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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
Commission File Number: 0-27008
SCHLOTZSKY'S, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2654208
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
200 West Fourth Street
Austin, Texas 78701
(address of principal executive offices)
(512) 469-7500
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by the Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days:
YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding at August 1, 1997
Common Stock, no par value 5,548,672
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets --
June 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of
Income -- Three and Six Months Ended
June 30, 1997 and June 30, 1996 3
Condensed Consolidated Statements of
Stockholders' Equity -- Six Months Ended
June 30, 1997 and the year ended December 31, 1996 4
Condensed Consolidated Statements of
Cash Flows -- Six Months Ended
June 30, 1997 and June 30, 1996 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
(UNAUDITED)
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,601,588 $ 5,638,958
Restricted certificates of deposit 18,000 18,000
Royalties receivable 801,363 580,470
Other receivables 2,374,683 1,573,483
Notes receivable, current portion 991,806 557,332
Notes receivable - affiliates, current portion 183,130 595,000
Real estate development, current portion 2,421,093 8,458,301
Prepaid expenses & other assets 468,042 247,762
----------- -----------
Total current assets 14,859,705 17,669,306
Other assets:
Property, equipment & leasehold improvements, net 7,463,004 5,440,882
Real estate development, less current portion 2,642,773 2,642,773
Notes receivable, less current portion 2,694,581 2,656,502
Notes receivable - affiliates, less current portion 2,044,299 2,180,456
Investments and advances 1,471,246 1,265,862
Deferred federal income tax asset 582,023 607,448
Intangible assets, net 10,493,713 8,515,883
----------- -----------
Total Assets $42,251,344 $40,979,112
----------- -----------
----------- -----------
Liabilities and Stockholder's Equity
Current liabilities:
Current maturities of long-term debt $193,048 $ 482,205
Accounts payable 334,955 1,540,527
Accrued liabilities 2,261,190 1,851,257
Federal income tax payable 127,767 --
----------- -----------
Total current liabilities 2,916,960 3,873,989
Other liabilities:
Deferred revenue, net 1,216,075 1,663,765
Long-term debt, less current portion 3,645,659 3,129,337
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Total Liabilities 7,778,694 8,667,091
Stockholders' Equity
Common stock, no par value, 30,000,000 shares
authorized, 5,548,672 and 5,539,922 issued and
outstanding at June 30, 1997 and December 31, 1996 44,345 44,257
Additional paid in capital 26,563,078 26,493,165
Retained earnings 7,865,227 5,774,599
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Total Stockholders' Equity 34,472,650 32,312,021
----------- -----------
Total Liabilities and Stockholders' Equity $42,251,344 $40,979,112
----------- -----------
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
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SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Royalties $3,605,747 $2,674,835 $ 6,883,307 $4,920,512
Franchise fees 240,000 475,000 592,500 822,500
Developer fees 125,000 415,750 125,000 1,010,750
Restaurant sales 1,438,639 809,677 2,762,290 1,375,945
Brand Contribution 807,177 237,955 1,341,823 359,797
Turnkey Development 762,278 80,297 1,447,768 119,791
Other fees and revenue 361,674 277,130 522,379 478,218
---------- ---------- ----------- ----------
Total revenues 7,340,515 4,970,644 13,675,067 9,087,513
Expenses
Service Costs:
Royalties 1,305,235 926,430 2,507,957 1,673,165
Franchise fees 132,500 249,250 312,500 448,250
Restaurant Operations:
Cost of sales 443,146 251,599 840,875 461,606
Labor cost 558,814 335,389 1,088,381 606,897
Operating expenses 451,815 222,017 850,543 339,693
General and administrative 2,419,146 1,762,897 4,429,352 3,282,541
Depreciation and amortization 264,200 197,024 513,940 393,909
---------- ---------- ----------- ----------
Total expenses 5,574,856 3,944,606 10,543,548 7,206,061
---------- ---------- ----------- ----------
Income from operations 1,765,659 1,026,038 3,131,519 1,881,452
Other
Interest income, net 137,118 116,911 195,517 270,888
---------- ---------- ----------- ----------
Income before income taxes 1,902,777 1,142,949 3,327,036 2,152,340
Provision for federal and state income taxes 740,963 428,606 1,276,646 808,897
---------- ---------- ----------- ----------
Net Income $1,161,814 $ 714,343 $2,050,390 $1,343,443
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Income per common share - primary:
Income per common share $ .20 $ .13 $ .36 $ .24
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Weighted average shares outstanding 5,723,499 5,674,357 5,700,591 5,669,226
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Income per common share - fully diluted:
Income per common share $ .20 $ .13 $ .36 $ .24
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Weighted average shares outstanding 5,723,499 5,674,357 5,700,591 5,679,872
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
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SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<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, 1996 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 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.
