<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
Commission File Number: 0-27008
SCHLOTZSKY'S, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2654208
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
203 Colorado Street
Austin, Texas 78701
(address of principal executive offices)
(512) 236-3600
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days:
YES /X/ NO / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding at August 1, 1999
Common Stock, no par value 7,417,714
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets --
June 30, 1999 and December 31, 1998 2
Consolidated Statements of
Income - Three and Six Months Ended
June 30, 1999 and June 30, 1998 3
Consolidated Statement of
Stockholders' Equity - Six Months Ended
June 30, 1999 and the year ended December 31, 1998 4
Condensed Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1999 and June 30, 1998 5
Notes to Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------------- -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................. $ 3,044,789 $ 15,384,991
Temporary cash investments............................................ 18,000 1,439,077
Royalties receivable.................................................. 1,347,116 762,141
Turnkey notes and other receivables, current portion.................. 10,668,497 14,556,424
Other receivables..................................................... 4,582,955 3,086,065
Prepaid expenses and other assets..................................... 806,033 572,996
Turnkey Program development........................................... 10,066,812 5,924,562
Notes receivable, current portion..................................... 8,170,841 4,246,574
---------------- -----------------
Total current assets.............................................. 38,705,043 45,972,830
Property, equipment and leasehold improvements, net........................ 20,840,777 18,529,746
Real estate and restaurants held for sale.................................. 10,240,253 9,215,485
Notes receivable, less current portion..................................... 11,459,129 6,875,915
Notes receivable from related parties, less current portion................ 2,804,155 2,609,775
Turnkey notes and other receivables, less current portion.................. 1,327,092 2,185,429
Intangible assets, net..................................................... 34,001,540 16,815,059
Other noncurrent assets.................................................... 1,260,448 2,023,901
---------------- -----------------
Total assets...................................................... $120,638,437 $104,228,140
---------------- -----------------
---------------- -----------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable-trade................................................ $ 3,798,455 $ 4,752,369
Current maturities of long-term debt.................................. 15,679,820 5,382,585
Accrued liabilities................................................... 2,757,310 9,613,593
---------------- -----------------
Total current liabilities......................................... 22,235,585 19,748,547
Deferred revenue, net................................................. 1,538,101 1,298,486
Long-term debt, less current maturities............................... 19,784,559 9,218,515
---------------- -----------------
Total liabilities................................................. 43,558,245 30,265,548
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Class C--no par value; authorized--1,000,000 shares; issued--none. - -
Common stock, no par value, 30,000,000 shares authorized, 7,412,538
and 7,401,942 issued at June 30, 1999 and December 31, 1998,
respectively...................................................... 62,983 62,877
Additional paid-in capital............................................ 57,624,534 57,533,997
Retained earnings..................................................... 19,497,675 16,470,718
Treasury stock (10,000 shares) ....................................... (105,000) (105,000)
---------------- -----------------
Total stockholders' equity........................................ 77,080,192 73,962,592
---------------- -----------------
Total liabilities and stockholders' equity........................ $120,638,437 $104,228,140
---------------- ----------------
---------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
2
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Revenues
Royalties.................................. $ 5,559,690 $ 4,719,538 $10,573,957 $ 8,978,556
Franchise fees............................. 193,333 380,000 438,333 720,000
Developer fees............................. 1,361,545 - 1,953,770 -
Restaurant sales........................... 3,838,564 1,884,651 6,381,611 3,500,908
Brand contribution......................... 1,601,513 1,005,571 2,802,580 1,865,887
Turnkey program development................ 159,997 1,732,462 830,045 2,857,479
Other fees and revenue..................... 318,314 590,803 614,741 844,487
-------------- ------------ -------------- --------------
Total revenues....................... 13,032,956 10,313,025 23,595,037 18,767,317
Expenses
Service costs:
Royalties................................ 1,738,842 1,799,891 3,530,363 3,420,513
Franchise fees........................... 92,500 203,250 220,500 374,500
Restaurant operations:
Cost of sales............................ 1,126,487 600,974 1,895,057 1,135,326
Labor cost............................... 1,453,553 761,532 2,447,827 1,516,418
Operating expenses....................... 844,442 542,963 1,470,643 1,042,786
Turnkey development costs.................. 975,421 917,541 2,011,990 1,328,989
General and administrative................. 3,676,296 2,942,771 6,532,596 5,447,024
Depreciation and amortization.............. 702,753 447,573 1,288,020 763,389
-------------- ------------ -------------- --------------
Total expenses....................... 10,610,294 8,216,495 19,396,996 15,028,945
-------------- ------------ -------------- --------------
Income from operations............... 2,422,662 2,096,530 4,198,041 3,738,372
Other
Interest income............................ 719,024 462,243 1,483,434 1,027,874
Interest expense........................... (570,686) (45,006) (876,782) (106,356)
-------------- ------------ -------------- --------------
Income before income taxes........... 2,571,000 2,513,767 4,804,693 4,659,890
Provision for income taxes................... 948,053 943,246 1,777,736 1,747,256
-------------- ------------ -------------- --------------
Net income........................... $ 1,622,947 $ 1,570,521 $ 3,026,957 $ 2,912,634
-------------- ------------ -------------- --------------
-------------- ------------ -------------- --------------
Income per common share - basic:
Net income........................... $0.22 $0.21 $0.41 $0.40
-------------- ------------ -------------- --------------
-------------- ------------ -------------- --------------
Weighted average shares outstanding........ 7,402,147 7,389,977 7,401,749 7,358,065
-------------- ------------ -------------- --------------
-------------- ------------ -------------- --------------
Income per common share - diluted:
Net income........................... $0.22 $0.21 $0.40 $0.38
-------------- ------------ -------------- --------------
-------------- ------------ -------------- --------------
Weighted average shares outstanding........ 7,500,782 7,605,953 7,507,653 7,602,320
-------------- ------------ -------------- --------------
-------------- ------------ -------------- --------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Stated Additional Total
Number of Capital Paid-In Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
---------------- -------------- -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998................. 7,334,416 $ 62,202 $56,664,104 $10,264,253 $ - $66,990,559
Options exercised........................ 44,089 441 399,175 - - 399,616
Warrants exercised....................... 23,437 234 224,761 - - 224,995
Treasury stock purchase (10,000 shares).. - - - - (105,000) (105,000)
Tax benefit from employee stock
transaction.............................. - - 245,957 - - 245,957
Net income............................... - - - 6,206,465 - 6,206,465
---------------- -------------- -------------- ------------- ------------ ---------------
Balance, December 31, 1998............... 7,401,942 62,877 57,533,997 16,470,718 (105,000) 73,962,592
Options exercised........................ 10,596 106 90,537 - - 90,643
Net income............................... - - - 3,026,957 - 3,026,957
---------------- -------------- -------------- ------------- ------------ ---------------
Balance, June 30, 1999................... 7,412,538 $ 62,983 $57,624,534 $19,497,675 $(105,000) $77,080,192
---------------- -------------- -------------- ------------- ------------ ---------------
---------------- -------------- -------------- ------------- ------------ ---------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
4
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------
JUNE 30, JUNE 30,
1999 1998
---------------- ---------------
<S> <C> <C>
Net cash used in operating activities............................................. $ (11,818,987) $ (7,254,739)
Cash flows from investing activities:
Advances on notes receivable (less payments) .................................. (3,501,622) (6,783,293)
Acquisition of intangibles..................................................... (17,553,149) (185,934)
Purchase of property, equipment and leasehold improvements..................... (2,730,742) (2,218,664)
Sale (purchase) of temporary investments....................................... 1,421,077 (1,417,906)
Other.......................................................................... 900,953 (173,412)
---------------- ---------------
Net cash used in investing activities............................................. (21,463,483) (10,779,209)
Cash flows from financing activities:
Net proceeds from issuance of debt............................................. 26,241,654 -
Principal payments on debt..................................................... (5,390,028) (23,885)
Proceeds from exercises of options and warrants................................ 90,643 524,603
---------------- ---------------
Net cash provided by financing activities......................................... 20,942,269 500,718
---------------- ---------------
Net decrease in cash and cash equivalents......................................... (12,340,202) (17,533,230)
Cash and cash equivalents at beginning of period.................................. 15,384,991 31,254,048
---------------- ---------------
Cash and cash equivalents at end of period........................................ $ 3,044,789 $ 13,720,818
---------------- ---------------
---------------- ---------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
5
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
NOTE 1. -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for
the six months ended June 30, 1999, are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999. This
information should be read in connection with the consolidated financial
statements and footnotes thereto incorporated by reference in the
Schlotzsky's, Inc. Annual Report on Form 10-K for the year ended December 31,
1998, as amended.
NOTE 2. - EARNINGS PER SHARE
Basic and diluted EPS computations for the three and six months ended
June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BASIC EPS
Net income ......................................... $ 1,622,947 $ 1,570,521 $ 3,026,957 $ 2,912,634
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common shares outstanding.......... 7,402,147 7,389,977 7,401,749 7,358,065
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic EPS........................................... $0.22 $0.21 $0.41 $0.40
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
DILUTED EPS
Net income ......................................... $ 1,622,947 $ 1,570,521 $ 3,026,957 $ 2,912,634
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common shares outstanding.......... 7,402,147 7,389,977 7,401,749 7,358,065
Assumed conversion of common shares issuable
under stock option plan and exercise of warrants.. 98,635 215,976 105,904 244,255
------------- ------------- ------------- -------------
Weighted average common shares outstanding
-assuming dilution................................ 7,500,782 7,605,953 7,507,653 7,602,320
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted EPS......................................... $0.22 $0.21 $0.40 $0.38
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Outstanding options that were not included in the diluted calculation because
their effect would be anti-dilutive total 612,125 and 535,000 for the three
months ended June 30, 1999 and June 30, 1998, respectively, and 613,125 and
535,000 for the six months ended June 30, 1999 and June 30, 1998,
respectively.
6
<PAGE>
NOTE 3. - SEGMENTS
The Company and its subsidiaries are principally engaged in franchising
quick service restaurants that feature made-to-order sandwiches with unique
sourdough buns, pizzas and salads. At June 30, 1999 the Schlotzsky's system
included Company owned and franchised stores in 38 states, the District of
Columbia and 14 foreign countries.
The Company identifies segments based on management responsibility within
the corporate structure. The Turnkey Development segment includes the
development of freestanding stores with high visibility and easy access. The
Restaurant Operations includes the operation of a limited number of
Company-owned restaurants for the purpose of product development, concept
refinement, prototype testing and training and to build brand awareness. The
Franchise Operations segment of the business encompasses both the Company's
restaurant concept and licensed private label products. The Company measures
segment profit as operating profit, which is defined as income before
interest and income taxes. Segment information and a reconciliation to
income, before interest and income taxes are as follows:
<TABLE>
<CAPTION>
TURNKEY RESTAURANT FRANCHISE
THREE MONTHS ENDED JUNE 30, 1999 DEVELOPMENT OPERATIONS OPERATIONS CONSOLIDATED
- -------------------------------------------------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 159,997 $ 3,838,564 $ 9,034,395 $ 13,032,956
Operating income (loss) (901,074) 187,014 3,136,722 2,422,662
Total assets $41,396,281 $26,544,299 $52,697,857 $120,638,437
<CAPTION>
TURNKEY RESTAURANT FRANCHISE
THREE MONTHS ENDED JUNE 30, 1998 DEVELOPMENT OPERATIONS OPERATIONS CONSOLIDATED
- -------------------------------------------------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 1,732,462 $ 1,884,651 $ 6,695,912 $ 10,313,025
Operating income (loss) 713,556 (179,379) 1,562,353 2,096,530
Total assets $31,367,811 $10,293,607 $37,095,058 $ 78,756,476
<CAPTION>
TURNKEY RESTAURANT FRANCHISE
SIX MONTHS ENDED JUNE 30, 1999 DEVELOPMENT OPERATIONS OPERATIONS CONSOLIDATED
- -------------------------------------------------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 830,045 $ 6,381,611 $16,383,381 $ 23,595,037
Operating income (loss) (1,379,564) 172,154 5,405,451 4,198,041
Total assets $41,396,281 $26,544,299 $52,697,857 $120,638,437
<CAPTION>
TURNKEY RESTAURANT FRANCHISE
SIX MONTHS ENDED JUNE 30, 1998 DEVELOPMENT OPERATIONS OPERATIONS CONSOLIDATED
- ------------------------------------------------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 2,857,479 $ 3,500,908 $12,408,930 $ 18,767,317
Operating income (loss) 1,400,237 (466,933) 2,805,068 3,738,372
Total assets $ 31,367,811 $10,293,607 $37,095,058 $ 78,756,476
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999, COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues increased 26.4% from $10,313,000 to
$13,033,000.
