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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 September 30, 1996
Commission File Number: 0-27008
SCHLOTZSKY'S, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2654208
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
200 West Fourth Street
Austin, Texas 78701
(address of principal executive offices)
(512) 469-7500
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by the Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares Outstanding at November 1, 1996
Common Stock, no par value 5,537,422
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INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
September 30, 1996 and December 31, 1995 2
Condensed Consolidated Statements of
Income -- Three and Nine Months Ended
September 30, 1996 and September 30, 1995 3
Condensed Consolidated Statements of
Stockholders' Equity -- Nine Months Ended
September 30, 1996 and the year ended December 31, 1995 4
Condensed Consolidated Statements of
Cash Flows -- Nine Months Ended
September 30, 1996 and September 30, 1995 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changed 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 13
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,417,491 $12,344,682
Restricted certificates of deposit 80,685 78,983
Royalties receivable 591,139 304,649
Other receivables 1,273,381 597,536
Notes receivable, current portion 2,272,027 2,325,965
Notes receivable - affiliates, current portion 300,942 221,402
Real estate development 11,364,133 5,717,049
Prepaid expenses & other assets 350,129 292,880
----------- -----------
Total current assets 20,649,927 21,883,146
Other assets:
Property, equipment & leasehold improvements, net 4,328,264 4,139,619
Notes receivable, less current portion 2,633,907 1,474,311
Notes receivable - affiliates, less current portion 815,205 867,687
Investments and advances 967,810 1,210,635
Deferred federal income tax asset 497,687 531,870
Intangible assets, net 8,216,503 6,601,099
----------- -----------
Total Assets $38,109,303 $36,708,367
----------- -----------
----------- -----------
Liabilities and Stockholder's Equity
Current liabilities:
Notes payable $ 10,968
Current maturities of long-term debt $ 225,629 902,947
Accounts payable 347,698 589,532
Accrued liabilities 1,523,415 1,010,331
Federal income tax payable 112,597 619,382
----------- -----------
Total current liabilities 2,209,339 3,133,160
Other liabilities:
Deferred revenue, net 1,440,785 1,572,325
Long-term debt, less current portion 3,221,013 3,028,517
----------- -----------
Total Liabilities 6,871,137 7,734,002
Stockholders' Equity
Common stock, no par value, 30,000,000 shares
authorized, 5,509,998 and 5,537,422 issued and
outstanding at December 31, 1995 and September 30, 1996 44,232 43,958
Additional paid in capital 26,360,678 26,238,964
Retained earnings 4,833,256 2,691,443
----------- -----------
Total Stockholders' Equity 31,238,166 28,974,365
----------- -----------
Total Liabilities and Stockholders' Equity $38,109,303 $36,708,367
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Revenues
Royalties $2,874,047 $1,960,858 $ 7,794,559 $5,294,832
Franchise fees 400,000 228,750 1,222,500 986,250
Developer fees 325,000 259,562 1,335,750 870,562
Restaurant sales 1,061,447 77,191 2,437,391 233,061
Brand Contribution 511,433 121,414 871,230 446,122
Turn-key Development 110,556 17,744 175,954 26,322
Other fees and revenue 154,421 40,832 687,031 186,359
---------- ---------- ----------- ----------
Total revenues 5,436,903 2,706,351 14,524,415 8,043,508
Expenses
Service Costs:
Royalties 989,587 640,807 2,662,752 1,681,612
Franchise fees 232,750 129,375 681,000 493,375
Restaurant operations:
Cost of sales 331,192 25,443 792,798 80,741
Labor cost 397,097 81,617 677,843 151,863
Operating Expenses 338,150 53,540 1,003,923 239,781
General & Administrative 1,743,507 1,521,432 5,026,118 4,266,359
Depreciation and amortization 207,720 119,068 601,629 304,783
---------- ---------- ----------- ----------
Total expenses 4,240,003 2,571,282 11,446,063 7,218,514
---------- ---------- ----------- ----------
Income from Operations 1,196,901 135,069 3,078,352 824,994
Other
Interest income (expense), net 117,692 (31,949) 388,580 (78,041)
---------- ---------- ----------- ----------
Income before income taxes and extraordinary gain 1,314,593 103,120 3,466,932 746,953
Provision for federal and state income taxes 516,223 44,992 1,325,119 304,075
---------- ---------- ----------- ----------
