Industry News | August 3, 2004

Schlotzsky's Files for Bankruptcy

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Schlotzsky's today filed for voluntary Chapter 11 protection in U.S. Bankruptcy Court in San Antonio, Texas. The company reported liabilities of approximately $71.3 million and assets of approximately $111.7 million, including approximately $64.8 million of intangible assets, according to the court filing. The company reported a net loss of $11.7 million in 2003, compared to a net loss of $199,000 in 2002, and a net loss of $671,000 in the first quarter of 2004.

"Today we have taken an important step toward creating a stronger Schlotzsky's," said Sam Coats, Schlotzsky's president and chief exec. "It became apparent to our board that this action was necessary to protect Schlotzsky's from millions of dollars in claims, judgments, and debts accumulated during the past few years, while enabling us to restructure the company. I believe the actions taken by the board took great courage and are clearly in the best interest of the company."

According to Coats, the company's goals going forward are to "make money by selling the world's best sandwich, simplify our operation, obtain the financial resources to grow our franchise system, and make certain that our valued franchisees get the support, training, and encouragement they are entitled to receive."

Over 95 percent of the restaurants in the Schlotzsky's system are franchisee-operated. At present there are 471 domestic franchisee-operated restaurants, 21 international franchisee-operated restaurants, and 21 company-operated restaurants. Coats said that both franchisee-operated restaurants and company-operated restaurants are expected to continue normal operations during Schlotzsky's financial restructuring. "Our customers should not notice any changes in our products as a result of today's court action," he said. Schlotzsky's closed 15 unprofitable company-operated restaurants during the month of July, reducing its company-operated restaurants by over 40 percent.

The company will request that the bankruptcy court issue a sale order that would allow Schlotzsky's to sell nine pieces of real estate to Westdale Asset Management, Ltd., an affiliate of the company's largest shareholder, for approximately $3.4 million. With this sale, the company would have an additional source of liquidity for its operations over the next few months.

The company's Form 10-Q for the first quarter of 2004 showed $24.6 million in contingent liabilities for lease guarantees, mortgage guarantees, and related party loan guarantees as of March 31, 2004. The company's Chapter 11 filing also identified several court judgments that exceed $1.2 million in the aggregate. As of March 31, 2004, the company had $3.9 million in accounts payable and $5.6 million in accrued liabilities.

"Schlotzsky's has taken a number of steps during recent months to reduce expenses, decrease overhead, and improve the company's cash position," said Coats. "Unfortunately, the situation in which we found ourselves made it impossible to go forward without a formal reorganization. We believe that by taking this action, we can restructure our financial obligations, obtain new financial resources, and emerge from this proceeding as a stronger company."

In addition to the bankruptcy filing, Schlotzsky's reported that it has eliminated 15 positions. Four of those eliminated were currently unfilled positions. Of the remaining 11, approximately half were located in the corporate headquarters and half were in the field.