Royalties increased 17.8% from $4,720,000 to $5,560,000. This
increase was due to the opening of 81 restaurants during the period from July
1, 1998 to June 30, 1999. Also driving the increase was the growing influence
of larger freestanding units, particularly the prototype units, which are the
focus of the new unit development. Furthermore, average weekly sales
increased 9.2% and same store sales increased 2.8% during the second quarter
of 1999. The Company believes its average weekly sales and same store sales
were positively impacted by the launch of its first network television
advertising campaign and the introduction of "Deli Deals-TM-", in-store menu
board offerings of a sandwich or pizza, chips and a drink for one price.
Franchise fees decreased 49.2% from $380,000 to $193,000. This
decrease was principally a result of 13 fewer store openings during the
three-month period ended June 30, 1999. The fewer number of openings is
principally the result of the Company's increasing emphasis on superior site
selection for larger freestanding stores with higher visibility and on more
highly qualified franchisees.
Developer fees increased from $0 to $1,362,000. This increase was
attributable to the sale of limited development rights to two domestic
territories during the three months ended June 30, 1999. The rights sold
entitle the developers to 1.25% out of the 6.0% royalties payable to the
Company on sales from restaurants in those territories. In return, the
developers have certain franchisee support responsibilities in the
territories.
Restaurant sales increased 103.7% from $1,885,000 to $3,839,000.
This increase was principally attributable to the addition of seven more
Company-owned units being operated in this quarter than in the corresponding
quarter of the previous year.
Private label licensing fees (brand contributions), increased 59.2%
from $1,006,000 to $1,602,000. This increase was principally the result of
more favorable terms with certain major suppliers, as well as the increasing
volume of system-wide sales and greater franchisee participation in the
Company's purchasing programs. The Company expects additional products may be
added to its private label program and alternative retail channels of
distribution of its products may be pursued, resulting in the potential for
further increases in licensing fees.
Turnkey development revenue decreased 90.8% from $1,732,000 to $160,000.
This decrease was primarily attributable to fewer transactions in the current
period compared to the second quarter of 1998. The Company has indicated that
it intends to transition away from an emphasis on Turnkey transactional
revenue during 1999.
Other fees and revenues decreased 46.2% from $591,000 to $318,000,
primarily as a result of recognition of revenue from expired licensing
contracts that were recognized in the second quarter of 1998, but which did
not recur in 1999. Additionally, other fees in 1998 included a higher level
of revenue from operating assistance agreements with certain licensees.
8
<PAGE>
The following table reflects the growth of the franchise system for
the three months ended June 30, 1999 and 1998. The growth of the system
during 1998 and 1999 to date was principally responsible for the increased
revenue as discussed above. In 1999, restaurant closings in the system
increased principally as a result of greater emphasis on quality, service,
cleanliness and compliance audits instituted in connection with the Company's
initial network advertising campaign, and the permanent removal of
temporarily closed stores where the franchisee had not recently been actively
pursuing a new location.
<TABLE>
<CAPTION>
SYSTEM PERFORMANCE THREE MONTHS ENDED
-------------------------------------
JUNE 30, JUNE 30,
1999 1998
----------------- ------------------
<S> <C> <C>
Units Opened
Domestic
Freestanding 11 25
End Cap 3 2
Other 2 3
----------------- ------------------
Total Domestic Openings 16 30
International 2 1
----------------- ------------------
Total Openings 18 31
Units Closed (15) (7)
----------------- ------------------
Net Unit Growth 3 24
----------------- ------------------
----------------- ------------------
System-wide Sales (in thousands) $ 102,451 $ 86,737
Average Weekly Sales $ 10,814 $ 9,900
Increase in Average Weekly Sales 9.2% 13.1%
Stores in Operation 758 722
Increase in Same Store Sales 2.8% 3.9%
</TABLE>
COSTS AND EXPENSES. Royalty service costs decreased 3.4% from
$1,800,000 to $1,739,000. In addition, royalty service costs as a percentage
of royalties declined from 38.1% to 31.3%. These decreases reflected the
Company's reacquisition and buy-down of rights to a limited number of area
developer territories during 1999 and at the end of 1998. Area developers
receive approximately 42% or 21% of the royalties from stores in their
territories (depending on whether their share of royalties is 2.5% or 1.25%).
The Company expects developer service costs as a percentage of royalty
revenue to continue to decrease as the Company plans to buy-down the rights
and obligations of several more of its area developers and may re-acquire the
full development rights to a limited number of territories.
Franchise fee costs decreased 54.2% from $203,000 to $93,000,
principally as a result of 13 fewer store openings during the three-month
period ended June 30, 1999. The fewer number of openings is mainly the result
of the Company's increasing emphasis on superior site selection for larger
freestanding stores with higher visibility and on more highly qualified
franchisees.
Restaurant cost of sales, which consists of food, beverage and paper
costs, increased 87.4% from $601,000 to $1,126,000, but as a percentage of
restaurant sales decreased from 31.9% to 29.3%. Likewise, restaurant labor
costs increased 90.8% from $762,000 to $1,454,000, but as a percentage of
restaurant sales decreased from 40.4% to 37.9% compared to the same quarter
in 1998. Restaurant operating expenses increased 55.4% from $543,000 to
$844,000, but as a percentage of restaurant sales decreased from 28.8% to
22.0% for the three months ended June 30, 1999, as compared to the
corresponding period in 1998. The decreases in restaurant operations
expenses, as a percentage of restaurant sales during the current quarter of
1999 as compared to the prior period, were primarily attributable to lower
opening and preopening costs associated with fewer new store openings this
year.
Turnkey development costs increased 6.2% from $918,000 to $975,000
and as a percentage of Turnkey development revenue increased from 53.0% to
609.4%. This increase as a percentage of sales was primarily the result of
fewer revenue transactions in the current period compared to the second
quarter of 1998.
9
<PAGE>
General and administrative expenses grew 24.9% from $2,943,000 to
$3,676,000, but as a percentage of total revenues decreased from 28.5% to
28.2%. The percentage decrease was primarily the result of the lessening pace
of additions to the corporate staff since the prior period and the fact that
revenue was increasing at a faster pace than costs. General and
administrative costs in the second quarter of 1999 included approximately
$181,000 of nonrecurring costs associated with the termination of two area
developer contracts.
Depreciation and amortization increased 55.6% from $448,000 to
$703,000, and as a percentage of total revenues increased from 4.3% to 5.4%.
The increases were principally due to the amortization of area development
territories, goodwill and other intangibles acquired during 1998 and the six
months ended June 30, 1999. In addition, depreciation increased as a result
of the seven additional stores the Company was operating in this period as
compared to the same period in the prior year.
Interest income increased 55.6% from $462,000 to $719,000. This
increase was a result of a greater level of funds outstanding in the form of
Turnkey mortgages and interim construction financing under the Turnkey
Program and an increase in notes receivables related to the sale of limited
development rights.
Interest expense increased from $45,000 to $571,000. This increase was a
result of a greater level of debt outstanding during the current period. The
Company expects interest expense may continue to trend upward as additional
debt financing may be used to fund construction of Company-owned stores,
acquisition of additional Turnkey program properties and reacquisition of
certain area developer rights.
INCOME TAX EXPENSE. Income tax expense reflected a combined federal
and state effective tax rate of 36.9% for the three months ended June 30,
1999, which was slightly lower than the effective combined tax rate of 37.5%
for the comparable period in 1998. Based on projections of taxable income,
the Company anticipates that its effective combined rate for federal and
state taxes will be approximately 37.0% for 1999.
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues increased 25.7% from $18,767,000 to
$23,595,000.
Royalties increased 17.8% from $8,979,000 to $10,574,000. This
increase was due to the opening of 81 stores during the period from July 1,
1998 to June 30, 1999. Also driving the increase was the growing influence of
larger freestanding units, particularly the prototype units, which are the
focus of the new unit development. Furthermore, average weekly sales
increased 8.4% and same store sales increased 1.7% during the six months
ended June 30, 1999. Royalties were only slightly impacted by 45 closings
since the end of the prior period. Many of those stores were underperforming
or had been temporarily closed prior to the Company's determination to treat
them as permanently closed.
Franchise fees decreased 39.2% from $720,000 to $438,000. This
decrease was principally a result of 26 fewer store openings during the
six-month period ended June 30, 1999. The fewer number of openings is chiefly
the result of the Company's increasing emphasis on superior site selection
for larger freestanding stores with higher visibility and on more highly
qualified franchisees.
Developer fees increased from $0 to $1,954,000. The increase was
attributable to the sale of certain limited development rights to five
domestic territories during the six months ended June 30, 1999. The rights
sold entitle the developers to a 1.25% share of the sales from restaurants in
those territories. In return, the developers have certain franchisee support
responsibilities in those territories.
Restaurant sales increased 82.3% from $3,501,000 to $6,382,000. This
increase was principally attributable to the acquisition of five stores from
franchisees, the opening of two new corporate stores, and a 9.7% increase in
same store sales for stores that were open the entirety of both six month
periods. The increase in same store sales is mainly attributable to the
rollout of national advertising and to the introduction of "Deli Deals-TM-"
Private label licensing fees (brand contributions), increased 50.2%
from $1,866,000 to $2,803,000. The increase was mainly the result of the
increasing volume of system-wide sales which generated more purchases of
private label products, and greater franchisee participation in the Company's
purchasing programs.
10
<PAGE>
Turnkey development revenue decreased 70.9% from $2,857,000 to $830,000.
As the Company has emphasized higher quality sites and more qualified
franchisees, fewer transactions with lower margins have been completed during
the first six months in 1999. The Company remains committed to providing its
franchisees the opportunity for ownership of these sites, where practicable,
and has indicated that it intends to transition away from an emphasis on
Turnkey transactional revenue during 1999.
Other fees and revenues decreased 27.1% from $844,000 to $615,000,
primarily as a result of recognition of revenue from expired licensing
contracts that were recognized during the second quarter of 1998.
Additionally, other fees in 1998 included revenue from operating assistance
agreements with certain licensees that did not reoccur in 1999.
The following table reflects the growth of the franchise system for
the six months ended June 30, 1999 and 1998. The growth of the system during
1998 and 1999 to date was principally responsible for the increased revenue
as discussed above.
