UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported)
August 17, 1998
THE QUIZNO'S CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 000-23174 84-1169286
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification
incorporation or No.)
organization)
1099 18th Street, Suite 2850
Denver, Colorado 80202
(Address of principal executive offices)
(303) 291-0999
(Registrant's telephone number, including area code)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) The registrant is filing the required financial statements in connection
with its acquisition of certain assets of the bankruptcy estates, including
the assumption and assignment of certain sandwich store leases, by three
affiliated debtors in possession, Stoico Restaurant Group, Inc., Subs &
Stuff, Inc. and Spaghetti Jack's, Inc. on August 17, 1998 on this amendment
to Form 8-K.
(b) The registrant is also filing the required pro forma information in
connection with the acquisition described in Item 7a above on this
amendment to Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE QUIZNO'S CORPORATION
Date: October 30, 1998 By:/s/John L. Gallivan
-------------------
John L. Gallivan
Chief Financial Officer
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Report.............................F - 1
Financial Statements
Consolidated Balance Sheet...........................F - 2
Consolidated Statements of Operations................F - 3
Consolidated Statements of Stockholders' Deficit.....F - 4
Consolidated Statements of Cash Flows................F - 5
Notes to Consolidated Financial Statements...............F - 6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Stoico Restaurant Group, Inc.
Wichita, Kansas
We have audited the accompanying consolidated balance sheet of Stoico Restaurant
Group, Inc. as of December 30, 1997 and the related consolidated statements of
operations and stockholders' deficit and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stoico Restaurant
Group, Inc. as of December 30, 1997 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the financial statements, the Company experienced continued losses in 1997 and
filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code on March 6, 1998. In July and August of 1998, creditors of the Company
sought to have the Chapter 11 proceedings converted to Chapter 7 proceedings.
The court denied these requests. However, the Company is currently in the
process of a complete liquidation under Chapter 11. These conditions indicate
that the Company will not continue as a going concern. The accompanying
consolidated financial statements do not include all adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that will be necessary since the Company is not a
going concern.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
October 21, 1998
Denver, Colorado
F - 1
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 30, July 14,
1997 1998
------------ -----------
(Unaudited)
Assets
Current assets
Cash and cash equivalents ............. $ 17,945 $ 39,775
Accounts receivable, net of $8,000
allowance........... ................. 45,223 2,785
Inventories ........................... 79,445 42,911
Prepaid expenses and other current
assets................................ 70,475 44,275
--------- ---------
Total current assets .............. 213,088 129,746
Property and equipment, net (Notes
3 and 4 ................................. 1,384,889 704,310
Notes receivable ......................... 3,581 --
Other assets ............................. 15,271 7,129
--------- ---------
Total assets ............................. $1,616,829 $ 841,185
========== ==========
Liabilities and Stockholders' Deficit
Prepetition liabilities secured
Accounts payable....................... $ 3,123 $ 3,123
Accrued expenses....................... -- --
Notes payable (Note 4)................. 28,732 --
---------- ----------
31,855 3,123
Prepetition liabilities subject to
compromise
Accounts payable....................... 1,432,027 1,430,905
Accrued expenses....................... 294,965 206,378
Lines-of-credit (Note 3)............... 398,727 388,137
Notes payable (Note 4)................. 667,217 659,886
---------- ----------
2,792,936 2,685,306
Post petition liabilities
Accounts payable....................... -- 127,456
Accrued expenses....................... -- 49,120
---------- ----------
-- 176,576
Commitments (Note 6)
Stockholders' deficit (Notes 7 and 8)
Preferred stock, $.01 par value,
5,000,000 shares authorized, -
0- shares issued and outstanding...... -- --
Common stock, $.01 par value,
20,000,000 shares authorized,
5,708,966 shares issued and outstanding
at December 30, 1997 and July 14, 1998
(unaudited), respectively............. 57,090 57,090
Additional paid-in capital............. 14,285,754 14,285,754
Accumulated deficit.................... (15,550,806) (16,366,664)
----------- ----------
Total stockholders' deficit........ (1,207,962) (2,023,820)
----------- ----------
Total liabilities and stockholders'
deficit ................................. $1,616,829 $841,185
=========== ==========
See notes to consolidated financial statements.
F - 2
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Year For the Twenty-Eight Weeks Ended
Ended ---------------------------
December 30, July 15, July 14,
1997 1997 1998
----------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenue
Sales ...................... $ 8,198,769 $ 5,137,715 $ 1,958,821
Royalty income ............. 87,771 50,313 5,653
Franchise fees ............. 170,000 60,000 10,891
----------- ----------- -----------
Total revenues ............ 8,456,540 5,248,028 1,975,365
----------- ----------- -----------
Cost of sales
Food and paper ............. 2,514,159 1,533,139 620,901
Wages and benefits ......... 3,430,792 1,963,539 756,830
----------- ----------- -----------
Total cost of sales ....... 5,944,951 3,496,678 1,377,731
----------- ----------- -----------
Gross profit .............. 2,511,589 1,751,350 597,634
Restaurant operating expenses 3,207,191 1,886,781 418,266
Pre-opening expenses ......... 123,078 123,036 --
Administrative expenses ...... 1,357,052 1,105,006 445,969
----------- ----------- -----------
Operating loss ............ (2,175,732) (1,363,473) (266,601)
----------- ----------- -----------
Other income (expense)
Interest income ............ 21,275 28,999 537
Interest expense ........... (83,346) (23,679) (24,075)
Loss on sale and
abandonment of assets,
net ....................... (3,465,933) -- (411,154)
Closed store expense ....... (234,674) -- (126,337)
Impairment of goodwill ..... (911,044) -- --
Miscellaneous other (expense)
income, net.............. . (25,260) 31,303 11,772
----------- ----------- -----------
Loss before income taxes .. (6,874,714) (1,326,850) (815,858)
Income taxes (Note 5) ........ -- -- --
----------- ----------- -----------
Net loss ..................... (6,874,714) $(1,326,850) $ (815,858)
=========== =========== ===========
Basic and diluted loss per
common share ................ $ (1.20) $ (.23) $ (.14)
=========== =========== ===========
Basic and diluted weighted
average common shares
outstanding ................. 5,708,966 5,730,700 5,708,966
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
--------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances, December 31,
1996...................... 5,708,966 $ 57,090 $14,285,754 $(8,676,092) $5,666,752
Net loss .................. -- -- -- (6,874,714) (6,874,714)
--------- -------- ----------- ----------- ----------
Balances, December 30,
1997...................... 5,708,966 57,090 14,285,754 (15,550,806) (1,207,962)
Net loss (unaudited) ...... -- -- -- (815,858) (815,858)
--------- ------- ----------- ----------- ----------
Balances, July 14, 1998
(unaudited) .............. 5,708,966 $ 57,090 $ 14,285,754 $(16,366,664) $(2,023,820)
========= ======== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Year For the Twenty-Eight Weeks Ended
Ended ----------------------------
December 30, July 15, July 14,
1997 1997 1998
----------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash from operating activities
Net loss ..................... $(6,874,714) $(1,326,850) $ (815,858)
----------- ----------- -----------
Adjustments to reconcile net
loss to net cash used
in operating activities
Depreciation and amortization 842,257 508,273 116,039
Loss (gain) on disposal and
abandonment of equipment
net, ....................... 3,465,933 (24,786) 411,154
equipment, net
Impairment of goodwill ...... 911,044 -- --
Income attributable to area
development fee
forfeiture ................. (105,000) (45,000) --
Changes in current assets
and liabilities
Receivables ................ 14,128 (65,939) 42,438
Inventories ................ 98,464 (11,361) 36,534
Notes receivable ........... 243,496 147,180 3,581
Prepaid expenses and other
current assets ............ 182,741 71,549 26,200
Accounts payable ........... (528,614) (579,038) 126,334
Accrued expenses and other . (122,268) (156) (39,467)
Deferred revenue ........... (185,000) (15,000) --
Other assets ............... 35,954 38,179 8,142
----------- ----------- -----------
4,853,135 23,901 730,955
----------- ----------- -----------
Net cash used in operating
activities ............... (2,021,579) (1,302,949) (84,903)
----------- ----------- -----------
Cash flows from investing
activities
Purchase of property, plant
and equipment ............... (1,288,991) (1,309,338) --
Proceeds from sale of
equipment and restaurant .... 272,480 87,906 153,386
----------- ----------- -----------
Net cash (used in) provided
by investing activities .. (1,016,511) (1,221,432) 153,386
----------- ----------- -----------
Cash flows from financing
activities
Proceeds from issuance of
notes payable ............... 527,000 500,000 21,739
Principal payments on notes
payable ..................... (32,742) (58,426) (55,302)
Proceeds from (payments on)
line-of-credit ........ ..... 398,727 -- (10,590)
Principal payment on officer
note payable ................ (108,500) (52,000) (2,500)
----------- ----------- -----------
Net cash provided by
(used in) financing
activities ............... 784,485 389,574 (46,653)
----------- ----------- -----------
Net decrease in cash and cash
equivalents ................... (2,253,605) (2,134,807) 21,830
Cash and cash equivalents at
beginning of period ........... 2,271,550 2,271,550 17,945
----------- ----------- -----------
Cash and cash equivalents at
end of period ................. $ 17,945 $ 136,743 $ 39,775
=========== =========== ===========
</TABLE>
Supplemental disclosure of cash flow information.
