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, 1998
---------------
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 3, 1998
----------- --------------
Common Stock, $0.001 par value 3,040,956 shares
THE QUIZNO'S CORPORATION
COMMISSION FILE NUMBER: 000-23174
QUARTER ENDED JUNE 30, 1998
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
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
FRANCHISE OPERATIONS:
Continuing fees $1,457,467 $ 537,360 $2,574,780 $1,006,485
Initial franchise fees 646,067 672,500 1,208,067 847,001
Area director marketing fees 479,985 470,327 1,052,985 895,750
Other 198,188 149,244 377,005 254,553
Interest 44,848 39,144 73,530 84,246
---------- ---------- --------- ----------
Total revenue 2,826,555 1,868,575 5,286,367 3,088,035
---------- ---------- --------- ----------
EXPENSES
Sales and royalty commissions 896,454 611,644 1,649,724 869,156
Advertising and promotion 56,113 98,852 100,165 129,909
General and administrative 1,391,289 1,054,448 2,761,891 1,978,067
---------- --------- ---------- ---------
Total expenses 2,343,856 1,764,944 4,511,780 2,977,132
---------- --------- ---------- ---------
NET INCOME FROM FRANCHISE
OPERATIONS 482,699 103,631 774,587 110,903
---------- --------- ---------- ---------
COMPANY STORE OPERATIONS:
SALES BY COMPANY OWNED STORES 1,472,898 886,734 3,214,307 1,499,474
---------- --------- --------- ---------
Cost of sales at Company stores 426,629 290,554 970,916 507,001
Cost of labor at Company stores 328,967 231,996 766,718 397,446
Other Company store expenses 550,916 293,905 1,202,903 523,782
---------- --------- --------- ---------
Total expenses 1,306,512 816,455 2,940,537 1,428,229
---------- --------- --------- ---------
NET INCOME FROM COMPANY STORES 166,386 70,279 273,770 71,245
---------- --------- --------- ---------
OTHER INCOME (EXPENSE):
RESEARCH & DEVELOPMENT AND
NEW PROGRAMS - (16,549) - (37,431)
OTHER
Sales by stores held for resale 415,384 37,284 415,384 111,286
Expenses related to stores
held for resale (510,658) (52,239) (510,658) (150,781)
Provision for bad debts (50,913) (11,164) (84,590) (21,664)
Other (5,993) (21,675) (7,292) (39,656)
Depreciation and amortization (145,158) (88,981) (289,768) (165,791)
Interest expense (103,073) (69,942) (181,080) (145,374)
---------- --------- -------- --------
TOTAL OTHER EXPENSE (400,411) (223,266) (658,004) (449,411)
---------- --------- -------- ---------
NET INCOME (LOSS) 248,674 (49,356) 390,353 (267,263)
Preferred stock dividends (55,222) (14,235) (110,445) (28,470)
---------- --------- -------- ---------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $193,452 $ (63,591) $279,908 $(295,733)
========== ========= ======== =========
DILUTED NET INCOME (LOSS) PER SHARE
OF COMMON STOCK $ 0.06 $ (0.02) $ 0.09 $ (0.10)
========== ========= ======== =========
DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,212,796 2,865,746 4,179,760 2,865,746
========== ========= ========= =========
BASIC NET INCOME (LOSS) PER
SHARE $ 0.06 $ (0.02) $ 0.09 $ (0.10)
========== ========= ========= ==========
BASIC WEIGHTED AVERAGE COMMON
SHARE OUTSTANDING 3,022,745 2,865,746 3,018,242 2,865,746
========= ========= ========= =========
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ----------------
<S> <C> <C>
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 1,320,618 $ 561,287
Short term investments 1,295,374 538,188
Accounts receivable, net of
allowance for doubtful
accounts of $80,377 in 1998
and $38,231 in 1997 572,463 545,109
Current portion of notes receivable 1,467,793 598,486
Other current assets 346,145 375,902
Assets of stores held for resale 1,130,206 -
Stores under development - 593,675
--------- -----------
TOTAL CURRENT ASSETS 6,132,599 3,212,647
--------- -----------
PROPERTY AND EQUIPMENT AT COST, net of
accumulated depreciation and amortization of
$479,647 in 1998 and $426,242 in 1997 2,139,785 2,164,898
--------- -----------
OTHER ASSETS:
Intangible assets, net of