4
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SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
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<S> <C> <C>
Cash flows from operating activities $ 659,357 $ 240,373
Cash flows from/(used for) investing activities
Purchase of real estate held for sale (8,293,914) (5,759,579)
Proceeds from sale of real estate 14,275,761 2,512,672
Issuance of notes receivable (less collections) (342,853) (525,409)
Acquisition of intangibles (2,173,570) (1,118,628)
Purchase of property, equipment and leasehold improvements (2,275,200) (404,775)
Other (224,354) 408,586
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Net cash from/(used for) investing activity 965,870 (4,887,133)
Cash flows from/(used for) financing activities:
Proceeds from issuance of long term debt 679,361 169,043
Principal payments on long term debt (452,196) (819,342)
Proceeds from exercises of options 110,238 59,376
----------- -----------
Net cash provided by/(used for) financing activities 337,403 (590,923)
----------- -----------
Net increase/(decrease) in cash and cash equivalents 1,962,630 (5,237,683)
Cash and cash equivalents at beginning of period 5,638,958 12,344,682
----------- -----------
Cash and cash equivalents at end of period $7,601,588 $7,106,999
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1997
NOTE 1. -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for
the three and six months ended June 30, 1997, are not necessarily indicative
of the results that may be expected for the year ended December 31, 1997.
For further information, refer to the consolidated financial statements and
footnotes thereto incorporated by reference in the Schlotzsky's, Inc. Annual
Report on Form 10-K/A for the year ended December 31, 1996.
NOTE 2. -- SIGNIFICANT ACCOUNTING POLICIES
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
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENT PRONOUNCEMENTS
In June, 1997, the Financial Accounting Standards Board ("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 Related 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.
6
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NOTE 3. -- FINANCING ARRANGEMENTS
In February 1997, the Company secured a line of credit of up to $5 million to
provide financing for the Turnkey Program. As of June 30, 1997, the Company
had not drawn against this line of credit.
In June 1997, the Company secured two lines of credit from a financial
institution. One line, in the amount of $3 million, will be used to retire
approximately $1.5 million of existing debt. The balance will be used to
fund various capital expenditures budgeted to occur in 1997. The other line
of credit will provide up to $12 million of financing for the Company's
Turnkey program. As of June 30, 1997, neither of the new lines had been
drawn upon.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997, COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
REVENUES. Total revenues increased 47.7% from $4,971,000 to $7,341,000.
Royalties increased 34.8% from $2,675,000 to $3,606,000. 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 units with higher visibility, a 9.8%
increase in average weekly sales and a 3.5% increase in same store sales.
Franchise fees decreased 49.5% from $475,000 to $240,000. This decrease
was a result of 12 fewer domestic openings during the three-month period
ended June 30, 1997, as compared to the three months ended June 30, 1996.
Fewer openings in the current quarter are the result of merely the timing of
completed stores being opened and the result of the Company's increasing
emphasis on superior site selection for larger freestanding restaurants with
higher visability.
