UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-23174
THE QUIZNO'S CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1169286
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1099 18TH STREET, SUITE 2850
DENVER, COLORADO 80202
(Address of principal executive offices)
(303) 291-0999
(Registrant's telephone number, including area code)
Check whether issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS MAY 11, 1998
-----------
Common Stock, $0.001 par value 3,013,327 shares
THE QUIZNO'S CORPORATION
COMMISSION FILE NUMBER: 000-23174
QUARTER ENDED MARCH 31, 1998
FORM 10-QSB
PART I FINANCIAL INFORMATION
Consolidated Statements of Operations Page 1
Consolidated Balance Sheets Page 3
Consolidated Statements of Cash Flows Page 5
Consolidated Statement of Stockholders' Equity Page 7
Notes to Consolidated Financial Statements Page 8
Management's Discussion and Analysis of Financial
Condition or Plan of Operation Page 9
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
FRANCHISE OPERATIONS:
REVENUE
Royalty fees $1,117,313 $ 469,125
Initial franchise fees 562,000 174,501
Area director marketing fees 573,000 425,423
Other 178,817 105,309
Interest revenue 28,682 45,102
---------- ---------
Total revenue 2,459,812 1,219,460
---------- ---------
EXPENSES
Sales and royalty commissions (753,270) (257,512)
Advertising and promotion (44,052) (31,057)
General and administrative expenses (1,361,458) (923,619)
---------- ----------
Total expenses (2,158,780) (1,212,188)
---------- ---------
INCOME FROM FRANCHISE OPERATIONS 301,032 7,272
---------- ---------
COMPANY STORE OPERATIONS:
SALES BY COMPANY OWNED STORES 1,741,408 612,740
----------- -----------
EXPENSES
Cost of sales at Company stores (544,287) (216,447)
Cost of labor at Company stores (437,751) (165,449)
Other Company store expenses (651,986) (229,878)
--------- ----------
Total expenses (1,634,024) (611,774)
---------- ----------
INCOME FROM COMPANY STORES 107,384 966
------------ ---------
OTHER INCOME (EXPENSE):
RESEARCH & DEVELOPMENT AND NEW PROGRAMS - (20,882)
OTHER
Sales by stores held for resale - 74,002
Expenses related to stores held for resale - (98,542)
Provision for bad debts (33,677) (10,500)
Other (1,299) (17,981)
Depreciation and amortization (144,610) (76,809)
Interest expense (78,007) (75,432)
------------ -----------
TOTAL OTHER EXPENSE (257,593) (226,144)
------------ ------------
NET INCOME (LOSS) 141,679 (217,906)
Preferred stock dividends (55,223) (14,235)
------------ ----------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 86,456 $ (232,141)
============ =============
DILUTED NET INCOME (LOSS) PER SHARE $ 0.03 $ (.08)
============= =============
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,053,191 2,865,746
============= =============
BASIC NET INCOME (LOSS) PER SHARE $ 0.03 $ (.08)
============= =============
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,930,866 2,865,746
============= ===========
</TABLE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,913,010 $ 561,287
Short term investments 263,716 538,188
Accounts receivable, net of
allowance for doubtful accounts
of $66,116 in 1998 and $38,231
in 1997 794,768 545,109
Current portion of notes receivable 636,195 598,486
Other current assets 384,270 375,902
Stores under development 838,913 593,675
---------- ----------
TOTAL CURRENT ASSETS 4,830,872 3,212,647
---------- ----------
PROPERTY AND EQUIPMENT AT COST, net of
accumulated depreciation and
amortization of $483,232 in 1998
and $426,242 in 1997 2,033,834 2,164,898
---------- -----------
OTHER ASSETS:
Intangible assets, net of
accumulated amortization
of $714,724 in 1998 and $662,087
in 1997 1,560,723 1,727,400
