U.S. SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ________ TO __________
Commission File Number 000-23174
THE QUIZNO'S CORPORATION
(Name of small business issuer as specified in its charter)
Colorado 84-1169286
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1099 18th Street, Suite 2850
Denver, Colorado 80202
(Address of Principal Executive officers) (Zip Code)
(303) 291-0999
(Issuer's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities 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 [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ ]
State registrant's revenue for its most recent fiscal year:
$7,486,495
The aggregate market value of the registrant's common stock held by
nonaffiliates of the registrant as of March 17, 1997 was
approximately
$4,102,676 (for purposes of the foregoing calculation only, each of
the registrant's officers and directors is deemed to be an affiliate).
There were 2,865,746 shares of registrant's common stock outstanding
as of March 17, 1996.
Documents incorporated by reference: Portions of the
registrant's Proxy Statement that will be filed with the Securities
and Exchange Commission in connection with the registrant's
annual meeting of
stockholders are incorporated by reference in Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check one): Yes [ ]
No [X]
This document contains __ pages.
The Exhibit Index is located at page 27.
TABLE OF CONTENTS
Page
No. PART I
ITEM 1. Description of Business 1
ITEM 2. Description of property 15
ITEM 3. Legal proceedings 15
ITEM 14.Submission of matters to a vote of security
holders 15
PART II
ITEM 5. Market for Common Equity and Related
Stockholder Matters 16
ITEM 6. Management's Discussion and Analysis or
Plan of Operation 17
ITEM 7. Financial Statements 26
ITEM 8. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 26
PART III
ITEM 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance
with Section 16(A) of the Exchange Act 27
ITEM 10. Executive Compensation 27
ITEM 11. Security Ownership of Certain Beneficial
Owners and Management 27
ITEM 12. Certain Relationship s and Related
Transactions 27
ITEM 13. Exhibits and Reports on Form 8-K 27
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Restaurants
The Company is engaged in franchising and, to a lesser
extent, operating quick service restaurants ("QSR") (the
"Restaurants") using the registered service mark "Quizno'sr" and
the name "Quizno's Classic Subs." The Restaurants offer a
menu of submarine style sandwiches, salads, soups,
desserts and beverages, including "Classic Lite"
selections of submarine sandwiches and salads designed for
consumers who are looking for a low-fat, healthy alternative
to typical fast food products.
The Company believes that the submarine
sandwiches offered in the Restaurants are distinctive in the
market for several reasons. Each submarine sandwich is
prepared after the
customer orders and with special ingredients, recipes
and
techniques. These ingredients, recipes and techniques
are
controlled to provide uniformity of taste and quality among
all of the Restaurants.
One of the most important distinctions of the
Quizno's sandwich product is that it is served to the customer
warm. Each sandwich is prepared open face and run through a
conveyor oven that toasts the bread, melts the cheese and
enhances the flavors of the meats.
The Company focuses on the quality of the
ingredients contained in the food products it uses and requires
that all of its specified ingredients, which are generally
higher quality than those that other submarine sandwich shops
use, be purchased from approved suppliers. The cheeses used in
the Restaurants are all natural. The Italian style meats
include a wine-cured Genoa salami, pepperoni and capicola,
an Italian spiced ham.
The
turkey breast is real turkey breast.
The Restaurants also are required to use
certain products which are prepared for the Company in
accordance with proprietary recipes developed by the
Company. Foremost among these is Quizno's special recipe
soft baguette style bread and its red-wine based vinaigrette
dressing used as a base on most of the sandwiches. In
addition, the Restaurants use the Company's proprietary recipe
tuna mix blend, garlic oil blend, and marinara sauce.
The Restaurants' upscale decor is designed to convey
an Italian deli ambiance and to match the upscale QSR market
niche represented by the product. The typical Restaurant has a
seating capacity of 20 to 60 customers at up to 30 tables.
Open kitchens allow customers to watch as their sandwiches are
prepared. The
decor package for the Restaurants includes framed
reproductions of old Italian food product labels, hand-
painted Italian style posters. The Italian theme is carried
through in standard red and green seating fixtures against a
black and white ceramic tile floor. Real wood trim adds a rich
warmth to the dining room not found in typical fast food
dining environments.
Besides a pleasant upscale environment for in-
house dining, the Restaurants offer conveniently packaged
meals for carry out to serve lunch time office workers and
to serve the home meal replacement segment of the market.
The recently developed Quizno's Express concept
is designed to operate in spaces as small as 100 square feet
yet with the same ambiance and decor as a traditional
Quizno's Restaurant. Quizno's Express units offer a full
menu with an extensive variety of Quizno's sandwiches.
Soups, salads and desserts are also available at Quizno's
Express units. Quizno's Express units will typically share
common area seating or may have very limited seating at
venues designed primarily for take out. By the end of 1997,
the Company believes Quizno's Express units may represent as
much as one third of all new Restaurants opened.
Quizno's Restaurants were first opened in 1981 by
the Company's predecessor. As of March 17, 1997, there
were 165 Restaurants in operation, and agreements were in
place for the opening of an additional 153 franchised
Restaurants.
Concept and Strategy
The Company's marketing strategy is to position
the
Restaurants between fast food and full-service dining.
The
Company believes that consumers are looking for a healthy
and tasty alternative to typical fast foods; in particular,
they are looking for an alternative to fast food hamburgers
and fried foods. At the same time, the Company also
believes many busy families are looking for a more convenient
and reasonably priced alternative to full-service dining.
Quizno's offers all the convenience of typical fast food in
terms of quick ticket times, affordability, and carry out and
home meal replacement options, but with a fresh, tasty
alternative to fast food products.
In
terms of full-service dining benefits, Quizno's offers
more comfortable dining rooms than most fast food restaurant
concepts as well as other dining options -- such as catering
and delivery -- generally not available in the fast food arena.
The Company's goal is to build a strong
and
consistently profitable nationwide chain of Restaurants.
The
primary vehicle for achieving the Company's planned growth
is
expected to be its Area Director marketing program. Under
this program, the Company grants to an Area Director the right
to sell on behalf of
the Company Quizno's franchises in a specified
market area. The Area Director's agreement with the
Company requires the Area Director, through the sale of
franchises , to
open a specified number of Restaurants within a specified
period of time.
The Company's revenues are derived from a royalty
on
all sales at franchised Restaurants, a per Restaurant
initial
franchise fee and fees collected from Area Directors for
the grant of territorial Restaurant marketing rights.
Franchisees and Area Directors pay fees to the Company
only once in
connection with execution of Franchise Agreements and
Area
Director Marketing Agreements. Royalties provide a long
term continuing
source of revenue. Although the Company believes
there are a substantial number of viable Area Director
markets
remaining to be sold, revenue from the sale of Area
Director rights are eventually expected to decline as the
number of
remaining exclusive areas available for sale to Area
Directors declines.
However, as that source of revenue declines other
sources of revenue, such as franchise fees and royalties,
are expected to increase as the number of franchised
Restaurants in
operation increases. The royalty rate set in current
Franchise Agreements is
6%; however, some franchisees operate under older
agreements that set lower royalty rates at 4% or 5%.
Due to the Company's unique quick service product,
the Company believes that it is well positioned to fill a
growing niche in the restaurant business that is developing
between fast food and full-service dining. Quizno's concept
also accommodates a variety of dining options from comfortable
in-house dining to
lunchtime carryout to home meal replacement. In addition,
the Company believes there to be an opportunity to earn a place
as a market leader within the submarine sandwich segment of
the food business. Where other more mature segments of the
food business have five or more established chains with more
than 1,000 units, the submarine sandwich segment currently only
has two chains with more than
1,000 units, with the second largest chain having
approximately 1,581 units. The Company's plan is to become
the third largest submarine sandwich chain in 1997.
Area Director Marketing Agreements
The Company offers to qualified candidates
("Area Directors") an exclusive area ("Exclusive Area") within
which to
sell franchised Restaurants pursuant to an Area
Director
Marketing Agreement. The Area Director marketing program
was
established by the Company in January 1993 and restructured
in December of 1994. This program is designed to assist the
Company in accelerating the marketing and sale of franchises
and the selection of Restaurant locations in the Exclusive
Area. Each
Exclusive Area is established with reference to
"designated market areas" of local television broadcast
stations as defined by the television broadcast industry.
The Company's growth strategy clusters Restaurants in
particular television markets in order to facilitate
implementation of its advertising program.
Upon execution of the Area Director
Marketing
Agreement, the Area Director is required to pay the Company
an Exclusive Area Development Fee equal to the total of the
area population multiplied by five cents ($.035 prior to
December 31, 1996, and $.03 prior to July 1996), plus a
training fee of $15,000 ($10,000 prior to July 1996).
The population based portion of the fee is deemed fully
earned by the Company when paid and is not refundable.
Area Directors are required to market franchises
for Restaurants to be located within the Exclusive Area.
The Area
Director undertakes to open, through the sale of franchises ,
a specified number of franchised Restaurants within the
Exclusive Area during the term of the Area Director Marketing
Agreement. The Area Director Marketing Agreement does not
grant the Area Director the exclusive right to market
franchises or solicit franchisees in the Exclusive Area,
but it does grant the Area Director the right to receive
certain fees and royalties, described in more detail below,
from all franchised Restaurants established in the Exclusive
Area during the term of the Area Director Marketing
Agreement. The Company reserves the right under the Area
Director Marketing Agreement to market and sell franchises
and to establish Company-owned Restaurants in an Exclusive
Area.
The Company as of March 17, 1997, had 63 Area
Directors whose territories cover approximately 55% of the
population of the United States. The following is a list of
the markets under development by Area Directors as of March 17,
1997.
Markets Under Development by Area Directors as of March 17,
1997
Alabama Illinois, Springfield Ohio, Cleveland
Arizona, Tucson Indiana Ohio, Columbus
Arizona, Phoenix Iowa Oregon, Portland
British Columbia Kansas Oregon, Eugene/Medford
California, Los Angeles
Cnty/Ventura Cnty Kentucky, Louisville Pennsylvania, Pittsburgh
(Partial)
California, San Diego Kentucky, Lexington S. Dakota, Rapid City
California, Orange County Kentucky, Bowling Green S. Dakota, Sioux Falls
California, Contra Costa
County Louisiana, Lake Charles Tennessee, Nashville
California Sacramento Louisiana, Shreveport Tennessee, Knoxville
California, Santa Carla/
San Mateo Louisiana, Alexandria Texas, Dallas/Ft. Worth
California, Riverside Louisiana, Baton Rouge Texas, Austin
County/San Bernadino Cnty Louisiana, New Orleans Texas, El Paso
California, Solano County Michigan Texas, San Antonio
California, Santa Barbara Minnesota, Minneapolis/ Texas, Waco
St. Paul
Colorado, Old Minnesota, Mankato Texas, Houston
Colorado, New Minnesota, Rochester Utah
Connecticut Missouri, St. Louis Virginia
Florida, Jacksonville Missouri, Kansas City Washington, Seattle
Florida, Orlando Montana Washington, Spokane
Florida, St. Petersburg Nebraska, Omaha Washington, Yakima
Florida, West Palm Beach Nebraska, Hastings/Kearney Wisconsin, Milwaukee
Georgia, Atlanta New Mexico Wisconsin, Madison
Georgia, Savannah Nevada Wisconsin, Wausau
Idaho N. Carolina, Raleigh/Durham Wisconsin, La Crosse
Illinois, Chicago N. Carolina, Greensboro Wyoming, Casper
Illinois, Rockford North Dakota Wyoming, Cheyenne
Illinois, Peoria Ohio, Cincinnati
The Area Director Marketing Agreements set
increasing "Minimum Performance Levels" that require the Area
Director to sell and open a specified number of franchised
Restaurants in each year during the term of the Area
Director Marketing Agreement.
There can be no assurance that each Area Director
will fulfill his or her obligation to sell and open the number
of Restaurants constituting the Minimum Performance Level for a
year or any number of years. At any given time, some Area
Directors may be ahead of schedule while others may be behind.
Delays in the sale and opening of Restaurants can occur for
many reasons, including, but not limited to, delays in
the selection or acquisition of an appropriate location for
the Restaurant and delays in the build-out of the Restaurant
site. The failure on the part of an Area Director to sell
and open Restaurants as required by the Area Director
Marketing Agreement enables the Company to terminate the
Area Director Marketing Agreement, but does not grant the
Company any other remedies against the Area Director.
Termination of an Area Director Marketing Agreement for
failure to meet Minimum Performance Levels does enable the
Company to engage a new Area Director for the relevant
market area. In its planning, the Company has allowed for a
certain percentage of Area Directors who will not meet their
development schedule.
Most Area Directors are required to maintain an
office within the Exclusive Area. In addition, through a
required monthly minimum marketing expenditure, the Area
Director is required to actively promote the sale of
Company franchises within the Exclusive Area. The Area
Director is required to visit with prospective
franchisees and refer appropriate locations for franchised
Restaurants within the Exclusive Area to the Company for
consideration. The Area Director is also required to
perform monthly quality assurance inspections of the units in
its area and assist franchisees within its area in opening.
The Company's franchise sales materials are made
available to the Area Director.
The Area Director receives compensation for
the
services provided under the Area Director Marketing Agreement
in the form of a commission equal to 40% of the royalty
fees collected by the Company from each franchised Restaurant
within the Exclusive Area opened and operated during the term
of the Area Director Marketing Agreement. The Area Director
is entitled to receive commissions for a period of 15 years
following the opening of each franchised Restaurant. Upon
the expiration of
the Area Director Marketing Agreement, the commission is
reduced to 1% for the remainder of the 15 years. This
approach rewards the Area Director for selecting higher
quality franchisees and higher quality locations while
discouraging the Area Director from selecting locations
that are too close together. In addition
to the foregoing, the Area Director is entitled to
receive a commission of 50% of the initial fee paid to
the Company for each franchise sold within the Exclusive Area.
The Company has a program under which it will
finance up to 50% of the Area Director Marketing Fees
for certain approved
Area Director candidates who have the experience and
skill requirement sought by the Company for its Area
Directors, but do not have sufficient cash to pay the fee in
full. The Area Director is required to personally sign a
promissory note due the Company for the amount financed, which
will bear interest at 15% per year and be repaid in monthly
installments over five years. The promissory note is secured
by the Area Director Marketing Agreement and by other
collateral unrelated to the business, typically a second
mortgage in the Area Director's home. The
amount of financing available under this program is limited
on both a per transaction and in total basis.
Franchise Program
The Company authorizes individuals and
companies
("Franchisees" or "Owners") to establish and operate
Restaurants at an approved location pursuant to the terms of
a Franchise Agreement. Under the Franchise Agreement, the
Company undertakes to perform or have performed certain
services with respect to the opening and operation of a
Restaurant. In connection with the opening of a
Restaurant, those services include (i) review and approval
of the proposed Restaurant location, (ii) review and
approval of construction plans for the
Restaurant,
(iii) identification of sources of supply for items which
are ordinarily necessary to operate a Restaurant, (iv) an
operations manual providing detailed instructions with respect
to operation of the Restaurant, (v) training with respect to
the Company's method of operations, including operating
procedures, food preparation techniques, controls, promotion
programs, management and public relations, and (vi) pre-
opening assistance. After opening of the Restaurant, the
Company provides continuing advice and consultation with
respect to operation of the Restaurant as well as
oversight of such operations to assure that the
Restaurant conforms to the Company's standards and
requirements.
The Company offers its franchise at a reduced fee
for smaller locations where the Quizno's Restaurant will be
operated in conjunction with another business operated by
the Owner ("Quizno's Express"). Examples of such locations
are convenience and gasoline stations, sports facilities,
hospitals, college campuses, etc.
Upon execution of the current Franchise Agreement,
the Franchisee is required to pay the Company an initial
fee of $20,000 for the first franchise agreement, $15,000
for the second, and $10,000 for the third and any additional
franchise agreement. The initial fee for Quizno's Express
franchises are $10,000,
$7,500 and $5,000, respectively. The Owner is also
required under the current Franchise Agreement to pay the
Company a continuing royalty fee of 6% of the Owner's gross
sales (8% for Quizno's Express franchise). Franchise
Agreements executed from 1991 to
1994 provided for a 5% royalty, and franchise agreement
executed prior to 1991 provided for a 4% royalty fee.
Gross
sales is defined as all sales, whether on credit or for cash
but excluding discounts, coupons and employee meals, and all
revenues
from any source caused by the operation of the
Restaurant, whether directly or indirectly relating to the
operation thereof. Sales tax and any other state or federal
tax which is collected by the Owner from customers and remitted
to any government agency are deducted from gross sales prior to
calculation of the royalty payment.
The Owner is also required under the current Franchise
Agreement to pay an advertising fee to the Company in an
amount equal to 1% of the Franchisee's gross sales, which fees
are used by the Company for advertising, marketing, and
public relations programs and materials to enhance and
build the image and goodwill of the Quizno's system. There
are certain other fees that must be paid by the Franchisee
to the Company in order
to
reimburse the Company for costs incurred in connection with
the establishment of a Restaurant. The total average cost
to a Franchisee for opening a Restaurant ranges between
$129,500 and $194,500, including funds to cover the initial
franchise fee, with most of the variation attributable to
differences in the costs of leasehold improvements for the
Restaurant. The average cost for a Quizno's Express unit is
between $40,000 and $80,000.
The Company is an approved franchise with The
Money Store Investment Corporation. As an approved franchise,
Quizno's Owners may obtain SBA guaranteed loans from The Money
Store for up to 70% of the total cost to open a restaurant.
The loans are repaid over ten years with interest a prime plus
2.75%. Owners may be prequalified and, generally, will not
be required to
collateralize the loans with assets unrelated to the business.
The Company has developed certain items, such as
bread and dressings for salads and sandwiches, which are
prepared for use in the Restaurants based upon recipes
developed by the Company and which are provided to Owners
under the private label "Quizno's." The Owner is required to
purchase those items from specified vendors for sale and
use in the Restaurant.
The
Franchise Agreement also requires the Owner to acquire
specified equipment and inventory, to establish and
maintain specified signage and to operate the Restaurant in
accordance with the standards and requirements outlined in
the Company's operations manual.
The Company has entered into an agreement with
a national food products distributor that allows Owners to
obtain meat products, produce and other food and non-
food items necessary for operation of franchised Restaurants
at prices more favorable than those that could be obtained by
individual Owners. All of the purchasing of the ingredients
for the food products offered in the Restaurants is done
centrally by the Company which allows for better quality
control by the Company. Each Owner then contacts the
distributor directly to obtain the items needed for the
Owner's Restaurant, which are delivered by
the
distributor. The distributor bills the Owner directly for
all
items ordered. If the national food products distributor
no
longer provided this service to the Company and its
franchisees, the Company believes adequate alternative
services would
be
available to it without a significant increase in costs.
The Company retains the right to approve the terms
of
the Owner's lease. A law firm selected by the Company
must review the lease as part of the approval process. The
cost for review of the lease by the lawyer selected by the
Company are at
the expense of the Owner.
The Owner, or person designated by the Owner
and approved by the Company, is required to devote his or her
full time, attention and efforts to the performance of the
Owner's duties under the Franchise Agreement relating to the
operation of
the Restaurant. The Owner agrees in the Franchise Agreement
to use his or her best efforts to produce maximum volume of
gross sales in the Restaurant. The Restaurant must be
operated continuously on such days and during such minimum
hours as are required by the Company, unless restricted by
Owner's lease or other rules applicable to the Restaurant.
The Owner agrees to maintain books and records for
the Restaurant in accordance with the requirements and
specifications set forth from time to time by the Company.
The Franchisee is required by the Franchise Agreement to
be responsible for submitting all required reports to the
Company when and in the manner or format required by the
Company.
In order to provide for proper financial tracking
and planning for Owners, the Company began providing a
restaurant bookkeeping service to its Restaurant Owners in
1994. This
service is intended to assure the Owners have accurate
financial records as well as to allow the Company to
keep accurate systemwide statistics. Franchise agreements
executed after February 10, 1995, require Owners to use this
bookkeeping service for the first year of operations for the
Owner's first unit for a fee of $350 per month. This
service provides for a revenue source from franchised
restaurants and is expected to become profitable as the
number of Restaurants serviced increases.
The Owner must submit copies of all
proposed
advertising or promotional materials for approval by the
Company prior to use. The Company must give its written
approval to any advertising or promotional materials
before the Owner is authorized to use such materials.
The Company expects that Restaurants operating
within its franchise system will emphasize quality
"submarine" sandwiches. In order to satisfy customer
expectations regarding menus and service, the Company
requires substantial uniformity among all Restaurants. All
Restaurants must conform to the decor and menu specifications
of the Company. The Owner is not allowed to sell any goods
or services at a Restaurant other than those goods and
services specified by the Company.
Franchise Marketing Programs
In order to facilitate the marketing and sale
of franchised Restaurants, the Company devotes resources,
national print media, sales staff, marketing materials, and
participation in trade shows. In addition, the Company has
several specific programs to market its franchise, which are
discussed below.
Discovery Day. Discovery Day is a day-long
event regularly scheduled in Denver to introduce potential
Owners from throughout the country to the Quizno's concept.
Toll Free Phone Line. The Company has installed a
toll free phone line (1-800-DELI-SUBS) which rings directly
into the Franchise Sales Department. The information is
entered into a data base of prospective Owner inquiries
and an informational package mailed to the caller.
Open Houses. The Company has an ongoing program
of hosting open houses throughout the country in conjunction
with its Area Directors. Individuals who have expressed an
interest in the Company's franchise are invited to open houses.
Computerized Data Base of Franchise Inquiries.
The
Company has installed a computer network within its
Franchise
Sales Department for the purpose of organizing, managing,
and tracking individuals who inquire about the Company's
franchise.
National Advertising. The Company continues
to advertise for new franchisees on a regular and consistent
basis in national, regional and local publications.
Company Owned Restaurants
The Company currently owns and operates eleven
Quizno's Restaurants, ten located in the Denver area and
one in the Detroit area. The Company may develop or
acquire additional Quizno's Restaurants.
The Company does not expect to add a significant
number of new Company owned Restaurants. From time to time
it may develop or acquire Restaurants when and if desirable
locations or franchised Restaurants become available. The
Company expects virtually all of its growth in the
foreseeable future to result from the development of
franchised Restaurants.
In addition, the Company has in the past and may in
the future acquire or takeover franchised Restaurants
that the franchisee has been unable to operate successfully
for reasons unrelated to the location or the market. In
such cases, the Company will typically operate the
Restaurant, make any required improvements and repairs, re-
staff, begin local store marketing, and ultimately transfer
the Restaurant to a new qualified owner. Occasionally the
Company may incur short term losses in such cases.
However, the royalty stream provided over the long term
by the new owner will normally offset or exceed any such
losses.
The Company continues to believe that the ownership
and management of Company owned stores is important as a
base for research and development efforts, training, and
maintaining a thorough first-hand knowledge of the business it
franchises.
Advertising
Quizno's advertising staff, in conjunction with
its advertising agency, is developing advertising campaigns
for use at all levels to support consumer sales in all of its
locations. The 1% of sales advertising fees paid to the
Company by Owners goes into a "national" fund to be used to
develop advertising to attract customers to the Restaurants
and to create awareness of the Quizno's brand image.
Campaigns developed using the "national" fund are created
with television, radio and print elements, which are
available to each local Quizno's market. To date, television
and radio buys have only occurred on an individual
market basis. Regional or network media buys will be
investigated and reviewed as Restaurant distribution increases.
Each Restaurant, except for Quizno's
Express Restaurants, is required to spend another 3% of sales
for local advertising or promotions. Funds may be used to
purchase media schedules for Company produced TV, radio, print
ads, or any other approved media. A limited number of markets
with a concentration of restaurants have formed separate
advertising cooperatives which coincide with the area of
dominant influence of local television broadcast stations.
These cooperatives pool their advertising fees to jointly
purchase media.
Consumer advertising chain wide also is funded by
a vendor program in which marketing funds are solicited by
the Company from vendors on behalf of all Restaurants once a
year. These funds are used to support "national"
marketing fund
programs which benefit all Restaurants. The vendor payments
are voluntary by the vendors and there is no guarantee or
assurance that such funds will continue to be available in the
future.
In addition to Company advertising support,
each Restaurant pursues local marketing strategies,
such as distribution of coupons and fliers in the immediate
area of the Restaurant and point of sale materials
displayed in
the
Restaurant. Several local marketing programs have been
developed by the Company's advertising staff and made
available to individual Restaurants.
New Programs
The Company has, and will continue to develop
new programs that will augment its Restaurant operations
and
facilitate the marketing of new franchised Restaurants.
Corporate Organizational Chart. The Company
continues to strive to improve the Restaurant chain and its
franchising organization. Early in 1996, the Company took
another major step in its national growth plan by dividing the
corporate staff into two divisions -- one specifically
focused on Franchise Support Services and the other on
Franchise Development. Clearly defined goals of making
Quizno's Owners successful for the Franchise Support
division and of bringing new markets to critical mass
quickly for the Franchise Development division, have
been identified to help implement the key strategies of
making Quizno's Owners successful and of bringing new
markets to critical mass quickly.
In 1997, J. Eric Lawrence joined the Board of
Directors of the Company bringing an extensive background in
retail and restaurant industries along with a solid financial
acumen. He is a general partner at Retail & Restaurant
Growth Capital, L.P., ("RRGC") a private investment
partnership that loaned the Company $2 million in December,
1996. RRGC's partners have been affiliated with Grandy's
Restaurants, On The Border, Spaghetti Warehouse, Canyon Cafe,
and other retailers. Mr. Lawrence is a CPA formerly with
Arthur Andersen & Co. and Strategic Retail Ventures, Inc.
Co-Branding. In 1997, the Company will investigate
and may solicit co-branding opportunities with other food
service retailers offering products that are compatible with
the Quizno's menu. The Company will look for co-branding
partners that offer products that can enhance the Company's
existing menu, produce increased traffic through the
Company's units, or provide products that will increase
sales during the evening and morning day-parts.
Quizno's Express Units. While the Company
continues its aggressive efforts to expand into
traditional sites in markets across the U.S. and in Canada,
the Company simultaneously has adapted its concept to
take advantage of the many opportunities in the growing
"express" market areas.
These venues include gas and convenience stores,
sports stadiums, hospitals and schools, among others. The
Company has opened express-type concessions at Denver's Coors
Field baseball stadium, Denver International Airport,
Albuquerque Airport, several convenience and gas stores, and
has under development two units in health care facilities.
Additionally, the Company developed a prototype
kiosk which can be installed in express venues in a short
time at a
cost of approximately $40,000 to $80,000, including the
franchise fee, working capital, equipment and construction.
Regionalization. In 1996, the Company placed
regional representatives who are responsible to implement and
manage the Franchise Support function in four geographic
regions of the U.S. The regional representatives are based
in their respective markets, allowing the Company to be more
efficient with regard to travel costs as it adds Restaurants
throughout the country.
Turnkey Program. In 1997, the Company plans
to
implement a "turnkey" development program funded from a
portion of the proceeds of the $2 million debt financing
completed in December, 1996. Under the turnkey program,
the Company will target specific areas, locations, or types
of locations where it will select sites, negotiate and sign
leases, fully construct and equip a Quizno's Restaurant,
and then sell the completed Restaurant to an approved
franchisee.
The Company will utilize its own funds to lease,
build, equip, and furnish each turnkey Restaurant. Upon
completion, each turnkey Restaurant will be sold to a
franchisee for the Company's total development costs plus an
initial franchise fee and a development fee. The Company
will not offer financing but believes that long term
financing will be available
to
franchisees for up to 70% of the total cost from
traditional small business lenders, including those who
currently provide financing to Quizno's Owners.
The Company expects this program will accelerate
the number of new Restaurants the Company can open each
year. Because the Company does not intend to provide
financing, the cash required for each turnkey unit will be
invested only for the development period of three to six
months, after which the funds can be put to use for the next
turnkey Restaurant. The Company has sufficient funds
allocated for this program so that multiple turnkey units can
be under development at the same time.
Additional advantages the Company believes it
will realize are: (1) quicker sales due to the elimination
of the Owner's responsibility to find and develop a
location, (2) increased development fee and franchise
fee revenue,
(3)
increased royalty revenue, (4) potential for increased
average unit sales resulting from the development of high
volume shopping mall units, and (5) lower costs for area
director sales and royalty commission expense.
Shopping Mall Development. The Company is committed
to increasing its shopping mall food court developments in
1997. In preparation for building this into a national venue
for Quizno's, a new prototype food court design was developed,
built and opened in Austin, Texas, in the first quarter of
1996.
Competition
Restaurant Operations. The restaurant industry
is highly competitive with respect to price, service, food
quality and location, and there are numerous well-established
competitors possessing substantially greater financial,
marketing, personnel and other resources than the
Company. Presented below is numerical information with
respect to these competitors. This information was obtained
from the Nation's Restaurant News, April 29, 1996 (NRN Top 100
Market Share).
The Company competes in the sandwich segment of
the fast food industry, an industry long dominated by
hamburger
chains. Subwayr, the nation's largest submarine
sandwich
restaurant chain, has grown significantly in recent years and
has a total of 10,093 units open at December 31,
1995 . The
expansion of Subwayr has drawn attention to submarine
sandwiches, during a time of growing concern relating to
beef and fried foods. Despite the growth of Subwayr, its
sales revenue makes up less than 5.53% of the total sales
revenue of the 18 largest sandwich chains.
The Company believes that the submarine
sandwich segment is underdeveloped, and that demand for
submarine style sandwiches will continue to grow. Blimpier,
the second largest submarine sandwich chain had only 1,581
units opened at June 30, 1996. Most of the other
submarine sandwich chains currently have less than 150
units each or are primarily concentrated in their home
markets, e.g.., Miami Subsr (Florida), Cousinsr (Wisconsin),
Togosr (California) and Tubby'sr (Michigan).
The Company's major competitors, including
Blimpier, have followed Subwayr closely in the style and
quality of the product, creating very little, if any,
differentiation in the market.
Subwayr offers a low-cost product in a fast food style
restaurant with limited seating. The Company has positioned
the Restaurants between the traditional fast food restaurant
style of its submarine sandwich competitors and full-service
dining, and has focused on higher quality food products, to
distinguish the Restaurants from
their competitors. See, "Business -
Restaurants."
The top 18 sandwich chains have $47 billion in
annual sales, with 57,294 restaurant units. Subwayr and
Blimpier are the only sub sandwich chains found in the top
18, with total systemwide sales of $2.6 billion and $341
million respectively, among 10,093 and 1,581 units
respectively. The size of the sub sandwich market continued
to grow through 1995, the last year for which numbers are
available, primarily as a result of a decrease in the burger
market share.
MARKET SHARE(1)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995
Submarine sandwiches 3.54% 4.54% 5.19% 5.71% 6.89%
Burgers 84.10% 81.52% 80.23% 80.07% 79.15%
</TABLE>
(1) Source: Nation's Restaurant News, August 7, 1995 (NRN
Top 100 Market Share). Market Share Numbers are
derived by totaling the Market Share Numbers of Sub-
dominated Chains and Burger-dominated Chains, each
expressed as a percentage of the Top 18 Sandwich Chain
Market Share.
LEADING BURGER AND SUBMARINE CHAINS WITH AT LEAST 600 UNITS
<TABLE>
<CAPTION>
Burger Chains No. of Units Sub Chains No. of Units
<S> <C> <C> <C>
McDonald's 11,368 Subway 10,093
Burger King 6,492 Blimpie 1,581
Dairy Queen 5,000
Wendy's 4,197
Hardee's 3,395
Sonic 1,464
Jack-in-the-Box 1,231
Carls Jr. 633
TOTAL 33,780 11,674
</TABLE>
Certain Factors Affecting the Restaurant Industry.
The Company will be required to respond to various factors
affecting the restaurant industry, including changes
in consumer
preferences, tastes and eating habits, demographic trends
and traffic patterns, increases in food and labor costs and
national, regional and local economic conditions, and
issues of food safety. A number of fast food restaurant
companies have recently been experiencing flattening growth
rates, customer counts, and declines in average sales per
restaurant, in response to which certain of
such companies have adopted "value
pricing"
strategies. Such strategies could have the effect of
drawing customers away from companies which do not engage in
discount pricing and could also negatively impact the operating
margins of competitors, including the Company, which do
attempt to match competitors' price reductions.
Franchise Competition. In addition to its
Restaurant operations, the Company competes with fast food
chains, major restaurant chains and other franchisors for
franchisees. Many franchisors, including those in the
restaurant industry, have greater market recognition and
greater financial, marketing and human resources than the
Company. The Company believes that it can compete
successfully for franchisees for several reasons. The
royalties charged by the Company tend to be lower than those of
its major submarine sandwich competitors. The total cost of
opening a Quizno's Restaurant tends to be lower than that
of hamburger fast food and full-service dining
restaurants. Finally, the ambiance of Quizno's Restaurants
offers a Franchisee a pride in ownership that is unique to the
Quizno's concept.
Government Regulations
The Company is subject to Federal Trade
Commission ("FTC") regulation and several state laws which
regulate the offer and sale of franchises. The Company is
also subject to a number of state laws which regulate
substantive aspects of the franchisor-franchisee
relationship. The FTC's rule
on
franchising (the "FTC Rule") requires the Company to furnish
to prospective franchisees a franchise offering circular
containing information prescribed by the FTC Rule.
State laws that regulate the offer and sale
of
franchises and the franchisor-franchisee relationship
presently exist in a substantial number of states. State
laws that regulate the offer and sale of franchises require
registration of the franchise offering with state
authorities. Those that regulate the franchise
relationship generally require the
franchisor to deal with its franchisees in good faith,
prohibit interference with the right of free
association among franchisees, limit the imposition of
standards of performance on a franchisee and regulate
discrimination against franchisees in charges, royalties or
fees. Although such laws may restrict a franchisor in the
termination of a franchise agreement by, for example,
requiring "good cause" to exist as a basis for the
termination, advance notice to the franchisee of the
termination, an opportunity to cure a default and a repurchase
of inventory or other compensation, these provisions have not
had a significant effect on the Company's franchise
operations. The Company is not aware of any pending franchise
legislation which in its view is likely to affect
significantly the operations of the Company. The Company
believes that its operations comply in all material respects
with the FTC Rule and the applicable state franchise laws.
Each franchised Restaurant, and each Company-
owned Restaurant, is subject to licensing and regulation by a
number of governmental authorities, which may include health,
sanitation, safety, fire, building and other agencies in
the state or municipality in which the Restaurant is located.
Difficulties in obtaining or failure to obtain the required
licenses or approvals could delay or prevent the development of
a new Restaurant in a particular area. The Company is
subject to federal and state environmental regulations, but
these have not had a material effect on the Company's
operations. More stringent and varied requirements of local
governmental bodies with respect to zoning, land use and
environmental factors could delay or prevent the development
of a new Restaurant in a particular area.
The Company is also subject to state and federal
labor laws that govern its relationship with its employees,
such as minimum wage requirements, overtime, working
conditions and citizenship requirements. Significant numbers
of food service and preparation personnel are paid at rates
governed by the federal minimum wage. Accordingly, increases
in the benefits under any of these laws would increase labor
costs to the Company and its franchisees.
Trademarks
The Company presently owns the following trademarks
or service marks, most of which are registered on the
Principal Register of the United States Patent and
Trademark Office: "QUIZNO'S" service mark, Registration
Number 1,317,420 (January 29, 1985); "QUIZNO'S" service mark,
Registration Number 1,317,421 (January 29, 1985);
"QUIZNO'S & Design", service mark, Registration Number
1,716,834 (September 15, 1992) and "QUIZNO'S CLASSIC SUBS
EXPRESS" service mark for which an application was filed on
May 20, 1996 ("Express Mark") (application number
75/106989). The service marks have not been registered in
any state.
Employees
As of December 31, 1996, the Company employed 39
fulltime employees and one part-time employee, at its
headquarters in Denver, Colorado. In addition, the Company
employed 20 full-time and 45 part-time employees in its Company-
owned Restaurants. The Company's employees are not covered by
any collective bargaining agreement and management believes
its employee relations are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its headquarter's office space
of 7,462 square feet at 1099 18th Street, Suite 2850,
Denver, Colorado. The Company leased the premises for each
of the 11 Company-owned and operated Restaurants at March
17, 1997, as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1. 8081 E. Orchard Rd., #67 Greenwood Village, CO 80111 3,166 sq. feet
2. 2875 Pearl St., Unit A Boulder, CO 80301 2,450 sq. feet
3. 760 S. Colorado Blvd., Unit 1 Glendale, CO 80222 2,855 sq. feet
4. 1275 Grant Street Denver, CO 80203 1,400 sq. feet
5. 37012 Van Dyke Avenue Sterling Heights, MI 48312 1,500 sq. feet
6. 1660 Lincoln Street Denver, CO 80264 2,490 sq. feet
7. 10450 West Colfax Lakewood, CO 80215 1,992 sq. feet
8. 4495 North Washington Denver, CO 80216 1,903 sq. feet
9. Coors Field Denver, CO 80205 429 sq. feet
10 5102 S. Broadway (1) Englewood, CO 80110 2,000 sq. feet
11 999 18th St., Suite 136 Denver, CO 80202 1,360 sq. feet
</TABLE>
(1) Stores held for resale
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved
in
litigation and proceedings arising out of the ordinary course
of its business. There are no pending material legal
proceedings to which the Company is a party or to which the
property of the Company is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security
holders of the Company during the fourth quarter of its fiscal
year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER
MATTERS
The Company's Common Stock is traded in the
NASDAQ Small-Cap Issues Market under the symbol "QUIZ." The
following table shows high asked and low bid price
information for each quarter in the last two calendar years
as reported by NASDAQ. Such quotations reflect inter-dealer
prices, without retail markups, markdowns or commissions, and
may not necessarily represent actual transactions. On March
17, 1997, the stock closed at $2.94 bid, $3.13 asked.
