U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
[ ] Transition Report Under Section 13 or 15(d) of
the Exchange Act
For the transition period from ___________ to ___________.
Commission file number 1-12350
QPQ CORPORATION
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(Exact Name of Small Business Issuer as Specified in Its Charter)
FLORIDA 65-0611607
- -------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 LINCOLN ROAD, SUITE 206
MIAMI BEACH, FLORIDA 33139
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(Address of Principal Executive Office)
(305) 674-8115
-----------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [X] No [ ]
The number of shares outstanding of the issuer's common stock, par
value $.01 per share as of August 9, 1996 was 7,220,000. .
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION PAGE
ITEM. 1 Financial Statements
Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations
for the Three and Six Months Ended
June 30, 1996 and 1995 4
Consolidated Statements of Shareholders'
Equity for the Six Months Ended June 30,
1996 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30,
1996 and 1995 6 - 7
Notes to Consolidated Financial
Statements 8 - 11
ITEM. 2 Management's Discussion and Analysis or
Plan of Operation 12 - 20
PART II. OTHER INFORMATION
SIGNATURES
2
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QPQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
JUNE DECEMBER 31,
CURRENT ASSETS: 1996 1995
------------ -----------
Cash and cash equivalents $ 420,020 $ 1,052,831
Restricted Cash 300,000 300,000
Receivables 51,948 868
Inventory 68,891 63,567
Due from affiliates 144,179 1,040
Prepaid expenses 191,140 7,952
------------ -----------
Total Current Assets 1,176,178 1,426,258
------------ -----------
Furniture, equipment & leasehold
improvements, net 2,340,696 1,635,195
Deferred charges, net of accumulated
amortization of $64,329 and $18,747
at 1996 and 1995, respectively 202,971 279,249
Domino's development rights, net of
accumulated amortization of $90,665 and
$75,123 at 1996 and 1995, respectively 220,189 235,731
------------ -----------
Total Assets $ 3,940,034 $ 3,576,433
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 568,936 $ 245,164
Accrued expenses 99,701 82,758
Due to affiliate 15,000 49,087
Bank credit facilities payable 337,137 -
------------ -----------
Total Current Liabilities 1,020,774 377,009
------------ -----------
Bank credit facilities payable - 300,000
------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 1,000,000
shares authorized; no shares issued - -
Common Stock, $.01 par value, 10,000,000
shares authorized; 7,220,000 and
6,025,000 shares issued and
outstanding, respectively 72,200 60,250
Additional paid-in capital 8,246,094 7,063,044
Accumulated Deficit ( 5,399,034) ( 4,223,870)
------------ ------------
Total Shareholders' Equity 2,919,260 2,899,424
------------ ------------
Total Liabilities and Shareholders'
Equity $ 3,940,034 $ 3,576,433
============ ============
See Accompanying Notes
3
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<TABLE>
<CAPTION>
QPQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE FOR THE FOR THE FOR THE
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30,1996 JUNE 30,1996 JUNE 30,1995 JUNE 30,1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant $ 365,459 $ 648,138 $ 326,709 $ 532,880
Medical Centers 260,587 307,590 - -
------------ ------------ ------------ ------------
Total Revenue $ 626,046 $ 955,728 $ 326,709 $ 532,800
------------ ------------ ------------ ------------
RESTAURANT OPERATING:
Food and packaging 128,168 237,806 126,619 204,258
Payroll and related costs 88,564 168,382 93,929 179,291
Occupancy and other operating
expenses 133,337 243,427 100,045 235,560
Depreciation and amortization 48,409 102,060 51,959 108,085
------------ ------------ ------------ ------------
Total restaurant operating
expenses 398,478 751,675 372,552 727,194
------------ ------------ ------------ ------------
MEDICAL CENTERS:
Payroll and related 124,063 223,834 - -
Occupancy and other 216,896 307,721 - -
Depreciation and amortization 15,688 27,516 - -
------------ ------------ ------------ ------------
Total Medical Centers 356,647 559,071 - -
------------ ------------ ------------ ------------
GENERAL & ADMINISTRATIVE
EXPENSES 360,170 796,875 348,366 677,828
------------ ------------ ------------ ------------
OPERATING LOSS ( 489,249) ( 1,151,893) ( 394,209) ( 872,142)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest and other income 7,882 13,969 92,984 181,969
Gain (loss) on sale of investment - - ( 333,663) ( 333,023)
Interest expense ( 9,351) ( 18,536) ( 107,177) ( 202,027)
Gain (Loss) from foreign
currency translation 28,765 ( 18,704) ( 20,234) ( 28,886)
------------ ------------ ------------ ------------
Total other income (expense),
net 27,296 ( 23,271) ( 368,090) ( 381,967)
------------ ------------ ------------ ------------
NET LOSS $( 461,953) $( 1,175,164) $( 762,299) $( 1,254,109)
============= ============ ============ ============
NET LOSS PER COMMON
SHARE $( .07) $( .19) $( .13) $( .29)
============= ============ ============ ===========
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 6,541,978 6,283,489 6,025,000 4,390,746
============= ============ ============ ============
</TABLE>
See Accompanying Notes
4
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<TABLE>
<CAPTION>
QPQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
COMMON STOCK ADDITIONAL
PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995 6,025,000 $60,250 $7,063,044 $(4,223,870) $2,899,424
Issuance of shares in
private offering 1,195,000 11,950 1,183,050 1,195,000
Net loss for the period (1,175,164) (1,175,164)
---------- ----------- ---------- ----------- ----------
Balances, June 30, 1996 7,220,000 $ 72,200 $8,246,094 $(5,399,034) $2,919,260
========== =========== ========== =========== ==========
</TABLE>
See Accompanying Notes
5
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<TABLE>
<CAPTION>
QPQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1996 ENDED JUNE 30, 1995
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Loss $( 1,175,164) $( 1,254,109)
Adjustment to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 193,327 170,493
Loss on the sale of investments - 333,023
Changes in operating assets and liabilities:
Receivables ( 51,080) 74,461
Inventory ( 5,324) ( 16,693)
Accrued interest receivable - 57,690
Prepaid expenses ( 183,188) 64,931
Other assets 40,696 11,792
Accounts payable and
accrued expenses 340,715 ( 26,802)
------------ ------------
Net cash used in operating activities ( 840,018) ( 585,214)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash - ( 225,853)
Proceeds from sales of investments - 5,727,078
Payments for furniture, equipment and leasehold
improvements ( 837,704) ( 195,469)
------------ ------------
Net cash provided by (used in)
investing activities ( 837,704) 5,305,756
------------ ------------
</TABLE>
See Accompanying Notes
6
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<TABLE>
<CAPTION>
QPQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
FOR THE SIX MONTHS THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30, 1995
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment for Options and Warrants ( 10,000) ( 10,000)
Proceeds from sale of common stock 1,195,000 850,000
Repayment of bank credit facilities - ( 5,196,909)
Borrowings under bank credit facilities 37,137 850,062
Due to (from) affiliates, net ( 177,226) 21,443
--------- ----------
Net cash (used in) provided by financing
activities 1,044,911 ( 3,485,404)
--------- ----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ( 632,811) 1,235,138
BEGINNING CASH AND CASH EQUIVALENTS 1,052,831 416,966
--------- ----------
ENDING CASH AND CASH EQUIVALENTS $ 420,020 $ 1,652,104
========= ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 18,536 $ 202,027
========= ==========
</TABLE>
See Accompanying Notes
7
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
QPQ Corporation (the "Company") formerly known as International Pizza
Corporation, was organized for the purpose of developing and operating
franchised Domino's stores in the Republic of Poland ("Poland"). One of the
Company's majority shareholder, Capital Brands, Inc. ("CBI"), entered into a
development agreement (the "Development Agreement") with Domino's Pizza
International, Inc. ("Domino's") and assigned all its rights and obligations
under the Development Agreement to the Company. Operations commenced on April 1,
1994.
In addition to having the exclusive right to develop Domino's Stores in
Poland, the Company has been granted the exclusive right to establish a
commissary or commissaries for the purpose of supplying food products and
supplies to the Domino's stores in Poland.
In August 1995, QPQ entered into the business of developing and
operating medical centers ("Medical Centers") which offer primary care medical
services and medically supervised weight loss programs. In January, April and
July 1996, QPQ Medical opened its first three medical centers and will open its
fourth medical center in September 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned Polish
subsidiary Pizza King Polska, a limited liability corporation ("PK Polska") and
a wholly owned subsidiary, QPQ Medical Centers, Inc. ("QPQ Medical"). QPQ
Medical was formed in August, 1995, and commenced operations in January, 1996.
All significant intercompany transactions and balances have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
The only currency that may be used in Poland is the zloty. The value of
the zloty is pegged pursuant to a system based on a basket of currencies, as
well as all other economic and political factors that effect the value of
currencies generally. The U.S. dollar is considered to be the functional
currency of PK Polska. As of January 1, 1995, the National Bank of Poland
introduced a new currency unit which is named a "zloty" (a "new zloty"). New
zlotys are equivalent to 10,000 old zlotys ("old zlotys"). Old zlotys will
remain legal tender until December 31, 1996, after which date they will only be
exchangeable at certain banks. All references in this document to zlotys are to
old zlotys. At June 30, 1996, the exchange rate was 27,200 old zlotys.
8
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
BASIS OF PRESENTATION, CONTINUED - Monetary assets and liabilities are
translated from the local currency, the "zloty", to U.S. dollars at the period
end exchange rate. Non-monetary assets, liabilities, and related expenses,
primarily furniture, equipment, leasehold improvements and related depreciation
and amortization, are translated using historical exchange rates. Income and
expense accounts, excluding depreciation and amortization, are translated at an
annual weighted average exchange rate.
