such options shall not have been
exercised.
II-6
<PAGE> 93
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Austin, State of Texas on September 19, 1997.
SCHLOTZSKY'S, INC.
By: /s/ JOHN C. WOOLEY
-------------------------------------
John C. Wooley
Chairman of the Board and President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN C. WOOLEY Chairman of the Board and September 19, 1997
- ----------------------------------------------------- President, (Principal
John C. Wooley Executive Officer),
Director
* /s/ JEFFREY J. WOOLEY Director, Senior Vice September 19, 1997
- ----------------------------------------------------- President and General
Jeffrey J. Wooley Counsel
* /s/ MONICA GILL Chief Financial Officer September 19, 1997
- ----------------------------------------------------- (Principal Financial
Monica Gill Officer and Principal
Accounting Officer)
* /s/ FLOOR MOUTHAAN Director September 19, 1997
- -----------------------------------------------------
Floor Mouthaan
* /s/ JOHN M. ROSILLO Director September 19, 1997
- -----------------------------------------------------
John M. Rosillo
* /s/ RAYMOND A. RODRIGUEZ Director September 19, 1997
- -----------------------------------------------------
Raymond A. Rodriguez
* /s/ AZIE TAYLOR MORTON Director September 19, 1997
- -----------------------------------------------------
Azie Taylor Morton
* /s/ JOHN L. HILL, JR. Director September 19, 1997
- -----------------------------------------------------
John L. Hill, Jr.
*By: /s/ JOHN C. WOOLEY
------------------------------------------------
John C. Wooley
As Attorney-in-fact
</TABLE>
II-7
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* -- Underwriting Agreement.
3.1 -- Articles of Incorporation of the Registrant, as
amended.(1)
3.2 -- Bylaws of the Registrant, as amended.(1)
4.1 -- Specimen stock certificate evidencing the Common
Stock.(1)
5.1* -- Opinion of Hughes & Luce, L.L.P.
10.1 -- Form of Unit Franchise Agreement entered into by the
Registrant and franchisees.(1)
10.2 -- Form of Unit Development Agreement entered into by the
Registrant and franchisees.(1)
10.3 -- Form of Area Developer Agreement entered into by the
Registrant and area developers.(1)
10.4 -- Form of Master License Agreement entered into by the
Registrant and area developers.(1)
10.5(a) -- Form of Territorial Agreement entered into by the
Registrant and master licensees.(1)
10.5(b) -- Form of Master Development Agreement entered into by the
Registrant and master licensees.(1)
10.6 -- Preferred Stock Repurchase Agreement, dated October 1993,
among the Company, John C. Wooley, Jeffrey J. Wooley, and
the purchasers of Class A Preferred Stock.(1)
10.7 -- Preferred Stock Purchase Agreement, dated July 20, 1994,
among the Registrant and the purchasers.(1)
10.8 -- Registration Rights Agreement, dated July 20, 1994, by
and between the Registrant and the shareholders named
therein.(1)
10.9 -- Second Amended Agreement among Shareholders, dated July
20, 1994, by and among the Registrant and the
Shareholders described therein.(1)
10.10 -- Loan/Compromise and Settlement Agreement, dated April 7,
1994, between the Federal Deposit Insurance Corporation,
as Receiver of Bank of the Hills, Austin, Texas, and the
Registrant.(1)
10.11 -- Promissory Note, dated May 18, 1993, of the Registrant to
First State Bank, Austin, Texas in the original principal
amount of $381,249.99.(1)
10.12(a) -- Promissory Note, dated April 15, 1993, of the Registrant
to Janet P. Newberger and Lester Baum, as trustees of the
1992 Newberger Family Trust, in the original principal
amount of $750,000.(1)
10.12(b) -- Promissory Note, dated March 31, 1994, by and between the
Registrant and Janet P. Newberger and Lester Baum,
co-trustees of the 1992 Newberger Family Trust.(1)
10.12(c) -- Second Modification Agreement, dated effective December
31, 1994, by and between the Registrant and Janet P.
Newberger and Lester Baum, as trustees of the 1992
Newberger Family Trust.(1)
10.12(d) -- Promissory Note, dated September 6, 1995, of the
Registrant to JanMor Corporation, in the original
principal amount of $400,000.(1)
</TABLE>
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.13 -- Promissory Note, dated February 1, 1995, of the
Registrant to Liberty National Bank, Austin, Texas in the
original principal amount $220,000, Security Agreement,
dated February 1, 1995 and Guarantee, dated February 1,
1995, by and between John C. Wooley and Liberty National
Bank.(1)
10.14 -- Real Estate Lien Note and Deed of Trust, Security
Agreement and Financing Statement, dated March 31, 1995,
of the Registrant to Texas Bank, N.A. in the original
principal amount of $500,000.(1)
10.15 -- Promissory Note, dated April 14, 1995, between the
Registrant and First State Bank in the original principal
amount of $2,000,000.(1)
10.16 -- Promissory Note and Security Agreement, dated July 15,
1993, of the Registrant to R. M. Wilkin, Inc. in the
original principal amount of $450,000.(1)
10.17 -- Commitment Letter, dated July 7, 1995, by and between
AT&T Commercial Finance Corporation and the Registrant in
an amount not to exceed $1,100,000.(1)
10.18 -- Term Sheet, dated July 19, 1995 by and between
BeneVent-Noro and the Registrant.(1)
10.19 -- Promissory Note, dated December 1, 1994, by and between
Bee Cave/Westbank, Ltd. and Liberty National Bank in the
original principal amount of $1,150,000.(1)
10.20 -- Loan Commitment, dated July 18, 1995, by and between
Manns Capital Corporation and Bee Cave/Westbank, Ltd.,
and Letter Amendment to Permanent Loan Commitment, dated
July 28, 1995.(1)
10.21 -- Promissory Note, dated August 18, 1995, by and between
the Registrant and First State Bank in the original
principal amount of $850,000.(1)
10.22 -- Operating Lease for 218 South Lamar, dated May 27, 1994,
by and between William C. Pfluger, et al. and
Schlotzsky's Restaurants, Inc.(1)
10.23 -- Lease Agreement, September 8, 1995, by and between the
Registrant and Austin CBD 29, Inc.(1)
10.24 -- Deed of Trust and Real Estate Lien Note, dated December
31, 1993, by and between Schlotzsky's Real Estate, Inc.
and Austin CBD Block 29, Ltd.(1)
10.25(a) -- Franchise Financing Program Procedures for Qualified
Franchisees, dated April 15, 1994, by and between Captec
Financial Group, Inc. and the Registrant.(1)
10.25(b) -- Ultimate Net Loss Agreement, dated April 15, 1994, by and
between the Registrant and Captec Financial Group,
Inc.(1)
10.25(c) -- Amendment to Ultimate Net Loss Agreement, dated March 30,
1995.(1)
10.26(a) -- Franchise finance letter of understanding, dated February
21, 1994, by and between Stephens Franchisee Finance and
the Registrant.(1)
10.26(b) -- Franchisee Financing Agreement, dated September 1, 1994,
between the Registrant and Stephens Diversified Leasing,
Inc.(1)
10.27 -- Agreement, dated July 1, 1994, by and among Thomas
Development Corporation, Micardo, Inc. and the
Registrant.(1)
10.28 -- Earnest Money Contract, dated May 20, 1994, among
Schlotzsky's Real Estate, Inc., William C. Pfluger, et
al., Schlotzsky's Restaurants, Inc., the Registrant and
John C. Wooley.(1)
10.29 -- Unsecured Promissory Note, dated June 29, 1993, from John
C. Wooley payable to the Registrant in the original
principal amount of $280,000.(1)
10.30 -- Unsecured Promissory Note, dated June 29, 1993, from
Jeffrey J. Wooley payable to the Registrant in the
original principal amount of $150,000.(1)
</TABLE>
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
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<C> <S>
10.31 -- Unsecured Promissory Note, dated January 1, 1993, from
John C. Wooley payable to the Registrant in the original
principal amount of $319,712.45.(1)
10.32 -- Unsecured Promissory Note, dated January 1, 1993, from
Jeffrey J. Wooley payable to the Registrant in the
original principal amount of $76,540.93.(1)
10.33 -- Unsecured Promissory Note, dated February 6, 1995, from
John C. Wooley payable to the Registrant in the original
principal amount of $131,000.(1)
10.34 -- Unsecured Promissory Note, dated February 6, 1995, from
Jeffrey J. Wooley payable to the Registrant in the
original principal amount of $6,000.(1)
10.35* -- Schlotzsky's, Inc. 1993 Third Amended and Restated Stock
Option Plan of the Registrant.
10.36(a)* -- Employment Agreement, dated as of December 21, 1995, by
and between the Registrant and John C. Wooley.
10.36(b)* -- Employment Agreement, dated as of December 21, 1995, by
and between the Registrant and Jeffrey J. Wooley.
10.36(c) -- Employment Agreement, dated January 1, 1994, by and
between the Registrant and Kelly R. Arnold.(1)
10.36(d) -- Employment Agreement, dated January 1, 1994, by and
between the Registrant and Karl D. Martin.(1)
10.37(a) -- Indemnity Agreement, dated June 30, 1993, by and between
the Registrant and John C. Wooley.(1)
10.37(b) -- Indemnity Agreement, dated June 30, 1993, by and between
the Registrant and Jeffrey J. Wooley.(1)
10.38 -- Form of Indemnification Agreement for Directors and
Officers of the Registrant.(1)
10.39 -- Schlotzsky's 1995 Nonemployee Directors Stock Option
Plan, and form of Stock Option Agreement.(1)
10.40 -- Warrant Certificate, dated March 31, 1994, of the
Registrant to William C. Pfluger for 75,000 warrants.(1)
10.41 -- Confidentiality Agreement, dated December 8, 1989, by and
between Bunge Foods Corporation and Schlotzsky's
Franchising Limited Partnership.(1)
10.42 -- Real Estate Lien Note dated December 31, 1993, from CBD
Block 29, Ltd. to Schlotzsky's Real Estate, Inc. in the
original principal amount of $302,209.12.(1)
10.43 -- Promissory Note, dated October 4, 1995, from the
Registrant to First State Bank, Austin, Texas in the
original principal amount of $576,000.(1)
10.44 -- Promissory Note dated October 25, 1995, from the
Registrant to United Bank & Trust in the original
principal amount of $500,000.(1)
10.45 -- Promissory Note dated November 1995 from Registrant and
Schlotzsky's Restaurants, Inc. to AT&T Commercial Finance
Corporation in the original principal amount of
$1,100,000.(1)
</TABLE>
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.46 -- Promissory Note dated November 17, 1995 from Registrant
to Comerica Bank -- Texas in the original principal
amount of $245,000.(1)
22.1* -- List of subsidiaries of the Registrant.
24.1 -- Consent of Hughes & Luce, L.L.P. (included in their
opinion filed as Exhibit 5.1).
24.2* -- Consent of Coopers & Lybrand L.L.P.
25.1 -- Power of Attorney (contained on the signature page of
this Registration Statement).
</TABLE>
- ---------------
* Filed herewith.
(1) Previously filed as an Exhibit to the Registrant's Registration Statement on
Form S-1 (File No. 33-98004) filed with the Securities and Exchange
Commission on October 12, 1995, as amended, and incorporated herein by
reference.
<PAGE> 1
EXHIBIT 1.1
DRAFT OF SEPTEMBER 18, 1997
2,200,000 SHARES
SCHLOTZSKY'S, INC.
COMMON STOCK
----------
UNDERWRITING AGREEMENT
St. Petersburg, Florida
September ___, 1997
Raymond James & Associates, Inc.
Morgan Keegan & Company, Inc.
Rauscher Pierce Refsnes, Inc.
As Representatives of the Several Underwriters
c/o Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, Florida 33716
Dear Sirs:
Schlotzsky's, Inc., a Texas corporation (the "Company"), proposes
to issue and sell and certain persons named in Schedule II annexed hereto (the
"Firm Selling Shareholders") propose to sell to the underwriters named in
Schedule I annexed hereto (the "Underwriters") an aggregate of 2,200,000
shares of Common Stock, no par value (the "Common Stock"), of the Company, of
which 1,500,000 shares are to be issued and sold by the Company and an
aggregate of 700,000 shares are to be sold by the Selling Shareholders in the
respective amounts set forth in Schedule II hereto. The aggregate of 2,200,000
shares to be purchased from the Company and the Selling Shareholders are herein
called the "Firm Shares." In addition, the Company and certain of the Selling
Shareholders propose to grant to the Underwriters an option to purchase up to
330,000 additional shares of Common Stock (the "Additional Shares"), of which
up to 231,825 shares are to be issued and sold by the Company and up to an
aggregate of 98,175 shares are to be sold by such Selling Shareholders in the
respective amounts set forth in Schedule II hereto, in each case if the option
so granted is exercised as provided in Section 2 hereof. The Firm Shares and,
to the extent such option is exercised, the Additional Shares are hereinafter
collectively referred to as the "Shares." Raymond James & Associates, Inc.,
Morgan Keegan & Company, Inc. and Rauscher Pierce Refsnes, Inc. are acting as
the representatives of the several Underwriters and in such capacity are
hereinafter referred to as the "Representatives."
<PAGE> 2
RAYMOND JAMES & ASSOCIATES, INC. Page 2
The Company and the Selling Shareholders wish to confirm as
follows their agreement with you and the other several Underwriters, on whose
behalf you are acting, in connection with the several purchases of the Shares
from the Company and the Selling Shareholders.
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company
has prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1 (Registration
No. 333-34921), including a prospectus subject to completion, relating to the
Shares. Such registration statement (including all financial schedules and
exhibits), as amended at the time when it becomes effective and as thereafter
amended by any post effective amendment, is referred to in this Agreement as
the "Registration Statement." The term "Prospectus" as used in this Agreement
means (i) the prospectus in the form included in the Registration Statement on
the date upon which the Registration Statement is declared effective by the
Commission, or (ii) if the prospectus included in the Registration Statement on
the date upon which the Registration Statement is declared effective by the
Commission omits information in reliance upon Rule 430A under the Act and such
information is included in a prospectus filed with the Commission pursuant to
Rule 424(b) under the Act or as part of a post-effective amendment to the
Registration Statement after the Registration Statement becomes effective, the
prospectus as so filed, or (iii) if the prospectus included in the Registration
Statement on the date upon which the Registration Statement is declared
effective by the Commission omits information in reliance upon Rule 430A under
the Act and such information is included in a term sheet (as described in Rule
434(b) under the Act) filed with the Commission pursuant to Rule 424(b) under
the Act, the prospectus included in the Registration Statement and such term
sheet, taken together. Each prospectus subject to completion in the form
included in the Registration Statement that is used prior to the date upon
which the Registration Statement is declared effective by the Commission is
referred to in this Agreement as a "Prepricing Prospectus." If the Company
files a registration statement to register a portion of the Shares and relies
on Rule 462(b) for such registration statement to become effective upon filing
with the Commission (the "Rule 462 Registration Statement"), then any reference
to the "Registration Statement" shall be deemed to refer to both the
registration statement referred to above (Registration No. 333-34921) and the
Rule 462 Registration Statement, in each case as amended from time to time.
SECTION 2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of
the representations, warranties and agreements of the Company and the Selling
Shareholders herein contained and subject to all the terms and conditions set
forth herein, the Company hereby agrees to sell 1,500,000 Firm Shares to the
Underwriters and the Selling Shareholders, severally and not jointly, hereby
agree to sell an aggregate of 700,000 Firm Shares (each to sell the number of
Firm Shares set forth opposite the name of such Selling Shareholder in Schedule
II hereto) to the Underwriters and each Underwriter agrees, severally and not
jointly, to purchase from the Company and the Selling Shareholders at a
purchase price of $________ per Share (the "purchase price per Share"), the
<PAGE> 3
RAYMOND JAMES & ASSOCIATES, INC. Page 3
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto (or such number of Firm Shares as adjusted pursuant to
Section 12 hereof).
Upon the basis of the representations, warranties and agreements
of the Company and the Selling Shareholders herein contained and subject to all
the terms and conditions set forth herein, the Company also agrees to sell up
to 231,825 Additional Shares to the Underwriters and certain Selling
Shareholders identified in Schedule II hereto, severally and not jointly, agree
to sell up to an aggregate of 98,175 Additional Shares (each to sell up to the
number of Additional Shares set forth opposite the name of such Selling
Shareholder in Schedule II hereto) to the Underwriters and, the Underwriters
shall have the one-time right for 30 days from the date upon which the
Registration Statement is declared effective by the Commission to purchase from
the Company and such Selling Shareholders up to 330,000 Additional Shares at
the purchase price per Share for the Firm Shares. The Additional Shares may be
purchased solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If the Underwriters exercise the right
to purchase less than 330,000 Additional Shares, then (i) the Company agrees to
sell the Underwriters a number of Additional Shares which bears the same
proportion to the total number of Additional Shares specified in the notice to
the Company and the Selling Shareholders and pursuant to Section 4 hereof as
231,825 bears to 330,000 and (ii) certain Selling Shareholders identified in
Schedule II hereto agree to sell to the Underwriters the balance of the
Additional Shares (the "Remaining Additional Shares") specified in such notice,
and each such Selling Shareholder will sell a number of Remaining Additional
Shares (subject to such adjustments as you may determine to avoid fractional
shares) which bears the same proportion to the total number of Remaining
Additional Shares as the number of Additional Shares set forth opposite the
name of such Selling Shareholder in Schedule II hereto bears to 98,175. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments as you may determine to avoid fractional shares) which bears the
same proportion to the number of Additional Shares to be sold as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto (or such number of Firm Shares as adjusted pursuant to Section 12
hereof) bears to 2,200,000.
SECTION 3. TERMS OF PUBLIC OFFERING. The Company has been
advised by you that the Underwriters propose to make a public offering of their
respective portions of the Shares as soon after the Registration Statement and
this Agreement have become effective as in your judgment is advisable and
initially to offer the Shares upon the terms set forth in the Prospectus.
SECTION 4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR.