Deferred assets 1,170,949 914,762
Deposits 48,930 76,294
Notes receivable, net of allowance
for doubtful accounts of $140,000
in 1998 and 1997 753,777 734,495
----------- -----------
TOTAL OTHER ASSETS 3,534,379 3,452,951
----------- -----------
$10,399,085 $8,830,496
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,292,094 $1,065,374
Accrued liabilities 401,565 489,848
Current portion of subordinated debt 149,475 110,912
Current portion of long term
obligations 303,528 303,084
----------- ---------
TOTAL CURRENT LIABILITIES 2,146,662 1,969,218
LONG TERM OBLIGATIONS 437,102 741,570
CONVERTIBLE SUBORDINATED DEBT 1,350,525 1,389,088
DEFERRED INITIAL FRANCHISE FEES 3,678,993 2,148,662
----------- -----------
TOTAL LIABILITIES 7,613,282 6,248,538
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value,
1,000,000 shares authorized;
Series A issued and outstanding
146,000 in 1998 and 1997
($876,000 liquidation preference) 146 146
Series B issued and outstanding
100,000 in 1998 and 1997 ($500,000
liquidation preference) 100 100
Series C issued and outstanding
167,000 in 1998 and 1997 ($835,000
liquidation preference) 167 167
Common stock, $.001 par value;
9,000,000 shares authorized; issued
and outstanding 2,947,029 in 1998,
2,923,294 in 1997 2,947 2,923
Capital in excess of par value 4,725,886 4,663,744
Accumulated deficit (1,943,443) (2,085,122)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,785,803 2,581,958
--------- ---------
$10,399,085 $ 8,830,496
=========== ============
</TABLE>
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
----- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 141,679 $ (217,906)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 144,610 82,553
Provision for losses on accounts
receivable 27,885 10,500
Issuance of stock for services 2,647 3,256
Promissory notes accepted for area
director fees (508,958) (65,319)
Changes in assets and liabilities:
Restricted cash -- (16,748)
Accounts receivable (277,544) (90,851)
Other current assets (8,120) (84,772)
Accounts payable 226,731 112,349
Accrued liabilities (20,283) 38,394
Deferred franchise costs (233,099) (223,411)
Deferred initial franchise fees 1,530,391 564,059
----------- ---------
NET CASH PROVIDED BY OPERATIONS 1,025,939 146,600
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (39,314) (160,381)
Stores under development (245,238) --
Short term investments 274,472 --
Purchase of Company owned stores (36,614) (133,261)
Acceptance of notes receivable -- (5,155)
Principle payments received on
notes receivable 482,380 232,242
Intangible assets (81,388) (38,308)
Other assets (3,050) (21,627)
----------- ----------
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES 351,248 (126,490)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock $114,732 $ -
Principle payments on long term
obligations (55,873) (262,000)
Principle payments on lines of credit -- (220,239)
Loan costs (29,100) (10,357)
Dividends paid (55,223) (14,235)
---------- ---------
NET CASH USED IN FINANCING ACTIVITIES (25,464) (506,831)
---------- ---------
NET INCREASE (DECREASE) IN CASH 1,351,723 (487,721)
CASH, BEGINNING OF PERIOD 561,287 2,127,330
---------- ---------
CASH, END OF PERIOD $1,913,010 $ 1,639,609
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest $ 78,007 $ 75,432
========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the first quarter of 1998, the Company sold the area directorship
rights for Canada for $706,000. The Company received $176,000 in cash and
$528,000 in the form of a note receivable bearing 6% interest and due in five
quarterly principal installments of $105,000 plus accrued interest. The last
installment is due June 20, 1999.