Cash paid for interest during the year ended December 30, 1997 was
$56,568.
See notes to consolidated financial statements.
F - 5
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Operations and Principles of Consolidation
- ------------------------------------------
These consolidated financial statements include the accounts of Stoico
Restaurant Group, Inc. (SRG) and its two wholly-owned subsidiaries, Spaghetti
Jack's, Inc. (Spaghetti Jack's) and Sub & Stuff, Inc. (Sub & Stuff), and two
predecessor entities which were merged into SRG on December 26, 1995,
collectively referred to as the Company. All significant intercompany balances
and transactions have been eliminated in consolidation.
Spaghetti Jack's operates restaurants of the same name specializing in the sale
of value priced, quick service Italian food. Sub & Stuff operates restaurants of
the same name specializing in the sale of Italian and American submarine
sandwiches and related menu items. In addition, both Spaghetti Jack's and Sub &
Stuff are involved in the development and sale of franchise and area development
agreements that allow for the operation of restaurants under the respective
concepts. As of December 30, 1997, Spaghetti Jack's had 2 company-owned stores
and 5 franchise stores in operation and Sub & Stuff had 15 company-owned stores
and 5 franchise stores in operation. As of December 30, 1997, there were no
franchises sold not in operation.
Fiscal Year
- -----------
The Company operates using a fiscal year ending on the last Tuesday of December
comprised of thirteen four-week periods. The accompanying consolidated financial
statements for 1997 reflect the results of operations for the period from
January 1, 1997 to December 30, 1997 (such period is referred to herein as the
year ended December 30, 1997).
Revenue Recognition
- -------------------
Revenues are derived from Company restaurant operations as well as from sales of
franchise/area development agreements and resulting royalties.
Franchise agreements are executed for each franchise restaurant and provide the
terms of the franchise agreement between the Company and the franchisee. The
franchise arrangement requires the franchisee to pay the Company an initial,
non-refundable franchise fee plus royalties based upon a percentage of
restaurant sales.
F - 6
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Revenue Recognition (continued)
- -------------------------------
Initial franchise fees are recognized as revenue when the Company has performed
substantially all initial services required by the franchise agreement, which
generally has occurred by the date the restaurant has opened. Initial franchise
fees applicable to restaurants for which substantially all initial services
required by the franchise agreement have not been performed are recorded as
deferred revenue until such time as the services have been performed. Revenue
from area development agreements are recognized in proportion to performance of
initial services required by the franchise agreement where reasonably estimable
or otherwise are recognized straight-line over the term of the area development
agreement.
Royalties are recognized as earned.
Advertising
- -----------
Advertising costs are expensed as incurred.
Inventories
- -----------
Inventories consist of food, beverages, paper products and related supplies,
etc. Inventories are recorded at the lower of cost or market value. Cost is
determined by use of the first-in, first-out method.
Goodwill and Long-Term Assets
- -----------------------------
Goodwill is amortized using the straight-line method over periods ranging from
ten to twenty years. The Company periodically assesses the recoverability of
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected future operating cash flows
discounted at a rate commensurate with the risks involved. The assessment of the
recoverability of goodwill is impacted if estimated future operating cash flows
are not achieved. As described in Note 10, the Company filed for reorganization
under Chapter 11. As such, the entire balance of goodwill has been impaired
consistent with the Company's policy of evaluting the recoverability of
long-term assets and intangibles.
F - 7
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Property and Equipment
- ----------------------
Property and equipment, which includes land and buildings, store equipment and
leasehold improvements, are stated at cost. Depreciation is computed using the
straight-line method over the estimated lives of the assets. Leasehold
improvements are amortized over the term of the lease including renewal option
periods when the Company intends to exercise renewal options, or the estimated
useful life of the asset. Depreciation and amortization periods utilized are as
follows:
Periods
-------
Building 39.5 years
Store equipment 7 years
Leasehold improvements 4-15 years
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes which requires an
asset and liability approach. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established for deferred tax assets
when it is more likely than not that such deferred tax assets will not result in
a benefit to the Company.
Statements of Cash Flows
- ------------------------
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
a cash equivalent.
Use of Estimates
- ----------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
F - 8
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Loss Per Common Share - Basic and Diluted
- -----------------------------------------
The Company adopted Statement of Financial Accounting Standard No. 128 ("FAS
128"), Earnings Per Share. All prior period loss per common share data has been
restated to conform to the provisions of this statement. Basic loss per common
share is computed using the weighted average number of shares outstanding.
Diluted loss per common share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares attributed to outstanding
options to purchase common stock, only if their effect is dilutive. Options to
purchase a total of approximately 180,563 shares of common stock in 1997, were
not included in the computation of diluted loss per common share because their
effect would be antidilutive.
Note 2 - Property and Equipment
- -------------------------------
Property and equipment consist of the following:
December 30,
1997
------------
Land ..................... $ 16,116
Building and improvements 215,022
Store equipment .......... 1,761,804
Leasehold improvements ... 1,117,540
-----------
3,110,482
Accumulated depreciation . (1,725,593)
-----------
Net property and equipment $ 1,384,889
===========
Note 3 - Line-of-Credit
- -----------------------
The Company has a $550,000 revolving line-of-credit with a bank. Interest
accrues at the bank's prime rate plus 1.5% and is payable monthly. The
line-of-credit had an outstanding balance of $398,727 at December 30, 1997. This
line is unsecured and subject to compromise.
F - 9
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Notes Payable - Prepetition
- ------------------------------------
Notes payable consist of the following:
Prepetition - Secured
- --------------------
December 30,
1997
------------
Variable interest rate real estate mortgage note
payable, (12.375% at December 30, 1997) secured by
real estate, monthly payment of $1,260, including
interest, scheduled maturity in February 2001. $ 28,732
========
Prepetition - Subject to Compromise
- -----------------------------------
December 30,
1997
------------
10% unsecured note payable - stockholder, principal
and interest due December 31, 1997. Note is currently
in default (Note 10). $ 500,000
12% unsecured notes payable, payable in monthly
payments of $1,110 including interest, with final
payment of $1,110 due October 31, 1998, notes are
callable at the lender's option after November
1995. Note is currently in default (Note 10). 11,462
Note payable to bank, interest rate is 2% above
bank's base rate, payable in monthly payments
of $950, including interest, with final payment
due on January 15, 1998. Note is currently in
default (Note 10). 1,264
14% unsecured notes payable, interest
payments are due monthly with $15,000
principal due in 1998, $92,000 principal
due in 1999 (which is currently callable
at lender's option), and $20,000 principal
due in 2000 (which can be called at lender's
option after January 1997). Note is currently
in default (Note 10). 105,000
12% unsecured notes payable in monthly
installments of $997, including interest
with final payment of $995 due October 30,
1998, notes are callable at lender's
option. Note is currently in default
(Note 10). 15,491
F - 10
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Notes Payable - Prepetition (continued)
- ------------------------------------------------
Prepetition - Subject to Compromise (continued)
- -----------------------------------------------
December 30,
1997
------------
Non interest bearing unsecured note payable to
an officer of the Company, due in varying monthly
payments, maturing in 1998. Note is currently
in default (Note 10). 11,500
11.85% unsecured note payable in monthly
installments of $2,625, including interest,
with final payment due September 11, 1998.
Note is currently in default (Note 10). 22,500
---------
$667,217
=========
Note 5 - Income Taxes
- ---------------------
Due to losses incurred in 1997 and prior years, the Company has reflected no
income tax expense or benefit for the year ended December 30, 1997.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 30, 1997 are presented below:
December 30,
1997
------------
Deferred tax assets
Net operating loss carryforwards $5,100,000
Less valuation allowance (5,100,000)
---------
Net deferred tax assets $ -
==========
At December 30, 1997, the Company has net operating loss carryforwards
(NOL) for income tax purposes of approximately $15.0 million which are
available to offset future taxable income, if any. The net operating loss
carryforwards will expire in varying amounts through 2012. Since management
believes that it is more likely than not that the NOLs will not be
utilized, it has fully impaired the asset by creating a $5,100,000
valuation allowance.
As of October 30, 1998, the 1997 corporate income tax return has not been
filed.
F - 11
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 6 - Commitments
- --------------------
Leases
- ------
The Company is obligated under various operating leases for Company store
locations and for certain items of store equipment. The leases expire at various
dates through 2010. Future minimum lease payments under such noncancelable
leases at December 30, 1997 are as follows:
1998 $797,202
1999 677,011
2000 539,728
2001 421,093
2002 198,463
Thereafter 998,139
----------
$3,631,636
==========
Total rent expense for the year ended December 30, 1997 was $924,507.
