<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
SCHLOTZSKY'S, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
SCHLOTZSKY'S, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
SCHLOTZSKY'S, INC.
203 COLORADO STREET
AUSTIN, TEXAS 78701
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 29, 1998
Dear Shareholder:
You are invited to attend the 1998 Annual Meeting of the Shareholders
of Schlotzsky's, Inc., a Texas corporation (the "Company") to be held at the
Renaissance Hotel, 9721 Arboretum Blvd., Austin, Texas on Friday, May 29,
1998, at 9:00 a.m., central daylight time. Following a report on the
Company's business operations, shareholders will act on the following:
1. The election of three directors to the Board of Directors to serve
until the 2001 Annual Meeting of Shareholders or until their respective
successors have been duly elected or appointed;
2. The approval of certain Amendments to the Third Amended and Restated
1993 Stock Option Plan; and
3. The approval of the Schlotzsky's, Inc. Employee Stock Purchase Plan.
Your Board urges you to vote FOR the nominees to the Board, the
approval of certain Amendments to the Third Amended and Restated 1993 Stock
Option Plan and the approval of the Schlotzsky's, Inc. Employee Stock
Purchase Plan. The enclosed Proxy Statement includes information relating to
these matters. Additionally, shareholders may be asked to transact such other
business as may properly come before the meeting.
All shareholders of record as of the close of business on April 24,
1998 are entitled to notice of and to vote at the meeting. At least a
majority of the outstanding shares of the Company is required to be present
at the meeting or represented by proxy to constitute a quorum.
The Board of Directors and management sincerely desire your presence
at the meeting. Even if you expect to attend the meeting, you are requested
to sign, date and return the accompanying proxy. If you attend the meeting
after having returned the accompanying proxy, you may revoke your proxy, if
you wish, and vote in person.
By Order of the Board of Directors
JOHN C. WOOLEY
Chairman of the Board and President
Dated April 30, 1998
Austin, Texas
<PAGE>
SCHLOTZSKY'S, INC.
203 COLORADO STREET
AUSTIN, TEXAS 78701
PROXY STATEMENT
INTRODUCTION
The enclosed proxy is solicited by and on behalf of the Board of
Directors of Schlotzsky's, Inc. (the "Company") to be used at the Annual
Meeting of Shareholders to be held May 29, 1998, at 9:00 a.m. central
daylight time, in the Renaissance Hotel, located at 9721 Arboretum Boulevard,
Austin, Texas 78759, and any adjournments thereof. All shares represented by
proxies will be voted at the meeting in the manner directed thereon or, if no
directions are made, the shares represented by such proxies will be voted FOR
the election of the named directors as noted on the enclosed proxy, IN FAVOR
of approval of certain amendments to the Third Amended and Restated 1993
Stock Option Plan, and IN FAVOR of approval of the Employee Stock Purchase
Plan of Schlotzsky's, Inc. The Board of Directors does not know of any other
business to be brought before the meeting, but it is intended that as to any
such other matters, votes may be cast pursuant to the proxies in accordance
with the judgment of the person or persons acting thereunder. Any shareholder
giving a proxy may revoke it at any time before it is voted by attending the
Annual Meeting and voting their shares in person or by giving written notice
to Jeffrey J. Wooley, Secretary of the Company, at 203 Colorado Street,
Austin, Texas 78701, stating that the proxy has been revoked.
This proxy statement is first being mailed to the shareholders of the
Company on or about April 30, 1998. It is contemplated that solicitation of
proxies will be by use of the mails only, but directors, officers and regular
employees of the Company may solicit the return of proxies in person, or by
telephone or telecopy. Such directors, officers and employees will not
receive additional remuneration, other than out-of-pocket expenses, with
respect to solicitation of proxies. Brokerage houses, nominees, fiduciaries
and other custodians will be requested to forward solicitation material to
the beneficial owners of shares to request authority for execution of the
proxies and will be reimbursed for their expenses. The Company will pay all
costs of this solicitation of proxies from its shareholders.
The close of business on April 24, 1998 has been fixed as the record
date for the determination of shareholders entitled to notice of and to vote
at the meeting. As of such date, there were 7,386,727 shares of Company
common stock, no par value ("Common Stock"), issued and outstanding and
entitled to vote at the meeting.
The presence in person or by proxy of a majority of the outstanding
shares of the Company's Common Stock will constitute a quorum at the meeting.
Each outstanding share of Company Common Stock is entitled to one vote on
each matter properly presented at the meeting and a majority vote of the
shares present in person or by proxy at the meeting will be required to
approve each matter, except in the election of directors for which a
plurality of the votes cast is required for election. Shares of Common Stock
held by the Company or any subsidiary of the Company will not be considered
present or entitled to vote.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership, as of the close of business on April 24, 1998, of
shares of Common Stock by each person or group (as that term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934) known to the Company
to be the
1
<PAGE>
beneficial owner of 5% or more of the outstanding Common Stock, each current
director of the Company, each named executive officer (as defined below), and
all current directors and executive officers of the Company as a group.
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
Securities Exchange Act of 1934 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 April 24, 1998. The percentages are based upon 7,386,727 shares
outstanding as of April 24, 1998.
<TABLE>
Shares Beneficially Owned
Name and Address -------------------------
of Beneficial Owner (1) Number Percent
----------------------- ---------- ---------
<S> <C> <C>
Greenfield Capital Partners B.V. ("Greenfield") 412,441 (1) 5.6%
John C. Wooley 734,976 (2) 9.9%
Jeffrey J. Wooley 187,401 (3) 2.5%
Darrell W. Kolinek 29,534 (4) *
Monica Gill 4,709 (5) *
Floor Mouthaan 412,441 (6) 5.6%
John M. Rosillo 262,687 (7) 3.5%
Raymond A. Rodriguez 18,169 *
John L. Hill, Jr. 10,000 (8) *
Azie Taylor Morton 7,000 (9) *
All executive officers and directors
as a group (nine persons) 1,665,775(10) 22.1%
</TABLE>
* Less than 1%
(1) Includes 362,441 shares held by NethCorp Investments VI B.V. ("NethCorp"),
for which Greenfield is the managing general partner, and 50,000 shares
held by CapCorp Investments N.V., an affiliate of Greenfield ("CapCorp").
The business address for Greenfield is Janskerkhof--12 3512, B.L. Utrecht,
The Netherlands.
(2) Includes 46,875 shares purchasable from the Company by John Wooley and
8,439 shares for which Mr. Wooley disclaims beneficial ownership
purchasable by his wife, in her capacity as an employee of the Company,
within 60 days after April 24, 1998 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. 7,813 shares held by John Wooley, Jeffrey Wooley or the
Wooley Trust are subject to currently exercisable options in favor of an
unrelated third party.
(3) Includes 31,250 shares purchasable from the Company within 60 days after
April 24, 1998 pursuant to options granted. Also includes 1,142 shares
held by the Wooley Trust, for which Jeffrey Wooley is a trustee.
(4) Includes 29,143 shares purchasable from the Company within 60 days after
April 24, 1998 pursuant to options granted. 10,146 of such shares subject
to options are owned by Mr. Kolinek's wife, in her capacity as an employee
of the Company.
(5) Includes 4,709 shares purchasable from the Company within 60 days after
April 24, 1998 pursuant to options granted.
2
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(6) Includes 362,441 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.
(7) Includes 134,563 shares held directly by Buxtehude Holding B.V. and
128,124 shares held directly by Getov Holding B.V. 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.
(8) Includes 10,000 shares purchasable from the Company within 60 days after
April 24, 1998 pursuant to options granted.
(9) Includes 7,000 shares purchasable from the Company within 60 days after
April 24, 1998 pursuant to options granted.
(10) 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
136,619 shares purchasable from the Company within 60 days after April 24,
1998 pursuant to options granted.
A majority of the shares beneficially owned by John Wooley and Jeffrey
Wooley, excluding the shares purchasable from the Company upon the exercise
of stock options, are pledged to secure personal indebtedness or are subject
to outstanding options granted to various third parties. In addition,
Buxtehude has pledged a majority of its shares to secure loans from third
parties. A change in control of the Company may result if a significant
number of these shares are transferred upon foreclosure resulting from the
inability of the shareholders to repay the debts secured by these pledges.
(PROPOSAL 1)
ELECTION OF DIRECTORS
The bylaws of the Company provide for a Board of Directors consisting
of nine members, divided into three groups of three directors each, serving
three-year staggered terms. There are currently seven directors serving on
the Company's Board of Directors, with the terms of three directors expiring
at the 1998 Shareholders Meeting. Of the four remaining positions, the term
of office of one will expire in 1999 and the terms of office of three will
expire in 2000.