Income before extraordinary item 798,370 58,128 2,141,813 442,878
Gain on extinguishment of debt, net of applicable
taxes of $18,271 at September 30, 1995 -0- -0- -0- 38,307
---------- ---------- ----------- ----------
Net Income 798,370 58,128 2,141,813 481,185
Redeemable preferred stock dividends (140,000) (420,000)
---------- ---------- ----------- ----------
Net income available to common shareholders $ 798,370 $ (81,872) $ 2,141,813 $ 61,185
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Income per common share - primary:
Income before extraordinary item $ .14 $ (.04) $ .38 $ .01
Extraordinary item --- --- --- .02
---------- ---------- ----------- ----------
Income per common share $ .14 $ (.04) $ .38 $ .03
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Weighted average shares outstanding 5,665,420 2,330,975 5,671,586 2,333,408
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Income per common share - fully diluted:
Income before extraordinary item $ .14 $ (.04) $ .38 $ .01
Extraordinary item --- --- --- .02
---------- ---------- ----------- ----------
Income per common share .14 (.04) .38 .03
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Weighted average shares outstanding 5,665,420 2,330,721 5,682,232 2,416,097
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock
---------------------- Additional Total
Shares Paid-In Retained Stockholders'
Outstanding Amount Capital Earnings Equity
----------- ------ ---------- ---------- -----------
Balance, January 1, 1995 2,187,500 $10,733 $1,602,820 $ 1,613,553
Redeemable preferred stock dividends (544,274) (544,274)
Public sale of stock 1,850,000 18,500 17,575,264 17,593,764
Conversion of redeemable preferred
stock 1,354,167 13,542 7,964,883 7,978,425
Conversion of redeemable preferred
stock dividends 118,331 1,183 698,817 700,000
Net income 1,632,897 1,632,897
---------- ------- ----------- ---------- -----------
Balance, December 31, 1995 5,509,998 43,958 26,238,964 2,691,443 28,974,365
Options exercised 27,424 274 121,714 121,988
Net Income 2,141,813 2,141,813
---------- ------- ----------- ---------- -----------
Balance, September 30, 1996 5,537,422 $44,232 $26,360,678 $4,833,256 $31,238,166
---------- ------- ----------- ---------- -----------
---------- ------- ----------- ---------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- ------------
Cash flows used for operating activities $ 857,667 $ 975,491
Cash flows used for investing activities
Purchase of real estate held for sale (9,146,131) (4,023,779)
Proceeds from sale of real estate 3,499,047 477,181
Issuance of notes receivable (752,079) (304,398)
Acquisition of intangibles (1,871,446) (334,098)
Other (87,823) (1,183,667)
----------- -----------
Net cash used for investing activity (8,358,432) (5,368,761)
Cash flows used for financing activities
Proceeds from issuance of long term debt 384,043 4,186,893
Principal payments on long term debt (879,833) (578,313)
Proceeds from exercises of options 69,364 -0-
Other -0- (177,376)
----------- -----------
Net cash provided by financing activities (426,426) 3,431,204
----------- -----------
Net increase/(decrease) in cash (7,927,191) (962,066)
Cash and cash equivalents at beginning of period 12,344,682 1,052,744
----------- -----------
Cash and cash equivalents at end of period $ 4,417,491 $ 90,678
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
NOTE 1. -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for
the three and nine months ended September 30, 1996, are not necessarily
indicative of the results that may be expected for the year ended December
31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto incorporated by reference in the
Schlotzsky's, Inc. Annual Report on Form 10-K for the year ended December 31,
1995.
NOTE 2. -- SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
In October 1995, the FASB issued Statement 123, "Accounting for Stock-Based
Compensation" ("Statement 123"), which establishes fair value-based
accounting and have implemented reporting standards for all transactions in
which a company acquires goods or services by issuing its equity securities.
As such, Statement 123 covers stock-based compensation plans including all
arrangements under which employees receive shares of stock. Statement 123
encourages employers to adopt its prescribed fair value-based method to be
adopted but employers must comply with the disclosure requirements set forth
in the statement. Statement 123 has an effective date of December 31, 1995.
The Company has adopted only the reporting standards of Statement 123.