Fiscal Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Last
High Low Trade
First Quarter $4.50 $3.31 $3.31
Second Quarter $3.33 $2.75 $3.63
Third Quarter $4.50 $3.25 $3.50
Fourth Quarter $4.25 $3.38 $3.63
</TABLE>
Fiscal Year Ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Last
High Low Trade
First Quarter $4.13 $3.38 $3.63
Second Quarter $3.75 $2.88 $3.13
Third Quarter $3.50 $2.63 $3.50
Fourth Quarter $4.38 $3.00 $3.13
</TABLE>
There were approximately 115 holders of record
(and approximately 850 beneficial owners) of the Company's
Common Stock as of March 17, 1997. The
first number includes
shareholders of record who hold stock for the benefit of
others.
The Company does not expect to pay any dividends on
its Common Stock in the foreseeable future. Management
currently intends to retain all available funds for the
development of its business and for use as working capital.
During 1996, the following securities were sold by
the Company without registration with the Securities and
Exchange Commission pursuant to the exemption noted:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Securities Exemptions
Sold Date Amount Purchasers Claimed
Senior 12/31/96 $1,155,825.70 1 institutional Section 4(2)
Subordinate (convertible investor and
into 372,847 Regulation D
shares of Company
stock at $3.10 per
share for a period
of up to eight years,
subject to adjustment)
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Overview
For 1996 the Company had income from
franchise operations of $19,866 and income from Company
owned store operations of $86,834, less other charges
totaling $1,125,667, resulting in a loss for the year of
$1,018,968. Other charges include the costs of new programs
introduced in 1996, research and development, amounts
reserved in 1996 for future potential costs, depreciation and
amortization expense, interest expense, and certain other
cost, which are discussed in more detail below.
In 1996 the Company enjoyed record growth while, at
the same time, investing in several programs for the sole
purpose of accelerating its growth in years beyond 1996.
These programs are expected to significantly increase the
number of Quizno's Restaurants, the number of area
directors, and the economic performance of existing and
future Restaurants in 1997 and beyond. However, the costs
incurred and expensed in 1996 related to these efforts alone
exceeded the Company's net income from its core franchise and
Company owned store operations. Nevertheless, management
believes that its investment in these programs will result in
returns and additional shareholder value over the next
few years that will offset the costs incurred in 1996.
Additionally in 1996, management evaluated
certain assets of the Company and other potential risks to
which the Company has exposure. Management's evaluation was
made on the basis of current information, including certain
factors effecting the
industry in general, other factors relating to the Company,
specific franchisees, and specific Quizno's
Restaurants. Management determined that reserves should be
established for amounts due the Company by specific
franchisees whose business or financial condition had been
adversely impacted in 1996 (see following table). These
reserves recorded in 1996, along with a reserve for a
potentially adverse claim made by one area director,
represented significant expenses in 1996 in relation to the
Company's net income from its franchise and Company owned
store operations. Although the recording of such reserves is
a normal business practice and, to a much lesser extent,
will likely recur in future periods, management does not
currently expect a recurrence of such charges in the same
magnitude as a percentage of revenue in future periods.
The following is a summary of the Company net
income from franchise operations, Company
store operations, and other
charges for the last three years:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Franchise Operations:
Revenue $ 4,574,603 $ 3,375,372 $1,849,739
Expenses (4,554,737) (3,045,505) (2,218,691)
Income (loss) 19,866 329,867 (368,952)
Company Store Operations:
Revenue $ 2,680,521 $ 3,011,195 $ 603,485
Expenses (2,593,687) (3,078,821) (630,440)
Income (loss) 86,834 (67,626) (26,955)
Other Charges:
New programs and research and
development (217,321) (10,564) (954)
Reserves against amounts
due the Company (224,063) (13,780) (15,182)
Provision for litigation
settlement, legal costs and
settlement (134,500) -- --
Net loss related to stores held
for resale (76,442) (120,439) (326,889)
Other (104,843) (43,625) 175,000
Depreciation and
amortization (288,435) (253,459) (131,962)
Interest expense (80,063) (111,946) (58,137)
Total (1,125,667) (553,813) (358,124)
Net loss $(1,018,967) $(291,572) $(754,031)
</TABLE>
The Company's primary business is the franchising
of Quizno's Restaurants. As a franchisor, revenue is derived
from: (1) area director marketing fees, (2) initial franchise
fees, and (3)
royalties paid by its Owners. Area director fees occur only
once for each exclusive area sold. Although the Company
believes there are a substantial number of markets remaining
to be sold, eventually such fees are expected to decline as
the number of remaining available markets declines. Initial
franchise fees are one time fees paid upon the sale of a
franchise and vary directly with the number of franchises the
Company can sell and open. Royalties, on the other hand,
are ongoing fees paid by every franchised restaurant and
increase as the number of franchised restaurants increase.
Each of these sources of revenue
contribute to the profitability of the Company, but the
relative contribution of each source will vary as the
Company matures. The Company expects that over time initial
franchise fees and royalties will generate proportionately
more revenue than area director marketing fees.
The following chart reflects the Company's
revenue growth by source and the Company's restaurants for the
past three years:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Royalty fees $1,590,673 $1,046,329 $ 779,249
Initial franchise fees 1,164,500 593,350 390,000
Area director fees 1,421,555 1,379,640 326,391
Other 248,094 208,776 198,209
Interest 149,781 147,277 155,890
Total franchise revenue 4,574,603 3,375,372 1,849,739
Sales by Company owned
stores 2,680,521 3,011,195 603,485
Sales by stores held for
resale 231,371 142,525 193,891
Total revenue $7,486,495 $6,529,092 $2,647,115
Restaurants open, beginning 105 66 40
New restaurants opened 67 39 27
Restaurants closed (12) -- (1)
Restaurants closed, scheduled
to reopen (4) -- --
Restaurant open, end 156 105 66
New franchises sold 172 50 37
Initial franchise fees
collected 1,743,846 $1,040,188 $710,000
Systemwide sales $36 million $26 million $19 million
Average unit volume $300,580 (1) $322,000 $363,000
Same store sales (2) (3) Down .2% Down 7.3% Up 4.1%
</TABLE>
(1) Excludes non-traditional units located in convenience
stores and gas stations, and includes only units open all of
1996.
(2) Same store sales for 1996 is based on 27 stores open all
of 1995 and 1996. Stores which transferred ownership during
this
period, or were in substantial default of the franchise
agreement at December 31, 1996, are excluded. In 1996 many
quick service restaurant chains experienced same store
sales declines.
Quizno's decrease is attributable in large part to the fact
that included in the niix are the Company's top volume
stores in
Colorado which have approached maturity after several years
of
growth. In addition, some new stores in markets which are
not yet built out to critical mass have come into the mix.
(3) Because the Company is and will continue to be in
an
aggressive growth mode over the next few years, it is
anticipated that same store sales will fluctuate as units are
included from more start up markets. The Company will
continue to concentrate on its overall rapid growth as a
primary goal and to provide interpretation of same store
sales changes from year to year. Results of Operations
Comparison of Years Ended December 31, 1996 and 1995
Franchise revenue increased 36% in 1996 to $4,574,603
from $3,375,372 in 1995. Total revenue increased 15% in
1996 to
$7,486,495 from $6,529,092 in 1995. The revenue
increase resulted from the following items, in order of
impact: initial franchise fees, royalty fees, and area
director fees.
Royalty fees increased 52% to $1,590,673 from $1,046,329 in
1995. Royalty fees are a percentage of each Owner's sales paid
to the Company weekly or monthly and will increase as new
franchises open, as the average royalty percentage increases,
and increase or decrease based on average unit sales. At
December 31, 1996 there were 147 franchises open as compared
to 96 at December 31, 1995. The royalty was increased to
6% for all franchise agreements entered into after February
10, 1995. The royalty for Quizno's Express units is 8%. The
Company has no immediate plans to further increase the royalty
percent.
The Company believes it is on track to reach a level
of
franchised units open in 1997 where royalty fees will begin
to
equal and then exceed its basic general and
administrative expense.
Initial franchise fees increased 96% in 1996 to $1,164,500
from $593,350 in 1995. Initial franchise fees are one time
fees paid by Owners at the time the franchise is
purchased. Initial franchise fees are not recognized as
income until the period in
which all of the Company's obligations relating to the sale
have been substantially performed, which generally occurs
when the franchise opens. In 1996 the Company opened 67
franchises as
compared to 35 opened in 1995. The Company's initial
franchise fee has been $20,000 since 1994. Owner's may
purchase a second franchise for $15,000 and third and
subsequent franchise for $10,000. The
initial franchise fee for a Quizno's Express
franchise is $10,000 for the first, $7,500 for the second,
and $5,000 for the third and additional franchises purchased
by the same Owner.
For four months during 1996 the Company offered approved
existing franchisees the right to purchase one additional
franchise for every currently effective franchise agreement
for an initial fee of $ 1,000. All such franchises are
required to be open in 1997. The Company sold 75 such
franchises, four of which were open as
of December 31, 1996.
Initial franchise fees collected by the Company are recorded
as deferred initial franchise fees until the related
franchise opens. Deferred initial franchise fees at December
31, 1996 were $1,575,471 and represent 150 franchises sold
but not yet in operation, compared to $1,309,155 at
December 31, 1995 representing 66 franchises sold but
not open. Direct costs related to the sale, primarily sales
commissions paid or due to area directors, are deferred on
the books of the Company and recorded as an expense at the
same time as the related initial franchise fee is recorded as
income. Deferred costs paid and due at the time of opening
with respect to initial franchise fees deferred at December
31, 1996 were $644,701 ($413,051 at December 31, 1995).
Approximately 50% of all initial franchisee fees
received by the Company are paid to area directors for sales
and opening commissions.
Area Director Marketing Fees increased 3% in 1996 to
$1,421,555 from $1,379,640 in 1995. Area director marketing
fees are one time fees paid to the Company for the right to
sell franchises in a designated, non-exclusive, area. The fee
was $.03 per person in the designated area through June,
1996, $.035 from July, 1996 through December, 1996, and $.05
beginning April 1, 1997. In
addition, each area director is required to pay a training
and equipment fee of $15,000 ($10,000 through June, 1996).
The
population based portion of the fee is deemed fully earned by
the Company when the area director marketing agreement is
signed and is recognized as income in that period. In 1996,
the Company sold 22 new area directorships including four
existing area directors who purchased additional territory, as
compared to 26 area directorships sold in 1995. At
December 31, 1996, the Company had a total of 62 area
directors who owned areas encompassing approximately 54% of
the population of the United States.
The Company offers area director applicants financing for up
to 50% of the area director marketing fee. The amount
financed is required to be paid to the Company in
installments over five years at 15% interest. The
promissory notes are personally signed by the area
director and, depending on the personal financial strength
of area director, secured by collateral unrelated to the
area directorship, usually a second mortgage on the area
director's home. Of the 22 area directorships sold in 1996,
three used this financing for $99,604, representing 7% of the
area director marketing fees recognized in 1996. In 1995,
a
total of $208,594 was financed representing 15. 1 % of
area director fee revenue.
Other revenue increased by 19% in 1996 to $248,094 from
$208,776 in 1995. Other revenue is primarily bookkeeping
fees charged Owner's for whom the Company provided
bookkeeping services. Since 1995 the Company's franchise
agreement requires all new franchisees to utilize the
Company's bookkeeping services for their first 12 months
of operations. The fee per store is currently $350 per
month. Bookkeeping fees were $189,055 in 1996 compared to
$74,470 in 1995.
Sales and royalty commissions expense increased 26 1 %
to $914,726 in 1996 from $253,173 in 1995. Sales and
royalty commissions are amounts paid to the area directors of
the Company under its area director program implemented March,
1995. Since this program was not implemented until the end
of the first quarter of 1995, the related expenses for 1995
were small
The Company's area directors receive commissions equal to 50%
of
the initial franchise fees and 40% of royalties received by
the Company from franchise sold, opened, and operating in the
area director's territory. In exchange for these payments,
the area director is required to market and sell
franchises, provide location selection assistance, provide
opening assistance to new owners, and perform monthly
quality control reviews at each franchise open in the area
director's territory.
Sales and royalty commissions expense will increase in
direct proportion to initial franchise fee revenue and royalty
revenue, and may ultimately reach 50% and 40% of such
revenue amounts, respectively. The amount of sales and
royalty commission expense for 1996 was 33% of the total
for initial franchise fee and royalty revenue because
certain operating franchises in Colorado open prior to
October, 1995 are excluded from the area director royalty
requirement until such time as the original franchise is sold
or transferred.
The Company has, and expects it will continue to benefit from
its area director program, including the commission amounts
paid to area directors, from both accelerated growth and a
reduction in employee costs, travel costs, and other
overhead costs the Company would incur if it were required
to perform the area directors functions.
Advertising and promotion expense increased $160,135 to
$239,209 in 1996 from $79,074. Advertising and
promotion expense represents national advertising of the
Company's franchise
opportunity combined with the costs of regularly
scheduled orientation and discovery days for franchise and
area director candidates.
General and administrative expenses increased 25% to
$3,400,802 in 1996 from $2,713,258 in 1995. General and
administrative expenses include all the operating costs of
the Company. The
increase is primarily due to the addition of employees to
service the rapidly growing network of Quizno's owners
and area
directors. Although general and administrative expenses
will likely continue to increase as the Company grows,
management expects the rate of increase to decline. In fact,
general and administrative expense increases have fallen from
127% in 1994, 40% in 1995, to 25% in 1996.
The following is a summary of general and administrative
expenses for 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Employee compensation, benefits,
and related employee
costs $1,860,540 $1,528,234
Office rent and operating costs 353,921 239,554
Out-sourced services and professional
fees 637,298 459,338
Travel 255,802 200,884
Other 293,241 285,248
Total $3,400,802 $2,713,258
</TABLE>
The Company believes its general and administrative expenses
are adequate and are not in excessive in relation to the
size and growth of the Company.
Sales by Company owned stores declined by 11% in 1996
to $2,680,521 from $3,011,195 in 1995. During 1996 the
Company operated six stores for the full 12 months, one store
for four months, and one Quizno's Express unit for six
months at a baseball stadium, a total of 82 store operating
months. In 1995, the Company had a total of 92 store
operating months. During
1996, the Company earned $86,834 at Company stores compared to
a loss of $67,626 in 1995. At
December 31, 1996 and 1995 the Company had eight
operating Company stores plus one store which operates only
during baseball season.
Direct retail advertising was $120,936 in 1996 and zero in
1995. Direct retail advertising was a one time cost for direct
retail advertising on behalf of franchised stores. Retail
advertising is paid for by the individual stores or, in
certain markets, store advertising cooperatives, from the
advertising amounts required to be spent under the terms of
the franchise agreements. In 1996 the Company contributed
additional funds to certain new markets in order to increase
sales and awareness in these markets quicker. Prior to 1996
the Company had not made any such contribution and the
Company has no plans to make such
contributions in 1997.
Research and development was $17,295 in 1996 compared to
$10,564 in 1995. Research and development are costs
incurred to research, test, and evaluate new concepts,
products and menu items.
Non-traditional development program expenses were $79,090 in
1996 and zero in 1995. In 1996 the Company formed and
staffed a department for the purpose of developing a
program to sell franchises and place Quizno's units in non-
traditional locations such as airports, hospitals, convenience
stores and gas stations, sports arenas, etc. The new
non-traditional development department also designed the
Quizno's Express unit for the purpose of fitting into the
smaller locations typical of such venues. The costs of
starting up this program of $79,090 have been fully expensed
in 1996, although the Company believes that the revenue
provided from the royalties and franchise fees beginning
in 1997 will exceed future operating costs and provide a
source of profit for the Company.
Sales by stores held for resale increased to $231,371 in
1996 compared to $142,525 in 1995. In 1996, the Company
operated one store held for resale for six months, which store
was sold to a franchisee in the first quarter of 1997, one
store for two months sold to a franchisee in 1996, and one
store for three months which was then closed in 1996. In
1995, the Company operated one store for seven months and one
store for four months, both sold to franchisees in 1995.
At December 31, 1996, the Company operated one store held
for resale, and none at December 31, 1995.
The Company has in the past and may continue in the future
to acquire or takeover franchised stores from Owners who have
been unable to operate successfully for reasons unrelated
to the location or the market. In such cases, the
Company will typically operate the restaurant, make any
required improvements and repairs, re-staff, begin local
store marketing,
and
ultimately transfer the restaurant to a new qualified
Owner. Occasionally the Company may in the future, as it has
in the past, incur short term operating losses in cases where
it takes over and remarkets a franchised store. However,
the royalties paid over the long term by the new owner will
normally offset or exceed such losses.
Loss and expenses related to stores held for resale increased
to $307,813 in 1996 compared to $262,964 in 1995. The 1996
expense includes $27,886 in expenses related to a closed store
in Chicago sold to a franchisee and reopened in the first
quarter of 1997.
The remaining expense for 1996 represents cost of sales,
labor, and other operating costs incurred at stores temporarily
held and operated by the Company. The 1995 expense includes
a $35,000 provision for loss on a store in Detroit sold in
January of 1996.
Provision for litigation settlement was $134,500 in 1996.
In
1995, there was no provision for litigation settlement.
The
amount includes $13,500 related to a settlement agreement
reached in 1996 with a previous area director, which sum was
paid in 1997, $95,000 reserved at December 31, 1996, and the
direct legal costs associated with both claims.
Provision for bad debts was $224,063 in 1996 compared to
$13,780 in 1995. The 1996 expense includes an addition to the
Company's reserves of $173,000 in the 4' quarter of 1996. The
addition to the reserves was allocated $33,000 to accounts
receivable and $140,000 to note receivable. The addition to
the reserves was made on the basis of management's regular
evaluation of accounts, notes receivable and payment
performance.
Other expenses were $104,843 in 1996 compared to $43,625 in
1995. The 1996 expense includes a one time loss on the sale of
a store located in Missouri and sold by the Company to a
franchisee in 1996, plus subleasing losses related to two
stores previously owned by the Company and sold to
franchisees. The 1995 expense is primarily subleasing losses.
Liquidity and Capital Resources
Net cash used by operating activities was $410,964 in
1996 compared to cash provided by operating activities of
$319,109 in 1995. The primary reason for the change from 1995
to 1996 is the 1996 loss which exceeded the 1995 loss by
$727,396. The
difference between the net loss and the cash used or
provided from operations in both years is primarily due to
the cash received from the sale of franchises not open at the
end of the year and, thus,
not recorded as revenue, and non-cash
depreciation and amortization expense.
Net cash used in investing activities was $858,058 in
1996 compared to cash used by investing activities of
$1,027,190 in 1995. Cash used by investing activities for
both years was primarily related to the acquisition or
development of Company owned stores and stores held for
resale, three in 1996 and four in 1995.
Net cash provided by financing activities was $1,711,930 in
1996 compared to cash used by financing activities of
$569,124 in 1995. The amount provided in 1996 was
primarily from the proceeds of the convertible subordinated
debt financing for $2 million completed in December 1996.
During 1996, other debt was reduced by $113,381, preferred
dividend of $56,940 paid, and loan costs of $117,749 incurred.
The cash used in 1995 was all for the reduction of debt
and the payment of preferred stock dividends.
On December 31, 1996 the Company completed a debt financing
for $2 million. The loan is payable interest only at 12.75%,
$21,250 per month, through June 1998, interest and principal
payments of $45,251 from July 1998 through November 2001, and
a final balloon payments of $783,060 on December 31, 2001.
Any outstanding balance on the loan is due in full if the
Company has a secondary public offering of its stock. In
connection with the loan, the lender has the right to
purchase 372,847 shares of the Company's common stock for $3.
10 per share.
The proceeds of the loan are directed to be used $1,150,000 for
a "turn key" development program, or a similar program
resulting in the opening of additional Quizno's units,
$400,564 to pay off existing debt outstanding at December
31, 1996, $80,000 for costs related to the financing, and
$369,436 available for working capital.
A "turn key" program is planned to commence in 1997 and the
funds will be used to procure, secure and develop new
locations which, upon completion, will be sold to franchisees.
Under the program, the franchisee will reimburse the Company in
full for 100% of its development costs, plus pay a franchise
fee of $20,000 and a development fee of $10,000. It is
expected that franchisees will be able to borrow up to 70% of
this amount from traditional small business lenders, and the
remaining 30% will be the cash equity provided by the
franchisee.
The lender has agreed to subordinate its security interests
to other lenders, including a line of credit lender, for
amounts up to a total of $700,000. At December 31, 1996,
the Company had $234,556 of such "senior" debt outstanding,
thus leaving another $465,443 available. The Company intends
to arrange a working capital line
of credit for this amount and is currently
negotiating with several interested lenders.
The working capital portion of the proceeds of the loan
is unrestricted and may used by the Company as required.
The Company built one store in leased property in Denver for
a cost of approximately $145,000 which is operated as a
Company owned store. The store opened in the first quarter of
1997. In
the first quarter of 1997 the Company reacquired a store
in Detroit from a franchisee and canceled the sublease with
the franchisee pursuant to which the franchisee leased the
facility and all of the assets at the location from the
Company. The
Company paid no cash but will incur operating costs for
the restaurant until it can be transferred to a new franchisee.
One
Company store held for resale in Denver is under contract to
be sold to a franchisee in the second quarter of 1997 for
$50,000 cash and $70,000 in the form of a promissory note
due the Company. The Company does not expect to record any
gain or loss on this sale.
Other than the above, the Company does not have any
commitments or contracts to build, acquire, or sell any
additional Company owned stores.
The Company's restaurant sales, and therefore royalties,
during the months of November through February are generally
lower due to the location of most of its restaurants.
Forward-Looking Statements
Certain of the information discussed in this annual report,
and in particular in this section entitled "Managements
Discussion and
Analysis or Plan of Operations," are forward-looking
statements that involve risks and uncertainties that
might adversely affect the Company's operating results in the
future in a material way. Such risks and uncertainties
include, without limitation, the effect of national and
regional economic and market conditions, costs of labor and
employee benefits, costs of marketing, costs of food and non-
food items used in the operation of the Restaurants,
intensity of competition for locations as well as customers,
perception of food safety, legal claims, and the
availability of financing for the Company and its
franchisees. Many of these risk are beyond the control of
the Company. In addition, specific reference is
made to the "Risk
Factors' contained in the Company's Prospectus, dated February
1, 1994, included in the Registration Statement filed by the
Company in connection with its initial public offering
(Registration No. 33-72378-D).
As described earlier, the Company's principal sources of
income are royalty fees, initial franchise fees, and area
director marketing fees. These sources are subject to a
variety of factors that could adversely impact the
profitability of the Company in the future, including those
mentioned in the preceding paragraph. The continued strength
of the U.S. economy is a key factor in the restaurant
business because consumers tend to immediately reduce their
discretionary purchases in economically difficult times. An
economic downturn would adversely affect all three of the
above identified sources of income. Because the Company's
franchises are still concentrated in a few regions of the
U.S., regional economic factors could adversely affect the
Company's profitability. Weather, particularly severe
winter weather, will adversely affect royalty income and
could affect the other sources cited above. Culinary fashions
among Americans will also impact the Company's profitability.
As eating habits change and types of cuisine move in and
out of fashion, the Company's challenge will be to
formulate a menu within the Company's distinctive
culinary style that appeals to an increasing market
share. Finally, the intense competition in the restaurant
industry continues to challenge participants in all segments
of this industry.
ITEM 7. FINANCIAL STATEMENTS
Attached hereto and filed as a part of this Form 10-KSB are the
consolidated financial
statements listed in the Index to the Consolidated
Financial Statements at page F- 1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by the above four Items is omitted
because the Company
intends to file a proxy statement with the Commission pursuant
to Regulation 14A not later than 120 days after the close of
the fiscal year in accordance with General Instruction E(3) to
Fon-n 10-KSB. The information called for by
these Items is
incorporated herein by reference to the proxy statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B.
The
Company will furnish to its shareholders of record as of
the record date for its 1996 Annual Meeting of Stockholders, a
copy of any of the exhibits listed below upon payment of $.25
per page to cover the costs of the Company of furnishing the
exhibits.
Item No. Exhibit Description
2.2 Articles of Merger Merging Schaden & Schaden into The
Quizno's Operating Company, incorporated by reference to
Exhibit 2(ii) to the Company's Form 8-K, dated November 4,
1994.
3.1 Amended and Restated Articles of Incorporation of the
Company, incorporated by reference to Exhibit 3(a) to the
Company's Registration Statement on Form SB-2 (Reg. No. 33-
72378D).
3.2 Articles of Amendment to the Articles of Incorporation
of the Company Authorizing 146,000 Shares of Class A Cumulative
Convertible Preferred Stock.
3.3 Articles of Amendment changing the Company name.
3.4 By-laws of the Company.
4.1 Form of certificate evidencing Common Stock, $.001 par
value, of the Company, incorporated by reference to Exhibit
4(a) to the Company's Registration Statement on Form SB-2
(Reg. No. 33-72378-D).
4.2 Form of Representative's Warrant, incorporated by
reference to Exhibit 4(b) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
9.1 Voting Trust Agreement between Richard E. Schaden and
Richard F. Schaden, dated July 14, 1994, incorporated by
reference to Exhibit A to the Schedule 13D, dated July 14,
1994, filed by Richard E. Schaden and Richard F. Schaden.
9.2 First Amendment to Voting Trust Agreement dated
November 4, i994, incorporated by reference to Exhibit A to the
Amendment No. 1 to Schedule 13-D, dated November 4, 1994, filed
by Richard E. Schaden and Richard F. Schaden.
9.3 Second Amendment to Voting Trust Agreement dated
September 5, 1996.
10.1 Employment Agreement of Mr. Richard E. Schaden,
incorporated by reference to Exhibit 10(a) to the Company's
Registration Statement on Form SB-2 (Reg. No. 33-72378-D).
10.2 Employment Agreement of Mr. Richard F. Schaden,
incorporated by reference to Exhibit 10(b) to the Company's
Registration Statement on Form SB-2 (Reg. No. 33-72378-D).
10.3 Employee Stock Option Plan, incorporated by reference
to Exhibit 10(c) to the Company's Registration Statement on
Form SB-2 (Reg. No. 33-72378-D).
10.4 Amended and Restated Stock Option Plan for Non-Employee
Directors and Advisors.
10.5 Indemnity Agreement of Richard E. Schaden, incorporated
by reference to Exhibit 10(e) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.6 Indemnity Agreement of Richard F. Schaden, incorporated
by reference to Exhibit 10(f) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.7 Indemnity Agreement of Patrick E. Meyers, incorporated
by reference to Exhibit 10(g) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.8 Indemnity Agreement of Brownell M. Bailey, incorporated
by reference to Exhibit 10(h) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.9 Indemnity Agreement of Frederick H. Schaden,
incorporated by reference to Exhibit 10(i) to the Company's
Registration Statement on Form SB-2 (Reg. No. 33-72378-D).
10.10 Form of Franchise Agreement.
10.11 Form of Territorial Development Agreement,
incorporated by reference to Exhibit 10(m) to the Company's
Registration Statement on Form SB-2 (Reg. No. 33-72378-D).
10.12 Form of Area Director Marketing Agreement.
10.14 Office Lease for the Company.
10.15 Amendment to Employment Agreement between the Company
and Mr. Richard E. Schaden, dated February 29, 1996,
incorporated by reference to Exhibit 10. 15 to the Company's
1O-KSB, dated March 29, 1996.
10.16 Amendment to Employment Agreement between the Company
and Mr. Richard F. Schaden, dated February 29, 1996,
incorporated by reference to Exhibit 10. 16 to the Company's
10-KSB, dated March 29, 1996.
10.17 Deferment Agreement between the Company and Illinois
Food Management, Inc., dated February 27, 1996, incorporated by
reference to Exhibit 10. 17 to the Company's 10-KSB, dated
March 29, 1996.
10.18 Investment Agreement between the Company and Retail and
Restaurant Growth Capital, L.P. ("RRGC"), dated as of December
31, 1996.
10.19 Senior Subordinated Convertible Promissory Note (with
Form of Warrant attached) issued by the Company to RRGC, dated
December 31, 1996, incorporated by reference to Exhibit 99(a)
to Schedule 13D filed by Retail & Restaurant Growth Capital,
L.P., a Delaware limited partnership, filed with the SEC on
January 9, 1997.
10.20 Security Agreement between the Company and RRGC, dated
as of December 31, 1996.
10.21 Stockholders' Agreement between the Company and RRGC,
dated as of December 31, 1996, incorporated by reference
to Exhibit 99(b) to Schedule 13D filed by Retail & Restaurant
Growth Capital, L.P., a Delaware limited partnership, filed
with the SEC on January 9, 1997.
20.1 Risk Factors Section from the Company's Prospectus
dated February 1, 1994 included in the Registration Statement
on Form SB-2 filed by the Company (Registration No. 33-
72378-D), incorporated by reference to Exhibit 20.1 to the
Company's 10-KSB, dated March 29, 1996.
21.1 List of Company subsidiaries, incorporated by
reference to Exhibit 21.1 to the Company's 10-KSB, dated
March 29, 1996.
(b) Reports on Form 8-K. The Company filed three (3) reports
on Form 8-K during
the last quarter of 1996. AU such Form 8-K filings reported
on only Item 5 matters. Such filings where made on October 9
and 28, and November 25, 1996 and related to a press
release regarding franchises sold in the third quarter, a
press release on stores opened and the third
quarter investor update,
respectively.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized on March 1997.
THE QUIZNO'S CORPORATION
By: Original signed by Richard E. Schaden
Richard E. Schaden, President and Chief
Executive Officer
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated and on the
dates indicated.
Signature Title Date
/s/ Richard E. Schaden President, Chief Executive March 28, 1997
Richard E. Schaden Officer and (Principal and
Executive Officer)
/s/ Richard F. Schaden Vice President, March 28, 1997
Richard F. Schaden Secretary and Director
/s/ Brownell M. Bailey Director March 28, 1997
Brownell M. Bailey
/s/ J. Eric Lawrence Director March 28, 1997
J. Eric Lawrence
/s/ Frederick H. Schaden Director March 28, 1997
Frederick H. Schaden
/s/John L. Gallivan Chief Financial Officer March 28, 1997
John L. Gallivan and Treasurer (Principal
Financial and Accounting
Officer)
THE QUIZNO'S CORPORATION AND
SUBSIDIARIES
Consolidated Financial Statements
and Independent Auditors' Report
December 31, 1996, 1995, and 1994
Table of Contents
Page
Independent Auditors' Report F-1
Consolidated Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
The Quizno's Corporation and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance
sheets of The Quizno's Corporation and Subsidiaries as of
December 31, 1996, 1995, and 1994, and the related
consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility
of the Company's management.
Our
responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting
the amounts and disclosures in
the
consolidated financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material
respects, the financial position of The Quizno's
Corporation and Subsidiaries as of December 31, 1996,
1995, and 1994 and the results of their operations and
their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
February 28, 1997
Denver, Colorado
F-1
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 2,127,330 $1,684,422 $3,112,575
Restricted cash 16,748 15,927 30,280
Accounts receivable, net of
allowance for doubtful accounts
of $51,077 (1996), $11,777 (1995)
and $4,700 (1994) (Note 7) 363,602 276,522 137,129
Current portion of notes receivable
(Notes 2 and 7) 501,255 304,918 83,841
Other current assets 147,856 155,973 99,152
Assets of stores held for resale
(Note 3) 116,229 144,499 276,922
Total current assets 3,273,020 2,582,261 3,739,899
Property and equipment at cost, net
(Note 4) 1,458,979 1,083,476 901,291
Other assets
Intangible assets, net (Note 5) 557,483 537,149 547,327
Deferred assets (Notes 6 and 12) 937,450 588,051 338,498
Deposits 37,630 31,454 45,945
Notes receivables, net (Notes 2 and 7) 575,222 528,484 26,173
Total other assets 2,107,785 1,685,138 957,943
Total assets $ 6,839,784 $ 5,350,875 $5,599,133
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,053,028 $ 713,446 $ 378,849
Accrued liabilities (Note 7) 170,728 53,168 47,960
Line-of-credit (Note 8) 100,000 160,000 200,000
Current portion of long-term
obligations (Notes 7 and 9) 375,595 171,217 226,424
Provision for loss on stores held for
resale (Note 3) - 58,000 259,000
Total current liabilities 1,699,351 1,155,831 1,112,233
Line-of-credit (Note 8) 120,239 215,505 290,506
Long-term obligations (Notes 7 and 9) 203,801 341,453 655,848
Convertible subordinated debt (Note 9) 2,000,000 - -
Other liabilities - 12,101 20,692
Deferred revenue (Note 7) 1,575,471 1,309,155 862,317
Total liabilities 5,598,862 3,034,045 2,941,596
Commitments and contingencies (Notes 3,
8, 10 and 14)
Stockholders' equity (Note 11)
Preferred stock, $.001 par value;
liquidation preference of $6 per share
plus unpaid and accumulated dividends,
1,000,000 authorized, issued and
outstanding 146,000 in 1996, 1995 and
1994 ($876,000 liquidation preference) 146 146 146
Common stock, $.001 par value; 9,000,000
shares authorized; issued and
outstanding, 2,864,757 (1996), 2,864,757
(1995), and 2,860,000 (1994) 2,865 2,865 2,865
Capital in excess of par value 3,233,415 3,290,355 3,339,495
Accumulated deficit (1,995,504) (976,536) (684,964)
Total stockholders' equity 1,240,922 2,316,830 2,657,537
Total liabilities and stockholders' $ 6,839,784 $5,350,875 $5,599,133
equity
</TABLE>
QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Franchise operations:
Revenue (Note 7)
Royalty fees $ 1,590,673 $ 1,046,329 $779,249
Initial franchise fees 1,164,500 593,350 390,000
Area director marketing fees 1,421,555 1,379,640 326,391
Other 248,094 208,776 198,209
Interest revenue 149,781 147,277 155,890
Total revenue 4,574,603 3,375,372 1,849,739
Expenses
Sales and royalty commissions (914,726) (253,173) (118,370)
Advertising and promotion (239,209) (79,074) (150,492)
General and administrative (Note 7) (3,400,802) (2,713,258) (1,949,829)
Total expenses (4,554,737) (3,045,505) (2,218,691)
Income (loss) from franchise operations 19,866 329,867 (368,952)
Company store operations:
Sales by Company owned stores expenses: 2,680,521 3,011,195 603,485
Cost of sales at Company stores (959,045) (1,006,317) (210,111)
Cost of labor at Company stores (777,170) (894,217) (229,405)
Other Company store expenses (857,472) (1,178,287) (190,924)
Total expenses (2,593,687) (3,078,821) (630,440)
Income (loss) from Company stores
operations 86,834 (67,626) (26,955)
Other income (expenses):
Research and development and new
programs
Direct retail advertising (120,936) - -
Research and development (17,295) (10,564) (954)
Non-traditional development program (79,090) - -
Other
Sales by stores held for resale 231,371 142,525 193,891
Loss and expenses related to stores
held for sale (307,813) (262,964) (320,780)
Provision for litigation settlement (134,500) - -
Provision for bad debts (224,063) (13,780) (15,182)
Other (expenses) income (104,844) (43,625) 175,000
Depreciation and amortization (288,435) (253,459) (131,962)
Interest expense (80,063) (111,946) (58,137)
Total other expenses (1,125,668) (553,813) (358,124)
Net loss (1,018,968) (291,572) (754,031)
Preferred stock dividends (56,940) (56,940) (14,235)
Net loss applicable to common
stockholders $ (1,075,908) $(348,512) $(768,266)
Net loss per share of common stock $ (.38) $ (.12) $ (.28)
Weighted average common shares
outstanding 2,864,757 2,863,130 2,746,849
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Convertible Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
<S> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994 146,000 $ 146 2,860,000 $ 2,860 $3,339,495 $ (684,964)
Issuance of common
stock in exchange
for general
partnership
interest - - 2,500 3 9,997 -
Purchase price paid
for Quiz One
Limited
Partnership
general partner's
interest over
historical book value
(Note 13) - - - - (56,940) -
Issuance of common
stock pursuant to
employee benefit
plan - - 2,257 2 7,803 -
Preferred stock
dividends - - - - (56,940 -
Net loss - - - - - (291,572)
Balance, December
31, 1995 146,000 146 2,864,757 2,865 3,290,355 (976,536)
Preferred stock
dividends - - - - (56,940) -
Net loss - - - - - (1,018,968)
Balance, December
31, 1996 146,000 $146 $ 2,864,757 $2,865 $3,233,415 $(1,995,504)
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,018,968) $ (291,572) $(754,031)
Adjustments to reconcile net loss to
net cash (used) provided by operating
activities -
Depreciation and amortization 259,840 253,459 131,962
Provision for losses on accounts and
notes receivable 179,300 7,077 15,000
Loss on disposal of asset 44,648 189,463 -
Reserve for closure losses - 35,000 259,000
Issuance of stock for services - 7,805 -
Deferred tax asset - - (175,000)
Issuance of notes receivable for area
director agreements (236,407) (208,594) (42,599)
Changes in assets and liabilities -
Restricted cash (821) 14,353 (30,280)
Accounts receivable (126,380) (146,470) (103,664)
Other current assets 8,117 (69,911) (11,163)
Accounts payable 339,582 334,597 (35,417)
Accrued liabilities 117,560 5,208 (119,502)
Other liabilities (12,101) (8,591) -
Deferred franchise costs (231,650) (249,553) (33,857)
Deferred initial franchise fees 266,316 446,838 210,247
608,004 610,681 64,727
Net cash (used) provided by
operating activities (410,964) 319,109 (689,304)
Cash flows from investing activities
Cash from sale of stores - 105,000 -
Purchase of businesses, net of cash
acquired - - (632,281)
Purchase of property and equipment (626,157) (869,926) (87,902)
Proceeds from notes receivable 273,421 24,680 (63,183)
Issuance of other notes receivable (305,089) (75,474) -
Intangible assets (149,773) (153,008) (26,249)
Proceeds from sale of asset 13,716 14,460 -
Deposits (6,176) 12,130 (28,896)
Payments of obligation associated with
stores held for resale - (236,000) -
Provision for store closure (58,000) - -
Net cash used by investing
activities (858,058) (1,178,138) (838,511)
Cash flows from financing activities
Line-of-credit - net (155,266) (115,001) 490,505
Principal payments on long-term
obligations (196,099) (397,183) (654,855)
Proceeds from long-term obligations 2,237,984 - 100,000
Loan costs (117,749) - -
Proceeds from issuance of common stock - - 5,300,000
Offering costs - - (823,643)
Dividends paid (56,940) (56,940) (14,235)
Net cash provided (used) by
financing activities 1,711,930 (569,124) 4,397,772
Net increase (decrease) in cash and cash 442,908 (1,428,153) 2,869,957
Cash and cash equivalents - beginning of
year 1,684,422 3,112,575 242,618
Cash and cash equivalents - end of year $2,127,330 $1,684,422 $3,112,575
</TABLE>
Supplemental disclosure of cash flow information
Cash paid during the year for interest was $80,063
(1996), $111,946 (1995) and $58,137 (1994).