During the first quarter of 1997, the Company began operating as Company owned
a restaurant in Michigan as a store held for resale until it was closed in the
fourth quarter of 1997.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
------------------- --------------------
Shares Amount Shares Amount
-------- ------ ------- -------
<S> <C> <C> <C> <C>
BALANCES AT JAN. 1, 1997 146,000 $ 146 2,864,757 $ 2,865
Issuance of Series C
preferred stock for cash,
net of offering costs
of $36,454 167,000 167 -- --
Issuance of Series B
preferred stock for debt,
net of offering costs of
$44,277 100,000 100 -- --
Inherent value of
warrants granted to
lender in connection
with conversion
of debt to Series B
preferred stock -- -- -- --
Issuance of common stock
for acquisition -- -- 18,182 18
Issuance of common stock
for exercise of options
pursuant to the employee
benefit plan -- -- 40,355 40
Inherent value of options
granted to area directors -- -- -- --
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
------------ ---------- ------------ ---------
BALANCES AT DEC. 31,
1997 413,000 413 2,923,294 2,923
Issuance of common
stock pursuant to
employee benefit plan -- -- 545 1
Issuance of common stock
for exercise of options by
underwriter -- -- 13,440 13
Issuance of common stock
for exercise of options by
area directors -- -- 9,750 10
Preferred stock dividends -- -- -- --
Net income -- -- -- --
------------ ------------ ----------- -----------
Balance, March 31,
1998 413,000 $ 413 2,947,029 $2,947
=========== =========== ========= ==========
</TABLE>
Consolidated Statement of Stockholders' Equity Continued below
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit
------------- ---------------
<S> <C> <C>
Balances at Jan. 1, 1997 $3,233,415 $(1,995,504)
Issuance of Series C preferred stock
for cash, net of offering costs of
$36,454 798,379 -
Issuance of Series B preferred
stock for debt, net of offering
costs of $44,277 455,623 -
Inherent value of warrants granted
to lender in connection with
conversion of debt to Series B
preferred stock 44,277 -
Issuance of common stock for
acquisition 99,982 -
Issuance of common stock for
exercise of options pursuant
to employee benefit plan 92,116 -
Inherent value of options granted
to area directors 33,950 -
Preferred stock dividends (93,998) -
Net loss - (89,618)
----------- --------------
Balances at Dec. 31, 1997 4,663,744 (2,085,122)
Issuance of common stock pursuant
to employee benefit plan 2,656 -
Issuance of commons tock for
exercise of options by underwriter 67,187 -
Issuance of common stock for
exercise of options by area
directors 47,522 -
Preferred stock dividends (55,223) -
Net income - 141,679
------------- ------------
Balance, March 31, 1998 4,725,886 $(1,943,443)
============== ==============
</TABLE>
THE QUIZNO'S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair statement of (a) the results
of consolidated operations for the three month periods ended March 31, 1998
and March 31, 1997 (b) the consolidated financial position at March 31, 1998
(c) the statements of cash flows for the three month periods ended March 31,
1998 and March 31, 1997 and (d) the consolidated changes in stockholders'
equity for the three month period ended March 31, 1998 have been made.
2. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for financial statements. For further information, refer to the audited
consolidated financial statements and notes thereto for the year ended
December 31, 1997, included in the Company's Annual Report on Form 10-QSB to
the Securities and Exchange Commission filed on March 27, 1998.
3. The results for the three month period ended March 31, 1998 are not
necessarily indicative of the results for the entire fiscal year of 1998.
4. The Company is obligated to pay an opening commission to the area
director who sold the franchise at the time the franchise opens for business.
These commissions are expensed at the time the related franchise opens for
business and are not accrued as a liability of the Company until that time.
At March 31, 1998, there were 234 franchises sold but not yet open with
related opening commissions totaling $921,930 ($510,437 at December 31, 1997).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
OVERVIEW
For the first quarter of 1998 the Company had income from franchise operations
of $301,032 and income from Company owned store operations of $107,384, less
other charges totaling $257,593 resulting in net income for the quarter of
$141,679.
The Company's primary business is the franchising of Quizno's Restaurants. As
a franchisor, revenue is derived from: (1) area director marketing fees, (2)
initial franchise fees, and (3) royalties paid by its franchisees. Area
director fees occur only once for each exclusive area sold, and are expected
to decline as the number of remaining available markets declines. Initial
franchise fees are one time fees paid upon the sale of a franchise and vary
directly with the number of franchises the Company can sell and open.
Royalties, on the other hand, are ongoing fees paid by every franchised
restaurant and increase as the number of franchised restaurants open increase.