In March 1995, the FASB issued Statement 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("Statement
121"), which addresses the accounting for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets
to be held and used. It also addresses the accounting for long-lived assets
and certain identifiable intangibles to be disposed of. Statement 121 has an
effective date of January 1, 1996. The Company has adopted Statement 121
which did not result in a significant impact upon the Company's financial
statements.
6
NOTE 3. -- FINANCING ARRANGEMENTS
In January 1996, the Company retired a note payable to a Trust with a
$650,000 balance. The note was convertible into 100,000 shares of common
stock and collateralized by royalties from certain franchises. The
retirement relieved both the conversion and collateral agreements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO THREE-MONTHS ENDED
SEPTEMBER 30, 1995
REVENUES. Total revenues increased 100.9% from $2,706,000 to $5,437,000.
Royalties increased 46.6% from $1,961,000 to $2,874,000. This increase
was due to the addition of 117 restaurants opened during the period from
October 1, 1995, to September 30, 1996. Also driving the increase was the
growing influence of larger freestanding units with higher visibility, a
12.4% increase in average weekly sales and a 3.1% increase in same store
sales.
Franchise fees increased 74.9% from $229,000 to $400,000. This increase
was a result of six additional unit openings, together with a higher average
franchise fee, for openings during the three-month period ended September 30,
1996, as compared to the same three-month period in 1995.
Developer fees increased 25.2% from $260,000 to $325,000. This increase
is due to the sale of the rights to one domestic development area and the
sale of the rights to one international market.
Restaurant sales increased 1,275% from $77,000 to $1,061,000. This
increase was due to the opening of the Company's flagship store in Austin,
Texas during November 1995, and the Company's purchase and operation of two
restaurants from franchisees during the second quarter of 1996. It is the
Company's intention to re-market the units acquired from franchisees once
their operations and profitability has improved. Management has not
established a timeframe to re-market these restaurants.
Private label licensing fees increased 321.2% from $121,000 to $511,000.
The increase was facilitated by the completion of contract negotiations with
two of the company's major suppliers of private label products for the
franchise system and the growth of system sales volume.
Turnkey development revenue increased from $17,000 to $111,000. The
completion of five turnkey sites and sale of two other previously completed
sites in the three-month period ended September 30, 1996, were responsible
for this increase.
Other fees and revenues increased 278.2% from $41,000 to $154,000. This
change was primarily due to rental income generated from Turnkey sites which
are currently under lease and an increase in the overhead recovery from the
Company's national advertising fund.
The following table reflects a comparison of system performance for the
three-months ended September 30, 1996 and September 30, 1995. The
information reflects the growth of the franchise system, which has been
principally responsible for the increased revenue as discussed above.
7
SYSTEM PERFORMANCE
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
Units Opened
Domestic
Freestanding 19 12
End Cap 6 6
Other 4 7
------- -------
Total Domestic Openings 29 25
International 2 -0-
------- -------
Total Openings 31 25
Units Closed 4 4
------- -------
Net Unit Growth 27 21
------- -------
------- -------
Sales:
System Wide Sales (in thousands) $54,716 $36,919
Average Weekly Sales $8,130 $7,233
Change in Average Weekly Sales 12% 8%
Stores in Operation 543 426
Change in Same Store Sales 3.1% .1%
COSTS AND EXPENSES. Royalty service costs increased 54.4% from $641,000
to $990,000. This increase was a direct result of the increase in royalty
revenue for the three-months ended September 30, 1996, as compared to the
same period in the prior year. Royalty service costs as a percentage of
royalties grew from 32.6% to 34.4%. This increase reflects the growing
number of restaurants serviced by the area developer system.
Restaurant cost of sales, which consists of food, beverage and paper
costs, increased from $25,000 to $331,000, but as a percentage of restaurant
sales remained relatively constant between 31% to 32%. This dollar increase
was primarily due to the November 1995 opening of the Company's flagship
store in Austin, Texas, and the acquisition of two restaurants from
franchisees in the second quarter of 1996. Other restaurant costs which
consist of labor and operating expenses also reflect increases which result
from the 1995 opening of the Company's flagship store and the two former
franchisee restaurants which were acquired earlier this year. Restaurant
labor costs increased from $82,000 to $397,000, but as a percentage of
restaurant sales decreased from 106% to 37% for the same quarter in 1995.