<TABLE>
<CAPTION>
SYSTEM PERFORMANCE SIX MONTHS ENDED
-------------------------------------
JUNE 30, JUNE 30,
1999 1998
----------------- ------------------
<S> <C> <C>
Units Opened
Domestic
Freestanding 26 44
End Cap 5 10
Other 2 4
----------------- ------------------
Total Domestic Openings 33 58
International 2 3
----------------- ------------------
Total Openings 35 61
Units Closed (27) (12)
----------------- ------------------
Net Unit Growth 8 49
----------------- ------------------
----------------- ------------------
System-wide Sales (in thousands) $194,679 $164,781
Average Weekly Sales $ 10,371 $ 9,568
Increase in Average Weekly Sales 8.4% 12.7%
Stores in Operation 758 722
Increase in Same Store Sales 1.7% 5.2%
</TABLE>
COSTS AND EXPENSES. Royalty service costs increased 3.2% from
$3,421,000 to $3,530,000. This increase was a result of the increase in
royalty revenue for the six months ended June 30, 1999, as compared to the
same period in the prior year. However, royalty service costs as a percentage
of royalties decreased from 38.1% to 33.4%. This decrease reflected the
reacquisition and buy-down of rights to a limited number of territories
during the period and at the end of 1998. Area developers typically receive
approximately 42% of the royalties from stores in their territories unless
the Company has bought down a portion of their development rights and
obligations, in which case they receive approximately 21% of the royalties.
Franchise fee costs decreased 41.1% from $375,000 to $221,000,
principally as a result of 26 fewer store openings during the six-month
period ended June 30, 1999. The fewer number of openings is chiefly the
result of the Company's increasing emphasis on superior site selection for
larger freestanding stores with higher visibility and on more highly
qualified franchisees.
Restaurant cost of sales, which consists of food, beverage and paper
costs, increased 67.0% from $1,135,000 to $1,895,000, but as a percentage of
restaurant sales decreased from 32.4% to 29.7%. Likewise, restaurant labor
costs increased 61.5% from $1,516,000 to $2,448,000, but as a percentage of
restaurant sales decreased from 43.3% to 38.4% compared to the same period in
1998. Restaurant operating expenses increased 41.0% from $1,043,000 to
$1,471,000, but as a percentage of restaurant sales decreased from 29.8% to
23.0% for the six months ended June 30, 1999, as compared to the
corresponding period in 1998. These percentage decreases in restaurant
operating expenses were primarily attributable to improved operating
efficiencies related to the Company-owned restaurants operated during the six
months ended June 30, 1999. In addition, the six month period ending June 30,
1998 included two new store openings which typically have certain
nonrecurring preopening and opening costs.
11
<PAGE>
Turnkey development costs increased 51.4% from $1,329,000 to
$2,012,000 and as a percentage of Turnkey development revenue increased from
46.5% to 242.4%. This increase was primarily the result of costs which had
been capitalized in 1998 being expensed in 1999 due to certain Turnkey sites
no longer being considered for development. Further contributing to these
increases was the addition of personnel to the real estate department during
1998.
General and administrative expenses grew 19.9% from $5,447,000 to
$6,533,000, but as a percentage of total revenues decreased from 29.0% to
27.7%. The percentage decrease was a result of revenues increasing at a
faster pace than expenses. In addition, the Company hired personnel at a
slower pace in the first six months of 1999 than it did in 1998, resulting in
reduced hiring costs. The Company believes the bulk of the infrastructure is
in place to service the franchise system.
Depreciation and amortization increased 68.8% from $763,000 to
$1,288,000, and as a percentage of total revenues increased from 4.1% to
5.5%. These increases were principally due to the amortization of area
development rights and goodwill acquired in 1999, and depreciation related to
the additional Company-owned restaurants.
Interest income increased 44.3% from $1,028,000 to $1,483,000. This
increase was a result of a greater level of funds outstanding in the form of
Turnkey mortgages and interim construction financing under the Turnkey
Program and an increase in notes receivables related to the sale of limited
development rights.
Interest expense increased from $106,000 to $877,000 due to the greater
level of debt outstanding during the current period. The Company expects
interest expense may continue to trend upward as additional debt financing
may be used to fund construction of Company-owned stores, acquisition of
additional Turnkey program properties and reacquisition of certain area
developer rights.
INCOME TAX EXPENSE. Income tax expense reflected a combined federal
and state effective tax rate of 37.0% for the six months ended June 30, 1999,
which was slightly lower than the effective combined tax rate of 37.5% for
the comparable period in 1998. Based on projections of taxable income, the
Company anticipates that its effective combined rate for federal and state
taxes will be approximately 37.0% for 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $11,819,000 for the first six
months of 1999. Accounts payable and accrued liabilities decreased
$7,810,000, primarily due to the payment of amounts outstanding at December
31, 1998. The majority of the amounts paid were related to properties under
development in the Turnkey Program. Net cash of $21,463,000 was used in
investing activities, primarily consisting of the purchases and development
of Company-owned restaurants and the acquisition of certain development
rights. The Company used approximately $2,731,000 to purchase and develop
seven Company-owned restaurants. In addition, the Company used approximately
$17,553,000 to buy-down the rights of several of its area developers and to
re-acquire the rights to a limited number of territories, including the
Austin, Texas territory.
During the first six months of 1999, financing activities provided net
cash of $20,942,000. The financing activities consisted primarily of the
issuance of short-term debt used for the acquisition of certain development
rights and Company-owned stores.
At June 30, 1999, the Company had approximately $35.5 million of debt
outstanding. These notes bear interest at rates ranging from the lender's
prime interest rate to 10.6% and all mature by the end of 2001. During the
first six months of 1999, the Company borrowed $15,000,000 under a new line
of credit to fund the buy-down of the rights of several of its area
developers and to re-acquire the rights to a limited number of territories.
In addition, the Company guarantees certain real estate mortgages and leases,
equipment leases and other obligations of franchisees. At June 30, 1999,
contingent liabilities totaled approximately $33,401,000.
12
<PAGE>
The Company is subject to a number of covenants under its various debt
instruments including limitations on additional borrowings, capital
expenditures and contingent liabilities, and requirements to maintain certain
financial ratios, working capital, and net worth. The bank credit facilities
are secured by a first priority perfected security interest in certain assets
of the Company. While the Company is currently in compliance with all
financial covenants under these facilities, the term of one facility is
scheduled to expire on October 1, 1999, and the financial covenants of the
other facility become stricter effective September 30, 1999. The Company
expects to either renegotiate the terms of its existing agreements into
long-term arrangements, or to seek alternative long-term financing from other
sources. There can be no assurance, however, that the Company will be able to
effect either of these strategies on satisfactory terms, if at all. Failure
to renegotiate the terms of the existing agreements could have material
adverse consequences to the Company.
The Company continues to refine its Turnkey Program and expects that it
will have 50 to 100 sites under contract or at various stages of development
at any given time. The Company has used the net proceeds from its public
offerings and the proceeds from sites sold and contracts assigned to finance
the activity of the Turnkey Program. With the anticipated activity in the
Turnkey Program, the capital required to finance the Turnkey Program will be
significant. The tables below provide a summary of the Turnkey Program
activity for the six months ended June 30, 1999 and 1998.
Turnkey Program revenue consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------
JUNE 30, JUNE 30,
1999 1998
----------------- ---------------
<S> <C> <C>
Sales to investors and franchisees..................... $ 533,008 $ 8,880,614
Development and construction management fees........... 20,099 130,000
----------------- ---------------
Gross Turnkey Program revenue..................... 553,107 9,010,614
Turnkey Program project costs.......................... (20,000) (6,260,683)
----------------- ---------------
Net revenue from Turnkey Program projects......... 533,107 2,749,931
Rental income.......................................... 296,938 43,600
Interim construction interest.......................... - 88,217
Deferred revenue recognized............................ - 550,396
Revenue deferred....................................... - (574,665)
----------------- ---------------
Total Turnkey Program revenue..................... $ 830,045 $ 2,857,479
----------------- ---------------
----------------- ---------------
</TABLE>
The following table reflects system performance of the Turnkey Program for
the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
NUMBER OF UNITS
--------------------------------
JUNE 30, JUNE 30,
1999 1998
--------------- ---------------
<S> <C> <C> <C>
Sites in process at beginning of period................ 86 78
Sites beginning development during the period *........ (5) 28
Sites inventoried as Company-owned stores.............. (2) -
Sites sold - revenue recognized........................ (4) (20)
Sites sold - revenue deferred.......................... - (6)
Other.................................................. (1) -
--------------- ---------------
Sites in process at end of period...................... 74 80
--------------- ---------------
--------------- ---------------
INVESTED AT
JUNE 30, 1999
-------------------
Sites under development or to be sold.................. 9 14 $ 8,216,000
Predevelopment Site (prequalification) ................ 65 66 1,851,000
--------------- --------------- -------------------
74 80 $ 10,067,000
--------------- --------------- -------------------
--------------- --------------- -------------------
</TABLE>
* Net of deletions for sites removed from consideration for development.
The Company has a line of credit from a financial institution which may
be used to finance Turnkey Program capital requirements. In December 1998,
the line of credit was increased to allow the Company to draw up to
$15,000,000, bears interest at the bank's prime lending rate and expires
December 2001. As of June 30, 1999, the Company had drawn approximately
$13,563,000 on this line of credit and had allowed certain area developers
and franchisees to borrow $1,430,000 under this credit facility.
13
<PAGE>
The Company believes that cash flow from operations, together with the
proceeds of the Turnkey Program, collections from notes receivable and
borrowings under existing credit facilities described above, will be
sufficient to meet the Company's anticipated operating cash needs for the
foreseeable future. Since the net proceeds from the Turnkey Program, credit
facilities, and cash flow from operations may not be sufficient to finance
both continuing investment in Company-owned stores and Turnkey Program
properties as well as the buydowns of percentages of royalties of certain
area developers, the Company intends to seek additional funds for this
purpose from future debt financings or additional offerings of equity
securities, although there can be no assurance of the availability of such
funds on acceptable terms in the future.
YEAR 2000 COMPLIANCE
The year 2000 issue is a result of many computer programs being written
using two digits, e.g. "99", to define a year. Date-sensitive software may
recognize the year "00" as the year 1900 rather than the year 2000. This
would result in errors and miscalculations or even system failure causing
disruptions in business activities and transactions.
The Company's computer software programs utilize four digits to define
the applicable calendar year and therefore the Company believes that it has
no material internal risk concerning the Year 2000 issue. The Company has
received responses from many of its major restaurant product and equipment
suppliers indicating that they and the products they sell to the Company's
restaurant system also have no material internal risk from the Year 2000
issue. To date, none of the Company's major suppliers have indicated that
they anticipate material internal risks. The Company is continuing a process
of in-depth inquiry concerning the readiness of its major suppliers and those
of the restaurant system. The Company will assess and, where practicable,
attempt to mitigate its risks with respect to the failure of these entities
to be Year 2000 compliant. The Company plans to continue to educate its
franchise system during 1999 to prepare them to anticipate Year 2000 issues
which could affect them locally. The Company does not anticipate that its
costs associated with monitoring readiness and mitigating risks concerning
the Year 2000 issue will be material. However, even if favorable responses
are received, there can be no assurance that third parties will be Year 2000
compliant. The impact on the Company's operations, if any, from the inability
of any of its suppliers and franchisees to become Year 2000 compliant is not
reasonably estimable (except that if there is a national or regional crisis
in the financial, transportation or utility infrastructure, it would likely
adversely affect most commercial enterprises, including the Company.)
FORWARD LOOKING STATEMENTS
This report contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, that are not historical
facts. Such statements may include, but are not limited to, projections of
revenues, income and capital expenditures, plans for future operations,
financing needs or plans (including plans relating to Turnkey Program real
estate transactions, possible debt financings and transactions with area
developers), and plans relating to products or services of the Company, as
well as assumptions relating to the foregoing. These statements involve
management assumptions and are subject to risks and uncertainties such as
changes in interest rates, availability of favorable financing for the
Company or its franchisees, satisfactory completion of transactions with
franchisees and area developers, intense competition, future restaurant
openings and changes in development plans or strategies, factors associated
with Year 2000 compliance by third parties, along with factors set forth in
the Company's Annual Report on Form 10-K/A in "Business," pages 1-15. The
Company undertakes no obligation to update forward looking statements that
may be contained in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in short-term interest rates on loans from financial
institutions could materially affect the Company's earnings because the
underlying obligations are either variable, or fixed for such a short period
of time as to effectively become variable.