Delivery to the Underwriters of the Firm Shares and payment therefor shall be
made at the offices of Raymond James & Associates, Inc., 880 Carillon Parkway,
St. Petersburg, Florida, at 10:00 a.m., St. Petersburg, Florida time, three
business days after the date hereof (the "Closing Date"). The
<PAGE> 4
RAYMOND JAMES & ASSOCIATES, INC. Page 4
place of closing for the Firm Shares and the Closing Date may be varied by
agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional
Shares to be purchased by the Underwriters shall be made at the offices of
Raymond James & Associates, Inc., 880 Carillon Parkway, St. Petersburg,
Florida, at 10:00 a.m., St. Petersburg, Florida time, on such date (the
"Additional Closing Date") (which may be the same as the Closing Date but shall
in no event be earlier than the Closing Date nor earlier than three nor later
than ten business days after the giving of the notice hereinafter referred to),
as shall be specified in a written notice from you, on behalf of the
Underwriters to the Company, of the Underwriters' determination to purchase a
number, specified in such notice, of Additional Shares. Such notice may be
given to the Company by you at any time within 30 days after the date upon
which the Registration Statement is declared effective by the Commission. The
place of closing for the Additional Shares and the Additional Closing Date may
be varied by agreement between you and the Company.
Certificates for the Firm Shares and for any Additional Shares to
be purchased hereunder shall be registered in such names and in such
denominations as you shall request prior to 1:00 p.m, St. Petersburg, Florida
time, on the second business day preceding the Closing Date or the Additional
Closing Date, as the case may be. Such certificates shall be made available to
you in St. Petersburg, Florida for inspection and packaging not later than 9:30
a.m., St. Petersburg, Florida time, on the business day immediately preceding
the Closing Date or the Additional Closing Date, as the case may be. The
certificates evidencing the Firm Shares and any Additional Shares to be
purchased hereunder shall be delivered to you on the Closing Date or the
Additional Closing Date, as the case may be, against payment of the purchase
price therefor by wire transfer of same day funds to the order of the Company
and to the Company as custodian for the Selling Shareholders, respectively.
SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with
the several Underwriters as follows:
(a) The Company will endeavor to cause the Registration
Statement to become effective and will advise you promptly and, if
requested by you, will confirm such advice in writing (i) when the
Registration Statement has become effective and when any post-effective
amendment thereto becomes effective, (ii) if Rule 430A under the Act is
employed, when the Prospectus or term sheet (as described in Rule 434(b)
under the Act) has been timely filed pursuant to Rule 424(b) under the
Act, (iii) of any request by the Commission for amendments or
supplements to the Registration Statement, any Prepricing Prospectus or
the Prospectus or for additional information, (iv) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction or the
<PAGE> 5
RAYMOND JAMES & ASSOCIATES, INC. Page 5
initiation (or threatened initiation) of any proceeding for such
purposes, and (v) within the period of time referred to in Section 5(e)
below, of any change in the Company's condition (financial or other),
business, business prospects, properties, net worth or results of
operations, or of any event that comes to the attention of the Company
that makes any statement made in the Registration Statement or the
Prospectus (as then amended or supplemented) untrue in any material
respect or that requires the making of any additions thereto or changes
therein in order to make the statements therein not misleading in any
material respect, or of the necessity to amend or supplement the
Prospectus (as then amended or supplemented) to comply with the Act or
any other law. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company
will make every reasonable effort to obtain the withdrawal of such order
at the earliest possible time.
(b) The Company will furnish to you, without charge,
one signed copies of the Registration Statement as originally filed with
the Commission and of each amendment thereto, including financial
statements and all exhibits thereto, and will also furnish to you,
without charge, such number of conformed copies of the Registration
Statement as originally filed and of each amendment thereto as you may
reasonably request.
(c) The Company will not file any amendment to the
Registration Statement or make any amendment or supplement to the
Prospectus of which you shall not previously have been advised (with a
reasonable opportunity to review such amendment or supplement) or to
which you have reasonably objected after being so advised.
(d) Prior to the execution and delivery of this
Agreement, the Company has delivered or will deliver to you, without
charge, in such quantities as you have requested or may hereafter
reasonably request, copies of each form of the Prepricing Prospectus.
The Company consents to the use, in accordance with the provisions of
the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Shares are offered by the several Underwriters and by dealers,
prior to the date of the Prospectus, of each Prepricing Prospectus so
furnished by the Company.
(e) As soon after the execution and delivery of this
Agreement as is practicable and thereafter from time to time for such
period as in the reasonable opinion of counsel for the Underwriters a
prospectus is required by the Act to be delivered in connection with
sales by any Underwriter or a dealer, the Company will deliver to each
Underwriter and each dealer, without charge, as many copies of the
Prospectus (and of any amendment or supplement thereto) as they may
reasonably request. The Company consents to the use of the Prospectus
(and of any amendment or supplement thereto) in accordance with the
provisions of the Act and with the securities or Blue Sky laws of the
jurisdictions in which
<PAGE> 6
RAYMOND JAMES & ASSOCIATES, INC. Page 6
the Shares are offered by the several Underwriters and by all dealers to
whom Shares may be sold, both in connection with the offering and sale
of the Shares and for such period of time thereafter as in the
reasonable opinion of counsel for the Underwriters the Prospectus is
required by the Act to be delivered in connection with sales by any
Underwriter or dealer. If during such period of time any event shall
occur that in the judgment of the Company or in the reasonable opinion
of counsel for the Underwriters is required to be set forth in the
Prospectus (as then amended or supplemented) or should be set forth
therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary to supplement or amend the Prospectus to comply with the Act
or any other law, the Company will forthwith prepare and file with the
Commission an appropriate supplement or amendment thereto, and will
furnish to each Underwriter and to each dealer who has previously
requested Prospectuses, without charge, a reasonable number of copies
thereof.
(f) The Company will cooperate with you and counsel for
the Underwriters in connection with the registration or qualification of
the Shares for offering and sale by the several Underwriters and by
dealers under the securities or Blue Sky laws of such jurisdictions as
you may reasonably designate and will file such consents to service of
process or other documents as may be reasonably necessary in order to
effect such registration or qualification; provided that in no event
shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action
which would subject it to service of process in suits, other than those
arising out of the offering or sale of the Shares, in any jurisdiction
where it is not now so subject. In the event that the qualification of
the Shares in any jurisdiction is suspended, the Company shall so advise
you promptly in writing.
(g) The Company will make generally available to its
security holders as soon as reasonably practicable a consolidated
earnings statement, which need not be audited, covering a period of at
least twelve months commencing after the effective date of the
Registration Statement (but in no event commencing later than 90 days
after such effective date), which consolidated earnings statement shall
satisfy the provisions of Section 11(a) of the Act.
(h) During the period of five years hereafter, the
Company will furnish to you as soon as practicable after the end of each
fiscal year, a copy of its annual report to shareholders for such year;
and the Company will furnish to you (i) as soon as available, a copy of
each report or definitive proxy statement of the Company filed with the
Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or mailed to shareholders, and (ii) from time to time
such other information concerning the Company as you may reasonably
request.
<PAGE> 7
RAYMOND JAMES & ASSOCIATES, INC. Page 7
(i) If this Agreement shall terminate or shall be
terminated after execution pursuant to any provisions hereof (other than
pursuant to Section 13(i), (ii) or (iii) or as a result of a failure by
the Representatives or any Underwriter to fulfill their or its
obligations hereunder) or if this Agreement shall be terminated by the
Underwriters because of any failure or refusal on the part of the
Company to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Representatives for
all out-of-pocket expenses (including fees and expenses of counsel for
the Underwriters but excluding wages and salaries paid by the
Representatives) reasonably incurred by you in connection herewith.
(j) The Company will apply the net proceeds from the
sale of the Shares to be sold by it hereunder substantially in
accordance with the description set forth in the Prospectus under the
caption "Use of Proceeds."
(k) If Rule 430A under the Act is employed, the Company
will timely file the Prospectus or term sheet (as described in Rule
434(b) under the Act) pursuant to Rule 424(b) under the Act.
(l) The Company will not offer, sell, contract to sell
or otherwise dispose of any Common Stock or rights to purchase Common
Stock, or any securities convertible into or exercisable or exchangeable
for Common Stock except to the Underwriters pursuant to this Agreement,
for a period of 120 days after commencement of the public offering of
the Shares by the Underwriters without the prior written consent of the
Representatives; provided, however, that the Company may (i) issue
Common Stock upon the exercise of warrants or stock options outstanding
at the time of effectiveness of the Registration Statement and (ii) may
grant stock options pursuant to the Company's Third Amended and Restated
Stock Option Plan and the 1995 Nonemployee Directors Stock Option Plan.
(m) The Company will not, directly or indirectly, take
any action which would constitute, or any action designed or which might
reasonably be expected to cause or result in or constitute, under the
Act or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(n) If at any time during the 25-day period after the
first date that any of the Shares are released by you for sale to the
public, any rumor, publication, or event relating to or affecting the
Company shall occur as a result of which in your opinion the market
price of the Common Stock (including the Shares) has been or is likely
to be materially affected (regardless of whether such rumor, publication
or event necessitates a supplement to or amendment of the Prospectus),
the Company will, after written notice from you advising the Company to
the effect set forth above, forthwith consult with you concerning the
advisability
<PAGE> 8
RAYMOND JAMES & ASSOCIATES, INC. Page 8
and substance of, and, if appropriate, disseminate, a press release or
other public statement responding to or commenting on such rumor,
publication, or event.
(o) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of its incorporation or the rules of
the Nasdaq Stock Market's National Market (the "Nasdaq National Market")
or any national securities exchange on which the Common Stock is listed,
a registrar (which, if permitted by applicable laws and rules, may be
the same entity as the transfer agent) for its Common Stock.
(p) The Company hereby agrees that this Agreement shall
be deemed, for all purposes, to have been made and entered into in
Pinellas County, Florida. The Company agrees that any dispute hereunder
shall be litigated solely in the Circuit Court of the State of Florida
in Pinellas County, Florida or in the United States District Court for
the Middle District of Florida, Tampa Division, and further agrees to
submit itself to the personal jurisdiction of such courts.
SECTION 6. AGREEMENTS OF THE SELLING SHAREHOLDERS. Each of the
Selling Shareholders, severally and not jointly, agrees with the several
Underwriters as follows:
(a) Such Selling Shareholder will not offer, sell,
contract to sell or otherwise dispose of any Common Stock or rights to
purchase Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock, except to the Underwriters pursuant to
this Agreement for a period of 120 days after commencement of the public
offering of the Shares by the Underwriters without the prior written
consent of the Representatives.
(b) Such Selling Shareholder will not, directly or
indirectly, take any action which would constitute, or any action
designed or which might reasonably be expected to cause or result in or
constitute, under the Act or otherwise, stabilization or manipulation of
the price of any security of the Company to facilitate the sale or
resale of the Shares.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to each Underwriter on the date hereof, and
shall be deemed to represent and warrant to each Underwriter on the Closing
Date and the Additional Closing Date, that:
(a) Each Prepricing Prospectus complied when so filed
in all material respects with the provisions of the Act, except that
this representation and warranty does not apply to statements in such
Prepricing Prospectus (or any amendment or supplement thereto) made in
reliance upon and in conformity with information relating to any
Underwriter
<PAGE> 9
RAYMOND JAMES & ASSOCIATES, INC. Page 9
furnished to the Company in writing by or on behalf of any Underwriter
through you expressly for use therein or in reliance upon and in
conformity with information relating to any Selling Shareholder
furnished to the Company in writing by or on behalf of any Selling
Shareholder expressly for use therein.
(b) The Commission has not issued any order preventing
or suspending the use of any Prepricing Prospectus, and the Prepricing
Prospectus included as part of the Registration Statement declared
effective by the Commission complied when so filed as to form in all
material respects with the requirements of the Act. The Registration
Statement, in the form in which it becomes effective and also in such
form as it may be when any post-effective amendment thereto shall become
effective, and the Prospectus, and any supplement or amendment thereto
when filed with the Commission under Rule 424(b) under the Act, will
comply when so filed in all material respects with the provisions of the
Act and will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that
this representation and warranty does not apply to statements in or
omissions from the Registration Statement or the Prospectus (or any
amendment or supplement thereto) made in reliance upon and in conformity
with information relating to any Underwriter furnished to the Company in
writing by or on behalf of any Underwriter through you expressly for use
therein or in reliance upon and in conformity with information relating
to any Selling Shareholder furnished to the Company in writing by or on
behalf of any Selling Shareholder expressly for use therein.
(c) The capitalization of the Company is as set forth
in the Prospectus as of the date set forth therein. All the outstanding
shares of Common Stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable and are free of any
preemptive or similar rights; the Shares to be issued and sold to the
Underwriters by the Company hereunder have been duly authorized and,
when issued and delivered to the Underwriters against payment therefor
in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights; the
capital stock of the Company conforms in all material respects to the
description thereof in the Registration Statement and the Prospectus (or
any amendment or supplement thereto); and the delivery of certificates
for the Shares pursuant to the terms of this Agreement and payment for
the Shares will pass valid and marketable title to the Shares, free and
clear of any voting trust arrangements, liens, encumbrances, equities,
claims or defects in title to the several Underwriters purchasing the
Shares in good faith and without notice of any lien, claim or
encumbrance.
<PAGE> 10
RAYMOND JAMES & ASSOCIATES, INC. Page 10
(d) The Company is a corporation duly organized and
validly existing in good standing under the laws of the State of Texas
with full corporate power and authority to own, lease and operate its
properties and to conduct its business as presently conducted and as
described in the Registration Statement and the Prospectus (and any
amendment or supplement thereto). Except for those jurisdictions where
the failure to so qualify would not, individually or in the aggregate,
have a material adverse effect on the condition (financial or other),
business, business prospects, properties, net worth or results of
operations of the Company and its Subsidiaries, taken as a whole, the
Company is not required, because of the nature of its properties or
conduct of its business, to register or qualify to conduct its business
in any other jurisdiction.
(e) Each of the subsidiaries of the Company identified
in Exhibit 22.1 to the Registration Statement (collectively, the
"Subsidiaries") is a corporation duly organized, validly existing and in
good standing in its jurisdiction of incorporation, with full corporate
power and authority to own, lease and operate its properties and to
conduct its business as presently conducted and as described in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto). None of the Subsidiaries are required, because of
the nature of their properties or the conduct of their business, to
register or qualify to conduct their business in any other jurisdiction.
All of the outstanding shares of capital stock of each of the
Subsidiaries has been duly authorized and validly issued, are fully paid
and nonassessable, and are owned by the Company directly or indirectly
through one of the other Subsidiaries, free and clear of any lien,
adverse claim, security interest, equity or other encumbrance. Except
for the Subsidiaries, the Company does not own a material interest in or
control, directly or indirectly, any other corporation, partnership,
joint venture, association, trust or other business organization or
entity.
(f) There are no legal or governmental proceedings
pending or, to the knowledge of the Company, threatened, against the
Company or any of the Subsidiaries, or to which the Company or any of
the Subsidiaries, or to which any of their respective property, is
subject, that are required to be described in the Registration Statement
or the Prospectus (or any amendment or supplement thereto) but are not
described as required. Except as described in the Prospectus, there is
no action, suit, inquiry (to the Company's knowledge), proceeding, or
investigation (to the Company's knowledge) by or before any court or
governmental or other regulatory or administrative agency or commission
pending or, to the best knowledge of the Company, threatened against or
involving the Company or any Subsidiary relating to any product alleged
to have been made or sold by the Company or any Subsidiary and alleged
to have been unreasonably hazardous or defective, nor is there any basis
for such action, suit, inquiry, proceeding or investigation. There are
no agreements, contracts, indentures, leases or other instruments that
are required to be described in the Registration Statement or the
Prospectus (or any amendment or supplement
<PAGE> 11
RAYMOND JAMES & ASSOCIATES, INC. Page 11
thereto) or to be filed as an exhibit to the Registration Statement that
are not described or filed as required. All agreements, contracts,
indentures, leases or other instruments described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto) or
filed as an exhibit to the Registration Statement have been duly
authorized, executed and delivered by the Company or a Subsidiary,
constitute valid and binding agreements of the Company or such
Subsidiary and are enforceable against the Company or such Subsidiary in
accordance with the terms thereof, except insofar as the enforceability
thereof may be limited by (i) bankruptcy, reorganization, insolvency,
fraudulent conveyance or transfer, moratorium or similar laws affecting
the enforcement of creditors' rights generally, and (ii) general
principles of equity (regardless of whether such is considered at law or
in equity).
(g) Neither the Company nor any of the Subsidiaries is
(i) in violation of (x) its certificate or articles of incorporation or
bylaws, or other organizational documents, or (y) any law, ordinance,
administrative or governmental rule or regulation applicable to the
Company or any of the Subsidiaries, except where the violation thereof
would not, individually or in the aggregate, have a material adverse
effect on the condition (financial or other), business, business
prospects, properties, net worth or results of operations of the Company
and its Subsidiaries, taken as a whole, or (z) any decree of any court
or governmental agency or body having jurisdiction over the Company or
any of the Subsidiaries, or (ii) in default in any material respect in
the performance of any obligation, agreement or condition contained in
any bond, debenture, note or any other evidence of indebtedness or in
any material agreement, indenture, lease or other instrument to which
the Company or any of the Subsidiaries is a party or by which any of
them or any of their respective properties may be bound.
(h) The execution and delivery of this Agreement and
the performance by the Company of its obligations under this Agreement
have been duly and validly authorized by the Company, and this Agreement
has been duly executed and delivered by the Company and constitutes the
valid and legally binding agreement of the Company, enforceable against
the Company in accordance with its terms, except insofar as the
enforceability hereof may be limited by (i) bankruptcy, reorganization,
insolvency, fraudulent conveyance or transfer, moratorium or similar
laws affecting the enforcement of creditors' rights generally, and (ii)
general principles of equity (regardless of whether such is considered
at law or in equity).
(i) None of the issuance and sale of the Shares to be
issued and sold by the Company, the execution, delivery or performance
of this Agreement by the Company nor the consummation by the Company of
the transactions contemplated hereby (i) is or may be void or voidable
by any person or entity, (ii) requires any consent, approval,
authorization or other order of or registration or filing with, any
court, regulatory body, administrative
<PAGE> 12
RAYMOND JAMES & ASSOCIATES, INC. Page 12
agency or other governmental body, agency or official (except such as
may be required for the registration of the Shares under the Act and
compliance with the securities or Blue Sky laws of various
jurisdictions, all of which will be, or have been, effected in
accordance with this Agreement) or conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the
certificate or articles of incorporation or bylaws, or other
organizational documents, of the Company or any of the Subsidiaries, or
(iii) conflicts or will conflict with or constitutes a breach of, or a
default under, any agreement, contract, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a party or
by which any of them or any of their respective properties may be bound,
or violates any statute, law, regulation or filing or judgment,
injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, or results in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of the Subsidiaries pursuant to
the terms of any agreement or instrument to which any of them is a party
or by which any of them may be bound or to which any of the property or
assets of any of them is subject.
