UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
---------------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO 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
(Exact name of registrant as specified in its charter)
COLORADO 84-1169286
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
1099 18TH STREET, SUITE 2850
DENVER, COLORADO 80202
(Address of principal executive offices)
(303) 291-0999
(Registrant's telephone number, including area code)
Check whether issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS AUGUST 7, 1997
- --------------------------------- ----------------
Common Stock, $0.001 par value 2,868,084 shares
THE QUIZNO'S CORPORATION
COMMISSION FILE NUMBER: 000-23174
QUARTER ENDED JUNE 30, 1997
FORM 10-QSB
PART I FINANCIAL INFORMATION
Consolidated Statements of Operations Page 1
Consolidated Balance Sheets Page 3
Consolidated Statements of Cash Flows Page 5
Consolidated Statement of Stockholders' Equity Page 7
Notes to Consolidated Financial Statements Page 8
Management's Discussion and Analysis of Financial
Condition or Plan of Operation Page 9
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Statement of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1997 1996 1997 1996
------- ------- ------ -------
<S> <C> <C> <C> <C>
FRANCHISE OPERATIONS:
REVENUE
Royalty fees $ 537,360 $ 395,286 $1,006,485 $714,221
Initial franchise fees 672,500 242,500 847,001 497,500
Area director marketing fees 470,327 637,169 895,750 887,655
Other 149,244 60,469 254,553 115,639
Interest revenue 39,144 42,735 84,246 83,549
--------- ---------- ---------- --------
Total revenue 1,868,575 1,378,159 3,088,035 2,298,564
--------- ---------- ---------- --------
EXPENSES
Sales and royalty commissions 611,644 225,462 869,156 359,188
Advertising and promotion 98,852 57,566 129,909 114,307
General and administrative
expenses 1,054,448 955,932 1,978,067 1,692,099
--------- ---------- ---------- --------
Total expenses 1,764,944 1,238,960 2,977,132 2,165,594
--------- ---------- ---------- --------
NET INCOME FROM FRANCHISE OPERATIONS 103,631 139,199 110,903 132,970
--------- ---------- ---------- --------
COMPANY STORE OPERATIONS:
SALES BY COMPANY OWNED STORES 886,734 709,258 1,499,474 1,337,250
--------- ---------- ---------- --------
EXPENSES
Cost of sales at Company stores 290,554 259,380 507,001 478,074
Cost of labor at Company stores 231,996 196,690 397,446 387,703
Other Company store expenses 293,905 235,977 523,782 444,695
--------- ---------- ------------ ------
Total expenses 816,455 692,047 1,428,229 1,310,472
--------- ---------- ---------- --------
NET INCOME FROM COMPANY STORES 70,279 17,211 71,245 26,778
--------- ---------- ---------- ---------
OTHER INCOME (EXPENSE):
RESEARCH & DEVELOPMENT AND NEW PROGRAMS
Direct retail advertising -- (17,647) $(3,053) (49,479)
Research and development (16,549) (4,134) (34,378) (4,134)
OTHER
Sales by stores held for resale 37,284 3,626 111,286 20,572
Expenses related to stores held for
resale (52,239) (8,832) (150,781) (39,361)
Loss on sale of Company stores -- -- -- (60,079)
Provision for bad debts (11,164) (2,100) (21,664) (4,200)
Other (21,675) (12,538) (39,656) --
Depreciation and amortization (88,981) (67,930) (165,791) (139,573)
Interest expense (69,942) (21,509) (145,374) (38,658)
----------- ----------- --------- ------
TOTAL OTHER EXPENSE (223,266) (131,064) (449,411) (327,450)
----------- ----------- ----------- ------
NET INCOME (LOSS) (49,356) 25,346 (267,263) (167,702)
Preferred stock dividends (14,235) (14,235) (28,470) (28,470)
----------- ----------- ---------- -------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $(63,591) $ 11,111 $(295,733) $(196,172)
============= ======== ========= ========
NET INCOME (LOSS) PER SHARE OF
COMMON STOCK $ (0.02) $ 0.00 $ (0.10) $ (0.07)
============ ========== ========= ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,865,746 2,864,757 2,865,746 2,864,757
============ ========== ======= ========
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- --------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 945,580 $2,127,330
Restricted cash -- 16,748
Accounts receivable, net of allowance for
doubtful accounts of $71,466 in 1997 and
$51,077 in 1996 598,290 363,602
Current portion of notes receivable 458,351 501,255
Other current assets 232,400 147,856
Assets of stores held for resale 112,492 116,229
