UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 (IRS Employer Identification No.)
incorporation or organization)
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 OCTOBER 3, 1997
- --------------------------------- ----------------
Common Stock, $0.001 par value 2,904,567 shares
THE QUIZNO'S CORPORATION
COMMISSION FILE NUMBER: 000-23174
QUARTER ENDED SEPTEMBER 30, 1997
FORM 10-QSB/A
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 8
Notes to Consolidated Financial Statements Page 9
Management's Discussion and Analysis of Financial
Condition or Plan of Operation Page 10
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1996 1997 1996
---------- ------------ --------- --------
<S> <C> <C> <C> <C>
FRANCHISE OPERATIONS:
REVENUE
Royalty fees $728,758 $424,349 $1,735,243 $1,138,570
Initial franchise fees 743,000 338,000 1,590,001 835,500
Area director marketing fees 553,031 210,382 1,448,781 1,098,037
Other 146,261 66,286 400,814 181,924
Interest revenue 23,187 33,113 107,433 116,662
-------------- ----------- ---------- ----------
Total revenue 2,194,237 1,072,130 5,282,272 3,370,693
-------------- ----------- ---------- -----------
EXPENSES
Sales and royalty
commissions 711,393 235,403 1,580,549 594,591
Advertising and promotion 51,609 53,472 181,518 167,779
General and administrative
expenses 1,216,974 925,192 3,195,042 2,617,291
-------------- ----------- ---------- ----------
Total expenses 1,979,976 1,214,067 4,957,109 3,379,661
-------------- ----------- ---------- ----------
NET INCOME FROM
FRANCHISE OPERATIONS 214,261 (141,937) 325,163 (8,968)
-------------- ----------- ---------- ----------
COMPANY STORE OPERATIONS:
SALES BY COMPANY OWNED
STORES 1,185,744 770,895 2,685,219 2,108,145
-------------- ----------- ---------- ----------
EXPENSES
Cost of sales at
Company stores 373,332 274,980 880,333 753,054
Cost of labor at
Company stores 297,915 230,570 694,988 618,273
Other Company store
expenses 396,150 211,723 920,306 656,418
-------------- ----------- ---------- ----------
Total expenses 1,067,397 717,273 2,495,627 2,027,745
-------------- ----------- ---------- ----------
NET INCOME FROM COMPANY
STORES 118,347 53,622 189,592 80,400
-------------- ----------- ---------- ----------
OTHER INCOME (EXPENSE):
RESEARCH & DEVELOPMENT AND
NEW PROGRAMS (19,321) (60,349) 56,752 113,962
OTHER
Sales by stores held for
resale 29,680 -- 140,966 20,572
Expenses related to stores
held for resale (45,484) -- (196,265) (39,361)
Loss on sale of Company
stores -- -- -- (60,079)
Provision for bad debts (7,000) (10,885) (28,664) (15,085)
Other (14,508) (16,301) (54,163) (28,839)
Depreciation and
amortization (98,328) (71,861) (264,119) (211,433)
Interest expense (73,589) (17,420) (218,963) (56,078)
---------- ---------- --------- -----------
TOTAL OTHER EXPENSE (228,550) (176,816) (677,960) (504,265)
---------- ---------- ---------- ----------
NET INCOME (LOSS) 104,058 (265,131) (163,205) (432,833)
Preferred stock dividends (14,235) (14,235) (42,705) (42,705)
---------- ---------- ---------- ---------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 89,823 $(279,366) $(205,910) $(475,538)
========== ========== =========== =========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.03 $ (0.10) $ (0.07) $ (0.17)
========== =========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
(SEE NOTE 6) 3,427,408 2,864,757 2,867,868 2,864,757
========== ========== ========== ==========
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,218,957 $ 2,127,330
Restricted cash -- 16,748
Accounts receivable, net of allowance for
doubtful accounts of $69,544 in 1997 and
$51,077 in 1996 541,934 363,602
Current portion of notes receivable 1,045,019 501,255
Other current assets 250,392 147,856
Assets of stores held for resale 135,068 116,229
Investment in turnkey stores under development 309,666 --
---------- --------------
TOTAL CURRENT ASSETS 3,501,036 3,273,020
PROPERTY AND EQUIPMENT AT COST, net of
accumulated depreciation and amortization of