Developer fees decreased 69.9% from $416,000 to $125,000. This decrease
was primarily due to the sale of the rights to one domestic development area
and one international market in the period ended June 30, 1997, as compared
to two domestic development areas and two international markets in the three
months ended June 30, 1996.
Restaurant sales increased 77.7% from $810,000 to $1,439,000. This
increase was attributable to a 23% increase in sales volume of the Company's
Flagship restaurant and the continued operation of two additional
Company-owned stores compared to those in operation for the same period last
year. It is the Company's intention to re-market the units acquired from
franchisees once their operations and profitablity have improved. Management
has not established a timeframe to re-market these restaurants.
Private label licensing fees increased 239.2% from $238,000 to $807,000.
The increase was the result of more favorable terms with certain major
suppliers compared to the terms in place in the prior year, the increasing
volume of system sales and greater franchisee participation in the Company's
purchasing programs.
Turnkey development revenue increased from $80,000 to $762,000. Revenue
in the current quarter included $76,000 of rental revenue for ten sites
completed and under lease. Eight of the ten completed sites were sold during
the second quarter of 1997 and the gain on these sales comprises the balance
of turnkey revenue generated this quarter.
Other fees and revenues increased 30.5% from $277,000 to $362,000. This
change was primarily due to the increased level of supplier contributions to
the Company's annual convention held in July 1997.
7
<PAGE>
The following table reflects a comparison of system performance for the
three months ended June 30, 1997 and June 30, 1996. The information reflects
the growth of the franchise system, which has been principally responsible
for the increased revenue as discussed above.
<TABLE>
<CAPTION>
SYSTEM PERFORMANCE THREE MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Units Opened
Domestic
Freestanding 14 18
End Cap 3 9
Other 2 4
-------- ---------
Total Domestic Openings 19 31
International 2 2
-------- ---------
Total Openings 21 33
Units Closed 3 2
-------- ---------
Net Unit Growth 18 31
-------- ---------
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Sales:
System-wide Sales (in thousands) $66,951 $49,948
Average Weekly Sales $ 8,756 $ 7,973
Change in Average Weekly Sales 9.8% 14.6%
Stores in Operation 612 516
Change in Same Store Sales 3.5% 4.6%
</TABLE>
COSTS AND EXPENSES. Royalty service costs increased 40.9% from $926,000
to $1,305,000. This increase was a direct result of the increase in royalty
revenue for the three months ended June 30, 1997, as compared to the same
period in the prior year. Royalty service costs as a percentage of royalties
grew from 34.6% to 36.2%. 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 from $252,000 to $443,000, but as a percentage of restaurant
sales decreased from 31.1% to 30.8%. Likewise, restaurant labor costs
increased from $335,000 to $559,000, but as a percentage of restaurant sales
decreased from 41.4% to 38.8% for the same quarter in 1996. These percentage
decreases were primarily due to the improving operational efficencies
attained in the various Company-owned restaurants. Restaurant operating
expenses have increased from $222,000 to $452,000, and as a percentage of
restaurant sales increased from 27.4% to 31.4% for the three months ended
June 30, 1997, as compared to the corresponding period in 1996. The increase
in operating expenses is due to the additional facility costs for the
additional units the Company operates.
General and administrative expenses grew from $1,763,000 to $2,419,000
representing a 37.2% increase, but as a percentage of total revenues
decreased from 35.5% to 33.0%. The dollar increase is principally the result
of additional personnel at the corporate office and the expensing of real
estate costs of certain Turnkey sites which management has determined are no
longer desirable locations for development.
Depreciation and amortization increased from $197,000 to $264,000, but
as a percentage of total revenues decreased from 4.0% to 3.6%. The dollar
increase was principally due to amortization of goodwill and other
intangibles acquired in late 1996 and depreciation related to the May opening
of an additional company-owned restaurant.
8
<PAGE>
OTHER. Net interest income increased 17.3% from $117,000 to $137,000.