Each of these sources of revenue contribute to the profitability of the
Company, but the relative contribution of each source will vary as the Company
matures. Over time initial fees and royalties will generate proportionately
more revenue than area director marketing fees.
The following chart reflects the Company's revenue growth by source and number
of restaurants for the first quarter of 1998 compared the first quarter of
1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------- PERCENT
1998 1997 IMPROVEMENT
-------- -------- -------------
<S> <C> <C> <C>
Royalty fees $1,117,313 $ 469,125 138
Initial franchise fees 562,000 174,501 222
Area director fees 573,000 425,423 35
Other 178,817 105,309 70
Interest 28,682 45,102 (36)
----------- ------------- -----
Total franchise revenue 2,459,812 1,219,460 102
Sales by Company owned
stores 1,741,408 612,740 184
Sales by Stores held
for resale -- 74,002 (100)
----------- -------------- ------
Total revenue $4,201,220 $1,906,202 120
========== ========== ====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- --------
<S> <S> <C>
Restaurants open, beginning (1) 329 156
New restaurants opened 39 16
Restaurants closed (1) (5) (2)
------- -------
Restaurants open, end 363 170
======= ========
New franchises sold 145 42
Initial franchise fees collected
$1,969,500 $791,000
Systemwide sales
$19.9 million $9.5 million
Average unit volume for 1997 $316,259 (4)
Same store sales (2) (3) Up 9.4% Down 0.4%
</TABLE>
(1) Includes 52 Bain's Deli units open at the beginning and 2 Bain's Deli
units closed. The Company acquired the Bain's Deli Franchise System on
November 12, 1997.
(2) Same stores sales is based on 120 stores open since the beginning of
1997. Stores which transferred ownership during this period or
are in substantial default of the franchise agreement are excluded.
(3) Because the Company is and will continue to be in an aggressive growth
mode over the next few year, it is anticipated that same store sales
will fluctuate as units are included from more start up markets.
(4) Excludes non-traditional units located in convenience stores and gas
stations, and includes only units open all of 1997.
RESULTS OF OPERATIONS
Comparison of the first quarter of 1998 with the first quarter of 1997
Franchise revenue increased 102% in the first quarter of 1998 to $2,459,812
from $1,219,460 in the same quarter last year. Total revenue increased 120%
in the first quarter of 1998 to $4,201,220 from $1,906,202 in the same quarter
last year.
ROYALTY FEES increased 138% to $1,117,313 from $469,125 in 1997. Royalty fees
are a percentage of each Owner's sales paid to the Company and will increase
as new franchises open, as the average royalty percentage increases, and as
average unit sales increase. At March 31, 1998 there were 341 franchises open
(including Bain's) as compared to 161 at March 31, 1997. The royalty was
increased to 6% for all Quizno's franchise agreements entered into after
February 10, 1995. The royalty for Quizno's Express units is 8%. The Company
increased the royalty to 7% for all non-express franchise agreements entered
into after March 31, 1998.
Included are 49 Bain's franchises which pay royalties at various rates
up to 5%, and account for $98,748 in royalty revenue, approximately 15.2%
of the increase. The Company records royalty revenue from Bain's franchisees
when the funds are collected.
INITIAL FRANCHISE FEES increased 222% in 1998 to $562,000 from $174,501 in
1997. Initial franchise fees are one time fees paid by Owners at the time the
franchise is purchased. Initial franchise fees are not recognized as income
until the period in which all of the Company's obligations relating to the
sale have been substantially performed, which generally occurs when the
franchise opens. In the first quarter of 1998, the Company opened 38
franchises as compared to 15 opened in the first quarter last year.
Initial franchise fees collected by the Company are recorded as deferred
initial franchise fees until the related franchise opens. Deferred initial
franchise fees at March 31, 1998 were $3,679,053 and represent 234 franchises
sold but not yet in operation, compared to $2,148,662 at March 31, 1997
representing 185 franchises sold but not open. The low per unit average fee
in 1996 was due to the sale of 75 franchises for $1,000 discussed above. The
Company sold 145 new franchises for $1,969,500 in the first quarter of 1998.