Likewise, restaurant operating expenses have increased from $54,000 to
$338,000, but as a percentage of restaurant sales decreased from 69% to 32%
for the three-months ended September 30, 1996, as compared to the same
three-month period in 1995. The decrease in labor and operating expenses as
a percentage of restaurant sales was primarily due to pre-opening costs
incurred relating to the November 1995 opening of the Company's flagship
store in Austin, Texas.
General and administrative expenses grew from $1,521,000 to $1,744,000
representing a 14.6% increase. The change is principally the result of
adding personnel at the corporate office and the increase of the Company's
reserves for collection of its receivables.
Depreciation and amortization increased from $119,000 to $208,000, but
as a percentage of total revenues decreased slightly from 4.0% to 3.8%. The
dollar increase was principally due to first time depreciation of
improvements and equipment at the Company's flagship store and additional
depreciation resulting from the acquisition of two stores from franchisees.
Amortization of pre-opening costs for the flagship store and the royalty
value related to remarketing the stores in Omaha and Albuquerque were the
primary factors contributing to the increase in amortization expense.
OTHER. A portion of the proceeds from the Company's initial public
offering were used to retire debt and with the remainder invested in
short-term liquid securities (SEE LIQUIDITY AND CAPITAL RESOURCES BELOW).
As a result, net interest income was $118,000 for the quarter ended September
30, 1996, a $150,000 improvement from the net interest expense of $32,000
incurred during the same period in 1995.
8
INCOME TAX EXPENSE. Income tax expense reflects a combined federal and
state effective tax rate of 39% for the three-months ended September 30, 1996,
which reflects a slight increase from the effective combined tax rate for the
comparable period in 1995, giving consideration to the extraordinary item and
its tax impact in that period. Based on projections of taxable income, the
Company anticipates that its effective combined rate for federal and state
taxes will be between 38% and 39% for 1996.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
REVENUES. Total revenues increased 80.6% from $8,044,000 to $14,524,000.
Royalties increased 47.2% from $5,295,000 to $7,795,000. This increase was
due to the addition of 117 restaurants opened during the period from October 1,
1995 to September 30, 1996. Also driving the increase was the growing influence
of larger freestanding units with higher visibility, an 11% increase in average
weekly sales and a 2.9% increase in same store sales.
Franchise fees increased 24.0% from $986,000 to $1,223,000. This increase
was a result of a higher average franchise fee for openings, during the
nine-month period ended September 30, 1996, as compared to the nine months ended
September 30, 1995.
Developer fees increased 53.4% from $871,000 to $1,336,000. This increase
was primarily due to the reacquisition and sale of the rights to four domestic
development areas.
Restaurant sales increased from $233,000 to $2,437,000. This increase was
due to the opening of the Company's flagship store in Austin, Texas during
November 1995, and the Company's purchase and continued operation of two
restaurants from franchisees during the second quarter of 1996. It is the
Company's intention to re-market the units acquired from franchisees once their
operations and profitability has improved. Management has not established a
timeframe to re-market these restaurants.
Private label licensing fees increased 95.3% from $446,000 to $871,000.
This change was the result of two re-negotiated contacts with suppliers of
private label products as well as an increase in the volume of the purchases of
these products by the franchise system.
Turnkey development fees grew from $26,000 to $176,000 for the nine months
ended September 30, 1996. The completion of twelve turnkey sites and sale of
six of these sites was responsible for the additonal fees in the current
nine-month period.
Other fees and revenues increased 269% from $186,000 to $687,000. This
change was primarily due to rental income from turnkey sites under lease
beginning for the first time in 1996, fees from franchise transfers, and an
increase in the overhead recovery from the Company's national advertising fund.
The following table reflects a comparison of system performance for the
nine months ended September 30, 1996 and September 30, 1995. The information
reflects the growth of the franchise system, which has been principally
responsible for the increased revenue as discussed above.