accumulated amortization
of $785,754 in 1998 and $662,087
in 1997 1,521,506 1,727,400
Deferred assets 1,329,602 914,762
Deposits 67,507 76,294
Notes receivable, net of allowance
for doubtful accounts of $140,000 in
1998 and 1997 381,520 734,495
---------- ----------
TOTAL OTHER ASSETS 3,300,135 3,452,951
---------- ----------
TOTAL ASSETS $11,572,519 $8,830,496
=========== ==========
CURRENT LIABILITIES:
Accounts payable $ 913,877 $1,065,374
Accrued liabilities 111,245 489,848
Current portion of subordinated debt 300,000 110,912
Current portion of long term obligations 260,228 303,084
----------- ----------
TOTAL CURRENT LIABILITIES 1,585,350 1,969,218
LONG TERM OBLIGATIONS 1,256,497 741,570
CONVERTIBLE SUBORDINATED DEBT 1,200,000 1,389,088
DEFERRED INITIAL FRANCHISE FEES 4,129,913 2,148,662
----------- -----------
TOTAL LIABILITIES 8,171,760 6,248,538
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par
value, 1,000,000 shares
authorized:
Series A issued and outstanding
146,000 in 1998 and 1997
($876,000 liquidation
preference) 146 146
Series B issued and outstanding
100,000 in 1998 and 1997 ($500,000
liquidation preference) 100 100
Series C issued and outstanding
167,000 in 1998 and 1997 ($835,000
liquidation preference) 167 167
Common stock, $.001 par value; 9,000,000
shares authorized; issued and
outstanding 3,033,863 in 1998,
2,923,294 in 1997 3,034 2,923
Capital in excess of par value 5,092,081 4,663,744
Accumulated deficit (1,694,769) (2,085,122)
----------- ---------
TOTAL STOCKHOLDERS' EQUITY 3,400,759 2,581,958
----------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $11,572,519 $8,830,496
========== ==========
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 390,353 $ (267,263)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 289,768 134,687
Provision for losses on accounts receivable 42,147 10,500
Issuance of stock for services 5,083 3,256
Issuance of stock options for services - 28,000
Promissory notes accepted for area
director fees (644,226) (182,297)
Changes in assets and liabilities:
Restricted cash - 16,748
Accounts receivable (69,501) (245,188)
Other current assets 29,757 (84,546)
Accounts payable (151,496) 592,934
Accrued liabilities (345,603) (18,695)
Deferred franchise costs (394,898) (417,488)
Deferred initial franchise fees 1,981,251 462,059
--------- ---------
NET CASH PROVIDED BY OPERATIONS 1,132,635 32,707
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short term investments (757,186) -
Purchase of property and equipment (7,546) (127,556)
Development of turnkey stores (315,513) (534,768)
Development of Company owned stores (508,875) (174,898)
Disposal of property and equipment - 9,249
Acceptance of notes receivable (445,116) (26,000)
Principal payments received on notes receivable 603,423 290,672
Intangible assets (67,536) (78,263)
Other assets (21,626) (19,901)
---------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,519,975) (661,465)
---------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 921,355 -
Proceeds from sale of stock 533,814 -
Principal payments on long term obligations (166,081) (261,177)
Principal payments on lines of credit - (220,239)
Financing and offering costs (31,972) (43,106)
Dividends paid (110,445) (28,470)
--------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,146,671 (552,992)
--------- --------
NET INCREASE (DECREASE) IN CASH 759,331 (1,181,750)
CASH, BEGINNING OF PERIOD 561,287 2,127,330
---------- ---------
CASH, END OF PERIOD $1,320,618 $ 945,580
========== =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 103,073 $ 145,374
========== =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the first quarter of 1998, the Company sold the area directorship
rights for Canada for $704,000. The Company received $176,000 in cash and
$528,000 in the form of a note receivable bearing 6% interest and due in five
quarterly principal installments of $105,000 plus accrued interest. The last
installment is due June 20, 1999.