It is the intention of the persons named in the enclosed proxy to vote
such proxy in the manner directed, but if no direction is indicated, the
shares represented by such proxies will be voted for the election of John C.
Wooley, Azie Taylor Morton and Jeffrey J. Wooley to terms of office expiring
in 2001. The nominee for each director position receiving a plurality of the
votes cast in person or by proxy at the meeting shall be elected. Should any
nominee become unavailable for election, discretionary authority is conferred
to vote for a substitute. Management of the Company has no reason to believe
that any such person will be unavailable for election.
DIRECTORS AND EXECUTIVE OFFICERS
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
shareholders meeting. John C. Wooley, Jeffrey J. Wooley and Azie Taylor
Morton are currently Class C directors and are standing for election at this
annual
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shareholders meeting. There are currently two vacant positions on the Board
of Directors in the group of Class A directors. It is not contemplated that
these vacancies will be filled in the immediate future.
The current directors and executive officers of the Company are:
<TABLE>
PRESENT TERM YEAR FIRST
NAME; POSITION WITH THE COMPANY AGE EXPIRES ELECTED
- ------------------------------- --- ------------ ----------
<S> <C> <C> <C>
John C. Wooley(1)(2)(3)
Chairman of the Board and President 48 1998 1981
Monica Gill
Chief Financial Officer 33 N/A N/A
Jeffrey J. Wooley(1)
Senior Vice President, Secretary, and Director 52 1998 1981
Darrell W. Kolinek
Senior Vice President, Franchise Services 46 N/A N/A
John L. Hill, Jr.(2)(3)
Director 74 2000 1996
Azie Taylor Morton(2)(3)
Director 62 1998 1996
Floor Mouthaan(2)
Director 51 2000 1994
Raymond A. Rodriguez
Director 40 1999 1994
John M. Rosillo(3)
Director 44 2000 1994
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
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.
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.
JEFFREY J. WOOLEY has served as Vice President and Secretary of the
Company since 1981. Mr. Wooley also served as General Counsel of the Company
from 1981 through 1997. Prior to 1981, Mr. Wooley was engaged in the private
practice of law in Colorado and Texas. Mr. Wooley received a BA degree from
Rice University in 1968 and a JD from The University of Texas at Austin in
1972. Jeffrey Wooley and John 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
4
<PAGE>
promoted to Senior Vice President of Franchise Services in July 1995. Mr.
Kolinek attended Southwest Texas State University.
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.
FLOOR MOUTHAAN has been the managing partner of Greenfield, the
managing general partner of NethCorp, since April 1995. 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.
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 is an owner of a Schlotzsky's Deli restaurant in Chicago,
Illinois since February 1993 and another in Glenview, Illinois since June
1995, and a third in Gurnee, Illinois, which opened in January 1998.
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 Holding B.V.
and Buxtehude Holding B.V., each a shareholder of the Company.
BOARD COMMITTEES
The Board of Directors has standing Executive, Audit and Compensation
Committees.
The Audit Committee annually recommends to the Board of Directors 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 of Directors regarding oversight and compliance with accounting
principles and legal requirements. The Audit Committee is composed of Floor
Mouthaan, Azie Taylor Morton, John L. Hill, Jr., and John C. Wooley.
The Compensation Committee reviews and makes recommendations to the
Board of Directors regarding the compensation of executive officers and the
overall compensation policies of the Company and administers the Company's
1993 Stock Option Plan. The Compensation Committee is composed of John C.
Wooley, John L. Hill, Jr., John M. Rosillo, and Azie Taylor Morton.
The Executive Committee has authority to take any action which can be
taken by the entire Board of Directors, except actions reserved to other
committees or which may be taken only by the full Board of Directors under
law or pursuant to the Company's bylaws. The Executive Committee is composed
of John Wooley and Jeffrey Wooley.
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The Board of Directors held four meetings in person during the fiscal
year ended December 31, 1997. The Executive Committee did not meet in 1997,
but took action by unanimous consent three times. The Audit Committee met one
time during the fiscal year ended December 31, 1997. The Compensation
Committee met one time during the fiscal year ended December 31, 1997 and
took action by unanimous consent four times. Each of the incumbent directors
attended no fewer than 75% of the meetings of the Board of Directors, and the
meetings of the committees on which such director served, held during 1997.
COMPENSATION OF EXECUTIVE OFFICERS AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
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, 1995, 1996 and 1997 to the Company's chief executive
officer and each other executive officer as of the end of the fiscal year
ended December 31, 1997 who received compensation in excess of $100,000 for
such fiscal year (collectively, the "named executive officers").
<TABLE>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
NAME ------------------------- OTHER SECURITIES
AND ANNUAL UNDER- ALL OTHER
PRINCIPAL COMPEN- LYING COMPEN-
POSITION YEAR SALARY BONUS SATION OPTIONS(#) SATION
-------- ---- -------- ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
John C. Wooley, 1997 $150,000 $ 0 $ 0 0 $ 0
Chairman of the Board 1996 130,000 0 0 0 0
and President 1995 120,000 0 25,089 46,875 0
Jeffrey J. Wooley, 1997 $120,000 0 0 0 0
Senior VP and Secretary 1996 110,000 0 0 0 0
1995 100,000 0 0 31,250 0
</TABLE>
INFORMATION REGARDING STOCK OPTIONS
There were no stock options granted in 1997 to the executive officers
included in the Summary Compensation Table. The Company has not granted any
stock appreciation rights.
Set forth in the following table is summary information regarding the
number of all unexercised options as of the end of 1997 for each of the
executive officers included in the Summary Compensation Table:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---- ------------------------- ----------------------------
<S> <C> <C>
John C. Wooley 46,875/0 $85,547/$0.00
Jeffrey J. Wooley 31,250/0 $57,031/$0.00
</TABLE>
- ------------
(1) The closing price per share of common stock on December 31, 1997
was $14.625.
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No executive officer of the Company exercised options in fiscal 1997.
LONG-TERM INCENTIVE PROGRAM
The Company has no long-term incentive programs.
PENSION PLAN
The Company has no defined benefit or actuarial plan.
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of, or consultants to, the
Company receive a retainer of $1,000 per month, $1,000 for each meeting of
the Board of Directors and $500 per committee meeting 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 the effective date of the Directors Stock Option Plan. The
options are granted at fair market value based upon trading prices during a
specified period prior to the date of grant. All options granted are
nonqualified stock options under the Internal Revenue Code of 1986, as
amended. 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. Each non-employee
director elected to the Board of Directors for the first time will receive
options to purchase Common Stock under the Directors Stock Option Plan with
an exercise price to be determined.
Options granted under the Directors Stock Option Plan vest in three
equal annual increments, with the first third vesting on the date of grant,
and will 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 February 16, 1998, the Company entered into new employment
agreements with John C. Wooley and Jeffrey J. Wooley, replacing employment
agreements which expired in December 1997. The new employment agreements
provide for: (i) three-year terms, renewable for one year periods thereafter;
(ii) annual base salaries of $200,000 increasing to $250,000 by 2000 for John
Wooley, and $160,000 increasing to $185,000 by 2000 for Jeffrey Wooley; and
(iii) payment of the salary for the balance of the term if terminated without
cause. In addition, cash incentive plans were adopted for 1998, establishing
performance criteria which, if met, would result in bonuses ranging from 8%
to 100% of their annual salaries, depending on whether certain threshold
performance criteria are met. John Wooley and Jeffrey Wooley are bound by
contractual confidentiality and noncompete provisions which extend 24 months
beyond the termination of their employment with the Company for any reason.
7
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COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under Section 16(a) of the Securities Exchange Act of 1934, directors,
certain officers, and beneficial owners of 10% or more of the Company's
Common Stock are required from time to time to file with the Securities and
Exchange Commission (the "Commission") reports on Forms 3, 4 or 5, relating
principally to transactions in Company securities by such persons. Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to the
Company during its fiscal year 1996 and thereafter, Forms 5 and amendments
thereto furnished to the Company with respect to its fiscal year 1997, and
any written representations received by the Company from a director, officer
or beneficial owner of more than 10% of the Common Stock ("reporting
persons") that no Form 5 is required, the Company believes that the following
reporting persons did not file on a timely basis the following reports
required by Section 16(a) of the Securities Exchange Act of 1934 during the
Company's fiscal year 1996. Azie Taylor Morton and John L. Hill, Jr.,
directors of the Company, did not file in a timely manner Form 3, the initial
statement of beneficial ownership of securities (such forms were subsequently
filed indicating that the only securities beneficially owned were the options
automatically granted under the Company's Non-Employee Director Stock Option
Plan).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John C. Wooley is the Chairman of the Board and Chief Executive Officer
of the Company, and a member of the Compensation Committee. Except as set
forth above, no executive officer of the Company serves as a member of the
compensation committee or as a director of any other entity, an executive
officer of which serves on the Compensation Committee or is a director of the
Company.
