SECURITIES AND EXCHANGE COMMISSION
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, 2004
Commission File Number: 0-27008
Schlotzsky’s, Inc.
| Texas | 74-2654208 | |
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) |
203 Colorado Street, Suite 600, Austin, Texas 78701
(Address of principal executive offices)
(512) 236-3800
(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 [ü] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ü]
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 4, 2004 | |
| Common Stock, no par value | 7,338,661 |
SCHLOTZSKY’S, INC.
Index to Form 10-Q
Quarter Ended March 31, 2004
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHLOTZSKY’S, INC. AND SUBSIDIARIES
| March 31, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | ||||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 1,133,087 | $ | 1,058,300 | ||||
Accounts receivable, net: |
||||||||
Royalties |
1,072,697 | 884,098 | ||||||
Brands |
906,654 | 905,085 | ||||||
Other |
1,505,071 | 1,494,513 | ||||||
Refundable income taxes |
9,350 | 9,350 | ||||||
Prepaids, inventories and other assets |
1,199,005 | 1,250,193 | ||||||
Real estate held for sale |
3,213,821 | 3,208,533 | ||||||
Current portion of: |
||||||||
Notes receivable |
55,134 | 50,570 | ||||||
Notes receivable – related party |
— | 3,500 | ||||||
Total current assets |
9,094,819 | 8,864,142 | ||||||
Property, equipment and leasehold improvements, net |
41,538,565 | 42,396,145 | ||||||
Notes receivable, net, less current portion |
4,059,407 | 4,121,951 | ||||||
Notes receivable – related party, net, less current portion |
1,740,606 | 2,613,170 | ||||||
Investments |
1,058,683 | 567,850 | ||||||
Intangible assets, net |
62,284,461 | 62,523,367 | ||||||
Goodwill, net |
3,519,242 | 3,519,242 | ||||||
Other noncurrent assets |
1,140,116 | 1,179,687 | ||||||
Total assets |
$ | 124,435,899 | $ | 125,785,554 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current Liabilities: |
||||||||
Short-term debt |
$ | 1,917,171 | $ | 1,133,701 | ||||
Current maturities of long-term debt |
7,357,985 | 6,564,646 | ||||||
Accounts payable |
3,899,488 | 5,768,117 | ||||||
Accrued liabilities |
5,634,784 | 5,243,563 | ||||||
Deferred revenue, current portion |
443,215 | 376,633 | ||||||
Total current liabilities |
19,252,643 | 19,086,660 | ||||||
Long-term debt, less current portion |
42,170,770 | 42,586,141 | ||||||
Deferred revenue, less current portion |
1,000,579 | 1,450,300 | ||||||
Deferred tax liability |
— | — | ||||||
Total liabilities |
62,423,992 | 63,123,101 | ||||||
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,
7,528,186 shares and 7,521,524 shares issued at March 31,
2004 and December 31, 2003, respectively |
64,140 | 64,073 | ||||||
Additional paid-in capital |
58,234,642 | 58,213,945 | ||||||
Retained earnings |
4,556,281 | 5,227,591 | ||||||
Treasury stock (189,525 shares at March 31, 2004 and
December 31, 2003), at cost |
(843,156 | ) | (843,156 | ) | ||||
Total stockholders’ equity |
62,011,907 | 62,662,453 | ||||||
Total liabilities and stockholders’ equity |
$ | 124,435,899 | $ | 125,785,554 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
SCHLOTZSKY’S, INC. AND SUBSIDIARIES
| For the three months ended |
||||||||
| March 31, | March 31, | |||||||
| 2004 |
2003 |
|||||||
Revenue: |
||||||||
Royalties |
$ | 3,592,768 | $ | 4,303,888 | ||||
Developer fees |
36,307 | 50,159 | ||||||
Restaurant sales |
7,781,785 | 7,612,229 | ||||||
Brand contribution |
1,416,596 | 1,651,105 | ||||||
Other fees and revenue |
219,996 | 212,649 | ||||||
Total revenue |
13,047,452 | 13,830,030 | ||||||
Expenses: |
||||||||
Service costs: |
||||||||
Royalties |
528,883 | 663,792 | ||||||
| 528,883 | 663,792 | |||||||
Restaurant operations: |
||||||||
Cost of sales |
2,110,003 | 2,171,620 | ||||||
Personnel and benefits |
2,950,497 | 3,365,161 | ||||||
Operating expenses |
1,871,420 | 1,902,247 | ||||||
| 6,931,920 | 7,439,028 | |||||||
Equity loss on investments |
— | 67,150 | ||||||
General and administrative |
3,942,874 | 5,070,715 | ||||||
Depreciation and amortization |
1,406,008 | 1,249,406 | ||||||
Total expenses |
12,809,685 | 14,490,091 | ||||||
