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Index to Form 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2002

Commission File Number: 0-27008

Schlotzsky's, Inc.
(Exact name of registrant as specified in its charter)

Texas
(State or other Jurisdiction of
incorporation or organization)		   74-2654208
(IRS Employer
Identification No.)

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 ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
   Shares Outstanding at August 9, 2002
Common Stock, no par value   7,306,586

SCHLOTZSKY'S, INC.

Index to Form 10-Q
Quarter Ended June 30, 2002

 
    
   Page No.
Part I   FINANCIAL INFORMATION    

Item 1.
 
Financial Statements
 
 

 
 
Condensed Consolidated Balance Sheets—
June 30, 2002 and December 31, 2001
 
1

 
 
Condensed Consolidated Statements of Income—
Three and Six Months Ended June 30, 2002 and June 30, 2001
 
2

 
 
Condensed Consolidated Statement of Stockholders' Equity—
Six Months Ended June 30, 2002 and Year Ended December 31, 2001
 
3

 
 
Condensed Consolidated Statements of Cash Flows—
Six Months Ended June 30, 2002 and June 30, 2001
 
4

 
 
Notes to Condensed Consolidated Financial Statements
 
5

Item 2.
 
Management's Discussion and Analysis of Financial Condition And Results of Operations
 
15

Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
23


Part II

 

OTHER INFORMATION

 

 

Item 1.
 
Legal Proceedings
 
24

Item 2.
 
Changes in Securities and Use of Proceeds
 
25

Item 3.
 
Defaults Upon Senior Securities
 
25

Item 4.
 
Submission of Matters to a Vote of Security Holders
 
25

Item 5.
 
Other Information
 
26

Item 6.
 
Exhibits and Reports on Form 8-K
 
26


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
   June 30,
2002
   December 31,
2001
  
 
   (Unaudited)

    
  
ASSETS        
Current Assets:              
  Cash and cash equivalents   $ 981,735   $ 2,567,904  
  Accounts receivable, net:              
    Royalties     786,779     579,503  
    Brands     1,516,207     1,214,936  
    Other     1,957,583     1,588,853  
  Refundable income taxes     362,830     1,609,795  
  Prepaids, inventories and other assets     1,211,950     1,349,444  
  Real estate available for sale     5,533,555     6,347,726  
  Deferred tax asset     1,888,074     1,888,074  
  Current portion of notes receivable     446,968     533,077  
   
 
 
    Total current assets     14,685,681     17,679,312  

Property, equipment and leasehold improvements, net
 
 
40,285,436
 
 
39,348,025
 
Notes receivable, net, less current portion     11,900,236     11,863,393  
Investments     1,615,344     1,693,639  
Intangible assets, net     43,333,902     43,118,101  
Other noncurrent assets     1,047,737     446,790  
   
 
 
    Total assets   $ 112,868,336   $ 114,149,260  
   
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current Liabilities:              
  Short-term debt   $ 926,454   $ 681,011  
  Current maturities of long-term debt     6,065,058     5,799,003  
  Accounts payable     1,568,720     1,429,762  
  Accrued liabilities     3,506,935     3,546,551  
  Deferred revenue, current portion     348,553     403,421  
   
 
 
    Total current liabilities     12,415,720     11,859,748  

Long-term debt, less current portion
 
 
22,975,268
 
 
25,896,769
 
Deferred revenue, less current portion     1,740,844     1,837,943  
Deferred tax liability     152,764     152,764  
   
 
 
    Total liabilities     37,284,596     39,747,224  
   
 
 

Commitments and contingencies
 
 
 
 
 
 
 

Stockholders' Equity:
 
 
 
 
 
 
 
Preferred stock, Class C, no par value, 1,000,000 shares authorized, none issued     —     —  
Common stock, no par value, 30,000,000 shares authorized, 7,483,189 shares and 7,463,990 shares issued at June 30, 2002 and December 31, 2001, respectively     63,750     63,498  
Additional paid-in capital     58,071,485     57,986,546  
Retained earnings     18,291,661     17,175,234  
Treasury stock (189,525 shares and 186,300 shares at June 30, 2002 and December 31, 2001, respectively), at cost     (843,156 )   (823,242 )
   
 
 
    Total stockholders' equity     75,583,740     74,402,036  
   
 
 
    Total liabilities and stockholders' equity   $ 112,868,336   $ 114,149,260  
   
 
 

The accompanying notes are an integral part of the condensed consolidated financial statements.

