<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 March 31, 2000
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 May 1, 2000
Common Stock, no par value 7,440,072
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets --
March 31, 2000 and December 31, 1999 2
Condensed Consolidated Statements of
Operations -- Three Months Ended
March 31, 2000 and March 31, 1999 3
Condensed Consolidated Statement of
Stockholders' Equity -- Three Months Ended
March 31, 2000 and the year ended December 31, 1999 4
Condensed Consolidated Statements of
Cash Flows -- Three Months Ended
March 31, 2000 and March 31, 1999 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
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
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Assets
Cash and cash equivalents............................................. $ 1,502,298 $ 4,895,302
Temporary cash investments............................................ 18,000 18,000
Receivables from Turnkey Program Development.......................... 545,000 51,603
Royalties receivable.................................................. 1,707,379 1,306,465
Notes receivable, current portion..................................... 3,059,797 5,737,363
Real estate and restaurants held for sale, current portion............ 7,911,994 7,909,870
Turnkey notes and other receivables, current portion.................. 6,912,131 8,908,286
Other receivables..................................................... 4,307,052 4,480,022
Prepaid expenses and other assets..................................... 1,498,191 1,326,405
Turnkey Program development........................................... 9,778,133 10,130,175
Deferred Federal income tax asset, current portion.................... 1,021,828 1,021,828
---------------- -----------------
Total current assets.............................................. 38,261,803 45,785,319
Property, equipment and leasehold improvements, net................... 20,118,712 19,861,420
Real estate and restaurants held for sale, less current portion....... 6,388,583 5,985,937
Notes receivable, less current portion................................ 14,299,893 13,239,897
Notes receivable from related parties, less current portion........... 8,933,907 8,257,528
Investments and advances.............................................. 576,248 564,446
Deferred Federal income tax asset, less current portion............... 1,615,959 1,615,959
Intangible assets, net................................................ 37,247,627 36,541,153
Other noncurrent assets............................................... 925,782 907,722
---------------- -----------------
Total assets...................................................... $128,368,514 $132,759,381
---------------- -----------------
---------------- -----------------
Liabilities and Stockholders' Equity
Accounts payable-trade................................................ $3,152,789 $5,527,504
Current maturities of long-term debt.................................. 11,525,806 19,455,430
Deferred revenue, current portion..................................... 551,853 1,206,206
Accrued liabilities................................................... 3,728,137 2,990,522
---------------- -----------------
Total current liabilities......................................... 18,958,585 29,179,662
Deferred revenue, less current portion................................ 7,552,819 7,570,095
Long-term debt, less current maturities............................... 25,865,319 21,275,043
---------------- -----------------
Total liabilities................................................. 52,376,723 58,024,800
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 7,440,072
and 7,427,714 issued at March 31, 2000 and December 31, 1999,
respectively........................................................ 63,258 63,135
Additional paid-in capital............................................ 57,848,242 57,779,291
Retained earnings..................................................... 18,185,291 16,997,155
Treasury stock (10,000 shares) ....................................... (105,000) (105,000)
---------------- -----------------
Total stockholders' equity........................................ 75,991,791 74,734,581
---------------- -----------------
Total liabilities and stockholders' equity........................ $128,368,514 $132,759,381
---------------- ----------------
---------------- ----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
2
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
MARCH 31, MARCH 31,
2000 1999
------------------ ------------------
<S> <C> <C>
Revenues:
Royalties................................................ $ 5,521,820 $ 5,014,267
Franchise fees........................................... 155,850 245,000
Developer fees........................................... 303,894 227,617
Restaurant sales......................................... 4,401,361 2,543,047
Brand contribution....................................... 1,603,457 1,201,067
Turnkey program development.............................. 589,596 670,048
Other fees and revenue................................... 479,414 296,427
------------------ ------------------
Total revenues..................................... 13,055,392 10,197,473
Expenses:
Service costs:
Royalties.............................................. 1,285,273 1,791,521
Franchise fees......................................... 75,000 128,000
Restaurant operations:
Cost of sales.......................................... 1,267,304 768,570
Labor costs............................................ 1,593,877 994,274
Operating expenses..................................... 958,260 626,201