Investment in turnkey stores under development 534,768 --
---------- ----------
TOTAL CURRENT ASSETS 2,881,881 3,273,020
PROPERTY AND EQUIPMENT AT COST, net of
accumulated depreciation and amortization of
$278,560 in 1997 and $218,270 in 1996 1,682,658 1,458,979
OTHER ASSETS:
Intangible assets, net of accumulated amortization
of $550,569 in 1997 and $496,317 in 1996 581,494 557,483
Deferred assets 1,390,873 937,450
Other 57,530 --
Deposits -- 37,630
Notes receivable, net of allowance for doubtful
accounts of $140,000 in 1997 and 1996 535,751 575,222
--------- ---------
TOTAL OTHER ASSETS 2,565,648 2,107,785
--------- ---------
$7,130,187 $6,839,784
========== ==========
CURRENT LIABILITIES:
Accounts payable $1,645,960 $1,053,028
Accrued liabilities 57,033 75,728
Line of credit and notes payable -- 100,000
Current portion of long term obligations 159,075 375,595
Provision for litigation settlement 95,000 95,000
---------- ----------
TOTAL CURRENT LIABILITIES 1,957,068 1,699,351
LINE OF CREDIT -- 120,239
LONG TERM OBLIGATIONS 159,144 203,801
CONVERTIBLE SUBORDINATED DEBT 2,000,000 2,000,000
DEFERRED INITIAL FRANCHISE FEES 2,037,530 1,575,471
--------- ---------
TOTAL LIABILITIES 6,153,742 5,598,862
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, liquidation
value of $6 per share plus unpaid and accumulated
dividends, 1,000,000 authorized, issued and
outstanding 146,000 in 1997 and in 1996 146 146
Common stock, $.001 par value, 9,000,000 shares
authorized, issued and outstanding 2,865,746 in
1997 and 2,864,757 1996 2,866 2,865
Capital in excess of par value 3,236,200 3,233,415
Accumulated deficit (2,262,767) (1,995,504)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 976,445 1,240,922
---------- -----------
$7,130,187 $6,839,784
========== ==========
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------- ----
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(267,263) $(167,702)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 134,687 139,573
Provision for losses on accounts receivable 10,500 4,200
Reserve for losses on stores sold -- (45,371)
Issuance of stock for services 3,256 --
Issuance of stock options for services 8,000 --
Promissory notes accepted for area director fees (182,297) (325,712)
Changes in assets and liabilities:
Restricted cash 16,748 (412)
Accounts receivable (245,188) (91,033)
Other current assets (84,546) (87,650)
Accounts payable 592,934 39,610
Accrued liabilities (18,695) 15,061
Deferred franchise costs (417,488) (150,399)
Deferred initial franchise fees 462,059 185,431
Other -- (12,101)
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATIONS 32,707 (496,505)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (127,556) (181,735)
Purchase of property and equipment turnkeys
under development (534,768) --
Purchase of Company owned stores (174,898) --
Disposal of property and equipment 9,249 --
Acceptance of notes receivable (26,000) (135,000)
Principle payments received on notes receivable 290,672 92,365
Intangible assets (78,263) (12,389)
Other assets (19,901) 7,584
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (661,465) (229,175)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable -- 29,511
Principle payments on long term obligations (261,177) (118,554)
Principle payments on lines of credit (220,239) (50,000)
Loan costs (43,106) --
Dividends paid (28,470) (28,470)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (552,992) (167,513)
----------- -----------
NET DECREASE IN CASH (1,181,750) (893,193)
CASH, BEGINNING OF PERIOD 2,127,330 1,684,422
----------- -----------
CASH, END OF PERIOD $945,580 $791,229
======== =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 145,374 $ 38,658
============= ============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the first quarter of 1997, the Company took back and began operating as
Company owned a restaurant in Michigan that had been subleased in the first
quarter of 1996 to a franchisee with an option to purchase the assets. The
option was not exercised and the sublease was cancelled by the franchisee in
January of 1997. The restaurant has been operated as a store held for resale
since then. During the first quarter of 1996, the assets of the restaurant
were reclassified from Assets of Stores Held for Resale to Property and
Equipment, and written down to the amount of the franchisee's option price.
