<PAGE>
===============================================================================
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 March 31, 1999
Commission File Number: 0-27008
SCHLOTZSKY'S, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2654208
(State or other (IRS Employer
jurisdiction of Identification Number)
incorporation or
organization)
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 May 1, 1999
Common Stock, no par value 7,402,338
===============================================================================
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets --
March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of
Income -- Three Months Ended
March 31, 1999 and March 31, 1998 3
Condensed Consolidated Statement of
Stockholders' Equity -- Three Months Ended
March 31, 1999 and the year ended December 31, 1998 4
Condensed Consolidated Statements of
Cash Flows -- Three Months Ended
March 31, 1999 and March 31, 1998 5
Notes to Condensed 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 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------- -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................. $ 5,389,448 $ 15,384,991
Temporary cash investments............................................ 1,030,734 1,439,077
Royalties receivable.................................................. 1,201,847 762,141
Turnkey notes and other receivables, current portion.................. 12,434,886 14,556,424
Other receivables..................................................... 4,069,643 3,086,065
Prepaid expenses and other assets..................................... 677,053 572,996
Turnkey Program development........................................... 6,162,838 5,924,562
Notes receivable, current portion..................................... 7,023,497 4,246,574
---------------- -----------------
Total current assets.............................................. 37,989,946 45,972,830
Property, equipment and leasehold improvements, net................... 19,407,219 18,529,746
Real estate and restaurants held for sale............................. 12,306,235 9,215,485
Notes receivable, less current portion................................ 6,054,028 6,875,915
Notes receivable from related parties, less current portion........... 2,617,905 2,609,775
Turnkey notes and other receivables, less current portion............. 1,386,573 2,185,429
Investments and advances.............................................. 1,461,136 1,530,947
Deferred federal income tax asset..................................... 23,885 23,885
Intangible assets, net................................................ 21,171,771 16,815,059
Other noncurrent assets............................................... 469,069 469,069
---------------- -----------------
Total assets...................................................... $ 102,887,767 $ 104,228,140
---------------- -----------------
---------------- -----------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable-trade................................................ $ 3,496,383 $ 4,752,369
Current maturities of long-term debt.................................. 5,748,093 5,382,585
Accrued liabilities................................................... 3,120,055 9,613,593
---------------- -----------------
Total current liabilities......................................... 12,364,531 19,748,547
Deferred revenue, net................................................. 1,137,210 1,298,486
Long-term debt, less current maturities............................... 13,940,556 9,218,515
---------------- -----------------
Total liabilities................................................. 27,442,297 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, 7,401,942
and 7,411,338 issued at December 31, 1998 and March 31, 1999,
respectively..................................................... 62,971 62,877
Additional paid-in capital............................................ 57,612,771 57,533,997
Retained earnings..................................................... 17,874,728 16,470,718
Treasury stock (10,000 shares) ....................................... (105,000) (105,000)
---------------- -----------------
Total stockholders' equity........................................ 75,445,470 73,962,592
---------------- -----------------
Total liabilities and stockholders' equity........................ $ 102,887,767 $ 104,228,140
---------------- ----------------
---------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
2
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
MARCH 31, MARCH 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Revenues
Royalties................................................ $ 5,014,267 $ 4,259,018
Franchise fees........................................... 245,000 340,000
Developer fees........................................... 592,225 - -
Restaurant sales......................................... 2,543,047 1,616,257
Brand contribution....................................... 1,201,067 860,316
Turnkey program development.............................. 670,048 1,125,017
Other fees and revenue................................... 296,427 253,684
------------------ ------------------
Total revenues..................................... 10,562,081 8,454,292
Expenses
Service costs:
Royalties.............................................. 1,791,521 1,620,621
Franchise fees......................................... 128,000 171,250
Restaurant operations:
Cost of sales.......................................... 768,570 534,352
Labor cost............................................. 994,274 754,886
Operating expenses..................................... 626,201 499,823
Turnkey development costs................................ 1,036,569 411,447
General and administrative............................... 2,856,301 2,504,254
Depreciation and amortization............................ 585,266 315,817
------------------ ------------------
Total expenses..................................... 8,786,702 6,812,450
------------------ ------------------
Income from operations............................. 1,775,379 1,641,842
Other
Interest income.......................................... 719,023 565,631
Interest expense......................................... (260,709) (61,350)
------------------ ------------------
Income before income taxes......................... 2,233,693 2,146,123