Turnkey development costs................................ 1,229,647 1,036,569
General and administrative............................... 3,887,948 2,856,301
Depreciation and amortization............................ 826,479 577,288
------------------ ------------------
Total expenses..................................... 11,123,788 8,778,724
------------------ ------------------
Income from operations............................. 1,931,604 1,418,749
Other
Interest income.......................................... 762,867 719,023
Interest expense......................................... (823,393) (260,709)
------------------ ------------------
Income before income taxes......................... 1,871,078 1,877,063
Provision for income taxes................................. 682,942 689,821
------------------ ------------------
Income before cumulative effect of change in
accounting principle............................... 1,188,136 1,187,242
Cumulative effect of change in accounting
principle, net of tax.............................. -- (3,819,592)
------------------ ------------------
Net Income......................................... $ 1,188,136 $ (2,632,350)
------------------ ------------------
------------------ ------------------
Income per common share - basic:
Income before cumulative effect of change in
accounting principle............................... $ 0.16 $ 0.16
Cumulative effect of change in accounting
principle, net of tax.............................. -- (0.52)
------------------ ------------------
Net Income......................................... 0.16 (0.36)
------------------ ------------------
------------------ ------------------
Weighted average shares outstanding - basic................. 7,430,072 7,401,338
------------------ ------------------
------------------ ------------------
Income per common share - diluted:
Income before cumulative effect of change in
accounting principle............................... $ 0.16 $ 0.16
Cumulative effect of change in accounting
principle.......................................... -- (0.51)
------------------ ------------------
Net Income.................................................. 0.16 (0.35)
------------------ ------------------
------------------ ------------------
Weighted average shares outstanding - diluted...... 7,450,456 7,514,725
------------------ ------------------
------------------ ------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<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, 1999............... 7,401,942 $62,877 $57,533,997 $16,470,718 $(105,000) $73,962,592
Options exercised...................... 5,825 58 52,887 -- -- 52,945
Tax benefit from employee stock
transactions........................... -- -- 25,072 -- -- 25,072
Issuance of common stock in connection
with employee stock purchase plan...... 19,947 200 167,335 -- -- 167,535
Net income............................. -- -- -- 526,437 -- 526,437
-------------- -------------- -------------- ------------- ------------ ---------------
Balance, December 31, 1999............. 7,427,714 63,135 57,779,291 16,997,155 (105,000) 74,734,581
Issuance of common stock in connection
with employee stock purchase plan...... 12,358 123 68,951 -- -- 69,074
Net income............................. -- -- -- 1,188,136 -- 1,188,136
-------------- -------------- -------------- ------------- ------------ ---------------
Balance, March 31, 2000 (Unaudited).... 7,440,072 $63,258 $57,848,242 $18,185,291 $(105,000) $75,991,791
-------------- -------------- -------------- ------------- ------------ ---------------
-------------- -------------- -------------- ------------- ------------ ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
MARCH 31, MARCH 31,
2000 1999
---------------- ---------------
<S> <C> <C>
Net cash used in operating activities................................... $ (1,959,602) $ (4,290,356)
Cash flows from investing activities:
Advances on notes receivable (less payments) ........................ 3,400,317 387,392
Acquisition of intangibles........................................... (962,065) (4,505,261)
Purchase of property, equipment and leasehold improvements........... (1,958,300) (7,213,709)
Sale of property, equipment and leasehold improvements............... 1,373,261 --
Sale of temporary investments........................................ (11,802) 408,343
Other................................................................ -- 77,940
---------------- ---------------
Net cash provided (used) by investing activities........................ 1,841,411 (10,845,295)
Cash flows from financing activities:
Proceeds from issuance of long term debt............................. 4,770,352 10,873,244
Principal payments on long term debt................................. (8,114,757) (5,812,004)
Proceeds from exercises of options and warrants...................... 69,592 78,868
---------------- ---------------
Net cash provided (used) by financing activities........................ (3,274,813) 5,140,108
---------------- ---------------
Net decrease in cash and cash equivalents............................... (3,393,004) (9,995,543)
Cash and cash equivalents at beginning of period........................ 4,895,302 15,384,991
---------------- ---------------
Cash and cash equivalents at end of period.............................. $ 1,502,298 $ 5,389,448
---------------- ---------------
---------------- ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE>
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2000
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, 2000, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. 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,
1999.
