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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, 1997
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, 1997
Common Stock, no par value 7,310,624
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INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets --
September 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of
Income -- Three and Nine Months Ended
September 30, 1997 and September 30, 1996 3
Condensed Consolidated Statements of
Stockholders' Equity -- Nine Months Ended
September 30, 1997 and the year ended
December 31, 1996 4
Condensed Consolidated Statements of
Cash Flows -- Nine Months Ended
September 30, 1997 and September 30, 1996 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
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
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
Assets
Current assets:
Cash and cash equivalents $32,723,636 $ 5,638,958
Restricted certificates of deposit 18,000 18,000
Royalties receivable 947,240 580,470
Other receivables 1,948,983 1,573,483
Notes receivable, current portion 2,223,370 557,332
Notes receivable - affiliates, current portion 193,970 595,000
Real estate development, current portion 4,138,705 8,458,301
Prepaid expenses & other assets 684,247 247,762
----------- -----------
Total current assets 42,878,151 17,669,306
Other assets:
Property, equipment & leasehold improvements, net 7,941,853 5,440,882
Real estate development, less current portion 1,415,995 2,642,773
Notes receivable, less current portion 2,497,724 2,656,502
Notes receivable - affiliates, less current
portion 2,044,299 2,180,456
Investments and advances 1,462,070 1,265,862
Deferred federal income tax asset 559,073 607,448
Intangible assets, net 10,904,566 8,515,883
----------- -----------
Total Assets $69,703,731 $40,979,112
----------- -----------
----------- -----------
Liabilities and Stockholder's Equity
Current liabilities:
Current maturities of long-term debt $ 135,199 $ 482,205
Accounts payable 1,110,473 1,540,527
Accrued liabilities 2,924,991 1,851,257
Federal income tax payable 282,827 --
----------- -----------
Total current liabilities 4,453,490 3,873,989
Other liabilities:
Deferred revenue, net 1,144,825 1,663,765
Long-term debt, less current portion 2,252,253 3,129,337
----------- -----------
Total Liabilities 7,850,568 8,667,091
Stockholders' Equity
Common stock, no par value, 30,000,000 shares
authorized, 7,077,861 and 5,539,922 issued and
outstanding at September 30, 1997 and December
31, 1996 59,637 44,257
Additional paid in capital 52,693,631 26,493,165
Retained earnings 9,099,895 5,774,599
----------- -----------
Total Stockholders' Equity 61,853,163 32,312,021
----------- -----------
Total Liabilities and Stockholders' Equity $69,703,731 $40,979,112
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED 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,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Revenues
Royalties $3,819,957 $2,874,047 $10,703,264 $ 7,794,559
Franchise fees 410,835 400,000 1,003,335 1,222,500
Developer fees -0- 325,000 125,000 1,335,750
Restaurant sales 1,636,335 1,061,447 4,398,625 2,437,391
Brand Contribution 790,477 511,433 2,132,301 871,230
Turnkey Development 1,374,288 110,556 2,822,056 175,954
Other fees and revenue 312,271 154,421 834,649 687,031
---------- ---------- ----------- -----------
Total revenues 8,344,163 5,436,904 22,019,230 14,524,415
Expenses
Service Costs:
Royalties 1,397,352 989,587 3,905,309 2,662,752
Franchise fees 218,750 232,750 531,250 681,000
Restaurant Operations:
Cost of sales 538,541 331,192 1,379,416 792,798
Labor cost 642,884 397,097 1,731,264 1,003,923
Operating expenses 549,311 338,150 1,399,854 677,843
General and administrative 2,789,509 1,743,507 7,218,862 5,026,118
Depreciation and amortization 268,770 207,720 782,710 601,629
---------- ---------- ----------- -----------
Total expenses 6,405,117 4,240,003 16,948,665 11,446,063
---------- ---------- ----------- -----------
Income from operations 1,939,046 1,196,901 5,070,565 3,078,352
Other
Interest income, net 88,632 117,692 284,148 388,580
---------- ---------- ----------- -----------
Income before income taxes 2,027,678 1,314,593 5,354,713 3,466,932
Provision for federal
and state income taxes 793,010 516,223 2,069,656 1,325,119
---------- ---------- ----------- -----------
Net Income $1,234,668 $ 798,370 $ 3,285,057 $ 2,141,813
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Income per common share - primary:
Income per common share $ .21 $ .14 $ .57 $ .38
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted average shares outstanding 5,888,774 5,665,420 5,769,633 5,671,586
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Income per common share - fully diluted:
Income per common share $ .21 $ .14 $ .57 $ .38
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted average shares outstanding 5,888,774 5,665,420 5,769,633 5,682,232
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
3
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK
---------------------
