On Feb. 24, 2000, the Company announced that it had adopted a new accounting policy, effective Jan. 1, 1999, for the financial reporting of revenue generated as non-refundable area developer fees. The new policy is consistent with recently published views of the SEC staff. These fees will now be recognized on a straight-line basis over the term of each contract's development schedule which averages approximately 10 years. The new accounting policy has no effect on the cash balances or the cash flow of the Company.
The change in accounting principle affected developer fee revenue of approximately $6.1 million from pre-1999 developer transactions and another $3.9 million of revenue from transactions completed in 1999, for a total of $10.0 million on a pre-tax basis. Approximately $1.2 million of this amount was applied against the basis of developer rights reacquired in 1998 and 1999. Approximately $1.1 million of deferred revenue is being recognized in 1999, and the remaining $7.7 million will be recognized in future years.
The impact of the accounting change results in 1999 after-tax net income of $4.3 million, before the cumulative effect of the pre-1999 deferral. An adjustment for the $6.1 million of pre-1999 developer fees recognized in prior years is shown as a cumulative effect of a change in accounting principle in the amount of $3.8 million, after taxes, resulting in net income of $526,000, or $0.07 per share.
The Company understands that the SEC's recently published views have been applied to other publicly traded franchise companies utilizing area developer programs. The Company's previous accounting policy regarding recognition of area developer fees was based on the SEC's 1994 pre-IPO review of the Company's policy. The change in accounting principle does not require the restatement of previously filed SEC reports.
Fourth quarter earnings for 1999 were $1.1 million, or $0.15 per share, as compared to $0.23 in the fourth quarter of 1998.
Net royalty revenue, that is royalty revenue after service costs, increased 28.2% to $14.9 million in 1999 as compared to $11.7 million in 1998. Likewise, the contribution from restaurant operations for restaurants owned by the Company increased from a net loss of $166,000 in 1998 to a positive contribution of $1.6 million in 1999. Brand contributions for the year 1999 were $6.2 million as compared to $4.0 million in 1998, a 54% increase. Turnkey development fees were significantly lower principally as a result of fewer transactions. In addition, 1998 turnkey revenue included $2.2 million of deferred revenue from 1997. Total revenues for 1999 increased 14% to $47.8 million as compared to $41.8 million in 1998.
Systemwide sales for calendar 1999 for all restaurants in the Schlotzsky's franchise system (including both franchised restaurants and restaurants owned by the Company) were $400.3 million, an increase of 17% over calendar 1998. As previously announced, average weekly sales per restaurant for 1999 were $10,579 which was 9.4% higher than for the same time period in 1998. Same store sales for calendar year 1999 grew at an annual rate of 2.8% compared to calendar year 1998.
Using the Company's accounting periods of thirteen-week quarters with 4-4-5 week periods results in a comparison of 52 weeks in 1999 to 53 weeks in 1998. Under that comparison, systemwide sales were 15% higher and same store sales were 1.6% higher in 1999.
The franchise system opened 66 new units in 1999, ending the year with 759 restaurants in 37 states, the District of Columbia and 12 foreign countries.
Schlotzsky's Inc., founded in Austin in 1971, is a franchisor of quick service restaurants featuring made-to-order hot sandwiches served on distinctive sourdough bread, along with sourdough crust pizzas, salads and soups.
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