The record sales were due, in part, to a royalty increase from 6% to 7%
effective for franchises purchased after March 31, 1998. Direct costs related
to the sale, primarily sales commissions to area directors, are deferred on
the books of the Company and recorded as an expense at the same time as the
related initial franchise fee is recorded as income. Deferred costs paid and
due at the time of opening with respect to initial franchise fees deferred at
March 31, 1998 were $1,791,778. Approximately 50% of all initial franchisee
fees received by the Company are paid to area directors for sales and opening
commissions.
The Company has not sold or opened any Bain's franchises, nor does it expect
to in the future.
AREA DIRECTOR MARKETING FEES increased 35% in 1997 to $573,000 from $425,423
in 1997. Area director marketing fees are one time fees paid to the Company
for the right to sell franchises in a designated, non-exclusive area,
including international markets. The fee for U.S. areas was $.05 per person
from January 1997 through December 1997, $.06 from January 1998 through
February 1998, and $.07 since March 1, 1998. In addition, each area director
is required to pay a training fee of $10,000. The population based portion of
the fee is deemed fully earned by the Company when the area director marketing
agreement is signed and is recognized as income in that period. In the first
quarter of 1998 the Company sold all of the area directorship rights for
Canada to its Canadian master franchisee for $706,000. As part of the
agreement, the Canadian master franchisee is allowed to retain 100% of the
initial franchise fees from franchises sold in Canada in 1998. The Company
has deferred $152,000 of the fee paid to be recognized as units sold in 1998
in Canada are opened. The Company did not sell any other area directorships
in the first quarter of 1998, compared to 14 sold in the first quarter of
1997. At March 31, 1998, the Company had a total of 76 area directors who
owned areas encompassing approximately 71% of the population of the United
States.
The Company offers area director applicants financing for up to 50% of the
area director marketing fee. The amount financed is required to be paid to
the Company in installments over five years at 15% interest. The promissory
notes are personally signed by the area director and depending on the personal
financial strength of area director, secured by collateral unrelated to the
area directorship, usually a second mortgage on the area director's home. The
Canadian master franchisee used the financing for the purchase of the Canadian
area directorships in the amount of $528,000. This was a one time negotiated
transaction in which the promissory note will be repaid over two years. In
the first quarter of 1997, a total of $169,068 was financed, representing 16%
of area director fee revenue.
There are no area directors in the Bain's system and the Company does not
intend to sell any Bain's area directorships in the future.
OTHER REVENUE increased by 70% in 1998 to $178,817 from $105,309 in 1997.
Other revenue is primarily bookkeeping fees charged franchisee's for whom the
Company provided bookkeeping services and amounts paid by equipment suppliers
for design and construction. Since 1995, the Company's franchise agreement
requires all new franchisees to utilize the Company's bookkeeping services for
their first 12 months of operations. The fee per store was increased from $80
to $85 per week for all franchise agreements executed after March 31, 1998.
Bookkeeping fees were $112,453 in the first quarter of 1998 compared to
$59,059 in the first quarter of 1997. The Company will out source the
bookkeeping function to an unaffiliated party beginning in the second quarter
of 1998. The Company will continue to collect the fee from the franchisees
and will pay the service provided directly for the bookkeeping services.
SALES AND ROYALTY COMMISSIONS expense increased to $753,270 in the first
quarter of 1998 from $257,512 in the same quarter last year. Sales and
royalty commissions are amounts paid to the area directors of the Company. As
a percent of royalty fees and initial franchisee fees, sales and royalty
commissions were 45% and 40%, respectively.
The Company's U.S. area directors receive commissions equal to 50% of the
initial franchise fees and 40% of royalties received by the Company from
franchises sold, opened, and operating in the area director's territory. The
Company's Canadian master franchisee receives 70% of both initial franchise
fees and royalties, except in 1998, in which they will receive 100% of initial
franchise fees, as discussed above. In exchange for these payments, the area
director is required to market and sell franchises, provide location selection
assistance, provide opening assistance to new owners, and perform monthly
quality control reviews at each franchise open in the area director's
territory.