(j) Except as described in the Prospectus, each
contract, agreement or arrangement to which the Company or any of its
Subsidiaries is a party or by which any of them is bound, or to which
any of the property or assets of the Company or any of its Subsidiaries
is subject, which is material to the condition (financial or other),
business, business prospects, properties, net worth or results of
operations of the Company and its Subsidiaries, taken as a whole, has
been duly and validly authorized, executed and delivered by the Company
or such Subsidiary, as applicable, and neither the Company nor any of
its Subsidiaries is in breach or default in any material respect of any
obligation, agreement, covenant or condition contained in any such
contract, agreement or arrangement; none of such contracts, agreements
or arrangements has been assigned by the Company or any of its
Subsidiaries, and the Company knows of no present condition or fact
which would prevent compliance by the Company or any of its Subsidiaries
or any other party thereto with the terms of any such contract,
agreement or arrangement in all material respects; neither the Company
nor any of its Subsidiaries has any present intention to exercise any
rights that it may have to cancel any such contract, agreement or
arrangement or otherwise to terminate its rights and obligations
thereunder, and none of them has any knowledge that any other party to
any such contract, agreement or arrangement has any intention not to
render full performance in all material respects as contemplated by the
terms thereof.
(k) Except as described in the Prospectus, the Company
does not have outstanding and at the Closing Date (and the Additional
Closing Date, if applicable) will not have outstanding any options to
purchase, or any warrants to subscribe for, or any securities or
obligations convertible into or exchangeable for, or any contracts or
commitments to issue or sell, any shares of Common Stock or any such
warrants or convertible or exchangeable
<PAGE> 13
RAYMOND JAMES & ASSOCIATES, INC. Page 13
securities or obligations. No holder of securities of the Company has
rights to the registration of any securities of the Company because of
the filing of the Registration Statement, except (i) with respect to the
Shares to be sold by the Selling Stockholders and (ii) any such rights
for which the Company has received valid and enforceable waivers or any
such rights which have lapsed pursuant to the terms of a registration
rights agreement.
(l) To the Company's knowledge, Coopers & Lybrand,
L.L.P., the certified public accountants who have certified the
financial statements filed as part of the Registration Statement and the
Prospectus (or any amendment or supplement thereto) are independent
public accountants as required by the Act.
(m) The financial statements, together with related
schedules and notes, forming part of the Registration Statement and the
Prospectus (and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and the Subsidiaries on the basis
stated in the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial
and statistical information and data set forth in the Registration
Statement and Prospectus (and any amendment or supplement thereto) is
accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company.
(n) Except as disclosed in the Registration Statement
and the Prospectus (or any amendment or supplement thereto), subsequent
to the respective dates as of which such information is given in the
Registration Statement and the Prospectus (or any amendment or
supplement thereto), neither the Company nor any of the Subsidiaries has
incurred any liability or obligation, direct or contingent, or entered
into any transactions, not in the ordinary course of business, that is
material to the Company and the Subsidiaries, taken as a whole, and
there has not been material change in the capital stock, or material
increase in the short-term debt or long-term debt, of the Company or any
of the Subsidiaries, or any material adverse change, or any development
involving or which may reasonably be expected to involve a potential
future material adverse change, in the condition (financial or other),
business, business prospects, properties, net worth or results of
operations of the Company and the Subsidiaries, taken as a whole.
(o) The Company or each of the Subsidiaries, as the
case may be, has good and marketable title to all property (real and
personal) described in the Prospectus as being owned by them, free and
clear of all liens, claims, security interests or other encumbrances
except such as are described in the Registration Statement and the
Prospectus
<PAGE> 14
RAYMOND JAMES & ASSOCIATES, INC. Page 14
or in a document filed as an exhibit to the Registration Statement or
such as are not materially burdensome and do not interfere in any
material respect with the use of the property or the conduct of the
business of the Company and the Subsidiaries, taken as a whole, and the
property (real and personal) held under lease by each of the Company or
the Subsidiaries, as the case may be, is held by them under valid,
subsisting and enforceable leases with only such exceptions as in the
aggregate are not materially burdensome and do not interfere in any
material respect with the conduct of the business of the Company and the
Subsidiaries, taken as a whole.
(p) The Company has not distributed and will not
distribute prior to the Closing Date any offering material in connection
with the offering and sale of the Shares other than the Prepricing
Prospectus, the Registration Statement, the Prospectus and such other
materials permitted by the Act.
(q) The Company has not taken, directly or indirectly,
any action which constituted, or any action designed or which might
reasonably be expected to cause or result in or constitute, under the
Act or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(r) The Company is not an "investment company," an
"affiliated person" of, or "promoter" or "principal underwriter" for an
investment company within the meaning of the Investment Company Act of
1940, as amended.
(s) The Company and each of the Subsidiaries have all
permits, licenses, franchises, approvals, consents and authorizations of
governmental or regulatory authorities or private persons or entities
(hereinafter "permit" or "permits") as are necessary to own their
properties and to conduct their business in the manner described in the
Prospectus, subject to such qualifications as may be set forth in the
Prospectus, except where the failure to have obtained any such permit
has not and will not have a material adverse effect upon the condition
(financial or other), business, business prospects, properties, net
worth or results of operations of the Company and the Subsidiaries,
taken as a whole; the Company and each of the Subsidiaries have
fulfilled and performed all of their material obligations with respect
to each such permit and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination of any
such permit or result in any other material impairment of the rights of
the holder of any such permit, subject in each case to such
qualification as may be set forth in the Prospectus; and, except as
described in the Prospectus, such permits contain no restrictions that
are materially burdensome to the Company or any of the Subsidiaries.
<PAGE> 15
RAYMOND JAMES & ASSOCIATES, INC. Page 15
(t) The Company and each of the Subsidiaries are
insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; and neither the Company nor any of
the Subsidiaries has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary
to continue its business at a comparable cost, except as disclosed in
the Registration Statement and the Prospectus.
(u) The Company and the Subsidiaries have complied and
will comply in all material respects with wage and hour determinations
issued by the U.S. Department of Labor under the Service Contract Act of
1965 and the Fair Labor Standards Act in paying its employees' salaries,
fringe benefits and other compensation for the performance of work or
other duties in connection with contracts with the U.S. government, and
have complied and will comply in all material respects with the
requirements of the Americans with Disabilities Act of 1990, the Family
and Medical Leave Act of 1993, the Employee Retirement Income Security
Act of 1974, the Civil Rights Act of 1964 (Title VII), the Age
Discrimination in Employment Act and state labor laws, each as amended,
except where the failure to comply with any such requirements has not,
and will not, have a material adverse effect on the condition (financial
or other) business, business prospects, properties, net worth or results
of operations of the Company and the Subsidiaries, taken as a whole.
The Company and the Subsidiaries have complied and will comply in all
material respects with the terms of all certifications and
representations made to the U.S. government in connection with the
submission of any bid or proposal or any contract. The Company and the
Subsidiaries have complied and will comply in all material respects with
their obligations under their agreements and contracts with the U.S.
government and agencies thereof, if any.
(v) The Company and the Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) Neither the Company nor any Subsidiary has,
directly or indirectly, at any time during the past five years (i) made
any unlawful contribution to any candidate for political office, or
failed to disclose fully any contribution in violation of law, or (ii)
made any payment to any federal, state or foreign governmental official,
or other person charged
<PAGE> 16
RAYMOND JAMES & ASSOCIATES, INC. Page 16
with similar public or quasi-public duties, other than payments required
or permitted by the laws of the United States or any jurisdiction
thereof or applicable foreign jurisdictions.
(x) The Company and the Subsidiaries have obtained all
permits, licenses and other authorizations, if any, which are required
under federal, state, regional, county, local and foreign statutes,
codes, ordinances and other laws relating to pollution or protection of
the environment, including laws relating to emissions, discharges,
releases, spilling, injecting, leaching, or disposing into the
environment or threatened releases of pollutants, contaminants,
chemicals or industrial, hazardous or toxic materials or wastes into the
environment (including, without limitation, ambient air, surface water,
ground water, land surface, or subsurface strata) or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage,
disposal, discharge into the environment, transport, or handling of
pollutants, contaminants, chemicals or industrial, hazardous or toxic
materials or wastes, or any regulation, rule, code, plan, order, decree,
judgment, injunction, notice or demand letter issued, entered,
promulgated, or approved thereunder ("Environmental Laws"). The Company
and the Subsidiaries are in material compliance with all terms and
conditions of all such permits, licenses, and authorizations, and are
also in material compliance with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in the Environmental Laws. There is
no pending or, to the best knowledge of the Company, after due inquiry,
threatened civil or criminal litigation, notice of violation, warning
letter or administrative proceeding relating in any way to the
Environmental Laws (including, without limitation, notices, demand
letters or claims under the Resource Conservation and Recovery Act of
1976, as amended ("RCRA"), the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), as
amended by the Superfund Amendments Reauthorization Act of 1987
("SARA"), the Toxic Substances Control Act of 1976, the Emergency
Planning and Community Right-to-Know Act of 1986, the Clean Water Act of
1977, and the Clear Air Act of 1966, all as amended, and similar
foreign, state, or local laws) involving the Company or any of the
Subsidiaries. There have not been and there are not any past, present,
or foreseeable future events, conditions, circumstances, activities,
practices, incidents, actions or plans which may interfere with or
prevent continued material compliance, or which may give rise to any
common law or legal material liability, or otherwise form the basis of
any present or future claim, action, demand, suit, proceeding, hearing,
study or investigation, based on or related to the manufacture,
processing, distribution, use, treatment, storage, disposal, arrangement
for disposal, transport, arrangement for transport or handling, or the
emission, discharge, release, or threatened release into the
environment, of any pollutant, contaminant, chemical or industrial,
hazardous or toxic material or waste, including, without limitation, any
material liability arising, or any material claim, action, demand, suit,
proceeding, hearing, study or investigation which may be brought, under
RCRA, CERCLA, SARA, or similar foreign, state, regional, county, or
local laws.
<PAGE> 17
RAYMOND JAMES & ASSOCIATES, INC. Page 17
(y) Except as otherwise disclosed in the Prospectus,
the Company and the Subsidiaries own and have full right, title and
interest in and to, or have valid licenses to use, each material trade
name, trademark, service mark, patent or copyright under which the
Company and the Subsidiaries conduct all or any portion of their
business, and neither the Company nor any of the Subsidiaries has
created any lien or encumbrance on, or granted any right or license with
respect to, any such trade name, trademark, service mark, patent or
copyright, except licenses to one or more of the Subsidiaries; except as
otherwise disclosed in the Prospectus, there is no claim pending against
the Company or any Subsidiary with respect to any trade name, trademark,
service mark, patent or copyright, and neither the Company nor any
Subsidiary has received notice that any trade name, trademark, service
mark, patent or copyright which it uses or has used in the conduct of
its business infringes upon or conflicts with the rights of any third
party.
(z) All offers and sales of the Company's and its
Subsidiaries' capital stock and debt or other securities prior to the
date hereof were made complied in all material respects with the Act and
all other applicable state and federal laws or regulations, or any
actions under the Act or any state or federal laws or regulations in
respect of any such offers or sales are effectively barred by effective
waivers or statutes of limitation.
(aa) All offers and sales of the Company's franchises
complied in all material respects with all applicable federal, state,
local and other laws.
(bb) All federal, state and local tax returns required
to be filed by or on behalf of the Company and each Subsidiary with
respect to all periods ended prior to the date of this Agreement have
been filed (or are the subject of valid extensions) with the appropriate
federal, state and local authorities and all such tax returns, as filed,
are accurate in all material respects except where the failure to file
such state and local tax returns would not, individually or in the
aggregate, have a material adverse effect on the condition (financial or
other), business, business prospects, properties, net worth or results
of operations of the Company and its Subsidiaries, taken as a whole.
All federal, state and local taxes (including estimated tax payments)
required to be shown on all such tax returns or claimed to be due from
or with respect to the business of the Company and each Subsidiary have
been paid or reflected as a liability on the financial statements of the
Company and the Subsidiaries for appropriate periods except where the
failure to pay or reflect as a liability such state and local taxes
would not, individually or in the aggregate, have a material adverse
effect on the condition (financial or other), business, business
prospects, properties, net worth or results of operations of the Company
and its Subsidiaries, taken as a whole. All deficiencies asserted as a
result of any federal, state or local tax audits have been paid or
finally settled and, except as previously disclosed to the
Representatives in writing, no issue has been raised in any such audit
which, by application of the same or similar principals, reasonably
could
<PAGE> 18
RAYMOND JAMES & ASSOCIATES, INC. Page 18
be expected to result in a proposed deficiency for any other period not
so audited. To the best knowledge of the Company, no state of facts
exists or has existed which would constitute grounds for the assessment
of any tax liability with respect to the periods which have not been
audited by appropriate federal, state or local authorities except for
such state and local tax liability which would not, individually or in
the aggregate, have a material adverse effect on the condition
(financial or other), business, business prospects, properties, net
worth or results of operations of the Company and its Subsidiaries,
taken as a whole. There are no outstanding agreements or waivers
extending the statutory period of limitation applicable to any federal,
state or local tax return for any period.
(cc) Except as disclosed in the Prospectus, there are no
outstanding loans, advances, or guarantees of indebtedness by the
Company or any Subsidiary to or for the benefit of any of its officers,
directors, or controlling persons, or any of the members of the families
of any of them which are required to be disclosed in the Prospectus.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF THE SELLING
SHAREHOLDERS. Each Selling Shareholder, severally and not jointly, represents
and warrants to each Underwriter on the date hereof, and shall be deemed to
represent and warrant to each Underwriter on the Closing Date and the
Additional Closing Date, that:
(a) Such Selling Shareholder now is, and at the time of
delivery by it of any Shares (whether the Closing Date or the Additional
Closing Date, as the case may be) will be, the lawful owner of the
number of Shares to be sold by such Selling Shareholder pursuant to this
Agreement and has, and at the time of delivery thereof will have, valid
and marketable title to the Shares to be sold by it.
(b) Upon delivery of and payment for the Shares
(whether at the Closing Date or the Additional Closing Date, as the case
may be) to be sold by such Selling Shareholder pursuant to this
Agreement, the Underwriters will acquire valid and marketable title to
such Shares free and clear of any claim, lien, encumbrance, security
interest, community property right, restriction on transfer or other
defect in title (other than any restriction on transfer imposed by the
Act and the securities or blue sky laws of certain jurisdictions).
(c) Such Selling Shareholder has and at the time of
delivery by it of any Shares (whether the Closing Date or the Additional
Closing Date, as the case may be) will have, full legal right, power and
capacity, and any approval required by law (other than any approval
required by the Act or the securities or blue sky laws of certain
jurisdictions), to sell, assign, transfer and deliver such Shares in the
manner provided in this Agreement.
<PAGE> 19
RAYMOND JAMES & ASSOCIATES, INC. Page 19
(d) Such Selling Shareholder has (i) executed and
delivered a Power of Attorney (the "Power of Attorney") appointing John
C. Wooley and Jeffrey J. Wooley, and each of them, as such Selling
Shareholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority
to execute and deliver this Agreement on behalf of such Selling
Shareholder, to determine the purchase price to be paid by the
Underwriters to the Selling Shareholder as provided in Section 2 hereof
and to authorize the delivery of the Shares to be sold by such Selling
Shareholder in connection with this Agreement, and (ii) has executed and
delivered, or caused to be executed and delivered on such Selling
Shareholder's behalf, a Custody Agreement among the Company, as
custodian, and the Selling Shareholders (the "Custody Agreement"), and
in connection therewith such Selling Shareholder further represents,
warrants and agrees that such Selling Shareholder has deposited in
custody, under the Power of Attorney and Custody Agreement, certificates
in negotiable form for the Shares to be sold hereunder by such Selling
Shareholder, for the purpose of further delivery pursuant to this
Agreement.
(e) This Agreement, the Power of Attorney and the
Custody Agreement have been duly executed and delivered by such Selling
Shareholder and each is a legal, valid and binding agreement of such
Selling Shareholder enforceable in accordance with its terms, except
insofar as rights to indemnity and contribution may be limited by
federal and state securities laws and as the enforceability hereof and
thereof may be limited by (i) bankruptcy, reorganization, insolvency,
fraudulent conveyance or transfer, moratorium or similar laws affecting
the enforcement of creditors' rights generally, and (ii) general
principles of equity (regardless of whether such is considered at law or
in equity).
(f) When the Registration Statement becomes effective
and at all times subsequent thereto through the latest of the Closing
Date, the Additional Closing Date or the termination of the offering of
the Shares, the Registration Statement and Prospectus, and any
supplements or amendments thereto, insofar as they relate to such
Selling Shareholder or contain information furnished by such Selling
Shareholder for inclusion therein, will not contain an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(g) The sale of such Selling Shareholder's Shares
pursuant to this Agreement is not prompted by any information concerning
the Company which is not set forth in the Prospectus.
(h) Such Selling Shareholder has not, directly or
indirectly, (i) taken any action which constituted, or any action
designed or which might reasonably be expected to cause or result in or
constitute, under the Act or otherwise, stabilization or manipulation of
<PAGE> 20
RAYMOND JAMES & ASSOCIATES, INC. Page 20
the price of any security of the Company to facilitate the sale or
resale of the Shares or (ii) since the filing of the Registration
Statement, bid for, purchased or paid anyone any compensation for
soliciting purchases of, the Shares.
SECTION 9. EXPENSES. The Company hereby agrees with the several
Underwriters that the Company will pay or cause to be paid the costs and
expenses associated with the following: (i) the preparation, printing or
reproduction, and filing with the Commission of the Registration Statement
(including financial statements and exhibits thereto), each Prepricing
Prospectus, the Prospectus, and each amendment or supplement to any of them;
(ii) the printing (or reproduction) and delivery (including postage, air
freight charges and charges for counting and packaging) of such copies of the
Registration Statement, each Prepricing Prospectus, the Prospectus, and all
amendments or supplements to any of them as may be reasonably requested for use
in connection with the offering and sale of the Shares as provided herein
during the period specified in Section 5(e) but not exceeding 180 days after
the effective date of the Registration Statement; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the offering of the Shares; (iv)
the printing (or reproduction) and delivery of this Agreement, [the preliminary
and supplemental Blue Sky Memoranda] and all other agreements or documents
printed (or reproduced) and delivered in connection with the offering of the
Shares; (v) the listing of the Shares on the Nasdaq National Market; [(vi) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states as provided in Section 5(f)
hereof (including the reasonable fees and expenses of counsel for the
Underwriters relating to the preparation, printing or reproduction, and
delivery of the preliminary and supplemental Blue Sky Memoranda and such
registration and qualification) subject to a maximum expense of $20,000;] (vii)
the filing fees and the reasonable fees and expenses of counsel for the
Underwriters in connection with any filings required to be made with the
National Association of Securities Dealers, Inc. in connection with the
offering; (viii) the transportation and other expenses incurred by or on behalf
of representatives of the Company in connection with the presentations to
prospective purchasers of the Shares; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel and including counsel for the Selling Shareholders) for the
Company; and (x) the performance by the Company of its other obligations under
this Agreement. Notwithstanding the foregoing, in the event that the proposed
offering is terminated for the reasons set forth in Section 5(i) hereof, the
Company agrees to reimburse the Underwriters as provided in Section 5(i).