REPORT OF THE COMPENSATION COMMITTEE ON ANNUAL COMPENSATION
Although the Compensation Committee of the Board of the Directors (the
"Committee") was formed in January 1995, prior to the Company's initial
public offering decisions concerning compensation were made by the entire
board with the interested parties abstaining. Beginning with fiscal year
1996, the Committee, which is currently made up of three outside directors
and John C. Wooley, has been responsible for reviewing salaries and benefits
of the officers of the Company, outlining their job descriptions,
establishing guidelines for performance and making recommendations to the
full Board of Directors regarding compensation for the officers. For purposes
of considering proposed compensation packages and stock option grants for
executive officers, a subcommittee consisting solely of outside directors has
been appointed.
Historically, compensation for executive officers has been based upon
the following criteria: level of responsibility at the Company; individual
performance and commitment to the Company; level of experience; the amount of
compensation paid to executive officers of comparable companies; the amount
of time and effort required by that position (both generally and for the
fiscal year); contributions (or the lack thereof) to the profitability of the
Company; assessment of risks associated with losing the benefit of their
services; and, number of years of service with the Company. The Committee
expects that these will continue to be the principal criteria for making
their evaluation of executive officer compensation.
8
<PAGE>
In 1995, in conjunction with the initial public offering, the Board
(with John Wooley and Jeffrey Wooley abstaining), determined to enter into an
employment agreement with John Wooley. (See "--Employment Agreements").
Accordingly, subject to discretionary bonuses, compensation for John Wooley
was fixed through December 1997.
The Compensation Committee sought advice from independent compensation
consultants with respect to compensation packages for 1998 for the top two
executive officers, and may continue to seek advice from time to time from
independent compensation consultants with respect to executive officer
compensation. This advice may include an analysis of executive salaries in
comparable businesses. The following compares John Wooley's compensation for
the last two fiscal years with the Company's performance for the same periods.
<TABLE>
JOHN WOOLEY'S ANNUAL COMPANY'S RESULTS SYSTEMWIDE
YEAR COMPENSATION SALARY OF OPERATIONS SALES*
---- -------------------- ----------------- ----------
<S> <C> <C> <C>
1996 $130,000 $3,195,000 $202
1997 $150,000 $4,449,000 $270
</TABLE>
- ----------
* In millions of dollars.
The Compensation Committee intends to continue to evaluate the
performance of the Company in light of management's efforts and to recommend
to the Board of Directors appropriate adjustments in compensation as the
situation warrants.
Submitted by the Compensation Committee:
John M. Rosillo
John L. Hill, Jr.
Azie Taylor Morton
John C. Wooley
FIVE-YEAR CUMULATIVE TOTAL RETURN CHART
The graph below compares total shareholder returns for the Company over
the entire period of time that the Company has been public to the end of
fiscal 1997 to the Standard & Poor's Restaurants Index and the NASDAQ Market
Index. Each of the three measures of cumulative total return assumes
reinvestment of dividends. The stock performance shown on the graph below is
not necessarily indicative of future price performance.
9
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COMPARISON OF 24 MONTH CUMULATIVE
TOTAL RETURN*
AMONG SCHLOTZKY'S INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE S & P RESTAURANTS INDEX
<TABLE>
SCHLOTZSKY'S INC. NASDAQ STOCK MARKET-US S & P RESTAURANTS
<S> <C> <C> <C>
12/15/95 100 100 100
12/95 93 99 101
12/96 91 122 100
12/97 133 150 107
</TABLE>
* $100 INVESTED ON 12/15/95 IN STOCK OR ON
11/30/95 IN INDEX - INCLUDING REINVESTMENT
OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
John C. Wooley and Jeffrey J. 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 $1,460,000 at December 31, 1997. John Wooley has also pledged a
personal life insurance policy to secure certain Company indebtedness.
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 February, 1998. 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, 1997 through December 31, 1997 were the
outstanding balances of December 31, 1997 of approximately $109,000 for John
Wooley and $122,000 for Jeffrey Wooley. The restructured terms of these notes
were ratified by the Board of Directors in January 1996.
10
<PAGE>
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 $217,000 as its share of franchise fees and
royalties under its area development agreement with the Company. The franchisees
with an operating store in which Mr. Rodriguez holds an interest paid the
Company approximately $51,000 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 December 1995, the Company entered into a master license agreement with
Buxtehude, a shareholder of the Company, of which John M. Rosillo, a director of
the Company, 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 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 Buxetude, the Company received
a $350,000 promissory note. The note bears interest at 9% and is repayable in
three installments, with the last installment of $175,000 due on December 31,
1998. The largest aggregate amount of such indebtedness since January 1, 1997
was $350,000. As of December 31, 1997, the balance of this obligation, including
accrued interest, was $301,000.
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 mount 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, 1998, and the largest aggregate amount
outstanding during 1997, and the balance of this obligation, including accrued
interest, as of December 31, 1997, was $136,000. 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.
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
11
<PAGE>
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, 1997, and the principal balance of this obligation, including
accrued interest, as of December 31, 1997, was $588,000.
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 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, 1998. 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, 1997 was approximately $136,000, the balance of this obligation,
including accrued interest, as of December 31, 1997.
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 leases 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 pays 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 beginning November 1997. 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 note, as modified in 1997, bears interest at 8% per annum, is
payable in ten annual installments of principal and interest beginning in
December 1998, and matures in December 2007. As of December 31, 1997, the
outstanding balance on this note was $211,000. 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 Transations." In 1996, the Company made a minority investment in
an affiliate of Bonner Carrington which has several master license agreements in
effect.
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 December 31, 1997, the outstanding
balance on this note including accrued interest was $173,000. CBD 29 had a right
of first refusal to acquire the master license
12
<PAGE>
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
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 defaulted 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 $40,000 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.
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. During fiscal 1997, the Company did not, 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.
13
<PAGE>
(PROPOSAL 2)
APPROVAL OF AMENDMENTS TO THIRD AMENDED AND RESTATED
1993 STOCK OPTION PLAN
In December 1993, the Board of Directors and the shareholders of the
Company adopted the 1993 Stock Option Plan, which has been amended by action of
the Board of Director, the shareholders or the Compensation Committee, as the
case may be, several times since adoption. The 1993 Stock Option Plan, as
amended (the "1993 Plan" or the "Amended Plan"), presently states that up to a
maximum of 950,000 shares of Common Stock are available for awards of options to
employees and directors of, and consultants to, the Company. As of April 24,
1998, options to purchase 856,839 shares of Common Stock had been granted
pursuant to the 1993 Plan, of which options to purchase 114,249 shares had been
exercised, leaving 93,161 shares available for future grants under the 1993
Plan.
PROPOSED AMENDMENTS
To continue the effectiveness of the 1993 Plan, the Compensation Committee
has, subject to shareholder approval, amended the 1993 Plan (the "Amendments")
to (i) increase by 500,000 the number of shares of Common Stock reserved for
issuance under the 1993 Plan, thus increasing the aggregate amount of Common
Stock for which options have been or may be granted pursuant to the 1993 Plan to
1,450,000 shares (subject to adjustment to prevent dilution), and (ii) increase
from 250,000 to 300,000 the number of shares with respect to which options may
be granted to any single executive officer in any fiscal year.
If approved by the shareholders, the increase in the number of shares
reserved for issuance under the 1993 Plan will permit the Company to effect
grants in favor of John Wooley, the Chairman of the Board and Chief Executive
Officer of the Company, and Jeffrey Wooley, Senior Vice President and Secretary,
and will also permit the Company to continue to grant options under the 1993
Plan, which the Compensation Committee believes is necessary in order to
attract, motivate and retain outstanding employees, directors and consultants.
In December 1997, employment contracts with John Wooley and Jeffrey Wooley
expired. The Compensation Committee retained consultants to analyze the
compensation paid to them and to make recommendations concerning appropriate
compensation packages in light of comparisons to executive compensation at
similarly situated companies. On February 12, 1998, the Compensation Committee
increased the number of shares under the 1993 Plan by 150,000 shares.