6
<PAGE>
NOTE 2. - EARNINGS PER SHARE
Basic and diluted EPS computations for the three months ended March 31, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(UNAUDITED)
-------------------------------
MARCH 31, MARCH 31,
2000 1999
--------------- --------------
<S> <C> <C>
BASIC EPS
Net income before cumulative effect of change in
accounting principle................................ $ 1,188,136 $ 1,187,242
Cumulative effect of change in accounting principle,
net tax............................................. -- (3,819,592)
--------------- --------------
Net income (loss)..................................... $ 1,188,136 $ (2,632,350)
--------------- --------------
--------------- --------------
Weighted average common shares outstanding............ 7,430,072 7,401,338
--------------- --------------
--------------- --------------
Basic EPS before cumulative effect of change in
accounting principle................................ 0.16 0.16
Cumulative effect of change in accounting principle... -- (0.52)
--------------- --------------
Basic EPS............................................. $ 0.16 $ (0.36)
--------------- --------------
--------------- --------------
DILUTED EPS
Income before cumulative effect of change in
accounting principle................................ $ 1,188,136 $ 1,187,242
Cumulative effect of change in accounting principle,
Net of tax.......................................... -- (3,819,592)
--------------- --------------
Net income (loss)..................................... 1,188,135 (2,632,350)
--------------- --------------
--------------- --------------
Weighted average common shares outstanding............ 7,430,072 7,401,338
Assumed conversion of common shares issuable
Under stock option plan and exercise of warrants..... 20,384 113,387
--------------- --------------
Weighted average common shares outstanding-
assuming dilution................................... 7,450,456 7,514,725
--------------- --------------
--------------- --------------
Diluted EPS before cumulative effect of change in
accounting principle................................ $ 0.16 $ 0.16
Cumulative effect of change in accounting principle -- (0.51)
--------------- --------------
Diluted EPS.............................................. $ 0.16 $ (0.35)
--------------- --------------
--------------- --------------
</TABLE>
Outstanding options that were not included in the diluted calculation because
their effect would be anti-dilutive total 994,965 and 615,025 in 2000 and
1999, respectively.
7
<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, 2000, 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 segment includes the operation of a limited number of
Company-owned restaurants for the purposes of product development, concept
refinement, prototype testing, training and building 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, is as follows:
<TABLE>
<CAPTION>
TURNKEY RESTAURANT FRANCHISE
THREE MONTHS ENDED MARCH 31, 2000 DEVELOPMENT OPERATIONS OPERATIONS CONSOLIDATED
- ------------------------------------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 589,596 $ 4,401,361 $ 8,064,435 $ 13,055,392
Operating income (loss) (716,078) 301,709 2,345,973 1,931,604
Total assets $ 39,790,830 $ 26,077,432 $ 62,500,252 $ 128,368,514
<CAPTION>
TURNKEY RESTAURANT FRANCHISE
THREE MONTHS ENDED MARCH 31, 2000 DEVELOPMENT OPERATIONS OPERATIONS CONSOLIDATED
- ------------------------------------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 670,048 $ 2,543,047 $ 6,984,378 $ 10,197,473
Operating income (loss) (478,490) (14,860) 1,912,099 1,418,749
Total assets $ 37,856,529 $ 24,131,564 $ 70,771,288 $ 132,759,381
</TABLE>
NOTE 4. - CHANGE IN ACCOUNTING PRINCIPLE
As discussed in the Company's Form 10K, the Company changed its
accounting policy in the fourth quarter of 1999, effective as of January 1,
1999, related to revenue recognition of developer fees. As such, the first
quarter 1999 results have been retroactively adjusted to reflect the change
in accounting principle effective January 1, 1999.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
REVENUES. Total revenues increased 28.0% from $10,197,000 to
$13,055,000.
Royalties increased 10.1% from $5,014,000 to $5,522,000. This increase
was due to the opening of 58 restaurants during the period from April 1, 1999
to March 31, 2000. Also driving the increase was the growing influence of
larger freestanding prototype units, which are the focus of the new unit
development. Furthermore, average weekly sales increased 10.7% and same store
sales increased 5.7% during the first quarter of 2000.
Franchise fees decreased 36.3% from $245,000 to $156,000. This decrease
was principally a result of ten fewer store openings during the three-month
period ended March 31, 2000, as compared to the same period in the prior
year. 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 33.3% from $228,000 to $304,000. This increase
was due to the sale of a significant number of developer territories in 1999
after the first quarter. These sales are amortized to income over a ten year
period.