SECTION 10. INDEMNIFICATION AND CONTRIBUTION. The Company
agrees to indemnify and hold harmless you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages, liabilities and expenses (including reasonable costs
of investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any Prepricing Prospectus or
in the Registration Statement or the
<PAGE> 21
RAYMOND JAMES & ASSOCIATES, INC. Page 21
Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
insofar as such losses, claims, damages, liabilities or expenses arise out of
or are based upon an untrue statement or omission or alleged untrue statement
or omission which has been made therein or omitted therefrom in reliance upon
and in conformity with the information relating to an Underwriter furnished in
writing to the Company by or on behalf of any Underwriter through you expressly
for use in connection therewith. The foregoing indemnity shall not inure to
the benefit of any Underwriter (or any person controlling such Underwriter) to
the extent that any such loss, claim, damage, liability or expense is based on
an untrue statement or omission or alleged untrue statement or omission in any
Prepricing Prospectus which was corrected in the Prospectus if the person
asserting any such loss, claim, damage, liability or expense purchased Shares
from such Underwriter but was not delivered or sent a copy of the Prospectus
within the time required under the Act (except that the provisions of this
sentence shall only apply if the Company furnished copies of the Prospectus to
such Underwriter or to the Representatives acting on behalf of such Underwriter
in requisite quantities and on a timely basis so as to permit the same to be
delivered or sent to such person within the time required).
Each Selling Shareholder, severally but not jointly, agrees to
indemnify and hold harmless you and each other Underwriter and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable costs of investigation)
arising out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in any Prepricing Prospectus or in the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon an untrue statement or
omission or alleged untrue statement or omission which has been made therein or
omitted therefrom in reliance upon and in conformity with the information
relating to an Underwriter furnished in writing to the Company by or on behalf
of any Underwriter through you expressly for use in connection therewith.
Notwithstanding the foregoing, (i) the foregoing indemnity shall apply only to
information furnished in writing by or on behalf of such Selling Shareholder
expressly for use in the Registration Statement or Prospectus and (ii) such
Selling Shareholder shall not be responsible pursuant to this indemnity for
losses, expenses, liabilities or claims for an amount in excess of the proceeds
to be received by such Selling Shareholder (before deducting expenses) from the
sale of Shares sold by such Selling Shareholder hereunder. The foregoing
indemnity shall not inure to the benefit of any Underwriter (or any person
controlling such Underwriter) to the extent that any such loss, claim, damage,
liability or expense is based on an untrue statement or omission or alleged
untrue statement or omission in any Prepricing Prospectus which was corrected
in the
<PAGE> 22
RAYMOND JAMES & ASSOCIATES, INC. Page 22
Prospectus if the person asserting any such loss, claim, damage, liability or
expense purchased Shares from such Underwriter but was not delivered or sent a
copy of the Prospectus within the time required under the Act (except that the
provisions of this sentence shall only apply if the Company furnished copies of
the Prospectus to such Underwriter or to the Representatives acting on behalf
of such Underwriter in requisite quantities and on a timely basis so as to
permit the same to be delivered or sent to such person within the time
required).
If any action or claim shall be brought against any Underwriter
or any person controlling any Underwriter in respect of which indemnity may be
sought against the Company or the Selling Shareholders, such Underwriter or
such controlling person shall promptly notify in writing the party or parties
against whom indemnification is being sought (the "indemnifying party" or
"indemnifying parties"), and such indemnifying party or parties shall assume
the defense thereof, including the employment of counsel reasonably acceptable
to such Underwriter or such controlling person and payment of all fees and
expenses. Such Underwriter or any such controlling person shall have the right
to employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Underwriter or such controlling person unless (i) the indemnifying party
or parties has or have agreed in writing to pay such fees and expenses, (ii)
the indemnifying party or parties has or have failed to assume the defense and
employ counsel reasonably acceptable to the Underwriter or such controlling
person, or (iii) the named parties to any such action (including any impleaded
parties) include both such Underwriter or such controlling person and the
indemnifying party or parties, and such Underwriter or such controlling person
shall have been advised by its counsel that representation of such indemnified
party and any indemnifying party or parties by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or
not such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying
party or parties shall not have the right to assume the defense of such action
on behalf of such Underwriter or such controlling person, it being understood,
however, that the Company shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all such Underwriters and controlling persons, which
firm shall be designated in writing by the Representatives and that all such
fees and expenses shall be reimbursed as they are incurred). The indemnifying
party or parties shall not be liable for any settlement of any such action
effected without its or their written consent, but if settled with such written
consent, or if there be a final judgment for the plaintiff in any such action,
the indemnifying party or parties agree to indemnify and hold harmless any
Underwriter and any such controlling person from and against any loss, claim,
damage, liability or expense by reason of such settlement or judgment, but in
the case of a judgment only to the extent stated in the immediately preceding
paragraph.
<PAGE> 23
RAYMOND JAMES & ASSOCIATES, INC. Page 23
Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, the Selling Shareholders and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, to the same extent as the foregoing indemnity from the Company to
each Underwriter, but only with respect to information relating to such
Underwriter furnished in writing by or on behalf of such Underwriter through
you expressly for use in the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto. If any action
or claim shall be brought or asserted against the Company, any of its
directors, any such officers, or any such controlling person based on the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be
sought against any Underwriter pursuant to this paragraph, such Underwriter
shall have the rights and duties given to the Company by the preceding
paragraph (except that if the Company shall have assumed the defense thereof
such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such Underwriter's expense), and the
Company, its directors, any such officers, and any such controlling persons
shall have the rights and duties given to the Underwriters by the immediately
preceding paragraph.
In any event, the Company and the Selling Shareholders will not,
without the prior written consent of the Representatives, settle or compromise
or consent to the entry of any judgment in any proceeding or threatened claim,
action, suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not the Representatives or any person who controls the
Representatives within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act is a party to such claim, action, suit or proceeding) unless
such settlement, compromise or consent includes an unconditional release of all
Underwriters and such controlling persons from all liability arising out of
such claim, action, suit or proceeding.
If the indemnification provided for in this Section 10 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then an indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company and the Selling Shareholders on the one hand
and the Underwriters on the other in connection with the statements or
omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other shall be deemed to be in the same
<PAGE> 24
RAYMOND JAMES & ASSOCIATES, INC. Page 24
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Shareholders bear to the
total underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus (or any
related term sheet used in reliance on Rule 434(b) under the Act); provided
that, in the event that the Underwriters shall have purchased any Additional
Shares hereunder, any determination of the relative benefits received by the
Company and the Selling Shareholders or the Underwriters from the offering of
the Shares shall include the net proceeds (before deducting expenses) received
by the Company and the Selling Shareholders, and the underwriting discounts and
commissions received by the Underwriters, from the sale of such Additional
Shares, in each case computed on the basis of the respective amounts set forth
in the notes to the table on the cover page of the Prospectus (or any related
term sheet used in reliance on Rule 434(b) under the Act). The relative fault
of the Company and the Selling Shareholders on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Shareholders on the one hand
or by the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Notwithstanding the foregoing, no Selling Shareholder
shall be required to contribute any amount in excess of the proceeds to be
received by such Selling Shareholder (before deducting expenses) from the sale
of Shares sold by such Selling Shareholder hereunder.
The Company, the Selling Shareholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 10 was determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities and
expenses referred to in this Section 10 shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 10, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price of the Shares underwritten by it and
distributed to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 10 are several in proportion to the respective numbers
of Firm Shares set forth opposite their names in Schedule I hereto (or such
numbers of Firm Shares increased as set forth in Section 12 hereof) and not
joint.
<PAGE> 25
RAYMOND JAMES & ASSOCIATES, INC. Page 25
Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 10 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 10 and the
representations and warranties of the Company and the Selling Shareholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Selling Shareholders, the Company,
its directors or officers or any person controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
10.
SECTION 11. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The
several obligations of the Underwriters to purchase the Firm Shares hereunder
are subject to the following conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 p.m., New York City time, on the date
hereof, or at such later date and time as shall be consented to in
writing by you, and all filings required by Rules 424(b) and 430A under
the Act shall have been timely made.
(b) Subsequent to the effective date of the
Registration Statement there shall not have occurred any change, or any
development involving, or which might reasonably be expected to involve,
a prospective material adverse change, in the condition (financial or
other), business, business prospects, properties, net worth or results
of operations of the Company and the Subsidiaries, taken as a whole, not
contemplated by the Prospectus (or any supplement thereto), that in your
reasonable opinion, as Representatives of the several Underwriters,
would materially and adversely affect the market for the Shares.
(c) You shall have received on the Closing Date (and
the Additional Closing Date, if any) an opinion of Hughes & Luce,
L.L.P., counsel for the Company and the Selling Shareholders, dated the
Closing Date (and the Additional Closing Date, if any), satisfactory to
you, to the effect that:
(i) Each of the Company and the Subsidiaries has
been duly incorporated and is validly existing as a corporation
in good standing under the laws of its jurisdiction of
incorporation with full corporate or other power and authority to
own and lease its properties and to conduct its business as
described in the Registration Statement and the Prospectus (and
any amendment or supplement thereto). All of the outstanding
shares of capital stock of each of the Subsidiaries
<PAGE> 26
RAYMOND JAMES & ASSOCIATES, INC. Page 26
have been duly authorized and validly issued, and are fully paid
and nonassessable, and are owned by the Company directly, or
indirectly through one of the other Subsidiaries, free and clear
of any security interest, or to the knowledge of such counsel,
any other voting trust arrangements, liens, encumbrances,
equities, claims or defects in title.
(ii) The authorized capital stock of the Company
conforms in all material respects as to legal matters to the
description thereof contained in the Prospectus under the heading
"Description of Capital Stock."
(iii) All shares of capital stock of the Company
outstanding prior to the issuance of the Shares to be issued and
sold by the Company hereunder have been duly authorized and
validly issued, are fully paid and nonassessable and are free of
any preemptive rights (statutory, contractual or otherwise) that
entitle or will entitle any person to acquire any Shares upon
issuance thereof by the Company.
(iv) All offers and sales of the Company's and
its Subsidiaries' capital stock prior to the date hereof were
made in compliance with the registration provisions of the Act
and the registration provisions of all other applicable state and
federal laws or regulations or any actions under the Act or any
state or federal laws or regulations in respect of any such
offers or sales are effectively barred by effective waivers or
statutes of limitation.
(v) The Shares to be issued and sold to the
Underwriters by the Company hereunder have been duly authorized
and, when issued and delivered to the Underwriters against
payment therefor in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable and free of any
preemptive rights (statutory, contractual or otherwise) that
entitle or will entitle any person to acquire any Shares upon the
issuance thereof by the Company.
(vi) To the knowledge of such counsel, each of
the Selling Shareholders has good and valid title to the Shares
to be sold by such Selling Shareholder under this Agreement free
and clear of all liens, encumbrances, equities or claims, and
full right, power and authority to sell, assign, transfer and
deliver the Shares to be sold by such Selling Shareholder
hereunder.
(vii) Upon delivery of the Shares to be sold by
each of the Selling Shareholders against payment therefor in
accordance with the terms of this Agreement, good and valid title
to such Shares, free and clear of all liens, encumbrances,
equities or claims, will be transferred to each of the several
<PAGE> 27
RAYMOND JAMES & ASSOCIATES, INC. Page 27
Underwriters which has purchased such Shares in good faith and
without notice of any adverse claim within the meaning of the
Texas Business and Commerce Code.
(viii) The form of certificates for the Shares
conforms to the requirements of the applicable corporate laws of
the State of Texas.
(ix) The Registration Statement has become
effective under the Act and, to the knowledge of such counsel, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose are
pending before or contemplated by the Commission.
(x) The Company has all requisite corporate
power and authority to enter into this Agreement and to issue,
sell and deliver the Shares to be sold by it to the Underwriters
as provided herein, and this Agreement has been duly authorized,
executed and delivered by the Company and is a valid, legal and
binding agreement of the Company enforceable in accordance with
its terms, except as enforceability may be limited by (i) any
bankruptcy, insolvency, moratorium and other laws of general
applicability affecting creditors rights generally, (ii)
limitations imposed by general principles of equity (regardless
of whether enforcement is considered in proceedings at law or in
equity) and (iii) limitations imposed under federal or state laws
on the enforceability of any provisions relating to
indemnification or contribution under this Agreement.
(xi) A Power of Attorney and a Custody Agreement
have been duly executed and delivered by or on behalf of each of
the Selling Shareholders and constitute valid and binding
agreements of each of the Selling Shareholders enforceable in
accordance with their terms, except as enforceability thereof may
be limited by (i) any bankruptcy, insolvency, moratorium and
other laws of general applicability affecting creditors rights
generally, (ii) limitations imposed by general principles of
equity (regardless of whether enforcement is considered in
proceedings at law or in equity), (iii) standards of commercial
reasonableness and good faith and (iv) limitations imposed under
federal or state laws on the enforceability of any provisions
relating to indemnification or contribution under this Agreement.
(xii) This Agreement has been duly executed and
delivered by or on behalf of each of the Selling Shareholders and
constitutes the valid and binding agreement of each of the
Selling Shareholders enforceable in accordance with its terms,
except as enforceability may be limited by (i) any bankruptcy,
insolvency, moratorium and other laws of general applicability
affecting creditors rights generally, (ii) limitations imposed by
general principles of equity (regardless of
<PAGE> 28
RAYMOND JAMES & ASSOCIATES, INC. Page 28
whether enforcement is considered in proceedings at law or in
equity), (iii) standards of commercial reasonableness and good
faith and (iv) limitations imposed under federal or state laws on
the enforceability of any provisions relating to indemnification
or contribution under this Agreement.
(xiii) Neither the Company nor any of the
Subsidiaries is in violation of its certificate or articles of
incorporation or bylaws, or other organizational documents, or to
the knowledge of such counsel, is in default in any material
respect in the performance of any obligation, agreement or
condition contained in any bond, indenture, note or other
evidence of indebtedness or in any other agreement material to
the Company and the Subsidiaries, taken as a whole, except as has
been disclosed in the Prospectus.
(xiv) Neither the offer, sale or delivery of the
Shares to be issued and sold by the Company, the execution,
delivery or performance of this Agreement, compliance by the
Company with all provisions hereof nor consummation by the
Company of the transactions contemplated hereby conflicts or will
conflict with or constitutes or will constitute a breach of, or a
default under, the certificate or articles of incorporation or
bylaws, or other organizational documents, of the Company or any
of the Subsidiaries or any agreement, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a
party or by which any of them or any of their respective
properties is bound that is made an exhibit to the Registration
Statement, or results or will result in the creation or
imposition of any lien, charge or encumbrance upon any material
property or assets of the Company or any of the Subsidiaries; nor
will any such action result in any violation of any existing law,
regulation, ruling (assuming compliance with all applicable state
securities and Blue Sky laws), judgment, injunction, order or
decree known to such counsel, applicable to the Company, the
Subsidiaries or any of their respective properties.
(xv) The sale of the Shares to be sold by each of
the Selling Shareholders hereunder and compliance by each of the
Selling Shareholders with all of the provisions of this
Agreement, the Power of Attorney and the Custody Agreement and
the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or
violation of any terms or provisions of, or constitute a default
under, any statute, rule or regulation or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over any of the Selling Shareholders or the property
of any of the Selling Shareholders, or the provisions of the
articles of incorporation or bylaws or other organizational
documents of any Selling Shareholder if any Selling Shareholder
is a corporation, the articles of partnership or partnership
agreement if any Selling
<PAGE> 29
RAYMOND JAMES & ASSOCIATES, INC. Page 29
Shareholder is a partnership, or any trust instrument (or similar
document) if any Selling Shareholder is a trust.
(xvi) No consent, approval, authorization or other
order of, or registration or filing with, any court, regulatory
body, administrative agency or other governmental body, agency or
official is required on the part of the Company (except such as
have been obtained under the Act or such as may be required under
state securities or Blue Sky laws governing the purchase and
distribution of the Shares) for the valid issuance and sale of
the Shares to the Underwriters under this Agreement.
(xvii) No consent, approval, authorization or other
order of, or registration or filing with, any court, regulatory
body, administrative agency or other governmental body, agency or
official is required on the part of any of the Selling
Shareholders (except such as have been obtained under the Act or
such as may be required under state securities or Blue Sky laws
governing the purchase and distribution of the Shares) for the
valid sale of the Shares to the Underwriters under this
Agreement.
(xviii) The Registration Statement and the
Prospectus and any supplements or amendments thereto (except for
the financial statements and the notes thereto and the schedules
and other financial and statistical data included or incorporated
by reference therein, as to which such counsel need not express
any opinion) comply as to form in all material respects with the
requirements of the Act.
(xix) To the knowledge of such counsel, (A) other
than as described or contemplated in the Registration Statement
or the Prospectus (or any amendment or supplement thereto), there
are no legal or governmental proceedings pending or threatened
against the Company or any of the Subsidiaries, or to which the
Company or any of the Subsidiaries, or any of their respective
property, is subject, that are required to be described in the
Registration Statement or Prospectus (or any amendment or
supplement thereto) that are not described as required therein,
and (B) there are no agreements, contracts, indentures, leases or
other instruments, that are required to be described in the
Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement that are not described or
filed as required, as the case may be.
(xx) To the knowledge of such counsel, neither
the Company nor any of the Subsidiaries is in material violation
of any law, ordinance, administrative or governmental rule or
regulation applicable to the Company or any of the
<PAGE> 30
RAYMOND JAMES & ASSOCIATES, INC. Page 30
Subsidiaries or any of their respective properties, or of any
decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries or any
of their respective properties, except where such violation does
not and will not have a material adverse effect on the condition
(financial or other), business, business prospects, properties,
net worth or results of operation of the Company and the
Subsidiaries, taken as a whole.