Immediately following that action, a subcommittee of the Compensation Committee
granted stock options for 50,000 shares to John Wooley and for 25,000 shares to
Jeffrey Wooley, both at the then current fair market value and vesting in
one-third increments on the first three anniversaries of the date of grant,
in order to effect a portion of the preliminary recommendations of its
compensation consultants.
On February 27, 1998, the Compensation Committee met to consider the final
report of its consultants. The Committee voted to increase the number of shares
under the 1993 Plan by an additional 500,000 shares, subject to shareholder
approval. In accordance with the consultant's recommendations, the subcommittee
granted options for an additional 250,000 shares to John Wooley and 75,000
shares to Jeffrey Wooley, both subject to shareholder approval of the 500,000
share increase in the 1993 Plan. In making the grant, the subcommittee
considered the Company's practices and the practices of similarly situated
companies, with respect to stock option grants for the years 1994 through 1997.
The grants reflect their attempt to address their belief that the compensation
packages for John Wooley and Jeffrey Wooley for those years were well below the
median of those received by their counterparts at comparable companies. In
addition, the subcommittee decided to make these grants adequate for fiscal
years 1998 and
14
<PAGE>
1999, consistent with their understanding of the stock option grant practices
of many public companies. Accordingly, it is not contemplated that additional
stock option grants would be made to John Wooley or Jeffrey Wooley until at
least the year 2000. The subcommittee also voted to increase the base
salaries payable to John Wooley and Jeffrey Wooley through 2001 and to adopt
cash incentive plans for 1998, consistent with the recommendations of the
consultant. (See "Comparison of Executive Officers and Other
Information--Employment Agreements.") The options granted on February 27,
1998 to John Wooley and Jeffrey Wooley were on the following terms:
<TABLE>
NO. OF
STOCK OPTIONS EXERCISE PRICE* VESTING
-------------- --------------- --------
<S> <C> <C> <C>
John C. Wooley 150,000 $22.095 One-third per year
100,000 $23.93625 One-third per year
Jeffrey J. Wooley 41,666 $22.095 One-third per year
33,334 $23.93625 One-third per year
</TABLE>
- --------------------
* These stock options are subject to the condition that on the date of the
annual meeting of shareholders, the fair market value of the Company's
Common Stock, as defined in the 1993 Plan, must be no greater than the
exercise price determined on February 27, 1998. If an exercise price is
less than the fair market value as determined under the 1993 Plan on the
date of the Annual Meeting, the exercise price will be automatically
increased to the fair market value on that date. As of April 24, 1998, the
fair market value as determined under the Plan was below both of the
exercise prices established on February 27, 1998.
Because options to acquire an aggregate of 300,000 shares were granted to
John Wooley during February 1998, the Compensation Committee has also amended
the 1993 Plan to increase the number of shares with respect to which options may
be granted to any single executive officer in any fiscal year from 250,000 to
300,000 shares. This will enable the Company to deduct compensation paid to the
extent his compensation exceeds $1 million as a result of proceeds from the
stock options if, and only if, the shareholders approve the Amendment. This
Amendment is made in response to Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). Section 162(m) of the Code generally provides
that a publicly held corporation's deduction for compensation paid to its chief
executive officer or one of its next four highest compensated officers (these
five individuals are defined in Section 162(m) of the Code as "covered
employees") is limited to $1 million per year, subject to certain exceptions.
One of these exceptions is for "performance-based" compensation, which includes
compensation under stock option plans if certain requirements are met. In order
for the stock options granted to John Wooley on February 27, 1998 to qualify
under the "performance-based" compensation exception to the deductibility limits
of Section 162(m) of the Code in the future, the shareholders must approve the
Amendment.
If shareholder approval of the Amendments is not obtained, (i) there will
be no increase in the number of shares of Common Stock subject to issuance under
the existing 1993 Plan and any options granted subject to such approval will be
cancelled, and (ii) the number of shares with respect to which options may be
granted to any single executive officer in any fiscal year will remain at
250,000 shares.
The following is a summary of certain major provisions of the 1993 Plan,
as amended.
GENERAL. Under the 1993 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 ("ISO's")
pursuant to Section 422 of the Code, or will constitute nonqualified stock
options ("NQSOs"). Options may be granted at any time prior to December 23,
2003. Provided the shareholders approve the Amendments, a maximum of 1,450,000
shares of Common Stock (subject to
15
<PAGE>
adjustment to prevent dilution) will be available for issuance under the
Amended Plan. As of April 24, 1998, options to purchase 856,839 shares of
Common Stock had been granted pursuant to the 1993 Plan and had not expired,
and 114,249 shares had been issued upon exercise of options granted pursuant
to the 1993 Plan.
ADMINISTRATION. The 1993 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, which is currently comprised of
three non-employee directors and John Wooley. For purposes of grants to
executive officers, a subcommittee consisting solely of non-employee directors
has been formed. The 1993 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 1993 Plan and the provisions of the options granted
thereunder, prescribe and amend rules for the operation of the 1993 Plan and
make all other determinations necessary or advisable for its implementation and
administration.
ELIGIBILITY. Eligibility to participate in the 1993 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 1993 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 300,000
shares (assuming the shareholders approve the Amendments).
TERMS OF OPTIONS AND LIMITATIONS ON RIGHT TO EXERCISE. Under the 1993
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 incentive stock option
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
incentive stock options granted to an optionee owning 10% of the Common Stock of
the Company) or such earlier date determined by the Administrator.
The 1993 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, as
permitted by the terms of the option agreement or 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 who has obtained
the optionee's
16
<PAGE>
rights under the option by will or under the laws of descent and
distribution, (iii) by a permitted transfer as contemplated by the 1993 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 theretofore granted, without such
optionee's consent. The 1993 Plan is scheduled to expire on December 23, 2003.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. Under the Amended Plan, the
Company may grant options which, for federal income tax purposes, (a) are
treated as "incentive stock options" within the meaning of Section 422 of the
Code, or (b) are treated as nonqualified options subject to Section 83 of the
Code. The federal income tax consequences of each type of option are different
for the participants and for the Company.
INCENTIVE STOCK OPTIONS. For an option granted pursuant to the Amended
Plan that qualifies as an incentive stock option, present law provides: (a) the
participant will not realize taxable income upon either the receipt or the
exercise of the option, provided, however, that in connection with the
computation of the alternative minimum tax, the amount by which the fair market
value of the Common Stock at the time of exercise exceeds the exercise price
generally will constitute an adjustment item; (b) any gain or loss upon a
disposition constituting a qualifying disposition of shares acquired pursuant to
the exercise of the option will be treated as capital gain or loss (assuming
that such shares are a capital asset in the hands of the participant); and (c)
no deduction will be allowed at any time to the Company or any parent or
subsidiary of the Company for federal income tax purposes in connection with the
grant or exercise of the option or a disposition constituting a qualifying
disposition of shares acquired pursuant to the exercise of the option. A
disposition of shares acquired upon exercise of an incentive stock option will
constitute a qualifying disposition if it does not occur within two years of the
granting of the option or within one year after the transfer of substantially
all of the incidents of ownership in the shares to the participant, and the
participant is an employee of the Company (or defined affiliates) at all times
from the grant of the option until three months prior to exercise. A disposition
not satisfying such holding period requirements results in a "disqualifying
disposition." If Common Stock acquired upon exercise of an incentive stock
option is disposed of by the participant in a disqualifying disposition, the
participant will be treated as receiving ordinary income equal to the difference
between the fair market value of the transferred shares on the date of exercise
and the exercise price of such shares, less any decline in value of
17
<PAGE>
the shares from the date of exercise to the date of sale. In the event the
sales price received in a disqualifying disposition of such Common Stock
exceeds the value of the Common Stock on the date of exercise, the
disqualifying disposition also will result in capital gain to the extent of
such excess (assuming that such Common Stock is a capital asset in the hands
of the participant). The amount treated as ordinary income to the participant
because of a disqualifying disposition will normally be allowed as a federal
income tax deduction to the Company (or any parent or subsidiary of the
Company) as compensation expense.
For purposes of computing a participant's capital gain or loss on the sale
of shares that were acquired under the Amended Plan pursuant to the exercise of
an incentive stock option, the participant's basis in such shares generally will
be equal to any amount paid by the participant to the Company for the shares
plus the amount, if any, recognized as ordinary income to the participant with
respect to the shares due to a disqualifying disposition. The participant's
holding period for such shares generally should begin at the time of the
participant's exercise of an option.
The Company and any parent or subsidiary of the Company will not be liable
to any participant or other person if it is determined for any reason by the
Internal Revenue Service or any court having jurisdiction that any option
granted pursuant to the Amended Plan does not qualify for tax treatment as an
incentive stock option under Section 422 of the Code.