(continued on next page)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL ACCUM-
PREFERRED STOCK COMMON STOCK PAID-IN ULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- ------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1,
1995 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 (goodwill) -- -- -- -- (10,000) --
Issuance of common stock
pursuant to employee
benefit plan -- -- 2,257 2 7,803 --
Preferred stock dividends -- -- -- -- (56,940) --
Net loss -- -- -- -- -- (291,572)
------- ------ ------- ------- -------- --------
BALANCES AT DEC. 31,
1995 146,000 146 2,864,757 2,865 3,290,355 (976,536)
Preferred stock
dividends -- -- -- -- (56,940) --
Net loss -- -- -- -- -- (1,108,968)
------- ----- -------- -------- -------- ----------
BALANCES AT DEC. 31,
1996 146,000 146 2,864,757 2,865 3,233,415 (1,995,504)
Issuance of common
stock pursuant to
employee benefit plan -- -- 989 1 3,255 --
Issuance of common
stock purchase
options to certain
area directors -- -- -- -- 28,000 --
Preferred stock dividends -- -- -- -- (28,470) --
Net loss -- -- -- -- -- --
------- ------ ---------- --------- -------- -------
BALANCES AT JUNE 30,
1997 146,000 $146 2,865,746 $2,866 $3,236,200 $(2,262,767)
======= ====== ========== =============================
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair statement of (a) the results
of consolidated operations for the three and six month periods ended June 30,
1997 and June 30, 1996 (b) the consolidated financial position at June 30,
1997 (c) the statements of cash flows for the six month periods
ended June 30, 1997 and June 30, 1996 and (d) the consolidated changes in
stockholders' equity for the six month period ended June 30,1997 have been
made.
2. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for financial statements. For further information, refer to the audited
consolidated financial statements and notes thereto for the year ended
December 31, 1996, included in the Company's Annual Report on Form 10-KSB to
the Securities and Exchange Commission filed on March 29, 1997.
3. The results for the three and six month periods ended June 30, 1997 are
not necessarily indicative of the results for the entire fiscal year of 1997.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
OVERVIEW
For the second quarter of 1997 the Company had income from franchise
operations of $103,631 and income from Company owned store operations of
$70,279, less other charges totaling $223,266, resulting in a loss for the
quarter of $49,356 compared to a profit of $25,346 for the same quarter last
year. For the six months ended June 30, 1997, the Company had income from
franchise operations of $110,903 and income from Company owned store
operations of $71,245, less other charges totaling $449,411, resulting in a
loss of $267,263, compared to a loss of $167,702 for the same period last
year. Other charges include the costs of new programs, research and
development, depreciation and amortization expense, interest expense, and
certain other cost, which are discussed in more detail below.