Supplemental disclosure of non-cash investing and
financing activities
During 1996, the Company sold a restaurant to a
franchisee for $115,000 plus $20,000 for a
franchise fee. The
franchise fee was paid in cash with the
remaining $115,000 to be paid in the future
pursuant to a promissory note. The net book
value of the assets sold was $155,000 resulting
in a loss of $40,000 in the current year.
During the first quarter of 1995, the Company
issued 2,500 shares of its $.001 par value
common stock to Berger Restaurant Corporation
in exchange for the general
partner's interest in Quiz One Limited
Partnership owned by Berger Restaurant
Corporation. The shares and the general
partner's interest were valued at $10,000 (Note
13).
During the second quarter of 1995, the Company
sold two restaurants to franchisees for $114,000
of which $30,000 was paid in cash, $49,000 to be
paid in the future pursuant to a promissory
note, and $35,000 to be paid in the future
upon the renewal of the franchisee's franchise
agreement. The net book value of the assets
sold was $281,650, resulting in a loss of
$167,650, which had been accrued and reserved for
in
1994.
During the fourth quarter of 1995, the Company
sold three restaurants to franchisees for
$455,000 of which $75,000 was paid in cash,
$380,000 to be paid in the future pursuant to
promissory notes. The net book value of the
assets sold was $473,278, resulting in a loss of
$18,278.
During 1996 and 1995, the Company acquired
assets under capital leases totaling $24,841
and $27,581, respectively.
During the fourth quarter of 1996 and 1995,
the Company
offered a store for resale and reclassified
$116, 229 and $144,499, respectively, of property
and equipment as assets held for resale.
During 1996, the 1995 store was taken off the
market and the $144,499 property and equipment
were reclassified back into operating assets.
The 1996 store was sold in 1997 (Note 13).
During the year ended December 31, 1994, the
Company purchased the net assets at Schaden &
Schaden, Inc., Quiz One Limited Partnership and
a Quizno's franchise
restaurant. The acquisitions were accounted for as
follows:
<TABLE>
<CAPTION>
<S> <C>
Cash $23,565
Inventory 41,296
Equipment 1,051,710
Other 14,060
Current liabilities (317,130)
Long-term debt (748,579)
Net book value of assets 64,922
acquired
Cash 656,000
Note payable 165,000
Preferred stock issued 876,000
Proceeds 1,697,000
Amount charged to additional paid-in-
capital (Note 13) 1,632,078
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of
Significant Accounting Policies
The Quizno's Corporation (The Company) was
incorporated on January 7, 1991, in the State of
Colorado, and is primarily engaged in the business
of franchising Quizno's quick service
restaurants throughout the United States
featuring submarine sandwiches, salads, soups, and
refreshments.
The Company's wholly owned subsidiaries are
the Quizno's Operating Company (QOC) incorporated in
1994
to own and operate Company stores, the
Quizno's Development Company (QDC) incorporated
in 1995 to develop stores to sell or lease to
franchisees, and the Quizno's Realty Company (QRC)
incorporated in 1995 to execute leases
for store location. QRC was
inactive in 1996 and 1995.
The following table summarizes the number of
Quizno's restaurants open at December 31, 1996:
<TABLE>
<CAPTION>
Sold But Not
Yet in
Operation Operational Total
<S> <C> <C> <C>
The Quizno's Operating
Corporation and affiliated - 9 9
entities
Franchise restaurants 150 147 297
150 156 306
</TABLE>
Principles of Consolidation
The consolidated financial statements include the
accounts of The Company and its wholly
owned subsidiaries QOC, QDC, QRC and a 52% owned
subsidiary, Classic Subs Limited Liability Company.
The minority interest was reduced to zero due to
losses incurred. All significant intercompany
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid
instruments purchased with an original maturity of
three months or less to be cash equivalents.
Restricted Cash
The Company sold franchise agreements in the state
of California, which required funds paid for
franchises to be held in escrow until the
franchise opens. Accordingly, The Company holds
these amounts, plus interest earned in restricted
accounts. Beginning in 1995, the Company was no
longer required to escrow such funds.
Inventory
Inventory is included in other assets and is stated
at the lower of cost or market and consists of food
and paper products. Cost is determined using the
first in, first out (FIFO) method.
Credit Risk
The Company grants credit in the normal course
of business, primarily consisting of royalty
fees
receivable and loans to area directors and to
its franchisees, the majority of whom are located
in the Midwest and the Rocky Mountain region.
To reduce credit risk, the Company electronically
debits the franchisees bank account weekly for
fees due the Company according to franchise
agreements entered into after 1993, and reserves
the right to terminate franchise and area
director agreements for non-payment of amounts owed.
The Company's cash equivalents consists of short-
term commercial paper with original maturities
not in excess of three months. The Company
continually monitors its positions with, and the
credit quality of, the financial institutions it
invests with. In
addition, the Company limits the amount of
credit exposure with any one institution.
Accounts Receivable/Royalties Receivable
At the time the accounts and royalty receivable
are originated, the Company considers a reserve
for
doubtful accounts based on the creditworthiness of
the franchisee. The provision for uncollectible
amounts is continually reviewed and adjusted to
maintain the allowance at a level considered
adequate to cover future losses. The allowance
is management's best estimate of uncollectible
amounts and is determined based on historical
performance of the notes which is tracked by the
Company on an ongoing basis. The
losses ultimately incurred could differ materially
in the near term from the amounts estimated
in
determining the allowance.
Property and Equipment
Property and equipment is stated at cost;
equipment under capital leases is valued at the
lower of fair market value or net present value of
the minimum lease payments at inception of the
lease. Depreciation is provided utilizing the
straight-line method over the estimated useful
lives for owned assets and leasehold improvements,
ranging from 5 to 31.5 years, and the related
lease term for equipment under capital leases.
Deferred Financing Costs
Cost associated with obtaining the
convertible subordinated debt financing are deferred
and amortized on a straight-line basis over the term
of the debt.
Intangible Assets
In connection with the Company's purchase of
the Quizno's name and business in 1991 from the
founder, it entered into a non-compete agreement
with the founder. Under the terms of the
non-compete agreement, the founder was paid
$500,113 in exchange for his agreement not to
compete with the Company for the period of 10
years. The amount paid by the Company is being
amortized over the term of the noncompete
agreement.
The excess of the purchase price over net assets
acquired for stores purchased by the Company from
unrelated third parties is recorded as goodwill and is
amortized over 15 years.
Other intangibles are recorded at cost and are
amortized on the straight-line basis over the
contractual or estimated useful lives as follows:
Franchise agreements
12 years
Trademarks and other
3 - 15 years
Initial Franchise Fees and Related Franchise Costs
Management believes it is probable that all of the
deferred franchise fees will be realized. The amount
of the deferred franchise fees considered
realizable, however, could be reduced in the
near term
if
estimates of the future franchise openings is
reduced.
Initial franchise fees are recognized as revenue
when all material services and conditions required
to be performed by the Company have been
substantially completed, which is generally when
the franchise commences operations. Initial
franchise fees collected by the Company before
all material services and conditions are
substantially performed is recorded as
deferred franchise sales revenue. Incremental
development costs are deferred, but not in excess
of the deferred revenue and estimated cost to open
the Quizno's restaurant, and are expensed when the
revenue is recognized.
Deferred Financing Costs
Costs associated with obtaining the
convertible subordinated debt financing are deferred
and amortized on a straight-line basis over the term
of the debt.
Area Director Marketing Agreements
Prior to 1995, the Company had entered into
area director marketing agreements which provide
the area director an exclusive right to market
and sell or purchase franchises in a defined
geographic territory and the rights to one Quizno's
restaurant within the territory. The marketing
agreements require the
Company to pay the area director $5,000 per
franchise sold by the area director and to pay the
area director a continuing fee of .5% to 1.5% of
gross sales as defined, of each franchise
within the defined geographic territory.
The Company changed the terms of the area
director marketing agreement, effective December 31,
1994. The new agreement provides the area director
an exclusive
right to sell and open franchises in a
defined geographic territory and requires that
the area
director be responsible for advertising
for,
soliciting and screening prospective franchisees.
The agreements also require the area director to
sell and open a minimum of new franchised
restaurants each year or to forfeit future rights
to the territory.
In
addition, the area director is responsible
for
identifying possible locations, providing on-
site opening assistance, and providing quality
assurance services to franchises in the defined
area. The
Company pays the area director 50% of the
initial franchise fee sold by the area director, and
a fee of
40% of the royalty received by the Company from
each franchise within the defined area. The
agreements are for a period of ten years, with the
option to extend for an additional ten years. The
area director is
entitled to receive commissions for a period of
15
years following the opening of each
franchised Restaurant, notwithstanding the
expiration of the area director agreement (unless
the area director agreement is terminated upon
the occurrence of a event of
default). The area director marketing fee is $.03
to
$.035 per person living in the area
director's territory, plus a $10,000 to $15,000
training fee which is deferred until training has
been completed. Subsequent to year end, the
Company increased the marketing fee to $.05 per
person living in the area.
During the years ended December 31, 1996, 1995
and 1994, zero, twelve and nine area directors
opted to
amend their previous agreement, respectively,
to
conform to the terms of the new agreement.
Revenues are recognized under the new agreement upon
collection of the marketing fee, which is non-
refundable. Fees
recognized in conjunction with this amendment
were approximately $0, $54,000 and $74,000 in
1996, 1995 and 1994, respectively. Area
directors under the original agreement were
given the option to amend their agreement to
meet the terms of the
new
agreement, but are under no obligation to do so.
Reserve for Losses on Stores Held for Resale
The Company continually assesses the operations
of
Company owned stores. At the time when the
Company determines to sell a store, a reserve is
established for any
anticipated loss in conjunction with
disposition of the store.
Royalties and Advertising Fees
Pursuant to the various franchise
agreements, franchises are required to pay the
Company royalties and advertising fees based on a
percentage of sales ranging from 4% to 8% for
royalties, and 1% to 3% for advertising fees.
Royalties as allowed by the franchise agreement
are accrued based on a percentage of gross
sales, as
reported by franchisees and are included in
accounts receivable.
The Company does not recognize any portion of
the advertising fees as revenue, nor does it accrue
such fees or consolidate the accounts of any
of the advertising funds.
Income Taxes
Prior to 1994, the Company had elected to be taxed
as an "S" corporation under the provisions
of the
Internal Revenue Code. Subsequent to the
completion of the initial public offering as
discussed in Note 11, the Company's "S" status
terminated for income tax purposes. The effect of
terminating the S Corporation generated a net
deferred tax asset of approximately $175,000 and
a tax benefit which is included in continuing
operations for the year ended December 31, 1994.
The Company calculates and records the amount of
taxes payable or refundable currently or in future
years for temporary differences between the
consolidated financial statement basis and income
tax basis based on
the current enacted tax laws. Temporary
differences are differences between the tax basis
of assets and liabilities and their reported
amounts in the consolidated financial statements
that will result in taxable or deductible amounts in
future years. The Company's temporary differences
result primarily from depreciation, deferred
franchise sales revenues and deferred franchise
costs and net operating loss carryforwards.
Net Loss Per Common Share
Net loss per common share has been computed based
on the weighted average number of shares
outstanding during each year. Common stock
equivalents have been excluded from the weighted
average number of common shares outstanding as
their affect would be antidilutive.
Use of Estimates
The preparation of consolidated 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 consolidated financial statements and
the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of financial
instruments including cash and cash equivalents,
receivables, prepaids, current portion of
notes receivable, accounts payable and accrued
expenses approximated fair value as of December
31, 1996 because of the relatively short maturity
of these instruments.
The carrying amounts of long-term notes
receivable approximate fair value as of December 31,
1996 because the discounted cash flows at current
rates approximate the rates of the notes.
The carrying amounts of notes payable and debt
issued approximate fair value as of December 31,
1996 because interest rates on these instruments
approximate market interest rates.
Reclassifications of Prior Year Amounts
Certain reclassifications have been made to
the
balances for the years ended December 31, 1995
and 1994 to make them comparable to those
presented for the year ended December 31, 1996,
none of which change the previously reported net
income or total assets.
Note 2 - Notes Receivable
Notes receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Notes receivable related to area director
marketing agreements, interest ranging
from 11% to 15%, due in varying amounts
through July 2002. $ 453,135 $ 241,697 $ 44,337
Notes receivable for sale of stores,
interest ranging from 8% to 15%, due in
varying amounts through October 2007. 434,383 464,000 -
Other notes receivable with interest
ranging from 0% to 15%, due in varying
amounts through 2001. Includes $178,444
(1996), $95,447 (1995) and $26,173 (1994)
due from the advertising fund (Note 7). 328,959 127,705 65,677
1,216,477 833,402 110,014
Less current porti on (501,255) (304,918) (83,841)
715,222 528,484 26,173
Less allowance (140,000) - -
$ 575,222 $ 528,484 $ 26,173
</TABLE>
At the time, the notes receivable are executed, the
Company reserves an allowance for doubtful collections. The
provision for uncollectible amounts is continually reviewed and
adjusted to maintain the allowance at a level considered adequate
to cover future losses. The allowance is management's best
estimate of uncollectible amounts and is determined based on
historical performance of the notes which is tracked by the Company
on an ongoing basis. The
losses ultimately incurred could differ materially in the near term
from the amounts estimated in determining the allowance.
Future principal payments are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ended December 31,
1997 $ 501,255
1998 176,333
1999 117,174
2000 98,827
2001 62,941
Thereafter 259,947
1,216,477
Less allowance (140,000)
$ 1,076,477
</TABLE>
Note 3 - Reserve for Losses on Stores Held for Resale
At December 31, 1996, 1995 and 1994, the Company identified one,
one and two Company owned stores for closure or sale in 1997, 1996 and
1995, respectively. At December 31, 1996, the Company had a signed
letterof-intent relating to the store held for sale which was in
excess of the carrying amount of the stores assets, therefore no
impairment was recorded. During 1995 and 1994, the Company impaired
the carrying value of the assets to their estimated realizable value.
Included in assets of stores to be sold or closed are the following:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Furniture fixtures and equipment $ 29,999 $ 36,961 $127,838
Leasehold improvements 81,673 107,538 113,947
Goodwill 4,557 - 35,137
$ 116,229 $ 144,499 $276,922
</TABLE>
The provision for loss on stores held for resale is
comprised of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Impairment of assets held for sale $ - $182,000
Reserve for costs associated with the
termination of the facility leases 58,000 77,000
$ 58,000 $259,000
</TABLE>
The operating losses associated with these stores for
the periods ended December 31, 1995 and 1994 were $85,838 and
$67,889, respectively, and are included in the loss and provision for
loss on stores held for resale in the accompanying consolidated
financial statements.
As a result of the sale of one store for which the
Company will subsidize rent over a period of time, a reserve for rent
associated with the sale of the store has been recognized in the amount
of $23,000.
Subsequent to December 31, 1995, the Company subleased the store held
for sale. The sublessee paid $5,000 for the rights to lease the
store and will pay a specified amount to the Company for rent
ranging from 3% to 14% of gross
monthly sales. The difference
between anticipated rent received on the sublease and rent paid by the
Company of approximately $35,000 has been accrued as a loss at
December 31, 1995. The
sublesee has an option to purchase the franchise for $140,000,
including the franchise fee through December 31, 1996. The option
expired and the accrued loss was realized at December 31, 1996.
In 1995, the Company sold one store in Denver and two
stores in Detroit for a net loss of $43,625. $14,117 of the loss
related to the store in Denver operated by the Company for two months.
The balance of the loss is applicable to the two
stores in Detroit. The two
Detroit stores were acquired, along with the area directorship
for Detroit, in connection with the Company's purchase of Quiz One
Limited Partnership in 1994. The Detroit area directorship was
resold for $147,000 in the fourth quarter of 1995, the same
quarter the two Detroit stores were sold at a loss, resulting in a
combined net effect of a $117,492 gain.
Note 4 - Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Equipment $267,061 $227,581 $278,823
Furniture and fixtures 271,727 195,590 149,841
Leasehold improvements 1,138,461 804,866 491,302
Vehicles - - 27,662
1,677,249 1,228,037 947,628
Less accumulated depreciation and (218,270) (144,561) (46,337)
amortization
Net property and equipment $1,458,979 $1,083,476 $901,291
</TABLE>
Note 5 - Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Covenant not to compete $500,113 $500,113 $500,113
Franchise agreements 292,395 292,395 292,395
Goodwill (Note 13) 77,407 - -
Trademarks and other 183,885 159,141 58,328
1,053,800 951,649 850,836
Less accumulated amortization (496,317) (414,500) (303,509)
$557,483 $537,149 $547,327
</TABLE>
Note 6 - Deferred Assets
Deferred assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Deferred franchise costs $ 644,701 $ 413,051 $163,498
Deferred tax asset (Note 12) 175,000 175,000 175,000
Deferred financing costs 117,749 - -
$ 937,450 $ 588,051 $338,498
</TABLE>
Note 7 - Related Party Transactions
The Company has notes receivable from the advertising
fund of $178,144, $95,447 and $26,173 at December
31, 1996, 1995 and 1994, respectively. The
balances relate to an off season build-up for
advertising and are reimbursed to the Company in
the subsequent year. At December 31, 1996, the
Company had a $44,555 noninterest bearing note to
the advertising fund which will be paid off in
1997 when the notes receivable are paid back.
In 1995 the Company sold the Detroit Area
Directorship to a majority stockholder of the
Company. The
agreement was sold for $150,000 paid in
cash. Accordingly, the Company recognized $147,000
in 1995 for area director revenue, net of $3,000
for future marketing services to be provided by the
Company.
The Company was affiliated with Schaden and
Schaden, Inc. (Schaden) through common ownership
until October
1, 1994, when the Company purchased Schaden.
Schaden, and entities in which Schaden had an
equity interest, owned and operated eleven Quizno's
restaurants. The
Company recognized royalty fees of
approximately $152,000 during the year prior to
October 1, 1994. Initial franchise fees
recognized upon opening of these stores were
$45,000 during the year ended December 31,
1994. During 1994, the Company paid $31,500,
respectively, to an entity controlled by Schaden
for use of the entity's Quizno's restaurant as a
training facility.
Prior to October 1, 1994, Schaden was a
general partner and a limited partner in Quiz
One Limited Partnership ("Quiz One"). Schaden,
prior to October 1, 1994, was owned by two
individuals who were also directors and majority
stockholders of the Company. On October 1,
1994, the Company acquired Schaden, which
included Schaden's general and limited
partnership interests in Quiz One. On December
1, 1994, the Company purchased all of the
remaining limited partnership interests in Quiz One.
In January 1995, the Company purchased the
remaining general partnership interest in Quiz One.
Two directors of the Company own more than 50% of
the outstanding shares of Illinois Food Managers,
Inc. which owned and operated Quizno's franchises
in the Chicago area. Two directors of the Company
owned 55% of the outstanding shares of S&K Food
Services, Inc. which was a franchisee of the
Company until such franchise was sold in October
1995. As of December 31, 1996, 1995 and 1994,
the Company had receivables of
approximately $12,092, $51,048 (net of area
director royalties due) and $11,343, respectively.
Two stockholders of the Company loaned Schaden
$99,243 in 1991 and another $62,000 under
notes payable agreements. The notes had
outstanding balances of $28,855 and $34,895 at
December 31, 1995 and 1994, respectively. The
notes were paid in full during 1996.
Summarized below is a recap of the related
party transactions previously described:
<TABLE>
<CAPTION>
As of and for the Years Ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
Assets
Accounts receivable $ 44,793 $ 61,829 $ 13,232
Notes receivable advertising fund 178,444 95,447 26,173
$ 223,237 $ 157,276 $ 39,405
Liabilities
Accrued liabilities $ 14,611 $ 42,655 $ -
Current portion of long-term
obligations 44,555 28,855 34,895
Long-term obligations - 10,297 114,156
Deferred initial franchise fees - 3,000 -
$ 59,166 $ 84,807 $149,051
Revenue
Royalty fees $ 16,773 $ 51,100 $151,801
Initial franchise fees - - 45,000
Area director marketing fees - 147,000 5,000
Other income 10,720 3,605 -
$ 27,493 $ 201,705 $201,801
Expenses
General and administrative expenses $ 47,429 $ 63,083 $ 48,889
</TABLE>
Note 8 - Line-of-Credit
The Company has available a $300,000 line-of-credit
and a term note from a financial institution. The
terms of the agreements specify a maturity date of May 1, 1999 and
require that $100,000 of the outstanding balance be converted to a
twelve month term note each May, with an interest rate of prime plus
3/4% (9.0% at December 31, 1996). The line and term note are
collateralized by a first lien in all assets of the Company and is
also guaranteed by the Company's majority stockholder. As of
December 31, 1996, the outstanding balance on the line-of-credit
and term note was $220,239, of which $100,000 is classified as a
current liability. The line-of-credit and term note
were paid off January 1997 with the proceeds from the $2,000,000 loan
from a commercial lender (Note 9).
The Company had an unsecured $100,000 revolving lineof-credit from a
financial institution obtained in 1994. The terms of the agreement
specify a maturity date of April 1, 1996, with interest payments
payable monthly at prime rate plus 3/4%, and principle due on
maturity. As of December 31, 1995, the outstanding balance on the
line-of-credit was $60,000. The lineof-credit was paid in full during
1996.
Note 9 - Long-Term Obligations and Convertible Subordinated
Debt
Long-term obligations consists of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Note payable to a financial institution,
monthly principal and interest payments
of $6,699 through December 1998, when
any unpaid principal and interest is
due. Interest is at 1% over the bank's
index rate (9.75% at December 31, 1996).
Collateralized by accounts receivable,
inventory, and equipment. $166,433 $226,970 $280,455
Various capital leases, with monthly
installments totaling $4,374, including
interest and expiring through November
1999. Collateralized by equipment. 88,647 121,015 146,960
Note payable to an individual, monthly
payments totaling $1,509, including
interest at 7%, through June 1998, when
any unpaid principal and interest is
due. Collateralized by terms and
conditions of a security agreement. 25,846 41,546 127,734
Note payable to a financial institution,
$1,372 monthly payments including
interest at the bank index rate (9.25%
at December 31, 1996) plus 1%, through
February 2001, when any unpaid principal
and interest is due. The note is cross-
collateralized by substantially all
assets. 68,123 83,987 100,303
Note payable to bank, interest at 11%,
unpaid principal and interest due
January 7, 1997. The note was
subsequently paid in full on January 7,
1997. 185,789 - -
Note payable to advertising fund, without
interest, principal due February 1997. 44,558 - -
Notes payable, paid in full in 1996 and - 39,152 226,820
1995.
579,396 512,670 882,272
Less current portion (375,595) (171,217) (226,424)
$203,801 $341,453 $655,848
</TABLE>
Convertible subordinated debt consists of:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
12.75% Convertible Subordinated Debt,
$1,155,825 convertible into 10% on a
fully diluted basis, (372,847 shares at
December 31, 1996) of the Company's
common stock at $3.10 per share.
Interest only until June 30, 1998.
Principal and interest payments based
upon a 5 year amortization from July 1,
1998 through November 30, 2001 with the
balance due December 31, 2001. The note
is collateralized by a first deed on all
of the assets of the Company and in 90%
of the stock of the two largest
stockholders who are also Directors of
the Company. The note will be
subordinated to $700,000 of debt if and
when arranged by the Company. The
Company is subject to certain financial
covenants including maintaining a net
worth of $1,000,000 and current ratio,
debt service and cash flow ratios, along
with restrictions on capital
expenditures, stock issuance and
acquisitions. The underlying stock and
warrants have a put option to the
Company on December 31, 2002, if the
Company has not completed a secondary
public offering. The warrants and
underlying stock have demand
registration rights as well as unlimited
piggy back registration rights .
No value was ascribed to the
underlying conversion
rights as the conversion
price exceeded the trading value of
the stock on
the date of issuance.
$1,150,000 of the proceeds are
reserved for use in the
Company's turnkey development
program and $850,000 may be used for
working capital and payment of
existing notes. $2,000,000 $ - $ -
</TABLE>
Maturities of long-term obligations, convertible
subordinated debt and capital leases are as follows:
<TABLE>
<CAPTION>
Long-Term
Obligations and
Convertible
Subordinated Capital
Year Ending December 31, Debt Leases Total
<S> <C> <C> <C>
1997 $325,617 $56,663 $ 382,280
1998 277,345 38,560 315,905
1999 341,908 5,362 347,270
2000 385,915 - 385,915
2001 1,159,964 - 1,159,964
2,490,749 100,585 2,591,334
Less amount representing
interest - (11,938) (11,938)
Total principal 2,490,749 88,647 2,579,396
Less current portion (325,617) (49,978) (375,595)
$2,165,132 $38,669 $2,203,801
</TABLE>
Included in equipment in the accompanying 1996, 1995
and 1994 balance sheet are assets held under
capital leases in the amount of $83,205,
$134,557 and $213,082, respectively and
accumulated amortization of
$32,850, $54,895 and $54,018, respectively.
Note 10 - Commitments and Contingencies
The Company leases an office facility,
eleven restaurant locations and certain
equipment and
vehicles under operating lease agreements
which
provide for the payment of rent totaling
approximately $34,000 per month. One of the
restaurant locations also requires the Company to
pay 6% of gross sales in excess of $430,000
annually. Rent expense under these operating
leases, totaled $367,439, $335,846 and
$127,689 during the years ended December 31,
1996, 1995, and 1994, respectively.
Future minimum rental payments are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
1997 $ 406,876
1998 223,300
1999 179,116
2000 98,271
2001 30,465
Thereafter 15,470
$ 953,498
</TABLE>
During the year ended December 31, 1993, the Company
entered into employment agreements with two directors,
officers, and stockholders of the Company which
provide for the payment of annual salaries totaling
$145,000 plus individual bonuses in fiscal year 1995
equal to six and ten percent of the positive increase
in net income before depreciation, amortization
and interest over the prior year. The agreements
were amended to reduce the bonus percentages to 4%
and 7% for 1995 only, equal to a total of $86,340,
which is accrued at December 31, 1995. There were
no bonuses accrued and paid during 1996 and 1994.
The agreements expire in December 1998 and 2003,
respectively. The
annual salary amount, in total, was increased
to $192,000 effective October 1, 1994.
Litigation
There are various claims and lawsuits pending by
and against the Company, which, in the opinion
of the management, and supported by advice
from legal counsel, will not result in any
material adverse effect in excess of amounts
accrued in the
accompanying consolidated financial statements.
Note 11 - Stockholders' Equity
Common Stock
In February 1994, the Company completed a
public offering of its common shares, whereby the
Company sold 1,060,000 shares at $5.00 per
share. Total proceeds, net of underwriters
commission and other expenses of $1,007,023, were
$4,292,977.
Convertible Preferred Stock
Convertible preferred stock bears a 6.5%
cumulative dividend, payable monthly and is
convertible beginning three years after issuance
into common shares on a one for one basis and is
callable beginning three years after issuance by
the Company with sixty days notice. The convertible
preferred stock has a liquidation preference
equivalent to $6 per share plus all then accrued
and unpaid cumulative dividends.
Stock Options and Warrants
The Company has established an Employee Stock
Option Plan (the Plan). The Company has reserved
320,000 shares of its Common Stock for issuance
upon the exercise of options available for grant
under the Plan. Options are granted under the plan
at not less than the market price of the
Company stock. The options expire after ten
years. Options granted under the Plan will include
incentive stock options (ISOs) as defined in
Section 422 of the Internal Revenue Code and non-
qualified stock options (NQSOs). Under the terms
of the Plan, all officers and employees are
eligible for ISOs. During the years ended
December 31, 1996, 1995, and 1994, 53,073, 64,899
and 66,321, options were granted under the Plan,
respectively.
Additionally, the Company has established an
Amended and Restated Stock Option Plan for
Non-Employee Directors and Advisors (Director
Plan). The Company has reserved 90,000 shares
of common stock for issuance upon the exercise
of options granted or available for grant to
non-employee directors under the Director Plan.
The Director Plan provides that any person who
becomes a non-employee director of the Company may
receive an option to purchase 4,000 shares at their
fair market value on the date such person becomes
a non-employee director and on each
anniversary date thereafter as long as the
person continues as a non-employee director limited
to the overall number of shares available for
issuance under the Director Plan. Options
that expire or are canceled may be re-granted
under the Director Plan at the discretion of the
Board of Directors. The options expire after ten
years. During the years ended December 31,
1996, 1995, and 1994, 12,000, 28,000 and 16,000
options were granted under the Director Plan,
respectively.
In connection with the public offering, the
Company issued a warrant for the underwriter to
purchase up to 100,000 shares of its common stock at
$5.00 per share. At December 31, 1996, no warrants
have been exercised.
Stock Options and Warrants
The Corporation has adopted the disclosure-
only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for
Stock-Based
Compensation." Accordingly, no compensation cost
has been recognized for the stock option plans.
Had compensation cost for the Corporation's two
stock option plans been determined based on the
fair value at the grant date for awards in
1995 and 1996 consistent with the provisions of
SFAS No. 123, the Corporation's net earnings and
earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Net loss applicable to common
stockholders - as reported $(1,075,908) $(348,512)
Net loss applicable to common
stockholders - pro forma (1,218,264) (577,126)
Loss per share - as reported (.38) (.12)
Loss per share - pro forma (.43) (.20)
</TABLE>
The fair value of each option grant is estimated on
the date of grant using the Black-Scholes
optionpricing model with the following weighted-
average assumptions used for grants: dividend
yield of 0%; expected volatility of 37%; discount
rate of 9.5%; and expected lives of 10 years.
Convertible Preferred Stock
The following is a table of the shares covered by
the options and warrants granted:
<TABLE>
<CAPTION>
Exercise
Options and Price
Warrants Per Share
<S> <C> <C>
Balance, December 31, 1993 6,000 $ 5.00
Granted 182,321 $3.75-$5.00
Balance, December 31, 1994 188,321 $3.75-$5.00
Granted 92,899 $3.31-$4.25
Balance, December 31, 1995 281,220 $3.31-$5.00
Granted 65,073 $3.00-$3.88
Forfeited (24,500) $3.13-$5.00
Balance, December 31, 1996 321,793 $3.00-$5.00
</TABLE>
The Company granted an option during the year ended
December 31, 1993, to an area director that after
this area director
opened its tenth restaurant in
accordance with the area director agreement, the
area director would be entitled to purchase one
percent of the then outstanding common stock of
the Company for $50,000. As of December 31, 1996,
this area director had opened four restaurants.
Compensation will be recognized equal to the
difference between the fair market value and the
option price at the date the tenth restaurant is
opened.
Note 12 - Income Taxes
As an S Corporation, the Company's taxable
income exceeded its financial reporting income by
$560,000 due to recognition of franchise fees and
costs on a
cash basis. Consequently, the Company will not
pay income taxes on this income when it recognizes
it for financial reporting purposes and
accordingly
recognized a deferred tax asset of $175,000
and revenue of $175,000 which is included in other
income for the year ended December 31,
1994. Although
realization is not assured, management believes it
is more likely than not that all of the deferred
tax asset will be realized. The amount of the
deferred tax asset is considered realizable,
however, could be reduced in the near term if
estimates of the future taxable income are
reduced. The Company has incurred losses of
approximately $1,650,000 before the income on the
deferred tax on the C Corporation conversion
resulting in a deferred tax asset from operations
of approximately $561,000. The Company has impaired
the deferred tax asset resulting from operations. The
following is a summary of the deferred tax asset:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Deferred tax asset related to S
Corporation termination $ 175,000 $ 175,000 $ 175,000
Deferred tax asset related to net
operating losses 561,000 325,000 122,000
736,000 500,000 297,000
Less impairment (561,000) (325,000) (122,000)
Net deferred tax asset $ 175,000 $ 175,000 $ 175,000
</TABLE>
As of December 31, 1996, the Company had a net
operating loss of approximately $1,650,000 expiring in 2011.
Note 13 - Purchase Agreements
During 1996, the Company acquired three existing
restaurants from franchisees. The net assets acquired totaled
approximately $433,000 and were acquired for cash and notes of
approximately $510,000 resulting in goodwill of approximately
$77,000. Subsequent to the acquisition of one of the stores
with net assets of approximately $155,000 it was sold for
$115,000 in the form of a note receivable and a $40,000
loss was recorded.
Effective October 1, 1994, the Company acquired 100% of the
issued and outstanding shares of Schaden & Schaden, Inc.
(Schaden) located in Denver, Colorado for $1,139,000 of which
$263,000 was paid in cash and the remainder through the
issuance of 146,000 shares of the Company's preferred stock
in the amount of approximately $876,000. In addition,
the Company incurred acquisition costs of approximately
$124,000. Prior to the acquisition, Schaden was owned 100%
by two individuals who own 50% of the outstanding shares of
the Company.
Effective December 1, 1994, QOC purchased all of the
partnership interests from the individual partners
(excluding the Company's partnership interest) of the Quiz One
Limited Partnership (the Partnership) located in Michigan for
the original contribution price of $279,000 plus a rate of
return of 10% on the original contribution, $21,326, for a
total purchase price of $300,326. Prior to the acquisition,
the Company owned 50% of the General Partnership interest and
22.275% of the limited partnership interest in the Partnership.
During 1995, The Company acquired the remaining general
partner interest in Quiz One for 2,500 shares of its $.001 par
value common stock valued at $10,000. Subsequent to the
acquisition, the Partnership was dissolved.
Both the Schaden and Partnership acquisitions have been
accounted for as a reorganization of companies under common
control as the entities had significant common ownership.
Note 14 - Employee Benefit Plan
The Company has adopted a 401(k) plan during 1995 for its
employees. Participation is voluntary and
employees are eligible to participate at age 21 and after
one year of employment with the Company. The
Company matches 50% of the employee's contribution up to 6%
of the employee's salary. The Company may also make a
discretionary contribution and/or an additional matching
contribution.
A participant's vested benefit is fully distributed upon
death or disability and is distributed upon termination
of employment according to the following vested schedule:
<TABLE>
<CAPTION>
Years of
Services Percentage
<S> <C>
1 0%
2 25%
3 50%
4 75%
5 100%
</TABLE>
The Company has contributed $10,525 and $19,878 to the Plan
for the years ended December 31, 1996 and 1995, respectively.
INDEX
1. Exhibit 3.3
ARTICLES OF AMENDMENT TO THE ARTICLES OF
INCORPORATION
2. Exhibit 3.4
BYLAWS OF THE QUIZNO'S CORPORATION ADOPTED
AUGUST 25, 1994, AS AMENDED
3. Exhibit 9.3
SECOND AMENDMENT TO VOTING TRUST AGREEMENT
4. Exhibit 10.4
AMENDED AND RESTATED STOCK
OPTION PLAN FOR NON-EMPLOYEE
DIRECTORS AND ADVISORS
5. Exhibit 10.18
INVESTMENT AGREEMENT
6. Exhibit 10.20
SECURITY AGREEMENT
QUIZNO'S EXHIBITS
Exhibit 3.3
Mail to: Secretary of
State Corporations Section
1560 Broadway, Suite 200
Denver, CO 80202
(303) 894-2251
MUST BE TYPED Fax (303) 894-2242
FILING FEE: $25.00
MUST SUBMIT TWO COPIES
ARTICLES OF AMENDMENT
Please include a typed TO THE
self-addressed envelope ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation
Act, the undersigned corporation adopts the following
Articles of Amendment to its Articles of Incorporation:
FIRST: The name of the corporation is The Quizno's
Franchise Corporation.
SECOND: The following amendment to the Articles of Incorporation
was adopted on May 25, 1995, as prescribed by the
Colorado Business
Corporation Act, in the manner marked with an X below:
____ No shares have been issued or Directors Elected
Action by Incorporators
____ No shares have been issued but Directors Elected
Action by Directors
____ Such amendment was adopted by the board of
directors where shares have been issued.
x Such amendment was adopted by a vote of the
shareholders. The number of shares voted for the amendment
was sufficient for approval.
"RESOLVED, that the Amended and Restated Articles of
Incorporation of The Quizno's Franchise Corporation is hereby
amended by deleting Article I in its entirety and substituting the
following therefor:
ARTICLE I
Name
The name of the Corporation is: The Quizno's
Corporation."
THIRD: The manner, if not set forth in such amendment, in which
any exchange, reclassification, or cancellation of issued shares
provided for in the amendment shall be effected, is as follows:
If these amendments are to have a delayed effective date, please
list that date:
(Not to exceed ninety (90) days from the date of filing)
The Quizno's Franchise Corporation
By /s/ Richard F. Schaden
Its Secretary
Title
Exhibit 3.4
BYLAWS
OF
THE QUIZNO'S CORPORATION
ADOPTED AUGUST 25, 1994, AS AMENDED
ARTICLE I.
Offices and Agents
1. Principal Office. The principal office of the
Corporation may be located within or without the State of Colorado,
as designated by the most recent filing with the Secretary of State
of Colorado. The Corporation may have other offices and places of
business at such places within or without the State of Colorado as
shall be determined by the directors.
2. Registered Office. The registered office of the
Corporation required by the Colorado Business Corporation Act must be
continually maintained in the State of Colorado, and it may be, but
need not be, identical with the principal office, if located in the
State of Colorado. The address of the registered office of the
Corporation may be changed from time to time as provided by the
Colorado Business Corporation Act.
3. Registered Agent. The Corporation shall maintain a
registered agent in the State of Colorado as required by the Colorado
Business Corporation Act. Such registered agent may be changed from
time to time as provided by the Colorado Business Corporation Act.
ARTICLE II
Shareholders Meetings
1. Annual Meetings. The annual meeting of the
shareholders of the Corporation shall be held at a date and time
fixed by resolution of the board of directors or by the president in
the absence of action by the board of directors. The annual meeting
of the shareholders shall be held for the purpose of electing
directors and transacting such other corporate business as may come
before the meeting. If the election of directors is not held as
provided herein at any annual meeting of the shareholders, or at any
adjournment thereof, the board of directors shall cause the election
to be held at a special meeting of the shareholders as soon
thereafter as it may conveniently be held.