Restaurant sales increased 73.1% from $2,543,000 to $4,401,000. This
increase was due to an increase from seven to thirteen in the weighted number
of Company-owned restaurants open during the three months ended March 31,
2000 compared to the same period in the prior year. The Company has acquired
from franchisees four locations in the Austin market and one in the Atlanta
market since January 1, 1999.
Private label licensing fees (brand contribution), increased 33.5% from
$1,201,000 to $1,603,000. This increase was the result of more favorable
terms with certain major suppliers, as well as the increasing volume of
system-wide sales. During 2000, additional products may be added to its
private label program. Additionally, the company intends to continue to add
retail channels of distribution for its private label products, resulting in
the potential for further increases in licensing fees.
The following table reflects the growth of the franchise system for the
three months ended March 31, 2000 and 1999. The growth of the system during
1999 and 2000, and an increase in the proportion of larger, freestanding
units in the system, is principally responsible for the increased revenue as
discussed above.
<TABLE>
<CAPTION>
SYSTEM PERFORMANCE THREE MONTHS ENDED
-------------------------------------
MARCH 31, 2000 MARCH 31, 1999
----------------- ------------------
<S> <C> <C>
Units Opened
Domestic
Freestanding 6 15
Other 1 2
----------------- ------------------
Total Domestic Openings 7 17
International -- --
----------------- ------------------
Total Openings 7 17
Units Closed 16 12
----------------- ------------------
Net Unit Growth (9) 5
----------------- ------------------
----------------- ------------------
System-wide Sales (in thousands) $ 104,231 $ 92,228
Average Weekly Sales $ 10,951 $ 9,890
Increase in Average Weekly Sales 10.7% 6.8%
Stores in Operation 750 755
Increase in Same Store Sales 5.7% 0.4%
</TABLE>
COSTS AND EXPENSES. Royalty service costs decreased 28.3% from
$1,792,000 to $1,285,000. Royalty service costs as a percentage of royalties
decreased from 35.7% to 23.3%. These decreases reflect the impact of the
reacquisition and reduction of certain area developers' interests in
royalties during 1999. Area developers generally receive approximately 42% or
21% of the royalties from stores in their territories (depending on whether
their share
9
<PAGE>
of royalties is 2.5% or 1.25%). The Company expects royalty service costs as
a percentage of royalty revenue to continue to decrease because the Company
recently assumed territory management responsibility for its largest area
developer in conjunction with an option to buy its territories (exercisable
until 2012). Under this option agreement, net service costs associated with
this territory management were 1% of royalties effective October 31, 1999 and
escalate to 2% by August 16, 2004, versus the current 2.5% rate. The Company
may buy-down the rights and obligations of certain area developers and may
re-acquire the full development rights to a limited number of territories
over the next few years.
Franchise fee costs decreased 41.4% from $128,000 to $75,000, as a
result of lower franchise fee revenue for the quarter. The decline in
franchise fee costs exceeded the decline in franchise fee revenue due to
certain area developers receiving 33%, rather than 50%, of franchise fees due
to provisions of buy down agreements.
Restaurant cost of sales, which consists of food, beverage and paper
costs, increased 64.8% from $769,000 to $1,267,000, but as a percentage of
restaurant sales decreased from 30.2% to 28.8%. Likewise, restaurant labor
costs increased 60.4% from $994,000 to $1,594,000, but as a percentage of
restaurant sales decreased from 39.1% to 36.2% for the same quarter in 1999.
Restaurant operating expenses increased 53.0% from $626,000 to $958,000, but
as a percentage of restaurant sales decreased from 24.6% to 21.8% for the
three months ended March 31, 2000, as compared to the corresponding period in
1999. The decreases in restaurant cost of sales, restaurant labor cost and
restaurant operating expenses as a percentage of restaurant sales were
primarily attributable to operational efficiencies experienced due to cost
controls implemented in the management of Company-owned stores.
Turnkey development costs increased 18.6% from $1,037,000 to $1,230,000
and as a percentage of Turnkey development revenue increased from 154.8% to
208.5%. This increase is primarily due to unexpected costs on a limited
number of Turnkey Program projects.
General and administrative expenses grew 36.1% from $2,856,000 to
$3,888,000 and as a percentage of total revenue increased from 28.0% to
29.8%. Salaries and benefits expenses increased 23.4% from $1,818,000 to
$2,244,000, primarily due to additional corporate personnel hired during
1999. Travel costs and costs associated with temporary labor, relocation, and
training also increased.