This increase was a result of the higher 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 38.9% for the three 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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Total revenues increased 50.5% from $9,088,000 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 units with higher visibility, a 10.6%
increase in average weekly sales and a 2.8% increase in same store sales.
Franchise fees decreased 28.0% from $823,000 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 restaurants with higher
visability.
Developer fees decreased 87.6% from $1,011,000 to $125,000. This
decrease was primarily due to the sale of the rights to one less domestic
development area sold during the period ending June 30, 1997, than in the
prior comparable period. The development areas sold in 1997 are
significantly smaller (in geographic area), and therefore generated less fees
than those areas sold during 1996.
Restaurant sales increased 100.8% from $1,376,000 to $2,762,000. This
increase was attributable to a 29% increase in sales volume of the Company's
Flagship restaurant and the continued operation of two additional
Company-owned stores compared to those in operation for the same period last
year. It is the Company's intention to re-market the units acquired from
franchisees once their operations and profitability have improved.
Management has not established a timeframe to re-market these restaurants.
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 those 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 for 17 sites completed and under lease. Fifteen of the seventeen
completed sites were sold during the six months ended June 30, 1997, and the
gain on these sales comprises the balance of turnkey revenue generated
through the second quarter.
Other fees and revenues increased 9.2% from $478,000 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.
9
<PAGE>
The following table reflects a comparison of system performance for the
six months ended June 30, 1997 and June 30, 1996. The information reflects
the growth of the franchise system, which has been principally responsible
for the increased revenue as discussed above.
<TABLE>
<CAPTION>
SYSTEM PERFORMANCE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Units Opened
Domestic
Freestanding 36 32
End Cap 7 16
Other 4 8
-------- --------
Total Domestic Openings 47 56
International 3 5
-------- --------
Total Openings 50 61
Units Closed 11 8
-------- --------
Net Unit Growth 39 53
-------- --------
-------- --------
Sales:
System-wide Sales (in thousands) $127,955 $91,392
Average Weekly Sales $ 8,487 $ 7,671
Change in Average Weekly Sales 10.6% 13.3%
Stores in Operation 612 516
Change in Same Store Sales 2.8% 2.8%
</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 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 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
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 efficencies
attained in the various Company-owned stores. Restaurant operating expenses
have increased 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
units the Company operates.
General and administrative expenses grew from $3,283,000 to $4,429,000
representing a 34.9% increase, but as a percentage of total revenues
decreased from 36.1% to 32.4%. The change is principally the result of
additional personnel at the corporate office and the expensing of real estate
costs of certain Turnkey sites which management has determined are no longer
desirable locations for development.
10
<PAGE>
Depreciation and amortization increased from $394,000 to $514,000, but
as a percentage of total revenues decreased from 4.3% 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
units the Company was operating in the more recent period.
OTHER. Net interest income decreased 27.8% 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong through the first six
months of 1997 as a continuing result of its initial public offering in
December 1995. Proceeds from the offering continue to fund the operations of
the Turnkey Program. Exceeds funds from operations and proceeds from the
Turnkey Program are being reinvested in the Turnkey Program and invested in
money market accounts.
The Company generated cash flow from the sale of completed turnkey sites
of $14,276,000 while investing cash of $8,294,000 to continue the development
of other sites during the first six months of 1997. In contrast, during this
period in 1996, cash generated from the sale of real estate was only
$2,513,000 while $5,760,000 of cash was invested in turnkey development. The
Company invested $2,174,000 in the reacquisition of two domestic development
territories, and in its planned expansion in the Austin, Texas market. Also
contributing to the change in cash position were purchases of property,
equipment and leasehold improvements of $2,275,000. These purchases were for
additional Company-owned units and are the result of the increased staffing
levels at the corporate headquarters.