The accompanying consolidated condensed financial statements as of June
30, 1996 and 1995 are unaudited. The consolidated Balance sheet as of December
31, 1995, was derived from the December 31, 1995 audited balance sheet. These
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes it has made
sufficient disclosures such that the information presented is not misleading. In
the opinion of management, the financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary to state fairly the
financial position and results of operations as of and for the periods
indicated.
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto for the year ended
December 31, 1995, included in the Company's Form 10-KSB. Results for the six
month period ended June 30, 1996, are not necessarily indicative of the results
to be achieved for the year ending December 31, 1996.
GOING CONCERN - The report of the Company's independant accountants on
their audit of the Company's December 31, 1995 consolidated financial statements
contained uncertainties relating to the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
FINANCIAL ACCOUNTING STANDARDS NO. 121 (FAS NO. 121) - In March 1995,
the FASB issued FAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". This statement, which is effective
for the Company's financial statements for its 1996 fiscal year, requires that
long lived assets and certain intangibles to be held and used by the Company be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the estimated
undiscounted cash flows that are expected to result from the use of the asset
are less than the carrying amount of the asset, an impairment loss is recorded
equal to the excess of the carrying amount over the fair value of the assets.
The Company will review for impairment of its long-lived assets in its fiscal
1996 year using the methodology prescribed by FAS No. 121.
9
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. LINE OF CREDIT:
In January 1995, PK Polska obtained a $300,000 line of credit from
American Bank in Poland, S.A. with interest payable quarterly at a rate of 7.75%
per annum. The Company has guaranteed the borrowings which are collateralized by
its amounts on deposit. The line expires January 28, 1997.
On March 18, 1996, PK Polska obtained a $150,000 line of credit from
American Bank. Borrowings under the facility bear interest at 10% per annum,
payable every three months commencing April 30, 1996, may be used to finance up
to 50% of the cost of developing Domino's Stores. The credit facility is secured
by a promissory note of PK Polska, a guarantee of QPQ and title to the fixtures
and equipment of the Domino's Stores developed with the credit facility
borrowings. Draws may be made on the credit facility until October 30, 1996.
Commencing October 31, 1996, PK Polska is required to repay $30,000 once every
three months until the outstanding principal balance of the credit facility is
repaid. As of June 30, 1996, $-0- had been borrowed under the facility.
4. SHAREHOLDERS' EQUITY:
In September 1993, QPQ consummated an underwritten initial public
offering (the "Public Offering") of 1,250,000 shares of its common stock and
1,405,660 redeemable Common Stock Purchase Warrants (the "Warrants"), each
Warrant entitling the holder thereof to purchase one share of QPQ's Common Stock
for $6.60, for aggregate proceeds of approximately $6,012,000, net of
underwriting discounts and commissions, expense allowances and other
registration costs.
Pursuant to the terms of the Common Stock Subscription Agreements dated
March 28, 1995, between the Company and the Company's Chairman and three other
investors, the Company sold an aggregate 3,400,000 shares of its Common Stock at
a purchase price of $.25 per share in exchange for cash of $850,000.
During the quarter ended June 30, 1996, the Company sold 1,195,000
shares of Common Stock in a private offering and received cash proceeds of
$1,195,000.
10
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. SHAREHOLDERS' EQUITY, CONTINUED:
The Company's Stock Option Plan (the "Plan") and Directors Stock Option
Plan (the "Directors Plan") (collectively the "Plans"), authorize the issuance
of 1,000,000 and 50,000 shares of common stock options, respectively. The Plans
are designed to serve as incentives for retaining qualified and competent
employees and directors.
The following table reflects the option activity for the six months
ended June 30, 1996:
Outstanding at beginning of period 542,000
Granted -
Exercised -
Expired -
-----------
Outstanding at end of period 542,000
===========
Exercisable at end of period 137,000
Price range of options
outstanding at end of period $.69 - $6.00
===========
Available for grant at end of period 508,000
===========
On March 7, 1995, certain of the stock option agreements were amended
to reduce the exercise price to $.69, which amount represented the market price
per share on that date.
As a result of the stock subscription and pursuant to the Underwriters
Warrant Agreement, the exercise price of 125,000 warrants to purchase common
stock issued to the Underwriter were repriced and became exercisable at a price
of $.25 per share. In June 1995, pursuant to a Warrant Redemption Agreement, the
Company repurchased 86,750 Underwriters Warrants for $10,000. Upon original
issuance those Warrants entitled the holder to purchase 86,750 shares of the
Company's Common Stock at an exercise price of $9.00 per share. The $10,000 is
reflected in the accompanying Consolidated Balance Sheet as a reduction of
additional paid in capital.
In June 1996, the Company paid $10,000 of cash to terminate an option
to purchase 250,000 shares of its stock held by International Fast Food
Corporation Common Stock.
During the quarter ended June 30, 1996, the Company sold 1,195,000
shares of Common Stock in a private offering and received cash proceeds of
$1,195,000.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
A. QPQ CORPORATION
GENERAL
QPQ Corporation operates through two wholly-owned subsidiaries, Pizza
King Polska, Sp. zo.o. ("PKP") and QPQ Medical Centers, Inc. ("QPQ Medical").