As of October 30, 1998, all but nine of the above store leases were rejected in
connection with the Chapter 11 filing in March 1998 (Note 10).
Note 7 - Equity Transactions
- ----------------------------
Initial Public Offering
- -----------------------
In December 1996, the Company completed an initial public offering through which
it issued 1,401,944 shares of common stock at a price of $7.50 per share
resulting in total gross proceeds of $10,514,580. The Company incurred $696,717
of costs in connection with the offering resulting in net proceeds from the
offering of $9,817,863.
Note 8 - Stock Options
- ----------------------
Prior to the initial public offering (see note 7), the Company and its majority
stockholder had issued various stock options to employees, directors and a
lender as described below. In connection with the initial public offering, the
Company adopted the 1996 Stock Option Plan which authorized the award of
nonqualified options to acquire 480,000 shares of common stock. On January 1,
1997, options to acquire 150,000 shares of common stock were granted pursuant to
the Plan. The options have an exercise price of $7.50 per share and become
exercisable one-third per year over a three-year period from date of grant. The
options expire in five years from date of grant. As of December 30, 1997, no
options have been exercised under the Plan.
F - 12
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Stock Options (continued)
- ----------------------------------
The Company applies APB Opinion No. 25 in accounting for options granted
to employees. Subsequent to the Company's initial public offering, the Company
was required to apply the provisions of SFAS No. 123 utilizing an option-pricing
model.
Had compensation cost for the Company's stock options been determined based on
the fair value at the grant date for awards in 1997 consistent with the
provisions of SFAS No. 123, the Company's consolidated net earnings and earnings
per share would have been reduced to the pro forma amounts indicated below:
Year Ended
December 30,
1997
------------
Net loss - as reported $(6,874,714)
Net loss - pro forma $(6,933,505)
Loss per share - as reported $ (1.20)
Loss per share - pro forma $ (1.21)
The fair value of options granted to nonemployees has been accounted for under
SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield of 0%; expected volatility of 0.00%;
discount rate of 5.44%; and expected lives of 1 year.
F - 13
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Stock Options (continued)
- ----------------------------------
Stock option activity relating to options issued by the Company to employees
during the periods indicated is as follows:
Weighted-
Average
Number of Exercise
Shares Price
---------- ---------
Balance at December 31, 1996 30,563 $ 2.1667
Granted 150,000 7.50
-------- ---------
Balance at December 30, 1997 180,563 $ 6.59
======== =========
At December 30, 1997, the range of exercise prices of outstanding options issued
to employees was $1.60 - $2.45. The 180,563 options issued to employees that are
outstanding at December 30, 1997, expire 10,188 in June 1999, 150,000 in January
2002, with the remaining 20,375 having no expiration date.
At December 30, 1997, the number of options outstanding to employees that were
exercisable was 80,563 and the weighted average exercise price of those
exercisable options was $4.89.
Note 9 - Fair Value of Financial Instruments
- --------------------------------------------
The Company has determined the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments. For notes payable and long-term debt,
the fair value is estimated by discounting the future cash flows at rates
currently available for similar types of debt instruments. The estimated value
of notes payable and long-term debt approximates their carrying value as of
December 30, 1997.
For all other financial instruments including cash and cash equivalents,
receivables, accounts payable and accrued expenses, the carrying amounts
approximate fair value because of the short maturity of those instruments.
F - 14
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - Continued Operations
- ------------------------------
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. During the year ended December
30, 1997, the Company continued to suffer recurring losses from operations in
excess of $2,000,000, resulting in an accumulated deficit of approximately
$15,500,000.
Due to continued losses, the Company chose to close ten locations. These
locations were not profitable and due to restricted financial resources, the
Company was unable to continue to fund these locations. The Company wrote off
$3,491,350 in furniture and leasehold improvement costs associated with these
locations and impaired $911,044 of goodwill associated with these stores. In
addition, the Company accrued $234,674 in costs related to closing these
locations.
In March of 1998, the Company, due to continued losses, filed for protection
under Chapter 11 of the bankruptcy code. After attempting to successfully
reorganize under Chapter 11, the Company determined no viable plan existed and
is currently in the process of a complete liquidation under Chapter 11. In
August 1998, the Company sold equipment, leasehold improvements and inventory
related to eight of its locations to a third party for $500,000 cash. All
remaining assets, if any, are currently being sold or liquidated for payment
of current expenses or existing obligations. Accordingly, the Company is
not a going concern. As such, the accompanying consolidated financial statements
have not been presented on a going concern basis and do not include the
adjustments necessary to reflect the amounts at which assets will be realized
and liabilities will be satisfied.
F - 15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Stoico Restaurant Group, Inc.:
We have audited the accompanying consolidated balance sheets of Stoico
Restaurant Group, Inc. and subsidiaries as of December 31, 1996 and December 26,
1995, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stoico Restaurant
Group, Inc. and subsidiaries as of December 31, 1996 and December 26, 1995, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Wichita, Kansas
January 25, 1997
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and December 26, 1995
December 31, December 26,
Assets 1996 1995
------ ----------- -----------
Current assets:
Cash and cash equivalents ............... $2,271,550 784,171
Receivables ............................. 59,351 56,482
Inventories ............................. 177,909 108,880
Prepaid expenses and other current assets 253,216 42,012
---------- ----------
Total current assets ............. 2,762,026 991,545
Property and equipment (notes 3 and 4) .... 4,521,779 1,693,354
Goodwill, net of amortization of $76,655
and $10,165, respectively ................ 989,413 1,055,903
Notes receivable:
Former officer .......................... 225,000 --
Other, net of related deferred
income of $201,560 at December 31, 1996 22,077 --
Other assets .............................. 51,225 14,572
---------- ----------
Total assets ..................... $8,571,520 3,755,374
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 1996 and December 26, 1995
<TABLE>
<CAPTION>
December 31, December 26,
1996 1995
------------ ------------
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable ........................... $ 1,963,764 $ 698,766
Accrued expenses ........................... 300,282 287,190
Current portion of long-term debt
(note 4) .................................. 190,191 357,139
Deferred revenue ........................... 195,000 36,917
Total current liabilities ........... 2,649,237 1,380,012
Long-term debt, less current
portion (note 4) ............................ 43,580 4,661,415
Long-term lease obligation
on closed store ............................ 116,951 --
Deferred revenue ............................. 95,000 --
------------ ------------
Total liabilities ................... 2,904,768 6,041,427
Redeemable equity - common stock subject to
rescission; -0- and 684,915 shares
at December 31, 1996 and December 26, 1995,
respectively (note 11) ...................... -- 1,250,526
Stockholders' equity (deficit) (notes 7 and 8):
Preferred stock, $.01 par value,
5,000,000 shares authorized,
-0- shares issued and outstanding .......... -- --
Common stock, $.01 par value,
20,000,000 shares authorized, 5,708,966
and 3,046,604 shares issued at
December 31, 1996 and December 26, 1995,
respectively .............................. 57,090 30,466
Additional paid-in capital ................. 14,285,754 2,810,596
Accumulated deficit ........................ (8,676,092) (6,377,641)
Total stockholders'
equity (deficit) ................... 5,666,752 (3,536,579)
------------ -------------
Commitments (note 6)
Total liabilities and
stockholders' equity (deficit) ........... $ 8,571,520 $ 3,755,374
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1996 and December 26, 1995
December 31, December 26,
1996 1995
------------ ------------
Revenues:
Sales ............................. $ 7,352,795 6,106,936
Royalty income .................... 131,108 128,523
Franchise fees .................... 34,000 --
----------- -----------
Total revenues ............. 7,517,903 6,235,459
----------- -----------
Cost of sales:
Food and paper .................... 2,244,412 1,977,004
Wages and benefits ................ 2,366,180 2,088,627
----------- -----------
Total cost of sales ........ 4,610,592 4,065,631
----------- -----------
Gross profit ............... 2,907,311 2,169,828
Restaurant operating expenses ....... 2,099,275 1,754,163
Pre-opening expenses ................ 283,272 --
Administrative expenses ............. 2,165,261 1,430,260
Noncash compensation expense (note 8) 13,749 1,169,115
----------- -----------
Operating loss ............. (1,654,246) (2,183,710)
Other income (expense):
Miscellaneous other income ........ 70,429 47,399
Provision for lease obligation
on closed store .................. (175,855) --
Interest income ................... 40,820 54,975
Interest expense .................. (579,599) (436,396)
Equity in income of joint
ventures (note 2) ................ -- 16,812
Minority interests in loss of
entities not wholly-owned
(notes 1(b) and 2) ............... -- 35,266
Loss before income taxes ... (2,298,451) (2,465,654)
