U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO
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Commission File Number 000-23174
THE QUIZNO'S CORPORATION
(Exact name of small business issuer as specified in its charter)
Colorado 84-1169286
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1099 18th Street, Suite 2850
Denver, Colorado 80202
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(Address of Principal Executive (Zip Code)
Offices)
(303) 291-0999
(Issuer's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
[ ]
State registrant's revenue for its most recent fiscal year: $20,736,754
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 16, 1999 was approximately
$10,199,609 (for purposes of the foregoing calculation only, each of the
registrant's officers and directors is deemed to be an affiliate).
There were 3,057,068 shares of registrant's common stock outstanding as of March
16, 1999.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (Check one): Yes [ ]
No [X]
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TABLE OF CONTENTS
PART I PAGE NO.
ITEM 1. DESCRIPTION OF BUSINESS.................................1
ITEM 2. DESCRIPTION OF PROPERTY.................................11
ITEM 3. LEGAL PROCEEDINGS.......................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS........................................13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION...................................15
ITEM 7. FINANCIAL STATEMENTS....................................25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE..............................................26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.......................26
ITEM 10. EXECUTIVE COMPENSATION..................................30
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................35
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................................37
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K........................39
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Restaurants
The Company is engaged in franchising and, to a lesser extent, operating quick
service restaurants ("QSR") (the "Restaurants") using the registered service
mark "Quizno's" and the name "Quizno's Subs." The Restaurants offer a menu of
submarine style sandwiches, salads, soups, desserts and beverages, including
"Classic Lite" selections of submarine sandwiches and salads designed for
consumers who are looking for a low-fat, healthy alternative to typical fast
food products.
The Company believes that the submarine sandwiches offered in the Restaurants
are distinctive in the market for several reasons. Each sandwich is prepared
after the customer orders and with special ingredients, recipes and techniques.
These ingredients, recipes and techniques are controlled to provide uniformity
of taste and quality among all of the Restaurants.
One of the most important distinctions of the Quizno's sandwich product is that
it is served to the customer warm. Each sandwich is prepared open face and run
through a conveyor oven that toasts the bread, melts the cheese and enhances the
flavors of the meats.
The Company focuses on the quality of the ingredients contained in the food
products it uses and requires that all of its specified ingredients, which are
generally higher quality than those that other submarine sandwich shops use, be
purchased from approved suppliers. The cheeses used in the Restaurants are all
natural. The Italian style meats include a wine-cured Genoa salami, pepperoni
and capicola, an Italian spiced ham. The turkey breast is real turkey breast.
The Restaurants also are required to use certain products which are prepared for
the Company in accordance with proprietary recipes developed by the Company.
Foremost among these is Quizno's special recipe soft baguette style bread and
its red-wine based vinaigrette dressing used as a base on most of the
sandwiches. In addition, the Restaurants use the Company's proprietary recipe
tuna mix blend, garlic oil blend, and marinara sauce.
The Restaurants' upscale decor is designed to convey an Italian deli ambiance
and to match the upscale QSR market niche represented by the product. Open
kitchens allow customers to watch as their sandwiches are prepared. The decor
package for the Restaurants includes framed reproductions of old Italian food
product labels, and hand-painted Italian style posters. The Italian theme is
prevalent throughout a Quizno's Restaurant.
Besides a pleasant upscale environment for in-house dining, the Restaurants
offer conveniently packaged meals for carry out to serve lunch time office
workers and the home meal replacement segment of the market.
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The Restaurants are also located in mall food courts and are designed to operate
in smaller spaces while retaining the same ambiance and decor as a traditional
Quizno's Restaurant. "Quizno's Express" Restaurants are typically smaller units
established at such non-traditional locations as convenience and gasoline
stations, sports facilities, hospitals, and college campuses. Quizno's Express
Restaurants offer a full menu with an extensive variety of Quizno's sandwiches.
Soups, salads and desserts are also available at Quizno's Express Restaurants.
Quizno's Express Restaurants will typically share common area seating or may
have very limited seating at venues designed primarily for take out.
Quizno's Restaurants were first opened in 1981 by the Company's predecessor. As
of March 24, 1999, there were 499 Restaurants in operation, including 15 Bain's
Deli restaurants (not including those sold to Bain's Deli Corporation), and
agreements were in place for the opening of an additional 481 franchised
Restaurants. 38 of the Restaurants in operation were in Canada and 1 was in
Japan.
In November 1997, the Company acquired the franchisor of the Bain's Deli
restaurant system. Since that acquisition, the Company has included Bain's Deli
restaurants within the definition of Restaurants for reporting purposes. In
March 1999, the Company sold the Bain's Deli franchising rights and the rights
and obligations under the existing Bain's Deli franchise agreements (other than
15 agreements retained by the Company) to Bain's Deli Corporation.
The Company from time to time may make proposals and engage in negotiations
regarding acquisitions of material restaurant assets or other companies in the
restaurant industry, if management and the Board of Directors believe that such
a proposed transaction would be in the best interest of the Company. The
Company's policy is not to publicly announce such proposals until the likelihood
that the proposed transaction will be completed becomes probable.
Going Private Proposal
On December 29, 1998, the Company received a proposal from Richard E. Schaden,
the President, CEO and a Director of the Company, and Richard F. Schaden, the
Secretary and a Director of the Company (the "Schadens"), who own a majority of
the outstanding shares of Common Stock of the Company, to merge the Company with
a new company to be owned by them, pursuant to which the shareholders of the
Company, other than themselves, would receive cash for their shares of the
Company's Common Stock. At a special meeting of the Board of Directors on that
date, the Board received the proposal and appointed a Special Committee of
independent Directors to consider the proposal. The proposal offered to pay each
shareholder, other than the Schadens, between $ 7.84 and $8.20 per share in the
merger. The proposal is subject to, among other things, the following
conditions: (i) the execution and delivery of a definitive acquisition agreement
and satisfaction of all conditions set forth therein, (ii) receipt of a fairness
opinion or an appraisal of the fair value of the shares, by the Special
Committee that indicates that the price payable to the stockholders is fair
value to the stockholders of the Company, (iii) receipt of satisfactory
financing for the transaction, (iv) approval of the proposed transaction by the
Special Committee of the Board, the Board of Directors and the Company's
shareholders, and (v) applicable regulatory approval. None of the above
conditions have been satisfied at the time of the filing of this Report. The
Company cannot predict whether any of these conditions will be satisfied or
whether the proposed transaction will ever be completed.
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Concept and Strategy
The Company's marketing strategy is to position the Restaurants between fast
food and full-service dining. The Company believes that consumers are looking
for a healthy and tasty alternative to typical fast foods; in particular, they
are looking for an alternative to fast food hamburgers and fried foods. At the
same time, the Company believes many busy families are looking for a more
convenient and reasonably priced alternative to full-service dining. Quizno's
offers all the convenience of typical fast food in terms of quick ticket times,
affordability, and carry out and home meal replacement options, but with a
fresh, tasty alternative to fast food products. In terms of full-service dining
benefits, Quizno's offers more comfortable dining rooms than most fast food
restaurant concepts as well as other dining options -- such as catering and
delivery -- generally not available in the fast food arena. Due to the Company's
quick service product, the Company believes it is well positioned to fill a
growing niche in the restaurant business that has developed between fast food
and full-service dining. The Quizno's concept also accommodates a variety of
dining options from comfortable in-house dining to lunchtime carry-out to home
meal replacement.
The Company's goal is to build a strong and consistently profitable nationwide
chain of Restaurants. The Company became the third largest submarine sandwich
restaurant chain in the United States in 1997. Since 1993, the primary vehicle
for achieving the Company's planned growth has been its Area Director marketing
program. Under this program, the Company grants to a qualified person (an "Area
Director") the right to sell Quizno's franchises on behalf of the Company in a
specified market area. The Area Director is required to sell and open a
specified number of franchised Restaurants annually throughout the life of the
Area Director marketing agreement.
The Company's revenues are primarily derived from a royalty on all sales at
franchised Restaurants, initial franchise fees from each franchise sold, and
fees collected from Area Directors for the grant of territorial Restaurant
marketing rights, as well as revenue generated from Company-owned Restaurants.
Franchisees and Area Directors pay fees to the Company only once in connection
with execution of Franchise Agreements and Area Director Marketing Agreements,
respectively. Royalties provide a long-term continuing source of revenue.
Franchise fees and royalties are expected to increase as the number of
franchised Restaurants in operation increases. The Company may also repurchase
certain territories in the future. The royalty rate is currently 7% for
traditional Restaurants, and the royalty rate is 8% for Quizno's Express
Restaurants; however, a small number of franchisees operate under older
agreements that set lower royalty rates of 4% to 6%.
Area Director Marketing Agreements
The Company offers to Area Directors a Territory ("Territory") within which to
sell franchised Restaurants pursuant to an Area Director Marketing Agreement.
The Area Director marketing program was established by the Company in January
1993 and restructured in December 1994. This program is designed to assist the
Company in accelerating the marketing and sale of franchises and the selection
of Restaurant locations in each Territory. Territories are generally based on
areas of dominant influence of local television broadcast stations as defined by
the television broadcast industry. The Company's growth strategy clusters
Restaurants in particular television markets in order to facilitate
implementation of its advertising program.
Each Area Director pays the Company a fee based on the total of the population
in the Territory. At present, the fee is $.07 per person located within the
Territory, plus a training fee of $10,000. The population-based portion of this
fee is deemed fully earned by the Company when paid and is not refundable.
Area Directors are required to market franchises for Restaurants to be located
within the Territory. The Area Director agrees to open, through the sale of
franchises, a specified number of franchised Restaurants within the Territory
during the term of the Area Director Marketing Agreement. The sales and opening
schedules are lower in the first years of the development period. The Area
Director Marketing Agreement does not grant the Area Director the exclusive
right to market franchises or solicit franchisees in the Territory, but it does
grant the Area Director the right to receive certain fees and royalties,
described in more detail below, from all franchised Restaurants and Company
owned Restaurants established in the Territory during the term of the Area
Director Marketing Agreement. The Company reserves the right under the Area
Director Marketing Agreement to market and sell franchises and to establish
Company-owned Restaurants in a Territory.
The Company, as of March 24, 1999, has 81 area directorships owned by 68 Area
Directors whose Territories cover approximately 75% of the population of the
United States. The Company has also sold the rights to open Quizno's Restaurants
in Canada, Japan, United Kingdom and Australia.
The Area Director Marketing Agreements set increasing "Minimum Performance
Levels" that require the Area Director to sell and open a specified number of
franchised Restaurants in each year during the term of the Area Director
Marketing Agreement. The Company's experience with the Area Director program to
date indicates that while some Area Directors will exceed their development
schedules, others will fail to meet their schedules. In its planning, the
Company has allowed for a certain percentage of Area Directors who will not meet
their development schedules. Delays in the sale and opening of Restaurants can
occur for many reasons. The most common are delays in the selection or
acquisition of an appropriate location for the Restaurant, delays in negotiating
the terms of the lease and delays in the franchisee financing. The Company may
terminate an Area Director Marketing Agreement if the Area Director fails to
meet the development schedule, and the Company would then have the right to
resell the Territory to a new Area Director.
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Most Area Directors are required to maintain an office within the Territory. In
addition, through a required monthly minimum marketing expenditure, the Area
Director is required to actively promote the sale of Company franchises within
the Territory. The Area Director is required to visit with prospective
franchisees and refer appropriate locations for franchised Restaurants within
the Territory to the Company for consideration. The Area Director is also
required to perform monthly quality assurance inspections of the Restaurants in
its area and assist franchisees within its area in opening. The Company's
franchise sales materials are made available to the Area Director.
Each Area Director is paid a commission of 40% of the royalty fees collected by
the Company from each franchised Restaurant or of royalties that would otherwise
be payable by Company owned Restaurants in the Territory opened and operated
during the term of the Area Director Marketing Agreement, so long as the Area
Director performs the services described above. In certain circumstances, Area
Directors are entitled to an ongoing commission of 1% on gross sales of
Restaurants open and operating in the Territory on the date the Area Director
Marketing Agreement is terminated through either the initial term of the
underlying franchise agreement or five years (15 years for Area Director
marketing Agreements executed before January 1998), whichever is less. This
approach rewards the Area Director for selecting higher quality franchisees and
higher quality locations while discouraging the Area Director from selecting
locations that are too close together. In addition to the foregoing, the Area
Director is entitled to receive a commission of 50% of the initial fee paid to
the Company for each franchise sold and open within the Territory during the
term of the Area Director Marketing Agreement.
The Company has a program under which it will finance up to 50% of the Area
Director Marketing Fees for certain approved Area Director candidates who have
the experience and skill requirement sought by the Company for its Area
Directors, but do not have sufficient cash to pay the fee in full. The Area
Director is required to personally sign a promissory note due the Company for
the amount financed, which will bear interest at between 6% and 15% per year and
be repaid in monthly installments over five years. The promissory note is
secured by the Area Director Marketing Agreement and by other collateral
unrelated to the business, typically a second mortgage in the Area Director's
home.
Franchise Program
The Company authorizes individuals and companies ("Franchisees" or "Owners") to
establish and operate Restaurants at an approved location pursuant to the terms
of a Franchise Agreement. Under the Franchise Agreement, the Company undertakes
to perform or have performed certain services with respect to the opening and
operation of a Restaurant. In connection with the opening of a Restaurant, those
services include (i) review and approval of the proposed Restaurant location,
(ii) review and approval of construction plans for the Restaurant, (iii)
identification of sources of supply for items which are ordinarily necessary to
operate a Restaurant, (iv) an operations manual providing detailed instructions
with respect to operation of the Restaurant, (v) training with respect to the
Company's method of operations, including operating procedures, food preparation
techniques, controls, promotion programs, management and public relations, and
(vi) pre-opening assistance. After opening of the Restaurant, the Company
provides continuing advice and consultation with respect to operation of the
Restaurant. From time to time, the Company takes over the operation of a
Restaurant from an unsuccessful Franchisee and operates the Restaurant until a
new Franchisee is found. The Company's investment in such operations may be
recovered at the time the Restaurant is transferred to the new Franchisee.
The current franchise fee for the Owner's first traditional Restaurant is
$20,000, $15,000 for the second, and $10,000 for the third and any additional
franchise agreement. The Company offers the franchise for a Quizno's Express
Restaurant at a reduced franchise fee of $10,000 for the first agreement. The
Owner also pays the Company a continuing royalty fee of 7% of the Owner's gross
sales (8% for Quizno's Express franchises). Old forms of the Franchise Agreement
require royalty fee payments at rates between 4% and 6%. "Gross sales" is
defined as all sales whether on credit or for cash, and all revenues from any
source caused by the operation of the Restaurant, whether directly or indirectly
relating to the operation thereof. Sales tax and any other state or federal tax
is excepted. The Owner also pays an advertising fee to the Company in an amount
equal to 1% to 4% of the Franchisee's gross sales, which fees are used by the
Company for advertising, marketing, and public relations programs and materials
to enhance and build the image and goodwill of the Quizno's system. There are
certain other fees that must be paid by the Franchisee to the Company in order
to reimburse the Company for costs incurred in connection with the establishment
of a Restaurant. The total average cost to a Franchisee for opening a Restaurant
ranges between $37,600 and $196,150, including funds to cover the initial
franchise fee, with most of the variation attributable to differences in the
costs of leasehold improvements for the Restaurant, size of the Restaurant, and
whether the Restaurant is a traditional or Express Restaurant.
The Company has developed certain items, such as bread and dressings for salads
and sandwiches, which are prepared for use in the Restaurants based upon recipes
developed by the Company and which are provided to Owners under the private
label "Quizno's." The Owner is required to purchase those items from specified
vendors for sale and use in the Restaurant. The Franchise Agreement also
requires the Owner to acquire specified equipment and inventory, to establish
and maintain specified signage and to operate the Restaurant in accordance with
the standards and requirements outlined in the Company's operations manual.
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The Company has entered into an agreement with a national food products
distributor that allows Owners to obtain meat products, produce and other food
and non-food items necessary for operation of franchised Restaurants at prices
more favorable than those that could be obtained by individual Owners. All of
the purchasing of the ingredients for the food products offered in the
Restaurants is done centrally by the Company, which allows for better quality
control by the Company. Each Owner then contacts the distributor directly to
obtain the items needed for the Owner's Restaurant, which are delivered by the
distributor. The distributor bills the Owner directly for all items ordered. If
the national food products distributor no longer provided this service to the
Company and its Franchisees, the Company believes adequate alternative services
would be available to it without a significant increase in costs.
The Company charges certain fees to the primary vendors who supply products to
its Company Restaurants and its franchisees. The fees are for the use of the
Company's name, trademarks, and proprietary information such as recipes, and
help offset the Company's costs related to research, development, and
negotiating and managing purchase arrangements on behalf of Company owned and
franchised Restaurants. In 1998, the Company received licensing fees of
approximately $1,840,562, of which $1,057,467 was deposited into the National
Advertising Fund. The Company also receives fees from equipment suppliers to
fund an in-house construction department primarily responsible for overseeing
all aspects of design and construction of Franchisees' Restaurants and
facilitating openings in as short a period and as cost-effectively as possible.
The Company retains the right to approve the terms of the Owner's lease. A law
firm selected by the Company must negotiate the lease as part of the approval
process. The cost for negotiation of the lease by the lawyer selected by the
Company are paid by the Owner. The Company also reserves the right to enter into
a lease directly with each landlord and then to sublease to the Franchisee.
The Owner, or person designated by the Owner and approved by the Company, is
required to devote his or her full time, attention and efforts to the
performance of the Owner's duties under the Franchise Agreement relating to the
operation of the Restaurant. The Owner agrees in the Franchise Agreement to use
his or her best efforts to produce maximum volume of gross sales in the
Restaurant. The Restaurant must be operated continuously on such days and during
such minimum hours as are required by the Company, unless restricted by Owner's
lease or other rules applicable to the Restaurant.
The Owner agrees to maintain books and records for the Restaurant in accordance
with the requirements and specifications set forth from time to time by the
Company. The Franchisee is required by the Franchise Agreement to be responsible
for submitting all required reports to the Company when and in the manner or
format required by the Company.
In order to provide for proper financial tracking and planning for Owners, the
Company began providing a restaurant bookkeeping service to its Restaurant
Owners in 1994. In mid-1998, the Company out sourced the bookkeeping function.
This service is intended to assure the Owners have accurate financial records as
well as to allow the Company to keep accurate systemwide statistics. Franchise
agreements executed after February 10, 1995, require Owners to use the Company's
designated bookkeeping service for the first year of operations for the Owner's
first Restaurant for a fee of $85 per week.
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The Owner must submit copies of all proposed advertising or promotional
materials for approval by the Company prior to use. The Company must give its
written approval to any advertising or promotional materials before the Owner is
authorized to use such materials.
The Company expects that Restaurants operating within its franchise system will
emphasize quality "submarine" sandwiches. In order to satisfy customer
expectations regarding menus and service, the Company requires substantial
uniformity among all Restaurants. All Restaurants must conform to the decor and
menu specifications of the Company. The Owner is not allowed to sell any goods
or services at a Restaurant other than those goods and services specified by the
Company.
Franchise Marketing Programs
In order to facilitate the marketing of franchised Restaurants, the Company
devotes resources for national print media, sales staff, marketing materials,
and trade shows. In addition, the Company has specific programs to market its
franchises, including the following:
Discovery Day. Discovery Day is a day-long event regularly scheduled
in Denver to introduce potential Owners from throughout the country
to the Quizno's concept.
Toll Free Phone Line. The Company has installed a toll free phone line
(1-800-DELI-SUBS) which rings directly into the Franchise Sales Department. The
information is entered into a data base of Owner inquiries and an informational
package mailed to the caller.
Open Houses. The Company has an ongoing program of hosting open houses
throughout the country in conjunction with its Area Directors. Individuals who
have expressed an interest in the Company's franchise are invited to open
houses.
Computerized Data Base of Franchise Inquiries. The Company has installed a
computer network within its Franchise Sales Department for the purpose of
organizing, managing, and tracking individuals who inquire about the Company's
franchise.
National Advertising. The Company continues to advertise nationally
for new Franchisees on a regular and consistent basis in national,
regional and local publications.
Company Owned Restaurants
The Company currently owns and operates 24 Quizno's Restaurants, 16 of which are
located in Colorado and 8 of which are located in Kansas. In 1998, Company-owned
Restaurants generated $560,880 in earnings. The Company also currently owns and
operates 4 Quizno's Restaurants held for resale which incurred losses totaling
$260,053 in 1998.
While the Company expects to add new Company owned Restaurants from time to
time, the Company expects most of its growth in the foreseeable future to result
from the development of franchised Restaurants.
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In addition, the Company, from time to time, acquires or assumes the operation
of franchised Restaurants where the Franchisee has 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 Owner. Occasionally the Company may
incur short term losses in such cases. However, the royalty stream provided over
the long term by the new Owner will normally offset or exceed any such losses.
Advertising
Quizno's advertising staff develops advertising campaigns for use at all levels
to support consumer sales in all of its locations. A marketing fee currently
equal to 1% of gross sales is paid to the Company by Owners, which is deposited
into a "national" advertising fund to be used to develop advertising to attract
customers to the Restaurants and to create awareness of the Quizno's brand
image. Campaigns developed using the "national" fund are created with
television, radio and print elements, which are available to each local Quizno's
market. Coverage has historically been local or regional, but in 1998, the
Company launched its first national cable television campaign, and plans to
continue and increase national coverage in 1999.
Each Restaurant is required to spend another 3% to 4% of sales for local
advertising or promotions. Funds may be used to purchase media schedules for
Company produced TV, radio, print ads, or any other approved media. A number of
markets with a concentration of Restaurants have formed separate advertising
cooperatives which coincide with the area of dominant influence of local
television broadcast stations. These cooperatives pool their advertising fees to
jointly purchase media.
New Programs
The Company has, and will continue to develop new programs that will augment its
Restaurant operations and facilitate the marketing of new franchised
Restaurants.
Decentralized Franchise Support. In 1998, the Company instituted a "High
Performance Team" program, in which regional teams of corporate personnel
support Area Directors in selling franchises, opening stores, and supporting
Franchisees. The teams include corporate employees who specialize in sales, real
estate, design and construction, and Restaurant operations. There are currently
three teams, and the Company believes that this program will accelerate openings
and help provide increased operational consistency throughout the chain.
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Foreign Operations
In 1997, the first non-U.S. Quizno's Restaurant was opened in Vancouver, British
Columbia. Since then, the Company has sold the rights to operate Restaurants in
all of Canada to a group of Canadian entrepreneurs and the rights to operate
Restaurants in all of Japan to a group of Japanese entrepreneurs. The Company
recently sold the rights to operate Restaurants in the United Kingdom to the
group of Canadian entrepeneurs, and the rights to operate Restaurants in
Australia to an Australian group. The Company continues to discuss further sales
of rights in other countries. While international operations involve risks that
do not exist in domestic operations, such as adverse fluctuation in foreign
exchange rates, monetary exchange controls, foreign government regulation of
business relationships, and uncertainty of intellectual property protection, the
Company believes that the rewards of expanding the market for the Company's
services to selected foreign countries outweighs such risks.
Competition
Restaurant Operations. The restaurant industry is highly competitive with
respect to price, service, food quality and location and there are numerous
well-established competitors possessing substantially greater financial,
marketing, personnel and other resources than the Company. The Company will be
required to respond to various factors affecting the restaurant industry,
including changes in consumer preferences, tastes and eating habits, demographic
trends and traffic patterns, increases in food and labor costs and national,
regional and local economic conditions.
The Company competes in the sandwich segment of the fast food industry, an
industry long dominated by hamburger chains. Subway(R), the nation's largest
submarine sandwich restaurant chain, has grown significantly in recent years and
had over 12,000 units opened at December 31, 1998. The expansion of Subway has
drawn attention to submarine sandwiches, during a time of growing concern
relating to beef and fried foods. The Company believes that the submarine
sandwich segment is underdeveloped, and that demand for submarine style
sandwiches will continue to grow. Blimpie(R), the second largest submarine
sandwich chain, had 2,060 (domestic and international) units open as of December
31, 1998. Most of the other submarine sandwich chains currently are primarily
local or regional. As of December 31, 1998, the Company had 494 franchised
Restaurants operating (including 45 Bain's Deli units), making the Company the
third largest submarine sandwich chain in the United States.
The Company's major competitors, including Blimpie, have followed Subway closely
in the style and quality of the product, creating very little, if any
differentiation in the market. Subway offers a low-cost product in a fast food
style restaurant with limited seating. The Company has positioned the
Restaurants between the traditional fast food restaurant style of its submarine
sandwich competitors and full-service dining, and has focused on higher quality
food products, to distinguish the Restaurants from their competitors.
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Franchise Competition. In addition to its Restaurant operations, the Company
competes with fast food chains, major restaurant chains and other franchisors
for Franchisees. Many franchisors, including those in the restaurant industry,
have greater market recognition and greater financial, marketing and human
resources than the Company. The Company believes that it can compete
successfully for Franchisees for several reasons. The total cost of opening a
Quizno's Restaurant tends to be lower than that of hamburger fast food and
full-service dining restaurants. The ratio of sales revenue per restaurant to
restaurant opening costs is also better for Quizno's Restaurants than for most
of its competitors. Finally, the ambiance of Restaurants offers a Franchisee a
unique pride in ownership.
Government Regulations
The Company is subject to Federal Trade Commission ("FTC") regulation and
several state laws which regulate the offer and sale of franchises. The Company
is also subject to a number of state laws which regulate substantive aspects of
the franchisor-franchisee relationship. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires the Company to furnish to prospective
franchisees a franchise offering circular containing information prescribed by
the FTC Rule.
State laws that regulate the offer and sale of franchises and the
franchisor-franchisee relationship presently exist in a substantial number of
states. State laws that regulate the offer and sale of franchises require
registration of the franchise offering with state authorities. Those that
regulate the franchise relationship generally require the franchisor to deal
with its franchisees in good faith, prohibit interference with the right of free
association among franchisees, limit the imposition of standards of performance
on a franchisee and regulate discrimination against franchisees in charges,
royalties or fees. Although such laws may restrict a franchisor in the
termination of a franchise agreement by, for example, requiring "good cause" to
exist as a basis for the termination, advance notice to the franchisee of the
termination, an opportunity to cure a default and a repurchase of inventory or
other compensation, these provisions have not had a significant effect on the
Company's franchise operations. The Company is not aware of any pending
franchise legislation which in its view is likely to affect significantly the
operations of the Company. The Company believes that its operations comply in
all material respects with the FTC Rule and the applicable state franchise laws.
Each franchised Restaurant, and each Company-owned Restaurant, is subject to
licensing and regulation by a number of governmental authorities, which may
include health, sanitation, safety, fire, building and other agencies in the
state or municipality in which the Restaurant is located. Difficulties in
obtaining or failure to obtain the required licenses or approvals could delay or
prevent the development of a new Restaurant in a particular area. The Company is
subject to federal and state environmental regulations, but these have not had a
material effect on the Company's operations. More stringent and varied
requirements of local governmental bodies with respect to zoning, land use and
environmental factors could delay or prevent the development of a new Restaurant
in a particular area.
- 9 -
<PAGE>
The Company is also subject to state and federal labor laws that govern its
relationship with its employees, such as minimum wage requirements, overtime,
working conditions and citizenship requirements. Significant numbers of food
service and preparation personnel are paid at rates governed by the federal
minimum wage. Accordingly, increases in the benefits under any of these laws
would increase labor costs to the Company and its Franchisees.
Trademarks
The Company presently owns the following trademarks or service marks (the
"Marks"), each of which is registered on the Principal Register of the United
States Patent and Trademark Officer:
Mark Registration Registration Date
Number
"QUIZNO'S" service mark 1,317,420 January 29, 1985
"QUIZNO'S" service mark 1,317,421 January 29, 1985
"QUIZNO'S & Design" service mark 1,716,834 September 15,
1992
"QUIZNO'S EXPRESS CLASSIC SUBS" 2,086,598 September 19,
service mark 1996
"CHEEZE LOUISE & Design" service 2,125,221 December 30, 1997
mark
The Quizno's Acquisition Company, a subsidiary of the Company, grants current
Bain's Deli franchisees the non-exclusive right to use the following trademarks
for the operation of their Bain's Deli Restaurants: "BAIN'S CAFETERIA"
trademark, Registration Number 959,079 (May 15, 1973); and "BAIN'S" trademark,
Registration Number
1,640,049 (April 2, 1991).
The Company also filed an application for registration of a new "QUIZNO'S SUBS
OVEN BAKED CLASSICS and Design" service mark on March 9, 1998, and that
application is pending. In addition, the Company has filed applications to
register its trademarks in the European Union, Australia, Canada, and Japan.
There are no presently effective determinations of the United States Patent and
Trademark Office, the trademark trial and appeal board, the trademark
administrator of any state or any court, nor are there any pending infringement,
opposition or cancellation proceedings or material litigation, involving the
Marks. There are no other agreements currently in effect which significantly
limit the Company's right to use or license the use of the Marks.
Research and Development
The Company conducts ongoing development of new menu items and tests such
products, as well as new Company-developed food marketing aids, in selected
Quizno's outlets. Although such research and development activities are
important to the Company's business, its expenditures for these activities have
not historically been material.
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<PAGE>
Employees
As of December 31, 1998, the Company employed 61 full-time employees. In
addition, the Company employed 71 full-time and 138 part-time employees in its
Company-owned Restaurants. The Company's employees are not covered by any
collective bargaining agreement and management believes its employee relations
are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its headquarters office space of 7,462 square feet at 1099
18th Street, Suite 2850, Denver, Colorado. The Company recently executed a new
lease for its headquarters at 1415 Larimer Street, Denver, Colorado, which
contains 13,368 square feet. The Company expects to move to its new headquarters
on or about June 1, 1999. The Company leased the premises for each of the 29
Company-owned and operated Restaurants at December 31, 1998, as follows:
1. 12201 E. Arapahoe Rd., #B7 Englewood, CO 80112 2,486 sq. feet
2. 6525 Gunpark Dr. Boulder, CO 80301 1,976 sq. feet
3. 191 Blue River Parkway Silverthorne, CO 80498 931 sq. feet
4. 8081 E. Orchard Rd., #67 Greenwood Village, CO
80111 3,166 sq. feet
5. 2875 Pearl St., Unit A Boulder, CO 80301 2,450 sq. feet
6. 9425 S. University Blvd. Highlands Ranch, CO 1,919 sq. feet
80126
7. 1275 Grant Street Denver, CO 80203 1,400 sq. feet
8. 1250 S. Hover Rd., Bldg. 8A Longmont, CO 80501 2,350 sq. feet
9. 1660 Lincoln St., # 105 Denver, CO 80264 1,660 sq. feet
10. 10450 West Colfax Lakewood, CO 80215 1,992 sq. feet
11. 4495 North Washington Denver, CO 80216 1,903 sq. feet
12. 11211 120th Ave., # 73A Kenosha, WI 53142 1,214 sq. feet
13. 14413 W. Colfax Lakewood, CO 80401 1,300 sq. feet
14. 999 18th Street, # 136 Denver, CO 80202 1,360 sq. feet
15. 3507 Manchester Expr., #F10 Columbus, GA 31909 613 sq. feet
16. 2236 Cove Blvd., #FC2236 Panama City, FL 32405 687 sq. feet
17. 250 Granite Street Braintree, MA 02184 775 sq. feet
18. 999 S. Washington St.(Bains) N. Attleborough, MA
02760 464 sq. feet
19. 270 W. 14th St. Denver, CO 80204 1,700 sq. feet
20. 4403 S. Tamarac Pkwy. Denver, CO 80237 2,420 sq. feet
21. 818 17th Street Denver, CO 80202 1,800 sq. feet
22. 2401 W. Central El Dorado, KS 67042 1,800 sq. feet
23. 738 N. Waco Wichita, KS 67203 1,151 sq. feet
24. 4100 E. Harry, #55 Wichita, KS 67218 1,850 sq. feet
25. 3300 N. Rock Rd. Wichita, KS 67226 1,840 sq. feet
26. 2792 S. Seneca Wichita, KS 67217 1,700 sq. feet
27. 2407 W. 21st St. Wichita, KS 67203 1,225 sq. feet
28. 602 N. Tyler Wichita, KS 67212 1,500 sq. feet
29. 678 E. 47th St. South Wichita, KS 67216 1,540 sq. feet
- 11 -
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Quizno's Corporation v. Robert W. Mitelhaus, No. 77 114 00187 98; American
Arbitration Association (Denver, Colorado). On August 1, 1998, the Company
terminated the area director agreement with Robert W. Mitelhaus, a California
Area Director. On the same day, the Company instituted an arbitration action
against Mitelhaus in Denver, Colorado, alleging that Mitelhaus had breached
various provisions of the area director agreement. On September 1, 1998,
Mitelhaus denied that he breached the area director agreement. Mitelhaus alleged
fraudulent termination of the area director agreement. In addition, Mitelhaus
alleged that the Company failed to refund or pay certain amounts he claims are
due to him, and that the Company violated various state and federal franchise
and securities laws by misstating revenues in publicly filed documents. Hearings
in this matter were held before the American Arbitration Association from March
8-16, 1999. During the hearings, the respondent demanded damages in excess of $4
million. The Company argued that should the arbitration panel find the
Respondent entitled to damages, the amount should not exceed $450,000, which the
Company believes is the value of the Territory as of the date the Respondent's
area director agreement was terminated. The Company believes that any award to
the Respondent will not exceed the value of that Territory (as determined by the
Arbitration panel), which the Company now owns.
In re Kirwin Ventures, L.L.C., Case No. 54 114 00312 98, American Arbitration
Association: Mibichu L.L.C, v. The Quizno's Corporation, No. 98-007226-CK
(Oakland County, Michigan). On June 29, 1998, Kirwin Ventures, L.L.C. and
Mibichu LLC, two Michigan franchisee entities owned by the same individuals,
filed an arbitration action and Michigan state court action against the Company
and certain of its subsidiaries and officers. The claims allege violations of
the Michigan Franchise Investment Law and misrepresentations in connection with
the franchise sale. The plaintiffs seek damages in excess of $400,000 in each
case. The Company intends to deny each claim and is confident that it complied
with all regulatory requirements as well as acted in good faith.
Larry and Carlene Wagner and Lester Clemetson v. The Quizno's Corporation and
Anthony Kruse. (No. 98-2-11502-5SEA) (King County, Washington). This action (the
"State Court Action") was brought against the Company on May 11, 1998, by a
former franchisee who had abandoned its Restaurant and opened a competing
restaurant. After receiving notice from the Company that the franchisee was in
breach of the post-term non-competition covenants of the franchise agreement,
the franchisee filed this action alleging failure to comply with Washington
state franchise disclosure rules and the Washington Consumer Protection Act. The
Complaint seeks damages in excess of $200,000 plus consequential and exemplary
damages. On or about July 16, 1998, the Company filed a Petition in the United
States District Court for the District of Colorado (Civil Action No. 98-B-1535)
to Compel Arbitration in Denver of the disputes set forth in the Complaint. The
Company also moved, on or about July 17, 1998, to stay the State Court Action
Pending Arbitration. On or about July 29, 1998, the parties entered into a
Stipulation staying the State Court Action pending final resolution of the
parties' claims in arbitration.
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<PAGE>
By Order dated November 17, 1998, the United States District Court for the
District of Colorado granted the Company's Petition to Compel Arbitration. The
Company subsequently filed a Motion for Attorneys' Fees and Costs it had
incurred in compelling arbitration. That Motion was granted by Order dated
February 9, 1999. The Company also filed, with the Denver, Colorado office of
the American Arbitration Association, a Demand for Arbitration against the
plaintiffs. The Demand seeks, among other things, a declaration that the Company
has no liability for the claims asserted in the State Court Action and an
injunction enforcing the terms of the post-term non-competition agreement in the
parties' Franchise Agreement. The district court entered a judgment awarding the
Company its attorneys' fees and costs on February 12, 1999. The Company intends
to also file claims against the Wagners in connection with their operation of a
competing Restaurant.
On December 9, 1998, the Company filed an action in the District Court, City and
County of Denver, Colorado entitled The Quizno's Corporation and The Quizno's
Acquisition Company vs. Bain's Deli Franchise Associates, LP. Bain's Deli
Franchise Corp., Gemini Enterprises, Ltd, Jolles Corporation #4, Gemini One
Inc., and Jordan A. Katz, individually and as shareholder of Gemini One. Inc,
Gemini Enterprises, Ltd. and Bain's Deli Franchise Associates, L.P., Civil
Action No. 98-9333. The Company alleged that the Defendants had made material
misrepresentations in connection with the sale of the Bain's Deli franchise
system to The Quizno's Acquisition Company in 1997. The Company seeks damages of
the amounts paid of over $220,000, recission of the purchase agreement,
recission of a $579,510.00 note, recission of 18,182 shares of the Company's
stock, indemnification, fees and costs. The Defendants removed the case to the
Federal District Court of Colorado and the case number is now 98-N-55. The
Defendants have filed counterclaims alleging breach of the underlying purchase
agreement. The Defendants seek $579,510.00 plus fees, costs and treble damages.
The Company intends to vigorously pursue its claims and vigorously defend
against the allegations in the counterclaims.
From time to time, the Company is involved in litigation and proceedings arising
out of the ordinary course of its business. Other than the foregoing, there are
no other pending material legal proceedings to which the Company is a party or
to which the property of the Company is subject. It is the opinion of management
that the liability, if any, arising from all pending claims and lawsuits will
not have a material adverse impact upon the Company's consolidated earnings or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of its fiscal year ended December 31, 1998.
- 13 -
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the NASDAQ Small-Cap Issues Market under
the symbol "QUIZ." The following table shows high asked, low bid and close price
information for each quarter in the last two calendar years as reported by
Prophet Information Services, Inc., a provider of online historical stock price
data for all major U.S. securities markets. Such quotations reflect inter-dealer
prices, without retail mark-ups, markdowns or commissions, and may not
necessarily represent actual transactions. On March 24, 1999, the stock closed
at $7.38.
Fiscal Year Ended December 31,
1997
High Low Close
First Quarter $ 3.63 $ 2.94 $ 3.13
Second Quarter $ 4.44 $ 3.00 $ 4.13
Third Quarter $ 6.88 $ 3.81 $ 5.00
Fourth Quarter $ 6.38 $ 4.50 $ 4.88
Fiscal Year Ended December 31,
1998
High Low Close
First Quarter $ 5.88 $ 4.44 $ 5.88
Second Quarter $ 9.00 $ 6.00 $ 8.19
Third Quarter $ 8.38 $ 7.25 $ 8.13
Fourth Quarter $ 8.06 $ 6.50 $ 7.63
There were approximately 151 holders of record (and approximately 1,000
beneficial owners) of the Company's Common Stock as of March 16, 1999. The first
number includes shareholders of record who hold stock for the benefit of others.
The Company does not expect to pay any dividends on its Common Stock in the
foreseeable future. Management currently intends to retain all available funds
for the development of its business and for use as working capital.
During the last quarter of the fiscal year ending December 31, 1998, the
following securities were sold by the Company without registration with the
Securities and Exchange Commission pursuant to the exemption noted:
Number
Securities of Exemptions
Sold Date Shares Consideration Purchasers Claimed
- ----------- ------ -------- --------------- -------------- ------------
Common Stock 11/5/98 635 $5,172 Plan Quizno's 401(k) Section 4(2)
obligation
- 14 -
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
In 1998, the Company was profitable for the year and for each of the four
quarters in 1998, completing its 6th consecutive profitable quarter on December
31, 1998. The Company ended the year with almost 500 Restaurants open, another
388 Restaurants sold and scheduled to open in the future, 29 Company owned
Restaurants, 81 area directorships owned by 68 Area Directors, and two
international master franchisees. Management believes it has built a strong
foundation for the Company upon which growth can continue along with regular
profits. In 1998 the Company earned $1,112,615 compared to a loss of $89,618 in
1997 (amounts are before preferred stock dividends).