Provision for income taxes................................. 829,683 804,010
------------------ ------------------
Net income......................................... $ 1,404,010 $ 1,342,113
------------------ ------------------
------------------ ------------------
Income per common share - basic:
Net income......................................... $0.19 $0.18
------------------ ------------------
------------------ ------------------
Weighted average shares outstanding...................... 7,401,338 7,349,309
------------------ ------------------
------------------ ------------------
Income per common share - diluted:
Net income......................................... $0.19 $0.18
------------------ ------------------
------------------ ------------------
Weighted average shares outstanding...................... 7,514,725 7,616,946
------------------ ------------------
------------------ ------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED 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> <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.................. 9,396 94 78,774 - - - - 78,868
Net income......................... - - - - - - 1,404,010 - - 1,404,010
----------------- -------------- -------------- ------------- ------------ ---------------
Balance, March 31, 1999............ 7,411,338 $ 62,971 $57,612,771 $17,874,728 $(105,000) $75,445,470
----------------- -------------- -------------- ------------- ------------ ---------------
----------------- -------------- -------------- ------------- ------------ ---------------
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>
THREE MONTHS ENDED
------------------------------------
MARCH 31, MARCH 31,
1999 1998
---------------- ---------------
<S> <C> <C>
Net cash used in operating activities............................................. $ (4,290,356) $ (6,373,921)
Cash flows from investing activities:
Advances on notes receivable (less payments) .................................. 387,392 (674,610)
Acquisition of intangibles..................................................... (4,505,261) (176,148)
Purchase of property, equipment and leasehold improvements..................... (7,213,709) (991,078)
Sale of temporary investments.................................................. 408,343 - -
Other.......................................................................... 77,940 (186,552)
---------------- ---------------
Net cash used in investing activities............................................. (10,845,295) (2,028,388)
Cash flows from financing activities:
Proceeds from issuance of long term debt....................................... 10,873,244 - -
Principal payments on long term debt........................................... (5,812,004) (12,830)
Proceeds from exercises of options and warrants................................ 78,868 453,360
---------------- ---------------
Net cash provided by financing activities......................................... 5,140,108 440,530
---------------- ---------------
Net decrease in cash and cash equivalents......................................... (9,995,543) (7,961,779)
Cash and cash equivalents at beginning of period.................................. 15,384,991 31,254,048
---------------- ---------------
Cash and cash equivalents at end of period........................................ $ 5,389,448 $ 23,292,269
---------------- ---------------
---------------- ---------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
5
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 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 three months ended March 31, 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.
NOTE 2. - EARNINGS PER SHARE
Basic and diluted EPS computations for the three months ended March 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Basic EPS
---------
Net income ............................................ $ 1,404,010 $ 1,342,113
--------------- ---------------
--------------- ---------------
Weighted average common shares outstanding............. 7,401,338 7,349,309
--------------- ---------------
--------------- ---------------
Basic EPS.............................................. $0.19 $0.18
--------------- ---------------
--------------- ---------------
Diluted EPS
-----------
Net income ............................................ $ 1,404,010 $ 1,342,113
--------------- ---------------
--------------- ---------------
Weighted average common shares outstanding............. 7,401,338 7,349,309
Assumed conversion of common shares issuable
under stock option plan and exercise of warrants..... 113,387 267,637
--------------- ---------------
Weighted average common shares outstanding
-assuming dilution................................... 7,514,725 7,616,946
--------------- ---------------
--------------- ---------------
Diluted EPS............................................ $0.19 $0.18
--------------- ---------------
--------------- ---------------
</TABLE>
Outstanding options that were not included in the diluted calculation because
their effect would be anti-dilutive total 615,025 and 88,000 in 1999 and
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 March 31, 1999 the Schlotzsky's system
included Company owned and franchised stores in 38 states, the District of
Columbia and 13 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 encompasses the franchising of stores in order
to achieve optimal success with owner-operated stores. 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 MARCH 31, 1999 DEVELOPMENT OPERATIONS OPERATIONS CONSOLIDATED
--------------------------------------------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 670,048 $ 2,543,047 $ 7,348,986 $ 10,562,081
Operating income (loss) (478,490) (14,860) 2,268,729 1,775,379
Total assets $ 37,856,529 $24,131,564 $40,899,674 $102,887,767
<CAPTION>
TURNKEY RESTAURANT FRANCHISE
THREE MONTHS ENDED MARCH 31, 1998 DEVELOPMENT OPERATIONS OPERATIONS CONSOLIDATED
--------------------------------------------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 1,125,017 $ 1,616,257 $ 5,713,018 $ 8,454,292
Operating income (loss) 686,681 (287,554) 1,242,715 1,641,842
Total assets $24,576,265 $10,232,311 $44,204,800 $ 79,013,376
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Total revenues increased 24.9% from $8,454,000 to
$10,562,000.