STATED ADDITIONAL TOTAL
SHARES CAPITAL PAID-IN RETAINED STOCKHOLDERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS EQUITY
----------- ------- ----------- ---------- -----------
Balance, January 1, 1996 5,509,998 $43,958 $26,238,964 $2,691,443 $28,974,365
Options exercised 29,924 299 254,201 (111,819) 142,681
Net income 3,194,975 3,194,975
--------- ------- ----------- ---------- -----------
Balance, December 31, 1996 5,539,922 44,257 26,493,165 5,774,599 32,312,021
Issuance of common stock 1,500,000 15,000 25,875,705 25,890,705
Options exercised 37,939 380 324,761 40,238 365,379
Net income 3,285,057 3,285,057
--------- ------- ----------- ---------- -----------
Balance, September 30, 1997 7,077,861 $59,637 $52,693,631 $9,099,895 $61,853,163
--------- ------- ----------- ---------- -----------
--------- ------- ----------- ---------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
4
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
Cash flows from operating activities $ 3,900,403 $ 857,667
Cash flows from investing activities:
Purchase of real estate held for sale (12,444,696) (9,146,131)
Proceeds from sale of real estate 17,984,203 3,499,047
Issuance of notes receivable (less collections) (1,506,070) 752,079
Acquisition of intangibles (2,773,932) 1,871,446
Purchase of property, equipment and leasehold
improvements (2,881,203) (513,669)
Other (226,019) 425,846
------------ -----------
Net cash used for investing activities (1,847,717) (8,358,432)
Cash flows from financing activities:
Proceeds from issuance of long term debt 1,112,710 384,043
Principal payments on long term debt (2,336,802) (879,833)
Proceeds from exercises of options 365,379 69,364
Proceeds from sales of Common Stock 25,890,705 0
------------ -----------
Net cash provided by/(used for) financing activities 25,031,992 (426,426)
------------ -----------
Net increase/(decrease) in cash and cash equivalents 27,084,678 (7,927,191)
Cash and cash equivalents at beginning of period 5,638,958 12,344,682
------------ -----------
Cash and cash equivalents at end of period $ 32,723,636 $ 4,417,491
------------ -----------
------------ -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
5
SCHLOTZSKY'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
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, 1997, are not necessarily
indicative of the results that may be expected for the year ended December
31, 1997. 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/A for the year
ended December 31, 1996.
NOTE 2. -- SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
During 1997, an additional corporation, SREI Turnkey Development, LLC,
was formed in connection with the purchase and subsequent sale of real
property located in Indiana. This corporation is wholly-owned by
Schlotzsky's Real Estate, Inc.
NOTES RECEIVABLE
The Company obtains annual valuations of all Area Developer and Master
Licensee promissory notes receivable from an independent financial services
institution. For the year ended December 31, 1996, a valuation allowance of
approximately $188,000 was established to adjust the cost basis to estimated
fair value. For the nine months ended September 30, 1997, an additional
$50,000 valuation allowance was taken to adjust the cost basis to estimated
fair value.
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.
6
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997.
The Company does not expect the adoption of statement 130 and 131 to
result in a significant impact upon the Company's financial statements.
NOTE 3. -- FINANCING ARRANGEMENTS
During 1997, notes receivable from Franchisees related to the sale of
turnkey properties, bearing interest at 8-10% per annum, collateralized by
the properties with all principal and interest due within 180 days, were
received in the amount of $1,976,000. As of September 30, 1997, a balance of
$1,283,000 remained outstanding on these notes.
In February 1997, the Company secured a line of credit of up to $5
million to provide financing for the Turnkey Program. As of September 30,
1997, the Company had not drawn against this line of credit.
In June 1997, the Company secured two lines of credit from a financial
institution. One line, in the amount of $3 million, will be used to retire
approximately $1.5 million of existing debt. The balance will be used to
fund various capital expenditures budgeted to occur in 1997. The other line
of credit will provide up to $12 million of financing for the Company's
Turnkey program. As of September 30, 1997, neither of the new lines had been
drawn upon.
NOTE 4. -- STOCKHOLDERS' EQUITY
In September 1997, the Company sold in a public offering 1,500,000 shares
of its Common Stock which generated net proceeds of approximately $25.9
million. A portion of the proceeds were used to repay debt owed to financial
institutions and corporations. The balance of the proceeds will fund the
Turnkey Program as well as the Company's expansion into the Austin market.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Total revenues increased 53.5% from $5,437,000 to $8,344,000.