Notice of an annual meeting need not include a description
of the purpose or purposes of the meeting except when the purpose of
the meeting is to consider (i) an amendment to the Articles of
Incorporation of the Corporation, (ii) a merger or share exchange in
which the Corporation is a party and, with respect to a share
exchange, in which the Corporation's shares will be acquired, (iii)
the sale, lease, exchange or other disposition, other than in the
usual and regular course of business, of all or substantially all of
the property of the Corporation or of another entity which the
Corporation controls, in each case with or without goodwill, (iv) the
dissolution of the Corporation or (v) any other purpose for which a
statement of purpose is required by the Colorado Business Corporation
Act.
2. Special Meetings. Unless otherwise prescribed by the
Colorado Business Corporation Act, special meetings of the
shareholders of the Corporation may be called at any time by the
chairman of the board of directors, if any, by the president, by
resolution of the board of directors or upon receipt of one or more
written demands for a meeting, stating the purpose or purposes for
which it is to be held, signed and dated by the holders of at least
ten percent (10%) of all votes entitled to be cast on any issue
proposed to be considered at the meeting. Notice of a special
meeting shall include a description of the purpose or purposes for
which the meeting is called.
3. Place of Meeting. The annual meeting of the
shareholders of the Corporation may be held at any place, either
within or without the State of Colorado, as may be designated by the
board of directors. Except as limited by the following sentence, the
person or persons calling any special meeting of the shareholders may
designate any place, within or without the State of Colorado, as the
place for the meeting. If no designation is made or if a special
meeting shall be called other than by the board of directors, the
chairman of the board of directors or the president, the place of
meeting shall be the principal office of the Corporation. A waiver
of notice signed by all shareholders entitled to vote at a meeting
may designate any place as the place for holding such meeting.
4. Notice of Meeting. Written notice stating the date,
time and place of the meeting shall be given no fewer than ten (10)
and no more than sixty (60) days before the date of the meeting,
except that if the number of authorized shares is to be increased, at
least thirty (30) days' notice shall be given. Notice shall be given
personally or by mail, private carrier, telegraph, teletype,
electronically transmitted facsimile or other form of wire or
wireless communication by or at the direction of the president, the
secretary, or the officer or other person calling the meeting to each
shareholder of record entitled to vote at such meeting. If mailed
and if in a comprehensible form, such notice shall be deemed to be
given and effective when deposited in the United States mail,
addressed to the shareholder at his or her address as it appears in
the Corporation's current record of shareholders, with postage
prepaid. If notice is given other than by mail, and provided that
the notice is in comprehensible form, the notice is given and
effective on the date received by the shareholder. No notice need be
sent to any shareholder if three successive notices mailed to the
last known address of such shareholder have been returned as
undeliverable until such time as another address for such shareholder
is made known to the Corporation by such shareholder.
When a meeting is adjourned to a different date, time or
place, notice need not be given of the new date, time or place if the
new date, time or place is announced at the meeting before
adjournment. At the adjourned meeting, the Corporation may transact
any business which might have been transacted at the original
meeting. If the adjournment is for more than 120 days, or if a new
record date is fixed for the adjourned meeting, a new notice of the
adjourned meeting shall be given to each shareholder of record
entitled to vote at the meeting as of the new record date.
5. Waiver of Notice. A shareholder may waive any notice
of a meeting either before or after the time and date of the meeting.
The waiver shall be in writing, be signed by the shareholder entitled
to the notice and be delivered to the Corporation for inclusion in
the minutes or filing with the corporate records, but such delivery
and filing shall not be conditions for effectiveness.
A shareholder's attendance at a meeting waives objection to
(i) lack of notice or defective notice of the meeting, unless the
shareholder at the beginning of the meeting objects to holding the
meeting because of lack of notice or defective notice, and (ii)
consideration of a particular matter at the meeting that is not
within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter when it is
presented.
6. Fixing of Record Date. In order to determine
shareholders entitled (i) to be given notice of a shareholders
meeting (ii) to demand a special meeting, (iii) to vote, or (iv) to
take any other action, the board of directors may fix a future date
as the record date, such date, in any case, shall not be more than
seventy (70) days and in case of a meeting of shareholders not less
than ten (10) days prior to the date on which the particular action
requiring such determination of shareholders is to be taken. If no
record date is fixed, the record date shall be the date on which
notice of the meeting is mailed or the date on which a resolution of
the board of directors providing for a distribution is adopted, as
the case may be. When a determination of shareholders entitled to
vote at any meeting of shareholders is made as provided in this
Section 6, such determination shall apply to any adjournment thereof.
Notwithstanding the foregoing, the record date for
determining the shareholders entitled to take action without a
meeting or entitled to be given notice of action so taken shall be
the date a writing upon which the action is taken is first received
by the Corporation. The record date for determining shareholders
entitled to demand a special meeting shall be the date of the
earliest of the demands pursuant to which the meeting is called.
7. Voting List. After fixing a record date for a
shareholder's meeting, the Corporation shall prepare a list of names
of all its shareholders who are entitled to be given notice of the
meeting. The list shall be arranged by voting groups and within each
voting group by class or series, and shall show the address of, and
the number of shares of each class or series that are held by each
shareholder.
The shareholders' list shall be available for inspection by
any shareholder, beginning the earlier of ten (10) days before the
meeting for which the list was prepared or two (2) business days
after notice of the meeting is given and continuing through the
meeting, and any adjournment thereof, at the Corporation's principal
office or at a place identified in the notice of the meeting in the
city where the meeting will be held.
A shareholder, his agent or attorney, may upon written
demand, inspect and copy the list during regular business hours and
during the period it is available for inspection, provided, (i) the
shareholder has been a shareholder for at least three (3) months
immediately preceding the demand or holds at least five percent (5%)
of all outstanding shares of any class of shares as the date of the
demand, (ii) the demand is made in good faith and for a purpose
reasonably related to the demanding shareholder's interest as a
shareholder, (iii) the shareholder describes with reasonable
particularity the purpose and records the shareholder desires to
inspect, (iv) the records are directly connected with the described
purpose and (v) the shareholder pays a reasonable charge covering the
costs of labor and material for such copies, not to exceed the cost
of production and reproduction.
8. Proxies. At all meetings of shareholders, a
shareholder may vote by proxy by signing an appointment form either
personally or by his or her duly authorized attorney-in-fact. A
shareholder may also appoint a proxy by transmitting or authorizing
the transmission of a telegram, teletype, or other electronic
transmission providing a written statement of the appointment to the
proxy, to a proxy solicitor, proxy support service organization or
other person duly authorized by the proxy to receive appointments as
agent for the proxy, or to the Corporation. The transmitted
appointment shall set forth or be transmitted with written evidence
from which it can be determined that the shareholder transmitted or
authorized the transmission of the appointment. The proxy appointment
form shall be filed with the Secretary of the Corporation by or at
the time of the meeting. The appointment of a proxy is effective
when received by the Corporation and is valid for eleven (11) months
unless a different period is expressly provided in the appointment
form.
Any complete copy, including an electronically transmitted
facsimile, of an appointment of a proxy may be substituted for or
used in lieu of the original appointment for any purpose for which
the original appointment could be used.
Revocation of a proxy does not affect the right of the
Corporation to accept the proxy's appointment unless (i) the
Corporation had notice that the appointment was coupled with an
interest and notice that the interest is extinguished is received by
the Secretary or other officer or agent authorized to tabulate votes
before the proxy exercises his authority under the appointment or
(ii) other notice of the revocation of the appointment is received by
the Secretary or other officer or agent authorized to tabulate votes
before the proxy exercises his authority under the appointment.
Other notice of revocation may, in the discretion of the Corporation,
be deemed to include the appearance at a shareholders meeting of the
shareholder who granted the proxy appointment and his voting in
person on any matter subject to a vote at such meeting.
The death or incapacity of the shareholder appointing a
proxy does not affect the right of the Corporation to accept the
proxy's authority unless notice of the death or incapacity is
received by the Secretary or other officer or agent authorized to
tabulate votes before the proxy exercised his authority under the
appointment.
The Corporation shall not be required to recognize an
appointment made irrevocable if it has received a writing revoking
the appointment signed by the shareholder either personally or by the
shareholder's attorney-in-fact, notwithstanding that the revocation
may be a breach of an obligation of the shareholder to another person
not to revoke the appointment.
A transferee for value of shares subject to an irrevocable
appointment may revoke the appointment if the transferee did not know
of its existence when he acquired the shares and the irrevocable
appointment was not noted on the certificate representing the shares.
Subject to the provisions of Article II, Section 10 below
or any express limitation on the proxy's authority appearing on the
appointment form, a corporation is entitled to accept the proxy's
vote or other action as that of the shareholder making the
appointment.
9. Voting Rights. Each outstanding share, regardless of
class, is entitled to one vote and each fractional share is entitled
to a corresponding fractional vote, on each matter voted on at a
shareholder's meeting except to the extent that the voting rights of
the shares of any class or classes are limited or denied by the
Articles of Incorporation. Only shares are entitled to vote. Voting
on any question or in any election may be by voice vote unless the
presiding officer shall order, or any shareholder shall demand, that
voting be by ballot.
Cumulative voting in the election of directors shall not be
permitted.
Except as otherwise ordered by a court of competent
jurisdiction upon a finding that the purpose of this Section 9 would
not be violated in the circumstances presented to the court, the
shares of the Corporation are not entitled to be voted if they are
owned, directly or indirectly, by another corporation, domestic or
foreign, and the Corporation owns, directly or indirectly, a majority
of the shares entitled to vote for directors of the other
corporation, except to the extent the other corporation holds the
shares in a fiduciary capacity.
Redeemable shares are not entitled to be voted after notice
of redemption is mailed to holders and a sum sufficient to redeem the
shares has been deposited with a bank, trust company, or other
financial institution under an irrevocable obligation to pay the
holders the redemption price on surrender of the shares.
10. Corporation's Acceptance of Votes. If the name signed
on a vote, consent, waiver, proxy appointment, or proxy appointment
revocation corresponds to the name of a shareholder, the Corporation,
if acting in good faith, is entitled to accept the vote, consent,
waiver, proxy appointment, or proxy appointment revocation and to
give it effect as the act of the shareholder. If the name signed on
a vote, consent, waiver, proxy appointment, or proxy appointment
revocation does not correspond to the name of a shareholder, the
Corporation, if acting in good faith, is nevertheless entitled to
accept the vote, consent, waiver, proxy appointment, or proxy
appointment revocation and to give it effect as the act of the
shareholder if:
(a) The shareholder is an entity and the name signed
purports to be that of an officer or agent of the entity;
(b) The name signed purports to be that of an
administrator, executor, guardian, or conservator representing the
shareholder and, if the Corporation requests, evidence of fiduciary
status acceptable to the Corporation has been presented with respect
to the vote, consent, waiver, proxy appointment or proxy appointment
revocation;
(c) The name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder and, if the Corporation
requests, evidence of this status acceptable to the Corporation has
been presented with respect to the vote, consent, waiver, proxy
appointment or proxy appointment revocation;
(d) The name signed purports to be that of a pledgee,
beneficial owner, or attorney-in-fact of the shareholder and, if the
Corporation requests, evidence acceptable to the Corporation of the
signatory's authority to sign for the shareholder has been presented
with respect to the vote, consent, waiver, proxy appointment or proxy
appointment revocation;
(e) Two or more persons are the shareholder as covenants
or fiduciaries and the name signed purports to be the name of at
least one of the covenants or fiduciaries and the person signing
appears to be acting on behalf of all the covenants or fiduciaries;
or
(f) The acceptance of the vote, consent, waiver, proxy
appointment, or proxy appointment revocation is otherwise proper
under rules established by the Corporation that are not inconsistent
with the provisions of this Section 10.
The Corporation is entitled to reject a vote, consent,
waiver, proxy appointment or proxy appointment revocation if the
Secretary or other officer or agent authorized to tabulate votes,
acting in good faith, has reasonable basis for doubt about the
validity of the signature on it or about the signatory's authority to
sign for the shareholder.
The Corporation and its officer or agent who accepts or
rejects a vote, consent, waiver, proxy appointment or proxy
appointment revocation in good faith and in accordance with the
standards of this Section 10 are not liable in damages for the
consequences of the acceptance or rejection.
11. Quorum and Voting Requirements. A majority of the
votes entitled to be cast on a matter by a voting group shall
constitute a quorum of that voting group for action on the matter
unless a lesser number is authorized by the Articles of
Incorporation. Once a share is represented for any purpose at a
meeting, including the purpose of determining that a quorum exists,
it is deemed present for quorum purposes for the remainder of the
meeting and for any adjournment of that meeting, unless otherwise
provided in the Articles of Incorporation or unless a new record date
is or shall be set for that adjourned meeting.
If a quorum exists, action on a matter other than the
election of directors by a voting group is approved if the votes cast
within the voting group favoring the action exceed the votes cast
within the voting group opposing the action, unless the vote of a
greater number or voting by classes is required by law or the
Articles of Incorporation. For election of directors, those
candidates receiving the most votes shall be elected.
12. Adjournments. If less than a quorum of shares
entitled to vote is represented at any meeting of the shareholders, a
majority of the shares so represented may adjourn the meeting from
time to time without further notice, for a period not to exceed 120
days at any one adjournment. If a quorum is present at such
adjourned meeting, any business may be transacted which might have
been transacted at the meeting as originally noticed. Any meeting of
the shareholders may adjourn from time to time until its business is
completed.
13. Action by Shareholders Without Meeting. Any action
required or permitted to be taken at a shareholders' meeting may be
taken without a meeting if all of the shareholders entitled to vote
thereon consent to such action in writing. Action taken under this
Section 13 shall be effective as of the date the last writing
necessary to effect the action is received by the Corporation, unless
all of the writings necessary to effect the action specify a later
date as the effective date of the action, in which case such later
date shall be the effective date of the action. If the Corporation
receives writings describing and consenting to the action signed by
all of the shareholders entitled to vote with respect to the action,
the effective date of the action may be any date that is specified in
all of the writings as the effective date of the action. Any such
writings may be received by the Corporation by electronically
transmitted facsimile or other form of wire or wireless communication
providing the Corporation with a complete copy thereof, including a
copy of the signature thereto. Action taken under this Section 13
has the same effect as action taken at a meeting of shareholders and
may be described as such in any document.
Any shareholder who has signed a writing describing and
consenting to action taken pursuant to this Section 13 may revoke
such consent by a writing signed by the shareholder describing the
action and stating that the shareholder's prior consent thereto is
revoked, if such writing is received by the Corporation before the
effectiveness of the action.
14. Meetings by Telecommunication. Any or all of the
shareholders may participate in an annual or special shareholders'
meeting by, or the meeting may be conducted through the use of, any
means of communication by which all persons participating in the
meeting may hear each other during the meeting. A shareholder
participating in a meeting by this means is deemed to be present in
person at the meeting.
ARTICLE III
Board of Directors
1. General Powers. All corporate powers shall be
exercised by or under the authority of, and the business and affairs
of the Corporation shall be managed under the direction of, the board
of directors, except as otherwise provided in the Colorado Business
Corporation Act or the Articles of Incorporation.
2. Number, Qualifications and Term of Office. The number
of directors of the Corporation shall be fixed from time to time by
resolution of the board of directors, within a range of no less than
three (3) or more than nine (9). A director shall be a natural
person who is eighteen years or older. A director need not be a
resident of the State of Colorado or a shareholder of the
Corporation.
Directors shall be elected at each annual meeting of
shareholders and shall hold such office until the next annual meeting
of shareholders and until his successor is elected and qualifies. A
decrease in the number of directors does not shorten an incumbent
director's term.
3. Resignation, Vacancies. Any director may resign at
any time by giving written notice to the Corporation. A resignation
of a director is effective when the notice is received by the
Corporation unless the notice specifies a later effective date.
Unless otherwise specified in the notice, the acceptance of such
resignation by the Corporation shall not be necessary to make it
effective. Any vacancy on the board of directors may be filled by
the affirmative vote of a majority of the shareholders or by the
affirmative vote of the board of directors even if less than a quorum
is remaining in office. If elected by the directors, the director
shall hold office until the next annual shareholders' meeting at
which directors are elected. If elected by the shareholders, the
director shall hold office for the unexpired term of his or her
predecessor in office, except that, if the director's predecessor was
elected by the directors to fill a vacancy, the director elected by
the shareholders shall hold office for the unexpired term of the last
predecessor elected by the shareholders.
4. Removal of Directors by Shareholders. Unless
otherwise provided in the Articles of Incorporation, the shareholders
may remove one or more directors with or without cause. A director
may be removed by the shareholders only at a meeting called for the
purpose of removing the director and the meeting notice states that
the purpose, or one of the purposes, of the meeting is removal of the
director.
5. Removal of Directors by Judicial Proceeding. A
director may be removed by the District Court of the Colorado county
where the principal office is located or if the Corporation has no
principal office in the State of Colorado, by the District Court of
the Colorado county in which its registered office is located, upon a
finding by the District Court that the director engaged in fraudulent
or dishonest conduct or gross abuse of authority or discretion with
respect to the Corporation and that removal is in the best interests
of the Corporation. The judicial proceeding may be commenced either
by the Corporation or by shareholders holding at least ten percent
(10%) of the outstanding shares of any class.
6. Compensation. By resolution of the board of
directors, any director may be paid any one or more of the following:
his expenses, if any, of attendance at meetings; a fixed sum for
attendance at each meeting; a stated salary as director; or such
other compensation as the Corporation and the director may reasonably
agree upon. No such payment shall preclude any director from serving
the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE IV
Meetings of the Board
1. Place of Meetings. The regular or special meetings of
the board of directors shall be held at the principal office of the
Corporation unless otherwise designated.
2. Regular Meetings. The board of directors shall meet
each year after the annual meeting of the shareholders for the
purpose of appointing officers and transacting such other business as
may come before the meeting. The board of directors may provide, by
resolution, for the holding of additional regular meetings without
other notice than such resolution.
3. Special Meetings. Special meetings of the board of
directors may be called at any time by the chairman of the board, if
any, by the president or by a majority of the members of the board of
directors.
4. Notice of Meetings. Notice of the regular meetings of
the board of directors need not be given. Except as otherwise
provided by these Bylaws or the laws of the State of Colorado,
written notice of each special meeting of the board of directors
setting forth the time and the place of the meeting shall be given to
each director not less than two (2) days prior to the date and time
fixed for the meeting. Notice of any special meeting may be either
personally delivered or mailed to each director at his business
address, or by notice transmitted by telegraph, telex, electronically
transmitted facsimile or other form of wire or wireless
communication. If mailed, such notice shall be deemed to be given
and to be effective on the earlier of (i) three (3) days after such
notice is deposited in the United States mail properly addressed,
with postage prepaid, or (ii) the date shown on the return receipt if
mailed by registered or certified mail return receipt requested. If
notice be given by telex, electronically transmitted facsimile or
other similar form of wire or wireless communication, such notice
shall be deemed to be given and to be effective when sent, and with
respect to a telegram, such notice shall be deemed to be given and to
be effective when the telegram is delivered to the telegraph company.
If a director has designated in writing one or more reasonable
addresses or facsimile numbers for delivery of notice to him, notice
sent by mail, telegraph, telex, electronically transmitted facsimile
or other form of wire or wireless communication shall not be deemed
to have been given or to be effective unless sent to such addresses
or facsimile numbers, as the case may be. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of
the board of directors need be specified in the notice or waiver of
notice of such meeting.
5. Waiver of Notice. A director may, in writing, waive
notice of any special meeting of the board of directors either
before, at, or after the meeting. Such waiver shall be delivered to
the Corporation for filing with the corporate records. Attendance or
participation of a director at a meeting waives any required notice
of that meeting unless at the beginning of the meeting or promptly
upon the director's arrival, the director objects to holding the
meeting or transacting business at the meeting because of lack of
notice or defective notice and does not thereafter vote for or assent
to action taken at the meeting.
6. Quorum, Manner of Acting. At meetings of the board of
directors a majority of the number of directors fixed by resolution
of the board shall constitute a quorum for the transaction of
business. If the number of directors is not fixed, then a majority
of the number in office immediately before the meeting begins, shall
constitute a quorum. If a quorum is present when a vote is taken,
the affirmative vote of a majority of directors present is the act of
the board of directors unless the vote of a greater number is
required by these Bylaws, the Articles of Incorporation or the
Colorado Business Corporation Act.
7. Presumption of Assent. A director who is present at a
meeting of the board of directors when corporate action is taken is
deemed to have assented to the action taken unless:
(a) the director objects at the beginning of such meeting
or promptly upon his or her arrival, to the holding of the meeting or
the transacting of business at the meeting and does not thereafter
vote for or assent to any action taken at the meeting;
(b) the director contemporaneously requests that his or
her dissent or abstention as to any specific action taken be entered
in the minutes of such meeting; or
(c) the director causes written notice of his or her
dissent or abstention as to any specific action to be received by the
presiding officer of such meeting before its adjournment or by the
Corporation promptly after adjournment of such meeting.
The right of dissent or abstention as to a specific action
taken in a meeting of a board is not available to a director who
votes in favor of the action taken.
8. Committees. The board of directors may, by a
resolution adopted by a majority of all of the directors in office
when the action is taken, designate one of more of its members to
constitute an executive committee, and one or more other committees.
To the extent provided in the resolution, each committee shall have
and may exercise all of the authority of the board of directors,
except that no such committee shall have the authority to: (i)
authorize distributions; (ii) approve or propose to shareholders
action required by the Colorado Business Corporation Act to be
approved by shareholders; (iii) fill vacancies on the board of
directors or any committee thereof; (iv) amend the Articles of
Incorporation; (v) adopt, amend or repeal these Bylaws; (vi) approve
a plan of merger not requiring shareholder approval; (vii) authorize
or approve the reacquisition of shares except in accordance with a
formula or method prescribed by the board of directors; or (viii)
authorize or approve the issuance or sale of shares, or a contract
for the sale of shares, or determine the designation, relative
rights, preferences and limitations of a class or series of shares;
except that the board of directors, may authorize a committee or an
officer to do so within limits specifically prescribed by the board
of directors. The conduct of committee meetings shall comply with
the provisions of this Article IV relating to board of director
meetings.
The creation of, delegation of authority to, or action by a
committee does not alone constitute compliance by a director with the
standards of conduct set forth in Article V.
9. Informal Action by Directors. Any action required or
permitted be taken at a board of directors' meeting may be taken
without a meeting if all members of the board consent to such action
in writing. Action taken under this Section 9 is effective at the
time the last director signs a writing describing the action taken
unless the directors establish a different effective date, and
unless, before such time, a director has revoked his or her consent
by a writing signed by the director and received by the president or
secretary. Action taken pursuant to this Section 9 has the same
effect as action taken at a meeting of the directors and may be
described as such in any document.
10. Telephonic Meetings. Members of the board of
directors may participate in a regular or special meeting by or
conduct the meeting through the use of any means of communication by
which all directors participating may hear each other during the
meeting. A director participating in a meeting by this means is
deemed to be present in person at the meeting.
ARTICLE V
Standards of Conduct
Each director shall perform his or her duties as a
director, including his or her duties as a member of any committee,
and each officer with discretionary authority shall discharge his or
her duties under that authority, (i) in good faith, (ii) with the
care an ordinarily prudent person in a like position would exercise
under similar circumstances, and in a manner he or she reasonably
believes to be in the best interest of the Corporation.
In discharging his or her duties, a director or officer is
entitled to rely on information, opinions, reports, or statements,
including financial statements and other financial data, if prepared
or presented by (i) one or more officers or employees of the
Corporation whom the director or officer reasonably believes to be
reliable and competent in the matters presented, (ii) legal counsel,
a public accountant, or other person as to matters which the director
or officer reasonably believes to be within such persons'
professional or expert competence or (iii) in the case of a director,
a committee of the board of directors of which the director is not a
member if the director reasonably believes the committee merits
confidence.
A director or officer is not acting in good faith if he or
she has knowledge concerning the matter in question that makes
reliance otherwise permitted under this Article V unwarranted.
A director or officer is not liable as such to the
Corporation or its shareholders for any action he or she takes or
omits to take as a director or officer, as the case may be, if, in
connection with such action or omission, he or she performed the
duties of the position in compliance with this Article V.
ARTICLE VI
Officers and Agents
1. General. The officers of the Corporation shall
consist of a president, secretary and treasurer, appointed annually
by the board of directors. Each officer shall be a natural person
eighteen years of age or older. The board of directors or the
president may appoint such other officers, assistant officers,
committees and agents, including a chairman of the board, vice
chairman of the board, one or more vice presidents, assistant
secretaries and assistant treasurers, as they may consider necessary.
To the extent not provided in these bylaws, the board of directors or
the president, as the case may be, shall from time to time determine
the procedure for the appointment of officers, their term of office,
their authority and duties and their compensation. One person may
hold more than one office. In all cases where the duties of any
officer, agent, or employee are not prescribed by these Bylaws or by
the board of directors, such officer, agent or employee shall follow
the orders and instructions of the president of the Corporation.
Any officer appointed by the board of directors shall have
the power to execute and deliver on behalf of and in the name of the
Corporation any instrument requiring the signature of an officer of
the Corporation, except as otherwise provided in these Bylaws or
where the execution and delivery thereof shall be expressly delegated
by the board of directors to some other officer or agent of the
Corporation. Unless authorized to do so by these Bylaws or by the
board of directors, no officer, agent or employee shall have any
power or authority to bind the Corporation in any way, to pledge its
credit or to render it liable pecuniarily for any purpose or in any
amount.
2. Appointment and Term of Office. The officers of the
Corporation appointed by the board of directors shall be appointed at
each annual meeting of the board held after each annual meeting of
the shareholders. If the appointment of officers is not made at such
meeting or if an officer or officers are to be appointed by another
officer or officers of the Corporation, such appointments shall be
made as soon thereafter as practicable. Officers appointed by the
president may be appointed for indeterminate terms.
3. Vacancies. A vacancy in any office, however
occurring, may be filled by the board of directors, or by the officer
or officers authorized by these bylaws or the board of directors, for
the unexpired portion of the officer's term.
4. Resignation. An officer may resign at any time by
giving written notice of resignation to the Corporation. A
resignation of an officer is effective when the notice is received by
the Corporation unless the notice specifies a later effective date.
If a resignation is made effective at a later date, the board of
directors may permit the officer to remain in office until the
effective date and may fill the pending vacancy before the effective
date if the board of directors provides that the successor does not
take office until the effective date, or the board of directors may
remove the officer at any time before the effective date and may fill
the resulting vacancy.
5. Removal. Any officer or agent of this Corporation may
be removed with or without cause by the board of directors, an
officer or officers authorized by the board of directors, or the
officer that appointed such officer or agent.
6. Contract Rights. Appointment of an officer does not
itself create contract rights. An officer's removal does not affect
the officer's contract rights, if any, with the Corporation. An
officer's resignation does not affect the Corporation's contract
rights, if any, with the officer.
7. Chairman of the Board. The chairman of the board, if
any, shall preside as chairman at meetings of the shareholders and
the board of directors. He or she shall, in addition, have such
other duties as the board may prescribe that he or she perform. At
the request of the president, the chairman of the board may, in the
case of the president's absence or inability to act, temporarily act
in his or her place. In the case of death of the president or in the
case of his or her absence or inability to act without having
designated the chairman of the board to act temporarily in his place,
the chairman of the board shall perform the duties of the president,
unless the board of directors, by resolution, provides otherwise. If
the chairman of the board shall be unable to act in place of the
president, the vice presidents may exercise such powers and perform
such duties as provided in Section 9 below.
8. Vice-Chairman of the Board. The Vice Chairman of the
Board, if any, in the absence of the Chairman of the Board, shall
preside at all meetings of the shareholders and of the Board of
Directors. He shall have such other powers and duties as may from
time to time be prescribed by the Board of Directors.
9. President. Subject to the direction and supervision
of the board of directors, the president shall be the chief executive
officer of the Corporation and shall have general and active control
of its affairs and business and general supervision of its officer,
agents and employees. In the event the position of chairman or vice-
chairman of the board shall not be occupied or the chairman or vice-
chairman shall be absent or otherwise unable to act, the president
shall preside at meetings of the shareholders and directors and shall
discharge the duties of the presiding officer. The president may
sign, with the secretary or any other proper officer of the
Corporation thereunto authorized by the board of directors,
certificates for shares of the Corporation, any deeds, mortgages,
bonds, contracts, or other instruments which the board of directors
has authorized to be executed, except in cases where the signing and
execution thereof shall be expressly delegated by the board of
directors or by these Bylaws to some other officer or agent of the
Corporation, or shall be required by law to be otherwise signed or
executed. Unless otherwise directed by the board of directors, the
president shall attend in person or by substitute appointed by him,
or shall execute on behalf of the Corporation written instruments
appointing a proxy or proxies to represent the Corporation at, all
meetings of the shareholders of any other corporation in which the
Corporation holds any stock. On behalf of the Corporation, the
president may in person or by substitute or by proxy execute written
waivers of notice and consents with respect to any such meetings. At
all such meetings and otherwise, the president, in person or by
substitute or proxy, may vote the stock held by the Corporation,
execute written consents and other instruments with respect to such
stock and exercise any and all rights and powers incident to the
ownership of said stock.
10. Vice Presidents. Each vice president shall have such
powers and perform such duties as the board of directors may from
time to time prescribe or as the president may from time to time
delegate to him. At the request of the president, in the case of the
president's absence or inability to act, any vice president may
temporarily act in his place. In the case of the death of the
president, or in the case of his absence or inability to act without
having designated a vice president or vice presidents to act
temporarily in his place, the board of directors, by resolution, may
designate a vice president or vice presidents, to perform the duties
of the president. If no such designation shall be made, the chairman
of the board of directors, if any, shall exercise such powers and
perform such duties, as provided in Section 8 of this Article V, but
if the Corporation has no chairman of the board of directors, or if
the chairman is unable to act in place of the president, any of the
vice presidents appointed by the board of directors may exercise such
powers and perform such duties.
11. Secretary. The secretary shall (i) prepare, or cause
to be prepared, and maintain as permanent records the minutes of the
proceedings of the shareholders and the board of directors or any
committee thereof, a record of all actions taken by the shareholders
or board of directors or any committee thereof without a meeting and
a record of all waivers of notice of meetings of shareholders and of
the board of directors or any committee thereof, (ii) see that all
notices are duly given in accordance with the provisions of these
Bylaws and as required by law, (iii) serve as custodian of the
records and of the seal of the Corporation and affix the seal to all
documents, (iv) keep at the registered office or principal place of
business, a record containing the names and addresses of all
shareholders in a form that permits preparation of a list of
shareholders arranged by voting group and by class or series of
shares within each voting group, that is alphabetical within each
class or series and that shows the address of, and the number of
shares of each class or series held by, each shareholder, unless such
a record shall be kept at the office of the Corporation's transfer
agent or registrar, (v) maintain at the Corporation's principal
office the originals or copies of the Corporation's Articles of
Incorporation, Bylaws, minutes of all shareholders' meeting and
records of all action taken by shareholders without meeting for the
past three years, all written communications within the past three
years to shareholders as a group or to the holders of any class or
series of shares as a group, a list of the names and business
addresses of the current directors and officers, a copy of the
Corporation's most recent corporate report filed with the Secretary
of State, and financial statements showing in reasonable detail the
Corporation's assets and liabilities and results of operations for
the last three years, (vi) have general charge of the stock transfer
books of the Corporation, unless the Corporation has a transfer
agent, (vii) authenticate records of the Corporation and (viii) in
general, perform all duties incident to the office of secretary and
such other duties as from time to time may be assigned to him by the
president or by the board of directors. Assistant secretaries, if
any, shall have the same duties and powers, subject to supervision by
the secretary. The directors and/or shareholders may however
respectively designate a person other than the secretary or assistant
secretary to keep the minutes of their respective meetings.
12. Treasurer. The treasurer shall be the chief financial
officer of the Corporation, shall have care and custody of all
corporate funds, securities, evidences of indebtedness and other
personal property of the Corporation and shall deposit the same in
accordance with the instructions of the board of directors. The
treasurer shall receive and give receipts and acquittances for money
paid in on account of the Corporation, and shall pay out of the
Corporation's funds on hand all bills, payrolls and other just debts
of the Corporation of whatever nature upon maturity. Such power
given to the treasurer to deposit and disburse funds shall not,
however, preclude any other officer or employee of the Corporation
from also depositing and disbursing funds when authorized to do so by
the board of directors. The treasurer shall, if required by the
board of directors, give the Corporation a bond in such amount and
with such surety or sureties as may be ordered by the board of
directors for the faithful performance of duties of his office. The
treasurer shall have such other powers and perform such other duties
as may be from time to time prescribed by the board of directors or
the president. The assistant treasurers, if any, shall have the same
powers and duties, subject to the supervision of the treasurer.
The treasurer shall also be the principal accounting
officer of the Corporation and shall prescribe and maintain the
methods and systems of accounting to be followed, keep complete books
and records of account as required by the Colorado Business
Corporation Act, prepare and file all local, state and federal tax
returns, prescribe and maintain an adequate system of internal audit
and prepare and furnish the president and the board of directors
statements of account showing the financial position of the
Corporation and the results of its operations.
13. Assistant Secretaries and Assistant Treasurers. The
Assistant Secretaries and the Assistant Treasurers respectively (in
the order designated by the Board of Directors or, lacking such
designation, by the President), in the absence of the Secretary or
Treasurer, as the case may be, shall perform the duties and exercise
the powers of such Secretary or Treasurer and shall perform such
other duties as the Board of Directors shall prescribe.
14. Delegation of Duties. Whenever an officer is absent,
or whenever, for any reason, the board of directors may deem it
desirable, the board may delegate the powers and duties of an officer
to any other officer or officers or to any director or directors.
15. Bond of Officers. The board of directors may require
any officer to give the Corporation a bond in such sum and with such
surety or sureties as shall be satisfactory to the board of directors
for such terms and conditions as the board of directors may specify,
including, without limitation, for the faithful performance of his
duties and for the restoration to the Corporation of all property in
his or her possession or under his or her control belonging to the
Corporation.
ARTICLE VII
Share Certificates and the Transfer of Shares
1. Share Certificates. Each share certificate shall
state on its face (i) the name of the Corporation and that it is
incorporated under the laws of the State of Colorado, (ii) the name
of the person to whom the certificate is issued, and (iii) the number
and class of shares and the designation of the series, if any, the
certificate represents. Each share certificate shall be signed,
either manually or in facsimile, by the chairman or vice-chairman of
the board of directors or by the president or the vice-president and
by the treasurer or an assistant treasurer or by the secretary or an
assistant secretary, or such other officers as the board of directors
may designate, by resolution, and may bear the corporate seal or its
facsimile, and such other information as may be deemed necessary or
appropriate. If the person who signed a share certificate either
manually or in facsimile, no longer holds office when the certificate
is issued, the certificate is nevertheless valid. If the Corporation
is authorized to issue different classes of shares or different
series within a class, the certificate shall state conspicuously on
its front or back that the Corporation will furnish the shareholder
information regarding the designations, preferences, limitations and
relative rights of each class and for each series, upon written
request and without charge.
2. Shares Without Certificates. The board of directors
may authorize the issuance by the Corporation of some or all of the
shares of any or all of its classes or series without certificates.
Said authorization shall not affect shares already represented by
certificates until they are surrendered to the Corporation. Within a
reasonable time after the issuance or transfer of shares without
certificates, the Corporation shall send to the shareholder a written
statement of the information required by Section 1 of this Article
VII.
3. Issuance of Shares. Except as provided in the
Articles of Incorporation, the board of directors may authorize the
issuance of shares for consideration consisting of any tangible,
intangible property or benefit to the Corporation, including cash,
promissory notes, services performed and other securities of the
Corporation. The board of directors shall determine that the
consideration received or to be received for the shares to be issued
is adequate. Such determination, in the absence of fraud, is
conclusive insofar as the adequacy of such consideration relates to
whether the shares are validly issued, fully paid and nonassessable.
The promissory note of a subscriber or an affiliate of a subscriber
for shares shall not constitute consideration for the shares unless
the note is negotiable and is secured by collateral other than the
shares, having a fair market value at least equal to the principal
amount of the note. For the purposes of this Section 3, "promissory
note" means a negotiable instrument on which there is an obligation
to pay independent of collateral and does not include a nonrecourse
not. Unless otherwise expressly provided in the Articles of
Incorporation, shares having a par value may be issued for less than
the par value.
4. Lost Certificates. The board of directors may direct
a new certificate to be issued in place of a certificate alleged to
have been destroyed or lost if the owner makes an affidavit or
affirmation of that fact and produces such evidence of loss or
destruction as the board may require. The board, in its discretion,
may as a condition precedent to the issuance of a new certificate
require the owner to give the Corporation a bond as indemnity against
any claim that may be made against the Corporation relating to the
certificate allegedly destroyed or lost.
5. Transfer of Shares.
(a) Shares of the Corporation shall only be transferred on
the stock transfer books of the Corporation by the holder of record
thereof upon the surrender to the Corporation of the share
certificates duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer and such documentary
stamps as may be required by law. In that event, the surrendered
certificates shall be cancelled, new certificates issued to the
persons entitled to them, and the transaction recorded on the books
of the Corporation. The person in whose name shares stand on the
books of the Corporation shall be deemed by the Corporation to be the
owner thereof for all purposes.
(b) The Articles of Incorporation, by these Bylaws, by an
agreement among shareholders, or among shareholders and the
Corporation, may impose restriction on the transfer or registration
or transfer of shares of the Corporation. A restriction does not
affect shares issued before the restriction became effective unless
the holder of such shares acquired such shares with knowledge of the
restriction, is a party to the agreement containing the restriction,
or voted in favor of the restriction or otherwise consented to the
restriction.
(c) A restriction on the transfer or registration of
transfer of shares is valid and enforceable against the holder or a
transferee of the holder if the restriction is authorized by the
Colorado Business Corporation Act and its existence is noted
conspicuously on the front or back of the certificate or is contained
in the information statement required by Section 2 of this Article
VII above. Unless so noted, a restriction is not enforceable against
a person without knowledge of the restriction.