$362,830 in 1997 and $218,270 in 1996 1,763,742 1,458,979
----------- -----------
OTHER ASSETS:
Intangible assets, net of accumulated amortization
of $602,378 in 1997 and $496,317 in 1996 586,767 557,483
Deferred assets 948,810 618,849
Other 45,563 --
Deposits -- 37,630
Notes receivable, net of allowance for doubtful
accounts of $140,000 in 1997 and 1996 361,085 575,222
--------- ---------
TOTAL OTHER ASSETS 1,942,225 1,789,184
--------- ---------
$7,207,003 $6,521,183
========== ==========
CURRENT LIABILITIES:
Accounts payable $1,138,262 $ 734,427
Accrued liabilities 136,166 75,728
Line of credit and notes payable -- 100,000
Current portion of long term
obligations 206,452 375,595
Provision for litigation settlement 95,000 95,000
---------- -----------
TOTAL CURRENT LIABILITIES 1,575,880 1,380,750
LINE OF CREDIT -- 120,239
LONG TERM OBLIGATIONS 202,908 203,801
CONVERTIBLE SUBORDINATED DEBT 2,000,000 2,000,000
--------- ------------
TOTAL LIABILITIES 3,778,788 3,704,790
DEFERRED INITIAL FRANCHISE FEES 2,269,756 1,575,471
--------- ------------
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 2,904,567 in
1997 and 2,864,757 1996 2,905 2,865
Capital in excess of par value 3,314,117 3,233,415
Accumulated deficit (2,158,709) (1,995,504)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 1,158,459 1,240,922
----------- ------------
$7,207,003 $6,521,183
========== ==========
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(163,205) $(432,833)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 264,119 211,436
Provision for losses on accounts
receivable 10,500 6,300
Reserve for losses on stores sold -- (49,012)
Issuance of stock for employee services 13,689 --
Issuance of stock options for area
director services 33,950 --
Promissory notes accepted for area
director fees (553,824) (157,494)
Changes in assets and liabilities:
Restricted cash 16,748 (617)
Accounts receivable (188,832) (80,291)
Other current assets (102,536) (72,413)
Accounts payable 403,837 28,387
Accrued liabilities 60,438 10,915
Deferred franchise costs (325,542) (242,128)
Deferred initial franchise fees 694,285 342,422
Other -- (9,876)
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATIONS 163,627 (445,204)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (184,403) (204,737)
Change in net assets of stores held
for resale (18,839) --
Purchase of property and equipment for
turnkeys units (740,981) --
Proceed from sale of turnkey units 431,315 --
Purchase of Company owned stores (287,040) (353,589)
Disposal of property and equipment 9,249 --
Acceptance of notes receivable (271,354) (416,693)
Principle payments received on notes
receivable 495,551 283,036
Intangible assets (122,781) (9,214)
Other assets (7,933) (12,834)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (697,216) (714,031)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 172,370 239,510
Principle payments on long term
obligations (342,412) (91,250)
Principle payments on lines of credit (220,239) (185,003)
Loan costs (17,606) --
Proceeds from issuance of stock 75,808 --
Dividends paid (42,705) (42,705)
----------- ------------
NET CASH USED IN FINANCING ACTIVITIES (374,784) (79,448)
----------- ------------
DECREASE IN CASH AND EQUIVALENTS (908,373) (1,238,683)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 2,127,330 1,684,422
----------- ------------
CASH AND EQUIVALENTS, END OF PERIOD $1,218,957 $ 445,739
=========== ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for
interest $ 218,963 $ 56,078
=========== =============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In July of 1997, the Company purchased two restaurants from a franchisee to be
operated as Company owned restaurants. The purchase price for both
restaurants was $183,666 of which $94,428 was financed by the seller, $40,000
was financed through a third party lender, $34,285 due the Company by the
franchisee was offset against the purchase prices, and $14,953 was paid in
cash.