Beginning in 1998 the Company offers its area directors a performance
incentive of short and long term common stock purchase options. The short
term options allow the area director to purchase a fixed number of shares for
seven days at a discount of the lesser of 20% or $1.20 from the market price
of the shares on the grant date. The long term options allow the area
director to purchase a fixed number of shares six months at market price on
the grant date. In the first half of 1998 the Company granted 25,006 short
term options and 25,006 long term options, of which 20,432 and 4,876
respectively, were exercised as of June 30, 1998. In connection with this
program, the Company has recorded an expense in the first half of 1998 of
$14,771 representing the discounts.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Accumu-
---------------- ---------------- Paid-in lated
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT
JANUARY 1, 1997 146,000 $ 146 2,864,757 $ 2,865 $3,233,415 $(1,995,504)
------- ------- --------- -------- ---------- -----------
Issuance of Series
C preferred stock
for cash, net of
offering costs of
$36,454 167,000 167 - - 798,379 -
Issuance of Series
B preferred stock
for debt, net of
offering costs of
$44,277 100,000 100 - - 455,623 -
Inherent value of
stock warrants
granted to lender
in connection with
conversion of debt
to Series B
preferred stock - - - - 44,277 -
Issuance of common
stock for acquisition - - 18,182 18 99,982 -
Issuance of common
stock for exercise
of options - - 40,355 40 92,116 -
Inherent value of
options granted to
area directors - - - - 33,950 -
Preferred stock
dividends - - - - (93,998) -
Net loss - - - - - (89,618)
--------- -------- --------- -------- ------- ----------
BALANCES AT
DECEMBER 31,
1997 413,000 413 2,923,294 2,923 4,663,744 (2,085,122)
Issuance of
common stock
pursuant to
employee benefit
plan - - 976 1 5,083 -
Issuance of common
stock for exercise
of options by
underwriter - - 80,000 80 399,920 -
Issuance of common
stock for exercise
of options by area
directors - - 25,308 26 133,408 -
Issuance of common
stock for exercise
of options pursuant
to the employee
benefit plan - - 4,285 4 371 -
Preferred stock
dividends - - - - (110,445) -
Net income - - - - - 390,353
--------- --------- ---------- -------- ------ ---------
BALANCES AT
JUNE 30, 1998 413,000 $ 413 3,033,863 $3,034 $5,092,081 $(1,694,769)
========= ========= ========== ====== ========= =========
</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 six month periods ended June 30,
1998 and June 30, 1997, (b) the consolidated financial position at June 30,
1998, (c) the consolidated statements of cash flows for the six month periods
ended June 30, 1998 and June 30, 1997, and (d) the consolidated changes in
stockholders' equity for the six month period ended June 30,1998 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, 1997, included in the Company's Annual Report on Form 10-KSB to
the Securities and Exchange Commission filed on March 26, 1998.
3. The results for the three and six month periods ended June 30, 1998 are
not necessarily indicative of the results for the entire fiscal year of 1998.
4. 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 June 30, 1998, there were 306 franchises sold but not yet open with related
opening commissions totaling $1,026,000 (510,437 at December 31, 1997).
5. In the second Quarter of 1998 the Company has reclassified royalty fee
revenue to a new income statement account called continuing fee revenue.
Continuing fee revenue will be comprised of royalty fee revenue plus other
fees generated from the licensing of the Quizno's trade mark to vendors and
suppliers of the Quizno's franchise system. See Managements Discussion and
Analysis of Financial Condition or Plan of Operation for details.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
OVERVIEW
The Company earned a profit in the second quarter of 1998 of $248,674,
composed of income from franchise operations of $482,699, income from Company
owned store operations of $166,386, and less other charges totaling $400,411.
The Company's primary business is the franchising of Quizno's Restaurants. As
a franchisor, revenue is principally derived from: (1) area director
marketing fees, (2) initial franchise fees, and (3) continuing fees. Area
director fees occur only once for each exclusive area sold, and 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.
Continuing fees, on the other hand, 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. Over time initial fees and continuing fees
will generate proportionately more revenue than area director marketing fees.