10
<PAGE>
Depreciation and amortization increased 43.2% from $577,000 to $826,000,
and as a percentage of total revenues increased from 5.7% to 6.3%. The
increase was principally due to the amortization of development territories,
goodwill and other intangibles acquired during 1999 and depreciation related
to the additional stores the Company was operating during the year. The
Company owned and operated eight stores as of March 31, 1999 and thirteen as of
March 31, 2000.
OTHER. Interest income increased 6.1% from $719,000 to $763,000. 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 loans to franchise advertising organizations.
Interest expense increased from $261,000 to $823,000. This increase was
a result of a greater level of debt outstanding during the current period.
The Company expects interest expense to gradually decline as payments are
made on term credit facilities and revolving credit facilities expire.
INCOME TAX EXPENSE. Income tax expense reflected a combined federal and
state effective tax rate of 36.5% for the three months ended March 31, 2000,
which was slightly lower than the effective combined tax rate of 36.75% for
the comparable period in 1999. Based on projections of taxable income, the
Company anticipates that its effective combined rate for federal and state
taxes will remain stable for 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1,960,000 for the first three
months of 2000. Accounts payable and accrued liabilities decreased
$1,638,000, primarily due to the payment of amounts outstanding at December
31, 1999. Net cash of $468,000 was produced through investing activities
primarily consisting of payments received on interim financing loans provided
by the company to facilitate the development of Turnkey Program restaurants.
At March 31, 2000, the Company had approximately $37,391,000 of debt
outstanding. During the three months ended March 31, 2000, the Company repaid
approximately $7,915,000 on a credit facility established in December 1999.
This credit facility consists of a $20 million term facility, which requires
payment ratably through December 2005, and a $15 million revolving credit
facility, which expires in September 2000. The Company intends to fund
repayment of the revolving credit facility largely through long-term
mortgages taken against wholly-owned Company restaurants and, to a lesser
extent, cash from operations. During the three months ended March 31, 2000,
the Company had secured $4,770,000 through financing of corporate
restaurants. Additionally, $200,000 was paid against mortgages and various
other notes owed by 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 Company has established relationships with certain lenders,
and is actively seeking relationships with additional lenders, to provide
interim financing for Turnkey Program projects during the construction phase
of the projects, but availability of such financing is uncertain. To assist
franchisees in qualifying for loans from third-party lenders related to
Turnkey projects, the Company makes loans to franchisees that are subordinate
to mortgages provided by third-party lenders. The tables below provide a
summary of the Turnkey Program activity for the three months ended March 31,
2000 and 1999.
11
<PAGE>
Turnkey Program revenue consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MARCH 31, MARCH 31,
2000 1999
----------------- ---------------
<S> <C> <C>
Sales to investors and franchisees..................... $ 2,673,224 $ 533,008
----------------- ---------------
Gross Turnkey Program revenue..................... 2,673,224 533,008
Turnkey Program project costs.......................... (2,099,302) (20,000)
----------------- ---------------
Net revenue from Turnkey Program projects......... 573,922 513,008
Rental income (net of reserves)........................ (15,100) 157,040
Interim construction interest.......................... 30,774 - -
----------------- ---------------
Total Turnkey Program revenue..................... $ 589,596 $ 670,048
----------------- ---------------
----------------- ---------------
</TABLE>
The following table reflects system performance of the Turnkey Program for
the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
NUMBER OF UNITS
--------------------------------
MARCH 31, MARCH 31,
2000 1999
--------------- ---------------
<S> <C> <C> <C>
Sites in process at beginning of period................ 59 86
Sites beginning development during the period *........ 2 (14)
Sites inventoried as Company-owned stores.............. - - (2)
Sites sold - revenue recognized........................ (6) (4)
Sites sold - revenue deferred.......................... - - - -
Other.................................................. - - (2)
--------------- ---------------
Sites in process at end of period...................... 55 64
--------------- ---------------
--------------- ---------------
<CAPTION>
INVESTED AT
MARCH 31, 2000
-------------------
<S> <C> <C> <C>
Sites under development or to be sold.................. 8 4 $7,918,000
Predevelopment sites (prequalification) ............... 47 60 1,860,000
--------------- --------------- -------------------
55 64 $9,778,000
--------------- --------------- -------------------
--------------- --------------- -------------------
</TABLE>
* Net of deletions for sites removed from consideration for development.