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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
CONVERTIBLE PAID-IN ACCUMULATED
PREFERRED STOCK COMMON STOCK CAPITAL DEFICIT
--------------- ------------ -------- -----------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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 -- -- -- -- -- (1,018,968)
-------- ------ --------- ------ ---------- -------
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 -- -- -- -- -- (267,263)
-------- ------- -------- ------- -------- ---------
BALANCES AT JUNE 30,
1997 146,000 146 2,865,746 2,866 3,236,200 (2,262,767)
Issuance of common stock
pursuant to employee
benefit plan -- -- 3,096 3 10,430 --
Issuance of common stock
pursuant to exercise of employee
stock options -- -- 6,989 7 25,801 --
Issuance of common stock
pursuant to exercise of area
director right to purchase
agreement -- -- 28,736 29 49,971 --
Issuance of common stock purchase
options to certain area
directors -- -- -- -- 5,950 --
Preferred stock
dividends -- -- -- -- (14,235) --
Net Income -- -- -- -- -- 104,058
------- ----- ------- ------ --------- ---------
BALANCES AT SEPT. 30,
1997 146,000 $ 146 2,904,567 $2,905 $3,314,117 $(2,158,709)
======= ===== ========= ====== ========== ============
</TABLE>
THE QUIZNO'S CORPORATION
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 nine month periods ended
September 30, 1997 and September 30, 1996 (b) the consolidated financial
position at September 30, 1997 (c) the statements of cash flows for the nine
month periods ended September 30, 1997 and September 30, 1996 and (d) the
consolidated changes in stockholders' equity for the nine month period ended
September 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 nine month periods ended September 30,
1997 are not necessarily indicative of the results for the entire fiscal year
of 1997.
4. Certain previously reported amounts have been reclassified to conform
to the Company's 1997 presentation.
5. The Company is obligated to pay an opening commission to the area
director who sold the franchise at the time the franchise opens for business.
These commissions are expensed at the time the related franchise opens for
business and are not accrued as a liability of the Company until that time.
At September 30, 1997, there were 170 franchises sold but not yet open with
related opening commissions totaling $467,687 ($318,601 at December 31, 1996).
6. Net Income Per Common Share
-----------------------------
Net income per common share has been computed based on the weighted average
number of shares outstanding during each period. Common stock equivalents are
included in the weighted average number of commons shares outstanding for the
third quarter of 1997.
OVERVIEW
The Company earned a profit of $104,058 on revenue of $3,409,661 in the third
quarter of 1997 compared to a loss of $265,131 on revenue of $1,843,025 in
the same quarter last year. The third quarter 1997 profit is composed of net
income from franchise operations of $214,261, net income from Company stores
of $118,347, less other charges of $228,550. For the nine months ended
September 30, 1997, the Company reported a loss of $163,205 on revenue of
$8,108,457, compared to a loss of $432,833 on revenue of $5,499,410 for the
first nine months of 1996. In the first nine months of 1997, the Company
earned $325,163 from franchise operations, $189,592 from Company store
operations, less other charges of $677,960. Other charges include the costs
of new programs, research and development, depreciation and amortization
expense, interest expense, and certain other costs, 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 nine months of 1997 compared the first
nine months of 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Royalty fees $728,758 $424,349 $1,735,243 $1,138,570
Initial franchise fees 743,000 338,000 1,590,001 835,500
Area director fees 553,031 210,382 1,448,781 1,098,037
Other 146,261 66,286 400,814 181,924
Interest 23,187 33,113 107,433 116,662
---------- ---------- ---------- ----------
Total franchise revenue 2,194,237 1,072,130 5,282,272 3,370,693
Sales by Company owned
stores 1,185,744 770,895 2,685,219 2,108,145
Sales by Stores held for
resale 29,680 -- 140,966 20,572
---------- ---------- ---------- ----------
Total revenue $3,409,661 $1,843,025 $8,108,457 $5,499,410
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION> THREE MONTHS ENDED NINE MONTH ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Restaurants open, beginning 203 128 156 105
New restaurants opened 42 19 99 45
Restaurants closed (3) (4) (10) (5)
Restaurants closed, scheduled
to reopen (1) (2) (4) (4)
Restaurants open, end 241 141 241 141
===== ==== ==== ====
New franchises sold 58 92 (1) 136 146
Initial franchise fees
collected $1,027,762 $550,750 $2,323,000 $1,318,750
(1) Includes 75 franchises sold for $1,000 each in the third quarter of 1996.