At June 30, 1999 a hypothetical 100 basis point increase in interest
rates would result in a reduction of approximately $71,000 in quarterly
pre-tax earnings. The estimated reduction is based upon the increased
interest expense of our variable rate debt and assumes no change in the
volume or composition of debt at June 30, 1999. The fair values of the
Company's bank loans are not significantly affected by changes in market
interest rates.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On August 5, 1999, the purported class action lawsuit filed against the
Company alleging securities fraud arising out of circumstances surrounding
the reissuance of its 1997 earnings release was dismissed with prejudice. A
consolidated amended complaint had been filed on August 26, 1998 by the Lone
Star Ladies Investment Club, et al. in the Federal District Court for the
Western District of Texas against the Company and four of its officers and
directors (Monica Gill, Executive Vice President and Chief Financial Officer;
John M. Rosillo, a former director; Jeffrey J. Wooley, Senior Vice President;
and John C. Wooley, President and Chairman of the Board of Directors).
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Shareholders of the Company was held on May 28,
1999. At the meeting, the following items were voted on:
1) Election of directors, whose terms expired at the meeting.
<TABLE>
<CAPTION>
FOR WITHHELD
------------------- -------------------
<S> <C> <C>
Raymond A. Rodriguez 5,772,292 42,205
Jeffrey J. Wooley 5,776,183 38,314
</TABLE>
The following directors' terms of office were not expired and continued after
the meeting:
John L Hill, Jr.
Azie Taylor Morton
Floor Mouthaan
John C. Wooley
2) Proposal to ratify and approve the Board's selection of Grant Thornton, LLP
to serve as the Company's auditors for the 1999 fiscal year.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------------------------------- -------------------------------- ---------------------------------
<S> <C> <C>
5,785,451 20,364 8,682
</TABLE>
ITEM 5. OTHER INFORMATION
None
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits:
<TABLE>
<CAPTION>
Exhibit
No.
-------
<S> <C>
10.54 Credit Agreement with Texas Capital Bank, N.A.
27 Financial Data Schedule.
</TABLE>
b. Current Reports on Form 8-K:
None
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHLOTZSKY'S, INC.
By: /s/ John C. Wooley
-------------------------------------
John C. Wooley
President and
Chief Executive Officer
By: /s/ Monica Gill
-------------------------------------
Monica Gill
Executive Vice President and
Chief Financial Officer
Austin, Texas
August 16, 1999
17
<PAGE>
_______________________________________________________________________________
CREDIT AGREEMENT
BETWEEN
SCHLOTZSKY'S, INC.
BORROWER,
AND
TEXAS CAPITAL BANK, NATIONAL ASSOCIATION
LENDER
$15,000,000.00 TERM LOAN
DATED AS OF
APRIL 9, 1999
_______________________________________________________________________________
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is entered into as of the 9th day of April, 1999,
between SCHLOTZSKY'S, INC., a Texas corporation ("BORROWER"), and TEXAS CAPITAL
BANK, NATIONAL ASSOCIATION, a banking association ("LENDER"). In consideration
of the mutual covenants contained herein, Borrower and Lender agree as follows:
SECTION 1. CERTAIN DEFINITIONS AND TERMS.
As used herein, the following terms have the meanings indicated:
AFFILIATE means any Person who (a) would be an "affiliate" of any Company
within the meaning of the regulations promulgated pursuant to the Securities Act
of 1933, as such regulations and act are amended and in effect on the date in
question, if such Person were subject to such act and regulations, or (b) owns
any legal or beneficial interest in any Company, is a director or officer of any
Company, or is a relative of any of the Persons described in this clause (b).
AGREEMENT means this Credit Agreement, including the Schedules and
Exhibits hereto, as the same may be renewed, extended, amended, supplemented, or
modified from time to time.
BUSINESS DAY means every day on which Lender is open for business.
CLOSING DATE means the date of the initial advance hereunder.
CODE means the Internal Revenue Code of 1986, as amended, and all
regulations promulgated and rulings issued thereunder.
COMPANY means Borrower or any Affiliate and Companies mean Borrower and
any Affiliate.
CURRENT FINANCIALS mean the most recent consolidated Financial Statements
of Borrower submitted to Lender prior to the Closing Date.
DEBT of any Person includes all obligations, contingent or otherwise,
which in accordance with GAAP should be classified upon such Person's balance
sheet as liabilities, but in any event including liabilities secured by any Lien
existing on property owned or acquired by such Person or Subsidiary thereof
(whether or not the liability secured thereby shall have been assumed),
obligations which have been or under GAAP should be capitalized for financial
reporting purposes, and all guaranties, endorsements, and other contingent
obligations with respect to Debt of others, including, but not limited to, any
obligations to acquire any such Debt, to purchase, sell, or furnish property or
services primarily for the purpose of enabling such other Person to make payment
of any of such Debt, or to otherwise assure the owner of any of such Debt
against loss with respect thereto.
DEBTOR RELIEF LAWS mean the Bankruptcy Code of the United States of
America and all other applicable liquidation, conservatorship, bankruptcy,
moratorium, rearrangement, receivership, insolvency, reorganization, fraudulent
transfer or conveyance laws, suspension of payments, or similar Laws from time
to time in effect affecting the Rights of creditors generally.
DEFAULT has the meaning set forth in Section 9.
ENVIRONMENTAL LAWS mean any Law pertaining to air emissions, water
discharge, noise emissions, solid or liquid waste disposal, hazardous wastes or
materials, industrial hygiene, or other environmental, health or safety matters
CREDIT AGREEMENT - Page 2
<PAGE>
or conditions on, under or about real property or any portion thereof, and
similar laws of any Tribunal having jurisdiction over real property as such Laws
may be amended or supplemented from time to time, and regulations promulgated
and rulings issued pursuant to such Laws.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations promulgated and rulings issued thereunder.
ERISA AFFILIATE means any Subsidiary or trade or business (whether or not
incorporated) which is a member of a group of which any Company is a member and
which is under common control with any Company within the meaning of Section 414
of the Code.
EXHIBIT means an exhibit attached hereto unless otherwise specified.
FINANCIAL REPORT CERTIFICATE means a certificate in a form reasonably
acceptable to Lender containing such certifications, statements, calculations,
explanations, and conclusions as Lender may reasonably request concerning
compliance with the Loan Papers.
FINANCIAL STATEMENTS mean balance sheets, profit and loss statements,
statements of cash flows, and schedules of sources and applications of funds
prepared in comparative form with respect to the corresponding period of the
preceding fiscal year and prepared in accordance with GAAP.
GAAP means all applicable generally accepted accounting principles of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and the Financial Accounting Standards Board which are applicable as
of the date of the Current Financials.
GUARANTORS mean any Person that has guaranteed payment of the Obligation.
HAZARDOUS MATERIALS mean any hazardous, toxic or dangerous waste,
substance, or material defined as such in or for purposes of any Environmental
Law, or any other similar Law.
HIGHEST LAWFUL RATE means the maximum rate or amount of interest which
Lender is allowed to contract for, charge, take, reserve, or receive under
applicable Law.
INDEMNIFIED PARTIES shall have the meaning set forth in Section 8.10.
LAW means all applicable statutes, laws, ordinances, regulations, orders,
writs, injunctions, or decrees of any Tribunal.
LIEN means any lien, mortgage, security interest, pledge, assignment,
charge, title retention agreement, or encumbrance of any kind, and any other
Right or arrangement with any creditor to have his claim satisfied out of any
property or assets, or the proceeds therefrom, prior to the general creditors of
the owner thereof.
LITIGATION means any proceeding, claim, lawsuit, or investigation
conducted or threatened by or before any Tribunal.
LOAN PAPERS mean (a) this Agreement, (b) any and all notes, mortgages,
deeds of trust, security agreements, pledge agreements, financing statements,
guaranties, intercreditor and subordination agreements, and other agreements,
documents, and instruments ever delivered pursuant to this Agreement, and
(c) all future renewals, extensions, or restatements of, or amendments,
modifications, or supplements to, all or any part of the foregoing.
MATERIAL ADVERSE EFFECT means any set of circumstances or events which
would reasonably be expected to (a) have any material adverse effect upon the
validity or enforceability of any Loan Paper, (b) be material and adverse to the
financial condition or business operations of any Company, as represented to
Lender in the Current Financials,
CREDIT AGREEMENT - Page 3
<PAGE>
or to the prospects of any Company, (c) impair any Company's ability to
fulfill its obligations under the terms and conditions of the Loan Papers, or
(d) cause a Default or a Potential Default.
MORTGAGE means the Mortgage, Deed of Trust, Trust Deed or Deed to Secure
Debt, if any, securing the payment of the Note and the payment and performance
of all obligations specified in the Mortgage and this Agreement, and evidencing
a valid and enforceable Lien and direct assignment of the Property.
MULTI EMPLOYER PLAN means a Multi employer plan as defined in Sections
3(37) or 4001(a)(3) of ERISA or Section 414 of the Code to which any Company or
any ERISA Affiliate is making, or has made, or is accruing, or has accrued, an
obligation to make contributions.
NET WORTH means as of any date, the total shareholders equity (including
capital stock, additional paid-in capital and retained earnings afer deducting
treasury stock) which would appear on a balance sheet of Borrower prepared as of
such date in accordance with GAAP.
OBLIGATION means all present and future indebtedness, obligations, and
liabilities, and all renewals, extensions, and modifications thereof, now or
hereafter owed to Lender by any Company, arising from, by virtue of, or pursuant
to any Loan Paper, together with all interest accruing thereon and costs,
expenses, and attorneys' fees incurred in the enforcement or collection thereof.
PERMITTED LIENS mean:
(a) Pledges or deposits made to secure payment of worker's
compensation, or to participate in any fund in connection with worker's
compensation, unemployment insurance, pensions or other social security
programs.
(b) Encumbrances consisting of zoning restrictions, easements, or
other restrictions on the use of real property, none of which materially impair
the use of such property by the Person in question in the operation of its
business, and none of which is violated by existing or proposed structures or
land use.
(c) The following to the extent no Lien has been filed in any
jurisdiction or agreed to: Liens for Taxes not yet due and payable; mechanic's
Liens and materialman's Liens for services or materials for which payment is not
yet due and payable and which, to the extent the same encumbers any of the
collateral, are subordinate to Liens in favor of Lender.
(d) The following so long as the validity or amount thereof is being
contested in good faith and by appropriate and lawful proceedings diligently
conducted, reserve or other appropriate provision (if any) required by GAAP
shall have been made, levy and execution thereon have been stayed and continue
to be stayed, and thereof covering any collateral must be subordinate to all
Liens in favor of Lender, and they do not in the aggregate materially detract
from the value of the property of the Person in question, or materially impair
the use thereof in the operation of its business: Claims and Liens for Taxes
due and payable; claims and Liens upon, defects of title to, real or personal
property (other than any of the collateral), including any attachment of
personal or real property or other legal process prior to adjudication of a
dispute on the merits; claims and Liens of mechanics, materialmen, warehousemen,
carriers, landlords, or other like Liens; and adverse judgments on appeal.
(e) Liens in favor of Wells Fargo Bank (Texas), National Association
pursuant to the Credit Agreement dated as of June 27, 1997 (as amended) existing
as of December 28, 1998.
(f) Purchase money security interests incurred in the ordinary course
of business pursuant to Section 8.13 hereof.