Income (loss) from operations |
237,767 | (660,061 | ) | |||||
Other: |
||||||||
Interest income |
62,393 | 103,648 | ||||||
Interest expense |
(931,470 | ) | (1,015,905 | ) | ||||
Income (loss) before provision (credit) for income taxes |
(631,310 | ) | (1,572,318 | ) | ||||
Provision (credit) for income taxes |
40,000 | (506,000 | ) | |||||
Net income (loss) |
$ | (671,310 | ) | $ | (1,066,318 | ) | ||
Earnings per share-basic |
$ | (0.09 | ) | $ | (0.15 | ) | ||
Earnings per share-diluted |
$ | (0.09 | ) | $ | (0.15 | ) | ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
SCHLOTZSKY’S, INC. AND SUBSIDIARIES
| Common Stock | ||||||||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||
| Number of | Stated Capital | Paid-in | Retained | Treasury | Stockholders’ | |||||||||||||||||||
| Shares |
Amount |
Capital |
Earnings |
Stock |
Equity |
|||||||||||||||||||
Balance, January 1, 2003 |
7,496,778 | $ | 63,826 | $ | 58,122,469 | $ | 16,976,186 | $ | (843,156 | ) | $ | 74,319,325 | ||||||||||||
Issuance of common stock in
connection with employee stock
purchase plan |
24,746 | 247 | 76,766 | — | — | 77,013 | ||||||||||||||||||
Issuance of employee stock options |
— | — | 14,710 | — | — | 14,710 | ||||||||||||||||||
Net loss |
— | — | — | (11,748,595 | ) | — | (11,748,595 | ) | ||||||||||||||||
Balance, December 31, 2003 |
7,521,524 | 64,073 | 58,213,945 | 5,227,591 | (843,156 | ) | 62,662,453 | |||||||||||||||||
Issuance of common stock in
connection with employee stock
purchase plan |
6,662 | 67 | 11,485 | — | — | 11,552 | ||||||||||||||||||
Issuance
of employee stock options |
— | — | 9,212 | — | — | 9,212 | ||||||||||||||||||
Net loss |
— | — | — | (671,310 | ) | — | (671,310 | ) | ||||||||||||||||
Balance, March 31, 2004 |
7,528,186 | $ | 64,140 | $ | 58,234,642 | $ | 4,556,281 | $ | (843,156 | ) | $ | 62,011,907 | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
SCHLOTZSKY’S, INC. AND SUBSIDIARIES
| Three Months Ended |
||||||||
| March 31, | March 31, | |||||||
| 2004 |
2003 |
|||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (671,310 | ) | $ | (1,066,318 | ) | ||
Adjustments to reconcile net income (loss) to cash provided by
operating activities: |
||||||||
Depreciation and amortization |
1,406,008 | 1,249,406 | ||||||
Provision for uncollectible accounts |
436,849 | 383,580 | ||||||
Provision for deferred taxes |
— | (536,000 | ) | |||||
Provision for stock option compensation |
9,212 | 6,096 | ||||||
Amortization of deferred revenue |
53,693 | (37,659 | ) | |||||
Equity loss on investments |
— | 67,150 | ||||||
Changes in: |
||||||||
Accounts receivable |
(675,859 | ) | 468,647 | |||||
Prepaid expenses and other assets |
190,221 | 259,656 | ||||||
Accounts payable and accrued liabilities |
(588,252 | ) | 1,181,918 | |||||
Net cash provided by operating activities |
160,562 | 1,976,476 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(149,320 | ) | (610,456 | ) | ||||
Sale of property, equipment and real estate held for sale |
— | 530,655 | ||||||
Acquisition of investments and intangible assets |
(164,954 | ) | (209,771 | ) | ||||
Issuance of notes receivable |
(37,977 | ) | (8,130 | ) | ||||
Repayments of notes receivable |
35,139 | 5,372 | ||||||
Net cash used in investing activities |
(317,112 | ) | (292,330 | ) | ||||
Cash flows from financing activities: |
||||||||
Sale of common stock |
11,552 | 36,082 | ||||||
Proceeds from issuance of debt |
1,500,000 | 150,000 | ||||||
Debt issuance costs |
— | (10,312 | ) | |||||
Acquisition of treasury stock |
— | — | ||||||
Repayment of debt |
(1,280,215 | ) | (1,821,722 | ) | ||||
Net cash provided by (used in) financing activities |
231,337 | (1,645,952 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
74,787 | 38,194 | ||||||
Cash and cash equivalents at beginning of period |
1,058,300 | 678,895 | ||||||
Cash and cash equivalents at end of period |
$ | 1,133,087 | $ | 717,089 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
SCHLOTZSKY’S, INC. AND SUBSIDIARIES
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 March 31, 2004, are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. 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, 2003.