</TABLE>
RESULTS OF OPERATIONS
Comparison of the first nine months of 1997 with the first nine months of 1996
and the third quarter of 1997 with the third quarter of 1996
Franchise revenue increased 104% in the third quarter of 1997 to $2,194,237
from $1,072,130 in the same quarter last year. For the first nine months of
1997, franchise revenue increased by 56% to $5,282,272 from $3,370,693 last
year. Total revenue increased 85% in the third quarter of 1997 to $3,409,661
from $1,843,025 in the same quarter last year and 47% in the first nine months
of 1997 to $8,108,457 from $5,499,410.
Royalty fees increased 71% in the third quarter of 1997 to $728,758 from
$424,349 in the third quarter of 1996. For the first nine months of 1997,
royalty fees increased 52% compared to the first nine months 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 September 30, 1997 there were 228 franchises open (excluding Company
stores) as compared to 131 September 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 may 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 119% in the third quarter of 1997 to $743,000
from $338,000 in the same quarter last year. For the first nine months of
1997, initial franchises fees increased 90% compared to the first nine months
of 1996. Initial franchise fees are one time fees paid by franchisees 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 the first nine months of 1997, the Company opened one
Company owned and 98 franchises as compared to 45 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, ten of
which opened in the first nine months of 1997 and four of which were opened in
1996.
In the third quarter of 1997, the Company sold 58 franchises for $1,027,762
compared to 92 franchises sold for $550,750 in the same quarter last year.
The 92 franchises sold last year include 75 sold under a special offering for
$1,000 each. For the nine months ended September 30, 1997, the Company sold
236 franchises for $2,323,000 compared to 146 sold for $1,318,750 during the
same period last year.
Initial franchise fees collected by the Company are recorded as deferred
initial franchise fees until the related franchise opens. Deferred initial
franchise fees at September 30, 1997 were $2,269,756 and represent 170
franchises sold but not yet in operation, compared to $1,651,577 at September
30, 1996 representing 74 franchises sold but not open. Direct costs related
to the sale, primarily sales commissions paid 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
September 30, 1997 were $651,646. 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 162% in the third quarter of 1997 to
$553,031 from $210,382 in the same quarter last year. For the first nine
months of 1997, area director marketing fees increased 31% compared to the
first nine months 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 nine months of 1997 the Company sold 23 new area
directorships including ten existing area directors who purchased additional
territory, as compared to 21 area directorships sold in the first nine months
of 1996. At September 30, 1997, the Company had a total of 68 area directors
who owned areas encompassing approximately 65% of the population of the United
States.
The Company offers U.S. 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 24 area directorships sold in the first nine months
of 1997, nine used this financing for $553,824, representing 38% of the area
director marketing fees recognized in the first nine months of 1997. In the
first nine months of 1996, a total of $157,494 was financed representing 14%
of area director fee revenue.
OTHER REVENUE increased by 120% in the third quarter of 1997 to $146,261 from
$66,286 in the same quarter last year. For the first nine months of 1997,
other revenue increased 120% compared to the first nine months of 1996. Other
revenue is primarily bookkeeping fees charged franchisees for whom the Company
provided bookkeeping services and equipment and design 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 $80 per week.