QPQ commenced its planned principal operations through PKP, in April 1,
1994. PKP anticipates that it will incur losses until, at the earliest, it
establishes a number of Domino's Stores generating sufficient revenues to offset
its operating costs and the costs of its proposed continuing expansion. There
can be no assurance that PKP will be able to successfully establish a sufficient
number of Domino's Stores to achieve profitable operations. PKP cannot
reasonably estimate the length of time before any Domino's Store may generate
sufficient revenues to offset its operating costs or the length of time before
PKP may generate income, if ever. QPQ's independent auditors have included as
explanatory paragraph in their report for the year ended December 31, 1995
stating that QPQ's financial statements have been prepared assuming QPQ will
continue as a going concern although QPQ's recurring losses raise substantial
doubt about QPQ's ability to do so.
QPQ Medical was organized on August 25, 1995. QPQ Medical offers: (1)
medically supervised weight loss programs using a protocol which integrates
systems and routines of nutrition management, exercise and prescribed
medication; and (2) certain other medical services to address the weight loss
and non-weight loss related medical problems of its patients. QPQ Medical
commenced its planned principal operations in January 1996. QPQ Medical
anticipates that it will incur losses until at the earliest, it establishes a
number of medical centers generating sufficient revenue to offset its operating
costs and the costs of its proposed expansion. There can be no assurance that
QPQ Medical will be able to successfully establish a sufficient number of
medical centers to achieve profitable operations. QPQ Medical cannot reasonably
estimate the length of time before it will generate sufficient revenues to
offset its operating costs, if ever.
Subject to market conditions and its need for funds, QPQ may generate
additional capital through the private or public sale of equity in QPQ and may
seek to borrow funds, if available, on commercially reasonable terms.
During the quarter ended June 30, 1996, QPQ completed a private
offering (the "Private Offering") of 1,195,000 shares of Common Stock at an
offering price of $1 per share. The Private Offering was made only to accredited
investors in accordance with the provisions of Regulation D promulgated under
the Securities Act of 1933, as amended. Mr. Rubinson, the Chairman of the Board,
Chief Executive Officer, President and a principal shareholder of QPQ, and Nigel
Norton, a principal shareholder of QPQ, purchased 200,000 and 100,000 shares of
common stock, respectively.
On July 26, 1996, the Company's Chairman of the Board, Chief Executive
Officer and President agreed to purchase 1,125,000 shares of the Company's
Common Stock from Compscript, Inc. in exchange for a non-recourse promissory
note in the original principal amount of $1,125,000, payable in full, including
accrued interest on July 26, 1997.
12
<PAGE>
The 1,125,000 shares will serve as collateral for the note subject to release
upon payment of the principal amount or portions thereof.
During the six months ended June 30, 1996, QPQ incurred a net loss of
$1,175,164 ($.19 per share) compared to a net loss of $1,254,109 ($.29 per
share) for the six months ended June 30, 1995. Set forth below is a discussion
of the results of operations and liquidity and capital resources of QPQ's
restaurant business and medical center business. General corporate and overhead
expenses, which benefit all of QPQ's businesses, have not been allocated to
business segments for this analysis and are discussed under "Results of
Operations of QPQ/PKP."
RESULTS OF OPERATIONS OF QPQ/PKP
SIX MONTHS ENDED JUNE 30, 1996 VS. SIX MONTHS ENDED JUNE 30, 1995
During the six months ended June 30, 1996 and June 30, 1995, QPQ
generated Restaurant Revenues of $648,138 and $532,880, respectively, from its
three Domino's Stores and the Cafe Renaissance. Relative to their performance in
the six months ended June 30, 1995, in the six months June 30, 1996 the three
Domino's Stores have generally experienced an increase in average revenues and
transactions.
During the six months ended June 30, 1996, QPQ incurred $237,806,
$168,382, $243,427 and $102,060 of Food and Packaging Expenses, Payroll and
Related Costs, Occupancy and Other Operating Expenses and Depreciation and
Amortization Expense, respectively.
Food and Packaging Expenses for the six months ended June 30, 1996 and
June 30, 1995 were approximately 36.7% and 38.3% of Restaurant Revenues,
respectively. The relative decrease in Food and Packaging Expenses is primarily
attributable to improved cost control regarding purchases. Food and Packaging
Expenses as a percentage of Restaurant Revenues for the six months ended June
30, 1995 were adversely affected by special promotions and giveaways conducted
in connection with the Cafe Renaissance grand opening in January 1995.
Payroll and Related Costs as a percentage of Restaurant Revenues for
the quarter ended June 30, 1996 and June 30, 1995 were approximately 26.0% and
33.6%, respectively. The relative decrease in Payroll and Related Costs as a
percentage of Sales is attributable to an increase in the average level of same
restaurant revenues, improved labor force scheduling and changes in the menu and
service at the Cafe Renaissance.