Income taxes (note 5) ............... -- --
----------- -----------
Net loss ............................ $(2,298,451) $(2,465,654)
=========== ===========
Loss per common share (note 1(m)) ... $ (.52) (.60)
=========== ===========
See accompanying notes to consolidated financial statements
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1996 and December 26, 1995
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Common Paid-in Accumulated Treasury Equity
Stock Capital Deficit Stock (Deficit)
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 .... $ 31,332 $1,814,233 $(3,911,987) $ (375) $(2,066,797)
Options granted to purchase
common stock (note 8) ......... -- 1,295,486 -- -- 1,295,486
Issuance of common stock
(97,894 shares) ............... 979 151,221 -- -- 152,200
Reorganization:
Treasury stock canceled
due to reorganization
(312 shares) (note 1(b)) ..... (3) (372) -- 375 --
Stock issued in connection
with acquisition of 29.2%
interest in Spaghetti
Jack's (note 1(b)) (500,772
shares) ...................... 5,008 793,704 -- -- 798,712
Transfer to redeemable
equity - common stock subject
to rescission (684,915 shares)
(note 11) ..................... (6,850) (1,243,676) -- -- (1,250,526)
Net loss ....................... -- (451) -- -- (451)
----------- ----------- ----------- ----------- -----------
Balances, December 26, 1995 .... 30,466 2,810,596 (6,377,641) -- (3,536,579)
Issuance of common stock
(40,753 shares) ............... 407 64,593 -- -- 65,000
Issuance of common stock in
connection with exercise of
stock options (534,755 shares) 5,348 244,747 -- -- 250,095
Options granted to purchase
common stock (note 8) ......... -- 113,749 -- -- 113,749
Capital contribution resulting
from sale of stock by principal
stockholder to employee ....... -- 5,000 -- -- 5,000
Transfer from redeemable equity
- common stock subject to
rescission (684,915 shares)
(note 11) ..................... 6,850 1,243,676 -- -- 1,250,526
Payments to shareholders for
fractions of shares on reverse
split ......................... -- (451) -- -- (451)
Issuance of common stock in
connection with initial public
offering net of offering costs
of $696,717 (1,401,944 shares)
(note 7) ...................... 14,019 9,803,844 -- -- 9,817,863
Net loss ....................... -- -- (2,298,451) -- (2,298,451)
----------- ---------- ----------- ----------- -----------
Balances, December 31, 1996 .... $ 57,090 $14,285,754 $(8,676,092) $ -- $5,666,752
=========== ========== =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STOICO RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1996 and December 26, 1995
<TABLE>
<CAPTION>
December 31, December 26,
1996 1995
------------ -----------
<S> <C> <C>
Cash from operating activities:
Net loss ................................... $ (2,298,451) (2,465,654)
Adjustments to reconcile net
loss to net cash used in
operating activities net of
amounts acquired in purchase of
joint ventures:
Depreciation and amortization ............ 575,447 250,126
Loss on disposal of equipment ............ 1,918 1,532
Noncash compensation expense ............. 13,749 1,169,115
Increase in receivables .................. (2,869) (20,064)
Increase in inventories .................. (69,029) (22,126)
Increase in notes receivable ............. (226,746) --
Decrease (increase) in prepaid
expenses and other current assets ....... (211,204) 5,592
Increase (decrease) in accounts
payable ................................. (98,201) 280,583
Increase in accrued expenses ............. 13,092 120,060
Increase in long-term lease
obligation on closed store .............. 116,951 --
Increase (decrease) in deferred
revenue ................................. 253,083 (26,567)
Loss attributable to minority interests .. -- (35,266)
Income attributable to investment
in joint ventures ....................... -- (16,812)
Decrease (increase) in other
assets .................................. (37,032) 1,170
----------- ---------
Net cash used in operating activities .. (1,969,292) (758,311)
----------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment .. (2,123,649) (925,595)
Purchase of remaining interest in limited
partnerships and joint ventures net of
cash acquired (note 2) .................... -- (586,272)
Proceeds from sale of restaurant ........... 251,300 --
Proceeds from the sale of equipment ........ 2,668 --
------------ ------------
Net cash used in investing activities . (1,869,681) (1,511,867)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ... 1,750,000 3,020,000
Principal payments on long-term debt ....... (6,591,155) (104,009)
Proceeds from issuance of common stock ..... 10,167,507 152,200
Distributions to minority interests ........ -- (45,159)
------------ ------------
Net cash provided by financing
activities ........................... 5,326,352 3,023,032
------------ ------------
Net increase in cash and cash
equivalents .......................... 1,487,379 752,854
Cash and cash equivalents at beginning of year 784,171 31,317
----------- ------------
Cash and cash equivalents at end of year ..... $ 2,271,550 784,171
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
(1) Summary of Significant Accounting Policies
(a)Operations and Principles of Consolidation
Theseconsolidated financial statements include the accounts of Stoico
Restaurant Group, Inc. (SRG) and its two wholly-owned subsidiaries,
Spaghetti Jack's, Inc. (Spaghetti Jack's) and Sub & Stuff, Inc. (Sub &
Stuff), and two predecessor entities which were merged into SRG on
December 26, 1995 as described in note 1(b), collectively referred to
as the Company. All significant intercompany balances and transactions
have been eliminated in consolidation.
Spaghetti Jack's operates restaurants of the same name specializing in the
sale of value priced, quick service Italian food. Sub & Stuff operates
restaurants of the same name specializing in the sale of Italian and
American submarine sandwiches and related menu items. In addition,
both Spaghetti Jack's and Sub & Stuff are involved in the development
and sale of franchise and area development agreements that allow for
the operation of restaurants under the respective concepts. As of
December 31, 1996, Spaghetti Jack's had eight company-owned stores and
six franchise stores in operation and Sub & Stuff had nineteen
company-owned stores and two franchise stores in operation.
(b)Reorganization
Priorto December 26, 1995, the operations of the Spaghetti Jack's
restaurant concept were conducted by a former company, Spaghetti
Jack's, Inc. (hereafter referred to as "Old SJ's") and the operations
of the Sub & Stuff restaurant concept were conducted by a former
company, Stoico Food Services, Inc. (Stoico). At December 26, 1995,
"Old SJ's" was owned approximately 70.8% by Stoico with the remaining
29.2% ownership held by certain individuals. Effective December 26,
1995, "Old SJ's" and Stoico reorganized whereby (i) all of the "Old
SJ's" stock owned by Stoico was canceled, (ii) all of the "Old SJ's"
stock owned by the certain individuals was exchanged for an equal
number of shares of common stock of SRG, a newly formed entity, and
(iii) each outstanding share of Stoico common stock was exchanged for
1.53 common shares of SRG. "Old SJ's" and Stoico were consolidated
into SRG and the separate existence of "Old SJ's" and Stoico ceased.
Two new entities (Spaghetti Jack's and Sub & Stuff) were then formed,
both of which are wholly-owned by SRG. SRG then contributed to
Spaghetti Jack's all of the assets and liabilities directly related to
the operations of the Spaghetti Jack's restaurant concept and to Sub &
Stuff all of the assets and liabilities directly related to the
operations of the Sub & Stuff restaurant concept.
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
(b)Reorganization, Continued
The acquisition of the 29.2% minority ownership of "Old SJ's" pursuant to
the reorganization described above was accounted for as a purchase.
The amount of purchase consideration was determined based upon the
estimated fair value of the common stock issued by the Company based
upon sales of the Company's common stock by the Company and its
principal stockholder which occurred during 1995. Goodwill increased
$798,712 as a result of the acquisition of such minority ownership.
(c)Fiscal Year
Priorto January 1, 1995, the Company's fiscal year was the calendar year.
During 1995, the Company adopted a fiscal year ending on the last
Tuesday of December comprised of thirteen four-week periods. The
accompanying consolidated financial statements for 1995 reflect the
results of operations for the period from January 1, 1995 to December
26, 1995 (such period is referred to herein as the year ended December
26, 1995). The accompanying consolidated financial statements for 1996
include twelve four-week periods and one five-week period or a total
of 53 weeks and is referred to as the year ended December 31, 1996.
(d)Revenue Recognition
Revenues are derived from Company restaurant operations as well as from
sales of franchise/area development agreements and resulting
royalties.
Franchise agreements are executed for each franchise restaurant and provide
the terms of the franchise agreement between the Company and the
franchisee. The franchise arrangement requires the franchisee to pay
the Company an initial, non-refundable franchise fee plus royalties
based upon a percentage of restaurant sales.
Initial franchise fees are recognized as revenue when the Company has
performed substantially all initial services required by the franchise
agreement, which generally has occurred by the date the restaurant has
opened. Initial franchise fees applicable to restaurants for which
substantially all initial services required by the franchise agreement
have not been performed are recorded as deferred revenue until such
time as the services have been performed. Revenue from area
development agreements are recognized in proportion to performance of
initial services required by the franchise agreement where reasonably
estimable or otherwise are recognized straight-line over the term of
the area development agreement.
Royalties are recognized as earned.
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
(e)Inventories
Inventories consist of food, beverages, paper products and related
supplies, etc. Inventories are recorded at the lower of cost or market
value. Cost is determined by use of the first-in, first-out method.