The following chart reflects the Company's revenue growth by source and number
of restaurants for the second quarter and first half of 1998 compared the
second quarter and first half of 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ----------------
June 30, June 30,
-------------------- ----------------
1998 1997 1998 1997
--------- ------- -------- ------
<S> <C> <C> <C> <C>
Continuing fees $1,457,467 $ 537,360 $2,574,780 $1,006,485
Initial franchise fees 646,067 672,500 1,208,067 847,001
Area Director fees 479,985 470,327 1,052,985 895,750
Other 198,188 149,244 377,005 254,553
Interest 44,848 39,144 73,530 84,246
------------ ---------- ---------- ----------
Total franchise revenue 2,826,555 1,868,575 5,286,367 3,088,035
Sales by Company owned stores 1,472,898 886,734 3,214,307 1,499,474
Sales by Stores held for resale 415,384 37,284 415,384 111,286
------------ ---------- ---------- ----------
Total Revenue $4,714,837 $2,792,593 $8,916,058 $4,698,795
============ ========== ========== ==========
Restaurants open, beginning (1) 361 170 327 156
New restaurants opened 39 41 78 57
Restaurants closed (1) (9) (8) (14) (10)
------------ ----------- ---------- ----------
Restaurants open, end 391 203 391 203
============ =========== ========== ==========
New franchises sold 86 36 231 78
Initial franchise fees collected $1,215,000 $500,000 $3,184,500 $1,258,000
Systemwide sales $23.2 $11.8 $42.7 $16.2
million million million million
Average unit volume for 1997 (2) -- -- -- $316,259
Same store sales (2) Up 9.6% Down 2.2% Up 9.4% Down 0.7%
</TABLE>
(1) Includes 52 Bain's Deli units open at the beginning of 1998 and 4
Bain's Deli units closed. The Company acquired the Bain's Deli franchise
system on November 12, 1997.
(2) Same stores sales is based on 117 stores open since the beginning of
1997. Stores which transferred ownership during this period or are in
substantial default of the franchise agreement are excluded. Because the
Company is and will continue to be in an aggressive growth mode over the next
few year, it is anticipated that same store sales will fluctuate as units are
included from more start up markets. Excludes non-traditional units located
in convenience stores and gas stations, and includes only units open all of
1997.
RESULTS OF OPERATIONS
Comparison of the first half of 1998 with the first half of 1997 and the
second quarter of 1998 with the second quarter of 1997
Franchise revenue increased 51% in the second quarter of 1998 to $2,826,555
from $1,868,575 in the same quarter last year. For the first half of 1998,
franchise revenue increased by 71% to $5,286,367 from $3,088,035 last year.
Total revenue increased 69% in the second quarter of 1998 to $ 4,714,837 from
$2,792,593 in the same quarter last year, and 90% in the first half of 1998 to
$ 8,916,058 from $4,698,795.
CONTINUING FEES increased 154% in the second quarter of 1998 to $1,457,467
from $573,360 in the second quarter of 1997. For the first half of 1998,
continuing fees increased 156% compared to the first half of 1997.
Continuing fees are comprised of royalties and licensing fees.
Royalty fees are a percentage of each franchisee's sales paid to the Company
and will increase as new franchises open, as the average royalty percentage
increases, and as average unit sales increase. At June 30, 1998 there were
369 franchises open (including Bain's) as compared to 192 at June 30, 1997.
The royalty was 5% for agreements entered into prior to February 11, 1995, 6%
for agreements entered into from February 11, 1995 to March 31, 1998, and 7%
for all franchise agreements entered into after March 31, 1998. The royalty
for Quizno's Express units is 8%.
Included are 48 Bain's franchises which pay royalties at various rates up to
5%, and account for $144,081 in royalty revenue for the first half of 1998,
approximately 9% of the increase. The Company records royalty revenue from
Bain's franchisees when the funds are collected.
Licensing fees are fees generated through the licensing of the Quizno's
trademark for use by others. Licensing fees are expected to continue and to
increase with systemwide sales and the awareness and value of the Quizno's's
brand. Licensing fees were $225,000 in the 2nd Quarter of 1998 (vs) 0 in the
2nd Quarter of 1997.