Occupancy and Other Operating Expenses as a percentage of Restaurant
Revenues for the six months ended June 30, 1996 and June 30, 1995 were
approximately 37.6% and 44.2%, respectively. The decrease in Occupancy and Other
Operating Expenses as a percentage of Restaurant Revenues is primarily
attributable to an increase in the average level of same restaurant revenues and
the implementation of better cost controls.
Restaurant Depreciation and Amortization as a percentage of Restaurant
Revenues for the six months ended June 30, 1996 and June 30, 1995 were 15.7% and
20.3%, respectively. The decrease in Restaurant Depreciation and Amortization
Expense as a percentage of Restaurant Revenues is a function of the increase in
QPQ's Restaurant Revenues.
13
<PAGE>
General and Administrative Expenses for the six months ended June 30,
1996 and June 30, 1995, totalled $796,875 and $677,828, respectively. For the
six months ended June 30, 1996, General and Administrative Expenses were
comprised of executive and office staff salaries and benefits of $225,079; legal
and professional fees, office rent, travel, telephone and other corporate
expenses of $528,690, and depreciation and amortization of $43,106. For the six
months ended June 30, 1995, General and Administrative Expenses were comprised
of executive and office staff salaries of $188,231, legal and professional fees,
office rent, travel, telephone and other general corporate expenses of $427,190,
and depreciation and amortization of $62,401.
QPQ's General and Administrative Expenses for the six months ended June
30, 1996 are higher than such expenses for the six months ended June 30, 1995,
as a result of, among other things, general and administrative expenses
associated with QPQ Medical's recent business commencement and expansion. The
increase in General and Administrative Expenses was partly offset by a reduction
in QPQ's allocation of certain expenses it shared with International Fast Food
Corporation in 1995.
Interest and Other Income for the six months ended June 30, 1996 and
June 30, 1995, were $7,882 and $181,969, respectively. The decrease in Interest
and Other Income is attributable to a reduction in the funds held for investment
by QPQ.
During the six months ended June 30, 1996 and June 30, 1995, Interest
Expense was $18,536 and $202,027, respectively. The decrease in Interest Expense
is due to a decrease in QPQ's borrowings.
LIQUIDITY AND CAPITAL RESOURCES
A. QPQ Corporation/Pizza King Polska
Pursuant to the Domino's Development Agreement, as amended November 13,
1995, QPQ is granted the exclusive right until December 31, 2003 to develop,
operate and franchise Domino's Stores in Poland. During the Initial Term of the
Domino's Development Agreement, which expires on December 31, 2003, QPQ is
required to open and operate, either through affiliates of QPQ ("Affiliated
Franchisees") or unrelated third parties ("Non-Affiliated Franchisees"), at
least 50 Domino's Stores in accordance with a schedule that obligates QPQ or its
Non-Affiliated Franchisees to open three Domino's Stores in 1994, no Domino's
Stores in 1995, eight Domino's Stores in 1996 and five, six or seven Domino's
Stores for each of the following seven years. Domino's Stores developed and/or
operated by Non-Affiliated Franchisees are counted towards QPQ's obligation to
open a minimum number of Domino's Stores.
In compliance with the Domino's Development Agreement, QPQ opened three
Domino's Stores in 1994. QPQ is required and, subject to the factors discussed
below, may open or cause to be opened at least eight additional Domino's Stores
prior to December 31, 1996. QPQ has secured its fourth site and has located but
not yet secured its fifth Domino's Store site. Subject to the modification of
the Domino's Agreement, if QPQ in fact fails to meet the development schedule
described above, QPQ will lose its rights to develop and franchise additional
Domino's Stores but will be entitled to act as a master franchisor and
franchisee with respect to the franchise agreements granted prior thereto. QPQ
does not intend to open additional cafe-style restaurants at this time.
14
<PAGE>
As of June 30, 1996, QPQ had working capital of $155,404. QPQ's
material commitments for capital expenditures relate to the Domino's Stores that
QPQ must open to comply with the Domino's Development Agreement. Although to
date QPQ has concentrated its efforts on the development of Domino's Stores in
Warsaw, Poland, subject to the re-evaluation described below, QPQ intends to
focus its future Domino's Store development efforts on other Polish cities.
QPQ's decision to expand its development efforts is based on a number of
factors, including, but not limited to, QPQ's ability to conserve its capital
resources by developing additional Domino's Stores outside of Warsaw through
Non-Affiliated Franchisees.
QPQ estimates the cost of opening a Domino's Store to be approximately
$125,000 to $500,000, including leasehold improvements, furniture, fixtures and
equipment, and opening inventories, but excluding up front payments, lease
payments and franchise fees. Such estimates vary depending on the size and
condition of a Domino's Store, the amount of customer seating provided and the
extent of leasehold improvements required. QPQ estimates that once a space has
been leased and made available, approximately 90 days is required to renovate,
equip and furnish the store, obtain necessary licenses and approvals and open a
Domino's Store.