(f) Goodwill
Goodwill is amortized using the straight-line method over periods ranging
from ten to twenty years. The Company periodically assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is
measured based on projected future operating cash flows discounted at
a rate commensurate with the risks involved. The assessment of the
recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
(g) Property and Equipment
Property and equipment, which includes land and buildings, store equipment
and leasehold improvements, are stated at cost. Depreciation is
computed using the straight-line method over the estimated lives of
the assets. Leasehold improvements are amortized over the term of the
lease including renewal option periods when the Company intends to
exercise renewal options, or the estimated useful life of the asset.
Depreciation and amortization periods utilized are as follows:
Periods
-------
Building 39.5 years
Store equipment 7 years
Leasehold improvements 4 - 15 years
(h)Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
which requires an asset and liability approach. Deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Valuation allowances are
established for deferred tax assets when it is more likely than not
that such deferred tax assets will not result in a benefit to the
Company.
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
(i)Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three
months or less to be a cash equivalent. At the balance sheet date,
cash and cash equivalents consist of checking and savings accounts at
financial institutions and cash on hand at store locations. Cash paid
for interest during the years ended December 31, 1996 and December 26,
1995 was $640,400 and $343,242, respectively.
Noncash financing and investing activities consist of the following for the
years ended December 31, 1996 and December 26, 1995:
December 31, 1996:
o Purchases of property and equipment in the amount of $1,363,199 were
included in accounts payable at December 31, 1996.
o Transfer of redeemable equity - common stock subject to rescission of
$1,250,526 to common stock and additional paid-in capital (see note
11).
o A debt discount of $70,000 and a corresponding increase in paid-in
capital were recorded in connection with granting of options to
lender.
o Offering costs incurred of $35,000 which were paid through issuance of
a stock option.
o Note receivable of $203,306 received in connection with sale of
restaurant offset by a deferred gain of $201,560.
December 26, 1995:
o "Old SJ's" acquired treasury stock (recorded as a purchase of minority
interest in the accompanying consolidated financial statements) in
exchange for future royalty income of $13,484 and a reduction of
receivables of $9,911.
o Issued 500,772 shares of common stock at an estimated fair value of
$798,712 to acquire minority interests ownership of "Old SJ's".
o Accrued interest of $527,500 was added to a note payable balance.
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
(i) Statements of Cash Flows, Continued
o A noncash capital contribution of $1,169,115 has been recorded by the
Company for stock options issued to purchase the Company's common
stock.
o Transfer of a portion of common stock and additional paid-in capital
aggregating $1,250,526 to redeemable equity - common stock subject to
rescission (see note 11).
(j)Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
(k)Stock Options
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeds the exercise
price. On January 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which allows entities to
continue to apply the provisions of APB Opinion No. 25 but which
requires that pro forma net earnings (loss) and pro forma earnings
(loss) per share disclosures be provided for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
(l)Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on December 27, 1995. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement
did not have a material impact on the Company's financial position,
results of operations, or liquidity in fiscal 1996.
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
(m)Income (Loss) Per Share
Loss per share is determined based on the weighted average number of common
and common equivalent shares outstanding during each period. The
weighted average number of common and common equivalent shares
outstanding for the years ended December 31, 1996 and December 26,
1995 were 4,398,338 and 4,124,149, respectively.
As described in note 1(b), the Company effectively consummated a stock
split on December 26, 1995 when the Company issued 1.53 shares of SRG
common stock for each then outstanding share of Stoico common stock.
This effective stock split has been accounted for retroactively to
January 1, 1995 in the accompanying consolidated financial statements
and, accordingly, all applicable share and per share amounts have been
restated to reflect this effective stock split. In addition, the
number of shares outstanding has been adjusted for the reverse stock
split described in note 7.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock issued or common stock options granted during the
twelve-month period prior to the initial filing of the registration
statement applicable to the initial public offering (see note 7), with
issue or exercise prices below the assumed initial public offering
price, have been included in the calculation of common share
equivalents, using the treasury stock method, as if such common stock
were outstanding for all periods presented.
(2) Limited Partnerships and Joint Ventures
The Company was the general partner, with exclusive rights to management,
in four limited partnerships, each of which owned a Sub & Stuff
restaurant. The Company's ownership percentage in these partnerships
ranged from 38.75% to 64%. The Company was also a partner in three
joint ventures, each of which owned a Sub & Stuff restaurant. The
Company's ownership percentage in the operations of the joint ventures
ranged from 20% to 60%. During 1995, the Company purchased the
remaining interest of these limited partnerships and joint ventures
for $587,500 (the limited partnerships and two of the joint ventures
were purchased on August 17, 1995 and the remaining joint venture was
purchased on September 14, 1995). In connection with these
transactions, the Company recorded goodwill in the amount of $243,961.
Prior to acquisition of the remaining interests, the operations of
these limited partnerships have been included in the accompanying
consolidated financial statements on a consolidated basis, with
recognition given to the ownership interest not owned by the Company
as minority interest. The operations of the joint ventures have been
accounted for under the equity method prior to acquisition of the
remaining interests. Subsequent to acquisition of the remaining
interests, the operations of both the limited partnerships and the
joint ventures have been included in the accompanying financial
statements on a consolidated basis.
<PAGE>
(2) Limited Partnerships and Joint Ventures, Continued
Summarized financial information for the joint ventures through the
purchase date in 1995 is as follows:
Summarized Statement of Operations:
Net revenue $ 665,632
=======
Net earnings $ 24,254
======
(3) Property and Equipment
Property and equipment consist of the following:
December 31, December 26,
1996 1995
------------ -------------
Land ................................. $ 16,116 16,116
Building and improvements ............ 215,022 214,277
Store equipment ...................... 2,987,100 1,623,712
Leasehold improvements ............... 3,233,625 1,406,128
----------- -----------
6,451,863 3,260,233
Accumulated depreciation ............. (1,930,084) (1,566,879)
Net property and equipment ........... $ 4,521,779 $ 1,693,354
=========== ===========
<PAGE>
(4) Long-Term Debt
Long-term debt consists of the following:
December 31, December 26,
1996 1995
------------ ------------
10% note payable to a minority stockholder,
interest payments are due quarterly and
all principal is due in 2000 ................... $ -- $3,000,000
12% (until June 30, 1996 and then 8% until
June 30, 1997) unsecured note payable
to a minority stockholder, interest payments
are due monthly and all principal
is due in June1997 (see below) ................. -- 1,700,000
14% unsecured notes payable, interest payments
are due monthly and all principal is due in 1996 -- 150,000
12% unsecured notes payable, payable in monthly
payments of $1,110 including interest, with
final payment of $1,110 due October 31, 1998,
notes are callable at the lender's option
after November 1995 ............................ 22,710 32,699
Note payable to bank, interest rate is 2%
above bank's base rate, payable in monthly
payments of $950, including interest, with final
payment due on January 15, 1998 ................ 11,761 22,174
Obligation for restaurant equipment, payable in
monthly payments of $1,144, including interest . 11,801 22,881
Obligation for restaurant equipment, payable in
monthly payments of $186, including interest ... -- 1,115
14% unsecured notes payable, interest
payments are due monthly with $15,000
principal due in 1998, $92,000 principal due
in 1999 (such $92,000 is currently callable
at lender's option), and $20,000 principal
due in 2000 (which can be called at lender's
option after January 1997) ..................... 127,000 132,000
(Continued)
<PAGE>
(4) Long-Term Debt, Continued
December 31, December 26,
1996 1995
------------ ------------
12% unsecured notes payable in monthly
installments of $997, including interest
with final payment of $995 due October 30,
1998, notes are callable at lender's
option .................................... 21,088 29,306
Variable interest rate real estate mortgage
note payable, (12.375% at December 31, 1996
and December 26, 1995) secured by real
estate, monthly payment of $1,260,
including interest, scheduled maturity in
February 2001 ............................. 39,411 49,090
---------- ----------
Total long-term debt .............. 233,771 5,139,265
Less unamortized debt discount
(see note 8) .......................... -- 120,711
Less current portion ................... 190,191 357,139
---------- ----------
Long-term portion
$ 43,580 $4,661,415
========== ==========
On March 19, 1996, the note payable with an unpaid balance of $1,700,000,
which prior to modification was due on June 30, 1996 and bore interest at a
12% interest rate, was modified (by retroactive reissuance) such that the
maturity was extended to June 30, 1997 and the interest rate remained at 12%
until June 30, 1996 and then changed to 8% until June 30, 1997. As a result
of such modification, the note payable is classified as long-term debt in
the accompanying financial statements at December 26, 1995.