On a quarterly basis, earnings by business segment reflect continued overall
improvement over the last eight quarters.
Franchise Company
Operations Stores Other Net
----------- ---------- ---------- ---------
1st Quarter 1997 $ 7,272 $ 966 $(226,144) $(217,906)
2nd Quarter 1997 103,631 70,279 (223,266) (49,356)
3rd Quarter 1997 214,261 118,347 (228,550) 104,058
4th Quarter 1997 357,876 102,059 (386,349) 73,586
1st Quarter 1998 291,888 107,384 (257,593) 141,679
2nd Quarter 1998 482,699 166,386 (400,411) 248,674
3rd Quarter 1998 463,868 203,556 (388,917) 278,507
4th Quarter 1998 708,022 83,554 (347,821) 443,755
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<PAGE>
The following table reflects the Company's revenue growth by source and the
Company's Restaurants for the past five years:
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- --------- -------- --------
(000's)
Continuing fees $ 5,837 $ 2,748 $ 1,591 $ 1,046 $ 779
Initial franchise fees 2,884 2,269 1,164 593 390
Area director fees 3,022 2,139 1,421 1,380 326
Other 863 731 398 356 354
-------- -------- --------- -------- --------
Franchise revenue 12,606 7,887 4,574 3,375 1,849
Sales by Company owned
stores 6,849 4,071 2,681 3,011 604
Sales by stores held
for resale 1,282 149 231 143 194
-------- -------- --------- -------- --------
Total revenue $ 20,737 $ 12,107 $ 7,486 $ 6,529 $ 2,647
======== ======== ========= ======== ========
Percent increase 71% 62% 15% 147%
======== ======== ======== ========
Restaurants open,
beginning 327 156 105 66 40
New Restaurants opened 187 140 67 39 27
Restaurants acquired 8 52 - -
Restaurants closed (28) (16) (12) - (1)
Restaurants closed,
scheduled to reopen - (5) (4) - -
-------- -------- --------- -------- --------
Restaurant open, end 494 327 156 105 66
======== ======== ========= ======== ========
Franchises sold,
domestic 401 180 172 50 37
Franchises sold,
international 87 11 1 - -
-------- -------- --------- -------- --------
Total franchises sold 488 191 173 50 37
======== ======== ========= ======== ========
Initial franchise fees
collected (000's) $ 5,670 $ 2,920 $ 1,744 $ 1,040 $ 710
Systemwide sales $102 $55 $36 $26 $19
million million million million million
Average unit volume (1) $339,000 $316,259 $300,580 $322,000 $363,000
Same store sales (2)(3) Up 10.7% Up 1.3% Down 0.2% Down 7.3% Up 4.1%
(1) Excludes Restaurants located in convenience stores and gas stations.
Includes only Restaurants open at least one year under the same ownership.
(2) Same store sales for 1998 is based on 109 stores open all of 1997 and
1998. Stores which transferred ownership during this period, or were in
substantial default of the franchise agreement at December 31, 1998, are
excluded.
(3) Because the Company is and will continue to be in an aggressive growth
mode over the next few years, it is anticipated that same store sales will
fluctuate as Restaurants are included from more start up markets.
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<PAGE>
Results of Operations
Comparison of Years Ended December 31, 1998 and 1997
Franchise revenue increased 60% in 1998 to $12,606,113 from $7,887,447 in 1997.
Total revenue increased 71% in 1998 to $20,736,754 from $12,107,662 in 1997. The
revenue increase resulted primarily from continuing fees and Company store
sales.
Continuing fees increased 112% to $5,836,822 from $2,747,955 in 1997. Continuing
fees are comprised of royalties and licensing fees.
Royalty fees increased 97% to $5,411,386 from $2,747,955 in 1997. Royalty fees
are a percentage of each Franchisee's sales paid to the Company and will
increase as new franchises open, as the average royalty percentage increases,
and as average unit sales increase or decrease. At December 31, 1998, there were
465 franchises open (including Bain's), as compared to 308 franchises open at
December 31, 1997. The royalty rate was 5% for agreements entered into prior to
February 11, 1995, 6% for all franchise agreements entered into from February
11, 1995 through March 31, 1998 and 7% for all agreements entered into since
March 31, 1998. The Company has no immediate plans to further increase the
royalty rate.
Included are 45 Bain's franchises acquired on November 12, 1997, which pay
royalties at rates ranging from 0% to 5%, and account for $282,685 in 1998
royalty revenue and $72,347 in 1997 royalty revenue.
Licensing fees are generated through the licensing of the Quizno's trademark for
use by others. Licensing fees are expected to continue and to increase as
systemwide sales and the awareness and value of the Quizno's brand increases.
For 1998, licensing fees were $425,436. There was no licensing fee revenue in
1997.
Initial franchise fees increased 27% in 1998 to $2,883,650 from $2,269,001 in
1997. Initial franchise fees are one-time fees paid by Franchisees at the time
the franchise is purchased. Initial franchise fees are not recognized as income
until the period in which all of the Company's obligations relating to the sale
have been substantially performed, which generally occurs when the franchise
opens. The Company's share of initial franchise fees sold by foreign master
franchisees is recognized when received. In 1998, the Company opened 187
franchises, including 26 international Restaurants, as compared to 140,
including 7 international Restaurants, opened in 1997. The Company's initial
franchise fee has been $20,000 since 1994. Franchisee's may purchase a second
franchise for $15,000 and third and subsequent franchise for $10,000. The
initial franchise fee for a Quizno's Express franchise is $10,000 for the first,
$7,500 for the second, and $5,000 for the third and additional franchises
purchased by the same Franchisee. The Company's share of initial franchise fees
for international Restaurants is generally 30% of the sales price and will vary
depending on the country and the currency exchange rate.
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<PAGE>
Initial franchise fees collected by the Company for domestic franchise sales are
recorded as deferred initial franchise fees until the related franchise opens.
Deferred initial franchise fees at December 31, 1998 were $4,781,946 and
represent 308 domestic franchises sold but not yet in operation, compared to
$2,148,662 at December 31, 1997 representing 142 domestic franchises sold but
not open. Approximately 80 international franchises had been sold but were not
open at December 31, 1998 (5 at December 31, 1997). 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 December 31,
1998 were $926,226. Approximately 50% of all domestic initial franchise fees
received by the Company are paid to Area Directors for sales and opening
commissions.
The Company did not sell or open any Bain's franchises in 1998 or 1997 nor does
it expect to in the future.
Area director and master franchise fees increased 41% in 1998 to $3,022,276 from
$2,139,080 in 1997. Area director fees are one-time fees paid to the Company for
the right to sell franchises in a designated, non-exclusive, area, including
international markets.
Domestic area director fees were $1,688,276 in 1998 compared to $2,020,330 in
1997. The fee for U.S. areas was $.03 per person in the designated area through
June 1996, $.035 from July 1996 through December 1996, $.05 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 1998, the Company sold 16 new area
directorships including 11 existing Area Directors who purchased additional
territory, as compared to 28 area directorships sold in 1997. At December 31,
1998, the Company had a total of 81 area directorships owned by 68 Area
Directors who owned areas encompassing approximately 75% of the population of
the United States.
International master franchise fees earned were $1,334,000 in 1998 and $118,750
in 1997. The 1998 fees were for Canada, $514,000, Japan, $350,000, and the
United Kingdom, $470,000. The 1997 fees were for the province of British
Columbia, Canada. An additional $1,332,848 is due the Company for the Japan area
fee in 1999, which will be recorded as revenue when paid.
The Company offers domestic and international area applicants financing for up
to 50% of the area fee. The amount financed is required to be paid to the
Company in installments over five years at interest rates between 6% and 15%.
The promissory notes are personally signed by the Area Director and, depending
on the personal financial strength of the Area Director, secured by collateral
unrelated to the area directorship, usually a second mortgage on the Area
Director's home. Of the 19 domestic and international areas sold in 1998, 12
used this financing for $1,926,438, representing 64% of the area director fees
recognized in 1998. In 1997, a total of $354,412 was financed, representing 17%
of area revenue.
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<PAGE>
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 2% in 1998 to $604,172 from $593,771 in 1997. Other
revenue is primarily amounts paid by equipment suppliers for design and
construction and bookkeeping fees charged Franchisee's for whom the Company
provided bookkeeping services. Amounts paid by equipment suppliers was $357,659
in 1998 compared to $145,993 in 1997. This amount will vary based on new store
openings. Since 1995, the Company's franchise agreement requires all new
Franchisees to utilize the Company's bookkeeping services, or a firm designated
by the Company to provide bookkeeping services, for their first 12 months of
operations. Bookkeeping fees were $172,382 in 1998 compared to $326,958 in 1997.
Bookkeeping fees declined, and are expected to be immaterial in the future,
because the Company out-sourced the function to a third party in 1998.
Sales and royalty commissions expense increased 82% to $4,266,024 (48.9% of
royalty and initial franchise fees) in 1998 from $2,346,746 (46.8% of royalty
and initial franchise fees) in 1997. Sales and royalty commissions are amounts
paid to the domestic Area Directors of the Company, commissions paid to other
sales agents and employees, and costs related to sales promotions and
incentives.
The Company's domestic 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. 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 Area
Director Marketing Agreement and in some cases, upon expiration of the area
director agreement, the commission paid is reduced to 1% of sales for 5 years.
General and administrative expenses increased 34% to $6,201,857 in 1998 from
$4,611,978 in 1997. As a percent of franchise revenue, general and
administrative expenses have fallen from 80% in 1995, 74% in 1996, 58% in 1997,
to 49% in 1998. General and administrative expenses include all the operating
costs of the Company. The increase is primarily due to the addition of employees
to service the rapidly growing network of Quizno's Franchisees and Area
Directors. Although general and administrative expenses will likely continue to
increase as the Company grows, management expects the rate of increase to
continue 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.
- 19 -
<PAGE>
Company owned stores earned $560,880 on sales of $6,848,737 in 1998 compared to
$291,651 on sales of $4,070,666 in 1997. During 1998 the Company operated stores
for a total of 197 store operating months. In 1997, the Company had a total of
118 store operating months. Sales per store month increased .5% in 1998 to
$34,677 from $34,497 in 1997.
At December 31, 1998 the Company had 24 (17 at December 31, 1997) Company owned
stores. During 1998 the Company acquired and converted to Company owned Quizno's
eight competitive sandwich shops in Wichita, Kansas, built and opened three new
Company owned Quizno's, purchased from Franchisees two Quizno's Restaurants,
reclassified as stores held for resale five Company owned Quizno's, and sold to
a Franchisee one Company owned stores. In 1997, the Company acquired three
Bain's sandwich shops, built and opened four new Company owned Quizno's, and
purchased from Franchisees five Quizno's Restaurants.
- 20 -
<PAGE>
Stores held for resale lost $260,053 on sales of $1,281,904 in 1998 compared to
a loss of $60,673 on sales of $149,549 in 1997. In 1998, the Company operated
eight stores held for resale, for a total of 71 store operating months. Two
Bain's units were returned to the seller in the first quarter and one Quizno's
Restaurant was sold to a Franchisee in the fourth quarter of 1998. In 1997, the
Company operated one Restaurant for three months and one store for ten months
which was then closed. At December 31, 1998, the Company operated four stores
held for resale (none at December 31, 1997).
Provision for bad debts was $285,308 in 1998 compared to $49,540 in 1997. The
1998 expense includes allowances for promissory notes due for stores purchased
from the Company subsequently closed.
Other expenses were $47,838 in 1998 compared to $64,544 in 1997. The 1998 and
1997 expense is primarily subleasing losses related to one store (two in 1997)
previously owned by the Company and sold to Franchisees.
Depreciation and amortization was $781,977 in 1998 and $406,444 in 1997. The
increase is due to the acquisition and development of seven new Company owned
Restaurants, the acquisition of the Bain's chain in late 1997, and certain other
tangible and intangible assets with short lives expensed beginning in late 1997
and 1998. A portion of the increase related to certain intangible assets fully
amortized in 1999 and thereafter not recurring.
Interest expense was $340,614 in 1998 and $290,019 in 1997. The increase is
primarily attributable to the interest on debt related to financing new Company
owned Restaurants and stores held for resale.
- 21 -
<PAGE>
Income tax benefit was $368,553 in 1998. There was no income tax benefit or
expense recorded in 1997. The Company's taxable income has historically exceeded
its book income primarily because initial franchise fees the Company receives
are taxable income in the year received and are book income in the year the
franchise opens. Consequently, the Company will not pay income taxes on this
income when it is recognized for financial reporting purposes. In 1998, the
Company used all of its tax net operating loss carryforwards and incurred a tax
liability. Accordingly, in 1998 the Company reduced the amount by which it had
recorded an impairment of its deferred tax asset in prior years and recorded the
tax benefit of prior years' net operating losses in 1998.
Liquidity and Capital Resources
Net cash provided by operating activities was $2,597,243 in 1998 compared to
$723,951 in 1997, an improvement of $1,873,292. The primary reason for the
improvement from 1997 to 1998 is the 1998 net income compared to the 1997 loss,
a turnaround of $1,202,233, the increase in net deferred franchise fees of
$2,060,093, less the increase in promissory notes accepted for area director
fees of $1,245,565 and the decrease of $641,068 associated with deferred income
taxes.
Net cash used in investing activities was $3,230,108 in 1998 compared to cash
used by investing activities of $2,620,457 in 1997. Cash used by investing
activities for both years was primarily related to the acquisition or
development of Company owned Restaurants. In addition, in 1997 cash was used to
acquire Bain's and was invested in short term A rated corporate bonds.
Net cash provided by financing activities was $773,836 in 1998 compared to cash
provided by financing activities of $330,463 in 1997. The 1998 amount was
primarily from financing Company owned Restaurants. The amount provided in 1997
was primarily from the sale of preferred stock less principal payments on debt.
At December 31, 1998, the Company had $690,030 invested in stores held for
resale. The stores held for resale are expected to be sold in 1999.
In the first quarter of 1998, the Company tested a program under which its Area
Directors had the right to elect to have all future Franchisee leases in the
Area Director's territory signed by The Quizno's Realty Company ("QRC"), a
wholly owned subsidiary of the Company. As a condition of the lease, the
landlord agrees not to look beyond QRC for payments. These locations would then
be subleased by QRC to the Franchisee, whose personal liability is limited to
one year. The Franchisee pays QRC an indemnification fee of $165 per month, pays
a one time lease processing fee to QRC of $2,200, and pays a security deposit to
QRC 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 QRC in
exchange for stock and a promissory note. As of December 31, 1998, 10 leases had
been executed under this program, and the Company is evaluating whether to
continue the program in the future.
- 22 -
<PAGE>
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.
On December 31, 1996, the Company completed a debt financing for $2 million of
which $500,000 was converted to preferred stock in December 1997. The $1,500,000
loan was payable interest only at 12.75%, $15,937.50 per month, through June
1998, interest and principal payments of $34,141 from July 1998 through November
2001, and a final balloon payment of $587,295 on December 31, 2001. In
connection with the loan, the lender has the right to purchase 372,847 shares of
the Company's common stock for $3.10 per share. On January 6, 1999 the Company
paid off the loan and redeemed the preferred stock at a cost of $1,854,000.
These funds were borrowed from a financial institution and is repayable over 7
years at an interest rate of 7.75%
As discussed elsewhere in this Report, on December 29, 1998, the Company
received a proposal from the majority shareholders of the Company to merge the
Company into a new company owned by them, pursuant to which all of the Company's
shareholders other than themselves, would receive cash for their Company shares.
Such proposal is subject to a number of conditions, which are listed elsewhere
in this Report. None of such conditions have yet been satisfied. If the proposed
transaction is in fact completed, the Company or its successors will incur
substantial debt in order to fund the cash payments to the minority
shareholders. The amount of such debt cannot be determined at this time. It is
expected that such debt will be secured by some or all of the Company's assets.
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 uses
a small amount of customized software, all of which has been developed by the
Company in the last twelve months, and has been written to be functional in the
year 2000. 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 has material risk from year 2000 issues.
- 23 -
<PAGE>
Forward-Looking Statements
Certain information discussed in this Form 10-KSB, and in particular in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," are forward-looking statements that involve risks
and uncertainties that might adversely affect the Company's operating results in
the future in a material way. Such risks and uncertainties include, without
limitation, the effect of national and regional economic and market conditions
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 for
locations 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 risks 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).
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 many of 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 severe 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 within the Company's distinctive culinary style that appeals to
an increasing market share. Finally, the intense competition in the restaurant
industry continues to challenge participants in all segments of this industry.
- 24 -
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
THE QUIZNO'S CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements and
Independent Auditors' Report
December 31, 1998, 1997 and 1996
- 25 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report......................................F - 1
Consolidated Financial Statements
Consolidated Balance Sheets...................................F - 2
Consolidated Statements of Operations.........................F - 3
Consolidated Statement of Stockholders' Equity................F - 4
Consolidated Statements of Cash Flows.........................F - 5
Notes to Consolidated Financial Statements........................F - 7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
The Quizno's Corporation and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheets of The Quizno's
Corporation and Subsidiaries as of December 31, 1998, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 The Quizno's
Corporation and Subsidiaries as of December 31, 1998, 1997 and 1996 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
March 2, 1999
Denver, Colorado
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Assets
<S> <C> <C> <C>
Current assets
Cash and cash equivalents .............................. $ 702,258 $ 561,287 $ 2,127,330
Short-term investments ................................. 1,541,423 538,188 --
Accounts receivable, net of allowance
for doubtful accounts of $20,000 (1998),
$38,231 (1997) and $51,077 (1996) (Note 8) ............ 857,280 545,109 363,602
Current portion of notes receivable
(Notes 3 and 8) ....................................... 1,212,522 598,486 501,255
Deferred tax asset (Note 13) ........................... 81,260 -- --
Other current assets ................................... 266,100 375,902 164,604
Assets of stores held for resale or under
development (Note 4) .................................. 690,030 593,675 116,229
------------ ------------ ------------
Total current assets ............................... 5,350,873 3,212,647 3,273,020
------------ ------------ ------------
Property and equipment at cost, net
(Notes 2 and 5) ........................................ 3,535,222 2,240,661 1,458,979
------------ ------------ ------------
Other assets
Intangible assets, net (Notes 2 and 6) ................. 1,553,522 1,651,637 557,483
Deferred assets (Notes 7 and 13) ....................... 1,854,179 914,762 937,450
Deposits and other assets (Note 2) ..................... 119,883 76,294 37,630
Notes receivables, net (Notes 3 and 8) ................. 1,375,872 734,495 575,222
------------ ------------ ------------
Total other assets ................................. 4,903,456 3,377,188 2,107,785
------------ ------------ ------------
Total assets ............................................ $ 13,789,551 $ 8,830,496 $ 6,839,784
============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ....................................... $ 1,317,085 $ 1,065,374 $ 1,053,028
Accrued liabilities .................................... 532,324 489,848 170,728
Line-of-credit (Note 9) ................................ -- -- 100,000
Current portion of long-term obligations
(Notes 8 and 10) ...................................... 370,404 303,084 375,595
Current portion of subordinated debt
(Note 10) ............................................. 244,084 110,912 --
Income taxes payable (Note 13) ......................... 200,000 -- --
------------ ------------ ------------
Total current liabilities .......................... 2,663,897 1,969,218 1,699,351
Line-of-credit (Note 9) ................................. -- -- 120,239
Long-term obligations (Notes 8 and 10) .................. 964,984 741,570 203,801
Convertible subordinated debt (Note 10) ................. 1,130,916 1,389,088 2,000,000
Deferred revenue ........................................ 4,781,946 2,148,662 1,575,471
------------ ------------ ------------
Total liabilities .................................. 9,541,743 6,248,538 5,598,862
------------ ------------ ------------
Commitments and contingencies (Notes 4, 11
and 14)
Minority interest in Subsidiary (Note 2) ................ 151,601 -- --
Stockholders' equity (Notes 10 and 12)
Preferred stock, $.001 par value,
1,000,000 shares authorized;
Series A issued and outstanding 146,000 ............... 146 146 146
(1998, 1997 and 1996) ($876,000
liquidation preference)
Series B issued and outstanding 100,000
(1998), 100,000 (1997) and 0 (1996) ................... 100 100 --
($500,000 liquidation preference)
Series C issued and outstanding 167,000
(1998), 167,000 (1997) and 0 (1996) ................... 167 167 --
($835,000 liquidation preference)
Common stock, $.001 par value; 9,000,000
shares authorized; issued and
outstanding, 3,054,459 (1998), 2,923,294 .............. 3,054 2,923 2,865
(1997) and 2,864,757 (1996)
Capital in excess of par value ........................ 5,065,247 4,663,744 3,233,415
Accumulated deficit ................................... (972,507) (2,085,122) (1,995,504)
------------ ------------ ------------
Total stockholders' equity ................... 4,096,207 2,581,958 1,240,922
------------ ------------ ------------
Total liabilities and stockholders' equity .............. $ 13,789,551 $ 8,830,496 $ 6,839,784
============ ============ ============
</TABLE>
F - 2
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Franchise operations:
Revenue (Note 8)
Continuing fees ..................... $ 5,836,822 $ 2,747,955 $ 1,590,673
Initial franchise fees .............. 2,883,650 2,269,001 1,164,500
Area director and master franchise
fees ............................... 3,022,276 2,139,080 1,421,555
Other ............................... 604,172 593,771 248,094
Interest ............................ 259,193 137,640 149,781
------------ ------------ ------------
Total revenue ................... 12,606,113 7,887,447 4,574,603
------------ ------------ ------------
Expenses
Sales and royalty commissions ....... (4,266,024) (2,346,476) (914,726)
Advertising and promotion ........... (191,755) (245,953) (239,209)
General and administrative .......... (6,201,857) (4,611,978) (3,400,802)
------------ ------------ ------------
Total expenses ................. (10,659,636) (7,204,407) (4,554,737)
------------ ------------ ------------
Income from franchise operations ...... 1,946,477 683,040 19,866
------------ ------------ ------------
Company store operations:
Sales ................................ 6,848,737 4,070,666 2,680,521
------------ ------------ ------------
Cost of sales ........................ (2,042,092) (1,309,624) (959,045)
Cost of labor ........................ (1,683,225) (1,037,101) (777,170)
Other store expenses ................. (2,562,540) (1,432,290) (857,472)
------------ ------------ ------------
Total expenses ................. (6,287,857) (3,779,015) (2,593,687)
------------ ------------ ------------
Income from Company stores operations . 560,880 291,651 86,834
Other income (expenses):
Research, development and new programs -- (72,161) (217,321)
Sales by stores held for resale ..... 1,281,904 149,549 231,371
Loss and expenses related to stores
held for sale ...................... (1,541,957) (210,222) (307,813)
Loss on sale or closure of Company
stores ............................. (47,505) (120,928) --
Provision for litigation settlement . -- -- (134,500)
Write-off of accounts and notes
receivable.......................... (285,308) (49,540) (224,063)
Other expenses ...................... (47,838) (64,544) (104,844)
Depreciation and amortization ....... (781,977) (406,444) (288,435)
Interest expense .................... (340,614) (290,019) (80,063)
------------ ------------ ------------
Total other expenses .......... (1,763,295) (1,064,309) (1,125,668)
------------ ------------ ------------
Net income (loss) before income taxes . 744,062 (89,618) (1,018,968)
Income tax benefit (Note 13) .......... 368,553 -- --
------------ ------------ ------------
Net income (loss) ..................... 1,112,615 (89,618) (1,018,968)
Preferred stock dividends ............. (220,890) (93,998) (56,940)
------------ ------------ ------------
Net income (loss) applicable to
common stockholders .................. $ 891,725 $ (183,616) $ (1,075,908)
============ ============ ============
Basic earnings (loss) per share of
common stock - basic ................. $ .30 $ (.06) $ (.38)
============ ============ ============
Weighted average common shares
outstanding - basic .................. 3,014,042 2,878,310 2,864,757
============ ============ ============
Earnings (loss) per share of common
stock - diluted ...................... $ .26 $ (.06) $ (.38)
============ ============ ============
Weighted average common shares
outstanding - diluted ................ 3,445,972 2,878,310 2,864,757
============ ============ ============
</TABLE>
F - 3
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------------- ------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- ----------- --------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995 146,000 $ 146 2,864,757 $ 2,865 $ 3,290,355 $ (976,536) $ 2,316,830
Preferred stock
dividends ........... -- -- -- -- (56,940) -- (56,940)
Net loss ............. -- -- -- -- -- (1,018,968) (1,018,968)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31,
1996 146,000 146 2,864,757 2,865 3,233,415 (1,995,504) 1,240,922
Issuance of
convertible Series
C preferred stock
for cash, net of
offering costs of
$36,454 (Note 12) ... 167,000 167 -- -- 798,379 -- 798,546
Issuance of Series
B convertible
preferred stock
for debt, net of
offering costs of
$44,277 (Note 10) ... 100,000 100 -- -- 455,623 -- 455,723
Inherent value of
warrants granted
to lender in
connection with
conversion at debt
to Series B
preferred stock
(Note 10) ........... -- -- -- -- 44,277 -- 44,277
Issuance of common
stock for
acquisition, (Note 2) -- -- 18,182 18 99,982 -- 100,000
Issuance of common
stock for exercise
of options and
pursuant to the
employee benefit
plan (Note 12) ...... -- -- 40,355 40 92,116 -- 92,156
Inherent value of
options granted to
area directors
(Note 12) ........... -- -- -- -- 33,950 -- 33,950
Preferred stock
dividend ............ -- -- -- -- (93,998) -- (93,998)
Net loss ............. -- -- -- -- -- (89,618) (89,618)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31,
1997 413,000 413 2,923,294 2,923 4,663,744 (2,085,122) 2,581,958
Issuance of common
stock for exercise
of options and
pursuant to the
employee benefit
plan (Note 12) ...... -- -- 51,165 51 222,473 -- 222,524
Issuance of common
stock for exercise
of options by
underwriter (Note 12) -- -- 80,000 80 399,920 -- 400,000
Preferred stock
dividends ........... -- -- -- -- (220,890) -- (220,890)
Net income ........... -- -- -- -- -- 1,112,615 1,112,615
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31,
1998 413,000 $ 413 3,054,459 $ 3,054 $ 5,065,247 $ (972,507) $ 4,096,207
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
F - 4
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) .......................... $ 1,112,615 $ (89,618) $(1,018,968)
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities -
Depreciation and amortization ............. 757,911 406,444 259,840
Write-off of accounts and notes
receivable ............................... 285,308 (12,846) 179,300
Loss on disposal of asset ................. 78,004 120,928 44,648
Issuance of stock for services ............ -- 16,349 --
Inherent value of options granted ......... -- 33,950 --
Deferred income taxes ..................... (641,068) -- --
Amortization of deferred financing
costs .................................... 24,066 54,072 --
Issuance of notes receivable for
master franchise and area director
agreeements .............................. (1,599,977) (354,412) (236,407)
Changes in assets and liabilities -
Accounts receivable ...................... (369,279) (168,661) (126,380)
Other assets ............................. 109,802 (192,997) 7,296
Accounts payable ......................... 251,711 12,346 339,582
Accrued liabilities ...................... 42,476 319,120 117,560
Other liabilities ........................ -- -- (12,101)
Deferred franchise costs ................. (287,610) 6,085 (231,650)
Deferred initial franchise fees .......... 2,633,284 573,191 266,316
Accrued income taxes ..................... 200,000 -- --
----------- ----------- -----------
1,484,628 813,569 608,004
----------- ----------- -----------
Net cash provided (used) by
operating activities ............... 2,597,243 723,951 (410,964)
----------- ----------- -----------
Cash flows from investing activities
Cash paid for acquisition .................. -- (623,800) --
Purchase of property and equipment ......... (1,780,767) (764,184) (626,157)
Proceeds from notes receivable ............. 889,671 553,007 273,421
Investment in turnkey stores ............... (281,620) (593,675) --
Short-term investments ..................... (1,003,235) (538,188) --
Issuance of other notes receivable ......... (773,307) (455,099) (305,089)
Investment by minority interest owners ..... 151,601 -- --
Intangible and deferred assets ............. (601,862) (294,853) (72,366)
Proceeds from sale of asset and stores ..... 213,000 135,000 13,716
Deposits ................................... (43,589) (38,665) (6,176)
Provision for store closure ................ -- -- (58,000)
----------- ----------- -----------
Net cash used by investing
activities ......................... (3,230,108) (2,620,457) (780,651)
----------- ----------- -----------
Cash flows from financing activities
Line-of-credit - net ....................... -- (220,239) (155,266)
Principal payments on long-term
obligations ............................... (505,440) (347,799) (196,099)
Proceeds from long-term obligations ........ 877,642 155,615 2,160,577
Loan costs ................................. -- (37,469) (117,749)
Proceeds from issuance of common stock
and preferred stock ....................... 622,524 910,807 --
Offering costs ............................. -- (36,454) --
Dividends paid ............................. (220,890) (93,998) (56,940)
----------- ----------- -----------
Net cash provided by financing
activities ........................ 773,836 330,463 1,634,523
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents ................................ 140,971 (1,566,043) 442,908
Cash and cash equivalents - beginning of year 561,287 2,127,330 1,684,422
----------- ----------- -----------
Cash and cash equivalents - end of year ..... $ 702,258 $ 561,287 $ 2,127,330
=========== =========== ===========
</TABLE>
F - 5
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information Cash paid during the year for
interest was $340,614 (1998), $290,019 (1997) and $80,063 (1996).
Cash paid during the year for income taxes was $72,515 (1998) and $0 (1997
and 1996).
Supplemental disclosure of non-cash investing and financing activities
During 1998, the Company transferred $220,227 of property and equipment to
assets of stores held for resale or under development.
Additionally in 1998, the Company reduced notes payable, pursuant to the
terms of the Bains purchase agreement, in the amount of $437,553.
Corresponding reductions in property and equipment ($150,000) and goodwill
($287,553) were also recorded.
During 1998, 1997 and 1996, the Company acquired assets under capital
leases totaling $231,085, $77,942 and $24,841, respectively.
During 1997, the Company converted $500,000 of subordinated debt to 100,000
shares of Series B convertible preferred stock net of $44,277 of deferred
offering costs.
Additionally in 1997, the Company acquired the assets of Bain's Deli
Franchise Associates, which included 52 franchise restaurants and three
company owned deli restaurants as follows:
Property and equipment $ 225,000
Non-compete agreement 1,060,000
Other assets 122,900
----------
$ 1,407,900
===========
Acquisition costs $ (104,600)
Cash paid (623,800)
Promissory note issued (579,500)
Common stock issued (100,000)
-----------
$(1,407,900)
===========
F - 6
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 1 - Description of Business and Summary of Significant
Accounting Policies
The Quizno's Corporation (the "Company") was incorporated on January 7, 1991, in
the State of Colorado, and is primarily engaged in the business of franchising
Quizno's quick service restaurants throughout the United States, Canada, United
Kingdom and Japan featuring submarine sandwiches, salads, soups, and
refreshments.
The Company's wholly owned subsidiaries are The Quizno's Operating Company
("QOC") incorporated in 1994 to own and operate Company stores, The Quizno's
Development Company ("QDC") incorporated in 1995 to develop stores to sell or
lease to franchisees, The Quizno's Realty Company ("QRC") incorporated in 1995
to execute leases for store locations, The Quizno's Acquisition Company ("QAC")
incorporated in 1997 to purchase existing unrelated quick service restaurants
and the Quizno's Licensing Company ("QLC") incorporated in 1998 to license
companies who use the Quizno's logos. In addition, in 1998, the Company
organized Quizno's Kansas LLC ("QKL"), and purchased the assets of Stoico
Restaurant Group (see below).
The following table summarizes the number of Quizno's restaurants open at
December 31, 1998:
Sold But Not
Yet in
Operation Operational Total
--------- ----------- ---------
Quizno's
- --------
Company owned restaurants - 16 16
Franchise restaurants 388 420 808
Restaurants held for resale - 4 4
Bain's
- -------
Restaurants held for resale - 1 1
Franchise restaurants - 45 45
Quizno's Kansas
- ---------------
Company owned restaurants - 8 8
--------- --------- ---------
388 494 882
========= ========= =========
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries QOC, QDC, QRC, QLC, QAC and a 52% owned
subsidiary, Classic Subs LLC and a 70% owned subsidiary, Quiznos Kansas, LLC.
F - 7
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 1 - Description of Business and Summary of Significant
Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Inventory
Inventory is included in other assets and is stated at the lower of cost or
market and consists of food and paper products. Cost is determined using the
first in, first out (FIFO) method.
Credit Risk
The Company grants credit in the normal course of business, primarily consisting
of royalty fees receivable and loans to area directors and its franchisees. To
reduce credit risk for U.S. franchises, the Company electronically debits the
franchisees bank account weekly for fees due the Company according to franchise
agreements entered into after 1993, and reserves the right to terminate
franchise and area director agreements for non-payment of amounts owed.
The Company's cash equivalents consists of short-term commercial paper with
original maturities not in excess of three months. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions it invests with. As of the balance sheet date, balances of cash and
cash equivalents exceeded the federally insured limit by approximately
$1,131,000.
Short-term Investments
The Company classifies its investment in corporate debt securities with original
maturities in excess of three months as short-term investments held-to-maturity.
The Company has the ability and intent to hold these securities until maturity.
Short-term investments are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Realized gains and losses
are recognized in earnings upon redemption. The specific identification method
is used to determine the cost of securities sold. Discounts or premiums are
accreted or amortized using the level-interest-yield method to the earlier of
the call date or maturity of the related security.
During 1998, unrealized gains and losses were immaterial as amortized cost
approximated market value.
F - 8
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 1 - Description of Business and Summary of Significant
Accounting Policies (continued)
Accounts Receivable/Royalties Receivable
At the time the accounts and royalties receivable are originated, the Company
considers a reserve for doubtful accounts based on the creditworthiness of the
franchisee. The provision for uncollectible amounts is continually reviewed and
adjusted to maintain the allowance at a level considered adequate to cover
future losses. The allowance is management's best estimate of uncollectible
amounts and is determined based on historical performance which is tracked by
the Company on an ongoing basis. The losses ultimately incurred could differ
materially in the near term from the amounts estimated in determining the
allowance.
Property and Equipment
Property and equipment is stated at cost. Equipment under capital leases is
valued at the lower of fair market value or net present value of the minimum
lease payments at inception of the lease. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 3 to 10 years, and the related lease term for leasehold improvements and
equipment under capital leases.
Deferred Financing Costs
Cost associated with obtaining debt financing are deferred and amortized on a
straight-line basis over the term of the debt.
Intangible Assets
The amounts paid by the Company for non-compete agreements are being amortized
over the term of the non-compete agreements.
The excess of the purchase price over net assets acquired for stores purchased
by the Company from unrelated third parties is recorded as goodwill and is
amortized over 15 years.
Other intangibles are recorded at cost and are amortized on the straight-line
basis over the contractual or estimated useful lives as follows:
Franchise agreements 12 years
Trademarks and other intangibles 3 - 15 years
F - 9
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 1 - Description of Business and Summary of Significant
Accounting Policies (continued)
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered. The Company looks primarily to the undiscounted future cash flows
in its assessment of whether or not long-lived assets have been impaired. At
December 31, 1998, the Company determined no impairment was appropriate.
Initial Franchise Fees and Related Franchise Costs
Management believes it is probable that all of the deferred franchise fees will
be realized. The amount of the deferred franchise fees considered realizable,
however, could be reduced in the near term if estimates of the future franchise
openings is reduced.
Initial franchise fees paid by U.S. franchises are recognized as revenue when
all material services and conditions required to be performed by the Company
have been substantially completed, which is generally when the franchise
commences operations. Initial franchise fees collected by the Company before all
material services and conditions are substantially performed are recorded as
deferred franchise sales revenue. Incremental development costs are deferred,
but not in excess of the deferred revenue and estimated cost to open the
Quizno's restaurant, and are expensed when the revenue is recognized.
Area Director Marketing Agreements
The area director marketing agreement provides the area director a non-exclusive
right to sell and open franchises in a defined geographic territory in the U.S.
and requires that the area director be responsible for advertising for,
soliciting and screening prospective franchisees. The agreements also require
the area director to sell and open a minimum of new franchised restaurants each
year or forfeit future rights to the territory. In addition, the area director
is responsible for identifying possible locations, providing on-site opening
assistance, and providing quality assurance services to franchises in the
defined area. The Company pays the area director 50% of the initial franchise
fee sold by the area director, and a fee of 40% of the royalty received by the
Company from each franchise within the defined area. The agreements are for a
period of ten years, with the option to extend for an additional ten years. The
area director is entitled to receive commissions during the term of the area
director marketing agreement and, in certain circumstances, the area director is
entitled to 1% of gross sales for franchise restaurants operating in the
territory as of the termination date of the area director agreement. The area
director marketing fee is $.07 per person living in the area director's
territory, plus a $10,000 training fee which is deferred until training has been
completed. Revenue is recognized when all material services and conditions
required to be performed by the Company have been substantially completed.
F - 10
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 1 - Description of Business and Summary of Significant
Accounting Policies (continued)
International Fees
The Company grants master franchise rights for the development of international
markets. The master franchisee will enter into individual franchise and area
director agreements for development within the franchised country, and will
assume all of the franchisor's obligations and duties under the agreement. The
Company is not a party to the individual franchise and area director agreements.
Generally, the master franchise agreement requires the master franchisee to pay
the Company a percentage, currently 30%, of all initial franchise fees,
royalties, and area fees collected by the franchisee. The Company recognizes
these fees when received by the Company.
The master franchise agreement provides the master franchisee an exclusive right
to sell and open franchises and grant area directorships in a defined geographic
territory. The master franchisee is responsible for providing all franchisor
services in the territory and must sell and open a minimum of new franchised
restaurants each year. The fee for master franchise agreements is based on the
population of the territory and will vary depending on certain economic,
demographic and cultural factors. Revenue is recognized when all material
services and conditions required to be performed by the Company have been
substantially performed, which is generally the date the fee is paid.
Royalties and Advertising Fees
Pursuant to the various franchise agreements, U.S. franchises are required to
pay the Company royalties and advertising fees based on a percentage of sales
ranging from 4% to 8% for royalties, and 1% to 4% for advertising fees.
Royalties as required by the franchise agreement are accrued based on a
percentage of gross sales, as reported by franchisees, and are included in
accounts receivable.
The Company does not recognize any portion of the advertising fees as revenue,
nor does it accrue such fees or consolidate the accounts of any of the
advertising funds as they are paid to and disbursed out of separate legal
advertising entities.
Income Taxes
The Company calculates and records the amount of taxes payable or refundable
currently or in future years for temporary differences between the consolidated
financial statement basis and income tax basis based on the current enacted tax
laws. Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated financial statements
that will result in taxable or deductible amounts in future years. The Company's
temporary differences result primarily from depreciation, deferred franchise
sales revenues and deferred franchise costs and net operating loss
carryforwards.
F - 11
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 1 - Description of Business and Summary of Significant
Accounting Policies (continued)
Basic and Diluted Loss Per Common Share
In accordance with FAS 128, basic earnings per share is computed by dividing net
income by the number of weighted average common shares outstanding during the
year. Diluted earnings per share is computed by dividing net income by the
number of weighted average common shares outstanding during the year, including
potential common shares, which for the years ended December 31, 1996, 1997 and
1998 consisted solely of convertible debt, stock options and warrants
outstanding (Note 12).
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, short-term investments, receivables, prepaids, current portion of
notes receivable, accounts payable and accrued expenses approximated fair value
as of December 31, 1998 because of the relatively short maturity of these
instruments.
The carrying amounts of long-term notes receivable approximate fair value as of
December 31, 1998 because the discounted cash flows at current rates approximate
the rates of the notes.
The carrying amounts of notes payable and debt issued approximate fair value as
of December 31, 1998 because interest rates on these instruments approximate
market interest rates.
Reclassifications of Prior Year Amounts
Certain reclassifications have been made to the balances for the years ended
December 31, 1997 and 1996 to make them comparable to those presented for the
year ended December 31, 1998, none of which change the previously reported net
income or total assets.