Royalties increased 17.7% from $4,259,000 to $5,014,000. This
increase was due to the opening of 94 restaurants during the period from
April 1, 1998 to March 31, 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 6.8% and same store sales increased 0.4% during the first
quarter of 1999.
Franchise fees decreased 27.9% from $340,000 to $245,000. This
decrease was principally a result of 13 fewer store openings during the
three-month period ended March 31, 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 and better capitalized franchisees.
Developer fees increased from $0 to $592,000. This increase was
attributable to the sale of certain limited development rights to three
domestic territories during the three months ended March 31, 1999. The rights
sold will entitle the developers to a 1.25% share of the sales from
restaurants in these territories. In return, the developers have certain
franchisee support responsibilities in these territories.
Restaurant sales increased 57.4% from $1,616,000 to $2,543,000. This
increase was principally attributable to a 13.1% increase in sales volume at
the Company's flagship store, the relocation and reopening of three
Company-owned units in the Austin and College Station, Texas markets, and the
opening of an additional Company-developed unit in the Austin, Texas market
during the first quarter of 1999.
Private label licensing fees (brand contributions), increased 39.7%
from $860,000 to $1,201,000. This increase was 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. During 1999, 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 40.4% from $1,125,000 to $670,000.
This decrease was primarily attributable to fewer transactions in the period
compared to the first quarter of 1998. The Company has indicated that it
intends to place less emphasis on Turnkey transactional revenue during 1999.
8
<PAGE>
The following table reflects the growth of the franchise system for
the three months ended March 31, 1999 and 1998. The growth of the system
during 1998 and 1999 to date is principally responsible for the increased
revenue as discussed above.
<TABLE>
<CAPTION>
SYSTEM PERFORMANCE THREE MONTHS ENDED
-------------------------------------
MARCH 31, 1999 MARCH 31, 1998
----------------- ------------------
<S> <C> <C>
Units Opened
Domestic
Freestanding 15 19
End Cap 2 9
----------------- ------------------
Total Domestic Openings 17 28
International - - 2
----------------- ------------------
Total Openings 17 30
Units Closed 12 5
----------------- ------------------
Net Unit Growth 5 25
----------------- ------------------
----------------- ------------------
System-wide Sales (in thousands) $ 92,228 $ 78,043
Average Weekly Sales $ 9,890 $ 9,260
Increase in Average Weekly Sales 6.8% 12.1%
Stores in Operation 755 698
Increase in Same Store Sales 0.4% 6.2%
</TABLE>
COSTS AND EXPENSES. Royalty service costs increased 10.5% from
$1,621,000 to $1,792,000. This increase was a direct result of the increase
in royalty revenue for the three months ended March 31, 1999, as compared to
the same period in the prior year. Royalty service costs as a percentage of
royalties declined from 38.1% to 35.7%. This decrease reflected the Company's
reacquisition of rights to a limited number of territories during the period
and at the end of 1998. Most area developers receive approximately 42% of the
royalties from stores in their territories. During 1999, the Company expects
developer service costs as a percentage of royalty revenue to decrease as the
Company intends to buy-down the rights and obligations of several of its area
developers and to re-acquire the full development rights to a limited number
of territories. Area developers whose rights and obligations have been bought
down receive 1.25% rather than 2.5% out of the 6.0% royalty stream the
Company receives from franchisees. Accordingly, area developers receive
approximately 21% of the royalties from stores in territories where the
Company has re-acquired a portion of their development rights and obligations.
