The Beard Gambit

In the midst of the battle between the Wooleys and the board, both sides fought a separate attempt to transform the company by Schlotzsky's largest shareholder, Dallas real estate investor Joseph Beard. In the weeks leading up to the Wooleys' ouster, Beard had ramped up a long-running campaign to depose them, this time with an offer to pay $6 million for five million shares of Schlotzsky's stock. The proposal was conditioned on the Wooleys' willingness to take a leave of absence to let the company resolve a tangled set of financial matters between the Wooleys and Schlotzsky's. As Beard saw it, the Wooleys had positioned themselves to be first in line at the trough in the event of a bankruptcy, and he wanted to derail that possibility.

The Wooleys rejected Beard's offer, and board member Pike Powers accused Beard of trying to obtain proprietary information on the company under the guise of attempting to drive out the Wooleys. Although the chain of events that followed wasn't what Beard had in mind, the brothers were driven out nonetheless. With the Wooleys gone, Beard proffered another offer to the new management, this time in the $6 million to $10 million range. Again, he was rejected. By that time the company was moving closer to a Chapter 11 filing.

According to new CEO Sam Coats, Schlotzsky's had little choice but to turn down Beard's proposal. "Since we were insolvent at that time and the proposal was subject to due diligence by the investor, there was no way we could have met the due diligence requirements that the investor would have insisted on Schlotzsky's meeting," he said. Had Beard wanted to make a large buy of shares in spite of the insolvency, Coats added, "It would have required shareholder approval, which would have taken at least six weeks to obtain and possibly longer." That was too risky a move, in Coats' view, because it would have placed the company at risk of an involuntary bankruptcy and ultimately a liquidation proceeding. Beard's response to the bankruptcy was immediate: He unloaded 1.2 million shares at prices ranging from 29 cents to 59 cents.