Reclassifications
Certain reclassifications have been made to the condensed consolidated financial statements at March 31, 2003, and for the period then ended, to correspond with the presentation used at March 31, 2004, and for the period then ended.
Note 2. – Stock-Based Compensation
Effective January 1, 2003, the Company adopted the cost recognition provisions for stock-based compensation of Statement of Financial Accounting Standards (“SFAS”) No. 123 under the prospective method of adoption authorized by SFAS No. 148. The amount charged to expense during the quarter ended March 31, 2004 was approximately $9,212. Had the Company adopted the cost recognition provisions of SFAS No. 123 in 1995, the Company’s net income and earnings per share would have been reduced to the pro forma amounts shown (in thousands, except per share amounts):
| For the three months ended |
||||||||
| March 31, 2004 |
March 31, 2003 |
|||||||
Net income (loss), as reported |
$ | (671 | ) | $ | (1,066 | ) | ||
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects |
9 | 4 | ||||||
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects |
(20 | ) | (69 | ) | ||||
Pro forma net income (loss) |
$ | (682 | ) | $ | (1,131 | ) | ||
Earnings per share: |
||||||||
Basic-as reported |
$ | (0.09 | ) | $ | (0.15 | ) | ||
Basic-pro forma |
$ | (0.09 | ) | $ | (0.15 | ) | ||
Diluted-as reported |
$ | (0.09 | ) | $ | (0.15 | ) | ||
Diluted-pro forma |
$ | (0.09 | ) | $ | (0.15 | ) | ||
5
SCHLOTZSKY’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)
Note 3. – Restaurant Operations
A summary of certain operating information for Company-operated restaurants is presented below for the three-month periods ended March 31, 2004 and 2003 (dollars in thousands).
| Long-term Portfolio | ||||||||||||||||
| Restaurants |
Available | |||||||||||||||
| Sandwich- | For Sale | |||||||||||||||
| Cafes |
Training |
Restaurants |
Total |
|||||||||||||
Three months ended March 31, 2004 |
||||||||||||||||
Restaurant sales |
$ | 4,994 | $ | 634 | $ | 2,154 | $ | 7,782 | ||||||||
Restaurant operations: |
||||||||||||||||
Cost of sales |
1,353 | 176 | 581 | 2,110 | ||||||||||||
Personnel and benefits |
1,718 | 289 | 944 | 2,951 | ||||||||||||
Operating expenses |
903 | 249 | 719 | 1,871 | ||||||||||||
| 3,974 | 714 | 2,244 | 6,932 | |||||||||||||
Operating income (loss) before depreciation
and amortization |
$ | 1,020 | $ | (80 | ) | $ | (90 | ) | $ | 850 | ||||||
Three months ended March 31, 2003 |
||||||||||||||||
Restaurant sales |
$ | 4,474 | $ | 657 | $ | 2,481 | $ | 7,612 | ||||||||
Restaurant operations: |
||||||||||||||||
Cost of sales |
1,275 | 195 | 702 | 2,172 | ||||||||||||
Personnel and benefits |
1,782 | 349 | 1,234 | 3,365 | ||||||||||||
Operating expenses |
829 | 248 | 825 | 1,902 | ||||||||||||
| 3,886 | 792 | 2,761 | 7,439 | |||||||||||||
Operating income (loss) before depreciation
and amortization |
$ | 588 | $ | (135 | ) | $ | (280 | ) | $ | 173 | ||||||
The classification of restaurants has changed from the previous year due to reorganization within the Company. The long-term portfolio of Schlotzsky’s Delis now consists of all but one of the former Long-term delis, two former Marketplace restaurants and two former Available for Sale restaurants. The Training classification consists of one former Marketplace, one former Long-term Schlotzsky’s Deli and two former Available for Sale restaurants.
Note 4. – Segments
The Company is principally engaged in franchising and operating restaurants in the fast casual sector under the Schlotzsky’s brand. Schlotzsky’s restaurants offer a menu of distinctive, high quality foods featuring our proprietary breads, complemented by excellent customer service in a visually appealing setting. Our current menu includes upscale made-to-order hot sandwiches and pizza served on our proprietary buns and crusts, wraps, chips, salads, soups, fresh baked cookies and other desserts, and beverages. At March 31, 2004, the Schlotzsky’s system included 537 Company-operated and franchised restaurants in 37 states, the District of Columbia and six foreign countries. The Company operated 36 restaurants as of March 31, 2004.