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 franchisees. 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 open 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
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 first half of 1997 compared the first half of
1996:
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Royalty fees $537,360 $395,286 $1,006,485 $714,221
Initial franchise fees 672,500 242,500 847,001 497,500
Area director fees 470,327 637,169 895,750 887,655
Other 149,244 60,469 254,553 115,639
Interest 39,144 42,735 84,246 83,549
------- --------- --------- -------
Total franchise revenue 1,868,575 1,378,159 3,088,035 2,298,564
Sales by Company owned stores 886,734 709,258 1,499,474 1,337,250
Sales by Stores held for resale 37,284 3,626 111,286 20,572
--------- --------- --------- --------
Total revenue $2,792,593 $2,091,043 $4,698,795 $3,656,386
========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1997 1996 1997 1996
------ ------ ------ -----
<S> <C> <C> <C> <C>
Restaurants open, beginning 170 116 156 105
New restaurants opened 41 13 57 26
Restaurants closed (6) (1) (7) (3)
Restaurants closed, scheduled
to reopen (2) -- (3) --
----------- --------- -------- ------
Restaurants open, end 203 128 203 128
=========== ========= ======== ======
New franchises sold 36 30 78 54
Initial franchise fees
collected $500,000 $343,000 $1,258,000 $768,000
Systemwide sales $11.8 million $8.9 million $21.4 million $16.2 million
</TABLE>
RESULTS OF OPERATIONS
Comparison of the first half of 1997 with the first half of 1996 and the
second quarter of 1997 with the second quarter of 1996
Franchise revenue increased 36% in the second quarter of 1997 to $1,868,575
from $1,378,159 in the same quarter last year. For the first half of 1997,
franchise revenue increased by 34% to $3,088,035 from $2,298,564 last year.
Total revenue increased 34% in the second quarter of 1997 to $2,792,593 from
$2,091,043 in the same quarter last year and 28% in the first half of 1997 to
$4,698,795 from $3,656,386.
ROYALTY FEES increased 36% in the second quarter of 1997 to $537,360 from
$395,286 in the second quarter of 1996. For the first half of 1997, royalty
fees increased 41% compared to the first half of 1996. Royalty fees are a
percentage of each franchisee'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 June 30,
1997 there were 192 franchises open as compared to 121 June 30, 1996. 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 expenses.
INITIAL FRANCHISE FEES increased 177% in the second quarter of 1997 to
$672,500 from $242,500 in the same quarter last year. For the first half of
1997, initial franchises fees increased 70% compared to the first half of
1996. Initial franchise fees are one time fees paid by franchisees as 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 the first half of 1997, the Company opened one Company
owned and 56 franchises as compared to 26 franchises opened in the same
quarter last year. The Company's initial franchise fee has been $20,000 since
1994. Franchisees may purchase a second franchise for 75% and third and
subsequent franchises for 50% of the then-current franchise fee. 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 franchisee.
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, seven of
which opened in the first half of 1997 and four of which were opened in 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 June 30, 1997 were $2,037,530 and represent 170 franchises
sold but not yet in operation, compared to $1,494,586 at June 30, 1996
representing 77 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
June 30, 1997 were $1,062,190 ($531,702 at June 30, 1996). Approximately 50%
of all initial franchisee fees
received by the Company are paid to area directors for sales and opening
commissions.
The average franchise fee per unit opened decreased in 1997 due to a greater
number of openings of Quizno's Express units, second or third units, and
franchises sold for a special discount in 1996 to operating franchisees.
AREA DIRECTOR MARKETING FEES decreased 26% in the second quarter of 1997 to
$470,327 from $637,169 in the same quarter last year. For the first half of
1997, area director marketing fees increased 1% compared to the first half of
1996. 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, $0.35 from July 1996
through March 1997, 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 the first half of 1997 the Company
sold 19 new area directorships including eight existing area directors who
purchased additional territory, as compared to 19 area directorships sold in
the first half of 1996. At June 30, 1997, the Company had a total of 69 area
directors who owned areas encompassing approximately 60% 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 the area director, secured by collateral
unrelated to the area directorship, usually a second mortgage on the area
director's home. Of the 19 area directorships sold in the first half of 1997,
six used this financing for $197,344, representing 22% of the area director
marketing fees recognized in the first half of 1997. In the first half of
1996, a total of $22,500 was financed representing 2.5% of area director fee
revenue.
OTHER REVENUE increased by 147% in the second quarter of 1997 to $149,244 from
$60,469 in the same quarter last year. For the first half of 1997, other
revenue increased 120% compared to the first half of 1996. Other revenue is
primarily bookkeeping fees charged franchisees for whom the Company provided
bookkeeping services and to a lesser degree design and equipment fees. 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.