F - 12
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 1 - Description of Business and Summary of Significant
Accounting Policies (continued)
Recently Issued Accounting Pronouncements
In February of 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" (SFAS No. 132), which supercedes SFAS No.'s 87, 88, and 106. SFAS No.
132 addresses disclosure only and is effective for fiscal years beginning after
December 15, 1997. Restatement of disclosures for prior periods is required. The
adoption of SFAS No. 132 will have no current impact on the Company's financial
statements, as no prior disclosures under SFAS No. 87, 88, or 106 were
applicable.
During June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement 133 establishes new standards by
which derivative financial instruments must be recognized in any entity's
financial statements. Besides requiring derivatives to be included on balance
sheets at fair value, Statement 133 generally requires that gains and losses
from later changes in a derivative's fair value be recognized currently in
earnings. Statement 133 also unifies qualifying criteria for hedges involving
all kinds of derivatives, requiring that a company document, designate and
assess the effectiveness of its hedges. Statement 133 is required to be adopted
by the Company in 2000. Management, however, does not expect the impact from
this statement to have a material impact on the financial statement
presentation, financial position or results of operations.
The Company has not determined what additional disclosures, if any, may be
required by the provisions of Statement 132 and 133 but does not expect adoption
of these statements to have a material effect on its results of operations.
During April 1998, Statement of Position 98-5, "Reporting on the costs of Start
Up Activities" was issued. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is required to be
adopted by the Company in 1999. Upon adoption, the Company will be required to
write off approximately $140,000 in preopening related costs currently deferred
on the balance sheet as of December 31, 1998. This write-off will be reported as
a cumulative effect of a change in accounting principle.
Note 2 - Acquisition of Assets
In August 1998, QKL purchased 70% of Stoico Restaurant Group. At the same time
30% of QKL was sold to an unrelated area director for $150,000. The results of
operations from August 17, 1998 (date of acquisition) to December 31, 1998 have
been included in the 1998 consolidated financial statements. As of December 31,
1998, $1,601 was allocated to the minority owners for their portion of the
earnings. The amount has not been disclosed separately on the statement of
operations due to its immateriality. The acquisition has been accounted for
under the purchase method.
F - 13
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 2 - Acquisition of Assets (continued)
The Company's purchase price has been allocated to the assets purchased based on
the fair market values at the date of acquisition, as follows:
Property and equipment $184,000
Goodwill 259,118
Inventory 38,455
Other assets 18,427
--------
Assets acquired $500,000
========
Cash paid $500,000
========
The following unaudited pro forma data summarizes the results of operations for
the periods indicated as if the acquisition of Stoico had been completed as of
the beginning of the periods presented. The pro forma data gives effect to
actual operating results prior to the acquisition, adjusted to include
depreciation of fixed assets, amortization of intangibles and the elimination of
Stoico corporate expenses and revenues and expenses related to stores whose
store leases were not assumed or assigned as part of the acquisition. These pro
forma amounts do not purport to be indicative of the results that would have
actually been obtained if the acquisition occurred as of the beginning of the
periods presented or that may be obtained in the future.
December 31,
-------------------------
1998 1997
----------- -----------
Revenues and sales from Company owned stores $20,533,970 $14,124,530
Net income (loss) applicable to common
stockholders $ 1,037,166 $ (47,101)
Basic earnings (loss) per share $ .34 $ (.02)
Diluted earnings (loss) per share $ .30 $ (.02)
On January 26, 1998, the Company purchased the assets of Falcon Financial LLC 2
for a total purchase price of $150,000. The purchase was accounted for under the
purchase method.
F - 14
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 2 - Acquisition of Assets (continued)
The purchase price has been allocated to the assets purchased based on the fair
market values at the date of acquisition, as follows:
Equipment $ 50,000
Leasehold improvements 100,000
--------
$150,000
========
Cash paid as a deposit in 1997 $ 10,000
Cash paid at closing 10,000
Promissory notes 130,000
--------
$150,000
========
No pro forma statement of operations is presented as the effect would not be
material to the Company's operations.
Note 3 - Notes Receivable
Notes receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Notes receivable related to area director
marketing agreements, interest ranging
from 6% to 15%, due in varying amounts
through December 2004. $1,878,855 $853,028 $453,135
Notes receivable for sale of stores,
interest ranging from 6% to 15%, due in
varying amounts through October 2012. 410,058 494,318 434,383
Note receivable from national advertising
trust, interest at 10%, paid in full in
February 1999. 267,058 - -
</TABLE>
F - 15
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 3 - Notes Receivable (continued)
December 31,
---------------------------------
1998 1997 1996
---------- --------- ----------
Other notes receivable with interest
ranging from 0% to 11%, due in varying
amounts through 2011. Includes $21,524
(1998), $35,524 (1997) and $178,444 (1996) 32,423 125,635 328,959
-------- -------- ---------
due from the Advertising Fund (Note 8).
2,588,394 1,472,981 1,216,477
Less current portion (1,212,522) (598,486) (501,255)
--------- --------- ---------
1,375,872 874,495 715,222
Less allowance - (140,000) (140,000)
-------- -------- ---------
$1,375,872 $734,495 $ 575,222
========== ======== =========
At the time notes receivable are executed, the Company reserves an allowance for
doubtful collections. The provision for uncollectible amounts is continually
reviewed and adjusted to maintain the allowance at a level considered adequate
to cover future losses. The allowance is management's best estimate of
uncollectible amounts and is determined based on historical performance of the
notes which is tracked by the Company on an ongoing basis. The losses ultimately
incurred could differ materially in the near term from the amounts estimated in
determining the allowance. The Company collateralizes the notes with the area
directorship agreement, assets of the store sold or other related assets.
Future principal payments are as follows:
Year Ended December 31,
1999 $1,212,522
2000 235,068
2001 278,026
2002 309,444
2003 263,683
Thereafter 289,651
---------
2,588,394
Less allowance -
---------
$2,588,394
=========
F - 16
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 4 - Assets of Stores Held for Resale or Under Development
Included in assets of stores held for resale or under development are the
following:
December 31,
---------------------------------
1998 1997 1996
---------- --------- ----------
Furniture fixtures and equipment $221,034 $ - $ 29,999
Leasehold improvements 383,771 - 81,673
Goodwill and other 85,225 - 4,557
Stores under development - 593,675 -
-------- -------- --------
$690,030 $593,675 $ 116,229
======== ======== =========
During 1997, the Company was in the process of constructing four stores. At the
end of 1997, three of the four stores were operational and in 1998, the fourth
store became operational. In March 1998, one of the stores was sold as a
franchise for a sale price of $213,000. Cost incurred by the Company prior to
the sale amounted to approximately $234,000. The Company will operate the
remaining three stores until they can be sold as franchises.
Note 5 - Property and Equipment
Property and equipment consist of the following:
December 31,
Useful ---------------------------------
Life 1998 1997 1996
--------- ---------- --------- ----------
Equipment 3-10 years $1,524,799 $903,371 $ 267,061
Furniture and fixtures 7-10 years 764,672 390,435 271,727
Leasehold improvements Lease term
(Note 11) 1,712,215 1,297,334 1,138,461
Software 3-5 years 313,540 113,506 -
---------- --------- ---------
4,315,226 2,704,646 1,677,249
Less accumulated
depreciation and amortization (780,004) (463,985) (218,270)
---------- --------- ---------
Net property and equipment $3,535,222 $2,240,661 $1,458,979
========== ========== ==========
Depreciation expense for 1998 included depreciation on certain assets held for
resale that will not recur in future years if these assets are sold, as is the
intention of the Company.
F - 17
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 6 - Intangible Assets
Intangible assets consist of the following:
December 31,
---------------------------------
1998 1997 1996
---------- --------- ----------
Covenants not to compete $1,667,546 $1,664,759 $500,113
Franchise agreements 310,506 292,395 292,395
Goodwill (Note 14) 126,705 126,705 77,407
Trademarks and other 316,108 192,122 183,885
--------- -------- --------
2,420,865 2,275,981 1,053,800
Less accumulated amortization (867,343) (624,344) (496,317)
--------- -------- --------
$1,553,522 $1,651,637 $557,483
========== ========== =========
Note 7 - Deferred Assets
Deferred assets consist of the following:
December 31,
---------------------------------
1998 1997 1996
---------- --------- ----------
Deferred franchise costs $926,226 $638,616 $ 644,701
Deferred tax asset (Note 13) 734,808 175,000 175,000
Deferred financing costs 87,080 101,146 117,749
Other deferred costs 106,065 - -
-------- -------- --------
$1,854,179 $914,762 $ 937,450
========== ======== =========
Note 8 - Related Party Transactions
The Company has notes receivable from the Advertising Fund of $21,524, $35,524
and $178,444 at December 31, 1998, 1997 and 1996, respectively. The balances
relate to an off season build-up for advertising which is reimbursed to the
Company in the subsequent year. At December 31, 1996, the Company had a $44,555
non-interest bearing note due to the Advertising Fund which was paid off in
1997.
F - 18
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 8 - Related Party Transactions (continued)
Two directors of the Company own more than 50% in one of the Company's area
directorships. The area directorship is managed by an adjacent area director
and, during 1997 and 1998, all sales, opening and royalty commissions were paid
to the managing area director. The Company made no payments to the area
director. At December 31, 1998, $58,149 was owed to the Company on a promissory
note due from the area director. During 1997 and 1998, payments on such notes
were $4,655 and $6,212, respectively. An additional $18,000 was paid in March
1999 to bring the note and all accrued interest current. The area director is
also indebted to the Company for $18,187 in connection with the resale of a
Quizno's restaurant once operated by the area director. The area director is
reducing this debt by offsetting commissions on royalty fees from that location
paid to the managing area director. The debt is expected to be reduced to zero
in approximately 18 months. The area director also is indebted to the Company
for $14,270 in accounts receivable for wages, accounting fees, royalties and
other amounts paid by the Company on behalf of the area director. This will be
satisfied by the assignment of equipment with a net book value in excess of
$14,000 to the Company.
In 1995, the Company sold an area directorship to a company owned by a director,
officer and shareholder for $150,000. During 1997 and 1998, the Company paid the
area director no sales commissions and $9,259 and $27,664 in royalties,
respectively. The area directorship was sold in 1998 to an unrelated third
party.
In 1997, the Company purchased a Quizno's restaurant from a company in which an
executive officer is a 50% shareholder. The restaurant paid royalties to the
Company of $2,027 in 1997 up to the date purchased by the Company. The purchase
price was $80,000 of which $15,000 was paid in cash and $60,000 paid by issuance
of the Company's promissory note bearing interest at 11% and payable over 4
years. During 1997 and 1998, the Company made payments pursuant to the
promissory note totaling $18,839 and $18,993, respectively.
Note 9 - Line-of-Credit
The Company had a $300,000 line-of-credit and a term note from a financial
institution. The line-of-credit and term note were paid off January 1997.
Note 10 - Long-Term Obligations and Convertible Subordinated Debt
December 31,
---------------------------------
1998 1997 1996
---------- --------- ----------
Various capital leases, with monthly
payments totaling $26,919 including
interest at rates ranging from 9.74% to 11%
and expiring through April 2003.
Collateralized by restaurant equipment. $ 986,077 $127,770 $ --
F - 19
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 10 - Long-Term Obligations and Convertible Subordinated Debt
(continued)
December 31,
---------------------------------
1998 1997 1996
---------- --------- ----------
Note payable to a financial institution,
$1,372 monthly payments including
interest at the bank index rate (8.75% at
December 31, 1998) plus 1%, through
February 2001, when any unpaid principal
and interest is due. The note is
collateralized by restaurant equipment. 35,869 52,048 68,123
Note payable to a company, with interest
at 11%. The note calls for monthly
payments of $1,583 and matures November
2001. Collateralized by the assets of
one store with a net book value of
approximately $68,000. 46,056 59,188 -
Notes payable to a company with interest at
11%. The notes call for monthly payments
of $2,888 and mature through July 2001.
Collateralized by the assets of two stores
with a combined net book value of
approximately $102,000. 57,526 82,833 -
Note payable to a company with interest
payments at 10%. The note calls for monthly
payments of $10,736 and matures in January
2004. Collateralized by the assets acquired
from Bain's Deli Franchise Associates.
The principal balance of the note was
decreased by approximately $431,000 due to
provisions in the purchase agreement which
allow for quarterly decreases or increases
in the note balance based on certain
performance standards of the franchises
acquired. 116,118 576,612 -
Note payable to a financing company with
interest at 9.5%. The note calls for
monthly principal and interest payments of
$2,106 and matures July 15, 2003.
Collateralized by restaurant equipment. 93,742 - -
Notes payable, paid in full in 1998 and
1997 - 146,203 511,273
--------- -------- --------
1,335,388 1,044,654 579,396
Less current portion (370,404) (303,084) (375,595)
--------- -------- --------
$ 964,984 $741,570 $203,801
========= ======== ========
F - 20
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 10 - Long-Term Obligations and Convertible Subordinated Debt
(continued)
Convertible subordinated debt consists of:
December 31,
---------------------------------
1998 1997 1996
---------- --------- ----------
12.75% Convertible Subordinated Debt,
$1,155,825 convertible into 10% on a
fully diluted basis, (372,847 shares
at December 31, 1998) of the
Company's common stock at $3.10 per
share. The warrants have a put
option to the Company on December 31,
2002, if the Company has not
completed a secondary public offering.
The warrants and underlying stock have
demand registration rights as well as
unlimited piggy back registration
rights. No value was ascribed to the
underlying conversion rights as the
conversion price exceeded the trading
value of the stock on the date of
issuance. In 1997, $500,000 was
converted into 100,000 shares of
Series B convertible preferred stock.
On January 6, 1999, the Company
paid $500,000 to redeem all of its
outstanding Class B Preferred Stock
and paid off the remaining principal
of its convertible subordinated loan.
As required by the loan agreement,
the Company issued a warrant to the
bondholder to purchase 372,847
shares of its common stock at an
exercise price of $3.10. $1,375,000 $1,500,000 $2,000,000
Less current portion (244,084) (110,912) -
---------- ---------- ----------
$1,130,916 $1,389,088 $2,000,000
========== ========== ==========
In connection with the conversion of debt to equity, the Company granted the
note holder 42,209 warrants to purchase common stock at $5.00 per share. The
inherent value of the options of $44,277 was recorded as deferred offering costs
associated with the conversion.
F - 21
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 10 - Long-Term Obligations and Convertible Subordinated Debt
(continued)
Maturities of long-term obligations, convertible subordinated debt and capital
leases are as follows:
Long-Term
Obligations
and
Convertible
Subordinated Capital
Year Ending December 31, Debt Leases Total
------------------------ ---------- -------- ----------
1999 $433,162 $277,173 $ 710,335
2000 348,657 273,520 622,177
2001 366,029 258,912 624,941
2002 379,808 255,582 635,390
2003 196,655 160,180 356,835
Thereafter - - -
---------- --------- ---------
1,724,311 1,225,367 2,949,678
Less amount representing
interest - (239,290) (239,290)
---------- -------- ----------
Total principal 1,724,311 986,077 2,710,388
Less current portion (433,162) (181,326) (614,488)
---------- -------- ----------
$1,291,149 $804,751 $2,095,900
========== ======== ==========
Included in equipment in the accompanying 1998, 1997 and 1996 balance sheets are
assets held under capital leases in the amount of $1,278,925, $161,147 and
$83,205, respectively and accumulated amortization of $132,837, $65,079 and
$32,850, respectively.
Note 11 - Commitments and Contingencies
The Company leases an office facility, twenty-nine restaurant locations
(including stores held for resale or under development) and certain equipment
and vehicles under operating lease agreements which provide for the payment of
rent totaling approximately $68,000 per month plus common area maintenance
costs. One of the restaurant locations also requires the Company to pay 6% of
gross sales in excess of $430,000 annually. Rent expense under these operating
leases, totaled $642,447, $636,874 and $367,439 during the years ended December
31, 1998, 1997 and 1996, respectively.
F - 22
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 11 - Commitments and Contingencies (continued)
Future minimum rental payments are as follows:
Year Ending December 31,
1999 $1,016,557
2000 941,494
2001 899,387
2002 835,317
2003 556,852
Thereafter 1,093,980
---------
$5,343,587
==========
Minimum payments for the year ended December 31, 1998 have not been reduced by
minimum rentals of $1,231,873 due in the future under a noncancellable sublease.
The Company has entered into employment agreements with two directors, officers,
and stockholders of the Company which provide for the payment of annual salaries
totaling $192,000 plus individual bonuses equal to six and ten percent of the
positive increase in net income before depreciation, amortization and interest
over the prior year. There were no bonuses accrued and paid during 1996;
however, $291,260 and $209,000 was accrued at December 31, 1997 and 1998,
respectively. One agreement expired in December 1998 while the other agreement
expires in December 2003. The annual salary amount, in total, was $303,500
from July 21, 1998 to December 31, 1998 and $220,000 after December 31, 1998.
Litigation
There are various claims and lawsuits pending by and against the Company, which,
in the opinion of the management, and supported by advice from legal counsel,
will not result in any material adverse effect in excess of amounts accrued in
the accompanying consolidated financial statements.
On December 31, 1996, a demand for arbitration was filed by S2D Subs, LLC, a
former franchisee of the Company. During 1997, the Company rejected any possible
settlement and vigorously defided the action. In May 1998, an arbitration
decision was reached whereby the case was discharged and the Company was
dismissed of any liability.
F - 23
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 11 - Commitments and Contingencies (continued)
On August 10, 1998, the Company terminated an area director agreement and
instituted an arbitration action alleging that the area director had breached
various provisions of the area director agreement. On September 1, 1998, the
area director denied that he breached the area director agreement, alleged
fraudulent termination of the area director agreement, alleged that the Company
failed to refund or pay certain amounts due him and alleged that the Company
violated various state and federal franchise and securities laws by misstating
revenues in publicly filed documents. Hearings in this matter were held before
the American Arbitration Association from March 8-16, 1999. During the hearings,
the respondent demanded damages in excess of $4 million. The Company argued that
should the arbitration panel find the respondent entitled to damages, the amount
should not exceed $450,000, which is the value of the territory as of the date
the respondent's area director agreement was terminated. The Company believes
that any award to the respondent will not exceed the value of that territory,
which the Company now owns.
Service Agreement
In connection with the Bain's acquisition, the Company entered into a two year
consulting agreement with a seller of Bain's to provide various services to the
Company for $50,000 per year. This agreement expires as of February 2000.
Note 12 - Stockholders' Equity
Convertible Preferred Stock
Series A convertible preferred stock bears a 6.5% cumulative dividend, payable
monthly and is convertible into common shares on a one for one basis and is
callable by the Company with sixty days notice. The Series A convertible
preferred stock has a liquidation preference of $6 per share plus all then
accrued and unpaid cumulative dividends.
Series B convertible preferred stock bears a 12.75% cumulative dividend, payable
monthly and is convertible after five years at the then market value of the
common stock. The Series B convertible preferred stock is redeemable at the
Company's option at $5.00 per share and has a liquidation preference of $5.00
per share plus all then accrued and unpaid cumulative dividends. The Series B
convertible preferred stock was redeemed in full in 1999.
Series C convertible preferred stock bears a 12.00% cumulative dividend, payable
monthly and is convertible into common stock on a one-for-one basis at $5.00 per
share. The Series C convertible preferred stock is redeemable at the Company's
option at $5.00 per share and has a liquidation preference of $5.00 per share
plus all then accrued and unpaid cumulative dividends.
F - 24
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 12 - Stockholders' Equity (continued)
During 1997, the Company sold 167,000 shares of Series C convertible preferred
stock at $5.00 per share. The Company incurred legal and accounting costs
related to the sale of $36,454.
Stock Options and Warrants
The Company has established an Employee Stock Option Plan (the Plan). The
Company has reserved 320,000 shares of its Common Stock for issuance upon the
exercise of options available for grant under the Plan. Options are granted
under the plan at not less than the market price of the Company stock. The
options cannot be exercisable for more than ten years. Options granted under the
Plan will include incentive stock options (ISOs) as defined in Section 422 of
the Internal Revenue Code and non-qualified stock options (NQSOs). Under the
terms of the Plan, all officers and employees are eligible for ISOs. During the
years ended December 31, 1998, 1997 and 1996, 117,205, 98,550 and 53,073,
options were granted under the Plan, respectively.
Additionally, the Company has established an Amended and Restated Stock Option
Plan for Non-Employee Directors and Advisors (Director Plan). The Company has
reserved 140,000 shares of common stock for issuance upon the exercise of
options granted or available for grant to non-employee directors and advisors
under the Director Plan. The Director Plan provides that any person who becomes
a non-employee director or advisor of the Company may receive an option to
purchase 4,000 shares (or a pro rata portion thereof) at their fair market value
on the date such person becomes a non-employee director or advisor, and on the
first day of each year thereafter as long as the person continues as a
non-employee director or advisor, limited to the overall number of shares
available for issuance under the Director Plan. Options that expire or are
canceled may be re-granted under the Director Plan at the discretion of the
Board of Directors. The options expire after ten years. During the years ended
December 31, 1998, 1997, and 1996, 28,000, 18,000 and 20,000 options were
granted under the Director Plan, respectively.
In February 1999, the Board of Directors approved an increase to 670,000 shares
for the Plan and 200,000 shares for the Director Plan subject to approval by the
shareholders.
In 1997, the Company granted stock options covering 48,500 shares to Area
Directors pursuant to individual contracts. The Company established an Area
Director Equity Participation Rights Stock Option Plan (AD Plan) providing for
grants of stock options to Area Directors beginning in 1998. During 1998, the
Company granted stock options covering 60,375 shares pursuant to the AD Plan.
Options are granted under the AD Plan at the market price of the common stock
for six month options or a 20% discount (not to exceed $1.20) if the grantee
exercises within seven business days of the grant. The Company recorded $33,950
related to the inherent value of the options granted to Area Directors in 1997.
No amounts were recorded for inherent value of the options for 1998.
F - 25
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 12 - Stockholders' Equity (continued)
In 1996, the Company issued warrants to purchase 372,847 shares of its common
stock to a lender in connection with a $2,000,000 convertible subordinated loan
made to the Company. The warrants are exercisable at $3.10 per share and expire
on December 31, 2004. Additionally, in 1997, the Company issued warrants to
purchase another 42,209 shares of its common stock to the same lender in
connection with the lender's conversion of $500,000 of the convertible
subordinated debt to Class B preferred stock. The warrants are exercisable at
$5.00 per share and do not have an expiration date. These warrants are reduced
to 20,597 if the Company meets certain earnings goals through 2000.
In connection with the Company's public offering, the Company issued a warrant
for the underwriter to purchase up to 100,000 shares of its common stock at
$5.00 per share. During 1998, 80,000 warrants were exercised and the remaining
20,000 were cancelled. Additionally in 1997, the Company issued 33,000 warrants
to consultants that allowed the holders to purchase 33,000 shares of common
stock at $5.40 to $5.50 per share. These warrants expire through December 2000.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plans
as they relate to options
issued to employees and directors.
Had compensation cost for the Company's two employee stock option plans been
determined based on the fair value at the grant date for consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
December 31,
-------------------------------
1998 1997 1996
---------- ---------- ---------
Net income (loss) applicable to common
stockholders - as reported $891,725 $(183,618) $(1,075,908)
Net income (loss) applicable to common
stockholders - pro forma $586,960 $(433,536) $(1,218,264)
Basic earnings (loss) per share - as reported $ .30 $ (.06) $ (.38)
Basic earnings (loss) per share - pro forma $ .19 $ (.15) $ (.43)
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 42%;
discount rate of 5.5%; and expected lives of up to 10 years.
F - 26
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 12 - Stockholders' Equity (continued)
The following is a table of the shares covered by the options and warrants
granted:
Exercise
Options and Price
Warrants Per Shares
----------- --------------
Balance, December 31, 1996 693,540 $3.00 - $5.75
Granted 240,259 $3.44 - $5.50
Forfeited or exercised (45,739) $3.13 - $5.00
-------- -------------
Balance, December 31, 1997 888,060 $3.00 - $5.75
Granted 205,580 $3.90 - $7.88
Forfeited or exercised (197,102) $3.00 - $7.75
- ----------------------- -------- -------------
Balance, December 31, 1998 896,538 $3.00 - $7.88
======== =============
The weighted average option and warrant exercise price at December 31, 1998 is
$4.05. The weighted average remaining contractual life is 63 months.
The Company granted an option during the year ended December 31, 1993, to an
area director that after this area director opened its tenth restaurant in
accordance with the area director agreement, the area director would be entitled
to purchase one percent of the then outstanding common stock of the Company for
$50,000. In 1997, the Company waived the requirement for ten restaurants and the
area director exercised the right to purchase one percent of the outstanding
common stock for $50,000 and received approximately 28,900 shares of common
stock.
Note 13 - Income Taxes
The components of the provision for income tax benefit for the year ended
December 31, 1998 are as follows:
December 31,
1998
-----------
Current income tax expense $ 213,500
Deferred income tax benefit (582,053)
----------
$ 368,553
==========
F - 27
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 13 - Income Taxes (continued)
Prior to 1998, the Company had provided for a valuation allowance against its
deferred tax asset as management had determined that it was more likely than not
that the Company would not realize its deferred tax asset. In 1998, management
determined it would be more likely than not they would realize their deferred
tax asset and this has eliminated its valuation allowance against the deferred
tax asset resulting in a benefit of $582,053 reflected in the statement of
operations for the year ending December 31, 1998.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement assets and liabilities and tax basis assets and
liabilities using the tax rates in effect for the year in which the differences
occur. In 1998, the Company's deferred income tax assets and liabilities result
primarily from differing depreciation and amortization periods of certain
assets, deferred franchise revenue and costs and the recognition of certain
expenses for financial statement purposes and not for tax purposes. For 1997 and
1996, the deferred income tax assets related primarily to net operating losses.
The net current and long-term deferred tax assets (liabilities) in the
accompanying balance sheet include the following items:
December 31,
-------------------------------
1998 1997 1996
---------- ---------- ---------
Current deferred tax asset $ 81,260 $ - $ -
Current deferred tax liabilities - - -
-------- -------- --------
$ 81,260 $ - $ -
======== ======== ========
December 31,
-------------------------------
1998 1997 1996
---------- ---------- ---------
Long-term deferred tax asset $1,673,620 $900,000 $ 736,000
Long-term deferred tax liability (938,812) - -
---------- -------- --------
734,808 900,000 736,000
Less impairment - (725,000) (561,000)
---------- -------- ---------
734,808 175,000 175,000
---------- -------- ---------
Net deferred tax asset $ 816,068 $175,000 $ 175,000
========== ======== =========
F - 28
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 13 - Income Taxes (continued)
Rate Reconciliation
The reconciliation of income tax expense (benefit) by applying the Federal
statutory tax rates to the Company's effective income tax rate is as follows:
December 31,
-------------------------------
1998 1997 1996
---------- ---------- ---------
Federal statutory rate 34.0% (34.0)% (34.0)%
Nondeductible expenses 8.4 - -
Other - deferred including utilization of (13.5) - -
NOL
Valuation allowance (78.0) 34.0 34.0
-------- -------- --------
(49.1)% - % - %
======== ======= ========
Note 14 - Employee Benefit Plan
The Company has adopted a 401(k) plan during 1995 for its employees.
Participation is voluntary and employees are eligible to participate at age 21
and after one year of employment with the Company. The Company matches 50% of
the employee's contribution up to $10,000 of the employee's salary.
A participant's vested benefit is fully distributed upon death or disability and
is distributed upon termination of employment according to the following vesting
schedule:
Years of Services Percentage
1 0%
2 25%
3 50%
4 75%
5 100%
The Company has contributed $31,675, $33,251 and $10,525 to the Plan for the
years ended December 31, 1998, 1997 and 1996, respectively.
F - 29
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements.
Note 15 - Earnings (Loss) Per Share
The following table sets forth the computation for basic and diluted earnings
per share:
December 31,
-------------------------------
1998 1997 1996
---------- ---------- ---------
Numerator
Numerator for basic and diluted earnings
per share - net income (loss) $891,725 $(183,616) $(1,075,908)
======== ========= ===========
Denominator
Denominator for basic earnings per share
- weighted average shares 3,014,042 2,878,310 2,864,757
Effect of dilutive securities -
convertible debt, options and warrants 431,930 - -
-------- -------- --------
Denominator for diluted earnings per
share - adjusted weighted average shares 3,445,972 2,878,310 2,864,757
========= ========= =========
Basic earnings (loss) per share $ .30 $ (.06) $ (.38)
========= ========= =========
Diluted earnings (loss) per share $ .26 $ (.06) $ (.38)
========= ========= =========
Where the inclusion of potential common shares is anti-dilutive, such shares are
excluded from the computation.
F - 30
<PAGE>
Attached hereto and filed as a part of this Form 10-KSB are the consolidated
financial statements listed in the Index to the Consolidated Financial
Statements at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors
The names of and other information about the Directors of the Company as of
March 16, 1999, are set forth below:
Nominee Age Position(s) with Company Director Since
Richard E. Schaden 35 President, Chief
Executive Officer and
Director 1991
Richard F. Schaden 60 Secretary and Director 1991
Frederick H. Schaden 52 Director 1993
J. Eric Lawrence 31 Director 1997
Brownell E. Bailey 45 Director 1993
Mark L. Bromberg 48 Director 1997
Each director is currently serving a one year term that will end on the date of
the Company's 1999 Annual Meeting of Shareholders. The Board of Directors has
nominated each of its members to stand for election for an additional one year
term at such Annual meeting.
Director's Biographical Information
Mr. Richard E. Schaden has been President and a Director of the Company since
its inception on January 7, 1991. Mr. Schaden had been a principal and the chief
operating officer of Schaden & Schaden, Inc., a company that owned and operated
Quizno's franchised Restaurants from 1987 to 1994 when it was sold to the
Company. Mr. Schaden graduated Magna Cum Laude from the University of Colorado
with a degree in Business Management and Finance. See "Certain Transactions."
- 26 -
<PAGE>
Mr. Richard F. Schaden has been Secretary and a Director of the Company since
its inception on January 7, 1991. He had been a Vice President of the Company
until December 31, 1998. Mr. Schaden had been a principal of Schaden & Schaden,
Inc., a company that owned and operated Quizno's franchised Restaurants from
1987 to 1994 when it was sold to the Company. Mr. Schaden is the founding
partner of the law firm of Schaden, Katzman, Lampert & McClune with offices in
Bloomfield Hills, Michigan and Broomfield, Colorado. Mr. Schaden graduated from
the University of Detroit with a Bachelor of Science in Aeronautical
Engineering, received his Juris Doctorate from the University of Detroit Law
School and is an internationally known, well-published attorney, specializing in
aviation law. Prior to entering the legal profession, Mr. Schaden was an
aeronautical engineer for Boeing Aircraft and Continental Aviation and
Engineering. Mr. Schaden has been on the board of numerous private companies.
See "Certain Transactions."
Mr. Brownell M. Bailey is a self-employed real-estate development consultant,
land planner and design engineer. He has been self-employed for over five years.
Prior employment included the management of field operations and contract
services for the acquisition, development and construction of resort properties,
including residential, mixed use, and commercial projects. Mr. Bailey has a B.A.
degree from Union College and a B.S. degree in Urban Planning and Engineering
from Worcester Polytechnic Institute.
Mr. Frederick H. Schaden is an Executive Vice President of the Automotive
Consulting Group of Aon Consulting, Inc. Aon Consulting, Inc. is a subsidiary of
Aon Corporation, a publicly held company with annual revenues of nearly $6
billion. He has been employed by Aon and its predecessors for over 25 years and
has served as a senior officer since 1981. Mr. Schaden earned a B.S. in Business
Administration from Xavier University in Cincinnati, Ohio. See "Certain
Transactions."
Mr. J. Eric Lawrence has been the General Partner of Retail & Restaurant Growth
Capital, L.P. ("RRGC"), a $60 million investment fund focused on providing
growth and expansion capital to small businesses in the retail and restaurant
industries, since December 1995. RRGC is a Small Business Investment Company,
federally licensed by the Small Business Administration. RRGC loaned $2,000,000
to the Company in 1996, and Mr. Lawrence serves on the Board pursuant to a
contractual arrangement between the Company and RRGC. Mr. Lawrence has been
extensively involved in the analysis of the financial, operational and
managerial aspects of retail and restaurant companies throughout his career.
Prior to RRGC, he served as Vice President of Strategic Retail Ventures, Inc., a
boutique financial consulting and private investment firm focusing on the needs
of specialty retail and restaurant companies from March 1993 to December 1995.
Prior to SRV, Mr. Lawrence was a Senior Consultant with Arthur Andersen, in
Dallas, Texas. Mr. Lawrence is a licensed C.P.A., and is a graduate of Southern
Methodist University with a B.B.A. in Accounting and Minor in Economics, which
included study abroad at Oxford University, Oxford, England.
- 27 -
<PAGE>
Mr. Mark L. Bromberg has been a self-employed management consultant providing
strategic planning, positioning and senior management consulting services to the
hospitality industry, for over five years. Mr. Bromberg is the former President
& CEO of East Side Mario's Restaurants Inc., the Dallas based subsidiary of
Pepsi-co, which he grew from one restaurant in 1988 to 30 in 1993 when it was
sold to Pepsi-co. Mr. Bromberg has been the founder and President of a number of
causal dining restaurant chains, including Mr. Greenjeans, Ginsberg & Wong and
Lime Rickey's and served as President of Prime Restaurant Group, the largest
privately-held restaurant chain in Canada. He holds a B.S. and an M.B.A. from
Cornell University and remains highly involved in foodservice education as a
curriculum advisor and guest lecturer. He is a past chairman of the Canadian
Restaurant and Foodservice Association and is a past director of the National
Restaurant Association of the U.S. Mr. Bromberg was elected to the Board of
Directors pursuant to a contractual arrangement with RRGC that required the
election of an additional Board member acceptable to RRGC.
Executive Officers
The following table sets forth (i) the names of the executive officers,
(ii) their ages, and (iii) the capacities in which they serve the Company:
Nominee Age Position(s) with Company
Richard E. Schaden 35 President, Chief Executive
Officer and Director
Mark R. Laramie 48 Chief Operating Officer
Robert W. Scanlon 52 Executive Vice President for Development
Sue A. Hoover 52 Executive Vice President for Marketing
Patrick E. Meyers 39 Vice President and General Counsel
John L. Gallivan 52 Chief Financial Officer, Treasurer and
Assistant Secretary
Richard F. Schaden 60 Secretary and Director
Executive Officer's Biographical Information
See "Director's Biographical Information" above for a description of the
backgrounds of Richard E. Schaden and Richard F. Schaden.
Mark R. Laramie joined the Company in 1998 as the Chief Operating Officer. Prior
to joining the Company, he was a managing member and owner of Great Lakes
Restaurant Group, LLC from November 1997 through August 1998. From July 1996
through October 1997, Mr. Laramie was a managing member of Peer Group, LLC, a
franchisee of Little Caesars Pizza in Michigan. Mr. Laramie was also the Vice
President of Franchising for Little Caesars Enterprises, Inc. from August 1980
through June 1996. He received his B.S. degree from Eastern Michigan University
in 1973.
- 28 -
<PAGE>
Robert W. Scanlon has been our Executive Vice President of Development since
October 1998. Mr. Scanlon served as our Senior Vice President of Real
Estate/Design & Construction from August 1997 through September 1998. He also
served as our Senior Vice President of Concept Development and Design from
January 1997 to July 1997 and as our Vice President of Nontraditional
Development from May 1996 to December 1996. From June 1990 through April 1996,
he was first Vice President of Sales and Marketing and later Vice President of
Business Development for Carts of Colorado, located in Commerce City, Colorado,
an equipment manufacturer. Mr. Scanlon graduated from the University of Texas,
with a B.S. degree in 1973.
Sue A. Hoover joined the Company as Director of Marketing in 1991 as Director of
Marketing and served in that capacity until 1996, when she left to start her own
marketing firm, although her firm continued to provide marketing services to the
Company. She rejoined the Company as Senior Vice President of Marketing in 1997
and was named an Executive Vice President of Marketing in October 1998. Ms.
Hoover graduated from the University of Iowa with a B.A. in 1968.
- 29 -
<PAGE>
Patrick E. Meyers joined the Company in 1997. He had been an associate with the
Denver law firm of Moye, Giles, O'Keefe, Vermeire & Gorrell since September
1991, and was selected as a partner of that firm in 1996. Before that he served
as a judicial law clerk to a Justice of the Colorado Supreme Court from July
1990 to September 1991. Mr. Meyers received his J.D. degree from the University
of California, Hastings College of Law and his B.A. degree from the University
of Colorado - Denver. Mr. Meyers served as a director of the Company from 1993
to 1997, when he resigned to become a full-time employee of the Company.
John L. Gallivan joined the Company as Chief Financial Officer in 1994. He was
later elected Treasurer and Assistant Secretary. Prior to his joining the
Company, he was a director and Executive Vice President of Grease Monkey Holding
Corporation of Denver, a franchisor, owner, and operator of over 200 ten minute
oil change and fluid maintenance centers in the U.S. and Mexico from 1979
through April 1994. He is a member of the Colorado Society and the American
Institute of CPAs. He graduated from the University of Colorado at Boulder with
a bachelors degree in accounting.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers (including a person performing a policy-making function) and
persons who own more than 10% of a registered class of the Company's equity
securities ("10% Holders") to file with the Securities and Exchange Commission
("SEC") initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Directors, officers and
10% Holders are required by SEC regulations to furnish the Company with copies
of all of the Section 16(a) reports they file. Based solely upon such reports,
the Company believes that during 1998 its directors, advisors, officers and 10%
Holders complied with all filing requirements under Section 16(a) of the
Exchange Act, except for Mr. Steven Shaffer, a Senior Regional Vice President,
who inadvertently failed to file his Form 3 in a timely manner, and who
inadvertently failed to file a Form 4 related to the exercise of options, which
was remedied in his Form 5 for 1998.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
Set forth below is information about the compensation during 1998 of the
Company's Chief Executive Officer, the four most highly compensated executive
officers of the Company at the end of 1998, other than the CEO, and additionally
the two most highly compensated non-executive officers (the "Named Officers").
- 30 -
<PAGE>
Summary Compensation Table. The following table provides certain summary
information for fiscal 1998, 1997, and 1996, concerning compensation awarded or
paid to, or earned by, the Named Officers:
<TABLE>
<CAPTION>
Annual Compensation Long-Term and Other Compensation
------------------------------------ -----------------------------------
Option 401(K) Plan
Name and Position Year Salary Bonus Other(1) Shares(2) Contribution(3)
- ----------------- --------- -------- ---------- ------------ ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Schaden, 12/31/96 $108,500 $ 0 $ 11,039 0 $2,160
President and Chief 12/31/97 $108,500 $125,731 $ 10,168 4,000 $2,534
Executive Officer 12/31/98 $181,452 $130,625 $ 15,361 5,164 $2,000
Richard F. Schaden, 12/31/96 $ 83,500 $ 0 $ 0 0 $ 0
Vice President and 12/31/97 $ 83,500 $ 75,439 $ 0 0 $ 0
Secretary 12/31/98 $ 83,500 $ 78,375 $ 0 0 $ 0
Robert W. Scanlon, 12/31/96 $ 49,110 $ 5,316 $ 0 4,000 $ 0
Executive Vice 12/31/97 $ 79,998 $ 13,276 $ 0 4,000 $1,168
President for 12/31/98 $ 85,783 $ 28,115 $ 0 5,164 $3,418
Development
Sue A. Hoover, 12/31/96 $ 24,000 $ 0 $ 0 0 $ 600
Executive Vice 12/31/97 $ 33,000 $ 0 $ 0 4,000 $ 654
President for 12/31/98 $ 90,479 $ 13,968 $ 0 9,164 $3,016
Marketing
John L. Gallivan, 12/31/96 $ 85,000 $ 6,100 $ 0 4,000 $5,100
Chief Financial 12/31/97 $ 79,165 $ 9,400 $ 0 4,000 $2,376
Officer and 12/31/98 $ 90,945 $ 11,961 $ 0 5,164 $3,080
Treasurer
Scott K. Adams, 12/31/96 $ 62,936 $ 64,747 $ 0 9,773 $ 0
Senior Vice 12/31/97 $220,347 $ 0 $ 0 4,000 $ 37
President for 12/31/98 $ 59,836 $198,457 $ 0 5,164 $ 0
Development(4)
John F. Fitchett, 12/31/96 $ 55,385 $ 0 $ 0 4,000 $ 0
Senior Regional 12/31/97 $ 82,176 $ 30,778 $ 0 4,000 $1,143
Vice President 12/31/98 $ 92,004 $ 21,651 $ 0 5,164 $2,102
for the East
Region
</TABLE>
- 31 -
<PAGE>
- ------
(1) The Company provides Mr. Richard E. Schaden with an automobile allowance
for both business and personal use and pays $1,200 annually in term life
insurance premiums on his behalf.