The area director is entitled to receive commissions during the term of the
ten year area director agreement or until early termination of the agreement,
although the area director may be entitled to a commission of 1% of sales for
the remainder of each franchised restaurant's franchise agreement, or five
years (whichever is less) if the area director agreement is terminated solely
because of failure to meet the development schedule. Agreements signed prior
to December 30, 1997, provided for ongoing payment of a 1% commission in such
circumstances for the remaining life of each franchise agreement in the
territory.
GENERAL AND ADMINISTRATIVE expenses increased 47% to $1,361,458 in the first
quarter of 1998 from $923,619 in the same quarter last year. As a percent of
franchise revenue, general and administrative expenses have fallen from 80% in
1995, 74% in 1996, 58% in 1997, to 55% for the first quarter of 1998. General
administrative expenses include all operating costs of the Company. The
increase is primarily due to the addition of employees to service the rapidly
growing network of Quizno's owners and area directors. Although general and
administrative expenses will likely continue to increase as the Company grows,
management expects the rate of increase to decline.
The Company believes its general and administrative expenses are adequate and
are not excessive in relation to the size and growth of the Company.
DEPRECIATION AND AMORTIZATION was $144,610 in the first quarter of 1998 and
$76,809 in the same quarter last year. The increase is primarily due to the
acquisition and development of eight new Company owned stores in 1997 and
three new stores in the first quarter of 1998 and the acquisition of the
Bain's chain in 1997.
INTEREST EXPENSE was $78,007 in the first quarter of 1998 and $75,432 in the
same quarter last year. The increase is primarily attributable to the
interest on convertible subordinated debt borrowed on December 31, 1996,
$2,000,000 through November 11, 1997 and $1,500,000 from November 12, 1997
through March 31, 1998.
SALES BY COMPANY OWNED STORES increased by 184% in the first quarter of 1998
to $1,741,408 from $612,740 in the same quarter last year. During the first
quarter of 1998 the Company operated stores for a total of 57 store operating
months. In the first quarter of 1997, the Company had a total of 21 store
operating months. Sales per store month increased 4.7% in the first quarter
of 1998 to $30,551 from $29,178. During the first quarter of 1998, the
Company earned $107,384 at Company stores compared to $966 in the first
quarter of 1997. At March 31, 1998 the Company had twenty-one (eight at March
31, 1997) operating Company stores including one Bain's Deli, plus one store
which operates only during baseball season.
The Company had no stores held for resale in the first quarter of 1998. In
the first quarter of 1997, the Company operated two stores held for resale.
In the first quarter of 1997, stores held for resale lost $24,540 on sales of
$74,002.
The Company has in the past and may continue in the future to acquire or
takeover franchised stores from franchisees who have been unable to operate
successfully for reasons unrelated to the location or the market. In such
cases, the Company will typically operate the restaurant, make any required
improvements and repairs, re-staff, begin local store marketing, and
ultimately transfer the restaurant to a new qualified franchisee. The Company
may in the future, as it has in the past, incur short term operating losses in
cases where it takes over and remarkets a franchised store. However, the
royalties paid over the long term by the new owner will normally offset or
exceed such losses.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH PROVIDED BY OPERATING ACTIVITIES was $1,025,938 in the first quarter
of 1998 compared to cash provided by operating activities of $146,600 in the
first quarter of 1997. The primary reasons for the improvement are net cash
from franchise sales and the net income improvement.
NET CASH PROVIDED BY INVESTING ACTIVITIES was $351,248 in the first quarter of
1998 compared to cash used by investing activities of $126,490 in the first
quarter of 1997. Cash provided by investing activities in the first quarter
of 1998 came from payments received by promissory notes and liquidations of
certain short term cash investments. Cash used by investing activities for
last year was primarily related to the acquisition and development of Company
owned stores.
NET CASH USED BY FINANCING ACTIVITIES was $25,464 in the first quarter of 1998
compared to cash used by financing activities of $506,831 in the first quarter
of 1997. The amount used in 1997 was primarily from principal payments on
debt.