NONQUALIFIED OPTIONS. For an option granted pursuant to the Amended Plan
that does not qualify as an incentive stock option, taxable income will not be
realized by the participant upon the grant of such a nonqualified option. A
participant generally will recognize ordinary taxable income (compensation),
subject to withholding, upon exercise of a nonqualified option in an amount
equal to the excess of the fair market value of the Common Stock on the date of
exercise over the option price paid.
For purposes of determining gain or loss upon a subsequent disposition of
Common Stock acquired upon the exercise of a nonqualified option, the
participant's basis in such shares will generally be equal to the purchase price
paid to the Company for the Common Stock, increased by the amount, if any,
includable in the participant's taxable income with respect to the Common Stock.
The participant's holding period for determining whether gain or loss on such
subsequent disposition is short-term or long-term begins on the date on which
the participant's rights in the stock are transferable or are not subject to a
substantial risk of forfeiture, whichever occurs earlier.
The foregoing is intended as a summary of the effect of certain federal
income tax consequences associated with the 1993 Plan and does not purport to be
complete. It is recommended that participants consult their own tax advisors for
counseling. The tax treatment under foreign, state or local law is not covered
in this summary.
SHAREHOLDER APPROVAL
The affirmative vote of holders of a majority of the shares of Common
Stock having voting power, represented in person or by proxy, at the Annual
Meeting is required to approve the Amendments. The Board of Directors believes
the proposed Amendments are in the best interest of the Company and its
shareholders and are important in order to help assure the ability of the
Company to continue to recruit and retain highly qualified employees, directors
and consultants.
It is the intention of the persons named in the enclosed proxy to vote
such proxy in the manner directed, but if no direction is indicated, the shares
represented by such proxy will be voted for the approval of the Amendments to
the 1993 Stock Option Plan.
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(PROPOSAL 3)
APPROVAL OF THE SCHLOTZSKY'S, INC. EMPLOYEE STOCK PURCHASE PLAN
On February 27, 1998, the Board of Directors voted to adopt the
Schlotzsky's, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan"),
subject to shareholder approval. A summary of the material features of the Stock
Purchase Plan follows. This summary does not purport to be complete and is
qualified in its entirety by reference to the text of the Stock Purchase Plan, a
copy of which is attached as Appendix A and is incorporated herein by reference.
GENERAL. Under the Stock Purchase Plan, eligible employees may purchase
Common Stock of the Company at a discount from the market price through a
program of voluntary, regular payroll deductions. The Stock Purchase Plan will
be administered by a committee of non-eligible directors (the "Compensation
Committee") designated by the Board of Directors. The Compensation Committee
will appoint an administrator who will be responsible for the implementation of
the Stock Purchase Plan, including the allocation of funds and Common Stock
purchased thereunder, and record keeping.
SHARES ISSUABLE THROUGH THE STOCK PURCHASE PLAN. A total of 250,000 shares
of Common Stock are authorized and reserved for issuance under the Stock
Purchase Plan. Appropriate adjustments to the aggregate number of shares
available under the Stock Purchase Plan will be made, in the discretion of the
Compensation Committee, in the event of any recapitalization, stock dividend,
stock split, combination of shares or other change in the Common Stock. The
shares of Common Stock authorized for sale under the Stock Purchase Plan may be
purchased by the Company in the open market, or may be authorized and unissued
shares, treasury shares, or any combination thereof.
ADMINISTRATION OF THE STOCK PURCHASE PLAN. The Compensation Committee has
complete authority to construe, interpret and administer the provisions of the
Stock Purchase Plan.
THE STOCK PURCHASE PLAN. Employees of the Company and its subsidiaries,
including members of the Board of Directors who are employees, and whose
customary employment is more than 20 hours per week and five months in a
calendar year and who have at least six months of service are eligible to
participate in the Stock Purchase Plan. Employees who own five percent (5%) or
more of the Company's outstanding Common Stock may not purchase stock under the
Stock Purchase Plan. As of April 24, 1998, a total of approximately 150
employees of the Company and its subsidiaries, including all officers other than
John C. Wooley, Jeffrey J. Wooley and Susan D. Vincent (who were ineligible
because the number of shares deemed beneficially owned by them was in excess of
five percent), were eligible to participate in the Stock Purchase Plan.
Under the Stock Purchase Plan, the Compensation Committee may permit
eligible employees to purchase, through regular payroll deductions, shares of
Common Stock at a purchase price equal to eighty-five percent (85%) of the lower
of the fair market value of a share of Common Stock on the first day of an
option period or the last day of an option period. Each option period is six
calendar months. Under the Stock Purchase Plan, the fair market value of a share
of Common Stock will be equal to the closing price of a share of Common Stock on
the date in question.
Participants may contribute up to a maximum of fifteen percent (15%) of
their base compensation for the purchase of shares pursuant to the Stock
Purchase Plan. Payroll deductions will be accumulated and will be used to
purchase shares of Common Stock at the end of the option period. A participant
may decrease (but cannot increase) or suspend payroll deductions during an
option period or withdraw from
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participation in the Stock Purchase Plan at any time. No participant may
purchase more than 1,000 shares during any option period, or $25,000 of
Common Stock in any calendar year, measured using the fair market value of a
share of Common Stock at the time each option is granted.
TERMINATION OF EMPLOYMENT. If a participant's employment terminates for
any reason before the end of an option period, his or her participation in the
Stock Purchase Plan ceases immediately, and any shares of Common Stock purchased
under the Stock Purchase Plan and any accumulated employee contributions will be
distributed to such participant.
AMENDMENTS TO THE STOCK PURCHASE PLAN. The Board of Directors may amend or
terminate the Stock Purchase Plan at any time subject to certain restrictions
set forth in the Stock Purchase Plan. The Stock Purchase Plan will automatically
terminate after ten years, or on the date all shares authorized to be sold
thereunder have been sold, subject to the right of the Board of Directors to
terminate the Stock Purchase Plan at any earlier time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following general description of
federal income tax consequences is based upon current statutes, regulations and
interpretations and does not purport to be complete. Reference should be made to
the applicable provisions of the Code. There may also be state, local and
foreign income tax consequences applicable to purchases of Common Stock.
The Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Code. A participant
under the Stock Purchase Plan will not recognize income subject to federal
income tax at the commencement of an option period or at the time shares are
purchased. Funds withheld under the Stock Purchase Plan and applied toward the
purchase of Common Stock are taxed to the participant in the same manner as
other regular earnings. The purchase of shares under the Stock Purchase Plan may
have additional tax consequences for a participant.
A taxable event will not occur until a participant sells or makes a gift
of the shares purchased through the Stock Purchase Plan. Whether the participant
disposes of the shares during or after the 2-year period following the first day
of the relevant option period (the "Holding Period") will determine the federal
income tax consequences to the participant.
Participants who purchase shares under the Stock Purchase Plan and dispose
of them within two years of the last day of the applicable option period will
recognize ordinary income on the difference between the price paid per share and
the fair market value on the last business day of the option period, regardless
of the market price of the shares at the time of the sale. A corresponding
deduction will be available to the Company. In addition, a participant who sells
shares within the applicable Holding Period will recognize a capital gain or
loss (long-term or short-term, depending on the length of time such shares are
held) on the difference between the amount realized on the sale and his or her
"basis" in the shares. The participant's "basis" equals the price paid plus any
ordinary income recognized as a result of the sale.
If a participant disposes of shares purchased under the Stock Purchase
Plan more than two years after the last day of the applicable option period, or
dies at any time while holding shares, ordinary income will be equal to the
lesser of (i) the fair market value of the shares at the time of disposition
minus the price paid under the Stock Purchase Plan; or (ii) the fair market
value of the shares on the last day of the applicable option period less the
price paid. The Company would not be entitled to a deduction for this amount. In
addition, a capital gain will be recognized on the excess, if any, of the amount
recognized on a sale over the participant's basis (the amount paid per share
plus the ordinary income as a result of the sale). Any loss will be treated as a
capital loss.
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REASON FOR PROPOSAL
The purpose of the Stock Purchase Plan is to make available to eligible
employees of the Company and its subsidiaries a means of purchasing shares of
Common Stock through voluntary, regular payroll deductions. The Board of
Directors believes that the Stock Purchase Plan is in the best interest of the
Company and its shareholders.
The affirmative vote of the holders of a majority of the total votes cast
with respect to the Stock Purchase Plan is required to approve the Stock
Purchase Plan.