(2) The Company, as an incentive for its eligible employees to endeavor to
enhance the Company's performance and assure its future success, grants
options to purchase shares of its Common Stock to successful employees from
time to time under its Employee Stock Option Plan. All options indicated in
this table have been granted under such Plan.
(3) The Company has provided its employees with a 401(K) Employee's Savings
Plan, pursuant to which the Company contributes to each eligible employee's
account an amount equal to 50% of such employee's annual contribution, up
to 6% of such employee's total annual compensation. The Company has issued
shares of its Common Stock for 50% of its annual contribution to each
account under its 401(K) Plan. Beginning in 1999, the limit on the amount
of an employee's total annual compensation that will receive a 50% match
has been amended to be $10,000.
(4) Mr. Adams terminated his employment with the Company in 1998.
Stock Option Awards. The Company adopted its Employee Stock Option Plan (the
"Employee Plan") in 1993. The purposes of the Employee Plan are to enable the
Company to provide opportunities for certain officers and key employees to
acquire a proprietary interest in the Company, to increase incentives for such
persons to contribute to the Company's performance and further success, and to
attract and retain individuals with exceptional business, managerial and
administrative talents, who will contribute to the progress, growth and
profitability of the Company. As of March 16, 1999, the Company had issued
11,436 shares upon exercise of options under the Employee Plan and has 308,564
shares currently reserved for issuance under the Employee Plan. The Board of
Directors of the Company has authorized a proposal to increase the number of
shares of Common Stock reserved for issuance under the Employee Plan from
320,000 to 670,000 to be presented to the Company's shareholders at the next
Annual Meeting.
Options granted under the Employee Plan include both incentive stock options
("ISOs"), within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and non-qualified stock options ("NQOs"). Under
the terms of the Employee Plan, all officers and employees of the Company are
eligible for ISOs. The Company determines in its discretion, which persons will
receive ISOs, the applicable exercise price, vesting provisions and the exercise
term thereof. The terms and conditions of option grants do differ and are set
forth in the optionees individual stock option agreement. Such options generally
vest over a period of one or more years and expire after up to ten years. In
order to qualify for certain preferential treatment under the Code, ISOs must
satisfy the statutory requirements thereof. Options that fail to satisfy those
requirements will be deemed NQOs and will not receive preferential treatment
under the Code. Upon exercise, shares will be issued upon payment of the
exercise price in cash, by delivery of shares of Company Common Stock, by
delivery of options granted under the Employee Plan or a combination of any of
these methods.
- 32 -
<PAGE>
Option Grants in 1998
-----------------------
Number of
Shares of
Common
Stock Percentage of
Underlying Total Options
Options Granted to
Granted Employees Exercise Expiration
Name in 1998 in 1998 Price Date
- ------------------ ---------- ---------- --------- ----------
Richard E. Schaden 5,164 4.4% $5.37 (1)
Richard F. Schaden 0 N.A. N.A. N.A.
Robert W. Scanlon 5,164 4.4% $4.875 (1)
Sue A. Hoover 5,165 4.4% $4.875 (1)
Sue A. Hoover 4,000 3.4% $7.25 11/05/08(2)
John L. Gallivan 5,164 4.4% $4.875 (1)
Scott K. Adams 5,164 4.4% $4.875 (1)
John F. Fitchett 5,164 4.4% $4.875 (1)
(1) The options have two expiration dates. In each case, the options covering
75% of the underlying shares expire on April 30, 1999, and the options
covering 25% of the underlying shares expire May 9, 2001.
(2) The options vest in equal amounts annually over five years.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year-End at Year-End(1)
Shares Value ----------------------------- -------------------------------
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
- ------ --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Schaden 0 0 1,087 5,164 $3,654 $11,645
Richard F. Schaden 0 0 0 0 0 0
Robert W. Scanlon 0 0 2,400 10,764 10,200 37,001
Sue A. Hoover 0 0 10,800 12,364 29,350 18,047
John L. Gallivan 0 0 7,006 12,364 27,827 44,347
Scott K. Adams 0 0 15,451 16,424 52,605 59,829
John F. Fitchett 0 0 2,400 10,764 10,200 37,001
</TABLE>
(1) The dollar values are calculated by determining the difference between
$7.625 per share, the fair market value of the Common Stock at December 31,
1998, and the exercise price of the respective options.
- 33 -
<PAGE>
Employment Contracts. Richard E. Schaden has entered into an Employment
Agreement with the Company that terminates on December 31, 2003. His contract
provides that he will serve as President and Chief Executive Officer of the
Company. Mr. Schaden will devote his full time to the Company. His annual base
salary was increased to $220,000, effective July 21, 1998. Such amount may be
adjusted from time to time by mutual agreement between Mr. Schaden and the Board
of Directors. The contract provides an annual bonus equal to 10% of any positive
increase in earnings before interest, taxes, depreciation and amortization for
such full calendar year over the level of such amount for the prior full
calendar year. Mr. Schaden will receive a monthly automobile allowance of up to
$620.00 plus up to $150.00 for insurance coverage. He will also receive a per
diem travel allowance of $30.00 per day while traveling on Company business. The
contract provides that the Company will pay one-half of Mr. Schaden's medical
insurance coverage and one-half of the cost of disability insurance. The Company
will pay for $1,000,000 of term life insurance for Mr. Schaden, payable to his
designated beneficiary. The Company may terminate the Employment Agreement for
cause upon ninety days notice. Mr. Schaden may terminate the Employment
Agreement upon ninety days notice.
Richard F. Schaden entered into an Employment Agreement with the Company in 1993
that terminated on December 31, 1998. Mr. Schaden did not devote his full time
to the Company, but devoted such time to the Company as the Company requested.
His base salary was $83,500 per year under the contract. The contract provided
an annual bonus equal to 6% of any positive increase in earnings before
interest, taxes, depreciation and amortization for such full calendar year over
the level of such amount for the prior full calendar year. Although his
Employment Agreement has terminated, Mr. Schaden continues to serve as Secretary
and a Director of the Company.
None of the other Named Officers have an employment agreement with the Company.
Director Compensation
Directors who are not officers or employees of the Company are paid $500 per day
for each Board and Committee meeting they attend and they are reimbursed for
their reasonable expenses of attending such meetings. In addition, such
directors receive an annual grant of options to purchase 4,000 shares of Company
Common Stock, which immediately vest.
- 34 -
<PAGE>
During 1998, the Company paid each of its non-employee directors, Messrs.
Bailey, Bromberg, Lawrence and Frederick Schaden ("Outside Directors"), $2,000,
as compensation for their attendance at Board and Committee meetings. For their
service during 1998, the Outside Directors each received a grant of options to
purchase 4,000 shares of Company Common Stock that immediately vested.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's equity securities (common stock and two classes of
preferred stock) as of March 16, 1999, (a) by each person known to the Company
to own beneficially more than 5% of the Company's Common Stock, (b) each of the
Company's Named Officers and directors and (c) by all officers and directors of
the Company named herein as a group.
- 35 -
<PAGE>
<TABLE>
<CAPTION>
Class A Class C
Class A Preferred Class C Preferred
Common Common Preferred Stock Preferred Stock
Stock Stock Stock Percentage Stock Percentage
Name Owned(1) Percentage Owned Owned Owned Owned
- ------------------ -------- ----------- ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Schaden 859,117(2) 27.4% 73,000 50% 0 0
1099 Eighteenth
St., Suite 2850
Denver, CO 80202
Richard F. Schaden 882,667(2) 27.9% 73,000 50% 34,000 20.4%
11870 Airport Way
Broomfield, CO
80021
Retail & 405,612(3) 11.7% 0 0 0 0
Restaurant Growth
Capital, L.P.
10000 N. Central
Expressway
Suite 1060
Dallas, TX 75231
Brownell M. Bailey 42,000(4) 1.4% 0 0 20,000 12.0%
10 Parkway Drive
Englewood, CO
80110
Mark L. Bromberg 10,000(4) * 0 0 0 0
1801 Kings Isle
Drive
Plano, TX 75093
J. Eric Lawrence 12,000(4) * 0 0 0 0
10000 N. Central
Expressway
Suite 1060
Dallas, TX 75231
Frederick H. 24,000(4) * 0 0 2,000 1.1%
Schaden
100 South Wacker
Drive, Suite 860
Chicago, IL 60606
Robert W. Scanlon 6,273(4) * 0 0 0 0
1099 18th Street,
Suite 2850
Denver, CO 80202
Sue A. Hoover 23,074(4) * 0 0 0 0
1099 18th Street,
Suite 2850
Denver, CO 80202
John L. Gallivan 13,297(4) * 0 0 0 0
1099 18th Street,
Suite 2850
Denver, CO 80202
Scott K. Adams 21,606(4) * 0 0 0 0
1099 18th Street,
Suite 2850
Denver, CO 80202
John F. Fitchett 6,273(4) * 0 0 0 0
1099 18th Street,
Suite 2850
Denver, CO 80202
All Executive 1,932,990 56.7% 146,000 100% 56,000 33.5%
Officers and
Directors as a
Group 14 persons)
- ------------------------------------------------------------------
</TABLE>
- 36 -
<PAGE>
- ------------------------
* Indicates less than 1% of the shares outstanding
(1) The persons named in the table have sole voting power with respect to all
shares of Common Stock shown as beneficially owned by them. A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within sixty (60) days from the filing date of the Report, upon
the exercise of options or warrants or conversion of convertible
securities. The record ownership of each beneficial owner is determined by
assuming that options or warrants or convertible securities that are held
by such person and that are exercisable or convertible within sixty (60)
days have been exercised or converted. The total outstanding shares used to
calculate each beneficial owner's percentage also assumes such options,
warrants or convertible securities will be exercised or converted. The
Company's Class A and Class C Preferred Stock are currently convertible
into Quizno's Common Stock.
(2) Richard E. Schaden and Richard F. Schaden hold all of their Common Stock
and Preferred Stock of the Company in a voting trust pursuant to which they
are joint voting trustees (excluding 577 shares allocated to Richard E.
Schaden under the Company's 401(K) Plan, 2,913 shares owned by Richard E.
Schaden as a result of exercising Company stock options and 34,000 shares
of Class C Convertible Preferred Stock owned by Richard F. Schaden).
However, each of them, individually, has been given a proxy by the voting
trust to vote 50% of the shares owned by the voting trust. The remaining
duration of the voting trust agreement is 5 years, subject to extension. Of
the shares indicated as owned by each of them, 73,000 may be acquired by
conversion of Class A Convertible Preferred Stock, 34,000 may be acquired
by Richard F. Schaden by conversion of Class C Convertible Preferred Stock,
and 4,960 may be acquired by Richard E. Schaden through the exercise of
options.
(3) Retail & Restaurant Growth Capital, L.P. ("RRGC"), in connection with a
loan to the Company that has since been repaid, has been issued two
Warrants by the Company. One is exercisable for 372,847 shares of Common
Stock at an exercise price of $3.10, subject to adjustment in certain
circumstances. The other is exercisable for 42,209 shares of Common Stock
at an exercise price of $5.00 per share, subject to adjustment in certain
circumstances.
(4) All of the shares indicated as owned by Messrs. Lawrence, Bromberg,
Fitchett and Scanlon may be acquired through the exercise of options by the
holder. All of the shares indicated as owned by Messrs. Bailey and
Frederick Schaden may be acquired through the exercise of options or
conversion of Class C Convertible Preferred Stock by the holder. All of the
shares indicated as owned by Messrs. Gallivan and Adams and Ms. Hoover may
be acquired through the exercise of options by the holder, except for 1,794
shares, 2,482 shares and 8,000 shares held by each of them, respectively.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 31, 1996, Retail & Restaurant Growth Capital, L.P. ("RRGC") made a
$2,000,000 loan to the Company, a portion of which was convertible into 372,847
shares of the Company's Common Stock which accrued interest at 12.75% per annum.
If the loan were repaid before conversion, RRGC would receive a warrant to
purchase the same number of shares of the Company's Common Stock at $3.10 per
share. On October 8, 1997, the Company and RRGC amended the loan agreement to
provide for the conversion of $500,000 of the principal amount of the loan into
100,000 shares of the Company's Class B Preferred Stock, reducing the
outstanding principal amount of the loan to $1,500,000. The Class B Preferred
Stock was non-voting, with a cumulative dividend of 12.75%. In connection with
such amendment, the Company also issued a Warrant to RRGC that granted it the
right to purchase up to 42,209 shares of the Company's Common Stock at $5.00 per
share. Such number of shares of Common Stock is subject to downward adjustment
if the Company meets certain net income and other goals. In no case will the
warrant be exercisable for less than 20,597 shares of the Company's Common
Stock. On January 6, 1999, the Company paid off the loan from RRGC, issued to
RRGC the Warrant to purchase 372,847 shares of Common Stock referred to above
and redeemed the Class B Preferred Stock held by RRGC.
- 37 -
<PAGE>
Effective October 1, 1994, a wholly-owned subsidiary of the Company acquired by
merger all of the assets and obligations of Schaden & Schaden, Inc., a Colorado
corporation ("SSI"), owned by Richard E. Schaden and Richard F. Schaden. The
assets of SSI included five wholly-owned Quizno's Classic Subs Restaurants
located in and near Denver, a majority interest in a sixth Quizno's Classic Subs
Restaurant located near Denver, and interests in two area directorships for the
Company owning three Quizno's Classic Subs Restaurants in the Chicago area and
two Quizno's Classic Subs Restaurants in Michigan as well as other assets. The
consideration paid by the Company to the Schadens, as selling shareholders, was
$1,139,000, of which $263,000 was paid in cash and $876,000 was paid in the
Company's Preferred Stock. The Class A Preferred Stock is non-voting, bears a
6.5% cumulative dividend, and became convertible on November 1, 1997 into
146,000 shares of the Company's Common Stock. The Company may call the Class A
Preferred Stock upon 60 days notice. During 1996 and 1997 each preferred
shareholder received dividends of $28,470 annually.
Richard F. Schaden and Frederick H. Schaden, directors of the Company, each own
an interest in one of the Company's Area Directors, Illinois Food Management,
Inc. ("IFM"). The Company also owns approximately 12% of IFM. The Area
Directorship is managed by an adjacent Area Director and, during 1997 and 1998,
all sales, opening and royalty commissions were paid to the managing Area
Director. The Company made no payments to IFM. In early 1996, IFM requested that
the Company convert to a promissory note certain amounts owed to the Company by
IFM. As a result of such request, IFM has issued to the Company a promissory
note for $63,547 payable over 6 years with an interest rate of 12% per annum. At
December 31, 1998, $ 58,149 was owed to the Company on this promissory note.
During 1997 and 1998, payments on such note were $4,655 and $6,212,
respectively. IFM is also indebted to the Company for $18,187 in connection with
the resale of a Restaurant once operated by IFM. IFM is reducing this debt by
offsetting commissions on royalty fees from that location paid to the managing
Area Director. The debt is expected to be reduced to zero in approximately 18
months. IFM also is indebted to the Company for $14,270 in accounts receivable
for wages, accounting fees, royalties and other amounts paid by the Company on
behalf of IFM. In 1999, IFM contributed its area directorship to an entity which
became the successor Area Director.
In 1995 the Company sold the Area Director rights for the Detroit, Michigan area
to a company wholly-owned by Richard F. Schaden. The fee to the Company was
$150,000, which is consistent with the then fees received for the sale of area
directorships to unaffiliated parties, and was paid in cash. During 1997 and
1998, the Company paid the Area Director $9,259 and $27,664 in royalties,
respectively. The area directorship was sold by Mr. Schaden in 1998 to an entity
owned by Scott Adams, a former Company employee, and the Company approved the
transfer of the Area Director Marketing Agreement.
In 1997, the Company purchased a Restaurant from a company in which Sue Hoover,
the Company's Executive Vice President of Marketing, is a 50% shareholder. The
Restaurant paid royalties to the Company of $2,027 and $0 in 1997 and 1998,
respectively, up to the date purchased by the Company. The purchase price was
$80,000, of which $15,000 was paid in cash and $65,000 paid by issuance of the
Company's promissory note bearing interest at 11% and payable over 4 years.
During 1997 and 1998, the Company made payments pursuant to the promissory note
totaling $18,839 and $18,993, respectively.
- 38 -
<PAGE>
Thomas Schaden, a brother of Richard F. Schaden and Frederick H. Schaden, is in
the insurance brokerage business and has acted as a broker for the Company's
insurance policies, including the directors and officers policies that the
Company has purchased.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B. The Company will furnish
to its shareholders of record as of the record date for its 1999 Annual
Meeting of Stockholders, a copy of any of the exhibits listed below upon
payment of $.25 per page to cover the costs of the Company of furnishing
the exhibits.
- 39 -
<PAGE>
2.1 Articles of Merger Merging Schaden & Schaden into The Quizno's Operating
Company, incorporated by reference to Exhibit 2(ii) to the Company's Form
8-K, dated November 4, 1994.
2.2 Asset Purchase Agreement, among The Quizno's Acquisition Company, Bain's
Deli Franchise Associates, through its General Partner, Gemini Enterprises,
Ltd., Gemini One, Inc. and Jolles #4 Partnership, dated November 12, 1997,
incorporated by reference to Exhibit 2.1 to Firm 8-K, filed by the Company
with the SEC on November 26, 1997.
3.1 Amended and Restated Articles of Incorporation of the Company, incorporated
by reference to Exhibit 3(a) to the Company's Registration Statement on
Form SB-2 (Reg. No. 33-72378-D).
3.2 Articles of Amendment to the Articles of Incorporation of the Company
Authorizing 146,000 Shares of Class A Cumulative Convertible Preferred
Stock, incorporated by reference to Exhibit 3.2 to the Company's Form
10-KSB, dated March 28, 1997.
3.3 Articles of Amendment changing the Company name, incorporated by reference
to Exhibit 3.3 to the Company's Form 10-KSB, dated March 28, 1997.
3.4 By-laws of the Company, incorporated by reference to Exhibit 3.4 to the
Company's Form 10-KSB, dated March 28, 1997 .
3.5 Articles of Amendment to the Articles of Incorporation of the Company,
authorizing 100,000 shares of Class B Preferred Stock and 200,000 shares of
Class C Cumulative Convertible Preferred Stock, incorporated by reference
to Exhibit 3.5 to the Company's Form 10-KSB, dated March 26, 1998.
4.1 Form of certificate evidencing Common Stock, $.001 par value, of the
Company, incorporated by reference to Exhibit 4(a) to the Company's
Registration Statement on Form SB-2 (Reg. No. 33-72378-D).
9.1 Voting Trust Agreement between Richard E. Schaden and Richard F. Schaden,
dated July 14, 1994, incorporated by reference to Exhibit A to the Schedule
13-D, dated July 14, 1994, filed by Richard E. Schaden and Richard F.
Schaden.
9.2 First Amendment to Voting Trust Agreement dated November 4, 1994,
incorporated by reference to Exhibit A to the Amendment No. 1 to Schedule
13-D, dated November 4, 1994, filed by Richard E. Schaden and Richard F.
Schaden.
9.3 Second Amendment to Voting Trust Agreement dated September 5, 1996,
incorporated by reference to Exhibit 9.3 to the Company's Form 10-KSB,
dated March 28, 1997.
10.1 Employment Agreement of Mr. Richard E. Schaden, incorporated by reference
to Exhibit 10(a) to the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.2 Employment Agreement of Mr. Richard F. Schaden, incorporated by reference
to Exhibit 10(b) to the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.3 Employee Stock Option Plan, incorporated by reference to Exhibit 99.1 to
the Company's Registration Statement on Form S-8 (Reg. No.333-45549).
10.4 Amended and Restated Stock Option Plan for Non-Employee Directors and
Advisors, incorporated by reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-8 (Reg. No. 333- 44549).
10.5 Indemnity Agreement of Richard E. Schaden, incorporated by reference to
Exhibit 10(e) to the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.6 Indemnity Agreement of Richard F. Schaden, incorporated by reference to
Exhibit 10(f) to the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.7 Indemnity Agreement of Patrick E. Meyers, incorporated by reference to
Exhibit 10(g) to the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.8 Indemnity Agreement of Brownell M. Bailey, incorporated by reference to
Exhibit 10(h) to the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.9 Indemnity Agreement of Frederick H. Schaden, incorporated by reference to
Exhibit 10(i) to the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.10Indemnity Agreement of J. Eric Lawrence, incorporated by reference to
Exhibit 10.10 to the Company's Form 10-KSB, dated March 26, 1998
10.11Indemnity Agreement of Mark L. Bromberg, incorporated by reference to
Exhibit 10.11 to the Company's Form 10-KSB, dated March 26, 1998
10.12Form of Franchise Agreement, incorporated by reference to Exhibit 10.12 to
the Company's Form 10-KSB, dated March 26, 1998.
10.13Form of Area Director Marketing Agreement, incorporated by reference to
Exhibit 10.12 to the Company's Form 10-KSB, dated March 28, 1997.
10.14(a) Headquarters Office Lease for the Company, incorporated by reference to
Exhibit 10.14 to the Company's Form 10-KSB, dated March 28, 1997.
10.14(b) Headquarters Office Lease, beginning on or about June 1, 1999
10.15Amendment to Employment Agreement between the Company and Mr. Richard E.
Schaden, dated February 29, 1996, incorporated by reference to Exhibit
10.15 to the Company's 10-KSB, dated March 29, 1996.
10.16Amendment to Employment Agreement between the Company and Mr. Richard F.
Schaden, dated February 29, 1996, incorporated by reference to Exhibit
10.16 to the Company's 10-KSB, dated March 29, 1996.
10.17Deferment Agreement between the Company and Illinois Food Management,
Inc., dated February 27, 1996, incorporated by reference to Exhibit 10.17
to the Company's 10-KSB, dated March 29, 1996.
10.18Investment Agreement between the Company and Retail and Restaurant Growth
Capital, L.P. ("RRGC"), dated as of December 31, 1996, incorporated by
reference to Exhibit 10.18 to the Company's From 10-KSB, dated March 28,
1997.
10.19Senior Subordinated Convertible Promissory Note (with Form of Warrant
attached) issued by the Company to RRGC, dated December 31, 1996,
incorporated by reference to Exhibit 99(a) to Schedule 13D filed by Retail
& Restaurant Growth Capital, L.P., a Delaware limited partnership, filed
with the SEC on January 9, 1998.
10.20Security Agreement between the Company and RRGC, dated as of December 31,
1996, incorporated by reference to Exhibit 10.20 to the Company's From
10-KSB, dated March 28, 1997.
10.21Stockholders' Agreement between the Company and RRGC, dated as of December
31, 1996, incorporated by reference to Exhibit 99(b) to Schedule 13D filed
by RRGC with the SEC on January 9, 1998.
10.22Amended and Restated Senior Subordinated Convertible Note issued by the
Company to RRGC, incorporated by reference to Exhibit 99(c) to Schedule
13D/A filed by RRGC with the SEC on December 4, 1997.
10.23First Amendment to Investment Agreement between RRGC and the Company,
dated as of October 8, 1997, incorporated by reference to Exhibit 10.23 to
the Company's Form 10-KSB, dated March 26, 1998.
10.24Warrant to Purchase Shares of Common Stock of the Company, dated as of
November 11, 1997 and issued to RRGC, incorporated by reference to Exhibit
10.24 to the Company's Form 10-KSB, dated March 26, 1998.
10.25First Amendment to Security Agreement between RRGC and the Company, dated
as of November 11, 1997, incorporated by reference to Exhibit 10.25 to the
Company's Form 10-KSB, dated March 26, 1998.
10.26Amended and Restated Security Agreement among the Company, The Quizno's
Operating Company and RRGC, dated as of December 31, 1996, incorporated by
reference to Exhibit 10.26 to the Company's Form 10-KSB, dated March 26,
1998.
10.27Asset Purchase Agreement among Stoico Restaurant Group, Inc. d/b/a Stoico
Food Service, Inc., Sub & Stuff, Inc. and spaghetti Jack's Inc. and
Quizno's Kansas LLC, incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K, filed by the Company with the SEC on September 1, 1998.
10.28Asset Purchase Agreement between The Quizno's Acquisition Company and
Bain's Deli Corporation dated as of February 1, 1999.
20.1 Risk Factors Section from the Company's Prospectus dated January 9, 1998
included in the Registration Statement on Form S-3 filed by the Company
(Registration No. 333-38691), incorporated by reference to Exhibit 20.1 to
the Company's 10-KSB, dated March 26, 1998.
21.1 List of Company subsidiaries.
23 Consent of Ehrhardt Keefe Steiner & Hottman PC to the incorporation by
reference of its report dated March 2, 1999 appearing elsewhere in this
Form 10-KSB into two Registration Statements on Form S-8 of the Company,
Reg. Nos. 333-45549 and 333-45205, and the Company's Registration Statement
on Form S-3, Reg. No. 333-38691.
(b) Reports on Form 8-K. The Company filed four (4) reports on Form 8-K and one
(1) report on Form 8-K/A during the last quarter of 1998. All four Form 8-K
filings reported on only Item 5 matters. Such filings where made on October
1, November 3, November 6, and December 29, 1998, and related to press
releases announcing the signing of a master franchise agreement for Japan,
Restaurants opened in the third quarter, third quarter financial results
and a going private proposal, respectively. The one Form 8-K/A was filed on
November 2, 1998 and amended an earlier Form 8-K by filing financial
statements in connection with the Company's acquisition of certain assets.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on March 31, 1999.
THE QUIZNO'S CORPORATION
By:/s/ Richard E. Schaden
---------------------------
Richard E. Schaden,
President and Chief Executive
Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated and on the dates indicated.
Signature Title Date
/s/ Richard E. Schaden President, Chief Executive
______________________ Officer and Director
Richard E. Schaden (Principal Executive Officer) March 31, 1999
/s/ Richard F. Schaden Vice President,
______________________ Secretary and Director
Richard F. Schaden March 31, 1999
/s/ Brownell M. Bailey Director
______________________
Brownell M. Bailey March 31, 1999
/s/J. Eric Lawrence Director
______________________
J. Eric Lawerence March 31, 1999
/s/ Frederick H. Schaden Director
____________________
Frederick H. Schaden March 31, 1999
/s/ Mark L. Bromberg
___________________ Director
Mark L. Bromberg March 31, 1999
/s/ John L. Gallivan Chief Financial Officer
____________________ and Treasurer (Principal
John L. Gallivan Financial and Accounting
Officer March 31, 1999
Exhibit 10.14b
LARIMER SQUARE OFFICE LEASE
[THE QUIZNO'S CORPORATION]
TABLE OF CONTENTS
OFFICE LEASE
SCHEDULE 1 (BASIC TERMS AND CONDITIONS)
EXHIBIT "A" (SITE PLAN)
EXHIBIT "B" (RULES AND REGULATIONS)
EXHIBIT "C" (CERTIFICATE OF GOOD STANDING)
EXHIBIT "D" (WORK LETTER)
EXHIBIT "E" (TENANT'S INSURANCE OBLIGATIONS)
EXHIBIT "F" (COMMENCEMENT CERTIFICATE)
EXHIBIT "G" (PARKING)
EXHIBIT "H" (APPROVED PLANS AND SPECIFICATIONS)
<PAGE>
Office Lease
THIS OFFICE LEASE (hereinafter referred to as this "Lease") is made this 1st day
of January 1999 ("Effective Date"), by and between Hermanson Family Limited
Partnership I, a Colorado limited partnership, and Larimer Square Associates,
Ltd., a Colorado limited partnership (hereinafter collectively referred to as
"Landlord") and The Quizno's Corporation, a Colorado corporation ("Tenant").
WITNESSETH, that for and in consideration of the mutual covenants and agreements
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and confessed, Landlord and Tenant
do hereby mutually agree as follows:
1. Effective Date. This Effective Date of this Lease shall be as set forth
above.
2. Premises. Landlord does hereby lease and demise to Tenant for use only by
Tenant, and Tenant does hereby hire, lease and take from Landlord, to have
and to hold for the Lease Term and upon the covenants and conditions
hereinafter set forth, the Premises hereinafter described, as located in
that certain area of lower downtown Denver known as "Larimer Square,"
located in the City and County of Denver, State of Colorado (the "Square"),
and as depicted in Exhibit "A" attached hereto and made a part hereof:
-----------
Office space known as 1st, 2nd and 3rd floors of the Lincoln Hall Building;
Address: 1415 Larimer Street Denver, Colorado 80202;
Consisting of approximately 13,368 rentable square feet of floor area. Landlord
and Tenant hereby acknowledge and agree that upon completion of the finish work
as set forth in the Work Letter attached hereto as Exhibit D, Landlord's
architect will calculate and certify the actual square footage in the Premises
which calculation will be conducted according to BOMA standards. The square
footage will then be acknowledged by Landlord and Tenant in the Commencement
Certificate, the form of which is attached hereto as Exhibit F.
3. Lease Term. The term of Tenant's possession of the Premises hereunder shall
be for a period of Seven Years (the "Lease Term") (or until such Lease Term
shall sooner terminate as provided herein), commencing on the Rent
Commencement Date and expiring on the Expiration Date.
(a) The "Rent Commencement Date" shall be the date the Premises are "Ready
for Occupancy" as that term is defined in Paragraph 8 below which is
anticipated to be June 1, 1999.
(b) The "Expiration Date" shall occur eighty four months after the Rent
Commencement Date which is anticipated to occur May 31, 2006.
4. Security Deposit. Tenant shall, concurrently with its execution hereof,
deposit with Landlord a sum equal to one month's rent, (the "Security
Deposit"), which shall be held and administered by Landlord as set forth
herein.
5. Rent; Payment.
(a) Definition. "Rent" or "rental" means the sum of (a) all "Base Rent"
due and payable hereunder, as hereinafter described, and (b) all other
financial obligations of Tenant arising under this Lease (such other
financial obligations being herein referred to collectively as
"Additional Rent"). Tenant shall pay as "Additional Rent" all sums
required to be paid by Tenant pursuant to the terms of this Lease,
whether or not the same be designated "Additional Rent." All amounts
of Rent payable from time to time hereunder shall be deemed to
comprise a single rental obligation of Tenant to Landlord.
(b) Payment. Tenant shall fully and timely pay, without setoff, deduction,
abatement, prior notice, or demand, all Rent due and payable
hereunder, in lawful money of the United States, to Landlord's
property manager at the following address:
Larimer Square Management Corporation
1400 Larimer Street
Suite 300
Denver, Colorado 80202-1705
or to such other entity and/or at such other address as Landlord may from
time to time notify Tenant in writing.
6. Base Rent; Payment.
(a) Base Rent. Tenant agrees to pay as Base Rent for the use and occupancy
of the Premises during the Lease Term annual rental as follows:
Annual
Period Base Rent
First Six Months of First Lease Year $0 per square foot
Last Six Months of First Lease Year $24.19 per square foot
Second Lease Year $24.19 per square foot
Third Lease Year $24.19 per square foot
Fourth Lease Year $25.19 per square foot
Fifth Lease Year $25.19 per square foot
Sixth Lease Year $26.19 per square foot
Seventh Lease Year $26.19 per square foot
For purposes of this Lease, "Lease Year" shall mean each twelve (12) month
period beginning with the Rent Commencement Date, or any anniversary thereof,
and ending on the preceding date one (1) year later.
(b) Payment. Base Rent shall be payable in advance, in equal monthly
installments, without setoff, deduction, abatement, prior notice, or
demand, on the first day of each calendar month.
7. Base Year Occupancy Cost Stop. For the purposes of Section 3 of Schedule 1
attached to this Lease, the "Base Year Occupancy Cost Stop" shall be equal
to the PSF Office Tenant Occupancy Costs (as defined in said Section 3 of
Schedule 1 attached to this Lease) for the Premises in respect of the
calendar year 1999 assuming 100% occupancy in the Leased Premises for such
year.
8. Finish Work.
(a) Landlord has agreed to perform certain remodeling work in the Premises
as set forth in the work letter to be executed between Landlord and
Tenant concurrently herewith (the "Work Letter") the form of which is
attached hereto as Exhibit D. Other than as set forth in the Work
Letter, Landlord shall have no obligations for the completion or
remodeling of the Premises, and Tenant shall accept the Premises in
their "as is" condition on the Rent Commencement Date. If Landlord is
to complete or remodel the Premises and if the Premises are not "Ready
for Occupancy," as hereafter defined, on the anticipated Rent
Commencement Date as set forth in Paragraph 3(a) above (regardless of
whether such delay is occasioned by Landlord's delay in the finish
work or the previous tenant's failure to timely vacate the Premises),
Tenant's obligation to pay Base Rent and other charges shall not
commence until the Premises are Ready for Occupancy, provided,
however, from the effective date hereof, other than the payment of
Base Rent, this Lease, and all of the covenants, conditions, and
agreements herein contained shall be in full force and effect. The
postponement of Tenant's obligation to pay Base Rent for such period
prior to the delivery of the Premises to Tenant, Ready for Occupancy,
as hereinafter defined, shall be in full settlement of all claims
which Tenant might otherwise have by reason of the Premises not being
Ready for Occupancy on the anticipated Rent Commencement Date.
However, if Tenant takes possession of all or any part of the Premises
prior to the date the Premises are Ready for Occupancy for the purpose
of conducting its usual business therein, all terms and provisions of
this Lease shall apply, including the obligations for the payment of
all Rent, and other amounts owing hereunder. "Ready for Occupancy" as
used herein shall mean the date that Landlord shall have substantially
completed the Premises or any remodeling work to be performed by
Landlord, to the extent agreed to in the Work Letter. The certificate
of the architect (or other representative of Landlord) in charge of
supervising the completion or remodeling of the Premises shall control
conclusively the date upon which the Premises are Ready for Occupancy,
and the obligation to pay rent begins as aforesaid. In addition to the
above, if Landlord is delayed in delivering the Premises to Tenant due
to the failure of a prior occupant to vacate the same, then the
obligation for the payment of rent and the commencement of the term
hereof shall also be postponed, as hereinabove set forth, and such
postponement shall be in full settlement of all claims which Tenant
may otherwise have by reason of such delay of delivery. In the event
Landlord's Contractor (as defined in the Work Letter) encounters
asbestos or asbestos containing materials in connection with the
Finish Work, then Landlord shall be responsible for the cost of any
requisite containment or removal occasioned thereby.
(b) If the Rent Commencement Date is delayed pursuant to subparagraph (a)
above, and such Rent Commencement Date would occur on other than the
first day of the month, the Rent Commencement Date shall be further
delayed until the first day of the following month and Tenant shall
pay proportionate Rent at the same monthly rate set forth herein (also
in advance) for such partial month. In the event said Rent
Commencement Date is so delayed, the Expiration Date shall be extended
so that the Lease Term will continue for the full period set forth in
Paragraph 3 above. As soon as the Lease Term commences, Landlord and
Tenant shall execute the Commencement Certificate (the form of which
is attached hereto as Exhibit F), if requested by either party,
setting forth those items set forth therein.
(c) Notwithstanding the foregoing, if the tenant who currently occupies
the Premises fails to vacate the Premises to Landlord on or before
April 4, 1999, then Tenant shall have the right to terminate this
Lease by delivering written notice to Landlord within five (5)
business days thereafter. If Tenant fails to deliver the termination
notice within the time period set forth herein, Tenant shall be deemed
to have waived its termination right and this Lease shall continue in
full force and effect.
<PAGE>
9. Tenant's Insurance Information. Information regarding Tenant's insurance
coverage is as follows:
(a) General Liability Insurance:
Name of Insurance Company:
Kemper Insurance Co.
Name of Broker:
Lockton Companies
Policy Number:
7J241605800
Phone Number of Broker:
303-753-2000
Address of Broker:
4500 Cherry Creek Drive South, Suite 400, Denver, CO 80222
(b) Workers' Compensation Insurance:
Name of Insurance Company:
Kemper Insurance Co.
Name of Broker:
Lockton Companies
Policy Number:
7CQ41603601
Phone Number of Broker:
303-753-2000
Address of Broker:
4500 Cherry Creek Drive South, Suite 400, Denver, CO 80222
12. Additional Lease Documents. Attached hereto are Schedule 1 ("Basic Terms
and Conditions"), Exhibit "A" ("Site Plan"), and Exhibit "B" ("Rules and
Regulations"), each of which attachments shall be and hereby is made as
fully a part hereof as if included herein. This Lease and all attachments
hereto collectively constitute the "Lease."
13. Authority of Tenant. Each of the persons executing this Lease on behalf of
Tenant hereby represents and warrants that, as of the Effective Date of
this Lease: (i) Tenant is a Colorado corporation, duly formed and in good
standing and qualified to do business in the State of Colorado; (ii)
attached hereto as Exhibit "C" is a copy of a Certificate of Good Standing
for Tenant, issued and dated by the Colorado Secretary of State within 30
days prior to the Effective Date; (iii) Tenant has paid all applicable
state franchise fees, licensing fees, registration fees, and other similar
fees and taxes necessary to maintain Tenant in good standing in the State
of Colorado; (iv) Tenant will file when due all forms, reports, fees and
other documents necessary to comply with applicable laws; (v) the
signatories signing on behalf of Tenant have the requisite authority to
bind Tenant pursuant to Tenant's bylaws or a certified copy of a resolution
authorizing the same by Tenant's board of directors; and (vi) when executed
by such person(s), this Lease shall be the valid and binding obligation of
Tenant, enforceable against Tenant.
<PAGE>
LANDLORD:
HERMANSON FAMILY LIMITED PARTNERSHIP I,
a Colorado limited partnership, and
LARIMER SQUARE ASSOCIATES, LTD.,
a Colorado limited partnership,
By: LARIMER SQUARE MANAGEMENT CORPORATION, a Colorado
corporation, its Authorized Agent
By: ----------------------------------------------
Jeffrey F. Hermanson
President
TENANT:
THE QUIZNO'S CORPORATION, a Colorado corporation
By:--------------------------------------------------
Title:-----------------------------------------------
Tenant's Notice Address:
At the Premises:
1415 Larimer Street
Denver, CO 80202
<PAGE>
SCHEDULE 1
BASIC TERMS AND CONDITIONS FOR OFFICE LEASE
Section 1. Security Deposit.
(a) The Security Deposit shall be deposited as security for the prompt,
full, and faithful performance by Tenant of each and every term,
covenant, duty, responsibility, obligation, and liability of this
Lease imposed upon Tenant.
(b) The Security Deposit shall not be mortgaged, assigned, transferred or
encumbered by Tenant without the prior written consent of Landlord;
and any such act on the part of Tenant shall be without force and
effect and shall not be binding upon Landlord.
(c) In the event that Tenant is in default hereunder, Landlord may use,
apply, or retain the whole or any part of the Security Deposit for the
payment of Rent or Additional Rent, including without limitation any
sum expended by Landlord on Tenant's behalf in accordance with the
provisions of this Lease or any sum which Landlord may expend or be
required to expend by reason of Tenant's default hereunder, including
without limitation damages or repairs to the Premises or any damages
or deficiency in the re-letting of the Premises.