9
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
SYSTEM PERFORMANCE
Units Opened
Domestic
Freestanding 51 42
End Cap 22 22
Other 12 19
------------- -------------
Total Domestic Openings 85 83
International 7 1
------------- -------------
Total Openings 92 84
Units Closed 12 9
------------- -------------
Net Unit Growth 80 75
------------- -------------
------------- -------------
Sales:
System Wide Sales (in thousands) $146,108 $97,948
Average Weekly Sales $ 7,819 $ 7,061
Change in Average Weekly Sales 11% 11%
Stores in Operation 543 426
Change in Same Store Sales 2.9% 1.6%
COSTS AND EXPENSES. Royalty service costs increased 58.3% from $1,682,000
to $2,663,000. This increase was a direct result of the growth in royalty
revenue and the increasing percentage of Schlotzsky's restaurants under the area
developer program for the nine months ended September 30, 1996, as compared to
the same period in the prior year. Likewise, royalty service costs as a
percentage of royalties increased from 31.7% to 34.1%.
Restaurant cost of sales, which consists of food, beverage and paper costs,
increased 881.9% from $81,000 to $793,000. This increase reflects the
operational impact of the Company's flagship store in Austin, Texas, which
opened in November 1995, and the acquisition and operation of two stores from
franchisees in the second quarter of 1996.
Restaurant labor cost and operating expenses also reflect the operational
impact of the Company's flagship store and the addition of the two former
franchisee restaurants now being operated by the Company. Labor costs increased
346.4% from $152,000 to $678,000. Additionally, restaurant operating expenses
grew 318.7% from $240,000 to $1,004,000 for the nine months ended September 30,
1996.
General and administrative expenses increased 17.8% from $4,266,000 to
$5,026,000. This increase was primarily due to the addition of staff at the
corporate office, the strengthening of reserves for certain receivables, and
other administrative costs. In addition, a one-time cost related to the
exercise of certain stock options by a former employee was experienced in the
second quarter of 1996.
Depreciation and amortization increased from $305,000 to $602,000. The
increase was primarily due to first time depreciation of improvements and
equipment at the Company's flagship store and the acquisition of two stores
from franchisees during the second quarter of 1996. Amortization of
pre-opening costs for that store and the royalty value related to remarketing
the stores in Omaha and Albuquerque were the primary factors contributing to
the increase in amortization expense.
OTHER. A portion of the proceeds from the Company's initial public
offering were used to retire debt and with the remainder invested in short-term
liquid securities (See LIQUIDITY AND CAPITAL RESOURCES BELOW). As a result,
net interest income was $389,000 for the nine-month period ended September 30,
1996, a $467,000 improvement from the net interest expense incurred during the
same period in 1995.
10
INCOME TAX EXPENSE. Income tax expense for the nine months ending
September 30, 1996, reflects a combined federal and state effective tax rate
of 38.2%. This is comparable to the rate of 38.7% for the same period in
1995, giving consideration to the extraordinary item and its tax impact in
that period. Based on projections of taxable income, the Company anticipates
that its effective combined rate for federal and state taxes will be between
38% and 39% for 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position improved significantly as the result of
its initial public offering of Common Stock in December 15, 1995. The Company
sold 1,850,000 shares of the total 2,250,000 shares offered to the public at a
per share price of $11. After expenses associated with the offering, the
Company generated cash proceeds of $17,594,000. The Company applied $6,027,000
of the cash proceeds to retire outstanding obligations. The Company began the
year with cash reserves of $12,423,665.
The Company financed $1,875,000 of developer fees generated during the
nine-month period ended September 30, 1996, resulting in cash provided from
operations of $857,667. Cash decreased by $7,927,000 during the nine months
ended September 30, 1996. The three most significant uses of cash were the
acquisition of intangibles in the amount of $1,872,000 related to the purchase
of two restaurants and two domestic development territories, repayment of
$819,000 of long-term debt and $5,647,000 used to acquire real estate for the
turnkey program.
Bee Cave/Westbank, Ltd., a limited partnership in which the Company and its
subsidiary, Schlotzsky's Real Estate, Inc., own a combined 40% interest in
capital and profits, obtained an interim loan of $1,150,000 from a bank in
December 1994 to finance the construction of a retail shopping center. The
Company is liable for the full amount of this loan. The loan, which had an
outstanding balance of $1,145,000 on September 30, 1996, bore interest at the
bank's base rate (9.5% on September 30, 1996), was renewed in July 1996. The
limited partnership is currently seeking to obtain permanent financing for this
project from a financial institution. While management believes such financing
will be available on favorable terms, there can be no assurance in this regard.