SALES AND ROYALTY COMMISSIONS expense increased 171% to $611,644 in the second
quarter of 1997 from $225,462 in the same quarter last year. For the first
half of 1997, sales and royalty commissions expense increased 141% compared to
the first half of 1996. Sales and royalty commissions are amounts paid to the
area directors of the Company under its area director program.
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, royalty revenue, and area director marketing
fees respectively.
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 $41,286 to $98,852 in the second
quarter of 1997 from $57,566. For the first half of 1997, advertising and
promotion expenses increased $15,602 to $129,909. 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 10% to $1,054,448 in the second
quarter of 1997 from $955,932 in the same quarter last year. For the first
half of 1997, general and administrative expenses increased 17% compared to
the first half of 1996. 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 franchises 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.
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.
COMPANY STORE OPERATIONS earned $70,279 on sales of $886,734 in the second
quarter of 1997, compared to earning of $17,211 on sales of $709,258 in the
same quarter last year. For the first half of 1997, Company stores earned
$71,245 on sales of $1,499,474, compared to earnings of $26,778 on sales of
$1,337,250 in the first half of 1996. In the second quarter of 1997, the
Company operated ten stores for the full three months, a total of 30 store
operating months, compared to a total of 22 store operating months in the same
quarter last year. For the first half of 1997, the Company operated stores
for a total of 54 store operating months compared to a total of 43 store
operating months in the first half of 1996. At June 30, 1997, the Company had
ten operating Company owned stores including one store which operates only
during baseball season.
DIRECT RETAIL ADVERTISING EXPENSE was zero in the second quarter and $3,053
for the first half of 1997, compared to $17,647 and $49,479, respectively, in
the same periods last year. Direct retail advertising reflects funds
voluntarily contributed to certain Quizno's franchisee advertising
cooperatives. The Company intentionally made significant contributions to
certain cooperatives in 1996 in order to promote awareness of the Quizno's
name and accelerate development of the Quizno's concept in new markets. The
Company has no plans to make any such contributions or to incur significant
direct retail advertising expense in 1997.
RESEARCH AND DEVELOPMENT was $16,549 in the second quarter of 1997 compared to
$4,134 in the same quarter last year. For the first half of 1997, research
and development was $34,738 compared to $4,134 for the first half of 1996.
Research and development are costs incurred to research, test, and evaluate
new concepts, products and menu items. The Company established a full time
research and development function in 1996.
STORES HELD FOR RESALE lost $14,955 on sale of $37,284 in the second quarter
of 1997, compared to a loss of $5,206 on sales of $3,626 in the same quarter
last year. For the first half of 1997, stores held for resale lost $39,495 on
sales of $111,286, compared to a loss of $18,789 on sales of $20,572 in the
first half of 1996. In the first half of 1997, the Company operated one store
held for resale until it was sold to a franchisee in April, 1997, and one
since February 1997, which was still held at June 30, 1997. In 1996, the
Company operated one store held for resale from February 1996, until it was
sold to a franchisee in April 1996.
The Company has in the past and may continue in the future to acquire or
takeover franchised stores from franchisees 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 franchisee. 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 franchisee
will normally offset or exceed such losses.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH PROVIDED BY OPERATING ACTIVITIES was $32,707 in the first half of
1997 compared to cash used by operating activities of $496,505 in the same
period of last year.
CASH USED BY INVESTING ACTIVITIES was $661,465 for the first half of 1997,
compared to cash used in investing activities of $229,175 in the same period
last year. For both periods cash used by investing activities was primarily
related to the acquisition or development of Company owned stores and the
purchase of property and equipment.
NET CASH USED IN FINANCING ACTIVITIES was $552,992 in the first half of 1997
compared to cash used in financing activities of $167,513 in the same period
last year. Debt was reduced by $481,416 in the first half of 1997 compared to
$168,554 in the same period last year.
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 "turnkey"
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.
The "turnkey" program commenced in 1997 with the first such units scheduled to
open in August 1997. Under the turnkey program, funds will be used to
procure, secure and develop new locations which, upon completion, will be sold
to franchisees. The franchisee will reimburse the Company in full 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.