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.
12
<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 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 although the Company
cannot guarantee the absence of such risks. To date, neither the Company nor
any of its major suppliers have experienced material internal disruptions.
The Company is continuing to monitor the performance of its computer systems
for disruptions during the year 2000. The impact on the Company's operations,
if any, from the inability of any of its suppliers and franchisees to be 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). The total costs to the Company of Year 2000
compliance activities were not material to its financial condition or results
of operations.
FORWARD LOOKING STATEMENTS
This report contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act" and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")). The words "expect," "estimate,"
"anticipate," "contemplate," "predict," "believe," "intend," "plan,"
"project" and similar expressions and variations thereof are intended to
identify forward-looking statements. Such statements appear in a number of
places in this Report and include statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with
respect to, among other things: (i) trends affecting the Company's financial
condition or results of operations; (ii) the Company's financing plans; (iii)
the Company's business and growth strategies, including strategies related to
the Company's Turnkey Program and plans to reduce the level of interim
financing provided during the purchasing and construction phase of Turnkey
Program store development; (iv) plans concerning the Company's relationship
with its area developers; and (v) the declaration and payment of dividends.
Shareholders and prospective investors are cautioned that any such
forward-looking statements are not guaranties of future performance and
involve risks and uncertainties, and that actual results may differ
materially from those projected in the forward-looking statements as a result
of various factors. The accompanying information contained in this Report
including, without limitation, the information set forth under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business," as well as information contained in the
Company's other filings with the Securities and Exchange Commission (the
"Commission"), identify important factors that could cause such differences.
13
<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
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits:
<TABLE>
<CAPTION>
Exhibit
No
-------
<S> <C>
10.58 First Amendment to Credit Agreement with Wells Fargo Bank
(Texas), National Association, as Agent dated as of
December 31, 1999.
27 Financial Data Schedule.
</TABLE>
b. Current Reports on Form 8-K:
None
15
<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
President and
Chief Executive Officer
By: /s/
----------------------------------
John Hester
Controller
Austin, Texas
May 15, 2000
16
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT"), dated as
of December 31, 1999 is among SCHLOTZSKY'S, INC., a Texas corporation
("BORROWER"), each of the Lenders party to the Agreement referred to below,
and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, a national banking
association, as Agent for itself and the other Lenders (in such capacity,
together with its successors in such capacity the "AGENT") and as the Issuing
Bank.
RECITALS:
A. Borrower, Agent, Lenders and Issuing Bank have previously entered
into that certain Credit Agreement dated as of December 7, 1999 (the
"AGREEMENT").
B. Borrower, Agent, Lenders and Issuing Bank now desire to amend the
Agreement to amend certain financial covenants as hereinafter more
specifically provided.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.1 DEFINITIONS. All capitalized terms not otherwise defined herein,
shall have the same meanings as in the Agreement, as amended hereby.
ARTICLE II.
AMENDMENTS
2.1 AMENDMENT TO LEVERAGE RATIO COVENANT. Effective as of the date
hereof Section 10.2 of the Agreement is hereby amended to read in its
entirety as follows:
"Section 10.2 LEVERAGE RATIO. As of the last day of any Fiscal
Quarter, the Borrower will during the periods indicated maintain a
Leverage Ratio of not greater than (a) 4.00 to 1.00 from the date
hereof through and including December 31, 1999, (b) 3.50 to 1.00 from
January 1, 2000 through and including March 31, 2000, (c) 3.00 to 1.00
from April 1, 2000 through and including September 30, 2000, (d) 2.75
to 1.00 from October 1, 2000 through and including September 30, 2001,
and (e) 2.50 to 1.00 thereafter."
<PAGE>
2.2 AMENDMENT TO CONSOLIDATED NET WORTH COVENANT. Effective as of
the date hereof Section 10.3 of the Agreement is hereby amended to read in
its entirety as follows:
"Section 10.3 CONSOLIDATED NET WORTH. As of December 31, 1999,
the Borrower will maintain Consolidated Net Worth in an amount not less
than Seventy-Four Million Five Hundred Thousand Dollars ($74,500,000),
and for the last day of each Fiscal Quarter thereafter, not less than
the sum of (i) the minimum Consolidated Net Worth required for the
prior Fiscal Quarter, plus (ii) 75% of Consolidated Net Income (not
less than zero (0) dollars [$0.00]) for the Fiscal Quarter then ended."