At March 31, 1998, the Company had $838,913 invested in Company owned turnkey
restaurants offered for sale. One such restaurant is under contract to be
sold for cash in the second quarter of 1998. The other restaurants are
expected to be sold for cash in 1998.
In the first quarter of 1998 the Company announced a program under which its
area directors will have a right to elect to have franchisee leases in the
area director's territory signed by The Quizno's Realty Company ("TQRC"), a
wholly owned subsidiary of the Company. As a condition of the lease, the
landlord will agree not to look beyond TQRC for payments. These locations
would then be subleased by TQRC to the franchisee whose personal liability is
limited to one year. The franchisee will pay TQRC an indemnification fee of
$165 per month, pay a one time lease processing fee to TQRC of $2,200, and pay
a security deposit to TQRC equal to two months rent. Effective March 1, 1998,
the Company transferred cash and other assets having a book value of
approximately $500,000 to TQRC in exchange for stock and a promissory note.
The Company expects that 10% to 20% of all new franchise locations in 1998
will be developed under this program. The Company will review results of the
program and decide whether to continue the program beyond 1998.
As it has in the past, the Company will continue to consider acquisitions of
other chains, the purchase of Quizno's restaurants from its franchisees, and
the purchase of Quizno's area directorships from its area directors. From
time to time the Company will make offers and enter into letters of intent for
such transactions subject to the completion of due diligence. In all such
cases, the Company will identify the sources of cash required to complete such
transactions prior to entering into a binding agreement.
Other than the above, the Company does not have any commitments or contracts
to build, acquire, or sell any additional Company owned stores.
Subsequent to March 31, 1998 additional warrants held by the Company's
underwriter in connection with its initial public offering in 1991 were
exercised. The Company received $332,800 from the exercise of warrants to
purchase 66,560 shares of common stock.
Since its inception, the Company has incurred losses totaling $1,943,443,
through March 31, 1998. The Company has financed these losses primarily
through the sale of common stock and through the issuance of preferred stock
as well as convertible subordinated debt. The Company's trends are positive
in that for the nine months ended March 31, 1998, it had a profit before
preferred stock dividends of $321,980. As seen in its statement of cash flows
for the first quarter of 1998, the Company generated cash from operations of
$1,025,938. The Company believes its ability to generate cash flow, combined
with additional financing, if necessary, will generate sufficient cash to
support its operations for the next twelve months.
The Company's restaurants sales, and therefore royalties, during the months of
November through February are generally lower due to the locations of most of
its restaurants.
YEAR 2000 DISCLOSURE
The Company uses current versions of widely used, publicly available software
for its accounting and other data processing requirements. The providers of
the software utilized by the Company have stated that there will be no
failures in the programs used by the Company resulting from the year 2000.
The Company has no customized software. The Company has not yet determined
the impact, if any, that year 2000 issues may have on its vendors. However,
the Company believes there are adequate alternative vendors that can supply
products and services to the Company if necessary. Finally, the Company's
business, quick service restaurants, is not highly dependent upon electronic
data processing. In conclusion, the Company does not believe it is at a
material risk from year 2000 issues.
FORWARD-LOOKING STATEMENTS
Certain of the information discussed in this Form 10-QSB, and in particular in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Plan of Operation," are forward-looking statements that
involve risks and uncertainties that might adversely affect the Company's
operating results in the future in a material way. Such risks and
uncertainties include, without limitation, the effect of national and regional
economic and market conditions in the United States and in other countries in
which franchises are sold, costs of labor and employee benefits, costs of
marketing, costs of food and non-food items used in the operation of the
Restaurants, intensity of competition of location and franchisees, as well as
customers, perception of food safety, legal claims, and the availability of
financing for the Company and its franchisees. Many of these risk are beyond
the control of the Company. In addition, specific reference is made to the
"Risk Factors" contained in the Company's Prospectus, dated January 9, 1998,
related to the Registration Statement on Form S-3 filed by the Company
(Registration No. 333-38691) and to the Company's annual report filed on Form
10-KSB for year ended December 31, 1997.