(xxi) Without opining as to any requirement to
qualify to transact business as a foreign corporation in any
jurisdiction, to the knowledge of such counsel, the Company and
each of the Subsidiaries have such permits, licenses franchises,
approvals, consents and authorizations of governmental or
regulatory authorities ("permits"), as are necessary to own their
properties and to conduct their business in the manner described
in the Prospectus, subject to such qualifications as may be set
forth in the Prospectus; the Company and each of the Subsidiaries
have fulfilled and performed all of their material obligations
with respect to such permits and no event has occurred which
allows, or after notice or lapse of time would allow, revocation
or termination thereof or result in any other material impairment
of the rights of the holder of any such permit, subject in each
case to such qualification as may be set forth in the Prospectus;
and, except as described in the Prospectus, such permits contain
no restrictions that are materially burdensome to the Company or
any of the Subsidiaries.
(xxii) Such counsel has reviewed all agreements,
contracts, indentures, leases or other documents or instruments
described in the Registration Statement and the Prospectus (other
than routine contracts entered into by the Company or any
Subsidiary for the purchase of materials or the sale of products,
entered into in the normal course of business) and such
agreements, contracts, indentures, leases or other documents or
instruments are fairly summarized or described therein, and filed
as exhibits thereto as required.
(xxiii) Such counsel has no reason to believe that
the descriptions in the Prospectus of statutes, regulations or
legal or governmental proceedings are other than accurate or fail
to present fairly the information required to be shown.
(xxiv) The Company is not an "investment company"
or an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended.
<PAGE> 31
RAYMOND JAMES & ASSOCIATES, INC. Page 31
In rendering such opinion, counsel may rely, to the extent they
deem such reliance proper, as to matters of fact upon certificates of officers
of the Company, the Selling Shareholders and of government officials and upon
the Powers of Attorney and the Custody Agreement. Copies of all such
certificates shall be furnished to you and your counsel on the Closing Date
(and the Additional Closing Date, if applicable).
In rendering such opinion, in each case where such opinion is
qualified by "the knowledge of such counsel," such counsel may rely as to
matters of fact upon certificates of executive and other officers and employees
of the Company or its Subsidiaries as you and such counsel shall deem are
appropriate and such other procedures as you and such counsel shall mutually
agree; provided, however, in each such case, such counsel shall state that it
has no knowledge contrary to the information contained in such certificates or
developed by such procedures and knows of no reason why you should not
reasonably rely upon the information contained in such certificates or
developed by such procedures.
In addition to the opinion set forth above, such counsel shall
state that during the course of the preparation of the Registration Statement
and the Prospectus and the amendments thereto, nothing has come to the
attention of such counsel which has caused it to believe that the Registration
Statement or any amendment thereto (except for the financial statements and
other financial and statistical information contained therein or omitted
therefrom as to which no opinion need be expressed), at the time it became
effective, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus as amended or
supplemented, as of the date of the opinion (except as aforesaid), contains an
untrue statement of a material fact or omits to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(d) You shall have received on the Closing Date (and
the Additional Closing Date, if any) an opinion of Baker & Botts,
L.L.P., counsel for the Underwriters, dated the Closing Date (and the
Additional Closing Date, if any), with respect to the issuance and sale
of the Firm Shares and the Additional Shares, if any, by the Company,
the Registration Statement and other related matters as you may
reasonably request and as is customary in underwritten offerings of
common equity securities and the Company and its counsel shall have
furnished to your counsel such documents as they may reasonably request
for the purpose of enabling them to pass upon such matters.
(e) You shall have received letters addressed to you
and dated the date hereof and the Closing Date (and the Additional
Closing Date, if any) from Coopers & Lybrand, L.L.P., independent
certified public accountants, substantially in the forms heretofore
approved by you.
<PAGE> 32
RAYMOND JAMES & ASSOCIATES, INC. Page 32
(f) (i) No stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for
that purpose shall have been taken or, to the knowledge of the Company,
shall be contemplated by the Commission at or prior to the Closing Date;
(ii) there shall not have been any change in the capital stock of the
Company nor any material increase in the short-term or long-term debt of
the Company (other than in the ordinary course of business) from that
set forth or contemplated in the Registration Statement or the
Prospectus (or any amendment or supplement thereto), except as may
otherwise be stated in the Registration Statement and Prospectus (or any
amendment or supplement thereto), or any material adverse change
(present or potential future) in the condition (financial or other),
business, business prospects, properties, net worth or results of
operations of the Company and the Subsidiaries, taken as a whole; (iii)
the Company and the Subsidiaries shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course
of business) that are material to the Company and the Subsidiaries,
taken as a whole, other than those reflected in the Registration
Statement or the Prospectus (or any amendment or supplement thereto);
and (iv) all of the representations and warranties of the Company
contained in this Agreement shall be true and correct in all material
respects on as of the date hereof and on and as of the Closing Date (and
the Additional Closing Date, if any) as if made on and as of the Closing
Date (and the Additional Closing Date, if any), and you shall have
received a certificate, dated the Closing Date (and the Additional
Closing Date, if any) and signed by the chief executive officer and the
chief financial officer of the Company (or such other officers as are
acceptable to you) to the effect set forth in this Section 11(f) and in
Section 11(g) hereof.
(g) The Company shall not have failed in any material
respect at or prior to the Closing Date (and the Additional Closing
Date, if any) to have performed or complied with any of its agreements
herein contained and required to be performed or complied with by it
hereunder at or prior to the Closing Date (and the Additional Closing
Date, if any).
(h) The Company shall have furnished or caused to have
been furnished to you such further certificates and documents as you
shall have reasonably requested.
(i) At or prior to the Closing Date, you shall have
received the written commitment of each of the Company's directors and
executive officers and certain other shareholders previously identified
by you in writing to the Company or counsel for the Company not to
offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to purchase Common Stock or any securities
convertible into or exercisable or exchangeable for, Common Stock, other
than in accordance with this Agreement for a period of 120 days after
commencement of the public offering of the Shares by the Underwriters
without the prior written consent of Raymond James & Associates, Inc.
<PAGE> 33
RAYMOND JAMES & ASSOCIATES, INC. Page 33
All such opinions, certificates, letters and other documents will
be in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the satisfaction on and as of the
Additional Closing Date of the conditions set forth in this Section 11, except
that, if the Additional Closing Date is other than the Closing Date, the
certificates, opinions and letters referred to in paragraphs (c) through (i)
shall be dated in the Additional Closing Date and the opinions called for by
paragraphs (c) and (d) shall be revised to reflect the sale of Additional
Shares.
SECTION 12. EFFECTIVE DATE OF AGREEMENT. This Agreement shall
become effective upon the later of (a) the execution and delivery hereof by the
parties hereto, or (b) release of notification of the effectiveness of the
Registration Statement by the Commission.
If any one or more of the Underwriters shall fail or refuse to
purchase Firm Shares which it or they have agreed to purchase hereunder, and
the aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-
tenth of the aggregate number of the Firm Shares, each non-defaulting
Underwriter shall be obligated, severally, in the proportion which the number
of Firm Shares set forth opposite its name in Schedule I hereto bears to the
aggregate number of Firm Shares set forth opposite the names of all non-
defaulting Underwriters or in such other proportion as you may specify in the
Agreement Among Underwriters, to purchase the Firm Shares which such defaulting
Underwriter or Underwriters agreed, but failed or refused, to purchase. If any
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and
the aggregate number of Firm Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Firm Shares and arrangements
satisfactory to you, the Company for the purchase of such Firm Shares are not
made within 96 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company. In any
such case which does not result in termination of this Agreement, either you or
the Company shall have the right to postpone the Closing Date, but in no event
for longer than seven (7) days, in order that the required changes, if any, in
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any such
default of any such Underwriter under this Agreement.
SECTION 13. TERMINATION OF AGREEMENT. This Agreement shall be
subject to termination in your absolute discretion, without liability on the
part of any Underwriter to the Company by notice to the Company, if prior to
the Closing Date or the Additional Closing Date (if different from the Closing
Date and then only as to the Additional Shares), as the case may be, (i)
trading in securities generally on the New York Stock Exchange, American Stock
Exchange or the Nasdaq National Market shall have been suspended or materially
limited, (ii) trading of any
<PAGE> 34
RAYMOND JAMES & ASSOCIATES, INC. Page 34
securities of the Company, including the Shares, on the Nasdaq National Market
shall have been suspended or materially limited, whether as the result of a
stop order by the Commission or otherwise, (iii) a general moratorium on
commercial banking activities in New York, Texas, or Florida shall have been
declared by either federal or state authorities, (iv) there shall have occurred
any outbreak or escalation of hostilities or other international or domestic
calamity, crisis or change in political, financial or economic conditions or
other material event the effect of which on the financial markets of the United
States is such as to make it, in your judgment, impracticable or inadvisable to
market the Shares or to enforce contracts for the sale of the Shares, or (v)
the Company or any of the Subsidiaries shall have, in the sole reasonable
judgment of the Representatives, sustained any material loss or interference
with their respective businesses or properties from fire, flood hurricane,
accident, or other calamity, whether or not covered by insurance, or from any
labor disputes or any legal or governmental proceeding, or there shall have
been any material adverse change (including, without limitation, a material
change in management or control of the Company) in the condition (financial or
otherwise), business, business prospects, properties, net worth or results of
operations of the Company and the Subsidiaries, taken as a whole, except in
each case as described in, or contemplated by, the Prospectus (excluding any
amendment or supplement thereto). Notice of such cancellation shall be
promptly given to the Company and its counsel by telegraph or telephone and
shall be subsequently confirmed by letter.
SECTION 14. INFORMATION FURNISHED BY THE UNDERWRITERS. The last
paragraph of text on the front cover page of the Prospectus, the stabilizing
and passive market making legends appearing as the first and second paragraphs
of text on page 2 of the Prospectus, the information set forth in the table
under the caption "Underwriting" in the Prospectus and the information set
forth in the third and fourth paragraphs under the caption "Underwriting" in
the Prospectus, constitute all the information furnished by or on behalf of the
Underwriters through you or on your behalf as such information is referred to
in Sections 7(a), 7(b) and 10 hereof.
SECTION 15. MISCELLANEOUS. Except as otherwise provided in
Sections 5, 12 and 13 hereof, notice given pursuant to any of the provisions of
this Agreement shall be in writing and shall be delivered
(i) to the Company:
Schlotzsky's, Inc.
200 West 4th Street
Austin, Texas 78701
Attention: John C. Wooley, President
Facsimile: (512) 477-2897
<PAGE> 35
RAYMOND JAMES & ASSOCIATES, INC. Page 35
with copy to:
Hughes & Luce, L.L.P.
111 Congress Avenue
Austin, Texas 78701
Attention: Phillip M. Slinkard, Esq.
Facsimile: (512) 482-6859
(ii) to the Underwriters:
Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, Florida 33716
Attention: Gary A. Downing, Managing Director
Facsimile: (813) 573-8058
with copy to:
Baker & Botts, L.L.P.
2001 Ross Avenue
Dallas, Texas 75201
Attention: Douglass M. Rayburn, Esq.
Facsimile: (214) 953-6503
This Agreement has been and is solely for the benefit of the
several Underwriters, the Company, its directors and officers, the Selling
Shareholders and the other controlling persons referred to in Section 10
hereof, and their respective successors and assigns, to the extent provided
herein, and no other person shall acquire or have any right under or by virtue
of this Agreement. Neither of the terms "successor" and "successors and
assigns" as used in this Agreement shall include a purchaser from you of any of
the Shares in his status as such purchaser.
SECTION 16. APPLICABLE LAW; COUNTERPARTS. This Agreement shall
be governed by and construed in accordance with the laws of the State of
Florida, without reference to choice of law principles thereunder. This
Agreement may be signed in various counterparts which together shall constitute
one and the same instrument. This Agreement shall be effective when, but only
when, at least one counterpart hereof shall have been executed on behalf of
each party hereto.
<PAGE> 36
RAYMOND JAMES & ASSOCIATES, INC. Page 36
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding agreement
between us.
Very truly yours,
SCHLOTZSKY'S, INC.
By:
----------------------------------
Name:
-----------------------------
Title:
----------------------------
SELLING SHAREHOLDERS
Named in Schedule II hereto
By:
----------------------------------
(Attorney-in-Fact)
By:
----------------------------------
(Attorney-in-Fact)
<PAGE> 37
CONFIRMED as of the date first above
mentioned, on behalf of itself and the other
several Underwriters named in Schedule I
hereto.
RAYMOND JAMES & ASSOCIATES, INC.
MORGAN KEEGAN & COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
By: RAYMOND JAMES & ASSOCIATES, INC.
By:
----------------------------------------
Authorized Representative
<PAGE> 38
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER
OF FIRM
NAME SHARES
- ---- --------
<S> <C>
Raymond James & Associates, Inc . . . . . . . . . . . . . . .
Morgan Keegan & Company, Inc. . . . . . . . . . . . . . . . . .
Rauscher Pierce Refsnes, Inc. . . . . . . . . . . . . . . . . .
---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200,000
=========
</TABLE>
<PAGE> 39
SCHEDULE II
<TABLE>
<CAPTION>
Number of Firm Maximum Number of
Shares to be Sold by Additional Shares to be
Name of Selling Shareholder Selling Shareholder Sold by Selling Shareholder
--------------------------- ------------------- ---------------------------
<S> <C> <C>
Buxtehude Holding B.V. 289,824 77,594
Getov Holding B.V. 227,468 0
John C. Wooley 87,500 13,125
Jeffrey J. Wooley 37,500 5,625
Raymond A. Rodriguez 12,208 1,831
Marybeth Zindrick 14,000 0
George and Maureen Miz 10,000 0
Larry and Elizabeth Johnson 10,000 0
Walter Ronemous 6,250 0
Richard Sutliff 4,000 0
Lawrence Kaplan 1,250 0
------- -------
700,000 98,175
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 5.1
OPINION OF HUGHES & LUCE, L.L.P.
September 18, 1997
Schlotzsky's, Inc.
200 West Fourth Avenue
Austin, Texas 78701
Ladies and Gentlemen:
On September 4, 1997, Schlotzsky's, Inc., a Texas corporation (the
"Company"), filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (File No. 333-34921) (the "Registration Statement"),
under the Securities Act of 1933, as amended (the "Act"), relating to the sale
by the Company and certain Selling Shareholders (as such term is defined in the
Registration Statement) of an aggregate of 2,200,000 shares of common stock, no
par value (the "Common Stock"), plus an additional 330,000 shares of Common
Stock subject to the exercise of an over-allotment option to be granted by the
Company and the Selling Shareholders (collectively, the "Shares"). We have
acted as counsel to the Company in connection with the preparation and filing
of the Registration Statement.
In connection therewith, we have examined and relied upon the original
or copies, certified to our satisfaction, of (i) the Articles of Incorporation
and the Bylaws of the Company, in each case as amended to date, (ii) copies of
resolutions of the Board of Directors of the Company authorizing the offering
and the issuance of the shares to be sold by the Company and related matters,
(iii) the Registration Statement, and all exhibits thereto, and (iv) such other
documents and instruments as we have deemed necessary for the expression of
opinions herein contained. In making the foregoing examinations, we have
assumed the genuineness of all signatures and the authenticity of all documents
submitted to us as originals, and the conformity to original documents of all
documents submitted to us as certified or photostatic copies. As to various
questions of fact
<PAGE> 2
Schlotzsky's, Inc.
September 18, 1997
Page 2
material to this opinion, we have relied, to the extent we deem reasonably
appropriate, upon representations or certificates of officers or directors of
the Company and upon documents, records and instruments furnished to us by the
Company, without independent check or verification of their accuracy.
Based upon the foregoing examination, we are of the opinion that the
Shares being sold by the Company and the Selling Shareholders, when sold to the
Underwriters as described in the Registration Statement, will be validly
issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. In
giving such consent, we do not admit that we come within the category of
persons whose consent is required by Section 7 of the Act or the rules and
regulations of the Commission thereunder.
Very truly yours,
/s/ HUGHES & LUCE, L.L.P.
<PAGE> 1
EXHIBIT 10.35
Amended and Restated
February 24, 1997
SCHLOTZSKY'S, INC.
THIRD AMENDED AND RESTATED
1993 STOCK OPTION PLAN
The Schlotzsky's, Inc. 1993 Stock Option Plan (the "Plan") is hereby
amended and restated in its entirety to read as follows:
1. Purpose. This 1993 Stock Option Plan (the "Plan") is intended to
provide incentives to the officers, other employees, directors and consultants
of Schlotzsky's, Inc., a Texas corporation (the "Company") and any present or
future subsidiaries by providing them with opportunities to purchase stock in
the Company pursuant to options granted hereunder ("Options"). As used herein
the term "subsidiary" has the meaning assigned to it in Section 424 of the
Internal Revenue Code of 1986, as amended (the "Code"), "Incentive Stock
Option" has the meaning assigned to it in Section 422 of the Code and
"Non-Qualified Option" means an Option which is not intended to qualify as an
Incentive Stock Option.
2. Approval of Grants. Each grant of Options ("Grant") must be
approved in one of the following ways:
(a) Board/Committee Approval. The entire Board of Directors of the
Company (the "Board") or the Committee (as defined below) may vote in
advance to approve such Grant.
(b) Shareholder Approval/Ratification. In compliance with Section
14 of the Securities Exchange Act of 1934, as amended ("1934 Act"), a
majority of the shareholders of the Company duly entitled to vote on such
matters at meetings held in accordance with the laws of the State of
Texas may, either in advance of the Grant or no later than the next
annual meeting of shareholders, affirmatively vote to approve such Grant.
3. Administration of the Plan. The Plan shall be administered by the
Board, except to the extent the Board delegates its authority to a committee of
the Board (the "Committee") which, must consist solely of non-employee
directors, and with respect to grants to directors or officers, must consist
solely of two or more Non-Employee Directors, as defined in Rule 16b-3,
promulgated pursuant to Section 16 of the 1934 Act ("Rule 16b-3") and must
consist only of "Outside Directors" in compliance with Section 162(m)(4)(C) of
the Code for purposes of grants to the chief executive officer and other
executive officers whose compensation limit may otherwise exceed the deduction
limit of Section 162(m) of the Code. The Compensation
<PAGE> 2
Committee may create a subcommittee for purposes of Grants to officers and
directors if the Committee would otherwise not qualify. References herein to
the "Committee" shall include any such subcommittee. All references in this
Plan to the Administrator shall mean the Board, unless it has delegated its
authority to the Committee, in which event Administrator shall mean the
Committee. With respect to the Grants of Options to directors, officers and
beneficial owners of more than 10% of a class of equity security registered
pursuant to the 1934 Act, the Plan shall be administered in such manner as will
enable compliance with Rule 16b-3. Grants made to executive officers subject
to Section 162(m) of the Code shall be contingent on shareholder approval of
the material terms of the Plan to the extent required under Section 162(m).