Estimated maturities of long-term debt are as follows:
1997 $190,191
1998 28,182
1999 13,855
2000 1,543
-------
Total $233,771
========
<PAGE>
(5) Income Taxes
Due to losses incurred in 1996, 1995 and prior years, the Company has
reflected no income tax expense or benefit for the years ended
December 31, 1996 and December 26, 1995. The tax effects of temporary
differences that give rise to significant portions of the deferred tax
assets at December 31, 1996 and December 26, 1995 are presented below:
December 31, December 26,
1996 1995
------------ ------------
Deferred tax assets:
Net operating loss carryforwards ....... $ 3,065,000 1,705,000
Compensation expense ................... -- 448,000
----------- ------------
Total gross deferred tax assets ..... 3,065,000 2,153,000
Less valuation allowance ............... (3,065,000) (2,153,000)
----------- ------------
Net deferred tax assets ............. $ -- --
=========== ===========
At December 31, 1996, the Company has net operating loss carryforwards
for income tax purposes of approximately $7.9 million which are
available to offset future taxable income, if any. Approximately $1.8
million of this net operating loss carryforward may only be used to
offset future taxable income of Spaghetti Jack's. The net operating
loss carryforwards will expire in varying amounts through 2011.
(6) Commitments
Leases
The Company is obligated under various operating leases for Company store
locations and for certain items of store equipment. The leases expire
at various dates through 2010. future minimum lease payments under
such noncancelable leases at December 31, 1996 are as follows:
1997 $1,104,416
1998 1,066,007
1999 943,169
2000 896,029
2001 612,179
Thereafter 980,817
----------
Total $5,602,617
==========
Total rent expense for the years ended December 31, 1996 and December 26,
1995 was $640,902 and $533,297, respectively.
<PAGE>
(6) Commitments, Continued
Obligations for Future Stores
At December 31, 1996, the Company is committed for future expenditures
that have not been accrued in the accompanying financial statements
totaling approximately $1.0 million related to the construction of new
stores.
(7) Equity Transactions
Initial Public Offering
In December 1996, the Company completed an initial public offering
through which it issued 1,401,944 shares of common stock at a price of
$7.50 per share resulting in total gross proceeds of $10,514,580. The
Company incurred $696,717 of costs in connection with the offering
resulting in net proceeds from the offering of $9,817,863.
Reverse Stock Split
The Company effected a .407533252 for 1 reverse stock split of the
Company's common stock effective September 16, 1996. This reverse
stock split has been reflected retroactively for all periods presented
in the accompanying consolidated financial statements and,
accordingly, all applicable share and per share amounts have been
restated to reflect the stock split.
(8) Stock Options
Priorto the initial public offering (see note 7), the Company and its
majority stockholder had issued various stock options to employees,
directors and a lender as described below. In connection with the
initial public offering, the Company adopted the 1996 Stock Option
Plan which authorized the award of nonqualified options to acquire
480,000 shares of common stock. As of December 31, 1996, no options
had been granted under the Plan. On January 1, 1997, options to
acquire 150,000 shares of common stock were granted pursuant to the
Plan. The options have an exercise price of $7.50 per share and become
exercisable one-third per year over a three-year period from date of
grant. The options expire in five years from date of grant.
<PAGE>
(8) Stock Options, Continued
During 1995, the Company granted stock options to an employee under which
the employee may purchase 378,873 shares of the Company's common stock
for an exercise price of $.000245 per share. In addition, the majority
stockholder of the Company granted stock options to various employees
of the Company under which the employees may purchase from the
majority stockholder 357,827 shares of common stock of the Company
owned by the majority stockholder for a weighted average exercise
price of $.00067 per share. All of the above options were exercisable
at December 26, 1995. No options were exercised during 1995. The
exercise prices of the above described options were less than the
estimated market value of the underlying common stock at the
measurement date; accordingly, compensation expense of $1,169,115 has
been recorded in the accompanying consolidated statement of operations
for the year ended December 26, 1995. A corresponding increase in
additional paid-in capital has also been reflected related to these
options. All of these options were exercised in January 1996.
In 1985, the Company issued a capital stock purchase warrant to an
employee whereby the employee could purchase 62,352 shares of the
Company's common stock for an exercise price of $1.60 per share
through February 1, 2000. This warrant remains outstanding.
In connection with the issuance of a $3 million note payable during the
year ended December 26, 1995, the Company also issued a stock option
to the lender whereby the lender may acquire 155,881 shares of the
Company's common stock at a price of $1.60 per share. This option was
assigned a value of $63,185 and a corresponding debt discount was
recorded. Also in connection with the issuance of this note payable,
the majority stockholder of the Company issued a stock option to the
lender whereby the lender may acquire 155,881 shares of the Company's
common stock owned by the majority stockholder at a price of $1.60 per
share. This option was assigned a value of $63,186 and a corresponding
debt discount was recorded. The lender exercised both of these options
in January 1996.
During 1996, the Company and the majority stockholder each issued a stock
option to a lender whereby the lender could acquire 40,753 shares of
the Company's common stock (81,506 shares in aggregate) for an
exercise price of $1.60 per share. These options were exercised during
1996. The Company recorded a debt discount and additional paid-in
capital of $70,000 in connection with this transaction. The Company
issued an option to an employee to acquire 10,188 shares of common
stock in June 1996 at an exercise price of $1.60 per share. The option
was exercisable upon issuance and expires in June 1999. The Company
recorded compensation expense of $8,750 in connection with this
transaction. These options have not been exercised at December 31,
1996. The Company also issued a stock option to acquire 14,264 shares
of the Company's common stock with an exercise price of $.0002 per
share to a consultant for services rendered in connection with the
initial public offering. Offering costs and additional paid-in capital
of $35,000 were recorded by the Company. These options were exercised
in 1996.
<PAGE>
(8) Stock Options, Continued
The Company applies APB Opinion No. 25 in accounting for options granted
to employees. All of the options issued during 1996 and 1995 were
issued prior to the Company completing its initial public offering,
thus the Company utilized the minimum value method prescribed by SFAS
No. 123 in computing the fair value of such options. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options issued to employees under SFAS No. 123, there
would have been no significant effect on the Company's net loss and
net loss per share as reflected in the accompanying 1996 and 1995
consolidated statements of operations. The fair value of options
granted to nonemployees has been computed under SFAS No. 123.
Stockoption activity relating to options issued by the Company to employees
during the periods indicated is as follows:
Weighted-
Average
Number of Exercise
Shares Price
-------- ----------
Balance at December 31, 1994 ............... -- $ --
Granted .................................. 399,228 .125270
-------- ---------
Balance at December 31, 1995 ............... 399,228 .125270
Granted ................................. 10,188 1.600000
Exercised ............................... (378,853) .000245
-------- ---------
Balance at December 31, 1996 ............. 30,563 $2.166700
======== =========
At December 31, 1996, the range of exercise prices of outstanding options
issued to employees was $1.60 - $2.45. The 30,563 options issued to
employees that are outstanding at December 31, 1996, expire 10,188 in
June 1999 with the remaining 20,375 having no expiration date.
At December 31, 1996 and 1995, the number of options outstanding to
employees that were exercisable was 20,783 and 378,853, respectively,
and the weighted average exercise price of those options was $2.03 and
$.000245, respectively.
<PAGE>
(9) Fair Value of Financial Instruments
The Company has determined the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments. For notes
payable and long-term debt, the fair value is estimated by discounting
the future cash flows at rates currently available for similar types
of debt instruments. The estimated value of notes payable and
long-term debt approximates their carrying value as of December 31,
1996 and December 26, 1995.
For all other financial instruments including cash and cash equivalents,
receivables, accounts payable and accrued expenses, the carrying
amounts approximate fair value because of the short maturity of those
instruments.
(10) Operations and Liquidity
As discussed in note 7, the Company completed an initial public offering
of its common stock during December 1996 resulting in net proceeds of
$9.8 million. The net proceeds were used to retire approximately $6.5
million in debt with the remainder to be primarily used to open new
stores. The Company opened four Spaghetti Jack's and three Sub & Stuff
restaurants during the period October 28, 1996 to December 31, 1996
and plans to open three Spaghetti Jack's and four Sub & Stuff
restaurants during the first three months of 1997. In connection with
the new store openings, the Company has accounts payable at December
31, 1996 of $1,363,199 (see note 1(i)) and commitments for future
property and equipment expenditures during the first quarter of 1997
that have not yet been recorded in the financial statements of
approximately $1 million (see note 6).
The Company incurred losses for the years ended December 31, 1996 and
December 26, 1995 of $2.3 million and $2.5 million resulting in cash
used by operating activities of $2.0 million and $.8 million in 1996
and 1995, respectively.
Basedupon the Company's level of working capital at December 31, 1996 and
the above described commitments for future property and equipment
expenditures, the Company would not be able to sustain losses or use
of cash by operating activities similar to the levels incurred in 1996
and 1995 without obtaining additional financing. The Company does not
presently have any commitments to obtain additional financing.
Management's plans to address these issues include the aforementioned
opening of new stores in late 1996 and early 1997 which management
anticipates will substantially improve operating results. Other plans
to improve cash flow from operations include (i) reduction of interest
expense as a result of the above-mentioned retirement of debt, (ii)
reduction of certain administrative expenses, and (iii) increased
franchising activity. Additionally, the Company may seek additional
financing, if determined necessary or desirable by management. The
ability of the Company to achieve profitable operations and continue
as a going concern is dependent upon the extent to which management
can achieve such plans.