2.3 AMENDMENT TO FIXED CHARGE COVERAGE RATIO COVENANT. Effective as
of the date hereof Section 10.4 of the Agreement is hereby amended to read in
its entirety as follows:
"Section 10.4 FIXED CHARGE COVERAGE RATIO. As of the last day
of any Fiscal Quarter, the Borrower will during the periods indicated
maintain a Fixed Charge Coverage Ratio for the preceding four (4)
Fiscal Quarters then ended of not less than (a) 1.25 to 1.00 from the
date hereof through and including March 31, 2000, (b) 1.35 to 1.0 from
April 1, 2000 through and including June 30, 2000, (c) 1.50 to 1.0 from
July 1, 2000 through and including September 30, 2000, and (d)
thereafter, 1.75 to 1.00."
ARTICLE III.
CONDITIONS PRECEDENT
3.1 CONDITION. The effectiveness of this Amendment is subject to the
satisfaction of the following conditions precedent:
(a) Agent shall have received all of the following, each dated
(unless otherwise indicated) the date of this Amendment, in form and
substance satisfactory to the Agent:
(i) This Amendment executed by all parties
hereto.
(ii) Resolutions of the Board of Directors of
Borrower certified by its secretary or assistant secretary
which authorizes the execution, delivery and performance by
Borrower of this Amendment and the other Loan Documents
executed in connection herewith.
(iii) A certificate of incumbency certified by the
secretary or the assistant secretary of Borrower certifying
the names of the officers thereof authorized to sign this
Amendment and the other Loan Documents together with specimen
signatures of such officers.
-2-
<PAGE>
(iv) Resolutions of the Board of Directors or
comparable authority of each of the Obligated Parties
certified by its secretary or assistant secretary which
authorize the execution, delivery and performance by each of
the Obligated Parties of this Amendment and the other Loan
Documents executed in connection herewith.
(v) A certificate of incumbency certified by the
secretary or the assistant secretary of each Obligated Party
certifying the names of the officers thereof authorized to
sign this Amendment and the other Loan Documents together with
specimen signatures of such officers.
(b) NO DEFAULT. No Default shall have occurred and be
continuing.
(c) REPRESENTATIONS AND WARRANTIES. All of the representations
and warranties contained in Article VII of the Agreement, as amended
hereby and in the other Loan Documents shall be true and correct on and
as of the date of this Amendment with the same force and effect as if
such representations and warranties had been made on and as of such
date, except to the extent such representations and warranties speak to
a specific date.
(d) AMENDMENT FEE. Borrower shall have paid to the Agent for
the benefit of the Lenders an amendment fee in the amount of
$10,000.00.
ARTICLE IV.
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
4.1 RATIFICATIONS. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions
set forth in the Agreement and except as expressly modified and superseded by
this Amendment, the terms and provisions of the Agreement and the other Loan
Documents are ratified and confirmed and shall continue in full force and
effect. Borrower, Lenders, Issuing Bank and Agent agree that the Agreement as
amended hereby and the other Loan Documents shall continue to be legal,
valid, binding and enforceable in accordance with their respective terms.
4.2 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to the Lenders, Agent and Issuing Bank that (i) the execution,
delivery and performance of this Amendment and any and all other Loan
Documents executed and/or delivered in connection herewith have been
authorized by all requisite corporate action on the part of Borrower and will
not violate the articles of incorporation or bylaws of Borrower, (ii) the
representations and warranties contained in the Agreement, as amended hereby,
and any other Loan Document are true and correct on and as of the date hereof
as though made on and as of the date hereof, except to the extent such
representations and warranties speak to a specific date, (iii) no Event of
Default has occurred and is continuing and no event or condition has occurred
that with the giving of notice or lapse of time or both would be an Event of
Default, and (iv) Borrower is in full compliance with all covenants and
agreements contained in the Agreement as amended hereby.
-3-
<PAGE>
ARTICLE V.