Subject to the terms of the Plan, the Board, the Committee or the
shareholders, as the case may be, shall have concurrent authority to determine
the persons to whom Options shall be granted, the number of shares covered by
each Option, the price per share specified in each Option, the time or times at
which Options shall be granted and the terms and provisions of the instruments
by which Options shall be evidenced. The Administrator is authorized to
interpret the provisions of the Plan or of any Option or Option agreement and
to make all rules and determinations which it deems necessary or advisable for
the administration of the Plan, provided, however, that all such
interpretations, rules and determinations shall be made and prescribed in the
context of preserving the tax status under Code Section 422 of those Options
which are designated as Incentive Stock Options. Subject to the foregoing, the
interpretation and construction by the Administrator of any provisions of the
Plan or of any Option granted under it shall be final. No member of the Board
or the Committee shall be liable for any action or determination made in good
faith with respect to the Plan or any Option granted under it.
4. Eligible Employees and Consultants. Subject to the limitations
contained in paragraphs 2 and 3, Non-Qualified Options may be granted to any
officer, other employee, director or consultant of the Company or any
subsidiary. Incentive Stock Options may only be granted to employees. Granting
of any Option to an employee, director or consultant shall neither entitle him
to, nor disqualify him from, participation in any other grant of options.
5. Stock. The stock subject to the Options shall be authorized but
unissued shares of Common Stock of the Company, no par value (the "Common
Stock"), or shares of Common Stock reacquired by the Company, including shares
purchased in the open market. The aggregate number of shares which may be
issued pursuant to the Plan is 800,000, subject to adjustment as provided in
paragraph 15; provided however, that the number of shares with respect to which
Options may be granted to any single executive officer of the Company during
any fiscal year shall not exceed 250,000 shares of Common Stock. In the event
any Option granted under the Plan shall expire or terminate for any reason
without having been exercised in full or shall cease for any reason to be
exercisable in whole or in part, the unpurchased shares subject thereto, shall
again be available for Grants of Options under the Plan, provided that an
Option that expires or terminates for any reason or ceases to be exercisable
in the fiscal year in which it is granted will continue to be counted against
the individual limit on Options granted to a single executive officer in any
fiscal year. The shares issued upon exercise of Options granted under the Plan
may be authorized and unissued shares or shares held by the Company in its
treasury, or both.
2
<PAGE> 3
6. Granting of Options. Options may be granted under the Plan at any
time within ten years from the date of approval of the Plan by the Board, the
Committee or the shareholders, as the case may be. The Administrator shall
specify at the time of each Grant of an Option under the Plan whether such
Option is an Incentive Stock Option. The date of Grant of an Option under the
Plan will be the date specified by the Administrator at the time it awards the
Option, provided, however, that such date shall not be prior to the date of
award. Notwithstanding any other provisions of this Plan, the Administrator
may authorize the Grant of an Option to a person not then an employee or
consultant of the Company or of a subsidiary. The actual Grant of such Option,
however, shall be conditioned upon such person becoming an employee or
consultant, as the case may be, at or prior to the time of the execution of the
Option agreement evidencing such Option.
7. Minimum Option Price. The price per share specified in each Option
granted under the Plan shall be as follows:
(a) The price per share specified in each Non-Qualified Stock Option
granted under the Plan shall in no event be less than 50% of the fair
market value per share of Common Stock on the date of such Grant;
provided that, as to Options awarded to executive officers, the price per
share shall be not less than the fair market value per share of the
Common Stock on the date of such Grant.
(b) The price per share specified in each Incentive Stock Option
granted under the Plan shall not be less than the fair market value per
share of the Common Stock on the date of such Grant. In the case of an
Incentive Stock Option to be granted to an employee owning, directly or
by reason of the applicable attribution rules in Section 424(d) of the
Code, more than 10% of the total combined voting power of all classes of
share capital of the Company or a subsidiary, the Option price per share
of the shares covered by each Option shall be not less than 110% of the
said fair market value on the date of Grant.
(c) In no event shall the aggregate fair market value (determined as
of the time of Grant) of the Common Stock with respect to which Incentive
Stock Options are exercisable (under all plans of the Company and any
subsidiaries) for the first time by an employee in any calendar year
exceed $100,000, provided that this subparagraph (c) shall have no force
or effect if its inclusion in the Plan is not necessary for Options
issued as Incentive Stock Options to qualify as Incentive Stock Options
pursuant to Section 422 of the Code.
For purposes of this Plan, "fair market value" with respect to a share of
Common Stock, shall mean the average of the daily market prices for the period
of 10 consecutive trading days ending immediately prior to the applicable date.
The market price for each such trading day shall be the last sale price on
such day on the New York Stock Exchange, or, if the Common Stock is not then
listed or admitted to trading on the New York Stock Exchange, on such other
principal stock exchange on which such stock is then listed or admitted to
trading, or, if no sale takes place
3
<PAGE> 4
on such day on any such exchange, the average of the closing bid and asked
prices on such day as officially quoted on any such exchange, or, if the Common
Stock is not then listed or admitted to trading on any stock exchange, the
market price for each such trading day shall be the last sale reported on the
NASDAQ National Market System as published in The Wall Street Journal or, if no
such sale is so reported, the average of the reported closing bid and asked
prices on such day in the over-the-counter market, as furnished by the National
Association of Securities Dealers Automated Quotation system, or, if such price
at the time is not available from such system, as furnished by any similar
system then engaged in the business of reporting such prices and selected by
the Administrator or, if there is no such system, as furnished by any member of
the National Association of Securities Dealers, selected by the Administrator.
If the Company's stock is not then publicly traded, the fair market value shall
be deemed to be the fair value of the Common Stock as determined by the
Administrator after taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and offer prices of the
Common Stock in private transactions negotiated at arm's length.
8. Option Duration. Subject to earlier termination as provided in
paragraphs 10, 11, 12, 13 and 19, each Option shall expire on the date
specified by the Administrator, consistent with the terms of the specific
Grant, but not more than ten years from the date of grant, provided, however,
that for optionees who own more than 10% of the total combined voting power of
all classes of share capital of the Company or a subsidiary, each Option shall
terminate not more than five years from the date of the Grant. Subject to
paragraph 18, the Administrator may extend the term of any previously granted
Option provided that such Option, as extended, expires within ten years of its
original date of grant.
9. Exercise of Option. Subject to the provisions of paragraphs 10,
11, 12, 13, 14, 15 and 19, each Option granted under the Plan shall be
exercisable ("vest") as follow:
(a) The Option shall either be fully exercisable upon grant or shall
become exercisable thereafter in such installments as the Administrator
may specify.
(b) Once an installment becomes exercisable it shall remain
exercisable until expiration or termination of the Option, unless
otherwise specified by the Administrator, consistent with the terms of
the specific Grant.
(c) Each Option may be exercised from time to time, in whole or in
part, for up to the total number of shares with respect to which it is
then exercisable.
(d) Consistent with the terms of the specific Grant, the
Administrator shall have the right to accelerate the date of exercise of
any installment, provided that the Administrator shall not accelerate the
exercise date of any installment of any Option granted to an optionee as
an Incentive Stock Option (and not previously converted into a
Non-Qualified Option pursuant to paragraph 24) if such acceleration would
violate the annual vesting limitation contained in Section 422(d) of the
Code, as described in paragraph 6(c).
4
<PAGE> 5
10. Voluntary Termination of Employment or Consulting. Except as the
Administrator may otherwise determine, if an optionee ceases to be employed or
retained by the Company or any subsidiary other than by reason of death or
Disability (as defined in paragraph 12 below) or a termination "for cause," no
further installments of his Options shall become exercisable, and his Options
shall terminate upon the expiration of three (3) months following the date of
termination of his employment, but in no event later than on their specified
expiration dates. In no event may an Option agreement provide, if the Option
is intended to be an Incentive Stock Option, that the time for exercise be
later than three (3) months after the optionee's termination of employment
except as otherwise provided in this paragraph 10 and in paragraphs 11 and 12.
Whether leave of absence by approval of the Company or by reason of military or
governmental service constitutes employment for purposes of the Plan shall be
conclusively determined by the Administrator.
The provisions of this paragraph 10, and not the provisions of paragraph
11 or 12, shall apply to an optionee who subsequently becomes disabled or dies
after the termination of employment or consultancy, provided, however, in the
case of an optionee's death within 45 days after the termination of employment
or consulting, the Optionee's Survivors (as defined below) may exercise the
Option within one year after the date of the optionee's death, but in no event
after the date of expiration of the term of the Option.
Notwithstanding anything herein to the contrary, if subsequent to an
optionee's termination of employment or consultancy, but prior to the exercise
of an Option, the Administrator determines that, either prior or subsequent to
the optionee's termination, the optionee engaged in conduct which would
constitute "cause," then such optionee shall immediately cease to have any
right to exercise any Option.
Options granted under the Plan shall not be affected by any change of
employment or other service within or among the Company and any subsidiaries,
so long as the optionee continues to be an employee or consultant of the
Company or any subsidiary, provided, however, if an optionee's employment by
either the Company or a subsidiary should cease (other than to become an
employee of a subsidiary or the Company), such termination shall affect the
optionee's rights under any Option granted to such optionee in accordance with
the terms of the Plan and the pertinent Option agreement.
11. Death. Except as otherwise provided in the applicable Option
agreement, in the event of the death of an optionee to whom an Option has been
granted hereunder, while the optionee is an employee or consultant of the
Company or of a subsidiary, such Option may be exercised by any person or
persons who acquired the optionee's rights to the Option by will or by the laws
of descent and distribution (the "Optionee's Survivors") to the extent
exercisable but not exercised on the date of death.
If the Optionee's Survivors wish to exercise the Option, they must take
all necessary steps to exercise the Option within two years after the date of
death of such Optionee, notwithstanding that the decedent might have been able
to exercise the Option as to some or all of the shares on a
5
<PAGE> 6
later date if he had not died and had continued to be an employee or consultant
or, if earlier, within the originally prescribed term of the Option.
12. Disability. Except as otherwise provided in the applicable Option
agreement, an optionee who ceases to be an employee of or consultant to the
Company or of a subsidiary by reason of Disability may exercise any Option
granted to such optionee to the extent exercisable but not exercised on the
date of his Disability.
"Disability" or "Disabled" means permanent and total disability as defined
in Section 22(e)(3) of the Code.
A Disabled optionee or his or her representative (except in the case of
Incentive Stock Options, only as permitted by Section 422(b)(5) of the Code)
may exercise such rights only within a period of not more than one year after
the date that the optionee became Disabled or, if earlier, within the
originally prescribed term of the Option.
The Administrator shall make the determination both of whether Disability
has occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such
optionee, in which case such procedure shall be used for such determination).
If requested, the optionee shall be examined by a physician selected or
approved by the Administrator, the cost of which examination shall be paid for
by the Company.
13. Termination for Cause. Except as otherwise provided in the
applicable Option agreement, the following rules apply if the optionee's
service (whether as an employee or consultant) is terminated "for cause" prior
to the time that all of his outstanding Options have been exercised:
(a) All outstanding and unexercised Options as of the date the
optionee is notified his service is terminated "for cause" will
immediately be forfeited.
(b) For purposes of this Plan, "cause" shall include (but is not
limited to) dishonesty with respect to the employer or entity retaining
the employee or consultant, insubordination, substantial malfeasance or
nonfeasance of duty, unauthorized disclosure of confidential information,
and conduct substantially prejudicial to the business of the Company or
any subsidiary. The determination of the Administrator as to the
existence of cause will be conclusive on the optionee and the Company.
(c) "Cause" is not limited to events which have occurred prior to a
optionee's termination of service, nor is it necessary that the
Administrator's finding of "cause" occur prior to termination. If the
Administrator determines, subsequent to an optionee's termination of
service but prior to the exercise of an Option, that either prior or
subsequent to the optionee's termination the optionee engaged in conduct
which would constitute "cause," then the right to exercise any Option is
forfeited.
6
<PAGE> 7
14. Assignability. No Option shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution or if such
Option is not an Incentive Stock Option, pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder, and during the lifetime of the
optionee each Option shall be exercisable only by him or his legal
representative, except in the case of Incentive Stock Options, only as
permitted by Section 422(b)(5) of the Code. Such Option shall not be assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise,
except as provided above) and shall not be subject to execution, attachment or
similar process. Any attempted transfer, assignment, pledge, hypothecation or
other disposition of any Option or of any rights granted thereunder contrary to
the provisions of this Plan, or the levy of any attachment or similar process
upon an Option, shall be null and void.
15. Terms and Conditions of Options. Options shall be evidenced by
agreements (which need not be identical) in such forms as the Administrator may
from time to time approve. Such agreements shall conform to the terms and
conditions set forth in paragraphs 7 through 14 hereof and may contain such
other provisions, as the Administrator deems advisable, which are not
inconsistent with the Plan, including restrictions applicable to shares of
Common Stock issuable upon exercise of Options.
16, Adjustments. Upon the happening of any of the following described
events, an optionee's rights with respect to Options granted hereunder shall be
adjusted as hereinafter provided:
(a) In the event shares of Common Stock shall be subdivided or
combined into a greater or smaller number of shares or if, upon a merger,
consolidation, reorganization, split-up, liquidation, combination,
recapitalization or the like of the Company the shares of Common Stock
shall be exchanged for other securities of the Company or of another
corporation, each optionee shall be entitled, subject to the conditions
herein stated, to purchase such number of shares of common stock or
amount of other securities of the Company or such other corporation as
were exchangeable for the number of shares of Common Stock which such
optionee would have been entitled to purchase except for such action, and
appropriate adjustments shall be made in the purchase price per share to
reflect such subdivision, combination, or exchange; and
(b) In the event the Company shall issue any of its shares as a
stock dividend upon or with respect to the shares of stock of the class
which shall at the time be subject to option hereunder, each optionee
upon exercising an Option shall be entitled to receive (for the purchase
price paid upon such exercise) the shares as to which he is exercising
his Option and, in addition thereto (at no additional cost), such number
of shares of the class or classes in which such stock dividend or
dividends were declared or paid, as he would have received if he had been
the holder of the shares as to which he is exercising his Option at all
times between the date of grant of such Option and the date of its
exercise and cash in lieu of fractional shares.
7
<PAGE> 8
Upon the happening of any of the foregoing events, the class and aggregate
number of shares set forth in paragraph 5 hereof which are subject to Options
which have heretofore been or may hereafter be granted under the Plan shall
also be appropriately adjusted to reflect the events specified in subparagraphs
(a) and (b) above. Consistent with the terms of the specific Grant, the
Administrator shall determine the adjustments to be made under this paragraph
16, and its determination shall be conclusive.
17. Mergers and Consolidations. Unless otherwise specifically provided
in the written agreement between the optionee and the Company relating to such
Option, if the Company is to be consolidated with or acquired by another entity
in a merger, sale of all or substantially all of the Company's assets or
otherwise (an "Acquisition"), the Administrator or the board of directors of
any entity assuming the obligations of the Company hereunder (the "Successor
Board"), shall, as to outstanding Options, either (i) make appropriate
provision for the continuation of such Options by substituting on an equitable
basis for the shares then subject to such Options the consideration payable
with respect to the outstanding shares of Common Stock in connection with the
Acquisition; or (ii) upon written notice to the optionees, provide that all
Options must be exercised, to the extent then exercisable, within a specified
number of days of the date of such notice, at the end of which period the
Options shall terminate; or (iii) terminate all Options in exchange for a cash
payment equal to the excess of the fair market value of the shares subject to
such Options (to the extent then exercisable) over the exercise price thereof.
18. Modification of Incentive Stock Options. Notwithstanding any other
provision of this Plan, any adjustments or changes made with respect to
Incentive Stock Options shall be made only after the Administrator, after
consulting with counsel for the Company, determines whether such adjustments
would constitute a "modification" of such Incentive Stock Options (as that term
is defined in Section 424(h) of the Code) or would cause any adverse tax
consequences for the holders of such Incentive Stock Options. If the
Administrator determines that such adjustments made with respect to Incentive
Stock Options would constitute a modification of such Incentive Stock Options,
it may refrain from making such adjustments notwithstanding any other provision
of this Plan, unless the holder of an Incentive Stock Option specifically
requests in writing that such adjustment be made and such writing indicates
that the holder has full knowledge of the consequences of such "modification"
on his income tax treatment with respect to the Incentive Stock Option. No
"modification" may be made without the affirmative votes of the holders of a
majority of shares of Common Stock then issued and outstanding.
19. Dissolution or Liquidation of the Company. Upon the dissolution or
liquidation of the Company, all Options granted under this Plan which as of
such date shall not have been exercised will terminate and become null and
void; provided, however, that if the rights of an optionee or an Optionee's
Survivors have not otherwise terminated and expired, the optionee or the
Optionee's Survivors will have the right immediately prior to such dissolution
or liquidation to exercise any Option to the extent that the right to purchase
shares has accrued under the Plan as of the date immediately prior to such
dissolution or liquidation.
20. Exercise of Options. An Option (or any part or installment thereof)
shall be exercised by giving written notice to the Company at its principal
office address, together with
8
<PAGE> 9
the tender of the full purchase price for the shares as to which such Option is
being exercised, and upon compliance with any other condition set forth in the
Option agreement. Such written notice shall be signed by the person exercising
the Option, shall state the number of shares with respect to which the Option
is being exercised and shall contain any representation required by the Plan or
the Option agreement. Full payment of the purchase price for the shares as to
which such Option is being exercised shall be made (a) in United States dollars
in cash or by check, or (b) at the discretion of the Administrator, through
delivery of shares of Common Stock having a fair market value equal as of the
date of the exercise to the cash exercise price of the Option, determined in
good faith by the Board, or (c) at the discretion of the Administrator, in such
other manner as constitutes valid consideration in accordance with applicable
law, or (d) at the discretion of the Administrator, by any combination of (a),
(b) and (c) above. Notwithstanding the foregoing, the Administrator shall
accept only such payment on exercise of an Incentive Stock Option as is
permitted by Section 422 of the Code.