Royalties increased 32.9% from $2,874,000 to $3,820,000. This increase
was due to the addition of 121 restaurants opened during the period from
October 1, 1996, to September 30, 1997. Also driving the increase was the
growing influence of larger freestanding units with higher visibility, a
10.2% increase in average weekly sales and a 4.6% increase in same store
sales.
Franchise fees increased 2.7% from $400,000 to $411,000. This increase
was a result of a higher average franchise fee per unit opened during the
three-month period ended September 30, 1997, as compared to the three months
ended September 30, 1996.
Developer fees decreased 100.0% from $325,000 to $0. This decrease was
primarily due to there being no sales of domestic or international
development markets during the three months ended September 30, 1997, as most
of the development rights have been sold.
Restaurant sales increased 54.2% from $1,061,000 to $1,636,000. This
increase was attributable to a 6.9% increase in sales volume of the Company's
Flagship restaurant and the continued operation of four additional
Company-owned stores compared to those in operation for the same period last
year. It is the Company's intention to re-market the units acquired from
franchisees once their operations and profitability have improved.
Management has not established a timeframe to re-market these restaurants.
Brand contributions, or private label licensing fees, increased 54.6%
from $511,000 to $790,000. The increase was the result of more favorable
terms with certain major suppliers compared to the terms in place in the
prior year, the increasing volume of system sales and greater franchisee
participation in the Company's purchasing programs.
Turnkey development revenue increased from $111,000 to $1,374,000.
Revenue in the current quarter was the result of the gain on the sale of 12
turnkey sites and one other contract for construction management only. In
addition, revenue in the quarter included $33,000 of rental revenue for two
previously completed sites sold during the period.
Other fees and revenues increased 102.2% from $154,000 to $312,000. This
change was primarily due to the increased level of supplier contributions to
the Company's annual convention held in July 1997.
8
The following table reflects the growth of the franchise system for the
three months ended September 30, 1997 and 1996, which has been principally
responsible for the increased revenue as discussed above.
THREE MONTHS ENDED
SYSTEM PERFORMANCE SEPTEMBER 30,
1997 1996
---- ----
Units Opened
Domestic
Freestanding 19 19
End Cap 4 6
Other 4 4
---- ----
Total Domestic Openings 27 29
International 1 2
---- ----
Total Openings 28 31
Units Closed 4 4
---- ----
Net Unit Growth 24 27
---- ----
---- ----
Sales:
System-wide Sales (in thousands) $70,457 $54,716
Average Weekly Sales $ 8,958 $ 8,130
Change in Average Weekly Sales 10.2% 12.4%
Stores in Operation 636 543
Change in Same Store Sales 4.6% 3.1%
COSTS AND EXPENSES. Royalty service costs increased 41.2% from $990,000
to $1,397,000. This increase was a direct result of the increase in royalty
revenue for the three months ended September 30, 1997, as compared to the
same period in the prior year. Royalty service costs as a percentage of
royalties grew from 34.4% to 36.6%. This increase reflects the growing
percentage of restaurants serviced by the area developer system and the
higher sales levels achieved by these stores.
Restaurant cost of sales, which consists of food, beverage and paper
costs, increased 62.6% from $331,000 to $539,000, and as a percentage of
restaurant sales increased from 31.2% to 32.9%. Likewise, restaurant labor
costs increased 61.9% from $397,000 to $643,000, and as a percentage of
restaurant sales increased from 37.4% to 39.3% for the same quarter in 1996.
These percentage increases were primarily due to the Company's focus on
product development and manager training in its restaurants, as well as the
initial inefficiencies experienced in operating new Company-owned units.
Restaurant operating expenses have increased from $338,000 to $549,000, and
as a percentage of restaurant sales increased from 31.9% to 33.6% for the
three months ended September 30, 1997, as compared to the corresponding
period in 1996. The increase in operating expenses is due to the additional
facility costs for the additional stores the Company operates.
General and administrative expenses grew from $1,744,000 to $2,790,000
representing a 60.0% increase, and as a percentage of total revenues
increased from 32.1% to 33.4%. These increases are principally the result of
additional personnel to support the growth in the Company's Turnkey program.
Depreciation and amortization increased from $208,000 to $269,000, but as
a percentage of total revenues decreased from 3.8% to 3.2%. The dollar
increase was principally due to amortization of goodwill and other
intangibles acquired in late 1996 and depreciation related to the additional
Company-owned restaurants.
9
OTHER. Net interest income decreased 24.7% from $118,000 to $89,000.
This decrease was a result of the lower level of funds invested during the
more recent period.