PENSION PLAN means an employee pension benefit plan as defined in Section
3(2) of ERISA in which any personnel of any Company or of an ERISA Affiliate
participate, excluding any Multi employer Plan.
PERSON means any individual, entity, or Tribunal.
CREDIT AGREEMENT - Page 4
<PAGE>
POTENTIAL DEFAULT means the occurrence of any event which, with notice or
lapse of time or both, would become a Default.
PROPERTY means the real property, if any, described in Exhibit "A"
attached hereto and incorporated herein by reference, together with any and all
improvements thereon and all other property constituting the "Mortgaged
Property," as described in the Mortgage.
RIGHTS means rights, remedies, powers, privileges, and benefits.
SCHEDULE means a schedule attached hereto unless specified otherwise.
SECTION means a section or subsection of this Agreement unless specified
otherwise.
SUBORDINATED DEBT means any Debt of Borrower which expressly contains in
the instruments evidencing such Debt or in the indenture or other similar
instrument under which such Debt is issued (which indenture or other similar
instrument shall be binding on all holders of such Debt) subordination
provisions substantially to the effect that the holder agrees that the Debt
evidenced by such instrument, and any renewals or extensions thereof, shall at
all times and in all respects to be subordinate and junior in right of payment
to the Obligation.
SUBSIDIARY OF A PERSON means any entity of any Person of which an
aggregate of fifty percent (50%) or more (in number of votes) of the securities
having ordinary voting power for the election of directors (or individuals
performing similar functions) is owned of record or beneficially, directly or
indirectly, by such Person.
TANGIBLE NET WORTH means as of any date, the total shareholders equity
(including capital stock, additional paid-in capital and retained earnings afer
deducting treasury stock) which would appear on a balance sheet of Borrower
prepared as of such date in accordance with GAAP, less Intangible Assets (as
herein defined) plus Subordinated Debt. For purposes of any such computation of
Tangible Net Worth, "INTANGIBLE ASSETS" mean (a) goodwill (whether representing
the excess of cost over book value of assets acquired or otherwise), (b)
patents, trademarks, trade names, copyrights, franchises and deferred charges,
and (c) all other similar assets which would be classified as intangible assets
under GAAP.
TAXES mean all taxes, assessments, fees, levies, imposts, duties,
deductions, withholdings, or other charges of any nature whatsoever from time to
time or at any time imposed by any Law or Tribunal.
TRIBUNAL means any (a) local, state, or federal judicial, executive, or
legislative instrumentality, and (b) private arbitration board or panel.
UCC means the Uniform Commercial Code as enacted in the State of Texas or
other applicable jurisdiction, as amended.
WORKING CAPITAL means total current assets less total current
liabilities.
SECTION 2. MISCELLANEOUS.
2.1 CHANGES IN GAAP. All accounting and financial terms used in any
of the Loan Papers and the compliance with each covenant contained in the Loan
Papers which relates to financial matters shall be determined in accordance with
GAAP, except to the extent that a deviation therefrom is expressly stated in
such Loan Papers. Should a change in GAAP require a change in any method of
accounting or should any voluntary change in the accounting methods be permitted
pursuant to any provision herein, then such change shall not result in a Default
if, at the time of such change, such Default had not occurred and was not then
continuing, based upon the former methods of accounting used by or on behalf of
Borrower; provided that, after any such change in accounting methods, the
Financial Statements required to be delivered to Lender pursuant to the terms
hereof shall be prepared in compliance with such new method
CREDIT AGREEMENT - Page 5
<PAGE>
or methods of accounting but accompanied by such information, in form and
detail satisfactory to Lender, that will allow Lender to readily determine
the effect of such changes in accounting methods on such Financial
Statements, and, for the purpose of determining whether a Default has
occurred, Lender shall look solely to such Financial Statements as adjusted
to reflect compliance with such former method or methods of accounting.
2.2 NUMBER AND GENDER OF WORDS. Whenever in any Loan Paper the
singular number is used, the same shall include the plural where appropriate,
and vice versa; and words of any gender in any Loan Paper shall include each
other gender where appropriate. The words "herein," "hereof," and "hereunder,"
and other words of similar import refer to the relevant Loan Paper as a whole
and not to any particular part or subdivision thereof.
2.3 HEADINGS. The headings, captions and arrangements used in any of
the Loan Papers are, unless specified otherwise, for convenience only and shall
not be deemed to limit, amplify or modify the terms of the Loan Papers, nor
affect the meaning thereof.
2.4 EXHIBITS. If any Exhibit, which is to be executed and delivered,
contains blanks, the same shall be completed correctly and in accordance with
the terms and provisions contained and as contemplated herein prior to, at the
time of, or after the execution and delivery thereof.
2.5 COMMUNICATIONS. Unless specifically otherwise provided, whenever
any Loan Paper requires or permits any consent, approval, notice, request, or
demand from one party to another, such communication must be in writing (which
may be by telecopier) to be effective and shall be deemed to have been given on
the day actually delivered or telecopied, or, if mailed, on the third Business
Day after it is enclosed in an envelope, addressed to the party to be notified
at the address stated below, properly stamped, sealed, and deposited in the
appropriate official postal service. Until changed by notice pursuant hereto,
the address, and telecopy number for each party for purposes hereof is as
follows:
BORROWER: SCHLOTZSKY'S, INC.
203 Colorado Street
Austin, Texas 78701
Telecopy No.: (512) 236-3655
Attention: Chief Financial Officer
LENDER: TEXAS CAPITAL BANK, NATIONAL ASSOCIATION
5910 N. Central Expwy.
Suite 1000
Dallas, Texas 75206
Telecopy No.: (214) 890-5824
Attention: Timothy W. Monter
COPY TO: Jones, Allen & Fuquay, LLP
8828 Greenville Avenue
Dallas, Texas 75243
Telecopy No.: (214) 343-7455
Attention: Mr. Martin R. Wiarda
2.6 FORM AND NUMBER OF DOCUMENTS. Each agreement, document,
instrument or other writing to be furnished to Lender under any provision of
this Agreement must be in form and substance and in such number of counterparts
as may be satisfactory to Lender and its counsel.
2.7 EXCEPTIONS TO COVENANTS. Borrower shall not take any action or
fail to take any action which is permitted as an exception to any of the
covenants contained in any of the Loan Papers if such action or omission would
result in the breach of any other covenant contained in any of the Loan Papers.
CREDIT AGREEMENT - Page 6
<PAGE>
2.8 SURVIVAL. All covenants, agreements, undertakings,
representations and warranties made in any of the Loan Papers shall survive all
closings under the Loan Papers and, except as otherwise indicated, shall not be
affected by any investigation made by any party.
2.9 GOVERNING LAW. This Agreement and all other Loan Papers and
related documents shall be construed in accordance with and governed by the Laws
of Texas, except to the extent that federal Laws may apply.
2.10 VENUE; SERVICE OF PROCESS. BORROWER, FOR ITSELF, ITS SUCCESSORS
AND ASSIGNS, HEREBY (A) IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF
THE STATE AND FEDERAL COURTS OF THE STATE OF TEXAS AND AGREES AND CONSENTS THAT
SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING ARISING OUT OF OR
IN CONNECTION WITH THE LOAN PAPERS AND THE OBLIGATION BY SERVICE OF PROCESS AS
PROVIDED BY TEXAS LAW, (B) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED
BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE
OF ANY LITIGATION ARISING OUT OF OR IN CONNECTION WITH THE LOAN PAPERS AND THE
OBLIGATION BROUGHT IN DISTRICT COURTS OF DALLAS COUNTY, TEXAS, OR IN THE UNITED
STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, (C)
IRREVOCABLY WAIVES ANY CLAIMS THAT ANY LITIGATION BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM, (D) IRREVOCABLY CONSENTS TO THE SERVICE
OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH LITIGATION BY THE
MAILING OF COPIES THEREOF BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE
PREPAID, TO SUCH BORROWER AT ITS ADDRESS SET FORTH HEREIN, AND (E) IRREVOCABLY
AGREES THAT ANY LEGAL PROCEEDING AGAINST LENDER ARISING OUT OF OR IN CONNECTION
WITH THE LOAN PAPERS OR THE OBLIGATION SHALL BE BROUGHT IN THE DISTRICT COURTS
OF DALLAS COUNTY, TEXAS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN
DISTRICT OF TEXAS, DALLAS DIVISION. NOTHING HEREIN SHALL AFFECT THE RIGHT OF
LENDER TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST BORROWER IN
ANY JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED BY APPLICABLE LAW.
2.11 MAXIMUM INTEREST RATE. Regardless of any provision contained in
any of the Loan Papers, Lender shall never be entitled to contract for, charge,
take, reserve, receive, or apply, as interest on the Obligation, or any part
thereof, any amount in excess of the Highest Lawful Rate, and, in the event
Lender ever contracts for, charges, takes, reserves, receives, or applies as
interest any such excess, it shall be deemed a partial prepayment of principal
and treated hereunder as such and any remaining excess shall be refunded to
Borrower. In determining whether or not the interest paid or payable, under any
specific contingency, exceeds the Highest Lawful Rate, Borrower and Lender
shall, to the maximum extent permitted under applicable Law, (a) characterize
any nonprincipal payment as an expense, fee or premium rather than as interest,
(b) exclude voluntary prepayments and the effects thereof, and (c) "spread" the
total amount of interest throughout the entire contemplated term of the
Obligation; provided that, if the Obligation is paid and performed in full prior
to the end of the full contemplated term thereof, and if the interest received
for the actual period of existence thereof exceeds the Highest Lawful Rate,
Lender shall refund such excess, and, in such event, Lender shall not be subject
to any penalties provided by any Laws for contracting for, charging, taking,
reserving or receiving the interest in excess of the Highest Lawful Rate.
Pursuant to Section 346.004 of the Texas Finance Code, as amended, Borrower
agrees that such Chapter 346 (which regulates certain revolving credit loan
accounts and revolving triparty accounts) shall not govern or in any manner
apply to the Obligation.
2.12 SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable, such provision shall be fully severable, and
the remaining provisions of this Agreement shall remain in full force and effect
and shall not be affected thereby.
2.13 ENTIRETY AND AMENDMENTS. THIS AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This Agreement embodies the
entire agreement
CREDIT AGREEMENT - Page 7
<PAGE>
between the Borrower and Lender and supersedes all prior proposals,
agreements and understandings relating to the subject matter hereof. Borrower
certifies that it is relying on no representation, warranty, covenant or
agreement except for those set forth herein and the other Loan Papers of even
date herewith. This Agreement may be amended, or the provisions hereof
waived, only by an instrument in writing executed jointly by an authorized
officer of Borrower and Lender, and supplemented only by documents delivered
or to be delivered in accordance with the express terms hereof.
2.14 WAIVERS. No course of dealing nor any failure or delay by Lender
or its officers, directors, employees, agents, representatives, or attorneys
with respect to exercising any Right of Lender hereunder shall operate as a
waiver thereof. BORROWER AND EACH GUARANTOR HEREBY WAIVE ANY RIGHT OR CLAIM TO
CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING OUT OF OR RELATED TO THE LOAN OR THE
LOAN PAPERS OR THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREBY, OR THE ACTIONS
OF LENDER IN THE NEGOTIATION, ADMINISTRATION OR ENFORCEMENT HEREOF OR THEREOF.
2.15 MULTIPLE COUNTERPARTS. This Agreement may be executed in a number
of identical counterparts, each of which shall be deemed an original for all
purposes and all of which constitute, collectively, one Agreement, but, in
making proof of this Agreement, it shall not be necessary to produce or account
for more than one such counterpart.