The Company identifies segments based on management responsibility within the corporate structure. The Restaurant Operations segment includes restaurants operated for the purposes of market leadership and redevelopment of certain markets, demonstrating sales potential and key operating metrics, operational leadership of the franchise system, product development, concept refinement, product and process testing, training and building brand awareness and restaurants available for sale. The Franchise Operations segment encompasses the franchising of restaurants, assisting franchisees in the development of restaurants, providing franchisee training and operating the national training center, communicating with franchisees, conducting regional and national franchisee meetings, developing and monitoring supplier and distributor relationships, planning and coordinating advertising and marketing programs, and the licensing of brand products for sale to the franchise system and retailers. The Company measures segment profit as operating income, which is defined as income before interest and income taxes. Segment information and a reconciliation to income before interest and income taxes are as follows (dollars in thousands):
6
SCHLOTZSKY’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)
| Restaurant | Franchise | |||||||||||
| Three months ended March 31, 2004 |
Operations |
Operations |
Consolidated |
|||||||||
Revenue from external customers |
$ | 7,782 | $ | 5,265 | $ | 13,047 | ||||||
Depreciation and amortization |
757 | 649 | 1,406 | |||||||||
Operating income (loss) |
93 | 145 | 238 | |||||||||
Total assets |
$ | 41,387 | $ | 83,049 | $ | 124,436 | ||||||
| Restaurant | Franchise | |||||||||||
| Three months ended March 31, 2003 |
Operations |
Operations |
Consolidated |
|||||||||
Revenue from external customers |
$ | 7,612 | $ | 6,218 | $ | 13,830 | ||||||
Depreciation and amortization |
521 | 728 | 1,249 | |||||||||
Operating income (loss) |
(348 | ) | (312 | ) | (660 | ) | ||||||
Total assets |
$ | 41,595 | $ | 93,784 | $ | 135,379 | ||||||
Of the Restaurant Operations depreciation and amortization for the three months ended March 31, 2004, $458,000 was allocated to the long-term portfolio of restaurants ($82,000 for Training restaurants and $376,000 for Sandwich-cafes) and $299,000 to restaurants available for sale. For the three months ended March 31, 2003, $369,000 of depreciation and amortization was allocated to the long-term portfolio of restaurants ($76,000 for Training restaurants and $293,000 for Sandwich-cafes) and $152,000 to restaurants available for sale.
Note 5. – Debt
The Company’s debt structure as of March 31, 2004, and December 31, 2003, is as follows (dollars in thousands):
| March 31, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | ||||||||
Short-term debt |
$ | 1,917 | $ | 1,134 | ||||
Long-term debt: |
||||||||
Notes payable to former area developers |
$ | 21,450 | $ | 21,851 | ||||
Mortgages on Company-operated restaurants and equipment |
21,136 | 21,589 | ||||||
Capital leases |
2,562 | 2,659 | ||||||
Notes payable to shareholders |
2,500 | 2,500 | ||||||
Obligations secured by royalty and licensing contracts. |
1,500 | — | ||||||
Other obligations |
381 | 551 | ||||||
| 49,529 | 49,150 | |||||||
Less current maturities of long-term debt |
(7,358 | ) | (6,564 | ) | ||||
Long-term debt |
$ | 42,171 | $ | 42,586 | ||||
7
SCHLOTZSKY’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)
Note 6. – Related Party Receivables
As of March 31, 2004, and December 31, 2003, receivables from related parties were as follows (dollars in thousands):
| March 31, | December 31, | |||||||
| 2004 | 2003 | |||||||
| (Unaudited) | ||||||||
Included in accounts receivable - other |
$ | 0 | $ | 23 | ||||
Included in other noncurrent assets |
751 | 939 | ||||||
Included in notes receivable |
1,741 | 2,617 | ||||||
Total related party receivables |
$ | 2,492 | $ | 3,579 | ||||
Note 7. – Earnings Per Share
Basic earnings per share are computed by dividing reported earnings available to common stockholders by weighted average common shares outstanding. Diluted earnings per share give effect to dilutive potential common shares. Earnings per share are calculated as follows (in thousands, except per share data):
| For the three months ended |
||||||||
| March 31, | March 31, | |||||||
| 2004 |
2003 |
|||||||
Basic earnings per share |
||||||||
Net income (loss) |
$ | (671 | ) | $ | (1,066 | ) | ||
Weighted average common shares outstanding |
7,339 | 7,320 | ||||||
Basic earnings per share |
$ | (0.09 | ) | $ | (0.15 | ) | ||
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