Bee Cave/Westbank, Ltd., a limited partnership in which the Company and
its subsidiary, Schlotzsky's Real Estate, Inc., own a combined 40% interest
in capital and profits, obtained an interim loan of $1,150,000 from a bank in
December 1994 to finance the construction of a retail shopping center. The
Company is liable for the full amount of this loan. The loan, which had an
outstanding balance of $1,133,000 on March 31, 1997, was renewed in April
1996 at a rate of prime plus 1.25% and matures April 2001. The loan balance
as of June 30, 1997, was $1,128,000, and monthly payments are being made by
the partnership.
The Company believes that cash flow from operations, cash reserves,
collections from notes receivable and borrowings under existing credit
facilities described above, will be sufficient to meet the Company's
anticipated cash needs through the end of 1997. Thereafter, the Company
believes that new store openings will result in increasing cash flow from
operations which, together with borrowings under credit facilities, should be
sufficient to meet the Company's anticipated cash needs, although there can
be no assurance in this regard. Substantially all of the Company's royalties
have been pledged to secure Company debt in the past. However, the proceeds
of its offering were used to repay most of these obligations. Accordingly,
these assets are available to secure future financing. The Company
guarantees certain leases of its franchisees for limited periods of time,
which may affect its ability to obtain financing in the future. To the
extent that credit facilities 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 financing or additional
offerings of equity securities, although there can be no assurance of the
availability of such funds on acceptable terms in the future.
11
<PAGE>
REAL ESTATE DEVELOPMENT
Under the Turnkey Program, the Company works 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
then 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 approximately $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
asset and recognizes such in the period in which it occurs. The Company
believes that the Turnkey Program enhances the ability of area developers to
recruit qualified franchisees by developing high profile restaurant sites and
achieving critical mass for advertising purposes more quickly in selected
markets.
At the end of 1996, 22 properties were in various stages of development and
seven were under lease generating rental income. Of these sites, eight have
been completed, seven sold and one being operated as a Company-owned
restaurant (see "Results of Operations"). Four sites remain in the
pre-development stage, four are under construction, two undeveloped sites
were sold and four sites in pre-development were abandoned. At June 30,
1997, there were 42 properties in various stages of development.
A summary of turnkey sites for the six months ended June 30, 1997 is as
follows:
<TABLE>
<CAPTION>
Number of Invested at Estimates to
Units June 30, 1997 Complete
--------- ------------- ------------
<S> <C> <C> <C>
Open and Sold 15 N/A N/A
Open (receiving rent and royalties) 2 $1,056,000 N/A
Under Construction 6 2,235,000 2,683,000
Pre-acquisition 36 150,000 34,911,000
Other 5 1,623,000 --
--------- ------------- ------------
Total 64 $5,064,000 $37,594,000
--------- ------------- ------------
--------- ------------- ------------
</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.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that are not historical facts.
Such statements may include, but not be limited to, projections of revenues,
income, capital expenditures, plans for future operations, financing needs or
plans, and plans relating to products or services of the Company, as well as
assumptions relating to the foregoing. These statements involve management
assumptions and are subject to risks and uncertainties, along with factors
set forth in the Company's Annual Report on Form 10-K/A in "Business" pages
1-13.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Shareholders of the Company was held on May 30,
1997. At the meeting, the following items were voted on:
1) Election of Directors, whose terms expired at the meeting.
<TABLE>
<CAPTION>
FOR WITHHELD NONVOTE
--------- ---------- ---------
<S> <C> <C> <C>
John M. Rosillo 3,736,573 7,333 1,804,766
Floor Mouthaan 3,736,573 7,333 1,804,766
John L. Hill, Jr. 3,736,573 7,333 1,804,766
</TABLE>
2) Proposal to approve the Third Amended and Restated 1993 Stock Option
Plan.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN/NONVOTE
----------- ---------- -----------------
<S> <C> <C> <C>
3,638,024 88,877 1,821,771
</TABLE>
3) Proposal to ratify and approve the selection of Coopers & Lybrand,
L.L.P., as the Company's auditors for the fiscal year ending December
31, 1997.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN/NONVOTE
----------- ---------- -----------------
<S> <C> <C> <C>
3,729,701 4,215 1,814,756
</TABLE>
ITEM 5. OTHER INFORMATION
None
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Numbered Page
------- -------------
<S> <C> <C>
11.1 Statement regarding computation of per share earnings. 15
27 Financial Data Schedule. 16
</TABLE>
b. Current Reports on Form 8-K: None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHLOTZSKY'S, INC.