QPQ intends to, to the extent possible, finance the operation and
expansion of its restaurant system and medical center system with the unutilized
proceeds of its Private Offering and Public Offering (defined below) credit
facilities and cash from operations.
Any implementation of QPQ's business plan with respect to the operation
of its three Domino's Stores and the Cafe Renaissance (the "QPQ Operations
Plan") beyond September 1996, may require resources greater than those currently
available to QPQ. Except as discussed below, QPQ has no current arrangements
with respect to, or sources of, additional financing, and it is not contemplated
that QPQ's principal shareholders, will provide any portion of QPQ's future
financing requirements. Implementation of the QPQ Operations Plan is contingent
upon, among other things, QPQ's ability to utilize significantly less of its
capital resources financing its restaurants' operations and General and
Administrative Expenses than it has to date. There can be no assurance that QPQ
will generate any cash flow from operations in the future, or that additional
financing will be available on acceptable terms, or at all, to fund QPQ's
operations.
Any implementation of QPQ's business plan with respect to the expansion
of its Domino's Store system by franchising Domino's Stores to Non-Affiliated
Franchisees (the "QPQ Development Plan") beyond August 1996 may require
resources greater than those allocated for such purpose or otherwise currently
available to QPQ. Successful implementation of QPQ's Development Plan is
contingent upon QPQ identifying and engaging Non-Affiliated Franchisees with the
financial and other resources capable of developing and opening Domino's Stores
in accordance with the development schedule or QPQ securing additional debt or
equity financing to permit QPQ to develop the Domino's Stores in accordance with
the development schedule. Successful implementation of the QPQ Development Plan
is also contingent upon QPQ's ability to economically supervise, provide
technical support and distribute food products from QPQ's Commissary to
Non-Affiliated Franchisees. QPQ has no experience in identifying, engaging,
supervising or providing technical assistance to Non-Affiliated Franchisees.
Further, QPQ has not yet identified nor engaged any Non-Affiliated Franchisees
which may develop and operate future Domino's Stores. In addition, QPQ has
secured one additional Domino's Store site.
15
<PAGE>
QPQ's Operations Plans and Development Plans beyond September 1996 are
contingent upon its operating and development experiences prior thereto.
Accordingly, QPQ cannot accurately predict its Operations Plans and Development
Plans beyond September 1996.
QPQ continues to review the performance and prospects of its pizza
operations and is evaluating its current business plan to determine the best
possible means of effecting a profitable operation. The alternatives now under
consideration include, among others, focusing future development efforts on
Domino's traditional takeout and delivery service; selling certain or all of
QPQ's existing Domino's Stores and/or the Cafe Renaissance (collectively, the
"Stores") to unrelated third parties and/or affiliates of QPQ; closing certain
of QPQ's Stores; or entering into management agreements or joint venture
agreements with unrelated third parties or affiliates with respect to the
operation of certain or all of QPQ'S Stores.
Subject to market conditions and its need for funds, QPQ may generate
additional capital through the public or private sale of equity in QPQ.
The deployment of QPQ's financial, personnel, capital and/or other
resources in other businesses or investment opportunities, including QPQ Medical
Centers, may result in a diminution in resources available to execute the QPQ
Operations Plan and/or the QPQ Development Plan. See "-B. QPQ Medical Centers,
Inc." for more information regarding QPQ Medical's liquidity and capital
resources.
Subject to, among other things, QPQ's future operating results, QPQ's
capital resources, QPQ's ability to locate a ready, willing and able buyer (a
"Qualified Buyer") for certain or all of the Stores, QPQ's ability to locate a
joint venture partner or Non-Affiliated Franchisee (a "Qualified Partner"),
willing and able to develop and operate its existing or additional Stores and
the Board of Directors believes that it may be in the best interests of QPQ to
close certain of its Stores. The Board of Directors' belief is based upon, among
other things, certain of the Stores operating results to date, QPQ's projected
operating results with all of the Stores open, QPQ's projected operating results
with certain of the Stores closed, QPQ's cash position, QPQ's ability to secure
additional sources of capital, QPQ's perceived risk adjusted rate of return on
additional cash investments in the Domino's Store and/or Cafe Renaissance
businesses versus QPQ's perceived risk adjusted rate of return in alternative
investments, QPQ's inability to date to locate a Qualified Buyer for the
Store(s) and/or QPQ's Domino's Store development rights on acceptable terms,
QPQ's inability to date to locate a Qualified Partner to develop and operate
additional Domino's Stores, and QPQ's relationship with Domino's.
To date, QPQ's business has been principally financed by proceeds from
QPQ's public offering of QPQ Common Stock and Warrants, proceeds from a bank
credit facility with Northern Trust Bank of Florida ("Northern Trust Bank"), the
proceeds from a bank credit facility with American Bank in Poland, S.A.
("American Bank") and proceeds from two private offerings of QPQ Common Stock.