In considering whether to vote for approval of the Stock Purchase Plan,
shareholders are advised that, John C. Wooley, the Chairman of the Board and
Chief Executive Officer of the Company, Jeffrey J. Wooley, Senior Vice President
and Secretary and a director of the Company, and each of the other directors
currently do not qualify to participate in the Stock Purchase Plan because they
hold too many shares to participate (in the case of John C. Wooley and Jeffrey
J. Wooley) or they are not employees (in the case of the remaining directors).
The Board of Directors recommends a vote "For" approval of the
Schlotzsky's, Inc. Employee Stock Purchase Plan. It is the intention of the
persons named in the enclosed Proxy to vote such proxy in the manner directed,
but if no direction is indicated, the shares represented by such proxy will be
voted for the approval of the Stock Purchase Plan.
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
It is anticipated that the 1999 Annual Meeting of Shareholders of the
Company will be held on May 28, 1999. Proposals of shareholders intended to be
presented at the 1999 annual meeting must be received in writing by the Company
at its principal executive offices for inclusion in the Company's proxy
statement and form of proxy not later than January 29, 1999. The principal
executive offices of the Company are located at 203 Colorado Street, Austin,
Texas 78701.
FINANCIAL STATEMENTS AND FORM 10-K
The Consolidated Financial Statements of the Company and its subsidiaries,
which include audited consolidated balance sheets as of December 31, 1997 and
1996 and audited consolidated statements of operations and cash flows for the
years ended December 31, 1997, 1996 and 1995, are included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed
with the Securities and Exchange Commission (the "Form 10-K"). The Company will
furnish a copy of the Form 10-K without charge to each person who was a
beneficial owner of its securities on April 24, 1998, the record date for the
Company's Annual Meeting of Shareholders, and who wishes to receive a copy of
the Form 10-K, upon the written request of any such person. Requests for copies
of such reports should be directed to Monica Gill, 203 Colorado Street, Austin,
Texas 78701.
OTHER MATTERS
The Board of Directors of the Company does not know of any other matters
to be acted upon at the meeting. However, if any other matter properly comes
before the meeting, the persons voting the proxies will vote them in accordance
with their best judgment.
April 30, 1998
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APPENDIX A
SCHLOTZSKY'S, INC.
EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the Schlotzsky's, Inc.
Employee Stock Purchase Plan, effective as of July 1, 1998.
1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its Subsidiaries with an opportunity to purchase Common Stock of the
Company. It is the intention of the Company to have the Plan qualify as an
"Employee Stock Purchase Plan" under section 423 of the Code. The provisions of
the Plan shall, accordingly, be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. DEFINITIONS.
(a) "ACQUIRED COMPANY" shall mean any company 50% or more of
whose stock or assets has been acquired by the Company or 50% or more of
whose assets have been acquired by a Subsidiary.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
(d) "COMMON STOCK" shall mean the common stock, no par value,
of the Company.
(e) "COMPANY" shall mean Schlotzsky's, Inc., a Texas
corporation, or any successor which adopts this Plan.
(f) "COMPENSATION" for the Offering Period shall mean the
regular straight-time earnings paid to the Employee by the Employer.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE" shall mean the absence
of any interruption or termination of service as an Employee. Continuous
Status as an Employee shall not be considered interrupted in the case of
a leave of absence that meets the requirements of paragraph 10(b). An
Employee who was employed by an Acquired Company on the date of such
acquisition and at the time of such acquisition was hired by an Employer
will be deemed to have Continuous Status as an Employee from the date of
employment by the Acquired Company, absent any interruption or
termination of service.
(h) "EMPLOYEE" shall mean any person, including an officer, who
is customarily employed for at least twenty (20) hours per week and for
more than five (5) months in the calendar year by an Employer and whose
wages are determined, in the sole judgment of the Employer, at the time
of payment to be subject to withholding for purposes of federal income
taxes.
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(i) "EMPLOYER" shall mean the Company and each of its
Subsidiaries, excluding any Subsidiary that has declined to participate
in the Plan.
(j) "ENROLLMENT DATE" shall mean the first day of each Offering
Period.
(k) "EXERCISE DATE" shall mean the last day of each Offering
Period.
(l) "EXERCISE PRICE" shall have the meaning as defined in
paragraphs 7(b) and 7(c).
(m) "OFFERING PERIOD" shall mean the period of six (6) months
during which an option granted pursuant to the Plan may be exercised, as
described in paragraph 4.
(n) "PARTICIPANT" shall mean an Eligible Employee in Continuous
Status as an Employee who has been offered the opportunity to purchase
Common Stock hereunder and who has elected to participate herein.
(o) "PARTICIPANT ACCOUNT" shall mean that separate account
maintained hereunder to record the amount that a Participant has
contributed to the Plan.
(p) "PLAN" shall mean the Schlotzsky's, Inc. Employee Stock
Purchase Plan.
(q) "PLAN CUSTODIAN" shall mean the party appointed by the Plan
administrator or any successor appointed by the Plan administrator.
(r) "SIX MONTHS OF SERVICE" shall mean a consecutive one
hundred-eighty (180) day period of Continuous Status as an Employee,
beginning the date on which an Employee commences employment with an
Employer, a Subsidiary or an Acquired Company.
(s) "SUBSIDIARY" shall mean a corporation, domestic or foreign,
of which at the time of the granting of the option pursuant to paragraph
7, not less than 50% of the total combined voting power of all classes of
stock are held by the Company or a Subsidiary, whether or not such
corporation now exists or is hereafter organized or acquired by the
Company or a Subsidiary.
3. ELIGIBILITY.
(a) GENERAL RULE. Any Employee, as defined in paragraph 2, who
has completed Six Months of Service and is employed by an Employer on a
given Enrollment Date shall be eligible to participate in the Plan as an
"Eligible Employee," subject to the requirements of paragraphs 3(b) and
5(a) and the limitations imposed by section 423(b) of the Code. Any
Eligible Employee who terminates employment and rehires with an Employer
prior to an Enrollment Date within one year from the date of the
Employee's termination shall not be required to complete another Six
Months of Service.
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(b) EXCEPTIONS. Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option to purchase
Common Stock under the Plan if:
(i) Immediately after the grant, such Employee (or any
other person whose stock would be attributed to such Employee
pursuant to section 424(d) of the Code) would own stock (including
for purposes of this paragraph 3(b) any stock he holds outstanding
options to purchase) possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of
the Company or of any Subsidiary computed in accordance with the
Code Section 423(b)(3), or
(ii) Such option would permit such Employee's right to
purchase stock under all employee stock purchase plans (described
in section 423 of the Code) of the Company and its Subsidiaries to
accrue at a rate which exceeds Twenty-five Thousand Dollars
($25,000) of the fair market value of such stock (determined at
the time such option is granted) for each calendar year in which
such option is outstanding at any time, in accordance with the
provisions of Code Section 423(b)(8).
4. OFFERING PERIODS. The first Offering Period begins July 1, 1998,
and shall end December 31, 1998, unless terminated earlier in accordance with
paragraph 19. Absent action by the Board, each subsequent Offering Period shall
be for a period of six (6) months, and shall commence on each January 1 and July
1. The Board shall have the power to change the duration of the Offering Periods
with respect to future offerings without stockholder approval if such change is
announced at least fifteen (15) days prior to the scheduled beginning of the
first Offering Period to be affected.
5. PARTICIPATION.
(a) An Eligible Employee may become a Participant in the Plan
by completing a subscription agreement, in a form prescribed by the Plan
administrator ("Subscription Agreement"), and filing it with the
Company's Human Resources Department prior to an applicable Enrollment
Date, unless a later time for filing the Subscription Agreement is set by
the Board for all eligible Employees with respect to a given Offering
Period.
(b) An Eligible Employee may waive his right to participate for
any Offering Period by declining to authorize a payroll deduction. Such
declination must be filed in writing in the time and manner specified by
the Company. The filing of a written declination shall result in the
Employee's waiver of participation for the current Offering Period and
all subsequent offering periods and shall be irrevocable with respect to
the current Offering Period. Except as otherwise provided in this
paragraph, an Employee's waiver of participation for a specified Offering
Period shall not, in and of itself, adversely impact the right of such
Employee to participate in the Plan during any subsequent Offering
Periods.
6. PAYMENT FOR COMMON STOCK.
(a) At the time a Participant files his or her Subscription
Agreement, such Participant shall elect to have payroll deductions made
on each pay date during
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the Offering Period at the rate of not less than 1% of and not to exceed
fifteen percent (15%) of the Compensation which he or she receives on
each pay date during the Offering Period, provided that the aggregate
amount of such payroll deductions during the Offering Period shall not
exceed fifteen percent (15%) of the Participant's aggregate Compensation
during said Offering Period.