2.16 PARTIES BOUND; ASSIGNMENTS. This Agreement is binding upon, and
inures to the benefit of, Lender, Borrower, and their respective successors and
assigns; provided that Borrower may not, without the prior written consent of
Lender, assign any Rights, duties, or obligations hereunder, and any purported
assignment in violation of the foregoing shall be void and ineffective.
SECTION 3. COMMITMENT TO LEND. Subject to and in reliance upon the terms,
conditions, representations and warranties contained in this Agreement, Lender
agrees to make a term loan (the "LOAN") to Borrower in an amount up to
$15,000,000.00.
SECTION 4. TERMS OF PAYMENT OF THE LOAN.
4.1 NOTE. The Loan and interest thereon shall be due and payable in
accordance with this Agreement and evidenced by a promissory note in the form
approved by Lender (the "NOTE").
4.2 PAYMENTS. Each payment or prepayment on the Note and payments of
fees must be paid at Lender's address set forth in Section 2.5 in funds which
are or will be available for immediate use by Lender at such address at or
before Noon (Dallas, Texas time) on the day due. If any action is required or
any payment is to be made on a day which is not a Business Day, then such action
or payment may be delayed until the succeeding Business Day. Any extension of
time shall be included in the computation of payments of interest.
4.3 DEFAULT RATE. At Lender's option and to the extent permitted by
Law, all past due amounts under the Note and all accrued but unpaid interest
thereon and fees shall bear interest from maturity (stated or by acceleration)
at the Highest Lawful Rate until paid, regardless of whether such payment is
made before or after entry of a judgment.
4.4 INTEREST AND FEE CALCULATIONS. All payments of interest and fees
shall be calculated on the basis of the actual number of days (including the
first day but excluding the last day) elapsed but computed as if each calendar
year consisted of 360 days.
4.5 ORDER OF APPLICATION. So long as no Default or Potential Default
has occurred, all prepayments of the principal of the Note shall be applied to
the unpaid installments of the principal of the Note in the inverse order of
maturity. At any time during which a Default or Potential Default has occurred
and is continuing, all payments and prepayments on the Note, including proceeds
from the exercise of any Rights under the Loan Papers or proceeds of any of the
collateral shall be applied to the Note in the order and manner as Lender deems
appropriate.
4.6 COMMITMENT FEE. On or prior to the date hereof, Borrower shall
have paid to Lender a non-refundable commitment fee in the sum of $37,500.00.
CREDIT AGREEMENT - Page 8
<PAGE>
SECTION 5. CONDITIONS.
5.1 ADVANCES ON LOAN. Lender will not be obligated to make the
initial advance of the Loan unless (a) it has received all of the items
described on Schedule 5.1 in form and substance reasonably satisfactory to
Lender; (b) at the time of the advance (i) the material representations and
warranties made in the Loan Papers are true and correct in all material
respects, and (ii) neither any change in the financial condition or prospect of
Borrower which could have a Material Adverse Effect nor any Default or Potential
Default shall have occurred and shall be continuing; (c) the making of the
advance is permitted by Law and shall not subject Lender to any materially
onerous condition; (d) all matters related to the advance are reasonably
satisfactory to Lender and its counsel, and, if requested by Lender, Borrower
shall have delivered to Lender evidence substantiating any of the matters
contained in this Agreement which are reasonably necessary to enable Borrower to
qualify for the advance; and (e) Lender shall have received such other
agreements, documents, instruments, information, approvals or opinions as Lender
may reasonably request.
5.2 WAIVER OF CONDITIONS. Lender may, at its election, make the Loan
or any advance of the Loan without all conditions being satisfied, but this
shall not be deemed a waiver of the requirement that each such condition
precedent be satisfied, unless Lender specifically waives each such item in
writing.
SECTION 6. ACCOUNT BALANCE AGREEMENT. At Borrower's request, Lender has agreed
to waive any required account balance.
SECTION 7. REPRESENTATIONS AND WARRANTIES. Borrower and Guarantors (by
execution and delivery of this Agreement and a guaranty of the Obligation)
represent and warrant to Lender as follows:
7.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower is a corporation duly
organized, validly existing, in good standing and is duly qualified to transact
business in the state of its incorporation and is in good standing as a foreign
corporation in each jurisdiction where the nature and extent of its assets,
business, properties, or operations require the same, except where failure to be
so duly qualified and in good standing would not, individually or collectively,
have a Material Adverse Effect.
7.2 BINDING OBLIGATIONS. The execution and delivery of the Loan
Papers have been duly authorized and approved by all necessary corporate action
and constitute the legal, valid, and binding obligations of Borrower enforceable
against it in accordance with their terms except as the enforceability thereof
may be limited by general principles of equity and applicable Debtor Relief
Laws.
7.3 COMPLIANCE WITH LAWS AND DOCUMENTS. Borrower is not, nor will the
execution, delivery and the performance of and compliance with the terms of the
Loan Papers cause Borrower to be, in violation of (a) any Laws, other than such
violations which would not, individually or collectively, cause a Material
Adverse Effect, or (b) its bylaws or articles or certificate of incorporation
(as amended). The execution, delivery, and the performance of and compliance
with the terms of the Loan Papers are not inconsistent with, and will not
conflict with or result in any breach of, or constitute a Default (excluding
Defaults which individually or collectively would not have a Material Adverse
Effect) under, or result in the creation or imposition of any Lien (except
pursuant to the Loan Papers) upon any of the property, assets, or revenues of
Borrower pursuant to the terms of, any indenture, mortgage, lease, deed of
trust, agreement, contract, instrument, or Law to which Borrower is a party or
by which Borrower or any of the property, assets, or revenues of Borrower is
bound or to which it is subject.
7.4 PRIOR NAMES. In the last five (5) years, Borrower has not
transacted business under any other corporate or trade name, been a party to any
merger, combination or consolidation, or, other than in the ordinary course of
business, acquired all or substantially all of the assets of any Person.
7.5 RELATIONSHIP WITH LENDER. No Person who may be deemed to have
"control" of Borrower is an "executive officer," "director," or "principal
shareholder" of Lender or any correspondent of Lender, as such quoted terms are
defined in Section 215.2 of Regulation O of the Board of Governors of the
Federal Reserve System, as amended.
CREDIT AGREEMENT - Page 9
<PAGE>
7.6 FINANCIAL STATEMENTS. The Current Financials were prepared in
accordance with GAAP and present fairly the consolidated financial condition and
the results of operations of Borrower as of, and for the portion of the fiscal
year ending on, the date thereof. All material liabilities (direct or indirect,
fixed or contingent) of Borrower as of the date of the Current Financials are
reflected therein or in the notes thereto. Between the date of the Current
Financials and the date hereof, there has been no material adverse change in the
financial condition of Borrower nor has Borrower incurred any material liability
(direct or indirect, fixed or contingent) which has not been disclosed in
writing to the Lender.
7.7 LABOR MATTERS. Hours worked by and payment made to employees of
Borrower have not in the past and do not now violate the Fair Labor Standards
Act or any other applicable Law dealing with such matters and none of the
inventory of Borrower has been produced by employees who are or were employed in
violation of the minimum wage or maximum hour provisions of the Fair Labor
Standards Act or any other applicable Law dealing with such matters.
7.8 LITIGATION. Borrower is not involved in, nor is Borrower aware of
the threat of involvement of Borrower in any Litigation, nor are there any
outstanding or unpaid judgments against Borrower, other than those which have
been previously disclosed, in writing, to Lender.
7.9 TAXES. All Tax returns and reports of Borrower required to be
filed have been filed, and all Taxes imposed upon Borrower which are due and
payable have been paid, other than Taxes being contested in good faith for which
the criteria for Permitted Liens have been satisfied.
7.10 GOVERNMENT REGULATION. Borrower is not, nor is any transaction
contemplated hereunder (a) subject to regulation under the Federal Power Act,
the Investment Company Act of 1940, the Interstate Commerce Act (as any of the
preceding acts have been amended), any regulations promulgated by the Office of
Foreign Assets Control as codified in Chapter V of 31 C.F.R., or any other Law
(other than Regulation G, T, U or X of the Board of Governors of the Federal
Reserve System) which regulates the incurrence of Debt, including, but not
limited to, Laws relating to common or contract carriers or the sale of
electricity, gas, steam, water, or other public utility services, or (b) a
"utility" as defined in Chapter 35 of the Texas Business and Commerce Code, as
amended.
7.11 EMPLOYEE BENEFIT PLANS. Borrower will not directly or indirectly,
sponsor or contribute to, or create or suffer to exist any contractual or other
obligation to contribute to, any Multi Employer Plan.
7.12 PURPOSE OF LOAN. The proceeds of the Loan will be used for
operating capital and to further the business interest of Borrower.
7.13 PROPERTIES; LIENS. Borrower has good and marketable title to all
of its property. Except for Permitted Liens, there is no Lien on any of
Borrower's property or income.
7.14 MATERIAL AGREEMENTS. Borrower is not, nor will the execution,
delivery and performance of and compliance with the terms of the Loan Papers
cause Borrower to be, in Default (nor has any Potential Default occurred) under
any material agreement, document or instrument other than such Defaults or
Potential Defaults which would not, individually or collectively, cause a
Material Adverse Effect.
7.15 NO CONSENTS. No order, consent, approval, license, permit, waiver,
exemption, authorization of or validation of, or filing, recording or
registration with (except as heretofore have been obtained or made), or
exemption by, any Person is required to authorize, or is required in connection
with, the execution, delivery, performance, legality, validity, binding effect,
or enforceability of the Loan Papers, other than Wells Fargo Bank (Texas)
National Association.
7.16 ENVIRONMENTAL LAWS; HAZARDOUS MATERIALS. Borrower is, and the
operations conducted on all of its real property are in compliance with all
Environmental Laws applicable to Borrower or its property, except for such
instances of noncompliance which would not, individually or collectively, cause
a Material Adverse Effect. Borrower
CREDIT AGREEMENT - Page 10
<PAGE>
has not received any summons, complaint, order, notification, citation, or
other similar notice that it or the operations conducted or the release,
disposal or storage of Hazardous Materials on any of its real property is not
in compliance with, or that any Tribunal is investigating its compliance
with, Environmental Laws, or that it has not obtained any required permit,
registration, license or other similar evidence of authorization. Borrower
is not aware of any noncompliance by it with any Environmental Laws or its
generation, handling, use, storage, or disposal of Hazardous Materials which
would cause a Material Adverse Effect.
7.17 GENERAL. There are no material facts or conditions relating to
the Loan Papers, any of the collateral, or the financial condition and business
of Borrower which would, individually or collectively, cause a Material Adverse
Effect and which have not been related in writing to Lender. All writings
heretofore or hereafter exhibited or delivered to Lender by or on behalf of
Borrower are and will be genuine and in all respects what they purport and
appear to be. No information furnished to Lender by or on behalf of Borrower
contains any material misstatement of fact or omits to state any fact necessary
to make the statements contained herein or therein not materially misleading.
7.18 YEAR 2000 COMPLIANCE. On or prior to September 30, 1999, Borrower
shall have taken all action necessary to ensure that the automated systems used
by Borrower that are material to its operations shall operate properly and
process data accurately, including dates before, as of and after December 31,
1999 (collectively, "YEAR 2000 COMPLIANCE"). Borrower agrees that upon the
reasonable request of Lender, Borrower will make its employees, consultants,
premises, records and documentation available to Lender with respect to
Borrower's Year 2000 compliance efforts.
SECTION 8. COVENANTS. Until the Obligation is paid and performed in full,
unless Borrower receives a prior written notice from Lender that it does not
object to a deviation, Borrower and Guarantors (by execution and delivery of
this Agreement and a guaranty of the Obligation), covenant and agree with Lender
as follows:
8.1 USE OF PROCEEDS. Borrower shall use the proceeds of the Loan only
as represented herein.