<PAGE>
(11) Rescission Offer
During 1996, the Company made a rescission offer to certain persons (the
rescission offerees) who had exchanged securities in two predecessor
entities for shares of the Company's common stock pursuant to the
reorganization of the Company which occurred on December 26, 1995 (see
note 1(b)). The rescission offer provided the rescission offerees the
right to rescind their exchange and to receive cash together with
interest from December 26, 1995 in exchange for the shares of the
common stock of the Company such persons received in the
reorganization. The rescission offerees owned 684,915 shares of the
Company's common stock. The rescission offer commenced on August 23,
1996 and expired on September 23, 1996. Rescission offerees holding an
aggregate of 638,195 shares of common stock of the Company rejected
the rescission offer. Rescission offerees holding an aggregate of
46,720 shares of common stock of the Company did not respond to the
rescission offer and according to the terms of the rescission offer,
were deemed to have rejected the offer. No rescission offerees
accepted the rescission offer.
The issuance of shares of common stock by the Company to the rescission
offerees in conjunction with the reorganization may not have met
certain requirements of various securities laws. Consequently, the
rescission offerees may have had the right under various securities
laws to rescind their acquisition of such shares of the Company's
common stock. Accordingly, the value of the shares of common stock
subject to the rescission offer (as determined by the amount offered
pursuant to the rescission offer which amounted to $1,250,526 at
December 26, 1995) has been classified as redeemable equity-common
stock subject to rescission in the accompanying consolidated financial
statements subsequent to the issuance of such shares. Common stock
classified as redeemable equity - common stock subject to rescission
was reclassified to be included within stockholders' equity (deficit)
effective as of the date that the holder of the applicable shares
rejected the rescission offer.
<PAGE>
UNAUDITED PRO FORMA COMBINED
INCOME (LOSS) AND UNAUDITED PRO FORMA
COMBINED BALANCE SHEETS
The following unaudited pro forma combined statements of income (loss) for the
year ended December 31, 1997 and the six month period ended June 30, 1998 and
the unaudited pro forma combined balance sheet as of June 30, 1998 give effect
to The Quizno's Corporation and Subsidiary's acquisition of certain assets and
the assumption and assignment of eight sandwich store leases of The Stoico
Restaurant Group, Inc. and Subsidiaries effective January 1, 1997, including the
related pro forma adjustments described in the note thereto. The unaudited pro
forma statements of income (loss) have been prepared as if the proposed
transaction occurred on January 1, 1997. The unaudited pro forma balance sheet
has been prepared as if the proposed transaction occurred June 30, 1998. The
eight sandwich stores, whose leases were assumed and related restaurant
equipment acquired, are in the process of being converted to Quizno's Classic
Subs locations. These pro forma statements are not necessarily indicative of the
results of operations or the financial positions as they may be in the future or
as they might have been had the transaction become effective on the above
mentioned date.
The unaudited pro forma combined statement of income (loss) for the year ended
December 31, 1997 and the six month period ended June 30, 1998 includes the
results of operation of The Quizno's Corporation and Subsidiary and The Stoico
Restaurant Group, Inc. and Subsidiaries.
The unaudited pro forma combined statements of operations and the unaudited pro
forma combined balance sheets should be read in conjunction with the separate
historical financial statements and notes thereto of The Quizno's Corporation
and Subsidiary and The Stoico Restaurant Group, Inc. and
Subsidiaries.
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Statements
The following notes and adjustments are related to the Quizno's Corporation and
Subsidiary's (Quiznos) purchase of certain assets of The Stoico Restaurant
Group, Inc. and Subsidiaries (Stoico).
1. Stoico operates on a fiscal year consisting of thirteen four-week periods
ending on the last Tuesday of December. For purposes of these Pro Forma
Combined Financial Statements, Stoico's 1997 information reflects the
results of operations for the year ending December 30, 1997 (however, such
period is referred to herein as the year ended December 31, 1997) and their
1998 information reflects the results of operations for the twenty-eight
weeks ended July 14, 1998 (however, such period is referred to herein as
the six months ended June 30, 1998). This is presented is this manner to
conform with Quizno's calendar year reporting periods.
2. This entry records the acquisition of Stoico assets for $ 500,000 in
exchange for cash. Quiznos paid $ 350,000 and the Quizno's Area Director
for the Wichita Area paid the remaining $150,000, which is recorded as a
minority interest. The purchase price has been allocated as follows:
Assets Category Valuation
Property and equipment $ 250,000
Goodwill 250,000
---------
$ 500,000
=========
3. This entry eliminates assets, liabilities and stock not acquired by
Quiznos.
4. This entry eliminates corporate expenses and revenues and expenses related
to stores whose store leases were not assumed or assigned as part of this
acquisition.
5. This entry records depreciation and amortization on fixed assets and
intangibles acquired. Fixed assets are depreciated over seven years and
goodwill is amortized of fifteen years.
6. This entry allocates earnings based upon the ownership percentage
represented by the minority interest.
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Combined Balance Sheet
June 30, 1998 Pro Forma Adjustments
---------------------------------------- -------------------------------
The Stoico
The Quizno's Restaurant Pro Forma
Corporation Group Total Debit Credit Combined
------------ ------------ ---------- ------------ -------------- -------------
Assets
<S> <C> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents ............ $ 1,320,618 $ 39,775 $1,360,393 $ -- $ 350,000(2) $ 970,618
39,775(3)
Short term investments ............... 1,295,374 -- 1,295,374 -- -- 1,295,374
Accounts receivable, net ............. 572,463 2,785 575,248 -- 2,785(3) 572,463
Inventory ............................ -- 42,911 42,911 -- 42,911(3) --
Current portion of notes receivable .. 1,467,793 -- 1,467,793 -- -- 1,467,793
Other current assets ................. 346,145 44,275 390,420 -- 44,275(3) 346,145
Assets of stores held for resale ..... 1,130,206 -- 1,130,206 -- -- 1,130,206
------------ ------------ ----------- ------------ ------------ ------------
Total current assets ............... 6,132,599 129,746 6,262,345 -- 479,746 5,782,599
------------ ------------ ----------- ------------ ------------ ------------
Property and equipment at cost, net .... 2,139,785 704,310 2,844,095 250,000(2) 704,310(3) 2,389,785
------------ ------------ ----------- ------------ ------------ ------------
Other assets
Intangible assets, net ............... 1,521,506 -- 1,521,506 250,000(2) -- 1,771,506
Deferred assets ...................... 1,329,602 -- 1,329,602 -- -- 1,329,602
Deposits ............................. 67,507 7,129 74,636 -- 7,129(3) 67,507
Notes receivable, net ................ 381,520 -- 381,520 -- -- 381,520
------------ ------------ ------------ ------------ ------------ ------------
Total other assets ............... 3,300,135 7,129 3,307,264 250,000 7,129 3,550,135
------------ ------------ ------------ ------------ ------------ ------------
Total assets ........................... $ 11,572,519 $ 841,185 $12,413,704 $ 500,000 $ 1,191,185 $ 11,722,519
============ ============ ============ ============ ============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable ..................... $ 913,877 $ 1,561,484 $ 2,475,361 $ 1,561,484(3) $ -- $ 913,877
Accrued liabilities .................. 111,245 255,498 366,743 255,498(3) -- 111,245
Line-of-credit and notes payable ..... -- 1,048,023 1,048,023 1,048,023(3) -- --
Current portion of subordinated debt . 300,000 -- 300,000 -- -- 300,000
Current portion of long term obligations 260,228 -- 260,228 -- -- 260,228
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities ........ 1,585,350 2,865,005 4,450,355 2,865,005 -- 1,585,350
Long term obligations .................. 1,256,497 -- 1,256,497 -- -- 1,256,497
Convertible subordinated debt .......... 1,200,000 -- 1,200,000 -- -- 1,200,000
Deferred initial franchise fees ........ 4,129,913 -- 4,129,913 -- -- 4,129,913
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities ................ 8,171,760 2,865,005 11,036,765 2,865,005 -- 8,171,760
------------ ------------ ------------ ------------ ------------ ------------
Minority interest ...................... -- -- -- -- 150,000(2) 150,000
Stockholders' equity (deficit)
Preferred stock, $.001 par value, .... -- -- -- -- -- --
1,000,000 shares authorized:
Series A 146,000 issued and ......... 146 -- 146 -- -- 146
outstanding
Series B 100,000 issued and ......... 100 -- 100 -- -- 100
outstanding