6. Registered Shareholders. The Corporation shall be
entitled to treat the registered holder of any shares of the
Corporation as the owner thereof for all purposes, and the
Corporation shall not be bound to recognize any equitable or other
claim to, or interest in, such shares or rights deriving from such
shares on the part of any person other than the registered holder,
including without limitation any purchaser, assignee or transferee of
such shares or rights deriving from such shares, unless and until
such other person becomes the registered holder of such shares,
whether or not the Corporation shall have either actual or
constructive notice of the claimed interest of such other person.
7. Transfer Agent, Registrars and Paying Agents. The
board may at its discretion appoint one or more transfer agents,
registrars and agents for making payment upon any class of stock,
bond, debenture or other security of the Corporation. Such agents
and registrars may be located either within or outside Colorado.
They shall have such rights and duties and shall be entitled to such
compensation as may be agreed.
ARTICLE VIII
Insurance
By action of the board of directors, notwithstanding any
interest of the directors in the action, the Corporation may purchase
and maintain insurance, in such scope and amounts as the board of
directors deems appropriate, on behalf of any person who is or was a
director, officer, employee, fiduciary or agent of the Corporation,
or who, while a director, officer, employee, fiduciary or agent of
the Corporation, is or was serving at the request of the Corporation
as a director, officer, partner, trustee, employee, fiduciary or
agent of any other foreign or domestic corporation or of any
partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company or other enterprise or
employee benefit plan, against any liability asserted against, or
incurred by, him or her in that capacity or arising out of his or her
status as such, whether or not the Corporation would have the power
to indemnify him or her against such liability under the provisions
of the Colorado Business Corporation Act. Any such insurance may be
procured from any insurance company designated by the board of
directors of the Corporation, whether such insurance company is
formed under the laws of Colorado or is a company in which the
Corporation has an equity interest or any other interest, through
stock ownership or otherwise.
ARTICLE IX
Miscellaneous
1. Seal. The Corporation's seal, if any, shall be
circular in form and shall contain the name of the Corporation and
the words, "Seal, Colorado."
2. Fiscal Year. The fiscal year of the Corporation shall
be December 31 of each year. Said fiscal year may be changed from
time to time by the board of directors in its discretion.
3. Amendments. The board of directors shall have power
to make, amend and repeal these bylaws at any regular or special
meeting of the board unless the shareholders expressly provide that
the directors may not amend or repeal such bylaw. The shareholders
also shall have the power to make, amend or repeal these bylaws at
any annual meeting or at any special meeting called for that purpose.
4. Gender. Whenever required by the context, the
singular shall include the plural, the plural the singular, and one
gender shall include all genders.
5. Invalid Provision. The invalidity or unenforceability
of any particular provision of these bylaws shall not affect the
other provisions herein, and these Bylaws shall be construed in all
respects as if such invalid or unenforceable provision was omitted.
6. Governing Law. These Bylaws shall be governed by and
construed in accordance with the laws of the State of Colorado.
7. Definitions. Except as otherwise specifically
provided in these Bylaws, all terms used in these Bylaws shall have
the same definition as in the Colorado Business Corporation Act.
I, Richard F. Schaden, as Secretary of The Quizno's
Corporation, hereby certify that the foregoing Bylaws were adopted by
the board of directors of the Corporation effective August 25, 1994,
and amended from time to time by such board through January 18, 1996.
/s/ Richard F. Schaden
Richard F. Schaden, Secretary
Exhibit 9.3
SECOND AMENDMENT TO VOTING TRUST AGREEMENT
THIS AGREEMENT is made and entered into this 5th day of
September, 1996, by and between Richard F. Schaden and Richard E.
Schaden ("Shareholders"), as shareholders of The Quizno's Corporation
(the "Corporation"), and as joint Trustees under the Voting Trust
Agreement (the "Trustees").
W I T N E S S E T H:
WHEREAS, the Shareholders and the Trustees are parties to a
Voting Trust Agreement dated July 14, 1994 (the "Voting Trust"); and
WHEREAS, pursuant to the terms of the Voting Trust, the
Shareholders deposited, with the Trustees, an aggregate of 1,552,800
shares of the Corporation's Common Stock; and
WHEREAS, pursuant to the terms of the Voting Trust, the
Shareholders deposited an additional 9,200 shares of the
Corporation's Common Stock and 146,000 shares of the Corporation's
Class A Cumulative Convertible Preferred Stock with the Trustees on
November 4, 1994; and
WHEREAS, the Shareholders desire to withdraw 8,666 shares
of the Corporation's Common Stock from the Voting Trust to make a
gift of such shares; and
WHEREAS, the Trustees have consented to such withdrawal.
NOW, THEREFORE, in consideration of the mutual promises and
covenants herein contained, the parties hereto agree as follows:
1. The number of shares of stock subject to the Voting
Trust listed adjacent to the signatures of the Shareholders on page 5
of the Voting Trust is hereby deleted and the following substituted
therefore:
SHAREHOLDERS: NUMBER OF SHARES OF CORPORATION
SUBJECT TO VOTING TRUST AGREEMENT
COMMON STOCK CLASS A STOCK
Richard F. Schaden 776,667 73,000
Richard E. Schaden 776,667 73,000
IN WITNESS WHEREOF, the parties have executed this
Agreement on the day and year first above written.
/s/ Richard F. Schaden
RICHARD F. SCHADEN,
SHAREHOLDER AND TRUSTEE
/s/ Richard E. Schaden
RICHARD E. SCHADEN,
SHAREHOLDER AND TRUSTEE
Exhibit 10.4
THE QUIZNO'S CORPORATION
AMENDED AND RESTATED STOCK OPTION PLAN FOR
NON-EMPLOYEE DIRECTORS AND ADVISORS
The purposes of The Quizno's Corporation's Amended and
Restated Stock Option Plan for Non-Employee Directors and Advisors
(the "Plan") are to (i) enable The Quizno's Corporation (the
"Company") to attract and retain qualified non-employee directors and
advisors who will serve and advise the Company regarding the
establishment and satisfaction of long-term, strategic objectives,
(ii) furnish an incentive to non-employee directors and advisors of
the Company by making ownership in the Company available to them and
(iii) amend and restate the Company's original Non-Employee Director
Stock Option Plan, adopted by the Board on the November 30, 1993 and
approved by the stockholders on December 20, 1993, under which no
Options were granted. Options granted under the Plan do not qualify
as "incentive stock options" under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
ARTICLE I
Definitions
For Plan purposes, except where the context clearly
indicates otherwise, the following terms shall have the following
meanings:
"Advisors" shall mean any person or persons appointed
or designated by resolution of the Board as an advisor to the Company
or the Board.
"Board" shall mean the Board of Directors of the
Company.
"Closing Price," see definition in "Fair Market
Value."
"Committee" shall mean the Compensation Committee of
the Board, or such other Committee of the Board as the Board shall
designate from time to time, which other Committee shall consist of
three or more directors appointed by the Board from time to time.
"Company" shall mean The Quizno's Corporation.
"Eligible Participant" shall mean any Advisor or
member of the Board who, on the date of the Committee's decision to
grant, or the date of the granting of, an Option hereunder, is not an
officer or an employee of the Company.
"Option" shall mean a right to purchase Shares granted
pursuant to the Plan and evidenced by an option certificate or stock
option agreement in such form as the Committee may adopt for general
use from time to time.
"Optionee" shall mean an Eligible Participant to whom
an Option is granted pursuant to this Plan.
"Plan" shall mean The Quizno's Corporation Stock
Option Plan for Non-Employee Directors and Advisors.
"Shares" shall mean shares of the Company's common
stock, par value $.001.
"Fair Market Value" of the Shares shall mean the
average of the daily Closing Price, as defined below, per Share for
the ten (10) consecutive trading days commencing fifteen (15) trading
days before such date. For purposes hereof, "Closing Price" shall
mean, with respect to each share of the Company's common stock for
any day, (a) the last reported sale price or, in case no such sale
takes place on such day, the average of the closing bid and asking
price, in either case as reported on the principal national
securities exchange on which the Shares are listed or admitted for
trading or, (b) if the Shares are not listed or admitted for trading
on national securities exchange, the last reported sale price, or in
the case no such sale takes place on such day, the average of the
highest reported bid and the lowest reported asked quotation for the
Shares, in either case as reported on the Automatic Quotation System
of NASDAQ or a similar service if NASDAQ is no longer reporting such
information. If no such market exists for the Shares, and no such
market has existed for the Shares for ninety (90) days or more, the
Board shall make a good faith determination of the Fair Market Value.
ARTICLE II
Shares Subject to the Plan
The aggregate number of Shares which may be delivered upon
exercise of Options granted under the Plan shall not exceed 140,000,
subject to appropriate adjustment in the event the number of issued
Shares shall be increased or reduced by a change in par value,
combination, split-up, merger, reclassification, distribution of a
dividend payable in stock, or the like. Shares covered by Options
which have lapsed or expired may, in the Board's discretion, again be
made subject to grants pursuant to the Plan.
ARTICLE III
Option Grants
3.1 Grant of Options. During the term of this Plan, all
Advisors and directors shall automatically be granted an Option to
purchase 4,000 Shares (subject to appropriate adjustment in the event
the number of issued Shares shall be increased or reduced by a change
in par value, combination, split-up, merger, reclassification,
distribution of a dividend payable in stock, or the like) on (i) the
date of their initial appointment or designation by the Board as an
Advisor or their initial election to the Board, as the case may be,
and (ii) every January 1 subsequent to that appointment, designation
or election; provided, however, that such Advisor or director
continues to hold such position of Advisor or director on such
January 1. An Advisor or director may waive their right to the
automatic grant of an Option as provided herein by notifying the
Company in writing at least ten (10) business days prior to the grant
date and or the anniversary date.
3.2 Stock Option Agreement. Each Option shall be
evidenced by a written instrument, in such form as the Committee
shall from time to time approve, which shall state the terms and
conditions of the Option in accordance with the Plan and also shall
contain such additional provisions as may be necessary or appropriate
under applicable laws, regulations and rules.
ARTICLE IV
Terms of Options
4.1 Exercise Price. The Option exercise price per Share
shall be one hundred percent (100%) of the "Closing Price," as
defined in Article I above, of a Share on the date the Option is
granted.
4.2 Transfer Restrictions. All Options shall be
exercisable during an Optionee's lifetime only by such Optionee.
Options shall not be transferable other than by will or the laws of
descent and distribution. No Option shall be subject, in whole or in
part, to attachment, execution or levy of any kind.
4.3 Vesting. All Options granted shall vest and be
exercisable on the grant date.
4.4 Expiration. All Options shall expire ten (10) years
from the grant date or, if an Optionee ceases to be a director or an
Advisor of the Company for any reason, all Options held by such
Optionee shall terminate upon the earlier of (i) three years after
the date on which he or she ceased to be a director or an Advisor, as
the case may be, or (ii) ten (10) years from the date of grant.
4.5 No Rights as Stockholder. No Optionee shall have any
rights to dividends or other rights of a stockholder of the Company
prior to the purchase of such Shares upon the exercise of the Option.
ARTICLE V
Delivery of Shares
No Shares will be delivered upon exercise of an Option
until the exercise price of the Option is paid in full (i) in cash,
(ii) by the delivery to the Company of Shares with a Fair Market
Value equal to the exercise price of the Option, (iii) by delivery of
a combination of (i) and (ii) with an aggregate Fair Market Value
equal to the exercise price or (iv) by delivery of an Option or
Options to purchase Shares with a net aggregate value (i.e., the
aggregate value of all Shares subject to the exercised Options less
the aggregate exercise price of such Options) equal to the exercise
price.
Share certificates issued to Optionees upon exercise of
Options may, at the sole discretion of the Committee, be issued
subject to, and bear language limiting their transfer otherwise than
in accordance with, the Plan and applicable state and federal law,
including the then existing regulations under Section 16(b) of the
Securities and Exchange Act of 1934, as amended.
ARTICLE VI
Continuation of Service
Neither this Plan nor the grant of any Option hereunder
shall confer upon any Optionee the right to continue as a director or
Advisor of the Company or obligate the Company to nominate any
Optionee for election as a director or appointment or designation an
as Advisor at any time.
ARTICLE VII
Fundamental Transactions
7.1 Merger, Consolidation or Change of Control. In
connection with any merger, consolidation, change in control or
similar reorganization, excluding an initial public offering
("Reorganization"), the Committee may in its discretion:
(a) Negotiate a binding agreement whereby any
acquiring or successor corporation will assume each Option then
outstanding or substitute an equivalent option meeting the
requirements of Section 424(a) of the Code for each Option
outstanding;
(b) Accelerate any applicable vesting provisions; or
(c) Authorize cash payments to Optionees equal to the
difference between the aggregate Exercise Price of each Option then
outstanding irrespective of the Option's current exercisability and
the Fair Market Value of the Shares covered by such Option. Any cash
payment which the Company may be required to make pursuant to such
Committee authorization shall be made within sixty (60) days
following such authorization and fully discharge any and all
obligations the Company may have in connection with the Options.
Notwithstanding the forgoing, the Committee shall have no obligation
to take any action with respect to any Option in connection with a
Reorganization.
7.2 Initial Public Offering. Notwithstanding the
registration with the Securities and Exchange Commission of any
Shares pursuant to a plan for the initial public offering of the
Company's common stock, the applicable vesting schedule shall
continue to apply to all Options. Upon the registration of any of
the Company's common stock, the Optionee must comply with all
applicable federal and state securities laws which apply to such
Optionees and any stock received upon exercise of any Options.
ARTICLE VIII
Plan Administration
8.1 Administration by Committee. The Plan shall be
administered by the Committee. The Committee shall be empowered,
subject to the provisions of the Plan and to any other directives
issued by the Board, to prescribe, amend and rescind rules and
regulations of general application relating to the operation of the
Plan and to make all other determinations necessary or desirable for
its proper administration. Decisions of the Committee shall be
final, conclusive and binding upon all parties, including the
Company, the stockholders and the Eligible Participants.
8.2 Indemnification. Neither the Company, any subsidiary
thereof, nor any director or officer thereof, nor the Committee nor
any member of the Committee shall be liable for any act, omission,
interpretation, construction or determination made in connection with
the Plan in good faith. The Committee and each of its members shall
be entitled to indemnification and reimbursement by the Company in
respect of any claim, loss, damage or expense (including reasonable
attorneys' fees and costs) arising therefrom to the full extent
permitted by law and under any directors and officers liability
insurance coverage which may be in effect from time to time.
ARTICLE IX
Amendment and Discontinuance
The Board is authorized to make such changes in the Plan as
it, in its sole discretion, deems necessary. The Board may at any
time suspend or discontinue the Plan. No action of the Board or of
the stockholders, however, shall alter or impair any Option
theretofore granted under the Plan except as herein provided.
ARTICLE X
Miscellaneous
10.1 No Obligation or Entitlement. It is expressly
understood that this Plan grants powers to the Committee but does not
require their exercise; nor shall any person, by reason of the
adoption of this Plan, be deemed to be entitled to the grant of any
Option; nor shall any rights be deemed to accrue under the Plan
except as Options may actually be granted hereunder.
10.2 Other Grants. The adoption of this Plan shall not
preclude the Board from granting options to purchase Shares to any
person in connection with his or her service on the Board without
reference to, and outside of, this Plan.
10.3 Expenses. All expenses of the Plan, including the
cost of maintaining records, shall be borne by the Company.
ARTICLE XI
Plan Adoption and Term
This Plan shall become effective upon the (i) adoption by
the Board and (ii) approval by the Company's stockholders at an
Annual Meeting of Stockholders. This Plan shall continue in effect
for ten years from the date of its initial approval by the Company's
stockholders. No Option may be granted hereunder after such ten-year
period, but Options granted within such ten-year period may extend
beyond the termination date of the Plan.
Exhibit 10.18
INVESTMENT AGREEMENT
$2,000,000 SENIOR SUBORDINATED CONVERTIBLE
PROMISSORY NOTE DUE 2001
BETWEEN
RETAIL & RESTAURANT GROWTH CAPITAL, L.P.
AND
THE QUIZNO'S CORPORATION
DECEMBER 31, 1996
TABLE OF CONTENTS
Please perform the macro TOCFIX to correct the First Level of the
Table of Contents.
Page
Recitals 1
Article 1-Amount and Terms of the Loan 1
1.1 The Loan 1
1.2 The Note 1
1.3 Subordination 1
1.4 Use of Proceeds 2
1.5 Security for Obligations 2
Article 2-Closing 2
2.1 Closing 2
Article 3-Representations and Warranties 2
3.1 Organization, Standing, etc. of the Company 3
3.2 Capitalization; Ownership of Company 3
3.3 Subsidiaries 3
3.4 Reservation of Common Stock 4
3.5 Authorization; Compliance with Other Instruments 4
3.6 Financial Information; Disclosure, etc. 4
3.7 Licenses; Franchises, etc 4
3.8 Tax Returns and Payments 5
3.9 Indebtedness, Liens and Investments, and Leases
of Personal Property 5
3.10 Title to Properties; Liens 5
3.11 Litigation, etc. 6
3.12 Governmental Consent 6
3.13 Employee Retirement Income Security Act of 1974 6
3.14 Environmental Matters 7
3.15 Intellectual Property 8
3.16 Insurance 8
3.17 Competitors 8
3.18 Senior Management Compensation 8
3.19 Clubs, Airplanes and Motor Vehicles 9
3.20 Customers and Suppliers 9
3.21 Contracts 9
3.22 Management Practices 10
3.23 Inventories; Receivables 10
3.24 Good Repair 11
3.25 Payables 11
3.26 Corporate Documents; Minute Books 11
3.27 Disclosure 11
3.28 Offering 11
3.29 Employees' Violations of Prior Agreements 11
3.30 Powers of Attorney 11
3.31 Information Provided to SEC 11
3.32 Compliance With Laws 12
3.33 Conflicts of Interest 12
3.34 Transactions with Affiliates 12
Article 4-Conditions of Lending 12
4.1 The Note 12
4.2 Opinions and Certificates 12
4.3 Small Business Administration Documentation 13
4.4 No Default; Representations and Warranties, etc. 13
4.5 Payment of Financing Fee 13
4.6 Fees and Expenses 13
4.7 Stockholders Agreement 13
4.8 Pledge Agreement 13
4.9 Security Agreement; UCC Financing Statements 13
4.10 Registration Rights Agreement 14
4.11 Waiver of First Refusal Rights 14
4.12 Consent of Third Parties 14
4.13 Retirement of Indebtedness 14
4.14 Retirement of Schaden Loans 14
Article 5-Affirmative Covenants 14
5.1 Financial Statements, etc. 15
5.2 Inspection 16
5.3 Accounting System 17
5.4 Legal Existence; Compliance with Laws, etc. 17
5.5 Insurance 17
5.6 Payment of Taxes 18
5.7 Payment of Other Indebtedness, etc. 18
5.8 Further Assurances 18
5.9 Additional Information 18
5.10 Compliance with ERISA 18
5.11 Securities Filings After Closing 19
5.12 Reimbursement of Expenses 19
5.13 Reservation of Common Stock 19
Article 6-Negative Covenants 19
6.1 Prepayment of Indebtedness 19
6.2 Mortgages, Liens, etc. 19
6.3 Loan, Guarantees and Investments 20
6.4 Sale of Assets 21
6.5 Dividends, Distributions, etc. 21
6.6 Creation and Acquisition of Subsidiaries 21
6.7 Mergers and Consolidations 21
6.8 Issuance of Stock to Officers, Directors
and Employees 22
6.9 Capital Expenditures 22
6.10 Transactions with Affiliates 22
6.11 Environmental Liabilities 22
6.12 Compensation of Officers 23
6.13 Prepayment of Obligations to Affiliates 23
6.14 Current Business 23
Article 7-Financial Covenants 23
7.1 Indebtedness 23
7.2 Minimum Operating Cash Flow Levels 24
7.3 Financial Ratios 24
7.4 Net Worth 25
Article 8-RRGC's Put Option 25
8.1 Put Option 25
8.2 Price 25
8.3 Payment 25
Article 9-SBIC Provisions 25
9.1 Small Business Concern 25
9.2 Informational Covenant 26
9.3 Use of Proceeds 26
9.4 Activities and Proceeds 26
Article 10-Representations and Warranties of RRGC and
Restrictions on Transfer Imposed by the Securities Act
of 1933 27
10.1 Representations and Warranties by RRGC 27
(a) Investment Intent 27
(b) Shares Not Registered 27
(c) No Transfer 28
(d) Permitted Transfers 28
(e) Accredited Investor 28
(f) Knowledge and Experience 28
(g) Organization, Power and Authority 28
10.2 Legends 29
10.3 Removal of Legend and Transfer Restrictions 30
10.4 Rule 144 30
10.5 Transfer of Rights 30
Article 11-Defaults; Remedies 30
11.1 Events of Default; Acceleration 31
11.2 Remedies on Default, etc. 33
11.3 Fees 33
11.4 Course of Dealings 34
Article 12-Registration 34
12.1 Definitions 34
12.2 Demand Registration 35
12.3 Registration Procedures 35
12.4 Limitations on Demand Registrations 37
12.5 Piggyback Registration 38
12.6 Limitations on Piggyback Registration 38
12.7 Designation of Underwriter 39
12.8 Form S-3 Registration 39
12.9 Cooperation by Prospective Sellers 40
12.10 Expenses of Registration 41
12.11 Indemnification 42
12.12 Rights that may be Granted to Subsequent RRGC 44
12.13 Transfer of Registration Rights 45
12.14 "Stand-Off" Agreement 45
12.15 Delay of Registration 45
Article 13-Definitions 45
Article 14-Taxes and Fees; Indemnification 51
14.1 Taxes, Placement Fee 51
14.2 Indemnification 51
Article 15-Waivers 52
15.1 Waivers 52
Article 16-Miscellaneous 52
16.1 Waivers and Amendments 52
16.2 Lost Notes, Warrants or Stock Certificates 52
16.3 Notices 52
16.4 Fees and Expenses 54
16.5 Calculations 54
16.6 Survival of Agreements 54
16.7 Counterparts 54
16.8 Entire Agreement 54
16.9 Governing Law; Jurisdiction; Waiver of Jury
Trial 54
Exhibits
Exhibit 1.2 Note
Exhibit 1.3 Subordination Agreement
Exhibit 1.4 Use of Proceeds
Exhibit 1.5 Security Agreement
Exhibit 1.5 Pledge Agreement
Exhibit 4.2(a) Opinion of Company's Counsel
Exhibit 4.7 Stockholders Agreement
Exhibit 4.10 (Reserved)
Schedules
Schedule 1.3 Permitted Term Indebtedness
Schedule 3.1 Qualifications to do Business
Schedule 3.2 Capitalization
Schedule 3.3 Subsidiaries
Schedule 3.5 Third Party Consents
Schedule 3.6 Financial Information
Schedule 3.7 Licenses
Schedule 3.8 Tax Returns
Schedule 3.9 Indebtedness, Liens, Investments and Leases of
Personal Property
Schedule 3.10 Real Property
Schedule 3.11(a) Litigation
Schedule 3.11(b) Litigation Opinion
Schedule 3.14 Environmental Matters
Schedule 3.15(a) Intellectual Property
Schedule 3.15(b) Exceptions to Intellectual Property
Schedule 3.16 Insurance
Schedule 3.17 Competitors
Schedule 3.18 Senior Management Compensation
Schedule 3.19 Clubs, Airplanes and Motor Vehicles
Schedule 3.20 Customers and Suppliers
Schedule 3.21(a) Contracts and Commitments
Schedule 3.21(b) Franchise and Area Directorship Agreements
Schedule 3.22 Management Practices
Schedule 3.23 Aged Accounts Receivable
Schedule 3.24 Good Repair
Schedule 3.25 Payables
Schedule 3.29 Employees' Violations of Prior Agreements
Schedule 3.30 Powers of Attorney
Schedule 3.34 Affiliate Transactions
Schedule 9.4 Business Activity
INVESTMENT AGREEMENT
This Investment Agreement is made as of December
31, 1996, by and between The Quizno's Corporation, a Colorado
corporation (the "Company"), and Retail & Restaurant Growth
Capital, L.P., a Delaware limited partnership ("RRGC"). Certain
other terms used herein are defined in Article 0.
Recitals
The following is a statement of facts underlying
this Agreement:
A. The Company wishes to borrow $2,000,000 and
RRGC has agreed to lend such funds to the Company (the "Loan").
Article 1
Amount and Terms of the Loan
1.1 The Loan. Simultaneously with the execution of
this Agreement, subject to the terms and conditions hereof, and
in reliance upon the representations and warranties contained
herein, RRGC will make the Loan to the Company on the Closing
Date.
1.2 The Note. The Loan shall be evidenced by a senior
subordinated convertible promissory note in the form attached
hereto as Exhibit 0 (the "Note") of the Company in a principal
amount of Two Million Dollars ($2,000,000.00). The Loan, as
evidenced by the Note, shall bear interest, shall be payable and
prepayable, may be converted into the Company's Common Stock, and
shall have other terms and conditions as set forth in the Note.
1.3 Subordination. The Loan, as evidenced by the
Note, shall be subordinate and junior in right of payment to (i)
a new senior revolving facility from a lender acceptable to the
Company's board of directors (the "Senior Lender"), and (ii)
certain existing term loans to the Company identified on Schedule
0 attached hereto (the "Permitted Term Indebtedness"). The
aggregate amount owed to the Senior Lender and pursuant to the
Permitted Term Indebtedness shall in no case exceed $700,000
(collectively, the "Senior Indebtedness"). RRGC will enter into
subordination agreements with any of the holders of the Senior
Indebtedness at the request of the Company, from time to time,
and such subordination agreements will be substantially in the
form attached as Exhibit 0. Notwithstanding the foregoing, RRGC
will be senior to all assets not specifically securing the
Permitted Term Indebtedness, until such time as the Company
enters into a new line of credit with the Senior Lender.
1.4 Use of Proceeds. The Company will use the
proceeds of the Loan for the purposes set out on Exhibit 0
hereto.
1.5 Security for Obligations. The Company's
obligations hereunder and under the Note shall be secured at all
times by:
(a) a perfected security interest in the
form of the security agreement attached hereto as Exhibit 0(a)
(the "Security Agreement") on all of the presently owned and
hereafter acquired tangible and intangible personal property,
fixtures and real estate of the Company, including, without
limitation, all trademarks, tradenames, franchise royalties and
other proprietary rights, subject only to prior liens expressly
permitted under this Agreement and to first priority liens in
favor of the Senior Lender securing the Senior Indebtedness.
(b) a first priority perfected security
interest on 90% of the issued and outstanding stock of the
Company held by the Schadens (the "Schaden Shares") as set forth
in a pledge agreement in the form attached hereto as Exhibit 0(b)
(the "Pledge Agreement"). RRGC will release its lien on the
Schaden Shares at a rate of the greater of (i) the ratio of
outstanding principal under the Note and $2,000,000 or (ii) 25%
annually beginning on the first anniversary of this Agreement,
pursuant to the terms and conditions further set forth in the
Pledge Agreement. The Security Agreement and Pledge Agreement
shall terminate and all collateral shall be released upon payment
in full of the Note.
Article 2
Closing
2.1 Closing. The closing (the "Closing") of the transactions
contemplated hereby is taking place at the offices of Ballard,
Spahr, Andrews & Ingersoll, 1225 l7th Street, Suite 2300, Denver,
Colorado, on the date set forth at the beginning of this
Agreement (the "Closing Date"). At the Closing, RRGC will make
its Loan by check payable to the Company, wire transfer of funds,
or a combination thereof.
Article 3
Representations and Warranties
In order to induce RRGC to enter into this
Agreement and to make the Loan as provided herein, the Company
represents and warrants and hereby covenants to RRGC, which shall
survive the execution and delivery of the Agreement and of the
Note, as follows:
3.1 Organization, Standing, etc. of the Company. The
Company and its Subsidiaries are corporations duly organized,
validly existing and in good standing under the laws of the state
of Colorado and have all requisite corporate power and authority
to own and operate their properties, to carry on their businesses
as now conducted and proposed to be conducted, to enter into the
Investment Documents, to issue the Note and to carry out the
terms hereof and thereof. The Company and its Subsidiaries are
duly qualified and in good standing in each state or other
jurisdiction in which the character of the properties owned by
them therein or the conduct of their present businesses would
make such qualification necessary and where failure to so qualify
would have a material adverse impact on the businesses or
financial condition of the Company or its Subsidiaries. Each
state in which the Company or its Subsidiaries are qualified to
do business is set forth in Schedule 0.
3.2 Capitalization; Ownership of Company. The
authorized capital stock of the Company consists of nine million
shares of Common Stock of which, immediately prior to the
Closing, 2,866,438 are issued and outstanding and 1 million
shares of Preferred Stock, 146,000 of which are designated Class
A Cumulative Convertible Preferred and are issued and
outstanding. Schedule 0 attached hereto correctly sets forth the
name of each of the Company's stockholders owning 5% or more of
the issued and outstanding capital stock of the Company on a
fully diluted basis (the "Principal Stockholders") and the number
of shares of each class of such capital stock owned by such
Principal Stockholders, the date of acquisition of such shares
and, if the Company received such consideration or has knowledge
of the amount thereof, the consideration paid. Except as
disclosed on Schedule 0, there are not any outstanding or
authorized subscriptions, options, warrants, calls, rights
commitments or agreements directly or indirectly obligating the
Company to issue (i) any additional shares of its capital stock
or (ii) any securities convertible into, or exercisable or
exchangeable for, or evidencing the right to subscribe for, any
shares of its capital stock. All of said outstanding shares are
validly issued, fully paid and nonassessable and with respect to
the Principal Stockholders are owned of record, and to the
knowledge of the Company beneficially, by such Stockholders as
specified in Schedule 0, and, to the knowledge of the Company,
such ownership is free of any assignment, pledge, lien, security
interest, charge, option or other encumbrance except as set forth
in Schedule 0. Except as otherwise set forth in Schedule 0, the
Company is not obligated in any manner to issue any additional
shares of its capital stock.
3.3 Subsidiaries. Except as set forth on Schedule 0,
the Company has no Subsidiaries and is not a partner in any
partnership, a member of any limited liability company, a
participant in a joint venture, or the owner of an equity
interest in any other legal entity.
3.4 Reservation of Common Stock. The Company has
reserved sufficient shares of Common Stock for conversion of the
Convertible Note.
3.5 Authorization; Compliance with Other Instruments.
The execution, delivery and performance of the Investment
Documents have been duly authorized by all necessary corporate
action on the part of the Company, will not result in any
violation of or be in conflict with or constitute a default under
any term of the Amended and Restated Articles of Incorporation or
Bylaws of the Company, or of any material agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to the Company, or result in the creation of any
material mortgage, lien, charge or encumbrance upon any of the
properties or assets of the Company pursuant to any such term
except as provided in the Investment Documents. No third party
consent is required for the execution or performance of the
Investment Documents except as specified on Schedule 0, which
consents have been received. The Company is not in violation of
any term of its Amended and Restated Articles of Incorporation or
Bylaws, or of any material term of any material agreement or
instrument to which it is a party, or, to the best of the
Company's knowledge, of any judgment, decree, order, statute,
rule or governmental regulation applicable to it.
3.6 Financial Information; Disclosure, etc. The
Company has furnished RRGC with audited financial statements for
its fiscal years 1994 and 1995 and unaudited financial statements
for the ten month period ended October 31, 1996 and other reports
listed in Schedule 0 attached hereto (collectively, the
"Financial Statements"). The Financial Statements have been
prepared in accordance with generally accepted accounting
principles applied on a consistent basis and fairly present the
financial position and results of operations as of the dates and
for the periods indicated subject to normal year-end adjustments
in the case of the 1996 ten month financial statements. Since
the end of the most recent fiscal period shown in such Financial
Statements (the "Balance Sheet Date"), there has not been any
material adverse change in the business, operations, properties
or financial position of the Company, there have been no
dividends declared or paid or any other distributions to
stockholders of any nature, the Company has made no loans to
stockholders, officers, employees, or Affiliates, and the Company
has carried on business only in the ordinary course. The Loan
will not render the Company unable to pay its debts as they
become due; the Company is not contemplating either the filing of
a petition by it under any state or federal bankruptcy or
insolvency laws or the liquidation of all or a major portion of
its property; and the Company has no knowledge of any person
contemplating the filing of any such petition against it.
3.7 Licenses; Franchises, etc. Schedule 0 attached
hereto accurately and completely lists all material
authorizations, licenses, permits and franchises of any public or
governmental regulatory body granted or assigned to the Company
and the same constitute the only material authorizations,
licenses, permits and franchises of any public or governmental
regulatory body which are necessary for the conduct of the
business of the Company as now conducted and proposed to be
conducted (such authorizations, licenses, permits and franchises,
together with any extensions or renewals thereof, being herein
sometimes referred to collectively as the "Licenses"). All of
such Licenses are validly issued and in full force and effect in
all material respects and the Company has fulfilled and performed
all of its material obligations with respect thereto and has full
power and authority to operate thereunder.
3.8 Tax Returns and Payments. Except as set forth in
Schedule 0 hereto, the Company has filed all tax returns required
by law to be filed and has paid all taxes (including, but not
limited to, payroll and withholding taxes), assessments and other
governmental charges due with respect to or otherwise levied upon
the Company or any of its properties, assets or income, other
than those not yet delinquent and those, not material in
aggregate amount, being or about to be contested as provided in
Section 0. The charges, accruals and reserves on the books of
the Company in respect of its taxes are adequate and the Company
knows of no unpaid assessment for additional taxes or of any
basis therefor. The Company is not being audited by any
governmental taxing authority.
3.9 Indebtedness, Liens and Investments, and Leases of
Personal Property. Schedule 0 attached hereto correctly
describes, as of the date or dates indicated therein, (a) all
outstanding Indebtedness of the Company in respect of borrowed
money, Capital Leases and the deferred purchase price of property
and all personal property leases with aggregate annual payment
amounts greater than $25,000; (b) all existing mortgages, liens
and security interests in respect of any property or assets of
the Company; (c) all outstanding investments, loans and advances
of the Company (other than expense advances to employees in the
ordinary course of business not exceeding $5,000) and (d) all
existing guarantees by the Company.
3.10 Title to Properties; Liens. Schedule 0 lists by
street address all real property which is owned by the Company or
in which it may have an ownership interest and the street address
of all real property and the ownership thereof which is used or
leased by the Company in its business. The Company has good and
marketable title to all of its properties and assets, and none of
such properties or assets owned by it is subject to any mortgage,
pledge, lien, security interests, charge or encumbrance except
for liens, security interest, charges and encumbrances set forth
in Schedule 0 hereto, and except for minor liens and encumbrances
which in the aggregate are not material in amount, do not in any
case materially detract from the value of the property subject
thereto or materially impair the operations of the Company and
have not arisen otherwise than in the ordinary course of
business. The Company enjoys quiet possession under all leases
to which it is a party as lessee, and all of such leases are
valid, subsisting and in full force and effect. No lease or
leases material to the current or proposed operations of the
Company contains any provision restricting the incurrence of
indebtedness by the lessee or any provision materially adversely
affecting the current and proposed operations of the Company.
3.11 Litigation, etc. There is no action, proceeding
or investigation pending or, to the Company's knowledge,
threatened (or any basis therefor known to the Company) which
questions the validity of the Investment Documents, or the other
documents executed in connection herewith, or any action taken or
to be taken pursuant hereto, or which might result, either in any
case or in the aggregate, in any material adverse change in the
business operations, affairs or condition of the Company or any
of its properties or in any material liability in excess of
$50,000 on the part of the Company other than as set forth on
Schedule 0(a). Schedule 0(a) sets forth a description of all
litigation and governmental investigations, claims or proceedings
to which the Company was a party, or, to the best of its
knowledge, subject to (including but not limited to claims
arising under workers' compensation laws and relating to OSHA
violations) since January 1, 1994 where such litigation,
investigations, claims or proceedings would result in material
liability to the Company in excess of $50,000. Schedule 0(b)
sets forth an opinion of counsel to the Company as to the
resolution of all resolved litigation and the status and
potential resolution of all outstanding litigation.
3.12 Governmental Consent. Neither the Company nor, to
the Company's knowledge, any of its stockholders, is required to
obtain any order, consent, approval or authorization of, or
required to make any declaration or filing with (collectively,
"Consents"), any governmental authority in connection with the
execution and delivery of this Agreement and the issuance and
delivery of the Note pursuant hereto except, if required, filings
or registrations under the Securities Act of 1933, as amended
(the "Securities Act") or the qualification or registration
requirements of the Colorado Law or other applicable state
securities laws.
3.13 Employee Retirement Income Security Act of 1974.
The terms used in this Section 0 and in Section 0 of this
Agreement shall have the meanings assigned thereto in the
applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and the Internal Revenue Code
of 1986, as amended (the "Code"), and the term "Affiliated
Company" shall mean the Company and all corporations,
partnerships, trades or businesses (whether or not incorporated)
which constitute a controlled group of corporations with the
Company, a group of trades or businesses under common control
with the Company, an affiliated service group or other affiliated
group, within the meaning of Section 414(b), Section 414(c),
Section 414(m) or Section 414(o), respectively, of the Code, or
Section 4001 of ERISA. Each employee benefit plan sponsored by
an Affiliated Company and, to the best of the Company's
knowledge, each multi-employer plan to which any Affiliated
Company makes contributions, is in material compliance with
applicable provisions of ERISA and the Code. No Affiliated
Company has incurred any material liability to the Pension
Benefit Guaranty Corporation ("PBGC") or any employee benefit
plan on account of any failure to meet the contribution
requirements of any such plan, minimum funding requirements or
prohibited transactions under ERISA or the Code, termination of a
single employer plan, partial or complete withdrawal from a multi-
employer plan, or the insolvency, reorganization or termination
of any multi-employer plan, and no event has occurred or
condition exists which presents a material risk that any
Affiliated Company will incur any material liability on account
of any of the foregoing circumstances. The consummation of the
transactions contemplated by this Agreement will not result in
any prohibited transaction under ERISA or the Code for which an
exemption is not available.