(d) The use, application, or retention of the Security Deposit or any
portion thereof by Landlord shall not prevent Landlord from exercising
any other right or remedy provided for hereunder or at law, and shall
not be construed as liquidated damages nor operate as a limitation on
any recovery to which Landlord may otherwise be entitled.
(e) In the event the Security Deposit held by Landlord is reduced by any
use or application by Landlord as described above, Tenant shall
deposit with Landlord, within 10 business days after written notice to
Tenant, an amount sufficient to restore the full amount of the
Security Deposit. A failure by Tenant to so restore the Security
Deposit shall be an event of default hereunder, as set forth in
Section 17(a)(iii)(B) hereof.
(f) In the event that Tenant shall fully and faithfully comply with all
the provisions of this Lease, both monetary and nonmonetary, the
Security Deposit or any balance thereof, without any interest thereon,
shall be reimbursed to Tenant within 60 calendar days following the
expiration or earlier termination of the Lease Term, provided that the
Premises are properly vacated by Tenant, the Premises have been
inspected by Landlord, all keys to the Premises have been returned to
Landlord, and no further issues or liabilities remain under this
Lease. Tenant hereby specifically waives any applicable statutory or
regulatory requirement for the earlier return of such Security
Deposit.
(g) In the event of a sale or other transfer of Landlord's interest in the
Premises, Landlord shall have the right to transfer the Security
Deposit to the purchaser or transferee thereof, and thereupon, if such
transferee has assumed in writing Landlord's obligations hereunder,
Landlord shall be discharged from any further liability with respect
to the Security Deposit; and Tenant agrees to look solely to such
transferee for the return of the Security Deposit. This Section shall
also apply to any subsequent transfers of Landlord's interest in the
Premises.
(h) Landlord shall not be required, and Tenant hereby specifically waives
any requirement of Landlord, to keep the Security Deposit separate
from Landlord's general funds; and Tenant shall not be entitled to,
and Tenant hereby specifically waives any requirement of Landlord to
pay any interest on the Security Deposit. Landlord may use, invest, or
employ the Security Deposit as if the Security Deposit were its own
funds; provided, however, that in no event shall the foregoing alter
Landlord's obligation to refund the Security Deposit on the terms and
conditions provided for under this Section.
(i) In the event of bankruptcy or other debtor-creditor proceedings
against Tenant, the Security Deposit shall be deemed to be applied
first to the payment of rent and other charges due Landlord for the
earliest periods prior to the filing of such proceedings.
Section 2. Payments.
(a) Interest on Late Payments. If Tenant fails to pay any item or
installment of Rent within ten (10) calendar days following the date
that the same is due and payable, such unpaid amounts shall bear
interest at rate of interest described in Section 40 hereof from the
date due to the date of payment.
(b) Late Fee. Tenant further acknowledges that the late payment by Tenant
of any installment or item of Rent will cause Landlord to incur
certain costs and expenses not contemplated under this Lease, the
exact amount of which costs are extremely difficult or impracticable
to fix. Such costs and expenses will include, without limitation,
administrative and collection costs (excluding legal costs and fees,
which are governed by and separately recoverable under Section 28
hereof), and processing and accounting expenses. Therefore, if any
such installment is not received by Landlord from Tenant within ten
(10) calendar days following the date that the same is due and
payable, Tenant shall immediately pay to Landlord a late charge of
$200.00. Landlord and Tenant agree that this late charge represents a
reasonable estimate of such costs and expenses and is fair
compensation to Landlord for its loss caused by Tenant's nonpayment.
Should Tenant pay said late charge but fail to pay contemporaneously
therewith all unpaid amounts of Base Rent and Additional Rent,
Landlord's acceptance of this late charge shall not constitute a
waiver of Tenant's default with respect to Tenant's nonpayment nor
prevent Landlord from exercising all other rights and remedies
available to Landlord under this Lease or under law.
(c) Returned Checks. In the event that any check tendered by Tenant fails
to clear or be honored by the financial institution upon which it is
drawn, then: (i) Landlord may impose a service charge in respect
thereof, in the amount of $20.00, as Additional Rent hereunder; (ii)
if Tenant fails to provide immediately available funds to "cover" such
dishonored check (and the foregoing service charge) within 2 business
days following Landlord's written demand therefor, such failure shall
constitute an event of default under the Lease as set forth in Section
17(a)(iii)(A) hereof; and (iii) at any time thereafter, Landlord may
require that all further payments required to be made by Tenant to
Landlord hereunder be made in certified or other immediately available
funds.
(d) No Post-dated Checks. No post-dated checks shall be or need be
accepted by Landlord, and the tender of a post-dated check or checks
by Tenant shall not be considered as payment by Tenant of any amounts
due and payable hereunder.
(e) No Cash. No cash shall be or need be accepted by Landlord, and the
tender of cash by Tenant shall not be considered as payment by Tenant
of any amounts due and payable hereunder.
(f) No Third Party Checks. No checks drawn on any account other than an
account which bears the exact name of Tenant shall be or need be
accepted by Landlord, and the tender of any such check shall not be
considered as payment of any amounts due and payable by Tenant
hereunder.
(g) Non-curable Event of Default. In the event that Tenant fails, on 3 or
more occasions within a single calendar year, to fully and timely pay
any then-due installment of (i) Base Rent or (ii) Additional Rent for
the items described in Section 3 hereof (if applicable) (and provided
Landlord has delivered written notice to Tenant that the requisite
payment was late, then such event shall be a non-curable event of
default hereunder, as set forth in Section 17(a)(i) hereof.
Section 3. Occupancy Cost Stop.
(a) Office Tenant Occupancy Costs. For the purposes of this Section, the
term "Office Tenant Occupancy Costs" in respect of any particular
calendar year means any and all costs and expenses arising in
connection with Landlord's operation, ownership, maintenance, and
management of the Square (including all its components and common
areas) and which are allocated to the office tenants of the Square in
accordance with the reasonable business practices and procedures
utilized by Landlord to determine and apportion such costs and
expenses among the space within the Square designated from time to
time by Landlord for occupancy by such office tenants ("Office Space")
and all other rentable space within the Square. Office Tenant
Occupancy Costs shall expressly exclude the costs of capital
improvements and replacements made in or to the Building or Square.
The Office Tenant Occupancy Costs shall include, but are not
necessarily limited to:
(i) all real and personal property and ad valorem taxes, and
assessments (collectively, "Taxes"), actually paid during such
calendar year in respect of the Square and allocated by Landlord
to the Office Space (being that portion of Taxes that is
allocated to the Premises based upon the relative values of all
real property located within, and from time to time constituting,
Larimer Square, all as determined by Landlord in its reasonable
discretion);
(ii) all utility expenses incurred by Landlord in supplying water,
electricity, sanitary sewer, HVAC, and other utility services to
the Square and allocated by Landlord to the Office Space (which
allocation shall be based upon the relative square footage of
Office Space as compared to all other rentable space within the
Square);
(iii)all insurance premiums and other insurance costs incurred by
Landlord in insuring the Square against such risks, and in such
amounts, as Landlord shall determine (but not inconsistent with
the insurance obligations imposed upon Landlord under its various
leases with tenants of the Square), as allocated by Landlord to
the Office Space (which allocation shall be based upon the
relative square footage of Office Space as compared to all other
rentable space within the Square); and
(iv) all other expenses incurred by Landlord in operating, owning,
maintaining, insuring, and protecting the Square, as allocated by
Landlord to the Office Space (which allocation shall be based
upon Landlord's good faith estimate of the benefits and burdens
reflected in each item of expense as allocable to the Office
Space).
(b) PSF Office Tenant Occupancy Costs. As soon as practicable following
the close of each calendar year, Landlord shall calculate a figure
(the "PSF Office Tenant Occupancy Costs") representing that portion of
the Office Tenant Occupancy Costs incurred by Landlord in respect of
such calendar year which are allocable to the Premises in accordance
with Section 3(a) hereof, and which shall be expressed as a "per
square foot" number.
(c) Tenant's Obligation. During (and in respect of) each calendar year or
partial calendar year of the Lease Term, commencing on the first
January 1 following the Rent Commencement Date, Tenant agrees to pay
to Landlord, as Additional Rent hereunder, an annual amount ("Tenant's
Occupancy Cost Share") equal to the product obtained by multiplying --
(i) the rentable square feet of the Premises, by
(ii) the excess of --
(A) the PSF Office Tenant Occupancy Cost in respect of such
calendar year, over
(B) the Base Year Occupancy Cost Stop, as hereinabove specified.
Provided, that the excess of (ii)(A) over (ii)(B) directly above shall not
be less than zero.
(d) Method of Payment. Commencing on January 1 of the first full calendar
year of the Lease Term and continuing throughout the balance of the
Lease Term, Tenant shall pay Landlord, in advance on the first day of
each calendar month, a portion of the amount estimated by Landlord to
be Tenant's Occupancy Cost Share in respect of such calendar year,
determined in accordance with the following provisions. During
December of each calendar year, or as soon after each December as
practicable, Landlord will give Tenant written notice of its estimate
of Tenant's Occupancy Cost Share payable for the ensuing calendar
year. On or before the first day of each calendar month during such
ensuing calendar year, Tenant will pay to Landlord one-twelfth
(1/12th) of such estimated amounts. Provided, however, that if such
notice is not given until sometime subsequent to December, then Tenant
will continue to pay on the basis of the prior year's estimate until
the first day of the calendar month after such notice is given; and on
such first day of the calendar month after such notice is given
("first day"), Tenant shall commence paying to Landlord one-twelfth
(1/12th) of such estimated amounts, and shall also pay to Landlord the
positive difference, if any, between (i) the amount that should have
been paid by Tenant under this subsection if such notice had been
given in the prior December less (ii) the amount paid by Tenant under
this subsection through such first day (provided, that if such
difference is a negative number, then Tenant shall be entitled to a
credit in the amount of such negative difference against payments next
thereafter to become due Landlord as set forth in this subsection or
refunded to Tenant at Tenant's election). The foregoing estimated
monthly charge may be adjusted by Landlord at the end of any calendar
quarter on the basis of Landlord's experience and reasonably
anticipated costs.
(e) Annual Reconciliation. As soon as practicable following the end of
each calendar year, Landlord shall furnish Tenant a statement covering
the calendar year just expired, showing (i) the actual amount of
Tenant's Occupancy Cost Share for such calendar year, and (ii) the
payments made by Tenant with respect to such period as set forth in
subsection (d) above. The foregoing amounts shall be reconciled as
follows:
(A) If the sum described in (i) directly above exceeds the sum
described in (ii) directly above, Tenant shall pay Landlord the
deficiency within 10 days after receipt of such statement.
(B) If the sum described in (ii) directly above exceeds the sum
described in (i) directly above, Tenant shall be entitled to a
credit in the amount of such excess, against payments next
thereafter to become due Landlord as set forth in subsection (d)
above (provided, that if the Lease has then expired or terminated
and no further payments are due Landlord, then Landlord shall
refund such excess to Tenant within 30 days of Tenant's request
therefor).
(C) If Tenant shall dispute Tenant's Occupancy Cost Share submitted
by Landlord above, Tenant shall give landlord written notice of
such dispute within thirty (30) days after Landlord advises
Tenant of such adjustment or proposed increase or decrease. If
Tenant does not give Landlord such notice within such time,
Tenant shall have waived its right to dispute the amounts so
determined. If Tenant timely objects, Tenant shall have the right
to engage its own certified public accountants; provided such
group is not retained on any type of contingency fee basis
("Tenant's Accountants") for the purpose of verifying the
accuracy of the statement complained of or the reasonableness of
the estimated increase or decrease. If Tenant's Accountants
determine that an error has been made, Landlord and Tenant's
Accountants shall endeavor to agree upon the matter, failing
which the parties shall settle the dispute by judicial action or
in such other manner as they agree. All costs incurred by Tenant
in obtaining its own accountants shall be paid for by Tenant
unless Tenant's Accountants disclose an error, acknowledged by
Landlord (or found to have occurred in a judicial action), of
more than six percent (6%) in the computation of the total amount
of Office Tenant Occupancy Costs as set forth in the statement
submitted by Landlord which is challenged, in which event
Landlord shall pay the reasonable costs incurred by Tenant in
obtaining such audit (excluding any charges billed on a
contingency fee basis). Notwithstanding the pendency of any
dispute over any particular statement, Tenant shall continue to
pay Landlord the amount of the adjusted monthly installments of
rent determined by Landlord until the adjustment has been
determined to be incorrect as aforesaid. Any audit conducted by
Tenant shall occur at Landlord's offices and must be completed
within ninety (90) days after Landlord advises Tenant of such
reconciliation.
(f) Survival. The obligation of Tenant to pay Tenant's Occupancy Cost
Share accruing during the term of this Lease shall survive any
termination or expiration hereof.
Section 4. Possession. Tenant shall accept the Premises in an "as is" condition,
except for latent defects of which Tenant has given notice to Landlord within
180 days after the date Tenant first occupies the Premises. Landlord shall have
no responsibility to make any renovations, improvements, decorations, or other
alterations to the Premises prior to the Rent Commencement Date or otherwise,
other than as may be specifically set forth in the Work Letter attached hereto
as Exhibit "D".
Section 5. Services and Utilities. Provided Tenant is not in default under any
of the terms, covenants and conditions of this Lease, but subject in all events
to Section 3 hereof, Landlord exclusively shall furnish and supply the
following:
(a) HVAC.
(i) Landlord shall furnish and supply to the Premises, heating,
ventilation, and air-conditioning designed to provide temperature
and humidity conditions required, in Landlord's reasonable
business judgment, for occupancy of the Premises under normal
office building operations daily from 8:00 a.m. to 6:00 p.m.
(Saturdays, 8:00 a.m. to 1:00 p.m., Sundays and holidays
excepted).
(ii) Whenever machines or equipment are used in the Premises (other
than as contemplated within the plans and specifications attached
hereto as Exhibit H and incorporated herein by this reference)
which affect the temperature otherwise maintained by the
Building's HVAC system, Landlord reserves the right, in its
reasonable business opinion, either to require Tenant to
discontinue use of such machines or equipment, or to install
appropriate supplementary equipment in the Premises to reduce or
offset such effect. The cost of purchasing, installing,
constructing, and maintaining any such supplementary equipment
shall be borne solely by Tenant. If such supplementary equipment
is provided by Landlord in its sole discretion, Tenant shall pay
to Landlord all such actual costs within 10 calendar days
following Landlord's written demand therefor, as Additional Rent
hereunder. The cost of maintaining any such supplementary
equipment (including the utility costs thereof) may be billed by
Landlord to Tenant on a monthly basis or otherwise made a part of
Tenant's monthly rental obligation hereunder, in such manner as
Landlord may from time to time determine.
(iii)Tenant shall perform no work on the Building's HVAC systems (or
cause any such work to be performed), whether within or without
the Premises, without first obtaining Landlord's express written
consent thereto.
(b) Electricity.
(i) Landlord shall furnish and supply to the Premises, quantities of
electric current necessary to operate the business in the
Premises as contemplated in the plans and specifications attached
hereto as Exhibit H and incorporated herein by this reference.
Tenant acknowledges that the electric current being supplied to
the Premises as referenced in the plans and specifications
attached hereto as Exhibit H, and the quantity and location of
all such outlets, is fully sufficient for Tenant's purposes.
(ii) Tenant shall not install or use any equipment (such as computers,
copying machines, or other office equipment, apparatus, or
devices whatsoever) which will require the use of electricity in
excess of the amount of electricity furnished or supplied to the
Premises as of the Rent Commencement Date, without first
obtaining Landlord's advance written consent. The cost of
purchasing, installing, constructing, and maintaining any
supplementary equipment necessary to increase the electric
current shall be borne solely by Tenant. If such supplementary
equipment is provided by Landlord, Tenant shall pay to Landlord
all such actual costs within 10 calendar days following
Landlord's written demand therefor, as Additional Rent hereunder.
The cost of maintaining any such supplementary equipment
(including the utility costs thereof) may be billed by Landlord
to Tenant on a monthly basis or otherwise made a part of Tenant's
monthly rental obligation hereunder, in such manner as Landlord
may from time to time determine.
(iii)At Landlord's option, at any time and from time to time separate
meters for determining electrical consumption within the Premises
may be installed by Landlord, and Tenant will pay the full amount
billed on such meters. Landlord shall be responsible for all
costs of acquiring, installing, and maintaining such meter(s).
(iv) Tenant shall perform no work on the Building's electrical systems
(or cause any such work to be performed), whether within or
without the Premises, without first obtaining Landlord's express
written consent thereto (including but not limited to any
replacement of outlets or any diversion of electric lines).
(c) Water. Landlord shall furnish and supply water at those points of
supply provided within the Building as of the Rent Commencement Date
for the non-exclusive general use of all tenants in the Building, to
be drawn through fixtures (such as drinking fountains and restrooms)
installed by Landlord. Water shall be furnished to the Premises in
accordance with the approved plans and specifications for the Premises
attached hereto as Exhibit H.
(d) Janitor Service. Landlord shall furnish and supply janitor services in
and about the Premises comparable to standard janitor service
furnished to comparable Class "A" buildings for professional or office
uses.
(e) Elevator Service. If the Building is equipped with either a passenger
elevator or a freight elevator, Landlord will cause the same to be
maintained in normal working order, for the use of Tenant in common
with other tenants of the Building and their customers and invitees,
daily at reasonable and customary hours. Operatorless automatic
elevator service shall be deemed "elevator service" within the meaning
of this subsection. Tenant shall not use, or authorize the use of any
elevator in any manner exceeding posted operating specifications.
(f) Maintenance. Landlord shall provide routine maintenance services for
the common areas of the Building in the manner and to the extent
deemed to be necessary in Landlord's reasonable business judgment.
(g) No Warranty. Landlord does not warrant that any services and utilities
will be free from shortages, failures, variations, or interruptions
caused by repairs, renewals, improvements, changes of service,
alterations, strikes, weather conditions, lockouts, labor
controversies, accidents, inability to obtain services, fuel, steam,
water or supplies, governmental requirements or requests, or other
causes beyond the reasonable control of Landlord. No such failure or
interruption of service shall be deemed an eviction or disturbance of
Tenant's use and possession of the Premises or any part thereof, or
render Landlord liable to Tenant for damages, by abatement of rent or
otherwise, or relieve Tenant from performance of Tenant's obligations
under this Lease. Landlord in no event shall be liable for damages by
reason of loss of profits, business interruptions, or other
consequential damages in respect thereof. Notwithstanding the
foregoing, Landlord agrees that if there is an interruption within
Landlord's reasonable control (other than an interruption resulting
from a fire or other casualty) of the services which Landlord is
obligated to provide that renders the Premises unusable for Tenant's
specific use and continues for a period of 3 or more consecutive days
after Landlord receives notice from Tenant (an "Unauthorized
Interruption"), rent will abate in proportion to the unusable portion
of the Premises, except as provided herein, commencing at the end of
such 3-day period and abatement shall continue until such services
have been restored to permit Tenant's specific use. Landlord agrees to
use its reasonable efforts to cause utility companies to restore any
interruptions of the supply of gas, electricity, and water utilities
to the Premises.
Section 6. Condition and Care of Premises.
(a) By taking possession of the Premises, Tenant conclusively accepts the
Premises and represents and acknowledges that the Premises are in good
and sanitary order, condition, and repair.
(b) Landlord shall endeavor to maintain the Premises and fixtures therein
(excluding Tenant's furnishings, trade fixtures, equipment, and
personal property) in good order and condition during the Lease Term,
and shall attempt to make all repairs thereto and to the Building
which Landlord deems necessary. Provided, that if any item of
maintenance or repair is caused in whole or in part by the act,
neglect, fault of, or omission of any duty by, Tenant or its
employees, agents, contractors, or invitees, then Tenant shall pay to
Landlord the actual cost of such maintenance and repair, within 10
business days following the written demand of Landlord, as Additional
Rent hereunder.
(c) Tenant shall be solely responsible for the following costs and
expenses, notwithstanding anything expressed or implied herein to the
contrary: any carpet installation, re-carpeting, or carpet cleaning
within the Premises subsequent to the Rent Commencement Date; and any
painting of walls within the Premises.
(d) Anything contained in this Section to the contrary notwithstanding,
Landlord shall maintain and repair the structural portions of the
Building, including the roof, foundations, basic plumbing, HVAC, and
electrical systems installed or furnished by Landlord. All such
activities shall be at the sole cost and expense of Landlord;
provided, that if any item of maintenance or repair is caused in whole
or in part by the act, neglect, fault of, or omission of any duty by,
Tenant or its employees, agents, contractors, or invitees, then Tenant
shall pay to Landlord the actual cost of such maintenance and repair,
within 10 calendar days following the written demand of Landlord, as
Additional Rent hereunder.
(e) There shall be no abatement of Rent and no liability of Landlord by
reason of any injury to or interference with Tenant's business arising
from the making of any repairs, alterations, or improvements in or to
any portion of the Square, the Building or the Premises or in or to
fixtures, appurtenances, and equipment therein.
(f) Tenant specifically waives any rights it may have under the provisions
of any law, statute, or ordinance now or hereafter in effect, or
otherwise, to make repairs at Landlord's expense or to offset the cost
thereof against any installment of Rent hereunder.
(g) Tenant shall keep the interior of the Premises in good order and
condition and, upon termination of this Lease, Tenant shall deliver
possession of the Premises to Landlord as set forth in Section 16
hereof.
Section 7. Use of Premises.
(a) Use. Tenant shall use the Premises for general office purposes, and as
a demonstrative franchise operation, and for no other use or purpose
whatsoever, without the express prior written consent of Landlord
which consent may be withheld, delayed or conditioned in its sole,
subjective and absolute discretion.
(b) Certain Rules and Regulations. Tenant's use of the Premises as
provided in this Lease shall be in accordance with the following (in
addition to the other terms, covenants, and conditions set forth
herein):
(i) Without limiting the generality of subsection (a) above, Tenant
shall not permit the Premises to be used for any kind of
commercial eating establishment, for retail sales, for sleeping
purposes, for washing clothes, or for cooking of food or beverage
use or preparation therein (other than (i) in connection with the
demonstrative franchise operation, and (ii) vending machines for
employees and employee snack food preparation as may be permitted
or installed by Landlord).
(ii) Tenant shall not do, bring, or keep anything in or about the
Premises that will cause a cancellation or threatened
cancellation of insurance covering the Square or the Building. If
the rate of any insurance carried by Landlord is increased as a
result of Tenant's use, including the use contemplated herein,
Tenant shall from time to time pay as Additional Rent to
Landlord, within 15 calendar days before the date Landlord is
obligated to pay a premium on the insurance, or within 30
calendar days after Landlord delivers to Tenant a certified
statement from Landlord's insurance carrier stating that the rate
increase was caused by an activity of Tenant on the Premises as
permitted in this Lease, whichever date is later, a sum equal to
the difference between the premium that would be charged in the
absence of such use and the increased premium.
(iii)Tenant shall not do or permit anything to be done in or about the
Premises which shall in any way conflict with any law, statute,
ordinance, rule, or regulation which is or may hereafter be
enacted or promulgated by any public authority. Tenant's
compliance with all of the requirements of any municipal, county,
state, or federal authority or law in connection with Tenant's
use of the Premises whether now in force, or which may hereafter
be in force, shall be at Tenant's sole cost and expense.
(iv) Tenant shall not do or permit any activity which in any way tends
to disturb, obstruct, or interfere with the rights of other
tenants of the Square or the Building or injure or annoy them, or
which in any ways tends to establish or maintain a nuisance.
(v) Tenant shall not use, or allow the Premises to be used, for any
improper, immoral, unlawful, or objectionable purpose.
(vi) Tenant shall not solicit or canvas any occupant of the Building
or any other occupant of the Square or do any act tending to
injure the reputation of the Building or of the Square.
(vii)Tenant shall not bring into or install in the Premises any
equipment or other objects (including but not limited to metal
safes or computers), the weight of which, singularly or in
aggregate, would exceed the maximum safe load per square foot of
the Premises.
(viii) No freight, furniture, equipment, or other bulky matter of any
description shall be received into the Building or the Premises
by Tenant, moved within the Premises or the Building, or
transported in any elevator, except as may be allowed under
Landlord's Rules and Regulations as from time to time in effect
or as Landlord shall have otherwise approved in an advance
writing (and if so approved, in accordance with such conditions
or restrictions as Landlord may in its sole discretion impose).
Tenant agrees to promptly remove from any common area adjacent to
or within the Building any of Tenant's furniture, materials,
equipment and/or other property there delivered or deposited.
(ix) In the event that Tenant desires to use the Premises in a manner
inconsistent with the foregoing or any other term, covenant, or
condition hereof, Tenant may request Landlord's consent thereto,
but such consent may be withheld in Landlord's sole and absolute
discretion. If given, such consent shall be binding on Landlord
only if given in writing, and only to the extent specifically
expressed in such writing. If Landlord should ever grant any such
consent, Tenant shall be solely responsible for obtaining, at
Tenant's sole cost and expense, any necessary zoning or other
governmental approvals, variances, or special use permits, and
for otherwise satisfying any governmental requirements in respect
thereof, without, however, in doing so, affecting or impairing in
any way Landlord's current and permitted use of the Building.
Landlord makes no representations whatsoever that any of the
foregoing items may be obtained, and any delays in Tenant's
obtaining the same shall not delay commencement of the term or
entitle Tenant to an abatement of Tenant's obligations under this
Lease, including but not limited to the obligation to pay Rent
hereunder.
(x) In the event that Tenant fails to cease or modify any activity or
circumstance giving rise to a violation of this subsection (b)
within 3 business days following Landlord's written demand (in
the manner specified by Landlord in such demand), such failure
shall constitute an event of default under the Lease as set forth
in Section 17(a)(iii)(C) hereof.
(c) General Rules and Regulations. Tenant agrees to keep and perform each
and all of the Rules and Regulations which are set forth in Exhibit
"B" attached to this Lease, as such Rules and Regulations may from
time to time be amended, supplemented, or restated by Landlord, in
Landlord' sole and absolute discretion. Said Rules and Regulations
shall not be inconsistent with the terms of this Lease, and if any
inconsistency does occur, this Lease shall govern. Any amended,
supplemented, or restated Rules and Regulations so made by Landlord,
after notice thereof to Tenant, shall be binding upon Tenant and
become conditions of Tenant's tenancy. All of such Rules and
Regulations shall be uniformly applicable to all tenants, but nothing
in this Section shall be construed to give Tenant any claim, demand,
or cause of action against Landlord by reason of or arising out of the
breach or violation of such Rules and Regulations by any other tenant,
lessee, occupant, or user of the Building. The violation of any such
Rules and Regulations by Tenant shall constitute a material breach of
this Lease and Landlord shall be entitled to pursue its remedies set
forth in Section 17 below.
Section 8. Tenant Improvements.
(a) Tenant shall make no additions, changes, alterations, or other
improvements ("Tenant Improvements") to the Premises or to any
electrical or mechanical facilities, equipment, or system pertaining
to or serving either the Premises, the Building, or the Square,
without the prior written consent of Landlord. Landlord may impose as
a condition of such consent such reasonable requirements as Landlord
in its sole discretion may deem desirable including without limitation
the submission of drawings, plans, and specifications for Landlord's
written approval, the obtaining of necessary permits, the posting of
bonds, and requirements as to the manner in which and the term or
times at which such Tenant Improvements shall be performed.
Notwithstanding the foregoing, Tenant shall have the right to make
Tenant Improvements the cost of which do not exceed $5,000 in the
aggregate without Landlord's prior written consent provided that the
Tenant Improvements are not of a structural nature, do not affect
Building systems and Tenant notifies Landlord in advance of its work
on any such Tenant Improvement and provides Landlord with a copy of
the plans for such Tenant Improvement. Landlord will not unreasonably
withhold its consent if the Tenant Improvement proposed for
installation does not involve any electrical or mechanical facilities,
equipment, or system pertaining to or serving either the Premises, the
Building, or the Square.
(b) In no event shall any Tenant Improvement affect the structure of the
Building or its exterior appearance.
(c) If Landlord consents to any Tenant Improvements, any contractor
selected by Tenant to do the same must first be approved in writing by
Landlord.
(d) Tenant shall hold Landlord harmless from and against any cost or
liability with respect to, and shall keep the Premises, the Building,
and the Square free from, any mechanic's, materialman's, or similar
liens in connection with any such Tenant Improvements. Tenant shall
reimburse Landlord, within 10 calendar days of Landlord's written
demand therefor and as Additional Rent hereunder, for any and all
costs and expenses (including but not limited to legal fees and costs)
incurred by Landlord in contesting or discharging any such liens.
(e) Tenant shall give Landlord at least 30 calendar days' advance written
notice prior to the commencement of any Tenant Improvements to afford
Landlord the opportunity of posting appropriate notices of
non-responsibility on or about the Premises.
(f) Prior to the commencement of any Tenant Improvements, Tenant shall
give evidence to Landlord that appropriate insurance satisfactory to
Landlord has been obtained by Tenant and contractors for the
protection of Landlord (including naming Landlord as an additional
insured) and its tenants and invitees from damage or injury resulting
from the Tenant Improvements. If requested by Landlord, labor and
material, payment, performance, completion and/or lien bonds
sufficient to cover the Tenant Improvements shall be provided by
Tenant.
(g) All Tenant Improvements (other than trade fixtures, office furniture
and other personal property of Tenant) shall become the property of
Landlord five (5) calendar days following the expiration or earlier
termination of this Lease. All such Improvements shall be surrendered
with the Premises, as a part thereof, at the expiration or earlier
termination of this Lease, without compensation, credit, or setoff to
Tenant. Provided, that Landlord (at the time it grants its approval of
the Tenant Improvement) may require Tenant to remove all or any part
of such Improvements and repair any damage to the Premises caused by
such removal, and to restore the Premises or any part thereof to their
original condition, all at Tenant's sole expense (and if such costs
and expenses are paid by Landlord, such costs shall be reimbursed to
Landlord by Tenant within 5 calendar days following Landlord's written
demand therefor, as Additional Rent hereunder). Landlord may elect to
charge Tenant at the time of installation of the Tenant Improvements,
for such removal and restoration expenses, which shall be paid by
Tenant as Additional Rent hereunder before commencement of work on the
Tenant Improvements.
(h) Subject to Tenant's: (i) compliance with the requirements set forth
herein; (ii) obtaining the approvals required hereunder (and of any
governmental and quasi-governmental entity with jurisdiction over the
Premises, including but not limited the Landmarks Commission), Tenant
shall have the right to construct and install, at its sole cost and
expense, a deck on the roof of the Building in which the Premises is
located.
Section 9. Tenant's Personal Property.
(a) At any time during the Lease Term and provided Tenant is not then in
breach of any provision hereunder, all articles of personal property,
trade fixtures, machinery, merchandise, equipment, furniture, and
movable partitions located on the Premises and owned by Tenant or
installed by Tenant at its expense in the Premises ("Personal
Property") shall be and remain the property of Tenant, and may be
removed by Tenant. Tenant shall be solely responsible for repairing
any damage to the Premises, the Building, or the Square occasioned by
Tenant's removal of its Personal Property from the Premises, and
Tenant shall reimburse Landlord for any and all reasonable and
documented costs and expenses incurred by Landlord in connection with
such repairs if Landlord in its sole discretion undertakes such
repairs (including legal fees and costs, and costs incurred by
Landlord in repairing any damage to the Premises occasioned by the
removal of the same) within 5 calendar days of Landlord's written
demand therefor and as Additional Rent hereunder.
(b) At Landlord's sole option, any of Tenant's Personal Property remaining
in or about the Premises five (5) calendar days after expiration or
earlier termination of this Lease shall conclusively be deemed to have
been abandoned by Tenant. Thereupon, Landlord may, at its sole option:
(i) keep the same for Landlord's use, and thereupon title to such
Personal Property shall automatically pass to Landlord and such
Personal Property shall become the property of Landlord without any
payment, credit, or setoff from Landlord to Tenant therefor and
without need of further action by Tenant (and Landlord may retain such
Personal Property or may dispose of the same for such consideration as
Landlord shall determine); or (ii) remove the same in any manner that
Landlord shall choose and store said items, all at Tenant's expense
and risk, without liability of Landlord to Tenant for loss thereof.
Tenant shall reimburse Landlord for any and all expenses incurred by
Landlord in connection with such removal and storage (including legal
fees and costs, and including any costs incurred by Landlord in
repairing any damage to the Premises occasioned by the removal of any
Personal Property from the Premises) within 10 calendar days of
Landlord's written demand therefor and as Additional Rent hereunder.
The liabilities of Tenant under this subsection shall survive the
expiration or earlier termination of this Lease.
(c) Nothing contained in this Section shall preclude Landlord from
pursuing, at its option, any other rights or remedies available to
Landlord at law or equity in respect of the subject matter of this
Section.
Section 10. Signage and Advertising.
(a) No sign, advertisement, display, or notice shall be inscribed,
painted, or affixed on any part of the outside or inside of the
Premises or the Building by Tenant, unless Landlord has provided its
advance written consent thereto (which consent may be withheld in
Landlord's sole and absolute discretion.
(b) Notwithstanding subsection (a) above, Tenant may place signage on or
about the door(s) to the Premises and the exterior of the Building,
identifying Tenant and its business, in such size, color, and style as
Landlord shall approve in advance (which approval shall not be
unreasonably withheld, delayed, or conditioned); and further provided,
that such signage is in compliance with all rules, regulations and
guidelines applicable to the Building and Premises and, to the extent
required, has been approved by the Landmarks Commission and any other
agency, board or entity with jurisdiction over the Building or
Premises.
(c) Landlord shall have the right to prohibit any sign, advertisement,
display, or notice of Tenant, wherever appearing, which in Landlord's
opinion tends to impair the reputation or appearance of the Square,
its desirability as a multi-use retail, entertainment, and office
complex, or its desirability in the estimation of financial,
insurance, or other institutions and businesses of like nature. Upon
written notice from Landlord, Tenant shall refrain from and
discontinue such sign, advertisement, display, or notice.
Section 11. Tenant's Liability for Damage to Premises and for Personal Injury.
(a) All damage to the Square, the Building, or the Premises, however
occurring, which is occasioned by the act or omission of Tenant or its
employees, agents, contractors, or invitees, shall be the sole
responsibility of Tenant; and Tenant shall be solely responsible and
liable for the repair, restoration, reconstruction, or replacement of
any property so damaged, as determined by Landlord in Landlord's sole
and absolute discretion. Landlord may in its sole and absolute
discretion undertake any of such activities, and in such event, Tenant
shall reimburse Landlord, within 5 calendar days of Landlord's written
demand therefor and as Additional Rent hereunder, for all costs and
expenses incurred by Landlord in connection therewith.
(b) Tenant shall be solely liable and responsible for all personal injury
occasioned by the act or omission of Tenant or its employees, agents,
contractors, or invitees, including but not limited to personal injury
or death arising directly or indirectly out of the construction,
installation or use by any person or entity of Tenant Improvements.
Section 12. Insurance Obligations.
(a) Tenant's Insurance Obligations. Tenant covenants and agrees that from
and after the earlier of the Rent Commencement Date or Tenant's entry
onto the Premises with Landlord's consent, Tenant will carry and
maintain, at its sole cost and expense, the insurance described in
Exhibit "E" attached hereto.
(b) Landlord's Insurance Obligations. At all times from and after the
Effective Date, Landlord shall maintain in effect a policy or policies
of insurance providing protection for the following liabilities and/or
risks:
(i) commercial general liability insurance arising from Landlord's
ownership and/or operation of the Square with coverage limits at
least equal to those maintained by reasonably prudent owners of
similar properties; and
(ii) any peril, in Landlord's sole discretion (generally included
within the classification "special perils" or "all risks"),
covering the Building, exclusive of any item insured by Tenant
pursuant to subsection (a) above, in an amount which is the
greater of 90% of its full replacement cost (exclusive of the
cost of excavations, foundations and footings) or such amount as
Landlord's mortgagee may require Landlord to maintain. Landlord's
obligation to carry such insurance may be satisfied by inclusion
of said building within the coverage of any so-called blanket
policy or policies of insurance carried and maintained by
Landlord, provided that the coverage afforded will not be reduced
or diminished by reason of the use of such blanket policies of
insurance.
(c) Mutual Waivers of Rights. Landlord (for itself and its insurer, and
Tenant (for itself and its insurer, hereby each waive all rights to
recover against each other or against any Affiliate of Landlord or
against any other tenant or occupant of the Square, or against the
officers, directors, shareholders, partners, members, managers,
trustees, employees, agents, customers, invitees, or business visitors
of each other or any Affiliate of Landlord or of any other tenant or
occupant of the Square, for any loss or damage to the Premises, the
Square, or the contents thereof, arising from any cause covered by any
insurance required by this Section to be carried by each of them or
any other insurance actually carried by each of them. Landlord and
Tenant shall each cause their respective insurers to issue appropriate
waivers of subrogation rights endorsements to all policies of
insurance carried in connection with the Square or the Premises or the
contents of either of them. Tenant shall cause all other occupants of
the Premises claiming by, through, or under Tenant to execute and
deliver to Landlord a waiver of such claims similar to the waiver in
this subsection and to obtain such waiver of subrogation rights
endorsements. The foregoing waivers shall be operative only so long as
available in the State of Colorado and so long as no policy is
invalidated thereby.
(d) Insurance Use Restrictions.
(i) Tenant agrees that it will not carry any stock or goods or do
anything in or about the Premises which will in any way tend to
increase the insurance rates upon the building of which the
Premises are a part. Tenant agrees to pay to Landlord forthwith
upon demand the amount of any increase in premiums charged to
Landlord for insurance carried by Landlord pursuant to subsection
(b) hereof, which increase results from Tenant's violation of the
foregoing restrictions, irrespective of whether Landlord shall
have consented to Tenant's act.
(ii) Tenant shall at its own expense make all changes to its Premises
and install and maintain any fire extinguishing equipment and/or
other safeguards that Landlord's insurance underwriters or
applicable fire, safety and building codes and regulations may
require, provided that the same are necessitated by Tenant's
activities or undertakings within the Premises.
(iii)Tenant shall take all necessary steps to ensure that no work
performed or equipment installed by Tenant overloads the
electrical lines.
(e) Periodic Increases. Not more frequently than every two (2) years, if
in the opinion of Landlord's mortgagee, the amount of any component of
Tenant's insurance as describe above is at that time not adequate,
Tenant shall increase the insurance coverage to the amount required by
such mortgagee or broker.
(f) Tenant's Responsibility to Insure Tenant's Property. Landlord assumes
no liability whatsoever for any loss, theft, or damage to Tenant's
Personal Property or Tenant Improvements, or to the property of any
employee, agent, contractor, or invitee of Tenant; and Tenant shall be
solely responsible for insuring all the foregoing property against
loss, theft, and damage while such Property is on the Premises.
Section 13. Indemnity. Subject to Paragraph 12(c), Tenant agrees to indemnify,
defend, and hold Landlord and its Affiliates, and their respective employees,
agents, and contractors harmless from all liability, costs, or expenses,
including attorneys' fees, on account of damage to the person or property of any
third party, including any other tenant in the Building, and Square, to the
extent caused by the acts or omissions of Tenant, its employees, agents or
contractors. Subject to Paragraph 12(c), Landlord agrees to indemnify, defend,
and hold Tenant, its employees, agents, and contractors harmless from all
liability, costs, or expenses, including attorneys' fees, on account of damage
to the person or property of any third party, including any other tenant in the
Building, and Square, to the extent caused by the acts or omissions of Landlord,
its employees, agents or contractors.
Section 14. Casualty Damage.
(a) Insured Casualty.
(i) In the event the Premises are damaged by fire or other perils
covered by proceeds from Landlord's insurance, Landlord shall,
not later than 90 days following such casualty, commence repair,
reconstruction and restoration (collectively referred to as
"Reconstruction" in this Section) of said Premises and prosecute
the same diligently to completion, in which event this Lease
shall continue in full force and effect.