The Company shall then deliver the shares as to which such Option was
exercised to the optionee (or to the Optionee's Survivors, as the case may be)
reasonably promptly. In determining what constitutes "reasonably promptly," it
is expressly understood that the delivery of the shares may be delayed by the
Company in order to comply with any law or regulation which requires the
Company to take any action with respect to the shares prior to their issuance.
The shares shall, upon delivery, be evidenced by an appropriate certificate or
certificates for fully-paid non-assessable shares.
The holder of an Option shall not have the rights of a shareholder with
respect to the shares covered by his Option until the date of issuance of a
stock certificate to him for such shares. No adjustment shall be made for
dividends or similar rights for which the record date is after the exercise of
the Option but before the date such stock certificate is issued. In no event
shall a fraction of a share be purchased or issued under the Plan.
21. Purchase for Investment. Unless the offering and sale of the shares
to be issued upon the particular exercise of an Option shall have been
effectively registered under the Securities Act of 1933, as now in force or
hereafter amended (the "Act"), the Company shall be under no obligation to
issue the shares covered by such exercise unless and until the following
conditions have been fulfilled:
(a) The person(s) who exercise such Option shall warrant to the
Company, at the time of such exercise or receipt, as the case may be,
that such person(s) are acquiring such shares for their own respective
accounts, for investment, and not with a view to, or for sale in
connection with, the distribution of any such shares, in which event the
person(s) acquiring such shares shall be bound by the provisions of the
following legend which shall be endorsed upon the certificate(s)
evidencing their shares issued pursuant to such exercise or such Grant:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE FEDERAL
9
<PAGE> 10
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS
OF ANY STATE. WITHOUT SUCH REGISTRATION, SUCH SECURITIES
MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED, EXCEPT UPON DELIVERY TO THE COMPANY OF AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR THE
SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE
SATISFACTORY TO THE COMPANY TO THE EFFECT THAT ANY SUCH
TRANSFER SHALL NOT BE IN VIOLATION OF THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR ANY
RULE OR REGULATION PROMULGATED THEREUNDER."
(b) The Company shall have received an opinion of its counsel that
the shares may be issued upon such particular exercise in compliance with
the Act without registration thereunder.
The Company may delay issuance of the shares until completion of any
action or obtaining of any consent which the Company deems necessary under any
applicable law (including, without limitation, state securities or "blue sky"
laws).
22. Issuance of Securities. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
subject to Options. Except as expressly provided herein, no adjustments shall
be made for dividends paid in cash or in property (including, without
limitation, securities) of the Company.
23. Fractional Shares. No fractional share shall be issued under the
Plan and the person exercising such right shall receive from the Company cash
in lieu of such fractional share equal to the fair market value thereof
determined in good faith by the Board.
24. Conversion of Incentive Stock Options into Non-Qualified Options:
Termination of Incentive Stock Options. The Administrator, at the written
request of any optionee, may in its discretion take such actions as may be
necessary to convert such optionee's Incentive Stock Options (or any
installments or portions of installments thereof) that have not been exercised
on the date of conversion into Non-Qualified Options at any time prior to the
expiration of such Incentive Stock Options, regardless of whether the optionee
is an employee of the Company or a subsidiary at the time of such conversion.
Such actions may include, but not be limited to, extending the exercise period
or reducing the exercise price of the appropriate installments of such Options.
At the time of such conversion, the Administrator (with the consent of the
optionee) may impose such conditions on the exercise of the resulting
Non-Qualified Options as the Administrator in its discretion may determine,
provided that such conditions shall not be inconsistent with this Plan.
Nothing in the Plan shall be deemed to give any optionee the right to have such
optionee's Incentive Stock Options converted into Non-Qualified Options, and no
such
10
<PAGE> 11
conversion shall occur until and unless the Administrator takes appropriate
action. The Administrator, with the consent of the optionee, may also
terminate any portion of any Incentive Stock Option that has not been exercised
at the time of such termination.
25. Term and Amendment of Plan. The Plan was initially adopted by the
Board on December 23, 1993, subject to its becoming effective upon approval by
the holders of a majority of the outstanding shares of Common Stock of the
Company. The Plan shall expire on December 23, 2003 (except as to Options
outstanding on that date). The Plan may be amended by the Administrator or the
shareholders in accordance with paragraph 3 hereof, including, without
limitation, to the extent necessary to qualify any or all outstanding options
granted under the Plan or options to be granted under the Plan for favorable
federal income tax treatment (including deferral of taxation upon exercise) as
may be afforded incentive stock options under Section 422 of the Code, to the
extent necessary to ensure the qualification of the Plan under Rule 16b-3, and
to the extent necessary to qualify the shares issuable upon exercise of any
outstanding options granted, or options to be granted, under the Plan for
listing on any national securities exchange or quotation in any national
automated quotation system of securities dealers. Any amendment approved by
the Administrator which is of a scope that requires shareholder approval in
order to ensure favorable federal income tax treatment for any Incentive Stock
Options or requires shareholder approval in order to ensure the qualification
of the Plan under Rule 16b-3 shall be subject to obtaining such shareholder
approval. Any modification or amendment of the Plan shall not, without the
consent of an optionee, affect his rights under an option previously granted to
him. With the consent of the optionee affected, the Board, the Committee or
the shareholders may amend outstanding Option agreements in a manner not
inconsistent with the Plan.
26. Application of Funds. The proceeds received by the Company from the
sale of shares pursuant to Options granted under the Plan shall be used for
general corporate purposes.
27. Governmental Regulation. The Company's obligation to sell and
deliver shares of the Common Stock under this Plan is subject to the approval
of any governmental authority required in connection with the authorization,
issuance or sale of such shares.
28. Withholding. Upon the exercise of a Non-Qualified Option for less
than its fair market value, the making of a Disqualifying Disposition (as
defined in paragraph 29) or the vesting of restricted Common Stock acquired on
the exercise of an Option hereunder, the Company may withhold from the
optionee's wages, or other remuneration, if any, or may require the optionee to
pay additional federal, state, and local income tax withholding and employee
contributions to employment taxes in respect of the amount that is considered
compensation includable in such person's gross income. The Administrator in
its discretion may condition the exercise of an Option for less than its fair
market value or the vesting of restricted Common Stock acquired by exercising
an Option on the grantee's payment of such additional income tax withholding
and employee contributions to employment taxes.
29. Notice to Company of Disqualifying Disposition. Each employee who
receives an Incentive Stock Option must agree to notify the Company in writing
immediately after the
11
<PAGE> 12
employee makes a Disqualifying Disposition of any shares acquired pursuant to
the exercise of an Incentive Stock Option. A Disqualifying Disposition is
defined in Section 424(c) of the Code and includes any disposition (including
any sale) of such shares before the later of (a) two years after the date the
employee was granted the Incentive Stock Option, or (b) one year after the date
the employee acquired shares by exercising the Incentive Stock Option, except
as otherwise provided in Section 424(c) of the Code. If the employee has died
before such stock is sold, these holding period requirements do not apply and
no Disqualifying Disposition can occur thereafter.
30. Governing Law. The validity and construction of the Plan and the
instruments evidencing Options shall be governed by the law of the State of
Texas.
31. Gender. Wherever reference is made herein to the male, female or
neuter genders, such reference shall be deemed to include any of the other
genders as the context may require.
32. Employment At Will. Nothing in the Plan shall be deemed to give any
optionee the right to be retained in employment by or as a consultant or
director to the Company or its subsidiaries for any period of time.
IN WITNESS WHEREOF, the Board of Directors of Schlotzsky's, Inc. approved
the 1993 Stock Option Plan as of the 23rd day of December, 1993, the
Shareholders approved the Plan as of December 31, 1993 and approved amendments
to the Plan as of November 30, 1995. The Compensation Committee has approved
the Second Amended and Restated 1993 Stock Option Plan as of the 28th day of
October, 1996 and the Third Amended and Restated Stock Option Plan, as of the
24th day of February, 1997. The Shareholders approved the Third Amended and
Restated Stock Option Plan as of the 30th day of May, 1997.
/s/ Jeffrey J. Wooley
----------------------------------
Jeffrey J. Wooley, Secretary
12
<PAGE> 13
SCHLOTZSKY'S INC.
Incentive Stock Option Agreement
[without Employee Covenants]
This Agreement ("Agreement") is entered into as of ______________, 19__,
between SCHLOTZSKY'S, INC., a Texas corporation (the "Company"), and
_______________________ an employee of the Company (the "Employee").
R E C I T A L S:
The Company desires to grant to the Employee an Option to purchase shares
of its Common Stock, no par value (the "Shares") pursuant to the Company's 1993
Stock Option Plan (the "Plan"). The Company and the Employee understand and
agree that any terms used herein have the same meanings as in the Plan.
The parties agree as follows:
1. Grant of Option. The Company hereby irrevocably grants to the Employee
the right and option to purchase all or any part of an aggregate of ________
Shares on the terms and conditions and subject to all the limitations set forth
herein and in the Plan, which is incorporated herein by reference. The
Employee acknowledges receipt of a copy of the Plan.
The Option granted hereunder is an Incentive Stock Option, as defined
under the Plan and Section 422 of the Code.
2. Purchase Price. The purchase price of the Shares covered by the Option
shall be $ per share.
3. Exercise of Option. Subject to the other terms and conditions of this
Agreement, the Option granted hereby shall vest and become exercisable only on
and after the dates set forth below as to the number of shares set forth
opposite such dates below:
<TABLE>
<CAPTION>
Vesting Dates Number of Shares Vested
-------------- -----------------------
<S> <C>
________ 1997 _____________
________ 1998 _____________
________ 1999 _____________
________ 2000 _____________
________ 2001 _____________
</TABLE>
<PAGE> 14
4. Term of Option. The Option shall terminate ten years from the date of
this Agreement, but shall be subject to earlier termination as provided herein
or in the Plan.
(a) Voluntary Termination or Termination Without Cause.
If the Employee ceases to be an employee of the Company or of an Affiliate
(for any reason other than death or Disability or termination by the Employee
for cause), the Option may be exercised within three (3) months after the date
the Employee ceases to be an employee or, if earlier, the date upon which the
Option terminates, as originally prescribed by this Agreement. In such event,
the Option shall be exercisable only to the extent that the right to purchase
shares under the Plan has vested and accrued and is in effect at the date of
such cessation of employment.
(b) Termination for Cause.
In the event the Employee's employment is terminated by the Company (or an
Affiliate) for "cause" (as defined in the Plan), the Employee's right to
exercise any unexercised portion of this Option shall cease immediately, and
this Option shall thereupon terminate.
(c) Disability.
In the event of the Disability of the Employee (as determined by the
Administrator, as defined in the Plan), the Option shall be exercisable within
one year after the date of such Disability or the date upon which the Option
terminates as originally prescribed by this Agreement, whichever is earlier.
In such event, the Option shall be exercisable to the extent that the right to
purchase the Shares hereunder has accrued on the date the Employee becomes
Disabled and is in effect as of such determination date.
(d) Death.
In the event of the death of the Employee while an employee of the Company
or of an Affiliate, the Option, to the extent exercisable but not exercised as
of the date of death, may be exercised by the Employee's legal representatives
or any person who acquired the Employee's rights to the Option by will or by
the laws of descent and distribution. In such event, the Option must be
exercised, if at all, within two years after the date of death of the Employee
or, if earlier, the date upon which the Option terminates, as originally
prescribed by this Agreement.
5. Non-Assignability. The Option shall not be transferable by the
Employee otherwise than by will or by the laws of descent and distribution and
shall be exercisable, during the Employee's lifetime, only by the Employee or
his or her guardian or legal representative. The Option shall not be assigned,
pledged or hypothecated in any way (whether by operation of law of otherwise)
and shall not be subject to execution, attachment or similar process. Any
attempted transfer, assignment, pledge, hypothecation or other disposition of
the Option or of any rights
2
<PAGE> 15
granted hereunder contrary to the provisions of this paragraph 5, or the levy
of any attachment or similar process upon the Option or such rights, shall be
null and void.
6. Exercise of Option and Issue of Shares. The Option may be exercised in
whole or in part (to the extent that it is exercisable in accordance with its
terms) by giving written notice to the Company, together with the tender of the
Option price. Such written notice shall be signed by the person exercising the
Option, shall state the number of Shares with respect to which the Option is
being exercised, shall contain any representation required by paragraph 7 below
and shall otherwise comply with the terms and conditions of this Agreement and
the Plan. The Company shall pay all transfer or original issue taxes with
respect to the issue of the Shares pursuant hereto and all other fees and
expenses necessarily incurred by the Company in connection herewith. Except as
specifically set forth herein, the holder acknowledges that any income or other
taxes due form him or her with respect to this Option or the shares issuable
pursuant to this Option shall be the responsibility of the holder and that the
Company may, in accordance with the Internal Revenue Code, require the holder
to pay additional withholding taxes in respect of the amount that is considered
compensation includable in such holders' gross income. The holder of this
Option shall have rights as a shareholder only with respect to any Shares
covered by the Option after due exercise of the Option and tender of the full
exercise price for the shares being purchased pursuant to such exercise.
Further, Employee agrees to execute and become bound by the Shareholders
Agreement attached hereto as Exhibit A upon the first exercise of all or part
of the Option.
7. Purchase for Investment. Unless the offering and sale of the Shares to
be issued upon the particular exercise of the Option shall have been
effectively registered under the Securities Act of 1933, as amended, or any
successor legislation (the "Act"), the Company shall be under no obligation to
issue the Shares covered by such exercise unless and until the following
conditions have been fulfilled.
The person(s) who exercise the Option shall represent to the Company, at
the time of such exercise, that such person(s) are acquiring such Shares for
his or her own account, for investment and not with a view to, or for sale in
connection with, the distribution of any such Shares, in which event the
person(s) acquiring such Shares shall be bound by the provisions of the
following legend which shall be endorsed upon the certificate(s) evidencing
their option Shares issued pursuant to such exercise;
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE. WITHOUT SUCH REGISTRATION,
SUCH SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED, EXCEPT UPON DELIVERY TO THE COMPANY
OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR THE
SUBMISSION TO THE COMPANY
3
<PAGE> 16
OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO THE COMPANY
TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN
VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS OR ANY RULE OR REGULATION
PROMULGATED THEREUNDER."
Without limiting the generality of the foregoing, the Company may delay
issuance of the Shares until completion of any action or obtaining of any
consent, which the Company deems necessary under any applicable law (including
without limitation state securities or "blue sky" laws).
8. Notices. Any notices required or permitted by the terms of this
Agreement or the Plan shall be given by personal delivery or registered or
certified mail, return receipt requested, addressed as follows:
To the Company: SCHLOTZSKY'S, INC.
200 West 4th Street
Austin, Texas 78701
Attn: President
To the Employee, to the
address shown below,
or to such other address or addresses of which notice in the same manner has
previously been given. Any such notice shall be deemed to have been given when
given in accordance with these provisions.
9. Governing Law. This Agreement shall be construed and enforced in
accordance with the internal laws, and not the laws of conflict, of the State
of Texas.
10. Benefit of Agreement; Employment At Will. This Agreement shall be for
the benefit of and shall be binding upon the heirs, executors, administrators
and successors of the parties hereto. Notwithstanding anything else contained
herein or in the Plan, the Employee shall remain employed at will, with no
contractual right to be retained in employment by or as a consultant to the
Company or its subsidiaries for any period of time.
EXECUTED on ____, 199_.
SCHLOTZSKY'S, INC.
By:
-------------------------------
John C. Wooley, President
----------------------------------
[EMPLOYEE]
Address:
----------------------------------
----------------------------------
4
<PAGE> 17
AMENDMENT TO THE THIRD AMENDED AND RESTATED STOCK OPTION PLAN
Section 3 shall be amended to read as follows:
"3. Administration of the Plan. The Plan shall be administered
by the Board, except to the extent the Board delegates its authority
to a committee of the Board (the "Committee") which, must consist
solely of directors, and with respect to grants to directors or
officers, must consist solely of two or more Non-Employee Directors,
as defined in Rule 16b-3, promulgated pursuant to Section 16 of the
1934 Act ("Rule 16b-3") and must consist only of "Outside Directors"
in compliance with Section 162(m)(4)(C) of the Code for purposes of
grants to the chief executive officer and other executive officers
whose compensation limit may otherwise exceed the deduction limit of
Section 162(m) of the Code. The Compensation Committee may create a
subcommittee for purposes of Grants to officers and directors if the
Committee would otherwise not qualify. References herein to the
"Committee" shall include any such subcommittee. All references in
this Plan to the Administrator shall mean the Board, unless it has
delegated its authority to the Committee, in which event Administrator
shall mean the Committee. With respect to the Grants of Options to
directors, officers and beneficial owners of more than 10% of a class
of equity security registered pursuant to the 1934 Act, the Plan shall
be administered in such manner as will enable compliance with Rule
16b-3. Grants made to executive officers subject to Section 162(m) of
the Code shall be contingent on shareholder approval of the material
terms of the Plan to the extent required under Section 162(m).
Subject to the terms of the Plan, the Board, the Committee or the
shareholders, as the case may be, shall have concurrent authority to
determine the persons to whom Options shall be granted, the number of
shares covered by each Option, the price per share specified in each
Option, the time or times at which Options shall be granted and the
terms and provisions of the instruments by which Options shall be
evidenced. The Administrator is authorized to interpret the
provisions of the Plan or of any Option or Option agreement and to
make all rules and determinations which it deems necessary or
advisable for the administration of the Plan, provided, however, that
all such interpretations, rules and determinations shall be made and
prescribed in the context of preserving the tax status under Code
Section 422 of those Options which are designated as Incentive Stock
Options. Subject to the foregoing, the interpretation and
construction by the Administrator of any provisions of the Plan or of
any Option granted under it shall be final. No member of the Board or
the Committee shall be liable for any action or determination made in
good faith with respect to the Plan or any Option granted under it."
<PAGE> 1
EXHIBIT 10.36(a)
EMPLOYMENT AGREEMENT
AGREEMENT dated as of December 21, 1995 made and entered into by and
between Schlotzsky's, Inc., a Texas corporation (the "Company") and John C.
Wooley ("Wooley") to be effective as of the closing of the Company's initial
public offering.
The Board of Directors of the Company has determined that it is in the
best interest of the Company to set forth the terms of employment of Wooley as
President of the Company and Wooley has agreed to such terms. The Company and
Wooley wish to promote their mutual best interest by setting forth the terms
and conditions in writing.