In September 1993, QPQ consummated an underwritten initial public
offering (the "Public Offering") of 1,250,000 shares of its common stock and
1,405,660 redeemable Common Stock Purchase Warrants (the "Warrants"), each
Warrant entitling the holder thereof to purchase one share of QPQ's Common Stock
for $6.60, for aggregate proceeds of approximately $6,012,000, net of
underwriting discounts and commissions, expense allowances and other
registration costs.
16
<PAGE>
The unutilized proceeds of the Public Offering were invested through a
discretionary management account at Northern Trust Bank of Florida, N.A.
("Northern Trust"). As of June 30, 1996 and August 6, 1996, $67,257 and $68,064,
respectively, of the remaining funds were invested in United States dollar
denominated money market funds.
As of March 30, 1995, QPQ sold (the "Private Offering") 3,400,000
restricted shares of QPQ Common Stock for aggregate proceeds of $850,000. The
proceeds of the Private Offering have been utilized by QPQ to finance it
operations and expansion.
In January 1994, QPQ's wholly owned subsidiary, PK Polska, obtained a
$28,000 line of credit from American Bank, with interest payable on outstanding
principal amounts at a rate equivalent to the American Bank's overdraft rate
minus 4%, payable monthly on the first day of the month. In September 1994, QPQ
guaranteed PK Polska's payment of any and all amounts, not exceeding $28,000,
owed to American Bank pursuant to the credit facility. As of June 30, 1996 and
August 6, 1996, $37,137 and $48,140, respectively, of the credit facility were
outstanding.
In January 1995, PK Polska obtained a $300,000 line of credit from
American Bank with interest payable on outstanding principal amount at a rate of
7.75%. PK Polska is also obligated to pay American Bank a 1% per annum
commission on the daily average unutilized principal balance of the credit
facility. Interest and commission expenses are payable once every three months.
The credit facility are secured by PK Polska deposits with American Bank and a
guarantee of QPQ. Borrowings are required to be repaid in full on January 28,
1997. As of June 30, 1996 and August 6, 1996, $300,000 and $300,000,
respectively, of the credit facility were outstanding.
On March 18, 1996, PK Polska obtained a $150,000 line of credit from
American Bank. PK Polska is required to make interest payments on the
outstanding principal amount of the credit facility at a rate of 10% per annum.
PK Polska is also obligated to pay American Bank a 2% per annum commission on
the daily average unutilized principal balance of the credit facility. Interest
and commission expenses are payable once every three months commencing April 30,
1996. The proceeds of the credit facility may be used to finance up to 50% of
the cost of developing Domino's Stores. The credit facility is secured by: (i) a
promissory note of PK Polska; (ii) a guarantee of QPQ; and (iii) title to the
fixtures and equipment of the Domino's Stores developed with the credit facility
proceeds. Draws can be made on the credit facility until October 30, 1996.
Commencing October 31, 1996, PK Polska is required to pay American Bank $30,000
once every three months until the outstanding principal balance of the credit
facility is repaid. As of June 30, 1996 and August 6, 1996, $0 and $0 of the
credit facility were outstanding.
During the quarter ended June 30, 1996, QPQ completed a private
offering (the "Private Offering") of 1,195,000 shares of Common Stock at an
offering price of $1 per share. The Private Offering was made only to accredited
investors in accordance with the provisions of Regulation D promulgated under
the Securities Act of 1933, as amended. Mr. Rubinson, the Chairman of the Board,
Chief Executive Officer, President and a principal shareholder of QPQ, and Nigel
Norton, a principal shareholder of QPQ, purchased 200,000 and 100,000 shares of
common stock, respectively.
17
<PAGE>
B. QPQ MEDICAL CENTERS, INC.
GENERAL
In August 1995, QPQ entered into the business of developing and
operating medical centers ("Medical Centers") which offer primary care medical
services and medically supervised weight loss programs. In January, April and
July 1996, QPQ Medical opened its first three Medical Centers and will open its
fourth medical center in September 1996. QPQ Medical has incurred losses and
anticipates that it will continue to incur losses until it establishes a number
of Medical Centers generating sufficient resources to offset its operating costs
and the costs of its proposed continuing expansion. In light of the
uncertainties in connection with the commencement of a new business, QPQ cannot
reasonably estimate the length of time before QPQ Medical may achieve profitable
operations, if ever.
RESULTS OF OPERATIONS OF QPQ MEDICAL
SIX MONTHS ENDED JUNE 30, 1996
QPQ Medical commenced operations in January 1996. Accordingly, a
comparison of QPQ Medical's results of operations in the six months ended June
30, 1996 with any other time period are not meaningful.
During the six months ended June 30, 1996, QPQ Medical generated
Medical Center Revenues of $307,590 from its two Medical Centers. During such
period, the average monthly level of Medical Center Revenues steadily increased.