8.2 BOOKS AND RECORDS. Borrower shall keep, in accordance with GAAP,
proper and complete books, records, and accounts and permit Lender during
reasonable business hours and upon reasonable advance notice to inspect the same
and make and take away copies thereof.
8.3 ITEMS TO BE FURNISHED. Borrower and Guarantors shall cause the
following to be furnished to Lender:
(a) As soon as available, but no later than one hundred twenty
(120) days after the last day of each fiscal year of Borrower, Financial
Statements showing the financial condition and result of operations of Borrower
as of, and for the year ending on, such last day (including, without limitation,
balance sheets, income statements and cashflow statements), accompanied by (i)
the opinion, without material qualification, of independent certified public
accountants reasonably acceptable to Lender, based on an audit using generally
accepted auditing standards, that such Financial Statements were prepared in
accordance with GAAP and present fairly the financial condition and result of
operations of Borrower in all material respects, (ii) 10-K reports, and (iii) a
Financial Report Certificate with respect to such Financial Statements.
(b) As soon as available, but no later than forty-five (45)
days after the last day of each fiscal quarter (i) Financial Statements
showing the financial condition and result of operations of Borrower as of,
and for the period from the beginning of the current fiscal year to, such
last day, (ii) 10-Q reports, and (iii) a Financial Report Certificate with
respect to such Financial Statements.
(c) As soon as available, but no later than forty-five (45)
days after the last day of each fiscal quarter internally prepared reports
regarding accounts receivable, notes receivable, contingent liabilities and
general intangibles, each in a form reasonably acceptable to Lender.
(d) As soon as available, but no later than forty-five (45)
days after the last day of each fiscal quarter, a report of "Turnkey Projects in
Development" in a form reasonable acceptable to Lender.
CREDIT AGREEMENT - Page 11
<PAGE>
(e) As soon as available, but no later than thirty (30) days
after the date required to be submitted to the Securities Exchange Commission
(as the same may be extended), copies of all public filings of Borrower and any
Guarantor.
(f) Notice, promptly after Borrower knows or has reason to
know, of (i) a Default or Potential Default has occurred, specifying the nature
thereof and what action Borrower has taken, is taking, or proposes to take with
respect thereto, (ii) the existence and status of any Litigation with respect to
Borrower which could have a Material Adverse Effect and (iii) any change in any
material fact or circumstance represented or warranted in any Loan Paper.
(g) Promptly upon request therefor by Lender, such information
(not otherwise required to be furnished under the Loan Papers) respecting the
business affairs, assets, and liabilities of Borrower or any other Person
guaranteeing or providing collateral to secure all or any part of the Obligation
and such opinions, certifications, and documents, in addition to those mentioned
in this Agreement, as Lender may reasonably request.
8.4 INSPECTION. Borrower shall allow Lender to inspect and/or examine
any of its properties and to discuss any of its affairs, conditions, and
finances with its creditors, directors, officers or employees from time to time
during reasonable business hours and upon reasonable advance notice to Borrower.
Borrower shall be responsible for all costs and expenses associated with any
such inspections and/or examinations.
8.5 TAXES. Borrower shall promptly pay when due any and all Taxes due,
except Taxes for which the criteria for Permitted Liens have been satisfied, and
Borrower will not, directly or indirectly, use any portion of the proceeds of
the Loan to pay the wages of employees.
8.6 PAYMENT OF OBLIGATIONS. Borrower shall promptly pay (or renew and
extend) all of its Debt as it becomes due.
8.7 EXPENSES OF LENDER. Any provision to the contrary
notwithstanding, and whether or not the transactions contemplated by this
Agreement shall be consummated, each Company shall pay on demand all
out-of-pocket expenses (including without limitation, the reasonable fees and
expenses of counsel for Lender) in connection with the negotiation, preparation,
execution, filing, recording, re-filing, re-recording, modification, release,
supplement and waiver of the Loan Papers and the making, servicing and
collection of the Obligation. The obligations of Borrower under this section
and Sections 8.10 and 8.11 shall survive the termination of this Agreement
and/or the payment of the Note.
8.8 MAINTENANCE OF CORPORATE EXISTENCE, ASSETS, BUSINESS AND
INSURANCE. Each Company shall at all times: Maintain its corporate existence
and authority to transact business and good standing in its jurisdiction of
incorporation and all other jurisdictions where the failure to do so might have
a Material Adverse Effect; maintain all licenses, permits, and franchises
necessary for its businesses; keep all of its assets which are useful in and
necessary to its businesses in good working order and condition and make all
necessary repairs thereto and replacements thereof; and maintain insurance with
such insurers, in such amounts, and covering such risks, including but not
limited to, business interruption, fire, worker's compensation, and other
insurance as shall be reasonably satisfactory to Lender.
8.9 ENVIRONMENTAL LAWS. Each Company shall conduct its business so as
to comply in all material respects with all Environmental Laws.
8.10 GENERAL INDEMNIFICATION OF LENDER. Borrower agrees to indemnify,
defend and hold Lender, its directors, officers and employees (collectively, the
"Indemnified Parties") harmless from and against any and all loss, liability,
obligation, damage, penalty, judgment, claim, deficiency and expense (including
interest, penalties, reasonable attorneys' fees and amounts paid in settlement)
to which the Indemnified Parties may become subject to any third party, arising
out of this Agreement and the other Loan Papers (other than those which arise by
reason of the gross negligence or willful misconduct of Lender), BUT
SPECIFICALLY INCLUDING ANY LOSS, LIABILITY, OBLIGATION,
CREDIT AGREEMENT - Page 12
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DAMAGE, PENALTY, JUDGMENT, CLAIM, DEFICIENCY OR EXPENSE ARISING OUT OF THE
SOLE OR CONCURRENT NEGLIGENCE OF LENDER.
8.11 ENVIRONMENTAL INDEMNIFICATION OF LENDER. Borrower shall
indemnify, protect, and hold each Indemnified Party harmless from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, proceedings, costs, expenses (including without
limitation, all reasonable attorneys' fees and legal expenses whether or not
suit is brought), and disbursements of any kind or nature whatsoever which may
at any time be imposed on, incurred by, or asserted against such Indemnified
Parties, with respect to or as a direct or indirect result of the violation by
Borrower of any Environmental Law; or with respect to or as a direct or indirect
result of use, generation, manufacture, production, storage, release, threatened
release, discharge, disposal, or presence of a Hazardous Substance on, under,
from or about real property, including, without limitation, (i) all foreseeable
consequential damages of any such use, generation, manufacture, production,
storage, release, threatened release, discharge, disposal, or presence, or (ii)
the costs of any required or necessary environmental investigation or monitoring
any repair, cleanup or detoxification of its real property and the preparation
and implementation of any closure, remedial, or other plans. The provisions of
and undertakings and indemnification set forth in this Section 8.11 shall
survive (i) the satisfaction and payment of the Obligation and termination of
this Agreement, and (ii) the release of any Liens held by Lender on real
property or the extinguishment of such Liens by foreclosure or action in lieu
thereof.
8.12 DEBT. Borrower will not, directly or indirectly, create, incur,
or suffer to exist any direct, indirect, fixed, or contingent liability for any
Debt, other than (a) the Obligation, (b) Debt previously disclosed to Lender in
writing, if any, and renewals and extensions thereof provided that the principal
amount thereof is not increased in connection with any such renewal or
extension, (c) obligations to pay Taxes, (d) accounts payable in the ordinary
course of business, (e) salaries and wages, (f) accrued expenses, deferred
credits, and loss contingencies which are properly classified as liabilities or
indebtedness under GAAP and (g) contingent liabilities incurred in accordance
with Section 8.30 hereof.
8.13 LIENS. Borrower will not, directly or indirectly, (a) create,
incur, or suffer or permit to be created or incurred or to exist any Lien upon
any of its assets except (i) the Liens in favor of Lender, (ii) the Permitted
Liens, or (iii) purchase money security interests, incurred in the ordinary
course of business, or (b) enter into or permit to exist any arrangement or
agreement, other than the Loan Papers, which directly or indirectly prohibits
Borrower from creating or incurring any Lien on any of its assets other than in
favor of Wells Fargo Bank (Texas), National Association as contemplated hereby.
8.14 ACQUISITIONS, MERGERS, AND DISSOLUTIONS. Borrower will not,
directly or indirectly, (a) acquire all or any substantial portion of the assets
or stock of, or interest in, any Person other than area developers or
franchisees, (b) merge or consolidate with any Person other than Borrower or any
Subsidiary of Borrower, or (c) liquidate, wind up, or dissolve itself (or suffer
any liquidation or dissolution).
8.15 LOANS, ADVANCES, AND INVESTMENTS. Borrower will not, directly or
indirectly, make any loan, advance, or extension of credit, or capital
contribution to, make any investments in, or purchase or commit to purchase any
stock or other securities or evidences of contractual obligations of, or
interests in, any Person, other than (a) investments in obligations of the
United States of America and agencies thereof and obligations guaranteed by the
United States of America maturing within one (1) year from the date of
acquisition, (b) certificates of deposit issued by commercial banks organized
under the Laws of the United States of America or any state thereof insured by
the Federal Deposit Insurance Corporation, and (c) current trade and customer
accounts receivable which are for goods furnished or services rendered in the
ordinary course of business, and are payable in accordance with the customary
trade terms.
8.16 DISTRIBUTIONS. Borrower will not, directly or indirectly, (a)
retire, redeem, purchase, or otherwise acquire for value any stock (other than
repurchases of its common stock up to $1,500,000.00) or other equity securities
issued by Borrower except to the extent that any Person has on the date hereof,
the Right, whether or not presently exercisable, to put any such securities to
Borrower, or (b) declare, make, or pay any dividend on or with respect to such
securities.
CREDIT AGREEMENT - Page 13
<PAGE>
8.17 ISSUANCE OF SECURITIES. Borrower will not directly or indirectly,
issue, sell, or otherwise dispose of (a) any of its shares of capital stock or
other investment securities of any class, (b) any securities convertible into or
exchangeable for any such shares, or (c) any carrying Rights, warrants, options,
or other Rights to subscribe for or purchase any such shares except with respect
to stock options to employees.
8.18 TRANSACTIONS WITH AFFILIATES. Borrower will not, directly or
indirectly, enter into any transaction (including, but not limited to, the sale
or exchange of property or the rendering of service) with any of its Affiliates,
other than in the ordinary course of business of Borrower and upon fair and
reasonable terms no less favorable than such Affiliate could obtain or could
become entitled to in an arm's-length transaction with a Person which was not an
Affiliate.
8.19 SALE OF ASSETS. Borrower will not, directly or indirectly, sell,
lease, or otherwise dispose of all or any substantial part of its assets, other
than (a) sales of inventory or restaurants in the ordinary course of business,
(b) sales of equipment for a fair and adequate consideration, provided that if
any such equipment is sold, and a replacement is necessary for the proper
operation of the business of Borrower, Borrower will replace such equipment with
adequate equipment, and (c) the sale, discount or transfer of delinquent notes
and accounts receivable in the ordinary course of business for purposes of
collection.
8.20 HAZARDOUS MATERIALS. Borrower shall not permit the manufacture,
storage, transmission, presence, release, discharge, or disposal of any
Hazardous Materials over, upon, or under any of its real property except as
permitted by Law.
8.21 CHANGE IN OWNERSHIP OR MANAGEMENT. Without the prior written
consent of Lender, (a) Borrower will not make any material change in the
management of Borrower, and (b) Borrower will not permit a material change in
the ownership of Borrower from the present ownership.
8.22 COMPLIANCE WITH LAWS AND DOCUMENTS. Borrower will not directly or
indirectly, violate the provisions of any Laws, its articles or certificate of
incorporation or bylaws or any material agreements if such violation alone, or
when aggregated with all other such violations, would cause a Material Adverse
Effect.