3.14 Environmental Matters. Except as disclosed in
Schedule 0, attached hereto, neither the Company nor, to the
Company's knowledge, any prior user or owner of real estate
owned, used or leased by the Company or any predecessor of the
Company, or any business which the Company has acquired or become
a successor to (including but not limited to the property on
which the Company's Denver, Colorado office is located) (the
"Property"), or any third party, has ever caused or permitted any
Hazardous Material to be disposed of on or under the Property,
and the Property has never been used (either by the Company or,
to the Company's knowledge by any prior user or owner of the
Property, or any third party) as (a) a disposal site or permanent
storage site for any Hazardous Material or (b) a temporary
storage site for any Hazardous Material. To the best of the
Company's knowledge, there have been no releases of Hazardous
Materials at, from, or to the Property. The Company has been
issued and is in compliance with all material permits,
certificates, licenses, approvals and other authorizations
relating to environmental matters and necessary for its business,
and has filed all notifications and reports relating to chemical
substances, air emissions, underground storage tanks, effluent
discharges and Hazardous Material waste storage, treatment and
disposal required in connection with the operation of its
business, the failure to have or comply with which would,
individually or in the aggregate, have a material adverse effect
on the Company. All Hazardous Materials used or generated by the
Company have been generated, accumulated, stored, transported,
treated, recycled and disposed of in compliance with all
applicable laws and regulations, the violation of which has any
reasonable likelihood of having a material adverse effect on the
Company. The Company has no liabilities with respect to
Hazardous Materials, and to the knowledge of the Company, no
facts or circumstances exist which could give rise to liabilities
with respect to Hazardous Materials, which could have any
reasonable likelihood of having a material adverse effect on the
Company.
3.15 Intellectual Property. Schedule 0(a) lists all
patents, trademarks, service marks, tradenames, copyrights, trade
secrets, licenses, information and proprietary rights and
processes ("Intellectual Property") that are directly or
indirectly owned, licensed, used, required for use, or controlled
in whole or in part by the Company. Except as disclosed in
Schedule 0(b), to the best of its knowledge, the Company owns
without an obligation to pay royalties, all Intellectual Property
necessary for its business as conducted and proposed to be
conducted without any conflict with, or infringement of the
rights of others. Except as disclosed on Schedule 0(b), the
Company has not received any communications alleging that it has
violated or, by conducting business as proposed, would violate
the Intellectual Property rights of any other person or entity.
Except as disclosed in Schedule 0(b), the Company has not
licensed or granted rights to others in any of its Intellectual
Property. Except as disclosed in Schedule 0(b), the Company has
not granted rights to manufacture, produce, assemble, license,
market or sell any of its products to any other person. Schedule
0(b) sets out the Intellectual Property on which royalties are
being paid by the Company and the amount of any such royalty
payments.
3.16 Insurance. Schedule 0 contains a full and
complete list of all policies of insurance insuring the real and
personal property of the Company and policies insuring the
Company against risks, all insurance policies maintained since
January 1, 1994, and all "key man" insurance policies (except key
man insurance on Schaden), and such policies provide adequate
coverage for all risks normally insured against. All of the
policies of insurance described therein (copies of which are to
be delivered upon RRGC's request) are in full force and effect as
stated therein and the premiums therefore have been paid as they
became due and payable and do not expire prior to December 31,
1996. The Company will obtain key man insurance on Schaden
within 90 days of the date hereof.
3.17 Competitors. Except as described on Schedule 0,
and except for the ownership of less than 1% of the securities of
corporations, the shares of which are publicly traded, no
Principal Stockholder nor, to the knowledge of any officer
elected by the Board of Directors of the Company (an "Officer"),
no Officer or director owns, directly or indirectly, any interest
or has any investment or profit participation in a corporation or
other entity which is a competitor or potential competitor of or
which otherwise, directly or indirectly, does business with the
Company.
3.18 Senior Management Compensation. Schedule 0 sets
forth the names, positions, salaries and benefits of the members
of the Board of Directors and all Officers of the Company,
together with the amount of estimated bonuses and description of
agreements or arrangements for commissions and other compensation
or benefits of any nature to be paid or provided to any such
person pursuant to agreement, custom, or present understanding.
3.19 Clubs, Airplanes and Motor Vehicles. Except as
set forth on Schedule 0, there are no memberships held in social,
country or other clubs or organizations, directly or for the
benefit of another person, the fees or charges for which exceed
$1,000 in any twelve month period and are paid, directly or
indirectly by the Company, and except as set forth on Schedule 0,
the Company neither owns or leases any aircraft, boats or motor
vehicles.
3.20 Customers and Suppliers. Schedule 0(a) lists the
ten largest suppliers to the Company during the eleven (11) month
period ended November 30, 1996 (stating for each the dollar
volume of the purchases).
3.21 Contracts.
(a) Schedule 0(a) lists all existing contracts
and commitments of the Company of any kind or nature whatsoever
whether written or unwritten (including, without limiting the
generality of the foregoing, labor agreements; leases; notes or
other evidences of indebtedness; mortgages; guarantee agreements;
pension stock option, stock purchase, bonus, profit sharing and
other employee or executive welfare or benefit plans or
agreements; sales representation and distribution agreements;
purchase orders and commitments; product warranties; and powers
of attorney) except that Schedule 0(a) need not list the
following:
(i)each contract with a customer
made (A) in the ordinary course of
business of the Company on or after
the date hereof, or (B) prior to
the date hereof whereby the Company
is obligated to deliver less than
$50,000 in invoice value of
finished goods or services in each
transaction or series of related
transactions; and
(ii)each purchase commitment made
(A) in the ordinary course of
business of the Company at
prevailing prices on or after the
date hereof, or (B) prior to the
date hereof which is not in excess
of $50,000 in each transaction or
series of related transactions.
The forms of written purchase and sales orders used by the
Company also are included as part of Schedule 0(a). Copies
of all written instruments evidencing the items listed in
Schedule 0(a) have been delivered to RRGC.
(b) All of the contracts and commitments to be
listed in Schedule 0(a) and all of the agreements and contracts
not required to be listed therein by reason of clauses (i) or
(ii) of Section 0(a), are valid and binding obligations of the
Company in accordance with their respective terms, there are, to
the best of the Company's knowledge, no liabilities of any party
thereto arising from a breach of or default in any provision of
any such contract or commitment, and no condition exists which
would permit the acceleration of an obligation of a party thereto
or the creation of a lien or encumbrance upon an asset of the
Company or which would give rise to any such liabilities upon the
giving of notice or lapse of time. No Officer has any
information which might reasonably indicate that any material
supplier to the Company intends to cease purchasing from, selling
to or dealing with the Company, nor has information been brought
to the attention of any Officer which might reasonably lead him
or her to believe that any material supplier intends to alter in
any material respect the amount of such sales or the extent of
dealings with the Company or would alter in any material respect
such sales or dealings in the event of the consummation of the
transactions contemplated hereby.
(c) Except as set forth on Schedule 0(b), no
franchisee has been notified of a default under any franchise
agreement and no area director has been notified of a default
under any area director agreement. To the best of the Company's
knowledge, there are no other material defaults under any
franchise agreements or area director agreements.
3.22 Management Practices. All of the transactions of
the Company have been conducted on an arms-length basis, except
that in the case of transactions between the Company and a
stockholder or any entity in which any of them has a direct or
indirect interest, such transactions have been fair to the
Company and on terms comparable to those which would have
prevailed in an arms-length transaction. No portion of the sales
or other ongoing business relationships of the Company is
dependent upon the friendship or the personal relationships
(other than those customary within business generally) of any
stockholder or any director or other Officer. Except as set
forth on Schedule 0, the Company has no outstanding loans or
other advances to any stockholder or any director or other
Officer or to any entity in which any of them has a direct or
indirect interest, other than travel advances in the usual and
ordinary course of business. No Officer has knowledge that any
Officer or other key employee of the Company is considering the
termination of employment. Neither the Company nor any person
acting on its behalf has engaged in any business practices of the
nature referred to in the Report of the Securities and Exchange
Commission ("SEC") dated May 12, 1976, on Questionable and
Illegal Corporate Payments & Practices or proscribed by the
Foreign Corrupt Practices Act. Since commencement of the period
covered by the Financial Statements, the Company has not forgiven
or canceled, without receiving full consideration, indebtedness
owing to it by any stockholder or any Officer or director.
3.23 Inventories; Receivables. All inventories
(including restaurant supplies and non-perishable food items) of
the Company which are shown on the most recent Financial
Statement are in good condition, not obsolete, nondefective and
useable and, to the best of the Company's knowledge, 100% is
saleable within one year from the date hereof in the usual and
ordinary course of business of the Company as conducted as of the
date hereof. To the best of the Company's knowledge, all of the
Company's receivables of any nature, including, but not limited
to, note receivables, which are shown on the most recent
Financial Statement are collectable in the usual and ordinary
course of business. Schedule 0 consists of aged accounts
receivable trial balances for the Company at October 31, 1996.
3.24 Good Repair. Except as set forth on Schedule 0,
all buildings and improvements and all of the machinery and
equipment owned or used by the Company are in good order and
repair, reasonable wear and tear excepted.
3.25 Payables. Schedule 0 sets forth an aged list of
all of the outstanding accounts payable of the Company as of
November 30, 1996.
3.26 Corporate Documents; Minute Books. The minute
books of the Company contain a complete and correct summary of
all meetings and consents in lieu of meetings of directors and
stockholders since the time of incorporation of the Company.
3.27 Disclosure. This Agreement (including the
Schedules attached and the Financial Statements), the other
Investment Documents, and the information supplied by the Company
in connection with the Investment Documents do not contain any
untrue statement of material fact or omit to state a material
fact necessary to make the statements made herein or therein, in
the light of the circumstances in which they were made, not
misleading.
3.28 Offering. In reliance on the representations and
warranties of RRGC in Article 9 hereof, the offer, sale and
issuance of the Note, in conformity with the terms and conditions
of this Agreement, is exempt from the registration requirements
of the Securities Act or the qualification or registration
requirements of the Colorado Business Corporation Act, as
amended, or other applicable state securities laws.
3.29 Employees' Violations of Prior Agreements. To the
best of the Company's knowledge, employment by the Company of any
of its employees does not violate the terms of any
confidentiality, employment, or other agreement with any of the
employees' prior employers or other third parties; the Company
has not received any notice claiming that the contrary is or may
be true, except as set forth on Schedule 0.
3.30 Powers of Attorney. The Company has no power of
attorney outstanding with respect to any matter, except for Powers of
Attorney granted with respect to matters pending in the U.S. Patent
and Trademark Office or the franchisor registration or qualification
process, and except as set forth on Schedule 0.
3.31 Information Provided to SEC. The Company has complied
fully and completely with Rule 10b-5 of the Securities Exchange Act
of 1934 in all of its filings with the SEC.
3.32 Compliance With Laws. The Company has complied with
all statutes, laws, ordinances, rules and regulations. The Company
has not been notified of violation of any such statutes, laws,
ordinances, rules or regulations or of any investigation into any
such possible violations. No facts have occurred which constitute a
violation of any statutes, laws, ordinances, rules or regulations.
3.33 Conflicts of Interest. No employee or officer of the
Company shall own any interest in any area directorship eighteen (18)
months subsequent to Closing, however, if, in order for such sale to
take place within this time period, the interest in the Chicago area
directorship would be sold for less than $350,000 and the Detroit
area directorship would be sold for less than $185,000, then this
time period shall be extended for six months. If, after this
additional six month period the area directorships owned by officers
or employees remain unsold, such officer or employee owner must
resign his or her position as an officer or employee.
Notwithstanding the foregoing, an Affiliate of an area director may
retain the office of corporate secretary.
3.34 Transactions with Affiliates. Except as set forth on
Schedule 0, the Company is not a party to any transactions with
Affiliates.
Article 4
Conditions of Lending
The obligation of RRGC to make the Loan hereunder is
subject to the following conditions:
4.1 The Note. RRGC shall have received the Note, duly
completed, executed and delivered, as provided in Article 1.
4.2 Opinions and Certificates. On and as of the Closing
Date, RRGC shall have received:
(i) The favorable opinion of Ballard, Spahr, Andrews
& Ingersoll, counsel for the Company, dated as of such date and in
substantially the form attached hereto as Exhibit 0(a).
(ii) A certificate, dated as of the Closing Date,
signed by a principal officer of the Company, certifying that the
conditions specified in Section 0 have been fulfilled.
(iii) All other information and documents which
RRGC or its counsel may reasonably have requested in connection with
the transactions contemplated by this Agreement, such information and
documents where appropriate to be certified by the proper Company
officers or governmental authorities.
4.3 Small Business Administration Documentation. RRGC
shall have received SBA Form 480 (Size Status Declaration) and SBA
Form 652 (Assurance of Compliance) which have been completed and
executed by the Company, and SBA Form 1031 (Portfolio Finance
Report), Parts A and B of which have been completed by the Company
(the "SBA Documents").
4.4 No Default; Representations and Warranties, etc. On
the Closing Date: (i) the representations and warranties of the
Company contained in Article 0 of this Agreement shall be true on and
as of such date as if they had been made on such date; (ii) the
Company shall be in compliance in all material respects with all of
the terms and provisions set forth herein on its part to be observed
or performed on or prior to such date; (iii) after giving effect to
the Loan, no Event of Default specified in Article 0 hereof, nor any
event which with the giving of notice or expiration of any applicable
grace period or both would constitute such an Event of Default, shall
have occurred and be continuing; (iv) all of the conditions to
closing set forth in this Article 4 have been satisfied; and (v)
since December 31, 1995 there shall have been no material adverse
change in the assets or liabilities or in the financial or other
condition of the Company.
4.5 Payment of Financing Fee. The Company shall have paid
RRGC a commitment fee in the amount of $40,000, $10,000 of which was
paid by the Company prior to closing.
4.6 Fees and Expenses. The Company shall have paid to
RRGC reasonable out-of-pocket expenses (including, but not limited
to, reasonable attorneys' fees; advisory and consulting fees, travel
and communications expenses, and reproduction costs) up to $50,000
for due diligence, negotiation and closing of the purchase and sale
of the Note. Additional expenses not presented for payment at
closing may be paid after closing, provided, however, that total
expenses do not exceed $50,000.
4.7 Stockholders Agreement. The Company and each of the
other necessary signatories thereto shall have executed and delivered
to RRGC the Stockholders Agreement in the form of Exhibit 0 hereto
(the "Stockholders Agreement").
4.8 Pledge Agreement. The Company and each of the other
necessary signatories thereto shall have executed and delivered to
RRGC the Pledge Agreement in the form of Exhibit 0(b) hereto.
4.9 Security Agreement; UCC Financing Statements. The
Company and each of the other necessary signatories thereto shall
have executed and delivered to RRGC the Security Agreement in the
form of Exhibit 0(a) hereto, and all related UCC Financing
Statements.
4.10 [Reserved].
4.11 Waiver of First Refusal Rights. Each of the Company's
stockholders shall have waived any and all preemptive rights or
rights of first refusal or similar rights to which they may be
entitled under the law of Colorado, the Amended and Restated Articles
of Incorporation or Bylaws of the Company or any agreement between
such stockholders and the Company in connection with the offer, sale
and issuance of the Note, the issuance of shares of Common Stock of
the Company upon the conversion of the Note, the issuance of warrants
upon payment of the Convertible Note and the sale and issuance of
Common Stock upon exercise of the Warrants, if any.
4.12 Consent of Third Parties. The Company shall have
received the consent (and, if necessary, waiver of defaults) of the
parties on Schedule 0.
4.13 Retirement of Indebtedness. The Company shall retire
the Company's line of credit with Norwest Bank, the Company's note
payable to MyGrands, Inc., and the Company's line of credit with
Merrill Lynch Business Financial Services, Inc. ("Merrill") as
contemplated on Schedule 0. The Company's WCMA Term Loan and
Security Agreement with Merrill shall be canceled. The Company will
deliver to RRGC an officer's certificate certifying to the retirement
of such indebtedness within five (5) days of Closing.
4.14 Retirement of Schaden Loans. The Company will retire
all indebtedness owed to the Schadens prior to Closing.
Article 5
Affirmative Covenants
Until all sums which become due and payable with
regard to the Note are paid and all fees due hereunder shall have
been paid in full, and while RRGC owns Acquired Stock representing
7.5% or more of the fully diluted equity ownership of the Company, or
the Warrants, the following covenants shall remain in full force and
effect, (subject if applicable to the restriction in Section 0 with
respect to providing information to a transferee who is a competitor
of the Company), which covenants shall be applicable to the Company
and each of its Subsidiaries, if any.
5.1 Financial Statements, etc. The Company will furnish
or cause to be furnished to the RRGC:
(a) In written and electronic form, within three (3)
business days after the Company 's Form 10-K or Form 10-KSB is due
for filing with the SEC, (i) the consolidated balance sheets of the
Company and its Subsidiaries as at the end of such year, and (ii) the
related consolidated and consolidating statements of income and cash
flows for such year, setting forth in comparative form with respect
to such consolidated financial statements figures for the previous
fiscal year, all in reasonable detail, together with the opinion
thereon of Erhardt, Keefe, Steiner & Hottman or another firm of
independent certified public accountants of recognized national
standing or otherwise reasonably acceptable to RRGC, which opinion
shall be in a form generally recognized as unqualified and shall
state that such financial statements have been prepared in accordance
with generally accepted accounting principles applied on a basis
consistent with that of the preceding fiscal year (except for
changes, if any, which shall be specified and approved in such
opinion) and that the audit by such accountants in connection with
such financial statements has been made in accordance with generally
accepted auditing standards related to reporting; provided that such
accountants' certification may be limited to the consolidated
financial statements in which case the consolidating financial
statements shall be signed by a principal officer of the Company and,
accompanying the financial information provided pursuant to this
subsection, a discussion in narrative form prepared by management of
the Company analyzing the Company's financial and operational
performance and projected performance and discussing current and
future trends of the Company and its industry, which discussion shall
be delivered in written and electronic forms and which discussion may
consist of the Company's MD&A in its Form 10-K or l0-KSD and
additional information regarding projected performance;
(b) Within 20 business days after the end of each
month, monthly financial statements (including a balance sheet and a
statement of operations for the month and year to date, each in
comparative form with the Company's budget for such period) for the
previous month and an analysis and report on the financial and
operating results of that month;
(c) Within 20 business days after the end of each
month, a table indicating franchises sold by class, franchises opened
by class, number of area directorships sold, average unit volumes,
and comparable system store sales;
(d) Within 20 business days after the end of each
month, a note receivable status report, and a customer receivable
aging and status report;
(e) In written and electronic form, within three
business days after the Company's Form 10-Q or Form 10-QSB is due for
filing with the SEC, (i) the unaudited consolidated balance sheets of
the Company and its Subsidiaries as at the end of such period, and
(ii) the related unaudited consolidated and consolidating statements
of income and cash flows for such period and for the period from the
beginning of the current fiscal year to the end of such period, all
in reasonable detail and signed by a principal officer of the
Company;
(f) at least 30 days prior to the beginning of each
fiscal year, a budget for the coming year and a forecast for an
additional four years which has been approved by the Company's Board
of Directors;
(g) Together with the financial statements delivered
pursuant to subparagraphs (a), (b) and (c) above, a compliance
certificate substantially in the form of Exhibit 0(e) attached hereto
signed by a principal officer of the Company;
(h) Concurrently with its delivery to the
stockholders and directors of the Company, any information generally
furnished by the Company to its stockholders and directors, including
without limitation all information pertaining to financial,
marketing, business development or regulatory issues generally
furnished by the Company to its stockholders or to any class of its
stockholders;
(i) Concurrently with its delivery to the Securities
and Exchange Commission, copies of any communications sent to the
Securities and Exchange Commission;
(j) Forthwith upon any Officer obtaining knowledge of
any condition or event which he or she knows constitutes or after
notice or lapse or time or both would constitute an Event of Default,
a certificate signed by such Officer specifying in reasonable detail
the nature and period of existence thereof and what action the
Company has taken or proposes to take with respect thereto;
(k) Prompt notice of any material threatened or
potential adverse claim, dispute, litigation and governmental
investigation or citation and any material correspondence related to
intellectual property or conflicts of interest regarding Officers.
5.2 Inspection. The Company shall permit RRGC or its
representative, at RRGC's expense, to visit and inspect the Company's
properties, to examine its books of account and records, and to
discuss the Company's affairs, finances and accounts with the
Company's officers, all at such reasonable times as may be requested
by RRGC; provided, however, that the Company shall not be obligated
pursuant to this Section 0 to provide access to any information which
it reasonably considers to be a trade secret or similar confidential
information unless RRGC has signed a confidentiality agreement
reasonably acceptable to the Company.
5.3 Accounting System. The Company will maintain a
standard system of accounting established and administered in
accordance with generally accepted accounting principles.
5.4 Legal Existence; Compliance with Laws, etc. The
Company will, and will cause each Subsidiary to: maintain its
corporate existence and business; maintain all properties which are
reasonably necessary for the conduct of such business, now or
hereafter owned, in good repair, working order and condition; take
all actions necessary to maintain and keep in full force and effect
its rights and franchises; and, comply in all material respects with
all applicable statutes, rules, regulations and orders of, and all
applicable restrictions imposed by, all governmental authorities in
respect of the conduct of its business and the ownership of its
properties; provided that neither the Company nor any Subsidiary
shall be required by reason of this subsection to comply therewith at
any time while the Company or such Subsidiary shall be contesting its
obligations to do so in good faith by appropriate proceedings
promptly initiated and diligently conducted, and if it shall have set
aside on its books such reserves, if any, with respect thereto as are
required by generally accepted accounting principles and deemed
adequate by the Company and its independent public accountants.
5.5 Insurance. The Company will maintain or cause to be
maintained on all insurable properties now or hereafter owned by the
Company or any Subsidiary insurance against loss or damage by fire or
other casualty to the extent customary with respect to like
properties of companies conducting similar businesses, will, at
closing, maintain business interruption insurance in an amount not
less than $2.5 million per occurrence. The Company will maintain or
cause to be maintained public liability and worker's compensation
insurance insuring the Company to the extent customary with respect
to companies conducting similar businesses and will maintain
insurance on Schaden in the amount of $1 million and, upon request,
will furnish to RRGC satisfactory evidence of the same. Copies of
all such policies (or certificates) shall be delivered to RRGC upon
request. The Company will require each of its insurance carriers to
notify RRGC thirty (30) days prior to the cancellation, expiration,
or non-renewal of any insurance policy. In the event of a casualty
loss, the Company may apply the proceeds of any insurance to the
restoration or replacement of the property or asset which was the
subject of such loss, provided that the Company shall have
demonstrated to the reasonable satisfaction of RRGC that such
property or asset will be restored to substantially its previous
condition or will be replaced by a substantially identical property
or asset. Notwithstanding the foregoing, the Company will have 90
days from the date hereof to obtain insurance on Schaden.
5.6 Payment of Taxes. The Company will, and will cause
each Subsidiary to, pay and discharge promptly as they become due and
payable all taxes (including but not limited to payroll and
withholding taxes), assessments and other governmental charges or
levies imposed upon it or its income or upon any of its properties or
assets, or upon any part thereof, as well as all lawful claims of any
kind (including claims for labor, materials and supplies) which, if
unpaid, might by law become a lien or a charge upon its property;
provided that neither the Company nor any Subsidiary shall be
required to pay any such tax, assessment, charge, levy or claim if
the amount, applicability or validity thereof shall currently be
contested in good faith by appropriate proceedings promptly initiated
and diligently conducted and if the Company shall have set aside on
its books such reserves, if any, with respect thereto as are required
by generally accepted accounting principles and deemed appropriate by
the Company and its independent public accountants.
Upon the request of RRGC, the Company will furnish to
RRGC satisfactory proof of the payment or deposit of payroll and
withholding taxes required by applicable federal, state and local
law. Such proof shall be furnished within ten days after written
request by RRGC.
5.7 Payment of Other Indebtedness, etc. Except as to
matters being contested in good faith and by appropriate proceedings,
the Company will, and will cause each Subsidiary to, pay promptly
when due all other Indebtedness and obligations incident to the
conduct of its business.
5.8 Further Assurances. From time to time hereafter, the
Company will execute and deliver, or will cause to be executed and
delivered, such additional instruments, certificates or documents,
and will take all such actions, as RRGC may reasonably request, for
the purposes of implementing or effectuating the provisions of the
Investment Documents. Upon the exercise by RRGC of any power, right,
privilege or remedy pursuant to this Agreement which requires any
consent, approval, registration, qualification or authorization of
any governmental authority or instrumentality, the Company will
execute and deliver, or will cause the execution and delivery of, all
applications, certifications, instruments and other documents and
papers that RRGC may be required to obtain for such governmental
consent, approval, registration, qualification or authorization.
5.9 Additional Information. The Company will promptly
deliver to RRGC such additional information as RRGC may reasonably
request, including in order to complete accurately and fully any and
all reports which a government or governmental regulatory agency may
require.
5.10 Compliance with ERISA. The Company will make, and
will cause all Affiliated Companies to make, all payments or
contributions to employee benefit plans required under the terms
thereof and in accordance with applicable minimum funding
requirements of ERISA and the Code and applicable collective
bargaining agreements. The Company will cause all employee benefit
plans sponsored by any Affiliated Company to be maintained in
material compliance with ERISA and the Code. The Company will not
engage, and will not permit or suffer any Affiliated Company or any
Person entitled to indemnification or reimbursement from the Company
or any Affiliated Company to engage, in any prohibited transaction
for which an exemption is not available. No Affiliated Company will
terminate, or permit the PBGC to terminate, any employee benefit plan
or withdraw from any multi-employer plan, in any manner which could
result in material liability of any Affiliated Company.
5.11 Securities Filings After Closing. The Company shall
file with relevant federal and state securities commissions and
agencies all documents with respect to the sale of the Note that was
not required to be filed prior to closing within the applicable time
periods for such filings. Copies of all such documents filed after
closing shall be provided to RRGC.
5.12 Reimbursement of Expenses. The Company shall
reimburse RRGC for the reasonable costs and expenses incurred by it
(including reasonable attorneys' fees, advisory and consulting fees,
travel and communication expenses, and reproduction costs) in
connection with any amendments to or waivers of Investment Documents
or the enforcement of any of its rights arising pursuant to the
Investment Documents.
5.13 Reservation of Common Stock. The Company will reserve
sufficient shares of Common Stock for conversion of the Note and, if
Warrants are issued, for exercise of the Warrants.
Article 6
Negative Covenants
6.1 Prepayment of Indebtedness. Neither the Company nor
any Subsidiary will prepay any Indebtedness except for the Note and
Senior Indebtedness.
6.2 Mortgages, Liens, etc. Neither the Company nor any
Subsidiary will, directly or indirectly, create, incur, assume or
suffer to exist, any mortgage, lien, charge or encumbrance on, or
security interest in, or pledge of, or conditional sale or other
title retention agreement (including any Capital Lease)
(collectively, a "lien") with respect to, any property or asset now
owned or hereafter acquired by the Company, except:
(a)Any lien securing Senior
Indebtedness;
(b)Any lien securing the Note;
(c)Liens for taxes not yet delinquent
or being contested in good faith as
provided in Section 0; liens in
connection with worker's compensation,
unemployment insurance or other social
security obligations; liens securing
the performance of bids, tenders,
contracts, surety and appeal bonds,
liens to secure progress or partial
payments and other liens of like nature
arising in the ordinary course of
business; mechanics', workmen's,
materialmen's or other like liens
arising in the ordinary course of
business in respect of obligations
which are not yet due or which are
being contested in good faith; and
other liens or encumbrances incidental
to the conduct of the business of the
Company or to the ownership of its
properties or assets, which were not
incurred in connection with the
borrowing of money or the obtaining of
credit and which do not materially
detract from the value of the
properties or assets of the Company or
materially affect the use thereof in
the operation of their business; and
(d)Purchase money liens and Capital
Leases permitted by Section 0.
6.3 Loan, Guarantees and Investments. Neither the Company
nor any Subsidiary will make or permit to remain outstanding any loan
or advance to, or guarantee or endorse (except as a result of
endorsing negotiable instruments for deposit or collection in the
ordinary course of business) or otherwise assume or remain liable
with respect to any obligation of, or make or own any investment in,
or acquire (except in the ordinary course of business) the properties
or assets of, any Person, except:
(a)Extensions of trade credit by the
Company in the ordinary course of
business in accordance with customary
trade practices, including loans to
franchisees or area directors made
pursuant to the Company's Uniform
Franchise Offering Circular and certain
accounts receivable from distressed or
imperiled franchisees and area
directors that are converted to notes
receivable, provided, however, that
individual notes receivable for amounts
greater than $50,000, and all notes
receivable issued after the aggregate
amount of such notes receivable issued
in any fiscal year equals or exceeds
$250,000, shall be issued only with the
approval of the Company's Board of
Directors;
(b)The presently outstanding
investments, loans and advances, if
any, and the presently existing
guarantees, if any, referred to in
Schedule 0 attached hereto;
(c)Cash or short-term liquid
investments generally regarding as
cash;
(d)Marketable direct obligations of the
United States of America or any
department or agency thereof maturing
not more than one year from the date of
issuance thereof;
(e)Certificates of deposit, repurchase
agreements, money market deposits or
other similar types of investments
maturing not more than one year from
the date of acquisition thereof and
evidencing direct obligations of any
bank within the United States of
America having capital surplus and
undivided profits in excess of
$50,000,000; and
(f)Capital Expenditures to the extent
permitted by Section 0;
(g)Guarantees on store leases for franchised stores
incurred in the ordinary course of business, provided
such guarantees do not exceed ten (10) stores at any
given time, with annual lease charges including
minimum rent and extra charges defined under the
lease, as defined under each respective lease, not to
exceed $50,000 per lease, and provided that RRGC
receives ten (10) days prior notice of all leases on
which the Company intends to act as a guarantor.
6.4 Sale of Assets. Neither the Company nor any
Subsidiary will sell, lease or otherwise dispose of all or any
material properties or assets, including intellectual property,
except in the ordinary course of business.
6.5 Dividends, Distributions, etc. The Company will not
pay any dividends or make any distributions to stockholders, or
redeem or exchange any equity securities except the Company may pay
dividends on the Company's Class A Preferred Stock in accordance with
the Company's Amended and Restated Articles of Incorporation.
6.6 Creation and Acquisition of Subsidiaries. The Company
will not create or acquire any additional subsidiaries or become a
partner in any partnership, a member in any limited liability
company, a partner in any joint venture, or otherwise acquire an
ownership interest in any entity, except for wholly owned
subsidiaries created or acquired in connection with one or more
acquisitions of no more than two hundred (200) retail food outlets
that are acquired, in the aggregate, for purposes of operation as or
conversion to the Quizno's store concept, and so long as each
acquisition does not violate any term of any Investment Document (the
"Permitted Subsidiaries").
6.7 Mergers and Consolidations. Neither the Company or
any Subsidiary will enter into acquisition, consolidation or merger,
except the Company may enter into one or more mergers, consolidations
or acquisitions in which the Company or a wholly owned subsidiary of
the Company is the survivor in which no more than 200 retail food
outlets are acquired, in the aggregate, for the purposes of operation
of or conversion to the Quizno's store concept, and so long as such
merger, consolidation or acquisition does not violate any of the
terms of the Investment Documents including approval rights on the
issuance of additional shares in the Company.
6.8 Issuance of Stock to Officers, Directors and
Employees. Any issuances of any of the Company's Common Stock, or
other capital stock of the Company, or any warrants, options, or any
right to subscribe for or purchase any capital stock of the Company,
which are issued or granted to any officer, director, or employee of
the Company, shall be approved by the Board of Directors and the
Compensation Committee of the Board of Directors. Notwithstanding
the foregoing, the Company may issue (i) Capital Stock in the Company
which may be issued under the Company's existing stock option plans
and 401(k) plans, so long as such shares outstanding in these plans
do not represent greater than 15% of the fully diluted shares of the
Company at any given time, (ii) Capital Stock issued as part of the
Company's Qualified Offering, and (iii) Capital Stock issued pursuant
to the Class A Cumulative Preferred Stock.
6.9 Capital Expenditures. The Company, together with its
Subsidiaries, if any, will not make any Capital Expenditure
(including any payments under Capital Leases) during any fiscal year
in excess of 5% of total assets of the Company, excluding such
Capital Expenditures which are contemplated on Exhibit 0, the
development of stores under the "Turnkey Program", and the
acquisition of stores for conversion to the Quizno's store concept,
so long as such acquisition does not violate any terms of the
Investment Documents.
6.10 Transactions with Affiliates. Neither the Company nor
any Subsidiary will, directly or indirectly, enter into any lease or
other transaction or contract with any stockholder of the Company who
owns 5% or more of the Company's stock or with any Affiliate of the
Company or such stockholder, or pay fees to any such Stockholder or
Affiliate except for currently existing contracts listed on Schedule
0.
6.11 Environmental Liabilities. Neither the Company nor
any Subsidiary will violate any requirement of law, rule or
regulation regarding Hazardous Materials, the failure to comply with
which would individually, or in the aggregate, have a material
adverse effect on the Company or such Subsidiary; and, without
limiting the foregoing, neither the Company nor any Subsidiary will
dispose of any Hazardous Material into or onto, or (except in
accordance with applicable law) from, any real property owned, leased
or operated by the Company or such Subsidiary or in which the Company
or such Subsidiary holds, directly or indirectly, any legal or
beneficial interest or estate, nor allow any lien imposed pursuant to
any law, regulation or order relating to Hazardous Materials or the
disposal thereof to be imposed or to remain on such real property,
except for liens being contested in good faith by appropriate
proceedings and for which adequate reserves have been established and
are being maintained on the books of the Company.
6.12 Compensation of Officers. The Company will not
increase the compensation of any officer elected by the Board of
Directors without the approval of the Compensation Committee of the
Board of Directors.
6.13 Prepayment of Obligations to Affiliates. The Company
will not prepay obligations to Affiliates of the Company.
6.14 Current Business. The Company will not engage in any
business other than that described on Schedule 0 and related
businesses.
Article 7
Financial Covenants
While the Note is unpaid the following covenants shall
remain in full force and effect, which covenants shall be applicable
to the Company and each of its subsidiaries, if any.
7.1 Indebtedness. Neither the Company nor any Subsidiary
will create, incur, assume or become or remain liable in respect of
any Indebtedness, except:
(i)Indebtedness pursuant to the Note;
(ii)Senior Indebtedness in an amount
not to exceed $700,000;
(iii)Current liabilities of the Company
(other than for borrowed money)
incurred in the ordinary course of its
business and in accordance with
customary trade practices; and
(iv)Indebtedness in respect of purchase
money liens and Capital Leases
permitted by Section 0.
(v)Deferred compensation to employees so long as, if
with respect to an officer, such compensation is
approved as provided in Section 0.
(vi)Indebtedness in respect of guarantees of store
leases permitted by Section 0(g).
7.2 Minimum Operating Cash Flow Levels. The Company will
maintain the following minimum Operating Cash Flow levels (as defined
below):
(i) Fiscal Year 1997
Annual $ 325,000
(ii) Fiscal Year 1998
First Six Months $ 350,000
Annual $ 900,000
(iii)Fiscal Year 1999 and thereafter
First Six Months $ 750,000
Annual $1,500,000
For purposes of this Article 0, "Operating Cash Flow" shall be
defined as the sum of earnings before interest, taxes, depreciation
and amortization and the following additions (subtractions) from the
balance sheet:
(Increase) Decrease in note receivable balances
(Increase) Decrease in customer receivable
balances
(Increase) Decrease in deferred franchise costs
Increase (Decrease) in deferred franchise revenue
If the Company uses the provisions of Section 11.1(b)(ii) to cure a
default under this Article 7, then, for purposes of determining
Operating Cash Flow in the fiscal year in which such default
occurred, Operating Cash Flow shall also include the following
addition (subtraction) from the balance sheet:
(Increase) Decrease in cash from capital stock
and paid in capital
7.3 Financial Ratios. The Company will maintain the
following financial ratios:
(i)Annual minimum fixed charge and debt service
coverage ratio ("Charge and Debt Ratio") equal to 1.0 in Fiscal Year
1997 and 1.25 in Fiscal Year 1998 and thereafter.
The Charge and Debt Ratio shall be determined as
follows: the numerator shall equal the Operating Cash Flow less
income taxes paid and the denominator shall equal the sum of (a) all
interest and principal payments made on any Indebtedness (including
capital leases, but excluding borrowings/repayments under future
borrowing lines of credit), (b) all usual and customary capital
expenditures, excluding such expenditures contemplated under the
Company's "Turnkey" program, or for the development of additional
Company owned stores, as approved by the Board of Directors, and (c)
all payments of permitted stock dividends (i.e. preferred stock
dividends).
(ii)Current assets (as determined in accordance with
GAAP) to current liabilities (as determined in accordance with GAAP)
of 1:1.
7.4 Net Worth. The Company will maintain a net worth (as
determined in accordance with GAAP) of not less than $1,000,000.
Article 8
RRGC's Put Option
8.1 Put Option. At any time after the sixth anniversary
of the Closing Date, RRGC shall have the right to cause the Company
to purchase any Warrants or Acquired Stock held by RRGC if either of
the following is true:
(a)A qualified Public Offering has not
occurred, or
(b)an Event of Default occurred while
the Note was outstanding.
8.2 Price. The price paid to RRGC for its Warrants and
Acquired Stock under Section 0 (the "Put Price") shall be the fair
market value such Warrants and Acquired Stock, determined in
accordance with the Valuation Procedure.
8.3 Payment. The Put Price shall be payable by the
Company to RRGC in cash.
Article 9
SBIC Provisions
The Company acknowledges that RRGC is a small business
investment company licensed by the United States Small Business
Administration, and makes the following representations, warranties
and covenants to RRGC:
9.1 Small Business Concern. The Company, taken together
with its "affiliates" (as that term is defined in 13 C.F.R.
121.401), is a "Small Business Concern" within the meaning of 15
U.S.C. 662(5), that is Section 103(5) of the Small Business
Investment Act of 1958, as amended (the "SBIC Act"), and the
regulation thereunder, including 13 C.F.R. 107, and meets the
applicable size eligibility criteria set forth in 13 C.F.R.