As described earlier, the Company's principal sources of income are royalty
fees, initial franchise fees, and area director marketing fees. These sources
are subject to a variety of factors that could adversely impact the
profitability of the Company in the future, including those mentioned in the
preceding paragraph. The continued strength of the U.S. economy is a key
factor to the restaurant business because consumers tend to immediately reduce
their discretionary purchases in economically difficult times. An economic
downturn would adversely affect all three of the above identified sources of
income. Because the Company's franchises are still concentrated in a few
regions of the U.S., regional economic factors could adversely affect the
Company's profitability. Weather, particularly sever winter weather, will
adversely affect royalty income and could affect the other sources cited
above. Culinary fashions among Americans and people in other countries in
which franchises are sold will also impact the Company's profitability. As
eating habits change and types of cuisine move in and out of fashion, the
Company's challenge will be to formulate a menu with the Company's distinctive
culinary style that appeals to an increasing market share. Finally, the
intense competition in the restaurant industry continues to challenge
participants in all segments of this industry.
THE QUIZNO'S CORPORATION
COMMISSION FILE NUMBER: 000-23174
QUARTER ENDED SEPTEMBER 30, 1997
FORM 10-QSB
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Jericho Resources v. The Quizno's Franchise Corporation, Richard Schaden and
Scott Adams, Case No. 96L05977, (Cook Cty. Ill.). On May 24, 1996, an area
director, Jericho Resources, Inc. ("Jericho") filed suit against the Company
and certain of its officers in response to the Company's termination of
certain area rights and related agreements. On March 5, 1998, this case was
settled. Without admitting any wrongdoing, the Company agreed to pay Jericho
$68,000 and a 1.9% commission on royalties for three restaurants established
by Jericho. The Company agreed to the settlement solely to avoid the inherent
cost of litigation.
Item 2. Changes in Securities
<TABLE>
<CAPTION>
Exemptions
----------
Securities Sold Date Shares Amount Purchasers Claimed
- --------------- ---- ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C>
Common Stock 2/19/98 545 $2,657 Quizno's 401(K) Section 4(2)
Plan
Common Stock 1/21/98 9,750 $38,025 Area Directors
pursuant to
Area Director
Equity
Participation
Rights Stock
Option Plan Section 4(2)
Common Stock 2/98-3/98 13,440 $67,200 Holders of
Underwriter's
Warrants Section 4(2)
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
Form 8-K of the Registrant, dated February 3, 1998,
reporting in Item 5 the sale of master franchise for Canada.
Form 8-K of the Registrant, dated February 18, 1998, reporting
in Item 5 the 1997 store openings.
Form 8-K of the Registrant, dated March 3, 1998, reporting in
Item 5 the new cable television campaign.
Form 8-K of the Registrant, dated March 16, 1998, reporting in
Item 5 the 1997 operating results.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE QUIZNO'S CORPORATION
By: Original signed by John L. Gallivan
------------------------------------------
John L. Gallivan
Chief Financial Officer
(Principal Financial and Accounting Officer)
Denver, Colorado
May 14, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,913,010
<SECURITIES> 263,716
<RECEIVABLES> 2,184,740
<ALLOWANCES> 206,116
<INVENTORY> 0
<CURRENT-ASSETS> 4,830,872
<PP&E> 2,517,066
<DEPRECIATION> (483,232)
<TOTAL-ASSETS> 10,399,085
<CURRENT-LIABILITIES> 2,146,662
<BONDS> 0
0
413
<COMMON> 2,947
<OTHER-SE> 2,782,443
<TOTAL-LIABILITY-AND-EQUITY> 10,399,085
<SALES> 1,741,408
<TOTAL-REVENUES> 4,201,220
<CGS> 982,038
<TOTAL-COSTS> 3,792,804
<OTHER-EXPENSES> 257,593
<LOSS-PROVISION> 33,677
<INTEREST-EXPENSE> 78,007
<INCOME-PRETAX> 141,679
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,456
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