(b) All payroll deductions made by a Participant shall be
credited to his or her Participant Account under the Plan.
(c) A Participant may discontinue or change the rate of his or
her payroll deductions during the Offering Period by completing and
filing with the Human Resources Department of the Company a new
Subscription Agreement. Such change or discontinuance shall be effective
as soon as administratively feasible after the Company's receipt of the
new Subscription Agreement.
7. GRANT OF OPTION.
(a) On the Enrollment Date of each Offering Period each
Eligible Employee in such Offering Period shall be granted an option to
purchase on each Exercise Date during such Offering Period up to a number
of whole shares of the Company's Common Stock determined by dividing
fifteen percent (15%) of the Eligible Employee's Compensation by the
Exercise Price on the Exercise Date for such Offering Period; provided,
however, that the number of shares subject to such option shall be
reduced, if necessary, to a number of shares which would not exceed the
limitations described in paragraph 3(b) or paragraph 12(a) hereof. In
addition, the maximum number of shares any Participant may be granted an
option to purchase in any Offering Period is one thousand (1000) shares.
The Exercise Price of a share of the Company's Common Stock shall be
determined as provided in paragraph 7(b) herein.
(b) The exercise price per share of the shares offered in a
given Offering Period shall be the lesser of (i) 85% of the fair market
value of a share of the Common Stock on the Exercise Date or (ii) 85% of
the fair market value of a share of the Common Stock on the Enrollment
Date of such Offering Period. The fair market value of the Company's
Common Stock on a given date shall be the closing price of such Stock as
reported by the Nasdaq Stock Market (or reported on such other national
exchange on which it may, from time to time, be reported) for the
Exercise Date or the Enrollment Date, as the case may be, (or if the
Common Stock did not trade on such date, for the most recent trading day
preceding the Exercise Date or the Enrollment Date, as the case may be,
on which the Common Stock traded), unless the Common Stock ceases to be
traded on a national exchange. If the Common Stock ceases to be traded on
a national exchange, its fair market value shall be determined by the
Board in its discretionor the Board may discontinue the Plan and refund
all uninvested payroll deduction accounts. Notwithstanding any provision
of the Plan to the contrary, no determination made with respect to the
fair market value of Common Stock shall be inconsistent with Code Section
423 or the regulations thereunder.
8. EXERCISE OF OPTION. The Participant's option for the purchase of
Common Stock will be exercised automatically on each Exercise Date of each
Offering Period, and the maximum number of whole shares subject to such option
will be purchased at the applicable exercise price with the funds in his or her
Participant
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Account and held in the Participant Account unless prior to such Exercise Date
the Participant has withdrawn from the Offering Period pursuant to paragraph
10. Any unused payroll deductions from a Participant Account will carry
forward to the next offering period unless requested to be refunded by the
Participant. During a Participant's lifetime a Participant's option to purchase
shares hereunder is exercisable only by such Participant.
9. DELIVERY AND VOTING. Shares issued pursuant to the exercise of
the option will be held in custody by the Plan Custodian until withdrawal by the
Participant. The Participant may request a certificate for full shares held in
his or her Participant Account immediately after the Exercise Date or as of the
10th of any month thereafter. A Participant shall be entitled to vote any shares
held by the Plan Custodian in his or her Participant account by furnishing
instructions to the Plan Custodian. Unless directions are given by the
Participant, the shares shall not be voted.
10. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A Participant may withdraw all, but not less than all, of
the payroll deductions credited to his or her Participant Account and not
yet used toward the exercise of his or her option under the Plan at any
time by giving written notice to the Company on a form prescribed by the
Plan administrator. Withdrawal shall be effective no earlier than the
date such notice is received by the Board or the committee appointed by
the Board pursuant to paragraph 13. All of the Participant's unused
payroll deductions credited to his or her Participant Account will be
paid to such Participant promptly after receipt of his or her notice of
withdrawal. A withdrawal of a Participant's Participant Account shall
terminate the Participant's participation for the Offering Period in
which the withdrawal occurs, and no further payroll deductions for the
purchase of shares will be made during that Offering Period.
(b) Upon termination of the Participant's Continuous Status as
an Employee of the Company for any reason, he or she will be deemed to
have elected to withdraw from the Plan and any full shares held by the
Plan Custodian for the Participant will be issued in the name of the
Participant and mailed together with a check for any fractional shares.
Any funds credited to his or her Participant Account and not then used
toward the exercise of his or her option will be returned to such
Participant and his or her option will be cancelled; provided, however,
that a Participant who goes on a leave of absence shall be permitted to
remain in the Plan with respect to an Offering Period which commenced
prior to the beginning of such leave of absence. If such Participant is
not guaranteed re-employment by contract or statute and the leave of
absence exceeds ninety (90) days, such Participant shall be deemed to
have terminated employment on the ninety-first day of such leave of
absence. Payroll deductions for a Participant who has been on a leave of
absence will resume upon return to work at the same rate as in effect
prior to such leave unless changed by such Participant or unless the
leave of absence begins in one Offering Period and ends in a subsequent
Offering Period, in which case the Participant shall not be permitted to
re-enter the Plan until a new Subscription Agreement is filed with
respect to any Offering Period which commences after such Participant has
returned to work from the leave of absence.
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(c) A Participant's withdrawal from one Offering Period will
not have any effect upon his or her eligibility to participate in a
different Offering Period or in any similar Plan which may hereafter be
adopted by the Company.
11. INTEREST. No interest shall accrue on the payroll deductions of a
Participant in the Plan.
12. STOCK.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be 250,000
(two hundred fifty thousand) shares, subject to adjustment upon changes
in capitalization of the Company as provided in paragraph 18. Either
authorized and unissued shares or issued shares heretofore or hereafter
reacquired by the Employer may be made subject to purchase under the
Plan, in the sole and absolute discretion of the Board. Further, if for
any reason any purchase of Common Stock under the Plan is not
consummated, shares subject to such purchase agreement may be subjected
to a new Subscription Agreement under the Plan. If, on a given Exercise
Date, the number of shares with respect to which options are to be
exercised exceeds the number of shares then available under the Plan, the
Company shall make a pro rata allocation of the shares remaining
available for purchase in as uniform a manner as shall be practicable and
as it shall determine to be equitable. In such event, the Company shall
give written notice of such reduction of the number of shares which each
Employee shall be allowed to purchase. Notwithstanding anything to the
contrary herein, the Company shall not be obligated to issue Common Stock
hereunder if, in the opinion of counsel for the Company, such issuance
would constitute a violation of Federal or state securities laws.
(b) The Participant will have no interest or voting right in
shares covered by his or her option until such option has been exercised
and the shares purchased.
(c) Shares to be delivered to a Participant under the Plan will
be registered in the name of the Participant or, at the prior written
request of the Participant, in the names of the Participant and his or
her spouse.
13. ADMINISTRATION. The Plan shall be administered by the Board or a
committee appointed by the Board. If a committee is appointed by the Board,
such committee shall have all of the powers of the Board with respect to the
Plan except for those powers set forth in paragraph 19 hereof. Members of the
Board who are eligible employees are permitted to participate in the Plan;
provided, however, that (i) members of the Board who are Eligible Employees may
not vote on any matter affecting the administration of the Plan or the grant of
any option pursuant to the Plan, and (ii) if a committee is appointed by the
Board to administer the Plan, no committee member will be eligible to
participate in the Plan. The Board or a committee appointed hereunder shall
have the following powers and duties:
(a) To direct the administration of the Plan in accordance with
the provisions herein set forth;
(b) To adopt rules of procedure and regulations necessary for
the administration of the Plan provided the rules are not inconsistent
with the terms of the Plan;
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(c) To determine all questions with regard to rights of
Employees and Participants under the Plan, including, but not limited to,
rights of eligibility of an Employee to participate in the Plan;
(d) To enforce the terms of the Plan and the rules and
regulations it adopts;
(e) To direct the distribution of the shares of Common Stock
purchased hereunder;
(f) To furnish the Employer with information which the Employer
may require for tax or other purposes;
(g) To engage the service of counsel (who may, if appropriate,
be counsel for the Employer) and agents whom it may deem advisable to
assist it with the performance of its duties;
(h) To prescribe procedures to be followed by Participants in
electing to participate herein;
(i) To receive from each Employer and from Employees such
information as shall be necessary for the proper administration of the
Plan;
(j) To maintain, or cause to be maintained, separate accounts
in the name of each Participant to reflect the Participant's Participant
Account under the Plan; and
(k) To interpret and construe the Plan.