INCOME TAX EXPENSE. Income tax expense reflects a combined federal and
state effective tax rate of 39.1% for the three months ended September 30,
1997, which is slightly lower than the effective combined tax rate for the
comparable period in 1996. Based on projections of taxable income, the
Company anticipates that its effective combined rate for federal and state
taxes will be approximately 39% for 1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
REVENUES. Total revenues increased 51.6% from $14,524,000 to $22,019,000.
Royalties increased 37.3% from $7,795,000 to $10,703,000. This increase
was due to the addition of 121 restaurants opened during the period from
October 1, 1996 to September 30, 1997. Also driving the increase was the
growing influence of larger freestanding units with higher visibility, a
10.7% increase in average weekly sales and a 3.4% increase in same store
sales.
Franchise fees decreased 17.9% from $1,223,000 to $1,003,000. This
decrease was a result of eleven fewer domestic openings during the nine-month
period ended September 30, 1997, as compared to the nine months ended
September 30, 1996. The fewer number of openings is the result of the
Company's increasing emphasis on superior site selection for larger
freestanding restaurants with higher visibility.
Developer fees decreased 90.6% from $1,336,000 to $125,000. This
decrease is primarily due to the fact that the development rights to the
majority of the domestic and international markets have been sold. It is
also the result of the Company's focus on the recurring revenue elements of
the business rather than these one-time transactional fees.
Restaurant sales increased 80.5% from $2,437,000 to $4,399,000. This
increase was attributable to a 20.6% increase in sales volume of the
Company's Flagship restaurant and the continued operation of four additional
Company-owned stores compared to those in operation for the same period last
year. It is the Company's intention to re-market the units acquired from
franchisees once their operations and profitability have improved.
Management has not established a timeframe to re-market these restaurants.
Brand contributions, or private label licensing fees, increased 144.8%
from $871,000 to $2,132,000. The increase was the result of more favorable
terms with certain major suppliers than those terms in place in the prior
year, as well as the increasing volume of system sales and greater franchisee
participation in the Company's purchasing programs.
Turnkey development revenue increased from $176,000 to $2,822,000.
Revenue in the nine months ended September 30, 1997 resulted from the gain on
the sale of 27 sites, rental revenue of $287,000 and a construction
management fee of $15,000. From time to time the Company may earn rental
revenue on sites which have been completed and opened, however not yet sold.
As of September 30, 1997 all such sites under lease during the year have been
sold.
Other fees and revenues increased 21.5% from $687,000 to $835,000. This
change was primarily due to the increased level of supplier contributions to
the Company's annual convention held in July 1997.
10
The following table reflects the growth of the franchise system for the
nine months ended September 30, 1997 and 1996, which has been principally
responsible for the increased revenue as discussed above.
NINE MONTHS ENDED
SYSTEM PERFORMANCE SEPTEMBER 30,
1997 1996
---- ----
Units Opened
Domestic
Freestanding 55 51
End Cap 11 22
Other 8 12
---- ----
Total Domestic Openings 74 85
International 4 7
---- ----
Total Openings 78 92
Units Closed 15 12
---- ----
Net Unit Growth 63 80
---- ----
---- ----
Sales:
System-wide Sales (in thousands) $198,412 $146,108
Average Weekly Sales $ 8,654 $ 7,819
Change in Average Weekly Sales 10.7% 10.7%
Stores in Operation 636 543
Change in Same Store Sales 3.4% 2.9%
COSTS AND EXPENSES. Royalty service costs increased 46.7% from
$2,663,000 to $3,905,000. This increase was a direct result of the increase
in royalty revenue for the nine months ended September 30, 1997, as compared
to the same period in the prior year. Royalty service costs as a percentage
of royalties grew from 34.2% to 36.5%. This increase reflects the growing
percentage of restaurants serviced by the area developer system and the
higher sales levels achieved by these stores.
Restaurant cost of sales, which consists of food, beverage and paper
costs, increased 74.0% from $793,000 to $1,379,000, but as a percentage of
restaurant sales decreased from 32.5% to 31.4%. Also, restaurant labor costs
increased 72.5% from $1,004,000 to $1,731,000, but as a percentage of
restaurant sales decreased from 41.2% to 39.4% for the same period in 1996.
These percentage decreases were primarily due to the overall improving
operational efficiencies attained in the various Company-owned stores.
Restaurant operating expenses have increased from $678,000 to $1,400,000, and
as a percentage of restaurant sales increased from 27.8% to 31.8% for the
nine months ended September 30, 1997, as compared to the same corresponding
period in 1996. The increase in operating expenses is due to the additional
facility costs for the additional stores the Company operates.