Series C 167,000 issued and ......... 167 -- 167 -- -- 167
outstanding
Common stock ......................... 3,034 57,090 60,124 57,090(3) -- 3,034
Capital in excess of par value ....... 5,092,081 14,285,754 19,377,835 14,285,754(3) -- 5,092,081
Accumulated deficit .................. (1,694,769) (16,366,664) (18,061,433) -- 16,366,664(3) (1,694,769)
------------ ------------ ------------ ------------ ------------ ------------
Total stockholders' equity
(deficit) ......................... 3,400,759 (2,023,820) 1,376,939 14,342,844 16,516,664 3,550,759
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity (deficit) ...................... $11,572,519 $ 841,185 $12,413,704 $ 17,207,849 $16,516,664 $11,722,519
=========== ============ ============ ============ =========== ============
</TABLE>
<PAGE>
Unaudited Pro Forma Combined Statement of Income (loss) for the year ended
December 31, 1997
<TABLE>
<CAPTION>
The Stoico Pro Forma Adjustments
The Quizno's Restaurant -----------------------------
Corporation Group Total Debit Credit Combined
----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Franchise operations
Continuing fees .................. $ 2,747,955 $ 87,771 $2,835,726 $ 87,771(4) $ -- $2,747,955
Initial franchise fees ........... 2,269,001 170,000 2,439,001 170,000(4) -- 2,269,001
Area director marketing fees ..... 2,139,080 -- 2,139,080 -- -- 2,139,080
Other ............................ 593,771 -- 593,771 -- -- 593,771
Interest ......................... 137,640 21,275 158,915 21,275(4) -- 137,640
----------- ------------ ---------- ------------ ------------ ----------
Total revenue ................... 7,887,447 279,046 8,166,493 279,046 -- 7,887,447
----------- ------------ ---------- ------------ ------------ ----------
Expenses
Sales and royalty commissions .... (2,346,476) -- (2,346,476) -- -- (2,346,476)
Advertising and promotion ........ (245,953) -- (245,953) -- -- (245,953)
General and administrative ....... (4,611,978) (1,357,052) (5,969,030) -- 1,357,052(4) (4,611,978)
----------- ------------ ---------- ------------ ------------ ----------
Total expenses .................. (7,204,407) (1,357,052) (8,561,459) -- 1,357,052 (7,204,407)
----------- ------------ ---------- ------------ ------------ ----------
Net income from franchise
operations ........................ 683,040 (1,078,006) (394,966) 279,046 1,357,052 683,040
----------- ------------ ---------- ------------ ------------ ----------
Company store operations
Sales by Company owned stores .... 4,070,666 8,198,769 12,269,435 6,032,352(4) -- 6,237,083
----------- ------------ ---------- ------------ ------------ ----------
Expenses
Cost of sales at Company stores .. 1,309,624 2,514,159 3,823,783 -- 1,905,681(4) 1,918,102
Cost of labor at Company stores .. 1,037,101 3,430,792 4,467,893 -- 2,633,885(4) 1,834,008
Other Company store expenses ..... 1,432,290 3,330,269 4,762,559 -- 2,816,639(4) 1,945,920
----------- ------------ ---------- ------------ ------------ ----------
Total expenses .................. 3,779,015 9,275,220 13,054,235 -- 7,356,205 5,698,030
----------- ------------ ---------- ------------ ------------ ----------
Net income from Company stores ..... 291,651 (1,076,451) (784,800) 6,032,352 7,356,205 539,053
Other income (expense)
Research & development and
new programs .................... (72,161) -- (72,161) -- -- (72,161)
Sales by stores held for resale .. 149,549 -- 149,549 -- -- 149,549
Expenses related to stores held
for resale ...................... (210,222) (234,674) (444,896) -- 234,674(4) (210,222)
Loss on sale and abandonment of
assets, net ..................... -- (3,465,933) (3,465,933) -- 3,465,933(4) --
Impairment of goodwill ........... -- (911,044) (911,044) -- 911,044(4) --
Loss on sale or closure of Company
stores .......................... (120,928) -- (120,928) -- -- (120,928)
Provision for bad debts .......... (49,540) -- (49,540) -- -- (49,540)
Other ............................ (64,544) (25,260) (89,804) -- 25,260(4) (64,544)
Depreciation and amortization .... (406,444) -- (406,444) 52,381(5) -- (458,825)
Interest expense ................. (290,019) (83,346) (373,365) -- 83,346(4) (290,019)
----------- ------------ ---------- ------------ ------------ ----------
Total other expense ............. (1,064,309) (4,720,257) (5,784,566) 52,381 4,720,257 (1,116,690)
Minority interest in earnings ...... -- -- -- 58,506(6) -- (58,506)
Net income (loss) .................. (89,618) (6,874,714) (6,964,332) 6,422,285 13,433,514 46,897
Preferred stock dividends .......... (93,998) -- (93,998) -- -- (93,998)
----------- ------------ ----------- ------------ ------------ ----------
Net income (loss) applicable to
common stockholders ............... $ (183,616) $ (6,874,714) $(7,058,330) $ 6,422,285 $ 13,433,514 $ (47,101)
=========== ============ =========== ============ ============ ==========
Basic and Diluted net loss per
share of common stock ............. $ (.06) $ (1.20) $ .02
=========== ============ ==========
Basic and Diluted weighted
average common shares
outstanding ....................... 2,878,310 5,708,966 2,878,310
=========== ============ ==========
</TABLE>
<PAGE>
Unaudited Pro Forma Combined Statement of Income (loss) for the Six
month period Ended June 30, 1998
<TABLE>
<CAPTION>
The Stoico Pro Forma Adjustments
The Quizno's Restaurant -----------------------------
Corporation Group Total Debit Credit Combined
----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Franchise operations
Continuing fees ............... $2,574,780 $ 5,653 $ 2,580,433 $ 5,653(4) $ -- $ 2,574,780
Initial franchise fees ........ 1,208,067 10,891 1,218,958 10,891(4) -- 1,208,067
Area director marketing fees .. 1,052,985 -- 1,052,985 -- -- 1,052,985
Other ......................... 377,005 11,772 388,777 11,772(4) -- 377,005
Interest ...................... 73,530 537 74,067 537(4) -- 73,530
----------- ----------- ----------- ----------- ----------- -----------
Total revenue ................ 5,286,367 28,853 5,315,220 28,853 -- 5,286,367
----------- ----------- ----------- ----------- ----------- -----------
Expenses
Sales and royalty commissions . 1,649,724 -- 1,649,724 -- -- 1,649,724
Advertising and promotion ..... 100,165 -- 100,165 -- -- 100,165
General and administrative .... 2,761,891 445,969 3,207,860 -- (445,969)(4) 2,761,891
----------- ----------- ----------- ----------- ----------- -----------
Total expenses ............... 4,511,780 445,969 4,957,749 -- 445,969 4,511,780
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) from franchise 774,587 (417,116) 357,471 28,853 445,969 774,587
----------- ----------- ----------- ----------- ----------- -----------
operations
Company store operations
Sales by Company owned stores . 3,214,307 1,958,821 5,173,128 882,701(4) -- 4,290,427
----------- ----------- ----------- ----------- ----------- -----------
Expenses
Cost of sales at Company stores 970,916 620,901 1,591,817 -- 286,374(4) 1,305,443
Cost of labor at Company stores 766,718 756,830 1,523,548 -- 374,647(4) 1,148,901
Other Company store expenses .. 1,202,903 418,266 1,621,169 -- 292,820(4) 1,328,349
----------- ----------- ----------- ----------- ----------- -----------
Total expenses ............... 2,940,537 1,795,997 4,736,534 -- 953,841 3,782,693
----------- ----------- ----------- ----------- ----------- -----------
Net income from Company stores .. 273,770 162,824 436,594 882,701 953,841 507,734
----------- ----------- ----------- ----------- ----------- -----------
Other income (expense)
Sales by stores held for resale 415,384 -- 415,384 -- -- 415,384
Expenses related to stores held
for resale ................... (510,658) (126,337) (636,995) -- 126,337(4) (510,658)
Loss on sale and abandonment of
assets ....................... -- (411,154) (411,154) -- 411,154(4) --
Provision for bad debts ....... (84,590) -- (84,590) -- -- (84,590)
Other ......................... (7,292) -- (7,292) -- -- (7,292)
Depreciation and amortization . (289,768) -- (289,768) 26,191(5) -- (315,959)
Interest expense .............. (181,080) (24,075) (205,155) -- 24,075(4) (181,080)
----------- ----------- ----------- ----------- ----------- -----------
Total other expense .......... (658,004) (561,566) (1,219,570) 26,191 561,566 (684,195)
----------- ----------- ----------- ----------- ----------- -----------
Minority interest in earnings ... -- -- -- 62,332(6) -- (62,332)
Net income (loss) ............... 390,353 (815,858) (425,505) 1,000,077 1,961,376 535,794
Preferred stock dividends ....... (110,445) -- (110,445) -- -- (110,445)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) applicable
to common stockholders ......... $ 279,908 $(815,858) $(535,950) $ 1,000,077 $ 1,961,376 $ 425,349
=========== =========== =========== =========== =========== ===========
Diluted net income (loss)
per share of common stock ...... $ 0.07 $ (.14) $ .10
=========== =========== ===========
Diluted weighted average
common shares outstanding ...... 4,179,760 5,708,966 4,179,760
=========== =========== ===========
Basic net income (loss)
per share ..................... $ 0.09 $ (.14) $ .14
=========== =========== ===========
Basic weighted average
common shares outstanding ...... 3,018,242 5,708,966 3,018,242
=========== =========== ===========
</TABLE>
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