Franchise fee costs decreased 25.1% from $171,000 to $128,000, as
a result of lower franchise fee revenue for the quarter.
Restaurant cost of sales, which consists of food, beverage and paper
costs, increased 44.0% from $534,000 to $769,000, but as a percentage of
restaurant sales decreased from 33.0% to 30.2%. Likewise, restaurant labor
costs increased 31.7% from $755,000 to $994,000, but as a percentage of
restaurant sales decreased from 46.7% to 39.1% for the same quarter in 1998.
Restaurant operating expenses increased 25.2% from $500,000 to $626,000, but
as a percentage of restaurant sales decreased from 30.9% to 24.6% for the
three months ended March 31, 1999, as compared to the corresponding period in
1998. The decreases in restaurant cost of sales, restaurant labor cost and
restaurant operating expenses as a percentage of restaurant sales were
primarily attributable to efficiencies gained at stores opened during 1998.
Turnkey development costs increased 152.3% from $411,000 to
$1,037,000 and as a percentage of Turnkey development revenue increased from
36.5% to 154.8%. These increases are 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 and because of a lower level of
inventory of Turnkey sites at March 31, 1999 compared to the prior period.
Further contributing to the increases was the addition of staff to the real
estate department during 1998.
General and administrative expenses grew 14.1% from $2,504,000 to
$2,856,000 but as a percentage of total revenues decreased from 29.6% to
27.0%. This percentage decrease is primarily the result of the decreasing
pace of additions to Corporate staff since the prior period. The slower rate
of increase in these expenses occurred principally because much of the
infrastructure necessary to service the franchise system was already in place
during the prior period.
9
<PAGE>
Depreciation and amortization increased 85.1% from $316,000 to
$585,000, and as a percentage of total revenues increased from 3.7% to 5.5%.
The increase was principally due to the amortization of development
territories, goodwill and other intangibles acquired during 1998 and the
three months ended March 31, 1999 and depreciation related to the additional
stores the Company was operating during the year. The Company owned and
operated six stores as of March 31, 1998 and eight as of March 31, 1999.
OTHER. Interest income increased 27.0% from $566,000 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.
Interest expenses increased 327.9% from $61,000 to $261,000. 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 and the reacquisition of certain area developer rights.
INCOME TAX EXPENSE. Income tax expense reflected a combined federal
and state effective tax rate of 37.1% for the three months ended March 31,
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% for 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4,290,000 for the first three
months of 1999. Accounts payable and accrued liabilities decreased
$7,750,000, primarily due to the payment of amounts outstanding at December
31, 1998. Net cash of $10,845,000 was used in investing activities primarily
consisting of property and equipment expenditures of $7,214,000 relating to
the development of five additional Company-owned units, two of which were
completed at the end of 1998, two which were completed in the first quarter
and one that remains in development. The Company used primarily $4,505,000 to
buy-down the rights of several of its area developers and to re-acquire the
rights to a limited number of territories.
During the first three months of 1999, financing activities provided net
cash of $5,140,000. This was primarily due to proceeds from the issuance of
term debt.
At March 31, 1999, the Company had approximately $19,689,000 of debt
outstanding. During 1999, the Company borrowed $5,061,000 to fund its
buy-down of the rights and obligations of several of its area developers and
to re-acquire the rights to a limited number of territories. During 1998, the
Company borrowed approximately $5,000,000 in connection with the
re-acquisition of certain domestic development rights and drew on its line of
credit to fund certain Turnkey development activities. The Company also
borrowed $1,113,000 primarily in connection with the re-acquisition of
certain domestic development rights during 1997. 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. The Company guaranties certain real estate mortgages and
leases, equipment leases and other obligations of franchisees. At March 31,
1999, contingent liabilities totaled approximately $24,610,000.
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 three months ended March 31, 1999 and 1998.
