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Naked City

Schlotzsky's Case Unwrapped

By Amy Smith, September 10, 2004, News

Attorneys for stakeholders on both sides of the Schlotzsky's bankruptcy case had been scheduled to present arguments Wednesday on a number of motions that could ultimately determine which path the sandwich company follows out of Chapter 11. But consideration of the weightiest issues in the case has now been postponed to allow more time for negotiation between the warring parties. The next hearing is Sept. 21.

Those two sides favor different directions for resolving the problems of the Austin-based chain, whose Aug. 3 filing listed liabilities of $71.3 million. Newly appointed chief executive Sam Coats and the company's board of directors favor trimming the fat, restructuring the debt, and selling the company – perhaps returning it to its private roots. Ousted chief executive John Wooley, on the other hand, says he has a debt-to-equity conversion plan that would pay off the creditors and restore shareholders' faith in what would remain a public company. Whichever proposal rises to the fore would, of course, require the blessing of the company's major creditors.

The case is being heard in San Antonio before U.S. Bankruptcy Judge Leif Clark, who will eventually have to decide on several issues raised in motions filed by Schlotzsky's attorneys from the Haynes and Boone law firm, from Wooley – who remains Schlotzsky's largest shareholder and one of its largest unsecured creditors – and his attorney Joe Martinec, and from lawyers representing the chain's secured creditors. The company has requested permission to retain the financial consulting services of BWK Trinity Capital Securities LLC, at a rate of $90,000 per month. The California-based firm has provided corporate reorganization and debt-restructuring services to other fast-food companies in a financial pinch, including Taco Bell and Burger King, according to court filings. Before he and his brother, Jeff Wooley, were fired from the company in June, John Wooley had sought Trinity's advice for pulling the company out of debt. But he says he was unhappy with Trinity's performance and opposes the consulting firm having a say in the direction of the company.

The case took an unexpected turn Tuesday when one of the largest secured creditors – GE Capital Franchise Finance Corp. – filed a strongly worded objection to Trinity's involvement in the bankruptcy process. Such opposition could carry substantial weight because of GE Capital's reputation as a major lender to the U.S. restaurant industry. In its motion, the lender argued that Trinity doesn't have the "experience, skills, or reputation necessary" to carry out its proposed mission for Schlotzsky's. The motion went on to state that "other, more suitable and less expensive professionals ... would better lead this process." GE Capital's objection could indirectly provide Wooley with an opportunity to pitch his business proposal to the company's board of directors since his is the only proposal that has materialized thus far. GE Capital noted that Trinity has yet to produce a "stalking horse bidder" or a proposed equity investor, even though Trinity has collected $500,000 from Schlotzsky's since March 19.

The new management also seeks the court's permission to cancel a bevy of contracts the company holds with third-party area developers, who are charged with recruiting prospective candidates to develop franchise restaurants in various geographic regions. Coats argues that the contracts are no longer beneficial to the company, but Wooley says his proposal to salvage the operation would leave the contracts in place.

On another matter, Martinec has asked the court to allow for a shareholders meeting, pointing out that, contrary to the company's bylaws, no such meeting has taken place since June 2003. Late Wednesday, the chain announced it would hold a meeting by Dec. 13.

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