121.301(c)(1) or the industry standard covering the industry in
which the Company is primarily engaged as set forth in 13 C.F.R.
121.301(c)(2). Neither the Company nor any of its subsidiaries
presently engages in any activities for which a small business
investment company is prohibited from providing funds by the SBIC Act
and the regulations thereunder, including 13 C.F.R. 107.
9.2 Informational Covenant. The Company will furnish or
cause to be furnished to RRGC information required by the U.S. Small
Business Administration concerning the economic impact of RRGC's
investment, including but not limited to, information concerning
taxes paid and number of employees. The Company will furnish
annually all information required on the appropriate SBA Forms.
The Company will also furnish or cause to be furnished
to RRGC such other information regarding the business, affairs and
condition of the Company as RRGC may from time to time reasonably
request. The Company will permit RRGC and examiners of the U.S.
Small Business Administration to inspect the books and any of the
properties or assets of the Company and its Subsidiaries and to
discuss the Company's business with senior management employees at
such reasonable times as RRGC may from time to time request. RRGC
agrees not to disclose any confidential information received from the
Company (except to its partners and to its professional advisors whom
RRGC shall cause to keep such information confidential) and to
execute a confidentiality agreement as required in Section 0.
9.3 Use of Proceeds. The Company will use the proceeds
from the Note for the purposes and in the amounts set forth on
Exhibit 0 attached to this Agreement. The Company will deliver
within ninety (90) days of the initial closing to RRGC a written
report, certified as correct by the Company's chief financial officer
verifying the purposes and amounts for which proceeds from the Note
have been disbursed, and, if the proceeds have not been fully
disbursed within that ninety (90) day period, an additional report
also so certified, delivered not later than the end of each
succeeding ninety (90) day period, verifying the purposes and amounts
for which proceeds have been disbursed. The Company will supply to
RRGC such additional information and documents as RRGC reasonably
requests with respect to use of proceeds and will permit RRGC to have
access to any and all Company records and information and personnel
as RRGC deems necessary to verify how proceeds have been or are being
used, and to assure that the proceeds have been used for the purposes
specified.
9.4 Activities and Proceeds.
(i) Neither the Company nor any of its
Subsidiaries will engage in any activities or use directly or
indirectly the proceeds from the Note for any purpose for which a
small business investment company is prohibited from providing funds
by the SBIC Act and the regulations promulgated thereunder, including
13 C.F.R. 107.
(ii) The Company will not change the Company's
business activity from that described on Schedule 0, to a business
activity which a small business investment company is prohibited from
providing funds by the SBIC Act and the regulations promulgated
thereunder. The Company agrees that any such changes in its business
activity without such prior written consent of RRGC will constitute
an event of default under the Note and a breach of the covenants of
the Company under this Agreement (an "Activity Event of Default").
If an Activity Event of Default occurs, RRGC has the right to demand
immediate repayment by the Company of the Note with interest to the
date of repayment and repurchase by the Company of Acquired Stock at
its purchase price. Upon receipt of such demand, the Company will
immediately make such payment within three (3) days of receipt of a
demand. The payment remedy is in addition to any and all other
rights and remedies against the Company and others to which RRGC may
be entitled.
Article 10
Representations and Warranties of RRGC and Restrictions on
Transfer Imposed by the Securities Act of 1933.
10.1 Representations and Warranties by RRGC. RRGC
represents and warrants to the Company as follows:
(a) Investment Intent. This Agreement is made with
RRGC in reliance upon RRGC's representation to the Company, which by
RRGC's execution of this Agreement RRGC hereby confirms that the Note
to be received by RRGC is being acquired for investment for RRGC's
own account, not as nominee or agent, for investment and not with a
view to, or for resale in connection with, any distribution or public
offering thereof within the meaning of the Securities Act.
(b) Shares Not Registered. RRGC understands and
acknowledges that the offering of the Note and the Acquired Stock
(collectively, the "Securities") pursuant to this Agreement will not
be registered under the Securities Act or qualified under any state
securities law based upon the offering and sale of such securities
being exempt from registration under the Securities Act and exempt
from qualification under such state securities laws, and that the
Company's reliance upon such exemptions is predicated upon RRGC's
representations set forth in this Agreement. RRGC acknowledges and
understands that the Securities must be held indefinitely unless the
Securities are subsequently registered under the Securities Act and
qualified under applicable state securities laws or exemptions from
such registrations are available.
(c) No Transfer. RRGC covenants that in no event
will RRGC dispose of any of the Securities (other than in conjunction
with an effective registration statement for the Securities under the
Securities Act or in compliance with Rule 144 promulgated under the
Securities Act) unless and until (i) RRGC shall have notified the
Company of the proposed disposition and shall have furnished the
Company with a statement of the circumstances surrounding the
proposed disposition, and (ii) if reasonably requested by the
Company, RRGC shall have furnished the Company with an opinion of
counsel satisfactory in form and substance to the Company to the
effect that (x) such disposition will not require registration under
the Securities Act and (y) appropriate action necessary for
compliance with the Securities Act has been taken.
(d) Permitted Transfers. Notwithstanding the
provisions of subsection (c) above, no registration statement or
opinion of counsel shall be necessary for a transfer by RRGC which is
a partnership to a partner of such partnership or an affiliate,
advisor or employee of or a retired partner of such partnership who
retires after the date hereof, or to the estate of any such partner
or retired partner or the transfer by gift, will or intestate
succession of any partner to his spouse or lineal descendants or
ancestors, if the transferee agrees in writing to be bound by the
terms hereof to the same extent as if he were an original investor
hereunder and such transfer complies with applicable laws.
(e) Accredited Investor. RRGC is an "accredited
investor" as that term is defined in Regulation D promulgated under
the Securities Act.
(f) Knowledge and Experience. RRGC (i) has such
knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of RRGC's prospective
investment in the Securities; (ii) has the ability to bear the
economic risks of RRGC's prospective investment; (iii) has been
furnished with and has had access to such information as RRGC has
considered necessary to make a determination as to the purchase of
the Securities together with such additional information as is
necessary to verify the accuracy of the information supplied;
(iv) has had all questions which have been asked by RRGC
satisfactorily answered by the Company; and (v) has not been offered
the Securities by any form of advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media
or broadcast over television or radio, or any seminar or meeting
whose attendees have been invited by any such media.
(g) Organization, Power and Authority. RRGC
represents that it is duly organized, validly existing and in good
standing, under the laws of the jurisdiction of its formation and was
not organized for the sole purpose of purchasing the Note. RRGC has
all requisite power to execute and deliver this Agreement and the
other Investment Documents and to perform its obligations under this
Agreement and the other Investment Documents. This Agreement and the
other Investment Documents have been duly and validly authorized by
RRGC, duly executed and delivered by RRGC or an authorized
representative of RRGC and constitute valid, legal and binding
obligations of RRGC, enforceable in accordance with their terms,
except as such enforceability is limited by applicable insolvency and
other laws affecting creditors' rights generally and by the
availability of equitable remedies.
10.2 Legends. Each certificate representing the Securities
shall be endorsed with the following legend:
"THE SECURITIES EVIDENCED BY THIS
CERTIFICATE AND THE COMMON SHARES INTO
WHICH SUCH SECURITIES ARE CONVERTIBLE
ARE SUBJECT TO AN INVESTMENT AGREEMENT
DATED DECEMBER 31, 1996, AND A
STOCKHOLDERS AGREEMENT DATED AS OF
DECEMBER 31, 1996, COPIES OF WHICH ARE
ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY AND WILL BE FURNISHED TO THE
HOLDER ON REQUEST TO THE SECRETARY OF
THE COMPANY. SUCH INVESTMENT AGREEMENT
AND STOCKHOLDERS AGREEMENT PROVIDE,
AMONG OTHER THINGS, FOR CERTAIN
RESTRICTIONS ON VOTING, SALE, TRANSFER,
PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION OF THE SECURITIES EVIDENCED
BY THIS CERTIFICATE AND THE HOLDER HAS
RIGHTS TO REQUIRE REPURCHASE BY THE
COMPANY UPON THE OCCURRENCE OF CERTAIN
EVENTS. THE SECURITIES EVIDENCED BY
THIS CERTIFICATE HAVE NOT BEEN
REGISTERED PURSUANT TO THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY STATE SECURITIES LAW, AND SUCH
SECURITIES MAY NOT BE SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF UNLESS THE
SAME ARE REGISTERED AND QUALIFIED IN
ACCORDANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS, OR IN
THE OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY, SUCH
REGISTRATION AND QUALIFICATION ARE NOT
REQUIRED."
The Company need not register a transfer of legended Securities, and
may also instruct its transfer agent not to register the transfer of
the Securities, unless the conditions specified in the foregoing
legend are satisfied.
10.3 Removal of Legend and Transfer Restrictions. Any
legend endorsed on a certificate pursuant to Section 0 and the stop
transfer instructions with respect to such legended Securities shall
be removed, and the Company shall issue a certificate without such
legend to the holder of such Securities if such Securities are
registered under the Securities Act and a prospectus meeting the
requirements of Section 10 of the Securities Act is available or if
such holder satisfies the requirements of Rule 144(k) and, where
reasonably deemed necessary by the Company, provides the Company with
an opinion of counsel for such holder of the Securities, reasonably
satisfactory to the Company, to the effect that (i) such holder,
meets the requirements of Rule 144 or (ii) a public sale, transfer or
assignment of such Securities may be made without registration.
10.4 Rule 144. RRGC is aware of the adoption of Rule 144
by the SEC promulgated under the Securities Act, which permits
limited public resales of securities acquired in a non-public
offering, subject to the satisfaction of certain conditions. RRGC
understands that under Rule 144, the conditions include, among other
things: the availability of certain current public information about
the issuer and the resale occurring not less than two years after the
party has purchased and fully paid for the securities to be sold.
The Company covenants that (i) at all times after the Company first
becomes subject to the reporting requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, the Company will use its best
efforts to comply with the current public information requirements of
Rule 144(c)(1) under the Securities Act; and (ii) at all such times
as Rule 144 is available for use by RRGC, the Company will furnish
RRGC upon reasonable request with all information within the
possession of the Company required for the preparation and filing of
Form 144.
10.5 Transfer of Rights. Subject to Section 0(d), the Note
and any Acquired Stock may be transferred by RRGC to its Affiliates
and its partners, members, stockholders, employees or advisers and
all of RRGC's rights under the Investment Documents may be assigned
to the transferee of such securities. RRGC is also permitted to
transfer its Note and Acquired Stock to any other third party,
including competitors of the Company subject to the provisions of
Article 0; provided, however, that any competitor acquiring the
Acquired Stock will only be entitled to receive financial statements
and information concerning the Company which are available to all
stockholders of the Company.
Article 11
Defaults; Remedies
11.1 Events of Default; Acceleration. The occurrence of
one or more of the following events without a permitted cure within
the time period provided herein (each an "Event of Default") shall
constitute an Event of Default:
(a) The Company shall default in the payment of
principal of or interest on the Note or any other fee due hereunder
when the same becomes due and payable, whether on demand, at maturity
or at a date fixed for the payment of any installment or prepayment
thereof or otherwise and, with respect to payment of interest, such
default is not cured within five (5) days after notice of such
default is given to the Company. Notwithstanding the foregoing, the
Company shall twice each year be allowed ten (10) days to cure any
such default in lieu of the five (5) day cure period after notice of
such default is given to the Company.
(b) The Company shall default in the performance of
or compliance with any covenant or agreement contained in the
Investment Documents, and such default shall continue for more than
fifteen (15) days after notice of such default is given to the
Company reduced, however, for any period of grace allowed under any
such Investment Document or, in the case of a default under Sections
0, 0 and 0 thirty (30) days after notice of such default is given to
the Company. Notwithstanding the foregoing, the Company shall have
the right to cure a default under any or all of Section 7.2, 7.3, and
7.4 a total of two (2) times while the Note is unpaid (i) by causing
the Principal Stockholders to invest in the Common Stock of the
Company at the then market value of the Common Stock, or (ii) by
invoking a grace period until the status of the Company under such
Section is determined at the end of the subsequent quarter, and if
there is no default under such Section at the end of the subsequent
quarter, the default shall be deemed to have not occurred. Any ratio
determined after a period of grace shall be determined based on the
previous six-month or twelve-month period, as applicable.
(c) A default occurs under any document evidencing
the Senior Indebtedness;
(d) Any material representation or warranty made by
the Company herein or pursuant hereto shall prove to have been false
or incorrect in any material respect when made;
(e) The Company shall discontinue its business or
shall make an assignment for the benefit of creditors, or shall fail
generally to pay its debts as such debts become due, or shall apply
for or consent to the appointment of or taking possession by a
trustee, receiver or liquidator (or other similar official) of the
Company or any substantial part of the property of the Company, or
shall commence a case or have an order for relief entered against it
under the federal bankruptcy laws, as now or hereafter constituted,
or any other applicable federal or state bankruptcy, insolvency or
other similar law, or if the Company shall take any action to
dissolve or liquidate the Company;
(f) If, within sixty (60) days after the commencement
against the Company of a case under the federal bankruptcy laws, as
now or hereafter constituted, or any other applicable federal or
state bankruptcy, insolvency or other similar law, such case shall
have been consented to or shall not have been dismissed or all orders
or proceedings thereunder affecting the operations or the business of
the Company stayed, or if the stay of any such order or proceeding
shall thereafter be set aside, or if within sixty (60) days after the
entry of a decree appointing a trustee, receiver or liquidator (or
other similar official) of the Company or any substantial part of the
property of the Company, such appointment shall not have been
vacated;
(g) An uninsured final judgment which, with other
outstanding uninsured final judgments against the Company, exceeds
the greater of (i) five percent (5%) of the Company's annual revenue
for the preceding twelve month period or (ii) $250,000 shall be
rendered against the Company unless such judgment has been appealed
and an execution thereof stayed pending appeal or unless, within
sixty (60) days after the expiration of any such stay, such judgment
has been discharged, or if any such judgment shall not be discharged
forthwith upon the commencement of proceedings to foreclose any lien,
attachment or charge which may attach as security therefor and before
any of the property or assets of the Company shall have been seized
in satisfaction thereof;
(h) A change in ownership of more than sixty percent
(60%) of the outstanding voting stock of the Company on a fully
diluted basis in a single transaction or a series of unrelated
transactions, excluding public transactions within a twelve (12)
month period;
(i) Schaden shall cease to be employed by the Company
as Chief Executive Officer. Notwithstanding the foregoing, an Event
of Default shall not occur upon Schaden's death so long as the
Company maintains a Key Man Life Insurance Policy on Schaden payable
to the Company in the amount of $1 million.
(j) After 90 days of the date hereof, the Company
fails to maintain insurance payable to the Company on Schaden in the
amount of $1,000,000;
(k) A material adverse change shall occur with
respect to the assets, liabilities, operations or prospects of the
Company;
(l) The Company shall use the proceeds of the Note
for a purpose not permitted pursuant to Exhibit 0.
(m) Litigation is commenced against the Company
which, materially restricts the ability of the Company to carry on
its business;
(n) a merger or consolidation involving the Company
(in a single transaction or a series of related or unrelated
transactions) excluding one or more mergers or consolidations in
which the Company or a wholly owned subsidiary of the Company is the
survivor and following such merger or consolidation, the shareholders
of the Company immediately prior to such event shall own a majority
of the stock of the surviving corporation in which no more than 200
retail food outlets are acquired in the aggregate, for the purposes
of operation of or conversion to the Quizno's store concept, as so
long as such merger or consolidation does not violate any of the
terms of the Transaction Documents;
(o) a sale of all or a material part of the Company's
assets unless the Note is retired upon such sale;
(p) the completion of a Qualified Public Offering
unless the Note is retired upon such Qualified Public Offering;
(q) an Event of Default occurs under the Security
Agreement or the Pledge Agreement.
11.2 Remedies on Default, etc. In case any one or more
Events of Default shall occur and be continuing: (a) RRGC may by
notice to the Company, declare the principal of and accrued interest
in respect of the Note to be forthwith due and payable, whereupon the
principal of and accrued interest in respect of the Note shall become
forthwith due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby expressly waived by
the Company; (b) RRGC may proceed to protect and enforce its rights
by an action at law, suit in equity or other appropriate proceeding,
whether for the specific performance of any agreement contained
herein or in the Note or for an injunction against a violation of any
of the terms hereof or thereof, or in aid of the exercise of any
power granted hereby or thereby or by law.
11.3 Fees. If the Company fails to pay any amount to RRGC
on account of the Loan or Note, the Company will pay to RRGC an
amount sufficient to reimburse RRGC for its costs and expenses of
enforcing its rights under the Investment Documents including, but
not limited to, its reasonable attorneys fees, expenses and
disbursements, if RRGC is the prevailing party in such enforcement
action. If the Company is successful in defending such enforcement
action, RRGC will pay to the Company its costs of such defense
including, but not limited to, its reasonable attorneys' fees,
expenses and disbursements.
11.4 Course of Dealings. No course of dealing and no delay
on the part of RRGC in exercising any right shall operate as a waiver
thereof or otherwise prejudice the RRGC's rights. No right conferred
hereby or by the Note, the Warrants or the Registration Rights
Agreement upon RRGC shall be exclusive of any other right referred to
herein or therein or now or hereafter available at law, in equity, by
statute or otherwise.
Article 12
Registration
The following provisions govern the registration of
Common Stock:
12.1 Definitions. As used herein, the following terms have
the following meanings:
Forms S-1, S-2 and S-3: The forms so designated,
promulgated by the Commission for registration of
securities under the Securities Act, and any forms
succeeding to the functions of such forms, whether or
not bearing the same designation.
Holder: A holder of Registrable Stock (subject to
Section 0 hereof), provided that anyone who acquires
any Registrable Stock in a distribution pursuant to a
registration statement filed by the Company under the
Securities Act shall not thereby be deemed to be a
"Holder".
"Register", "registered" and "registration" refer to a
registration effected by filing a registration
statement in compliance with the Securities Act and
the declaration or ordering by the Commission of
effectiveness of such registration statement.
Registrable Stock: All shares of Common Stock issued
or issuable upon conversion of the Note or exercise of
a Warrant or held by a person to whom registration
rights have been transferred pursuant to the
provisions of this Section 0, all shares of Common
Stock issued by the Company in respect of such shares
and all shares of Common Stock that RRGC hereafter
acquires pursuant to its rights of first refusal or
otherwise.
Required Demand Amount: 51% of the Registrable Stock
then outstanding.
12.2 Demand Registration. (a) If (i) the holder or holders
of an aggregate of at least the Required Demand Amount propose to
dispose of at least 20% of the then outstanding Registrable Stock
(such holder or holders being herein called the "Initiating
Holders"), and (ii) such disposition may not, in the opinion of such
Initiating Holders, be effected in the public marketplace (as opposed
to a private transaction under the Securities Act) on equally
favorable net terms to the Initiating Holders without such
registration of such shares under the Securities Act, the Initiating
Holders may request the Company in writing to effect such
registration, stating the number of shares of Registrable Stock to be
disposed of by such Initiating Holders (which, in the aggregate,
shall be not less than 20% of the then outstanding Registrable Stock)
and the intended method of disposition. Upon receipt of such
request, the Company will give prompt written notice thereof to all
other Holders whereupon such other Holders shall give written notice
to the Company within 20 days after the date of the Company's notice
(the "Notice Period") if they propose to dispose of any shares of
Registrable Stock pursuant to such registration, stating the number
of shares of Registrable Stock to be disposed of by such Holder or
Holders and the intended method of disposition.
12.3 The Company will use its best efforts to
effect promptly after the Notice Period the registration under the
Securities Act of all shares of Registrable Stock specified in the
requests of the Initiating Holders and the requests of the other
Holders subject, however, to the limitations set forth in Section 0.
12.4 Registration Procedures. Whenever the Company is
required by the provisions of this Section 0 to use its best efforts
to effect promptly the registration of shares of Registrable Stock,
the Company will:
12.5 prepare and file with the Commission a
registration statement with respect to such shares and use its best
efforts to cause such registration statement to become and remain
effective as provided herein;
12.6 prepare and file with the Commission such
amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep
such registration statement effective and current and to comply with
the provisions of the Securities Act with respect to the disposition
of all shares covered by such registration statement, including such
amendments and supplements as may be necessary to reflect the
intended method of disposition from time to time of the prospective
seller or sellers of such shares, but for no longer than one hundred
twenty (120) days subsequent to the effective date of such
registration in the case of a registration statement on Form S-1 or S-
2 and for no longer than ninety (90) days in the case of a
registration statement on Form S-3;
12.7 furnish to each prospective seller such
number of copies of a prospectus, including a preliminary prospectus,
in conformity with the requirements of the Securities Act, and such
other documents, as such seller may reasonably request in order to
facilitate the public sale or other disposition of the shares owned
by such seller;
12.8 use its best efforts to register or qualify
the shares covered by such registration statement under such other
securities or blue sky or other applicable laws of such jurisdiction
within the United States as each prospective seller shall reasonably
request, to enable such seller to consummate the public sale or other
disposition in such jurisdictions of the shares owned by such seller;
provided, however, that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not at the
time so qualified or to take any action which would subject it to
service of process in suits other than those arising out of the offer
or sale of the Registrable Stock covered by such registration
statement in any jurisdiction where it is not at the time so subject;
12.9 furnish to each prospective seller (i) a
signed counterpart, addressed to the prospective sellers, of an
opinion of counsel for the Company, dated the effective date of the
registration statement, covering substantially the same matters with
respect to the registration statement (and the prospectus included
therein) as are customarily covered (at the time of such
registration) in opinions of issuer's counsel delivered to the
underwriters in underwritten public offerings of securities, and (ii)
a letter dated such date, from the independent certified public
accountants of the Company, in form and substance as is customarily
given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters, if
any, and to the Holders requesting registration of Registrable Stock;
12.10 in the event of any underwritten public
offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the
managing underwriter of such offering; each Holder participating in
such underwriting shall also enter into and perform its obligations
under such an agreement;
12.11 notify each Holder of Registrable Stock
covered by such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Securities Act
of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances
then existing; and
12.12 apply for listing and use its best
efforts to list the Registrable Stock being registered on any
national securities exchange on which a class of the Company's equity
securities are listed or, if the Company does not have a class of
equity securities listed on a national securities exchange, apply for
qualification and use its best efforts to qualify the Registrable
Stock being registered for inclusion on the automated quotation
system of the National Association of Securities Dealers, Inc. or on
a national securities exchange.
12.13 Limitations on Demand Registrations.
12.14 The Company shall not be required to
effect more than one registration on behalf of RRGC pursuant to
Section 0.
12.15 The Company shall not register
securities for sale for its own account or give rights to any other
person other than those persons holding registration rights on the
date hereof, or as provided in Section 0 ("Other Shareholders") to
have securities owned by such Other Shareholders included in any
registration requested pursuant to Section 0 unless permitted to do
so by the written consent of Holders who hold at least 51% of the
Registrable Stock as to which registration has been requested. The
Company may not cause any other registration of securities for sale
for its own account or the account of any Other Shareholders (other
than a registration effected solely to implement an employee benefit
plan) to be initiated after a registration requested pursuant to
Section 0 and to become effective less than 120 days after the
effective date of any registration requested pursuant to Section 0.
12.16 Whenever a requested registration under
Section 12.2 is for an underwritten offering, only shares which are
to be included in the underwriting may be included in the
registration. Notwithstanding the provisions of Section 0(c), if the
underwriter determines that (i) marketing factors require a
limitation of the total number of shares to be underwritten, or (ii)
the offering price per share would be reduced by the inclusion of the
shares of the Company, then the number of shares to be included in
the registration and underwriting shall first be allocated among all
Holders who indicated to the Company their decision to distribute any
of their Registrable Stock through such underwriting, in proportion,
as nearly as practicable, to the respective numbers of shares of
Registrable Stock owned by such Holders at the time of filing the
registration statement, and the remainder, if any, to the Company and
the Other Shareholders in such proportion as they shall agree. No
stock excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration unless
there is a withdrawal from the underwriting. If any Holder or the
Company disapproves of any such underwriting, such person may elect
to withdraw therefrom by written notice to the Initiating Holders and
the underwriter. The securities so withdrawn from such underwriting
shall also be withdrawn from such registration.
12.17 The Company shall not be required to
effect a registration pursuant to Section 0 unless the proposed
disposition of shares of Registrable Stock has an aggregate expected
offering price (before deduction of underwriting discounts and
expenses of sale) of not less than $2,000,000.
12.18 If at the time of any request to
register Registrable Stock pursuant to Section 0 hereof, the Company
is engaged, or has fixed plans to engage within 90 days of the time
of the request, in a registered public offering as to which the
Holders may include such Stock pursuant to Section 0 hereof or is
engaged in any other activity which, in the good faith determination
of the Company's Board of Directors, would be adversely affected by
the requested registration to the material detriment of the Company,
then the Company may at its option direct that such request be
delayed for a period not in excess of six (6) months from the
effective date of such offering, or the date of commencement of such
other material activity, as the case may be, such right to delay a
request to be exercised by the Company not more than once while the
rights set forth in Section 0 are in effect.
12.19 The registration rights granted under
Section 0 shall terminate as to any Holder or permissible transferees
or assignee of such rights if such person (i) holds one percent (1%)
or less of the outstanding shares of Common Stock of the Company on a
fully diluted, as if converted basis, and (ii) would be permitted to
sell all of the Registrable Stock held by it pursuant to Rule 144(k)
of the Securities Act of 1933, 17 C.F.R. 230.144(k) ("Rule 144(k)").
12.20 Piggyback Registration. If the Company at any time
proposes to register any of its securities under the Securities Act
(other than a registration effected solely to implement an employee
benefit plan or a transaction to which Rule 145 of the Commission is
applicable), it will each such time give prompt written notice to all
Holders and Other Shareholders of its intention so to do. Upon the
written request of a Holder or Holders or an Other Shareholder or
Other Shareholders given within twenty (20) days after receipt of any
such notice (stating the number of shares of Registrable Stock to be
disposed of by such Holder or Holders or such Other Shareholder or
Other Shareholders and the intended method of disposition), the
Company will use its best efforts to cause all such shares of
Registrable Stock intended to be disposed of, the Holders or such
Other Shareholder or Other Shareholders of which shall have requested
registration thereof, to be registered under the Securities Act so as
to permit the disposition (in accordance with the methods in said
request) by such Holder or Holders or such Other Shareholder or Other
Shareholders of the shares so registered, subject, however, to the
limitations set forth in Section 0.
12.21 Limitations on Piggyback Registration. If the
registration of which the Company gives notice pursuant to Section 0
is for an underwritten offering, only securities that are to be
included in the underwriting may be included in the registration.
Notwithstanding any provision of Section 0, if the underwriter
determines that marketing factors require a limitation of the number
of shares to be underwritten, then the number of shares to be
included in the registration and underwriting shall first be
allocated to the Company, and the underwriter may eliminate or reduce
the number of shares of Registrable Stock to be included in the
registration and underwriting. The Company shall so advise all
Holders and the Other Shareholders (except those Holders and Other
Shareholders who have not indicated to the Company their decision to
distribute any of their Registrable Stock through such underwriting),
and the number of shares of Registrable Stock that may be included in
the registration and underwriting shall be allocated among such
Holders and Other Shareholders in proportion, as nearly as
practicable, to the respective amounts of Registrable Stock owned by
such Holders and Other Shareholders at the time of filing the
registration statement. No Registrable Stock excluded from the
underwriting by reason of the underwriter's marketing limitation
shall be included in such registration, unless there is a withdrawal
from the underwriting. If any Holder or Other Shareholder
disapproves of any such underwriting, such person may elect to
withdraw therefrom by written notice to the Company and the
underwriter. The Registrable Stock and/or other securities so
withdrawn from such underwriting shall also be withdrawn from such
registration. The registration rights granted under Section 0 shall
terminate as to any Other Shareholder or Holder or permissible
transferees or assignee of such rights if such person (a) holds one
percent (1%) or less of the outstanding shares of Common Stock of the
Company on a fully diluted, as if converted basis and (b) would be
permitted to sell all of the Registrable Stock held by him pursuant
to Rule 144(k).
12.22 Designation of Underwriter.
12.23 In the case of any registration
effected pursuant to Section 0 or 0, a majority in interest of the
requesting Holders shall have the right to designate the managing
underwriters in any underwritten offering.
12.24 In the case of any registration
initiated by the Company, the Company shall have the right to
designate the managing underwriter in any underwritten offering.
12.25 Form S-3 Registration.
12.26 The Holders shall have the right to
request up to three (3) registrations on Form S-3 (such requests
shall be in writing and shall state the number of shares of
Registrable Stock to be disposed of and the intended method of
disposition) subject only to the following:
12.27 The Company shall not be required
to effect a registration pursuant to this Section 0 unless the Holder
or Holders requesting registration propose to dispose of shares of
Registrable Stock having an aggregate expected public offering price
(before deduction of underwriting discounts and expenses of sale) of
at least $500,000.
12.28 The Company shall not be required
to effect a registration pursuant to this Section 0 more frequently
than once during any twelve-month period.
The Company shall give prompt written notice to all Holders of the
receipt of a request for registration pursuant to this Section 0 and
shall provide a reasonable opportunity for other Holders to
participate in the registration, provided that if the registration is
for an underwritten offering, the terms of paragraph (d) of Section 0
shall apply to all participants in such offering. Subject to the
foregoing, the Company will use its best efforts to effect promptly
the registration of all shares of Registrable Stock on Form S-3 to
the extent requested by the Holder or Holders thereof.
12.29 The registration rights granted under
this Section 0 shall terminate as to any Holder or permissible
transferees or assignee of such rights if such person (a) holds one
percent (1%) or less of the outstanding shares of Common Stock of the
Company on a fully diluted, as if converted basis, and (b) would be
permitted to sell all of the Registrable Stock held by it pursuant to
Rule 144(k).
12.30 Cooperation by Prospective Sellers.
12.31 Each prospective seller of Registrable
Stock, and each underwriter designated by a majority in interest of
the requesting Holders, will furnish to the Company such information
as the Company may reasonably require from such seller or underwriter
in connection with the registration statement (and the prospectus
included therein).
12.32 Failure of a prospective seller of
Registrable Stock to furnish the information and agreements described
in this Section 0 shall not affect the obligations of the Company
under this Section 0 to remaining sellers who furnish such
information and agreements unless, in the reasonable opinion of
counsel to the Company or the underwriters, such failure impairs or
may impair the viability of the offering or the legality of the
registration statement or the underlying offering.
12.33 The Holders holding shares included in
the registration statement will not (until further notice) effect
sales thereof after receipt of telegraphic or written notice from the
Company to suspend sales to permit the Company to correct or update a
registration statement or prospectus; but the obligations of the
Company with respect to maintaining any registration statement
current and effective shall be extended by a period of days equal to
the period such suspension is in effect unless (i) such extension
would result in the Company's inability to use the financial
statements in the registration statement initially filed pursuant to
the Holder or Holders' request, and (ii) such correction or update
did not result from the Company's acts or failures to act.
At the end of the period during which the Company
is obligated to keep the registration statement current and effective
as described in paragraph (b) of Section 0 (and any extensions
thereof required by the preceding sentence), the Holders holding
shares included in the registration statement shall discontinue sales
of shares pursuant to such registration statement upon receipt of
notice from the Company of its intention to remove from registration
the shares covered by such registration statement which remain
unsold, and such Holders shall notify the Company of the number of
shares registered which remain unsold immediately upon receipt of
such notice from the Company.
12.34 Expenses of Registration.
All expenses incurred in effecting any
registration pursuant to Sections 0, 0 and 0 including, without
limitation, all registration and filing fees, printing expenses,
expenses of compliance with blue sky laws, fees and disbursements of
counsel for the Company, expenses, fees and disbursements of one
special counsel retained by the Holders which shall be Pepper,
Hamilton & Scheetz, Gardere & Wynne, or other special counsel
reasonably acceptable to the Company and expenses of any audits
incidental to or required by any such registration, shall be borne by
the Company, except (a) that all expenses, fees and disbursements of
any additional counsel retained by the Holders and all underwriting
discounts and commissions shall be borne by the Holders of the
securities registered pursuant to such registration, pro rata
according to the quantity of their securities so registered; and (b)
the Company shall not be required to pay for any expenses of any
registration proceeding begun pursuant to Section 0 if the
registration request is subsequently withdrawn at the unilateral
written request, not concurred in by the Company, of the Holders of a
majority of the Registrable Securities to be registered (in which
case all participating Holders shall bear such expenses), unless the
Holders of a majority of the Registrable Securities agree to forfeit
their right to demand registration pursuant to Section 0; provided,
however, that if immediately prior to the time of such withdrawal,
the Holders have learned of a materially adverse change in the
condition, business or prospects of the Company from that known to
the Holders at the time of their request, then the Holders shall not
be required to pay any of such expenses and shall retain their rights
pursuant to Section 0.
12.35 Indemnification.
12.36 To the extent permitted by law, the
Company will indemnify and hold harmless each Holder requesting or
joining in a registration, each agent, officer and director of such
Holders, each person controlling (within the meaning of Section 15 of
the Securities Act) such Holder and each underwriter and selling
broker of the securities so registered (collectively, "Indemnitees")
against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any
prospectus, offering circular or other document incident to any
registration, qualification or compliance (or in any related
registration statement, notification or the like) or any omission (or
alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or any violation (or alleged violation) by the Company of
the Securities Act, the Exchange Act or state securities laws or any
rule or regulation promulgated under the Securities Act, the Exchange
Act or a state securities law, in each case applicable to the
Company, and will reimburse each such Indemnitee for any legal and
any other fees and expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or
action, provided, however, that the Company will not be liable to any
Indemnitee in any such case to the extent that any such claim, loss,
damage, liability or action is caused by any untrue statement or
omission so made in strict conformity with written information
furnished to the Company by an instrument duly executed by such
Indemnitee and stated to be specifically for use therein, or if such
claim, loss, damage, liability or action resulted from such
Indemnitee's intentional fraud, willful misconduct or gross
negligence and except that the foregoing indemnity agreement is
subject to the condition that, insofar as it relates to any such
untrue statement (or alleged untrue statement) or omission (or
alleged omission) made in the preliminary prospectus but eliminated
or remedied in the amended prospectus on file with the Commission at
the time the registration statement becomes effective or in the
amended prospectus filed with the Commission pursuant to Rule 424(b)
(the "Final Prospectus"), such indemnity agreement shall not inure to
the benefit of any underwriter, or any Indemnitee if there is no
underwriter, if a copy of the Final Prospectus was not furnished to
the person or entity asserting the loss, liability, claim or damage
at or prior to the time such furnishing is required by the Securities
Act; provided, further, that this indemnity shall not be deemed to
relieve any underwriter of any of its due diligence obligations;
provided, further, that the indemnity agreement contained in this
subsection 0(a) shall not apply to amounts paid in settlement of any
such claim, loss, damage, liability or action if such settlement is
effected without the consent of the Company, which consent shall not
be unreasonably withheld.
12.37 To the extent permitted by law, each
Holder requesting or joining in a registration and each underwriter
and selling broker of the securities so registered will indemnify and
hold harmless the Company and its officers and directors and each
person, if any, who controls any thereof within the meaning of
Section 15 of the Securities Act and their respective successors
against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any
prospectus, offering circular or other document incident to any
registration, qualification or compliance (or in any related
registration statement, notification or the like) or any omission (or
alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading and will reimburse the Company and each other person
indemnified pursuant to this paragraph (b) for any legal and any
other fees and expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or
action, provided, however, that this paragraph (b) shall apply only
if (and only to the extent that) such statement or omission was made
in reliance upon and in strict conformity with written information
(including, without limitation, written negative responses to
inquiries) furnished to the Company by an instrument duly executed by
such Holder, underwriter or selling broker and stated to be
specifically for use in such prospectus, offering circular or other
document (or related registration statement, notification or the
like) or any amendment or supplement thereto; and except that the
foregoing indemnity agreement is subject to the condition that,
insofar as it relates to any such untrue statement (or alleged untrue
statement) or omission (or alleged omission) made in the preliminary
prospectus but eliminated or remedied in the amended prospectus on
file with the Commission at the time the registration statement
becomes effective or in the Final Prospectus, such indemnity
agreement shall not inure to the benefit of (i) the Company and (ii)
any underwriter or Holder, if there is no underwriter, if a copy of
the Final Prospectus was not furnished to the person or entity
asserting the loss, liability, claim or damage at or prior to the
time such furnishing is required by the Securities Act; provided,
further, that this indemnity shall not be deemed to relieve any
underwriter of any of its due diligence obligations; provided,
further, that the indemnity agreement contained in this subsection
0(b) shall not apply to amounts paid in settlement of any such claim,
loss, damage, liability or action if such settlement is effected
without the consent of the Holder or underwriter, as the case may be,
which consent shall not be unreasonably withheld; and provided,
further, that the obligations of such Holders shall be limited to an
amount equal to the net proceeds received by such Holder from the
sale of Registrable Stock in such offering as contemplated herein,
unless such claim, loss, damage, liability or action resulted from
such Holder's intentional fraudulent misconduct.
12.38 Each party entitled to indemnification
hereunder (the "indemnified party") shall give notice to the party
required to provide indemnification (the "indemnifying party")
promptly after such indemnified party has actual knowledge of any
claim as to which indemnity may be sought, and shall permit the
indemnifying party (at its expense) to assume the defense of any
claim or any litigation resulting therefrom, provided that counsel
for the indemnifying party, who shall conduct the defense of such
claim or litigation, shall be reasonably satisfactory to the
indemnified party, and the indemnified party may participate in such
defense at such party's expense, and provided further that the
omission by any indemnified party to give notice as provided herein
shall not relieve the indemnifying party of its obligations under
this Section 0 except to the extent that the omission results in a
failure of actual notice to the indemnifying party and such
indemnifying party is damaged solely as a result of the failure to
give notice. No indemnifying party, in the defense of any such claim
or litigation, shall consent, except with the consent of each
indemnified party, to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such indemnified party of
a release from all liability in respect to such claim or litigation.
12.39 The reimbursement required by this
Section 0 shall be made by periodic payments during the course of the
investigation or defense, as and when bills are received or expenses
incurred.