At June 30, 1997, the Company had invested a total of $534,768 in turnkey
locations. As the turnkey units are sold, the Company's investment will be
paid back in cash with such funds then earmarked for future turnkey units.
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
June 30, 1997, the Company had $214,467 of such "senior" debt outstanding,
thus leaving another $485,533 available. The Company intends to arrange a
working capital line of credit for this amount.
The working capital portion of the proceeds of the loan is unrestricted and
may be used by the Company as required.
In July of 1997, the Company purchased two Quizno's restaurants in Boulder,
Colorado from a franchisee. The total purchase price is $178,210 to be paid
$74,781 in cash and $103,429 in a promissory note due the seller.
Other than the above, the Company does not have any commitments or contract to
build, acquire, or sell any additional Company owned stores.
The Quizno'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 report, and in particular in this
section entitled "Management's Discussion and Analysis of 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 operating franchises are still concentrated in
a few regional 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.
THE QUIZNO'S CORPORATION
COMMISSION FILE NUMBER: 000-23174
QUARTER ENDED JUNE 30, 1997
FORM 10-QSB
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on June 6, 1997.
At the meeting, the shareholders voted on three proposals. The results of the
voting are as follows:
<TABLE>
<CAPTION>
Proposal #1 Election of Directors For Withheld
<S> <C> <C> <C>
Richard E. Schaden 2,358,516 17,610
Richard F. Schaden 2,358,516 17,610
Frederick H. Schaden 2,363,166 12,960
J. Eric Lawrence 2,363,216 12,910
Brownell M. Bailey 2,363,516 12,610
</TABLE>
Proposal #2 Increase the number of shares reserved under the Company's
Non-Employee Directors and Advisors Stock Option Plan
<TABLE>
<CAPTION>
For Against Abstain Not Voted
<S> <S> <S> <S>
2,278,448 45,539 27,039 25,100
</TABLE>
Proposal #3 Ratify the selection by the Board of Directors of Ehrhardt
Keefe Steiner & Hottman, P.C. as independent auditors of the Company for the
1997 fiscal year
<TABLE>
<CAPTION>
For Against Abstain Not Voted
<S> <C> <C> <C> <C>
2,362,877 7,310 5,639 300
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
Form 8-K of the Registrant, dated May 16, 1997, reporting in Item 5 the results
of the first quarter of 1997 (filed May 28, 1997).
Form 8-K of the Registrant, dated June 26, 1997, reporting in Item 5 on the
signing of Area Director Marketing Agreements (filed June 27, 1997).
Form 8-K of the Registrant, dated July 31, 1997, reporting in Item 5 the store
openings for the second quarter of 1997 (filed August 1, 1997).
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE QUIZNO'S CORPORATION
By: Original signed by John L. Gallivan
------------------------------------
John L. Gallivan
Chief Financial Officer
(Principal Financial and Accounting Officer)
Denver, Colorado
August 11 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 945,580 945,580
<SECURITIES> 0 0
<RECEIVABLES> 669,756 669,756
<ALLOWANCES> 71,466 71,466
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,881,881 2,881,881
<PP&E> 1,961,218 1,961,218
<DEPRECIATION> 278,560 278,560
<TOTAL-ASSETS> 7,130,187 7,130,187
<CURRENT-LIABILITIES> 1,957,068 1,957,068
<BONDS> 0 0
0 0
146 146
<COMMON> 3,239,066 3,239,066
<OTHER-SE> (2,262,767) (2,262,767)
<TOTAL-LIABILITY-AND-EQUITY> 7,130,187 7,130,187
<SALES> 2,792,593 4,698,795
<TOTAL-REVENUES> 2,792,593 4,698,795
<CGS> 2,581,399 4,405,361
<TOTAL-COSTS> 2,772,007 4,820,684
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 69,942 145,374
<INCOME-PRETAX> (63,591) (295,733)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (63,591) (295,733)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (63,591) (295,733)
<EPS-PRIMARY> (.02) (.10)
<EPS-DILUTED> (.02) (.10)
</TABLE>