MISCELLANEOUS
5.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made in this Amendment or any other Loan Document including
any Loan Document furnished in connection with this Amendment shall survive
the execution and delivery of this Amendment and the other Loan Documents,
and no investigation by the Lenders, Agent or Issuing Bank or any closing
shall affect the representations and warranties or the right of the Lenders
or Agent or Issuing Bank to rely upon them.
5.2 REFERENCE TO AGREEMENT. Each of the Loan Documents, including
the Agreement and any and all other agreements, documents, or instruments now
or hereafter executed and delivered pursuant to the terms hereof or pursuant
to the terms of the Agreement as amended hereby, are hereby amended so that
any reference in such Loan Documents to the Agreement shall mean a reference
to the Agreement as amended hereby.
5.3 SEVERABILITY. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
5.4 APPLICABLE LAW. This Amendment and all other Loan Documents
executed pursuant hereto shall be deemed to have been made and to be
performable in Austin, Travis County, Texas and shall be governed by and
construed in accordance with the laws of the State of Texas.
5.5 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall
inure to the benefit of the Lenders, Agent, Issuing Bank and Borrower and
their respective successors and assigns, except Borrower may not assign or
transfer any of its rights or obligations hereunder without the prior written
consent of the Lenders.
5.6 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the
same instrument.
5.7 ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS,
DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS
AMENDMENT REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO AND MAY NOT
BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN
ORAL AGREEMENTS AMONG THE PARTIES HERETO.
-4-
<PAGE>
Executed as of the date first written above.
BORROWER:
SCHLOTZSKY'S, INC.
By:
------------------------------------
Name:
----------------------------
Title:
---------------------------
Address for Notices:
203 Colorado St.
Austin, TX 78701
Fax No.: (512) 236-3740
Telephone No.: (512) 236-3600
Attention: Chief Financial Officer
AGENT, ISSUING BANK AND LENDER:
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By:
------------------------------------
Name: Keith Smith
Title: Vice President
Address for Notices:
111 Congress Avenue, Suite 300
Austin, TX 78701
Fax No.: (512) 344-7318
Telephone No.: (512) 344-7011
Attention: Keith Smith
-5-
<PAGE>
OTHER LENDERS:
FROST NATIONAL BANK
By:
------------------------------------
Name:
----------------------------
Title:
---------------------------
Address for Notices:
2728 North Harwood, Suite 100
Dallas, TX 75201
Fax No.: (214) 515-4955
Telephone No.: (214) 515-4907
Attention: Shannon Bettis
TEXAS CAPITAL BANK,
NATIONAL ASSOCIATION
By:
------------------------------------
Name:
----------------------------
Title:
---------------------------
Address for Notices:
2100 McKinney Avenue, Suite 900
Dallas, TX 75201
Fax No.: (214) 932-6604
Telephone No.: (214) 932-6675
Attention: Tim Monter
-6-
<PAGE>
OBLIGATED PARTIES CONSENT
Each of the undersigned Obligated Parties (i) consent and agree to
this Amendment; and (ii) agree that the Loan Documents to which it is a party
shall remain in full force and effect and shall continue to be the legal,
valid and binding obligation of such Obligated Party enforceable against it
in accordance with their respective terms.
OBLIGATED PARTIES:
RAD Acquisition Corp.
Schlotzsky's Real Estate, Inc.
Schlotzsky's Restaurants, Inc.
DFW Restaurant Transfer Corp.
Schlotzsky's Equipment Corporation
SREI Turnkey Development, L.L.C.
56th & 6th, Inc.
By:
----------------------------------
Name:
--------------------------
Title:
-------------------------
-7-
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,520,298
<SECURITIES> 0
<RECEIVABLES> 17,682,676
<ALLOWANCES> 1,151,317
<INVENTORY> 0
<CURRENT-ASSETS> 38,261,803
<PP&E> 24,438,069
<DEPRECIATION> 4,319,357
<TOTAL-ASSETS> 128,368,514
<CURRENT-LIABILITIES> 18,958,585
<BONDS> 0
0
0
<COMMON> 63,258
<OTHER-SE> 75,928,533
<TOTAL-LIABILITY-AND-EQUITY> 128,368,514
<SALES> 4,401,361
<TOTAL-REVENUES> 13,055,392
<CGS> 1,267,304
<TOTAL-COSTS> 11,123,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 823,393
<INCOME-PRETAX> 1,871,078
<INCOME-TAX> 682,943
<INCOME-CONTINUING> 1,188,136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,188,136
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