INITIAL FRANCHISE FEES decreased 4% in the second quarter of 1998 to $646,067
from $672,500 in the same quarter last year. For the first half of 1998,
initial franchise fees increased 43% compared to the first half of 1997.
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 half of 1998, the Company opened 75 franchises
and three Company owned units as compared to 56 franchises and one Company
owned unit opened in 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 June 30, 1998 were $4,129,913 and represent 306 franchises
sold but not yet in operation, compared to $2,037,530 at June 30, 1997
representing 170 franchises sold but not open. The Company sold 231 new
franchises for $3,184,500 in the first half of 1998, of which 145 were sold in
the first quarter and 86 in the second quarter. The record sales were due, in
part, to a royalty increase from 6% to 7% effective for franchises purchased
after March 31, 1998. Direct costs related to the franchise 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 with respect to
initial franchise fees deferred at June 30, 1998 were $1,014,886.
Approximately 50% of all initial franchisee fees received by the Company are
paid to area directors for sales and opening commissions. The Company has not
sold or opened any Bain's franchises, nor does it expect to in the future.
AREA DIRECTOR MARKETING FEES increased 2% in the second quarter of 1998 to
$479,985 from $470,327 in same quarter last year. For the first half of 1998,
area director marketing fees increased 18% compared to the first half of 1997.
Area director marketing fees are one time fees paid to the Company for the
right to sell franchises in a designated, non-exclusive area, including
international markets. The fee for U.S. areas was $.05 per person from
January 1997 through December 1997, $.06 from January 1998 through February
1998, and $.07 since March 1, 1998. In addition, each area director is
required to pay a training fee of $10,000. 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
quarter of 1998 the Company sold all of the area directorship rights for
Canada to its Canadian master franchisee for $706,000. As part of the
agreement, the Canadian master franchisee is allowed to retain 100% of the
initial franchise fees from franchises sold in Canada in 1998. The Company
deferred $152,000 of the fee paid to be recognized as the Company's
obligations are completed. In addition to the Canadian master franchise, the
Company sold seven area directorships, including three existing area directors
who purchased additional territory, in the first half of 1998, compared to
19, including eight existing area directors who purchased additional
territory, sold in the first half of 1997. At June 30, 1998, the Company had
a total of 80 area directors who owned areas encompassing approximately 74% 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 Canadian master franchisee used the
financing for the purchase of the Canadian area directorships in the amount of
$528,000. This was a negotiated transaction in which the promissory note will
be repaid over two years. Of the additional area directorships sold in the
first half of 1998, two area directors financed a total of $150,643. In the
first half of 1997, a total of $22,500 was financed.
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. The Company's experience with the Area Director program
to date indicates that while some Area Directors will exceed their development
schedules, others will fail to meet their schedules. In its planning, the
Company has allowed for a certain percentage of Area Directors who will not
meet their development schedule. Delays in the sale and opening of
Restaurants can occur for many reasons. The most common are delays in the
selection or acquisition of an appropriate location for the Restaurant, delays
in negotiating the terms of the lease and delays in franchisee financing. The
Company may terminate an Area Director Marketing Agreement if the Area
Director fails to meet the development schedule, and the Company would then
have the right to resell the Territory to a new Area Director.
There are no area directors in the Bain's system and the Company does not
intend to sell any Bain's area directorships in the future.
OTHER REVENUE increased by 33% in the second quarter of 1998 to $198,188 from
$149,244 in the second quarter of 1997. For the first half of 1998, other
revenue increased 48% compared to the first half of 1997. Other revenue is
primarily bookkeeping fees charged franchisees for whom the Company provided
bookkeeping services and amounts paid by equipment suppliers for design and
construction. Since 1995, the Company's franchise agreement requires all new
franchisees to utilize the Company's bookkeeping services, or a firm
designated by the Company to provide bookkeeping services, for their first 12
months of operations. The fee per store was increased from $80 to $85 per
week for all franchise agreements executed after March 31, 1998. Bookkeeping
fees were $ 178,606 in the first half of 1998 compared to $125,708 in the
first half of 1997. The Company out-sourced the bookkeeping to an unaffiliated
party beginning in the second quarter of 1998. In the future, the Company will
earn only a small administrative fee relative to the bookkeeping function.