(ii) Notwithstanding the foregoing:
(A) In the event of a partial or total destruction of the
Premises during the last 2 years of the Lease Term, Landlord
and Tenant shall each have the option to terminate this
Lease upon not less than 15 days advance written notice to
the other given within 30 days after such destruction. For
purposes of this Section, "partial destruction" shall mean
destruction to an extent of at least 33_% of the full
replacement cost as of the date of destruction.
(B) In the event any mortgagee under a mortgage or deed of trust
covering the Square or any part thereof should require that
the insurance proceeds payable as a result of said casualty
be used to retire the mortgage debt, then Landlord shall
have the option to terminate this Lease upon not less than
15 days advance written notice to Tenant given within 30
days after the casualty relating thereto.
(b) Uninsured Casualty. In the event the Premises are damaged by any
casualty not covered by proceeds from Landlord's insurance to any
extent whatsoever (which may include but which is not limited to
flood, earthquake, act of war, nuclear reaction, nuclear
radiation or radioactive contamination), Landlord shall have the
election (and shall within 90 days following the date of such
damage give Tenant written notice of Landlord's election) either
--
(i) to commence Reconstruction of the Premises within 60 days
following the date of Landlord's election, and prosecute the
same diligently to completion, in which event this Lease
shall continue in full force and effect, or
(ii) not to perform such Reconstruction of the Premises, in which
event this Lease shall cease and terminate upon a date which
shall be not later than 60 days following Landlord's notice
of its election to so terminate this Lease.
(c) Construction Provisions.
(i) In the event of any Reconstruction of the Premises by
Landlord under this Section, Landlord shall reconstruct the
Premises substantially to the extent of their "as is"
condition as of the Rent Commencement Date. Such
Reconstruction shall cover all of the work set forth in
Exhibit "D".
(ii) In the event of any Reconstruction of the Premises by
Landlord under this Section, Tenant, at its sole cost and
expense, shall reconstruct and replace its Tenant
Improvements and Personal Property. Tenant shall commence
such reconstruction and replacement of Tenant's Tenant
Improvements and Personal Property promptly upon delivery to
it of possession of the Premises following Reconstruction of
the Premises by Landlord, and shall diligently prosecute the
same to completion.
(iii)Landlord shall in no event be required to rebuild, repair,
or replace any part of Tenant's Tenant Improvements or
Personal Property in the event of any casualty.
(iv) Landlord shall not in any event be required to spend on
Reconstruction an amount in excess of the net insurance
proceeds actually received by Landlord as a result of the
casualty.
(v) Landlord shall not be responsible for delays outside its
control in completing the Reconstruction.
(d) Release of Liability. Upon any termination of this Lease under any of
the provisions of this Section, the parties shall be released thereby
without further obligation to the other party coincident with the
surrender of possession of the Premises to Landlord, except for items
which have theretofore accrued and are then unpaid. In the event of
termination, all proceeds from Tenant's insurance (including
self-insurance and deductibles) under Section 12 hereof covering
Tenant's Tenant Improvements, but excluding proceeds from Tenant's
Personal Property, shall be disbursed and paid to Landlord.
(e) Abatement of Rent.
(i) In the event of Reconstruction as herein provided, the Base Rent,
and Additional Rent described in Section 3 hereof, payable by
Tenant hereunder shall be abated proportionately with the degree
to which Tenant's use of the Premises is impaired, commencing
from the date of casualty and continuing during the period of
such Reconstruction and replacement. Tenant shall continue the
operation of its business on the Premises during any such period
to the extent reasonably practicable from the standpoint of
prudent business management, and the obligation of Tenant to pay
Additional Rent hereunder except the Additional Rent described in
Section 3 hereof shall remain in full force and effect.
(ii) In the event that Landlord shall elect to terminate this Lease in
accordance with subsection (a) or (b) above, the Base Rent
payable by Tenant hereunder, and Additional Rent described in
Section 3 hereof, shall be abated proportionately with the degree
to which Tenant's use of the Premises is impaired, commencing
from the date of the casualty to the date of termination of this
Lease.
(iii)Tenant shall not be entitled to any compensation or damages from
Landlord for loss of use of the whole or any part of the
Premises, the Building, Tenant Improvements or Personal Property,
or any inconvenience, annoyance, or loss of business occasioned
by such damage, Reconstruction or replacement.
(f) Major Destruction. Notwithstanding any of the foregoing provisions of
this Section, should there be a destruction of more than 20% of the
rentable square footage within the Square at any time after the
Effective Date, Landlord and Tenant shall each have the right to
terminate this Lease upon not less than 15 days advance written notice
to the other given within 30 days after such destruction.
(g) Notice. If the Premises or any part thereof shall be damaged by fire
or other casualty, Tenant shall give prompt written notice thereof to
Landlord.
(h) Waiver. Tenant hereby specifically waives any and all rights it may
have under any law, statute, ordinance, or regulation to terminate the
Lease by reason of casualty or damage to the Premises, the Building,
or the Square, and the parties hereto specifically agree that the
Lease shall not automatically terminate by law upon destruction of the
Premises.
(i) Damage by Tenant. The obligation of Landlord to Reconstruct the
Premises is subject in all cases to the provisions of Section 11
hereof.
(j) Termination by Tenant. In the event of a partial or total destruction
of the Premises so that a competent architect, in good standing,
selected by Landlord shall certify in writing to Landlord and Tenant
within sixty (60) days of said casualty that the Premises, with the
exercise of reasonable diligence, cannot be made fit for occupancy
within one hundred eighty (180) working days from the happening
thereof, then Tenant shall have the right for ten (10) business days
after receipt of such certification from the architect to terminate
this Lease which termination shall be effective from and after the
date Landlord receives such notice of termination.
Section 15. Condemnation.
(a) Condemnation Resulting in Termination.
(i) Complete Condemnation of Premises. In the event the entire
Premises shall be condemned by any public or quasi-public
authority, this Lease shall terminate as of the date of such
condemnation, and Landlord and Tenant shall each thereupon be
released from any further liability accruing subsequent to such
date under this Lease.
(ii) Partial or Complete Condemnation of Square. In the event 25
percent or more of the rentable square footage of the
improvements located within the Square shall be condemned by any
public or quasi-public authority, this Lease shall terminate as
of the date of such condemnation, and Landlord and Tenant shall
each thereupon be released from any further liability accruing
subsequent to such date under this Lease.
(iii)Condemnation Proceeds Applied by Lender. In the event that (A)
all or any portion of the Premises or the Square shall be
condemned by any public or quasi-public authority and (B) any
mortgagee under a mortgage or deed of trust covering the Square
or any part thereof should require that the condemnation proceeds
payable as a result of said taking be used to retire the mortgage
debt, this Lease shall terminate as of the date such mortgagee
makes such determination, and Landlord and Tenant shall each
thereupon be released from any further liability accruing
subsequent to such date under this Lease.
(b) Other Takings. In the event that less than all of the Floor Area of
the Premises is taken under the power of eminent domain by any public
or quasi-public authority under circumstances not described in
subsection (a) above, then either Landlord or Tenant shall have the
right to terminate this Lease as of the date of such condemnation,
upon giving notice in writing of such election within 30 days after
receipt by Tenant from Landlord of written notice that the Premises
have been so appropriated or taken. In the event of such termination,
both Landlord and Tenant shall thereupon be released from any further
liability accruing subsequent to such date under this Lease.
(c) If Lease Not Terminated. In the event that the Premises have been only
partially condemned and this Lease is not terminated pursuant to
subsection (a) or (b) above, then Tenant shall continue to occupy that
portion of the Premises which shall not have been appropriated or
taken, and the parties shall proceed as follows:
(i) At Landlord's cost and expense and as soon as reasonably
possible, Landlord shall restore the Premises on the land
remaining to a complete unit of like quality and character as
existed prior to such appropriation or taking. Provided, that
such work shall not exceed the scope of the work done in
originally constructing or rehabilitating the Building in which
the Premises are located, nor shall Landlord in any event be
required to spend for such work an amount in excess of the net
condemnation award received by Landlord which is allocable to the
Premises.
(ii) The amount of the Base Rent provided for hereunder shall be
reduced on an equitable basis, taking into account the relative
values of the portion taken as compared to the portion remaining.
(iii)Tenant hereby specifically waives any and all rights it may have
under any law, statute, ordinance or regulation to terminate or
petition to terminate this Lease upon partial condemnation of the
Premises or the building in which the Premises are located or any
portion of the Square; and the parties hereto specifically agree
that this Lease shall not automatically terminate upon
condemnation except as specifically provided herein. Tenant
hereby waives any statutory rights of termination which may arise
by reason of any partial taking of the Premises under the power
of eminent domain.
(d) Award.
(i) Landlord shall be entitled to receive the entire condemnation
award for the taking of all real property interests in the
Premises and the Square (subject to the rights of any mortgagee
under a mortgage or deed of trust covering the Premises or the
Square), regardless of whether the award or awards shall be made
to Tenant or to any person claiming through or under Tenant (and
Tenant hereby irrevocably assigns to Landlord all of its right,
title and interest in and to any such awards).
(ii) Tenant's right to receive a condemnation award for the taking of
its Personal Property, goodwill, relocation expenses, and/or
interests in other than the real property taken shall not be
affected in any manner by the provisions of this Section,
provided Tenant's award does not reduce or affect Landlord's
award.
(e) Miscellaneous Provisions.
(i) Definitions. The words "condemnation" or "condemned" as used
herein shall mean the taking or appropriation for any public or
quasi-public use under any governmental law, ordinance, or
regulation or the exercise of, or intent to exercise, the power
of eminent domain, expressed in writing, as well as the filing of
any action or proceeding for such purpose, by any person, entity,
body, agency or authority having the right or power of eminent
domain.
(ii) Threat of Condemnation. Landlord may, without any obligation or
liability to Tenant and without affecting the validity and
existence of this Lease other than as hereafter expressly
provided, voluntarily agree to sell or convey to the appropriate
person, entity, body, agency or authority ("condemnor"), without
obtaining Tenant's permission, and without requiring the
institution of any legal or administrative proceeding (or if such
action or proceeding shall have been instituted, without
requiring any trial or hearing thereof (and Landlord is expressly
empowered to stipulate to judgment therein)), the Premises or
portion hereof sought by the condemnor, free from this Lease and
the rights of Tenant hereunder. For the purposes of this Section
only, any such voluntary sale or conveyance shall be deemed a
"condemnation" as such term is used herein.
(iii)Date of Condemnation. The "date of such condemnation" shall occur
in point of time upon the actual physical taking of possession by
the condemnor or the date of conveyance pursuant to a voluntary
sale or conveyance described in paragraph (ii) directly above,
whichever is applicable.
(iv) Notifications. Landlord and Tenant agree, immediately after
learning of any appropriation or taking, to give notice in
writing thereof to each other.
(v) Prorations. The rental and other charges for the last month of
Tenant's occupancy shall be prorated and Landlord agrees to
refund to Tenant any unearned rental or other charges paid in
respect of such month.
Section 16. Lease Expiration or Termination. At the expiration or earlier
termination of the Lease:
(a) Tenant shall surrender all keys of the Premises to Landlord and make
known to Landlord the explanation of all combination locks remaining
on the Premises.
(b) Tenant shall return to Landlord the Premises and all equipment and
fixtures in as good condition as when Tenant originally took
possession or as it is thereafter, but, subject to the provisions of
Section 8 hereof and subsection (c) directly below, ordinary wear and
tear and, to the extent covered by proceeds of insurance, loss or
damage by casualty excepted.
Section 17. Defaults and Remedies.
(a) Events of Default. The occurrence of any one or more of the following
events shall constitute a default and breach of this Lease by Tenant
("Event of Default"):
(i) Tenant fails to pay any amount of Base Rent, Additional Rent, or
any other charge imposed on Tenant hereunder, when due in
accordance with the provisions of this Lease, and such failure
continues, in whole or in part, for more than 5 business days
after written notice thereof has been given by Landlord to
Tenant;
(ii) Tenant fails to occupy and maintain the Premises in strict
accordance with each and every provision of Sections 7 and 10
hereof, and such failure continues for more than 10 calendar days
after written notice thereof has been given by Landlord to
Tenant;
(iii)Tenant fails to perform any of the following acts within the time
period specified below:
(A) Tenant fails to provide certified or other immediately
available funds to "cover" a dishonored check within 2
business days following Landlord's written demand therefor,
as described in Section 2(c) hereof.
(B) Tenant fails to deposit with Landlord, within 10 business
days after written notice to Tenant, an amount sufficient to
restore the full amount of the Security Deposit, as
described in Section 1(e) hereof.
(C) Tenant fails to cease or modify any activity or circumstance
giving rise to a violation of Section 7(a) hereof within 10
business days following Landlord's written demand.
(D) If any other provision hereof requires Tenant to perform or
refrain from any act within a stated period of time
following written notice, request, or demand from Landlord,
and Tenant fails to so perform or refrain from any such act
within such time period.
(iv) Any of the following events occur, each of which event is hereby
agreed by the parties hereto to be non-curable event of default
(and as to which Landlord may therefore, if it so chooses,
immediately deliver to Tenant a Notice to Quit the Premises,
subject to subsection (b) directly below, without the need of
further notice hereunder):
(A) Tenant enters into a Transfer contrary to the provisions of
Section 24 hereof.
(B) Tenant fails, on 3 or more occasions within a single
calendar year, to fully and timely pay any then-due
installment of rent described in Section 2(g) hereof (and
provided Landlord has delivered written notice to Tenant
that the requisite payment was late).
(C) Tenant maintains, commits or permits on the Premises any
waste, nuisance or use of the Premises for an unlawful
purpose.
(D) Tenant's representations and warranties set forth in
Paragraph 12 of the basic lease provisions to which this
Schedule 1 is attached prove to be false or inaccurate in
any respect whatsoever.
(E) Tenant commits any other breach of this Lease which is not
capable of cure by Tenant.
(v) Tenant fails to perform any covenant or condition of this Lease,
other than those specified in paragraphs (i), (ii), (iii), or
(iv) above, the breach of which Tenant is capable of curing, and
such failure continues for more than 10 calendar days after
notice thereof has been given by Landlord to Tenant; provided,
however, that if such failure is capable of cure by Tenant but
cannot reasonably be cured in such 10-day period, then an Event
of Default shall not exist hereunder with respect to such failure
if Tenant commences the cure thereof within such 10-day period
and thereafter diligently pursues the same to completion and so
completes such cure within 45 calendar days after such notice;
(vi) Proceedings are instituted whereby all, or substantially all, of
Tenant's assets are placed in the hands of a receiver, trustee or
assignee for the benefit of Tenant's creditors, and such
proceedings continue for at least 60 days;
(vii)Any creditor of Tenant institutes judicial or administrative
process to execute on, attach or otherwise seize any of Tenant's
Personal Property or Tenant Improvements located on the Premises
and Tenant fails to discharge, set aside, exonerate by posting a
bond, or otherwise obtain a release of such property within 30
days;
(viii) Tenant becomes a debtor in any case filed under the Bankruptcy
Code or similar law providing relief to bankrupt or insolvent
debtors.
To the extent permitted by applicable law, the time periods provided in this
subsection (a) for cure of Tenant's defaults under this Lease which are capable
of cure shall be deemed to run concurrently with, and shall not be deemed to be
in addition to, any similar time periods prescribed by applicable law as a
condition precedent to the commencement of legal action against Tenant for
possession of the Premises.
(b) Landlord's Remedies.
(i) Upon the occurrence of an Event of Default, Landlord may exercise
any one or more of the following remedies without further notice
or demand of any kind to Tenant or any other person, except as
required by applicable law:
(A) Landlord may terminate this Lease and reenter the Premises,
take possession thereof and remove all persons therefrom,
using such force as may be necessary, following which Tenant
shall have no further claim thereon or hereunder;
(B) Landlord may, without terminating this Lease, reenter the
Premises and occupy and/or relet the whole or any part
thereof for and on account of Tenant and collect any unpaid
rentals and other charges, which have become payable, or
which may thereafter become payable; or
(C) Landlord may, even though it may have reentered the Premises
in accordance with subparagraph (B) directly above, elect
thereafter to terminate this Lease.
(ii) Should Landlord reenter the Premises under the provisions of
Section 17(b)(i)(B) above, Landlord shall not be deemed to have
terminated this Lease or have accepted a surrender thereof by any
such reentry, unless Landlord shall have expressly notified
Tenant in writing that it has so elected to terminate this Lease.
Tenant further covenants and agrees that the service by Landlord
of any notice pursuant to the unlawful detainer statutes of the
State of Colorado (such as, but not limited to, a so-called "pay
or quit" notice) and the surrender of possession pursuant to such
notice shall not (unless Landlord specifically elects to the
contrary at the time of, or at any time subsequent to, the
serving of such notice and such election is evidenced by a
written notice to Tenant) be deemed to be a termination of this
Lease.
(iii)The rights and remedies given to Landlord in this subsection
shall be additional and supplemental to all other rights or
remedies which Landlord may have under laws in force when the
default occurs.
(iv) Tenant specifically acknowledges and agrees that acceptance by
Landlord of any partial payment of rent hereunder following the
giving of a notice of default by Landlord to Tenant shall not
preclude or prevent Landlord from instituting or prosecuting any
action pursuant to the unlawful detainer statutes of the State of
Colorado in respect of the amount then remaining unpaid by
Tenant; and no such acceptance of a partial payment or payments
of rent under the circumstances described shall operate as a
waiver by Landlord of any of such rights.
(c) Landlord's Damages. Should Landlord terminate this Lease
pursuant to the provisions of Sections 17(b)(i)(A) or (C),
Tenant shall remain liable for and Landlord may demand and
collect from Tenant all rental (including Base Rent and
Additional Rent) that would have accrued for the balance of
the Lease Term, less the net proceeds of any reletting of
the Premises, when and as the same becomes due. In the
alternative, Landlord may, at Landlord's sole option,
immediately recover from Tenant, as damages for loss of the
bargain and not as a penalty, all of the following:
(i) The worth at the time of award of any unpaid rental that had been
earned at the time of such termination;
(ii) The worth at the time of award of the amount by which the unpaid
rental that would have been earned after termination until the
time of award exceeds the amount of such rental loss Tenant
proves could have been reasonably avoided;
(iii)The worth at the time of award of the amount by which the unpaid
rental for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves could
be reasonably avoided;
(iv) Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, including, without
limitation, any costs or expense incurred by Landlord in (A)
retaking possession of the Premises, including reasonable
attorney fees therefor, (B) maintaining or preserving the
Premises after such default, (C) preparing the Premises for
reletting to a new tenant, including reasonable repairs or
alterations to the Premises for such reletting, (D) leasing
commissions, and (E) any other costs necessary or appropriate to
relet the Premises; and
(v) At Landlord's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by
the laws of the State of Colorado.
As used in paragraphs (i) and (ii) directly above, the "worth at the time of
award" is computed by allowing interest at the maximum rate specified in Section
40 hereof. As used in paragraph (iii) directly above, the "worth at the time of
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus 1%. All rental,
other than Base Rent, shall, for the purposes of calculating any amount due
under the provisions of paragraph (iii) directly above, be computed on the basis
of the average monthly amount thereof accruing during the immediately preceding
12 month period, except that, if it becomes necessary to compute such rental
before such a 12 month period has occurred, then such rental shall be computed
on the basis of the average monthly amount hereof accruing during such shorter
period.
(d) Additional Cumulative Remedy. Notwithstanding anything to the contrary
in this Lease, Landlord and Tenant hereby acknowledge and agree that
the abatement of Tenant's Base Rent obligations for the first six
months of the term of the Lease (as set forth in Section 6 of the
Lease) is made subject to the express condition subsequent that Tenant
not cause an "Event of Default" under this Lease during the term
hereof. If at any time during the Term, an Event of Default occurs,
Tenant owes Landlord, in addition to all other amounts, the amount of
Eighty Thousand Eight Hundred Forty Two and 98/100 ($80,842.98) which
represents three months of Base Rent that was not charged or collected
in the first Lease Year. Tenant has no obligation to pay the
aforementioned amount if no Event of Default occurs prior to the
expiration of the Lease Term. Landlord's right to recover the amount
hereunder in the Event of Default is in addition to all other rights
and remedies of Landlord set forth herein and under applicable law.
(e) Tenant Improvements and Personal Property. Without limiting Landlord's
rights under subsection (b) above, upon the occurrence of an Event of
Default:
(i) All of Tenant's Personal Property, all Tenant Improvements, and
all other fixtures located in the Premises ("Fixtures"), shall
remain on the Premises.
(ii) Notwithstanding paragraph (i) above, in the event of any reentry
or taking possession of the Premises by Landlord as provided in
this Section, or in the event that Landlord retakes or is granted
possession of the Premises following an Event of Default
(including but not limited to the granting of possession of the
Premises to Landlord by a court having jurisdiction over the
matter), any of Tenant's Personal Property, Tenant Improvements,
or any Fixtures remaining in or about the Premises at such time
shall conclusively be deemed to have been abandoned by Tenant.
Thereupon, Landlord may, at its sole option: (i) keep the same
for Landlord's use, and thereupon title to such Personal
Property, Tenant Improvements, and Fixtures shall automatically
pass to Landlord, and all such items shall become the property of
Landlord without any payment, credit, or setoff from Landlord to
Tenant therefor and without need of further action by Tenant (and
Landlord may retain such Personal Property, Tenant Improvements,
and Fixtures or may dispose of the same for such consideration as
Landlord shall determine); or (ii) remove the same in any manner
that Landlord shall choose and store said effects, all at
Tenant's expense and risk, without liability of Landlord to
Tenant for loss thereof. Tenant shall reimburse Landlord for any
and all expenses incurred by Landlord in connection with such
removal and storage (including legal fees and costs, and
including any costs incurred by Landlord in repairing any damage
to the Premises occasioned by the removal of any of such items
from the Premises) within 5 calendar days of Landlord's written
demand therefor and as Additional Rent hereunder.
(f) Waiver. The waiver by Landlord of any breach of any term, covenant, or
condition contained in this Lease shall not be deemed a waiver of such
term, covenant, or condition of any subsequent breach thereof, or of
any other term, covenant or condition contained in this Lease.
Landlord's subsequent acceptance of partial rental or performance by
Tenant shall not be deemed to be an accord and satisfaction or a
waiver of any preceding breach by Tenant of any term, covenant or
condition of this Lease or of any right of Landlord to a forfeiture of
this Lease by reason of such breach, regardless of Landlord's
knowledge of such preceding breach at the time of Landlord's
acceptance. No term, covenant, or condition of this Lease shall be
deemed to have been waived by Landlord unless such waiver be in
writing and signed by Landlord.
(g) Tenant's Default. Landlord shall be under no obligation to observe or
perform any covenant of this Lease on its part to be observed or
performed which accrues after the date of any default by Tenant
hereunder. The various rights and remedies reserved to Landlord
herein, including those not specifically described herein, shall be
cumulative, and, except as otherwise provided by state statutory law
in force and effect at the time of the execution hereof, Landlord may
pursue any or all of such rights and remedies, whether at the same
time or otherwise.
Section 18. Quiet Enjoyment. Landlord agrees that subject to the terms,
covenants, and conditions of this Lease, Tenant, on timely paying said Rent and
performing the covenants aforesaid, shall and may peaceably and quietly hold and
enjoy the Premises during the Lease Term, subject to the provisions of Section
19 hereof and any transaction described in Section 26 hereof.
Section 19. Rights of Landlord. Landlord and its agents shall have the right:
(a) To change the name, number or designation of the Building without
liability to Tenant.
(b) At any reasonable time during the final 180 days of the Lease Term
hereof, to advertise, display and show the Premises to prospective
tenants, mortgagees, insurance agents, or others. Landlord may display
"For Rent" signs on the Premises.
(c) To constantly have passkeys to the Premises, and every room or part
thereof.
(d) To enter the Premises at any reasonable time (except that in the event
of any emergency, Landlord shall have the right to enter at any time)
for trash removal or maintenance, inspections, repairs, alterations or
additions to the Premises or the Building, to exhibit the Premises to
others, such as insurance agents, building and lender's inspectors,
prospective purchasers and for any purpose whatsoever related to the
safety, protection or preservation of the Premises, the Building, or
Landlord's interest, without being deemed guilty of an eviction or
disturbance of Tenant's use and possession. In exercising these
rights, Landlord shall not unreasonably interfere with Tenant's
business operations. In the event Landlord shall be precluded from
timely access or entry to the Premises or any part thereof as a result
of closed or secured doors or entries to which Landlord does not have
a passkey, Tenant shall be solely responsible for personal or property
damages of any nature which result from Landlord's inability to gain
timely access or entry to the Premises or any part thereof.
(e) At any reasonable time and from time to time, whether at the
insistence of Landlord or pursuant to government requirements, at
Landlord's expense, to make repairs, alterations, additions,
improvements or decorating, whether structural or otherwise, in or to
an adjoining suite, or to the Building or any part thereof, including
the Premises; provided, however, Landlord will use reasonable efforts
not to interfere with Tenant's use and occupancy of the Premises.
Landlord expressly reserves the right to change the configuration or
rentable area of the Building.
(f) In connection with making repairs, alterations, decorating, additions
or improvements under the terms of this Section, Landlord shall have
the right, after reasonable notice to Tenant (except in the event of
emergencies, when no notice shall be required), to have access through
the Premises as well as the right to take into and upon and through
the Premises or any other part of the Building, all material that may
be required to make such repairs, alterations, decorating, additions,
or improvements, as well as the right in the course of such work to
close entrances, doors, corridors, elevators or other Building
facilities, without liability whatever to Tenant nor shall such
access, closures, repairs, alterations, decorations, additions or
improvements be the basis for abatement of Rent.
(g) Tenant acknowledges that Landlord shall have the right and does hereby
reserve the right at any time and from time to time, in Landlord's
sole and absolute discretion, to alter, expand, reduce, remove,
demolish, renovate, rehabilitate, remodel, or construct any existing
or new improvements at the Square, in whole or in part, including
without limitation, the right to change the shape, size, location,
number, design, or extent of such improvements, to build additional
stories on or under such improvements, to alter or relocate the
entranceways and lobbies of any building or buildings in the Square,
to construct other buildings and improvements in the Square and on
lands adjacent thereto, to construct decks and elevated or
subterranean parking facilities, to relocate or change the common
areas of the Square, to expand or contract the Square and to
redesignate its boundaries. In all such cases, this Lease shall remain
in full force and effect, and none of the foregoing shall be deemed a
constructive or actual eviction or shall subject Landlord to
liability.
Section 20. Landlord's Inability to Perform. This Lease and the obligations of
Landlord and Tenant hereunder shall not be affected or impaired because Landlord
or Tenant is unable to fulfill any of its obligations or furnish services and
utilities hereunder or is delayed in doing so, if such inability or delay is
caused by reason of acts of God, strikes, lockouts, labor troubles, inability to
procure materials, governmental laws or regulations or governmental requests for
the general public welfare, or other cause beyond the reasonable control of
Landlord or Tenant.
Section 21. Landlord's Defaults.
(a) If Landlord shall neglect or fail to perform or observe any of the
terms, covenants, or conditions contained in this Lease on its part to
be performed or observed within 30 days after written notice of
default or, when more than thirty (30) days shall be required because
of the nature of the default, if Landlord shall fail to proceed
diligently to cure such default after written notice thereof, then
Landlord shall be liable to Tenant for any and all damages sustained
by Tenant as a result of Landlord's breach; provided, however, it is
expressly understood and agreed that (a) any money judgment resulting
from any default or other claim arising under this Lease shall be
satisfied only out of the current rents, issues, profits and other
income Landlord receives from its operation of the Building, net of
all current operating expenses, liabilities, reserves and debt service
associated with said operation ("Net Income" for purposes of this
Section), (b) no other real, personal or mixed property of Landlord,
wherever located, shall be subject to levy on any such judgment
obtained against Landlord, (c) if such Net Income is insufficient to
satisfy such judgment, Tenant will not institute any further action,
suit, claim or demand, in law or in equity, against Landlord for or on
the account of such deficiency, and (d) such neglect or failure shall
not constitute consent by Landlord for Tenant to perform or observe
such terms, covenants or conditions at Landlord's expense. Tenant
hereby waives, to the extent permitted under law, any right to satisfy
said money judgment against Landlord except from Net Income. The term
"Landlord" for purposes of this Section only shall mean any and all
partners, whether general or limited, if any, which comprise Landlord.
(b) If the Premises or any part thereof are at any time subject to any
mortgage or deed of trust and this Lease or the rentals due from
Tenant hereunder are assigned to such mortgagee, trustee or
beneficiary (called "Assignee" for purposes of this Section only) and
Tenant is given written notice thereof, including the post office
address of such Assignee, then Tenant shall give written notice to
such Assignee, specifying the default in reasonable detail, and
affording such Assignee a reasonable opportunity to make performance
for and on behalf of Landlord. If and when the said Assignee has made
performance on behalf of Landlord, such default shall be deemed cured.
Section 22. Waiver.
(a) No waiver, delay, or omission by Landlord of any provision of this
Lease shall be deemed to be a waiver of any other provision hereof or
of any subsequent breach by Tenant of the same or any other provision,
or of any of Landlord's rights or remedies with respect to any such
breach. Landlord's consent to or approval of any act by Tenant
requiring Landlord's consent or approval shall not be deemed to render
unnecessary the obtaining of Landlord's consent to or approval of any
subsequent act of Tenant, whether or not similar to the act so
consented to or approved. No act or thing done by Landlord or
Landlord's agents during the Lease Term shall be deemed an acceptance
of a surrender of the Premises, and no agreement to accept such a
surrender shall be valid unless in writing signed by Landlord. No
employee of Landlord or of Landlord's agents shall have any power to
accept the keys to the Premises prior to the termination of this
Lease, and the delivery of the keys to any such employee shall not
operate as a termination of this Lease or a surrender of the Premises.
(b) The subsequent acceptance of Rent or any payments of any amounts from
Tenant or any other party by Landlord or its employees or agents shall
not be a waiver of any preceding breach by Tenant of any term,
condition or covenant of this Lease, regardless of Landlord's
knowledge of such preceding breach at the time of acceptance of such
Rent, and no payment by Tenant or any other party or receipt thereof
by Landlord or its agents of a lesser amount than the Rent herein
stipulated shall be deemed to be other than on account of the earliest
stipulated Rent, nor shall any endorsement or any statement on any
check or any letter accompanying such check or payment as Rent be
deemed an accord and satisfaction, and the Landlord may accept such
check or payment without prejudice to the Landlord's right to recover
the balance of such Rent or pursue any other remedy in this Lease.
Section 23. Transfer of Landlord's Interest. In the event of a conveyance by
Landlord of the Premises or the Building or of any portion of the Building or
the Premises, and if the transferee has assumed in writing Landlord's
obligations hereunder, such conveyance shall release Landlord from any
liability, including for Security Deposits, upon any of the covenants or
conditions, express or implied, herein contained in favor of Tenant; and in such
event, Tenant agrees to look solely to the responsibility of the successor in
interest of Landlord and to this Lease. Upon written notice from Landlord of
such conveyance, Tenant shall acknowledge ownership in the transferee and attorn
and continue in quiet enjoyment of the Premises. Landlord shall have the right
to sell, hypothecate, mortgage, transfer, sublet or assign this Lease and/or any
or all of its interests in the Premises and/or the Building and shall not be
liable for obligations thereafter accruing hereunder.
Section 24. Assignment and Subletting.
(a) Tenant shall not, without Landlord's prior written consent, which
shall not unreasonably be withheld, do any of the following (each and
all of which shall hereinafter be individually and collectively
referred to as a "Transfer"):
(i) assign, hypothecate, mortgage, encumber or convey this Lease;
(ii) allow any transfer thereof or any lien upon Tenant's interest by
operation of law;
(iii)sublet the Premises or any part thereof;
(iv) permit the use or occupancy of the Premises or any part thereof
by anyone other than Tenant;
(v) if Tenant is a partnership, permit a withdrawal or change,
voluntary, involuntary, or by operation of law, of any partner or
the dissolution of the partnership;
(vi) if Tenant is a corporation (whose stock is not publicly traded
through an exchange or over the counter), permit any dissolution,
merger, consolidation or other reorganization of Tenant, or the
sale or other transfer of a controlling percentage of the capital
stock of Tenant, or the sale of more than an aggregate of 25% of
the value of the assets of Tenant. As used herein, "controlling
percentage" means the ownership of, and the right to vote, stock
possessing more than an aggregate of 25% of the total combined
voting power of all classes of Tenant's capital stock issued,
outstanding and entitled to vote for the election of directors.
(b) If Tenant desires the consent of Landlord to a Transfer of the entire
Premises for the remaining Lease Term, or desires the Transfer of all
or a portion of the Premises (the entire Premises for the remaining
Lease Term or a portion of the Premises being hereinafter referred to
as the "Subject Premises"), Tenant shall submit to Landlord:
(i) the proposed sublease or assignment or other Transfer agreement
or instrument (executed by Tenant and the proposed subtenant or
assignee), which shall not commence or take effect prior to 60
days after the receipt by Landlord of Tenant's submission of all
information required to be submitted by Tenant to Landlord
hereunder, and
(ii) any other information or item Landlord may reasonably request,
including without limitation sufficient information to enable
Landlord to determine the acceptability of the financial
responsibility (as measured by such factors as audited net worth
and credit rating) experience and character of the proposed
subtenant or assignee (herein, "transferee").
Landlord shall respond to Tenant's request within 15 days of
receipt of such request.
(c) Landlord shall not unreasonably withhold its consent to any such
Transfer, except that it shall be reasonable for Landlord to withhold
its consent if one of the following situations exist:
(i) in the judgment of Landlord the proposed transferee is of a
character or engaged in a business which is not in keeping with
the standards of Landlord for the Building;
(ii) in the judgment of Landlord the net worth of the transferee is
materially less than the greater of Tenant's net worth on the
Commencement Date, or Tenant's net worth at the date of Tenant's
request for consent;
(iii)in the judgment of Landlord the purposes for which the proposed
transferee intends to use the Subject Premises are not in keeping
with the standards of Landlord for the Building, it being
understood that the purposes for which transferee intends to use
the Subject Premises may not be in violation of this Lease;
(iv) a transfer will result in there being more than a reasonable and
safe number of occupants per floor within the Premises, including
Tenant and all transferees, or will result in insufficient
parking, if provided by Landlord, for the Building;
(v) the Subject Premises are not regular in shape with appropriate
means of ingress and egress and suitable for normal renting
purposes;
(vi) the proposed transferee is a governmental or quasi-governmental
agency;
(vii)the proposed transferee is an occupant or tenant of the Square;
(viii) the Transfer would breach any covenant of Landlord respecting
radius, location, use or exclusivity in any other Lease,
financing agreement or other agreement relating to the Building;
(ix) Tenant is in default under this Lease;
(x) In Landlord's sole judgment, the proposed transferee's business
use and/or occupancy of the Premises would --
(A) violate any of the terms of this Lease or the lease of any
other tenant in the Square,
(B) not conform with Landlord's tenant-mix requirements then
pertaining in the Square,
(C) fall within any category of tenant for which Landlord would
not then lease space in the Square under its leasing
guidelines and policies then in effect,
(D) require any alterations which would reduce the value of the
existing leasehold improvements in the Premises, or
(E) require increased services by Landlord; or
(xi) in the case of a sublease, if the rent payable by the subtenant
is less than (by an amount equal to or greater than $2 per
rentable square foot) the then prevailing rate being charged by
Landlord for the lease of comparable space in the Square;
provided Landlord has comparable competing space available for
lease.
(d) If Landlord shall grant consent:
(i) the terms, covenants, and conditions of this Lease, including
among other things, Tenant's liability for the Subject Premises,
shall in no way be deemed modified, abrogated or amended unless
an amendment therefor is executed by all parties hereto;
(ii) the consent shall not be deemed a consent to any further Transfer
by either Tenant or such transferee.
(e) In the event Tenant enters into a Transfer, if any amounts payable by
the assignee or subtenant with respect to its occupancy of all or a
portion of the Premises are in excess of the amounts payable by Tenant
to Landlord hereunder, then 50% of such amounts shall be immediately
due and payable to the Landlord as Additional Rent.
(f) Tenant shall pay Landlord's expenses, but not to exceed $500.00, for
each Transfer submitted to cover the legal review and processing
expenses of Landlord, irrespective of whether Landlord shall grant
consent.
(g) Any arrangement for a Transfer which is not in compliance with the
provisions of this Section shall be of no effect and void. Landlord
shall not be obligated to pay any fees, commissions or amounts in
respect of any transfer unless Landlord shall agree to such obligation
in writing.
(h) Notwithstanding anything to the contrary contained hereinabove in this
Paragraph 24, Tenant shall have the right, without obtaining
Landlord's prior written consent, to assign or sublease all or any
portion of the Premises to the following parties on the following
conditions: (A) Any subsidiary or affiliate of Tenant; (B) Any parent
corporation of Tenant; (C) Any subsidiary or affiliate of Tenant's
parent corporation if such parent owns a substantial interest in such
subsidiary or affiliate; or (D) Any corporation into which Tenant may
be merged or consolidated or which purchases all or substantially all
of the assets or stock of Tenant; provided that the resulting
corporation has a net worth at least equal to Tenant's net worth as of
the date hereof; and further provided that: (i) Tenant continues to
remain primarily liable on its obligations set forth herein; (ii) Any
such subtenant and/or assignee shall assume and be bound by all
obligations of Tenant for payment of all amounts of rental and other
sums and the performance of all covenants required by Tenant pursuant
to this Lease; and (iii) Any such subtenant and/or assignee intends to
operate the Premises in accordance with the usage restrictions of this
Lease and under the same name as Tenant. Not less than thirty (30)
days prior to the effective date of such transaction, Tenant shall
provide Landlord with copies of the documents evidencing such
transaction and such evidence as Landlord may reasonably require to
establish that such transaction falls within the terms and provisions
of this subparagraph h.
Section 25. Holdover Provisions.
(a) If Tenant fails to surrender possession of the Premises on or before
the close of business on the Expiration Date, Landlord may exercise
any and all remedies at law or in equity to recover possession of the
Premises, as well as any damages incurred by Landlord, due to such
failure, without any further notice to Tenant whatsoever (and Tenant
hereby waives any and all such notices).
(b) If Tenant holds over after the expiration or earlier termination of
the Lease Term, Tenant shall be deemed a tenant at sufferance, subject
to all of the terms, covenants, and agreements of this Lease as the
same may apply to a tenancy at sufferance, except that during such
tenancy at sufferance Tenant shall be obligated to pay to Landlord a
monthly Base Rent equal to one and one half times (150%) the rate
payable for the month immediately preceding said holding over for each
month or part thereof (without reduction for any such partial month)
that Tenant remains in possession (and such amount shall be payable in
advance on the first day of each and every month).
(c) In addition to the foregoing Base Rent, during such tenancy at
sufferance Tenant shall pay Landlord (i) Additional Rent which
Landlord may reasonably estimate, computed on a per-month basis, and
(ii) all damages, consequential as well as direct, sustained by reason
of Tenant's retention of possession.
Section 26. Subordination and Attornment. This Lease is subject and subordinate
to the lien, provisions, operation and effect of any mortgage or deed of trust
which currently encumbers the land under which the Premises are constructed.
Upon request from Tenant, Landlord will use reasonable efforts to obtain a
nondisturbance agreement from any existing mortgagee. Provided the applicable
mortgagee enters into a subordination and nondisturbance agreement with Tenant
on the mortgagee's then current form or otherwise in a form reasonably
acceptable to Tenant, this Lease shall also be subject and subordinate to the
lien, provisions, operation and effect of all mortgages, deeds of trust, ground
leases or other security instruments (collectively, "Mortgages") which may
hereafter encumber the Building, the Premises or the land, to all funds and
indebtedness intended to be secured thereby, and to all renewals, extensions,
modifications, or recastings thereof; however, this Lease shall not be
subordinated to any Mortgage if the holder thereof fails to enter into such a
nondisturbance agreement with Tenant. The holder of any Mortgage to which this
Lease is subordinate shall have the right at any time to declare this Lease to
be superior to the lien, provisions, operation and effect of such Mortgage, and
Tenant shall execute, acknowledge and deliver all reasonable documents required
by such holder in confirmation thereof.
