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 September 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
--------------------------------------------------------------------------
(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
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(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 November 8, 1996 was 7,557,012.
Traditional Small Business Disclosure Format: Yes [x] No [ ]
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM. 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 and December 31,
1995 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 1996 and 1995 4
Consolidated Statements of
Shareholders' Equity for the Nine
Months Ended September 30, 1996 5
Consolidated Statements of Cash Flows
for the Nine Months Ended September
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
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( unaudited)
ASSETS
------
September 30, December 31,
1996 1995
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 499,472 $ 1,052,831
Restricted Cash 300,000 300,000
Receivables 107,183 868
Inventory 68,840 63,567
Due from affiliates 154,192 1,040
Prepaid expenses 271,871 7,952
------------ ------------
Total Current Assets 1,401,558 1,426,258
------------ ------------
Furniture, equipment & leasehold
improvements, net 2,292,878 1,635,195
Deferred charges, net of accumulated
amortization of $99,302 and $18,747
at 1996 and 1995, respectively 153,455 279,249
Domino's development rights, net of
accumulated amortization of $98,437
and $75,123 at 1996 and 1995,
respectively 212,417 235,731
------------ ------------
Total Assets $ 4,060,308 $ 3,576,433
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 592,762 $ 245,164
Accrued expenses 172,459 82,758
Due to affiliate 210,474 49,087
Bank credit facilities payable 353,072 -
------------ ------------
Total Current Liabilities 1,328,767 377,009
------------ ------------
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,
100,000,000 shares authorized;
7,557,012 and 6,025,000 shares
issued and outstanding,
respectively 75,570 60,250
Additional paid-in capital 9,035,656 7,063,044
Accumulated Deficit ( 6,379,685) ( 4,223,870)
------------ ------------
Total Shareholders' Equity 2,731,541 2,899,424
------------ ------------
Total Liabilities and
Shareholders' Equity $ 4,060,308 $ 3,576,433
============ ============
See Accompanying Notes
3
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
1996 1995 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant $ 363,109 $ 345,395 $ 1,011,247 $ 878,275
Medical Centers 292,060 - 599,650 -
------------ ------------ ----------- -----------
Total Revenue $ 655,169 $ 345,395 $ 1,610,897 $ 878,275
------------ ------------ ----------- -----------
RESTAURANT OPERATING:
Food and packaging 128,954 139,259 366,760 343,517
Payroll and related costs 103,519 103,494 271,901 282,785
Occupancy and other operating
expenses 128,111 140,443 371,538 376,003
Depreciation and amortization 48,641 89,086 150,701 197,171
------------ ------------ ----------- -----------
Total restaurant operating
expenses 409,225 472,282 1,160,900 1,199,476
------------ ------------ ----------- -----------
MEDICAL CENTERS:
Payroll and related 266,518 - 490,352 -
Occupancy and other 209,809 - 360,373 -
Advertising 123,389 - 280,546 -
Depreciation and amortization 25,802 - 53,318 -
------------ ------------ ----------- -----------
Total Medical Centers 625,518 - 1,184,589 -
------------ ------------ ----------- -----------
GENERAL & ADMINISTRATIVE
EXPENSES 484,965 221,369 1,281,840 899,197
PROVISION FOR LOSS ON SALE
OF ASSETS 70,000 - 70,000 -
------------ ------------ ----------- -----------
OPERATING LOSS ( 934,539) ( 348,256) (2,086,432) (1,220,398)
------------ ------------ ----------- -----------
OTHER INCOME (EXPENSES):
Interest and other income 1,957 22,405 15,926 204,374
Gain (loss) on sale of investment - ( 333,023)
Interest expense ( 10,262) ( 11,488) ( 28,798) ( 213,515)
Gain (Loss) from foreign
currency translation ( 37,807) 28,523 ( 56,511) ( 363)
------------ ------------ ----------- -----------
Total other income (expense),
net ( 46,112) 39,440 ( 69,383) ( 342,527)
------------ ------------ ----------- -----------
NET LOSS $( 980,651) $( 308,816) $(2,155,815) $(1,562,925)
============ ============ =========== ===========
NET LOSS PER COMMON
SHARE $( .13) $( .05) $( .33) $( .32)
============ ============ =========== ===========
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 7,271,293 6,025,000 6,615,234 4,941,484
============ ============ =========== ===========
</TABLE>
See Accompanying Notes
4
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the nine months ended September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
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
Issuance of shares in
Regulation S offering, net
of expenses of offering 337,012 3,370 799,562 802,932
Payment for termination
of option ( 10,000)
Net loss for the period ( 10,000) ( 2,155,815) ( 2,155,815)
------------ ----------- ------------ ------------ ------------
Balances, September 30, 1996 7,557,012 $ 75,570 $ 9,035,656 $( 6,379,685) $ 2,731,541
============ =========== ============ ============ ============
</TABLE>
See Accompanying Notes
5
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
---------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Loss $( 2,155,815) $( 1,562,925)