SALES AND ROYALTY COMMISSIONS expense increased to $896,454 in the second
quarter of 1998 from $611,644 in the same quarter last year. For the first
half of 1998, sales and royalty commissions expense increased 90% compared to
the first half of 1998. Sales and royalty commissions are amounts paid to the
area directors of the Company. As a percent of royalty fees and initial
franchisee fees, sales and royalty commissions were 46% for the first half of
1998 compared to 47% for the first half of 1997.
The Company's U.S. area directors receive commissions equal to 50% of the
initial franchise fees and 40% of royalties received by the Company from
franchises sold, opened, and operating in the area director's territory. The
Company's Canadian master franchisee receives 70% of both initial franchise
fees and royalties, except in 1998, in which they will receive 100% of initial
franchise fees, as discussed above. 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.
The area director is entitled to receive commissions during the term of the
ten year area director agreement or until early termination of the agreement,
although the area director may be entitled to a commission of 1% of sales for
the remainder of each franchised restaurant's franchise agreement, or five
years (whichever is less) if the area director agreement is terminated solely
because of failure to meet the development schedule. Agreements signed prior
to December 30, 1997 provided for ongoing payment of a 1% commission in such
circumstances for the remaining life of each franchise agreement in the
territory.
GENERAL AND ADMINISTRATIVE expenses increased 32% to $1,391,289 in the second
quarter of 1998 from $1,054,448 in the same quarter last year. For the first
half of 1998, general and administrative expenses increased 40% compared to
the first half of 1997. As a percent of franchise revenue, general and
administrative expenses have fallen from 80% in 1995, 74% in 1996, 58% in
1997, to 52% for the first half of 1998. General administrative expenses
include all operating costs of the Company. The increase is primarily due to
the addition of employees to service the growing network of Quizno's
franchisees 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 excessive in relation to the size and growth of the Company.
DEPRECIATION AND AMORTIZATION was $145,158 in the second quarter of 1998 and
$88,981 in the same quarter last year. For the first half of 1998 depreciation
and amortization was $289,786 compared to $165,791 for the first half of 1997.
The increase is primarily due to the acquisition and development of eight new
Company stores in 1997, five new company stores in the first half of 1998, and
the acquisition of the Bain's chain in 1997.
INTEREST EXPENSE was $103,073 in the second quarter of 1998 and $69,942 in the
same quarter last year. For the first half of 1998, interest was $181,080
compared to $145,374 for the same period last year. The increase is primarily
attributable to the interest on debt related to financing new company owned
stores and stores held for resale.
COMPANY STORES earned $166,386 on sales of $1,472,898 in the second quarter of
1998 compared to $70,279 on sales of $886,734 in the same quarter last year.
For the first half of 1998, Company stores earned $273,770 on revenue of
$3,214,307, compared to $71,245 on revenue of $1,499,474 in the first half of
1997. During the first half of 1998 the Company operated stores for a total of
100 store operating months, compared to 54 store operating months in the first
half of 1997. Sales per store month increased 15.8% in the first half of 1998
to $32,143 from $27,768. At June 30, 1998 the Company had 16 (ten at June 30,
1997) operating Company stores including one Bain's Deli, plus one store which
operates only during baseball season.
STORES HELD FOR RESALE lost $95,274 on sales of $415,384 in the second quarter
and first half of 1998, compared to losses of $14,955 on sales of $37,284, and
$39,495 on sales of $111,286 in the second quarter and first half of 1997,
respectively. In the second quarter of 1998 the Company operated six stores
held for resale, all of which were offered for sale by the Company at the
beginning of the second quarter of 1998, at which time they were reclassified
to stores held for resale from Company stores.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH PROVIDED BY OPERATING ACTIVITIES was $1,132,635 in the first half of
1998 compared to cash provided by operating activities of $32,707 in the first
half of 1997. The primary reasons for the improvement are net cash from
franchise sales and the net income improvement.
NET CASH USED IN INVESTING ACTIVITIES was $1,519,975 in the first half of 1998
compared to cash used by investing activities of $661,465 in the first half of
1997. Cash used in investing activities in the first half of 1998 was
primarily related to the acquisition and development of Company owned stores
and the investment of excess cash in short term investments.