12.40 The obligation of the Company under
this Section 0 shall survive the completion of any offering of
Registrable Stock in a registration statement under this Section 0,
or otherwise.
12.41 Rights that may be Granted to Subsequent RRGC.
12.42 Within the limitations prescribed by
this paragraph (a), but not otherwise, the Company may grant to
subsequent investors in the Company the right of registration. Such
rights may be granted with respect to (i) registrations actually
requested by Initiating Holders pursuant to Section 0, but only in
respect of that portion of any such registration as remains after
inclusion of all Registrable Stock requested by Holders, (ii)
registrations initiated by the Company, and (iii) registrations
initiated by such subsequent investors. With respect to
registrations which are for underwritten public offerings, "available
portion" shall mean the portion of the underwritten shares that is
available as specified in clauses (i) and (ii) of the third sentence
of this paragraph (a). Shares not included in such underwriting
shall not be registered.
12.43 The Company may not grant to subsequent
investors in the Company rights of registration upon request (such as
those provided in Sections 0 and 0) unless (i) all Holders are given
enforceable contractual rights to participate in registrations
requested by such subsequent investors to the same extent as such
subsequent investors could participate under Sections 0 and 0, such
participation to be on a pro-rata basis, and subject to the
limitations, described in the final three sentences of paragraph (a)
of this Section 0, (ii) such rights shall not become effective prior
to 90 days after the effective date of the registration pursuant to
Section 0, and (iii) such rights shall not be more favorable than
those granted to RRGC, including rights regarding cutback provisions.
12.44 Transfer of Registration Rights. The registration
rights granted to RRGC under this Section 0 may be transferred but
only to (i) a transferee who shall acquire not less than 200,000
shares of Registrable Stock, as adjusted for stock splits, stock
dividends, and other recapitalization events, (ii) affiliates of
RRGC, and (iii) partners of RRGC's general partner (including spouses
and ancestors, lineal descendants and siblings of such partners or
spouses who acquire Registrable Stock by gift, will or intestate
succession) if all such transferees or assignees agree in writing to
appoint a single representative as their attorney in fact for the
purpose of receiving any notices and exercising their rights under
this Section 0.
12.45 "Stand-Off" Agreement. In consideration for the
Company performing its obligations under this Section 0, RRGC, on
behalf of itself and any of its successors or assigns, agrees for a
period of time (not to exceed 120 days) from the effective date of
any registration (other than a registration effected solely to
implement an employee benefit plan) of securities of the Company
(upon request of the Company or of the underwriters managing an
underwritten offering of the Company's securities) not to sell, make
any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Registrable Stock or any other stock of the
Company held by RRGC, other than shares of Registrable Stock included
in the registration, without the prior written consent of the Company
or such underwriters, as the case may be, provided that all officers
and directors of the Company and each holder of more than 5% of the
outstanding Common Stock shall enter into similar agreements.
12.46 Delay of Registration. RRGC shall have no right to
take any action to restrain, enjoin, or otherwise delay any
registration as the result of any controversy that might arise with
respect to the interpretation or implementation of this Section 0.
Article 13
Definitions
As used herein, the following terms have the following
respective meanings:
Acquired Stock: means any outstanding warrant
received by RRGC upon prepayment of the Note (a "Warrant"), and any
Common Stock held by RRGC or its transferee obtained upon conversion
of the Note or exercise of a Warrant.
Affiliate: as applied to any Person, any other Person
directly or indirectly controlling, controlled by or under direct or
indirect common control with such Person; in any event, however,
always excluding RRGC.
Affiliated Company: the meaning specified in Section
3.13.
Banking Day: any day, excluding Saturday and Sunday
and excluding any other day which shall be in Denver, Colorado, a
legal holiday or a day on which banking institutions are authorized
by law to close.
Capital Expenditure: any payment made directly or
indirectly for the purpose of acquiring or constructing fixed assets,
real property or equipment which in accordance with GAAP would be
added as a debit to the fixed asset account of the Person making such
expenditure, including, without limitation, amounts paid or payable
under any conditional sale or other title retention agreement or
under any lease or other periodic payment arrangement which is of
such a nature that payment obligations of the lessee or obligor
thereunder would be required by generally accepted accounting
principles to be capitalized and shown as liabilities on the balance
sheet of such lessee or obligor.
Capital Lease: any lease of property (real, personal
or mixed) which, in accordance with GAAP, should be capitalized on
the lessee's balance sheet or for which the amount of the asset and
liability thereunder as if so capitalized should be disclosed in a
note to such balance sheet.
Charge and Debt Ratio: the meaning specified in
Section 7.4.
Closing: the meaning specified in Section 2.1.
Closing Date: the meaning specified in Section 2.1.
Code: the meaning specified in Section 3.13.
Common Stock: the common stock, par value $0.001, of
the Company.
Company: the meaning specified at the beginning of
this Agreement.
Consents: the meaning specified in Section 3.12.
Convertible Note: the meaning specified in Section 1.2
ERISA: the meaning specified in Section 3.13.
Event of Default: the meaning specified in Section 11.1.
Financial Statements: the meaning specified in
Section 3.6.
Forms S-1, S-2 and S-3: the meaning specified in
Section 12.1.
GAAP: generally accepted accounting principles
consistently applied.
Hazardous Material: means any substance presently or
hereafter listed, defined, designated or classified as hazardous,
toxic, radioactive or which is otherwise regulated under any
Environmental Law. It includes, without limitation, any toxic waste,
pollutant, contaminate, hazardous substance, toxic substance,
hazardous waste, and radioactive material. "Environmental" Law means
any federal, state, local or other statute, law, ordinance, code,
rule, regulation, order or decree regulating, relating to, or
imposing liability or standards of conduct concerning the (1)
protection, preservation or restoration of the environment or to
human health and safety or (2) the exposure to, or the use, storage,
recycling, treatment, generation, transportation, handling, release
or disposal of hazardous material. It includes, without limitation
the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Resource Conservation and Recovery
Act of 1976, each as amended, or any state counterpart thereof.
Holder: the meaning specified in Section 0.1.
Indebtedness: as applied to any Person, (i) all items
(except items of capital or surplus or of retained earnings) which in
accordance with GAAP would be included in determining total
liabilities as shown on the liability side of the balance sheet of
such Person as of the date of which Indebtedness is to be determined,
including any Capital Lease, (ii) all indebtedness secured by any
mortgage, pledge, lien or conditional sale or other title retention
agreement to which any property or asset owned or held by such Person
is subject, whether or not the indebtedness secured thereby shall
have been assumed, and (iii) all indebtedness of others which such
Person has directly or indirectly guaranteed, endorsed (otherwise
than for collection or deposit in the ordinary course of business),
discounted or sold with recourse or agreed (contingently or
otherwise) to purchase or repurchase or otherwise acquire, or in
respect of which such Person has agreed to supply or advance funds
(whether by way of loan, stock purchase, capital contributions or
otherwise) or otherwise to become directly or indirectly liable.
Indebtedness shall not include payment of Preferred Stock dividends.
Indemnitees: the meaning specified in Section 12.11.
Initiating Holders: the meaning specified in Section
12.2.
Intellectual Property: the meaning specified in
Section 3.15.
Investment Documents: collectively, the Investment
Agreement, the Note, the Security Agreement, the Pledge Agreement,
the Stockholders' Agreement, the SBA Documents and all certificates
and agreements delivered by the Company in connection herewith and
with such other agreements.
RRGC: the meaning specified at the beginning of this
Agreement, including their permitted successors and assigns.
Licenses: the meaning specified in Section 0.
Loan: the meaning specified in the Recitals.
Non-Convertible Note: the meaning specified in
Section 1.2.
Notes: the meaning specified in Section 1.2.
Notice Period: the meaning specified in Section 12.2.
Officers: the meaning specified in Section 3.17.
Operating Cash Flow: the meaning specified in Section
7.2.
Operating Lease: any lease, including a lease with an
option to purchase, other than a Capital Lease.
Other Shareholders: the meaning specified in Section
12.4.
PBGC: the meaning specified in Section 6.6.
Permitted Subsidiary: the meaning specified in
Section 6.6.
Person: a corporation, an association, a partnership,
a limited liability company, a joint venture, a trust, an
organization, a business, an individual, a government or political
subdivision thereof, a governmental agency or any other legal entity.
Principal Stockholder: the meaning specified in
Section 3.2.
Property: the meaning specified in Section 3.14.
Qualified Public Offering: a secondary public
offering of the Company's Common stock which results in net proceeds
to the Company of at least $15,000,000.
Register, Registered and Registration: the meaning
specified in Section 12.1.
Registration Rights Agreement: the meaning specified
in Section 4.7.
Required Demand Amount: the meaning specified in
Section 12.1.
Rule 144(k): the meaning specified in Section 12.4(f).
SBIC Act: the meaning specified in Section 9.1.
SBA Documents: the meaning specified in Section 4.3.
Schaden: Richard E. Schaden.
Schadens: Richard E. Schaden and Richard F. Schaden.
Schaden Shares: the meaning specified in
Section 1.5(b).
SEC: the meaning specified in Section 10.1(g)
Securities Act: Securities Act of 1933, as amended.
Senior Indebtedness: the meaning specified in Section
1.3.
Senior Lender: the meaning specified in Section 1.3.
Small Business Concern: the meaning specified in
Section 9.2.
Stockholders Agreement: the meaning specified in
Section 4.7.
Subsidiary: any corporation, association,
partnership, limited liability company, joint venture or other
business entity of which more than 50% of the outstanding voting
stock (or equivalent interest) is at the time owned by the Company or
by one or more Subsidiaries or by the Company and one or more
Subsidiaries.
Valuator: a member of an accounting, appraisal or
investment banking firm of nationally recognized standing or other
person with demonstrable skills which qualifies them to value the
business of the Corporation.
Valuation Procedure: the following procedure for
determining the fair value of Common Stock or Warrants to be acquired
by the Company (the "Redeemed Securities"): (a) upon the event
triggering the need to determine the fair value of the Redeemed
Securities ("Valuation Notice"), the Company and Holder whose
Redeemed Securities are being valued (the "Selling Person") shall
attempt to agree on a mutually acceptable Valuator to value the
Redeemed Securities, and if such parties agree on a Valuator within
ten days following the receipt of the Valuation Notice, such Valuator
shall, on or before twenty days following the date it is appointed,
determine the fair value of the Redeemed Securities, and such
determination shall be binding upon the Company and the Selling
Person; (b) in the event the Company and Selling Person are unable to
agree upon a mutually acceptable Valuator within ten days following
the date of the receipt of the Valuation Notice, on the expiration of
such ten-day period the Company and the Selling Person shall each
appoint a Valuator to value the Redeemed Securities. Within twenty
days following the date they are appointed, the Valuators appointed
by the Company and the Selling Person shall determine the fair value
of the Redeemed Securities. In the event the value determined by the
Company's Valuator is within 5% of the value determined by the
Selling Person's Valuator, the fair value for purposes of this
Agreement shall be the average of the values determined by such
Valuators and such determination shall be binding upon the Company
and the Selling Person. In the event the value determined by the
Company's Valuator is not within 5% of the value determined by the
Selling Person's Valuator, such Valuators shall in turn appoint a
third Valuator who shall, within twenty days following the date it is
appointed, determine the fair value of the Redeemed Securities. The
value which is neither the lowest nor the highest of the values
determined by the three Valuators shall be the fair value of the
Redeemed Securities for purposes of this Agreement and shall be
binding on the Company and the Selling Person. In the event either
the Company or the Selling Person fails to timely appoint a Valuator,
such failing party shall be deemed to have waived its rights to
appoint a Valuator, and the Valuator appointed by the other party
shall determine the fair value for purposes of this Agreement, which
determination shall be binding upon the Selling Person and the
Company. The costs of any mutually agreeable Valuator referred to in
(a) above and of the third Valuator referred to in (b) above shall be
paid equally by the Company and the Selling Person. The Selling
Person shall pay all costs of the Valuator appointed by the Selling
Person pursuant to (b) above and the Company shall pay all cost of
the Valuator so appointed by it.
The Valuators shall use the following valuation guidelines:
(1) The Corporation shall be valued based upon the higher
of its value as a going concern or upon its
liquidation.
(2) The Redeemed Securities shall be valued without
discount for illiquidity, lack of marketability, or
minority holding.
Notwithstanding the foregoing, if the Company's Common Stock has had
an average trading volume of 30,000 shares per day over the last
twenty (20) days, excluding trading initiated by the Principal
Stockholders, then the fair value of the Company shall be determined
based on the average closing prices over those same twenty (20) days.
Warrants: the meaning specified in the definition of
Acquired Stock.
Article 14
Taxes and Fees; Indemnification
14.1 Taxes, Placement Fee. Whether or not the transactions
contemplated hereby shall be consummated, the Company agrees to pay
all taxes and fees (including interest and penalties), including,
without limitation, all recording and filing fees, transfer and
documentary stamp and similar taxes, which may be payable in respect
of the execution and delivery of the Investment Documents (including
any amendment, consent or waiver hereafter requested by the Company
hereunder or thereunder) and to indemnify RRGC and hold RRGC harmless
against any loss or liability resulting from non-payment or delay in
payment of any such tax. The Company shall also pay any private
placement fees assessed by the State of Texas or any subdivisions
thereof. Notwithstanding the foregoing, this section does not apply
to income taxes or other taxes measured by income of RRGC.
14.2 Indemnification. The Company will indemnify RRGC, its
general and limited partners, and their its directors, officers and
employees and each other Person, if any, who controls RRGC and will
hold RRGC and such other Persons harmless from and against any and
all claims, damages, losses, liabilities, judgments and expenses
(including without limitation all reasonable fees and expenses of
counsel and all expenses of litigation or preparation therefor) which
RRGC or such other Persons may incur or which may be asserted against
RRGC or such other Persons in connection with or arising out of any
investigation, litigation or proceeding involving the Company or any
stockholder or any Affiliate of the Company or any such stockholder
(including compliance with or contesting of any subpoenas or other
process issued against RRGC, or any director, officer or employee of
RRGC or any Person, if any, who controls RRGC in any proceeding
involving the Company or any stockholder or any Affiliate of the
Company or any such stockholder), whether or not RRGC is party
thereto, other than claims, damages, losses, liabilities, expenses or
judgments with respect to any matter as to which RRGC or such other
Person seeking indemnity shall have been finally adjudicated to have
acted with willful misconduct or gross negligence. Promptly upon
receipt by any indemnified party hereunder of notice of the
commencement of any action, such indemnified party shall, if a claim
in respect thereof is to be made against the Company hereunder,
notify the Company in writing of the commencement thereof.
Article 15
Waivers
15.1 Waivers. RRGC's failure to insist upon the strict performance
of any term, condition or other provision of any Investment Document,
or to exercise any right or remedy hereunder or thereunder shall not
constitute a waiver by RRGC of any such term, condition or other
provision or default or Event of Default in connection therewith; and
any waiver of any such term, condition or other provision or of any
such default or Event of Default shall not affect or alter any
Investment Document and each and every term, condition and other
provision of the Investment Documents shall, in such event, continue
in full force and effect and shall be operative with respect to any
other then existing or subsequent default or Event of Default in
connection therewith.
Article 16
Miscellaneous
16.1 Waivers and Amendments. This Agreement may be amended
only by the written consent of RRGC and the Company. The terms of
this Agreement may be waived only by a statement in writing signed by
the party against whom enforcement of the waiver is sought.
16.2 Lost Notes, Warrants or Stock Certificates. Upon
receipt of an affidavit of loss of a Note, a Warrant or any stock
certificate and, in the case of any such loss, theft or destruction,
upon receipt of an indemnity agreement from RRGC reasonably
satisfactory to the Company, or in the case of any such mutilation
upon surrender and cancellation of such Note, Warrant or stock
certificate, the Company will make and deliver a new Note, Warrant or
stock certificate, or like tenor, in lieu of the lost, stolen,
destroyed or mutilated Note, Warrant or stock certificate.
16.3 Notices. All notices and other communications
hereunder shall be in writing and shall be delivered by facsimile
where confirmation or receipt by the receiving party's receiver can
be documented, or personally delivered by hand or by reputable
overnight courier or mailed by first class certified or registered
mail, postage prepaid, as follows:
(a) If to RRGC:
Retail & Restaurant Growth Capital, L.P.
10000 N. Central Expressway
Suite 1060
Dallas, Texas 75231
ATTN: Eric Lawrence
Facsimile Number: 214/750-0060
with a copy to:
Michael B. Staebler, Esq.
Pepper, Hamilton & Scheetz
100 Renaissance Center
Suite 3600
Detroit, MI 48243
Facsimile Number: 313/259-7926
(b) If to the Company:
The Quizno's Corporation
7555 East Hampden Avenue
Suite 601
Denver, CO 80231
Attn: Richard E. Schaden
Facsimile Number: 303/368-9454
with a copy to:
Lyle B. Stewart, Esq.
Ballard, Spahr, Andrews & Ingersoll
1225 l7th Street, Suite 2300
Denver, CO 80202
Facsimile Number 303/296-3956
or to such other address or addresses as the party to whom such
notice is directed may have designated in writing to the other party
hereto. A notice shall be deemed to have been given upon receipt by
the party to whom such notice is directed, or, if receipt is refused,
on the day on which delivery was attempted.
16.4 Fees and Expenses. Subject to Section 0, the Company
shall reimburse RRGC for up to $50,000 of fees and expenses
(including but not limited to legal fees, advisory and consulting
fees, travel and communication expenses, and reproduction costs)
incurred in connection with the transactions contemplated by this
Agreement. Subject to Section 0, the Company shall also reimburse
RRGC for all reasonable costs incurred in amending, modifying, or
enforcing this Agreement.
16.5 Calculations. Calculations hereunder shall be made
and financial data required hereby shall be prepared, both as to
classification of items and as to amounts, in accordance with
generally accepted accounting principles and practices which
principles and practices shall be consistently applied and in
conformity with those used in the preparation of the financial
statements referred to herein.
16.6 Survival of Agreements. This Agreement shall inure to
the benefit of RRGC and its successors and assigns including any
subsequent holder or holders of the Note or other Acquired Stock, as
the case may be, and the terms RRGC, shall include any such holder or
holders whenever the context permits. All agreements,
representations and warranties made herein shall survive the
execution and delivery of this Agreement and the making of the Loan
hereunder.
16.7 Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties hereto on
separate counterparts, each of which when so executed and delivered
shall be an original, but all the counterparts shall together
constitute one and the same instrument. The parties may deliver
execution copies of this Agreement by delivery of signature pages by
fax transmission, provided that such delivery is thereafter followed,
within a reasonable time, with delivery of originally executed
signature pages.
16.8 Entire Agreement. This Agreement, together with the
Investment Documents, constitutes the entire contract between the
parties hereto and shall supersede and take the place of any other
instrument purporting to be an agreement of the parties hereto
relating to the transactions contemplated hereby.
16.9 Governing Law; Jurisdiction; Waiver of Jury Trial.
This Agreement and each of the other Investment Documents, including
the validity hereof and thereof and the rights and obligations of the
parties hereunder and thereunder, shall be construed in accordance
with and governed by the laws of the State of Texas (without regard
to its choice of law provisions). The Company, to the extent that it
may lawfully do so, hereby consents to service of process, and to be
sued, in the State of Texas and consents to the jurisdiction of the
courts of Dallas County, Texas, as well as to the jurisdiction of all
courts to which an appeal may be taken from such courts, for the
purpose of any suit, action or other proceeding arising out of any of
its obligations hereunder or under the Note or with respect to the
transactions contemplated hereby or thereby, and expressly waives any
and all objections it may have as to venue in any such courts. The
Company further agrees that a summons and complaint commencing an
action or proceeding in any of such courts shall be properly served
and shall confer personal jurisdiction if served personally or by
certified mail to it at its address provided in Section 0 or as
otherwise provided under the laws of the State of Texas. The Company
and RRGC irrevocably waive all right to a trial by jury in any
proceeding hereafter instituted by or against the Company or RRGC, as
applicable, in respect of the Investment Documents or any other
documents executed in connection herewith or therewith.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date set forth.
THE QUIZNO'S
CORPORATION, a Colorado corporation
By: /s/ Richard E. Schaden
Its: President
RETAIL AND RESTAURANT
GROWTH CAPITAL, L.P., a Delaware limited
partnership
By: Retail &
Restaurant Growth Capital, L.P., a
Texas limited partnership, its general
partner
By: Retail &
Restaurant Growth Management, Inc., a
Texas corporation, its general partner
By: /s/ Raymond C. Hemming
Its: COB/CEO
Exhibit 10.20
SECURITY AGREEMENT
This SECURITY AGREEMENT is made as of December 31,
1996 by and between The Quizno's Corporation a Colorado
corporation ("Debtor"), with an address at 7555 E. Hampden
Ave., Suite 601, Denver, Colorado 80231, and Retail &
Restaurant Growth Capital, L.P., a Delaware limited
partnership with an address at 10000 N. Central Expressway,
Suite 1060, Dallas, Texas 75231 (the "Secured Party").
Recitals
The following is a statement of facts underlying
this Agreement:
A. Debtor and the Secured Party are parties to an
Investment Agreement of even date herewith ("Investment
Agreement") whereby Secured Party loaned Debtor $2,000,000
(the "Loan") as evidenced by a Senior Subordinated
Convertible Promissory Note (the "Note").
B. As a condition to making the Loan Secured Party
requires that Debtor grant to it a security interest in the
Collateral, as described in Section 3 below, to secure
payment of the Loan and the Note and performance of the
other obligations contained in this Agreement.
Agreement
NOW, THEREFORE, in consideration of the Secured
Party making the Loan to the Debtor and their mutual
promises set forth herein, Debtor and the Secured Party
hereby agree as follows:
1. Security Interest. Debtor hereby creates and
grants to the Secured Party a continuing security interest
in the Collateral described in Section 3 hereof, to secure
the payment of the Loan and the Note and performance of the
other obligations of Debtor described in this Agreement.
Such security interest shall be subordinate to certain other
liens and security interests granted by Debtor as provided
in Section 1.3 of the Investment Agreement.
2. Obligations Secured. The security interest
created and granted hereby secures (a) Debtor's obligation
to pay, perform and discharge all debts, liabilities and
obligations of Debtor to the Secured Party arising under or
by virtue of the Loan and the Note and any and all
extensions and increases thereof; and (b) other indebtedness
and obligations of Debtor arising pursuant to the provisions
of this Security Agreement (collectively, the
"Obligations"). This Agreement will automatically terminate
upon payment in full of the Note.
3. Collateral. The collateral (the
"Collateral")
shall mean and include all right, title, estate and interest
of Debtor in or to: all tangible and intangible personal
property and fixtures of Debtor which Debtor now or at any
time hereafter may acquire or in which Debtor now or any
time hereafter has any rights, including but not limited to
all accounts receivable, documents, instruments, chattel
paper, general intangibles, inventory, contract rights,
choses in action, insurance policies, insurance proceeds,
tax refunds, inventory, goods, merchandise, and other
personal property now owned or hereafter acquired by Debtor
which are held for sale or lease, or are raw materials, work-
in-process, supplies, or materials used or consumed in
Debtor's business, and all substitutions, replacements,
additions, or accessions therefore and thereto, all
intellectual property, trade copyrights, equipment,
trademarks, franchises, patents, trade names, licenses,
jingles, slogans and logotypes, related common law and
statutory copyrights owned or licensed to Debtor, cash and
short-term investments, vehicles, consumer goods of every
kind and description, including, without limitation, motor
vehicles, with all present and future proceeds and products
of, increases, replacements and accessions thereto.
The term "accounts receivable" shall include,
without limitation, all accounts and any other obligations
or indebtedness owed to Debtor from whatever source arising;
all rights of Debtor to receive any payments in money or
kind; all guarantees of receivables and security therefor;
all of the right, title and interest of Debtor in and with
respect to the goods, services or other property which gave
rise to or which secure any of the receivables and insurance
policies and proceeds relating thereto, and all of the
rights of Debtor as an unpaid seller of goods or services,
including, without limitation, the rights of stoppage in
transit, replevin, reclamation and resale; and all of the
foregoing, whether now existing or hereafter created or
acquired.
4. Perfection of Security Interest. Debtor
shall join with the Secured Party in executing and filing
and refiling under the Uniform Commercial Code such
financing statements and other documents, such recordings of
assignments of real estate interests and such patent,
trademark, copyright or other assignment forms and such
other writings in such offices as the Secured Party may deem
necessary or appropriate and wherever required or permitted
by law in order to perfect and preserve its security
interest in the Collateral, and Debtor hereby constitutes
and appoints the Secured Party as its attorney-infact for
the purpose of signing and filing such financing state ments
and other documents and writings and agrees to do such
further acts and things and to execute and deliver to the
Secured Party such additional conveyances, assignments,
agreements and instruments as the Secured Party may require
or deem advisable to carry into effect the purpose of this
Security Agreement or to better assure and confirm in the
Secured Party its rights, powers and remedies hereunder.
5. Right of Inspection. From the date hereof
until the payment in full, including interest, of the
Obligations, the Secured Party and any authorized agent of
the Secured Party shall be allowed to inspect any and all of
the premises, books and records of Debtor for any purpose
related to the Collateral, this Security Agreement or the
Obligations secured hereby. Each Secured Party will
endeavor to give Debtor reasonable notice of any such
inspection, but shall not be obligated to do so. Prior to
providing access to information, the Company reasonably
considers to be trade secret or similar confidential
information, the Company may request that the Secured Party
or its authorized agent sign a confidentiality agreement
reasonably acceptable to
the Company.
6. Representations and Warranties of Debtor.
Except
for "Permitted Encumbrances" as hereafter defined, Debtor
repre sents and warrants to the Secured Party that the
Collateral is free and clear of all security interests,
restrictions, liens and encumbrances, except the security
interests herein granted or permitted, and those described
in Section 3.10 of the Investment Agreement that Debtor has
the full right and power to transfer the Collateral to the
Secured Party under this Security Agreement and to enter
into this Security Agreement and carry out its terms, and
that Debtor is, or at the time each item of Collateral comes
into existence will be, the true and lawful owner of, and
has, or at the time it comes into existence will have, good
and clear title thereto subject only to the Secured Party's
security interests and Permitted Encumbrances. Debtor
further represents and warrants that (i) all Collateral is
located as set forth on Exhibit A, and (ii) its principal
place of business is located in the State of Colorado.
"Permitted Encumbrances" shall mean all of the
follow ing: (i) liens for taxes, assessments or governmental
charges or levies not yet due or delinquent, or which-can
thereafter be paid without penalty, or which are being
contested in good faith in accordance with the Investment
Agreement; (ii) unfiled inchoate mechanics' and
materialmen's liens for construction work in progress; (iii)
workmen's, repairmen's, warehousemen's and carriers' lien
and other similar liens, if any, arising in the ordinary
course of business; (iv) purchase money security interests;
and (v) security interests or liens in the Collateral
granted to the holders of Senior Indebtedness as defined in
the Investment Agreement.
7. Right of Possession. Unless otherwise
provided
herein and subject to the terms and conditions of this
Security Agreement, unless and until an Event of Default (as
hereinafter defined) shall occur, Debtor shall be entitled
to the use, pos session and quiet enjoyment of the
Collateral.
8. Covenants with Respect to Collateral. From
the
date hereof until payment in full, including interest, or
performance of all Obligations hereunder, Debtor shall:
(a) not sell, transfer, assign, dispose of,
hypothecate or subject to any lien or encumbrance any or all
of the Collateral except for sales of immaterial amounts of
equipment or Permitted Encumbrances or unless the Secured
Party has consented in advance and in writing; provided,
however, that this Section 8(a) shall not apply to bona fide
sales of items of Collateral in the ordinary course of
business and Debtor may grant purchase money security
interests as defined in the Colora do Uniform Commercial
Code in the ordinary course of business and Permitted
Encumbrances (as hereafter defined);
(b) maintain in full force and effect the
policy or policies of insurance issued by insurers of
recognized responsibility insuring the Collateral against
such losses and risks and in such amounts as are customary
in the case of corpora tions of established reputation
engaged in the same or a similar business and similarly
situated;
(c) keep all Collateral and its principal
place of business located in the locations listed on Exhibit
A unless Secured Party has received written notice of any
change at least twenty (20) days in advance of such change;
and
(d) properly maintain and care for the
Collateral in accordance with the highest standards
customary for businesses similar to the business of Debtor.
9. Rights of Secured Party. In addition to all
other
rights given the Secured Party herein, the Secured Party
may, but shall not be obligated to, (a) discharge any or all
taxes, liens, security interests or other encumbrances at
any time levied or placed upon the Collateral, (b) pay for
the insurance on the Collateral, and (c) pay for the
maintenance and preservation of the Collateral. Debtor
shall reimburse the Secured Party on demand for any payment
made, or any expense incurred, together with interest at the
lesser of an annual rate of fourteen percent (14%) or the
highest rate permitted by law, by the Secured Party pursuant
to the foregoing authorization. Any action which is
required to be taken or which may be taken or any document
which is required to be executed or which may be executed by
a Secured Party under this Security Agreement, including
without limitation, any modification, termination or
amendment of this Security Agreement, release of any or all
of the Collateral, waiver of the performance of any
obligations of Debtor hereunder, exercise of the remedies
provided herein upon default by the Debtor and application
of the proceeds of any sale of the Col lateral hereunder,
may be taken or executed by the Secured Party.
10. Events of Default. An Event of Default as
used in this Security Agreement shall be any or all of the
following:
(a) an Event of Default as defined in the
Invest ment Agreement;
(b) the failure of Debtor to perform,
observe or keep any covenant, agreement, condition or
obligation under this Security Agreement, which failure
shall continue after ten (10) days have elapsed from demand
by a Secured Party to Debtor for performance thereof; or
(c) if any representation or warranty made
herein by Debtor shall prove to have been false or
misleading in any material respect.
11. Remedies in the Event of Default.
(a) Upon the occurrence of an Event of
Default shall have occurred, the Secured Party shall be
entitled to proceed to enforce its rights, including,
without limitation, the right to exercise with respect to
the Collateral all the rights and remedies available to a
secured party upon default under the Colorado Uniform
Commercial Code at the time, including the right to sell,
lease or otherwise dispose of the Collateral or any portion
thereof at public or private sale upon such terms as the
Secured Party may determine. In addition, the Secured Party
shall have all other rights and remedies provided for herein
and in the Investment Agreement and such other rights and
remedies as may be provided by law, and may require Debtor
to assemble the Collateral and make it available to the
Secured Party at a place to be designated by Debtor which is
reasonably convenient to both parties. The Secured Party
shall have the right, without notice or demand or legal
process, to enter upon the premises of Debtor and take
possession of the Collateral, together with all additions
and accessions thereto. Further, upon the occurrence of an
Event of Default, the Secured Party may, without notice,
declare all obligations secured hereby immediately due and
payable.
(b) The Secured Party shall give Debtor
notice of
the time and place of any public sale of the Collateral or
of the time on or after which any private sale or other
intended dispo sition is to be consummated, which notice
shall be mailed to Debtor in the manner set forth in Section
16(c) hereof at least ten (10) days prior to the time of
such sale or other intended disposition, and such notice
shall be considered reasonable.
Each purchaser at any sale of the Collateral
(including the Secured Party) shall hold the property sold
absolutely free from any claim or right on the part of
Debtor, and Debtor hereby waives to the extent permitted by
law all rights of redemption, stay and/or appraisal which it
now has or may at any time in the future have under any rule
of law or statute now existing or hereafter enacted and, to
the extent permitted by law, any right which it may have to
demand a hearing or other judicial or ad ministrative
proceeding prior to the enforcement by the Secured Party of
any of their rights and remedies hereunder. Any public or
private sale of the Collateral or any party of it shall be
held at such time or times within ordinary business hours
and at such place or places as the Secured Party may fix in
the notice of sale, and at any such sale the Collateral, or
the portion thereof to be sold, may be sold in one lot as an
entirety or in separate parcels, as the Secured Party in its
sole and absolute discretion may determine. If permitted by
law, a Secured Party may bid (which bid may be, in whole or
in part, in the form of cancellation of indebtedness) for
the purchase of the Collateral.
The Secured Party shall not be obligated to make
any sale of the Collateral or any part of it if they
determine not to do so, regardless of the fact that notice
of sale of the Col lateral may have been given. The Secured
Party may, without notice or publication, adjourn a public
or private sale of the Collateral, or cause the same to be
adjourned from time to time by announcement at the time and
place fixed for sale, and such sale may, without further
notice, be made at the time and place to which the same was
so adjourned.
(c) All demands and presentments of any kind
or nature are hereby expressly waived by Debtor. Debtor
hereby waives the right to require the Secured Party to
proceed against any of the Collateral it may hold or against
any debtor of Debtor, or to pursue any other remedy. All of
the Secured Party's remedies are cumulative and may be
enforced successively or concurrently and no such action
shall estop or prevent the Secured Party from pursuing any
other remedies.
(d) Following an Event of Default, Debtor
hereby irrevocably appoints the Secured Party, or any person
designated by the Secured Party, its true and lawful
attorney-in-fact to receive, open and dispose of all mail
addressed to Debtor, to endorse the name of Debtor on any
notes, acceptances, drafts, money orders or other
remittances; to notify account debtors to direct payments
directly to Secured Party at such address as Secured Party
may designate; to endorse the name of Debtor on any invoice,
freight or expense bill or bill of lading, storage receipt,
warehouse receipt or other instrument or document in respect
to any Collateral; to sign the names of Debtor to drafts
against Debtor, assignments or verifications of accounts and
notices to Debtor; to station a representative of the
Secured Party on the premises of the Debtor for the purpose
of taking any of the actions described in this paragraph
including, without limitation, taking possession of books
and records; and to do all other acts and things necessary
to carry out the intent of this Security Agreement. The
foregoing appointment and authority shall remain in effect
until all obligations of Debtor to the Secured Party secured
hereby have been paid in full.
12. Application of Proceeds. All proceeds of any
sale of the Collateral by the Secured Party pursuant to
Section 11 hereof shall be applied in favor of the Secured
Party as follows:
(a) first, to the payment of all fees and
expenses incurred by the Secured Party in connection with
any such sale, including, but not limited to, the expenses
of taking, advertising, processing, preparing and storing
the Collateral to be sold, all court costs and reasonable
fees of counsel for the Secured Party in connection
therewith, and to the payment of all advances made by the
Secured Party hereunder to the account of Debtor and the
payment of all costs and expenses paid or incurred by the
Secured Party in connection with the exercise of any right
or remedy hereunder, to the extent that such advances, costs
and expenses shall not theretofore have been reimbursed to
the Secured Party by Debtor;
(b) second, to the payment of accrued
interest, if any, on the Note;
(c) third, to the payment of the outstanding
prin cipal balance of the Note;
(d) fourth, to the payment of accrued
interest, if any, on the Obligations, other than the Note;
and
(e) fifth, to the payment of the outstanding
principal of the Obligations, other than the Note.
Any surplus shall be delivered to Debtor. If
there is any deficiency, Debtor shall promptly pay the
deficiency to the Secured Party on demand.
13. Miscellaneous.
(a) Upon payment in full of the Note by
Debtor and any and all other obligations secured hereby, the
security interest in the Collateral granted to the Secured
Party in this Security Agreement shall terminate, and
Secured Party shall execute any required releases or
termination statements.
(b) The Secured Party may delay exercising,
or omit to exercise, any right or remedy under this Security
Agree ment without waiving that or any past, present or
future right or remedy.
(c) All notices, requests, demands and other
com munications hereunder shall be given as required in the
Investment Agreement.
(d) This Security Agreement shall bind and
inure to the benefit of the parties, their successors and
assigns; pro vided, however, that this Security Agreement
shall not be assigned by Debtor without the prior written
consent of the Se cured Party and any attempted assignment
by Debtor without such consent shall be null and void.
(e) This Security Agreement and its
performance shall be governed by the internal laws of the
State of Colorado.
(f) This Security Agreement and the security
interest created hereby are for the sole and exclusive
benefit of the parties hereto and shall not operate to the
benefit of any third party.
(g) If any term, covenant or condition of
this Security Agreement or the application thereof shall be
invalid or unenforceable, the remainder of this Security
Agreement or the application of such term, condition or
covenant to persons or circumstances other than those as to
which it is held invalid or unenforceable shall be
unaffected thereby and shall be valid and enforced to the
fullest extent permitted by law.
(h) This Agreement may be executed in
counterparts, each of which shall be deemed an original and
all of which, when taken together, shall constitute one and
the same instrument.
(i) This Agreement may be amended only by
the written consent of the Secured Party. The terms of this
Agreement may be waived only by a statement signed by the
party against whom enforcement of the waiver is sought.
IN WITNESS WHEREOF, the parties hereto have duly
exe cuted this Security Agreement on the date first above
written.
DEBTOR: THE QUIZNO'S CORPORATION
a Colorado corporation
By: /s/ Richard E. Schaden
ts: President
SECURED PARTY: RETAIL & RESTAURANT GROWTH
CAPITAL, L.P., a Delaware
limited partnership
By: Retail & Restaurant Growth
Partners, L.P., its
General Partner
By: Retail & Restaurant Growth
Management, Inc., its
General Partner
By: /s/ Raymond C. Hemming
Its: COB/CEO
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,144,078
<SECURITIES> 0
<RECEIVABLES> 414,679
<ALLOWANCES> 51,077
<INVENTORY> 0
<CURRENT-ASSETS> 3,273,020
<PP&E> 1,677,249
<DEPRECIATION> 218,270
<TOTAL-ASSETS> 6,839,784
<CURRENT-LIABILITIES> 1,699,351
<BONDS> 0
0
146
<COMMON> 2,865
<OTHER-SE> 1,237,911
<TOTAL-LIABILITY-AND-EQUITY> 6,839,784
<SALES> 7,088,620
<TOTAL-REVENUES> 7,486,495
<CGS> 2,901,500
<TOTAL-COSTS> 5,060,493
<OTHER-EXPENSES> 104,844
<LOSS-PROVISION> 358,563
<INTEREST-EXPENSE> 80,063
<INCOME-PRETAX> (1,018,968)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,018,968)
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<NET-INCOME> (1,018,968)
<EPS-PRIMARY> (.38)
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