Section 27. Estoppel Certificate.
(a) Tenant shall at any time and from time to time, within 10 days after
written request from Landlord, execute, acknowledge and deliver to
Landlord a statement in writing (i) certifying that this Lease is
unmodified and in full force and effect or, if modified, stating the
nature of such modification and certifying that this Lease as so
modified, is in full force and effect, and the dates to which the
rental and other charges are paid in advance, if any, and the amounts
of any security deposits; and (ii) acknowledging that there are not,
to Tenant's knowledge, any uncured defaults on the part of Landlord
hereunder, or specifying such defaults if any are claimed. Any such
statement may be relied upon by any prospective purchaser, mortgagee
or encumbrancer of all or any portion of the Building, or the real
property on which the Building is situated.
(b) Tenant's failure to deliver the foregoing statement within such time
period shall be conclusive upon Tenant that (i) this Lease is in full
force and effect, without modification except as may be represented by
Landlord, (ii) there are no uncured defaults in Landlord's
performance, and (iii) not more than one (1) month's Rent has been
paid in advance.
Section 28. Attorney Fees. If at any time after the Effective Date, either
Landlord or Tenant institutes any action or proceeding against the other
relating to the provisions of this Lease, or any default hereunder, the
non-prevailing party in such action or proceeding shall reimburse the prevailing
party for the reasonable expenses of attorney fees and all costs and
disbursements incurred therein by the prevailing party, including without
limitation, any such fees, costs or disbursements incurred on any appeal from
such action or proceeding. Subject to the provisions of local law, the
prevailing party shall recover all such fees, costs or disbursements as costs
taxable by the court or arbiter in the action or proceeding itself without the
necessity for a cross-action by the prevailing party.
Section 29. Entire Agreement. This Lease contains all the terms, covenants,
conditions and agreements between Landlord and Tenant relating in any manner to
the rental, use and occupancy of the Premises. No prior or other agreement or
understanding pertaining to the same shall be valid or of any force and effect;
and the terms, covenants and conditions of this Lease cannot be altered,
changed, modified or added to, except in writing signed by Landlord and Tenant.
No representations, inducements, understanding or anything of any nature
whatsoever, made, stated or represented by Landlord or anyone acting for or on
Landlord's behalf, either orally or in writing, have induced Tenant to enter
this Lease, and Tenant acknowledges, represents and warrants that Tenant has
entered into this Lease under and by virtue of Tenant's own independent
investigation.
Section 30. Captions, Definitions and Severability.
(a) The captions of the sections, subsections, paragraphs, and
subparagraphs of this Lease are for convenience and easy reference
only and shall not be considered or referred to in resolving questions
of construction.
(b) The words "Landlord" and "Tenant" wherever used herein shall be
applicable to one or more persons as the case may be, and the singular
shall include the plural, and the neuter shall include the masculine
and feminine; and if there be more than one, the obligations thereof
shall be joint and several.
(c) Whenever this Lease imposes any duty, responsibility, obligation, or
liability on the Tenant hereunder, the word "Tenant" shall be deemed
to include Tenant's subtenants, concessionaires and licensees as the
context may require; and such duty, responsibility, obligation, or
liability shall be the joint and several duty, responsibility,
obligation, and liability of Tenant (and each and every person or
entity comprising Tenant, if there is more than one Tenant) and
Tenant's subtenants, concessionaires and licensees, as the case may
be.
(d) The word "persons" wherever used shall include individuals, firms,
associations and corporations.
(e) Whenever in this Lease any words of obligations of duty are used, such
words shall have the same force and effect as though made in the form
of covenants.
(f) [Intentionally Omitted]
(g) If any provision of this Lease shall be adjudged to be invalid, void
or illegal, it shall in no way affect, impair or invalidate any other
provision hereof, the parties hereto agreeing that they would have
entered into the remaining portion of this Lease notwithstanding the
omission of the portion or portions adjudged invalid, void or illegal.
Section 31. Other Uses by Landlord. Nothing contained in this Lease shall be
construed to exclude or prohibit Landlord from using or leasing any offices,
facilities, or other space in the Building, or any part or portion thereof, or
any other property owned or controlled by Landlord, for any lawful purposes,
although in direct competition with Tenant.
Section 32. Relationship of the Parties. Nothing contained in this Lease shall
be deemed or construed by the parties hereto, or by a third person, to create
the relationship of principal and agent or of partnership or of joint venture or
of trustee and beneficiary or of any association between Landlord and Tenant and
neither the method of computation of Rent nor Landlord's obligation with respect
to the common area, nor any other provisions contained in this Lease, nor any
acts of the parties hereto, shall be deemed to create any relationship between
Landlord and Tenant other than the relation of landlord and tenant.
Section 33. Successors and Assigns. Each and all of the covenants and
obligations of this Lease shall be binding upon and inure to the benefit of the
parties hereto, their respective heirs, executors, administrators, successors
and assigns, subject at all times, nevertheless, to all agreements and
restrictions herein contained with respect to assignment, subletting,
hypothecation, or any other transfer or conveyance of Tenant's interest in this
Lease.
Section 34. Use of Building Name; Use of Trade Name Prohibited. Tenant shall not
use the name of the Building for any purpose other than as the address of the
business to be conducted by Tenant in the Premises. Tenant shall in no event use
the phrase "Larimer Square" in any advertising, stationery, or other materials
whatsoever.
Section 35. Time. Time is of the essence with respect to the
performance of every provision of this Lease in which time of
performance is a factor.
Section 36. Applicable Law; Venue. This Lease and each and every provision
hereof, and all questions concerning the validity and enforceability of this
Lease and each and every provision hereof, shall be governed by and interpreted
and construed in accordance with the laws and interpretations thereof of the
State of Colorado. In any action or proceeding involving this Agreement, whether
at law or in equity, each party stipulates that the state courts of the State of
Colorado shall have jurisdiction over the parties hereto and over such action,
and each party hereto stipulates that all such actions and proceedings shall be
brought exclusively in the appropriate state court in the City and County of
Denver, Colorado (and each party hereto waives any objection to venue).
Section 37. Execution and Delivery. The submission of this Lease for examination
does not constitute an offer to lease or a reservation of or an option for the
Premises, and this Lease shall become effective only upon execution and delivery
thereof by Landlord and Tenant. No amendments, modifications of or supplements
to this Lease shall be effective unless the same shall be in writing, executed
and delivered by Landlord and Tenant.
Section 38. Notices.
(a) Any notices, demands, or other communications required or desired to
be given under any provision of this Lease shall be given in writing
and shall be deemed given or received, as the case may be, upon the
first of the following to occur: (i) when personally delivered to such
party (or, in the case of notices to Tenant, posted upon the
Premises), (ii) one (1) business day after delivery to a national
overnight courier service, delivery costs paid or provided for, or
(iii) two (2) business days after mailing by certified or registered
mail, postage prepaid and return receipt requested, addressed to the
parties as follows:
To: Landlord: c/o Larimer Square Management Corporation
1400 Larimer Street, #300
Denver, Colorado 80202
Attn: General Manager
To: Tenant: At the address of the
Premises set forth in the Lease to which this
Schedule 1 is attached.
(b) Any party hereto may change their notice address by giving written
notice of such change to all other parties hereto in accordance with
subsection (a) directly above.
(c) Nothing in this Section shall be deemed to affect the application of
any statute governing the giving of notice between landlords and
tenants.
Section 39. No Warranties. Tenant acknowledges and agrees that, in entering into
this Lease, Tenant has not relied on any representation, statement, or warranty
of Landlord or anyone acting for or on behalf of Landlord, all matters
concerning the Premises to be independently verified by Tenant; that Tenant is
taking possession of the Premises on its own inspection and examination thereof
and on an "AS IS" basis; and that LANDLORD MAKES NO WARRANTY OR REPRESENTATION,
EXPRESS OR IMPLIED, OR ARISING BY OPERATION OF LAW, INCLUDING, BUT NOT LIMITED
TO, ANY WARRANTY OF CONDITION, HABITABILITY, MERCHANTABILITY, TENANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE PREMISES. This Lease
does not grant any rights to light or air.
Section 40. Rate of Interest. The rate of interest to be charged in accordance
with certain Sections hereof which refer to this Section shall be four percent
(4%) above the annualized rate of interest published from time to time by
FirstBank of Denver, N.A., as its commercial base lending rate, per annum, based
on the actual number of days elapsed.
Section 41. Affiliates. For the purposes hereof, "Affiliates" means: Larimer
Square Management Corporation; Larimer Square Associates, Ltd.; Hermanson Family
Trust; Hermanson Family Limited Partnership I; Hermanson Family Limited
Partnership III; and the partners, trustees, members, managers, shareholders,
directors, officers, employees, agents, affiliates, and assigns of each of them.
Section 42. Counting Days. Whenever this Lease specifies a certain number of
days, the days shall be counted using calendar days unless the applicable
provision specifically calls for business days.
Section 43. Option to Extend. As additional consideration for the covenants of
Tenant hereunder, Landlord hereby grants unto Tenant an option (the "Option") to
extend the Lease Term for one (1) additional term of five (5) years (the "Option
Term"). The Option shall apply only to the original space leased hereunder and
shall be on the following terms and conditions:
A. Written notice of Tenant's interest in exercising the Option
shall be given to Landlord no earlier than twelve (12) months and
no later than four (4) months prior to the expiration of the
Lease Term ("Tenant's Notice"). Not later than thirty (30) days
after receiving Tenant's Notice, Landlord shall give to Tenant
notice of the terms, conditions and rental rate applicable during
the Option Term, in accordance with subparagraph E below
("Landlord's Notice").
B. Tenant shall have fifteen (15) days following Tenant's receipt of
Landlord's Notice within which to exercise the Option by
delivering written notice of such exercise to Landlord under the
terms, conditions and rental rate set forth in Landlord's Notice.
If Tenant timely exercises the Option, the Lease shall be deemed
extended and thereafter the parties shall execute an amendment to
the Lease setting forth the terms of the extension.
C. Unless Landlord is timely notified by Tenant in accordance with
subparagraphs A and B above, it shall be conclusively deemed that
Tenant does not desire to exercise the Option, and the Lease
shall expire in accordance with its terms, at the end of the
Primary Lease Term.
D. Tenant's right to exercise its Option shall be conditioned on:
(i) Tenant not being in default under the Lease at the time of
exercise of the Option or at the time of the commencement of the
Option Term; and (ii) Tenant not having subleased more than
twenty-five percent (25%) of the Premises or assigned its
interest under the Lease as of the commencement of the Option
Term or having vacated more than twenty-five percent (25%) of the
Premises.
E. The Option granted hereunder shall be upon the terms and
conditions contained in the Lease except that there shall be no
further option to extend the term of the Lease beyond the Option
Term and except that the rental to be paid by Tenant to Landlord
during the Option Term shall be the rate which Landlord would
quote to third parties for space comparable to the Premises, if
it were to become available for leasing, for a lease term
scheduled to commence at the time of commencement of the Option
Term, but in no event shall the rental rate be less than the rent
which Tenant is paying immediately prior to the commencement of
the Option Term. Such rental rate may include escalations and
pass-throughs.
F. After exercise of the Option above described, there shall be no
further rights on the part of Tenant to extend the term of the
Lease.
Section 44. Free Rent Period. Landlord and Tenant hereby acknowledge and agree
that Landlord is giving Tenant the benefits of the free rent period set forth in
Section 6 of the Lease to compensate Tenant for its current unamortized
leasehold improvements and relocation expenses.
Section 45. Subordination of Landlord's Lien. If Tenant assigns, acquires or
leases personal property to be installed or used in the Premises subject to a
conditional sales contract, chattel mortgage or other security agreement or
lease, Landlord will subordinate any claim arising by way of any landlord's lien
with respect to such personal property and will execute and deliver to any such
secured creditor and/or lessor ("Secured Creditor") a subordination of lien
agreement provided that such subordination contains the following provisions:
upon a default by Tenant under the agreement between Tenant and the Secured
Creditor, the Secured Creditor may enter the Premises solely to remove the
collateral (but only during the Tenant's occupancy or prior to the completion of
eviction of the Tenant) in the exercise of its rights under the agreement,
provided that the Secured Creditor shall (a) provide Landlord with advance
written notice of such entry, (b) be responsible for repair of any damages
caused by the removal of the collateral by the Secured Creditor, and (c) in no
event conduct any sales, auctions, or other such disposition of the collateral
in or around the Premises.
<PAGE>
EXHIBIT "A"
SITE PLAN
<PAGE>
EXHIBIT "B"
RULES AND REGULATIONS
1. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors, or halls shall not be obstructed or encumbered by any
Tenant, or used for any purpose other than ingress and egress to and from
the Premises.
2. No awnings or other projections shall be attached to the outside of the
Building. No curtains, blinds, shades, or screens shall be attached to or
hung in, or used in connection with, any window or door of the Premises
without the prior written consent of Landlord. Such curtains, blinds,
shades, screens or other fixtures must be of a quality, type, design and
color, and attached in the manner approved by the Landlord.
3. No sign, advertisement, display, notice, or lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of
the Premises or Building. In the event of the violation of the foregoing by
any Tenant, Landlord may remove same without any liability, and may charge
the expense incurred by such removal to the Tenant or Tenants violating
this rule.
4. The sashes, sash doors, skylights, windows, and doors that reflect or admit
light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by any Tenant, nor shall any
bottles, flowers, plants, parcels, or other articles be placed on the
windowsills.
5. Nothing shall be put in front of or affixed to any part of the exterior of
the Building, nor placed in the stairways, elevators, halls, corridors or
vestibules.
6. Tenant will not affix anything to the walls of the Premises or make holes
in such walls without the prior written consent of the Landlord.
7. Tenant will not prop open any corridor doors, exit doors or doors
connecting corridors during or after business hours.
8. Tenant shall not store or operate any computer (except a desk top computer)
or any other large business machines in the Premises, the weight or nature
of which may, in Landlord's determination, constitute a hazard or danger to
person or property, and Landlord shall have the right to require Tenant to
remove or relocate any such articles which, whether individually or in the
aggregate and in the opinion of Landlord, may endanger person or property.
9. Tenant shall not do or allow any cooking in the Premises (except in
connection with the demonstration of franchise operation authorized under
Section 7 of the Lease).
10. Tenant shall not use or store, or allow to be used or stored, in the
Premises any oil, burning fluids, gasoline, kerosene for heating, warming
or lighting, or any other flammable, combustible or explosive fluid,
chemical or substance whatsoever, unless stored in a manner satisfactory to
insurance and legal requirements. No offensive gases, odors, or liquids
shall be permitted.
11. If Tenant requires any special wiring for business machines or otherwise,
such wiring shall be done by an electrician designated by Landlord at
Tenant's cost. The electrical current shall be used for ordinary lighting
purposes only, unless written permission to do otherwise shall first have
been obtained from Landlord at an agreed cost to Tenant.
12. Tenant may not conduct business in the hallways or corridors or any other
areas except in its designated offices without written consent of Landlord.
Tenant agrees to promptly remove from any common area adjacent to or within
the Building any of Tenant's furniture, materials, equipment and/or other
property there delivered or deposited.
13. [Intentionally Omitted]
14. Tenant and its employees and agents shall cooperate and be courteous with
all other occupants of the Building and Landlord's staff and personnel, and
will conduct themselves in a businesslike manner. Tenant shall not use, or
allow the Premises to be used, for any improper, immoral, unlawful, or
objectionable purpose. Tenant shall not solicit or canvas any occupant of
the Building or any other occupant of the Square. Tenant shall not do any
act tending to injure or impair the reputation of the Building or of the
Square, their desirability as a multi-use retail, entertainment, and office
complex, or their desirability in the estimation of financial, insurance,
or other institutions and businesses of like nature; and upon written
notice from Landlord, Tenant shall refrain from or discontinue such act.
15. The water and wash closets and other plumbing fixtures shall not be used
for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags or other substances shall be thrown therein. All
damages resulting from any misuse of the fixtures shall be borne by Tenant
who, or whose employees, agents, visitors or licensees shall have caused
the same.
16. No space in the Building shall be used for non-office purposes, including
the storage of merchandise for the sale of merchandise, goods or property,
without the prior written consent of Landlord.
17. No Tenant shall make, or permit to be made, any unseemly or disturbing
noises or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them, whether by way of
the use of any musical instrument, radio, television set, talking machine,
unmusical noise, whistling, singing, or in any other way. No Tenant shall
throw anything out of the doors, windows or skylights or down the
passageways.
18. No dogs, cats, pets, livestock, horses, rodents, birds, poultry, lizards,
snakes, insects, or other animals, fish, or fowl whatsoever shall be
permitted in the Building without the written consent of Landlord.
19. Landlord agrees to furnish to Tenant, free of charge, two keys for each
corridor door entering the Premises, and additional keys will be furnished
at a charge by Landlord equal to its cost plus fifteen percent (15%) upon
delivery to Landlord of an order for such keys signed by Tenant or Tenant's
authorized representative. All such keys shall remain the property of
Landlord. No additional locks shall be allowed on any door of the Premises,
and Tenant shall not make or permit to be made any duplicate keys, except
those furnished by Landlord. Upon termination of this Lease, Tenant shall
surrender to Landlord all keys to the Premises, and give to Landlord the
explanation of the combination of all locks, if any, in the Premises.
20. No freight, furniture, equipment, or other bulky matter of any description
shall be received into the Building or the Premises by Tenant, moved within
the Premises or the Building, or transported in any elevator, except as may
be allowed under Landlord's Rules and Regulations as from time to time in
effect or as Landlord shall have otherwise approved in an advance writing
(and if so approved, in accordance with such conditions or restrictions as
Landlord may in its sole discretion impose). All removals from or the
carrying in or out from the Building or Premises of any freight or
furniture of any description must take place during the hours from time to
time established by Landlord therefor. Landlord reserves the right to
inspect all such freight or other articles to be brought into the Building
and to exclude from the Building all freight or other articles which
violate any of these Rules and Regulations or the Lease of which these
Rules and Regulations are a part. No article or freight, the weight or
nature of which may, in Landlord's determination, constitute a hazard or
danger to person or property, shall be permitted in the Building, and
Landlord shall have the right to require Tenant to remove or relocate
articles or freight which, whether individually or in the aggregate and in
the opinion of Landlord, may endanger person or property. Any damages
caused by delivery of or removal of freight or other articles shall be paid
by Tenant.
21. No Tenant shall occupy or permit any portion of the Premises demised to him
to be occupied: for a public stenographer or typist; for the possession,
storage, manufacture, or sale of liquor, or narcotics; as an employment
bureau or agency; for any business whatsoever that receives or provides
"900", "976", or similar pay-per-call phone services; or for a fortune
teller or psychic.
22. Landlord shall have the right to prohibit any advertising by any Tenant
which tends to injure or impair the reputation of the Building or of the
Square, their desirability as a multi-use retail, entertainment, and office
complex, or their desirability in the estimation of financial, insurance,
or other institutions and businesses of like nature; and upon written
notice from Landlord, Tenant shall refrain from or discontinue such
advertising.
23. Landlord reserves the right to exclude from the Building at any time other
than normal daily business hours, and at all hours on Sundays and legal
holidays, all persons who do not present identification acceptable to
Landlord or its agents; but Landlord shall not in any event be responsible
for death or injury to person or loss or damage to property of any Tenant,
guest, visitor, licensee, invitee or other user of the Building. In the
event Landlord elects to furnish passes for ingress and egress, Landlord
will furnish passes to persons for whom any Tenant requests same in
writing. Each Tenant shall be responsible for all persons for whom he
requests such pass and shall be liable to Landlord for all acts of such
persons. Tenant, its agents, servants and employees shall, before leaving
the Premises unattended, close and lock all doors and turn off all lights.
24. The requirements of Tenants will be attended to only upon application at
the main office of the Building's property manager. Employees shall not
perform any work or do anything outside of the regular duties, unless under
special instructions from the office of Landlord.
25. Canvassing, soliciting and peddling in the Building is prohibited and each
Tenant shall cooperate to prevent same.
26. There shall not be used in any space, or in the public halls of the
Building, either by any Tenant or by jobbers or others, in the delivery or
receipt of merchandise, any hand trucks except those equipped with rubber
tires and side guards.
27. No smoking is permitted in any hallway, corridor, stairwell, elevator, or
any common area or element within the Building. No pipe or cigar smoking
shall be allowed in any areas of the Building, including within the
Premises.
28. Tenant shall not do, bring, or keep anything in or about the Premises that
will cause a cancellation or threatened cancellation of insurance covering
the Square or the Building. If the rate of any insurance carried by
Landlord is increased as a result of Tenant's use, including the use
contemplated herein, Tenant shall from time to time pay as Additional Rent
to Landlord, within fifteen (15) calendar days before the date Landlord is
obligated to pay a premium on the insurance, or within thirty (30) calendar
days after Landlord delivers to Tenant a certified statement from
Landlord's insurance carrier stating that the rate increase was caused by
an activity of Tenant on the Premises as permitted in this Lease, whichever
date is later, a sum equal to the difference between the premium that would
be charged in the absence of such use and the increased premium.
29. Tenant shall not do or permit anything to be done in or about the Premises
which shall in any way conflict with any law, statute, ordinance, rule, or
regulation which is or may hereafter be enacted or promulgated by any
public authority (including but not limited to the Americans With
Disabilities Act of 1990). Tenant's compliance with all of the requirements
of any municipal, county, state, or federal authority or law now in force,
or which may hereafter be in force, shall be at Tenant's sole cost and
expense.
30. Unless Landlord shall furnish electricity hereunder as a service included
in the rent, each Tenant shall, at its expense, provide artificial light
for the employees of Landlord while doing janitorial service or other
cleaning, and in making repairs or alterations to said Premises. Tenant
shall not employ any person or persons other than the janitorial service of
Landlord for the purpose of cleaning or taking charge of the Premises
leased, without the written consent of Landlord, it being understood and
agreed that Landlord shall be in no way responsible to any Tenant or
employee, guest, or invitee of the same for any loss of property from the
Premises, however occurring, or for any damage done to the furniture by the
janitor or any of his employees, or by any other person or persons
whomsoever. Any person or persons employed by Tenant, with the written
consent of Landlord, must be subject to and under the control and direction
of the property manager of the Building, in all things, in the Building and
outside of the Premises.
31. The property manager of the Building may at all times keep a pass key, and
he and other agents of Landlord shall at all times be allowed admittance to
the Premises.
32. Landlord reserves the right to amend, supplement, or restate these Rules
and Regulations and make such other and further reasonable Rules and
Regulations as Landlord in its sole discretion and judgment may from time
to time determine are needed for the Building or for the safety, care,
cleanliness, and preservation of good order therein, provided Landlord
gives notice thereof to Tenant.
<PAGE>
EXHIBIT "C"
CERTIFICATE OF GOOD STANDING
<PAGE>
EXHIBIT "D"
WORK LETTER
January 14, 1999
The Quizno's Corporation
1099 18th Street, Suite 2850
Denver, CO 80202
Re: Premises: Approximately 13,368 rentable square feet of space
comprising a portion of the 1st, 2nd and 3rd floors of
the Lincoln Hall Building at 1415 Larimer Street,
Denver, CO (the "Premises")
Ladies and Gentlemen:
Concurrently herewith, you as Tenant and the undersigned as Landlord have
executed a Lease (the "Lease") covering the Premises (the provisions of the
Lease are hereby incorporated by reference as if fully set forth herein). In
consideration of the execution of the Lease, Landlord and Tenant mutually agree
as set forth in Parts I and II below.
PART I
Summary of delivery, approval, and completion dates:
Date
-----------
1. Layout Drawings (P. 2) from Tenant to Completed Landlord
(signed by Tenant) for Landlord review. Completed
2. Landlord review of Layout Drawings (P. 2)for compliance
with space usage requirements (5 business days). Completed
3. Tenant Working Drawings (P. 3) to Landlord within 8
business days after submission of Layout Drawings. Completed
4. Review of Tenant Working Drawings (P. 3) within 5 business
days of submission (once approved, the "Final Working
Drawings"). Completed
5. Cost proposal (P. 5) and tentative schedule from
Landlord to Tenant (P. 5) 8 business days after
approval of Final Working Drawings. January 22, 1999
6. Tenant signed approval of cost and schedule (P. 5) 5
business days from submittal. January 22, 1999
PART II
7. Landlord has retained a space planner (the "Designated Space Planner") to
prepare Layout Drawings and Tenant Working Drawings for the Premises and to
provide related services requested by Tenant in connection with the design
and drawing preparation related thereto.
8. Tenant has provided to Landlord two copies of finalized Tenant approved
Layout Drawings (the "Layout Drawings") for the Premises. Tenant's approval
of the Layout Drawings was acknowledged by Tenant signing one copy of each
sheet of the Layout Drawings. Landlord had five (5) business days after
Tenant's submission of the Layout Drawings to review the same for
compliance with space usage requirements. Landlord shall also submit the
Layout Drawings to Landlord's Engineer during such period. If within this
five (5) business day review period, Landlord determines that the Layout
Drawings are insufficient for engineering design or indicate space usages
which are inconsistent with the Lease, Landlord shall so advise Tenant, and
the Designated Space Planner shall revise such drawings accordingly and
resubmit the same to Landlord and the above review process and time frames,
including Landlord's five (5) business day period to review the Layout
Drawings for completeness and space usage, will be repeated. All time
required for Tenant to resubmit the Layout Drawings, after the first five
(5) business day Landlord review period, shall be deemed Tenant Delay.
Landlord's review shall not imply approval by Landlord as to compliance of
the Layout Drawings with the requirements of applicable codes, rules or
regulations of any governmental agencies having jurisdiction over the
Premises.
9. Based upon such Tenant approved Layout Drawings with Tenant's requirements
indicated thereon, as set forth above, Landlord, through Landlord's
Engineers, shall have prepared the structural, plumbing, fire protection,
mechanical controls, electrical and life safety engineering drawings
("Engineering Working Drawings").
The Designated Space Planner shall, within eight (8) business days after
approval of Layout Drawings by Landlord, as set forth in Paragraph 8 above,
submit to Landlord complete architectural working drawings (the "Tenant Working
Drawings"). Landlord shall have five (5) business days after receipt to review
these drawings. If within five (5) business days following Landlord's receipt of
the Tenant Working Drawings, Landlord's review uncovers design errors as a
result of the Designated Space Planner's work, Landlord shall so advise Tenant.
Tenant will instruct the Designated Space Planner and/or Engineers to correct
the same and any time delay will be deemed Tenant Delay. Said Tenant Working
Drawings and Engineering Working Drawings when approved by Landlord and Tenant
shall be acknowledged as such by Tenant and Landlord signing each sheet of the
Tenant Working Drawings. Such signed Tenant Working Drawings and Engineering
Working Drawings shall be referred to hereinafter as "Final Working Drawings."
Landlord and Tenant have completed the process set forth in Sections 7 through 9
above and have mutually agreed upon the Final Working Drawings.
10. Changes to the Final Working Drawings shall be made only upon prior written
approval of Landlord. Landlord shall respond to all written requests for
changes within five (5) business days of Landlord's receipt of the same. If
Landlord does not reply within said five (5) business day period, Landlord
shall be deemed to have given its consent to said changes. Any delays
caused by such changes or by the process of approval or disapproval shall
be deemed Tenant Delay.
11. Tenant shall have the right to designate one (1) contractor from whom
Landlord will solicit a bid for the Finish Work to be constructed
hereunder. Notwithstanding the foregoing, Landlord, in its sole, absolute
and subjective discretion, shall select the tenant finish contractor and
subcontractors to complete the Finish Work. Landlord's tenant finish
contractor and subcontractors (herein referred to collectively as
"Landlord's Contractor") shall diligently perform all finish work on the
suite including, but not limited to, those millwork items and all cabinetry
work which are permanently attached to walls and form a part of the
Premises. Prior to the commencement of any such work, Landlord will provide
Tenant with a cost proposal in accordance with the Final Working Drawings
within eight (8) business days of Landlord's and Tenant's approval of such
drawings (architectural, structural, plumbing, mechanical, fire protection,
and electrical). The proposal shall also include a tentative schedule.
Tenant shall have five (5) business days to respond to such proposal and
schedule, in writing. Unless Landlord receives Tenant's written objection
within such five (5) business day period, the proposal and schedule shall
be deemed accepted by Tenant. If within such five (5) business day period
Landlord receives Tenant's written objection to the proposal, and schedule,
then Tenant shall forthwith meet with Landlord's representative to revise
the Final Working Drawings; any delays resulting from such revisions shall
be deemed Tenant Delay.
12. Landlord shall give Tenant a tenant finish allowance equal to Four Hundred
Seventeen Thousand Three Hundred Sixty Dollars ($417,360) (the "Allowance")
to be applied against the cost of the Finish Work. In addition to the
Allowance, Landlord shall be responsible for all costs and expenses
incurred (as reasonably determined by the contractor performing the Finish
Work) in installing those specific items set forth on Schedule 1 to this
Work Letter, which items shall be incorporated into the Layout Drawings and
the Final Working Drawings. The cost of the Finish Work shall include all
costs attributable to design and construction of the Finish Work, including
but not limited to services, fees and expenses of the Designated Planner
and Landlord's Engineers; costs of construction management; costs of
permits and licenses required for completion of the Finish Work; labor,
materials, fees and expenses of Landlord's Contractor in completing the
Finish Work; and costs attributable to building standard tenant finish
items prestocked or in place in the Premises which Landlord normally
provides to tenants (e.g., ceiling grid, sprinklers, HVAC and similar
items) ("Building Standard" or "Building Standard Finish Work Items"). To
the extent that such costs exceed the Allowance, Tenant shall pay all such
amounts within ten (10) calendar days after receipt of billing therefor
from Landlord. Partial billing may be made periodically as the work
progresses.
13. Notwithstanding any provision herein or in the Lease to the contrary, the
Rent Commencement Date will not be delayed or extended by any Net Tenant
Delay. The term "Tenant Delay," as referred to above, shall include, but
not be limited to, delay: (i) in the preparation, finalization or approval
of the Final Working Drawings caused by Tenant (or its agents or
employees); (ii) caused by modifications, revisions and changes to the
Final Working Drawings due to changes requested by Tenant (or its agents or
employees); (iii) in the delivery, installation or completion of any item
specified by Tenant and performed by Landlord's Contractor to the extent
that such items require ordering or work deadlines inconsistent with the
scheduled commencement date; or (iv) of any other kind or nature in the
completion of the Finish Work caused by Tenant (or its agents or
employees). All delay other than Tenant Delay shall be deemed Landlord
Delay. "Net Tenant Delay" as used herein shall mean the total number of
days of Tenant Delay and minus the total number of days of Landlord Delay,
if any. Tenant shall have the right, upon reasonable prior notice to and
coordination with Landlord's Contractor, to move its personal property into
(but not to occupy) the Premises prior to the date the Premises are Ready
for Occupancy.
14. If the number of days of Landlord Delay, as described herein, exceeds the
number of days of Tenant Delay, the difference shall be "Net Landlord
Delay" and notwithstanding anything set forth in Paragraph 7 above, the
Lease Commencement Date shall be delayed by a number of days equal to the
number of days of Net Landlord Delay, if any. Similarly, if there are more
days of Tenant Delay than Landlord Delay, the provisions of Paragraph 13
above regarding Net Tenant Delay shall control.
15. Tenant has designated Mark Laramie as its sole representative with respect
to the matters set forth in this Work Letter, who shall have full authority
and responsibility to act on behalf of the Tenant as required in this Work
Letter.
16. Landlord has designated Joe Vostrejs as its representatives with respect to
Landlord's responsibilities under this Work Letter, who shall have full
authority and responsibility to act on behalf of the Landlord as required
in this Work Letter.
17. Any and all notices required to be given hereunder shall be in writing in
accordance with the terms and provisions of the Lease. However, in all
cases notices shall also be given to those individuals to be specified
pursuant to Paragraphs 15 and 16 above.
Very truly yours,
Hermanson Family Limited
Partnership I, a Colorado
limited partnership, and
Larimer Square
Associates, Ltd., a
Colorado limited
partnership
By:
Authorized Signature
"Landlord"
ACCEPTED AND APPROVED this ______ day of January 1999.
The Quizno's Corporation,
a Colorado corporation
By:
Title:
Attest:
By:
Title:
"Tenant"
<PAGE>
EXHIBIT "E"
Tenant's Insurance Obligations
1. Requirements. Tenant covenants and agrees that from and after the earlier
of the Rent Commencement Date or Tenant's entry onto the Premises with
Landlord's consent, Tenant will carry and maintain, at its sole cost and
expense, the following types of insurance, in the amounts specified and in
the form hereinafter provided.
(A) Commercial General Liability. Tenant shall carry and maintain in
force, commercial general liability insurance (including product
liability insurance) with coverage of not less than $1,000,000 per
occurrence, combined single limit, on an "occurrence basis."
(B) Contractual Liability. The insurance described in subparagraph (A)
above shall specifically include contractual liability coverage
insuring, among other risks, Tenant's liability under Section 13
hereof, with the limits described above.
(C) Workers' Compensation. Tenant shall carry and maintain in force,
statutory Worker's Compensation (Part A) Insurance as required by the
State of Colorado, and Employer's Liability (Part B) Insurance in the
amount of $100,000.
(D) Tenant Improvements and Personal Property. Tenant shall carry and
maintain in force, insurance covering Tenant's (1) Tenant Improvements
(as defined in Section 8 hereof), and (2) Personal Property (as
defined in Section 9 hereof) from time to time, in, on or upon the
Premises, in an amount not less than 90% of the full replacement cost
thereof from time to time after the Effective Date.
(E) Builder's Risk. During the course of any construction or repair by
Tenant of any Tenant Improvements, Tenant shall carry and maintain in
force, builder's completed value risk insurance against all risks of
physical loss, including collapse and transit coverage, during
construction, with deductibles not to exceed $1,000, in nonreporting
form, and covering the total value of work performed and equipment,
supplies, and materials furnished. Said policy of insurance shall
contain the "permission to occupy upon completion of work or
occupancy" endorsement.
(F) In General. Tenant shall also at all times during the Lease Term and
at its sole cost and expense maintain such insurance, in standard and
reasonable amounts, as would be common, reasonable, and prudent for
the type of business operated in the Premises by Tenant.
2. Standards.
(A) All insurance policies required to insure the full replacement cost of
any item shall be evidenced in the form of an "agreed amount"
endorsement or other equivalent evidence in form and content
acceptable to Landlord.
(B) Any deductible for any of the insurance coverages required hereunder
shall be subject to Landlord's prior review and approval.
(C) In no event shall Tenant be or become a co-insurer under any of the
insurance policies required hereunder.
(D) All property insurance referred to above shall insure against any
peril included within the classification "special perils" or "all
risks," including, without limitation, coverage for sprinkler damage,
hail damage, flood damage, and theft. All policy proceeds thereof
shall be used for the repair or replacement of the property damaged or
destroyed unless this Lease shall terminate under the provisions of
Section 14 hereof.
(E) All policies of insurance provided for herein shall be issued by
insurance companies with a general policyholder's rating of not less
than A and a financial rating equivalent to a policyholder's surplus
of at least $100,000,000 as rated in the most current available Best's
Insurance Reports, qualified to do business in the State of Colorado.
(F) All such policies shall contain cross-liability endorsements and shall
name as additional insureds: Landlord (including each person or entity
from time to time constituting Landlord) and Landlord's Affiliates;
Landlord's mortgagees and beneficiaries; and such other individuals or
entities as Landlord may in its sole discretion from time to time
designate in writing as "additional insureds." For the purposes
hereof, "Affiliates" means: Larimer Square Management Corporation;
Larimer Square Associates, Ltd.; Hermanson Family Trust; Hermanson
Family Limited Partnership I; Hermanson Family Limited Partnership
III; and the partners, trustees, members, managers, shareholders,
directors, officers, employees, agents, affiliates, and assigns of
each of them.
(G) Executed copies of such policies of insurance or certificates thereof
shall be delivered to Landlord within 10 days after the earlier of
delivery of the Premises, or Tenant's entry onto the Premises with
Landlord's consent, and thereafter executed copies of renewal policies
or certificates thereof shall be delivered to Landlord within 30 days
prior to the expiration of the term of each such policy. Tenant agrees
to permit Landlord at all reasonable times and upon 2 days' prior
written notice to inspect any policies of insurance or renewals
thereof which Tenant has not delivered to Landlord.
(H) As often as any policy shall expire or terminate, renewal or
additional policies shall be procured and maintained by Tenant in like
manner and to like extent. All policies of insurance delivered to
Landlord must contain a provision that the company writing such policy
will give to Landlord 20 days' notice in writing in advance of any
cancellation, lapse, reduction or other adverse change respecting such
insurance.
(I) All public liability, property damage or other casualty policies shall
be written as primary policies, not contributing with or secondary to
coverage which Landlord may carry.
(J) Tenant's obligations to carry the insurance provided for above may be
satisfied by inclusion of the Premises within the coverage of a
so-called blanket policy or policies of insurance carried and
maintained by Tenant; provided, however, that all other requirements
herein stated and pertaining to Tenant's insurance are fully satisfied
(including the requirement to name additional insureds as stated
above), and that the coverage afforded Landlord will not be reduced or
diminished by reason of the use of such blanket policies of insurance.
(K) Tenant shall not materially amend any such policies, which amendments
shall be deemed to include any reduction in the scope or limits of
overage under existing policies, without having first obtained the
prior written approval of Landlord. Tenant shall cause the insurance
carrier to provide copies of any amendments to such policies to
Landlord not less than 20 days prior to the effective date thereof.
(L) In the event of a failure by Tenant to obtain and maintain in effect
any or all of the foregoing insurance requirements and after notice
from Landlord to Tenant and the passage of any applicable cure period
without Tenant obtaining any such coverage, Landlord may procure such
insurance, pay the premiums thereon, and charge back to Tenant the
cost thereof, which cost shall be payable by Tenant upon Landlord's
demand as Additional Rent hereunder.
(M) All such policies shall provide that Tenant's insurance carrier shall
have the duty to defend, indemnify and/or settle any suit against
Landlord seeking damages on account of bodily injury or property
damage even if any of the allegations of such suit are groundless,
false or fraudulent.
(N) In no event shall the limits of said policy or policies be considered
as limiting the liability of Tenant under this Lease.
3. Waiver of Rights of Subrogation. Each of the foregoing policies of
insurance shall be accompanied by a waiver of subrogation rights
endorsement, pursuant to which the insurer shall agree to waive all rights
to recover against the Landlord or any Affiliate thereof or against any
other tenant or occupant of the Square, or against the officers, directors,
shareholders, partners, members, managers, trustees, employees, agents,
customers, invitees, or business visitors of Landlord or any Affiliate
thereof or any other tenant or occupant of the Square, for any loss or
damage arising from any cause covered by any insurance required by this
Exhibit "E" to be carried by Tenant or any other insurance actually carried
by Tenant.
<PAGE>
EXHIBIT F
COMMENCEMENT CERTIFICATE
__________________, 19__
____________________
____________________
____________________
____________________
RE: Lease dated as of the ____ day of _____________, ____ (the
"Lease"), by and between ______________________ as Landlord, and
__________________________, a __________________________________,
as Tenant, pertaining to approximately __________ rentable
square feet of space (the "Premises") located in the building known
as ________________________________ (the "Building") located at
________ Denver, Colorado
Dear ____________:
With regard to the referenced Lease, Landlord and Tenant acknowledge the
following:
1. All Finish Work in the Building or Premises required to be constructed and
finished by Landlord in accordance with the Work Letter, if any, has been
satisfactorily completed by Landlord and the Premises have been delivered
to and accepted by Tenant on ---------------.
2. In accordance with the provisions of Paragraph 3 of the Lease, the Rent
Commencement Date commenced at 12:01 a.m., on ___________________, and the
Expiration Date will occur at 12:00 midnight on ___________________.