SALES AND ROYALTY COMMISSIONS expense increased 202% to $711,393 in the third
quarter of 1997 from $235,403 in the same quarter last year. For the first
nine months of 1997, sales and royalty commissions expense increased 165%
compared to the first nine months 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 in the U.S. 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 decreased 3% to $51,609 in the third quarter
of 1997 from $53,472. For the first nine months of 1997, advertising and
promotion expenses increased 8% to $181,518. 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 31% to $1,216,974 in the third
quarter of 1997 from $925,192 in the same quarter last year. For the first
nine months of 1997, general and administrative expenses increased 22%
compared to the first nine months 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 $118,347 on sales of $1,185,744 in the third
quarter of 1997, compared to earning of $53,622 on sales of $770,895 in the
same quarter last year. For the first nine months of 1997, Company stores
earned $189,592 on sales of $2,685,219, compared to earnings of $80,400 on
sales of $2,108,145 in the first nine months of 1996. In the third quarter of
1997, the Company operated 12 stores for the full three months, a total of 36
store operating months, compared to a total of 26 store operating months in
the same quarter last year. For the first nine months of 1997, the Company
operated stores for a total of 84 store operating months compared to a total
of 73 store operating months in the first nine months of 1996. At September
30, 1997, the Company had twelve operating Company owned stores including one
store which operates only during baseball season.
STORES HELD FOR RESALE lost $15,804 on sales of $29,680 in the third quarter
of 1997. The Company had no stores held for resale in the same quarter last
year. For the first nine months of 1997, stores held for resale lost $55,299
on sales of $140,966, compared to a loss of $18,789 on sales of $20,572 in the
first nine months of 1996. In the first nine months 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 September 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 $163,627 in the first nine
months of 1997 compared to cash used by operating activities of $445,204 in
the same period of last year. The improvement is the result of profits from
both the Company's franchise and Company owned store divisions, combined with
record new franchise sales.
CASH USED BY INVESTING ACTIVITIES was $697,216 for the first nine months of
1997, compared to cash used in investing activities of $714,031 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, including $740,981 for the
development of turnkey units in 1997, less $431,315 proceeds from the sale of
turnkey units
NET CASH USED IN FINANCING ACTIVITIES was $374,784 in the first nine months of
1997 compared to cash used in financing activities of $79,448 in the same
period last year. Debt was reduced by $562,651 in the first nine months of
1997 compared to $276,253 in the same period last year.
CAPITAL RESOURCES AND COMMITMENTS
On December 31, 1996, the Company completed a debt financing for $2 million.
The loan is payable interest only at 12.75%, through June 1998, interest and
principal payments from July 1998 through November 2001, and a final balloon
payment 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 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
September 30, 1997, the Company had $187,922 of such "senior" debt
outstanding, thus leaving another $512,078 available. The Company intends to
arrange a working capital line of credit for this amount.
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 opened in
September 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 September 30, 1997, the Company had invested a total of $740,981 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. In
the third quarter, the Company sold three turnkey units, two for cash and one
for a promissory note, for a total of $431,315.
The working capital portion of the proceeds of the loan is unrestricted and
may be used by the Company as required.
In October of 1997, the Company and the lender agreed to convert $500,000 of
the principal amount of the $2 million debt to a new class of preferred stock
(Class B). Class B preferred stock will have a cumulative dividend of 12.75%,
be callable at any time by the Company, and is convertible into common stock
after five years at market value. In connection with this conversion, the
Company will issue the lender 42,209 common stock purchase warrants
exercisable at $5 per share. The number of warrants decline to 20,586 over
three years if the preferred stock is not called by the Company, all dividends
have been paid, and certain specified earnings levels have been reached.