NET CASH PROVIDED BY FINANCING ACTIVITIES was $1,146,671 in the first half of
1998 compared to cash used by financing activities of $552,992 in the first
half of 1997. The amount provided in 1998 was primarily from the sale of
stock and the proceeds of long term borrowing.
At June 30, 1998 the Company had $1,130,206 invested in stores held for
resale. One such restaurant is under contract to be sold for $213,000 in the
third quarter of 1998. The company agreed to finance $173,000 of the price
over ten years. The other restaurants are expected to be sold in 1998.
In the first quarter of 1998 the Company began a program under which its area
directors have a right to elect to have franchisee leases in the area
director's territory signed by The Quizno's Realty Company ("TQRC"), a wholly
owned subsidiary of the Company. As a condition of the lease, the landlord
agrees not to look beyond TQRC for payments. These locations are then
subleased by TQRC to the franchisee whose personal liability is limited to one
year. The franchisee will pay TQRC an indemnification fee of $38 per week,
pay a one time lease processing fee to TQRC of $2,200, and pay a security
deposit to TQRC equal to two months rent. Effective March 1, 1998, the
Company transferred cash and other assets having a book value of approximately
$500,000 to TQRC in exchange for stock and a promissory note. Through June
30, 1998 one such lease had been executed.
As it has in the past, the Company will continue to consider acquisitions of
other chains, the purchase of Quizno's restaurants from its franchisees, and
the purchase of Quizno's area directorships from its area directors. From
time to time the Company will make offers and enter into letters of intent for
such transactions subject to the completion of due diligence. In all such
cases, the Company will establish the sources of cash required to complete
such transactions prior to entering into a binding agreement.
Other than as described herein, the Company does not have any material
commitments or contracts which will require a significant amount of working
capital or capital resources.
Since its inception, the Company has incurred losses totaling $1,694,769,
through June 30, 1998. The Company has financed these losses primarily through
the sale of common stock and through the issuance of preferred stock as well
as convertible subordinated debt. The Company's trends are positive in that
for the twelve months ended June 30, 1998, it had a profit before preferred
stock dividends of $567,998. As seen in its statement of cash flows for the
first half of 1998, the Company generated cash from operations of $1,132,635.
The Company believes its ability to generate cash flow, combined with
additional financing, if necessary, will generate sufficient cash to support
its operations for the next twelve months.
The Company's restaurant sales, and therefore royalties, during the months of
November through February are generally lower due to the locations of most of
its restaurants.
YEAR 2000 DISCLOSURE
The Company uses current versions of widely used, publicly available software
for its accounting and other data processing requirements. The providers of
the software utilized by the Company have stated that there will be no
failures in the programs used by the Company resulting from the year 2000.
The Company has no customized software. The Company has not yet determined
the impact, if any, that year 2000 issues may have on its vendors. However,
the Company believes there are adequate alternative vendors that can supply
products and services to the Company if necessary. Finally, the Company's
business, quick service restaurants, is not highly dependent upon electronic
data processing. Therefore, the Company does not believe it is at a material
risk from year 2000 issues.
FORWARD-LOOKING STATEMENTS
Certain of the information discussed in this Form 10-QSB, and in particular in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Plan of Operation," 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 in the United States and in other countries in which
franchises are sold, 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 of location and franchisees, 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 January 9, 1998, related to the
Registration Statement on Form S-3 filed by the Company (Registration No.
333-38691) and to the Company's annual report filed on Form 10-KSB for year
ended December 31, 1997.
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 to 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 sever winter weather, will
adversely affect royalty income and could affect the other sources cited
above. Culinary fashions among Americans and people in other countries in
which franchises are sold 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 with 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 AND SUBSIDIARIES
COMMISSION FILE NUMBER: 000-23174
QUARTER ENDED JUNE 30, 1998
FORM 10-QSB
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In re Kirwin Ventures, L.L.C., Case No. 54 114 00312 98, American
---------------------------------
Arbitration Association; Mibichu L.L.C. v. The Quizno's Corporation, No.