1


SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
   Three months ended
   Six months ended
  
 
   June 30,
2002
   June 30,
2001
   June 30,
2002
   June 30,
2001
  
Revenue:                          
  Royalties   $ 5,264,312   $ 5,733,405   $ 10,383,799   $ 11,168,001  
  Franchise fees     42,000     35,000     62,000     185,000  
  Developer fees     60,034     85,566     120,067     170,048  
  Restaurant sales     8,269,362     7,648,059     16,140,254     15,064,202  
  Brand contribution     1,991,130     1,967,129     3,874,157     3,696,146  
  Other fees and revenue     276,294     594,595     568,679     1,127,529  
   
 
 
 
 
      Total revenue     15,903,132     16,063,754     31,148,956     31,410,926  
   
 
 
 
 

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Service costs:                          
    Royalties     1,106,100     1,191,288     2,241,368     2,484,231  
    Franchise fees     15,955     17,500     25,955     77,500  
   
 
 
 
 
      1,122,055     1,208,788     2,267,323     2,561,731  
   
 
 
 
 
  Restaurant operations:                          
    Cost of sales     2,311,986     2,146,036     4,508,120     4,193,678  
    Personnel and benefits     3,292,578     3,163,864     6,461,889     6,347,163  
    Operating expenses     1,869,095     1,765,119     3,635,994     3,353,455  
   
 
 
 
 
      7,473,659     7,075,019     14,606,003     13,894,296  
   
 
 
 
 

Equity loss on investments
 
 
48,074
 
 
38,696
 
 
78,294
 
 
54,452
 
   
 
 
 
 
General and administrative     4,835,390     5,006,884     9,315,277     9,689,753  
   
 
 
 
 
Depreciation and amortization     1,086,438     1,039,465     2,169,731     2,037,768  
   
 
 
 
 
      Total expenses     14,565,616     14,368,852     28,436,628     28,238,000  
   
 
 
 
 
      Income from operations     1,337,516     1,694,902     2,712,328     3,172,926  

Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Interest income     94,618     267,084     312,061     530,266  
  Interest expense     (655,436 )   (707,048 )   (1,257,962 )   (1,492,735 )
   
 
 
 
 
     
Income before provision for income taxes
 
 
776,698
 
 
1,254,938
 
 
1,766,427
 
 
2,210,457
 

Provision for income taxes
 
 
288,000
 
 
504,000
 
 
650,000
 
 
868,000
 
   
 
 
 
 

Net income
 
$
488,698
 
$
750,938
 
$
1,116,427
 
$
1,342,457
 
   
 
 
 
 

Earnings per share-basic
 
$
0.07
 
$
0.10
 
$
0.15
 
$
0.18
 
   
 
 
 
 

Earnings per share-diluted
 
$
0.07
 
$
0.10
 
$
0.15
 
$
0.18
 
   
 
 
 
 

The accompanying notes are an integral part of the condensed consolidated financial statements.

2


SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)

 
   Common Stock
    
    
    
    
  
 
   Number of
Shares
   Stated Capital
Amount
   Additional
Paid-in
Capital
   Retained
Earnings
   Treasury
Stock
   Total
Stockholders'
Equity
  
Balance, January 1, 2001   7,443,342   $ 63,291   $ 57,877,642   $ 14,686,095   $ (105,000 ) $ 72,522,028  
Issuance of common stock in connection with employee stock purchase plan   18,348     184     38,806     —     —     38,990  
Issuance of warrants   —     —     57,000     —     —     57,000  
Treasury stock purchases (176,300 shares)   —     —     —     —     (718,242 )   (718,242 )
Options exercised   2,300     23     6,877     —     —     6,900  
Tax benefit from employee stock transactions   —     —     6,221     —     —     6,221  
Net income   —     —     —     2,489,139     —     2,489,139  
   
 
 
 
 
 
 
Balance, December 31, 2001   7,463,990     63,498     57,986,546     17,175,234     (823,242 )   74,402,036  
Issuance of common stock in connection with employee stock purchase plan   7,199     72     33,339     —     —     33,411  
Treasury stock purchases (3,225 shares)   —     —     —     —     (19,914 )   (19,914 )
Options exercised   12,000     180     46,748     —     —     46,928  
Tax benefit from employee stock transactions   —     —     4,852     —     —     4,852  
Net income   —     —     —     1,116,427     —     1,116,427  
   
 
 
 
 
 
 
Balance, June 30, 2002   7,483,189   $ 63,750   $ 58,071,485   $ 18,291,661   $ (843,156 ) $ 75,583,740  
   
 
 
 
 
 
 

PREFERRED STOCK

        Authorized 1,000,000 Class C shares, no par value; no shares outstanding at June 30, 2002, December 31, 2001, or January 1, 2001.