General and administrative expenses grew 43.6% from $5,026,000 to
$7,219,000, but as a percentage of total revenues decreased from 34.6% to
32.8%. The dollar change is principally the result of additional personnel to
support the growth in the Company's Turnkey program and the expensing of real
estate costs of certain Turnkey sites which management has determined are no
longer desirable locations for development. The percentage decrease is the
result of revenue increasing at a greater rate than these expenses for the
nine months ended September 30, 1997.
11
Depreciation and amortization increased from $602,000 to $783,000, but as a
percentage of total revenues decreased from 4.1% to 3.6%. The dollar increase
was principally due to amortization of goodwill and other intangibles acquired
in late 1996 and depreciation related to the additional stores the Company was
operating in the more recent period.
OTHER. Net interest income decreased 26.9% from $389,000 to $284,000.
This decrease was a result of a lower level of funds invested during the more
recent period.
INCOME TAX EXPENSE. Income tax expense reflects a combined federal and
state effective tax rate of 38.7% for the nine months ended September 30, 1997,
which is slightly higher than the effective combined tax rate for the comparable
period in 1996. Based on projections of taxable income, the Company anticipates
that its effective combined rate for federal and state taxes will be
approximately 39% for 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position improved significantly during the first
nine months of 1997 as a result of its secondary public offering of common
stock. The Company issued 1,500,000 shares of the total 2,300,000 shares
offered to the public at a per share price of $18.375. After expenses
associated with the offering, the Company generated cash proceeds of
$25,891,000. The Company applied $1,500,000 of the cash proceeds to retire
outstanding obligations.
Net cash provided by operating activities was $3,900,000 for the nine
months ended September 30, 1997. Net cash of $1,848,000 was used for various
investing activities for the nine-month period. Proceeds from the sale of
Turnkey projects during the first nine months of 1997 exceeded funds used to
purchase new sites for development by $5,558,000. The Company also invested
$2,774,000 to reaquire the development rights to three domestic territories and
in its planned expansion in the Austin, Texas market. Additionally, the Company
invested $2,881,000 through September 30, 1997 toward the completion of two
Company-owned stores and the construction of its new corporate office. During
the first nine months of 1997, financing activities provided cash of
$25,032,000, primarily from the issuance of additional shares of common stock
described above, less the retirement of some long term debt obligations.
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 was renewed in
April 1996 at a rate of prime plus 1.25% and matures April 2001. The loan
balance as of September 30, 1997, was $1,123,000, and monthly payments are being
made by the partnership.
12
The Company continues to expand and refine its Turnkey Program and
expects that it will have 50 to 80 sites 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 it has sold to finance the development
activity of the Turnkey Program. With the continued growth in the Turnkey
Program, the capital required to finance the Turnkey Program will remain
significant. During the first nine months of 1997, the Company developed 28
sites under the Turnkey Program, of which 27 were sold and the remaining
store is operated as a Company-owned store. Seventy-eight properties were in
various stages of development as of September 30, 1997. The Company has also
entered into agreements to manage and fund the construction of six sites for
a fee. The tables below provide a summary of the Turnkey Program development
activity since its inception and a summary of the status of the Turnkey
Program inventory at September 30, 1997.
NUMBER OF SITES
---------------
1995 1996 1997
(9 Mo)
---- ---- ------
TURNKEY PROGRAM DEVELOPMENT ACTIVITY:
Sites in process at beginning of period 0 27 35
Sites beginning development during the period 32 19 71
Sites completed as Company-owned stores 0 (1) (1)
Sites Sold (5) (10) (27)
---- ---- ------
Sites in process at end of period 27 35 78
---- ---- ------
---- ---- ------
INVESTED AT
SEPTEMBER 30, ESTIMATES TO
1997 COMPLETE
------------- ------------
STATUS OF TURNKEY PROGRAM INVENTORY:
Open (receiving rent & royalties) 2 8 0 $ -0- $ N/A
Investment Sites (under construction) 9 9 6 3,251,000 2,000,000
Predevelopment Sites (preacquisition) 11 13 68 777,000 66,000,000
Other 5 5 4 1,527,000 --
---- ---- ------ ---------- -----------
Total 27 35 78 $5,555,000 $68,000,000
---- ---- ------ ---------- -----------
---- ---- ------ ---------- -----------
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 market the properties.
The Company believes that cash flow from operations, together with the
proceeds from the Turnkey program, cash reserves from its public offering,
collections from notes receivable and borrowings under existing credit
facilities described above, will be sufficient to meet the Company's
anticipated cash needs for the foreseeable future. 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. 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 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.
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/A in "Business" pages
1-13.
13
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
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. 16
27 Financial Data Schedule. 17
b. Current Reports on Form 8-K: None
14
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
Chief Financial Officer
Austin, Texas
November 13, 1997
15