98-007226-CK (Oakland County, Michigan). On June 29, 1998, Kirwin Ventures,
L.L.C. and Mibichu LLC, two Michigan franchisee entities owned by the same
individuals, filed an arbitration action and Michigan state court action
against the Company and certain of its subsidiaries and officers. The claims
allege violations of the Michigan Franchise Investment Law and
misrepresentations in connection with the franchise sale. The plaintiffs seek
damages in excess of $400,000 in each case. The Company intends to deny each
claim and is confident that it complied with all regulatory requirements as
well as acted in good faith.
Wagner v. The Quizno's Corporation, No. 98-2-11502-5SEA (King County,
--------------------------------------
Washington). This action was brought against the Company on May 11, 1998, by
a former franchisee who had abandoned its restaurant and opened a competing
restaurant. After receiving notice from the Company that the franchisee was
in breach of the post-term non-competition covenants of the franchise
agreement, the franchisee filed this action alleging failure to comply with
Washington state franchise disclosure rules and the Washington Consumer
Protection Act. The complaint seeks damages in excess of $200,000 plus
consequential and exemplary damages. On July 16, 1998, the Company filed a
petition in federal court in Colorado to compel arbitration in Denver pursuant
to the franchise agreement, and filed a motion to dismiss or stay the
Washington state action. A stipulated order staying the Washington action was
issued in July 1998. The Company intends to also file claims against the
Wagners in connection with their competing unit.
It is the opinion of management that the liability, if any, arising from
all pending claims and lawsuits will not have a material adverse impact upon
the Company's consolidated earnings or financial position.
Item 2. Changes in Securities
Sales of Unregistered Securities
<TABLE>
<CAPTION>
Securities Sold Date Amount of Purchasers Exemption
Consideration
- --------------- ---- ------------- ---------- ---------
<S> <C> <C> <C> <C>
Common Stock 4/30/98 $2,427 Quizno's 401(k) Plan Section 4(2)
Common Stock 4/98 $332,800 Holders of
Underwriters'
Warrants Section 4(2)
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
COMMISSION FILE NUMBER: 000-23174
QUARTER ENDED JUNE 30, 1998
FORM 10-QSB
PART II OTHER INFORMATION (CONTINUED)
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 25, 1998.
At the meeting, the shareholders voted on two proposals. The results of the
voting are as follows:
<TABLE>
<CAPTION>
Proposal #1 Election of Directors For Withheld
----------------------- --- --------
<S> <C> <C>
Brownell M. Bailey 2,578,113 7,900
Mark L. Bromberg 2,578,113 7,900
J. Eric Lawrence 2,578,113 7,900
Frederick H. Schaden 2,578,113 7,900
Richard E. Schaden 2,575,813 10,200
Richard F. Schaden 2,577,113 8,900
Proposal #2 Ratify the selection by the Board of Directors of Ehrhardt
Keefe Steiner & Hottman, P.C. as independent auditors of the
Company for the 1998 fiscal year.
For Against Abstain
--- ------- -------
2,575,721 5,695 4,597
</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 April 29, 1998, reporting in Item 5
preliminary 1st Quarter 1998 operating results
Form 8-K at the registrant, dated May 14, 1998, reporting in Item 5 final 1st
Quarter 1998 operating results.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
COMMISSION FILE NUMBER: 000-23174
QUARTER ENDED JUNE 30, 1998
FORM 10-QSB
PART II OTHER INFORMATION (CONTINUED)
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, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,615,992
<SECURITIES> 0
<RECEIVABLES> 2,040,256
<ALLOWANCES> 80,377
<INVENTORY> 0
<CURRENT-ASSETS> 6,132,599
<PP&E> 2,139,785
<DEPRECIATION> (479,647)
<TOTAL-ASSETS> 11,572,519
<CURRENT-LIABILITIES> 1,585,350
<BONDS> 0
0
413
<COMMON> 3,034
<OTHER-SE> 3,397,312
<TOTAL-LIABILITY-AND-EQUITY> 11,572,519
<SALES> 3,214,307
<TOTAL-REVENUES> 8,500,674
<CGS> 1,737,634
<TOTAL-COSTS> 7,452,317
<OTHER-EXPENSES> 658,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181,080
<INCOME-PRETAX> 279,908
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 279,908
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