The Company believes that cash flow from operations, cash reserves,
collections from notes receivable and borrowings under existing credit
facilities described above, will be sufficient to meet the Company's anticipated
cash needs through the end of 1996. Thereafter, the Company believes that new
store openings will result in increasing cash flow from operations which,
together with borrowings under credit facilities, should be sufficient to meet
the Company's anticipated cash needs, although there can be no assurance in this
regard. Substantially all of the Company's royalties have been pledged to
secure Company debt in the past. However, the proceeds of its offering were
used to repay most of these obligations. Accordingly, these royalties are
available to secure future financing. The Company guarantees certain leases of
its franchisees for limited periods of time, which may affect its ability to
obtain financing in the future. To the extent that the remaining net proceeds
from the initial public offering, credit facilities, and cash flow from
operations are insufficient to finance the Company's future expansion plans, the
Company intends to seek additional funds for this purpose from future debt
financing or additional offerings of equity securities, although there can be no
assurance of the availability of such funds on acceptable terms in the future.
REAL ESTATE DEVELOPMENT
The Company instituted the Turnkey Program during 1995 to further assist
franchisees in obtaining superior sites and to achieve more rapid penetration in
those selected major markets where the Company believes there is strong demand
by franchisees for quality locations. Under the Turnkey Program, the Company
works with an area developer to identify superior store sites within a
territory. The Company will purchase or lease a selected site, design and
construct a Schlotzsky's Deli restaurant on the site and sell, lease or sublease
the completed store to a franchisee. Where the Company does not sell the
property to a franchisee, the Company then sells the improved property, or, in
the case of a leased property, assigns
11
the lease and any sublease, to an investor. The Company charges the
franchisee approximately $20,000 per site for managing the construction of
the store. This construction management fee is recognized when the store is
opened. The Company anticipates that the total investment in each acquired
free-standing location will be approximately $500,000 to $800,000 (less for
leased locations), and that it will typically recognize fees on the sale or
assignment of the site to investors. The Company believes that the Turnkey
Program enhances the ability of area developers to recruit qualified
franchisees by developing high profile restaurant sites and achieving
critical mass more quickly in selected markets.
The Company has completed eighteen properties under the Turnkey Program, twelve
for the nine-month period ended September 30, 1996, eleven of which were sold,
six during the nine months ended September 30, 1996, and the remaining twelve
stores have generated $73,000 of rental revenue. Thirty-six properties were
under development as of the end of the period. The Company has obtained
commitments from institutional investors for up to $5,308,000 of purchases of
properties under the Turnkey Program. These commitments require the Company to
guarantee rental payments by the lessees/franchisees for a portion of their
lease terms.
A summary of turnkey sites developed since inception of the program is as
follows:
Invested at
Number of September 30, Estimates to
Units 1996 Complete
--------- ----------- ------------
Opened and Sold 11 -- --
Opened (receiving rent and
royalties) 7 4,965,900 --
Under Construction 6 2,570,800 1,729,200
Pre-construction 7 2,365,400 3,209,600
Pre-acquisition 18 218,800 12,996,200
Other 5 1,233,700 --
---- ----------- -----------
54 $11,354,600 $17,935,000
Contracts from Purchasers -- -- --
---- ----------- -----------
Net 54 $11,354,600 $17,935,000
---- ----------- -----------
---- ----------- -----------
Estimates above are based upon information from third parties and management's
assessment of conditions in existence at the time of this filing. There can be
no assurance that conditions (such as general or regional economic conditions)
will not change significantly requiring greater investment of resources or a
longer period of time to satisfactorily complete construction or marketing the
properties.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that are not historical facts.
Such statements may include, but not be limited to, projections of revenues,
income, capital expenditures, plans for future operations, financing needs or
plans, and plans relating to products or services of the Company, as well as
assumptions relating to the foregoing. These statements involve management
assumptions and are subject to risks and uncertainties, along with factors
set forth in the Company's Annual Report on Form 10-K in "Business" pages
1-16.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of the significant legal proceedings involving the Company,
reference is made to Item 3 of the Company's Annual Report on Form 10-K for the
period ended December 31, 1995.
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
Exhibit Sequentially
No. Numbered Page
------- -------------
11.1 Statement regarding computation of per share earnings 15
27 Financial Data Schedule 16
b. Current Reports on Form 8-K: None
13
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:
---------------------------------
CHARLES E. HARVEY, JR.
Executive Vice President and
Chief Financial Officer
Austin, Texas
November 12, 1996
14