COMMON STOCK

        Authorized 30,000,000 shares, no par value; 7,483,189 shares issued at June 30, 2002, 7,463,990 shares issued at December 31, 2001, and 7,443,342 shares issued at January 1, 2001. Shares issued include 189,525, 186,300 and 10,000 shares in treasury at June 30, 2002, December 31, 2001, and January 1, 2001, respectively.

The accompanying notes are an integral part of the condensed consolidated financial statements.

3


SCHLOTZSKY'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
   For the six months ended
  
 
   June 30,
2002
   June 30,
2001
  
Cash flows from operating activities:              
  Net income   $ 1,116,427   $ 1,342,457  
  Adjustments to reconcile net income to cash provided by operating activities:              
    Depreciation and amortization     2,169,731     2,037,768  
    Provisions for uncollectible accounts and impairment of assets     425,779     784,857  
    Amortization of deferred revenue     (158,217 )   (427,548 )
    Equity loss on investments     78,294     54,452  
    Changes in:              
      Accounts receivable     129,515     498,963  
      Prepaid expenses and other assets     (415,847 )   85,161  
      Accounts payable and accrued liabilities     179,357     867,664  
   
 
 
        Net cash provided by operating activities     3,525,039     5,243,774  
   
 
 
Cash flows from investing activities:              
  Purchase of property, equipment and real estate available for sale     (1,356,779 )   (4,519,826 )
  Sale of property, equipment and real estate available for sale     814,403     1,495,973  
  Acquisition of investments and intangible assets     (732,257 )   (1,937,308 )
  Issuance of notes receivable     (16,260 )   (703,749 )
  Repayments of notes receivable     42,912     4,663,363  
  Sale of investments and intangible assets     —     64,608  
   
 
 
        Net cash used in investing activities     (1,247,981 )   (936,939 )
   
 
 
Cash flows from financing activities:              
  Sale of stock     85,191     16,620  
  Issuance of warrants     —     57,000  
  Acquisition of treasury stock     (19,914 )   (642,625 )
  Proceeds from issuance of debt     —     833,917  
  Repayment of debt     (3,928,504 )   (3,769,204 )
   
 
 
        Net cash used in financing activities     (3,863,227 )   (3,504,292 )
   
 
 
Net increase (decrease) in cash and cash equivalents     (1,586,169 )   802,543  
Cash and cash equivalents at beginning of period     2,567,904     1,163,839  
   
 
 
Cash and cash equivalents at end of period   $ 981,735   $ 1,966,382  
   
 
 

The accompanying notes are an integral part of the condensed consolidated financial statements.

4


SCHLOTZSKY'S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.—Basis of Presentation

        The accompanying unaudited condensed 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 June 30, 2002, are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. This information should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Schlotzsky's, Inc. Annual Report on Form 10-K for the year ended December 31, 2001.

Reclassifications

        Certain reclassifications have been made to the condensed consolidated financial statements for the periods ended June 30, 2001, to correspond with the presentation used at June 30, 2002, and for the periods then ended.

Note 2.—Restaurant Operations

        A summary of certain operating information for Company-owned restaurants is presented below for the three and six month periods ended June 30, 2002 and 2001 (dollars in thousands).

 
   Long-term Portfolio Restaurants
   Available for Sale
Restaurants
  
 
   Schlotzsky's® Delis
    
  
 
   Marketplaces
   Schlotzsky's® Delis
  
Three months ended June 30, 2002                    
Restaurant sales   $ 4,031   $ 1,317   $ 2,921  
   
 
 
 
Restaurant operations:                    
  Cost of sales     1,101     400     812  
  Personnel and benefits     1,384     630     1,278  
  Operating expenses     685     320     864  
   
 
 
 
      3,170     1,350     2,954  
   
 
 
 
Operating income (loss) before depreciation and amortization   $ 861   $ (33 ) $ (33 )