3. In accordance with Paragraph 2 of the Lease, The square footage of the
Premises is acknowledged to be ___________________. Accordingly, Base Rent
due under the Lease shall be as follows:
Annual Monthly
Period Base Rent Base Rent
First Lease Year
Second Lease Year
Third Lease Year
Fourth Lease Year
Fifth Lease Year
Sixth Lease Year
Seventh Lease Year
4. The Security Deposit in the amount of $____________________ has been
received by Landlord.
------------------------------------
By:
Authorized Agent
"Landlord"
<PAGE>
THE PROVISIONS OF THE FOREGOING COMMENCE-
MENT CERTIFICATE ARE HEREBY ACKNOWLEDGED:
By: ____________________________
Title: _________________________
Date:___________________________
"Tenant"
<PAGE>
EXHIBIT G
PARKING
A. Tenant shall have the right to use fifteen (15) unassigned covered parking
spaces (the "Unassigned Spaces") in the parking structure known as the
Larimer Square Parking Garage on the terms and conditions contained herein.
The rights of Tenant to the Unassigned Spaces as granted by Landlord shall
be referred to as the "Parking Privileges."
B. Tenant's right to the Parking Privileges shall commence at the Rent
Commencement Date and shall continue for the balance of the Lease Term
unless Tenant fails to timely pay the Fee as set forth below. The Parking
Privileges shall automatically terminate upon the expiration or earlier
termination of the Lease Term or any extensions thereof.
C. Tenant shall pay directly to the operator of the parking garage (the
"Operator") a parking fee for the Unassigned Spaces (the "Fee") in an
amount equal to the monthly charge per parking space established by the
Operator from time to time multiplied by the number of Unassigned Spaces to
which Tenant is then entitled. The Operator shall have the unfettered right
to increase or decrease the charge per parking space from time to time. All
payments of the Fee shall be made in advance, without notice or set off, at
Landlord's Notice Address, or at such place as Landlord from time to time
designates in writing. Tenant shall pay the Fee on the first day of the
Lease Term and on the first day of each succeeding calendar month during
the Lease Term or any extension thereof. If Tenant takes occupancy of the
Premises on a day other than the first day of a calendar month, the Fee for
the fractional month shall be prorated on a daily basis and shall be paid
on the date Tenant takes occupancy of the Premises. If Tenant fails to pay
the Fee in a timely manner, Landlord, at its election, may cancel Tenant's
right to use the number of Unassigned Spaces for which Tenant has failed to
pay and shall notify Tenant of such cancellation. If the Parking
Privileges, or a portion thereof, are cancelled, Tenant shall remain liable
to Landlord for all Fees and other sums accrued and unpaid hereunder to the
date of such cancellation. The Fee for the Unassigned Spaces shall be due
and payable in full each month regardless of whether Tenant actually uses
all or only a portion of the Unassigned Spaces allocated for Tenant each
month.
D. Landlord and/or the Operator shall have the right at any time to change the
arrangement or location of or to regulate the use of Unassigned Spaces
without incurring any liability to Tenant or entitling Tenant to any
abatement of the Fee. Among other things, Landlord shall be entitled to
assign designated areas of the parking structure for use by particular
persons or groups of persons and Tenant shall refrain from parking in such
spaces. Tenant acknowledges that the Unassigned Spaces will not be
individually designated or reserved for use by Tenant and that Tenant will
use the Unassigned Spaces in the parking structure in common with all
persons to whom or which Landlord grants the right to use the parking
structure.
E. In addition to the Rules and Regulations set forth in the Lease, the use of
the Unassigned Spaces is subject to the following rules:
1. Tenant shall designate use of the Unassigned Spaces to specific
individuals employed by Tenant ("Designated Users"), but Tenant shall
remain responsible for payment of the Fee and all other obligations
hereunder. Within five (5) business days after Landlord's request,
Tenant agrees to provide Landlord with a listing of all vehicles of
Designated Users, including names of vehicle owners, vehicle models,
colors, and license plate numbers, and Tenant shall provide Landlord
with revised listing promptly after any change to the listing. Tenant
shall deliver to Tenant's Designated Users parking decals provided by
Landlord which decals shall at all times be displayed prominently on
the vehicles of Designated Users. Landlord shall have the right to
directly ban any Designated User from further use of any of the
parking spaces for violation of the rules for the use of Unassigned
Spaces.
3. Tenant and Designated Users shall park only in parking spaces and not
on ramps, corridors, approaches, or other areas designated as "no
parking" areas.
4. Tenant and Designated Users shall observe the special hours of
opening, closing, and non-use of the parking structure when closings
are necessitated for repairs, cleaning, and rehabilitations. Should
any repair or rehabilitation result in Tenant not being provided the
Unassigned Spaces in the parking structure, or designated alternate
parking facility, the abatement of Tenant's obligation to pay the Fee
during the period the same are unavailable shall constitute Tenant's
sole remedy in the event of such unavailability.
5. Tenant and Designated Users shall use the Unassigned Spaces only for
automobile parking.
6. Tenant and Designated Users shall observe all posted vehicle height
limitations.
7. Tenant and Designated Users shall not allow unauthorized vehicles to
use the Unassigned Spaces and, except for emergencies, shall not
repair nor authorize service to vehicles parked in the parking
structure.
F. If any portion of the parking structure shall be damaged by fire or other
casualty or shall be taken by right of eminent domain or by condemnation or
shall be conveyed in lieu of any such taking, then the Parking Privileges
shall automatically cease and terminate and the Fee and all other sums
payable hereunder shall be duly apportioned to the date of such casualty,
taking, or conveyance. Tenant thereupon shall surrender to Landlord the
Unassigned Spaces and all interest therein, and Landlord may re-enter and
take possession of the Unassigned Spaces.
G. Tenant shall not be permitted to assign the Unassigned Spaces or any
interest herein or permit the Unassigned Spaces or any part thereof to be
used by others without the prior written consent of Landlord, which consent
may be granted or withheld in Landlord's sole discretion. Notwithstanding
the foregoing, if a proposed assignee or user is a permitted assignee,
sublessee, or occupant under the terms of this Lease, Landlord's consent as
to such assignment or sublease shall be deemed consent to the assignment of
the Unassigned Spaces. Tenant shall remain primarily liable for the
performance of the obligations of the Tenant hereunder notwithstanding any
assignment or occupancy arrangement permitted or consented to by Landlord.
H. Neither Landlord nor its agents or employees shall be liable for any
damage, fire, theft or loss to vehicles or other properties or injuries to
persons occurring in the parking structure or service parking area or
arising out of the use of the Unassigned Spaces whether caused by theft,
collision, moving vehicle, explosion or any other activity of occurrence in
such parking areas. Tenant and/or its Designated Users of the Spaces assume
the risk of such loss or damage and shall indemnify, defend and hold
Landlord, its agents and employees harmless from and against any and all
claims and damages incurred by Landlord, its agents and employees arising
from Tenant's or its Designated Users' use of the parking areas or the
Unassigned Spaces, including all costs, attorneys' fees, expenses and
liability arising out of any such claim or action. Tenant, at Landlord's
request, shall obtain a written agreement from each Designated User
agreeing to the terms of this Exhibit G and Landlord's rules for operation
of the parking areas. If Tenant shall fail to obtain such agreement and
deliver it to Landlord, Tenant shall assume all obligations set forth in
this Exhibit G or Landlord's rules for such Designated User.
I. Landlord acknowledges that pursuant to the Larimer Square Parking
Association Partnership Agreement, tenants of improvements located within
the Square, tenants of the Retail Space in the Square, and clients and
customers of any of them have a priority for parking in the Parking Garage
subject to the terms and limitations of the Garage Management Agreement by
and between the Larimer Square Parking Association and the Operator.
<PAGE>
EXHIBIT H
APPROVED PLANS AND SPECIFICATIONS
[To Be Attached]
Exhibit 10.28
ASSET PURCHASE AGREEMENT
BETWEEN
THE QUIZNO'S ACQUISITION COMPANY
AND
BAIN'S DELI CORPORATION
Dated as of February 1, 1999
<PAGE>
TABLE OF CONTENTS
Page
1. PURCHASE AND SALE OF ASSETS...............................1
1.1 Conveyance of Assets.................................1
2. CONSIDERATION FOR ASSETS..................................2
2.1 Purchase Price and Payment...........................2
2.2 Promissory Note Payment..............................3
2.3 Security.............................................4
3. ALLOCATION................................................4
4. OTHER COVENANTS...........................................4
4.1 Right of First Refusal...............................4
4.2 License Agreement....................................5
4.3 Financial and other Reports..........................5
4.4 Audit Rights.........................................6
5. CLOSING...................................................6
6. CLOSING OBLIGATIONS.......................................6
6.1 Seller's Obligations.................................6
6.2 Buyer's Obligations..................................7
7. EMPLOYEES AND EMPLOYMENT MATTERS..........................7
7.1 No Obligations Assumed...............................7
8. REPRESENTATIONS AND WARRANTIES OF SELLER..................7
8.1 Organization, Good Standing, and Qualification.......7
8.2 Authorization; Binding Obligation....................7
8.3 Assets...............................................8
8.4 No Violation.........................................8
8.5 Government Consents..................................8
8.6 No Brokers...........................................8
8.7 Taxes................................................8
8.8 Contracts and Other Agreements.......................9
9. REPRESENTATIONS AND WARRANTIES OF BUYER...................9
9.1 Familiarity and Assets...............................9
9.2 Organization, Good Standing and Qualification........9
9.3 Authorization; Binding Agreement.....................9
9.4 No Violation........................................10
9.5 Consents............................................10
9.6 Brokers.............................................10
9.7 Taxes...............................................10
10. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS..............10
10.1 Accuracy of Seller's Representations and Warranties.10
10.2 Performance by Seller...............................10
10.3 Delivery of Documents...............................11
10.4 Governmental and Other Consents.....................11
10.5 Closing Obligations.................................11
11. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS.............11
11.1 Accuracy of Buyer's Representations and Warranties..11
11.2 Performance by Buyer................................11
11.3 Delivery of Documents...............................11
11.4 Closing Obligations.................................11
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES...............11
13. INDEMNIFICATION..........................................12
13.1 Indemnification by Seller...........................12
13.2 Indemnification of Buyer............................12
13.3 Other Indemnification Provisions....................12
14. CONFIDENTIALITY..........................................12
15. MICELLANEOUS.............................................13
15.1 Expenses............................................13
15.2 Entire Subject Matter; Amendment....................13
15.3 Successors and Assigns..............................13
15.4 Counterparts........................................13
15.5 Notices.............................................13
15.6 Headings............................................14
15.7 Governing Law Jurisdiction..........................14
15.8 Attorneys' Fees.....................................14
15.9 Schedules and Exhibits..............................14
15.10Further Assurances..................................15
<PAGE>
SCHEDULES
1.2(a) Excluded Franchise Agreements
4 Allocation of Purchase Price
EXHIBITS
Exhibit A Form of Promissory Note
Exhibit B Form of Security Agreement
Exhibit C Form of License Agreement from Seller to Buyer
Exhibit D Form of License Agreement from Buyer to Seller
Exhibit E Form of Letter from Seller to Franchisees Regarding Assignment
<PAGE>
ASSET PURCHASE AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of the 1st day of
February, 1999, in Denver, Colorado by and between THE QUIZNO'S ACQUISITION
COMPANY, a Colorado corporation ("Seller"), and BAIN'S DELI CORPORATION, a
Pennsylvania corporation, and Jeffrey Jolles, an individual (collectively called
"Buyer").
WHEREAS, Seller owns certain assets, property and other matter as
described in this Agreement ("Assets") that it has the right to, and does,
operate, utilize and possess on an ongoing basis in conducting the franchise
system represented by the Franchise Agreements (as defined below) other than the
Excluded Agreements (as defined below) ("Franchise System") and restaurant
business known as "Bain's Deli"(collectively, the "Business"); and
WHEREAS, Seller is willing to grant Buyer a right of first refusal to
purchase such of the Excluded Agreements as are sold or transferred to a person
or entity that is not owned or controlled by, under control of, or under common
control with Seller ("Affiliate"); and
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell
to Buyer, subject to the terms and conditions set forth in this Agreement and
for the consideration as hereinafter specified, certain but not all of the
Assets and Business of Seller as hereinafter set forth; and
WHEREAS, the parties acknowledge the existence of liens against the Assets
("Existing Liens"), which liens may encumber certain of the assets being
transferred hereunder, and shall enter into an indemnification agreement
("Indemnification Agreement") in which Seller will agree to protect Buyer with
respect to such liens.
NOW, THEREFORE, the parties agree as follows:
<PAGE>
1 PURCHASE AND SALE OF ASSETS
1.1 Conveyance of Assets. At the "Closing" (as defined below), Seller
agrees to convey, transfer, assign and sell to Buyer and Buyer agrees
to acquire, accept, and purchase from Seller, those Assets
specifically listed below (collectively called the "Assets"). Seller
will convey to Buyer at the Closing good and marketable title to all
of the Assets, free and clear of all liens except as provided in the
Indemnification Agreement. The Assets shall include:
(a) The rights of Seller under any Bain's Deli franchise or license
agreement between Seller and any third-party, including rights to
receive royalty payments, commencing as of February 1, 1999
("Franchise Agreements"), other than the Excluded Agreements as
defined Section 1.2.
(b) All of the Seller's claims and choses in action arising out of or
in connection with the Franchise System, and all warranties,
rights, and claims of Seller under all existing warranties
relating to any and all of the Assets, other than those related
to the Excluded Agreements.
(c) All of Seller's goodwill relating to the Business, including
goodwill relating to the Franchise System ("Goodwill") other than
goodwill associated with the Excluded Agreements or with the
Marks (as defined in Section 4.2);
(a) All of Seller's accounts receivable ("Accounts Receivable") other
than Accounts Receivable arising from the Excluded Agreements.
1.2 Status of Assets/Excluded Assets. The Assets will be all of the assets
used in or related to the ongoing business operations of the Franchise
System, excluding however the following assets:
(a) Excluded Franchise Agreements. All Franchise Agreements for the
Bain's Deli Restaurants listed on Schedule 1.2(a) ("Excluded
Agreements").
(b) Miscellaneous. Cash on hand, Accounts Receivable arising from
Excluded Agreements, office furniture or computers, office
leases, and goodwill associated with the Excluded Agreements or
the Marks.
(c) Pending Litigation. Any claims, or amounts recovered (including
settlements or judgments) that arise from the pending litigation
known as The Quizno's Corporation v. Bain's Deli Franchise
Associates, LP, No. 98CV009333 (Denver District Court, State of
Colorado) ("Pending Litigation"), except to the extent such
judgment includes the removal of Liens (as defined in the
Indemnification Agreement).
- 1 -
<PAGE>
2 CONSIDERATION FOR ASSETS
As consideration for the sale, assignment, transfer and conveyance of the
Assets, Buyer hereby agrees to the following:
2.1 Purchase Price and Payment.
(a) Purchase Price: The total price to be paid by Buyer for the
Assets is Eight Hundred Fifty Thousand Dollars ($850,000.00)
("Purchase Price").
(b) Payment of Purchase Price: The Purchase Price will be paid as
follows:
(i) Cancellation of Independent Contractor Agreement: Fifty
Thousand Dollars ($50,000.00) paid at Closing in the form of
early termination of the Independent Contractor Services
Agreement between Seller and Jeffrey Jolles dated February
1, 1998, and cancellation of Seller's obligations
thereunder; and
(ii) Note. A promissory note for the balance for the Purchase
Price in the amount of Eight Hundred Thousand Dollars
$800,000 ("Promissory Note") in a form substantially the
same as Exhibit A.
- 2 -
<PAGE>
2.2 Promissory Note Payments. The Promissory Note shall be paid as
follows:
(a) Royalties or other continuing fees, however characterized, paid
to Buyer for use of the Marks, commencing as of February 1, 1999
(e.g., royalties paid pursuant to the Franchise Agreements other
than the Excluded Agreements) ("Proceeds") excluding, however,
any form of income generated by any and all Bain's Deli
restaurants currently wholly owned by Buyer and existing as of
the date of this Agreement, will be paid to and collected by
Buyer from Bain's franchisees on a monthly basis. Upon their
receipt, Buyer will deposit all such Proceeds into a separate
account at an institution to be selected by Buyer (subject to
Seller's prior written approval) and established by both parties,
but controlled and under the signature authority of Seller. Each
month, by the fifth day of such month, Seller will pay to Buyer
the first Three Thousand Three Hundred Thirty Three Dollars and
34/100s ($3,333.34) of the prior month's collected Proceeds. If
any Proceeds remain, Seller will pay Fifty Percent (50%) of such
remaining amount to Buyer in addition to, and at the same time as
the initial payment described above. Seller will retain the
remaining portion of each month's Proceeds as payments of
principal (and interest if applicable pursuant to subsection
2.2(b)) due under the Promissory Note.
(b) If the principal balance of the Promissory Note is not reduced by
at least Twenty Five Thousand Dollars ($25,000.00) in any one
year, interest equal to Six Percent (6%) of the outstanding
balance of the Promissory Note on December 31 of such year shall
be added to the principal balance of the Promissory Note.
(c) Other than Accounts Receivable arising from the Excluded
Agreements, Accounts Receivable prior to February 1, 1999, that
are collected after such date will be paid Fifty Percent (50%) to
Seller and Fifty Percent (50%) to Buyer upon collection; provided
that until paid in full, Buyer's portion will be applied to
reduce the principal and interest (if any) owed under the
Promissory Note. Buyer will be responsible for all efforts of
collection of the Accounts Receivable (other than efforts related
to the Accounts Receivable for Excluded Agreements), but shall
not take any action with respect to the collection of Accounts
Receivable that is inconsistent with Seller's general policy of
collection of accounts receivable, and Buyer shall indemnify and
hold Seller harmless from any claim related to the collection of
the Accounts Receivable by Buyer, its employees, agents and/or
representatives.
(d) All outstanding principal and interest if any will be deemed due
and owing on, and is to be paid in full by, the seventh
anniversary of the Closing.
- 3 -
2.3 Security. The obligations of Buyer under this Agreement, the Note, and
the License Agreement shall be secured by an interest in the Assets
under a security agreement substantially in the form attached hereto
as Exhibit B ("Security Agreement").
3 ALLOCATION
The parties agree that the Purchase Price is properly allocable and shall
be allocated among the Assets in accordance with Schedule 4. The parties
agree to report this transaction for federal, state and local income and
other tax purposes in accordance with Schedule 4.
4 OTHER COVENANTS
As additional consideration for the transactions set forth herein, the
parties agree to the following additional covenants:.
4.1 Right of First Refusal. So long as Buyer is not in default under this
Agreement, the Note, the License Agreement, or the Security Agreement,
Seller will grant to Buyer a right of first refusal to purchase, on
the same terms as Seller would sell to any other third party, the
rights and/or assets under any or all of the Excluded Agreements
("Right of First Refusal"). The Right of First Refusal shall be
exercised as follows: In the event Seller determines, in its sole
discretion, that it intends to sell such rights or assets of the
Excluded Agreements to a third party, Seller will notify Buyer of such
intent by sending Buyer notice, which shall include the material terms
(including consideration) of the proposed sale. If Buyer chooses to
exercise the Right of First Refusal, Buyer must send notice to Seller
of such exercise no later than Ten (10) business days after Buyer
receives Seller's notice. If Buyer chooses not to exercise the Right
of First Refusal, Seller shall be free to sell such rights and/or
assets to any other party. If Buyer fails to respond to the Seller's
notice within Ten (10) business days, Buyer shall be deemed to have
waived the Right of First Refusal for the proposed transaction set
forth in Seller's notice. In order to exercise the Right of First
Refusal, Buyer must, at the time of such exercise, have fully
performed all of Buyer's obligations under this Agreement, the Note,
the License Agreement, and the Security Agreement. The Right of First
Refusal shall not apply to transfers to Seller's Affiliates.
- 4 -
4.2 License Agreement. Seller will grant a royalty free, non-exclusive
license to Buyer (in the form of the License Agreement attached as
Exhibit C) ("License Agreement") for the use of the Bain's Deli
trademarks, service marks, trade dress, and other intellectual
property ("Marks") used in connection with the Franchise System. Upon
full performance of Buyer's obligations under this Agreement, the
Note, the License Agreement, and the Security Agreement, Seller will
transfer ownership of the Marks to Buyer. Upon the transfer of
ownership of the Marks and contemporaneous therewith, Buyer will grant
a royalty-free, non-exclusive license to Seller (in the form of the
License Agreement attached as Exhibit D) for use of the Marks by
Seller for any remaining Excluded Agreements not transferred to Buyer
or previously sold to a third party. So long as Buyer has fully
performed its obligations under this Agreement, the Note, the License
Agreement, and the Security Agreement, the Buyer will have the sole
right to sell additional Bain's Deli franchises under the following
conditions:
(a) That such sales comply in all respects with applicable statutes
and regulations governing the sale of franchises in the relevant
jurisdiction, and so long as Seller has approved, in writing,
Buyer's form of Uniform Franchise Offering Circular prior to such
sale, which approval shall not be unreasonably withheld; and
(b) That no Bain's Deli restaurant may be located within one (1) mile
of a Quizno's Classic Subs(R) restaurant.
4.3 Financial and other Reports. Buyer shall provide to Seller financial
and accounting reports in a manner and form as Seller may reasonably
require, including monthly summary reports due on the Tenth (10th)
business day of each month showing the following information:
(a) gross sales for the previous month of any restaurant or other
operations owned or controlled by Buyer using the Marks, other
than under the Excluded Agreements ("Bain's Restaurant"); and
(b) royalties or other continuing fees, however characterized,
received by Buyer from each Bain's Restaurant in the prior month
(including any amounts that were Accounts Receivable as of
February 1, 1999, but excluding Accounts Receivable from Excluded
Agreements); and
(c) a list of any Bain's Restaurants opened, closed, terminated
and/or operating without authorization and any new Franchise
Agreements sold in the prior month.
(d) Within Ninety (90) days after the end of Buyer's fiscal year, an
income statement and balance sheet of the Business for such
fiscal year (reflecting all year-end adjustments), and a
statement of changes in cash flow of the Business, prepared in
accordance with generally accepted accounting principles,
consistently applied. Seller reserves the right to require that
Buyer have financial statements prepared and reviewed by an
independent certified public accountant on an annual basis.
- 5 -
4.4 Audit Rights. Buyer shall permit Seller and/or its representatives to
inspect and audit the books and records of the Business at any
reasonable time, and with reasonable notice, at Seller's expense. If
any audit discloses a deficiency in amounts owed to Seller, then such
amounts shall become immediately payable to Seller by Buyer, with
interest from the date such payments were due at the lesser of Two
Percent (2%) per month or the maximum rate allowed by law. In
addition, if such audit discloses that the Gross Sales of the Bain's
Restaurants have been understated by Two Percent (2%) or more during
the audit period, Buyer shall pay all reasonable costs and expenses
Seller incurred in connection with such audit, and such understatement
shall be considered a breach of this Agreement.
5 CLOSING
The closing of the sale and purchase of the Assets ("Closing") shall be
deemed to have taken place at the offices of Seller, 1099 18th Street,
Suite 2850, Denver, Colorado 80202 at 9:00 a.m. local time, on March 11,
1999 ("Closing Date"), or at such other location, time or date as may be
agreed to by Seller and Buyer.
6 CLOSING OBLIGATIONS
The following obligations will be satisfied at Closing ("Closing
Obligations"):
6.1 Seller's Obligations. At Closing, Seller shall deliver to Buyer,
properly executed and acknowledged:
(a) a Bill of Sale for all of the transferred Assets;
(b) resolutions of Seller approving the transactions contemplated
under this Agreement, duly adopted and authorized by the
directors thereof;
(c) assignments of the Franchise Agreements, along with a
corresponding letter from Seller to each franchisee under each
such Franchise Agreement (in the form attached as Exhibit E)
explaining such assignment to Buyer, and directing that all
obligations under each such agreement arising on or after
February 1, 1999, shall be made payable to Bain's Deli
Corporation, and delivered to the appropriate address as set
forth in Section 15.5;
(d) such other instruments of sale, transfer, conveyance, and
assignment as are necessary to vest title in the Assets purchased
by Buyer; and
(e) Trademark License Agreement for the Marks.
- 6 -
6.2 Buyer's Obligations. At Closing, Buyer shall deliver to Seller:
(a) the Purchase Price as specified in Section 2.1; and
(b) such other instruments of sale, transfer, conveyance and
assignment as Seller may reasonably request.
Satisfaction with each Closing Obligation is a condition to the
parties' obligations hereunder and under the other related closing
documents. In the event that any Closing Obligation is not satisfied
or waived by mutual agreement of the parties, this Agreement and the
related closing documents shall terminate.
7 EMPLOYEES AND EMPLOYMENT MATTERS
7.1 No Obligations Assumed. Buyer does not assume any liabilities, duties,
or obligations of Seller with respect to any current or past employees
of Seller, any of Seller's employee benefits or benefit plans, or any
other employment-related liability, duty, or obligation of Seller
whatsoever.
8 REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer that as of the Closing:
8.1 Organization, Good Standing, and Qualification. Seller is duly
organized, validly existing and in good standing under the laws of the
State of Colorado. Seller has all requisite power and authority to own
and operate its properties and to carry on its business as now
conducted, to enter into this Agreement and to carry out and perform
its obligations under this Agreement.
8.2 Authorization; Binding Obligation. The execution and delivery by
Seller of this Agreement and all of the documents and instruments
required hereby and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all requisite action
on the part of Seller. This Agreement and each of the other documents
and instruments required hereby have been fully executed and delivered
by Seller and constitute the valid and binding obligations of Seller,
enforceable against Seller in accordance with their respective terms.
- 7 -
8.3 Assets. Other than the Marks and the Excluded Agreements, the Assets
are all tangible and intangible personal property owned by, in the
possession of or used by Seller in connection with the Business and
such personal property constitutes all such personal property
necessary for the conduct of the Business as now conducted. Seller has
good and marketable title to each and, collectively, all of the
Assets, free and clear of any and all liens (other than as set forth
in the Indemnification Agreement), agreements, restrictions, claims,
security interest, pledges, charges, equities and other encumbrances.
8.4 No Violation. The execution, delivery and compliance with and
performance by Seller of this Agreement and each of the other
documents and instruments required hereby do not and will not (i)
violate the articles of incorporation or bylaws of Seller or any law,
statute, rule, regulation, order, judgment or decree to which Seller
is subject, (ii) conflict with or result in a breach of or constitute
a default under any contract, agreement or other instrument to which
Seller is a party or by which Seller or any of Seller's assets or
properties are bound or to which Seller or any of Seller's assets or
properties are subject (other than as referenced in the
Indemnification Agreement), (iii) result in or require the creation of
any lien upon Seller's capital stock or upon any of Seller's
properties or assets, (iv) require any approval or consent of any
person or entity under any contract, agreement or other instrument to
which Seller is a party or by which Seller or any of Seller's assets
or properties are bound or to which Seller or any of Seller's assets
or properties are subject, other than the consents specifically set
forth herein.
8.5 Government Consents. The execution, delivery, and performance by
Seller of this Agreement and each of the other documents and
instruments required hereby, and the consummation of the transactions
contemplated hereby and thereby, do not and will not require any
authorization, consent, approval, permit, filing, registration ,or
exemption, or other action by or notice to any court or administrative
or governmental body.
8.6 No Brokers. Seller has not employed, either directly or indirectly, or
incurred any liability to, any broker, finder or other agent in
connection with the transactions contemplated by this Agreement.
Seller agrees to indemnify Buyer for any claims brought by any broker,
finder or other agent claiming to have acted on behalf of Seller in
connection with this sale.
8.7 Taxes. Seller has duly filed or will file when due all federal, state
and local tax returns and reports, and all returns and reports of
other governmental units having jurisdiction with respect to taxes
imposed upon any of the Assets or taxes imposed on Seller which might
create a lien on any of the Assets, and Seller has paid or will pay
when due all such taxes, including without limitation ad valorem taxes
and employment taxes, for all years up to and including all periods
through the date immediately preceding the Closing Date, which the
failure to file or pay would result in a valid and subsisting lien on
the Assets after transfer thereof to Buyer. Seller will indemnify
Buyer against any claims arising from failure to comply with any Bulk
Sales Act requirement.
- 8 -
8.8 Contracts and Other. There are no contracts or other agreements (other
than the Franchise Agreements and Excluded Agreements) to which Seller
is a party or to which it or its assets or properties are bound or
subject with respect to the Business, including without limitation
licenses, employment contracts, personal or real property leases, or
purchase contracts.
9 REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents, warrants and covenants to Seller that as of
Closing:
9.1 Familiarity with Assets. Buyer is an existing owner of Bain's Deli
restaurants and a former owner of the Franchise System, and is
familiar with the Franchise System, its assets, business and
operations. Buyer has had an opportunity to ask questions of and
receive satisfactory answers from Seller, or any person or persons
acting on its behalf, concerning the Assets, and all such questions
have been answered to the full satisfaction of the Buyer. Buyer
further represents and acknowledges that Buyer has not relied and is
not relying on any representations and warranties of Seller other than
the specific representations and warranties set forth in Section 8.
Buyer acknowledges that as of the date of this Agreement, there are
multiple Franchise Agreements that are in default, including without
limitation, for failure to pay royalties, and Buyer shall take such
steps as Buyer deems necessary to address such defaults. Buyer
releases Seller from any and all claims that might arise from such
defaults, and acknowledges that Seller has made no representation or
warranty whatsoever concerning the condition (financial or otherwise)
of the Assets as of Closing except those specifically stated in
Section 8.
9.2 Organization, Good Standing and Qualification. Buyer is a Pennsylvania
corporation duly organized, validly existing and in good standing.
Buyer has all requisite power and authority to own and operate each of
its properties and to carry on its business as now conducted, to enter
into this Agreement and to carry out and perform its obligations under
this Agreement.
9.3 Authorization; Binding Agreement. The execution and delivery by Buyer
of this Agreement and all of the documents and instruments required
hereby and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by all requisite action on the
part of Buyer. This Agreement and each of the other documents and
instruments required hereby have been duly executed and delivered by
Buyer and constitute the valid and binding obligations of Buyer,
enforceable against Buyer in accordance with their respective terms.
- 9 -
9.4 No Violation. The execution, delivery, compliance with and performance
by Buyer of this Agreement and each of the other documents and
instruments required hereby do not and will not (i) violate the
articles of incorporation or bylaws of Buyer or any law, statute,
rule, regulation, order, judgment or decree to which Buyer is subject,
or (ii) conflict with or result in a breach of or constitute a default
under any contract, agreement or other instrument to which Buyer is a
party or by which Buyer or any of its assets or properties is bound or
to which Buyer or any of its assets or properties is subject.
9.5 Consents. The execution, delivery and performance by Buyer of this
Agreement and each of the other documents and instruments required
hereby and the consummation of the transactions contemplated hereby
and thereby do not and will not require any authorization, consent,
approval, permit, filing, registration or exemption or other action by
or notice to any court or administrative or governmental body.
9.6 Brokers. Buyer has not employed, either directly or indirectly, or
incurred any liability to, any broker, finder or other agent in
connection with the transactions contemplated by this Agreement. Buyer
agrees to indemnify Seller for any claims brought by any broker,
finder or other agent claiming to have acted on behalf of Buyer in
connection with this sale.
9.7 Taxes. Buyer shall file when due all federal, state and local tax
returns and reports, and all returns and reports of other governmental
units having jurisdiction with respect to taxes imposed upon any of
the Assets, or taxes imposed on Buyer which might create a lien on any
of the Assets, and will pay when due all such taxes, including without
limitation ad valorem and employment taxes, which arise on or after
the Closing Date.
10 CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS
The obligations of Buyer under this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions, all
or any of which may be waived in writing by Buyer:
10.1 Accuracy of Seller's Representations and Warranties. All
representations and warranties made by Seller in this Agreement and in
any written statement delivered to Buyer by Seller under this
Agreement shall be true and correct as of the Closing.
10.2 Performance by Seller. Seller shall have performed and complied with
all its respective obligations required by this Agreement to be
performed or complied with by it at or prior to the Closing.
- 10 -
10.3 Delivery of Documents. All documents required to be delivered by
Seller at or prior to the Closing shall have been properly executed by
Seller and delivered to Buyer in form and substance reasonably
satisfactory to Buyer.
10.4 Governmental and Other Consents. All necessary approvals, consents and
clearances from governmental authorities and others in connection with
the transactions contemplated by this Agreement shall have been
obtained at or prior to the Closing.
10.5 Closing Obligations. All Closing Obligations to be performed by Seller
have been satisfied or waived in writing by Buyer.
11 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS
The obligations of Seller under this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions, all
or any of which may be waived in writing by Seller:
11.1 Accuracy of Buyer's Representations and Warranties. All
representations and warranties made by Buyer in this Agreement and in
any written statements delivered to Seller by Buyer under this
Agreement shall be true and correct as of the Closing.
11.2 Performance by Buyer. Buyer shall have performed and complied with all
obligations of Buyer required by this Agreement to be performed or
complied with by it at or prior to the Closing.
11.3 Delivery of Documents. All documents required to be delivered by Buyer
at or prior to the Closing shall have been properly executed by Buyer
and delivered to Seller in form and substance reasonably satisfactory
to Seller.
11.4 Closing Obligations. All Closing Obligations to be performed by Buyer
have been satisfied or waived in writing by Seller.
12 SURVIVAL OF REPRESENTATIONS AND WARRANTIES20
All covenants, agreements, representations, warranties, and conditions of
the Closing contained in this Agreement that are intended to be made or
performed at or prior to the Closing shall survive after the Closing.
- 11 -
13 INDEMNIFICATION
13.1 Indemnification by Seller. Seller agrees to indemnify and hold
harmless Buyer and/or any of its affiliates, officers, shareholders,
directors, agents, and representatives from and against any and all
loss, claim, liability, obligation and/or expense (including
attorneys' fees) that arises from (a) the breach by Seller of any of
its covenants, agreements, representations, or warranties as set forth
in this Agreement, or (b) any liability, obligation, or commitment of
any nature relating to the Assets or the Business based on events
and/or obligations occurring prior to Closing; provided, however, that
to qualify for such defense and indemnification, Buyer must give
Seller prompt written notice of any such claim and allow Seller, at
its sole expense, to operate and control the defense of such claim and
any related settlement negotiations. Buyer shall reasonably cooperate
with Seller in such defense.
13.2 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless
Seller and/or any of Seller's affiliates, officers, managers, members,
agents, and representatives from and against any and all loss, claim,
liability, obligation and/or expense (including attorneys' fees) that
arises from (a) the breach by Buyer of any of its covenants,
agreements, representations, or warranties as set forth in this
Agreement, or (b) any liability, obligation, or commitment of any
nature relating to the Assets or the Business based on events and/or
obligations occurring on or after the Closing Date; provided, however,
that, to qualify for such defense and indemnification, Seller must
give Buyer prompt written notice of any such claim and allow Buyer, at
its sole expense, to operate and control the defense of such claim and
any related settlement negotiations. Seller shall reasonably cooperate
with Buyer in such defense.
13.3 Other Indemnification Provisions. The foregoing indemnification
provisions are in additional to, and not in derogation of, any
statutory or common law remedy any party may have for breach of
representation, warranty, covenant, or contract.
14 CONFIDENTIALITY
Except as specifically provided herein and to the extent reasonably
necessary to perform its obligations or exercise or enforce its rights
hereunder, no party shall provide or disclose to any third party (except
affiliates), or use, unless authorized in writing to do so by the other
party or properly directed or ordered to do so by public authority, any
information or matter that constitutes or concerns the terms and conditions
of this Agreement or that regards any dealings or negotiations with the
other party related to this Agreement; provided, however, that the parties
may consult with their respective counsel with respect to such information
and matter provided that said counsel agree to abide by the terms and
conditions of this Section.
- 12 -
15 MISCELLANEOUS
15.1 Expenses. Each of the parties hereto shall pay its own fees, costs and
expenses incurred in connection with the negotiation, preparation,
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby.
15.2 Entire Subject Matter; Amendment. This Agreement and the other
documents referred to herein contain the entire understanding of the
parties with respect to the subject matter hereof and supersede all
prior agreements, either oral or written. This Agreement may not be
amended, or any term or condition waived, except by a writing signed
by each of the parties hereto.
15.3 Successors and Assigns. Except as otherwise expressly provided herein,
this Agreement shall be binding upon and inure to the benefit of the
respective successors and assigns of the parties hereto, whether so
expressed or not. Seller may assign this Agreement and the other
closing documents without consent and in its absolute discretion so
long as the assignee assumes the obligations arising hereunder and
thereunder. Buyer may not assign this Agreement or any other closing
document without Seller's consent, which consent shall not be
unreasonably withheld.
15.4 Counterparts. This Agreement may be executed in one or more
counterparts and sent via facsimile, any one of which need not contain
the signatures of all parties, but all of which counterparts when
taken together will constitute one and the same Agreement.
15.5 Notices. Any notice and similar communications concerning this
Agreement ("Notice") shall be in writing and shall be either (a)
delivered in person (including by a nationally recognized courier
service such as Federal Express); or (b) sent to the other party by
certified mail with return receipt requested. Notices shall be
delivered or sent as follows or to such other address as a party may
hereafter establish by Notice given in the manner prescribed in this
Section.
- 13 -
If to Seller:
The Quizno's Acquisition Company
1099 18th Street
Suite 2850
Denver, Colorado 80202
Fax: (303) 291-0909
Attention: Legal Department
If to Buyer:
Bain's Deli Corporation
3002 Hopkinson House
Philadelphia, Pennsylvania 19106
Fax: (215) 829-1510
Attention: Jeffrey Jolles, President
15.6 Headings. The titles and headings herein are for convenience only. In
case of ambiguity or inconsistency, the text rather than the titles or
headings shall control.
15.7 Governing Law and Jurisdiction. This Agreement shall be governed by
and interpreted in accordance with the laws of the State of Colorado.
The parties hereto consent to venue and jurisdiction in, and agree
that the sole venue shall be, the District Court in and for the City
and County of Denver, Colorado, or in the United States District Court
for the District of Colorado, for any action commenced relating to
this Agreement or the transactions contemplated hereby. The parties
agree that any action or proceeding arising out of this Agreement
shall be heard by a court sitting without a jury and thus hereby waive
all rights to a trial by jury.
15.8 Attorneys' Fees. In the event of any dispute hereunder, or any default
in the performance of any term or condition of this Agreement, the
prevailing party shall be entitled to recover all costs and expenses
associated therewith, including reasonable attorneys' fees.
15.9 Schedules and Exhibits. The Schedules and Exhibits attached hereto are
incorporated by reference into this Agreement.
- 14 -
15.10Further Assurances. Each of the parties hereto shall, from time to
time after the Closing, upon the request of any other party hereto,
duly execute, acknowledge and deliver all such further instruments and
documents reasonably required to further effectuate the interests and
purposes of this Agreement. IN WITNESS WHEREOF, the parties have
executed this Agreement themselves or by their authorized
representatives.
- 15 -
BUYER: SELLER:
BAIN'S DELI CORPORATION THE QUIZNO'S ACQUISITION
COMPANY
By: By:
Its: Its:
JEFFREY JOLLES
LIST OF SUBSIDIARIES OF THE QUIZNO'S CORPORATION
1. The Quizno's Operating Company, a Colorado corporation.
2. The Quizno's Development Company, a Colorado corporation.
3. The Quizno's Realty Company, a Colorado corporation.
4. The Quizno's Acquisition Company, a Colorado corporation.
5. The Quizno's Licensing Company, a Colorado corporation.
6. Quizno's Kansas, LLC, a Colorado limited liability company.
Each subsidiary does business only under its corporate name.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
The Quizno's Corporation and Subsidiaries on Form S-3 (No. 333-38691) and Forms
S-8 (Nos. 333-45549 and 333-45205), of our report dated March 2, 1999 appearing
in the annual report on Form 10-KSB of The Quizno's Corporation and Subsidiaries
for the year ended December 31, 1998 and to the reference to us under the
heading "Experts" in the Prospectus, which is part of these Registration
Statements.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
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