14. DESIGNATION OF BENEFICIARY.
(a) A Participant may file a written designation of a
beneficiary who is to receive any shares from the Participant's
Participant Account under the Plan in the event of such Participant's
death subsequent to an Exercise Date on which an option is exercised but
prior to the issuance of such shares. In addition, a Participant may
file a written designation of a beneficiary who is to receive any cash
from the Participant's Participant Account under the Plan in the event of
such Participant's death prior to the Exercise Date of the option.
(b) Such designation of beneficiary may be changed by the
Participant at any time by written notice. In the event of the death of
a Participant and in the absence of a beneficiary validly designated
under the Plan who is living at the time of such Participant's death, the
Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the Participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the
Company, in its discretion, may deliver such shares and/or cash to the
spouse or to any one or more dependents or relatives of the Participant,
or if no spouse, dependent or relative is known to the Company, then to
such other person as the Company may designate.
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15. TRANSFERABILITY. Neither any monies credited to Participant's
Participant Account nor any rights with regard to the exercise of an option to
receive shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and distribution
or as provided in paragraph 14 hereof) by the Participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with paragraph 10.
16. USE OF FUNDS. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such funds. The Plan shall not
be construed as creating any trust or fiduciary relationship.
17. REPORTS. Individual Participant Accounts will be maintained for
each Participant in the Plan. Statements of Participant Account will be given
to participating Employees promptly following an Exercise Date, which statements
will set forth the amounts of payroll deductions, the per share purchase price,
the number of shares purchased and the remaining cash balance, if any.
18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. If an option under
this Plan is exercised subsequent to any stock dividend, stock split, spin-off,
recapitalization, merger, consolidation, exchange of shares or the like,
occurring after such option was granted, as a result of which shares of any
class shall be issued in respect of the outstanding shares, or shares shall be
changed into a different number of the same or another class or classes, the
number of shares to which such option shall be applicable and the option price
for such shares shall be appropriately adjusted by the Company. Any such
adjustment, however, in the Common Stock shall be made without change in the
total price applicable to the portion of the Common Stock purchased hereunder
which has not been fully paid for, but with a corresponding adjustment, if
appropriate, in the price for each share of Common Stock.
In the event of the proposed dissolution or liquidation of the Company,
the Offering Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. In the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, each option under the
Plan shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the Board determines, in the exercise of its sole discretion and in lieu
of such assumption or substitution, that (i) the Participant shall have the
right to exercise the option; or (ii) the Plan shall be terminated and any
uninvested payroll deduction amount refunded to Participant. If the Board makes
an option fully exercisable, in lieu of assumption or substitution in the event
of a merger or sale of assets, the Board shall notify the Participant that the
option shall be fully exercisable for a period of thirty (30) days from the date
of such notice, and the option will terminate upon the expiration of such
period.
19. AMENDMENT OR TERMINATION. The Board may at any time and for any
reason terminate or amend the Plan. The Plan shall automatically terminate on
the Exercise Date that Participants become entitled to purchase a number of
shares greater than the number of shares available for purchase under paragraph
12. In the event of an automatic termination, reserved shares remaining as of
such Exercise Date shall be sold to Participants on a pro rata basis, as
described in paragraph 12.
8
<PAGE>
Except as specifically provided in the Plan, as required to comply with
Code section 423, or as required to obtain a favorable ruling from the Internal
Revenue Service, no amendment may make any change in any option theretofore
granted which adversely affects the rights of any Participant.
20. NOTICES. All notices or other communications by a Participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. SHAREHOLDER APPROVAL. The Plan is adopted subject to shareholder
approval within 12 months of the adoption of the Plan.
22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Act, the rules and regulations
promulgated under both sets of laws, and the requirements of any stock exchange
upon which the shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute, such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. TERM OF PLAN. The Plan becomes effective on July 1, 1998. It
shall continue in effect for a term of ten (10) years unless sooner terminated
under paragraph 19.
24. NO RIGHTS IMPLIED. Nothing contained in this Plan or any
modification or amendment to the Plan or in the creation of any Participant
Account, or the execution of any participation election form, or the issuance of
any shares of Stock, shall give any Employee or Participant any right to
continue employment, any legal or equitable right against the Employer or
Company or any officer, director, or Employee of the Employer or Company, except
as expressly provided by the Plan.
25. SEVERABILITY. In the event any provision of the Plan shall be
held to be illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining provisions of the Plan, but shall be fully severable
and the Plan shall be construed and enforced as if the illegal or invalid
provision had never been included herein.
26. NOTICE. Any notice required to be given herein by the Employer,
the Company or the Board shall be deemed delivered, when (a) personally
delivered, or (b) placed in the United States mails, in an envelope addressed to
the last known address of the person to whom the notice is given.
27. WAIVER OF NOTICE. Any person entitled to notice under the Plan
may waive the notice.
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28. SUCCESSORS AND ASSIGNS. The Plan shall be binding upon all
persons entitled to purchase Common Stock under the Plan, their respective
heirs, legatees, and legal representatives upon the Employer, its successors and
assigns.
29. HEADINGS. The titles and headings of the paragraphs are included
for convenience of reference only and are not to be considered in construction
of the provisions hereof.
30. LAW. All questions arising with respect to the provisions of this
Agreement shall be determined by application of the laws of the State of Texas
except to the extent Texas law is preempted by Federal statute. The obligation
of the Employer to sell and deliver Common Stock under the Plan is subject to
applicable laws and to the approval of any governmental authority required in
connection with the authorization, issuance, sale or delivery of such Common
Stock.
31. NO LIABILITY FOR GOOD FAITH DETERMINATIONS. Neither the members
of the Board nor any member of the committee (nor their delegates) shall be
liable for any act, omission, or determination taken or made in good faith with
respect to the Plan or any right to purchase shares of Common Stock granted
under it, and members of the Board and the committee (and their delegates) shall
be entitled to indemnification and reimbursement by the Company in respect of
any claim, loss, damage, or expense (including attorneys' fees, the costs of
settling any suit, provided such settlement is approved by independent legal
counsel selected by the Company, and amounts paid in satisfaction of a judgment,
except a judgment based on a finding of bad faith) arising therefrom to the full
extent permitted by law and under any directors and officers liability or
similar insurance coverage that may from time to time be in effect.
32. PARTICIPATING EMPLOYERS. This Plan shall constitute the employee
stock purchase plan of each Subsidiary which shall be deemed to have adopted
this Plan until and unless its board of directors declines in writing to do so.
A Subsidiary may withdraw from the Plan as of any Enrollment Date by giving
written notice to the Board, which notice must be received by the Board at least
thirty (30) days prior to such Enrollment Date.
IN WITNESS WHEREOF, this Stock Purchase Plan has been executed as of May
29, 1998.
SCHLOTZSKY'S, INC.
BY:
-------------------------------------
John C. Wooley,
President and Chief Executive Officer
10
<PAGE>
PROXY PROXY
SCHLOTZSKY'S, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John C. Wooley and Monica Gill, or either
of them, as Proxies, each with full power of substitution, to represent and
to vote, as designated below, all shares of Common Stock of Schlotzsky's,
Inc. (the "Company") held of record by the undersigned on April 24, 1998, at
the Annual Meeting of Shareholders to be held on May 29, 1998, and any
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR THE LISTED NOMINEES AND FOR PROPOSAL 2 AND PROPOSAL 3.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE.
(Continued, and to be signed on reverse side)
<PAGE>
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/
FOR the nominees WITHHOLD
listed below AUTHORITY to vote
1. ELECTION OF DIRECTORS / / / /
(INSTRUCTION: To withhold authority to
vote for any individual nominee strike a
line through the nominee's name in the
list below)
John C. Wooley
Azle Taylor Morton
Jeffrey J. Wooley
For Against Abstain
2. Proposal to approve the amendments to the / / / / / /
Third Amended and Restated 1993 Stock Option
Plan
For Against Abstain
3. Proposal to approve the Schlotzsky's, Inc. / / / / / /
Employee Stock Purchase Plan.
For Against Abstain
4. In their discretion, the Proxies are / / / / / /
authorized to vote upon such business as may
properly come before the meeting or any
adjournment thereof.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
Dated ____________________________________________________________, 1998
Signature ______________________________________________________________
Signature if held jointly ______________________________________________
When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please sign in full name by
President or other authorized officer. If partnership, please sign
partnership name by authorized person.