10
<PAGE>
Turnkey Program revenue consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MARCH 31, MARCH 31,
1999 1998
----------------- ---------------
<S> <C> <C>
Sales to investors and franchisees..................... $ 533,008 $ 5,184,236
Development and construction management fees........... - - 55,000
----------------- ---------------
Gross Turnkey Program revenue..................... 533,008 5,239,236
Turnkey Program project costs.......................... (20,000) (3,584,335)
----------------- ---------------
Net revenue from Turnkey Program projects......... 513,008 1,654,901
Rental income.......................................... 157,040 21,800
Interim construction interest.......................... - - 38,217
Revenue deferred - - (589,901)
----------------- ---------------
Total Turnkey Program revenue..................... $ 670,048 $ 1,125,017
----------------- ---------------
----------------- ---------------
</TABLE>
The following table reflects system performance of the Turnkey Program for
the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
NUMBER OF UNITS
--------------------------------
MARCH 31, MARCH 31,
1999 1998
--------------- ---------------
<S> <C> <C> <C>
Sites in process at beginning of period................ 86 78
Sites beginning development during the period *........ (14) 34
Sites inventoried as Company-owned stores.............. (2) - -
Sites sold - revenue recognized........................ (4) (9)
Sites sold - revenue deferred.......................... - - (6)
Other.................................................. (2) - -
--------------- ---------------
Sites in process at end of period...................... 64 97
--------------- ---------------
--------------- ---------------
INVESTED AT
MARCH 31, 1999
-----------------
Sites under development or to be sold.................. 4 10 $ 4,644,000
Predevelopment Site (prequalification) ................ 60 87 1,519,000
--------------- --------------- -------------------
64 97 $ 6,163,000
--------------- --------------- -------------------
--------------- --------------- -------------------
</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 March 31, 1999, the Company had drawn approximately
$12,785,000 on this line of credit and had allowed certain area developers
and franchisees to borrow $2,215,000 under this credit facility.
At March 31, 1999, the Company had $5,000,000 outstanding on a line of
credit from a financial institution, bearing interest at the bank's prime
lending rate. This line was retired in April 1999 and is no longer available
to the Company.
During 1999, the Company secured a line of credit from a financial
institution to retire existing debt and to buy-down the rights and
obligations of several of its area developers and to re-acquire the rights to
a limited number of territories. The line of credit can be drawn upon to fund
up to $15,000,000, bears interest at the bank's prime lending rate less 0.75%
and expires July 1999. As of March 31, 1999, the Company had not drawn upon
this line of credit.
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. If the net proceeds from the Turnkey Program, credit
facilities, and cash flow from operations are insufficient to finance the
Company's future expansion plans, including continuing investment in Turnkey
Program properties and 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.
11
<PAGE>
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 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, 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 March 31, 1999 a hypothetical 100 basis point increase in
interest rates would result in a reduction of approximately $38,000 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 March 31, 1999. The fair values of the
Company's bank loans are not significantly affected by changes in market
interest rates.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits:
<TABLE>
<CAPTION>
Exhibit
No
-------
<S> <C>
27 Financial Data Schedule.
</TABLE>
b. Current Reports on Form 8-K:
None
14
<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
May 14, 1999
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
INCOME ON PAGES TWO AND THREE OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,420,182
<SECURITIES> 0
<RECEIVABLES> 26,434,043
<ALLOWANCES> (1,704,168)
<INVENTORY> 0
<CURRENT-ASSETS> 37,989,947
<PP&E> 22,131,589
<DEPRECIATION> (2,724,370)
<TOTAL-ASSETS> 102,887,767
<CURRENT-LIABILITIES> 12,364,531
<BONDS> 0
0
0
<COMMON> 62,971
<OTHER-SE> 75,382,499
<TOTAL-LIABILITY-AND-EQUITY> 102,887,767
<SALES> 2,543,047
<TOTAL-REVENUES> 10,562,081
<CGS> 768,570
<TOTAL-COSTS> 8,786,702
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 260,709
<INCOME-PRETAX> 2,233,693
<INCOME-TAX> 829,683
<INCOME-CONTINUING> 1,404,010
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,404,010
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