NOW, THEREFORE, in consideration of the covenants and agreements set forth
in this Agreement, the parties agree as follows:
1. Employment. The Company employs Wooley and Wooley agrees to the terms
and conditions set forth in this Agreement. Wooley agrees to serve as
President of the Company to be responsible for general management of the
affairs of the Company, reporting directly to the Board of Directors, and to
devote good faith efforts on behalf of the Company.
2. Term of Employment. Wooley's employment with the Company shall
continue for two years after the closing of the Company's initial public
offering, provided that such term shall be extended to three years if he
remains liable on over $250,000 of guarantees in favor of the Company
(exclusive of any guarantee directly related to the flagship store location) at
the end of the first year, and provided further that such term shall be
extended to four years if he remains liable on over $100,000 of guarantees in
favor of the Company (exclusive of any guarantee directly related to the
flagship store location) at the end of the second year, unless earlier
terminated by Wooley or the Company in accordance herewith.
3. Base Salary, Bonus and Other Compensation. The Company shall pay to
Wooley an annual base salary of $120,000 for the balance of 1995, $130,000
during 1996, $140,000 during 1997, and for each year thereafter an amount equal
to the aggregate of the previous year's salary plus the greater of (i) 5%
thereof, or (ii) the percentage increase in consumer prices for the previous
year, as measured by the Consumer Price Index ("CPI") or if the CPI is no
longer calculated, an index acceptable to Wooley and the Company, multiplied by
such salary. Wooley's salary shall be payable on the same schedule that salary
is paid to other employees. Wooley shall be entitled to such bonuses and other
compensation as the Board of Directors shall approve.
4. Benefits. Wooley shall receive, in addition to the base salary and the
bonuses set forth in Section 3 hereof, such other benefits as are provided by
the Company to its executive officers, such as, group life, medical and
disability insurance. In addition, Wooley shall be entitled to receive stock
options to acquire 46,875 shares of Common Stock of the Company at an exercise
price of $12.80 per share, such shares to vest in the manner determined by the
<PAGE> 2
Compensation Committee. The Company agrees to purchase for cash at face value
the loan receivable in the face amount of $110,000 from a limited partner in
Bee Cave/Westbank Ltd. within a reasonable period of time following the closing
of the Company's initial public offering. The Company shall, within a
reasonable period of time following the closing of the Company's initial public
offering, restructure the notes payable from WTM Development, Inc. to provide
for quarterly payments of interest only at an annual rate of 8% per annum, and
an extended maturity of five years from such closing. In addition, the Company
will commit to make additional advances of up to $35,000 to WTM Development,
Inc., such amount to be added to the principal of the restructured notes.
5. Wooley Covenants.
(a) Confidential Information. Wooley acknowledges that the information,
observations and data obtained by him while employed by the Company (including
those obtained by him while employed at the Company prior to the date of this
Agreement) concerning the business or affairs of the Company ("Confidential
Information") are the property of the Company. Therefore, Wooley agrees that
he shall not disclose to any unauthorized person or use for his own account any
Confidential Information, unless and to the extent that the aforementioned
matters become generally known to and available for use by the public other
than as a result of Wooley's acts or omissions to act. Wooley shall deliver to
the Company at the termination of employment, or at any other time the Company
may request, all memoranda, notes, plans, records, reports and other documents
(and copies thereof) relating to the Confidential Information or the business
of the Company which he may then possess or have under his control.
(b) Inventions and Patents.
(i) Wooley agrees that all inventions, innovations, improvements,
developments, methods, designs, analyses, drawings, reports, and all similar or
related information which relates to the Company's actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by Wooley while employed by the
Company ("Work Product") belong to the Company. Wooley will promptly disclose
such Work Product to the President and perform all actions reasonably requested
by the President to establish and confirm such ownership.
(ii) Wooley is hereby advised that Section 5(b)(i) of this Agreement
regarding the Company's ownership of intellectual property does not apply to
any invention for which no equipment, supplies, facilities or trade secret
information of the Company was used and which was developed entirely on
Wooley's own time, unless (i) the invention relates to the business of the
Company or to the Company's actual or demonstrably anticipated research or
development or (ii) the invention results from any work performed by Wooley of
the Company.
<PAGE> 3
(c) Non-Compete, Non-Solicitation.
(i) Wooley acknowledges that in the course of his employment with the
Company he will become familiar, and during his employment with the Company he
has become familiar, with the Company's trade secrets and with other
confidential information concerning the Company and that his services will be
of special, unique and extraordinary value to the Company. Therefore, Wooley
agrees that, during employment and for eighteen months thereafter, he shall not
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any manner engage in any business competing with the
business of the Company or any foreign country where the Company is authorized
to do business. For purposes of this Agreement, a business shall be deemed
competitive if it is a restaurant, sandwich shop or food service operation
offering principal menu entrees or items which are the same or confusingly
similar to those than offered at any Schlotzsky's restaurant or outlet
worldwide. Nothing herein shall prohibit Wooley from being a passive owner of
not more than 5% of the outstanding stock of any class of a corporation which
is publicly traded, so long as Wooley has no active participation in the
business of such corporation.
(ii) During employment, Wooley shall not (i) induce or attempt to
induce any employee of the Company to leave the employ of the Company or in any
way interfere with the relationship between the Company and any employee
thereof, (ii) hire directly or through another entity any person who was an
employee of the Company at any time during employment or (iii) induce or
attempt to induce any customer, supplier, licensee or other business relation
of the Company to ceases doing business with the Company or in any what
interfere with the relationship between any such customer, supplier, licensee
or business relation and the Company.
(d) Full-Time. Wooley agrees to devote his best efforts to the business
and affairs of the Company. Wooley shall seek written consent from the
Compensation Committee of the Board of Directors of the Company to provide
service to a third party for compensation. Consent to such activities may be
withheld in the sole judgment of the Compensation Committee. Consents granted
may be referenced in an addendum to this Agreement.
(e) Enforcement. If, at the time of enforcement of paragraphs 5 (a), (b),
(c) or (d) of this Agreement, a court holds that the restrictions stated herein
are unreasonable under circumstances then existing, the parties hereto agree
that the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area.
Because Wooley's services are unique and because Wooley has access to
Confidential Information and Work Product, the parties hereto agree that money
damages would be inadequate remedy for any breach of this Agreement.
Therefore, in the event a breach or threatened breach of this Agreement, the
Company or its successors or assigns may, in addition to other rights and
remedies existing in their favor, apply to any court of competent jurisdiction
for specific performance or injunction or other relief in order to enforce, or
prevent any violations of, the provisions hereof.
6. Termination. (a) The Company may terminate the employment of Wooley
for cause or without cause. For purposes of this Agreement "for cause" means
termination by the
<PAGE> 4
Company of the employment of Wooley upon any of the following grounds and no
others: (i) any act of dishonesty on the part of Wooley resulting or intended
to result directly or indirectly in personal gain or benefit at the expense of
the Company; and (ii) fraud, misappropriation, embezzlement or willful and
material damage of or to property of the Company.
(b) Upon termination of Wooley's employment for any reason, he shall be
entitled to receive the base salary and any bonuses earned through the date of
termination. In addition, the Company shall use good faith efforts to remove
Wooley from all guaranties in favor of the Company as soon as practicable.
(c) Upon termination of Wooley's employment without cause, he shall be
entitled to receive the base salary and any bonuses earned through the date of
termination, plus the base salary through the end of the term then in effect.
Wooley may elect to treat a substantial reduction in responsibilities and
duties as termination without cause. In the event of any dispute between the
Company and Wooley concerning the status of a reduction in responsibilities and
duties as "substantial," the dispute shall be submitted to an independent third
party arbitrator acceptable to the Company and Wooley for a determination which
shall be binding on both parties.
7. Disability or Death. (a) If as a result of illness, injury or other
disability, Wooley is unable to perform his duties hereunder on a substantially
full time basis for any period of twelve months or more, the Company may at its
option terminate Wooley's employment hereunder and shall pay to Wooley the base
salary and any bonuses through the date of termination, plus the base salary
through the end of the term then in effect.
(b) If Wooley shall die during the term of his employment by the Company,
the Company shall pay to Wooley's estate the base salary and any bonuses
through the date of his death, plus the base salary through the end of the term
then in effect.
8. Miscellaneous. This Agreement contains the entire agreement of the
parties regarding the subject matter hereof. This Agreement may not be changed
orally but only by an agreement in writing signed by the parties hereto. This
Agreement shall be binding upon and inure to the benefit of the parties and, to
their respective successors and assigns. This Agreement shall be construed
under and enforced in accordance with the laws of the State of Texas, and shall
be performable in Travis County, Texas.
* * *
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
COMPANY:
SCHLOTZSKY'S, INC.
By:
-------------------------------
Its:
-------------------------------
WOOLEY:
----------------------------------
John C. Wooley
<PAGE> 1
EXHIBIT 10.36(b)
EMPLOYMENT AGREEMENT
AGREEMENT dated as of December 21, 1995 made and entered into by and
between Schlotzsky's, Inc., a Texas corporation (the "Company") and Jeffrey J.
Wooley ("Wooley") to be effective as of the closing of the Company's initial
public offering.
The Board of Directors of the Company has determined that it is in the
best interest of the Company to set forth the terms of employment of Wooley as
President of the Company and Wooley has agreed to such terms. The Company and
Wooley wish to promote their mutual best interest by setting forth the terms
and conditions in writing.
NOW, THEREFORE, in consideration of the covenants and agreements set forth
in this Agreement, the parties agree as follows:
1. Employment. The Company employs Wooley and Wooley agrees to the terms
and conditions set forth in this Agreement. Wooley agrees to serve as Senior
Vice President, General Counsel of the Company to be responsible for performing
the functions of a Vice President as described in the Bylaws of the Company,
reporting directly to the President, and to devote good faith efforts on behalf
of the Company.
2. Term of Employment. Wooley's employment with the Company shall
continue for two years after the closing of the Company's initial public
offering, provided that such term shall be extended to three years if he
remains liable on over $250,000 of guarantees in favor of the Company
(exclusive of any guarantee directly related to the flagship store location) at
the end of the first year, and provided further that such term shall be
extended to four years if he remains liable on over $100,000 of guarantees in
favor of the Company (exclusive of any guarantee directly related to the
flagship store location) at the end of the second year, unless earlier
terminated by Wooley or the Company in accordance herewith.
3. Base Salary, Bonus and Other Compensation. The Company shall pay to
Wooley an annual base salary of $100,000 for 1995, $110,000 during 1996,
$120,000 during 1997, and for each year thereafter an amount equal to the
aggregate of the previous year's salary plus the greater of (i) 5% thereof, or
(ii) the percentage increase in consumer prices for the previous year, as
measured by the Consumer Price Index ("CPI") or if the CPI is no longer
calculated, an index acceptable to Wooley and the Company, multiplied by such
salary. Wooley's salary shall be payable on the same schedule that salary is
paid to other employees. Wooley shall be entitled to such bonuses and other
compensation as the Board of Directors shall approve.
4. Benefits. Wooley shall receive, in addition to the base salary and the
bonuses set forth in Section 3 hereof, such other benefits as are provided by
the Company to its executive officers, such as, group life, medical and
disability insurance. In addition, Wooley shall be entitled to receive stock
options to acquire 31,250 shares of Common Stock of the Company at an exercise
price of $12.80 per share, such shares to vest in the manner determined by the
Compensation Committee. The Company shall, within a reasonable period of time
following the
<PAGE> 2
closing of the Company's initial public offering, restructure the notes payable
from WTM Development, Inc. to provide for quarterly payments of interest only
at an annual rate of 8% per annum, and an extended maturity of five years from
such closing. In addition, the Company will commit to make additional advances
of up to $35,000 to WTM Development, Inc., such amount to be added to the
principal of the restructured notes.
5. Wooley Covenants.
(a) Confidential Information. Wooley acknowledges that the information,
observations and data obtained by him while employed by the Company (including
those obtained by him while employed at the Company prior to the date of this
Agreement) concerning the business or affairs of the Company ("Confidential
Information") are the property of the Company. Therefore, Wooley agrees that
he shall not disclose to any unauthorized person or use for his own account any
Confidential Information, unless and to the extent that the aforementioned
matters become generally known to and available for use by the public other
than as a result of Wooley's acts or omissions to act. Wooley shall deliver to
the Company at the termination of employment, or at any other time the Company
may request, all memoranda, notes, plans, records, reports and other documents
(and copies thereof) relating to the Confidential Information or the business
of the Company which he may then possess or have under his control.
(b) Inventions and Patents.
(i) Wooley agrees that all inventions, innovations, improvements,
developments, methods, designs, analyses, drawings, reports, and all similar or
related information which relates to the Company's actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by Wooley while employed by the
Company ("Work Product") belong to the Company. Wooley will promptly disclose
such Work Product to the President and perform all actions reasonably requested
by the President to establish and confirm such ownership.
(ii) Wooley is hereby advised that Section 5(b)(i) of this Agreement
regarding the Company's ownership of intellectual property does not apply to
any invention for which no equipment, supplies, facilities or trade secret
information of the Company was used and which was developed entirely on
Wooley's own time, unless (i) the invention relates to the business of the
Company or to the Company's actual or demonstrably anticipated research or
development or (ii) the invention results from any work performed by Wooley of
the Company.
(c) Non-Compete, Non-Solicitation.
(i) Wooley acknowledges that in the course of his employment with the
Company he will become familiar, and during his employment with the Company he
has become familiar, with the Company's trade secrets and with other
confidential information concerning the Company and that his services will be
of special, unique and extraordinary value to the Company. Therefore, Wooley
agrees that, during employment and for eighteen months
<PAGE> 3
thereafter, he shall not directly or indirectly own, manage, control,
participate in, consult with, render services for, or in any manner engage in
any business competing with the business of the Company or any foreign country
where the Company is authorized to do business. For purposes of this
Agreement, a business shall be deemed competitive if it is a restaurant,
sandwich shop or food service operation offering principal menu entrees or
items which are the same or confusingly similar to those than offered at any
Schlotzsky's restaurant or outlet worldwide. Nothing herein shall prohibit
Wooley from being a passive owner of not more than 5% of the outstanding stock
of any class of a corporation which is publicly traded, so long as Wooley has
no active participation in the business of such corporation.
(ii) During employment, Wooley shall not (i) induce or attempt to
induce any employee of the Company to leave the employ of the Company or in any
way interfere with the relationship between the Company and any employee
thereof, (ii) hire directly or through another entity any person who was an
employee of the Company at any time during employment or (iii) induce or
attempt to induce any customer, supplier, licensee or other business relation
of the Company to ceases doing business with the Company or in any what
interfere with the relationship between any such customer, supplier, licensee
or business relation and the Company.
(d) Full-Time. Wooley agrees to devote his best efforts to the business
and affairs of the Company. Wooley shall seek written consent from the
Compensation Committee of the Board of Directors of the Company to provide
service to a third party for compensation. Consent to such activities may be
withheld in the sole judgment of the Compensation Committee. Consents granted
may be referenced in an addendum to this Agreement.
(e) Enforcement. If, at the time of enforcement of paragraphs 5 (a), (b),
(c) or (d) of this Agreement, a court holds that the restrictions stated herein
are unreasonable under circumstances then existing, the parties hereto agree
that the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area.
Because Wooley's services are unique and because Wooley has access to
Confidential Information and Work Product, the parties hereto agree that money
damages would be inadequate remedy for any breach of this Agreement.
Therefore, in the event a breach or threatened breach of this Agreement, the
Company or its successors or assigns may, in addition to other rights and
remedies existing in their favor, apply to any court of competent jurisdiction
for specific performance or injunction or other relief in order to enforce, or
prevent any violations of, the provisions hereof.
6. Termination. (a) The Company may terminate the employment of Wooley
for cause or without cause. For purposes of this Agreement "for cause" means
termination by the Company of the employment of Wooley upon any of the
following grounds and no others: (i) any act of dishonesty on the part of
Wooley resulting or intended to result directly or indirectly in personal gain
or benefit at the expense of the Company; and (ii) fraud, misappropriation,
embezzlement or willful and material damage of or to property of the Company.
(b) Upon termination of Wooley's employment for any reason, he shall be
entitled to receive the base salary and any bonuses earned through the date of
termination. In
<PAGE> 4
addition, the Company shall use good faith efforts to remove Wooley from all
guaranties in favor of the Company as soon as practicable.
(c) Upon termination of Wooley's employment without cause, he shall be
entitled to receive the base salary and any bonuses earned through the date of
termination, plus the base salary through the end of the term then in effect.
Wooley may elect to treat a substantial reduction in responsibilities and
duties as termination without cause. In the event of any dispute between the
Company and Wooley concerning the status of a reduction in responsibilities and
duties as "substantial," the dispute shall be submitted to an independent third
party arbitrator acceptable to the Company and Wooley for a determination which
shall be binding on both parties.
7. Disability or Death. (a) If as a result of illness, injury or other
disability, Wooley is unable to perform his duties hereunder on a substantially
full time basis for any period of twelve months or more, the Company may at its
option terminate Wooley's employment hereunder and shall pay to Wooley the base
salary and any bonuses through the date of termination, plus the base salary
through the end of the term then in effect.
(b) If Wooley shall die during the term of his employment by the Company,
the Company shall pay to Wooley's estate the base salary and any bonuses
through the date of his death, plus the base salary through the end of the term
then in effect.
8. Miscellaneous. This Agreement contains the entire agreement of the
parties regarding the subject matter hereof. This Agreement may not be changed
orally but only by an agreement in writing signed by the parties hereto. This
Agreement shall be binding upon and inure to the benefit of the parties and, to
their respective successors and assigns. This Agreement shall be construed
under and enforced in accordance with the laws of
the State of Texas, and shall be performable in Travis County, Texas.
* * *
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
COMPANY:
SCHLOTZSKY'S, INC.
By:
-------------------------------
Its:
-------------------------------
WOOLEY:
----------------------------------
Jeffrey J. Wooley
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C> <C>
1. Schlotzsky's Real Estate, Inc. Texas
2. Schlotzsky's Restaurant, Inc. Texas
3. Schlotzsky's Brands, Inc. Texas
4. Schlotzsky's Equipment Corporation Texas
5. DFW Restaurant Transfer Corporation Texas
6. 56th & 6th, Inc. Texas
7. SREI Turnkey Development, L.L.C. Texas
</TABLE>
<PAGE> 1
EXHIBIT 24.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Amendment No.
2 to Form S-1 (File No. 333-34921) of our report, dated February 28, 1997, on
our audits of the consolidated financial statements and financial statement
schedule of Schlotzsky's, Inc. and Subsidiaries. We also consent to the
reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Austin, Texas
September 19, 1997