8.23 NEW BUSINESSES. Borrower will not, directly or indirectly, engage
in any business other than the businesses in which it is presently engaged.
8.24 FISCAL YEAR AND ACCOUNTING METHODS. Borrower will not change its
fiscal year or method of accounting (other than immaterial changes in methods).
8.25 CAPITAL EXPENDITURES. Borrower will not, directly or indirectly,
make capital expenditures other than such expenditures which (a) are for or
related to assets or leaseholds used or useful in the normal business operations
of Borrower, and (b) do not, in the aggregate exceed $5,000,000.00 (including
expenditures incurred in developing company owned stores) during the term of
this Loan.
8.26 MINIMUM NET WORTH. Borrower will not permit its Net Worth to be
less than the aggregate of $70,000,000.00, plus (ii) seventy-five percent (75%)
of the net profit of Borrower for the immediately preceding fiscal quarter.
8.27 DEBT TO TANGIBLE NET WORTH. Borrower will not permit the ratio of
(i) total liabilities to (ii) Tangible Net Worth to be greater than 0.9 to 1.0.
8.28 MINIMUM WORKING CAPITAL. Borrower will not permit its Working
Capital to be less than $20,000,000.00.
CREDIT AGREEMENT - Page 14
<PAGE>
8.29 FUNDED DEBT TO EARNINGS BEFORE INTEREST AND TAXES. Borrower shall
not permit the ratio determined on the basis of the most recent four (4) fiscal
quarters of (i) Funded Debt (as hereinafter defined) to (ii) EBITDA (as
hereinafter defined) to exceed 2.0 to 1.0. "FUNDED DEBT" means total funded
Debt of Borrower not subordinated to the indebtedness of Borrower to Lender,
"EBITDA" means the net income of Borrower before taxes, plus interest expense
(net of capitalized interest expense), depreciation expense and amortization
expense. Through and including the fiscal quarter ending March 31, 2000, EBITDA
shall be adjusted with respect to royalty payments made to area developers for
rights acquired, by adding to EBITDA the annualized royalty payments made to
such area developers for the most recent quarter prior to acquisition of the
rights.
8.30 LIMITATION ON CONTINGENT LIABILITIES. From the Closing Date,
through and including, June 30, 1999, Borrower shall not permit its contingent
liabilities (as determined in accordance with GAAP) to exceed $40,000,000.00.
Thereafter, Borrower shall not permit its contingent liabilities (as determined
in accordance with GAAP) to exceed $35,000,000.00.
8.31 DIVIDENDS, DISTRIBUTIONS AND PAYMENTS. No dividends (other than a
dividend of Borrower's stock issued pro rata to all shareholders), distributions
or payments on any stock or payment will be made to any shareholders of Borrower
without the prior written consent of Lender.
SECTION 9. DEFAULT. The term "Default" means the occurrence of any one or
more of the following events:
9.1 PAYMENT OF OBLIGATION. The failure or refusal of Borrower to pay
any portion of the Obligation, as the same become due in accordance with the
terms of the Loan Papers.
9.2 CERTAIN COVENANTS. The failure or refusal of Borrower to
punctually and properly perform, observe, and comply with any covenant,
agreement or condition contained in Section 8.1 through 8.6 and 8.10 through
8.31 inclusive and such failure or refusal continues for a period of ten (10)
days after Borrower has notice thereof.
9.3 OTHER COVENANTS. The failure or refusal of Borrower or any other
Person guaranteeing or providing collateral to secure all or any part of the
Obligation, as applicable, to punctually and properly perform, observe, and
comply with any covenant, agreement or condition contained in any of the Loan
Papers, other than the covenant to pay the Obligation and the covenants listed
in Section 9.2 preceding, and such failure or refusal continues for a period of
ten (10) days after Borrower or such other Person has notice thereof.
9.4 VOLUNTARY DEBTOR RELIEF. Borrower or any other Person
guaranteeing or providing collateral to secure all or any part of the Obligation
shall (a) execute an assignment for the benefit of creditors, (b) admit in
writing its inability to pay its debts generally as they become due, (c)
voluntarily seek the benefits of any Debtor Relief Law which could suspend or
otherwise affect any of Lender's Rights under any of the Loan Papers, or (d)
take any corporate action to authorize any of the foregoing.
9.5 INVOLUNTARY PROCEEDINGS. Borrower or any other Person
guaranteeing or providing collateral to secure all or any part of the Obligation
shall involuntarily (a) have an order, judgment or decree entered against it by
any Tribunal pursuant to any Debtor Relief Law that could suspend or otherwise
affect any of Lender's Rights under any of the Loan Papers or (b) have a
petition filed against it seeking the benefit or benefits provided for by any
Debtor Relief Law that could suspend or otherwise affect any of Lender's Rights
under any of the Loan Papers, and such order, judgment or decree, or petition is
not discharged within sixty (60) days after the entry or filing thereof.
9.6 ATTACHMENT. The failure to have discharged within a period of
sixty (60) days after the commencement thereof any attachment, sequestration, or
similar proceeding against any assets of Borrower.
9.7 PAYMENT OF JUDGMENTS. Borrower should fail to pay any money
judgment against it or its assets at least ten (10) days prior to the date on
which Borrower's assets may be sold lawfully to satisfy such judgment.
CREDIT AGREEMENT - Page 15
<PAGE>
9.8 DEFAULT UNDER OTHER DEBT. Borrower shall Default in the due and
punctual payment of the principal of or the interest on any Debt in excess of
$50,000.00 in the aggregate amount, secured or unsecured, or in the due
performance or observance of any covenant or condition of any indenture or
other agreement executed in connection therewith, and such Default shall have
continued beyond any period of grace provided with respect thereto.
9.9 MATERIAL ADVERSE EFFECT. The occurrence of any event or events
which shall have or cause a Material Adverse Effect.
9.10 IMPAIRMENT OF COLLATERAL OR ABILITY TO PAY. The discovery by
Lender of information that the prospect of payment or performance of the
Obligation is materially impaired, or that the value of the collateral has or
will be materially decreased and the situation giving rise thereto is not
corrected to the reasonable satisfaction of Lender within thirty (30) days after
notice thereof from Lender to Borrower.
9.11 MISREPRESENTATIONS. The discovery by Lender that any material
statement, representation, or warranty in the Loan Papers or in any writing ever
delivered to Lender pursuant to the Loan Papers is false, misleading, or
erroneous in any material respect when made or deemed to be repeated.
9.12 CROSS DEFAULT PROVISION. Any Default by Borrower on any
obligation owed to Lender or any obligation owed to Wells Fargo Bank (Texas)
National Association shall constitute a Default by Borrower hereunder.
SECTION 10. RIGHTS AND REMEDIES.
10.1 REMEDIES UPON DEFAULT. Should a Default occur, Lender may, at its
election, do any one or more of the following without notice of any kind,
including without limitation notice of acceleration or of intention to
accelerate, presentment and demand or protest, all of which are hereby expressly
waived by Borrower: (a) Declare the entire unpaid balance of the Obligation or
any part thereof, immediately due and payable, whereupon it shall be due and
payable (provided that, upon the occurrence of a Default under Section 9.4 or
9.5, the entire Obligation shall automatically become due and payable without
notice or other action of any kind whatsoever); (b) terminate its commitment to
lend hereunder; (c) reduce any claim to judgment; (d) exercise the Rights of
offset or banker's Lien against the interest of Borrower or any other Guarantor
of the Obligation in and to every account and other property of Borrower or any
other Guarantor of the Obligation which are in the possession of Lender to the
extent of the full amount of the Obligation; (e) foreclose any or all Liens held
by Lender to secure the Obligation, or otherwise realize upon any all of the
Rights Lender may have in and to the collateral securing the Obligation, or any
part thereof; (f) exercise any and all other legal or equitable Rights afforded
by the Loan Papers, the Laws of the State of Texas or any other jurisdiction as
Lender shall deem appropriate.
10.2 PERFORMANCE BY LENDER. If any covenant, duty, or agreement of
Borrower is not performed in accordance with the terms of the Loan Papers,
Lender may, at its option, perform, or attempt to perform, such covenant, duty
or agreement on behalf of Borrower. In such event, any amount expended by
Lender in such performance or attempted performance shall be payable by Borrower
to Lender on demand, shall become part of the Obligation, and shall bear
interest at the Highest Lawful Rate from the date of such expenditure by Lender
until paid. Notwithstanding the foregoing, it is expressly understood that
Lender does not assume and shall never have, except by express written consent
of Lender, any liability or responsibility for the performance of any covenant,
duty, or agreement of Borrower.
10.3 DELEGATION OF DUTIES AND RIGHTS. Lender may perform any of its
duties or exercise any of its Rights under the Loan Papers by or through its
officers, directors, employees, attorneys, agents or other representatives.
10.4 LENDER NOT IN CONTROL. None of the covenants or other provisions
contained in this Agreement shall, or shall be deemed to, give Lender the Right
or power to exercise control over the affairs or management of Borrower, the
power of Lender being limited to the Right to exercise the remedies provided in
this Section 10.
10.5 NO WAIVER; CUMULATIVE REMEDIES. The acceptance by Lender at any
time and from time to time of partial payment on the Obligation shall not be
deemed to be a waiver of any Default then existing. No failure to
CREDIT AGREEMENT - Page 16
<PAGE>
exercise and no delay on the part of Lender in exercising any Right under
this Agreement or any of the Loan Papers shall operate as a waiver thereof,
nor shall any single or partial exercise of any Right under this Agreement
preclude any other or further exercise thereof or the exercise of any other
Right. No modification or waiver of any provision of this Agreement shall be
effective unless the same shall be in writing and signed by Lender and
Borrower, and then such waiver or consent shall be effective only in the
specific instance to which it relates and for the purpose for which it is
given. The Rights provided for in this Agreement and the other Loan Papers
are cumulative and not intended to be exclusive of any other Right given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
10.6 EXPENDITURES BY LENDER. All court costs, reasonable attorneys'
fees, other costs of collection, and other sums spent by Lender pursuant to the
exercise of any Right (including, without limitation, any effort to collect or
enforce the Note) provided herein shall be payable to Lender on demand, shall
become part of the Obligation, and shall bear interest at the Highest Lawful
Rate from the date spent until the date repaid.
EXECUTED as of the day and year first mentioned.
BORROWER:
SCHLOTZSKY'S, INC.
By:
---------------------------------
Name:
----------------------------
Title:
---------------------------
LENDER:
TEXAS CAPITAL BANK, NATIONAL
ASSOCIATION
By:
---------------------------------
Name:
----------------------------
Title:
---------------------------
CREDIT AGREEMENT - Page 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS ON PAGES TWO AND THREE
OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,062,789
<SECURITIES> 0
<RECEIVABLES> 26,867,620
<ALLOWANCES> (2,098,211)
<INVENTORY> 0
<CURRENT-ASSETS> 38,705,043
<PP&E> 23,763,549
<DEPRECIATION> (2,922,772)
<TOTAL-ASSETS> 120,638,437
<CURRENT-LIABILITIES> 22,235,585
<BONDS> 0
0
0
<COMMON> 62,983
<OTHER-SE> 77,017,209
<TOTAL-LIABILITY-AND-EQUITY> 120,638,437
<SALES> 6,381,611
<TOTAL-REVENUES> 23,595,037
<CGS> 1,895,057
<TOTAL-COSTS> 19,396,996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 663,934
<INTEREST-EXPENSE> 876,782
<INCOME-PRETAX> 4,804,693
<INCOME-TAX> 1,777,736
<INCOME-CONTINUING> 3,026,957
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,026,957
<EPS-BASIC> .41
<EPS-DILUTED> .40
</TABLE>