During the six months ended June 30, 1996, QPQ Medical incurred
$223,834, $307,721 and $27,516 of Payroll and Related Expense, Occupancy and
Other Expense and Depreciation and Amortization, respectively. QPQ Medical
believes that the foregoing expenses as a percentage of Medical Center Revenues
should decline as Medical Center Revenues increase and Medical Centers currently
under lease and renovation develop into revenue production centers.
See "A. QPQ Corporation-Results of Operations" for a discussion of QPQ
Medical's general corporate and overhead expenses.
LIQUIDITY AND CAPITAL RESOURCES
Subject to QPQ's other business commitments, QPQ Medical is required to
use its best efforts to develop the Medical Center business concept, the License
Agreement does not require QPQ Medical to develop and open Medical Centers
pursuant to an established schedule. QPQ Medical's material commitments for
capital expenditures relate to the weight loss centers it is in the process of
developing and operating. In addition, under the License Agreement, QPQ Medical
is required to expend a minimum of $100,000 in start-up funding and a percentage
of its annual gross receipts for promotion and marketing the Program. QPQ
Medical has expanded the required amounts in accordance with the License
Agreement.
18
<PAGE>
QPQ Medical estimates the cost of opening a Medical Center to be
approximately $50,000 to $300,000, including leasehold improvements, furniture,
fixtures and equipment, but excluding lease payments and license fees. Such
estimates vary depending on the size and style of a Medical Center and the
extent of leasehold improvements required. QPQ Medical estimates that once a
space has been leased and made available, approximately 90 days is required to
renovate, equip and furnish the Medical Center, obtain necessary licenses and
approvals and open a Medical Center.
QPQ intends to finance the development and operations of Medical
Centers with the unutilized proceeds of QPQ's Private Offering and Public
Offering and cash, if any, from Medical Center operations. Any implementation of
QPQ Medical's business plan with respect to the operation of its Medical Centers
(the "QPQ Medical Operations Plan") beyond September 1996 may require resources
greater than those currently available to QPQ Medical. Although QPQ Medical
desires to develop additional Medical Centers, any implementation of QPQ
Medical's business plan with respect to the expansion of its Medical Center
System (the "QPQ Medical Development Plan") beyond September 1996 may require
resources greater than those currently available to QPQ Medical. QPQ Medical has
no current arrangements with respect to, or sources of, financing. QPQ's
Medical's Operation Plans and QPQ Medical's Development Plans beyond September
1996 are contingent upon its operating and development experiences prior
thereto. Accordingly, QPQ Medical cannot accurately predict its operations and
development plans beyond September 1996.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Domino's Store operations are conducted in Poland. The Polish economy
has historically been characterized by high rates of inflation and devaluation
of the Polish zloty against the United States dollar and European currencies.
However, in the year ended December 31, 1995, the rates of inflation and
devaluation improved. For the years ended December 31, 1993, 1994 and 1995, the
annual inflation rate in Poland exceeded 35%, 32% and 21.6%, respectively, and
as of December 31, 1993, 1994 and 1995 the exchange rate was 21,344, 24,372 and
24,680 zlotys per dollar, respectively. Franchise fees for each Domino's Store
opened are paid in United States currency. Additionally, QPQ is dependent on
foreign sources of supply (equipment, paper goods and certain food products)
which require payment in European or United States currencies. Since QPQ's
revenues from operations are in zlotys, QPQ is subject to the risk of currency
fluctuations. QPQ has and intends to maintain substantially all of its
unutilized funds in dollar denominated accounts and/or securities. There can be
no assurance that QPQ will successfully manage its exposure to currency
fluctuations or that such fluctuations will not have a material adverse effect
on QPQ.
Thus far, QPQ's revenues have been used to fund restaurant operations
and QPQ's expansion. As a result, such revenues have been relatively insulated
from inflationary conditions in Poland. There can be no assurance that
inflationary conditions in Poland will not have an adverse effect on QPQ.
The accounts of PK Polska are measured using the Polish zloty. Due to
Poland's highly inflationary environment, generally accepted accounting
principles require QPQ to calculate and recognize on its statement of operations
its currency translation gains or losses associated with PK Polska. For the six
months ended June 30, 1996 and June 30, 1995, QPQ had a foreign currency
translation gain (loss) of ($18,704) and ($28,886), respectively.
19
<PAGE>
The only currency that may be used in Poland is the zloty. The value of
the zloty is pegged pursuant to a system based on a basket of currencies, as
well as all other economic and political factors that affect the value of
currencies generally. As of January 1, 1995, the National Bank of Poland
introduced a new currency unit which is named a "zloty" (a "new zloty"). New
zlotys are equivalent to 10,000 old zlotys ("old zlotys"). Old zlotys will
remain legal tender until December 31, 1996, after which date they will only be
exchangeable at certain banks. All references in this document to zlotys are to
old zlotys. At June 30, 1996, the exchange rate was 27,200 zlotys per dollar.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No reports on Form 8-K have been filed during the quarter ended
June 30, 1996.
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QPQ CORPORATION
DATE: August 19, 1996 By: /S/ MITCHELL RUBINSON
--------------------------
Mitchell Rubinson, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
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