Adjustment to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 334,690 297,314
Provision for loss on sale of assets 70,000
Loss on the sale of investments - 333,023
Changes in operating assets and liabilities:
Receivables ( 106,315) 117,906
Inventory ( 5,273) ( 4,532)
Accrued interest receivable - 57,690
Prepaid expenses ( 263,919) 65,755
Other assets 27,240 ( 8,875)
Accounts payable and
accrued expenses 437,299 ( 90,090)
------------ ------------
Net cash used in operating activities ( 1,662,093) ( 794,734)
------------ ------------
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 ( 940,505) ( 227,191)
------------ ------------
Net cash provided by (used in)
investing activities ( 940,505) 5,274,034
------------ ------------
See Accompanying Notes
6
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(unaudited)
Nine Months Ended
September 30,
-----------------------------
1996 1995
------------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment for Options and Warrants ( 10,000) ( 10,000)
Proceeds from sale of common stock 1,997,932 850,000
Repayment of bank credit facilities - ( 5,196,909)
Borrowings under bank credit facilities 53,072 838,371
Due to (from) affiliates, net 8,235 63,033
------------- ------------
Net cash provided by (used in) financing
activities 2,049,239 ( 3,455,505)
------------- ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ( 553,359) 1,023,795
BEGINNING CASH AND CASH EQUIVALENTS 1,052,831 416,966
------------- ------------
ENDING CASH AND CASH EQUIVALENTS $ 499,472 $ 1,440,761
============= ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 28,798 $ 213,515
============ ============
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 then major shareholders, 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, July and
September 1996, QPQ Medical opened its first four medical centers.
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 September 30, 1996, the exchange rate was 28,010 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
September 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 nine
month period ended September 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.
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.
9
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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. No draws were made and the credit facility expired on October 30,
1996.
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 nine months ended September 30, 1996, the Company sold
1,195,000 shares of Common Stock in a private offering and received cash
proceeds of $1,195,000, and sold 337,012 shares in a Regulation S offering and
received cash proceeds, net of offering expenses of $802,932.
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 nine months ended
September 30, 1996:
Outstanding at beginning of period 592,500
Granted 85,000
Exercised -
Expired or cancelled ( 175,000)
----------
Outstanding at end of period 502,500
==========
Exercisable at end of period 300,000
Price range of options
outstanding at end of period $1.50 - $2,875
==============
Available for grant at end of period 547,500
==========
10
<PAGE>
QPQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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, thereby leaving
38,250 remaining warrants. 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 July 1996, the Company paid $25,000 of cash to terminate an option to
purchase 75,000 shares of its Common Stock held by its former Chief Financial
Officer.
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.
5. SUBSEQUENT EVENT:
On October 1, 1996, PK Polska sold its Cafe Renaissance restaurant for
$250,000, consisting of cash of $180,000 and a promissory note in the amount of
$70,000, payable on or before December 31, 1996.
PK Polska recognized an approximate $70,000 loss on the sale which has
been included in the accompanying consolidated financial statements for the
three and nine month periods ended September 30, 1996 as Provision For Loss on
Sale of Assets.
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 an
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. The 1,125,000 shares will serve as collateral
for the note subject to release upon payment of the principal amount or portions
thereof.
12
<PAGE>
During September 1996, QPQ completed a Regulation S offering of 337,012
shares of Common Stock and received cash proceeds, net of offering expenses of
$802,932.
During the nine months ended September 30, 1996, QPQ incurred a net loss
of $2,155,815 ($.33 per share) compared to a net loss of $1,562,925 ($.32 per
share) for the nine months ended September 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.
RESULTS OF OPERATIONS OF QPQ/PKP
NINE MONTHS ENDED SEPTEMBER 30, 1996 VS. NINE MONTHS ENDED SEPTEMBER 30, 1995
During the nine months ended September 30, 1996 and September 30, 1995,
QPQ generated Restaurant Revenues of $1,610,897 and $878,275, respectively, from
its three Domino's Stores and the Cafe Renaissance. Compared to their
performance for the nine months ended September 30, 1995, for the nine months
September 30, 1996 the three Domino's Stores have generally experienced an
increase in average revenues and transactions.
During the nine months ended September 30, 1996, QPQ incurred $366,760, of
Food and Packaging Expenses, $271,901 of Payroll and Related Costs, $371,538 of
Occupancy and Other Operating Expenses and $150,701 of Depreciation and
Amortization Expense, respectively.