By: /s/ John C. Wooley
-------------------------
John C. Wooley, President
Chief Executive Officer
By: /s/ Monica Gill
-------------------------
Monica Gill, Controller
Chief Accounting Officer
Austin, Texas
August 13, 1997
14
<PAGE>
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME(LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Computation of income (loss) per
common share-primary:
Net income(loss) $1,161,814 $ 714,343 $2,050,390 $1,343,443
Redeemable preferred stock dividends 0 0 0 0
------------- ------------- ------------- -------------
Income (loss) available to
common shareholders 1,161,814 714,343 2,050,390 1,343,443
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of
shares outstanding 5,548,264 5,518,057 5,549,547 5,518,057
Common shares issuable under
stock option plan 658,897 537,332 658,897 560,852
Common stock warrants outstanding 23,438 23,438 23,438 23,438
Less shares assumed repurchased (507,100) (404,470) (531,291) (433,121)
------------- ------------- ------------- -------------
5,723,499 5,674,357 5,700,591 5,669,226
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Income (loss) per common share:
Income (loss) before extraordinary item $0.20 $0.13 $0.36 $0.24
Extraordinary item 0.00 0.00 0.00 0.00
------------- ------------- ------------- -------------
$0.20 $0.13 $0.36 $0.24
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Computation of income (loss) per
common share-fully diluted:
Net income(loss) $1,161,814 $714,343 $2,050,390 $1,343,443
Redeemable preferred stock dividends 0 0 0 0
Interest Add-back 0 0 0 0
------------- ------------- ------------- -------------
Income (loss) available to
common shareholders 1,161,814 714,343 2,050,390 1,343,443
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of
shares outstanding 5,548,264 5,518,057 5,549,547 5,518,057
Common shares issuable under
stock option plan 658,897 537,332 658,897 560,852
Common stock warrants outstanding 23,438 23,438 23,438 23,438
Convertible securities 0 0 0 10,646
Less shares assumed repurchased (507,100) (404,470) (531,291) (433,121)
------------- ------------- ------------- -------------
5,723,499 5,674,357 5,700,591 5,679,872
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Income (loss) per common share:
Income (loss) before extraordinary item $0.20 $0.13 $0.36 $0.24
Extraordinary item 0.00 0.00 0.00 0.00
------------- ------------- ------------- -------------
$0.20 $0.13 $0.36 $0.24
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
INCOME ON PAGES TWO AND THREE OF THE COMPANY'S FORM 10Q FOR THE YEAR-TO-DATE AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,619,588
<SECURITIES> 0
<RECEIVABLES> 4,693,756
<ALLOWANCES> (342,774)
<INVENTORY> 0
<CURRENT-ASSETS> 14,859,705
<PP&E> 8,584,898
<DEPRECIATION> (1,121,894)
<TOTAL-ASSETS> 42,251,344
<CURRENT-LIABILITIES> 2,916,960
<BONDS> 0
0
0
<COMMON> 44,345
<OTHER-SE> 34,428,305
<TOTAL-LIABILITY-AND-EQUITY> 42,251,344
<SALES> 2,762,290
<TOTAL-REVENUES> 13,675,607
<CGS> 840,875
<TOTAL-COSTS> 10,543,548
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (195,517)
<INCOME-PRETAX> 3,327,036
<INCOME-TAX> 1,276,646
<INCOME-CONTINUING> 2,050,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,050,390
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