In October of 1997, the Company offered to certain individuals, including
officers and directors of the Company, a new class of preferred stock (Class
C). The amount of the offering is $1 million of preferred stock at $5 per
share. Class C preferred stock will have a cumulative dividend of 12.00%, be
callable by the Company after three years, and is convertible into common on a
one for one basis. As of October 8, 1997, the Company has received
commitments to purchase $600,000 Class C preferred stock.
At June 30, 1997, the Company's stockholders' equity was $976,445, which was
$23,555 below the amount required for continued listing of the Company's stock
on the NASDAQ SmallCap Market. The Company was notified by NASDAQ in August
1997 of the deficiency and a hearing has been set for October 23, 1997. At
the hearing the Company will present evidence of current compliance and its
ability to continue to meet listing requirements in the future. At September
30, 1997, the Company has stockholders' equity of $1,158,459, in excess of the
minimum requirement by $158,459. In addition, in October 1997 stockholders'
equity will be increased by another $500,000 as a result of the conversion of
debt discussed above. Finally, by October 23, 1997 the Company expects to
have completed its offering of Class C preferred stock, thus increasing
stockholders' equity a further $600,000 to $1 million, resulting in
stockholders' equity of $2.2 million to $2.6 million by October 23, 1997. As
a result, the Company expects that by October 23rd it will have cured the
deficiency by a substantial excess and the Company's stock will continue to be
listed on the NASDAQ SmallCap Market. However, the Company does not have any
assurance that it will prevail. If the Company's stock is removed from the
NASDAQ SmallCap Market, the Company's ability to raise equity capital in the
future, including acquisitions made with stock, may be adversely impacted.
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.
The Company has entered into an agreement to purchase an existing Quizno's
restaurant from a franchisee for $80,000. The restaurant will be operated as
a Company owned restaurant. Under the terms of the agreement, the Company
will pay $15,000 cash and issue its promissory note for $65,000 to be paid in
monthly installments over 48 months at 11% interest. The purchase is expected
to be completed in October 1997.
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 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.
THE QUIZNO'S CORPORATION
COMMISSION FILE NUMBER: 000-23174
QUARTER ENDED SEPTEMBER 30, 1997
FORM 10-QSB/A
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Exemptions
Securities Sold Date Shares Amount Purchasers Claimed
- ------------------ ------- ------ ------- ---------- ------------
Common Stock 7/30/97 6,989 $25,808 Employees pursuant
to exercise of
options Section 4(2)
Common Stock 7/1/97 2,338 $ 7,306 Quizno's 401(k) Plan Section 4(2)
Common Stock 9/3/97 758 $ 3,127 Quizno's 401(k) Plan Section 4(2)
Common Stock 9/30/97 28,736 $50,000 Area Director Section 4(2)
pursuant to right of purchase
agreement
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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 August 13, 1997, reporting in Item 5 the results of the second quarter of 1997 (filed
August 12, 1997).
</TABLE>
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
October 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 1,218,957 1,218,957
<SECURITIES> 0 0
<RECEIVABLES> 611,478 611,478
<ALLOWANCES> 69,544 69,544
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,501,036 3,501,036
<PP&E> 2,126,572 2,126,572
<DEPRECIATION> 362,830 362,830
<TOTAL-ASSETS> 7,207,003 7,207,003
<CURRENT-LIABILITIES> 1,575,880 1,575,880
<BONDS> 0 0
0 0
146 146
<COMMON> 3,317,022 3,317,022
<OTHER-SE> (2,158,709) (2,158,709)
<TOTAL-LIABILITY-AND-EQUITY> 7,207,003 7,207,003
<SALES> 3,409,661 8,108,457
<TOTAL-REVENUES> 3,409,661 8,108,457
<CGS> 3,047,373 7,452,736
<TOTAL-COSTS> 3,202,334 7,911,733
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 73,589 218,963
<INCOME-PRETAX> 89,823 (205,910)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 89,823 (205,910)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 89,823 (205,910)
<EPS-PRIMARY> .03 (.07)
<EPS-DILUTED> .03 (.07)
</TABLE>