Food and Packaging Expenses for the nine months ended September 30, 1996
and September 30, 1995 were approximately 36.3% and 39.1% of Restaurant
Revenues, respectively. The relative decrease in Food and Packaging Expenses is
primarily attributable to improved inventory controls. Food and Packaging
Expenses as a percentage of Restaurant Revenues for the nine months ended
September 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
nine months ended September 30, 1996 and September 30, 1995 were approximately
26.9% and 32%, 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 nine months ended September 30, 1996 and September 30, 1995
were approximately 36.7% and 42.8%, 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 nine months ended September 30, 1996 and September 30, 1995
were 14.9% and 22.4%, 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 nine months ended September
30, 1996 and September 30, 1995, totalled $1,223,840 and $899,197, respectively.
For the nine months ended September 30, 1996, General and Administrative
Expenses were comprised of executive and office staff salaries and benefits of
$393,266; legal and professional fees, office rent, travel, telephone and other
corporate expenses of $699,903, and depreciation and amortization of $130,671.
For the nine months ended September 30, 1995, General and Administrative
Expenses were comprised of executive and office staff salaries of $307,662,
legal and professional fees, office rent, travel, telephone and other general
corporate expenses of $491,392, and depreciation and amortization of $100,143.
QPQ's General and Administrative Expenses for the nine months ended
September 30, 1996 are higher than such expenses for the nine months ended
September 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 nine months ended September 30, 1996 and
September 30, 1995, were $15,926 and $204,374, respectively. The decrease in
Interest and Other Income is attributable to a reduction in the funds held for
investment by QPQ.
During the nine months ended September 30, 1996 and September 30, 1995,
Interest Expense was $28,798 and $213,515, 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, nine 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 September 30, 1996, QPQ had working capital of $130,791. 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 December 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 December 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 December 1996 are
contingent upon its operating and development experiences prior thereto.
Accordingly, QPQ cannot accurately predict its Operations Plans and Development
Plans beyond December 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 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 Stores 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 September 30, 1996 and November 7, 1996, $0 and $0,
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 September 30, 1996
and November 7, 1996, $53,072 and $1,233, 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 September 30, 1996 and November 7, 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. No draws were made and the credit facility expired on October 30, 1996.
During the nine months ended September 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.
During September 1996, QPQ completed a Regulation S offering of Common
Stock and received cash proceeds, net of offering expenses of $802,932.
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, July and
September 1996, QPQ Medical opened its first four Medical Centers. 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
NINE MONTHS ENDED SEPTEMBER 30, 1996
QPQ Medical commenced operations in January 1996. Accordingly, a
comparison of QPQ Medical's results of operations in the nine months ended
September 30, 1996 with any other time period are not meaningful.
During the nine months ended September 30, 1996, QPQ Medical generated
Medical Center Revenues of $599,650 from its two Medical Centers. During such
period, the average monthly level of Medical Center Revenues steadily increased.
During the nine months ended September 30, 1996, QPQ Medical incurred
$490,352, $360,373, $280,544 and $53,318 of Payroll and Related Expense,
Occupancy and Other Expense, Advertising 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.
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
18
<PAGE>
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 was 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 nine
months ended September 30, 1996 and September 30, 1995, QPQ had a foreign
currency translation (loss) of ($56,511) and ($363), respectively.
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
19
<PAGE>
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 September 30, 1996, the exchange rate was 28,010 zlotys per
dollar.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) On September 27, 1996, the Company filed a Form 8-K in connection with
the sale of 337,012 shares of its Common Stock pursuant to a Regulation S
offering.
21
<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: November 12, 1996 By: /s/ Mitchell Rubinson
-------------------------------------
Mitchell Rubinson, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QPQ CORPORATION FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 799,472
<SECURITIES> 0
<RECEIVABLES> 261,375
<ALLOWANCES> 0
<INVENTORY> 68,840
<CURRENT-ASSETS> 1,401,558
<PP&E> 2,904,463
<DEPRECIATION> (611,585)
<TOTAL-ASSETS> 4,060,308
<CURRENT-LIABILITIES> 1,328,767
<BONDS> 0
0
0
<COMMON> 75,570
<OTHER-SE> 2,655,971
<TOTAL-LIABILITY-AND-EQUITY> 4,060,308
<SALES> 1,610,897
<TOTAL-REVENUES> 1,610,897
<CGS> 2,345,489
<TOTAL-COSTS> 2,345,489
<OTHER-EXPENSES> 1,392,425
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,798
<INCOME-PRETAX> (2,155,815)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,155,815)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (2,155,815)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
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